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EX-32.2 - CERTIFICATION OF THE CFO PURSUANT TO 18 U.S.C. - COMVERSE TECHNOLOGY INC/NY/dex322.htm
EX-32.1 - CERTIFICATION OF THE CEO PURSUANT TO 18 U.S.C. - COMVERSE TECHNOLOGY INC/NY/dex321.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2010

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

COMVERSE TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

New York   0-15502   13-3238402

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

810 Seventh Avenue

New York, New York

10019

(Address of Principal Executive Offices)

(Zip Code)

(212) 739-1000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ¨  Yes    x  No

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    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    x  No

There were 205,033,176 shares of the registrant’s common stock outstanding on July 15, 2011.


Table of Contents

TABLE OF CONTENTS

 

DEFINITIONS      i   
FORWARD-LOOKING STATEMENTS      i   
EXPLANATORY NOTE      iv   
PART I   FINANCIAL INFORMATION      1   
  ITEM 1.    FINANCIAL STATEMENTS      1   
     CONDENSED CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 2010 AND JANUARY 31, 2010      1   
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2009      2   
     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2009      3   
  ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      45   
  ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      68   
  ITEM 4.    CONTROLS AND PROCEDURES      68   
PART II     OTHER INFORMATION      69   
  ITEM 1.    LEGAL PROCEEDINGS      69   
  ITEM 1A.    RISK FACTORS      69   
  ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      70   
  ITEM 3.    DEFAULTS UPON SENIOR SECURITIES      70   
  ITEM 4.    REMOVED AND RESERVED      70   
  ITEM 5.    OTHER INFORMATION      70   
  ITEM 6.    EXHIBITS      71   


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DEFINITIONS

In this Quarterly Report on Form 10-Q (or Quarterly Report):

 

   

CTI means Comverse Technology, Inc., excluding its subsidiaries;

 

   

Comverse, Inc. means Comverse, Inc., CTI’s wholly-owned subsidiary, excluding its subsidiaries;

 

   

Comverse means Comverse, Inc., including its subsidiaries;

 

   

Verint Systems means Verint Systems Inc., CTI’s majority-owned subsidiary, excluding its subsidiaries;

 

   

Verint means Verint Systems, including its subsidiaries;

 

   

Ulticom, Inc. means Ulticom, Inc., CTI’s majority-owned subsidiary prior to its sale on December 3, 2010, excluding its subsidiaries;

 

   

Ulticom means Ulticom, Inc., including its subsidiaries;

 

   

Starhome B.V. means Starhome B.V., CTI’s majority-owned subsidiary, excluding its subsidiaries;

 

   

Starhome means Starhome B.V., including its subsidiaries; and

 

   

we, us, our, our company and similar expressions mean CTI, including its subsidiaries.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking statements.” 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. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “expects,” “plans,” “anticipates,” “estimates,” “believes,” “potential,” “projects,” “forecasts,” “intends,” or the negative thereof or other comparable terminology. By their very nature, forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results, performance and the timing of events to differ materially from those anticipated, expressed or implied by the forward-looking statements in this Quarterly Report. Such risks or uncertainties may give rise to future claims and increase exposure to contingent liabilities. These risks and uncertainties arise from (among other factors) the following:

 

   

the risk that the registration of CTI’s common stock will be revoked by a non-appealable order of the Securities and Exchange Commission (or the SEC), pursuant to Section 12(j) of the Securities Exchange Act of 1934, as amended (or the Exchange Act), if CTI is unable to satisfy the terms of an agreement in principle entered into with the Division of Enforcement of the SEC on July 13, 2011 by filing on a timely basis its Quarterly Report on Form 10-Q for the fiscal quarter ending July 31, 2011. If a final order is issued by the SEC to revoke the registration of CTI’s common stock, brokers, dealers and other market participants would be prohibited from buying, selling, making market in, publishing quotations of, or otherwise effecting transactions with respect to, such common stock and, as a result, public trading of CTI’s common stock would cease and investors would find it difficult to acquire or dispose of CTI’s common stock or obtain accurate price quotations for CTI’s common stock, which could result in a significant decline in the value of CTI’s common stock and our business may be adversely impacted, including, without limitation, an adverse impact on CTI’s ability to issue stock to raise equity capital, engage in business combinations or provide employee equity incentives;

 

   

the risk of diminishment in our capital resources as a result of, among other things, negative cash flows from operations at Comverse or the continued incurrence of significant expenses by CTI and Comverse in connection with CTI’s efforts to become current in its periodic reporting obligations under the federal securities laws and to remediate material weaknesses in internal control over financial reporting;

 

   

the ineffectiveness of CTI’s disclosure controls and procedures resulting in its inability to file its periodic reports under the federal securities laws in a timely manner due to material weaknesses in internal control over financial reporting described in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011 (referred to as the 2010 Form 10-K) and the potential that CTI may be unable to effectively implement appropriate remedial measures in a timely manner;

 

   

the continuation of material weaknesses or the discovery of additional material weaknesses in our internal control over financial reporting and any delay in the implementation of remedial measures;

 

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the review of the periodic reports of CTI and Verint Systems (including, but not limited to this Quarterly Report) by the staff of the SEC could result in amendments to our and Verint Systems’ financial information or other disclosures;

 

   

the risk that if CTI ceases to maintain a majority ownership of Verint Systems’ outstanding equity securities and ceases to maintain control over Verint’s operations, it may be required to no longer consolidate Verint’s financial statements within its consolidated financial statements and, in such event, the presentation of CTI’s consolidated financial statements would be materially different from the presentation for the fiscal periods covered by this Quarterly Report and for the fiscal years covered by the 2010 Form 10-K;

 

   

CTI’s common stock may continue to be traded over-the-counter on the “Pink Sheets” and shareholders may continue to experience limited liquidity due to, among other things, the absence of market makers;

 

   

CTI may be unable to relist its common stock on the NASDAQ Stock Market (or NASDAQ) or another national securities exchange;

 

   

we may need to recognize further impairment of intangible assets or financial assets, including our auction rate securities (or ARS) portfolio, and goodwill;

 

   

the effects of any potential decline or weakness in the global economy on the telecommunications industry, which may result in reduced information technology spending and reduced demand for our subsidiaries’ products and services;

 

   

disruption in the credit and capital markets may limit our ability to access capital;

 

   

continued diversion of management’s attention from business operations as a result of CTI’s efforts to become current in its periodic reporting obligations under the federal securities laws and to remediate material weaknesses;

 

   

potential loss of business opportunities due to continued concern on the part of customers, partners, investors and employees about our financial condition and CTI’s extended delay in becoming current in its periodic reporting obligations under the federal securities laws;

 

   

constraints on our ability to obtain new debt or equity financing or engage in business combinations due to, among other things, CTI’s not being current in its periodic reporting obligations under the federal securities laws that could have a material adverse effect on our financial position and results of operations, including, but not limited to, those identified herein and in the 2010 Form 10-K;

 

   

rapidly changing technology in our subsidiaries’ industries and our subsidiaries’ ability to enhance existing products and develop and market new products;

 

   

our subsidiaries’ dependence on contracts for large systems and large installations for a significant portion of their sales and operating results including, among other things, the lengthy and complex bidding and selection process, the difficulty predicting their ability to obtain particular contracts and the timing and scope of these opportunities;

 

   

the difficulty in predicting operating results as a result of lengthy and variable sales cycles, focus on large customers and installations, short delivery windows required by customers, and the high percentage of orders typically generated late in the fiscal quarter;

 

   

the deferral or loss of one or more significant orders or customers or a delay in an expected implementation of such an order could materially and adversely affect our results of operations in any fiscal period, particularly if there are significant sales and marketing expenses associated with the deferred, lost or delayed sales;

 

   

the potential incurrence by our subsidiaries of significant costs to correct previously undetected operational problems in their complex products;

 

   

our subsidiaries’ dependence on a limited number of suppliers and manufacturers for certain components and third-party software could cause a supply shortage and/or interruptions in product supply;

 

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the risk that increased competition could force our subsidiaries to lower their prices or take other actions to differentiate their products and changes in the competitive environment in the telecommunications industry worldwide could seriously affect Comverse’s business;

 

   

the risk that increased costs or reduced demand for Comverse’s products resulting from compliance with evolving telecommunications regulations and the implementation of new standards may adversely affect our business and financial condition;

 

   

the risk that Comverse will be unable to comply with stringent standards imposed through Indian telecommunications service providers on equipment and software vendors that are not Indian owned or controlled by the Department of Telecommunications of the Government of India (or DoT), in which case Comverse’s ability to conduct business in India will be substantially limited and our revenue, profitability and cash flows would be materially adversely affected;

 

   

risks associated with significant indemnification obligations and various other obligations to which Comverse is, and will continue to be, subject as part of its compliance with DoT prescribed standards;

 

   

the risk that the failure or delay in achieving interoperability of Comverse’s products with its customers’ systems could impair its ability to sell its products;

 

   

the competitive bidding process used to generate sales requires our subsidiaries to expend significant resources with no guarantee of recoupment;

 

   

our subsidiaries’ inability to maintain relationships with value added resellers, systems integrators and other third parties that market and sell their products could adversely impact our financial condition and results of operations;

 

   

third parties’ infringement of our subsidiaries’ proprietary technology and the infringement by our subsidiaries of the intellectual property of third parties, including through the use of free or open source software;

 

   

risks of certain contractual obligations of our subsidiaries exposing them to uncapped liabilities;

 

   

the impact of mergers and acquisitions, including, but not limited to, difficulties relating to integration, the achievement of anticipated synergies and the implementation of required controls, procedures and policies at the acquired company;

 

   

risks associated with significant foreign operations and international sales, including the impact of geopolitical, economic and military conditions in foreign countries, conducting operations in countries with a history of corruption, entering into transactions with foreign governments and ensuring compliance with laws that prohibit improper payments;

 

   

adverse fluctuations of currency exchange rates;

 

   

risks relating to our significant operations in Israel, including economic, political and/or military conditions in Israel and the surrounding Middle East, and uncertainties relating to research and development grants, tax benefits and the ability of our Israeli subsidiaries to pay dividends;

 

   

potential decline in the price of CTI’s common stock in the event that holders of securities awarded under CTI’s equity incentive plans elect to sell a significant number of shares after CTI has filed all periodic reports required in a 12-month period and makes provision for the registration for issuance or sale of securities awarded under equity incentive plans;

 

   

the issuance of additional equity securities diluting CTI’s outstanding common stock, including the potential issuance of shares of CTI’s common stock in November 2011 pursuant to the settlement agreement of a consolidated shareholder class action;

 

   

risks that the credit ratings of CTI and its subsidiaries could be downgraded or placed on a credit watch based on, among other things, financial results or, in CTI’s case, delays in the filing of its periodic reports;

 

   

the ability of Verint to pay its indebtedness as it becomes due or refinance its indebtedness as well as comply with the financial and other restrictive covenants contained therein;

 

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Verint’s dependence on government contracts and the possibility that U.S. or foreign governments could refuse to purchase Verint’s Communications Intelligence solutions or could deactivate Verint’s security clearances in their countries;

 

   

risks associated with Verint’s handling, or the perception of mishandling, of customers’ sensitive information;

 

   

Verint’s ability to receive or retain necessary export licenses or authorizations; and

 

   

other risks described in filings with the SEC.

The risks and uncertainties discussed above, as well as others, are discussed in greater detail in Item 1A, “Risk Factors” of the 2010 Form 10-K. The documents and reports we file with the SEC are available through CTI, or its website, www.cmvt.com, or through the SEC’s Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) at www.sec.gov. CTI undertakes no commitment to update or revise any forward-looking statements except as required by law.

EXPLANATORY NOTE

This Quarterly Report for the three months ended April 30, 2010 is being filed by CTI after its due date as a result of the delay in filing CTI’s Annual Report on Form 10-K for the fiscal year ended January 31, 2010 (referred to as the 2009 Form 10-K), which was filed on January 25, 2011 and as a result of material weaknesses in our internal control over financial reporting. The filing of the 2009 Form 10-K, in turn, had been delayed due to the delay in filing CTI’s comprehensive Annual Report on Form 10-K for the fiscal years ended January 31, 2009, 2008, 2007 and 2006 (referred to as the Comprehensive Form 10-K), which was filed on October 4, 2010 and, to a lesser extent, as a result of material weaknesses in our internal control over financial reporting.

The delay in filing CTI’s Comprehensive Form 10-K was primarily the result of (i) adjustments to our historical financial statements required to reflect the results of the completed investigations by a Special Committee (referred to as the Special Committee) of CTI’s Board of Directors (referred to as the Board) of historic improper stock option grant practices and other financial and accounting matters and (ii) the evaluation of application of accounting principles generally accepted in the United States of America (or U.S. GAAP) in connection with the recognition of revenue, including the assessment of vendor specific objective evidence (or VSOE) of fair value, and (iii) other items relating to the completion of our consolidated financial statements.

CTI filed its Annual Report on Form 10-K for the fiscal year ended January 31, 2011 (referred to as the 2010 Form 10-K), which includes the fiscal quarter covered by this Quarterly Report, on May 31, 2011. CTI had determined that it could best provide current and accurate information to investors by focusing its efforts on preparing and filing the 2010 Form 10-K and then preparing and filing certain Quarterly Reports on Form 10-Q for prior fiscal periods. In addition, CTI filed its Quarterly Report on Form 10-Q for the three months ended April 30, 2011 (referred to as the 2011 Form 10-Q) on June 22, 2011. This Quarterly Report and the Quarterly Reports on Form 10-Q for the fiscal quarters ended July 31, 2010 and October 31, 2010 are being filed as required under the agreement in principle entered into by CTI and the SEC’s Division of Enforcement on July 13, 2011. Because information for periods subsequent to the three months ended April 30, 2010 is already available in our 2010 Form 10-K and the 2011 Form 10-Q, we have included information for periods ended subsequent to April 30, 2010 in certain sections of this Quarterly Report and, in some instances, have made reference to such periodic reports. We urge investors to read the 2010 Form 10-K and the 2011 Form 10-Q, which include financial information for subsequent fiscal periods and reflect events subsequent to April 30, 2010.

CTI expects to file its future periodic reports with the SEC on a timely basis.

Sale of Ulticom, Inc.

Ulticom, Inc. was a majority-owned publicly-traded subsidiary of CTI until it was sold to an affiliate of Platinum Equity Advisors, LLC (or Platinum Equity) on December 3, 2010 (referred to as the Ulticom Sale). Ulticom was a reportable segment prior to its sale. The results of operations of Ulticom are reflected in discontinued operations, less applicable income taxes, as a separate component of net loss in our condensed consolidated statements of operations for all fiscal periods presented, and the assets and liabilities of Ulticom are reflected in discontinued operations in our condensed consolidated balance sheets as of April 30, 2010 and January 31, 2010. See note 15 to the condensed consolidated financial statements included in this Quarterly Report.

 

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PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share data)

 

     April 30,
2010
    January 31,
2010
 

ASSETS

   

Current assets:

   

Cash and cash equivalents

  $ 439,048      $ 561,682   

Restricted cash and bank time deposits

    70,488        69,984   

Auction rate securities

    28,923        35,846   

Accounts receivable, net of allowance of $17,234 and $16,877 respectively

    332,646        310,221   

Inventories, net

    88,576        81,004   

Deferred cost of revenue

    58,699        59,412   

Deferred income taxes

    51,020        49,554   

Prepaid expenses and other current assets

    111,065        132,768   

Receivables from affiliates

    —          269   

Current assets of discontinued operations

    95,937        97,101   
               

Total current assets

    1,276,402        1,397,841   

Property and equipment, net

    97,002        99,541   

Goodwill

    958,038        953,397   

Intangible assets, net

    224,679        231,751   

Deferred cost of revenue

    177,222        194,300   

Deferred income taxes

    14,554        16,497   

Auction rate securities

    69,606        78,804   

Other assets

    129,400        119,420   

Noncurrent assets of discontinued operations

    9,145        9,660   
               

Total assets

  $ 2,956,048      $ 3,101,211   
               

LIABILITIES AND EQUITY

   

Current liabilities:

   

Accounts payable and accrued expenses

  $ 410,547      $ 450,680   

Deferred revenue

    641,982        632,674   

Deferred income taxes

    12,646        11,770   

Bank loans

    22,098        22,678   

Litigation settlement

    91,100        61,100   

Income taxes payable

    19,828        10,061   

Other current liabilities

    65,043        48,624   

Current liabilities of discontinued operations

    9,231        9,542   
               

Total current liabilities

    1,272,475        1,247,129   

Convertible debt obligations

    2,195        2,195   

Bank loans

    598,234        598,234   

Deferred revenue

    329,511        355,226   

Deferred income taxes

    29,791        32,156   

Other long-term liabilities

    303,111        351,192   

Noncurrent liabilities of discontinued operations

    5,289        5,357   
               

Total liabilities

    2,540,606        2,591,489   
               

Commitments and contingencies

   

Equity:

   

Comverse Technology, Inc. shareholders’ equity:

   

Common stock, $0.10 par value - authorized, 600,000,000 shares; issued, 204,444,206 and 204,228,369 shares, respectively; outstanding, 204,252,024 and 204,073,385 shares, respectively

    20,444        20,422   

Treasury stock, at cost, 192,182 and 154,984 shares, respectively

    (1,915     (1,578

Additional paid-in capital

    1,967,060        1,959,701   

Accumulated deficit

    (1,657,191     (1,575,316

Accumulated other comprehensive income

    9,573        19,257   
               

Total Comverse Technology, Inc. shareholders’ equity

    337,971        422,486   

Noncontrolling interest

    77,471        87,236   
               

Total equity

    415,442        509,722   
               

Total liabilities and equity

  $ 2,956,048      $ 3,101,211   
               

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except share and per share data)

 

     Three Months Ended April 30,  
     2010     2009  

Revenue:

    

Product revenue

   $ 163,955      $ 176,400   

Service revenue

     192,933        211,848   
                

Total revenue

     356,888        388,248   
                

Costs and expenses:

    

Product costs

     66,380        69,164   

Service costs

     110,224        112,370   

Selling, general and administrative

     191,123        155,081   

Research and development, net

     66,897        66,092   

Other operating expenses:

    

Restructuring charges

     5,956        11,780   
                

Total costs and expenses

     440,580        414,487   
                

Loss from operations

     (83,692     (26,239

Interest income

     994        2,555   

Interest expense

     (6,168     (6,890

Other income (expense), net

     1,677        (6,203
                

Loss before income tax provision

     (87,189     (36,777

Income tax benefit (provision)

     378        (11,634
                

Net loss from continuing operations

     (86,811     (48,411

(Loss) income from discontinued operations, net of tax

     (1,640     16,123   
                

Net loss

     (88,451     (32,288

Less: Net loss (income) attributable to noncontrolling interest

     6,576        (9,211
                

Net loss attributable to Comverse Technology, Inc.

   $ (81,875   $ (41,499
                

Weighted average common shares outstanding:

    

Basic and diluted

     204,882,544        204,304,791   
                

Loss per share attributable to Comverse Technology, Inc.’s shareholders:

    

Basic (loss) earnings per share

    

Continuing operations

   $ (0.39   $ (0.28

Discontinued operations

     (0.01     0.08   
                

Basic loss per share

   $ (0.40   $ (0.20
                

Diluted (loss) earnings per share

    

Continuing operations

   $ (0.39   $ (0.30

Discontinued operations

     (0.01     0.08   
                

Diluted loss per share

   $ (0.40   $ (0.22
                

Net loss attributable to Comverse Technology, Inc.

    

Net loss from continuing operations

   $ (80,651   $ (57,915

(Loss) income from discontinued operations, net of tax

     (1,224     16,416   
                

Net loss attributable to Comverse Technology, Inc.

   $ (81,875   $ (41,499
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Three Months Ended April 30,  
     2010     2009  

Cash flows from operating activities:

  

Net cash used in operating activities - continuing operations

   $ (95,654   $ (28,439

Net cash used in operating activities - discontinued operations

     (3,102     (933
                

Net cash used in operating activities

     (98,756     (29,372
                

Cash flows from investing activities:

    

Proceeds from sales and maturities of investments

     20,248        148,836   

Acquisition of businesses, net of cash acquired

     (15,292     (7

Purchase of property and equipment

     (5,687     (5,345

Capitalization of software development costs

     (462     (509

Net change in restricted cash and bank time deposits

     (11,434     (9,490

Settlement of derivative financial instruments not designated as hedges

     (5,960     (3,854

Other, net

     (6     (155
                

Net cash (used in) provided by investing activities - continuing operations

     (18,593     129,476   

Net cash provided by investing activities - discontinued operations

     9,797        33,275   
                

Net cash (used in) provided by investing activities

     (8,796     162,751   
                

Cash flows from financing activities:

    

Debt issuance costs

     (897     —     

Repayment of bank loans and long-term debt

     (580     (1,562

Repurchase of common stock

     (337     (49

Net payments from repurchase of common stock by subsidiaries

     (3,312     —     

Dividends paid to noncontrolling interest

     —          (2,142
                

Net cash used in financing activities - continuing operations

     (5,126     (3,753

Net cash provided by (used in) financing activities - discontinued operations

     74        (64,319
                

Net cash used in financing activities

     (5,052     (68,072
                

Effects of exchange rates on cash and cash equivalents

     (2,970     589   

Net (decrease) increase in cash and cash equivalents

     (115,574     65,896   

Cash and cash equivalents, beginning of period including cash of discontinued operations

     574,872        1,078,927   
                

Cash and cash equivalents, end of period including cash of discontinued operations

   $ 459,298      $ 1,144,823   

Less: Cash and cash equivalents of discontinued operations at end of period

     (20,250     (39,914
                

Cash and cash equivalents, end of period

   $ 439,048      $ 1,104,909   
                

Non-cash investing and financing transactions:

    

Accrued but unpaid purchases of property and equipment

   $ 1,465      $ 1,314   
                

Inventory transfers to property and equipment

   $ 20      $ 1,576   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

Company Background

Comverse Technology, Inc. (“CTI” and, together with its subsidiaries, the “Company”) is a holding company organized as a New York corporation in October 1984 that conducts business through its wholly-owned subsidiary, Comverse, Inc. (together with its subsidiaries, “Comverse”), and its majority-owned subsidiaries, Verint Systems Inc. (“Verint Systems” and together with its subsidiaries, “Verint”), Starhome B.V. (together with its subsidiaries, “Starhome”) and, prior to its sale to a third party on December 3, 2010, Ulticom, Inc. (together with its subsidiaries, “Ulticom”).

Comverse

Comverse is a leading provider of software-based products, systems and related services that (i) provide converged, prepaid and postpaid billing and active customer management for wireless, wireline and cable network operators (“Business Support Systems” or “BSS”) delivering a value proposition designed to ensure timely and efficient service monetization and enable real-time offers to be made to end users based on all relevant customer profile information; (ii) enable wireless and wireline (including cable) network-based Value-Added Services (“VAS”), comprised of two categories – Voice and Messaging – that include voicemail, visual voicemail, call completion, short messaging service (“SMS”) text messaging (“texting”), multimedia picture and video messaging and Internet Protocol (“IP”) communications; and (iii) provide wireless users with optimized access to mobile Internet websites, content and applications, and generate data usage and revenue for wireless operators. Comverse’s products and services are designed to generate carrier voice and data network traffic, revenue and customer loyalty, monetize network operators’ services and improve operational efficiency for more than 450 wireless and wireline network communication service provider customers in more than 125 countries, including the majority of the world’s 100 largest wireless network operators. Comverse comprises the Company’s Comverse segment.

Verint

Verint is a global leader in Actionable Intelligence solutions and value-added services. Verint’s solutions enable organizations of all sizes to make timely and effective decisions to improve enterprise performance and enhance safety. Verint’s customers use Verint’s Actionable Intelligence solutions to capture, distill, and analyze complex and underused information sources, such as voice, video, and unstructured text.

In the enterprise market, Verint’s Workforce Optimization solutions help organizations enhance customer service operations in contact centers, branches and back-office environments to increase customer satisfaction, reduce operating costs, identify revenue opportunities, and improve profitability. In the security intelligence market, Verint’s Video Intelligence, public safety, and Communications Intelligence solutions are used by government and commercial organizations in their efforts to protect people and property and neutralize terrorism and crime. Verint comprises the Company’s Verint segment.

Starhome

Starhome is a provider of wireless service mobility solutions that enhance international roaming. Wireless operators use Starhome’s software-based solutions to generate additional revenue and to improve profitability by directing international roaming traffic to preferred networks and by providing a wide range of services to subscribers traveling outside their home network. Starhome is part of the Company’s All Other segment.

Ulticom

Ulticom, Inc. was a majority-owned publicly-traded subsidiary of CTI until it was sold to an affiliate of Platinum Equity Advisors, LLC (“Platinum Equity”) on December 3, 2010 (the “Ulticom Sale”). Ulticom was a reportable segment of the Company prior to its sale. The results of operations of Ulticom are reflected in discontinued operations, less applicable income taxes, as a separate component of net loss in the Company’s condensed consolidated statements of operations for all fiscal periods presented, and the assets and liabilities of Ulticom are reflected in discontinued operations in the Company’s condensed consolidated balance sheets as of April 30, 2010 and January 31, 2010 (see Note 15, Discontinued Operations).

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

Condensed Consolidated Financial Statements Preparation

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2010 (the “2009 Form 10-K”). The condensed consolidated statements of operations and cash flows for the periods ended April 30, 2010 and 2009, and the condensed consolidated balance sheet as of April 30, 2010 are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results of the periods presented. The condensed consolidated balance sheet as of January 31, 2010 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2011 (the “2010 Form 10-K”). Certain information and disclosures normally included in annual consolidated financial statements have been omitted in this interim period report pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by U.S. GAAP for annual financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in the 2009 Form 10-K and the 2010 Form 10-K. The results for interim periods are not necessarily indicative of a full fiscal year’s results. The results for the fiscal year ended January 31, 2011 are presented in the 2010 Form 10-K. Where appropriate, we have provided information for events which have occurred subsequent to April 30, 2010 to enable the reader to better understand these condensed consolidated financial statements in the context of more current events. See Note 21, Subsequent Events, for a description of certain such events.

Principles of Consolidation

The accompanying condensed consolidated financial statements include CTI and its wholly-owned subsidiaries and its controlled and majority-owned subsidiaries, which include Verint Systems (in which CTI owned 56.7% of the common stock and held 66.0% of the voting power as of April 30, 2010), and Starhome B.V. (64.1% owned as of April 30, 2010). Ulticom, Inc. was a majority-owned subsidiary prior to its sale on December 3, 2010 (66.4% owned as of April 30, 2010). On January 14, 2011, CTI completed the sale of 2.3 million shares of Verint Systems’ common stock in a secondary public offering. CTI continues to retain a majority interest in Verint Systems following the offering. For controlled subsidiaries that are not wholly-owned, the noncontrolling interest is included as a separate component of “Net loss” in the condensed consolidated statements of operations and “Total equity” in the condensed consolidated balance sheets. Verint Systems holds a 50% equity interest in a consolidated variable interest entity in which it is the primary beneficiary.

All intercompany balances and transactions have been eliminated.

The Company includes the results of operations of an acquired business from the date of acquisition.

Use of Estimates

The preparation of the condensed consolidated financial statements and the accompanying notes in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.

The most significant estimates include:

 

   

The determination of vendor specific objective evidence (“VSOE”) of fair value for arrangement elements;

 

   

Inventory reserves;

 

   

Allowance for doubtful accounts;

 

   

Fair value of stock-based compensation;

 

   

Valuation of assets acquired and liabilities assumed in business combinations;

 

   

Fair value of reporting units for the purpose of goodwill impairment test;

 

   

Valuation of other intangible assets;

 

   

Valuation of investments and financial instruments;

 

   

Realization of deferred tax assets; and

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

   

The identification and measurement of uncertain tax positions.

The Company’s actual results may differ from its estimates. The Company has accounted for certain items for which it obtained additional information subsequent to the balance sheet date that relates to conditions that existed at the balance sheet date and affect the estimates inherent in the process of preparing consolidated financial statements. Such subsequent information that became available prior to the issuance of these condensed consolidated financial statements has been assessed by management in its evaluation of the conditions on which the estimates were based. Therefore, the condensed consolidated financial statements were adjusted for any significant changes in estimates resulting from the use of such subsequent additional information, where applicable.

Working Capital Position and Management’s Plans

The Company incurred substantial losses and experienced declines in cash flows and working capital during the three fiscal years ended January 31, 2011 and the three months ended April 30, 2011, and had a significant accumulated deficit as of April 30, 2011.

The Company forecasts that available cash and cash equivalents will be sufficient to meet the liquidity needs, including capital expenditures, of CTI and Comverse for at least the next 12 months from the filing date of this Quarterly Report. To further enhance the cash position of CTI and Comverse, the Company continues to evaluate capital raising alternatives. The Company’s forecast is based upon a number of assumptions, which the Company believes are reasonable. However, should one or more of the assumptions prove incorrect, or should one or more of the risks or uncertainties attendant to the Company and its business materialize, the Company’s business and operations could be materially adversely affected and, in such event, the Company may need to seek new borrowings, asset sales or the issuance of equity or debt securities. Management believes that sources of liquidity could be identified.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Standards Implemented During The Three Months Ended April 30, 2010

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued guidance which modifies the approach for determining the primary beneficiary of a variable interest entity (“VIE”). Under the modified approach, an enterprise is required to make a qualitative assessment whether it has (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb losses of the VIE, or the right to receive benefits from the VIE, that could potentially be significant to the VIE. If an enterprise has both of these characteristics, the enterprise is considered the primary beneficiary and must consolidate the VIE. The modified approach for determining the primary beneficiary of a VIE was effective for the Company commencing February 1, 2010, and the application of this guidance did not have a material impact on the condensed consolidated financial statements.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in an active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a gross presentation of activity within the Level 3 (significant unobservable inputs) roll forward, presenting information on purchases, sales, issuance, and settlements separately. The guidance was effective for the Company for interim and annual periods that commenced February 1, 2010, except for the gross presentation of the Level 3 roll forward, which became effective for the Company for interim and annual periods that commenced February 1, 2011. Adoption of this guidance resulted in additional disclosures for the gross presentation of the Level 3 roll forward.

Standards Implemented For Fiscal Periods Ended Subsequent to April 30, 2010

Revenue Recognition

The Company reports its revenue in two categories: (i) product revenue, including hardware and software products; and (ii) service revenue, including revenue from professional services, training services and post-contract customer support (“PCS”). Professional services primarily include installation, customization and consulting services.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

Revenue arrangements may include one of these single elements, or may incorporate one or more elements in a single transaction or combination of related transactions. In September 2009, the FASB issued revenue recognition guidance applicable to multiple element arrangements, which:

 

   

applies to multiple element revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of the software revenue guidance; and

 

   

addresses how to separate consideration related to each element in a multiple element arrangement, excluding software arrangements, and establishes a hierarchy for determining the selling price of a deliverable. It also eliminates the residual method of allocation by requiring that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.

The Company has not elected to early adopt this guidance. As a result, it is effective on a prospective basis for revenue arrangements entered into, or materially modified, on or after February 1, 2011.

Certain of the Company’s multiple element arrangements include hardware that functions together with software to provide the essential functionality of the product. Therefore, such arrangements entered into or materially modified on or after February 1, 2011 are no longer accounted for in accordance with the FASB’s software accounting guidance. Accordingly, the selling price used for each deliverable is based on VSOE of fair value, if available, third-party evidence (“TPE”) of fair value if VSOE is not available, or the Company’s best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. In determining the units of accounting for these arrangements, the Company evaluates whether each deliverable has stand-alone value as defined in the FASB’s guidance. For the Company’s Comverse segment, the professional services performed prior to the product’s acceptance do not have stand-alone value and are therefore combined with the related hardware and software as one non-software deliverable. After determining the fair value for each deliverable, the arrangement consideration is allocated using the relative selling price method. Revenue is recognized accordingly for each deliverable once the respective revenue recognition criteria are met for that deliverable.

The Company’s Comverse segment has not yet established VSOE of fair value for any element other than PCS for a portion of its arrangements. The Company’s Verint segment has established VSOE of fair value for one or more elements (installation services, training, consulting and PCS) for a majority of its arrangements. Generally, the Company is not able to determine TPE because its offerings contain a significant level of differentiation such that the comparable pricing of substantially similar products or services cannot be obtained. When the Company is unable to establish fair value of its non-software deliverables using VSOE or TPE, it uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which it would transact a sale if the product or service were sold on a stand-alone basis, which requires significant judgment. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies and customer classes. The Company exercises judgment and uses estimates in determining the revenue to be recognized in each accounting period.

With the exception of arrangements that require significant customization of the product to meet the particular requirements of the customer, which are accounted for using the percentage-of-completion method, the initial revenue recognition for each non-software product deliverable is generally upon completion of the related professional services. Given that the Company’s typical cycle time is between six to twelve months from contract signing to completion of services for these arrangements, the impact of implementing the guidance was not significant for the three months ended April 30, 2011. For the three months ended April 30, 2011, an additional $5.4 million and $1.9 million of revenue and a reduction of loss before income tax (provision) benefit, respectively, was recognized as a result of the adoption of the new guidance. The Company believes that the adoption of this guidance could materially increase revenue for the fiscal year ending January 31, 2012.

For all transactions entered into prior to February 1, 2011 that have not been subsequently materially modified, as well as multiple element arrangements without hardware, the Company allocates revenue to the delivered elements of the arrangement using the residual method, whereby revenue is allocated to the undelivered elements based on VSOE of fair value of the undelivered elements with the remaining arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue recognition criteria are met. If the Company is unable to establish VSOE of fair value 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, the Company recognizes the arrangement fee ratably over the PCS period.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

Goodwill Impairment

In December 2010, the FASB issued guidance on when to perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. Upon adoption, if the carrying amount of the reporting unit is zero or negative, the reporting entity must perform step two of the goodwill impairment test if it is more likely than not that goodwill is impaired as of the date of adoption. In determining if it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. Goodwill impairment recognized upon adoption of the guidance should be presented as a cumulative-effect adjustment to opening retained earnings as of the adoption date reflecting a change in accounting principle. This guidance was effective for the Company for interim and annual periods that commenced on February 1, 2011. Because the carrying value of the Company’s Comverse reporting unit being negative as of February 1, 2011 and existence of adverse qualitative factors indicating potential impairment, step two of the goodwill impairment test was performed as of such date which did not result in an impairment. The Company believes that the adoption of this guidance will not have a material impact on the consolidated financial statements for the fiscal year ending January 31, 2012.

Standards to be Implemented

In May 2011, the FASB issued updated accounting guidance to amend existing requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective beginning with the interim period ending April 30, 2012. The Company is assessing the impact that the application of this guidance may have on its condensed consolidated financial statements.

In June 2011, the FASB issued accounting guidance, which revises the manner in which entities present other comprehensive income in their financial statements. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of equity. Under the new guidance, entities are required to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The guidance is effective for the Company for interim and annual periods commencing February 1, 2012. The Company believes that the adoption of this guidance will not have a material impact on its consolidated financial statements.

3. INVESTMENTS

The following is a summary of available-for-sale securities as of April 30, 2010 and January 31, 2010:

 

     April 30, 2010  
            Included in Accumulated Other
Comprehensive Income
              
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Cumulative
Impairment
Charges
    Estimated
Fair Value
 
     (In thousands)  

Short-term:

             

Auction rate securities - Student loans

   $ 32,550       $ 9,711       $ —         $ (13,338   $ 28,923   
                                           

Total short-term investments

   $ 32,550       $ 9,711       $ —         $ (13,338   $ 28,923   
                                           

Long-term:

             

Auction rate securities - Corporate issuers

   $ 68,900       $ 4,878       $ —         $ (63,783   $ 9,995   

Auction rate securities - Student loans

     72,650         11,497         —           (24,536     59,611   
                                           

Total long-term investments

   $ 141,550       $ 16,375       $ —         $ (88,319   $ 69,606   
                                           

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

     January 31, 2010  
            Included in Accumulated Other
Comprehensive Income
              
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Cumulative
Impairment
Charges
    Estimated
Fair Value
 
     (In thousands)  

Short-term:

             

Auction rate securities - Student loans

   $ 42,550       $ 11,136       $ —         $ (17,840   $ 35,846   
                                           

Total short-term investments

   $ 42,550       $ 11,136       $ —         $ (17,840   $ 35,846   
                                           

Long-term:

             

Auction rate securities - Corporate issuers

   $ 91,200       $ 6,973       $ —         $ (79,509   $ 18,664   

Auction rate securities - Student loans

     72,800         11,946         —           (24,606     60,140   
                                           

Total long-term investments

   $ 164,000       $ 18,919       $ —         $ (104,115   $ 78,804   
                                           

The auction rate securities (“ARS”) have stated maturities in excess of 5 years.

Investments with original maturities of three months or less, when purchased, are included in “Cash and cash equivalents,” in “Restricted cash and bank time deposits” or in long-term restricted cash (long-term restricted cash is classified within “Other assets”) in the condensed consolidated balance sheets. Such investments are not reflected in the tables above as of April 30, 2010 or January 31, 2010 and include commercial paper, money market funds and U.S. government agency securities totaling $218.3 million and $236.6 million as of April 30, 2010 and January 31, 2010, respectively.

As of April 30, 2010 and January 31, 2010, all the ARS (all of which were held by CTI as of such dates) were restricted pursuant to the settlement agreement of the consolidated shareholder class action CTI entered into on December 16, 2009, as amended on June 19, 2010. All cash proceeds from sales and redemptions of ARS (other than ARS that were held in an account with UBS) (including interest thereon) received after the original date of the settlement agreement, were also restricted (see Note 20, Commitments and Contingencies).

For ARS that the Company determined it could not assert its intent to hold such ARS until their fair value recovered to amortized cost, the Company recorded other-than-temporary impairment charges of $46 thousand and $2.9 million during the three months ended April 30, 2010 and 2009, respectively, as a component of “Other income (expense), net” in the condensed consolidated statements of operations.

There were no investments in unrealized loss positions as of April 30, 2010 and January 31, 2010.

The Company sold investments for proceeds of $20.2 million and $148.8 million in the three months ended April 30, 2010 and 2009, respectively.

The gross realized gains and losses on the Company’s investments for the three months ended April 30, 2010 and 2009 are as follows:

 

(In thousands)    Gross Realized
Gains
     Gross Realized
Losses
 

April 30, 2010

   $ 8,104       $ —     
                 

April 30, 2009

   $ 28       $ —     
                 

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

The components of other comprehensive income related to available-for-sale securities are as follows:

 

     Three Months Ended April 30,  
         2010             2009      
     (In thousands)  

Accumulated OCI related to available-for-sale securities, beginning of the period

   $ 25,663      $ 10,302   

Unrealized gains on available-for-sale securities

     1,438        4,921   

Reclassification adjustment for gains included in net loss

     (5,320     (124
                

Unrealized (losses) gains on available-for-sale securities, before tax

     (3,882     4,797   

Other comprehensive (loss) income attributable to noncontrolling interest

     (21     39   

Deferred income tax benefit (provision)

     627        (1,208
                

Unrealized (losses) gains on available-for-sale securities, net of reclassification adjustment and tax

     (3,276     3,628   
                

Accumulated OCI related to available-for-sale securities, end of the period

   $ 22,387      $ 13,930   
                

4. INVENTORIES, NET

Inventories as of April 30, 2010 and January 31, 2010, respectively, consist of:

 

     April 30,
2010
    January 31,
2010
 
     (In thousands)  

Raw materials

   $ 56,474      $ 51,578   

Work in process

     52,692        47,779   

Finished goods

     9,594        8,448   
                

Total inventories

     118,760        107,805   

Less: reserves for excess and obsolete inventories

     (30,184     (26,801
                

Inventories, net

   $ 88,576      $ 81,004   
                

5. BUSINESS COMBINATIONS

Verint Segment

On February 4, 2010, Verint acquired all of the outstanding shares of Iontas Limited (“Iontas”), a privately held provider of desktop analytics solutions. Prior to this acquisition, Verint licensed certain technology from Iontas, whose solutions measure application usage and analyze workflows to help improve staff performance in contact center, branch, and back-office operations environments. Verint acquired Iontas, among other objectives, to expand the desktop analytical capabilities of its workforce optimization solutions. The financial results of Iontas have been included in the condensed consolidated financial statements since the acquisition date.

Verint acquired Iontas for total consideration valued at $21.7 million, including cash consideration of $17.7 million, and additional milestone-based contingent payments of up to $3.8 million, tied to certain performance targets being achieved over the two-year period following the acquisition date.

Verint recorded the acquisition-date estimated fair value of the contingent consideration of $3.2 million as a component of the purchase price of Iontas. The acquisition-date fair value of the contingent consideration was measured based on the probability-adjusted present value of the contingent consideration expected to be earned and transferred. The fair value of the contingent consideration was remeasured as of April 30, 2010 at $3.3 million, and the change in the fair value of the contingent consideration between the acquisition date and April 30, 2010 was recorded within “Selling, general and administrative expenses” in the Company’s condensed consolidated statements of operations. The fair value of the contingent consideration was then remeasured as of January 31, 2011 at $3.5 million. During the three months ended April 30, 2011, $2.0 million of the previously recorded contingent

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

consideration was paid to the former shareholders of Iontas. The estimated fair value of the remaining contingent consideration was $1.6 million as of April 30, 2011. The $0.1 million change in the fair value of this contingent consideration for the three months ended April 30, 2011 was recorded within “Selling, general and administrative expenses” for that fiscal period.

The purchase price to acquire Iontas also included $1.5 million of prepayments for product licenses and support services procured from Iontas prior to the acquisition date, partially offset by $0.7 million of trade accounts payable to Iontas as of the acquisition date.

The following table sets forth the components and the final allocation of the purchase price of Iontas.

 

     Amount     Estimated Useful
Lives
 
     (In thousands)        

Components of Purchase Price:

    

Cash

   $ 17,738     

Fair value of contingent consideration

     3,224     

Prepaid product licenses and support services

     1,493     

Trade accounts payable

     (712  
          

Total purchase price

   $ 21,743     
          

Allocation of Purchase Price:

    

Net tangible assets:

    

Cash and cash equivalents

   $ 2,569     

Other current assets

     286     

Other assets

     89     

Current liabilities

     (211  

Deferred income taxes - current and long term

     (993  
          

Net tangible assets

     1,740     
          

Identifiable intangible assets:

    

Developed technology

     6,949        6 years   

Non-competition agreements

     278        3 years   
          

Total identifiable intangible assets (1)

     7,227     
          

Goodwill (2)

     12,776     
          

Total purchase price

   $ 21,743     
          

 

(1) The weighted-average amortization period of all finite-lived identifiable intangible assets is 5.9 years.
(2) The goodwill presented is based on the final purchase price allocation as of January 31, 2011, consistent with the presentation in the 2010 Form 10-K.

Among the factors that contributed to the recognition of goodwill in this transaction were the expansion of Verint’s desktop analytical capabilities and suite of products and services, and the addition of an assembled workforce.

Transaction costs, primarily professional fees, directly related to the acquisition of Iontas, totaled $1.3 million, including $0.5 million incurred during the three months ended April 30, 2010, and were expensed as incurred.

Revenue from Iontas for the three months ended April 30, 2010 was not material.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

6. GOODWILL

The changes in the carrying amount of goodwill in the Comverse, Verint and All Other segments for the three months ended April 30, 2010 are as follows:

 

     Comverse     Verint     All Other  (1)      Total  
     (In thousands)  

For the Three Months Ended April 30, 2010

         

Goodwill, gross at January 31, 2010

   $ 312,142      $ 790,151      $ 7,559       $ 1,109,852   

Accumulated impairment losses at January 31, 2010

     (156,455     —          —           (156,455
                                 

Goodwill, net, at January 31, 2010

     155,687        790,151        7,559         953,397   

Acquisition of Iontas Limited

     —          12,899        —           12,899   

Effect of changes in foreign currencies and other

     (482     (7,776     —           (8,258
                                 

Goodwill, net, at April 30, 2010

   $ 155,205      $ 795,274      $ 7,559       $ 958,038   
                                 

Balance at April 30, 2010

         

Goodwill, gross at April 30, 2010

   $ 311,660      $ 795,274      $ 7,559       $ 1,114,493   

Accumulated impairment losses at April 30, 2010

     (156,455     —          —           (156,455
                                 

Goodwill, net, at April 30, 2010

   $ 155,205      $ 795,274      $ 7,559       $ 958,038   
                                 

 

(1) The amount of goodwill in the “All Other” segment is attributable to Starhome.

The Company tests goodwill for impairment annually as of November 1 or more frequently if events or circumstances indicate the potential for an impairment exists. For the three months ended April 30, 2010, the Company did not identify circumstances that required goodwill to be tested for impairment. However, subsequent to April 30, 2010, the Company identified circumstances that required goodwill to be tested for impairment prior to the November 1, 2010 annual impairment testing date due to the Comverse reporting unit experiencing continued operating losses and cash outflows. As a result, the Company performed an interim impairment test of goodwill for its Comverse reporting unit as of July 31, 2010 and determined, similar to the result of the impairment tests performed as of November 1, 2010 and February 1, 2011, that the fair value of the Comverse reporting unit exceeded its carrying value and goodwill was not impaired as of that date.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

7. INTANGIBLE ASSETS, NET

Acquired intangible assets as of April 30, 2010 and January 31, 2010 are as follows:

 

     Useful Life    April 30,
2010
     January 31,
2010
 
          (In thousands)  

Gross carrying amount:

        

Acquired technology

   5 to 7 years    $ 158,867       $ 152,629   

Customer relationships

   3 to 10 years      231,738         233,975   

Trade names

   1 to 10 years      12,853         12,951   

Non-competition agreements

   1 to 10 years      3,694         3,429   

Distribution network

   10 years      2,440         2,440   
                    
        409,592         405,424   

Accumulated amortization:

        

Acquired technology

        92,772         87,124   

Customer relationships

        77,680         72,658   

Trade names

        11,211         10,824   

Non-competition agreements

        2,325         2,203   

Distribution network

        925         864   
                    
        184,913         173,673   
                    

Total

      $ 224,679       $ 231,751   
                    

Amortization of intangible assets was $12.2 million and $13.5 million for the three months ended April 30, 2010 and 2009, respectively. There was no impairment of finite-lived intangible assets for the three months ended April 30, 2010 and 2009.

8. RESTRUCTURING

The Company reviews its business, manages costs and aligns resources with market demand and in conjunction with various acquisitions. As a result, the Company has taken several actions to reduce fixed costs, eliminate redundancies, strengthen operational focus and better position itself to respond to market pressures or unfavorable economic conditions. In addition to existing restructuring initiatives, Comverse’s management had approved one restructuring initiative during the three months ended April 30, 2010.

First Quarter 2010 Restructuring Initiatives

During the three months ended April 30, 2010, Comverse’s management approved a restructuring plan to eliminate staff positions and close certain facilities in order to more appropriately streamline Comverse’s activities. The aggregate cost of the plan was $7.0 million, of which severance-related and facilities-related costs of $5.5 million and $0.3 million, respectively, were recorded during the three months ended April 30, 2010 with the remaining $1.2 million of charges recorded during the remainder of the fiscal year ended January 31, 2011. Severance-related and facilities-related costs of $4.3 million and $0.2 million, respectively, were paid during the three months ended April 30, 2010. Severance-related and facilities-related costs of $1.7 million and $0.7 million, respectively, were paid during the remainder of the fiscal year ended January 31, 2011, with the remaining costs of $0.1 million expected to be substantially paid by January 31, 2012.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

The rollforward of the workforce reduction and restructuring activities under various plans is presented below:

 

     Comverse First
Quarter 2010
Initiative
    Comverse 2009 Initiative     Pre 2009 Initiatives     Verint Initiatives         
     Severance
Related
    Facilities
Related
    Severance
Related
    Facilities
Related
    Severance
Related
    Facilities
Related
    Severance
Related
    Facilities
Related
     Total  
     (In thousands)  

For the Three Months Ended April 30, 2010

                   

January 31, 2010

   $ —        $ —        $ 342      $ 423      $ 357      $ 4,064      $ 116      $ —         $ 5,302   

Charges

     5,505        277        (2     4        7        165        —          —           5,956   

Change in assumptions

     —          —          —          —          —          —          —          —           —     

Paid or utilized

     (4,330     (209     (296     (230     (24     (1,252     (116     —           (6,457
                                                                         

April 30, 2010

   $ 1,175      $ 68      $ 44      $ 197      $ 340      $ 2,977      $ —        $ —         $ 4,801   
                                                                         

 

     Comverse 2009
Initiative
    Pre 2009 Initiatives     Verint Initiatives               
     Severance
Related
    Facilities
Related
    Severance
Related
    Facilities
Related
    Severance
Related
    Facilities
Related
     Other (1)
initiatives
    Total  
     (In thousands)  

For the Three Months Ended April 30, 2009

                 

January 31, 2009

   $ —        $ —        $ 1,746      $ 8,670      $ 537      $ —         $ 4      $ 10,957   

Charges

     10,967        166        33        763        13        —           128        12,070   

Change in assumptions

     —          —          (47     (243     —          —           —          (290

Paid or utilized

     (4,558     (45     (1,108     (1,205     (281     —           (132     (7,329
                                                                 

April 30, 2009

   $ 6,409      $ 121      $ 624      $ 7,985      $ 269      $ —         $ —        $ 15,408   
                                                                 

 

(1) Includes costs and payments associated with initiatives implemented at Starhome.

9. DEBT

As of April 30, 2010 and January 31, 2010, debt is comprised of the following:

 

     April 30,
2010
     January 31,
2010
 
     (In thousands)  

Convertible debt obligations

   $ 2,195       $ 2,195   

Term loan

     605,332         605,912   

Revolving credit facility

     15,000         15,000   
                 

Total debt

   $ 622,527       $ 623,107   

Less: current portion

     22,098         22,678   
                 

Total long-term debt

   $ 600,429       $ 600,429   
                 

Convertible Debt Obligations

As of April 30, 2010 and January 31, 2010, CTI had $2.2 million aggregate principal amount of outstanding Convertible Debt Obligations (the “Convertible Debt Obligations”). The Convertible Debt Obligations are not secured by any assets of the Company and are not guaranteed by any of CTI’s subsidiaries.

Each $1,000 principal amount of the Convertible Debt Obligations is convertible, at the option of the holder upon certain circumstances, into shares of CTI’s common stock at a conversion price of $17.9744 per share (equal to a conversion rate of 55.6347 shares per $1,000 principal amount of Existing Convertible Debt Obligations), subject to adjustment for certain events.

The Convertible Debt Obligations are convertible upon the occurrence of certain events, including during any period, if following the date on which the credit rating assigned to the Convertible Debt Obligations by S&P is lower than “B-” or upon the withdrawal or suspension of the Convertible Debt Obligations rating at CTI’s request. On August 19, 2010, S&P discontinued rating the Convertible Debt Obligations at which time they became convertible.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

Verint Credit Facilities

On May 25, 2007, Verint entered into a credit agreement with a group of banks to fund a portion of the acquisition of Witness Systems Inc. (“Witness”). On April 29, 2011, Verint (i) entered into a credit agreement (the “New Credit Agreement”) with a group of lenders (the “Lenders”) and Credit Suisse AG, as administrative agent and collateral agent for the Lenders (in such capacities, the “Agent”), and (ii) terminated the credit agreement, dated May 25, 2007 (the “Prior Facility”).

The discussion below relates to the Prior Facility which was in effect during the three months ended April 30, 2010. Subsequent to April 30, 2010, Verint made a mandatory “excess cash flow” payment, repaid revolving credit facility borrowings, amended the Prior Facility, terminated the interest rate swap, and, as noted above, entered into the New Credit Agreement and terminated the Prior Facility (see Note 21, Subsequent Events).

Prior Facility

The Prior Facility provided for a $650.0 million seven-year term loan facility and a $25.0 million six-year revolving credit facility that were scheduled to mature on May 25, 2014 and May 25, 2013, respectively.

Verint’s $25.0 million revolving credit facility was effectively reduced to $15.0 million during the fiscal quarter ended October 31, 2008, in connection with the bankruptcy of Lehman Brothers and the related subsequent termination of its revolving commitment under the Prior Facility in June 2009. In July 2010, the Prior Facility was amended (see Note 21, Subsequent Events, for disclosure of the amended terms). As part of the amendments, the borrowing capacity under the revolving credit facility was increased to $75.0 million. During the three months ended January 31, 2009, Verint borrowed the full $15.0 million then available under the revolving credit facility, which Verint repaid during the fiscal quarter ended January 31, 2011.

The Prior Facility included a requirement that Verint submit audited consolidated financial statements to the lenders within 90 days of the end of each fiscal year, beginning with the financial statements for the fiscal year ended January 31, 2010. Should Verint have failed to deliver such audited consolidated financial statements as required, the agreement provided for a thirty-day period to cure such default, or an event of default would occur.

On April 27, 2010, Verint entered into an amendment to the Prior Facility that extended the due date for delivery of audited consolidated financial statements and related documentation for the fiscal year ended January 31, 2010 from May 1, 2010 to June 1, 2010. In consideration for this amendment, Verint paid approximately $0.9 million to its lenders which was included within deferred debt related costs and was subject to amortization as additional interest expense over the remaining term of the Prior Facility using the effective interest method. Legal fees and other out-of-pocket costs directly relating to the amendment, which were expensed as incurred, were not significant. Verint filed its Annual Report on Form 10-K for the fiscal year ended January 31, 2010 containing the requisite financial statements on May 19, 2010 and, accordingly, delivered its audited consolidated financial statements to the lenders in compliance with the amended terms of the Prior Facility.

The Prior Facility contained one financial covenant that required Verint not to exceed a certain consolidated leverage ratio, as of each fiscal quarter end, with respect to the then applicable trailing twelve months. The consolidated leverage ratio was defined as Verint’s consolidated net total debt divided by consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) as defined in the agreement. Under the Prior Facility, the consolidated leverage ratio was not permitted to exceed 3.50:1 for the quarterly periods ended April 30, 2010 and January 31, 2010, and Verint was in compliance with such requirements. As amended in July 2010, the consolidated leverage ratio was not permitted to exceed 3.50:1 for periods through October 31, 2011, and was not permitted to exceed 3.00:1 for all quarterly periods thereafter. As of January 31, 2011, October 31, 2010 and July 31, 2010, Verint was in compliance with such requirements.

On May 25, 2007, concurrently with entry into the Prior Facility, Verint entered into a pay-fixed/receive-variable interest rate swap agreement with a multinational financial institution with a notional amount of $450.0 million to mitigate a portion of the risk associated with variable interest rates on the term loan (see Note 10, Derivatives and Financial Instruments, for further details regarding the interest rate swap agreement). The original term of the interest rate swap agreement extended through May 2011. However, on July 30, 2010, Verint terminated the interest rate swap agreement in exchange for a payment of $21.7 million to the counterparty, made on August 3, 2010, representing the approximate present value of the expected remaining quarterly settlement payments Verint otherwise would have owed under the interest rate swap agreement (see Note 21, Subsequent Events).

Verint incurred interest expense on borrowings under the Prior Facility of $5.4 million and $5.8 million during the three months ended April 30, 2010 and 2009, respectively. Verint also recorded $0.5 million and $0.4 million during the three months ended April 30, 2010 and 2009, respectively, for amortization of its deferred debt issuance costs, which is reported within interest expense.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

As of April 30, 2010 and January 31, 2010, the interest rates on both the term loan and the revolving credit facility were 3.54% and 3.49%, respectively. The interest rate on the revolving credit facility reset to 5.25% as of August 4, 2010.

Comverse Ltd. Lines of Credit

As of April 30, 2010 and January 31, 2010, Comverse Ltd., a wholly-owned Israeli subsidiary of Comverse, Inc., had a $25.0 million line of credit with a bank to be used for various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. This line of credit is not available for borrowings. The line of credit bears no interest and is subject to renewal on an annual basis. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts utilized under the line of credit. In June 2010, this line of credit was decreased to $15.0 million with a corresponding decrease in the cash balances Comverse Ltd. was required to maintain with the bank to $15.0 million. In December 2010, this line of credit was further decreased to $10.0 million with a corresponding decrease in the cash balances Comverse Ltd. was required to maintain with the bank to $10.0 million. In June 2011, the line of credit increased to $20.0 million with a corresponding increase in the cash balances Comverse Ltd. is required to maintain with the bank to $20.0 million. As of April 30, 2010 and January 31, 2010, Comverse Ltd. had utilized $6.9 million and $7.7 million, respectively of capacity under the line of credit for guarantees and foreign currency transactions.

As of April 30, 2010 and January 31, 2010, Comverse Ltd. had an additional line of credit with a bank for $20.0 million, to be used for borrowings, various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. The line of credit bears no interest other than on borrowings thereunder and is subject to renewal on an annual basis. Borrowings under the line of credit bear interest at an annual rate of LIBOR plus a variable margin determined based on the bank’s underlying cost of capital. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts borrowed or utilized under the line of credit. In June 2010, this line of credit was decreased to $15.0 million with a corresponding decrease in the cash balances Comverse Ltd. is required to maintain with the bank to $15.0 million. In December 2010, Comverse Ltd. borrowed and repaid $6.0 million under the line of credit. In January 2011, Comverse Ltd. borrowed $6.0 million under the line of credit, which was repaid during the three months ended April 30, 2011. As of April 30, 2010 and January 31, 2010, Comverse Ltd. had no outstanding borrowings under the line of credit, but had utilized $8.1 million and $9.8 million, respectively, of capacity under the line of credit for guarantees and foreign currency transactions.

Other than Comverse Ltd.’s requirement to maintain cash balances with the banks as disclosed above, the lines of credit have no financial covenant provisions. These cash balances required to be maintained with the banks were classified within the condensed consolidated balance sheets as “Restricted cash and bank time deposits” as of April 30, 2010 and January 31, 2010.

10. DERIVATIVES AND FINANCIAL INSTRUMENTS

The Company entered into derivative arrangements to manage a variety of risk exposures during the three months ended April 30, 2010 and 2009, including interest rate risk associated with Verint’s Prior Facility and foreign currency risk related to forecasted foreign currency denominated payroll costs at the Company’s Comverse, Verint and Starhome subsidiaries. The Company assessed the counterparty credit risk for each party related to its derivative financial instruments for the periods presented.

With the exception of Verint’s interest rate swap, all derivatives outstanding as of April 30, 2010 are short-term in nature and are due to contractually settle within the next twelve months.

Forward Contracts

During the three months ended April 30, 2010 and 2009, Comverse entered into a series of short-term foreign currency forward contracts to limit the variability in exchange rates between the U.S. dollar (the “USD”) and the new Israeli shekels (“NIS”) to hedge probable cash flow exposure from expected future payroll expense. The transactions qualified for cash flow hedge accounting under the FASB’s guidance and there was no hedge ineffectiveness. Accordingly, the Company recorded all changes in fair value of the forward contracts as part of other comprehensive income or loss. Such amounts are reclassified to the condensed consolidated statements of operations when the effects of the item being hedged are recognized in the condensed consolidated statements of operations.

Verint periodically enters into short-term foreign currency forward contracts to mitigate risk of fluctuations in foreign currency exchange rates primarily relating to compensation and related expenses denominated in currencies other than USD, primarily the NIS

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

and Canadian dollar. Verint’s 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 settlement of liabilities denominated in USD. Certain of these foreign currency forward contracts were not designated as hedging instruments under the FASB’s guidance and, therefore, gains and losses from changes in their fair values were reported in “Other income (expense), net” in the condensed consolidated statements of operations. Changes in the fair value of effective forward contracts qualifying for cash flow hedge accounting under the FASB’s guidance are recorded as part of other comprehensive income or loss. Such amounts are reclassified to the consolidated statements of operations when the effects of the item being hedged are recognized in the condensed consolidated statements of operations.

During the three months ended April 30, 2010 and 2009, Starhome entered into short-term foreign currency forward contracts to mitigate risk of fluctuations in foreign currency exchange rates mainly relating to payroll costs denominated in the NIS. Certain of these foreign currency forward contracts were not designated as hedging instruments, and therefore, gains and losses from changes in their fair values were reported in “Other income (expense), net” in the condensed consolidated statements of operations.

Interest Rate Swap Agreement

On May 25, 2007, concurrently with entry into its Prior Facility, Verint executed a pay-fixed/receive-variable interest rate swap agreement with a multinational financial institution to mitigate a portion of the risk associated with variable interest rates on the term loan under the Prior Facility, under which Verint paid fixed interest at 5.18% and received variable interest equal to three-month LIBOR on a notional amount of $450.0 million. The original term of the interest rate swap agreement extended through May 2011, and cash settlements with the counterparty occurred on a quarterly basis. The interest rate swap agreement was not designated as a hedging instrument under derivative accounting guidance, and gains and losses from changes in its fair value were therefore reported in “Other income (expense), net” in the condensed consolidated statements of operations. On July 30, 2010, Verint terminated the interest rate swap agreement (see Note 21, Subsequent Events, for disclosures relating to the termination of the interest rate swap agreement).

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

The following tables summarize the Company’s derivative positions and their respective fair values as of April 30, 2010 and January 31, 2010:

 

    April 30, 2010  

Type of Derivative

  Notional
Amount
   

Balance Sheet Classification

  Fair
Value
 
    (In thousands)  

Assets

     

Derivatives not designated as hedging instruments

     

Short-term foreign currency forward

  $ 30,888      Prepaid expenses and other current assets   $ 898   

Derivatives designated as hedging instruments

     

Short-term foreign currency forward

    108,636      Prepaid expenses and other current assets     1,794   
           

Total assets

      $ 2,692   
           

Liabilities

     

Derivatives not designated as hedging instruments

     

Short-term interest rate swap (1)

    Other current liabilities   $ 21,204   

Long-term interest rate swap (1)

    Other long-term liabilities     4,636   
           

Total liabilities

      $ 25,840   
           

 

    January 31, 2010  

Type of Derivative

  Notional
Amount
   

Balance Sheet Classification

  Fair
Value
 
          (In thousands)      

Assets

     

Derivatives not designated as hedging instruments

     

Short-term foreign currency forward

  $ 11,079      Prepaid expenses and other current assets   $ 758   

Derivatives designated as hedging instruments

     

Short-term foreign currency forward

    93,015      Prepaid expenses and other current assets     864   
           

Total assets

      $ 1,622   
           

Liabilities

     

Derivatives not designated as hedging instruments

     

Short-term interest rate swap (1)

    Other current liabilities   $ 20,988   

Short-term foreign currency forward

    26,500      Other current liabilities     598   

Long-term interest rate swap (1)

    Other long-term liabilities     8,824   

Derivatives designated as hedging instruments

     

Short-term foreign currency forward

    5,187      Other current liabilities     38   
           

Total liabilities

      $ 30,448   
           

 

(1) The total notional amount of the interest rate swap was $450.0 million.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

The following tables summarize the Company’s classification of gains and losses on derivative instruments for the three months ended April 30, 2010 and 2009.

 

    Three Months Ended April 30, 2010  
    Gain (Loss)  

Type of Derivative

  Recognized in Other
Comprehensive
Income
    Reclassified from
Accumulated Other
Comprehensive
Income into
Statement of
Operations (1)
    Recognized in Other
Income (Expense),
Net
 
    (In thousands)  

Derivatives not designated as hedging instruments

     

Foreign currency forward

  $ —        $ —        $ 351   

Interest rate swap

    —          —          (1,601

Derivatives designated as hedging instruments

     

Foreign currency forward

    976        43        —     
                       

Total

  $ 976      $ 43      $ (1,250
                       
    Three Months Ended April 30, 2009  
    Gain (Loss)  

Type of Derivative

  Recognized in Other
Comprehensive
Income
    Reclassified from
Accumulated Other
Comprehensive
Income into
Statement of
Operations (1)
    Recognized in Other
Income (Expense),
Net
 
    (In thousands)  

Derivatives not designated as hedging instruments

     

Foreign currency forward

  $ —        $ —        $ 142   

Interest rate swap

    —          —          (3,685

Derivatives designated as hedging instruments

     

Foreign currency forward

    (1,982     (1,316     —     
                       

Total

  $ (1,982   $ (1,316   $ (3,543
                       

 

(1) Amounts reclassified from accumulated other comprehensive income into the statement of operations are classified as operating expenses.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

The components of other comprehensive income related to cash flow hedges are as follows:

 

     Three Months Ended April 30,  
         2010             2009      
     (In thousands)  

Accumulated OCI related to cash flow hedges, beginning of the period

   $ 785      $ (3,028

Unrealized gains (losses) on cash flow hedges

     1,012        (1,951

Reclassification adjustment for (gains) losses included in net loss

     (43     1,316   
                

Unrealized gains (losses) on cash flow hedges, before tax

     969        (635

Other comprehensive loss attributable to noncontrolling interest

     (36     (31

Deferred income tax provision

     (34     —     
                

Unrealized gains (losses) on cash flow hedges, net of tax

     899        (666
                

Accumulated OCI related to cash flow hedges, end of the period

   $ 1,684      $ (3,694
                

11. FAIR VALUE MEASUREMENTS

Under the FASB’s guidance, fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., “the exit price”).

The FASB’s guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy consists of three levels based on the reliability of inputs as follows:

 

   

Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access.

 

   

Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

   

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in transfers within fair value measurement hierarchy. The Company did not have any transfers between levels of the fair value measurement hierarchy during the three months ended April 30, 2010.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial instruments is estimated by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Money Market Funds and U.S. Government Agency Debt Securities. The Company values these assets using quoted market prices for such funds.

Commercial Paper. The Company uses quoted prices for similar assets and liabilities.

ARS. The Company determines the fair value of ARS on a quarterly basis by utilizing a discounted cash flow model, which considers, among other factors, assumptions about the (i) underlying collateral, (ii) credit risk associated with the issuer, and (iii) contractual maturity. The discounted cash flow model considers contractual future cash flows, representing both interest and principal payments. Future interest payments were projected using U.S. Treasury and swap curves over the remaining term of the ARS in accordance with the terms of each specific security and principal payments were assumed to be made at an estimated contractual maturity date taking into account applicable prepayments. Yields used to discount these payments were determined based on the

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

specific characteristics of each security. Key considerations in the determination of the appropriate discount rate include the securities’ remaining term to maturity, capital structure subordination, quality and level of collateralization, complexity of payout structure, credit rating of the issuer, and the presence or absence of additional insurance enhancement from monoline insurers.

Contingent Consideration. The Company values contingent consideration using an estimated probability-adjusted discounted cash flow model. The fair value measurement is based on significant inputs not observable in the market. The fair value of contingent consideration is re-measured at each reporting period, and any changes in fair value are recorded in earnings.

Derivative Assets and Liabilities. The fair value of derivative instruments is based on quotes or data received from counterparties and third party financial institutions. 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 markets rates for similar contracts using readily observable market prices thereof.

The following tables present financial instruments according to the fair value hierarchy as defined by the FASB’s guidance as of April 30, 2010 and January 31, 2010:

 

     April 30, 2010  
     Quoted Prices
in Active

Markets for
Identical

Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable

Inputs
(Level 3)
     Fair
Value
 
     (In thousands)  

Financial Assets:

           

Commercial paper (1)

   $ —         $ 58,408       $ —         $ 58,408   

Money market funds (1)

     139,526         —           —           139,526   

U.S. Government agency securities (1)

     —           20,341         —           20,341   

Auction rate securities

     —           —           98,529         98,529   

Derivative assets

     —           2,692         —           2,692   
                                   
   $ 139,526       $ 81,441       $ 98,529       $ 319,496   
                                   

Financial Liabilities:

           

Derivative liabilities

   $ —         $ 25,840       $ —         $ 25,840   

Contingent consideration liability for business combination

     —           —           3,264         3,264   
                                   
   $ —         $ 25,840       $ 3,264       $ 29,104   
                                   

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

     January 31, 2010  
     Quoted Prices
to Active

Markets for
Identical

Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable

Inputs
(Level 3)
     Fair
Value
 
     (In thousands)  

Financial Assets:

           

Commercial paper (1)

   $ —         $ 122,219       $ —         $ 122,219   

Money market funds (1)

     114,387         —           —           114,387   

Auction rate securities

     —           —           114,650         114,650   

Derivative assets

     —           1,622         —           1,622   
                                   
   $ 114,387       $ 123,841       $ 114,650       $ 352,878   
                                   

Financial Liabilities:

           

Derivative liabilities

   $ —         $ 30,448       $ —         $ 30,448   
                                   
   $ —         $ 30,448       $ —         $ 30,448   
                                   

 

(1) As of April 30, 2010, $171.3 million of commercial paper, money market funds and U.S. government agency securities were classified in “Cash and cash equivalents,” $19.2 million of money market funds were classified in “Restricted cash and bank time deposits” and $27.8 million of money market funds were classified in “Other assets” as long-term restricted cash. As of January 31, 2010, $210.5 million of commercial paper and money market funds were classified in “Cash and cash equivalents,” $9.0 million of commercial paper and money market funds were classified in “Restricted cash and bank time deposits” and $17.1 million of money market funds were classified in “Other assets” as long-term restricted cash.

The following table is a summary of changes in the fair value of the level 3 financial assets and liabilities, during the three months ended April 30, 2010 and 2009:

 

     Level Three Financial Assets and Liabilities  
     Three Months Ended April 30,  
     2010      2009  
     Asset     Liability      Asset     Liability  
     (In thousands)  

Beginning balance

   $ 114,650      $ —         $ 120,265      $ —     

Sales and redemptions

     (20,210     —           —          —     

Change in realized and unrealized gains included in other income (expense), net

     8,104        —           —          —     

Change in unrealized (losses) gains included in other comprehensive income

     (3,969     —           5,156        —     

Impairment charges

     (46     —           (2,911     —     

Contingent consideration liability recorded for business combination

     —          3,224         —          —     

Change in fair value recorded in operating expenses

     —          40         —          —     
                                 

Ending balance

   $ 98,529      $ 3,264       $ 122,510      $ —     
                                 

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, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. The Company measures non-financial assets, including goodwill, intangible assets and property, plant and equipment, at fair value when there is an indication of impairment. The Company also elected not to apply the fair value option for non-financial assets and non-financial liabilities.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

UBS Put

In November 2008, CTI accepted an offer from UBS AG (“UBS”), providing rights related to $51.6 million in aggregate principal amount of ARS that were held in an account with UBS (the “UBS Put”). Under the terms of the UBS Put, CTI had the right, but not the obligation, to sell its eligible ARS at par value to UBS at any time during the period of June 30, 2010 through July 2, 2012. Additionally, UBS had the right, at its discretion and at any time until July 2, 2012, to purchase the ARS from CTI at par value, which is defined as the price equal to the principal amount of the ARS plus accrued but unpaid dividends or interest, if any. UBS purchased from CTI, pursuant to its purchase right, approximately $10.0 million and $9.0 million aggregate principal amount of ARS during the three months ended April 30, 2010 and the fiscal year ended January 31, 2010, respectively. Subsequently, during the period from May 1, 2010 through June 30, 2010, UBS purchased from CTI approximately $22.6 million aggregate principal amount of ARS. Under the terms of the settlement agreement of the consolidated shareholder class action, CTI was required to exercise the UBS Put on June 30, 2010, and apply the proceeds from such exercise toward amounts payable under such settlement. Effective June 30, 2010, CTI exercised the UBS Put for the balance of the ARS that were subject to the UBS Put.

The UBS Put is carried at historical cost and assessed for impairment. The Company evaluated the UBS Put for impairment based on redemptions and changes in fair value of the related ARS subject to the UBS Put. During the three months ended April 30, 2010 and 2009, the Company recorded $3.1 million and $2.0 million of impairment charges related to the UBS Put respectively, which are classified in “Other income (expense), net”. As of April 30, 2010 the UBS Put’s carrying value was $3.6 million and the fair value of the related ARS was $28.9 million before consideration of the UBS Put, with a corresponding principal amount of $32.6 million. As of January 31, 2010 the UBS Put’s carrying value was $6.7 million and the fair value of the related ARS was $35.8 million before consideration of the UBS Put, with a corresponding principal amount of $51.6 million.

The UBS Put fair value was determined using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality and risk profile which are considered significant unobservable inputs. In determining the market interest yield curve, the Company considered the credit rating of UBS. As such the UBS Put has a fair value based on inputs consistent with an asset included in Level 3 of the fair value hierarchy.

Verint’s Prior Facility

As of April 30, 2010 and January 31, 2010, the carrying amounts reported in the condensed consolidated balance sheets for Verint’s term loan were $605.3 million and $605.9 million, respectively. The estimated fair values of the outstanding term loan as of April 30, 2010 and January 31, 2010 were $583.4 million and $572.6 million, respectively, based upon the estimated bid and ask prices as determined by the agent responsible for the syndication of Verint’s term loan. The fair value of the revolving credit facility was estimated to equal the principal amount outstanding as of April 30, 2010 and January 31, 2010.

12. SEVERANCE

Under Israeli law, the Company is obligated to make severance payments under certain circumstances to employees of its Israeli subsidiaries on the basis of each individual’s current salary and length of employment. The Company’s liability for severance pay is calculated pursuant to Israel’s Severance Pay Law based on the most recent monthly salary of the employee multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment or a portion thereof. The gross accrued severance liability as of April 30, 2010 and January 31, 2010 is $67.3 million and $68.6 million, respectively, and is included in “Other long-term liabilities” in the condensed consolidated balance sheets. A portion of such liability is funded by monthly deposits into insurance policies, which are restricted to only be used to satisfy such severance payments. The amount of deposits is classified in “Other assets” as severance pay fund in the amounts of $46.6 million and $47.8 million as of April 30, 2010 and January 31, 2010, respectively.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

13. STOCK-BASED COMPENSATION

Stock-based compensation expense associated with awards made by CTI and its subsidiaries are included in the Company’s condensed consolidated statements of operations as follows:

 

     Three Months Ended April 30,  
             2010                      2009          
     (In thousands)  

Stock options:

     

Product costs

   $ 400       $ 146   

Service costs

     1,179         678   

Selling, general and administrative

     7,222         1,561   

Research and development

     2,519         843   
                 
     11,320         3,228   

Restricted/Deferred stock awards:

     

Product costs

     239         107   

Service costs

     598         260   

Selling, general and administrative

     7,538         6,229   

Research and development

     1,062         592   
                 
     9,437         7,188   
                 

Total

   $ 20,757       $ 10,416   
                 

CTI

CTI’s Restricted Period

As a result of the delinquency in the filing of periodic reports under the Exchange Act since April 2006, CTI has been ineligible to use its registration statements on Form S-8 for the offer and sale of equity securities, including through the exercise of stock options by employees. Consequently, to ensure that it does not violate the federal securities laws, CTI prohibited the exercise of vested stock options from April 2006 until such time as it is determined that CTI has filed all periodic reports required in a 12-month period and has an effective registration statement on Form S-8 on file with the SEC. This period is referred to as the “restricted period.”

Restricted Awards and Stock Options

CTI granted restricted stock, deferred stock units (“DSU”) awards (collectively “Restricted Awards”) and stock options under its various stock incentive plans.

During the three months ended April 30, 2010, CTI granted DSU awards covering an aggregate of 1,013,000 shares of CTI’s common stock to certain executive officers and key employees, including a DSU award covering 300,000 shares of CTI’s common stock to CTI’s then-President and Chief Executive Officer and a DSU award covering 150,000 shares of CTI’s common stock to CTI’s then-Executive Vice President and Chief Financial Officer.

During the three months ended April 30, 2009, CTI granted DSU awards covering an aggregate of 952,200 shares of CTI’s common stock to certain executive officers and key employees.

As of April 30, 2010, stock options to purchase 12,774,945 shares of CTI’s common stock and Restricted Awards with respect to 2,001,986 shares of CTI’s common stock were outstanding and 5,643,063 shares of CTI’s common stock were available for future grant under CTI’s Stock Incentive Compensation Plans. In addition, as of April 30, 2010, CTI was committed to issue 952,948 shares of its common stock to holders of its vested Restricted Awards who had elected to defer delivery of such underlying shares.

The total fair value of Restricted Awards vested during the three months ended April 30, 2010 and 2009 was $6.3 million and $5.3 million, respectively. As of April 30, 2010, the unrecognized compensation expense related to unvested Restricted Awards was $18.1 million which is expected to be recognized over a weighted-average period of 2.5 years.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

Outstanding stock options at April 30, 2010 include unvested stock options to purchase 778,500 shares of CTI’s common stock with a weighted-average grant date fair value of $2.34, an expected term of 4.0 years and a total fair value of $1.8 million. The unrecognized compensation cost related to the remaining unvested stock options to purchase CTI’s common stock was $1.0 million, which is expected to be recognized over a weighted-average period of 2.1 years.

The fair value of stock options to purchase CTI’s common stock vested during the three months ended April 30, 2010 and 2009 was zero and $0.8 million, respectively.

Verint

Stock Options

Verint Systems has not granted stock options subsequent to January 31, 2006. However, in connection with Verint’s acquisition of Witness on May 25, 2007, stock options to purchase Witness common stock were converted into stock options to purchase approximately 3.1 million shares of Verint Systems’ common stock.

Restricted Stock Awards and Restricted Stock Units

Verint Systems periodically awards shares of restricted stock, as well as restricted stock units, to its directors, officers and other employees. These awards contain various vesting conditions, and are subject to certain restrictions and forfeiture provisions prior to vesting.

During the three months ended April 30, 2010 and 2009, Verint Systems granted 1.0 million and 1.3 million combined restricted stock awards and restricted stock units, respectively. An aggregate of 0.1 million of restricted stock awards and restricted stock units were forfeited during the three months ended April 30, 2009, and forfeitures were not significant during the three months ended April 30, 2010. As of April 30, 2010 and 2009, Verint Systems had 4.1 million and 3.1 million of combined restricted stock awards and stock units outstanding, respectively, with weighted-average grant date fair values of $25.30 and $4.90, respectively.

As of April 30, 2010, there was approximately $27.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock awards and restricted stock units, which is expected to be recognized over weighted-average periods of 0.5 years for restricted stock awards and 0.7 years for restricted stock units.

Phantom Stock Units

Verint Systems liability-classified awards are primarily phantom stock units. Verint Systems has issued phantom stock units to certain non-officer employees that settle, or are expected to settle, with cash payments upon vesting. Like equity-settled awards, phantom stock units are awarded by Verint Systems with vesting conditions and are subject to certain forfeiture provisions prior to vesting.

During the three months ended April 30, 2010 and 2009 Verint Systems granted 0.2 million and 0.3 million phantom stock units, respectively. Forfeitures of awards in each period were not significant. Total cash payments made by Verint Systems upon vesting of phantom stock units were $10.6 million and $2.2 million for the three months ended April 30, 2010 and 2009, respectively. The total accrued liabilities for phantom stock units were $13.9 million and $14.5 million as of April 30, 2010 and January 31, 2010, respectively.

14. EQUITY ATTRIBUTABLE TO COMVERSE TECHNOLOGY, INC. AND NONCONTROLLING INTEREST

Noncontrolling interest represents minority shareholders’ interest in Verint Systems and Starhome B.V., the Company’s majority-owned subsidiaries and in Ulticom, Inc., a former CTI majority-owned subsidiary, prior to its sale to a third party on December 3, 2010. The Company recognizes noncontrolling interest as a separate component of “Total equity” in the condensed consolidated balance sheets and recognizes income attributable to the noncontrolling interest as a separate component of “Net loss” in the condensed consolidated statements of operations.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

Components of equity attributable to Comverse Technology, Inc.’s and its noncontrolling interest are as follows:

 

     Three Months Ended April 30, 2010     Three Months Ended April 30, 2009  
     Comverse
Technology,
Inc.’s
Shareholders’
Equity
    Noncontrolling
Interest
    Total
Equity
    Comverse
Technology,
Inc.’s
Shareholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 
     (In thousands)     (In thousands)  

Balance, January 31

   $ 422,486      $ 87,236      $ 509,722      $ 653,258      $ 109,929      $ 763,187   

Comprehensive loss:

            

Net loss (income)

     (81,875     (6,576     (88,451     (41,499     9,211        (32,288

Unrealized (losses) gains on available-for-sale securities, net of reclassification adjustments and tax

     (3,276     21        (3,255     3,628        (39     3,589   

Unrealized gains (losses) for cash flow hedge positions, net of reclassification adjustments and tax

     899        36        935        (666     31        (635

Foreign currency translation adjustment

     (7,307     (3,845     (11,152     (586     958        372   
                                                

Total comprehensive (loss) gain

     (91,559     (10,364     (101,923     (39,123     10,161        (28,962

Stock-based compensation expense

     2,817        —          2,817        3,326        —          3,326   

Impact from equity transactions of subsidiaries and other

     4,564        599        5,163        (16     6,534        6,518   

Repurchase of common stock

     (337     —          (337     (49     —          (49

Dividends to noncontrolling interest

     —          —          —          —          (64,471     (64,471
                                                

Balance, April 30

   $ 337,971      $ 77,471      $ 415,442      $ 617,396      $ 62,153      $ 679,549   
                                                

15. DISCONTINUED OPERATIONS

On December 3, 2010 (the “Effective Date”), Ulticom, Inc. completed a merger (the “Merger”) with an affiliate of Platinum Equity Advisors, LLC (“Platinum Equity”), pursuant to the terms and conditions of a Merger Agreement, dated October 12, 2010 (the “Merger Agreement”), with Utah Intermediate Holding Corporation (“UIHC”), a Delaware corporation, and Utah Merger Corporation (“Merger Sub”), a New Jersey corporation and wholly-owned subsidiary of UIHC. As a result of the Merger, Ulticom, Inc. became a wholly-owned subsidiary of UIHC.

Immediately prior to the effective time of the Merger, Ulticom, Inc. paid a special cash dividend in the aggregate amount of $64.1 million (the “Dividend”), amounting to $5.74 per share, to its shareholders of record on November 24, 2010. CTI received $42.4 million in respect of the Dividend.

Pursuant to the terms of the Merger, Ulticom, Inc.’s shareholders (other than CTI) received $2.33 in cash, without interest per share of common stock of Ulticom, Inc. after payment of the Dividend.

Shares of Ulticom, Inc. common stock held by CTI were purchased by an affiliate of Platinum Equity, pursuant to the terms and conditions of a Share Purchase Agreement, dated October 12, 2010, following payment of the Dividend and immediately prior to the consummation of the Merger. In consideration thereof, CTI received aggregate consideration of up to $17.2 million, amounting up to $2.33 per share, consisting of (i) approximately $13.2 million in cash and (ii) the issuance by Merger Sub to CTI of two non-interest bearing promissory notes originally in the aggregate principal amount of $4.0 million. The first promissory note, originally in the amount of $1.4 million, was subsequently reduced to $0.7 million in connection with the purchase of certain products from Ulticom and is payable to CTI 14 months after the Effective Date. The second promissory note, in the amount of $2.6 million, is payable to CTI following the determination of Ulticom’s revenue for a 24-month period beginning on January 1, 2011 and is subject to reduction by 40% of the difference between $75 million and the revenue generated by Ulticom during such period. This note has no carrying value as of April 30, 2011 and January 31, 2011.

Prior to the sale, Ulticom, Inc. was a majority-owned subsidiary of CTI, and Ulticom constituted one of the Company’s reporting segments. Ulticom, Inc. was not previously classified as held for sale, because the sale was not probable until December 2, 2010, the date when the noncontrolling shareholders approved the sale.

The results of operations of Ulticom are reflected in discontinued operations, less applicable income taxes, as a separate component of net loss in the Company’s condensed consolidated statements of operations for the three months ended April 30, 2010 and 2009.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

The results of Ulticom’s operations included in discontinued operations for the three months ended April 30, 2010 and 2009 were as follows:

 

     Three Months Ended April 30,  
         2010             2009      
     (In thousands)  

Total revenue

   $ 7,986      $ 11,118   

Loss before income tax benefit

     (3,171     (1,882

Income tax benefit

     1,531        533   
                

Loss from discontinued operations, net of tax

     (1,640     (1,349

Tax on discontinued operations

     —          17,472   
                

Total (loss) income from discontinued operations, net of tax

   $ (1,640   $ 16,123   
                

(Loss) income from discontinued operations, net of tax

    

Atributable to Comverse Technology, Inc.

     (1,224     16,416   

Attributable to noncontrolling interest

     (416     (293
                

Total

   $ (1,640   $ 16,123   
                

The Company had previously entered into transactions with Ulticom for the supply of circuit boards and it is expected these transactions will continue. The purchases made by the Company from Ulticom prior to the Ulticom Sale for the three months ended April 30, 2010 and 2009 were $0.4 million in both fiscal periods. These amounts were eliminated in the condensed consolidated financial statements.

The assets and liabilities of Ulticom presented in discontinued operations in the condensed consolidated balance sheets as of April 30, 2010 and January 31, 2010 were as follows:

 

     April 30,
2010
     January 31,
2010
 
     (in thousands)  
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 20,250       $ 13,190   

Short-term investments

     55,184         65,087   

Accounts receivable, net of allowance of $157 and $138, respectively

     9,917         10,361   

Inventories, net

     1,526         1,018   

Deferred income taxes

     849         855   

Prepaid expenses and other current assets

     8,211         6,590   
                 

Total current assets

     95,937         97,101   

Property and equipment, net

     1,687         1,872   

Other assets

     7,458         7,788   
                 

Total assets

   $ 105,082       $ 106,761   
                 

LIABILITIES

     

Current liabilities:

     

Accounts payable and accrued expenses

   $ 4,715       $ 6,597   

Deferred revenue

     4,516         2,945   
                 

Total current liabilities

     9,231         9,542   

Deferred revenue

     3,628         3,682   

Other long-term liabilities

     1,661         1,675   
                 

Total liabilities

   $ 14,520       $ 14,899   
                 

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

16. LOSS PER SHARE ATTRIBUTABLE TO COMVERSE TECHNOLOGY, INC.’S SHAREHOLDERS

For purposes of computing basic loss per share attributable to Comverse Technology, Inc.’s shareholders, any unvested shares of restricted stock that have been issued by the Company and which vest solely on the basis of a service condition are excluded from the weighted average number of shares of common stock outstanding because such restricted stock does not allow the holders to receive dividends that participate in undistributed earnings. Incremental potential shares of common stock from stock options, unvested restricted stock and DSUs are included in the computation of diluted loss per share attributable to Comverse Technology, Inc.’s shareholders except when the effect would be antidilutive. The dilutive impact of outstanding stock-based awards on Comverse Technology, Inc.’s reported net loss is recorded as an adjustment to net loss for the purposes of calculating loss per share.

The calculation of loss per share attributable to Comverse Technology, Inc.’s shareholders for the three months ended April 30, 2010 and 2009 was as follows:

 

    Three Months Ended April 30,  
    2010     2009  
    (In thousands, except per share data)  

Numerator:

   

Net loss from continuing operations attributable to Comverse Technology, Inc.-basic

  $ (80,651   $ (57,915

Adjustment for subsidiary stock options

    —          (2,553
               

Net loss from continuing operations attributable to Comverse Technology, Inc.-diluted

  $ (80,651   $ (60,468
               

Net loss from discontinued operations, attributable to Comverse Technology, Inc.-basic and diluted

  $ (1,224   $ 16,416   

Denominator:

   

Basic and diluted weighted average common shares outstanding

    204,883        204,305   

Loss per share

   

Basic

   

Loss per share from continuing operations attributable to Comverse Technology, Inc.

  $ (0.39   $ (0.28

(Loss) earnings per share from discontinued operations attributable to Comverse

Technology, Inc.

    (0.01     0.08   
               

Basic loss per share

  $ (0.40   $ (0.20
               

Diluted

   

Loss per share from continuing operations attributable to Comverse Technology, Inc.

  $ (0.39   $ (0.30

(Loss) earnings per share from discontinued operations attributable to Comverse

Technology, Inc.

    (0.01     0.08   
               

Diluted loss per share

  $ (0.40   $ (0.22
               

As a result of the Company’s net loss attributable to Comverse Technology, Inc. during the three months ended April 30, 2010 and 2009, the diluted loss per share attributable to Comverse Technology, Inc.’s shareholders computation excludes 1.0 million and 0.3 million of contingently issuable shares, respectively, because the effect would be antidilutive.

The FASB’s guidance requires contingently convertible instruments be included in diluted earnings per share, if dilutive, regardless of whether a market price trigger has been met. The Convertible Debt Obligations meet the definition of a contingently convertible instrument. The Convertible Debt Obligations were excluded from the computation of diluted earnings per share attributable to Comverse Technology, Inc.’s shareholders because the effect would be antidilutive for the three months ended April 30, 2010 and 2009.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

17. INCOME TAXES

The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented. The significant differences that impact the effective tax rate relate to the difference between the U.S. federal statutory rate and the rates in foreign jurisdictions, incremental valuation allowances, investments in affiliates and tax contingencies.

For the three months ended April 30, 2010, the Company recorded an income tax benefit of $0.4 million, which represents an effective tax rate of 0.4%. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to the mix of income and losses by jurisdiction. The Company did not record a significant income tax benefit on the quarterly loss, primarily because it maintains a valuation allowance against certain of its U.S. and foreign net deferred tax assets as such deferred tax assets are not more likely than not to be realized. Additionally, the benefit of losses in other jurisdictions was offset by withholding taxes and certain tax contingencies recorded in the three months ended April 30, 2010.

        For the three months ended April 30, 2009, the Company recorded an income tax provision of $11.6 million, which represents an effective tax rate of (31.6%). The effective tax rate was negative due to the fact that the Company reported income tax expense on a consolidated pre-tax loss. The Company did not record an income tax benefit on the quarterly loss, primarily because it maintains a valuation allowance against certain of its U.S. and foreign net deferred tax assets. The tax provision for the quarter is comprised of income tax expense recorded in non-loss jurisdictions, withholding taxes, and certain tax contingencies recorded during such period.

As required by the authoritative guidance on accounting for income taxes, the Company evaluates 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, the Company establishes a valuation allowance. The Company determined that there is sufficient negative evidence to maintain the valuation allowances against certain of the Company’s federal, state and foreign deferred tax assets as a result of historical losses in the most recent three-year period in the U.S. and certain state and foreign jurisdictions. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

The Company regularly assesses the adequacy of the Company’s provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company 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 limitation. As of April 30, 2010, the total amount of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate were approximately $103.9 million. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of April 30, 2010 could decrease by approximately $3.9 million in the twelve months period following such date as a result of settlements of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional taxes, the adjustment of deferred taxes, including the need for additional valuation allowances, and the recognition of tax benefits. The Company’s income tax returns are subject to ongoing tax examinations in several jurisdictions in which the Company operates. The Company believes that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur which would require increases or decreases to the balance of reserves for unrecognized tax benefits. However, an estimate of such changes cannot reasonably be made.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes in the condensed consolidated statements of operations. The Company recorded $1.9 million and $3.1 million of interest and penalties related to uncertain tax positions in its provision for income taxes for the three months ended April 30, 2010 and 2009, respectively. Accrued interest and penalties were $48.2 million and $46.2 million as of April 30, 2010 and January 31, 2010, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

18. BUSINESS SEGMENT INFORMATION

The Company has three reportable segments: Comverse, Verint and All Other. The All Other segment is comprised of Starhome B.V. and its subsidiaries, miscellaneous operations and CTI’s holding company operations. Ulticom was a reportable segment of the Company prior to its sale to a third party on December 3, 2010. The results of operations of Ulticom are reflected in discontinued operations, less applicable income taxes, as a separate component of net loss in the Company’s condensed consolidated statements of operations for all fiscal periods presented.

The Company evaluates its business by assessing the performance of each of its segments. CTI’s Chief Executive Officer is its chief operating decision maker. The chief operating decision maker uses segment performance, as defined below, as the primary basis for assessing the financial results of the segments and for the allocation of resources. Segment performance, as the Company defines it in accordance with the FASB’s guidance relating to segment reporting, is not necessarily comparable to other similarly titled captions of other companies. Segment performance, as defined by management, represents operating results of a segment without the impact of significant expenditures incurred by the segment in connection with the efforts to become current in periodic reporting obligations under the federal securities laws, certain non-cash charges, and certain other insignificant gains and charges.

Segment Performance

Segment performance is computed by management as (loss) income from operations adjusted for the following: (i) stock-based compensation expense; (ii) amortization of acquisition-related intangibles; (iii) compliance-related professional fees; (iv) compliance-related compensation and other expenses; (v) impairment charges; (vi) litigation settlements and related costs; (vii) acquisition-related charges; (viii) restructuring and integration charges; and (ix) certain other insignificant gains and charges. Compliance-related professional fees and compliance-related compensation and other expenses relate to fees and expenses incurred in connection with (a) the Company’s efforts to complete current and previously issued financial statements and audits of such financial statements, and (b) the Company’s efforts to become current in its periodic reporting obligations under the federal securities laws.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

The tables below present information about total revenue, total costs and expenses, (loss) income from operations, interest expense, depreciation and amortization, significant non-cash items, and segment performance for the three months ended April 30, 2010 and 2009:

 

     Comverse     Verint     All Other     Eliminations     Consolidated
Totals
 
     (In thousands)  

Three Months Ended April 30, 2010:

          

Revenue

   $ 175,996      $ 172,613      $ 8,279      $ —        $ 356,888   

Intercompany revenue

     575        —          202        (777     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 176,571      $ 172,613      $ 8,481      $ (777   $ 356,888   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

   $ 230,821      $ 176,595      $ 34,375      $ (1,211   $ 440,580   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

   $ (54,250   $ (3,982   $ (25,894   $ 434      $ (83,692
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Computation of segment performance:

          

Segment revenue

   $ 176,571      $ 172,613      $ 8,481       
  

 

 

   

 

 

   

 

 

     

Total costs and expenses

   $ 230,821      $ 176,595      $ 34,375       
  

 

 

   

 

 

   

 

 

     

Segment expense adjustments:

          

Stock-based compensation expense

     241        17,970        2,546       

Amortization of acquisition-related intangibles

     4,659        7,572        —         

Compliance-related professional fees

     20,226        20,200        18,651       

Compliance-related compensation and other expenses

     (198     —          —         

Litigation settlements and related costs

     —          —          95       

Acquisition-related charges

     —          507        —         

Restructuring and integration charges

     5,956        —          —         

Other

     (1,462     13        89       
  

 

 

   

 

 

   

 

 

     

Segment expense adjustments

     29,422        46,262        21,381       
  

 

 

   

 

 

   

 

 

     

Segment expenses

     201,399        130,333        12,994       
  

 

 

   

 

 

   

 

 

     

Segment performance

   $ (24,828   $ 42,280      $ (4,513    
  

 

 

   

 

 

   

 

 

     

Interest expense

   $ (204   $ (5,948   $ (16   $ —        $ (6,168
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

   $ (10,385   $ (11,898   $ (239   $ —        $ (22,522
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Significant non-cash items (1)

   $ 251      $ 43      $ —        $ —        $ 294   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Significant non-cash items consist primarily of write-offs and impairments of property and equipment.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

     Comverse     Verint     All Other     Eliminations     Consolidated
Totals
 
     (In thousands)  

Three Months Ended April 30, 2009:

          

Revenue

   $ 204,278      $ 175,148      $ 8,822      $ —        $ 388,248   

Intercompany revenue

     524        —          161        (685     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 204,802      $ 175,148      $ 8,983      $ (685   $ 388,248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

   $ 256,203      $ 139,139      $ 20,283      $ (1,138   $ 414,487   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

   $ (51,401   $ 36,009      $ (11,300   $ 453      $ (26,239
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Computation of segment performance:

          

Segment revenue

   $ 204,802      $ 175,148      $ 8,983       
  

 

 

   

 

 

   

 

 

     

Total costs and expenses

   $ 256,203      $ 139,139      $ 20,283       
  

 

 

   

 

 

   

 

 

     

Segment expense adjustments:

          

Stock-based compensation expense

     1,362        6,558        2,496       

Amortization of acquisition-related intangibles

     5,424        8,029        —         

Compliance-related professional fees

     16,269        6,562        3,065       

Compliance-related compensation and other expenses

     2,405        —          —         

Litigation settlements and related costs

     —          —          1,107       

Acquisition-related charges

     (89     —          —         

Restructuring and integration charges

     11,639        13        128       

Other

     106        —          689       
  

 

 

   

 

 

   

 

 

     

Segment expense adjustments

     37,116        21,162        7,485       
  

 

 

   

 

 

   

 

 

     

Segment expenses

     219,087        117,977        12,798       
  

 

 

   

 

 

   

 

 

     

Segment performance

   $ (14,285   $ 57,171      $ (3,815    
  

 

 

   

 

 

   

 

 

     

Interest expense

   $ (532   $ (6,353   $ (5   $ —        $ (6,890
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

   $ (13,043   $ (13,073   $ (289   $ —        $ (26,405
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Significant non-cash items (1)

   $ 1,541      $ (135   $ 8      $ —        $ 1,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Significant non-cash items consist primarily of write-offs and impairments of property and equipment.

19. RELATED PARTY TRANSACTIONS

Ulticom’s 2009 Special Cash Dividend and Stock Option Modification

In April 2009, Ulticom, Inc. paid a special cash dividend of $199.6 million to its shareholders, including CTI. Ulticom, Inc.’s minority shareholders were paid $64.3 million and an additional $0.2 million was payable to holders of deferred stock units awarded under Ulticom, Inc.’s equity incentive plan upon each issuance of common stock subject to such awards. As of April 30, 2010 $0.1 million remained payable to holders of the deferred stock units.

Effective as of April 21, 2009, the exercise prices of outstanding options to purchase 2,982,104 shares of Ulticom Inc.’s common stock were reduced in connection with the payment of the special cash dividend of $4.58 per share. These reductions in the option exercise prices resulted in no change in Ulticom’s share-based payment expense.

Sonus Networks, Inc.

Dr. Nottenburg, a member of CTI’s Board of Directors, served as the President and Chief Executive Officer of Sonus Networks, Inc., a telecommunications company, from June 13, 2008 until October 12, 2010. Sonus Networks, Inc. is a customer of Comverse and Verint. The Company had a well-established and ongoing business relationship with Sonus Networks, Inc. prior to the appointment of

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

Dr. Nottenburg to CTI’s Board of Directors. For the three months ended April 30, 2010 and 2009, the revenue derived by Comverse from Sonus Networks, Inc. was $0.1 million for both fiscal periods. Comverse did not have any accounts receivables outstanding as of April 30, 2010. As of January 31, 2010, Comverse had accounts receivable from Sonus Networks, Inc. of $0.3 million. Verint derived no revenue from Sonus Networks, Inc. for the three months ended April 30, 2010 and 2009 and had no accounts receivable therefrom as of April 30, 2010 and January 31, 2010.

Verint Series A Convertible Perpetual Preferred Stock

On May 25, 2007, in connection with Verint’s acquisition of Witness, CTI entered into a Securities Purchase Agreement with Verint (the “Securities Purchase Agreement”), whereby CTI purchased, for cash, an aggregate of 293,000 shares of Verint’s Series A Convertible Perpetual Preferred Stock (“preferred stock”), which represents all of Verint’s outstanding preferred stock, for an aggregate purchase price of $293.0 million. Proceeds from the issuance of the preferred stock were used to partially finance the acquisition. The preferred stock is eliminated in consolidation. Through April 30, 2010 and January 31, 2010, cumulative, undeclared dividends on the preferred stock were $36.0 million and $32.9 million, respectively. As of April 30, 2010 and January 31, 2010, the liquidation preference of the preferred stock was $329.0 million and $325.9 million, respectively.

Originally, the preferred stock did not confer on CTI voting rights and was not convertible into Verint Systems’ common stock. On October 5, 2010, Verint Systems’ stockholders approved, in a special stockholders meeting, the issuance of the Verint Systems’ common stock underlying the preferred stock and accordingly, on such date, the preferred stock became voting and convertible into Verint Systems’ common stock. Each share of preferred stock is entitled to a number of votes equal to the number of shares of common stock into which such share of preferred stock is convertible using the conversion rate that was in effect upon the issuance of the preferred stock in May 2007, on all matters voted upon by Verint Systems’ common stockholders. The conversion rate was set at 30.6185 shares of common stock for each share of preferred stock. If it were convertible as of April 30, 2010 and January 31, 2010, the preferred stock could be converted into approximately 10.1 million and 10.0 million shares of Verint Systems’ common stock, respectively.

20. COMMITMENTS AND CONTINGENCIES

Guarantees

The Company provides certain customers in the ordinary course of business with financial performance guarantees which in certain cases are backed by standby letters of credit or surety bonds, the majority of which are cash collateralized and accounted for as restricted cash and bank time deposits. The Company is only liable for the amounts of those guarantees in the event of its nonperformance, which would permit the customer to exercise the guarantee. As of April 30, 2010 and January 31, 2010, the Company believes that it was in compliance with its performance obligations under all contracts for which there is a financial performance guarantee, and that any liabilities arising in connection with these guarantees will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows. The Company also obtained bank guarantees primarily to provide customer assurance relating to the performance of certain obligations required by customer agreements for the guarantee of certain payment obligations. These guarantees, which aggregated $24.6 million as of April 30, 2010, are generally scheduled to be released upon the Company’s performance of specified contract milestones, a majority of which are scheduled to be completed at various dates through January 31, 2012.

Litigation Overview

Except as disclosed below, the Company does not believe that it is currently party to any other claims, assessments or pending legal action that could reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.

Proceedings Related to CTI’s Special Committee Investigations

Overview

On March 14, 2006, CTI announced the creation of a Special Committee of its Board of Directors (the “Special Committee”) composed of outside directors to review CTI’s historic stock option grant practices and related accounting matters, including, but not limited to, the accuracy of the stated dates of option grants and whether all proper corporate procedures were followed. In November 2006, the Special Committee’s investigation was expanded to other financial and accounting matters, including the recognition of revenue related to certain contracts, errors in the recording of certain deferred tax accounts, the misclassification of certain expenses, the misuse of accounting reserves and the misstatement of backlog. The Special Committee issued its report on January 28, 2008.

 

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(UNAUDITED)

 

Following the commencement of the Special Committee’s investigation, CTI, certain of its subsidiaries and some of CTI’s former directors and officers and a current director were named as defendants in several class and derivative actions, and CTI commenced direct actions against certain of its former officers and directors.

Petition for Remission of Civil Forfeiture

In July 2006, the U.S. Attorney filed a forfeiture action against certain accounts of Jacob “Kobi” Alexander, CTI’s former Chairman and Chief Executive Officer, that resulted in the United States District Court for the Eastern District entering an order freezing approximately $50.0 million of Mr. Alexander’s assets. In order to ensure that CTI receives the assets in Mr. Alexander’s frozen accounts, in July 2007, CTI filed with the U.S. Attorney a Petition for Remission of Civil Forfeiture requesting remission of any funds forfeited by Mr. Alexander. The United States District Court entered an order on November 30, 2010 directing that the assets in such accounts be liquidated and remitted to CTI. The process of liquidating such assets has been completed and the proceeds from the assets in such accounts have been transferred to a class action settlement fund in conjunction with the settlements of the Direct Actions (as defined below), the consolidated shareholder class action and shareholder derivative actions. The agreement to settle the shareholder class action was approved by the court in which such action was pending on June 23, 2010. The agreement to settle the federal and state derivative actions was approved by the courts in which such actions were pending on July 1, 2010 and September 23, 2010, respectively.

Direct Actions

Based on the Special Committee’s findings, CTI commenced litigations against three former executive officers as a result of their misconduct relating to historical stock option grants. On January 16, 2008, CTI commenced an action against Mr. Alexander, its former Chairman and Chief Executive Officer, and William F. Sorin, its former Senior General Counsel and director, in the Supreme Court of the State of New York, captioned Comverse Technology, Inc. v. Alexander et al., No. 08/600142. On January 17, 2008, CTI commenced an action against David Kreinberg, its former Executive Vice President and Chief Financial Officer, in the Superior Court of New Jersey, captioned Comverse Technology, Inc. v. Kreinberg (N.J. Super. Ct.). That action was discontinued and on January 8, 2009, a separate action was commenced against Mr. Kreinberg in the Supreme Court of the State of New York, captioned Comverse Technology, Inc. v. Kreinberg, No. 09/600052. The actions captioned Comverse Technology, Inc. v. Alexander et al. and Comverse Technology, Inc. v. Kreinberg are referred to collectively as the “Direct Actions.” The Direct Actions asserted claims for fraud, breach of fiduciary duty, and unjust enrichment in connection with the defendants’ conduct related to historical stock option grants. As part of the agreement to settle the federal and state derivative actions, which was approved by the courts in which such actions were pending on July 1, 2010 and September 23, 2010, respectively, CTI dismissed the Direct Actions on September 29, 2010.

Shareholder Derivative Actions

Beginning on or about April 11, 2006, several purported shareholder derivative lawsuits were filed in the New York Supreme Court for New York County and in the United States District Court for the Eastern District of New York. The defendants in these actions included certain of CTI’s former directors and officers and a current director and, in the state court action, CTI’s independent registered public accounting firm. CTI was named as a nominal defendant only. The consolidated complaints in both the state and federal actions alleged that the defendants breached certain duties to CTI and that certain former officers and directors were unjustly enriched (and, in the federal action, violated the federal securities laws, specifically Sections 10(b) and 14(a) of the Exchange Act, and Rules 10(b)-5 and 14(a)-9 promulgated thereunder) by, among other things: (i) allowing and participating in an alleged scheme to backdate the grant dates of employee stock options to provide improper benefits to the recipients; (ii) allowing insiders, including certain of the defendants, to profit by trading in CTI’s stock while allegedly in possession of material inside information; (iii) failing to oversee properly or implement procedures to detect and prevent the alleged improper practices; (iv) causing CTI to issue allegedly materially false and misleading proxy statements and to file other allegedly false and misleading documents with the SEC; and (v) exposing CTI to civil liability. The complaints sought unspecified damages and various forms of equitable relief.

The state court derivative actions were consolidated into one action captioned, In re Comverse Technology, Inc. Derivative Litigation, No. 601272/2006. On August 7, 2007, the New York Supreme Court dismissed the consolidated state court derivative action, granting CTI’s motion to dismiss. That decision was successfully appealed by the plaintiffs to the Appellate Division of the New York State Supreme Court which, in its decision issued on October 7, 2008, reinstated the action.

The federal court derivative actions were consolidated into one action captioned, In re Comverse Technology, Inc. Derivative Litigation, No. 06-CV-1849. CTI filed a motion to stay that action in deference to the state court proceeding. That motion was denied by the court. On October 16, 2007, CTI filed a motion to dismiss the federal court action based on the plaintiffs’ failure to make a demand on the Board and the state court’s ruling that such a demand was required. On the same date, various individual defendants

 

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(UNAUDITED)

 

also filed motions to dismiss the complaint. On April 22, 2008, the court ordered that all dismissal motions would be held in abeyance pending resolution of the appeal of the New York State Supreme Court’s decision in the state court derivative action.

On December 17, 2009, the parties to the shareholder derivative actions entered into an agreement to settle these actions, which settlement was approved by the courts in which the federal and state derivative actions were pending on July 1, 2010 and September 23, 2010, respectively (see Settlement Agreements below). The Company recorded a charge associated with the settlement during the fiscal year ended January 31, 2007.

Shareholder Class Action

Beginning on or about April 19, 2006, class action lawsuits were filed by persons identifying themselves as CTI shareholders, purportedly on behalf of a class of CTI’s shareholders who purchased its publicly traded securities. Two actions were filed in the United States District Court for the Eastern District of New York, and three actions were filed in the United States District Court for the Southern District of New York. On August 28, 2006, the actions pending in the United States District Court for the Southern District of New York were transferred to the United States District Court for the Eastern District of New York. A consolidated amended complaint under the caption In re Comverse Technology, Inc. Sec. Litig., No. 06-CV- 1825, was filed by the court-appointed Lead Plaintiff, Menorah Group, on March 23, 2007. The consolidated amended complaint was brought on behalf of a purported class of CTI shareholders who purchased CTI’s publicly traded securities between April 30, 2001 and November 14, 2006. The complaint named CTI and certain of its former officers and directors as defendants and alleged, among other things, violations of Sections 10(b) and 14(a) of the Exchange Act, Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act in connection with prior statements made by CTI with respect to, among other things, its accounting treatment of stock options. The action sought compensatory damages in an unspecified amount.

The parties to this action entered into a settlement agreement on December 16, 2009, which was amended on June 19, 2010 and approved by the court in which such action was pending on June 23, 2010 (see Settlement Agreements below). The Company recorded a charge associated with the settlement during the fiscal year ended January 31, 2007.

Settlement Agreements

On December 16, 2009 and December 17, 2009, CTI entered into agreements to settle the consolidated shareholder class action and consolidated shareholder derivative actions described above, respectively. The agreement to settle the consolidated shareholder class action was amended on June 19, 2010. Pursuant to the amendment, CTI agreed to waive certain rights to terminate the settlement in exchange for a deferral of the timing of scheduled payments of the settlement consideration and the right to a credit (the “Opt-out Credit”) in respect of a portion of the settlement funds that would have been payable to a class member that elected not to participate in and be bound by the settlement. In connection with such settlements, CTI dismissed its Direct Actions against Messrs. Alexander, Kreinberg and Sorin, who, in turn, dismissed any counterclaims they filed against CTI.

As part of the settlement of the consolidated shareholder class action, as amended, CTI agreed to make payments to a class action settlement fund in the aggregate amount of up to $165.0 million that were paid or remain payable as follows:

 

   

$1.0 million that was paid following the signing of the settlement agreement in December 2009;

 

   

$17.9 million that was paid in July 2010 (representing an agreed $21.5 million payment less a holdback of $3.6 million in respect of the anticipated Opt-out Credit, which holdback is required to be paid by CTI if the Opt-out Credit is less);

 

   

$30.0 million that was paid in May 2011; and

 

   

$112.5 million (less the amount, if any, by which the Opt-out Credit exceeds the holdback described above) payable on or before November 15, 2011.

Of the $112.5 million due on or before November 15, 2011, $30.0 million is payable in cash and the balance is payable in cash or, at CTI’s election, in shares of CTI’s common stock valued using the ten day average of the closing prices of CTI’s common stock prior to such election, provided that CTI’s common stock is listed on a national securities exchange on or before the payment date, and that the shares delivered at any one time have an aggregate value of at least $27.5 million. In addition, under the terms of the settlement agreement, CTI had the right to make the $30.0 million payment made in May 2011 in shares of CTI’s common stock if, prior thereto, CTI had met such conditions to using shares as payment consideration. CTI, however, did not meet such conditions and accordingly, made such $30.0 million payment in cash.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

If CTI receives net cash proceeds from the sale of certain ARS held by it in an aggregate amount in excess of $50.0 million, CTI is required to use $50.0 million of such proceeds to prepay the settlement amounts referred to above and, if CTI receives net cash proceeds from the sale of such ARS in an aggregate amount in excess of $100.0 million, CTI is required to use an additional $50.0 million of such proceeds to prepay the settlement amounts referred to above. As of April 30, 2010 and January 31, 2010, CTI had $27.8 million and $17.1 million of restricted cash received from sales or redemptions of ARS (including interest thereon) to which these provisions of the settlement agreement apply, respectively. As a result of certain redemptions of ARS, through July 20, 2011, CTI had received net cash proceeds from the sale of certain ARS held by it in an aggregate amount in excess of $50.0 million and, as a result, believes it is required to prepay $20.0 million of the remaining $112.5 million due under the settlement agreement on November 15, 2011 on or before October 18, 2011 (as $30.0 million of such net proceeds were used to fund the May 2011 payment).

The amendment to the consolidated shareholder class action settlement agreement primarily impacted the payment schedule under such agreement. As part of the settlement of the consolidated shareholder class action prior to its amendment, CTI agreed to make payments to a class action settlement fund in the aggregate amount of up to $165.0 million as follows:

 

   

$1.0 million that was paid following the signing of the settlement agreement in December 2009;

 

   

$51.5 million payable on or before August 15, 2010;

 

   

$30.0 million payable on or before February 15, 2011; and

 

   

$82.5 million payable on or before August 15, 2011.

Under the terms of the settlement agreement prior to its amendment, the scheduled payments of $30.0 million due on or before February 15, 2011 and $82.5 million due on or before August 15, 2011 were payable in cash or, at CTI’s election, in shares of CTI’s common stock valued using the ten day average of the closing prices of CTI’s common stock prior to such election, provided that CTI’s common stock is listed on a national securities exchange on or before the applicable payment date, and that the shares delivered at any one time have an aggregate value of at least $27.5 million.

As noted above, prior to the amendment of the terms of the settlement agreement of the consolidated shareholder class action, a scheduled payment of $51.5 million was due on or before August 15, 2010 and, accordingly, as of April 30, 2010 and January 31, 2010, was recorded within “Other current liabilities” in the condensed consolidated balance sheets. In addition, under the terms of the settlement agreement prior to its amendment, CTI agreed to (i) exercise the UBS Put on June 30, 2010, (ii) within 48 hours after receipt of payment, pay to the plaintiff class the proceeds received from all sales of ARS held in an account with UBS (including as a result of the exercise of the UBS Put), which payment would reduce the amount of $51.5 million payable on or before August 15, 2010. These provisions restricted CTI’s ability to use proceeds from sales of such ARS for any purpose other than the payment of such amount due under the settlement agreement. In addition, CTI granted a security interest for the benefit of the plaintiff class in the account in which CTI holds its ARS (other than the ARS that were held in an account with UBS) and the proceeds from any sales thereof, restricting CTI’s ability to use the proceeds from sales of such ARS until the amounts payable under the settlement agreement are paid in full. As of April 30, 2010 and January 31, 2010, the Company had $47.0 million and $26.1 million, respectively, of cash proceeds received from sales and redemptions of ARS (including interest thereon) that were restricted under the terms of the consolidated shareholder class action settlement agreement, of which $19.2 million and $9.0 million received from sales of ARS held with UBS were classified in “Restricted cash and bank time deposits” and $27.8 million and $17.1 million, including interest, were classified within “Other assets” as long-term restricted cash. As of April 30, 2011 and January 31, 2011, the Company had $34.0 million and $33.4 million, respectively, of cash received from sales and redemptions of ARS (including interest thereon) to which these provisions of the settlement agreement apply which were classified in “Restricted cash and bank time deposits.”

In addition, as part of the settlement of the shareholder derivative actions, CTI agreed to pay $9.4 million to cover the legal fees and expenses of the plaintiffs upon the settlements becoming final without any further appeal. The Company expected that these conditions will be satisfied during the fiscal year ended January 31, 2011 and, accordingly, as of April 30, 2010 and January 31, 2010, such payment was recorded within “Other current liabilities” in the condensed consolidated balance sheets. CTI paid such amount in October 2010.

In addition, as part of the settlements of the Direct Actions, the consolidated shareholder class action and shareholder derivative actions, Mr. Alexander agreed to pay $60.0 million to CTI to be deposited into the derivative settlement fund and then transferred into the class action settlement fund. All amounts payable by Mr. Alexander have been paid. Also, as part of the settlement of the shareholder derivative actions, Mr. Alexander transferred to CTI shares of Starhome B.V. representing 2.5% of its outstanding share capital.

Pursuant to the amendment, Mr. Alexander agreed to waive certain rights to terminate the settlement and received the right to a credit in respect of a portion of the settlement funds that would have been payable to a class member that elected not to participate in and be bound by the settlement. CTI’s settlement of claims against it in the class action for aggregate consideration of up to $165.0 million (less the Opt-out Credit) is not contingent upon Mr. Alexander satisfying his payment obligations. Certain other

 

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defendants in the Direct Actions and the shareholder derivative actions have paid or agreed to pay to CTI an aggregate of $1.4 million and certain former directors agreed to relinquish certain outstanding unexercised stock options. As part of the settlement of the shareholder derivative actions, CTI paid, in October 2010, $9.4 million to cover the legal fees and expenses of the plaintiffs. In September 2010, CTI received insurance proceeds of $16.5 million under its directors’ and officers’ insurance policies in connection with the settlements of the shareholder derivative actions and the consolidated shareholder class action.

Under the terms of the settlements, Mr. Alexander and his wife relinquished their claims to the assets in Mr. Alexander’s frozen accounts that were subject to the forfeiture action, and the United States District Court entered an order on November 30, 2010 directing that the assets in such accounts be liquidated and remitted to CTI. The process of liquidating such assets has been completed and the proceeds from the assets in such accounts have been transferred to the class action settlement fund.

The agreement to settle the consolidated shareholder class action, as amended, was approved by the court in which such action was pending on June 23, 2010. The agreement to settle the federal and state derivative actions was approved by the courts in which such actions were pending on July 1, 2010 and September 23, 2010, respectively.

The Company had accrued liabilities for this matter of $173.6 million as of April 30, 2010 and January 31, 2010, and $146.1 million as of April 30, 2011 and January 31, 2011.

Opt-Out Plaintiffs’ Action

On September 28, 2010, an action was filed in the United States District Court for the Eastern District of New York under the caption Maverick Fund, L.D.C., et al. v. Comverse Technology, Inc., et al., No. 10-cv-4436. Plaintiffs allege that they are CTI shareholders who purchased CTI’s publicly traded securities in 2005, 2006 and 2007. The plaintiffs, Maverick Fund, L.D.C. and certain affiliated investment funds, opted not to participate in the settlement of the consolidated shareholder class action described above. The complaint names CTI, its former Chief Executive Officer and certain of its former officers and directors as defendants and alleges, among other things, violations of Sections 10(b), 18 and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and negligent misrepresentation in connection with prior statements made by CTI with respect to, among other things, its accounting treatment of stock options, other accounting practices at CTI and the timeline for CTI to become current in its periodic reporting obligations. The action seeks compensatory damages in an unspecified amount. The Company filed a motion to dismiss the complaint in December 2010, and a hearing on the motion was conducted on March 4, 2011. On July 12, 2011, the Court dismissed the plaintiffs’ claims related to their purchase of CTI’s securities in 2007 and the claims against Andre Dahan, CTI’s former President and Chief Executive Officer, and Avi Aronovitz, CTI’s former Interim Chief Financial Officer, and otherwise denied CTI’s motion to dismiss. The Company reserved for the potential liabilities as if the plaintiffs had not opted-out and the Company has no information that indicates that any other amount is probable and estimable at this time.

Disgorgement Derivative Action

On June 1, 2007, Mark Levy filed a purported shareholder derivative action on CTI’s behalf, entitled Levy v. Koren and John Does 1-20, No. 07-CV-0896, against a former officer of one of CTI’s subsidiaries based in Israel and twenty unidentified “John Doe” defendants. The action was filed in the United States District Court for the Southern District of New York and alleged violations of Section 16(b) of the Exchange Act. Specifically, the complaint alleged that the defendant purchased and sold CTI equity securities within a six-month period by exercising stock options he had been awarded by CTI and then selling the stock at a $4.0 million profit. The complaint sought disgorgement of gains realized from such purchases and sales. The complaint did not set forth a specific damage amount sought by plaintiff. CTI was named solely as a nominal defendant in the action. Discovery in this action was completed, and defendants moved for summary judgment on January 15, 2008. On March 25, 2010, the parties entered into a Stipulation of Settlement, pursuant to which (i) defendant paid $150,000 to CTI, (ii) defendant relinquished all rights to outstanding stock options to purchase 92,500 shares of CTI’s common stock and (iii) CTI paid plaintiff’s counsel’s attorneys’ fees and costs of $250,000. The settlement, which provides for the release of all claims under Section 16(b) of the Exchange Act that were or might be asserted in the action, was approved by the court in which such action was pending on June 24, 2010.

Israeli Optionholder Class Actions

CTI and certain of its subsidiaries were named as defendants in four potential class action litigations in the State of Israel involving claims to recover damages incurred as a result of purported negligence or breach of contract that allegedly prevented certain current or former employees from exercising certain stock options. The Company intends to vigorously defend these actions.

Two cases were filed in the Tel Aviv District Court against CTI on March 26, 2009, by plaintiffs Katriel (a former Comverse Ltd. employee) and Deutsch (a former Verint Systems Ltd. employee). The Katriel case (Case Number 1334/09) and the Deutsch case

 

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(Case Number 1335/09) both seek to approve class actions to recover damages that are claimed to have been incurred as a result of CTI’s negligence in reporting and filing its financial statements, which allegedly prevented the exercise of certain stock options by certain employees and former employees. By stipulation of the parties, on September 30, 2009, the court ordered that these cases, including all claims against CTI in Israel and the motion to approve the class action, be stayed until resolution of the actions pending in the United States regarding stock option accounting, without prejudice to the parties’ ability to investigate and assert the unique facts, claims and defenses in these cases. To date, the stay has not yet been lifted.

Two cases were also filed in the Tel Aviv Labor Court by plaintiffs Katriel and Deutsch, and both seek to approve class actions to recover damages that are claimed to have been incurred as a result of breached employment contracts, which allegedly prevented the exercise by certain employees and former employees of certain CTI and Verint Systems stock options, respectively. The Katriel litigation (Case Number 3444/09) was filed on March 16, 2009, against Comverse Ltd., and the Deutsch litigation (Case Number 4186/09) was filed on March 26, 2009, against Verint Systems Ltd. The Tel Aviv Labor Court has ruled that it lacks jurisdiction, and both cases have been transferred to the Tel Aviv District Court. The Katriel case has been consolidated with the Katriel case filed in the Tel Aviv District Court (Case Number 1334/09) and is subject to the stay discussed above. The Deutsch case has been scheduled for a preliminary hearing in the Tel Aviv District Court in October 2011.

The Company did not accrue for these matters as the potential loss is currently not probable or estimable.

SEC Civil Actions

Promptly following the discovery of the errors and improprieties related to CTI’s historic stock option grant practices and the creation of the Special Committee, CTI, through the Special Committee and its representatives, met with and informed the staff of the SEC of the underlying facts and the initiation of the Special Committee investigation. In March and April 2008, each of CTI, Verint Systems and Ulticom, Inc. received a “Wells Notice” from the staff of the SEC arising out of the SEC’s respective investigations of their respective historical stock option grant practices and certain unrelated accounting matters. The “Wells Notices” provided notification that the staff of the SEC intended to recommend that the SEC bring civil actions against CTI, Verint Systems and Ulticom, Inc. alleging violations of certain provisions of the federal securities laws.

On June 18, 2009, a settlement between CTI and the SEC with respect to such matters was announced. On that date, the SEC filed a civil action against CTI in the United States District Court for the Eastern District of New York alleging violations of certain provisions of the federal securities laws regarding CTI’s improper backdating of stock options and other accounting practices, including the improper establishment, maintenance, and release of reserves, the reclassification of certain expenses, and the improper calculation of backlog of sales orders. Simultaneous with the filing of the complaint, without admitting or denying the allegations therein, CTI consented to the issuance of a final judgment (the “Final Judgment”) that was approved by the United States District Court for the Eastern District of New York on June 25, 2009. Pursuant to the Final Judgment, CTI is permanently restrained and enjoined from any future violations of the federal securities laws addressed in the complaint and was ordered to become current in its periodic reporting obligations under Section 13(a) of the Exchange Act by no later than February 8, 2010. No monetary penalties were assessed against CTI in conjunction with this settlement. These matters were the result of actions principally taken by senior executives of CTI who were terminated in 2006. CTI, however, was unable to file the requisite periodic reports by February 8, 2010.

As a result of CTI’s inability to become current in its periodic reporting obligations under the federal securities laws in accordance with the final judgment and court order by February 8, 2010, CTI received an additional “Wells Notice” from the staff of the SEC on February 4, 2010. The “Wells Notice” provided notification that the staff of the SEC intended to recommend that the SEC institute an administrative proceeding to determine whether, pursuant to Section 12(j) of the Exchange Act, the SEC should suspend or revoke the registration of each class of CTI’s securities registered under Section 12 of the Exchange Act. Under the process established by the SEC, recipients of a “Wells Notice” have the opportunity to make a Wells Submission before the staff of the SEC makes a formal recommendation to the SEC regarding what action, if any, should be brought by the SEC. On February 25, 2010, CTI submitted a Wells Submission to the SEC in response to this Wells Notice. On March 23, 2010, the SEC issued an Order Instituting Administrative Proceedings (“OIP”) pursuant to Section 12(j) of the Exchange Act to suspend or revoke the registration of CTI’s common stock because, prior to the filing of the Annual Report on Form 10-K for the fiscal years ended January 31, 2009, 2008, 2007 and 2006 with the SEC on October 4, 2010, CTI had not filed an Annual Report on Form 10-K since April 20, 2005 or a Quarterly Report on Form 10-Q since December 12, 2005. On July 22, 2010, the Administrative Law Judge issued an initial decision to revoke the registration of CTI’s common stock. The initial decision does not become effective until the SEC issues a final order, which would indicate the date on which sanctions, if any, would take effect. On August 17, 2010, the SEC issued an order granting a petition by CTI for review of the Administrative Law Judge’s initial decision to revoke the registration of CTI’s common stock and setting forth a briefing schedule under which the final brief was filed on November 1, 2010. On February 17, 2011, the SEC issued an order directing

 

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the parties to file additional briefs in the matter and such briefs were filed on March 7, 2011. In May 2011, the SEC granted CTI’s motion for oral argument and such argument was scheduled for July 14, 2011. On July 13, 2011, CTI entered into an agreement in principle with the SEC’s Division of Enforcement regarding the terms of a settlement of the Section 12(j) administrative proceeding. The agreement in principle is subject to approval by the SEC. Under the terms of the agreement in principle, the SEC’s Division of Enforcement will recommend that the SEC resolve the Section 12(j) administrative proceeding against CTI if CTI files its Quarterly Reports on Form 10-Q for the fiscal quarters ended April 30, 2010, July 31, 2010 and October 31, 2010 by 5:30 p.m. EDT on September 9, 2011 and its Quarterly Report on Form 10-Q for the second quarter of fiscal 2011 ending July 31, 2011 on a timely basis. Under the agreement in principle, if CTI fails to file such reports on the schedule set forth above, the SEC will issue a non-appealable order, pursuant to Section 12(j) of the Exchange Act, to revoke the registration of CTI’s securities. As a result of the agreement in principle, on July 13, 2011, a joint motion by CTI and the Division of Enforcement was filed with the SEC to cancel the oral argument scheduled for July 14, 2011 in the proceeding.

If the registration of CTI’s common stock is ultimately revoked, CTI intends to complete the necessary financial statements, file an appropriate registration statement with the SEC and seek to have it declared effective in order to resume the registration of such common stock under the Exchange Act as soon as practicable.

On June 18, 2009, a settlement between Ulticom, Inc. and the SEC was announced. On that date, the SEC filed a civil action against Ulticom, Inc. in the United States District Court for the Eastern District of New York alleging violations of certain provisions of the federal securities laws regarding Ulticom, Inc.’s historical option grant and non-option grant accounting practices. Simultaneous with the filing of the complaint, without admitting or denying the allegations therein, Ulticom, Inc. consented to the issuance of a final judgment (the “Ulticom Final Judgment”) that was approved by the United States District Court for the Eastern District of New York on July 22, 2009. Pursuant to the Ulticom Final Judgment, Ulticom, Inc. is permanently restrained and enjoined from any future violations of the federal securities laws addressed in the complaint and was ordered to become current in its periodic reporting requirements under the Exchange Act by no later than November 9, 2009. No monetary penalties were assessed against Ulticom, Inc. in conjunction with this settlement. On October 30, 2009, Ulticom, Inc. filed the last of the periodic reports required to be filed within the preceding 12 months.

On April 9, 2008, Verint Systems received a “Wells Notice” from the staff of the SEC arising from the staff’s investigation of Verint Systems’ past stock option grant practices and certain unrelated accounting matters. These accounting matters were also the subject of Verint’s internal investigation. On March 3, 2010, a settlement between Verint Systems and the SEC with respect to such matters was announced. On such date, the SEC filed a civil action against Verint Systems in the United States District Court for the Eastern District of New York alleging violations of certain provisions of the federal securities laws relating to certain of Verint’s accounting reserve practices. Simultaneous with the filing of the complaint, without admitting or denying the allegations therein, Verint Systems consented to the issuance of a final judgment that was approved by the United States District Court for the Eastern District of New York on March 9, 2010. Pursuant to the final judgment, Verint Systems is permanently restrained and enjoined from violating Section 17(a) of the Securities Act, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 13a-1 and 13a-13 thereunder. No monetary penalties were assessed against Verint Systems in conjunction with this settlement.

As a result of its previous failure to be current in its periodic reporting obligations under the federal securities laws, Verint Systems received an additional “Wells Notice” from the staff of the SEC on December 23, 2009. On March 3, 2010, the SEC issued an OIP pursuant to Section 12(j) of the Exchange Act to suspend or revoke the registration of Verint Systems’ common stock because of its previous failure to file certain annual and quarterly reports. On May 28, 2010, Verint Systems entered into an agreement in principle with the SEC’s Division of Enforcement regarding the terms of a settlement of the Section 12(j) administrative proceeding, which agreement was subject to approval by the SEC. On June 18, 2010, Verint Systems satisfied the requirements of such agreement and subsequently submitted an Offer of Settlement to the SEC. On July 28, 2010, the SEC issued an order accepting Verint Systems’ Offer of Settlement and dismissing the Section 12(j) administrative proceeding.

Investigation of Alleged Unlawful Payments

On March 16, 2009, CTI disclosed that the Audit Committee of its Board of Directors was conducting an internal investigation of alleged improper payments made by certain Comverse employees and external sales agents in foreign jurisdictions in connection with the sale of certain products. The Audit Committee found that the conduct at issue did not involve CTI’s current executive officers. The Audit Committee also reviewed Comverse’s other existing and prior arrangements with agents. When the Audit Committee commenced the investigation, CTI voluntarily disclosed to the SEC and the DOJ these facts and advised that the Audit Committee had initiated an internal investigation and that the Audit Committee would provide the results of its investigation to the agencies. On April 27, 2009, the SEC advised CTI that it was investigating the matter and issued a subpoena to CTI in connection

 

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with its investigation. The Audit Committee provided information to, and cooperated fully with, the DOJ and the SEC with respect to its findings of the internal investigation and resulting remedial action.

On April 7, 2011, CTI entered into a non-prosecution agreement with the DOJ and the SEC submitted a settlement agreement with CTI to the United States District Court for the Eastern District of New York for its approval, which was obtained on April 12, 2011. These agreements resolved allegations that CTI and certain of its foreign subsidiaries violated the books and records and internal controls provisions of the U.S. Foreign Corrupt Practices Act (the “FCPA”) by inaccurately recording certain improper payments made from 2003 through 2006 by certain former employees and an external sales agent of Comverse Ltd. or its subsidiaries, in connection with the sale of certain products in foreign jurisdictions.

Under the non-prosecution agreement with the DOJ, CTI paid a fine of $1.2 million to the DOJ and agreed to continue to implement improvements in its internal controls and anti-corruption practices and policies. Under its settlement agreement with the SEC, CTI paid approximately $1.6 million in disgorgement and pre-judgment interest and is required under a conduct-based injunction to comply with the books and records and internal controls provisions of the FCPA.

The Company recorded charges associated with this matter during the fiscal year ended January 31, 2009.

Ulticom Shareholder Class Action

On October 14, 2010, a purported shareholder class action was filed in the Superior Court of New Jersey, Chancery Division, Burlington County, entitled Greenbaum v. Ulticom, Inc. et al., No. c 86-10, against Ulticom, Platinum Equity and certain of its affiliates, and Ulticom’s board of directors. The complaint alleged that Ulticom’s directors breached their fiduciary duties by failing to ensure that Ulticom’s shareholders receive maximum value for their shares in connection with the proposed acquisition of Ulticom by Platinum Equity and that Platinum Equity aided and abetted such breaches of fiduciary duty. The action sought, among other things, injunctive relief, rescission and attorneys’ fees and costs. On December 16, 2010, the plaintiff filed a Notice of Voluntary Dismissal to terminate the action without prejudice, with each party to bear its own expenses. The case was dismissed on December 21, 2010.

Other Legal Proceedings

In addition to the litigation discussed above, the Company is, and in the future, may be involved in various other lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, the Company believes that the ultimate resolution of these current matters will not have a material adverse effect on its condensed consolidated financial statements taken as a whole.

Indemnifications

In the normal course of business, the Company provides indemnifications of varying scopes to customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s products. The Company evaluates its indemnifications for potential losses and in its evaluation considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Generally, the Company has not encountered significant charges as a result of such indemnification provisions.

To the extent permitted under state laws or other applicable laws, the Company has agreements where it will indemnify its directors and officers for certain events or occurrences while the director or officer is, or was, serving at the Company’s request in such capacity. The indemnification period covers all pertinent events and occurrences during the Company’s director’s or officer’s lifetime. The maximum potential amount of future payments that the Company could be required to make under these indemnification agreements is unlimited; however, the Company has certain director and officer insurance coverage that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. The Company is not able to estimate the fair value of these indemnification agreements in excess of applicable insurance coverage, if any.

 

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21. SUBSEQUENT EVENTS

Sale of Land

On September 16, 2010, Comverse Ltd. entered into an agreement for the sale of land in Ra’anana, Israel to a third party for approximately $28.5 million. Approximately $27.1 million of such proceeds were received in September 2010. The balance, which was originally held in escrow to cover, to the extent necessary, any applicable taxes and levies, was received in May 2011. The sale was consummated following a bid process during which the Company considered multiple offers. The land sale was pursued as part of the initiatives undertaken by management to improve the Company’s cash position.

Sale of Ulticom

On December 3, 2010, Ulticom, Inc. completed a merger with an affiliate of Platinum Equity Advisors, LLC (see Note 15, Discontinued Operations).

Sale of Shares of Verint Systems’ Common Stock

Effective July 15, 2010, CTI made a demand pursuant to a Registration Rights Agreement with Verint to have up to 2.8 million shares of Verint Systems’ common stock registered in a registration statement on Form S-1. On January 14, 2011, CTI completed the sale of 2.3 million shares of Verint Systems’ common stock in a secondary public offering for aggregate proceeds net of underwriting discounts and commissions of $76.5 million. The offering was completed as part of the initiatives undertaken by management to improve the Company’s cash position. Following completion of the offering, CTI maintained a controlling financial interest in Verint Systems’ common stock and, in accordance with the FASB’s guidance, accounted for the sale of shares of Verint Systems’ common stock as an equity transaction. As a result, the Company increased “Additional paid-in capital” by $52.2 million, increased “Noncontrolling interest” by $4.5 million representing the change in ownership interest of the noncontrolling shareholders and increased “Accumulated other comprehensive income” by $2.6 million.

Verint’s Prior Facility and Interest Rate Swap Agreement

Term Loan Excess Cash Flow and Revolving Credit Facility Payments

In May 2010, Verint made a $22.1 million mandatory “excess cash flow” payment on the term loan, based upon its operating results for the fiscal year ended January 31, 2010, $12.4 million of which were to be applied to the eight immediately following principal payments and $9.7 million of which were to be applied pro rata to the remaining principal payments. In December 2010, Verint repaid $15.0 million previously borrowed under the revolving credit facility of the Prior Facility.

Amendments to Prior Facility

In July 2010, the Prior Facility was amended to, among other things, (i) change the method of calculation of the applicable interest rate margin to be based on Verint’s periodic consolidated leverage ratio, (ii) add a London Interbank Offered Rate (“LIBOR”) floor of 1.50%, (iii) change certain negative covenants, including providing covenant relief with respect to the permitted consolidated leverage ratio, and (iv) increase the aggregate amount of incremental revolving commitment and term loan increases permitted under the Prior Facility from $50.0 million to $200.0 million. Also, in July 2010, Verint amended the Prior Facility to increase the revolving credit facility from $15.0 million to $75.0 million. The commitment fee for unused capacity under the revolving credit facility was increased from 0.50% to 0.75% per annum.

In consideration for the July 2010 amendments, Verint paid $2.6 million to its lenders. These payments were subject to amortization over the remaining contractual term of the Prior Facility. Legal fees and other out-of-pocket costs directly relating to these amendments, which were expensed as incurred, were not significant.

The Prior Facility contained one financial covenant that required Verint not to exceed a certain consolidated leverage ratio, as of each fiscal quarter end, with respect to the then applicable trailing twelve months. The consolidated leverage ratio was defined as Verint’s consolidated net total debt divided by consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) as defined in the agreement. As amended in July 2010, the consolidated leverage ratio was not permitted to exceed 3.50:1 for periods through October 31, 2011, and was not permitted to exceed 3.00:1 for all quarterly periods thereafter. As of January 31, 2011, October 31, 2010 and July 31, 2010, Verint was in compliance with such requirements.

Substantial modifications of credit terms require assessment to determine whether the modifications should be accounted for and reported in the same manner as a formal extinguishment of the prior arrangement and replacement with a new arrangement, with the

 

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potential recognition of a gain or loss on the extinguishment. The July 2010 Prior Facility amendments were determined to be modifications of the prior arrangement, not requiring extinguishment accounting.

Termination of Interest Rate Swap Agreement

On July 30, 2010, Verint terminated the interest rate swap agreement entered in connection with the Prior Facility in exchange for a payment of $21.7 million to the counterparty, representing the approximate present value of the expected remaining quarterly settlement payments that Verint otherwise would have owed under the interest rate swap agreement. Verint paid this obligation on August 3, 2010. Verint recorded a $3.1 million loss on the interest rate swap for the fiscal year ended January 31, 2011.

Verint’s New Credit Facility

On April 29, 2011, Verint (i) entered into a Credit Agreement (the “New Credit Agreement”) with a group of lenders (the “Lenders”) and Credit Suisse AG, as administrative agent and collateral agent for the Lenders (in such capacities, the “Agent”) and (ii) terminated that certain credit agreement dated May 25, 2007 (the “Prior Facility”).

New Credit Agreement

The New Credit Agreement provides for $770.0 million of secured senior credit facilities, comprised of a $600.0 million term loan maturing in October 2017 (the “Term Loan Facility”) and a $170.0 million revolving credit facility maturing in April 2016 (the “Revolving Credit Facility”), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time according to the terms of the New Credit Agreement. As of April 30, 2011, Verint had no outstanding borrowings under the Revolving Credit Facility.

The majority of the Term Loan Facility proceeds were used to repay all $583.2 million of outstanding term loan borrowings under the Prior Facility at the closing date of the New Credit Agreement.

The New Credit Agreement included an original issuance Term Loan Facility discount of 0.50%, or $3.0 million, resulting in net Term Loan Facility proceeds of $597.0 million. This discount will be amortized as interest expense over the term of the Term Loan Facility using the effective interest method.

Loans under the New Credit Agreement bear 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 Verint’s election:

(a) in the case of Eurodollar loans, the Adjusted LIBO Rate plus 3.25% (or if Verint’s corporate ratings are at least BB- and Ba3 or better, 3.00%). The “Adjusted LIBO Rate” is the greater of (i) 1.25% per annum and (ii) the product of the LIBO Rate and Statutory Reserves (both as defined in the New Credit Agreement), and

(b) in the case of Base Rate loans, the Base Rate plus 2.25% (or if Verint’s corporate ratings are at least BB- and Ba3 or better, 2.00%). The “Base Rate” is the greatest of (i) the Agent’s prime rate, (ii) the Federal Funds Effective Rate (as defined in the New Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one month interest period plus 1.00%.

Verint incurred debt issuance costs of $14.8 million associated with the New Credit Agreement, which has been deferred and classified within “Other assets.” The deferred costs will be amortized as interest expense over the term of the New Credit Agreement. Deferred costs associated with the Term Loan Facility were $10.2 million, and will be amortized using the effective interest method. Deferred costs associated with the Revolving Credit Facility were $4.6 million and will be amortized on a straight-line basis.

At the closing date of the New Credit Agreement, there were $9.0 million of unamortized deferred costs associated with the Prior Facility. Upon termination of the Prior Facility and repayment of the prior term loan, $8.1 million of these fees were expensed as a loss on extinguishment of debt. The remaining $0.9 million of these fees were associated with lenders that provided commitments under both the new and the prior revolving credit facilities, which will continue to be deferred and amortized over the term of the New Credit Agreement.

As of April 30, 2011, the interest rate on the Term Loan Facility was 4.50%. Including the impact of the 0.50% original issuance Term Loan Facility discount and the deferred debt issuance costs, the effective interest rate on Verint’s Term Loan Facility was approximately 4.90% as of April 30, 2011.

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

Verint is required to pay a commitment fee with respect to undrawn availability under the Revolving Credit Facility, payable quarterly, at a rate of 0.50% per annum, and customary administrative agent and letter of credit fees.

The New Credit Agreement requires Verint to make term loan principal payments of $1.5 million per quarter through August 2017, beginning in August 2011, with the remaining balance due in October 2017. Optional prepayments of the loan 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 a Repricing Transaction (as defined in the New Credit Agreement) prior to April 30, 2012. The loans are also subject to mandatory prepayment requirements with respect to certain asset sales, excess cash flow (as defined in the New Credit Agreement), and certain other events. Prepayments are applied first to the eight immediately following scheduled term loan principal payments, and then pro rata to other remaining scheduled term loan principal payments, if any, and thereafter as otherwise provided in the New Credit Agreement.

Verint Systems’ obligations under the New Credit Agreement are guaranteed by substantially all of Verint’s domestic subsidiaries and are secured by a security interest in substantially all assets of Verint and its guarantor subsidiaries, subject to certain exceptions. Verint’s obligations under the New Credit Agreement are not guaranteed by CTI and are not secured by any of CTI’s assets.

The New Credit Agreement contains customary negative covenants for credit facilities of this type, including limitations on Verint and its subsidiaries with respect to indebtedness, liens, nature of business, investments and loans, distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. Accordingly, the New Credit Agreement precludes Verint Systems from paying cash dividends and limits its ability to make asset distributions to its stockholders, including CTI. The New Credit Agreement also contains a financial covenant that requires Verint to maintain a Consolidated Total Debt to Consolidated EBITDA (each as defined in the New Credit Agreement) leverage ratio until July 31, 2013 no greater than 5.00 to 1.00 and, thereafter, no greater than 4.50 to 1.00. The limitations imposed by the covenants are subject to certain exceptions. As of April 30, 2011, Verint was in compliance with such requirements.

The New Credit Agreement also contains a number of affirmative covenants, including a requirement that Verint submit consolidated financial statements to the Lenders within certain periods after the end of each fiscal year and quarter.

The New Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay principal or interest under the New Credit Agreement when due, failure to comply with covenants, any representation or warranty made by Verint proving to be inaccurate in any material respect, defaults under certain other indebtedness of Verint or its subsidiaries, a Change of Control (as defined in the New Credit Agreement) of Verint, and certain insolvency or receivership events affecting Verint or its significant subsidiaries. Upon an event of default, all obligations of Verint owing under the New Credit Agreement may be declared immediately due and payable, and the Lenders’ commitments to make loans under the New Credit Agreement may be terminated.

Verint’s Acquisitions

In December 2010, Verint acquired certain technology and other assets in a transaction that qualified as a business combination. Total consideration for this acquisition, including potential future contingent consideration, will be less than $20.0 million. The impact of this acquisition was not material to the Company’s condensed consolidated financial statements. The fair value of Verint’s liability for contingent consideration related to this acquisition increased by $1.9 million during the three months ended April 30, 2011, resulting in a corresponding charge recorded within “Selling, general and administrative expenses” for that fiscal period.

In March 2011, Verint acquired a company for total consideration, including potential future contingent consideration, of less than $20.0 million. The impact of this acquisition was not material to the Company’s condensed consolidated financial statements.

On July 19, 2011, Verint entered into a definitive agreement to acquire, upon closing, Vovici Corporation (“Vovici”), a privately held provider of enterprise feedback management solutions. Verint acquired Vovici to expand its Voice of the Customer Analytics platform. Under the terms of the agreement, Verint will be acquiring Vovici for a total cash consideration of approximately $56.5 million to be paid at closing, subject to certain adjustments, and potential additional cash payments not to exceed $19.9 million over 18 months, contingent upon certain future performance.

Restructuring Initiatives

Third Quarter 2010 Restructuring Initiative

During the three months ended October 31, 2010, the Company commenced the first phase of a plan to restructure the operations of Comverse with a view towards aligning operating costs and expenses with anticipated revenue. The first phase of the plan includes termination of certain employees located primarily in Israel, the U.S., Asia Pacific and the United Kingdom. In relation to this first phase, the Company recorded severance-related costs of $11.6 million and facilities-related costs of $0.2 million during the fiscal year ended January 31, 2011. Severance-related and facilities-related costs of $9.1 million and $0.1 million, respectively, were paid during the fiscal year ended January 31, 2011. Severance-related costs of $1.2 million and facility-related costs of $0.1 million

 

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COMVERSE TECHNOLOGY, INC. SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(UNAUDITED)

 

were paid during the three months ended April 30, 2011, with the remaining costs of $1.3 million expected to be substantially paid by January 31, 2012.

During the three months ended April 30, 2011, Comverse commenced the implementation of a second phase of measures (the “Phase II Business Transformation”) that focuses on process reengineering to maximize business performance, productivity and operational efficiency, as described below.

Netcentrex 2010 Initiative

During the three months ended October 31, 2010, Comverse’s management, as part of initiatives to improve focus on its core business and to maintain its ability to face intense competitive pressures in its markets, began pursuing a wind down of the Netcentrex business. In connection with the wind down, Comverse’s management approved a restructuring plan to eliminate staff positions primarily located in France. In relation to this plan, the Company recorded severance-related costs of $10.9 million during the fiscal year ended January 31, 2011 and $6.6 million of severance-related costs were recorded during the three months ended April 30, 2011. Severance-related costs of $8.0 million were paid during the fiscal year ended January 31, 2011 and $3.5 million of such costs were paid during the three months ended April 30, 2011, with the remaining costs of $6.7 million expected to be substantially paid by January 31, 2012. As an alternative to a wind down, management continues to evaluate other strategic options for the Netcentrex business.

Phase II Business Transformation

During the fiscal year ended January 31, 2011, the Company commenced certain initiatives to improve its cash position, including a plan to restructure the operations of Comverse with a view towards aligning operating costs and expenses with anticipated revenue. Comverse implemented the first phase of such plan during the fiscal year ended January 31, 2011, reducing its annualized operating costs. During the three months ended April 30, 2011, Comverse commenced the implementation of the Phase II Business Transformation that focuses on process reengineering to maximize business performance, productivity and operational efficiency. As part of the Phase II Business Transformation, Comverse is in the process of creating new business units (BSS, VAS, Mobile Internet and Global Services) that are designed to improve operational efficiency and business performance. One of the primary purposes of the Phase II Business Transformation is to solidify Comverse’s leadership in BSS and leverage the growth in mobile data usage, while maintaining its leadership in VAS. In relation to the Phase II Business Transformation, Comverse recorded severance-related costs of $4.5 million during the three months ended April 30, 2011, of which $3.8 million were paid during such fiscal period with the remaining costs of $0.7 million expected to be substantially paid by January 31, 2012. The Company is currently in the process of evaluating the total cost of the Phase II Business Transformation which may result in additional charges.

Appointment of Chief Executive Officer

On February 25, 2011, the Company and Andre Dahan entered into a Separation and Consulting Agreement, pursuant to which, by mutual agreement, Mr. Dahan agreed to (i) resign as the Company’s President and Chief Executive Officer and as a member of the Board of Directors of the Company and each of its subsidiaries effective March 4, 2011 and (ii) serve as a consultant to the Company until June 4, 2011.

Also, on February 25, 2011, the Board of Directors appointed Charles J. Burdick, who then served as the Company’s non-executive Chairman of the Board, as Chairman and Chief Executive Officer, effective March 4, 2011.

As a result of Mr. Burdick’s appointment as Chief Executive Officer, Mr. Burdick was no longer “independent” for purposes of serving on the Board’s Audit Committee and Corporate Governance and Nominating Committee and, consequently, resigned from such committees.

Section 12(j) Administrative Proceeding

On July 13, 2011, CTI entered into an agreement in principle with the SEC’s Division of Enforcement regarding the terms of a settlement of the Section 12(j) administrative proceeding against CTI. The agreement in principle is subject to approval by the SEC (see Note 20, Commitments and Contingencies, for additional information regarding recent developments in the Section 12(j) administrative matter).

Future Payments Under the Consolidated Shareholder Class Action Settlement Agreement

As a result of CTI’s receipt of net proceeds from the redemption of certain ARS, a portion of the amount otherwise payable under the settlement agreement for the consolidated shareholder class action on November 15, 2011 will be payable in cash on or before October 18, 2011 (see Note 20, Commitments and Contingencies, for additional information regarding the settlement agreement).

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the audited consolidated financial statements and related notes included in Item 15 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 (or the 2009 Form 10-K) and the condensed consolidated financial statements and related notes included in this Quarterly Report. In addition, we note that this Quarterly Report has been filed by CTI after its due date, and that on May 31, 2011 and June 22, 2011 CTI filed its Annual Report on Form 10-K for the fiscal year ended January 31, 2011 (or the 2010 Form 10-K) and its Quarterly Report on Form 10-Q for the three months ended April 30, 2011 (or the 2011 Form 10-Q), respectively. Accordingly, we urge investors to review the 2010 Form 10-K, together with the audited consolidated financial statements and related notes included in Item 15 thereof, and the 2011 Form 10-Q and the condensed consolidated financial statements and related notes included therein, as these periodic reports reflect events that occurred subsequent to April 30, 2010. Percentage and amounts within this section may not calculate precisely due to rounding differences.

OVERVIEW

CTI is a holding company that conducts business through its subsidiaries, principally, Comverse, Inc., Verint Systems and Starhome, B.V. CTI’s reportable segments for the three months ended April 30, 2010 were:

 

   

Comverse. The Comverse segment is comprised of Comverse, Inc. and its subsidiaries. Comverse, Inc. is a wholly-owned subsidiary of CTI;

 

   

Verint. The Verint segment is comprised of Verint Systems and its subsidiaries. As of July 15, 2011, CTI held 42.0% of the outstanding shares of Verint Systems’ common stock and 100% of the outstanding shares of Series A Convertible Perpetual Preferred Stock, par value $0.001 per share, of Verint Systems (or the preferred stock), giving CTI aggregate beneficial ownership of 54.4% of Verint Systems’ common stock. The common stock of Verint Systems is publicly traded and Verint Systems files separate periodic and current reports with the SEC, which are available on its website, www.verint.com, and on the SEC’s website at www.sec.gov; and

 

   

All Other. The All Other segment is comprised of Starhome B.V. and its subsidiaries, miscellaneous operations and CTI’s holding company operations. As of July 15, 2011, CTI held 66.5% of Starhome B.V., a privately-held company.

Ulticom was a reportable segment prior to its sale on December 3, 2010. The results of operations of Ulticom are reported as discontinued operations for the three months ended April 30, 2010 and 2009. See note 15 to the condensed consolidated financial statements included in this Quarterly Report.

Comverse

Comverse is a leading provider of software-based products, systems and related services that:

 

   

provide converged, prepaid and postpaid billing and active customer management for wireless, wireline and cable network operators (referred to as Business Support Systems or BSS) delivering a value proposition designed to ensure timely and efficient service monetization and enable real-time offers to be made to end users based on all relevant customer profile information;

 

   

enable wireless and wireline (including cable) network-based Value-Added Services (or VAS), comprised of two categories—Voice and Messaging—that include voicemail, visual voicemail, call completion, short messaging service (or SMS) text messaging (or texting), multimedia picture and video messaging, and Internet Protocol (or IP) communications; and

 

   

provide wireless users with optimized access to mobile Internet websites, content and applications, and generate data usage and revenue for wireless operators.

Comverse’s products and services are designed to generate carrier voice and data network traffic, revenue and customer loyalty, monetize network operators’ services and improve operational efficiency for more than 450 wireless and wireline network communication service provider customers in more than 125 countries, including the majority of the world’s 100 largest wireless network operators.

 

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Verint

Verint is a global leader in Actionable Intelligence® solutions and value-added services. Verint’s solutions enable organizations of all sizes to make timely and effective decisions to improve enterprise performance and enhance safety. More than 10,000 organizations in over 150 countries—including more than 85% of the Fortune 100—use Verint’s Actionable Intelligence solutions to capture, distill, and analyze complex and underused information sources, such as voice, video, and unstructured text.

In the enterprise market, Verint’s Workforce Optimization solutions help organizations enhance customer service operations in contact centers, branches and back-office environments to increase customer satisfaction, reduce operating costs, identify revenue opportunities, and improve profitability. In the security intelligence market, Verint’s Video Intelligence, public safety, and Communications Intelligence solutions are vital to government and commercial organizations in their efforts to protect people and property and neutralize terrorism and crime.

Starhome

Starhome is a provider of wireless service mobility solutions that enhance international roaming. Wireless operators use Starhome’s software-based solutions to generate additional revenue and to improve profitability by directing international roaming traffic to preferred networks and by providing a wide range of services to subscribers traveling outside their home network.

Segment Performance

We evaluate our business by assessing the performance of each of our segments. CTI’s Chief Executive Officer is its chief operating decision maker. We use segment performance, as defined below, as the primary basis for assessing the financial results of the segments and for the allocation of resources. Segment performance, as we define it in accordance with the Financial Accounting Standard Board’s (or the FASB) guidance relating to segment reporting, is not necessarily comparable to other similarly titled captions of other companies. Segment performance, as defined by management, represents operating results of a segment without the impact of significant expenditures incurred by the segment in connection with the efforts to become current in periodic reporting obligations under the federal securities laws, certain non-cash charges, and certain other insignificant gains and charges.

Segment performance is computed by management as (loss) income from operations adjusted for the following: (i) stock-based compensation expense; (ii) amortization of acquisition-related intangibles; (iii) compliance-related professional fees; (iv) compliance-related compensation and other expenses; (v) impairment charges; (vi) litigation settlements and related costs; (vii) acquisition-related charges; (viii) restructuring and integration charges; and (ix) certain other insignificant gains and charges. Compliance-related professional fees and compliance-related compensation and other expenses relate to fees and expenses incurred in connection with (a) our efforts to complete current and previously issued financial statements and audits of such financial statements and (b) our efforts to become current in our periodic reporting obligations under the federal securities laws. For additional information on how we apply segment performance to evaluate the operating results of our segments for each of the three months ended April 30, 2010 and 2009, see note 18 to the condensed consolidated financial statements included in this Quarterly Report.

 

     Three Months Ended April 30,  
     2010     2009  
     (Dollars in thousands)  

Comverse

    

Segment revenue

   $ 176,571      $ 204,802   

Segment performance

   $ (24,828   $ (14,285

Segment performance margin

     (14.1%     (7.0%

Verint

    

Segment revenue

   $ 172,613      $ 175,148   

Segment performance

   $ 42,280      $ 57,171   

Segment performance margin

     24.5%        32.6%   

All Other

    

Segment revenue

   $ 8,481      $ 8,983   

Segment performance

   $ (4,513   $ (3,815

Segment performance margin

     (53.2%     (42.5%

For a discussion of the results of our segments see “—Results of Operations.”

Business Trends and Uncertainties

As noted above, prior to the date of this Quarterly Report, we filed the 2010 Form 10-K and the 2011 Form 10-Q, which include disclosures with respect to our current business trends and uncertainties. Such disclosures are set forth in Item 7, “Management’s Discussion and Analysis of

 

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Financial Condition and Results of Operations—Overview—Segment Business Highlights and Trends” of the 2010 Form 10-K and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Comverse Segment Business Trends and Uncertainties” of the 2011 Form 10-Q and are incorporated by reference into this Quarterly Report.

RESULTS OF OPERATIONS

The following discussion provides an analysis of our condensed consolidated results and the results of operations of each of our segments for the fiscal periods presented. The discussion of our condensed consolidated results relates to the consolidated results of CTI and its subsidiaries. The discussion of the results of operations of each of our segments provides a more detailed analysis of the results of each segment presented. Accordingly, the discussion of our condensed consolidated results should be read in conjunction with the discussions of the results of operations of our segments.

Three Months Ended April 30, 2010 Compared to Three Months Ended April 30, 2009

Condensed Consolidated Results

 

     Three Months Ended April 30,     Change  
             2010                     2009             Amount     Percent  
     (Dollars in thousands, except per share data)  

Total revenue

   $ 356,888      $ 388,248      $ (31,360     (8.1 %) 
                          

Loss from operations

     (83,692     (26,239     (57,453     219.0

Interest income

     994        2,555        (1,561     (61.1 %) 

Interest expense

     (6,168     (6,890     722        (10.5 %) 

Other income (expense), net

     1,677        (6,203     7,880        (127.0 %) 

Income tax benefit (provision)

     378        (11,634     12,012        (103.2 %) 
                          

Net loss from continuing operations

     (86,811     (48,411     (38,400     79.3

(Loss) income from discontinued operations, net of tax

     (1,640     16,123        (17,763     (110.2 %) 
                          

Net Loss

     (88,451     (32,288     (56,163     173.9
                          

Less: Net loss (income) attributable to noncontrolling interest

     6,576        (9,211     15,787        (171.4 %) 
                          

Net loss attributable to Comverse Technology, Inc.

   $ (81,875   $ (41,499   $ (40,376     97.3
                          

Loss per share attributable to Comverse Technology, Inc.’s shareholders:

        

Basic (loss) earnings per share

        

Continuing operations

   $ (0.39   $ (0.28   $ (0.11  
                          

Discontinued operations

   $ (0.01   $ 0.08      $ (0.09  
                          

Diluted (loss) earnings per share

        

Continuing operations

   $ (0.39   $ (0.30   $ (0.09  
                          

Discontinued operations

   $ (0.01   $ 0.08      $ (0.09  
                          

Net loss attributable to Comverse Technology, Inc.

        

Net loss from continuing operations

   $ (80,651   $ (57,915   $ (22,736  

(Loss) income from discontinued operations, net of tax

     (1,224     16,416        (17,640  
                          

Net loss attributable to Comverse Technology, Inc.

   $ (81,875   $ (41,499   $ (40,376  
                          

Total Revenue

Total revenue was $356.9 million for the three months ended April 30, 2010, a decrease of $31.4 million, or 8.1%, compared to the three months ended April 30, 2009. The decrease was primarily attributable to a decrease in revenue at the Comverse segment of $28.3 million compared to the three months ended April 30, 2009. In addition Verint’s revenue for the three months ended April 30, 2010 decreased $2.5 million compared to the three months ended April 30, 2009.

Loss from Operations

Loss from operations was $83.7 million for the three months ended April 30, 2010, an increase of $57.5 million, or 219.0%, compared to the three months ended April 30, 2009. The increase was primarily attributable to:

 

   

a $31.4 million decrease in total revenue that was partially offset by a related decrease in cost of revenue of $4.9 million, primarily attributable to the Comverse segment, and

 

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a $33.2 million increase in total compliance-related professional fees for the three months ended April 30, 2010 compared to the three months ended April 30, 2009.

These increases were partially offset by a $5.8 million decrease in restructuring charges primarily due to higher restructuring charges recorded in the three months ended April 30, 2009 in the Comverse segment relating to an initiative commenced in such period.

Interest Income

Interest income was $1.0 million for the three months ended April 30, 2010, a decrease of $1.6 million, or 61.1%, compared to the three months ended April 30, 2009. The decrease was primarily attributable to a $1.1 million decrease in interest income at the Comverse segment due to lower cash and cash equivalents during the three months ended April 30, 2010 compared to the three months ended April 30, 2009.

Interest Expense

Interest expense was $6.2 million for the three months ended April 30, 2010, a decrease of $0.7 million, or 10.5%, compared to the three months ended April 30, 2009.

Other Income (Expense), Net

Other income, net was $1.7 million for the three months ended April 30, 2010, a change of $7.9 million compared to other expense, net of $6.2 million for the three months ended April 30, 2009. The change was primarily attributable to an $8.1 million increase in net realized gains recognized on investments.

Income Tax Benefit (Provision)

Income tax benefit was $0.4 million for the three months ended April 30, 2010, representing an effective tax rate of 0.4%, as compared to an income tax provision of $11.6 million, representing an effective tax rate of (31.6%) for the three months ended April 30, 2009.

For the three months ended April 30, 2010, the effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to the mix of income and losses by jurisdiction. We did not record a significant income tax benefit on the quarterly loss, primarily because we maintain a valuation allowance against certain of our U.S. and foreign net deferred tax assets as such deferred tax assets are not more likely than not to be realized. Additionally, the benefit of losses in other jurisdictions was offset by withholding taxes and certain tax contingencies recorded in the three months ended April 30, 2010.

For the three months ended April 30, 2009, the effective tax rate was negative due to the fact that we reported income tax expense on a consolidated pre-tax loss. We did not record an income tax benefit on the quarterly loss, primarily because we maintain a valuation allowance against certain of our U.S. and foreign net deferred tax assets. The tax provision for the quarter is comprised of income tax expense recorded in non-loss jurisdictions, withholding taxes, and certain tax contingencies recorded during such period.

The change in our effective tax rate for the three months ended April 30, 2010, compared to the three months ended April 30, 2009 is primarily attributable to changes in the relative mix of income and losses across various jurisdictions.

(Loss) Income from Discontinued Operations, Net of Tax

Loss from discontinued operations, net of tax, was $1.6 million for the three months ended April 30, 2010 as compared to $16.1 million income, net of tax for the three months ended April 30, 2009. The change was primarily attributable to $17.5 million tax benefit allocated from continuing operations to discontinued operations for the three months ended April 30, 2009 with no corresponding allocation for the three months ended April 30, 2010.

Net Loss (Income) Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interest was $6.6 million for the three months ended April 30, 2010, a change of $15.8 million, or 171.4%, compared to net income attributable to noncontrolling interest of $9.2 million for the three months ended April 30, 2009. The change was primarily attributable to a change in Verint’s results from net income for the three months ended April 30, 2009 to net loss for the three months ended April 30, 2010.

 

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Segment Results

Comverse

 

     Comverse  
     Three Months Ended April 30,     Change  
     2010     2009     Amount     Percent  
     (Dollars in thousands)  

Revenue:

        

Revenue

   $ 175,996      $ 204,278      $ (28,282     (13.8 %) 

Intercompany revenue

     575        524        51        9.7
                          

Total revenue

     176,571        204,802        (28,231     (13.8 %) 
                          

Costs and expenses:

        

Cost of revenue

     117,181        122,507        (5,326     (4.3 %) 

Intercompany purchases

     396        377        19        5.0

Selling, general and administrative

     68,938        76,490        (7,552     (9.9 %) 

Research and development, net

     38,350        45,190        (6,840     (15.1 %) 

Other operating expenses

     5,956        11,639        (5,683     (48.8 %) 
                          

Total costs and expenses

     230,821        256,203        (25,382     (9.9 %) 
                          

Loss from operations

   $ (54,250   $ (51,401   $ (2,849     5.5
                          

Computation of segment performance:

        

Segment revenue

   $ 176,571      $ 204,802      $ (28,231     (13.8 %) 
                          

Total costs and expenses

   $ 230,821      $ 256,203      $ (25,382     (9.9 %) 

Segment expense adjustments:

        

Stock-based compensation expense

     241        1,362        (1,121     (82.3 %) 

Amortization of acquisition-related intangibles

     4,659        5,424        (765     (14.1 %) 

Compliance-related professional fees

     20,226        16,269        3,957        24.3

Compliance-related compensation and other expenses

     (198     2,405        (2,603     (108.2 %) 

Acquisition-related charges

     —          (89     89        N/M   

Restructuring and integration charges

     5,956        11,639        (5,683     (48.8 %) 

Other

     (1,462     106        (1,568     N/M   
                          

Segment expense adjustments

     29,422        37,116        (7,694     (20.7 %) 
                          

Segment expenses

     201,399        219,087        (17,688     (8.1 %) 
                          

Segment performance

   $ (24,828   $ (14,285   $ (10,543     73.8
                          

Revenue

Management analyzes Comverse’s revenue by: (i) revenue generated from its customer solutions, and (ii) maintenance revenue. Revenue generated from customer solutions consists primarily of the licensing of Comverse’s BSS and VAS customer solutions hardware and related professional services and training. Professional services primarily include installation, customization and consulting services. Maintenance revenue consists primarily of post-contract customer support (or PCS), including technical software support services, unspecified software updates or upgrades to customers on a when-and-if-available basis. Maintenance revenue is typically less susceptible to changes in market conditions as it generally represents a stable revenue stream from recurring renewals of contracts with Comverse’s existing customer base.

Revenue from customer solutions was $103.4 million for the three months ended April 30, 2010, a decrease of $20.3 million, or 16.4%, compared to the three months ended April 30, 2009. Revenue from BSS customer solutions was $38.7 million for the three months ended April 30, 2010, a decrease of $21.4 million, or 35.6%, compared to the three months ended April 30, 2009. Revenue from VAS customer solutions was $64.7 million for the three months ended April 30, 2010, an increase of $1.1 million, or 1.7%, compared to the three months ended April 30, 2009.

The decrease in revenue from BSS customer solutions was primarily attributable to (i) increasing complexity of project deployment resulting in extended periods of time required to complete project milestones and receive customer acceptance, and (ii)

 

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lower volume of BSS projects during the three months ended April 30, 2010 resulting from reduced customer order activity in recent years due to the weakness in market conditions in certain regions.

During the three months ended April 30, 2010, revenue from VAS customer solutions continued to be adversely affected by certain trends (referred to as the VAS market trends) primarily attributable to (i) the continuance of the weakness in the general market conditions in certain regions and the resulting lower levels of spending by telecommunication service providers located in such regions, (ii) the continued proliferation of alternative messaging applications, such as SMS text messaging, in part as an attractive substitute for voicemail usage, (iii) the continued maturation of the wireless services industry, particularly as it relates to voice-based services such as voicemail, resulting in a decreasing rate of growth in the subscriber base of Comverse’s telecommunication service provider customers and in their capital spending budgets, and (iv) increased competition in certain product areas from low-cost service providers, particularly in emerging markets. The increase in the VAS customer solutions revenue was partially offset by a decrease in revenue of $1.5 million attributable to Comverse’s Netcentrex reporting unit for the three months ended April 30, 2010 compared to the three months ended April 30, 2009. The decline in Netcentrex’ revenue was mainly due to continued weakness in market conditions, increased competition from low-cost service providers and resulting pricing pressures and significant reductions in orders by a key customer.

Maintenance revenue was $72.6 million for the three months ended April 30, 2010, a decrease of $7.9 million, or 9.9%, compared to the three months ended April 30, 2009. This decrease was primarily attributable to pricing pressures on maintenance services and voice-related products.

Revenue by Geographic Region

Revenue in the Americas, Europe, Middle East and Africa (or EMEA) and Asia Pacific (or APAC) represented approximately 32%, 46%, and 22% of Comverse’s revenue, respectively, for the three months ended April 30, 2010 compared to approximately 25%, 56%, and 19% of Comverse’s revenue, respectively, for the three months ended April 30, 2009. The presentation of revenue by geographic region is based on the location of customers. During the three months ended April 30, 2010, revenue by geographic region was impacted by market conditions therein. Comverse’s revenue increased in North America and APAC, regions in which general market conditions improved. The increase in revenue in North America was primarily attributable to an increase in levels of spending by telecommunication service providers during the three months ended April 30, 2010 due to the improvement in general market conditions. Europe continued to suffer from significant weakness in market conditions, and accordingly, Comverse’s European customers continued to closely monitor their costs and maintain lower levels of spending. As a result, Comverse’s revenue from its European customers declined during three months ended April 30, 2010 compared to the three months ended April 30, 2009.

Foreign Currency Impact on Revenue

Our functional currency for financial reporting purposes is the U.S. dollar. The majority of Comverse’s revenue for the three months ended April 30, 2010 was derived from transactions denominated in U.S. dollars. All other revenue was derived from transactions denominated in various foreign currencies, primarily the euro. Fluctuations in the U.S. dollar relative to foreign currencies in which Comverse conducted business for the three months ended April 30, 2010 compared to the three months ended April 30, 2009 had a de-minimis favorable impact on revenue.

Foreign Currency Impact on Costs

A significant portion of Comverse’s expenses, principally personnel-related costs, is incurred in new Israeli shekels (or NIS), whereas our functional currency for financial reporting purposes is the U.S. dollar. A strengthening of the NIS against the U.S. dollar would increase the U.S. dollar value of Comverse’s expenses in Israel. Comverse enters into foreign currency forward contracts to mitigate risk attributable to foreign currency exchange rate fluctuations.

Cost of Revenue

Cost of revenue consists primarily of hardware and software material costs and compensation and related expenses for personnel involved in the customization of Comverse’s products for customer delivery, contractor costs, maintenance and professional services, such as installation costs and training, royalties and license fees, depreciation of equipment used in operations, amortization of capitalized software costs and certain purchased intangible assets and related overhead costs.

Cost of revenue was $117.2 million for the three months ended April 30, 2010, a decrease of $5.3 million, or 4.3%, compared to the three months ended April 30, 2009. The decrease was primarily attributable to:

 

   

a $3.5 million decrease in contractor costs due to project completion and increased use of company employees in lieu of the use of contractors as part of cost-saving initiatives;

 

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a $1.8 million decrease in other product and service costs due primarily to lower value-added taxes as a result of the change in regulations in certain jurisdictions;

 

   

a $1.7 million decrease in travel and entertainment expenses as a result of cost-saving initiatives; and

 

   

a $0.8 million decrease in amortization expenses due primarily to the impairment of intangible assets during the fiscal year ended January 31, 2010.

These decreases were partially offset by a $2.8 million increase in personnel-related costs primarily due to higher costs related to our customization projects partially offset by decrease in personnel-related costs primarily due to workforce reductions associated with restructuring initiatives and a decline in compensation levels for the three months ended April 30, 2010. Fluctuations in foreign currency exchange rates had an unfavorable impact on personnel-related costs of approximately $2.5 million for the three months ended April 30, 2010.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of compensation and related expenses of personnel, professional services, sales and marketing expenses, facility costs and unallocated overhead expenses.

Selling, general and administrative expenses were $68.9 million for the three months ended April 30, 2010, a decrease of $7.6 million, or 9.9%, compared to the three months ended April 30, 2009. The decrease was primarily attributable to:

 

   

a $6.7 million decrease in agent and employees sales commissions principally due to a decrease in bookings generated from certain projects and in certain geographic locations with respect to which Comverse pays higher commissions to sales agents and, to a lesser extent, a decrease in sales commissions paid to employees primarily due to a shift in product and project mix during the three months ended April 30, 2010 to products and projects with respect to which Comverse pays lower sales commissions compared to the three months ended April 30, 2009;

 

   

a $1.7 million decrease in bad debt expense due primarily to improved collection process;

 

   

a $1.5 million decrease in personnel-related costs primarily due to workforce reductions associated with restructuring initiatives and decline in compensation levels during the three months ended April 30, 2010. Fluctuations in foreign exchange rates had an unfavorable impact on personnel-related costs of approximately $1.5 million for the three months ended April 30, 2010; and

 

   

a $0.9 million decrease in contractor costs due to increased use of company employees in lieu of the use of contractors as part of cost-saving initiatives.

These decreases were partially offset by a $4.0 million increase in compliance-related professional fees.

Research and Development, Net

Research and development expenses primarily consist of personnel-related costs involved in product development, net of reimbursement under government programs. Research and development expenses also include third-party development and programming costs and the amortization of purchased software code and services content used in research and development activities.

Research and development expenses, net were $38.4 million for the three months ended April 30, 2010, a decrease of $6.8 million, or 15.1%, compared to the three months ended April 30, 2009. The decrease was primarily attributable to:

 

   

a $3.7 million decrease in personnel-related costs principally due to workforce reductions associated with restructuring initiatives and a decline in compensation levels during the three months ended April 30, 2010. Fluctuations in foreign exchange rates had an unfavorable impact on personnel-related costs of approximately $0.9 million for the three months ended April 30, 2010;

 

   

a $1.3 million decrease in depreciation expense due to a decline in depreciable assets as a result of reduced capital expenditures and write-off of assets no longer in use; and

 

   

a $1.0 million decrease in allocated overhead costs relating to research and development.

Other Operating Expenses

Other operating expenses were $6.0 million for the three months ended April 30, 2010, a decrease of $5.7 million, or 48.8%, compared to the three months ended April 30, 2009. The decrease was attributable to higher restructuring charges recorded in the three months ended April 30, 2009 due to a restructuring initiative commenced at Comverse during such period to eliminate staff positions and close certain facilities to better align with its customers’ needs and improve delivery and service capabilities. For the three months

 

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ended April 30, 2010, restructuring charges of $6.0 million were primarily attributable to the plan implemented by Comverse’s management during the three months ended April 30, 2010 to eliminate staff positions and close certain facilities in order to align operating costs and expenses with anticipated revenue.

Segment Performance

Segment performance was a $24.8 million loss for the three months ended April 30, 2010 based on segment revenue of $176.6 million, representing a segment performance margin of (14.1%) as a percentage of segment revenue. Segment performance was a $14.3 million loss for the three months ended April 30, 2009 based on segment revenue of $204.8 million, representing a segment performance margin of (7.0%) as a percentage of segment revenue. The decrease in segment performance margin was primarily attributable to the decline in segment revenue, which was only partially offset by lower segment expenses, for the three months ended April 30, 2010.

Verint

 

     Verint  
     Three Months Ended April 30,      Change  
     2010     2009      Amount     Percent  
     (Dollars in thousands)  

Revenue:

         

Revenue

   $ 172,613      $ 175,148       $ (2,535     (1.4 %) 

Intercompany revenue

     —          —           —          N/M   
                           

Total revenue

     172,613        175,148         (2,535     (1.4 %) 
                           

Costs and expenses:

         

Cost of revenue

     57,807        57,069         738        1.3

Intercompany purchases

     —          —           —          N/M   

Selling, general and administrative

     92,356        63,156         29,200        46.2

Research and development, net

     26,432        18,901         7,531        39.8

Other operating expenses

     —          13         (13     N/M   
                           

Total costs and expenses

     176,595        139,139         37,456        26.9
                           

(Loss) income from operations

   $ (3,982   $ 36,009       $ (39,991     (111.1 %) 
                           

Computation of segment performance:

         

Segment revenue

   $ 172,613      $ 175,148       $ (2,535     (1.4 %) 
                           

Total costs and expenses

   $ 176,595      $ 139,139       $ 37,456        26.9

Segment expense adjustments:

         

Stock-based compensation expense

     17,970        6,558         11,412        174.0

Amortization of acquisition-related intangibles

     7,572        8,029         (457     (5.7 %) 

Compliance-related professional fees

     20,200        6,562         13,638        207.8

Acquisition-related charges

     507        —           507        N/M   

Restructuring and integration charges

     —          13         (13     N/M   

Other

     13        —           13        N/M   
                           

Segment expense adjustments

     46,262        21,162         25,100        118.6
                           

Segment expenses

     130,333        117,977         12,356        10.5
                           

Segment performance

   $ 42,280      $ 57,171       $ (14,891     (26.0 %) 
                           

Revenue

Verint’s product revenue consists of the sale of hardware and software products. Verint’s service and support revenue consists primarily of revenue from installation, consulting and training services and post-contract customer support.

Product revenue was $92.1 million for the three months ended April 30, 2010, a decrease of $5.0 million, or 5.2%, compared to the three months ended April 30, 2009. The decrease in product revenue was primarily related to Verint’s Video Intelligence solutions principally due to the product delivery of a large order from a major customer in the three months ended April 30, 2009 and a decrease

 

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in product revenue related to Verint’s Communications Intelligence solutions as a result of reduced revenue associated with work performed on customized projects. The decreases were partially offset by an increase in product revenue related to Verint’s Workforce Optimization solutions due to increased customer orders believed to be due to the improving economic environment.

Service and support revenue was $80.5 million for the three months ended April 30, 2010, an increase of $2.5 million, or 3.2%, compared to the three months ended April 30, 2009. The increase was primarily attributable to an increase in revenue related to Verint’s Workforce Optimization solutions due to higher support revenue and higher professional services revenue associated with installation, consulting and training.

Revenue by Geographic Region

Revenue in the Americas, EMEA and APAC represented approximately 54%, 26%, and 20% of Verint’s revenue, respectively, for the three months ended April 30, 2010 compared to approximately 54%, 24%, and 22%, respectively, for the three months ended April 30, 2009.

Cost of Revenue

Cost of revenue consists of product costs, service costs and amortization of acquired technology. Verint’s product cost of revenue primarily consist of hardware material costs, royalties due to third parties for software components that are embedded in the software applications, amortization of capitalized software development costs, personnel-related costs associated with Verint’s global operations, contractor and consulting expenses, travel expenses relating to resources dedicated to the delivery of customized projects, facility costs, and other allocated overhead expenses. Verint’s service costs primarily consist of personnel-related costs, contractor costs, travel expenses relating to installation, training, consulting, and maintenance services, stock-based compensation expenses, facility costs and other overhead expenses.

Product cost of revenue was $29.1 million for the three months ended April 30, 2010, a decrease of $2.7 million, or 8.4%, compared to the three months ended April 30, 2009. The decrease was primarily attributable to the decrease in product costs related to Verint’s Communications Intelligence segment. Material costs decreased $1.5 million as a result of lower product costs in Verint’s Video Intelligence and Communications Intelligence solutions. In addition, contractor expenses decreased $1.4 million and personnel-related costs decreased $0.2 million as a result of less work performed on customized projects related to the Verint’s Communications Intelligence solutions. These decreases were partially offset by an increase in stock-based compensation expense of $0.5 million, primarily related to an increase in Verint’s stock price impacting certain stock-based compensation arrangements accounted for as liability awards and the issuance of restricted stock awards, restricted stock units and stock-based compensation arrangements granted at a higher market price during the three months ended April 30, 2010. Verint’s overall product margins increased in the three months ended April 30, 2010 compared to the three months ended April 30, 2009, primarily due to a favorable change in product mix, as higher margin software revenue accounted for a larger portion of overall product mix. Product costs for the three months ended April 30, 2010 and 2009 also included amortization of acquired technology of $2.2 million and $2.1 million, respectively.

Service cost of revenue was $28.7 million for the three months ended April 30, 2010, an increase of $3.4 million, or 13.4%, compared to the three months ended April 30, 2009. The increase was primarily attributable to an increase in personnel-related costs of $0.7 million mainly related to Verint’s Workforce Optimization solutions due to an increase in employee headcount, an increase in contractors costs of $1.4 million primarily related to Verint’s Communication Intelligence solutions as a result of a change in project mix, and an increase in stock-based compensation expense of $1.0 million primarily due to the impact of the increase in Verint’s stock price on certain stock-based compensation arrangements accounted for as liability awards, and the issuance of restricted stock awards, restricted stock units and stock-based compensation arrangements granted at a higher market price during the three months ended April 30, 2010. Verint’s overall service margins decreased in the three months ended April 30, 2010 compared to the three months ended April 30, 2009, primarily due to the increase in service and support expenses discussed above.

Selling, General and Administrative

Verint’s selling, general and administrative expenses consist primarily of personnel-related costs and related expenses, professional fees, sales and marketing expenses, including travel, sales commissions and sales referral fees, facility costs, communication expenses, other administrative expenses and amortization of other acquired intangible assets.

Selling, general, and administrative expenses were $92.4 million for the three months ended April 30, 2010, an increase of $29.2 million, or 46.2%, compared to the three months ended April 30, 2009. The increase was primarily attributable to:

 

   

a $15.8 million increase in professional fees primarily as a result of the increased effort to complete Verint’s audit and filings of the periodic reports as required by the SEC;

 

   

a $7.5 increase in stock-based compensation expense primarily related to an increase in Verint’s stock price impacting certain stock-based compensation arrangements accounted for as liability awards and the issuance of

 

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restricted stock awards, restricted stock units and stock-based compensation arrangements granted at a higher market price during the three months ended April 30, 2010;

 

   

a $2.6 million increase in personnel-related costs due to an increase in headcount and the unfavorable foreign exchange impact of the weakening U.S. dollar;

 

   

a $1.0 million increase in sales commissions due to an increase in customer orders received during the three months ended April 30, 2010;

 

   

a $0.9 million increase in marketing expenses due to Verint’s global brand awareness marketing campaign; and

 

   

other expense increases, including increases in travel and entertainment expenses of $0.8 million and in other expenses totaling $1.2 million.

Research and Development, Net

Verint’s research and development expenses primarily consist of personnel and subcontracting expenses, facility costs, and other allocated overhead, net of certain software development costs that are capitalized as well as reimbursements under government programs. Software development costs are capitalized upon the establishment of technological feasibility and until related products are available for general release to customers.

Research and development expenses, net were $26.4 million for the three months ended April 30, 2010, an increase of $7.5 million, or 39.8%, compared to the three months ended April 30, 2009. The increase was primarily attributable to increases in personnel-related costs of $5.2 million mainly due to a higher portion of employees’ time devoted to generic product development rather than specific customization work for projects related to Verint’s Communications Intelligence solutions and an increase in employee headcount related to Verint’s Workforce Optimization solutions. Employee stock-based compensation expense also increased $2.4 million primarily due to the impact of the increase in Verint’s stock price on certain stock-based compensation arrangements accounted for as liability awards and the issuance of restricted stock awards, restricted stock units and stock-based compensation arrangements granted at a higher market price during the three months ended April 30, 2010.

Foreign Currency Effect on Operating Results

In the three months ended April 30, 2010 compared to the three months ended April 30, 2009, fluctuations in the value of the U.S. dollar relative to the other major currencies used in Verint’s business resulted in an increase in Verint’s revenue, cost of revenue and operating expenses. Had foreign exchange rates remained constant in these periods, Verint’s revenue would have been approximately $1.0 million lower and its cost of revenue and operating expenses would have been approximately $3.0 million lower, which would have resulted in approximately $2.0 million of lower loss from operations for the three months ended April 30, 2010.

Segment Performance

Segment performance was $42.3 million for the three months ended April 30, 2010 based on segment revenue of $172.6 million, representing a segment performance of 24.5% as a percentage of segment revenue. Segment performance was $57.2 million for the three months ended April 30, 2009 based on segment revenue of $175.1 million, representing a segment performance of 32.6% as a percentage of segment revenue. The decrease in segment performance margin was primarily attributable to the increase in segment expenses and a slight decline in segment revenue for the three months ended April 30, 2010 compared to the three months ended April 30, 2009.

 

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All Other

 

     All Other  
     Three Months Ended April 30,     Change  
     2010     2009     Amount     Percent  
     (Dollars in thousands)  

Revenue:

        

Revenue

   $ 8,279      $ 8,822      $ (543     (6.2 %) 

Intercompany revenue

     202        161        41        25.5
                          

Total revenue

     8,481        8,983        (502     (5.6 %) 
                          

Costs and expenses:

        

Cost of revenue

     1,786        2,281        (495     (21.7 %) 

Intercompany purchases

     629        423        206        48.7

Selling, general and administrative

     29,845        15,450        14,395        93.2

Research and development, net

     2,115        2,001        114        5.7

Other operating expenses

     —          128        (128     N/M   
                          

Total costs and expenses

     34,375        20,283        14,092        69.5
                          

Loss from operations

   $ (25,894   $ (11,300   $ (14,594     129.2
                          

Computation of segment performance:

        

Segment revenue

   $ 8,481      $ 8,983      $ (502     (5.6 %) 
                          

Total costs and expenses

   $ 34,375      $ 20,283      $ 14,092        69.5

Segment expense adjustments:

        

Stock-based compensation expense

     2,546        2,496        50        2.0

Compliance-related professional fees

     18,651        3,065        15,586        N/M   

Litigation settlements and related costs

     95        1,107        (1,012     (91.4 %) 

Restructuring and integration charges

     —          128        (128     N/M   

Other

     89        689        (600     (87.1 %) 
                          

Segment expense adjustments

     21,381        7,485        13,896        185.7
                          

Segment expenses

     12,994        12,798        196        1.5
                          

Segment performance

   $ (4,513   $ (3,815   $ (698     18.3
                          

Revenue

All Other revenue for the three months ended April 30, 2010 and 2009 was generated primarily by Starhome. Starhome’s product revenue consists of the sale of hardware and software products and professional services, including managed services and PCS. All Other revenue was $8.3 million for the three months ended April 30, 2010, a decrease of $0.5 million, or 6.2%, compared to the three months ended April 30, 2009. The decrease was due primarily to decreased revenue from Starhome’s products and services.

Cost of Revenue

Substantially all of cost of revenue for the three months ended April 30, 2010 and 2009 was attributable to Starhome. Starhome’s cost of revenue primarily consists of material costs and personnel-related costs associated with the customization of products and providing maintenance and professional services. Cost of revenue was $1.8 million for the three months ended April 30, 2010, a decrease of $0.5 million, or 21.7%, compared to the three months ended April 30, 2009, primarily attributable to the reduction in Starhome’s revenue.

Selling, General and Administrative

Selling, general and administrative expenses include expenses incurred by Starhome, CTI’s holding company operations, and other insignificant subsidiaries. Selling, general and administrative expenses for the entire segment were $29.8 million for the three months ended April 30, 2010, an increase of $14.4 million, or 93.2%, compared to the three months ended April 30, 2009. The increase was primarily attributable to an increase in compliance-related professional fees of $15.6 million at CTI, partially offset by an increase in recharges of $1.4 million by CTI of certain selling, general and administrative expenses to its subsidiaries. For the three

 

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months ended April 30, 2010 and 2009, selling, general and administrative expenses attributable to Starhome were $3.5 million and $3.9 million, respectively.

Loss from Operations

Loss from operations was $25.9 million for the three months ended April 30, 2010, an increase in loss of $14.6 million, or 129.2%, compared to the three months ended April 30, 2009, due primarily to the reasons described above. For the three months ended April 30, 2010 and 2009, Starhome had income from operations of $0.5 million and $0.2 million, respectively.

Segment Performance

Segment performance was a $4.5 million loss for the three months ended April 30, 2010, an increase in loss of $0.7 million, or 18.3%, compared to the loss for the three months ended April 30, 2009. The increase was primarily attributable to a decrease in segment revenue and an increase in segment expenses.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal sources of liquidity historically have consisted of cash and cash equivalents, cash flows from operations, including changes in working capital, borrowings under term loans and revolving credit facilities, proceeds from the issuance of convertible debt obligations, the sale of investments and assets and receipt of dividends from subsidiaries. We believe that our future sources of liquidity would include cash and cash equivalents, proceeds from sales of investments, including ARS, new borrowings, cash generated from asset divestitures, or proceeds from the issuance of equity or debt securities.

During the three months ended April 30, 2010, our principal uses of liquidity were to fund operating expenses, make capital expenditures, service our debt obligations and pay significant professional fees and other expenses in connection with our efforts to become current in our periodic reporting obligations under the federal securities laws. In addition, we expended resources and made investments to improve our internal control over financial reporting, through the hiring of additional experienced finance and accounting personnel, redesigning of processes, implementing accounting and finance systems and performing additional business analytics. These expenses declined significantly in the three months ended April 30, 2011 compared to the three months ended April 30, 2010 and we expect these expenses to continue to decline significantly in subsequent fiscal periods after we become current in our periodic reporting obligations under the federal securities laws, remediate our material weakness and improve internal controls and expand our financial reporting and analysis capabilities.

Financial Condition of CTI and Comverse

Cash and Cash Equivalents

As of April 30, 2010, CTI and Comverse had cash, cash equivalents, bank time deposits and restricted cash of approximately $369.2 million, compared to approximately $446.4 million as of January 31, 2010.

During the three months ended April 30, 2010, CTI and Comverse made the following significant disbursements:

 

   

approximately $42.7 million paid for professional fees primarily in connection with CTI’s efforts to become current in its periodic reporting obligations under the federal securities laws and, to a lesser extent, to remediate material weaknesses in internal control over financial reporting;

 

   

approximately $8.1 million paid for special retention bonus; and

 

   

approximately $6.3 million in restructuring payments, including a workforce reduction initiative at Comverse.

In addition, during the three months ended April 30, 2010, each of Comverse and CTI’s holding company operations continued to experience negative cash flows from operations.

Such reductions in cash and cash equivalents were partially offset primarily by proceeds of approximately $20.2 million received from sales and redemptions of ARS.

As of April 30, 2011 and January 31, 2011, CTI and Comverse had cash, cash equivalents, bank time deposits and restricted cash of approximately $380.3 million and $457.6 million, respectively. For trends related to cash and cash equivalents, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Condition of CTI and Comverse” of the 2010 Form 10-K and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Condition of CTI and Comverse” of the 2011 Form 10-Q.

 

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Restricted Cash

Restricted cash aggregated $69.0 million, $67.9 million, $95.0 million and $83.4 million as of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, respectively. Restricted cash includes compensating cash balances related to existing lines of credit and deposits that are pledged as collateral or restricted for use to settle specified credit-related bank instruments, pending tax judgments and proceeds received from sales and redemptions of ARS (including interest thereon) that are restricted under the terms of the consolidated shareholder class action settlement agreement. As of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, CTI had $34.0 million, $33.4 million, $47.0 million, and $26.1 million, respectively, of restricted cash received from sales and redemptions of ARS (including interest thereon) that were restricted under the terms of the settlement agreement. In May 2011, CTI used $30.0 million of such restricted cash to make the payment due under terms of the settlement agreement and, subsequent to April 30, 2011 through the date of this Quarterly Report, CTI received approximately $25.3 million of cash proceeds from redemptions of ARS.

In June 2011, one of Comverse Ltd.’s existing lines of credit was increased by $10.0 million with a corresponding increase in the cash balances Comverse Ltd. was required to maintain with the bank. Such additional compensating cash balances will be included in restricted cash in our condensed consolidated balance sheets to the extent they remain outstanding on the applicable balance sheet date.

ARS

Cash, cash equivalents, bank time deposits and restricted cash excludes ARS. As of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, CTI had $94.2 million, $94.4 million, $174.1 million and $206.6 million aggregate principal amount of ARS with a carrying value as of such dates at approximately $72.4 million, $72.4 million, $98.5 million and $114.7 million, respectively. As noted above, proceeds from sales and redemptions of ARS (including interest thereon) are restricted under the terms of the consolidated shareholder class action settlement agreement.

Subsequent Events

Liquidity Forecast

Subsequent to April 30, 2010, we disclosed our management’s forecast that, in the absence of the successful completion of certain operational and capital raising initiatives, CTI and Comverse would experience a shortfall in the cash required to support the working capital needs of the business of CTI and Comverse during the fiscal year ending January 31, 2012.

To improve the cash position of CTI and Comverse, (i) we successfully implemented the first phase of a plan to restructure the operations of Comverse with a view toward aligning operating costs and expenses with anticipated revenue, significantly reducing its annualized operating costs, (ii) Comverse sold land in Ra’anana, Israel for which it received proceeds of $27.1 million, (iii) CTI received total cash proceeds of $55.6 million from the Ulticom Sale and (iv) CTI completed the sale of 2.3 million shares of Verint Systems’ common stock in a secondary public offering for aggregate net proceeds of $76.5 million. For a more detailed discussion of these events, see notes 15 and 21 to the condensed consolidated financial statements included in this Quarterly Report. In addition, during the three months ended April 30, 2011, Comverse commenced the implementation of a second phase of restructuring measures (referred to as the Phase II Business Transformation) that focuses on process reengineering to maximize business performance, productivity and operational efficiency. As part of the Phase II Business Transformation, Comverse is in the process of creating new business units that are designed to improve operational efficiency and business performance. One of the primary purposes of the Phase II Business Transformation is to solidify Comverse’s leadership in BSS and leverage the growth in mobile data usage, while maintaining its leadership in VAS. Comverse is also evaluating other initiatives to improve its focus on its core business and maintain its ability to face intense competitive pressures in its markets. As part of these initiatives, Comverse is pursuing a wind down of, and continues to evaluate other strategic options for, its Netcentrex business. For a more comprehensive discussion of management’s initiatives, see “—Phase II Business Transformation,” “—Restructuring Initiatives—Netcentrex 2010 Initiative” and note 21 to the condensed consolidated financial statements included in this Quarterly Report.

We currently forecast that available cash and cash equivalents will be sufficient to meet the liquidity needs, including capital expenditures, of CTI and Comverse for at least the next 12 months from the filing date of this Quarterly Report. To further enhance the cash position of CTI and Comverse, we continue to evaluate capital raising alternatives.

Management’s current forecast is based upon a number of assumptions including, among others: improved operating performance of the Comverse segment due to, among other things, the implementation of the Phase II Business Transformation as described below; continued reduced operating costs attributable to the first phase of Comverse’s restructuring plan; restricted cash and bank time deposits in amounts consistent with historical levels; slight reductions in the unrestricted cash levels required to support the working capital needs of the business; reductions in compliance-related costs; sales or redemptions of substantially all of CTI’s remaining ARS for proceeds consistent with their carrying value as of April 30, 2011; and intra-quarter working capital fluctuations consistent with historical trends. Management believes that the above-noted assumptions are reasonable. However, should one or more of the assumptions prove incorrect, or should one or

 

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more of the risks or uncertainties described in Item 1A, “Risk Factors” of the 2010 Form 10-K materialize, CTI and Comverse may experience a shortfall in the cash required to support working capital needs.

Phase II Business Transformation

As previously disclosed, during the fiscal year ended January 31, 2011, we commenced certain initiatives to improve our cash position, including a plan to restructure the operations of Comverse with a view towards aligning operating costs and expenses with anticipated revenue. Comverse successfully implemented the first phase of such plan, significantly reducing its annualized operating costs. During the three months ended April 30, 2011, Comverse commenced the implementation of the Phase II Business Transformation that focuses on process reengineering to maximize business performance, productivity and operational efficiency. One of the primary purposes of the Phase II Business Transformation is to solidify Comverse’s leadership in BSS and leverage the growth in mobile data usage, while maintaining its leadership in VAS.

As part of the Phase II Business Transformation, Comverse is in the process of creating new business units that are designed to improve operational efficiency and business performance. Comverse’s business units will consist of the following:

 

   

BSS, which conducts Comverse’s converged, prepaid and postpaid billing and active management systems business and includes groups engaged in product management, professional services, research and development and product sales;

 

   

VAS, which conducts Comverse’s value added services business and includes groups engaged in VAS delivery, voice product research and development, messaging product research and development and product sales;

 

   

Mobile Internet, which is responsible for Comverse’s mobile Internet products and includes groups engaged in product management, solution engineering, delivery, research and development and product sales; and

 

   

Global Services, which is a dedicated business unit focused on customer post-delivery services and includes groups engaged in support services for BSS, VAS and Mobile Internet products, services sales and product management.

In addition, certain business operations are conducted through the following global groups:

 

   

Customer Facing Group, which is primarily engaged in providing overall customer account management and sales for all product lines;

 

   

Operations Group, which provides centralized information technology, procurement, supply chain management and global business operations services to all business units;

 

   

Business Transformation group, which continues to engage in the implementation of the Phase II Business Transformation initiative and monitor its execution; and

 

   

Strategy and innovation, finance, legal and human resources groups, which continue to support all business operations.

For more information, see note 21 to the condensed consolidated financial statements included in this Quarterly Report.

Financial Condition of CTI’s Majority-Owned Subsidiaries

Based on past performance and current expectations, we believe that cash and cash equivalents, and cash generated from operations by our majority-owned subsidiaries will be sufficient to meet their respective anticipated operating costs, working capital needs, capital expenditures, research and development spending, and other commitments and, in respect of Verint, required payments of principal and interest, for at least the next 12 months from the filing date of this Quarterly Report.

The liquidity of CTI’s majority-owned subsidiaries could be negatively impacted by a decrease in demand for their products and service and support, including the impact of changes in customer buying behavior due to the economic environment. If any of CTI’s majority-owned subsidiaries determines to make acquisitions or otherwise require additional funds, it may need to raise additional capital, which could involve the issuance of equity or debt securities. There can be no assurance that such subsidiary would be able to raise additional equity or debt in the private or public markets on terms favorable to it, or at all.

Verint incurred significant professional fees and related expenses during the past several fiscal years, including the fiscal year ended January 31, 2011, in connection with its efforts to become current in its periodic reporting obligations under the federal securities laws. By July 2010, Verint filed with the SEC annual reports for all required fiscal years and quarterly reports for certain fiscal quarters for which it had not previously filed reports and resumed making timely periodic filings with the SEC, relisted its common stock on NASDAQ and resolved certain matters with the SEC. As a result, professional fees incurred by Verint during the

 

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three months ended April 30, 2011 declined significantly. Verint expects future professional fees and related expenses to continue to decline significantly from the amounts incurred during Verint’s filing delay period.

Sources of Liquidity

The following is a discussion that highlights our primary sources of liquidity, cash and cash equivalents, and changes in those amounts due to operations, financing, and investing activities and the liquidity of our investments.

Cash Flows

Three Months Ended April 30, 2010 Compared to Three Months Ended April 30, 2009

 

     Three Months Ended April 30,  
     2010     2009  
     (Dollars in thousands)  

Net cash used in operating activities

   $ (95,654   $ (28,439

Net cash (used in) provided by investing activities

     (18,593     129,476   

Net cash used in financing activities

     (5,126     (3,753

Net cash provided by (used in) discontinued operations

     6,769        (31,977

Effects of exchange rates on cash and cash equivalents

     (2,970     589   
                

Net (decrease) increase in cash and cash equivalents

     (115,574     65,896   

Cash and cash equivalents, beginning of period including cash of discontinued operations

     574,872        1,078,927   
                

Cash and cash equivalents, end of period including cash of discontinued operations

     459,298        1,144,823   

Less: Cash and cash equivalents of discontinued operations at end of period

     (20,250     (39,914
                

Cash and cash equivalents, end of period

   $ 439,048      $ 1,104,909   
                

Operating Cash Flows

Our operating cash flows vary significantly from period to period based on timing of collections of accounts receivable, receipts of deposits on work-in-process and achievement of milestones. During the three months ended April 30, 2010, we used net cash of $95.7 million for operating activities. Net cash used in operating activities was primarily attributable to:

 

   

net loss for the three months ended April 30, 2010 after non-cash charges add-back;

 

   

a decrease in cash from collection of accounts receivable previously recognized;

 

   

an increase in inventories;

 

   

cash used to settle previously recognized accounts payable and accrued expenses; and

 

   

the recognition of deferred revenue for which the related deposits were previously received.

Such cash used in operating activities was partially offset by a decrease in deferred cost of revenue and a decrease in prepaid expenses and other assets.

Investing Cash Flows

During the three months ended April 30, 2010, net cash used in investing activities was $18.6 million. Net cash used in investing activities was primarily attributable to the $15.3 million of net cash used for Verint’s acquisition of Iontas and payments of contingent consideration associated with a business combination consummated in prior periods, $11.4 million reclassified from cash and cash equivalents to restricted cash and bank time deposits, $6.1 million of cash used for capital expenditures, including capitalization of software development costs and $6.0 million of cash used to settle derivative financial instruments not designated as hedges. These decreases were partially offset by $20.2 million of cash receipts from sales and maturities of investments, net of purchases of investments.

 

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Financing Cash Flows

During the three months ended April 30, 2010, cash used in financing activities was $5.1 million primarily attributable to $3.3 million of cash used to acquire Verint treasury stock, and $0.9 million of cash paid for debt issuance costs.

Effects of Exchange Rates on Cash and Cash Equivalents

The majority of our cash and cash equivalents are denominated in the U.S. dollars. However, due to the nature of our global business, we also hold cash denominated in other currencies, primarily the euro, the NIS and the British pound sterling. For the three months ended April 30, 2010, the fluctuation in foreign currency exchange rates had an unfavorable impact of $3.0 million on cash and cash equivalents primarily due to the strengthening of the U.S. dollar relative to the major foreign currencies we held during the three-month period.

Liquidity of Investments

As of April 30, 2010 and January 31, 2010, the carrying amount of our ARS was $98.5 million and $114.7 million, respectively, and their principal amount was $174.1 million and $206.6 million, respectively. Since February 1, 2010, the market liquidity for ARS had exhibited some improvement, although the price in the markets for certain classes of our ARS holdings continued to decline. Accordingly, for the three months ended April 30, 2010 and 2009, we recorded other-than-temporary impairment charges of $46 thousand and $2.9 million, respectively, with respect to CTI’s holdings of those specific ARS. As of April 30, 2010 and January 31, 2010, all investments in ARS (all of which were held by CTI as of such dates) were restricted as CTI was prohibited from using proceeds from sales of such ARS pursuant to the terms of the consolidated shareholder class action settlement agreement CTI entered into on December 16, 2009, as amended on June 19, 2010. For more information about these restrictions, see “—Restrictions on Use of ARS Sales Proceeds.”

Investments in Securities Portfolio

We hold ARS supported by corporate issuers and student loans. The ARS have long-term stated maturities. We plan to sell our remaining ARS during the fourth quarter of the fiscal year ending January 31, 2012 after the expiration of the restrictions on sales of ARS and the use of proceeds from sales thereof following the final payment under the settlement agreement of the consolidated shareholder class action due on or before November 15, 2011.

UBS Put

In November 2008, CTI accepted an offer from UBS AG (referred to as UBS), providing rights related to $51.6 million in aggregate principal amount of ARS that were held in an account with UBS (referred to as the UBS Put). Under the terms of the UBS Put, CTI had the right, but not the obligation, to sell its eligible ARS at par value to UBS at any time during the period of June 30, 2010 through July 2, 2012. Additionally, UBS had the right, at its discretion and at any time until July 2, 2012, to purchase the ARS from CTI at par value, which is defined as the price equal to the principal amount of the ARS plus accrued but unpaid dividends or interest, if any. Under the terms of the settlement agreement of the consolidated shareholder class action, CTI was required to exercise the UBS Put on June 30, 2010, and apply the proceeds from such exercise toward amounts payable under such settlement. Effective June 30, 2010, CTI exercised the UBS Put for the balance of the ARS that were subject to the UBS Put. UBS purchased from CTI, pursuant to its purchase right and upon exercise of the UBS Put by CTI, approximately $42.6 million and $9.0 million aggregate principal amount of ARS during the fiscal years ended January 31, 2011 and 2010, respectively.

Restrictions on Use of ARS Sales Proceeds

As part of the settlement agreement of the consolidated shareholder class action, as amended, CTI granted a security interest for the benefit of the plaintiff class in the account in which CTI holds its ARS (other than the ARS that were held in an account with UBS) and the proceeds from any sales thereof, restricting CTI’s ability to use proceeds from sales of such ARS until the amounts payable under the settlement agreement are paid in full. In addition, under the terms of the settlement agreement of the consolidated shareholder class action, if CTI receives net cash proceeds from the sale of certain ARS held by it in an aggregate amount in excess of $50.0 million, CTI is required to use $50.0 million of such proceeds to prepay the settlement amounts under the settlement agreement and, if CTI receives net cash proceeds from the sale of such ARS in an aggregate amount in excess of $100.0 million, CTI is required to use an additional $50.0 million of such proceeds to prepay the settlement amounts under the settlement agreement. As of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, CTI had $34.0 million, $33.4 million, $27.8 million and $17.1 million of restricted cash received from sales and redemptions of ARS (including interest thereon) to which these provisions of the settlement agreement apply, respectively. In May 2011, CTI used $30.0 million of such restricted cash to make the payments due under the terms of the settlement agreement. As a result of certain redemptions of ARS, through July 20, 2011, CTI had received cash proceeds from the sale of certain ARS held by it in an aggregate amount in excess of $50.0 million and, as a result, believes it is required to prepay $20.0 million of the remaining $112.5 million due under the settlement agreement on November 15, 2011 on or before October 18, 2011 (as $30.0 million of such net proceeds were used to fund the May 2011 payment). As of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, CTI held $94.2 million, $94.4 million, $174.1 million and $206.6 million aggregate principal amount of ARS with a carrying value on each such date of $72.4 million, $72.4 million, $98.5 million and $114.7 million, respectively, to which such restrictions apply. In addition, as of April 30, 2010 and January 31, 2010, CTI held $19.2 million and $9.0 million, respectively, received from sales of ARS held

 

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with UBS, which under the terms of the settlement agreement of the consolidated shareholder class action, CTI was required to apply towards amounts payable under the settlement agreement.

Indebtedness

Verint Credit Facilities

On May 25, 2007, Verint entered into a credit agreement with a group of banks to fund a portion of the acquisition of Witness. On April 29, 2011, Verint (i) entered into a credit agreement (referred to as the new credit agreement) with a group of lenders and Credit Suisse AG, as administrative agent and collateral agent for the lenders (referred to in such capacities as the agent), and (ii) terminated the credit agreement, dated May 25, 2007 (referred to as the prior facility).

Prior Facility

The prior facility provided for a $650.0 million term loan and a $25.0 million revolving credit facility. The $25.0 million revolving credit facility was effectively reduced to $15.0 million in September 2008 (in connection with the bankruptcy of Lehman Brothers, which was one of the lenders, and the related subsequent termination of its revolving commitment under the prior facility in June 2009), and then later increased to $75.0 million in July 2010. Also in July 2010, the prior facility was amended to, among other things, (i) change the method of calculation of the applicable interest rate margin to be based on Verint’s periodic consolidated leverage ratio, (ii) add a London Interbank Offered Rate (or LIBOR) floor of 1.50%, (iii) change certain negative covenants, including providing covenant relief with respect to the permitted consolidated leverage ratio, and (iv) increase the aggregate amount of incremental revolving commitment and term loan increases permitted under the prior facility from $50.0 million to $200.0 million. Also in July 2010, Verint amended the prior facility to increase the revolving credit facility from $15.0 million to $75.0 million. The commitment fee for unused capacity under the revolving credit facility was increased from 0.50% to 0.75% per annum. The term loan and the revolving credit facility were scheduled to mature on May 25, 2014 and May 25, 2013, respectively. Verint’s obligations under the prior facility were guaranteed by certain of its domestic subsidiaries (including Witness) and were secured by substantially all of the assets of Verint Systems and these subsidiaries. The prior facility was not guaranteed by CTI and was not secured by any of its assets.

As of January 31, 2011, April 30, 2010 and January 31, 2010, Verint’s outstanding term loan balance under the prior facility was approximately $583.2 million, $605.3 million and $605.9 million, respectively. Verint borrowed $15.0 million under the revolving credit facility in November 2008, which loan remained outstanding as of April 30, 2010. In December 2010, Verint repaid in full the $15.0 million previously borrowed under its revolving credit facility. Accordingly, Verint had $75.0 million available for borrowing under the revolving credit facility as of January 31, 2011. Verint’s ability to borrow under the revolving credit facility was dependent upon certain conditions, including the absence of any material adverse effect or change on Verint’s business, as defined in the prior facility.

The prior facility required mandatory payments of the term loan with the net cash proceeds of certain asset sales (to the extent such net cash proceeds were not otherwise reinvested in assets useful in Verint’s business) and, on an annual basis, a percentage of excess cash flow that ranged from 0% to 50% depending on Verint’s consolidated leverage ratio (as defined in the prior facility). It also required periodic amortization payments of the term loan. Verint made an “excess cash flow” prepayment on the term loan of $22.1 million in May 2010 in respect of the fiscal year ended January 31, 2010 and an amortization payment of $0.6 million in February 2010. A mandatory excess cash flow prepayment was not required in respect of the fiscal year ended January 31, 2011.

The prior facility contained one financial covenant that required Verint not to exceed a certain consolidated leverage ratio, as of each fiscal quarter end, with respect to the then applicable trailing twelve months. The consolidated leverage ratio was defined as Verint’s consolidated net total debt divided by consolidated EBITDA for the trailing four quarters. EBITDA was defined in the prior facility as net income (loss) plus income tax expense, interest expense, depreciation and amortization, amortization of intangibles, losses related to hedge agreements, any extraordinary, unusual, or non-recurring expenses or losses, any other non-cash charges, and expenses incurred or taken prior to April 30, 2008 in connection with the acquisition of Witness, minus interest income, any extraordinary, unusual, or non-recurring income or gains, gains related to hedge agreements, and any other non-cash income. Under the prior facility, for the quarterly periods ended January 31, April 30, July 31 and October 31, 2010, the consolidated leverage ratio was not permitted to exceed 3.50:1, and Verint was in compliance with such requirements as of such dates. As of April 30, 2010, Verint’s consolidated leverage ratio was approximately 2.70:1 compared to a permitted consolidated leverage ratio of 3.50:1, and Verint’s EBITDA for the twelve-month period then ended exceeded the requirement of the covenant by at least $47.0 million. For the quarterly periods ended January 31 and April 30, 2011 and the quarterly periods ending July 31 and October 31, 2011, the consolidated leverage ratio was not permitted to exceed 3.50:1. As of January 31, 2011, Verint’s consolidated leverage ratio was approximately 2.50:1 compared to a permitted consolidated leverage ratio of 3.50:1, and Verint’s EBITDA for the twelve-month period then ended exceeded the requirement of the covenant by at least $50.0 million.

In addition, Verint was subject to a number of other restrictive covenants under the prior facility, including limitations on its ability to incur indebtedness, create liens, make fundamental business changes, dispose of property, make restricted payments

 

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(including dividends), make significant investments, enter into sale and leaseback transactions, enter new lines of business, provide negative pledges, enter into transactions with related parties, and enter into speculative hedges, although there were limited exceptions to these covenants. Accordingly, the prior facility precluded Verint Systems from paying cash dividends and limited its ability to make asset distributions to its stockholders, including CTI. The prior facility also contained a number of affirmative covenants, including a requirement that Verint submit consolidated financial statements to the lenders within certain periods after each fiscal year and quarter. In April 2010, Verint entered into an amendment to the prior facility to extend the due date for delivery of audited consolidated financial statements and related documentation for the fiscal year ended January 31, 2010. In consideration for this amendment, Verint paid approximately $0.9 million.

Prior to the amendment of Verint’s prior facility in July 2010, the applicable interest rate margin on its loans was determined by reference to its corporate ratings and twice increased (each time by 25 basis points) due to Verint’s previous failure to deliver certain audited financial statements and lack of corporate ratings (both resulting from the continued delay in filing its periodic reports). The applicable margin accordingly was reduced by 50 basis points in June 2010 when Verint delivered the required financial statements and obtained corporate ratings. After it entered into an amendment of the prior facility in July 2010, the applicable margin was determined under the prior facility by reference to Verint’s consolidated leverage ratio. As of April 30, 2010 and January 31, 2010, the interest rate on both the term loan and the revolving credit facility borrowings was 3.54% and 3.49%, respectively. As of January 31, 2011, the interest rate on the term loan was 5.25%. The higher interest rate as of January 31, 2011 reflected, among other things, the impact of the July 2010 amendments discussed above. For more information about Verint’s prior facility, see note 9 to the condensed consolidated financial statements included in this Quarterly Report.

Termination of Interest Rate Swap Agreement

On May 25, 2007, concurrently with entry into the prior facility, Verint entered into a pay-fixed/receive-variable interest rate swap agreement with a multinational financial institution with a notional amount of $450.0 million to mitigate a portion of the risk associated with variable interest rates on the term loan. The original term of the interest rate swap agreement extended through May 2011. However, in July 2010, Verint terminated the interest rate swap agreement in exchange for a payment of $21.7 million to the counterparty, made in August 2010, representing the approximate present value of the expected remaining quarterly settlement payments Verint otherwise would have owed under the interest rate swap agreement.

New Credit Agreement

The new credit agreement provides for $770.0 million of secured senior credit facilities, comprised of a $600.0 million term loan maturing in October 2017 (referred to as the new term loan facility) and a $170.0 million revolving credit facility maturing in April 2016 (referred to as the new revolving credit facility), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time according to the terms of the new credit agreement. As of April 30, 2011, Verint had no outstanding borrowings under the new revolving credit facility.

The majority of the new term loan facility proceeds were used to repay all $583.2 million of outstanding term loan borrowings under the prior facility at the closing date of the new credit agreement.

The new credit agreement included an original issuance term loan facility discount of 0.50%, or $3.0 million, resulting in net term loan facility proceeds of $597.0 million. This discount will be amortized as interest expense over the term of the term loan facility using the effective interest method.

Loans under the new credit agreement bear 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 Verint’s election:

 

   

in the case of Eurodollar loans, the Adjusted LIBO Rate plus 3.25% (or if Verint’s corporate ratings are at least BB- Ba3 or better, 3.00%). The “Adjusted LIBO Rate” is the greater of (i) 1.25% per annum and (ii) the product of the LIBO Rate and Statutory Reserves (both as defined in the new credit agreement), and

 

   

in the case of base rate loans, the Base Rate plus 2.25% (or if Verint’s corporate ratings are at least BB- and Ba3 or better, 2.00%). The “Base Rate” is the greatest of (i) the agent’s prime rate, (ii) the Federal Funds Effective Rate (as defined in the new credit agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one month interest period plus 1.00%.

Verint incurred debt issuance costs of $14.8 million associated with the new credit agreement, which have been deferred and classified within “Other assets.” The deferred costs will be amortized as interest expense over the term of the new credit agreement. Deferred costs associated with the term loan facility were $10.2 million, and will be amortized using the effective interest method. Deferred costs associated with the revolving credit facility were $4.6 million and will be amortized on a straight-line basis.

At the closing date of the new credit agreement, there were $9.0 million of unamortized deferred costs associated with the prior facility. Upon termination of the prior facility and repayment of the prior term loan, $8.1 million of these fees were expensed as a loss on extinguishment of debt. The remaining $0.9 million of these fees were associated with lenders that provided commitments under

 

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both the new and the prior revolving credit facilities, which will continue to be deferred and amortized over the term of the new credit agreement.

As of April 30, 2011, the interest rate on the term loan facility was 4.50%. Including the impact of the 0.50% original issuance term loan facility discount and the deferred debt issuance costs, the effective interest rate on Verint’s term loan facility is approximately 4.90% as of April 30, 2011.

Verint incurred interest expense on borrowings under its credit facilities of $7.5 million and $5.4 million during the three months ended April 30, 2011 and 2010, respectively. Verint also recorded $0.7 million and $0.5 million during the three months ended April 30, 2011 and 2010, respectively, for amortization of deferred debt issuance costs, which is reported within interest expense.

Verint is required to pay a commitment fee with respect to undrawn availability under the new revolving credit facility, payable quarterly, at a rate of 0.50% per annum, and customary administrative agent and letter of credit fees.

The new credit agreement requires Verint to make term loan principal payments of $1.5 million per quarter through August 2017, beginning in August 2011, with the remaining balance due in October 2017. Optional prepayments of the loan 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 a Repricing Transaction (as defined in the new credit agreement) prior to April 30, 2012. The loans are also subject to mandatory prepayment requirements with respect to certain asset sales, excess cash flow (as defined in the new credit agreement), and certain other events. Prepayments are applied first to the eight immediately following scheduled term loan principal payments, and then pro rata to other remaining scheduled term loan principal payments, if any, and thereafter as otherwise provided in the new credit agreement.

Verint Systems’ obligations under the new credit agreement are guaranteed, similar to the prior facility, by substantially all of Verint’s domestic subsidiaries and are secured, similar to the prior facility, by a security interest in substantially all assets of Verint and its guarantor subsidiaries, subject to certain exceptions. Verint’s obligations under the new credit agreement are not guaranteed by CTI and are not secured by any of CTI’s assets.

The new credit agreement contains customary negative covenants for credit facilities of this type similar to those in the prior facility, including limitations on Verint and its subsidiaries with respect to indebtedness, liens, nature of business, investments and loans, distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. Accordingly, the new credit agreement, similar to the prior facility, precludes Verint Systems from paying cash dividends and limits its ability to make asset distributions to its stockholders, including CTI. The new credit agreement also contains a financial covenant that requires Verint to maintain a Consolidated Total Debt to Consolidated EBITDA (each as defined in the new credit agreement) leverage ratio until July 31, 2013 no greater than 5.00 to 1.00 and, thereafter, no greater than 4.50 to 1.00. The limitations imposed by the covenants are subject to certain exceptions. As of April 30, 2011, Verint was in compliance with such requirements.

The new credit agreement also contains a number of affirmative covenants, including a requirement that Verint submit consolidated financial statements to the lenders within certain periods after the end of each fiscal year and quarter.

The new credit agreement provides for customary events of default with corresponding grace periods similar to those in the prior facility, including failure to pay principal or interest under the new credit agreement when due, failure to comply with covenants, any representation or warranty made by Verint proving to be inaccurate in any material respect, defaults under certain other indebtedness of Verint or its subsidiaries, a change of control (as defined in the new credit agreement) of Verint, and certain insolvency or receivership events affecting Verint or its significant subsidiaries. Upon an event of default, all obligations of Verint owing under the new credit agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the new credit agreement may be terminated.

Convertible Debt Obligations

As of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, CTI had $2.2 million aggregate principal amount of outstanding convertible debt obligations (referred to as the Convertible Debt Obligations). The Convertible Debt Obligations are not secured by any of our assets and are not guaranteed by any of CTI’s subsidiaries.

Comverse Ltd. Lines of Credit

As of April 30, 2010 and January 31, 2010, Comverse Ltd., a wholly-owned Israeli subsidiary of Comverse, Inc., had a $25.0 million line of credit with a bank to be used for various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. This line of credit is not available for borrowings. The line of credit bears no interest and is subject to renewal on an annual basis. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts utilized under the line of credit. In June 2010, this line

 

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of credit was decreased to $15.0 million with a corresponding decrease in the cash balances Comverse Ltd. was required to maintain with the bank to $15.0 million. In December 2010, this line of credit was further decreased to $10.0 million with a corresponding decrease in the cash balances Comverse Ltd. was required to maintain with the bank to $10.0 million. In June 2011, the line of credit increased to $20.0 million with a corresponding increase in the cash balances Comverse Ltd. is required to maintain with the bank to $20.0 million. As of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, Comverse Ltd. had utilized $3.7 million, $4.0 million, $6.9 million and $7.7 million, respectively, of capacity under the line of credit for guarantees and foreign currency transactions.

As of April 30, 2010 and January 31, 2010, Comverse Ltd. had an additional line of credit with a bank for $20.0 million, to be used for borrowings, various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. The line of credit bears no interest other than on borrowings thereunder and is subject to renewal on an annual basis. Borrowings under the line of credit bear interest at an annual rate of LIBOR plus a variable margin determined based on the bank’s underlying cost of capital. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts borrowed or utilized under the line of credit. In June 2010, this line of credit was decreased to $15.0 million with a corresponding decrease in the cash balances Comverse Ltd. is required to maintain with the bank to $15.0 million. As of April 30, 2010 and January 31, 2010, Comverse Ltd. had no outstanding borrowings under the line of credit. In December 2010, Comverse Ltd. borrowed and repaid $6.0 million under the line of credit. In January 2011, Comverse Ltd. borrowed $6.0 million under the line of credit, which was repaid during the three months ended April 30, 2011. Accordingly, as of April 30, 2011, Comverse Ltd. had no outstanding borrowings under the line of credit. As of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, Comverse Ltd. had utilized $3.4 million, $7.3 million, $8.1 million and $9.8 million, respectively, of capacity under the line of credit for guarantees and foreign currency transactions.

Other than Comverse Ltd.’s requirement to maintain cash balances with the banks as discussed above, the lines of credit have no financial covenant provisions. These cash balances required to be maintained with the banks were classified within the condensed consolidated balance sheets as “Restricted cash and bank time deposits” as of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010.

Settlement Agreement

On December 16, 2009 and December 17, 2009, CTI entered into agreements to settle a consolidated shareholder class action and consolidated shareholder derivative actions, respectively. The agreement to settle the consolidated shareholder class action was amended on June 19, 2010. Pursuant to the amendment, CTI agreed to waive certain rights to terminate the settlement in exchange for a deferral of the timing of scheduled payments of the settlement consideration and the right to a credit (referred to as the Opt-out Credit) in respect of a portion of the settlement funds that would have been payable to a class member that elected not to participate in and be bound by the settlement. For a discussion of these actions and additional terms of the settlement, see note 20 to the condensed consolidated financial statements included in this Quarterly Report. As part of the settlement of the consolidated shareholder class action, as amended, CTI agreed to make payments to a class action settlement fund in the aggregate amount of up to $165.0 million that were paid or remain payable as follows:

 

   

$1.0 million that was paid following the signing of the settlement agreement in December 2009;

 

   

$17.9 million that was paid in July 2010 (representing an agreed $21.5 million payment less a holdback of $3.6 million in respect of the anticipated Opt-out Credit, which holdback is required to be paid by CTI if the Opt-out Credit is less);

 

   

$30.0 million that was paid in May 2011; and

 

   

$112.5 million (less the amount, if any, by which the Opt-out Credit exceeds the holdback discussed above) payable on or before November 15, 2011.

Of the $112.5 million due on or before November 15, 2011, $30.0 million is payable in cash and the balance is payable in cash or, at CTI’s election, in shares of CTI’s common stock valued using the ten-day average of the closing prices of CTI’s common stock prior to such election, provided that CTI’s common stock is listed on a national securities exchange on or before the payment date, and that the shares delivered at any one time have an aggregate value of at least $27.5 million. In addition, under the terms of the settlement agreement, CTI had the right to make the $30.0 million payment made in May 2011 in shares of CTI’s common stock if, prior thereto, CTI had met such conditions to using shares as payment consideration. CTI, however, did not meet such conditions and accordingly, made such $30.0 million payment in cash.

As part of the settlement of the shareholder derivative actions, CTI paid, in October 2010, $9.4 million to cover the legal fees and expenses of the plaintiffs. In September 2010, CTI received insurance proceeds of $16.5 million under its directors’ and officers’ insurance policies in connection with the settlements of the shareholder derivative actions and the consolidated shareholder class action. The agreement to settle the consolidated shareholder class action, as amended, was approved by the court in which such action

 

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was pending on June 23, 2010. The agreement to settle the federal and state derivative actions was approved by the courts in which such actions were pending on July 1, 2010 and September 23, 2010, respectively.

We expect to fund any cash payments we make under the settlement of the consolidated shareholder class action using cash on hand or, if insufficient, from proceeds of the sale of investments, including ARS and new borrowings, cash generated from asset divestitures or proceeds from the issuance of equity or debt securities. The consolidated shareholder class action settlement agreement includes restrictions on CTI’s ability to use proceeds from sales of ARS until the amounts payable under the settlement agreement are paid in full. See “—Restrictions on Use of ARS Sales Proceeds.”

Restructuring Initiatives

We review our business, manage costs and align resources with market demand and in conjunction with various acquisitions. As a result, we have taken several actions to reduce fixed costs, eliminate redundancies, strengthen operational focus and better position us to respond to market pressures or unfavorable economic conditions. While such restructuring initiatives are expected to have positive impact on our operating cash flows in the long term, they also have led, and will lead to, some charges.

First Quarter 2010 Restructuring Initiative

During the three months ended April 30, 2010, Comverse’s management approved a restructuring plan to eliminate staff positions and close certain facilities in order to more appropriately streamline Comverse’s activities. The aggregate cost of the plan was $7.0 million, of which severance-related and facilities-related costs of $5.5 million and $0.3 million, respectively, were recorded during the three months ended April 30, 2010, with the remaining $1.2 million of charges recorded during the remainder of the fiscal year ended January 31, 2011. Severance-related and facilities-related costs of $4.3 million and $0.2 million, respectively, were paid during the three months ended April 30, 2010. Severance-related and facilities-related costs of $1.7 million and $0.7 million, respectively, were paid during the remainder of the fiscal year ended January 31, 2011, with the remaining costs of $0.1 million expected to be substantially paid by January 31, 2012.

Third Quarter 2010 Restructuring Initiative

During the three months ended October 31, 2010, we commenced the first phase of a plan to restructure the operations of Comverse with a view towards aligning operating costs and expenses with anticipated revenue. The first phase of the plan includes termination of certain employees located primarily in Israel, the U.S., Asia Pacific and the United Kingdom. In relation to this first phase, we recorded severance-related costs of $11.6 million and facilities-related costs of $0.2 million during the fiscal year ended January 31, 2011. Severance-related and facilities-related costs of $9.1 million and $0.1 million, respectively, were paid during the fiscal year ended January 31, 2011. Severance-related costs of $1.2 million and facility-related costs of $0.1 million were paid during the three months ended April 30, 2011, with the remaining costs of $1.3 million expected to be substantially paid by January 31, 2012.

During the three months ended April 30, 2011, Comverse commenced the implementation of the Phase II Business Transformation that focuses on process reengineering to maximize business performance, productivity and operational efficiency. For more information, see “—Financial Condition of CTI and Comverse—Subsequent Events—Phase II Business Transformation” and note 21 to the condensed consolidated financial statements included in this Quarterly Report.

Netcentrex 2010 Initiative

During the three months ended October 31, 2010, Comverse’s management, as part of initiatives to improve focus on its core business and to maintain its ability to face intense competitive pressures in its markets, began pursuing a wind down of the Netcentrex business. In connection with the wind down, Comverse’s management approved a restructuring plan to eliminate staff positions primarily located in France. In relation to this plan, we recorded severance-related costs of $10.9 million during the fiscal year ended January 31, 2011 and $6.6 million of severance-related costs were recorded during the three months ended April 30, 2011. Severance-related costs of $8.0 million were paid during the fiscal year ended January 31, 2011 and $3.5 million of such costs were paid during the three months ended April 30, 2011, with the remaining costs of $6.7 million expected to be substantially paid by January 31, 2012. As an alternative to a wind down, management continues to evaluate other strategic options for the Netcentrex business.

Guarantees and Restrictions on Access to Subsidiary Cash

Guarantees

We provide certain customers in the ordinary course of business with financial performance guarantees which in certain cases are backed by standby letters of credit or surety bonds, the majority of which are cash collateralized and accounted for as restricted cash and bank time deposits. We are only liable for the amounts of those guarantees in the event of our nonperformance, which would permit the customer to exercise the guarantee. As of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, we believe that we were in compliance with our performance obligations under all contracts for which there is a financial performance guarantee, and that any liabilities arising in connection with these guarantees will not have a material adverse effect on our

 

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consolidated results of operations, financial position or cash flows. We also obtained bank guarantees primarily to provide customer assurance relating to the performance of certain obligations required by customer agreements for the guarantee of certain payment obligations. These guarantees, which aggregated $47.6 million, $24.6 million and $35.0 million as of January 31, 2011, April 30, 2010 and January 31, 2010, respectively, are generally scheduled to be released upon our performance of specified contract milestones, a majority of which are scheduled to be completed at various dates through January 31, 2012. In addition, such guarantees aggregating $42.9 million as of April 30, 2011, are also generally scheduled to be released upon our performance of specified contract milestones, a majority of which are scheduled to be completed at various dates through January 31, 2013.

Dividends from Subsidiaries

The ability of our Israeli subsidiaries to pay dividends is governed by Israeli law, which provides that dividends may be paid by an Israeli corporation only out of earnings as defined in accordance with the Israeli Companies Law of 1999, provided that there is no reasonable concern that such payment will cause such subsidiary to fail to meet its current and expected liabilities as they come due.

We operate our business internationally. A significant portion of our cash and cash equivalents are held outside of the United States by various foreign subsidiaries. If cash and cash equivalents held outside the United States are distributed to the United States resident corporate parents in the form of dividends or otherwise, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. We may incur substantial withholding taxes if we repatriate our cash from certain foreign subsidiaries.

In addition, Verint is party to a credit agreement that contains certain restrictive covenants which, among other things, preclude Verint Systems from paying cash dividends and limits its ability to make asset distributions to its stockholders, including CTI. Also, pursuant to its investment agreements, Starhome B.V. is precluded from paying cash dividends to its shareholders without the approval of certain minority shareholders.

Investment in Verint Systems’ Preferred Stock

On May 25, 2007, in connection with Verint’s acquisition of Witness, CTI entered into a Securities Purchase Agreement with Verint (referred to as the Securities Purchase Agreement), whereby CTI purchased, for cash, an aggregate of 293,000 shares of Verint’s Series A Convertible Perpetual Preferred Stock (referred to as the preferred stock), which represents all of Verint’s outstanding preferred stock, for an aggregate purchase price of $293.0 million. Proceeds from the issuance of the preferred stock were used to partially finance the acquisition. The preferred stock is eliminated in consolidation. Through April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, cumulative, undeclared dividends on the preferred stock were $48.9 million, $45.7 million, $36.0 million and $32.9 million, respectively. As of April 30, 2011, January 31, 2011, April 30, 2010 and January 31, 2010, the liquidation preference of the preferred stock was $341.9 million, $338.7 million, $329.0 million and $325.9 million, respectively.

Originally, the preferred stock did not confer on CTI voting rights and was not convertible into Verint Systems’ common stock. On October 5, 2010, Verint Systems’ stockholders approved, in a special stockholders meeting, the issuance of the Verint Systems’ common stock underlying the preferred stock and accordingly, on such date, the preferred stock became voting and convertible into Verint Systems’ common stock. Each share of preferred stock is entitled to a number of votes equal to the number of shares of common stock into which such share of preferred stock is convertible using the conversion rate that was in effect upon the issuance of the preferred stock in May 2007, on all matters voted upon by Verint Systems’ common stockholders. The initial conversion rate was set at 30.6185 shares of common stock for each share of preferred stock. As of April 30, 2011 and January 31, 2011, and, if it were convertible as of April 30, 2010 and January 31, 2010, the preferred stock could be converted into approximately 10.5 million, 10.4 million, 10.1 million and 10.0 million shares of Verint Systems’ common stock, respectively.

Verint Acquisition

On July 19, 2011, Verint entered into a definitive agreement to acquire, upon closing, Vovici Corporation (or Vovici), a privately held provider of enterprise feedback management solutions. Verint acquired Vovici to expand its Voice of the Customer Analytics platform. Under the terms of the agreement, Verint will be acquiring Vovici for a total cash consideration of approximately $56.5 million to be paid at closing, subject to certain adjustments, and potential additional cash payments not to exceed $19.9 million over 18 months, contingent upon certain future performance.

Liquidation Preference in Starhome B.V.

In the event of a liquidation, merger or sale of Starhome B.V., the first $20.0 million of proceeds would be distributed to certain minority shareholders. Thereafter, each shareholder would be entitled to receive its pro rata share of any remaining proceeds on an as-converted basis, provided, that, under certain circumstances, CTI would be entitled to receive up to $41.0 million of any such remaining proceeds.

OFF-BALANCE SHEET ARRANGEMENTS

As of April 30, 2010, we had no material off-balance sheet arrangements, other than performance guarantees disclosed in “—Liquidity and Capital Resources–Guarantees and Restrictions on Access to Subsidiary Cash—Guarantees.” There were no material changes in our off-balance sheet arrangements since January 31, 2010. For a more comprehensive discussion of our off-balance sheet arrangements as of January 31, 2011, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2010 Form 10-K.

 

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CONTRACTUAL OBLIGATIONS

There were no material changes in our contractual obligations or commercial commitments as of April 30, 2010 compared to January 31, 2010. For a more comprehensive discussion of our contractual obligations as of January 31, 2011, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2010 Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We described the significant accounting policies and methods used in the preparation of our consolidated financial statements in note 1 to the consolidated financial statement included in Item 15 of our 2009 Form 10-K. The accounting policies that reflect our more significant estimates, judgments and assumptions in the preparation of our consolidated financial statements are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2010 Form 10-K and 2009 Form 10-K, and include the following:

 

   

revenue recognition;

 

   

stock-based compensation;

 

   

business combinations;

 

   

recoverability of goodwill;

 

   

impairment of long-lived assets;

 

   

allowance for doubtful accounts;

 

   

valuation and other-than-temporary impairments;

 

   

income taxes; and

 

   

litigation and contingencies.

There were no significant changes during the three months ended April 30, 2010 to our critical accounting policies and estimates as disclosed in our 2010 Form 10-K and 2009 Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS TO BE IMPLEMENTED

For information related to recent accounting pronouncements implemented during periods ended subsequent to April 30, 2010 and recent accounting pronouncements to be implemented, see note 2 to the condensed consolidated financial statements included in this Quarterly Report.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our 2010 Form 10-K, filed with the SEC on May 31, 2011, provides a detailed discussion of the market risks affecting our operations. As discussed below, Verint completed transactions which impacted our exposures to interest rate risk during the three months ended April 30, 2011. Other than the impact of these transactions, which are described below, we believe our exposure to these market risks did not materially change during the three months ended April 30, 2011.

Interest Rate Risk on our Debt

In April 2011, Verint entered into a new credit agreement and concurrently terminated its prior facility. For additional discussion, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness—Verint Credit Facilities—New Credit Agreement” and note 21 to the condensed consolidated financial statements included in this Quarterly Report.

Because the interest rates applicable to borrowings under the new credit agreement are variable, Verint is exposed to market risk from changes in the underlying index rates, which affect its cost of borrowing. The periodic interest rate on the term loan facility is currently a function of several factors, most importantly the LIBO Rate and the applicable interest rate margin. However, borrowings are subject to a 1.25% 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 1.25%. Although the periodic interest rate may still fluctuate based upon Verint’s corporate ratings, which determines the interest rate margin, changes in short-term LIBO Rates will not impact the calculation unless those rates increase above 1.25%. Based upon Verint’s April 30, 2011 borrowings, for each 1% increase in the applicable LIBO Rate above 1.25%, annual interest payments would increase by approximately $6.0 million.

Verint had utilized a pay-fixed/receive-variable interest rate swap agreement to partially mitigate the variable interest rate risk associated with its prior facility. Verint terminated that agreement in July 2010. Verint may consider utilizing interest rate swap agreements, or other agreements intended to mitigate variable interest rate risk, in the future.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, for the three months ended April 30, 2010. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, because of the material weaknesses in internal control over financial reporting described in our 2009 Form 10-K, and our inability to file this Quarterly Report within the required time period, our disclosure controls and procedures were not effective as of April 30, 2010.

Changes in Internal Controls Over Financial Reporting

In evaluating whether there were any reportable changes in our internal control over financial reporting during the three months ended April 30, 2010, we determined, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, that there were such changes in the form of remedial measures either initiated or enhanced during this quarter to address the material weaknesses in our internal control over financial reporting as identified in Item 9A of the 2009 Form 10-K filed on January 25, 2011. As explained in greater detail under Item 9A of the 2009 Form 10-K, we undertook a broad range of remedial measures prior to January 25, 2011, the filing date of the 2009 Form 10-K, to address the material weaknesses in our internal control over financial reporting.

With respect to the material weaknesses that were identified in the 2009 Form 10-K, throughout the fiscal year ended January 31, 2011, we continued to implement certain remedial measures, documented in our 2010 Form 10-K which was filed on May 31, 2011, and identified additional actions which need to be taken. Since the filing of our 2010 Form 10-K, there have been no significant changes in our internal control over financial reporting. Our leadership team, together with other senior executives, continues to implement remedial actions to address the material weaknesses identified in our 2010 Form 10-K. We are committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity and transparency. This commitment is accompanied by management’s continued focus on processes intended to achieve accurate and reliable financial reporting.

 

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PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

For a description of our legal proceedings, see note 20 to the condensed consolidated financial statements included in this Quarterly Report. Except as set forth below, there have been no material developments in the legal proceedings previously reported in our 2010 Form 10-K, 2009 Form 10-K and 2011 Form 10-Q.

On July 13, 2011, CTI entered into an agreement in principle with the SEC’s Division of Enforcement with respect to the settlement of the Section 12(j) administrative proceeding, which was initiated by the SEC in March 2010, pursuant to Section 12(j) of the Exchange Act, to revoke the registration of CTI’s common stock due to CTI’s previous failure to file certain periodic reports with the SEC. The agreement in principle is subject to approval by the SEC. For additional information regarding recent developments in the Section 12(j) administrative proceeding, see note 20 to the condensed consolidated financial statements included in this Quarterly Report under the caption “SEC Civil Actions” and Item 1A, “Risk Factors” below.

In response to CTI’s motion to dismiss, on July 12, 2011, the United States District Court for the Eastern District of New York under the caption Maverick Fund, L.D.C., et al. v. Comverse Technology, Inc., et al., No. 10-cv-4436, issued an order dismissing the plaintiffs’ claims related to their purchase of CTI’s securities in 2007 and the claims against Andre Dahan, CTI’s former President and Chief Executive Officer, and Avi Aronovitz, CTI’s former Interim Chief Financial Officer, and otherwise denied CTI’s motion to dismiss. Other claims against the defendants in such action remain outstanding. For additional information regarding recent developments in this action, see note 20 to the condensed consolidated financial statements included in this Quarterly Report under the caption “Opt-Out Plaintiffs’ Action.”

 

ITEM 1A. RISK FACTORS

Except as set forth below, there has been no material change to the risk factors previously reported in our 2010 Form 10-K and 2009 Form 10-K.

In June 2009, CTI entered into a civil settlement with the SEC over allegations regarding the improper backdating of stock options and other accounting practices, including the improper establishment, maintenance and release of reserves, the reclassification of certain expenses, and the calculation of backlog of sales orders. Without admitting or denying the allegations in the SEC’s complaint, CTI consented to the issuance of a final judgment. The final judgment enjoined CTI from future violations of the federal securities laws and ordered it to be in compliance with its obligations to file periodic reports with the SEC by no later than February 8, 2010. CTI, however, was unable to file the requisite periodic reports by such date.

As a result of CTI’s inability to become current in its periodic reporting obligations in accordance with the final judgment and court order by February 8, 2010, in March 2010 the SEC instituted an administrative proceeding, pursuant to Section 12(j) of the Exchange Act, to suspend or revoke the registration of CTI’s common stock. On July 13, 2011, CTI and the SEC’s Division of Enforcement entered into an agreement in principle to resolve the Section 12(j) administrative proceeding against CTI. CTI faces the risk that it will be unable to satisfy the terms of the agreement in principle and, as a result, registration of CTI’s common stock would be revoked. Under such agreement in principle, which is subject to SEC approval, the Division of Enforcement will recommend that the SEC resolve the Section 12(j) administrative proceeding if CTI files its Quarterly Report on Form 10-Q for the fiscal quarter ending July 31, 2011 on a timely basis. Under the terms of the agreement in principle, if CTI fails to file such report on a timely basis, the SEC will issue a non-appealable order to revoke the registration of CTI’s common stock. If a final order is issued by the SEC to revoke the registration of CTI’s common stock, brokers, dealers and other market participants would be prohibited from buying, selling, making market in, publishing quotations of, or otherwise effecting transactions with respect to, such common stock and, as a result, public trading of CTI’s common stock would cease and investors would find it difficult to acquire or dispose of CTI’s common stock or obtain accurate price quotations for CTI’s common stock, which could result in a significant decline in the value of CTI’s common stock. In addition, our business may be adversely impacted, including, without limitation, an adverse impact on CTI’s ability to issue stock to raise equity capital, engage in business combinations or provide employee incentives;

If the registration of CTI’s common stock is ultimately revoked, CTI intends to complete the necessary financial statements, file an appropriate registration statement with the SEC and seek to have it declared effective in order to resume the registration of such common stock under the Exchange Act as soon as practicable.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

CTI has not been eligible to register grants of securities made to employees, executive officers and directors of CTI and Comverse under the Securities Act on a registration statement on Form S-8 as CTI has not filed all periodic reports required under the Exchange Act in a 12-month period. During the three months ended April 30, 2010, CTI granted unregistered deferred stock unit awards to certain executive officers and employees in private placements in reliance on exemptions from the registration requirement of the Securities Act afforded by Section 4(2) thereof and unregistered stock options to non-executive employees in reliance on the “no-sale” theory. For more information relating to such grants, see the disclosure set forth in Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Recent Sales of Unregistered Securities” of the 2010 Form 10-K, which is incorporated by reference into this Quarterly Report.

Issuer Purchases of Equity Securities

In the three months ended April 30, 2010, CTI purchased an aggregate of 37,198 shares of CTI’s common stock from certain of its members of the Board of Directors, executive officers and employees to cover tax liabilities in connection with the delivery of shares in settlement of stock awards. The shares purchased by CTI are deposited in CTI’s treasury. CTI does not have a specific repurchase plan or program. The following table provides information regarding CTI’s purchases of its common stock in respect of each month during the three months ended April 30, 2010 during which purchases occurred:

 

Period

   Total Number of
Shares (or Units)
Purchased
     Average Price Paid
Per  Share (or Unit)
     Total Number of
Shares  (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
     Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
That May Yet Be
Purchased Under the
Plans or Programs
 

February 1, 2010 – February 28, 2010

     6,459       $ 8.98         —           —     

March 1, 2010 – March 31, 2010

     25,922       $ 9.04         —           —     

April 1, 2010 – April 30, 2010

     4,817       $ 9.18         —           —     
                                   

Total

     37,198       $ 9.05         —           —     
                                   

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

NONE

 

ITEM 4. REMOVED AND RESERVED

 

ITEM 5. OTHER INFORMATION

NONE

 

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ITEM 6. EXHIBITS

 

Exhibit

No.

 

Exhibit Description

  3.1*   By-Laws, as amended and restated on March 10, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K under the Securities Exchange Act of 1934 filed on March 15, 2010).
  3.2*   By-Laws, as amended and restated on December 2, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K under the Securities Exchange Act of 1934 filed on December 8, 2010).
  3.3*   By-Laws, as amended and restated on February 25, 2011 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K under the Securities Exchange Act of 1934 filed on February 28, 2011).
10.1*   Amendment, Waiver, and Consent, dated April 27, 2010, to Credit Agreement, dated as of May 25, 2007, among Verint Systems Inc., as Borrower, the Lenders, as parties thereto, and Credit Suisse AG, Cayman Islands Branch, as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Verint Systems Inc. on May 3, 2010).
10.2*†   Amendment to Employment Agreement, dated April 29, 2010, between Comverse Ltd. and Dror Bin (incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended January 31, 2011 filed on May 31, 2011).
10.3*†   Amendment, dated April 22, 2010, to Employment Agreement, dated May 21, 2009, between Comverse Technology, Inc. and Stephen M. Swad (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K under the Securities Exchange Act of 1934 filed on April 23, 2010).
10.4*†   Deferred Stock Award Agreement, dated April 19, 2010, between Comverse Technology, Inc. and Andre Dahan (incorporated by reference to Exhibit 10.169 to the Registrant’s Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended January 31, 2009 filed on October 4, 2010).
10.5*†   Deferred Stock Award Agreement, dated April 22, 2010, between Comverse Technology, Inc. and Joel E. Legon (incorporated by reference to Exhibit 10.170 to the Registrant’s Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended January 31, 2009 filed on October 4, 2010).
10.6*†   Deferred Stock Award Agreement, dated April 20, 2010, between Comverse Technology, Inc. and Gabriel Matsliach (incorporated by reference to Exhibit 10.171 to the Registrant’s Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended January 31, 2009 filed on October 4, 2010).
10.7*†   Deferred Stock Award Agreement, dated April 21, 2010, between Comverse Technology, Inc. and Shefali Shah (incorporated by reference to Exhibit 10.172 to the Registrant’s Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended January 31, 2009 filed on October 4, 2010).
10.8*†   Deferred Stock Award Agreement, dated April 15, 2010, between Comverse Technology, Inc. and Stephen M. Swad (incorporated by reference to Exhibit 10.173 to the Registrant’s Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended January 31, 2009 filed on October 4, 2010).
31.1**   Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2**   Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1***   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2***   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Incorporated by reference.
** Filed herewith.
*** This exhibit is being “furnished” pursuant to Item 601(b)(32) of SEC Regulation S-K and is not deemed “filed” with the Securities and Exchange Commission and is not incorporated by reference in any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Constitutes a management contract or compensatory plan or arrangement.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements 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.

 

  COMVERSE TECHNOLOGY, INC.
Dated: July 28, 2011  

/s/    Charles J. Burdick        

 

Charles J. Burdick

Chief Executive Officer

Dated: July 28, 2011  

/s/    Joel E. Legon        

 

Joel E. Legon

Senior Vice President and

Interim Chief Financial Officer

 

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