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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 October 31, 2012
or
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
 
New York
 
001-35303
 
13-3238402
(State or other jurisdiction
of incorporation or organization)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
810 Seventh Avenue
New York, New York
10019
(Address of Principal Executive Offices)
(Zip Code)
(212) 739-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   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
 
x
 
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
 
 ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
¨


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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 219,349,654 shares of the registrant’s common stock outstanding on November 15, 2012.


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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.


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DEFINITIONS
In this Quarterly Report on Form 10-Q (or Quarterly Report):
CTI means Comverse Technology, Inc., excluding its subsidiaries;
Comverse, Inc. means Comverse, Inc., CTI’s wholly-owned subsidiary prior to the completion of the Share Distribution (as defined below) on October 31, 2012, excluding its subsidiaries;
Comverse means Comverse, Inc, including its subsidiaries;
Verint Systems means Verint Systems Inc., CTI’s majority-owned subsidiary, excluding its subsidiaries;
Verint means Verint Systems, including its subsidiaries;
Starhome B.V. means Starhome B.V., CTI’s majority-owned subsidiary prior to the completion of the Share Distribution (as defined below) on October 19, 2012, excluding its subsidiaries;
Starhome means Starhome B.V., including its subsidiaries; and
we, us, our, our company and similar expressions mean CTI, including its subsidiaries.

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

risks associated with Verint's and CTI's ability to satisfy the conditions and terms of the Verint Merger (as defined below), and to consummate the Verint Merger in the estimated timeframe, or at all,
uncertainties regarding the expected benefits of the Verint Merger;
uncertainties regarding the tax consequences of the Verint Merger;
the risk that, in view of the Share Distribution, CTI is a smaller company that may be subject to increased instability and, prior to the proposed Verint Merger any elimination of the CTI holding company structure, CTI's interest in Verint will be its primary asset and CTI will be dependent on Comverse's performance of various transition services agreements necessary for its ongoing operations;
the risk that, if the Verint merger is not consummated, CTI may cease to maintain a majority of the voting power of Verint's outstanding equity securities, may cease to maintain control over Verint's operations, and may be required to no longer consolidate Verint's financial statements within CTI's consolidated financial statements ( in which event the presentation of its consolidated financial statements would be materially different from the presentation for the periods presented in this Quarterly Report);
the continuation of a material weakness related to income taxes or the discovery of additional material weaknesses in CTI's internal control over financial reporting and any delay in the implementation of remedial measures;
the risk of disruption in the credit and capital markets which may limit CTI's ability to access capital;
the risk that CTI may need to recognize future impairment of goodwill and intangible assets;
risks that CTI's credit ratings could be downgraded or placed on a credit watch based on, among other things, CTI's financial results;

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the following risks with respect to Verint, as CTI is now a holding company whose assets consist primarily of its controlling equity interest in Verint:
uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in information technology spending and government budgets, on Verint's business;
risks associated with Verint's ability to keep pace with technological changes and evolving industry standards in its product offerings and to successfully develop, launch, and drive demand for new and enhanced, innovative, high−quality products that meet or exceed customer needs;
risks associated with Verint being a part of CTI's consolidated tax group;
risks associated with CTI's current ability to control the Verint board of directors and the outcome of certain matters submitted for Verint stockholder action;
risks due to aggressive competition in all of Verint's markets, including with respect to maintaining margins and sufficient levels of investment in Verint's business;
risks created by the continued consolidation of Verint's competitors or the introduction of large competitors in Verint's markets with greater resources than Verint has;
risks associated with Verint's ability to successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with capital constraints, costs and expenses, maintaining profitability levels, management distraction, post−acquisition integration activities, and potential asset impairments;
risks that Verint may be unable to maintain and enhance relationships with key resellers, partners, and systems integrators;
risks relating to Verint's ability to effectively and efficiently execute on its growth strategy, including managing investments in its business and operations and enhancing and securing its internal and external operations;
risks relating to Verint's ability to successfully implement and maintain adequate systems and internal controls for its current and future operations and reporting needs and related risks of financial statement omissions, misstatements, restatements, or filing delays;
risks associated with the mishandling or perceived mishandling of sensitive or confidential information, security lapses, or with information technology system failures or disruptions;
risks associated with Verint's ability to efficiently and effectively allocate limited financial and human resources to business, development, strategic, or other opportunities that may not come to fruition or produce satisfactory returns;
risks associated with significant international operations, including, among others, in Israel, Europe, and Asia, exposure to regions subject to political or economic instability, and fluctuations in foreign exchange rates;
risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which Verint operates;
risks associated with Verint's ability to recruit and retain qualified personnel in regions in which Verint operates;
challenges associated with selling sophisticated solutions, long sales cycles, and emphasis on larger transactions, including in accurately forecasting revenue and expenses and in maintaining profitability;
risks that Verint's intellectual property rights may not be adequate to protect its business or assets or that others may make claims on Verint's intellectual property or claim infringement on their intellectual property rights;
risks that Verint's products may contain undetected defects, which could expose Verint to substantial liability;
risks associated with a significant amount of Verint's business coming from domestic and foreign government customers, including the ability to maintain security clearances for certain projects;
risks associated with Verint's dependence on a limited number of suppliers or original equipment manufacturers for certain components of Verint's products, including companies that may compete with Verint or work with its competitors;
risks that Verint's customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;

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risks that Verint may experience liquidity or working capital issues and related risks that financing sources may be unavailable to Verint on reasonable terms or at all;
risks associated with significant leverage resulting from Verint's current debt position, including with respect to covenant limitations and compliance, fluctuations in interest rates, and Verint's ability to maintain its credit ratings;
risks relating to Verint's ability to timely implement new accounting pronouncements or new interpretations of existing accounting pronouncements and related risks of future restatements or filing delays; and
risks associated with changing tax rates, tax laws and regulations, and the continuing availability of expected tax benefits;

These risks and uncertainties discussed above, as well as others, are discussed in greater detail in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 31, 2012 (or the 2011 Form 10-K) and in Part II, Item 1A "Risk Factors" of each of our Quarterly Reports on Form 10-Q, for the fiscal quarters ended April 30, 2012 (or the Q1 2012 Form 10-Q), for the fiscal quarter ended July 31, 2012 (or the Q2 2012 Form 10-Q) and this Quarterly Report. The documents and reports we file with the SEC are available through CTI, or its website, www.cmvt.com, or through the SEC's Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) at www.sec.gov. CTI undertakes no commitment to update or revise any forward-looking statements except as required by law.


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PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share and per share data)
 
October 31,
2012
 
January 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
237,021

 
$
322,445

Restricted cash and bank time deposits
36,518

 
12,863

Auction rate securities

 
272

Accounts receivable, net of allowance of $2,369 and $2,929, respectively
157,402

 
154,764

Inventories
11,711

 
14,414

Deferred cost of revenue
4,457

 
11,951

Deferred income taxes
13,096

 
13,447

Prepaid expenses and other current assets
42,958

 
47,218

Current assets of discontinued operations

 
489,428

Total current assets
503,163

 
1,066,802

Property and equipment, net
37,167

 
29,853

Goodwill
896,968

 
894,155

Intangible assets, net
154,253

 
184,230

Deferred cost of revenue
7,486

 
13,285

Deferred income taxes
8,925

 
9,467

Other assets
42,023

 
44,399

Noncurrent assets of discontinued operations

 
414,822

Total assets
$
1,649,985

 
$
2,657,013

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
178,748

 
$
188,744

Convertible debt obligations

 
2,195

Deferred revenue
138,653

 
156,772

Deferred income taxes
651

 
1,056

Bank loans
6,438

 
6,228

Income taxes payable
5,178

 
6,284

Other current liabilities
42,663

 
41,911

Current liabilities of discontinued operations

 
574,579

Total current liabilities
372,331

 
977,769

Bank loans
586,146

 
591,151

Deferred revenue
14,257

 
25,987

Deferred income taxes
43,266

 
36,741

Other long-term liabilities
57,080

 
60,166

Noncurrent liabilities of discontinued operations

 
412,447

Total liabilities
1,073,080

 
2,104,261

Commitments and contingencies

 

Equity:
 
 
 
Comverse Technology, Inc. shareholders’ equity:
 
 
 
Common stock, $0.10 par value - authorized, 600,000,000 shares; issued 220,601,756 and 219,708,779 shares, respectively; outstanding, 219,257,343 and 218,636,842 shares, respectively
22,060

 
21,971

Treasury stock, at cost, 1,344,413 and 1,071,937 shares, respectively
(9,696
)
 
(8,011
)
Additional paid-in capital
2,269,611

 
2,198,871

Accumulated deficit
(1,816,949
)
 
(1,762,518
)
Accumulated other comprehensive loss
(19,917
)
 
(8,805
)
Total Comverse Technology, Inc. shareholders’ equity
445,109

 
441,508

Noncontrolling interest
131,796

 
111,244

Total equity
576,905

 
552,752

Total liabilities and equity
$
1,649,985

 
$
2,657,013

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

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share data)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2012

2011
 
2012
 
2011
Revenue:
 
 
 
 
 
 
 
Product revenue
$
87,404

 
$
101,164

 
$
281,393

 
$
284,865

Service revenue
114,116

 
98,200

 
329,188

 
285,790

Total revenue
201,520

 
199,364

 
610,581

 
570,655

Costs and expenses:
 
 
 
 
 
 
 
Product costs
29,116

 
37,048

 
103,818

 
98,128

Service costs
36,166

 
33,091

 
105,772

 
96,469

Research and development, net
27,732

 
28,464

 
86,330

 
81,640

Selling, general and administrative
101,793

 
96,700

 
284,935

 
294,740

Other operating expenses:
 
 
 
 
 
 
 
Litigation settlements

 
4,880

 

 
4,880

Total costs and expenses
194,807

 
200,183

 
580,855

 
575,857

Income (loss) from operations
6,713

 
(819
)
 
29,726

 
(5,202
)
Interest income
130

 
387

 
392

 
2,111

Interest expense
(7,818
)
 
(7,909
)
 
(23,240
)
 
(24,571
)
Loss on extinguishment of debt

 

 

 
(8,136
)
Other (expense) income, net
(130
)
 
(1,101
)
 
577

 
13,617

(Loss) income before income tax (provision) benefit
(1,105
)
 
(9,442
)
 
7,455

 
(22,181
)
Income tax (provision) benefit
(5,462
)
 
4,317

 
(25,950
)
 
(19,314
)
Net loss from continuing operations
(6,567
)
 
(5,125
)
 
(18,495
)

(41,495
)
Income (loss) from discontinued operations, net of tax
14,800

 
47,392

 
(14,823
)
 
(5,245
)
Net income (loss)
8,233

 
42,267

 
(33,318
)
 
(46,740
)
Less: Net income attributable to noncontrolling interest
(4,549
)
 
(6,577
)
 
(21,113
)
 
(16,462
)
Net income (loss) attributable to Comverse Technology, Inc.
$
3,684

 
$
35,690

 
$
(54,431
)
 
$
(63,202
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
219,238,541

 
205,886,126

 
219,068,912

 
205,890,586

Earnings (loss) per share attributable to Comverse Technology, Inc.’s shareholders:
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share
 
 
 
 
 
 
 
Continuing operations
$
(0.05
)
 
$
(0.05
)
 
$
(0.18
)
 
$
(0.27
)
Discontinued operations
0.07

 
0.22

 
(0.07
)
 
(0.04
)
Basic and diluted earnings (loss) per share
$
0.02

 
$
0.17

 
$
(0.25
)
 
$
(0.31
)
Net income (loss) attributable to Comverse Technology, Inc.
 
 
 
 
 
 
 
Net loss from continuing operations
$
(10,960
)
 
$
(11,083
)
 
$
(38,442
)
 
$
(55,932
)
Income (loss) from discontinued operations, net of tax
14,644

 
46,773

 
(15,989
)
 
(7,270
)
Net income (loss) attributable to Comverse Technology, Inc.
$
3,684

 
$
35,690

 
$
(54,431
)
 
$
(63,202
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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


 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net income (loss)
$
8,233

 
$
42,267

 
$
(33,318
)
 
$
(46,740
)
Other comprehensive (loss) income, net of tax:

 

 
 
 
 
Foreign currency translation adjustments
(20,457
)
 
(4,483
)
 
(17,750
)
 
(1,960
)
Unrealized (loss) gain on available-for-sale securities, net of reclassification adjustments and tax

 
(1,463
)
 
8,391

 
(4,443
)
Unrealized gain (loss) on cash flow hedges, net of reclassification adjustments and tax
3,471

 
(506
)
 
(876
)
 
(373
)
Other comprehensive loss, net of tax
(16,986
)
 
(6,452
)
 
(10,235
)
 
(6,776
)
Comprehensive (loss) income
(8,753
)
 
35,815

 
(43,553
)
 
(53,516
)
Less: comprehensive income attributable to noncontrolling interest
(10,210
)
 
(1,968
)
 
(21,990
)
 
(14,511
)
Comprehensive (loss) income attributable to Comverse Technology, Inc.
$
(18,963
)
 
$
33,847

 
$
(65,543
)
 
$
(68,027
)
The accompanying notes are an integral part of these condensed consolidated financial statements.



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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

 
Nine Months Ended October 31,
 
2012
 
2011
Cash flows from operating activities:
 
Net cash provided by (used in) operating activities - continuing operations
$
29,830

 
$
(61,874
)
Net cash used in operating activities - discontinued operations
(46,400
)
 
(19,599
)
Net cash used in operating activities
(16,570
)
 
(81,473
)
Cash flows from investing activities:
 
 
 
Proceeds from sales and maturities of investments
394

 
26,275

Acquisition of businesses, including adjustments, net of cash acquired
(660
)
 
(98,698
)
Purchase of property and equipment
(11,477
)
 
(9,240
)
Capitalization of software development costs
(2,921
)
 
(2,542
)
Net change in restricted cash and bank time deposits
(23,729
)
 
23,093

Settlement of derivative financial instruments not designated as hedges
(266
)
 
(1,183
)
Net cash used in investing activities - continuing operations
(38,659
)

(62,295
)
Net cash used in investing activities - discontinued operations
(2,844
)
 
(13,605
)
Net cash used in investing activities
(41,503
)
 
(75,900
)
Cash flows from financing activities:
 
 
 
Debt issuance costs and other debt-related costs
(217
)
 
(15,280
)
Proceeds from borrowings, net of original issuance discount

 
597,000

Cash of Comverse, Inc. as of the Share Distribution date, including capital contribution of $38.5 million
(205,250
)
 

Repayment of convertible debt obligation
(2,195
)
 

Repayment of bank loans, long-term debt and other financing obligations
(5,130
)
 
(585,514
)
Repurchase of common stock of CTI and subsidiary
(2,300
)
 
(5,146
)
Proceeds from exercises of stock options of CTI and subsidiary
1,821

 
10,418

Payments of contingent consideration for business combinations (financing portion)
(6,074
)
 
(2,004
)
Net cash used in financing activities - continuing operations
(219,345
)
 
(526
)
Net cash used in financing activities - discontinued operations
(35
)
 
(6,028
)
Net cash used in financing activities
(219,380
)
 
(6,554
)
Effects of exchange rates on cash and cash equivalents
(1,163
)
 
3,883

Net decrease in cash and cash equivalents
(278,616
)
 
(160,044
)
Cash and cash equivalents, beginning of period including cash from discontinued operations
515,637

 
581,390

Cash and cash equivalents, end of period including cash from discontinued operations
237,021

 
421,346

Less: cash and cash equivalents of discontinued operations, end of period

 
(172,149
)
Cash and cash equivalents, end of period
$
237,021

 
$
249,197

Non-cash investing and financing transactions:
 
 
 
Accrued but unpaid purchases of property and equipment
$
1,715

 
$
1,241

Inventory transfers to property and equipment
$
374

 
$
555

Liabilities for contingent consideration recorded for business combinations
$

 
$
33,704

Leasehold improvements funded by lease incentive
$
5,014

 
$

Stock options exercised, proceeds received subsequent to period end
$

 
$
364

Purchases under supplier financing arrangements, including capital leases
$

 
$
1,090

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

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
BASIS OF PRESENTATION
Company Background
Comverse Technology, Inc. (“CTI” and, together with its subsidiary, the “Company”) is a holding company organized as a New York corporation in October 1984 that, subsequent to the Share Distribution (as defined below) that occurred on October 31, 2012, conducts business through its majority-owned subsidiary, Verint Systems Inc. (“Verint Systems” and together with its subsidiaries, “Verint”). Prior to the Share Distribution, CTI also conducted business through its wholly-owned subsidiary, Comverse, Inc. (together with its subsidiaries, “Comverse”), and prior to the completion of the Starhome Disposition (as defined below) on October 19, 2012, through its majority-owned subsidiary Starhome B.V. (together with its subsidiaries, “Starhome”). Comverse's and Starhome's assets and liabilities and results of operations are included in discontinued operations (see Note 12, Discontinued Operations).
Continuing Operations
Verint
Overview
Verint is a global leader in Actionable Intelligence solutions and value-added services. Verint's solutions enable organizations of all sizes to make more timely and effective decisions to improve enterprise performance and enhance safety. Verint's customers use Verint's Actionable Intelligence solutions to capture, distill, and analyze complex and underused information sources, such as voice, video and unstructured text.
In the enterprise intelligence market, Verint's workforce optimization and voice of the customer solutions help organizations enhance the customer service experience, increase customer loyalty, enhance products and services, reduce operating costs, and drive revenue. In the security intelligence market, Verint's communications and cyber intelligence, video and situation intelligence and public safety solutions help government and commercial organizations in their efforts to protect people and property and neutralize terrorism and crime.
Merger of CTI and Verint
On August 12, 2012, CTI entered into an agreement and plan of merger (the “Verint Merger Agreement”) with Verint pursuant to which CTI agreed to merge with and into a subsidiary of Verint and become a wholly-owned subsidiary of Verint (the “Verint Merger”). Upon completion of the Verint Merger the separate corporate existence of CTI will cease.
Discontinued Operations
Comverse
Overview
Comverse is a leading provider of software-based products, systems and related services that:
provide converged, prepaid and postpaid billing and active customer management systems ("Business Support Systems" or "BSS") for wireless, wireline and cable network operators delivering a value proposition designed to ensure timely and efficient service monetization, consistent customer experience, reduced complexity and cost, and enable real-time marketing based on all relevant customer profile information;
enable wireless and wireline (including cable) network-based Value-Added Services ("VAS"), comprised of two categories—Voice and Messaging—that include voicemail, visual voicemail, call completion, short messaging service ("SMS") text messaging ("texting"), multimedia picture and video messaging, and Internet Protocol ("IP") communications; and
provide wireless users with optimized access to Internet websites, content and applications, manage and enforce policy and generate data usage and revenue for wireless operators.
Comverse's products and services are used by more than 450 wireless, wireline and cable network communication service providers in more than 125 countries, including the majority of the world's 100 largest wireless network operators. Comverse's products and services are designed to generate voice and data network traffic, increase revenue and customer loyalty, monetize services and improve operational efficiency.

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



Comverse Share Distribution
On October 31, 2012, CTI completed its previously announced spin-off of Comverse as an independent, publicly-traded company, accomplished by means of a pro rata distribution of 100% of Comverse's outstanding common shares to CTI's shareholders (the “Share Distribution”). Following the Share Distribution, CTI no longer holds any of Comverse's outstanding capital stock.
Immediately prior to the Share Distribution, CTI contributed to Comverse Exalink Ltd. (“Exalink”), its wholly-owned subsidiary. Other than holding certain intellectual property rights, Exalink has no operations. Following the Share Distribution, Comverse and CTI operate independently, and neither have any ownership interest in the other. In order to govern certain ongoing relationships between CTI and Comverse after the Share Distribution and to provide mechanisms for an orderly transition, CTI and Comverse entered into agreements relating to the provision of certain services and setting forth certain rights and obligations between them following the Share Distribution. CTI and Comverse agreed, among other things, to indemnify each other against certain liabilities arising from their respective businesses and the services that will be provided under such agreements (see Note 12, Discontinued Operations).
Starhome
Starhome is a provider of wireless service mobility solutions that enhance international roaming. Wireless operators use Starhome’s software-based solutions to generate additional revenue and to improve profitability by directing international roaming traffic to preferred networks and by providing a wide range of services to subscribers traveling outside their home network.
Sale of Starhome
On August 1, 2012, CTI, certain other Starhome shareholders and Starhome entered into a Share Purchase Agreement (the “Starhome Share Purchase Agreement”) with Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, “Fortissimo”) pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome (the “Starhome Disposition”). On September 19, 2012, CTI, in order to ensure it could meet the conditions to the Verint Merger, contributed to Comverse, its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Starhome Disposition was completed on October 19, 2012.
Discontinued Operations Presentation
As a result of the Share Distribution and the Starhome Disposition, the results of operations of Comverse and Starhome, are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in the Company's condensed consolidated statements of operations for all periods presented. The assets and liabilities of Comverse and Starhome are included in discontinued operations as separate components to the Company's condensed consolidated balance sheet as of January 31, 2012 (see Note 12, Discontinued Operations).
Condensed Consolidated Financial Statements Preparation
The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and on the same basis as the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2012 (the “2011 Form 10-K”). The condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the periods ended October 31, 2012 and 2011, and the condensed consolidated balance sheets as of October 31, 2012 and January 31, 2012 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 presentation of the results of the periods presented. Certain information and disclosures normally included in annual consolidated financial statements have been omitted in this interim period report pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by U.S. GAAP for annual financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in the 2011 Form 10-K. The results for interim periods are not necessarily indicative of a full fiscal year’s results.
For information regarding measurement period adjustments related to certain business combinations that have been applied retrospectively to condensed consolidated balance sheet as of January 31, 2012, refer to Note 5, “Business Combinations.”

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(UNAUDITED)



Principles of Consolidation
The accompanying condensed consolidated financial statements include CTI and its controlled subsidiary Verint Systems (in which CTI owned 40.6% of the common stock and held 51.5% of the voting power as of October 31, 2012). Comverse was a wholly-owned subsidiary prior to the Share Distribution on October 31, 2012 and Starhome was a majority-owned subsidiary prior to its sale on October 19, 2012 and their results were included in the consolidated balance sheets and the consolidated statements of operations, comprehensive loss and cash flows through such dates. For controlled subsidiaries that are not wholly-owned, the noncontrolling interest is included as a separate component of “Net income (loss)” in the condensed consolidated statements of operations and “Total equity” in the condensed consolidated balance sheets. Verint Systems holds a 50% equity interest in a consolidated variable interest entity in which it is the primary beneficiary. The results of operations of this variable interest entity for the three and nine months ended October 31, 2012 and 2011 were not significant to the condensed consolidated statements of operations.
All intercompany balances and transactions have been eliminated.
The Company includes the results of operations of acquired businesses from the dates of acquisition.
Segment Reporting and Changes in Reportable Segments
The Company has one reportable segment, Verint. The results of CTI's holding company operations, are included in the column captioned “All Other” as part of the Company’s business segment presentation. As a result of the Share Distribution, the Company no longer presents Comverse BSS and Comverse VAS as reportable segments and Comverse's operations previously included in “All Other” have been removed therefrom as Comverse's results of operations are included in discontinued operations for the three and nine months ended October 31, 2012 and 2011. In addition, on August 1, 2012, CTI entered into the Starhome Share Purchase Agreement with unaffiliated purchasers and accordingly, Starhome's results of operations, which previously were included in “All Other,” have been removed therefrom and are included in discontinued operations for the three and nine months ended October 31, 2012 and 2011.
Use of Estimates
The preparation of the condensed consolidated financial statements and the accompanying notes in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.
The most significant estimates include:
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;
Inventory write-off;
Allowance for doubtful accounts;
Fair value of stock-based compensation;
Valuation of assets acquired and liabilities assumed in business combinations, including contingent consideration;
Fair value of reporting units for the purpose of goodwill impairment test;
Valuation of other intangible assets;
Valuation of investments and financial instruments; 
Realization of deferred tax assets; and
The identification and measurement of uncertain tax positions.
The Company’s actual results may differ from its estimates.
Cash Position
The Company incurred substantial losses and had negative cash flows during the three fiscal years ended January 31, 2012 and the nine months ended October 31, 2012, and had a significant accumulated deficit as of October 31, 2012.

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The Company forecasts that available cash and cash equivalents will be sufficient to meet the liquidity needs of CTI for at least the next 12 months. The Company’s forecast is based upon a number of assumptions, which the Company believes are reasonable. However, should one or more of the assumptions prove incorrect, or should one or more of the risks or uncertainties attendant to the Company and its business materialize, the Company’s business and operations could be materially adversely affected. Management believes that sources of liquidity could be identified.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
Standards Implemented
In May 2011, the Financial Accounting Standards Board (the “FASB”) issued updated accounting guidance to amend existing requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance was effective for the Company for the interim period ended April 30, 2012. The adoption of this guidance did not materially impact the Company's condensed consolidated financial statements.
In June 2011, the FASB issued accounting guidance, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of equity. Under the new guidance, entities are required to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The amended and updated guidance was effective for the Company for the interim period ended April 30, 2012 and has been applied retrospectively as required by this standard. Other than the change in presentation, adoption of this guidance did not impact the Company's condensed consolidated financial statements.
Standards to be Implemented
In July 2012, the FASB issued new accounting guidance on indefinite-lived intangible assets. The new guidance provides an entity the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount and recognize an impairment loss, if any, to the extent the carrying value exceeds its fair value. The guidance is effective for the Company for annual and, if any, interim impairment tests performed in the fiscal years beginning after September 15, 2012, with early adoption permitted. The Company believes that the adoption of this guidance will not have a material impact on the Company's condensed consolidated financial statements.

3.
INVESTMENTS
Investments with original maturities of three months or less, when purchased, are included in "Cash and cash equivalents" or in “Restricted cash and bank time deposits” in the condensed consolidated balance sheets. As of October 31, 2012 and January 31, 2012, such investments included money market funds totaling $71.4 million and $208.0 million, respectively. There were no unrealized gains (losses) on these investments as of October 31, 2012 and January 31, 2012. As of October 31, 2012, the Company held no other investments.

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As of January 31, 2012, the Company had other investments in available-for-sale securities which are set forth in the following table:

 
January 31, 2012
 
 
 
Included in Accumulated
Other Comprehensive Income
 
 
 
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Cumulative
Impairment
Charges
 
Estimated
Fair Value
 
(In thousands)
Short-term:
 
 
 
 
 
 
 
 
 
Auction rate securities - Corporate issuers
$
7,500

 
$
34

 
$

 
$
(7,262
)
 
$
272

Total short-term investments
$
7,500

 
$
34

 
$

 
$
(7,262
)
 
$
272

There were no cash proceeds from sale or redemption of investments for the three months ended October 31, 2012. The Company received cash proceeds from sales and redemptions of Auction Rate Securities ("ARS") and other investments of $0.4 million for the nine months ended October 31, 2012 and $0.5 million and $26.3 million for the three and nine months ended October 31, 2011, respectively.
The gross realized gains and losses on the Company’s investments for the three and nine months ended October 31, 2012 and 2011 are as follows:
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
Gross Realized
Gains
 
Gross Realized
Losses
 
Gross Realized
Gains
 
Gross Realized
Losses
 
(In thousands)
2012
$

 
$

 
$
156

 
$

2011
$
120

 
$

 
$
8,011

 
$


The components of other comprehensive income (“OCI”) related to available-for-sale securities are as follows:
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Accumulated OCI related to available-for-sale securities, beginning of the period
$

 
$
10,260

 
$
(8,391
)
 
$
13,240

Unrealized gains on available-for-sale securities

 
(1,376
)
 

 
(287
)
Reclassification adjustment for gains included in net loss

 
(87
)
 
(34
)
 
(4,156
)
Changes in accumulated OCI on available-for-sale securities, before tax

 
(1,463
)
 
(34
)
 
(4,443
)
Deferred income tax benefit

 

 
8,425

 

Changes in accumulated OCI on available-for-sale securities, net of tax

 
(1,463
)
 
8,391

 
(4,443
)
Accumulated OCI related to available-for-sale securities, end of the period
$

 
$
8,797

 
$

 
$
8,797


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(UNAUDITED)



4.
INVENTORIES
Inventories as of October 31, 2012 and January 31, 2012 consist of:
 
 
October 31, 2012
 
January 31, 2012
 
(In thousands)
Raw materials
$
3,994

 
$
4,959

Work in process
3,998

 
5,777

Finished goods
3,719

 
3,678

 
$
11,711

 
$
14,414

5.
BUSINESS COMBINATIONS
The Company did not execute any business combinations during the nine months ended October 31, 2012.
Verint Segment
Vovici Acquisition
On August 4, 2011, Verint acquired all of the outstanding shares of Vovici Corporation (“Vovici”), a U.S.-based provider of online survey management and enterprise feedback solutions, for total consideration of $66.1 million. Included in this consideration was $9.9 million for the fair value of potential additional cash payments to the former Vovici shareholders of up to approximately $19.1 million, payment of which is contingent upon the achievement of certain performance targets over the period from the acquisition date through January 31, 2013.
At each reporting date, the contingent consideration obligations associated with business combinations are revalued to their estimated fair values, and any increases or decreases in fair values are reflected within “Selling, general and administrative” expenses in the Company’s condensed consolidated statements of operations.
For the three and nine months ended October 31, 2012, the Company recorded an expense of $0.8 million and a benefit of $2.9 million, respectively, and for the three months ended October 31, 2011, the Company recorded an expense of $0.3 million, within “Selling, general and administrative” expenses for changes in the fair value of the Vovici contingent consideration obligation, which primarily reflected the impacts of revised expectations of achieving the performance targets. As of October 31, 2012, the fair value of this contingent consideration was $4.3 million and no payments had been made to the former Vovici shareholders under this arrangement.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to the acquisition of Vovici, totaled $0.5 million for the nine months ended October 31, 2012, the majority of which were incurred during the three months ended April 30, 2012. Such costs totaled $1.3 million and $2.5 million for the three and nine months ended October 31, 2011, all of which were incurred during the three months ended October 31, 2011, respectively. All transaction and related costs were expensed as incurred and recorded within “Selling, general and administrative” expenses.
Global Management Technologies Acquisition
On October 7, 2011, Verint acquired all of the outstanding shares of Global Management Technologies Corporation (“GMT”), a U.S.-based provider of workforce management solutions whose software and services are widely used by organizations, particularly in retail branch banking environments for total consideration of $36.6 million. Included in this consideration was $12.0 million for the fair value of potential additional cash payments to the former GMT shareholders of up to approximately $17.4 million, payment of which is contingent upon the achievement of certain performance targets over the period from the acquisition date through January 31, 2014.
For the three and nine months ended October 31, 2012, the Company recorded benefits of $1.3 million and $5.8 million, respectively, within “Selling, general and administrative” expenses for changes in the fair value of the GMT contingent consideration obligation, which primarily reflected the impacts of revised expectations of achieving the performance targets. 

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As of October 31, 2012, the fair value of this contingent consideration was $3.8 million, and no payments had been made to the former GMT shareholders under this arrangement.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to the acquisition of GMT, totaled $0.3 million for the nine months ended October 31, 2012, the majority of which were incurred during the three months ended April 30, 2012. Such costs totaled $1.0 million for the nine months ended October 31, 2011, almost all of which were incurred during the three months ended October 31, 2011. All transaction and related costs were expensed as incurred and recorded within “Selling, general and administrative” expenses.
Other Business Combinations
During the fiscal year ended January 31, 2012, Verint executed five additional business combinations for total combined consideration of $55.2 million, including $20.5 million for the fair value of potential additional cash payments to the respective former shareholders or asset owners aggregating up to approximately $41.0 million, payment of which is contingent upon the achievement of certain performance targets over periods extending through January 31, 2015. Two of these combinations were acquisitions of assets in transactions that qualified as business combinations.
For the three and nine months ended October 31, 2012, the Company recorded a net benefit of $0.4 million and a net expense of $0.2 million, respectively, within “Selling, general and administrative” expenses for changes in the aggregate fair values of the contingent consideration obligations associated with these acquisitions, reflecting the impact of revised expectations of achieving the performance targets, as well as decreases in the discount periods since the acquisition dates. As of October 31, 2012, the aggregate fair value of the contingent consideration obligations associated with these acquisitions was $15.2 million. During the three and nine months ended October 31, 2012, Verint made payments of $1.0 million and $5.2 million, respectively, to the respective former shareholders or asset owners under these arrangements. No such payments were made during the nine months ended October 31, 2011.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions, totaled $0.1 million and $0.6 million for the three and nine months ended October 31, 2012, respectively.  Such costs totaled $0.6 million and $3.0 million for the three and nine months ended October 31, 2011, the majority of which were incurred during the three months ended October 31, 2011, respectively.  All transaction and related costs were expensed as incurred and recorded within "Selling, general and administrative" expenses.
As of January 31, 2012, the tax deductibility of $21.4 million of the goodwill associated with these business combinations, was still being assessed. Purchase price allocation adjustments, as discussed below, as well as fluctuations in foreign currency exchange rates reduced this goodwill to $16.6 million as of October 31, 2012, and the Company has concluded that $6.5 million of this goodwill is tax deductible, and $10.1 million is not tax deductible.
In connection with one of the foregoing business combinations, the purchase price allocation included liabilities for uncertain tax positions and certain other liabilities associated with pre-acquisition business activities of the acquired company.  As of January 31, 2012, the current and long-term liabilities for these matters were $4.0 million and $4.7 million, respectively, were reflected within current and long-term assets, respectively, recognizing the selling shareholders' contractual obligation to indemnify Verint for these pre-acquisition liabilities, and were measured on the same basis as the corresponding liabilities. As of October 31, 2012, the liability associated with certain other pre-acquisition business activities of the acquired company, and corresponding indemnification asset, were $3.1 million.  The change in these carrying values during the nine months ended October 31, 2012 reflects the derecognition of certain liabilities and corresponding indemnification assets and the impact of foreign currency exchange rate fluctuations.  These changes were offsetting and therefore did not impact the Company's condensed consolidated statements of operations for the three and nine months ended October 31, 2012.
As of October 31, 2012, the liability associated with pre-acquisition uncertain tax positions, and corresponding indemnification asset, were $2.9 million.  During the nine months ended October 31, 2012, these carrying values were impacted by foreign currency exchange rate fluctuations in offsetting amounts which therefore did not impact the Company's condensed consolidated statements of operations.  In addition, during the three months ended October 31, 2012, Verint met the criteria required to adjust a certain pre-acquisition uncertain tax position, so an applicable $1.1 million tax liability was reversed and was reflected as a component of "Income tax provision" for the three and nine months ended October 31, 2012 in the condensed consolidated statements of operations. Because the uncertain tax position was reversed, the Company also recorded a write-off of the corresponding $1.1 million indemnification asset, which is included in "Other (expense) income, net" for the same periods. 

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Purchase Price Allocations
As of January 31, 2012, the purchase price allocations for acquisitions completed during the fiscal year ended January 31, 2012 were initially provisional and were based on the information that was available to the Company as of the respective acquisition dates, and represented the Company's best estimates of the fair values of the assets acquired and liabilities assumed.
Based upon additional information obtained during the three months ended April 30, 2012 about facts and circumstances that existed as of the respective acquisition dates, the Company adjusted the purchase price allocations for several acquisitions completed during the fiscal year ended January 31, 2012, as described below:
For the Vovici purchase price allocation, the Company reduced certain liabilities by $0.2 million and recorded a corresponding reduction of goodwill.
For the purchase price allocation associated with Verint's August 2, 2011 acquisition, the Company adjusted certain acquisition-date deferred income taxes, which also required the Company to change several assumptions in the discounted cash flow models used to estimate the fair values of certain identified intangible assets. As a result, the estimated acquisition-date fair values of the developed technology and customer relationship intangible assets identified in this acquisition decreased by $0.3 million and $0.4 million, respectively, net deferred income tax liabilities decreased by $3.8 million, and goodwill decreased by $3.1 million. For the purchase price allocation associated with Verint's January 5, 2012 acquisition, the Company recorded minor refinements to the purchase price and to certain liabilities, which resulted in a $0.1 million increase in goodwill.
Changes to a provisional purchase price allocation resulting from additional information obtained about facts and circumstances that existed as of the acquisition date are adjusted retrospectively to the condensed consolidated financial statements. Accordingly, the condensed consolidated balance sheet as of January 31, 2012 has been revised to reflect the impacts of these adjustments. These adjustments resulted in decreases in goodwill of $2.9 million, intangible assets, net of $0.6 million, accounts payable and accrued expenses of $0.2 million, and other liabilities of $3.1 million, and a $0.2 million increase to other assets. Accounts payable was increased by a negligible amount.
These adjustments did not materially impact the Company's condensed consolidated statements of operations.
The purchase price allocation for the acquisition of GMT did not change subsequent to January 31, 2012.
No purchase price allocation adjustments were identified subsequent to April 30, 2012 and the purchase price allocations for all acquisitions executed during the fiscal year ended January 31, 2012 are now complete.

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(UNAUDITED)



The following table sets forth the components and the allocations of the purchase price for the acquisition of Vovici, as well as the combined purchase prices for the Company's other individually insignificant acquisitions completed during the fiscal year ended January 31, 2012, reflecting all subsequent purchase price allocation adjustments:
 
Vovici
 
 
Other
 
(In thousands)
Components of purchase price:
 
 
 
 
Cash and cash equivalents
$
55,708

 
 
$
33,835

Fair value of contingent consideration
9,900

 
 
20,504

Fair value of stock options
60

 
 

Bank debt, prepaid at closing
435

 
 

Other purchase price adjustments

 
 
816

Total purchase price
$
66,103

 
 
$
55,155

Allocation of purchase price:
 
 
 
 
Net tangible assets (liabilities):
 
 
 
 
Cash and cash equivalents
$
179

 
 
$
4,614

Accounts receivable
1,106

 
 
842

Other current assets
5,219

 
 
11,036

Other assets
913

 
 
5,579

Current and other liabilities
(2,931
)
 
 
(15,419
)
Deferred revenue
(2,264
)
 
 
(944
)
Bank debt

 
 
(3,330
)
Deferred income taxes - long-term
(6,021
)
 
 
186

Net tangible (liabilities) assets
(3,799
)
 
 
2,564

Identifiable intangible assets:
 
 
 
 
Developed technology
11,300

 
 
9,743

Customer relationships
15,400

 
 
7,040

Trademarks and trade names
1,700

 
 
1,350

In-process research and development assets

 
 
2,500

Other identifiable intangible assets

 
 
1,421

Total identifiable intangible assets
28,400

 
 
22,054

Goodwill
41,502

 
 
30,537

Total purchase price
$
66,103

 
 
$
55,155

For the Year Ended January 31, 2011
On February 4, 2010, Verint acquired all of the outstanding shares of Iontas Limited (“Iontas”), a provider of desktop analytics solutions.
Consideration for the acquisition of Iontas included contingent milestone-based payments tied to certain performance targets being achieved over the two-year period following the acquisition date. As of January 31, 2012, the estimated fair value of the remaining contingent consideration obligation was $1.7 million, which was subsequently paid to the former Iontas shareholders during the three months ended April 30, 2012. Verint has no further contingent consideration obligations for this business combination. For the nine months ended October 31, 2011, an increase of $0.2 million, in the fair value of this contingent consideration obligation was recorded as a charge to “Selling, general and administrative” expenses.
In December 2010, Verint acquired certain technology and other assets in a transaction that qualified as a business combination. The fair value of the liability for contingent consideration related to this acquisition increased by $1.9 million during the nine months ended October 31, 2011, resulting in a corresponding charge recorded within “Selling, general and administrative” expenses for that period. Substantially all of the increase occurred during the three months ended April 30,

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2011. The earned contingent consideration related to this acquisition was paid to the sellers during the three months ended October 31, 2011.
Pro Forma Information
The following table provides unaudited pro forma financial information attributable to Comverse Technology, Inc. for the three and nine months ended October 31, 2011, as if Vovici and GMT had been acquired on February 1, 2010. These unaudited pro forma results reflect certain adjustments related to these acquisitions, such as amortization expense on finite-lived intangible assets acquired from Vovici and GMT. The unaudited pro forma results do not include any operating efficiencies or potential cost savings which may result from these business combinations. Accordingly, such unaudited pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions occurred on February 1, 2010, nor are they indicative of future operating results. The pro forma impact of the other business combinations completed during the fiscal year ended January 31, 2012 was not material to the Company’s historical condensed consolidated operating results and is therefore not presented.
 
 
Three Months Ended October 31, 2011
 
Nine Months Ended October 31, 2011
 
 
(In thousands)
Total revenue
 
$
203,362

 
$
588,290

Net income (loss) attributable to Comverse Technology, Inc.
 
$
35,768

 
$
(65,800
)
6.
GOODWILL
The change in the carrying amount of goodwill in the Company’s reportable segment for the nine months ended October 31, 2012 is as follows:
 
Verint
 
(In thousands)
For the Nine Months Ended
October 31, 2012
 
Goodwill, gross, at January 31, 2012 (1)
$
894,155

Accumulated impairment losses at January 31, 2012

Goodwill, net, at January 31, 2012
894,155

Effect of changes in foreign currencies and other
2,813

Goodwill, net, at October 31, 2012
$
896,968

Balance at October 31, 2012
 
Goodwill, gross, at October 31, 2012
896,968

Accumulated impairment losses at October 31, 2012

Goodwill, net, at October 31, 2012
$
896,968

 
(1)
Goodwill balances as of January 31, 2012 have been retrospectively adjusted to reflect measurement period adjustments to the purchase price allocations for several business combinations completed during the fiscal year ended January 31, 2012. These adjustments were identified during the three months ended April 30, 2012, and resulted from new information obtained about facts and circumstances that existed as of the respective acquisition dates. These adjustments reduced goodwill by $2.9 million in the Verint segment (see Note 5, Business Combinations).
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. No events or circumstances indicating the potential for goodwill impairment were identified during either the nine months ended October 31, 2012 or the nine months ended October 31, 2011.

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7.
INTANGIBLE ASSETS, NET
Intangible assets, net as of October 31, 2012 and January 31, 2012 were as follows:
 
 
Useful Life
 
October 31,
2012
 
January 31,
2012
 
 
 
(In thousands)
Gross carrying amount:
 
 
 
 
 
Intangible assets with finite lives:
 
 
 
 
 
Acquired technology
2 to 7 years
 
$
93,802

 
$
94,027

Customer relationships
4 to 10 years
 
225,941

 
225,554

Trade names
3 to 5 years
 
12,783

 
12,824

Non-competition agreements
3 to 10 years
 
5,776

 
5,779

Distribution network
10 years
 
2,440

 
2,440

Backlog
3 years
 
843

 
843

Total intangible assets with finite lives
 
 
341,585

 
341,467

In-process research and development with indefinite lives
 
 
2,500

 
2,500

 
 
 
344,085

 
343,967

Accumulated amortization:
 
 
 
 
 
Acquired technology
 
 
60,947

 
49,732

Customer relationships
 
 
112,614

 
95,173

Trade names
 
 
10,395

 
9,805

Non-competition agreements
 
 
4,279

 
3,656

Distribution network
 
 
1,535

 
1,352

Backlog
 
 
62

 
19

 
 
 
189,832

 
159,737

Total
 
 
$
154,253

 
$
184,230

Amortization of intangible assets was $9.8 million and $29.5 million for the three and nine months ended October 31, 2012, respectively, and $9.4 million and $25.7 million for the three and nine months ended October 31, 2011, respectively. There was no impairment of intangible assets for the nine months ended October 31, 2012 and 2011.
Intangible assets have been retrospectively adjusted as of January 31, 2012 to reflect measurement period adjustments to the purchase price allocations for several business combinations completed during the fiscal year ended January 31, 2012. These adjustments were identified during the three months ended April 30, 2012, and resulted from new information obtained about facts and circumstances that existed as of the respective acquisition dates. Intangible assets were changed to reduce acquired technology and customer relationships by $0.3 million and $0.4 million, respectively (see Note 5, Business Combinations).

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



Estimated future amortization expense on finite-lived acquisition-related intangible assets for the remainder of the fiscal year and the four succeeding fiscal years and thereafter is as follows:
 
Fiscal Years Ending January 31,
 
(In thousands)
2013 (remainder of fiscal year)
 
$
9,915

2014
 
34,510

2015
 
30,959

2016
 
29,568

2017
 
26,835

2018 and thereafter
 
19,966

 
 
$
151,753

8.
DEBT
As of October 31, 2012 and January 31, 2012, debt is comprised of the following:
 
 
October 31,
2012
 
January 31,
2012
 
(In thousands)
Convertible debt obligations
$

 
$
2,195

Term loan:
 
 
 
Gross loan
592,500

 
597,000

Unamortized debt discount on term loan
(2,366
)
 
(2,685
)
Other debt
2,450

 
3,064

Total debt
592,584

 
599,574

Less: current portion
6,438

 
8,423

Total long-term debt
$
586,146

 
$
591,151

Convertible Debt Obligations
As of January 31, 2012, CTI had $2.2 million aggregate principal amount of outstanding Convertible Debt Obligations (the “Convertible Debt Obligations”). The Convertible Debt Obligations were not secured by any assets of the Company and were not guaranteed by any of CTI’s subsidiaries.
Each $1,000 principal amount of the Convertible Debt Obligations was convertible, at the option of the holder upon certain circumstances, into shares of CTI’s common stock at a conversion price of $17.9744 per share (equal to a conversion rate of 55.6347 shares per $1,000 principal amount of Existing Convertible Debt Obligations), subject to adjustment for certain events.
The Convertible Debt Obligations were convertible upon the occurrence of certain events, including during any period, if following the date on which the credit rating assigned to the Convertible Debt Obligations by S&P is lower than “B-” or upon the withdrawal or suspension of the Convertible Debt Obligations rating at CTI’s request. On August 19, 2010, S&P discontinued rating the Convertible Debt Obligations at which time they became convertible. Accordingly, the Convertible Debt Obligations were classified as current liabilities as of January 31, 2012.
In September 2012, CTI redeemed all outstanding convertible debt obligations for $2.2 million (100% of the principal amount of such convertible debt obligations).
Verint Credit Facilities
On May 25, 2007, Verint entered into a $675.0 million secured credit agreement (the “Prior Facility”) with a group of banks to fund a portion of the acquisition of Witness Systems Inc. (“Witness”). The Prior Facility was comprised of a $650.0

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



million 7-year term loan facility and a $25.0 million 6-year revolving line of credit. The borrowing capacity under the revolving line of credit was increased to $75.0 million in July 2010.
On April 29, 2011, Verint entered into a credit agreement (the “Credit Agreement”) with a group of lenders (the “Lenders”) and Credit Suisse AG, as administrative agent and collateral agent for the Lenders (in such capacities, the “Agent”) and concurrently terminated the Prior Facility.
The Credit Agreement provides for $770.0 million of secured senior credit facilities, comprised of a $600.0 million term loan maturing in October 2017 (the “Term Loan Facility”) and a $170.0 million revolving credit facility maturing in April 2016 (the “Revolving Credit Facility”), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time according to the terms of the Credit Agreement.
The majority of the Term Loan Facility proceeds were used to repay all $583.2 million of outstanding term loan borrowings under the Prior Facility at the closing date of the Credit Agreement. There were no outstanding borrowings under the prior revolving credit facility at the closing date.
 
The Credit Agreement included an original issuance Term Loan Facility discount of 0.50%, or $3.0 million, resulting in net Term Loan Facility proceeds of $597.0 million. This discount is being amortized as interest expense over the term of the Term Loan Facility using the effective interest method.
As of October 31, 2012, Verint had $592.5 million of gross outstanding borrowings under the Term Loan Facility and no outstanding borrowings under the Revolving Credit Facility, all of which was available as of that date.
Loans under the Credit Agreement bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months or shorter, at the end of any interest period, at a per annum rate of, at Verint’s election:
in the case of Eurodollar loans, the Adjusted London Interbank Offered (“LIBO”) Rate plus 3.25% (or if Verint’s corporate ratings are at least BB- and Ba3 or better, 3.00%). The “Adjusted LIBO Rate” is the greater of (i) 1.25% per annum and (ii) the product of the LIBO Rate and Statutory Reserves (both as defined in the Credit Agreement), and
in the case of Base Rate loans, the Base Rate plus 2.25% (or if Verint’s corporate ratings are at least BB- and Ba3 or better, 2.00%). The “Base Rate” is the greatest of (i) the Agent’s prime rate, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus 1.00%.
Verint incurred debt issuance costs of $14.8 million associated with the Credit Agreement, which have been deferred and classified within “Other assets.” The deferred costs are being amortized as interest expense over the term of the Credit Agreement. Deferred costs associated with the Term Loan Facility were $10.2 million, and are being amortized using the effective interest rate method. Deferred costs associated with the Revolving Credit Facility were $4.6 million and are being amortized on a straight-line basis.
At the closing date of the Credit Agreement, there were $9.0 million of unamortized deferred costs associated with the Prior Facility. Upon termination of the Prior Facility and repayment of the prior term loan, $8.1 million of these fees were expensed as a loss on extinguishment of debt. The remaining $0.9 million of these fees were associated with Lenders that provided commitments under both the new and the prior revolving credit facilities, which remained deferred and are being amortized over the term of the Credit Agreement.
As of October 31, 2012 and January 31, 2012, the interest rate on the Term Loan Facility was 4.50%. Including the impact of the 0.50% original issuance Term Loan Facility discount and the deferred debt issuance costs, the effective interest rate on Verint’s Term Loan Facility was approximately 4.91% as of October 31, 2012.
Verint incurred interest expense on borrowings under its credit facilities of $6.8 million and $20.3 million during the three and nine months ended October 31, 2012, respectively, and $6.9 million and $21.3 million during the three and nine months ended October 31, 2011, respectively. Verint also recorded $0.7 million and $2.1 million, respectively, during the three and nine months ended October 31, 2012 and 2011, for amortization of deferred debt issuance costs, which is reported within “Interest expense.” During the three and nine months ended October 31, 2012, Verint also recorded $0.1 million and $0.3 million, respectively, for amortization of the original issuance term loan discount, which is reported within “Interest expense.” During the three and nine months ended October 31, 2011, Verint recorded $0.1 million and $0.2 million, respectively, for amortization of the original issuance term loan discount.

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(UNAUDITED)



Verint is required to pay a commitment fee equal to 0.50% per annum on the unused portion of the Revolving Credit Facility, payable quarterly, and customary administrative agent and letter of credit fees.
The Credit Agreement requires Verint to make term loan principal payments of $1.5 million per quarter through August 2017, beginning in August 2011, with the remaining balance due in October 2017. Optional prepayments of the loans are permitted without premium or penalty, other than customary breakage costs associated with the prepayment of loans bearing interest based on LIBO Rates. The loans are also subject to mandatory prepayment requirements with respect to certain asset sales, excess cash flow (as defined in the Credit Agreement), and certain other events. Prepayments are applied first to the eight immediately following scheduled term loan principal payments, then pro rata to other remaining scheduled term loan principal payments, if any, and thereafter as otherwise provided in the Credit Agreement.
Verint Systems’ obligations under the Credit Agreement are guaranteed by substantially all of Verint’s domestic subsidiaries and certain foreign subsidiaries that have elected to be disregarded for U.S. tax purposes and are secured by security interests in substantially all assets of Verint and its guarantor subsidiaries, subject to certain exceptions. Verint’s obligations under the Credit Agreement are not guaranteed by CTI and are not secured by any of CTI’s assets.

The Credit Agreement contains customary negative covenants for credit facilities of this type, including limitations on Verint and its subsidiaries with respect to indebtedness, liens, nature of business, investments and loans, distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. Accordingly, the Credit Agreement precludes Verint Systems from paying cash dividends and limits its ability to make asset distributions to its stockholders, including CTI. The Credit Agreement also contains a financial covenant that requires Verint to maintain a Consolidated Total Debt to Consolidated Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (each as defined in the Credit Agreement) leverage ratio until July 31, 2013 of no greater than 5.00 to 1.00 and, thereafter, of no greater than 4.50 to 1.00. The limitations imposed by the covenants are subject to certain exceptions. As of October 31, 2012, Verint was in compliance with such requirements.
The Credit Agreement also contains a number of affirmative covenants, including a requirement that Verint submit consolidated financial statements to the Lenders within certain periods after the end of each fiscal year and quarter.
The Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay principal or interest under the Credit Agreement when due, failure to comply with covenants, any representation or warranty made by Verint proving to be inaccurate in any material respect, defaults under certain other indebtedness of Verint or its subsidiaries, a Change of Control (as defined in the Credit Agreement) of Verint, and certain insolvency or receivership events affecting Verint or its significant subsidiaries. Upon an event of default, all of Verint’s indebtedness under the Credit Agreement may be declared immediately due and payable, and the Lenders’ commitments to provide loans under the Credit Agreement may be terminated.
Other Verint Indebtedness
In connection with a Verint business combination completed during the three months ended October 31, 2011, Verint assumed approximately $3.3 million of development bank and government debt in the Americas region. This debt is payable in periods through February 2017 and bears interest at varying rates. As of October 31, 2012, the majority of this debt bears interest at an annual rate of 7.00%. The carrying value of this debt was approximately $2.5 million as of October 31, 2012.

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



Debt Maturities
As of October 31, 2012, the Company’s debt maturities were as follows:
 
Fiscal Years Ending January 31
 
(In thousands)
 
2013 (Remainder of Year)
$
1,515

2014
6,584

2015
6,631

2016
6,606

2017
6,614

2018 and thereafter
567,000

 
$
594,950

9.
DERIVATIVES AND FINANCIAL INSTRUMENTS
The Company's primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. Verint enters into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Forward Contracts
Under Verint's risk management strategy, Verint periodically uses derivative financial instruments to manage its short-term exposures to fluctuations in foreign currency exchange rates.  Verint utilizes foreign exchange forward contracts to hedge certain operational cash flow exposures resulting from changes in foreign currency exchange rates.  These cash flow exposures result from portions of Verint's forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, primarily the Israeli shekel and the Canadian dollar.  Verint also periodically utilizes foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency.  Verint's joint venture, which has a Singapore dollar functional currency, also utilizes foreign exchange forward contracts to manage its exposure to exchange rate fluctuations related to settlements of liabilities denominated in U.S. dollars.  These foreign currency forward contracts are reported at fair value on the condensed consolidated balance sheets and generally have maturities of no longer than twelve months, although occasionally Verint will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.
The counterparties to Verint's derivative financial instruments consist of several major international financial institutions.  Verint regularly monitors the financial strength of these institutions. While the counterparties to these contracts expose Verint to credit-related losses in the event of a counterparty's non-performance, the risk would be limited to the unrealized gains on such affected contracts. Verint does not anticipate any such losses.
Certain of these foreign currency forward contracts are not designated as hedging instruments under accounting guidance for derivatives, and gains and losses from changes in their fair values are therefore reported in “Other income (expense), net” in the condensed consolidated statements of operations. Changes in the fair values of foreign currency forward contracts that are designated and effective as cash flow hedges are recorded as part of other comprehensive income (loss) in the condensed consolidated statements of comprehensive loss. Such amounts are reclassified to the condensed consolidated statements of operations when the effects of the item being hedged are recognized in the condensed consolidated statements of operations.

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



The following tables summarize the Company’s derivative positions and their respective fair values as of October 31, 2012 and January 31, 2012:
 
 
 
October 31, 2012
Type of Derivative
 
Notional
Amount
 
Balance Sheet Classification
 
Fair Value
 
 
(In thousands)
Assets
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
$
36,749

 
Prepaid expenses and other current assets
 
$
713

Total assets
 
 
 
 
 
$
713

Liabilities
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
$
12,800

 
Other current liabilities
 
$
155

Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
45,778

 
Other current liabilities
 
669

Total liabilities
 
 
 
 
 
$
824

 
 
 
January 31, 2012
Type of Derivative
 
Notional
Amount
 
Balance Sheet Classification
 
Fair Value
 
 
(In thousands)
Assets
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
$
62,719

 
Prepaid expenses and other current assets
 
$
978

Total assets
 
 
 
 
 
$
978

Liabilities
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
$
14,510

 
Other current liabilities
 
$
303

Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
16,907

 
Other current liabilities
 
227

Total liabilities
 
 
 
 
 
$
530



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



The following tables summarize the Company’s classification of gains and losses on derivative instruments for the three and nine months ended October 31, 2012 and 2011:
 
 
 
Three Months Ended October 31, 2012
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Reclassified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations (1)
 
Recognized in 
Other Income (Expense), Net
 
 
(In thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$

 
$

 
$
(254
)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
(1,670
)
 
(440
)
 

Total
 
$
(1,670
)
 
$
(440
)
 
$
(254
)
 
 
 
Three Months Ended October 31, 2011
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Reclassified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations (1)
 
Recognized in 
Other Income (Expense), Net
 
 
(In thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$

 
$

 
$
682

Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
(985
)
 
(607
)
 

Total
 
$
(985
)
 
$
(607
)
 
$
682


 
 
Nine Months Ended October 31, 2012
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Reclassified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations (1)
 
Recognized in 
Other Income (Expense), Net
 
 
(In thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$

 
$

 
$
(123
)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
(868
)
 
(1,205
)
 

Total
 
$
(868
)
 
$
(1,205
)
 
$
(123
)
 
 
 
 
 
 
 



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




 
 
Nine Months Ended October 31, 2011
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Reclassified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations (1)
 
Recognized in 
Other Income (Expense), Net
 
 
(In thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$

 
$

 
$
(1,225
)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
1,037

 
1,179

 

Total
 
$
1,037

 
$
1,179

 
$
(1,225
)

 
(1)
Amounts reclassified from accumulated other comprehensive income (“OCI”) into the statement of operations are classified as operating expenses.
The components of OCI related to cash flow hedges are as follows:
 
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
 
2012
 
2011
 
2012
 
2011
 
 
(In thousands)
Accumulated OCI related to cash flow hedges, beginning of the period
 
$
(2,017
)
 
$
573

 
$
514

 
$
748

Unrealized (gains) losses on cash flow hedges
 
4,192

 
(1,591
)
 
(343
)
 
4,091

Reclassification adjustment for (losses) gains included in net gain (loss)
 
(153
)
 
1,044

 
(293
)
 
(4,509
)
Changes in accumulated OCI on cash flow hedges, before tax
 
4,039

 
(547
)
 
(636
)
 
(418
)
Other comprehensive (loss) income attributable to noncontrolling interest
 
(1,444
)
 
465

 
372

 
157

Deferred income tax (provision) benefit

 
(258
)
 
41

 
70

 
45

Discontinued operations adjustment
 
(310
)
 

 
(310
)
 

Changes in accumulated OCI on cash flow hedges, net of tax
 
2,027

 
(41
)
 
(504
)
 
(216
)
Accumulated OCI related to cash flow hedges, end of the period
 
$
10

 
$
532

 
$
10

 
$
532


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



10.
FAIR VALUE MEASUREMENTS
Under the FASB’s guidance, fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., “the exit price”).
The FASB’s guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy consists of three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. 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.
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.
ARS. The Company determined the fair value of ARS on a quarterly basis by utilizing a discounted cash flow model, which considers, among other factors, assumptions about the (i) underlying collateral, (ii) credit risk associated with the issuer, and (iii) contractual maturity. The discounted cash flow model considers contractual future cash flows, representing both interest and principal payments. Future interest payments were projected using U.S. Treasury and swap curves over the remaining term of the ARS in accordance with the terms of each specific security and principal payments were assumed to be made at an estimated contractual maturity date taking into account applicable prepayments. Yields used to discount these payments were determined based on the specific characteristics of each security. Key considerations in the determination of the appropriate discount rate include the securities’ remaining term to maturity, capital structure subordination, quality and level of collateralization, complexity of payout structure, credit rating of the issuer, and the presence or absence of additional insurance. The Company had no investments in ARS as of October 31, 2012 (see Note 3, Investments).
Contingent consideration liabilities associated with business combinations. The Company values contingent consideration liabilities associated with business acquisitions using an estimated probability-adjusted discounted cash flow model. The fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. The fair value of contingent consideration is re-measured at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates or in the expectations of achieving the performance targets, are recorded in earnings. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. The Company utilized discount rates ranging from 3.1% to 16.5% in its calculations of the estimated fair values of our contingent consideration liabilities as of October 31, 2012.
Derivative assets and liabilities. The fair value of derivative instruments is based on quotes or data received from counterparties and third party financial institutions. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and markets rates for similar contracts using readily observable market prices thereof.

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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 as of October 31, 2012 and January 31, 2012:
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of October 31, 2012
  
October 31, 2012
 
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)
$
71,383

 
$

 
$

 
$
71,383

Derivative assets

 
713

 

 
713

 
$
71,383

 
$
713

 
$

 
$
72,096

Financial Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
824

 
$

 
$
824

Contingent consideration liabilities associated with business combinations

 

 
23,316

 
23,316

 
$

 
$
824

 
$
23,316

 
$
24,140

 
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of January 31, 2012
 
 
January 31, 2012
 
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)
$
207,950

 
$

 
$

 
$
207,950

Auction rate securities

 

 
272

 
272

Derivative assets

 
978

 

 
978

 
$
207,950

 
$
978

 
$
272

 
$
209,200

Financial Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
530

 
$

 
$
530

Contingent consideration liabilities associated with business combinations

 

 
38,646

 
38,646

 
$

 
$
530

 
$
38,646

 
$
39,176

 
(1)
As of October 31, 2012 and January 31, 2012, money market funds of $69.3 million and $205.8 million, respectively, were classified in “Cash and cash equivalents” and as of each such date $2.1 million of money market funds were classified in “Restricted cash and bank time deposits” within the condensed consolidated balance sheets.


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



The following table is a summary of changes in the fair value of the Level 3 financial assets and liabilities, during the three and nine months ended October 31, 2012 and 2011:
 
 
Level 3 Financial Assets and Liabilities
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2012
 
2011
 
2012
 
2011
 
Asset
 
Liability
 
Asset
 
Liability
 
Asset
 
Liability
 
Asset
 
Liability
 
(In thousands)
Beginning balance
$

 
$
25,204

 
$
52,612

 
$
2,364

 
$
272

 
$
38,646

 
$
73,163

 
$
3,686

Sales and redemptions

 

 
(250
)
 

 
(394
)
 

 
(25,750
)
 

Change in realized and unrealized gains included in other expense, net

 

 
120

 

 
156

 

 
8,011

 

Change in unrealized losses included in other comprehensive income

 

 
(1,463
)
 

 
(34
)
 

 
(4,443
)
 

Contingent consideration liabilities associated with business combinations

 

 

 
32,800

 

 

 

 
33,704

Payments of contingent consideration

 
(1,000
)
 

 

 

 
(6,902
)
 

 
(4,107
)
Change in fair value recorded in operating expenses

 
(888
)
 
20

 
(541
)
 

 
(8,428
)
 
58

 
1,340

Ending balance
$

 
$
23,316

 
$
51,039

 
$
34,623

 
$

 
$
23,316

 
$
51,039

 
$
34,623


The Company did not recognize any transfers between levels of fair value measurement hierarchy during the three and nine months ended October 31, 2012 and 2011.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. The Company measures non-financial assets, including goodwill, intangible assets and property, plant and equipment, at fair value when there is an indication of impairment. These assets are recorded at fair value only when an impairment charge is recognized. The Company has elected not to apply the fair value option for non-financial assets and non-financial liabilities.
Other Financial Instruments
The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities.
Verint’s Credit Facilities
As of October 31, 2012 and January 31, 2012, the carrying amount of the Term Loan under Verint’s Credit Agreement was $590.1 million and $594.3 million, respectively, and the estimated fair value was $599.0 million and $597.0 million as of October 31, 2012 and January 31, 2012, respectively. The estimated fair value of the Term Loan is based upon the indicative bid and ask prices as determined by the agent responsible for the syndication of Verint’s term loan. The Company considers these inputs to be Level 3 of the fair value hierarchy, because the Company cannot reasonably observe activity in the limited market in which participations in the Term Loan are traded. The indicative prices provided to the Company at each of October 31, 2012 and January 31, 2012 did not significantly differ from par value.

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



11.
STOCK-BASED COMPENSATION
Stock-based compensation expense associated with awards made by CTI and its subsidiaries are included in the Company’s condensed consolidated statements of operations as follows:
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Stock options:
 
 
 
 
 
 
 
Product costs
$

 
$
4

 
$
26

 
$
122

Service costs
19

 
28

 
108

 
230

Research and development
22

 
32

 
132

 
378

Selling, general and administrative
45

 
222

 
486

 
2,032

 
86

 
286

 
752

 
2,762

Restricted/Deferred stock awards:
 
 
 
 
 
 
 
Product costs
257

 
242

 
557

 
564

Service costs
545

 
491

 
1,423

 
1,445

Research and development
747

 
625

 
1,774

 
1,865

Selling, general and administrative
6,108

 
5,928

 
16,701

 
18,444

 
7,657

 
7,286

 
20,455

 
22,318

Total
$
7,743

 
$
7,572

 
$
21,207

 
$
25,080

Stock-based compensation expense associated with awards granted by CTI and options granted by Starhome to Comverse's and Starhome's employees are included in discontinued operations and therefore not presented in the table above. For the three months ended October 31, 2012 and 2011, such stock-based compensation expense was $2.2 million and $1.1 million, respectively. For the nine months ended October 31, 2012 and 2011, such stock-based compensation expense was $6.0 million and $3.0 million, respectively.
CTI
Replacement and Modification of Equity-Based Compensation Awards
In connection with the Share Distribution, CTI's equity-based compensation awards held by CTI employees were modified and CTI 's equity-based compensation awards held by Comverse employees were replaced with Comverse's equity-based compensation awards. The modification and replacement of CTI's equity- based compensation awards occurred on November 1, 2012. The change in terms of CTI's equity-based awards held by CTI employees was considered a modification of an award. As a result, the Company compared the fair value of the awards immediately prior to the Share Distribution to the fair value of the awards immediately after the Share Distribution to measure incremental compensation cost. The modification resulted in an increase in the fair value of the awards. The amount of non-cash compensation expense was negligible. For a description of the treatment of CTI's equity-based compensation awards see Note 20, Subsequent Events, Equity-Based Compensation Awards.
CTI’s Restricted Period
As a result of the delinquency in the filing of periodic reports under the Exchange Act since April 2006, CTI had been ineligible to use its registration statements on Form S-8 for the offer and sale of equity securities, including equity securities issuable upon exercise of stock options by employees. Consequently, to ensure that it did not violate the federal securities laws, CTI prohibited the exercise of vested stock options from April 2006 until such time as it was determined that CTI has filed all periodic reports required in a 12-month period and had an effective registration statement on Form S-8 on file with the SEC. This period is referred to as the “restricted period.” In October 2011, CTI resumed option exercises.

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



Restricted Awards and Stock Options
CTI granted restricted stock unit ("RSU") awards, deferred stock unit (“DSU”) awards (collectively “Restricted Awards”) and stock options under its various stock incentive plans. The information below includes stock option activity for CTI and Comverse included in continuing operations and discontinued operations.
During the three and nine months ended October 31, 2012, CTI granted RSU awards covering an aggregate of 95,242 shares and 3,701,696 shares, respectively, of CTI’s common stock to certain executive officers and key employees.
During the three and nine months ended October 31, 2011, CTI granted DSU awards covering an aggregate of 35,000 shares and 1,360,116 shares, respectively, of CTI’s common stock to certain executive officers and key employees.