AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 2002
REGISTRATION NO. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------------
VERINT SYSTEMS INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 7373 11-3200514
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
234 CROSSWAYS PARK DRIVE
WOODBURY, NEW YORK 11797
(516) 677-7300
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
---------------------------
DAN BODNER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VERINT SYSTEMS INC.
234 CROSSWAYS PARK DRIVE
WOODBURY, NEW YORK 11797
(516) 677-7300
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------------
Copies to:
MATTHEW D. BLOCH, ESQ. DENNIS J. FRIEDMAN, ESQ.
JEFFREY NADLER, ESQ. BARBARA L. BECKER, ESQ.
WEIL, GOTSHAL & MANGES LLP ANTHONY C. PROVIDENTI, ESQ.
767 FIFTH AVENUE GIBSON, DUNN & CRUTCHER LLP
NEW YORK, NEW YORK 10153 200 PARK AVENUE
(212) 310-8000 NEW YORK, NEW YORK 10166
(212) 351-4000
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ___________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ___________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
============================================================ ================== ============================ ==================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) AGGREGATE OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------ ------------------ ---------------------------- ------------------
Common Stock, par value $.001 per share.................. $75,000,000 $6,900
============================================================ ================== ============================ ==================
(1) Includes __________ Shares subject to underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) promulgated under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
================================================================================
NY2:\1111496\12\NTMW12!.DOC\37994.0028
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 2002
PROSPECTUS
SHARES
[LOGO]
VERINT SYSTEMS INC.
COMMON STOCK
- --------------------------------------------------------------------------------
This is our initial public offering of shares of our common stock. We
are offering _________ shares of our common stock. No public market for our
common stock currently exists.
We anticipate that the initial public offering price will be between
$______ and $______ per share. We intend to apply to have our common stock
approved for quotation on the Nasdaq National Market under the symbol "VRNT".
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE __.
---------------------------
Per Share Total
Initial Public Offering Price........................... $ $
Underwriting Discounts and Commissions.................. $ $
Proceeds, before expenses, to Verint Systems Inc........ $ $
We have granted the underwriters a 30 day option to purchase up to
_____ additional shares of our common stock to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver
the shares on or about _____________, 2002.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
SALOMON SMITH BARNEY
ROBERTSON STEPHENS
UBS WARBURG
U.S. BANCORP PIPER JAFFRAY
, 2002
i
[ARTWORK TO BE INSERTED]
ii
TABLE OF CONTENTS
PAGE PAGE
---- ----
Prospectus Summary......................................1 Certain Relationships and Related Transactions.........50
Risk Factors............................................5 Principal Stockholders.................................53
Forward-Looking Statements.............................16 Description of Capital Stock...........................54
Use of Proceeds........................................17 Shares Eligible for Future Sale........................56
Dividend Policy........................................17 Certain United States Federal Tax
Capitalization.........................................18 Considerations for Non-United States Holders..........57
Dilution...............................................19 Underwriting...........................................60
Selected Consolidated Financial Data...................20 Legal Matters..........................................64
Management's Discussion and Analysis of Experts................................................64
Financial Condition and Results of Operations.........21 Where You Can Find More Information....................64
Business...............................................29 Reports to Stockholders................................64
Management.............................................43 Index to Consolidated Financial Statements............F-1
--------------
You should rely only on the information contained in this prospectus.
We have not and the underwriters have not authorized any other person to provide
you with information different from that contained in this prospectus. We are
offering to sell, and seeking offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of the common stock.
Until ___________, 2002 (25 days after the date of this prospectus),
all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
iii
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus and may not contain all of the information that may be important to
you. You should read this entire prospectus carefully, including the information
set forth in "Risk Factors" before making an investment decision. In this
prospectus, "Verint," "we," "us," and "our" refers to Verint Systems Inc. and
its subsidiaries unless the context otherwise requires.
VERINT SYSTEMS INC.
We are a leading provider of analytic solutions for communications
interception, digital video security and surveillance, and enterprise business
intelligence. Our software generates actionable intelligence through the
collection, retention and analysis of voice, fax, video, email, Internet and
data transmissions from multiple types of communications networks.
Since the terrorist attacks of September 11, 2001, heightened
awareness surrounding homeland defense and security, both in the United States
and globally, has increased the demand for solutions such as ours. Recent
legislative and regulatory actions have provided greater surveillance powers to
law enforcement agencies, imposed strict requirements on communications service
providers to facilitate interception of communications over public networks, and
increased the security measures being implemented at airports and other public
facilities. Demand for solutions such as ours has also been driven by the
enormous growth in recent years in both the types and volume of communications.
We provide our solutions to two principal markets: the digital
security and surveillance market and the enterprise business intelligence
market.
DIGITAL SECURITY AND SURVEILLANCE
The digital security and surveillance market consists primarily of
communications interception by law enforcement agencies and digital video
security utilized by government agencies and public and private organizations.
Communications interception, historically referred to as wiretapping, is the
monitoring and recording of voice and data transmissions to and from a specified
target over communications networks to obtain intelligence and gather evidence.
Video security is the monitoring and recording of surveillance camera
transmissions to safeguard public and private facilities.
Our digital security and surveillance solutions include the STAR-GATE
and RELIANT communications interception products and LORONIX digital video
security products. STAR-GATE enables communications service providers to
intercept communications over a variety of wireline, wireless and Internet
protocol, or IP, networks for delivery to law enforcement and other government
agencies, and is sold to communications service and equipment providers. RELIANT
provides intelligent recording and analysis solutions for communications
interception activities, and is sold to law enforcement and government agencies.
LORONIX digital video security products provide intelligent recording and
analysis of video for security and surveillance applications and are sold to
government agencies and public and private organizations for use in airports,
public buildings, correctional facilities and corporate sites.
ENTERPRISE BUSINESS INTELLIGENCE
The enterprise business intelligence market consists primarily of
solutions targeting enterprises that rely on contact centers for voice, email
and Internet interactions with their customers. Additionally, an emerging
segment of enterprise business intelligence utilizes digital video information
to allow enterprises and institutions to enhance their operations, processes and
performance. The pressure on companies to manage their businesses more
effectively has fueled the demand for analytic technologies and enterprise
business intelligence solutions that provide actionable intelligence to
organizations in a quick, convenient and helpful manner. Actionable intelligence
generated from enterprise business intelligence solutions helps enterprises to
service and retain customers, improve business processes and optimize contact
center agent performance.
Our enterprise business intelligence solutions include ULTRA contact
center business intelligence products and LORONIX video business intelligence
products. Our ULTRA products record and analyze customer interactions with
contact centers, providing enterprises with intelligence about customers,
1
processes and contact center agents in order to monitor and improve business
performance. Our LORONIX video business intelligence products enable enterprises
to monitor and improve their operations through the analysis of live and
recorded digital video. We sell our enterprise business intelligence solutions
to financial institutions, casinos, retailers, utilities, communications service
providers, contact center service bureaus, manufacturers and other enterprises.
OUR STRATEGY
Our strategy is to further enhance our position as a leading provider
of digital security and surveillance and enterprise business intelligence
solutions worldwide. Key elements of our strategy include:
o Enhancing our technological leadership and expanding the analytic
capabilities of our software;
o Focusing on new market opportunities;
o Leveraging our existing technologies into new markets and
applications;
o Utilizing strategic alliances to enhance our products and increase our
customer base; and
o Enhancing our relationships with system integrators and software
resellers.
We believe that we maintain a competitive advantage over industry
participants in each of our markets as a result of our comprehensive product
offerings, long-term customer relationships, established reputation in the
industry, and extensive experience with and expertise in analytic solutions. We
have established relationships with a variety of global partners including ADT,
Avaya, Genesys, Nortel, PriceWaterhouseCoopers, Siebel, Siemens and Visionics
and maintain a global presence through our direct sales force and international
network of value added resellers and systems integrators.
Our products are used by over 800 organizations in over 50 countries
worldwide. Customers for our digital security and surveillance products include
the U.S. Capitol, the Port Authority of New York and New Jersey, the U.S.
Department of Defense, the U.S. Department of Justice, Washington Dulles
International Airport, the Toronto Police Service and other domestic and foreign
law enforcement and intelligence agencies, as well as communications service and
equipment providers, such as Cingular, Ericsson, Nortel and VoiceStream.
Customers for our enterprise business intelligence products include Con Edison,
FedEx, HSBC, JC Penney, Sprint and Tiffany & Co.
We are a subsidiary of Comverse Technology, Inc. We were incorporated
in Delaware on February 23, 1994 as "Interactive Information Systems
Corporation," and from January 1999 through January 2002 we were known as
"Comverse Infosys, Inc." On February 1, 2002, we changed our name to "Verint
Systems Inc." Our principal executive offices are located at 234 Crossways Park
Drive, Woodbury, New York 11797. Our telephone number at that address is (516)
677-7300. Our website is www.verintsystems.com. The information contained on our
website is not part of this prospectus.
2
THE OFFERING
Common stock offered by us.......................................... shares
----------
Common stock to be outstanding after this offering.................. shares
----------
Use of Proceeds .................................................... We intend to use the net proceeds to finance the
growth of our business and for general corporate
purposes and capital expenditures. We may use a
significant portion of the proceeds to repay bank
debt. We may also use a portion of the proceeds
for acquisitions or other investments.
Proposed Nasdaq National Market symbol.............................. "VRNT"
The common stock to be outstanding after this offering is based on
the number of shares outstanding as of October 31, 2001, which excludes:
o 15,188,322 shares of common stock issuable upon exercise of stock
options outstanding as of October 31, 2001 under our stock option
plan, with a weighted average exercise price of $1.37 per share;
o [________] shares of common stock issuable upon the exercise of stock
options granted under our stock option plan effective upon completion
of this offering at an exercise price equal to the initial offering
price; ]
o _____________ shares available for future issuance under our stock
option plan; and
o 700,000 shares of common stock issuable upon conversion of an
outstanding convertible note.
ABOUT THIS PROSPECTUS
Unless otherwise indicated, the information in this prospectus:
o assumes an initial public offering price of $______ per share (the
midpoint of the price range set forth on the front cover or this
prospectus);
o assumes no exercise of the underwriters' over-allotment option; and
o reflects a _________ for ________ reverse stock split of our common
shares that will be effected immediately prior to this offering.
References in this prospectus to Comverse Technology refer to our
controlling stockholder, Comverse Technology, Inc., and its subsidiaries
excluding Verint Systems Inc. References in this prospectus to Comverse, Inc.
refer to our affiliate, Comverse, Inc. and its subsidiaries. Comverse, Inc. is a
wholly-owned subsidiary of Comverse Technology.
In 1998, we changed our fiscal year from the calendar year to the
fiscal year ending January 31. References in this prospectus to fiscal 1999
refer to our fiscal year ended January 31, 2000. References in this prospectus
to fiscal 2000 refer to our fiscal year ended January 31, 2001. References in
this prospectus to fiscal 2001 refer to our fiscal year ended January 31, 2002.
-----------------------
LORONIX(R) and cctvware(R) are registered trademarks of ours. We have
also applied for registration of our RELIANT(TM), vCRM(TM), Building the
Customer Intelligent Enterprise(TM), OpenStorage Portal(TM) and Intelligent
Recording(TM) trademarks. Other trademarks and trade names appearing in this
prospectus are the property of their respective holders.
3
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes financial data regarding our business.
You should read this information together with the consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus. Financial data for the year ended December 31, 1997, the one-month
period ended January 31, 1998, the year ended January 31, 1999 and the
nine-month periods ended October 31, 2000 and 2001 are unaudited. See "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ONE MONTH
YEAR ENDED ENDED NINE MONTHS
DECEMBER 31, JANUARY 31, YEAR ENDED JANUARY 31, ENDED OCTOBER 31,
------------ ----------- ---------------------- -----------------
1997 1998 1999 2000 2001 2000 2001
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales............................ $ 58,865 $ 758 $ 89,282 $ 120,612 $ 141,677 $ 102,707 $ 97,614
Loss from operations............. (10,962) (5,796) (10,626) (9,548) (7,565)(1) (9,145)(1) (2,051)(2)
Net loss......................... (11,627) (5,866) (11,659) (10,544) (8,559)(1) (9,890)(1) (3,657)(2)
Net loss per share:
Basic and diluted............... $ (0.12) $ (0.06) $ (0.12) $ (0.11) $ (0.09) $ (0.10) $ (0.04)
Shares used in computing
basic and diluted net loss per
share.......................... 95,140 95,140 95,140 95,144 95,577 95,527 95,854
- -----------------
(1) Includes merger expenses of approximately $10,909.
(2) Includes workforce reduction expenses of approximately $1,164.
The following table summarizes our balance sheet as of October 31, 2001:
o on an actual basis; and
o on an as adjusted basis to give effect to the sale of _______________
shares in this offering, at an assumed offering price of $_______ per
share, after deducting the underwriting discounts and estimated offering
expenses, and our anticipated application of the net proceeds of the
offering.
AS OF OCTOBER 31, 2001
AS
ACTUAL ADJUSTED
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 45,408 $
Working capital.................................. 41,812
Total assets..................................... 112,768
Long-term debt, including current maturities..... 44,451
Stockholders' equity............................. 19,406
4
RISK FACTORS
Investing in our common stock involves a high degree of risk. Before
purchasing our shares, you should carefully consider the risks described below
in addition to the other information in this prospectus. Our business, results
of operations and financial condition may be materially and adversely affected
due to any of the following risks. The trading price of our shares could decline
due to any of these risks, and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE INCURRED OPERATING AND NET LOSSES EVERY YEAR SINCE 1997. WE MAY NOT
OPERATE PROFITABLY IN THE FUTURE.
We reported net losses of $10.5 million for fiscal 1999, $8.6 million
for fiscal 2000 and $3.7 million for the nine-month period ended October 31,
2001. As of October 31, 2001, our accumulated deficit was $44.0 million. If our
sales do not increase as anticipated or if our expenses increase at a greater
pace than our revenues, we will not become profitable. Even if we become
profitable, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
THE RECENT GLOBAL ECONOMIC SLOWDOWN AND THE DECLINE IN INFORMATION TECHNOLOGY
SPENDING HAS ADVERSELY IMPACTED OUR MARKETS AND REVENUES. ANY FURTHER DECLINE IN
INFORMATION TECHNOLOGY SPENDING MAY RESULT IN A FURTHER DECREASE IN OUR
REVENUES.
The information technology industry has been particularly affected by
worldwide conditions of economic weakness, causing many companies to reduce or
in extreme cases eliminate altogether, information technology spending. During
the first nine months of fiscal 2001, we experienced reduced demand for certain
of our solutions and our revenues decreased from $102.7 million in the
nine-month period ended October 31, 2000 to $97.6 million in the nine-month
period ended October 31, 2001. If our current and prospective customers do not
increase their spending on information technology or if such spending declines,
our revenues may decrease even further. The information technology spending of
our customers in the near term remains uncertain. Accordingly, we cannot assure
you that we will be able to increase or maintain our revenues.
OUR LENGTHY AND VARIABLE SALES CYCLE MAKES IT DIFFICULT FOR US TO PREDICT OUR
OPERATING RESULTS.
It is difficult for us to forecast the timing of revenues from sales
of our products because our customers often need a significant amount of time to
evaluate our products before purchasing them. The period between initial
customer contact and a purchase by a customer may vary from six months to more
than one year. During the evaluation period, customers may defer or scale down
proposed orders of our products for various reasons, including:
o changes in budgets and purchasing priorities;
o reduced need to upgrade existing systems;
o customer deferrals in anticipation of enhancements or new products;
o introduction of products by our competitors; and
o lower prices offered by our competitors.
BECAUSE OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND MAY BE
BELOW THE EXPECTATIONS OF ANALYSTS AND INVESTORS, THE MARKET PRICE FOR OUR STOCK
MAY BE VOLATILE.
Our quarterly operating results are difficult to predict and may
fluctuate significantly in the future. As a result, our stock price may be
volatile. The following factors, many of which are outside our control, can
cause fluctuations in our operating results and volatility in our stock price:
5
o the size, timing, terms and conditions of orders from and shipments to
our customers;
o unanticipated delays or problems in releasing new products;
o the timing and success of our customers' deployment of our products
and services; and
o the amount and timing of our investments in research and development
activities.
The deferral or loss of one or more significant sales could
materially and adversely affect our operating results in any fiscal quarter,
particularly if there are significant sales and marketing expenses associated
with the deferred or lost sales. We base our current and future expense levels
on our internal operating plans and sales forecasts, and our operating costs are
to a large extent fixed. As a result, we may not be able to sufficiently reduce
our costs in any quarter to compensate for an unexpected near-term shortfall in
revenues.
IF THE MARKETS FOR OUR PRODUCTS DO NOT DEVELOP, WE WILL NOT BE ABLE TO MAINTAIN
OUR GROWTH.
The markets for our digital security and surveillance and enterprise
business intelligence products are still emerging. Our growth is dependent on,
among other things, the size and pace at which the markets for our products
develop. If the markets for our products decrease, remain constant or grow
slower than we anticipate, we will not be able to maintain our growth. Continued
growth in the demand for our products is uncertain as, among other reasons, our
customers and potential customers may:
o not achieve a return on their investment in our products;
o experience technical difficulty in utilizing our products; or
o use alternative solutions to achieve their security, intelligence or
business objectives.
In addition, as our enterprise business intelligence products are
sold primarily to contact centers, slower than anticipated growth or a
contraction in the number of contact centers will have an adverse effect on our
ability to maintain our growth.
THE INDUSTRY IN WHICH WE OPERATE IS CHARACTERIZED BY RAPID TECHNOLOGICAL
CHANGES, AND OUR CONTINUED SUCCESS WILL DEPEND UPON OUR ABILITY TO REACT TO SUCH
CHANGES.
The markets for our products are characterized by rapidly changing
technology and evolving industry standards. The introduction of products
embodying new technology and the emergence of new industry standards can render
our existing products obsolete and unmarketable and can exert price pressures on
existing products. It is critical to our success for us to be able to anticipate
changes in technology or in industry standards and to successfully develop and
introduce new, enhanced and competitive products on a timely basis. We cannot
assure you that we will successfully develop new products or introduce new
applications for existing products, that new products and applications will
achieve market acceptance or that the introduction of our new products or
technological developments by others will not render our products obsolete. Our
inability to develop products that are competitive in technology and price and
meet customer needs could have a material adverse effect on our business,
financial condition or results of operations.
IF WE ARE UNABLE TO COMPETE SUCCESSFULLY OR IF OUR CUSTOMERS OPT TO DEVELOP
INTERNAL SUBSTITUTES FOR OUR PRODUCTS, OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS COULD SUFFER.
The global market for analytical solutions for security and business
applications is intensely competitive, both in the number and breadth of
competing companies and products and the manner in which products are sold. For
example, we often compete for customer contracts through a competitive bidding
process that subjects us to risks associated with:
o the frequent need to bid on programs in advance of the completion of
their design, which may result in unforeseen technological
difficulties and cost overruns; and
6
o the substantial time and effort, including design, development and
marketing activities, required to prepare bids and proposals for
contracts that may not be awarded to us.
Our competitors may be able to develop more quickly or adapt faster
to new or emerging technologies and changes in customer requirements, or devote
greater resources to the development, promotion and sale of their products. Some
of our competitors have, in relation to us, longer operating histories, larger
customer bases, longer standing relationships with customers, greater name
recognition and significantly greater financial, technical, marketing, customer
service, public relations, distribution and other resources. New competitors or
alliances among competitors could emerge and rapidly take significant market
share. In addition, some of our customers may in the future decide to develop
internally their own solutions instead of purchasing them from us. Increased
competition could force us to lower our prices or take other actions to
differentiate our products.
WE ARE DEPENDENT ON CONTRACTS WITH GOVERNMENTS FOR A SIGNIFICANT PORTION OF OUR
REVENUES.
During fiscal 1999, fiscal 2000 and the nine-month period ended
October 31, 2001, we derived a significant portion of our revenues from
government contracts. We expect that government contracts will continue to be a
significant source of our revenues for the foreseeable future. Our business
generated from government contracts may be adversely affected if:
o levels of government expenditures and authorizations for law
enforcement and security related programs decrease, remain constant or
shift to programs in areas where we do not provide products and
services;
o we are prevented from entering into new government contracts or
extending existing government contracts based on violations or
suspected violations of procurement laws or regulations;
o we are not granted security clearances that are required to sell our
products to domestic or foreign governments or such security
clearances are revoked;
o our reputation or relationship with government agencies is impaired;
o there is a change in government procurement procedures; or
o we are suspended from contracting with a domestic or foreign
government or any significant law enforcement agency.
OUR PROXY AGREEMENT WITH THE U.S. DEPARTMENT OF DEFENSE LIMITS OUR CONTROL OVER
ONE OF OUR SUBSIDIARIES. IF THIS AGREEMENT IS TERMINATED, WE MAY BE SUSPENDED
FROM SELLING OUR COMMUNICATIONS INTERCEPTION PRODUCTS TO THE U.S. GOVERNMENT.
Our subsidiary, Verint Technology Inc., or Verint Technology, which
markets, sells and supports our communications interception solutions to various
U.S. government agencies, is required by the National Industrial Security
Program to maintain facility security clearances and to be insulated from
foreign ownership, control or influence. To comply with the National Industrial
Security Program requirements, we, Verint Technology, Comverse Technology and
the Department of Defense have entered into a proxy agreement with respect to
the ownership and operations of Verint Technology. Under the proxy agreement,
we, among other things, appointed three individuals who are U.S. citizens
holding the requisite security clearances as holders of proxies to vote the
Verint Technology stock. The proxy holders have the power to exercise all
prerogatives of ownership of Verint Technology. These three individuals are
responsible for the oversight of Verint Technology's security arrangements.
The proxy agreement may be terminated and Verint Technology's
facility security clearance may be revoked in the event of a breach of the proxy
agreement, or if it is determined by the Department of Defense that termination
7
is in the national interest. If Verint Technology's facility security clearance
is revoked, we may lose all or a substantial portion of our sales to U.S.
government agencies and our business, financial condition and results of
operations would be harmed.
OUR GOVERNMENT CONTRACTS CONTAIN PROVISIONS THAT ARE UNFAVORABLE TO US.
Many of our government contracts contain provisions that give the
government rights and remedies not typically found in private commercial
contracts, including provisions enabling the government to:
o terminate or cancel our existing contracts for convenience;
o suspend us from doing business with a foreign government or prevent us
from selling our products in certain countries;
o audit and object to our contract-related costs and expenses, including
allocated indirect costs; and
o change specific terms and conditions in our contracts, including
changes that would reduce the value of our contracts.
In addition, many jurisdictions have laws and regulations that deem
government contracts in those jurisdictions to include these types of
provisions, even if the contract itself does not contain them. If a government
terminates a contract with us for convenience, we may not recover our incurred
or committed costs, any settlement expenses or profit on work completed prior to
the termination. If a government terminates a contract for default, we may not
recover even those amounts, and instead we may be liable for any costs incurred
by a government in procuring undelivered items and services from another source.
IF WE FAIL TO COMPLY WITH COMPLEX PROCUREMENT LAWS AND REGULATIONS, WE MAY BE
SUBJECT TO CIVIL AND CRIMINAL PENALTIES AND ADMINISTRATIVE SANCTIONS.
We must comply with domestic and foreign laws and regulations
relating to the formation, administration and performance of government
contracts. These laws and regulations affect how we do business with government
agencies in various countries and may impose added costs on our business. For
example, in the United States, we are subject to the Federal Acquisition
Regulations, which comprehensively regulate the formation, administration and
performance of federal government contracts, and to the Truth in Negotiations
Act, which requires certification and disclosure of cost and pricing data in
connection with contract negotiations. We are subject to similar regulations in
foreign countries as well.
If a government review or investigation uncovers improper or illegal
activities, we may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeiture of profits, suspension
of payments, fines and suspension or debarment from doing business with
government agencies, which could materially and adversely affect our business,
financial condition and results of operations. In addition, a government may
reform its procurement practices or adopt new contracting rules and regulations
that could be costly to satisfy or that could impair our ability to obtain new
contracts.
GOVERNMENT REGULATION OF COMMUNICATIONS MONITORING COULD CAUSE A DECLINE IN THE
USE OF OUR PRODUCTS, RESULT IN INCREASED EXPENSES FOR US OR SUBJECT US AND OUR
CUSTOMERS TO LIABILITY.
As the communications industry continues to evolve, governments may
increasingly regulate products that monitor and record voice, video and data
transmissions over public communications networks, such as our solutions. For
example, products which we sell to law enforcement agencies and which interface
with a variety of wireline, wireless and Internet protocol networks must comply
in the United States with the technical standards established by the Federal
Communications Commission pursuant to the Communications Assistance for Law
Enforcement Act and in Europe by the European Telecommunications Standard
Institute. The adoption of new laws governing the use of our products or changes
made to existing laws could cause a decline in the use of our products and could
result in increased expenses for us, particularly if we are required to modify
or redesign our products to accommodate these new or changing laws.
8
WE MAY NOT BE ABLE TO RECEIVE OR RETAIN THE NECESSARY LICENSES OR AUTHORIZATIONS
REQUIRED FOR US TO EXPORT SOME OF OUR PRODUCTS THAT WE DEVELOP OR MANUFACTURE IN
SPECIFIC COUNTRIES.
We are required to obtain export licenses from the Israeli and German
governments to export some of our products that we develop or manufacture in
these countries. For example, exporting some of our RELIANT products outside of
Israel requires an export license from the Israeli Ministry of Defense. We
cannot assure you that we will be successful in obtaining the licenses and other
authorizations required to export our products from applicable governmental
authorities. Our failure to receive any required export license or authorization
would hinder our ability to sell our products and could adversely affect our
business, financial condition and results of operations.
IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH VALUE ADDED RESELLERS,
SYSTEMS INTEGRATORS AND OTHER THIRD PARTIES THAT MARKET AND SELL OUR PRODUCTS,
OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND ABILITY TO GROW
COULD SUFFER.
Our ability to achieve revenue growth depends to some extent on
adding new partners to expand our sales channels, as well as leveraging our
relationships with existing partners. If our relationships with these value
added resellers, systems integrators and strategic and technology partners
deteriorate or terminate, we may lose important sales and marketing
opportunities.
OUR FAILURE TO DEVELOP STRATEGIC ALLIANCES OR EXPAND OR IMPLEMENT NEW JOINT
VENTURES COULD LIMIT OUR ABILITY TO GROW.
As part of our growth strategy, we intend to pursue new strategic
alliances. We consider and engage in strategic transactions from time to time
and may be evaluating alliances or joint ventures at any time. We compete with
other analytic solution providers for these opportunities. We cannot assure you
that we will be able to effect these transactions on commercially reasonable
terms or at all. If we enter into these transactions, we also cannot be sure
that we will realize the benefits we anticipate.
ACQUISITIONS OR INVESTMENTS THAT WE HAVE MADE OR MAY DECIDE TO MAKE IN THE
FUTURE COULD TURN OUT TO BE UNSUCCESSFUL.
On February 1, 2002, we acquired the digital video recording business
of Lanex, LLC. If we are unable to successfully integrate Lanex with our
business, we may be unable to realize the anticipated benefits of this
acquisition. We may experience technical difficulties that could delay the
integration of Lanex's products into our solutions, resulting in a disruption of
our business.
We may in the future pursue acquisitions of businesses, products and
technologies, or the establishment of joint venture arrangements. The
negotiation of potential acquisitions or joint ventures as well as the
integration of an acquired or jointly developed business, technology or product
could result in a substantial diversion of management resources. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, amortization of
certain identifiable intangible assets, research and development write-offs and
other acquisition-related expenses. In addition, we may also fail to
successfully integrate acquired businesses with our operations or successfully
realize the intended benefits of any acquisition.
OUR PRODUCTS MAY CONTAIN UNDETECTED DEFECTS WHICH COULD IMPAIR THEIR MARKET
ACCEPTANCE.
We offer complex products that may contain undetected defects or
errors, particularly when first introduced or as new versions are released. We
may not discover such defects or errors until after a product has been released
and used by the customer. We may incur significant costs to correct undetected
defects or errors in our products and these defects or errors could result in
future lost sales. In addition, defects or errors in our products may result in
product liability claims brought against us, which could cause adverse publicity
and impair their market acceptance.
9
OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATE TO PROTECT OUR BUSINESS.
While we occasionally file patent applications, we cannot assure you
that patents will be issued on the basis of such applications or that, if such
patents are issued, they will be sufficiently broad to protect our technology.
In addition, we cannot assure you that any patents issued to us will not be
challenged, invalidated or circumvented.
In order to safeguard our unpatented proprietary know-how, trade
secrets and technology, we rely primarily upon trade secret protection and
non-disclosure provisions in agreements with employees and others having access
to confidential information. We cannot assure you that these measures will
adequately protect us from disclosure or misappropriation of our proprietary
information.
LOSS OF THIRD PARTY SOFTWARE LICENSING WOULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We incorporate in our solutions software that we license from third
parties. If we lose or are unable to maintain any software licenses, we could
incur additional costs or experience unexpected delays until equivalent software
can be developed or licensed and integrated into our products.
OUR PRODUCTS MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
COULD LEAD TO COSTLY DISPUTES OR DISRUPTIONS.
The information technology industry is characterized by frequent
allegations of intellectual property infringement. In the past, third parties
have asserted that certain of our products infringe their intellectual property
and they may do so in the future. Any allegation of infringement against us
could be time consuming and expensive to defend or resolve, result in
substantial diversion of management resources, cause product shipment delays, or
force us to enter into royalty or license agreements rather than dispute the
merits of such allegation. If patent holders or other holders of intellectual
property initiate legal proceedings against us, we may be forced into protracted
and costly litigation. We may not be successful in defending such litigation and
we may not be able to procure any required royalty or license agreements on
terms acceptable to us, or at all.
IF OUR PRODUCTS INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE MAY
BE REQUIRED TO INDEMNIFY OUR CUSTOMERS FOR ANY DAMAGES THEY SUFFER.
We generally indemnify our customers with respect to infringement by
our products of the proprietary rights of third parties. Third parties may
assert infringement claims against our customers. These claims may require us to
initiate or defend protracted and costly litigation on behalf of our customers,
regardless of the merits of these claims. If any of these claims succeed, we may
be forced to pay damages on behalf of our customers or may be required to obtain
licenses for the products they use. If we cannot obtain all necessary licenses
on commercially reasonable terms, our customers may be forced to stop using, or
in the case of value added resellers selling, our products.
THE RECENT CHANGE OF OUR NAME MAY CONFUSE OUR CUSTOMERS AND HARM OUR BUSINESS.
On February 1, 2002, we changed our company name from Comverse
Infosys, Inc. to Verint Systems Inc. We are also in the process of phasing out
the Comverse Infosys name and trademark and introducing a new trademark. The
change of our name may be costly to implement, may confuse our customers or may
result in lost sales. Our new name may not achieve the market acceptance and
name recognition of our former name.
WE RELY ON A LIMITED NUMBER OF SUPPLIERS FOR SPECIFIC COMPONENTS AND WE MAY NOT
BE ABLE TO OBTAIN SUBSTITUTE SUPPLIERS ON TERMS THAT ARE AS FAVORABLE IF OUR
SUPPLIES ARE INTERRUPTED.
Although we generally use standard parts and components in our
products, certain components are presently available only from a limited number
of sources. The inability to obtain sufficient quantities of components or to
locate alternative sources of supply, if and as required in the future, could
adversely affect our operations.
10
OUR RELIANCE ON A LIMITED NUMBER OF INDEPENDENT MANUFACTURERS TO ASSEMBLE
PRINTED CIRCUIT BOARDS FOR OUR PRODUCTS COULD LEAD TO A DISRUPTION IN SUPPLY OF
THESE BOARDS.
We rely on independent manufacturers to produce printed circuit
boards that are used in our products. We do not have any long term manufacturing
agreements with any of these manufacturers. If these manufacturers experience
financial, operational, manufacturing capacity or quality assurance
difficulties, or if there is any other disruption in our relationships, we will
be required to seek alternate manufacturers and our supply of boards may be
disrupted. We cannot assure you that alternate manufacturers that meet our
requirements could be found or that existing or alternative sources for boards
will be available at favorable prices. Our inability to develop alternative
sources if required in the future could result in delays or reductions in
product shipments or increases in product costs.
OUR FAILURE TO HIRE AND RETAIN QUALIFIED PERSONNEL COULD LIMIT OUR ABILITY TO
GROW.
We depend on the continued services of our executive officers and
other key personnel. In addition, we may need to attract and retain a
substantial number of new employees, particularly sales and marketing personnel
and technical personnel, who understand and have experience with our products
and services. If we are unable to attract and retain qualified employees, our
ability to grow could be impaired. Competition for personnel in our industry is
intense, and we have experienced difficulty in recruiting qualified personnel
due to the market demand for their services. We have also experienced difficulty
in locating qualified candidates within desired geographic locations and on
occasion we have had to relocate personnel to fill positions in locations where
we could not attract qualified experienced personnel.
RISKS RELATING TO OUR INTERNATIONAL OPERATIONS
BECAUSE WE HAVE SIGNIFICANT FOREIGN OPERATIONS, WE ARE SUBJECT TO RISKS THAT
COULD ADVERSELY AFFECT OUR BUSINESS.
We have significant foreign operations, including in Israel, the
United Kingdom and Germany, and we intend to continue to expand our operations
internationally. Our business may suffer if we are unable to successfully expand
and maintain foreign operations. Our foreign operations are, and any future
foreign expansion will be, subject to a variety of risks, many of which are
beyond our control, including risks associated with:
o foreign currency fluctuations;
o customizing products for foreign countries;
o political and economic instability in foreign countries;
o potentially adverse tax consequences of operating in foreign
countries;
o legal uncertainties regarding liability, export and import
restrictions, tariffs and other trade barriers;
o compliance with local laws and regulations, including labor laws,
employee benefits, currency restrictions and other requirements;
o hiring qualified foreign employees; and
o difficulty in accounts receivable collection and longer collection
periods.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO CURRENCY EXCHANGE FLUCTUATIONS.
To date, most of our sales have been denominated in U.S. dollars,
while a significant portion of our expenses, primarily labor expenses in Israel,
Germany and the United Kingdom, are incurred in the local currencies of these
countries. As a result, we are exposed to the risk that fluctuations in the
value of these currencies relative to the U.S. dollar could increase the dollar
cost of our operations in Israel, Germany or the United Kingdom and would
therefore have an adverse effect on our results of operations.
11
In addition, since a portion of our sales are made in foreign
currencies, primarily the British pound and the Euro, fluctuation in the value
of these currencies relative to the U.S. dollar could decrease our revenues and
adversely effect our results of operations.
CONDITIONS IN ISRAEL MAY AFFECT OUR OPERATIONS AND MAY LIMIT OUR ABILITY TO
PRODUCE AND SELL OUR PRODUCTS.
A substantial portion of our manufacturing and research and
development facilities are located in the State of Israel. Political, economic
and military conditions in Israel directly affect our operations. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors, and the continued state of
hostility, varying in degree and intensity, has led to security and economic
problems for Israel. Since October 2000, there has been a significant increase
in violence, primarily in the West Bank and Gaza Strip, and more recently Israel
has experienced terrorist incidents within its borders. As a result,
negotiations between Israel and representatives of the Palestinian Authority
have been sporadic and have failed to result in peace. We could be adversely
affected by hostilities involving Israel, the interruption or curtailment of
trade between Israel and its trading partners, or a significant downturn in the
economic or financial condition of Israel. In addition, several countries
continue to restrict business with Israel and with companies having operations
in Israel. We could be negatively affected by adverse developments in the peace
process, including the recent violence, or by restrictive laws or practices
directed towards Israel or companies having operations in Israel.
In addition, some of our employees in Israel are subject to being
called upon to perform military service in Israel, and their absence may have an
adverse effect upon our operations. Generally, unless exempt, male adult
citizens and permanent residents of Israel under the age of 54 are obligated to
perform up to 36 days of military reserve duty annually. Additionally, all such
residents are subject to being called to active duty at any time under emergency
circumstances.
THE GRANTS WE RECEIVE FROM THE GOVERNMENT OF ISRAEL FOR RESEARCH AND DEVELOPMENT
EXPENDITURES RESTRICT OUR ABILITY TO MANUFACTURE PRODUCTS AND TRANSFER
TECHNOLOGIES OUTSIDE OF ISRAEL AND REQUIRE US TO SATISFY SPECIFIED CONDITIONS.
IF WE FAIL TO SATISFY THESE CONDITIONS, WE MAY BE REQUIRED TO REFUND GRANTS
PREVIOUSLY RECEIVED TOGETHER WITH INTEREST AND PENALTIES, AND MAY BE SUBJECT TO
CRIMINAL CHARGES.
We receive grants from the Government of Israel through the Office of
the Chief Scientist of the Ministry of Industry and Trade for the financing of a
portion of our research and development expenditures in Israel. In fiscal 1999,
fiscal 2000 and the nine-month period ended October 31, 2001, we received grants
totaling $4.8 million, $7.5 million and $4.5 million, respectively, representing
18.5%, 34.5% and 28.3%, respectively, of our total research and development
expenditures in these periods. The terms of these grants limit our ability to
manufacture products, and prohibit us from transferring technologies, outside of
Israel if such products or technologies were developed using these grants. Even
if we receive approval to manufacture products developed using these grants
outside of Israel, we may be required to pay a significantly increased amount of
royalties on an accelerated basis to the Government of Israel, depending on the
manufacturing volume that is performed outside of Israel. This restriction may
impair our ability to outsource manufacturing or engage in similar arrangements
for those products or technologies. In addition, if we fail to comply with any
of the conditions imposed by the Office of the Chief Scientist, we may be
required to refund any grants previously received together with interest and
penalties, and we may be subject to criminal charges. In recent years, the
Government of Israel has accelerated the rate of repayment of Chief Scientist
grants and may further accelerate them in the future. Further, the Government of
Israel has reduced the benefits available under these programs in recent years
and these programs may be discontinued or curtailed in the future. If the
Government of Israel ends these programs, our business, financial condition and
results of operations could be adversely affected.
TAX BENEFITS WE RECEIVE IN ISRAEL MAY BE REDUCED OR ELIMINATED IN THE FUTURE.
Our investment program in leasehold improvements and equipment at our
manufacturing facility in Israel has been granted approved enterprise status and
we are therefore eligible for tax benefits under the Israeli Law for
Encouragement of Capital Investments. From time to time, the Government of
Israel has discussed reducing or eliminating the tax benefits available to
approved enterprise programs such as ours. We cannot assure you that these tax
benefits will be continued in the future at their current levels or at all. If
these tax benefits are reduced or eliminated, the amount of taxes that we pay in
Israel will increase.
12
RISKS RELATED TO OUR RELATIONSHIP WITH COMVERSE TECHNOLOGY
COMVERSE TECHNOLOGY WILL CONTROL OUR BUSINESS AND AFFAIRS AND ITS INTERESTS MAY
NOT BE ALIGNED WITH OUR INTERESTS AND THOSE OF OUR STOCKHOLDERS.
Upon completion of the offering, Comverse Technology will
beneficially own approximately __% of our outstanding shares of common stock.
Consequently, Comverse Technology will effectively control the outcome of all
matters submitted for stockholder action, including the composition of our board
of directors and the approval of significant corporate transactions. Through its
representation on our board of directors, Comverse Technology will have a
controlling influence on our management, direction and policies, including the
ability to appoint and remove our officers. As a result, Comverse Technology may
cause us to take actions which may not be aligned with our interests or those of
our other stockholders. For example, Comverse Technology may prevent or delay
any transaction involving a change in control or in which stockholders might
receive a premium over the prevailing market price for their shares.
OUR DIRECTORS THAT ALSO HOLD POSITIONS WITH COMVERSE TECHNOLOGY MAY HAVE
CONFLICTS OF INTEREST WITH RESPECT TO MATTERS INVOLVING BOTH COMPANIES.
Three of our five directors are officers and/or directors of Comverse
Technology, or otherwise affiliated with Comverse Technology. These directors
will have fiduciary duties to both companies and may have conflicts of interest
on matters affecting both us and Comverse Technology and in some circumstances
may have interests adverse to us. Our Chairman, Mr. Kobi Alexander, will
continue to be the chairman of Comverse Technology following the offering. This
position with Comverse Technology will continue to impose significant demands on
Mr. Alexander's time and present potential conflicts of interest.
SO LONG AS WE ARE INCLUDED IN COMVERSE TECHNOLOGY'S CONSOLIDATED GROUP FOR TAX
PURPOSES, WE ARE POTENTIALLY LIABLE FOR TAXES NOT OUR OWN.
After this offering is completed we expect that we will continue to
be included in the Comverse Technology consolidated group for federal income tax
purposes and we will not file our own federal income tax return. To the extent
Comverse Technology or other members of the group fail to make any federal
income tax payments required of them by law in respect of years for which
Comverse Technology files a consolidated federal income tax return which
includes us we would be liable for the shortfall. Similar principles apply for
state income tax purposes in many states. In addition, by virtue of its
controlling ownership and its tax sharing agreement with us, Comverse Technology
effectively controls all of our tax decisions. For so long as we are included in
the Comverse Technology consolidated group for federal income tax purposes,
Comverse Technology has sole authority to respond to and conduct all federal
income tax proceedings and audits relating to us, to file all federal income tax
returns on our behalf and to determine the amount of our liability to, or
entitlement to payment from, Comverse Technology under our tax sharing
agreement. Despite this agreement, federal law provides that each member of a
consolidated group is liable for the group's entire tax obligation and we could,
under certain circumstances, be liable for taxes of other members of the
Comverse Technology consolidated group.
For a discussion of our relationship with Comverse Technology, see
"Related Party Transactions--Relationship with Comverse Technology and its
Subsidiaries."
RISKS RELATED TO THIS OFFERING
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK. OUR STOCK PRICE IS LIKELY
TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY.
Prior to this offering, there has been no public market for our
common stock, and we cannot assure you that an active trading market will
develop or be sustained after this offering. The initial public offering price
for our common stock may not be representative of the price that will prevail in
the open market.
Recently, the stock market has experienced significant price and
volume fluctuations. Market prices of securities of technology companies
particularly following an initial public offering, have been highly volatile and
frequently reach levels that bear no relationship to the operating performance
of such companies. These market prices generally are not sustainable and are
13
subject to wide variations. Our stock price may experience similar volatility.
If our common stock trades to unsustainably high levels following this offering,
it is likely that the market price of our common stock will thereafter
experience a material decline.
In the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price of
its securities. We could be the target of similar litigation in the future.
Securities litigation could cause us to incur substantial costs, divert
management's attention and resources, harm our reputation in the industry and
the securities markets and reduce our profitability.
FUTURE SALES OF OUR COMMON STOCK MAY HURT OUR MARKET PRICE.
A substantial number of shares of our common stock will be available
for resale within a short period of time after the offering. If our stockholders
sell substantial amounts of our common stock in the public market following the
offering, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity securities in the future at
times and prices that we deem appropriate.
We, our officers, directors and some of our existing stockholders
have agreed not to offer, sell or otherwise dispose of any shares of capital
stock or any securities which may be converted into or exchanged for any shares
of our capital stock for a period of 180 days from the date of this prospectus.
However, the underwriters may waive this restriction and allow us or them to
sell shares at any time. Shares of common stock subject to these lock-up
agreements will become eligible for sale in the public market upon expiration of
these lock-up agreements, subject to limitations imposed by Rule 144 under the
Securities Act of 1933.
We have entered into a registration rights agreement with Comverse
Technology. For a discussion of the registration rights agreement, see "Certain
Relationships and Related Transactions - Relationship with Comverse Technology
and its Subsidiaries."
OUR MANAGEMENT MAY SPEND OR INVEST A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF
THIS OFFERING IN WAYS WITH WHICH YOU MIGHT NOT AGREE.
We have broad discretion to determine the allocation of our net
proceeds from this offering. You will not have an opportunity to evaluate the
economic, financial or other information upon which we base our decisions on how
to use these proceeds and, subject to certain exceptions, our management will be
able to use and allocate the net proceeds without first obtaining stockholder
approval.
TERRORIST ATTACKS AND OTHER ACTS OF WAR MAY ADVERSELY AFFECT THE MARKETS ON
WHICH OUR COMMON STOCK TRADES, THE MARKETS IN WHICH WE OPERATE, OUR OPERATIONS
AND OUR PROFITABILITY.
Terrorist attacks and other acts of war, and any response to them,
may lead to armed hostilities and such developments would likely cause
instability in financial markets. Armed hostilities and terrorism may directly
impact our facilities, personnel and operations which are located in the United
States, Israel, Europe, the Far East, Australia and South America, as well as
those of our clients. Furthermore, severe terrorist attacks or acts of war may
result in temporary halts of commercial activity in the affected regions, and
may result in reduced demand for our products. These developments could have a
material adverse effect on our business and the trading price of our common
stock.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY MAKE IT MORE
DIFFICULT FOR YOU TO RECEIVE A CHANGE IN CONTROL PREMIUM.
Our board's ability to designate and issue up to ________________
shares of preferred stock and issue up to _______________ shares of common stock
could adversely affect the voting power of the holders of common stock, and
could have the effect of making it more difficult for a person to acquire, or
could discourage a person from seeking to acquire, control of our company. If
this occurred you could lose the opportunity to receive a premium on the sale of
your shares in a change of control transaction.
In addition, the Delaware General Corporation Law contains provisions
that would have the effect of restricting, delaying and/or preventing altogether
certain business combinations with interested stockholders. Interested
14
stockholders include, among others, any person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of a corporation's
voting stock. These provisions could also limit your ability to receive a
premium in a change of control transaction.
15
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, as such term is
defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are statements that include information about possible or assumed
future sales, results of operations, developments, regulatory approvals or other
circumstances and may be found in the sections of this prospectus entitled "Risk
Factors," "Business-The Verint Systems Solution" and "-Our Strategy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this prospectus. Statements that use the terms
"believe," "do not believe," "expect," "plan," "intend," "estimate,"
"anticipate," "project," "may," "will," "shall," "should" and similar
expressions are intended to identify forward-looking statements.
All forward-looking statements in this prospectus reflect our current
views about future events and are based on assumptions and are subject to risks
and uncertainties. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Consequently, actual results
may differ materially from those anticipated in these forward-looking statements
as a result of various factors, including all the risks discussed in "Risk
Factors" and elsewhere in this prospectus. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
or revise any forward-looking statements.
16
USE OF PROCEEDS
We expect to receive net proceeds of $_____ million from this
offering after deducting the underwriting discount and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, our
estimated net proceeds will be $_____ million.
We intend to use the net proceeds to finance the growth of our
business and for general corporate purposes and capital expenditures. We may use
a significant portion of the proceeds to repay bank debt, including indebtedness
in the original principal amount of $42 million that is guaranteed by Comverse
Technology. This bank debt bears interest at a rate of LIBOR plus 0.55%, matures
in February 2003 and may be prepaid without penalty at the end of any interest
period. We may also use a portion of the proceeds for acquisitions or other
investments. However, we have no present understanding or agreement relating to
any specific acquisition or investment.
We have not yet determined the amount of net proceeds to be used
specifically for each of the foregoing purposes. Accordingly, our management
will have significant flexibility in applying the net proceeds of the offering.
Pending their use as described above, we may invest the net proceeds of this
offering in interest-bearing investment-grade instruments or bank deposits.
DIVIDEND POLICY
We do not expect to pay any cash dividends for the foreseeable
future. We currently intend to retain future earnings, if any, to finance
operations and for the expansion of our business.
Any future determination to pay cash dividends will be at the
discretion of the board of directors and will depend upon our financial
condition, operating results, capital requirements and such other factors as the
board of directors deems relevant.
17
CAPITALIZATION
The following table sets forth, as of October 31, 2001, our
capitalization:
o on an actual basis, and
o on an as adjusted basis to give effect to the sale of the _______
shares offered by us in this offering, after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by us, and the application of the net proceeds therefrom.
Please read this table together with the sections of this prospectus
entitled "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes included in this prospectus.
AS OF OCTOBER 31, 2001
----------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED; IN THOUSANDS)
Cash and cash equivalents............................................................. $ 45,408 $
=========== ===========
Long-term bank loans, including current maturities.................................... $ 2,451 $
----------- -----------
Due to related parties, long-term..................................................... $ 42,000 $
----------- -----------
Stockholders' equity:
Common Stock, $0.001, 300,000,000 shares authorized; 95,917,197 shares issued
and outstanding on an actual basis; and [ ] shares issued and
outstanding on an as adjusted basis................................................ $ 96 $
Additional paid-in capital............................................................ 63,259
Accumulated deficit................................................................... (44,010)
Cumulative translation adjustment..................................................... 61
----------- -----------
Total stockholders' equity............................................................ 19,406
----------- -----------
Total capitalization.................................................................. $ 63,857 $
=========== ===========
The table excludes:
o 15,188,322 shares of common stock issuable upon the exercise of stock
options outstanding as of October 31, 2001 under our stock option
plan, with a weighted average exercise price of $1.37 per share;
o ____ shares of common stock issuable upon the exercise of stock
options granted under our stock option plan upon completion of this
offering at an exercise price equal to the initial offering price;
o _____________ shares available for future issuance under our stock
option plan; and
o 700,000 shares of common stock issuable upon conversion of an
outstanding convertible note.
18
DILUTION
Our net tangible book value as of October 31, 2001, was $19,406,000,
or approximately $0.20 per share. Net tangible book value represents the amount
of tangible assets reduced by the total liabilities, divided by the number of
shares of common stock outstanding as of October 31, 2001. After giving effect
to our sale of the ______ shares in this offering and receipt of the net
proceeds from this offering, after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us, our net tangible
book value as of October 31, 2001, would have been $_______, or $_______ per
share. This represents an immediate increase in pro forma net tangible book
value of $_______ per share to existing stockholders and an immediate dilution
in net tangible book value of $_______ per share to new investors.
Dilution per share represents the difference between the price per
share to be paid by new investors and the net tangible book value per share
immediately after this offering. The following table illustrates this per share
dilution:
Per Share Per Share
--------- ---------
Assumed initial public offering price per share..................... $
Net tangible book value per share before the offering......... $ 0.20
Increase per share attributable to new investors..............
Net tangible book value per share after this offering...............
Dilution per share to new investors.................................
The following table sets forth as of October 31, 2001, the difference
between (1) the number of shares of common stock purchased, (2) the total
consideration paid and (3) the average price paid per share by existing
stockholders and by the new investors purchasing shares of common stock in this
offering, before deducting underwriting discounts, commissions and other
estimated offering expenses:
AVERAGE PRICE PER
SHARES PURCHASED TOTAL CONSIDERATION SHARE
---------------- ------------------- -----
NUMBER PERCENT AMOUNT PERCENT
------ ------- ------ -------
Existing stockholders............ 95,917,197 % % $
New investors....................
------------- ------ ------------- ------ -----------
Total...................... 100% 100% $
============= ====== ============= ====== ===========
The foregoing table does not reflect:
o 15,188,322 shares of common stock issuable upon exercise of options
outstanding as of October 31, 2001 under our stock option plan at a
weighted average exercise price of $1.37 per share;
o ____ shares of common stock issuable upon the exercise of stock
options granted under our stock option plan upon completion of this
offering at an exercise price equal to the initial offering price;
o _____ shares available for future issuance under our stock option
plan; and
o 700,000 shares of common stock issuable upon conversion of an
outstanding convertible note.
19
SELECTED CONSOLIDATED FINANCIAL DATA
We derived the selected consolidated financial data presented below
from our consolidated financial statements and related notes included in this
prospectus. You should read the selected consolidated financial data together
with our consolidated financial statements and related notes and the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Statements of operations data for the years ended January 31, 2000
and 2001, and the balance sheet data at January 31, 2000 and 2001 have been
derived from our consolidated financial statements and are included elsewhere in
this prospectus. Statements of operations data for the years ended December 31,
1997, the one month ended January 31, 1998 and the year ended January 31, 1999,
and the balance sheet data at December 31, 1997 and January 31, 1998 and 1999
have been derived from our unaudited consolidated financial statements not
included herein.
Statements of operations data for the nine-month period ended October
31, 2000 and 2001 and the balance sheet data as of October 31, 2001 have been
derived from our unaudited interim consolidated financial statements included
elsewhere in this prospectus. Our unaudited consolidated interim financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of our management, are necessary for a fair
presentation of the results for these periods. Operating results for the
nine-month period ended October 31, 2001 are not necessarily indicative of the
results that may be expected for the fiscal year ending January 31, 2002.
ONE MONTH
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, JANUARY 31, JANUARY 31, NINE MONTHS ENDED OCTOBER 31,
------------ ----------- ----------- -----------------------------
1997 1998 1999 2000 2001 2000 2001
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales....................... $ 58,865 $ 758 $ 89,282 $ 120,612 $ 141,677 $ 102,707 $ 97,614
Cost of sales............... 31,749 1,456 50,024 61,898 73,191 53,114 50,295
--------- --------- --------- --------- --------- --------- ---------
Gross profit................ 27,116 (698) 39,258 58,714 68,486 49,593 47,319
Research and development, net 14,345 2,204 16,412 21,307 14,249 10,323 11,410
Selling, general and
administrative............ 23,116 2,862 31,924 44,914 48,162 35,483 34,710
Royalties and license fees.. 617 32 1,548 2,041 2,731 2,023 2,086
Merger and workforce
reduction expenses........ - - - - 10,909 10,909 1,164
--------- --------- --------- --------- --------- --------- ---------
Loss from operations........ (10,962) (5,796) (10,626) (9,548) (7,565) (9,145) (2,051)
Interest and other income
(expense), net............ (709) (111) (753) (641) (497) (724) (352)
--------- --------- --------- --------- --------- --------- ---------
Loss before income taxes.... (11,671) (5,907) (11,379) (10,189) (8,062) (9,869) (2,403)
Income tax provision
(benefit)................. (44) (41) 280 355 497 21 1,254
--------- --------- --------- --------- --------- --------- ---------
Net loss.................... $ (11,627) $ (5,866) $ (11,659) $ (10,544) $ (8,559) $ (9,890) $ (3,657)
========= ========= ========= ========= ========= ========= =========
Net loss per share - basic
and diluted............... $ (0.12) $ (0.06) $ (0.12) $ (0.11) $ (0.09) $ (0.10) $ (0.04)
Shares used in computing
basic and diluted net loss
per share................ 95,140 95,140 95,140 95,144 95,577 95,527 95,854
AS OF AS OF
DECEMBER 31, AS OF JANUARY 31, OCTOBER 31,
------------ ----------------- -----------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 40,344 $ 38,924 $ 32,456 $ 35,933 $ 43,330 $ 45,408
Working capital................. 40,694 35,311 22,189 10,804 3,512 41,812
Total assets.................... 93,648 92,830 88,942 103,410 117,554 112,768
Long-term debt, including
current maturities............ 692 692 1,161 1,323 2,806 44,451
Stockholders' equity............ 57,268 51,475 40,075 30,896 22,525 19,406
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes thereto which appear elsewhere in this
prospectus.
OVERVIEW
Our analytic solutions for digital security and surveillance include
our STAR-GATE and RELIANT communications interception products and our LORONIX
digital video security products. STAR-GATE enables communications service
providers to intercept communications over a variety of wireline, wireless and
Internet protocol, or IP, networks for delivery to law enforcement and other
government agencies, and is sold to communications service and equipment
providers. RELIANT provides intelligent recording and analysis solutions for
communications interception activities and is sold to law enforcement and
government agencies. Our LORONIX digital video security products provide
intelligent recording and analysis of video for security and surveillance
applications, and are sold to government agencies and public and private
organizations for use in airports, public buildings, correctional facilities and
corporate sites.
Our analytic solutions for enterprise business intelligence include
our ULTRA contact center business intelligence products and LORONIX video
business intelligence products. Our ULTRA products are sold to contact centers
within a variety of enterprises, including financial institutions,
communications service providers and utilities, to record and analyze customer
interactions with their contact centers. Our LORONIX video business intelligence
products enable enterprises to monitor and improve their operations through the
analysis of live and recorded digital video and are sold primarily to commercial
enterprises including retailers, shopping malls, casinos, manufacturers and
other enterprises.
We generally recognize revenue at the time of shipment for sales of
systems that do not require significant customization to be performed by us and
when collection of the resulting receivable is deemed probable by us. Our
systems generally consist of a bundled hardware and software solution that are
shipped together. Customers may also purchase separate maintenance contracts,
which generally consist of bug-fixing assistance and telephone access to our
technical personnel, but in certain circumstances may also include the right to
receive unspecified product updates, upgrades and enhancements. We recognize
revenue from these services ratably over the contract period. We recognize
revenue from certain development contracts under the percentage-of-completion
method on the basis of physical completion to date or using actual costs
incurred to total expected costs under the contract. Revisions in estimates of
costs and profits are reflected in the accounting period in which the facts that
require such revision become known. At the time a loss on a contract is known,
the entire amount of the estimated loss is accrued. Amounts received from
customers in excess of revenues earned are recorded as advance payments from
customers.
Our cost of sales includes costs of materials, subcontractor costs,
salary and related benefits for the operations and service departments,
depreciation and amortization of equipment used in the operations and service
departments, amortization of capitalized software costs, travel costs and an
overhead allocation. Research and development costs include salary and related
benefits as well as travel, depreciation and amortization of research and
development equipment, an overhead allocation, as well as other costs associated
with research and development activities, and is stated net of amounts
reimbursed by the Israeli government. Selling, general and administrative costs
include salary and related benefits, travel, depreciation and amortization,
sales commissions, marketing and promotional materials, recruiting expenses,
professional fees, facility costs, as well as other costs associated with sales,
marketing, finance and administrative departments.
In July 2000, our parent, Comverse Technology, acquired all of the
outstanding stock of Loronix Information Systems, Inc., or Loronix, a company
that develops software-based digital video recording and management systems and
Syborg, a company that develops software-based digital voice and Internet
recording systems. These business combinations were accounted for as poolings of
interests. In February 2001, we issued 34,539,905 shares of our common stock to
Comverse Technology in exchange for Comverse Technology's ownership interest in
Loronix and Syborg. These shares are reflected in our consolidated financial
statements as if they were outstanding as of the earliest period presented,
which is consistent with the pooling of interests method of accounting. Our
consolidated financial statements for the year ended January 31, 2000 include
the operations of Loronix and Syborg for the year ended December 31, 1999.
21
For a discussion of our relationship and transactions with Comverse
Technology and its subsidiaries, see "Certain Relationships and Related
Transactions - Relationship with Comverse Technology and its Subsidiaries," and
note 11 to our consolidated financial statements.
For information about our consolidated revenues according to the
geographical regions to which such revenues are attributable and the locations
of our long-lived assets, see note 14 to our consolidated financial statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data expressed as a percentage of sales:
YEAR ENDED JANUARY 31, NINE MONTHS ENDED OCTOBER 31,
---------------------- -----------------------------
2000 2001 2000 2001
---- ---- ---- ----
Sales............................................100.0% 100.0% 100.0% 100.0%
Cost of sales.....................................51.3 51.7 51.7 51.5
---- ------ ------ ------
Gross profit......................................48.7 48.3 48.3 48.5
Research and development, net.....................17.7 10.1 10.1 11.7
Selling, general and administrative...............37.2 34.0 34.5 35.6
Royalties and license fees.........................1.7 1.9 2.0 2.1
Merger and workforce reduction expenses.............- 7.7 10.6 1.2
- ------ ------ ------
Loss from operations..............................(7.9) (5.3) (8.9) (2.1)
Interest and other income (expense), net..........(0.5) (0.4) (0.7) (0.4)
---- ------ ------ ------
Loss before income taxes..........................(8.4) (5.7) (9.6) (2.5)
Income tax provision...............................0.3 0.4 0.0 1.3
--- ------ ------ ------
Net loss..........................................(8.7)% (6.0)% (9.6)% (3.8)%
==== ====== ====== ======
ADJUSTED INCOME (LOSS) FROM OPERATIONS
Adjusted income (loss) from operations is calculated by adding to
loss from operations merger expenses of $10.9 million for the year ended January
31, 2001 and workforce reduction expenses of $1.2 million for the nine-month
period ended October 31, 2001. These expenses are nonrecurring charges. Adjusted
income (loss) from operations is not a measurement of financial performance and
should not be considered as an alternative to measures of performance derived in
accordance with accounting principles generally accepted in the United States of
America.
The following table sets forth, for the periods indicated, our
calculation of adjusted income (loss) from operations.
YEAR ENDED JANUARY 31, NINE MONTHS ENDED OCTOBER 31,
---------------------- -----------------------------
2000 2001 2000 2001
---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
Loss from operations......................................$ (9,548) $ (7,565) $ (9,145) $ (2,051)
Merger expenses........................................... - 10,909 10,909 -
Workforce reduction expenses.............................. - - - 1,164
- --------- --------- ---------
Adjusted income (loss) from operations....................$ (9,548) $ 3,344 $ 1,764 $ (887)
========= ========= ========= =========
NINE MONTHS ENDED OCTOBER 31, 2001 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
2000
Sales. Sales for the nine-month period ended October 31, 2001
decreased by approximately $5.1 million, or 5%, compared to the nine-month
period ended October 31, 2000. This decrease was primarily attributable to a
decrease in sales of products of approximately $7.5 million while service
revenues increased by approximately $2.4 million. Such decrease was principally
due to decreased demand as a result of a general slowdown in information
technology spending. Sales to international customers represented 59% of sales
for the nine-month period ended October 31, 2001, as compared to 51% for the
nine-month period ended October 31, 2000.
22
Cost of Sales. Cost of sales for the nine-month period ended October
31, 2001 decreased by approximately $2.8 million, or 5%, as compared to the
nine-month period ended October 31, 2000. This decrease was primarily
attributable to a decrease in material costs due to the decrease in product
sales and a reduction in purchase prices of raw materials. Gross margins
increased to approximately 48.5% in the nine-month period ended October 31, 2001
from approximately 48.3% in the nine-month period ended October 31, 2000.
Research and Development Expenses, net. Research and development
expenses, net, for the nine-month period ended October 31, 2001 increased by
approximately $1.1 million, or 11%, compared to the nine-month period ended
October 31, 2000. This net increase was primarily attributable to an overall
shift in the portion of research and development expenses generated in the
United States and Germany for which we were not eligible for government
reimbursement.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine-month period ended October 31, 2001
decreased by approximately $0.8 million, or 2%, compared to the nine-month
period ended October 31, 2000. This decrease was primarily attributable to a
decrease in compensation and benefits for existing personnel and a reduction in
headcount to support the decreased level of sales during the nine-month period
ended October 31, 2001. Selling, general and administrative expenses as a
percentage of sales were 35% and 36% for the nine-month periods ended October
31, 2000 and 2001, respectively.
Royalties and License Fees. Royalties and license fees for the
nine-month period ended October 31, 2001 increased by approximately $0.1
million, or 3%, compared to the nine-month period ended October 31, 2000.
Merger Expenses. In connection with the acquisitions of Loronix and
Syborg, we charged $10.9 million of merger related charges to operations in the
nine-month period ended October 31, 2000. These charges relate to the following:
o Asset write-downs and impairments. In connection with these
acquisitions, in the nine-month period ended October 31,
2000, certain assets became impaired due to the existence of
duplicative technology, property and equipment and inventory
of the merged companies. Accordingly, these assets were
written down to their net realizable value at the time of
the related merger and approximately $7.4 million was
charged to operations.
o Professional fees and other direct merger expenses. In
connection with these acquisitions, in the nine-month period
ended October 31, 2000, we recorded a charge of $3.5 million
for professional fees to lawyers, investment bankers and
accountants, as well as other direct costs in connection
with the mergers, such as printing costs and filing fees.
Workforce Reduction Expenses. During the nine-month period ended
October 31, 2001, we reduced our workforce. As a result, we recorded a charge of
$1.2 million to operations for severance and other related costs.
Interest and Other Income (Expense), net. Net interest and other
expense for the nine-month period ended October 31, 2001 decreased by
approximately $0.4 million as compared to the nine-month period ended October
31, 2000. This decrease was primarily attributable to a decrease in net foreign
currency gains/losses.
Income Tax Provision. During the nine-month period ended October 31,
2001, the income tax provision increased by approximately $1.2 million compared
to the nine-month period ended October 31, 2000. This increase was primarily
attributable to an increase in pre-tax income in certain foreign tax
jurisdictions after giving effect to available net operating loss carryforwards.
Net Loss. Net loss decreased by approximately $6.2 million, or 63%,
for the nine-month period ended October 31, 2001 compared to the nine-month
period ended October 31, 2000, and as a percentage of sales it decreased to
approximately 4% for the nine-month period ended October 31, 2001 from
approximately 10% for the nine-month period ended October 31, 2000. This
decrease was primarily attributable to the factors described above.
23
YEAR ENDED JANUARY 31, 2001 COMPARED TO YEAR ENDED JANUARY 31, 2000
Sales. Sales for the fiscal year ended January 31, 2001, or fiscal
2000, increased by approximately $21.1 million, or 17%, compared to the year
ended January 31, 2000 or fiscal 1999. This increase was attributable to an
increase in both sales of products of approximately $12.3 million and service
revenue of approximately $8.8 million. Such increase was principally due to
increased sales in the United States and Europe. Sales to international
customers represented 51% of sales for fiscal 2000 as compared to 49% of sales
for fiscal 1999.
Cost of Sales. Cost of sales for fiscal 2000 increased by
approximately $11.3 million, or 18%, as compared to fiscal 1999. This increase
in cost of sales was primarily attributable to (i) increased materials and
production costs of approximately $3.8 million due to the increase in sales,
(ii) increased personnel-related costs of approximately $3.6 million due to the
hiring of additional personnel and increased compensation and benefits for
existing personnel and (iii) an increase in other production and service costs
of approximately $3.9 million. Gross margins decreased to approximately 48.3% in
fiscal 2000 from approximately 48.7% in fiscal 1999.
Research and Development Expenses, net. Research and development
expenses, net, for fiscal 2000 decreased by approximately $7.1 million, or 33%,
compared to fiscal 1999. This decrease was primarily attributable to a decrease
in personnel costs related to research and development activities due to
redeployment to other departments, such as production, project management,
service, and sales and marketing, to support the increased sales and an increase
in government research and development grants as compared to the previous
period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2000 increased by approximately $3.2 million,
or 7%, compared to fiscal 1999. This increase was primarily attributable to an
increase in compensation and benefits for existing personnel and an increase in
headcount to support the increased level of sales during fiscal 2000. Selling,
general and administrative expenses as a percentage of sales decreased to 34%
for fiscal 2000 from 37% for fiscal 1999.
Royalties and License Fees. Royalties and license fees for fiscal
2000 increased by approximately $0.7 million, or 34%, compared to fiscal 1999.
This increase was primarily attributable to a growth in sales of royalty-bearing
products.
Merger Expenses. In connection with the acquisition of Loronix and
Syborg, we have charged $10.9 million of merger related charges to operations in
fiscal 2000. Such charges relate to the following:
o Asset write-downs and impairments. In connection with these
acquisitions, certain assets became impaired due to the
existence of duplicative technology, property and equipment
and inventory of the merged companies. Accordingly, these
assets were written down to their net realizable value at
the time of the merger and approximately $7.4 million was
charged to operations.
o Professional fees and other direct merger expenses. In
connection with these acquisitions, we recorded a charge of
$3.5 million for professional fees to lawyers, investment
bankers and accountants, as well as other direct merger
costs in connection with the mergers, such as printing costs
and filing fees.
Interest and Other Income (Expenses), net. Net interest and other
expense for fiscal 2000 decreased by approximately $0.1 million as compared to
fiscal 1999. This decrease was primarily attributable to increased interest
income of approximately $1.1 million offset by an increase in interest expense
of approximately $0.9 million.
Income Tax Provision. During fiscal 2000, the income tax provision
increased by approximately $0.1 million compared to fiscal 1999. This increase
was primarily attributable to an increased pre-tax income in certain foreign tax
jurisdictions after giving effect to available net operating loss carryforwards.
Net Loss. Net loss decreased by approximately $2.0 million, or 19%,
in fiscal 2000 compared to fiscal 1999, while as a percentage of sales it
decreased to approximately 6% for fiscal 2000 from approximately 9% for fiscal
1999. This decrease was primarily attributable to the factors described above.
24
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables set forth consolidated statement of operations
data for each of the seven consecutive quarters ended October 31, 2001. This
information has been derived from our unaudited consolidated financial
statements. The unaudited consolidated financial statements have been prepared
substantially on the same basis as the audited consolidated financial statements
appearing elsewhere in this prospectus and include all adjustments, consisting
only of normal recurring adjustments, that we consider necessary for a fair
presentation of such information. You should read this information in
conjunction with our consolidated financial statements and the related notes
elsewhere in this prospectus. The operating results for any quarter are not
necessarily indicative of the operating results of any future period.
THREE MONTHS ENDED
------------------------------------------------------------------------------------
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31,
2000 2000 2000 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
Sales....................................... $ 30,586 $ 35,163 $ 36,958 $38,970 $ 34,558 $ 32,017 $ 31,039
Cost of sales............................... 15,804 18,127 19,183 20,077 17,840 16,335 16,120
-------- -------- -------- ------- -------- -------- --------
Gross profit................................ 14,782 17,036 17,775 18,893 16,718 15,682 14,919
Research and development, net............... 3,392 3,266 3,665 3,926 4,007 3,786 3,617
Selling, general and administrative......... 11,258 12,452 11,773 12,679 12,032 11,135 11,543
Royalties and license fees.................. 672 660 691 708 719 697 670
Merger and workforce reduction expenses..... - 10,909 - - - 1,164 -
-------- -------- -------- ------- -------- -------- --------
Income (loss) from operations............... (540) (10,251) 1,646 1,580 (40) (1,100) (911)
Interest and other income (expense), net.... (293) (201) (230) 227 (292) (188) 128
-------- -------- -------- ------- -------- -------- --------
Income (loss) before income taxes........... (833) (10,452) 1,416 1,807 (332) (1,288) (783)
Income tax provision........................ 7 3 11 476 560 454 240
-------- -------- -------- ------- -------- -------- --------
Net income (loss)........................... $ (840) $(10,455) $ 1,405 $ 1,331 $ (892) $ (1,742) $(1,023)
======== ======== ======== ======= ======== ======== ========
AS A PERCENTAGE OF SALES
Sales....................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 51.7 51.6 51.9 51.5 51.6 51.0 51.9
------- ------- ------- ------- ------ ------ ------
Gross profit................................ 48.3 48.4 48.1 48.5 48.4 49.0 48.1
Research and development, net............... 11.1 9.3 9.9 10.1 11.6 11.8 11.7
Selling, general and administrative......... 36.8 35.4 31.9 32.5 34.8 34.8 37.2
Royalties and license fees.................. 2.2 1.9 1.9 1.8 2.1 2.2 2.2
Merger and workforce reduction expenses..... - 31.0 - - - 3.6 -
------- ------- ------- ------- ------ ------ ------
Income (loss) from operations............... (1.8) (29.2) 4.5 4.1 (0.1) (3.4) (2.9)
Interest and other income (expense), net.... (1.0) (0.6) (0.6) 0.6 (0.8) (0.6) 0.4
------- ------- ------- ------- ------ ------ ------
Income (loss) before income taxes........... (2.7) (29.7) 3.8 4.6 (1.0) (4.0) (2.5)
Income tax provision........................ 0.0 0.0 0.0 1.2 1.6 1.4 0.8
------- ------- ------- ------- ------ ------ ------
Net income (loss)........................... (2.7)% (29.7)% 3.8% 3.4% (2.6)% (5.4)% (3.3)%
======= ======= ======= ======= ====== ====== ======
Our quarterly results of operations have varied significantly in the
past as a result of various factors, including the recent global economic
slowdown and the general decline in information technology spending.
Accordingly, sales and net income, if any, in any particular period may be lower
than sales and net income, if any, in a preceding or comparable period.
Period-to-period comparisons of our results of operations may not be meaningful,
and you should not rely upon them as indicators of our future performance.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations and met our capital expenditure
requirements primarily through cash flows from operations and borrowings from
Comverse Technology. As of October 31, 2001, we had cash and cash equivalents of
approximately $45.4 million and working capital of approximately $41.8 million.
Operating activities for fiscal 1999, fiscal 2000 and for the
nine-month period ended October 31, 2001, after adding back non-cash items,
provided (or used) cash of approximately ($3.3) million, $8.8 million, and $1.6
25
million, respectively. During such periods, other changes in operating assets
and liabilities provided (or used) cash of approximately $10.1 million, ($0.4)
million, and $7.2 million, respectively.
Investing activities for fiscal 1999, fiscal 2000 and for the
nine-month period ended October 31, 2001 used cash of approximately $8.7
million, $10.6 million and $6.9 million, respectively. These amounts primarily
include additions to property and equipment in fiscal 1999, fiscal 2000 and for
the nine-month period ended October 31, 2001 of approximately $4.7 million, $6.3
million and $3.7 million, respectively, and capitalization of software
development costs of approximately $4.0 million, $4.3 million and $3.1 million,
respectively.
Financing activities for fiscal 1999 and fiscal 2000 provided cash of
approximately $5.4 million and $9.4 million, respectively. Financing activities
for the nine-month period ended October 31, 2001 were not material. For fiscal
1999 and 2000, proceeds from the issuance of common stock provided $1.4 million
and $0.9 million, respectively, and net proceeds from bank loans and related
party loans provided $4.0 million and $8.6 million, respectively.
In January 2002, we obtained a $42 million bank loan. This loan
matures in February 2003, bears interest at LIBOR plus 0.55%, and may be prepaid
without penalty at the end of any interest period. The proceeds of this loan
were used to repay amounts owed to Comverse Technology. The loan is guaranteed
by Comverse Technology.
On February 1, 2002, our wholly-owned subsidiary, Loronix, acquired
the digital video recording business of Lanex, LLC. The Lanex business provides
digital video recording solutions for security and surveillance applications
primarily to North American banks. The purchase price consisted of $9.5 million
in cash and a $2.2 million convertible note issued by us to Lanex. The note is
non-interest bearing and matures on February 1, 2004. The holder of the note may
elect to convert the note, in whole or in part, into shares of our common stock
at a conversion price of $3.1429 per share at any time on or after the
completion of our initial public offering. The note is guaranteed by Comverse
Technology.
We believe that the net proceeds from this offering, together with
our current cash balances and potential cash flow from operations, will be
sufficient to meet the anticipated cash needs for working capital, capital
expenditures and other activities for at least the next 12 months. Thereafter,
if current sources are not sufficient to meet our needs, we may seek additional
debt or equity financing. In addition, although there is no present
understanding, commitment or agreement with respect to any acquisition of other
businesses, products, or technologies, we may in the future consider such
transactions, which may require additional debt or equity financing and could
result in a decrease of our working capital. There can be no assurance that such
additional financing would be available on acceptable terms, if at all.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards No. 141, "Business
Combinations." SFAS No. 141 applies prospectively to all business combinations
initiated after June 30, 2001 and to all business combinations accounted for
using the purchase method of accounting for which the date of acquisition is
July 1, 2001, or later. SFAS No. 141 requires all business combinations to be
accounted for using one method, the purchase method. Under previously existing
accounting rules, business combinations were accounted for using one of two
methods, the pooling-of-interests method or the purchase method. The adoption of
SFAS No. 141 did not have a material impact on our consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill
and some intangible assets will no longer be amortized, but rather will be
reviewed for impairment on a periodic basis. The provisions of SFAS No. 142 are
required to be applied starting with fiscal years beginning after December 15,
2001. SFAS No. 142 is required to be applied at the beginning of our fiscal year
and is to be applied to all goodwill and other intangible assets recognized in
our financial statements at that date. Impairment losses for goodwill and
certain intangible assets that arise due to the initial application of SFAS No.
142 are to be reported as resulting from a change in accounting principle.
Goodwill and intangible assets acquired after June 30, 2001 will be subject
immediately to the provisions of SFAS No. 142. We do not expect the adoption of
SFAS No. 142 to have a material impact on our consolidated financial statements.
26
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. We do not expect the
adoption of SFAS No. 143 to have a material impact on our financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supercedes certain provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years; however, early adoption is
encouraged. We are currently evaluating the impact that SFAS No. 144 will have
on our consolidated financial statements.
CORPORATE TAX RATE
We have operations primarily in the United States, Israel, and the
United Kingdom. The statutory corporate income tax rate in these jurisdictions
are 34%, 36% and 30%, respectively. For the years ended January 31, 2000 and
2001 and the nine-month period ended October 31, 2001, we have not had
significant taxable income in the United States or the United Kingdom. If and
when we generate taxable income in these tax jurisdictions, we would expect our
effective tax rate to increase. Our facilities in Israel have been granted
approved enterprise status under the Law for the Encouragement of Capital
Investment, 1959. As a result of this status, our Israeli subsidiary is entitled
to a reduction in the normally applicable tax rate in Israel for income
generated from these facilities. However, these benefits may not be applied to
reduce the tax rate for any income derived by our non-Israeli subsidiaries.
Under the current rules, the portion of income derived by our Israeli
subsidiary from each of its approved enterprise programs at our manufacturing
facilities in Israel is exempt from income tax in Israel for a period of two
years commencing in the first year in which our Israeli subsidiary has taxable
income allocable to a specific program and is subject to a reduced company tax
of 10% for the subsequent eight year period, so long as we continue to hold at
least 90% of the ordinary shares of our Israeli subsidiary. In addition, these
reduced rates are limited to a period of 12 years from the year in which the
facilities commenced operations or 14 years from the year in which the letter of
approval was granted, whichever comes earlier.
If our Israeli subsidiary subsequently pays us dividends out of
income derived from the approved enterprise during the tax exempt period, there
will be a tax on the gross amount distributed. The tax rate will be between 10%
to 25%, depending on the percentage of ordinary shares of our Israeli subsidiary
that we hold at the relevant time. In addition, we would also be taxed in Israel
on the dividends we receive from our Israeli subsidiary at a reduced rate
applicable to dividends from approved enterprises, which is 15% if the dividend
is distributed during the tax exempt period or within 12 years after such
period. Our Israeli subsidiary would be required to withhold the tax on its
dividends at the time the dividend is paid.
GOVERNMENT GRANTS
Our research and development efforts in Israel have been partially
financed through internal resources and grants from the Government of Israel
through the Office of the Chief Scientist of the Ministry of Industry and Trade.
Under the Law for the Encouragement of Industrial Research and Development,
27
1984, approved research and development expenditure programs are eligible for
grants of up to 50% of the expenditures if they meet certain criteria.
In fiscal 1999, fiscal 2000 and the nine-month period ended October
31, 2001, we received grants of approximately $4.8 million, $7.5 million and
$4.5 million, respectively, from the Office of the Chief Scientist. We expect
that Chief Scientist grants as a percentage of our consolidated research and
development expenses will decrease in future periods due to an expected increase
in the portion of research and development activities that will not be
recognized by the Chief Scientist and an expected increase in research and
development activities outside of Israel. To date, we have received
approximately $43 million in grants from the Office of the Chief Scientist.
We pay royalties to the Chief Scientist for each project once the
project begins to yield revenues. The royalty rates are between 3% and 5% of
sales of products developed through the project up to the repayment of 100% of
the grants received. For grants received under programs approved subsequent to
January 1, 1999, the maximum payment is 100% of the grant amount, linked to the
U.S. dollar, plus interest thereon. To date, we have recorded approximately $14
million in cumulative royalties to the Office of the Chief Scientist.
The manufacturing of products developed with Chief Scientist grants
must be performed in Israel. However, subject to the Chief Scientist's approval,
manufacturing may be performed outside of Israel if the recipient of the grants
pays accelerated royalties based on the amount of manufacturing performed
outside of Israel.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign currency
exchange rates which could impact our results of operations and financial
condition. We consider our exchange rate risk, in particular that of the U.S.
dollar versus the British pound, the Euro and the new Israeli shekel, to be our
primary market risk exposure. We do not believe that our exchange rate exposure
will have a material effect on our financial condition, results of operations or
cash flows.
We manage our exposure to foreign currency exchange risks primarily
through our regular operating and financing activities. In the future, we may
use foreign currency exchange contracts and other derivative instruments to
reduce our exposure to this risk if these contracts or financial instruments
enable us to reduce our exposure to exchange rate movements. To date, we have
not used any material foreign currency exchange contracts or other derivative
instruments to reduce our exposure to this risk. As of October 31, 2001, we had
no outstanding foreign currency exchange contracts or other derivative
instruments.
We currently maintain our surplus cash in short-term,
interest-bearing bank deposits. Upon completion of this offering, pending
further application, we may invest a portion of the net proceeds in
interest-bearing investment-grade instruments or bank deposits. We do not expect
that a 100 basis point increase nor decrease from current interest rates would
have a material effect on our financial position, results of operations or cash
flows.
28
BUSINESS
OVERVIEW
We are a leading provider of analytic solutions for communications
interception, digital video security and surveillance, and enterprise business
intelligence. Our software generates actionable intelligence through the
collection, retention and analysis of voice, fax, video, email, Internet and
data transmissions from multiple types of communications networks.
Since the terrorist attacks of September 11, 2001, heightened
awareness surrounding homeland defense and security, both in the United States
and globally, has increased the demand for solutions such as ours. Recent
legislative and regulatory actions have provided greater surveillance powers to
law enforcement agencies, imposed strict requirements on communications service
providers to facilitate interception of communications over public networks, and
increased the security measures being implemented at airports and other public
facilities. Demand for solutions such as ours has also been driven by the
enormous growth in recent years in both the types and volume of communications.
INDUSTRY BACKGROUND
Overview
The two markets that we focus on, digital security and surveillance
and enterprise business intelligence, include a variety of applications aimed at
generating actionable intelligence from voice, video and data transmissions. The
process of generating actionable intelligence is comprised of the following five
components: collection, retention, analysis, decision and distribution.
o Collection of raw multimedia information is achieved through an
interface with wireline and wireless communications networks,
including the Internet and closed circuit television, or CCTV cameras,
as well as cameras with direct connection to IP networks.
o Retention consists of storage of the collected multimedia information
for a period of time. Collected information can be processed
concurrently with its storage.
o Analysis of stored information is performed through various voice,
video and data mining techniques. These analytical tools convert raw
multimedia information into organized useful data.
o Decision criteria are established by users to filter and prioritize
processed data. By applying decision criteria, the processed data
becomes actionable intelligence.
o Distribution of actionable intelligence to the appropriate decision
makers is the last component of the multimedia analytic solution.
Through notification techniques, the decision makers are made aware of
the existence of actionable intelligence in a timely manner.
THE DIGITAL SECURITY AND SURVEILLANCE MARKET
The digital security and surveillance market consists primarily of
communications interception by law enforcement agencies and digital video
security utilized by government agencies and public and private organizations
for use in airports, public buildings, correctional facilities and corporate
sites.
Communications Interception
Lawful communications interception, historically referred to as
wiretapping, is the monitoring and recording of voice and data transmissions to
and from a specified target over communications networks in order to obtain
intelligence and gather evidence. Law enforcement agencies are typically granted
the authority from national and regional government authorities to monitor,
record, process and store intercepted transmissions to and from specified
targets. Since laws governing electronic surveillance vary significantly by
country, and within many countries at the state or provincial levels, law
enforcement agencies are increasingly turning to established industry leaders
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for turnkey solutions that enable them to operate within the legal limits of
information monitoring and collection.
In 1994, the U.S. Congress passed the Communications Assistance for
Law Enforcement Act, or CALEA, and subsequently, the European Telecommunications
Standards Institute, or ETSI, adopted similar standards. These two developments
have prompted an increase in the demand for communications interception
solutions. The purpose of CALEA and the ETSI standards is to ensure that
communications service providers are able to fulfill the technical requirements
of channeling intercepted transmissions to law enforcement agencies. Although
CALEA was introduced approximately eight years ago, communications service
providers were not required to comply with CALEA's standards until June 30,
2000, and were allowed to individually seek further exemptions. Following the
September 11 terrorist attacks, the Federal Communications Commission issued an
order stating that no further exemptions would be granted after December 31,
2001. Since then, communications service providers seeking to comply with CALEA
and the ETSI standards and communications equipment vendors seeking to provide
compliant products have fueled the demand for solutions that are CALEA and ETSI
compliant. By outsourcing their need for a compliant communications interception
solution, communications service providers and equipment vendors are able to
focus on their core business activities.
On November 19, 2001, the President of the United States signed into
law the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001, known as the "USA
Patriot Act." This legislation significantly expanded federal wiretap capability
and eased the process for acquiring wiretapping warrants by granting law
enforcement agencies the authority to intercept multiple methods of
communications, such as cellular calls and emails with a single warrant and by
extending the duration and scope of such warrants in certain circumstances. In
addition, the USA Patriot Act encourages collaboration between law enforcement
agencies by easing the restrictions on the sharing of recorded communications.
Similar legislation is currently being considered in Europe and Asia.
Altogether, the recent legislative, regulatory and technological
developments surrounding communications interception activities have led to an
increase in demand for sophisticated communications interception solutions.
Traditionally, lawful communications interception activities consisted of a law
enforcement or other authorized official eavesdropping on the telephone
conversation of a suspected target. Today, utilizing advanced communications
interception technologies, all voice and data transmissions of a target can be
intercepted through multiple communications channels.
We believe the market for communications interception solutions will
grow primarily due to:
o the emphasis placed on security-related spending stemming from the
September 11 terrorist attacks. We believe that spending on
communications intelligence is now among the highest of priorities for
the United States and its allies, and many new homeland security
initiatives are underway;
o initiatives by communications service providers to comply with the
technical standards established by CALEA in the United States, the
ETSI standards in Europe and other international regulatory bodies;
o initiatives by law enforcement agencies following enactment of the USA
Patriot Act;
o the development and deployment of new communications technologies,
including increased use and acceptance of e-mail, the Internet, and
other data transmissions as means of communication; and
o the dramatic increase in data traffic, which is anticipated to require
new surveillance tools capable of collecting and processing an
increased volume and array of signals.
Digital Video Security
Organizations are increasingly recognizing the need for surveillance
of their facilities and operations to ensure the proper level of security. The
September 11 terrorist attacks have heightened public awareness to the security
needs of public facilities, including airports and government buildings, as well
as other organizations and institutions. Digital video security solutions
coupled with intelligent video analysis tools address some of these security
needs by providing a proactive approach to surveillance and security. A
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proactive approach to surveillance and security is achieved through the
instantaneous processing of collected data and, in contrast to a passive
approach, may help prevent or contain a security breach in real time.
Traditionally, video security consisted of connecting surveillance
cameras to analog recording equipment that archived video images on tape. Today,
digital video technology offers many advantages over analog equipment while
allowing for the continued use of the existing infrastructure of installed
cameras. These advantages include more efficient storage of video for faster
search and retrieval, either locally or remotely through IP networks.
Additionally, as video data is digitized and compressed, a variety of
intelligent video analysis tools can be applied, including biometric
identification, the process of using unique biological characteristics to
identify an individual, and motion detection technologies. The combination of
digital recording and intelligent video analysis technologies provides users
with a more effective integrated security and surveillance solution.
Digital video security systems are marketed primarily to government
agencies and public and private organizations for use in airports, public
buildings, correctional facilities and corporate sites that require the capture,
retention and analysis of video information for crime prevention and
investigation, asset protection and other related purposes.
We believe that the market for digital video security will grow
primarily due to:
o expected increases in the number and quality of security solutions
deployed in corporate and public facilities due to heightened security
awareness;
o expected migration from analog to digital video recording; and
o expected increases in value-added applications utilizing digital video
promoting the shift from passive to proactive video monitoring.
THE ENTERPRISE BUSINESS INTELLIGENCE MARKET
The pressure on companies to manage their businesses more effectively
has fueled the demand for analytic technologies and enterprise business
intelligence solutions that provide actionable intelligence to organizations in
a quick, convenient and helpful manner. The enterprise business intelligence
market consists primarily of solutions targeting enterprises that rely on
contact centers for voice, email and Internet interactions with their customers.
Additionally, an emerging segment of enterprise business intelligence utilizes
digital video information to allow enterprises and institutions to enhance their
operations, processes and performance.
Contact Center Business Intelligence
Developing and maintaining long-term customer relationships is
critical to the success of an enterprise operating in the competitive global
marketplace. However, to understand and enhance customer relations, an
enterprise must first improve its business processes that involve a high degree
of direct customer interaction. Today, many organizations interact with their
customers or clients primarily through contact centers. Increasingly, the
contact center is the primary "hub" within an organization for processing
inbound or outbound communications with customers that relate to the
organization's products and services. Contact centers generally consist of
supervisor and agent workstations that are staffed with customer service
representatives and are linked to a central telephone switch as well as computer
systems linking all functions of database management to capture, store and
report relevant customer information.
Recently, demand has increased for solutions that automate and
evaluate key sales, marketing and customer service processes, improve the
effectiveness of customer interactions, and aid in the retention of contact
center agents. As customers continue to interact with customer service
representatives through multiple communication channels including the Internet,
the role and importance of recording and quality assurance for contact centers
is increasing. Additionally, the rapid growth of the Internet and electronic
commerce has also increased the importance companies place on their customer
relationships since the Internet enables consumers to easily evaluate products
and prices from a wide range of geographically dispersed vendors and quickly
change vendors at a relatively low cost. Enterprises across industries are being
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driven to purchase quality assurance software primarily to improve customer
care, as well as to comply with industry-specific regulations. In addition, due
to the high cost of agent training and the high turnover of contact center
agents, the retention of contact center agents has become a high priority for
many enterprises.
Contact center business intelligence solutions target enterprises
that rely on contact centers for voice, email and Internet interactions with
their customers. Actionable intelligence generated from such interactions helps
these enterprises to better service and retain customers, improve business
processes and optimize contact center agent performance and retention. Companies
possessing a better understanding of the characteristics and preferences of
their customers are better positioned to customize product and service offerings
resulting in increased sales and enhanced customer retention. In addition, these
companies will also be able to better identify opportunities to sell
complementary or higher-end products and to more accurately forecast customer
demand. For example, major financial institutions generally and credit card
issuers particularly, need to monitor contact center activity in real time to
ensure that contact center representatives are responsive to customer needs, and
assure that customers do not cancel accounts or transfer balances based on poor
service. Additionally, increased intelligence allows these companies to identify
new business opportunities with customers, such as cross-selling other financial
services and products, including investments, insurance and mortgages, to
existing credit card customers.
We believe that the market for contact center business intelligence
solutions will grow primarily due to:
o increased awareness and acceptance of the benefits of analytical
recording and quality assurance solutions to optimize the customer
experience;
o continuing shift from traditional contact centers to web-enabled and
multimedia contact centers requiring advanced quality assurance
solutions;
o upgrades of existing contact centers seeking to improve efficiency and
reduce costs;
o increased need by corporations to provide innovative management tools
to motivate and reward agents, as well as to decrease the high
turnover of agents in the contact center field; and
o transition by contact centers from measurement of agent performance
improvement alone to business process improvement.
Video Business Intelligence
An emerging segment of enterprise business intelligence utilizes
digital video information to allow enterprises and institutions to enhance their
operations, processes and performance. Traditional video security and
surveillance systems allow enterprises to view and record actions and behaviors
associated with security-related or criminal activity; however, information on
the actions, behaviors and interactions of personnel or customers of an
enterprise is also valuable. The existing infrastructure of closed circuit
television cameras often already captures much of this valuable operational
information, however, utilizing information recorded by analog recording systems
is impractical. The expansion of digital recording and the introduction of
intelligent video analysis tools allow an enterprise to easily access and
utilize this valuable operational information.
Implementing video business intelligence applications offers valuable
information and process improvements to businesses in many vertical markets,
such as the retail, gaming and corporate markets. Some of the applications for
video business intelligence include the automatic counting, categorizing,
monitoring and assessment of customers and personnel. Improved service is
realized by real-time identification and notification of business opportunities
and customer service requirements.
We believe that the market for digital video business intelligence
solutions will grow primarily due to:
o The continuing demands on enterprises and institutions to streamline
their operations, improve their competitiveness and enhance their
customer service; and
o The rapid expansion of digital-based video systems that provide the
platform for, and enable the use of, intelligent video analysis tools,
including biometrics and other advanced analytics.
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OUR STRATEGY
Our strategy is to further enhance our position as a leading provider
of digital security and surveillance and enterprise business intelligence
solutions worldwide. Key elements of our strategy include:
o Enhancing our technological leadership and expanding the analytic
capabilities of our software. We intend to enhance our position in the
digital security and surveillance market and the enterprise business
intelligence market by continuing to develop internally the analytic
capabilities of our products and enhancing our core and complementary
technologies.
o Focusing on new market opportunities. As the need for actionable
intelligence is recognized by more organizations and market segments,
we believe we are well positioned to offer effective solutions to
these sectors.
o Leveraging our existing technologies into new markets and
applications. Our core technologies can be applied to several
different business applications. For example, the core technology of
our video business intelligence solutions originates from our digital
video security products. We continuously seek to utilize our
technologies in different business applications, as well as explore
the opportunity to combine our voice and video technologies into one
comprehensive solution.
o Utilizing strategic alliances to enhance our products and increase our
customer base. We plan to expand our product offerings and increase
our customer base by providing advanced complementary solutions, such
as biometric identification, through strategic alliances and joint
ventures with technology providers.
o Enhancing our relationships with systems integrators and software
resellers. We believe that our global network of systems integrators
and software resellers provides us with a unique opportunity to access
new markets and customers both domestically and internationally. We
are expanding our distribution channels by establishing additional
relationships with value added resellers, systems integrators and
distributors that sell security and business intelligence solutions to
global enterprises and service providers. We are also increasing our
worldwide product support and sales operations and our direct sales
channels.
OUR SOLUTION
Our solution enables the intelligent recording and analysis of voice,
video and data transmissions for digital security and surveillance and
enterprise business intelligence. Our products are utilized by government
agencies, leading corporations, financial institutions and telecommunications
service and equipment providers.
Our solutions provide our customers with the following key benefits:
o Robust functionality with advanced features. Our solutions address the
unique needs of our customers by providing a wide range of functions.
In addition, we have developed a number of applications that enhance
the functionality of our base product offerings. For example, our
digital video systems incorporate object-tracking software that
analyzes real-time video for specific motion, such as the separation
of a passenger from his luggage at an airport. In addition, our
communications interception products feature a cell-phone tracking
program that can identify the location of a wireless caller.
o End-to-end systems. Our products are unique in that we deliver
complete solutions for both access to and delivery from communications
networks and the collection, storage, management and processing of
multimedia communications by our end users.
o Turnkey solutions. Our solutions can be quickly and efficiently
deployed by our customers. We offer integrated hardware and software
as well as training and project management services. In addition, we
offer comprehensive documentation, installation and maintenance
services.
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o Intuitive user interface. Our products utilize standard user
interfaces, such as web-browser and email software, which allow our
customers to operate our software in a familiar and easy to use
framework.
o Scalable network-based solution with centralized control. Our digital
security and surveillance and enterprise business intelligence
solutions are network-based so that our customers can access recorded
information from any network connection. By allowing for centralized
monitoring, we believe that our solutions enable customers to more
efficiently manage their security and business information located at
dispersed sites. Our products can be scaled to support thousands of
inputs, both locally and across a customer networked site.
o Open, extendable platform. Our software runs on standard platforms and
integrates with standard storage, compression and database
technologies. We integrate with communications switches and customer
relationship management software, as applicable, from multiple vendors
across both traditional and next-generation communications networks.
In addition, we have developed application programming interfaces,
which enable our customers to easily incorporate their proprietary
database information into our solutions.
o Global support and service. We are a global company with systems
installed in more than 50 countries around the world and a service
infrastructure able to quickly and efficiently meet customer needs. We
believe that the breadth of our distribution, service and support is
unparalleled in the industry.
o Expertise in national and international standards and laws. Our
products are designed to comply with intricate local, national and
international standards regarding the lawful interception of
communications. We believe that the thorough knowledge of the
regulatory environments in which our customers operate enables us to
build more functional and practical solutions.
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DIGITAL SECURITY AND SURVEILLANCE SOLUTIONS
The following table summarizes our digital security and surveillance product
lines:
- --------------------- -------------------- --------------------------- --------------------------- ----------------------------
Product Line Market Served Type of Customer Purpose / Description Location of Product
- --------------------- -------------------- --------------------------- --------------------------- ----------------------------
STAR-GATE Communications o Communications Access, delivery and Embedded in circuit or
interception service providers administrative functions packet-based switch
of communications infrastructure
o Internet service interception
providers
o Switch
manufacturers
- --------------------- -------------------- --------------------------- --------------------------- ----------------------------
RELIANT Communications o Law enforcement Collection, delivery, Law enforcement or
interception agencies storage, and analysis of intelligence agency
o Intelligence data from communications monitoring center
agencies interception
- --------------------- -------------------- --------------------------- --------------------------- ----------------------------
LORONIX digital video Digital video o Government Intelligent recording of Networked to customer CCTV
security security agencies video from CCTV camera or IP cameras
o Public agencies transmissions
o Transportation
agencies
o Public buildings
- --------------------- -------------------- --------------------------- --------------------------- ----------------------------
STAR-GATE
Our STAR-GATE product line enables communications carriers, Internet
service providers, and communications equipment manufacturers to overcome the
complexities posed by global digital communications and comply with governmental
requirements. STAR-GATE enables communications service providers to intercept
simultaneous communications over a variety of wireline, wireless and IP networks
for delivery to law enforcement and other government agencies. STAR-GATE's
flexibility supports multi-network, multi-vendor switch environments for a
common interface across communications networks and supports switches from
communications equipment manufacturers, such as Alcatel, Ericsson, Lucent,
Nokia, Nortel and Siemens. STAR-GATE also supports interfaces to packet data
networks, such as the Internet and general packet radio services.
Our STAR-GATE product line performs two primary functions:
o Administration. STAR-GATE automates the implementation of a court
order for communications interception. This process includes assigning
surveillance targets, defining recipients of intercepted data and
setting time and security parameters conforming with the court order.
o Mediation. STAR-GATE routes the intercepted data from the
communications switch, converts data into the required legal
interception standard format, and delivers the intercepted
communications to the appropriate law enforcement agency.
STAR-GATE complies with CALEA and the ETSI standards for both circuit
switched and IP networks.
RELIANT
Our RELIANT product line provides intelligent recording and analysis
solutions for communications interception activities to law enforcement
organizations and government agencies. Our RELIANT software equips law
enforcement agencies with an end-to-end solution for live monitoring of
intercepted target communications and evidence collection management, regardless
of the type of communication or network used. Applications can scale from a
35
small center for a local police force, to a country-wide center for national law
enforcement agencies. RELIANT products are designed to comply with legal
regulations and can be integrated with communications networks in the country
where the system is utilized.
The RELIANT monitoring center is comprised of a system administration
workstation and an operator workstation as well as collection and storage
databases and servers. RELIANT collects intercepted communications from multiple
channels and stores them for immediate access, further analysis and later use as
evidence. The system enables the review of intercepted voice, fax and data
transmissions in their original forms through an easy to use interface.
RELIANT offers the following key features:
o Open database architecture, which enables the application of external
analysis tools, while advanced security measures maintain the
integrity of intercepted information against penetration and
unauthorized access;
o Long-term session archiving for use in court playback and submission
of evidence;
o Location tracking capabilities for wireless network interception; and
o Maintenance and fault management.
LORONIX Digital Video Security
Our LORONIX digital video security product line provides intelligent
recording and analysis of video for security and surveillance applications to
government agencies and public organizations. Our LORONIX software digitizes,
compresses, stores and retrieves video imaging. In addition, LORONIX products
provide live video streaming and camera control over local and wide area
computer networks and the Internet.
Our LORONIX product line may be configured to allow customers to
perform complete monitoring for security and management of local and remote
sites from a central investigative unit. The use of digital storage and
compression technology makes the LORONIX product line a more efficient
alternative to analog tape storage. The technology interfaces with access
control, facial recognition, activity and intrusion detection and other
technologies for enhanced security and surveillance.
The LORONIX solution offers the following features:
o Activity scan functionality that enables users to detect activity in
recorded video by analyzing frames of a video segment to detect
changes from image to image. As a scan progresses, images of video
frames containing activity are highlighted and set aside for further
analysis;
o Camera management software that displays all cameras connected to a
given system with a graphic user interface. Intuitive camera icons
denote whether cameras are black and white, color, fixed, or have
pan/tilt/zoom functionality;
o An image toolkit that allows users to enhance, annotate, print, and
save images in a variety of formats from live or recorded video;
o Video authentication technology that utilizes a mathematical algorithm
to confirm the authenticity of digital video and to produce an image
fingerprint. This fingerprint is compared to others that were created
and stored when the video was originally captured by the recorder;
o A video export application that can send live and recorded video for
review at any time;
o Scalability allowing for the monitoring of thousands of cameras at the
same moment;
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o Open architecture allowing for the application of intelligent video
tools such as biometric identification and motion detection
technologies;
o Operation capabilities whereby users can conduct diversified tasks,
such as playback, archiving and live review simultaneously; and
o Advanced compression technologies.
ENTERPRISE BUSINESS INTELLIGENCE SOLUTIONS
The following table summarizes our enterprise business intelligence product
lines:
- ------------------------ ---------------------- ---------------------------- ---------------------------- -------------------------
Product Line Market Served Type of Customer Purpose / Description Location of Product
- ------------------------ ---------------------- ---------------------------- ---------------------------- -------------------------
ULTRA Contact centers o Internal contact Recording and analysis of Interface through
centers of large customer interactions with customer relations
organizations and contact centers agents management application
enterprises, including server
utilities and
financial institutions
o Outsourced
contact centers
- ------------------------ ---------------------- ---------------------------- ---------------------------- -------------------------
LORONIX video business Business intelligence o Large Analysis of digital video Networked to customer
intelligence organizations and to improve business CCTV or IP cameras
enterprises, primarily processes and performance
in the retail and
gaming industries
- ------------------------ ---------------------- ---------------------------- ---------------------------- -------------------------
ULTRA
Our ULTRA products record and analyze customer interactions to
provide enterprises with business intelligence about their customers and help
monitor and improve the performance of their contact centers. ULTRA's
intelligent recording platform uses an innovative architecture that leverages
voice and data processing technologies to offer customers multiple methods of
recording contact center interactions while providing a flexible framework for
expansions and changes in technologies.
ULTRA products capture customer interactions from multiple sources,
including telephone, email, Internet or voice over Internet protocol. Utilizing
ULTRA's OpenStorage Portal and Universal Database, our customers can leverage
their existing storage infrastructure to store and access recorded customer
interactions using standard file formats. ULTRA's software tools analyze
customer interactions and distribute the resulting actionable intelligence to
specified individuals based on predetermined parameters via private computer
networks or the Internet.
ULTRA products integrate with leading customer relationship
management, or CRM, applications allowing the delivery of information directly
to the user's desktop within Siebel, PeopleSoft and other CRM solutions. ULTRA
also interfaces with popular desktop software tools, including Microsoft
Outlook, Lotus Notes and web browsers, to enable the user to easily access the
data in a familiar computing environment.
The ULTRA product line offers the following key features:
o Advanced analytical tools for efficient data mining of call content
for customer intelligence;
o Unique user-defined customer satisfaction analysis features. Such
features include a call flow analysis which monitors information such
as call length, number of holds, hold times, and transfers, as well as
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stress analysis which defines customer stress level during calls,
allowing for either on-line assistance from a supervisor or offline
analysis for improved agent performance;
o Open architecture, allowing for quick and easy integration with
leading CRM applications; and
o Advanced storage systems which convert calls to standard file format,
allowing for the integration of voice to CRM applications as well as
the enterprise wide distribution via local or wide area networks.
LORONIX Video Business Intelligence
Our LORONIX video business intelligence products enable our
enterprise customers to monitor and improve their operations through the
analysis of live and recorded digital video. Like the LORONIX digital video
security product, the LORONIX video business intelligence product digitizes,
compresses, stores and retrieves video imaging. While leveraging the technology
of our digital security product, the LORONIX enterprise product line also
contains unique software focused on maximizing operational effectiveness through
video analysis.
By interfacing with customer databases and software systems, LORONIX
facilitates the user's review of video imaging based on specific criteria such
as employee ID, product barcodes and point of sale transaction history. The
LORONIX solution also integrates intelligent software that allows for the
detection of movement of people and objects at a customer's premises. These
features can be used to improve the operational performance of businesses, such
as retail chains and casinos, by providing real-time alerts to customer
bottlenecks. Enterprises can combine our software with other video analysis
technologies that actively monitor customer and employee behavior and responses.
SALES AND MARKETING
We sell our products primarily through a combination of our direct
sales force and agents, distributors, value added resellers and systems
integrators. As of January 31, 2002, we had several sales offices in the United
States and offices in Australia, Canada, France, Germany, Hong Kong, Israel,
Japan, the Netherlands, Singapore and the United Kingdom. Our direct sales force
consists of account executives, solutions consultants, and regional sales
directors, that possess industry-specific experience.
Our sales force pursues potential sales leads identified internally
or provided by systems integrators. We develop strategic marketing alliances
with leading companies in our industry to expand the coverage and support of our
direct sales force. Our business development personnel are responsible for the
initiation, negotiation and completion of these marketing alliances. We
currently have such relationships with ADT, Avaya, Genesys, Nortel,
PriceWaterhouseCoopers, Siebel, Siemens and Visionics.
Our direct sales cycle typically begins with our initiation of a
sales lead or the receipt of a request for a proposal from a prospective
customer. The sales lead, or request for a proposal, is followed by an
assessment of the customer's requirements, a formal proposal, presentations and
product demonstrations, site visits to an existing customer that utilizes our
products and contract negotiation and signing. The sales cycle can vary
substantially from customer to customer but typically lasts six months to one
year and is considered completed with the delivery of our product to the
customer.
We use a variety of marketing programs to build brand name awareness,
as well as to attract potential customers. These programs include market
research, product and strategy updates with industry analysts, direct marketing
programs to current and prospective customers, advertising, participation in
industry trade shows, conferences, and seminars, and a public relations program
that includes demonstrations of our products. To support sales efforts, we also
produce promotional materials that include brochures, video presentations, data
sheets and other technical descriptions.
CUSTOMERS
Our products are currently used by over 800 organizations and are
deployed in over 50 countries, across many industries and markets. Many users of
our products are large corporations or government agencies that operate from
multiple locations and facilities across large geographic areas and sometimes
38
across several countries. These organizations typically implement our solutions
in stages, with implementation in one or more sites and then gradually expanding
to a full enterprise, networked-based solution.
The following list represents sample purchasers of our products in
our key market segments:
o Communications interception: Cingular Wireless, Ericsson, Nortel, the
Toronto Police Service, the U.S. Department of Justice and
VoiceStream;
o Digital video security: FedEx, Mohegan Sun Casino, the Port Authority
of New York & New Jersey, the U.S. Capitol, the U.S. Department of
Defense, the U.S. Department of the Treasury - Bureau of Engraving and
Printing, and Washington Dulles International Airport;
o Contact center business intelligence: BlueCross BlueShield, Con
Edison, Datek, HSBC, JCPenney, OnStar and Sprint; and
o Video business intelligence: FedEx and Tiffany & Co.
RESEARCH AND DEVELOPMENT
We continue to enhance the features and performance of our existing
products and introduce new solutions. We believe that our future success depends
on a number of factors, which include our ability to:
o identify and respond to emerging technological trends in our target
markets;
o develop and maintain competitive solutions that meet our customers'
changing needs; and
o enhance our existing products by adding features and functionality to
meet specific customer's needs, or that differentiate our products
from those of our competitors.
As a result, we have made and intend to continue to make significant
investments in research and development. We allocate our research and
development resources in response to market research and customer demands for
additional features and solutions. Our development strategy involves rolling out
initial releases of our products and adding features over time. We continuously
incorporate product feedback we receive from our customers into our product
development process. While we expect that new products will continue to be
developed internally, we may, based on timing and cost considerations, acquire
or license technologies, products or applications from third parties.
Our net research and development expenses were approximately $21.3
million for fiscal 1999, $14.2 million for fiscal 2000 and $11.4 million for the
nine-month period ended October 31, 2001. Our principal research and development
activities are located in Israel, the United States and Germany. As of January
31, 2002, we had over 260 employees engaged in our research and development
activities.
MANUFACTURING
Our manufacturing operations, which are performed in our Israeli,
U.S. and German facilities, consist primarily of installing our software on
externally purchased hardware components and final assembly and testing, which
involves the application of extensive quality control procedures to materials,
components, subassemblies and systems. A majority of the hardware components for
our products are available from equipment vendors. Only a limited number of
hardware components are manufactured specifically for us. To date, we have been
able to obtain adequate supplies of all components in a timely manner from
existing sources or, when necessary, from alternative sources.
We maintain organization-wide quality assurance procedures,
coordinating the quality control activities of our research and development,
manufacturing and service departments. Our primary manufacturing and research
and development facility in Israel has received certification to Quality
Standard ISO 9001.
39
INTELLECTUAL PROPERTY RIGHTS
We have accumulated a significant amount of proprietary know-how and
expertise over the years in developing multimedia analytic solutions for digital
security and surveillance and enterprise business intelligence. As of October
31, 2001, we had no patents and five patent applications pending. We
continuously review with our patent attorneys new areas of technology to
determine whether they are patentable.
The names RELIANT(TM), LORONIX(TM), cctvware(TM), vCRM(TM), Building
the Customer Intelligent Enterprise(TM), OpenStorage Portal(TM), Intelligent
Recording(TM) and our logos are our trademarks.
We license certain software, technology and related rights for use in
the manufacture and marketing of our products, and pay royalties to third
parties under such licenses and other agreements. We believe that our rights
under such licenses and other agreements are sufficient for the manufacturing
and marketing of our products and, in the case of licenses, extend for periods
at least equal to the estimated useful lives of the related technology and
know-how.
In January 2000, Comverse Technology and Lucent, acting through
subsidiary patent holding companies on behalf of themselves and their various
subsidiaries and affiliates, entered into a non-exclusive cross-licensing
arrangement covering current and certain future patents issued to Comverse
Technology and its affiliates and a portfolio of current and certain future
patents in the area of communications technology issued to Lucent and its
affiliates. Under that arrangement, and pursuant to a patent license agreement
between us and Comverse Technology, Lucent is entitled to non-exclusive
royalty-free licenses under any patents granted to us or which we obtain the
right to license during the term of the agreement, while we are entitled to a
non-exclusive royalty-free sublicense to all patents that are licensed by Lucent
to Comverse Technology. See "Related Party Transactions - Patent License
Agreement."
COMPETITION
We face strong competition in the markets for our products, both in
the United States and internationally. We expect competition to persist and
intensify in the digital security and surveillance market, primarily due to
increased demand for homeland defense and security solutions following the
September 11 terror attacks. Our primary competitors are suppliers of security
and recording systems and software, and indirect competitors that supply certain
components to systems integrators. In the enterprise business intelligence
market, we face competition from organizations emerging from the traditional
call logging or call recording market as well as software companies that develop
and sell products that perform specific functions for this market. Additionally,
many of our competitors specialize in a subset of our portfolio of products and
services. Primary competitors include, among others, ADC Telecommunications,
ECtel, e-talk, Eyretel, JSI Telecom, NICE-Systems, Sensormatic and Witness
Systems. We believe we compete principally on the basis of:
o product performance and functionality;
o knowledge and experience in our industry;
o product quality and reliability;
o customer service and support; and
o price.
We believe that our success depends primarily on our ability to
provide technologically advanced and cost effective solutions. Additionally, we
must continue to provide our customers with prompt and responsive customer
support. Our competitors that manufacture other security-related systems or
other recording systems may derive a competitive advantage in selling to
customers that are purchasing or have previously purchased other compatible
equipment from such manufacturers. Further, we expect that competition will
increase as other established and emerging companies enter our market and as new
products, services and technologies are introduced.
40
EMPLOYEES
As of January 31, 2002, we had approximately 800 employees. A
majority of our employees are scientists, engineers or technicians engaged in
research and development and marketing support services. We consider our
relationship with our employees to be good. Our employees in the United States
are not covered by any collective bargaining agreement. Our employees outside
the United States are entitled to severance and other benefits mandated under
local laws.
Israeli law generally requires the payment by employers of severance
pay upon the death of an employee, retirement or upon termination of employment,
and we provide for such payment obligations through monthly contributions to an
insurance fund. Additionally, Israeli employees and employers are required to
pay pre-determined sums to the National Insurance Institute, which covers
medical and other benefits similar to the benefits provided by the United States
Social Security Administration.
FACILITIES
We lease approximately 60,000 square feet of office space in the
United States, including approximately 32,000 square feet in Woodbury, New York,
where our headquarters and some of our support and sales facilities are located.
The lease of our Woodbury, New York facilities expires in February 2003. We
lease approximately 70,000 square feet of office and storage space for
manufacturing, development, support and sales facilities in Tel Aviv, Israel.
This lease expires in January 2004. Additionally, we lease approximately 15,000
square feet of office space for sales, installation and support in the United
Kingdom. We also lease small office facilities in Germany and the Netherlands.
We own approximately 40,000 square feet of office space for the
development, manufacturing, support and sales of our LORONIX product lines in
Durango, Colorado. We also own approximately 25,000 square feet of office space
for sales, manufacturing, support and development in Bexbach, Germany. We
believe that our owned and leased facilities are adequate for our current
operations, and that additional facilities can be acquired or developed to
provide for expansion of our operations in the foreseeable future.
LEGAL PROCEEDINGS
From time to time, we are subject to claims in legal proceedings
arising in the normal course of our business. We do not believe that we are
party to any pending legal action that could reasonably be expected to have a
material adverse effect on our business or operating results.
PROXY AGREEMENT WITH THE DEPARTMENT OF DEFENSE
One of our subsidiaries, Verint Technology Inc., or Verint
Technology, is engaged in the development, marketing and sale of our
communications interception solutions to various U.S. governmental agencies. In
order to conduct its business, Verint Technology is required to maintain
facility security clearances under the National Industrial Security Program, or
the NISP. The NISP requires companies maintaining facility security clearances
to be insulated from foreign ownership, control or influence. We, Comverse
Technology and the Department of Defense have entered into a proxy agreement
with respect to the ownership and operations of Verint Technology. The proxy
agreement has been approved by the Defense Security Service, which has oversight
responsibilities on behalf of the Department of Defense.
Under the proxy agreement we appointed three U.S. citizens that have
the requisite personal security clearance as directors of Verint Technology and
as holders of proxies to vote the stock of Verint Technology. These individuals
are responsible for the oversight of Verint Technology's security arrangements,
including the separation of Verint Technology from us and our affiliates. As
proxy holders, these individuals have the power to exercise all prerogatives of
ownership of Verint Technology, except that without obtaining our express
written approval they may not authorize any individual sale or disposal of
capital assets constituting a material amount of Verint Technology's assets, the
mortgaging of assets other than for working capital or capital improvement
purposes, any merger, consolidation, reorganization or dissolution of Verint
Technology and the filing of a petition under the federal bankruptcy laws.
41
Under the proxy agreement we have also established a government
security committee, which consists of the three proxy holders. The government
security committee is in charge of the development and implementation of a
technology control plan, which prescribes measures and establishes procedures to
prevent unauthorized disclosure or export of controlled information to us, any
of our affiliates or others. In addition, the proxy agreement establishes
procedures regarding meetings, visits and communications between Verint
Technology, us and our other affiliates. The Department of Defense continually
reviews the technology control plan and receives an annual report from the proxy
holders.
EXPORT REGULATIONS
We are subject to export restrictions in Israel with respect to
certain components of our RELIANT products which are developed and manufactured
in Israel. In order to export our RELIANT products from Israel, we are required
to obtain export licenses from the Israeli Ministry of Defense prior to
marketing these products in foreign countries. We are also required to obtain an
additional license prior to the completion of each sale. To date, we have been
successful in obtaining necessary permits.
We are also subject to export restrictions in Germany with respect to
components of our RELIANT products which are developed and manufactured in
Germany. To date, we have been able to rely on the terms of a general export
license in Germany to export these components to countries outside the European
Union. Under the terms of this license, we are also required to report to German
authorities each shipment of these components outside of the European Union.
42
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning our directors,
executive officers and key employees. Prior to the completion of this offering,
we intend to designate three independent directors in accordance with the rules
of the Nasdaq National Market:
NAME AGE POSITION
- ---- --- --------
Executive Officers and Directors:
Kobi Alexander........................ 49 Chairman of the Board of Directors
Dan Bodner............................ 43 President, Chief Executive Officer and Director
Igal Nissim........................... 46 Chief Financial Officer and Director
David Kreinberg....................... 37 Director
William F. Sorin...................... 53 Director
Key Employees:
David T. Ledwell ..................... 55 President and Chief Executive Officer of Loronix
Elan Moriah........................... 39 Vice-President and divisional President for Contact Center
Business Intelligence Solutions
David Worthley........................ 40 President and Chief Executive Officer of Verint Technology Inc.
David Parcell......................... 48 Managing Director of Europe, Middle East and Africa
Meir Sperling......................... 52 Managing Director of Verint Systems Ltd.
Executive Officers and Directors
KOBI ALEXANDER has served as Chairman of our Board of Directors since February
1994. Mr. Alexander, a founder of Comverse Technology, Inc., has been a director
and senior executive officer of Comverse Technology since its formation in
October 1984, serving in the capacities of Chairman of the Board of Directors
since September 1986 and Chief Executive Officer since April 1987. Mr. Alexander
also serves as director and Chairman of the Board of various subsidiaries of
Comverse Technology, including its other principal operating subsidiaries,
Comverse, Inc. and Ulticom, Inc. Mr. Alexander is also a director of System
Management Arts Incorporated, or SMARTS, a leading developer of intelligent
software to assure availability and performance of network-based services. Mr.
Alexander received a B.A., magna cum laude, in Economics from the Hebrew
University of Jerusalem in 1977, and an M.B.A. in Finance from New York
University in 1980.
DAN BODNER is President, Chief Executive Officer and a director of our company.
Mr. Bodner served as our President and/or Chief Executive Officer and director
since February 1994. From 1991 to 1998, Mr. Bodner also served as President and
Chief Executive Officer of Comverse Government Systems Corp., a former affiliate
of ours. Prior to such positions, from 1987 to 1991, Mr. Bodner held various
management positions at Comverse Technology. Prior to joining Comverse
Technology, Mr. Bodner was employed for two years as Director of Software
Development for Contahal Ltd. From 1981 through 1985, Mr. Bodner served in the
Israeli Defense Force in an engineering capacity. Mr. Bodner received a B.Sc.,
cum laude, in Electrical Engineering from the Technion, Israel Institute of
Technology, in 1981 and a M.Sc., cum laude, in Telecommunications and Computer
Science from Tel Aviv University in 1987.
IGAL NISSIM has served as our Chief Financial Officer and has been a director
since January 1999. Mr. Nissim has been employed by Comverse Technology since
1986 where he served as Chief Financial Officer from 1993 until 1998. Prior to
this position, Mr. Nissim served as Chief Financial Officer of Efrat Future
Technology Ltd. From 1984 to 1986, Mr. Nissim was employed by Gadot Industrial
Enterprises Ltd. as deputy controller, responsible for financial and cost
accounting. Mr. Nissim is a Certified Public Accountant in Israel and was
employed for four years by Kesselman & Kesselman (now a member of
PriceWaterhouseCoopers). Mr. Nissim received a B.A. in Economics and Accounting
from the Tel-Aviv University in 1981.
43
DAVID KREINBERG has been a director since January 1999. Mr. Kreinberg has served
as Vice President of Finance and Chief Financial Officer of Comverse Technology,
Inc. since May 1999. Previously, Mr. Kreinberg had served Comverse Technology as
Vice President of Finance and Treasurer from April 1996 and as Vice President of
Financial Planning from April 1994. Mr. Kreinberg also served as the Chief
Financial Officer of Ulticom from December 1999 until September 2001. Mr.
Kreinberg is also a director of Ulticom and SMARTS. Mr. Kreinberg is a Certified
Public Accountant, and prior to joining Comverse Technology he served as a
senior manager at Deloitte & Touche LLP. Mr. Kreinberg received a B.S., summa
cum laude, in Accounting from Yeshiva University in 1986 and an M.B.A. in
Finance and International Business from Columbia Business School in 1990.
WILLIAM F. SORIN has been a director since January 1999. Mr. Sorin has served as
a director and the Corporate Secretary of Comverse Technology Inc. since its
formation in October 1984. Mr. Sorin is also a director of Ulticom and SMARTS.
Mr. Sorin is an attorney engaged in private practice and is General Counsel to
Comverse Technology. Mr. Sorin received a B.A. from Trinity College in 1970 and
a J.D., cum laude, from Harvard Law School in 1973.
Key Employees
DAVID T. LEDWELL has served as the President and Chief Executive Officer of our
subsidiary, Loronix, since September 1999. Mr. Ledwell also served as a director
of Loronix from September 1999 until July 2000. From 1986 to 1998, Mr. Ledwell
served in various senior executive capacities at DH Technology, Inc., a company
engaged in the development, marketing, sales and support of transaction, bar
code printers and credit card readers. From 1995 to 1998, Mr. Ledwell served as
Executive Vice President responsible for several of the DH Technology's
subsidiaries and divisions. Prior to 1986, Mr. Ledwell held various management
positions with companies in the computer and electronics industries, including
Texas Instruments and Datapoint Corporation. Mr. Ledwell holds a B.S. in
Electrical Engineering from Colorado State University.
ELAN MORIAH has served as our divisional President for Contact Center Business
Intelligence Solutions since August 2001 and as a Vice President since May 2000.
From 1995 until May 2000, Mr. Moriah held various senior management positions in
Motorola Inc., including Business Development Manager for Europe, Middle East
and Africa business at Motorola Inc.'s Schaumburg; Illinois based worldwide
network services division, where he established large-scale joint ventures in
the area of wireless communication. Mr. Moriah has also served as Vice President
of Marketing and Sales of Motorola's paging subsidiary in Israel. From 1989 to
1995, Mr. Moriah worked for Comet Software Inc., as Vice President of Marketing
and Sales and as Operations Manager. Mr. Moriah received a B.Sc., cum laude, in
Industrial Engineering and Management from the Technion, Israel Institute of
Technology, in 1988, and an M.B.A., summa cum laude, in International Business
from the City University of New York in 1992.
DAVID WORTHLEY has served as President and Chief Executive Officer of our
subsidiary Verint Technology Inc. since January 1999. From August 1997 to
January 1999, Mr. Worthley served as our Vice President. Prior to joining our
company, Mr. Worthley served as the Chief of the FBI's Telecommunications
Industry Liaison Unit, which was responsible for the implementation of CALEA.
Mr. Worthley joined the FBI in 1988 as a Special Agent. In 1991 Mr. Worthley was
assigned to the FBI's engineering research facility where he supervised
electronic surveillance matters. Prior to his employment with the FBI, Mr.
Worthley worked as an account representative for Motorola Communications Sector
from 1986 to 1988. From 1982 to 1986, Mr. Worthley worked as an audio engineer
for ORTV Productions. Mr. Worthley received a B.S. in Telecommunications from
Oral Roberts University in 1984 and is a 1988 graduate of the FBI Academy.
DAVID PARCELL has served as our Managing Director of Europe, Middle East and
Africa, or EMEA, since May 2001. From July 1997 until joining our company Mr.
Parcell was employed by Aspect Communications, where he served as Vice
President, EMEA. From April 1994 to July 1997, Mr. Parcell served as United
Kingdom Managing Director for Co-Cam, a subsidiary of Colonial (now First Wave
Technologies). From July 1981 to January 1994, Mr. Parcell held various senior
sales and general management positions at Datapoint UK Ltd., where he also
served as Sales and Marketing Director for a period of four years. Prior to
these positions, Mr. Parcell held sales positions at Unisys between June 1978
and June 1981, and with Olivetti between June 1975 and June 1978. Mr. Parcell
received a B.Sc. with honors, in Economics and Law from the Surrey University in
1974.
44
MEIR SPERLING has served as a Managing Director of our subsidiary Verint Systems
Ltd. since September 2000. From January 1999 to January 2000, Mr. Sperling was
employed by ECI Telecom Ltd., where he served as Corporate Vice President,
General Manager of the business systems division and a director in several of
ECI's subsidiaries. From 1992 to 1999, Mr. Sperling served as Corporate Vice
President and General Manager of the business and access systems divisions of
Tadiran Telecommunications Ltd. Mr. Sperling also served as a director in
several of Tadiran's subsidiaries. From 1987 to 1992, Mr. Sperling served as
Director of Product Planning and Business Development of TEI, a U.S. subsidiary
of Tadiran Ltd. Between 1975 and 1987, Mr. Sperling served in various positions
in research and development at Tadiran, where he also served as a Director of
research and development of Tadiran's business systems division. Mr. Sperling
received a B.Sc. in Electronic Engineering from the Ben Gurion University,
Israel, in 1975.
BOARD COMPOSITION
Our by-laws will authorize our board of directors to have not less
than three and not more than fifteen members. Our board of directors currently
has five members. We intend to have additional directors, including independent
directors, join our Board of Directors effective upon completion of this
offering. Members of the board of directors are elected each year at the annual
meeting of stockholders to serve until the following annual meeting of
stockholders or until their successors have been elected and qualified.
Directors may be removed by the affirmative vote of the holders of a majority of
the shares entitled to vote at an election of directors. There are no family
relationships among any of our directors and executive officers.
BOARD COMMITTEES
Our board of directors will have four committees: an executive
committee, a compensation committee, an audit committee and a stock option
committee. Members will serve on these committees for one-year terms.
Our executive committee consists of Messrs. Kobi Alexander, Dan
Bodner, William Sorin and David Kreinberg. The executive committee has all the
authority of the board, except with respect to items requiring stockholder
approval or submission and except as otherwise required by law.
Our compensation committee consists of Messrs. ____________,
____________ and ____________. The compensation committee makes recommendations
to the board of directors regarding the various incentive compensation and
benefit plans and determines salaries for the executive officers and incentive
compensation for employees.
Our audit committee consists of Messrs. ____________, ____________
and ____________. The audit committee makes recommendations to the board of
directors regarding the selection of independent public accountants, reviews the
results and scope of the audit and other services provided by our independent
public accountants and reviews and evaluate our control functions.
Our stock option committee consists of Messrs. ____________,
____________ and ____________. The stock option committee administers the
issuance of stock options under our stock incentive compensation plan.
DIRECTOR COMPENSATION
Our directors do not currently receive any compensation for serving
on the board of directors or any committee of the board. Our directors are
reimbursed for the expenses they incur in attending meetings of the board or
board committees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation decisions in fiscal 2001 were made exclusively
by our Chairman, Kobi Alexander. No interlocking relationship exists between our
board of directors and the board of directors or compensation committee of any
other company, nor has any such interlocking relationship existed in the past.
45
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation we
paid to our chief executive officer and our other executive officer during
fiscal 2001.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------------------------------------------
FISCAL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ------ ----- ------------
Dan Bodner,
President and Chief Executive Officer................ 2001 $ $ $
---------- ---------- ----------
Igal Nissim,
Chief Financial Officer.............................. 2001 $ $ $
---------- ---------- ----------
STOCK OPTION INFORMATION
_________ options to purchase shares of common stock were granted by
us to our executive officers during fiscal 2001.
YEAR-END OPTION VALUES
No options granted by us were exercised by the executive officers
during fiscal 2001. The following table provides certain information concerning
options granted by us as of January 31, 2002, with respect to each of the
executive officers. These options vest in four equal annual increments
commencing from the date of grant. The value of the unexercised options set
forth below has been calculated by subtracting the exercise price from the
assumed initial offering price of $___ per share and multiplying that amount by
the number of shares underlying the option.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT JANUARY 31, 2002 AT JANUARY 31, 2002
------------------------------------- ------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Dan Bodner..................
Igal Nissim.................
VERINT SYSTEMS INC. STOCK INCENTIVE COMPENSATION PLAN
The purpose of this plan is induce key personnel, including
employees, directors, independent contractors, and other persons rendering
valued services, to remain in the employ or service of our company, our
subsidiaries and affiliates, to attract new personnel and to encourage such
personnel to secure or increase on reasonable terms their stock ownership in our
company.
General. Options granted under the plan are intended to be either
incentive stock options or options not intended to be incentive stock options,
called non-qualified options, or a combination thereof. We have reserved
25,000,000 shares of our common stock for issuance upon exercise of awards under
the plan.
Administration. The plan has been to date, and up to the closing of
this offering will be, administered by a committee. Following completion of this
offering, the plan will be administered by a stock option committee consisting
of Messrs. ________, ______________ and ____________.
Eligibility. Employees of our company or our affiliates may receive
incentive stock options. Non-qualified options may be granted to employees and
to independent contractors rendering services to our company or our affiliates.
46
Deferred Stock. An award of deferred stock is an agreement by our
company to deliver to an employee a specified number of shares of common stock
at the end of a specified deferral period or periods. Before the issuance and
delivery of the deferred stock, the awarded employee does not have any rights as
a stockholder with respect to any shares of deferred stock credited to his or
her account. Dividends declared during the deferral period on shares covered by
a deferred stock award will be paid to the awarded employee currently, or
deferred and deemed to be reinvested in additional deferred stock, or otherwise
reinstated on terms as the committee may determine at the time of the award. The
stock option committee may condition the grant of the deferred stock award or
the expiration of the deferral period upon the employee's achievement of one or
more performance goals. Shares of deferred stock credited to the account of the
awarded employee are issued and delivered to the employee at the end of the
deferral period under the terms of the deferred stock agreement. The committee
may, in its sole discretion, accelerate the delivery of all or any part of a
deferred stock award or waive the deferral limitations for all or any part of
the deferred stock award.
Restricted Stock. An award of restricted stock to an employee is a
grant by our company of a specified number of shares of common stock subject to
forfeiture upon the happening of specified events. The certificates representing
shares of restricted stock are legended as to sale, transfer, assignment, pledge
or other encumbrances during the restriction period and are deposited by the
employee, together with a stock power endorsed in blank, with our company, to be
held in escrow during the restriction period. Unless the stock option committee
determines otherwise, during the restriction period the awarded employee has the
right to receive dividends from and to vote the shares of restricted stock. The
committee may condition the grant of an award of restricted stock or the
expiration of the restriction period upon the employee's achievement of one or
more performance goals. The committee may, in its sole discretion, modify or
accelerate the vesting and delivery of shares of restricted stock.
Stock Appreciation Rights. Stock appreciation rights are rights to
receive payment in cash, common stock, restricted stock or deferred stock or any
combination of these equal to the increase in the fair market value of a
specified number of shares of common stock from the date of grant of the rights
to the date of exercise. Stock appreciation rights may be granted in tandem with
all or a portion of a related option under the plan, or may be granted
separately as a freestanding stock appreciation right. A tandem stock
appreciation right may be granted either at the time of the grant of the option
or at any time thereafter during the term of the option and may be exercisable
only to the extent that the related option is exercisable. No stock appreciation
right may be exercisable within the first six months of its grant. The base
price of a tandem stock appreciation right may only be the option price under
the related option. The base price of a freestanding stock appreciation right
may not be less than 100% of the fair market value of the common stock, as
determined by the stock option committee, on the date of grant.
Options. Options give an employee the right to purchase a specified
number of shares of common stock from us for a specified time period at a fixed
price. The price per share at which common stock may be purchased upon exercise
of an option is determined by the stock option committee; however, in the case
of grants of incentive stock options, the price per share may not be less than
the fair market value of a share of common stock on the date of grant. In case
of any incentive stock option granted to a person who owns stock possessing more
than 10% of the total combined voting power of all classes of our capital stock,
the option price per share will not be less than 110% of the fair market value
of a share of common stock on the date of grant. The option price per share for
non-qualified options may be less than the fair market value of a share of
common stock on the date of grant.
Option terms may not be greater than 10 years, or five years in the
case of an incentive stock option granted to a holder of 10% or more of the
voting power of our capital stock. Except as provided in an option agreement,
the price upon exercise of an option will be paid in full at the time of the
exercise in cash, or in sole determination of the committee in shares of common
stock at fair market value on the date of exercise or a combination of cash and
shares. The committee or our board of directors may in their discretion extend
the period during which an option held by an employee of, or consultant to, our
company or any affiliate may be exercised to a period not to exceed three years
following the termination of an employee's employment or service, as the
committee or our board of directors may determine to be appropriate in any
particular instance.
Adjustments Upon a Change in Control. Except as otherwise provided by
applicable agreement, upon the occurrence of a change in control, excluding a
hostile change of control, the committee may elect to provide that all
outstanding options and stock appreciation rights will immediately vest and
become exercisable, each deferral period and restriction period will immediately
lapse, or all shares of deferred stock subject to outstanding awards will be
issued and delivered to the awarded employee. In the event of a hostile change
in control, each of the foregoing actions will occur automatically upon the
47
occurrence of the hostile change in control. At any time before a change in
control, the committee may, without the consent of any employee to whom an
option was granted:
o require the entity effecting the change in control or a parent or
subsidiary of the entity to assume each outstanding option or
substitute an equivalent option therefor, or
o terminate and cancel all outstanding options upon the change in
control and pay the employee to whom an option was granted cash equal
to the product of (x) the difference between the fair market value of
common stock on the date of the change in control and the exercise
price of the option and (y) the number of shares of common stock
subject to the option.
Effective Date, Termination and Amendment. The plan will remain
effective until September 10, 2006, or the date it is terminated by our board of
directors. Under the provisions of Section 15 of the plan, our board of
directors has the power to amend, suspend or terminate the plan at any time;
however, the board may not effect any of the following amendments without
stockholder approval:
o increasing the total number of shares available for issuance under the
plan;
o changing the class of individuals eligible to participate under the
plan;
o change the manner of determining the option prices which would result
in a decrease in the option price; or
o extend the period during which an option may be granted or exercised.
2002 EMPLOYEE STOCK PURCHASE PLAN
We expect to adopt an employee stock purchase plan prior to the
completion of this offering. The purpose of this plan is to provide a method
whereby our employees and those of our eligible subsidiaries, if any, will have
an opportunity to acquire a proprietary interest in our company through the
purchase of shares of our common stock.
General. The plan is intended to comply with the provisions of
Section 423 of the U.S. Internal Revenue Code of 1986, as amended, generally
referred to as the Code. The plan will allow eligible employees who elect to
participate in the plan to make purchases of our common stock through payroll
deductions at a price of 85% of the fair market value of our common stock on the
first day or last day of each offering period, whichever is lower. Participants
will be limited by the Code to a maximum of $25,000 deducted from their
compensation under the plan during any calendar year.
Administration. The plan will be administered by our compensation
committee, which will be authorized to decide questions of eligibility and to
make rules and regulations for the administration and interpretation of the
plan, subject to final authority of our board of directors. All determinations
of the compensation committee with respect to the plan will be binding. The
expenses of administering the plan will be borne by us.
Shares Available Under the Plan. Under the Plan, we will issue an
aggregate of not more than 5,000,000 shares of our company's common stock. The
maximum number of shares issuable under the plan will be subject to adjustment
for any dividend, stock split or other relevant change in our capitalization.
Eligibility. With certain exceptions, all full-time employees who
have been employed by us or an eligible subsidiary, if any, for at least three
months, are eligible to participate in the plan. The purchase of shares under
the plan will be voluntary, and we cannot determine the number of shares to be
purchased under the plan.
Operation of the Stock Purchase Plan. Our common stock will be
purchased under the plan through semi-annual offering periods. The first
offering is expected to begin on September 1, 2002. Offering periods will begin
on March 1 and September 1 of each year.
During each offering period, the maximum number of shares which may
be purchased by a participant will be determined on the first day of the
offering period under a formula whereby 85% of the market value of a share of
48
our common stock on the first day of the offering period will be divided into an
amount equal to 6% of that participant's annualized base pay, as defined in the
plan. A participant may elect to have up to 10% of his or her base pay withheld
from his or her pay for this purpose. The price at which the participant may
purchase shares will be the lower of (i) 85% of the last sale price of our
common stock on the Nasdaq National Market on the first day of the offering
period or (ii) 85% of such price on the last day of the offering period.
Amendment. Our board of directors may at any time, and from time to
time, modify, terminate or amend the plan in any respect without obtaining
stockholder approval, except where the approval of our stockholders is required
under (i) Section 423 of the Code, (ii) Rule 16b-3 of the Exchange Act or any
successor provisions or (iii) under any applicable listing requirement of
Nasdaq.
The termination, modification or amendment of this plan shall not,
without the consent of a participant, affect his or her rights under a purchase
option previously selected by the participant. With the consent of the
participant affected, our board of directors may amend outstanding purchase
options in a manner not inconsistent with the terms of the plan. Our board of
directors shall also have the right to amend or modify the terms and provisions
of the plan and of any purchase options previously granted under the plan to the
extent necessary to ensure the continued qualification of the plan under Section
423 of the Code and Rule 16b-3. The plan also contains provisions relating to
the disposition of purchase options in the event of certain mergers or other
significant transactions in which we may be involved.
49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH COMVERSE TECHNOLOGY AND ITS SUBSIDIARIES
We are a subsidiary of Comverse Technology. Set forth below is a
brief description of the existing relationships and agreements between us and
Comverse Technology.
Corporate Services Agreement
We have a corporate services agreement with Comverse Technology.
Under this agreement, Comverse Technology provides us with the following
services:
o routine legal services;
o administration of employee benefit plans;
o maintaining in effect a policy of directors' and officers'
insurance covering our directors and officers;
o maintaining in effect general liability and other insurance
policies providing coverage for us; and
o consulting services with respect to our public relations.
As of February 1, 2002, we are required to pay Comverse Technology a
quarterly fee of $131,250, subject to adjustment and annual increases, for the
services provided by Comverse Technology during each fiscal quarter. In
addition, we agree to reimburse Comverse Technology for any out-of-pocket
expenses incurred by Comverse Technology in providing the services. During
fiscal 1999, fiscal 2000 and the nine-month period ended October 31, 2001 no
amounts were paid to Comverse Technology for reimbursement of out-of-pocket
expenses. The term of this agreement extends to January 31, 2005 and is
automatically extended for additional twelve-month periods unless terminated by
either Comverse Technology or us. Since February 1, 1999, Comverse Technology
has been providing these services to us for a quarterly fee that has ranged from
$118,750 to $131,250.
Enterprise Resource Planning Software Sharing Agreement
On February 1, 2001, we entered into an enterprise resource planning,
or ERP, software sharing agreement with Comverse, Inc. Under this agreement,
Comverse, Inc. agreed to continue to share the use of specific ERP software with
us and undertook to provide for the ongoing operation, back up, maintenance and
support of the software for an annual fee of $100,000. We have been sharing the
ERP software with Comverse, Inc. since February 1999. During fiscal 1999, fiscal
2000 and the nine-month period ended October 31, 2001, we recorded $1,500,000,
$200,000 and $75,000, respectively, for services relating to our use of the ERP
Software.
Satellite Services Agreement with Comverse, Inc.
In January 2002, we entered into a services agreement with Comverse,
Inc. pursuant to which Comverse, Inc. provides us with the exclusive use of the
services of specified employees of Comverse, Inc. and its facilities where such
employees are located. Under this agreement, we pay Comverse, Inc. a quarterly
fee, which is equal to the expenses Comverse, Inc. incurs in providing these
services plus ten percent. For services rendered by Comverse, Inc. during fiscal
1999, fiscal 2000 and the nine-month period ended October 31, 2001, we recorded
$459,000, $1,193,000 and $1,168,000, respectively.
We believe that the terms of the Corporate Services Agreement, the
Enterprise Resource Planning Software Sharing Agreement and the Satellite
Services Agreement are fair to us and are not materially less favorable to us
than those we could have obtained from an unaffiliated third party.
Federal Income Tax Sharing Agreement
We have a tax sharing agreement with Comverse Technology. Comverse
Technology is the parent company of a group of companies which includes us and
for which Comverse Technology files consolidated a federal income tax return.
After this offering is completed we expect that we will continue to be included
in the Comverse Technology consolidated group for federal income tax purposes
50
and that we will not file our own federal income tax return. Under the terms of
the tax sharing agreement, during years in which Comverse Technology files a
consolidated federal income tax return which includes us, we pay Comverse
Technology an amount equal to our separate tax liability computed by Comverse
Technology in its reasonable discretion. Our separate tax liability generally is
the amount of federal income tax that we would owe if we had filed a tax return
independent of the Comverse Technology group. If the calculation of our tax
liability for any year results in a net operating loss or capital loss, we are
not entitled to receive any payments from Comverse Technology with respect to
such loss in such year or as a result of carrying such loss back to any prior
year or forward to any future year, or otherwise to take such loss into account
in determining our liability to Comverse Technology, including in the event that
Comverse Technology utilizes such loss to reduce its own tax liability so that
such loss is not available to us in the event of deconsolidation. The tax
sharing agreement also provides for certain payments in the event of adjustments
to tax liability. The tax sharing agreement continues in effect until 60 days
after the expiration of the applicable statute of limitations with respect to
the final year of the Comverse Technology consolidated group which includes us.
Patent License Agreement
Our affiliate, Comverse Patent Holding, granted Lucent GRL a
non-exclusive license to those patents now owned by Comverse Patent Holding or
for which Comverse Patent Holding has a right to license and to those patents
granted to Comverse Patent Holding or for which Comverse Patent Holding obtains
the right to license during the terms of that arrangement. In return, Comverse
Patent Holding was granted a non-exclusive license to certain patents now owned
by Lucent GRL or for which Lucent GRL has right to license and to those patents
granted to Lucent GRL or for which Lucent GRL obtains the right to license
during the term of that arrangement. Under that arrangement, Comverse Patent
Holding has the right to grant a sublicense to us. In connection with that
arrangement, effective December 30, 1999, we entered into a patent license
agreement with Comverse Patent Holding under which we have granted a
non-exclusive royalty-free license to Comverse Patent Holding with the right to
sublicense to Lucent GRL our patents and those patents granted to us or for
which we obtain the right to license during the term of the agreement. In
return, Comverse Patent Holding granted to us a non-exclusive royalty-free
sublicense to all patents that are licensed by Lucent GRL to Comverse Patent
Holding. We believe that the value of our sublicense from Comverse Patent
Holding is greater than the value of our license to Comverse Patent Holding.
Registration Rights Agreement
We have entered into a registration rights agreement with Comverse
Technology. Under this Agreement, Comverse Technology may require us on one
occasion to register our common stock for sale on Form S-1 under the Securities
Act if we are not eligible to use Form S-3 under that Act. After we become
eligible to use Form S-3, Comverse Technology may require us on unlimited
occasions to register our common stock for sale on this form. Comverse
Technology will also have an unlimited number of piggyback registration rights.
This means that any time we register our common stock for sale, Comverse
Technology may require us to include shares of our common stock held by it in
that offering and sale. Comverse Technology will not be allowed to exercise any
registration rights during the 180-day lock-up period.
We have agreed to pay all expenses that result from registration of
our common stock under the registration rights agreement, other than
underwriting commissions for such shares and taxes. We have also agreed to
indemnify Comverse Technology, its directors, officers and employees against
liabilities that may result from its sale of our common stock, including
Securities Act liabilities.
Proxy Agreement with the Department of Defense
We and Comverse Technology are parties to a proxy agreement with the
Department of Defense concerning the ownership and operations of our subsidiary
Verint Technology Inc. See "Business - Proxy Agreements with the Department of
Defense."
51
Contribution Agreement
We entered into a contribution agreement, dated as of February 1,
2001, with Comverse Technology, pursuant to which we acquired from Comverse
Technology all of the outstanding shares of Loronix, all of the outstanding
shares of Comverse GmbH, which holds 99.8% of the partnership interest in Syborg
Informationsysteme beschrankt haftende OHG, or Syborg, and all of the shares of
Comverse Grundbesitz GmbH, which holds 0.2% of the partnership interest in
Syborg, in exchange for 34,539,905 shares of our common stock. Under this
agreement, we received all of the burdens, benefit and incidents of ownership in
each of the companies as of February 1, 2001. This transaction was designed to
qualify as a tax-free exchange pursuant to section 351(a) of the Code.
This transaction was accounted for as a pooling of interests. Our
consolidated financial statements for the year ended January 31, 2000, include
the operations of Loronix and Syborg for the year ended December 31, 1999.
Sale of Comverse Media Holding Inc.
On February 1, 2001, we sold 100% of the capital stock of Comverse
Media Holding Inc., or Media, to Comverse, Inc. The purchase price for the
shares of Media was $100,000, which was paid by a reduction in intercompany debt
that we owed to Comverse, Inc.
Transactions with an Affiliate
We sell products and services to an affiliated systems integrator in
the ordinary course of our business. Sales to this affiliate were approximately
$961,000, $4,271,000 and $2,488,000 for the years ended January 31, 2000 and
2001 and the nine-month period ended October 31, 2001, respectively. In
addition, we were charged marketing and office service fees by that affiliate.
These fees were approximately $56,000, $270,000 and $241,000 for the years ended
January 31, 2000 and 2001 and the nine-month period ended October 31, 2001,
respectively.
Transactions with Other Subsidiaries of Comverse Technology
We charge subsidiaries of Comverse Technology for services relating
to the use of our facilities and employees. Charges to these subsidiaries were
approximately $365,000, $1,006,000 and $1,153,000 for fiscal 1999, fiscal 2000
and the nine-month period ended October 31, 2001, respectively.
We also purchased products and services from other subsidiaries of
Comverse Technology in the ordinary course of our business. Purchases from these
subsidiaries were approximately $268,000, $0 and $2,000 for the years ended
January 31, 2000 and 2001 and the nine-month period ended October 31, 2001,
respectively.
Guarantees of Our Obligations to Third Parties
On January 31, 2002, we borrowed $42 million under a term loan from a
bank. We used the proceeds of this loan to repay our outstanding indebtedness
owed to Comverse Technology. The bank loan is guaranteed by Comverse Technology.
During fiscal 1999, fiscal 2000 and the nine-month period ended October 31,
2001, we were charged with interest on our indebtedness to Comverse Technology
in an amount equal to approximately $1,357,000, $2,142,000 and $1,246,000,
respectively. The interest rate on our indebtedness to Comverse Technology was
the three-month LIBOR rate during fiscal 1999, fiscal 2000 and the nine-month
period ended October 31, 2001.
Comverse Technology has guaranteed the payment of rent and the
performance of all other obligations under the leases for our facilities in
Woodbury, New York and the lease for our facility in the United Kingdom. In
addition, Comverse Technology has guaranteed the payment of the convertible note
issued by us to Lanex, LLC.
52
PRINCIPAL STOCKHOLDERS
The following table contains information with respect to the
beneficial ownership of our common stock as of October 31, 2001, and as adjusted
to reflect the sale of common stock in this offering by:
o each person who we know beneficially owns more than 5% of
our common stock;
o each of our directors and each individual who serve as our
named executive officers individually; and
o all of our directors and executive officers as a group.
Unless otherwise indicated, to our knowledge, all persons listed
below have sole voting and investment power with respect to their shares of
common stock. Share ownership in each case includes shares issuable upon
exercise of outstanding options that are exercisable within 60 days. Each of our
directors and executive officers who is also a director or officer of Comverse
Technology disclaims ownership of the shares of our common stock owned by
Comverse Technology. Unless otherwise indicated, the address of the beneficial
owners is c/o Verint Systems Inc., 234 Crossways Park Drive, Woodbury, New York,
11797.
SHARES OF SHARES OF NUMBER OF OPTIONS NOT
COMMON STOCK COMMON STOCK EXERCISABLE
BENEFICIALLY OWNED BENEFICIALLY OWNED WITHIN 60 DAYS
BEFORE THE OFFERING(1) AFTER THE OFFERING --------------
---------------------- ------------------
NUMBER PERCENTAGE(2) PERCENTAGE(3)
Principal Stockholders:
Comverse Technology, Inc............... 94,989,905 99.0% --
Directors and Executive Officers:
Kobi Alexander............................ 1,824,000 (4) 1.9% 608,000
Dan Bodner................................ 337,502 (4) * 662,498
Igal Nissim............................... 172,500 (4) * 332,500
David Kreinberg........................... 10,000 (4) * 50,000
William F. Sorin.......................... 7,500 (4) * 7,500
All executive officers and directors as a
group (five persons)................... 2,351,502 (4) 2.4% 1,660,498
- -----------------
*Less than 1%
(1) Unless otherwise indicated and except pursuant to applicable
community property laws, to our knowledge, each person or entity
listed in the table above has sole voting and investment power with
respect to all ordinary shares listed as owned by such person or
entity.
(2) Based on 95,917,197 shares of common stock outstanding prior to this
offering.
(3) Based on ___________________ shares of common stock outstanding
immediately following this offering.
(4) Consists of shares of common stock issuable upon the exercise of
options exercisable within 60 days of October 31, 2001.
53
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will
consist of ________ shares of common stock, par value $.001 per share and
_______ shares of preferred stock, par value $________ per share. We refer you
to our certificate of incorporation and bylaws, both of which have been filed as
exhibits to the registration statement of which this prospectus forms a part,
and the applicable provisions of the Delaware General Corporation Law.
COMMON STOCK
Voting Rights. Holders of common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
Holders of common stock do not have cumulative voting rights in the election of
directors. Accordingly, Comverse Technology, our controlling stockholder, may
elect all of the directors standing for election.
Dividends. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as the board of directors may declare on
the common stock out of funds legally available for that purpose.
Liquidation. Upon the liquidation, dissolution or winding up of
Verint, holders of common stock are entitled to share ratably in all assets
remaining after the payment of all debts and other liabilities and the
liquidation preferences of any outstanding shares of preferred stock.
PREFERRED STOCK
There are no shares of preferred stock outstanding. The board of
directors has the authority, without further action by the stockholders, to
issue up to ________ shares of preferred stock, par value $________ per share,
in one or more series and to fix the powers, preferences, privileges and rights
thereof, and the number of shares constituting any series or the designation of
the series, without any further vote or action by stockholders. We believe that
the board of directors' authority to set the terms of, and our ability to issue,
preferred stock will provide flexibility in connection with possible financing
transactions in the future. The issuance of preferred stock, however, could
adversely affect the voting power of holders of common stock, and the likelihood
that the holders will receive dividend payments and payments upon liquidation
and could have the effect of delaying, deferring or preventing a change in
control in us. We have no present plans to issue any shares of preferred stock.
PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
STATE LAW PROVISIONS WITH POTENTIAL ANTITAKEOVER EFFECT
Certificate of Incorporation; By-laws
Our certificate of incorporation and by-laws contain provisions that
could make more difficult the acquisition of the company by means of a tender
offer, a proxy contest or otherwise.
Advance Notice Procedures. Our by-laws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors, or bring other business before an annual or special meeting of our
stockholders. This notice procedure provides that only persons who are nominated
by, or at the direction of our board of directors or by a stockholder who has
given timely written notice to the secretary of our company prior to the meeting
at which directors are to be elected will be eligible for election as directors.
The procedure also requires that, in order to raise matters at an annual or
special meeting, those matters be raised before the meeting pursuant to the
notice of meeting we deliver or by, or at the direction of, our board of
directors or by a stockholder who is entitled to vote at the meeting and who has
given timely written notice to the secretary of our company of his intention to
raise those matters at the annual meeting. If our chairman or other officer
presiding at a meeting determines that a person was not nominated, or other
business was not brought before the meeting, in accordance with the notice
procedure, that person will not be eligible for election as a director, or that
business will not be conducted at the meeting.
54
Authorized but Unissued Shares. The authorized but unissued shares of
common stock are available for future issuance without stockholder approval. We
may use these additional shares for a variety of corporate purposes, including
future public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock could render more difficult or discourage an attempt to obtain
control of us by means of a proxy contest, tender offer, merger or otherwise.
The Delaware General Corporation Law
We are subject to Section 203 of the Delaware General Corporation
Law, which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a business combination with
an interested stockholder for a period of three years following the date the
person became an interested stockholder, unless:
o the board of directors approved the transaction in which
such stockholders became an interested stockholder prior
to the date the interested stockholder attained such
status;
o upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, he or
she owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are
directors and also officers and employee stock plans in
which employee participants do not have the right to
determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer;
and
o the business combination is approved by a majority of the
board of directors and by the affirmative vote of at least
two-thirds of the outstanding voting stock that is not
owned by the interested stockholder.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that our directors will not
be personally liable to us or our stockholders for damages for breach of any
duty owed to us or our stockholders except for liability for: (i) any breach of
the director's duty of loyalty to us or our stockholders, (ii) acts or omissions
not in good faith or, in failing to act, not having acted in good faith, (iii)
having acted in a manner involving intentional misconduct or a knowing violation
of law or, in failing to act, having acted in a manner involving intentional
misconduct or a knowing violation of law, or (iv) having derived an improper
personal benefit.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation requires us to indemnify, to the
full extent permitted by the Delaware General Corporation Law, all persons we
may indemnify pursuant thereto.
Under the corporate services agreement described above, Comverse
Technology has directors' and officers' liability insurance which also provides
coverage for our officers and directors.
LISTING
We intend to have our common stock quoted on the Nasdaq National
Market under the symbol "VRNT".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be
American Stock Transfer & Trust Company. Its address is 59 Maiden Lane, New
York, New York 10038 and its telephone number at this location is (212)
936-5100.
55
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market
after the offering could cause the market price of our common stock to fall and
could affect our ability to raise equity capital in the future on terms
favorable to us.
Upon completion of this offering, we will have issued and outstanding
an aggregate of ________ shares of common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options to
purchase common stock. All of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless such shares are purchased by our "affiliates," as that term is defined in
Rule 144 under the Securities Act.
The remaining ________ shares were issued and sold by us in private
transactions, are restricted securities and may be sold in the public market
only if registered under the Securities Act or if they qualify for an exemption
from registration under Rules 144 or 144(k) under the Securities Act, which
rules are summarized below. Subject to the lock-up agreements described below
and the provisions of Rule 144, additional shares will be available for sale in
the public market, subject in the case of shares held by affiliates to
compliance with certain volume restrictions, as follows:
o ___________ shares will be available for immediate sale in
the public market on the date of this prospectus; and
o ____________ shares will be available for sale upon the
expiration of lock-up agreements 180 days after the date
of this prospectus.
LOCK-UP AGREEMENTS
We, our directors and executive officers, and Comverse Technology
will sign a lock-up agreement under which each will agree not to transfer,
dispose of or hedge any shares of common stock or any securities convertible
into or exchangeable for shares of common stock for a period of 180 days from
the date of this prospectus. Transfer or dispositions can be made sooner with
the prior written consent of Lehman Brothers Inc.
RULE 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of common stock that are restricted securities for at
least one year would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
o 1% of the number of shares of common stock then
outstanding, which will equal approximately _______ shares
immediately after this offering; or
o the average weekly trading volume of the common stock on
the Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect
to such sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us.
Under Rule 144(k), a person who has not been one of our
affiliates at any time during the three months before a sale, and who has
beneficially owned the restricted shares for at least two years, is entitled to
sell the shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
REGISTRATION RIGHTS
We have entered into a registration rights agreement with Comverse
Technology. See "Certain Relationships and Related Transactions--Relationship
with Comverse Technology and its Subsidiaries." We do not have any other
contractual obligations to register our common stock.
56
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of the material U.S. federal
income and estate tax consequences of the ownership and disposition of our
common stock applicable to Non-U.S. Holders. A "Non-U.S. Holder" is a beneficial
owner of our common stock that holds our common stock as a capital asset and who
is generally an individual, corporation, estate or trust other than:
o an individual who is a citizen or resident of the U.S. for
U.S. federal income tax purposes;
o a corporation (or entity treated as a corporation for U.S.
federal income tax purposes) created or organized in the
U.S. or under the laws of the U.S. or of any subdivision
thereof;
o an estate whose income is includible in gross income for
U.S. federal income tax purposes regardless of source; and
o a trust subject to the primary supervision of a court
within the U.S. and the control of one or more U.S.
persons.
The following discussion does not consider specific facts and
circumstances that may be relevant to a particular Non-U.S. Holder's tax
position and does not consider U.S. state and local or non-U.S. tax
consequences. Further, it does not consider Non-U.S. Holders subject to special
tax treatment under the federal income tax laws (including partnerships or other
pass-through entities, banks and insurance companies, dealers in securities,
holders of securities held as part of a "straddle," "hedge," "conversion
transaction" or other risk-reduction transaction and persons who hold or receive
common stock as compensation). The following discussion is based on provisions
of the U.S. Internal Revenue Code of 1986, as amended, applicable Treasury
regulations, and administrative and judicial interpretations as of the date of
this prospectus, all of which are subject to change, possibly on a retroactive
basis, and any change could affect the continuing validity of this discussion.
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION.
ACCORDINGLY, EACH PROSPECTIVE NON-U.S. HOLDER IS URGED TO CONSULT A TAX ADVISOR
WITH RESPECT TO THE FEDERAL, STATE, LOCAL OR NON-U.S. TAX CONSEQUENCES OF
HOLDING AND DISPOSING OF COMMON STOCK.
U.S. TRADE OR BUSINESS INCOME
For purposes of the following discussion, dividends and gains on the
sale, exchange or other disposition of our common stock will be considered to be
"U.S. trade or business income" if such income or gain is (i) effectively
connected with the conduct of a U.S. trade or business or (ii) in the case of a
treaty resident, attributable to a permanent establishment (or, in the case of
an individual, a fixed base) in the U.S. Generally, U.S. trade or business
income is subject to U.S. federal income tax on a net income basis at regular
graduated tax rates. Any U.S. trade or business income received by a Non-U.S.
Holder that is a corporation may, under specific circumstances, be subject to an
additional "branch profits tax" at a 30% rate or a lower rate that an applicable
income tax treaty may specify.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding of U.S. federal income tax at a 30% rate unless the
dividends are U.S. trade or business income and the Non-U.S. Holder files a
properly executed IRS Form W-8ECI with the withholding agent.
The 30% withholding rate may be reduced if the Non-U.S. Holder is
eligible for the benefits of an income tax treaty that provides for a lower
rate. Generally, to claim the benefits of an income tax treaty, a Non-U.S.
Holder of common stock will be required to provide a properly executed IRS Form
W-8BEN and satisfy applicable certification and other requirements. A Non-U.S.
Holder of common stock that is eligible for a reduced rate of U.S. withholding
tax under an income tax treaty may obtain a refund or credit of any excess
amounts withheld by filing an appropriate claim for a refund with the IRS. A
57
Non-U.S. Holder should consult its tax advisor on its entitlement to benefits
under a relevant income tax treaty.
DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal
income tax in respect of gain recognized on a disposition of common stock
unless:
o the gain is U.S. trade or business income;
o the Non-U.S. Holder is an individual who is present in the
U.S. for 183 or more days in the taxable year of the
disposition and meets other requirements;
o the Non-U.S. Holder is subject to U.S. tax under
provisions applicable to certain U.S. expatriates
(including certain former citizens or residents of the
U.S.); or
o we are or have been a "U.S. real property holding
corporation" (a "USRPHC") for U.S. federal income tax
purposes at any time during the shorter of the five-year
period ending on the date of disposition and the Non-U.S.
Holder's holding period for the common stock.
The tax relating to stock in a USRPHC does not apply to a Non-U.S.
Holder whose holdings, actual and constructive, at all times during the
applicable period, amount to 5% or less of the common stock, provided that the
common stock is regularly traded on an established securities market. Generally,
a corporation is a USRPHC if the fair market value of its "U.S. real property
interests" equals or exceeds 50% of the sum of the fair market value of its
worldwide real property interests and its other assets used or held for use in a
trade or business. We believe that we have not been and are not currently a
USRPHC for U.S. federal income tax purposes, nor do we anticipate becoming a
USRPHC in the future. However, no assurance can be given that we will not be a
USRPHC when a Non-U.S. Holder sells its shares of common stock.
FEDERAL ESTATE TAXES
Common stock owned or treated as owned by an individual who is a
Non-U.S. Holder at the time of death will be included in the individual's gross
estate for U.S. federal estate tax purposes and may be subject to U.S. federal
estate tax, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
DIVIDENDS
We must report annually to the IRS and to each Non-U.S. Holder any
dividend income that is subject to withholding or that is exempt from U.S.
withholding tax pursuant to an income tax treaty. Copies of these information
returns may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-U.S. Holder
resides. Dividends paid to Non-U.S. Holders of common stock generally will be
exempt from backup withholding if the Non-U.S. Holder provides a properly
executed IRS Form W-8BEN or otherwise establishes an exemption.
DISPOSITION OF COMMON STOCK
The payment of the proceeds from the disposition of common stock to
or through the U.S. office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner certifies
as to its non-U.S. status under penalties of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of common
stock to or through a non-U.S. office of a non-U.S. broker will not be subject
to information reporting or backup withholding unless the non-U.S. broker has
certain types of relationships with the U.S. (a "U.S. related person"). In the
case of the payment of the proceeds from the disposition of common stock to or
through a non-U.S. office of a broker that is either a U.S. person or a U.S.
58
related person, the Treasury regulations require information reporting (but not
backup withholding) on the payment unless the broker has documentary evidence in
its files that the owner is a Non-U.S. Holder and the broker has no knowledge to
the contrary. Non-U.S. Holders should consult their own tax advisors on the
application of information withholding and backup withholding to them in their
particular circumstances (including upon their disposition of common stock).
Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules from a payment to a Non-U.S. Holder will be
refunded or credited against the holder's U.S. federal income tax liability, if
any, if the holder provides the required information to the IRS.
59
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below for whom Lehman Brothers Inc., Salomon Smith Barney Inc., Robertson
Stephens, Inc., UBS Warburg LLC and U.S. Bancorp Piper Jaffray Inc., are acting
as representatives, has agreed to purchase from us, on a firm commitment basis,
subject only to the conditions contained in the underwriting agreement the
respective number of shares of common stock shown opposite its name below:
NUMBER OF
UNDERWRITERS SHARES
- ------------ ----------
Lehman Brothers Inc. .........................................
Salomon Smith Barney Inc. ....................................
Robertson Stephens, Inc. .....................................
UBS Warburg LLC...............................................
U.S. Bancorp Piper Jaffray, Inc. ............................. __________
Total................................................. __________
The underwriting agreement provides that the underwriters'
obligations to purchase our common stock depends on the satisfaction of the
conditions contained in the underwriting agreement, which includes:
o if any shares of common stock are purchased by the
underwriters, then all of the shares of common stock the
underwriters agreed to purchase must be purchased;
o the representations and warranties made by us to the
underwriters are true;
o there is no material change in the financial markets; and
o we deliver customary closing documents to the
underwriters.
COMMISSION AND EXPENSES
The representatives had advised us that the underwriters propose to
offer the common stock directly to the public at the public offering price
presented on the cover page of this prospectus, and to selected dealers, that
may include the underwriters, at the public offering price less a selling
concession not in excess of $0.___ per share. The underwriters may allow, and
the selected dealers may reallow, a concession not in excess of $0.___ per share
to brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
The following table summarizes the underwriting discounts and
commissions to be paid to the underwriters by us. The underwriting discounts and
commissions are equal to the public offering price per share, less the amount
paid to us per share. The underwriting discounts and commissions equal to ____%
of the initial public offering price.
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
-------------- --------------
Per Share Total..................
-------------- --------------
We estimate that the total expenses of the offering, including
registration, filing and listing fees, printing fees and legal and accounting
expenses, but excluding underwriting discounts and commissions, will be
approximately $____ million.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option to purchase up to an
aggregate of ________ shares of common stock, exercisable solely to cover
over-allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the date
60
of the underwriting agreement. To the extent the underwriters exercise this
option, each underwriter will be committed, so long as the conditions of the
underwriting agreement are satisfied, to purchase a number of additional shares
proportionate to that underwriter's initial commitment as indicated in the
preceding table.
LOCK-UP AGREEMENTS
We have agreed that, without the prior written consent of Lehman
Brothers Inc., we will not, directly or indirectly, offer, sell or dispose of
any common stock or any securities which may be converted into or exchanged for
any common stock for a period of 180 days from the date of this prospectus. We
and all of our executive officers and directors, and certain stockholders
holding in the aggregate ______ shares of our common stock, have agreed under
lock-up agreements not to, without the prior written consent of Lehman Brothers
Inc., directly or indirectly, offer, sell or otherwise dispose of any common
stock or any securities which may be converted into or exchanged or exercised
for any common stock for a period of 180 days from the date of this prospectus.
OFFERING PRICE DETERMINATION
Prior to this offering, there has been no public market for our
common stock. The initial public offering price has been negotiated between the
representatives and us. In determining the initial public offering price of our
common stock, the representatives considered:
o prevailing market conditions;
o our historical performance and capital structure;
o estimates of our business potential and earnings
prospects;
o an overall assessment of our management; and
o the consideration of these factors in relation to market
valuation of companies in related businesses.
INDEMNIFICATION
We have agreed to indemnify the underwriters against liabilities
relating to the offering, including liabilities under the Securities Act and
liabilities arising from breaches of the representations and warranties
contained in the underwriting agreement, and to contribute to payments that the
underwriters may be required to make for these liabilities. We have further
agreed to indemnify Lehman Brothers Inc. against liabilities related to the
directed share program referred to below, including liabilities under the
Securities Act.
STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
The representatives may engage in over-allotment, stabilizing
transactions, syndicate covering transactions, and penalty bids or purchases for
the purpose of pegging, fixing or maintaining the price of the common stock, in
accordance with Regulation M under the Securities Exchange Act of 1934:
o Over-allotment involves sales by the underwriters of
shares in excess of the number of shares the underwriters
are obligated to purchase, which creates a syndicate short
position. The short position may be either a covered short
position or a naked short position. In a covered short
position, the number of shares over-allotted by the
underwriters is not greater than the number of shares that
they may purchase in the over-allotment option. In a naked
short position, the number of shares involved is greater
than the number of shares in the over-allotment option.
The underwriters may close out any short position by
either exercising their over-allotment option, in whole or
in part, or purchasing shares in the open market.
o Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not
exceed a specific maximum.
61
o Syndicate covering transactions involve purchases of the
common stock in the open market after the distribution has
been completed in order to cover syndicate short
positions. In determining the source of shares to close
out the short position, the underwriters will consider,
among other things, the price of shares available for
purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment
option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short
position, the position can only be closed out by buying
shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the
shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
o Penalty bids permit the representatives to reclaim a
selling concession from a syndicate member when the common
stock originally sold by the syndicate member is purchased
in a stabilizing or syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the market price of
our common stock or preventing or retarding a decline in the market price of our
common stock. As a result, the price of our common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters make any representation that the representatives
will engage in these stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
STAMP TAXES
Purchasers of the shares of our common stock offered by this
prospectus may be required to pay stamp taxes and other charges under the laws
and practices of the country of purchase, in addition to the offering price
listed on the cover of this prospectus.
OFFER AND SALES IN CANADA
This prospectus is not, and under no circumstance is it to be
construed as, an advertisement or a public offering of shares in Canada or any
province or territory thereof. Any offers in Canada will be made only under an
exception from the requirements to file a prospectus supplement or a prospectus
and an exemption from the dealer registration requirement in the relevant
province or territory of Canada in which such offer or sale is made.
DIRECTED SHARE PROGRAM
At our request, the underwriters have reserved up to __________
shares, or _______% of our common stock offered by this prospectus, for sale
under a directed share program to our officers, directors and employees and
those of our affiliates and their respective family members and to our other
business associates. All of the persons purchasing the reserved shares must
commit to purchase no later than the close of business on the day following the
date of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase the reserved shares.
Shares committed to be purchased by directed share participants which are not so
purchased will be reallocated for sale to the general public in the offering.
All sales of shares pursuant to the directed share program will be made at the
initial public offering price set forth on the cover page of this prospectus.
DISCRETIONARY SALES
The underwriters have informed us that they do not intend to confirm
sales to discretionary accounts that exceed 5% of the total number of shares of
our common stock offered by them.
62
ELECTRONIC DISTRIBUTION
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by one or more of the
underwriters and/or selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view offering terms
online and, depending upon the particular underwriter or selling group member,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distributions will be
made by the representatives on the same basis as other allocations.
Other than the prospectus in electronic format, the information on
any underwriter's or selling group member's web site and any information
contained in any other web site maintained by an underwriter or selling group
member is not part of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter or selling group member in its capacity as underwriter or selling
group member and should not be relied upon by investors.
63
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for us by Weil, Gotshal & Manges LLP, New York, New York. Certain
legal matters will be passed upon for the underwriters by Gibson, Dunn &
Crutcher LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company and its
subsidiaries, except Loronix Information Systems, Inc. for the year ended
December 31, 1999, as of January 31, 2000 and 2001 and for each of the two years
in the period ended January 31, 2001, included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein. The consolidated financial statements of Loronix
Information Systems, Inc. and its subsidiaries (combined with those of the
Company and not presented separately herein) for the year ended December 31,
1999 have been audited by KPMG LLP, independent accountants, as stated in their
report which is included herein. Such financial statements of the Company and
its consolidated subsidiaries are included herein in reliance upon the
respective reports of such firms given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are part
of the registration statement. For further information with respect to us and
our common stock, reference is made to the registration statement and exhibits
and schedules thereto. You may read and copy any document we file at the SEC's
public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330
for further information on the public reference room. Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934 and will file periodic reports, proxy statements and other information
with the SEC. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the SEC's public reference rooms and
the website of the SEC referred to above. Information on our website does not
constitute a part of this prospectus.
REPORTS TO STOCKHOLDERS
We intend to furnish our stockholders annual reports containing
audited consolidated financial statements and will make available copies of
quarterly reports for the first three quarters of each year containing unaudited
interim consolidated financial information.
64
VERINT SYSTEMS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report of Deloitte & Touche LLP................................................................... F-2
Independent Auditors' Report of KPMG LLP................................................................................ F-3
Consolidated Balance Sheets as of January 31, 2000 and 2001 and October 31, 2001 (Unaudited)............................ F-4
Consolidated Statements of Operations for the Years Ended January 31, 2000 and 2001 and for the Nine Months Ended
October 31, 2000 and 2001 (Unaudited)................................................................................ F-5
Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2000 and 2001 and the Nine Months Ended
October 31, 2001 (Unaudited)......................................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended January 31, 2000 and 2001 and for the Nine Months Ended
October 31, 2000 and 2001 (Unaudited)................................................................................ F-7
Notes to Consolidated Financial Statements.............................................................................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Verint Systems Inc.
Woodbury, New York
We have audited the accompanying consolidated balance sheets of
Verint Systems Inc. and subsidiaries (the "Company") as of January 31, 2000 and
2001, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended January 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of the Company and Loronix Information Systems,
Inc. ("Loronix"), which has been accounted for as a pooling of interests as
described in Note 7 of the consolidated financial statements. We did not audit
the consolidated balance sheet of Loronix as of December 31, 1999, or the
related statements of operations, stockholders' equity, and cash flows of
Loronix for the year ended December 31, 1999, which statements reflect total
assets constituting approximately 20% of consolidated total assets as of January
31, 2000, and total sales constituting approximately 31% of consolidated total
sales for the year ended January 31, 2000. These financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Loronix is based
solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other
auditors, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of January 31, 2000 and 2001,
and the results of their operations and their cash flows for each of the two
years in the period ended January 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Jericho, New York
February 4, 2002
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Loronix Information Systems, Inc.:
We have audited the consolidated balance sheets of Loronix Information Systems,
Inc. and subsidiary as of December 31, 1999 and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Loronix Information
Systems, Inc. and subsidiary as of December, 31, 1999, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
San Diego, California
January 28, 2000
except as to Note 12, which is as of March 5, 2000
F-3
VERINT SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, JANUARY 31, OCTOBER 31,
2000 2001 2001
---------- ---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 35,933 $ 43,330 $ 45,408
Accounts receivable, net............................................ 24,272 28,502 23,544
Inventories......................................................... 15,107 10,961 8,399
Due from related parties............................................ 627 3,972 3,682
Prepaid expenses and other current assets........................... 4,798 6,559 6,744
---------- ---------- ----------
Total current assets............................................ 80,737 93,324 87,777
Property and equipment, net......................................... 13,034 12,977 13,230
Other assets........................................................ 9,639 11,253 11,761
---------- ---------- ----------
Total assets.................................................... $ 103,410 $ 117,554 $ 112,768
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................... $ 29,132 $ 34,405 $ 33,461
Advance payments from customers..................................... 6,778 13,666 11,162
Due to related parties.............................................. 34,023 41,741 1,342
---------- ---------- ----------
Total current liabilities....................................... 69,933 89,812 45,965
Due to related parties.............................................. - - 42,000
Liability for severance pay......................................... 1,179 1,128 1,413
Other liabilities................................................... 1,402 4,089 3,984
---------- ---------- ----------
Total liabilities............................................... 72,514 95,029 93,362
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value - authorized,
300,000,000 shares; issued and outstanding,
95,147,405, 95,748,753, and 95,917,197 shares..................... 95 96 96
Additional paid-in capital.......................................... 61,435 62,745 63,259
Accumulated deficit................................................. (30,577) (40,353) (44,010)
Cumulative translation adjustment................................... (57) 37 61
---------- ---------- ----------
Total stockholders' equity...................................... 30,896 22,525 19,406
---------- ---------- ----------
Total liabilities and stockholders' equity...................... $ 103,410 $ 117,554 $ 112,768
========== ========== ==========
See notes to consolidated financial statements.
F-4
VERINT SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED NINE MONTHS ENDED
JANUARY 31, OCTOBER 31,
------------------------------ -------------------------------
2000 2001 2000 2001
---------- ---------- ---------- ----------
(UNAUDITED)
Sales.............................................. $ 120,612 $ 141,677 $ 102,707 $ 97,614
Cost of sales...................................... 61,898 73,191 53,114 50,295
---------- ---------- ---------- ----------
Gross profit....................................... 58,714 68,486 49,593 47,319
Operating expenses:
Research and development, net...................... 21,307 14,249 10,323 11,410
Selling, general and administrative................ 44,914 48,162 35,483 34,710
Royalties and license fees......................... 2,041 2,731 2,023 2,086
Merger and workforce reduction
expenses........................................ - 10,909 10,909 1,164
---------- ---------- ---------- ----------
Loss from operations............................... (9,548) (7,565) (9,145) (2,051)
Interest and other income (expense), net........... (641) (497) (724) (352)
---------- ---------- ---------- ----------
Loss before income taxes........................... (10,189) (8,062) (9,869) (2,403)
Income tax provision............................... 355 497 21 1,254
---------- ---------- ---------- ----------
Net loss........................................... $ (10,544) $ (8,559) $ (9,890) $ (3,657)
========== ========== ========== ==========
Net loss per share:
Basic and diluted.................................. $ (0.11) $ (0.09) $ (0.10) $ (0.04)
========= ========= ========== ==========
Weighted average shares:
Basic and diluted.................................. 95,144 95,577 95,527 95,854
========== ========== ========== ==========
See notes to consolidated financial statements.
F-5
VERINT SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
----------------------
NUMBER OF PAR PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT ADJUSTMENT EQUITY
------ ----- ------- ------- ---------- ------
BALANCE, FEBRUARY 1, 1999........................ 95,139,905 $ 95 $ 59,989 $ (20,033) $ 24 $ 40,075
Comprehensive loss:
Net loss......................................... (10,544)
Translation adjustment........................... (81)
Total comprehensive loss......................... (10,625)
Exercise of stock options of subsidiary.......... 1,421 1,421
Exercise of stock options........................ 7,500 25 25
------------ -------- -------- ------------ ------ ----------
BALANCE, JANUARY 31, 2000........................ 95,147,405 95 61,435 (30,577) (57) 30,896
Comprehensive loss:
Net loss......................................... (8,559)
Translation adjustment........................... 94
Total comprehensive loss......................... (8,465)
Change in year end of pooled companies........... (1,217) (1,217)
Issuance of subsidiaries' stock to third parties. 704 704
Exercise of stock options of subsidiary.......... 338 338
Exercise of stock options........................ 601,348 1 268 269
------------ -------- -------- ------------ ------ ----------
BALANCE, JANUARY 31, 2001........................ 95,748,753 96 62,745 (40,353) 37 22,525
Comprehensive loss:
Net loss (unaudited)............................. (3,657)
Translation adjustment (unaudited)............... 24
Total comprehensive loss (unaudited)............. (3,633)
Exercise of stock options (unaudited)............ 168,444 216 216
Sale of subsidiary shares to parent (unaudited)..
298 298
------------ -------- -------- ------------ ------ ----------
BALANCE, OCTOBER 31, 2001 (UNAUDITED)............ 95,917,197 $ 96 $ 63,259 $ (44,010) $ 61 $ 19,406
============ ======== ======== ============ ====== ==========
See notes to consolidated financial statements.
F-6
VERINT SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS ENDED
JANUARY 31, OCTOBER 31,
--------------------------- ----------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................... $ (10,544) $ (8,559) $ (9,890) $ (3,657)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization............................... 5,671 7,740 5,546 5,574
Allowance for doubtful accounts............................. 1,608 2,183 1,929 (346)
Asset write-downs and impairments........................... - 7,399 7,399 -
Changes in assets and liabilities:
Accounts receivable......................................... (3,980) (6,413) 163 5,303
Inventories................................................. (4,959) 461 1,119 2,562
Prepaid expenses and other assets........................... (558) (3,877) (3,440) 356
Accounts payable and accrued expenses....................... 14,351 5,551 1,760 (686)
Advance payments from customers............................. (643) 6,888 3,125 (2,504)
Liability for severance pay................................. 465 (43) 331 289
Due to/from related parties................................. 5,502 (2,868) (4,332) 2,003
Other....................................................... (46) (115) (1,233) (169)
----------- ----------- ----------- -----------
Net cash provided by operating activities................... 6,867 8,347 2,477 8,725
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (4,695) (6,332) (3,331) (3,739)
Capitalization of software development costs................ (4,036) (4,252) (3,283) (3,139)
----------- ----------- ----------- -----------
Net cash used in investing activities....................... (8,731) (10,584) (6,614) (6,878)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in connection
with exercise of stock options............................ 1,446 607 493 216
Proceeds from issuance of common stock of subsidiary........ - 250 250 -
Net proceeds (repayments) of bank loans and other debt...... 151 1,336 (965) (75)
Net proceeds of related party loans......................... 3,823 7,241 7,241 -
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities......... 5,420 9,434 7,019 141
----------- ----------- ----------- -----------
Effect of exchange rates on cash............................ (79) 200 303 90
NET INCREASE IN CASH AND CASH EQUIVALENTS........................ 3,477 7,397 3,185 2,078
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................... 32,456 35,933 35,933 43,330
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................... $ 35,933 $ 43,330 $ 39,118 $ 45,408
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................... $ 113 $ 85 $ 88 $ 95
=========== =========== =========== ===========
Cash paid during the period for income taxes................ $ 776 $ 938 $ 445 $ 439
=========== =========== =========== ===========
See notes to consolidated financial statements.
F-7
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2000 AND 2001 AND
THE NINE MONTHS ENDED OCTOBER 31, 2000 AND 2001
(INFORMATION RELATING TO THE NINE MONTHS ENDED
OCTOBER 31, 2000 AND 2001 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS
Verint Systems Inc. ("Verint" and, together with its subsidiaries,
the "Company") was organized as a Delaware corporation on February 23, 1994
under the name "Interactive Information Systems Corporation". The Company is
engaged in providing analytic solutions for communications interception, digital
video security and surveillance, and enterprise business intelligence.
On January 30, 1996, the Company changed its name to "Comverse
Information Systems Corporation." Effective January 31, 1999, Comverse Infomedia
Systems Corp. merged with and into Comverse Information Systems Corporation and
changed the name of the Company to Comverse Infosys, Inc. and amended its
certificate of incorporation to increase its authorized common stock from 1,500
shares to 100,000,000 shares. On February 1, 2001, the Company amended its
certificate of incorporation to increase its authorized stock from 100,000,000
shares to 300,000,000 shares. In February 2002, the name of the Company was
changed to Verint Systems Inc.
In February 2002, the Board of Directors of the Company approved the
filing of a registration statement by the Company under the Securities Act of
1933 relating to an initial public offering of the Company's common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts of the Company and its wholly-owned and majority-owned
subsidiaries. All material intercompany balances and transactions have been
eliminated.
INTERIM RESULTS (UNAUDITED)--The accompanying consolidated balance
sheet as of October 31, 2001 and the consolidated statements of operations and
cash flows for the nine-month periods ended October 31, 2000 and 2001, and the
consolidated statement of stockholders' equity for the nine-month period ended
October 31, 2001 are unaudited. In the opinion of management, the statements
have been prepared on the same basis as the audited financial statements and
included all adjustments, consisting only of normal recurring adjustments,
necessary for the fair statement of the results of the interim periods.
Operating results for the nine-month period ended October 31, 2001 are not
necessarily indicative of the results that may be expected for the year ending
January 31, 2002.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The estimated fair value amounts
of financial instruments have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily 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 current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially
expose the Company to concentration of credit risk consist primarily of cash
investments and accounts receivable. The Company places its cash investments
with high-credit quality financial institutions and currently invests primarily
in bank time deposits. Accounts receivable are generally diversified due to the
number of commercial and government entities comprising the Company's customer
base and their dispersion across many geographical regions. As of January 31,
2000 and 2001 and October 31, 2001, the Company's allowance for doubtful
accounts was approximately $3,744,000, $4,985,000, and $4,598,000, respectively.
The Company believes no significant concentration of credit risk exists with
F-8
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respect to these cash investments and accounts receivable. The carrying amount
of these financial instruments are reasonable estimates of their fair value.
INVENTORIES--Inventories are stated at the lower of cost or market.
Cost is determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT--Property and equipment are carried at cost
less accumulated depreciation and amortization. The Company depreciates its
property and equipment on a straight-line basis over periods ranging from three
to seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the related lease term. The cost of maintenance and
repairs is charged to operations as incurred. Significant renewals and
improvements are capitalized.
INCOME TAXES--The Company accounts for income taxes under the asset
and liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
A valuation allowance is provided against net deferred tax assets unless, in
management's judgment, it is more likely than not that such deferred tax assets
will be realized. For federal income tax purposes, the Company's results will be
included in the Comverse Technology, Inc. ("Comverse Technology") consolidated
tax return as long as Comverse Technology retains beneficial ownership of at
least 80% of the total voting power and value of the outstanding common stock of
the Company. Income taxes are determined as if the Company was a separate
taxpayer. Income taxes currently payable have been charged to the related
parties account in the period that the liability arose, if any.
NET LOSS PER SHARE--Basic net loss per share is computed by dividing
net loss by the weighted-average number of common shares outstanding during the
period. Diluted net loss per share is the same as basic net loss per share since
the assumed exercise of options would have been antidilutive.
REVENUE AND EXPENSE RECOGNITION--Revenue is generally recognized at
the time of shipment for sales of systems which do not require significant
customization to be performed by the Company and collection of the resulting
receivable is deemed probable by the Company. The Company's systems are
generally a bundled hardware and software solution that are shipped together.
Amounts billed to customers pursuant to the terms specified in contracts but for
which revenue has not been recognized are recorded as advance payments from
customers. The Company generally has no obligations to customers after the date
products are shipped, except for product warranties. The Company generally
warranties its products for one year after sale. A provision for estimated
warranty costs is recorded at the time of sale.
Customers may also purchase separate maintenance contracts, which
generally consist of bug-fixing and telephone access to Company technical
personnel, but in certain circumstances may also include the right to receive
unspecified product updates, upgrades and enhancements. Revenue from these
services is recognized ratably over the contract period. Included in sales are
revenues from services of $8,511,000, $17,257,000, $12,890,000 and $15,317,000
for the years ended January 31, 2000 and 2001 and the nine-month periods ended
October 31, 2000 and 2001, respectively.
Revenue from certain development contracts is recognized under the
percentage-of-completion method on the basis of physical completion to date or
using actual costs incurred to total expected costs under the contract.
Revisions in estimates of costs and profits are reflected in the accounting
period in which the facts that require the revision become known. At the time a
loss on a contract is known, the entire amount of the estimated loss is accrued.
Amounts received from customers in excess of revenues earned under the
percentage-of-completion method are recorded as advance payments from customers.
Related contract costs include all direct material and labor costs and those
indirect costs related to contract performance, and are included in cost of
sales in the consolidated statements of operations.
Expenses incurred in connection with research and development
activities, other than certain software development costs that are capitalized,
and selling, general and administrative expenses are charged to operations as
incurred.
F-9
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SOFTWARE DEVELOPMENT COSTS--Software development costs are
capitalized upon the establishment of technological feasibility and are
amortized on a straight-line basis over the estimated useful life of the
software, which to date has been four years or less. Amortization begins in the
period in which the related product is available for general release to
customers. Amortization expenses amounted to $3,044,000, $2,967,000, $2,373,000
and $2,223,000 for the years ended January 31, 2000 and 2001 and the nine-month
periods ended October 31, 2000 and 2001, respectively.
LONG-TERM BANK LOANS--Included in the caption other liabilities on
the consolidated balance sheets as of January 31, 2000 and 2001 and October 31,
2001 are long-term bank loans of $1,226,000, $2,513,000 and $2,212,000,
respectively, and included in the caption accounts payable and accrued expenses
are the current maturities of long-term bank loans of $97,000, $293,000 and
$239,000, respectively. These loans are secured by certain land and buildings
and restricted cash balances are required to be maintained at these banks in the
amounts of $0, $1,130,000, and $715,000 as of January 31, 2000 and 2001 and
October 31, 2001, respectively, and such restricted cash is included in the
caption of other assets on the consolidated balance sheets.
FUNCTIONAL CURRENCY AND FOREIGN CURRENCY TRANSACTION GAINS AND
LOSSES--The United States dollar (the "dollar") is the functional currency of
the major portion of the Company's foreign operations. Most of the Company's
sales and materials purchased for manufacturing, are denominated in or linked to
the dollar. Certain operating costs, principally salaries, of foreign operations
are denominated in local currencies. In those instances where a foreign
subsidiary has a functional currency other than the dollar, the Company records
any necessary foreign currency translation adjustment, reflected in
stockholders' equity, at the end of each reporting period.
Net gains (losses) from foreign currency transactions, included in
the consolidated statements of operations, approximated $(266,000), $(541,000),
$(554,000) and $(413,000) for the years ended January 31, 2000 and 2001 and the
nine-month periods ended October 31, 2000 and 2001, respectively.
The Company occasionally enters into foreign exchange forward
contracts and options on foreign currencies. The purpose of the Company's
foreign currency hedging activities is to protect the Company from the risk that
the eventual dollar cash flows resulting from the sale of products to
international customers will be adversely affected by changes in exchange rates.
Any gain or loss on a foreign exchange contract which hedges a firm commitment
is deferred until the underlying transaction is realized, at which time it is
included in the consolidated statement of operations. The Company may also
purchase foreign exchange options which permit, but do not require, the Company
to exchange foreign currencies at a future date with another party at a
contracted exchange rate. To finance premiums paid on such options, from time to
time, the Company may also write offsetting options at exercise prices which
limit, but do not eliminate, the effect of purchased options as a hedge. As of
January 31, 2000 and 2001 and October 31, 2001, the Company had no material
outstanding foreign exchange contracts.
LONG-LIVED ASSETS--The Company reviews for the impairment of
long-lived assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when estimated future
undiscounted cash flows expected to result from the use of the asset and
proceeds from its eventual disposition are less than its carrying amount.
Impairment is measured at fair value.
PERVASIVENESS OF ESTIMATES--The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS--In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations." SFAS No. 141 applies
prospectively to all business combinations initiated after June 30, 2001 and to
all business combinations accounted for using the purchase method of accounting
for which the date of acquisition is July 1, 2001, or later. SFAS No. 141
requires all business combinations to be accounted for using one method, the
purchase method. Under previously existing accounting rules, business
F-10
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
combinations were accounted for using one of two methods, the
pooling-of-interests method or the purchase method. The adoption of SFAS No. 141
did not have a material impact on the Company's consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill
and some intangible assets will no longer be amortized, but rather will be
reviewed for impairment on a periodic basis. The provisions of SFAS No. 142 are
required to be applied starting with fiscal years beginning after December 15,
2001. SFAS No. 142 is required to be applied at the beginning of the Company's
fiscal year and is to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date. Impairment losses for
goodwill and certain intangible assets that arise due to the initial application
of SFAS No. 142 are to be reported as resulting from a change in accounting
principle. Goodwill and intangible assets acquired after June 30, 2001 will be
subject immediately to the provisions of SFAS No. 142. The adoption of SFAS No.
142 is not expected to have a material impact on the Company's consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The adoption of SFAS
No. 143 is not expected to have a material impact on the Company's financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supercedes certain provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years; however, early adoption is
encouraged. The Company is currently evaluating the impact that SFAS No. 144
will have on its consolidated financial statements.
3. RESEARCH AND DEVELOPMENT
A significant portion of the Company's research and development
operations are located in Israel where the Company derives substantial benefits
from participation in programs sponsored by the Government of Israel for the
support of research and development activities conducted in that country. The
Company's research and development activities include projects partially funded
by the Office of the Chief Scientist of the Ministry of Industry and Trade of
the State of Israel (the "OCS") under which the funding organization reimburses
a portion of the Company's research and development expenditures under approved
project budgets. The Company is currently involved in several ongoing research
and development projects supported by the OCS. The Company accrues royalties to
the OCS for the sale of products incorporating technology developed in these
projects up to the amount of such fund, plus interest in certain circumstances.
In addition, under the terms of the applicable funding agreements, products
resulting from projects funded by the OCS may not be manufactured outside of
Israel without government approval. The amounts reimbursed by the OCS for the
years ended January 31, 2000 and 2001 and the nine-month periods ended October
31, 2000 and 2001 were $4,826,000, $7,499,000, $5,628,000 and $4,495,000,
respectively.
F-11
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVENTORIES
Inventories consists of:
JANUARY 31, OCTOBER 31,
-------------------------------
2000 2001 2001
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Raw materials............................................. $ 9,112 $ 8,143 $ 5,408
Work in process........................................... 3,552 945 1,030
Finished goods............................................ 2,443 1,873 1,961
---------- ---------- ----------
$ 15,107 $ 10,961 $ 8,399
========== ========== ==========
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
JANUARY 31, OCTOBER 31,
-------------------------------
2000 2001 2001
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Fixtures and equipment................................... $ 18,830 $ 17,401 $ 19,806
Land..................................................... 226 477 468
Building and building improvements....................... 2,773 3,449 3,969
Software................................................. 1,164 1,415 1,840
Transportation vehicles.................................. 1,216 1,023 904
Leasehold improvements................................... 257 460 574
---------- ---------- ----------
24,466 24,225 27,561
Less accumulated depreciation and amortization........... 11,432 11,248 14,331
---------- ---------- ----------
$ 13,034 $ 12,977 $ 13,230
========== ========== ==========
6. OTHER ASSETS
Other assets consists of :
JANUARY 31, OCTOBER 31,
-------------------------------
2000 2001 2001
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Software development costs, net of accumulated
amortization of $12,707,000, $12,856,000 and
$15,079,000........................................... $ 9,106 $ 8,201 $ 9,117
Other assets............................................. 533 3,052 2,644
---------- ---------- ----------
$ 9,639 $ 11,253 $ 11,761
========== ========== ==========
7. BUSINESS COMBINATIONS
In July 2000, the Company's parent, Comverse Technology acquired all
of the outstanding stock of Loronix Information Systems, Inc. ("Loronix"), a
company that develops software-based digital video recording and management
systems, for 1,994,806 shares of Comverse Technology's common stock and the
assumption of options to purchase the equivalent of 370,101 shares of the
Comverse Technology common stock. The business combination was accounted for as
F-12
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
a pooling of interests. For the six months ended June 30, 2000, Loronix had
sales of approximately $18,104,000 and a net loss, including merger related
expenses, of approximately $2,249,000.
In July 2000, Comverse Technology acquired all of the outstanding
stock of Syborg Informationsysteme GmbH, ("Syborg") a company that develops
software-based digital voice and Internet recording systems, for 201,251 shares
of Comverse Technology common stock. The business combination was accounted for
as a pooling of interests. For the six months ended June 30, 2000, Syborg had
sales of approximately $2,561,000 and a net loss, including merger related
expenses, of approximately $425,000.
In February 2001, the Company issued 34,539,905 shares of its common
stock to Comverse Technology in exchange for Comverse Technology's ownership
interest in Loronix and Syborg. These shares are reflected in the consolidated
financial statements as if they were outstanding as of the earliest period
presented which is consistent with the pooling of interests method of
accounting.
The table below sets forth the separate and combined results of
Verint, Loronix and Syborg for the fiscal year ended January 31, 2000:
VERINT LORONIX SYBORG COMBINED
------ ------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AMOUNTS)
JANUARY 31, 2000
Sales....................................... $ 78,074 $ 37,477 $ 5,061 $ 120,612
Net income (loss)........................... $ (13,633) $ 2,885 $ 204 $ (10,544)
Net loss per share--diluted.................. $ (0.22) $ (0.11)
The consolidated statement of operations data combines Verint's
historical statement of operations data for the fiscal year ended January 31,
2000 with the historical statements of income data of Loronix and Syborg for
their fiscal year ended December 31, 1999. Loronix's net loss for the period
from July 1, 2000 through July 31, 2000 of approximately $715,000 has been
excluded from the Company's consolidated statement of operations for the year
ended January 31, 2001 as a result of conforming fiscal years and has been
included as an adjustment to accumulated deficit. Syborg's net loss for the
period from July 1, 2000 through July 31, 2000 of approximately $502,000 has
been excluded from the Company's consolidated statement of operations for the
year ended January 31, 2001 as a result of conforming fiscal years and has been
included as an adjustment to accumulated deficit.
In connection with the above acquisitions, the Company has charged
$10,909,000 to operations in the year ended January 31, 2001 for merger related
charges. Such charges relate to the following:
Asset write-downs and impairments
---------------------------------
(In thousands)
Inventory........................................................................ $ 3,685
Property and equipment........................................................... 1,528
Capitalized software costs....................................................... 2,186
----------
Total asset write-downs and impairments.......................................... $ 7,399
==========
In connection with the acquisitions in the year ended January 31,
2001, certain assets became impaired due to the existence of duplicative
technology, property and equipment and inventory of the merged companies.
Accordingly, these assets were written down to their net realizable value at the
time of the merger.
Professional fees and other direct merger expenses
--------------------------------------------------
In connection with the acquisitions in the year ended in January 31,
2001, the Company recorded a charge of $3,510,000 for professional fees to
lawyers, investment bankers and accountants, as well as other merger costs in
connection with the mergers, such as printing costs and filing fees.
F-13
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
JANUARY 31, OCTOBER 31,
-------------------------------
2000 2001 2001
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Accounts payable........................................ $ 13,513 $ 14,271 $ 11,627
Accrued salaries........................................ 5,112 4,554 6,476
Accrued vacation........................................ 2,559 2,925 3,074
Other accrued expenses.................................. 7,948 12,655 12,284
---------- ---------- ----------
$ 29,132 $ 34,405 $ 33,461
========== ========== ==========
During the nine-month period ended October 31, 2001, the Company
reduced its workforce. As a result of this workforce reduction the Company
recorded a charge of $1,164,000 to operations for severance and other related
costs in the nine-month period ended October 31, 2001.
A summary of the workforce reduction accrual is as follows:
(IN THOUSANDS)
(UNAUDITED)
Balance January 31, 2001......................................................... $ -
Provision........................................................................ 1,164
Payments of employee severance................................................... (1,044)
----------
Balance October 31, 2001......................................................... $ 120
==========
9. LIABILITY FOR SEVERANCE PAY
Liability for severance pay consists of the Company's unfunded
liability for severance pay to employees of certain foreign subsidiaries.
Under Israeli law, the Company is obligated to make severance
payments to employees of its Israeli subsidiary on the basis of each
individual's current salary and length of employment. These liabilities are
currently provided primarily by premiums paid by the Company to insurance
providers.
10. STOCK OPTIONS
EMPLOYEE STOCK OPTIONS--As of January 31, 2001 and October 31, 2001,
respectively, 11,869,956 and 15,188,322 shares of common stock were reserved for
issuance upon the exercise of stock options then outstanding and 12,521,196 and
9,034,386 shares were available for future grant under the Company's Stock
Option Plan, under which options may be granted to key employees, directors, and
other persons rendering services to the Company. Options which are designated as
"incentive stock options" under the option plan may be granted with an exercise
price not less than the fair market value of the underlying shares at the date
of grant and are subject to certain quantity and other limitations specified in
Section 422 of the Internal Revenue Code. Options which are not intended to
qualify as "incentive stock options" may be granted at any price, but not less
than the par value of the underlying shares, and without restriction as to
amount. The options and the underlying shares are subject to adjustment in
accordance with the terms of the plan in the event of stock dividends,
recapitalizations and similar transactions. The right to exercise options
generally vests in increments over periods of up to four years from the date of
grant or the date of commencement of the grantee's employment with the Company,
up to a maximum term of ten years for all options granted.
F-14
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The changes in the number of options were as follows:
NINE MONTHS
ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
-----------------------------------
2000 2001 2001
-------------- -------------- --------------
(UNAUDITED)
Outstanding at beginning of period.................. 4,387,250 10,120,793 11,869,956
Granted during the period........................... 6,653,950 3,602,000 4,462,100
Exercised during the period......................... (7,500) (601,348) (168,444)
Canceled, terminated and expired.................... (912,907) (1,251,489) (975,290)
-------------- -------------- --------------
Outstanding at end of period........................ 10,120,793 11,869,956 15,188,322
============== ============== ==============
At January 31, 2001 and October 31, 2001, options to purchase an
aggregate of 3,633,604 and 5,335,799 shares, respectively, were vested and
currently exercisable under the option plan and options to purchase an
additional 8,236,352 and 9,852,523 shares, respectively, vest at various dates
extending through the year 2005.
Weighted average option exercise price information was as follows:
NINE MONTHS
ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
-----------------------------------
2000 2001 2001
-------------- -------------- --------------
(UNAUDITED)
Outstanding at beginning of period....................... $ 0.93 $ 1.05 $ 1.26
Granted during the period................................ $ 1.16 $ 1.73 $ 1.70
Exercised during the period.............................. $ 3.33 $ 0.45 $ 1.25
Canceled, terminated and expired......................... $ 1.27 $ 1.28 $ 1.54
Outstanding at end of period............................. $ 1.05 $ 1.26 $ 1.37
Exercisable at end of period............................. $ 0.51 $ 0.92 $ 1.05
Significant option groups outstanding at January 31, 2001 and related
weighted average exercise price and life information were as follows:
WEIGHTED AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL WEIGHTED AVERAGE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE PRICE
-------------- ----------- ---- -------------- ----------- -----
$0.11 1,073,000 5.26 $ 0.11 1,073,000 $ 0.11
$0.50 143,000 3.16 $ 0.50 143,000 $ 0.50
$1.15 6,726,706 7.99 $ 1.15 2,195,354 $ 1.15
$1.35 2,917,000 8.95 $ 1.35 86,375 $ 1.35
$2.35 112,750 9.25 $ 2.35 - $ -
$3.00 728,500 9.61 $ 3.00 - $ -
$3.33 84,500 5.92 $ 3.33 84,500 $ 3.33
$4.50 84,500 6.84 $ 4.50 51,375 $ 4.50
------------- ----- ------ ------------- ------
11,869,956 8.01 $ 1.26 3,633,604 $ 0.92
============= ===== ====== ============= ======
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its option plan. Accordingly, as all options have been granted at
F-15
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exercise prices equal to fair market value on the date of grant, no compensation
expense has been recognized by the Company in connection with its stock-based
compensation plan. Had compensation cost for the Company's stock option plan
been determined based upon the fair value at the grant date for awards under the
plan consistent with the methodology prescribed under SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net loss and net loss per share
would have been increased by approximately $1,311,000, $1,760,000, $1,266,000
and $2,212,000 or $0.01, $0.02, $0.02 and $0.02 per diluted share for the years
ended January 31, 2000 and 2001 and the nine-month periods ended October 31,
2000 and 2001, respectively. The weighted average fair value of the options
granted for the years ended January 31, 2000 and 2001 and the nine-month periods
ended October 31, 2000 and 2001, respectively, is estimated at $0.68, $1.12,
$1.04 and $1.08 on the date of grant (using the Black-Scholes option pricing
model) with the following weighted average assumptions for the years ended
January 31, 2000 and 2001 and the nine-month periods ended October 31, 2000 and
2001, respectively: volatility of 65.0%, 73.5%, 73.5% and 73.5%; risk-free
interest rate of 4.72%, 6.53%, 6.60% and 4.66%; expected dividend yield of 0%;
and an expected life of 5 years.
11. RELATED PARTY TRANSACTIONS
CORPORATE SERVICES AGREEMENT--The Company has a corporate services
agreement with Comverse Technology. Under this agreement, Comverse Technology
provides the Company with the following services:
o routine legal services;
o administration of employee benefit plans;
o maintaining in effect a policy of directors' and officers'
insurance covering the Company's directors and officers;
o maintaining in effect general liability and other
insurance policies providing coverage for the Company; and
o consulting services with respect to the Company's public
relations.
For the years ended January 31, 2000 and 2001 and the nine-month
periods ended October 31, 2000 and 2001, the Company recorded $475,000,
$500,000, $375,000 and $375,000, respectively, for the services provided by
Comverse Technology. As of February 1, 2002, the Company will pay Comverse
Technology a quarterly fee of $131,250, subject to adjustment and annual
increases, for services provided by Comverse Technology during each fiscal
quarter. In addition, the Company agreed to reimburse Comverse Technology for
any out-of-pocket expenses incurred by Comverse Technology in providing the
services. During the year ended January 31, 2000 and 2001 and the nine-month
periods ended October 31, 2000 and 2001, no amounts were paid to Comverse
Technology for reimbursement of out-of-pocket expenses. The term of this
agreement extends to January 31, 2005 and is automatically extended for
additional twelve-month periods unless terminated by either Comverse Technology
or the Company.
ENTERPRISE RESOURCE PLANNING SOFTWARE SHARING AGREEMENT--On February
1, 2001, the Company entered into an enterprise resource planning ("ERP")
software sharing agreement with Comverse, Inc., a subsidiary of Comverse
Technology. Under this agreement, Comverse, Inc. agreed to continue to share the
use of specific ERP software with the Company and undertook to provide for the
ongoing operation, back up, maintenance and support of the software for an
annual fee of $100,000. The Company was charged $1,500,000, $200,000, $150,000
and $75,000 for the years ended January 31, 2000 and 2001 and the nine-month
periods ended October 31, 2000 and 2001, respectively, for ERP support services.
SATELLITE SERVICES AGREEMENT WITH COMVERSE, INC.--In January 2002,
the Company entered into a services agreement with Comverse, Inc. pursuant to
which Comverse, Inc.'s subsidiaries provide the Company with the exclusive use
of the services of specified employees of Comverse, Inc. and its facilities
where such employees are located. Under this agreement, the Company pays
Comverse, Inc. a fee, which is equal to the expenses Comverse, Inc. incurs in
providing these services plus ten percent. During the year ended January 31,
2000 and 2001 and during the nine-month periods ended October 31, 2000 and 2001,
F-16
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company recorded $459,000, $1,193,000, $552,000 and $1,168,000,
respectively, for services rendered by Comverse, Inc. during these periods.
FEDERAL INCOME TAX SHARING AGREEMENT--The Company has a tax sharing
agreement with Comverse Technology. Comverse Technology is the parent company of
a group of companies which includes the Company and for which Comverse
Technology files consolidated a federal income tax return. After this offering
is completed the Company expects that it will continue to be included in the
Comverse Technology consolidated group for federal income tax purposes and that
the Company will not file its own federal income tax return. Under the terms of
the tax sharing agreement, during years in which Comverse Technology files a
consolidated federal income tax return which includes the Company, the Company
is required to pay Comverse Technology an amount equal to the Company's separate
tax liability, if any, computed by Comverse Technology in its reasonable
discretion. The Company's separate tax liability generally is the amount of
federal income tax that the Company would owe if the Company had filed a tax
return independent of the Comverse Technology group. If the calculation of the
Company's separate tax liability for any year results in a net operating loss or
capital loss, the Company is not entitled to receive any payments from Comverse
Technology with respect to such loss in such year or as a result of carrying
such loss back to any prior year or forward to any future year, or otherwise to
take such loss into account in determining the Company's liability to Comverse
Technology, including in the event that Comverse Technology utilizes such loss
to reduce its own tax liability so that such loss is not available to the
Company in the event of deconsolidation. The tax sharing agreement also provides
for certain payments in the event of adjustments to tax liability. The tax
sharing agreement continues in effect until 60 days after the expiration of the
applicable statute of limitations with respect to the final year of the Comverse
Technology consolidated group which includes the Company.
PATENT LICENSE AGREEMENT--The Company's affiliate, Comverse Patent
Holding, granted Lucent GRL a non-exclusive license to those patents now owned
by Comverse Patent Holding or for which Comverse Patent Holding has a right to
license and to those patents granted to Comverse Patent Holding or for which
Comverse Patent Holding obtains the right to license during the term of that
arrangement. In return, Comverse Patent Holding was granted a non-exclusive
license to certain patents now owned by Lucent GRL or for which Lucent GRL has
right to license and to those patents granted to Lucent GRL or for which Lucent
GRL obtains the right to license during the term of that arrangement. Under that
arrangement, Comverse Patent Holding has the right to grant a sublicense to the
Company. In connection with that arrangement, effective December 30, 1999, the
Company entered into a patent license agreement with Comverse Patent Holding
under which the Company has granted a non-exclusive royalty-free license to
Comverse Patent Holding with the right to sublicense to Lucent GRL the Company's
patents and those patents granted to the Company or for which the Company
obtains the right to license during the term of the agreement. In return,
Comverse Patent Holding granted to the Company a non-exclusive royalty-free
sublicense to all patents that are licensed by Lucent GRL to Comverse Patent
Holding. The Company believes that the value of the sublicense from Comverse
Patent Holding is greater than the value of the license to Comverse Patent
Holding.
REGISTRATION RIGHTS AGREEMENT--The Company has entered into a
registration rights agreement with Comverse Technology. Under this agreement,
Comverse Technology may require the Company on one occasion to register the
Company's common stock for sale on Form S-1 under the Securities Act of 1933
(the "Act") if the Company is not eligible to use Form S-3 under the Act. After
the Company becomes eligible to use Form S-3, Comverse Technology may require
the Company on unlimited occasions to register the Company's common stock for
sale on this form. Comverse Technology will also have an unlimited number of
piggyback registration rights. Comverse Technology will not be allowed to
exercise any registration rights during the 180-day lock-up period.
The Company has agreed to pay all expenses that result from
registration of its common stock under the registration rights agreement, other
than underwriting commissions for such shares and taxes. The Company has also
agreed to indemnify Comverse Technology, its directors, officers and employees
against liabilities that may result from its sale of the Company's common stock,
including Securities Act liabilities.
PROXY AGREEMENT WITH THE DEPARTMENT OF DEFENSE--One of the Company's
subsidiaries, Verint Technology Inc. ("Verint Technology"), is engaged in the
development, marketing and the sale of the Company's communications interception
solutions to various U.S. governmental agencies. In order to conduct its
business, Verint Technology is required to maintain facility security clearances
F-17
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
under the National Industrial Security Program ("NISP"). The NISP requires
companies maintaining facility security clearances to be insulated from foreign
ownership, control or influence. The Company, Comverse Technology and the
Department of Defense have entered into a proxy agreement with respect to the
ownership and operations of Verint Technology. The proxy agreement has been
approved by the Defense Security Service, which has oversight responsibilities
on behalf of the Department of Defense.
Under the proxy agreement, the Company appointed three U.S. citizens
that have the requisite personal security clearance as directors of Verint
Technology and as holders of proxies to vote the stock of Verint Technology.
These individuals are responsible for the oversight of Verint Technology's
security arrangements, including the separation of Verint Technology from the
Company and the Company's affiliates. As proxy holders, these individuals have
the power to exercise all prerogatives of ownership of Verint Technology, except
that without obtaining the Company's express written approval they may not
authorize any individual sale or disposal of capital assets constituting a
material amount of Verint Technology's assets, the mortgaging of assets other
than for working capital or capital improvement purposes, any merger,
consolidation, reorganization or dissolution of Verint Technology and the filing
of a petition under the federal bankruptcy laws.
Under the proxy agreement, the Company has also established a
government security committee, which consists of the three proxy holders. The
government security committee is in charge of the development and implementation
of a technology control plan, which prescribes measures and establishes
procedures to prevent unauthorized disclosure or export of controlled
information to the Company, any of the Company's affiliates or others. In
addition, the proxy agreement establishes procedures regarding meetings, visits
and communications between Verint Technology, the Company and the Company's
other affiliates. The Department of Defense continually reviews the technology
control plan and receives an annual report from the proxy holders.
SALE OF COMVERSE MEDIA HOLDING INC.--In February 2001, the Company
sold 100% of the capital stock of Comverse Media Holding Inc. to Comverse,
Inc., a subsidiary of Comverse Technology, for $100,000. The Company increased
stockholders' equity for the nine-month period ended October 31, 2001 by
$298,000 which represents the excess of the consideration given and the carrying
amount of the net liabilities of Comverse Media Holding Inc.
TRANSACTIONS WITH AN AFFILIATE--The Company sells products and
services to an affiliated systems integrator in the ordinary course of business.
Sales to this affiliate were approximately $961,000, $4,271,000, $4,871,000 and
$2,488,000 for the years ended January 31, 2000 and 2001 and the nine-month
periods ended October 31, 2000 and 2001, respectively. In addition, the Company
was charged marketing and office service fees by that affiliate. These fees were
approximately $56,000, $270,000, $158,000 and $241,000 for the years ended
January 31, 2000 and 2001 and the nine-month periods ended October 31, 2000 and
2001, respectively.
TRANSACTIONS WITH OTHER SUBSIDIARIES OF COMVERSE TECHNOLOGY--The
Company charges subsidiaries of Comverse for services relating to the use of the
Company's facilities and employees. Charges to these subsidiaries were
approximately $365,000, $1,006,000, $702,000 and $1,153,000 for the years ended
January 31, 2000 and 2001 and the nine-month periods ended October 31, 2000 and
2001, respectively.
The Company also purchased products and services from other
subsidiaries of Comverse Technology in the ordinary course of business.
Purchases from these subsidiaries were approximately $268,000, $0, $0 and $2,000
for the years ended January 31, 2000 and 2001 and the nine-month periods ended
October 31, 2000 and 2001, respectively.
INTERCOMPANY LOAN--The Company was charged interest on balances owed
to Comverse Technology amounting to $1,357,000, $2,142,000, $1,523,000 and
$1,246,000 for the years ended January 31, 2000 and 2001 and the nine-month
periods ended October 31, 2000 and 2001, respectively. The interest rate on the
indebtedness to Comverse Technology was the three-month LIBOR rate.
F-18
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GUARANTEE OF LEASES--Comverse Technology has guaranteed the payment
of rent and the performance of all other obligations under the leases for the
Company's facilities in Woodbury, New York and the lease for the Company's
facility in the United Kingdom.
12. INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, consists of the following:
YEAR ENDED NINE MONTHS ENDED
JANUARY 31, OCTOBER 31,
---------------------------- -----------------------------
2000 2001 2000 2001
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
Interest income..................... $ 1,076 $ 2,151 $ 1,597 $ 1,190
Interest expense.................... (1,472) (2,409) (1,776) (1,419)
Other, net.......................... (245) (239) (545) (123)
-------- -------- -------- --------
$ (641) $ (497) $ (724) $ (352)
======== ======== ======== ========
13. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED NINE MONTHS ENDED
JANUARY 31, OCTOBER 31,
---------------------------- -----------------------------
2000 2001 2000 2001
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
Current:
Federal.......................... $ 170 $ 2 $ 2 $ -
State............................ 7 91 5 252
Foreign.......................... 234 624 14 947
-------- -------- -------- --------
Total current.................. 411 717 21 1,199
-------- -------- -------- --------
Deferred (benefit):
Federal.......................... $ (49) $ - $ - $ -
State............................ (7) - - -
Foreign.......................... - (220) - 55
-------- -------- -------- --------
Total deferred................. (56) (220) - 55
-------- --------- -------- --------
$ 355 $ 497 $ 21 $ 1,254
======== ======== ======== ========
The reconciliation of the U.S. Federal statutory tax rate to the
Company's effective tax rate is as follows:
YEAR ENDED NINE MONTHS ENDED
JANUARY 31, OCTOBER 31,
---------------------------- -----------------------------
2000 2001 2000 2001
-------- -------- -------- --------
U.S. Federal statutory rate............. 34 % 34 % 34 % 34 %
Change in valuation allowance........... (35) (34) (34) (34)
Foreign and state income taxes.......... (2) (6) - (52)
----- ----- ----- -----
Company's effective tax rate............ (3)% (6)% -% (52)%
===== ===== ======= =====
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (b)
F-19
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operating loss carryforwards. The tax effects of significant items comprising
the Company's deferred tax assets and liabilities at January 31, 2000 and 2001,
and October 31, 2001 are as follows:
JANUARY 31, OCTOBER 31,
--------------------------------
2000 2001 2001
----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
Deferred tax liabilities:
Expenses deductible for tax purposes and not for
financial reporting purposes......................... $ (923) $ (486) $ (493)
----------- ----------- -----------
Deferred tax assets:
Reserves not currently deductible.................... 5,257 5,487 5,464
Tax loss carryforwards............................... 4,162 6,024 6,392
---------- ---------- ----------
9,419 11,511 11,856
Less: valuation allowance.............................. (8,671) (11,030) (11,435)
---------- ---------- ----------
Net deferred tax liabilities............................ $ (175) $ (5) $ (72)
========== ========== ==========
As of January 31, 2001, the Company had approximately $16.1 million
of net operating loss carryforwards for federal income tax purposes. These
carryforwards will begin to expire in 2019 if not utilized.
Income tax has not been provided on unrepatriated earnings of foreign
subsidiaries as currently it is the intention of the Company to reinvest such
foreign earnings in their operations.
14. BUSINESS SEGMENT INFORMATION
The Company is engaged in providing analytic solutions for
communications interception, digital video security and surveillance, and
enterprise business intelligence. The Company operates in one business segment
and manages its business on a geographic basis. Summarized financial information
for the Company's reportable geographic segments is presented in the following
table. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
UNITED UNITED RECONCILING CONSOLIDATED
STATES ISRAEL KINGDOM OTHER ITEMS TOTALS
------------- -------------- -------------- -------------- ----------------- ------------------
YEAR ENDED JANUARY 31, 2000 (IN THOUSANDS)
---------------------------- ------------- -------------------------------------------- ----------------- ------------------
Sales..................... $ 71,152 $ 47,045 $ 9,487 $ 5,323 $ (12,395) $ 120,612
Costs and expenses........ (71,801) (52,260) (12,325) (5,795) 12,021 (130,160)
---------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)... $ (649) $ (5,215) $ (2,838) $ (472) $ (374) $ (9,548)
========== =========== =========== =========== =========== ===========
YEAR ENDED JANUARY 31, 2001
---------------------------- ------------- -------------- -------------- -------------- ----------------- ------------------
Sales..................... $ 77,777 $ 53,246 $ 20,503 $ 9,662 $ (19,511) $ 141,677
Costs and expenses........ (84,679) (54,045) (20,994) (9,115) 19,591 (149,242)
---------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)... $ (6,902) $ (799) $ (491) $ 547 $ 80 $ (7,565)
========== =========== =========== =========== =========== ===========
F-20
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNITED UNITED RECONCILING CONSOLIDATED
STATES ISRAEL KINGDOM OTHER ITEMS TOTALS
------------- -------------------------------------------- ----------------- ------------------
NINE MONTHS ENDED (IN THOUSANDS)
OCTOBER 31, 2000
(UNAUDITED)
---------------------------- ------------- -------------------------------------------- ----------------- ------------------
Sales..................... $ 55,736 $ 38,492 $ 15,336 $ 6,456 $ (13,313) $ 102,707
Costs and expenses........ (63,940) (38,849) (15,279) (7,162) 13,378 (111,852)
---------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)... $ (8,204) $ (357) $ 57 $ (706) $ 65 $ (9,145)
========== =========== =========== =========== =========== ===========
NINE MONTHS ENDED
OCTOBER 31, 2001
(UNAUDITED)
---------------------------- ------------- -------------- -------------- -------------- ----------------- ------------------
Sales..................... $ 50,416 $ 45,067 $ 13,507 $ 4,304 $ (15,680) $ 97,614
Costs and expenses........ (53,554) (41,955) (14,540) (5,886) 16,270 (99,665)
---------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)... $ (3,138) $ 3,112 $ (1,033) $ (1,582) $ 590 $ (2,051)
========== =========== =========== =========== =========== ===========
Long-lived assets by country of domicile consist of:
JANUARY 31, OCTOBER 31,
------------------------------
2000 2001 2001
--------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
Israel.................................................. $ 13,195 $ 11,692 $ 12,835
United States........................................... 7,429 8,300 8,292
Germany................................................. 1,610 3,602 3,299
United Kingdom.......................................... 439 478 355
Other................................................... 0 158 210
--------- --------- ---------
$ 22,673 $ 24,230 $ 24,991
========= ========= =========
Sales by country, based on end-user location, as a percentage of
total sales were as follows:
NINE MONTHS ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
-------------------------- ---------------------------
2000 2001 2000 2001
------ ------ ------ ------
United States....................... 51% 49% 49% 41%
United Kingdom...................... 7% 15% 16% 14%
Other............................... 42% 36% 35% 45%
------ ------ ------ ------
100% 100% 100% 100%
====== ====== ====== ======
No single customer accounted for 10% or more of sales for the years
ended January 31, 2000 and 2001 and the nine-month periods ended October 31,
2000 and 2001.
15. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases office, manufacturing, and warehouse space
under non-cancelable operating leases. Rent expense for all leased premises
approximated $2,475,000, $2,596,000, $1,983,000 and $2,247,000 in the years
ended January 31, 2000 and 2001 and the nine-month periods ended October 31,
2000 and 2001, respectively.
F-21
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of January 31, 2001, the minimum annual rent obligations of the
Company were approximately as follows:
YEAR ENDING JANUARY 31, AMOUNT
----------------------- ------
(IN THOUSANDS)
2002.................................... $ 2,553
2003.................................... 2,584
2004.................................... 2,270
2005.................................... 635
2006 and thereafter..................... 405
--------
$ 8,447
========
LICENSES AND ROYALTIES--The Company licenses certain technology,
"know-how" and related rights for use in the manufacture and marketing of its
products, and pays royalties to third parties under such licenses and under
other agreements entered into in connection with research and development
financing. The Company currently pays royalties on a substantial portion of its
product sales in varying amounts based upon the revenues attributed to the
various components of such products. Royalties typically range up to 6% of net
sales of the related products and, in the case of royalties due to government
funding sources in respect of research and development projects, are required to
be paid until the funding organization has received total royalties amounting to
100% of the amounts received by the Company under the approved project budgets,
plus interest in certain circumstances.
DIVIDEND RESTRICTIONS--The ability of the Company's Israeli
subsidiaries to pay dividends is governed by Israeli law, which provides that
cash dividends may be paid by an Israeli corporation only out of retained
earnings as determined for statutory purposes in Israeli currency. In the event
of a devaluation of the Israeli currency against the dollar, the amount in
dollars available for payment of cash dividends out of prior years' earnings
will decrease accordingly. Cash dividends paid by an Israeli corporation to
United States residents are subject to withholding of Israeli income tax at
source at a rate of up to 25%, depending on the particular facilities which have
generated the earnings that are the source of the dividends.
GUARANTIES--The Company has obtained bank guaranties primarily for
performance of certain obligations under contracts with customers. These
guaranties, which aggregated approximately $10,317,000 at January 31, 2001, are
to be released by the Company's performance of specified contract milestones,
which are scheduled to be completed in the ensuing year.
LITIGATION--From time to time, the Company is subject to certain
legal actions arising in the normal course of business. After taking into
consideration legal counsel's evaluation of such actions, management is of the
opinion that their final resolution will not have any significant adverse effect
upon the Company's financial position or results of operations.
16. SUBSEQUENT EVENTS
In January 2002, the Company took a bank loan in the amount of $42
million. This loan, which matures in February 2003, bears interest at LIBOR plus
0.55%, and may be prepaid without penalty. The proceeds of this loan were used
to repay amounts owed to related parties. The loan is guaranteed by Comverse
Technology.
On February 1, 2002, the Company's wholly-owned subsidiary, Loronix
Information Systems, Inc., acquired the digital video recording business of
Lanex, LLC. The Lanex business provides digital video recording solutions for
security and surveillance applications primarily to North American banks. The
purchase price consisted of $9.5 million in cash and a $2.2 million convertible
note issued by the Company to Lanex. The note is non-interest bearing and
matures on February 1, 2004. The holder of the note may elect to convert the
note, in whole or in part, into shares of the Company's common stock at a
conversion price of $3.1429 per share at any time on or after the completion of
the Company's initial public offering. The note is guaranteed by Comverse
Technology.
******
F-22
[LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses, other than underwriting commissions, expected to be
incurred by the Company in connection with the issuance and distribution of the
securities being registered under this Registration Statement are estimated to
be as follows:
Securities and Exchange Commission Registration Fee........................... $ *
National Association of Securities Dealers, Inc. Filing Fee................... $ *
Nasdaq National Market Filing Fee............................................. $ *
Printing and Engraving........................................................ $ *
Legal Fees and Expenses....................................................... $ *
Accounting Fees and Expenses.................................................. $ *
Miscellaneous................................................................. $ *
-----------
Total.............................................................. $
===========
- -----------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law, or DGCL, as
amended, allows a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except where the director breached the
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that we may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding--other than
an action by or in the right of the Company--by reason of the fact that the
person is or was a director, officer, agent, or employee of the Company, or is
or was serving at our request as a director, officer, agent or employee of
another corporation, partnership, joint venture, trust or other enterprise
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding or (b) if such person acting in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of the Company, and with respect to any criminal action or proceeding
had no reasonable cause to believe his or her conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of the Company as well
but only to the extent of defense expenses, including attorneys' fees but
excluding amounts paid in settlement, actually and reasonably incurred and not
to any satisfaction of judgment or settlement of the claim itself, and with the
further limitation that in such actions no indemnification shall be made in the
event of any adjudication of liability to the Company, unless the court believes
that in light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a
director, who willfully or negligently approves of an unlawful payment of
dividends or an unlawful stock purchase or redemption, may be held liable for
such actions. A director who was either absent when the unlawful actions were
approved or dissented at the time, may avoid liability by causing his or her
dissent to such actions to be entered in the books containing minutes of the
meetings of the board of directors at the time such action occurred or
immediately after such absent director receives notice of the unlawful acts.
Our certificate of incorporation provides that we shall indemnify, to
the full extent permitted by Section 145 of the DGCL, all persons whom we may
indemnify pursuant thereto. Under the corporate services agreement described in
the Prospectus, Comverse Technology has obtained directors' and officers'
liability insurance which also provides coverage for our officers and directors.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Described below are unregistered securities sold by the Company
during the three years preceding the filing of this Registration Statement:
In _____, we issued ________ shares of our common stock to employees
upon the exercise of options for aggregate consideration of $__.
On ___________ __, 2001, we issued 34,539,905 shares of our common
stock to Comverse Technology, Inc., or Comverse Technology, as consideration
under a contribution agreement, dated as of February 2, 2001, pursuant to which
we acquired from Comverse Technology all of the outstanding shares of Loronix
Information Systems, Inc. and all of the outstanding shares of Comverse GmbH,
which holds 99.8% of the partnership interest in Syborg Informationsysteme
beschrankt haftende OHG, or Syborg, and all of the shares of Comverse
Grundbesitz GmbH, which holds 0.2% of the partnership interest in Syborg.
On February 1, 2002, the Company's wholly-owned subsidiary, Loronix
Information Systems, Inc., acquired the digital video recording business of
Lanex, LLC. The purchase price consisted of $9,510,000 in cash and a $2,200,000
convertible note issued by the Company to Lanex. The note is non-interest
bearing and matures on February 1, 2004. The holder of the note may elect to
convert the note, in whole or in part, into shares of the Company's common stock
at a conversion price of $3.1429 per share at any time on or after the
completion of the Company's initial public offering. The note is guaranteed by
Comverse Technology.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
NUMBER DESCRIPTION
------ -----------
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of Verint
Systems Inc.
3.2* Amended and Restated Bylaws of Verint Systems Inc.
4.1* Specimen Common Stock certificate
5.1* Opinion of Weil, Gotshal & Manges LLP
10.1* Corporate Services Agreement, dated as of ___________,
between Comverse Technology and the Registrant
10.2* Federal Income Tax Sharing Agreement, dated as of __________,
between Comverse Technology and the Registrant
10.3* Patent License Agreement, dated as of ___________, between
Comverse Patent Holding and the Registrant
10.4* Registration Rights Agreement, dated as of __________,
between Comverse Technology and the Registrant
10.5* Contribution Agreement, dated as of ___________, between
Comverse Technology and the Registrant
10.6* Enterprise Resource Planning Software Sharing Agreement,
dated as of _____________, between Comverse Ltd. and the
Registrant
10.7* Satellite Services Agreement, dated as of _____________,
between Comverse Technology and the Registrant
10.8* Proxy Agreement, dated as of _____________, between Comverse
Technology, the Registrant and the United Stated Department
of Defense
10.9* Verint Systems Inc. Stock Incentive Compensation Plan
10.10* Stock Purchase Agreement, dated as of _____________________,
between Comverse, Inc. and the Registrant
21.1* Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG LLP
23.3* Consent of Weil, Gotshal & Manges LLP (included in Exhibit
5.1)
24.1 Powers of Attorney (See Signature Page)
- ------------
* To be filed by amendment.
II-2
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes that:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commissions such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suite or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b)(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to each
purchaser.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of New York,
state of New York, on this 7th day of February, 2002.
VERINT SYSTEMS INC.
By: /s/ DAN BODNER
--------------------------------------------
Name: Dan Bodner
Title: President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of Verint Systems Inc.,
hereby severally constitute and appoint Dan Bodner and Igal Nissim, and each of
them individually, with full powers of substitution and resubstitution, our true
and lawful attorneys, with full powers to them and each of them to sign for us,
in our names and in the capacities indicated below, the Registration Statement
on Form S-1 filed with the Securities and Exchange Commission, and any and all
amendments to said Registration Statement (including post-effective amendments),
and any registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933 in connection with the registration under the Securities
Act of 1933 of equity securities of the Company, and to file or cause to be
filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as each of them might or could do in
person, and hereby ratifying and confirming all that said attorneys, and each of
them, or their substitute or substitutes, shall do or cause to be done by virtue
of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933 this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ KOBI ALEXANDER Chairman of the Board of Directors February 7, 2002
----------------------------- and Director
Kobi Alexander
/s/ DAN BODNER President and Chief Executive Officer and Director February 7, 2002
-----------------------------
Dan Bodner
/s/ IGAL NISSIM Chief Financial Officer and Director February 7, 2002
-----------------------------
Igal Nissim
/s/ WILLIAM F. SORIN Director February 7, 2002
-----------------------------
William F. Sorin
/s/ DAVID KREINBERG Director February 7, 2002
-----------------------------
David Kreinberg
II-1
INDEX TO EXHIBITS
NUMBER DESCRIPTION
------ -----------
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of Verint
Systems Inc.
3.2* Amended and Restated Bylaws of Verint Systems Inc.
4.1* Specimen Common Stock certificate
5.1* Opinion of Weil, Gotshal & Manges LLP
10.1* Corporate Services Agreement, dated as of ___________,
between Comverse Technology and the Registrant
10.2* Federal Income Tax Sharing Agreement, dated as of __________,
between Comverse Technology and the Registrant
10.3* Patent License Agreement, dated as of ___________, between
Comverse Patent Holding and the Registrant
10.4* Registration Rights Agreement, dated as of __________,
between Comverse Technology and the Registrant
10.5* Contribution Agreement, dated as of ___________, between
Comverse Technology and the Registrant
10.6* Enterprise Resource Planning Software Sharing Agreement,
dated as of _____________, between Comverse Ltd. and the
Registrant
10.7* Satellite Services Agreement, dated as of _____________,
between Comverse Technology and the Registrant
10.8* Proxy Agreement, dated as of _____________, between Comverse
Technology, the Registrant and the United Stated Department
of Defense
10.9* Verint Systems Inc. Stock Incentive Compensation Plan
10.10* Stock Purchase Agreement, dated as of _____________________,
between Comverse, Inc. and the Registrant
21.1* Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG LLP
23.3* Consent of Weil, Gotshal & Manges LLP (included in Exhibit
5.1)
24.1 Powers of Attorney (See Signature Page)
- ------------
* To be filed by amendment.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Verint
Systems Inc. on Form S-1 of our report dated February 4, 2002, appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/S/ Deloitte & Touche LLP
Jericho, New York
February 4, 2002
2
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Loronix Information Systems, Inc.:
We consent to the use of our report included herein and to the reference to our
Firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
San Diego, California
February 5, 2002
3
