UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2014
Commission File No. 001-34807
Verint Systems Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
330 South Service Road, Melville, New York
(Address of Principal Executive Offices)
11-3200514
(I.R.S. Employer Identification No.)
11747
(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
Common Stock, $.001 par value per share
Name of each exchange
on which registered
The NASDAQ Stock Market, LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
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
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
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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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 NASDAQ Global Select Market on the last business day of the registrant’s most recently
completed second fiscal quarter (July 31, 2013) was approximately $1,900,631,000.
There were 53,614,192 shares of the registrant’s common stock outstanding on March 14, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated herein by reference from
the registrant's definitive proxy statement relating to the Annual Meeting of Stockholders to be held in 2014, which definitive
proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to
which this report relates.
Table of Contents
Verint Systems Inc. and Subsidiaries
Index to Form 10-K
January 31, 2014
Cautionary Note on Forward-Looking Statements
PART I
Item1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Signatures
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Cautionary Note on Forward-Looking Statements
This Annual Report on Form 10-K contains "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 (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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 may appear throughout this report,
including without limitation, Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and 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, assumptions, and other important factors that could cause our actual results or conditions to differ
materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions,
and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements
include, among others:
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uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in
information technology spending and government budgets, on our business;
risks associated with our ability to keep pace with technological changes and evolving industry standards in our
product offerings and to successfully develop, launch, and drive demand for new and enhanced, innovative, high-
quality products that meet or exceed customer needs;
risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient
levels of investment in our business;
risks created by the continued consolidation of our competitors or the introduction of large competitors in our markets
with greater resources than we have;
risks associated with our ability to successfully compete for, consummate, and implement mergers and acquisitions,
including risks associated with capital constraints, valuations, costs and expenses, maintaining profitability levels,
management distraction, post-acquisition integration activities, and potential asset impairments;
risks relating to our ability to effectively and efficiently execute on our growth strategy, including managing
investments in our business and operations and enhancing and securing our internal and external operations;
risks associated with our ability to effectively and efficiently allocate limited financial and human resources to
business, development, strategic, or other opportunities that may not come to fruition or produce satisfactory returns;
risks that we may be unable to maintain and enhance relationships with key resellers, partners, and systems
integrators;
risks associated with the mishandling or perceived mishandling of sensitive or confidential information, security
lapses, or with information technology system failures or disruptions;
risks associated with our significant international operations, including, among others, in Israel, Europe, and Asia,
exposure to regions subject to political or economic instability, and fluctuations in foreign exchange rates;
risks associated with a significant amount of our business coming from domestic and foreign government customers,
including the ability to maintain security clearances for certain projects;
risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we
operate;
risks associated with our ability to recruit and retain qualified personnel in regions in which we operate;
challenges associated with selling sophisticated solutions, long sales cycles, and emphasis on larger transactions,
including in assisting customers in realizing the benefits of our solutions and in accurately forecasting revenue and
expenses and in maintaining profitability;
risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make
claims on our intellectual property or claim infringement on their intellectual property rights;
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risks that our products may contain defects, which could expose us to substantial liability;
risks associated with our dependence on a limited number of suppliers or original equipment manufacturers ("OEMs")
for certain components of our products, including companies that may compete with us or work with our competitors;
risks that our customers or partners delay or cancel orders or are unable to honor contractual commitments due to
liquidity issues, challenges in their business, or otherwise;
risks that we may experience liquidity or working capital issues and related risks that financing sources may be
unavailable to us on reasonable terms or at all;
risks associated with significant leverage resulting from our current debt position, including with respect to covenant
limitations and compliance, fluctuations in interest rates, and our ability to maintain our credit ratings;
risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent
company, Comverse Technology, Inc. (“CTI”), or associated with formerly being consolidated with, and part of a
consolidated tax group with, CTI, or as a result of CTI's former subsidiary, Comverse, Inc. ("Comverse") being
unwilling or unable to provide us with certain indemnities or transition services to which we are entitled;
risks relating to our ability to successfully implement and maintain adequate systems and internal controls for our
current and future operations and reporting needs and related risks of financial statement omissions, misstatements,
restatements, or filing delays; and
risks associated with changing tax rates, tax laws and regulations, and the continuing availability of expected tax
benefits, including those expected as a result of acquisitions.
These risks, uncertainties, assumptions, and challenges, as well as other factors, are discussed in greater detail in "Risk Factors"
under Item 1A of this report. You are cautioned not to place undue reliance on forward-looking statements, which reflect our
management’s view only as of the 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.
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PART I
Table of Contents
Item 1. Business
Our Company
Verint® Systems Inc. (together with its consolidated subsidiaries, "Verint", the "Company", "we", "us", and "our", unless the
context indicates otherwise) is a global leader in Actionable Intelligence® solutions. Actionable Intelligence is a necessity in a
dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision
makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and
across many industries can make more timely and effective decisions. Today, more than 10,000 organizations in over 180
countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the
world a safer place.
Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement
Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of
information from numerous data types and sources, use analytics to glean insights from the information, and leverage the
resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.
We have established leadership positions in our respective markets by developing highly-scalable, enterprise-class solutions
with advanced, integrated analytics for both unstructured and structured information. Our innovative solutions are developed
by a large research and development team, which has led to more than 600 patents and patent applications worldwide. We offer
a range of customer services—from initial implementation and training, to consulting and managed services, as well as ongoing
customer support and maintenance—to help maximize the value our customers receive from our Actionable Intelligence
solutions.
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of
selling and support partners.
Company Background
We were incorporated in Delaware in February 1994 and completed our initial public offering (“IPO”) in May 2002. Over the
last decade, we have grown our revenue every year and expanded our portfolio of Actionable Intelligence solutions through a
combination of organic innovation and acquisitions.
We have three operating segments: Enterprise Intelligence Solutions™ ("Enterprise Intelligence"), Communications and Cyber
Intelligence Solutions™ ("Communications Intelligence"), and Video and Situation Intelligence Solutions™ ("Video
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 18, "Segment, Geographic, and Significant Customer
Information" to our consolidated financial statements included under Item 8 of this report for additional information and
financial data about each of our operating segments and geographic regions.
On February 4, 2013, we successfully completed the acquisition of our former parent company, CTI, eliminating its majority
ownership and control of us. Our acquisition of CTI is described in greater detail in Note 4, “Merger with CTI” to our
consolidated financial statements included under Item 8 of this report.
On February 3, 2014, we completed the acquisition of KANA Software, Inc. and its subsidiaries through the merger of KANA
Software, Inc.’s parent holding company, Kay Technology Holdings, Inc. (collectively, “KANA”) with a subsidiary of ours.
KANA has since become part of our Enterprise Intelligence segment. Our acquisition of KANA is described in greater detail
below under “Recent Developments.”
On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX Technologies Limited (“UTX”), a
provider of certain mobile device tracking solutions for security applications. Our acquisition of UTX is described in greater
detail below under “Recent Developments.”
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Through our website at www.verint.com, we 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, or
furnish such materials to, the Securities and Exchange Commission ("SEC"). 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.
Our Market—Actionable Intelligence
Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations
with crucial insights and enables decision makers to anticipate, respond, and take action. Customers are now more aware of the
value they can create by using insights gleaned from large data sets. The amount and types of structured and unstructured data
available to customers is growing rapidly and presents new and increasing challenges and complexities. At the same time,
organizations that are able to generate Actionable Intelligence from big data are better positioned to create value and achieve
their strategic objectives.
Verint has been focused on Actionable Intelligence for more than a decade. Our solutions address three areas of the market:
• Customer Engagement Optimization—solutions that help organizations enhance customer loyalty, increase revenue,
mitigate risk and manage operational costs.
•
Security Intelligence—solutions that help organizations prevent, neutralize, and investigate crime and terror, as well as
protect people and property.
• Fraud, Risk and Compliance—solutions that help organizations prevent loss, comply with regulations, investigate cyber
and financial crime, and protect private information.
Customer Engagement Optimization
We are a leading provider of Customer Engagement Optimization software and services that help organizations transform
customer engagements to drive better business outcomes by enhancing loyalty, increasing revenue, mitigating risk, and
managing operational costs. Our Customer Engagement Optimization solutions provide our customers with Actionable
Intelligence to optimize the workforce, improve processes, and enrich customer interactions in order to achieve important
strategic objectives. These solutions are implemented in industries that have significant customer service operations, such as
insurance, banking and brokerage, telecommunications, media, retail, public services, and hospitality.
Historically, as organizations have looked to engage with their customers more effectively and to address evolving
communication channels and changing expectations, they have been forced to purchase multiple point solutions from different
vendors, creating integration challenges. Even if such point solutions are able to be integrated, we believe they often do not
work together optimally or in a unified manner. As a result, we believe that organizations can benefit from deploying a
comprehensive Customer Engagement Optimization solution that includes both enterprise workforce optimization and
multichannel customer service capabilities from a single provider. As organizations take a more strategic approach to customer
sales and service, they will be better positioned to gain a competitive advantage, build more meaningful customer and
employee engagement, reduce operating costs, and increase revenue and customer loyalty.
We believe the key trends driving demand for Customer Engagement Optimization solutions include:
• Consumers expecting a more personalized and consistent experience across service channels. The manner in which
consumers obtain customer service has evolved from traditional call centers and in-store visits, to multichannel customer
engagement centers that include web self-service and digital communications, such as email, chat, and social media.
Today, consumers select service channels based on a number of factors, including which channels are available, their
experiences with those channels, personal preference, and the type of service issue at hand. Often they use multiple
channels for the same service-related issue, initially starting with a digital channel and ending with the call center or vice
versa. Consumer expectations are changing rapidly as organizations provide them with more interaction channels than
ever before. We believe consumers have come to expect a consistent, contextual, and personalized experience across these
channels, and therefore, organizations are seeking Customer Engagement Optimization solutions to achieve better business
outcomes.
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• Customer-centric organizations increasingly looking for the ability to aggregate, analyze, and act on big data to
enhance operational efficiencies, build customer loyalty, and drive profitability. Today’s organizations have a significant
amount of structured and unstructured customer, workforce, and other business data that is typically generated from
numerous departments and multiple systems across the enterprise. We believe that customer-centric organizations are
increasingly seeking Customer Engagement Optimization solutions that allow them to collect and analyze intelligence
across different service channels and sources to gain a better understanding of the performance of their workforce, the
effectiveness of their service processes, the quality of their interactions, and changing customer behaviors. When captured,
analyzed, and acted upon, organizations can use this Actionable Intelligence to help achieve important strategic objectives,
such as gaining a holistic view of customer service effectiveness, improving customer engagement, enhancing loyalty,
maximizing revenue, reducing operational costs, and mitigating risk.
Security Intelligence
We are a leading provider of Security Intelligence solutions. Our solutions are implemented in a variety of sectors, such as
government, law enforcement, transportation, critical infrastructure, and commercial organizations.
We believe that terrorism, criminal activities, cyber-attacks, and other security threats, combined with new and more complex
security challenges, are driving demand for innovative solutions that can enhance security through the extensive use of
Actionable Intelligence to help anticipate, prepare, and respond to security threats.
We believe that the key trends driving demand for Security Intelligence solutions include:
• Communications Intelligence—increasing complexity of communications networks and demand for advanced
intelligence and investigative solutions. Law enforcement, national security, and intelligence agencies worldwide are
responsible for investigations related to criminal, national security and terrorist networks, drug trafficking, financial
crimes, and other illegal activities. Such investigations require highly complex methods and often involve collecting and
analyzing information from multiple sources, including communications networks. Further, 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, and we believe that the
increasing complexity of communications networks coupled with the need for communications intelligence are creating
demand for Actionable Intelligence solutions.
• Cyber Security—increased threat of cyber-attacks and demand for innovative solutions to protect networks. Over the
last few years, cyber security has become a growing concern, and many countries around the world are seeking tools to
detect and help prevent cyber-attacks. In a world of growing connectivity, the Internet, and the proliferation of IP
networks, protecting the end points of the network from cyber-attacks is no longer sufficient, and the network itself has
become key to an effective cyber security program. For example, there is a growing need not just to protect networks from
malicious intrusion, but also to identify malware that already exists in the network and to investigate cyber-attacks and
determine who is behind the attacks and why. We believe that countries around the world are seeking innovative cyber
security solutions that capture and analyze network traffic and that glean insights from the data to detect malware and help
prevent and investigate cyber-attacks.
•
Situation Management—demand for innovative IP-based video and integrated situation management solutions. The
physical security market continues to experience a technology transition from relatively passive analog CCTV video
systems that use analog equipment and closed networks and generally provide only basic video recording and viewing, 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. In addition, in the physical security market, there is a need to
aggregate data from many other non-video sensors, including access control, intrusion detection, and other security sensors
to allow centralized monitoring and more effective prevention of and response to security events. We believe that situation
management solutions that aggregate data from multiple sensors and security systems and leverage Actionable Intelligence
can effectively address these security needs.
• Homeland Security (HLS)—demand for innovative, integrated solutions that combine situation management,
communications and cyber intelligence, and facilitate collaboration across security and law enforcement agencies. We
believe that government organizations, in connection with safe city, border control, transportation security, critical
infrastructure, and other large-scale security initiatives, are interested in deploying innovative security solutions that fuse
data from a wide range of security systems and intelligence sources to enable efficient information correlation and
analysis; rapid, rules-based alerts and action; and the ability to share information easily within and across agencies to
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facilitate timely response and investigation. We believe that Actionable Intelligence presents an opportunity for HLS
agencies to implement solutions that enhance security and public safety, while reducing operating costs.
Fraud, Risk, and Compliance
Verint is an innovator and global provider of Fraud, Risk, and Compliance solutions. Our solutions are implemented across
many industries, including financial services, retail, and telecommunications service providers.
We believe that enterprise organizations are looking to generate Actionable Intelligence to identify and prevent fraud, mitigate
risk, and help ensure compliance with legal, regulatory, and internal requirements. Organizations across industries face the
challenge of identifying fraud and non-compliance driven by the significant growth in information and the development of
more sophisticated methods of attack that require advanced solutions to detect, mitigate, and prevent such breaches. The
consequences of fraud and non-compliance extend far beyond direct financial loss to serious risks associated with information
breaches that can harm both customers and organizations, leading to reputation damage, customer attrition, and in some cases
significant fines and personal liability for senior executives.
We believe that the key trends driving demand for Fraud, Risk, and Compliance solutions include:
• Ongoing fraud intensified by new vulnerabilities and sophisticated methods of attack. Fraud can take different forms
across industries, and organizations must be prepared to address these risks effectively. Many of these risks are fueled by
new system vulnerabilities and the rise of more sophisticated methods of attack. For example, in financial services, call
center fraud has resulted in the demand for new solutions based on voice biometrics and predictive analytics to help
authenticate customers. In retail, where profit margins are narrow, organizations are seeking solutions to investigate
suspicious activities and reduce theft in their stores. We believe that organizations are seeking new analytical solutions that
can analyze a wide range of information to better mitigate fraud and effectively manage risk.
• Organizations seeking innovative solutions to respond to rapidly-evolving legal and regulatory compliance
requirements. With the ever-changing nature of financial and other laws, rules, and regulations—such as the Dodd-Frank
Wall Street Reform and Consumer Protection Act, and the Payment Card Industry Data Security Standard (PCI DSS)—
organizations face a tremendous challenge with legal and regulatory compliance requirements. Consumer financial
protection is growing across the globe, with costly, large-scale remediation activities and significant financial penalties
mandated for infractions. While organizations often have detailed processes and procedures for their employees to follow
in support of regulatory requirements, we believe that many lack the tools to adequately capture and analyze the actual
behavior of employees across the enterprise, exposing these organizations to significant risk. We believe that organizations
are looking to evolve their practices and tools that support these areas, and that new, sophisticated compliance solutions
can help them address these requirements, mitigate risks, and make the necessary adjustments as regulations and other
requirements continue to evolve.
Our Strategy
Our strategy to further enhance our position as a leading provider of Actionable Intelligence solutions worldwide includes the
following key elements:
• Continue to drive the development of Actionable Intelligence solutions for unstructured data. We were a pioneer in the
development of solutions that help commercial businesses and governmental organizations derive intelligence from both
structured and unstructured data. We intend to continue to drive the adoption of our Actionable Intelligence vision and
solutions by building the Verint brand; expanding our portfolio of Customer Engagement Optimization, Security
Intelligence, and Fraud, Risk, and Compliance solutions delivered from a single provider; leveraging our large installed
base of customers; and offering services that help our customers maximize their investments in our solutions.
• 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 structured and
unstructured data. In order to do this, we intend to continue to make significant investments in research and development,
protect our intellectual property through patents and other means, and maintain regular dialog with our customer base in
order to anticipate and understand their business objectives and requirements.
• Continue to expand our market presence through OEM and partner relationships. We have expanded our relationships
with OEMs and other channel partners. We believe that these relationships broaden our market coverage and help make
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our solutions even more widely available on a global basis. We intend to continue expanding our existing relationships,
while creating new ones.
• Augment our organic growth with acquisitions. We examine acquisition opportunities regularly as a means to add
technology, increase our geographic presence, enhance our market leadership, and/or expand into adjacent markets.
Historically, we have engaged in acquisitions for all of these purposes and expect to continue doing so in the future when
strategic opportunities arise.
Our Operating Segments
We conduct our business through three operating segments—Enterprise Intelligence, Communications and Cyber Intelligence,
and Video and Situation Intelligence. Organizing our business through three operating segments allows us to align our
resources and domain expertise to effectively address the Actionable Intelligence market. We address the Customer
Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the
Security Intelligence market opportunity through solutions from our Communications and Cyber Intelligence segment and
Video and Situation Intelligence segment, and we address the Fraud, Risk, and Compliance market opportunity through
solutions from all three operating segments. Below is a summary of the solutions included in each of our segments.
The Enterprise Intelligence Segment
Our Enterprise Intelligence solutions are primarily marketed under the Impact 360® and KANA brands. Our solutions are
implemented on customer premises and/or are available in a hosted model. The following tables summarize our portfolio of
workforce optimization and customer service solutions that comprise our Enterprise Intelligence segment.
Workforce Optimization Solutions
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SOLUTION
Quality Monitoring
Full-Time and Compliance
Recording
Voice Biometrics/Fraud
Detection
DESCRIPTION
Records multimedia interactions 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, and to help trading room floors and related financial environments with
their compliance mandates.
Helps reduce risk and fraud-related loss by enabling contact centers to screen incoming calls and
detect known fraudster voices, without disrupting the customer experience. Incorporates passive
voice biometrics and predictive analytics to profile and recognize the unique vocal
characteristics, or “voiceprints,” of callers.
Voice of the Customer
Analytics (Speech Analytics,
Text Analytics, Enterprise
Feedback Management)
Speech Analytics: analyzes call content for the purpose of proactively identifying business
trends, building effective cost containment and customer service strategies, and enhancing
quality monitoring programs.
Text Analytics: analyzes structured and unstructured data in multiple text sources, including
email, chat sessions, blogs, contact center notes, white mail, survey comments, and social media
channels. Provides enterprises with a better understanding of customer sentiment, corporate
image, competitors, and other market factors for more effective decision making.
Enterprise Feedback Management: provides enterprise-wide customer feedback capabilities via
surveys and online communities to centralize and simplify survey management, deployment, and
analysis across multiple survey platforms, including email, social media, mobile devices, and
Interactive Voice Response ("IVR"). Delivers a more holistic view of customer—as well as
employee—sentiments, behaviors, and experiences to enable better decisions for increasing
satisfaction, loyalty, and value.
Helps enterprises forecast staffing requirements, deploy the appropriate level of resources, and
evaluate the productivity of their customer service staff. Incorporates employee skills into
staffing capacity models to help align resources to the type of work forecasted. Also includes
optional strategic planning capabilities.
Captures information from customer service employee interactions with their desktop
applications to provide insights into productivity, training requirements, process adherence, and
bottlenecks.
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, 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. Features automated coaching capabilities that provide employees with
personalized guidance on how to improve their performance and extend their skills.
Includes quality assurance, forecasting and scheduling, speech analytics, performance
scorecards, citizen surveys, incident investigation and analytics, and full-time and compliance
recording solutions under the Audiolog™ brand. Allows first responders (i.e., police, fire
departments, emergency medical services) to deploy workforce optimization solutions to record,
manage, and act on incoming assistance requests and related data.
Workforce Management
Desktop and Process
Analytics
Performance Management
eLearning and Coaching
Public Safety Workforce
Optimization
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Customer Service Solutions
SOLUTION
Agent Desktop
Case Management
Email Management
Knowledge Management
Live Chat
Co-Browse
Experience Analytics
Web Self-Service
Experience Community
DESCRIPTION
Responds to the needs of agents during service interactions by providing access to the contextual
knowledge, applications, and tools needed to resolve inquiries, all from the same screen. Guides
agents to relevant products or services quickly, provides up-to-date contextual information to
match customers’ needs, and suggests best next actions in context to customer sales/service
queries. Features extensive integration capabilities that enable real-time interaction with
telephony systems (CTI, IVR, ACD) and external information sources to provide the right
information to the right agent at the right time.
Delivers dynamic process flows to handle the full lifecycle of customer cases. Supports
unstructured and ad hoc requests via a process engine and managed via service-level agreements
(SLAs), and leverages enterprise knowledge management that provides access to information
relevant to the context of the case and customer profile.
Enables users to efficiently manage email communications and help meet customer expectations
by providing rapid, intelligent handling of large volumes of email. Features enhanced pre-
processing, routing, and delivery of inbound email to the correct user group. Provides agents
with available information and tools, including templates and knowledgebase articles, to provide
efficient, high-quality responses.
Provides access to information contextually to make searches and services targeted and efficient.
Allows organizations to provide consistent answers to customers’ queries, regardless of channel
(i.e., phone, web, email, mobile, social). Proactively applies and presents relevant knowledge to
agents or customers.
Enables customers to chat with agents over the web to get assistance with online activities and
other service requests. Allows multiple concurrent chats and offers proactive features to invite
customers to chat based on predetermined criteria. Supports chat from mobile devices.
Allows customers and agents to share computer screens, so agents can guide customers through
activities. Helps increase the use of web self-service and decrease abandonment. Provides
access to customer profiles for views into previous interactions that may affect current inquiries.
Enables organizations to listen, monitor, analyze, and respond to social media posts and
interactions on direct channels. Leverages natural language processing and categorizes for
topics and sentiment. Delivers analytics that are automated and contextual, and allows agents to
access case histories and context-based knowledge pertaining to the topic of the post.
Features knowledge-based processes that help customers navigate the web more effectively and
swiftly to the products and information that best meet their needs. Understands users’ language
(using intelligent natural language search) and the context of searches—i.e., customer profile,
location-related products and services.
Provides a forum for a company's customers and employees to come together and exchange
information. Enables customers to interact with each other to share experiences, and enables
agents to contribute or add insight to the process. Allows customers to leverage community
knowledge to resolve issues, which increases zero-contact resolution by taking advantage of
crowd sourcing.
The Communications and Cyber Intelligence Segment
Our Communications and Cyber Intelligence solutions are marketed under the RELIANT™, VANTAGE®, STAR-GATE™,
ENGAGE™, FOCAL-INFO™, CYBERVISION™, SIC™, and VIGIA® brand names. The following table summarizes our
portfolio of Communications and Cyber Intelligence solutions.
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DESCRIPTION
SOLUTION
Communications Interception 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.
Communications Service
Provider Compliance
Mobile Location Tracking
Open Source Web
Intelligence
Enables communication service providers to collect and deliver to government agencies specific
call-data records and call-content 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.
Increases the productivity and efficiency of investigations in which the Internet is the primary
source of information. Features advanced data collection, text analysis, data enrichment,
advanced analytics, and a clearly defined investigative workflow on a scalable platform.
Tactical Communications
Intelligence
Provides portable communications off-air interception and location tracking capabilities for local
use or integration with centralized monitoring systems to support tactical field operations.
Cyber Security
Designed to provide network-based cyber security, including malware detection capabilities for
high-speed networks, for national cyber protection organizations.
The Video and Situation Intelligence Segment
Our Video and Situational Intelligence solutions are marketed under the Nextiva® brand. The following table summarizes our
portfolio of Video and Situation Intelligence solutions.
SOLUTION
Physical Security Information
Management (PSIM)
IP Video Management
Software
Edge Devices
Video Analytics
Network Video Recorders
Customer Services
DESCRIPTION
Provides unified visualization, workflow, and reports on alarms and incidents across business
and security systems, including third-party products—such as access control, video, intrusion,
fire and public safety, first responder, and other mobile device systems—to improve response
times, effectiveness, total cost of ownership, and future extensibility as security and safety needs
evolve.
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
interoperability 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 and
bandwidth-efficient video encoders to convert analog images to IP video for transmission over IP
networks.
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. Offers advanced analytics that integrate facial recognition and license plate
recognition capabilities with POS, ATM, and teller transactions in retail store and branch bank
environments. Includes industry-specific analytics applications focused on the behavior of
people in retail and other environments.
Performs networked video recording utilizing secure, embedded operating systems and market-
specific data integrations for applications that require local storage, as well as remote
networking.
We offer a range of customer services, including implementation and training, consulting and managed services, and
maintenance support, to help our customers maximize their return on investment in our solutions.
Implementation and Training
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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 solutions with our
customers’ environments and third-party solutions. Our training programs are designed to enable our customers to effectively
use our solutions and to certify our partners to sell, install, and support our solutions. Customer and partner training is provided
at the customer site, at our training centers around the world, and/or remotely online.
Consulting and Managed Services
Our management consulting capabilities include business strategy, process excellence, performance management, and project
and program management, and are designed to help our customers maximize the value of our solutions in their own
environments. We also offer managed services delivered on a subscription basis to help our customers gain further value from
their investments in our technology and minimize the need for additional resources. Our managed services enable us to help
ensure customers effectively manage our solutions and maximize the business insights produced, heighten customer
engagement, and create strong relationships working together in the process.
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, seven-days-a-week. Our support programs are designed to help ensure
long-term, successful use of our solutions. We believe that customer support is critical to retaining and expanding our customer
base. Our Enterprise Intelligence solutions are sold with a warranty of generally one year for hardware and 90 days for
software. Our Communications Intelligence solutions and Video Intelligence solutions are sold with warranties that typically
range from 90 days to three 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
Enterprise Intelligence solutions.
Direct and Indirect Sales
We sell our solutions through our direct sales teams and indirect channels, including distributors, systems integrators, value-
added resellers ("VARs"), and OEM partners. Approximately half of our overall sales are made through partners, distributors,
resellers, and system integrators.
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, help 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. See "Risk Factors—Risks Related to Our Business—
Competition, Markets, and Operations—If we are unable to maintain our relationships with third parties that market and sell
our products, our business and ability to grow could be materially adversely affected" under Item 1A of this report.
Customers
Our solutions are used by more than 10,000 organizations in over 180 countries. In the year ended January 31, 2014, we
derived approximately 55%, 32%, and 13% of our revenue from the sale of our Enterprise Intelligence solutions,
Communications Intelligence solutions, and Video Intelligence solutions, respectively. In the year ended January 31, 2013, we
derived approximately 58%, 28%, and 14% of our revenue from the sale of our Enterprise Intelligence solutions,
Communications Intelligence solutions, and Video Intelligence solutions, respectively. In the year ended January 31, 2012, we
derived approximately 56%, 26%, and 18% of our revenue from the sale of our Enterprise Intelligence solutions,
Communications Intelligence solutions, and Video Intelligence solutions, respectively. We are party to contracts with
customers in each of our segments, the loss of which could have a material adverse effect on the segment.
In the year ended January 31, 2014, we derived approximately 56%, 20%, and 24% of our revenue from sales to end users in
the Americas, in Europe, the Middle East and Africa ("EMEA"), and in the Asia-Pacific region ("APAC"), respectively. In the
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year ended January 31, 2013, we derived approximately 55%, 24%, and 21% of our revenue from sales to end users in the
Americas, EMEA, and APAC, respectively. In the year ended January 31, 2012, we derived approximately 53%, 27%, and
20% of our revenue from sales to end users in the Americas, EMEA, and APAC, respectively. See also Note 18, “Segment,
Geographic, and Significant Customer Information” to our consolidated financial statements included under Item 8 of this
report for additional information and financial data about each of our operating segments and geographic regions.
For the year ended January 31, 2014, approximately one quarter of our business was generated from contracts with various
governments around the world, including local, regional, and national government agencies. Due to the unique nature of the
terms and conditions associated with government contracts generally, our government contracts may be subject to renegotiation
or termination at the election of the government customer. Some of our customer engagements require us to have security
credentials or to participate in projects through an approved legal entity.
Seasonality and Cyclicality
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. Our
revenue and operating income are typically highest in the fourth quarter and lowest in the first quarter. Moreover, revenue and
operating income in the first quarter of a new year may be lower than in the fourth quarter of the preceding year, potentially by
a significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders
concentrated in the later part of that month. We believe that these seasonal and cyclical factors primarily reflect customer
spending patterns and budget cycles, as well as the impact of compensation incentive plans for our sales personnel. While
seasonal and cyclical factors such as these are common in the software and technology industry, this pattern should not be
considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic
conditions, also have an impact on our business and financial results. See "Risk Factors" under Item 1A of this report for a
more detailed discussion of factors which may affect our business and financial results.
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, primarily in our Communications and Cyber Intelligence segment, we may customize our products to meet the
particular requirements of our customers. Research and development is performed primarily in the United States, Israel, the
United Kingdom, Ireland, the Netherlands, and Indonesia for our Enterprise Intelligence segment; in Israel, Germany, Brazil,
Cyprus, and Bulgaria for our Communications Intelligence segment; and primarily in Canada, Israel, and the United States for
our Video Intelligence segment.
We believe that our future success depends on a number of factors, including among others, our ability to:
•
•
•
identify and respond to emerging technological trends in our target markets;
develop and maintain competitive solutions that meet or exceed our customers’ changing needs;
enhance our existing products by adding features and functionality to meet or exceed 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, 2014, 2013, and 2012, we spent approximately $126.5 million, $115.9 million, and $111.0 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. See "Risk Factors—Risks Related to Our
Business—Competition, Markets, and Operations—For certain products and components, we rely on a limited number of
suppliers, manufacturers, and partners and if these relationships are interrupted we may not be able to obtain substitute
suppliers, manufacturers, or partners on favorable terms or at all" under Item 1A of this report.
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As noted above, a significant portion of our research and development operations is located outside the United States.
Historically, we have also derived benefits from participation in certain government-sponsored programs, including those of the
Israeli Office of the Chief Scientist ("OCS") and in other jurisdictions, for the support of research and development activities
conducted in those locations. 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—Risks Related to Our Business—Competition, Markets, and Operations—Because we have significant foreign
operations, we are subject to geopolitical and other risks that could materially adversely affect our business" and "Risk Factors
—Risks Related to Our Business—Competition, Markets, and Operations—Conditions in and our relationship to Israel may
materially adversely affect our operations and personnel and may limit our ability to produce and sell our products or engage in
certain transactions" under Item 1A of this report for a discussion of risks associated with our foreign operations.
Manufacturing and Suppliers
We rely on both our internal manufacturing and assembly operations, as well as several unaffiliated manufacturing
subcontractors, to produce our hardware products and solutions. Our internal manufacturing and assembly operations consist
primarily 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 perform
system integration functions prior to shipping turnkey solutions to our customers. Our internal manufacturing and assembly
operations are performed primarily in our German, Israeli, and Cypriot facilities for our Communications Intelligence
solutions, and in our Canadian facilities for certain of our Video Intelligence solutions. Our Enterprise Intelligence solutions
are substantially all software and do not require any internal manufacturing. For substantially all other manufacturing, we rely
on several unaffiliated manufacturing subcontractors for the supply of specific proprietary components and assemblies that are
incorporated in our products, as well as for certain other manufacturing and assembly 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—Risks Related to Our Business—Competition, Markets, and Operations—For certain products and
components, we rely on a limited number of suppliers, manufacturers, and partners and if these relationships are interrupted,
we may not be able to obtain substitute suppliers, manufacturers, or partners on favorable terms or at all" under Item 1A of this
report for a discussion of risks associated with our manufacturing operations and suppliers.
Employees
As of January 31, 2014, we employed more than 3,400 professionals, including certain contractors, with approximately 46%,
31%, 14%, and 9% of our employees and contractors located in the Americas, Israel, EMEA (excluding Israel), and APAC,
respectively. In February 2014, we completed our acquisition of KANA and in March 2014, we completed our acquisition of
UTX. Following the closing of these acquisition transactions, we employ more than 4,400 professionals in total.
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
trade unions 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 Laborers in Israel) and the Coordinating Bureau
of Economic Organizations (including the Manufacturers’ Association of Israel) are applicable to our Israeli employees by
virtue of expansion orders 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 January 31, 2014, we had more than 600 patents and patent applications worldwide. We have accumulated a significant
amount of proprietary know-how and expertise in developing Actionable Intelligence solutions. We regularly review new areas
of technology related to our businesses to determine whether they can and should be patented.
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Licenses
While we employ many of our innovations exclusively in our products and services, we also engage in outbound and inbound
licensing of specific patented technologies. 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. See "Risk Factors—Risks Related
to Our Business—Competition, Markets, and Operations—For certain products and components, we rely on a limited number
of suppliers, manufacturers, and partners and if these relationships are interrupted we may not be able to obtain substitute
suppliers, manufacturers, or partners on favorable terms or at all" under Item 1A of this report.
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. While it may be necessary in the future to seek or renew
licenses relating to various aspects of our products, we believe, based on industry practice, such licenses generally could be
obtained on commercially reasonable terms.
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—Risks Related to Our Business—Intellectual Property and Data/Systems Security—Our
intellectual property may not be adequately protected" under Item 1A of this report 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 Enterprise Intelligence segment, our competitors include Aspect Software, Inc., eGain Corporation, Genesys
Telecommunications, NICE Systems Ltd. (“NICE”), and Pegasystems Inc., and divisions of larger companies, including Oracle
Corporation and Salesforce.com, Inc., along with many smaller companies, which can vary across regions. In our
Communications Intelligence segment, our primary competitors include BAE Systems, FireEye, Inc., JSI Telecom, NICE,
Rohde and Schwarz, RSA NetWitness (a business unit of EMC Corporation), and SS8, Inc., along with a number of smaller
companies and divisions of larger companies that compete with us in certain regions or only with respect to portions of our
product portfolio. In our Video Intelligence segment, our competitors include American Dynamics (a business unit of Tyco),
Avigilon Corporation, Genetec Inc., March Networks Corporation (a business unit of Infinova Ltd.), Milestone Systems A/S,
and NICE, and divisions of larger companies, including Bosch Security Systems, Honeywell International Inc., and United
Technologies Corp., along with many smaller companies, which can vary across regions.
In each of our operating segments, we believe that we compete principally on the basis of:
•
•
•
•
•
•
product performance and functionality;
product quality and reliability;
breadth of product portfolio and pre-defined integrations;
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. Some of our competitors have superior brand recognition and significantly greater financial or other resources
than we do. We expect that competition will increase as other established and emerging companies enter our markets or we
enter theirs, and as new products, services, and technologies are introduced, such as SaaS. In addition, consolidation is
common in our markets and has in the past and may in the future improve the position of our competitors. See “Risk Factors—
Risks Related to Our Business—Competition, Markets, and Operations—Intense competition in our markets and competitors
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with greater resources than us may limit our market share, profitability, and growth” under Item 1A of this report 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. 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 Enterprise Intelligence or Video Intelligence solutions. 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
As previously disclosed, on January 6, 2014, we entered into an agreement and plan of merger with KANA (the “KANA
Merger Agreement”). On February 3, 2014, we completed the merger with KANA (the “KANA Merger”).
The closing of the KANA Merger was subject to a number of conditions, including, among others, the termination or expiration
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). On
January 15, 2014, early termination of the waiting period under the HSR Act was granted by the U.S. Federal Trade
Commission.
In connection with the acquisition of KANA, on February 3, 2014, we borrowed $125.0 million under our revolving credit
facility and entered into Amendment No. 1 to our Amended and Restated Credit Agreement, dated as of March 6, 2013 (as
amended, the "2013 Amended Credit Agreement"), pursuant to which we incurred, on such date, $300.0 million of incremental
term loans (the “2014 Term Loans”). The net proceeds of these borrowings were used to fund a portion of the KANA purchase
price.
On February 3, 2014, we also entered into Amendment No. 2 to the 2013 Amended Credit Agreement which, among other
things, (i) permits us to increase the permitted amount of additional incremental term loans and revolving credit commitments
under the 2013 Amended Credit Agreement (beyond the 2014 Term Loans borrowed under Amendment No. 1) by up to $200.0
million plus an additional amount such that the First Lien Leverage Ratio (as defined in Amendment No. 2) would not exceed
the specified maximum ratio set forth therein, (ii) increased the size of certain negative covenant basket carve-outs, (iii) permits
us to issue Permitted Convertible Indebtedness (as defined in Amendment No. 2), and (iv) permits us to refinance all or a
portion of any existing class of term loans under the 2013 Amended Credit Agreement with replacement term loans.
Further, on February 3, 2014, we entered into Amendment No. 3 to the 2013 Amended Credit Agreement which extended by
one year, to January 31, 2016, the step-down date of the leverage ratio covenant applicable to our revolving credit facility and,
subject to the effectiveness date of Amendment No. 4 (as defined below), repriced the interest rate applicable to borrowings
under the revolving credit facility to the interest rate applicable to the 2014 Term Loans.
On March 7, 2014, we entered into Amendment No. 4 to our 2013 Amended Credit Agreement to, among other things, reprice
the interest rate applicable to the 2013 Term Loans to the interest rate applicable to the 2014 Term Loans. The repricing of the
interest rate applicable to borrowings under the revolving credit facility contemplated by Amendment No. 3 became effective
on March 7, 2014, upon the effectiveness of Amendment No. 4.
On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX, a provider of certain mobile device
tracking solutions for security applications, from UTX Limited. UTX Limited was our supplier of these products to our
Communications Intelligence operating segment prior to the transaction. The purchase price consisted of $82.9 million of cash
paid at closing, subject to adjustment, and we agreed to make potential additional future cash payments to UTX Limited of up
to $1.5 million, contingent upon the achievement of certain performance targets over the period from closing through June 30,
2014. The cash paid at closing was funded with cash on hand.
Further details regarding the KANA Merger, the amendments to our 2013 Amended Credit Agreement, and the UTX
acquisition transaction appear in Note 19, “Subsequent Events” to our consolidated financial statements included under Item 8
of this report.
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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.
Risks Related to Our Business
Competition, Markets, and Operations
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,
recessions, economic instability, political unrest, armed conflicts, or natural disasters around the world may cause companies
and governments to delay, reduce, or even cancel planned spending. In particular, declines in information technology spending
and limited or reduced government budgets have affected the markets for our solutions in both the enterprise intelligence
market and the security intelligence market in certain periods and in certain regions. For the year ended January 31, 2014,
approximately one quarter of our business was generated from contracts with various governments around the world, including
national, regional, and local government agencies. We expect that government contracts will continue to be a significant source
of our revenue for the foreseeable future. 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.
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 and continually innovate our products and technologies 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, new delivery platforms such as SaaS, the commoditization of older
technologies, and the emergence of new industry standards can exert pricing pressure on existing products and/or render them
unmarketable or obsolete. It is critical to our success that we are able to anticipate and respond to changes in technology and
industry standards by consistently developing new and enhanced, innovative and high-quality products and services that meet
or exceed the changing needs of our customers. We must also successfully launch and drive demand for our new and enhanced
solutions. If we are unable to develop, launch, and drive demand for our new and enhanced solutions, we may lose market
share and our profitability and other results of operations may be materially adversely affected.
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, invest, and grow. We are also encountering new competitors as we expand into new markets.
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, superior brand recognition, and significantly greater financial, technical, marketing, customer service, public
relations, distribution, or other resources, especially in new markets we may enter. Consolidation among our competitors may
also improve their competitive position. In recent years, several companies significantly larger than we are have also entered or
increased their presence in our markets through internal development, partnerships, and acquisitions, and we have encountered
larger competitors as we have expanded into new markets. We also face competition from solutions developed internally by
our customers or partners. To the extent that we cannot compete effectively, our market share and, therefore, results of
operations could be materially adversely affected.
Because price and related terms are key considerations for many of our customers, we may, from time to time, 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 or defend existing installations. If we are forced to take these kinds of actions to remain competitive in the short-term,
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such actions may adversely impact our ability to execute and compete in the long-term.
Our solutions may contain defects, and we could incur substantial costs to correct such defects and face customer claims
for substantial damages if such defects cause our solutions to fail to perform properly. In addition, defects may cause
adverse publicity and impair the market acceptance of our solutions.
Many of our existing solutions are and future solutions are expected to be sophisticated and may develop operational problems.
New products and new product versions also give rise to the risk of defects or errors. If we are not able to remedy or do not
discover such defects, errors, or other operational problems until after a product has been released and used by customers or
partners, we may incur significant costs to correct such defects, errors, or other operational problems and/or become liable for
substantial damages for product liability claims or other contract liabilities. In addition, defects or errors in our products may
result in questions regarding the integrity of the products generally, which could cause adverse publicity and impair their
market acceptance.
If we are unable to maintain our relationships with third parties that market and sell our products, our business and
ability to grow could be materially adversely affected.
Approximately half of our sales are made through partners, distributors, resellers, and systems integrators. We must often
compete with other suppliers for these relationships and our competitors often seek to establish exclusive relationships with
these sales channels or, at a minimum, to become a preferred partner for them. Our ability to procure and maintain these
relationships is based on factors that are similar to those on which we compete for end customers, including features,
functionality, ease of use, installation and maintenance, and price, among others. Even if we are able to secure such
relationships on terms we find acceptable, there is no assurance that we will be able to realize the benefits we anticipate. Some
of our channel partners may also compete with us or have affiliates that compete with us or may partner with our competitors or
even offer our products and those of our competitors as alternatives when presenting bids to end customers. Our ability to
achieve our revenue goals and growth depends to a significant extent on maintaining, enabling, and adding to these sales
channels, and if we are unable to do so, our business and ability to grow could be materially adversely affected.
The sophisticated nature of our solutions, sales cycle, and sales strategy may create uncertainty in or negatively impact
our operating results and make such results more volatile and difficult to predict.
Although the timing of our sales cycle ranges from as little as a few weeks to more than a year, our larger sales, which we
emphasize in our sales strategy, typically require a minimum of a few months to consummate. As the length or complexity of a
sales process increases, so does the risk of successfully closing the sale. Larger sales are often made by competitive bid, which
also increases the time and uncertainty associated with such opportunities. Moreover, because many of our solutions are also
sophisticated, customers may require education on the value and functionality of our solutions as part of the sales process,
further extending the time frame and uncertainty of the process. Longer sales cycles, competitive bid processes, and the need
to educate customers means that:
• There is greater risk of customers deferring, scaling back, or cancelling sales as a result of, among other things,
receipt of competitive proposals, changes in budgets and purchasing priorities, or the introduction or anticipated
introduction of new or enhanced products by us or our competitors during the process.
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We may make a significant investment of time and money in opportunities that do not come to fruition, which
investments we may be unable to recoup or utilize in future projects.
• We may be required to bid on a project in advance of the completion of its design or be required to begin
implementation of a project in advance of finalizing a sale, in either case, increasing the risk of unforeseen
technological difficulties or cost overruns.
• We face greater downside risks if we do not correctly and efficiently deploy limited human and financial resources
and convert such sales opportunities into orders.
Our emphasis on larger solution sales also requires greater expertise in sales execution and transaction implementation than
more basic product sales, including in establishing and maintaining appropriate contacts and relationships with customers and
partners, product development, project management, staffing, integration, services, and support. Additionally, after the
completion of a solution sale or the sale of a more sophisticated product in general, our customers or partners may need
assistance from us in making use of the full functionality of these solutions or products, in realizing all of their benefits, or in
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implementation generally. If we are unable to assist our customers and partners in realizing the benefits they expect from our
solutions and products, demand for our solutions and products may decline and our operating results may suffer.
The extended time frame and uncertainty associated with many of our sales opportunities also makes it difficult for us to
accurately forecast our revenues (and attendant budgeting and guidance decisions) and increases the volatility of our operating
results from period to period. Our ability to forecast and the volatility of our operating results is also impacted by the fact that
pricing, margins, and other deal terms may vary substantially from transaction to transaction, especially across business lines.
The terms of our transactions, including with respect to pricing, future deliverables, delivery model (e.g., perpetual license
versus SaaS), and post-contract customer support, also impact the timing of our ability to recognize revenue. Because these
transaction-specific factors are difficult to predict in advance, this also complicates the forecasting of revenue. Additionally,
because, as noted above, we emphasize larger transactions in our sales strategy, the deferral or loss of one or more significant
orders or a delay in a large implementation could materially adversely affect our operating results, especially in any given
quarter. As with other software-focused companies, a large amount of our quarterly business tends to come in the last few
weeks, or even the last few days, of each quarter. This trend has also complicated the process of accurately predicting revenue
and other operating results, particularly on a quarterly basis. Finally, our business is subject to seasonal factors that may also
cause our results to fluctuate from quarter to quarter.
For certain products and components, we rely on a limited number of suppliers, manufacturers, and partners and if
these relationships are interrupted we may not be able to obtain substitute suppliers, manufacturers, or partners on
favorable terms or at all.
Although we generally use standard parts and components in our products, we do rely on non-affiliated suppliers and OEM
partners for certain non-standard products or components which may be critical to our products, including both hardware and
software, and on manufacturers of assemblies that are incorporated into our products. We also purchase technology, license
intellectual property rights, and oversee third-party development and localization of certain products or components, in some
cases, by or from companies that may compete with us or work with our competitors. While we endeavor to use larger, more
established suppliers, manufacturers, and partners wherever possible, in some cases, these providers may be smaller, less
established companies, particularly in the case of suppliers of new or unique technologies that we have not developed
internally. If these suppliers, manufacturers, or partners 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,
including loss of license, OEM, or distribution rights, in our relationships with these suppliers, manufacturers, or partners,
including as a result of the acquisition of a supplier or partner by a competitor, we will be required to locate alternative sources
of supply or manufacturing, to internally develop the applicable technologies, to redesign our products, and/or to remove
certain features from our products, any of which would be likely to increase expenses, create delivery delays, and negatively
impact our sales. Although we endeavor to put in place contracts with these key providers, including protections such as source
code escrows (where needed), warranties, and indemnities, we may not be successful in obtaining adequate protections, these
agreements may be short-term in duration, the counterparties may be unwilling or unable to stand behind such protections, and
any contractual protections offer limited practical benefits to us in the event our relationship with a key provider is interrupted,
any of which may adversely affect our business.
If we cannot recruit or retain qualified personnel, our ability to operate and grow our business may be impaired.
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 who understand and have experience with our products, services,
and markets, including new markets we may enter. The market for such personnel is competitive in the geographies in which
we operate. If we are unable to attract and retain qualified employees, on reasonable economic and other terms or at all, our
ability to operate and grow our business could be impaired.
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 outside the United States, including sales, research and development, manufacturing, customer
support, and administrative services. The countries in which we have our most significant foreign operations include Israel, the
United Kingdom, Canada, Brazil, India, Germany, Indonesia, the Netherlands, and Cyprus, 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:
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political, security, and economic instability or corruption in foreign countries;
compliance with laws prohibiting improper payments or offers of payments for the purposes of obtaining or retaining
business in non-U.S. jurisdictions, including the U.S. Foreign Corrupt Practices Act and similar laws of the United
States and other countries;
changes in and compliance with local laws and regulations, including trade compliance laws, data privacy laws, gift
policies, 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;
preference for or policies and procedures that protect local suppliers;
legal uncertainties regarding liability and intellectual property rights;
hiring and retaining qualified foreign employees; and
difficulty in, and longer time frames associated with, accounts receivable collection.
Any or all of these factors could materially adversely affect our business or results of operations.
Conditions in and our relationship to Israel may materially adversely affect our operations and personnel and may limit
our ability to produce and sell our products or engage in certain transactions.
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
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 or 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. 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.
Restrictive laws, policies, or practices in certain countries directed toward Israel, Israeli goods, or companies having operations
in Israel may also limit our ability to sell some of our products in certain countries.
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 that we submit
to the OCS each year. 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. This may limit our ability to engage in certain outsourcing
or business combination transactions involving these products or require us to pay significant royalties or fees to the OCS in
order to obtain any OCS consent that may be required in connection with such transactions.
We are subject to complex, evolving regulatory requirements that may be difficult and expensive to comply with and
that could negatively impact our business.
Our business and operations are subject to a variety of regulatory requirements in the United States and abroad, including,
among other things, with respect to performance of government contracts, labor, tax, import and export, anti-corruption, data
privacy and protection, and communications monitoring and interception. Compliance with these regulatory requirements may
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be onerous and expensive, especially where these requirements are inconsistent from jurisdiction to jurisdiction or where the
jurisdictional reach of certain requirements is not clearly defined or seeks to reach across national borders. Regulatory
requirements in one jurisdiction may make it difficult or impossible to do business in another jurisdiction. We may also be
unsuccessful in obtaining permits, licenses, or other authorizations required to operate our business, such as for the import or
export of our products. While we have implemented policies and procedures designed to achieve compliance with these laws
and regulations, we also cannot assure you that we or our personnel will not violate applicable laws and regulations or our
policies regarding the same. Violations of these laws or regulations may harm our reputation and deter government agencies
and other existing or potential customers or partners from purchasing our solutions. Furthermore, non-compliance with
applicable U.S. and non-U.S. laws and regulations could also result in fines, damages, criminal sanctions against us, our
officers or our employees, prohibitions on the conduct of our business, and damage to our reputation.
Regulatory requirements, such as laws requiring telecommunications providers to facilitate the monitoring of communications
by law enforcement, may also influence market demand for many of our products and/or customer requirements for specific
functionality and performance or technical standards. The domestic and international regulatory environment is subject to
constant change, often based on factors beyond our control or anticipation, including political climate, budgets, and current
events, which could reduce demand for our products or require us to change or redesign products to maintain compliance or
competitiveness.
Loss of security clearances or political factors may adversely affect our business.
Some of our subsidiaries maintain security clearances domestically and abroad in connection with the development, marketing,
sale, and support of our Communications Intelligence solutions. These clearances are reviewed from time to time by these
countries and could be deactivated, including for political reasons unrelated to the merits of our solutions, such as the list of
countries we do business with or the fact that our local entity is controlled by or affiliated with an entity based in another
country. If we lose our security clearances in a particular country, our business generated from government contracts may be
materially adversely affected in that we would be unable to sell our Communications Intelligence solutions for secure projects
in that country on a direct basis and might also experience greater challenges in selling such solutions even for non-secure
projects in that country. Even if we are able to obtain and maintain applicable security clearances, government customers may
decline to purchase our Communications Intelligence solutions if they were not developed or manufactured in that country or if
they were developed or manufactured in other countries that are considered disfavored by such country. We may also
experience negative publicity or other adverse impacts on our business if we sell our Communications Intelligence solutions to
countries that are considered disfavored by the media or political or social rights organizations even though such transactions
may be permissible under applicable law or if our reputation or relationship with government agencies is impaired.
Intellectual Property and Data/Systems Security
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 even in jurisdictions with well-
established legal protections for intellectual property such as the United States. It may be even more difficult to protect our
intellectual property in other jurisdictions where legal protections for intellectual property rights are less established. If we are
unable to adequately protect our intellectual property against unauthorized third-party use or infringement, our competitive
position could be adversely affected.
Our products may infringe or may be alleged to infringe on the intellectual property rights of others, which could lead
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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, either with respect to
our own intellectual property or intellectual property we license from third parties, 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, which, in some cases, may not be limited to a specified
maximum amount and for which we may not have sufficient insurance coverage or an adequate indemnification in the case of
intellectual property licensed from a third party. 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.
Use of free or open source software could expose our products to unintended restrictions and could materially adversely
affect our business.
Some of our products contain free or open source software (together, 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
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, including the need to seek licenses from third parties, to re-engineer affected products, to discontinue sales of affected
products, or to release all or portions of the source code of affected products. Any of these developments could materially
adversely affect our business.
The mishandling or 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 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 the customer's sensitive or confidential information or data, we or our partners may
receive or come into contact with such information or data, including personally identifiable information, when we are asked to
perform services or support functions for our customers. We or our partners may also receive or come into contact with such
information or data in connection with our SaaS or other hosted or managed services offerings. We have implemented policies
and procedures and use information technology systems to help ensure the proper handling of such information and data,
including background screening of certain service personnel, non-disclosure agreements with employees and partners, access
rules, and controls on our information technology systems. Customers are also increasingly focused on the security of our
products and we work to ensure their security, including through the use of encryption, access rights, and other customary
security features. However, these measures are designed to mitigate the risks associated with handling or processing sensitive
data and cannot safeguard against all risks at all times. The improper handling of sensitive data, or even the perception of such
mishandling (whether or not valid), or other security lapses by us or our partners or within our products, could reduce demand
for our products or otherwise expose us to financial or reputational harm or legal liability.
We may be subject to information technology system failures or disruptions that could harm our operations, financial
condition, or reputation.
We rely extensively on information technology systems to operate and manage our business and to process, maintain, and
safeguard information, including information belonging to our customers, partners, and personnel. These systems may be
subject to failures or disruptions as a result of, among other things, natural disasters, accidents, power disruptions,
telecommunications failures, new system implementations, acts of terrorism or war, physical security breaches, computer
viruses, or other cyber security attacks. We have experienced cyber security attacks in the past and may experience them in the
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future, potentially with greater frequency. While we are continually working to maintain secure and reliable systems, our
security, redundancy, and business continuity efforts may be ineffective or inadequate. We must continuously improve our
design and coordination of security controls across our business groups and geographies. Despite our efforts, it is possible that
our security controls and other procedures that we follow may not prevent systems failures or disruptions. Such system failures
or disruptions could subject us to research and development or production downtimes, delays in our ability to process orders,
delays in our ability to provide products and services to customers, including SaaS or other hosted or managed services
offerings, delays or errors in financial reporting, compromise or loss of sensitive or confidential information or intellectual
property, destruction or corruption of data, financial losses from remedial actions, liabilities to customers or other third parties,
or damage to our reputation. Any of the foregoing could harm our competitive position, result in a loss of customer confidence,
and materially and adversely affect our results of operations or financial condition.
Risks Related to Our Finances and Capital Structure
Our future success depends on our ability to execute on our growth strategy and properly manage investment in our
business and operations.
Our strategy is to continue to invest in, enhance, and secure our business and operations and grow, both organically and through
acquisitions. Investments in, among other things, new markets, new products, solutions, and technologies, research and
development, infrastructure and systems, geographic expansion, and headcount are critical to achieving our growth strategy.
However, such investments and efforts may not be successful, especially in new markets in which we have little or no
experience, and even if successful, may negatively impact our short-term profitability. Our success depends on our ability to
effectively and efficiently execute on our growth strategy, including our ability to properly allocate limited investment dollars,
balance the extent and timing of investments with the associated impact on expenses and profitability, capture efficiencies and
economies of scale, and compete in the new markets and with the new solutions in which we have invested. If we are unable to
effectively and efficiently execute on our growth strategy and properly manage our investments and expenditures, our results of
operations and stock price may be materially adversely affected.
We may not be able to identify suitable targets for acquisition or investment, or complete acquisitions or investments, on
terms acceptable to us, which could negatively impact our ability to implement our growth strategy.
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, subject to the terms of our credit agreement and other restrictions.
In many areas, we have seen the market for acquisitions become more competitive and valuations increase. In recent periods,
several of our competitors have also completed acquisitions of companies in or adjacent to our markets. As a result, it may be
more difficult for us to identify suitable acquisition or investment targets or to consummate acquisitions or investments once
identified on acceptable terms or at all. If we are not able to execute on our acquisition strategy, we may not be able to achieve
our growth strategy, may lose market share, or may lose our leadership position in one or more of our markets.
Our acquisition and investment activity presents certain risks to our business, operations and financial position.
Acquisitions or investments are an important part of our strategy. Successful execution following the closing of an acquisition
or investment is paramount to achieving the anticipated benefits of the transaction. If we are unable to execute successfully, we
may experience both a loss on the investment and damage to our legacy business and valuation.
The process of integrating an acquired company's business into our operations and investing in new technologies is challenging
and may result in expected or unexpected operating or compliance challenges, which may require significant expenditures and
a significant amount of our management's attention that would otherwise be focused on the ongoing operation of our business.
The potential difficulties or risks of integrating an acquired company’s business include, among others:
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the effect of the acquisition on our financial and strategic positions and our reputation;
risk that we fail to successfully implement our business plan for the combined business;
risk that we are unable to obtain the anticipated benefits of the acquisition, including synergies or economies of scale;
risk that the market does not accept the integrated product portfolio;
challenges in reconciling business practices or in integrating product development activities, logistics, or information
technology and other systems;
retention risk with respect to key customers, suppliers, and employees;
challenges in complying with newly applicable laws and regulations, including obtaining or retaining required
approvals, licenses, and permits; and
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potential impact on our internal controls over financial reporting.
Acquisitions or investments may also result in potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities, the expenditure of available cash, and amortization expenses or write-downs related to intangible assets
such as goodwill, any of which could have a material adverse effect on our operating results or financial condition.
Investments in immature businesses with unproven track records and technologies have an especially high degree of risk, with
the possibility that we may lose the value of our entire investments or incur additional unexpected liabilities. Transactions that
are not immediately accretive to earnings may make it more difficult for us to maintain satisfactory profitability levels or
compliance with the maximum leverage ratio covenant under the revolving credit facility under our credit agreement. Large or
costly acquisitions or investments may also diminish our capital resources and liquidity or limit our ability to engage in
additional transactions for a period of time.
All of the foregoing risks may be magnified as the cost, size, or complexity of an acquisition or acquired company increases, or
where the acquired company’s products, market or business are materially different from ours. There can be no assurance that
we will be successful in making additional acquisitions in the future or in integrating or executing on our business plan for
existing or future acquisitions.
If our goodwill or other intangible assets become 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. Goodwill and other intangible assets totaled approximately $986 million, or
approximately 56% of our total assets, as of January 31, 2014. In addition, we expended almost $600 million to acquire KANA
and UTX in February 2014 and March 2014, respectively. Although the allocations of the respective purchase prices for the
KANA and UTX acquisitions are still in process, at this time we anticipate that a significant portion of the purchase prices will
be allocated to goodwill and other intangible assets. We test our goodwill for impairment at least annually, or more frequently
if an event occurs indicating the potential for impairment, and we assess on an as-needed basis whether there have been
impairments in our other intangible assets. We make assumptions and estimates in this assessment which are complex and often
subjective. These assumptions and estimates 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. To the extent that
the factors described above change, we could be required to record additional non-cash impairment charges in the future. Any
significant impairment charges would negatively affect our financial condition and results of operations.
We may be adversely affected by our acquisition of CTI or our historical affiliation with CTI and its former
subsidiaries.
As a result of the acquisition of our former parent company, CTI (the "CTI Merger"), CTI's liabilities, including contingent
liabilities, have been consolidated into our financial statements. If CTI's liabilities are greater than represented, if the
contingent liabilities we have assumed become fixed, or if there are obligations of CTI of which we were not aware at the time
of completion of the CTI Merger, we may have exposure for those obligations and our business or financial condition could be
materially and adversely affected. Adjustments to the CTI consolidated group's tax liability for periods prior to the CTI Merger
could also affect the net operating losses ("NOLs") allocated to Verint as a result of the CTI Merger and cause us to incur
additional tax liability in future periods.
As a result of our historical affiliation with CTI and other members of the historical CTI consolidated tax group, we could also
become liable for taxes of other members of the CTI consolidated group for historical periods under certain circumstances and
applicable tax law. Adjustments to the historical CTI consolidated group's tax liability for periods prior to Verint’s IPO could
also affect the NOLs allocated to Verint in the IPO and cause us to incur additional tax liability in future periods.
We are entitled to certain rights to indemnification from Comverse in connection with the transactions contemplated by our
agreement and plan of merger with CTI (the "CTI Merger Agreement") and the agreements entered into in connection with the
distribution by CTI to its shareholders of substantially all of its assets other than its interest in us (the "Comverse share
distribution"). However, there is no assurance that Comverse will be willing and able to provide such indemnification if
needed. If we become responsible for liabilities (including tax liabilities) not covered by indemnification or substantially in
excess of amounts covered by indemnification, or if Comverse becomes unwilling or unable to stand behind such protections,
our financial condition and results of operations could be materially and adversely affected.
Changes in our tax rates, the adoption of new U.S. or international tax legislation, inability to realize value from our
NOLs, or exposure to additional tax liabilities could affect our future results.
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We are subject to taxes in the United States and numerous foreign jurisdictions. Our future effective tax rates could be affected
by changes in the mix of earnings in countries with differing statutory tax rates, changes in valuation allowance on deferred tax
assets (including our NOL carryforwards), changes in unrecognized tax benefits or changes in tax laws or their interpretation.
Any of these changes could have a material adverse effect on our profitability. 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 or among 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.
We have significant deferred tax assets which can provide us with significant future cash tax savings if we are able to use them.
In addition, as a result of the CTI Merger, significant CTI NOLs have become available for use on our consolidated U.S. tax
returns. However, the extent to which we will be able to use these NOLs may be impacted, restricted, or eliminated by a
number of factors, including changes in tax rates, laws or regulations, whether we generate sufficient future taxable income,
and possible adjustments to the tax attributes of CTI or its non-Verint subsidiaries for periods prior to the CTI Merger. To the
extent that we are unable to utilize our NOLs or other losses, our results of operations, liquidity, and financial condition could
be materially adversely affected. When we cease to have NOLs available to us in a particular tax jurisdiction, either through
their expiration, disallowance, or utilization, our cash tax liability will increase in that jurisdiction.
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, the United
Kingdom, Germany and certain other European countries whose functional currency is the euro, Singapore, Brazil, and
Australia. 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, which could have a material adverse effect on our
results of operations. In addition, because a portion of our sales are made in foreign currencies, primarily the Singapore dollar,
euro and the British pound, 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. We attempt to mitigate a portion of these risks
through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense,
however, our hedging activities are limited in scope and duration and may not be effective at reducing the U.S. dollar cost of
our global operations.
We have a significant amount of debt under our credit agreement, which exposes us to leverage risks and subjects us to
covenants which may adversely affect our operations.
At March 15, 2014, we had total outstanding indebtedness of approximately $1.0 billion under our credit agreement, meaning
that we are significantly leveraged. Our leverage position may, among other things:
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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
in periods where market rates exceed the interest rate floor provided by our credit agreement.
The revolving credit facility under our credit agreement contains a financial covenant that requires us to maintain a maximum
consolidated leverage ratio. Our ability to comply with the leverage ratio covenant is dependent upon our ability to continue to
generate sufficient earnings each quarter, or in the alternative, to reduce expenses and/or reduce the level of our outstanding
debt and we cannot assure that we will be successful in any or all of these regards.
Our credit agreement also includes a number of restrictive covenants which limit our ability to, among other things:
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•
•
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. Additionally, under any change of control, as defined in our
credit agreement, the lenders under our credit facilities would have the right to require us to repay all of our outstanding
obligations under the facilities.
If certain events of default occur under our credit agreement, our lenders could declare all amounts outstanding to be
immediately due and payable. In that event, we may be forced to seek an amendment of and/or waiver under the credit
agreement, raise additional capital through securities offerings, asset sales, or other transactions, 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 an amendment and/or
waiver, capital raising transaction, refinancing, or restructuring on reasonable terms or at all.
We consider other financing and refinancing options from time to time, however, we cannot assure you that such options will
be available to us on reasonable terms or at all. If one or more rating agencies were to downgrade our credit ratings, that could
also impede our ability to refinance our existing debt or secure new debt, increase our future cost of borrowing, and create
third-party concerns about our financial condition or results of operations.
Our internal controls over financial reporting may not prevent misstatements and material weaknesses or deficiencies
could arise in the future which could lead to restatements or filing delays.
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 U.S. generally accepted accounting principles ("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, because the degree of compliance with policies or
procedures decreases over time, or because of unanticipated circumstances or other factors. As a result, although our
management has concluded that our internal controls are effective as of January 31, 2014, we cannot assure you that our
internal controls will prevent or detect every misstatement, that material weaknesses or other deficiencies will not occur or be
identified in the future, that this or future financial reports will not contain material misstatements or omissions, that future
restatements will not be required, or that we will be able to timely comply with our reporting obligations in the future.
Our stock price has been volatile and your investment could lose value.
All of the risk factors discussed in this section could affect our stock price. The timing of announcements in the public market
regarding new products, product enhancements or technological advances by our competitors or us, and any announcements by
us or our competitors of acquisitions, major transactions, or management changes could also affect our stock price. Our stock
price is subject to speculation in the press and the analyst community, including with respect to changes in recommendations or
earnings estimates by financial analysts, changes in investors' or analysts' valuation measures for our stock, our credit ratings
and market trends unrelated to our performance. Stock sales by our directors, officers, or other significant holders may also
affect our stock price. A significant drop in our stock price could also expose us to the risk of securities class actions lawsuits,
which could result in substantial costs and divert management's attention and resources, which could adversely affect our
business.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following describes our material properties as of the date of this report, which include the properties that we acquired as a
result of the KANA Merger.
We lease a total of approximately 759,000 square feet of office space covering approximately 50 offices around the world and
we own an aggregate of approximately 89,000 square feet of office space at three sites in Scotland, Germany, and Indonesia.
On December 19, 2013, we sold our Durango, Colorado property, which represented approximately 40,000 square feet of
owned office space, to an unaffiliated third party.
Other than as described below, these properties are comprised of small and mid-sized facilities that are used to support our
administrative, marketing, manufacturing, product development, sales, training, support, and services needs for our three
operating segments.
Our corporate headquarters are located in a leased facility in Melville, New York, and consist of approximately 45,800 square
feet under a lease that expires in November 2015. The Melville facility is used primarily by our executive management and
corporate groups, including finance, legal and human resources, as well as for customer support and services for our Enterprise
Intelligence operations.
We lease approximately 132,700 square feet at a facility in Alpharetta, Georgia under a lease that expires in September 2026.
The Alpharetta facility is used primarily by the administrative, marketing, product development, support, and sales groups for
our Enterprise Intelligence operations.
We also occupy approximately 176,000 square feet at a facility in Herzliya, Israel under a lease that expires in October 2015.
This Herzliya facility is used primarily for manufacturing, storage, development, sales, marketing, and support related to our
Communications Intelligence operations, as well as for product development related to our Enterprise Intelligence and Video
Intelligence operations.
For additional information regarding our lease obligations, see Note 17, "Commitments and Contingencies" to our consolidated
financial statements included under Item 8 of this report.
We believe that our leased and owned facilities are in good operating condition and are adequate for our current requirements,
although 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.
Item 3. Legal Proceedings
On March 26, 2009, legal actions were commenced by Ms. Orit Deutsch, a former employee of our subsidiary, Verint Systems
Limited ("VSL"), against VSL in the Tel Aviv Regional Labor Court (Case Number 4186/09) (the “Deutsch Labor Action”) and
against CTI in the Tel Aviv Regional District Court (Case Number 1335/09) (the “Deutsch District Action”). In the Deutsch
Labor Action, Ms. Deutsch filed a motion to approve a class action lawsuit on the grounds that she purports to represent a class
of our employees and former employees who were granted Verint and CTI stock options and were allegedly damaged as a
result of the suspension of option exercises during our previous extended filing delay period. In the Deutsch District Action, in
addition to a small amount of individual damages, Ms. Deutsch is seeking to certify a class of plaintiffs who were allegedly
damaged due to their inability to exercise Verint and CTI stock options as a result of alleged negligence by CTI in its financial
reporting. The class certification motions do not specify an amount of damages. On February 8, 2010, the Deutsch Labor
Action was dismissed for lack of material jurisdiction and was transferred to the Tel Aviv Regional District Court and
consolidated with the Deutsch District Action. On March 16, 2009 and March 26, 2009, respectively, legal actions were
commenced by Ms. Roni Katriel, a former employee of CTI's former subsidiary, Comverse Limited, against Comverse Limited
in the Tel Aviv Regional Labor Court (Case Number 3444/09) (the “Katriel Labor Action”) and against CTI in the Tel Aviv
Regional District Court (Case Number 1334/09) (the “Katriel District Action”). In the Katriel Labor Action, Ms. Katriel is
seeking to certify a class of plaintiffs who were granted CTI stock options and were allegedly damaged as a result of the
suspension of option exercises during CTI's previous extended filing delay period. In the Katriel District Action, in addition to
a small amount of individual damages, Ms. Katriel is seeking to certify a class of plaintiffs who were allegedly damaged due to
24
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their inability to exercise CTI stock options as a result of alleged negligence by CTI in its financial reporting. The class
certification motions do not specify an amount of damages. On March 2, 2010, the Labor Court ordered the transfer of the case
to the District Court in Tel Aviv - Jaffa, based on an agreed motion filed by the parties requesting such transfer.
On April 4, 2012, Ms. Deutsch and Ms. Katriel filed an uncontested motion to consolidate and amend their claims and on
June 7, 2012, the court allowed Ms. Deutsch and Ms. Katriel to file the consolidated class certification motion and an amended
consolidated complaint against VSL, CTI, and Comverse Limited. Following CTI's announcement of its intention to effect the
Comverse share distribution, on July 12, 2012, the plaintiffs filed a motion requesting that the District Court order CTI to set
aside up to $150 million in assets to secure any future judgment. The District Court ruled that it would not decide this motion
until the Deutsch and Katriel class certification motion was heard. On August 16, 2012, in light of the announcement of the
signing of the CTI Merger Agreement, the plaintiffs filed a motion for leave to appeal this District Court ruling to the Israeli
Supreme Court. We filed our response to this motion on September 6, 2012.
Prior to the consummation of the Comverse share distribution, CTI either sold or transferred substantially all of its business
operations and assets (other than its equity ownership interests in us and Comverse) to Comverse or unaffiliated third parties.
On October 31, 2012, CTI completed the Comverse share distribution, in which it distributed all of the outstanding shares of
common stock of Comverse to CTI's shareholders. As a result of the Comverse share distribution, Comverse became an
independent public company and ceased to be a wholly owned subsidiary of CTI, and CTI ceased to have any material assets
other than its equity interest in us.
We and the other defendants filed our responses to the complaint on November 11, 2012 and plaintiffs filed their replies on
December 20, 2012. A pre-trial hearing for the case was held on December 25, 2012, during which all parties agreed to attempt
to settle the dispute through mediation.
On February 4, 2013, we completed the CTI Merger. As a result of the CTI Merger, we have assumed certain rights and
liabilities of CTI, including any liability of CTI arising out of the Deutsch District Action and the Katriel District Action.
However, under the terms of the Distribution Agreement between CTI and Comverse relating to the Comverse share
distribution, we, as successor to CTI, are entitled to indemnification from Comverse for any losses we suffer in our capacity as
successor-in-interest to CTI in connection with the Deutsch District Action and the Katriel District Action.
On February 28, 2013, the mediation process began and, as of the date of this report, remains ongoing.
From time to time we or our subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course
of our business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of
any current claims will have a material effect on our consolidated financial position, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Market Information
Our common stock trades on the NASDAQ Global Select Market under the symbol "VRNT".
The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as
reported by the NASDAQ Global Select Market.
Year Ended January 31, 2013:
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended January 31, 2014:
First quarter
Second quarter
Third quarter
Fourth quarter
Holders
Low
High
$
$
$
$
$
$
$
$
26.56
27.10
25.87
24.60
32.25
32.35
32.80
35.24
$
$
$
$
$
$
$
$
32.76
31.69
29.60
35.29
37.00
37.04
38.34
48.99
There were 3,565 holders of record of our common stock at March 14, 2014. Such record holders include holders who are
nominees for an undetermined number of beneficial owners.
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 stock. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources" included under Item 7 of this report and Note 7, "Long-Term Debt" to our consolidated financial statements
included under Item 8 of this report for a more detailed discussion of these limitations.
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 will depend upon our earnings, financial condition,
capital requirements, and other relevant factors.
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, 2009 through January 31, 2014, and the reinvestment of any dividends. The comparisons in the graph
below are based upon (i) closing sale prices on NASDAQ for our common stock from July 6, 2010 through January 31, 2014
and (ii) the closing bid quotations on the over-the-counter securities market (as reported by the Pink Sheets) for periods prior to
July 6, 2010. This data is not indicative of, nor intended to forecast, future performance of our common stock.
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January 31,
2009
2010
2011
2012
2013
2014
Verint Systems Inc.
NASDAQ Composite Index
NASDAQ Computer & Data Processing Index
$100.00
$100.00
$100.00
$281.54
$145.73
$157.95
$530.15
$185.35
$188.65
$435.08
$196.13
$194.78
$520.00
$222.33
$211.02
$690.62
$296.73
$307.32
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Selected Financial Data
The following selected consolidated financial data has been derived from our audited consolidated financial statements. The
data below should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 and our consolidated financial statements and notes thereto included under Item 8 of this report.
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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
Net income
Net income attributable to Verint Systems Inc.
Net income attributable to Verint Systems Inc.
common shares
Net income per share attributable to Verint
Systems Inc.:
Basic
Diluted
Weighted-average shares:
Basic
Diluted
Year Ended January 31,
2014
2013
907,292
$ 839,542
122,286
58,776
53,757
53,583
1.01
0.99
$
$
$
$
$
$
99,553
58,804
54,002
38,530
0.97
0.96
$
$
$
$
$
$
$
$
$
$
$
$
$
$
52,967
53,878
39,748
40,312
2012
782,648
86,478
40,625
36,993
22,203
0.58
0.56
38,419
39,499
$
$
$
$
$
$
$
2011
726,799
73,105
28,585
25,581
11,403
0.33
0.31
35,544
37,179
$
$
$
$
$
$
$
2010
703,633
65,679
17,100
15,617
2,026
0.06
0.06
33,478
32,127
We have never declared a cash dividend to common stockholders.
Consolidated Balance Sheet Data
(in thousands)
Total assets
January 31,
2014
2013
2012
2011
2010
$ 1,772,907
$ 1,564,269
$ 1,502,868
$ 1,376,127
$ 1,396,337
Long-term debt, including current maturities
Preferred stock
Total stockholders' equity (deficit)
642,385
—
633,118
576,689
285,542
229,676
597,379
285,542
144,295
583,234
285,542
77,687
620,912
285,542
(14,567)
During the five-year period ended January 31, 2014, we acquired a number of businesses, the more significant of which were
the acquisitions of Vovici Corporation ("Vovici") in August 2011, and Global Management Technologies ("GMT") in October
2011. 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.
On February 3, 2014, we completed the acquisition of KANA, a leading provider of on-premises and cloud-based customer
service solutions for large enterprises and mid-market organizations, for net cash consideration of $514.2 million. In connection
with this acquisition, we incurred additional long-term debt for purposes of partially funding the purchase price. On March 31,
2014, we completed the acquisition of UTX, a provider of certain mobile device tracking solutions for security applications.
Please refer to Note 19, "Subsequent Events", to our consolidated financial statements included under Item 8 of this report for
information regarding these transactions.
Our consolidated operating results and consolidated financial conditions for the years during the five-year period ended January
31, 2014 include the following noteworthy transactions:
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As of and for
the year ended
January 31,
Description
2014
• Completion of the CTI Merger on February 4, 2013; and
• Losses on extinguishments of debt of $9.9 million, primarily associated with an amendment to our credit
agreement.
2013
• Professional fees and related expenses of $16.1 million associated with the CTI Merger.
2012
2011
2010
• A loss on extinguishment of debt of $8.1 million associated with the termination of our prior credit
agreement.
• Realized losses on an interest rate swap of $3.1 million; and
• Approximately $29 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 previous
extended filing delay period. During this year, we resumed timely filing of periodic reports with the SEC.
• Realized and unrealized losses on an interest rate swap of $13.6 million; and
• Approximately $54 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 previous
extended filing delay period.
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 "Business" under Item 1, "Selected Financial Data" under Item 6, and our consolidated financial statements
and the related notes thereto included under Item 8 of 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 in "Risk Factors" under Item 1A.
Overview
Our Business
Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of
massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate,
respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries
can make more timely and effective decisions. Today, more than 10,000 organizations in over 180 countries, including over 80
percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place.
Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement
Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of
information from numerous data types and sources, use analytics to glean insights from the information, and leverage the
resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of
selling and support partners.
We conduct our business through three operating segments—Enterprise Intelligence, Communications and Cyber Intelligence,
and Video and Situation Intelligence. Organizing our business through three operating segments allows us to align our
resources and domain expertise to effectively address the Actionable Intelligence market. We address the Customer
Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the
Security Intelligence market opportunity through solutions from our Communications and Cyber Intelligence segment and
Video and Situation Intelligence segment, and we address the Fraud, Risk, and Compliance market opportunity through
solutions from all three operating segments.
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For the years ended January 31, 2014, 2013, and 2012, our Enterprise Intelligence segment represented approximately 55%,
59%, and 56% of our total revenue, respectively. For the years ended January 31, 2014, 2013, and 2012, our Communications
and Cyber Intelligence segment represented approximately 32%, 27%, and 26% of our total revenue, respectively. For the
years ended January 31, 2014, 2013, and 2012, our Video and Situation Intelligence segment represented approximately 13%,
14%, and 18% 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 revolving credit facility. See "— Liquidity and Capital Resources" for more information.
Key Trends and Factors That May Impact our Performance
We believe that there are many factors that affect our ability to sustain and increase both revenue and profitability, including:
• Market acceptance of Actionable Intelligence solutions. We compete in markets 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 and realization of the value of our product offerings.
•
•
Technological change. Our success depends in part on our ability to keep pace with technological changes and evolving
industry standards in our product offerings and to successfully develop, launch, and drive demand for new and enhanced,
innovative, high-quality solutions that meet or exceed customer needs.
Information technology spending. Our growth and results depend in part on general economic conditions and the pace of
information technology spending by both commercial and governmental customers.
See also "Risk Factors" under Item 1A of this report for a more complete description of these and other risks that may impact
future revenue and profitability.
Recent Developments
On February 3, 2014, we completed the acquisition of KANA through the merger of KANA Software, Inc.'s parent holding
company, Kay Technology Holdings, Inc. with an indirect, wholly owned subsidiary of ours, with Kay Technology Holdings,
Inc. continuing as the surviving company and as our wholly owned subsidiary. The purchase price consisted of $542.4 million
of cash paid at the closing, partially offset by $28.2 million of KANA’s cash received in the acquisition, resulting in net cash
consideration of $514.2 million.
The acquisition was funded through a combination of cash on hand, $300.0 million of incremental term loans incurred in
connection with an amendment to our 2013 Amended Credit Agreement, and $125.0 million of borrowings under our existing
revolving credit facility.
KANA, based in Sunnyvale, California and with global operations, is a leading provider of on-premises and cloud-based
solutions which create differentiated, personalized, and integrated customer experiences for large enterprises and mid-market
organizations. KANA will be integrated into our Enterprise Intelligence operating segment.
On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX, a provider of certain mobile device
tracking solutions for security applications, from UTX Limited. UTX Limited was our supplier of these products to our
Communications Intelligence operating segment prior to the transaction. The purchase price consisted of $82.9 million of cash
paid at closing, subject to adjustment, and we agreed to make potential additional future cash payments to UTX Limited of up
to $1.5 million, contingent upon the achievement of certain performance targets over the period from closing through June 30,
2014. The cash paid at closing was funded with cash on hand. UTX is based in the EMEA region.
Further details regarding the acquisition of KANA and the associated additional long-term debt, and the acquisition of UTX,
appear in Note 19, "Subsequent Events" to our consolidated financial statements included under Item 8 of this report.
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Our Previous Extended Filing Delay Period and Related Matters
From March 2006 through March 2010, we did not make periodic filings with the SEC. This extended filing delay arose as a
result of certain internal and external investigations and reviews of accounting matters discussed in our prior public filings. In
connection with the foregoing and related matters, we incurred approximately $137 million of professional fees and related
expenses during the four years ended January 31, 2011.
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 us 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 and report our revenue in two
categories: (a) product revenue, including sale of hardware products (which include software that works together with the
hardware to deliver the product's essential functionality) and licensing of software products, and (b) service and support
revenue, including revenue from installation services, post-contract customer support ("PCS"), project management, hosting
services, SaaS, product warranties, consulting and training services. Our customer arrangements may include any combination
of these elements. We follow the appropriate revenue recognition rules for each of these revenue streams. For additional
information, see Note 1, "Summary of Significant Accounting Policies" to our consolidated financial statements included under
Item 8 of this report. 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 on each of these factors, and if we were to change any of these assumptions or
judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.
We generally consider a purchase order or executed sales quote, when combined with a master license agreement, to constitute
evidence of an arrangement. Delivery occurs when the product is shipped or transmitted and title and risk of loss have
transferred to the customers. Our typical customer arrangements do not include substantive product acceptance provisions;
however, if such provisions are provided, delivery is deemed to occur upon acceptance. We consider the fee to be fixed or
determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. If the fee
due from a customer is not fixed or determinable due to extended payment terms, revenue is recognized when payment
becomes due or upon cash receipt, whichever is earlier.
Our multiple-element arrangements consist of a combination of our product and service offerings that may be delivered at
various points in time. For arrangements within the scope of the multiple-deliverable guidance, a deliverable constitutes a
separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return rights for the
delivered elements. For multiple-element arrangements comprised only of tangible products containing software components
and non-software components and related services, we allocate revenue to each element in an arrangement based on a selling
price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available,
third-party evidence (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is
available. The total transaction revenue is allocated to the multiple elements based on each element's relative selling price
compared to the total selling price.
We account for multiple-element arrangements that contain only software and software-related elements by allocating a portion
of the total purchase price to the undelivered elements, primarily installation services, PCS, consulting, and training, using
VSOE of fair value of the undelivered elements. The remaining portion of the total transaction value is allocated to the
delivered software, referred to as the residual method. 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.
For multiple-element arrangements that are comprised of a combination of hardware and software elements, the total
transaction value is bifurcated between the hardware elements and the software elements that are not essential to the
functionality of the hardware, based on the relative selling prices of the hardware elements and the software elements as a
group. Revenue is then recognized for the hardware and hardware-related services following the hardware revenue recognition
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methodology outlined above and revenue for the software and software-related services is recognized following the residual
method or ratably over the PCS period if VSOE for PCS does not exist.
Our policy for establishing VSOE for installation, consulting, and training is based upon an analysis of separate sales of
services. We utilize either the substantive renewal rate approach or the bell-shaped curve approach to establish VSOE for our
PCS offerings, depending upon the business segment, geographical region, or product line. The timing of revenue recognition
on software licenses and other revenue could be significantly impacted if we are unable to maintain VSOE on one or more
undelivered elements during any quarterly period. Loss of VSOE could result in (i) the complete deferral of all revenue or (ii)
ratable recognition of all revenue under a customer arrangement until such time as VSOE is re-established. If we are unable to
re-establish VSOE on one or more undelivered elements for an extended period of time it would impact our ability to
accurately forecast the timing of quarterly revenue, which could have a material adverse effect on our business, financial
position, results of operations or cash flows.
We typically are not able to determine TPE for our products or our service and support offerings. TPE of selling price is
established by evaluating largely similar and interchangeable competitor products or services in stand-alone sales to similarly
situated customers.
If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of
allocating the arrangement by considering several external and internal factors including, but not limited to, pricing practices,
similar product offerings, margin objectives, geographies in which we offer our products and services, internal costs,
competition, and product lifecycle. The determination of ESP is made through consultation with and approval by our
management, taking into consideration our go-to-market strategies. We have established processes to update ESP for each
element, when appropriate, to ensure that it reflects recent pricing experience.
PCS revenue is 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 of the PCS, depending upon the business operating
segment, geographical region, or product line.
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. 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.
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.
Some of our arrangements require significant customization of the product to meet the particular requirements of the customer.
For these arrangements, revenue is recognized under contract accounting methods, 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. 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.
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Our SaaS offerings generally provide customers access to certain of our software within a cloud-based information technology
environment that we manage and offer to customers on a subscription basis. We recognize revenue for subscription and related
support services over the contract period originating when the subscription service is made available to the customer and the
contractual hosting period has commenced.
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. When a customer is not deemed creditworthy,
revenue is recognized when payment is received.
We record provisions for estimated product returns 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) since we do not expect our resellers or OEMs to carry inventory of our
products. This policy is predicated on our ability to estimate sales returns as well as other criteria 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.
Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the
contracts should be combined and accounted for as a single arrangement. We record reimbursements from customers for out-of-
pocket expenses as revenue. 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. Historically, these fees and expenses have
not been material. Taxes collected from customers and remitted to government authorities are excluded from revenue.
For multiple-element arrangements that contain software and software related elements 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.
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
accounts receivable 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
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired, including in-process
research and development assets, and liabilities assumed, 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 us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets,
contractual support obligations assumed, and pre-acquisition contingencies.
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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:
•
•
•
•
•
future expected cash flows from software license sales, support agreements, consulting contracts, other customer
contracts, and acquired developed technologies;
expected costs to develop 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.
Impairment of Goodwill and Other Intangible Assets
We test goodwill for impairment at the reporting unit level, which can be an operating segment or one level below an operating
segment, 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. As of January 31, 2014, our reporting units are consistent with our operating
segments identified in Note 18, "Segment, Geographic, and Significant Customer Information" to our consolidated financial
statements included under Item 8 of this report.
We review goodwill for impairment utilizing either a qualitative assessment or a two-step process. If we decide that it is
appropriate to perform a qualitative assessment and conclude that the fair value of a reporting unit more likely than not exceeds
its carrying value, no further evaluation is necessary. For reporting units where we perform the two-step process, the first step
requires us to estimate the fair value of each reporting unit and compare that fair value to the respective carrying value, which
includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired and
no further evaluation is necessary. If the carrying value is higher than the estimated fair value, there is an indication that
impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the
excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of
goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment charge.
For reporting units where we decide to perform a qualitative assessment, we assess and make judgments regarding a variety of
factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-
specific conditions, customer behavior, cost factors, our financial performance and trends, our strategies and business plans,
capital requirements, management and personnel issues, and our stock price, among others. We then consider the totality of
these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit’s
fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more likely than not
that the fair value of a reporting unit exceeds its carrying amount.
For reporting units where we perform the two-step process, we utilize some or all of three primary approaches to assess 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.
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Our estimate of fair value of each reporting unit is based on a number of subjective factors, including: (a) appropriate
consideration of valuation approaches (income approach, comparable public company approach, and comparable transaction
approach), (b) estimates of future growth rates, (c) estimates of our future cost structure, (d) discount rates for our estimated
cash flows, (e) selection of peer group companies for the comparable public company and the comparable transaction
approaches, (f) required levels of working capital, (g) assumed terminal value, and (h) time horizon of cash flow forecasts.
The determination of reporting units also requires judgment. We assess whether a reporting unit exists within a reportable
segment by identifying the unit, determining whether the unit qualifies as a business under GAAP, and assessing the
availability and regular review by segment management of discrete financial information for the unit.
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. The
impairment loss recognized is the amount by which the carrying amount of the long-lived asset exceeds its fair value.
For all of our goodwill and other intangible asset impairment reviews, the assumptions and estimates used in the 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 in our assessments are reasonable and appropriate, a material change in
any of our assumptions or external factors could lead to future goodwill or other intangible asset impairment charges.
Based upon our November 1, 2013 goodwill impairment reviews, we concluded that the estimated fair values of our Enterprise
Intelligence and Communications Intelligence reporting units significantly exceeded their carrying values. Our Enterprise
Intelligence and Communications Intelligence reporting units carried goodwill of $764.8 million and $47.8 million,
respectively, at January 31, 2014. The estimated fair value of our Video Intelligence reporting unit was approximately 30%
greater than its carrying value, which included $40.6 million of goodwill at January 31, 2014, and we have therefore concluded
that this reporting unit is at more than remote risk of failing step one of future goodwill impairment tests, and is therefore at
risk of future impairment in the event of significant unfavorable changes in the assumptions used in our impairment review,
including the weighted average cost of capital (discount rate) and growth rates utilized in our discounted cash flow analysis.
Although we believe that our current estimates are reasonable and appropriate, our Video Intelligence reporting unit competes
in a challenging environment and there can be no assurance that the estimates and assumptions made for purposes of our
goodwill impairment test will prove to be accurate predictions of future performance. Delays or declines in spending to install,
upgrade or maintain security intelligence systems, technological changes, new competitors, or changes in buying patterns from
key customers are examples of circumstances that could adversely impact the fair value of our Video Intelligence reporting
unit.
We did not record any impairments of goodwill for the years ended January 31, 2014, 2013 or 2012.
Income Taxes
We account for income taxes under the asset and liability method which includes the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements.
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 deferred taxes. 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, and we
establish a valuation allowance 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
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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.
We use a two-step approach to recognizing and measuring uncertain tax positions. 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 represent our unrecognized income tax benefits, which we either record as a
liability or as a reduction of deferred tax assets. Our policy is to include interest (expense and/or income) and penalties related
to unrecognized income tax benefits as a component of the provision for income taxes.
Contingencies
We recognize an estimated loss from a claim or loss contingency when and if 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
We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair
value of the award.
During the three-year period ended January 31, 2014, restricted stock units were our predominant stock-based payment award.
The fair value of these awards is equivalent to the market value of our common stock on the grant date. We have also
occasionally awarded stock options, the fair value of which is estimated on the date of grant using an option-pricing model. We
use the Black-Scholes option-pricing model for this purpose, 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.
We periodically award restricted stock units that vest upon the achievement of specified performance goals. Our estimate of the
fair value of these performance-based awards requires an assessment of the probability that the specified performance criteria
will be achieved. At each reporting date, we update our assessment of the probability that the specified performance criteria
will be achieved and adjust our estimate of the fair value of the award, if necessary.
Changes in 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.
Cost of Revenue
We have made an accounting policy election whereby certain costs of product 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 recognized over the PCS support period, the cost of revenue
associated with the product is capitalized upon product delivery and amortized over that same 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.
Results of Operations
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Seasonality and Cyclicality
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. Our revenue
and operating income are typically highest in the fourth quarter and lowest in the first quarter. Moreover, revenue and operating
income in the first quarter of a new year may be lower than in the fourth quarter of the preceding year, potentially by a
significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders
concentrated in the later part of that month. We believe that these seasonal and cyclical factors primarily reflect customer
spending patterns and budget cycles, as well as the impact of incentive compensation plans for our sales personnel. While
seasonal and cyclical factors such as these are common in the software and technology industry, this pattern should not be
considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic
conditions, may also have an impact on our business and financial results.
Overview of Operating Results
The following table sets forth a summary of certain key financial information for the years ended January 31, 2014, 2013, and
2012:
(in thousands, except per share data)
Revenue
Operating income
Net income attributable to Verint Systems Inc. common shares
Net income per share attributable to Verint Systems Inc.:
Basic
Diluted
Year Ended January 31,
2013
2012
2014
$
$
$
$
$
907,292
122,286
53,583
1.01
0.99
$
$
$
$
$
839,542
99,553
38,530
0.97
0.96
$
$
$
$
$
782,648
86,478
22,203
0.58
0.56
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Our revenue increased approximately $67.8 million,
or 8%, to $907.3 million in the year ended January 31, 2014 from $839.5 million in the year ended January 31, 2013. In our
Communications Intelligence segment, revenue increased approximately $58.4 million, or 25%, from $229.6 million in the
year ended January 31, 2013 to $288.0 million in the year ended January 31, 2014. The increase consisted of a $39.5 million
increase in product revenue and a $18.9 million increase in service and support revenue. In our Enterprise Intelligence
segment, revenue increased approximately $8.4 million, or 2%, to $498.9 million in the year ended January 31, 2014 from
$490.5 million in the year ended January 31, 2013. The increase consisted of a $22.0 million increase in service and support
revenue, partially offset by a $13.6 million decrease in product revenue. In our Video Intelligence segment, revenue increased
approximately $0.9 million, or 1%, from $119.5 million in the year ended January 31, 2013 to $120.4 million in the year ended
January 31, 2014, primarily due to an increase in product revenue. For additional details on our revenue by segment, see "—
Revenue by Operating Segment". Revenue in the Americas, EMEA, and APAC represented approximately 56%, 20%, and
24% of our total revenue, respectively, in the year ended January 31, 2014, compared to approximately 55%, 24%, and 21%,
respectively, in the year ended January 31, 2013. Further details of changes in revenue are provided below.
Operating income was $122.3 million in the year ended January 31, 2014 compared to $99.6 million in the year ended
January 31, 2013. This increase in operating income was primarily due to a $43.4 million increase in gross profit from $557.5
million to $600.9 million, partially offset by an $20.6 million increase in operating expenses, from $458.0 million to $478.6
million. The increase in gross profit was primarily due to increased gross profit in our Communications Intelligence segment.
The increase in operating expenses consisted of a $9.8 million increase in selling, general and administrative expense, a $10.6
million increase in net research and development expenses, and a $0.2 million increase in amortization of other acquired
intangible assets. Further details of changes in operating income are provided below.
Net income attributable to Verint Systems Inc. common shares was $53.6 million, and diluted net income per common share
was $0.99, in the year ended January 31, 2014 compared to net income attributable to Verint Systems Inc. common shares of
$38.5 million, and diluted net income per common share of $0.96, in the year ended January 31, 2013. The increase in net
income attributable to Verint Systems Inc. common shares and diluted net income per common share in the year ended
January 31, 2014 was primarily due to our increased operating income, as described above, a $15.3 million decrease in
dividends on preferred stock resulting from the cancellation of our Preferred Stock, and a $4.4 million decrease in our provision
for income taxes. These increases were partially offset by a $27.2 million increase in total other expense, net, due primarily to
the derecognition of a $12.9 million indemnification asset due to the resolution of an uncertain tax position recorded in
connection with the CTI Merger, a $7.0 million increase in foreign currency losses, net, and a $9.9 million loss upon
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extinguishment of debt recorded during the year ended January 31, 2014, which primarily relates to the extinguishment of the
term loan under the 2011 Credit Agreement. Further details of changes in total other expense, net, are provided below.
A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating
expenses are affected by fluctuations in applicable foreign currency exchange rates as noted above. When comparing average
exchange rates for the year ended January 31, 2014 to average exchange rates for the year ended January 31, 2013, while the
U.S. dollar weakened relative to the Israeli shekel, it strengthened relative to the British pound sterling, Australian dollar,
Japanese yen, and Brazilian real, resulting in an overall decrease in our revenue, cost of revenue and operating expenses on a
U.S. dollar-denominated basis. For the year ended January 31, 2014, had foreign exchange rates remained unchanged from
rates in effect for the year ended January 31, 2013, our revenue would have been approximately $2.2 million higher and our
cost of revenue and operating expenses would have been approximately $0.1 million higher, which would have resulted in a
$2.1 million increase in operating income.
As of January 31, 2014, we employed approximately 3,400 employees, including part-time employees and certain contractors,
as compared to approximately 3,200 in the year ended January 31, 2013.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Our revenue increased approximately $56.9 million,
or 7%, to $839.5 million in the year ended January 31, 2013 from $782.6 million in the year ended January 31, 2012. In our
Enterprise Intelligence segment, revenue increased approximately $52.5 million, or 12%, to $490.5 million in the year ended
January 31, 2013 from $438.0 million in the year ended January 31, 2012. The increase consisted of a $40.2 million increase in
service and support revenue, and a $12.3 million increase in product revenue. In our Communications Intelligence segment,
revenue increased approximately $23.0 million, or 11%, from $206.6 million in the year ended January 31, 2012 to $229.6
million in the year ended January 31, 2013. The increase consisted of a $16.3 million increase in service and support revenue
and a $6.7 million increase in product revenue. In our Video Intelligence segment, revenue decreased approximately $18.5
million, or 13%, from $138.0 million in the year ended January 31, 2012 to $119.5 million in the year ended January 31, 2013,
primarily due to a decrease in product revenue. For additional details on our revenue by segment, see "-Revenue by Operating
Segment". Revenue in the Americas, EMEA, and APAC represented approximately 55%, 24%, and 21% of our total revenue,
respectively, in the year ended January 31, 2013, compared to approximately 53%, 27%, and 20%, respectively, in the year
ended January 31, 2012. Further details of changes in revenue are provided below.
Operating income was $99.6 million in the year ended January 31, 2013 compared to $86.5 million in the year ended
January 31, 2012. This increase in operating income was primarily due to a $43.2 million increase in gross profit from $514.3
million to $557.5 million, partially offset by an $30.2 million increase in operating expenses, from $427.8 million to $458.0
million. The increase in gross profit was primarily due to increased gross profit in our Enterprise Intelligence segment. The
increase in operating expenses consisted of a $23.7 million increase in selling, general and administrative expense, a $4.9
million increase in net research and development expenses, and a $1.5 million increase in amortization of other acquired
intangible assets. Further details of changes in operating income are provided below.
Net income attributable to Verint Systems Inc. common shares was $38.5 million, and diluted net income per common share
was $0.96, in the year ended January 31, 2013 compared to net income attributable to Verint Systems Inc. common shares of
$22.2 million, and diluted net income per common share of $0.56, in the year ended January 31, 2012. The increase in net
income attributable to Verint Systems Inc. common shares and diluted net income per common share in the year ended
January 31, 2013 was primarily due to our increased operating income, as described above, and a decrease in total other
expense, net, due primarily to the termination of our May 2007 credit agreement (the "2007 Credit Agreement") during the year
ended January 31, 2012 and repayment of the term loan under that agreement, which resulted in an $8.1 million loss during the
year ended January 31, 2012. There were no such losses recognized during the year ended January 31, 2013.
A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating
expenses are affected by fluctuations in applicable foreign currency exchange rates as noted above. When comparing average
exchange rates for the year ended January 31, 2013 to average exchange rates for the year ended January 31, 2012, the U.S.
dollar strengthened relative to the British pound sterling, euro, Israeli shekel, and Brazilian real, resulting in decreases in our
revenue, cost of revenue and operating expenses on a U.S. dollar-denominated basis. For the year ended January 31, 2013, had
foreign exchange rates remained unchanged from rates in effect for the year ended January 31, 2012, our revenue would have
been approximately $11.7 million higher and our cost of revenue and operating expenses would have been approximately $17.1
million higher, which would have resulted in a $5.4 million decrease in operating income.
We employed approximately 3,200 employees, including part-time employees and certain contractors, as of January 31, 2013
and 2012.
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Revenue by Operating Segment
The following table sets forth revenue for each of our three operating segments for the years ended January 31, 2014, 2013, and
2012:
(in thousands)
Enterprise Intelligence
Communications Intelligence
Video Intelligence
Total revenue
Enterprise Intelligence Segment
$
$
Year Ended January 31,
2013
490,478
229,607
119,457
839,542
2014
498,901
288,003
120,388
907,292
$
$
$
$
% Change
2012
438,018
206,614
138,016
782,648
2014 - 2013
2%
25%
1%
8%
2013 - 2012
12%
11%
(13)%
7%
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Enterprise Intelligence revenue increased
approximately $8.4 million, or 2%, from $490.5 million in the year ended January 31, 2013 to $498.9 million in the year ended
January 31, 2014. The increase consisted of a $22.0 million increase in service and support revenue, offset by a $13.6 million
decrease in product revenue. The increase in service and support revenue was primarily due to an increase in our customer
install base and the related support revenue generated from this customer base during the year ended January 31, 2014. The
decrease in product revenue was primarily due to a decrease in product sales to new and existing customers during the year
ended January 31, 2014. The continued growth of service revenue is attributable to various factors, including an increase in
services associated with customer product upgrades, a higher component of service offerings in our standard arrangements, and
our growing install base. The aggregate value of executed license arrangements, which comprises the majority of our product
revenue, can fluctuate from quarter to quarter.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Enterprise Intelligence revenue increased
approximately $52.5 million, or 12%, from $438.0 million in the year ended January 31, 2012 to $490.5 million in the year
ended January 31, 2013. The increase consisted of a $40.2 million increase in service and support revenue and a $12.3 million
increase in product revenue. The increase in service and support revenue was primarily due to an increase in our customer
install base and the related support revenue generated from this customer base during the year ended January 31, 2013 and an
increase in service and support revenue from business acquisitions in our Enterprise Intelligence segment that were
consummated during the year ended January 31, 2012. The increase in product revenue was primarily due to an increase in
product sales to new and existing customers during the year ended January 31, 2013.
Communications Intelligence Segment
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Communications Intelligence revenue increased
approximately $58.4 million, or 25%, from $229.6 million in the year ended January 31, 2013 to $288.0 million in the year
ended January 31, 2014. The increase consisted of a $39.5 million increase in product revenue and a $18.9 million increase in
service and support revenue. Approximately $23.6 million of the increase in product revenue was primarily due to an increase
in product deliveries to a single large customer. The remaining $15.9 million of the increase in product revenue was primarily
due to an increase in progress realized during the current year on projects recognized using the POC method, some of which
commenced in the previous fiscal year. The increase in service and support revenue was primarily attributable to an increase in
the customer install base, the progress realized during the current year on projects recognized using the POC method, some of
which commenced in the previous fiscal year, and new communications intelligence SaaS offerings.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Communications Intelligence revenue increased
approximately $23.0 million, or 11%, from $206.6 million in the year ended January 31, 2012 to $229.6 million in the year
ended January 31, 2013. The increase consisted of a $16.3 million increase in service and support revenue and a $6.7 million
increase in product revenue. The increase in service and support revenue was primarily attributable to the progress realized
during the current year on projects recognized using the POC method, some of which commenced in the previous fiscal year,
and an increase in the customer install base. The increase in product revenue was mainly due to an increase in product
deliveries to customers, new communications intelligence product offerings, the inclusion of a full year's product revenue from
a business acquisition in our Communications Intelligence segment that was consummated during the year ended January 31,
2012, and to a lesser extent, on progress on projects being accounted for under the POC method, some of which commenced in
the previous fiscal year.
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Video Intelligence Segment
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Video Intelligence revenue increased approximately
$0.9 million, or 1%, from $119.5 million in the year ended January 31, 2013 to $120.4 million in the year ended January 31,
2014. The increase was primarily attributable to a $0.8 million increase in product revenue, resulting largely from an increase
in sales of certain hardware products to a single large customer during the year ended January 31, 2014 as compared to the year
ended January 31, 2013, partially offset by a decrease in product deliveries to other customers in the year ended January 31,
2014 as compared to the year ended January 31, 2013.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Video Intelligence revenue decreased approximately
$18.5 million, or 13%, from $138.0 million in the year ended January 31, 2012 to $119.5 million in the year ended January 31,
2013. The decrease was primarily attributable to a $19.6 million decrease in product revenue, resulting largely from a decrease
in sales of certain hardware products to a single large customer during the year ended January 31, 2013 as compared to the year
ended January 31, 2012, as well as a reduction in product deliveries associated with a few other customers from period to
period. These decreases were partially offset by an increase in product deliveries to other customers in the year ended
January 31, 2013 as compared to the year ended January 31, 2012.
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 derive and report our revenue in two categories: (a) product revenue, including licensing of software products and sale of
hardware products (which include software that works together with the hardware to deliver the product's essential
functionality), and (b) service and support revenue, including revenue from installation services, post-contract customer
support, project management, hosting services, SaaS, product warranties, and training services. 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.
The following table sets forth product revenue and service and support revenue for the years ended January 31, 2014, 2013, and
2012:
(in thousands)
Product revenue
Service and support revenue
Total revenue
Product Revenue
$
$
Year Ended January 31,
2013
389,787
449,755
839,542
2014
416,478
490,814
907,292
$
$
$
$
% Change
2012
390,392
392,256
782,648
2014 - 2013
7%
9%
8%
2013 - 2012
—%
15%
7%
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Product revenue increased approximately $26.7
million from $389.8 million for the year ended January 31, 2013 to $416.5 million for the year ended January 31, 2014,
resulting from a $39.5 million increase in our Communications Intelligence segment and a $0.8 million increase in our Video
Intelligence segment, partially offset by a $13.6 million decrease in our Enterprise Intelligence segment.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Product revenue decreased approximately $0.6
million from $390.4 million for the year ended January 31, 2012 to $389.8 million for the year ended January 31, 2013,
resulting from a decrease in our Video Intelligence segment of $19.6 million, partially offset by a $12.3 million increase in our
Enterprise Intelligence segment and a $6.7 million increase in our Communications Intelligence segment.
For additional information see "— Revenue by Operating Segment".
Service and Support Revenue
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Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Service and support revenue increased approximately
$41.0 million, or 9%, from $449.8 million for the year ended January 31, 2013 to $490.8 million for the year ended January 31,
2014. This increase was primarily attributable to increases of $22.0 million and $18.9 million in our Enterprise Intelligence
and Communications Intelligence segments, respectively.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Service and support revenue increased approximately
$57.5 million, or 15%, from $392.3 million for the year ended January 31, 2012 to $449.8 million for the year ended
January 31, 2013. This increase was primarily attributable to increases of $40.2 million and $16.3 million in our Enterprise
Intelligence and Communications Intelligence segments, respectively.
For additional information see "— Revenue by Operating Segment".
Cost of Revenue
The following table sets forth cost of revenue by product and service and support, as well as amortization of acquired
technology and backlog for the years ended January 31, 2014, 2013, and 2012:
(in thousands)
Cost of product revenue
Cost of service and support revenue
Amortization of acquired technology and
backlog
Total cost of revenue
$
$
Year Ended January 31,
2013
121,748
145,444
2014
137,558
156,593
$
$
% Change
2012
126,050
129,911
2014 - 2013
13%
8%
2013 - 2012
(3)%
12%
12,269
306,420
$
14,812
282,004
$
12,400
268,361
(17)%
9%
19%
5%
We exclude certain costs of product revenue and certain costs of service and support revenue, including shared support costs,
stock-based compensation, and asset impairment charges, among others, from the calculations of our operating segment gross
margins.
Cost of Product Revenue
Cost of product revenue primarily consists of hardware material costs and royalties due to third parties for software
components that are embedded in our software solutions. When revenue is deferred, we also defer hardware material costs and
third-party software royalties and recognize those costs over the same period that the product revenue is recognized. Cost of
product revenue also includes amortization of capitalized software development costs, employee compensation and related
expenses associated with our global operations, facility costs, and other allocated overhead expenses. In our Communications
Intelligence segment, cost of product revenue also includes employee compensation and related expenses, contractor and
consulting expenses, and travel expenses, in each case for resources dedicated to project management and associated product
delivery.
Our product gross margins are impacted by the mix of products that we sell from period to period. As with many other
technology companies, our software products tend to have higher gross margins than our hardware products.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Cost of product revenue increased approximately
13% from $121.7 million in the year ended January 31, 2013 to $137.6 million in the year ended January 31, 2014. Our overall
product gross margins decreased to 67% in the year ended January 31, 2014 from 69% in the year ended January 31,
2013. Product gross margins in our Enterprise Intelligence segment increased from 91% in the year ended January 31, 2013 to
92% in the year ended January 31, 2014 primarily as a result of lower third party royalty expense, as well as a continued
decrease in hardware sales as part of our product offering. Product gross margins in our Communications Intelligence segment
decreased from 57% in the year ended January 31, 2013 to 56% in the year ended January 31, 2014 primarily due to a change
in product mix. Product gross margins in our Video Intelligence segment increased to 58% in the year ended January 31, 2014
compared to 57% in the year ended January 31, 2013 due to a change in product mix.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Cost of product revenue decreased approximately
3% from $126.1 million in the year ended January 31, 2012 to $121.7 million in the year ended January 31, 2013. Our overall
product gross margins increased to 69% in the year ended January 31, 2013 from 68% in the year ended January 31,
2012. Product gross margins in our Enterprise Intelligence segment increased from 89% in the year ended January 31, 2012 to
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91% in the year ended January 31, 2013 primarily as a result of a continued decrease in hardware sales as part of our product
offering. Product gross margins in our Communications Intelligence segment decreased to 57% for the year ended January 31,
2013 from 59% in the year ended January 31, 2012 as a result of a change in product mix. Product gross margins in our Video
Intelligence segment increased to 57% in the year ended January 31, 2013 compared to 56% in the year ended January 31, 2012
due to a change in product mix.
Cost of Service and Support Revenue
Cost of service and support revenue primarily consists of employee compensation and related expenses, contractor costs, and
travel expenses relating to installation, training, consulting, and maintenance services. Cost of service and support revenue also
includes stock-based compensation expenses, facility costs, and other overhead expenses. In accordance with GAAP
and our accounting policy, the cost of revenue associated with the services is generally expensed as incurred in the period in
which the services are performed, with the exception of certain transactions accounted for under the POC method.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Cost of service and support revenue increased
approximately 8% from $145.4 million in the year ended January 31, 2013 to $156.6 million in the year ended January 31,
2014. Employee compensation and related expenses increased $8.0 million, primarily driven by a $5.2 million and $2.0
million increase in our Enterprise Intelligence and Communications Intelligence segments, respectively, reflecting an increase
in employee headcount required to deliver the increased implementation services. Contractor costs increased $2.9 million, of
which $2.7 million was due to increased use of contractors in our Enterprise Intelligence segment to deliver services during the
year ended January 31, 2014 compared to the year ended January 31, 2013. These increases were offset by a $0.5 million
decrease in travel costs primarily in our Enterprise Intelligence segment, and a $0.4 million decrease in stock based
compensation expense attributable to service and support employees. Our overall service and support gross margins were 68%
in each of the years ended January 31, 2014 and 2013.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Cost of service and support revenue increased
approximately 12% from $129.9 million in the year ended January 31, 2012 to $145.4 million in the year ended January 31,
2013. Employee compensation and related expenses increased $7.4 million, primarily driven by a $6.6 million increase in our
Enterprise Intelligence segment, reflecting an increase in employee headcount required to deliver the increased implementation
services. Contractor costs increased $6.7 million, of which $3.4 million was due to increased use of contractors in our
Enterprise Intelligence segment to deliver services during the year ended January 31, 2013 compared to the year ended
January 31, 2012. The remaining $3.2 million increase in contractor costs was due to increased use of contractors resulting
from product mix and geographical locations of implementation services in our Communications Intelligence segment. Our
overall service and support gross margins increased to 68% in the year ended January 31, 2013 compared to 67% in the year
ended January 31, 2012.
Amortization of Acquired Technology and Backlog
Amortization of acquired technology and backlog consists of amortization of technology assets and customer backlog acquired
in connection with business combinations.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Amortization of acquired technology and backlog
decreased approximately 17% from $14.8 million in the year ended January 31, 2013 to $12.3 million in the year ended
January 31, 2014, primarily due to a reduction in amortization of acquired technology from a historical business combination,
which became fully amortized during the year ended January 31, 2014, partially offset by an increase in amortization expense
of acquired technology-based intangible assets associated with business combinations that closed during the year ended
January 31, 2014.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Amortization of acquired technology and backlog
increased approximately 19% from $12.4 million in the year ended January 31, 2012 to $14.8 million in the year ended
January 31, 2013, primarily due to an increase in amortization expense of acquired technology-based intangible assets
associated with business combinations that closed during the year ended January 31, 2012.
Further discussion regarding our business combinations appears in Note 5, "Business Combinations" to our consolidated
financial statements included under Item 8 of this report.
Research and Development, Net
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Research and development expenses consist primarily 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 continue to be
capitalized through the general release of the related software product.
The following table sets forth research and development, net for the years ended January 31, 2014, 2013, and 2012:
(in thousands)
Research and development, net
$
Year Ended January 31,
2013
115,906
$
$
2014
126,539
% Change
2012
111,001
2014 - 2013
9%
2013 - 2012
4%
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Research and development, net increased
approximately $10.6 million, or 9%, from $115.9 million in the year ended January 31, 2013 to $126.5 million in the year
ended January 31, 2014. The increase was primarily attributable to a $6.8 million increase in employee compensation and
related expenses, which resulted from an increase in employee headcount in our Enterprise Intelligence and Communication
Intelligence segments and merit increases to employee salaries, and a $2.1 million increase in contractor expense primarily due
to increased use of contractors in our Communications Intelligence and Enterprise Intelligence segments during the year ended
January 31, 2014 compared to the year ended January 31, 2013, as well as a $0.8 million increase in stock-based compensation
resulting from an increase in average amounts of outstanding restricted stock units, and continued increases in our stock price,
which impacts the total stock-based compensation to be recognized over the vesting periods, in each case associated with our
research and development employees.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Research and development, net increased
approximately $4.9 million, or 4%, from $111.0 million in the year ended January 31, 2012 to $115.9 million in the year ended
January 31, 2013. The increase was primarily attributable to a $5.2 million increase in employee compensation and related
expenses, which resulted from an increase in employee headcount in our Enterprise Intelligence and Communication
Intelligence segments and merit increases to employee salaries, and a $0.7 million increase in contractor expense primarily due
to increased use of contractors in our Enterprise Intelligence and Video Intelligence segments during the year ended January 31,
2013 compared to the year ended January 31, 2012. These increases were partially offset by a $0.6 million increase in research
and development reimbursements from government programs that were received during the year ended January 31, 2013, and a
$0.4 million decrease in stock-based compensation primarily due to the impact of a shift in the mix of outstanding restricted
stock units from awards with two-year vesting periods to awards with three-year vesting periods and a decrease in outstanding
phantom stock awards, in each case associated with our research and development employees.
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 expenses for the years ended January 31, 2014, 2013, and
2012:
(in thousands)
Selling, general and administrative
$
Year Ended January 31,
2013
317,637
$
$
2014
327,385
% Change
2012
293,906
2014 - 2013
3%
2013 - 2012
8%
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Selling, general and administrative expenses
increased approximately $9.8 million, or 3%, from $317.6 million in the year ended January 31, 2013 to $327.4 million in the
year ended January 31, 2014 primarily due to a $9.4 million increase in stock-based compensation resulting from an increase in
average amounts of outstanding restricted stock units, and continued increases in our stock price, which impacts the total stock-
based compensation to be recognized over the vesting periods, a $6.4 million increase in costs associated with business
combinations, a decrease in the change in fair value of our obligations under contingent consideration arrangements (from a
benefit of $6.2 million to a benefit of $2.5 million), resulting in a $3.7 million increase to selling, general, and administrative
expenses, a $4.4 million increase in employee compensation and related expenses, $2.5 million of which was attributable to an
increase in headcount in corporate support employees and the remainder due primarily to increased selling and marketing
employee headcount in our Communications Intelligence segment. Also included in selling, general, and administrative
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expenses for the year ended January 31, 2014 were $3.5 million of special performance incentives associated with a prior
period business combination. These increases were partially offset by a $15.5 million decrease in professional fees incurred in
connection with the CTI Merger, and a $2.0 million decrease in contractor expense primarily due to decreased use of
contractors for corporate support services.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Selling, general and administrative expenses
increased approximately $23.7 million, or 8%, from $293.9 million in the year ended January 31, 2012 to $317.6 million in the
year ended January 31, 2013. During the year ended January 31, 2013, we incurred approximately $16.1 million of professional
fees in connection with the CTI Merger, with no such costs incurred during the year ended January 31, 2012. Employee
compensation and related expenses increased $14.8 million, primarily due to an increase in employee headcount and merit
increases. Sales commissions increased $3.5 million due to a $4.6 million increase in our Enterprise Intelligence segment
primarily due to an increase in revenue, and a $0.5 million increase in our Communications Intelligence segment, partially
offset by a $1.6 million decrease in our Video Intelligence segment as a result of a decrease in revenue. Contractor costs
increased $1.3 million primarily due to increased use of contractors resulting from prior-year acquisitions in our
Communications Intelligence segment, and to a lesser extent, increased use of contractors in our Enterprise Intelligence
segment. These increases were partially offset by a $8.1 million decrease in legal and other professional fees related to
business combinations, a net $2.9 million decrease in the change in fair value of our obligations under contingent consideration
arrangements, and a $1.8 million decrease in stock-based compensation expense primarily due to a decrease in the number of
outstanding stock-based compensation arrangements accounted for as liability awards and lower average amounts of
outstanding restricted stock units compared to the year ended January 31, 2012.
Amortization of Other Acquired Intangible Assets
Amortization of other acquired intangible assets consists of amortization of certain intangible assets acquired in connection
with business combinations, including customer relationships, distribution networks, trade names and non-compete agreements.
The following table sets forth amortization of other acquired intangible assets for the years ended January 31, 2014, 2013, and
2012:
(in thousands)
Amortization of other acquired intangible
assets
Year Ended January 31,
2013
2012
2014
% Change
2014 - 2013
2013 - 2012
$
24,662
$
24,442
$
22,902
1%
7%
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Amortization of other acquired intangible assets did
not materially change in the year ended January 31, 2014 compared to the year ended January 31, 2013. Amortization
associated with business combinations that closed during the year ended January 31, 2014 was approximately $0.4 million,
which was offset by the impact of the strengthening of the foreign currencies in which some of our intangible assets are
denominated during the year ended January 31, 2014 relative to the year ended January 31, 2013.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Amortization of other acquired intangible assets
increased approximately 7% from $22.9 million in the year ended January 31, 2012 to $24.4 million in the year ended
January 31, 2013 primarily due to an increase in amortization associated with business combinations that closed during the year
ended January 31, 2012.
Further discussion surrounding our business combinations appears in Note 5, "Business Combinations" to our consolidated
financial statements included under Item 8 of this report.
Other Income (Expense), Net
The following table sets forth total other expense, net for the years ended January 31, 2014, 2013, and 2012:
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(in thousands)
Interest income
Interest expense
Loss on extinguishment of debt
Other income (expense):
Foreign currency gains (losses)
Gains (losses) on derivatives
Derecognition of indemnification asset
related to CTI Merger
Other, net
Total other income (expense)
Total other expense, net
* Percentage is not meaningful.
Year Ended January 31,
2013
2012
2014
$
963
(29,780)
(9,879)
$
531
(31,034)
—
661
(32,358)
(8,136)
% Change
2014 - 2013
81%
(4)%
*
2013 - 2012
(20)%
(4)%
*
(6,057)
345
960
(399)
1,382
(896)
(731)%
(186)%
(12,874)
(1,689)
(20,275)
(58,971) $
—
(1,847)
(1,286)
(31,789) $
—
(974)
(488)
(40,321)
*
(9)%
1,477%
86%
(31)%
(55)%
*
90%
164%
(21)%
$
$
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Total other expense, net, increased by $27.2 million
from $31.8 million in the year ended January 31, 2013 to $59.0 million in the year ended January 31, 2014. During the year
ended January 31, 2014, we recorded a $9.9 million loss upon extinguishment of debt, which primarily relates to the
extinguishment of the term loan under the 2011 Credit Agreement. There were no such losses recognized during the year ended
January 31, 2013. Further discussion regarding our credit agreements appears in Note 7, “Long-term Debt” to our consolidated
financial statements included under Item 8 of this report.
Interest expense decreased to $29.8 million in the year ended January 31, 2014 from $31.0 million in the year ended
January 31, 2013 primarily due to lower interest rates on borrowings associated with the 2013 Amended Credit Agreement,
which was effective in March 2013, compared to interest incurred under the 2011 Credit Agreement. Further discussion
regarding our credit agreements appears in Note 7, “Long-term Debt” to our consolidated financial statements included under
Item 8 of this report.
We recorded $6.1 million of net foreign currency losses in the year ended January 31, 2014 compared to $1.0 million of net
gains in the year ended January 31, 2013. Foreign currency losses in the year ended January 31, 2014 resulted primarily from
(i) strengthening of the U.S. dollar against the Singapore dollar, resulting in foreign currency losses on Singapore dollar-
denominated net assets in certain entities which use a U.S. dollar functional currency, (ii) weakening of the U.S. dollar against
the Israeli shekel, resulting in foreign currency losses on Israeli shekel-denominated net liabilities in certain entities which use a
U.S. dollar functional currency, (iii) weakening of the euro against the British pound sterling, resulting in foreign currency
losses on euro-denominated net assets in certain entities which use a British pound sterling functional currency, and (iv)
weakening of the Japanese yen against the U.S. dollar, resulting in foreign currency losses on U.S. dollar-denominated net
liabilities in certain entities which use a Japanese yen functional currency.
In the year ended January 31, 2014, there were net gains on derivative financial instruments (not designated as hedging
instruments) of $0.3 million, compared to net losses of $0.4 million on such instruments for the year ended January 31, 2013.
The higher net losses in the prior year resulted from weakening of the hedged currencies against the functional currencies,
primarily the U.S. dollar against the Singapore dollar, during that period. Movements of hedged currencies against functional
currencies were generally not significant during the year ended January 31, 2014.
In the year ended January 31, 2014, we recorded a charge of $12.9 million for the derecognition of an indemnification asset
associated with the resolution of an uncertain tax position previously recorded in connection with the CTI Merger. At the
closing of the CTI Merger, we recorded indemnification assets in amounts corresponding to CTI’s liabilities for uncertain tax
positions, recognizing Comverse’s contractual obligation to indemnify us for these potential liabilities. If an uncertain tax
position liability is required to be subsequently reversed, the reversal is generally recorded as a reduction to the provision for
income taxes. The reversal of the corresponding indemnification asset is reflected within other income (expense), net.
Accordingly, the $12.9 million charge to other income (expense) was substantially offset by a reduction to our provision for
income taxes. Please refer also to the discussion under “Provision for Income Taxes”, below. Further information regarding the
CTI Merger appears in Note 4, “Merger with CTI” to our consolidated financial statements included under Item 8 of this report.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Total other expense, net, decreased by $8.5 million
from $40.3 million in the year ended January 31, 2012 to $31.8 million in the year ended January 31, 2013. Interest expense
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decreased to $31.0 million in the year ended January 31, 2013 from $32.4 million in the year ended January 31, 2012 primarily
due to lower interest rates on borrowings associated with the 2011 Credit Agreement, which was effective in April 2011,
compared to interest incurred under the 2007 Credit Agreement. We recorded $1.0 million of net foreign currency gains in the
year ended January 31, 2013 compared to a $1.4 million of net gains in the year ended January 31, 2012. Foreign currency
gains in the year ended January 31, 2013 resulted primarily from the weakening of the U.S. dollar against the Singapore dollar
and the euro, which resulted in foreign currency gains on our U.S. dollar-denominated liabilities in certain entities which use
those functional currencies, partially offset by foreign currency losses due to the strengthening of the U.S. dollar against the
Japanese yen, which resulted in foreign currency losses on our U.S. dollar-denominated liabilities in certain entities which use
the yen as their functional currency.
In the year ended January 31, 2013, there were net losses on derivative financial instruments (not designated as hedging
instruments) of $0.4 million, compared to net losses of $0.9 million on such instruments for the year ended January 31, 2012.
The higher net losses in the prior year resulted from weakening of the hedged currencies against the functional currencies,
primarily the U.S. dollar against the Singapore dollar, during that period. Movements of hedged currencies against functional
currencies were generally not significant during the year ended January 31, 2013.
During the year ended January 31, 2012, we recorded an $8.1 million loss upon termination of the 2011 Credit Agreement and
repayment of the term loan under that agreement. There were no such losses recognized during the year ended January 31,
2013. Further discussion regarding our credit facilities appears in Note 7, "Long-Term Debt" to our consolidated financial
statements included under Item 8 of this report.
Other, net expense was $1.8 million in the year ended January 31, 2013 compared to $1.0 million in the year ended January 31,
2012. The increase was primarily attributable to a $1.1 million write-off of an indemnification asset in connection with the
resolution of an uncertain tax position from a prior-year business combination in our Communications Intelligence segment.
Further discussion surrounding our business combinations appears in Note 5, "Business Combinations" to our consolidated
financial statements included under Item 8 of this report.
Provision for Income Taxes
The following table sets forth our provision for income taxes for the years ended January 31, 2014, 2013, and 2012:
(in thousands)
Provision for income taxes
Year Ended January 31,
2013
2,012
2014
% Change
2014 - 2013
2013 - 2012
$
4,539
$
8,960
$
5,532
(49)%
62%
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Our effective tax rate was 7.2% for the year ended
January 31, 2014, compared to 13.2% for the year ended January 31, 2013. For the year ended January 31, 2014, our effective
income tax rate was lower than the U.S. federal statutory rate of 35% primarily due to the mix and levels of income and losses
by jurisdiction and a tax benefit of $12.4 million for reversal of unrecognized tax benefits established in connection with the
CTI Merger. The recognition of the CTI tax benefits resulted in other, net expense due to the write-off of an indemnification
asset. Pre-tax income in our profitable jurisdictions, where we recorded tax provisions at rates lower than the U.S. federal
statutory rate, was partially offset by our domestic losses where we maintain valuation allowances and did not record the
related tax benefits. The result was an income tax provision of $4.5 million on $63.3 million of pre-tax income, resulting in an
effective tax rate of 7.2%. For the year ended January 31, 2013, our effective income tax rate was lower than the U.S. federal
rate of 35% primarily due to the level and mix of income and losses by jurisdiction, partially offset by the write-off of certain
tax attributes resulting from the merger of certain foreign subsidiaries, an increase in unrecognized tax benefits and an increase
in the valuation allowance. The income generated in foreign jurisdictions, taxed at rates lower than the U.S. federal statutory
rate, was higher than domestic losses where we maintain valuation allowances and did not record a tax benefit. The result was
an income tax provision of $9.0 million on $67.8 million of pre-tax income, which represented an effective tax rate of 13.2%.
Year Ended January 31, 2013 compared to Year Ended January 31, 2012. Our effective tax rate was 13.2% for the year ended
January 31, 2013, compared to 12.0% for the year ended January 31, 2012. For the year ended January 31, 2013, our effective
income tax rate was lower than the U.S. federal statutory rate of 35% primarily due to the mix and levels of income and losses
by jurisdiction, partially offset by the write-off of certain tax attributes resulting from the merger of certain foreign subsidiaries,
an increase in unrecognized tax benefits and an increase in valuation allowances. Pre-tax income in our profitable jurisdictions,
where we recorded tax provisions at rates lower than the U.S. federal statutory rate, was partially offset by our domestic losses
where we maintain valuation allowances and did not record the related tax benefits. The result was an income tax provision of
$9.0 million on $67.8 million of pre-tax income, resulting in an effective tax rate of 13.2%. For the year ended January 31,
2012, our effective income tax rate was lower than the U.S. federal rate of 35% primarily due to the level and mix of income
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and losses by jurisdiction, the recognition of unrecognized tax benefits and the partial release of a valuation allowance. The
income generated in foreign jurisdictions, taxed at rates lower than the U.S. federal statutory rate, was higher than domestic
losses where we maintain valuation allowances and did not record a tax benefit. The result was an income tax provision of $5.5
million on $46.2 million of pre-tax income, which represented an effective tax rate of 12.0%.
The comparison of our effective tax rates between periods is significantly impacted by the level and mix of earnings and losses
by tax jurisdiction, foreign income tax rate differentials, amount of permanent book to tax differences, the impact of
unrecognized tax benefits, and the effects of valuation allowances on certain loss jurisdictions.
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 longer periods 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.
Liquidity and Capital Resources
Overview
Our primary source of cash is the collection of proceeds from the sale of products and services to our customers, including cash
periodically collected in advance of delivery or performance.
In April 2011, we entered into the 2011 Credit Agreement and terminated our 2007 Credit Agreement. The 2011 Credit
Agreement included a term loan facility, with an outstanding balance of $576.0 million at January 31, 2013, and a $170.0
million revolving line of credit, which was unused at January 31, 2013. On March 6, 2013, the 2011 Credit Agreement was
replaced by the 2013 Amended Credit Agreement. The 2013 Amended Credit Agreement included a term loan facility, with an
outstanding balance of $645.1 million at January 31, 2014, and a $200.0 million revolving credit facility, which was unused at
January 31, 2014. In February 2014, in connection with our acquisition of KANA, we borrowed $125.0 million under the
revolving credit facility and we also incurred $300.0 million of incremental term loans, for purposes of funding a portion of the
purchase price for KANA. Further discussion of our credit agreements appears below, under "Credit Agreements".
Our primary recurring use of cash is payment of our operating costs, which consist primarily of employee-related expenses,
such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs, and
capital expenditures. We also utilize cash for debt service under our credit agreements and periodically for business
acquisitions. Cash generated from operations is our primary source of operating liquidity, and we believe that internally
generated cash flows are sufficient to support our current business operations, including debt service and capital expenditure
requirements.
On February 4, 2013, we completed the CTI Merger, which eliminated CTI's majority ownership in and control of us. The CTI
Merger was accomplished through an exchange of new shares of our common stock for all of the issued and outstanding shares
of CTI common stock. Other than the payment of professional fees and other transaction expenses, no cash was used in the CTI
Merger.
We have historically expanded our business in part by investing in strategic growth initiatives, including acquisitions of
products, technologies, and businesses. We have used cash as consideration for substantially all of our historical business
acquisitions, including $32.8 million of net cash on hand expended for business acquisitions during the year ended January 31,
2014. We expended $514.2 million of net cash to acquire KANA on February 3, 2014, funded through a combination of cash on
hand, and as described above, incremental term loans and borrowings under our revolving credit facility. We expended $82.9
million of cash to acquire UTX on March 31, 2014, funded from cash on hand. To the extent that we continue this strategy, our
future cash requirements and liquidity may be impacted. As we did to fund the acquisition of KANA and have done otherwise
in the past, we may utilize external capital sources, including debt and equity, to supplement our internally generated sources of
liquidity as necessary and if available. We also may consider initiatives to modify the debt and equity components of our
current capitalization, as we did in March 2014, February 2014, and March 2013 by amending our credit agreement, or as we
did in February 2013 by completing the CTI Merger.
A considerable portion of our operating income is earned outside the United States. Cash, cash equivalents, short-term
investments, and restricted cash and bank time deposits (including any long-term portions) held by our subsidiaries outside the
United States were $268.6 million and $192.9 million as of January 31, 2014 and 2013, respectively, and are generally used to
fund the subsidiaries’ operating requirements and to invest in company growth initiatives, including business acquisitions. Cash
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on hand in the United States was utilized to fund a portion of the purchase price for KANA, and cash on hand outside of the
United States was utilized to fund the purchase price for UTX. We currently do not anticipate that we will need funds generated
from foreign operations to fund our domestic operations for the next 12 months and for the foreseeable future.
Should other circumstances arise whereby we require more capital in the United States than is generated by our domestic
operations, or should we otherwise consider it in our best interests, we could repatriate future earnings from foreign
jurisdictions, which could result in higher effective tax rates. We have not provided for deferred taxes on the excess of the
amount for financial reporting over the tax basis of investments in our foreign subsidiaries because we currently plan to
indefinitely reinvest such earnings outside the United States.
In the past, we have periodically reported a working capital deficit (current liabilities in excess of current assets), due largely to
the impact of changes in our deferred revenue balances. Because deferred revenue is not a cash-settled liability, working
capital in this case may not be a meaningful indicator of our liquidity. We believe our liquidity is better measured and assessed
by our operating cash flow.
The following table sets forth our cash and cash equivalents, restricted cash and bank time deposits, short-term investments and
long-term debt as of January 31, 2014 and 2013:
(in thousands)
Cash and cash equivalents
Restricted cash and bank time deposits
Short-term investments
Long-term debt
January 31,
2014
2013
$
$
$
$
378,618
6,423
32,049
635,830
$
$
$
$
209,973
11,128
13,593
570,822
At January 31, 2014, our cash and cash equivalents totaled $378.6 million, an increase of $168.6 million from $210.0 million at
January 31, 2013. On February 3, 2014, we expended approximately $96.4 million of cash on hand, including closing costs, in
connection with the acquisition of KANA.
Our operating activities generated $178.3 million of cash during the year ended January 31, 2014, which was partially offset by
$9.7 million of net cash used in investing and financing activities during this period. Further discussion of these items appears
below.
Consolidated Cash Flow Activity
The following table summarizes selected items from our consolidated statements of cash flows for the year ended January 31,
2014, 2013 and 2012:
(in thousands)
Net cash provided by 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 Operating Activities
$
$
$
Year Ended January 31,
2013
123,385
(35,696)
(29,306)
928
59,311
2014
178,284
(64,196)
54,534
23
168,645
$
$
$
2012
106,498
(126,848)
2,078
(972)
(19,244)
Net cash provided by operating activities is driven primarily by our net income, adjusted for non-cash items, and working
capital changes. Operating activities generated $178.3 million of net cash during the year ended January 31, 2014, compared to
$123.4 million generated during the year ended January 31, 2013. The improved operating cash flow resulted primarily from
our higher operating income in the year ended January 31, 2014, which contributed to higher accounts receivable collections
and customer deposits, compared to the year ended January 31, 2013, and the impact of net income tax refunds of $1.7 million
in the year ended January 31, 2014, compared to net income tax payments of $18.2 million in the prior year. The net income tax
refunds in the year ended January 31, 2014 resulted principally from the impact of income tax refunds in Israel associated with
prior periods' income tax returns.
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Operating activities generated $123.4 million of net cash during the year ended January 31, 2013, compared to $106.5 million
of cash provided by operating activities during the year ended January 31, 2012. Improved operating results in the year ended
January 31, 2013 drove higher accounts receivable collections and customer deposits compared to the year ended January 31,
2012.
Net Cash Used in Investing Activities
During the year ended January 31, 2014, our investing activities used $64.2 million of net cash, the primary components of
which were $32.8 million of net cash utilized for business acquisitions, $22.4 million of payments for property, equipment, and
capitalized software development costs, and $18.9 million of net purchases of short-term investments. We expanded our short-
term investing activity during the year ended January 31, 2014 to increase returns on available funds provided by operating and
financing activities. Partially offsetting these uses was a $7.7 million decrease in restricted cash and bank time deposits.
Restricted cash and bank time deposits are typically short-term deposits used to secure bank guarantees in connection with
sales contracts, the amounts of which will fluctuate from period to period.
For the year ended January 31, 2013, our investing activities used $35.7 million of net cash, primarily reflecting $20.0 million
of payments for property, equipment, and capitalized software development costs. We also purchased $13.6 million of short-
term investments during this year.
During the year ended January 31, 2012, our investing activities used $126.8 million of net cash, of which the most significant
use was $109.8 million of net cash utilized for business acquisitions, including $56.0 million of net cash paid to acquire Vovici
in August 2011, and $24.6 million of net cash paid to acquire GMT in October 2011. In addition, we made $16.5 million of
payments for property, equipment, and capitalized software development costs during the year ended January 31, 2012.
Other than for our February 3, 2014 acquisition of KANA, we had no significant commitments for capital expenditures at
January 31, 2014. We simultaneously signed and closed our acquisition of UTX on March 31, 2014.
Net Cash Provided by (Used in) Financing Activities
For the year ended January 31, 2014, our financing activities provided $54.5 million of net cash. During this period, we
borrowed $646.7 million under our 2013 Amended Credit Agreement (consisting of gross borrowings of $650.0 million,
reduced by a $3.3 million original issuance discount), repaid $576.0 million of outstanding borrowings under our 2011 Credit
Agreement, and paid $7.8 million of related debt issuance costs. We also received $10.4 million of cash in connection with the
CTI Merger during this year. Other financing activities during the year ended January 31, 2014 included payments of $16.1
million for the financing portion of payments under contingent consideration arrangements related to prior business
combinations, and the receipt of $10.9 million of proceeds from exercises of stock options.
During the year ended January 31, 2013, our financing activities used $29.3 million of net cash, the primary use of which was
$22.0 million of repayments of borrowings, including an optional $15.0 million term loan payment. We also made payments of
$6.5 million for the financing portion of payments under contingent consideration arrangements related to prior business
combinations. These uses were partially offset by $2.6 million of proceeds from exercises of stock options.
During the year ended January 31, 2012, our financing activities provided $2.1 million of net cash, which included $12.5
million of proceeds from exercises of stock options, partially offset by cash used in several other financing activities. During
the year, we borrowed $597.0 million under the 2011 Credit Agreement (consisting of gross borrowings of $600.0 million,
reduced by a $3.0 million original issuance discount), repaid $587.5 million of outstanding borrowings, including $583.2
million of outstanding borrowings under our 2007 Credit Agreement, and paid $15.3 million of debt issuance and other debt-
related costs. The net impact of this debt refinancing activity was a use of $5.8 million of cash for the year. We also made
payments of $2.0 million during the year for the financing portion of payments under contingent consideration arrangements
related to prior business combinations.
Please refer to the discussion contained herein under "– Credit Agreements" for information regarding financing activities
associated with our February 3, 2014 acquisition of KANA.
Liquidity and Capital Resources Requirements
Based on past performance and current expectations, we believe that our cash, cash equivalents, short-term investments and
cash generated from operations will be sufficient to meet anticipated operating costs, required payments of principal and
interest, working capital needs, ordinary course capital expenditures, research and development spending, and other
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commitments for at least the next 12 months. Currently, we have no plans to pay any cash dividends on our common stock,
which are not permitted under our 2013 Amended Credit Agreement.
Our liquidity could be negatively impacted by a decrease in demand for our products and service and support, including the
impact of changes in customer buying behavior due to circumstances over which we have no control. If we determine to make
additional business acquisitions or otherwise require additional funds, we may need to raise additional capital, which could
involve the issuance of additional equity or debt securities.
Credit Agreements
In April 2011, we entered into the 2011 Credit Agreement with our lenders and concurrently terminated our 2007 Credit
Agreement. The 2011 Credit Agreement provided for $770.0 million of secured credit facilities, comprised of a $600.0 million
term loan maturing in October 2017 and a $170.0 million revolving credit facility maturing in April 2016, subject to increase
(up to a maximum increase of $300.0 million) and reduction from time to time according to the terms of the 2011 Credit
Agreement.
The 2011 Credit Agreement included an original issuance term loan discount of 0.50%, or $3.0 million, resulting in net term
loan proceeds of $597.0 million.
On March 6, 2013, we entered into an amendment and restatement agreement with the lenders under the 2011 Credit
Agreement providing for the amendment and restatement of the 2011 Credit Agreement. The 2013 Amended Credit Agreement
provided for $850.0 million of senior secured credit facilities, comprised of (i) $650.0 million of term loans maturing in
September 2019 and (ii) a $200.0 million revolving credit facility maturing in March 2018, subject to increase (up to a
maximum increase of $300.0 million) and reduction from time to time according to the terms of the 2013 Amended Credit
Agreement.
The 2013 Amended Credit Agreement included an original issuance term loan discount of 0.50%, or $3.3 million, resulting in
net 2013 Term Loans proceeds of $646.7 million.
The majority of the proceeds of the 2013 Term Loans were used to repay all $576.0 million of outstanding term loan
borrowings under the 2011 Credit Agreement at the March 6, 2013 closing date of the 2013 Amended Credit Agreement. There
were no outstanding borrowings under the 2011 Credit Agreement's revolving credit facility at the closing date.
As of January 31, 2014, the 2013 Term Loans had an outstanding balance of $645.1 million, and there were no outstanding
borrowings under the revolving credit facility, all of which was available at that date. The interest rate on the 2013 Term Loans
was 4.00% at January 31, 2014, but was adjusted to 3.50% on March 7, 2014, as described below.
On February 3, 2014, in connection with the acquisition of KANA, we borrowed $125.0 million under our revolving credit
facility to fund a portion of the KANA purchase price. Borrowings under our revolving credit facility are due upon maturity of
the revolving credit facility in March 2018. The initial interest rate on the revolving credit borrowings was 4.00%, but was
adjusted to 3.50% on March 7, 2014, as described below.
In addition, on February 3, 2014, we entered into Amendment No. 1 to our 2013 Amended Credit Agreement pursuant to which
we incurred $300.0 million of incremental term loans. The net proceeds of the 2014 Term Loans were used to fund a portion of
the KANA purchase price.
The 2014 Term Loans were subject to an original issuance discount of 0.25%, or $0.8 million.
The 2014 Term Loans bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months
or less, at the end of the applicable interest period, at a per annum rate of, at our election:
(a) in the case of Eurodollar loans, the Adjusted LIBO Rate plus 2.75%. The Adjusted LIBO Rate is the greater of (i)
0.75% per annum and (ii) the product of (x) the LIBO Rate and (y) Statutory Reserves (both as defined in the 2013
Amended Credit Agreement), and
(b) in the case of Base Rate loans, the Base Rate plus 1.75%. The Base Rate is the greatest of (i) the administrative agent’s
prime rate, (ii) the Federal Funds Effective Rate (as defined in the 2013 Amended Credit Agreement) plus 0.50% and (iii)
the Adjusted LIBO Rate for a one-month interest period plus 1.00%.
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The initial interest rate on the 2014 Term loans was 3.50%.
On February 3, 2014, we also entered into Amendment No. 2 to the 2013 Amended Credit Agreement which, among other
things, (i) permits us to increase the permitted amount of additional incremental term loans and revolving credit commitments
under the 2013 Amended Credit Agreement (beyond the 2014 Term Loans borrowed under Amendment No. 1) by up to $200.0
million plus an additional amount such that the First Lien Leverage Ratio (as defined in Amendment No. 2) would not exceed
the specified maximum ratio set forth therein, (ii) increased the size of certain negative covenant basket carve-outs, (iii) permits
us to issue Permitted Convertible Indebtedness (as defined in Amendment No. 2), and (iv) permits us to refinance all or a
portion of any existing class of term loans under the 2013 Amended Credit Agreement with replacement term loans.
Further, on February 3, 2014, we entered into Amendment No. 3 to the 2013 Amended Credit Agreement which extended by
one year, to January 31, 2016, the step-down date of the leverage ratio covenant applicable to the revolving credit facility and,
at the March 7, 2014 effectiveness of Amendment No. 4 (as described below), repriced the interest rate applicable to
borrowings under the revolving credit facility to the interest rate applicable to the 2014 Term Loans.
On March 7, 2014, we entered into Amendment No. 4 to our 2013 Amended Credit Agreement to, among other things, reprice
the interest rate applicable to the 2013 Term Loans to the interest rate applicable to the 2014 Term Loans. The repricing of the
interest rate applicable to borrowings under the revolving credit facility contemplated by Amendment No. 3 became effective
on March 7, 2014, upon the effectiveness of Amendment No. 4.
As of March 7, 2014, all borrowings under the 2013 Amended Credit Agreement, as amended in February 2014 and March
2014, bear interest in a manner as described above for the 2014 Term Loans, at an interest rate of 3.50%.
Under the 2013 Amended Credit Agreement, we are required to pay a commitment fee equal to 0.50% per annum of the
undrawn portion on the revolving credit facility, payable quarterly, and customary administrative agent and letter of credit fees.
The 2013 Amended Credit Agreement requires us to make principal payments on the 2013 Term Loans of $1.6 million per
quarter through August 1, 2019, with the remaining balance due in September 2019. 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 LIBO Rates. The loans are also subject to mandatory prepayment requirements with respect to certain asset
sales, excess cash flows (as defined in the 2013 Amended Credit Agreement), and certain other events. Prepayments are applied
first to the eight immediately following scheduled term loan principal payments, then pro rata to other remaining scheduled
term loan principal payments, if any, and thereafter as otherwise provided in the 2013 Amended Credit Agreement.
We are required to make principal payments of $0.8 million per quarter on the 2014 Term Loans commencing on May 1, 2014
and continuing through August 1, 2019, with the remaining balance due in September 2019. Optional prepayments of the 2014
Term Loans are permitted without premium or penalty, other than customary breakage costs associated with the prepayment of
loans bearing interest based on LIBO Rates and a 1.0% premium applicable in the event of specified repricing transactions
prior to September 8, 2014. The other terms, conditions and provisions applicable to the 2014 Term Loans, including provisions
regarding security, guaranties, affirmative and negative covenants and events of defaults, as described below, are consistent
with those applicable to the 2013 Term Loans.
Our obligations under the 2013 Amended Credit Agreement are guaranteed by substantially all of our domestic subsidiaries and
certain foreign subsidiaries that have elected to be disregarded for U.S. tax purposes, and are secured by security interests in
substantially all of our and their assets, subject to certain exceptions detailed in the 2013 Amended Credit Agreement and
related ancillary documents.
The 2013 Amended Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this
type, including limitations on us and our subsidiaries with respect to indebtedness, liens, nature of business, investments and
loans, distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. The
revolving credit facility also contains a financial covenant that requires us to maintain a ratio of Consolidated Total Debt to
Consolidated EBITDA (each as defined in the 2013 Amended Credit Agreement, as amended) of no greater than 5.00 to 1 until
January 31, 2016 and no greater than 4.50 to 1 thereafter (the "Leverage Ratio Covenant"). The limitations imposed by the
covenants are subject to certain exceptions as detailed in the 2013 Amended Credit Agreement. At January 31, 2014, our
consolidated leverage ratio was approximately 2.30 to 1 compared to a permitted consolidated leverage ratio of 5.00 to 1, and
our EBITDA for the twelve-month period then ended exceeded by at least $120.0 million the minimum EBITDA required to
satisfy the leverage ratio covenant given our outstanding debt as of that date. At February 3, 2014, after giving effect to our
incurrence of additional long-term debt in connection with our acquisition of KANA, as described in greater detail above, on a
pro forma basis our consolidated leverage ratio was less than 4.25 to 1.
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The 2013 Amended Credit Agreement provides for certain customary events of default with corresponding grace periods.
These events of default include failure to pay principal or interest when due under the 2013 Amended Credit Agreement, failure
to comply with covenants, any representation or warranty made by us proving to be inaccurate in any material respect, defaults
under certain other indebtedness of ours or our subsidiaries, the occurrence of a Change of Control (as defined in the 2013
Amended Credit Agreement) with respect to us and certain insolvency or receivership events affecting us or our significant
subsidiaries. Upon the occurrence of an event of default resulting from a violation of the Leverage Ratio Covenant, the lenders
under our revolving credit facility may require us to immediately repay outstanding borrowings under the revolving credit
facility and may terminate their commitments to provide loans under that facility. A violation of the Leverage Ratio Covenant
would not, by itself, result in an event of default under the 2013 Term Loans or 2014 Term Loans, but may trigger a cross-
default under the term loans in the event we are required to repay outstanding borrowings under the revolving credit facility.
Upon the occurrence of other events of default, the lenders may require us to immediately repay all outstanding borrowings
under the 2013 Amended Credit Agreement and the lenders under our revolving credit facility may terminate their
commitments to provide loans under the facility.
Convertible Preferred Stock
Our capitalization previously included Series A Convertible Perpetual Preferred Stock ("Preferred Stock") originally issued in
May 2007 which, as of January 31, 2013, had a carrying value of $285.5 million and a liquidation preference and redemption
value of $365.9 million. All of the Preferred Stock was originally issued to, and as of January 31, 2013 continued to be held by,
CTI.
On August 12, 2012, we entered into the CTI Merger Agreement providing for the merger of CTI with and into our new, wholly
owned subsidiary. The CTI Merger was completed on February 4, 2013 and eliminated CTI's majority ownership and control of
us. Each outstanding share of our Preferred Stock, all of which was held by CTI, was canceled upon completion of the CTI
Merger.
Further details regarding the Preferred Stock appear in Note 9, "Convertible Preferred Stock" and further details regarding the
CTI Merger Agreement appear in Note 4, "Merger with CTI" to our consolidated financial statements included under Item 8 of
this report.
Contractual Obligations
At January 31, 2014, 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
787,705
74,739
46,130
460
909,034
$
$
$
$
Payments Due by Period
1-3 years
< 1 year
3-5 years
> 5 years
32,618
15,335
42,443
167
90,563
$
64,439
21,322
3,687
293
89,741
$
63,282
10,416
—
—
73,698
$
627,366
27,666
—
—
655,032
The long-term debt obligations reflected above include projected interest payments over the term of our outstanding debt as of
January 31, 2014, assuming an interest rate of 4.00%, which was the interest rate in effect for our term loan borrowings as of
January 31, 2014.
As described above under "Credit Agreements", on February 3, 2014, we incurred additional long-term debt in connection with
our acquisition of KANA. As a result, our long-term debt obligations, including projected future interest, have increased from
approximately $788 million at January 31, 2014 to approximately $1.3 billion at February 3, 2014 (including the impact of the
March 2014 amendment to our 2013 Amended Credit Agreement). This increase results primarily from the impact of the
additional long-term debt, partially offset by the impact of lower projected interest rates associated with the February 2014 and
March 2014 amendments to our 2013 Amended Credit Agreement. Details regarding our long-term debt obligations are
provided in Note 7, "Long-Term Debt" and Note 19, "Subsequent Events" to our consolidated financial statements included
under Item 8 of this report.
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Operating lease obligations reflected above exclude future sublease income from certain space we have subleased to third
parties. As of January 31, 2014, total expected future sublease income is $2.6 million and ranges from $0.3 million to $0.8
million on an annual basis through March 2018.
Additional operating lease obligations that we assumed upon the February 3, 2014 acquisition of KANA and March 31, 2014
acquisition of UTX are estimated to be less than $10.0 million and are not included in the table presented above.
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. Agreements to
purchase goods or services that have cancellation provisions with no penalties are excluded from these purchase obligations.
Our consolidated balance sheet at January 31, 2014 included $42.3 million of non-current tax reserves, net of related benefits
(including interest and penalties of $8.7 million) for uncertain tax positions. 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 12 months.
Contingent Payments Associated with Business Combinations
In connection with certain of our business combinations, we have agreed to make contingent cash payments to the former
shareholders of the acquired companies based upon achievement of performance targets following the acquisition
dates. Excluding the CTI Merger, we completed five business combinations during the year ended January 31, 2014, all of
which included contingent cash consideration arrangements. Please refer to Note 5, "Business Combinations" to our
consolidated financial statements included under Item 8 of this report for information regarding our business combinations.
For the year ended January 31, 2014, we made $17.1 million of payments under contingent consideration arrangements. As of
January 31, 2014, potential future cash payments and earned consideration expected to be paid subsequent to January 31, 2014
under contingent consideration arrangements total $38.0 million, the estimated fair value of which was $17.3 million of which
$9.9 million is included within accrued expenses and other current liabilities, and $7.4 million is included within other
liabilities. The performance periods associated with these potential payments extend through January 2019.
Off-Balance Sheet Arrangements
As of January 31, 2014, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources that are material to investors.
Recent Accounting Pronouncements
New Accounting Pronouncements Implemented
In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2012-02,
Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies how
entities test indefinite-lived intangible assets for impairment and improves consistency in impairment testing requirements
among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it
is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in
which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, these amended
standards eliminate the requirement to perform quantitative impairment testing. The amended guidance was effective for annual
and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. Our
adoption of this guidance effective February 1, 2013 did not materially impact our consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income, which contained amended standards regarding disclosure requirements for
items reclassified out of accumulated other comprehensive income ("AOCI"). These amended standards require the disclosure
of information about the amounts reclassified out of AOCI by component and, in addition, require disclosure, either on the face
of the financial statements or in the notes, of significant amounts reclassified out of AOCI by the respective line items of net
income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For
amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other
disclosures that provide additional details about those amounts. These amended standards do not change the current
53
requirements for reporting net income or other comprehensive income in the consolidated financial statements. These amended
standards were effective for us on February 1, 2013, and adoption of this guidance did not materially impact our consolidated
financial statements. The disclosures required by the amended standards appear in Note 10, "Stockholders' Equity" to our
consolidated financial statements included under Item 8 of this report.
In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective
Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, permitting entities
to use the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in
addition to the U.S. Treasury rate and the London Interbank Offered Rate (LIBOR). The amendments also remove the
restriction on using different benchmark rates for similar hedges. The amendments in this ASU were effective prospectively for
qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We adopted the amendments in this
ASU effective July 17, 2013, and the initial adoption of the amendments in this ASU did not impact our consolidated financial
statements.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires
that entities with an unrecognized tax benefit and a net operating loss carryforward or similar tax loss or tax credit carryforward
in the same jurisdiction as the uncertain tax position present the unrecognized tax benefit as a reduction of the deferred tax asset
for the loss or tax credit carryforward rather than as a liability, when the uncertain tax position would reduce the loss or tax
credit carryforward under the tax law, thereby eliminating diversity in practice regarding this presentation issue. We adopted
ASU No. 2013-11 in our consolidated balance sheet as of January 31, 2014, but did not retrospectively apply the standard to
our consolidated balance sheet as of January 31, 2013. The adoption of this standard did not materially impact our consolidated
financial statements.
New Accounting Pronouncements To Be Implemented
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the
Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or
of an Investment in a Foreign Entity. This new standard is intended to resolve diversity in practice regarding the release into net
income of a cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity.
ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after
December 15, 2013. We are currently reviewing this standard, but we do not anticipate that its adoption will have a material
impact on our consolidated financial statements, absent any material transactions involving the derecognition of subsidiaries or
groups of assets within a foreign entity.
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 speculative purposes.
Interest Rate Risk on Our Debt
On March 6, 2013, we entered into an amendment and restatement agreement with the lenders under the 2011 Credit
Agreement providing for the 2013 Amended Credit Agreement. The 2013 Amended Credit Agreement provided for $850.0
million of senior secured credit facilities, comprised of a $650.0 million term loan maturing in September 2019 and a $200.0
million revolving credit facility maturing in March 2018, subject to increase (up to a maximum increase of $300.0 million) and
reduction from time to time according to the terms of the 2013 Amended Credit Agreement.
Prior to March 7, 2014, loans under the 2013 Amended Credit Agreement incurred interest, payable quarterly or, in the case of
Eurodollar loans with an interest period of three months or shorter, at the end of any interest period, at a per annum rate of, at
our election:
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(a) in the case of Eurodollar loans, the Adjusted LIBO Rate plus 3.00% (or, if our corporate credit ratings are BB- and Ba3
or better, 2.75%). The Adjusted LIBO Rate is the greater of (i) 1.00% per annum and (ii) the product of the LIBO Rate and
Statutory Reserves (both as defined in the 2013 Amended Credit Agreement), and
(b) in the case of Base Rate loans, the Base Rate plus 2.00% (or, if our corporate credit ratings are BB- and Ba3 or better,
1.75%). The Base Rate is the greatest of (i) the administrative agent's prime rate, (ii) the Federal Funds Effective Rate (as
defined in the 2013 Amended Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest
period plus 1.00%.
On February 3, 2014, in connection with the acquisition of KANA, we borrowed $125.0 million under our revolving credit
facility, and we entered into Amendment No. 1 to our 2013 Amended Credit Agreement pursuant to which we incurred $300.0
million of incremental term loans. The net proceeds from these borrowings were used to fund a portion of the KANA purchase
price.
The initial interest rate on the revolving credit borrowings was 4.00%, but was adjusted to 3.50% on March 7, 2014, as
described below.
The 2014 Term Loans bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months
or less, at the end of the applicable interest period, at a per annum rate of, at our election:
(a) in the case of Eurodollar loans, the Adjusted LIBO Rate plus 2.75%. The Adjusted LIBO Rate is the greater of (i)
0.75% per annum and (ii) the product of (x) the LIBO Rate and (y) Statutory Reserves (both as defined in the 2013
Amended Credit Agreement), and
(b) in the case of Base Rate loans, the Base Rate plus 1.75%. The Base Rate is the greatest of (i) the administrative agent’s
prime rate, (ii) the Federal Funds Effective Rate (as defined in the 2013 Amended Credit Agreement) plus 0.50% and (iii)
the Adjusted LIBO Rate for a one-month interest period plus 1.00%.
The initial interest rate on the 2014 Term loans was 3.50%.
On February 3, 2014, we also entered into Amendment No. 2 to the 2013 Amended Credit Agreement which, among other
things, (i) permits us to increase the permitted amount of additional incremental term loans and revolving credit commitments
under the 2013 Amended Credit Agreement (beyond the 2014 Term Loans borrowed under Amendment No. 1) by up to, in the
aggregate, $200.0 million plus an additional amount such that the First Lien Leverage Ratio (as defined in Amendment No. 2)
would not exceed the specified maximum ratio set forth therein, (ii) increased the size of certain negative covenant basket
carve-outs, (iii) permits us to issue Permitted Convertible Indebtedness (as defined in Amendment No. 2), and (iv) permits us to
refinance all or a portion of any existing class of term loans under the 2013 Amended Credit Agreement with replacement term
loans.
Further, on February 3, 2014, we entered into Amendment No. 3 to the 2013 Amended Credit Agreement which extended by
one year, to January 31, 2016, the step-down date of the leverage ratio covenant applicable to the revolving credit facility and,
at the March 7, 2014 effectiveness of Amendment No. 4 (as described below), repriced the interest rate applicable to
borrowings under the revolving credit facility to the interest rate applicable to the 2014 Term Loans.
On March 7, 2014, we entered into Amendment No. 4 to our 2013 Amended Credit Agreement to, among other things, reprice
the interest rate applicable to the 2013 Term Loans to the interest rate applicable to the 2014 Term Loans. The repricing of the
interest rate applicable to borrowings under the revolving credit facility contemplated by Amendment No. 3 became effective
on March 7, 2014, upon the effectiveness of Amendment No. 4.
Because the interest rates applicable to borrowings under the 2013 Amended Credit Agreement are variable, we are exposed to
market risk from changes in the underlying index rates, which affect our cost of borrowing. The periodic interest rates on the
term loans under the 2013 Amended Credit Agreement are currently a function of several factors, most importantly the LIBO
Rate and the applicable interest rate margin. However, borrowings are subject to a 0.75% LIBO Rate floor in the interest rate
calculation, which currently reduces the likelihood of increases in the periodic interest rate, because current short-term LIBO
Rates are well below 0.75%, and accordingly changes in short-term LIBO Rates will not impact the calculation unless those
rates increase above 0.75%. Based upon our borrowings as of February 3, 2014, for each 1.00% increase in the applicable
LIBO Rate above 0.75%, our annual interest payments would increase by approximately $10.7 million.
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Previously, we utilized a pay-fixed/receive-variable interest rate swap agreement to partially mitigate the variable interest rate
risk associated with a prior credit agreement. We may consider utilizing interest rate swap agreements, or other agreements
intended to mitigate variable interest rate risk, in the future.
Interest Rate Risk on Our Investments
We invest in cash, cash equivalents, bank time deposits and marketable debt securities. 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, and our marketable debt
investments are restricted to highly rated corporate debt securities. We have not invested in marketable debt securities with
remaining maturities in excess of twelve months or in equity securities during the three-year period ended January 31, 2014.
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, 2014 and 2013, we had cash and cash equivalents totaling approximately $378.6 million and $210.0 million,
respectively, consisting of demand deposits, bank time deposits with maturities of three months or less, money market
accounts, and marketable debt securities with remaining maturities of three months or less. At such dates we also held $6.4
million and $11.1 million, respectively, of cash equivalents which were restricted and were not available for general operating
use. These balances primarily represent short-term deposits to secure bank guarantees in connection with sales contracts. The
amounts of these deposits can vary depending upon the terms of the underlying contracts. We also had short-term investments
of $32.0 million and $13.6 million at January 31, 2014 and 2013, respectively, consisting of bank time deposits and marketable
debt securities of corporations, all with remaining maturities in excess of three months at the time of purchase.
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 ending January 31, 2015, average short-term interest rates increase or decrease by 50 basis points
relative to average rates realized during the year ended January 31, 2014. Such a change would cause our projected interest
income from cash, cash equivalents, restricted cash and bank time deposits, and short-term investments to increase or decrease
by approximately $2.1 million, assuming a similar level of investments in the year ending January 31, 2015 as in the year
ended January 31, 2014.
Due to the short-term nature of our cash and cash equivalents, time deposits, money market accounts and marketable debt
securities, their carrying values approximate their market values and are not generally subject to price risk due to fluctuations in
interest rates. See Note 3, "Cash, Cash Equivalents, and Short-Term Investments" to our consolidated financial statements
included under Item 8 of this report for more information regarding our short-term investments.
Foreign Currency Exchange Risk
The functional currency for most of our foreign subsidiaries is the applicable local currency, of which the notable exceptions
are 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 are changes 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 (loss) within stockholders’ equity.
Our international operations subject us to risks associated with currency fluctuations. While most of our revenue and expenses
are denominated in U.S. dollars, we do have significant portions of our operating expenses, primarily labor expenses, that are
denominated in the local currencies where our foreign operations are located, primarily Israel, the United Kingdom, Germany,
Singapore, Brazil, and Australia. We also generate some of our revenue in foreign currencies, mainly the euro, British pound
sterling, and Singapore dollar. 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 transact.
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 net foreign currency losses of $6.1 million, and net foreign currency gains of $1.0 million and $1.4 million, for the
years ended January 31, 2014, 2013, and 2012, respectively, which are recorded in other expense, net.
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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 generally limited to durations of approximately 12 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 U.S. dollar
payments to its suppliers. These contracts are generally limited to durations of approximately 12 months or less. We have also
periodically entered into foreign currency forward contracts to manage exposures resulting from forecasted customer
collections denominated in currencies other than the respective entity’s functional currency and exposures from cash, cash
equivalents and short-term investments denominated in currencies other than the applicable functional currency.
During the years ended January 31, 2014, 2013, and 2012, we recorded net gains of $0.3 million, and net losses of $0.4 million
and $1.3 million, respectively, on foreign currency forward contracts not designated as hedges for accounting purposes. We had
$1.6 million of net unrealized gains on outstanding foreign currency forward contracts as of January 31, 2014, with notional
amounts totaling $127.6 million. We had $2.3 million of net unrealized gains on outstanding foreign currency forward contracts
as of January 31, 2013, with notional amounts totaling $108.1 million.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of January 31, 2014. This sensitivity analysis
was based on a modeling technique that measures the hypothetical market value resulting from a 10% shift in the value of
exchange rates relative to the U.S. dollar, and assumes no changes in interest rates. A 10% increase in the relative value of the
U.S. dollar would decrease the estimated fair value of our foreign exchange derivatives by approximately $5.3 million.
Conversely, a 10% decrease in the relative value of the U.S. dollar would increase the estimated the fair value of these financial
instruments by approximately $6.5 million.
The counterparties to these foreign currency forward contracts are multinational commercial banks. While we believe the risk
of counterparty nonperformance is not material, past disruptions in the global financial markets have 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 disruption in the financial markets could affect our ability to secure creditworthy counterparties for our foreign currency
hedging programs.
57
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Item 8. Financial Statements and Supplementary Data
VERINT SYSTEMS INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2014 and 2013
Consolidated Statements of Operations for the Years Ended January 31, 2014, 2013, and 2012
Consolidated Statements of Comprehensive Income for the Years Ended January 31, 2014, 2013, and 2012
Consolidated Statements of Stockholders’ Equity for the Years Ended January 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows for the Years Ended January 31, 2014, 2013, and 2012
Notes to Consolidated Financial Statements
Page
59
60
61
62
63
64
65
58
Table of Contents
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, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, stockholders’ equity,
and cash flows for each of the three years in the period ended January 31, 2014. 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, 2014 and 2013, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 2014, in conformity with accounting principles generally accepted in the
United States of America.
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, 2014, based on the criteria established in Internal
Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 31, 2014 expressed an unqualified opinion on the Company’s internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 31, 2014
59
Table of Contents
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 2014 and 2013
(in thousands, except share and per share data)
Assets
Current Assets:
Cash and cash equivalents
Restricted cash and bank time deposits
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $1.2 million and $1.8 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
Long-term deferred cost of revenue
Long-term deferred income taxes
Other assets
Total assets
Liabilities, Preferred Stock, and Stockholders' Equity
Current Liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current maturities of long-term debt
Deferred revenue
Deferred income taxes
Total current liabilities
Long-term debt
Long-term deferred revenue
Long-term deferred income taxes
Other liabilities
Total liabilities
Preferred Stock - $0.001 par value; authorized 2,207,000 and 2,500,000 shares at January 31, 2014
and 2013, respectively. Series A convertible preferred stock; 0 and 293,000 shares issued and
outstanding at January 31, 2014 and 2013, respectively; aggregate liquidation preference and
redemption value of $365,914 at January 31, 2013.
Commitments and Contingencies
Stockholders' Equity:
Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 53,907,000 and 40,460,000
shares; outstanding 53,605,000 and 40,158,000 shares at January 31, 2014 and 2013, respectively.
Additional paid-in capital
Treasury stock, at cost - 302,000 shares at January 31, 2014 and 2013, respectively.
Accumulated deficit
Accumulated other comprehensive loss
Total Verint Systems Inc. stockholders' equity
Noncontrolling interest
Total stockholders' equity
Total liabilities, preferred stock, and stockholders' equity
See notes to consolidated financial statements.
60
January 31,
2014
2013
$
378,618
6,423
32,049
194,312
10,693
10,818
9,002
52,476
694,391
40,145
853,389
132,847
8,483
9,843
9,783
24,026
1,772,907
65,656
178,674
6,555
162,124
474
413,483
635,830
13,661
13,358
63,457
1,139,789
$
$
209,973
11,128
13,593
168,415
15,014
6,253
10,447
66,830
501,653
38,161
829,909
144,261
6,343
7,742
10,342
25,858
1,564,269
47,355
176,972
5,867
163,252
764
394,210
570,822
13,562
10,261
60,196
1,049,051
—
285,542
54
924,663
(8,013)
(250,005)
(39,725)
626,974
6,144
633,118
1,772,907
$
40
580,762
(8,013)
(303,762)
(44,225)
224,802
4,874
229,676
1,564,269
$
$
$
$
Table of Contents
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended January 31, 2014, 2013 and 2012
(in thousands, except per share data)
Revenue:
Product
Service and support
Total revenue
Cost of revenue:
Product
Service and support
Amortization of acquired technology and backlog
Total cost of revenue
Gross profit
Operating expenses:
Research and development, net
Selling, general and administrative
Amortization of other acquired intangible assets
Total operating expenses
Operating income
Other income (expense), net:
Interest income
Interest expense
Losses on extinguishment of debt
Other expense, net
Total other expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interest
Net income attributable to Verint Systems Inc.
Dividends on preferred stock
Net income attributable to Verint Systems Inc. common shares
Net income per common share attributable to Verint Systems Inc.:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
See notes to consolidated financial statements.
Year Ended January 31,
2013
2012
2014
$
$
416,478
490,814
907,292
$
389,787
449,755
839,542
137,558
156,593
12,269
306,420
600,872
126,539
327,385
24,662
478,586
122,286
963
(29,780)
(9,879)
(20,275)
(58,971)
63,315
4,539
58,776
5,019
53,757
(174)
53,583
1.01
0.99
52,967
53,878
$
$
$
121,748
145,444
14,812
282,004
557,538
115,906
317,637
24,442
457,985
99,553
531
(31,034)
—
(1,286)
(31,789)
67,764
8,960
58,804
4,802
54,002
(15,472)
38,530
0.97
0.96
39,748
40,312
$
$
$
$
$
$
390,392
392,256
782,648
126,050
129,911
12,400
268,361
514,287
111,001
293,906
22,902
427,809
86,478
661
(32,358)
(8,136)
(488)
(40,321)
46,157
5,532
40,625
3,632
36,993
(14,790)
22,203
0.58
0.56
38,419
39,499
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Table of Contents
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended January 31, 2014, 2013 and 2012
(in thousands)
Net income
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation adjustments
Net unrealized gains on available-for-sale securities
Net unrealized (losses) gains on derivative financial instruments designated as
hedges
Benefit from (provision for) income taxes on net unrealized (losses) gains on
derivative financial instruments designated as hedges
Other comprehensive income (loss)
Comprehensive income
Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Verint Systems Inc.
See notes to consolidated financial statements.
Year Ended January 31,
2013
2012
2014
$
58,776
$
58,804
$
40,625
5,283
9
(1,227)
265
4,330
63,106
4,849
58,257
$
2,002
—
1,993
(212)
3,783
62,587
5,074
57,513
$
(6,685)
—
1,055
(149)
(5,779)
34,846
3,520
31,326
$
62
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years Ended January 31, 2014, 2013 and 2012
Verint Systems Inc. Stockholders’ Equity
Common Stock
Shares
Par
Value
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total Verint
Systems Inc.
Stockholders'
Equity
Non-
controlling
Interest
Total
Stockholders'
Equity
$ 519,834
$ (6,639) $ (394,757) $
(42,069) $
76,407
$
(in thousands)
Balances as of January
31, 2011
Net income
Other comprehensive loss
Stock-based compensation
- equity portion
Exercises of stock options
Common stock issued for
stock awards
Purchases of treasury stock
Treasury stock retired
Stock options issued in
business combination
Dividends to
noncontrolling interest
Tax effects from stock
award plans
37,089
$
—
—
—
623
1,323
(53)
—
—
—
—
Balances as of January
31, 2012
38,982
Net income
Other comprehensive
income
Stock-based compensation
- equity portion
Exercises of stock options
Common stock issued for
stock awards and stock
bonuses
Purchases of treasury stock
Treasury stock retired
Dividends to
noncontrolling interest
Tax effects from stock
award plans
—
—
—
121
1,076
(21)
—
—
—
Balances as of January
31, 2013
40,158
38
—
—
—
1
1
—
—
—
—
—
40
—
—
—
—
—
—
—
—
—
40
—
—
21,781
12,843
(52)
—
(777)
60
—
662
—
—
—
—
51
(1,655)
777
—
—
—
36,993
—
—
—
—
—
—
—
—
—
—
(5,667)
—
—
—
—
—
—
—
—
554,351
(7,466)
(357,764)
(47,736)
54,002
—
36,993
(5,667)
21,781
12,844
—
(1,655)
—
60
—
$
1,280
3,632
(112)
—
—
—
—
—
—
77,687
40,625
(5,779)
21,781
12,844
—
(1,655)
—
60
(1,930)
(1,930)
662
—
662
141,425
54,002
2,870
4,802
144,295
58,804
—
—
20,174
2,222
4,073
—
(68)
—
10
—
—
—
—
—
(615)
68
—
—
—
—
—
—
—
—
—
—
3,511
3,511
272
3,783
—
—
—
—
—
—
—
20,174
2,222
4,073
(615)
—
—
10
—
—
—
—
—
20,174
2,222
4,073
(615)
—
(3,070)
(3,070)
—
10
580,762
(8,013)
(303,762)
(44,225)
224,802
4,874
229,676
Net income
Other comprehensive
income (loss)
Stock-based compensation
- equity portion
Exercises of stock options
Common stock issued for
stock awards and stock
bonuses
Common stock issued for
CTI Merger, net
Dividends to
noncontrolling interest
Tax effects from stock
award plans
Balances as of January
31, 2014
— $ — $
— $
— $
53,757
$
— $
53,757
$
5,019
$
58,776
—
—
384
789
12,274
—
—
—
—
—
1
13
—
—
—
30,471
10,982
2,837
299,626
—
(15)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,500
4,500
(170)
4,330
—
—
—
—
—
—
30,471
10,982
2,838
299,639
—
—
—
—
30,471
10,982
2,838
299,639
—
(3,579)
(3,579)
(15)
—
(15)
53,605
$
54
$ 924,663
$ (8,013) $ (250,005) $
(39,725) $
626,974
$
6,144
$
633,118
See notes to consolidated financial statements.
Table of Contents
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended January 31, 2014, 2013 and 2012
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for doubtful accounts
Stock-based compensation - equity portion
Provision for (benefit from) deferred income taxes
Excess tax benefits from stock award plans
Non-cash (gains) losses on derivative financial instruments, net
Loss on extinguishment of debt
Other non-cash items, net
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable
Inventories
Deferred cost of revenue
Prepaid expenses and other assets
Accounts payable and accrued expenses
Deferred revenue
Other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Cash paid for business combinations, including adjustments, net of cash acquired
Purchases of property and equipment
Purchases of investments
Sales and maturities of investments
Settlements of derivative financial instruments not designated as hedges
Cash paid for capitalized software development costs
Change in restricted cash and bank time deposits, including long-term portion, and other
investing activities, net
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from borrowings, net of original issuance discount
Repayments of borrowings and other financing obligations
Payments of debt issuance and other debt-related costs
Proceeds from exercises of stock options
Cash received in CTI Merger
Dividends paid to noncontrolling interest
Purchases of treasury stock
Excess tax benefits from stock award plans
Payments of contingent consideration for business combinations (financing portion)
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
See notes to consolidated financial statements.
64
Year Ended January 31,
2013
2012
2014
$
58,776
$
58,804
$
40,625
55,968
1,112
30,173
2,553
(64)
(346)
9,879
(1,964)
(23,387)
3,105
(6,148)
33,487
23,444
(1,994)
(6,513)
203
178,284
(32,767)
(15,725)
(197,749)
178,820
(359)
(6,668)
10,252
(64,196)
646,750
(586,126)
(7,754)
10,896
10,370
(3,579)
—
64
(16,087)
—
54,534
23
168,645
209,973
378,618
$
57,097
734
21,004
328
(139)
399
—
(5,297)
(13,809)
(1,957)
11,421
(17,577)
(598)
(6,104)
19,078
1
123,385
(660)
(16,045)
(13,593)
—
(270)
(3,916)
(1,212)
(35,696)
384
(22,035)
(217)
2,605
—
(3,070)
(615)
139
(6,497)
—
(29,306)
928
59,311
150,662
209,973
$
53,040
1,055
21,781
(11,101)
(847)
896
8,136
(802)
(2,942)
1,080
3,199
6,339
(7,192)
(3,424)
(3,326)
(19)
106,498
(109,780)
(13,080)
—
245
(1,313)
(3,399)
479
(126,848)
597,136
(587,549)
(15,276)
12,474
—
(1,930)
(1,655)
847
(2,004)
35
2,078
(972)
(19,244)
169,906
150,662
$
Table of Contents
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 is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of
massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate,
respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries
can make more timely and effective decisions. Today, more than 10,000 organizations in over 180 countries, including over 80
percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place.
Significant Change in Ownership
For the periods presented in these consolidated financial statements through and including January 31, 2013, Comverse
Technology, Inc. ("CTI"), beneficially owned a majority of our common stock (assuming the conversion of CTI’s preferred
stock holdings into common stock) and held a majority of the voting power of our common stock. On February 4, 2013, CTI
was merged with and into our new, wholly owned subsidiary, eliminating CTI's majority ownership and control of us. Further
details are provided in Note 4, "Merger with CTI".
During the years ended January 31, 2013 and 2012, CTI did not provide us with material levels of corporate or administrative
services.
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 functions as a systems integrator for
Asian markets and is a variable interest entity in which we are the primary beneficiary. Investments in companies in which we
have less than a 20% ownership interest and do not exercise significant influence are accounted for at cost. We include the
results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and
balances are eliminated.
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.
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 remaining maturities 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, warranty programs, and other obligations. Restricted bank time
deposits generally consist of certificates of deposit with original maturities of between 30 and 360 days.
Investments
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Our investments generally consist of bank time deposits, and marketable debt securities of corporations, the U.S. government,
and agencies of the U.S. government, all with remaining maturities in excess of three months at the time of purchase. We do not
invest in auction rate securities as a matter of policy.
Investments in marketable securities which are classified as available-for-sale are stated at fair value based on market quotes.
Investments in time deposits and in certain marketable debt securities which are classified as held-to-maturity are stated at
amortized cost. Occasionally, 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, although we held no such securities at January
31, 2014 and 2013. Unrealized gains and losses on available-for-sale securities, net of deferred taxes, are recorded as a
component of accumulated other comprehensive income (loss) in stockholders’ equity. 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 other income (expense), net.
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 industries and geographic areas.
Accounts Receivable, Net
Trade accounts receivable are recorded at the invoiced amount and are not interest-bearing.
Accounts receivable, net, includes costs in excess of billings and estimated earnings on arrangements recognized under contract
accounting methods, representing revenue recognized on contracts for which billing will occur in subsequent periods, in
accordance with the terms of the contracts. Costs in excess of billings and estimated earnings on such contracts were $22.5
million and $5.1 million as of January 31, 2014 and 2013, respectively.
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 a given deferred revenue transaction is the amount included in deferred revenue 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
accounts receivable 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. We write-off an account receivable and charge it against its recorded allowance at the point when it is
considered uncollectible.
The following table summarizes the activity in our allowance for doubtful accounts for the years ended January 31, 2014, 2013,
and 2012:
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(in thousands)
Balance at beginning of period
Provisions charged to expense
Amounts written off
Other (1)
Balance at end of period
Year Ended January 31,
2013
2012
2014
$
$
1,775
1,100
(1,700)
12
1,187
$
$
2,929
250
(1,520)
116
1,775
$
$
5,395
399
(2,912)
47
2,929
(1) Includes balances from acquisitions and changes in balances resulting from fluctuations in 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. Equipment, furniture and other are depreciated over
periods ranging from three to ten years. Software is depreciated over periods ranging from three to four years. We own a single
building at January 31, 2014, which is being depreciated over a period of twenty-five 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.
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, in-process research and development ("IPR&D"), trade
names, customer relationships, distribution networks, non-competition agreements, and sales backlog. We amortize the cost of
finite-lived identifiable intangible assets over their estimated useful lives, which are periods of ten years or less. Amortization is
based on the pattern in which the economic benefits of the intangible asset are expected to be realized, which typically is on a
straight-line basis.
We regularly perform reviews to determine if the carrying values of our goodwill and other intangible assets are impaired.
We test goodwill for impairment at the reporting unit level, which can be an operating segment or one level below an operating
segment, 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. As of January 31, 2014, our reporting units are consistent with our operating
segments identified in Note 18, "Segment, Geographic, and Significant Customer Information".
We review goodwill for impairment utilizing either a qualitative assessment or a two-step process. If we decide that it is
appropriate to perform a qualitative assessment and conclude that the fair value of a reporting unit more likely than not exceeds
its carrying value, no further evaluation is necessary. For reporting units where we perform the two-step process, the first step
requires us to estimate the fair value of each reporting unit and compare that fair value to the respective carrying value, which
includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired and
no further evaluation is necessary. If the carrying value is higher than the estimated fair value, there is an indication that
impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the
excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of
goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment charge.
For reporting units where we decide to perform a qualitative assessment, we assess and make judgments regarding a variety of
factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-
specific conditions, customer behavior, cost factors, our financial performance and trends, our strategies and business plans,
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capital requirements, management and personnel issues, and our stock price, among others. We then consider the totality of
these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit’s
fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more likely than not
that the fair value of a reporting unit exceeds its carrying amount.
For reporting units where we perform the two-step process, we utilize some or all of three primary approaches to assess 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 consideration of valuation approaches (income approach, comparable public company approach, and comparable
transaction approach), (b) estimates of future growth rates, (c) estimates of our future cost structure, (d) discount rates for our
estimated cash flows, (e) selection of peer group companies for the public company and the market transaction approaches, (f)
required levels of working capital, (g) assumed terminal value, and (h) time horizon of cash flow forecasts.
Further information regarding our annual goodwill impairment reviews appears in Note 6, "Intangible Assets and Goodwill".
Acquired IPR&D projects which have not reached technological feasibility at the date of acquisition are considered indefinite-
lived intangible assets and are not subject to amortization until the completion or abandonment of the associated research and
development efforts. Upon completion of the development process, the IPR&D assets are amortized over their estimated useful
lives. If a project is abandoned rather than completed, the IPR&D asset is written-off. IPR&D assets are tested for impairment
annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. The impairment
test compares the fair value of the IPR&D asset with its carrying amount. If the carrying amount of the IPR&D asset exceeds
its fair value, an impairment loss is recognized in an amount equal to that excess.
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. The
impairment loss recognized is the amount by which the carrying amount of the long-lived asset exceeds its fair value.
Fair Values of Financial Instruments
Our recorded amounts of cash and cash equivalents, restricted cash and bank time deposits, accounts receivable, investments,
and accounts payable approximate fair value, due to the short-term nature of these instruments. We measure certain financial
assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants. Fair value disclosures regarding our money market funds, short-term investments, derivative financial instruments,
contingent consideration obligations, and long-term debt are included in Note 13, "Fair Value Measurements".
Derivative Financial Instruments
As part of our risk management strategy, when considered appropriate, we use derivative financial instruments including
foreign currency forward contracts and interest rate swap agreements to hedge against certain foreign currency and interest rate
exposures. Our intent is to mitigate gains and losses caused by the underlying exposures with offsetting gains and losses on the
derivative contracts. By policy, we do not enter into speculative positions with derivative instruments. The criteria we use for
designating a derivative as a hedge include contemporaneous and ongoing documentation of the instrument’s effectiveness in
risk reduction and direct matching of the financial instrument to the underlying transaction. We record all derivatives as assets
or 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 years ended January 31, 2014, 2013, and 2012, 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 accumulated
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. See Note 14, "Derivative
Financial Instruments", for further details regarding our hedging activities and related accounting policies.
Long-term Debt
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We capitalize debt issuance costs, as well as costs incurred for subsequent modification of debt, incurred in connection with our
long-term borrowings and credit facilities. We amortize these costs as an adjustment to interest expense over the remaining
contractual life of the associated long-term borrowing or credit facility using the effective interest method for term loan
borrowings and the straight-line method for revolving credit facilities. When unscheduled principal payments are made, we
adjust the amortization of our deferred debt-related costs to reflect the expected remaining terms of the borrowing.
Segment Reporting
We have three operating segments, which are also our reportable segments, Enterprise Intelligence Solutions ("Enterprise
Intelligence"), Communications and Cyber Intelligence Solutions ("Communications Intelligence"), and Video and Situation
Intelligence Solutions ("Video Intelligence"). We determine our reportable segments based on a number of factors our
management uses to evaluate and run our business operations, including similarities of customers, products and technology.
Our Chief Executive Officer is our chief operating decision maker, who utilizes segment revenue and segment operating
contribution as the primary basis for assessing financial results of segments and for the allocation of resources. See Note 18,
"Segment, Geographic, and Significant Customer Information", for a full description of our segments and related accounting
policies.
Revenue Recognition
We derive and report our revenue in two categories: (a) product revenue, including sale of hardware products (which include
software that works together with the hardware to deliver the product's essential functionality) and licensing of software
products, and (b) service and support revenue, including revenue from installation services, post-contract customer support
("PCS"), project management, hosting services, software-as-a-service ("SaaS"), product warranties, consulting 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 reasonably
assured and whether fees are fixed and determinable.
For arrangements that do not require significant modification or customization of the underlying products, we recognize
revenue when we have persuasive evidence of an arrangement, the product has been delivered or the services have been
provided to the customer, the sales price is fixed or determinable and collectability is reasonably assured. In addition, our
multiple-element arrangements must be carefully reviewed to determine the selling price of each element.
Our multiple-element arrangements consist of a combination of our product and service offerings that may be delivered at
various points in time. For arrangements within the scope of the multiple-deliverable guidance, a deliverable constitutes a
separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return rights for the
delivered elements. For multiple-element arrangements comprised only of tangible products containing software components
and non-software components and related services, we allocate revenue to each element in an arrangement based on a selling
price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence ("VSOE") if available,
third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available.
The total transaction revenue is allocated to the multiple elements based on each element's relative selling price compared to
the total selling price. We limit the amount of revenue recognized for delivered elements to an amount that is not contingent
upon future delivery of additional products or services or meeting of any specified performance conditions.
Our policy for establishing VSOE for installation, consulting, and training is based upon an analysis of separate sales of
services. We utilize either the substantive renewal rate approach or the bell-shaped curve approach to establish VSOE for our
PCS offerings, depending upon the business segment, geographical region, or product line.
TPE of selling price is established by evaluating largely similar and interchangeable competitor products or services in stand-
alone sales to similarly situated customers. However, as most of our products contain a significant element of proprietary
technology and its solutions offer substantially different features and functionality, the comparable pricing of products with
similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what
competitors products' selling prices are on a stand-alone basis, the Company is not typically able to determine TPE.
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If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of
allocating the arrangement by considering several external and internal factors including, but not limited to, pricing practices,
similar product offerings, margin objectives, geographies in which we offer our products and services, internal costs,
competition, and product life cycle. The determination of ESP is made through consultation with and approval by our
management, taking into consideration our go-to-market strategies. We have established processes to update ESP for each
element, when appropriate, to ensure that it reflects recent pricing experience.
For multiple-element arrangements comprised only of software products and related services, a portion of the total purchase
price is allocated to the undelivered elements, primarily installation services, PCS, consulting and training services, using
VSOE of fair value of the undelivered elements. The remaining portion of the total transaction value is allocated to the
delivered software, referred to as the residual method. 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.
For multiple-element arrangements that contain software and software related elements 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 multiple-element arrangements that are comprised of a combination of hardware and software elements, the total
transaction value is bifurcated between the hardware elements and the software elements that are not essential to the
functionality of the hardware, based on the relative selling prices of the hardware elements and the software elements as a
group. Revenue is then recognized for the hardware and hardware-related services following the hardware revenue recognition
methodology outlined above and revenue for the software and software-related services is recognized following the residual
method or ratably over the PCS period if VSOE for PCS does not exist.
PCS revenue is 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.
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 multiple-element software arrangements that do not contain a stated renewal rate, revenue associated with
the entire bundled arrangement is recognized ratably over the PCS term. Multiple-element software arrangements 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 customer expectations. We have concluded that our software products have estimated
economic lives ranging from five to seven years.
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.
Some of our arrangements require significant customization of the product to meet the particular requirements of the customer.
For these arrangements, revenue is recognized under contract accounting methods, 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 the event some level of profitability on a contract cannot be assured, the completed-contract method of revenue recognition
is applied.
Our SaaS multiple-element arrangements are typically comprised of subscription and support fees from customers accessing
our software, set-up fees, and fees for consultation services. We do not provide the customer the contractual right to take
possession of the software at any time during the hosting period under these arrangements. We recognize revenue for
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subscription and support services over the contract period originating when the subscription service is made available to the
customer and the contractual hosting period has commenced. The initial set-up fees are recognized over the longer of the initial
contract period or the period the customer is expected to benefit from payment of the up-front fees. Revenue from consultation
services is generally recognized as services are completed.
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 an
arrangement containing software elements obligates us to deliver specified future software products or upgrades, revenue
related to the software elements under the arrangement is initially deferred and is recognized only when the specified future
software products or upgrades are delivered, or when the obligation to deliver specified future software products expires,
whichever occurs earlier.
We record provisions for estimated product returns 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.
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) since we do not expect our
resellers or OEMs to carry inventory of our products. 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.
In instances where revenue is derived from sale of third-party vendor services and we are a principal in the transaction, we
generally record revenue on a gross basis and record costs related to a sale within cost of revenue. Though uncommon, in cases
where we act as an agent between the customer and the vendor, revenue is recorded net of costs.
Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the
contracts should be combined and accounted for as a single arrangement. We record reimbursements from customers for out-of-
pocket expenses as revenue. 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. 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 is classified in its entirety as current or long-term based on whether the related revenue will be
recognized within twelve months of the origination date of the arrangement.
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 the 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.
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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.
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 Israel Office of the Chief Scientist ("OCS") that fund a portion of our research and
development expenditures. We currently 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.
We also periodically derive benefits from participation in certain government-sponsored programs in other jurisdictions, for the
support of research and development activities conducted in those locations.
Software Development Costs
Costs incurred to acquire or develop software to be sold, leased or otherwise marketed are capitalized after technological
feasibility is established, and continue to be capitalized through the general release of the related software product.
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.
Internal-Use Software
We capitalize costs associated with internal-use software systems that have reached the application development stage. These
capitalized costs include external direct costs utilized in developing or obtaining the applications and expenses for employees
who are directly associated with the development of the applications. Capitalization of such costs begins when the preliminary
project stage is complete and continues until the project is substantially complete and is ready for its intended purpose.
Capitalized costs of computer software developed for internal use are amortized over estimates useful lives of four years on a
straight-line basis, which best represents the pattern of the software’s use.
Income Taxes
We account for income taxes under the asset and liability method which includes the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements.
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 deferred taxes. 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, and
establish valuation allowances 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.
We use a two-step approach to recognizing and measuring uncertain tax positions. 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
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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 represent our unrecognized income tax benefits, which we either record as a
liability or as a reduction of deferred tax assets. Our policy is to include interest (expense and/or income) and penalties related
to unrecognized income tax benefits as a component of income tax expense.
Functional Currency and Foreign Currency Transaction Gains and Losses
The functional currency for most of our foreign subsidiaries is the respective local currency, of which the notable exceptions
are our subsidiaries in Israel and Canada, whose functional currencies are the U.S. dollar. Most of our revenue and materials
purchased from suppliers are denominated in or linked to the U.S. dollar. Transactions denominated in currencies other than a
functional currency (primarily compensation and benefits costs of foreign operations) are converted to the functional currency
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. We recorded net foreign currency losses of $6.1 million, and net foreign currency gains of $1.0
million and $1.4 million for the years ended January 31, 2014, 2013 and 2012, respectively.
For consolidated reporting purposes, in those instances where a foreign subsidiary has a functional currency other than the U.S.
dollar, revenue and expenses are translated into U.S. dollars using average exchange rates for the reporting period, while assets
and liabilities are translated into U.S. dollars using period-end rates. The effects of foreign currency translation adjustments are
included in stockholders’ equity as a component of accumulated other comprehensive income (loss) in the accompanying
consolidated balance sheets.
Stock-Based Compensation
We recognize the cost of employee services received in exchange for awards of equity instruments 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. We recognize the fair value of the award as compensation expense over the period during which an employee is
required to provide service in exchange for the award.
Net Income Per Common Share Attributable to Verint Systems Inc.
Shares used in the calculation of basic net income per common share are based on the weighted-average number of common
shares outstanding during the accounting period. Shares used in the calculation of basic net income per common share include
vested but unissued shares underlying awards of restricted stock units when all necessary conditions for earning those shares
have been satisfied at the award's vesting date, but exclude unvested shares of restricted stock because they are contingent upon
future service conditions. Shares used in the calculation of diluted net income per common share are based on the weighted-
average number of common shares outstanding, adjusted for the assumed exercise or vesting 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 common share also include the assumed conversion of our Series A Convertible Perpetual Preferred Stock
("Preferred Stock"), if dilutive, for periods prior to cancellation of the Preferred Stock on February 4, 2013 in connection with
the CTI Merger. In periods for which we report a net loss, basic net loss per common share and diluted net loss per common
share are identical since the effect of potential common shares is anti-dilutive and therefore excluded.
Recent Accounting Pronouncements
New Accounting Pronouncements Implemented
In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2012-02,
Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies how
entities test indefinite-lived intangible assets for impairment and improves consistency in impairment testing requirements
among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it
is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in
which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, these amended
standards eliminate the requirement to perform quantitative impairment testing. The amended guidance was effective for annual
and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. Our
adoption of this guidance effective February 1, 2013 did not materially impact our consolidated financial statements.
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In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income, which contained amended standards regarding disclosure requirements for
items reclassified out of accumulated other comprehensive income ("AOCI"). These amended standards require the disclosure
of information about the amounts reclassified out of AOCI by component and, in addition, require disclosure, either on the face
of the financial statements or in the notes, of significant amounts reclassified out of AOCI by the respective line items of net
income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For
amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other
disclosures that provide additional details about those amounts. These amended standards do not change the current
requirements for reporting net income or other comprehensive income in the consolidated financial statements. These amended
standards were effective for us on February 1, 2013, and adoption of this guidance did not materially impact our consolidated
financial statements. The disclosures required by the amended standards appear in Note 10, "Stockholders' Equity".
In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective
Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, permitting entities
to use the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in
addition to the U.S. Treasury rate and the London Interbank Offered Rate (LIBOR). The amendments also remove the
restriction on using different benchmark rates for similar hedges. The amendments in this ASU were effective prospectively for
qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We adopted the amendments in this
ASU effective July 17, 2013, and the initial adoption of the amendments in this ASU did not impact our consolidated financial
statements.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires
that entities with an unrecognized tax benefit and a net operating loss carryforward or similar tax loss or tax credit carryforward
in the same jurisdiction as the uncertain tax position present the unrecognized tax benefit as a reduction of the deferred tax asset
for the loss or tax credit carryforward rather than as a liability, when the uncertain tax position would reduce the loss or tax
credit carryforward under the tax law, thereby eliminating diversity in practice regarding this presentation issue. We adopted
ASU No. 2013-11 in our consolidated balance sheet as of January 31, 2014, but did not retrospectively apply the standard to
our consolidated balance sheet as of January 31, 2013. The adoption of this standard did not materially impact our consolidated
financial statements.
New Accounting Pronouncements To Be Implemented
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the
Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or
of an Investment in a Foreign Entity. This new standard is intended to resolve diversity in practice regarding the release into net
income of a cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity.
ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after
December 15, 2013. We are currently reviewing this standard, but we do not anticipate that its adoption will have a material
impact on our consolidated financial statements, absent any material transactions involving the derecognition of subsidiaries or
groups of assets within a foreign entity.
2. NET INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
The following table summarizes the calculation of basic and diluted net income per common share attributable to Verint
Systems Inc. for the years ended January 31, 2014, 2013, and 2012:
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(in thousands, except per share amounts)
Net income
Net income attributable to noncontrolling interest
Net income attributable to Verint Systems Inc.
Dividends on Preferred Stock
Net income attributable to Verint Systems Inc. for basic net income per
common share
Dilutive effect of dividends on Preferred Stock
Net income attributable to Verint Systems Inc. for diluted net income per
common share
Weighted-average shares outstanding:
Basic
Dilutive effect of employee equity award plans
Dilutive effect of assumed conversion of Preferred Stock
Diluted
Net income per common share attributable to Verint Systems Inc.:
Basic
Diluted
Year Ended January 31,
2013
2012
2014
$
58,776
5,019
53,757
(174)
53,583
—
$
$
58,804
4,802
54,002
(15,472)
38,530
—
40,625
3,632
36,993
(14,790)
22,203
—
$
53,583
$
38,530
$
22,203
52,967
911
—
53,878
39,748
564
—
40,312
38,419
1,080
—
39,499
$
$
1.01
0.99
$
$
0.97
0.96
$
$
0.58
0.56
We excluded the following weighted-average common shares underlying stock-based awards and the assumed conversion of
our Preferred Stock from the calculations of diluted net income per common share because their inclusion would have been
anti-dilutive:
(in thousands)
Common shares excluded from calculation:
Stock options and restricted stock-based awards
Convertible Preferred Stock
Year Ended January 31,
2013
2012
2014
247
123
749
11,043
813
10,625
Our Preferred Stock was canceled in conjunction with the CTI Merger on February 4, 2013. The weighted-average common
shares underlying the assumed conversion of the Preferred Stock for the year ended January 31, 2014 in the table above reflect
the Preferred Stock as outstanding for only four days during the year ended January 31, 2014. Further details regarding the CTI
Merger appear in Note 4, "Merger with CTI".
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents and short-term investments as of January 31, 2014 and 2013:
(in thousands)
Cash and cash equivalents:
Cash and bank time deposits
Money market funds
Commercial paper
Total cash and cash equivalents
Short-term investments:
Commercial paper and corporate debt securities (available-
for-sale)
Bank time deposits
Total short-term investments
January 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Cost Basis
314,604
14,023
49,986
378,613
9,402
22,643
32,045
$
$
$
$
$
$
$
$
75
— $
—
5
5
$
4
—
4
$
$
— $
—
—
— $
314,604
14,023
49,991
378,618
— $
—
— $
9,406
22,643
32,049
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(in thousands)
Cash and cash equivalents:
Cash and bank time deposits
Money market funds
Commercial paper
Total cash and cash equivalents
Short-term investments:
Bank time deposits
Total short-term investments
January 31, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Cost Basis
$
$
$
$
143,888
62,085
4,000
209,973
13,593
13,593
$
$
$
$
— $
—
—
— $
— $
— $
— $
—
—
— $
143,888
62,085
4,000
209,973
— $
— $
13,593
13,593
Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with
maturities of greater than three months, or without specified maturity dates which we intend to hold for periods in excess of
three months.
As of January 31, 2014, all of our available-for-sale investments had contractual maturities of less than one year.
We report our available-for-sale securities at fair value, based on quoted market prices or other readily available market
information. Unrealized gains and losses, net of applicable income taxes, are included in accumulated other comprehensive
income (loss) within stockholders’ equity on our consolidated balance sheets. Realized gains or losses, if applicable, are
recorded in other income (expense), net in our consolidated statement of operations, using the specific identification method.
Gains and losses on sales of available-for-sale securities during the year ended January 31, 2014 were not significant. We did
not realize any gains or losses on sales of available-for-sale securities during the years ended January 31, 2013 and 2012.
During the year ended January 31, 2014, proceeds from sales and maturities of available-for-sale securities were $178.8
million. Proceeds from sales and maturities of available-for-sale securities were not significant for the years ended January 31,
2013 and 2012.
We periodically review our investment portfolios to determine if any investment is other-than-temporarily impaired due to
changes in credit risk or other potential valuation concerns. We believe that the investments we held at January 31, 2014 were
not other-than-temporarily impaired. We held no available-for-sale securities with unrealized losses at January 31, 2014. We do
not intend to sell our available-for-sale securities and it is not more likely than not that we will be required to sell them before
recovery at par, which may be at maturity.
4. MERGER WITH CTI
Overview
On August 12, 2012, we entered into an agreement and plan of merger agreement with CTI (the "CTI Merger Agreement"),
providing for the merger of CTI with and into our new, wholly owned subsidiary (the "CTI Merger") upon the terms and
subject to the conditions set forth in the CTI Merger Agreement. Pursuant to the terms of the CTI Merger Agreement, the
completion of the CTI Merger was contingent upon, among other things, CTI's completion of a distribution to its shareholders
of substantially all of its assets other than its interests in us (the "Comverse share distribution") or other sale or disposition by
CTI of these assets. On October 31, 2012, CTI completed the Comverse share distribution in which it distributed all of the
outstanding shares of common stock of its subsidiary, Comverse, Inc. ("Comverse"), to its shareholders. As a result of the
Comverse share distribution, Comverse became an independent public company and ceased to be a wholly owned subsidiary of
CTI.
Following the satisfaction of the various conditions precedent to closing the CTI Merger, including the requisite approval of the
CTI Merger Agreement and the transactions contemplated by that agreement by our stockholders and the shareholders of CTI,
the CTI Merger was completed on February 4, 2013. As of January 31, 2013, prior to the effective time of the CTI Merger, CTI
held approximately a 53.5% beneficial ownership position in us, assuming conversion of all of our Preferred Stock then held by
CTI, into shares of our common stock. The CTI Merger eliminated CTI's majority ownership and control of us.
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At the closing of the CTI Merger, each issued and outstanding share of CTI common stock was converted into the right to
receive new shares of our common stock at an exchange ratio of 0.1298 shares of our common stock for each share of CTI
common stock, pursuant to which approximately 28.6 million newly issued shares of our common stock were exchanged for
approximately 220.0 million issued and outstanding shares of CTI common stock. In addition, the 16.3 million shares of our
common stock and all shares of our Preferred Stock held by CTI at the time of the CTI Merger were canceled, resulting in
approximately 12.3 million incremental shares of our common stock outstanding upon completion of the CTI Merger.
The 28.6 million shares of our common stock issued to CTI shareholders in the CTI Merger were comprised of the following:
•
•
•
•
16.3 million shares in exchange for the same number of shares held by CTI at the time of the CTI Merger.
11.2 million shares in exchange for all shares of our Preferred Stock held by CTI at the time of the CTI Merger,
calculated using the $366.1 million liquidation preference of the Preferred Stock at the CTI Merger date and a
conversion price of $32.66 per share.
0.8 million shares determined by dividing a $25.0 million "Target Amount" by $32.78, the average of the daily volume
weighted average of the trading prices of our common stock during the 20 consecutive trading days ending on January
31, 2013. The $25.0 million "Target Amount" was determined in accordance with the CTI Merger Agreement and was
based on CTI's successful distribution of their Comverse subsidiary to CTI's shareholders, as discussed below, on
October 31, 2012.
0.3 million shares determined by dividing CTI's $9.9 million positive net worth (as defined in the CTI Merger
Agreement) at the effective date of the CTI Merger, by $32.78, the average of the daily volume weighted average of the
trading prices of our common stock during the 20 consecutive trading days ending on January 31, 2013. The maximum
allowable CTI positive net worth for which consideration was to be paid in the CTI Merger was $10.0 million.
Holders of shares of our common stock immediately prior to the completion of the CTI Merger, other than CTI, continued to
own their existing shares, which were not affected by the CTI Merger.
The CTI Merger qualified as a tax-free reorganization for U.S. federal income tax purposes.
Several agreements between Verint and CTI were executed concurrently with the CTI Merger Agreement, including a Voting
Agreement and a Governance and Repurchase Rights Agreement, which terminated upon completion of the CTI Merger on
February 4, 2013. These agreements governed certain activities of the parties prior to the CTI Merger, and also provided for
certain rights and obligations in the event that the CTI Merger Agreement was terminated.
During the years ended January 31, 2014 and 2013, we incurred expenses associated with this matter of $0.6 million and $16.1
million, respectively, consisting primarily of legal and other professional fees, which have been expensed as incurred and are
reflected within selling, general and administrative expenses.
As noted previously, on October 31, 2012, CTI completed the spin-off of Comverse as an independent, publicly traded
company, accomplished by means of a pro rata distribution of 100% of Comverse's outstanding common shares to CTI's
shareholders. Following the Comverse share distribution, Comverse and CTI operated independently, and neither had any
ownership interest in the other. In order to govern certain ongoing relationships between CTI and Comverse after the Comverse
share distribution and to provide mechanisms for an orderly transition, CTI and Comverse entered into a Distribution
Agreement, Transition Services Agreement, Tax Disaffiliation Agreement and Employee Matters Agreement in connection with
the Comverse share distribution.
The Distribution Agreement, among other things, provided for the allocation between CTI and Comverse of various assets,
liabilities and obligations attributable to periods prior to the Comverse share distribution. Under the Distribution Agreement,
Comverse agreed to indemnify CTI and its affiliates (including Verint following the CTI Merger) against certain losses arising
as a result of the CTI Merger and the Comverse share distribution. Certain of Comverse's indemnification obligations are
capped at $25.0 million and certain obligations are uncapped. Pursuant to the terms of the Distribution Agreement, at the
closing of the CTI Merger, CTI placed $25.0 million of cash into an escrow account to support indemnification claims to the
extent made against Comverse by CTI and its affiliates (including Verint after the CTI Merger). The balance remaining in such
escrow account on August 4, 2014 (18 months after the closing of the CTI Merger), if any, will be released to Comverse. The
escrow account cannot be used for claims related to an Israeli option holder lawsuit, details of which appear in Note 17,
"Commitments and Contingencies".
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Under the Transition Services Agreement, each of Comverse and CTI (including Verint after the CTI Merger) may provide the
other with certain administrative services on an interim basis for agreed upon fees. The Tax Disaffiliation Agreement governs
rights, responsibilities and obligations of CTI and Comverse after the Comverse share distribution with respect to tax liabilities
and benefits, tax attributes, tax contests and other tax matters. The Employee Matters Agreement allocated liabilities and
responsibilities relating to CTI and Comverse employee compensation and benefit plans.
Consolidated Financial Statement Impact
For financial reporting purposes, the CTI Merger was accounted for as our acquisition of CTI in a combination of entities under
common control. We are the continuing reporting entity. Common control transactions are transfers and exchanges between
entities that are under the control of the same parent, or are transactions in which all of the combining entities are controlled by
the same party or parties before and after the transaction and that control is not transitory. When accounting for a transfer of
assets or exchange of shares between entities under common control, the entity receiving the net assets or the equity interests
recognizes the assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of
the transfer.
Following the October 31, 2012 Comverse share distribution, the net assets of CTI consisted primarily of its controlling equity
interests in Verint, as well as certain residual cash and cash equivalents and other sundry net assets. In addition, CTI had net
operating loss ("NOL") carryforwards for income tax reporting purposes, and other tax attributes. No CTI employees,
operations or business processes moved to the combined company in the CTI Merger. As a result, our existing net assets and
operations represent the vast majority of the net assets and all of the operations of the combined company.
As a result of the CTI Merger, our consolidated stockholders' equity was adjusted to reflect the $285.5 million carrying value of
our Preferred Stock, all of which was held by CTI, and the $14.1 million carrying value of CTI's net assets (other than its equity
interests in us) at February 4, 2013, as increases to our additional paid-in capital. Prior to the CTI Merger, our Preferred Stock
had been classified as mezzanine equity on our consolidated balance sheet. The majority of CTI's net assets (other than its
equity interests in us) at February 4, 2013 consisted of cash and cash equivalents.
As noted above, CTI's net assets also included net deferred tax assets primarily relating to CTI's NOL carryforwards for income
tax purposes. The net deferred tax assets were fully offset by unrecognized tax benefits and valuation allowances. Also included
in CTI's net assets were $15.8 million of liabilities primarily related to certain unrecognized tax benefits (not offsetting NOL
carryforwards) and accrued penalties and interest and corresponding indemnification assets totaling the same amount,
recognizing Comverse's contractual obligation under the Tax Disaffiliation Agreement to indemnify us for these liabilities.
5. BUSINESS COMBINATIONS
On February 4, 2014, we completed the acquisition of KANA (as defined in Note 19, "Subsequent Events"), a leading global
provider of on-premises and cloud-based solutions which create differentiated, personalized, and integrated customer
experiences for large enterprises and mid-market organizations.
On March 31, 2014, we completed the acquisition of UTX (as defined in Note 19, "Subsequent Events"), a provider of certain
mobile device tracking solutions for security applications.
Please refer to Note 19, "Subsequent Events", for information regarding these business combinations.
Year Ended January 31, 2014
On February 4, 2013, we completed the CTI Merger, details for which appear in Note 4, "Merger with CTI".
Other Business Combinations
During the year ended January 31, 2014, in addition to the CTI Merger, we completed five business combinations:
• On August 1, 2013, we acquired certain technology and other assets for use in our Communications Intelligence operating
segment in a transaction that qualified as a business combination.
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• On October 4, 2013, we acquired all of the outstanding shares of a privately held company specializing in performance
improvements in customer contact centers, based in the Europe, the Middle East and Africa ("EMEA") region, that is being
integrated into our Enterprise Intelligence operating segment.
• On November 6, 2013, we acquired certain technology and other assets for use in our Communications Intelligence
operating segment in a transaction that qualified as a business combination.
• On December 6, 2013, we acquired all of the outstanding shares of a privately held management consulting and
performance management company, based in the Americas region, that is being integrated into our Enterprise Intelligence
operating segment.
• On December 19, 2013, we acquired all of the outstanding shares of a privately held provider of fraud prevention and
identity authentication solutions, based in the Americas region, that is being integrated into our Enterprise Intelligence
operating segment.
These business combinations were not individually material to our consolidated financial statements.
We have included the financial results of these business combinations in our consolidated financial statements from their
respective acquisition dates.
The combined consideration for these business combinations was approximately $46.1 million, including $34.2 million of
combined cash paid at the closings. We also agreed to make potential additional cash payments to the respective former
shareholders or asset owners aggregating up to approximately $27.4 million, contingent upon the achievement of certain
performance targets over periods ending through January 2019. The combined fair values of these contingent consideration
obligations were estimated to be $11.9 million as of the respective acquisition dates.
The $11.9 million acquisition date combined fair values of the contingent consideration obligations were estimated based on
probability adjusted present values of the consideration expected to be transferred using significant inputs that are not
observable in the market. Key assumptions used in these estimates included probability assessments with respect to the
likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each
reporting date, we revalue the contingent consideration obligations to their fair values and record increases and decreases in fair
value within selling, general and administrative expenses in our consolidated statements of operations. Changes in the fair
value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability
assumptions with respect to the likelihood of achieving the performance targets. For the year ended January 31, 2014, we
recorded a charge of $0.3 million within selling, general and administrative expenses for changes in the fair values of these
contingent consideration obligations, which primarily reflected the impacts of revised expectations of achieving the
performance targets. As of January 31, 2014, the aggregate fair value of the contingent consideration obligations associated
with these acquisitions was $12.1 million, of which $5.3 million was recorded within accrued expenses and other current
liabilities, and $6.8 million was recorded within other liabilities.
The purchase prices were allocated to the tangible assets and intangible assets acquired and liabilities assumed based on their
estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair
values assigned to identifiable intangible assets acquired in these business combinations were determined primarily by using
the income approach, which discounts expected future cash flows attributable to these assets to present value using estimates
and assumptions determined by management. The acquired identifiable finite-lived intangible assets are being amortized
primarily on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their
estimated useful lives.
Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and
technologies, and the addition of skilled, assembled workforces. Of the $19.0 million of goodwill associated with these
business combinations, $18.3 million and $0.7 million was assigned to our Enterprise Intelligence and Communications
Intelligence segments, respectively. For income tax purposes, $5.3 million of this goodwill is deductible and $13.7 million is
not deductible.
Revenue and the impact on net income attributable to these acquisitions for the year ended January 31, 2014 were not
significant.
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Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these
acquisitions, totaled $2.7 million for the year ended January 31, 2014. All transaction and related costs were expensed as
incurred and are included in selling, general and administrative expenses.
The following table sets forth the components and the allocations of the combined purchase prices for the business
combinations completed during the year ended January 31, 2014, other than the CTI Merger. These purchase price allocations
have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes
available during the respective measurement periods (up to one year from the respective acquisition dates).
(in thousands)
Components of Purchase Prices:
Cash
Fair value of contingent consideration
Total purchase prices
Allocation of Purchase Prices:
Net tangible assets:
Accounts receivable
Other current assets
Other assets
Current and other liabilities
Deferred revenue
Deferred income taxes - current and long-term
Net tangible assets
Identifiable intangible assets:
Developed technology
Customer relationships
Trademarks and trade names
Total identifiable intangible assets
Goodwill
Total purchase prices
Amount
34,229
11,907
46,136
3,687
3,050
275
(2,717)
(1,310)
(2,272)
713
14,009
11,714
649
26,372
19,051
46,136
$
$
$
$
For these acquisitions, customer relationships, developed technology, and trademarks and trade names were assigned estimated
useful lives of from six years to nine years, from three years to five years, and from one year to two years, respectively, the
weighted average of which is approximately 5.9 years.
The pro forma impact of these acquisitions was not material to our historical consolidated operating results and is therefore not
presented.
Year Ended January 31, 2013
We did not complete any business combinations during the year ended January 31, 2013.
Year Ended January 31, 2012
Vovici Corporation
On August 4, 2011, we acquired all of the outstanding shares of Vovici Corporation ("Vovici"), a U.S.-based provider of online
survey management and enterprise feedback solutions. This acquisition enhanced our Enterprise Intelligence product suite to
include comprehensive voice of the customer software and services offerings, designed to help organizations implement a
single-vendor solution set for collecting, analyzing, and acting on customer insights. We have included the financial results of
Vovici in our consolidated financial statements since August 4, 2011.
We acquired Vovici for total consideration of $66.1 million, including $56.1 million of cash paid at closing, $0.4 million of
which was used to repay Vovici's bank debt. In addition, the consideration also included the exchange of certain unvested
Vovici stock options for options to acquire approximately 42,000 shares of our common stock with fair values totaling $1.0
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million, of which $0.1 million represented compensation for pre-acquisition services and was included in the consideration
transferred and $0.9 million represented compensation for services to be performed subsequent to August 4, 2011, to be
recognized as post-acquisition stock-based compensation expense over the remaining vesting periods of the awards. Also
included in the consideration was $9.9 million for the fair value of potential additional cash payments to the former Vovici
shareholders of up to approximately $19.1 million, payment of which was contingent upon the achievement of certain
performance targets over the period from the acquisition date through January 31, 2013.
The $9.9 million acquisition date fair value of the contingent consideration obligation was estimated based on a probability
adjusted present value of the consideration expected to be transferred using significant inputs that are not observable in the
market. Key assumptions used in this estimate included probability assessments with respect to the likelihood of achieving the
performance targets and discount rates consistent with the level of risk of achievement. At each reporting date prior to January
31, 2013, we revalued the contingent consideration obligation to its fair value and recorded increases and decreases in fair
value within selling, general and administrative expenses in our consolidated statements of operations. Changes in the fair
value of the contingent consideration obligation resulted from changes in discount periods and rates, and changes in probability
assumptions with respect to the likelihood of achieving the performance targets.
As of January 31, 2013, $6.4 million had been accrued for the actual contingent consideration earned and expected to be paid to
the former Vovici shareholders under this arrangement. This liability changed by a negligible amount during the three months
ended April 30, 2013, and payment of this amount was made during the three months ended July 31, 2013. No contingent
consideration had been paid to the former Vovici shareholders prior to this payment. We have no further contingent
consideration obligations for this acquisition.
For the years ended January 31, 2013 and 2012, we recorded benefits of $0.8 million and $2.7 million, respectively, within
selling, general and administrative expenses for changes in the fair value of the Vovici contingent consideration obligation,
which primarily reflected the impacts of revised expectations of achieving the performance targets.
The purchase price was allocated to the tangible assets and intangible assets acquired and liabilities assumed based on their
estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair
values assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which
discounts expected future cash flows to present value using estimates and assumptions determined by management. The
acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern
in which the assets are utilized, over their estimated useful lives.
Among the factors contributing to the recognition of goodwill in this transaction were synergies in products and technologies,
and the addition of a skilled, assembled workforce. This goodwill was assigned to our Enterprise Intelligence segment and was
not deductible for income tax purposes.
In connection with the purchase price allocation, the estimated fair value of support obligations assumed from Vovici was
determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs relating
to fulfilling the support obligations plus a normal profit margin, which approximates the amount that we believe would be
required to pay a third party to assume these obligations. The estimated costs to fulfill the support obligation were based on the
historical direct costs related to providing support services. These estimated costs did not include any costs associated with
selling efforts or research and development or the related margins on these costs. Profit associated with selling efforts was
excluded because the selling effort on the support contracts concluded prior to the August 4, 2011 acquisition date. The
estimated profit margin was 15%, which we believe best approximated our operating profit margin to fulfill these support
obligations. As a result, in allocating the purchase price, we recorded an adjustment to reduce the $5.3 million carrying value of
Vovici’s deferred revenue to $2.3 million, representing the estimated fair value of the support obligations assumed. As former
Vovici customers have renewed their support contracts, we have recognized revenue at the full contract value over the terms of
the contracts.
Revenue attributable to Vovici from August 4, 2011 through January 31, 2012 was $5.0 million. The impact of Vovici on net
income for that period was not significant.
Transaction and related costs, consisting primarily of professional fees and integration expenses directly related to the
acquisition of Vovici, totaled $0.5 million and $3.4 million for the years ended January 31, 2013 and 2012, respectively. All
transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
Global Management Technologies
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On October 7, 2011, we acquired all of the outstanding shares of Global Management Technologies ("GMT"), a U.S.-based
provider of workforce management solutions whose software and services are widely used by organizations, particularly in
retail branch banking environments. This acquisition added key functionality to our Enterprise Intelligence product suite. We
have included the financial results of GMT in our consolidated financial statements since October 7, 2011.
We acquired GMT for total consideration of $36.6 million, including $24.6 million of cash paid at closing. In addition, the
consideration included $12.0 million for the fair value of potential additional cash payments to the former GMT shareholders of
up to approximately $17.4 million, payment of which was contingent upon the achievement of certain performance targets over
the period from the acquisition date through January 31, 2014.
The $12.0 million acquisition date fair value of the contingent consideration obligation was estimated based on a probability
adjusted present value of the consideration expected to be transferred using significant inputs that are not observable in the
market. Key assumptions used in this estimate included probability assessments with respect to the likelihood of achieving the
performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, we revalue the
contingent consideration obligation to its fair value and record increases and decreases in fair value within selling, general and
administrative expenses in our consolidated statements of operations. Increases or decreases in the fair value of the contingent
consideration obligation may result from changes in discount periods and rates, and changes in probability assumptions with
respect to the likelihood of achieving the performance targets.
As of January 31, 2013, the fair value of the GMT contingent consideration was $2.8 million. During the year ended
January 31, 2014, we reached an agreement to settle our potential obligations under the GMT contingent consideration
arrangement with respect to the former GMT securityholders in exchange for a payment of $2.7 million. This payment, which
was made during the year ended January 31, 2014, eliminated any remaining contingent consideration obligations to these
former securityholders. No contingent consideration had been paid under the GMT contingent consideration arrangement prior
to this payment. Certain other participants under the GMT contingent consideration arrangement, who were not GMT
securityholders, were eligible to earn contingent consideration for the period ended January 31, 2014, none of which was
earned. We have no further contingent consideration obligations for this acquisition.
For the years ended January 31, 2014, 2013 and 2012, we recorded benefits of $0.1 million, $6.8 million and $2.4 million,
respectively, within selling, general and administrative expenses for changes in the fair value of the GMT contingent
consideration obligation, which primarily reflected the impacts of revised expectations of achieving the performance targets.
The purchase price was allocated to the tangible assets and intangible assets acquired and liabilities assumed based on their
estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair
values assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which
discounts expected future cash flows to present value using estimates and assumptions determined by management. The
acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern
in which the assets are utilized, over their estimated useful lives.
Among the factors contributing to the recognition of goodwill in this transaction were synergies in products and technologies,
and the addition of a skilled, assembled workforce. This goodwill was assigned to our Enterprise Intelligence segment and was
deductible for income tax purposes.
In connection with the purchase price allocation, the estimated fair value of support obligations assumed from GMT was
determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs relating
to fulfilling the obligations plus a normal profit margin, which approximates the amount that we believe would be required to
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 support services. These estimated costs did not include any costs associated with
selling efforts or research and development or the related margins on these costs. Profit associated with selling efforts was
excluded because the selling effort on the support contracts was concluded prior to October 7, 2011. The estimated profit
margin was 20%, which we believe best approximated our operating profit margin to fulfill these support obligations. As a
result, in allocating the purchase price, we recorded an adjustment to reduce the $4.3 million carrying value of GMT’s deferred
revenue to $1.2 million, representing the estimated fair value of the support obligations assumed. As former GMT customers
have renewed their support contracts, we have recognized revenue at the full contract value over the terms of the contracts.
Revenue and the impact on net income attributable to GMT from October 7, 2011 through January 31, 2012 were not
significant.
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Transaction and related costs, consisting primarily of professional fees and integration expenses directly related to the
acquisition of GMT, totaled $0.4 million and $1.6 million for the years ended January 31, 2013 and 2012, respectively. All
transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
Other Business Combinations
During the year ended January 31, 2012, we executed the following additional business combinations:
• On March 30, 2011, we acquired all of the outstanding shares of a privately held company, based in Israel, that has been
integrated into our Video Intelligence operating segment. This acquisition broadened our Video Intelligence product line.
• On August 2, 2011, we acquired all of the outstanding shares of a privately held provider of communications intelligence
solutions, data retention services, and network performance management, based in the Americas region. This acquisition
expanded our Communications Intelligence product portfolio and increased our presence in this region.
• On November 1, 2011, we acquired certain technology and other assets for use in our Communications Intelligence
operating segment in a transaction that qualified as a business combination.
• On November 10, 2011, we acquired certain technology and other assets for use in our Enterprise Intelligence operating
segment in a transaction that qualified as a business combination.
• On January 5, 2012, we acquired all of the outstanding shares of a privately held provider of web intelligence technology,
based in the EMEA region, that has been integrated into our Communications Intelligence operating segment.
The combined consideration for these business combinations was approximately $55.2 million, including $33.8 million of
combined cash paid at the closings. We also agreed to make potential additional cash payments to the respective former
shareholders or asset owners aggregating up to approximately $41.0 million, payment of which is contingent upon the
achievement of certain performance targets over periods ending through January 31, 2015. The combined fair values of these
contingent consideration obligations were estimated to be $20.5 million as of the respective acquisition dates.
For the years ended January 31, 2014, 2013 and 2012, we recorded net benefits of $2.8 million, charges of $1.4 million, and net
benefits of $0.4 million, respectively, within selling, general and administrative expenses for changes in the aggregate fair
values of the contingent consideration obligations associated with these acquisitions, reflecting the impacts of revised
expectations of achieving the performance targets, as well as decreases in the discount periods since the acquisition dates. As
of January 31, 2014, the aggregate fair value of the contingent consideration obligations associated with these acquisitions was
$5.2 million, of which $4.6 million was recorded within accrued expenses and other current liabilities, and $0.6 million was
recorded within other liabilities. During the years ended January 31, 2014 and 2013, we made payments of $7.8 million and
$5.7 million, respectively, to the former shareholders or asset owners under these arrangements. No such payments were made
during the year ended January 31, 2012.
The purchase prices were allocated to the tangible assets and intangible assets acquired and liabilities assumed based on their
estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair
values assigned to identifiable intangible assets acquired in these business combinations were determined primarily by using
the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined
by management. The acquired identifiable finite-lived intangible assets are being amortized on a straight-line basis, which we
believe approximates the pattern in which the assets are utilized, over their estimated useful lives.
Intangible assets acquired in these business combinations included several IPR&D assets with estimated fair values totaling
$2.5 million. IPR&D assets are considered indefinite-lived intangible assets until the completion or abandonment of the
associated research and development efforts. The fair values of the IPR&D assets were estimated by projecting the costs
required to develop the IPR&D assets into commercially viable products, estimating the resulting net cash flows from the
projects when completed and discounting the net cash flows to their present values. We will amortize these intangible assets
once the projects are complete. Currently, we expect to complete the remaining IPR&D projects during the year ended January
31, 2015. IPR&D assets are subject to impairment testing at least annually, or more frequently if circumstances are identified
indicating the potential for impairment.
Among the factors contributing to the recognition of goodwill in these transactions were synergies in products and
technologies, and the additions of skilled, assembled workforces. Of the $30.5 million of goodwill associated with these
business combinations, $10.1 million was assigned to our Video Intelligence segment and was not deductible for income tax
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purposes, $2.0 million was assigned to our Enterprise Intelligence segment and was not deductible for income tax purposes,
and $18.4 million was assigned to our Communications Intelligence segment, of which $8.3 million was deductible, and $10.1
million was not deductible, for income tax purposes.
Revenue and the impact on net income attributable to these acquisitions for the year ended January 31, 2012 were not
significant.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these
acquisitions, totaled $0.8 million and $5.0 million for the years ended January 31, 2013 and 2012, respectively. All transaction
and related costs were expensed as incurred and are included in selling, general and administrative expenses.
In connection with the foregoing August 2, 2011 Communications Intelligence acquisition, the purchase price allocation
included liabilities for uncertain tax positions and certain other liabilities associated with pre-acquisition business activities of
the acquired company. Based upon our evaluation of these matters, including assessments of additional information obtained
subsequent to the August 2, 2011 acquisition date regarding facts and circumstances that existed as of the acquisition date, the
purchase price allocation for this acquisition included current liabilities of approximately $4.7 million associated with certain
other pre-acquisition business activities of the acquired company and long-term liabilities of approximately $5.2 million
associated with uncertain tax positions of the acquired company. Corresponding indemnification assets of $4.7 million and $5.2
million, respectively, classified as current and long-term in the same manner, were also recorded as components of the purchase
price allocation for this acquisition, recognizing the selling shareholders’ contractual obligation to indemnify us for these pre-
acquisition liabilities and were measured on the same basis as the corresponding liabilities.
As of January 31, 2014 and 2013, the liabilities associated with certain other pre-acquisition business activities of the acquired
company, included within accrued expenses and other current liabilities, were $1.8 million and $3.0 million, respectively, and
the corresponding indemnification assets, reflected within prepaid expenses and other current assets, were also $1.8 million and
$3.0 million, respectively. The changes in these carrying values during the years ended January 31, 2014 and 2013 reflected
derecognition of certain liabilities and corresponding indemnification assets and the impact of foreign currency exchange rate
fluctuations. These changes were offsetting and therefore did not impact our consolidated statement of operations for the year
ended January 31, 2014. Changes in the carrying value of these assets and liabilities also did not impact our consolidated
statements of operations for the years ended January 31, 2013 and 2012.
As of January 31, 2014 and 2013, the liabilities associated with pre-acquisition uncertain tax positions of the acquired company
were $1.5 million and $3.0 million, respectively, and were included within other liabilities. The corresponding indemnification
assets as of January 31, 2014 and 2013 were $0.4 million and $2.6 million, respectively, and were included within other assets.
During the years ended January 31, 2014 and 2013, we met the criteria required to adjust several of these pre-acquisition
uncertain tax positions, and therefore tax liabilities of $1.0 million and $1.1 million for the years ended January 31, 2014 and
2013, respectively, were reversed and reflected as components of the provision for income taxes for those years. Because the
liabilities for the uncertain tax positions were reversed, we also recorded write-offs of the corresponding indemnification assets
for the years ended January 31, 2014 and 2013 of $0.9 million and $1.1 million, respectively, which are included in other
income (expense), net for those years. In addition, during the years ended January 31, 2014 and 2013, based upon our
assessment of the collectibility of the indemnification from the former shareholders of the acquired company, we recognized
impairments of $0.9 million and $0.4 million, respectively, of the indemnification assets associated with these liabilities, which
are included in other income (expense), net for those years. No impairment was recognized for the year ended January 31,
2012. The carrying values of these assets and liabilities were also impacted by foreign currency exchange rate fluctuations.
Purchase Price Allocations
The following table sets forth the components and the allocations of the purchase prices for the acquisitions of Vovici and
GMT, as well as the combined purchase prices for our other individually insignificant acquisitions completed during the year
ended January 31, 2012, reflecting all subsequent purchase price allocation adjustments:
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(in thousands)
Components of Purchase Prices:
Cash
Fair value of contingent consideration
Fair value of stock options
Bank debt, repaid at closing
Other purchase price adjustments
Total purchase prices
Allocation of Purchase Prices:
Net tangible (liabilities) assets:
Accounts receivable
Other current assets
Other assets
Current and other liabilities
Deferred revenue
Bank debt
Deferred income taxes - current and long-term
Net tangible (liabilities) assets
Identifiable intangible assets:
Developed technology
Customer relationships
Trademarks and trade names
In-process research and development assets
Other identifiable intangible assets
Total identifiable intangible assets (1)
Goodwill
Total purchase prices
Vovici
GMT
Other
Acquisitions
55,708
9,900
60
435
—
66,103
1,106
5,398
913
(2,931)
(2,264)
—
(6,021)
(3,799)
11,300
15,400
1,700
—
—
28,400
41,502
66,103
$
$
$
$
24,596
12,000
—
—
—
36,596
512
1,717
483
(1,915)
(1,234)
—
(108)
(545)
7,400
6,200
400
—
—
14,000
23,141
36,596
$
$
$
$
33,835
20,504
—
—
816
55,155
842
15,650
5,579
(15,419)
(944)
(3,330)
186
2,564
9,743
7,040
1,350
2,500
1,421
22,054
30,537
55,155
$
$
$
$
(1) The weighted-average estimated useful life of all finite-lived identifiable intangible assets is 7.5 years.
For the acquisition of Vovici, the acquired developed technology, customer relationships, and trademarks and trade names were
assigned estimated useful lives of six years, ten years, and five years, respectively, the weighted average of which is
approximately 8.1 years.
For the acquisition of GMT, the acquired developed technology, customer relationships, and trademarks and trade names were
assigned estimated useful lives of five years, ten years, and three years, respectively, the weighted average of which is
approximately 7.2 years.
For the other acquisitions, the acquired developed technology, customer relationships, trademarks and trade names, and other
identifiable intangible assets were assigned estimated useful lives of from six years to seven years, from four years to ten years,
from four years to five years, and from three years to four years, respectively, the weighted average of which is approximately
6.7 years.
6.
INTANGIBLE ASSETS AND GOODWILL
Acquisition-related intangible assets consisted of the following as of January 31, 2014 and 2013:
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(in thousands)
Intangible assets with finite lives:
Customer relationships
Acquired technology
Trade names
Non-competition agreements
Distribution network
Backlog
Total intangible assets with finite lives
In-process research and development, with indefinite lives
Total
(in thousands)
Intangible assets with finite lives:
Customer relationships
Acquired technology
Trade names
Non-competition agreements
Distribution network
Backlog
Total intangible assets with finite lives
In-process research and development, with indefinite lives
Total
January 31, 2014
Accumulated
Amortization
Net
Cost
240,208
106,361
13,378
5,514
2,440
386
368,287
1,700
369,987
$
$
(141,714) $
(76,922)
(11,378)
(4,970)
(1,840)
(316)
(237,140)
—
(237,140) $
98,494
29,439
2,000
544
600
70
131,147
1,700
132,847
January 31, 2013
Accumulated
Amortization
Net
Cost
225,321
93,860
12,737
5,516
2,440
843
340,717
2,500
343,217
$
$
(117,903) $
(64,617)
(10,537)
(4,227)
(1,596)
(76)
(198,956)
—
(198,956) $
107,418
29,243
2,200
1,289
844
767
141,761
2,500
144,261
$
$
$
$
The following table presents net acquisition-related intangible assets by reportable segment as of January 31, 2014 and 2013:
(in thousands)
Enterprise Intelligence
Communications Intelligence
Video Intelligence
Total
January 31,
2014
2013
$
$
115,928
14,856
2,063
132,847
$
$
126,341
14,040
3,880
144,261
Total amortization expense recorded for acquisition-related intangible assets was $36.9 million, $39.3 million, and $35.3
million for the years ended January 31, 2014, 2013, and 2012, respectively. The reported amount of net acquisition-related
intangible assets can fluctuate from the impact of changes in foreign exchange rates on intangible assets not denominated in
U.S. dollars.
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
(in thousands)
Years Ending January 31,
2015
2016
2017
2018
2019
2020 and thereafter
Total
86
Amount
36,582
34,343
30,794
13,406
4,885
11,137
131,147
$
$
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During the year ended January 31, 2014, we recorded a $0.5 million acquired intangible asset impairment, which is included
within cost of product revenue. No impairments of acquired intangible assets were recorded during the years ended January 31,
2013 and 2012.
Our in-process research and development assets were acquired during the year ended January 31, 2012, and no impairment
indicators were identified for these assets during the years ended January 31, 2014 and 2013.
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and
identifiable intangible assets acquired. At the acquisition date, goodwill resulting from a business combination is assigned to
those reporting units expected to benefit from the synergies of the combination. Reporting units may either be at, or one level
below, our operating segment level.
Goodwill activity for the years ended January 31, 2014, and 2013, in total and by reportable segment, was as follows:
(in thousands)
Year Ended January 31, 2013:
Goodwill, gross, at January 31, 2012
Accumulated impairment losses through
January 31, 2012
Goodwill, net, at January 31, 2012
Foreign currency translation and other
Goodwill, net, at January 31, 2013
Year Ended January 31, 2014:
Goodwill, gross, at January 31, 2013
Accumulated impairment losses through
January 31, 2013
Goodwill, net, at January 31, 2013
Business combinations
Foreign currency translation and other
Goodwill, net, at January 31, 2014
Balance at January 31, 2014:
Goodwill, gross, at January 31, 2014
Accumulated impairment losses through
January 31, 2014
Goodwill, net, at January 31, 2014
$
$
$
$
$
$
Total
Enterprise
Intelligence
Reportable Segment
Communications
Intelligence
Video
Intelligence
895,623
$
770,298
$
49,111
$
76,214
(66,865)
828,758
1,151
829,909
$
(30,791)
739,507
1,440
740,947
$
—
49,111
(878)
48,233
$
(36,074)
40,140
589
40,729
896,774
$
771,738
$
48,233
$
76,803
(66,865)
829,909
19,051
4,429
853,389
$
(30,791)
740,947
18,339
5,645
764,931
$
—
48,233
712
(1,107)
47,838
$
(36,074)
40,729
—
(109)
40,620
920,254
$
795,722
$
47,838
$
76,694
(66,865)
853,389
$
(30,791)
764,931
$
—
47,838
$
(36,074)
40,620
The results of our goodwill impairment testing as of November 1, 2012 and 2011 indicated that the estimated fair values of all
our reporting units significantly exceeded their carrying values.
Based upon our November 1, 2013 goodwill impairment review, we concluded that the estimated fair values of our Enterprise
Intelligence and Communications Intelligence reporting units significantly exceeded their carrying values. The estimated fair
value of our Video Intelligence reporting unit was approximately 30% greater than its carrying value, and we have therefore
concluded that this reporting unit is at more than remote risk of failing step one of future goodwill impairment tests, and is
therefore at risk of future impairment in the event of significant unfavorable changes in the assumptions used in our impairment
review, including the weighted average cost of capital (discount rate) and growth rates utilized in our discounted cash flow
analysis. Although we believe that our current estimates are reasonable and appropriate, our Video Intelligence reporting unit
competes in a challenging environment and there can be no assurance that the estimates and assumptions made for purposes of
our goodwill impairment test will prove to be accurate predictions of future performance. Delays or declines in spending to
install, upgrade or maintain security intelligence systems, technological changes, new competitors, or changes in buying
patterns from key customers are examples of circumstances that could adversely impact the fair value of our Video Intelligence
reporting unit.
No changes in circumstances or indicators of potential impairment were identified between November 1 and January 31 in each
of the years ended January 31, 2014, 2013 and 2012.
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No goodwill impairment was identified for the years ended January 31, 2014, 2013 and 2012.
7. LONG-TERM DEBT
The following table summarizes our long-term debt at January 31, 2014 and 2013:
(in thousands)
Term loan facility - 2013 Amended Credit Agreement:
Gross borrowings
Unamortized debt discount
Term loan facility - 2011 Credit Agreement:
Gross borrowings
Unamortized debt discount
Other debt
Total debt
Less: current maturities
Long-term debt
January 31,
2014
2013
$
$
645,125
(2,827)
$
—
—
—
—
87
642,385
6,555
635,830
$
576,000
(2,199)
2,888
576,689
5,867
570,822
In April 2011, we entered into a credit agreement (the "2011 Credit Agreement") with our lenders and concurrently terminated a
prior credit agreement. The 2011 Credit Agreement provided for $770.0 million of secured credit facilities, comprised of a
$600.0 million term loan maturing in October 2017 and a $170.0 million revolving credit facility maturing in April 2016,
subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time according to the terms of the
2011 Credit Agreement.
The 2011 Credit Agreement included an original issuance term loan discount of 0.50%, or $3.0 million, resulting in net term
loan proceeds of $597.0 million. This discount was being amortized as interest expense over the term of the term loan using
the effective interest method. We incurred debt issuance costs of $14.8 million associated with the 2011 Credit Agreement,
which were deferred and were classified within other assets, and were being amortized as interest expense over the term of the
2011 Credit Agreement.
On March 6, 2013, we entered into an amendment and restatement agreement with the lenders under the 2011 Credit
Agreement providing for the amendment and restatement of the 2011 Credit Agreement (as amended and restated, the "2013
Amended Credit Agreement"). The 2013 Amended Credit Agreement provided for $850.0 million of senior secured credit
facilities, comprised of (i) $650.0 million of term loans maturing in September 2019 (the "2013 Term Loans") and (ii) a $200.0
million revolving credit facility maturing in March 2018, subject to increase (up to a maximum increase of $300.0 million) and
reduction from time to time according to the terms of the 2013 Amended Credit Agreement.
The 2013 Amended Credit Agreement included an original issuance term loan discount of 0.50%, or $3.3 million, resulting in
net 2013 Term Loans proceeds of $646.7 million. This discount is being amortized as interest expense over the term of the 2013
Term Loans using the effective interest method.
The majority of the proceeds of the 2013 Term Loans were used to repay all $576.0 million of outstanding term loan
borrowings under the 2011 Credit Agreement at the March 6, 2013 closing date of the 2013 Amended Credit Agreement. There
were no outstanding borrowings under the 2011 Credit Agreement's revolving credit facility at the closing date.
On February 3, 2014, in connection with our acquisition of KANA, we borrowed $125.0 million under our revolving credit
facility and, in connection with an amendment to our 2013 Amended Credit Agreement, we incurred $300.0 million of
incremental term loans, both for purposes of funding a portion of the purchase price for KANA. We also executed several
additional amendments on February 3, 2014 and March 7, 2014 to our 2013 Amended Credit Agreement. Please refer to Note
19, "Subsequent Events", for information regarding these transactions.
Through January 31, 2014, loans under the 2013 Amended Credit Agreement incurred interest, payable quarterly or, in the case
of Eurodollar loans with an interest period of three months or shorter, at the end of any interest period, at a per annum rate of, at
our election:
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(a) in the case of Eurodollar loans, the Adjusted LIBO Rate plus 3.00% (or, if our corporate credit ratings are BB- and Ba3
or better, 2.75%). The Adjusted LIBO Rate is the greater of (i) 1.00% per annum and (ii) the product of the LIBO Rate and
Statutory Reserves (both as defined in the 2013 Amended Credit Agreement), and
(b) in the case of Base Rate loans, the Base Rate plus 2.00% (or, if our corporate credit ratings are BB- and Ba3 or better,
1.75%). The Base Rate is the greatest of (i) the administrative agent's prime rate, (ii) the Federal Funds Effective Rate (as
defined in the 2013 Amended Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest
period plus 1.00%.
As of January 31, 2014, the interest rate on the 2013 Term Loans was 4.00%. Including the impact of the 0.50% original
issuance term loan discount and the deferred debt issuance costs, the effective interest rate on the term loan was approximately
4.23% as of January 31, 2014.
On March 7, 2014, as further described in Note 19, "Subsequent Events", the provisions for determining the interest rates
applicable to the 2013 Term Loans and to the revolving credit facility were modified.
Loans under the 2011 Credit Agreement incurred interest, payable quarterly or, in the case of Eurodollar loans with an interest
period of three months or shorter, at the end of any interest period, at a per annum rate of, at our election:
(a) in the case of Eurodollar loans, the Adjusted LIBO Rate plus 3.25% (or, if our corporate credit ratings were at least
BB- and Ba3 or better, 3.00%). The Adjusted LIBO Rate was the greater of (i) 1.25% per annum and (ii) the product of the
LIBO Rate and Statutory Reserves (both as defined in the 2011 Credit Agreement), and
(b) in the case of Base Rate loans, the Base Rate plus 2.25% (or, if our corporate credit ratings were at least BB- and Ba3
or better, 2.00%). The Base Rate was the greatest of (i) the administrative agent’s prime rate, (ii) the Federal Funds
Effective Rate (as defined in the 2011 Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month
interest period plus 1.00%.
We incurred debt issuance costs of approximately $7.5 million, associated with the 2013 Amended Credit Agreement, which
were deferred and are classified within other assets and are being amortized as interest expense over the term of the 2013
Amended Credit Agreement. Of these deferred costs, $5.0 million were associated with the 2013 Term Loans and are being
amortized using the effective interest rate method. Deferred costs associated with the revolving credit facility were $2.5 million
and are being amortized on a straight-line basis.
At the March 6, 2013 closing date of the 2013 Amended Credit Agreement, there were $11.0 million of unamortized deferred
fees and $2.2 million of unamortized original issuance term loan discount associated with the 2011 Credit Agreement. Of the
$11.0 million of unamortized deferred fees, $3.5 million were associated with the revolving credit commitments under the 2011
Credit Agreement provided by lenders that continued to provide revolving credit commitments under the 2013 Amended Credit
Agreement and therefore continued to be deferred, and are being amortized over the term of the 2013 Amended Credit
Agreement. The remaining $7.5 million of unamortized deferred fees and the $2.2 million unamortized original issuance
discount, all of which related to the 2011 term loan, were recorded as a $9.7 million loss on extinguishment of debt for the year
ended January 31, 2014.
Under the 2013 Amended Credit Agreement, we are required to pay a commitment fee equal to 0.50% per annum of the
undrawn portion on the revolving credit facility, payable quarterly, and customary administrative agent and letter of credit fees.
These fees are unchanged from the 2011 Credit Agreement.
The 2013 Amended Credit Agreement requires us to make principal payments of $1.6 million per quarter on the 2013 Term
Loans through August 1, 2019, with the remaining balance due in September 2019. 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 LIBO Rates. The loans are also subject to mandatory prepayment requirements with respect to certain asset
sales, excess cash flows (as defined in the 2013 Amended Credit Agreement), and certain other events. Prepayments are applied
first to the eight immediately following scheduled term loan principal payments, then pro rata to other remaining scheduled
term loan principal payments, if any, and thereafter as otherwise provided in the 2013 Amended Credit Agreement.
As of January 31, 2014, future scheduled principal payments on the 2013 Term Loans are presented in the following table:
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(in thousands)
Years Ending January 31,
2015
2016
2017
2018
2019
2020 and thereafter
Total
Amount
6,500
6,500
6,500
6,500
6,500
612,625
645,125
$
$
We incurred interest on borrowings under our credit facilities of $26.3 million, $27.1 million, and $28.1 million during the
years ended January 31, 2014, 2013 and 2012, respectively. In addition, we recorded $2.2 million, $3.0 million, and $2.8
million during the years ended January 31, 2014, 2013 and 2012, respectively, for amortization of our deferred debt issuance
costs, which is also reported within interest expense on our consolidated statements of operations. Included in the deferred
debt-related cost amortization for the year ended January 31, 2013 was $0.2 million of additional amortization of deferred debt
issuance costs associated with an unscheduled principal repayment in that year. In addition, we recorded $0.5 million, $0.5
million and $0.3 million during the years ended January 31, 2014, 2013 and 2012, respectively, for amortization of original
issuance term loan discounts, which is also reported within interest expense on our consolidated statements of operations.
Included in the original issuance term loan discount amortization for the year ended January 31, 2013 was $0.1 million of
additional amortization of original issuance term loan discount associated with an unscheduled principal repayment in that year.
Our obligations under the 2013 Amended Credit Agreement are guaranteed, in the same manner as under the 2011 Credit
Agreement, by substantially all of our domestic subsidiaries and certain foreign subsidiaries that have elected to be disregarded
for U.S. tax purposes, and are secured, in the same manner as under the 2011 Credit Agreement, by security interests in
substantially all of our and their assets, subject to certain exceptions detailed in the 2013 Amended Credit Agreement and
related ancillary documents.
The 2013 Amended Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this
type, which covenants are substantially similar to those in the 2011 Credit Agreement. These covenants include limitations on
us and our subsidiaries with respect to indebtedness, liens, nature of business, investments and loans, distributions, acquisitions,
dispositions of assets, sale-leaseback transactions and transactions with affiliates. The revolving credit facility also contains a
financial covenant that requires us to maintain a ratio of Consolidated Total Debt to Consolidated EBITDA (each as defined in
the 2013 Amended Credit Agreement, and as amended on February 3, 2014 as described in Note 19, "Subsequent Events") of
no greater than 5.00 to 1 until January 31, 2016 and no greater than 4.50 to 1 thereafter (the "Leverage Ratio Covenant"). The
limitations imposed by the covenants are subject to certain exceptions as detailed in the 2013 Amended Credit Agreement.
The 2013 Amended Credit Agreement provides for certain customary events of default with corresponding grace periods. These
events of default include failure to pay principal or interest when due under the 2013 Amended Credit Agreement, failure to
comply with covenants, any representation or warranty made by us proving to be inaccurate in any material respect, defaults
under certain other indebtedness of ours or our subsidiaries, the occurrence of a Change of Control (as defined in the 2013
Amended Credit Agreement) with respect to us and certain insolvency or receivership events affecting us or our significant
subsidiaries. Upon the occurrence of an event of default resulting from a violation of the Leverage Ratio Covenant, the lenders
under our revolving credit facility may require us to immediately repay outstanding borrowings under the revolving credit
facility and may terminate their commitments to provide loans under that facility. A violation of the Leverage Ratio Covenant
would not, by itself, result in an event of default under the 2013 Term Loans or 2014 Term Loans but may trigger a cross-
default under the term loans in the event we are required to repay outstanding borrowings under the revolving credit facility.
Upon the occurrence of other events of default, the lenders may require us to immediately repay all outstanding borrowings
under the 2013 Amended Credit Agreement and the lenders under our revolving credit facility may terminate their
commitments to provide loans under the facility.
In connection with a business combination completed during the year ended January 31, 2012, we assumed approximately $3.3
million of development bank and government debt in the Americas region. The carrying value of this debt was $2.5 million at
January 31, 2013. During the year ended January 31, 2014, we repaid $2.0 million of this debt, resulting in a $0.2 million loss
on extinguishment of debt, which is reported in the consolidated statement of operations for the year ended January 31, 2014.
The remaining portion of this debt has a carrying value of $0.1 million at January 31, 2014.
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8. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION
Consolidated Balance Sheets
Inventories consisted of the following as of January 31, 2014 and 2013:
(in thousands)
Raw materials
Work-in-process
Finished goods
Total inventories
Property and equipment, net consisted of the following as of January 31, 2014 and 2013:
(in thousands)
Land and buildings
Leasehold improvements
Software
Equipment, furniture, and other
Less: accumulated depreciation and amortization
Total property and equipment, net
January 31,
2014
2013
3,190
5,645
1,858
10,693
$
$
4,263
5,633
5,118
15,014
January 31,
2014
2013
3,781
19,438
32,542
62,126
117,887
(77,742)
40,145
$
$
6,121
17,964
28,672
55,293
108,050
(69,889)
38,161
$
$
$
$
Depreciation expense on property and equipment was $13.5 million, $11.8 million and $10.8 million the years ended January
31, 2014, 2013, and 2012, respectively.
Other assets consisted of the following as of January 31, 2014 and 2013:
(in thousands)
Deferred debt issuance costs, net
Long-term restricted cash and time deposits
Other
Total other assets
January 31,
2014
2013
$
$
9,598
391
14,037
24,026
$
$
11,275
3,379
11,204
25,858
Accrued expenses and other current liabilities consisted of the following as of January 31, 2014 and 2013:
(in thousands)
Compensation and benefits
Billings in excess of costs and estimated earnings on uncompleted contracts
Professional and consulting fees
Distributor and agent commissions
Taxes other than income taxes
Interest on indebtedness
Contingent consideration - current portion
Other
Total accrued expenses and other current liabilities
Other liabilities consisted of the following as of January 31, 2014 and 2013:
91
January 31,
2014
2013
69,122
46,569
8,574
3,640
8,940
6,595
9,859
25,375
178,674
$
$
60,982
41,717
14,387
2,958
9,515
4,569
13,961
28,883
176,972
$
$
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(in thousands)
Unrecognized tax benefits, including interest and penalties
Obligations for severance compensation
Contingent consideration - long-term portion
Other
Total other liabilities
Consolidated Statements of Operations
January 31,
2014
2013
42,280
3,036
7,448
10,693
63,457
$
$
37,873
2,881
11,080
8,362
60,196
$
$
Other expense, net consisted of the following for the years ended January 31, 2014, 2013, and 2012:
(in thousands)
Foreign currency (losses) gains, net
Gains (losses) on derivative financial instruments, net
Derecognition of indemnification asset related to CTI Merger
Other, net
Total other expense, net
Consolidated Statements of Cash Flows
Year Ended January 31,
2013
2012
2014
$
$
(6,057) $
345
(12,874)
(1,689)
(20,275) $
$
960
(399)
—
(1,847)
(1,286) $
1,382
(896)
—
(974)
(488)
The following table provides supplemental information regarding our consolidated cash flows for the years ended January 31,
2014, 2013, and 2012:
(in thousands)
Cash paid for interest
Cash (refunds) payments of income taxes, net
Non-cash investing and financing transactions:
Accrued but unpaid purchases of property and equipment
Inventory transfers to property and equipment
Liabilities for contingent consideration in business combinations
Stock options exercised, proceeds received subsequent to period end
Purchases under supplier financing arrangements, including capital leases
Leasehold improvements funded by lease incentive
Year Ended January 31,
2013
2012
2014
24,444
$
(1,748) $
27,497
18,161
$
$
29,227
16,629
1,161
$
757
$
11,907
$
86
$
$
637
— $
$
1,058
566
$
— $
— $
— $
$
5,042
832
637
42,404
383
1,090
—
$
$
$
$
$
$
$
$
9. CONVERTIBLE PREFERRED STOCK
On May 25, 2007, we entered into a Securities Purchase Agreement with CTI whereby CTI purchased, for cash, an aggregate
of 293,000 shares of our Series A Convertible Preferred Stock, for an aggregate purchase price of $293.0 million. Proceeds
from the issuance of the Preferred Stock were used to partially finance our May 2007 acquisition of Witness Systems Inc.
("Witness").
On August 12, 2012, we entered into the CTI Merger Agreement providing for the CTI Merger. The CTI Merger was completed
on February 4, 2013 and eliminated CTI's majority ownership and control of us. Each outstanding share of Preferred Stock, all
of which was held by CTI, was canceled upon completion of the CTI Merger. Further details regarding the CTI Merger appear
in Note 4, "Merger Agreement with CTI".
The Preferred Stock was issued at a purchase price of $1,000 per share and ranked senior to our common stock. The Preferred
Stock had 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 would have been 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 included accrued and unpaid dividends.
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The terms of the Preferred Stock provided that upon a fundamental change, as defined in the certificate of designation
governing the Preferred Stock, the holders of the Preferred Stock would have had the right to require us to repurchase the
Preferred Stock for 100% of the liquidation preference then in effect. Therefore, the Preferred Stock was classified as
mezzanine equity on our consolidated balance sheets as of January 31, 2013, separate from permanent equity, because the
occurrence of such a fundamental change, and thus a potential required repurchase of the Preferred Stock, however remote in
likelihood, was not solely under our control. Fundamental change events included the sale of substantially all of our assets, and
certain changes in beneficial ownership, board of directors' representation, and business reorganizations.
Under the CTI Merger Agreement, CTI had agreed that the CTI Merger and other transactions contemplated by the CTI Merger
Agreement did not constitute fundamental change events under the terms of the Preferred Stock.
We concluded that, as of January 31, 2013, the occurrence of a fundamental change and the associated potential required
repurchase of the Preferred Stock were not probable. We therefore did not adjust the carrying amount of the Preferred Stock to
its redemption amount, which is its liquidation preference, at January 31, 2013. Through January 31, 2013, cumulative,
undeclared dividends on the Preferred Stock were $72.9 million and, as a result, the liquidation preference of the Preferred
Stock was $365.9 million at that date.
Cash dividends on the Preferred Stock were cumulative and were calculated quarterly at a specified dividend rate on the
liquidation preference in effect at such time. At the time of its cancellation in connection with the CTI Merger on February 4,
2013, the dividend rate on the Preferred Stock was 3.875%, and no dividends had been declared or paid on the Preferred Stock
in any period. Other than through these cumulative dividends, the Preferred Stock did not participate in our earnings.
Upon cancellation of 293,000 shares of Preferred Stock in connection with the CTI Merger, our authorized shares of preferred
stock were reduced from 2,500,000 shares to 2,207,000 shares, in accordance with the Preferred Stock's Certificate of
Designation.
10. STOCKHOLDERS’ EQUITY
Dividends on Common Stock
We did not declare or pay any dividends on our common stock during the years ended January 31, 2014, 2013, and 2012.
Commencing in May 2007, with our issuance of Preferred Stock and our entry into an earlier credit agreement, and continuing
currently under the terms of our 2013 Amended Credit Agreement, we are subject to certain restrictions on declaring and
paying dividends on our common stock. Our Preferred Stock was canceled on February 4, 2013 in connection with the CTI
Merger, further details of which appear in Note 4, "Merger with CTI".
Treasury Stock
Repurchased shares of common stock are recorded as treasury stock, at cost. At January 31, 2014 and 2013, we held
approximately 302,000 shares of treasury stock with a cost of $8.0 million.
Shares of restricted stock awards that are forfeited when recipients separate from their employment prior to the lapsing of the
award’s restrictions are recorded as treasury stock.
From time to time, our board of directors has approved limited programs to repurchase shares of our common stock from
directors or officers in connection with the vesting of restricted stock or restricted stock units to facilitate required income tax
withholding by us or the payment of required income taxes by such holders. In addition, the terms of some of our equity award
agreements with all grantees provide for automatic repurchases by us for the same purpose if a vesting-related or delivery-
related tax event occurs at a time when the holder is not permitted to sell shares in the market. Our stock bonus program
contains similar terms. Any such repurchases of common stock occur at prevailing market prices and are recorded as treasury
stock.
During the year ended January 31, 2013, we acquired approximately 18,000 shares of treasury stock from directors, executive
officers, and other employees at a cost of $0.5 million. During the year ended January 31, 2012, we acquired approximately
23,000 shares of treasury stock from certain executive officers and directors at a cost of $0.8 million.
As previously disclosed, in connection with the resumption of option exercises following the conclusion of our previous
extended filing delay period and the vesting of restricted stock units after the relisting of our common stock on the NASDAQ
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Global Market, during the summer of 2010, we issued up to an aggregate of approximately 135,000 shares of common stock to
certain current and former employees and a former director in transactions that did not involve public offerings and that were
made in reliance on available exemptions from registration under the Securities Act. In April 2012, we repurchased 2,250 of
these securities at a cost of less than $0.1 million, all of which were retired. The cost of the retired shares was deducted from
common stock at par value, which was negligible, and from additional paid-in capital for the excess over par value.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and
unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges.
Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders’ equity section of our
consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income as
presented in our consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive (income) loss by
component for the year ended January 31, 2014:
(in thousands)
Accumulated other comprehensive income (loss) at January
31, 2013
Other comprehensive income before reclassifications
Amounts reclassified out of accumulated other comprehensive
income (loss)
Net other comprehensive income (loss), current period
Accumulated other comprehensive income (loss) at
January 31, 2014
Unrealized
Gains on
Derivative
Financial
Instruments
Designated as
Hedges
Unrealized
Gains on
Available-for-
Sale
Investments
Foreign
Currency
Translation
Adjustments
Total
$
2,447
$
— $
4,062
(5,024)
(962)
$
1,485
$
9
—
9
9
(46,672) $
5,453
(44,225)
9,524
—
5,453
(5,024)
4,500
$
(41,219) $
(39,725)
All amounts presented in the table above are net of income taxes, if applicable. The accumulated net losses in foreign currency
translation adjustments primarily reflect the strengthening of the U.S. dollar against the British pound sterling since our
acquisition of Witness in May 2007, which has resulted in lower U.S. dollar-translated balances of British pound sterling-
denominated goodwill and intangible assets associated with that acquisition.
The amounts reclassified out of accumulated other comprehensive income (loss) into the consolidated statement of operations,
with presentation location, for the year ended January 31, 2014 were as follows:
(in thousands)
Unrealized (gains) on derivative financial instruments:
Foreign currency forward contracts
Amount
Affected Line Items in the Consolidated
Statement of Operations
$
$
(478) Cost of product revenue
(494) Cost of service revenue
(3,246) Research and development
(1,501) Selling, general and administrative
(5,719) Total, before provision for income taxes
695 Provision for income taxes
(5,024) Total, net of income taxes
Noncontrolling Interest
The noncontrolling interest presented in our consolidated financial statements reflects a 50% noncontrolling equity interest in a
joint venture which functions as a systems integrator for Asian markets. Net income attributable to noncontrolling interest, as
reported on our consolidated statements of operations, represents the net income of this joint venture attributable to the
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noncontrolling equity interest. The noncontrolling interest is reflected within stockholders’ equity on the consolidated balance
sheet but is presented separately from our equity.
11. RESEARCH AND DEVELOPMENT, NET
Our gross research and development expenses for the years ended January 31, 2014, 2013, and 2012, were $131.6 million,
$121.2 million, and $115.7 million, respectively. OCS reimbursements amounted to $3.5 million, $3.3 million, and $3.2 million
for the years ended January 31, 2014, 2013, and 2012, respectively, which were recorded as reductions of gross research and
development expenses. We recorded other reimbursements of research and development expenses amounting to $1.6 million,
$1.9 million, and $1.5 million for the years ended January 31, 2014, 2013, and 2012, respectively.
We capitalize certain costs incurred to develop our commercial software products, and we then recognize those costs within
cost of product revenue as the products are sold. Activity for our capitalized software development costs for the years ended
January 31, 2014, 2013, and 2012 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
Impairments, foreign currency translation and other
Capitalized software development costs, net, end of year
Year Ended January 31,
2013
2012
2014
$
$
6,343
6,668
(2,482)
(2,046)
8,483
$
$
5,846
3,916
(3,089)
(330)
6,343
$
$
6,787
3,399
(4,135)
(205)
5,846
During the year ended January 31, 2014, we recorded a $2.1 million impairment of capitalized software development costs to
reflect strategy changes in certain product development initiatives, due primarily to acquisition of technology associated with a
business combination. Impairments recorded for the years ended January 31, 2013 and 2012 were not significant.
12. INCOME TAXES
The components of income before provision for income taxes for the years ended January 31, 2014, 2013, and 2012 were as
follows:
(in thousands)
Domestic
Foreign
Total income before provision for income taxes
Year Ended January 31,
2013
2012
2014
$
$
(37,987) $
101,302
63,315
$
(11,292) $
79,056
67,764
$
(40,272)
86,429
46,157
The provision for income taxes for the years ended January 31, 2014, 2013, and 2012 consisted of the following:
(in thousands)
Current provision for (benefit from) income taxes:
Federal
State
Foreign
Total current provision for income taxes
Deferred provision for (benefit from) income taxes:
Federal
State
Foreign
Total deferred provision for (benefit from) income taxes
Total provision for income taxes
95
Year Ended January 31,
2013
2012
2014
$
$
(12,966) $
664
14,288
1,986
2,187
493
(127)
2,553
4,539
$
15
523
8,094
8,632
3,880
226
(3,778)
328
8,960
$
$
145
1,387
15,101
16,633
(4,865)
(1,040)
(5,196)
(11,101)
5,532
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The reconciliation of the U.S. federal statutory rate to our effective tax rate on income before provision for income taxes for the
years ended January 31, 2014, 2013, and 2012 was as follows:
(in thousands)
U.S. federal statutory income tax rate
Income tax provision at the U.S. federal statutory rate
State tax provision
Foreign tax rate differential
Tax incentives
Valuation allowances
Stock-based and other compensation
Non-deductible expenses
Tax credits
Tax contingencies
U.S. tax effects of foreign operations
Other, net
Total provision for income taxes
Effective income tax rate
Year Ended January 31,
2013
2012
2014
35.0 %
35.0 %
35.0 %
$
$
22,160
982
(15,756)
(14,390)
10,597
3,163
4,969
(2,277)
(5,102)
1,197
(1,004)
4,539
7.2%
$
$
23,717
1,055
(12,471)
(29,171)
4,844
1,833
1,329
(4,170)
17,546
3,854
594
8,960
13.2%
$
$
16,155
2,443
(7,408)
(8,846)
(5,575)
1,480
2,392
(2,034)
(223)
7,864
(716)
5,532
12.0%
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 Israeli Approved
Enterprise entities’ effective tax rates by 22.7%, 43.0%, and 19.2% for the years ended January 31, 2014, 2013, and 2012,
respectively.
Deferred tax assets and liabilities consisted of the following at January 31, 2014 and 2013:
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(in thousands)
Deferred tax assets:
Accrued expenses
Deferred revenue
Loss carryforwards
Tax credits
Stock-based and other compensation
Capitalized research and development expenses
Other, net
Total deferred tax assets
Deferred tax liabilities:
Deferred cost of revenue
Goodwill and other intangible assets
Other, net
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
Year Ended January 31,
2013
2014
6,800
12,387
137,565
8,795
15,060
3,914
910
185,431
(873)
(32,134)
(611)
(33,618)
(146,860)
4,953
9,002
9,783
(474)
(13,358)
4,953
$
$
$
$
5,800
21,326
103,885
9,151
11,221
2,737
5,450
159,570
(2,445)
(41,569)
(1,035)
(45,049)
(104,757)
9,764
10,447
10,342
(764)
(10,261)
9,764
$
$
$
$
At January 31, 2014 and 2013, we had U.S. federal NOL carryforwards of approximately $631.2 million and $302.5 million,
respectively. The U.S. federal NOL increased by $315 million due to the CTI Merger. These loss carryforwards expire in
various years ending from January 31, 2018 to 2034. We had state NOL carryforwards of approximately $211.3 million and
$193.2 million in the same respective years, expiring in years ending from January 31, 2014 to 2034. We had foreign NOL
carryforwards of approximately $51.9 million and $55.5 million in the same respective years. At January 31, 2014, all but $2.2
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 NOL carryforwards
for tax return purposes are different from the NOL carryforwards for financial statement purposes, primarily due to the
reduction of NOL carryforwards for financial statement purposes under the authoritative guidance on accounting for
uncertainty in income taxes. We have U.S. federal, state and foreign tax credit carryforwards of approximately $14.4 million
and $12.6 million at January 31, 2014 and 2013, respectively, the utilization of which is subject to limitation. At January 31,
2014, approximately $1.5 million of these tax credit carryforwards may be carried forward indefinitely. The balance of $12.9
million expires in various years ending from January 31, 2015 to 2034.
As of January 31, 2014, we have not provided for deferred taxes on the excess of financial reporting over the tax basis of
investments in certain foreign subsidiaries in the amount of $349.7 million because we plan to reinvest such earnings
indefinitely outside the United States. If these earnings were repatriated in the future, additional income and withholding tax
expense would be incurred. 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 the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on
a jurisdictional basis at each reporting date. Accounting for income taxes 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 $146.9 million and $104.8 million at January
31, 2014 and 2013, respectively. The $42.1 million increase in the valuation allowance between January 31, 2013 and January
31, 2014 arose primarily as a result of the CTI Merger, an overall increase in net deferred tax assets, primarily related to
amortization of acquired intangibles, loss carryforwards, and equity compensation, offset by changes in deferred revenue.
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The recorded valuation allowance consisted of the following at January 31, 2014 and 2013:
(in thousands)
Valuation allowance, beginning of year
Provision for income taxes
Additional paid-in capital
Acquisitions
Cumulative translation adjustment
Valuation allowance, end of year
Year Ended January 31,
2013
2014
(104,757) $
(10,597)
75
(30,268)
(1,313)
(146,860) $
(100,842)
(4,844)
1,077
—
(148)
(104,757)
$
$
In accordance with the authoritative guidance for accounting for stock-based compensation, we use a "with-and-without"
approach to applying the intra-period allocation rules in accordance with accounting for income taxes. 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.
federal income tax provision for the years ended January 31, 2014, 2013, and 2012.
In accordance with the authoritative guidance on accounting for uncertainty in income taxes, 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 accounting for uncertainty in income taxes, represent our
unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets.
For the years ended January 31, 2014, 2013, and 2012, the aggregate changes in the balance of gross unrecognized tax benefits
were as follows:
(in thousands)
Gross unrecognized tax benefits, beginning of year
Increases related to tax positions taken during the current year
Increases as a result of acquisitions
Increases related to tax positions taken during prior years
Increases (decreases) related to foreign currency exchange rate
Reductions for tax positions of prior years
Lapses of statutes of limitations
Gross unrecognized tax benefits, end of year
Year Ended January 31,
2013
2012
2014
$
$
55,412
11,013
83,523
—
1,255
(4,491)
(1,304)
145,408
$
$
36,377
8,909
—
15,575
(375)
(3,602)
(1,472)
55,412
$
$
32,672
4,424
2,781
1,904
(71)
(2,320)
(3,013)
36,377
As of January 31, 2014, we had $145.4 million of unrecognized tax benefits, of which $139.7 million represents the amount
that, if recognized, would impact the effective income tax rate in future periods. We recorded $(10.5) million, $0.6 million, and
$(0.7) million of interest and penalties related to uncertain tax positions in our provision for income taxes for the years ended
January 31, 2014, 2013, and 2012, respectively. Accrued liabilities for interest and penalties were $8.7 million and $8.3 million
at January 31, 2014 and 2013, respectively. Interest and penalties (expense and/or benefit) are recorded as a component of the
provision for income taxes in the consolidated financial statements.
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, 2011. In Israel, we are no
longer subject to income tax examination for years prior to January 31, 2006. In the United Kingdom, with the exception of
years which are currently under examination, we are no longer subject to income tax examination for years prior to January 31,
2013.
As of January 31, 2014, income tax returns are under examination in the following significant tax jurisdictions:
Jurisdiction
Canada
United Kingdom
India
Tax Years
January 31, 2011 - January 31, 2012
December 31, 2006; January 31, 2008
March 31, 2008; March 31, 2010; March 31, 2011
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We regularly assess the adequacy of our provisions for income tax contingencies. 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 expiration. We believe that it
is reasonably possible that the total amount of unrecognized tax benefits at January 31, 2014 could decrease by approximately
$2.9 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.
13. FAIR VALUE MEASUREMENTS
Fair value is defined 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.
Accounting guidance 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. An instrument’s categorization within the fair value
hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This fair value hierarchy
consists of three levels of inputs that may be used to measure fair value:
• 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.
We review the fair value hierarchy classification of our applicable assets and liabilities at each reporting period. Changes in the
observability of valuation inputs may result in transfers within the fair value measurement hierarchy. We did not identify any
transfers between levels of the fair value measurement hierarchy during the years ended January 31, 2014 and 2013.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of January 31, 2014 and 2013:
January 31, 2014
Fair Value Hierarchy Category
Level 2
Level 3
Level 1
$
$
$
$
14,023
—
—
—
14,023
$
$
— $
—
— $
— $
49,991
9,406
2,466
61,863
846
—
846
$
$
$
—
—
—
—
—
—
17,307
17,307
(in thousands)
Assets:
Money market funds
Commercial paper (1)
Short-term investments, classified as available-for-sale
Foreign currency forward contracts
Total assets
Liabilities:
Foreign currency forward contracts
Contingent consideration - business combinations
Total liabilities
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(in thousands)
Assets:
Money market funds
Commercial paper (1)
Foreign currency forward contracts
Total assets
Liabilities:
Foreign currency forward contracts
Contingent consideration - business combinations
Total liabilities
January 31, 2013
Fair Value Hierarchy Category
Level 2
Level 3
Level 1
$
$
$
$
62,085
—
—
62,085
$
$
— $
—
— $
— $
4,000
2,854
6,854
542
—
542
$
$
$
—
—
—
—
—
25,041
25,041
(1) Commerical paper investments with remaining maturities of three months or less at time of purchase, classified within
cash and cash equivalents.
The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured
using significant unobservable inputs (Level 3) for the years ended January 31, 2014 and 2013:
(in thousands)
Fair value measurement at beginning of period
Contingent consideration liabilities recorded for business combinations
Changes in fair values, recorded in operating expenses
Payments of contingent consideration
Fair value measurement at end of period
Year Ended January 31,
2014
2013
$
$
25,041
11,907
(2,547)
(17,094)
17,307
$
$
38,646
—
(6,203)
(7,402)
25,041
Our estimated liability for contingent consideration represents potential payments of additional consideration for business
combinations, payable if certain defined performance goals are achieved. Changes in fair value of contingent consideration are
recorded in the consolidated statements of operations within selling, general and administrative expenses.
Fair Value Measurements
Money Market Funds - We value our money market funds using quoted active market prices for such funds.
Short-term Investments - Short-term investments represent investments in commercial paper and corporate bonds classified as
available-for-sale. Investments in commercial paper with remaining maturities of three months or less at time of purchase are
classified within cash and cash equivalents. The fair values of these investments are estimated using observable market prices
for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities
are not available, we value these short-term investments using non-binding market price quotes from brokers which we review
for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a
discounted cash flow model.
Foreign Currency Forward Contracts - The estimated fair value of foreign currency forward contracts is based on quotes
received from the counterparties thereto. 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 using readily
observable market prices for similar contracts.
Contingent Consideration - Business Combinations - The fair value of the contingent consideration related to business
combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based
on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount
rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent
consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events
occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance
targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have
inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving
performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized
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discount rates ranging from 1.1% to 27.0% in our calculations of the estimated fair values of our contingent consideration
liabilities as of January 31, 2014. We utilized discount rates ranging from 2.4% to 17.0% in our calculations of the estimated
fair values of our contingent consideration liabilities as of January 31, 2013.
Other Financial Instruments
The carrying amounts of accounts receivable, accounts payable, and accrued liabilities and other current liabilities approximate
fair value due to their short maturities.
The estimated fair values of our term loan borrowings were $647.0 million and $583.0 million at January 31, 2014 and 2013,
respectively. The estimated fair values of the term loans are based upon indicative bid and ask prices as determined by the
agent responsible for the syndication of our term loans. We consider these inputs to be within Level 3 of the fair value hierarchy
because we cannot reasonably observe activity in the limited market in which participations in our term loans are traded. The
indicative prices provided to us as at each of January 31, 2014 and 2013 did not significantly differ from par value.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and
liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets and property,
plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the
asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is
recognized. Further details regarding our regular impairment reviews appear in Note 1, "Summary of Significant Accounting
Policies".
14. DERIVATIVE FINANCIAL INSTRUMENTS
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest
rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for
speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use derivative financial instruments to manage our short-term exposures
to fluctuations in foreign currency exchange rates. We utilize foreign currency 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. We also periodically utilize foreign currency forward
contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the
applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in
currencies other than the applicable functional currency. Our joint venture, which has a Singapore dollar functional currency,
also utilizes foreign exchange forward contracts to manage its exposure to exchange rate fluctuations related to settlements of
liabilities denominated in U.S. dollars. These foreign currency forward contracts are reported at fair value on our consolidated
balance sheets and generally have maturities of no longer than twelve months, although occasionally we will execute a contract
that extends beyond twelve months, depending upon the nature of the underlying risk.
The counterparties to our derivative financial instruments consist of several major international financial institutions. We
regularly monitor the financial strength of these institutions. While the counterparties to these contracts expose us to credit-
related losses in the event of a counterparty’s non-performance, the risk would be limited to the unrealized gains on such
affected contracts. We do not anticipate any such losses.
Certain of these foreign currency forward contracts are not designated as hedging instruments under accounting guidance for
derivatives, and gains and losses from changes in their fair values are therefore reported in other income (expense), net.
Changes in the fair values 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 consolidated
statements of operations when the effects of the item being hedged are recognized in the consolidated statements of operations.
Notional Amounts of Derivative Financial Instruments
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Our outstanding derivative financial instruments consisted only of foreign currency forward contracts with notional amounts of
$127.6 million and $108.1 million as of January 31, 2014 and 2013, respectively.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments as of January 31, 2014 and 2013 were as follows:
(in thousands)
Derivative financial instruments
designated as hedging instruments:
Foreign currency forward contracts
Total derivative financial instruments
designated as hedging instruments
Derivative financial instruments not
designated as hedging instruments:
Foreign currency forward contracts
Total derivative financial instruments
not designated as hedging
instruments
(in thousands)
Derivative financial instruments
designated as hedging instruments:
Foreign currency forward contracts
Total derivative financial instruments
designated as hedging instruments
Derivative financial instruments not
designated as hedging instruments:
Foreign currency forward contracts
Total derivative financial instruments
not designated as hedging
instruments
January 31, 2014
Assets
Liabilities
Balance Sheet
Classification
Fair Value
Balance Sheet
Classification
Fair Value
Prepaid expenses and
other current assets
Prepaid expenses and
other current assets
Assets
Balance Sheet
Classification
Prepaid expenses and
other current assets
Prepaid expenses and
other current assets
$
$
$
$
$
$
$
$
2,245
2,245
221
221
Accrued expenses
and other liabilities
Accrued expenses
and other liabilities
$
$
$
$
769
769
77
77
January 31, 2013
Liabilities
Fair Value
Balance Sheet
Classification
Fair Value
2,808
2,808
46
46
Accrued expenses
and other liabilities
Accrued expenses
and other liabilities
$
$
$
$
64
64
478
478
Derivative Financial Instruments in Cash Flow Hedging Relationships
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The effects of derivative financial instruments designated as cash flow hedging instruments for the years ended January 31,
2014 and 2013 were as follows:
Classification of Net Gains
(Losses)
Reclassified from Other
Comprehensive Loss
into the Consolidated
Statements of Operations
Net Gains Recognized in
Accumulated Other
Comprehensive Loss
January 31,
2014
2013
Net Gains (Losses) Reclassified
from Other Comprehensive Loss
into the Consolidated
Statements of Operations
Year Ended January 31,
2014
2013
2012
(in thousands)
Foreign currency forward contracts
$
1,485
$
2,447
Operating Expenses
$
5,719
$
(803) $
(373)
There were no gains or losses from ineffectiveness of these hedges recorded for the years ended January 31, 2014, 2013, and
2012. All of the foreign currency forward contracts underlying the $1.5 million of net unrealized gains recorded in our
accumulated other comprehensive loss at January 31, 2014 mature within twelve months, and therefore we expect all such
gains to be reclassified into earnings within the next twelve months.
Derivative Financial Instruments Not Designated as Hedging Instruments
Gains (losses) recognized on derivative financial instruments not designated as hedging instruments in our consolidated
statements of operations for the years ended January 31, 2014, 2013 and 2012 were as follows:
(in thousands)
Foreign currency forward contracts
Total
Classification in Consolidated
Statements of Operations
Other income (expense), net
15. STOCK-BASED COMPENSATION AND OTHER BENEFIT PLANS
Stock-Based Compensation Plans
Plan Summaries
Year Ended January 31,
2013
2012
2014
$
$
346
346
$
$
(399) $
(399) $
(896)
(896)
Our stock-based incentive awards are provided to employees and directors under the terms of our multiple outstanding stock
benefit plans (the "Plans" or "Stock Plans") and/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 1996 Plan allowed 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. The deadline for granting new awards under the 1996 Plan was March 10, 2012.
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 contained an evergreen provision, which allowed 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 granting new awards
under the 1997 Plan was November 18, 2009. Additionally, in connection with the acquisition of Witness, we assumed certain
new-hire inducement grants made by Witness outside of its stockholder-approved equity plans prior to May 25, 2007.
Terminations of the 1996 Plan and 1997 Plan did not affect outstanding awards under those Plans, which remain in effect until
such awards have been exercised or have expired in accordance with their terms.
Our stockholders approved the 2004 Stock Incentive Compensation Plan (the "2004 Plan") on July 27, 2004. Under the 2004
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. To the extent not used under the 1996 Plan, the shares
available pursuant to the 2004 Plan could be increased by a maximum of 1.0 million shares for awards granted under the 1996
103
Plan that were forfeited, expire, or are cancelled on or after July 28, 2004. On June 15, 2012, our stockholders approved
Amendment No. 1 to the 2010 Long-Term Stock Incentive Plan, as discussed further below, which included the transfer of 0.2
million shares that remained available for issuance or transfer under the 2004 Plan to the 2010 Long-Term Stock Incentive Plan
and terminated the 2004 plan. Termination of the 2004 Plan did not affect awards outstanding under the 2004 Plan at the time
of termination.
On October 5, 2010, our stockholders approved the 2010 Long-Term Incentive Plan, and on June 15, 2012, approved
Amendment No. 1 to the 2010 Long-Term Incentive Plan (together, the "2010 Plan"). The amendment provided for an increase
of 4.5 million shares available for issuance under the 2010 Plan and concurrently transferred 0.2 million shares that remained
available under the 2004 Plan to the 2010 Plan. Under the 2010 Plan, we are permitted to grant stock options (both incentive
and non-qualified), stock appreciation rights, RSAs, RSUs, performance awards, performance compensation awards or other
awards to eligible employees, directors and consultants. Awards of incentive stock options are limited to an aggregate of 3.5
million shares under the 2010 Plan. No grant will be made under the 2010 Plan after June 15, 2022, but all grants made on or
prior to such date will continue in effect thereafter subject to the terms and conditions of the 2010 Plan.
On August 4, 2011, in connection with the acquisition of Vovici, we assumed a stock plan referred to as the Vovici 2006
Amended and Restated Stock Plan, as amended (the "Vovici Plan"). Under the Vovici Plan, we are permitted to grant stock
options (both incentive and nonstatutory), stock purchase rights, and restricted stock units. The Vovici Plan shall continue in
effect until July 28, 2020. However, our board of directors may at any time amend, alter, suspend, or terminate the Vovici Plan.
On February 4, 2013, in connection with the CTI Merger, we assumed the Comverse Technology, Inc. Stock Incentive
Compensation Plan (the "CTI Plan"). Under the CTI Plan, we are permitted to grant stock options, stock appreciation rights,
restricted stock, performance-based compensation awards, and other stock-based awards. There were 2.7 million shares
available to be granted pursuant to the CTI Plan, of which 2.5 million shares remained available for grants as of January 31,
2014. The CTI Plan will continue in effect until September 7, 2021. Further details regarding the CTI Merger appear in Note 4,
"Merger with CTI".
The table below summarizes key information for the Plans as of January 31, 2014:
(in thousands)
The 1996 Plan
The 1997 Plan
The 1997 Blue Pumpkin inducement grants
The 2004 Plan
The 2010 Plan
The CTI Plan
The Vovici Plan
Total
Number of
Shares
Reserved
for Grants
5,000
6,400
158
3,000
8,700
2,700
317
26,275
Number of
Shares
Outstanding
126
—
—
540
1,903
191
5
2,765
Number of
Shares
Available
for Grants
—
—
—
—
3,989
2,505
—
6,494
As presented in the table above, the number of shares outstanding excludes, and the number of shares available for grants has
not been reduced for, approximately 0.1 million RSUs with performance conditions awarded to officers for which the
performance criteria has not yet been established by our board. Under applicable accounting guidance, if an award is subject to
a performance vesting condition, an accounting grant date for the award is generally not established until the performance
vesting condition has been defined and communicated. The table also excludes 0.3 million shares available for grants under the
Vovici Plan which are not expected to be used for future awards.
Awards are generally subject to multi-year vesting periods. We recognize compensation expense for awards on a straight-line
basis over the requisite service periods of the awards, which are generally the vesting periods, reduced by estimated forfeitures.
Upon exercise of stock options, issuance of restricted stock, or issuance of shares under the Plans, we generally issue new
shares of common stock, but occasionally may issue treasury shares.
Stock-Based Compensation Expense
As described in Note 1, "Summary of Significant Accounting Policies", we recognize stock-based compensation expense based
on the grant date fair value of stock-based awards granted to employees and others.
We recognized stock-based compensation expense in the following line items on the consolidated statements of operations for
the years ended January 31, 2014, 2013 and 2012:
(in thousands)
Component of income 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 allowances)
Stock-based compensation, net of taxes
Year Ended January 31,
2013
2012
2014
$
$
$
759
1,678
3,417
29,137
34,991
$
771
2,086
2,636
19,715
25,208
8,171
26,820
$
6,456
18,752
$
883
2,424
3,060
21,544
27,911
7,175
20,736
The following table summarizes stock-based compensation expense by type of award for the years ended January 31, 2014,
2013, and 2012:
(in thousands)
Component of stock-based compensation expense:
Restricted stock units and restricted stock awards
Stock options
Phantom stock units
Stock bonus program
Stock-based compensation expense
Year Ended January 31,
2013
2012
2014
$
$
30,115
176
128
4,572
34,991
$
$
20,425
289
516
3,978
25,208
$
$
21,414
723
2,533
3,241
27,911
Total stock-based compensation expense by classification was as follows for the years ended January 31, 2014, 2013 and 2012:
(in thousands)
Equity-classified awards
Stock bonus program
Total equity-settled awards
Other liability-classified awards
Total stock-based compensation expense
Year Ended January 31,
2013
2012
2014
$
$
30,471
(298)
30,173
4,818
34,991
$
$
20,174
830
21,004
4,204
25,208
$
$
21,781
—
21,781
6,130
27,911
Awards under our stock bonus program are accounted for as liability-classified awards, because the obligations are based
predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable
number of shares of our common stock. Our other liability-classified awards include our phantom stock awards, the values of
which track the market price of our common stock and are therefore subject to volatility, and which are settled with cash
payments equivalent to the market value of our common stock upon vesting. Upon settlement of other liability-classified
awards with equity, compensation expense associated with those awards is reported within equity-classified awards in the table
above.
Net excess tax benefits resulting from our Stock Plans were nominal for the years ended January 31, 2014 and 2013, and were
$0.7 million for the year ended January 31, 2012. Excess tax benefits represent a reduction in income taxes, otherwise payable
during the period, attributable to the actual gross tax benefits in excess of the expected tax benefits, and are recorded as
increases to additional paid-in capital.
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. The risk-free interest rate is the implied daily yield currently available on U.S. Treasury issues with a
remaining term closely approximating the expected term used as the input to the Black-Scholes option pricing model.
We generally did not grant stock options during the years ended January 31, 2014, 2013, and 2012. However, in connection
with our acquisition of Vovici on August 4, 2011, stock options to purchase shares of Vovici common stock were converted into
stock options to purchase approximately 42,000 shares of our common stock.
The fair values of the options granted in August 2011 in connection with the acquisition of Vovici were estimated using a
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
5.43
1.26%
50.40%
—%
We utilized the simplified method to calculate the expected lives of options granted to Vovici employees due to the limited data
available regarding the exercise patterns of Vovici option holders.
The following table summarizes stock option activity under the Plans for the years ended January 31, 2014, 2013, and 2012:
(in thousands, except exercise
prices)
Beginning balance
Granted
Exercised
Forfeited
Expired
Ending balance
Stock options exercisable
2014
Weighted-
Average
Exercise
Price
Stock
Options
$
924
— $
(384) $
(8) $
(16) $
$
516
$
515
31.88
—
28.61
8.71
35.27
34.60
34.64
Year Ended January 31,
2013
Weighted-
Average
Exercise
Price
Stock
Options
1,114
$
— $
(121) $
(23) $
(46) $
$
924
$
907
30.4
—
18.35
30.07
32.73
31.88
32.32
2012
Weighted-
Average
Exercise
Price
Stock
Options
$
1,767
42
$
(623) $
— $
(72) $
$
$
1,114
1,083
27.33
9.28
20.51
—
28.07
30.40
31.03
As of January 31, 2014, the aggregate intrinsic value for the options vested and exercisable was $5.6 million with a weighted-
average remaining contractual life of 1.2 years. Additionally, there were 0.5 million options vested and expected to vest with a
weighted-average exercise price of $34.60 per share and an aggregate intrinsic value of $5.6 million with a weighted-average
remaining contractual life of 1.2 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, 2014 was not significant.
The following table summarizes information about stock options as of January 31, 2014:
(number of options in thousands)
Range of Exercise Prices
$8.71 - $9.56
$28.41 - $28.41
$31.78 - $31.78
$32.16 - $32.16
$34.40 - $34.40
$35.11 - $35.11
$37.99 - $37.99
$8.71 - $37.99
Options Outstanding
Weighted-
Average
Remaining
Contractual
Term (years)
6.3
0.3
0.4
1.3
2.0
0.8
1.6
1.2
$
$
$
$
$
$
$
$
Number of
Options
Outstanding
5
10
6
3
128
346
18
516
Weighted-
Average
Exercise
Price
8.72
28.41
31.78
32.16
34.40
35.11
37.99
34.60
Options Exercisable
Number of
Options
Exercisable
4
10
6
3
128
346
18
515
$
$
$
$
$
$
$
$
Weighted-
Average
Exercise
Price
8.73
28.41
31.78
32.16
34.40
35.11
37.99
34.64
The following table summarizes key data points for exercised options:
(in thousands)
Intrinsic value of options exercised
Cash received from the exercise of stock options
Tax benefits realized from stock options exercised
Fair value of options vested
Restricted Stock Units and Restricted Stock Awards
Year Ended January 31,
2013
2012
2014
$
$
$
$
3,817
10,896
780
10,524
$
$
$
$
1,450
2,605
339
17,832
$
$
$
$
8,034
12,474
3,219
20,413
We periodically award RSUs and RSAs to our directors, officers, and other employees. The fair value of these awards is
equivalent to the market value of our common stock on the grant date. 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.
Service-based RSUs typically vest based upon continued service, and we amortize the fair value of such time-based RSUs on a
straight-line basis over the requisite service periods.
We periodically award RSUs to executive officers and certain employees that vest upon the achievement of specified
performance goals (“PRSUs”). For some of these awards, the performance goals are established by our board subsequent to the
award date. As noted above, for PRSUs, an accounting grant date for the award is generally not established until the
performance vesting condition has been defined and communicated. We separately recognize compensation expense for each
tranche of a PRSU award as if it were a separate award with its own vesting date. Therefore, for certain PRSUs, a grant date
has been established but the requisite service period has not yet begun as of January 31, 2014.
Once the performance vesting condition has been defined and communicated, and the requisite service period has begun, our
estimate of the fair value of PRSUs requires an assessment of the probability that the specified performance criteria will be
achieved, which we update at each reporting date and adjust our estimate of the fair value of the PRSUs, if necessary.
RSUs that settle, or are expected to settle, with cash payments upon vesting are reflected as liabilities on our consolidated
balance sheets.
The following table summarizes activity for RSAs and RSUs (including PRSUs) under the Plans for the years ended January
31, 2014, 2013, and 2012:
2014
Year Ended January 31,
2013
2012
(in thousands, except grant date fair
values)
Beginning balance
Granted
Released
Forfeited
Ending balance
Shares or
Units
Weighted-
Average
Grant-Date
Fair Value
31.42
34.87
31.63
31.87
33.77
1,536
$
$
1,602
(789) $
(99) $
$
2,250
Weighted-
Average
Grant-Date
Fair Value
30.25
29.59
27.62
32.59
31.42
Shares or
Units
1,450
$
$
1,258
(1,076) $
(96) $
$
1,536
Shares or
Units
Weighted-
Average
Grant-Date
Fair Value
18.09
34.84
15.72
28.85
30.25
1,935
$
$
902
(1,336) $
(51) $
$
1,450
We granted 0.5 million, 0.1 million, and 0.2 million PRSUs during the years ended January 31, 2014, 2013, and 2012,
respectively. Shares of common stock earned and issued and under PRSU grants totaled 0.1 million, 0.2 million, and 0.2
million during the years ended January 31, 2014, 2013, and 2012, respectively. As of January 31, 2014, there were 0.4 million
unvested PRSUs outstanding.
Activity presented in the table above includes shares earned and released under our stock bonus program, further details
regarding which appear below under "Stock Bonus Program".
As of January 31, 2014, unrecognized compensation expense related to 2.1 million unvested RSUs expected to vest subsequent
to January 31, 2014 was approximately $47.8 million, with remaining weighted-average vesting periods of approximately 1.7
years, over which such expense is expected to be recognized. The unrecognized compensation expense does not include
compensation expense related to shares for which a grant date has been established but the requisite service period has not
begun. The total fair values of restricted stock units vested during the years ended January 31, 2014, 2013, and 2012 were $24.9
million, $29.1 million, and $21.0 million, respectively.
Phantom Stock Units
We have periodically issued phantom stock units to certain non-officer employees that settle, or are expected to settle, with cash
payments upon vesting. 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 vesting conditions as equity awards granted on the same date. We recognize compensation expense for phantom stock
units on a straight-line basis, reduced by estimated forfeitures. Phantom stock units are accounted for as liabilities and as such
their value tracks our stock price and is subject to market volatility.
The following table summarizes phantom stock unit activity for the years ended January 31, 2014, 2013, and 2012:
(in thousands)
Beginning balance, in units
Granted
Released
Forfeited
Ending balance, in units
Year Ended January 31,
2013
2012
2014
9
1
(5)
—
5
90
3
(79)
(5)
9
403
10
(298)
(25)
90
Total accrued liabilities for phantom stock units was $0.2 million and $0.2 million as of January 31, 2014 and 2013,
respectively. Total cash payments made upon vesting of phantom stock units were $0.2 million, $2.3 million, and $10.3 million
for the years ended January 31, 2014, 2013, and 2012, respectively.
The phantom stock units granted during the years ended January 31, 2014, 2013, and 2012 primarily vest over two-year and
three-year periods.
As of January 31, 2014, unrecognized compensation expense related to 5,000 unvested phantom stock units expected to vest
subsequent to January 31, 2014 was approximately $0.1 million, based on our stock price of $45.44 at January 31, 2014, with a
remaining weighted-average vesting period of approximately 1.2 years over which such expense is expected to be recognized.
Stock Bonus Program
In September 2011, our board of directors approved a stock bonus program under which eligible employees may receive a
portion of their bonuses in the form of discounted shares of our common stock. Executive officers were eligible to participate in
this program for the year ended January 31, 2014 to the extent that shares remained available for awards following the
enrollment of all other participants, but were not eligible to participate in previous years. This program is subject to annual
funding approval by our board of directors and an annual cap on the number of shares that can be issued. Subject to these
limitations, the number of shares to be issued under the program for a given year is determined using a five-day trailing average
price of our common stock when the awards are calculated, reduced by a discount to be determined by the board of directors
each year (the "discount"). Shares issued to executive officers in respect of the discount are subject to a one-year vesting
period. To the extent that this program is not funded in a given year or the number of shares of common stock needed to fully
satisfy employee enrollment exceeds the annual cap, the applicable portion of the employee bonuses will generally revert to
being paid in cash. Obligations under this program are accounted for as liabilities, because the obligations are based
predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable
number of shares of common stock determined using a discounted average price of our common stock, as described above.
For the year ended January 31, 2012, our board of directors approved up to 150,000 shares of common stock for awards under
this program and a discount of 20% (the "2012 stock bonus program"). Approximately 132,000 shares of common stock earned
under the 2012 stock bonus program were issued during the year ended January 31, 2013, which, along with $0.1 million of
awards settled with cash payments, settled our obligations under the 2012 stock bonus program.
For the year ended January 31, 2013, our board of directors approved up to 150,000 shares of common stock for awards under
this program and a discount of 15%, (the "2013 stock bonus program"). The total accrued liability for the 2013 stock bonus
program was $3.1 million as of January 31, 2013. Approximately 93,000 shares of our common stock were earned and issued
to participants under the 2013 stock bonus program, including 80,000 shares issued during the year ended January 31, 2014,
which completed our obligations under the 2013 stock bonus program.
For the year ended January 31, 2014, our board of directors approved up to 150,000 shares of common stock for awards under
this program and a discount of 15%, (the "2014 stock bonus program"). The total accrued liability for the 2014 stock bonus
program was $4.9 million as of January 31, 2014. Awards earned under the 2014 stock bonus program are expected to be
issued during the first half of the year ending January 31, 2015.
Please see Note 19, “Subsequent Events” for information regarding this program for the year ending January 31, 2015.
Employee Stock Purchase Plan
Effective September 1, 2002, we adopted and implemented the 2002 Employee Stock Purchase Plan (the "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. The ESPP
was suspended in March 2006 in connection with the beginning of our previous extended filing delay period and remained
inactive as of January 31, 2014.
No expense related to the ESPP was recorded during the years ended January 31, 2014, 2013, and 2012 due to the suspension
of the ESPP during those periods.
Other Benefit Plans
401(k) Plan and Other Retirement Plans
We maintain a 401(k) Plan for our full-time employees in the United States. The plan 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.
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.
Our matching contribution expenses for our 401(k) Plan were $1.8 million, $1.7 million, and $1.5 million for the years ended
January 31, 2014, 2013, and 2012, respectively.
We provide retirement benefits for non-U.S. employees as required by local laws or to a greater extent as we deem appropriate
through plans that function similar to 401(k) plans. Funding requirements for programs required by local laws are determined
on an individual country and plan basis and are subject to local country practices and market circumstances.
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 payment
arrangements. 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.
Severance expenses for the years ended January 31, 2014, 2013, and 2012 were $5.8 million, $4.9 million, and $5.2 million,
respectively.
16. RELATED PARTY TRANSACTIONS
As noted previously, on February 4, 2013 we completed the CTI Merger, which eliminated CTI's majority ownership and
control of us. As of January 31, 2013, prior to the CTI Merger, CTI beneficially owned approximately 53.5%, and also held a
majority of the voting power, of our common stock on an as-converted basis.
During the year ended January 31, 2013, we paid $0.3 million to a subsidiary of CTI for its assignment to us of user licenses for
certain third-party internal-use software. We also paid $1.6 million during the same year to certain subsidiaries of CTI to settle
pre-existing liabilities incurred in the regular course of business.
Previous Relationships with CTI and its Subsidiaries
Prior to the CTI Merger, we were a party to several business agreements with CTI or its affiliates, each of which either
terminated in connection with the CTI Merger, or is inactive and will be formally terminated, with the exception of the Federal
Income Tax Sharing Agreement, which will remain in effect for the foreseeable future. These business agreements included
service agreements whereby, if necessary, we received certain business support services from CTI and its other subsidiaries.
Activity under these service agreements was not significant during the years ended January 31, 2013 and 2012.
The Federal Income Tax Sharing Agreement with CTI applies to periods prior to our IPO in which we were included in CTI’s
consolidated federal tax return. By virtue of its controlling ownership and this tax sharing agreement, CTI effectively controlled
all of our tax decisions for periods ending prior to the completion of our IPO, which occurred in May 2002. Under the
agreement, for periods during which we were included in CTI's consolidated income tax return, we were required to pay CTI an
amount equal to the tax liability we would have owed, if any, had we filed a federal income tax return on our own, as computed
by CTI in its reasonable discretion. Under the agreement, we were not entitled to receive any payments from CTI in respect of,
or to otherwise take advantage of, any loss resulting from the calculation of our separate income tax liability. The tax sharing
agreement also provided for certain payments in the event of adjustments to the group’s income 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 CTI consolidated group for income tax purposes.
Other Related Party Transactions
Our joint venture incurs certain operating expenses, including office rent and other administrative costs, under arrangements
with one of its noncontrolling shareholders. These expenses totaled $0.5 million, $0.5 million, and $0.5 million for the years
ended January 31, 2014, 2013, and 2012, respectively. The joint venture also recognized $0.2 million, $0.3 million, and $0.2
million of revenue from this noncontrolling shareholder for the years ended January 31, 2014, 2013 and 2012, respectively.
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17. COMMITMENTS AND CONTINGENCIES
Operating and Capital Leases
We lease office, manufacturing, and warehouse space, as well as certain equipment, under non-cancelable operating lease
agreements. We have also periodically entered into capital leases. 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 $15.0 million, $16.0 million, and $16.3 million for the years ended
January 31, 2014, 2013, and 2012, respectively.
As of January 31, 2014, our minimum future rentals under non-cancelable operating leases were as follows:
(in thousands)
Years Ending January 31,
2015
2016
2017
2018
2019
2020 and thereafter
Total
Operating
Leases
15,335
13,115
8,207
5,634
4,782
27,666
74,739
$
$
We sublease certain space in our facilities to third parties. As of January 31, 2014, total expected future sublease income was
$2.6 million and ranged from $0.3 million to $0.8 million on an annual basis through March 2018.
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.
As of January 31, 2014, our unconditional purchase obligations totaled approximately $46.1 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 the fair value of these obligations at January 31, 2014.
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 the years ended January 31, 2014, 2013, and 2012:
(in thousands)
Warranty liability, beginning of year
Provision (credited against) charged to expenses
Warranty charges
Foreign currency translation and other
Warranty liability, end of year
Year Ended January 31,
2013
2012
2014
$
$
1,045
(337)
—
(2)
706
$
$
2,015
(780)
(188)
(2)
1,045
$
$
1,996
675
(389)
(267)
2,015
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We accrue for warranty costs as part of our cost of revenue based on associated product costs, labor costs, and associated
overhead. Our Enterprise Intelligence solutions are sold with a warranty of generally one year on hardware and 90 days for
software. Our Communications Intelligence solutions and Video Intelligence solutions are sold with warranties that typically
range in duration from 90 days to three 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 1, "Summary of Significant Accounting Policies", we receive non-refundable grants from the OCS that
fund a portion of our research and development expenditures. 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
penalties.
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, 2014, we had approximately $40.1 million of outstanding letters of credit and surety bonds relating primarily to
these performance guarantees. As of January 31, 2014, 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 effect 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.
Legal Proceedings
On March 26, 2009, legal actions were commenced by Ms. Orit Deutsch, a former employee of our subsidiary, Verint Systems
Limited ("VSL"), against VSL in the Tel Aviv Regional Labor Court (Case Number 4186/09) (the “Deutsch Labor Action”) and
against CTI in the Tel Aviv Regional District Court (Case Number 1335/09) (the “Deutsch District Action”). In the Deutsch
Labor Action, Ms. Deutsch filed a motion to approve a class action lawsuit on the grounds that she purports to represent a class
of our employees and former employees who were granted Verint and CTI stock options and were allegedly damaged as a
result of the suspension of option exercises during our previous extended filing delay period. In the Deutsch District Action, in
addition to a small amount of individual damages, Ms. Deutsch is seeking to certify a class of plaintiffs who were allegedly
damaged due to their inability to exercise Verint and CTI stock options as a result of alleged negligence by CTI in its financial
reporting. The class certification motions do not specify an amount of damages. On February 8, 2010, the Deutsch Labor
Action was dismissed for lack of material jurisdiction and was transferred to the Tel Aviv Regional District Court and
consolidated with the Deutsch District Action. On March 16, 2009 and March 26, 2009, respectively, legal actions were
commenced by Ms. Roni Katriel, a former employee of CTI's former subsidiary, Comverse Limited, against Comverse Limited
in the Tel Aviv Regional Labor Court (Case Number 3444/09) (the “Katriel Labor Action”) and against CTI in the Tel Aviv
112
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Regional District Court (Case Number 1334/09) (the “Katriel District Action”). In the Katriel Labor Action, Ms. Katriel is
seeking to certify a class of plaintiffs who were granted CTI stock options and were allegedly damaged as a result of the
suspension of option exercises during CTI's previous extended filing delay period. In the Katriel District Action, in addition to
a small amount of individual damages, Ms. Katriel is seeking to certify a class of plaintiffs who were allegedly damaged due to
their inability to exercise CTI stock options as a result of alleged negligence by CTI in its financial reporting. The class
certification motions do not specify an amount of damages. On March 2, 2010, the Labor Court ordered the transfer of the case
to the District Court in Tel Aviv - Jaffa, based on an agreed motion filed by the parties requesting such transfer.
On April 4, 2012, Ms. Deutsch and Ms. Katriel filed an uncontested motion to consolidate and amend their claims and on
June 7, 2012, the court allowed Ms. Deutsch and Ms. Katriel to file the consolidated class certification motion and an amended
consolidated complaint against VSL, CTI, and Comverse Limited. Following CTI's announcement of its intention to effect the
Comverse share distribution, on July 12, 2012, the plaintiffs filed a motion requesting that the District Court order CTI to set
aside up to $150 million in assets to secure any future judgment. The District Court ruled that it would not decide this motion
until the Deutsch and Katriel class certification motion was heard. On August 16, 2012, in light of the announcement of the
signing of the CTI Merger Agreement, the plaintiffs filed a motion for leave to appeal this District Court ruling to the Israeli
Supreme Court. We filed our response to this motion on September 6, 2012.
Prior to the consummation of the Comverse share distribution, CTI either sold or transferred substantially all of its business
operations and assets (other than its equity ownership interests in us and Comverse) to Comverse or unaffiliated third parties.
On October 31, 2012, CTI completed the Comverse share distribution, in which it distributed all of the outstanding shares of
common stock of Comverse to CTI's shareholders. As a result of the Comverse share distribution, Comverse became an
independent public company and ceased to be a wholly owned subsidiary of CTI, and CTI ceased to have any material assets
other than its equity interest in us.
We and the other defendants filed our responses to the complaint on November 11, 2012 and plaintiffs filed their replies on
December 20, 2012. A pre-trial hearing for the case was held on December 25, 2012, during which all parties agreed to attempt
to settle the dispute through mediation.
On February 4, 2013, we completed the CTI Merger. As a result of the CTI Merger, we have assumed certain rights and
liabilities of CTI, including any liability of CTI arising out of the Deutsch District Action and the Katriel District Action.
However, under the terms of the Distribution Agreement between CTI and Comverse relating to the Comverse share
distribution, we, as successor to CTI, are entitled to indemnification from Comverse for any losses we suffer in our capacity as
successor-in-interest to CTI in connection with the Deutsch District Action and the Katriel District Action.
On February 28, 2013, the mediation process began and, as of the date of this report, remains ongoing.
From time to time we or our subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course
of our business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of
any current claims will have a material effect on our consolidated financial position, results of operations, or cash flows.
18. SEGMENT, GEOGRAPHIC, AND SIGNIFICANT CUSTOMER INFORMATION
Segment 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 through three operating segments—Enterprise Intelligence, Communications and Cyber Intelligence,
and Video and Situation Intelligence. Organizing our business through three operating segments allows us to align our
resources and domain expertise to effectively address the Actionable Intelligence market. We address the Customer
Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the
Security Intelligence market opportunity through solutions from our Communications and Cyber Intelligence segment and
Video and Situation Intelligence segment, and we address the Fraud, Risk, and Compliance market opportunity through
solutions from all three operating segments.
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
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not allocate certain 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 costs when
calculating operating segment contribution. 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".
Revenue adjustments represent revenue of acquired companies which is included within segment revenue reviewed by the
CODM, but not recognizable within GAAP revenue. These adjustments primarily relate to the acquisition-date excess of the
historical carrying value over the fair value of acquired companies’ future maintenance and service performance obligations. As
the obligations are satisfied, we report our segment revenue using the historical carrying values of these obligations, which we
believe better reflects our ongoing maintenance and service revenue streams, whereas GAAP revenue is reported using the
obligations’ acquisition-date fair values.
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. There were no material changes in the allocation of
goodwill and acquired intangible assets by operating segment during the years ended January 31, 2014, 2013 and 2012. The
allocations of goodwill and acquired intangible assets by operating segment appear in Note 6, "Intangible Assets and
Goodwill".
Operating results by segment for the years ended January 31, 2014, 2013 and 2012 were as follows:
(in thousands)
Revenue:
Enterprise Intelligence
Segment revenue
Revenue adjustments
Communications Intelligence
Segment revenue
Revenue adjustments
Video Intelligence
Segment revenue
Revenue adjustments
Total revenue
Segment contribution:
Enterprise Intelligence
Communications Intelligence
Video Intelligence
Total segment contribution
Unallocated expenses, net:
Amortization of acquired intangible assets
Stock-based compensation
Other unallocated expenses
Total unallocated expenses, net
Operating income
Other expense, net
Income before provision for income taxes
114
Year Ended January 31,
2013
2012
2014
$
$
$
$
$
500,847
(1,946)
498,901
$
494,967
(4,489)
490,478
288,619
(616)
288,003
120,555
(167)
120,388
907,292
215,368
90,658
28,986
335,012
36,931
34,991
140,804
212,726
122,286
(58,971)
63,315
$
$
$
231,719
(2,112)
229,607
121,390
(1,933)
119,457
839,542
216,941
67,168
27,407
311,516
39,254
25,208
147,501
211,963
99,553
(31,789)
67,764
$
$
$
444,700
(6,682)
438,018
210,937
(4,323)
206,614
140,610
(2,594)
138,016
782,648
198,428
63,296
34,697
296,421
35,302
27,911
146,730
209,943
86,478
(40,321)
46,157
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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.
Revenue in the Americas includes the United States, Canada, Mexico, Brazil, and other countries in the Americas. Revenue in
Europe, the Middle East and Africa (“EMEA”) includes the United Kingdom, Germany, Israel, and other countries in those
regions. Revenue in the Asia-Pacific ("APAC") region includes Australia, India, Singapore, and other Asia-Pacific countries.
The information below summarizes revenue from unaffiliated customers by geographic area for the years ended January 31,
2014, 2013 and 2012:
(in thousands)
Americas:
United States
Other
Total Americas
EMEA
APAC
Total revenue
Year Ended January 31,
2014
2013
2012
$
374,518
$
387,927
$
133,531
508,049
185,151
214,092
907,292
$
72,089
460,016
201,727
177,799
839,542
$
$
342,479
70,944
413,423
213,554
155,671
782,648
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.
Property and equipment, net by geographic area consisted of the following as of January 31, 2014, 2013 and 2012:
(in thousands)
United States
Israel
Other countries
Total property and equipment, net
Significant Customers
2014
January 31,
2013
$
$
18,921
14,320
6,904
40,145
$
$
20,607
11,025
6,529
38,161
$
$
2012
11,406
10,150
6,733
28,289
One customer in our Communications Intelligence operating segment accounted for slightly more than 10% of our revenue
during the year ended January 31, 2014. No single customer accounted for more than 10% of our revenue during the years
ended January 31, 2013 and 2012.
19. SUBSEQUENT EVENTS
Business Combinations
On February 3, 2014, we completed the acquisition of KANA Software, Inc. and its subsidiaries through the merger of KANA
Software, Inc.'s parent holding company, Kay Technology Holdings, Inc. (collectively, "KANA"), with an indirect, wholly
owned subsidiary of Verint, with KANA continuing as the surviving company and as our wholly owned subsidiary. The
purchase price consisted of $542.4 million of cash paid at the closing, partially offset by $28.2 million of KANA’s cash
received in the acquisition, resulting in net cash consideration of $514.2 million. The purchase price is subject to customary
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purchase price adjustments related to the final determination of KANA's cash, debt, net working capital, transaction expenses
and taxes as of February 3, 2014.
The acquisition was funded through a combination of cash on hand, and as further described below, incremental term loans in
connection with Amendment No. 1 to our 2013 Amended Credit Agreement, and borrowings under our existing revolving
credit facility.
KANA, based in Sunnyvale, California and with global operations, is a leading provider of on-premises and cloud-based
solutions which create differentiated, personalized, and integrated customer experiences for large enterprises and mid-market
organizations. KANA is being integrated into our Enterprise Intelligence operating segment.
We incurred transaction and related costs, consisting primarily of professional fees directly related to the acquisition of KANA,
of $2.3 million for the year ended January 31, 2014. All transaction and related costs were expensed as incurred and are
included in selling, general and administrative expenses.
On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX Technologies Limited (“UTX”), a
provider of certain mobile device tracking solutions for security applications, from UTX Limited. UTX Limited was our
supplier of these products to our Communications Intelligence operating segment prior to the transaction. The purchase price
consisted of $82.9 million of cash paid at closing, subject to adjustment, and we agreed to make potential additional future cash
payments to UTX Limited of up to $1.5 million, contingent upon the achievement of certain performance targets over the
period from closing through June 30, 2014. The cash paid at closing was funded with cash on hand. The acquired business,
based in the EMEA region, is being integrated into our Communications Intelligence operating segment.
Transaction and related costs directly related to the acquisition of UTX were not significant for the year ended January 31,
2014. We are assessing whether the acquisition of UTX will change our current product development initiatives. Impairments
identified in the carrying values of existing technology assets, if any, will be recorded in the consolidated statement of
operations for the three months ended April 30, 2014.
We are currently in the process of completing the purchase price accounting and related allocations associated with the
acquisitions of KANA and UTX. Although this work is still in process, at this time we anticipate that a significant portion of
the respective purchase prices will be allocated to goodwill and acquired identifiable intangible assets, including technology
and customer assets, and we expect the preliminary purchase price accounting to be completed during the three months ending
April 30, 2014. Additionally, we are still determining the pro forma impact of these acquisitions on our results for the year
ended January 31, 2014.
Long-Term Debt
In connection with the acquisition of KANA, on February 3, 2014 we borrowed $125.0 million under our revolving credit
facility and entered into Amendment No. 1 to our 2013 Amended Credit Agreement pursuant to which, on such date, we
incurred $300.0 million of incremental term loans (the “2014 Term Loans”). The net proceeds of these borrowings were used
to fund a portion of the KANA purchase price.
Borrowings under our revolving credit facility bear interest as described in Note 7, "Long-Term Debt" and are due upon
maturity of the revolving credit facility in March 2018. The initial interest rate on the revolving credit borrowings was 4.00%,
but was adjusted to 3.50% on March 7, 2014, as described below.
The 2014 Term Loans were subject to an original issuance discount of 0.25%, or $0.8 million, which is being amortized as
interest expense over the term of the 2014 Term Loans using the effective interest method.
The 2014 Term Loans bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months
or less, at the end of the applicable interest period, at a per annum rate of, at our election:
(a) in the case of Eurodollar loans, the Adjusted LIBO Rate plus 2.75%. The Adjusted LIBO Rate is the greater of (i)
0.75% per annum and (ii) the product of (x) the LIBO Rate and (y) Statutory Reserves (both as defined in the 2013
Amended Credit Agreement), and
(b) in the case of Base Rate loans, the Base Rate plus 1.75%. The Base Rate is the greatest of (i) the administrative agent’s
prime rate, (ii) the Federal Funds Effective Rate (as defined in the 2013 Amended Credit Agreement) plus 0.50% and (iii)
the Adjusted LIBO Rate for a one-month interest period plus 1.00%.
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The initial interest rate on the 2014 Term Loans was 3.50%.
We incurred debt issuance costs, which are being quantified but are estimated to be approximately $7.1 million associated with
the 2014 Term Loans, which have been deferred and will be amortized as interest expense over the term of the 2014 Term
Loans.
We are required to make principal payments of $0.8 million per quarter on the 2014 Term Loans commencing on May 1, 2014
and continuing through August 1, 2019, with the remaining balance due in September 2019. Optional prepayments of the 2014
Term Loans are permitted without premium or penalty, other than customary breakage costs associated with the prepayment of
loans bearing interest based on LIBO Rates and a 1.0% premium applicable in the event of specified repricing transactions
prior to September 8, 2014. The other terms, conditions and provisions applicable to the 2014 Term Loans, including provisions
regarding security, guaranties, affirmative and negative covenants and events of defaults, are consistent with those applicable to
our 2013 Term Loans.
On February 3, 2014, we also entered into Amendment No. 2 to the 2013 Amended Credit Agreement which, among other
things, (i) permits us to increase the permitted amount of additional incremental term loans and revolving credit commitments
under the 2013 Amended Credit Agreement (beyond the 2014 Term Loans borrowed under Amendment No. 1) by up to, in the
aggregate, $200.0 million plus an additional amount such that the First Lien Leverage Ratio (as defined in Amendment No. 2)
would not exceed the specified maximum ratio set forth therein, (ii) increased the size of certain negative covenant basket
carve-outs, (iii) permits us to issue Permitted Convertible Indebtedness (as defined in Amendment No. 2), and (iv) permits us to
refinance all or a portion of any existing class of term loans under the 2013 Amended Credit Agreement with replacement term
loans.
Further, on February 3, 2014, we entered into Amendment No. 3 to the 2013 Amended Credit Agreement which extended by
one year, to January 31, 2016, the step-down date of the leverage ratio covenant applicable to our revolving credit facility and,
subject to the effectiveness of Amendment No. 4 (as described below), repriced the interest rate applicable to borrowings under
the revolving credit facility to the interest rate applicable to the 2014 Term Loans.
On March 7, 2014, we entered into Amendment No. 4 to our 2013 Amended Credit Agreement to, among other things, reprice
the interest rate applicable to the 2013 Term Loans to the interest rate applicable to the 2014 Term Loans. The repricing of the
interest rate applicable to borrowings under the revolving credit facility contemplated by Amendment No. 3 became effective
on March 7, 2014, upon the effectiveness of Amendment No. 4.
We incurred approximately $2.4 million of fees in consideration of Amendment No. 4, which have been deferred and will be
amortized as interest expense over the remaining term of the 2013 Term Loans. As of March 7, 2014, there were approximately
$4.3 million of unamortized deferred fees and $2.8 million of unamortized original issuance term loan discount associated with
the 2013 Term Loans. We are assessing the impact that Amendment No. 4 may have on these unamortized costs.
Stock Bonus Program
On March 21, 2014, our board of directors approved up to 125,000 shares of common stock, and a discount of 15%, for awards
under our stock bonus program for the year ending January 31, 2015. Executive officers will be permitted to participate in this
program for the year ending January 31, 2015, but only to the extent that shares remain available for awards following the
enrollment of all other participants. Shares awarded to executive officers with respect to the 15% discount will be subject to a
one year vesting period.
20. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized condensed quarterly financial information for the years ended January 31, 2014 and 2013 appears in the following
tables:
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(in thousands, except per share data)
Revenue
Gross profit
Income (loss) before provision for income taxes
Net income (loss)
Net income (loss) attributable to Verint Systems Inc.
Net income (loss) attributable to Verint Systems Inc.
common shares:
for basic net income (loss) per common share
for diluted net income (loss) per common share
Net income (loss) per common share attributable to Verint
Systems Inc.
Basic
Diluted
(in thousands, except per share data)
Revenue
Gross profit
Income before provision for income taxes
Net income
Net income attributable to Verint Systems Inc.
Net income attributable to Verint Systems Inc. common
shares:
for basic net income per common share
for diluted net income per common share
Net income per common share attributable to Verint
Systems Inc.
Basic
Diluted
Three Months Ended
April 30,
2013
July 31,
2013
October 31,
2013
January 31,
2014
$
204,786
131,478
(4,834)
(7,937)
(9,153)
$
222,447
149,840
21,314
18,505
17,536
$
224,314
152,157
30,011
24,054
22,487
255,745
167,397
16,824
24,154
22,887
(9,327)
(9,327)
17,536
17,536
22,487
22,487
22,887
22,887
(0.18) $
(0.18) $
0.33
0.33
$
$
0.42
0.42
$
$
0.43
0.42
Three Months Ended
April 30,
2012
July 31,
2012
October 31,
2012
January 31,
2013
$
196,635
128,307
14,029
11,630
10,035
$
212,426
136,446
18,037
13,265
12,607
$
201,520
136,238
8,858
6,615
5,471
228,961
156,547
26,840
27,294
25,889
6,291
6,291
8,739
8,739
1,562
1,562
21,938
25,889
0.16
0.16
$
$
0.22
0.22
$
$
0.04
0.04
$
$
0.55
0.50
$
$
$
$
$
$
Net income (loss) per common share attributable to Verint Systems Inc. is computed independently for each quarterly period
and for the year. Therefore, the sum of quarterly net income (loss) per common share amounts may not equal the amounts
reported for the years.
The computation of diluted net income per share attributable to Verint Systems Inc. for the quarter ended January 31, 2013
assumes the conversion of our Preferred Stock into approximately 11.2 million shares of common stock.
Quarterly operating results for the year ended January 31, 2014 include a $9.7 million loss on extinguishment of debt in the
three months ended April 30, 2013 associated with the amendment of a credit agreement.
Quarterly operating results for the year ended January 31, 2013 include professional fees and related expenses associated with
the CTI Merger of approximately $0.9 million, $2.4 million, $9.6 million, and $3.2 million for the four quarterly periods in the
year ended January 31, 2013, respectively.
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. Our revenue
and operating income are typically highest in the fourth quarter and lowest in the first quarter. Moreover, revenue and operating
income in the first quarter of a new year may be lower than in the fourth quarter of the preceding year, potentially by a
significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders
concentrated in the later part of that month. We believe that these seasonal and cyclical factors primarily reflects customer
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spending patterns and budget cycles, as well as the impact of compensation incentive plans for our sales personnel. While
seasonal and cyclical factors such as these are common in the software and technology industry, this pattern should not be
considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic
conditions, also have an impact on our business and financial results. See "Risk Factors" under Item 1A for a more detailed
discussion of factors which may affect our business and financial results.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The information contained in this section covers management's evaluation of our disclosure controls and procedures and
management's assessment of our internal control over financial reporting in each case as of January 31, 2014.
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, as of January 31, 2014. Disclosure controls and procedures are those 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 effective as of
January 31, 2014.
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 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 January 31, 2014. In making this assessment, our management utilized the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control -
Integrated Framework (1992). As a result of this evaluation, our management concluded that our internal control over financial
reporting was effective as of January 31, 2014.
Our independent registered accounting firm, Deloitte & Touche LLP, has audited the effectiveness of our internal control over
financial reporting as stated in their report included herein.
Changes in Internal Control Over Financial Reporting
Under applicable SEC rules (Exchange Act Rules 13a-15(c) and 15d-15(c)) management is required to evaluate any change in
internal control over financial reporting that occurred during each fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
In evaluating whether there were any reportable changes in our internal control over financial reporting during the quarter
ended January 31, 2014, management determined, with the participation of our Chief Executive Officer and Chief Financial
Officer, that there were no changes in our internal control over financial reporting that have materially affected, or are
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reasonably likely to materially affect, our internal control over financial reporting.
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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 internal control over financial reporting of Verint Systems Inc. and subsidiaries (the "Company") as of
January 31, 2014, based on criteria established in Internal Control — Integrated Framework (1992) 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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
January 31, 2014, based on the criteria established in Internal Control — Integrated Framework (1992) 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 and for the year ended January 31, 2014 of the Company and our report dated March
31, 2014 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 31, 2014
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Item 9B. Other Information
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Except as set forth below, the information required by Item 10 will be included under the captions “Election of Directors”,
“Corporate Governance”, “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance" in our
definitive Proxy Statement for the 2014 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal
year ended January 31, 2014 (the "2014 Proxy Statement") and is incorporated herein by reference.
Corporate Governance Guidelines
All of our employees, including our executive officers, are required to comply with our Code of Conduct. Additionally, our
Chief Executive Officer, Chief Financial Officer, and senior officers must comply with our Code of Business Conduct and
Ethics for Senior Officers. The purpose of these corporate policies is to ensure to the greatest possible extent that our business
is conducted in a consistently legal and ethical manner. The text of the Code of Conduct and the Code of Business Conduct and
Ethics for Senior Officers is available on our website (www.verint.com). We intend to disclose on our website any amendment
to, or waiver from, a provision of our policies as required by law.
Item 11. Executive Compensation
The information required by Item 11 will be included under the captions “Executive Compensation” and “Compensation
Committee Interlocks and Insider Participation” in the 2014 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Except as set forth below, the information required by Item 12 will be included under the caption “Security Ownership of
Certain Beneficial Owners and Management” in the 2014 Proxy Statement and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information regarding our equity compensation plans as of January 31, 2014.
(a)
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options,
Warrants, and
Rights
(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))
Plan Category
Equity compensation plans approved by security holders
2,920,411 (2)
$
34.60
6,338,833 (3)
Equity compensation plans not approved by security holders
—
—
Total
2,920,411
$
34.60
6,338,833
(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 515,908 stock options and 2,404,503 restricted stock units.
(3) Excludes 265,316 shares available under the Vovici Corporation 2006 Amended and Restated Stock Plan, which plan was
assumed in connection with our acquisition of Vovici Corporation in 2011 and is not expected to be used for future awards.
123
Table of Contents
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 will be included under the captions “Corporate Governance” and “Certain Relationships
and Related Person Transactions” in the 2014 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 will be included under the caption “Audit Matters” in the 2014 Proxy Statement and is
incorporated herein by reference.
124
Table of Contents
PART IV
Item 15. Exhibits, Financial Statement Schedules
(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
in Part II, Item 8 of this Form 10-K.
(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
Description
2.1
2.2
2.3
2.4
3.1
3.2
3.3
Agreement and Plan of Merger, dated August 12, 2012, by and among
Comverse Technology, Inc., Verint Systems Inc. and Victory Acquisition
I LLC*
Agreement and Plan of Merger, dated January 6, 2014, by and among
Verint Systems Inc., Kiwi Acquisition Inc., Kay Technology Holdings,
Inc. and Accel-KKR Capital Partners III, LP*
Distribution Agreement, dated as of October 31, 2012, by and between
Comverse Technology, Inc. and Comverse, Inc.
Tax Disaffiliation Agreement, dated as of October 31, 2012, by and
between Comverse Technology, Inc. and Comverse, Inc.
Filed Herewith /
Incorporated by
Reference from
Form 8-K filed on August 13, 2012
Form 8-K filed on January 6, 2014
Comverse, Inc. Current Report on
Form 8-K filed with the SEC on
November 2, 2012
Comverse, Inc. Current Report on
Form 8-K filed with the SEC on
November 2, 2012
Amended and Restated Certificate of Incorporation of Verint Systems
Inc.
Form S-1 (Commission File No.
333-82300) effective on May 16, 2002
Amended and Restated By-laws of Verint Systems Inc.
Form 8-K filed on February 5, 2013
Amended and Restated Certificate of Designation, Preferences and
Rights of the Series A Convertible Perpetual Preferred Stock of Verint
Systems Inc.
Form 10-Q filed on September 6, 2012
4.1
Specimen Common Stock certificate
Form S-1 (Commission File No.
333-82300) effective on May 16, 2002
4.2
10.1
10.2
10.3
10.4
10.5
Specimen Series A Convertible Perpetual Preferred Stock certificate
Form 10-K filed on March 17, 2010
Form of Indemnification Agreement
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)
Amendment No. 2 to Verint Systems Inc. Stock Incentive Compensation
Plan (dated March 4, 2009)
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 May 1, 2003
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
125
Table of Contents
10.6
10.7
10.8
10.9
10.10
10.11
10.12
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
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
Verint Systems Inc. 2004 Stock Incentive Compensation Plan, as
amended and restated
Form 8-K filed on January 10, 2006
Amendment No. 1 to Verint Systems Inc. 2004 Stock Incentive
Compensation Plan, as amended and restated (dated December 23, 2008)
Form 10-K filed on March 17, 2010
Witness Systems Amended and Restated Stock Incentive Plan
Witness Systems, Inc. Form 10-Q for
the period ended June 30, 2005
Amendment No. 1 to Witness Systems Amended and Restated Stock
Incentive Plan (dated May 29, 2001)
Witness Systems, Inc. Form 10-K filed
on March 17, 2006
Amendment No. 2 to Witness Systems Amended and Restated Stock
Incentive Plan (dated January 15, 2004)
Witness Systems, Inc. Form 10-K filed
on March 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)
10.13
Verint Systems Inc. 2010 Long-Term Stock Incentive Plan
Form 10-K filed on March 17, 2010
Form 10-K filed on March 17, 2010
Form S-8 (Commission File No.
333-169768) effective on October 5,
2010
Form 8-K filed on June 19, 2012
Amendment No. 1 to Verint Systems Inc. 2010 Long-Term Stock
Incentive Plan
Vovici Corporation Amended and Restated Stock Plan
Form 10-K filed on April 2, 2012
Amended and Restated Comverse Technology, Inc. 2011 Stock Incentive
Compensation Plan
Form S-8 (Commission File No.
333-189062) effective on June 3, 2013
Verint Systems Inc. Stock Bonus Program
Form 10-Q filed on June 3, 2013
Form of Stock Option Award Agreement**
Form 8-K filed on December 7, 2004
Form of Time-Based Restricted Stock Unit Award Agreement**
Form 10-K filed on March 17, 2010
Form of Performance-Based Restricted Stock Unit Award Agreement**
Form 10-K filed on March 17, 2010
Form of Time-Based Deferred Stock Award Agreement**
Form 10-K filed on March 17, 2010
Form of Performance-Based Deferred Stock Award Agreement**
Form 10-K filed on March 17, 2010
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**
Form 10-K filed on March 17, 2010
Form 10-K filed on April 8, 2010
Form 10-K filed on April 8, 2010
Form of Time-Based Deferred Stock Award Agreement Solely Related to
2010 Grant**
Form 10-K filed on April 8, 2010
Form of Performance-Based Deferred Stock Award Agreement Solely
Related to 2010 Grant**
Form 10-K filed on April 8, 2010
Form of Global Performance-Based Restricted Stock Unit Award**
Form 10-K filed on April 6, 2011
Form of Global Time-Based Restricted Stock Unit Award**
Form 10-K filed on April 6, 2011
Form of Performance-Based Restricted Stock Unit Award Agreement for
Grants Subsequent to March 2012**
Form of Time-Based Restricted Stock Unit Award Agreement for Grants
Subsequent to March 2012**
Form of Performance-Based Restricted Stock Unit Award Agreement for
Grants Subsequent to March 2013**
Form 10-K filed on April 2, 2012
Form 10-K filed on April 2, 2012
Form 10-K filed on March 28, 2013
Form of Time-Based Restricted Stock Unit Award Agreement for Grants
Subsequent to March 2013**
Form 10-K filed on March 28, 2013
Form of Special Performance-Based Restricted Stock Unit Award
Agreement for Grants Subsequent to March 2013**
Form 8-K filed on April 22, 2013
Form of Performance-Based Restricted Stock Unit Award Agreement for
Grants Subsequent to March 2014**
Filed herewith
126
Table of Contents
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
21.1
23.1
31.1
Form of Time-Based Restricted Stock Unit Award Agreement for Grants
Subsequent to March 2014**
Filed herewith
Credit Agreement dated as of April 29, 2011 among Verint Systems Inc.,
as Borrower, the lenders from time to time party thereto, and Credit
Suisse AG, as administrative agent and collateral agent
Amendment and Restatement Agreement, dated as of March 6, 2013,
among Verint Systems Inc., the lenders party thereto, and Credit Suisse
AG, as administrative agent and collateral agent, including the Amended
and Restated Credit Agreement, dated as of March 6, 2013, among Verint
Systems Inc., as Borrower, the lenders from time to time party thereto,
and Credit Suisse AG, as administrative agent and collateral agent
attached as Exhibit A thereto
Amendment No. 1, Incremental Amendment and Joinder Agreement
dated February 3, 2014 to the Amended and Restated Credit Agreement,
dated as of March 6, 2013, among Verint Systems Inc., as Borrower, the
lenders from time to time party thereto, and Credit Suisse AG, as
administrative agent and collateral agent
Amendment No. 2, dated February 3, 2014 to the Amended and Restated
Credit Agreement, dated as of March 6, 2013, among Verint Systems
Inc., as Borrower, the lenders from time to time party thereto, and Credit
Suisse AG, as administrative agent and collateral agent
Amendment No. 3, dated February 3, 2014 to the Amended and Restated
Credit Agreement, dated as of March 6, 2013, among Verint Systems
Inc., as Borrower, the lenders from time to time party thereto, and Credit
Suisse AG, as administrative agent and collateral agent
Amendment No. 4, dated March 7, 2014 to the Amended and Restated
Credit Agreement, dated as of March 6, 2013, among Verint Systems
Inc., as Borrower, the lenders from time to time party thereto, and Credit
Suisse AG, as administrative agent and collateral agent
Form 8-K filed on May 2, 2011
Form 8-K filed on March 8, 2013
Form 8-K filed on February 3, 2014
Form 8-K filed on February 3, 2014
Form 8-K filed on February 3, 2014
Form 8-K filed on March 10, 2014
Employment Agreement, dated February 23, 2010, between Verint
Systems Inc. and Dan Bodner**
Amended and Restated Employment Agreement, dated July 13, 2011,
between Verint Systems Inc. and Douglas Robinson**
Second Amended and Restated Employment Agreement, dated July 13,
2011, between Verint Systems Inc. and Elan Moriah**
Contract of Employment, dated July 10, 2011, by and among Meir
Sperling, Verint Systems Ltd., and Verint Systems Inc. **
Employment Agreement, dated April 16, 2001, between Comverse
Infosys UK Limited and David Parcell**
Form 8-K filed on February 23, 2010
Form 8-K filed on July 14, 2011
Form 8-K filed on July 14, 2011
Form 8-K filed on July 14, 2011
Form 10-K filed on March 17, 2010
Amended and Restated Supplemental Employment Agreement, dated
July 13, 2011, between Verint Systems UK Limited and David Parcell**
Form 8-K filed on July 14, 2011
Settlement Agreement, dated September 30, 2013, between Verint
Systems UK Limited and David Parcell**
Consulting Agreement, dated as of October 1, 2013, between Verint
Systems UK Limited and David Parcell**
Second Amended and Restated Employment Agreement, dated July 13,
2011, between Verint Systems Inc. and Peter Fante**
Form 10-Q Filed on December 4, 2013
Form 10-Q Filed on December 4, 2013
Form 8-K filed on July 14, 2011
Summary of the Terms of Verint Systems Inc. Executive Officer Annual
Bonus Plan**
Form 10-K filed on May 19, 2010
Federal Income Tax Sharing Agreement, dated as of January 31, 2002,
between Comverse Technologies, Inc. an Verint Systems Inc.
Subsidiaries of Verint Systems Inc.
Consent of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm
Form S-1 (Commission File No.
333-82300) effective on May 16, 2002
Filed herewith
Filed herewith
Certification of Dan Bodner, Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Filed herewith
127
Table of Contents
31.2
32.1
32.2
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)
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
These exhibits are being "furnished" with this periodic report and are not deemed "filed" with the SEC and are not
(1)
incorporated by reference in any filing of the company under the Securities Act of 1933, as amended or the Securities Exchange Act of
1934, as amended.
* Certain exhibits and schedules have been omitted, and the company agrees to furnish supplementally to the SEC a copy of any
omitted exhibits or schedules upon request.
** 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
128
Table of Contents
SIGNATURES
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.
March 31, 2014
March 31, 2014
VERINT SYSTEMS INC.
/s/ Dan Bodner
Dan Bodner
President and Chief Executive Officer
/s/ Douglas E. Robinson
Douglas E. Robinson
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Dan Bodner
Dan Bodner
Chief Executive Officer and President, and Director
March 31, 2014
(Principal Executive Officer)
/s/ Douglas E. Robinson
Chief Financial Officer
March 31, 2014
Douglas E. Robinson
(Principal Financial Officer and Principal Accounting Officer)
/s/ Victor A. DeMarines
Chairman of the Board of Directors
March 31, 2014
Victor A. DeMarines
/s/ John R. Egan
John R. Egan
/s/ Larry Myers
Larry Myers
/s/ Richard Nottenburg
Richard Nottenburg
/s/ Howard Safir
Howard Safir
/s/ Earl Shanks
Earl Shanks
Director
Director
Director
Director
Director
129
March 31, 2014
March 31, 2014
March 31, 2014
March 31, 2014
March 31, 2014
EXHIBIT 10.35
___________ __, 20__
[Name of Recipient]
[Address]
Dear [Name]:
Notice of Grant of Performance-Based Restricted Stock Units
Congratulations! You have been granted a performance-based restricted stock unit award (the “Award”)
pursuant to the terms and conditions of the [Verint Systems Inc. 2010 Long-Term Stock Incentive Plan]
[Comverse Technology, Inc. 2011 Stock Incentive Compensation Plan (assumed by the Company)][, as
modified by the [UK Sub-Plan thereunder][Canadian Sub-Plan thereunder][Israeli Supplement thereto]
[India Addendum],] (the “Plan”) and the attached Verint Systems Inc. (the “Company”) Performance-Based
Restricted Stock Unit Award Agreement (the “Agreement”). The details of your Award are specified below and in
the attached Agreement. Capitalized terms used in this Notice of Grant and not otherwise defined shall have the
meanings given in the Plan or the Agreement.
Granted To:
ID#:
[Name]
[ID Number]
Grant Date:
[____________], 20__
Target Number
of Units Granted:
[Number] (with the opportunity to earn up to
[Number] additional restricted stock units)
Price Per Unit:
U.S.$0.00
Vesting Schedule:
The restricted stock units granted hereby shall vest on the dates or at
the times set forth in the Agreement, upon the achievement of specified
performance goals, but in any event, no earlier than [________], 20__.
Verint Systems Inc.
By my signature below or my electronic acceptance hereof (if provided to me electronically), I hereby acknowledge
my receipt of this Award granted on the date shown above, which has been issued to me under the terms and
conditions of the Plan and the Agreement. I agree that the Award is subject to all of the terms and conditions of this
Notice of Grant, the Plan, and the Agreement.
If I am a resident of Canada, I also acknowledge having requested that this Notice and all documents
referred to herein be drafted in the English language. Je reconnais également avoir exigé que ce document ainsi que
tout document auquel ce document fait référence, soient rédigés en langue anglaise.
Signature: _______________________________
Date: ______________
1 Not to exceed 100% of the Target Number of Units (or such lower percentage as specified by the grant resolutions).
2 Note that the maximum number of Restricted Stock Units granted is subject to the approval of the Compensation Committee.
VERINT SYSTEMS INC.
PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT
This Performance-Based Restricted Stock Unit Award Agreement (“Agreement”) and the [Verint Systems Inc. 2010
Long-Term Stock Incentive Plan][Comverse Technology, Inc. 2011 Stock Incentive Compensation Plan
(assumed by the Company)][, as modified by the [UK Sub-Plan thereunder][Canadian Sub-Plan thereunder]
[Israeli Supplement thereto][India Addendum],] (the “Plan”) govern the terms and conditions of the
Performance-Based Restricted Stock Unit Award (the “Award”) specified in the Notice of Grant of Performance-
Based Restricted Stock Units (the “Notice of Grant”) delivered herewith entitling the person to whom the Notice of
Grant is addressed (“Grantee”) to receive from Verint Systems Inc. (the “Company”) the target number of
performance-based restricted stock units indicated in the Notice of Grant and the opportunity to earn additional
restricted stock units (if provided for in the Notice of Grant), as described herein, subject to the terms and conditions
of this Agreement.
1
RESTRICTED STOCK UNITS; VESTING
1.1
Grant of Performance-Based Restricted Stock Units.
(a)
(b)
(c)
(d)
Subject to the terms of this Agreement, the Company hereby grants to Grantee the target number of
performance-based restricted stock units (as may be further defined under the terms of the Plan, “Restricted
Stock Units”) indicated in the Notice of Grant (the “Target Units”), and the opportunity to earn additional
Restricted Stock Units (if provided for in the Notice of Grant), as described herein, (the “Overachievement
Units”, and together with the Target Units, the “Total Units”), vesting of which depends upon the
Company’s performance during the Performance Period (defined below).
Grantee’s right to receive all or any portion of the Total Units will be contingent upon the Company’s
achievement of one or more performance goals specified in a performance matrix attached as an exhibit to
this Agreement (the “Performance Matrix”) measured over the period from [________] through
[________] (the “Performance Period”).
The performance goal(s) and related “Target”, “Threshold”, and “Maximum” levels (as described below)
and any associated definitions for the Performance Period are memorialized in the Performance Matrix
attached as Exhibit A hereto.
If and when the Restricted Stock Units vest in accordance with the terms of the Plan, this Agreement, and
the Notice of Grant without forfeiture, and upon the satisfaction of all other applicable conditions as to the
Restricted Stock Units, one Share shall be issuable to Grantee for each Restricted Stock Unit that vests on
such date, which Shares, except as otherwise provided herein or in the Notice of Grant, will be free of any
Company-imposed transfer restrictions. Any fractional Restricted Stock Unit remaining after the Award is
fully vested shall be discarded and shall not be converted into a fractional Share.
1.2
Achievement of Payout Percentages and Vesting of Performance-Based Restricted Stock Units.
(a)
(b)
Below Threshold. If upon conclusion of the Performance Period, achievement of a performance goal falls
below the “Threshold” level for such performance goal, as set forth in the Performance Matrix, a payout
percentage of 0% in respect of such performance goal shall be achieved.
At a Level or Between Levels. If, upon conclusion of the Performance Period, achievement of a
performance goal equals a specified level for such performance goal as set forth in the Performance Matrix
(other than the “Maximum” level), the payout percentage specified for such level in the Performance
Matrix shall be achieved. However, if, upon conclusion of the Performance Period, achievement of a
performance goal exceeds a specified level for such performance goal as set forth in the Performance
Matrix (e.g., above the “Threshold” level but less than the “Maximum” level), the payout percentage shall
be calculated on a linear basis based on (i) where the actual achievement of such performance goal falls
between the two nearest specified levels as set forth in the Performance Matrix and (ii) the corresponding
payout percentages specified in the Performance Matrix. Notwithstanding the foregoing, if, upon
conclusion of the Performance Period, achievement of such performance goal exceeds the “Target” level
(but is less than the “Maximum” level) the payout percentage in respect of such performance goal shall
only exceed the payout percentage specified for the Target level if the Notice of Grant indicates that
Overachievement Units are eligible to be earned.
Equals or Exceeds Maximum. If the Notice of Grant indicates that Overachievement Units are eligible to
be earned, and upon conclusion of the Performance Period, achievement of a performance goal equals or
exceeds the “Maximum” level for such performance goal, as set forth in the Performance Matrix, the
payout percentage indicated on the Performance Matrix for “Maximum” performance in respect of such
performance goal shall be achieved.
Vesting of Units; Independence of Performance Goals. Subject to Section 1.2(e), the number of Restricted
Stock Units that will vest in the Performance Period shall, unless otherwise specified in the Performance
Matrix, be determined by multiplying the “combined average payout percentage achieved” by the number
of Target Units eligible to be earned. The “combined average payout percentage achieved” shall, unless
otherwise specified in the Performance Matrix, be the quotient of (A) and (B), where (A) is the sum of the
actual payout percentages achieved for each performance goal, and (B) is the number of performance goals.
If the foregoing calculation would result in the vesting of a fraction of a Restricted Stock Unit, the result of
the calculation will be rounded down to the nearest whole Restricted Stock Unit.
Determination of Earned Award. Not later than 60 days following the Board’s receipt of the Company’s
audited financial statements covering the Performance Period, the Committee will determine (i) whether
and to what extent the performance goal(s) have been satisfied, (ii) the number of Restricted Stock Units
that shall have become vested hereunder pursuant to the terms hereof, and (iii) whether all other conditions
to receipt of the Shares have been met. The Committee’s determination of the foregoing shall be final and
binding on Grantee absent a showing of manifest error. Notwithstanding any other provision of this
Agreement, no Restricted Stock Units shall vest (x) until the Committee has made the foregoing
determinations for the Performance Period and (y) prior to the date discussed in the next paragraph.
Notwithstanding anything herein to the contrary: (A) the Committee will have the discretion, but not the
obligation, to adjust any budget-related performance goals and/or the associated payout percentage
indicated on the Performance Matrix to reflect the impact of extraordinary and non-recurring unbudgeted
Company merger/acquisition or similar activity in order to prevent unintended enlargement or dilution of
benefits to Grantee hereunder as a result of such activity, provided that the decision to make any such
adjustment(s) pursuant to this clause (A), if any, shall occur in connection with the Board’s approval of the
applicable merger/acquisition or similar activity, and (B) the final number of Restricted Stock Units that
shall vest hereunder may be adjusted upward or downward by the Committee in its sole discretion in an
amount not to exceed 25% of the number of Restricted Stock Units that would otherwise have vested
hereunder but for the application of this clause (B); provided, however, that in no event will the number of
Shares issued pursuant to the Award exceed the Total Units (including as a result of the application of
clause (A) or (B) of this sentence).
Time Vesting Limitation. Notwithstanding the determination of the Board or the Committee pursuant to the
previous paragraph, no Restricted Stock Units will vest prior to the date specified in the Notice of Grant.
Other Vesting Provisions. Any Restricted Stock Units that do not become vested based on the foregoing
provisions will be automatically forfeited by Grantee without consideration.
(c)
(d)
(e)
(f)
(g)
1.3
Forfeiture.
(a)
Except as otherwise provided herein, Grantee’s right to receive any of the Restricted Stock Units is
contingent upon his or her remaining in the Continuous Service of the Company or a Subsidiary or Affiliate
through the respective vesting dates specified in the Notice of Grant and hereunder. If Grantee’s
Continuous Service terminates for any reason, all Restricted Stock Units which are then unvested shall,
unless otherwise determined by the Board or the Committee in its sole discretion or subject to a separate
written agreement between the parties, be cancelled and the Company shall thereupon have no further
obligation thereunder. For the avoidance of doubt, subject to a separate written agreement between the
parties, Grantee acknowledges and agrees that he or she has no expectation that any Restricted Stock Units
will vest on the termination of his or her Continuous Service for any reason and that he or she will not be
entitled to make a claim for any loss occasioned by such forfeiture as part of any claim for breach of his or
her employment or service contract or otherwise.
1.4
Delivery.
(a)
(b)
Subject to Section 1.6 and any other applicable conditions hereunder, as soon as administratively
practicable following the vesting of Restricted Stock Units in accordance with the terms of this Agreement
(but in no event later than the date the short-term deferral period under Section 409A of the Code expires
with respect to such vested Shares), the Company shall issue the applicable Shares and, at its option, (i)
deliver or cause to be delivered to Grantee a certificate or certificates for the applicable Shares or (ii)
transfer or arrange to have transferred the Shares to a brokerage account of Grantee designated by the
Company.
Notwithstanding the foregoing, the issuance of Shares upon the vesting of a Restricted Stock Unit shall be
delayed in the event the Company reasonably anticipates that the issuance of Shares would constitute a
violation of U.S. federal securities laws, other applicable law, or Nasdaq rules. If the issuance of the Shares
is delayed by the provisions of this paragraph, such issuance shall occur at the earliest date at which the
Company reasonably anticipates issuing the Shares will not cause such a violation. For purposes of this
paragraph, the issuance of Shares that would cause inclusion in gross income or the application of any
penalty provision or other provision of the Code or other tax legislation applicable to Grantee is not
considered a violation of applicable law.
1.5
Restrictions.
(a)
Except as provided herein, Grantee shall not have any rights as a stockholder with respect to any Shares to
be distributed under the Plan until he or she has become the holder of such Shares as provided in the Plan.
(b)
The Award is subject to the transferability restrictions under the Plan.
1.6
Tax; Withholding.
(a)
(b)
The Company shall determine the amount of any withholding or other tax required by law to be withheld or
paid by the Company or its Subsidiary with respect to any income recognized by Grantee with respect to
the Restricted Stock Units or the issuance of Shares pursuant to the terms of the Restricted Stock Units.
Neither the Company nor any Subsidiary, Affiliate or agent makes any representation or undertaking
regarding the treatment of any tax or withholding in connection with the grant or vesting of the Award or
the subsequent sale of Shares subject to the Award. The Company and its Subsidiaries and Affiliates do not
commit and are under no obligation to structure the Award to reduce or eliminate Grantee’s tax liability and
none of the Company, any of its Subsidiaries or Affiliates, or any of their employees or representatives shall
have any liability to Grantee with respect thereto.
(c)
Notwithstanding the withholding provision in the Plan:
(i)
(ii)
If in the tax jurisdiction in which Grantee resides, a tax withholding obligation arises upon vesting
of the Award (regardless of when the Shares underlying the Award are delivered to Grantee), or for
non-employee directors of the Company in any jurisdiction, on each date the Award actually vests,
if (1) the Company does not have in place an effective registration statement under the Securities
Act of 1933, as amended (the “Securities Act”) or there is not a Securities Act exemption available
under which Grantee may sell Shares or (2) Grantee is subject to a Company-imposed trading
blackout, then unless Grantee has made other arrangements satisfactory to the Company, the
Company will (x) with respect to employees of the Company, withhold from the Shares to be
delivered to Grantee such number of Shares as are sufficient in value (as determined by the
Company in its sole discretion) to cover the minimum amount of the tax withholding obligation
and (y) with respect to non-employee directors of the Company, settle 40% of the portion of the
Award then vesting in cash by paying Grantee cash (in accordance with the Company’s normal
payroll practices) equal to the Fair Market Value of one Share for each Restricted Stock Unit being
settled in such manner.
If in the tax jurisdiction in which Grantee resides a tax withholding obligation arises upon delivery
of the Shares underlying the Restricted Stock Units (regardless of when vesting occurs), then
following each date the Award actually vests, the Company will defer the delivery of the Shares
otherwise deliverable to Grantee until the earliest of (1) the date Grantee’s employment with the
Company (or a Subsidiary or Affiliate) is terminated (by either party), (2) the date that the short-
term deferral period under Section 409A of the Code expires with respect to such vested Shares, or
(3) the date on which the Company has in place an effective registration statement under the
Securities Act or there is a Securities Act exemption available under which Grantee may sell
Shares and on which Grantee is not subject to a Company-imposed trading blackout (the earliest
of such dates, the “Delivery Date”). If on the Delivery Date (1) the Company does not have in
place an effective registration statement under the Securities Act or there is not a Securities Act
exemption available under which Grantee may sell Shares or (2) Grantee is subject to a Company-
imposed trading blackout, then unless Grantee has made other arrangements satisfactory to the
Company, the Company will withhold from the Shares to be delivered to Grantee such number of
Shares as are sufficient in value (as determined by the Company in its sole discretion) to cover the
minimum amount of the tax withholding obligation.
(d)
(e)
Grantee is ultimately liable and responsible for all taxes owed by Grantee in connection with the Award,
regardless of any action the Company or any of its Subsidiaries, Affiliates or agents takes with respect to
any tax withholding obligations that arise in connection with the Award. Accordingly, Grantee agrees to
pay to the Company or its relevant Subsidiary or Affiliate as soon as practicable, including through
additional payroll withholding (if permitted under applicable law), any amount of required tax withholding
that is not satisfied by any such action of the Company or its Subsidiary or Affiliate.
The Committee shall be authorized, in its sole discretion, to establish such rules and procedures relating to
the use of Shares of common stock to satisfy tax withholding obligations as it deems necessary or
appropriate to facilitate and promote the conformity of Grantee’s transactions under this Agreement with
Rule 16b-3 under the Securities Exchange Act of 1934, as amended, if such rule is applicable to
transactions by Grantee.
Detrimental Activity. In the event the Company determines or discovers during or after the course of
1.7
Grantee’s employment or service that Grantee committed an act during the course of employment or service that
constitutes or would have constituted Cause for termination, the Committee shall have the right, to the maximum
extent permissible under applicable law, to cancel any or all of Grantee’s then outstanding Awards (whether or not
vested).
1.8
Erroneously Awarded Compensation. The Award, if and to the extent subject to the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, may be subject to a claw back policy or other incentive compensation
policy established from time to time by the Company to comply with such Act.
2
CERTAIN DEFINITIONS
Defined terms not defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. For
the avoidance of doubt, in each instance that the term “Company” is used in the Plan, “Company” shall mean Verint
Systems Inc.
3
REPRESENTATIONS OF GRANTEE
Grantee hereby represents to the Company that Grantee has read and fully understands the provisions of this Agreement,
and Grantee acknowledges that Grantee is relying solely on his or her own advisors with respect to the tax consequences
of this Award. Grantee acknowledges that this Agreement has not been reviewed or approved by any regulatory authority
in his or her country of residence or otherwise.
4
NOTICES
All notices or communications under this Agreement shall be in writing, addressed as follows:
To the Company:
Verint Systems Inc.
330 South Service Road
Melville, NY 11747-3201
U.S.A.
+(631) 962-9600 (phone)
+(631) 962-9623 (fax)
Attn: Chief Legal Officer
To Grantee:
as set forth in the Company’s payroll
records
Any such notice or communication shall be (a) delivered by hand (with written confirmation of receipt) or sent by a
nationally recognized overnight delivery service (receipt requested) or (b) sent certified or registered mail, return receipt
requested, postage prepaid, addressed as above (or to such other address as such party may designate in writing from
time to time), and the actual date of receipt shall determine the time at which notice was given. Grantee will promptly
notify the Company in writing upon any change in Grantee’s mailing address or e-mail address.
5
BINDING AGREEMENT
This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of Grantee and the assigns
and successors of the Company.
6
ENTIRE AGREEMENT; AMENDMENT
The Plan, this Agreement and the Notice of Grant represent the entire agreement of the parties with respect to the subject
matter hereof. Subject to the terms of the Plan, the Committee may waive any conditions or rights under, amend any
terms of, or alter, suspend, discontinue, cancel or terminate, the Award; provided that any such waiver, amendment,
alteration, suspension, discontinuance, cancellation or termination that would impair the rights of Grantee or any holder
or beneficiary of the Award previously granted shall not be effective as to Grantee without the written consent of
Grantee, holder or beneficiary, further, provided, that the consent of Grantee or any holder or beneficiary shall not be
required to an amendment that is deemed necessary by the Company to ensure compliance with (a) the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 or any regulations promulgated thereunder, including as a
result of the implementation of any recoupment policy the Company adopts to comply with the requirements set forth
in the Dodd-Frank Act and (b) Section 409A of the Code as amplified by any Internal Revenue Service or U.S. Treasury
Department regulations or guidance, or any other applicable equivalent tax law, rule, or regulation, as the Company
deems appropriate or advisable.
7
GOVERNING LAW
The rules and regulations relating to this Agreement shall be determined in accordance with the laws of the State of
New York, applied without giving effect to its conflict of laws principles. Each party to this Agreement hereby consents
and submits himself, herself or itself to the jurisdiction of the courts of the state of New York for the purposes of any
legal action or proceeding arising out of this Agreement. Nothing in this Agreement shall affect the right of the Company
to commence proceedings against Grantee in any other competent jurisdiction, or concurrently in more than one
jurisdiction, or to serve process, pleadings and other papers upon Grantee in any manner authorized by the laws of any
such jurisdiction. Grantee irrevocably waives:
(a)
or proceeding in any court referred to in this Section; and
any objection which it may have now or in the future to the laying of the venue of any action, suit
(b)
any claim that any such action, suit or proceeding has been brought in an inconvenient forum.
8
SEVERABILITY
If any provision of this Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction
or as to any person or this Agreement, or would disqualify this Agreement under any law deemed applicable by the
Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be
construed or deemed amended without, in the determination of the Committee, materially altering the intent of this
Agreement, such provision shall be stricken as to such jurisdiction, person or this Agreement and the remainder of this
Agreement shall remain in full force and effect.
9
ONE-TIME GRANT; NO RIGHT TO CONTINUED SERVICE OR PARTICIPATION; EFFECT
ON OTHER PLANS
The award evidenced by this Agreement is a voluntary, discretionary bonus being made on a one-time basis and it does
not constitute a commitment to make any future awards, even if awards have been made repeatedly in the past. Further,
the Award is made outside the scope of the Grantee’s employment contract, if any, unless otherwise expressly provided
therein. Neither this Agreement nor the Notice of Grant shall be construed as giving Grantee the right to be retained
in the employ of, or in any consulting relationship to, or as a director on the Board or board of directors, as applicable,
of, the Company or any Subsidiary or Affiliate of the Company. Further, the Company or a Subsidiary or Affiliate of
the Company may at any time dismiss Grantee from employment or discontinue any consulting relationship, free from
any liability or any claim under the Plan or this Agreement, unless otherwise expressly provided in the Plan, this
Agreement or any applicable employment contract or agreement. In the event that the Grantee is not an employee of
the Company, the grant of the Award will not be interpreted to form an employment contract or relationship with the
Company; and furthermore, the grant of the Award will not be interpreted to form an employment contract with the
Company or any Affiliate or Subsidiary of the Company. Payment received by Grantee pursuant to this Agreement and
the Notice of Grant shall not be considered part of normal or expected compensation or salary for any purpose, including,
but not limited to, calculation of any overtime, severance, resignation, termination, redundancy, end of service payments,
bonuses, long-service awards, pension or retirement benefits or similar payments and shall not be included in the
determination of benefits under any pension, group insurance or other benefit plan of the Company or any Subsidiary
or Affiliate in which Grantee may be enrolled, except as provided under the terms of such plans, or as determined by
the Board.
10
NATURE OF THE GRANT
In accepting the Award, the Grantee acknowledges that:
(a)
the Plan is established voluntarily by the Company, it is discretionary in nature and may
be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan
and this Agreement;
(b)
(c)
certainty;
the Grantee’s participation in the Plan is voluntary;
the future value of the underlying Shares is unknown and cannot be predicted with
(d)
if the Grantee receives Shares upon vesting of the Award, the value of such Shares may
increase or decrease in value; and
(e)
in consideration of the grant of the Award, no claim or entitlement to compensation or
damages arises from diminution in value of the Award received upon vesting of the Award or, except as otherwise
provided herein or under a separate agreement between the parties, from the termination of the Award resulting from
termination of the Grantee’s Service to the Company or an Affiliate (for any reason whatsoever and whether or not
in breach of local labor laws) and, subject to the foregoing, the Grantee irrevocably releases the Company and its
Affiliates from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court
of competent jurisdiction to have arisen, then, by signing this Agreement, the Grantee shall be deemed irrevocably to
have waived his or her entitlement to pursue such claim.
11
NO STRICT CONSTRUCTION
No rule of strict construction shall be implied against the Company, the Committee, or any other person in the
interpretation of any of the terms of this Agreement, the Notice of Grant or any rule or procedure established by the
Committee.
12
USE OF THE WORD “GRANTEE”
Wherever the word “Grantee” is used in any provision of this Agreement under circumstances where the provision
should logically be construed to apply to the executors, the administrators, or the person or persons to whom the
Restricted Stock Units may be transferred by will or the laws of descent and distribution, the word “Grantee” shall be
deemed to include such person or persons.
13
FURTHER ASSURANCES
Grantee agrees, upon demand of the Company or the Committee, to do all acts and execute, deliver and perform all
additional documents, instruments and agreements which may be reasonably required by the Company or the Committee,
as the case may be, to implement the provisions and purposes of this Agreement.
14
CONSENT TO TRANSFER PERSONAL DATA
The Company and its Subsidiaries hold certain personal information about Grantee, that may include Grantee’s
name, home address and telephone number, date of birth, social security number or other employee identification
number, salary, nationality, job title, any Shares of stock held in the Company, or details of any entitlement to Shares
of stock awarded, canceled, purchased, vested, or unvested, for the purpose of implementing, managing, and
administering the Award or the Agreement (“Data”). Grantee hereby agrees that the Company and/or its
Subsidiaries may transfer Data amongst themselves as necessary for the purpose of implementation, administration,
and management of Grantee’s participation in the Award or the Agreement, and the Company and/or any of its
Subsidiaries may each further transfer Data to any third parties assisting the Company in the implementation,
administration, and management of the Award or the Agreement. These recipients may be located throughout the
world, including outside Grantee’s country of residence (or outside of the European Economic Area, for Grantees
located within the European Economic Area). Such countries may not provide for a similar level of data protection
as provided for by local law (such as, for example, European privacy directive 95/46/EC and local implementations
thereof). Grantee hereby authorizes those recipients – even if they are located in a country outside of Grantee’s
country of residence (or outside of the European Economic Area, for Grantees located within the European
Economic Area) – to receive, possess, use, retain, and transfer the Data, in electronic or other form, for the purpose
of implementing, administering, and managing Grantee’s participation in the Award or the Agreement, including any
requisite transfer of such Data as may be required for the administration of the Award or the Agreement and/or the
subsequent holding of Shares of stock on Grantee’s behalf by a broker or other third party with whom Grantee or the
Company may elect to deposit any Shares of stock acquired pursuant to the Award or the Agreement. Grantee is not
obliged to consent to such collection, use, processing and transfer of personal data and may, at any time, review
Data, require any necessary amendments to it, or withdraw the consent contained in this Section by contacting the
Company in writing. However, withdrawing or withholding consent may affect Grantee’s ability to participate in the
Award or the Agreement. More information on the Data and/or the consequences of withholding or withdrawing
consent can be obtained from the Company’s legal department.
15
GOVERNING PLAN DOCUMENT
This Agreement is subject to all the provisions of the Plan, the provisions of which are hereby made a part of this
Agreement, and is further subject to all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this
Agreement and those of the Plan, the provisions of the Plan control.
16
CERTAIN COUNTRY-SPECIFIC PROVISIONS
For residents of the UK only:
Grantee agrees, as a condition to its acceptance of the Award, to satisfy any requirement of the Company or any
Subsidiary that, prior to vesting of all or any part of the Award, Grantee enter into a joint election under section 431
(1) of the UK Income Tax (Earnings and Pensions) Act 2003, the effect of which is that the Shares issued on vesting
will be treated as if they were not restricted securities.
Tax withholding obligations under this Agreement shall include, without limitation:
(i)
United Kingdom (UK) income tax; and
(ii)
UK primary class 1 (employee's) national insurance contributions.
For residents of Canada only:
I acknowledge having requested that this Agreement and all documents referred to herein be drafted in the English
language. Je reconnais également avoir exigé que ce document ainsi que tout document auquel ce document fait
référence, soient rédigés en langue anglaise.
Tax withholding obligations under this Agreement shall include federal and provincial income tax, Canadian
Pension Plan contributions, and Employment Insurance premiums (including the provincial equivalents) as
applicable.
For residents of Hong Kong only:
a) The Data Protection Principles specified in the Personal Data (Privacy) Ordinance (Cap. 486 of the Laws of
Hong Kong) will apply to any Data upon its transfer to any place outside of Hong Kong.
b) Hong Kong Securities Law Notice. The Restricted Stock Units and any Shares issued pursuant to the Awards do
not constitute a public offering of securities under Hong Kong law and are available to any eligible person under the
Plan. The Agreement, the Plan and other incidental communication materials (together, the “Award Agreement”)
have not been prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of
securities under the applicable securities legislation in Hong Kong. The Restricted Stock Units and any related
documentation are intended only for the personal use of each eligible person under the Plan and may not be
distributed to any other person. The contents of the Award Agreement, including the Plan, have not been reviewed
by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in
any doubt about any of the contents of the Award Agreement or the Plan, you should obtain independent
professional advice.
For residents of Russia only:
You acknowledge that the grant of Restricted Stock Units, the Plan and all other materials you may receive
regarding participation in the Plan do not constitute an advertising or offering of securities in Russia. The issuance
of securities pursuant to the Plan has not and will not be registered in Russia and therefore, the securities described
in any Plan-related documents may not be used for offering or public circulation in Russia.
You further acknowledge that in no event will Shares that may be issued to you with respect to the Restricted Stock
Units be delivered to you in Russia; all Shares issued to you with respect to the Restricted Stock Units will be
maintained on your behalf in the United States.
For residents of Argentina only:
Neither the award under the plan nor the underlying shares are publicly offered or listed on any stock exchange in
Argentina. The offer is private and not subject to the supervision of any Argentine governmental authority.
For residents of Israel only:
By my signature on or electronic acceptance of this Agreement, I acknowledge that the Award is granted under and
governed by (i) this Agreement, (ii) the Plan, a copy of which has been provided to me or made available for my
review, (iii) the Israeli Supplement (“the Supplement”), a copy of which has been provided to me or made available
for my review; (iv) Section 102(b)(2) of the Income Tax Ordinance (New Version) – 1961 and the Rules
promulgated in connection therewith, and (v) the Trust Agreement, a copy of which has been provided to me or
made available for my review. Furthermore, by my signature on or electronic acceptance of this Agreement, I agree
that the Awards will be issued to the Trustee to hold on my behalf, pursuant to the terms of the Section 102, the
Section 102 Rules and the Trust Agreement.
In addition, by my signature on or electronic acceptance of this Agreement, I confirm that I am familiar with the
terms and provisions of Section 102, particularly the Capital Gains Track described in subsection (b)(2) thereof, and
I agree that I will not require the Trustee to release the Awards or Company shares to me, or to sell the Awards or
Company shares to a third party, during the Holding Period, unless permitted to do so by applicable law.
All capitalized terms in this undertaking shall have the meaning granted to them under the Supplement.
END OF AGREEMENT
EXHIBIT A
Performance Matrix
Performance Equity Award Granted [_______], 20__
Performance Period Ending [________], 20__
Target Units for Performance Period: ______________
Total Units for Performance Period: ______________
Revenue Achieved in Performance Period4
Revenue Payout Percentage in Performance Period
Threshold ([__]% of Revenue Target)
Target (100% of Revenue Target)
Maximum ([__]% of Revenue Target)
[__]%
[__]%
[__]%5
EBITDA Achieved in Performance Period6
EBITDA Payout Percentage in Performance Period
Threshold ([__]% of EBITDA Target)
Target (100% of EBITDA Target)
Maximum ([__]% of EBITDA Target)
[__]%
[__]%
[__]%7
Relative TSR Achieved in Performance Period
EBITDA Payout Percentage in Performance Period
Threshold (25th or < percentile Relative TSR)
Target (50th percentile Relative TSR)
Maximum (75th or > percentile Relative TSR)
[__]%
[__]%
[__]%
“Relative TSR” means the Company’s total stockholder return, on a percentile basis, relative to the
companies comprising the [______] (the “Index”) with respect to the Performance Period, weighted equally
and based on the applicable 90-day volume-weighted trailing average closing prices of such constituent
companies as of the beginning and end of the Performance Period; provided that members of the Index will
only be taken into account for purposes of the calculation of Relative TSR if they constitute part of the
Index at both the beginning and the end of the Performance Period.
4 May include more than three data points.
5 If the Notice of Grant does not make Overachievement Units available for over-performance, replace this line of the
table with “Maximum: Not Applicable”.
6 May include more than three data points.
7 See footnote 3 above.
EXHIBIT 10.36
___________ __, 20__
[Name of Recipient]
[Address]
Dear [Name]:
Notice of Grant of Restricted Stock Units
Congratulations! You have been granted a restricted stock unit award (the “Award”) pursuant to
the terms and conditions of the [Verint Systems Inc. 2010 Long-Term Stock Incentive Plan][Comverse
Technology, Inc. 2011 Stock Incentive Compensation Plan (assumed by the Company)][, as modified
by the [UK Sub-Plan thereunder][Canadian Sub-Plan thereunder][Israeli Supplement thereto][India
Addendum],] (the “Plan”) and the attached Verint Systems Inc. (the “Company”) Restricted Stock Unit
Award Agreement (the “Agreement”). The details of your Award are specified below and in the attached
Agreement. Capitalized terms used in this Notice of Grant and not otherwise defined shall have the
meanings given in the Plan or the Agreement.
Granted To:
ID#:
[Name]
[ID Number]
Grant Date:
[___________]
Units Granted:
[Number]
Price Per Unit:
U.S.$0.00
Vesting Schedule:
The restricted stock units granted hereby shall vest on each of
the following dates:
(a) [1/3] on [______________];
(b) [1/3] on [______________]; and
(c) [1/3] on [______________].
Verint Systems Inc.
By my signature below or my electronic acceptance hereof (if provided to me electronically), I
hereby acknowledge my receipt of this Award granted on the date shown above, which has been issued to
me under the terms and conditions of the Plan and the Agreement. I agree that the Award is subject to all of
the terms and conditions of this Notice of Grant, the Plan, and the Agreement.
If I am a resident of Canada, I also acknowledge having requested that this Notice and all
documents referred to herein be drafted in the English language. Je reconnais également avoir exigé que ce
document ainsi que tout document auquel ce document fait référence, soient rédigés en langue anglaise.
Signature: _______________________________
Date: ______________
VERINT SYSTEMS INC.
RESTRICTED STOCK UNIT AWARD AGREEMENT
This Restricted Stock Unit Award Agreement (“Agreement”) and the [Verint Systems Inc. 2010 Long-
Term Stock Incentive Plan][Comverse Technology, Inc. 2011 Stock Incentive Compensation Plan
(assumed by the Company)][, as modified by the [UK Sub-Plan thereunder][Canadian Sub-Plan
thereunder][Israeli Supplement thereto][India Addendum],] (the “Plan”) govern the terms and
conditions of the Restricted Stock Unit Award (the “Award”) specified in the Notice of Grant of Restricted
Stock Units (the “Notice of Grant”) delivered herewith entitling the person to whom the Notice of Grant is
addressed (“Grantee”) to receive from Verint Systems Inc. (the “Company”) the number of restricted stock
units indicated in the Notice of Grant.
1
RESTRICTED STOCK UNITS; VESTING
1.1
Grant of Restricted Stock Units.
(a)
The Award of the restricted stock units (as may be further defined under the terms of the Plan,
“Restricted Stock Units”) is made subject to the terms and conditions of the Plan, this Agreement
and the Notice of Grant. If and when the Restricted Stock Units vest in accordance with the terms
of the Plan, this Agreement and the Notice of Grant without forfeiture, and upon the satisfaction of
all other applicable conditions as to the Restricted Stock Units, one Share shall be issuable to
Grantee for each Restricted Stock Unit that vests on such date, which Shares, except as otherwise
provided herein or in the Notice of Grant, will be free of any Company-imposed transfer
restrictions. Any fractional Restricted Stock Unit remaining after the Award is fully vested shall
be discarded and shall not be converted into a fractional Share.
1.2
Restrictions.
(a)
Except as provided herein, Grantee shall not have any rights as a stockholder with respect to any
Shares to be distributed under the Plan until he or she has become the holder of such Shares as
provided in the Plan.
(b)
The Award is subject to the transferability restrictions under the Plan.
1.3
Vesting.
(a)
Subject to the terms and conditions of this Agreement, the applicable percentage or fraction (per the
Notice of Grant) of Restricted Stock Units awarded hereunder shall be deemed vested and no longer
subject to forfeiture under this Agreement on the applicable vesting date in accordance with the
schedule set forth in the Notice of Grant.
(b)
Vesting shall cease upon the date Grantee’s Continuous Service terminates for any reason, unless
otherwise determined by the Board or the Committee in its sole discretion.
1.4
Forfeiture.
(a)
Except as otherwise provided herein, Grantee’s right to receive any of the Restricted Stock Units is
contingent upon his or her remaining in the Continuous Service of the Company or a Subsidiary or
Affiliate through the respective vesting dates specified in the Notice of Grant and hereunder. If
Grantee’s Continuous Service terminates for any reason, all Restricted Stock Units which are then
unvested shall, unless otherwise determined by the Board or the Committee in its sole discretion
2
or subject to a separate written agreement between the parties, be cancelled and the Company shall
thereupon have no further obligation thereunder. For the avoidance of doubt, subject to a separate
written agreement between the parties, Grantee acknowledges and agrees that he or she has no
expectation that any Restricted Stock Units will vest on the termination of his or her Continuous
Service for any reason and that he or she will not be entitled to make a claim for any loss
occasioned by such forfeiture as part of any claim for breach of his or her employment or service
contract or otherwise.
1.5
Delivery.
(a)
(b)
Subject to Section 1.6 and any other applicable conditions hereunder, as soon as administratively
practicable following the vesting of Restricted Stock Units in accordance with the terms of this
Agreement (but in no event later than the date the short-term deferral period under Section 409A
of the Code expires with respect to such vested Shares), the Company shall issue the applicable
Shares and, at its option, (i) deliver or cause to be delivered to Grantee a certificate or certificates
for the applicable Shares or (ii) transfer or arrange to have transferred the Shares to a brokerage
account of Grantee designated by the Company.
Notwithstanding the foregoing, the issuance of Shares upon the vesting of a Restricted Stock Unit
shall be delayed in the event the Company reasonably anticipates that the issuance of Shares
would constitute a violation of U.S. federal securities laws, other applicable law, or Nasdaq rules.
If the issuance of the Shares is delayed by the provisions of this paragraph, such issuance shall
occur at the earliest date at which the Company reasonably anticipates issuing the Shares will not
cause such a violation. For purposes of this paragraph, the issuance of Shares that would cause
inclusion in gross income or the application of any penalty provision or other provision of the
Code or other tax legislation applicable to Grantee is not considered a violation of applicable law.
1.6
Tax; Withholding.
(a)
(b)
The Company shall determine the amount of any withholding or other tax required by law to be
withheld or paid by the Company or its Subsidiary with respect to any income recognized by Grantee
with respect to the Restricted Stock Units or the issuance of Shares pursuant to the terms of the
Restricted Stock Units.
Neither the Company nor any Subsidiary, Affiliate or agent makes any representation or
undertaking regarding the treatment of any tax or withholding in connection with the grant or
vesting of the Award or the subsequent sale of Shares subject to the Award. The Company and its
Subsidiaries and Affiliates do not commit and are under no obligation to structure the Award to
reduce or eliminate Grantee’s tax liability and none of the Company, any of its Subsidiaries or
Affiliates, or any of their employees or representatives shall have any liability to Grantee with
respect thereto.
(c)
Notwithstanding the withholding provision in the Plan:
(i)
If in the tax jurisdiction in which Grantee resides, a tax withholding obligation arises
upon vesting of the Award (regardless of when the Shares underlying the Award are
delivered to Grantee), or for non-employee directors of the Company in any jurisdiction,
on each date the Award actually vests, if (1) the Company does not have in place an
effective registration statement under the Securities Act of 1933, as amended (the
“Securities Act”) or there is not a Securities Act exemption available under which
Grantee may sell Shares or (2) Grantee is subject to a Company-imposed trading
blackout, then unless Grantee has made other arrangements satisfactory to the Company,
3
(ii)
the Company will (x) with respect to employees of the Company, withhold from the
Shares to be delivered to Grantee such number of Shares as are sufficient in value (as
determined by the Company in its sole discretion) to cover the minimum amount of the
tax withholding obligation and (y) with respect to non-employee directors of the
Company, settle 40% of the portion of the Award then vesting in cash by paying Grantee
cash (in accordance with the Company’s normal payroll practices) equal to the Fair
Market Value of one Share for each Restricted Stock Unit being settled in such manner.
If in the tax jurisdiction in which Grantee resides a tax withholding obligation arises upon
delivery of the Shares underlying the Restricted Stock Units (regardless of when vesting
occurs), then following each date the Award actually vests, the Company will defer the
delivery of the Shares otherwise deliverable to Grantee until the earliest of (1) the date
Grantee’s employment with the Company (or a Subsidiary or Affiliate) is terminated (by
either party), (2) the date that the short-term deferral period under Section 409A of the
Code expires with respect to such vested Shares, or (3) the date on which the Company
has in place an effective registration statement under the Securities Act or there is a
Securities Act exemption available under which Grantee may sell Shares and on which
Grantee is not subject to a Company-imposed trading blackout (the earliest of such dates,
the “Delivery Date”). If on the Delivery Date (1) the Company does not have in place an
effective registration statement under the Securities Act or there is not a Securities Act
exemption available under which Grantee may sell Shares or (2) Grantee is subject to a
Company-imposed trading blackout, then unless Grantee has made other arrangements
satisfactory to the Company, the Company will withhold from the Shares to be delivered
to Grantee such number of Shares as are sufficient in value (as determined by the
Company in its sole discretion) to cover the minimum amount of the tax withholding
obligation.
(d)
(e)
Grantee is ultimately liable and responsible for all taxes owed by Grantee in connection with the
Award, regardless of any action the Company or any of its Subsidiaries, Affiliates or agents takes
with respect to any tax withholding obligations that arise in connection with the Award. Accordingly,
Grantee agrees to pay to the Company or its relevant Subsidiary or Affiliate as soon as practicable,
including through additional payroll withholding (if permitted under applicable law), any amount of
required tax withholding that is not satisfied by any such action of the Company or its Subsidiary or
Affiliate.
The Committee shall be authorized, in its sole discretion, to establish such rules and procedures
relating to the use of Shares of common stock to satisfy tax withholding obligations as it deems
necessary or appropriate to facilitate and promote the conformity of Grantee’s transactions under this
Agreement with Rule 16b-3 under the Securities Exchange Act of 1934, as amended, if such rule is
applicable to transactions by Grantee.
1.7
Detrimental Activity. In the event the Company determines or discovers during or after the course
of Grantee’s employment or service that Grantee committed an act during the course of employment or service
that constitutes or would have constituted Cause for termination, the Committee shall have the right, to the
maximum extent permissible under applicable law, to cancel any or all of Grantee’s then outstanding Awards
(whether or not vested).
1.8
Erroneously Awarded Compensation. The Award, if and to the extent subject to the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010, may be subject to a claw back policy or other incentive
compensation policy established from time to time by the Company to comply with such Act.
2
CERTAIN DEFINITIONS
4
Defined terms not defined in this Agreement but defined in the Plan shall have the same definitions as in the
Plan. For the avoidance of doubt, in each instance that the term “Company” is used in the Plan, “Company”
shall mean Verint Systems Inc.
3
REPRESENTATIONS OF GRANTEE
Grantee hereby represents to the Company that Grantee has read and fully understands the provisions of this
Agreement, and Grantee acknowledges that Grantee is relying solely on his or her own advisors with respect
to the tax consequences of this Award. Grantee acknowledges that this Agreement has not been reviewed or
approved by any regulatory authority in his or her country of residence or otherwise.
4
NOTICES
All notices or communications under this Agreement shall be in writing, addressed as follows:
To the Company:
Verint Systems Inc.
330 South Service Road
Melville, NY 11747-3201
U.S.A.
+(631) 962-9600 (phone)
+(631) 962-9623 (fax)
Attn: Chief Legal Officer
To Grantee:
as set forth in the Company’s payroll
records
Any such notice or communication shall be (a) delivered by hand (with written confirmation of receipt) or
sent by a nationally recognized overnight delivery service (receipt requested) or (b) sent certified or registered
mail, return receipt requested, postage prepaid, addressed as above (or to such other address as such party may
designate in writing from time to time), and the actual date of receipt shall determine the time at which notice
was given. Grantee will promptly notify the Company in writing upon any change in Grantee’s mailing address
or e-mail address.
5
BINDING AGREEMENT
This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of Grantee and
the assigns and successors of the Company.
6
ENTIRE AGREEMENT; AMENDMENT
The Plan, this Agreement and the Notice of Grant represent the entire agreement of the parties with respect
to the subject matter hereof. Subject to the terms of the Plan, the Committee may waive any conditions or
rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, the Award; provided that
any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would
impair the rights of Grantee or any holder or beneficiary of the Award previously granted shall not be effective
as to Grantee without the written consent of Grantee, holder or beneficiary, further, provided, that the consent
of Grantee or any holder or beneficiary shall not be required to an amendment that is deemed necessary by
the Company to ensure compliance with (a) the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 or any regulations promulgated thereunder, including as a result of the implementation of any
5
recoupment policy the Company adopts to comply with the requirements set forth in the Dodd-Frank Act and
(b) Section 409A of the Code as amplified by any Internal Revenue Service or U.S. Treasury Department
regulations or guidance, or any other applicable equivalent tax law, rule, or regulation, as the Company deems
appropriate or advisable.
7
GOVERNING LAW
The rules and regulations relating to this Agreement shall be determined in accordance with the laws of the
State of New York, applied without giving effect to its conflict of laws principles. Each party to this Agreement
hereby consents and submits himself, herself or itself to the jurisdiction of the courts of the state of New York
for the purposes of any legal action or proceeding arising out of this Agreement. Nothing in this Agreement
shall affect the right of the Company to commence proceedings against Grantee in any other competent
jurisdiction, or concurrently in more than one jurisdiction, or to serve process, pleadings and other papers
upon Grantee in any manner authorized by the laws of any such jurisdiction. Grantee irrevocably waives:
(a)
action, suit or proceeding in any court referred to in this Section; and
any objection which it may have now or in the future to the laying of the venue of any
(b)
forum.
any claim that any such action, suit or proceeding has been brought in an inconvenient
8
SEVERABILITY
If any provision of this Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or as to any person or this Agreement, or would disqualify this Agreement under any law deemed
applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable
laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially
altering the intent of this Agreement, such provision shall be stricken as to such jurisdiction, person or this
Agreement and the remainder of this Agreement shall remain in full force and effect.
9
ONE-TIME GRANT; NO RIGHT TO CONTINUED SERVICE OR PARTICIPATION;
EFFECT ON OTHER PLANS
The award evidenced by this Agreement is a voluntary, discretionary bonus being made on a one-time basis
and it does not constitute a commitment to make any future awards, even if awards have been made repeatedly
in the past. Further, the Award is made outside the scope of the Grantee’s employment contract, if any, unless
otherwise expressly provided therein. Neither this Agreement nor the Notice of Grant shall be construed as
giving Grantee the right to be retained in the employ of, or in any consulting relationship to, or as a director
on the Board or board of directors, as applicable, of, the Company or any Subsidiary or Affiliate of the Company.
Further, the Company or a Subsidiary or Affiliate of the Company may at any time dismiss Grantee from
employment or discontinue any consulting relationship, free from any liability or any claim under the Plan or
this Agreement, unless otherwise expressly provided in the Plan, this Agreement or any applicable employment
contract or agreement. In the event that the Grantee is not an employee of the Company, the grant of the Award
will not be interpreted to form an employment contract or relationship with the Company; and furthermore,
the grant of the Award will not be interpreted to form an employment contract with the Company or any
Affiliate or Subsidiary of the Company. Payment received by Grantee pursuant to this Agreement and the
Notice of Grant shall not be considered part of normal or expected compensation or salary for any purpose,
including, but not limited to, calculation of any overtime, severance, resignation, termination, redundancy,
end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments
and shall not be included in the determination of benefits under any pension, group insurance or other benefit
plan of the Company or any Subsidiary or Affiliate in which Grantee may be enrolled, except as provided
under the terms of such plans, or as determined by the Board.
6
10
NATURE OF THE GRANT
In accepting the Award, the Grantee acknowledges that:
(a)
the Plan is established voluntarily by the Company, it is discretionary in nature
and may be modified, amended, suspended or terminated by the Company at any time, unless otherwise
provided in the Plan and this Agreement;
(b)
(c)
with certainty;
the Grantee’s participation in the Plan is voluntary;
the future value of the underlying Shares is unknown and cannot be predicted
(d)
if the Grantee receives Shares upon vesting of the Award, the value of such
Shares may increase or decrease in value; and
(e)
in consideration of the grant of the Award, no claim or entitlement to
compensation or damages arises from diminution in value of the Award received upon vesting of the Award
or, except as otherwise provided herein or under a separate agreement between the parties, from the
termination of the Award resulting from termination of the Grantee’s Service to the Company or an Affiliate
(for any reason whatsoever and whether or not in breach of local labor laws) and, subject to the foregoing,
the Grantee irrevocably releases the Company and its Affiliates from any such claim that may arise; if,
notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen,
then, by signing this Agreement, the Grantee shall be deemed irrevocably to have waived his or her
entitlement to pursue such claim.
11
NO STRICT CONSTRUCTION
No rule of strict construction shall be implied against the Company, the Committee, or any other person in
the interpretation of any of the terms of this Agreement, the Notice of Grant or any rule or procedure established
by the Committee.
12
USE OF THE WORD “GRANTEE”
Wherever the word “Grantee” is used in any provision of this Agreement under circumstances where the
provision should logically be construed to apply to the executors, the administrators, or the person or persons
to whom the Restricted Stock Units may be transferred by will or the laws of descent and distribution, the
word “Grantee” shall be deemed to include such person or persons.
13
FURTHER ASSURANCES
Grantee agrees, upon demand of the Company or the Committee, to do all acts and execute, deliver and perform
all additional documents, instruments and agreements which may be reasonably required by the Company or
the Committee, as the case may be, to implement the provisions and purposes of this Agreement.
14
CONSENT TO TRANSFER PERSONAL DATA
The Company and its Subsidiaries hold certain personal information about Grantee, that may include
Grantee’s name, home address and telephone number, date of birth, social security number or other
employee identification number, salary, nationality, job title, any Shares of stock held in the Company, or
details of any entitlement to Shares of stock awarded, canceled, purchased, vested, or unvested, for the
purpose of implementing, managing, and administering the Award or the Agreement (“Data”). Grantee
7
hereby agrees that the Company and/or its Subsidiaries may transfer Data amongst themselves as
necessary for the purpose of implementation, administration, and management of Grantee’s participation
in the Award or the Agreement, and the Company and/or any of its Subsidiaries may each further transfer
Data to any third parties assisting the Company in the implementation, administration, and management of
the Award or the Agreement. These recipients may be located throughout the world, including outside
Grantee’s country of residence (or outside of the European Economic Area, for Grantees located within the
European Economic Area). Such countries may not provide for a similar level of data protection as
provided for by local law (such as, for example, European privacy directive 95/46/EC and local
implementations thereof). Grantee hereby authorizes those recipients – even if they are located in a
country outside of Grantee’s country of residence (or outside of the European Economic Area, for Grantees
located within the European Economic Area) – to receive, possess, use, retain, and transfer the Data, in
electronic or other form, for the purpose of implementing, administering, and managing Grantee’s
participation in the Award or the Agreement, including any requisite transfer of such Data as may be
required for the administration of the Award or the Agreement and/or the subsequent holding of Shares of
stock on Grantee’s behalf by a broker or other third party with whom Grantee or the Company may elect to
deposit any Shares of stock acquired pursuant to the Award or the Agreement. Grantee is not obliged to
consent to such collection, use, processing and transfer of personal data and may, at any time, review Data,
require any necessary amendments to it, or withdraw the consent contained in this Section by contacting
the Company in writing. However, withdrawing or withholding consent may affect Grantee’s ability to
participate in the Award or the Agreement. More information on the Data and/or the consequences of
withholding or withdrawing consent can be obtained from the Company’s legal department.
15
GOVERNING PLAN DOCUMENT
This Agreement is subject to all the provisions of the Plan, the provisions of which are hereby made a part
of this Agreement, and is further subject to all interpretations, amendments, rules and regulations which
may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of this Agreement and those of the Plan, the provisions of the Plan control.
16
CERTAIN COUNTRY-SPECIFIC PROVISIONS
For residents of the UK only:
Grantee agrees, as a condition to its acceptance of the Award, to satisfy any requirement of the Company or
any Subsidiary that, prior to vesting of all or any part of the Award, Grantee enter into a joint election under
section 431(1) of the UK Income Tax (Earnings and Pensions) Act 2003, the effect of which is that the
Shares issued on vesting will be treated as if they were not restricted securities.
Tax withholding obligations under this Agreement shall include, without limitation:
(i)
United Kingdom (UK) income tax; and
(ii)
UK primary class 1 (employee's) national insurance contributions.
For residents of Canada only:
I acknowledge having requested that this Agreement and all documents referred to herein be drafted in the
English language. Je reconnais également avoir exigé que ce document ainsi que tout document auquel ce
document fait référence, soient rédigés en langue anglaise.
8
Tax withholding obligations under this Agreement shall include federal and provincial income tax,
Canadian Pension Plan contributions, and Employment Insurance premiums (including the provincial
equivalents) as applicable.
For residents of Hong Kong only:
a) The Data Protection Principles specified in the Personal Data (Privacy) Ordinance (Cap. 486 of the
Laws of Hong Kong) will apply to any Data upon its transfer to any place outside of Hong Kong.
b) Hong Kong Securities Law Notice. The Restricted Stock Units and any Shares issued pursuant to the
Awards do not constitute a public offering of securities under Hong Kong law and are available to any
eligible person under the Plan. The Agreement, the Plan and other incidental communication materials
(together, the “Award Agreement”) have not been prepared in accordance with and are not intended to
constitute a “prospectus” for a public offering of securities under the applicable securities legislation in
Hong Kong. The Restricted Stock Units and any related documentation are intended only for the personal
use of each eligible person under the Plan and may not be distributed to any other person. The contents of
the Award Agreement, including the Plan, have not been reviewed by any regulatory authority in Hong
Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the
contents of the Award Agreement or the Plan, you should obtain independent professional advice.
For residents of Russia only:
You acknowledge that the grant of Restricted Stock Units, the Plan and all other materials you may receive
regarding participation in the Plan do not constitute an advertising or offering of securities in Russia. The
issuance of securities pursuant to the Plan has not and will not be registered in Russia and therefore, the
securities described in any Plan-related documents may not be used for offering or public circulation in
Russia.
You further acknowledge that in no event will Shares that may be issued to you with respect to the
Restricted Stock Units be delivered to you in Russia; all Shares issued to you with respect to the Restricted
Stock Units will be maintained on your behalf in the United States.
For residents of Argentina only:
Neither the award under the plan nor the underlying shares are publicly offered or listed on any stock
exchange in Argentina. The offer is private and not subject to the supervision of any Argentine
governmental authority.
For residents of Israel only:
By my signature on or electronic acceptance of this Agreement, I acknowledge that the Award is granted
under and governed by (i) this Agreement, (ii) the Plan, a copy of which has been provided to me or made
available for my review, (iii) the Israeli Supplement (“the Supplement”), a copy of which has been provided
to me or made available for my review; (iv) Section 102(b)(2) of the Income Tax Ordinance (New Version)
– 1961 and the Rules promulgated in connection therewith, and (v) the Trust Agreement, a copy of which
has been provided to me or made available for my review. Furthermore, by my signature on or electronic
acceptance of this Agreement, I agree that the Awards will be issued to the Trustee to hold on my behalf,
pursuant to the terms of the Section 102, the Section 102 Rules and the Trust Agreement.
In addition, by my signature on or electronic acceptance of this Agreement, I confirm that I am familiar
with the terms and provisions of Section 102, particularly the Capital Gains Track described in subsection
(b)(2) thereof, and I agree that I will not require the Trustee to release the Awards or Company shares to
9
me, or to sell the Awards or Company shares to a third party, during the Holding Period, unless permitted to
do so by applicable law.
All capitalized terms in this undertaking shall have the meaning granted to them under the Supplement.
END OF AGREEMENT
10
EXHIBIT 21.1
Subsidiaries of Verint Systems Inc.
(as of February 28, 2014)
Name
Blue Pumpkin Software Israel Ltd.
Broadbase Software, Inc.
Ciboodle Customer Interaction Solutions South Africa (PTY) Ltd.
Ciboodle Inc.
Ciboodle Ireland Ltd.
Ciboodle (Land and Estates) Ltd.
Ciboodle Ltd.
Ciboodle New Zealand Ltd.
Ciboodle PTY Ltd.
CIS Comverse Information Systems Ltd.
Edgar Acquisition Company Limited
Febrouin Investments Ltd.
Focal Info Israel Ltd.
Global Management Technologies, LLC
Global Management Technologies Asia-Pacific PTY Limited
Graham Technology BV
Graham Technology Ltd
Iontas Limited
KANA Benelux BV
KANA Software BV
KANA Software Canada, Ltd
KANA Software, Inc.
KANA Software Ireland Limited
KANA Software Ireland No. 2 Limited
KANA Software KK
KANA Software Limited
KANA Solutions Limited
KAY Technology Holdings, Inc.
Lagan Technologies (Canada) Inc.
Lagan Technologies, Inc.
Lagan Technologies Limited
MultiVision Holdings Limited
Overtone, Inc.
PT Ciboodle Indonesia
Rontal Engineering Applications (2001) Ltd.
Suntech S.A.
Sword Soft, Inc.
Syborg GmbH
Syborg Grundbesitz GmbH
Syborg Informationsysteme b.h. OHG
Teletrain Verint B.V.
Triniventures BV
Trinicom Belgie NV
Trinicom Duetschland Gmbh
Jurisdiction of
Incorporation or
Organization
Israel
Delaware
South Africa
Delaware
Ireland
United Kingdom
United Kingdom
New Zealand
Australia
Israel
United Kingdom
Cyprus
Israel
Delaware
Australia
Netherlands
United Kingdom
Ireland
Netherlands
Netherlands
Canada
Delaware
Ireland
Ireland
Japan
United Kingdom
United Kingdom
Delaware
Canada
Delaware
United Kingdom
British Virgin Islands
Delaware
Indonesia
Israel
Brazil
Delaware
Germany
Germany
Germany
Netherlands
Netherlands
Belgium
Germany
Trinicom UK Ltd
Verint Acquistion LLC
Verint Americas Inc.
Verint Systems (Asia Pacific) Limited
Verint Systems (Australia) PTY Ltd.
Verint Systems (India) Private Ltd.
Verint Systems (Singapore) Pte. Ltd. (1)
Verint Systems (Zhuhai) Limited
Verint Systems B.V.
Verint Systems Bulgaria
Verint Systems Canada Inc.
Verint Systems Cayman Limited
Verint Systems GmbH
Verint Systems Holdings B.V.
Verint Systems Japan K.K.
Verint Systems Ltd.
Verint Systems New Zealand Limited
Verint Systems Poland sp.z.o.o.
Verint Systems SAS
Verint Systems UK Ltd.
Verint Technology Inc.
Verint Technology UK Limited
Verint Video Solutions Inc.
Verint Video Solutions SL
Verint Video Solutions UK Limited
Verint Witness Systems Deutschland GmbH
Verint Witness Systems
Verint Witness Systems LLC
Verint Witness Systems S.A. de C.V.
Verint Witness Systems Services S.A. de C.V.
Verint Witness Systems Software, Hardware, E Servicos Do Brasil Ltda
Verint WS Holdings Ltd.
View Links Euclipse Ltd.
Victory Acquisition I LLC
Vovici LLC
Witness Systems Software (India) Private Limited
United Kingdom
Delaware
Delaware
Hong Kong
Australia
India
Singapore
People's Republic of China
Netherlands
Bulgaria
Canada
Cayman Islands
Germany
Netherlands
Japan
Israel
New Zealand
Poland
France
United Kingdom
Delaware
United Kingdom
Nevada
Spain
United Kingdom
Germany
United Kingdom
Delaware
Mexico
Mexico
Brazil
United Kingdom
Israel
Delaware
Delaware
India
___________________
(1) We own a 50% equity interest in this entity and do not have the power to unilaterally direct or cause the direction of
the management and policies of this entity.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-98965, 333-98967, 333-120269, 333-167618,
333-169005, 333-169768, 333-171006, 333-173421, 333-173454, 333-174820, 333-182032, 333-182755 and 333-189062 on
Form S-8 of our reports dated March 31, 2014, relating to the consolidated financial statements of Verint Systems Inc., and the
effectiveness of Verint Systems Inc.'s internal control over financial reporting, appearing in this Annual Report on Form 10-K
of Verint Systems Inc. for the year ended January 31, 2014.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 31, 2014
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Dan Bodner, certify that:
1. I have reviewed this annual report on Form 10-K of Verint Systems Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: March 31, 2014
By:
/s/ Dan Bodner
Dan Bodner
President and Chief Executive Officer
Principal Executive Officer
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Douglas E. Robinson, certify that:
1. I have reviewed this annual report on Form 10-K of Verint Systems Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: March 31, 2014
By:
/s/ Douglas E. Robinson
Douglas E. Robinson
Chief Financial Officer
Principal Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Verint Systems Inc. (the “Company”) on Form 10-K for the period ended January 31,
2014 (the “Report”), I, Dan Bodner, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: March 31, 2014
/s/ Dan Bodner
Dan Bodner
President and Chief Executive Officer
Principal Executive Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall
not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.
EXHIBIT 32.2
CERTIFICATION REQUIRED BY 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Verint Systems Inc. (the “Company”) on Form 10-K for the period ended January 31,
2014 (the “Report”), I, Douglas E. Robinson, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: March 31, 2014
/s/ Douglas E. Robinson
Douglas E. Robinson
Chief Financial Officer
Principal Financial Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall
not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.