Attached files

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EX-2.1 - EXHIBIT 2.1 - ASSET PURCHASE AGREEMENT - XURA, INC.cnsi-7312015xexhibit21.htm
EX-2.3 - EXHIBIT 2.3 - CONSENT, WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT - XURA, INC.cnsi-7312015xexhibit23.htm
EX-32.1 - EXHIBIT 32.1 - CERTIFICATION OF THE CEO PURSUANT TO 18 U.S.C. - XURA, INC.cnsi-7312015xexhibit321.htm
EX-32.2 - EXHIBIT 32.2 - CERTIFICATION OF THE CFO PURSUANT TO RULES 18 U.S.C. - XURA, INC.cnsi-7312015xexhibit322.htm
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION OF THE CEO PURSUANT TO RULES 13A-14 AND 15D-14A - XURA, INC.cnsi-7312015xexhibit311.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION OF THE CFO PURSUANT TO RULES 13A-14 AND 15D-14A - XURA, INC.cnsi-7312015xexhibit312.htm
EX-10.1 - EXHIBIT 10.1 - EMPLOYMENT AGREEMENT - XURA, INC.cnsi-7312015xexhibit101.htm
EX-2.2 - EXHIBIT 2.2 - CREDIT AGREEMENT - XURA, INC.cnsi-7312015xexhibit22.htm

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 July 31, 2015
or
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
XURA, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-35572
 
04-3398741
(State or other jurisdiction
of incorporation or organization)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
200 Quannapowitt Parkway
Wakefield, MA
01880
(Address of Principal Executive Offices)
(Zip Code)
(781) 246-9000
(Registrant’s telephone number, including area code)

(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.   x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  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
 
 ¨
 
Accelerated filer
x
 
 
 
 
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 25,058,741 shares of the registrant’s common stock outstanding on August 31, 2015.



TABLE OF CONTENTS
 
 
 
 
PART I
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
 
 
ITEM 3.
 
 
 
 
 
ITEM 4.
 
 
 
PART II  
 
 
 
 
 
ITEM 1.
 
 
 
 
 
ITEM 1A.
 
 
 
 
 
ITEM 2.
 
 
 
 
 
ITEM 3.
 
 
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 5.
 
 
 
 
 
ITEM 6.



FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended July 31, 2015 are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for 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.
In particular, we recently completed three material transactions:
the sale of our BSS business to Amdocs Limited;
execution of a master services agreement with Tech Mahindra pursuant to which Tech Mahindra performs certain services for us on a global basis; and
the acquisition of Acision Global Limited (or Acision), which closed on August 6, 2015.
These transactions are subject to numerous risks and uncertainties, which include:
general disruption of the business and allocation of resources to integration and restructuring following these transactions rather than sales and fulfillment efforts;
loss of customers or delays in orders until operations normalize following completion of the transaction;
loss of key employees, employee unrest or distraction, or employee litigation or union or work council-related actions, including strikes or litigation; and
Inability to transfer employees in certain jurisdictions immediately or at any time.
The Tech Mahindra transaction poses additional risks such as:
failure to achieve the cost savings and other benefits anticipated; and
material dependence on Tech Mahindra for critical functions and operations (including research and development, project deployment, delivery, maintenance, and support services).
The BSS Business sale transaction poses additional risks such as:
delays in anticipated benefits of the transaction;
reduction in the purchase price as a result of breaches of representation, warranties or covenants, including those relating to certain third party consents to be achieved after closing;
failure to meet performance standards under the post-closing Transition Services Agreement and/or losses from the fulfillment of our requirements under such agreement;
difficulties in implementing restructuring initiatives necessary to reduce costs and expenses following the completion of the BSS Business sale transaction; and
inability to re-invest the proceeds of the sale in our Digital Services or new businesses that are profitable or otherwise successful.
The Acision acquisition poses additional risks such as:
problems may arise in successfully integrating the Acision business into our current business, which may result in our not operating as effectively and efficiently as expected;
we may be unable to achieve expected synergies or it may take longer than expected to achieve such synergies;

i


the transaction may involve unexpected costs or unexpected liabilities; and
Acision’s senior credit facility may impose operating and financial requirements and restrictions on us and Acision, including requirements and restrictions that may limit our ability to engage in acts that we believe may be in our long-term best interests.
In addition, we generally face the following operating and legal risks:
possible inability to stem declines in customer sales and related cash flows, and then begin to achieve growth in sales and cash flows;
possible inability to develop, produce and sell products and services that satisfy customer demands, that operate in their particular technology environments, and that comply with constantly changing standards, laws and regulations;
the generation of a significant portion of our revenue from two major customers could materially adversely affect our revenue, profitability and cash flows if we are unable to maintain or develop relationships with these customers, or if these customers reduce demand for our products;
pricing pressure on products and services arising out of customer demand for lower capital and operating costs;
competition from larger and more well capitalized businesses that have greater ability to lower their pricing to secure business;
the difficulty in reducing costs to match revenues (and in forecasting quarterly and annual product bookings), because a high percentage of orders are typically placed late in fiscal quarters or fiscal years, sales cycles are lengthy and unpredictable, and we are dependent on large projects that require material upfront investment for a large portion of our revenues;
any failure to timely implement restructuring alternatives designed to reduce costs when and as required to align with revenues;
costs associated with product or service implementation delays, performance issues, warranty claims and other liabilities (which may result in material quarter to quarter fluctuations especially in projects accounted for using the percentage-of-completion method);
decline or weakness in the global economy;
adverse conditions in the telecommunications industry that result in reduced spending or demand for our products and services;
our reliance on third-party subcontractors for important company functions;
supply shortage and/or interruptions in product supply due to our dependence on a limited number of suppliers and manufacturers for certain components and third-party software;
the risk that natural disasters, environmental issues or other force majeure events may harm our business;
the cost to comply with, and the consequences if we fail to comply with, the Sarbanes-Oxley Act of 2002, Dodd-Frank Wall Street Reform and Consumer Protection Act, environmental laws, and other laws or regulations that govern our business;
the loss of revenues and any costs to assert any infringement of our proprietary technology by a third party;
costs associated with (including potential loss of sales revenue) any infringement by us of the intellectual property of third parties, including through the use of free or open source software;
contractual obligations, including intellectual property indemnity provisions, that in some cases expose us to significant or uncapped liabilities;
our dependence upon hiring and retaining highly qualified employees;
labor disruptions, union or work council actions, or similar events;
security breaches and other disruptions that could compromise our confidential information (whether at our facilities or those of third party providers or other business partners), or customer or supplier information;

ii


risks associated with significant foreign operations and international sales, including the impact of geopolitical, economic and military conditions in foreign countries, operations in countries with a history of corruption or which are on various restricted lists, entering into transactions with foreign governments, compliance with laws that prohibit improper payments, and adverse fluctuations of currency exchange rates;
in particular, risks relating to our significant operations in Israel, including economic, political and/or military conditions in Israel and the Middle East, and uncertainties and restrictions relating to research and development grants and tax benefits;
risks related to the Share Distribution (defined below) including our obligation to indemnify Verint Systems Inc. in connection with the distribution; taxes of the prior consolidated group for periods ending on or before the Share Distribution date; and any legal infirmities related to the Share Distribution; and
limitations on our ability to use our net operating loss carryforwards, which would reduce our future cash flows, that could arise out of changes in ownership we cannot prevent.
Any of these risks could result in adverse effects to our operations and financial conditions, which would likely result in a decline in our stock price.
These risks and uncertainties discussed above, as well as others, are discussed in greater detail in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K filed by us with the SEC on April 16, 2015 and Part II, Item 1A "Risk Factors" of this Quarterly Report. The documents and reports we file with the SEC are available through Xura, or our website, www.Xura.com, or through the SEC's Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) at www.sec.gov. We undertake no commitment to update or revise any forward-looking statements except as required by law.

iii


PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
XURA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share data)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Product revenue
$
17,005

 
$
20,062

 
$
27,112

 
$
37,072

Service revenue
44,624

 
54,926

 
80,222

 
102,998

Total revenue
61,629

 
74,988

 
107,334

 
140,070

Costs and expenses:
 
 
 
 
 
 
 
Product costs
12,715

 
18,808

 
25,668

 
28,703

Service costs
27,249

 
39,148

 
58,053

 
80,138

Research and development, net
8,235

 
9,813

 
16,515

 
18,172

Selling, general and administrative
19,686

 
23,059

 
39,559

 
48,619

Other operating expenses:
 
 
 
 
 
 
 
Restructuring expenses
4,238

 
1,171

 
7,646

 
3,043

Total other operating expenses
4,238

 
1,171

 
7,646

 
3,043

Total costs and expenses
72,123

 
91,999

 
147,441

 
178,675

Loss from operations
(10,494
)
 
(17,011
)
 
(40,107
)
 
(38,605
)
Interest income
89

 
100

 
173

 
215

Interest expense
(167
)
 
(231
)
 
(360
)
 
(354
)
Foreign currency transaction loss, net
(4,202
)
 
(2,949
)
 
(9,775
)
 
(930
)
Other income (expense), net
77

 
(413
)
 
179

 
(465
)
Loss before income tax benefit (expense)
(14,697
)
 
(20,504
)
 
(49,890
)
 
(40,139
)
Income tax benefit (expense)
2,534

 
(1,877
)
 
(2,253
)
 
(4,337
)
Loss from continuing operations
(12,163
)
 
(22,381
)
 
(52,143
)
 
(44,476
)
Income from discontinued operations
175,060

 
5,515

 
188,379

 
11,479

Net income (loss)
$
162,897

 
$
(16,866
)
 
$
136,236

 
$
(32,997
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic & diluted
22,005,116

 
22,401,902

 
21,936,379

 
22,348,835

Earnings (loss) per share - basic & diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.55
)
 
$
(1.00
)
 
$
(2.38
)
 
$
(1.99
)
Discontinued operations
7.95

 
0.25

 
8.59

 
0.51

 
$
7.40

 
$
(0.75
)
 
$
6.21

 
$
(1.48
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

1


XURA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)

 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
162,897

 
$
(16,866
)
 
$
136,236

 
$
(32,997
)
Other comprehensive income ("OCI"), net of tax:

 

 
 
 
 
     Foreign currency translation adjustments
3,985

 
1,305

 
6,680

 
(1,157
)
     Changes in accumulated OCI on cash flow hedges, net of tax
176

 
110

 
605

 
233

Other comprehensive income (loss), net of tax
4,161

 
1,415

 
7,285

 
(924
)
Comprehensive income (loss)
$
167,058

 
$
(15,451
)
 
$
143,521

 
$
(33,921
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


2


XURA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
 
July 31, 2015
 
January 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
346,074

 
$
158,121

Restricted cash and bank deposits
55,584

 
35,802

Accounts receivable, net of allowance of $3,225 and $4,403, respectively
29,653

 
71,670

Inventories
14,296

 
17,817

Deferred cost of revenue
2,855

 
7,059

Deferred income taxes
14,298

 
13,781

Prepaid expenses
11,288

 
15,156

Other current assets
31,663

 
10,570

Total current assets
505,711

 
329,976

Property and equipment, net
38,496

 
49,230

Goodwill
67,622

 
151,217

Intangible assets, net
1,440

 
4,049

Deferred cost of revenue
19,303

 
30,437

Deferred income taxes
1,731

 
3,064

Long-term restricted cash
5,253

 
7,940

Other assets
16,406

 
30,439

Total assets
$
655,962

 
$
606,352

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
145,150

 
$
121,720

Deferred revenue
103,574

 
185,323

Deferred income taxes
1,593

 
1,491

Income taxes payable

 
2,166

Total current liabilities
250,317

 
310,700

Deferred revenue
62,313

 
89,999

Deferred income taxes
51,088

 
56,815

Other long-term liabilities
132,350

 
135,456

Total liabilities
496,068

 
592,970

Commitments and contingencies (Note 18)

 

Equity:
 
 
 
Common stock, $0.01 par value - authorized, 100,000,000 shares; issued 22,908,954 and 22,591,411 shares, respectively; outstanding, 21,993,027 and 21,830,081 shares, respectively
229

 
226

Preferred stock, $0.01 par value - authorized, 100,000 shares

 

Treasury stock, at cost, 915,927 and 761,330 shares, respectively
(20,353
)
 
(17,211
)
Accumulated earnings (deficit)
89,846

 
(46,390
)
Additional paid in capital
52,065

 
45,935

Accumulated other comprehensive income
38,107

 
30,822

Total equity
159,894

 
13,382

Total liabilities and equity
$
655,962

 
$
606,352

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

3


XURA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
Six Months Ended July 31,
 
2015
 
2014
Cash flows from operating activities:
 
Net income (loss)
$
136,236

 
$
(32,997
)
Non-cash operating items:
 
 
 
Depreciation and amortization
9,364

 
9,561

Gain on BSS Business sale
(201,602
)
 

Provision for doubtful accounts
331

 
331

Stock-based compensation expense
6,133

 
5,923

Deferred income taxes
(4,850
)
 
3,131

Inventory write-downs
1,303

 
1,108

Other non-cash items, net
420

 
446

Changes in assets and liabilities:
 
 
 
Accounts receivable
3,701

 
(16,392
)
Inventories
1,417

 
(8,624
)
Deferred cost of revenue
4,747

 
11,592

Prepaid expense and other current assets
(32,838
)
 
(5,580
)
Accounts payable and accrued expense
25,642

 
(16,195
)
Income taxes
(4,223
)
 
(1,053
)
Deferred revenue
(4,954
)
 
(5,750
)
Tax contingencies
15,352

 
3,598

Other assets and liabilities
(5,442
)
 
1,517

Net cash used in operating activities
(49,263
)
 
(49,384
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(7,982
)
 
(11,472
)
Advance payment for acquisition of Solaiemes

 
(2,678
)
Net change in restricted cash and bank deposits
(18,477
)
 
(4,027
)
Proceeds from asset sales
110

 
46

Proceeds from BSS Business sale including $26 million held in escrow
266,081

 

Net cash provided by (used in) investing activities
239,732

 
(18,131
)
Cash flows from financing activities:
 
 
 
Payment for repurchase of common stock in connection with tax liabilities upon settlement of stock awards
(532
)
 
(972
)
Payment for repurchase of common stock under repurchase program
(2,351
)
 
(3,573
)
Proceeds from exercises of stock options

 
40

Net cash used in financing activities
(2,883
)
 
(4,505
)
Effects of exchange rates on cash and cash equivalents
367

 
(973
)
Net increase (decrease) in cash and cash equivalents
187,953

 
(72,993
)
Cash and cash equivalents, beginning of period 
158,121

 
254,580

Cash and cash equivalents, end of period
$
346,074

 
$
181,587

Non-cash investing transactions:
 
 
 
Accrued but unpaid purchases of property and equipment
$
785

 
$
4,587

Inventory transfers to property and equipment
$
824

 
$
1,673

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

4


XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Background
Prior to October 31, 2012, the date of the Share Distribution (as defined below), Xura, Inc. (formerly known as Comverse, Inc.) (the “Company”) was a wholly-owned subsidiary of Comverse Technology, Inc. (“CTI”). Effective September 9, 2015, the Company changed its name from Comverse, Inc. to Xura, Inc. The Company was organized as a Delaware corporation in November 1997.
The Company is a global provider of digital communications solutions for communication service providers (“CSPs”), Over-The-Top (“OTT”) providers and enterprises. The Company's solutions are designed to enhance CSPs’ and OTTs’ ability to address evolving market trends towards simplification and modernization of networks, as well as create monetizable services with emerging technologies such as voice over long-term evolution (“VoLTE”), rich communication services (“RCS”), IP Messaging, Data Analytics, Web Real-Time Communication (“WebRTC”), and Machine-to-Machine messaging. Solutions are also provided to the enterprise market and are designed to accelerate their move towards mobile-enabling their customer engagements. These solutions include secure enterprise application-to-person messaging (“A2P”), credit orchestration, two-factor authentication (“2FA”) and developer tools for customized service creation. Additionally, the Company continues to offer traditional Value Added Services (“VAS”) solutions, including voicemail, visual voicemail, call completion, short messaging service (“SMS”), and multimedia picture and Video Messaging (“MMS”). This core VAS platform has been designed to allow CSPs and OTTs the ability to augment their networks with emerging products and solutions to address new types of devices, technologies, and multi-device experience which the Company believes its subscribers demand. Solutions around IP messaging connectivity to legacy networks, communications security, network signaling and spam filtering, are among the Company's solutions in this space.
The Company also offers a portfolio of professional services designed to help its customers improve and streamline operations, identify revenue opportunities, reduce costs and maximize financial flexibility.  Many of the Company's solutions can be delivered via the cloud, in a “software-as-a-service” model, and are designed to allow it to speed up deployment and permit rapid introduction of additional services. With the acquisition of Acision (as defined below), several of the Company's solutions will be offered in a revenue-share model, allowing the Company to de-risk its customers’ investments and giving the Company an ability to take part in the resulting value creation.
Amdocs Asset Purchase Agreement
On April 29, 2015, the Company entered into an Asset Purchase Agreement (the “Amdocs Purchase Agreement”) with Amdocs Limited, a Guernsey company (the “Purchaser”). Pursuant to the Amdocs Purchase Agreement, the Company agreed to sell substantially all of its assets required for operating the Company's converged, prepaid and postpaid billing and active customer management systems for wireless, wireline, cable and multi-play communication service providers (the “BSS Business”) to the Purchaser, and the Purchaser has agreed to assume certain post-closing liabilities of the Company (the “Asset Sale”). The initial closing of the Asset Sale occurred on July 2, 2015. The total cash purchase price payable by the Purchaser to the Company in connection with the initial closing of the Asset Sale was approximately $273 million, subject to various purchase price adjustments, of which an aggregate of $6.5 million was scheduled to be paid upon certain deferred closings.
In connection with the Asset Sale, the Company agreed to indemnify Amdocs for certain pre-closing liabilities and breaches of certain representations and warranties. Upon the closing, $26 million of the purchase price was deposited into escrow to fund potential indemnification claims and certain adjustments for a period of 12 months following the closing. In late August 2015, the Company received certain notices of alleged claims against the escrow from Amdocs, which the Company believes to be without merit. The Company intends to defend the claims as appropriate.
In connection with the Amdocs Purchase Agreement, the Company and the Purchaser have also entered into a Transition Services Agreement (the “TSA”), which provides for support services between the Company and the Purchaser in connection with the transition of the BSS Business to the Purchaser, for various periods up to 12 months following the closing of the Asset Sale (see Note 14, Discontinued Operations).
Basis of Presentation
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

5

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015 (the “2014 Form 10-K”).
The condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the periods ended July 31, 2015 and 2014, and the condensed consolidated balance sheet as of July 31, 2015 are not audited but in the opinion of management reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair statement of the results of the periods presented. Certain information and disclosures normally included in audited financial statements have been omitted in these condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Because the condensed consolidated 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 2014 Form 10-K. The results for the three and six months ended July 31, 2015 are not necessarily indicative of the results for the full fiscal year ending January 31, 2016.
Intercompany accounts and transactions within the Company have been eliminated.
Discontinued Operations
As of April 30, 2015, the BSS Business met the criteria to be classified as held for sale as well as discontinued operations. As such, the BSS Business has been re-classified and reflected as discontinued operations on the consolidated statements of operations for all periods presented. As of July 31, 2015, certain assets and liabilities are classified as held for sale due to deferred closings and restructuring initiatives commenced in connection with the BSS Business sale. (see Note 14, Discontinued Operations).
Segment Information
Prior to entering into the Amdocs Purchase Agreement, the Company’s reportable segments consisted of BSS and Digital Services. As a result of entering into the Amdocs Purchase Agreement, the results of operations of the former BSS Business segment are classified as discontinued operations. Therefore, with the reported divestiture, the Company now operates as a single business segment the results of which are included in the Company's income statement from continuing operations.
The Share Distribution
On October 31, 2012, CTI completed the spin-off of the Company as an independent, publicly-traded company, accomplished by means of a pro rata distribution of 100% of the Company's outstanding common shares to CTI's shareholders (the “Share Distribution”). Following the Share Distribution, CTI no longer holds any of the Company's outstanding capital stock, and the Company is an independent publicly-traded company.
In order to govern certain ongoing relationships between CTI and the Company after the Share Distribution and to provide mechanisms for an orderly transition, CTI and the Company entered into agreements pursuant to which certain services and rights are provided for following the Share Distribution, and CTI and the Company agreed to indemnify each other against certain liabilities that may rise from their respective businesses and the services that are provided under such agreements. Following the completion of CTI's merger with Verint Systems Inc. (“Verint”) discussed below, these obligations continue to apply between the Company and Verint (see Note 3, Share Distribution Agreements).
Upon completion of the Share Distribution, the Company's shares were listed, and began trading, on NASDAQ under the symbol “CNSI.” On September 9, 2015, the Company changed its trading symbol to “MSEG”. On November 1, 2012 in connection with the Share Distribution, CTI's equity-based compensation awards held by the Company's employees were replaced with the Company's equity-based compensation awards.
Merger of CTI and Verint
On August 12, 2012, CTI entered into an agreement and plan of merger (the “Verint Merger Agreement”) with Verint, its then majority-owned publicly-traded subsidiary, providing for the merger of CTI with and into a subsidiary of Verint to become a wholly-owned subsidiary of Verint (the “Verint Merger”). The Verint Merger was completed on February 4, 2013. The Company agreed to indemnify CTI and its affiliates (including Verint after the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution (see Note 3, Share Distribution Agreements). On February 4, 2013, in connection with the closing of the Verint Merger Agreement, CTI placed $25.0 million in escrow to support indemnification claims to the extent made against the Company by Verint and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger (the "Escrow Release Date"), less any claims made on or prior to such date, to

6

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



be released to the Company. On August 6, 2014, the escrow was released in accordance with its terms and the Company received the escrow amount of approximately $25.0 million. As of the closing of the Verint Merger, the Company recognized the estimated fair value of the potential indemnification liability of $4.0 million with the remaining $21.0 million as an additional contribution from CTI. As of July 31, 2015, the indemnification liability is $3.7 million.
Acquisition of Acision
On August 6, 2015 (the “Closing Date”), the Company completed its previously announced acquisition (the “Acquisition”) of Acision Global Limited, a private company formed under the laws of England and Wales (“Acision”) pursuant to the terms of the share sale and purchase agreement, dated June 15, 2015 (the “Purchase Agreement”), between the Company and Bergkamp Coöperatief U.A., a cooperative with excluded liability formed under the laws of the Netherlands (the “Seller”). Acision is a provider of messaging software solutions to CSPs and enterprises, including SMSC, MMS, IM and IP messaging. The Company acquired Acision to complement its solution portfolio, enhance its market leadership, penetrate growth markets and improve its operational efficiency.
Pursuant to the terms of the Purchase Agreement, on the Closing Date the Company acquired 100% of the equity interests of Acision in exchange for $136 million in cash, certain earnout payments (as discussed below), and 3.14 million shares of the Company’s common stock, par value $0.01 per share (the “Consideration Shares”), which were issued in a private placement transaction conducted pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”). As previously disclosed, pursuant to the terms of the Purchase Agreement, an amount up to $35 million of cash consideration is subject to an earnout, contingent on the achievement of certain revenue objectives by certain of Acision’s business lines through the first quarter of 2016. To secure claims the Company may have under the Purchase Agreement, $10 million of the initial cash consideration was retained in escrow, which amount will be increased in the event that further consideration is triggered under the earnout, up to a total maximum aggregate escrow retention of $25 million. Such monies will be released to the Seller two years after completion of the transaction, subject to any claims. In addition, Acision, in consultation with the Company, entered into the previously disclosed amendment and waiver (the “Amendment”) with the requisite lenders under the Acision’s credit agreement (the “Acision Credit Agreement”) governing Acision’s existing approximately $156 million senior credit facility (the “Acision Senior Debt”), pursuant to which the Acision Senior Debt remains in place following completion of the Acquisition. Pursuant to the terms of the Acision Credit Agreement the Acision Senior Debt bears interest at a rate per annum, at the option of the Company, of either (i) a customary adjusted Eurocurrency interest rate plus 9.75% or (ii) a customary base rate plus 8.75%, and matures, subject to the terms and conditions of the Acision Credit Agreement, on December 15, 2018. In connection with the Amendment, the Company agreed to pay certain costs imposed on Acision by its lenders under the Acision Senior Debt (see Note 19, Subsequent Events).
Each party has agreed to indemnify the other for certain potential liabilities and claims, subject to certain exceptions and limitations.
Acquisition of Solaiemes
On August 1, 2014, the Company acquired 100% of the outstanding equity of Spain-based Solaiemes, S.L. (“Solaiemes”) for approximately $2.7 million and the assumption of $1.4 million of debt. Solaiemes is an innovator focused on enabling the creation and monetization of CSPs’ digital services. Solutions from Solaiemes complement the Company's Evolved Communication Suite offering and the combined portfolio creates an end-to-end platform for service monetization of IP-based digital services.
At the time of the acquisition, Solaiemes had 15 employees. Results of the most recent periods for Solaiemes prior to the acquisition were not material to the Company. The results of operations of Solaiemes have been included in the consolidated financial statements beginning on the acquisition date. Revenue and earnings of Solaiemes since the acquisition date were not material.
The acquisition of Solaiemes has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the August 1, 2014 acquisition date. The fair values of intangible asset were based on valuations using a cost approach.
The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



Agreement with Tech Mahindra
On April 14, 2015, the Company entered into a Master Service Agreement (the “MSA”) with Tech Mahindra Limited (“Tech Mahindra”) pursuant to which Tech Mahindra performs certain services for the Company’s Digital Services business on a global basis. The services include research and development, project deployment and delivery and maintenance and support for customers of the Company’s Digital Service business. In connection with the transaction, approximately 500 employees of the Company and its subsidiaries have been rehired by Tech Mahindra or its affiliates. Tech Mahindra may hire additional employees contingent upon country regulatory and compliance requirements under applicable law.
Under the MSA, the Company is obligated to pay to Tech Mahindra in the aggregate approximately $211 million in base fees for services to be provided pursuant to the MSA for a term of six years, renewable at the Company’s option. The services under the MSA started on June 1, 2015. (see Note 18, Commitments and Contingencies).
The Company has the right to terminate the MSA for convenience subject to the payment of certain termination fees. The Company may terminate the MSA upon certain material breaches, certain material performance failures or violations of applicable law by Tech Mahindra without termination fees. Tech Mahindra may terminate the MSA upon certain material breaches by the Company, including the failure to pay undisputed amounts. Upon any termination or expiration, Tech Mahindra will provide reverse transition services to transition the services being provided by Tech Mahindra pursuant to the MSA back to the Company or its designee. The MSA contains certain indemnification provisions by both the Company and Tech Mahindra.
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 among others include:
Estimates relating to the recognition of revenue, including the determination of vendor specific objective evidence (“VSOE”) of fair value and the determination of best estimate of selling price for multiple element arrangements;
Fair value of stock-based compensation;
Fair value of reporting unit for the purpose of goodwill impairment testing;
Fair value of long-lived assets and asset groups;
Realization of deferred tax assets;
The identification and measurement of uncertain tax positions;
Contingencies and litigation;
Total estimates to complete on percentage-of-completion (“POC”) projects;
Valuation of inventory;
Israel employees severance pay;
Allowance for doubtful accounts;
Valuation of other intangible assets; and
Discontinued operations.
The Company’s actual results may differ from its estimates.
Recoverability of Long-Lived Assets
The Company periodically evaluates its long-lived assets for potential impairment. In accordance with the relevant accounting guidance, the Company reviews the carrying value of our long-lived assets or asset group that is held and used for impairment whenever circumstances occur that indicate that those carrying values are not recoverable. Under the held and used approach, assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The identification of asset groups involves judgment, assumptions, and estimates. The lowest level of cash flows which are largely independent of one another was determined to be at the BSS and Digital Services reporting units.
The Company makes judgments about the recoverability of long-lived assets, including fixed assets and purchased finite-lived intangible assets whenever events or changes in circumstances indicate that impairment may exist. Each period we

8

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



evaluate the estimated remaining useful lives of long-lived assets and whether events or changes in circumstances warrant a revision to the remaining periods of depreciation or amortization. If circumstances arise that indicate an impairment may exist, we use an estimate of the undiscounted value of expected future operating cash flows over the primary asset’s remaining useful life and salvage value to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows and salvage values are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying amount of the assets over the fair value of such assets, with the fair value generally determined using the discounted cash flow ("DCF") method. Application of the DCF method for long-lived assets requires judgment and assumptions related to the amount and timing of future expected cash flows, salvage value assumptions, and appropriate discount rates. Different judgments or assumptions could result in materially different fair value estimates. During the three months ended April 30, 2015, the Company assessed its Digital Services asset group for impairment and determined no impairment existed. There were no indicators that required interim testing for the three months ended July 31, 2015.
Goodwill
Goodwill represents the excess of the fair value of consideration transferred in a business combination over the fair value of tangible and intangible assets acquired net of the fair value of liabilities assumed and the fair value of any noncontrolling interest in the acquiree. The Company has no indefinite-lived intangible assets other than goodwill. The carrying amount of goodwill is reviewed annually for impairment on November 1 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
The Company applies the FASB's guidance when testing goodwill for impairment which permits the Company to make a qualitative assessment of whether goodwill is impaired, or opt to bypass the qualitative assessment, and proceed directly to performing the first step of the two-step impairment test. If the Company performs a qualitative assessment and concludes it is more-likely-than-not that the fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the two-step impairment test is unnecessary. However, if the Company concludes otherwise, it is then required to perform the first step of the two-step impairment test.
The Company has the option to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period.
For reporting units where the Company decides to perform a qualitative assessment, the Company's management assesses and makes judgments regarding a variety of factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-specific conditions, customer behavior, cost factors, financial performance and trends, strategies and business plans, capital requirements, management and personnel issues, and stock price, among others. Management then considers the totality of these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit's fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more-likely-than-not that the fair value of a reporting unit exceeds its carrying amount.
For reporting units where the Company performs the two-step goodwill impairment test, the first step requires the Company to compare the fair value of each reporting unit to the carrying value of its net assets. The Company considers both an income-based approach using projected discounted cash flows and a market-based approach using multiples of comparable companies to determine the fair value of its reporting units. The Company's estimate of fair value of each reporting unit is based on a number of subjective factors, including: (i) the appropriate weighting of valuation approaches (income-based approach and market-based approach), (ii) estimates of the future revenue and cash flows, (iii) discount rate for estimated cash flows, (iv) selection of peer group companies for the market-based approach, (v) required levels of working capital, (vi) assumed terminal value, (vii) the time horizon of cash flow forecasts; and (viii) control premium.
If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and no further evaluation is necessary. If the carrying value of the reporting unit is greater than the estimated fair value of the reporting unit, there is an indication that impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair value assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment charge.
The Company's forecasts and estimates are based on assumptions that are consistent with the plans and estimates used to manage the business. Changes in these estimates could change the conclusion regarding an impairment of goodwill.
As a result of the Amdocs Purchase Agreement for the sale the BSS Business, the Company performed an interim goodwill test in conjunction with the preparation of its financial statements for the three months ended April 30, 2015 which did

9

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



not result in an impairment (see Note 5, Goodwill). There were no indicators that required interim testing for the three months ended July 31, 2015.
Revenue Recognition
Management is required to make judgments to estimate the total estimated costs and progress to completion. Changes to such estimates can impact the timing of the revenue recognition period to period. The Company uses historical experience, project plans, and an assessment of the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties in these arrangements include implementation delays or performance issues that may or may not be within the Company's control. If some level of profitability is assured, but the related revenue and costs cannot be reasonably estimated, then revenue is recognized to the extent of costs incurred until such time that the project's profitability can be estimated or the services have been completed. If the Company determines that based on its estimates its costs exceed the sales price, the entire amount of the estimated loss is accrued in the period that such losses become known.
The change in profit estimate for those projects accounted for under the percentage of completion method where a loss provision was recorded, negatively impacted income from operations by $0.1 million and $8.0 million during the six months ended July 31, 2015 and 2014, respectively.
2.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The Company is currently classified as an emerging growth company as defined under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. The Company has elected to follow the required adoption dates for private companies. Therefore, the adoption dates below reflect the Company's current classification.
Standards To Be Implemented
In April 2014, the FASB issued an Accounting Standards update for Presentation of Financial Statements, Property, Plant, and Equipment and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under the new guidance, raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance will be effective for the Company for the annual reporting period fiscal year ended January 31, 2016 and interim periods thereafter. The Company is currently following the previous guidance and is evaluating the impact of the adoption of this accounting standard update on its financial statements.
In May 2014, the FASB issued new accounting guidance on revenue recognition. This topic requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued an amendment to defer the effective date of this guidance by one year and allow entities to early adopt no earlier than the original effective date. The guidance will be effective for the Company beginning February 1, 2018. The Company is currently evaluating the impact of the adoption of this accounting standard update on its financial statements.
In August 2014, the FASB issued new guidance on going concern. Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The provisions of this guidance are effective for annual periods beginning after December 15, 2016, and for interim periods therein. This guidance is not expected to have an impact on the Company’s financial statements or disclosures.

10

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



3.
SHARE DISTRIBUTION AGREEMENTS
Share Distribution Agreements
The Company entered into a distribution agreement (the “Distribution Agreement”), transition services agreement, tax disaffiliation agreement and employee matters agreement (collectively, the “Share Distribution Agreements”) with CTI in connection with the Share Distribution. In particular, the Distribution Agreement, among other things, provides for the allocation between the Company and CTI of various assets, liabilities and obligations attributable to periods prior to the Share Distribution. Under the Distribution Agreement, the Company agreed to indemnify CTI and its affiliates (including Verint following the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution. Certain of the Company's indemnification obligations are capped at $25.0 million and certain are uncapped. Specifically, the capped indemnification obligations include indemnifying CTI and its affiliates (including Verint after the Verint Merger) against losses stemming from breaches by CTI of representations, warranties and covenants in the Verint Merger Agreement and for any liabilities of CTI that were known by CTI but not included on the net worth statement delivered by CTI at the closing of the Verint Merger. The Company's uncapped indemnification obligations include indemnifying CTI and its affiliates (including Verint after the Verint Merger) against liabilities relating to the Company's business; claims by any shareholder or creditor of CTI related to the Share Distribution, the Verint Merger or related transactions or disclosure documents; certain claims made by employees or former employees of CTI and any claims made by employees and former employees of the Company (including but not limited to the Israeli optionholder suits discussed in Note 18, Commitments and Contingencies); any failure by the Company to perform under any of the agreements entered into in connection with the Share Distribution; claims related to CTI's ownership or operation of the Company; claims related to the Starhome Disposition (as defined in Note 18, Commitments and Contingencies); certain retained liabilities of CTI that are not reflected on or reserved against on the net worth statement delivered by CTI at the closing of the Verint Merger; and claims arising out of the exercise of appraisal rights by a CTI shareholder in connection with the Share Distribution. On February 4, 2013, in connection with the closing of the Verint Merger Agreement, CTI placed $25.0 million in escrow to support indemnification claims to the extent made against the Company by Verint and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger, less any claims made on or prior to such date, to be released to the Company. The escrow funds could not be used for claims related to the Israeli optionholder suits. On August 6, 2014, the escrow was released in accordance with its terms and the Company received the escrow amount of approximately $25.0 million. The Company also assumed all pre-Share Distribution tax obligations of each of the Company and CTI.

The Company and CTI entered into a tax disaffiliation agreement that governs their respective rights, responsibilities and obligations after the Share Distribution with respect to tax liabilities and benefits, tax attributes, tax contests and other tax matters regarding income taxes, other taxes and related tax returns. The Company and CTI also entered into an employee matters agreement, which allocates liabilities and responsibilities relating to employee compensation and benefit plans and programs.
4.
INVENTORIES
Inventories consist of the following:
 
July 31,
 
January 31,
 
2015
 
2015
 
(In thousands)
Raw materials
$
8,217

 
$
10,455

Work in process
6,079

 
7,362

Finished goods

 

 
$
14,296

 
$
17,817


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XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



5.
GOODWILL
The changes in the carrying amount of goodwill for the six months ended July 31, 2015 are as follows:
 
(In thousands)
Goodwill, gross, at January 31, 2015
$
313,277

Accumulated impairment losses at January 31, 2015
(162,060
)
Goodwill, net, at January 31, 2015
151,217

BSS Business sale (1)
(83,699
)
Effect of changes in foreign currencies and other
104

Goodwill, net, at July 31, 2015
$
67,622

Balance at July 31, 2015
 
Goodwill, gross, at July 31, 2015
$
224,077

Accumulated impairment losses at July 31, 2015
(156,455
)
Goodwill, net, at July 31, 2015
$
67,622

(1) Reflects reduction in goodwill from the sale of the BSS Business completed on July 2, 2015 (see Note 14, Discontinued Operations).
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. Under the Company's segment structure prior to the Asset Sale, the BSS and Digital Services segments have been evaluated and it has been determined that for each segment the fair value significantly exceeds the book value.
As a result of the Amdocs Purchase Agreement for the sale the BSS Business, the Company performed an interim goodwill test in conjunction with the preparation of its financial statements for the three months ended April 30, 2015.
The determination of whether or not goodwill is impaired involves a significant level of judgment in the assumptions underlying the approaches used to determine the estimated fair value of the Company’s reporting units as well as the allocation of the carrying value of the assets and liabilities to each of the reporting units which has historically been based on headcount. Management believes the analysis included sufficient tolerance for sensitivity in key assumptions. The determination of the fair value of the Company’s reporting units include a market-based approach using multiples of comparable companies to determine the fair value of its reporting units and an income-based approach using projected discounted cash flows based on the Company’s internal forecasts and projections. Management believes the assumptions and rates used in the Company’s impairment assessment are reasonable, but they are judgmental, and variations in any assumptions could result in materially different calculations of fair value and potentially result in impairment of assets.
Digital Services Reporting Unit
Step one of the quantitative goodwill impairment interim test resulted in the determination that the estimated fair value of Digital Services exceeded its carrying amount, including goodwill; however a step two analysis was performed on the reporting unit due to the negative carrying value of continuing assets and liabilities following the classification of BSS as an asset held for sale. The fair value of the goodwill as calculated under step two of the impairment test exceeded the carrying value as recorded.
There were no indicators that required interim testing for the three months ended July 31, 2015.

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XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



6.
INTANGIBLE ASSETS, NET
Intangible assets, net are as follows:
 
July 31,
 
January 31,
 
2015
 
2015
 
(In thousands)
Gross carrying amount
 
 
 
Acquired technology
$
1,784

 
$
99,833

Customer relationships

 
35,499

Trade names

 
3,400

Total intangible assets
1,784

 
138,732

Accumulated amortization
 
 
 
Acquired technology
344

 
98,175

Customer relationships

 
33,108

Trade names

 
3,400

 
344

 
134,683

Total (1)
$
1,440

 
$
4,049

(1) Reflects reduction in intangible assets from the sale of the BSS Business completed on July 2, 2015 (see Note 14, Discontinued Operations).
Amortization of intangible assets was $0.6 million and $1.3 million for the three and six months ended July 31, 2015. There were no impairments of intangible assets for the three and six months ended July 31, 2015 or 2014.
Estimated future amortization expense on finite-lived acquisition-related assets for each of the succeeding fiscal years is as follows:
Fiscal Years Ending January 31,
 
(In thousands)
2016 (remainder of fiscal year)
 
$
175

2017
 
349

2018
 
316

2019
 
316

2020 and thereafter
 
284

 
 
$
1,440

7.
OTHER ASSETS
Other assets consisted of the following:
 
 
July 31,
 
January 31,
 
 
2015
 
2015
 
 
(In thousands)
Severance pay fund (1)
 
$
12,572

 
$
25,759

Deposits
 
2,244

 
2,776

Other (2)
 
1,590

 
1,904

 
 
$
16,406

 
$
30,439

(1)
Represents deposits into insurance policies to fund severance liability of the Company's Israeli employees (see Note 12, Other Long-Term Liabilities). As a result of entering into a MSA with Tech Mahindra, the Company re-classified $11.2 million in severance pay long-term assets to Other current assets during the six months ended July 31, 2015.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



(2)
Includes a $1.2 million cost-method investment in a subsidiary of a significant customer at each of July 31, 2015 and January 31, 2015.
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 improve its cash position, reduce fixed costs, eliminate redundancies, strengthen operational focus and better position itself to respond to market pressures or unfavorable economic conditions. Restructuring expenses are recorded within Other operating expenses in the consolidated statements of operations.
2015 Initiatives
During the six months ended July 31, 2015, the Company approved the commencement of a restructuring plan primarily in connection with the MSA with Tech Mahindra and the BSS Business sale which is expected to include primarily a reduction of workforce included in cost of revenue, research and development and selling, general and administrative expenses. The aggregate cost of the plan is currently estimated at $24.5 million in severance and facilities-related costs, which is expected to be accrued and paid by July 2016. During the six months ended July 31, 2015, the Company recorded severance-related costs of $24.3 million and paid $5.9 million.
2014 Initiatives
During the fiscal year ended January 31, 2015, the Company commenced certain initiatives with a plan to further restructure its operations towards aligning operating costs and expenses with anticipated revenue. On September 9, 2014, the Company commenced an expansion of its previously disclosed 2014 restructuring plan. The restructuring plan has been facilitated by efficiencies gained through initiatives implemented in recent fiscal periods and the expectation that software will account for a higher portion of the Company's revenue in future periods. The restructuring is designed to align operating costs and expenses with currently anticipated revenue. The restructuring plan (as expanded) includes a reduction of workforce included in cost of revenue, research and development and selling, general and administrative expenses. In relation to this restructuring plan, the Company recorded severance-related and facilities-related costs of $13.0 million and $2.4 million, respectively, for the fiscal year ended January 31, 2015. During the six months ended July 31, 2015, the Company paid severance and facilities-related costs of $1.9 million and $0.6 million, respectively. The remaining severance-related and facilities-related costs accrued under the plan are expected to be paid by October, 2015 and December, 2024, respectively.
During the fiscal year ended January 31, 2015, the Company recognized a write-off of $1.5 million in property and equipment in connection with the 2014 restructuring initiatives.
Fourth Quarter 2012 Initiatives
During the fourth quarter of the fiscal year ended January 31, 2013, following the Share Distribution, the Company commenced certain initiatives to restructure its operations and reorganize its activities and go-to-market strategy, including a plan to restructure the operations of the Company with a view towards aligning operating costs and expenses with anticipated revenue and the new go-to-market strategy. During the six months ended July 31, 2015, the Company paid facilities-related costs of $0.5 million. The remaining facilities-related costs accrued under this plan are expected to be paid by October, 2019.
Third Quarter 2010 Restructuring Initiatives and 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 its operations with a view towards aligning operating costs and expenses with anticipated revenue, reducing its annualized operating costs. During the fiscal year ended January 31, 2012, the Company implemented a second phase of measures (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, the Company restructured its operations into 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 the Company’s leadership in BSS and leverage the growth in mobile data usage, while maintaining its leading market position in Digital Services and implementing further cost savings through operational efficiencies and strategic focus. The remaining facilities-related costs accrued under this plan are expected to be paid by April, 2016.

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XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



Netcentrex 2010 and 2011 Initiatives
During the fiscal years ended January 31, 2011 and 2012, management, as part of initiatives to improve focus on the Company’s core business and to maintain its ability to face intense competitive pressures in its markets, approved the first phase of a restructuring plan to eliminate staff positions primarily located in France.
The following tables represent a roll forward of the workforce reduction and restructuring activities noted above for the six months ended July 31, 2015 and 2014:
 
2015 Initiative
 
2014 Initiative
 
Fourth Quarter 2012 Initiative
 
Third Quarter 2010 Initiative
 
 
 
Severance
Related
 
Facilities
Related
 
Severance
Related
 
Facilities
Related
 
Facilities
Related
 
Facilities
Related
 
Total
 
(In thousands)
January 31, 2015
$

 
$

 
$
2,843

 
$
1,837

 
$
2,872

 
$
214

 
$
7,766

Expenses (1)
24,269

 
273

 
50

 
51

 
39

 
10

 
24,692

Change in assumptions
(934
)
 
(4
)
 
(504
)
 
254

 
1

 
(2
)
 
(1,189
)
Translation and other adjustments
(1
)
 

 

 

 

 

 
(1
)
Paid or utilized
(5,860
)
 
(203
)
 
(1,893
)
 
(618
)
 
(537
)
 
(97
)
 
(9,208
)
July 31, 2015 (2)
$
17,474

 
$
66

 
$
496

 
$
1,524

 
$
2,375

 
$
125

 
$
22,060

(1) Includes restructuring expense associated with BSS employees of $15.9 million for the six months ended July 31, 2015.
(2) Includes restructuring liability relating the BSS Business sale of $13.7 million as of July 31, 2015.

 
2014 Initiative
 
Fourth Quarter 2012 Initiative
 
Third Quarter 2010 Initiative
 
Netcentrex 2010 and 2011 Initiative
 
 
 
Severance
Related
 
Severance
Related
 
Facilities
Related
 
Facilities
Related
 
Severance
Related
 
Facilities
Related
 
Total
 
(In thousands)
January 31, 2014
$

 
$
1,062

 
$
5,728

 
$
390

 
$
50

 
$
15

 
$
7,245

Expenses (1)
5,015

 
84

 
48

 
10

 

 

 
5,157

Change in assumptions
(107
)
 
(102
)
 
(250
)
 

 
(47
)
 

 
(506
)
Translation and other adjustments

 

 

 

 
(1
)
 
(1
)
 
(2
)
Paid or utilized
(3,456
)
 
(1,030
)
 
(873
)
 
(97
)
 
(2
)
 

 
(5,458
)
July 31, 2014
$
1,452

 
$
14

 
$
4,653

 
$
303

 
$

 
$
14

 
$
6,436

(1) Includes restructuring expense associated with BSS employees of $1.6 million for the six months ended July 31, 2014.
9.
DEBT
Spain Government Sponsored Loans
On August 1, 2014, the Company assumed in connection with the acquisition of Solaiemes approximately $1.4 million of debt. The debt consists of Spain government sponsored loans extended for research and development projects. The loans are subject to certain acceleration clauses which are not considered probable of being triggered. As of July 31, 2015 and January 31, 2015, the balance of outstanding debt classified in accounts payable and accrued expense and long-term liabilities are as follows:


15

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



(In thousands)
 
July 31, 2015
 
January 31, 2015
3.98% note due 2017
 
$
210

 
$
216

0.53% note due 2018
 
304

 
312

2.48% notes due 2018
 
99

 
118

3.95% note due 2020
 
82

 
84

0% note due 2022
 
365

 
400

 
 
1,060

 
1,130

Less: current portion
 
89

 
132

Long-term debt
 
$
971

 
$
998

Aggregate debt maturities for each of the succeeding fiscal years are as follows:
Fiscal Years Ending January 31,
 
(In thousands)
2016 (remainder of fiscal year)
 
$
89

2017
 
251

2018
 
255

2019
 
241

2020 and thereafter
 
224

 
 
$
1,060

Acision Indebtedness
In connection with the completion of the Acquisition of Acision, on August 6, 2015, Acision, in consultation with the Company, entered into the previously disclosed amendment and waiver with the requisite lenders under Acision’s credit agreement governing Acision’s existing approximately $156 million senior credit facility with $10 million and $146 million classified as short-term and long-term debt, respectively. (see Note 19 Subsequent Events).
Comverse Ltd. Lines of Credit
As of July 31, 2015 and January 31, 2015, Comverse Ltd., the Company’s wholly-owned Israeli subsidiary, had a $17.0 million and $25.0 million, respectively, 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. During the three months ended July 31, 2015, Comverse Ltd. decreased the line of credit from $25.0 million to $17.0 million with a corresponding decrease in the cash balances Comverse Ltd. is required to maintain with the bank to $17.0 million. 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. As of July 31, 2015 and January 31, 2015, Comverse Ltd. had utilized $12.6 million and $19.5 million, respectively, of capacity under the line of credit for guarantees and foreign currency transactions.
As of July 31, 2015 and January 31, 2015, Comverse Ltd. had an additional line of credit with a bank for $10.0 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 London Interbank Offered Rate 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. As of July 31, 2015 and January 31, 2015, Comverse Ltd. had no outstanding borrowings under the line of credit. As of July 31, 2015 and January 31, 2015, Comverse Ltd. had utilized $4.8 million and $6.8 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 covenants. These cash balances required to be maintained with the banks were classified as “Restricted cash

16

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



and bank deposits” and “Long-term restricted cash” included within the condensed consolidated balance sheets as of July 31, 2015 and January 31, 2015.
10.
DERIVATIVES AND FINANCIAL INSTRUMENTS
The Company entered into derivative arrangements to manage a variety of risk exposures during the six months ended July 31, 2015 and 2014, including foreign currency risk related to forecasted foreign currency denominated payroll costs. The Company assesses the counterparty credit risk for each party prior to entering into its derivative financial instruments and in valuing the derivative instruments for the periods presented.
Forward Contracts
During the six months ended July 31, 2015 and 2014, the Company entered into a series of short-term foreign currency forward contracts to limit the variability in exchange rates between the U.S. dollar and the new Israeli shekel 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 (loss) in the condensed consolidated statements of comprehensive income (loss). Such amounts are re-classified to the statements of operations when the effects of the item being hedged are recognized. The Company’s derivatives outstanding as of July 31, 2015 are short-term in nature and are due to contractually settle within the next twelve months.
The following tables summarize the Company’s derivative positions and their respective fair values:
 
 
July 31, 2015
Type of Derivative
 
Notional
Amount
 
Balance Sheet Classification
 
Fair Value
 
 
(In thousands)
Assets
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
$
14,595

 
Prepaid expenses and other current assets
 
$
488

Total assets
 
 
 
 
 
$
488

 
 
 
January 31, 2015
Type of Derivative
 
Notional
Amount
 
Balance Sheet Classification
 
Fair Value
 
 
(In thousands)
Liabilities
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
$
31,123

 
Other current liabilities
 
$
117

Total liabilities
 
 
 
 
 
$
117


17

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



The following tables summarize the Company’s classification of gains and losses on derivative instruments:
 
 
Three Months Ended July 31, 2015
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Re-classified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations
 
Recognized in 
foreign currency transaction gain (loss), net

 
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
437

 
$
261

 
$

Total
 
$
437

 
$
261

 
$


 
 
Three Months Ended July 31, 2014
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Re-classified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations
 
Recognized in 
foreign currency transaction gain (loss), net

 
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
209

 
$
99

 
$

Total
 
$
209

 
$
99

 
$

 
 
Six Months Ended July 31, 2015
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Re-classified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations
 
Recognized in 
foreign currency transaction gain (loss), net

 
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
759

 
$
154

 
$

Total
 
$
759

 
$
154

 
$

 
 
Six Months Ended July 31, 2014
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Re-classified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations
 
Recognized in 
foreign currency transaction gain (loss), net

 
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
460

 
$
227

 
$

Total
 
$
460

 
$
227

 
$

There were no gains or losses from ineffectiveness of these hedges recorded for the three and six months ended July 31, 2015 and 2014.

18

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



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”).
In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. 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 by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company's judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into 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. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
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. All transfers into and/or out of all levels are assumed to occur at the end of the reporting period. The Company did not have any transfers between levels of the fair value measurement hierarchy during the three and six months ended July 31, 2015 and 2014.
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. The Company values these assets using quoted market prices for such funds.
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 market rates for similar contracts using readily observable market prices thereof.

19

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



The following tables present financial instruments according to the fair value hierarchy as defined by the FASB’s guidance:

 Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of:
  
July 31, 2015
 
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:
 
 
 
 
 
 
 
Money market funds (1)
$
10,402

 
$

 
$

 
$
10,402

Derivative assets

 
488

 

 
488

 
$
10,402

 
$
488

 
$

 
$
10,890

 
 
January 31, 2015
 
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:
 
 
 
 
 
 
 
Money market funds (1)
$
20,401

 
$

 
$

 
$
20,401

 
$
20,401

 
$

 
$

 
$
20,401

Financial Liabilities:
 
 
 
 
 
 
 
Embedded derivatives
$

 
$
117

 
$

 
$
117

 
$

 
$
117

 
$

 
$
117

 
(1)
Money market funds are classified in “Cash and cash equivalents” within the condensed consolidated balance sheets.
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, classified within Level 3 of the fair value hierarchy, including goodwill, intangible assets and property and equipment, at fair value when there is an indication of impairment. These assets are recorded at fair value only when an impairment expense is recognized. The Company has elected not to apply the fair value option for non-financial assets and non-financial liabilities.
The carrying amounts of cash and cash equivalents, restricted cash and bank deposits, accounts receivable and accounts payable are reasonable estimates of their fair value.

20

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



12.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:
 
July 31,
 
January 31,
 
2015
 
2015
 
(In thousands)
Liability for severance pay (1)
$
18,521

 
$
36,166

Tax contingencies
102,316

 
85,782

Long-term debt
971

 
998

Other long-term liabilities
10,542

 
12,510

Total
$
132,350

 
$
135,456

(1) As a result of entering into a MSA with Tech Mahindra, the Company re-classified $14.6 million in severance pay long-term liabilities to Accounts payable and accrued expense during the six months ended July 31, 2015.
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. The liability for severance pay is recognized as compensation benefits in the condensed consolidated statements of operations. Employees are entitled to one month’s salary for each year of employment or a portion thereof.  The Company records the obligation as if it was payable at each balance sheet date.  A portion of such severance liability is funded by monthly deposits into insurance policies, which are restricted to only be used to satisfy such severance payments. Any change in the fair value of the asset is recognized as an adjustment to compensation expense in the condensed consolidated statements of operations. The asset and liability are recognized gross and not offset on the condensed consolidated balance sheet. Upon involuntary termination, employees will receive the balance from deposited funds from the insurance policies with the remaining balance paid by the Company. For voluntarily termination the employees are entitled, based on Company's policy, to the balance in the deposited funds. Any remaining net liability balance is reversed as compensation benefits in the condensed consolidated statements of operations.
For employees in Israel hired after January 2011, the Company makes regular deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employee's rights upon termination. The Company is relieved from any severance pay liability with respect to deposits made on behalf of each employee. As such, the severance plan is only defined by the monthly contributions made by the Company, the liability accrued in respect of these employees and the amounts funded are not reflected in the Company's condensed balance sheets. The portion of liability not funded is included in Other liabilities in the condensed consolidated balance sheets.
A portion of such severance 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” within the condensed consolidated balance sheets as severance pay fund in the amounts of $12.6 million and $25.8 million as of July 31, 2015 and January 31, 2015, respectively.
Severance pay expenses pursuant to Israel’s Severance Pay Law were as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Increase due to passage of time
$
458

 
$
1,038

 
$
1,212

 
$
2,072

Increase due to salary increase
289

 
447

 
415

 
674

Reversal due to voluntary termination of employee
(258
)
 
(364
)
 
(363
)
 
(511
)
Loss (gain) from change in fund value
(168
)
 
(177
)
 
(191
)
 
(152
)
 Total operating expense due to Israeli Severance Law
$
321

 
$
944

 
$
1,073

 
$
2,083



21

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



13.STOCK-BASED COMPENSATION
2012 Stock Incentive Compensation Plan
In October 2012, in connection with the Share Distribution the Company adopted the Xura, Inc. 2012 Stock Incentive Compensation Plan, which was amended and restated June 2015 (as amended, the "2012 Incentive Plan"). The 2012 Incentive Plan provides for the issuance of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance-based compensation awards and other stock-based awards (referred to collectively as the "Awards") based on shares of the Company's common stock (referred to as "Shares"). The Company's employees, non-employee directors and consultants as well as employees and consultants of its subsidiaries and affiliates are eligible to receive Awards. In June 2015, the Company registered additional shares under the 2012 Incentive Plan in connection with its amendment and restatement.
A total of 5.0 million Shares are reserved for issuance under future Awards to be granted under the 2012 Incentive Plan (referred to as the "Future Awards").
As of July 31, 2015, stock options to purchase 1,390,517 Shares and additional Awards covering 373,990 Shares were outstanding. As of July 31, 2015, an aggregate of 3,227,565 Future Awards are available for future grant under the 2012 Incentive Plan.
Employee Stock Purchase Plan
In June 2015, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The ESPP authorizes an aggregate of 840,000 Shares to be purchased by eligible employees. The ESPP allows eligible employees to purchase Shares at certain regular purchase dates through payroll deductions of up to a maximum of 15% of the employee’s compensation. The purchase price for each offering period is 85% of the lesser of (a) the fair market value of the Shares on the offering date or (b) the fair market value of the Shares on the purchase date. There were no offerings under the ESPP plan during the three months ended July 31, 2015.
Share-Based Awards
Stock-based compensation expense associated with awards for the three and six months ended July 31, 2015 and 2014 included in the condensed consolidated statements of operations is as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Stock options:
 
 
 
 
 
 
 
Service costs
$
31

 
$
76

 
$
52

 
$
117

Research and development
56

 
55

 
105

 
94

Selling, general and administrative
781

 
564

 
1,398

 
947

 
868

 
695

 
1,555

 
1,158

Restricted/Deferred stock awards:
 
 
 
 
 
 
 
Service costs
330

 
701

 
1,092

 
1,630

Research and development
102

 
235

 
318

 
553

Selling, general and administrative
1,778

 
1,354

 
3,168

 
2,582

 
2,210

 
2,290

 
4,578

 
4,765

Total (1)
$
3,078

 
$
2,985

 
$
6,133

 
$
5,923

(1) Includes stock-based compensation expense associated with awards granted to BSS employees of $0.6 million and $1.3 million, respectively, for the three and six months ended July 31, 2015 and $0.6 million and $1.4 million, respectively, for the three and six months ended July 31, 2014.
Restricted Awards and Stock Options
The Company grants restricted stock unit awards subject to vesting provisions (“RSUs”) and stock options to certain key employees and director stock unit awards (“DSUs”) to non-employee directors (such RSUs and DSUs collectively referred to as “Restricted Awards”). For the six months ended July 31, 2015, the Company granted Restricted Awards covering an aggregate

22

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



of 215,771 Shares and stock options to purchase an aggregate of 399,186 Shares. For the six months ended July 31, 2014, the Company granted Restricted Awards covering an aggregate of 300,494 Shares and stock options to purchase an aggregate of 374,827 Shares.
During the six months ended July 31, 2014, 1,365 shares were issued upon exercise of stock options under the 2012 Incentive Plan. Total proceeds from these Shares were negligible. For the six months ended July 31, 2015, there were no shares issued upon exercise of stock options under the 2012 Incentive Plan.
The fair market value of the Company's Restricted Awards that vested during the three and six months ended July 31, 2015, was $4.7 million and $6.8 million, respectively. The fair market value of the Company's Restricted Awards that vested during the three and six months ended July 31, 2014, was $3.0 million and $9.1 million, respectively.
As of July 31, 2015, the unrecognized Company compensation expense, net of estimated forfeitures, related to unvested Restricted Awards was $6.7 million, which is expected to be recognized over a weighted-average period of 2.07 years.
The Company's outstanding stock options as of July 31, 2015 include unvested stock options to purchase 694,574 Shares with a weighted-average grant date fair value of $7.02, an expected term of 4.0 years and a total fair value of $4.9 million. The unrecognized compensation expenses related to the remaining unvested stock options to purchase Shares was $4.2 million, which is expected to be recognized over a weighted-average period of 2.23 years.
14.
DISCONTINUED OPERATIONS
Amdocs Asset Purchase Agreement
On April 29, 2015, the Company entered into an Asset Purchase Agreement (the “Amdocs Purchase Agreement") with Amdocs Limited, a Guernsey company (the “Purchaser”). Pursuant to the Amdocs Purchase Agreement, the Company agreed to sell substantially all of its assets required for operating the Company's converged, prepaid and postpaid billing and active customer management systems for wireless, wireline, cable and multi-play communication service providers (the “BSS Business”) to the Purchaser, and the Purchaser agreed to assume certain post-closing liabilities of ours (the “Asset Sale”). The initial closing of the Asset Sale occurred on July 2, 2015. The total cash purchase price payable by the Purchaser to the Company in connection with the initial closing of the Asset Sale was approximately $273 million, subject to various purchase price adjustments, of which an aggregate of $6.5 million was scheduled to be paid upon certain deferred closings. During the three months ended July 31, 2015, $2.0 million of deferred closings were completed with payment received in August, 2015.
In connection with the Asset Sale, the Company agreed to indemnify Amdocs for certain pre-closing liabilities and breaches of certain representations and warranties. Upon the closing, $26 million of the purchase price was deposited into escrow to fund potential indemnification claims and certain adjustments for a period of 12 months following the closing. This $26 million is classified as a current asset within restricted cash in the Company's condensed consolidated balance sheet. In late August 2015, the Company received certain notices of alleged claims against the escrow from Amdocs, which the Company believes to be without merit. The Company intends to defend the claims as appropriate.
In connection with the Amdocs Purchase Agreement, the Company and the Purchaser have also entered into a Transition Services Agreement (the “TSA”), which provides for support services between the Company and the Purchaser in connection with the transition of the BSS Business to the Purchaser, for various periods up to 12 months following the closing of the Asset Sale. During the three months ended July 31, 2015, approximately $1.7 million and $1.8 million have been recorded in other current assets for services provided under the TSA and expenses to be reimbursed by the Purchaser.
The BSS Business met the criteria to be classified as held for sale as well as discontinued operations. As such, the BSS Business has been re-classified and reflected as discontinued operations on the consolidated statements of operations for all periods presented. As of July 31, 2015, certain assets and liabilities are held for sale due to deferred closings and restructuring initiatives commenced in connection the BSS Business sale.
Upon completion of the sale, the Company paid a commission of approximately $4.0 million to its advisors.





23

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



The table below provides a breakout of the discontinued operations statements of operations.

 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue
$
22,504

 
$
40,333

 
$
71,092

 
$
94,382

Costs and expenses:
 
 
 
 
 
 
 
Product and service costs
10,980

 
17,905

 
39,489

 
47,484

Research and development, net
2,554

 
4,933

 
6,704

 
12,106

Selling, general and administrative
4,596

 
6,490

 
11,750

 
15,074

Other operating expenses:
 
 
 
 
 
 
 
Restructuring expenses
15,290

 
742

 
15,857

 
1,613

Total other operating expenses
15,290

 
742

 
15,857

 
1,613

Total costs and expenses
33,420

 
30,070

 
73,800

 
76,277

(Loss) income from operations
(10,916
)
 
10,263

 
(2,708
)
 
18,105

Income tax benefit (expense)
9,440

 
(4,748
)
 
14,551

 
(6,626
)
Discontinued operations, net of tax
(1,476
)
 
5,515

 
11,843

 
11,479

Gain on sale of discontinued operations, before tax
201,602

 

 
201,602

 

Income tax expense
(25,066
)
 

 
(25,066
)
 

Gain on sale of discontinued operations, net of tax
176,536

 

 
176,536

 

Net income from discontinued operations, net of tax
$
175,060

 
$
5,515

 
$
188,379

 
$
11,479



24

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



Components of assets and liabilities held for sale (in thousands):
 
July 31,
2015
 
April 30,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Accounts receivable, net of allowance
$
989

 
$
38,315

Deferred cost of revenue

 
4,042

Prepaid expenses and other current assets
316

 
8,345

Total current assets
1,305

 
50,702

Property and equipment, net
2,276

 
8,794

Goodwill

 
83,797

Intangible assets, net

 
1,700

Deferred cost of revenue

 
7,114

Other assets
290

 
2,722

Total assets
$
3,871

 
$
154,829

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$

 
$
28,725

Deferred revenue
980

 
73,334

Total current liabilities
980

 
102,059

Deferred revenue

 
27,738

Other long-term liabilities
368

 
3,549

Total liabilities
$
1,348

 
$
133,346

Stock-based compensation expense associated with awards for the three and six months ended July 31, 2015 and 2014 included in the discontinued operations statements of operations is as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Stock options:
 
 
 
 
 
 
 
Service costs
$
11

 
$
11

 
$
16

 
$
12

Research and development

 
9

 

 
13

Selling, general and administrative
42

 
45

 
85

 
70

 
53

 
65

 
101

 
95

Restricted/Deferred stock awards:
 
 
 
 
 
 
 
Service costs
176

 
296

 
552

 
715

Research and development
23

 
85

 
72

 
234

Selling, general and administrative
361

 
157

 
567

 
344

 
560

 
538

 
1,191

 
1,293

Total
$
613

 
$
603

 
$
1,292

 
$
1,388




25

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



In connection with completing the final terms of the Asset Sale certain customer arrangements were not transferred to Amdocs and therefore the unaudited consolidated statements of operations for the three and six months ended July 31, 2015 and 2014 include adjustments to reflect a change in estimates made to our discontinued operations presentation previously reported. For the three and six months ended July 31, 2015, the Company reflects an increase of $6.7 million in revenue and $3.7 million in costs of revenue from continuing operations previously included in discontinued operations for the three months ended April 30, 2015. For the three and six months ended July 31, 2014, the Company reflects an increase of $9.6 million in revenue and $5.3 million in costs of revenue from continuing operations previously included in discontinued operations for the three months ended April 30, 2014.
15.
EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of equity are as follows:
 
Six Months Ended July 31,
 
2015
 
2014
 
(In thousands)
Balance, January 31
$
13,382

 
$
32,810

Net income (loss)
136,236

 
(32,997
)
Unrealized gain for cash flow hedge positions, net of reclassification adjustments and net of zero tax
605

 
233

Foreign currency translation adjustment
6,680

 
(1,157
)
Stock-based compensation expense
6,133

 
5,923

Exercises of stock options

 
40

Repurchase of common stock in connection with tax liabilities upon settlement of stock awards
(791
)
 
(972
)
Repurchase of common stock under repurchase program
(2,351
)
 
(3,573
)
Balance, July 31
$
159,894

 
$
307

Accumulated Other Comprehensive Income
The components of Accumulated Other Comprehensive Income (“AOCI”), net of zero tax, were as follows (in thousands, unaudited):    
 
Foreign Currency Translation Adjustments
 
Unrealized Gains on Cash Flow Hedges
 
Total
Balance as of January 31, 2015
$
30,939

 
$
(117
)
 
$
30,822

Other comprehensive income before reclassifications
6,680

 
759

 
7,439

Amounts re-classified from AOCI

 
(154
)
 
(154
)
Other comprehensive income
6,680

 
605

 
7,285

Balance as of July 31, 2015
$
37,619

 
$
488

 
$
38,107

 
Foreign Currency Translation Adjustments
 
Unrealized Gains on Cash Flow Hedges
 
Total
Balance as of January 31, 2014
$
23,274

 
$
58

 
$
23,332

Other comprehensive (loss) income before reclassifications
(1,157
)
 
460

 
(697
)
Amounts re-classified from AOCI

 
(227
)
 
(227
)
Other comprehensive (loss) income
(1,157
)
 
233

 
(924
)
Balance as of July 31, 2014
$
22,117

 
$
291

 
$
22,408



26

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)




The amounts of unrealized losses (gains) on cash flow hedges re-classified out of accumulated other comprehensive income (loss) into the condensed consolidated condensed statements of operations, with presentation location, were as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Cost of revenue
$
(102
)
 
$
(49
)
 
$
(55
)
 
$
(111
)
Research and development, net
(37
)
 
(14
)
 
(17
)
 
(33
)
Selling, general and administrative
(122
)
 
(36
)
 
(82
)
 
(83
)
   Total
$
(261
)
 
$
(99
)
 
$
(154
)
 
$
(227
)
Net Operating Loss Rights Agreement
Effective April 29, 2015, the Company's Board of Directors adopted a rights plan (the “Rights Plan”) and declared a dividend of one preferred share purchase right for each outstanding share of common stock. The dividend is payable to the Company's stockholders of record as of May 11, 2015.
The Company's Board of Directors adopted the Rights Plan in an effort to protect stockholder value by attempting to diminish the risk that the Company's ability to use its net operating losses and unrealized losses (collectively, the “NOLs”) to reduce potential future federal income tax obligations may become substantially limited. The Company has experienced and may continue to experience substantial operating losses, including realized losses for tax purposes from sales inventory previously written down for financial statement purposes, which would produce NOLs. Under the Internal Revenue Code and regulations promulgated by the U.S. Treasury Department, the Company may “carry forward” these NOLs in certain circumstances to offset any current and future taxable income and thus reduce the Company's federal income tax liability, subject to certain requirements and restrictions. To the extent that the NOLs do not otherwise become limited, the Company projects to be able to carry forward a significant amount of NOLs, and therefore these NOLs could be a substantial asset to the Company. However, if the Company experiences an “Ownership Change,” as defined in Section 382 of the Internal Revenue Code, the ability to use the NOLs, including NOLs later arising from sales inventory previously written down, will be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, which could therefore significantly impair the value of that asset.
The Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9% or more of the Company's outstanding common stock (an “Acquiring Person”) without the approval of the Company's Board of Directors. Stockholders who own 4.9% or more of the Company's outstanding common stock as of the close of business on May 11, 2015 will not trigger the Rights Plan so long as they do not (i) acquire any additional shares of common stock or (ii) fall under 4.9% ownership of common stock and then re-acquire 4.9% or more of the common stock of the Company. The Rights Plan does not exempt any future acquisitions of common stock by such persons. Any rights held by an Acquiring Person are void and may not be exercised. The Board of Directors may, in its sole discretion, exempt any person or group from being deemed an Acquiring Person for purposes of the Rights Plan.
The Company's Board of Directors authorized the issuance of one right per each outstanding share of the Company's common stock payable to the Company's stockholders of record as of May 11, 2015. Subject to the terms, provisions and conditions of the Rights Plan, if the rights become exercisable, each right would initially represent the right to purchase from us one one-thousandth of a share of the Company's Series A Junior Participating Preferred Stock (the “Series A Preferred Stock”) for a purchase price of $100.00 (the “Purchase Price”). If issued, each fractional share of preferred stock would give the stockholder approximately the same dividend, voting and liquidation rights as does one share of the Company's common stock. However, prior to exercise, a right does not give its holder any rights as a stockholder of the Company, including without limitation any dividend, voting or liquidation rights.
The rights and the Rights Plan will expire on the earliest of (i) April 29, 2018, (ii) the time at which the rights are redeemed pursuant to the Rights Agreement, (iii) the time at which the rights are exchanged pursuant to the Rights Agreement, (iv) the repeal of Section 382 of the Code or any successor statute if the Board of Directors determines that the Rights Agreement is no longer necessary for the preservation of Tax Benefits, (v) the beginning of a taxable year of the Company to

27

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



which the Board of Directors determines that no Tax Benefits may be carried forward and (vi) April 29, 2016 if Stockholder Approval has not been obtained.
The Rights Plan was approved by the Company's stockholders at the 2015 Annual Meeting of Stockholders held on June 24, 2015.
16.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed using the weighted average number of shares of common stock outstanding. For purposes of computing diluted loss per share attributable to the Company's stockholders, shares issuable upon exercise of stock options and deliverable in settlement of unvested Restricted Awards are included in the weighted average number of shares of common stock outstanding, except when the effect would be antidilutive.

The calculation of earnings (loss) per share is as follows:
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Loss from continuing operations
$
(12,163
)
 
$
(22,381
)
 
$
(52,143
)
 
$
(44,476
)
Income from discontinued operations
175,060

 
5,515

 
188,379

 
11,479

Denominator:
 
 
 
 
 
 
 
Basic & diluted weighted average common shares outstanding
22,005,116

 
22,401,902

 
21,936,379

 
22,348,835

Earnings (loss) per share - basic & diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.55
)
 
$
(1.00
)
 
$
(2.38
)
 
$
(1.99
)
Discontinued operations
7.95

 
0.25

 
8.59

 
0.51

 
$
7.40

 
$
(0.75
)
 
$
6.21

 
$
(1.48
)
    
As a result of the Company’s net loss from continuing operations during the three and six months ended July 31, 2015, the diluted earnings (loss) per share computation excludes 0.1 million and 0.1 million of stock-based awards, respectively, and for the three and six months ended July 31, 2014, such computation excludes 0.1 million and 0.2 million of stock-based awards, respectively, from the calculations because their inclusion would have been anti-dilutive.
On August 6, 2015, the Company completed its previously announced acquisition of Acision. Pursuant to the Acision Purchase Agreement, the Company acquired all of the equity securities of and voting interests in Acision for a purchase price consisting of approximately $136 million in cash, certain earnout payments (as discussed below) and 3.14 million shares of the Company’s common stock, par value $0.01 per share which were issued in a private placement transaction conducted pursuant to Section 4(a)(2) or Regulation S under the Securities Act of 1933, as amended, subject to certain adjustments.
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 tax jurisdictions, withholding taxes, incremental valuation allowances and tax contingencies.
The Company recorded an income tax benefit from continuing operations of $2.5 million for the three months ended July 31, 2015, representing an effective tax rate of 17.2% compared with an income tax provision from operations of $1.9 million, representing an effective tax rate of (9.2)% for the three months ended July 31, 2014. During the three months ended July 31, 2015 and 2014, the effective tax rates were different from the U.S. statutory rate primarily due to the fact that the Company did not record an income tax benefit on losses incurred in the U.S. and certain of the Company's foreign tax jurisdictions in which the Company maintains valuation allowances against the Company's net deferred tax assets. The income tax provisions from operations are comprised of income tax expense recorded in non-loss tax jurisdictions, withholding taxes, incremental valuation allowances and certain tax contingencies. The change in the Company's effective tax rate for the three months ended July 31,

28

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



2015, compared to the three months ended July 31, 2014 was primarily attributable to changes in the relative mix of income and losses across various tax jurisdictions, and the fact that the Company has to compute a separate effective tax rate for certain tax jurisdictions incurring losses.
The Company recorded an income tax provision from continuing operations of $2.3 million for the six months ended July 31, 2015, representing an effective tax rate of (4.5)% compared with an income tax provision from operations of $4.3 million, representing an effective tax rate of (10.8)% for the six months ended July 31, 2014. During the six months ended July 31, 2015 and 2014, the effective tax rates were different from the U.S. statutory rate primarily due to the fact that the Company did not record an income tax benefit on losses incurred in U.S. and certain of the Company's foreign tax jurisdictions in which the Company maintains valuation allowances against the Company's net deferred tax assets. The income tax provisions from operations are comprised of income tax expense recorded in non-loss tax jurisdictions, withholding taxes, incremental valuation allowances and certain tax contingencies. The change in the Company's effective tax rate for the six months ended July 31, 2015, compared to the six months ended July 31, 2014 was primarily attributable to changes in the relative mix of income and losses across various tax jurisdictions, and the fact that the Company has to compute a separate effective tax rate for certain tax jurisdictions incurring losses.
As required by the authoritative guidance on accounting for income taxes, the Company evaluates the realizability of deferred tax assets on a tax 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 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 tax jurisdictions. During the six months ended July 31, 2015, the Company reassessed its valuation allowance requirements taking into consideration the Share Distribution and concluded that it intends to maintain its 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 July 31, 2015, the total amount of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate were approximately $102.3 million (see Note 12, Other Long-Term Liabilities). The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of July 31, 2015 could decrease by approximately $36.1 million within the next twelve months 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 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. Accrued interest and penalties was $40.0 million as of July 31, 2015.
As of January 31, 2015, the Company operated in Israel under a “Preferred Enterprise” program pursuant to the Law for Encouragement of Capital Investments, 1959, subject to an alternative income tax rate of 16%. In the first quarter of the fiscal year ended January 31, 2016, the Company entered into a master service agreement with Tech Mahindra (India). Following this agreement, the company is not expected to fulfill the direct local manufacturing employment requirement of the program. Accordingly, the alternative income tax rate of 16% no longer applies and the general corporate income tax rate of 26.5% is applicable for the entire fiscal year ended January 31, 2016. The change in corporate income tax rate results in a $48.5 million increase to the fiscal year ended January 31, 2016 opening net deferred tax assets and to offsetting valuation allowance, with no net impact on income tax expense.

29

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



18.
COMMITMENTS AND CONTINGENCIES
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 expenses as a result of such indemnification provisions.
To the extent permitted under state laws or other applicable laws, the Company has agreements in which it agreed to 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.
In addition, under the Share Distribution Agreements the Company entered into in connection with the Share Distribution, the Company agreed to indemnify CTI and its affiliates (including Verint following the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution (see Note 3, Share Distribution Agreements). On February 4, 2013, in connection with the closing of the Verint Merger Agreement, CTI placed $25.0 million in escrow to support indemnification claims to the extent made against the Company by Verint and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger, less any claims made on or prior to such date, to be released to the Company. On August 6, 2014, the escrow was released in accordance with its terms and the Company received the escrow amount of approximately $25.0 million.
As a result of the Verint Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the actions discussed below. Under the terms of the Distribution Agreement between CTI and us relating to the Share Distribution, Verint, as successor to CTI, is entitled to indemnification from us for any losses it suffers in its capacity as successor-in-interest to CTI in connection with these actions. As of the closing of the Verint Merger, the Company recognized the estimated fair value of the potential indemnification liability (see Note 1, Organization, Business and Summary of Significant Accounting Policies).
Israeli Optionholder Class Action
CTI and certain of its former subsidiaries, including Comverse Ltd. (a subsidiary of the Company), 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 due to previously-settled allegations regarding illegal backdating of CTI options 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 (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. On May 7, 2012, the court lifted the stay, and the plaintiffs have filed an amended complaint and motion to certify a class of plaintiffs in a single consolidated class action. The defendants responded to this amended complaint on November 11, 2012, and the plaintiffs filed a further reply on December 20, 2012. A pre-trial hearing for the case was held on December 25, 2012, during which all parties agreed to attempt to settle the dispute through mediation.
The mediation process ended without success. According to the parties’ consent to submit summations in the motion to certify the claims as a class action, including the certification of the class of plaintiffs, the court held the following dates for submission of summations: Summations on behalf of the plaintiffs were submitted on August 31, 2014; Summations on behalf

30

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



of the defendants were submitted on November 20, 2014; and summations of response by the plaintiffs were submitted on December 30, 2014. On February 9, 2015, the Judge presiding over the case recused herself due to a conflict of interests. On March 30, 2015, the plaintiffs filed a motion to the Court seeking to have the case assigned to a new presiding Judge and as a result on April 4, 2015 a new presiding judge was assigned to the case. The parties are now awaiting for the Court’s decision.
Separately, on July 13, 2012, plaintiffs filed a motion seeking an order that CTI hold back $150 million in assets as a reserve to satisfy any potential damage awards that may be awarded in this case, but did not seek to enjoin the Share Distribution. On July 25, 2012, the court decided that it will not rule on the motion until after it rules on plaintiffs’ motion to certify a class of plaintiffs. On August 16, 2012, plaintiffs filed a motion for leave to appeal the court’s decision to the Israeli Supreme Court (the “Appeal”) and on November 11, 2012, CTI responded to plaintiff's motion.
On July 1, 2014, the plaintiffs filed a motion to the Supreme Court to withdraw the Appeal and accordingly the Appeal was dismissed.
Two cases were also filed in the Tel Aviv Labor Court by plaintiffs Katriel and Deutsch, and both sought 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 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. These cases have been consolidated with the Tel Aviv District Court cases discussed above.
The Company has not accrued for these matters as the potential loss is currently not probable or estimable.
An additional case has been filed by an individual plaintiff in the Tel Aviv District Court similarly seeking to recover damages up to an aggregate of $3.3 million allegedly incurred as a result of the inability to exercise certain stock options. The case generally alleges the same causes of actions alleged in the potential class action discussed above. The parties conducted a mediation process that ended without success. On June 26, 2014 the Court ordered the plaintiff to notify it why not to transfer the claim to the Labor Court. On July 10, 2014, the plaintiff filed a notice to court according to which the subject-matter jurisdiction is reserved to the District Court. The Court did not accept the plaintiff's argument and has assigned the case to the Labor Court. A preliminary hearing at the Labor court was held on July 8, 2015. The court scheduled dates for further proceedings, as follows: Completion of preliminary proceedings by October 10, 2015; Plaintiff will submit affidavits on his behalf by January 1, 2016; The defendants will submit affidavits on their behalf by April 1, 2016; Evidentiary hearings have been set for June 23, 2016 and July 14, 2016.
Starhome Sale and Indemnification
Starhome was a CTI subsidiary (66.5% owned prior to the disposition). On September 19, 2012, CTI, in order to ensure it could meet the conditions of the Verint Merger, contributed to the Company its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement discussed below. The Starhome Disposition was completed on October 19, 2012.
Under the terms of the Starhome Share Purchase Agreement, Starhome’s shareholders received aggregate cash proceeds of approximately $81.3 million, subject to adjustment for fees, transaction expenses and certain taxes. Of this amount, $10.5 million is held in escrow to cover potential post-closing indemnification claims, with $5.5 million being released after 18 months and the remainder released after 24 months, in each case, less any claims made on or prior to such dates. The Company received aggregate net cash consideration (including $4.9 million deposited in escrow at closing) of approximately $37.2 million, after payments that CTI agreed to make to certain other Starhome shareholders of up to $4.5 million. The escrow funds were available to satisfy certain indemnification claims under the Starhome Share Purchase Agreement to the extent that such claims exceeded $1.0 million. During the fiscal year ended January 31, 2015, the Company received approximately $4.7 million in settlement of escrow.
Amdocs Asset Purchase Agreement
On April 29, 2015, the Company entered into an Asset Purchase Agreement (the “Amdocs Purchase Agreement”) with Amdocs Limited, a Guernsey company (the “Purchaser”). Pursuant to the Amdocs Purchase Agreement, the Company’s BSS Business to the Purchaser, and the Purchaser agreed to assume certain post-closing liabilities of the Company (the “Asset Sale”). The initial closing of the Asset Sale occurred on July 2, 2015. The total cash purchase price payable by the Purchaser to the Company in connection with the initial closing of the Asset Sale was approximately $273 million, subject to various purchase price adjustments, of which an aggregate of $6.5 million will be paid upon certain deferred closings.

31

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



In connection with the Asset Sale, the Company agreed to indemnify Amdocs for certain pre-closing liabilities and breaches of certain representations and warranties. Upon the closing, $26 million of the purchase price was deposited into escrow to fund potential indemnification claims and certain adjustments for a period of 12 months following the closing. (see Note 14, Discontinued Operations). In late August 2015, the Company received certain notices of alleged claims against the escrow from Amdocs, which the Company believes to be without merit. The Company intends to defend the claims as appropriate.
Agreement with Tech Mahindra
On April 14, 2015, the Company entered into a MSA with Tech Mahindra pursuant to which Tech Mahindra performs certain services for the Company’s Digital Services business on a global basis. The services include research and development, project deployment and delivery and maintenance and support for customers of the Company’s Digital Service business. In connection with the transaction, approximately 500 employees of the Company and its subsidiaries have been rehired by Tech Mahindra or its affiliates. Tech Mahindra may hire additional employees contingent upon country regulatory and compliance requirements under applicable law.
Under the MSA, the Company is obligated to pay to Tech Mahindra in the aggregate approximately $211 million in base fees for services to be provided pursuant to the MSA for a term of six years, renewable at the Company’s option. The Company's expected obligation is $23 million, $40 million, $39 million, $36 million, $32 million, $29 million and $12 million, for fiscal years ended January 31, 2016, 2017, 2018, 2019, 2020, 2021 and 2022, respectively. The services under the MSA started on June 1, 2015. The Company has accrued $3.5 million for services performed during the three months ended July 31, 2015.
The Company has the right to terminate the MSA for convenience subject to the payment of certain termination fees. The Company may terminate the MSA upon certain material breaches, certain material performance failures or violations of applicable law by Tech Mahindra without termination fees. Tech Mahindra may terminate the MSA upon certain material breaches by the Company, including the failure to pay undisputed amounts. Upon any termination or expiration, Tech Mahindra will provide reverse transition services to transition the services being provided by Tech Mahindra pursuant to the MSA back to the Company or its designee. The MSA contains certain customary indemnification provisions by both the Company and Tech Mahindra.
Acision
On August 6, 2015, the Company completed its previously announced acquisition of Acision pursuant to the terms of the share sale and purchase agreement, dated June 15, 2015.
The Acision Purchase Agreement contains customary representations, warranties and covenants, by the parties thereto. Each party agreed to indemnify the other for certain potential liabilities and claims, subject to certain exceptions and limitations (see Note 19, Subsequent Events).
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 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 July 31, 2015 and January 31, 2015, 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 condensed 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 $20.9 million and $29.0 million as of July 31, 2015 and January 31, 2015, respectively, 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 July 31, 2016.
Legal Proceedings
From time to time, the Company and its subsidiaries are subject to claims in legal proceedings arising in the normal course of business. The Company does not believe that it or its subsidiaries are currently party to any pending legal action not described herein or disclosed in the consolidated financial statements that could reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.

32

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



Brazil Tax and Labor Contingencies
The Company's operations in Brazil are involved in various litigation matters and have received or been the subject of numerous governmental assessments related to indirect and other taxes, as well as disputes associated with former Company employees. The tax matters, which comprise a significant portion of the contingencies, principally relate to claims for taxes on the transfers of inventory, municipal service taxes on rentals and gross revenue taxes. The Company is disputing these tax matters and intends to vigorously defend its positions. The labor matters principally relate to claims made by former Company employees for pay wages, social security and other related labor benefits, as well as related tax obligations. As of July 31, 2015, the total amounts related to the reserved portion of the tax and labor contingencies was $0.1 million and the unreserved portion of the tax and labor contingencies totaled approximately $7.1 million. With respect to the unreserved balance, these have been assessed by management as being either remote or possible as to the likelihood of ultimately resulting in a loss to the Company. Local laws and regulations often require that the Company make deposits or post other security in connection with such proceedings. As of July 31, 2015, the Company had $4.8 million of deposits, included in Long-term restricted cash, with the government in Brazil for claims that the Company is disputing which provides security with respect to these matters. Generally, any deposits would be refundable to the extent the matters are resolved in the Company's favor. Management routinely assesses these matters as to probability of ultimately incurring a liability against the Company's Brazilian operations and the Company records its best estimate of the ultimate loss in situations where management assesses the likelihood of an ultimate loss as probable.
19.
SUBSEQUENT EVENTS
Acision Indebtedness
On August 6, 2015 (the “Closing Date”), the Company completed its previously announced acquisition (the “Acquisition”) of Acision Global Limited, a private company formed under the laws of England and Wales (“Acision”) pursuant to the terms of the share sale and purchase agreement, dated June 15, 2015 (the “Purchase Agreement”), between the Company and Bergkamp Coöperatief U.A., a cooperative with excluded liability formed under the laws of the Netherlands (“Seller”). Acision is a provider of messaging software solutions to CSPs and enterprises, including SMSC, MMS, IM and IP messaging. The Company acquired Acision to complement its solution portfolio, enhance its market leadership, penetrate growth markets and improve its operational efficiency.
Pursuant to the terms of the Purchase Agreement, on the Closing Date the Company acquired 100% of the equity interests of Acision in exchange for $136 million in cash, certain earnout payments (as discussed below), and 3.14 million shares of the Company’s common stock, par value $0.01 per share (the “Consideration Shares”), which were issued in a private placement transaction conducted pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”). As previously disclosed, pursuant to the terms of the Purchase Agreement, an amount up to $35 million of cash consideration will be subject to an earnout, contingent on the achievement of certain revenue objectives by certain of Acision’s business lines through the first quarter of 2016. To secure claims the Company may have under the Purchase Agreement, $10 million of the initial cash consideration was retained in escrow, which amount will be increased in the event that further consideration is triggered under the earnout, up to a total maximum aggregate escrow retention of $25 million. Such monies will be released to the Seller two years after completion of the transaction, subject to any claims. In addition, Acision, in consultation with the Company, entered into the previously disclosed amendment and waiver (the “Amendment”) with the requisite lenders under the Acision’s credit agreement (the “Acision Credit Agreement”) governing Acision’s existing approximately $156 million senior credit facility (the “Acision Senior Debt”), pursuant to which the Acision Senior Debt remains in place following completion of the Acquisition. Pursuant to the terms of the Acision Credit Agreement the Acision Senior Debt bears interest at a rate per annum, at the Company's option, of either (i) a customary adjusted Eurocurrency interest rate plus 9.75% or (ii) a customary base rate plus 8.75%, and matures, subject to the terms and conditions of the Acision Credit Agreement, on December 15, 2018. In connection with the Amendment, the Company agreed to pay certain costs imposed on Acision by its lenders under the Acision Senior Debt.
The Acision Credit Agreement contains customary representations and warranties and affirmative, restrictive and financial covenants. These provisions, with certain exceptions, restrict Acision’s ability and the ability of its subsidiaries to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends, distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. The Acision

33

XURA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



Credit Agreement also contains customary events of default, including, among other things, non-payment defaults, covenant defaults, material adverse effect defaults, bankruptcy and insolvency defaults and material judgment default.
The Acision Purchase Agreement contains customary representations, warranties and covenants, by the parties thereto. Each party agreed to indemnify the other for certain potential liabilities and claims, subject to certain exceptions and limitations

Due to the limited time since the acquisition date, the initial accounting for the business combination is incomplete. As a result, the Company is unable to provide amounts recognized as of the acquisition date for major classes of assets and liabilities acquired. The Company will include such information in the Quarterly Report on Form 10-Q for the period ending October 31, 2015.
Amdocs Asset Purchase Agreement
As previously disclosed,  the purchase price under the Asset Sale is subject to a working capital adjustment, which is currently estimated to increase the purchase price by approximately $5.2 million.

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 Part IV, Item 15 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2015 (or the 2014 Form 10-K) and the condensed consolidated financial statements and related notes included in this Quarterly Report. This discussion and analysis contains forward-looking statements based on current expectations relating to future events and our future financial performance that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Forward-Looking Statements” on page i of this Quarterly Report. Percentages and amounts within this section may not calculate due to rounding differences.
EXECUTIVE SUMMARY
Overview
We are a global provider of digital communications solutions for communication service providers (or CSPs), Over-The-Top (or OTT) providers and enterprises. Our solutions are designed to enhance CSPs’ and OTTs’ ability to address evolving market trends towards simplification and modernization of networks, as well as create monetizable services with emerging technologies such as voice over long-term evolution (or VoLTE), rich communication services (or RCS), IP Messaging, Data Analytics, Web Real-Time Communication (or WebRTC), and Machine-to-Machine messaging.  Solutions are also provided to the enterprise market and are designed to accelerate their move towards mobile-enabling their customer engagements. These solutions include secure enterprise application-to-person messaging (or A2P), credit orchestration, two-factor authentication (or 2FA) and developer tools for customized service creation. Additionally, we continue to offer traditional Value Added Services (or VAS) solutions, including voicemail, visual voicemail, call completion, short messaging service (or SMS), and multimedia picture and Video Messaging (or MMS)).  This core VAS platform has been designed to allow CSPs and OTTs the ability to augment their networks with emerging products and solutions to address new types of devices, technologies, and multi-device experience which we believe their subscribers demand.  Solutions around IP messaging connectivity to legacy networks, communications security, network signaling and spam filtering, are among our solutions in this space.
We also offer a portfolio of professional services designed to help our customers improve and streamline operations, identify revenue opportunities, reduce costs and maximize financial flexibility.  Many of our solutions can be delivered via the cloud, in a “software-as-a-service” model, allowing us to speed up deployment and permit rapid introduction of additional services. With our acquisition of Acision Global Limited (“Acision”), several of our solutions will be offered in a revenue-share model, allowing us to de-risk our customers’ investments and giving us the ability to take part in the resulting value creation.
Amdocs Asset Purchase Agreement
On April 29, 2015, we entered into an Asset Purchase Agreement (as amended, the Amdocs Purchase Agreement) with Amdocs Limited, a Guernsey company (or Purchaser). Pursuant to the Amdocs Purchase Agreement, we agreed to sell

34


substantially all of our assets required for operating our converged, prepaid and postpaid billing and active customer management systems for wireless, wireline, cable and multi-play communication service providers (or BSS Business) to the Purchaser, and the Purchaser agreed to assume certain post-closing liabilities of ours (or the Asset Sale). The initial closing of the Asset Sale occurred on July 2, 2015. The total cash purchase price payable by the Purchaser to us in connection with the initial closing of the Asset Sale was approximately $273 million, subject to various purchase price adjustments, of which an aggregate of $6.5 million was scheduled to be paid upon certain deferred closings.
In connection with the Asset Sale, we agreed to indemnify Amdocs for certain pre-closing liabilities and breaches of certain representations and warranties. Upon the closing, $26 million of the purchase price was deposited into escrow to fund potential indemnification claims and certain adjustments for a period of 12 months following the closing.
In connection with the Amdocs Purchase Agreement, we and the Purchaser have also entered into a Transition Services Agreement (or the TSA), which provides for support services between us and the Purchaser in connection with the transition of the BSS Business to the Purchaser, for various periods up to 12 months following the closing of the Asset Sale. For additional information, see Note 19 to our condensed consolidated financial statements included in Item 1 of this Quarterly Report.
Discontinued Operations
As of April 30, 2015, the BSS Business met the criteria to be classified as held for sale as well as discontinued operations. As such, the BSS Business have been re-classified and reflected as discontinued operations on the consolidated statements of earnings for all periods presented. As of July 31, 2015, certain assets and liabilities are held for sale due to deferred closings and restructuring initiatives commenced in connection the BSS Business sale. For additional information, see Note 14 to our condensed consolidated financial statements included in Item 1 of this Quarterly Report.
Segment Information
Prior to entering into the Amdocs Purchase Agreement, our reportable segments consisted of BSS and Digital Services. As a result of entering into the Amdocs Purchase Agreement, the results of operations of the former BSS Business segment are classified as discontinued operations. Therefore, with the reported divestiture we now operate as a single business segment the results of which are included in the Company's income statement from continuing operations.
Other Significant Events
During the six months ended July 31, 2015 and subsequent thereto, the following significant events occurred:
Acquisition of Acision.
On August 6, 2015 (or the Closing Date), we completed the previously announced acquisition (or the Acquisition) of Acision Global Limited, a private company formed under the laws of England and Wales (or Acision) pursuant to the terms of the share sale and purchase agreement, dated June 15, 2015 (or the Purchase Agreement), between us and Bergkamp Coöperatief U.A., a cooperative with excluded liability formed under the laws of the Netherlands (or the Seller).

35


Pursuant to the terms of the Purchase Agreement, on the Closing Date we acquired 100% of the equity interests of Acision in exchange for $136 million in cash, certain earnout payments (as discussed below), and 3.14 million shares of our common stock, par value $0.01 per share (or the Consideration Shares), which were issued in a private placement transaction conducted pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended (or the Securities Act). As previously disclosed, pursuant to the terms of the Purchase Agreement, an amount up to $35 million of cash consideration will be subject to an earnout, contingent on the achievement of certain revenue objectives by certain of Acision’s business lines through the first quarter of 2016. To secure claims we may have under the Purchase Agreement, $10 million of the initial cash consideration was retained in escrow, which amount will be increased in the event that further consideration is triggered under the earnout, up to a total maximum aggregate escrow retention of $25 million. Such monies will be released to the Seller two years after completion of the transaction, subject to any claims. In addition, Acision, in consultation with us, entered into the previously disclosed amendment and waiver (or the Amendment) with the requisite lenders under Acision’s credit agreement (the “Acision Credit Agreement”) governing Acision’s existing approximately $156 million senior credit facility (or the Acision Senior Debt), pursuant to which the Acision Senior Debt will remain in place following completion of the Acquisition. Pursuant to the terms of the Acision Credit Agreement the Acision Senior Debt bears interest at a rate per annum, at our option, of either (i) a customary adjusted Eurocurrency interest rate plus 9.75% or (ii) a customary base rate plus 8.75%, and matures, subject to the terms and conditions of the Acision Credit Agreement, on December 15, 2018. In connection with the Amendment, we agreed to pay certain costs imposed on Acision by its lenders under the Acision Senior Debt. For additional information, see Note 19 to our condensed consolidated financial statements included in Item 1 of this Quarterly Report.
Master Services Agreement with Tech Mahindra. On April 14, 2015, we entered into a Master Service Agreement (or the MSA) with Tech Mahindra Limited (or Tech Mahindra) pursuant to which Tech Mahindra performs certain services for our Digital Services business on a global basis. The services include research and development, project deployment and delivery, and maintenance and support for customers of our Digital Service business. In connection with the transaction, approximately 500 of our employees have been rehired by Tech Mahindra or its affiliates. Tech Mahindra may hire additional employees contingent upon country regulatory and compliance requirements under applicable law.
Under the MSA, we are required to pay to Tech Mahindra in the aggregate approximately $211 million in base fees for services to be provided pursuant to the MSA for a term of six years, renewable at the Company’s option. The services under the MSA started on June 1, 2015. We expect to realize gross savings in excess of $70 million over the term of the MSA. For additional information, see Note 18 to our condensed consolidated financial statements included in Item 1 of this Quarterly Report.
Net Operating Loss Rights Agreement. Effective April 29, 2015, our Board of Directors adopted a rights plan (or the Rights Plan) and declared a dividend of one preferred share purchase right for each outstanding share of common stock. The dividend is payable to our stockholders of record as of May 11, 2015.
Our Board of Directors adopted the Rights Plan in an effort to protect stockholder value by attempting to diminish the risk of our ability to use its net operating losses and unrealized losses (collectively, the “NOLs”) to reduce potential future federal income tax obligations may become substantially limited. We have experienced and may continue to experience substantial operating losses, including realized losses for tax purposes from sales inventory previously written down for financial statement purposes, which would produce NOLs. Under the Internal Revenue Code and regulations promulgated by the U.S. Treasury Department, we may “carry forward” these NOLs in certain circumstances to offset any current and future taxable income and thus reduce our federal income tax liability, subject to certain requirements and restrictions. To the extent that the NOLs do not otherwise become limited, we project to be able to carry forward a significant amount of NOLs, and therefore these NOLs could be a substantial asset to us. However, if we experience an “Ownership Change,” as defined in Section 382 of the Internal Revenue Code, the ability to use the NOLs, including NOLs later arising from sales inventory previously written down, will be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, which could therefore significantly impair the value of that asset.
The Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9% or more of our outstanding common stock (an “Acquiring Person”) without the approval of our Board of Directors. Stockholders who own 4.9% or more of our outstanding common stock as of the close of business on May 11, 2015 will not trigger the Rights Plan so long as they do not (i) acquire any additional shares of common stock or (ii) fall under 4.9% ownership of common stock and then re-acquire 4.9% or more of our common stock. The Rights Plan does not exempt any future acquisitions of common stock by such persons. Any rights held by an Acquiring Person are void and may not be exercised. The Board of Directors may, in its sole discretion, exempt any person or group from being deemed an Acquiring Person for purposes of the Rights Plan.
Our Board of Directors authorized the issuance of one right per each outstanding share of our common stock payable to our stockholders of record as of May 11, 2015. Subject to the terms, provisions and conditions of the Rights Plan, if the rights

36


become exercisable, each right would initially represent the right to purchase from us one one-thousandth of a share of our Series A Junior Participating Preferred Stock (the “Series A Preferred Stock”) for a purchase price of $100.00 (the “Purchase Price”). If issued, each fractional share of preferred stock would give the stockholder approximately the same dividend, voting and liquidation rights as does one share of our common stock. However, prior to exercise, a right does not give its holder any rights as a stockholder of ours, including without limitation any dividend, voting or liquidation rights.
The rights and the Rights Plan will expire on the earliest of (i) April 29, 2018, (ii) the time at which the rights are redeemed pursuant to the Rights Agreement, (iii) the time at which the rights are exchanged pursuant to the Rights Agreement, (iv) the repeal of Section 382 of the Code or any successor statute if the Board of Directors determines that the Rights Agreement is no longer necessary for the preservation of Tax Benefits, (v) the beginning of a taxable year of the Company to which the Board of Directors determines that no Tax Benefits may be carried forward and (vi) April 29, 2016 if Stockholder Approval has not been obtained.
The Rights Plan was approved by our stockholders at the 2015 Annual Meeting of Stockholders held on June 24, 2015.
Separation agreement with Thomas Sabol. On April 30, 2015, we entered into a separation agreement with Thomas Sabol, our former Senior Vice President, Chief Financial Officer, pursuant to which Mr. Sabol ceased to serve as Senior Vice President and Chief Financial Officer on April 30, 2015 and his employment with us was terminated on July 1, 2015.
Resignation of Board Member. On May 9, 2015, Neil Montefiore did not stand for re-election at the 2015 annual meeting of stockholders (or Annual Meeting) and resigned from our Board of Directors effective the date of the 2015 Annual Meeting of Stockholders. Mr. Montefiore, whose primary expertise lies with the BSS Business, advised us that his resignation was prompted by the sale of the BSS business to Amdocs Limited.
Extension of Employment Terms of Named Executive Officers. On May 14, 2015, we entered into amendment to employments agreements with each of Philippe Tartavull, our President, Chief Executive Officer and Director, and Nassrin Tavakoli, our Executive Vice President and Chief Technology Officer pursuant to which the term of employment of Mr. Tartavull and Ms. Tavakoli was extended for a year through May 21, 2016 and October 1, 2016, respectively. The term of each executive’s employment will automatically renew for one year increments, unless either the executive of the Company provides the other party with a prior written notice of non-renewal at least 60 days prior to the renewal date.


37


Condensed Consolidated Financial Highlights
The following table presents certain financial highlights for the three and six months ended July 31, 2015 and 2014, including Xura Performance, Xura Performance margin (reflecting Xura Performance as a percentage of revenue), Adjusted EBITDA and Adjusted EBITDA loss per share - basic & diluted, non-GAAP financial measures, for us on a consolidated basis:

 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Total revenue
$
61,629

 
$
74,988

 
$
107,334

 
$
140,070

Gross margin
35.2
 %
 
22.7
 %
 
22.0
 %
 
22.3
 %
Loss from operations
(10,494
)
 
(17,011
)
 
(40,107
)
 
(38,605
)
Operating margin
(17.0
)%
 
(22.7
)%
 
(37.4
)%
 
(27.6
)%
Loss from continuing operations
(12,163
)
 
(22,381
)
 
(52,143
)
 
(44,476
)
Income from discontinued operations
175,060

 
5,515

 
188,379

 
11,479

Net income (loss)
162,897

 
(16,866
)
 
136,236

 
(32,997
)
Net cash used in operating activities
(31,559
)
 
(13,785
)
 
(49,263
)
 
(49,384
)
Non-GAAP Financial Measures
 
 
 
 
 
 
 
Xura Performance
$
(616
)
 
$
(11,522
)
 
$
(22,465
)
 
$
(27,239
)
Xura Performance margin
(1.0
)%
 
(15.4
)%
 
(20.9
)%
 
(19.4
)%
Adjusted EBITDA
2,723

 
(8,261
)
 
(15,759
)
 
(20,817
)
Adjusted EBITDA margin
4.4
 %
 
(11.0
)%
 
(14.7
)%
 
(14.9
)%
Adjusted EBITDA earnings (loss) per share - basic & diluted
$
0.12

 
$
(0.37
)
 
$
(0.72
)
 
$
(0.93
)
Reconciliation of Loss from Operations to Xura Performance and Adjusted EBITDA
We provide Xura Performance, Adjusted EBITDA and Adjusted EBITDA per share, non-GAAP financial measures, as additional information for our operating results. These measures are not in accordance with, or alternatives for, GAAP financial measures and may be different from, or not comparable to similarly titled or other non-GAAP financial measures used by other companies. We believe that the presentation of these non-GAAP financial measures provide useful information to investors regarding certain additional financial and business trends relating to our results of operations as viewed by management in monitoring our businesses, reviewing our financial results and for planning purposes.

38


The following table provides a reconciliation of loss from operations to Xura Performance and Adjusted EBITDA for the three and six months ended July 31, 2015 and 2014:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Loss from operations
$
(10,494
)
 
$
(17,011
)
 
$
(40,107
)
 
$
(38,605
)
Expense adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
2,589

 
2,382

 
4,965

 
4,535

Amortization of intangible assets
86

 

 
172

 

Compliance-related professional fees
654

 
335

 
705

 
704

Compliance-related compensation and other expenses
229

 

 
237

 
(70
)
Strategic related costs
1,875

 
1,100

 
3,769

 
2,390

Write-off of property and equipment
78

 
169

 
104

 
178

Certain litigation settlements and related costs
12

 
41

 
54

 
5

Restructuring expenses
4,201

 
1,171

 
7,609

 
3,043

Loss (gain) on sale of fixed assets
154

 
(14
)
 
152

 
(19
)
Other

 
305

 
(125
)
 
600

Total expense adjustments
9,878

 
5,489

 
17,642

 
11,366

Xura Performance
$
(616
)
 
$
(11,522
)
 
$
(22,465
)
 
$
(27,239
)
Depreciation
3,339

 
3,261

 
6,706

 
6,422

Adjusted EBITDA
2,723

 
(8,261
)
 
(15,759
)
 
(20,817
)
Adjusted EBITDA earnings (loss) per share - basic & diluted
$
0.12

 
$
(0.37
)
 
$
(0.72
)
 
$
(0.93
)
Xura Performance and Adjusted EBITDA
Our Chief Executive Officer is our chief operating decision maker (or CODM). The CODM uses Xura Performance, as defined below, as the primary basis for assessing our financial results. Xura Performance is not necessarily comparable to other similarly titled captions of other companies.
Xura Performance is computed by management as loss from operations adjusted for the following: (i) stock-based compensation expense; (ii) amortization of intangible assets; (iii) compliance-related professional fees; (iv) compliance-related compensation and other expenses; (v) strategic-related costs (vi) write-off of property and equipment; (vii) certain litigation settlements and related costs; (viii) restructuring expenses; and (ix) certain other gains, losses and expenses. Strategic related costs include business strategy evaluation and mergers and acquisition efforts.
Adjusted EBITDA is computed by management by adding depreciation to Xura Performance.
Business Trends and Uncertainties
For the three months ended July 31, 2015 compared to the three months ended July 31, 2014, our consolidated revenue decreased and our costs and operating expenses decreased. The decrease in our costs and operating expenses exceeded the decrease in revenue.
For the six months ended July 31, 2015 compared to the six months ended July 31, 2014, our consolidated revenue decreased and our costs and operating expenses decreased. The decrease in our revenue exceeded the decrease in our costs and operating expenses.
Revenue from customer solutions for the three and six months ended July 31, 2015 decreased compared to the three and six months ended July 31, 2014. The decrease was primarily attributable to a lower volume of projects in the current period resulting from lower bookings.
Revenue from maintenance revenue for the three and six months ended July 31, 2015 decreased compared to the three and six months ended July 31, 2014. The decrease was primarily attributable to a reduction in maintenance fees charged to

39


certain customers, the termination of certain maintenance contracts and a decrease from the timing of entering into renewals of maintenance contracts.
Our costs and operating expenses for the three and six months ended July 31, 2015 decreased compared to the three and six months ended July 31, 2014, primarily due to a decrease in cost of revenue due to lower revenue and a decrease in selling, general and administrative expenses decrease due to a reduction in personnel-related and overhead allocation costs.
During the six months ended July 31, 2015, our cash and cash equivalents and restricted cash increased primarily due to the Asset Sale partially offset by negative operating cash flow, payments made in connection with restructuring activities and purchases of property and equipment.
Our costs, operating expenses and disbursements decreased during the three and six months ended July 31, 2015 compared to three and six months ended July 31, 2014, primarily due to our continued focus on closely monitoring our costs and operating expenses as part of our efforts to improve our cash position and achieve long-term improved operating performance and positive operating cash flows. As part of our efforts to reduce costs and expenses, improve our cash position and achieve long-term improved operating performance and positive operating cash flows, we continued to implement initiatives to reduce costs and expenses during the six months ended July 31, 2015, including the relocation of certain delivery and research and development activities to low cost centers of excellence in Eastern Europe and Asia.
In connection with the MSA and the BSS Business sale, we commenced a restructuring plan during the six months ended July 31, 2015, which is expected to include primarily a reduction of workforce included in cost of revenue, research and development and selling, general and administrative expenses. The aggregate cost of the plan is currently estimated to be approximately $24.5 million in severance-related costs, which is expected to be accrued and paid by July, 2016.
We continue to maintain our market leadership in the traditional value added services (or VAS) market by providing solutions to CSPs based on voice and messaging services, such as voicemail, call completion, SMS and MMS. However, CSPs face increasing competition from both Internet players and mobile device manufacturers, using new technologies that may provide alternatives to CSP products and services. For example, the introduction of IP-based over-the-top (or OTT) applications on wireless devices, allows end users to utilize IP-based person-to-person (or P2P) services, such as Facebook, Facetime, Google, Whatsapp, Line or Skype, to access, among other things, IP communications free of charge rather than use similar services provided by CSPs. Furthermore, these CSP services continue to face competition from low-cost service providers from emerging markets. We believe these changes have reduced demand for traditional P2P communication products and services and increased pricing pressures, which have in turn adversely impacted our revenue and margins and we expect this trend to continue.
At the same time, in emerging markets where mobile user are predominantly prepaid subscribers and mobile internet is less accessible, CSP’s are looking for services that leverage existing messaging infrastructure and allow users to stay connected from feature phones via SMS. These include mobile credit (or monetization) services, which enable users to continue to communicate when out of credit, by texting another subscrier who has the option to pay the cost. These services provide new incremental revenue streams to CSPs. As a leading provider of these credit services, we are witnessing increased uptake from users which, in turn, is driving SMS traffic and revenue growth.
Additionally, the growth in global wireless subscriptions, and high growth wireless segments, such as data services and Internet browsing are pushing CSPs to evolve to 4G/LTE IP-based network technologies, supporting the demand for several of our products. Also, increased use by subscribers of data services means CSPs are focused on increasing their relevance in the digital lifestyle of their subscribers. We believe that by leveraging our IP-based solutions, CSPs will be able to launch and offer applications and services that underpin subscribers’ digital lifestyles and that will create new revenue streams to CSPs.
To address these market trends and the needs of our customers, we are implementing our strategy in respect of traditional VAS, IP-based solutions and unified communications. The key elements to our Digital Communications Services strategy include:
Continuing to leverage our leading market position in traditional VAS. As a market leader in the traditional VAS market we plan to focus on the following initiatives:
Leveraging existing customer base. We continue to maintain our existing VAS customer base by enhancing our existing products and services and offering new products and services that facilitate system consolidation and total cost reduction of CSPs system operations and allow CSPs to launch new services;

40


Gain market share through virtualization and cloud-based offering. We are currently aggressively pursuing new opportunities with new and existing customers by offering virtualized and cloud-based solutions which are designed to simplify CSPs’ current systems, improve efficiencies and reduce total cost of ownership; and
Centralize the systems of multi-country large CSPs. We are currently pursuing and intend to continue to pursue opportunities to consolidate the systems of large, multi-country CSPs by moving their traditional VAS deployments from a per-country operation to a centralized cloud infrastructure that either they can operate or we could operate for them. This proposition is designed to create a significant reduction in the total cost of ownership for CSPs and also provides them with a platform for launching new digital services for their markets.
Focusing on IP-Based Evolved Communication Services (or ECS). Our ECS solution is designed to modernize the Traditional VAS deployments by extending current services to IP endpoints, as well as upgrade the CSP’s voice and messaging offer to a comprehensive communication package that is based on Rich Communication Standards (or RCS), including voice, multi-device visual voicemail, messaging to IP-based devices, video, presence and chat. Our connectivity layer uses multiple access technologies to bridge traditional endpoints, web endpoints, and IP Multimedia System Session Initiation Protocol (SIP) endpoints. In order to enhance our solution, we recently acquired Solaiemes, whose WebRTC, RCS Monetization API Gateway and Presence solutions complement our ECS offering, with the combined portfolio creating a platform for service monetization of IP-based digital services. We plan to continue to enhance our ECS solution internally and through acquisitions or third party engagements;
Increase market share in emerging markets with monetization services. Having had a reasonable amount of success deploying monetization and mobile credit services at CSPs within emerging markets, we will continue to aggressively pursue opportunities with existing customers to expand their services with more advanced systems and services that go beyond their own networks and internationally, while also adding new customers to our portfolio who do not currently offer these services;
Pursuing Enterprise Unified Communications Opportunities. We offer a portfolio of IP Trunking and Unified Communications services that CSPs can extend to their enterprise customers. Our objective is to sell these solutions through the CSP, and become the CSP’s Unified Communication solution of choice. The strength of our portfolio lies in its ability to provide convergence between the “at-work” Unified Communication experience and the “outside-work” ECS experience for CSPs’ end customers. This capability leverages our existing broad customer base which we believe provides us with a competitive advantage and
Growth in enterprise customer portfolio. By expanding our secure application-to-person (or A2P) messaging services into new industry verticals beyond our current financial, logistics and travel customer base, while directly offering and enabling new IP-based communication through Rich Communication (RCS) and WebRTC technology, which provide more interactive IP-based messaging, voice and video chat services.
Uncertainties Impacting Future Performance
Mix of Revenue in Digital Services
It is unclear whether our advanced Digital Services offerings will be widely adopted by existing and potential customers. Currently, we are unable to predict whether sales of advanced offerings will fully offset declines in the sale of traditional VAS solutions in subsequent fiscal periods. If sales of advanced offerings do not increase or if increases in sales of advanced offerings do not exceed or fully offset any declines in sales of traditional solutions, due to adverse market trends, changes in consumer preferences or otherwise, our revenue, profitability and cash flows would likely be materially adversely affected.
Difficulty in Forecasting Product Bookings
Our product bookings are difficult to predict. A high percentage of our product bookings have typically been generated late in fiscal quarters. In addition, based on historical industry spending patterns of CSPs, we typically forecast our highest product booking levels in our fourth fiscal quarter. This trend makes it difficult for us to forecast our annual product bookings and to implement effective measures to cover any shortfalls of prior fiscal quarters if product bookings for the fourth fiscal quarter fail to meet our expectations. Furthermore, we continue to emphasize large capacity systems in our product development and marketing strategies. Contracts for installations typically involve a lengthy, complex and highly competitive bidding and selection process, and our ability to obtain particular contracts is inherently difficult to predict. A delay,

41


cancellation or other factor resulting in the postponement or cancellation of significant orders may cause us to miss our projections.
Indemnification Obligations
We are subject to significant indemnification obligations, including to customers in the ordinary course and counterparties in connection with corporate transactions. In the normal course of business we provide indemnifications of varying scopes to customers against claims of intellectual property infringement made by third parties arising from the use of our products. In addition, we are subject to significant indemnification obligations to counterparties under certain agreements with third parties in connection with corporate transactions. These indemnification obligations include obligations to (i) Verint (as successor to CTI) under the Share Distribution Agreements we entered into in connection with the Share Distribution, (ii) Amdocs for certain pre-closing liabilities and breaches of certain representations and warranties in connection with the Asset Sale of the BSS business to Amdocs, (iii) Tech Mahindra, under the MSA therewith; and (iv) Acision, for certain potential liabilities and claims, subject to certain exceptions and limitations in connection with the acquisition of Acision. For more information, see note 18 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report. These indemnification obligations could subject us to significant liabilities.


42


RESULTS OF OPERATIONS
Segment Information
Prior to entering into the Amdocs Purchase Agreement, our reportable segments consisted of BSS and Digital Services. As a result of entering into the Amdocs Purchase Agreement, the results of operations of the former BSS Business segment are classified as discontinued operations. Therefore, with the reported divestiture we now operate as a single business segment the results of which are included in our income statement from continuing operations.
The expenses that qualify for inclusion in discontinued operations are only the direct operating expenses incurred by the disposed component. As a result of the reported divestiture, certain previously allocated corporate overhead costs charged to the BSS Segment are excluded from discontinued operations and included in continuing operations.
Under the prior segment structure, our global corporate functions, that provided common support to its segments, were included in a column captioned “All Other” as part of our business segment presentation. All Other included sales, marketing, finance, legal, and management as they provided services to both the BSS and Digital Services segments. In addition, there were certain delivery, support, and research and development groups that provided common support to the BSS and Digital Services segments, and therefore the costs of these common groups were included in All Other. The majority of the costs included in All Other are indirect costs that did not qualify for the inclusion in discontinued operations. As a result of the reported divestiture, included in continuing operations are all unallocated indirect shared costs of ours, which were previously included in All Other.
The following discussion provides an analysis of our condensed consolidated results of operations.
Three and Six Months Ended July 31, 2015 Compared to Three and Six Months Ended July 31, 2014
Condensed Consolidated Results
 
Three Months Ended July 31,
 
Change
 
Six Months Ended July 31,
 
Change
 
 
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
 
(Dollars in thousands, except per share data)
Total revenue
$
61,629

 
$
74,988

 
$
(13,359
)
 
(17.8
)%
 
$
107,334

 
$
140,070

 
$
(32,736
)
 
(23.4
)%
Costs and expenses
 
 
 
 


 


 
 
 
 
 
 
 
 
Cost of revenue
39,964

 
57,956

 
(17,992
)
 
(31.0
)%
 
83,721

 
108,841

 
(25,120
)
 
(23.1
)%
Research and development, net
8,235

 
9,813

 
(1,578
)
 
(16.1
)%
 
16,515

 
18,172

 
(1,657
)
 
(9.1
)%
Selling, general and administrative
19,686

 
23,059

 
(3,373
)
 
(14.6
)%
 
39,559

 
48,619

 
(9,060
)
 
(18.6
)%
Other operating expenses
4,238

 
1,171

 
3,067

 
261.9
 %
 
7,646

 
3,043

 
4,603

 
151.3
 %
Total costs and expenses
72,123

 
91,999

 
(19,876
)
 
(21.6
)%
 
147,441

 
178,675

 
(31,234
)
 
(17.5
)%
Loss from operations
(10,494
)
 
(17,011
)
 
6,517

 
(38.3
)%
 
(40,107
)
 
(38,605
)
 
(1,502
)
 
3.9
 %
Interest income
89

 
100

 
(11
)
 
(11.0
)%
 
173

 
215

 
(42
)
 
(19.5
)%
Interest expense
(167
)
 
(231
)
 
64

 
27.7
 %
 
(360
)
 
(354
)
 
(6
)
 
1.7
 %
Foreign currency transaction loss, net
(4,202
)
 
(2,949
)
 
(1,253
)
 
N/M

 
(9,775
)
 
(930
)
 
(8,845
)
 
951.1
 %
Other income (expense), net
77

 
(413
)
 
490

 
N/M

 
179

 
(465
)
 
644

 
(138.5
)%
Income tax benefit (expense)
2,534

 
(1,877
)
 
4,411

 
(235.0
)%
 
(2,253
)
 
(4,337
)
 
2,084

 
(48.1
)%
Loss from continuing operations
(12,163
)
 
(22,381
)
 
10,218

 
45.7
 %
 
(52,143
)
 
(44,476
)
 
(7,667
)
 
17.2
 %
Income from discontinued operations
175,060

 
5,515

 
169,545

 
N/M

 
188,379

 
11,479

 
176,900

 
N/M

Net income (loss)
$
162,897

 
$
(16,866
)
 
$
179,763

 
N/M

 
$
136,236

 
$
(32,997
)
 
$
169,233

 
N/M

Earnings (loss) per share - basic & diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.55
)
 
$
(1.00
)
 
$
0.45

 

 
$
(2.38
)
 
$
(1.99
)
 
$
(0.39
)
 
 
Discontinued operations
7.95

 
0.25

 
7.70

 
 
 
8.59

 
0.51

 
8.08

 
 
 
$
7.40

 
$
(0.75
)
 
$
8.15

 
 
 
$
6.21

 
$
(1.48
)
 
$
7.69

 
 
Total Revenue
Management analyzes our revenue by: (i) revenue generated from customer solutions, and (ii) maintenance revenue. Revenue generated from customer solutions consists primarily of the licensing of our customer solutions, hardware and related

43


professional services and training. Professional services primarily include installation, customization and consulting services. Certain revenue arrangements that require significant customization of a product to meet the particular requirements of a customer are recognized under the percentage-of-completion method. The vast majority of the percentage-of-completion method arrangements are fixed-fee contracts. Maintenance revenue consists 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.
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Revenue from customer solutions was $31.4 million for the three months ended July 31, 2015, a decrease of $2.5 million, or 7.5%, compared to the three months ended July 31, 2014. The decrease was primarily attributable to a lower volume of projects in the current period resulting from lower bookings. Revenue recognized using the percentage-of-completion method was $16.4 million and $20.2 million for the three months ended July 31, 2015 and 2014, respectively.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Revenue from customer solutions was $56.0 million for the six months ended July 31, 2015, a decrease of $14.2 million, or 20.2%, compared to the six months ended July 31, 2014. The decrease was primarily attributable to a lower volume of projects in the current period resulting from lower bookings. Revenue recognized using the percentage-of-completion method was $29.4 million and $40.0 million for the six months ended July 31, 2015 and 2014, respectively.
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Maintenance revenue was $30.2 million for the three months ended July 31, 2015, a decrease of $10.8 million, or 26.3%, compared to the three months ended July 31, 2014. This decrease was primarily attributable to an approximate $3.4 million decrease from the termination of certain maintenance contracts, a $3.0 million reduction in maintenance fees charged to certain customers and a $0.5 million decrease due to the timing of entering into renewals of maintenance contracts.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Maintenance revenue was $51.3 million for the six months ended July 31, 2015, a decrease of $18.6 million, or 26.6%, compared to the six months ended July 31, 2014. This decrease was primarily attributable to an approximate $6.5 million reduction in maintenance fees charged to certain customers, a $6.1 million decrease from the termination of certain maintenance contracts and a $2.6 million decrease due to the timing of entering into renewals of maintenance contracts.
Revenue by Geographic Region
The presentation of revenue by geographic region is based on the location of customers.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Revenue in the Americas, Asia-Pacific and Europe, Middle East and Africa represented approximately 44%, 25% and 31% of our revenue, respectively, for the six months ended July 31, 2015 compared to approximately 44%, 29% and 27% of our revenue, respectively, for the six months ended July 31, 2014.
Foreign Currency Impact on Revenue
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Our currency for financial reporting purposes is the U.S. dollar. The majority of our revenue for the six months ended July 31, 2015 was derived from transactions denominated in U.S. dollars. All other revenue was derived from transactions denominated in various foreign currencies, primarily the euro and Japanese yen. Fluctuations in the U.S. dollar relative to foreign currencies in which we conducted business for the six months ended July 31, 2015 compared to the six months ended July 31, 2014 had unfavorably impacted revenue by $4.3 million primary related to the euro and Japanese yen.
Foreign Currency Impact on Costs
A significant portion of our expenses, principally personnel-related costs, is incurred in new Israeli shekel (or NIS), whereas our 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 our expenses in Israel. In order to mitigate this risk we enter into foreign currency forward contracts to hedge foreign currency exchange rate fluctuations.
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. For the three months ended July 31, 2015, fluctuations in the U.S. dollar relative to all foreign currencies in which we conducted business favorably impacted costs by $2.6 million compared to the three months ended July 31, 2014, primarily due to a favorable impact of the NIS.

44


Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. For the six months ended July 31, 2015, fluctuations in the U.S. dollar relative to all foreign currencies in which we conducted business favorably impacted costs by $5.9 million compared to the six months ended July 31, 2014, primarily due to a favorable impact of the NIS.
Cost of Revenue
Cost of revenue primarily consists of (i) material costs, (ii) compensation and related overhead expenses for personnel involved in the customization of our products, customer delivery and maintenance and professional services, (iii) contractor costs, (iv) royalties and license fees, (v) depreciation of equipment used in operations, and (vi) amortization of capitalized software costs and certain purchased intangible assets.
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Cost of revenue was $40.0 million for the three months ended July 31, 2015, a decrease of $18.0 million, or 31.0%, compared to the three months ended July 31, 2014. The decrease was attributable to a decrease of $13.9 million in personnel-related and overhead allocation costs due to restructuring initiatives and from the transfer of employees to Tech Mahindra and a decrease of $4.4 million in material costs due to a decline in revenue partially offset by an increase of $2.7 million in subcontractor costs from the transfer of employees to Tech Mahindra.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Cost of revenue was $83.7 million for the six months ended July 31, 2015, a decrease of $25.1 million, or 23.1%, compared to the six months ended July 31, 2014. The decrease was attributable to a decrease of $23.0 million in personnel-related and overhead allocation costs due to restructuring initiatives and from the transfer of employees to Tech Mahindra and a decrease of $5.8 million in material costs due to a decline in revenue partially offset by an increase of $4.8 million in project loss accruals and an increase of $1.2 million in subcontractor costs from the transfer of employees to Tech Mahindra.
Research and Development, Net
Research and development expenses, net, primarily consist of personnel-related costs involved in product development and third party development and programming costs.
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Research and development expenses, net, were $8.2 million for the three months ended July 31, 2015, a decrease of $1.6 million, or 16.1%, compared to the three months ended July 31, 2014. The decrease was attributable to a decrease in personnel-related and overhead allocation costs of $2.1 million due to restructuring initiatives partially offset by a $0.3 million increase in subcontractor costs.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Research and development expenses, net, were $16.5 million for the six months ended July 31, 2015, a decrease of $1.7 million, or 9.1%, compared to the six months ended July 31, 2014. The decrease was attributable to a decrease in personnel-related and overhead allocation costs of $2.4 million due to restructuring initiatives partially offset by a $0.4 million increase in subcontractor costs.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of compensation and related expenses of personnel involved in sales, marketing, finance, legal and management and professional fees related to such functions.
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Sales and marketing costs were $5.0 million for the three months ended July 31, 2015, a decrease of $4.1 million or 45.1%, compared to the three months ended July 31, 2014. The decrease was primarily attributable to a $4.6 million decrease in personnel-related and overhead allocation costs due to restructuring initiatives.
General and administrative expenses were $14.3 million for the three months ended July 31, 2015, an increase of $0.7 million or 5.0%, compared to the three months ended July 31, 2014. The increase was primarily attributable to an increase in strategic related costs partially offset by a decrease in legal and personnel-related costs.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Sales and marketing costs were $12.1 million for the six months ended July 31, 2015, a decrease of $7.3 million or 37.7%, compared to the six months ended July 31, 2014. The decrease was primarily attributable to a $5.4 million decrease in personnel-related and overhead allocation costs and to a $1.6 million decrease in agent and employee commissions due to a reduction in and mix of bookings with varying commission fee arrangements.
General and administrative expenses were $27.2 million for the six months ended July 31, 2015, a decrease of $1.9 million or 6.4%, compared to the six months ended July 31, 2014. The decrease was primarily attributable to a decrease in legal and personnel-related costs.

45


Other Operating Expenses
Other operating expenses consist of operating expenses not included in research and development, net and selling, general and administrative expenses and for the fiscal periods presented consist of restructuring expenses.
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Other operating expenses were $4.2 million for the three months ended July 31, 2015, an increase of $3.1 million, or 261.9%, compared to the three months ended July 31, 2014. The increase was attributable to an increase in restructuring expenses primarily in connection with employees transferring to Tech Mahindra during the three months ended July 31, 2015 compared to the three months ended July 31, 2014.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Other operating expenses were $7.6 million for the six months ended July 31, 2015, an increase of $4.6 million, or 151.3%, compared to the six months ended July 31, 2014. The increase was attributable to an increase in restructuring expenses during the six months ended July 31, 2015 compared to the six months ended July 31, 2014.
For more information relating to restructuring expense, see Note 14 of the condensed consolidated financial statements included in this Quarterly Report
Loss from Operations
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Loss from operations was $10.5 million for the three months ended July 31, 2015, a decrease in loss of $6.5 million, or 38.3% compared to the three months ended July 31, 2014.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Loss from operations was $40.1 million for the six months ended July 31, 2015, an increase in loss of $1.5 million, or 3.9% compared to the six months ended July 31, 2014.
Interest Income
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Interest income was $0.1 million for the three months ended July 31, 2015 and 2014.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Interest income was $0.2 million for the six months ended July 31, 2015, and 2014.
Interest Expense
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Interest expense was $0.2 million for the three months ended July 31, 2015 and 2014.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Interest expense was $0.4 million for the six months ended July 31, 2015, and 2014.
Foreign Currency Transaction Loss, Net
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Foreign currency transaction loss, net, was $4.2 million for the three months ended July 31, 2015, an increase of $1.3 million as compared to the three months ended July 31, 2014. The change was attributable to exchange rate volatility primarily related to the Brazilian real, euro and the British pound.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Foreign currency transaction loss, net, was $9.8 million for the six months ended July 31, 2015, an increase of $8.8 million as compared to the six months ended July 31, 2014. The change was attributable to exchange rate volatility primarily related to the Brazilian real, euro and the British pound.
Other Income (Expense), Net
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. Other income, net, was $0.1 million for the three months ended July 31, 2015, a change of $0.5 million compared to Other expense, net of $0.4 million for the three months ended July 31, 2014.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. Other income, net, was $0.2 million for the six months ended July 31, 2015, a change of $0.6 million compared to Other expense, net of $0.5 million for the six months ended July 31, 2014.

46


Income Tax Expense
Three Months Ended July 31, 2015 Compared to Three Months Ended July 31, 2014. We recorded income tax benefit of $2.5 million for the three months ended July 31, 2015, representing an effective tax rate of 17.2%, compared with income tax expense of $1.9 million, representing an effective tax rate of (9.2)% for the three months ended July 31, 2014. During the three months ended July 31, 2015 and 2014, the effective tax rates were different than the U.S. statutory rate primarily due to the fact that we did not record an income tax benefit on losses incurred in certain of our U.S. and foreign tax jurisdictions in which we maintain valuation allowances against our net deferred tax assets. The income tax provisions from operations are comprised of income tax expense recorded in non-loss tax jurisdictions, withholding taxes, incremental valuation allowances and certain tax contingencies. The change in our effective tax rate for the three months ended July 31, 2015, compared to the three months ended July 31, 2014, was primarily attributable to changes in the relative mix of income and losses across various tax jurisdictions, the timing of when that mix of income occurs during the year and because we compute a separate effective tax rate for tax jurisdictions incurring losses.
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014. We recorded income tax expense of $2.3 million for the six months ended July 31, 2015, representing an effective tax rate of (4.5)%, compared with income tax expense of $4.3 million, representing an effective tax rate of (10.8)% for the six months ended July 31, 2014. During the six months ended July 31, 2015 and 2014, the effective tax rates were different than the U.S. statutory rate primarily due to the fact that we did not record an income tax benefit on losses incurred in certain of our U.S. and foreign tax jurisdictions in which we maintain valuation allowances against our net deferred tax assets. The income tax provisions from operations are comprised of income tax expense recorded in non-loss tax jurisdictions, withholding taxes, incremental valuation allowances and certain tax contingencies. The change in our effective tax rate for the six months ended July 31, 2015, compared to the six months ended July 31, 2014, was primarily attributable to changes in the relative mix of income and losses across various tax jurisdictions, the timing of when that mix of income occurs during the year and because we compute a separate effective tax rate for tax jurisdictions incurring losses.
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 from CTI, the incurrence of indebtedness from third parties, and the sale of investments and assets. We believe that our future sources of liquidity will include cash and cash equivalents, cash flows from operations, proceeds from the sale of assets and may include new borrowings or proceeds from the issuance of equity or debt securities.
During the three months ended July 31, 2015, our principal uses of liquidity were to fund operating expenses, implement restructuring initiatives and make capital expenditures. Subsequent to July 31, 2015, our principal use of liquidity was for funding the acquisition of Acision. We expect that our future principal uses of liquidity may also include funding of additional acquisitions.
Financial Condition
Cash and Cash Equivalents and Restricted Cash
As of July 31, 2015, we had cash, cash equivalents, bank time deposits and restricted cash of approximately $406.9 million, compared to approximately $201.9 million as of January 31, 2015. During the three months ended July 31, 2015, our principal source of cash was from the Asset Sale completed on July 2, 2015. On August 6, 2015, we paid approximately $136 million in cash as part of the consideration for the acquisition of Acision.
Restricted Cash
Restricted cash aggregated $60.8 million and $43.7 million as of July 31, 2015 and January 31, 2015, respectively. Restricted cash includes compensating cash balances related to existing lines of credit and deposits that are pledged as collateral or restricted for use specified performance guarantees to customers and vendors, letters of credit, indemnification claims, foreign currency transactions in the ordinary course of business and pending tax judgments. Upon closing of the Asset Sale during the three months ended July 31, 2015, $26 million of the purchase price was deposited into escrow to fund potential indemnification claims and certain adjustments for a period of 12 months following the closing.

47


Liquidity Forecast
We currently forecast that available cash and cash equivalents will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12 months.
Management's current forecast is based upon a number of assumptions including, among others: assumed levels of customer order activity, revenue and collections; continued implementation of initiatives to reduce operating costs; no significant degradation in operating margins; increased spending on certain investments in the business; slight reductions in the unrestricted cash levels required to support the working capital needs of the business and other professional fees; successful integration of the Acision business; 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 more of the risks or uncertainties described in Part I, Item 1A, “Risk Factors” of the 2014 Form 10-K, filed with the SEC on April 16, 2015, or in Part II, Item 1A, “Risk Factors” of this Quarterly Report materialize, we may experience a shortfall in the cash required to support working capital needs.
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
Six Months Ended July 31, 2015 Compared to Six Months Ended July 31, 2014
 
Six Months Ended July 31,
 
2015
 
2014
 
(In thousands)
Net cash used in operating activities
$
(49,263
)
 
$
(49,384
)
Net cash provided by (used in) investing activities
239,732

 
(18,131
)
Net cash used in financing activities
(2,883
)
 
(4,505
)
Effects of exchange rates on cash and cash equivalents
367

 
(973
)
Net increase (decrease) in cash and cash equivalents
187,953

 
(72,993
)
Cash and cash equivalents, beginning of period
158,121

 
254,580

Cash and cash equivalents, end of period
$
346,074

 
$
181,587

Operating Cash Flows
Net cash used in operating activities from operations was $49.3 million during the six months ended July 31, 2015, a decrease in cash used of $0.1 million, compared to the six months ended July 31, 2014. The change was primarily attributable to an increase in accounts payable and accrued expense and offsetting increase in other current assets in connection with the BSS Business sale due to services provided under the TSA, working capital adjustments and accrued restructuring costs.
Investing Cash Flows
Net cash provided by investing activities was $239.7 million during the six months ended July 31, 2015, an increase of $257.9 million, compared to the six months ended July 31, 2014. The increase was primarily attributable to an increase of $266.1 million in proceeds from the BSS Business sale during the six months ended July 31, 2015, partially offset by an increase in cash used for restricted cash of $14.5 million primarily due to $26 million placed in escrow in connection with the BSS Business sale net of a decrease in our line of credit.
Financing Cash Flows
Net cash used in financing activities was $2.9 million during the six months ended July 31, 2015, a decrease of $1.6 million, compared to the six months ended July 31, 2014. The decrease was attributable to a decrease of $1.2 million in cash used to repurchase common stock under the repurchase program and a $0.4 million decrease in cash used to repurchase

48


common stock in connection with tax liabilities upon settlement of awards during the six months ended July 31, 2015 compared to the six months ended July 31, 2014.
Effects of Exchange Rates on Cash and Cash Equivalents
The majority of our cash and cash equivalents are denominated in U.S. dollars. However, due to the nature of our global business, we also hold cash denominated in other currencies, primarily the euro, British pound, and the NIS. For the six months ended July 31, 2015, the fluctuation in foreign currency exchange rates had an favorable impact of $0.4 million on cash and cash equivalents.
Amdocs Asset Purchase Agreement
On April 29, 2015, we entered into an Asset Purchase Agreement (as amended, the Amdocs Purchase Agreement) with Amdocs Limited, a Guernsey company (or Purchaser). Pursuant to the Amdocs Purchase Agreement, we agreed to sell substantially all of our assets required for operating our converged, prepaid and postpaid billing and active customer management systems for wireless, wireline, cable and multi-play communication service providers (or BSS Business) to the Purchaser, and the Purchaser agreed to assume certain post-closing liabilities of ours (or the Asset Sale). The initial closing of the Asset Sale occurred on July 2, 2015. The total cash purchase price payable by the Purchaser to us in connection with the initial closing of the Asset Sale was approximately $273 million, subject to various purchase price adjustments, of which an aggregate of $6.5 million was scheduled to be paid upon certain deferred closings.
Upon the closing, $26 million of the purchase price was deposited into escrow to fund potential indemnification claims and certain adjustments for a period of 12 months following the closing.
In connection with the Amdocs Purchase Agreement, we and the Purchaser have also entered into a Transition Services Agreement (or the TSA), which provides for support services between us and the Purchaser in connection with the transition of the BSS Business to the Purchaser, for various periods up to 12 months following the closing of the Asset Sale. For additional information, see Note 14 to our condensed consolidated financial statements included in Item 1 of this Quarterly Report.
Acquisition of Acision
On August 6, 2015 (or the Closing Date), we completed the previously announced acquisition (or the Acquisition) of Acision Global Limited, a private company formed under the laws of England and Wales (or Acision) pursuant to the terms of the share sale and purchase agreement, dated June 15, 2015 (or the Purchase Agreement), between us and Bergkamp Coöperatief U.A., a cooperative with excluded liability formed under the laws of the Netherlands (or the Seller).
Pursuant to the terms of the Purchase Agreement, on the Closing Date we acquired 100% of the equity interests of Acision in exchange for $136 million in cash, certain earnout payments (as discussed below), and 3.14 million shares of our common stock, par value $0.01 per share (or the Consideration Shares), which were issued in a private placement transaction conducted pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended (or the Securities Act). As previously disclosed, pursuant to the terms of the Purchase Agreement, an amount up to $35 million of cash consideration will be subject to an earnout, contingent on the achievement of certain revenue objectives by certain of Acision’s business lines through the first quarter of 2016. To secure claims we may have under the Purchase Agreement, $10 million of the initial cash consideration was retained in escrow, which amount will be increased in the event that further consideration is triggered under the earnout, up to a total maximum aggregate escrow retention of $25 million. Such monies will be released to the Seller two years after completion of the transaction, subject to any claims. In addition, Acision, in consultation with us, entered into the previously disclosed amendment and waiver (or the Amendment) with the requisite lenders under the Acision’s credit agreement (the “Acision Credit Agreement”) governing Acision’s existing approximately $156 million senior credit facility (or the Acision Senior Debt), pursuant to which the Acision Senior Debt will remain in place following completion of the Acquisition. Pursuant to the terms of the Acision Credit Agreement the Acision Senior Debt bears interest at a rate per annum, at the option of Acision, of either (i) a customary adjusted Eurocurrency interest rate plus 9.75% or (ii) a customary base rate plus 8.75%, and matures, subject to the terms and conditions of the Acision Credit Agreement, on December 15, 2018. In connection with the Amendment, we agreed to pay certain costs imposed on Acision by its lenders under the Acision Senior Debt.
The Acision Credit Agreement contains customary representations and warranties and affirmative, restrictive and financial covenants. These provisions, with certain exceptions, restrict Acision’s ability and the ability of its subsidiaries to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends,

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distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. The Acision Credit Agreement also contains customary events of default, including, among other things, non-payment defaults, covenant defaults, material adverse effect defaults, bankruptcy and insolvency defaults and material judgment default. For additional information, see Note 19 to our condensed consolidated financial statements included in Item 1 of this Quarterly Report.
Agreement with Tech Mahindra
On April 14, 2015, we entered into a MSA with Tech Mahindra pursuant to which Tech Mahindra performs certain services for our Digital Services business on a global basis. Under the MSA, we are obligated to pay to Tech Mahindra in the aggregate approximately $211 million in base fees for services to be provided pursuant to the MSA for a term of six years, renewable at our option. As a result of the MSA, we expect approximately $12 million in annual cost savings. For additional information relating to our contractual obligations see "Contractual Obligations" included in this Quarterly Report.
Indebtedness
Spain Government Sponsored Loans
As of July 31, 2015 and January 31, 2015, we had approximately $1.1 million of debt which we assumed in connection with the acquisition of Solaiemes on August 1, 2014. The debt consists of Spain government sponsored loans extended for research and development projects. For additional information, see Note 9 to the condensed consolidated financial statements included in this Quarterly Report.
Acision Indebtedness
In connection with the completion of the Acquisition of Acision, on August 6, 2015, Acision, in consultation with us, entered into the previously disclosed amendment and waiver with the requisite lenders under Acision’s credit agreement governing Acision’s existing approximately $156 million senior credit facility with $10 million and $146 million classified as short-term and long-term debt, respectively. For more information, see “−Acquisition of Acision.”
Comverse Ltd. Lines of Credit
As of July 31, 2015 and January 31, 2015, Comverse Ltd., our wholly-owned Israeli subsidiary, had a $17.0 million and $25.0 million, respectively, 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. During the three months ended July 31, 2015, Comverse Ltd. decreased the line of credit from $25.0 million to $17.0 million with a corresponding decrease in the cash balances Comverse Ltd. is required to maintain with the bank to $17.0 million. 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. As of July 31, 2015 and January 31, 2015, Comverse Ltd. had utilized $12.6 million and $19.5 million, respectively, of capacity under the line of credit for guarantees and foreign currency transactions.
As of July 31, 2015 and January 31, 2015, Comverse Ltd. had an additional line of credit with a bank for $10.0 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 the London Interbank Offered Rate 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. As of July 31, 2015 and January 31, 2015, Comverse Ltd. had no outstanding borrowings under the line of credit. As of July 31, 2015 and January 31, 2015, Comverse Ltd. had utilized $4.8 million and $6.8 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 covenants. These cash balances required to be maintained with the banks were classified as “Restricted cash and bank deposits” and “Long-term restricted cash” included within the consolidated balance sheets as of July 31, 2015 and January 31, 2015.

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Common Stock Repurchase
As previously disclosed, our Board of Directors adopted a program to repurchase from time to time at management’s discretion up to $30.0 million in shares of our common stock on the open market during the 18-month period ending October 9, 2015 at prevailing market prices. In early September 2014, as part of this program, our Board approved a $5.0 million committed repurchase plan to be implemented in accordance with Rule 10b5-1 of the Exchange Act. Repurchases were made under the program using our own cash resources. During the fiscal year ended January 31, 2015, we repurchased in the open market under this program 688,642 shares of common stock for an aggregate purchase price of approximately $15.1 million and a weighted average purchase price of $21.98 per share. In Mid July 2015, as part of this program, our Board approved a $5.0 million committed repurchase plan to be implemented in accordance with Rule 10b5-1 of the Exchange Act. During the three months ended July 31, 2015, we repurchased in the open market under this program 116,969 shares of common stock for an aggregate purchase price of approximately $2.4 million and a weighted average purchase price of $20.10 per share.
Restructuring Initiatives
We review our business, manage costs and align resources with market demand and in connection with acquisitions. As a result, we have taken several actions to improve our cash position, 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 expenses. During the six months ended July 31, 2015 and 2014, we recorded severance and facility-related costs attributable to existing restructuring initiatives of $23.5 million and $4.7 million, respectively, and paid $9.2 million and $5.5 million, respectively. The remaining severance and facility-related costs relating to existing restructuring initiatives of $18.0 million and $4.1 million are expected to be substantially paid by July, 2016 and December, 2024, respectively.
For additional information relating to our financial obligations in respect of restructuring initiatives, see "-Overview-Business Trends and Uncertainties" and Note 8 to the condensed consolidated financial statements included in this Quarterly Report.
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 July 31, 2015 and January 31, 2015, 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 condensed 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 $20.9 million and $29.0 million as of July 31, 2015 and January 31, 2015, 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 July 31, 2016.
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.
Cash and cash equivalents held by foreign subsidiaries
We operate our business internationally. A significant portion of our cash and cash equivalents are held by various foreign subsidiaries. As of July 31, 2015 and January 31, 2015, we had $70.9 million and $88.0 million or 20% and 56% respectively, of our cash and cash equivalents held by our foreign subsidiaries. If cash and cash equivalents held outside the United States are

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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. We expect a portion of our foreign subsidiaries cash to be repatriated to the U.S. As this amount has been previously subject to U.S. tax, the non-U.S. withholding taxes that would be imposed on an actual triggering of a dividend of $149.0 million has been accrued in the amount of $20.1 million. At July 31, 2015, the Company had approximately $89.0 million of undistributed earnings in certain of its foreign subsidiaries which are considered to be indefinitely reinvested.
OFF-BALANCE SHEET ARRANGEMENTS
As of July 31, 2015, 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, 2015. For a more comprehensive discussion of our off-balance sheet arrangements as of January 31, 2015, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of our 2014 Form 10-K.
CONTRACTUAL OBLIGATIONS
On April 14, 2015, we entered into a MSA with Tech Mahindra pursuant to which Tech Mahindra performs certain services for our Digital Services business on a global basis. The services include research and development, project deployment and delivery and maintenance and support for customers of our Digital Service business. In connection with the transaction, approximately 500 of our employees have been rehired by Tech Mahindra or its affiliates. Tech Mahindra may hire additional employees contingent upon country regulatory and compliance requirements under applicable law.
Under the MSA, we are obligated to pay to Tech Mahindra in the aggregate approximately $211 million in base fees for services to be provided pursuant to the MSA for a term of six years, renewable at our option. Of this obligation, $23 million are due in the next twelve months, $79 million are due in one to three years, $68 million are due in three to five years and $41 million are due in more than five years. The services under the MSA started on June 1, 2015.
We have the right to terminate the MSA for convenience subject to the payment of certain termination fees. We may terminate the MSA upon certain material breaches, certain material performance failures or violations of applicable law by Tech Mahindra without termination fees. Tech Mahindra may terminate the MSA upon certain material breaches by us, including the failure to pay undisputed amounts. Upon any termination or expiration, Tech Mahindra will provide reverse transition services to transition the services being provided by Tech Mahindra pursuant to the MSA back to us or our designee. The MSA contains certain customary indemnification provisions by both Xura and Tech Mahindra.
Except as disclosed herein, there were no other material changes in our contractual obligations from January 31, 2015. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of our 2014 Form 10-K.

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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 statements included in Part IV, Item 15 of our 2014 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of our 2014 Form 10-K, and include the following:
revenue recognition;
extended payment terms;
percentage-of-completion accounting;
stock-based compensation;
recoverability of goodwill;
recoverability of long-lived assets;
income taxes;
litigation and contingencies;
Israel employees severance pay; and
discontinued operations.
We do not believe that there were any significant changes in our critical accounting policies during the six months ended July 31, 2015.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For information related to recently issued accounting pronouncements, see Note 2 to the condensed consolidated financial statements included in this Quarterly Report.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our 2014 Form 10-K, filed with the SEC on April 16, 2015, provides a detailed discussion of the market risks affecting our operations. We believe our exposure to these market risks did not materially change during the six months ended July 31, 2015.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our principal executive officer and principal 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, as amended (the Exchange Act) for the fiscal quarter ended July 31, 2015. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of July 31, 2015 to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the fiscal quarter ended July 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.
OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
For a description of our legal proceedings, see Note 19 to the condensed consolidated financial statements included in this Quarterly Report. Except as disclosed in such note, there have been no material developments in the legal proceedings previously reported in our 2014 Form 10-K, filed with the SEC on April 16, 2015.
ITEM 1A.
RISK FACTORS


Following the acquisition of Acision and the divestiture of the BSS Business to Amdocs Limited, we have reassessed our Risk Factors. You should carefully consider the risks described below, in addition to the risks and other information included in this Quarterly Report, our Quarterly Report for the quarter ended April 30, 2015 and our most recent Annual Report on Form 10-K for the fiscal year ended January 31, 2015 (or the Annual Report), including our consolidated and combined financial statements and related notes. If any of the risks described below or in our other filings actually occurs, our business, financial results, financial condition and stock price could be materially adversely affected.

Risk Relating to Our Business

We experienced a decline in product bookings during the fiscal year ended January 31, 2015 compared to the prior fiscal year. If product bookings do not increase, our revenue, profitability and cash flows will likely be materially adversely affected and we may be required to implement certain measures to preserve or enhance our operating results and cash position.
We experienced a decline in product bookings in the fiscal year ended January 31, 2015, which continued an adverse business trend that began in 2008. Although product bookings are expected to increase in the fiscal year ending January 31, 2016 (or fiscal 2015), we cannot assure you that we will achieve our targets and product bookings may continue to decrease in fiscal 2015 and in future periods. If product bookings do not increase, our revenue, profitability and cash flows will likely be materially adversely affected and we may be required to implement further cost reduction measures and other initiatives to preserve and enhance our operating results and cash position. Any such measures may limit or hinder our ability to execute our strategy and achieve our objectives thereby adversely affecting our business. In addition, declines in customer order activity may result in reduced revenue in future periods and may require us to record non-cash expenses relating to the impairment of goodwill and intangible assets, which may materially adversely affect our results of operations.
Our success depends on our ability to anticipate customer demand for new products and solutions and to generate revenue from new products and technologies that exceed any declines in revenue we may experience from the sale of traditional products and solutions. Our advanced Digital Services offerings may not be widely adopted by our existing and potential customers and increases in sales of our advanced offerings, if any, may not exceed or fully offset potential declines in sales of traditional solutions.
In response to a rapidly evolving Digital Services market, we are engaged in the promotion of Digital Services advanced offerings, such as IP messaging, WebRTC, IP-SMS-Gateway, security solutions, mobile monetization, enterprise solutions, Rich Communication Solutions (or RCS), and Software as a Service (or SaaS) cloud-based solutions, in addition to our traditional solutions, such as voicemail, SMS and MMS. While we believe demand for advanced offerings may grow due to the increasing deployment of smartphones and rollout of 4G/LTE networks by wireless CSPs, the implementation of a new services model poses challenges with respect to pricing and customer demand for and acceptance of new offerings.
It is unclear whether our advanced offerings will be widely adopted by existing and potential customers. Currently, we are unable to predict whether sales of advanced offerings will exceed or fully offset declines that we may experience in the sale of VAS traditional solutions in subsequent fiscal periods. If sales of advanced offerings do not increase or if increases in sales of advanced offerings do not exceed or fully offset any declines in sales of traditional solutions, due to adverse market trends, changes in consumer preferences or otherwise, our revenue, profitability and cash flows would likely be materially adversely affected.

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Historically, we have derived a significant portion of our revenue from certain major customers, and our revenue, profitability and cash flows could be materially adversely affected if we are unable to maintain or develop relationships with these customers, or if these customers reduce demand for our products.
Historically, we have derived a significant portion of our revenue from a limited number of customers. For the fiscal year ended January 31, 2015 and 2014, one customer accounted for approximately 15% and 28%, respectively, of our consolidated revenue. We intend to establish long-term relationships with existing customers and continue to expand our customer base. While we diligently seek to become less dependent on any single customer, it is likely that one or more customers will continue to contribute a significant portion of our revenue in any given year for the foreseeable future. The loss of one or more of our significant customers, or reduced demand from one or more of our significant customers, would result in an adverse effect on our revenue and profitability.
Product bookings are difficult to predict as a result of a high percentage of product bookings typically generated late in the fiscal quarter and in the fiscal year, lengthy and variable sales cycles, and a focus on large customers and projects.
A high percentage of our product bookings has typically been generated late in fiscal quarters. In addition, based on historical industry spending patterns of CSPs, we typically forecast our highest customer product booking level in our fourth fiscal quarter. This trend makes it difficult for us to forecast our annual product bookings and to implement effective measures to cover any shortfalls of prior fiscal quarters if product bookings for the fourth fiscal quarter fail to meet our expectations.
Furthermore, we continue to emphasize large capacity systems in our product development and marketing strategies. Contracts for Digital Services installations typically involve a lengthy, complex and highly competitive bidding and selection process, and our ability to obtain particular contracts is inherently difficult to predict. A delay, cancellation or postponement of significant orders may cause us to miss our projections, which may not be discernible until the end of a financial reporting period.
It is difficult for us to forecast the timing of orders because our customers often need a significant amount of time to evaluate products before purchasing them. The period between initial customer contact and a purchase by a customer may vary from a few weeks to more than a year. During the evaluation period, customers may defer or scale down proposed orders of products for various reasons, including:
changes in budgets and purchasing priorities;
reduced need to upgrade existing systems;
deferrals in anticipation of enhancements or new products;
introduction of products by competitors; and
lower prices offered by competitors.
We have many significant customers and frequently receive multi-million dollar orders. The deferral or loss of one or more significant orders or customers, could materially and adversely affect our results of operations in future fiscal periods.
We base our current and future expense levels on internal operating plans and sales forecasts, and operating costs are, to a large extent, fixed. As a result, we may not be able to sufficiently reduce our operating costs in any period to compensate for an unexpected near-term shortfall in revenue.
Restructuring initiatives to align operating costs and expenses with anticipated revenue could have an adverse impact on our product development, project deployment and the timely execution of our business strategy.
In recent years we have implemented certain initiatives to improve our cash position. In order to improve operating performance and cash flow from operations, we intend to continue to implement initiatives which we believe will enhance efficiency and result in significant reductions in costs and operating expenses, including realigning our cost structure to our current size and business environment by primarily reducing our selling, general and administrative expenses. We intend to continue to implement restructuring initiatives during the fiscal year ending January 31, 2016 in connection with the sale of the BSS business to Amdocs, the acquisition of Acision and as part of our ongoing review of our operations. While restructuring our operations is designed to improve operational efficiency and business performance, there is a risk that such restructuring could have an adverse impact on our product development, project deployment and the timely execution of our business strategy. In addition, there is no assurance that these initiatives will reduce costs and the costs to implement them may offset any savings for a period of time.

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We have engaged third parties to perform portions of our business operations, including research and development, project deployment, delivery, maintenance and support functions, and expect to use third parties for additional business operations which may limit our control over these business operations and exposes us to additional risk as a result of our reliance on third-party providers.
We use third-party subcontractors, also referred to as third-party providers, primarily for certain research and development, project deployment, delivery, maintenance and support, and general and administrative functions, primarily in India, Israel, China and the United States. As of July 31, 2015, we used approximately 750 independent subcontractors for such functions including the recently entered into master services agreement with another third party, Tech Mahindra Limited (or Tech Mahindra). For more information about the agreement with Tech Mahindra, see “−Risks Related to Our Recent Material Transactions.”
We use third-party providers to help provide flexibility to our cost structure as well as provide expertise in certain areas where the hiring of some skills in certain geographies may be difficult to obtain. While we utilize a number of companies to supply subcontractors and other services we do rely on a few for a large portion of these functions. In addition, we expect to be dependent on Tech Mahindra for the provision of services related to our Digital Services business. To the extent that we do not properly manage or supervise our third-party providers or where we cannot find an adequate number of qualified third-party providers, we may experience delays and quality issues and ultimately cost overruns and losses on projects. In addition, any disputes or other interruptions in our relationships with such third-party providers may have a material adverse effect on our business.
Furthermore, as we rely on third-party providers for more of our business operations we are not able to directly control these activities. Our third-party providers may not prioritize our business over that of their other customers and they may not meet our desired level of quality, performance, service, cost reductions or other metrics. Failure to meet key performance indicators may result in our being in default with our customers. In addition, we may rely on our third-party providers to secure materials from our suppliers with whom our third-party providers may not have existing relationships and we may be required to continue to manage these relationships even after we engage third-party providers to perform certain business operations.
As we engage third-party providers for business operations we become dependent on the IT systems of our third-party providers, including to transmit demand and purchase orders to suppliers, which can result in a delay in order placement. In addition, in an effort to reduce costs and limit their liabilities our third-party providers may not have robust systems or make commitments in as timely a manner as we require.
In some cases the actions of our third-party providers may result in our being found to be in violation of laws or regulations like import or export regulations. As many of our third-party providers operate outside of the U.S., our activity through third-party providers exposes us to information security vulnerabilities and increases our global risks. In addition, we are exposed to the financial viability of our third-party providers. Once a business activity is transitioned to a third-party provider we may be contractually prohibited from or may not practically be able to bring such activity back within our company or move it to another third-party provider. The actions of our third-party providers could result in reputational damage to us and could negatively impact our financial results.
Increased competition could force us to lower our prices or take other actions to differentiate our products and changes in the competitive environment in the telecommunications industry worldwide could seriously affect our business.
Our competitors may be able to develop more quickly or adapt faster to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products. Some of our competitors have, relative to us, greater name recognition and significantly greater financial, technical, marketing, customer service, public relations, distribution and other resources. We also experience competition from significantly larger network providers who at times may be able to bundle Digital Services solutions with an overall network deployment project and as a result may put pressure on prices. Certain Asian competitors have cost structures and financing alternatives that allow them in certain locations to also put pressure on prices. In addition, our competitors that manufacture other network telecommunications equipment may derive a competitive advantage in selling systems to customers that are purchasing, or have previously purchased, other compatible network equipment from such manufacturers. Furthermore, due to competition and market trends we expect to provide an increased portion of our solutions as SaaS, which is expected to create further pricing pressures. In addition, some of our customers may in the future decide to develop their own solutions internally instead of purchasing them from us. Increased competition could force us to lower our prices or take other actions to differentiate our products.

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In addition, the telecommunications industry in which we operate continues to undergo significant changes as a result of deregulation and privatization worldwide, reduced restrictions on competition in the industry and rapid and evolving technologies. The worldwide enhanced services industry is already highly competitive and we expect competition to intensify. In addition, as we enter new markets as a result of our own research and development efforts, acquisitions or changes in subscriber preferences, we are likely to encounter new competitors. Moreover, we face indirect competition from changing and evolving technology, which provides alternatives to our products and services. For example, the introduction of open access to web-based applications from wireless devices allows end users to utilize web-based services, such as Facebook, Facetime, Google, Whatsapp, Line or Skype, to access, among other things, IP communications free of charge rather than use similar services provided by CSPs. This may reduce demand and the price of our products and services.
We recently completed the acquisition of Acision and may continue to pursue mergers and acquisitions and strategic investments that present risks and may not be successful.
We have made acquisitions in the past, including the recent acquisition of Acision, and continue to examine opportunities for growth through mergers and acquisitions. Mergers and acquisitions entail a number of risks including:
the impact of the assumption of known potential liabilities or unknown liabilities associated with the merged or acquired companies;
financing the acquisition through the use of cash reserves, the incurrence of debt or the issuance of equity securities, which may be dilutive to our existing stockholders;
the difficulty of assimilating the operations, personnel and customers of the acquired companies into our operations and business;
the potential disruption of our ongoing business and distraction of management;
the difficulty of integrating acquired technology and rights into our services and unanticipated expenses related to such integration;
the difficulty of achieving the anticipated synergies from the combined businesses, including marketing, product integration, sales and distribution, product development and other synergies;
the failure to successfully develop acquired technology, resulting in the impairment of amounts capitalized as intangible assets at the date of the acquisition;
the potential for patent, trademark and other intellectual property infringement claims against the acquired company;
the impairment of relationships with customers and partners of the acquired companies or our customers and partners as a result of the integration of acquired operations;
the impairment of relationships with employees of the acquired companies or our employees as a result of integration of new management personnel;
the difficulty of integrating the acquired company's accounting, management information, human resources and other administrative systems into existing administrative, financial and managerial controls, reporting systems and procedures, particularly in the case of large acquisitions;
the need to implement required controls, procedures and policies at private companies which, prior to acquisition, lacked such controls, procedures and policies;
in the case of foreign acquisitions, uncertainty regarding the impact of foreign laws and regulations, currency risks and the particular economic, political and regulatory risks associated with specific countries and the difficulty integrating operations and systems as a result of language, cultural, systems and operational differences;
the potential inheritance of the acquired companies' past financial statements with their associated risks; and
the potential need to write-down impaired goodwill associated with any such transaction in subsequent periods, resulting in expenses to operations.
We continue to make significant investments in our business and to examine opportunities for growth. These activities may involve significant expenditures and obligations that cannot readily be curtailed or reduced if anticipated demand for the associated products does not materialize or is delayed. The impact of these decisions on future financial results cannot be predicted with assurance, and our commitment to growth may increase our vulnerability to downturns in our markets, technology changes and shifts in competitive conditions.
We face certain risks associated with potential labor disruptions.
In August 2015, The Histadrut (General Federation of Labor in Israel), the representative organization of our employees in Israel, declared a labor dispute. In connection with these process and other matters, we are conducting discussions with the unions. If negotiations of collective bargaining agreements or other discussions with the unions are not successful or become unproductive, the affected unions could take actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns or work stoppages or the possibility of such actions could delay or affect the transition process or otherwise have an

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adverse effect on our business. We could also incur higher costs from such actions, new collective bargaining agreements or the renewal of collective bargaining agreements on less favorable terms.
Risks Relating to Our Recent Material Transactions
We are subject to various risks and uncertainties arising out of the MSA pursuant to which a substantial portion of the employee base in our Digital Services business is transferred to a third party, Tech Mahindra, any of which could materially and adversely affect our business and operations, and our stock price.
On June 1, 2015, Tech Mahindra began performing certain services for the Company’s Digital Services business on a global basis. In connection with the master services agreement with Tech Mahindra, approximately 500 of our employees have been rehired by Tech Mahindra or its affiliates. Tech Mahindra may hire additional employees contingent upon country regulatory and compliance requirements under applicable law. Further, we will be materially dependent on Tech Mahindra for certain critical functions and operations, including research and development, project deployment, delivery, maintenance, and support services. Any failure on Tech Mahindra’s part could materially affect our business and financial results and we may fail to achieve the cost savings and other benefits anticipated from the master services agreement.
We are subject to various risks and uncertainties arising out of the recently completed divestiture of our BSS Business, any of which could materially and adversely affect our business and operations, and our stock price.
We completed the sale of our BSS Business on July 2, 2015. There may be delays in the realization of anticipated benefits of the sale. Following the closing of the sale of the BSS Business, the purchase price is subject to various post-closing adjustment provisions relating to compliance with our representations, warranties and covenants, including post-closing covenants relating to the procurement of various third party consents, over which we will have no meaningful control.
In connection with the Asset Sale, we agreed to indemnify Amdocs for certain pre-closing liabilities and breaches of certain representations and warranties. Upon the closing, $26 million of the purchase price was deposited into escrow to fund potential indemnification claims and certain adjustments for a period of 12 months following the closing. In late August 2015, we received certain notices of alleged claims against the escrow from Amdocs, which we believe to be without merit. However, we are not able to predict the ultimate outcome of these or future claims that Amdocs may assert against us in connection with the asset sale, any of which could have a material adverse effect on our results of operation and financial condition.
In addition, we could bear losses under our post-closing Transition Services Agreement, whether due to pricing versus cost variances, or in the case of any breach of or failure to meet performance standards under the agreement. Furthermore, we may be unable to re-invest the proceeds of the sale in our Digital Services business or new businesses that are profitable or otherwise successful.
In connection with the divestiture of the BSS Business, certain previously allocated corporate overhead costs (indirect BSS costs) charged to the BSS segment were excluded from discontinued operations and included in continuing operations. Following the closing of the sale of the BSS business, our efforts to reduce such costs and expenses, including through restructuring initiatives, may not be as successful as anticipated, or at all. We may encounter difficulties in implementing restructuring initiatives in certain countries in a timely manner, or at all, and restructuring costs may ultimately exceed our initial estimates. There is no assurance that these initiatives will reduce costs and the costs to implement them may not offset any savings for a period of time.
The failure to successfully integrate the Acision business and/or fully realize expected synergies from the acquisition in the expected timeframe or at all may adversely affect our business and operations.
The success of the Acision acquisition will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining our business with the business of Acision. Prior to the completion of the transaction, our business and Acision operated independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect the combined company’s ability to achieve the anticipated benefits of the transaction. If we experience difficulties with the integration process, the anticipated synergies and other benefits of the transaction may not be realized fully or at all, or may take longer to realize than expected. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on us and Acision for an undetermined period after completion of the transaction. In addition, even if we successfully integrate Acision’s business

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operations with our own, we may not realize the full expected benefits of the transaction, including the synergies, cost savings, sales and growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all.
Also, we have incurred, and continue to expect to incur, acquisition-related costs, including legal and accounting fees and expenses, and other related charges. We expect to incur additional costs to integrate the two companies’ businesses, such as IT integration expenses, retention costs and severance costs, which may be higher than expected. We also may incur unanticipated integration-related costs. As a result, we cannot assure you that the combination of our business and the business of Acision will result in the realization of the full synergies and other benefits, or any of them, anticipated from the transaction.
Acision’s indebtedness could adversely affect us, including by decreasing our business flexibility and increasing our costs.
Upon the signing of the definitive documentation relating to the Acision acquisition, Acision, in consultation with the Company, entered into a consent, waiver and first amendment (referred to as the Amendment) to the Acision senior credit facility, which became effective concurrent with the completion of the Acision acquisition and pursuant to which Acision’s debt under its senior credit facility remains in place.  In connection with the Amendment, the Company has paid certain fees and costs imposed on Acision by its senior lenders as a condition to the effectiveness of the Amendment. The Acision senior credit facility contains customary representations and warranties and affirmative, restrictive and financial covenants, each of which may impose operating and financial restrictions on us and Acision, including restrictions that may limit our ability to engage in acts that we believe may be in our long-term best interests. These provisions, with certain exceptions, restrict Acision’s ability and the ability of its subsidiaries to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends, distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. The Acision senior credit facility also contains customary events of default, including, among other things, non-payment defaults, covenant defaults, material adverse effect defaults, bankruptcy and insolvency defaults and material judgment default.
The operating restrictions and covenants in the Acision senior credit facility and any future financing agreements may limit our ability to finance future operations or capital needs, to engage in other business activities or to respond to changes in market conditions. Acision’s ability to comply with any such covenants could be affected materially by events beyond our and/or Acision’s control, and Acision may be unable to satisfy any such requirements. If Acision fails to comply with any such covenants or any event of default occurs, Acision may need to seek waivers or amendments of such covenants or events of default from the lenders under its senior credit facility or we and/or Acision may seek alternative or additional sources of financing or reduce its expenditures. Acision may be unable to obtain such waivers or amendments or we and/or Acision may not be able to obtain such alternative or additional financing on a timely basis or at all, or on favorable terms.
Acision is required to make periodic principal and interest payments and, in certain circumstances, mandatory prepayments pursuant to the terms of the Acision senior credit facility. If an event of default occurs, the interest rate on any amounts due will increase and the lenders under the Acision senior credit facility may declare all outstanding borrowings, together with accrued interest and other fees and costs, to be immediately due and payable and may exercise remedies in respect of the collateral provided by Acision and its subsidiaries as security. Acision may not be able to repay all amounts due under the Acision senior credit facility in the event these amounts are accelerated and declared due upon an event of default.
We may have difficulty attracting, motivating and retaining executives and other key employees in light of the Acision acquisition.
Uncertainty about the effect of the acquisition on our employees and Acision employees may have an adverse effect on the combined business. This uncertainty may impair our ability to attract, retain and motivate key personnel. If our key employees or Acision key employees depart, we may incur costs in identifying, hiring, training and retaining replacements for departing employees, which could reduce our ability to realize the anticipated benefits of the acquisition.

Risks Relating to Operations in Israel
Rules of the Office of the Chief Scientist may limit our ability to transfer technology outside of Israel or engage in strategic transaction or require us to pay redemption fees in the event we engage in such transactions.

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Historically, a portion of the research and development operations of Comverse Ltd. benefited from financial incentives provided by government agencies to promote research and development activities performed in Israel. Our research and development activities included projects submitted for partial funding under a program administered by the Office of the Chief Scientist of the Ministry of the Economy of the State of Israel (or the OCS), under which reimbursement of a portion of our research and development expenditures was made subject to final approval of project budgets. Although the Government of Israel does not own proprietary rights in the OCS-funded Products and there is no specific restriction by the OCS with regard to the export of the OCS-funded Products, under certain circumstances, there may be limitations on our ability to transfer technology, know-how and manufacturing of OCS-funded Products outside of Israel. Such limitations could result in the requirement to pay increased royalties or a redemption fee calculated according to the applicable regulations. During the fiscal year ended January 31, 2013, we discontinued the practice of seeking funding from the OCS and accordingly, there were no new programs initiated with the OCS during the fiscal years ended January 31, 2015 and 2014.  In addition, we do not plan to submit any new applications for funding.  However, the limitations on the transfer of technology, know-how and manufacturing of OCS-funded Products outside of Israel continue to apply.  We are currently in discussions with the OCS in respect of certain plans relating to the BSS business that was sold to Amdocs and are evaluating the submission of an application for the transfer of technology, know-how, manufacturing activities outside of Israel relating to our current business.  The difficulties in obtaining the approval of the OCS for the transfer of technology, know-how, manufacturing activities and/or manufacturing rights out of Israel could impair the ability of some of our subsidiaries to outsource manufacturing, enter into strategic alliances or engage in similar arrangements for those technologies, know-how or products or, if approved may require us to pay significant redemption fees.  If we are restricted to engage in such transaction or may be required to pay redemption fees, our business, results of operations and cash flows could be materially adversely affected.

Conditions in Israel and the Middle East may materially adversely affect our operations and personnel and may limit our ability to produce and sell our products.
We have significant operations in Israel, including research and development, manufacturing, sales, and support. Approximately 40% of our employees and approximately 40% of our facilities were located in Israel as of July 31, 2015. Since the establishment of the State of Israel in 1948, a number of armed conflicts and terrorist acts have taken place, which in the past did, and in the future may, lead to security and economic problems for Israel. Israel has faced, and continues to face, difficult relations with the Palestinians and the risk of terrorist violence from both Palestinians and Hezbollah. In addition, tensions between Israel and Iran have intensified over Iran's continued pursuit of nuclear capabilities. Furthermore, certain countries in the Middle East adjacent to Israel, including Egypt and Syria, continue to experience political unrest and instability marked by civil war, military actions and violence, which in some cases resulted in the replacement of governments and regimes. Current and future conflicts and political, economic and/or military conditions in Israel and the Middle East region may affect our operations in Israel. The exacerbation of violence within Israel or the outbreak of violent conflicts involving Israel may impede our ability to manufacture, sell, and support our products, engage in research and development, or otherwise adversely affect our business or operations. In addition, many of our employees in Israel are required to perform annual mandatory military service and are subject to being called to active duty at any time under emergency circumstances. The absence of these employees may have an adverse effect on our operations. Hostilities involving Israel that also result in the interruption or curtailment of trade between Israel and its trading partners could materially adversely affect our results of operations.
Risks Relating to Our Common Stock
Anti-takeover provisions in our organizational documents, our stockholder rights plan, and Delaware law could delay or prevent a change in control.
Anti-takeover provisions of our charter, bylaws, and the Delaware General Corporation Law, or DGCL, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable and diminish the opportunity for stockholders to participate in acquisition proposals at a price above the then-current market price of our common stock. For example, our charter and bylaws authorize our Board, without further stockholder approval, to issue one or more classes or series of preferred stock and fix the powers, preferences, rights, and limitations of such class or series, which could adversely affect the voting power of your shares. In addition, our bylaws provide for an advance notice procedure for nomination of candidates to our Board that could have the effect of delaying, deterring, or preventing a change in control.
We also have adopted a stockholder rights plan as a deterrent against an “ownership change” under federal tax law that would diminish our ability to utilize our significant net operating losses and other tax attributes. Although the rights plan is intended to reduce the likelihood of an ownership change that could adversely affect us, we cannot assure that it would prevent all transfers that could result in such an ownership change. Further, because the rights plan may restrict a stockholder’s ability to acquire our stock, the liquidity and market value of our stock might be adversely affected. The rights plan also may cause substantial dilution to a person or group that becomes an "acquiring person" under the plan and may discourage or delay a

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merger or acquisition that individual stockholders consider favorable or in which stockholders might otherwise receive a premium for their shares.
Further, as a Delaware corporation, we are subject to provisions of the DGCL regarding “business combinations,” which can deter attempted takeovers in certain situations. We may, in the future, consider adopting additional anti-takeover measures. The authority of our Board to issue undesignated preferred or other capital stock and the anti-takeover provisions of the DGCL, as well as other current and any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter, or prevent takeover attempts and other changes in control of the Company not approved by our Board.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
In the three months ended July 31, 2015, we purchased an aggregate of 33,741 shares of our common stock from certain of our 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 the Company are deposited in its treasury.
Common Stock Repurchase Program
As previously disclosed, our Board of Directors adopted a program to repurchase from time to time at management’s discretion up to $30.0 million in shares of our common stock on the open market during the 18-month period ending October 9, 2015 at prevailing market prices. Repurchases are made under the program using our own cash resources. In early September 2014, as part of this program, our Board approved a $5.0 million committed repurchase plan to be implemented in accordance with Rule 10b5-1 of the Exchange Act. During the fiscal year ended January 31, 2015, we repurchased in the open market under this program 688,642 shares of common stock for an aggregate purchase price of approximately $15.1 million and a weighted average purchase price of $21.98 per share. In Mid July 2015, as part of this program, our Board approved a $5.0 million committed repurchase plan to be implemented in accordance with Rule 10b5-1 of the Exchange Act. During the three months ended July 31, 2015, we repurchased in the open market under this program 116,969 shares of common stock for an aggregate purchase price of approximately $2.4 million and a weighted average purchase price of $20.10 per share.
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
May 1, 2015 – May 31, 2015
3,227

 
$
24.31

 

 
$
14,865,329

June 1, 2015 – June 30, 2015
30,145

 
20.70

 

 
14,865,329

July 1, 2015 – July 31, 2015
369

 
20.21

 
116,969

 
12,514,294

Total
33,741

 
$
21.04

 
116,969

 
$
12,514,294

Sales of Unregistered Securities
On August 6, 2015, in connection with the closing of the Acision Purchase Agreement, we agreed to pay at closing part of the consideration through the issuance of 3.14 million shares of our common stock, were issued in a private placement transaction conducted pursuant to Section 4(a)(2) or Regulation S under the Securities Act of 1933, as amended.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable. 
ITEM 5.
OTHER INFORMATION
Not applicable.

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ITEM 6.EXHIBITS
Exhibit No.
 
Exhibit Description
 
 
 
2.1*
 
Acision Purchase Agreement, dated as of June 15, 2015, by and between Xura, Inc. (formerly known as Comverse, Inc.) and Bergkamp Coöperatief U.A.
 
 
 
2.2*
 
Credit Agreement, dated as of December 15, 2014, by and between Acision B.V. as Parent, Fortissimo Holding B.V. as Dutch Borrower, Acision LLC as US Borrower, Elavon Financial Services Limited as Administrative Agent, U.S. Bank Trustees Limited as Collateral Agent, Jefferies Finance LLC as Sole Lead Arranger and Bookrunner and Newstar Financial Inc. as Documentation Agent.
 
 
 
2.3*
 
Consent, Waiver and First Amendment to Credit Agreement, dated as of July 13, 2015, by and between Fortissimo Holding, B.V., Acision Finance LLC and Acision B.V.

 
 
 
3.1
 
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Comverse, Inc. (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on September 8, 2015).
 
 
 
3.2
 
Amended and restated Bylaws of Xura, Inc. (incorporated herein by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the SEC on September 8, 2015).
 
 
 
10.1*†
 
Employment Agreement, dated as of August 7, 2014, by and between Comverse, Inc. and Michael Grossi.
 
 
 
10.2#
 
Amendment #1 to the Master Service Agreement, dated as of June 30, 2015, by and between Comverse, Inc. and Tech Mahindra Limited (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2015).
 
 
 
10.3†
 
Comverse, Inc. Amended and Restated 2012 Stock Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 25, 2015).
 
 
 
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.
 
 
101*
 
The following materials from the Registrant’s Quarterly Report on Form 10-Q for the three months and six months ended July 31, 2015, formatted in XBRL (eXtensible Business Reporting Language), include: (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Comprehensive Income (Loss), (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to the Condensed Consolidated Financial Statements.
*
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, as amended, or the Securities Exchange Act of 1934, as amended.
 
 
Constitutes a management contract or compensatory plan or arrangement.
 
 
#
Confidential treatment was requested for certain provisions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. These provisions have been omitted from the filing and submitted separately to the Securities and Exchange Commission. The location of the confidential information is indicated in the exhibit with brackets and an asterisk ([*])


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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.
 
 
XURA, INC.
 
 
September 9, 2015
/s/ Philippe Tartavull
 
Philippe Tartavull
President and Chief Executive Officer
(Principal Executive Officer)
 
 
September 9, 2015
/s/ Jacky Wu
 
Jacky Wu
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)

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