UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended January 31, 2009
Commission File Number 000-49790
VERINT SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
11-3200514
(I.R.S. Employer
Identification No.)
330 South Service Road, Melville, New York 11747
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (631) 962-9600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Name of each exchange
on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
Title of class
(cid:0)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
(cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes
No
(cid:0)
(cid:2)
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
No
(cid:0)
(cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
No
(cid:0)
(cid:0)
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
(cid:2)
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
(cid:0)
Accelerated filer
(cid:2)
Non-accelerated filer
(cid:0)
Smaller reporting company
(cid:0)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
(cid:2)
(cid:0)
No
The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing price for the
registrant’s common stock on the Pink OTC Markets Inc. on the last business day of the registrant’s most recently completed
second fiscal quarter (July 31, 2009) was approximately $164,409,515.
There were 32,634,352 shares of the registrant’s common stock outstanding on March 18, 2010.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
EXPLANATORY NOTE
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
i
ii
v
1
1
17
45
45
47
52
53
53
58
60
112
115
115
116
129
130
130
138
180
185
189
192
192
Cautionary Note on Forward-Looking Statements
Certain statements discussed in this report constitute “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) (which Sections were adopted as part of the Private
Securities Litigation Reform Act of 1995). Forward-looking statements include financial projections, statements of plans and
objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto.
Forward-looking statements are often identified by future or conditional words such as “will”, “plans”, “expects”, “intends”,
“believes”, “seeks”, “estimates”, or “anticipates”, or by variations of such words or by similar expressions. There can be no
assurances that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known
and unknown risks, uncertainties, and other important factors that could cause our actual results or performance to differ
materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, and other factors
that could cause our actual results to differ materially from our forward-looking statements include, among others:
•
(cid:129)
(cid:129)
(cid:129)
(cid:129)
risks relating to the filing of our Securities and Exchange Commission (“SEC”) reports, including the occurrence of
known contingencies or unforeseen events that could delay our plan for completion of our outstanding financial
statements, management distraction, and significant expense;
risk associated with the SEC’s initiation of an administrative proceeding on March 3, 2010 to suspend or revoke the
registration of our common stock under the Exchange Act due to our previous failure to file an annual report on either
Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on either Form 10-Q or Form 10-QSB since
December 12, 2005;
risks that the delay in the filing of our Annual Report on Form 10-K for the years ended January 31, 2008, 2007, and
2006, this report, and/or the Quarterly Reports on Form 10-Q for each of the quarters ended April 30, July 31, and
October 31, 2009 may cause us to be delayed in the completion of the audit of our financial statements for the year
ended January 31, 2010, resulting in a default under our credit facility if not completed and delivered to the lenders by
May 1, 2010 and an event of default if not completed and delivered to the lenders by May 31, 2010 (which could result
in the holders of the debt declaring all amounts outstanding to be immediately due and payable);
risks related to the announcement by Standard & Poor’s (“S&P”) on January 29, 2010 that our credit rating had been
placed on CreditWatch Developing, or that S&P could downgrade our credit ratings;
risks associated with being a consolidated, controlled subsidiary of Comverse Technology, Inc. (“Comverse”) and
formerly part of Comverse’s consolidated tax group, including risk of any future impact on us resulting from
Comverse’s special committee investigation and restatement or related effects, and risks related to our dependence on
Comverse to provide us with accurate financial information, including with respect to stock-based compensation
expense and net operating loss carryforwards (“NOLs”) for our financial statements;
ii
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
uncertainty regarding the impact of general economic conditions, particularly in information technology spending, on
our business;
risk that our financial results will cause us not to be compliant with the leverage ratio covenant under our credit
facility;
risk that customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity
issues, challenges in their business, or otherwise;
risk that we will experience liquidity or working capital issues and related risk that financing sources will be
unavailable to us on reasonable terms or at all;
uncertainty regarding the future impact on our business of our internal investigation, restatement, extended filing
delay, and the SEC’s administrative proceeding, including customer, partner, employee, and investor concern and
potential customer and partner transaction deferrals or losses;
risks relating to the remediation or inability to adequately remediate material weaknesses in our internal controls over
financial reporting and relating to the proper application of highly complex accounting rules and pronouncements in
order to produce accurate SEC reports on a timely basis;
risks relating to our implementation and maintenance of adequate systems and internal controls for our current and
future operations and reporting needs;
risk of possible future restatements if the special processes being used to prepare the financial statements contained in
this report or the regular recurring processes that will be used to produce future SEC reports are inadequate;
risk associated with current or future regulatory actions or private litigations relating to our internal investigation,
restatement, or delay in timely making required SEC filings;
risk that we will be unable to re-list our common stock on a national securities exchange and maintain such listing;
risks associated with Comverse controlling our board of directors and a majority of our common stock (and therefore
the results of any significant stockholder vote);
risks associated with significant leverage, resulting from our current debt position;
iii
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient
levels of investment in the business and with respect to introducing quality products which achieve market acceptance;
risks created by continued consolidation of competitors or introduction of large competitors in our markets with
greater resources than us;
risks associated with significant foreign and international operations, including exposure to fluctuations in exchange
rates;
risks associated with complex and changing local and foreign regulatory environments;
risks associated with our ability to recruit and retain qualified personnel in all geographies in which we operate;
challenges in accurately forecasting revenue and expenses;
risks associated with acquisitions and related system integrations;
risks relating to our ability to improve our infrastructure to support growth;
risks that our intellectual property rights may not be adequate to protect our business or that others may make claims
on our intellectual property or claim infringement on their intellectual property rights;
risks associated with a significant amount of our business coming from domestic and foreign government customers;
risk that we improperly handle sensitive or confidential information or perception of such mishandling;
risks associated with dependence on a limited number of suppliers for certain components of our products;
risk that we are unable to maintain and enhance relationships with key resellers, partners, and systems integrators; and
risk that use of our NOLs or other tax benefits may be restricted or eliminated in the future.
These risks and uncertainties, as well as other factors, are discussed in greater detail in “Risk Factors” under Item 1A of this
report. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view
only as of the filing date of this report. We make no commitment to revise or update any forward-looking statements in order to
reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal
securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others
should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the
federal securities laws.
iv
Explanatory Note
General. This report of Verint Systems Inc. (together with its consolidated subsidiaries, “Verint”, the “Company”, “we”, “us”,
and “our”, unless the context indicates otherwise) is for the year ended January 31, 2009, with expanded financial and other
disclosures in lieu of filing separate Quarterly Reports on Form 10-Q for each of the quarters ended April 30, 2008, July 31,
2008, and October 31, 2008. We believe that the filing of this expanded annual report enables us to provide information to
investors in a more efficient manner than separately filing each of the quarterly reports described above. In addition, the
information relating to our business and related matters in this report includes certain information for periods after January 31,
2009. We intend to file, as soon as practicable, our Quarterly Reports on Form 10-Q for each of the quarters ended April 30,
2009, July 31, 2009, and October 31, 2009.
This report has been delayed due to the previously announced accounting reviews and internal investigations at Comverse and at
Verint, together with the resulting restatement of certain items and the making of other corrective adjustments to our previously-
filed historical financial statements for periods through January 31, 2005, all of which were described in our comprehensive
Annual Report on Form 10-K for the years ended January 31, 2008, 2007, and 2006 filed on March 17, 2010 (the
“Comprehensive Form 10-K”). The Comverse investigation, conducted by a special committee of Comverse’s board of directors,
primarily related to Comverse’s practices and accounting for stock options, reserves, and certain other accounting areas. Our
internal investigation primarily related to our practices and accounting for reserves in periods prior to the year ended January 31,
2003, and was triggered by the Comverse investigation. Our accounting reviews primarily related to our historical revenue
recognition methodology. Please see our Comprehensive Form 10-K for a more detailed explanation of the facts and
circumstances giving rise to our filing delay and the impact of the Comverse investigation, our internal investigation, and our
accounting reviews on us and our financial statements. Please see also “Controls and Procedures” under Item 9A of this report
for a discussion of material weaknesses in our internal controls over financial reporting which existed as of January 31, 2009 and
related remediation efforts.
This Annual Report on Form 10-K supersedes the information provided in our Current Report on Form 8-K filed on February 3,
2010, including the preliminary unaudited financial information and highlights and the notes thereto included as Exhibit 99.2 in
such Form 8-K.
Other Information. As a result of the delay in filing our periodic reports with the SEC, we were unable to comply with the listing
standards of NASDAQ and our common stock was suspended from trading effective February 1, 2007 and formally de-listed
effective June 4, 2007.
v
On April 9, 2008, as we previously reported, we received a “Wells Notice” from the staff of the SEC arising from the staff’s
investigation of our past stock option grant practices and certain unrelated other accounting matters. These accounting matters
also were the subject of our internal investigation. On March 3, 2010, the SEC filed a settled enforcement action against us in the
United States District Court for the Eastern District of New York relating to certain of our accounting reserve practices. Without
admitting or denying the allegations in the SEC’s Complaint, we consented to the issuance of a Final Judgment permanently
enjoining us from violating Section 17(a) of the Securities Act, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act
and Rules 13a-1 and 13a-13 thereunder. The settled SEC action did not require us to pay any monetary penalty and sought no
relief beyond the entry of a permanent injunction. The SEC’s related press release noted that, in accepting the settlement offer,
the SEC considered our remediation and cooperation in the SEC’s investigation. The settlement was approved by the United
States District Court for the Eastern District of New York on March 9, 2010.
On December 23, 2009, as we previously reported, we received an additional “Wells Notice” from the staff of the SEC relating
to our failure to timely file our periodic reports under the Exchange Act. On March 3, 2010, the SEC issued an Order Instituting
Proceedings (“OIP”) pursuant to Section 12(j) of the Exchange Act to suspend or revoke the registration of our common stock
because of our failure to file an annual report on either Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on
either Form 10-Q or Form 10-QSB since December 25, 2005. An Administrative Law Judge will consider the evidence in the
Section 12(j) proceeding and has been directed in the OIP to issue an initial decision within 120 days of service of the OIP. We
are currently evaluating the Section 12(j) OIP, including available procedural remedies, and intend to defend against the possible
suspension or revocation of the registration of our common stock.
vi
PART I
Item 1. Business
As discussed under “Explanatory Note”, this report is the annual report for the year ended January 31, 2009. However, as a
result of the gap in our public financial reporting and the significant changes we have made to our business in the interim, the
information in this Item 1 includes certain updated information for periods after January 31, 2009.
Our Company
Verint® Systems Inc. is a global leader in Actionable Intelligence® solutions and value-added services. Our solutions enable
organizations of all sizes to make timely and effective decisions to improve enterprise performance and make the world a safer
place. More than 10,000 organizations in over 150 countries — including over 80% of the Fortune 100 — use Verint solutions to
capture, distill, and analyze complex and underused information sources, such as voice, video, and unstructured text.
In the enterprise market, our workforce optimization solutions help organizations enhance customer service operations in contact
centers, branches, and back-office environments to increase customer satisfaction, reduce operating costs, identify revenue
opportunities, and improve profitability. In the security intelligence market, our video intelligence, public safety, and
communications intelligence solutions are vital to government and commercial organizations in their efforts to protect people
and property and neutralize terrorism and crime.
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of
selling and support partners.
Actionable Intelligence Markets — Enterprise Workforce Optimization and Security Intelligence
We deliver our Actionable Intelligence solutions to the enterprise workforce optimization and security intelligence markets
across a wide range of industries, including financial services, retail, healthcare, telecommunications, law enforcement,
government, transportation, utilities, and critical infrastructure. Much of the information available to organizations in these
industries is unstructured, residing in telephone conversations, video streams, Web pages, email, and other text communications.
Our advanced Actionable Intelligence solutions enable our customers to collect and analyze large amounts of both structured and
unstructured information in order to make better decisions.
In the enterprise workforce optimization market, demand for our Actionable Intelligence solutions is driven by organizations that
seek to leverage unstructured information from customer interactions and other customer-related data in order to optimize the
performance of their customer service operations, improve the customer experience, and enhance compliance. In the security
intelligence market, demand for our Actionable Intelligence solutions is driven by organizations that seek to distill intelligence
from a wide range of unstructured and structured information sources in order to detect, investigate, and neutralize security
threats.
1
We have established leadership positions in both the enterprise workforce optimization and security intelligence markets by
leveraging our core competency in developing highly scalable, enterprise-class applications with advanced, integrated analytics
for both unstructured and structured information.
Company Background
We were incorporated in Delaware in February 1994 as a wholly owned subsidiary of Comverse. Our initial focus was on the
commercial call recording market, which at the time was transitioning from analog tape to digital recorders. In 1999, we
expanded into the security market by combining with another division of Comverse focused on the communications interception
market. In 2001, we further expanded our security offering into video security through a combination of our business with
Loronix® Information Systems, Inc., which had been previously acquired by Comverse.
In May 2002, we completed our initial public offering (“IPO”), and, today, Comverse holds approximately a 67% ownership
position in us (assuming conversion of all of our Series A Convertible Preferred Stock, par value $0.001 per share (“preferred
stock”), into common stock). Since our IPO, we have acquired a number of companies that have strengthened our position in
both the enterprise workforce optimization and security intelligence markets. Our largest acquisition was of Witness Systems,
Inc. (“Witness”) in May 2007, which strengthened our leadership position in the enterprise workforce optimization market.
We participate in the enterprise workforce optimization and security intelligence markets through three operating segments:
Enterprise Workforce Optimization Solutions (“Workforce Optimization”), Video Intelligence Solutions™ (“Video
Intelligence”), and Communications Intelligence and Investigative Solutions™ (“Communications Intelligence”), each of which
is described in greater detail below and in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” under Item 7. See also Note 17, “Segment, Geographic, and Significant Customer Information” to the consolidated
financial statements included in Item 15 for additional information and financial data about each of our operating segments and
geographic regions.
Through our website at www.verint.com, we will make available our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, and Current Reports on Form 8-K, as well as amendments to those reports filed or furnished by us pursuant to Section 13
(a) or Section 15(d) of the Exchange Act, free of charge, as soon as reasonably practicable after we file such materials with the
SEC. Any documents that we file with the SEC can also be read and copied at the SEC’s Public Reference Room located at 100
F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information. Our filings are also
available at the SEC’s website at www.sec.gov. Our website address set forth above is not intended to be an active link and
information on our website is not incorporated in, and should not be construed to be a part of, this report.
2
The Enterprise Workforce Optimization Solutions Segment
We are a leading provider of enterprise workforce optimization software and services. Our solutions enable organizations to
extract and analyze valuable information from customer interactions and related operational data in order to make more effective,
proactive decisions for optimizing the performance of their customer service operations, improving the customer experience, and
enhancing compliance. Marketed under the Impact 360® brand to contact centers, back offices, branch and remote offices, and
public safety centers, these solutions comprise a unified suite of enterprise workforce optimization applications and services that
include Internet Protocol (“IP”) and legacy Time-Division Multiplexing (“TDM”) voice recording and quality monitoring,
speech and data analytics, workforce management, customer feedback, eLearning and coaching, performance management, and
desktop productivity/ application analysis. These applications can be deployed stand-alone or in an integrated fashion.
The Workforce Optimization Market and Trends
We believe that customer service is being viewed more strategically than in the past, particularly by organizations whose
interactions with customers regarding sales and services take place primarily through contact centers. Consistent with this trend,
we believe organizations seek solutions that enable them to strike a balance between driving sales, managing operating costs, and
delivering the optimal customer experience.
In order to make better decisions to achieve these goals, we believe that organizations increasingly seek to leverage valuable data
collected from customer interactions and associated operational activities. However, customer service solutions have
traditionally been deployed in the contact center as stand-alone applications, which prevented information from being shared and
analyzed across multiple/related applications. These solutions also lacked functionality for analyzing unstructured information,
such as the content of phone calls and email. As a result, organizations historically based their customer service-related business
decisions on a fraction of the information available to them.
We believe that customer-centric organizations today seek unified, innovative workforce optimization solutions delivered by a
single vendor to better manage customer service operations across the enterprise. We believe that the key business and
technology trends driving demand for workforce optimization solutions include:
Integration of Workforce Optimization Applications
We believe that organizations increasingly seek a unified workforce optimization suite that includes call recording and quality
monitoring, speech and data analytics, workforce management, customer feedback, performance management, eLearning, and
coaching, as well as pre-defined business integrations. Such a unified workforce optimization suite can provide business and
financial benefits, create a foundation for continuous improvement through a closed loop feedback process, and improve
collaboration among various functions throughout the enterprise. For example:
(cid:129)
contact center managers can receive instant alerts when staff is out of adherence with standards, monitor and record
interactions to determine the cause, and act quickly to correct the problem;
3
(cid:129)
(cid:129)
supervisors can assign and deliver electronic learning material to staff desktops based on training needs automatically
identified from quality monitoring evaluation scores and performance management scorecard metrics, and then track
courses taken and new skills acquired; and
using integrated speech analytics with quality monitoring, our solutions can categorize calls, allowing organizations to
review the interactions that are most significant to the business and identify the underlying causes of customer service
issues.
Additionally, by deploying an integrated workforce optimization suite with a single, unified graphical user interface and common
database, enterprises can achieve lower cost of ownership, reduce hardware costs, simplify system administration, and streamline
implementation and training. An integrated workforce optimization suite also enables enterprises to interact with a single vendor
for sales and service and helps ensure seamless integration and update of all applications.
Greater Insight through Customer Interaction Analytics
We believe that enterprises are increasingly interested in deploying sophisticated customer interaction analytics, particularly
speech, data, and customer feedback analytics, for gaining a better understanding of workforce performance, the customer
experience, and the factors underlying business trends in order to improve the performance of their customer service operations.
Although enterprises have recorded customer interactions for many years, most were able to extract intelligence only by
manually listening to calls, which generally could be done for only a small percentage of all calls. Today, customer interaction
analytics applications, such as speech and data analytics, have evolved to automatically analyze and categorize customer
interactions in order to detect patterns and trends that significantly impact the business. Customer surveys included in a unified
analytics suite help enterprises understand the effectiveness of their employees, products, and processes directly from the
customer’s perspective. Together, these applications provide a new level of insight into such important areas as customer
satisfaction, customer behavior, and staff effectiveness, including the underlying cause of business trends in these critical areas.
Adoption of Workforce Optimization Across the Enterprise
Workforce optimization solutions have traditionally been deployed in contact centers. However, many customer service
employees work in other areas of the enterprise, such as the back office and branch and remote office locations. Today, we
believe that certain enterprises show increased interest in deploying certain workforce optimization applications, such as staff
scheduling and desktop activity management, outside the contact center to enable the same type of performance measurement
that has historically been available in the contact center, with the goal of improving customer service and performance across the
enterprise.
4
Migration to Voice over Internet Protocol (“VoIP”) Technologies
Many enterprises are replacing their contact centers’ legacy voice (TDM) infrastructures with VoIP telephony infrastructure.
These upgrades typically require new deployments of workforce optimization solutions that are designed to support IP or hybrid
TDM/IP environments.
Our Enterprise Workforce Optimization Solutions Portfolio
We are a leader in the workforce optimization market with Impact 360, a comprehensive, unified portfolio of workforce
optimization solutions. Our Workforce Optimization solutions are highly scalable and designed to be deployed by small to very
large organizations in traditional contact centers and other areas of the enterprise, such as the back office, remote offices, and
branches, as well as by public safety centers. Our solutions are generally implemented in industries that have significant
customer service operations, such as insurance, banking and brokerage, telecommunications, media, retail, public safety, and
hospitality.
The following table summarizes our portfolio of Workforce Optimization solutions.
Solution
Quality Monitoring
Full-Time and Compliance Recording
Workforce Management
Customer Interaction Analytics
(Speech, Data, and Customer
Feedback)
Description
Records multimedia interactions based on user-defined business rules and provides
sophisticated interaction assessment functionality, including intelligent evaluation
forms and automatic delivery of calls for evaluation according to quotas or contact-
related criteria, to help enterprises evaluate and improve the performance of
customer service staff.
Provides contact center recording for compliance, sales verification, and monitoring
in IP, traditional TDM, and mixed telephony environments. Includes encryption
capabilities to help support the Payment Card Industry Data Security Standard and
other regulatory requirements for protecting sensitive data.
Helps enterprises forecast staffing requirements, deploy the appropriate level of
resources, and evaluate the productivity of their customer service staff. Also
includes optional strategic planning capabilities to help determine optimal hiring
plans.
Our speech analytics solutions analyze call content for the purpose of proactively
identifying business trends, building effective cost containment and customer
service strategies, and enhancing quality monitoring programs.
Our data analytics apply our data mining technology to call-related information
(metadata) and call content, as well as to productivity, quality, and customer
experience metrics, to help enterprises identify hidden service and quality issues,
determine the causes, and correct them.
Our customer feedback analytics help enterprises efficiently survey customers via
Interactive Voice Response (“IVR”), Web, or email in order to gather customer
feedback on products, processes, agent performance, and customer satisfaction and
loyalty.
5
Solution
Performance Management
eLearning and Coaching
Desktop Activity Management
Workforce Optimization for
Small-to-Medium Sized Businesses
(“SMB”)
Public Safety
Description
Provides a comprehensive view of key performance indicators (“KPIs”), with
performance scorecards and reports on customer interactions, customer experience
trends, and contact center, back office, branch, remote office, and customer service
staff performance.
Enables enterprises to deliver Web-based training to customer service staff
desktops, including learning clips created from recordings and other customized
materials targeted to staff needs and competencies.
Captures information from customer service employee interactions with their
desktop applications to provide insights into productivity, training issues, process
adherence, and bottlenecks.
Designed for smaller companies (with contact centers), which increasingly face the
same business requirements as their larger competitors. Enables companies of all
sizes to boost productivity, reduce attrition, capture and evaluate interactions, and
satisfy compliance and risk management requirements in a cost-effective way.
Includes quality monitoring, speech analytics, and full-time and compliance
recording solutions under the brand Impact 360 for Public Safety Powered by
Audiolog™. Our public safety solution allows first responders (police, fire
departments, emergency medical services, etc.) in the Security Intelligence market
to deploy workforce optimization solutions to record, manage, and act on incoming
assistance requests and related data.
The Video Intelligence Solutions Segment
We are a leading provider of networked IP video solutions designed to optimize security and enhance operations. Our Video
Intelligence solutions portfolio includes IP video management software and services, edge devices for capturing, digitizing, and
transmitting video over different types of wired and wireless networks, video analytics, and networked digital video recorders
(“DVRs”). Marketed under the Nextiva® brand, this portfolio enables organizations to deploy an end-to-end IP video solution
with analytics or evolve to IP video solutions without discarding their investments in analog Closed Circuit Television
(“CCTV”) technology.
6
The Networked IP Video Market and Trends
We believe that terrorism, crime, and other security threats around the world are generating demand for advanced video security
solutions that can help detect threats and prevent security breaches. We believe that organizations across a wide range of
industries, including public transportation, utilities, ports and airports, government, education, finance, and retail, are interested
in broader deployment of video solutions and more proactive use of existing video to increase the safety and security of their
facilities, employees, and visitors, improve emergency response, and enhance their investigative capabilities.
Consistent with this trend, the video security market continues to experience a technology transition from relatively passive
analog CCTV video systems, which use analog equipment and closed networks and generally provide only basic recording and
viewing capabilities, to more sophisticated, proactive, network-based IP video systems that use video management software to
efficiently collect, manage, and analyze large amounts of video over networks and feature analytics. We believe this transition
from passive analog systems to network-based digital systems greatly improves the ability of organizations to quickly and
efficiently detect security breaches and deliver video and data across the enterprise and to outside agencies in order to address
security threats, improve operational efficiency, and comply with cost containment mandates.
While the security market is evolving to networked IP video solutions, many organizations have already made significant
investments in analog technology. Our Nextiva solutions allow these organizations to cost effectively migrate to networked IP
video without discarding their existing analog investments. Designed on an open platform, our solutions facilitate inter-
operability with our customers’ business and security systems and with complementary third-party products, such as cameras,
video analytics, video management software, command and control systems, and access control systems.
Our Video Intelligence Solutions Portfolio
We are a leader in the networked video market with Nextiva, a comprehensive, end-to-end, networked IP video solution
portfolio. The following table summarizes our portfolio of Video Intelligence solutions.
Solution
IP Video Management Software
Edge Devices
Description
Simplifies management of large volumes of video and geographically dispersed
video surveillance operations, with a suite of applications that includes automated
system health monitoring, policy-based video distribution, networked video
viewing, and investigation management. Designed for use with industry-standard
servers and storage solutions and for inter-operability with other enterprise systems.
Captures, digitizes, and transmits video across enterprise networks, providing many
of the benefits of IP video while using existing analog CCTV investments. Includes
IP cameras, bandwidth-efficient video encoders to convert analog images to IP
video for transmission over IP networks, and wireless devices that perform both
video encoding and wireless IP transmission, facilitating video surveillance in areas
too difficult or expensive to wire.
7
Solution
Video Analytics
Networked DVRs
Description
Analyzes video content to automatically detect anomalies and activities of interest,
such as perimeter intrusion, unattended objects, camera tampering, and vehicles
moving in the wrong direction. Also includes industry-specific analytics
applications focused on the behavior of people in retail and other environments.
Performs networked digital video recording utilizing secure, embedded operating
systems and market-specific data integrations for applications that require local
storage, as well as remote networking.
Our Video Intelligence solutions are deployed across a wide range of industries, including banking, retail, critical infrastructure,
government, corporate campuses, education, airports, seaports, public transportation, and homeland security. Our video solutions
include certain video analytics and data integrations specifically optimized for these industries. For example, our public
transportation application includes global positioning system (“GPS”) integrations, our retail application includes point of sale
integrations and retail traffic analytics, our banking application includes automated teller machine (“ATM”) integrations, and our
critical infrastructure application includes video analytics for detecting suspicious events and command and control integrations.
The Communications Intelligence and Investigative Solutions Segment
We are a leading provider of Communications Intelligence solutions that help law enforcement, national security, intelligence,
and other government agencies effectively detect, investigate, and neutralize criminal and terrorist threats. Our solutions are
designed to handle massive amounts of unstructured and structured information from different sources, quickly make sense of
complex scenarios, and generate evidence and intelligence. Our portfolio includes solutions for communications interception,
service provider compliance, mobile location tracking, fusion and data management, financial crime investigation, Web
intelligence, integrated video monitoring, and tactical communications intelligence. These solutions can be deployed stand-alone
or collectively, as part of a large-scale system to address the needs of large government agencies that require advanced,
comprehensive solutions.
8
The Communications Intelligence and Investigative Solutions Market and Trends
We believe that terrorism, criminal activities, including financial fraud and drug trafficking, and other security threats, combined
with an expanding range of communication and information media, are driving demand for innovative security solutions that
collect, integrate, and analyze information from voice, video, and data communications, as well as from other sources, such as
private and public databases. We believe the key trends driving demand for our Communications Intelligence solutions are:
Increasing Complexity of Communications Networks and Growing Network Traffic
Law enforcement and certain other government agencies are typically given the authority to intercept communication
transmissions to and from specified targets for the purpose of generating evidence. National security and intelligence agencies
intercept communications, often in massive volumes, for the purpose of generating intelligence and supporting investigations.
We believe that these agencies are seeking technically advanced solutions to help them to keep pace with increasingly complex
communications networks and the growing amount of network traffic.
Growing Demand for Advanced Intelligence and Investigative Solutions
Investigations related to criminal and terrorist networks, drugs, financial crimes, and other illegal activities are highly complex
and often involve collecting and analyzing information from multiple sources. We believe that law enforcement, national
security, intelligence, and other government agencies are seeking advanced solutions that enable them to integrate and analyze
information from multiple sources and collaborate more efficiently with various other agencies in order to unearth suspicious
activity, optimize investigative workflows, and make investigations more effective.
Legal and Regulatory Compliance Requirements
In many countries, communications service providers are mandated by government regulation to satisfy certain technical
requirements for delivering communication content and data to law enforcement and government authorities. For example, in the
United States, requirements have been established under the Communications Assistance for Law Enforcement Act (“CALEA”).
In Europe, similar requirements have been adopted by the European Telecommunications Standards Institute (“ETSI”). In
addition, many law enforcement and government agencies around the world are mandated to ensure compliance with laws and
regulations related to criminal activities, such as financial crime. We believe these laws and regulations are creating demand for
our Communications Intelligence solutions.
Our Communications Intelligence and Investigative Solutions Portfolio
We are a leader in the market for communications intelligence solutions, which are marketed under the RELIANT™,
VANTAGE®, STAR-GATE™, X-TRACT®, and ENGAGE™ brand names. The following table summarizes our portfolio of
Communications Intelligence solutions.
Solution
Communications Interception
Description
Enables the interception, monitoring, and analysis of information collected from a
wide range of communications networks, including fixed and mobile networks, IP
networks, and the Internet. Includes lawful interception solutions designed to
intercept specific target communications pursuant to legal warrants and mass
interception solutions for investigating and proactively addressing criminal and
terrorist threats.
9
Solution
Communications Service Provider
Compliance
Mobile Location Tracking
Fusion and Investigation Management
Financial Crime Investigation
Web Intelligence
Integrated Video Monitoring
Tactical Communications Intelligence
Customer Services
Description
Enables communication service providers to collect and deliver to government
agencies specific call-related information in compliance with CALEA, ETSI, and
other compliance regulations and standards. Includes a scalable warrant and
subpoena management system for efficient, cost-effective administration of legal
warrants across multiple networks and sites.
Tracks the location of mobile network devices for intelligence and evidence
gathering, with analytics and workflow designed to support investigative activities.
Provides real-time tracking of multiple targets, real-time alerts, and investigative
capabilities, such as geospatial fencing and events correlation.
Fuses data gathered from multiple database sources, with link analysis, adaptable
investigative workflow, and analytics to improve investigation efficiency and
productivity. Supports complex investigations that require expertise across various
domains, involve multiple government agencies, and require significant resources
and time.
Helps law enforcement and government financial regulatory agencies investigate
financial fraud, money laundering, and other financial crimes, as well as drug- and
terror-related cases.
Increases the productivity and efficiency of investigations in which the Internet is
the prime source of information. Features advanced data collection, text analysis,
data enrichment, advanced analytics, and a clearly defined investigative workflow
on a scalable platform.
Enables the scalable collection, storage, and analysis of video captured by
surveillance systems and its integration with other sources of information, such as
intercepted communications or location tracking data.
Provides portable communications interception and location tracking capabilities
for local use or integration with centralized monitoring systems, to support tactical
field operations.
We offer a range of customer services, including implementation, training, consulting, and maintenance, to help our customers
maximize their return on investment in our solutions.
Implementation, Training, and Consulting
Our solutions are implemented by our service organizations, authorized partners, resellers, or customers. Our implementation
services include project management, system installation, and commissioning, including integrating our applications with our
customers’ environments and third-party solutions. Our training programs are designed to enable our customers to effectively
utilize our solutions and to certify our partners to sell, install, and support our solutions. Customer and partner training are
provided at the customer site, at our training centers around the world, or remotely through webinars. Our consulting services are
designed to enable our customers to maximize the value of our solutions in their own environments.
10
Maintenance Support
We offer a range of customer maintenance support programs to our customers and resellers, including phone, Web, and email
access to technical personnel up to 24 hours a day, 7 days a week. Our support programs are designed to ensure long-term,
successful use of our solutions. We believe that customer support is critical to retaining and expanding our customer base. Our
Workforce Optimization solutions are sold with a warranty of generally one year for hardware and 90 days for software. Our
Video Intelligence solutions and Communications Intelligence solutions are sold with warranties that typically range from
90 days to 3 years, and in some cases longer. In addition, customers are typically provided the option to purchase maintenance
plans that provide a range of services, such as telephone support, advanced replacement, upgrades when and if available, and on-
site repair or replacement. Currently, the majority of our maintenance revenue is related to our Workforce Optimization
solutions.
Direct and Indirect Sales
We sell our solutions through our direct sales teams and indirect channels, including distributors, systems integrators, value-
added resellers (“VAR”), and original equipment manufacturer (“OEM”) partners.
Each of our solutions is sold by trained, dedicated, regionally organized direct and indirect sales teams. Our direct sales teams
are focused on large and mid-sized customers and, in many cases, co-sell with our other channels and sales agents. Our indirect
sales teams are focused on developing and supporting relationships with our indirect channels, which provide us with broader
market coverage, including access to their customer base, integration services, and presence in certain geographies and vertical
markets. Our sales teams are supported by business consultants, solutions specialists, and pre-sales engineers who, during the
sales process, determine customer requirements and develop technical responses to those requirements. While we sell directly
and indirectly in all three of our segments, sales of our Video Intelligence solutions are primarily indirect, and sales of our
Communications Intelligence solutions are primarily direct.
Customers
Our solutions are currently used by more than 10,000 organizations in over 150 countries. In the year ended January 31, 2009,
we derived approximately 53%, 19%, and 28% of our revenue from the sales of our Workforce Optimization solutions, Video
Intelligence solutions, and Communications Intelligence solutions, respectively. In the year ended January 31, 2008, we derived
approximately 49%, 28%, and 23% of our revenue from the sales of our Workforce Optimization solutions, Video Intelligence
solutions, and Communications Intelligence solutions, respectively. In the year ended January 31, 2007, we derived
approximately 34%, 33%, and 33% of our revenue from the sales of our Workforce Optimization solutions, Video Intelligence
solutions, and Communications Intelligence solutions, respectively.
11
In the year ended January 31, 2009, we derived approximately 52%, 32%, and 16 % of our revenue from sales to end users in the
Americas; Europe, the Middle East, and Africa (“EMEA”); and the Asia Pacific Region (“APAC”), respectively. In the year
ended January 31, 2008, we derived approximately 52%, 33%, and 15% of our revenue from sales to end users in the Americas,
EMEA, and APAC, respectively. In the year ended January 31, 2007, we derived approximately 48%, 31%, and 21% of our
revenue from sales to end users in the Americas, EMEA, and APAC, respectively.
None of our customers, including system integrators, VARs, various local, regional, and national governments worldwide, and
OEM partners, individually accounted for more than 10% of our revenue in the years ended January 31, 2009, 2008, and 2007. In
some years, we have entered into one or more contracts with customers in our Video Intelligence segment or our
Communications Intelligence segment the loss of which could have a material adverse effect on the segment. See Note 17,
“Segment, Geographic, and Significant Customer Information” to the consolidated financial statements included in Item 15.
Some of the customer engagements on which we work require us to have the necessary security credentials or to participate in
the project through an approved legal entity. For a more detailed discussion of the risks associated with our government
customers, see “Risk Factors — We are dependent on contracts with governments around the world for a significant portion of
our revenue. These contracts expose us to additional business risks and compliance obligations” under Item 1A and “Risk
Factors — U.S. and foreign governments could refuse to buy our Communications Intelligence solutions or could deactivate our
security clearances in their countries thereby restricting or eliminating our ability to sell these solutions in those countries and
perhaps other countries influenced by such a decision” under Item 1A.
Research and Development
We continue to enhance the features and performance of our existing solutions and to introduce new solutions through extensive
research and development activities, including the development of new solutions, the addition of capabilities to existing
solutions, quality assurance, and advanced technical support for our customer services organization. In certain instances, we
customize our products to meet the particular requirements of our customers. Research and development is performed primarily
in the United States, the United Kingdom, and Israel for our Workforce Optimization segment; primarily in the United States,
Canada, and Israel for our Video Intelligence segment; and primarily in Israel, with separate and independent research and
development activities in Germany, for our Communications Intelligence segment.
We believe that our future success depends on a number of factors, which include our ability to:
(cid:129)
(cid:129)
identify and respond to emerging technological trends in our target markets;
develop and maintain competitive solutions that meet our customers’ changing needs;
12
(cid:129)
(cid:129)
enhance our existing products by adding features and functionality to meet specific customer needs or differentiate our
products from those of our competitors; and
attract, recruit, and retain highly skilled and experienced employees.
To support these efforts, we make significant investments in research and development every year. In the years ended
January 31, 2009, 2008, and 2007, we spent approximately $88.3 million, $87.7 million, and $53.0 million, respectively, on
research and development, net. We allocate our research and development resources in response to market research and customer
demand for additional features and solutions. Our development strategy involves rolling out initial releases of our products and
adding features over time. We incorporate product feedback received from our customers into our product development process.
While the majority of our products are developed internally, in some cases, we also acquire or license technologies, products,
and applications from third parties based on timing and cost considerations.
As noted above, a significant portion of our research and development operations is located outside the United States.
Historically, we have also derived substantial benefits from participation in certain government-sponsored programs, including
those of the Office of the Chief Scientist (“OCS”) of Israel and certain research and development programs in Canada, for the
support of research and development activities conducted in those countries. The Israeli law under which these OCS grants are
made limits our ability to manufacture products, or transfer technologies, developed using these grants outside of Israel without
permission from the OCS. See “Risk Factors — Research and development and tax benefits we receive in Israel may be reduced
or eliminated in the future and our receipt of these benefits subjects us to certain restrictions” and “Risk Factors — Because we
have significant foreign operations, we are subject to geopolitical and other risks that could materially adversely affect our
business” under Item 1A for a discussion of these and other risks associated with our foreign operations.
Manufacturing and Suppliers
Our manufacturing and assembly operations are performed in our U.S. and Israeli facilities for our Workforce Optimization
solutions; in our U.S., Israeli, and Canadian facilities for our Video Intelligence solutions; and in our German and Israeli
facilities for our Communications Intelligence solutions. These operations consist of installing our software on externally
purchased hardware components, final assembly, and testing, which involves the application of extensive quality control
procedures to materials, components, subassemblies, and systems. We also manufacture certain hardware units and perform
system integration functions prior to shipping turnkey solutions to our customers. We rely on several unaffiliated subcontractors
for the supply of specific proprietary components and assemblies that are incorporated in our products, as well as for certain
operations activities that we outsource. Although we have occasionally experienced delays and shortages in the supply of
proprietary components in the past, we have, to date, been able to obtain adequate supplies of all components in a timely manner
from alternative sources, when necessary. See “Risk Factors — For certain products and components, we rely on a limited
number of suppliers and manufacturers and, if these relationships are interrupted, we may not be able to obtain substitute
suppliers or manufacturers on favorable terms or at all” under Item 1A for a discussion of risks associated with our
manufacturing operations and suppliers.
13
Employees
As of January 31, 2010, we employed approximately 2,500 people, including part-time employees and certain contractors.
Approximately 46%, 38%, 10%, and 6% of our employees are located in the Americas, Israel, Europe, and APAC, respectively.
We consider our relationship with our employees to be good and a critical factor in our success. Our employees in the United
States are not covered by any collective bargaining agreements. In some cases, our employees outside the United States are
automatically subject to certain protections negotiated by organized labor in those countries directly with the government or are
automatically entitled to severance or other benefits mandated under local laws. For example, while we are not a party to any
collective bargaining or other agreement with any labor organization in Israel, 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 Manufacturers’ Association of Israel) are applicable to our Israeli employees by virtue of an
expansion order of the Israeli Ministry of Industry, Trade and Labor.
Intellectual Property Rights
General
Our success depends to a significant degree on the legal protection of our software and other proprietary technology. We rely on
a combination of patent, trade secret, copyright, and trademark laws and confidentiality and non-disclosure agreements with
employees and third parties to establish and protect our proprietary rights.
Patents
As of February 28, 2010, we had more than 460 patents and patent applications worldwide. We have accumulated a significant
amount of proprietary know-how and expertise in developing analytics solutions for enterprise workforce optimization and
security intelligence products. We regularly review new areas of technology related to our businesses to determine whether they
are patentable.
Licenses
Our licenses are designed to prohibit unauthorized use, copying, and disclosure of our software technology. When we license our
software to customers, we require license agreements containing restrictions and confidentiality terms customary in the industry
in order to protect our proprietary rights in the software. These agreements generally warrant that the software and propriety
hardware will materially comply with written documentation and assert that we own or have sufficient rights in the software we
distribute and have not violated the intellectual property rights of others. We license our products in a format that does not permit
users to change the software code.
14
We license certain software, technology, and related rights for use in the manufacture and marketing of our products and pay
royalties to third parties under such licenses and other agreements. We believe that our rights under such licenses and other
agreements are sufficient for the manufacture and marketing of our 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.
Trademarks and Service Marks
We use various trademarks and service marks to protect the marks used in our business. We also claim common law protections
for other marks we use in our business. Competitors and other companies could adopt similar marks or try to prevent us from
using our marks, consequently impeding our ability to build brand identity and possibly leading to customer confusion. See
“Risk Factors — Our intellectual property may not be adequately protected” under Item 1A for a more detailed discussion
regarding the risks associated with the protection of our intellectual property.
Competition
We face strong competition in all of our markets, and we expect that competition will persist and intensify. In our Workforce
Optimization segment, our competitors are Aspect Software, Inc., Autonomy Corp., Genesys Telecommunications, NICE
Systems Ltd (“NICE”), and many smaller companies, which can vary across regions. In our Video Intelligence segment, our
competitors include Dedicated Microcomputer Limited, Genetec Inc., March Networks Corporation, Milestone Systems A/S,
NICE, and Pelco, Inc. (a division of Schneider Electric Limited); divisions of larger companies, including Bosch Security
Systems, Cisco Systems, Inc., General Electric Company (which announced in November 2009 its intent to sell its fire-detection
and security business to United Technologies Corp.), Honeywell International Inc., and many smaller companies, which can vary
across regions. In our Communications Intelligence segment, our primary competitors are Aqsacom Inc., ETI, JSI Telecom,
NICE, Pen-Link, Ltd., RCS S.R.L., Trovicor, SS8 Networks, Inc., Ultimaco (a division of Sophos, Plc), and many smaller
companies, which can vary across regions. Some of our competitors have superior brand recognition and greater financial
resources than we do, which may enable them to increase their market share at our expense. Furthermore, we expect that
competition will increase as other established and emerging companies enter IP markets and as new products, services, and
technologies are introduced.
In each of our operating segments, we believe we compete principally on the basis of:
(cid:129)
(cid:129)
(cid:129)
product performance and functionality;
product quality and reliability;
breadth of product portfolio and inter-operability;
15
(cid:129)
(cid:129)
(cid:129)
global presence and high-quality customer service and support;
specific industry knowledge, vision, and experience; and
price.
We believe that our success depends primarily on our ability to provide technologically advanced and cost-effective solutions
and services. We expect that competition will increase as other established and emerging companies enter our market and as new
products, services, and technologies are introduced. In recent years, there has also been significant consolidation among our
competitors, which has improved the competitive position of several of these companies and enabled new competitors to emerge
in all of our markets. See “Risk Factors — Intense competition in our markets and competitors with greater resources than us
may limit our market share, profitability, and growth” under Item 1A for a more detailed discussion of the competitive risks we
face.
Export Regulations
We and our subsidiaries are subject to applicable export control regulations in countries from which we export goods and
services, including the United States and Israel. These controls may apply by virtue of the country in which the products are
located or by virtue of the origin of the content contained in the products. If the controls of a particular country apply, the level of
control generally depends on the nature of the goods and services in question. For example, our Communications Intelligence
solutions tend to be more highly controlled than our Workforce Optimization solutions. Certain countries, including the United
States and Israel, have also imposed controls on products that contain encryption functionality, which covers many of our
products. Where controls apply, the export of our products generally requires an export license or authorization (either on a per-
product or per-transaction basis) or that the transaction qualify for a license exception or the equivalent, and may also be subject
to corresponding reporting requirements.
Recent Developments
The following summaries describe the significant developments that occurred subsequent to January 31, 2009.
Acquisition of Iontas
On February 4, 2010, our wholly owned subsidiary, Verint Americas Inc. (“Verint Americas”), acquired all of the outstanding
shares of Iontas Limited (“Iontas”), a privately held provider of desktop analytics solutions. Prior to this acquisition, we licensed
certain technology from Iontas, whose solutions measure application usage and analyze workflows to help improve staff
performance in contact center, branch, and back-office operations environments. We acquired Iontas for approximately
$15.2 million in cash (net of cash acquired) and potential additional earn-out payments of up to $3.8 million, tied to certain
targets being achieved over the next two years. The initial purchase price allocation for this acquisition is not yet available, as we
have not completed the appraisals necessary to assess the fair values of the tangible and identified intangible assets acquired and
liabilities assumed, the assets and liabilities arising from contingencies (if any), and the amount of goodwill to be recognized as
of the acquisition date.
16
Wells Notices
On April 9, 2008, as we previously reported, we received a “Wells Notice” from the staff of the SEC arising from the staff’s
investigation of our past stock option grant practices and certain unrelated accounting matters. These accounting matters also
were the subject of our internal investigation. On March 3, 2010, the SEC filed a settled enforcement action in the United States
District Court for the Eastern District of New York relating to certain of our accounting reserve practices. Without admitting or
denying the allegations in the SEC’s Complaint, we consented to the issuance of a Final Judgment permanently enjoining us
from violating Section 17(a) of the Securities Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and
Rules 13a-1 and 13a-13 thereunder. The settled SEC action did not require us to pay any monetary penalty and sought no relief
beyond the entry of a permanent injunction. The SEC’s related press release noted that, in accepting the settlement offer, the
SEC considered our remediation and cooperation in the SEC’s investigation. The settlement was approved by the United States
District Court for the Eastern District of New York on March 9, 2010.
On December 23, 2009, as we previously reported, we received an additional “Wells Notice” from the staff of the SEC relating
to our failure to timely file our periodic reports under the Exchange Act. On March 3, 2010 the SEC issued an OIP pursuant to
Section 12(j) of the Exchange Act to suspend or revoke the registration of our common stock because of our failure to file an
annual report on either Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on either Form 10-Q or Form 10-
QSB since December 12, 2005. An Administrative Law Judge will consider the evidence in the Section 12(j) proceeding and has
been directed in the OIP to issue an initial decision within 120 days of service of the OIP. We are currently evaluating the
Section 12(j) OIP, including available procedural remedies, and intend to defend against the possible suspension or revocation of
the registration of our common stock.
Item 1a. Risk Factors
Many of the factors that affect our business and operations involve risks and uncertainties. The factors described below are risks
that could materially harm our business, financial condition, and results of operations. These are not all the risks we face and
other factors currently considered immaterial or unknown to us may have a material adverse impact on our future operations.
17
Risks Related to Our Internal Investigation, Restatement, Internal Controls, and Ownership
Following the filing of this report, we will remain delayed in our SEC reporting obligations, we cannot assure you when
we will complete our remaining SEC filings for periods subsequent to those included in this report, and we are likely to
continue to face challenges until we complete these filings and re-list our common stock.
Although our internal investigation, revenue recognition review, and related restatement of our financial statements have been
completed, as discussed under “Explanatory Note” and in our Comprehensive Form 10-K, we continue to face challenges with
regard to completing our remaining SEC filings for periods subsequent to those included in this report. We remain delayed with
our SEC reporting obligations as of the filing date of this report and we cannot assure you that we will be able to complete our
remaining filings for periods subsequent to those included in this report prior to the conclusion of the SEC administrative
proceeding to suspend or revoke the registration of our common stock, described below. Until we complete these remaining
filings, we expect to continue to face many of the risks and challenges we have experienced during our extended filing delay
period, including:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
risk associated with the SEC’s initiation of an administrative proceeding on March 3, 2010 to suspend or revoke the
registration of our common stock under the Exchange Act due to our previous failure to file an annual report on either
Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on either Form 10-Q or Form 10-QSB since
December 12, 2005;
continued risk in maintaining compliance with the covenants and other requirements of our credit agreement, which,
among other things, makes it a default if we do not provide audited financial statements for the year ended January 31,
2010 to our lenders on or before May 1, 2010 and an event of default if we do not do so by May 31, 2010 (which could
result in the holders of the debt declaring all amounts outstanding to be immediately due and payable);
continued concern on the part of customers, partners, investors, and employees about our financial condition and
extended filing delay status, including potential loss of business opportunities;
additional significant time and expense required to complete our remaining filings and the process of seeking the re-
listing of our common stock on NASDAQ or another national securities exchange beyond the very significant time
and expense we have already incurred in connection with our internal investigation, restatement, and audits to date;
continued distraction of our senior management team and our board of directors as we work to complete our remaining
filings and seek to re-list our common stock;
limitations on our ability to raise capital and make acquisitions; and
general reputational harm as a result of the foregoing.
18
Even if we complete our remaining filings for periods subsequent to those included in this report and our common stock is re-
listed on NASDAQ or another national securities exchange, we cannot assure you that all of the risks and challenges described
above will be eliminated. For example, we cannot assure you that lost business opportunities can be recaptured or that general
reputational harm will not persist. If we are unable to complete our remaining filings prior to the conclusion of the SEC
administrative proceeding to suspend or revoke the registration of our common stock described below, are unable to re-list our
common stock, or if one or more of the foregoing risks or challenges persist even after we have done so, our business, results of
operations, and financial condition are likely to be materially and adversely affected.
We have identified various material weaknesses in our internal control over financial reporting which have materially
adversely affected our ability to timely and accurately report our results of operations and financial condition. These
material weaknesses may not have been fully remediated as of the filing date of this report and we cannot assure you that
other material weaknesses will not be identified in the future.
As a result of the circumstances which gave rise to our internal investigation, restatement, and revenue recognition review
discussed under “Explanatory Note” and in our Comprehensive Form 10-K, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of January 31, 2009, we had material weaknesses in our internal controls over financial reporting
and that, as a result, our disclosure controls and procedures and our internal controls over financial reporting were not effective at
such date. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that
creates a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be
prevented or detected on a timely basis.
In addition, we believe that we continued to have material weaknesses in our internal control over financial reporting subsequent
to January 31, 2009. See “Controls and Procedures” under Item 9A for a detailed discussion of the material weaknesses
identified as of January 31, 2009, possible material weaknesses as of subsequent periods, and related remediation activities.
Although we have implemented remedial measures to address all of the identified material weaknesses, our assessment of the
impact of these measures has not been completed as of the filing date of this report, and we cannot assure you that these
measures are adequate. Moreover, we cannot assure you that additional material weaknesses in our internal control over financial
reporting will not arise or be identified in the future.
As a result, we must continue our remediation activities and must also continue to improve our operational, information
technology, and financial systems, infrastructure, procedures, and controls, as well as continue to expand, train, retain, and
manage our employee base. Any failure to do so, or any difficulties we encounter during implementation, could result in
additional material weaknesses or in material misstatements in our financial statements. These misstatements could result in a
future restatement of our financial statements, could cause us to fail to meet our reporting obligations, or could cause investors to
lose confidence in our reported financial information, leading to a decline in our stock price.
19
The extraordinary processes underlying the preparation of the financial statements contained in this report may not have
been adequate and our financial statements remain subject to the risk of future restatement.
The completion of our audits for the years ended January 31, 2009, 2008, 2007, and 2006, the restatement of certain items and
the making of other corrective adjustments to our financial statements for periods through January 31, 2005, and the revenue
recognition review undertaken in connection therewith, involved many months of review and analysis, including highly technical
analyses of our contracts and business practices, equity-based compensation instruments, tax accounting, and the proper
application of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software
Revenue Recognition (“SOP 97-2”), SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts (“SOP 81-1”), and other accounting rules and pronouncements. The completion of our financial statement audits also
followed the completion of an extremely detailed forensic audit as part of our internal investigation. Given the complexity and
scope of these exercises, and notwithstanding the very extensive time, effort, and expense that went into them, we cannot assure
you that these extraordinary processes were adequate or that additional accounting errors will not come to light in the future in
these or other areas.
In addition, the relevant accounting rules and pronouncements that were the focus of our restatement and extended audit are
subject to ongoing interpretation by the Financial Accounting Standards Board (“FASB”), the AICPA, the SEC, and various
bodies formed to promulgate and interpret appropriate accounting principles. Further, the accounting profession continues to
assess these accounting rules and pronouncements with the objectives of providing additional guidance on potential
interpretations or refining accounting methodologies. As a result, ongoing interpretations of these rules and pronouncements or
the adoption of new rules and pronouncements could drive changes in our accounting practices or financial reporting. We cannot
assure you that such changes will not arise or that if they do arise that we will be able to timely adapt to them or that we will not
experience future reporting delays.
If additional accounting errors come to light in areas reviewed as part of our extraordinary processes or otherwise, or if ongoing
interpretations of applicable accounting rules and pronouncements result in unanticipated changes in our accounting practices or
financial reporting, future restatements of our financial statements may be required.
We cannot assure that our regular financial statement preparation and reporting processes are or will be adequate or
that future restatements will not be required.
As discussed in the preceding risk factor, the processes underlying the preparation of the financial statements contained in this
report were extraordinary. While we expect to continue to rely on these extraordinary processes for a period of time, during the
year ending January 31, 2011, we expect to increasingly rely on our regular financial statement preparation and reporting
processes.
20
While we have significantly changed and enhanced these regular processes (as described elsewhere in this report) as of the filing
date of this report, we cannot assure you that previously identified material weaknesses have been fully remediated and we
continue to:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
make changes to our finance organization;
adopt new accounting and reporting processes and procedures;
enhance our revenue recognition and other existing accounting policies and procedures;
introduce new or enhanced accounting systems and processes; and
improve our internal controls over financial reporting.
Many of these changes and enhancements to our regular processes are ongoing as of the filing date of this report and we continue
to assimilate the complex and pervasive changes we have already made. We cannot assure you that the changes and
enhancements made to date, or those that are still in process, are adequate, will operate as expected, or will be completed in a
timely fashion (if still in process). As a result, we cannot assure you that we will not discover additional errors, that future
financial reports will not contain material misstatements or omissions, that future restatements will not be required, that we will
be able to timely complete our remaining SEC filings for periods subsequent to this report, or that we will be able to timely
comply with our reporting obligations in the future.
We cannot assure you that our common stock will be re-listed, or that once re-listed, it will remain listed.
As a result of the delay in filing our periodic reports with the SEC, we were unable to comply with the listing standards of
NASDAQ and our common stock was suspended from trading effective February 1, 2007 and formally de-listed effective June 4,
2007. We have applied to re-list our common stock with NASDAQ; however, there can be no assurance that we will be able to
re-list our common stock in an expeditious manner or at all. Even if our common stock is re-listed, unless we are able to timely
comply with our SEC reporting obligations in the future, our common stock may again be de-listed. If we cannot re-list our
common stock or if it is de-listed again in the future, the price of our common stock will likely be adversely affected and there
may be a decrease in the liquidity of our common stock.
21
The circumstances which gave rise to our extended filing delay and restatement continue to create the risk of litigation
against us, which could be expensive and could damage our business.
Although Comverse and its affiliates have been named in a number of class action or shareholder derivative lawsuits relating to
Comverse’s internal investigation and restatement, no such actions relating to our internal investigation, restatement, or extended
filing delay have been brought against us to date. However, companies that have undertaken internal reviews and investigations
or restatements face greater risk of litigation or other actions and there can be no assurance that such a suit or action relating to
our internal investigation, restatement, or extended filing delay will not be initiated against us or our current or former officers,
directors, or other personnel in the future. In addition, we have in the past and may in the future become subject to litigation or
threatened litigation from current or former personnel as a result of our suspension of option exercises during our extended filing
delay period, the expiration of equity awards during such period, or other employment-related matters relating to our internal
investigation, restatement, or extended filing delay. Any such litigation or action may be time consuming and expensive, and
may distract management from the conduct of our business. Any such litigation or action could have a material adverse effect on
our business, financial condition, and results of operations, and may expose us to costly indemnification obligations to current or
former officers, directors, or other personnel, regardless of the outcome of such matter.
We were the subject of an SEC investigation relating to our reserve and stock option accounting practices and are the
subject of an SEC proceeding relating to our failure to timely file required SEC reports. These government inquiries or
any future inquiries to which we may become subject could result in penalties and/or other remedies that could have a
material adverse effect on our financial condition and results of operation.
Comverse was the subject of an SEC investigation and resulting civil action regarding the improper backdating of stock options
and other accounting practices, including the improper establishment, maintenance, and release of reserves, the reclassification
of certain expenses, and the calculation of backlog of sales orders. On June 18, 2009, Comverse announced that it had reached a
settlement with the SEC on these matters without admitting or denying the allegations of the SEC complaint. Three of
Comverse’s former officers, each of whom previously served on our board of directors, have also been charged in civil and
criminal actions by the SEC and the Department of Justice in connection with the circumstances surrounding the Comverse
special committee investigation. Two of these three matters have been settled to date.
On July 20, 2006, we announced that, in connection with the SEC investigation into Comverse’s past stock option grants which
was in process at that time, we had received a letter requesting that we voluntarily provide to the SEC certain documents and
information related to our own stock option grants and practices. We voluntarily responded to this request. On April 9, 2008, as
we previously reported, we received a “Wells Notice” from the staff of the SEC arising from the staff’s investigation of our past
stock option grant practices and certain unrelated accounting matters. These accounting matters were also the subject of our
internal investigation. On March 3, 2010, the SEC filed a settled enforcement action against us in the United States District Court
for the Eastern District of New York relating to certain of our accounting reserve practices. Without admitting or denying the
allegations in the SEC’s Complaint, we consented to the issuance of a Final Judgment permanently enjoining us from violating
Section 17(a) of the Securities Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 13a-1 and 13a-
13 thereunder. The settled SEC action did not require us to pay any monetary penalty and sought no relief beyond the entry of a
permanent injunction. The SEC’s related press release noted that, in accepting the settlement offer, the SEC considered our
remediation and cooperation in the SEC’s investigation. The settlement was approved by the United States District Court for the
Eastern District of New York on March 9, 2010.
22
On December 23, 2009, as we previously reported, we received an additional “Wells Notice” from the staff of the SEC relating
to our failure to timely file our periodic reports under the Exchange Act. On March 3, 2010, the SEC issued an OIP pursuant to
Section 12(j) of the Exchange Act to suspend or revoke the registration of our common stock because of our failure to file an
annual report on Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on either Form 10-Q or Form 10-QSB
since December 12, 2005. An Administrative Law Judge will consider the evidence in the Section 12(j) proceeding and has been
directed in the OIP to issue an initial decision within 120 days of service of the OIP. We are currently evaluating the Section 12
(j) OIP, including available procedural remedies and intend to defend against the possible suspension or revocation of the
registration of our common stock. We cannot at this time predict the outcome of the Section 12(j) administrative proceedings or
of any available appeals that may follow. Similarly, we cannot predict what, if any, impact the outcome of the administrative
proceedings may have on our business. If a final order is issued by the SEC suspending or revoking the registration of our
common stock, broker-dealers would be prevented from making a market in our common stock in the United States and from
any further trading of our common stock on the Pink OTC Markets, Inc. (the “Pink Sheets”) or any other exchange, market, or
board in the United States until, in the case of a suspension, the lifting of such suspension, and, in the case of a revocation, we
file a new registration with the SEC under the Exchange Act and that registration is made effective.
In addition, as a result of our acquisition of Witness, we are subject to an additional SEC inquiry relating to certain of Witness’
stock option grants. On October 27, 2006, Witness received notice from the SEC of an informal non-public inquiry relating to
the stock option grant practices of Witness from February 1, 2000 through the date of the notice. On July 12, 2007, we received a
copy of the Formal Order of Investigation from the SEC relating to substantially the same matter as the informal inquiry. We and
Witness have fully cooperated, and intend to continue to fully cooperate, if called upon to do so, with the SEC regarding this
matter. In addition, the U.S. Attorney’s Office for the Northern District of Georgia was given access to the documents and
information provided by Witness to the SEC. While we have not heard from the SEC or the U.S. Attorney’s office on this matter
since June 2008, we have no assurance that one or both will not further pursue the matter.
We cannot predict the outcome of any of the foregoing unresolved proceedings or whether we will face additional government
inquiries, investigations, or other actions related to these other matters. An adverse ruling in any SEC enforcement action or
other regulatory proceeding could impose upon us fines, penalties, or other remedies, including the suspension or revocation of
the registration of our common stock, as discussed above, which could have a material adverse effect on our results of operations
and financial condition. Even if we are successful in defending against an SEC enforcement action or other regulatory
proceeding, such an action or proceeding may be time consuming, expensive, and distracting from the conduct of our business
and could have a material adverse effect on our business, financial condition, and results of operations. In the event of any such
action or proceeding, we may also become subject to costly indemnification obligations to current or former officers, directors,
or employees, which may or may not be covered by insurance.
23
We may not have sufficient insurance to cover our liability in any future litigation claims either due to coverage limits or
as a result of insurance carriers seeking to deny coverage of such claims.
We face a variety of litigation-related liability risks, including liability for indemnification of (and advancement of expenses to)
current and former directors, officers, and employees under certain circumstances, pursuant to our certificate of incorporation,
by-laws, other applicable agreements, and/or Delaware law.
Prior to the announcement of the Comverse special committee investigation, our directors and officers were included in a
director and officer liability insurance policy, which covered all directors and officers of Comverse and its subsidiaries, which
policy remains the sole source of insurance in connection with the matters related to such investigation. The Comverse insurance
coverage may not be adequate to cover any claims against us in connection with such matters and may not be available to us due
to the exhaustion of the coverage limits by Comverse in connection with the claims already asserted against Comverse and its
personnel.
Following the announcement of the Comverse special committee investigation, we sought and obtained our own director and
officer liability insurance policy for our directors and officers. We cannot assure you that the limits of our directors and officers
liability insurance coverage will be sufficient to cover our potential exposure.
In addition, the underwriters of our present coverage or our old shared coverage with Comverse may seek to avoid coverage in
certain circumstances based upon the terms of the respective policies, in which case we would have to self-fund any
indemnification amounts owed to our directors and officers and bear any other uninsured liabilities.
If we do not have sufficient directors and officers insurance coverage under our present or historical insurance policies, or if our
insurance underwriters are successful in avoiding coverage, our results of operations and financial condition could be materially
adversely affected.
We have been adversely affected as a result of being a consolidated, controlled subsidiary of Comverse and may continue
to be adversely affected in the future.
We have been adversely affected as a result of being a consolidated, controlled subsidiary of Comverse and may continue to be
adversely affected in the future. These adverse effects arise in part, though not exclusively, from the Comverse special
committee investigation. Under applicable accounting rules, we were required to record stock-based compensation expenses on
our books for Comverse stock options granted to our employees while we were a wholly owned subsidiary of Comverse which
were found to have been improperly accounted for as part of the Comverse special committee investigation. Because we were
dependent upon Comverse to provide us with the amount of these charges, we were forced to wait until the conclusion of the
Comverse special committee investigation to record them, which was the initial reason we were not able to timely complete our
required SEC filings. The subsequent expansion of the Comverse special committee investigation into other accounting issues
further delayed our receipt of the required information. In addition, because of our previous inclusion in Comverse’s
consolidated tax group and our related tax sharing agreement with Comverse, as further discussed below, we were also forced to
wait for Comverse to substantially complete its analysis of certain tax information, including information related to the NOLs
allocated to us as of our May 2002 IPO, in order to complete the restatement of our historical financial statements, the
preparation of our current financial statements, and associated audits. In addition to our own internal investigation and revenue
recognition review, these investigations and reviews have required significant time, expense, and management distraction, have
contributed to a protracted delay in the completion of our SEC filings, and have caused significant concerns on the part of
customers, partners, investors, and employees.
24
Future delays at Comverse, if any, may again delay the completion of the preparation of our outstanding or future financial
statements, associated audits and SEC filings, which could have an adverse effect on our business. In addition, if errors are
discovered in the information provided to us by Comverse, we may be required to correct or restate our financial statements. In
part because of the issues identified at Comverse and our relationship with Comverse, we have also been subject to enhanced
scrutiny by third parties, including customers, prospects, suppliers, service providers, and regulatory authorities, all of which
have adversely affected our business, and the cost, duration, and risks associated with our restatement and audits have increased.
We may continue to be adversely affected by events at Comverse so long as we remain one of its majority-owned subsidiaries. In
particular, Comverse’s strategic plans regarding its assets, including its ownership interest in our stock, may adversely affect our
business.
Our previous inclusion in Comverse’s consolidated tax group and our related tax sharing agreement with Comverse may
expose us to additional tax liabilities.
Prior to our IPO in May 2002, we were included in Comverse’s U.S. federal income tax return. Following our IPO, we began
filing a separate U.S. federal income tax return for our own consolidated group; however, we remained party to a tax-sharing
agreement with Comverse for prior periods. As a result, Comverse may unilaterally make decisions that could impact our
liability for income taxes for periods prior to the IPO. Additionally, adjustments to the consolidated group’s tax liability for
periods prior to our IPO could affect our NOLs from Comverse and cause us to incur additional tax liability in future periods.
The foregoing could result from, among other things, any agreements between Comverse and the Internal Revenue Service
relating to issues that could be raised upon examination or the filing of amended federal income tax returns by Comverse on our
behalf.
In addition, notwithstanding the terms of the tax sharing agreement, federal tax law provides that each member of a consolidated
federal income tax group is jointly and severally liable for the group’s entire tax obligation; as a result, under certain
circumstances, we could be liable for taxes of other members of the Comverse consolidated group if, for example, federal
income tax assessments were not paid. Similar principles apply for certain combined state income tax return filings.
25
Comverse can control our business and affairs, including our board of directors.
Because Comverse currently holds approximately a 67% ownership position in us (assuming the conversion of all of our
preferred stock into common stock), Comverse effectively controls the outcome of all matters submitted for stockholder action,
including the approval of significant corporate transactions, such as financings, equity issuances, or mergers and acquisitions.
Our preferred stock, all of which is held by Comverse, entitles it to further control over significant corporate transactions.
By virtue of its majority ownership stake, Comverse also has the ability, acting alone, to remove existing directors and/or to elect
new directors to our board of directors in order to fill vacancies. At present, Comverse has appointed individuals who are officers
or executives of Comverse as six of our eleven directors. These directors have fiduciary duties to both us and Comverse and may
become subject to conflicts of interest on certain matters where Comverse’s interest as majority stockholder may not be aligned
with the interests of our minority stockholders. In addition, under the terms of the preferred stock, Comverse also has the right to
appoint two additional directors to our board of directors under certain circumstances.
As a consequence of Comverse’s control over the composition of our board of directors, Comverse can also exert a controlling
influence on our management, direction and policies, including the ability to appoint and remove our officers or, subject to the
terms of our credit agreement, declare and pay dividends.
We may lose business opportunities to Comverse that might otherwise be available to us.
In connection with our May 2002 IPO, we entered into a business opportunities agreement with Comverse that addresses certain
potential conflicts of interest between Comverse and us. This agreement allocates between Comverse and us opportunities to
pursue transactions or matters that, absent such allocation, could constitute corporate opportunities of both companies. In
general, we are precluded under this agreement from pursuing opportunities offered to officers or employees of Comverse who
may also be our directors, officers, or employees, unless Comverse fails to pursue these opportunities. As a result, we may lose
valuable business opportunities to Comverse, which could have an adverse effect on our results of operations.
As a result of the delay in completing our financial statements, we are currently unable to register securities with the
SEC, which may adversely affect our ability to raise, and the cost of raising, future capital.
As a result of the delay in completing our financial statements, we have been and remain unable to register securities for sale by
us or for resale by other security holders, which has adversely affected our ability to raise capital. Additionally, following the
filing of our Quarterly Reports on Form 10-Q for each of the quarters ended April 30, 2009, July 31, 2009, and October 31, 2009
and our Annual Report on Form 10-K for the year ended January 31, 2010, we will remain ineligible to use Form S-3 to register
securities until we have timely filed all periodic reports under the Exchange Act for at least 12 calendar months (or, in the event
the registration of our common stock is revoked pursuant to the Section 12(j) proceeding discussed under “Explanatory Note”,
until after we have timely filed all required reports for the 12 calendar months following the date on which we once again
become subject to the SEC reporting requirements). In the meantime, we would need to use Form S-1 to register securities with
the SEC for capital raising transactions or issue such securities in private placements, in either case, increasing the costs of
raising capital during that period.
26
Risks Related to Our Business
Competition and Markets
Our business is impacted by changes in general economic conditions and information technology spending in particular.
Our business is subject to risks arising from adverse changes in domestic and global economic conditions. Slowdowns or
recessions around the world may cause companies and governments to delay, reduce, or even cancel planned spending. In
particular, declines in information technology spending have affected the market for our products, especially in industries that
are or have experienced significant cost-cutting, such as financial services. Customers or partners who are facing business
challenges or liquidity issues are also more likely to delay purchase decisions or cancel orders, as well as to delay or default on
payments. If customers or partners significantly reduce their spending with us or significantly delay or fail to make payments to
us, our business, results of operations, and financial condition would be materially adversely affected. Moreover, as a result of
current economic conditions, like many companies, we have engaged in significant cost-saving measures over the last
24 months. We cannot assure you that these measures will not negatively impact our ability to execute on our objectives and
grow in the future, particularly if we are not able to invest in our business as a result of a protracted economic downturn.
Intense competition in our markets and competitors with greater resources than us may limit our market share,
profitability, and growth.
We face aggressive competition from numerous and varied competitors in all of our markets, making it difficult to maintain
market share, remain profitable, and grow. Even if we are able to maintain or increase our market share for a particular product,
revenue or profitability could decline due to pricing pressures, increased competition from other types of products, or because the
product is in a maturing industry.
Our competitors may be able to more quickly develop or adapt to new or emerging technologies, better respond to changes in
customer requirements or preferences, or devote greater resources to the development, promotion, and sale of their products.
Some of our competitors have, in relation to us, longer operating histories, larger customer bases, longer standing relationships
with customers, greater name recognition, and significantly greater financial, technical, marketing, customer service, public
relations, distribution, or other resources. Some of our competitors are also significantly larger than us and some of these
companies have increased their presence in our markets in recent years through internal development, partnerships, and
acquisitions. There has also been significant consolidation among our competitors, which has improved the competitive position
of several of these companies, and enabled new competitors to emerge in all of our markets. In addition, we may face
competition from solutions developed internally by our customers or partners. To the extent we cannot compete effectively, our
market share and, therefore, results of operations, could be materially adversely affected.
27
Because price and related terms are key considerations for many of our customers, we may have to accept less-favorable
payment terms, lower the prices of our products and services, and/or reduce our cost structure, including reducing headcount or
investment in research and development, in order to remain competitive. Certain of our competitors have become increasingly
aggressive in their pricing strategy, particularly in markets where they are trying to establish a foothold. If we are forced to take
these kinds of actions to maintain market share, our revenue and profitability may suffer or we may adversely impact our longer-
term ability to execute or compete.
The industry in which we operate is characterized by rapid technological changes and evolving industry standards, and if
we cannot anticipate and react to such changes our results may suffer.
The markets for our products are characterized by rapidly changing technology and evolving industry standards. The
introduction of products embodying new technology and the emergence of new industry standards can exert pricing pressure on
existing products and/or can render our existing products obsolete and unmarketable. It is critical to our success that, in all of our
markets, we are able to:
(cid:129)
(cid:129)
(cid:129)
anticipate and respond to changes in technology and industry standards;
successfully develop and introduce new, enhanced, and competitive products which meet our customers’ changing
needs; and
deliver these new and enhanced products on a timely basis while adhering to our high quality standards.
We may not be able to successfully develop new products or introduce new applications for existing products. In addition, new
products and applications that we introduce may not achieve market acceptance. If we are unable to introduce new products that
address the needs of our customers or that achieve market acceptance, there may be a material adverse impact on our revenue
and on our financial results.
Because many of our solutions are sophisticated, we must invest greater resources in sales and installation processes with
greater risk of loss if we are not successful.
In many cases, it is necessary for us to educate our potential customers about the benefits and value of our solutions because
many of our solutions are not simple, mass-market items with which customers are already familiar. In addition, many of our
solutions are sophisticated and may not be readily usable by customers without our assistance in training, system integration, and
configuration. The greater need to work with and educate customers as part of the sales process and, after completion of a sale,
during the installation process for many of our products, increases the time and difficulty of completing transactions, makes it
more difficult to efficiently deploy limited resources, and creates risk that we will have invested in an opportunity that ultimately
does not come to fruition. If we are unable to demonstrate the benefits and value of our solutions to customers and efficiently
convert our sales leads into successful sales and installations, our results may be adversely affected.
28
Many of our sales are made by competitive bid, which often requires us to expend significant resources, which we may
not recoup.
Many of our sales, particularly in larger installations, are made by competitive bid. Successfully competing in competitive
bidding situations subjects us to risks associated with the frequent need to bid on programs in advance of the completion of their
design, which may result in unforeseen technological difficulties and cost overruns, as well as making substantial investments of
time and money in research and development and marketing activities for contracts that may not be awarded to us. If we do not
ultimately win a bid, we may obtain little or no benefit from these expenditures and may not be able to recoup these costs on
future projects.
Even where we are not involved in a competitive bidding process, due to the intense competition in our markets and increasing
customer demand for shorter delivery periods, we must in some cases begin the implementation of a project before the
corresponding order has been finalized, increasing the risk that we will have to write off expenses associated with potential
orders that do not come to fruition.
The nature of our business and our varying business models may impact and make it difficult for us to predict our
operating results.
It is difficult for us to forecast the timing of revenue from product sales because customers often need a significant amount of
time to evaluate our products before a purchase, and sales are dependent on budgetary and, in the case of government customers,
other bureaucratic processes. The period between initial customer contact and a purchase by a customer may vary from as little
as a few weeks to more than a year. During the evaluation period, customers may defer or scale down proposed orders for
various reasons, including:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
changes in budgets and purchasing priorities;
reductions in need to upgrade existing systems;
deferrals in anticipation of enhanced or new products;
introduction of new products by our competitors; or
lower prices offered by our competitors.
29
In addition, we have historically derived a significant portion of our revenue from contracts for large system installations with
major customers and we continue to emphasize sales to larger customers in our product development and marketing strategies.
Contracts for large installations typically involve a lengthy and complex bidding and selection process, and our ability to obtain
particular contracts is inherently difficult to predict. The timing and scope of these opportunities are difficult to forecast, and the
pricing and margins may vary substantially from transaction to transaction. As a result, our future operating results may be
volatile and vary significantly from period to period.
While we have no single customer that is material to our total revenue, we do have many significant customers in each of our
segments, notably in our Video Intelligence segment and our Communications Intelligence segment, and periodically receive
multi-million dollar orders. The deferral or loss of one or more significant orders or customers or a delay in an expected
implementation of such an order could materially adversely affect our segment operating results.
In recent years, an increasing percentage of our revenue has come from software sales as compared to hardware sales. This trend
has only been amplified with the addition of the Witness business. As with other software-focused companies, this has meant
that more of our quarterly business has come in the last few weeks of each quarter. In addition, customers have increasingly been
placing orders close to, or even on, the requested delivery date. The trend of shorter periods between order date and delivery
date, along with this trend of business moving to the end of the quarter, has further complicated the process of accurately
predicting revenue or making sales forecasts on a quarterly basis.
Under applicable accounting standards and guidance, revenue for some of our software and hardware transactions is recognized
at the time of delivery, while revenue from other software and hardware transactions is required to be deferred over a period of
years. To a large extent, this depends on the terms we offer to customers and resellers, including terms relating to pricing, future
deliverables, and post-contract customer support (“PCS”). As a result, it is difficult for us to accurately predict at the outset of a
given period how much of our future revenue will be recognized within that period and how much will be required to be deferred
over a longer period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under
Item 7 for additional information.
We base our current and future expense levels on our internal operating plans and sales forecasts, and our operating costs are, to
a large extent, fixed. As a result, we may not be able to sufficiently reduce our operating costs in any period to compensate for an
unexpected near-term shortfall in revenue.
30
If we are unable to maintain our relationships with resellers, systems integrators, and other third parties that market and
sell our products, our business, financial condition, results of operations, and ability to grow could be materially
adversely impacted.
Approximately half of our revenue is generated by sales made through partners, distributors, resellers, and systems integrators. If
our relationship in any of these sales channels deteriorates or terminates, we may lose important sales and marketing
opportunities. In pursuing new partnerships and strategic alliances, we must often compete for the opportunity with similar
solution providers. In order to effectively compete for such opportunities, we must introduce products tailored not only to meet
specific partner needs, but also to evolving customer and prospective customer needs, and include innovative features and
functionality easy for partners to sell and install. Even if we are able to win such opportunities on terms we find acceptable, there
is no assurance that we will be able to realize the benefits we anticipate. Our competitors often seek to establish exclusive
relationships with these sales channels or, at a minimum, to become a preferred partner for these sales channels. Some of our
sales channel partners also partner with our competitors and may even offer our products and those of our competitors as
alternatives when presenting bids to end customers. Our ability to achieve revenue growth depends to a significant extent on
maintaining and adding to these sales channels and if we are unable to do so, our revenue could be materially adversely affected.
Certain provisions in agreements that we have entered into may expose us to liability that is not limited in amount by the
terms of the contract.
Certain contract provisions, principally confidentiality and indemnification obligations in certain of our license agreements,
could expose us to risks of loss that, in some cases, are not limited to a specified maximum amount. Even where we are able to
negotiate limitation of liability provisions, these provisions may not always be enforced depending on the facts and
circumstances of the case at hand. If we or our products fail to perform to the standards required by our contracts, we could be
subject to uncapped liability for which we may or may not have adequate insurance and our business, financial condition, and
results of operations could be materially adversely affected.
Our products may contain undetected defects which could impair their market acceptance and may result in customer
claims for substantial damages if our products fail to perform properly.
Our products are complex and involve sophisticated technology that performs critical functions to highly demanding standards.
Our existing and future products may develop operational problems. In addition, new products or new versions of existing
products may contain undetected defects or errors. If we do not discover such defects, errors, or other operational problems until
after a product has been released and used by the customer or partner, we may incur significant costs to correct such defects,
errors, or other operational problems, including product liability claims or other contract liabilities to customers or partners. In
addition, defects or errors in our products may result in claims for substantial damages and questions regarding the integrity of
the products, which could cause adverse publicity and impair their market acceptance.
31
If the regulatory environment does not evolve as expected or does not favor our products, our results may suffer.
The regulatory environment relating to our solutions is still evolving and, in the security market in particular, has been driven to
a significant extent by legislative and regulatory actions, such as CALEA in the United States and standards established by ETSI
in Europe, as well as initiatives to strengthen security for critical infrastructure, such as airports. These actions and initiatives are
evolving and are at all times subject to change based on factors beyond our control, such as political climate, budgets, and even
current events. While we attempt to anticipate these actions and initiatives through our product offerings and refinements thereto,
we cannot assure you that we will be successful in these efforts, that our competitors will not do so more successfully than us, or
that changes in these actions or initiatives or the underlying factors which affect them will not occur which will reduce or
eliminate this demand. If any of the foregoing should occur, or if our markets do not grow as anticipated for any other reason,
our results may suffer. In addition, changes to these actions or initiatives, including changes to technical requirements, may
require us to modify or redesign our products in order to maintain compliance, which may subject us to significant additional
expense.
Conversely, as the telecommunications industry continues to evolve, state, federal, and foreign governments (including
supranational government organizations such as the European Union) and industry associations may increasingly regulate the
monitoring of telecommunications and telephone or internet monitoring and recording products such as ours. We believe that
increases in regulation could come in a number of forms, including increased regulations regarding privacy or protection of
personal information such as social security numbers, credit card information, and employment records. The adoption of these
types of regulations or changes to existing regulations could cause a decline in the use of our solutions or could result in
increased expense for us if we must modify our solutions to comply with these regulations. Moreover, these types of regulations
could subject our customers or us to liability. Whether or not these kinds of regulations are adopted, if we do not adequately
address the privacy concerns of consumers, companies may be hesitant to use our solutions. If any of these events occur, our
business could be materially adversely affected.
For certain products and components, we rely on a limited number of suppliers and manufacturers and if these
relationships are interrupted we may not be able to obtain substitute suppliers or manufacturers on favorable terms or at
all.
Although we generally use standard parts and components in our products, we do rely on non-affiliated suppliers for certain non-
standard components which may be critical to our products, including both hardware and software, and on manufacturers of
assemblies that are incorporated into our products. While we endeavor to use larger, more established suppliers and
manufacturers wherever possible, in some cases, these providers may be smaller, more early-stage companies, particularly with
respect to suppliers of new technologies we may incorporate into our products that we have not developed internally. Although
we do have agreements in place with most of these providers, which include appropriate protections such as source code escrows
where needed, these agreements are generally not long-term and these contractual protections offer limited practical benefits to
us in the event our relationship with a key provider is interrupted. If these suppliers or manufacturers experience financial,
operational, manufacturing capacity, or quality assurance difficulties, or cease production and sale of the products we buy from
them entirely, or there is any other disruption in our relationships with these suppliers or manufacturers, we will be required to
locate alternative sources of supply or manufacturing, to internally develop the applicable technologies, to redesign our products
to accommodate an alternative technology, or to remove certain features from our products. This could increase the costs of, and
create delays in, delivering our products or reduce the functionality of our products, which could adversely affect our business
and financial results.
32
If we cannot recruit or retain qualified personnel, our ability to operate and grow our business may be limited.
We depend on the continued services of our executive officers and other key personnel. In addition, in order to continue to grow
effectively, we need to attract (and retain) new employees, including managers, finance personnel, sales and marketing
personnel, and technical personnel, who understand and have experience with our products, services, and industry. The market
for such personnel is intensely competitive in most, if not all, of the geographies in which we operate, and on occasion we have
had to relocate personnel to fill positions in locations where we could not attract qualified experienced personnel. Further, for as
long as we remain delayed with our SEC reporting obligations and our common stock remains de-listed, we are likely to
continue to experience a certain amount of difficulty attracting and retaining highly qualified personnel, particularly at more
senior levels, due to concerns about our status. So long as we remain delayed with our SEC reporting obligations and our
common stock remains de-listed, our ability to use our common stock to retain and motivate employees will also continue to be a
challenge and subject to certain restrictions. If we are unable to attract and retain qualified employees, on reasonable economic
and other terms or at all, our ability to grow could be impaired, our ability to timely report our financial results could be
adversely affected, and our operations and financial results could be materially adversely affected.
Because we have significant foreign operations, we are subject to geopolitical and other risks that could materially
adversely affect our business.
We have significant operations in foreign countries, including sales, research and development, customer support, and
administrative services. The countries in which we have our most significant foreign operations include Israel, the United
Kingdom, Canada, India, Hong Kong, and Germany, and we intend to continue to expand our operations internationally. We
believe our business may suffer if we are unable to successfully expand into new regions, as well as maintain and expand
existing foreign operations. Our foreign operations are, and any future foreign expansion will be, subject to a variety of risks,
many of which are beyond our control, including risks associated with:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
foreign currency fluctuations;
political, security, and economic instability in foreign countries;
changes in and compliance with local laws and regulations, including export control laws, tax laws, labor laws,
employee benefits, customs requirements, currency restrictions, and other requirements;
differences in tax regimes and potentially adverse tax consequences of operating in foreign countries;
customizing products for foreign countries;
legal uncertainties regarding liability and intellectual property rights;
33
(cid:129)
(cid:129)
hiring and retaining qualified foreign employees; and
difficulty in accounts receivable collection and longer collection periods.
Any or all of these factors could materially affect our business or results of operations.
In addition, the tax authorities in the jurisdictions in which we operate, including the United States, may from time to time
review the pricing arrangements between us and our foreign subsidiaries. An adverse determination by one or more tax
authorities in this regard may have a material adverse effect on our financial results. Restrictive laws, policies, or practices in
certain countries directed toward Israel or companies having operations in Israel may also limit our ability to sell some of our
products in those countries.
Conditions in Israel may materially adversely affect our operations and personnel and may limit our ability to produce
and sell our products.
We have significant operations in Israel, including research and development, manufacturing, sales, and support. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors,
which in the past have led, and may in the future lead, to security and economic problems for Israel. In addition, Israel has faced
and continues to face difficult relations with the Palestinians and the risk of terrorist violence from both Palestinian as well as
foreign elements such as Hezbollah. Infighting among the Palestinians may also create security and economic risks to Israel.
Current and future conflicts and political, economic, and/or military conditions in Israel and the Middle East region have affected
and may in the future affect our operations in Israel. The exacerbation of violence within Israel or the outbreak of violent
conflicts between Israel and its neighbors, including Iran, may impede our ability to manufacture, sell, and support our products,
engage in research and development, or otherwise adversely affect our business or operations. In addition, many of our
employees in Israel are required to perform annual compulsory military service and are subject to being called to active duty at
any time under emergency circumstances. The absence of these employees may have an adverse effect on our operations.
Hostilities involving Israel may also result in the interruption or curtailment of trade between Israel and its trading partners or a
significant downturn in the economic or financial condition of Israel and could materially adversely affect our results of
operations.
34
Regulatory and Government Contracting
We are dependent on contracts with governments around the world for a significant portion of our revenue. These
contracts expose us to additional business risks and compliance obligations.
A significant portion of our business is generated from sales under government contracts around the world. We expect that
government contracts will continue to be a significant source of our revenue for the foreseeable future. We must comply with
domestic and foreign laws and regulations relating to the formation, administration, and performance of government contracts.
These laws and regulations affect how we do business with government agencies in various countries and may impose added
costs on our business. Our business generated from government contracts may be materially adversely affected if:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
our reputation or relationship with government agencies is impaired;
we are suspended or otherwise prohibited from contracting with a domestic or foreign government or any significant
law enforcement agency;
levels of government expenditures and authorizations for law enforcement and security related programs decrease or
shift to programs in areas where we do not provide products and services;
we are prevented from entering into new government contracts or extending existing government contracts based on
violations or suspected violations of laws or regulations, including those related to procurement;
we are not granted security clearances that are required to sell our products to domestic or foreign governments or
such security clearances are deactivated;
there is a change in government procurement procedures; or
there is a change in political climate that adversely affects our existing or prospective relationships.
As a result of the consent judgment we entered into with the SEC relating to our reserves accounting practices, we and our
subsidiaries are required, for three years from the date of the settlement, to disclose that this civil judgment was rendered against
us in any proposals to perform new government work for U.S. federal agencies. In addition, we and our subsidiaries must amend
our representations in existing grants and contracts with U.S. federal agencies to reflect the civil judgment. While this
certification does not bar us from receiving government grants or contracts from U.S. federal agencies, each government
procurement official has the discretion to determine whether it considers us and our subsidiaries “responsible” companies for
purposes of each transaction. The government procurement officials may also seek advice from government agency debarring
officials to determine if we and our subsidiaries should be considered for suspension or debarment from receiving government
contracts or grants from U.S. federal agencies.
In addition, our government contracts may contain, or under applicable law may be deemed to contain, provisions not typically
found in private commercial contracts, including provisions enabling the government party to:
(cid:129)
(cid:129)
terminate or cancel existing contracts for convenience;
in the case of the U.S. federal government, suspend us from doing business with a foreign government or prevent us
from selling our products in certain countries;
35
(cid:129)
(cid:129)
audit and object to our contract-related costs and expenses, including allocated indirect costs; and
unilaterally change contract terms and conditions, including warranty provisions, schedule, quantities, and scope of
work, in advance of our agreement on corresponding pricing adjustments.
The effect of these provisions may significantly increase our cost to perform the contract or defer our ability to recognize
revenue from such contracts. In some cases, this may mean that we must begin recording expenses on a contract in advance of
being able to recognize the corresponding revenue. If a government customer terminates a contract with us for convenience, we
may not recover our incurred or committed costs, receive any settlement of expenses, or earn a profit on work completed prior to
the termination. If a government customer terminates a contract for default, we may not recover these amounts, and, in addition,
we may be liable for any costs incurred by the government customer in procuring undelivered items and services from another
source. Further, an agency within a government may share information regarding our termination with other agencies. As a
result, our ongoing or prospective relationships with other government agencies could be impaired.
We may not be able to receive or retain the necessary licenses or authorizations required for us to export some of our
products that we develop or manufacture in specific countries.
We are required to obtain export licenses or qualify for other authorizations from the United States, Israel, and other
governments to export some of the products that we develop or manufacture in these countries and, in any event, are required to
comply with applicable export control laws of each country generally. There can be no assurance that we will be successful in
obtaining or maintaining the licenses and other authorizations required to export our products from applicable government
authorities. In addition, export laws and regulations are revised from time to time and can be extremely complex in their
application; if we are found not to have complied with applicable export control laws, we may be fined or penalized by, among
other things, having our ability to obtain export licenses curtailed or eliminated, possibly for an extended period of time. Our
failure to receive or maintain any required export licenses or authorizations or our penalization for failure to comply with
applicable export control laws would hinder our ability to sell our products and could materially adversely affect our business,
financial condition, and results of operations.
36
U.S. and foreign governments could refuse to buy our Communications Intelligence solutions or could deactivate our
security clearances in their countries thereby restricting or eliminating our ability to sell these solutions in those countries
and perhaps other countries influenced by such a decision.
Some of our subsidiaries maintain security clearances in the United States and other countries in connection with the
development, marketing, sale, and support of our Communications Intelligence solutions. These clearances are reviewed from
time to time by the applicable government agencies in these countries and, following these reviews, our security clearances are
either maintained or deactivated. Our security clearances can be deactivated for many reasons, including that the clearing
agencies in some countries may object to the fact that we do business in certain other countries or the fact that our local
subsidiary is affiliated with or controlled by an entity based in another country. In the event that our security clearances are
deactivated in any particular country, we would lose the ability to sell our Communications Intelligence solutions in that country
for projects that require security clearances. Additionally, any inability to obtain or maintain security clearances in a particular
country may affect our ability to sell our Communications Intelligence solutions in that country generally (even for non-secure
projects). We have in the past, and may in the future, have our security clearances deactivated. Any inability to obtain or
maintain clearances can materially adversely affect our results of operations.
Whether or not we are able to maintain our security clearances, law enforcement and intelligence agencies in certain countries
may decline to purchase Communications Intelligence solutions if they were not developed or manufactured in that country. As a
result, because our Communications Intelligence solutions are developed or manufactured in whole or in part in Israel or in
Germany, there may be certain countries where some or all of the law enforcement and intelligence agencies are unwilling to
purchase our Communications Intelligence solutions. If we are unable to sell our Communications Intelligence solutions in
certain countries for this reason, our results of operations could be materially adversely affected.
The mishandling or even the perception of mishandling of sensitive information could harm our business.
Our products are in some cases used by customers to compile and analyze highly sensitive or confidential information and data,
including in some cases, information or data used in intelligence gathering or law enforcement activities. While our customers’
use of our products in no way affords us access to this information or data, we may come into contact with such information or
data when we perform services or support functions for our customers. We have implemented policies and procedures to help
ensure the proper handling of such information and data, including background screening of services personnel, non-disclosure
agreements, access rules, and controls on our information technology systems. However, these measures are designed to mitigate
the risks associated with handling sensitive data and cannot safeguard against all risks at all times. The improper handling of
sensitive data, or even the perception of such mishandling or other security lapses or risks, whether or not valid, could reduce
demand for our products or otherwise expose us to financial or reputational harm.
37
Intellectual Property
Our intellectual property may not be adequately protected.
While much of our intellectual property is protected by patents or patent applications, we have not and cannot protect all of our
intellectual property with patents or other registrations. There can be no assurance that patents we have applied for will be issued
on the basis of our patent applications or that, if such patents are issued, they will be sufficiently broad enough to protect our
technologies, products, or services. There can be no assurance that we will file new patent, trademark, or copyright applications,
that any future applications will be approved, that any existing or future patents, trademarks or copyrights will adequately protect
our intellectual property or that any existing or future patents, trademarks, or copyrights will not be challenged by third parties.
Our intellectual property rights may not be successfully asserted in the future or may be invalidated, designed around, or
challenged.
In order to safeguard our unpatented proprietary know-how, source code, trade secrets, and technology, we rely primarily upon
trade secret protection and non-disclosure provisions in agreements with employees and other third parties having access to our
confidential information. There can be no assurance that these measures will adequately protect us from improper disclosure or
misappropriation of our proprietary information.
Preventing unauthorized use or infringement of our intellectual property rights is difficult. The laws of certain countries do not
protect our proprietary rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions we may be
unable to protect our intellectual property adequately against unauthorized third-party use or infringement, which could
adversely affect our competitive position.
Our products may infringe or may be alleged to infringe on the intellectual property rights of others, which could lead to
costly disputes or disruptions for us and may require us to indemnify our customers and resellers for any damages they
suffer.
The technology industry is characterized by frequent allegations of intellectual property infringement. In the past, third parties
have asserted that certain of our products infringed upon their intellectual property rights and similar claims may be made in the
future. Any allegation of infringement against us could be time consuming and expensive to defend or resolve, result in
substantial diversion of management resources, cause product shipment delays, or force us to enter into royalty or license
agreements. If patent holders or other holders of intellectual property initiate legal proceedings against us, we may be forced into
protracted and costly litigation, regardless of the merits of these claims. We may not be successful in defending such litigation, in
part due to the complex technical issues and inherent uncertainties in intellectual property litigation, and may not be able to
procure any required royalty or license agreements on terms acceptable to us, or at all. Third parties may also assert infringement
claims against our customers. Subject to certain limitations, we generally indemnify our customers and resellers with respect to
infringement by our products of the proprietary rights of third parties. These claims may require us to initiate or defend
protracted and costly litigation, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay
damages, be required to obtain licenses for the products our customers or partners use, or incur significant expenses in
developing non-infringing alternatives. If we cannot obtain all necessary licenses on commercially reasonable terms, our
customers may be forced to stop using or, in the case of resellers and other partners, stop selling our products.
38
Reliance on or loss of third-party licensing agreements could materially adversely affect our business, financial condition,
and results of operations.
While most of our products are developed internally, we also purchase technology, license intellectual property rights, and
oversee third-party development and localization of certain products or components. If we lose or are unable to maintain licenses
or distribution rights, we could incur additional costs or experience unexpected delays until an alternative solution can be
internally developed or licensed from another third party and integrated into our products or we may be forced to redesign our
products or remove certain features from our products. See “For certain products and components, we rely on a limited number
of suppliers and manufacturers and if these relationships are interrupted we may not be able to obtain substitute suppliers or
manufacturers on favorable terms or at all” above for additional information. Additionally, when purchasing or licensing
products and services from third parties, we endeavor to negotiate appropriate warranties, indemnities, and other protections. We
cannot assure you, however, that all such third-party contracts contain adequate protections or that all such third parties will be
able to provide the protections we have negotiated. To the extent we are not able to negotiate adequate protections from these
third parties or these third parties are unwilling or unable to provide the protections we have negotiated, our business, financial
condition, and results of operations could be materially adversely affected.
Use of free or open source software could expose our products to unintended restrictions and could materially adversely
affect our business, financial condition, and results of operations.
Some of our products contain free or open source (collectively, “open source”) software and we anticipate making use of open
source software in the future. Open source software is generally covered by license agreements that permit the user to use, copy,
modify, and distribute the software without cost, provided that the users and modifiers abide by certain licensing requirements.
The original developers of the open source software generally provide no warranties on such software or provide protections in
the event the open source software infringes a third party’s intellectual property rights. Although we endeavor to monitor the use
of open source software in our product development, we cannot assure you that past, present, or future products will not contain
open source software elements that impose unfavorable licensing restrictions or other requirements on our products. In addition,
the terms of many open source software licenses have not yet been interpreted by U.S. or foreign courts and as a result there is a
risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on products that use
such software. The introduction of certain kinds of open source software into our products or a court decision construing an open
source software license in an unexpected way could require us to seek licenses from third parties in order to continue offering
affected products, to re-engineer affected products, to discontinue sales of affected products, or to release all or portions of the
source code of affected products under the terms of the applicable open source software licenses. Any of these developments
could materially adversely affect our business, financial condition, and results of operations.
39
Risks Related to Our Capital Structure and Finances
We have incurred significant indebtedness as a result of the acquisition of Witness, which makes us highly leveraged,
subjects us to restrictive covenants, and could adversely affect our operations.
Risks associated with being highly leveraged.
At February 28, 2010, we had outstanding indebtedness of approximately $620 million. As a result of our significant
indebtedness, we are highly leveraged. Our leverage position may, among other things:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
limit our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions,
or other general corporate purposes;
require us to dedicate a substantial portion of our cash flow from operations to debt service, reducing the availability
of our cash flow for other purposes;
require us to repatriate cash for debt service from our foreign subsidiaries resulting in dividend tax costs or require us
to adopt other disadvantageous tax structures to accommodate debt service payments; or
increase our vulnerability to economic downturns, limit our ability to capitalize on significant business opportunities,
and restrict our flexibility to react to changes in market or industry conditions.
In addition, because our indebtedness bears interest at a variable rate, we are exposed to risk from fluctuations in interest rates.
While we have hedged a portion of this exposure under our term loan, this interest rate swap does not cover all of our term loan
indebtedness, it expires prior to the maturity date of our term loan, and it subjects us to above-market interest rates at any time
that prevailing rates drop below the rate fixed by the swap.
On January 29, 2010, S&P announced that our credit rating had been placed on CreditWatch Developing, and there can be no
assurance that S&P will not downgrade our credit rating which could impede our ability to refinance existing debt or secure new
debt or otherwise increase our future cost of borrowing and could create additional concerns on the part of customers, partners,
investors, and employees about our financial condition and extended filing delay status.
Risks associated with our leverage ratio and financial statement delivery covenants.
Our credit agreement contains a financial covenant that requires us to maintain a minimum consolidated leverage ratio and a
covenant requiring us to deliver audited financial statements to the lenders each year, as provided below. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” under Item 7 for
additional information.
40
Our ability to comply with the leverage ratio covenant is highly dependent upon our ability to continue to grow earnings from
quarter to quarter, which requires us to increase revenue while limiting increases in expenses or, if we are unable to increase or
maintain revenue, to reduce expenses. Our ability to satisfy our debt obligations and our leverage ratio covenant will depend
upon our future operating performance, which will be affected by prevailing economic conditions and financial, business, and
other factors, many of which are beyond our control. Alternatively, we may seek to maintain compliance with the leverage ratio
covenant by reducing our outstanding debt by raising additional funds through a number of means, including, but not limited to,
securities offerings or asset sales. There can be no assurance that we will be able to grow our earnings, reduce our expenses,
and/or raise funds to reduce our outstanding debt to the extent necessary to maintain compliance with this covenant. In addition,
any expense reductions undertaken to maintain compliance may impair our ability to compete by, among other things, limiting
research and development or hiring of key personnel. The complexity of our revenue accounting and the continued shift of our
business to the end of the quarter (discussed in greater detail above) has also increased the difficulty in accurately forecasting
quarterly revenue and therefore in predicting whether we will be in compliance with the leverage ratio requirements at the end of
each quarter.
Because our revenue recognition review resulted in changes in the way we recognize revenue from the way we did at the time
the credit agreement was put in place, it may be more difficult for us to maintain compliance with our leverage ratio covenant on
a prospective basis than we expected at the time we entered into the credit agreement since the leverage ratio covenant is based
on our earnings before interest, taxes, depreciation, and amortization (“EBITDA”), which is affected by revenue. In addition,
because U.S. generally accepted accounting principles (“GAAP”) require us to continue to refine our accounting for open
periods until the financial statements for such periods are filed, it is also possible that we may determine that we were not in
compliance with the leverage ratio covenant in periods subsequent to January 31, 2009, until such time as we file the financial
statements for such periods.
The credit agreement also includes a requirement that we submit audited consolidated financial statements to the lenders within
90 days of the end of each fiscal year, beginning with the year ended January 31, 2010, which, for the year ended January 31,
2010, is May 1, 2010. If audited consolidated financial statements are not so delivered, and such failure of delivery is not
remedied within 30 days thereafter, an event of default occurs. Because of the delay in filing this report and our Comprehensive
Form 10-K, and/or the Quarterly Reports on Form 10-Q for each of the quarters ended April 30, July 31, and October 31, 2009,
we cannot assure you that we will be able to deliver the required audited financial statements for the year ended January 31, 2010
on or prior to the May 1, 2010 deadline to avoid a default or the May 31, 2010 deadline to avoid an event of default.
If an event of default occurs under the credit agreement, our lenders could declare all amounts outstanding to be immediately due
and payable. In that event, we may be forced to sell assets, raise additional capital through a securities offering, or seek to
refinance or restructure our debt. In such a case, there can be no assurance that we will be able to consummate such a sale or
securities offering or refinance or restructure our debt on reasonable terms or at all.
41
Limitations resulting from the restrictive covenants in the credit agreement.
Our credit agreement also includes a number of restrictive covenants which limit our ability to, among other things:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
incur additional indebtedness or liens or issue preferred stock;
pay dividends or make other distributions or repurchase or redeem our stock or subordinated indebtedness;
engage in transactions with affiliates;
engage in sale-leaseback transactions;
sell certain assets;
change our lines of business;
make investments, loans, or advances; and
engage in consolidations, mergers, liquidations, or dissolutions.
These covenants could limit our ability to plan for or react to market conditions, to meet our capital needs, or to otherwise
engage in transactions that might be considered beneficial to us.
The rights of the holders of shares of our common stock are subject to, and may be adversely affected by, the rights of
holders of the preferred stock that we issued to Comverse in connection with the Witness acquisition.
In connection with the Witness acquisition, we issued 293,000 shares of preferred stock to Comverse at an aggregate purchase
price of $293.0 million. The issuance of shares of common stock upon conversion of the preferred stock (after the conversion
feature of the preferred stock has been approved by our stockholders) will result in substantial dilution to the other common
stockholders. In addition, the terms of the preferred stock include liquidation, dividend, and other rights that are senior to and
more favorable than the rights of the holders of our common stock.
Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments.
As part of our growth strategy, we have made a number of acquisitions and investments and expect to continue to make
acquisitions and investments in the future. However, so long as we remain delayed with our SEC filings and our common stock
remains de-listed, our ability to use our common stock to raise capital for acquisitions will continue to be severely restricted.
42
Future acquisitions or investments, if any, could result in potentially dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities, and amortization expenses related to intangible assets, any of which could have a material adverse
effect on our operating results and financial condition. In addition, investments in immature businesses with unproven track
records and technologies have a high degree of risk, with the possibility that we may lose the value of our entire investments and
potentially incur additional unexpected liabilities.
The process of integrating an acquired company’s business into our operations and investing in new technologies may result in
unforeseen operating difficulties and expenditures, which may require a significant amount of our management’s attention that
would otherwise be focused on the ongoing operation of our business. Other risks we may encounter with acquisitions include
the effect of the acquisition on our financial and strategic positions and our reputation, the inability to obtain the anticipated
benefits of the acquisition, including synergies or economies of scale, on a timely basis or at all, or unexpected challenges in
reconciling business practices, particularly in foreign geographies. Due to rapidly changing market conditions, we may also find
the value of our acquired technologies and related intangible assets, such as goodwill, as recorded in our financial statements, to
be impaired, resulting in charges to operations. The magnitude of these risks is greater in the case of large acquisitions, such as
our 2007 acquisition of Witness. See Note 4, “Business Combinations” to the consolidated financial statements included in
Item 15. There can be no assurance that we will be successful in making additional acquisitions or that we will be able to
effectively integrate any acquisitions we do make or realize the expected benefits for our business.
If our goodwill or other intangible assets become further impaired, our financial condition and results of operations
would be negatively affected.
Because we have historically acquired a significant number of companies, goodwill and other intangible assets have represented
a substantial portion of our assets. As of January 31, 2009, goodwill and other intangible assets totaled approximately
$910.2 million, or approximately 68% of our total assets. At a minimum, we assess annually whether there has been impairment
in the carrying amount of our goodwill or indefinite-lived intangible assets. In determining fair value, we make significant
judgments and estimates, including assumptions about our strategic plans with regard to our operations, as well as current
economic indicators and market valuations. We have recorded non-cash impairment charges for the years ended January 31,
2009, 2008, and 2007, totaling $26.0 million, $23.4 million, and $24.7 million, respectively. These non-cash impairment charges
relate to acquisitions made in our Video Intelligence segment (related to the MultiVision Intelligence Surveillance Limited
(“MultiVision”) acquisition) and in our Workforce Optimization performance management consulting business (related to the
Opus Group, LLC acquisition, the CM Insight Limited (“CM Insight”) acquisition, and a portion of the Witness acquisition). To
the extent economic conditions that would impact the future fair value of our reporting units worsen, we would be required to
record an additional non-cash charge. Any significant goodwill or intangible asset impairment would negatively affect our
financial condition and results of operations. See Note 5, “Intangible Assets and Goodwill” to the consolidated financial
statements included in Item 15 for more information.
43
Our international operations subject us to currency exchange risk.
Most of our revenue is denominated in U.S. Dollars, while a significant portion of our operating expenses, primarily labor
expenses, is denominated in the local currencies where our foreign operations are located, principally Israel, Germany, the
United Kingdom, and Canada. As a result, we are exposed to the risk that fluctuations in the value of these currencies relative to
the U.S. Dollar could increase the U.S. Dollar cost of our operations in these countries and which could have a material adverse
effect on our results of operations. In addition, since a portion of our sales are made in foreign currencies, primarily the British
Pound and the Euro, fluctuations in the value of these currencies relative to the U.S. Dollar could impact our revenue (on a U.S.
Dollar basis) and materially adversely affect our results of operations.
Our ability to realize value from and use our NOLs will impact our results and tax liability.
We have significant deferred tax assets as a result of prior net operating losses. These deferred tax assets can provide us with
significant future tax savings if we are able to use them. However, the extent to which we will be able to use these tax benefits
may be impacted, restricted, or eliminated by a number of factors including whether we generate sufficient future net income, a
future ownership change, adjustments to Comverse’s tax liability for periods prior to our IPO, or changes in tax rates, laws, or
regulations that could have retroactive effect. To the extent that we are unable to utilize our NOLS, our results of operations,
liquidity, and financial condition could be adversely affected in a significant manner. When we cease to have NOLs available to
us in a particular tax jurisdiction, either through their expiration, disallowance, or utilization, our effective tax rate will increase
in that jurisdiction, thereby impacting our overall effective tax rate. Our effective tax rate in any given year is also dependent on
the relative mix of jurisdictions (and corresponding local tax rates) in which we operate.
Research and development and tax benefits we receive in Israel may be reduced or eliminated in the future and our
receipt of these benefits subjects us to certain restrictions.
We receive grants from the OCS for the financing of a portion of our research and development expenditures in Israel. The
availability in any given year of these OCS grants depends on OCS approval of the projects and related budgets we submit to the
OCS each year. In addition, in recent years, the Government of Israel has reduced the benefits available under these programs
and these programs may be discontinued or curtailed in the future. The continued reduction in these benefits or the termination of
our eligibility to receive these benefits may adversely affect our financial condition and results of operations.
The Israeli law under which these OCS grants are made also limits our ability to manufacture products, or transfer technologies,
developed using these grants outside of Israel. This may limit our ability to engage in certain outsourcing or business
combination transactions involving these products. We may seek permission from the OCS to manufacture these products or
transfer these technologies out of Israel, but we cannot assure you that any such request would be approved, and even if
approved, we may be required to pay significant royalties or fees to the OCS. If we fail to comply with these restrictions, we may
be required to repay the grants we received from the OCS and could also become subject to monetary or criminal penalties.
44
Our facility in Israel has been granted approved enterprise status and we are therefore eligible for tax benefits under the Israeli
Law for Encouragement of Capital Investments. The Government of Israel may reduce or eliminate the tax benefits available to
approved enterprise programs such as the programs provided to us. There can be no assurance that these tax benefits will
continue in the future at their current levels or at all. If these tax benefits are reduced or eliminated, the amount of tax that we pay
in Israel will increase. In addition, if we fail to comply with any of the conditions and requirements of the investment programs,
the tax benefits we have received may be rescinded and we may be required to disgorge the amount of the tax benefit received,
together with interest and penalties.
Item 1b. Unresolved Staff Comments
None.
Item 2. Properties
The following describes our leased and owned properties as of the date of this report.
Leased Properties
We lease a total of approximately 260,900 square feet of office space in the United States. Our corporate headquarters is located
in a leased facility in Melville, New York, and consists of approximately 45,800 square feet under a lease that expires in
May 2013. The facility is used primarily by our administrative, sales, marketing, customer support, and services groups. We
lease approximately 91,600 square feet at a facility in Roswell, Georgia under a lease that expires in November 2012. The
Roswell, Georgia facility is used primarily by the administrative, marketing, product development, support, and sales groups for
our Workforce Optimization operations.
We occupy additional leased facilities in the United States, including offices located in Columbia, Maryland and Denver,
Colorado which are primarily used for product development, sales, training, and support for our Video Intelligence operations;
an office in Chantilly, Virginia used primarily for supporting our Communications Intelligence operations; and offices in Santa
Clara, California; Lyndhurst, New Jersey; San Diego, California; and Norwell, Massachusetts which are primarily used for
product development, sales, training, and support for our Workforce Optimization operations.
45
Outside of the United States, we occupy approximately 176,000 square feet at a facility in Herzliya, Israel under a lease that
expires in October 2015. The Herzliya, Israel facility is used primarily for manufacturing, storage, development, sales,
marketing, and support related to our Communications Intelligence operations. We also occupy approximately 34,500 square feet
at a leased facility in Laval, Quebec, which is used primarily for our manufacturing, product development, support, and sales for
our Video Intelligence operations. The lease in Laval, Quebec expires in June 2011. We occupy approximately 21,000 square
feet at a facility in Leatherhead, the United Kingdom under a lease which expires in March 2014. The Leatherhead facility is
used primarily for administrative, marketing, product development, support, and sales groups for our Workforce Optimization
and Video Intelligence operations.
Additionally, we occupy leased facilities outside of the United States in Weybridge, the United Kingdom; Sao Paulo, Brazil;
Mexico City, Mexico; Hong Kong, China; Tokyo, Japan; Sydney, Australia; Taguig, Philippines; Singapore (through our joint
venture); and Gurgaon and Bangalore, India which are used primarily by our administrative, product development, sales, and
support functions for our Workforce Optimization, Communications Intelligence, and Video Intelligence operations.
In addition to the leases noted above, we also lease executive office space throughout the world for our local sales, support, and
services needs. For additional information regarding our lease obligations, see Note 16, “Commitments and Contingencies” to
the consolidated financial statements included in Item 15.
Owned Properties
We own approximately 12.3 acres of land, including 40,000 square feet of office space in Durango, Colorado, which we have
historically used to support our Video Intelligence operations. We owned an additional 12.7 acres of adjacent land which we sold
on October 10, 2006 to a third party. Additionally, on October 10, 2006, we entered into a 10-year lease with the same third party
for 6.5 acres of the 12.3 acres we own, all of which was undeveloped and not being used by us. The remaining 5.8 acres,
including the office space, are subject to a mortgage under the term loan and credit agreement entered into by us in connection
with the acquisition of Witness.
We also own approximately 35,000 square feet of office and storage space for sales, manufacturing, support, and development
for our Communications Intelligence operations in Bexbach, Germany.
We believe our leased and owned facilities are in good operating condition and are adequate for our current requirements, though
growth in our business may require us to acquire additional facilities or modify existing facilities. We believe that alternative
locations are available in all areas where we currently do business.
46
Item 3. Legal Proceedings
Comverse Investigation-Related Matters
On December 17, 2009, Comverse entered into agreements to settle the following lawsuits previously disclosed by Comverse
relating to the matters involved in the Comverse special committee investigation which had been brought against Comverse and
certain former officers and directors of Comverse: (a) a consolidated shareholder class action before the U.S. District Court for
the Eastern District of New York, In re Comverse Technology, Inc. Securities Litigation; (b) a shareholder derivative action
before the U.S. District Court for the Eastern District of New York, In re Comverse Technology, Inc. Derivative Litigation; and
(c) a shareholder derivative action before the New York State Supreme Court, Appellate Division, First Department, In re
Comverse Technology, Inc. Derivative Litigation.
On April 2, 2010, the U.S. District Court for the Eastern District of New York issued orders in the shareholder class action and
derivative action granting preliminary approval of the settlement agreements in those actions. The court has scheduled a
settlement hearing to be held on June 21, 2010 that will, among other things, consider orders and final judgments dismissing
those actions with prejudice.
Verint was not named as a defendant in any of these suits. Igal Nissim, our former Chief Financial Officer, was named as a
defendant in the federal and state shareholder derivative actions in his capacity as the former Chief Financial Officer of
Comverse, and Dan Bodner, our Chief Executive Officer, was named as a defendant in the federal and state shareholder
derivative actions in his capacity as the Chief Executive Officer of Verint (i.e., as the president of a significant subsidiary of
Comverse). Mr. Nissim and Mr. Bodner were not named in the shareholder class action suit.
The federal shareholder derivative suit alleged that the defendants breached their fiduciary duties beginning in 1994 by:
(a) allowing and participating in a scheme to backdate the grant dates of employee stock options to improperly benefit
Comverse’s executives and certain directors; (b) allowing insiders, including certain of the defendants, to personally profit by
trading Comverse’s stock while in possession of material inside information; (c) failing to properly oversee or implement
procedures to detect and prevent such improper practices; (d) causing Comverse to issue materially false and misleading proxy
statements, as well as causing Comverse to file other false and misleading documents with the SEC; and (e) exposing Comverse
to civil liability. The plaintiffs originally filed suit on April 20, 2006. The Consolidated, Amended, and Verified Shareholder
Derivative Complaint, filed on October 6, 2006, sought unspecified damages, injunctive relief, including restricting the proceeds
of the defendants’ trading activities and other assets, setting aside the election of the defendant directors to the Comverse board
of directors, and costs and attorneys’ fees. On December 21, 2007, motions to dismiss the federal shareholder derivative suit
were fully briefed on behalf of Comverse as well as the individual defendants, including Mr. Nissim and Mr. Bodner. No
decision had been rendered on these motions to dismiss as of the signing of the settlement agreements or as of the filing date of
this report.
The state shareholder derivative suit made similar allegations to the federal shareholder derivative suit. The plaintiffs first filed
suit on April 11, 2006. The Consolidated and Amended Shareholder Derivative Complaint, which was filed on September 18,
2006, sought unspecified damages, injunctive relief, such as restricting the proceeds of the defendants’ trading activities and
other assets, and costs and attorneys’ fees.
The agreements in settlement of the above-mentioned actions are subject to notice to Comverse’s shareholders and approval by
the federal and state courts in which such proceedings are pending. Neither we nor Mr. Nissim or Mr. Bodner is responsible for
making any payments or relinquishing any equity holdings under the terms of the settlement.
Comverse was also the subject of an SEC investigation and resulting civil action regarding the improper backdating of stock
options and other accounting practices, including the improper establishment, maintenance, and release of reserves, the
reclassification of certain expenses, and the calculation of backlog of sales orders. On June 18, 2009, Comverse announced that it
had reached a settlement with the SEC on these matters without admitting or denying the allegations of the SEC complaint.
47
Verint Investigation-Related Matters
On July 20, 2006, we announced that, in connection with the SEC investigation into Comverse’s past stock option grants that
was in process at that time, we had received a letter requesting that we voluntarily provide to the SEC certain documents and
information related to our own stock option grants and practices. We voluntarily responded to this request. On April 9, 2008, as
we previously reported, we received a “Wells Notice” from the staff of the SEC arising from the staff’s investigation of our past
stock option grant practices and certain unrelated accounting matters. These accounting matters were also the subject of our
internal investigation. On March 3, 2010, the SEC filed a settled enforcement action against us in the United States District Court
for the Eastern District of New York relating to certain of our accounting reserve practices. Without admitting or denying the
allegations in the SEC’s Complaint, we consented to the issuance of a Final Judgment permanently enjoining us from violating
Section 17(a) of the Securities Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 13a-1 and 13a-
13 thereunder. The settled SEC action did not require us to pay any monetary penalty and sought no relief beyond the entry of a
permanent injunction. The SEC’s related press release noted that, in accepting the settlement offer, the SEC considered our
remediation and cooperation in the SEC’s investigation. The settlement was approved by the United States District Court for the
Eastern District of New York on March 9, 2010.
On December 23, 2009, as we previously reported, we received an additional “Wells Notice” from the staff of the SEC relating
to our failure to timely file periodic reports under the Exchange Act. Under the SEC’s Wells process, recipients of a Wells
Notice have the opportunity to make a Wells Submission before the SEC staff makes a recommendation to the SEC regarding
what action, if any, should be brought by the SEC. After considering our Wells Submission, on March 3, 2010, the SEC issued
an OIP pursuant to Section 12(j) of the Exchange Act to suspend or revoke the registration of our common stock because of our
failure to file an annual report on either Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on either Form 10-
Q or Form 10-QSB since December 12, 2005. An Administrative Law Judge will consider the evidence in the Section 12(j)
proceeding and has been directed in the OIP to issue an initial decision within 120 days of service of the OIP. On March 26,
2010, we filed our Answer to the OIP. On March 30, 2010, the Administrative Law Judge issued an amended procedural order
scheduling the completion of briefing for June 1, 2010. We are currently evaluating all available procedural remedies, and intend
to defend against the possible suspension or revocation of the registration of our common stock.
48
On March 26, 2009, a motion to approve a class action lawsuit (the “Labor Motion”) and the class action lawsuit itself (the
“Labor Class Action”) (Labor Case No. 4186/09) were filed against our subsidiary, Verint Systems Limited (“VSL”), by a
former employee of VSL, Orit Deutsch, in the Tel Aviv Labor Court. Ms. Deutsch purports to represent a class of our employees
and ex-employees who were granted options to buy shares of Verint and to whom allegedly, damages were caused as a result of
the blocking of the ability to exercise Verint options by our employees or ex-employees. The Labor Motion and the Labor
Class Action both claim that we are responsible for the alleged damages due to our status as employer and that the blocking of
Verint options from being exercised constitutes default of the employment agreements between the members of the class and
VSL. The Labor Class Action seeks compensatory damages for the entire class in an unspecified amount. On July 9, 2009, we
filed a motion for summary dismissal and alternatively for the stay of the Labor Motion. A preliminary session was held on
July 12, 2009. Ms. Deutsch filed her response to our response on November 10, 2009. On February 8, 2010, the Tel Aviv Labor
Court dismissed the case for lack of material jurisdiction and ruled that it will be transferred to the District Court in Tel Aviv.
Witness Investigation-Related Matters
At the time of our May 25, 2007 acquisition of Witness, Witness was subject to a number of proceedings relating to a stock
options backdating internal investigation undertaken and publicly disclosed by Witness prior to the acquisition. The following is
a summary of those proceedings and developments since the date of the acquisition.
On August 29, 2006, A. Edward Miller filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District
of Georgia, Atlanta Division, naming Witness as a nominal defendant and naming all of Witness’ directors and a number of its
officers as defendants (Miller v. Gould, et al., Civil Action No. 1:06-CV-2039 (N.D. Ga.)). The complaint alleged purported
violations of federal and state law, and violations of certain anti-fraud provisions of the federal securities laws (including
Sections 10(b) and 14(a) of the Exchange Act and Rules 10b-5 and 14a-9 thereunder) in connection with certain stock option
grants made by Witness. The complaint sought monetary damages in unspecified amounts, disgorgement of profits, an
accounting, rescission of stock option grants, imposition of a constructive trust over the defendants’ stock options and proceeds
derived therefrom, punitive damages, reimbursement of attorneys’ fees and other costs and expenses, an order directing Witness
to adopt or put to a stockholder vote various proposals relating to corporate governance, and other relief as determined by the
court. On March 11, 2009, the Court granted defendants’ motion to dismiss the complaint in its entirety, with prejudice. Plaintiff
did not file an appeal and the time to do so under the federal rules has elapsed.
On August 14, 2006, a class action securities lawsuit was filed by an individual claiming to be a Witness stockholder naming
Witness and certain of its directors and officers as defendants in connection with certain stock option grants made by Witness
(Rosenberg v. Gould, et al., Civil Action No. 1:06-CV-1894 (N.D. Ga.)). The complaint, filed in the U.S. District Court for the
Northern District of Georgia, alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint
sought unspecified damages, attorneys’ fees and other costs and expenses, unspecified extraordinary, equitable and injunctive
relief, and other relief as determined by the court. On March 31, 2008, the Court granted defendants’ motion to dismiss the
complaint in its entirety, with prejudice. On April 29, 2008, plaintiff filed a notice of appeal and on January 9, 2009, the 11th
Circuit affirmed the lower court’s dismissal of the complaint. Plaintiff has not pursued further appeal of this decision and the
time to do so under the federal rules has elapsed.
49
On October 27, 2006, Witness received notice from the SEC of an informal non-public inquiry relating to the stock option grant
practices of Witness from February 1, 2000 through the date of the notice. On July 12, 2007, we received a copy of the Formal
Order of Investigation from the SEC relating to substantially the same matter as the informal inquiry. We and Witness have fully
cooperated, and intend to continue to fully cooperate, if called upon to do so, with the SEC regarding this matter. In addition, the
U.S. Attorney’s Office for the Northern District of Georgia was also given access to the documents and information provided by
Witness to the SEC. Our last communication with the SEC with respect to the matter was in June 2008.
Verint Patent and General Litigation Matters
On December 18, 2006, Trover Group, Inc. (“Trover”) filed a patent infringement suit seeking monetary damages and injunctive
relief in the U.S. District Court for the Eastern District of Texas against us, Target Corporation, and The Home Depot, Inc. based
on claims of U.S. Patent Nos. 5,751,345 and 5,751,346 (the “Trover Patents”). Trover dismissed Home Depot and Target
without prejudice on April 17, 2008 and on April 25, 2008, respectively. Trover also commenced separate patent infringement
suits in the U.S. District Court for the Eastern District of Texas against Diebold Incorporated, one of our customers, and against
Regions Bank, a user of our video security and surveillance products. On July 21, 2008, we entered into a settlement agreement
with Trover. The settlement agreement provides protections to us and other parties that have or had purchased or used certain of
our products, including the products at issue in the foregoing litigations. On July 23, 2008, the court dismissed with prejudice all
claims asserted against us by Trover.
On October 18, 2005, the Administrative Court of Appeals of Athens entered a final, non-appealable verdict against our wholly
owned subsidiary, Verint Systems UK Ltd. (formerly Comverse Infosys UK Limited) (“Verint UK”), in a dispute between Verint
UK and its former customer, the Greek Civil Aviation Authority, which began in June 1999. The Greek Civil Aviation
Authority had claimed that the equipment provided to it by Verint UK did not operate properly. The verdict did not contain a
calculation of the monetary judgment, however, we estimated the amount at approximately $2.6 million based on an earlier
decision in the case, exclusive of any interest which may be assessed on the judgment based on the passage of time. The Greek
government must seek enforcement of this judgment in the United Kingdom. To date this judgment has not been enforced and
we have made no payments.
50
Witness Patent Litigation
NICE Systems Settlement Agreement
On August 1, 2008, we reached a settlement agreement with NICE to resolve all patent litigations between NICE and Witness in
existence at that time. The following is a summary of these litigations, each of which was formally terminated by the applicable
court between August 8, 2008 and August 13, 2008:
(cid:129)
Suit filed on July 20, 2004 in the U.S. District Court for the Southern District of New York by STS Software Systems
Ltd. (“STS Software”), a wholly owned subsidiary of NICE and declaratory judgment action filed the same day by
Witness against STS Software in the U.S. District Court for the Northern District Georgia. These two cases were
consolidated to the Northern District of Georgia, where STS Software asserted that certain Witness recording products
infringed on claims of U.S. Patent Nos. 6,122,665; 6,865,604; 6,871,229; and 6,880,004 relating to VoIP technology
and sought only injunctive relief. A bench trial was held from March 17-21, 2008. On May 23, 2008, the court
entered a judgment of non-infringement in our favor.
(cid:129)
Suit filed on August 30, 2004, in the U.S. District Court for the Northern District of Georgia, Atlanta Division, by
Witness against NICE Systems, Inc., a wholly owned subsidiary of NICE. Witness asserted that NICE’s screen capture
products infringed on claims of U.S. Patent Nos. 5,790,790 and 6,510,220. The case was consolidated with a separate
February 24, 2005 suit filed by Witness against NICE alleging infringement on the same patents. We were waiting on
the court to assign a trial date at the time of the settlement.
(cid:129)
Suit filed on January 19, 2006, in the U.S. District Court for the Northern District of Georgia, Atlanta Division, by
Witness against NICE. Witness asserted that NICE’s speech analytics products infringed on claims of U.S. Patent
No. 6,404,857. A jury trial was held from May 12-16, 2008 and the jury returned a verdict in our favor and against
NICE on the claims of infringement. The jury also awarded us $3.3 million in damages; however, this award was
superseded by the terms of the settlement disclosed above.
(cid:129)
Suit filed on May 10, 2006, in the U.S. District Court for the District of Delaware by NICE against Witness seeking
monetary damages and injunctive relief. NICE asserted that various Witness recording products infringed on claims of
U.S. Patent Nos. 5,274,738; 5,396,371; 5,819,005; 6,249,570; 6,728,345; 6,775,372; 6,785,370; 6,870,920; 6,959,079;
and 7,010,109. These patents cover various aspects for recording customer interaction communications and traditional
call logging. A jury trial was held from January 14-22, 2008, and the jury was unable to reach a verdict, resulting in a
mistrial.
(cid:129)
Declaratory judgment action filed on December 27, 2006, in the U.S. District Court for the Northern District of
Georgia by NICE against Witness seeking a declaration that the claims of U.S. Patent No. 6,757,361 (relating to
speech analytics) were invalid and that NICE has not infringed this patent. The Court granted our motion to dismiss
the case for lack of subject matter jurisdiction on August 10, 2007.
From time to time we or our subsidiaries may be involved in other legal proceedings and/or litigation arising in the ordinary
course of our business that might impact our financial position, our results of operations, or our cash flows.
51
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
52
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Market Information
Since February 1, 2007, our common stock has traded on the over-the-counter securities market under the symbol “VRNT.PK”
with pricing and financial information provided by the Pink Sheets. Prior to February 1, 2007, our common stock traded on
NASDAQ under the symbol “VRNT”. However, as a result of the delay in filing our periodic reports with the SEC, we were
unable to comply with the listing standards of NASDAQ and our common stock was suspended from trading effective
February 1, 2007 and formally de-listed effective June 4, 2007.
The following table sets forth the range of high and low quotations as reported by the Pink Sheets from February 1, 2007 through
January 31, 2009. The bid quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not
necessarily reflect actual transactions:
Year Ended January 31,
Quarter
Low
High
2008
2009
Holders
2/1/07 — 4/30/07
5/1/07 — 7/31/07
8/1/07 — 10/31/07
11/1/07 — 1/31/08
2/1/08 — 4/30/08
5/1/08 — 7/31/08
8/1/08 — 10/31/08
11/1/08 — 1/31/09
$
$
$
$
$
$
$
$
28.40
28.40
23.50
13.35
14.90
19.75
9.10
5.55
$
$
$
$
$
$
$
$
32.80
33.25
30.25
25.10
21.00
24.10
22.51
12.25
There were 98 holders of record of our common stock at March 18, 2010. Such record holders include holders who are nominees
for an undetermined number of beneficial owners.
53
Dividends
We have not declared or paid any cash dividends on our equity securities and have no current plans to pay any dividends on our
equity securities. We intend to retain our earnings to finance the development of our business, repay debt, and for other corporate
purposes. In addition, the terms of our credit agreement restrict our ability to pay cash dividends on shares of our common or
preferred stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources” under Item 7 for a more detailed discussion of these limitations. Our ability to pay dividends on our common
stock is also limited by the terms of our outstanding shares of preferred stock which ranks senior to our common stock with
respect to the payment of dividends and bears a preferred dividend which currently accrues at the rate of 3.875% per year. See
“Certain Relationships and Related Transactions, and Director Independence – Comverse Preferred Stock Financing
Agreements” under Item 13 and “Note 8, Convertible Preferred Stock” to the consolidated financial statements included in
Item 15 for a more detailed discussion of these restrictions.
Any future determination as to the payment of dividends on our common stock will be made by our board of directors at its
discretion, subject to the limitations contained in the credit agreement and the rights of the holders of the preferred stock and will
depend upon our earnings, financial condition, capital requirements, and other relevant factors.
Securities Authorized for Issuance Under Equity Compensation Plans
See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters - Equity
Compensation Plan Information” under Item 12.
Stock Performance Graph
The following table compares the cumulative total stockholder return on our common stock with the cumulative total return on
the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Services Index, assuming an investment of
$100 on January 31, 2004, through January 31, 2009, and the reinvestment of any dividends. The comparisons in the graph
below are based upon historical data based upon closing sale prices on NASDAQ for our common stock for each day prior to the
year ended January 31, 2007 and the high and low closing bid quotations (as reported by the Pink Sheets) for each day during the
years ended January 31, 2008 and January 31, 2009 and are not indicative of, nor intended to forecast, future performance of our
common stock.
54
Verint Systems Inc.
NASDAQ Composite Index
NASDAQ Computer & Data
Processing Index
January
31, 2004
$ 100.00
$ 100.00
January
31, 2005
$ 155.00
$ 101.03
January
31, 2006
$ 147.36
$ 112.79
January
31, 2007
$ 134.35
$ 124.39
January
31, 2008
75.20
$
$ 118.95
January
31, 2009
26.42
$
73.11
$
$ 100.00
$ 107.61
$ 119.46
$ 133.63
$ 136.21
$
83.84
Recent Sales of Unregistered Securities
Equity Grants
As a result of our inability to file required SEC reports during our extended filing delay period, we ceased using our Registration
Statement on Form S-8 to make equity grants to employees. As a result, on March 27, 2006, we suspended option exercises
under our equity incentive plans and terminated purchases under our employee stock purchase plan for all employees, including
executive officers. In addition, we did not make any equity awards to employees, including executive officers, during the year
ended January 31, 2007.
55
On May 24, 2007, we received a no-action letter from the SEC upon which we relied to make broad-based equity grants to
employees under a no-sale theory. We have also made equity grants to our directors, executive officers, and certain other
executives who qualify as accredited investors in reliance upon a private placement exemption from the federal securities laws
and have made a small number of equity grants to non-U.S. employees under the exemption provided by Regulation S of the
Securities Act of 1933.
The following summarizes various time-based equity awards approved by the stock option committee on the dates listed below
since the beginning of the year ended January 31, 2009 (excluding directors and executive officers) in the United States and
elsewhere throughout the world under the application of the no sale theory or under the exemption provided by Regulation S of
the Securities Act of 1933:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
April 10, 2008 and May 28, 2008 — equity awards representing an aggregate of approximately 717,000 shares;
March 4, 2009 — equity awards representing approximately 585,000 shares;
May 20, 2009 — equity awards representing approximately 458,000 shares; and
March 17, 2010 — equity awards representing approximately 283,850 shares.
The following summarizes various time-based and performance-based equity awards approved by the board of directors or the
stock option committee on the dates listed below since the beginning of the year ended January 31, 2009 under a private
placement exemption to directors, executive officers, or other employees qualifying as accredited investors:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
May 28, 2008 — equity awards representing approximately 524,000 shares;
March 4, 2009 — equity awards representing approximately 768,000 shares;
March 19, 2009 — equity awards representing approximately 20,000 shares;
May 20, 2009 — equity awards representing approximately 72,000 shares;
March 17, 2010 — equity awards representing approximately 426,850 shares; and
March 18, 2010 — equity awards representing approximately 20,000 shares.
All grants were made under a stockholder-approved equity compensation plan or contain vesting conditions which require that
we receive stockholder approval of a new equity compensation plan or have additional share capacity under an existing
stockholder-approved equity compensation plan for the awards to stock vest. All grants were compensatory in nature and were
issued without cost to the employee. For a more detailed discussion of equity granted to our executive officers, see “Executive
Compensation — Compensation Discussion and Analysis” under Item 11.
56
Issuer Purchases of Equity Securities
All of the purchases in the table below reflect shares withheld upon vesting of restricted stock to satisfy statutory minimum tax
withholding obligations. The shares that were withheld were deposited in our treasury and a corresponding cash payment was
made by us to the tax authorities. Due to the extended period covered by this report, the table below only includes those months
in which purchases were made (no purchases were made in the months omitted from the table). Purchases subsequent to
January 31, 2009, which are not included in the table below, are as follows (repurchase prices correspond to the closing prices of
our common stock on the Pink Sheets on the relevant vesting dates (or the trading date immediately preceding the vesting date)):
May 16, 2009 (8,000 shares at $6.20 per share), January 11, 2010 (2,913 shares at $19.00 per share) and March 17, 2010 (8,556
shares at $24.58 per share). From time to time, we may also foreclose on shares of our common stock pledged to us by non-
officer employees as security for tax-related loans associated with equity vestings if the employee defaults on his or her
repayment obligations.
Issuer Purchases of Equity Securities
(c)
Total number of
shares (or units)
(a)
Total number of
purchased as part of
shares (or units) Average price paid publicly announced
per share (or unit) plans or programs
purchased
(b)
(d)
Maximum number (or
approximate dollar value) of
shares (or units) that may yet
be purchased under the plans
or programs
2,000 $
2,000 $
17.69
23.50
2,000 (1)
2,000(1)
N/A (1)
N/A (1)
Period
February 2008
May 2008
(1) On June 28, 2007, our board of directors approved a limited stock repurchase program (the “Director Repurchase
Program”) to enable us to automatically repurchase, upon vesting, 40% of the shares of restricted stock otherwise
deliverable to the independent directors of our board of directors (and such other directors as our board of directors may
from time to time designate) upon such vesting in order to enable these directors to make required tax payments. The
Director Repurchase Program is effective through the date we become compliant with our SEC reporting obligations,
however, on March 18, 2010, our board of directors approved an extension of the program through (and including) May 16,
2010 to the extent that the program would otherwise have ended at such time and either we do not have in place an effective
registration statement under which the directors may sell shares or the directors are subject to a Company-imposed trading
blackout. Based on all grants made eligible for the Director Repurchase Program as of the filing date of this report,
assuming that the Director Repurchase Program is still in effect at the time of vesting and that all grants vest, the maximum
number of shares yet to be repurchased is currently 8,000. In addition, on November 24, 2009, our board of directors
approved a limited stock repurchase program (the “Officer Repurchase Program”) to enable us to offer to repurchase from
each executive officer the number of shares necessary to satisfy such officer’s minimum tax withholding obligation in
connection with equity vesting-related tax events that occur during a company-imposed trading blackout. Our executive
officers are not obligated to participate in the Officer Repurchase Program, which is effective through the date we file our
Annual Report on Form 10-K for the year ended January 31, 2010, and is not limited to a set number of shares.
57
Item 6. Selected Financial Data
The following selected consolidated financial data as of and for the years ended January 31, 2009, 2008, 2007 and 2006 has been
derived from our audited consolidated financial statements. The selected consolidated financial data as of and for the year ended
January 31, 2005 has been derived from our unaudited consolidated financial statements and reflects adjustments to our
previously filed consolidated financial statements for that period as discussed in our Comprehensive Form 10-K.
Our historical results should not be viewed as indicative of results expected for any future period.
Five-Year Selected Financial Highlights:
Consolidated Statements of Operations Data
(in thousands, except per share data)
Revenue
Operating income (loss)
Net income (loss)
Net income (loss) applicable to
common shares
Net income (loss) per share:
Basic
Diluted
Weighted-average shares:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
$
$
2009
669,544
(15,026)
(80,388)
(93,452)
(2.88)
(2.88)
32,394
32,394
For the Years Ended January 31,
2007
368,778
(47,253)
(40,519)
2008
534,543
(114,630)
(198,609)
$
$
$
$
$
$
2006
278,754
4,112
1,664
$
$
$
(207,290)
(6.43)
(6.43)
32,222
32,222
$
$
$
(40,519)
(1.26)
(1.26)
32,156
32,156
1,664
0.05
0.05
31,781
32,620
$
$
$
$
$
$
2005
214,038
(15,074)
19,027
19,027
0.62
0.59
30,881
32,175
We have never declared a cash dividend to common stockholders.
(in thousands)
Total assets
Long-term debt, including current
maturities
Preferred stock
Total stockholders’ equity (deficit)
Consolidated Balance Sheet Data
2009
$ 1,337,393
2008
$ 1,492,275
As of January 31,
2007
593,676
$
2006
609,558
2005
529,761
$
$
625,000
285,542
(76,743)
610,000
293,663
29,298
1,058
—
197,604
1,325
—
219,632
1,823
—
203,074
During the five year period ended January 31, 2009, we acquired a number of businesses, the more significant of which were the
acquisitions of MultiVision in January 2006, Mercom Systems Inc. (“Mercom”) in July 2006, and Witness in May 2007. The
operating results of acquired businesses have been included in our consolidated financial statements since their respective
acquisition dates and have contributed to our revenue growth. The May 2007 acquisition of Witness had significant impacts to
our revenue and operating results for the years ended January 31, 2009 and January 31, 2008.
58
Results for the period ended January 31, 2009 include:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
a full year’s revenue from Witness compared to eight months in the prior year;
amortization of intangible assets associated with the acquisition of Witness of $31.1 million;
integration costs of $3.2 million incurred to support and facilitate the combination of Verint and Witness into a single
organization;
net proceeds after legal fees of approximately $4.3 million associated with the settlement of pre-existing litigation
between Witness and a competitor;
interest expense on our term loan and revolving credit agreement of $35.2 million;
stock-based compensation expense of $36.0 million;
realized and unrealized losses on our interest rate swap of $11.5 million;
restructuring costs of $5.7 million and approximately $28 million in professional fees and related expenses associated
with our restatement of previously filed consolidated financial statements for periods through January 31, 2005 and
our extended filing delay status; and
non-cash goodwill impairment charges of $26.0 million.
Results for the period ended January 31, 2008 include:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
an increase in revenue of $123.1 million from the Witness business, beginning in the quarter ended July 31, 2007;
amortization of intangible assets associated with the acquisition of Witness of $22.6 million;
a $6.4 million charge for in-process research and development;
integration costs of $11.0 million incurred to support and facilitate the combination of Verint and Witness into a single
organization;
legal fees of $8.7 million associated with pre-existing litigation between Witness and a competitor;
interest expense on our term loan of $34.4 million;
59
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
restructuring costs of $3.3 million and approximately $26 million in professional fees and related expenses associated
with our restatement of previously filed consolidated financial statements for periods through January 31, 2005 and
our extended filing delay status;
realized and unrealized losses on our interest rate swap of $29.2 million;
unrealized gains of $7.2 million on an embedded derivative financial instrument related to the variable dividend
feature of our preferred stock;
stock-based compensation expense of $31.0 million associated with our implementation of Statement of Financial
Accounting Standards No. 123(revised 2004) Share-Based Payment (“SFAS No. 123(R)”); and
non-cash goodwill and intangible asset impairment charges of $23.4 million.
Operating results for the year ended January 31, 2007 include a $19.2 million one-time settlement charge related to our exit from
a royalty-bearing program with the OCS.
More detailed information regarding these transactions appears in the notes to the consolidated financial statements included in
Item 15.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis of our financial condition and results of operations should be read in
conjunction with the “Explanatory Note” at the beginning of this report, “Business” under Item 1, “Selected Financial Data”
under Item 6, and the consolidated financial statements and the related notes thereto which appear elsewhere in this report. This
discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which
could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these
forward-looking statements as a result of many factors including, but not limited to, those described under “Risk Factors” under
Item 1A.
Business Overview
Verint is a global leader in Actionable Intelligence® solutions and value-added services. Our solutions enable organizations of all
sizes to make timely and effective decisions to improve enterprise performance and make the world a safer place. More than
10,000 organizations in over 150 countries — including over 80% of the Fortune 100 — use Verint solutions to capture, distill,
and analyze complex and underused information sources, such as voice, video, and unstructured text.
60
In the enterprise market, our workforce optimization solutions help organizations enhance customer service operations in contact
centers, branches, and back-office environments to increase customer satisfaction, reduce operating costs, identify revenue
opportunities, and improve profitability. In the security intelligence market, our video intelligence, public safety, and
communications intelligence and investigative solutions are vital to government and commercial organizations in their efforts to
protect people and property and neutralize terrorism and crime.
We support our customers around the globe directly and with an extensive network of selling and support partners.
Our Business
We serve two markets through three operating segments. Our Workforce Optimization segment serves the enterprise workforce
optimization market, while our Video Intelligence segment and Communications Intelligence segment serve the security
intelligence market.
In our Workforce Optimization segment, we are a leading provider of enterprise workforce optimization software and services.
Our solutions enable organizations to extract and analyze valuable information from customer interactions and related
operational data in order to make more effective, proactive decisions for optimizing the performance of their customer service
operations, improving the customer experience, and enhancing compliance. Marketed under the Impact 360® brand to contact
centers, back offices, branch and remote offices, and public safety centers, these solutions comprise a unified suite of enterprise
workforce optimization applications and services that include IP and TDM voice recording and quality monitoring, speech and
data analytics, workforce management, customer feedback, eLearning and coaching, performance management, and desktop
productivity/application analysis. These applications can be deployed stand-alone or in an integrated fashion. Key business and
technology trends driving this segment include a growing interest in a unified workforce optimization suite and sophisticated
customer interaction analytics, the adoption of workforce optimization solutions outside contact centers, and the ongoing
upgrade of TDM voice systems to VoIP telephony infrastructure. For the years ended January 31, 2009, 2008, and 2007, this
segment represented approximately 53%, 49%, and 34% of our total revenue, respectively.
In our Video Intelligence segment, we are a leading provider of networked IP video solutions designed to optimize security and
enhance operations. Our Video Intelligence Solutions portfolio includes IP video management software and services, edge
devices for capturing, digitizing, and transmitting video over different types of wired and wireless networks, video analytics, and
networked DVRs. Marketed under the Nextiva® brand, this portfolio enables organizations to deploy an end-to-end IP video
solution with analytics or evolve to IP video operations without discarding their investments in analog CCTV technology. Key
business and technology trends in the Video Intelligence segment include increased demand for advanced security solutions due
to ongoing terrorism and security threats around the world and the transition from relatively passive analog CCTV video systems
to more sophisticated network-based IP video solutions. For the years ended January 31, 2009, 2008, and 2007, this segment
represented approximately 19%, 28%, and 33% of our total revenue, respectively.
61
In our Communications Intelligence segment, we are a leading provider of communications intelligence and investigative
solutions that help law enforcement, national security, intelligence, and civilian government agencies effectively detect,
investigate, and neutralize criminal and terrorist threats. Our solutions are designed to handle massive amounts of unstructured
and structured information from different sources, quickly make sense of complex scenarios, and generate evidence and
intelligence. Our portfolio includes solutions for communications interception, service provider compliance, mobile location
tracking, fusion and data management, financial crime investigation, Web intelligence, integrated video monitoring, and tactical
communications intelligence. These solutions can be deployed stand-alone or collectively, as part of a large-scale system to
address the needs of large government agencies that require advanced, comprehensive solutions. Key business and technology
trends in this segment include the demand for innovative communications intelligence and investigative solutions due to
terrorism, criminal activities, and other security threats, an expanding range of communication and information media, the
increasing complexity of communications networks and growing network traffic, and legal and compliance requirements. For the
years ended January 31, 2009, 2008, and 2007, this segment represented approximately 28%, 23%, and 33% of our total revenue,
respectively.
Generally, we make business decisions by evaluating the risks and rewards of the opportunities available to us in the markets
served by each of our segments. We view each operating segment differently and allocate capital, personnel, resources, and
management attention accordingly. In reviewing each operating segment, we also review the performance of that segment by
geography. Our marketing and sales strategies, expansion opportunities, and product offerings may differ materially within a
particular segment geographically, as may our allocation of resources between segments. When making decisions regarding
investment in our business, increasing capital expenditures or making other decisions that may reduce our profitability; we also
consider the leverage ratio in our credit facility. See “- Liquidity and Capital Resources Requirements”.
Our Strategy
There are several elements to our strategy, including:
(cid:129)
Continue to drive the development of Actionable Intelligence solutions for unstructured data. We were a pioneer in the
development of solutions that help businesses and governmental organizations derive intelligence from unstructured
data (such as telephone conversations, video streams, email and Internet communications, etc.) to help them make
better decisions. We believe that traditional business intelligence solutions, which have generally been designed for
structured data stored in relational databases, cannot easily analyze this unstructured information and that the market
opportunity for Actionable Intelligence solutions is still in its early stages. We intend to continue to drive the adoption
of Actionable Intelligence solutions by delivering solutions to the workforce optimization and security intelligence
markets designed to provide a high return on investment.
62
(cid:129)
Maintain market leadership through innovation and customer centricity. We believe that to compete successfully we
must continue to introduce solutions that better enable customers to derive Actionable Intelligence from their
unstructured data. In order to do this, we intend to continue to make significant investment in research and
development and to protect our intellectual property through patents and other means. We must continue to be in
regular dialog with our customer base in order to understand their business objectives and requirements.
(cid:129)
Grow through acquisitions, in addition to organic growth. Companies in our markets continue to consolidate, and we
believe this trend will continue. We examine acquisition opportunities regularly as a means to add technology,
increase our geographic presence, enhance our market leadership, or expand into adjacent markets. Historically, we
have engaged in acquisitions for all of these purposes and expect to continue to do so in the future when strategic
opportunities arise.
(cid:129)
Expand our market presence through OEM and partner relationships. We offer our products and solutions to
customers both directly and indirectly. For our indirect sales, we have expanded our relationships with OEMs and
other channel partners. We believe these relationships broaden our market coverage, particularly in the SMB portion
of the market, though in these arrangements, the partner has the primary relationship with the customer. We believe
this is an important part of our growth strategy and intend to expand existing relationships while creating new
relationships.
Key Trends and Developments in Our Business
We believe that there are many factors that affect our ability to sustain and increase both revenue and profitability, including:
(cid:129)
(cid:129)
Completion of our outstanding SEC filings. Our extended filing delay status has limited the information we have been
able to provide to the public and other interested parties, including customers, partners, and bank lenders. This has had
an adverse impact upon relationships with customers and resellers and, we believe, upon our actual results.
Decreased information technology spending. During the current global recession, information technology spending
has decreased, and the market for our products and services has been adversely affected. Customers are delaying,
reducing, and eliminating their spending on information technology, and we believe this has adversely affected our
results.
(cid:129)
Market acceptance of Actionable Intelligence for unstructured data, particularly analytics. We are in an early stage
market where the value of certain aspects of our products and solutions is still in the process of market acceptance. We
believe that our future growth depends in part on the continued and increasing acceptance of the value of our data
analytics across our product offerings.
63
(cid:129)
Our ownership and capital structure constrains investment and growth. We have a majority stockholder that can
effectively control our business and affairs. We also are subject to various restrictive covenants under our credit
facility, as well as a leverage ratio financial covenant. As a result, our current capital structure limits our ability to
issue equity, incur additional debt, or make certain investments in our business. We are also limited in our ability to
raise additional capital until such time that we have filed certain additional late periodic reports. These limitations may
impede our ability to execute upon our business strategy.
See also “Risk Factors” under Item 1A for a more complete description of these and other risks that may impact future revenue
and profitability.
Prior Investigation and Restatement
This report has been delayed due to the previously announced accounting reviews and internal investigations at Comverse and at
Verint, together with the resulting restatement of certain items and the making of other corrective adjustments to certain of our
previously filed historical financial statements through January 31, 2005, all of which were described in our Comprehensive
Form 10-K. The Comverse investigation, conducted by a special committee of Comverse’s board of directors, primarily related
to Comverse’s practices and accounting for stock options, reserves, and certain other accounting areas. Our internal investigation
primarily related to our practices and accounting for reserves in periods prior to the year ended January 31, 2003, and was
triggered by the Comverse investigation. Our accounting reviews primarily related to our historical revenue recognition
methodology.
We have incurred substantial expense for accounting assistance, audit, legal, tax, and other professional services in connection
with the accounting reviews and preparation of this report, and the ongoing preparation of our other outstanding periodic reports,
including our restatement of previously filed financial statements for periods through January 31, 2005 and our extended filing
delay status. Certain of these expenses are difficult to quantify, as we are unable to specifically segregate accounting and tax
expenses related to the accounting reviews and related restatement activities from such expenses associated with customary and
ongoing accounting and tax services. Billing for these services did not provide this level of differentiation as the services were
often commingled. However, we estimate that expenses associated with our restatement of previously filed financial statements
and expenses related to our extended filing delay status were approximately $26 million and $4 million in the years ended
January 31, 2008 and 2007, respectively, including our best estimate of the associated accounting and tax expenses. Of these
amounts, expenses related specifically to the internal investigation were approximately $17 million and $3 million in the years
ended January 31, 2008 and 2007, respectively. We estimate that we incurred approximately $28 million of expenses associated
with our restatement of previously filed financial statements for periods through January 31, 2005 and our extended filing delay
status during the year ended January 31, 2009, including approximately $4 million related specifically to the internal
investigation. We estimate that we incurred approximately $55 million of expenses associated with our restatement of previously
filed financial statements for periods through January 31, 2005 and our extended filing delay status during the year ended
January 31, 2010. We expect to continue to incur significant expenses in connection with completing our periodic reports at least
until the time we begin to timely file our SEC filings.
64
Critical Accounting Policies and Estimates
An appreciation of our critical accounting policies is necessary to understand our financial results. The accounting policies
outlined below are considered to be critical because they can materially affect our operating results and financial condition, as
these policies may require management to make difficult and subjective judgments regarding uncertainties. The accuracy of
these estimates and the likelihood of future changes depend on a range of possible outcomes and a number of underlying
variables, many of which are beyond our control, and there can be no assurance that our estimates are accurate.
Revenue Recognition
Our revenue recognition policy is a critical component of determining our operating results and is based on a complex set of
accounting rules that require us to make significant judgments and estimates. We derive revenue primarily from two sources:
product revenue, which includes revenue from hardware and software products, and service and support revenue, which includes
revenue from installation services, PCS, project management, hosting services, and training services. Our customer arrangements
typically include several of these elements. Revenue recognition for a particular arrangement is dependent upon such factors as
the level of customization within the solution and the contractual delivery, acceptance, payment, and support terms with the
customer. Significant judgment is required to conclude whether collectability of fees is considered probable and whether fees are
fixed or determinable. In addition, our multiple-element arrangements must be carefully reviewed to determine whether the fair
value of each element can be established, which is a critical factor in determining the timing of the arrangement’s revenue
recognition.
The majority of our software license arrangements contain multiple elements including software, hardware, PCS, and
professional services, such as installation, consulting, and training. We allocate revenue to delivered elements of the arrangement
using the residual value method (“Residual Method”), whereby revenue is allocated to the undelivered elements based on vendor
specific objective evidence of the fair value (“VSOE”) of the undelivered elements as prescribed in SOP 97-2 with the remaining
arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue recognition criteria are
met. If we are unable to establish VSOE for the undelivered elements of the arrangement, revenue recognition is deferred for the
entire arrangement until all elements of the arrangement are delivered. However, if the only undelivered element is PCS, we
recognize the arrangement fee ratably over the PCS period.
Our policy for establishing VSOE for installation, consulting, and training is based upon an analysis of separate sales of services,
which are then compared with the fees charged when the same elements are included in a multiple-element arrangement.
65
PCS revenues are derived from providing technical software support services and software updates and upgrades to customers on
a when-and-if-available basis. PCS revenue is recognized ratably over the term of the maintenance period, which in most cases is
one year. When PCS is included within a multiple-element arrangement, we utilize either the substantive renewal rate approach
or the bell-shaped curve approach to establish VSOE of the PCS, depending upon the business operating segment, geographical
region, or product line.
Under the bell-shaped curve approach of establishing VSOE, we perform a VSOE compliance test to ensure that a substantial
majority (75% or over) of our actual PCS renewals are within a narrow range of plus or minus 15% of the median pricing.
Under the substantive renewal rate approach, we believe it is necessary to evaluate whether both the support renewal rate and
term are substantive, and whether the renewal rate is being consistently applied to subsequent renewals for a particular customer.
We establish VSOE under this approach through analyzing the renewal rate stated in the customer agreement and determining
whether that rate is above the minimum substantive VSOE renewal rate established for that particular PCS offering. The
minimum substantive VSOE rate is determined based upon an analysis of revenue associated with historical PCS contracts.
Typically, renewal rates of 15% for PCS plans that provide when-and-if-available upgrades, and 10% for plans that do not
provide for when-and-if-available upgrades, would be deemed to be minimum substantive renewal rates. For contracts that do
not contain a stated renewal rate, revenue associated with the entire bundled arrangement is recognized ratably over the PCS
term. Contracts that have a renewal rate below the minimum substantive VSOE rate are deemed to contain a more than
insignificant discount element, for which VSOE cannot be established. We recognize revenue for these arrangements over the
period that the customer is entitled to renew their PCS at the discounted rate, but not to exceed the estimated economic life of the
product. We evaluate many factors in determining the estimated economic life of our products, including the support period of
the product, technological obsolescence, product roadmaps, and customer expectations. We have concluded that our software
products have estimated economic lives of from five to seven years.
For certain of our products, we do not have an explicit obligation to provide PCS but as a matter of business practice have
provided implied PCS. The implied PCS is accounted for as a separate element for which VSOE does not exist. Arrangements
that contain implied PCS are recognized over the period the implied PCS is provided, but not to exceed the estimated economic
life of the product.
For shipment of products which include embedded firmware that has been deemed incidental, we recognize revenue in
accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition (“SAB No. 104”), and Emerging Issues Task
Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF No. 00-21”). EITF No. 00-21
addresses the accounting for arrangements that may involve the delivery or performance of multiple products, services, and/or
rights to use assets. Under the terms of SAB No. 104, revenue is recognized provided that persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability of the fee is
reasonably assured. For shipments of hardware products, delivery is considered to have occurred upon shipment, provided that
the risks of loss, and title in certain jurisdictions, have been transferred to the customer.
66
Some of our arrangements require significant customization of the product to meet the particular requirements of the customer.
For these arrangements, revenue is recognized in accordance with Accounting Research Bulletin No. 45, Long-Term
Construction-Type Contracts, and the relevant guidance contained within SOP 81-1, typically using the percentage of
completion (“POC”) method. Under the POC method, revenue recognition is generally based upon the ratio of hours incurred to
date to the total estimated hours required to complete the contract. Profit estimates on long-term contracts are revised
periodically based on changes in circumstances, and any losses on contracts are recognized in the period that such losses become
evident. Generally, the terms of long-term contracts provide for progress billings based on completion of milestones or other
defined phases of work. Significant judgment is often required when estimating total hours and progress to completion on these
arrangements, as well as whether a loss is expected to be incurred on the contract due to several factors including the degree of
customization required and the customer’s existing environment. If the range of profitability cannot be estimated but some level
of profit is assured, revenue is recognized to the extent of costs incurred, until such time that the project’s profitability can be
estimated or the services have been completed. In addition, if VSOE does not exist for the contract’s PCS element, but some
level of profit is assured, the zero gross margin approach of applying percentage of completion accounting is used based on the
extent of costs incurred. Once the services are completed, the remaining unrecognized portion of the arrangement fee is
recognized ratably over the remaining PCS period. In the event some level of profitability on a contract cannot be assured, the
completed-contract method of revenue recognition is applied. We use historical experience, project plans, and an assessment of
the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties in these arrangements include
implementation delays or performance issues that may or may not be within our control.
In certain of our arrangements accounted for under SOP 81-1, the fee is contingent on the return on investment our customers
receive from our products and services. Revenue from these arrangements is recognized under the completed-contract method of
accounting when the contingency is resolved and collectability is assured, which in most cases is upon final receipt of payment.
If an arrangement includes customer acceptance criteria, revenue is not recognized until we can objectively demonstrate that the
software or services meet the acceptance criteria, or the acceptance period lapses, whichever occurs earlier. If a software license
arrangement obligates us to deliver specified future products or upgrades, revenue under the arrangement is initially deferred and
is recognized only when the specified future products or upgrades are delivered, or when the obligation to deliver specified
future products expires, whichever occurs earlier.
We extend customary trade payment terms to our customers in the normal course of conducting business. To assess the
probability of collection for purposes of revenue recognition, we have established credit policies that establish prudent credit
limits for our customers. These credit limits are based upon our risk assessment of the customer’s ability to pay, their payment
history, geographic risk, and other factors, and are not contingent upon the resale of the product or upon the collection of
payments from their customers. These credit limits are reviewed and revised periodically on the basis of updated customer
financial statement information, payment performance, and other factors.
67
We record provisions for estimated product returns in accordance with SFAS No. 48, Revenue Recognition When Right of Return
Exists (“SFAS No. 48”), in the same period in which the associated revenue is recognized. We base these estimates of product
returns upon historical levels of sales returns and other known factors. Actual product returns could be different from our
estimates and current or future provisions for product returns may differ from historical provisions. Concessions granted to
customers are recorded as reductions to revenue in the period in which they were granted and have been minimal in both amount
and frequency.
Product revenue derived from shipments to resellers and OEMs who purchase our products for resale are generally recognized
when such products are shipped (on a “sell-in” basis). This policy is predicated on our ability to estimate sales returns as well as
the other criteria outlined in SFAS No. 48 regarding these customers. We are also required to evaluate whether our resellers and
OEMs have the ability to honor their commitment to make fixed or determinable payments regardless of whether they collect
payment from their customers. In this regard, we assess whether our resellers and OEMs are new, poorly capitalized, or
experiencing financial difficulty, and whether they have a pattern of not paying as amounts become due on previous
arrangements or seeking payment terms longer than those provided to end customers. If we were to change any of these
assumptions or judgments, it could cause a material change to the revenue reported in a particular period. We have historically
experienced insignificant product returns from resellers and OEMs, and our payment terms for these customers are similar to
those granted to our end-users. Our policy also presumes that we have no significant performance obligations in connection with
the sale of our products by our resellers and OEMs to their customers. If a reseller or OEM develops a pattern of payment
delinquency, or seeks payment terms longer than generally granted to our resellers or OEMs, we defer the recognition of revenue
from transactions with that reseller or OEM until the receipt of cash.
For multiple-element arrangements for which we are unable to establish VSOE of one or more elements, we use various
available indicators of fair value and apply our best judgment to reasonably classify the arrangement’s revenue into product
revenue and service revenue for financial reporting purposes. For these arrangements, we review our VSOE for training,
installation, and PCS services from similar transactions and stand-alone service arrangements and prepare comparisons to peers,
in order to determine reasonable and consistent approximations of fair values of service revenue for statement of operations
classification purposes with the remaining amount being allocated to product revenue. Installation services associated with our
Communications Intelligence arrangements recognized under SOP 97-2 are included within product revenue as such amounts are
not considered material.
68
Allowance for Doubtful Accounts
We estimate the collectability of our accounts receivable balances each accounting period and adjust our allowance for doubtful
accounts accordingly. We exercise a considerable amount of judgment in assessing the collectability of accounts receivable,
including consideration of the creditworthiness of each customer, their collection history, and the related aging of past due
receivables balances. We evaluate specific accounts when we learn that a customer may be experiencing a deterioration of its
financial condition due to lower credit ratings, bankruptcy, or other factors that may affect its ability to render payment.
Accounting for Business Combinations
Business acquisitions completed prior to January 31, 2009 have been accounted for under the provisions of SFAS No. 141,
Business Combinations (“SFAS No. 141”). Pursuant to SFAS No. 141, we allocate the purchase price of acquired companies to
the tangible and intangible assets acquired and liabilities assumed as well as to in-process research and development costs based
upon their estimated fair values at the acquisition date. These fair values are typically estimated with assistance from
independent valuation specialists. The purchase price allocation process requires our management to make significant estimates
and assumptions, especially at the acquisition date with respect to intangible assets, contractual support obligations assumed, and
pre-acquisition contingencies.
Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are
based in part on historical experience and information obtained from the management of the acquired companies and are
inherently uncertain.
Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include
but are not limited to:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
future expected cash flows from software license sales, support agreements, consulting contracts, other customer
contracts, and acquired developed technologies;
expected costs to develop the in-process research and development into commercially viable products and estimated
cash flows from the projects when completed;
the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired
brand will continue to be used in the combined company’s product portfolio;
cost of capital and discount rates; and
estimating the useful lives of acquired assets as well as the pattern or manner in which the assets will amortize.
In connection with the purchase price allocations for applicable acquisitions, we estimate the fair value of the contractual support
obligations we are assuming from the acquired business. The estimated fair value of the support obligations is determined
utilizing a cost build-up approach, which determines fair value by estimating the costs related to fulfilling the obligations plus a
reasonable profit margin. The estimated costs to fulfill the support obligations are based on the historical direct costs related to
providing the support services. The sum of these costs and operating profit represents an approximation of the amount that we
would be required to pay a third party to assume the support obligations.
69
Impairment of Goodwill and Other Intangible Assets
We perform our goodwill impairment test on an annual basis, as of November 1, or more frequently, if changes in facts and
circumstances indicate that impairment in the value of goodwill may exist. Our goodwill impairment evaluation is based upon
comparing the fair value to the carrying value of our reporting units containing goodwill. To test for potential impairment, we
first perform an assessment of the fair value of our reporting units. We utilize three primary approaches to determine fair value:
(a) an income based approach, using projected discounted cash flows, (b) a market based approach using multiples of
comparable companies, and (c) a transaction based approach using multiples for recent acquisitions of similar businesses made in
the marketplace.
Our estimate of fair value of each reporting unit is based on a number of subjective factors, including: (a) appropriate weighting
of valuation approaches (income approach, market approach, and comparable public company approach), (b) estimates of our
future cost structure, (c) discount rates for our estimated cash flows, (d) selection of peer group companies for the public
company approach, (e) required level of working capital, (f) assumed terminal value, and (g) time horizon of cash flow forecasts.
The fair value of each reporting unit is compared to its carrying value to determine whether there is an indication of impairment
in value. If an indication of impairment exists, we perform a second analysis to measure the amount of impairment, if any.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review intangible assets
that have finite useful lives and other long-lived assets when an event occurs indicating the potential for impairment. If any
indicators are present, we perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows
attributable to the assets in question to their carrying amounts. If the undiscounted cash flows used in the test for recoverability
are less than the long-lived assets carrying amount, we determine the fair value of the long-lived asset and recognize an
impairment loss if the carrying amount of the long-lived asset exceeds its fair value.
During the years ended January 31, 2009, 2008, and 2007 we recorded non-cash charges to recognize impairments of goodwill
and other intangible assets of $26.0 million, $23.4 million, and $24.7 million, respectively.
The assumptions and estimates used in this process are complex and often subjective. They can be affected by a variety of
factors, including external factors such as industry and economic trends, and internal factors such as changes in our business
strategy or our internal forecasts. Although we believe the assumptions, judgments, and estimates we have used are reasonable
and appropriate, changes in any of our assumptions could trigger impairments not originally identified or could result in a
material change to impairments identified.
70
Income Taxes
We account for income taxes using a balance sheet approach in accordance with SFAS No. 109, Accounting for Income Taxes
(“SFAS No. 109”). Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or
payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the
financial statement and tax bases of our assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes
are enacted. The effects of future changes in income tax laws or rates are not anticipated.
We are subject to income taxes in the United States and numerous foreign jurisdictions. The calculation of our tax provision
involves the application of complex tax laws and requires significant judgment and estimates.
We evaluate the realizability of our deferred tax assets for each jurisdiction in which we operate at each reporting date. SFAS
No. 109 requires a valuation allowance to be established when it is more likely than not that all or a portion of our deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income of the same character and in the same jurisdiction. We consider all available positive and negative evidence in making
this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies. In circumstances where there is sufficient negative evidence indicating that our deferred tax assets
are not more-likely-than-not realizable, we establish a valuation allowance.
On February 1, 2007, we implemented the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 requires a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate tax positions
taken or expected to be taken in a tax return by assessing whether they are more-likely-than-not sustainable, based solely on their
technical merits, upon examination, and including resolution of any related appeals or litigation process. The second step is to
measure the associated tax benefit of each position as the largest amount that we believe is more-likely-than-not realizable.
Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax
benefits recognized in our financial statements, determined by applying the prescribed methodologies of FIN 48, represent our
unrecognized income tax benefits, which we either record as a liability or as a reduction of the deferred tax asset for NOL’s. This
interpretation also provides guidance on de-recognition, financial statement classification, interest and penalties, accounting in
interim periods, disclosure, and transition. Our policy is to include interest and penalties related to unrecognized income tax
benefits as a component of income tax expense.
71
Contingencies
We account for claims and contingencies in accordance with SFAS No. 5, Accounting for Contingencies, which requires the
recognition of an estimated loss from a claim or loss contingency when information available prior to issuance of the financial
statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting for claims and contingencies requires the use of
significant judgment and estimates. One notable potential source of loss contingencies is pending or threatened litigation. Legal
counsel and other advisors and experts are consulted on issues related to litigation as well as on matters related to contingencies
occurring in the ordinary course of business.
Accounting for Stock-Based Compensation
On February 1, 2006, we adopted SFAS No. 123(R) and related interpretative guidance issued by the FASB and the SEC. SFAS
No. 123(R) requires the recognition of the cost of employee services received in exchange for an award of equity instruments in
the financial statements and measurement of such cost based on the grant-date fair value of the award.
The application of SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of
grant using an option-pricing model. We use the Black-Scholes option-pricing model, which requires the input of significant
assumptions including an estimate of the average period of time employees will retain stock options before exercising them, the
estimated volatility of our common stock price over the expected term, the number of options that will ultimately be forfeited
before completing vesting requirements, and the risk-free interest rate. Changes in the assumptions can materially affect the
estimate of fair value of stock-based compensation and, consequently, the related expense recognized. The assumptions we use
in calculating the fair value of stock-based payment awards represent our best estimates, which involve inherent uncertainties
and the application of judgment. As a result, if factors change and we use different assumptions, our stock-based compensation
expense could be materially different in the future.
Impact of Our VSOE/Revenue Recognition Policies on Our Results of Operations
As reported in our Comprehensive Form 10-K, we conducted a review of our historical revenue recognition practices in
accordance with SOP 97-2 and related accounting pronouncements, including performing additional analysis associated with the
establishment of VSOE and whether we were able to determine the fair value of an undelivered element within a multiple-
element arrangement. When VSOE does not exist for all delivered elements of an arrangement, SOP 97-2, as modified by SOP
98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, requires revenue to be
recognized under the Residual Method. In essence, the value of our products is derived by ascertaining the fair value of all
undelivered elements (i.e., PCS and other services) and subtracting the value of the undelivered elements from the total
arrangement value. If the fair value of all undelivered elements cannot be determined, revenue recognition is deferred for all
elements, including delivered elements, until all elements are delivered. However, if the only undelivered element is PCS, the
entire arrangement fee is recognized ratably over the PCS period.
72
As we disclosed in our Comprehensive Form 10-K, we determined that for many of the arrangements we examined in previously
reported periods, we were unable to determine the fair value of all or some of the elements within the multiple-element
arrangement, as required by SOP 97-2. Further, for certain transactions occurring during periods reported herein, we were
similarly unable to determine the fair value of all or some of the elements.
Following is a general overview of how we recognize revenue for multiple-element arrangements by segment.
Workforce Optimization Segment
During the year ended January 31, 2009, VSOE for professional services was established for the majority of our Workforce
Optimization transactions which allowed for the recognition of product revenue prior to the services being performed. In the
years ended January 31, 2008 and 2007 VSOE for professional services was not established for a majority of our Workforce
Optimization transactions and as a result, product revenue that could have otherwise been recognized upon delivery is being
deferred until all services associated with the arrangement are completed. This results in revenue recognition being deferred for
up to several quarters depending on the nature of the arrangement.
In addition during the three year period covered by this report, we were also unable to establish VSOE of PCS services related to
certain other Workforce Optimization transactions. As a result, product revenue that could otherwise been recognized upon
delivery is being recognized ratably over either the term of the PCS services or the estimated economic life of the software
product.
In addition, several of our Workforce Optimization PCS service plans provide for significant and incremental discounts on future
when-and-if available version upgrades, which also result in the deferral of certain previously recognized product revenue to
later periods.
Over the last three years, in our Workforce Optimization segment, approximately 55% of our revenue was recognized when
delivery of our products or performance of our services occurred using the Residual Method and approximately 45% was
recognized ratably over either the PCS term or the period that the customer was entitled to renew their PCS but not to exceed the
estimated economic life of the product or contractual period (“Ratable Method”).
Video Intelligence Segment
In certain of our Video Intelligence arrangements we provided support services that qualify as PCS for which we were not
contractually obligated to render. We were unable to adequately establish VSOE for these implied PCS services. Accordingly,
we are recognizing revenue for these arrangements over the implied support period, limited to the estimated economic life of the
product.
We now offer separate PCS service plans to our Video Intelligence customers and have implemented improved processes which
allow us to better identify Video Intelligence customers that were under current PCS service plans. However, we were not able to
establish VSOE for our PCS plans due to the lack of actual subsequent PCS renewals. Therefore, revenue will continue to be
recognized ratably over the support period for those arrangements which contain PCS.
73
Over the last three years, in our Video Intelligence segment, approximately 60% of our revenue was recognized when delivery of
our products or performance of our services occurred using the Residual Method and approximately 40% was recognized using
the Ratable Method.
Communications Intelligence Segment
Certain Communications Intelligence contracts include professional services, for which VSOE was not adequately established, in
circumstances similar to those described previously for the Workforce Optimization segment. As a result, revenue for these
contracts is deferred to subsequent periods. In addition, several of our Communications Intelligence contracts require substantial
customization, and are therefore accounted for under the provisions of SOP 81-1. In addition, certain of these arrangements are
bundled with PCS for which we were unable to establish VSOE, and revenue is deferred accordingly.
Over the last three years, based on the way we recognize revenue in our Communications Intelligence segment, approximately
55% of our revenue was recognized using the Residual Method, approximately 20% was recognized using the Ratable Method,
and approximately 25% was recognized under the provisions of SOP 81-1, primarily using the percentage of completion method,
or alternately, the completed contract method (the “Contract Accounting Method”).
Our revenue recognition policies described above primarily relate to the timing of the recognition of revenue over accounting
periods, and do not impact the aggregate amount of cash flows or the aggregate amount of revenue we will ultimately record
other than the impact of foreign currency exchange rates on certain revenue now reported and translated into U.S. Dollars in
different accounting periods and certain transactions moving from net to gross accounting. As described above, revenue
arrangements are being recognized ratably over a period as long as seven years. For example, revenue for an arrangement that
was previously recognized entirely in the year ended January 31, 2005 may now be recognized ratably over a period through the
year ended January 31, 2012, thereby reducing revenue in the year ended January 31, 2005 and adding to revenue in later
periods.
In addition, as part of deferring revenue for a particular arrangement, we have also deferred certain cost of revenue associated
with the arrangement. We have made an accounting policy election whereby the product cost of revenue, including hardware and
third-party software license fees, are capitalized and amortized over the same period that product revenue is recognized, while
installation and other service costs are generally expensed as incurred, except for certain contracts recognized according to
contract accounting. For example, in a multiple-element arrangement where revenue is now being recognized over a seven-year
period, the cost of revenue associated with the product is capitalized upon product delivery and amortized over that same seven-
year period. However, the cost of revenue associated with the services is expensed as incurred in the period in which the services
are performed. In addition, we expense customer acquisition and origination costs to selling, general and administrative expense,
including sales commissions, as incurred, with the exception of certain sales referral fees in our Communications Intelligence
segment which are capitalized and amortized ratably over the revenue recognition period.
74
As a result of the matters discussed above, revenue recognized in each of the years ended January 31, 2009, 2008, and 2007
relates to products and services that were delivered in that year as well as products and services that were delivered in prior
years. Beginning in the year ended January 31, 2009 and more so in the year ended January 31, 2010, we believe that, in most
cases, we have or will have changed our business processes and systems in a way that will enable us to establish fair value for
each element in our offerings. These changes are intended to enable us to recognize revenue from product and services upon
delivery instead of deferring all revenue over the PCS period and as a result we expect the amount of revenue that we will
recognize in future periods that originated from prior periods will diminish over time. However, we believe that we will, in
certain selected situations, continue to enter into arrangements that will require revenue to be deferred over longer periods of
time.
Results of Operations
Financial Overview
The following table sets forth a summary of certain key financial information for the years ended January 31, 2009, 2008, and
2007:
(in thousands, except per-share data)
Total revenue
Operating loss
Net loss applicable to common shares
Net loss per share:
Basic and diluted
$
$
$
$
For the Years Ended January 31,
2008
534,543
(114,630)
(207,290)
2009
669,544
(15,026)
(93,452)
$
$
$
$
$
$
2007
368,778
(47,253)
(40,519)
(2.88)
$
(6.43)
$
(1.26)
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Our revenue increased approximately 25%, or
$135.0 million, to $669.5 million in the year ended January 31, 2009 from $534.5 million in the year ended January 31, 2008.
The increase was due to revenue increases in our Workforce Optimization and Communications Intelligence segments, partially
offset by a reduction in our Video Intelligence segment. In our Workforce Optimization segment, revenue increased by
$91.5 million, or 35%, primarily due to a full year of Witness being included in our results for the year ended January 31, 2009
compared to only eight months in the year ended January 31, 2008, coupled with an increase in Witness maintenance renewal
revenue recognized at full value as a result of the reduced impact of purchase accounting adjustments to support obligations
assumed. We recorded an adjustment reducing support obligations assumed in the Witness acquisition to their estimated fair
value at the acquisition date. As a result, as required by business combination accounting rules, revenues related to maintenance
contracts in the amount of $5.2 million and $33.9 million that would have been otherwise recorded by Witness as an independent
75
entity, were not recognized in the years ended January 31, 2009 and 2008, respectively. Historically, substantially all of our
customers, including customers from acquired companies, renew their maintenance contracts when such contracts are eligible for
renewal. To the extent these underlying maintenance contracts are renewed, we will recognize the revenues for the full value of
these contracts over the maintenance periods, the substantial majority of which are one year. In our Communications Intelligence
segment, revenue increased by $63.8 million, or 50%, primarily due to increased business including several large project
implementations that started during the year, as well as the completion of certain installations and work performed for projects
accounted for as Contract Accounting Method revenue. In our Video Intelligence segment, revenue decreased $20.2 million, or
14%, due to timing of installations from a major customer, a decline in our distribution business in the APAC region, and a
decline in Residual Method revenue due to the global economic downturn. For more details on our revenue by segment, see “-
Revenue by Operating Segment”. Revenue in the Americas, EMEA, and APAC regions represented approximately 52%, 32%,
and 16% of our total revenue, respectively, in the year ended January 31, 2009 compared to approximately 52%, 33%, and 15%,
respectively, in the year ended January 31, 2008.
We had an operating loss of $15.0 million in the year ended January 31, 2009 compared to an operating loss of $114.6 million in
the year ended January 31, 2008. The decrease in operating loss was primarily due to an increase in gross profit of
$106.8 million to $411.3 million, or 61%, from $304.5 million, or 57%, partially offset by an increase of $7.2 in operating
expenses. The increase in gross profit was primarily due to higher revenue and higher gross margin in our Workforce
Optimization and Communications Intelligence segments, partially offset by lower revenue and lower gross margin in our Video
Intelligence segment. The increase in operating expenses was due to a $23.0 million increase in selling, general and
administrative expenses and a $5.6 million increase in amortization of intangible assets, primarily due to a full year of Witness
being included in our results for the year ended January 31, 2009 compared to only eight months in the year ended January 31,
2008, as well as a $3.0 million increase in impairment of goodwill and other acquired intangible assets, partially offset by a
$5.3 million reduction in integration and restructuring costs, a $13.0 million decrease in legal fees associated with intellectual
property litigation assumed in the Witness acquisition, net of settlement recovery, as well as the absence in the year ended
January 31, 2009 of a $6.7 million in-process research and development charge recorded in the year ended January 31, 2008. For
additional information see “- Impairment of Goodwill and Other Acquired Intangible Assets” and Note 5, “Intangible Assets and
Goodwill” to the consolidated financial statements included in Item 15.
We had a net loss applicable to common shares of $93.5 million and a loss per share of $2.88 in the year ended January 31, 2009,
compared to a net loss applicable to common shares of $207.3 million and a loss per share of $6.43 in the year ended January 31,
2008. The decrease in our net loss applicable to common shares and loss per share in the year ended January 31, 2009 was due to
our higher gross profit and lower integration costs and the Witness intellectual property legal fees as described above, and to
lower interest and other expenses, net of $43.9 million in the year ended January 31, 2009, compared to interest and other
expenses, net of $55.2 million in the year ended January 31, 2008. The decrease in interest and other expenses was primarily a
result of the repurchase by our broker of our auction rate securities (“ARS”) at the value equal to the par value plus interest.
76
The U.S. Dollar was mixed relative to the major foreign currencies where we do business (weakened versus the Euro and Israeli
Shekel and strengthened versus the British Pound and Canadian Dollar) in the year ended January 31, 2009 compared to the year
ended January 31, 2008. The net impact was unfavorable on our revenue primarily due to the weaker British Pound, and had a
net unfavorable impact on our operating loss primarily due to the stronger Israeli Shekel (which caused our local expenses to be
higher). Had foreign exchange rates remained constant in these periods, our total revenue would have been approximately
$5 million higher and our operating expenses and cost of revenue would have been approximately $2 million lower, or a net
favorable constant dollar impact of approximately $7 million on our operating loss in the year ended January 31, 2009.
As of January 31, 2009, we employed approximately 2,550 employees, including part-time employees and certain contractors, as
compared to approximately 2,600 as of January 31, 2008.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Our revenue increased approximately 45%, or
$165.7 million, to $534.5 million in the year ended January 31, 2008 from $368.8 million in the year ended January 31, 2007.
The increase was primarily due to the acquisition of Witness in May 2007, which represented approximately 74% of the revenue
increase, as well as approximately 10% of the increase resulting from greater Residual Method revenue primarily related to our
Video Intelligence segment. For more details on our revenue by segment, see “- Revenue by Operating Segment”. Revenue in
the Americas, EMEA, and APAC regions represented approximately 52%, 33%, and 15% of our total revenue, respectively, in
the year ended January 31, 2008 compared to approximately 48%, 31%, and 21%, respectively, in the year ended January 31,
2007.
We had an operating loss of $114.6 million in the year ended January 31, 2008 compared to an operating loss of $47.3 million in
the year ended January 31, 2007. The increased operating loss was primarily due to an increase in professional fees and related
expenses of approximately $22 million associated with our restatement of previously filed financial statements and our extended
filing delay status, an increase in amortization of intangibles of $20.4 million, an increase in stock-based compensation of
$12.4 million, integration and restructuring expenses of $14.3 million, and legal fees associated with intellectual property
litigations of $12.0 million. With the exception of the professional fees, all of the previously mentioned increases were primarily
due to the acquisition of Witness. Also included in our operating loss was an impairment charge of $2.7 million related to
acquired intangible assets in our Video Intelligence segment and goodwill impairment charges totaling $14.0 million in our
Workforce Optimization segment and $6.6 million in our Video Intelligence segment. For additional information see “-
Impairment of Goodwill and Other Acquired Intangible Assets” and Note 6, “Intangible Assets and Goodwill” to the
consolidated financial statements included in Item 15. The operating loss for the year ended January 31, 2007 included a
$19.2 million settlement charge relating to the exit from a royalty-bearing program with the OCS. For additional information see
“- OCS Royalty Settlement”.
77
We had a net loss applicable to common shares of $207.3 million and a loss per share of $6.43 in the year ended January 31,
2008, compared to a net loss applicable to common shares of $40.5 million and a loss per share of $1.26 in the year ended
January 31, 2007. The increase in our net loss and loss per share in the year ended January 31, 2008 was due to our higher
operating expenses as described above and to interest and other expenses, net of $55.2 million in the year ended January 31,
2008, compared to interest and other income, net of $7.8 million in the year ended January 31, 2007. Included in interest and
other expenses is a $29.2 million loss in connection with a $450.0 million interest rate swap contract entered into concurrently
with our credit agreement. The increased interest and other expenses were primarily a result of the financing arrangements that
we entered into in connection with the Witness acquisition. See “- Liquidity and Capital Resources”.
The weakening of the U.S. Dollar relative to the major foreign currencies where we do business (primarily the British Pound, the
Euro, Israeli Shekel, and Canadian Dollar) in the year ended January 31, 2008 compared to the year ended January 31, 2007 had
a favorable impact on our revenue and an unfavorable impact on our operating expenses and our operating loss. Had foreign
exchange rates remained constant in these periods, our total revenue would have been approximately $12 million lower and our
operating expenses and cost of revenue would have been approximately $16 million lower, or a net favorable constant dollar
impact of approximately $4 million on our operating loss.
As of January 31, 2008, we employed approximately 2,600 employees, including part-time employees and certain contractors, as
compared to approximately 1,800 as of January 31, 2007. This increase was almost entirely due to the Witness acquisition.
Revenue by Operating Segment
The following table sets forth revenue for each of our three operating segments for the years ended January 31, 2009, 2008, and
2007:
(in thousands)
Workforce Optimization
Video Intelligence
Communications Intelligence
Total revenue
$
$
For the Years Ended January 31,
2008
260,938
147,225
126,380
534,543
2009
352,367
127,012
190,165
669,544
2007
125,982
122,681
120,115
368,778
$
$
$
$
% Change
2009 –
2008
2008 –
2007
35%
(14%)
50%
25%
107%
20%
5%
45%
78
Workforce Optimization Segment
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. In our Workforce Optimization segment, revenue
increased by $91.5 million, or 35%, primarily due to a full year of Witness being included in our results for the year ended
January 31, 2009 compared to only eight months in the year ended January 31, 2008, coupled with an increase in Witness
maintenance renewal revenue recognized at full value as a result of the reduced impact of purchase accounting adjustments to
support obligations assumed. We recorded an adjustment reducing support obligations assumed in the Witness acquisition to
their estimated fair value at the acquisition date. As a result, as required by business combination accounting rules, revenues
related to maintenance contracts in the amount of $5.2 million and $33.9 million that would have been otherwise recorded by
Witness as an independent entity, were not recognized in the years ended January 31, 2009 and 2008, respectively. Historically,
substantially all of our customers, including customers from acquired companies, renew their maintenance contracts when such
contracts are eligible for renewal. To the extent these underlying maintenance contracts are renewed, we will recognize the
revenues for the full value of these contracts over the maintenance periods, the substantial majority of which are one year.
During the year ended January 31, 2009, we merged certain legal entities of Verint and Witness as well as integrated some of the
products of both companies. As a result, we cannot accurately quantify the increase in revenue attributable to the Witness
acquisition.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Workforce Optimization segment revenue increased
approximately 107%, or $134.9 million, to $260.9 million in the year ended January 31, 2008 from $126.0 million in the year
ended January 31, 2007. Approximately 91% of the increase was due to the acquisition of Witness in May 2007.
Video Intelligence Segment
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Video Intelligence segment revenue decreased
approximately 14%, or $20.2 million, to $127.0 million in the year ended January 31, 2009 from $147.2 million in the year
ended January 31, 2008. Approximately 35% of the decrease was due to lower revenue from a major customer due to the timing
of installations, approximately 35% of the decrease was due to a decline in our distribution business in the APAC region, and
approximately 30% of the decrease was due to a decline in Residual Method revenue due to the global economic downturn.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Video Intelligence segment revenue increased
approximately 20%, or $24.5 million, to $147.2 million in the year ended January 31, 2008 from $122.7 million in the year
ended January 31, 2007. Approximately 70% of the increase was due to greater Residual Method revenue primarily related to the
completion of a multi-site installation for a major customer, partially offset by a decline in our distribution business in the APAC
region, and approximately 30% of the increase was due to an increase in Ratable Method revenue recognized, primarily as a
result of the introduction of our Nextiva Video Solution during the year ended January 31, 2007.
Communications Intelligence Segment
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Communications Intelligence segment revenue
increased approximately 50%, or $63.8 million, to $190.2 million in the year ended January 31, 2009 from $126.4 million in the
year ended January 31, 2008. The increase was due to increased business including several large project implementations that
started during the year as well as the completion of certain installations and work performed for projects accounted for as
Contract Accounting Method revenue. Approximately 60% of the increase was due to an increase in Residual Method revenue
related to the completion of certain installations and approximately 30% of the increase was due to an increase in Contract
Accounting Method revenue.
79
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Communications Intelligence segment revenue
increased approximately 5%, or $6.3 million, to $126.4 million in the year ended January 31, 2008 from $120.1 million in the
year ended January 31, 2007. This increase was primarily due to the increase in Ratable Method revenue related to the
completion of certain installations, partially offset by a decline in Contract Accounting Method revenue.
Volume and Price
We sell products in multiple configurations, and the price of any particular product varies depending on the configuration of the
product sold. Due to the variety of customized configurations for each product we sell, we are unable to quantify the amount of
any revenue increases attributable to a change in the price of any particular product and/or a change in the number of products
sold.
Revenue by Product Revenue and Service and Support Revenue
We categorize and report our revenue in two categories — product revenue and service and support revenue. For multiple-
element arrangements for which we are unable to establish VSOE of one or more elements, we use various available indicators
of fair value and apply our best judgment to reasonably classify the arrangement’s revenue into product revenue and service and
support revenue. For additional information see Note 1, “Summary of Significant Accounting Policies” to the consolidated
financial statements included in Item 15.
The following table sets forth revenue for products and service and support for the years ended January 31, 2009, 2008, and
2007:
(in thousands)
Product revenue
Service and support revenue
Total revenue
Product Revenue
$
$
For the Years Ended January 31,
2008
333,130
201,413
534,543
2009
365,485
304,059
669,544
2007
251,584
117,194
368,778
$
$
$
$
% Change
2009 –
2008
2008 –
2007
10%
51%
25%
32%
72%
45%
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Product revenue increased approximately 10%, or
$32.4 million, to $365.5 million in the year ended January 31, 2009 from $333.1 million in the year ended January 31, 2008. The
increase was primarily a result of our Communication Intelligence segment which had a $47.4 million increase in product
revenue, as well as an increase of $6.6 million in our Workforce Optimization segment. These increases were offset by a
decrease of $21.6 million in product revenue in our Video Intelligence segment. For additional information see “- Revenue by
Operating Segment”.
80
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Product revenue increased approximately 32%, or
$81.5 million, to $333.1 million in the year ended January 31, 2008 from $251.6 million in the year ended January 31, 2007. The
increase was primarily in our Workforce Optimization segment, due to the acquisition of Witness in May 2007 which
represented approximately 70% of the product revenue increase, as well as an increase in product revenue recognized in our
Video Intelligence segment which represented approximately 30% of the product revenue increase.
Service and Support Revenue
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Service and support revenue increased approximately
51%, or $102.7 million, to $304.1 million for the year ended January 31, 2009 from $201.4 million in the year ended January 31,
2008. The increase was primarily in our Workforce Optimization segment which represented $84.9 million of the total increase,
as well as a combined increase of $17.8 million in our Video Intelligence and Communications Intelligence segments. The
increase in our Workforce Optimization segment was primarily due to a full year of Witness being included in our results for the
year ended January 31, 2009 compared to only eight months in the year ended January 31, 2008, coupled with an increase in
Witness maintenance renewal revenue recognized at full value as a result of reduced impact of the purchase accounting
adjustments to support obligations assumed. We recorded an adjustment reducing support obligations assumed in the Witness
acquisition to their estimated fair value at the acquisition date. As a result, as required by business combination accounting rules,
revenues related to maintenance contracts in the amount of $5.2 million and $33.9 million that would have been otherwise
recorded by Witness as an independent entity, were not recognized in the years ended January 31, 2009 and 2008, respectively.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Service and support revenue increased approximately
72%, or $84.2 million, to $201.4 million for the year ended January 31, 2008 from $117.2 million in the year ended January 31,
2007. The increase was primarily in our Workforce Optimization segment, due to the acquisition of Witness in May 2007 which
represented approximately 80% of the service and support revenue increase, as well as an increase in service and support revenue
recognized in both our Workforce Optimization and Communications Intelligence segments which represented approximately
20% of the revenue increase.
81
Cost of Revenue
The following table sets forth cost of revenue by product and service and support, as well as amortization and impairment of
acquired technology and backlog, and the settlement with the OCS for the years ended January 31, 2009, 2008, and 2007:
(in thousands)
Product cost of revenue
Service and support cost of revenue
Amortization and impairment of
acquired technology and backlog
Settlement with OCS
Total cost of revenue
$
$
Product Cost of Revenue
For the Years Ended January 31,
2008
121,627
100,397
2009
131,638
117,588
$
$
2007
116,274
48,175
9,024
—
258,250
$
8,018
—
230,042
$
7,664
19,158
191,271
% Change
2009 –
2008
2008 –
2007
8%
17%
13%
12%
5%
108%
5%
20%
Product cost of revenue primarily consists of hardware material costs and royalties due to third parties for software components
that are embedded in our software applications. As discussed under “- Impact of Our VSOE/Revenue Recognition Policies on
our Results of Operations”, when revenue is deferred, we also defer hardware material costs and third-party software royalties
and amortize those costs over the same period that the product revenue is recognized. Product cost of revenue also includes
amortization of capitalized software development costs, OCS royalties (only for periods prior to August 1, 2006), write-offs of
intangible assets, employee compensation and related expenses associated with our global operations, facility costs, and other
allocated overhead expenses. In our Communications Intelligence segment, product cost of revenue also includes employee
compensation and related expenses, contractor and consulting expenses, and travel expenses, in each case relating to resources
dedicated to the delivery of customized projects for which certain contracts are accounted for under the Contract Accounting
Method.
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Product cost of revenue increased approximately 8%
to $131.6 million in the year ended January 31, 2009 from $121.6 million in the year ended January 31, 2008 primarily as a
result of greater product revenue in our Communication Intelligence segment. This increase in revenue resulted in an increase in
hardware material costs as well as expenses relating to resources dedicated to the delivery of customized projects, and included
an increase in employee compensation and related expenses of $6.0 million, an increase in consulting and contracting costs of
$3.2 million, and an increase in other product cost of revenue expenses of $0.8 million. Product costs in our Workforce
Optimization segment also increased as a result of an increase in product revenue. Product costs in our Video Intelligence
segment decreased as a result of decrease in product revenue. Our overall product margins increased slightly as a result of higher
revenues and product mix.
82
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Product cost of revenue increased approximately 5%
to $121.6 million in the year ended January 31, 2008 from $116.3 million in the year ended January 31, 2007 primarily as a
result of increased costs related to an increase in product revenue. The majority of the product revenue increase was in our
Workforce Optimization segment and was almost entirely due to the acquisition of Witness. Our product margins have expanded
as a result of product mix, as our Workforce Optimization solutions carry a lower hardware component and therefore a lower
product cost of revenue compared to our Video Intelligence and Communications Intelligence solutions. The increase in product
costs included an increase in hardware and software material costs of $5.6 million, an increase in employee compensation and
related expenses of $2.8 million, primarily a result of increased employee headcount attributable to the Witness acquisition, and
an increase in contractor costs of $1.9 million. These increases were offset by a $2.4 million elimination of royalty expenses as a
result of exiting the OCS royalty-bearing programs in calendar year 2006 (for additional information see “- OCS Royalty
Settlement”), a $1.6 million reduction in write-down of capitalized software development costs, and $1.0 million elimination of
write-down in prepaid third-party licenses.
Service and Support Cost of Revenue
Service and support cost of revenue primarily consists of employee compensation and related expenses, contractor costs, and
travel expenses relating to installation, training, consulting, and maintenance services. Service and support cost of revenue also
include stock-based compensation expenses, OCS royalties (only for periods prior to August 1, 2006), facility costs, and other
overhead expenses.
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Service and support cost of revenue increased
approximately 17% to $117.6 million in the year ended January 31, 2009 from $100.4 million in the year ended January 31, 2008
primarily due to a full year of Witness being included in our results for the year ended January 31, 2009 compared to only eight
months in the year ended January 31, 2008. Of these expenses, employee compensation and related expenses increased
$8.3 million, service and support material costs increased $4.3 million, contractor expenses increased $1.7 million, travel and
lodging expenses increased $0.7 million, stock-based compensation expense increased $0.6 million, and other expenses
increased $1.6 million.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Service and support cost of revenue increased
approximately 108% to $100.4 million in the year ended January 31, 2008 from $48.2 million in the year ended January 31,
2007. Of these expenses, employee compensation and related expenses increased $29.4 million primarily as a result of an
increase in employee headcount attributable to the Witness acquisition and partially as a result of our special retention program
in the year ended January 31, 2008. Other increases included an increase in contractor expenses of $6.4 million, an increase in
travel and lodging expenses of $4.7 million, a $3.0 million increase in stock-based compensation expense, a $4.3 million
increase in overhead expenses, and an increase in other expenses totaling $5.7 million, all of which were almost entirely due to
the acquisition of Witness. These increases were offset by a $1.3 million elimination of royalty expenses as a result of exiting the
OCS royalty-bearing programs in calendar year 2006. For additional information see “- OCS Royalty Settlement”.
83
Amortization and Impairment of Acquired Technology and Backlog
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Amortization and impairment of acquired technology
and backlog increased approximately 13% to $9.0 million in the year ended January 31, 2009 from $8.0 million in the year ended
January 31, 2008, primarily due to a full year of Witness in our results for the year ended January 31, 2009 as compared to only
eight months in the year ended January 31, 2008.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Amortization and impairment of acquired technology
and backlog increased approximately 5% to $8.0 million in the year ended January 31, 2008 from $7.7 million in the year ended
January 31, 2007, primarily due to the Witness acquisition. In the year ended January 31, 2008, we recorded a $0.4 million
impairment charge related to certain acquired technologies in our Video Intelligence segment in the APAC region.
OCS Royalty Settlement
On July 31, 2006, we entered into a settlement arrangement with the OCS, pursuant to which we exited a royalty-bearing
program and the OCS agreed to accept a lump sum payment of approximately $36.0 million. Prior to the settlement, we had
accrued approximately $16.8 million of royalties and related interest due under the original terms of the program through charges
to cost of revenue in the corresponding periods of the related revenue, net of previous royalty payments. We recorded a charge of
$19.2 million to cost of revenue in the second quarter of the year ended January 31, 2007 for the remaining amount of the lump
sum settlement in excess of amounts previously accrued under the program. Payments agreed to under the OCS settlement were
completed immediately following the execution of the settlement agreement. Beginning in the calendar year 2006, we entered
into a new program with the OCS under which we are no longer required to pay royalties to the OCS.
Research and Development, Net
Research and development expenses primarily consist of personnel and subcontracting expenses, facility costs, and other
allocated overhead, net of certain software development costs that are capitalized as well as reimbursements under government
programs. Software development costs are capitalized upon the establishment of technological feasibility and until related
products are available for general release to customers.
84
The following table sets forth research and development, net expense for the years ended January 31, 2009, 2008, and 2007:
(in thousands)
Research and development, net
For the Years Ended January 31,
2008
2007
2009
% Change
2009 –
2008
2008 –
2007
$
88,309
$
87,668
$
53,029
1%
65%
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Research and development, net expense increased
approximately 1% to $88.3 million in the year ended January 31, 2009 from $87.7 million in the year ended January 31, 2008.
The increase reflects increases in stock-based compensation of $2.0 million, contractors and consultants fees of $2.3 million, and
other expenses totaling $0.5 million, all of which were primarily due to a full year of Witness in our results for the year ended
January 31, 2009. These increases were offset by the absence of our special retention program in the year ended January 31,
2009, which totaled $4.2 million in the year ended January 31, 2008.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Research and development, net expense increased
approximately 65% to $87.7 million in the year ended January 31, 2008 from $53.0 million in the year ended January 31, 2007.
Of these expenses, employee compensation and related expenses increased $22.6 million primarily as a result of an increase in
employee headcount attributable to the Witness acquisition and partially as a result of our special retention program in the year
ended January 31, 2008. Other increases included an increase in contractor expenses of $5.3 million, a $3.4 million increase in
facility costs and other overhead expenses, $2.1 million of greater depreciation and amortization expenses, and an increase in
other expenses totaling $1.3 million, all of which were primarily due to the acquisition of Witness.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel costs and related expenses, professional fees, sales
and marketing expenses, including travel, sales commissions and sales referral fees, facility costs, communication expenses, and
other administrative expenses.
The following table sets forth selling, general and administrative expense for the years ended January 31, 2009, 2008, and 2007:
(in thousands)
Selling, general and administrative
$
For the Years Ended January 31,
2008
259,183
2009
282,147
$
$
2007
148,229
% Change
2009 –
2008
2008 –
2007
9%
75%
85
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Selling, general and administrative expenses increased
approximately 9% to $282.1 million in the year ended January 31, 2009 from $259.2 million in the year ended January 31, 2008.
Of these expenses, employee compensation and related expenses increased $7.4 million partially due to a full year of Witness in
our results for the year ended January 31, 2009 offset by lower expenses in our Video Intelligence segment due to a decrease in
employee headcount as a result of cost-saving initiatives and the absence of our special retention program. Other increases
included an increase in stock-based compensation expense of $2.1 million and an increase in rent and utilities expense of
$2.0 million, both of which were due to a full year of Witness in our results for the year ended January 31, 2009. Agent
commissions increased $9.3 million, due to increased revenue in our Communications Intelligence segment, and professional
fees increased $4.0 million. Professional fees and related expenses associated with our restatement of previously filed financial
statements through January 31, 2005 and our extended filing delay status increased by approximately $2 million to $28 million in
the year ended January 31, 2009 from approximately $26 million in the year ended January 31, 2008. These increases were offset
by a decline in sales commissions of $3.2 million in approximately equal measures in our Workforce Optimization and Video
Intelligence segments, due to a decline in customer orders received during the year, as well as other expense reductions totaling
$0.7 million.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Selling, general and administrative expenses increased
approximately 75% to $259.2 million in the year ended January 31, 2008 from $148.2 million in the year ended January 31,
2007. Of these expenses, employee compensation and related expenses increased $45.9 million, and employee sales
commissions increased $11.7 million primarily as a result of an increase in employee headcount attributable to the Witness
acquisition and partially as a result of our special retention program in the year ended January 31, 2008. Other increases included
an increase in stock-based compensation expense of $8.4 million, an increase in rent and utilities expense of $6.3 million, an
increase in communication expense of $3.6 million, an increase in travel and entertainment expense of $4.5 million, and an
increase in other expenses totaling $8.6 million, all of which were primarily due to the acquisition of Witness. In addition,
professional fees and related expenses associated with our restatement of previously filed financial statements and our extended
filing delay status increased by approximately $22 million to $26 million in the year ended January 31, 2008 from approximately
$4 million in the year ended January 31, 2007.
Amortization of Other Acquired Intangible Assets
The following table sets forth amortization of other acquired intangible assets for the years ended January 31, 2009, 2008, and
2007:
(in thousands)
Amortization of other acquired
intangible assets
For the Years Ended January 31,
2008
2007
2009
% Change
2009 –
2008
2008 –
2007
$
25,249
$
19,668
$
3,164
28%
522%
86
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Amortization of other acquired intangible assets
increased approximately 28% to $25.2 million in the year ended January 31, 2009 from $19.7 million in the year ended
January 31, 2008 primarily due to a full year of Witness being included in our results for the year ended January 31, 2009
compared to only eight months in the year ended January 31, 2008. We report amortization of acquired trade names, customer
relationships, and non-compete agreements as operating expenses.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Amortization of other acquired intangible assets
increased approximately 522% to $19.7 million in the year ended January 31, 2008 from $3.2 million in the year ended
January 31, 2007 almost entirely due to the Witness acquisition.
In-Process Research and Development
We expense the fair value of in-process research and development upon the date of the associated acquisition, as it represents
incomplete research and development projects that had not yet reached technological feasibility and has no known alternative
future use as of the date of the acquisition. Technological feasibility is generally established when an enterprise completes all
planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design
specifications, including functions, features, and technical performance requirements.
The following table sets forth in-process research and development expense for the years ended January 31, 2009, 2008, and
2007:
(in thousands)
In-process research and development
For the Years Ended January 31,
2008
2009
2007
$
—
$
6,682
$
—
Year Ended January 31, 2008. In-process research and development expenses in the year ended January 31, 2008 primarily
related to incomplete research and development projects attributable to the Witness acquisition. No in-process research and
development charges were recorded for the years ended January 31, 2009 or 2007.
87
Impairment of Goodwill and Other Acquired Intangible Assets
The following table sets forth impairment of goodwill and other acquired intangible assets for the years ended January 31, 2009,
2008, and 2007:
(in thousands)
Intangible asset impairment
Goodwill impairment
Impairments of goodwill and other acquired intangible assets
For the Years Ended January 31,
2008
2009
2007
$
$
—
25,961
25,961
$
$
2,295
20,639
22,934
$
$
838
20,265
21,103
Year Ended January 31, 2009. We recorded a goodwill impairment charge of $12.3 million in our Video Intelligence segment, as
we fully impaired the remaining goodwill balance in one reporting unit in the Asia Pacific region, due to our decision in the
fourth quarter to discontinue the development of a product line as a result of continued decline in our distribution business in that
region. We also recorded a goodwill impairment charge of $13.7 million in our Workforce Optimization segment. The
impairment in our Workforce Optimization segment was related to our performance management consulting business in the
United States and was due primarily to overall lower than anticipated demand for our consulting services, which resulted in a
decline in projected future revenue and cash flow. See Note 5, “Intangible Assets and Goodwill” to the consolidated financial
statements included in Item 15.
Year Ended January 31, 2008. We recorded a $2.3 million impairment charge to customer relationships and a goodwill
impairment charge of $6.6 million in our Video Intelligence segment. The goodwill impairment charge was recorded due to a
change in business strategy, which resulted in a decline in our distribution business in the APAC region. We reviewed our
intangible assets for impairment in conjunction with our goodwill impairment review and determined that the customer
relationships related to this business were also impaired. We also recorded a goodwill impairment charge of $14.0 million in our
Workforce Optimization segment. The impairment in our Workforce Optimization segment was related to our performance
management consulting businesses in the United States and Europe and was due primarily to overall lower than anticipated
demand for our consulting services, which resulted in a decline in projected future revenue and cash flow. See Note 5,
“Intangible Assets and Goodwill” to the consolidated financial statements included in Item 15.
Year Ended January 31, 2007. We recorded a $0.8 million impairment charge of an acquired distribution network in our Video
Intelligence segment in the APAC region. We fully impaired the value of an acquired distribution network due to reduced
business with certain distributors, driven by changes in our business strategy in the region. We also recorded goodwill
impairment charges of $3.1 million in our Workforce Optimization segment and $17.1 million in our Video Intelligence
segment. The impairment in our Workforce Optimization segment is related to our performance management consulting
business in the United States and was primarily due to overall lower than anticipated demand for our consulting services, which
resulted in a decline in projected future revenue and cash flow. The impairment in our Video Intelligence segment is related to
our business in the APAC region, where revenue declined due to a change in business strategy, which resulted in a decline in our
distribution business in the region. See Note 5, “Intangible Assets and Goodwill” to the consolidated financial statements
included in Item 15.
88
Integration, Restructuring and Other, Net
The following table sets forth integration, restructuring and other, net for the years ended January 31, 2009, 2008, and 2007:
(in thousands)
Integration costs
Restructuring costs
Other legal costs (recoveries)
Gain on sale of land
Integration, restructuring and other, net
Integration and Restructuring Costs
For the Years Ended January 31,
2008
2009
2007
$
$
3,261
5,685
(4,292)
—
4,654
$
$
10,980
3,308
8,708
—
22,996
$
$
—
—
—
(765)
(765)
Year Ended January 31, 2009. We continually review our business to manage costs and align our resources with market demand.
In connection with such reviews, and also in conjunction with the acquisition of Witness, we continued to take several actions in
the year ended January 31, 2009 to reduce fixed costs, eliminate redundancies, strengthen areas needing operational focus, and
better position us to respond to market pressures or unfavorable economic conditions. We incurred restructuring costs of
$5.7 million, consisting primarily of severance and personnel-related costs resulting from headcount reductions and retention,
due to the acquisition of Witness and the restructuring of our Video Intelligence segment. As a result of the subsequent
integration of the Witness and Verint businesses, and our Oracle enterprise resource planning re-engineering project, we incurred
integration costs of $3.3 million, the majority of which were professional fees.
Year Ended January 31, 2008. We continually review our business to manage costs and align our resources with market demand.
In connection with such reviews, and also in conjunction with the acquisition of Witness, we took several actions in the year
ended January 31, 2008 to reduce fixed costs, eliminate redundancies, strengthen areas needing operational focus, and better
position us to respond to market pressures or unfavorable economic conditions. As a result of these actions, we incurred
restructuring costs of $3.3 million, in approximately equal measure as a result of acquiring Witness and from restructuring
charges pertaining to the Video Intelligence segment. Also, resulting from the Witness acquisition and the subsequent integration
of the Witness and Verint businesses, we incurred integration costs of $11.0 million during the year ended January 31, 2008. The
majority of these integration and restructuring costs consisted of severance and personnel-related costs resulting from headcount
reductions and retention, professional fees, and costs associated with travel and lodging. We did not incur any significant
restructuring and integration costs during the year ended January 31, 2007.
89
Other Legal Costs
Year Ended January 31, 2009. On August 1, 2008, we reached a settlement agreement related to an ongoing patent infringement
litigation matter, and recorded $9.7 million in settlement gains in the three months ended October 31, 2008. This gain was
partially offset by $5.4 million of legal fees incurred during the year ended January 31, 2009 resulting in a net recovery of
$4.3 million.
Year Ended January 31, 2008. We incurred $8.7 million of legal fees related to an ongoing patent infringement litigation matter.
This litigation was subsequently settled during the year ended January 31, 2009.
Gain on Sale of Land
Year Ended January 31, 2007. We recorded a gain of $0.8 million from the sale of a parcel of land in Durango, Colorado.
Other Income (Expense), Net
The following table sets forth total other income (expense), net for the years ended January 31, 2009, 2008, and 2007:
(in thousands)
Interest income
Interest expense
Other income (expense):
For the Years Ended January 31,
2008
2007
2009
$
1,872
(37,211)
$
5,443
(36,862)
$
8,835
(444)
Gains (losses) on investments
Foreign currency gains (losses), net
Losses on derivatives, net
Other, net
Total other expense
Total other income (expense), net
$
4,713
1,645
(14,592)
(307)
(8,541)
(43,880)
$
(4,713)
1,431
(20,407)
(78)
(23,767)
(55,186)
$
360
(919)
—
(36)
(595)
7,796
*
Percentage is not meaningful.
% Change
2009 –
2008
2008 –
2007
(66%)
1%
(200%)
15%
(28%)
339%
(64%)
(20%)
(38%)
*
*
(256%)
*
218%
*
(808%)
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Total other income (expense), net, decreased
$11.3 million to an expense of $43.9 million in the year ended January 31, 2009, compared to an expense of $55.2 million in the
year ended January 31, 2008. Interest income decreased to $1.9 million in the year ended January 31, 2009 from $5.4 million in
the year ended January 31, 2008 primarily due to lower interest rates. Interest expense increased to $37.2 million in the year
ended January 31, 2009 from $36.9 million in the year ended January 31, 2008 due to an increase in our average debt balance
year over year, offset by lower interest rates during the year ended January 31, 2009. In the year ended January 31, 2009, our
investment in auction rate securities (“ARS”) with a carrying value of $2.3 million, were repurchased by our broker at the value
equal to the par value of $7.0 million, resulting in a gain of $4.7 million. Foreign currency gains (losses) were the result of the
effect of currency rate movements, primarily between the U.S. Dollar and the Euro, British Pound Sterling, Israeli Shekel, and
Canadian Dollar.
90
In the year ended January 31, 2009, we recorded a net loss on derivatives of $14.6 million. This loss was primarily attributable to
a $11.5 million loss in connection with a $450.0 million interest rate swap contract entered into concurrently with our credit
agreement. This interest rate swap is not designated as a hedging instrument under the terms of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (“SFAS No. 133”), and is accounted for as a derivative. See “- Critical
Accounting Policies and Estimates”. This loss was also partially due to a $3.1 million loss on foreign currency derivatives, which
represented the realized and unrealized portions of our foreign currency hedges. As of January 31, 2009, some of our foreign-
currency forward contracts were not designated as hedging instruments under the terms of SFAS No. 133 and were accounted for
as derivatives, whereby the fair value of the contracts are reported as other current assets or other current liabilities on our
consolidated balance sheet, and gains and losses from changes in fair value are reported in other income (expense), net.
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Total other income (expense), net, decreased
$63.0 million to an expense of $55.2 million in the year ended January 31, 2008, compared to $7.8 million of income in the year
ended January 31, 2007. Interest income decreased approximately 38% to $5.4 million in the year ended January 31, 2008 from
$8.8 million in the year ended January 31, 2007 primarily due to lower interest earning investments, as a result of the acquisition
of Witness. Interest expense increased to $36.9 million in the year ended January 31, 2008 from $0.5 million in the year ended
January 31, 2007 due to interest on borrowings under our $650.0 million term loan which we entered into to finance a portion of
the purchase price of Witness. As of January 31, 2008, we also held investments in ARS which had an original cost of
$7.0 million and estimated fair value of $2.3 million. During the fourth quarter of the year ended January 31, 2008, we concluded
that our ARS investments had incurred an “other-than-temporary” impairment in market value and recorded a $4.7 million pre-
tax charge. Subsequent to January 31, 2008, our ARS were repurchased by our broker at the value equal to the par value plus
interest. Foreign currency gains (losses) were the result of the effect of currency rate movements, primarily between the U.S.
Dollar and the Euro, British Pound Sterling, Israeli Shekel, and Canadian Dollar.
In the year ended January 31, 2008, we recorded a net loss on derivatives of $20.4 million. This loss was primarily attributable to
a $29.2 million loss in connection with a $450.0 million interest rate swap contract entered into concurrently with our credit
agreement. These losses reflected the dramatic decline in market interest rates during the second half of the year ended
January 31, 2008. This interest rate swap is not designated as a hedging instrument under the terms of SFAS No. 133, and is
accounted for as a derivative. See “- Critical Accounting Policies and Estimates”. This loss was partially offset by a $1.5 million
gain on foreign currency derivatives, which represented the realized and unrealized portions of our foreign currency hedges. As
of January 31, 2008, our foreign-currency forward contracts were not designated as hedging instruments under the terms of
SFAS No. 133 and were accounted for as derivatives, whereby the fair value of the contracts is reported as other current assets or
other current liabilities on our consolidated balance sheet, and gains and losses from changes in fair value are reported in other
income (expense), net. The loss was also partially offset by a $7.2 million gain from an increase in the fair value of a derivative
embedded in the preferred stock issued to Comverse for $293.0 million to finance a portion of the Witness acquisition.
91
Income Tax Provision
The following table sets forth our income tax provision for the years ended January 31, 2009, 2008, and 2007:
(in thousands)
Provision for income taxes
*
Percentage is not meaningful.
For the Years Ended January 31,
2008
2009
2007
% Change
2009 –
2008
2008 –
2007
$
19,671
$
27,729
$
141
(29%)
*
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. Our effective tax rate was (33.4)% for the year ended
January 31, 2009, as compared to (16.3)% for the year ended January 31, 2008. The effective tax rate was negative in both years
due to the fact that we reported tax expense on a consolidated pre-tax loss, primarily because we recorded a valuation allowance
against certain pre-tax losses while, at the same time, recording an income tax provision in profitable jurisdictions. Lower pre-tax
losses reported in the current year, as compared to the prior year, coupled with the relative mix of income and losses by taxing
jurisdictions with rates different than the U.S. statutory rate and the impact of permanent book to tax differences, resulted in a
larger negative effective tax rate for the year ended January 31, 2009. The most significant permanent difference in each year
related to non-deductible goodwill impairment charges. For the year ended January 31, 2008 we recorded valuation allowances
against our U.S. deferred tax assets resulting in the recording of tax expense. For the year ended January 31, 2009 we continued
to record valuation allowances against our U.S. deferred tax assets resulting in no tax benefit being recorded in the current year.
These charges reduced the benefits we could record on our pre-tax losses. Excluding the impact of valuation allowances, our
effective tax rate for the year ended January 31, 2009 would have been 17.9%, which was lower than the U.S. statutory tax rate
primarily due to income in certain foreign jurisdictions being taxed at lower rates.
The manner in which we evaluate the need for valuation allowances is described in “Critical Accounting Policies” and in Note 1,
“Summary of Significant Accounting Policies” to the consolidated financial statements included in Item 15.
92
Year Ended January 31, 2008 compared to Year Ended January 31, 2007. Our effective tax rate was (16.3)% for the year ended
January 31, 2008, as compared to (0.4)% for the year ended January 31, 2007. The effective tax rate was negative for both years
because we reported tax expense on a consolidated pre-tax loss. Tax expense was primarily due to our recording of valuation
allowances during the year ended January 31, 2008 on our U.S. deferred tax assets and the impact of non-deductible impairment
charges on identified intangibles. This resulted in U.S. income tax expense being recorded for the year even though we incurred
U.S. net operating losses. Such losses were primarily caused by interest expense on Witness acquisition indebtedness. Excluding
the impact of valuation allowances, our effective tax rate for the year ended January 31, 2008 would have been 26.9%, which
was lower than the U.S. statutory tax rate primarily due to tax benefits in certain foreign jurisdictions recorded at lower rates.
Backlog
The delivery cycles of most of our products are generally very short, ranging from days to several months, with the exception of
certain projects with multiple deliverables over a longer period of time. Therefore, we do not view backlog as a meaningful
indicator of future business activity and do not consider it a meaningful financial metric for evaluating our business.
93
Selected Quarterly Results of Operations
The following table shows selected results of operations for each quarter during the two years ended January 31, 2009:
(in thousands, except per-share data)
Revenue
Cost of revenue
Amortization and impairment of
Jan. 31, Oct. 31,
Jul. 31, Apr. 30,
Jan. 31, Oct. 31, Jul. 31, Apr. 30,
2009
2008
2008
2008
2008
2007
2007
2007
For the Quarters Ended
$190,698 $157,867 $166,025 $154,954 $158,712 $158,135 $128,325 $ 89,371
39,958
64,421 56,230
64,965 59,554
63,844
60,863
61,415
acquired technology and backlog
2,173
2,228
Gross profit
123,560 96,085
2,298
99,883
2,325
2,819
2,468
2,039
91,766
94,478
91,246 70,056
692
48,721
Research and development, net
18,412 21,963
23,672
24,262
24,361
23,278 22,933
17,096
Selling, general and administrative
64,058 69,977
73,644
74,468
80,476
72,306 63,090
43,311
Amortization of other acquired
intangible assets
In-process research and
development
Impairment of goodwill and other
acquired intangible assets
25,961
Integration, restructuring and other,
5,931
6,139
6,465
6,714
6,941
6,961
5,264
—
—
—
—
—
—
—
—
6,439
— 22,934
—
—
502
243
—
net
Income (loss) from operations
Other income (expense), net
Loss before taxes and
noncontrolling interest
Provision for (benefit from) income
taxes
Noncontrolling interest in net
income of joint venture
Net loss
Dividends on preferred stock
Net loss applicable to common
3,486
5,712
(7,393)
5,399
(15,573) (16,399)
3,606
(7,504)
(7,470)
4,955
(18,633)
(4,438)
9,216
(49,450)
(29,195)
5,836
7,705
(17,135) (35,375)
(9,316)
(17,734)
239
(12,670)
1,059
(9,861) (11,000)
(14,974)
(23,071)
(78,645)
(34,869) (44,691)
(11,611)
8,784
9,441
(260)
1,706
(104)
(3) 30,676
(2,840)
223
695
(18,868) (21,136)
(3,301)
(3,336)
373
(15,087)
(3,266)
520
(25,297)
(3,161)
149
(78,690)
(3,197)
235
244
(35,101) (75,611)
(2,320)
(3,164)
436
(9,207)
—
shares
$ (22,204) $ (24,437) $ (18,353) $ (28,458) $ (81,887) $ (38,265) $ (77,931) $ (9,207)
Net loss per share
Basic & diluted
$
(0.68) $
(0.75) $
(0.57) $
(0.88) $
(2.54) $
(1.19) $
(2.42) $
(0.29)
94
Revenue
Three Months Ended January 31, 2009 compared to Three Months Ended January 31, 2008. Our revenue increased
approximately 20%, or $32.0 million, to $190.7 million in the three months ended January 31, 2009 from $158.7 million in the
three months ended January 31, 2008. The increase was due to a revenue increase in our Communications Intelligence segment
partially offset by a revenue decrease in our Workforce Optimization and Video Intelligence segments. Revenue in our
Communications Intelligence segment increased by approximately 94% or $34.8 million, primarily due to an increase in
Residual Method revenue related to the completion of certain installations and partially due to an increase in work performed for
projects accounted for as Contract Accounting Method revenue. Workforce Optimization segment revenue decreased by
approximately 1%, or $0.7 million. Revenue decline was partially offset by an increase in Witness maintenance renewal revenue
recognized at full value as a result of reduced impact of purchase accounting adjustments to support obligations assumed. We
recorded an adjustment reducing support obligations assumed in the Witness acquisition to their estimated fair value at the
acquisition date. As a result, revenues related to maintenance contracts in the amount of $7.9 million that would have been
otherwise recorded by Witness as an independent entity, were not recognized in the three months ended January 31, 2008.
Absent this adjustment, our Workforce Optimization segment decrease would have been approximately 9%, or $8.6 million,
primarily due to the global economic downturn. Video Intelligence segment revenue decreased by approximately 6%, or
$2.1 million, mainly due to a decline in our distribution business in the APAC region. Revenue in the Americas, EMEA, and
APAC regions represented approximately 46%, 37%, and 17% of our total revenue, respectively, in the three months ended
January 31, 2009, compared to approximately 49%, 37%, and 14%, respectively, in the three months ended January 31, 2008.
Three Months Ended October 31, 2008 compared to Three Months Ended October 31, 2007. Our revenue decreased
approximately 0.1% or $0.2 million, to $157.9 million in the three months ended October 31, 2008 from $158.1 million in the
three months ended October 31, 2007. Workforce Optimization segment revenue increased by approximately 19%, or
$14.1 million, primarily due to increases in services and support revenues. This increase resulted from higher Witness
maintenance renewal revenue recognized at full value as a result of reduced impact of purchase accounting adjustments to
support obligations assumed. We recorded an adjustment reducing support obligations assumed in the Witness acquisition to
their estimated fair value at the acquisition date. As a result, revenues related to maintenance contracts in the amount of
$13.4 million that would have been otherwise recorded by Witness as an independent entity, were not recognized in the three
months ended October 31, 2007. Absent this adjustment, our Workforce optimization segment revenues increase would have
been approximately 1%, or $0.7 million. Video Intelligence segment revenue decreased by approximately 35%, or $16.8 million,
primarily due to a decrease in revenue from a major customer related to the timing of installations as well as a decline in
Residual Method revenue due to the global economic downturn. Communications Intelligence segment revenue increased by
approximately 7%, or $2.4 million, primarily due to increase in work performed for projects accounted for as Contract
Accounting Method revenue, partially offset by a decline in Residual Method revenue. Revenue in the Americas, EMEA, and
APAC regions represented approximately 57%, 27%, and 16% of our total revenue, respectively, in the three months ended
October 31, 2008 compared to approximately 59%, 28%, and 13%, respectively, in the three months ended October 31, 2007.
95
Three Months Ended July 31, 2008 compared to Three Months Ended July 31, 2007. Our revenue increased approximately 29%,
or $37.7 million, to $166.0 million in the three months ended July 31, 2008 compared to $128.3 million in the three months
ended July 31, 2007. Workforce Optimization segment revenue increased by 48%, or $31.0 million, due to a full three months of
Witness being included in our results for the three months ended July 31, 2008, compared to approximately two months of
Witness in the three months ended July 31, 2007, coupled with an increase in Witness maintenance renewal revenue recognized
at full value as a result of reduced impact of purchase accounting adjustments to support obligations assumed. We recorded an
adjustment reducing support obligations assumed in the Witness acquisition to their estimated fair value at the acquisition date.
As a result, revenues related to maintenance contracts in the amount of $1.0 million and $12.6 million that would have been
otherwise recorded by Witness as an independent entity, were not recognized in the three month periods ended July 31, 2008 and
2007, respectively. Video Intelligence segment revenue increased by approximately 7%, or $2.4 million, primarily attributable to
the completion of installations for a major customer, and Communications Intelligence segment revenue increased by
approximately 14%, or $4.3 million, primarily due to increase in work performed for projects accounted for as Contract
Accounting Method revenue. Revenue in the Americas, EMEA, and APAC regions represented approximately 56%, 27%, and
17% of our total revenue, respectively, in the three months ended July 31, 2008 compared to approximately 49%, 35%, and 16%,
respectively, in the three months ended July 31, 2007.
Three Months Ended April 30, 2008 compared to Three Months Ended April 30, 2007. Our revenue increased approximately
73%, or $65.6 million, to $155.0 million in the three months ended April 30, 2008 from $89.4 million in the three months ended
April 30, 2007. Workforce Optimization segment revenue increased by approximately 144%, or $47.0 million, due to Witness
being included in our results for the three months ended April 30, 2008. We recorded an adjustment reducing support obligations
assumed in the Witness acquisition to their estimated fair value at the acquisition date. As a result, revenues related to
maintenance contracts in the amount of $4.2 million that would have been otherwise recorded by Witness as an independent
entity, were not recognized in the three months ended April 30, 2008. Absent this adjustment, our Workforce Optimization
segment increase would have been approximately 157%, or $51.2 million. Communications Intelligence segment revenue
increased by approximately 94%, or $22.3 million, primarily due to an increase in Residual Method revenue related to the
completion of certain installations and partially due to an increase in work performed for projects accounted for as Contract
Accounting Method revenue. Video Intelligence segment revenue decreased approximately 11%, or $3.7 million, primarily due
to a decrease in Residual Method revenue, including a decline in our distribution business in the APAC region. Revenue in the
Americas, EMEA, and APAC regions represented approximately 50%, 35%, and 15% of our total revenue, respectively, in the
three months ended April 30, 2008 compared to approximately 49%, 33%, and 18%, respectively, in the three months ended
April 30, 2007.
Cost of Revenue
Three Months Ended January 31, 2009 compared to Three Months Ended January 31, 2008. Cost of revenue increased
$3.6 million in the three months ended January 31, 2009 compared to the three months ended January 31, 2008. Product cost of
revenue increased $7.7 million, primarily as a result of greater product revenue in our Communication Intelligence segment,
resulting in an increase in hardware material costs as well as expenses relating to resources dedicated to the delivery of
customized projects. Of these expenses, employee compensation and related expenses increased $2.1 million, hardware and
software material costs increased $3.8 million, contractor costs increased $1.5 million, and other product cost of revenue
expenses increased $0.3 million. Service and support cost of revenue decreased $4.1 million. Of these expenses, employee
compensation and related expenses decreased $3.0 million as a result of a decrease in employee headcount in our Workforce
Optimization segment due to the elimination of redundancies resulting from the integration of Witness and in our Video
Intelligence segment due to cost-saving initiatives. Other service and support cost of revenue decreases included a decrease in
travel expenses of $0.9 million, and other service expenses decreased $0.2 million, all of which were primarily due to the
elimination of redundancies resulting from the integration of Witness and partially due to our cost-saving initiatives.
96
Three Months Ended October 31, 2008 compared to Three Months Ended October 31, 2007. Cost of revenue decreased
$4.9 million in the three months ended October 31, 2008 compared to the three months ended October 31, 2007. Product cost of
revenue decreased $3.3 million, primarily as a result of a decline in product revenue in our Video Intelligence segment. Service
and support cost of revenue decreased $1.6 million. Of these expenses, consultant costs decreased $0.9 million, travel expenses
decreased $0.4 million, and other service expenses decreased $0.3 million, all of which were primarily due to the elimination of
redundancies resulting from the integration of Witness and cost-saving initiatives in our Video Intelligence segment.
Three Months Ended July 31, 2008 compared to Three Months Ended July 31, 2007. Cost of revenue increased $7.6 million in
the three months ended July 31, 2008 compared to the three months ended July 31, 2007. Product cost of revenue increased
$0.9 million primarily as a result of greater product revenue in our Communication Intelligence segment, resulting in an increase
in hardware material costs as well as expenses relating to resources dedicated to the delivery of customized projects. Service and
support cost of revenue increased $6.7 million primarily due to a full three months of Witness in our results for the three months
ended July 31, 2008, compared to approximately two months of Witness in the three months ended July 31, 2007. Of these
expenses, employee compensation and related expenses increased $2.1 million, contractor costs increased $1.2 million, travel
expense increased $0.5 million and other service expenses increased $0.5 million. In addition, during the three months ended
July 31, 2008 we completed certain projects in our performance management business included in our Workforce Optimization
segment, accounted for under Contract Accounting Method. As a result, we recognized deferred service revenues and costs,
which resulted in an increase in service expenses of $2.4 million.
Three Months Ended April 30, 2008 compared to Three Months Ended April 30, 2007. Cost of revenue increased $20.9 million
in the three months ended April 30, 2008 compared to the three months ended April 30, 2007. Product cost of revenue increased
$4.7 million, due to greater hardware and software material costs of $2.0 million as a result of greater product revenue in our
Workforce Optimization and Communications Intelligence segments. Other product cost of revenue increases included an
increase in employee compensation and related expenses of $1.1 million and contractor costs of $1.7 million, both of which were
almost entirely due to the acquisition of Witness. These increases were offset by other product cost of revenue reductions totaling
$0.1 million. Services and support cost of revenue increased $16.2 million. Of these expenses, employee compensation and
related expenses increased $8.9 million as a result of an increase in employee headcount attributable to the Witness acquisition.
Other service and support cost of revenue increases included an increase in stock-based compensation expense of $1.1 million,
an increase in contractor costs of $2.1 million, an increase in travel expenses of $1.6 million, an increase in materials of
$1.0 million, and other service expenses increased $1.5 million, all of which were almost entirely due to the acquisition of
Witness.
97
Research and Development, Net
Three Months Ended January 31, 2009 compared to Three Months Ended January 31, 2008. Research and development, net
decreased $5.9 million in the three months ended January 31, 2009 compared to the three months ended January 31, 2008. Of
these expenses, employee compensation and related expenses decreased $3.8 million primarily as a result of a decrease in
employee headcount attributable to cost-saving initiatives in our Video Intelligence segment and the absence of our special
retention program. Other expense decreases included a decrease in contractor costs of $1.2 million and other expense reductions
totaling $0.9 million, partially due to the elimination of redundancies resulting from the integration of Witness and our cost-
saving initiatives.
Three Months Ended October 31, 2008 compared to Three Months Ended October 31, 2007. Research and development, net
decreased $1.3 million in the three months ended October 31, 2008 compared to the three months ended October 31, 2007. Of
these expenses, there was a decrease of $0.6 million as a result of the absence of our special retention program. Other expense
reductions totaling $0.7 million were due to the elimination of redundancies resulting from the integration of Witness.
Three Months Ended July 31, 2008 compared to Three Months Ended July 31, 2007. Research and development, net increased
$0.7 million in the three months ended July 31, 2008 compared to the three months ended July 31, 2007. Of these expenses,
stock-based compensation expense increased $0.8 million, offset by other reductions totaling $0.1 million.
Three Months Ended April 30, 2008 compared to Three Months Ended April 30, 2007. Research and development, net increased
$7.2 million in the three months ended April 30, 2008 compared to the three months ended April 30, 2007. Of these expenses,
employee compensation and related expenses increased $3.7 million and stock-based compensation expense increased
$1.0 million, both of which were primarily a result of an increase in employee headcount attributable to the Witness acquisition.
Other increases included an increase in contractor costs of $2.0 million, and an increase in other expenses totaling $0.5 million,
all of which were almost entirely due to the acquisition of Witness.
Selling, General and Administrative Expense
Three Months Ended January 31, 2009 compared to Three Months Ended January 31, 2008. Selling, general and administrative
expenses decreased $16.4 million in the three months ended January 31, 2009 compared to the three months ended January 31,
2008. Of these expenses, employee compensation and related expenses decreased $3.7 million primarily as a result of a decrease
in employee headcount attributable to cost-saving initiatives in our Video Intelligence segment and the absence of our special
retention program. Other expense decreases included a decrease in employee sales commissions of $2.8 million, a decrease in
stock-based compensation expense of $2.0 million, a decrease in professional fees of $2.1 million, and reductions in other
expenses totaling $0.8 million, all of which were partially due to the elimination of redundancies resulting from the integration of
Witness and our cost-saving initiatives. Professional fees and related expenses associated with our restatement of previously filed
financial statements and our extended filing delay status decreased by approximately $5 million.
98
Three Months Ended October 31, 2008 compared to Three Months Ended October 31, 2007. Selling, general and administrative
expenses decreased $2.3 million in the three months ended October 31, 2008 compared to the three months ended October 31,
2007. Of these expenses, employee compensation and related expenses decreased $1.4 million primarily as a result of a decrease
in employee headcount attributable to cost-saving initiatives in our Video Intelligence segment and the absence of our special
retention program. Professional fees and related expenses associated with our restatement of previously filed financial statements
and our extended filing delay status decreased by approximately $1 million. Other expense increases aggregated to $0.1 million.
Three Months Ended July 31, 2008 compared to Three Months Ended July 31, 2007. Selling, general and administrative
expenses increased $10.6 million in the three months ended July 31, 2008, compared to the three months ended July 31, 2007
primarily due to a full three months of Witness in our results for the three months ended July 31, 2008, compared to
approximately two months of Witness in the three months ended July 31, 2007. Of these expenses, employee compensation and
related expenses increased $1.0 million, offset by the absence of our special retention program. Other increases included an
increase in stock-based compensation expense of $1.2 million, an increase in rent and utilities expense of $0.9 million, an
increase in professional fees of $1.9 million, and an increase in other expenses totaling $1.6 million, all of which were almost
entirely due to the acquisition of Witness. Professional fees and related expenses associated with our restatement of previously
filed financial statements and our extended filing delay status increased by approximately $4 million.
Three Months Ended April 30, 2008 compared to Three Months Ended April 30, 2007. Selling, general and administrative
expenses increased $31.2 million in the three months ended April 30, 2008 compared to the three months ended April 30, 2007
primarily due to the acquisition of Witness. Of these expenses, employee compensation and related expenses increased
$11.5 million, and employee sales commissions increased $1.0 million. Other increases included an increase in stock-based
compensation expense of $2.8 million, an increase in professional fees of $2.2 million, an increase in rent and utilities expense of
$1.8 million, an increase in communication expense of $1.2 million, an increase in travel and entertainment expense of
$1.5 million, and an increase in other expenses totaling $2.8 million. Agent commissions increased $2.4 million due to an
increase in revenue in our Communication Intelligence segment. Professional fees and related expenses associated with our
restatement of previously filed financial statements and our extended filing delay status increased by approximately $4 million.
Amortization and Impairment of Acquired Intangible Assets
Three Months Ended January 31, 2009 compared to Three Months Ended January 31, 2008. Total amortization and impairment
of acquired intangible assets decreased $1.7 million in the three months ended January 31, 2009 compared to the three months
ended January 31, 2008 primarily due to certain intangible assets becoming fully amortized during the year ended January 31,
2009.
99
Three Months Ended October 31, 2008 compared to Three Months Ended October 31, 2007. Total amortization of acquisition-
related intangibles decreased $1.1 million in the three months ended October 31, 2008 compared to the three months ended
October 31, 2007 as certain intangible assets became fully amortized during the nine months period ended October 31, 2008.
Three Months Ended July 31, 2008 compared to Three Months Ended July 31, 2007. Total amortization of acquisition-related
intangibles increased $1.5 million in the three months ended July 31, 2008 compared to the three months ended July 31, 2007
primarily due to the acquisition of Witness.
Three Months Ended April 30, 2008 compared to Three Months Ended April 30, 2007. Total amortization of acquisition-related
intangibles increased $7.8 million in the three months ended April 30, 2008 compared to the three months ended April 30, 2007
primarily due to the acquisition of Witness.
Other Income (Expense), Net
Three Months Ended January 31, 2009 compared to Three Months Ended January 31, 2008. Other income (expense), net
decreased $13.6 million to other expense, net, of $15.6 million in the three months ended January 31, 2009, compared to other
expense, net, of $29.2 million in the three months ended January 31, 2008. Interest expense decreased by $4.5 million due to
lower interest rates. Interest income decreased by $0.3 million due to lower interest rates. We recorded a $4.1 million gain on
foreign currency in the three months ended January 31, 2009 compared to a $1.6 million gain in the prior year quarter. In
addition, during the three months ended January 31, 2009, we recorded a net loss on derivatives of $12.0 million, compared to a
$16.1 million net loss on derivatives in the three months ended January 31, 2008. This loss is primarily attributable to a
$10.1 million loss related to a $450.0 million interest rate swap contract entered concurrently with our credit agreement, and is
also partially due to a $1.9 million loss on foreign currency derivatives.
Three Months Ended October 31, 2008 compared to Three Months Ended October 31, 2007. Other income (expense), net
decreased $1.3 million to other expense, net, of $16.4 million in the three months ended October 31, 2008 compared to other
expense, net, of $17.7 million in the three months ended October 31, 2007. Interest expense decreased by $3.4 million due to
lower interest rates. Interest income decreased by $0.3 million due to lower interest rates. We recorded a $3.7 million loss on
foreign currency in the three months ended October 31, 2008 compared to a $0.4 million loss in the prior year quarter. In
addition, during the three months ended October 31, 2008, we recorded a net loss on derivatives of $9.3 million, compared to a
net loss on derivatives of $3.4 million in the three months ended October 31, 2007. This loss is primarily attributable to an $8.1
million loss related to a $450.0 million interest rate swap contract executed concurrently with our credit agreement, as well as a
$1.1 million loss on foreign currency derivatives.
100
Three Months Ended July 31, 2008 compared to Three Months Ended July 31, 2007. Other income (expense), net decreased
$1.8 million to other expense, net, of $7.5 million in the three months ended July 31, 2008 compared to other expense, net, of
$9.3 million in the three months ended July 31, 2007. Interest expense decreased by $1.5 million due to lower interest rates;
which was partially offset by higher average debt attributable to the $650.0 million term loan used to acquire Witness on
May 25, 2007. Interest income decreased by $1.4 million due to lower interest rates. We recorded a $0.1 million loss on foreign
currency in the three months ended July 31, 2008 compared to a $1.0 million gain in the prior year quarter. In addition, during
the three months ended July 31, 2008, we recorded a net gain on derivatives of $2.4 million, compared to a net loss on
derivatives of $0.9 million in the three months ended July 31, 2007. This gain is primarily attributable to a $2.5 million gain
related to a $450.0 million interest rate swap contract executed concurrently with our credit agreement, partially offset by a
$0.1 million loss on foreign currency derivatives.
Three Months Ended April 30, 2008 compared to Three Months Ended April 30, 2007. Other income (expense), net decreased
$5.5 million to other expense, net, of $4.4 million in the three months ended April 30, 2008 compared to other income, net, of
$1.1 million in the three months ended April 30, 2007. Interest expense increased by $9.8 million due to interest under our
$650.0 million term loan used to acquire Witness. Interest income decreased by $1.6 million due to lower cash and investment
balances. We recorded a $1.4 million gain on foreign currency in the three months ended April 30, 2008 compared to a
$0.7 million loss in the prior year quarter. In addition, during the three months ended April 30, 2008, we recorded a net gain on
derivatives of $4.4 million related to a $450.0 million interest rate swap contract executed concurrently with our credit
agreement.
Liquidity and Capital Resources
Overview
Prior to the year ended January 31, 2008, our primary source of liquidity was cash from operations, consisting of collections of
our accounts receivable for services and products as well as cash advances from our customers. However, in the year ended
January 31, 2008, we borrowed $650.0 million under a new term loan facility ($40.0 million of which was prepaid during the
year ended January 31, 2008) and received $293.0 million through the issuance of preferred stock to finance a significant portion
of the Witness acquisition. We also have a $15.0 million revolving line of credit, which we initially borrowed against on
November 24, 2008, and this borrowing remains outstanding as of the date of this report. See “- Liquidity and Capital Resources
Requirements” below for additional information regarding our credit agreement. Our primary uses of cash have been and are
expected to continue to be for acquisitions of businesses, selling and marketing activities, research and development,
professional fees and related expenses associated with our restatement of previously filed financial statements and our extended
filing delay status, and capital expenditures. Beginning in the year ended January 31, 2008, uses of cash have also included
interest payments and debt repayments.
101
The following table sets forth, for the years ended January 31, 2009 and 2008, cash and cash equivalents, and other funding
sources:
(in thousands)
Cash and cash equivalents
Preferred stock (at carrying value)
Long-term debt
As of January 31,
2009
$
$
$
115,928
285,542
620,912
$
$
$
2008
83,233
293,663
610,000
Year Ended January 31, 2009 compared to Year Ended January 31, 2008. At January 31, 2009, our cash and cash equivalents
totaled $115.9 million, an increase of $32.7 million as compared to our January 31, 2008 balance. Our debt increased during this
same period by $15.0 million as a result of borrowings under our revolving credit agreement. This net increase in cash is due to
our improved operating performance including higher sales and higher operating margins.
Statements of Cash Flows
The following table summarizes selected items from our statements of cash flows for the years ended January 31, 2009, 2008,
and 2007:
(in thousands)
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Net Cash Provided by (Used in) Operating Activities
For the Years Ended January 31,
2008
2009
2007
$
$
53,635
(26,247)
11,888
(6,581)
32,695
$
$
(299)
(851,733)
885,017
923
33,908
$
$
9,099
(15,086)
(1,089)
671
(6,405)
Prior to the year ended January 31, 2008, we historically had positive cash provided by operating activities as our cash
collections from operations exceeded our costs. In the year ended January 31, 2008, we made payments related to the Witness
acquisition including interest expense, integration expense, and special employee compensation. In addition, we made
professional fee and related expense payments associated with our restatement of previously filed financial statements and our
extended filing delay status. These incremental payments resulted in a $0.3 million use of cash in our operating activities in the
year ended January 31, 2008. In the year ended January 31, 2009, due to our improved operating performance reflecting higher
sales and operating margins versus the prior year, our operating activities returned to a positive cash flow position of $53.6
million. This improvement occurred despite increasing expenses related to restatements and our extended filing delay status
during the year ended January 31, 2009.
102
During the year ended January 31, 2009, we generated $53.6 million in cash from operating activities. This $53.6 million
positive cash from operating activities was due to non-cash items of $143.8 million, primarily depreciation and amortization,
stock-based compensation, impairment of assets, provision for deferred income taxes, non-cash losses on derivative financial
instruments, and lower deferred cost of revenue of $12.2 million. These increases were partially offset by a net loss of
$80.4 million, lower accounts payable and accrued expenses of $10.8 million, and lower deferred revenue of $7.3 million.
During the year ended January 31, 2008, we used $0.3 million in cash in operating activities. The cash used consisted primarily
of a net loss of $198.6 million and increased accounts receivable of $20.2 million due to higher revenue. This was partially offset
by non-cash items of $160.8 million, primarily depreciation and amortization, deferred income taxes, stock-based compensation,
impairment of assets, and non-cash losses on derivative financial instruments, increased deferred revenue of $25.1 million, lower
prepaid expenses and other assets of $14.0 million, lower deferred cost of revenue of $5.6 million, and higher accounts payable
and accrued expenses of $8.5 million.
During the year ended January 31, 2007, we generated $9.1 million in cash from operating activities. This $9.1 million positive
cash from operating activities was due to non-cash items of $60.6 million, primarily impairment of assets, depreciation and
amortization, and stock-based compensation, lower accounts receivable of $7.1 million, and higher accounts payable and accrued
expenses of $6.1 million, partially offset by a net loss of $40.5 million and a decrease to deferred revenue of $23.7 million.
Net Cash Used by Investing Activities
During the year ended January 31, 2009, our investing activities used $26.2 million in cash, primarily resulting from
$10.0 million of payments to settle derivative financial instruments not designated as hedges, and capital expenditures of
$11.1 million.
During the year ended January 31, 2008, $851.7 million in cash was used in investing activities, principally due to the acquisition
of Witness and ViewLinks Euclipse Ltd. with net assets acquired, net of cash, of $953.2 million, and capital expenditures of
$14.2 million, partially offset by cash receipts from sales and maturities of investments, net of purchases, of $120.5 million.
During the year ended January 31, 2007, $15.1 million in cash was used in investing activities, principally related to the
acquisitions of Mercom and CM Insight of $42.5 million, capital expenditures of $11.2 million and capitalized software
development costs of $4.5 million, partially offset by cash receipts from sales and maturities of investments, net of purchases of
$41.6 million.
Currently, we have no significant commitments for capital expenditures.
103
Net Cash Provided by (Used in) Financing Activities
During the year ended January 31, 2009, we generated $11.9 million in cash from financing activities, primarily reflecting
$15.0 million of proceeds from borrowings under our revolving credit facility.
During the year ended January 31, 2008, we generated $885.0 million in cash from financing activities, reflecting $650.0 million
of proceeds from borrowings under our new term loan and $293.0 million of proceeds from issuance of convertible preferred
stock to Comverse, partially offset by $42.5 million of repayments of long-term debt and payment of $13.6 million of debt
issuance costs.
During the year ended January 31, 2007, we used $1.1 million in cash from financing activities.
Liquidity and Capital Resources Requirements
Based on past performance and current expectations, we believe that our cash and cash equivalents, and cash generated from
operations will be sufficient to meet anticipated operating costs including required payments of principal and interest, working
capital needs, capital expenditures, research and development spending, and other commitments for at least the next 12 months.
Currently, we have no plans to pay any dividends on our preferred or common stock, which are not permitted under our credit
agreement.
Our liquidity could be negatively impacted by a decrease in demand for our products and services and support, including the
impact of changes in customer buying behavior due to the general global economic downturn. We have incurred significant
professional fees and related expenses in connection with our restatement of previously filed financial statements through
January 31, 2005 and our extended filing delay status. We expect that we will continue to incur significant professional fees and
costs in the first half of 2010. Our liquidity could be negatively impacted by these additional fees and costs. In the event we
determine to make acquisitions or otherwise require additional funds, we may need to raise additional capital, which could
involve the issuance of equity or debt securities. There can be no assurance that we would be able to raise additional equity or
debt in the private or public markets on terms favorable to us, or at all.
On May 25, 2007, we entered into a $650.0 million term loan and a $25.0 million revolving credit facility with a group of banks
to fund a portion of the acquisition of Witness. As of January 31, 2009, our outstanding term loan balance was $610.0 million.
The original $25.0 million revolving credit facility was reduced to $15.0 million in September 2008 due to the bankruptcy of
Lehman Brothers and the termination of its commitment under the credit agreement. We borrowed the entire $15.0 million
available to us in November 2008 and currently have no remaining balance available to us. We have made no payments during
the year ended January 31, 2009 on the revolving credit facility. The term loan matures on May 25, 2014 and the revolving credit
facility matures on May 25, 2013.
104
The credit agreement requires mandatory prepayments from the proceeds of certain asset sales, excess cash flow as defined by
the agreement and proceeds of indebtedness as well as quarterly principal repayments. Any re-borrowings under the revolving
credit facility are dependent upon certain conditions including the absence of any material adverse effect or change on our
business, as defined in the credit agreement.
The credit agreement contains one financial covenant that requires us to meet a certain consolidated leverage ratio, defined as our
consolidated net total debt divided by consolidated EBITDA for the trailing four quarters. EBITDA is defined in our credit
agreement as net income/(loss) plus income tax expense, interest expense, depreciation and amortization, losses related to hedge
agreements, any extraordinary, unusual, or non-recurring expenses or losses, any other non-cash charges, and expenses incurred
or taken prior to April 30, 2008 in connection with our acquisition of Witness, minus interest income, any extraordinary, unusual,
or non-recurring income or gains, gains related to hedge agreements, and any other non-cash income. Under the credit
agreement, the consolidated leverage ratio could not exceed 5.50:1 for the quarterly period ended January 31, 2008, and we were
in compliance with such requirement as of such date. For the quarterly periods ended April 30, July 31, and October 31, 2008,
the consolidated leverage ratio could not exceed 5.50:1 and we were in compliance with such requirement as of such dates. For
the quarterly periods ended January 31, April 30, July 31, and October 31, 2009, the consolidated leverage ratio could not exceed
4.50:1. As of January 31, 2009, we were in compliance with such requirement. For the quarterly periods ended January 31,
April 30, July 31, and October 31, 2010, the consolidated leverage ratio cannot exceed 3.50:1. For the quarterly periods ended
January 31, April 30, July 31, and October 31, 2011, the consolidated leverage ratio cannot exceed 2.50:1. For the quarterly
period ended January 31, 2012 and thereafter, the consolidated leverage ratio cannot exceed 2.00:1.
Because our revenue recognition review resulted in changes in the way we recognize revenue from the way we did so at the time
the credit agreement was put in place, it may be more difficult for us to maintain compliance with our leverage ratio covenant on
a prospective basis than we expected at the time we entered into the credit agreement since the leverage ratio covenant is based
on EBITDA, which is affected by revenue.
In addition, because GAAP requires us to continue to refine our accounting for open periods until the financial statements for
such periods are filed, it is also possible that we may determine that we were not in compliance with the leverage ratio covenant
in periods subsequent to January 31, 2009, until such time as we file the financial statements for such periods. Based on our
current expectations, we intend to reduce our outstanding debt by the end of the quarterly period ending January 31, 2011 in
order to maintain compliance with the consolidated leverage ratio covenant using available cash or cash raised from financing
activities. Alternatively, we may pursue an acquisition that is accretive to our earnings. There can be no assurance that we will be
successful with any such financing activities or in pursuing such an acquisition.
In addition, we are subject to a number of restrictive covenants, including limitations on our ability to incur indebtedness, create
liens, make fundamental business changes, dispose of property, make restricted payments including dividends, make significant
investments, enter into sale and leasebacks, enter new lines of business, provide negative pledges, enter into transactions with
related parties, and enter into any speculative hedges, although there are limited exceptions to these covenants. Because of the
delay in the filing of this report, our Comprehensive Form 10-K, and/or the Quarterly Reports on Form 10-Q for each of the
quarters ended April 30, July 31, and October 31, 2009, we may be delayed in the completion of the audit of our financial
statements for the year ended January 31, 2010, resulting in a default under the credit agreement if these financial statements are
not completed and delivered to the lenders by May 1, 2010 and an event of default if not completed and delivered to the lenders
by May 31, 2010.
105
Effective on February 25, 2008, our applicable borrowing margin increased by 0.25%, pursuant to the terms of the facility,
because we did not provide certain audited financial statements to our lenders. Additionally, on August 25, 2008, the applicable
margins increased another 0.25%, or 50% in total, since we did not deliver audited financial statements to our lenders.
See “Risk Factors — We have incurred significant indebtedness as a result of the acquisition of Witness, which makes us highly
leveraged, subjects us to restrictive covenants, and could adversely affect our operations” under Item 1A.
If we are unable to comply with any of the requirements in the credit agreement, an event of default could occur which could
cause or permit holders of the debt to declare all amounts outstanding to be immediately due and payable. In that event, we may
be forced to sell assets, raise additional capital through a securities offering, or seek to refinance or restructure our debt. In such a
case, we may not be able to consummate such a sale, securities offering, or refinancing or restructuring of the debt on reasonable
terms, or at all.
Contractual Obligations
At January 31, 2009, our contractual obligations were as follows:
(in thousands)
Long-term debt obligations, including
interest
Operating lease obligations
Purchase obligations
Other long-term obligations
Total contractual obligations
Total
< 1 year
Payments Due by Period
1-3 years
3-5 years
> 5 years
$
$
773,338
53,802
24,426
3,700
855,266
$
$
42,988
11,660
23,142
2,000
79,790
$
107,346
20,391
1,241
1,700
130,678
$
$
$
623,004
15,373
43
—
638,420
$
$
—
6,378
—
—
6,378
The long-term debt obligations reflected above include projected interest payments over the term of the debt, assuming interest
rates of 3.59% and 3.64%, which were the interest rates in effect for our term loan and revolving credit agreement borrowings,
respectively, as of January 31, 2009. The terms of our long-term debt obligations are further discussed in Note 6, “Long-term
Debt” to the consolidated financial statements included in Item 15. The long-term debt obligations also include the projected
quarterly settlements of our interest rate swap, through its expiration in May 2011, using the same future interest rate
assumptions that underlie the estimated fair value of the swap at January 31, 2009.
106
Our purchase obligations are associated with agreements for purchases of goods or services generally including agreements that
are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased;
fixed, minimum, or variable price provisions; and the approximate timing of the transactions. The table above also includes
agreements to purchase goods or services that have cancellation provisions requiring little or no payment. The amounts under
such contracts are included in the table above because we believe that cancellation of these contracts is unlikely and we expect to
make future cash payments according to the contract terms or in similar amounts for similar materials.
Our consolidated balance sheet at January 31, 2009 includes $24.2 million of non-current tax reserves, net of related benefits
(including interest and penalties of $6.6 million, net of federal benefit) for uncertain tax positions under FIN 48. However these
amounts are not included in the table above because it is not possible to predict or estimate the timing of payments for these
obligations. We do not expect to make any significant payments for these uncertain tax positions within the next twelve months.
Off Balance Sheet Arrangements
We lease certain of our current facilities, furniture, and equipment under non-cancelable operating lease agreements. We are
typically required to pay property taxes, insurance, and normal maintenance costs for these facilities.
In the normal course of business, we provide certain customers with financial performance guarantees, which are generally
backed by standby letters of credit or surety bonds. In general, we would only be liable for the amounts of these guarantees in the
event that our nonperformance permits termination of the related contract by our customer, which we believe is remote. At
January 31, 2009, we had approximately $8.7 million of outstanding letters of credit and surety bonds relating to these
performance guarantees. As of January 31, 2009, we believe we were in compliance with our performance obligations under all
contracts for which there is a financial performance guarantee, and the ultimate liability, if any, incurred in connection with these
guarantees will not have a material adverse affect on our consolidated results of operations, financial position, or cash flows. Our
historical noncompliance with our performance obligations has been insignificant.
In the normal course of business, we provide indemnifications of varying scopes to customers against claims of intellectual
property infringement made by third parties arising from the use of our products. Historically, costs related to these
indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these
indemnification provisions on our future results of operations.
To the extent permitted under Delaware law or other applicable law, we indemnify our directors, officers, employees, and agents
against claims they may become subject to by virtue of serving in such capacities for us. We also have contractual
indemnification agreements with our directors, officers, and certain senior executives. The maximum amount of future payments
we could be required to make under these indemnification arrangements and agreements is potentially unlimited; however, we
have insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We are not able
to estimate the fair value of these indemnification arrangements and agreements in excess of applicable insurance coverage, if
any.
107
Subsequent Events
The following summarizes significant developments since January 31, 2009.
Acquisition of Iontas
On February 4, 2010, our wholly owned subsidiary, Verint Americas, acquired all of the outstanding shares of Iontas, a privately
held provider of desktop analytics solutions. Iontas solutions measure application usage and analyze workflows to help improve
staff performance in contact center, branch, and back-office operations environments. Iontas’ desktop analytics solutions will be
tightly integrated into our Impact 360® Workforce Optimization suite. We acquired Iontas for approximately $15.2 million in
cash (net of cash and net assets acquired) and potential additional earn-out payments tied to certain targets being achieved over a
two-year period.
Wells Notices
On April 9, 2008, as we previously reported, we received a “Wells Notice” from the staff of the SEC arising from the staff’s
investigation of our past stock option grant practices and certain unrelated accounting matters. These accounting matters also
were the subject of our internal investigation. On March 3, 2010, the SEC filed a settled enforcement action in the United States
District Court for the Eastern District of New York relating to certain of our accounting reserve practices. Without admitting or
denying the allegations in the SEC’s Complaint, we consented to the issuance of a Final Judgment permanently enjoining us
from violating Section 17(a) of the Securities Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and
Rules 13a-1 and 13a-13 thereunder. The settled SEC action did not require us to pay any monetary penalty and sought no relief
beyond the entry of a permanent injunction. The SEC’s related press release noted that, in accepting the settlement offer, the
SEC considered our remediation and cooperation in the SEC’s investigation. The settlement was approved by the United States
District Court for the Eastern District of New York on March 9, 2010.
On December 23, 2009, as we previously reported, we received an additional “Wells Notice” from the staff of the SEC relating
to our failure to file our periodic reports under the Exchange Act. On March 3, the SEC issued an OIP pursuant to Section 12(j)
of the Exchange Act to suspend or revoke the registration of our common stock because of our failure to file an annual report on
either Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on either Form 10-Q or Form 10-QSB since
December 12, 2005. An Administrative Law Judge will consider the evidence in the Section 12(j) proceeding and has been
directed in the OIP to issue an initial decision within 120 days of service of the OIP. We are currently evaluating the Section 12
(j) OIP, including available procedural remedies, and intend to defend against the possible suspension or revocation of the
registration of our common stock.
108
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R)
replaces SFAS No. 141, Business Combinations (“SFAS No. 141”), but retains the requirement that the purchase method of
accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on the disclosures previously
required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes
principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed, and any non-
controlling interests in the acquired business. SFAS No. 141(R) is effective for all business combinations with an acquisition
date occurring in years beginning after December 15, 2008, which means that it is effective for our year beginning February 1,
2009. The impact that SFAS No. 141(R) will have on us will depend on the nature and size of any acquisitions completed after
we adopt this standard.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS
No. 160”), which establishes accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for
the deconsolidation of a subsidiary. SFAS No. 160 is effective for business arrangements entered into in years beginning on or
after December 15, 2008, which means that it is effective for our year beginning February 1, 2009. Early adoption is prohibited.
We are in the process of evaluating this standard, but do not expect that the adoption of SFAS No. 160 will have a significant
impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133 (“SFAS No. 161”), which changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial
performance, and cash flows. SFAS No. 161 is effective for financial statements issued for years and interim periods beginning
after November 15, 2008, with early application encouraged, which means that it is effective for our year beginning February 1,
2009. The adoption of SFAS No. 161 is not expected to have a significant impact on our consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that all outstanding unvested share-
based payments that contain rights to non-forfeitable dividends participate in the undistributed earnings with the common
shareholders and are therefore participating securities. Companies with participating securities are required to apply the two-class
method in calculating basic and diluted earnings per share. FSP EITF 03-6-1 is effective for years beginning after December 15,
2008 and early adoption is prohibited, which means that it is effective for our year beginning February 1, 2009. The adoption of
FSP EITF 03-6-1 is not expected to have a significant impact on our consolidated financial statements.
109
In April 2009, the FASB issued the following three FSPs that are intended to provide additional application guidance and
enhance disclosures about fair value measurements and impairments of securities:
(cid:129)
(cid:129)
(cid:129)
FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”);
FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP
FAS 115-2”); and
FSP No. FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value of Financial Instruments (“FSP FAS 107-
1”).
FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in
market activity for the asset being measured. FSP FAS 115-2 establishes a new model for measuring other-than-temporary
impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other
comprehensive income. FSP FAS 107-1 expands the fair value disclosures required for all financial instruments within the scope
of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to interim periods. All of these FSPs are effective for
interim and annual periods ending after June 15, 2009. We are assessing the potential impact that the adoption of FSP FAS 157-4
and FSP FAS 115-2 may have on our consolidated financial statements. FSP FAS 107-1 may result in increased disclosures in
our future interim periods.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 establishes general
standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are
issued. In February 2010, the FASB issued FASB Accounting Standards Update No. 2010-09, Subsequent Events (Topic 855) —
Amendments to Certain Disclosure Requirements. The amendments remove the requirement for an SEC filer to disclose a date
through which subsequent events have been evaluated in both issued and revised financial statements. This statement, as
amended, is effective for interim and annual periods ending after June 15, 2009. We do not expect that the adoption of SFAS
No. 165, as amended, will have a material effect on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167
amends FIN 46 (Revised 2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, and requires a
company to perform an analysis to determine whether its variable interests give it a controlling financial interest in a variable
interest entity. This analysis requires a company to assess whether it has the power to direct the activities of the variable interest
entity and if it has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the
variable interest entity. SFAS No. 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity, eliminates the quantitative approach previously required for determining the primary beneficiary of a
variable interest entity, and significantly enhances disclosures. SFAS No. 167 may be applied retrospectively in previously
issued financial statements with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated.
SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. We are in the process of evaluating this standard
and therefore have not yet determined the impact that the adoption of SFAS No. 167 will have on our consolidated financial
statements.
110
In September 2009, the FASB ratified the consensuses reached by the EITF regarding the following issues involving revenue
recognition:
(cid:129)
(cid:129)
Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (“EITF No. 08-1”); and
Issue No. 09-3, Certain Revenue Arrangements That Include Software Elements (“EITF No. 09-3”).
EITF No. 08-1 applies to multiple-deliverable revenue arrangements that are currently within the scope of EITF No. 00-21. EITF
No. 08-1 also provides principles and application guidance on whether a revenue arrangement contains multiple deliverables,
how the arrangement should be separated, and how the arrangement consideration should be allocated. EITF No. 08-1 requires
an entity to allocate revenue in a multiple-deliverable arrangement using estimated selling prices of the deliverables if a vendor
does not have VSOE or third-party evidence of selling price. It eliminates the use of the residual method and, instead, requires an
entity to allocate revenue using the relative selling price method. It also expands disclosure requirements with respect to
multiple-deliverable revenue arrangements.
EITF No. 09-3 applies to multiple-deliverable revenue arrangements that contain both software and hardware elements, focusing
on determining which revenue arrangements are within the scope of the software revenue guidance in SOP No. 97-2. EITF
No. 09-3 removes tangible products from the scope of the software revenue guidance and provides guidance on determining
whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue
guidance.
The accounting guidance in EITF No. 08-1 and EITF No. 09-3 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. It will be effective for us in
our fiscal year beginning February 1, 2011, although early adoption is permitted. Alternatively, an entity can elect to adopt the
provisions of these issues on a retrospective basis. We are assessing the impact that the application of EITF No. 08-1 and EITF
No. 09-3 may have on our consolidated financial statements.
During the third quarter of the year ended January 31, 2010, we adopted the new Accounting Standards Codification (“ASC”) as
issued by the FASB. The ASC has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. The ASC is not intended to change or alter existing GAAP. The adoption of the ASC had no impact
on our consolidated financial statements.
111
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial condition due to adverse changes in financial market prices
and rates. We are exposed to market risk related to changes in interest rates and foreign currency exchange rate fluctuations. To
manage the volatility relating to interest rate and foreign currency risks, we periodically enter into derivative instruments
including foreign currency forward exchange contracts and interest rate swap agreements. It is our policy to enter into derivative
transactions only to the extent considered necessary to meet our risk management objectives. We use derivative instruments
solely to reduce the financial impact of these risks and do not use derivative instruments for trading purposes.
Credit Agreement
On May 25, 2007, to partially finance the acquisition of Witness, we entered into a $675.0 million secured financing
arrangement comprised of a seven-year $650.0 million term loan facility and a six-year $25.0 million revolving credit facility
(the “facilities”). As of January 31, 2009, we had $610.0 million outstanding under the term loan. The $25.0 million revolving
credit facility was subsequently reduced to $15.0 million due to the bankruptcy of Lehman Brothers and in November 2008, we
borrowed the full $15.0 million under the facility, which remained outstanding as of January 31, 2009.
Borrowings under the facilities bear interest at a rate of, at our election, (a) 1.75% plus the higher of (i) prime rate and (ii) the
federal funds rate plus 0.50% or (b) 2.75% over the London Interbank Offered Rate, or LIBOR. In the case of the former, the
interest rate adjusts in unison with the underlying index. In the case of LIBOR borrowings, the interest rate adjusts at the end of
the relevant LIBOR period. Effective on February 25, 2008, our applicable margins indicated above increased by 0.25%,
pursuant to the terms of the facility, because we did not provide certain audited financial statements to our lenders. Additionally,
on August 25, 2008 the applicable margins increased another 0.25%, or 0.50% in total, since we did not deliver audited financial
statements to our lenders. After delivery of certain audited financials and receipt of appropriate credit ratings from Standard &
Poors and Moody’s Investor Services, the applicable margins described above will be determined by reference to our credit
ratings, and will range from 1.00% to 1.75% in the case of prime rate (or federal funds) based borrowings, and from 2.00% to
2.75% for LIBOR-based borrowings.
Interest Rate Risk on Our Debt
Because the interest rates applicable to borrowings under the facilities are variable, we are exposed to market risk from changes
in the underlying index rates, which affect our cost of borrowing. To partially mitigate this risk, and in part because we were
required to do so by the lenders, when we entered into our credit facilities in May 2007, we executed a pay-fixed, receive-
variable interest rate swap with a multinational financial institution under which we pay fixed interest at 5.18% and receive
variable interest of three-month LIBOR on a notional amount of $450.0 million. This instrument is settled with the counterparty
on a quarterly basis, and matures on May 1, 2011. As of January 31, 2009, of the $610.0 million of borrowings that were
outstanding under the term loan, the interest rate on $450.0 million of such borrowings was substantially fixed by utilization of
the interest rate swap. Interest on the remaining $160.0 million was variable. If the market interest rates for one or three-month
LIBOR changed by 1.00% as of January 31, 2009, the annual interest expense on these borrowings would change by
approximately $1.6 million.
112
This interest rate swap is not designated as a hedging instrument under the terms of SFAS No. 133 and is accounted for as a
derivative, whereby the fair value of the instrument is reported on our consolidated balance sheets, and gains and losses from
changes in its fair value, whether realized or unrealized, are reported in other income (expense), net. For the year ended
January 31, 2009, we recorded losses on this instrument of approximately $15.4 million in other income (expense), net on the
consolidated statements of operations. These losses reflect the decline in market interest rates during the year ended January 31,
2009.
The counterparty to our interest rate swap is a multinational financial institution. Despite the recent disruption in the global
financial markets, we believe the risk of this counterparty’s nonperformance of its obligations is not material. Currently and for
the expected remaining term of the agreement, the swap is in the counterparty’s favor and not ours, so we do not expect to have
counterparty risk as a result of the significant decline in interest rates since first quarter 2008.
Investments
We invest in cash, cash equivalents, and bank time deposits. Interest rate changes could result in an increase or decrease in
interest income we generate from these interest-bearing assets. Our cash, cash equivalents, and bank time deposits are primarily
maintained at high credit-quality financial institutions around the world. The primary objective of our investment activities is the
preservation of principal while maximizing investment income and minimizing risk. We have investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity.
As of January 31, 2009, we had cash and cash equivalents totaling approximately $115.9 million, consisting of demand deposits
and bank time deposits having maturities of three months or less. We also held $7.8 million of cash equivalents which were
restricted for purposes of securing certain short-term performance obligations, and were not available for general operating use.
As of January 31, 2008, we had cash and cash equivalents totaling approximately $83.2 million, consisting of demand deposits
and bank time deposits having maturities of three months or less. We also held $3.6 million of cash equivalents which were
restricted for purposes of securing certain short-term performance obligations, and were not available for general operating use.
As of January 31, 2008, we also held investments in ARS, which had an original cost of $7.0 million and estimated fair value of
$2.3 million. These ARS investments represented investments in pools of assets, including commercial paper, collateralized debt
obligations, credit default linked notes, and credit derivative products. These investments were intended to provide liquidity
through an auction process that resets the applicable interest rate at pre-determined calendar intervals, allowing investors to
either roll over their holdings or gain immediate liquidity by selling the investments at par. The disruptions in the credit markets
during 2007 and 2008 affected our holdings in ARS investments, as scheduled auctions for the securities failed and therefore
severely limited the liquidity of these investments. During the quarter ended January 31, 2008, we concluded that our ARS
investments had incurred an “other-than-temporary” impairment in market value and recorded a $4.7 million pre-tax charge to
reduce the carrying value of these investments to $2.3 million. In consideration of the ongoing failed auctions and the uncertain
market for these securities, we classified them within other assets as of January 31, 2008. In October and November 2008, these
ARS investments were repurchased from us at par value of $7.0 million cost, plus interest, by the investment firm from whom
we had purchased them. Our current investment policy no longer permits investments in ARS and we did not own any as of
January 31, 2009.
113
Interest Rate Risk on Our Investments
To provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a sensitivity
analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming, during
the year ended January 31, 2010, average short-term interest rates increase or decrease by 50 basis points relative to average rates
realized during the year ended January 31, 2009. Such a change would cause our projected interest income from cash, cash
equivalents, and bank time deposits to increase or decrease by approximately $0.6 million, assuming a similar level of
investments in the year ended January 31, 2010 as in the year ended January 31, 2009.
Due to the short-term nature of our cash and cash equivalents and time deposits, the carrying values approximate market values
and are not generally subject to price risk due to fluctuations in interest rates. See Note 4, “Short-term Investments” to the
consolidated financial statements included in Item 15 for more information regarding our short-term investments.
Foreign Currency Exchange Risk
The functional currency for each of our foreign subsidiaries is the respective local currency with the exception of our subsidiaries
in Israel and Canada, whose functional currencies are the U.S. Dollar. We are exposed to foreign exchange rate fluctuations as
we convert the financial statements of our foreign subsidiaries into U.S. Dollars for consolidated reporting purposes. If there is a
change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. Dollars
results in a gain or loss which is recorded as a component of accumulated other comprehensive income within stockholders’
equity (deficit).
Our international operations subject us to risks associated with currency fluctuations. Most of our revenue is denominated in U.S.
Dollars, while a significant portion of our operating expenses, primarily labor expenses, is denominated in the local currencies
where our foreign operations are located, primarily Israel, the United Kingdom, Germany, and Canada. As a result, our
consolidated U.S. Dollar operating results are subject to the potentially adverse impact of fluctuations in foreign currency
exchange rates between the U.S. Dollar and the other currencies in which we conduct business.
114
In addition, we have certain assets and liabilities that are denominated in currencies other than the respective entity’s functional
currency. Changes in the functional currency value of these assets and liabilities create fluctuations that result in gains or losses.
We recorded foreign currency transaction gains and losses, realized and unrealized, in other income (expense), net on the
consolidated statements of operations, of approximately $1.6 million of net gains in the year ended January 31, 2009,
$1.4 million of net gains in the year ended January 31, 2008, and $0.9 million of net losses in the year ended January 31, 2007.
Additionally, from time to time, we enter into foreign currency forward contracts in an effort to reduce the volatility of cash
flows primarily related to forecasted payroll and payroll-related expenses denominated in Israeli Shekels and Canadian Dollars.
These contracts are limited to durations of approximately six months or less. Our 50% owned joint venture in Singapore enters
into foreign currency forward contracts in an effort to reduce the volatility of cash flows primarily related to forecasted dollar
denominated accounts payable payments. These contracts are limited to durations of approximately one year or less.
We have not entered into any foreign currency forward contracts for trading or speculative purposes.
During the years ended January 31, 2009 and 2008, we realized net losses of $2.1 million and net gains of $1.8 million,
respectively, on settlements of foreign currency forward contracts not designated as hedges. We had $1.9 million of net
unrealized losses on outstanding foreign currency forward contracts as of January 31, 2009, with notional amounts totaling
$35.9 million. We had $0.3 million of unrealized losses on outstanding foreign currency forward contracts as of January 31,
2008, with notional amounts totaling $11.7 million. We did not execute any foreign currency forward contracts during the year
ended January 31, 2007.
The counterparties to these foreign currency forward contracts are multinational commercial banks. While we believe the risk of
counterparty nonperformance is not material, the recent disruption in the global financial markets has impacted some of the
financial institutions with which we do business. A sustained decline in the financial stability of financial institutions as a result
of the disruption in the financial markets could affect our ability to secure creditworthy counterparties for our foreign currency
hedging programs.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are set forth at the pages indicated at Item 15(a).
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
115
Item 9a. Controls and Procedures
The information contained in this section covers management’s evaluation of our disclosure controls and procedures and our
assessment of our internal control over financial reporting as of January 31, 2009.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and other
procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange
Act is recorded, processed, summarized, and reported within the time periods specified by the rules and forms promulgated by
the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such
information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of
January 31, 2009 because of the material weaknesses set forth below.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting”, as defined
in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our system of internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated
financial statements for external reporting purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement. An
evaluation of effectiveness is subject to the risk that the controls may become inadequate because of changes in conditions, or
that the degree of compliance with policies or procedures may decrease over time.
Our internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (b) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management
and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized use, acquisition, or
disposition of our assets that could have a material effect on the consolidated financial statements.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our internal control over financial reporting as of the year ended January 31, 2009. In making this assessment, we utilized the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control —
Integrated Framework.
116
A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is
a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. As a result of this evaluation, we concluded that our internal control over financial reporting was not
effective as of January 31, 2009 because of the material weaknesses set forth below.
The following is a summary of our material weaknesses as of January 31, 2009:
(cid:129)
Risk Assessment
Risk assessment is the component of our Company’s internal control that involves identifying and analyzing internal and
external risks related to the preparation of reliable financial statements. We failed to perform an adequate global risk
assessment to identify all material locations, balances, and related fraud risks when evaluating our internal control over
financial reporting and therefore, we did not maintain an effective process to identify, analyze, and manage risks associated
with financial reporting and anti-fraud programs and controls.
(cid:129)
Monitoring
Effective monitoring enables a company to determine whether internal control over financial reporting is present and
functioning. We did not design adequate monitoring controls related to certain subsidiaries, such that we could not be
assured that a material misstatement of financial results would be prevented or detected on a timely basis.
(cid:129)
Financial Reporting
Due to a lack of adequate systems, processes, and resources with sufficient GAAP knowledge, experience, and training, we
did not maintain effective controls over the period-end financial close and reporting processes. Due to the actual and
potential effect on financial statement balances and disclosures, the resulting restatement of our financial statements and the
importance of the financial closing and reporting processes, we concluded that, in the aggregate, these deficiencies in
internal controls over the period-end financial close and reporting process constituted a material weakness in internal
control over financial reporting. The specific deficiencies contributing to this material weakness were as follows:
(a) Inadequate policies and procedures. We did not design, establish, and maintain effective documented GAAP-
compliant financial accounting policies and procedures, nor a formalized process for determining, documenting,
communicating, implementing, monitoring, and updating accounting policies and procedures, including policies and
procedures related to significant, complex, and non-routine transactions.
117
(b) Journal entries. We did not design, establish, and maintain effective procedures for ensuring adequate review,
approval, and existence of sufficient supporting documentation over journal entries, both recurring and non-recurring.
(c) Accruals and reserves. We did not design, establish, and maintain effective policies and procedures and
documentation requirements as they relate to accrued liabilities and reserves, including those accounts requiring
significant management estimates and judgment.
(d) Account reconciliations. We did not design, establish, and maintain effective controls over the preparation, timely
review, and documented approval of account reconciliations. Specifically, we did not have effective controls over the
completeness and accuracy of supporting schedules.
(e) Inadequate segregation of duties within financial systems. In various accounting processes, applications, and systems
we did not design effective controls to adequately segregate job responsibilities and system access for initiating,
authorizing, and recording transactions, nor were there adequate mitigating or monitoring controls in place.
Specifically, we did not perform an analysis of financial reporting job responsibilities and system user access,
including information technology (“IT”) personnel, in order to establish effective segregation of responsibilities.
(f) Deficiencies in end-user computing controls of critical spreadsheets. We did not design, establish, or maintain
adequate controls over the access, completeness, accuracy, validity, and review of certain spreadsheet information that
supports the financial reporting process.
(g) Property and equipment. We did not have adequate controls over our property and equipment process, as we did not
maintain effective controls over the existence, completeness, and accuracy of our property and equipment and
recording of depreciation and amortization expense. In addition, effective controls were not designed and in place for
appropriate classification of our property and equipment and the selection and consistent application of useful lives.
(cid:129)
Equity Compensation
We did not maintain adequate policies and procedures to ensure effective controls over the administration, accounting, and
disclosure for stock-based compensation sufficient to prevent a material misstatement of related compensation expense.
Specifically, the following deficiencies in our granting, administration, and accounting for awards were identified:
(a) Inaccurate accounting and disclosure. We did not maintain adequate procedures or effective controls over accounting,
communication, and disclosure of compensation expense related to awards. Specifically, we lacked a process of
financial and administrative oversight over the stock-based compensation process.
118
(b) Administration of awards. We did not maintain effective controls related to the reconciliation of source data and
sufficient procedures to ensure that grantees were notified in a timely manner.
(c) Insufficient tracking of employee data. We did not maintain adequate procedures or effective controls over reporting
changes affecting employees and other award holders (e.g., terminations) that ultimately impacted the timely
accounting for compensation expense.
(cid:129)
Revenue and Cost of Revenue
We did not maintain effective internal controls over order management, contract management, master file monitoring,
issuance of credit memos, and policies and procedures to ensure effective controls over accounts receivable and the
recognition of revenue, deferred revenue, and cost of revenue in accordance with GAAP, which resulted in material errors
in the recognition of revenue and related cost of revenue. Specifically:
(a) we lacked sufficient personnel with appropriate knowledge, experience, and training in the complexities of software
revenue recognition;
(b) we did not establish adequate procedures or effective controls to determine VSOE for installation, training services, or
certain PCS agreements;
(c) we did not establish adequate procedures or effective controls to determine proper accounting treatment for
undelivered elements in multiple-element sales arrangements in accordance with SOP 97-2;
(d) we did not establish adequate procedures or effective controls to ensure that all elements included in a multiple-
element arrangement were timely identified and measured including establishment of VSOE for undelivered elements;
(e) we did not establish adequate procedures or effective controls to identify the nature of projects, capture the necessary
data, and determine the appropriate accounting treatment for arrangements subject to contract accounting;
(f) we did not establish or maintain appropriate policies and procedures to identify, capitalize, and amortize product costs
associated with revenue arrangements for which related revenue had been deferred;
(g) we did not establish adequate procedures or effective controls to identify sufficient evidence of customer delivery and
acceptance; and
(h) we lacked consistent communication and coordination between and among the various finance and non-finance
organizations across the company on the scope and terms of customer arrangements, including the proper
identification of all undelivered contractual obligations that impacted revenue recognition.
119
(cid:129)
Income Taxes
We did not maintain adequate policies and procedures and related internal controls to ensure the completeness, accuracy,
and timely preparation and review of our consolidated income tax provision, related account balances, and disclosures
sufficient to prevent a material misstatement of related account balances. We did not employ adequate resources, with
sufficient technical expertise in the area of accounting for income taxes, to properly account for and disclose income taxes
in accordance with GAAP.
Our independent registered public accounting firm, Deloitte & Touche LLP, expressed an adverse opinion on our internal control
over financial reporting as of January 31, 2009 because of the material weaknesses described above.
Changes in Internal Control Over Financial Reporting
Our management performed extensive procedures designed to ensure the reliability of our financial reporting. In addition to other
internal processes undertaken, procedures performed included, but were not limited to the following actions: (a) dedicating
significant resources, including the engagement of subject matter specialists to support management in its efforts to complete our
financial filings, (b) expending substantial resources in response to the findings of the Comverse investigation relating to stock-
based compensation errors associated with stock option grants issued to our employees previously employed by Comverse, and
(c) performing extensive, substantive reviews of our revenue recognition, cost of revenue recognition, income and expense
classification, stock compensation, and tax provisions. Based on these procedures, we have concluded that the consolidated
financial statements included in this report fairly present, in all material respects, our financial position, results of operations, and
cash flows for the interim and annual periods for the years ended January 31, 2009, 2008, and 2007.
Discussed below are changes made to our internal control over financial reporting from January 31, 2008 through January 31,
2009, as well as changes made to our internal control over financial reporting from February 1, 2009 through the date of this
report, in each case, in response to the identified material weaknesses. In addition, we are also providing a description of
remediation efforts for periods subsequent to January 31, 2009.
Our efforts to improve our internal controls are ongoing and focused on expanding our organizational capabilities to improve our
control environment and on implementing process changes to strengthen our internal control and monitoring activities.
As part of our ongoing remedial efforts, we have, among other things:
(cid:129)
established an internal audit department in March 2008, which reports directly to the audit committee. Our internal
audit department continues to be expanded and strengthened by hiring additional qualified staff as well as increasing
the number of external consultants engaged;
120
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
appointed a Vice President (“VP”) of Finance and Global Revenue Controller and Regional Revenue Controllers, and
established a centralized revenue recognition department to address complex revenue recognition matters, and to
provide oversight and guidance on the design of controls and processes to enhance and standardize revenue
recognition accounting application;
appointed our Chief Legal Officer as Chief Compliance Officer in September 2008, and established a robust world-
wide compliance program;
hired a new Senior VP of Finance and Corporate Controller;
appointed a VP of Global Accounting to help ensure accurate, consistent application of GAAP;
engaged a large global public accounting firm to act as an external subject matter expert with respect to the accounting
for and disclosure of stock-based compensation related matters, including providing additional SFAS No. 123(R)
training and accounting assistance, and centralized responsibility for the administration of stock-based compensation
within the purview of the Senior VP and Corporate Controller;
established a corporate tax department in the first quarter of the year ended January 31, 2009, which now includes a
Vice President, Domestic Director, International Director, and two full-time tax accountants, assisted by external
expert tax advisors to prepare and/or review significant tax provisions in accordance with SFAS No. 109, Accounting
for Income Taxes / FIN 48, Accounting for Uncertainty in Income Taxes / APB 28, Interim Financial Reporting / FIN
18, Accounting for Income Taxes in Interim Periods, as well as any changes in local law. During the year ended
January 31, 2009, we implemented a tax provision software program designed to prepare the consolidated tax
provision and related SFAS No. 109 footnote disclosures;
engaged external subject matter experts with specialized international and consolidated income tax knowledge to assist
in creating, implementing, and documenting a consolidated tax process;
performed a detailed Sarbanes-Oxley scoping and risk analysis and global fraud risk assessment for the year ended
January 31, 2010 to properly identify material locations;
engaged external subject matter experts to assist in developing and implementing a formal remediation plan;
updated our Employee Code of Business Conduct and Ethics and implemented a new Finance and Accounting Code of
Conduct that serves as a set of guiding principles emphasizing our commitment to financial and accounting reporting
integrity, as well as transparency and robust and complete communications with, and disclosures to, internal and
external auditors; annually, all finance department personnel are required to acknowledge their commitment to
adhering to the Finance and Accounting Code of Conduct;
121
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
re-emphasized to all employees the availability of our whistleblower hotline, through which all employees at all levels
can anonymously submit information or express concerns regarding accounting, financial reporting, or other
irregularities they become aware of or have observed;
expanded our accounting policy and controls organization by creating and filling new positions with qualified
accounting and finance personnel, increasing significantly the number of persons who are CPAs or the CPA
international equivalent;
engaged external subject matter experts to assist in developing, implementing, and/or enhancing accounting- and
finance-related policies and procedures, including revenue recognition, account reconciliations, journal entry
review/approval procedures, end-user computing, fixed assets, and reserve and accrual analyses. Also, we have
established an online global portal which includes, among other items, an electronic library containing various
accounting policies and literature;
implemented a record retention program, with the assistance of an external expert, to centralize global finance
documentation in a standard repository. This program is being administered by regional coordinators with oversight by
the internal audit department;
initiated a project to review our key financial systems security processes and responsibilities to appropriately design
automated controls that adequately segregate job responsibilities;
significantly increased our investment in the design and implementation of enhanced information technology systems
and user applications commensurate with the complexity of our business and our financial reporting requirements,
including a broader and more sophisticated implementation of our enterprise resource planning system, particularly in
the area of revenue recognition accounting. It is expected that these investments will improve the reliability of our
financial reporting by reducing the need for manual processes, reducing the chance for errors and omissions and
thereby decreasing our reliance on manual controls to detect and correct accounting and financial reporting
inaccuracies;
122
(cid:129)
(cid:129)
conducted employee training sessions on insider trading and general ethics; and
implemented a training program in the areas of business ethics, certain compliance matters, financial statements and
processes, and best management practices, targeted to appropriate employees to enhance awareness and understanding
of standards and principles for accounting and financial reporting.
We believe that the foregoing actions have improved and will continue to improve our internal control over financial reporting,
as well as our disclosure controls and procedures. We intend to perform such procedures and commit such resources as necessary
to continue to allow us to overcome or mitigate these material weaknesses such that we can make timely and accurate quarterly
and annual financial filings until such time as those material weaknesses are fully addressed and remediated.
123
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Verint Systems Inc.
Melville, New York
We have audited Verint Systems Inc.’s and subsidiaries’ (the “Company’s”) internal control over financial reporting as of
January 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
124
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s
assessment:
1.
The Company failed to perform an adequate global risk assessment to identify all material locations, balances and
related fraud risks when evaluating internal control over financial reporting and therefore, did not maintain an effective
process to identify, analyze, and manage risks associated with financial reporting and anti-fraud programs and
controls.
2.
The Company did not design adequate monitoring controls as it related to certain subsidiaries such that management
of the Company could not be assured that a material misstatement of financial results would be prevented or detected
on a timely basis.
3.
Due to a lack of adequate systems, processes, and resources with sufficient knowledge of generally accepted
accounting principles (“GAAP”), experience, and training, the Company did not maintain effective controls over the
period-end financial close and reporting processes as of January 31, 2009. Due to the actual and potential effect on
financial statement balances and disclosures, the resulting restatement of the financial statements and the importance
of the financial closing and reporting processes, management of the Company concluded that, in the aggregate, these
deficiencies in internal controls over the period-end financial close and reporting process constituted a material
weakness in internal control over financial reporting. The specific deficiencies contributing to this material weakness
were as follows:
(a) Inadequate policies and procedures. The Company did not design, establish, and maintain effective documented
financial accounting policies and procedures that are compliant with GAAP, nor a formalized process for
determining, documenting, communicating, implementing, monitoring, and updating accounting policies and
procedures, including policies and procedures related to significant, complex, and non-routine transactions.
(b) Journal entries. The Company did not design, establish and maintain effective procedures for ensuring adequate
review, approval and existence of sufficient supporting documentation over journal entries, both recurring and
non-recurring.
(c) Accruals and reserves. The Company did not design, establish, and maintain effective policies and procedures
and documentation requirements as they relate to accrued liabilities and reserves, including those accounts
requiring significant management estimates and judgment.
(d) Account reconciliations. The Company did not design, establish, and maintain effective controls over the
preparation, timely review, and documented approval of account reconciliations. Specifically, the Company did
not have effective controls over the completeness and accuracy of supporting schedules.
125
(e) Inadequate segregation of duties within financial systems. In various accounting processes, applications, and
systems the Company did not design effective controls to adequately segregate job responsibilities and system
access for initiating, authorizing, and recording transactions, nor were there adequate mitigating or monitoring
controls in place. Specifically, the Company did not perform an analysis of financial reporting job responsibilities
and system user access, including Information Technology personnel, in order to establish effective segregation
of responsibilities.
(f) Deficiencies in end-user computing controls of critical spreadsheets. The Company did not design, establish, or
maintain adequate controls over the access, completeness, accuracy, validity, and review of certain spreadsheet
information that supports the financial reporting process.
(g) Property and equipment. The Company did not have adequate controls over the property and equipment process,
as the Company did not maintain effective controls over the existence, completeness, and accuracy of property
and equipment and recording of depreciation and amortization expense. In addition, effective controls were not
designed and in place for appropriate classification of property and equipment and the selection and consistent
application of useful lives.
4.
Equity Compensation. The Company did not maintain adequate policies and procedures to ensure effective controls
over the administration, accounting, and disclosure for stock-based compensation sufficient to prevent a material
misstatement of related compensation expense. Specifically, the following deficiencies in the granting, administration,
and accounting for awards were identified:
(a) Inaccurate accounting and disclosure. The Company did not maintain adequate procedures or effective controls
over accounting, communication, and disclosure of compensation expense related to awards. Specifically, the
Company lacked a process of financial and administrative oversight over the stock-based compensation process.
(b) Administration of awards. The Company did not maintain effective controls related to the reconciliation of source
data and sufficient procedures to ensure that grantees were notified in a timely manner.
(c) Insufficient tracking of employee data. The Company did not maintain adequate procedures or effective controls
over reporting changes affecting employees and other award holders (e.g., terminations) that ultimately impacted
the timely accounting for compensation expense.
5.
Revenue and Cost of Revenue. The Company did not maintain effective internal controls over order management,
contract management, master file monitoring, issuance of credit memos, and policies and procedures to ensure
effective controls over accounts receivable and the recognition of revenue, deferred revenue, and cost of revenue in
accordance with GAAP, which resulted in material errors in the recognition of revenue and related cost of revenue.
Specifically:
(a) The Company lacked sufficient personnel with appropriate knowledge, experience, and training in the
complexities of software revenue recognition.
126
(b) The Company did not establish adequate procedures or effective controls to determine vendor specific objective
evidence of fair value (“VSOE”) for installation, training services, or certain post-contract customer support
agreements.
(c) The Company did not establish adequate procedures or effective controls to determine proper accounting
treatment for undelivered elements in multiple-element sales arrangements in accordance with American Institute
of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition.
(d) The Company did not establish adequate procedures or effective controls to ensure that all elements included in a
multiple-element arrangement were timely identified and measured including establishment of VSOE for
undelivered elements.
(e) The Company did not establish adequate procedures or effective controls to identify the nature of projects,
capture the necessary data, and determine the appropriate accounting treatment for arrangements subject to
contract accounting.
(f) The Company did not establish or maintain appropriate policies and procedures to identify, capitalize, and
amortize product costs associated with revenue arrangements for which related revenue had been deferred.
(g) The Company did not establish adequate procedures or effective controls to identify sufficient evidence of
customer delivery and acceptance; and
(h) The Company lacked consistent communication and coordination between and among the various finance and
non-finance organizations across the Company on the scope and terms of customer arrangements, including the
proper identification of all undelivered contractual obligations that impacted revenue recognition.
6.
Income Taxes. The Company did not maintain adequate policies and procedures and related internal controls to
ensure the completeness, accuracy, and timely preparation and review of the consolidated income tax provision,
related account balances, and disclosures sufficient to prevent a material misstatement of related account balances. The
Company did not employ adequate resources, with sufficient technical expertise in the area of accounting for income
taxes, to properly account for and disclose income taxes in accordance with GAAP.
127
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the
consolidated financial statements of the Company as of and for the year ended January 31, 2009, and this report does not affect
our report on such financial statements.
In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the
control criteria, the Company has not maintained effective internal control over financial reporting as of January 31, 2009, based
on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of the years ended January 31, 2009 and 2008 and for each of the three years in the period
ended January 31, 2009, of the Company and our report dated April 7, 2010, expressed an unqualified opinion on those financial
statements and includes an explanatory paragraph regarding the Company’s adoption of Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes as discussed in Note 1 to the consolidated financial
statements.
/s/ DELOITTE & TOUCHE LLP
New York, New York
April 7, 2010
128
Item 9b. Other Information
Not Applicable.
129
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Current Executive Officers and Directors
The following lists our current executive officers and directors as of the date of this report. Vacancies on the board of directors
that have arisen due to the departures noted below have been filled by the vote of the board of directors, in accordance with our
Amended and Restated By-laws and Amended and Restated Certificate of Incorporation. As of the date of this report, two
vacancies remain on the board of directors.
Name
Dan Bodner
Peter D. Fante
Elan Moriah
Age
51
42
47
President, Chief Executive Officer, Corporate Officer, and Director
Position
Chief Legal Officer, Chief Compliance Officer, Secretary, and
Corporate Officer
President, Verint Witness Actionable Solutions and Verint Video
Intelligence Solutions and Corporate Officer
David Parcell
56
Managing Director, EMEA and Corporate Officer
Douglas E. Robinson
53
Chief Financial Officer and Corporate Officer
Meir Sperling
Paul D. Baker
John Bunyan
Andre Dahan
61
President, Verint Communications Intelligence and Investigative
Solutions and Corporate Officer
51
Director
57
Director
61
Chairman of the Board
Victor A. DeMarines
73
Director
Kenneth A. Minihan
Larry Myers
Howard Safir
Shefali Shah
Stephen Swad
Lauren Wright
66
Director
71
Director
68
Director
38
Director
48
Director
56
Director
130
Background of Current Directors
Dan Bodner serves as our President, Chief Executive Officer, a director, and Corporate Officer. Mr. Bodner has served as our
President and/or Chief Executive Officer and as a director since February 1994. From 1991 to 1998, Mr. Bodner also served as
President and Chief Executive Officer of Comverse Government Systems Corp., a former affiliate of ours when we were a
subsidiary of Comverse. Prior to such positions, from 1987 to 1991, Mr. Bodner held various management positions at
Comverse.
Paul D. Baker has served as one of our directors since May 2002. Mr. Baker also serves as Vice President, Corporate Marketing
and Corporate Communications of Comverse, a position he has held since joining Comverse in April 1991. Mr. Baker is also a
member of the board of directors of Ulticom, Inc., a Comverse majority-owned public company and former operating subsidiary
of Comverse. Mr. Baker was nominated by Comverse to serve as a member of our board of directors.
John Bunyan has served as one of our directors since March 2008. Mr. Bunyan also serves as Chief Marketing Officer of
Comverse, a position he has held since October 2007. Prior to joining Comverse, Mr. Bunyan was President of Intelliventure
LLC, a marketing and strategy firm, of which he remains a member, although the company is currently inactive. He also served
as Senior Vice President of Mobile Multimedia Services at AT&T Wireless from November 2001 to April 2005 and was
responsible for the consumer wireless data business. Before then, Mr. Bunyan served as Senior Vice President of Marketing at
Dun & Bradstreet, and prior to that, as Executive Vice President of Marketing at Reuters Americas. Mr. Bunyan is also a
member of the board of directors of Ulticom, Inc., a Comverse majority-owned public company and former operating subsidiary
of Comverse, and one other wholly owned subsidiary of Comverse. Mr. Bunyan was nominated by Comverse to serve as a
member of our board of directors.
Andre Dahan has served as one of our directors since July 2007 and Chairman of the board of directors since March 2008.
Mr. Dahan has also served as Chief Executive Officer and President and a director of Comverse since April 2007. Prior to
joining Comverse, Mr. Dahan was President and Chief Executive Officer of Mobile Multimedia Services at AT&T Wireless
from July 2001 to December 2004. Previously, he served as President of North America and Global Accounts and in several
other global executive positions for Dun & Bradstreet, a global business information and business tools provider. Before then,
Mr. Dahan served in a variety of senior executive positions with Teradata Corp. (now NCR), Sequent Computer Systems, and
S.E. Qual, an information technology consulting firm. He also serves as a member of the board of directors of Ulticom, Inc., a
Comverse majority-owned public company and former operating subsidiary of Comverse, Starhome, B.V., also a Comverse
majority-owned company and a global provider of mobile roaming technology and services, as well as numerous other directly
and indirectly wholly owned subsidiaries of Comverse. Mr. Dahan was nominated by Comverse to serve as a member of our
board of directors.
131
Victor A. DeMarines has served as one of our directors since May 2002. In May, 2000, Mr. DeMarines retired from his position
as President and Chief Executive Officer of MITRE Corporation, a nonprofit organization, which provides security solutions for
the computer systems of the Department of Defense, the Federal Aviation Administration, the Department of Homeland
Security, the Internal Revenue Service, and several organizations in the U.S. intelligence community. Mr. DeMarines served in
this capacity with MITRE Corporation beginning in 1995, and since retiring serves as a director. Mr. DeMarines currently also
serves as a director of NetScout Systems, Inc., a provider of network performance solutions. He serves as a member of the
Strategic Command Advisory Group. Mr. DeMarines served as a Presidential Executive with the Department of Transportation
and is a Lieutenant of the U.S. Air Force.
Kenneth A. Minihan has served as one of our directors since May 2002. Lieutenant General Minihan was a career U.S. Air
Force officer who attained the rank of Lieutenant General and retired from the Air Force on June 1, 1999. Since February 2002,
he has served as a Managing Director of Paladin Capital Group, a private equity firm. Lieutenant General Minihan also served as
the 14th Director of the National Security Agency/Central Security Services and was the senior uniformed intelligence officer in
the Department of Defense. Prior to this, Lieutenant General Minihan served as the Director of the Defense Intelligence Agency.
Lieutenant General Minihan sits on the board of directors of (a) BAE Systems Inc., a defense systems company, (b) MTC
Technologies, Inc., a telecommunications company, (c) Lucent Government Solutions, an information technology company,
(d) Lexis Nexis Special Services, Inc., a leading provider of information and technology solutions to government, (e) ManTech
International Corporation, a business software and services company and (f) American Government Solutions, a software
development company. Lieutenant General Minihan was awarded the National Security Medal, the Defense Distinguished
Service Medal, the Bronze Star, and the National Intelligence Distinguished Service Medal, among other awards and
decorations.
Larry Myers has served as one of our directors since August 2003. Since November 1999, Mr. Myers has been retired from his
position of Senior Vice President, Chief Financial Officer, and Treasurer of MITRE Corporation, a nonprofit organization that
provides security solutions for the computer systems of the Department of Defense, the Federal Aviation Administration, the
Department of Homeland Security, the Internal Revenue Service, and several organizations in the U.S. intelligence community.
Mr. Myers served in this capacity with MITRE Corporation beginning in 1991.
Howard Safir has served as one of our directors since May 2002. Since December 2001, Mr. Safir has been the Chairman and
Chief Executive Officer of SafirRosetti, a provider of security and investigation services and a wholly owned subsidiary of
Global Options Group Inc. Mr. Safir has served as the Vice Chairman of Global Options Group Inc. since its May 2005
acquisition of SafirRosetti. He has served as Chief Executive Officer of Bode Technology, also a wholly owned subsidiary of
Global Options Group Inc., since February 2007. Mr. Safir also currently serves as a director of (a) Implant Sciences
Corporation, an explosives device detection company and (b) LexisNexis Special Services, Inc., a leading provider of
information and technology solutions to government. During his career, Mr. Safir served as the 39th Police Commissioner of the
City of New York, as Associate Director for Operations, U.S. Marshals Service, and as Assistant Director of the Drug
Enforcement Administration. Mr. Safir was awarded the Ellis Island Medal of Honor among other citations and awards.
132
Shefali Shah has served as one of our directors since September 2007. Since March 2010, Ms. Shah has served as Senior Vice
President, General Counsel and Corporate Secretary of Comverse. From March 2009 to March 2010, Ms. Shah served as the
Acting General Counsel and Corporate Secretary of Comverse and from June 2006 through March 2009, Ms. Shah served as
Associate General Counsel and Assistant Secretary. Prior to joining Comverse, Ms. Shah was an attorney in the corporate
practice group of Weil, Gotshal & Manges LLP from September 2002 to June 2006. Ms. Shah also serves as a member of the
board of directors of Ulticom, Inc., a Comverse majority-owned public company and former operating subsidiary of Comverse,
and Starhome, B.V., a Comverse majority-owned subsidiary and a global provider of mobile roaming technology and services.
Ms. Shah was nominated by Comverse to serve as a member of our board of directors.
Stephen Swad has served as one of our directors since June 2009. Mr. Swad has served as Executive Vice President and Chief
Financial Officer of Comverse since June 2009. Prior to joining Comverse, Mr. Swad served as Chief Financial Officer at
Federal National Mortgage Association (Fannie Mae) from August 2007 to August 2008 and, prior to that, at AOL, LLC
(formerly, America Online, Inc.) from February 2003 to February 2007. He also served as Executive Vice President of Finance
and Administration at Turner Entertainment Group, and Vice President, Financial Planning and Analysis at Time Warner.
Mr. Swad, a Certified Public Accountant and former partner of KPMG LLP, also served as Deputy Chief Accountant at the SEC.
Mr. Swad was nominated by Comverse to serve as a member of our board of directors.
Lauren Wright has served as one of our directors since September 2007. After serving as Special Advisor to the board of
directors at Comverse from January 2007 to May 2007, Ms. Wright formally joined Comverse in May 2007 and has served since
then as Senior Vice President Global Business Operations of Comverse. Prior to joining Comverse, Ms. Wright acted as a
consultant and held a variety of executive positions including President and CEO of Pryor Resources, Inc., a venture-backed
international seminar company, which she managed through bankruptcy reorganization, and President of Sprint International, a
global telecommunications provider where she worked from 1988 to 2000. Ms. Wright was nominated by Comverse to serve as a
member of our board of directors.
Background of Current Executive Officers (Not Also a Director)
Peter D. Fante serves as our Chief Legal Officer, Chief Compliance Officer, Secretary, and Corporate Officer. Mr. Fante was
appointed as General Counsel in September 2002, Chief Compliance Officer in September 2008, and Secretary in
September 2005. Prior to joining us, Mr. Fante was an associate at various global law firms including Shearman & Sterling,
Morrison & Foerster LLP, and Cadwalader, Wickersham & Taft LLP.
Elan Moriah serves as President, Verint Witness Actionable Solutions and Verint Video Intelligence Solutions global business
lines and Corporate Officer. Mr. Moriah has served in such capacity since 2008, having previously served as our President,
Americas from 2004 to 2008 and as President of our Contact Center division from 2000 to 2004. Prior to joining us, Mr. Moriah
held various management positions with Motorola Inc., where he served as Business Development Manager for Europe, Middle
East, and Africa, Worldwide Network Services Division and as Vice President of Marketing and Sales of a paging subsidiary.
Before then, Mr. Moriah worked for Comet Software Inc., as Vice President of Marketing and Sales and as Operations Manager.
133
David Parcell serves as our Managing Director, EMEA and as Corporate Officer. He has served in such capacity since
May 2001. Prior to joining us, Mr. Parcell served as Vice President of EMEA for Aspect Software, Inc. from 1997 to 2001.
Before then, Mr. Parcell held key management positions at Co-Cam and Datapoint, along with senior sales positions with Unisys
and Olivetti.
Douglas E. Robinson has served as our Chief Financial Officer and Corporate Officer since December 2006 (following
completion of a transition from the previous Chief Financial Officer which began in August 2006). Prior to joining us,
Mr. Robinson spent 17 years at CA, Inc. (formerly Computer Associates), one of the world’s largest information technology
management software companies, where he held the positions of Senior Vice President, Finance, Americas Division, Corporate
Controller, Interim Chief Financial Officer, CFO of CA’s iCan SP subsidiary, and Senior Vice President Investor Relations,
among other positions.
Meir Sperling serves as our President, Verint Communications Intelligence and Investigative Solutions and Corporate Officer.
Mr. Sperling has served in such capacity since 2000. He also served as President, APAC from 2006 to 2007. Before joining us,
Mr. Sperling served as Corporate Vice President of ECI Telecom Ltd. (“ECI”) as General Manager of its Business Systems
Division, and Director of several ECI subsidiaries. Before then, Mr. Sperling held various management positions with Tadiran
Telecommunications Communications Ltd. as well as with Tadiran Ltd and TEI, a U.S. subsidiary.
Former Directors
Avi Aronovitz, a former employee of Comverse, served on our board of directors from November 2004 until tendering his
resignation in November 2008. John Spirtos, a former employee of Comverse, served on our board of directors from
November 2008 until tendering his resignation in June 2009.
The Board of Directors and Board Committees
The Board of Directors
Although our common stock is not currently listed on NASDAQ, we have endeavored to continue to operate during our extended
filing delay period in accordance with NASDAQ rules. To that end, the board of directors has determined that
Messrs. DeMarines, Minihan, Myers, and Safir are “independent” for purposes of NASDAQ’s amended governance listing
standards (specifically, NASDAQ Listing Rule 5605(a)(2)), and the requirements of both the SEC and NASDAQ that all
members of the audit committee satisfy a special “independence” definition. The full board of directors has determined that
Messrs. DeMarines, Minihan, Myers, and Safir not only are “independent” under the objective definitional criteria established by
the SEC and NASDAQ, but also qualify as “independent” under the separate, subjective determination required by NASDAQ
that, as to each of these directors, no relationships exist which, in the opinion of the board of directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a director. Both our audit committee and our stock option
committee are composed solely of these four independent directors. The board of directors also has determined that Mr. Myers is
an “audit committee financial expert”, as that term is defined by the SEC in Item 407(d) of Regulation S-K. Stockholders should
understand that this designation is an SEC disclosure requirement relating to Mr. Myer’s experience and understanding of certain
accounting and auditing matters, which the SEC has stated does not impose on the director so designated any additional duty,
obligation, or liability than otherwise is imposed generally by virtue of serving on the audit committee and/or the board of
directors.
134
The remaining seven members of the board of directors do not satisfy these “independence” definitions because they are either
executive officers of ours or have been chosen by and/or are affiliated with our controlling stockholder, Comverse. Because we
are eligible to be a “controlled company” (within the meaning of relevant NASDAQ Listing Rule 5615(c)), we previously were,
and if our common stock was listed on NASDAQ, would continue to be exempt from certain NASDAQ Listing Rules that would
otherwise require us to have a majority independent board or fully independent standing nominating and compensation
committees. We determined that we are such a “controlled company” because Comverse holds more than 50% of the voting
power for the election of our directors. If Comverse’s ownership were to fall below 50%, however, we would cease to be
permitted to rely on the controlled company exception and would be required to have a majority independent board and fully
independent standing nominating and compensation committees.
As of the date of this report, the board of directors consists of 11 directors and has four standing committees: the corporate
governance and nominating committee, the audit committee, the compensation committee, and the stock option committee.
The Corporate Governance and Nominating Committee
Members: Messrs. Dahan, DeMarines, and Safir, and Ms. Wright
The corporate governance and nominating committee of the board of directors makes recommendations on director nominees to
the board of directors and will consider director candidates suggested by existing directors, senior management, and stockholders
if properly submitted in accordance with the applicable procedures set forth in our by-laws. These procedures have not changed
since the filing of our last proxy statement in 2005.
The corporate governance and nominating committee and the board of directors are heavily influenced in selecting director
candidates and nominees by our majority stockholder, Comverse. Comverse has the right to designate all members for
nomination to the board of directors, other than those required by applicable law and regulation, including NASDAQ’s amended
governance listing standards and the requirements of the SEC, to be “independent”, and may fill any vacancy resulting from a
Comverse designee ceasing to serve as a director. As the sole holder of our preferred stock, Comverse also has the right to
designate up to two directors to the board of directors if we fail to redeem the preferred stock when otherwise required to do so
upon the happening of certain corporate events. See “Certain Relationships and Related Transactions, and Director Independence
— Comverse Preferred Stock Financing Agreements” under Item 13 for further discussion of rights associated with our preferred
stock. Comverse designees currently serving on our board of directors are Messrs. Baker, Bunyan, Dahan and Swad, Ms. Shah,
and Ms. Wright.
135
The corporate governance and nominating committee’s responsibilities are set forth in its charter and include, among other things
(a) responsibility for establishing our corporate governance guidelines, (b) overseeing the board of director’s operations and
effectiveness, and (c) identifying, screening, and recommending qualified candidates to serve on the board of directors. This
committee was formed on September 11, 2007. Prior to this time, the nominating function was performed by the full board of
directors.
The Audit Committee
Members: Messrs. DeMarines, Minihan, Myers, and Safir
We have a separately designated standing audit committee established as contemplated by Section 10A of the Exchange Act. The
board of directors has determined that each member of the audit committee is “independent” and financially literate as required
by the additional independence requirements for members of the audit committee pursuant to Rule 10A-3 under the Exchange
Act. The audit committee’s responsibilities are set forth in its charter and include, among other things, (a) assisting the board of
directors in its oversight of our compliance with all applicable laws and regulations, which includes oversight of the quality and
integrity of our financial reporting, internal controls, and audit functions, and (b) direct and sole responsibility for the
appointment, retention, compensation, and monitoring of the performance of our independent registered public accounting firm.
The Compensation Committee
Members: Messrs. Dahan, DeMarines, and Minihan and Ms. Shah
The compensation committee’s responsibilities are set forth in its charter and include, among other things, (a) approving
compensation arrangements for our executive officers and (b) making recommendations to the stock option committee and the
board of directors regarding awards under our equity compensation plans.
The Stock Option Committee
Members: Messrs. DeMarines, Minihan, Myers, and Safir
The stock option committee is responsible for administering our stock incentive compensation plans and approving all grants of
stock options and other forms of equity awards, except that equity grants to non-employee directors are approved or ratified by
the full board of directors.
136
Codes of Business Conduct and Ethics
Codes of Business Conduct and Ethics
The board of directors has adopted a Code of Business Conduct and Ethics for Senior Officers to promote our commitment to the
legal and ethical conduct of our business. The Chief Executive Officer, Chief Financial Officer, and other senior officers are
required to abide by the code. We intend to disclose on our website any amendment to, or waiver from, a provision of the code
that applies to our Chief Executive Officer, Chief Financial Officer, or principal accounting officer that relates to any elements of
the code of ethics.
On March 19, 2009, we adopted an amended and restated Code of Conduct: Ethics Promote Excellence that replaced our
Employee Code of Conduct and Ethics which was adopted in 2003. The new code applies to all executive officers, directors, and
employees of the Company. A copy of the amended code was filed as an exhibit to a Current Report on Form 8-K filed with the
SEC on March 24, 2009. The amended code can also be found on our website at www.verint.com under the “Investor Relations”
tab. A copy of the Code of Conduct and Ethics for Senior Officers is also posted on our website under the “Investor Relations”
tab. We will provide a copy of these codes of ethics to any person without charge, upon request. Requests may be made by
writing or telephoning us at the following address:
Verint Systems Inc.
330 South Service Road
Melville, NY 11747 USA
(631) 962-9600
Attn: Corporate Secretary
Ethics Hot Line
We have a hot line, managed by a third party, that gives employees and our other stakeholders a way to confidentially and
anonymously report any actual or perceived unethical behavior or violations or suspected violations of our Codes of Conduct.
Information regarding our hot line can be found on our website at www.verint.com under the “Investor Relations” tab.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers, and persons who beneficially own more than 10%
of a registered class of our equity securities to file initial reports of ownership on Form 3 and reports of changes in ownership on
Forms 4 or 5 with the SEC. Such officers, directors, and 10% stockholders also are required by SEC rules to furnish us with
copies of all Section 16(a) reports they file.
Based solely on review of the copies of such reports furnished to us, or written representations that no reports were required, we
believe that during the year ended January 31, 2009, our directors, executive officers, and 10% stockholders complied with all
filing requirements.
137
Item 11. Executive Compensation
Compensation Discussion and Analysis
This Compensation Discussion and Analysis describes our executive officer compensation program and addresses how we made
compensation decisions for the executive officers named below (the “named executive officers”) for the year ended January 31,
2009:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
Dan Bodner, President and Chief Executive Officer and Corporate Officer
Douglas Robinson, Chief Financial Officer and Corporate Officer
Elan Moriah, President, Verint Witness Actionable Solutions and Verint Video Intelligence Solutions and Corporate
Officer
Meir Sperling, President, Verint Communications Intelligence and Investigative Solutions and Corporate Officer
David Parcell, Managing Director, EMEA and Corporate Officer
Peter Fante, Chief Legal Officer, Chief Compliance Officer, Secretary and Corporate Officer
We have included certain information in this Compensation Discussion and Analysis and this section generally for periods
subsequent to January 31, 2009 that we believe may be useful for a more complete understanding of our compensation
arrangements. While the focus of this discussion is on our compensation arrangements with our named executive officers (who
are also referred to as “executive officers” or just “officers” below), in some cases we also provide information about
compensation arrangements with our other executives or our employees generally where we believe it may be useful for
providing context for our officer compensation arrangements.
Compensation Philosophy and Process
Philosophy and Objectives of Compensation Program
The primary objectives of our executive officer compensation programs are to:
(cid:129)
(cid:129)
(cid:129)
attract and retain highly qualified and effective officers by providing a total compensation package that is competitive
in the market in which we compete for talent;
incentivize our executive officers to execute on our operational and strategic goals and reward the successful
achievement of such goals; and
align the interests of our officers with those of our stockholders.
138
Our executive officer compensation packages have historically been, and continue to be, comprised of a mix of base salary,
annual cash bonus, and annual equity or equity-linked grant, plus limited perquisites. We believe this relatively simple mix of
compensation elements allows us to successfully achieve the compensation objectives outlined above, however, the
compensation committee periodically re-evaluates the company’s compensation philosophy, objectives, and tools. In recent
years, due to our extended filing delay period, we have also made use of supplementary incentives in addition to our regular
officer compensation packages.
We believe it is important that a significant portion of an officer’s compensation be “at-risk” by being tied to the performance of
our business or our stock price. We believe this is addressed through the use of performance-based bonuses and performance-
vested equity, wherein payment or vesting is directly dependent on performance, as well as through the use of equity-based
compensation generally, such as stock options, restricted stock, or restricted stock units (“RSUs”), whose value depends on our
stock price. We believe that equity-based compensation that is subject to vesting based on continued employment is also an
effective tool for retaining our officers, aligning their interests with those of our stockholders, and for building long-term
commitment to the company.
Roles and Responsibilities
The compensation committee of the board of directors (the “compensation committee”) determines the base salaries and bonus
structure for our executive officers. The compensation committee also establishes the performance goals that are used to
determine how much of an officer’s annual target bonus is ultimately earned and evaluates the company’s and the officer’s
performance against these goals in awarding actual bonus payments after the conclusion of the applicable performance period.
The compensation committee is also responsible for overseeing our employee compensation programs generally, including our
long-term incentive programs and any special compensation initiatives.
The stock option committee of the board of directors (the “stock option committee”), which is comprised solely of independent
directors, is responsible for administering our equity compensation programs, including final approval of all equity grants, based
on recommendations on size, scope, and structure from the compensation committee. The stock option committee has approved
all equity grants to all personnel since our May 2002 IPO, except that equity grants to non-employee directors are approved by
the full board of directors. Based on recommendations from the compensation committee, the stock option committee also
establishes the performance goals that are used to determine how much of an officer’s performance-based equity award
ultimately vests and evaluates the company’s and the officer’s performance against these goals in determining actual vesting
levels after the conclusion of the applicable performance period.
139
Process Overview and Guidelines
In establishing the compensation package for our executive officers each year, the compensation committee reviews the various
components and amounts of compensation being considered for each officer normally through the use of “tally sheets” or similar
compensation summaries. The compensation committee, from time to time, engages a nationally recognized independent
compensation consultant to prepare a peer group compensation “benchmarking” analysis for our officer compensation packages
and to assist the compensation committee in structuring and evaluating proposed officer compensation packages or other
executive compensation arrangements. The independent compensation consultant does not provide any other services to the
company except advising the compensation committee on compensation for our officers, directors, or other personnel. The
company pays the cost for the consultant’s services. With the compensation committee’s permission or at the compensation
committee’s request, selected members of senior management generally work cooperatively with the compensation consultant in
preparing proposals for officer compensation packages or other executive compensation arrangements for consideration by the
compensation committee. The compensation consultant at all times remains independent of management, however, and forms its
own views with respect to the recommendations it makes to the compensation committee. With the exception of his own
package, the Chief Executive Officer also provides input to the compensation committee on each proposed executive officer
compensation package. The compensation committee also meets in executive session (outside the presence of management) with
its independent compensation consultant and other advisors from time to time. The compensation committee is solely responsible
for making final decisions on cash compensation for executive officers and the stock option committee is solely responsible for
making final decisions on equity compensation for executive officers.
The composition of the peer group used for benchmarking analyses prepared by the compensation consultant is developed
following discussions between the compensation committee, the compensation consultant, and members of senior management,
and varies from year to year. The companies to be included in the peer group are selected from a sampling of publicly traded
software and technology companies with annual revenues, market capitalizations, and/or enterprise values within a range above
and below ours. In general, certain of our closest competitors do not fit within these parameters, either because they are much
larger or much smaller than us, are privately held, or are foreign issuers who do not publicly file detailed compensation data.
For compensation for the year ended January 31, 2009, our compensation peer group consisted of:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
McAfee Inc.,
Compuware Corporation,
THQ Inc.,
Sybase, Inc.,
140
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
Take-Two Interactive Software, Inc.,
Novell, Inc.,
NAVTEQ Corporation,
FLIR Systems, Inc.,
Lawson Software, Inc.,
Salesforce.com, Inc.,
Quest Software, Inc., and
Nuance Communications, Inc.
Elements of compensation are considered by the compensation committee individually and in the aggregate. Based on the
benchmarking analysis, the compensation committee initially uses a guideline of setting cash compensation (salary and target
bonus) at the median of our peer group for target performance and of setting equity compensation at the 75th percentile of our
peer group (based on dollar value) for target performance. We believe that targeting cash compensation at the median and equity
compensation at the 75th percentile of our peer group ensures that we are well positioned to attract and retain the highest caliber
of executive officer talent and properly incentivize our officers consistent with our compensation philosophy and objectives
described above. The actual cash and equity target award levels for a given executive officer in a given year are not, however,
determined solely based on these guidelines, but have not historically exceeded them.
In establishing these actual cash and equity target award levels and the mix between cash compensation and equity
compensation, the other factors considered by the compensation committee include:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
the officer’s compensation for the previous year;
the officer’s performance in the previous year;
our performance in the previous year;
our growth from the previous year;
our outlook, budget, and cash forecast for the upcoming year;
the proposed packages for the other executive officers (internal pay equity);
the proposed merit increases, if any, being offered to our employees generally;
141
(cid:129)
(cid:129)
(cid:129)
(cid:129)
equity dilution and burn rates;
the value of previously awarded equity grants;
executive officer recruiting and retention considerations; and
compensation trends and competitive factors in the market for talent in which we compete.
We do not target a specific ratio of equity to cash.
Subject to the parameters of our compensation philosophy, the compensation committee believes that it is appropriate for our
Chief Executive Officer to be compensated more highly from both a cash and an equity perspective than our other executive
officers, and this approach has been supported by our peer group analyses. In establishing the relative compensation of the other
executive officers, in addition to the factors above and peer group analyses, the compensation committee is also mindful of
internal pay equity and takes into account differences in the scope of each officer’s responsibilities.
For the reasons discussed below, in recent years, due to our extended filing delay period, we have placed increased emphasis on
executive retention, particularly in sizing equity awards and in considering supplementary incentives in addition to our regular
executive officer compensation packages. See “- Compensation and Awards During Our Extended Filing Delay Period” below.
Elements of Compensation
Base Salary
Base salaries for our executive officers are generally negotiated by us with the officer upon hiring based on prior compensation
history, salary levels of our other executive officers, geographic location, and benchmarking data. Base salaries for our executive
officers are subject to adjustment annually by the compensation committee as part of its regular compensation review process
based on the benchmarking process and the other factors described above, as well as based on special achievements, promotions,
and other facts and circumstances specific to the individual officer. For the year ended January 31, 2009, we increased base
salaries for our executive officers, primarily based on the results of the peer group study prepared by the compensation
committee’s consultant.
142
Annual Bonus
Each of our executive officers is eligible to receive an annual cash bonus. As with base salaries, target bonuses are established
annually by the compensation committee as part of its regular compensation review process. In establishing target bonuses, in
addition to the factors considered as part of the compensation review process generally, the compensation committee also
considers the target bonus set forth in the executive officer’s employment agreement (if applicable), as well as special
achievements, promotions, and other facts and circumstances specific to the individual officer.
Although an officer’s employment agreement may provide for a specified target bonus (a target bonus below which an officer
may have “good reason” to resign under his employment agreement) and although the compensation committee establishes a
bonus target for each officer annually, the actual bonus payment an officer receives is not guaranteed. Actual bonuses are paid
based on company and officer performance, generally by reference to pre-defined performance goals established by the
compensation committee as part of the regular compensation review process.
Performance goals are based on revenue, a measure of profitability (generally operating income), and a measure of cash
generation. For the year ended January 31, 2009, the measure of cash generation was days sales outstanding (“DSO”). A portion
of the bonus is also tied to the achievement of non-financial management business objectives (“MBOs”) approved by the
compensation committee. The compensation committee uses the same budget prepared by management and approved by our
board of directors for operating our business in establishing corresponding quantitative financial goals. This operating budget is
prepared annually through a highly detailed, bottom-up process involving dozens of employees around the world from each of
our three operating segments and represents a consensus view from the organization on the performance we can drive from our
business. This same operating budget is also used in establishing the performance goals for our other employees who receive
performance-based compensation, such as performance-based annual bonuses or sales commissions. We believe that using the
same budget for operating the business and for establishing annual compensation performance goals helps to maximize the
alignment between the interests of our executive officers (and other employees) and our stockholders. For executive officers with
responsibility for a specific operating unit, unit revenue and unit profitability goals are also incorporated into the officer’s
performance goals.
143
Because our operating budget is an internal tool primarily designed to assist management and the board of directors in
understanding and managing the operations of the business, it uses measures of revenue and operating income that are different
from their GAAP counterparts. As a result, because the compensation committee establishes the compensation performance
goals using this same budget, these performance goals are also different from their GAAP counterparts and may also be
calculated differently from the non-GAAP metrics that we may disclose publicly from time to time. For example, our internal
budget targets, and therefore our performance goals, may exclude the effect of acquisitions that occur during the year. The
following table summarizes the differences between our reported GAAP revenue and GAAP operating income and the
corresponding measures used for our operating budget and our compensation performance goals, subject to any additional
adjustments the compensation committee may deem appropriate in a particular period:
Budget /
Performance Goal
Metric
Revenue
Operating income
Differences from Corresponding GAAP Metric
GAAP revenue excluding the impact of fair value adjustments relating to future support obligations
under acquired contracts which would otherwise have been recognized on a stand-alone basis, as well
as adjustments for sales concessions related to accounts receivable balances that existed prior to the
date of an acquisition.
GAAP operating income, adjusted for revenue as described above, and adjustments related to
acquisitions including amortization of acquisition-related intangible assets, integration costs,
acquisition-related write-downs, in-process research and development, impairment of goodwill and
intangible assets, and special legal costs and settlement income, as well adjustments for stock-based
compensation, expenses related to our restatement and extended filing delay, and certain other non-
cash or non-recurring charges.
The financial performance goals established by the compensation committee generally come in the form of a range, wherein the
officer may achieve a percentage of his target bonus (generally 50-75%) at the low end of the performance range (or threshold),
100% of his target bonus towards the middle of the performance range (target performance), and up to 200% of his target bonus
at the high end of the performance range. Below threshold, the officer is not entitled to any of his target bonus (for that goal). For
performance that falls between points on the range, the bonus payout is calculated on a linear basis between those points. The
compensation committee’s objective in establishing a range is to incentivize our officers to overachieve, while at the same time
providing for a target performance number that can reasonably be achieved and lesser levels of reward for performance that
approaches but does not achieve target performance. As a result, while the compensation committee takes into account the
probability of achieving different levels of performance in establishing the threshold, target, and maximum for each performance
goal and attempts to set the target at a level the compensation committee believes requires strong performance on the part of the
officer, the compensation committee does not specifically attempt to identify a point in the range where it is as likely that the
officer will fail to achieve the goal as it is that he will achieve the goal. Similarly, any MBO goals incorporated into an officer’s
bonus plan are designed to require strong performance on the part of the officer, but are not intended to be so difficult to achieve
that it is more likely than not that the officer will be unable to reach the goal.
144
For the year ended January 31, 2009, the compensation committee implemented a new bonus structure in an effort to further
ensure satisfaction of the requirement for deductibility under Section 162(m) of the Internal Revenue Code. The independent
members of the compensation committee established a maximum bonus pool for the executive officers equal to 3% of our non-
GAAP operating income for the year ended January 31, 2009, which pool was then allocated among the executive officers on a
percentage basis. The compensation committee also established target bonuses (below the amounts expected to result from the
percentage allocations of the pool) and retained discretion to reduce the percentage allocations of the pool to or below these
target bonus amounts based on, among other things, the achievement of the performance goals adopted by the compensation
committee, provided that any such adjustments (a) are consistent with and subject to the requirements set forth in Section 162(m)
of the Internal Revenue Code and (b) do not result in an actual bonus payout that is less than 80% of the amount such executive
officer would receive, if any, if bonuses were based solely on the financial performance goals (i.e., excluding for this purpose the
MBO goal).
In establishing target bonuses for the executive officers other than Mr. Bodner, the compensation committee elected to set the
target bonus for Messrs. Robinson and Moriah at approximately 60% of base salary and the target bonus for Messrs. Sperling,
Parcell, and Fante at 40-50% of base salary. These percentages of base salary were based on the bonus target specified by the
officer’s employment agreement (if applicable) and the regular compensation review process, including the committee’s review
of benchmarking data provided by its independent compensation consultant. Mr. Bodner’s target bonus was also based on
benchmarking data provided by the compensation committee’s independent compensation consultant as part of the regular
compensation review process, but was not tied directly to his base salary. For the year ended January 31, 2009, we increased
target bonuses for our executive officers, primarily based on the results of the peer group study prepared by the compensation
committee’s consultant.
145
The following summarizes the specific approach taken by the compensation committee for establishing annual bonuses for each
executive officer the year ended January 31, 2009:
Name
Bodner
Description of Bonus Plan
Bonus based 40% on company revenue,
40% on company operating income, 10%
on DSO, and 10% on MBOs.
Robinson
Bonus based 40% on company revenue,
40% on company operating income, 10%
on DSO, and 10% on MBOs.
Moriah
Bonus based 40% on company revenue,
40% on company operating income, 10%
on DSO, and 10% on MBOs.
Sperling
Parcell
Fante
Bonus based 20% on company revenue,
20% on company operating income, 20%
on unit revenue, 20% on unit operating
income (relating to the unit for which
Mr. Sperling was responsible), 10% on
DSO, and 10% on MBOs.
Bonus based 20% on company revenue,
20% on company operating income, 20%
on unit revenue, 20% on unit operating
income (relating to the unit for which
Mr. Parcell was responsible), 10% on
DSO, and 10% on MBOs.
Bonus based 40% on company revenue,
40% on company operating income, 10%
on DSO, and 10% on MBOs.
Max %
Bonus
Pool
39.5%
Target Bonus
% of
Bonus Pool
15.2%
$
$600,000
14.0%
5.4%
$212,400
14.0%
5.4%
$212,400
11.3%
4.4%
$178,705
10.4%
4.0%
$158,560
10.7%
4.1%
$162,500
Actual Achievement Against
Performance Goals
Company revenue: 96.5%
Company operating income: 99.9%
DSO: 126%
MBO: 100%
Company revenue: 96.5%
Company operating income: 99.9%
DSO: 126%
MBO: 100%
Company revenue: 96.5%
Company operating income: 99.9%
DSO: 126%
MBO: 100%
Company revenue: 96.5%
Company operating income: 99.9%
Unit revenue: 123.3%
Unit contribution margin: 156.4%
DSO: 126%
MBO: 100%
Company revenue: 96.5%
Company operating income: 99.9%
Unit revenue: 72.3%
Unit contribution margin: 56.8%
DSO: 126%
MBO: 90%
Company revenue: 96.5%
Company operating income: 99.9%
DSO: 126%
MBO: 100%
146
Actual
Payout
Amount
$
584,230
206,818
206,818
205,040
111,148
(includes
$30,000
discretionary
bonus)
158,229
Actual
Payout
Percentage
81.4
99.8
200.0
100.0
81.4
99.8
200.0
100.0
81.4
99.8
200.0
100.0
81.4
99.8
200.0
200.0
200.0
100.0
81.4
99.8
0.0
0.0
200.0
90.0
81.4
99.8
200.0
100.0
%
%
%
%
$
%
%
%
%
$
%
%
%
%
$
%
%
%
%
%
%
$
%
%
%
%
%
%
$
%
%
%
%
Performance vs. Payout Matrices
(unless otherwise noted below, applies to each officer on a goal by goal basis based on the officer’s individualized bonus plan
per the table above)
Percentage of Company Revenue Goal Achieved
Less than 95%
95%
100%
101%
106% or more
Percentage of Company Operating Income Goal Achieved
Less than 79%
79%
100%
103%
116% or more
Percentage of DSO Goal Achieved
Less than 88%
88%
94%
100%
106%
112%
124% or more
Sperling: Percentage of Unit Revenue Goal Achieved
Less than 90%
90%
100%
106%
110% or more
Sperling: Percentage of Unit Operating Income Goal Achieved
Less than 82%
82%
100%
111%
119% or more
147
Payout Percentage (for goal)
0%
75%
100%
125%
200%
Payout Percentage (for goal)
0%
75%
100%
125%
200%
Payout Percentage (for goal)
0%
50%
75%
100%
125%
150%
200%
Payout Percentage (for goal)
0%
75%
100%
125%
200%
Payout Percentage (for goal)
0%
75%
100%
125%
200%
Parcell: Percentage of Unit Revenue Goal Achieved
Less than 90%
90%
100%
103%
110% or more
Parcell: Percentage of Unit Operating Income Goal Achieved
Less than 84%
84%
100%
106%
117% or more
Payout Percentage (for goal)
0%
75%
100%
125%
200%
Payout Percentage (for goal)
0%
75%
100%
125%
200%
Mr. Parcell’s bonus reflects a discretionary bonus from the compensation committee in recognition of his performance in
supporting our business in regions outside of EMEA. This discretionary bonus did not result from any accounting related
adjustments described under “— Compensation and Awards During Our Extended Filing Delay Period” below. The payout
amounts for Messrs. Parcell and Sperling reflect the impact of applicable exchange rates on the payment dates.
Equity Awards
Each of our executive officers is eligible to receive an annual equity award. Equity awards for executive officers are normally
made as part of our regular annual equity grant to employees. Annual equity awards are established by the stock option
committee based on recommended award levels resulting from the compensation committee’s regular compensation review
process. In establishing each officer’s recommended annual equity award, in addition to the factors considered as part of the
compensation review process generally, the compensation committee places special focus on internal pay equity among the
executive officers.
Where possible, the board of directors (or the compensation committee or stock option committee) endeavors to establish the
grant date well in advance of the grant and to schedule vesting dates to occur at a time when we would not normally be in a
quarterly trading blackout (to reduce the chances that vesting-related tax events occur during blackout periods), however, due to
our extended filing delay and the complexity of our equity granting practice during this period, in recent years, grant dates have
fluctuated. Apart from seeking to grant or schedule vesting dates outside of blackout periods, we do not time our grants by
reference to the release of earnings or other material information.
Prior to the year ended January 31, 2006, our preferred form of equity award was stock options. In recent years, we have moved
to restricted stock and subsequently to RSUs as the preferred form of award. This move from stock options to restricted stock
and RSUs resulted from a desire to decrease equity compensation expense under SFAS No. 123(R) and to improve the retentive
effect and perceived value of our equity awards, and was also informed by dilution considerations. The compensation committee
periodically reviews the elements of compensation it uses, however, and we may in the future incorporate stock options as a
component of our compensation packages for executive officers or others. To the extent that stock options are used, the exercise
price of such options is always the closing price of our stock on the date of board of directors or stock option committee
approval.
148
Since the beginning of the year ended January 31, 2008, annual equity awards for our executive officers have been divided
evenly between time-vested awards and performance-vested awards. We moved to this 50-50 mix in order to further align officer
incentives with company performance and put a greater proportion of our officer’s compensation “at risk”. Time-based equity
awards for officers normally vest over a three- or four-year period. Performance-based equity awards to date have been
comprised of three separate vesting periods corresponding to three separate performance periods, each concluding at the end of a
fiscal year, though in some cases, the performance period has been less than 12 months in duration. The stock option committee
sets the performance goal for each such performance period following the beginning of the performance period. We believe that
waiting until the beginning of the applicable performance period to set the performance goal for that period allows much greater
precision in tailoring the incentive and retentive effect of these awards than would setting the goals for all periods at the time of
grant.
The performance goal for each such performance period is revenue. The stock option committee establishes the revenue goal for
each performance period based on a recommendation from the compensation committee. In making this recommendation, the
compensation committee uses the same budget prepared by management and approved by our board of directors for operating
our business. As described above in the discussion of annual bonuses, we believe that using the same budget for operating the
business and for establishing annual compensation performance goals helps to maximize the alignment between the interests of
our executive officers and our stockholders. As described above with respect to our annual bonus plans, because our revenue
performance goals come from our annual operating budget, they are expressed on a non-GAAP basis. See “— Elements of
Compensation — Annual Bonus” above for more information.
The revenue performance goal established by the stock option committee generally comes in the form of a range, wherein the
officer may earn a portion of the award for the applicable performance period (generally ranging from 50-75%) at the low end of
the performance range (or threshold) and 100% of the award at target performance. The stock option committee may also
provide for the opportunity to earn in excess of 100% of the target award in the event actual performance exceeds target
performance, however, the stock option committee did not provide for such an opportunity for awards made prior to the year
ended January 31, 2010. For performance that falls between points on the range, the amount earned is calculated on a linear basis
between those points. As with the compensation committee’s approach for annual bonuses, the stock option committee’s
objective in establishing a range for the performance goal is to provide for a target performance number that can reasonably be
achieved and lesser levels of reward for performance that approaches but does not achieve target performance. As a result, while
the stock option committee takes into account the probability of achieving different levels of performance in establishing the
threshold and target performance levels of the range and attempts to set the target performance number at a level the stock option
committee believes requires strong performance on the part of the officer, the stock option committee does not specifically
attempt to identify a point in the range where it is as likely that the officer will fail to achieve the goal as it is that he will achieve
the goal.
149
The following summarizes the performance versus payout matrices established by the stock option committee for the
performance period ended January 31, 2009:
Performance vs. Payout Matrix (for awards approved July 2, 2007)
Percentage of Revenue Goal Achieved
Less than 95%
95%
100% or more
Percentage of Eligible Performance
Shares Earned for Period
0%
75%
100%
Performance vs. Payout Matrix (for awards approved May 28, 2008)
Percentage of Revenue Goal Achieved
Less than 100%
100% or more
Percentage of Eligible Performance
Shares Earned for Period
0%
100%
For the January 31, 2009 performance period, the stock option committee elected to set a lower revenue goal under the May 28,
2008 award than under the July 2, 2007 award, but also elected to eliminate the opportunity for the officers to earn a partial
vesting at a threshold level of performance.
The stock option committee determines the amount earned by each officer under his outstanding performance equity awards after
year-end following the finalization of results for the applicable performance period.
For the year ended January 31, 2009, the stock option committee determined that 96.5% of the revenue goal had been achieved
for the awards granted on July 2, 2007 and that 106.4% of the revenue goal had been achieved for the awards granted on May 28,
2008. This resulted in the officers earning 81.4% of the performance shares eligible to be earned in such performance period
under the July 2, 2007 awards and 100% of the performance shares eligible to be earned in such performance period under the
May 28, 2008 awards.
We do not presently have any stock ownership guidelines in place for our executive officers, however, our insider trading policy
prohibits all personnel (including officers and directors) from short selling in our securities, from short-term trades in our
securities (open market purchase and sale within three months), and from trading options in our securities. Due to our extended
filing delay, other than limited dispositions to the company to cover tax liabilities in connection with vestings, none of our
current executive officers has been able to sell any of our securities, including shares underlying equity awards, since
January 2006.
150
Other Pay Elements
Except as described in the next section with respect to our extended filing delay period, we do not currently make use of other
equity or cash based long-term incentive compensation arrangements, defined-benefit plans, or deferred compensation plans. We
provide a limited amount of perquisites to our executive officers, which vary from officer to officer and region to region and
include use of a company car or an annual car allowance, fuel reimbursement allowance, an annual allowance for professional
legal, tax, or financial advice, certain statutory payments, payments for accrued vacation days (prior to separation from service),
and supplemental company-paid life insurance. Executive officers in the United States also receive the same partial match of
their 401(k) contributions as all other U.S. employees. Executive officers in the United Kingdom receive company contributions
to a retirement fund on the same basis as other U.K. employees. Executive officers in Israel receive company contributions to a
retirement fund, a severance fund, and a continuing education fund, in each case, on the same basis as other Israeli employees.
Executive officers receive the same health insurance and company-paid group life and disability insurance offered to all other
employees in the country in which the executive officer is employed.
Employment Agreements
As of the filing date of this report, each of our executive officers other than Mr. Sperling is party to a formal employment
agreement with us. Mr. Sperling has a customary offer letter from us and a letter agreement regarding the release of his
severance, retirement, and disability insurance funds in the event of a termination event, but does not currently have a formal
employment agreement.
Several of the formal employment agreements or the most recent material amendments thereto with our executive officers have
been signed only recently (during the year ended January 31, 2010 or the year ended January 31, 2011) and others have been in
place for only part of the period covered by this Item 11. As a result, neither Mr. Bodner nor Mr. Sperling was covered by a
formal employment agreement at any time during the period covered by this Item 11 (i.e., through January 31, 2009).
Messrs. Fante and Moriah were covered by formal employment agreements during the year ended January 31, 2008, but not
during the year ended January 31, 2007, and did not sign their most recent amendments until the year ended January 31, 2010.
Mr. Robinson has been covered by a formal employment agreement from and after the year ended January 31, 2007. Mr. Parcell
has been covered by a formal employment agreement for all periods covered by this Item 11.
151
The following table summarizes the dates that each formal employment agreement or material amendment was signed:
Name
Bodner
(cid:129) Employment agreement signed on February 23, 2010
Date of Employment Agreement or Material Amendment
Robinson
(cid:129) Employment agreement signed on August 14, 2006
Moriah
(cid:129) Initial employment agreement signed on September 18, 2007
(cid:129) Amended and restated agreement signed on October 29, 2009
Sperling
(cid:129) No formal employment agreement as of the filing date of this report
Parcell
(cid:129) Initial employment agreement signed on April 16, 2001
(cid:129) Supplemental employment agreement signed on June 13, 2008
Fante
(cid:129) Initial employment agreement signed on September 18, 2007
(cid:129) Amended and restated agreement signed on November 10, 2009
Mr. Parcell’s original employment agreement was signed in 2001 in accordance with our local U.K. practice of entering into
employment agreements with all U.K. employees. The other officer employment agreements were put in place following the
negotiation of our first formal executive employment agreement in connection with the recruiting of Mr. Robinson as our new
Chief Financial Officer. This process of entering into formal employment agreements with our executive officers has progressed
iteratively during our extended filing delay period and at different rates with each of our officers. We are currently in discussions
regarding a formal employment agreement with Mr. Sperling and amended employment agreements with Mr. Robinson and
Mr. Parcell. All of the employments agreements and amended agreements entered into with our officers since 2006 have been
designed in consultation with the compensation committee’s independent compensation consultant.
The terms and conditions of each of the executive officer employment agreements are discussed in greater detail below under
“— Executive Officer Severance Benefits and Change in Control Provisions”, but in general, the employment agreements
entered into with Messrs. Robinson, Fante, and Moriah during 2006 and 2007, and the supplemental employment agreement
entered into with Mr. Parcell in 2008, provided for 12 months (inclusive of any notice period required by the officer’s existing
employment agreement) of severance and certain other continued benefits in the event of an involuntary termination, as well as
acceleration of unvested equity in the event of an involuntary termination in connection with a change in control. Mr. Robinson’s
agreement provides for acceleration of unvested equity in connection with a change in control whether or not his employment
was terminated. The new employment agreements or amended agreements entered into beginning in 2009 as part of the
compensation committee review of executive compensation arrangements during 2008 and 2009 described below provide,
among other things, for greater amounts of severance in the event of an involuntary termination in connection with a change in
control as well as excise tax gross-ups for our U.S.-based executive officers.
152
Clawback Policy
Each of our executive officers who is party to an employment agreement with us is subject to a clawback provision which allows
us to recoup from the officer, or cancel, all or a portion of the officer’s incentive compensation (including bonuses and equity
awards) for a particular year if we are required to restate our financial statements for that year due to material noncompliance
with any financial reporting requirement under the securities laws as a result of the officer’s misconduct. The clawback applies
from and after the year in which the employment agreement was first signed to awards made during the term of the agreement.
The amount to be recovered or forfeited is the amount by which the incentive compensation in the year in question exceeded the
amount that would have been awarded had the financial statements originally been filed as restated.
Compensation and Awards During Our Extended Filing Delay Period
Introduction
Due to the protracted length of our extended filing delay period, we have placed special emphasis on retention in our
compensation philosophy during the last several years. As noted above, this has impacted the sizing of executive officer and
other key employee equity awards, and has also included the use of special retention awards and bonuses, as well as modification
of existing awards to improve their retentive effect, and ensuring that executive compensation packages are at market levels and
contain market terms and conditions.
Due to our restatement and lack of audited financial statements during our extended filing delay period, for compensation for the
year ended January 31, 2009, performance goals for cash bonuses and for performance-based equity, and corresponding year-end
payout and vesting calculations, were based on preliminary, unaudited financial metrics and results. As a result, in addition to the
regular discretion retained by the compensation committee in awarding annual bonuses, these performance goals and/or these
year-end payouts and vesting calculations have been subject to equitable adjustment by the compensation committee or the stock
option committee, as applicable, in connection with their regular annual determination of whether performance goals have been
achieved, to take into account changes resulting from our revenue recognition review and other accounting adjustments unrelated
to our operations. The compensation and stock option committees reserved the right to make such equitable adjustments to
ensure that neither the company nor the officers unfairly benefited or were unfairly penalized by changes to our financial
performance metrics resulting solely from changes to our accounting methodology.
153
Granting of Equity Awards
As a result of our inability to file required SEC reports during our extended filing delay period, we ceased using our Registration
Statement on Form S-8 to make equity grants to employees. As a result, on March 27, 2006, we suspended option exercises
under our equity incentive plans and terminated purchases under our employee stock purchase plan for all employees, including
executive officers. In addition, we did not make any equity awards to employees, including executive officers, during the year
ended January 31, 2007. Our board of directors did not believe it was appropriate to make equity grants to executive officers
under an exemption from registration at a time when grants could not be made to other employees. In connection with our
suspension of option exercises, on March 27, 2006, the stock option committee also adopted a resolution generally extending the
exercise period of our stock options for employees, including executive officers, whose employment is terminated during our
extended filing delay period until the 30th day following the date the board of directors determines we have become compliant
with our SEC filing obligations (subject, however, to the original term of such stock options).
On May 24, 2007, we received a no-action letter from the SEC upon which we relied to make a broad-based equity grant to
employees under a no-sale theory. The stock option committee approved this grant approximately 30 days later on July 2, 2007.
On this same date, the board of directors and the stock option committee also approved an equity grant to our directors, executive
officers, and certain other executives who were accredited investors in reliance upon a private placement exemption from the
federal securities laws. In addition to a regular annual equity award, the July 2, 2007 equity award to our executive officers also
included a special time-vested retention grant (the “2007 retention grants”). This special time-vested retention grant
corresponded to special cash-based retention bonuses for certain key employees awarded during 2007 which the compensation
committee deemed necessary to help retain these key employees during our extended filing delay period (the “2007 retention
bonuses”). Other than Mr. Parcell, who was not an executive officer in the year ended January 31, 2007 and who received his
2007 retention award part in cash and part in stock, none of our executive officers received a 2007 retention bonus. These 2007
special retention programs were designed in consultation with the compensation committee’s independent compensation
consultant.
We have continued to rely on our no-action relief to make broad-based equity grants during our extended filing delay period,
while simultaneously making annual grants to our executive officers and directors under a private placement exemption. We
believe that these continued broad-based equity awards have been an important part of our retention initiatives and have also
helped to incentivize participants and to build long-term commitment and goodwill to the company. Consistent with this
philosophy, in connection with the equity award for the year ended January 31, 2009 (approved on May 28, 2008), Mr. Bodner
requested, and was permitted by the compensation and stock option committees, to reduce his proposed award by approximately
50,000 shares (or approximately 40%) for reallocation to key employees below the officer level and the compensation and stock
option committees determined to increase the proposed share pool available for grant to these key non-officer employees by
approximately 100,000 shares (or approximately 12% of the non-officer pool).
154
Modification of Equity Awards
Other than awards to our independent directors, all of the equity awards granted in the years ended January 31, 2008 and
January 31, 2009 (including the 2007 retention grants awarded to the executive officers) were made subject to special
“compliance” vesting conditions which override the regular time-vesting or performance-vesting schedule of the awards. These
compliance vesting conditions require that we be both current with our SEC filings and that our common stock be re-listed on
NASDAQ or another nationally recognized exchange for the awards to vest. The 2008 awards also require that we have received
stockholder approval of a new equity compensation plan or have additional share capacity under an existing stockholder-
approved equity compensation plan for the 2008 awards to vest. If any of these compliance vesting conditions is not satisfied on
the date the awards would otherwise vest, the portion of the award that would otherwise vest remains unvested until such time as
all of the applicable compliance vesting conditions are satisfied, except that awards granted to non-officers in 2008 vested and
settled in cash if the compliance vesting conditions were not satisfied on the award’s vesting date. This feature was included in
the 2008 awards to non-officer employees as part of our retention initiative in lieu of a 2008 retention bonus program.
Following the payment of the 2007 retention bonuses in mid-2007 and early 2008 to certain key employees (other than executive
officers, except, as noted above, for Mr. Parcell) and the cash settlement of the first half of the 2008 equity awards for employees
(other than executive officers) in April 2009, the compensation and stock option committees concluded that, in light of these
cash payments to other employees, the inability of the executive officers to derive any present value from their outstanding
equity awards (as a result of our extended filing delay period), and continued officer retention concerns on the part of senior
management, the officers (a) should be permitted to vest into the portions of their outstanding equity awards that would
otherwise have vested but for the compliance vesting conditions and (b) to the extent feasible, should not be subject to
compliance vesting conditions under future equity awards. The compensation and stock option committees believed that this
approach of removing the risk of loss on the “earned” portions of these awards was important in ensuring that the officers were
not being treated unfairly vis-à-vis other grantees and was preferable to paying a portion of these awards in cash as we did for
other grantees. As a result, the compensation and stock option committees authorized us to enter into amendments with each of
the executive officers to remove the compliance vesting conditions from their 2007 and 2008 equity awards, thereby permitting
these awards to vest on their original schedule. As of the filing date of this report, we have finalized most of these amendments.
In addition, the 2009 annual equity awards to our executive officers approved on March 4, 2009 and May 20, 2009 (unlike the
grants made to other employees) did not contain these compliance vesting conditions, however, our most recent officer grant,
approved on March 17, 2010, did contain a plan capacity vesting condition due to plan capacity limitations at such time.
155
Review of Executive Compensation Arrangements
Over the course of the second half of 2008 and throughout 2009, the compensation committee, in consultation with its
independent compensation consultant and other advisors, undertook a review of the employment terms of our senior
management, including our executive officers, to ensure that these arrangements were at market levels and contained market
terms and conditions. This review was motivated both by a desire to continue to improve executive retention during our extended
filing delay period as well as by a desire to remain competitive from a compensation perspective generally. As a result of this
process, we have entered into, or are currently in discussions regarding, new or amended employment agreements with each of
our executive officers to provide, among other things, for enhanced severance benefits in the event of a termination in connection
with a corporate transaction. A more detailed discussion of these updated arrangements is provided under “— Executive Officer
Severance Benefits and Change in Control Provisions” below. In addition to the goals of enhancing executive officer retention
and bringing the terms of our executive employment arrangements up to market generally, the compensation committee also
believed that it was in our best interest to provide appropriate change in control protections to our executive officers so they
would not be distracted by personal considerations in the event of a business combination transaction that may be beneficial to
our stockholders but may result in the loss of the officer’s position.
2009 Retention Awards
In 2009, we entered into retention award letter agreements with each of our executive officers which provide for the payment of
cash bonuses over a two-year period ending in April 2011 (the “2009 retention bonuses”). At Mr. Bodner’s request, the
compensation committee did not approve a 2009 retention bonus for him. As with the 2007 retention programs, the 2009
retention bonus program was designed in consultation with the compensation committee’s independent compensation consultant.
Tax Implications
To maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the
compensation committee has not adopted a policy that all compensation must be deductible under Section 162(m) of the Internal
Revenue Code, however, we attempt to satisfy the requirements for deductibility under Section 162(m) wherever possible.
156
COMPENSATION COMMITTEE REPORT
The compensation committee has reviewed and discussed the “Compensation Discussion and Analysis” section of this report
with management. Based on its review and discussions with management regarding such section of this report, the compensation
committee recommended to the board of directors that the “Compensation Discussion and Analysis” section be included in this
report.
Compensation Committee:
Andre Dahan, Chairman
Victor DeMarines
Kenneth Minihan
Shefali Shah
The foregoing report shall not be deemed incorporated by reference by any general statement incorporating by reference this
report into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended,
except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under
such Acts.
Compensation Committee Interlocks and Insider Participation
No executive officer has served on the board of directors or compensation committee of any other entity that has or has had one
or more executive officers who served as a member of the company’s board of directors or compensation committee. None of the
members of the compensation committee is or has ever been an officer or employee of the company.
157
584,230
506,616
—
206,818
238,298
—
206,818
213,650
160,300
205,040 (6)
245,586
175,843
81,148 (7)
146,356
135,549
158,229
139,410
147,700
24,000
24,000
7,500
1,460,955
999,652
254,358
14,644
11,969
12,731
1,603,375
1,312,562
1,106,574
97,030
93,388
93,621
1,642,636
1,353,332
1,080,293
51,620
52,188
46,963
1,132,773
971,789
790,306
14,000
48,672 (8)
2,000
1,171,488
952,120
731,572
Executive Compensation
Summary Compensation Table
The following table lists the annual compensation of our named executive officers for the three years ended January 31, 2009.
Name and Principal Position
Dan Bodner
President and Chief Executive Officer and
Corporate Officer
Douglas Robinson
Chief Financial Officer and Corporate Officer
Year
Ended
January Salary
($)
31,
2009 600,000
2008 506,800
2007 440,000
Bonus
($)(1)
—
—
447,300
Non-Equity
Incentive Plan
Awards Awards Compensation
Option
Stock
($)(2)
($)(2)
($)(3)
2,156,104 784,867
1,531,006 985,935
960,799 1,209,953
All Other
Compensation
($)(4)
41,090
36,412
37,337
Total ($)
4,166,291
3,566,769
3,095,389
2009 354,000
2008 340,000
2007 151,458 (5) 95,400 (5)
—
—
876,137
397,354
—
—
—
—
Elan Moriah
President, Verint Witness Actionable Solutions
and Verint Video Intelligence Solutions and
Corporate Officer
2009 354,000
2008 340,000
2007 325,000
—
—
—
818,775 209,138
427,212 319,731
173,656 434,887
Meir Sperling
President, Verint Communications Intelligence
and Investigative Solutions and Corporate Officer
2009 345,899 (6)
2008 277,601
2007 244,404
—
—
—
785,529 209,138
420,830 315,927
173,656 392,769
David Parcell
Managing Director, EMEA and Corporate Officer
2009 348,695 (7) 102,823 (7) 458,259
67,413
2008 376,470
—
2007 334,674
90,228
171,156 158,206
68,753 204,367
Peter Fante
Chief Legal Officer, Chief Compliance Officer,
Secretary and Corporate Officer
2009 325,000
2008 292,500
2007 280,000
—
25,590
—
90,228
584,031
258,757
60,159 241,713
187,191
(1) Includes annual bonuses paid based on general performance reviews by the compensation committee not tied to pre-defined
performance goals or other special bonuses.
(2) Reflects the dollar amount recognized for financial statement reporting purposes for years ended January 31, 2009, 2008,
and 2007, in accordance with SFAS No. 123(R), for RSUs, shares of restricted stock, and stock options awarded in and
prior to the years ended January 31, 2009, January 31, 2008, and January 31, 2007. For further discussion of our accounting
for equity compensation, see Note 14, “Employee Benefit Plans” to the consolidated financial statements included in Item
15.
(3) Amount represents performance-based annual cash bonuses tied to pre-defined performance goals.
(4) See the table below for additional information on “All Other Compensation” amounts for the year ended January 31, 2009.
“All Other Compensation” does not include premiums for group life, health, or disability insurance that is available
generally to all salaried employees in the country in which the executive officer is employed and do not discriminate in
scope, terms, or operation in favor of our executive officers or directors.
(5) Represents pro rated portion of $325,000 base salary and of $189,000 bonus approved by the compensation committee for
Mr. Robinson for partial year of service in the year ended January 31, 2007.
158
(6) Mr. Sperling received a salary of NIS 1,238,892 per annum ($345,899 based on the average exchange rate from February 1,
2008 through January 31, 2009 of NIS 1=$0.2792) and a performance-based bonus of NIS 860,069 ($205,040 based on the
April 1, 2009 exchange rate of NIS 1=$0.2384).
(7) Mr. Parcell received a salary of £192,500 per annum ($348,695 based on the average exchange rate from February 1, 2008
through January 31, 2009 of £1= $1.8114) and a performance-based bonus of £52,368 ($81,148) paid in installments based
on the average exchange rate from September 1, 2008 through March 31, 2009 of £1= $1.5496). For the year ended
January 31, 2009, Mr. Parcell also received a discretionary bonus of $30,000 and £36,850 ($72,823 based on the May 31,
2008 exchange rate of £1=$1.9762) representing the second half of his 2007 cash retention bonus, which was earned and
paid in 2008.
(8) Includes a one-time relocation allowance of $30,000 for Mr. Fante.
All Other Compensation Table (1)
Car Allowance
or Cost of
Company Car Professional Accrued Statutory Supplemental
Employer Severance
Retirement
Fund
Contribution Contribution Contribution
($)
Study Fund
($)
($)
Plus Fuel
Allowance
($)
2,000
2,000
2,000
19,387
22,389
2,000
—
—
—
27,698
—
—
—
—
—
25,942
—
—
14,650
12,000
12,644
18,290
26,484
12,000
Advice
Allowance
($)
20,000
10,000
—
—
2,747
—
Vacation Recreation
Payout Payment
($)
($)
—
—
—
5,066
—
—
—
—
647
—
—
Life
Insurance
($)
4,440
Total
($)
41,090
— 24,000
— 14,644
— 97,030
— 51,620
— 14,000
Name
Dan Bodner
Douglas Robinson
Elan Moriah
Meir Sperling (2)
David Parcell (3)
Peter Fante
(1) This supplemental table is provided as additional information for our stockholders and is not intended as a substitute for the
information presented in the “Summary Compensation Table”.
(2) For the year ended January 31, 2009, Mr. Sperling received a company contribution to his retirement fund of NIS 69,438
($19,387), to his severance fund of NIS 99,208 ($27,698), to his study fund of NIS 92,917 ($25,942), use of a company car
plus a fuel reimbursement allowance which cost us NIS 65,510 ($18,290) for the period, payout of accrued vacation of NIS
18,145 ($5,066), and a statutory recreation payment of NIS 2,317 ($647), in each case, based on the average exchange rate
from February 1, 2008 through January 31, 2009 of NIS 1=$0.2792).
(3) For the year ended January 31, 2009, Mr. Parcell received a company contribution to his retirement fund of £12,360
($22,389), use of a company car plus a fuel reimbursement allowance which cost us £14,621 ($26,484) for the period, and
reimbursement of professional advice allowance of £1,516 ($2,747), in each case, based on the average exchange rate from
February 1, 2008 through January 31, 2009 of £1= $1.8114).
159
Grants of Plan-Based Awards for the Year Ended January 31, 2009
The following table sets forth information concerning equity grants to our named executive officers during the year ended
January 31, 2009. For the sake of clarity, the table also contains information about awards made in other years to the extent that
the performance goal for any tranche of such awards was set in the year ended January 31, 2010.
Estimated Possible Payouts
Under Non-Equity Incentive
Plan Awards
Estimated Future
Payouts Under Equity
Incentive Plan Awards
All Other Stock Grant-Date
Awards: Number Fair Value
of Shares of
of Stock
123(R)
Threshold Target Max
($)
($)(1)
($)
Threshold
(#)
—
—
Target Max Stock or Units and Option
Awards(2)
$ 823,125
(#)
—
37,500
—
(#)
(#)
Name
Dan Bodner
Douglas
Robinson
Elan Moriah
Date of
Committee
123(R)
Approval Grant
Date
of Grant
5/28/2008
5/28/2008
Type of Award
RSU
(Time-vested
grant)(3)
5/28/2008 5/28/2008 (8)
RSU
(Performance-
5/28/2008 3/18/2009 (8)
vested grant)(4)(5) 5/28/2008 3/17/2010 (8)
7/2/2007
1/31/2008 (8)
7/2/2007 5/28/2008 (8)
7/2/2007 3/18/2009 (8)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2008 Annual
Bonus
n/a
n/a
390,000
600,000
1,140,000
5/28/2008
5/28/2008
RSU (Time-vested
grant)(3)
5/28/2008 5/28/2008 (8)
RSU
(Performance-
5/28/2008 3/18/2009 (8)
vested grant)(4)(5) 5/28/2008 3/17/2010 (8)
7/2/2007
1/31/2008 (8)
7/2/2007 5/28/2008 (8)
7/2/2007 3/18/2009 (8)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5/28/2008
5/28/2008
RSU (Time-vested
grant)(3)
5/28/2008 5/28/2008 (8)
RSU
(Performance-
5/28/2008 3/18/2009 (8)
vested grant)(4)(5) 5/28/2008 3/17/2010 (8)
1/31/2008 (8)
7/2/2007
7/2/2007 5/28/2008 (8)
7/2/2007 3/18/2009 (8)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2008 Annual
Bonus
n/a
n/a
138,060
212,400
403,560
160
— 12,500 (9) 12,500 12,500
6,250 (9) 12,500 12,500
—
7,500 (9) 12,500 12,500
—
— 14,075 (9) 18,766
18,766
— 14,075 (9) 18,767 18,767
9,384 (9) 18,767 18,767
—
—
—
—
— $ 274,375
— $
42,500
— $ 307,250
— $ 347,171
— $ 411,936
63,808
— $
—
—
—
—
—
22,557
$ 495,126
7518
7,518 (9) 7518
7518
3,759 (9) 7518
7520
4,512 (9) 7520
3,225 (9)
4,300
4,300
3,225 (9) 4,300 4,300
2,150 (9) 4,300 4,300
—
—
—
—
7,518 (9) 7,518 7,518
3,759 (9) 7,518 7,518
4,512 (9) 7,520 7,520
3,766
3,766
2,825 (9)
2,825 (9) 3,767 3,767
1,884 (9) 3,767 3,767
—
—
—
— $ 165,020
— $
25,561
— $ 184,842
79,550
— $
94,385
— $
14,620
— $
—
—
22,557
$ 495,126
— $ 165,020
— $
25,561
— $ 184,842
69,671
— $
82,686
— $
12,808
— $
—
—
2008 Annual
Bonus
n/a
n/a
138,060
212,400
403,560
—
—
Date of
Committee
123(R)
Approval Grant
Date
5/28/2008
of Grant
5/28/2008
5/28/2008
5/28/2008(8)
Estimated Possible Payouts
Under Non-Equity Incentive
Plan Awards
Target
($)
Threshold
($)(1)
Max
($)
—
—
—
—
—
—
5/28/2008 3/18/2009(8)
5/28/2008 3/17/2010(8)
7/2/2007 1/31/2008(8)
7/2/2007 5/28/2008(8)
7/2/2007 3/18/2009(8)
—
—
—
—
—
116,158 178,705 339,540
—
—
—
—
—
—
—
—
—
—
Estimated Future
Payouts Under Equity
Incentive Plan Awards
123(R)
of Shares of
All Other Stock Grant Date
Awards: Number Fair Value
of Stock
and Option
Awards(2)
$ 440,098
20,050
(#)
Target Max Stock or Units
Threshold
(#)
—
(#)
—
(#)
—
6,683 (9)
6683
6683
—
$ 146,692
3,342 (9) 6683 6683
4,010 (9) 6684 6684
2,825 (9) 3,766 3,766
2,825 (9) 3,767 3,767
1,884 (9) 3,767 3,767
— —
—
— $
22,722
— $ 164,293
69,671
— $
82,686
— $
12,808
— $
—
—
5/28/2008
5/28/2008
5/28/2008
5/28/2008(8)
—
—
—
—
—
—
—
—
—
20,050
$ 440,098
6,683 (9)
6,683
6,683
—
$ 146,692
Name
Meir Sperling
Type of Award
RSU (Time-vested grant)
(3)
RSU (Performance-
vested
grant)(4)(5)
2008 Annual Bonus(6)
n/a
n/a
David Parcell
RSU (Time-vested grant)
(3)
RSU (Performance-
vested
grant)(4)(5)
5/28/2008 3/18/2009(8)
5/28/2008 3/17/2010(8)
7/2/2007 1/31/2008(8)
7/2/2007 5/28/2008(8)
7/2/2007 3/18/2009(8)
—
—
—
—
—
103,064 158,560 301,264
—
—
—
—
—
—
—
—
—
—
3,342 (9) 6,683 6,683
4,010 (9) 6,684 6,684
2,125 (9) 2,833 2,833
2,125 (9) 2,833 2,833
1,417 (9) 2,834 2,834
— —
—
— $
22,722
— $ 164,293
52,411
— $
62,184
— $
9,636
— $
—
—
2008 Annual Bonus(7)
n/a
n/a
Peter Fante
RSU (Time-vested grant)
(3)
RSU (Performance-
vested
grant)(4)(5)
5/28/2008
5/28/2008
5/28/2008
5/28/2008(8)
—
—
—
—
—
—
—
—
—
20,050
$ 440,098
6,683 (9)
6,683
6,683
—
$ 146,692
5/28/2008 3/18/2009(8)
5/28/2008 3/17/2010(8)
7/2/2007 1/31/2008(8)
7/2/2007 5/28/2008(8)
7/2/2007 3/18/2009(8)
—
—
—
—
—
105,625 162,500 308,750
—
—
—
—
—
—
—
—
—
—
3,342 (9) 6,683 6,683
4,010 (9) 6,684 6,684
1,450 (9) 1,933 1,933
1,450 (9) 1,933 1,933
967 (9) 1,934 1,934
— —
—
— $
22,722
— $ 164,293
35,761
— $
42,429
— $
6,576
— $
—
—
2008 Annual Bonus
n/a
n/a
(1) The threshold column corresponds to the minimum bonus payable to the executive officer assuming that minimum
performance goals are achieved. If minimum performance goals are not achieved, the bonus payable to the executive officer
would be zero.
(2) The 123(R) grant-date fair value of equity awards is based on the target number of shares and calculated using the closing
price of our common stock on the 123(R) grant date, which is not always the same as the date the stock option committee
approved the grant. The following table summarizes the grant-date fair value of the July 2, 2007 and May 28, 2008
performance-vested awards based on the target number of shares and calculated using the closing price of our common
stock on July 2, 2007 ($30.77) and May 28, 2008 ($21.95), the date the stock option committee approved the grants.
161
Name
Dan Bodner
Douglas Robinson
Elan Moriah
Meir Sperling
David Parcell
Peter Fante
Target
Shares
12,500
12,500
12,500
18,766
18,767
18,767
7,518
7,518
7,520
4,300
4,300
4,300
7,518
7,518
7,520
3,766
3,767
3,767
6,683
6,683
6,684
3,766
3,767
3,767
6,683
6,683
6,684
2,833
2,833
2,834
6,683
6,683
6,684
1,933
1,933
1,934
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Date of Board
Approval of Grant
5/28/2008 (1st tranche)
5/28/2008 (2nd tranche)
5/28/2008 (3rd tranche)
7/2/2007 (1st tranche)
7/2/2007 (2nd tranche)
7/2/2007 (3rd tranche)
5/28/2008 (1st tranche)
5/28/2008 (2nd tranche)
5/28/2008 (3rd tranche)
7/2/2007 (1st tranche)
7/2/2007 (2nd tranche)
7/2/2007 (3rd tranche)
5/28/2008 (1st tranche)
5/28/2008 (2nd tranche)
5/28/2008 (3rd tranche)
7/2/2007 (1st tranche)
7/2/2007 (2nd tranche)
7/2/2007 (3rd tranche)
5/28/2008 (1st tranche)
5/28/2008 (2nd tranche)
5/28/2008 (3rd tranche)
7/2/2007 (1st tranche)
7/2/2007 (2nd tranche)
7/2/2007 (3rd tranche)
5/28/2008 (1st tranche)
5/28/2008 (2nd tranche)
5/28/2008 (3rd tranche)
7/2/2007 (1st tranche)
7/2/2007 (2nd tranche)
7/2/2007 (3rd tranche)
5/28/2008 (1st tranche)
5/28/2008 (2nd tranche)
5/28/2008 (3rd tranche)
7/2/2007 (1st tranche)
7/2/2007 (2nd tranche)
7/2/2007 (3rd tranche)
162
Fair Value on Date
of Board Approval
274,375
274,375
274,375
577,430
577,461
577,461
165,020
165,020
165,064
132,311
132,311
132,311
165,020
165,020
165,064
115,880
115,911
115,911
146,692
146,692
146,714
115,880
115,911
115,911
146,692
146,692
146,714
87,171
87,171
87,202
146,692
146,692
146,714
59,478
59,478
59,509
For further discussion of our accounting for equity compensation, see Note 14, “Employee Benefit Plans” to the
consolidated financial statements included in Item 15.
(3) The May 28, 2008 time-based award vests 1/3 on April 3, 2009, 1/3 on April 3, 2010, and 1/3 on May 28, 2011 and as of
January 31, 2009 was subject to the special vesting conditions described in “- Narrative to ‘Grants of Plan-Based Awards’
Table”.
(4) The May 28, 2008 performance award vests 1/3 upon the stock option committee’s determination of our achievement of
specified revenue targets (set by the stock option committee for the relevant performance period) for the period from
May 1, 2008 through January 31, 2009, 1/3 upon the determination of such achievement for the period from February 1,
2009 through January 31, 2010, and 1/3 upon the determination of such achievement for the period from February 1, 2010
through January 31, 2011 (provided that, with respect to the period from February 1, 2010 through January 31, 2011, no
such determination by the stock option committee shall be final until on or after May 28, 2011), and as of January 31, 2009
was subject to the special vesting conditions described in “— Narrative to ‘Grants of Plan-Based Awards’ Table”.
(5) The July 2, 2007 performance award vests 1/3 upon the stock option committee’s determination of our achievement of
specified revenue targets (set by the stock option committee for the relevant performance period) for the period from
August 1, 2007 through January 31, 2008, 1/3 upon the determination of such achievement for the period from February 1,
2008 through January 31, 2009, and 1/3 upon the determination of such achievement for the period from February 1, 2009
through January 31, 2010 (provided that, with respect to the period from February 1, 2009 through January 31, 2010, no
such determination by the stock option committee shall be final until on or after July 2, 2010), and as of January 31, 2009
was subject to the special vesting conditions described in “— Narrative to ‘Grants of Plan-Based Awards’ Table”.
(6) On April 30, 2008, the compensation committee approved threshold, target, and maximum bonus awards for Mr. Sperling
of NIS 402,350, NIS 619,000, and NIS 1,176,100, respectively ($116,158, $178,705, and $339,540 based on the April 30,
2008 exchange rate of NIS1=$0.28870).
(7) On April 30, 2008, the compensation committee approved threshold, target, and maximum bonus awards for Mr. Parcell of
£52,000, £80,000, and £152,000, respectively ($103,064, $158,560 and $301,264 based on the April 30, 2008 exchange rate
of £1=$1.9820).
(8) Each performance award contains three equal tranches which vest based on three separate performance periods. Dates
correspond to the SFAS No. 123(R) grant date applicable to the first, second, and third tranches, respectively, and are based
on the date the stock option committee approved the performance goal for the applicable performance period.
(9) Represents the threshold number of shares that were available to be earned in each of the 2007, 2008, and 2009
performance periods. The following table summarizes the actual number of shares earned for each of these performance
periods (which have now been completed). If the minimum performance goal is not achieved in any performance period, no
shares are earned for that period.
Performance Grant Approved July 2, 2007
Name
Dan Bodner
Douglas Robinson
Elan Moriah
Meir Sperling
David Parcell
Peter Fante
for 2007
Actual Shares Earned Actual Shares Earned Actual Shares Earned
for 2008
Performance Period Performance Period Performance Period
18,767
4,300
3,767
3,767
2,834
1,934
15,275
3,500
3,065
3,065
2,306
1,573
18,625
4,267
3,737
3,737
2,811
1,918
for 2009
163
Name
Dan Bodner
Douglas Robinson
Elan Moriah
Meir Sperling
David Parcell
Peter Fante
Performance Grant Approved May 28, 2008
Actual Shares Earned Actual Shares Earned
for 2008
for 2009
Performance Period Performance Period
12,500
7,518
7,518
6,683
6,683
6,683
12,500
7,519
7,519
6,684
6,684
6,684
Further Information Regarding “Summary Compensation” Table and “Grants of Plan-Based Awards” Table
As of the filing date of this report, each of our executive officers other than Mr. Sperling is party to an employment agreement
with us. Each agreement provides for certain severance payments and benefits, including in connection with a change in control.
See “— Executive Officer Severance Benefits and Change in Control Provisions” below for a discussion of these severance and
change in control benefits, as well as a description of the restrictive covenants and clawback provisions contained in such
agreements.
The agreements with our U.S. executive officers generally provide for an initial term of two years, followed by automatic one-
year renewals (unless terminated by either party in accordance with the agreement and subject to required notice). The
agreements with our non-U.S. executive officers do not provide for a fixed term. Mr. Sperling has a customary offer letter from
us and a letter agreement regarding the release of his severance, retirement, and disability insurance funds in the event of a
termination event, but does not currently have a formal employment agreement.
Narrative to “Summary Compensation” Table
As discussed in the “Compensation Discussion and Analysis” above, each employment agreement provides for an annual base
salary, target bonus (subject to the achievement of performance goals), and certain perquisites. Although target bonuses are
specified in each employment agreement, bonuses are not guaranteed and are paid based on the achievement of performance
goals. In Mr. Robinson’s case, the target bonus is fixed at 60% of his base salary under the terms of his employment agreement.
For the other executive officers party to an employment agreement, the target bonus is expressed as a dollar amount or an
amount denominated in local currency. As of January 31, 2009, the target bonuses specified by the employment agreements were
as follows: $104,500 (for Mr. Fante), $182,900 (for Mr. Moriah), and £38,000 (for Mr. Parcell). Mr. Parcell’s contractual target
bonus of £38,000 corresponded to $54,367 as of January 31, 2009 based on an exchange rate of £1=$1.4307 on such date. As of
January 31, 2009, Messrs. Bodner and Sperling had not entered into employment agreements with us and therefore did not yet
have contractually defined target bonuses. Mr. Sperling’s offer letter provides for an annual base salary and a discretionary
annual bonus. Historically, the target bonuses for each executive officer established by the compensation committee as part of its
annual compensation review process has equaled or exceeded the target bonus specified in the officer’s employment agreement
(if any) and the target bonus from the previous year.
164
Narrative to “All Other Compensation” Table
We provide a limited amount of perquisites to our executive officers, which vary from officer to officer. Each of the executive
officers is entitled to use of a company car or an annual car allowance. Messrs. Sperling and Parcell are entitled to an annual
allowance for fuel reimbursement. Messrs. Bodner, Robinson, and Fante are entitled to an annual allowance for legal, tax, or
accounting advice. In some years, Mr. Parcell has received reimbursement of a modest amount of legal or tax advice as agreed
by us on a case by case basis in connection with proposed modifications of his employment arrangements. All executive officers
receive the same health insurance and company-paid group life and disability insurance offered to all other employees in the
country in which the executive officer is employed. In addition, Mr. Bodner has historically received a supplemental company-
paid life insurance policy.
Executive officers in the U.S. receive the same partial match of their 401(k) contributions as all other U.S. employees, up to a
maximum company contribution of $2,000 per year.
In the case of Mr. Parcell, we contribute a percentage of his base salary to a retirement fund on the same basis as other U.K.
employees. Under the retirement fund Mr. Parcell, can elect to contribute a percentage of his monthly salary to the fund, which is
administered by an outside third party, similar to a 401(k). If he elects to contribute 3% or less of his salary, we contribute an
amount equal to 4% of his salary. If he elects to contribute 4% of salary, our contribution is 5%. If he elects to contribute 5% or
more, our contribution is 6%. Our contributions are incremental to his salary and are paid by us directly to the third-party
provider.
Like all Israeli employees, under Israeli law, Mr. Sperling is entitled to severance pay equal to one month’s salary for each year
of employment upon termination without cause (as defined in the Israel Severance Pay Law). To satisfy this requirement, for all
Israeli employees, including Mr. Sperling, we make contributions on behalf of the employee to a severance fund. This severance
fund is often part of a larger savings fund which also includes a retirement fund and in some cases an insurance component. Each
employee can elect to contribute an amount equal to between 5% and 7% of his or her monthly salary to the retirement fund. We
contribute an amount equal to 5% of the employee’s monthly salary to the retirement fund plus an additional amount equal to
8.33% of the employee’s monthly salary to the severance fund. The employee is not required to pay anything towards the
severance fund. Our contributions are incremental to the employee’s base salary and, except as noted below, are paid by us
directly to the third-party plan administrator. Applicable tax law permits allocations made by the employer to the retirement fund
to be made on a tax-free basis up to a limit set by applicable Israeli tax regulations. Under local Israeli company policy, the
employee may request that any company contributions in excess of this limit be made directly to him or her rather than being
placed in the retirement fund. For executives like Mr. Sperling, if the amount in the severance fund is insufficient to cover the
required statutory payment under Israeli labor law at the time of a termination event, we are obligated to supplement the amounts
in the severance fund.
165
In addition, all Israeli employees, including Mr. Sperling, are also entitled to participate in a continuing education fund, often
referred to as a study fund. The continuing education fund is a savings fund from which the employee can withdraw on a tax-free
basis for any purpose after six years, irrespective of his or her employment status with us. Each month, eligible employees
contribute 2.5%, and we contribute 7.5%, of the employee’s base salary to the study fund. Applicable tax law permits a portion
of the company contributions to the study fund to be made tax-free. Under local Israeli company policy, the employee may
request that any company contributions in excess of this limit be made directly to him or her rather than being placed in the fund.
Our contributions are incremental to the employee’s base salary and, except as noted above, are paid by us directly to the third-
party plan administrator.
Under applicable Israeli law, each employee is paid a small annual amount for recreation based on the employee’s tenure and a
per-diem rate published by the government. Under local Israeli company policy, our Israeli employees are also entitled to receive
a cash payment in exchange for vacation days in accordance with the terms of the policy.
Narrative to “Grants of Plan-Based Awards” Table
All of the equity awards listed in the table entitled “Grants of Plan-Based Awards” were made under or subsequently allocated to
the Verint Systems Inc. Stock Incentive Compensation Plan or the Verint Systems Inc. Amended and Restated 2004 Stock
Incentive Compensation Plan (each as amended). Time-based equity awards for officers normally vest over a three- or a four-
year period. Performance-based equity awards to date have been comprised of three separate vesting periods corresponding to
three separate performance periods which generally correspond to our fiscal year. Specific vesting schedules for each award
listed in the table entitled “Grants of Plan-Based Awards” are provided in the footnotes to the table.
All of the equity awards granted to our executive officers in the years ended January 31, 2009 and 2008 were made subject to
special “compliance” vesting conditions which override the regular time-vesting or performance-vesting schedule of the awards.
These compliance vesting conditions require us to be both current with our SEC filings and re-listed on NASDAQ or another
nationally recognized exchange for the awards to vest. The May 2008 awards also require that we have received stockholder
approval of a new equity compensation plan or have additional share capacity under an existing stockholder-approved equity
compensation plan for the 2008 awards to vest. If any of these compliance vesting conditions is not satisfied on the date the
awards would otherwise vest, the portion of the award that would otherwise vest remains unvested until such time as all of the
applicable compliance vesting conditions are satisfied. As described in the Compensation Discussion and Analysis above, the
compensation and stock option committees subsequently authorized us to enter into amendments with each of the executive
officers to remove the compliance vesting conditions, thereby permitting these awards to vest on their original schedule. As of
the filing date of this report, we have finalized most of these amendments. For our U.S. executive officers, these amendments
also provided for a delay in the delivery of the shares underlying these awards subject to limitations imposed by Section 409A of
the Internal Revenue Code.
166
Outstanding Equity Awards at January 31, 2009
The following table sets forth information regarding various equity awards held by our named executive officers as of
January 31, 2009. The market value of all RSU and restricted stock awards is based on the closing price of our common stock on
the last trading day of the year ended January 31, 2009 ($6.50 on January 30, 2009).
167
Option Awards
Number of Number of
Securities Securities
Underlying Underlying
Unexercised Unexercised Option
Options
Options
Number of
Plan Awards:
Market or Payout
Shares or Market Value
of Shares or Unearned Shares, Value of Unearned
Units of
Stock That Units of Stock Units or Other Shares, Units or
Exercise Option Have Not That Have Rights That Have Other Rights That
Have Not Vested
Price Expiration Vested Not Vested
($)
Not Vested
(#)
Number of
Date
(#)
(#)
(#)
($)
Stock Awards
Equity Incentive Equity Incentive
Plan Awards:
Name
Dan Bodner
Douglas
Robinson
Elan Moriah
Meir Sperling
David Parcell
Peter Fante
Date of
Board
Approval
of Grant
5/21/2002 (1)
3/5/2003 (1)
12/12/2003 (1)
12/9/2004 (1)
1/11/2006 (2),(3)
7/2/2007 (4)
7/2/2007 (5)
7/2/2007 (6)
5/28/2008 (9)
5/28/2008 (10)
Exercisable Unexercisable
—
—
—
—
22,000
—
—
—
—
—
16,635
40,000
37,200
80,000
66,000
—
—
—
—
—
12/9/2014
($)
16.00 5/21/2012
17.00 3/5/2013
23.00 12/12/2013
35.11
34.40 1/11/2016
—
—
—
—
—
—
—
—
—
—
7/2/2007 (7)
7/2/2007 (4)
7/2/2007 (8)
7/2/2007 (6)
5/28/2008 (9)
5/28/2008 (10)
5/21/2002 (1)
3/5/2003 (1)
12/12/2003 (1)
12/9/2004 (1)
1/11/2006 (2),(3)
7/2/2007 (4)
7/2/2007 (5)
7/2/2007 (6)
5/28/2008 (9)
5/28/2008 (10)
4/1/2001 (1)
5/21/2002 (1)
3/5/2003 (1)
12/12/2003 (1)
12/9/2004 (1)
1/11/2006 (2),(3)
7/2/2007 (4)
7/2/2007 (5)
7/2/2007 (6)
5/28/2008 (9)
5/28/2008 (10)
5/21/2002 (1)
3/5/2003 (1)
12/12/2003 (1)
12/9/2004 (1)
1/11/2006 (3)
7/2/2007 (4)
7/2/2007 (5)
7/2/2007 (6)
5/28/2008 (9)
5/28/2008 (10)
11/20/2002 (1)
12/12/2003 (1)
12/9/2004 (1)
1/11/2006 (3)
7/2/2007 (4)
7/2/2007 (5)
7/2/2007 (6)
5/28/2008 (9)
5/28/2008 (10)
—
—
—
—
—
—
2,446
20,000
18,750
25,000
15,000
—
—
—
—
—
2,446
2,446
25,000
25,000
25,000
15,000
—
—
—
—
—
2,446
7,500
11,250
20,000
—
—
—
—
—
—
6,250
18,750
20,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,000
—
—
—
—
—
—
—
—
—
—
5,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
16.00 5/16/2012
17.00 3/5/2013
23.00 12/12/2013
35.11 12/9/2014
34.40 1/11/2016
—
—
—
—
—
—
—
—
—
—
8.69 4/1/2011
16.00 5/16/2012
17.00 3/5/2013
23.00 12/12/2013
35.11 12/9/2014
34.40 1/11/2016
—
—
—
—
—
—
—
—
—
—
16.00 5/16/2012
17.00 3/5/2013
23.00 12/12/2013
35.11 12/9/2014
—
—
—
—
—
—
—
—
—
—
—
—
14.90 11/20/2012
23.00 12/12/2013
35.11 12/9/2014
—
—
—
—
—
—
—
—
—
—
—
—
168
—
—
—
—
9,675
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,500
—
—
—
—
—
—
—
—
—
—
2,500
—
—
—
—
—
—
—
—
—
2,000
—
—
—
—
—
—
—
—
1,750
—
—
—
—
—
—
—
—
—
62,888
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
16,250
—
—
—
—
—
—
—
—
—
—
16,250
—
—
—
—
—
—
—
—
—
13,000
—
—
—
—
—
—
—
—
11,375
—
—
—
—
—
—
—
—
—
—
38,800
56,300
52,668
37,500
37,500
25,800
22,400
12,900
12,067
22,557
22,556
—
—
—
—
—
28,200
11,300
10,570
22,557
22,556
—
—
—
—
—
—
27,200
11,300
10,570
20,050
20,050
—
—
—
—
—
8,000
8,500
7,951
20,050
20,050
—
—
—
—
25,200
5,800
5,425
20,050
20,050
—
—
—
—
—
252,200
365,950
342,342
243,750
243,750
167,700
145,600
83,850
78,436
146,621
146,614
—
—
—
—
—
183,300
73,450
68,705
146,621
146,614
—
—
—
—
—
—
176,800
73,450
68,705
130,325
130,325
—
—
—
—
—
52,000
55,250
51,682
130,325
130,325
—
—
—
—
163,800
37,700
35,263
130,325
130,325
(1) This award was fully vested at January 31, 2009.
(2) The vesting schedule for this option grant was/is 25% on January 11, 2007, 25% on January 11, 2008, 25% on January 11,
2009, and 25% on January 11, 2010.
(3) The vesting schedule for this restricted stock grant was/is 50% on January 11, 2008, 25% on January 11, 2009, and 25% on
January 11, 2010.
(4) The vesting schedule for this RSU grant was/is 50% on March 15, 2008 and 50% on July 2, 2010, and as of January 31,
2009, this award was subject to the special vesting conditions described below.
(5) The vesting schedule for this RSU grant was/is 33% on March 15, 2008, 33% on March 15, 2009, and 34% on July 2, 2010,
and as of January 31, 2009, this award was subject to the special vesting conditions described below.
(6) The vesting schedule for this RSU grant was/is 1/3 upon the stock option committee’s determination of our achievement of
specified revenue targets (set by the stock option committee for the relevant performance period) for the period from
August 1, 2007 through January 31, 2008, 1/3 upon the determination of such achievement for the period from February 1,
2008 through January 31, 2009, and 1/3 upon the determination of such achievement for the period from February 1, 2009
through January 31, 2010 (provided that, with respect to the period from February 1, 2009 through January 31, 2010, no
such determination by the stock option committee shall be final until on or after July 2, 2010), and as of January 31, 2009,
this award was subject to the special vesting conditions described below.
(7) The vesting schedule for this RSU grant was/is 25% on August 14, 2007, 25% on August 14, 2008, 25% on August 14,
2009, and 25% on August 14, 2010, and as of January 31, 2009, this award was subject to the special vesting conditions
described below.
(8) The vesting schedule for this RSU grant was/is 30% on August 14, 2007, 30% on August 14, 2008, 30% on August 14,
2009, and 10% on July 2, 2010, and as of January 31, 2009, this award was subject to the special vesting conditions
described below.
(9) The May 28, 2008 award vests 1/3 on April 3, 2009, 1/3 on April 3, 2010, and 1/3 on May 28, 2011 and as of January 31,
2009 was subject to the special vesting conditions described below.
(10) The May 28, 2008 performance award vests 1/3 upon the stock option committee’s determination of our achievement of
specified revenue targets (set by the stock option committee for the relevant performance period) for the period from
May 1, 2008 through January 31, 2009, 1/3 upon the determination of such achievement for the period from February 1,
2009 through January 31, 2010, and 1/3 upon the determination of such achievement for the period from February 1, 2010
through January 31, 2011 (provided that, with respect to the period from February 1, 2010 through January 31, 2011, no
such determination by the stock option committee shall be final until on or after May 28, 2011), and as of January 31, 2009
was subject to the special vesting conditions described below.
All of the equity awards granted to our executive officers in the years ended January 31, 2009 and 2008 (including the special
2007 retention equity grants) were made subject to special “compliance” vesting conditions which override the regular time-
vesting or performance-vesting schedule of the awards. These compliance vesting conditions require us to be both current with
our SEC filings and re-listed on NASDAQ or another nationally recognized exchange for the awards to vest. The May 2008
awards also require that we have received stockholder approval of a new equity compensation plan or have additional share
capacity under an existing stockholder-approved equity compensation plan for the 2008 awards to vest. If any of these
compliance vesting conditions is not satisfied on the date the awards would otherwise vest, the portion of the award that would
otherwise vest remains unvested until such time as all of the applicable compliance vesting conditions are satisfied. As described
in the “Compensation Discussion and Analysis” above, the compensation and stock option committees subsequently authorized
us to enter into amendments with each of the executive officers to remove the compliance vesting conditions, thereby permitting
these awards to vest on their original schedule. As of the filing date of this report, we have finalized most of these amendments.
For our U.S. executive officers, these amendments also provided for a delay in the delivery of the shares underlying these awards
subject to limitations imposed by Section 409A of the Internal Revenue Code.
169
Option Exercises and Stock Vesting During the Year Ended January 31, 2009
No stock options were exercised during the year ended January 31, 2009. The value of stock awards realized on vesting is
calculated by multiplying the number of shares vesting by the closing price of our common stock on the vesting date. See the
table entitled “Outstanding Equity Awards at January 31, 2009” above for the vesting schedule of outstanding awards.
Name
Dan Bodner
Douglas Robinson
Elan Moriah
Meir Sperling
David Parcell
Peter Fante
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise
(#)
Value
Realized on
Exercise
($)
—
—
—
—
—
—
—
—
—
—
—
—
Number of
Shares
Value
Acquired on Realized on
Vesting
(#)
18,425
—
5,000
5,000
2,000
1,750
Vesting
($)
124,205
—
33,875
33,875
12,200
10,675
Executive Officer Severance Benefits and Change in Control Provisions
As of the filing date of this report, each of our executive officers other than Mr. Sperling is party to an employment agreement
with us. The following is a summary of the severance and change in control provisions of these employment agreements as of the
filing date of this report, with differences existing at January 31, 2009 noted under the “Provisions of Executive Officer
Agreements Historically” caption. The following also summarizes benefits that our non-U.S. executive officers may become
entitled to under local law or local company policy.
Provisions of Executive Officer Agreements at Present Date
Each of the employment agreements with our executive officers provides for an annual base salary and a performance-based
bonus target.
Severance Not in Connection with a Change in Control
In the event of an involuntary termination of employment (a termination without cause or a resignation for good reason) not in
connection with a change in control, the executive officers are, subject to their execution of a release and continued compliance
with the restrictive covenants described below, entitled to severance consisting of base salary and, for our U.S. executive
officers, reimbursement of health insurance premiums for 12 months (inclusive of any notice period required under the officer’s
employment agreement), or 18 months in the case of Mr. Bodner. Mr. Bodner is also entitled to 60 days advanced notice of any
termination other than for cause, continuation of his professional advice allowance, and access to his company-leased vehicle for
18 months in such instance.
170
In addition, in the event of an involuntary termination, each executive officer other than Mr. Bodner and Mr. Robinson is entitled
to a pro-rated portion of his annual bonus for such year plus an amount equal to 100% of his average annual bonus measured
over the last three years. Mr. Bodner’s agreement provides for a pro-rated portion of his annual bonus for such year plus an
amount equal to 150% of his target bonus. Mr. Robinson’s agreement provides for payment of 150% of his average annual bonus
measured over the last three years, but no pro-rated portion of his annual bonus for the year in question.
Severance in Connection with a Change in Control
In the event of a termination of employment in connection with a change in control, in lieu of the cash severance described
above, each of the officers who has entered into a new or amended employment agreement with us beginning in 2009 is entitled
to enhanced cash severance equal to the sum of 1.5 times base salary and target bonus, plus a pro-rated target bonus for the year
of termination, or in the case of Mr. Bodner, 2.5 times the sum of base salary and target bonus, plus a pro-rated target bonus for
the year of termination. We are currently in discussions regarding a formal employment agreement with Mr. Sperling and
amended employment agreements with Mr. Robinson and Mr. Parcell, which we expect would include similar change in control
benefits to Messrs. Moriah and Fante.
Equity
Other than in the case of Mr. Bodner, no equity acceleration is provided in the case of an involuntary termination not in
connection with a change in control. In the event of an involuntary termination of employment in connection with a change in
control, each of the employment agreements provides for acceleration of all unvested equity awards. Mr. Robinson’s agreement
provides for acceleration of his unvested equity awards in the event of a change in control whether or not his employment is
terminated. Each of the new or amended employment agreements signed beginning in 2009 also provides that all of the officer’s
outstanding equity awards will become fully vested if not assumed in connection with a change in control.
Other Provisions
Each of the employment agreements provides for customary restrictive covenants, with a covenant period ranging from 12 to
24 months, including a non-compete, a non-solicitation of customers and employees, and an indefinite non-disclosure provision.
Each agreement also contains a clawback provision which allows us to recoup from the officer, or cancel, a portion of the
officer’s incentive compensation (including bonuses and equity awards) for a particular year if we are required to restate our
financial statements for that year due to material noncompliance with any financial reporting requirement under the securities
laws as a result of the officer’s misconduct. The clawback applies from and after the year in which the employment agreement
was first signed to awards made during the term of the agreement. The amount to be recovered or forfeited is the amount by
which the incentive compensation in the year in question exceeded the amount that would have been awarded had the financial
statements originally been filed as restated. Each of our U.S. executive officers who has entered into a new or amended
employment agreement with us beginning in 2009 is also entitled to a gross-up for any excise taxes he may become subject to in
connection with a change in control. The terms “cause”, “good reason”, and “change in control” are defined in the forms of
employment agreements incorporated by reference into this report.
171
Provisions of Executive Officer Agreements Historically
As of January 31, 2009, Messrs. Bodner and Sperling had not entered into employment agreements with us and therefore did not
have any of the contractual benefits described in the preceding section. As of January 31, 2009 and the filing date of this report,
Mr. Sperling is party to a customary offer letter with us which provides for 90 days advanced notice in the event of a termination
of employment by either party. Mr. Sperling is also party to a letter agreement with us pursuant to which we have agreed to
release the full amounts in his severance, retirement, and disability insurance funds in the event of a termination event.
As noted above, Mr. Robinson’s and Mr. Parcell’s current employment agreements do not, and did not as of January 31, 2009,
provide for the enhanced cash severance or tax gross-ups in the event of a termination in connection with a change in control
described above.
As of January 31, 2009, Messrs. Moriah and Fante had not yet entered into the most recent amendments to their respective
employment agreements and therefore were not entitled to the enhanced cash severance and tax gross-up in the event of a
termination in connection with a change in control described above.
Benefits Under Local Law or Local Company Policy
As discussed under “- Narrative to ‘All Other Compensation’ Table” above, Mr. Sperling is entitled to severance pay equal to
one month’s salary for each year of employment upon termination without cause (as defined in the Israel Severance Pay Law)
under Israeli law applicable to all Israeli employees. We make payments into a severance fund to secure this severance obligation
during the course of Mr. Sperling’s employment and, unless there is a shortfall as described below, we are not responsible for
any payments at the time of a qualifying termination. As a result, these amounts are included in the table entitled “Summary
Compensation Table” above, but not in the table entitled “Potential Payments Upon Termination or Change in Control” below.
However, the table entitled “Potential Payments Upon Termination or Change in Control” does include any additional amount of
severance we are responsible for in excess of the balance in the severance fund at the time of a qualifying termination (in the
event there is a shortfall) based on the legally mandated formula described above.
172
In addition to any severance fund shortfall, Mr. Sperling is also entitled to a minimum notice period under Israeli law in the event
of an involuntary termination and to 90 days advanced notice of termination under his offer letter. Local company notice
guidelines for our Israeli employees subsume this legal notice requirement and, in Mr. Sperling’s case, exceed the requirements
of his offer letter. Assuming application of these local company guidelines, employees are entitled to between two weeks and
three and one-half months of pay depending on the circumstances of the termination and the employee’s tenure. In
Mr. Sperling’s case, assuming application of the guidelines at January 31, 2009, he would have been entitled to three and one-
half months of notice, during which he would receive continued salary and all benefits.
Employees in the United Kingdom are entitled to severance payments under local U.K. company policy in the event of an
involuntary termination in which the employee is made redundant (meaning that the termination resulted from us closing or
downsizing our U.K. operations or a particular function). Under this policy, U.K. employees receive between two and three
weeks of pay for each year of service depending on the employee’s age, with partial service years of six months or more being
rounded up. Assuming the application of this local company policy at January 31, 2009, Mr. Parcell would have been entitled to
three weeks of pay for each year of service in addition to the benefits provided under his employment agreement. The payment is
comprised of salary, pro rata bonus, and car allowance, but no other benefits.
Because payments under the foregoing Israeli and U.K. company guidelines or policies do not arise until a qualifying termination
event, these payments are included in the table entitled “Potential Payments Upon Termination or Change in Control” below, but
not in the table entitled “Summary Compensation Table” above.
Potential Payments Upon Termination or Change in Control
The table below outlines the potential payments and benefits that would have become payable by us to our named executive
officers in the event of an involuntary termination and/or a change in control, assuming that the relevant event occurred on
January 31, 2009. In reviewing the table, please note the following:
(cid:129)
The table does not include amounts that would be payable by third parties where we have no continuing liability, such
as amounts payable under private insurance policies, government insurance such as social security or national
insurance, or 401(k) or similar defined contribution retirement plans. As a result, the table does not reflect amounts
payable to Mr. Sperling or Mr. Parcell under the applicable local company retirement plan or retirement fund, for
which we have no liability at the time of payment.
(cid:129)
(cid:129)
Except as noted in the following bullet, the table does not include payments or benefits that are available generally to
all salaried employees in the country in which the executive officer is employed and do not discriminate in scope,
terms, or operation in favor of our executive officers or directors, such as short-term disability payments or payment
for accrued but unused vacation.
The table includes all severance or notice payments for which we are financially responsible, even if such payments
are available generally to all salaried employees in the country in which the executive officer is employed and do not
discriminate in scope, terms, or operation in favor of our executive officers or directors.
173
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
With respect to Mr. Sperling’s severance fund, the table includes the difference between the amount that would have
been owed to Mr. Sperling under applicable Israeli labor law in the event of an involuntary termination and the amount
in his severance fund at January 31, 2009.
As noted in the previous section, as of January 31, 2009, Messrs. Bodner and Sperling had not entered into
employment agreements with us, however, Mr. Sperling (but not Mr. Bodner) is included in the table below because
he was entitled to certain statutory severance benefits and advanced notice payments, as described below.
The information for Messrs. Robinson, Moriah, Parcell, and Fante included in the table below reflects their
entitlements as of January 31, 2009 and therefore excludes amounts attributable to any recent amendments to their
employment agreements (signed after January 31, 2009) providing for enhanced cash severance and other benefits in
the event of a termination in connection with a change in control.
The value of equity awards in the table below is based on the closing price of our common stock on the last trading
day of the year ended January 31, 2009, which was $6.50 on January 30, 2009.
All amounts are calculated on a pre-tax basis.
174
Name of Executive Officer and
Triggering Event
Douglas Robinson
Death
Disability
Resignation for Good
Reason/Involuntary Termination
without Cause
Resignation for Good
Reason/Involuntary Termination
without Cause in Connection
with CIC
CIC Only (continued employment)
Elan Moriah
Death
Disability
Resignation for Good
Reason/Involuntary Termination
without Cause
Resignation for Good
Reason/Involuntary Termination
without Cause in Connection
with CIC
CIC Only (continued employment)
Meir Sperling
Death
Disability
Resignation for Good
Reason/Involuntary Termination
without Cause
Resignation for Good
Reason/Involuntary Termination
without Cause in Connection
with CIC
CIC Only (continued employment)
David Parcell
Death
Disability
Resignation for Good
Reason/Involuntary Termination
without Cause
Resignation for Good
Reason/Involuntary Termination
without Cause in Connection
with CIC
CIC Only (continued employment)
Peter Fante
Death
Disability
Resignation for Good
Reason/Involuntary Termination
without Cause
Resignation for Good
Reason/Involuntary Termination
without Cause in Connection
with CIC
CIC Only (continued employment)
Salary
Continuation(1)
($)
Pro Rata
Bonus(2)
($)
Additional
Bonus(3)
($)
—
175,250
212,400
212,400
—
—
350,500
—
326,194
Accelerated
Equity
Awards(4)
($)
Cont. Health
(present
Insurance
Coverage
value)(5)
($)
Cont. Other
Benefits(6)
($)
Total
($)
—
—
—
29,462
14,731
—
—
241,862
402,381
29,462
—
706,156
350,500
—
—
—
326,194
—
768,820
768,820
—
175,250
206,818
103,409
—
—
350,500
206,818
193,589
—
—
—
29,462
—
29,462
14,731
—
—
—
—
1,474,976
768,820
236,280
293,390
29,462
—
780,369
350,500
—
206,818
—
193,589
—
634,940
—
—
—
123,779
123,779
—
—
—
—
—
—
—
—
114,456
114,456
—
—
—
—
—
—
—
402,522
194,956
103,317
—
—
—
—
—
—
—
—
29,462
—
—
—
—
—
—
—
1,415,309
—
—
—
14
25,907
149,700
14
—
—
25,907
—
149,700
—
—
—
114,456
114,456
2,535
28,941
732,271
402,522
—
194,956
—
103,317
—
432,582
—
—
162,500
158,229
158,229
—
—
325,000
158,229
156,976
—
—
—
2,535
—
29,462
14,731
28,941
—
1,164,853
—
—
—
187,691
335,460
29,462
—
669,667
325,000
—
158,229
—
156,976
—
508,788
—
29,462
—
—
—
1,178,455
—
175
(1) For Mr. Sperling, includes the difference between the amount that would have been owed to Mr. Sperling under applicable
Israeli labor law in the event of an involuntary termination at January 31, 2009 and the amount in his severance fund on
such date, or NIS 140,193 ($34,600 based on the January 31, 2009 exchange rate of NIS 1 = $0.2468) plus three and one-
half month’s base salary during his notice period assuming the application of local company notice guidelines equaling NIS
361,344 ($89,180 based on the January 31, 2009 exchange rate of NIS 1 = $0.2468). For Mr. Parcell, includes six months of
base salary during his contractual notice period, plus six months of severance under his supplemental employment contract,
plus an additional 24 weeks of salary (assuming a termination event on January 31, 2009) assuming the application of local
company redundancy policy, costing an aggregate of £281,346, or $402,522 as indicated in the table above, based on the
January 31, 2009 exchange rate of £1= $1.4307.
(2) For Mr. Parcell, includes six-month’s worth (or 50%) of the average annual bonus paid or payable to him over the course of
the three years ended January 31, 2009 as part of his six month contractual notice period, 100% of his target bonus that was
set for the year ended January 31, 2009 (assuming a termination event on January 31, 2009) as part of his supplemental
employment agreement plus an additional 24 week’s worth (assuming a termination event on January 31, 2009) of his
three-year average annual bonus assuming the application of local company redundancy policy, costing an aggregate of
£136,266, or $194,956 as indicated in the table above, based on the January 31, 2009 exchange rate of £1= $1.4307.
(3) For Mr. Parcell, represents the average annual bonus paid or payable to him over the course of the three years ended
January 31, 2009 as part of his supplemental employment agreement equaling £72,214 ($103,317 based on the January 31,
2009 exchange rate of £1= $1.4307).
(4) For equity awards other than stock options, value is calculated as the closing price of our common stock on the last trading
day in the year ended January 31, 2009 ($6.50 on January 30, 2009) times the number of shares accelerating. For stock
options, value is calculated as the difference between the closing price of our common stock on January 31, 2009 and the
option exercise price per share times the number of stock options accelerating.
(5) For executive officers other than Messrs. Parcell and Sperling, amounts shown represent the actual cost of the contractually
agreed number of months of COBRA payments. As of January 31, 2009, neither Mr. Parcell nor Mr. Sperling was entitled
to company-paid or reimbursed health insurance following a termination event, however, Mr. Parcell was entitled to
continued health benefits during his six-month notice period costing £1,772 or $2,535 as indicated in the table above, based
on the January 31, 2009 exchange rate of £1= $1.4307 and Mr. Sperling was entitled to continued health benefits during his
notice period assuming the application of local company notice guidelines costing NIS 55, or $14 as indicated in the table
above, based on the January 31, 2009 exchange rate of NIS 1 = $0.2648.
(6) For Mr. Sperling, assuming the application of local company notice guidelines, includes three and one-half months of
continued contributions to his retirement fund of NIS 20,253 ($4,998), to his severance fund of NIS 28,936 ($7,141), to his
study fund of NIS 27,101 ($6,688), disability insurance premiums of NIS 8,899 ($2,196), a statutory recreation payment of
NIS 676 ($167), and use of a company car plus a fuel reimbursement allowance costing NIS 19,107 ($4,716) for the period,
for a total of NIS 104,972 ($25,907), in each case, based on the January 31, 2009 exchange rate of NIS 1 = $0.2468. For
Mr. Parcell, includes six months of continued retirement plan contributions, car allowance/fuel reimbursement allowance,
and insurance premiums during his contractual notice period costing £6,180 ($8,842), £7,310 ($10,459), and £1,286
($1,840), respectively, plus an additional 24 weeks of car allowance assuming the application of local company redundancy
policy, costing £5,452 ($7,800), for a total of £20,228 ($28,941), in each case, based on the January 31, 2009 exchange rate
of £1= $1.4307.
Subsequent to January 31, 2009 (between October 2009 and the filing date of this report), Messrs. Bodner, Moriah, and Fante
entered into a new or amended employment agreement with us which materially augmented or altered their severance and/or
change in control benefits. The terms of these new or amended agreements are described in greater detail under “— Executive
Officer Severance Benefits and Change in Control Provisions” above.
176
Director Compensation for the Year Ended January 31, 2009
The following table summarizes the cash and equity compensation earned by each member of the board of directors during the
year ended January 31, 2009 for service as a director.
Name
Aronovitz, Avi (1),(5)
Baker, Paul (5)
Bodner, Dan
Bunyan, John (5)
Dahan, Andre (5)
DeMarines, Victor
Minihan, Kenneth
Myers, Larry
Safir, Howard
Shah, Shefali (5)
Spirtos, John (5),(6)
Wright, Lauren (5)
Fees Earned or
Paid in Cash
($)(2)
Stock
Awards
($)(3)
Option
Awards
($)(3)
—
—
—
—
—
191,600
127,500
192,500
139,500
—
—
—
—
—
—
—
—
128,227 (4)
128,227 (4)
128,227 (4)
128,227 (4)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
—
—
—
—
—
319,827
255,727
320,727
267,727
—
—
—
(1) Resigned from the board of directors on November 24, 2008.
(2) Represents amount earned for board of directors service during the year indicated regardless of the year of payment.
(3) Reflects the dollar amount recognized for financial statement reporting purposes for year ended January 31, 2009 in
accordance with SFAS No. 123(R).
(4) On May 28, 2008, each of Messrs. DeMarines, Minihan, Myers, and Safir received an award of 5,000 shares of restricted
stock in respect of board of directors service for the year ended January 31, 2009, vesting May 16, 2009. These were the
only equity awards made to our directors (for service as directors) in the year ended January 31, 2009. The fair value on the
date of board of directors approval of each of these awards was $109,750 based on a closing price of our common stock of
$21.95 on May 28, 2008.
(5) Comverse-designated director.
(6) Resigned from the board of directors June 12, 2009.
177
The following table summarizes the aggregate number of unvested stock options and unvested shares of restricted stock held by
each member of our board of directors (granted for service as a director) as of the end of the year ended January 31, 2009.
Name
Aronovitz, Avi
Baker, Paul
Bodner, Dan
Bunyan, John
Dahan, Andre
DeMarines, Victor
Minihan, Kenneth
Myers, Larry
Safir, Howard
Shah, Shefali
Spirtos, John
Wright, Lauren
Unvested Unvested Stock
Options
(#)
Awards
(#)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,000
5,000
5,000
5,000
—
—
—
We do not presently have any stock ownership guidelines in place for our directors, however, our insider trading policy prohibits
all personnel (including directors) from short selling in our securities, from short-term trades in our securities (open market
purchase and sale within three months), and from trading options in our securities. Due to our extended filing delay, other than
limited dispositions to the company to cover tax liabilities in connection with vestings, none of our present directors has been
able to sell any of our securities, including shares underlying equity awards, since January 2006.
Non-Independent Directors
Our non-independent directors, including Comverse designees and employee directors, do not currently receive any cash
compensation for serving on the board of directors or any committee of the board of directors. These directors may receive
grants of stock options or restricted stock for their service on the board of directors, in the discretion of the board of directors.
None of the Comverse designated directors received an equity grant in the year ended January 31, 2009. Mr. Bodner has not been
separately compensated for his service on the board of directors.
All directors (whether or not independent) are eligible to be reimbursed for their out-of-pocket expenses in attending meetings of
the board of directors or board of directors committees.
178
Independent Directors
The board of directors is responsible for establishing independent director compensation arrangements based on
recommendations from the compensation committee. These compensation arrangements are designed to provide competitive
compensation necessary to attract and retain high quality independent directors. The compensation committee annually reviews
the independent director compensation arrangements based on market studies or trends and from time to time engages its
independent compensation consultant to prepare a customized peer group analysis. In recent years, the compensation committee
and the board of directors have also placed special focus on the work load associated with the completion of our internal
investigation, restatement, audits, and outstanding SEC filings in establishing independent director compensation arrangements.
Our independent directors receive both an annual cash retainer (paid quarterly) as well as per-meeting fees for attendance of
meetings of the board of directors and board of directors committees. Independent directors also receive an annual equity grant.
As a result of the increased work load and time commitment associated with serving as a director during our extended filing
delay period, during this period, we have also introduced an annual fee for an independent director’s service as the board of
directors or a committee chair, a special quarterly cash retainer (for the duration of our extended filing delay period), and a per
diem fee for work done outside of board of directors and committee meetings.
The following table summarizes the compensation package for our independent directors for the year ended January 31, 2009.
Component of Compensation
Annual retainer (per annum)
Board meeting fee
Committee meeting fee
Annual equity grant
Special quarterly retainer (per quarter)
Chairmanship fee (per annum)
$50,000
$1,500
$750
5,000 shares of restricted stock (vesting annually for
12 months of service)
$10,000
Board
Audit
Compensation
Stock Option
Governance
$25,000
$20,000
$10,000
$5,000
$7,500
Per diem fee (for work outside meetings)
$2,500
Because the chairmanship of our board of directors, our compensation committee, and our corporate governance & nominating
committee is not presently held by an independent director, these chairmanship fees are not currently being paid.
179
On March 19, 2009, the special quarterly retainer for Mr. Myers, chairman of the audit committee, was increased to $20,000 per
quarter for the duration of our extended filing delay period in recognition of his special role and added responsibilities in
overseeing the completion of our restatement and audits.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 18, 2010
(the “Reference Date”) by:
(cid:129)
(cid:129)
(cid:129)
each person (or group within the meaning of Section 13(d)(3) of the Exchange Act) known by us to own beneficially
5% or more of our common stock;
each of our directors and named executive officers; and
all our directors and named executive officers as a group.
As used in this table, “beneficial ownership” means the sole or shared power to vote or direct the voting or to dispose or direct
the disposition of any equity security. A person is deemed to be the beneficial owner of securities that he or she has the right to
acquire within 60 days from the Reference Date through the exercise of any option, warrant, or right. Shares of our common
stock subject to options, warrants, or rights which are currently exercisable or exercisable within 60 days (assuming the
suspension of option exercises referred to in “Executive Compensation” under Item 11 is released) are deemed outstanding for
computing the ownership percentage of the person holding such options, warrants, or rights, but are not deemed outstanding for
computing the ownership percentage of any other person. The amounts and percentages are based upon 32,634,352 shares of
common stock outstanding as of the Reference Date and exclude 9,978,682 shares of common stock issuable to Comverse upon
conversion of shares of preferred stock (if converted on the Reference Date). The foregoing issued and outstanding share number
includes employee equity awards that have been settled but excludes awards that are vested but not yet delivered. The table
below, however, includes awards that have or will vest within 60 days of the Reference Date even if the underlying shares have
not yet been delivered.
180
Name of Beneficial Owner
Principal Stockholders:
Comverse Technology, Inc.
909 Third Avenue
New York, NY 10022
Comverse Technology, Inc.
909 Third Avenue
New York, NY 10022
Cadian Capital Management, LLC (5)
461 Fifth Avenue 24th Floor
New York, NY 10017
Platinum Partners (6)
152 West 57th Street 54th Floor
New York, NY 10019
Directors and Executive Officers:
Dan Bodner
Douglas E. Robinson
Peter Fante
Elan Moriah
David Parcell
Meir Sperling
Paul D. Baker
John Bunyan
Andre Dahan
Victor A. DeMarines
Kenneth A. Minihan
Larry Myers
Howard Safir
Shefali Shah
Lauren Wright
Stephen M. Swad
All executive officers and directors as a group (sixteen
persons)
Class
Number of Shares
Beneficially Owned(1)
Percentage of Total
Shares Outstanding
Common
18,589,023(2)
57.0%
Series A Preferred
10,072,966(3)
100%(4)
Common
2,302,525
Common
1,718,300
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
587,522(7)
108,656(8)
124,114(9)
195,745(10)
65,811(11)
200,712(12)
10,723(13)
0(14)
0(15)
36,000(16)
37,000(17)
25,000(18)
42,000(19)
0(20)
0(21)
0(22)
1,433,283
7.1%
5.3%
1.8%
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
4.2%
** Less than 1%
(1) Unless otherwise indicated and except pursuant to applicable community property laws, to our knowledge, each person or
entity listed in the table above has sole voting and investment power with respect to all shares listed as owned by such
person or entity.
(2) As the preferred stock is not currently convertible, it is not included in this number. If the preferred stock were converted to
common stock 60 days after the Reference Date, then the percentage of beneficial ownership of Comverse would equal
67.1%. Please see “Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities — Recent Sales of Unregistered Securities” under Item 5 and “Certain Relationships and Related Transactions,
and Director Independence — Preferred Stock Financing” under Item 13 for a discussion of the conversion rights of the
preferred stock.
(3) Reflects the number of shares of common stock issuable to Comverse upon conversion of shares of preferred stock if
converted 60 days after the Reference Date due to effect of additional dividend accruals on the preferred stock during such
60 day period. 9,978,682 shares of common stock would be issuable to Comverse upon conversion of shares of preferred
stock if converted on the Reference Date.
181
(4) Comverse is the sole holder of our preferred stock. See “Certain Relationships and Related Transactions, and Director
Independence — Preferred Stock Financing” under Item 13, for details on the rights of the preferred stock.
(5) As reported in the Schedule 13G filed with the SEC on January 15, 2010 by Cadian Capital Management, LLC (“CCM”)
on behalf of itself and Eric Bannasch, CCM and Eric Bannasch have shared voting and dispositive power over all the
shares.
(6) As reported in the Schedule 13G/A filed on February 11, 2010, with the SEC by Platinum Partners Value Arbitrage Fund
LP (“PPVAF”), Platinum Partners Legacy Feeder Ltd (“PPLF”) and Platinum Partners Liquid Opportunity Fund L.P.
(“PPLOF”) (collectively, “Platinum Partners”), Platinum Partners expressly affirms their membership of a group and each
has sole voting and dispositive power over the following shares: PPVAF — 401,153 shares; PPLF — 1,212,140 shares; and
PPLOF — 105,007 shares.
(7) Includes options to purchase 261,835 shares of common stock which are currently exercisable. Includes 103,474 shares of
restricted stock which are fully vested. Also includes 222,213 RSUs, of which 178,463 are fully vested and of which 43,750
will vest within 60 days after the Reference Date but were subject to forfeiture as of the Reference Date. Mr. Bodner
beneficially owns options to purchase 4,781 shares of Comverse common stock exercisable within 60 days after the
Reference Date.
(8) Consists of 108,656 RSUs of which 89,859 are fully vested and of which 18,797 will vest within 60 days after the
Reference Date but were subject to forfeiture as of the Reference Date.
(9) Includes options to purchase 45,000 shares of common stock which are currently exercisable. Includes 6,235 shares of
restricted stock which are fully vested. Also includes 72,879 RSUs, of which 56,171 are fully vested and of which 16,708
will vest within 60 days after the Reference Date but were subject to forfeiture as of the Reference Date.
(10) Includes options to purchase 91,088 shares of common stock which are currently exercisable. Includes 16,718 shares of
restricted stock which are fully vested. Also includes 87,939 RSUs, of which 69,142 are fully vested and of which 18,797
will vest within 60 days after the Reference Date but were subject to forfeiture as of the Reference Date.
(11) Includes options to purchase 41,196 shares of common stock which are currently exercisable. Includes 6,944 shares of
restricted stock which are fully vested. Also includes 17,761 RSUs, of which 7,646 are fully vested and of which 10,025
will vest within 60 days after the Reference Date but are currently subject to forfeiture. Excludes 41,461 RSUs, of which
34,778 will vest immediately upon the earlier of finalization of an amendment to Mr. Parcell’s equity award agreements or
satisfaction of certain compliance conditions as discussed in Item 11 and of which 6,683 will vest within 60 days after the
Reference Date upon the earlier of finalization of an amendment to Mr. Parcell’s equity award agreements or satisfaction of
certain compliance conditions as discussed in Item 11.
(12) Includes options to purchase 99,892 shares of common stock which are currently exercisable. Includes 20,000 shares of
restricted stock which are fully vested. Also includes 80,820 RSUs, of which 64,112 are fully vested and of which 16,708
will vest within 60 days after the Reference Date but were subject to forfeiture as of the Reference Date.
(13) Includes options to purchase 10,223 shares of common stock which are currently exercisable and 500 shares of common
stock held following the exercise of stock options. Mr. Baker beneficially owns 12,000 shares of Comverse common stock
deliverable in settlement of vested deferred stock unit awards on the first date within calendar 2010 on which such shares
are the subject of an effective Registration Statement on Form S-8 and no resale restrictions apply. Mr. Baker also
beneficially owns options to purchase 81,250 shares of Comverse common stock exercisable within 60 days after the
Reference Date. Mr. Baker is a senior executive at Comverse. He disclaims beneficial ownership of any of our securities
held by Comverse.
(14) Mr. Bunyan beneficially owns 66,000 shares of Comverse common stock deliverable in settlement of vested deferred stock
unit awards on the first date within calendar 2010 on which such shares are the subject of an effective Registration
Statement on Form S-8 and no resale restrictions apply. Mr. Bunyan is a senior executive at Comverse. He disclaims
beneficial ownership of any of our securities held by Comverse.
(15) Mr. Dahan beneficially owns 502,822 shares of Comverse common stock deliverable in settlement of vested deferred stock
unit awards on the first date within calendar 2010 on which such shares are the subject of an effective Registration
Statement on Form S-8 and no resale restrictions apply. Mr. Dahan is President, Chief Executive Officer, and a director of
Comverse. He disclaims beneficial ownership of any of our securities held by Comverse.
182
(16) Includes options to purchase 17,000 shares of common stock which are currently exercisable. Includes 19,000 shares of
restricted stock, 9,000 of which are fully vested, 5,000 of which will vest within 60 days after the Reference Date but were
subject to forfeiture as of the Reference Date and of which 5,000 are unvested and subject to forfeiture.
(17) Includes options to purchase 18,000 shares of common stock which are currently exercisable. Includes 19,000 shares of
restricted stock, 9,000 of which are fully vested, 5,000 of which will vest within 60 days after the Reference Date but were
subject to forfeiture as of the Reference Date and of which 5,000 are unvested and subject to forfeiture.
(18) Includes options to purchase 6,000 shares of common stock which are currently exercisable. Includes 19,000 shares of
restricted stock, 9,000 of which are fully vested, 5,000 of which will vest within 60 days after the Reference Date but were
subject to forfeiture as of the Reference Date and of which 5,000 are unvested and subject to forfeiture.
(19) Includes options to purchase 23,000 shares of common stock which are currently exercisable. Includes 19,000 shares of
restricted stock, 9,000 of which are fully vested, 5,000 of which will vest within 60 days after the Reference Date but were
subject to forfeiture as of the Reference Date and of which 5,000 are unvested and subject to forfeiture.
(20) Ms. Shah beneficially owns 34,667 shares of Comverse common stock deliverable in settlement of vested deferred stock
unit awards on the first date within calendar 2010 on which such shares are the subject of an effective Registration
Statement on Form S-8 and no resale restrictions apply. Ms. Shah is a senior executive at Comverse. She disclaims
beneficial ownership of any of our securities held by Comverse.
(21) Ms. Wright beneficially owns 45,001 shares of Comverse common stock deliverable in settlement of vested deferred stock
unit awards on the first date within calendar 2010 on which such shares are the subject of an effective Registration
Statement on Form S-8 and no resale restrictions apply. Ms. Wright is a senior executive at Comverse. She disclaims
beneficial ownership of any of our securities held by Comverse.
(22) Mr. Swad is a senior executive at Comverse. Mr. Swad does not beneficially own any shares of Comverse common stock or
options to purchase shares of Comverse common stock and disclaims beneficial ownership of any of our securities held by
Comverse.
Equity Compensation Plan Information
The following table sets forth certain information regarding our equity compensation plans as of January 31, 2009, after giving
effect to our assumption on May 25, 2007 of the following in connection with our acquisition of Witness: (a) the Witness
Amended and Restated Stock Incentive Plan, the Witness Broad Based Option Plan, and the Witness Non-Employee Director
Stock Option Plan, (b) all unvested awards previously issued under such plans as of May 25, 2007, and (c) certain new-hire
inducement grants made by Witness outside of its stockholder-approved equity plans prior to May 25, 2007. In accordance with
applicable NASDAQ rules at the time, the Witness Broad Based Option Plan was not approved by stockholders. No awards were
assumed by us under the Witness Broad Based Option Plan or the Witness Non-Employee Director Stock Option Plan in
connection with our acquisition of Witness. Since the closing of the Witness acquisition, we have not made, and do not in the
future expect to make, additional awards under the Witness Broad Based Option Plan or the Witness Non-Employee Director
Stock Option Plan and these plans are therefore not included in column (c) in either of the tables below.
183
(a)
Number of Securities to
be Issued upon Exercise
of Outstanding Options,
Warrants, and Rights
Plan Category
Equity compensation plans approved by
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights(1)
(c)
Number of Securities Remaining
Available for Future Issuance
under Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))
security holders
Equity compensation plans not
approved by security holders
Total
6,828,274(2) $
152,419(4) $
$
6,980,693
22.50
17.57
22.36
4,271,446(3)
0
4,271,446(5)
The following table sets forth certain information regarding our equity compensation plans as of March 18, 2010, after giving
effect to (a) the assumption of the Witness plans and awards referred to above, (b) grants subsequent to January 31, 2009, and
(c) the passage of the expiration date for making new awards under the Witness Amended and Restated Stock Incentive Plan on
November 18, 2009. The following table does not include awards for an aggregate of 1,908,530 shares which were approved for
grant by the stock option committee of our board of directors on March 4, 2009, May 20, 2009 and March 17, 2010 outside of
our equity incentive plans. The vesting of these awards is contingent on stockholder approval of a new equity compensation plan
or having additional share capacity under an existing stockholder-approved equity compensation plan.
(a)
Number of Securities to
be Issued upon Exercise
of Outstanding Options,
Warrants, and Rights
Plan Category
Equity compensation plans approved by
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights(1)
(c)
Number of Securities Remaining
Available for Future Issuance
under Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))
security holders
Equity compensation plans not
approved by security holders
Total
6,719,369(6) $
5,943(4) $
$
6,725,312
23.35
19.53
23.34
509,814
0
509,814(5)
(1) The weighted-average price relates to outstanding stock options only (as of the applicable date). Other outstanding awards
carry no exercise price and are therefore excluded from the weighted-average price.
(2) Consists of 5,072,827 stock options and 1,755,447 RSUs. Does not include 75,519 shares of restricted stock previously
issued under our equity compensation plans.
(3) The Witness Amended and Restated Stock Incentive Plan contains an evergreen provision pursuant to which the number of
shares available under the plan may increase annually so that the total number of shares reserved will equal the sum of
(a) the aggregate number of shares previously issued under the plan, (b) the aggregate number of shares subject to
outstanding options granted under the plan, and (c) 10% of the number of shares outstanding on the last day of the
preceding year. Notwithstanding the foregoing, the board of directors (or an authorized committee thereof), in its discretion,
may authorize a smaller number of additional shares to be reserved under this plan. The maximum annual increase in the
number of shares, however, shall not exceed 3,000,000 in any calendar year. No new awards are permitted to be made
under this plan after November 18, 2009.
184
(4) Consists solely of certain new-hire inducement grants made by Witness outside of its stockholder-approved equity plans
prior to May 25, 2007.
(5) Does not include 743,489 shares available for issuance pursuant to our Employee Stock Purchase Plan as of January 31,
2009 and as of March 18, 2010. The Witness Employee Stock Purchase Plan was terminated immediately prior to our
acquisition of Witness and therefore was not assumed by us.
(6) Consists of 4,662,546 stock options and 2,056,823 RSUs. Does not include 40,000 shares of restricted stock previously
issued under our equity compensation plans.
For additional information about equity grants made subsequent to January 31, 2009, see “Market for Registrant’s Common
Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities - Equity Grants” under Item 5.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The following summarizes various agreements in place between Verint and related parties, principally Comverse (our majority
stockholder) and its affiliates.
Under our audit committee charter, all related-party transactions (other than director and officer compensation arrangements
approved by the full board of directors or the compensation committee) must be approved in advance by the audit committee of
our board of directors. Proposed related-party transactions are generally brought to the audit committee’s attention for
consideration by our legal department based on its review of the requirements of Item 404 of Regulation S-K. Apart from the
requirements of our audit committee charter, we have no other written policy or procedure regarding the approval of related-
party transactions. The audit committee has reviewed and approved all of the agreements and transactions referred to in this
section.
See “Directors, Executive Officers, and Corporate Governance” under Item 10 for a discussion of director independence.
Comverse Preferred Stock Financing Agreements
On May 25, 2007, in connection with our acquisition of Witness, we entered into a Securities Purchase Agreement with
Comverse pursuant to which Comverse purchased, for cash, an aggregate of 293,000 shares of our preferred stock, at an
aggregate purchase price of $293.0 million. Proceeds from the issuance of the preferred stock were used, together with the
proceeds of the $650.0 million term loan under our credit agreement and cash on hand, to finance the consideration for the
acquisition.
The terms of the preferred stock are set forth in the Certificate of Designation.
The preferred stock was issued at purchase price of $1,000 per share and ranks senior to our common stock. The preferred stock
has an initial liquidation preference equal to the purchase price of the preferred stock, or $1,000 per share. In the event of any
voluntary or involuntary liquidation, dissolution, or winding-up of the company, the holders of the preferred stock will be
entitled to receive, out of the assets available for distribution to our stockholders and before any distribution of assets is made on
our common stock, an amount equal to the then-current liquidation preference plus accrued and unpaid dividends.
185
Cash dividends on the preferred stock are cumulative and are accrued quarterly at a specified dividend rate on the liquidation
preference in effect at such time. Initially, the specified dividend rate was 4.25% per annum per share, however, in accordance
with the terms of the Certificate of Designation, beginning with the first quarter after the initial interest rate on the term loan
under our credit agreement had been reduced by 50 basis points or more (i.e., the quarter ended April 30, 2008), the dividend rate
was reset to 3.875% per annum and is now fixed at this level. If we determine that we are prohibited from paying cash dividends
on the preferred stock under the terms of our credit agreement or other debt instruments, we may elect to make such dividend
payments in shares of our common stock, which common stock will be valued at 95% of the volume weighted-average price of
our common stock for each of the five consecutive trading days ending on the second trading day immediately prior to the record
date for such dividend.
The preferred stock does not have voting or conversion rights until the underlying shares of common stock are approved for
issuance by a vote of holders of a majority of our common stock. Following receipt of stockholder approval for the issuance of
the underlying common shares, each share of preferred stock will be entitled to a number of votes equal to the number of shares
of common stock into which such share of preferred stock would be convertible at the Conversion Rate in effect on the date the
preferred stock was issued to Comverse (the “Issue Date”). In addition, following receipt of stockholder approval for the
issuance of the underlying shares, each share of preferred stock will be convertible at the option of the holder into a number of
shares of our common stock equal to the liquidation preference then in effect divided by the conversion price then in effect,
which was initially set at $32.66 (as adjusted from time to time, the “Conversion Rate”). The initial Conversion Rate is set at
30.6185 shares of common stock for each share of preferred stock that is converted. We also have the right in certain
circumstances to cause the mandatory conversion of the preferred stock into shares of common stock at the then-applicable
Conversion Rate.
Subject to stockholder approval of the issuance of the common stock underlying the preferred stock as described above, at any
time on or after the second anniversary of the Issue Date, we may force the conversion of all, but not less than all, of the
preferred stock into common stock at our option, but only if the closing sale price of our common stock immediately prior to
such conversion equals or exceeds the conversion price then in effect by: (a) 150%, if the conversion is on or after the second
anniversary of the Issue Date but prior to the third anniversary of the Issue Date, (b) 140%, if the conversion is on or after the
third anniversary of the Issue Date but prior to the fourth anniversary of the Issue Date, or (c) 135%, if the conversion is on or
after the fourth anniversary of the Issue Date.
186
The terms of the preferred stock also provide that upon a fundamental change, as defined in the Certificate of Designation, the
holders of the preferred stock will have the right to require us to repurchase the preferred stock for 100% of the liquidation
preference then in effect. If we fail to repurchase the preferred stock as required upon a fundamental change, then the number of
directors constituting the board of directors will be increased by two, and the holders of the preferred stock will have the right to
elect two directors to fill such vacancies. Upon repurchase of the preferred stock subject to the fundamental change repurchase
right, the holders of the preferred stock will no longer have the right to elect additional directors, the term of office of each
additional director will terminate immediately upon such repurchase, and the number of directors will, without further action, be
reduced by two. In addition, in the event of a fundamental change, the Conversion Rate will be increased to provide for
additional shares of common stock issuable to the holders of the preferred stock upon conversion, based on a sliding scale
depending on the acquisition price, as defined in the Certificate of Designation, ranging from zero to 3.7 million additional
shares of common stock for every share of preferred stock converted into common stock following a fundamental change.
Comverse has had the right to sell the preferred stock since November 25, 2007 in either private or public transactions. Pursuant
to a registration rights agreement we entered into concurrently with the Securities Purchase Agreement (the “New Registration
Rights Agreement”), commencing 180 days after we regain compliance with SEC reporting requirements, and provided that the
underlying shares of our common stock have been approved for issuance by our common stockholders, Comverse will be
entitled to two demands to require us to register (which may be underwritten registrations, upon Comverse’s request) the shares
of common stock underlying the preferred stock (the “Conversion Shares”) for resale under the Securities Act. We are not,
however, required to comply with a demand request if (a) any such request is within 12 months after the effective date of a prior
demand registration, (b)(i) within the 90-day period preceding the request, we have effected (x) any registration other than an
underwritten registration pursuant to which Comverse was entitled to participate without any limitation on its ability to include
all of its registrable securities requested to be included therein or (y) an underwritten registration pursuant to which Comverse
was entitled to participate and include between 25% to 50% of the registrable securities requested to be included therein, or
(ii) within the 180-day period preceding such request, we have effected an underwritten registration pursuant to which Comverse
was entitled to participate and include more than 50% of the registrable securities requested to be included therein, (c) a
registration statement is effective at the time the request is made, pursuant to which Comverse can effect the disposition of its
registrable securities in the manner requested, (d) the registrable securities requested to be registered (i) have an aggregate then-
current market value of less than $100.0 million (before deducting any underwriting discounts and commission) or (ii) constitute
less than all remaining registrable securities if less than $100.0 million of then-current market value of registrable securities are
then outstanding; or (e) during the pendency of any blackout period (as defined in the New Registration Rights Agreement).
The New Registration Rights Agreement also gives Comverse unlimited piggyback registration rights on certain Securities Act
registrations filed by us on our own behalf or on behalf of other stockholders.
187
We have agreed to pay all expenses that result from a registration under the New Registration Rights Agreement, other than
underwriting commissions and taxes. We have also agreed to indemnify Comverse, its directors, officers and employees against
liabilities that may result from its sale of Conversion Shares, including Securities Act liabilities.
Comverse may transfer its rights under the New Registration Rights Agreement to any transferee of the registrable securities that
is an affiliate of Comverse or any other subsequent transferee; provided that in each case such affiliate or transferee becomes a
party to the New Registration Rights Agreement by executing a joinder agreement agreeing to be bound by all of the terms and
conditions of the New Registration Rights Agreement.
Comverse Original Registration Rights Agreement
Comverse’s rights under the New Registration Rights Agreement are in addition to its rights under a previous registration rights
agreement we entered into with Comverse shortly before our IPO in 2002. This registration rights agreement (the “Original
Registration Rights Agreement”) covers all shares of common stock then held by Comverse and any additional shares of
common stock acquired by Comverse at a later date. Under the Original Registration Rights Agreement, Comverse is entitled to
unlimited demand registrations of its shares on Form S-3. If we are not eligible to use Form S-3, Comverse is also entitled to one
demand registration on Form S-1. Under the agreement, we are not required to comply with a demand request made by
Comverse less than 90 days after the effective date of a prior demand request made under this registration rights agreement. We
may also delay satisfying a demand request if (a) we are in the process of preparing a registration statement at the time the
demand request is received which we intend to file within 90 days from the date of Comverse’s demand request or (b) the board
of directors determines in good faith that filing a registration statement in response to a demand request would either require us
to publicly disclose information which would have a material adverse effect on us or would be seriously detrimental to us or our
stockholders, or could interfere with, or would require us to accelerate public disclosure of, any material financing, acquisition,
disposition, corporate reorganization, or other material transaction involving us or our subsidiaries.
Like the New Registration Rights Agreement, the Original Registration Rights Agreement also provides that Comverse will have
unlimited piggyback registration rights, that we will pay all expenses of a registration under the agreement (other than
underwriting commissions and taxes), that we will indemnify Comverse and its affiliates from liabilities that may result from the
sale of our stock under the agreement, and that Comverse may transfer its rights under the agreement to an affiliate or other
subsequent transferee subject to the transferee signing a joinder to the agreement.
188
Other Agreements with Comverse
Federal Income Tax Sharing Agreement
We are party to a tax sharing agreement with Comverse which applies to periods prior to our IPO in which we were included in
Comverse’s consolidated federal tax return. By virtue of its controlling ownership and this tax sharing agreement, Comverse
effectively controls all of our tax decisions for periods ending prior to the completion of our IPO. Under the agreement, for
periods during which we were included in Comverse’s consolidated tax return, we were required to pay Comverse an amount
equal to the tax liability we would have owed, if any, had we filed a federal tax return on our own, as computed by Comverse in
its reasonable discretion. Under the agreement, we were not entitled to receive any payments from Comverse in respect of, or to
otherwise take advantage of, any loss resulting from the calculation of our separate tax liability. The tax sharing agreement also
provided for certain payments in the event of adjustments to the group’s tax liability. The tax sharing agreement continues in
effect until 60 days after the expiration of the applicable statute of limitations for the final year in which we were part of the
Comverse consolidated group for tax purposes.
Business Opportunities Agreement
We are party to a business opportunities agreement with Comverse which addresses potential conflicts of interest between
Comverse and us. This agreement allocates between Comverse and us opportunities to pursue transactions or matters that, absent
such allocation, could constitute corporate opportunities of both companies. Under the agreement, each party is precluded from
pursuing opportunities it may become aware of which are offered to an employee of the other party, even if such employee
serves as a director of the other entity. For example, if one of the directors on our board designated by Comverse becomes aware
of an opportunity that might be of interest to us, we cannot pursue that opportunity unless and until Comverse has failed to
pursue it. The agreement also allocates to Comverse in the first instance a common interest opportunity which is offered to a
person who is an employee of both Comverse and us or a director of both Comverse and us. We have also agreed to indemnify
Comverse and its directors, officers, employees, and agents against any liabilities as a result of any claim that any provision of
the agreement, or the failure to offer any business opportunity to us, violates or breaches any duty that may be owed to us by
Comverse or any such person. Unless earlier terminated by the parties, the agreement will remain in place until Comverse no
longer holds 20% of our voting power and no one on our board of directors is a director or employee of Comverse.
We have in the past and may from time to time in the future enter into other agreements with Comverse or its subsidiaries. For
example, in the past we have entered into certain intercompany services agreements with Comverse or its subsidiaries relating to
shared computer services, insurance, and use of personnel, as well as a patent cross-license agreement involving a third party.
We believe that the terms of any such agreements have been, and expect that in the future any such terms would be, no less
favorable to us than those we could obtain from an unaffiliated third party. Other than as described elsewhere in this Item 13, we
do not believe that any of these historical agreements are currently material to us or to Comverse.
Item 14. Principal Accounting Fees and Services
The audit committee of our board of directors is directly responsible for the appointment, oversight, and evaluation of our
independent registered public accounting firm. In accordance with the audit committee’s charter, it must approve, in advance of
the service, all audit and permissible non-audit services to be provided by our independent registered public accounting firm and
establish policies and procedures for the engagement of the outside auditor to provide audit and permissible non-audit services.
Our independent registered public accounting firm may not be retained to perform non-audit services specified in Section 10A(g)
of the Exchange Act.
189
The audit committee appointed Deloitte & Touche LLP as our auditors for the years ended January 31, 2009 and 2008, and in
accordance with established policy, our board of directors ratified those appointments. Deloitte & Touche LLP has advised the
audit committee that they are independent accountants with respect to our company, within the meaning of standards established
by the AICPA, the Public Company Accounting Oversight Board, the Independence Standards Board and federal securities laws
administered by the SEC.
In conjunction with our management, the audit committee regularly reviews the services and fees from its independent registered
public accounting firm. Our audit committee has determined that the providing of certain non-audit services, as described below,
is compatible with maintaining the independence of Deloitte & Touche LLP.
In addition to performing the audit of our consolidated financial statements, Deloitte & Touche LLP provided various other
services during the years ended January 31, 2009 and 2008. Our audit committee has determined that these services did not
impair Deloitte & Touche LLP’s independence from Verint.
The aggregate fees billed for years ended January 31, 2009 and 2008 for each of the following categories of services are as
follows:
(in thousands)
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
All other fees (4)
Total fees
For the Years Ended January 31,
2009
2008
$
$
13,171
—
105
13
13,289
$
$
7,790
8
99
—
7,897
The categories in the above table have the definitions assigned under Item 9 of Schedule 14A promulgated under the Exchange
Act, and these categories include in particular the following components:
(1) “Audit fees” include fees for audit services principally related to the year-end examination and the quarterly reviews of our
consolidated financial statements, consultation on matters that arise during a review or audit, review of SEC filings, audit
services performed in connection with our acquisitions, and statutory audit fees.
(2) “Audit-related fees” include fees which are for assurance and related services other than those included in Audit fees.
(3) “Tax fees” include fees for tax compliance and advice.
(4) “All other fees” include fees for all other non-audit services. For the year ended January 31, 2009, we incurred these fees to
license an online accounting research tool from Deloitte & Touche LLP.
190
By policy, all services (audit and non-audit) to be provided by the independent registered public accounting firm must be pre-
approved by the audit committee. The committee may delegate pre-approval authority to one or more of its members. The
member to whom such authority is delegated must report any pre-approval decisions to the audit committee at its next scheduled
meeting.
As reflected in the table above, and as described in greater detail elsewhere in this report, we have incurred significant audit fees
in connection with our investigation and restatement activities.
191
PART IV
Item 15. Exhibits, Financial Statement Schedules
Page(s)
(a) Documents filed as part of this report
(1) Financial Statements.
The consolidated financial statements filed as part of this report are listed on the Index to Consolidated Financial
Statements on page F-1.
(2) Financial Statement Schedules.
All financial statement schedules have been omitted here because they are not applicable, not required, or the information is
shown in the consolidated financial statements or notes thereto.
(3) Exhibits.
See (b) below.
(b) Exhibits
Number
2.1
2.2
2.3
3.1
3.2
Description
Asset Purchase Agreement between Verint Systems Ltd. and ECtel Ltd.
dated as of February 9, 2004
Merger Agreement and Plan of Reorganization by and among Witness
Systems, Inc., Baron Acquisition Corporation, Blue Pumpkin Software, Inc.,
and, solely with respect to Article VIII and Article IX, Laurence R. Hootnick
as Shareholder Agent and The U.S. Stock Transfer Corporation as
Depository Agent dated December 16, 2004
Agreement and Plan of Merger, dated as of February 11, 2007, among Verint
Systems Inc., White Acquisition Corporation and Witness Systems, Inc.
Amended and Restated Certificate of Incorporation of Verint Systems Inc.
Certificate of Designation, Preferences and Rights of the Series A
Convertible Perpetual Preferred Stock
3.3
Amended and Restated By-laws of Verint Systems Inc.
Filed Herewith /
Incorporated by
Reference from
Form 8-K filed on March 31, 2004
Witness Systems, Inc. Form 8-K
(Commission File No. 000-29335)
filed on January 27, 2005
Form 8-K filed on February 15,
2007
Form S-1 (Commission File
No. 333-82300) effective on May
16, 2002
Form 8-K filed on May 30, 2007
8-K
Form 10-K filed on March 17, 2010
192
Number
4.1
Specimen Common Stock certificate
Description
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Specimen Series A Convertible Perpetual Preferred Stock certificate
Registration Rights Agreement by and among the Company, Nic.
Christiansen Invest A/G and Ulrik Ortiz Rasmussen, dated as of
September 2, 2004
Registration Rights Agreement, by and between the Company and Comverse
Technology, Inc., dated May 25, 2007
Form of Indemnification Agreement
Federal Income Tax Sharing Agreement, dated as of January 31, 2002,
between Comverse and the Company
Business Opportunities Agreement dated as of March 19, 2002, between
Comverse and the Company
Offer Letter, dated July 27, 2006, from the Office of the Chief Scientist of
the Ministry of Industry, Trade and Labor of the State of Israel (regarding
final part of settlement payment) (English translation)
Acceptance Letter, dated July 31, 2006, from Verint Systems Ltd. to the
Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of
the State of Israel (regarding final part of settlement payment) (English
translation)
Verint Systems Inc. 2002 Employee Stock Purchase Plan
Verint Systems Inc. Stock Incentive Compensation Plan (as amended
through December 12, 2002)
Amendment No. 1 to Verint Systems Inc. Stock Incentive Compensation
Plan (dated December 23, 2008)
Filed Herewith /
Incorporated by
Reference from
Form S-1 (Commission File
No. 333-82300) effective on May
16, 2002
Form 10-K filed on March 17, 2010
Form S-3 (Commission File
No. 333-120266) effective on
December 17, 2004
Form 8-K filed on May 30, 2007
Form S-1 (Commission File
No. 333-82300) effective on May
16, 2002
Form S-1 (Commission File
No. 333-82300) effective on May
16, 2002
Form S-1 (Commission File
No. 333-82300) effective on May
16, 2002
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form S-1 (Commission File
No. 333-82300) effective on May
16, 2002
Form 10-K filed on May 1, 2003
Form 10-K filed on March 17, 2010
193
Number
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Description
Amendment No. 2 to Verint Systems Inc. Stock Incentive Compensation
Plan (dated March 4, 2009)
Verint Systems Inc. 2004 Stock Incentive Compensation Plan, as amended
and restated
Amendment No. 1 to Verint Systems Inc. 2004 Stock Incentive
Compensation Plan, as amended and restated (dated December 23, 2008)
Witness Systems Amended and Restated Stock Incentive Plan
Amendment No. 1 to Witness Systems Amended and Restated Stock
Incentive Plan (dated May 29, 2001)
Amendment No. 2 to Witness Systems Amended and Restated Stock
Incentive Plan (dated January 15, 2004)
Amendment No. 3 to Witness Systems Amended and Restated Stock
Incentive Plan (dated December 6, 2007)
Amendment No. 4 to Witness Systems Amended and Restated Stock
Incentive Plan (dated December 23, 2008)
Form of Stock Option Award Agreement*
Form of Restricted Stock Award Agreement to a U.S. executive officer*
Form of Restricted Stock Award Agreement to an Israeli executive officer*
Form of Restricted Stock Award Agreement to an Independent Director, as
amended*
Form of Time-Based Restricted Stock Unit Award Agreement*
Form of Performance-Based Restricted Stock Unit Award Agreement*
Form of Time-Based Deferred Stock Award Agreement*
Form of Performance-Based Deferred Stock Award Agreement*
Form of Amendment to Time-Based and Performance-Based Equity Award
Agreements*
Form of Time-Based Restricted Stock Unit Award Agreement Solely
Related to 2010 Grant*
Form of Performance-Based Restricted Stock Unit Award Agreement Solely
Related to 2010 Grant*
Filed Herewith /
Incorporated by
Reference from
Form 10-K filed on March 17, 2010
Form 8-K filed on January 10, 2006
Form 10-K filed on March 17, 2010
Witness Systems, Inc. Form 10-Q
for the period ended June 30, 2005
Witness Systems, Inc. Form 10-K
filed on March 17, 2006
Witness Systems, Inc. Form 10-K
filed on March 15, 2004
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 8-K filed on December 7,
2004
Form 8-K filed on January 10, 2006
Form 8-K filed on January 10, 2006
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Filed herewith
Filed herewith
194
Number
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
Description
Form of Time-Based Deferred Stock Award Agreement Solely Related to
2010 Grant*
Form of Performance-Based Deferred Stock Award Agreement Solely
Related to 2010 Grant*
Contribution Agreement, dated as of February 1, 2001, between Comverse
and the Company
Stock Purchase Agreement, dated as of January 31, 2002, between
Comverse, Inc. and the Company
Registration Rights Agreement, dated as of January 31, 2002, between
Comverse and the Company
Stock Purchase Agreement, dated as of September 7, 2005, by and among
Verint Systems Inc., MultiVision Holdings Limited, and MultiVision
Intelligent Surveillance Limited
Securities Purchase Agreement, by and between the Company and Comverse
Technology, Inc., dated May 25, 2007.
Credit Agreement dated as of May 25, 2007 among the Company, as
Borrower, the Lenders as parties thereto and Lehman Commercial Paper
Inc., as Administrative Agent
Employment Agreement, dated February 23, 2010, between Verint Systems
Inc. and Dan Bodner*
Employment Agreement, dated August 14, 2006, between Verint Systems
Inc. and Douglas E. Robinson*
Amendment No. 1, dated July 2, 2007, to Employment Agreement between
Verint Systems and Douglas E. Robinson*
Amendment No. 2, dated December 29, 2008, to Employment Agreement
between Verint Systems Inc. and Douglas E. Robinson*
Amended and Restated Employment Agreement, dated October 29, 2009,
between Verint Systems Inc. and Elan Moriah*
Employment Agreement, dated April 16, 2001, between Comverse Infosys
UK Limited and David Parcell*
Filed Herewith /
Incorporated by
Reference from
Filed herewith
Filed herewith
Form S-1 (Commission File
No. 333-82300) effective on May
16, 2002
Form S-1 (Commission File
No. 333-82300) effective on May
16, 2002
Form S-1 (Commission File
No. 333-82300) effective on May
16, 2002
Form 10-Q/A filed on
December 12, 2005
Form 8-K filed on May 30, 2007
Form 8-K filed on May 30, 2007
Form 8-K filed on February 23,
2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
195
Number
10.42
10.43
10.44
10.45
10.46
10.47
14.1
21.1
31.1
31.2
32.1
32.2
Description
Supplemental Employment Agreement, dated June 13, 2008, between Verint
Systems UK Limited and David Parcell*
Amended and Restated Employment Agreement, dated November 10, 2009,
between Verint Systems Inc. and Peter Fante*
Employment Offer Letter, dated August 30, 2000, between Comverse
Infosys Ltd. and Meir Sperling*
Manager’s Insurance Policy Letter between Comverse Infosys Ltd. and Meir
Sperling* (English translation)
Summary of the Terms of Verint Systems Inc. Executive Officer Annual
Bonus Arrangements*
2009 Executive Officer Retention Letter
Verint Code of Conduct: Ethics Promote Excellence, revised and restated
March 19, 2009
Subsidiaries of the Company
Certification of Dan Bodner, Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Douglas E. Robinson, Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to Securities Exchange
Act Rule 13a-14(b) and 18 U.S.C. Section 1350(1)
Certification of the Chief Financial Officer pursuant to Securities Exchange
Act Rule 13a-14(b) and 18 U.S.C. Section 1350(1)
Filed Herewith /
Incorporated by
Reference from
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form 8-K filed on March 24, 2009
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
(1) These exhibits are being “furnished” with this periodic report and are not deemed “filed” with the Securities and Exchange
Commission and are not incorporated by reference in any filing of the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
*
Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 15(b) of this report.
(c) Financial Statement Schedules
None.
196
Item 15A. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
As of January 31, 2009 and 2008
Consolidated Statements of Operations
For the Years Ended January 31, 2009, 2008, and 2007
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Years Ended January 31, 2009, 2008, and 2007
Consolidated Statements of Cash Flows
For the Years Ended January 31, 2009, 2008, and 2007
Notes to Consolidated Financial Statements
Page F-1
F-2
F-3
F-4
F-5
F-6
F-7
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Verint Systems Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Verint Systems Inc. and subsidiaries (the “Company”) as of
January 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows
for each of the three years in the period ended January 31, 2009. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Verint
Systems Inc. and subsidiaries as of January 31, 2009 and 2008 and the results of their operations and their cash flows for each of
the three years in the period ended January 31, 2009, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the consolidated financial statements, effective February 1, 2007, the Company adopted Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of January 31, 2009, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated April 7, 2010 expressed an adverse opinion on the Company’s internal control over financial reporting because of
material weaknesses.
/s/ DELOITTE & TOUCHE LLP
New York, New York
April 7, 2010
Page F-2
Financial Statements
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of January 31, 2009 and 2008
(in thousands, except share and per share data)
Assets
Current Assets:
Cash and cash equivalents
Restricted cash and bank time deposits
Accounts receivable, net of allowance for doubtful accounts of $6.0 million and
$6.5 million, respectively
Inventories
Deferred cost of revenue
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Capitalized software development costs, net
Deferred cost of revenue
Deferred income taxes
Other assets
Total assets
Liabilities, Preferred Stock, and Stockholders’ Equity (Deficit)
Current Liabilities:
Accounts payable
Accrued expenses and other liabilities
Current maturities of long-term debt
Deferred revenue
Deferred income taxes
Liabilities to affiliates
Income taxes payable
Total current liabilities
Long-term debt
Deferred income taxes
Deferred revenue
Other liabilities
Total liabilities
Preferred Stock — $0.001 par value; authorized 2,500,000 shares. Series A convertible
preferred stock; 293,000 shares issued and outstanding; aggregate liquidation
preference and redemption value of $313,575 at January 31, 2009
Commitments and Contingencies
Stockholders’ Equity (Deficit):
Common stock — $0.001 par value; authorized 120,000,000 shares. Issued 32,623,000
and 32,600,000 shares, respectively; outstanding 32,535,000 and 32,526,000 shares,
respectively
Additional paid-in capital
Treasury stock, at cost — 88,000 and 74,000 shares, respectively
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity (deficit)
Total liabilities, preferred stock, and stockholders’ equity (deficit)
See notes to consolidated financial statements.
As of January 31,
2009
2008
$
115,928
7,722
$
83,233
3,612
$
$
113,178
20,455
8,935
14,314
32,434
312,966
30,544
709,984
200,203
10,489
47,913
6,478
18,816
1,337,393
38,484
144,067
4,088
160,918
403
1,389
2,271
351,620
620,912
13,424
88,985
53,653
1,128,594
116,427
19,525
8,698
30,991
31,565
294,051
36,315
785,014
249,542
10,272
64,043
12,686
40,352
1,492,275
49,434
143,941
—
157,803
1,021
1,277
3,360
356,836
610,000
18,990
114,897
68,591
1,169,314
$
$
285,542
293,663
32
419,937
(2,353)
(435,955)
(58,404)
(76,743)
1,337,393
$
32
387,537
(2,094)
(355,567)
(610)
29,298
1,492,275
$
Page F-3
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended January 31, 2009, 2008, and 2007
(in thousands, except share and per share data)
Revenue:
Product
Service and support
Total revenue
Cost of revenue:
Product
Service and support
Amortization and impairment of acquired technology and backlog
Settlement with OCS
Total cost of revenue
Gross profit
Operating expenses:
Research and development, net
Selling, general and administrative
Amortization of other acquired intangible assets
In-process research and development
Impairments of goodwill and other acquired intangible assets
Integration, restructuring and other, net
Total operating expenses
Operating loss
Other income (expense), net
Interest income
Interest expense
Other expense, net
Total other income (expense), net
Loss before income taxes and noncontrolling interest
Provision for income taxes
Noncontrolling interest in net income of joint venture
Net loss
Dividends on preferred stock
Net loss applicable to common shares
Net loss per share
Basic
Diluted
Weighted-average common shares outstanding
Basic
Diluted
See notes to consolidated financial statements.
Page F-4
For the Years Ended January 31,
2008
2009
2007
$
$
365,485
304,059
669,544
$
333,130
201,413
534,543
131,638
117,588
9,024
—
258,250
411,294
88,309
282,147
25,249
—
25,961
4,654
426,320
(15,026)
1,872
(37,211)
(8,541)
(43,880)
(58,906)
19,671
1,811
(80,388)
(13,064)
(93,452)
(2.88)
(2.88)
121,627
100,397
8,018
—
230,042
304,501
87,668
259,183
19,668
6,682
22,934
22,996
419,131
(114,630)
5,443
(36,862)
(23,767)
(55,186)
(169,816)
27,729
1,064
(198,609)
(8,681)
(207,290)
(6.43)
(6.43)
$
$
$
$
$
$
$
$
$
251,584
117,194
368,778
116,274
48,175
7,664
19,158
191,271
177,507
53,029
148,229
3,164
—
21,103
(765)
224,760
(47,253)
8,835
(444)
(595)
7,796
(39,457)
141
921
(40,519)
—
(40,519)
(1.26)
(1.26)
32,394
32,394
32,222
32,222
32,156
32,156
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Years Ended January 31, 2009, 2008, and 2007
Common
Accumulated
Other
Comprehensive
Income
(Loss)
(in thousands)
Balances as of January 31, 2006
Comprehensive loss:
Net loss
Unrealized gains on available for sale securities, net
Currency translation adjustment
Total comprehensive loss
Implementation of SFAS No. 123(R)
Exercise of stock options
Stock-based compensation expense
Forfeitures of restricted stock awards
Purchases of treasury stock
Tax effects from stock award plans
Other tax adjustments
Balances as of January 31, 2007
Comprehensive loss:
Net loss
Unrealized gains on available for sale securities, net
Currency translation adjustment
Total comprehensive loss
Cumulative effect of the adoption of FIN 48
Stock-based compensation expense
Stock options issued in business acquisition
Common stock issued for stock awards
Forfeitures of restricted stock awards
Purchases of treasury stock
Tax effects from stock award plans
Balances as of January 31, 2008
Comprehensive loss:
Net loss
Unrealized gains on derivative financial instruments, net
Unrealized losses on available for sale securities, net
Currency translation adjustment
Total comprehensive loss
Stock-based compensation expense
Common stock issued for stock awards
Forfeitures of restricted stock awards
Purchases of treasury stock
Tax effects from stock award plans
Other tax adjustments
Balances as of January 31, 2009
See notes to consolidated financial statements.
Stock
Additional
Unearned
Unrealized
Par Paid-in Treasury Stock-based Accumulated Gains
Shares Value Capital
32,524 $
32 $
346,644 $
Stock Compensation Deficit
(Losses)
— $
(13,119) $
(113,083) $
(147) $
Total
Cumulative
Translation Stockholders’
Adjustment Equity (Deficit)
219,632
(695) $
— —
— —
— —
— —
— —
23 —
— —
(12) —
(16) —
— —
— —
32
32,519
— —
— —
— —
— —
— —
— —
— —
53 —
(33) —
(13) —
— —
32
32,526
— —
— —
— —
— —
— —
— —
23 —
(9) —
(5) —
— —
— —
32,535 $
32 $
—
—
—
—
(13,119)
382
18,132
395
—
149
312
352,895
—
—
—
—
(1,674)
31,013
4,717
—
792
—
(206)
387,537
—
—
—
—
—
32,040
—
166
—
(21)
215
—
—
—
—
—
—
—
(395)
(541)
—
—
(936)
—
—
—
—
—
—
—
—
(792)
(366)
—
(2,094)
—
—
—
—
—
—
—
(166)
(93)
—
—
419,937 $ (2,353) $
Page F-5
—
—
—
—
13,119
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
(40,519)
—
—
(40,519)
—
—
—
—
—
—
—
(153,602)
(198,609)
—
—
(198,609)
(3,356)
—
—
—
—
—
—
(355,567)
(80,388)
—
—
—
(80,388)
—
—
—
—
—
—
(435,955) $
—
135
—
135
—
—
—
—
—
—
—
(12)
—
12
—
12
—
—
—
—
—
—
—
—
—
101
(29)
—
72
—
—
—
—
—
—
72
$
—
—
(78)
(78)
—
—
—
—
—
—
—
(773)
—
—
163
163
—
—
—
—
—
—
—
(610)
—
—
—
(57,866)
(57,866)
—
—
—
—
—
—
(58,476) $
(40,519)
135
(78)
(40,462)
—
382
18,132
—
(541)
149
312
197,604
(198,609)
12
163
(198,434)
(5,030)
31,013
4,717
—
—
(366)
(206)
29,298
(80,388)
101
(29)
(57,866)
(138,182)
32,040
—
—
(93)
(21)
215
(76,743)
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended January 31, 2009, 2008, and 2007
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization
Provision for doubtful accounts
Impairments of assets
In-process research and development
Stock-based compensation
Provision for deferred income taxes
Excess tax benefits from stock-based compensation
Non-cash losses on derivative financial instruments, net
Non-cash gains on sales of auction rate securities
Other non-cash items, net
Changes in operating assets and liabilities, net of effects of business
combinations:
Accounts receivable
Inventories
Deferred cost of revenue
Accounts payable and accrued expenses
Deferred revenue
Prepaid expenses and other assets
Other liabilities
Other, net
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Cash paid for business combinations, net of cash acquired, including payments of
contingent consideration
Purchases of property and equipment
Purchases of investments
Sales and maturities of investments
Settlement of derivative financial instruments not designated as hedges
Cash paid for capitalized software development costs
Other investing activities
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of preferred stock
Proceeds from borrowings
Repayments of borrowings and other financing obligations
Payment of debt issuance and other debt related costs
Exercises of stock options
Excess tax benefits from stock-based compensation
Other financing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Non-cash investing and financing transactions:
Fair value of stock options exchanged in connection with business combinations
Accrued but unpaid purchases of property and equipment
Inventory transfers to property and equipment
Business combination consideration earned, but paid in subsequent periods
Settlement of embedded derivative
For the Years Ended January 31,
2008
2009
2007
$
(80,388)
$
(198,609)
$
(40,519)
55,142
793
25,961
—
32,040
17,768
—
14,591
(4,713)
2,252
(3,328)
(2,761)
12,201
(10,754)
(7,329)
8,876
(6,877)
161
53,635
(3,092)
(11,113)
—
7,000
(10,041)
(4,547)
(4,454)
(26,247)
—
15,000
(2,869)
(150)
—
—
(93)
11,888
(6,581)
32,695
83,233
115,928
36,544
3,319
—
382
1,325
—
8,121
$
$
$
$
$
$
$
$
46,791
3,380
28,083
6,682
31,013
19,992
—
22,267
—
2,631
(20,184)
1,005
5,613
8,480
25,130
14,040
4,697
(1,310)
(299)
(953,154)
(14,247)
(208,000)
328,465
—
(4,624)
(173)
(851,733)
293,000
650,000
(42,496)
(13,606)
—
—
(1,881)
885,017
923
33,908
49,325
83,233
30,680
4,113
4,717
1,466
795
1,796
—
20,873
495
25,036
—
18,132
(6,222)
(107)
—
—
2,406
7,067
(1,936)
(740)
6,105
(23,666)
(2,731)
5,381
(475)
9,099
(42,473)
(11,166)
(1,347,100)
1,388,684
—
(4,492)
1,461
(15,086)
—
—
(424)
—
382
107
(1,154)
(1,089)
671
(6,405)
55,730
49,325
150
3,323
—
1,878
947
8,152
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Dividend to noncontrolling interest — declared, but paid in subsequent period
$
2,142
$
—
$
—
See notes to consolidated financial statements.
Page F-6
VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Unless the context otherwise requires, the terms “Verint”, “we”, “us”, and “our” in these notes to consolidated financial
statements refer to Verint Systems Inc. and its consolidated subsidiaries.
Verint® Systems Inc. is a leading global provider of Actionable Intelligence® solutions and value-added services designed to
help organizations make timely and effective decisions. Our solutions are used to capture, distill, and analyze complex and
underused information sources, such as voice, video, and unstructured text. In the enterprise market, our workforce optimization
solutions help organizations enhance customer service operations in contact centers, branches, and back-office environments to
increase customer satisfaction, reduce operating costs, identify revenue opportunities, and improve profitability. In the security
intelligence market, our video intelligence, public safety, and communications intelligence and investigative solutions are used
by government and commercial organizations in their efforts to protect people, property, and infrastructure.
Basis of Presentation
We are a majority-owned subsidiary of Comverse Technology, Inc. (“Comverse”). During the three years ended January 31,
2009, Comverse did not provide material levels of corporate or administrative services to us.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned subsidiaries,
and a joint venture in which we hold a 50% equity interest. This joint venture is a variable interest entity in which we are the
primary beneficiary. Our investment in this joint venture, which functions as a systems integrator for Asian markets, is not
material to our consolidated financial statements. All significant intercompany accounts and transactions have been eliminated.
We reflect the noncontrolling interest in net income (loss) of the joint venture in the consolidated statements of operations, and
the noncontrolling interest in the joint venture is recorded in other liabilities on the consolidated balance sheet. We have included
the results of operations of acquired companies from the date of acquisition.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires our
management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ from those estimates.
Page F-7
Cash and Cash Equivalents
Cash primarily consists of cash on hand and bank deposits. Cash equivalents primarily consist of interest-bearing money market
accounts and other highly liquid investments with an original maturity of three months or less when purchased.
Restricted Cash and Bank Time Deposits
Restricted cash and restricted bank time deposits are pledged as collateral or otherwise restricted as to use for vendor payables,
general liability insurance, workers’ compensation insurance, and warranty programs. Restricted bank time deposits generally
consist of certificates of deposit with original maturities of between 90 and 360 days.
Investments
Investments generally consist of marketable debt securities of corporations, the U.S. government, and agencies of the U.S.
government. Through January 31, 2008, we also periodically invested in auction rate securities (“ARS”). Effective in the year
ended January 31, 2009, we no longer invest in ARS as a matter of policy.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt
and Equity Securities, we determine the appropriate classification of debt securities at the time of purchase and reevaluate such
designations as of each balance sheet date. Our investments in marketable securities, all of which are classified as available-for-
sale, are stated at fair value based on market quotes. Investments with stated maturities beyond one year are classified as short-
term if the securities are highly marketable and readily convertible into cash for current operations. Unrealized gains and losses,
net of deferred taxes, are recorded as a component of accumulated other comprehensive income in stockholders’ equity (deficit).
We recognize realized gains and losses upon sale of short-term investments and declines in value deemed to be other than
temporary using the specific identification method. Interest on short-term investments is recognized within income when earned.
We periodically review our investments for indications of possible impairment in value. Factors considered in determining
whether a loss is other than temporary include the length of time and extent to which fair value has been below the cost basis, the
financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time
sufficient to allow for any anticipated recovery in market value. Upon sale, the cumulative unrealized gain or loss associated
with the sold security that was previously recorded in accumulated other comprehensive income (loss) is reclassified into the
consolidated statement of operations as a realized gain (loss), which is included in interest and other income, net.
Page F-8
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents,
bank time deposits, short-term investments, and trade accounts receivable. We invest our cash in bank accounts, certificates of
deposit, and money market accounts with major financial institutions, in U.S. Treasury and agency obligations, and in debt
securities of corporations. By policy, we seek to limit credit exposure on investments through diversification and by restricting
our investments to highly rated securities.
We grant credit terms to our customers in the ordinary course of business. Concentrations of credit risk with respect to trade
accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across
different geographic areas.
Accounts Receivable, Net
Accounts receivable are recorded at the invoiced amount and are not interest-bearing, subject to the following:
The application of our revenue recognition policies sometimes results in circumstances for which we are unable to recognize
revenue relating to sales transactions that have been billed, but the related account receivable has not been collected. For
consolidated balance sheet presentation purposes, we do not recognize the deferred revenue or the related account receivable and
no amounts appear in our consolidated balance sheets for such transactions. Only to the extent that we have received cash for
given deferred revenue transaction is the amount included in the deferred revenue recorded on the consolidated balance sheets.
Allowance for Doubtful Accounts
We estimate the collectability of our accounts receivable balances each accounting period and adjust our allowance for doubtful
accounts accordingly. We exercise a considerable amount of judgment in assessing the collectability of accounts receivable,
including consideration of the creditworthiness of each customer, their collection history, and the related aging of past due
receivables balances. We evaluate specific accounts when we learn that a customer may be experiencing a deterioration of its
financial condition due to lower credit ratings, bankruptcy, or other factors that may affect its ability to render payment.
Page F-9
The following table summarizes the activity in our allowance for doubtful accounts for the years ended January 31, 2009, 2008,
and 2007:
(in thousands)
Balance at beginning of year
Provisions charged to expense
Amounts written off
Other (1)
Balance at end of year
For the Years Ended January 31,
2008
2009
2007
$
$
6,490
793
(868)
(426)
5,989
$
$
2,630
3,366
(251)
745
6,490
$
$
2,304
425
(294)
195
2,630
(1) Includes balances from acquisitions and changes in balances due to foreign currency exchange rates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted- average method of inventory
accounting. The valuation of our inventories requires us to make estimates regarding excess or obsolete inventories, including
making estimates of the future demand for our products. Although we make every effort to ensure the accuracy of our forecasts
of future product demand, any significant unanticipated changes in demand, price, or technological developments could have a
significant impact on the value of our inventory and reported operating results. Charges for excess and obsolete inventories are
included within cost of revenue.
Property and Equipment, net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the
straight-line method based over the estimated useful lives of the assets. We depreciate our property and equipment, other than
buildings and leasehold improvements, over periods ranging from three to ten years. Buildings are depreciated over periods
ranging from twenty-five to thirty years. Furniture and fixtures are depreciated over periods ranging from three to ten years.
Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term.
The cost of maintenance and repairs of property and equipment is charged to operations as incurred. When assets are retired or
disposed of, the cost and accumulated depreciation or amortization thereon are removed from the consolidated balance sheet and
any resulting gain or loss is recognized in the consolidated statement of operations.
Page F-10
Goodwill, Other Acquired Intangible Assets, and Long-lived Assets
We record goodwill when the purchase price of net tangible and intangible assets we acquire exceeds their fair value. Other
acquired intangible assets include identifiable acquired technologies, trade names, customer relationships, distribution networks,
sales backlogs, and non-competition agreements. We amortize the cost of finite-lived identifiable intangible assets on a straight-
line basis, which approximates the pattern in which the economic benefits of the assets are expected to be realized, over periods
of ten years or less.
We regularly perform reviews to determine if the carrying values of our goodwill and other intangible assets are impaired. In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), we review goodwill for impairment at
least annually on November 1, or more frequently if an event occurs indicating the potential for impairment. As of January 31,
2009 and 2008, we had no indefinite-lived intangible assets other than goodwill. To test for potential impairment, we first
perform an assessment of the fair value of our reporting units. We utilize three primary approaches to determine fair value: (a) an
income based approach, using projected discounted cash flows, (b) a market based approach using multiples of comparable
companies, and (c) a transaction based approach using multiples for recent acquisitions of similar businesses made in the
marketplace.
Our estimate of fair value of each reporting unit is based on a number of subjective factors, including: (a) appropriate weighting
of valuation approaches (income approach, comparable public company approach, and comparable transaction approach),
(b) estimates of our future cost structure, (c) discount rates for our estimated cash flows, (d) selection of peer group companies
for the public company and the market transaction approaches, (e) required levels of working capital, (f) assumed terminal value,
and (g) time horizon of cash flow forecasts.
The fair value of each reporting unit is compared to its carrying value to determine whether there is an indication of impairment
in value. If an indication of impairment exists, we perform a second analysis to measure the amount of impairment, if any.
During the years ended January 31, 2009, 2008, and 2007, we recorded non-cash charges to recognize impairments of goodwill
of $26.0 million, $20.6 million, and $20.3 million, respectively.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), we
review intangible assets that have finite useful lives and other long-lived assets when an event occurs indicating the potential for
impairment. If any indicators are present, we perform a recoverability test by comparing the sum of the estimated undiscounted
future cash flows attributable to the assets in question to their carrying amounts. If the undiscounted cash flows used in the test
for recoverability are less than the long-lived assets carrying amount, we determine the fair value of the long-lived asset and
recognize an impairment loss if the carrying amount of the long-lived asset exceeds its fair value.
During the years ended January 31, 2008, and 2007, we recorded non-cash charges to recognize impairments of long-lived
intangible assets other than goodwill of $2.7 million, and $4.5 million, respectively. No impairments of long-lived assets other
than goodwill were recorded during the year ended January 31, 2009.
Further discussion of these impairment charges appears in Note 5, “Intangible Assets and Goodwill”. Impairment charges related
to operating expenses are included in impairments of goodwill and other acquired intangible assets and impairment charges
related to cost of revenue are included in amortization and impairment of acquired technology and backlog on the accompanying
consolidated statements of operations.
Page F-11
Fair Value of Financial Instruments
Our recorded amounts of cash and cash equivalents, accounts receivable, investments, and accounts payable approximate fair
value, due to the short-term nature of these instruments. The fair value of derivative instruments, long-term debt, and certain
marketable securities classified as other assets are disclosed in Note 13, “Fair Value Measurements”.
Effective February 1, 2008, we adopted Statement SFAS No. 157, Fair Value Measurements (“SFAS No. 157”) as it relates to
financial assets and financial liabilities. SFAS No. 157 is effective for our nonfinancial assets and nonfinancial liabilities
beginning February 1, 2009. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value
measurements, defines fair value based upon an exit price model, establishes a framework for measuring fair value, and expands
the applicable disclosure requirements. SFAS No. 157 establishes a fair value hierarchy disclosure framework that prioritizes and
ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is
impacted by a number of factors, including the type of asset or liability and its characteristics.
The adoption of SFAS No. 157 as of February 1, 2008 did not have a material effect on our financial position, results of
operations, or cash flows. As it relates to nonfinancial assets and liabilities, we do not expect the adoption of SFAS No. 157 as of
February 1, 2009 to have a material impact on our financial position, results of operations, or cash flows.
Effective February 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities —
Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits an instrument-by-instrument
irrevocable election to account for selected financial assets and financial liabilities at fair value. We have elected not to apply the
fair value option to any eligible financial assets or financial liabilities during the year ended January 31, 2009.
In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP FAS 157-3”). FSP FAS
157-3 clarifies the application of SFAS No. 157 in a market that is not active, and addresses application issues such as the use of
internal assumptions when relevant observable data does not exist, the use of observable market information when the market is
not active, and the use of market quotes when assessing the relevance of observable and unobservable data. Applicable to
financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance
with SFAS No. 157, FSP FAS 157-3 is effective for all periods presented in accordance with SFAS No. 157. The adoption of
FSP FAS 157-3 resulted in no changes in the fair values of our financial assets.
Page F-12
Derivative Financial Instruments
As part of our risk management strategy we use derivative financial instruments including forward contracts and interest rate
swap agreements to hedge against certain foreign currency and interest rate exposures. Our intent is to offset gains and losses
that occur from the underlying exposure with gains and losses on the derivative contracts used to offset them. As a matter of
company policy, we do not enter into speculative positions with derivative instruments. In accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), the criteria we use for designating a derivative
as a hedge include contemporaneous documentation of the instrument’s effectiveness in risk reduction and direct matching of the
financial instrument to the underlying transaction. We record all derivatives in other assets or other liabilities on our consolidated
balance sheets at their fair values. Gains and losses from the changes in values of these derivatives are accounted for based on
the use of the derivative and whether it qualifies for hedge accounting.
For the year ended January 31, 2009, certain foreign currency forward contracts qualified for accounting as hedges and
accordingly the effective portions of the changes in fair value of these instruments were recorded in other comprehensive income
(loss) in our consolidated balance sheets, net of applicable income taxes. The ineffective portion, if any, of these contracts is
reported in other income (expense), net. For derivative financial instruments not accounted for as hedges, gains and losses from
changes in their fair values are reported in other income (expense), net. For the years ended January 31, 2008 and 2007, none of
our derivative instruments were accounted for using hedge accounting, and accordingly, all derivatives were marked-to-market at
the end of each accounting period, with changes in fair value, whether realized or unrealized, recognized in current period
earnings within other income (expense), net. See Note 13, “Fair Value Measurements”, for further details regarding our hedging
activities and related accounting policies.
Long-term Debt
We capitalize debt issuance costs incurred in connection with our long-term borrowings and credit facilities. We amortize these
costs as an adjustment to interest expense over the contractual life of the associated long-term borrowing or credit facility using
the effective interest method for long-term borrowings and the straight-line method for revolving credit facilities. When
unscheduled principal payments are made, we adjust the amortization of our deferred debt issuance costs to reflect the expected
remaining terms of the borrowing.
Segment Reporting
We have three operating segments, which are also our reportable segments, Enterprise Workforce Optimization Solutions
(“Workforce Optimization”), Video Intelligence Solutions (“Video Intelligence”), and Communications Intelligence and
Investigative Solutions (“Communications Intelligence”). We determine our reportable segments in accordance with
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Our Chief Executive Officer is our chief
operating decision maker, who utilizes segment revenues and segment operating contribution as the primary basis for assessing
financial results of segments and for the allocation of resources. See Note 17, “Segment, Geographic, and Significant Customer
Information”, for a full description of our segments and related accounting policies.
Page F-13
Revenue Recognition
We derive and report our revenue in two categories: (a) product revenue including hardware and software products and
(b) service and support revenue, including revenue from installation services, post-contract customer support (“PCS”), project
management, hosting services, and training services.
Our revenue recognition policy is a critical component of determining our operating results and is based on a complex set of
accounting rules that require us to make significant judgments and estimates. Our customer arrangements typically include
several elements including products, services, and support. Revenue recognition for a particular arrangement is dependent upon
such factors as the level of customization within the solution and the contractual delivery, acceptance, payment, and support
terms with the customer. Significant judgment is required to conclude whether collectability of fees is considered probable and
whether fees are fixed and determinable. In addition, our multiple-element arrangements must be carefully reviewed to determine
whether the fair value of each element can be established, which is a critical factor in determining the timing of the
arrangement’s revenue recognition.
For software license arrangements that do not require significant modification or customization of the underlying software, we
recognize revenue when we have persuasive evidence of an arrangement, the product has been shipped or the services have been
provided to the customer, the sales price is fixed or determinable, collectability is probable, and all pertinent criteria are met as
required by the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software
Revenue Recognition, SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain
Transactions, and Emerging Issues Task Force (“EITF”) Issue No. 03-5, Applicability of AICPA Statement of Position 97-2 to
Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software (in the aggregate also known as
“SOP 97-2”).
The majority of our software license arrangements contain multiple elements including software, hardware, PCS, and
professional services such as installation, consulting, and training. We allocate revenue to the delivered elements of the
arrangement using the residual method, whereby revenue is allocated to the undelivered elements based on vendor specific
objective evidence of fair value (“VSOE”) of the undelivered elements as prescribed in SOP 97-2 with the remaining
arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue recognition criteria are
met. If we are unable to establish VSOE for the undelivered elements of the arrangement, revenue recognition is deferred for the
entire arrangement until all elements of the arrangement are delivered. However, if the only undelivered element is PCS, we
recognize the arrangement fee ratably over the PCS period.
Page F-14
For multiple-element arrangements for which we are unable to establish VSOE of one or more elements, and where such
arrangements are recognized ratably, we use various available indicators of fair value and apply our best judgment to reasonably
classify the arrangement’s revenue into product revenue and service revenue for financial reporting purposes. For these
arrangements, we review our VSOE for training, installation, and PCS services from similar transactions and stand-alone
services arrangements and prepare comparisons to peers, in order to determine reasonable and consistent approximations of fair
values of service revenue for statement of operations classification purposes with the remaining amount being allocated to
product revenue. Installation services associated with our Communications Intelligence arrangements recognized under SOP 97-
2 are included within product revenue as such amounts are not considered material.
Our policy for establishing VSOE for installation, consulting, and training is based upon an analysis of separate sales of services.
PCS revenues are derived from providing technical software support services and unspecified software updates and upgrades to
customers on a when-and-if-available basis. PCS revenue is recognized ratably over the term of the maintenance period, which in
most cases is one year. When PCS is included within a multiple-element arrangement, we utilize either the substantive renewal
rate approach or the bell-shaped curve approach to establish VSOE for the PCS, depending upon the business segment,
geographical region, or product line.
Under the bell-shaped curve approach of establishing VSOE, we perform VSOE compliance tests to ensure that a substantial
majority of our actual PCS renewals are within a narrow range of pricing.
Under the substantive renewal rate approach, we believe it is necessary to evaluate whether both the support renewal rate and
term are substantive, and whether the renewal rate is being consistently applied to subsequent renewals for a particular customer.
We establish VSOE under this approach through analyzing the renewal rate stated in the customer agreement and determining
whether that rate is above the minimum substantive VSOE renewal rate established for that particular PCS offering. The
minimum substantive VSOE rate is determined based upon an analysis of renewal rates associated with historical PCS contracts.
For contracts that do not contain a stated renewal rate, revenue associated with the entire bundled arrangement is recognized
ratably over the PCS term. Contracts that have a renewal rate below the minimum substantive VSOE rate are deemed to contain
a more than insignificant discount element, for which VSOE cannot be established. We recognize aggregate contractual revenue
for these arrangements over the period that the customer is entitled to renew its PCS at the discounted rate, but not to exceed the
estimated economic life of the product. We evaluate many factors in determining the estimated economic life of our products,
including the support period of the product, technological obsolescence, and the customers’ expectations. We have concluded
that our software products have estimated economic lives ranging from five to seven years.
For certain of our products, we do not have an explicit obligation to provide PCS but as a matter of business practice have
provided implied PCS. The implied PCS is accounted for as a separate element for which VSOE does not exist. Arrangements
that contain implied PCS are recognized over the period the implied PCS is provided, but not to exceed the estimated economic
life of the product.
Page F-15
For shipment of products that include embedded firmware that has been deemed incidental, we recognize revenue in accordance
with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition (“SAB No. 104”) and EITF Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (“EITF No. 00-21”). EITF No. 00-21 addresses the accounting for arrangements that
may involve the delivery or performance of multiple products, services, and/or rights to use assets. Under the terms of SAB
No. 104, revenue is recognized provided that persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the fee is fixed or determinable, and collectability of the fee is reasonably assured. For shipments of
hardware products, delivery is considered to have occurred upon shipment, provided that the risks of loss, and title in certain
jurisdictions, have been transferred to the customer.
Some of our arrangements require significant customization of the product to meet the particular requirements of the customer.
For these arrangements, revenue is recognized in accordance with Accounting Research Bulletin No. 45, Long-Term
Construction-Type Contracts, and the relevant guidance contained within SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (“SOP 81-1”), typically using the percentage-of-completion (“POC”)
method. Under the POC method, revenue recognition is generally based upon the ratio of hours incurred to date to the total
estimated hours required to complete the contract. Profit estimates on long-term contracts are revised periodically based on
changes in circumstances, and any losses on contracts are recognized in the period that such losses become evident. If the range
of profitability cannot be estimated, but some level of profit is assured, revenue is recognized to the extent of costs incurred, until
such time that the project’s profitability can be estimated or the services have been completed. In addition, if VSOE does not
exist for the contract’s PCS element but some level of profitability is assured, revenue is recognized to the extent of costs
incurred. Once the services are completed, the remaining portion of the arrangement fee is recognized ratably over the remaining
PCS period. In the event some level of profitability on a contract cannot be assured, the completed-contract method of revenue
recognition is applied.
In certain of our arrangements accounted for under SOP 81-1, the fee is contingent on the return on investment our customers
receive from such services. Revenue from these arrangements is recognized under the completed-contract method of accounting
when the contingency is resolved and collectability is assured, which in most cases is upon final receipt of payment.
If an arrangement includes customer acceptance criteria, revenue is not recognized until we can objectively demonstrate that the
software or services meet the acceptance criteria, or the acceptance period lapses, whichever occurs earlier. If a software license
arrangement obligates us to deliver specified future products or upgrades, revenue under the arrangement is initially deferred and
is recognized only when the specified future products or upgrades are delivered, or when the obligation to deliver specified
future products expires, whichever occurs earlier.
We record provisions for estimated product returns in accordance with SFAS No. 48, Revenue Recognition When Right of Return
Exists, in the same period in which the associated revenue is recognized. We base these estimates of product returns upon
historical levels of sales returns and other known factors. Actual product returns could be different from our estimates and
current or future provisions for product returns may differ from historical provisions. Concessions granted to customers are
recorded as reductions to revenue in the period in which they were granted. The vast majority of our contracts are successfully
completed, and concessions granted to customers are minimal in both dollar value and frequency.
Page F-16
Product revenue derived from shipments to resellers and original equipment manufacturers (“OEMs”) who purchase our
products for resale are generally recognized when such products are shipped (on a “sell-in” basis). We have historically
experienced insignificant product returns from resellers and OEMs, and our payment terms for these customers are similar to
those granted to our end-users. If a reseller or OEM develops a pattern of payment delinquency, or seeks payment terms longer
than generally accepted, we defer the recognition of revenue until the receipt of cash. Our arrangements with resellers and OEMs
are periodically reviewed as our business and products change.
We follow EITF Issue No. 99-19, Reporting Revenue Gross as Principal versus Net as an Agent. Generally, we record revenue
at gross and record costs related to a sale in cost of revenue. In those cases where we are not the primary obligor and/or do not
bear credit risk, or where we earn a fixed transactional fee, revenue is recorded under the net method based on the net amount
retained by us.
Reimbursements for out-of-pocket expenses are reported as revenue in accordance with EITF Issue No. 01-14, Income Statement
Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. Shipping and handling fees and expenses
that are billed to customers are recognized in revenue and the costs associated with such fees and expenses are recorded in cost
of revenue in accordance with EITF Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. Historically, these
fees and expenses have not been material. Taxes collected from customers and remitted to government authorities are excluded
from revenue.
Cost of Revenue
Our cost of revenue includes costs of materials, compensation and benefit costs for operations and service personnel,
subcontractor costs, royalties and license fees, depreciation of equipment used in operations and service, amortization of
capitalized software development costs and certain purchased intangible assets, and related overhead costs.
Where revenue is recognized over multiple periods in accordance with our revenue recognition policies, we have made an
accounting policy election whereby cost of product revenue, including hardware and third-party software license fees, are
capitalized and recognized in the same period that product revenue is recognized, while installation and other service costs are
generally expensed as incurred, except for certain contracts that are accounted for using contract accounting principles. Deferred
cost of revenue are classified in their entirety as current or long-term assets based on whether the related revenue will be
recognized within twelve months of the origination date of the arrangement.
Page F-17
For certain contracts accounted for using contract accounting principles, revisions in estimates of costs and profits are reflected
in the accounting period in which the facts that require the revision become known, if such facts become known subsequent to
the issuance of the consolidated financial statements. If such facts become known before the issuance of the consolidated
financial statements, the requisite revisions in estimates of costs and profits are reflected in these consolidated financial
statements. At the time a loss on a contract becomes evident, the entire amount of the estimated loss is accrued. Related contract
costs include all direct material and labor costs and those indirect costs related to contract performance.
Customer acquisition and origination costs, including sales commissions, are recorded in selling, general and administrative
expenses. These costs are expensed as incurred, with the exception of certain sales referral fees in our Communication
Intelligence segment which are capitalized and amortized ratably over the revenue recognition period.
On July 31, 2006, we entered into a settlement agreement with the Israel Office of the Chief Scientist (“OCS”), pursuant to
which we exited a royalty-bearing program and the OCS agreed to accept a lump sum payment of approximately $36.0 million.
Prior to the settlement, we had accrued approximately $16.8 million of royalties and related interest due under the original terms
of the program through charges to cost of revenue in the corresponding periods of the related revenue, net of previous royalty
payments. We recorded a charge of approximately $19.2 million to cost of revenue in the second quarter of the year ended
January 31, 2007 for the remaining amount of the lump sum settlement in excess of amounts previously accrued under the
program. Payments agreed to under the OCS settlement were completed immediately following the execution of the settlement
agreement. Beginning in calendar year 2006, we entered into a new program with the OCS under which we are no longer
required to pay royalties to the OCS.
Research and Development, net
With the exception of certain software development costs, all research and development costs are expensed as incurred, and
consist primarily of personnel and consulting costs, travel, depreciation of research and development equipment, and related
overhead and other costs associated with research and development activities.
We receive non-refundable grants from the OCS that fund a portion of our research and development expenditures. Since
calendar year 2006, we only enter into non-royalty-bearing arrangements with the OCS which do not require us to pay royalties.
Funds received from the OCS are recorded as a reduction to research and development expense. Royalties, to the extent paid, are
recorded as part of our cost of revenue.
Software Development Costs
Software development costs incurred subsequent to establishing technological feasibility, and continuing through general release
of the software products, are capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed. Amortization of capitalized costs begins in the period in which the related product is
available for general release to customers and is recorded on a straight-line basis, which approximates the pattern in which the
economic benefits of the capitalized costs are expected to be realized, over the estimated economic lives of the related software
products, generally four years.
Page F-18
Income Taxes
We account for income taxes using a balance sheet approach in accordance with SFAS No. 109, Accounting for Income Taxes
(“SFAS No. 109”). Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or
payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the
financial statement and tax bases of our assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes
are enacted. The effects of future changes in income tax laws or rates are not anticipated.
We are subject to income taxes in the United States and numerous foreign jurisdictions. The calculation of our tax provision
involves the application of complex tax laws and requires significant judgment and estimates.
We evaluate the realizability of our deferred tax assets for each jurisdiction in which we operate at each reporting date. SFAS
No. 109 requires a valuation allowance to be established when it is more likely than not that all or a portion of our deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income of the same character and in the same jurisdiction. We consider all available positive and negative evidence in making
this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies. In circumstances where there is sufficient negative evidence indicating that our deferred tax assets
are not more-likely-than-not realizable, we establish a valuation allowance.
On February 1, 2007, we implemented the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 requires a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate tax positions
taken or expected to be taken in a tax return by assessing whether, based solely on their technical merits, they are more-likely-
than-not sustainable upon examination and including resolution of any related appeals or litigation process. The second step is to
measure the associated tax benefit of each position as the largest amount that we believe is more-likely-than-not realizable.
Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax
benefits recognized in our consolidated financial statements, determined by applying the prescribed methodologies of FIN 48,
represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of the deferred tax asset
for net operating loss carryforwards (“NOLs”). This interpretation also provides guidance on de-recognition, financial statement
classification, interest and penalties, accounting in interim periods, disclosure, and transition. Our policy is to include interest and
penalties related to unrecognized income tax benefits as a component of income tax expense.
Page F-19
Functional Currency and Foreign Currency Transaction Gains and Losses
The functional currency for each of our foreign subsidiaries is the respective local currency with the exception of our subsidiaries
in Israel and Canada, whose functional currencies are the U.S. Dollar (“dollar”). Most of our revenue and materials purchased
from suppliers are denominated in or linked to the dollar. Transactions denominated in currencies other than the dollar (primarily
compensation and benefits costs of foreign operations) are converted to the dollar on the transaction date, and any resulting
assets or liabilities are further translated at each reporting date and at settlement. Gains and losses recognized upon such
translations are included within other income (expense), net in the consolidated statements of operations.
In those limited instances where a foreign subsidiary has a functional currency other than the dollar, revenue and expenses are
translated into dollars using average exchange rates for the reporting period, while assets and liabilities are translated into dollars
using period-end rates. The effects of foreign currency translation adjustments are included in stockholders’ equity (deficit) as a
component of accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets.
Stock-Based Compensation
On February 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”) and related
interpretative guidance issued by the FASB and the Securities and Exchange Commission (“SEC”). SFAS No. 123(R) requires
the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial
statements and measurement of such cost based on the grant-date fair value of the award. We use the Black-Scholes option-
pricing model to estimate the fair value of certain of our stock-based awards. SFAS No. 123(R) requires the fair value of an
award to be recognized over the period during which an employee is required to provide service in exchange for the award.
SFAS No. 123(R) replaced SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), and superseded
Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and its
related interpretations. Prior to the adoption of SFAS No. 123(R), we previously recognized expense using an intrinsic method
for option awards granted at exercise prices less than the fair market value of the underlying common stock as of the
measurement date.
As part of our adoption of SFAS No. 123(R), we applied the modified prospective transition method to all past awards
outstanding and unvested as of February 1, 2006 and are recognizing the associated expense over the remaining vesting period of
such awards based on the fair values determined under SFAS No. 123. As such, the modified prospective transition method does
not result in a restatement of results of prior periods.
Page F-20
Net Income (Loss) Per Share
Shares used in the calculation of basic net income (loss) per share are based on the weighted-average number of shares
outstanding during the accounting period. Shares used in the calculation of basic earnings per share exclude unvested shares of
restricted stock because they are contingent upon future service conditions. Shares used in the calculation of diluted net income
per share are based on the weighted-average number of shares outstanding, adjusted for the assumed exercise of all potentially
dilutive stock options and other stock-based awards outstanding using the treasury stock method. Shares used in the calculation
of diluted net income per share also include the assumed conversion of our convertible preferred stock, if dilutive. In periods for
which we report a net loss, basic net loss per share and diluted net loss per share are identical since the effect of potential
common shares is anti-dilutive and therefore excluded.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R)
replaces SFAS No. 141, Business Combinations (“SFAS No. 141”), but retains the requirement that the purchase method of
accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on the disclosures previously
required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes
principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed, and any non-
controlling interests in the acquired business. SFAS No. 141(R) is effective for all business combinations with an acquisition
date occurring in years beginning after December 15, 2008, which means that it is effective for our year beginning February 1,
2009. The impact that SFAS No. 141(R) will have on us will depend on the nature and size of any acquisitions completed after
we adopt this standard.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS
No. 160”), which establishes accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for
the deconsolidation of a subsidiary. SFAS No. 160 is effective for business arrangements entered into in years beginning on or
after December 15, 2008, which means that it is effective for our year beginning February 1, 2009. Early adoption is prohibited.
We are in the process of evaluating this standard, but do not expect that the adoption of SFAS No. 160 will have a significant
impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an
amendment of FASB Statement No. 133 (“SFAS No. 161”), which changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial
performance, and cash flows. SFAS No. 161 is effective for financial statements issued for years and interim periods beginning
after November 15, 2008, with early application encouraged, which means that it is effective for our year beginning February 1,
2009. The adoption of SFAS No. 161 is not expected to have a significant impact on our consolidated financial statements.
Page F-21
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that all outstanding unvested share-
based payments that contain rights to non-forfeitable dividends participate in the undistributed earnings with the common
shareholders and are therefore participating securities. Companies with participating securities are required to apply the two-class
method in calculating basic and diluted earnings per share. FSP EITF 03-6-1 is effective for years beginning after December 15,
2008 and early adoption is prohibited, which means that it is effective for our year beginning February 1, 2009. The adoption of
FSP EITF 03-6-1 is not expected to have a significant impact on our consolidated financial statements.
In April 2009, the FASB issued the following three FSPs that are intended to provide additional application guidance and
enhance disclosures about fair value measurements and impairments of securities:
(cid:129)
(cid:129)
(cid:129)
FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”);
FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP
FAS 115-2”); and
FSP No. FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value of Financial Instruments (“FSP FAS 107-
1”).
FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in
market activity for the asset being measured. FSP FAS 115-2 establishes a new model for measuring other-than-temporary
impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other
comprehensive income. FSP FAS 107-1 expands the fair value disclosures required for all financial instruments within the scope
of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to interim periods. All of these FSPs are effective for
interim and annual periods ending after June 15, 2009. We are assessing the potential impact that the adoption of FSP FAS 157-4
and FSP FAS 115-2 may have on our consolidated financial statements. FSP FAS 107-1 may result in increased disclosures in
our future interim periods.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 establishes general
standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are
issued. In February 2010, the FASB issued FASB Accounting Standards Update No. 2010-09, Subsequent Events (Topic 855) –
Amendments to Certain Disclosure Requirements. The amendments remove the requirement for an SEC filer to disclose a date
through which subsequent events have been evaluated in both issued and revised financial statements. This statement, as
amended, is effective for interim and annual periods ending after June 15, 2009. We do not expect that the adoption of SFAS
No. 165, as amended, will have a material effect on our consolidated financial statements.
Page F-22
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167
amends FIN 46 (Revised 2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, and requires a
company to perform an analysis to determine whether its variable interests give it a controlling financial interest in a variable
interest entity. This analysis requires a company to assess whether it has the power to direct the activities of the variable interest
entity and if it has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the
variable interest entity. SFAS No. 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity, eliminates the quantitative approach previously required for determining the primary beneficiary of a
variable interest entity, and significantly enhances disclosures. SFAS No. 167 may be applied retrospectively to previously
issued financial statements with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated.
SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. We are in the process of evaluating this standard
and therefore have not yet determined the impact that the adoption of SFAS No. 167 will have on our consolidated financial
statements.
In September 2009, the FASB ratified the consensuses reached by the EITF regarding the following issues involving revenue
recognition:
(cid:129)
(cid:129)
Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (“EITF No. 08-1”); and
Issue No. 09-3, Certain Revenue Arrangements That Include Software Elements (“EITF No. 09-3”).
EITF No. 08-1 applies to multiple-deliverable revenue arrangements that are currently within the scope of EITF No. 00-21. EITF
No. 08-1 also provides principles and application guidance on whether a revenue arrangement contains multiple deliverables,
how the arrangement should be separated, and how the arrangement consideration should be allocated. EITF No. 08-1 requires
an entity to allocate revenue in a multiple-deliverable arrangement using estimated selling prices of the deliverables if a vendor
does not have VSOE or third-party evidence of selling price. It eliminates the use of the residual method and, instead, requires an
entity to allocate revenue using the relative selling price method. It also expands disclosure requirements with respect to
multiple-deliverable revenue arrangements.
EITF No. 09-3 applies to multiple-deliverable revenue arrangements that contain both software and hardware elements, focusing
on determining which revenue arrangements are within the scope of the software revenue guidance in SOP No. 97-2. EITF
No. 09-3 removes tangible products from the scope of the software revenue guidance and provides guidance on determining
whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue
guidance.
The accounting guidance in EITF No. 08-1 and EITF No. 09-3 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. It will be effective for us in
our fiscal year beginning February 1, 2011, although early adoption is permitted. Alternatively, an entity can elect to adopt the
provisions of these issues on a retrospective basis. We are assessing the impact that the application of EITF No. 08-1 and EITF
No. 09-3 may have on our consolidated financial statements.
Page F-23
During the third quarter of the year ended January 31, 2010, we adopted the new Accounting Standards Codification (“ASC”) as
issued by the FASB. The ASC has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. The ASC is not intended to change or alter existing GAAP. The adoption of the ASC had no impact
on our consolidated financial statements.
2. NET LOSS PER SHARE
The following table summarizes the calculation of basic and diluted net loss per share for the years ended January 31, 2009,
2008, and 2007:
(in thousands, except per-share amounts)
Net loss
Dividends on preferred stock
Net loss applicable to common shares - basic and diluted
$
$
2009
For the Years Ended January 31,
2008
(198,609)
(8,681)
(207,290)
(80,388)
(13,064)
(93,452)
$
$
$
$
2007
(40,519)
—
(40,519)
Weighted-average shares outstanding
Basic and diluted
Net loss per share
Basic and diluted
32,394
32,222
32,156
$
(2.88)
$
(6.43)
$
(1.26)
Due to net losses applicable to common shareholders reported for all periods presented, the assumed exercise of stock options
and assumed settlement of unvested restricted stock awards and restricted stock units had an antidilutive effect and was therefore
excluded from the computation of diluted net loss per share. Such options, awards and units excluded from the computation of
diluted net loss per share totaled 7.1 million, 7.0 million and 3.6 million for the years ended January 31, 2009, 2008 and 2007,
respectively. Also excluded from the calculation of diluted net loss per share were 9.6 million and 9.2 common shares at
January 31, 2009 and January 31, 2008, respectively, issuable from the assumed conversion of our convertible preferred stock.
3. INVESTMENTS
As of January 31, 2009, all of our excess funds are in cash and cash equivalents or restricted cash. We have historically invested
in a variety of securities, including U.S. Government, corporation, agency bonds, and ARS, which typically provide higher yields
than money market and other cash equivalent investments. Effective in the year ended January 31, 2009, we no longer invest in
ARS as a matter of policy.
Page F-24
As of January 31, 2008, our investments consisted of ARS with a total cost basis (par value) of $7.0 million and estimated fair
value of $2.3 million, included within other assets.
At January 31, 2008, the collateral underlying our ARS portfolio consisted of AAA-rated pools of residential mortgages and
corporate debt obligations. These collateralized debt instruments had long-term underlying maturities, but were historically
considered highly liquid because of the occurrence of regular auctions every 90 days or less that reset the applicable interest and
allowed for purchases and sales. Beginning in the quarter ended October 31, 2007, these ARS failed to receive sufficient order
interest from potential investors to clear successfully, resulting in failed auctions. Due to continued failures of these auctions,
during the year ended January 31, 2008, we concluded our ARS were no longer liquid, and in the event we needed to access
these funds, we would not have been able to do so without realizing a loss of principal. However, we continued to earn interest
on our ARS at the maximum contractual rate.
Prior to the first failed auction, we valued our ARS using quoted market prices because the securities were highly liquid and
there were active markets which generally resulted in valuations at par. Once the auctions began to fail, we could not value these
securities using prices established by market transactions and we valued these securities in part using estimated values provided
by the firms which underwrote the securities. Accordingly, we concluded that as of January 31, 2008, our portfolio of three ARS
with a cost basis (par value) of $7.0 million had an estimated fair value of $2.3 million. We therefore concluded that these
securities had an other-than-temporary impairment in market value and recorded a $4.7 million pre-tax charge during the year
ended January 31, 2008 in other income (expense), net in our consolidated statement of operations.
Additionally, because we could not reliably estimate when a successful auction for the ARS that we held at January 31, 2008
would occur, we reclassified these securities as long-term assets on our consolidated balance sheets.
During the year ended January 31, 2009, we sold our ARS to the broker from whom we purchased the securities at par value plus
accrued interest. We are aware that at the time, the broker had entered into a settlement agreement with the Attorney General of
the State of New York and the North American Securities Administrators Association Task Force. Consequently, we recorded a
gain of $4.7 million in other income (expense), net in our consolidated statement of operations when the securities were sold to
the broker.
Proceeds from sales or maturities of available-for-sale investments were $7.0 million, $328.5 million, and $1,388.7 million
during the years ended January 31, 2009, 2008, and 2007, respectively.
Page F-25
4. BUSINESS COMBINATIONS
We did not enter into any business combinations during the year ended January 31, 2009.
Business Combinations for the Year Ended January 31, 2008
Witness Systems, Inc.
We acquired Witness Systems, Inc. (“Witness”), formerly a publicly held company based in Roswell, Georgia, on May 25, 2007.
We acquired Witness, among other objectives, to expand our business in the enterprise workforce optimization market. We have
included the financial results of Witness in our consolidated financial statements since May 25, 2007.
Page F-26
The following table sets forth the components and the allocation of the purchase price of Witness:
(in thousands)
Components of Purchase Price:
Acquisition of approximately 35.2 million shares of outstanding common stock of
Witness at $27.50 per share in cash, net of interest earned
Settlement of vested and accelerated Witness stock options in cash
Fair value of unvested Witness stock options exchanged
Subsequent payments on assumed contingent consideration arrangements
Direct transaction costs
Total purchase price
Allocation of Purchase Price:
Net tangible assets:
Cash
Other current assets
Deferred income taxes — current
Other assets
Current liabilities
Deferred income taxes — long-term
Other liabilities
Net tangible assets
Identifiable intangible assets:
Developed technology
Trademark and trade name
Customer relationships
Non-competition agreements
Total identifiable intangible assets (1)
In-process research and development
Goodwill
Total purchase price
Amount
Estimated
Useful Lives
$
$
$
$
966,518
93,225
4,717
5,802
14,833
1,085,095
139,777
71,045
1,823
15,028
(65,130)
(12,042)
(7,590)
142,911
43,000
10,000
206,000
1,300
260,300
6,440
675,444
1,085,095
6 years
2-4 years
10 years
1 year
(1) The weighted-average amortization period of all finite-lived identifiable intangible assets is 9.0 years.
Purchase Price
We paid $967.1 million in cash to acquire all of the 35.2 million outstanding shares of Witness common stock on May 25, 2007
at $27.50 per share. The amount was reduced by $0.6 million of interest earned on funds deposited with the paying agent for
which settlement with Witness stockholders did not occur within one day.
Page F-27
In accordance with the terms of the acquisition agreement and the underlying Witness stock option agreements, at the acquisition
date all vested Witness stock options, in lieu of being exercised, were exchanged for a cash payment equal to the excess, if any,
of $27.50 over the exercise price per share of the options. In addition, pursuant to their terms, certain unvested Witness stock
options were deemed vested as a result of the acquisition and were also settled in cash, in the same manner. These payments,
including applicable payroll taxes, totaled $93.2 million and are included within the purchase price.
Unvested Witness stock options were exchanged for options to purchase our common stock using a conversion formula that
maintained the option holder’s intrinsic value. The fair value of the unvested options exchanged, $4.7 million of which was
attributable to past service and included within the purchase price, was determined using a Black-Scholes valuation model with
the following assumptions: expected lives ranging from 1.4 years to 3.9 years, a risk-free interest rate of approximately 4.9%,
expected volatility of 40.5%, and no dividend yield.
We assumed several contingent consideration arrangements related to businesses previously acquired by Witness. One such
arrangement provided for potential additional consideration of up to $18.5 million, to be earned quarterly through July 31, 2009,
based upon the previously acquired business achieving certain performance metrics. During the years ended January 31, 2009
and 2008, $1.1 million and $2.7 million of this contingent consideration was earned, respectively, and was recorded as additional
goodwill. We also paid $2.0 million of additional consideration during the year ended January 31, 2008 related to a separate
business previously acquired by Witness, and recorded the payment as additional goodwill. No further contingent consideration
was earned through the completion of the contingent consideration periods of these arrangements.
Direct transaction costs include investment banking, legal, and accounting fees, and other external costs directly related to the
acquisition.
In-Process Research and Development
We expensed the fair value of Witness’ in-process research and development (“IPR&D”) upon acquisition, as it represents
incomplete research and development projects that had not yet reached technological feasibility and had no known alternative
future use as of the date of the acquisition. IPR&D is presented as a separate line item on our consolidated statement of
operations. Technological feasibility is generally established when an enterprise completes all planning, designing, coding, and
testing activities that are necessary to establish that a product can be produced to meet its design specifications, including
functions, features, and technical performance requirements. The value assigned to IPR&D of $6.4 million was determined by
considering the importance of each project to our overall future development plans, estimating costs to develop the purchased
IPR&D into commercially viable products, estimating the resulting net cash flows from each project when completed, and
discounting the net cash flows to their present values.
Page F-28
The revenue estimates used to value the IPR&D were based on estimates of the relevant market sizes and growth factors,
expected trends in technology, and the nature and expected timing of new product introductions. The rates used to discount the
cash flows to their present values were based on the weighted-average cost of capital. The weighted-average cost of capital was
adjusted to reflect the difficulties and uncertainties in completing each project and thereby achieving technical feasibility, the
percentage of completion of each project, anticipated market acceptance and penetration, market growth rates, and risks related
to the impact of potential changes in future target markets. Based on these factors, a discount rate of 17% was deemed
appropriate for valuing the IPR&D.
Goodwill and Identifiable Intangible Assets
Among the factors that contributed to the recognition of goodwill in this transaction were the significant expansion of our market
share in the enterprise workforce optimization market, a broader available suite of products and services, the addition of a
talented assembled workforce, and opportunities for future efficiencies and cost savings. This goodwill has been assigned to our
Workforce Optimization segment, and is not deductible for income tax purposes.
Deferred Revenue
Included within the net tangible assets of Witness at May 25, 2007 is the fair value of support obligations assumed from Witness
in connection with the acquisition. We based our determination of the fair value of the support obligations, in part, on a valuation
completed by a third-party valuation firm using estimates and assumptions provided by management. The estimated fair value of
the support obligations was determined utilizing a cost build-up approach. The cost build-up approach determines fair value by
estimating the costs relating to fulfilling the obligations plus a reasonable profit margin. The sum of the costs and operating
profit is used to approximate the amount that we would pay a third party to assume the support obligations. The estimated costs
to fulfill the support obligations were based on the historical direct costs related to providing the support services. We did not
include any costs associated with selling efforts or research and development or the related fulfillment margins on these costs.
Profit associated with selling effort is excluded because Witness had concluded the selling effort on the support contracts prior to
the acquisition date. The estimated research and development costs have not been included in the fair value determination, as
these costs do not represent a legal obligation at the time of acquisition. As a result, in our purchase price allocation, we recorded
an adjustment to reduce the historical carrying value of Witness’ May 25, 2007 deferred support revenue by $38.9 million, to
reflect our estimate of the fair value of the support obligations assumed.
Page F-29
ViewLinks Euclipse, Ltd.
We acquired Israel-based ViewLinks Euclipse Ltd. (“ViewLinks”), a privately held provider of data mining and link analysis
software solutions, on February 1, 2007. We have included the financial results of ViewLinks in our consolidated financial
statements since February 1, 2007. Through January 31, 2009, the total purchase price for ViewLinks was $7.6 million, which
consisted of $5.7 million in cash paid to acquire ViewLinks’ remaining outstanding common stock, $1.8 million of contingent
consideration earned by and substantially paid to the former ViewLinks shareholders through January 31, 2009, and $0.1 million
of direct transaction costs. Our purchase price allocation for ViewLinks, based on estimated fair values, consisted of $4.9 million
of goodwill, $1.8 million of identifiable intangible assets, $0.7 of net tangible assets, and $0.2 million of IPR&D. The intangible
assets acquired in this transaction are being amortized over estimated useful lives of one to five years. The goodwill recorded in
this acquisition has been assigned to our Communications Intelligence segment, and is not deductible for income tax purposes.
Business Combinations for the Year Ended January 31, 2007
Mercom Systems Inc.
We acquired the stock of Mercom Systems, Inc. (“Mercom”), a privately held company based in Lyndhurst, New Jersey, on
July 14, 2006. We acquired Mercom to, among other things, expand our offering of interaction recording and performance
evaluation solutions for small to midsized enterprises with contact centers and public safety centers. We have included the
financial results of Mercom in our consolidated financial statements since July 14, 2006.
Page F-30
The following table sets forth the components and the allocation of the purchase price of Mercom:
(in thousands)
Components of Purchase Price:
Cash
Payments under contingent consideration arrangement
Direct transaction costs
Total purchase price
Allocation of Purchase Price:
Net tangible assets:
Cash
Other current assets
Deferred income taxes — current
Other assets
Current liabilities
Deferred income taxes — long-term
Other liabilities
Net tangible assets
Identifiable intangible assets:
Developed technology
Distribution network
Trademark and trade name
Backlog
Non-competition agreements
Total identifiable intangible assets (1)
Goodwill
Total purchase price
Amount
Estimated
Useful Lives
$
$
$
$
35,000
3,657
651
39,308
536
5,018
186
299
(6,241)
(1,406)
(1,243)
(2,851)
3,745
2,440
375
450
1,035
8,045
34,114
39,308
7 years
10 years
1 year
1 month
5 years
(1) The weighted-average amortization period of all finite-lived identifiable intangible assets is 7.0 years.
Purchase Price
The initial purchase price of Mercom included $35.0 million of cash and $0.7 million of direct transaction costs.
The terms of the agreement also provided the former Mercom stockholders an opportunity to earn up to $17.5 million of
additional cash consideration, based upon achieving certain performance goals, over the two-year period following the
acquisition date. $3.7 million of additional consideration was earned and paid pursuant to this arrangement through January 31,
2008 and was recorded as additional goodwill. No further contingent consideration was earned through the completion of the
contingent consideration period.
Page F-31
Goodwill and Identifiable Intangible Assets
Among the factors that contributed to the recognition of goodwill in this transaction were securing an expanded presence in the
small to midsized contact center market, acquiring a talented assembled workforce, and opportunities for future synergies and
cost savings. This goodwill has been assigned to our Workforce Optimization segment, and is not deductible for income tax
purposes.
During the year ended January 31, 2009, we reduced the goodwill associated with the acquisition of Mercom by $0.3 million to
reflect the recognition of a previously reserved income tax net operating loss carryforward.
CM Insight Limited
We acquired CM Insight Limited (“CM Insight”), a privately held performance management solution provider, based in the
United Kingdom, on February 6, 2006. We have included the financial results of CM Insight in our consolidated financial
statements since February 6, 2006. The total purchase price for CM Insight was $10.5 million, which consisted of $6.3 million in
cash paid to acquire the outstanding common stock of CM Insight, $3.9 million of contingent consideration earned for the period
ended January 31, 2008, and $0.3 million for direct transaction costs. The contingent consideration earned and paid during this
period was recorded as additional goodwill. No further contingent consideration was earned by the former CM Insight
shareholders through the completion of the contingent consideration period. Our purchase price allocation for CM Insight, based
on estimated fair values, consisted of $9.7 million of goodwill, $0.5 million of identifiable intangible assets, and $0.3 of net
tangible assets. The intangible assets acquired in this transaction are being amortized over estimated useful lives of one to three
years. The goodwill recorded in this transaction has been assigned to our Workforce Optimization segment, and is not deductible
for income tax purposes.
Unaudited Pro Forma Financial Information
The unaudited financial information presented in the table below summarizes the combined results of our operations and the
operations of Witness and Mercom on a pro forma basis, as though the companies had been combined as of the beginning of
each of the periods presented. The pro forma impact of the CM Insight and ViewLinks acquisitions are not material either
individually or in the aggregate to our overall consolidated operating results and therefore are not presented.
Pro forma financial information is subject to various assumptions and estimates and is presented for informational purposes only.
This pro forma information does not purport to represent or be indicative of the consolidated operating results that would have
been reported had the transactions been completed as described herein, and the data should not be taken as indicative of future
consolidated operating results.
Page F-32
No pro forma financial information is presented for the year ended January 31, 2009, as we did not enter into any business
combinations during that period.
Pro forma financial information for the years ended January 31, 2008 and 2007 is as follows:
(in thousands, except per-share data)
Revenue
Net income (loss)
Net income (loss) applicable to common shares
Basic and diluted loss per share
5. INTANGIBLE ASSETS AND GOODWILL
For the Years Ended January 31,
2008
601,833
(230,288)
(243,310)
(7.55)
2007
599,409
(117,891)
(130,913)
(4.07)
$
$
$
$
$
$
$
$
Acquisition-related intangible assets consist of the following as of January 31, 2009 and 2008:
(in thousands)
Customer relationships
Acquired technology
Trade names
Non-competition agreements
Distribution network
Total
(in thousands)
Customer relationships
Acquired technology
Trade names
Non-competition agreements
Distribution network
Total
$
$
$
$
Page F-33
As of January 31, 2009
Accumulated
Amortization
(34,420)
$
(20,134)
(5,926)
(1,760)
(620)
(62,860)
$
Cost
194,076
53,781
9,350
3,416
2,440
263,063
As of January 31, 2008
Accumulated
Amortization
(15,891)
$
(11,786)
(2,848)
(2,219)
(376)
(33,120)
$
Cost
208,399
56,798
10,283
4,742
2,440
282,662
$
$
$
$
Net
159,656
33,647
3,424
1,656
1,820
200,203
Net
192,508
45,012
7,435
2,523
2,064
249,542
The following table presents net acquisition-related intangible assets by segment as of January 31, 2009 and 2008.
(in thousands)
Workforce Optimization
Video Intelligence
Communications Intelligence
Total
As of January 31,
2009
196,483
1,427
2,293
200,203
$
$
2008
243,628
1,847
4,067
249,542
$
$
All acquired, finite-lived intangible assets are amortized on a straight-line basis, which approximates the pattern in which the
estimated economic benefits of the assets are realized, over their estimated useful lives.
Total amortization expense recorded for acquisition-related intangible assets was $34.3 million, $27.2 million, and $6.9 million
for the years ended January 31, 2009, 2008, and 2007, respectively. The remainder of the decline in net acquisition-related
intangible assets during the year ended January 31, 2009 reflects the impact of lower foreign exchange rates on intangible assets
not denominated in U.S. dollars.
Estimated future finite-lived acquisition-related intangible asset amortization expense is as follows:
(in thousands)
For the Years Ended January 31,
2010
2011
2012
2013
2014
2015 and thereafter
Total
Amount
29,761
28,760
27,851
27,078
22,218
64,535
200,203
$
$
In conjunction with the goodwill impairment reviews described below, we conducted reviews for impairment of our other long-
lived assets, including finite-lived intangible assets, in accordance with SFAS No. 144, as any impairment of these assets must be
considered prior to the conclusion of the impairment review under SFAS No. 142. As a result of these reviews, we recorded
impairments of finite-lived intangible assets of $2.7 million in the fourth quarter of the year ended January 31, 2008, and
$4.5 million in the fourth quarter of the year ended January 31, 2007, related to our Video Intelligence business in the Asia
Pacific region. No impairments of intangible assets were recorded during the year ended January 31, 2009.
Page F-34
The impairment charge of $2.7 million in the year ended January 31, 2008 was due to a change in business strategy, which
resulted in a decline in our distribution business in the region. For this impairment, $0.4 million is related to acquired technology
and is reported within cost of revenue, and $2.3 million is related to customer-related intangible assets and is reported within
operating expenses. The impairment charge of $4.5 million in the year ended January 31, 2007 resulted from our decision to
replace certain acquired technology with new technology sooner than originally planned. We also fully impaired the value of an
acquired distribution network due to reduced business with certain distributors, driven by changes in our business strategy in the
region. For this impairment, $3.7 million is related to acquired technology and reported within cost of revenue and $0.8 million
is related to customer-related intangible assets and is reported within operating expenses.
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and identifiable
intangible assets acquired. Goodwill activity for the years ended January 31, 2009 and 2008, in total and by reportable segment,
is as follows:
Reportable Segment
(in thousands)
Balance at January 31, 2007
Acquisition of Witness
Acquisition of ViewLinks
Additional consideration — previous acquisitions (1)
Income tax-related adjustments
Goodwill impairment
Foreign currency translation and other
Balance at January 31, 2008
Additional consideration — previous acquisitions (1)
Income tax-related adjustments
Goodwill impairment
Foreign currency translation and other
Balance at January 31, 2009
Total
122,727
674,378
4,692
1,730
(971)
(20,639)
3,097
785,014
1,303
(398)
(25,961)
(49,974)
709,984
$
$
Workforce
Optimization
49,782
$
674,378
—
—
(186)
(14,019)
969
710,924
1,066
(398)
(13,649)
(47,594)
650,349
$
(1) Contingent consideration for acquisitions completed in prior years.
Video
Intelligence
$
Communications
47,891 $
—
—
1,730
(785)
(6,620)
2,128
44,344
—
—
(12,312)
(2,380)
29,652 $
Intelligence
25,054
—
4,692
—
—
—
29,746
237
—
—
—
29,983
$
In accordance with SFAS No. 142, we assigned goodwill to multiple reporting units at one level below our segments, primarily
based on types of products sold or services provided and in certain cases by products sold in a particular industry or vertical
market.
In accordance with SFAS No. 142, we test our goodwill for impairment annually as of November 1, or more frequently, if events
or circumstances indicate the potential for an impairment. We performed goodwill impairment tests for each of our reporting
units as of November 1, 2008, 2007 and 2006.
Page F-35
The results of step one of our testing as of November 1, 2008 indicated that the net carrying value of two of our reporting units
exceeded their fair values. We performed the required step two analysis and recorded impairment charges of $13.7 million in our
Workforce Optimization segment and $12.3 million in our Video Intelligence segment in the fourth quarter of the year ended
January 31, 2009, which represented the excess of the carrying value of the impaired reporting units’ goodwill over their implied
fair values. These charges are recorded in impairments of goodwill and other acquired intangible assets on the accompanying
consolidated statements of operations. The impairment in our Workforce Optimization segment related to our performance
management consulting business in the United States, and was due primarily to overall lower than anticipated demand for our
consulting services, which resulted in a decline in projected future revenue and cash flow. We fully impaired the remaining
goodwill balance of $12.3 million in one reporting unit of our Video Intelligence segment in the Asia Pacific region, due to our
decision in the fourth quarter to discontinue the development of a product line as a result of continued decline in our distribution
business in that region.
The results of step one of our testing as of November 1, 2007 indicated that the net carrying value of four of our reporting units
exceeded their fair values. We performed the required step two analysis and recorded impairment charges of $14.0 million in our
Workforce Optimization segment and $6.6 million in our Video Intelligence segment in the fourth quarter of the year ended
January 31, 2008, which represented the excess of the carrying value of the impaired reporting units’ goodwill over their implied
fair values. These charges are recorded in impairments of goodwill and other intangible assets on the accompanying consolidated
statements of operations. The impairment in our Workforce Optimization segment related to our performance management
consulting businesses in the United States and Europe, and was due primarily to overall lower than anticipated demand for our
consulting services, which resulted in a decline in projected future revenue and cash flow. The impairment in our Video
Intelligence segment related to our distribution business in the Asia Pacific region, where revenue declined due to a change in
business strategy.
The results of step one of our testing as of November 1, 2006 indicated that the net carrying value of two of our reporting units
exceeded their fair values. These same two reporting units were determined to be further impaired as of November 1, 2007, as
they are both among the four reporting units for which impairment was identified at that date, as noted above. We performed the
required step two analysis and recorded impairment charges of $3.1 million in our Workforce Optimization segment and
$17.1 million in our Video Intelligence segment in the fourth quarter of the year ended January 31, 2007, which represented the
excess of the carrying value of the impaired reporting units’ goodwill over their implied fair values. These charges are recorded
in impairments of goodwill and other acquired intangible assets on the accompanying consolidated statements of operations. The
impairment in our Workforce Optimization segment related to our performance management consulting business in the United
States and was due primarily to overall lower than anticipated demand for our consulting services, which resulted in a decline in
projected future revenue and cash flow. The impairment in our Video Intelligence segment related to our distribution business in
the Asia Pacific region, where revenue declined due to a change in business strategy.
Page F-36
6. LONG-TERM DEBT
The following is a summary of our outstanding financing arrangements as of January 31, 2009 and 2008:
(in thousands)
Term loan facility
Revolving credit facility
Less: current portion
Long-term debt
As of January 31,
2009
2008
610,000
15,000
625,000
4,088
620,912
$
$
610,000
—
610,000
—
610,000
$
$
On May 25, 2007, to partially finance the acquisition of Witness, we entered into a $675.0 million secured credit facility
comprised of a $650.0 million seven-year term loan facility and a $25.0 million six-year revolving credit facility.
Borrowings under the credit facility bear interest at a rate of, at our election, (a) the higher of (i) the prime rate and (ii) the
federal funds rate plus 0.50% plus, in either case, a margin of 1.75% or (b) the applicable London Interbank Offered Rate
(“LIBOR”) plus a margin of 2.75%. Such margins were subject to increase by 0.25% if we failed to receive corporate credit
ratings from both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”) or failed to
deliver certain financial statements to the credit facility administrative agent by February 25, 2008, and an additional 0.25% if we
failed to do so by August 25, 2008. Because we did not timely do so, the above-referenced applicable margins increased by
0.25% on February 25, 2008 and another 0.25% on August 25, 2008 to 2.25% and 3.25%, respectively. If we both obtain the
above-referenced corporate ratings and deliver to the credit facility administrative agent the requisite financial statements, the
applicable margins will subsequently range from 1.00% to 1.75% and 2.00% to 2.75%, respectively, depending on our corporate
ratings from Moody’s and S&P.
Optional prepayments of the loans are permitted without premium or penalty (other than customary breakage costs associated
with the prepayment of loans bearing interest based on LIBOR). The loans are also subject to mandatory prepayment
requirements based upon certain asset sales, excess cash flow, and certain other events.
The term loan originally amortized in 27 consecutive quarterly installments of $1.6 million each, beginning August 1, 2007,
followed by a final amortization payment of the remaining outstanding principal amount when the loan matures. However, on
July 31, 2007, we made an optional prepayment of $40.0 million, $13.0 million of which was applied towards the eight
immediately following principal payments and $27.0 million of which was applied pro rata to the remaining principal payments.
As of January 31, 2009, $4.1 million of the term loan is classified as a current liability, reflecting a $4.1 million mandatory
“excess cash flow” prepayment made in May 2009. As of January 31, 2009, the interest rate on the term loan was 3.59%.
Page F-37
Our $25.0 million revolving line of credit facility was reduced to $15.0 million during the quarter ended October 31, 2008 as a
result of the bankruptcy of Lehman Brothers. During the quarter ended January 31, 2009, we borrowed the full $15.0 million
available under the revolving credit facility. Repayment of these borrowings is required upon expiration of the facility in
May 2013. As of January 31, 2009, the interest rate on the revolving line of credit borrowings was 3.64%.
Our obligations under our credit facility are guaranteed by certain of our domestic subsidiaries (including Witness) and are
secured by substantially all of our and their assets. We paid debt issuance costs of $13.6 million associated with the credit
facility, which we have deferred and are classified within other assets. We are amortizing these deferred debt issuance costs over
the life of the credit facility. Amortization of deferred costs associated with the term loan is recorded using the effective interest
rate method, while amortization of deferred costs associated with the revolving credit facility is recorded on a straight-line basis.
On May 25, 2007, concurrently with entry into our credit facility, we entered into a receive-variable/pay-fixed interest rate swap
agreement with a multinational financial institution on a notional amount of $450.0 million to mitigate a portion of the risk
associated with variable interest rates on the term loan. This interest rate swap agreement terminates in May 2011. See Note 13,
“Fair Value Measurements” for further details regarding the interest rate swap agreement.
During the years ended January 31, 2009 and 2008, we incurred $35.2 million and $34.4 million of interest expense,
respectively, on borrowings under our credit facilities which commenced during the year ended January 31, 2008. We also
recorded $1.7 million during the year ended January 31, 2009 and $1.9 million during the year ended January 31, 2008 of
amortization of our deferred debt issuance costs, which is reported within interest expense. Included in the deferred debt issuance
cost amortization for the year ended January 31, 2008 was a $0.8 million write-off associated with the $40.0 million principal
prepayment, in July 2007.
Future scheduled annual principal payments on indebtedness as of January 31, 2009 are as follows:
(in thousands)
For the Years Ended January 31,
2010
2011
2012
2013
2014
2015
Total
Page F-38
Amount
4,088
5,249
6,225
6,224
21,224
581,990
625,000
$
$
The credit facility agreement contains customary affirmative and negative covenants for credit facilities of its type, including
limitations on us and our subsidiaries with respect to indebtedness, liens, dividends and distributions, acquisitions and
dispositions of assets, investments and loans, transactions with affiliates, and nature of business. It also prohibits us from
exceeding a specified consolidated leverage ratio, tested over rolling four-quarter periods.
The agreement also includes a requirement that we submit audited consolidated financial statements to the lenders within 90 days
of the end of each fiscal year, beginning with the financial statements for the year ended January 31, 2010. We are therefore
obligated to deliver our audited consolidated financial statements for the year ended January 31, 2010 by May 1, 2010 or be in
default of the agreement. The agreement provides us a thirty day period to cure such default or an event of default occurs.
The credit facility agreement contains customary events of default with corresponding grace periods. If an event of default
occurs and is continuing, the lenders may terminate and/or suspend their obligations to make loans and issue letters of credit
under the credit facility and/or accelerate amounts due and/or exercise other rights and remedies. In the case of certain events of
default related to insolvency and receivership, the commitments of the lenders will be automatically terminated and all
outstanding loans will become immediately due and payable.
7. BALANCE SHEET INFORMATION
Inventories consist of the following as of January 31, 2009 and 2008:
(in thousands)
Raw materials
Work-in-process
Finished goods
Total inventories
As of January 31,
2009
2008
$
$
6,389
5,070
8,996
20,455
$
$
6,225
3,308
9,992
19,525
Page F-39
Property and equipment, net consist of the following as of January 31, 2009 and 2008:
(in thousands)
Land
Buildings
Leasehold improvements
Software
Equipment, furniture, and other
Less: accumulated depreciation and amortization
Total property and equipment, net
As of January 31,
2009
2008
3,595
2,250
9,289
18,298
41,935
75,367
(44,823)
30,544
$
$
4,161
2,250
9,967
14,735
43,518
74,631
(38,316)
36,315
$
$
Depreciation expense on property and equipment was $15.0 million, $14.4 million, and $9.0 million for the years ended
January 31, 2009, 2008, and 2007, respectively.
Other assets consist of the following as of January 31, 2009 and 2008:
(in thousands)
Deferred debt issuance costs, net
Derivative financial instruments, at fair value
Other
Total other assets
As of January 31,
2009
2008
$
$
10,207
—
8,609
18,816
$
$
11,749
8,121
20,482
40,352
Accrued expenses and other liabilities consist of the following as of January 31, 2009 and 2008:
(in thousands)
Compensation and benefits
Billings in excess of costs and estimated earnings on uncompleted contracts
Professional fees and consulting
Derivative financial instruments, at fair value
Taxes other than income
Interest on indebtedness
Distributor and agent commissions
Other
Total accrued expenses and other liabilities
As of January 31,
2009
2008
34,821
42,250
7,157
16,851
5,417
2,398
5,446
29,727
144,067
$
$
48,335
29,284
15,185
8,832
6,799
3,754
2,249
29,503
143,941
$
$
Page F-40
Other liabilities consist of the following as of January 31, 2009 and 2008:
(in thousands)
Unrecognized tax benefits
Derivative financial instruments, at fair value
Obligation for severance compensation
Other
Total other liabilities
8. CONVERTIBLE PREFERRED STOCK
As of January 31,
2009
2008
17,602
18,263
3,305
14,483
53,653
$
$
28,219
21,040
4,414
14,918
68,591
$
$
On May 25, 2007, in connection with our acquisition of Witness, we entered into a Securities Purchase Agreement with
Comverse, (the “Securities Purchase Agreement”) whereby Comverse purchased, for cash, an aggregate of 293,000 shares of our
Series A Convertible Preferred Stock (“preferred stock”), for an aggregate purchase price of $293.0 million. Proceeds from the
issuance of the preferred stock were used to partially finance the acquisition. We incurred $0.2 million of direct issuance costs
associated with the issuance of the preferred stock, which were charged against the carrying value of the preferred stock.
The preferred stock was issued at a purchase price of $1,000 per share and ranks senior to our common stock. The preferred
stock has an initial liquidation preference equal to its $1,000 per- share purchase price. In the event of any voluntary or
involuntary liquidation, dissolution, or winding-up of our company, the holders of the preferred stock will be entitled to receive,
out of assets available for distribution to our stockholders and before any distribution of assets to our common stockholders, an
amount equal to the then-current liquidation preference, which includes accrued and unpaid dividends.
The terms of the preferred stock provide that upon a fundamental change, as defined, the holders of the preferred stock would
have the right to require us to repurchase the preferred stock for 100% of the liquidation preference then in effect. Therefore, the
preferred stock has been classified as mezzanine equity on our consolidated balance sheets as of January 31, 2009 and
January 31, 2008, separate from permanent equity, because the occurrence of these fundamental changes, and thus potential
redemption of the preferred stock, however remote in likelihood, is not solely under our control. Fundamental change events
include the sale of substantially all of our assets, and certain changes in beneficial ownership, board of directors’ representation,
and business reorganizations. In the event of a fundamental change, the conversion rate (as described in the section entitled
Voting and Conversion, below) will be increased to provide for additional shares of common stock issuable to the holders of
preferred stock, based on a sliding scale (depending on the acquisition price, as defined) ranging from none to 3.7 additional
shares of common stock for every share of preferred stock converted into shares of common stock.
Page F-41
We have concluded that, as of January 31, 2009, there is no indication that the occurrence of a fundamental change and the
associated redemption of the preferred stock were probable. We therefore have not adjusted the carrying amount of the preferred
stock to its redemption amount, which is its liquidation preference, at January 31, 2009. Through January 31, 2009, cumulative,
undeclared dividends on the preferred stock were $20.6 million and as a result, the liquidation preference of the preferred stock
was $313.6 million at that date.
We determined that the variable dividend feature of the preferred stock, details of which are further described below, was not
clearly and closely related to the characteristics of the preferred stock host contract and, therefore, is an embedded derivative
financial instrument, subject to bifurcation from the preferred stock. This feature was determined to be an asset, and was
assigned an initial fair value of $0.9 million at the May 25, 2007 issue date of the preferred stock. Therefore, the preferred stock
was assigned an initial fair value of $293.9 million, and the $0.9 million bifurcated derivative financial instrument was reflected
within other assets. The $293.7 million carrying value of the preferred stock at January 31, 2008 also reflects the previously
discussed $0.2 million of direct issuance costs. Subsequent changes in the fair value of the derivative financial instrument during
the year ended January 31, 2008 are reflected within other income (expense), net. As of January 31, 2008, the fair value of the
embedded derivative instrument had increased to $8.1 million, driven by declining market interest rates which increased the
likelihood that the dividend rate might be reduced. This $7.2 million increase in fair value was reflected within other income
(expense), net.
The fair value of the embedded derivative financial instrument was based on the potential future savings implicit in paying
dividends at a reduced rate of 3.875% instead of the original stated preferred dividend rate of 4.25%. On February 1, 2008, as
described below, the preferred stock dividend rate was reset to 3.875% per annum and upon occurrence of this dividend rate
reset, the embedded derivative has been settled in the form of reduced future dividend obligations. Accordingly, we reclassified
the $8.1 million fair value of the derivative asset at that date against the carrying value of the preferred stock as of February 1,
2008, reducing the carrying value of the preferred stock to $285.5 million.
The holders of the preferred stock have various rights and preferences, as follows:
Dividends
Cash dividends on the preferred stock are cumulative and are calculated quarterly at a specified dividend rate on the liquidation
preference in effect at such time. Dividends are paid only if declared by our board of directors. Initially, the specified annual
dividend rate was 4.25% per share. However, beginning in the first quarter after the initial interest rate on our variable term loan
was reduced by 50 basis points or more, the dividend rate was reset to 3.875% per annum and then fixed at that level. This
variable dividend feature was accounted for as an embedded derivative financial instrument, as described above.
During the quarter ended January 31, 2008, the interest rate on our term loan was reduced by more than 50 basis points below the
initial interest rate. Accordingly, the dividend rate on the preferred stock was reset to 3.875%, effective February 1, 2008. This
rate is now only subject to future change in the event we are unable to obtain approval of the issuance of common shares
underlying the preferred stock’s conversion feature.
Page F-42
We are prohibited from paying cash dividends on the preferred stock under the terms of a covenant in our credit agreement. We
may elect to make dividend payments in shares of our common stock. The common stock used for dividends, when and if
declared, would be valued at 95% of the volume weighted-average price of our common stock for each of the five consecutive
trading days ending on the second trading day immediately prior to the record date for the dividend.
Through January 31, 2009, no dividends had been declared or paid on the preferred stock.
Voting and Conversion
The preferred stock does not have voting or conversion rights until the underlying shares of common stock are approved for
issuance by a vote of holders of a majority of our common stock. Following receipt of stockholder approval for the issuance of
the underlying common shares, each share of preferred stock will be entitled to a number of votes equal to the number of shares
of common stock into which the preferred stock would be convertible at the conversion rate (as defined below) in effect on the
date the preferred stock was issued to Comverse. In addition, following receipt of stockholder approval for the issuance of the
underlying common shares, each share of preferred stock will be convertible at the option of the holder into a number of shares
of our common stock equal to the liquidation preference then in effect, divided by the conversion price then in effect, which was
initially set at $32.66. The conversion price is subject to periodic adjustment upon the occurrence of certain dilutive events. If it
were convertible at January 31, 2009, the preferred stock could be converted into approximately 9.6 million shares of our
common stock.
At any time on or after May 25, 2009, we have the right, provided approval of the issuance of the underlying shares of common
stock has been obtained, to cause the preferred stock, in whole but not in part, to be automatically converted into common stock
at the conversion price then in effect. However, we may exercise this right only if the closing sale price of our common stock
immediately prior to conversion equals or exceeds the conversion price then in effect by: (a) 150%, if the conversion is on or
after May 25, 2009 but prior to May 25, 2010, (b) 140%, if the conversion is on or after May 25, 2010 but prior to May 25, 2011,
or (c) 135%, if the conversion is on or after May 25, 2011.
Transfer and Registration Rights
Comverse has had the right to sell the preferred stock since November 25, 2007 in either private or public transactions. Pursuant
to a registration rights agreement we entered into concurrently with the Securities Purchase Agreement (“New Registration
Rights Agreement”), commencing 180 days after we regain compliance with SEC reporting requirements, and provided that the
underlying shares of our common stock have been approved for issuance by our common stockholders, Comverse will be
entitled to two demands to require us to register the shares of common stock underlying the preferred stock for resale under the
Securities Act of 1933, as amended (the “Securities Act”).
Page F-43
The New Registration Rights Agreement also gives Comverse unlimited piggyback registration rights on certain Securities Act
registrations filed by us on our own behalf or on behalf of other stockholders.
Comverse may transfer its rights under the New Registration Rights Agreement to any transferee of the registrable securities that
is an affiliate of Comverse or any other subsequent transferee, provided that in each case such affiliate or transferee becomes a
party to the New Registration Rights Agreement, agreeing to be bound by all of its terms and conditions.
Comverse’s rights under the New Registration Rights Agreement are in addition to its rights under a previous registration rights
agreement we entered into with Comverse shortly before our initial public offering (“IPO”) in 2002. This registration rights
agreement (“Original Registration Rights Agreement”) covers all shares of common stock then held by Comverse and any
additional shares of common stock acquired by Comverse at a later date. Under the Original Registration Rights Agreement,
Comverse is entitled to unlimited demand registrations of its shares on Form S-3. If we are not eligible to use Form S-3,
Comverse is also entitled to one demand registration on Form S-1.
Like the New Registration Rights Agreement, the Original Registration Rights Agreement also provides Comverse with
unlimited piggyback registration rights. Comverse may transfer its rights under this agreement to an affiliate or other subsequent
transferee, subject to the transferee agreeing to be bound by all of its terms and conditions.
9. STOCKHOLDERS’ EQUITY (DEFICIT)
Dividends on Common Stock
We did not declare or pay any dividends on our common stock during the years ended January 31, 2009, 2008, and 2007.
Commencing with our issuance of preferred stock, and our entry into term loan and revolving credit facilities in May 2007, we
are subject to certain restrictions on declaring and paying dividends on our common stock.
Treasury Stock
Repurchased shares of common stock are recorded as treasury stock, at cost. At January 31, 2009, we held 88,000 shares of
treasury stock with a cost of $2.4 million, and at January 31, 2008, we held 74,000 shares of treasury stock with a cost of
$2.1 million.
Shares of restricted stock awards that are forfeited when recipients separate their employment prior to the lapsing of the award’s
restrictions are recorded as treasury stock.
Page F-44
Our board of directors has approved a program to repurchase shares of our common stock from our independent directors, and
such other directors as may from time to time be designated by the board of directors upon vesting of restricted stock grants
during our extended filing delay period, in order to provide funds to the recipient for the payment of associated income taxes.
From time to time, our board of directors has also approved repurchases from executive officers for the same purpose when a
vesting has occurred during a blackout period. We record these repurchases of common stock as treasury stock.
Accumulated Other Comprehensive Loss
In addition to net income (loss), accumulated other comprehensive income (loss) includes items such as foreign currency
translation adjustments and unrealized gains and losses on certain marketable securities, investments and derivative financial
instruments designated as hedges. Accumulated other comprehensive income (loss) is presented as a separate line item in the
stockholders’ equity (deficit) section of our consolidated balance sheets, the components of which are detailed in our
consolidated statements of stockholders’ equity (deficit). Accumulated other comprehensive income (loss) items have no impact
on our net income (loss) as presented in our consolidated statements of operations.
The following table summarizes, as of each balance sheet date, the components of our accumulated other comprehensive loss.
Income tax effects on unrealized gains and losses on available-for-sale marketable securities and derivative financial instruments
were insignificant.
(in thousands)
Foreign currency translation losses, net
Unrealized gains on derivative financial instruments
Unrealized losses on available-for-sale marketable securities
Total accumulated other comprehensive loss
For the Years Ended January 31,
2009
2008
$
$
(58,476)
101
(29)
(58,404)
$
$
(610)
—
—
(610)
The increase in foreign currency translation losses, net, during the year ended January 31, 2009 primarily reflects the
strengthening of the U.S. dollar against the British pound sterling during this period, which resulted in lower U.S. dollar
translated balances of British pound sterling denominated assets, principally goodwill and intangible assets associated with the
acquisition of Witness.
Page F-45
10. INTEGRATION, RESTRUCTURING AND OTHER, NET
Integration, restructuring and other, net, is comprised of the following for the years ended January 31, 2009, 2008, and 2007:
(in thousands)
Restructuring costs
Integration costs
Other legal costs (recoveries), net
Gain on sale of land
Total integration, restructuring and other, net
For the Years Ended January 31,
2008
2009
2007
$
$
5,685
3,261
(4,292)
—
4,654
$
$
3,308
10,980
8,708
—
22,996
$
$
—
—
—
(765)
(765)
Integration, restructuring and other, net are reported as unallocated items for segment reporting purposes, as more fully described
in Note 17, “Segment, Geographic, and Significant Customer Information”.
Restructuring and Integration Costs
We continually review our business model and carefully manage our cost structure. When considered necessary, we have
periodically implemented plans to reduce costs and better align our resources with market demand.
The following table summarizes our restructuring and integration charges incurred during the years ended January 31, 2009 and
2008:
For the Year Ended January 31, 2009
(in thousands)
Global cost reduction plan
Consulting business in Europe
Acquisition of Witness
Video Intelligence segment
Total
For the Year Ended January 31, 2008
(in thousands)
Acquisition of Witness
Video Intelligence segment
Total
Restructuring
3,193
$
1,370
858
264
5,685
$
Integration
—
$
—
3,261
—
3,261
$
Restructuring
$
$
1,501
1,807
3,308
Integration
10,980
$
—
10,980
$
Total
3,193
1,370
4,119
264
8,946
Total
12,481
1,807
14,288
$
$
$
$
Page F-46
We did not incur any restructuring and integration costs during the year ended January 31, 2007.
Restructuring Costs Related to our Global Cost Reduction Plan
In the quarter ended January 31, 2009, we implemented a global cost reduction plan in order to reduce our operating costs in
response to uncertainty in the global economic environment. These cost reduction initiatives included a restructuring plan which
included the elimination of approximately 90 positions throughout all functional areas of our global workforce, reducing our
utilization of outside contractors and consultants, and the closing of one leased facility. The associated restructuring charges
consisted predominantly of severance and related employee payments resulting from terminations. We recorded the majority of
these restructuring expenses with charges of $3.2 million in the quarter ended January 31, 2009, including $2.8 million for
severance and related benefits and $0.4 million for the exit from the leased facility and other costs.
The following table summarizes the activity during the year ended January 31, 2009 associated with the restructuring charges
related to our global cost reduction plan.
(in thousands)
Accrued restructuring costs — January 31, 2008
Costs accrued during the year
Payments and settlements during the year
Accrued restructuring costs — January 31, 2009
Severance and
Related Costs
$
2,795
(2,264)
531
$
— $
Other Costs
—
398
(398)
—
$
Total
—
3,193
(2,662)
531
$
$
Throughout the implementation and execution phase of this restructuring plan, the scope would periodically be reevaluated,
resulting in revisions to the number of personnel impacted, and the amounts paid under the plan. The liabilities of $0.5 million
for remaining obligations under this plan as of January 31, 2009 are included within accrued expenses and other liabilities on the
accompanying consolidated balance sheet at January 31, 2009, and were settled during the year ended January 31, 2010.
Restructuring Costs Related to our Consulting Services in Europe
In the quarter ended July 31, 2008, as a result of reduced demand for our consulting services in Europe, we implemented a cost
reduction plan in this sector of our Workforce Optimization business. The plan resulted in the elimination of approximately 30
positions and was substantially completed by the end of October 2008. The associated restructuring charges consisted
predominantly of severance and related employee payments resulting from terminations. We recorded these restructuring
expenses with charges of $0.5 million and $0.9 million in the quarters ended July 31, 2008 and October 31, 2008, respectively.
Page F-47
The following table summarizes the activity during the year ended January 31, 2009 associated with the restructuring charges
related to our consulting services in Europe.
(in thousands)
Accrued restructuring costs — January 31, 2008
Costs accrued during the year
Payments and settlements during the year
Accrued restructuring costs — January 31, 2009
Severance and
Related Costs
$
— $
1,345
(1,345)
$
— $
Other Costs
—
25
(25)
—
Total
—
1,370
(1,370)
—
$
$
Restructuring and Integration Costs Related to our Acquisition of Witness
In conjunction with the acquisition of Witness in May 2007, as more fully described in Note 4, “Business Combinations”, we
took several actions during the year ended January 31, 2008, some of which further extended into the year ended January 31,
2009, to reduce fixed costs, eliminate redundancies, strengthen operational focus, and better position us to respond to market
pressures or unfavorable economic conditions. As a result, we incurred restructuring and integration charges from acquiring
Witness and integrating Witness into our Workforce Optimization segment. Following the acquisition of Witness in May 2007,
we immediately formulated and approved a plan to integrate the Witness business with our existing Workforce Optimization
segment in all regions. We implemented certain staff reductions, and streamlined and improved operations and processes
necessary to restructure, integrate, and combine the Witness and Verint businesses, primarily in the following operational areas
and functions: (a) products — integrate products and platforms marketed to clients; (b) sales, marketing, and services —
centralize and train sales and field marketing personnel, create a dedicated channel and OEM sales group, leverage and increase
the combined business’ services helpdesk expertise, and transition to a single global services organization; and (c) general and
administrative — transition finance, human resources, and legal support to our facilities in New York and Georgia, and combine
information technology and communications organizations, processes, and systems.
The following table summarizes the activity during the years ended January 31, 2009 and 2008 associated with the restructuring
charges related to the acquisition of Witness.
(in thousands)
Accrued restructuring costs — January 31, 2007
Costs accrued during the year
Payments and settlements during the year
Accrued restructuring costs — January 31, 2008
Costs accrued during the year
Payments and settlements during the year
Accrued restructuring costs — January 31, 2009
Page F-48
Total
—
1,501
(1,081)
420
858
(1,278)
—
$
$
Restructuring expenses associated with the acquisition of Witness consisted of severance and related costs recorded during the
years ended January 31, 2009 and 2008 for global workforce reductions of Verint personnel, primarily as a result of
redundancies, in sales and marketing, research and development, and administration and support. Throughout the implementation
and execution phase of this restructuring plan, the scope would periodically be reevaluated, resulting in revisions to the number
of personnel impacted, and the amounts paid under the plan.
In addition to the aforementioned restructuring charges, we also incurred integration costs of $3.2 million and $11.0 million
during the years ended January 31, 2009 and January 31, 2008, respectively, resulting from the Witness acquisition and the
subsequent integration of the Witness and Verint businesses. These costs included $5.6 million of legal, accounting, consulting,
and other professional fees, $2.4 million of travel and related costs associated with the integration efforts, $4.2 million of
marketing, systems integration and other costs, and $2.0 million of incremental compensation and personnel costs, primarily for
employees temporarily retained following the acquisition solely to assist in integration and knowledge transfer activities. These
personnel had no other significant day-to-day responsibilities outside of the integration effort and were generally retained for
periods no longer than twelve months. Professional fees primarily relate to legal, accounting, and consulting advice associated
with efforts to optimize the legal and tax structure of our global entities, since both Witness and Verint conduct operations in
common locations. The process of integrating the Witness and Verint businesses was substantially complete as of January 31,
2009.
Restructuring Costs Related to our Video Intelligence Segment
During the quarter ended July 31, 2007, we established and approved a plan to perform a comprehensive assessment of our
Video Intelligence business operations, predominantly in our North American and Hong Kong locations. As a result, we
implemented certain restructuring initiatives and activities intended to reduce our overall cost structure, improve operations by
building areas of more centralized expertise, adjust our organization structure to improve scalability, and enhance our
competitive position.
In the years ended January 31, 2009 and 2008, we recorded $0.3 million and $1.8 million, respectively, of restructuring costs
under this plan, arising from the elimination of certain positions in finance, customer service, sales and marketing, and research
and development and, in certain instances, migrating certain positions to lower cost markets, areas of more concentrated
expertise, or to corporate locations. Certain staff changes resulted from combining our call centers and customer support sites in
Colorado, and better aligning and leveraging our worldwide research and development activities in Hong Kong. Throughout the
execution of this restructuring plan, the scope would periodically be reevaluated, resulting in revisions to the number of
personnel impacted, and the amounts paid under the plan.
These restructuring costs included $1.8 million of severance and related costs and $0.3 million of consulting and temporary
personnel costs.
Page F-49
The following table summarizes the activity for the years ended January 31, 2009 and 2008 related to our Video Intelligence
segment restructuring:
(in thousands)
Accrued restructuring costs — January 31, 2007
Costs accrued during the year
Payments and settlements during the year
Accrued restructuring costs — January 31, 2008
Costs accrued during the year
Payments and settlements during the year
Accrued restructuring costs — January 31, 2009
Severance and Consulting and
Temporary Staff
Related Costs
$
— $
1,513
(597)
916
240
(1,146)
10
$
$
— $
294
(294)
—
24
(24)
— $
Total
—
1,807
(891)
916
264
(1,170)
10
The activity under this plan was substantially complete by October 31, 2008.
In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, costs associated with
restructuring activities have been recognized when they were incurred, rather than at the date of a commitment to an exit or
disposal plan. Such costs were exclusive of certain costs directly associated with the acquisition of Witness, which were recorded
as part of the purchase price. We continually evaluate the adequacy of liabilities accrued under these restructuring initiatives.
Although we believe that these estimates accurately reflect the remaining costs of our restructuring plans, actual results may
differ, which may require us to record adjustments to the liabilities.
Other Legal Costs
During the year ended January 31, 2008, we incurred $8.7 million of legal fees related to an ongoing patent infringement
litigation matter, which we are reporting within integration, restructuring and other, net. This litigation was subsequently settled
in our favor during the year ended January 31, 2009. The $9.7 million settlement amount received was partially offset by
$5.4 million of related legal costs incurred during the year ended January 31, 2009, resulting in a net recovery of $4.3 million.
Gain on Sale of Land
During the year ended January 31, 2007, we sold a parcel of land in Durango, Colorado, realizing a pre-tax gain of $0.8 million.
Page F-50
11. RESEARCH AND DEVELOPMENT, NET
Our gross research and development expenses for the years ended January 31, 2009, 2008, and 2007, were approximately
$91.3 million, $91.4 million, and $56.1 million, respectively. OCS grants amounted to approximately $2.2 million, $2.5 million,
and $2.3 million for the years ended January 31, 2009, 2008, and 2007, respectively, which were recorded as a reduction of gross
research and development expenses. We recorded other reimbursements of research and development expenses amounting to
approximately $0.8 million, $1.2 million, and $0.8 million for the years ended January 31, 2009, 2008, and 2007, respectively.
We capitalize certain costs incurred to develop our commercial software products, and we then recognize those costs within
product cost of revenue as the products are sold. Activity for our capitalized software development costs for the three years
ended January 31, 2009 was as follows:
(in thousands)
Capitalized software development costs, net, beginning of year
Software development costs capitalized during the year
Amortization of capitalized software development costs
Other
Capitalized software development costs, net, end of year
For the Years Ended January 31,
2008
2009
2007
$
$
10,272
4,547
(4,135)
(195)
10,489
$
$
9,762
4,624
(3,268)
(846)
10,272
$
$
10,241
4,492
(4,971)
—
9,762
The adjustment of $0.8 million in the year ended January 31, 2008 primarily reflects a charge recorded to recognize the
impairment of certain capitalized software development costs determined to be redundant as a result of the May 2007 acquisition
of Witness.
12. INCOME TAXES
The components of loss before income taxes and noncontrolling interest are as follows:
(in thousands)
Domestic
Foreign
Total loss before income taxes and noncontrolling interest
$
$
Page F-51
2009
For the Years Ended January 31,
2008
(116,844)
(52,972)
(169,816)
(68,109)
9,203
(58,906)
$
$
$
$
2007
(8,887)
(30,570)
(39,457)
The provision for income taxes consists of the following:
(in thousands)
Current income tax provision (benefit):
Federal
State
Foreign
Total current income tax provision
Deferred income tax provision (benefit):
Federal
State
Foreign
Total deferred income tax provision (benefit)
Total provision for income taxes
For the Years Ended January 31,
2008
2009
2007
$
$
(11,266)
(755)
13,924
1,903
11,805
1,088
4,875
17,768
19,671
$
$
847
398
6,492
7,737
26,056
1,748
(7,812)
19,992
27,729
$
$
926
201
5,236
6,363
(1,416)
160
(4,966)
(6,222)
141
The reconciliation of the U.S. federal statutory rate to our effective tax rate on income (loss) before income taxes and
noncontrolling interest is as follows:
(in thousands)
U.S. federal statutory income tax rate
Income tax provision (benefit) at the U.S. statutory rate
State tax provision (benefit)
Foreign taxes at rates different from U.S. federal statutory rate
Valuation allowance
Foreign exchange
Stock-based compensation
Non-deductible expenses
Tax credits
Tax contingencies
Impairment of goodwill and intangible assets
Fair value of derivatives
In-process research and development
Change in tax rates
U.S. tax effects of foreign operations
Other, net
Total provision for income taxes
Effective income tax rate
Page F-52
For the Years Ended January 31,
2008
2007
2009
35.0%
35.0%
$
$
(20,618)
(5,086)
(5,887)
30,233
2,920
2,808
745
(221)
(997)
9,127
—
—
3,873
3,394
(620)
19,671
$
$
(59,436)
(5,747)
7,305
73,404
(860)
2,831
1,063
(2,260)
5,495
4,716
(2,837)
2,253
751
711
340
27,729
-33.4%
-16.3%
$
$
35.0%
(13,810)
234
2,128
(408)
(2,495)
4,556
2,398
(1,345)
3,351
5,463
—
—
(244)
(430)
743
141
-0.4%
Our operations in Israel have been granted “Approved Enterprise” status by the Investment Center of the Israeli Ministry of
Industry, Trade and Labor, which makes us eligible for tax benefits under the Israeli Law for Encouragement of Capital
Investments, 1959. Under the terms of the program, income attributable to an approved enterprise is exempt from income tax for
a period of two years and is subject to a reduced income tax rate for the subsequent five to eight years (generally 10-25%,
depending on the percentage of foreign investment in the company). These tax incentives decreased our effective tax rates by
8.4%, 1.4%, and 0.2% for the years ended January 31, 2009, 2008, and 2007, respectively.
Page F-53
Deferred tax assets and liabilities consist of the following:
(in thousands)
Deferred tax assets:
Accrued expenses
Allowance for doubtful accounts
Deferred revenue
Inventory
Depreciation of property and equipment
Loss carryforwards
Tax credits
Stock-based and other compensation
Capitalized research and development expenses
Fair value of derivatives
Other long-term liabilities
Other, net
Total deferred tax assets
Deferred tax liabilities:
Deferred cost of revenue
Prepaid expenses
Goodwill and other intangible assets
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
Recorded as:
Current deferred tax assets
Long-term deferred tax assets
Current deferred tax liabilities
Long-term deferred tax liabilities
Net deferred tax assets
Page F-54
For the Years Ended January 31,
2009
2008
$
$
$
$
5,943
1,438
56,707
2,701
2,807
81,859
11,105
19,465
2,433
13,184
2,323
2,234
202,199
(12,612)
(1,401)
(64,404)
(78,417)
(116,817)
6,965
14,314
6,478
(403)
(13,424)
6,965
$
$
$
$
6,110
3,508
73,027
3,814
2,613
83,363
9,165
12,325
2,898
11,543
2,549
2,339
213,254
(19,953)
(1,486)
(79,089)
(100,528)
(89,060)
23,666
30,991
12,686
(1,021)
(18,990)
23,666
At January 31, 2009 and 2008, we had U.S. federal NOLs of approximately $230.8 million and $205.9 million, respectively.
These losses expire in various years ending from January 31, 2016 to 2029. We had state NOLs of approximately $150.2 million
and $127.9 million in the same respective years, expiring in years ending from January 31, 2010 to 2029. We had foreign NOLs
of approximately $24.0 million and $62.3 million in the same respective years. At January 31, 2009, all but $4.6 million of these
foreign loss carryforwards have indefinite carryforward periods. Certain of these federal, state, and foreign loss carryforwards
and credits are subject to Internal Revenue Code Section 382 or similar provisions, which impose limitations on their utilization
following certain changes in ownership of the entity generating the loss carryforward. The NOLs for tax return purposes are
different from the NOLs for financial statement purposes. This is primarily due to the reduction of NOLs for financial statement
purposes under FIN 48. We have U.S. federal, state and foreign tax credit carryforwards of approximately $9.6 million and
$10.2 million at January 31, 2009 and 2008, respectively, the utilization of which is subject to limitation. At January 31, 2009,
approximately $3.5 million of these tax credit carryforwards may be carried forward indefinitely. The balance of $6.1 million
expires in various years ending from January 31, 2010 to 2029.
We provide income and withholding taxes on undistributed earnings of foreign subsidiaries unless they are indefinitely
reinvested. Cumulatively, indefinitely reinvested foreign earnings total approximately $32.9 million at January 31, 2009. If these
earnings were repatriated in the future, additional income and withholding tax expense would be accrued. Due to complexities in
the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the total
amount of income taxes that would have to be provided on such earnings.
As required by SFAS No. 109, we evaluate the realizability of deferred tax assets on a jurisdictional basis at each reporting date.
SFAS No. 109 requires that a valuation allowance be established when it is more likely than not that all or a portion of the
deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred
tax assets are not more-likely-than-not realizable, we establish a valuation allowance. We have recorded valuation allowances in
the amounts of $116.8 million, $89.1 million at January 31, 2009 and 2008, respectively. The $27.8 million increase in the
valuation allowance between January 31, 2008 and January 31, 2009 arose primarily as a result of an overall increase in net
deferred tax assets in jurisdictions where we maintain a valuation allowance and a reduction in reserves related to uncertain tax
positions which caused a subsequent increase to our valuation allowance.
The recorded valuation allowance consists of the following:
(in thousands)
Valuation allowance, beginning of year
Provision for (benefit from) income taxes
Additional paid in capital
SFAS No. 5 and FIN 48
Cumulative translation adjustment
Valuation allowance, end of year
For the Years Ended January 31,
2009
(89,060)
(30,233)
786
—
1,690
(116,817)
$
$
2008
(16,049)
(73,404)
—
139
254
(89,060)
$
$
Page F-55
In accordance with SFAS No. 123(R), we use a “with-and-without” approach to applying the intra-period allocation rules in
accordance with SFAS No. 109. Under this approach, the windfall tax benefit is calculated based on the incremental tax benefit
received from deductions related to stock-based compensation. The amount is measured by calculating the tax benefit both
“with” and “without” the excess tax deduction; the resulting difference between the two calculations is considered the windfall.
We did not recognize a windfall benefit in our U.S. income tax provision for the years ended January 31, 2009 and January 31,
2008 because we incurred a net operating loss.
On February 1, 2007, we implemented the provisions of FIN 48. FIN 48 contains a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to determine whether any
amount of tax benefit may be recognized by evaluating tax positions taken or expected to be taken in a tax return and assessing
whether, based solely on their technical merits, they are more-likely-than-not sustainable upon examination, including resolution
of any related appeals or litigation process. The second step is to measure the amount of associated tax benefit that may be
recorded for each position as the largest amount that we believe is more-likely-than-not sustainable. Differences between the
amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our
financial statements, determined by applying the prescribed methodologies of FIN 48, represent our unrecognized income tax
benefits, which we either record as a liability or as a reduction of the deferred tax asset for net operating losses.
For the years ended January 31, 2009 and January 31, 2008, the aggregate changes in the balance of gross unrecognized tax
benefits were as follows:
(in thousands)
Gross unrecognized tax benefits, beginning of year
Increases as a result of acquisitions
Increases related to tax positions taken during the current year
Increases (decreases) related to foreign currency exchange rate fluctuations
Reductions for tax positions of prior years
Reduction for settlements with taxing authorities
Lapses of statutes of limitation
Gross unrecognized tax benefits, end of year
For the Years Ended January 31,
2009
2008
$
$
46,903
—
6,355
(2,011)
(14,912)
(125)
(1,038)
35,172
$
$
27,073
13,619
5,755
1,039
—
—
(583)
46,903
As of January 31, 2009, we had $35.2 million of unrecognized tax benefits, of which $30.5 million represents the amount that, if
recognized, would impact the effective income tax rate in future periods. We recorded $0.1 million and $1.6 million of interest
and penalties related to uncertain tax positions in our provision for income taxes for the years ended January 31, 2009 and
January 31, 2008, respectively. The accrued liability for interest and penalties was $6.6 million and $6.4 million at January 31,
2009 and January 31, 2008, respectively. Interest and penalties are recorded as a component of the provision for income taxes in
the financial statements.
Page F-56
Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. In the United States,
we are no longer subject to federal income tax examination for years prior to January 31, 2007. On October 31, 2008, we reached
an agreement with the Internal Revenue Service regarding U.S. federal income tax returns for the years ended January 31, 2004
through January 31, 2007, whereby we closed any outstanding issues for these periods in return for a $0.4 million reduction in
our NOL’s. We are currently in discussions with the Israeli tax authorities regarding adjustments that will be made to income tax
returns for the years ended January 31, 2004 through January 31, 2008 due to our restated results of operations. As of January 31,
2009, income tax returns are under examination in the following major tax jurisdictions:
Jurisdiction
Tax Years
Canada
United Kingdom
Hong Kong
January 31, 2004 — January 31, 2008
December 31, 2003, December 31, 2005
March 31, 2003 — March 31, 2005, January 31, 2006 — January 31, 2007
We regularly assess the adequacy of our provisions for income tax contingencies in accordance with FIN 48. As a result, we may
adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations
of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitations.
We believe that it is reasonably possible that the total amount of unrecognized tax benefits at January 31, 2009 could decrease by
approximately $1.8 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of
limitation. Such decreases may involve the payment of additional taxes, the adjustment of certain deferred taxes including the
need for additional valuation allowances and the recognition of tax benefits. We also believe that it is reasonably possible that
new issues may be raised by tax authorities or developments in tax audits may occur which would require increases or decreases
to the balance of reserves for unrecognized tax benefits; however, an estimate of such changes cannot reasonably be made.
In December 2007, the FASB issued SFAS 141(R), which supersedes SFAS No. 141, Business Combinations (SFAS 141) and
will be effective for our year ending January 31, 2010. Subsequent to adoption, adjustments related to valuation allowances or
reserves for uncertain tax positions that were established in connection with prior acquisitions will impact earnings, rather than
goodwill.
13. FAIR VALUE MEASUREMENTS
We perform fair value measurements in accordance with the guidance provided by SFAS No. 157 and certain related guidance.
SFAS No. 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When determining the fair value measurements for
assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we
would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of nonperformance.
Page F-57
SFAS No. 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the fair value measurement. SFAS No. 157 establishes three levels of
inputs that may be used to measure fair value:
(cid:129)
(cid:129)
(cid:129)
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active
markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities; or
Level 3: unobservable inputs that are supported by little or no market activity.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our financial assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments:
(in thousands)
Assets:
Money market funds
Foreign currency forward contracts
Total assets
Liabilities:
Foreign currency forward contracts
Interest rate swap agreement
Total liabilities
Money Market Funds
As of January 31, 2009
Fair Value Measurements
Using Input Types
Level 2
Level 1
Level 3
$
$
$
$
34,292
—
34,292
—
—
—
$
$
$
$
—
146
146
2,000
33,114
35,114
$
$
$
$
—
—
—
—
—
—
We value our money market funds using quoted market prices for such funds.
Page F-58
Foreign Currency Forward Contracts
The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparty. These quotes
are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and
maturities of the contracts and market exchange rates.
During the years ended January 31, 2009 and January 31, 2008, we utilized foreign exchange forward contracts to hedge certain
operational cash flow exposures resulting from changes in foreign currency exchange rates. These cash flow exposures result
from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in
currencies other than the U.S. Dollar, primarily the Israeli Shekel and the Canadian Dollar. These foreign currency forward
contracts are reported at fair value on our consolidated balance sheets and have maturities of no longer than twelve months. We
enter into these foreign currency forward contracts in the normal course of business to mitigate risks and not for speculative
purposes. Certain of these foreign currency forward contracts are not designated as hedging instruments under the provisions of
SFAS No. 133, and gains and losses from changes in their fair values are reported in other income (expense), net. Changes in the
fair value of foreign currency forward contracts that are designated and effective as cash flow hedges are recorded net of related
tax effects in accumulated other comprehensive income (loss), and are reclassified to the statement of operations when the
effects of the item being hedged are recognized in the statement of operations.
The fair values of our foreign currency forward contracts are reported on our consolidated balance sheets within current assets or
current liabilities.
During the years ended January 31, 2009 and 2008, we realized net losses of $2.1 million and net gains of $1.8 million,
respectively, on settlements of foreign currency forward contracts not designated as hedges. We had $1.9 million of net
unrealized losses on outstanding foreign currency forward contracts as of January 31, 2009, with notional amounts totaling
$35.9 million. We had $0.3 million of unrealized losses on outstanding foreign currency forward contracts as of January 31,
2008, with notional amounts totaling $11.7 million. We did not execute any foreign currency forward contracts during the year
ended January 31, 2007.
Interest Rate Swap Agreement
The interest rates applicable to borrowings under our credit facilities are variable, and we are exposed to risk from changes in the
underlying index interest rates, which affect our cost of borrowing. To partially mitigate this risk, and in part because we were
required to do so by the lenders, when we entered into our credit facilities in May 2007, we executed a pay-fixed, receive-
variable interest rate swap with a high credit-quality multinational financial institution under which we pay fixed interest at
5.18% and receive variable interest of three-month LIBOR on a notional amount of $450.0 million. This instrument is settled
with the counterparty on a quarterly basis, and matures on May 1, 2011. As of January 31, 2009, of the $610.0 million of
borrowings which were outstanding under the term loan facility, the interest rate on $450.0 million of such borrowings was
substantially fixed by utilization of this interest rate swap. Interest on the remaining $160.0 million of borrowings was variable.
Page F-59
The fair value of our interest rate swap agreement is based in part on data received from a third party bank. These fair values
represent the estimated amount we would receive or pay to settle the swap agreement, taking into consideration current and
projected interest rates as well as the creditworthiness of the parties.
The fair value of the instrument is reported on our consolidated balance sheets. While we consider the interest rate swap an
effective economic hedge of our interest rate risk, it is not designated as a hedging instrument under the provisions of SFAS
No. 133 and therefore gains and losses from changes in its fair value are reported within other income (expense), net. The impact
of quarterly cash settlements of the interest rate swap agreement are also recorded within other income (expense), net.
For the years ended January 31, 2009 and 2008, we recorded net losses of approximately $11.5 million and $29.2 million,
respectively, on the interest rate swap. These net losses reflect the decline in market interest rates that occurred during the second
half of the year ended January 31, 2008 and persisted through January 31, 2009. The fair value of the interest rate swap as of
January 31, 2009 is a liability of $33.1 million in favor of the counterparty, of which $14.8 million is classified within other
current liabilities, and $18.3 million is classified within other liabilities. The fair value of the interest rate swap at January 31,
2008 was $29.6 million in the favor of the counterparty, of which $8.5 million was classified within other current liabilities, and
$21.1 million was classified within other liabilities.
Embedded Derivative — Preferred Stock
As discussed in more detail within Note 8, “Convertible Preferred Stock”, we determined that the variable dividend feature of
our preferred stock qualified for accounting as an embedded derivative financial instrument, subject to bifurcation from the
preferred stock host contract. For the year ended January 31, 2008, the embedded derivative financial instrument was valued
using a Monte Carlo simulation model. A Monte Carlo simulation model calculates a probabilistic approximation to the solution
of a problem containing multiple variables using repeated statistical random sampling techniques. This feature was determined to
be an asset because the variable rate feature potentially provided for a lower dividend rate than the initial preferred stock
dividend rate, and was assigned an initial fair value of $0.9 million at the May 25, 2007 issue date of the preferred stock.
Subsequent changes in the fair value of the derivative financial instrument through January 31, 2008 are reflected within other
income (expense), net. As of January 31, 2008, the fair value of the embedded derivative instrument had increased to
$8.1 million. This $7.2 million increase in fair value was reflected within other income (expense), net for the year ended
January 31, 2008.
On February 1, 2008, the preferred stock dividend rate was reset to 3.875% per annum and upon occurrence of this dividend rate
reset, the embedded derivative has been settled in the form of reduced future dividend obligations. Accordingly, we reclassified
the $8.1 million fair value of the derivative asset at that date against the carrying value of the preferred stock as of February 1,
2008, reducing the carrying value of the preferred stock to $285.5 million.
Page F-60
Other Financial Instruments
The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short
maturities.
As of January 31, 2009, the estimated fair values of our term loan and revolving credit borrowings outstanding were
$359.9 million and $15.0 million, respectively. The estimated fair value of the term loan is based upon the pricing of trades of
portions of the loan in the secondary market. The fair value of the revolving credit borrowings is assumed to equal the principal
amount outstanding.
14. EMPLOYEE BENEFIT PLANS
401(k) Plan and Other Retirement Plans
We maintain a 401(k) Plan and similar type plans for our full-time employees in the United States and certain non-U.S.
employees of our foreign subsidiaries. The plan in the United States allows eligible employees who attain the age of 21 with
three months of service to elect to contribute up to 60% of their annual compensation, subject to the prescribed maximum
amount. We match employee contributions at a rate of 50%, up to a maximum annual matched contribution of $2,000 per
employee. The plans in foreign subsidiaries are similar to a 401(k) plan, and provide benefits consistent with customary local
practices. Employee contributions are always fully vested, while our matching contributions for each year vest on the last day of
the calendar year provided the employee remains employed with us on that day. During the years ended January 31, 2009, 2008,
and 2007, contributions to our worldwide retirement plans, including our matching contributions to the 401(k) plan, amounted to
approximately $4.8 million, $4.0 million, and $2.6 million, respectively.
Cash Bonus Retention Program
On February 1, 2007, our board of directors initiated a special retention program for certain of our employees, other than
executive officers and directors. The program provided for bonuses to be earned on July 31, 2007 and January 31, 2008. The
amount recognized as compensation expense during the year ended January 31, 2008 totaled $15.0 million.
Liability for Severance Pay
We are obligated to make severance payments for the benefit of certain employees of our foreign subsidiaries. Severance
payments made to Israeli employees are considered significant compared to all other subsidiaries with severance payments.
Under Israeli law, we are obligated to make severance payments to employees of our Israeli subsidiaries, subject to certain
conditions. In most cases, our liability for these severance payments is fully provided for by regular deposits to funds
administered by insurance providers and by an accrual for the amount of our liability which has not yet been deposited.
Page F-61
Severance expenses for the years ended January 31, 2009, 2008, and 2007, were $3.5 million, $2.9 million, and $2.0 million,
respectively.
Stock-Based Compensation and Purchase Plans
Plan Summaries
Our stock-based incentive awards are provided to employees under the terms of our multiple outstanding stock benefit plans (the
“Plans” or “Stock Plans”) or forms of equity award agreements approved by the board of directors.
The 1996 Stock Incentive Compensation Plan, as amended (the “1996 Plan”), was approved by our stockholders and became
effective on September 10, 1996. The number of shares reserved under the 1996 Plan may from time to time be reduced to the
extent that a corresponding number of issued and outstanding shares of the common stock are purchased by us and set aside for
issuance pursuant to awards. The 1996 Plan allows for the granting of awards of deferred stock, restricted stock awards
(“RSAs”) and restricted stock units (“RSUs”), incentive and non-qualified stock options, and stock appreciation rights to our
employees, directors, and consultants. If any award expires or terminates for any reason without having been exercised in full,
the outstanding shares subject thereto shall again be available for the purposes of the 1996 Plan. The 1996 Plan will terminate on
March 10, 2012 or at such earlier time as the board of directors may determine. Awards may be granted under the 1996 Plan at
any time and from time to time prior to its termination. Any awards outstanding under the 1996 Plan at the time of the
termination of the 1996 Plan shall remain in effect until such awards shall have been exercised or shall have expired in
accordance with their terms.
On May 25, 2007, in connection with the acquisition of Witness, we assumed a stock plan referred to as the Witness Systems,
Inc. Amended and Restated Stock Incentive Plan, as amended (the “1997 Plan”). Under the 1997 Plan, we were permitted to
grant awards of deferred stock, RSAs, and RSUs, incentive and non-qualified stock options, and stock appreciation rights to our
employees, directors, and consultants. The 1997 Plan contains an evergreen provision, which allows for an increase in the
number of shares available for issuance, up to a maximum of 3.0 million shares per year. The deadline for making new awards
under the 1997 Plan was November 18, 2009. Additionally, in connection with the acquisition, we assumed certain new-hire
inducement grants made by Witness outside of its shareholder-approved equity plans prior to May 25, 2007.
Our stockholders approved the 2004 Stock Incentive Compensation Plan (the “2004 Plan”) on July 27, 2004. Under the 2004
Plan, we are permitted to grant awards of deferred stock, RSAs and RSUs, incentive and non-qualified stock options, and stock
appreciation rights to our employees, directors, and consultants. To the extent not used under the 1996 Plan, the shares available
pursuant to the 2004 Plan may be increased by a maximum of 1.0 million shares for awards granted under the 1996 Plan that are
forfeited, expire, or are cancelled on or after July 28, 2004. The 2004 Plan will remain in full force and effect until the earlier of
July 27, 2014 or the date it is terminated by our board of directors. Termination of the 2004 Plan shall not affect awards
outstanding under the 2004 Plan at the time of termination.
Page F-62
The table below summarizes key data points for the Plans as of January 31, 2009:
(in thousands)
The 1996 Plan
The 1997 Plan
The 1997 Blue Pumpkin inducement grants
The 2004 Plan
Total
Number of
Shares Reserved
for Grant
Number of
Shares
Outstanding
Number of
Shares Available
for Grant
5,000
6,400
158
3,000
14,558
1,725
2,842
146
2,262
6,975
350
3,574
11
438
4,373
Awards are generally subject to multi-year vesting periods and generally expire 10 years or less after the date of grant. Awards
granted under award agreements contain vesting conditions which require available share capacity under the plans or a new
stockholder approved plan for the awards to vest. We recognize compensation expense for awards on a straight-line basis over
the life of the vesting period, reduced by estimated forfeitures. Upon exercise of stock options, issuance of restricted stock, or
issuance of shares under the Plans, we will issue authorized but unissued common stock unless treasury shares are available.
As described in Note 1, “Summary of Significant Accounting Policies”, we adopted the provisions of SFAS No. 123(R) on
February 1, 2006. The implementation of SFAS No. 123(R) resulted in the stock-based compensation expense of $36.0 million,
$31.0 million, and $18.6 million for the years ended January 31, 2009, 2008, and 2007, respectively. The total income tax benefit
recognized for stock-based compensation arrangements was $9.0 million, $7.8 million, and $2.3 million, for the years ended
January 31, 2009, 2008, and 2007, respectively. We capitalized stock-based compensation cost of $4.7 million for the fair value
of the vested portion of options issued in connection with the acquisition of Witness on May 25, 2007, and included as part of the
net assets (goodwill) of Witness.
Page F-63
We recognized stock-based compensation expense in the following line items on the consolidated statement of operations for the
years indicated:
(in thousands, except per-share amounts)
Component of loss before provision for income taxes:
Cost of revenue — product
Cost of revenue — service and support
Research and development, net
Selling, general and administrative
Stock-based compensation expense
Income tax benefits related to stock-based compensation (before
consideration of valuation allowance)
Stock-based compensation, net of taxes
Impact on net loss per share:
Basic
Diluted
(in thousands)
Component of stock-based compensation expense:
Verint stock options
Verint restricted stock awards and restricted stock units
Comverse stock options
Verint phantom stock units
Stock-based compensation expense
$
$
$
$
$
$
For the Years Ended January 31,
2008
2009
2007
540
4,886
6,813
23,751
35,990
9,027
26,963
0.83
0.83
$
$
$
$
223
4,329
4,831
21,665
31,048
7,750
23,298
0.72
0.72
$
$
$
$
360
1,279
3,822
13,154
18,615
2,264
16,351
0.51
0.51
For the Years Ended January 31,
2008
2009
2007
15,977
15,948
15
4,050
35,990
$
$
22,011
9,229
(487)
295
31,048
$
$
13,276
3,390
1,834
115
18,615
The table above includes stock-based compensation amounts where we modified certain option awards to revise exercising terms
for certain terminated employees and recognized incremental compensation expense of $0.7 million, $1.7 million, and
$2.9 million for the years ended January 31, 2009, 2008, and 2007, respectively. Participants in the Plans are currently restricted
from exercising options due to our inability to use our Registration Statement on Form S-8 during our extended filing delay
period. As such, we modified grants held by terminated employees by extending the time a terminated employee would normally
have to exercise vested stock option awards. The number of employees affected under such modifications was 74, 103, and 92
for the years ended January 31, 2009, 2008, and 2007, respectively.
For the year ended January 31, 2007, we recorded an excess tax benefit of $0.1 million as a financing cash flow as required by
SFAS No. 123(R). Excess tax benefits were not recognized for the years ended January 31, 2009 and 2008 as we incurred
taxable losses. The excess tax benefits represent the reduction in income taxes otherwise payable during the period, attributable
to the actual gross tax benefits in excess of the expected tax benefits.
Page F-64
Stock Options
When stock options are awarded, the fair value of the options is estimated on the date of grant using the Black-Scholes option-
pricing model. Expected volatility and the expected term are the input factors to that model that require the most significant
management judgment. Expected volatility is estimated utilizing daily historical volatility over a period that equates to the
expected life of the option. The expected life (estimated period of time outstanding) is estimated using the historical exercise
behavior of employees.
We have not granted stock options subsequent to January 31, 2006. However, in connection with our acquisition of Witness on
May 25, 2007, options to purchase Witness common stock were converted into options to purchase approximately 3.1 million
shares of our common stock. The fair value of the option grants was estimated using the Black-Scholes option-pricing model
with the weighted-average assumptions presented in the following table:
Expected life (in years)
Risk-free interest rate
Expected volatility
Dividend yield
As of May 25, 2007
2.62
4.88%
40.50%
0%
Based on the above assumptions, the weighted-average fair value of the stock options on the date of acquisition was $15.02.
See Note 4, “Business Combinations”, for additional information concerning the acquisition of Witness.
Page F-65
The following table summarizes stock option activity under the Plans for the years ended January 31, 2009, 2008, and 2007:
(in thousands, except exercise
prices)
Beginning balance
Assumed in acquisition (1)
Exercised
Forfeited
Expired
Ending balance
Options exercisable
For the Years Ended January 31,
2008
2009
Weighted-
Average
Exercise
Price
$
$
$
$
$
$
$
21.77
—
—
22.40
5.94
22.36
22.42
Stock
Options
5,735
—
—
(296)
(214)
5,225
4,461
Weighted-
Average
Exercise
Price
$
$
$
$
$
$
$
23.56
20.24
—
24.16
8.56
21.77
21.17
Stock
Options
3,003
3,065
—
(326)
(7)
5,735
3,663
2007
Weighted-
Average
Exercise
Price
$
$
$
$
$
$
$
23.78
—
16.22
30.80
17.83
23.56
20.57
Stock
Options
3,151
—
(24)
(121)
(3)
3,003
2,081
(1) On May 25, 2007, 3.3 million non-vested stock options of Witness were converted to 3.1 million options for our stock using
the purchase conversion ratio of .9335 shares of Verint common stock for every 1.0 share of Witness stock.
As of January 31, 2009, the aggregate intrinsic value for the options vested and exercisable was $0.1 million with a weighted-
average remaining contractual life of 3.02 years. Additionally, there were 5.2 million options vested and expected to vest with a
weighted-average exercise price of $22.37 and an aggregate intrinsic value of $0.1 million with a weighted-average remaining
contractual life of 2.92 years.
The unrecognized compensation expense calculated under the fair value method for options expected to vest (unvested shares net
of expected forfeitures) as of January 31, 2009 was approximately $9.9 million and is expected to be recognized over a
weighted-average period of 1.53 years.
Page F-66
The following table summarizes information about stock options as of January 31, 2009:
(in thousands, except exercise prices)
Range of Exercise Prices
$ 4.46 - $ 14.26
$14.90 - $ 17.00
$17.06 - $ 18.00
$18.18 - $ 19.16
$19.39 - $ 21.75
$22.11 - $ 23.95
$25.01 - $ 32.16
$34.40 - $ 34.40
$35.11 - $ 35.11
$37.99 - $ 37.99
Number of
Options
Outstanding
531
629
575
553
631
936
315
147
884
24
$ 4.46 - $ 37.99
5,225
Options Outstanding
Weighted-
Average
Remaining
Contractual
Term
Options Exercisable
Weighted-
Average
Exercise
Price
Weighted-
Average
Exercise
Price
$
$
$
$
$
$
$
$
$
$
$
8.49
16.54
17.79
18.73
21.08
23.44
28.81
34.40
35.11
37.99
22.36
Number of
Options
Exercisable
531
629
446
391
467
718
256
115
884
24
4,461
1.47
2.86
1.85
2.08
1.86
3.13
3.61
6.57
4.64
6.64
2.92
$
$
$
$
$
$
$
$
$
$
$
8.49
16.54
17.76
18.71
21.03
23.30
28.84
34.40
35.11
37.99
22.42
The following table summarizes key data points for exercised options:
(in thousands)
The intrinsic value of options exercised
Cash received from the exercise of stock options
The tax benefit realized from stock options exercised
The fair value of options vested
Restricted Stock Awards and Restricted Stock Units
For the Years Ended January 31,
2008
2009
2007
$
$
$
$
—
—
—
68,250
$
$
$
$
—
—
—
52,661
$
$
$
$
480
382
107
26,641
Stock awards are granted in the form of RSAs and RSUs. The principal difference between these instruments is that RSUs are
not shares of our common stock and do not have any of the rights or privileges thereof, including voting or dividend rights. On
the applicable vesting date, the holder of an RSU becomes entitled to a share of our common stock. Both RSAs and RSUs are
subject to certain restrictions and forfeiture provisions prior to vesting.
We have granted RSUs with performance vesting conditions that require that we become current with our filings with the SEC
and be re-listed on a nationally recognized exchange for the awards to vest. Some awards also require that additional
stockholders approved plan capacity be available for the awards to vest. In addition, we have granted RSUs to executive officers
and certain members of senior management that require us to estimate the expected achievement of performance targets over the
performance period. The expense associated with such awards is included in our stock-based compensation cost.
Page F-67
RSUs that settle, or are expected to settle, with cash payments upon vesting are reflected as liabilities on our consolidated
balance sheet under the provisions of SFAS No. 123(R).
Prior to the adoption of SFAS No. 123(R), unearned compensation for RSAs and RSUs, based on the fair value of our common
stock at the date of grant, was recorded and shown as a separate component of stockholders’ equity (deficit). The unearned
compensation was amortized to compensation expense over the restricted stock’s vesting period, which is generally a four-year
period. In accordance with the adoption of SFAS No. 123(R) on February 1, 2006, we reclassified the unearned compensation
recorded as a separate component of stockholders’ equity (deficit) to additional paid-in-capital within stockholders’ equity
(deficit). Prior to the adoption of SFAS No. 123(R), compensation expense was being recognized over the restricted stock’s
vesting period.
The following table summarizes RSA and RSU activity under the Plans for the years ended January 31, 2009, 2008, and 2007:
(in thousands, except
grant-date fair value)
Beginning balance
Granted
Released
Forfeited
Ending balance
2009
Weighted-
For the Years Ended January 31,
2008
Weighted-
Average
Grant-Date
Fair Value
29.39
$
18.07
$
33.98
$
23.91
$
24.48
$
Shares
1,267
865
(85)
(217)
1,830
Average
Grant-Date
Fair Value
33.88
$
28.64
$
32.85
$
29.21
$
29.39
$
Shares
354
1,215
(203)
(99)
1,267
2007
Weighted-
Average
Grant-Date
Fair Value
33.52
$
—
$
30.77
$
34.40
$
33.88
$
Shares
417
—
(51)
(12)
354
The unrecognized compensation expense related to 1.8 million unvested RSAs and RSUs expected to vest as of January 31, 2009
was approximately $22.2 million, with remaining weighted-average vesting periods of approximately 0.78 years and 1.40 years,
respectively, over which such expense is expected to be recognized. The total fair value of restricted stock awards and units
vested during the years ended January 31, 2009, 2008, and 2007 is $2.9 million, $6.7 million, and $1.6 million, respectively.
Page F-68
Phantom Stock Units
During the year ended January 31, 2007, we began issuing phantom stock units to non-officer employees that settle, or are
expected to settle, with cash payments upon vesting, pursuant to the terms of a form of a phantom stock award agreement
approved by the board of directors. Phantom stock units provide for the payment of a cash bonus equivalent to the value of our
common stock as of the vesting date of the award. Phantom stock units generally have a multi-year vesting and are generally
subject to the same performance vesting conditions as equity awards granted. We recognize compensation expense for phantom
stock units on a straight-line basis, reduced by estimated forfeitures. The phantom stock units are being accounted for as
liabilities under the provisions of SFAS No. 123(R) and as such their value tracks our stock price and is subject to market
volatility.
The total accrued liability for phantom stock units was $4.0 million, $0.3 million, and $0.1 million as of January 31, 2009, 2008,
and 2007, respectively. Total cash payments made upon vesting of phantom stock units was $0.3 million for the year ended
January 31, 2009.
The following table summarizes phantom stock unit activity for the years ended January 31, 2009, 2008, and 2007:
(in thousands)
Beginning balance, in units
Granted
Released
Forfeited
Ending balance, in units
For the Years Ended January 31,
2008
2009
2007
85
1,323
(33)
(136)
1,239
19
87
(17)
(4)
85
—
19
—
—
19
The phantom stock units granted during the years ended January 31, 2009, 2008, and 2007 primarily vest over three-year
periods, subject to applicable performance conditions.
The unrecognized compensation expense related to 1.2 million unvested phantom stock units expected to vest as of January 31,
2009 was approximately $3.6 million, based on our stock price of $6.50 at January 31, 2009 with a remaining weighted-average
vesting period of approximately 1.02 years over which such expense is expected to be recognized.
Tandem Awards
We issued grants known as “tandem” awards to certain of our Israeli employees during the year ended January 31, 2009. These
tandem awards include two components — a share of deferred stock and a share of phantom stock. The recipient received two
different units and two separate award agreements. The tandem awards are structured so that, on any given vesting date, only one
component of the awards vests. The tandem awards are being accounted for as liabilities under the provisions of SFAS No. 123
(R) based on our assessment that the tandem awards would likely be settled in phantom stock units upon vesting.
Page F-69
We also issued grants known as “hybrid” awards to our employees during the year ended January 31, 2009 which vest in
restricted stock units upon the achievement of certain performance conditions that have been set by our board of directors. In the
event that any of the stock-settle conditions are not satisfied on the vesting date, no shares of common stock will be issued and
instead we will settle these awards with cash payments equal to the fair market value (as defined in the award agreement) of the
vested restricted stock units. These hybrid awards are being accounted as liabilities under the provisions of SFAS No. 123(R)
based on our assessment that the hybrid awards would likely be settled in cash upon vesting.
Comverse Stock Options
One component of stock-based compensation cost is related to stock options granted to Verint employees who were employed
with Comverse when the stock options were issued by Comverse and the related expenses or benefits are recognized in
accordance with SFAS No. 123(R). We recorded expenses of $15 thousand and $1.8 million related to Comverse stock options
issued to Verint employees for the years ended January 31, 2009, and 2007, respectively, and a reduction to expenses of $0.5
million for the year ended January 31, 2008.
ESPP
Effective September 1, 2002, we adopted and implemented the 2002 Employee Stock Purchase Plan (“ESPP”), which was
amended and restated, on May 22, 2003. Any employee who had completed three months of employment and was employed by
us on the applicable offering commencement date was eligible to participate in the ESPP. Participants elected to have amounts
withheld through payroll deductions at the rate of up to 10% of their annualized base salary, to purchase shares of our common
stock at 85% of the lesser of the market price at the offering commencement date or the offering termination date.
The number of shares available under the ESPP is 1.0 million, of which approximately 260,000 have been issued as of the date
the ESPP was suspended in March 2006, due to our inability to use our Registration Statement on Form S-8 during our extended
filing delay period.
No expense related to the ESPP was recorded during the years ended January 31, 2009, 2008, and 2007 due to the suspension of
the ESPP during these periods resulting from our extended filing delay status.
Page F-70
15. RELATED PARTY TRANSACTIONS
Relationships with Comverse and its Other Subsidiaries
Preferred Stock Financing
On May 25, 2007, in connection with our acquisition of Witness, we entered into the Securities Purchase Agreement with
Comverse pursuant to which Comverse purchased, for cash, an aggregate of 293,000 shares of our preferred stock for
$293.0 million. Proceeds from the issuance of the preferred stock were used to partially finance the acquisition of Witness. In
connection with the sale of the preferred stock we entered into the New Registration Rights Agreement with Comverse. Further
details regarding the preferred stock and the related registration rights agreement appear within Note 8, “Convertible Preferred
Stock”.
Original Registration Rights Agreement
Shortly before our IPO in 2002, we entered into the Original Registration Rights Agreement with Comverse that covered all
shares of common stock then held by Comverse and any additional shares of common stock acquired by Comverse at a later
date. Under the Original Registration Rights Agreement, Comverse has the right to demand registration of its shares on a stand-
alone filing, or to participate in other registrations we may undertake (piggyback rights). In addition, we are required to pay
registration-related expenses and indemnify Comverse from liabilities that may arise from sale of shares registered pursuant to
the Original Registration Rights Agreement.
Service and Tax Agreements with Comverse
There were, and still are, several agreements in place between us and Comverse and its other subsidiaries, which were executed
prior to our IPO in order to allow us to continue to receive certain services from Comverse and its other subsidiaries following
our IPO. A separate agreement clarifies the income tax relationship between us and Comverse. Since our IPO, we have
established our own systems and reduced or eliminated our reliance on these services. As of January 31, 2009 and 2008, we had
liabilities to Comverse for services under these agreements of $1.4 million and $1.3 million, respectively, which are presented as
liabilities to affiliates on our consolidated balance sheets at those dates. The following is an overview of certain of these
agreements with Comverse:
Corporate Services Agreement
Under the Corporate Services Agreement, Comverse formerly provided us with maintenance services for general liability and
other insurance policies held by Comverse under which we were covered. As of calendar 2007, we obtained our own insurance
policies, including our own directors’ and officers’ insurance policy. In the past, we also received certain administration services
with respect to employee benefit plans, legal support, and public relations support under this agreement. Following a period of
transition, responsibility for these activities was fully transferred to us and we now handle all of these functions ourselves. For
the years ended January 31, 2008 and 2007, we recorded expenses of $0.3 million, and $0.6 million, respectively, for the services
provided by Comverse under this agreement. There were no such expenses incurred for the year ended January 31, 2009, as this
agreement was terminated effective July 31, 2007.
Page F-71
Enterprise Resource Planning Software Sharing Agreement
Under the Enterprise Resource Planning Software Sharing Agreement, Comverse Ltd., a subsidiary of Comverse, formerly
provided us with shared access to its enterprise resource planning (“ERP”) and customer relationship management (“CRM”)
software for the operation of our business. During the quarter ended October 31, 2007, we completed a separation from
Comverse’s ERP/CRM system and fully transitioned to our own internal ERP/CRM system. No expenses were incurred under
this agreement for the year ended January 31, 2009. For the years ended January 31, 2008 and 2007, we recorded expenses of
$0.4 million, and $0.2 million, respectively, for the services under this agreement.
Satellite Services Agreement
Under the Satellite Services Agreement, Comverse Inc., a subsidiary of Comverse, provides us with the exclusive use of the
services of specified employees and facilities of Comverse Inc. located in countries where we do not have our own legal
presence or facilities. The fee for this service is equal to the expenses Comverse Inc. incurs in providing these services plus ten
percent. For the years ended January 31, 2009, 2008, and 2007, we recorded expenses of $0.6 million, $1.1 million, and
$2.9 million, respectively, for the services provided by Comverse Inc. under this agreement. We anticipate that we will continue
to use some level of services under this agreement in the future.
Federal Income Tax Sharing Agreement
We are party to a tax sharing agreement with Comverse which applies to periods prior to our IPO in which we were included in
Comverse’s consolidated federal tax return. By virtue of its controlling ownership and this tax sharing agreement, Comverse
effectively controlled all of our tax decisions for periods ending prior to the completion of our IPO, which took place in
May 2002. Under the agreement, for periods during which we were included in Comverse’s consolidated tax return, we were
required to pay Comverse an amount equal to the tax liability we would have owed, if any, had we filed a federal tax return on
our own, as computed by Comverse in its reasonable discretion. Under the agreement, we were not entitled to receive any
payments from Comverse in respect of, or to otherwise take advantage of, any loss resulting from the calculation of our separate
tax liability. The tax sharing agreement also provided for certain payments in the event of adjustments to the group’s tax liability.
The tax sharing agreement continues in effect until 60 days after the expiration of the applicable statute of limitations for the
final year in which we were part of the Comverse consolidated group for tax purposes.
Page F-72
16. COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease office, manufacturing, and warehouse space, as well as certain equipment, under non-cancelable operating lease
agreements. Terms of the leases, including renewal options and escalation clauses, vary by lease. When determining the term of
a lease, we include renewal options that are reasonably assured. The lease agreements generally provide that we pay taxes,
insurance, and maintenance expenses related to the leased assets over the initial lease term and those renewal periods that are
reasonably assured.
Our facility leases may contain rent escalation clauses or rent holidays, commencing at various times during the terms of the
agreements. Rent expense on operating leases with scheduled rent increases or holidays during the lease term is recognized on a
straight-line basis. The difference between rent expense and rent paid is recorded as deferred rent. Leasehold improvements are
depreciated over the shorter of their economic lives, which begin once the assets are ready for their intended use, or the term of
the lease.
Rent expense incurred under all operating leases was $13.9 million, $12.5 million, and $7.8 million for the years ended
January 31, 2009, 2008, and 2007, respectively.
As of January 31, 2009, our minimum future rentals under non-cancelable operating leases were as follows:
(in thousands)
For the Years Ended January 31,
2010
2011
2012
2013
2014
2015 and thereafter
Total
Amount
11,660
10,423
9,968
9,249
6,124
6,378
53,802
$
$
During the year ended January 31, 2008, we entered into a non-cancelable operating sublease with a third party to rent space in a
location previously utilized by us as a warehouse facility. We received rental payments totaling $0.1 million during the year
ended January 31, 2009 and expect to receive $0.2 million over the next 22 months related to the sublease. We had no material
sublease arrangements prior to May 2007.
Unconditional Purchase Obligations
In the ordinary course of business, we enter into certain unconditional purchase obligations, which are agreements to purchase
goods or services that are enforceable, legally binding, and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Our
purchase orders are based on current needs and are typically fulfilled by our vendors within a relatively short time horizon.
Page F-73
As of January 31, 2009, our unconditional purchase obligations totaled approximately $24.4 million, the majority of which were
scheduled to occur within the subsequent twelve months. Due to the relatively short life of the obligations, the carrying value
approximates their fair value at January 31, 2009.
Warranty Liability
The following table summarizes the activity in our warranty liability, which is included in accrued expenses and other liabilities
in the consolidated balance sheets, for each of the years ended January 31, 2009 and 2008.
(in thousands)
Warranty liability, beginning of year
Provision charged to expenses
Warranty charges
Foreign currency translation and other
Warranty liability, end of year
For the Years Ended January 31,
2008
2009
2007
$
$
1,874
483
(1,115)
(54)
1,188
$
$
2,521
266
(989)
76
1,874
$
$
2,237
385
(364)
263
2,521
We accrue for warranty costs as part of our cost of revenue based on associated product costs, labor costs, and associated
overhead. Our Workforce Optimization solutions are sold with a warranty of generally one year on hardware and 90 days for
software. Our Video Intelligence solutions and Communications Intelligence solutions are sold with warranties that typically
range in duration of from 90 days to 3 years, and in some cases longer.
Licenses and Royalties
We license certain technology and pay royalties under such licenses and other agreements entered into in connection with
research and development activities. As discussed in Note 11, “Research and Development, Net”, prior to calendar 2006, we
historically paid royalties to the OCS based on the sales of products successfully developed under the OCS program. On July 31,
2006, we finalized an arrangement with the OCS pursuant to which we exited the royalty-bearing funding program.
The Israeli law under which the OCS grants are made limits our ability to manufacture products, or transfer technologies,
developed using these grants outside of Israel. If we were to seek approval to manufacture products, or transfer technologies,
developed using these grants outside of Israel, we could be subject to additional royalty requirements or be required to pay
certain redemption fees. If we were to violate these restrictions, we could be required to refund any grants previously received,
together with interest and penalties, and may be subject to criminal charges.
Page F-74
Preferred Stock Dividends, Conversion, and Redemption
On May 25, 2007, in connection with our acquisition of Witness, we entered into the Securities Purchase Agreement under
which Comverse purchased, for cash, an aggregate of 293,000 shares of our preferred stock, for $293.0 million. Upon a
fundamental change event, as defined, and subject to certain exceptions, the holders of the preferred stock would have the right
to require us to purchase the preferred stock for 100% of the liquidation preference then in effect. Fundamental change events
include the sale of substantially all of our assets, and certain changes in beneficial ownership, board of directors’ representation,
and business reorganizations. Further information regarding the terms of the preferred stock, including liquidation preferences,
dividends, conversion, and redemption rights are included in Note 8, “Convertible Preferred Stock”.
Off-Balance Sheet Risk
In the normal course of business, we provide certain customers with financial performance guarantees, which are generally
backed by standby letters of credit or surety bonds. In general, we would only be liable for the amounts of these guarantees in the
event that our nonperformance permits termination of the related contract by our customer, which we believe is remote. At
January 31, 2009, we had approximately $8.7 million of outstanding letters of credit and surety bonds relating to these
performance guarantees. As of January 31, 2009, we believe we were in compliance with our performance obligations under all
contracts for which there is a financial performance guarantee, and the ultimate liability, if any, incurred in connection with these
guarantees will not have a material adverse affect on our consolidated results of operations, financial position, or cash flows. Our
historical non-compliance with our performance obligations has been insignificant.
Indemnifications
In the normal course of business, we provide indemnifications of varying scopes to customers against claims of intellectual
property infringement made by third parties arising from the use of our products. Historically, costs related to these
indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these
indemnification provisions on our future results of operations.
To the extent permitted under Delaware law or other applicable law, we indemnify our directors, officers, employees, and agents
against claims they may become subject to by virtue of serving in such capacities for us. We also have contractual
indemnification agreements with our directors, officers, and certain senior executives. The maximum amount of future payments
we could be required to make under these indemnification arrangements and agreements is potentially unlimited; however, we
have insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We are not able
to estimate the fair value of these indemnification arrangements and agreements in excess of applicable insurance coverage, if
any.
Page F-75
We are party to a business opportunities agreement with Comverse which addresses potential conflicts of interest between
Comverse and us. This agreement allocates between Comverse and us opportunities to pursue transactions or matters that, absent
such allocation, could constitute corporate opportunities of both companies. Under the agreement, each party is precluded from
pursuing opportunities it may become aware of which are offered to an employee of the other party, even if such employee
serves as a director of the other entity. We have agreed to indemnify Comverse and its directors, officers, employees, and agents
against any liabilities as a result of any claim that any provision of the agreement, or the failure to offer any business opportunity
to us, violates or breaches any duty that may be owed to us by Comverse or any such person. Unless earlier terminated by the
parties, the agreement will remain in place until Comverse no longer holds 20% of our voting power and no one on our board is a
director or employee of Comverse.
Litigation
Comverse Investigation-Related Matters
On December 17, 2009, Comverse entered into agreements to settle the following lawsuits previously disclosed by Comverse
relating to the matters involved in the Comverse Special Committee investigation which had been brought against Comverse and
certain former officers and directors of Comverse: (a) a consolidated shareholder class action before the U.S. District Court for
the Eastern District of New York, In re Comverse Technology, Inc. Securities Litigation; (b) a shareholder derivative action
before the U.S. District Court for the Eastern District of New York, In re Comverse Technology, Inc. Derivative Litigation; and
(c) a shareholder derivative action before the New York State Supreme Court, Appellate Division, First Department, In re
Comverse Technology, Inc. Derivative Litigation.
On April 2, 2010, the U.S. District Court for the Eastern District of New York issued orders in the shareholder class action and
derivative action granting preliminary approval of the settlement agreements in those actions. The court has scheduled a
settlement hearing to be held on June 21, 2010 that will, among other things, consider orders and final judgments dismissing
those derivative actions with prejudice.
Verint was not named as a defendant in any of these suits. Igal Nissim, our former Chief Financial Officer, was named as a
defendant in the federal and state shareholder derivative actions in his capacity as the former Chief Financial Officer of
Comverse, and Dan Bodner, our Chief Executive Officer, was named as a defendant in the federal and state shareholder
derivative actions in his capacity as the Chief Executive Officer of Verint (i.e., as the president of a significant subsidiary of
Comverse). Mr. Nissim and Mr. Bodner were not named in the shareholder class action suit.
The federal shareholder derivative suit alleged that the defendants breached their fiduciary duties beginning in 1994 by:
(a) allowing and participating in a scheme to backdate the grant dates of employee stock options to improperly benefit
Comverse’s executives and certain directors; (b) allowing insiders, including certain of the defendants, to personally profit by
trading Comverse’s stock while in possession of material inside information; (c) failing to properly oversee or implement
procedures to detect and prevent such improper practices; (d) causing Comverse to issue materially false and misleading proxy
statements, as well as causing Comverse to file other false and misleading documents with the SEC; and (e) exposing Comverse
to civil liability. The plaintiffs originally filed suit on April 20, 2006. The Consolidated, Amended, and Verified Shareholder
Derivative Complaint, filed on October 6, 2006, sought unspecified damages, injunctive relief, including restricting the proceeds
of the defendants’ trading activities and other assets, setting aside the election of the defendant directors to the Comverse board
of directors, and costs and attorneys’ fees. On December 21, 2007, motions to dismiss the federal shareholder derivative suit
were fully briefed on behalf of Comverse as well as the individual defendants, including Mr. Nissim and Mr. Bodner. No
decision had been rendered on these motions to dismiss as of the signing of the settlement agreements or as of the filing date of
this report.
Page F-76
The state shareholder derivative suit made similar allegations to the federal shareholder derivative suit. The plaintiffs first filed
suit on April 11, 2006. The Consolidated and Amended Shareholder Derivative Complaint, which was filed on September 18,
2006, sought unspecified damages, injunctive relief, such as restricting the proceeds of the defendants’ trading activities and
other assets, and costs and attorneys’ fees.
The agreements in settlement of the above-mentioned actions are subject to notice to Comverse’s shareholders and approval by
the federal and state courts in which such proceedings are pending. Neither we nor Mr. Nissim or Mr. Bodner is responsible for
making any payments or relinquishing any equity holdings under the terms of the settlement.
Comverse was also the subject of an SEC investigation and resulting civil action regarding the improper backdating of stock
options and other accounting practices, including the improper establishment, maintenance, and release of reserves, the
reclassification of certain expenses, and the calculation of backlog of sales orders. On June 18, 2009, Comverse announced that it
had reached a settlement with the SEC on these matters without admitting or denying the allegations of the SEC complaint.
Verint Investigation-Related Matters
On July 20, 2006, we announced that, in connection with the SEC investigation into Comverse’s past stock option grants that
was in process at that time, we had received a letter requesting that we voluntarily provide to the SEC certain documents and
information related to our own stock option grants and practices. We voluntarily responded to this request. On April 9, 2008, as
we previously reported, we received a “Wells Notice” from the staff of the SEC arising from the staff’s investigation of our past
stock option grant practices and certain unrelated accounting matters. These accounting matters were also the subject of our
internal investigation. On March 3, 2010, the SEC filed a settled enforcement action against us in the United States District Court
for the Eastern District of New York relating to certain of our accounting reserve practices. Without admitting or denying the
allegations in the SEC’s Complaint, we consented to the issuance of a Final Judgment permanently enjoining us from violating
Section 17(a) of the Securities Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (the
“Exchange Act”), and Rules 13a-1 and 13a-13 thereunder. The settled SEC action did not require us to pay any monetary penalty
and sought no relief beyond the entry of a permanent injunction. The SEC’s related press release noted that, in accepting the
settlement offer, the SEC considered our remediation and cooperation in the SEC’s investigation. The settlement was approved
by the United States District Court for the Eastern District of New York on March 9, 2010.
Page F-77
On December 23, 2009, as we previously reported, we received an additional “Wells Notice” from the staff of the SEC relating
to our failure to timely file periodic reports under the Exchange Act. Under the SEC’s Wells process, recipients of a Wells
Notice have the opportunity to make a Wells Submission before the SEC staff makes a recommendation to the SEC regarding
what action, if any, should be brought by the SEC. After considering our Wells Submission, on March 3, 2010, the SEC issued
an Order Instituting Proceedings (“OIP”) pursuant to Section 12(j) of the Exchange Act to suspend or revoke the registration of
our common stock because of our failure to file an annual report on either Form 10-K or Form 10-KSB since April 25, 2005 or
quarterly reports on either Form 10-Q or Form 10-QSB since December 12, 2005. An Administrative Law Judge will consider
the evidence in the Section 12(j) proceeding and has been directed in the OIP to issue an initial decision within 120 days of
service of the OIP. On March 26, 2010, we filed our Answer to the OIP. On March 30, 2010, the Administrative Law Judge
issued an amended procedural order scheduling the completion of briefing for June 1, 2010. We are currently evaluating all
available procedural remedies, and intend to defend against the possible suspension or revocation of the registration of our
common stock.
On March 26, 2009, a motion to approve a class action lawsuit (the “Labor Motion”) and the class action lawsuit itself (the
“Labor Class Action”) (Labor Case No. 4186/09) were filed against our subsidiary, Verint Systems Limited (“VSL”), by a
former employee of VSL, Orit Deutsch, in the Tel Aviv Labor Court. Ms. Deutsch purports to represent a class of our employees
and ex-employees who were granted options to buy shares of Verint and to whom, allegedly, damages were caused as a result of
the blocking of the ability to exercise Verint options by our employees or ex-employees. The Labor Motion and the Labor
Class Action both claim that we are responsible for the alleged damages due to our status as employer and that the blocking of
Verint options from being exercised constitutes default of the employment agreements between the members of the class and
VSL. The Labor Class Action seeks compensatory damages for the entire class in an unspecified amount. On July 9, 2009, we
filed a motion for summary dismissal and alternatively for the stay of the Labor Motion. A preliminary session was held on
July 12, 2009. Ms. Deutsch filed her response to our response on November 10, 2009. On February 8, 2010, the Tel Aviv Labor
Court dismissed the case for lack of material jurisdiction and ruled that it will be transferred to the District Court in Tel Aviv.
Witness Investigation-Related Matters
At the time of our May 25, 2007 acquisition of Witness, Witness was subject to a number of proceedings relating to a stock
options backdating internal investigation undertaken and publicly disclosed by Witness prior to the acquisition. The following is
a summary of those proceedings and developments since the date of the acquisition.
Page F-78
On August 29, 2006, A. Edward Miller filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District
of Georgia, Atlanta Division, naming Witness as a nominal defendant and naming all of Witness’ directors and a number of its
officers as defendants (Miller v. Gould, et al., Civil Action No. 1:06-CV-2039 (N.D. Ga.)). The complaint alleged purported
violations of federal and state law, and violations of certain anti-fraud provisions of the federal securities laws (including
Sections 10(b) and 14(a) of the Exchange Act and Rules 10b-5 and 14a-9 thereunder) in connection with certain stock option
grants made by Witness. The complaint sought monetary damages in unspecified amounts, disgorgement of profits, an
accounting, rescission of stock option grants, imposition of a constructive trust over the defendants’ stock options and proceeds
derived therefrom, punitive damages, reimbursement of attorneys’ fees and other costs and expenses, an order directing Witness
to adopt or put to a stockholder vote various proposals relating to corporate governance, and other relief as determined by the
court. On March 11, 2009, the Court granted defendants’ motion to dismiss the complaint in its entirety, with prejudice. Plaintiff
did not file an appeal and the time to do so under the federal rules has elapsed.
On August 14, 2006, a class action securities lawsuit was filed by an individual claiming to be a Witness stockholder naming
Witness and certain of its directors and officers as defendants in connection with certain stock option grants made by Witness
(Rosenberg v. Gould, et al., Civil Action No. 1:06-CV-1894 (N.D. Ga.)). The complaint, filed in the U.S. District Court for the
Northern District of Georgia, alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint
sought unspecified damages, attorneys’ fees and other costs and expenses, unspecified extraordinary, equitable and injunctive
relief, and other relief as determined by the court. On March 31, 2008, the Court granted defendants’ motion to dismiss the
complaint in its entirety, with prejudice. On April 29, 2008, plaintiff filed a notice of appeal and on January 9, 2009, the 11th
Circuit affirmed the lower court’s dismissal of the complaint. Plaintiff has not pursued further appeal of this decision and the
time to do so under the federal rules has elapsed.
On October 27, 2006, Witness received notice from the SEC of an informal non-public inquiry relating to the stock option grant
practices of Witness from February 1, 2000 through the date of the notice. On July 12, 2007, we received a copy of the Formal
Order of Investigation from the SEC relating to substantially the same matter as the informal inquiry. We and Witness have fully
cooperated, and intend to continue to fully cooperate, if called upon to do so, with the SEC regarding this matter. In addition, the
U.S. Attorney’s Office for the Northern District of Georgia was also given access to the documents and information provided by
Witness to the SEC. Our last communication with the SEC with respect to the matter was in June 2008.
Verint Patent and General Litigation Matters
On December 18, 2006, Trover Group, Inc. (“Trover”) filed a patent infringement suit seeking monetary damages and injunctive
relief in the U.S. District Court for the Eastern District of Texas against us, Target Corporation, and The Home Depot, Inc. based
on claims of U.S. Patent Nos. 5,751,345 and 5,751,346 (the “Trover Patents”). Trover dismissed Home Depot and Target
without prejudice on April 17, 2008 and on April 25, 2008, respectively. Trover also commenced separate patent infringement
suits in the U.S. District Court for the Eastern District of Texas against Diebold Incorporated, one of our customers, and against
Regions Bank, a user of our video security and surveillance products. On July 21, 2008, we entered into a settlement agreement
with Trover. The settlement agreement provides protections to us and other parties that have or had purchased or used certain of
our products, including the products at issue in the foregoing litigations. On July 23, 2008, the court dismissed with prejudice all
claims asserted against us by Trover.
Page F-79
On October 18, 2005, the Administrative Court of Appeals of Athens entered a final, non-appealable verdict against our wholly
owned subsidiary, Verint Systems UK Ltd. (formerly Comverse Infosys UK Limited) (“Verint UK”), in a dispute between Verint
UK and its former customer, the Greek Civil Aviation Authority, which began in June 1999. The Greek Civil Aviation Authority
had claimed that the equipment provided to it by Verint UK did not operate properly. The verdict did not contain a calculation of
the monetary judgment, however, we estimated the amount at approximately $2.6 million based on an earlier decision in the
case, exclusive of any interest which may be assessed on the judgment based on the passage of time. The Greek government
must seek enforcement of this judgment in the United Kingdom. To date this judgment has not been enforced and we have made
no payments.
Witness Patent Litigation
NICE Systems Ltd. Settlement Agreement
On August 1, 2008, we reached a settlement agreement with NICE Systems Ltd. (“NICE”) to resolve all patent litigations
between NICE and Witness in existence at that time. The following is a summary of these litigations, each of which was
formally terminated by the applicable court between August 8, 2008 and August 13, 2008:
(cid:129)
Suit filed on July 20, 2004 in the U.S. District Court for the Southern District of New York by STS Software Systems
Ltd. (“STS Software”), a wholly owned subsidiary of NICE and declaratory judgment action filed the same day by
Witness against STS Software in the U.S. District Court for the Northern District Georgia. These two cases were
consolidated to the Northern District of Georgia, where STS Software asserted that certain Witness recording products
infringed on claims of U.S. Patent Nos. 6,122,665; 6,865,604; 6,871,229; and 6,880,004 relating to Voice over Internet
Protocol (“VoIP”) technology and sought only injunctive relief. A bench trial was held from March 17-21, 2008. On
May 23, 2008, the court entered a judgment of non-infringement in our favor.
(cid:129)
Suit filed on August 30, 2004, in the U.S. District Court for the Northern District of Georgia, Atlanta Division, by
Witness against NICE Systems, Inc., a wholly owned subsidiary of NICE. Witness asserted that NICE’s screen capture
products infringed on claims of U.S. Patent Nos. 5,790,790 and 6,510,220. The case was consolidated with a separate
February 24, 2005 suit filed by Witness against NICE alleging infringement on the same patents. We were waiting on
the court to assign a trial date at the time of the settlement.
(cid:129)
Suit filed on January 19, 2006, in the U.S. District Court for the Northern District of Georgia, Atlanta Division, by
Witness against NICE. Witness asserted that NICE’s speech analytics products infringed on claims of U.S. Patent
No. 6,404,857. A jury trial was held from May 12-16, 2008 and the jury returned a verdict in our favor and against
NICE on the claims of infringement. The jury also awarded us $3.3 million in damages; however, this award was
superseded by the terms of the settlement disclosed above.
Page F-80
(cid:129)
Suit filed on May 10, 2006, in the U.S. District Court for the District of Delaware by NICE against Witness seeking
monetary damages and injunctive relief. NICE asserted that various Witness recording products infringed on claims of
U.S. Patent Nos. 5,274,738; 5,396,371; 5,819,005; 6,249,570; 6,728,345; 6,775,372; 6,785,370; 6,870,920; 6,959,079;
and 7,010,109. These patents cover various aspects for recording customer interaction communications and traditional
call logging. A jury trial was held from January 14-22, 2008, and the jury was unable to reach a verdict, resulting in a
mistrial.
(cid:129)
Declaratory judgment action filed on December 27, 2006, in the U.S. District Court for the Northern District of
Georgia by NICE against Witness seeking a declaration that the claims of U.S. Patent No. 6,757,361 (relating to
speech analytics) were invalid and that NICE has not infringed this patent. The Court granted our motion to dismiss
the case for lack of subject matter jurisdiction on August 10, 2007.
From time to time we or our subsidiaries may be involved in other legal proceedings and/or litigation arising in the ordinary
course of our business that might impact our financial position, our results of operations, or our cash flows.
17. SEGMENT, GEOGRAPHIC, AND SIGNIFICANT CUSTOMER INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is
evaluated regularly by the enterprise’s chief operating decision maker (“CODM”), or decision making group, in deciding how to
allocate resources and in assessing performance. Our Chief Executive Officer is our CODM.
We conduct our business in three operating segments — Enterprise Workforce Optimization Solutions (“Workforce
Optimization”), Video Intelligence Solutions (“Video Intelligence”), and Communications Intelligence and Investigative
Solutions (“Communications Intelligence”).
Our Workforce Optimization solutions enable large organizations and small-to-medium sized business organizations to extract
and analyze valuable information from customer interactions and related operational and transactional data for the purpose of
optimizing the performance of their customer service operations, including contact centers, back offices, branches, and remote
locations.
Our Video Intelligence solutions help organizations enhance safety and security by enabling them to deploy an end-to-end IP
video solution with integrated analytics or evolve to IP video operations without discarding their investments in analog Closed
Circuit Television technology.
Our Communications Intelligence solutions are designed to generate evidence and intelligence and are used to detect and
neutralize criminal and terrorist threats.
Page F-81
We measure the performance of our operating segments based upon operating segment revenue and operating segment
contribution. Operating segment contribution includes segment revenue and expenses incurred directly by the segment, including
material costs, service costs, research and development and selling, marketing, and administrative expenses. We do not allocate
our shared expenses, which include the majority of general and administrative expenses, facilities and communication expenses,
purchasing expenses, manufacturing support and logistic expenses, depreciation and amortization, amortization of capitalized
software development costs, stock-based compensation, and special charges such as restructuring and integration expenses.
These expenses are included in the unallocated expenses section of the table presented below. Revenue from transactions
between our operating segments is not material.
The accounting policies used to determine the performance of the operating segments are the same as those described in the
summary of significant accounting policies in Note 1, “Summary of Significant Accounting Policies”.
With the exception of goodwill and acquired intangible assets, we do not identify or allocate our assets by operating segment.
Consequently, it is not practical to present assets by operating segment. The allocation of goodwill and acquired intangible assets
by operating segment appears in Note 5, “Intangible Assets and Goodwill”.
Page F-82
Operating results by segment for the years ended January 31, 2009, 2008, and 2007 were as follows:
(in thousands)
For the Years Ended January 31,
2009
Revenue
Revenue adjustment
Segment revenue
Segment contribution
Unallocated expenses:
Amortization of other acquired intangible assets
Impairments of goodwill and other acquired intangible
assets
Stock-based compensation
Integration, restructuring and other, net
Other common expenses
Operating loss
Other expense, net
Loss before taxes and noncontrolling interest
2008
Revenue
Revenue adjustment
Segment revenue
Segment contribution
Unallocated expenses:
Amortization of other acquired intangible assets
Impairments of goodwill and other acquired intangible
assets
Stock-based compensation
Integration, restructuring and other, net
Other common expenses
Operating loss
Other expense, net
Loss before taxes and noncontrolling interest
2007
Revenue
Segment contribution
Unallocated expenses:
Amortization of other acquired intangible assets
Impairments of goodwill and other acquired intangible
assets
Stock-based compensation
Settlement with OCS
Integration, restructuring and other, net
Other common expenses
Operating loss
Other income, net
Loss before taxes and noncontrolling interest
Workforce
Optimization
Video
Intelligence
Communications
Intelligence
Total
$
$
$
$
$
$
352,367
5,890
358,257
139,375
$
$
$
127,012
—
127,012
28,013
260,938
37,254
298,192
112,856
$
$
$
147,225
—
147,225
37,213
$
$
$
$
$
$
190,165
—
190,165
65,987
$
$
669,544
5,890
675,434
233,375
34,273
25,961
35,990
4,654
147,523
(15,026)
(43,880)
(58,906)
534,543
37,254
571,797
190,242
27,249
$
$
$
126,380
—
126,380
40,173
23,370
31,048
22,996
200,209
(114,630)
(55,186)
$ (169,816)
$
$
125,982
43,357
$
$
122,681
23,670
$
$
120,115
38,489
$
368,778
105,516
6,889
24,729
18,615
19,158
(765)
84,143
(47,253)
7,796
(39,457)
$
Page F-83
Workforce Optimization segment revenue reviewed by the CODM includes $5.9 million for the year ended January 31, 2009 and
$37.3 million for the year ended January 31, 2008, of additional revenue, primarily related to deferred maintenance and service
revenue not recognizable in our GAAP revenue as a result of purchase accounting following our May 2007 acquisition of
Witness. We include this additional revenue within our segment revenue because it better reflects our ongoing maintenance and
service revenue stream. For additional details, see Note 4, “Business Combinations”.
The significant increase in unallocated expenses during the years ended January 31, 2009 and January 31, 2008 reflects higher
stock-based compensation costs, higher amortization of intangible assets, higher general and administrative expenses, and certain
restructuring, integration, and litigation costs, all associated with the acquisition of Witness.
Unallocated expenses for the years ended January 31, 2009 and January 31, 2008 also include considerably higher professional
fees and other costs associated with our internal investigation, restatement process, and other activities associated with our
efforts to prepare and file our delinquent financial reports with the SEC, compared to such fees and costs incurred for the year
ended January 31, 2007.
Geographic Information
Revenue by major geographic region is based upon the geographic location of the customers who purchase our products. The
geographic locations of distributors, resellers, and systems integrators who purchase and resell our products may be different
from the geographic locations of end customers. The information below summarizes revenue to unaffiliated customers by
geographic area for the years ended January 31, 2009, 2008, and 2007:
(in thousands)
United States
United Kingdom
Other
Total revenue
$
$
For the Years Ended January 31,
2008
245,836
73,437
215,270
534,543
2009
304,602
77,213
287,729
669,544
2007
141,457
40,959
186,362
368,778
$
$
$
$
Our long-lived assets primarily consist of net property and equipment, goodwill and other intangible assets, capitalized software
development costs, deferred cost of revenue, and deferred income taxes. We believe that our tangible long-lived assets, which
consist of our net property and equipment, are exposed to greater geographic area risks and uncertainties than intangible assets
and long-term cost deferrals, because these tangible assets are difficult to move and are relatively illiquid.
Page F-84
Property and equipment, net by geographic area consists of the following as of January 31, 2009 and 2008:
(in thousands)
United States
Israel
Germany
United Kindgom
Canada
Other
Total property and equipment, net
Significant Customers
As of January 31,
2009
2008
10,566
12,274
2,537
1,494
1,405
2,268
30,544
$
$
12,740
12,656
3,535
2,431
2,014
2,939
36,315
$
$
No single customer accounted for more than 10% of our total revenue during any of the years ended January 31, 2009, 2008, and
2007.
18. SUBSEQUENT EVENTS
Wells Notices
On April 9, 2008, as we previously reported, we received a “Wells Notice” from the staff of the SEC arising from the staff’s
investigation of our past stock option grant practices and certain unrelated accounting matters. These accounting matters were
also the subject of our internal investigation. On March 3, 2010, the SEC filed a settled enforcement action against us in the
United States District Court for the Eastern District of New York relating to certain of our accounting reserve practices. Without
admitting or denying the allegations in the SEC’s Complaint, we consented to the issuance of a Final Judgment permanently
enjoining us from violating Section 17(a) of the Securities Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange
Act, and Rules 13a-1 and 13a-13 thereunder. The settled SEC action did not require us to pay any monetary penalty and sought
no relief beyond the entry of a permanent injunction. The SEC’s related press release noted that, in accepting the settlement
offer, the SEC considered our remediation and cooperation in the SEC’s investigation. The settlement was approved by the
United States District Court for the Eastern District of New York on March 9, 2010.
On December 23, 2009, as we previously reported, we received an additional “Wells Notice” from the staff of the SEC relating
to our failure to timely file periodic reports under the Exchange Act. Under the SEC’s Wells process, recipients of a Wells
Notice have the opportunity to make a Wells Submission before the SEC staff makes a recommendation to the SEC regarding
what action, if any, should be brought by the SEC. After considering our Wells Submission, on March 3, 2010, the SEC issued
an OIP pursuant to Section 12(j) of the Exchange Act to suspend or revoke the registration of our common stock because of our
failure to file an annual report on either Form 10-K or Form 10-KSB since April 25, 2005 or quarterly reports on either
Form 10-Q or Form 10-QSB since December 12, 2005. An Administrative Law Judge will consider the evidence in the Section
12(j) proceeding and has been directed in the OIP to issue an initial decision within 120 days of service of the OIP. On March 26,
2010, we filed our Answer to the OIP. On March 30, 2010, the Administrative Law Judge issued an amended procedural order
scheduling the completion of briefing for June 1, 2010. We are currently evaluating the Section 12(j) OIP, including available
procedural remedies, and intend to defend against the possible suspension or revocation of the registration of our common stock.
Page F-85
Business Combination
On February 4, 2010, our wholly owned subsidiary, Verint Americas Inc., (“Verint Americas”), acquired all of the outstanding
shares of Iontas Limited (“Iontas”), a privately held provider of desktop analytics solutions. Prior to this acquisition, we licensed
certain technology from Iontas, whose solutions measure application usage and analyze workflows to help improve staff
performance in contact center, branch, and back-office operations environments. We acquired Iontas for approximately
$15.2 million in cash (net of cash acquired) and potential additional earn-out payments of up to $3.8 million, tied to certain
targets being achieved over the next two years. The initial purchase price allocation for this acquisition is not yet available, as we
have not completed the appraisals necessary to assess the fair values of the tangible and identified intangible assets acquired and
liabilities assumed, the assets and liabilities arising from contingencies (if any), and the amount of goodwill to be recognized as
of the acquisition date.
19. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized consolidated quarterly financial information for the years ended January 31, 2009 and 2008 appears in the following
tables:
(in thousands, except per share data)
Revenue
Gross profit
Loss before income taxes and noncontrolling interest
Net loss
Net loss applicable to common shares
$
$
April 30,
2008
154,954
91,766
(23,071)
(25,297)
(28,458)
For the Quarters Ended
July 31,
2008
166,025
99,883
(14,974)
(15,087)
(18,353)
October 31,
2008
157,867
96,085
(11,000)
(21,136)
(24,437)
$
$
January 31,
2009
190,698
123,560
(9,861)
(18,868)
(22,204)
Basic and diluted net loss per share
$
(0.88)
$
(0.57)
$
(0.75)
$
(0.68)
Page F-86
(in thousands, except per share data)
Revenue
Gross profit
Loss before income taxes and noncontrolling interest
Net loss
Net loss applicable to common shares
April 30,
2007
$
$
89,371
48,721
(11,611)
(9,207)
(9,207)
For the Quarters Ended
July 31,
2007
128,325
$
October 31,
2007
158,135
91,246
(34,869)
(35,101)
(38,265)
$
January 31,
2008
158,712
94,478
(78,645)
(78,690)
(81,887)
70,056
(44,691)
(75,611)
(77,931)
Basic and diluted net loss per share
$
(0.29)
$
(2.42)
$
(1.19)
$
(2.54)
The May 2007 acquisition of Witness had significant impacts to our quarterly operating results beginning in the quarter ended
July 31, 2007.
Quarterly operating results for the year ended January 31, 2009 include impacts from our acquisition of Witness, including
impacts from the financing required for that acquisition, as follows:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
amortization of intangible assets of $8.2 million, $8.0 million, $7.6 million and $7.3 million for the four quarterly
periods ended January 31, 2009, respectively;
continuing integration costs incurred to support and facilitate the combination of Verint and Witness into a single
organization, of $1.2 million, $0.9 million, $0.8 million, and $0.3 million for the four quarterly periods ended
January 31, 2009, respectively;
legal fees associated with pre-existing litigation between Witness and a competitor of $3.5 million, $1.7 million, and
$0.2 million for the three quarterly periods ended October 31, 2008, respectively, and a $9.7 million recovery pursuant
to the settlement of this litigation in the quarter ended July 31, 2008;
interest expense on our term loan and revolving credit agreement of $9.4 million, $9.2 million, $9.3 million, and
$7.3 million for the four quarterly periods ended January 31, 2009, respectively;
realized and unrealized gains (losses), net on our interest rate swap of $4.4 million, $2.5 million, $(8.2) million, and
$(10.2) million for the four quarterly periods ended January 31, 2009, respectively.
We also recorded a non-cash charge to recognize impairments of goodwill of $26.0 million during the quarter ended January 31,
2009.
Page F-87
Quarterly operating results for the year ended January 31, 2008 include impacts from our acquisition of Witness, including
impacts from the financing required for that acquisition, as follows:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
an increase in revenue beginning in the quarter ended July 31, 2007;
amortization of intangible assets of $6.1 million, $8.3 million, and $8.2 million for the quarters ended July 31, 2007,
October 31, 2007, and January 31, 2008, respectively;
a charge for in-process research and development of $6.4 million in the quarter ended July 31, 2007;
integration costs incurred to support and facilitate the combination of Verint and Witness into a single organization, of
$0.2 million, $4.8 million, $3.2 million, and $2.8 million for the four quarterly periods ended January 31, 2008,
respectively;
legal fees associated with pre-existing litigation between Witness and a competitor of $1.3 million, $2.4 million, and
$5.0 million for the quarters ended July 31, 2007, October 31, 2007, and January 31, 2008, respectively;
interest expense on our term loan of $9.9 million, $12.6 million, and $11.9 million for the quarters ended July 31,
2007, October 31, 2007, and January 31, 2008, respectively;
realized and unrealized losses on our interest rate swap of $1.5 million, $6.9 million, and $20.8 million for the quarters
ended July 31, 2007, October 31, 2007, and January 31, 2008, respectively;
unrealized gains on an embedded derivative financial instrument related to the variable dividend feature of our
perpetual preferred stock of $0.8 million, $1.9 million, and $4.5 million for the quarters ended July 31, 2007,
October 31, 2007, and January 31, 2008, respectively.
We also recorded a non-cash charge to recognize impairments of goodwill and long-lived intangible assets of $23.4 million
during the quarter ended January 31, 2008.
Page F-88
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
April 7, 2010
April 7, 2010
VERINT SYSTEMS INC.
(Registrant)
By: /s/ Dan Bodner
Dan Bodner, President and Chief Executive Officer
By: /s/ Douglas E. Robinson
Douglas E. Robinson, Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Dan Bodner
Dan Bodner, Chief Executive Officer and President; Director of Verint
Systems Inc.
(Principal Executive Officer)
/s/ Douglas E. Robinson
Douglas E. Robinson, Chief Financial Officer of Verint Systems Inc.
(Principal Financial Officer and Principal Accounting Officer)
/s/ Paul D. Baker
Paul D. Baker, Director of Verint Systems Inc.
197
April 7, 2010
April 7, 2010
April 7, 2010
/s/ John Bunyan
John Bunyan, Director of Verint Systems Inc.
/s/ Andre Dahan
Andre Dahan, Chairman of the Board of Directors of Verint Systems Inc.
/s/ Victor A. DeMarines
Victor A. DeMarines, Director of Verint Systems Inc.
/s/ Kenneth A. Minihan
Kenneth A. Minihan, Director of Verint Systems Inc.
/s/ Larry Myers
Larry Myers, Director of Verint Systems Inc.
/s/ Howard Safir
Howard Safir, Director of Verint Systems Inc.
/s/ Shefali Shah
Shefali Shah, Director of Verint Systems Inc.
/s/ Stephen M. Swad
Stephen M. Swad, Director of Verint Systems Inc.
/s/ Lauren Wright
Lauren Wright, Director of Verint Systems Inc.
198
April 7, 2010
April 7, 2010
April 7, 2010
April 7, 2010
April 7, 2010
April 7, 2010
April 7, 2010
April 7, 2010
April 7, 2010