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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Year ended January 31, 2003
Commission File Number 000-49790
VERINT SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3200514
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 South Service Road
Melville, New York 11747
(Address of principal executive offices)
Registrant's telephone number, including area code: 631-962-9600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- --------------------
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: |X| No: |_|
================================================================================
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
|X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of The Act).
Yes: |_| No: |X|
The aggregate market value of Common Stock held by non-affiliates of the
registrant, based on the closing price for the Common Stock on The Nasdaq
National Market on the last business day of the registrant's most recently
completed fiscal second quarter (July 31, 2002) was approximately $30,059,980
million.
There were 23,800,332 shares of the registrant's common stock outstanding
on April 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K
Report, which Proxy Statement is to be filed within 120 days after the end of
the Registrant's fiscal year ended January 31, 2003.
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LORONIX(R) is a registered trademark, and Intelligent Recording, OpenStorage
Portal, RELIANT, STAR-GATE, ULTRA, cctvware, vCRM, Building the Customer
Intelligent Enterprise, Intelligent Recording, Universal Database, Verint
Systems and Verint's logos are trademarks, of Verint Systems Inc.
- ii -
PART I
ITEM 1. BUSINESS.
Overview
Verint Systems Inc. (including its subsidiaries, "Verint" or the "Company")
is a leading provider of analytic software-based solutions for communications
interception, digital video security and surveillance, and enterprise business
intelligence. Verint's software generates actionable intelligence through the
collection, retention and analysis of voice, fax, video, email, Internet and
data transmissions from multiple types of networks.
Heightened awareness surrounding homeland defense and security, both in the
United States and globally, has increased the demand for solutions such as those
provided by Verint. 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.
Verint was incorporated in Delaware on February 23, 1994 as "Interactive
Information Systems Corporation." 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." On February 1, 2002, the Company changed its name to "Verint Systems Inc."
Verint's principal executive offices are located at 330 South Service Road,
Melville, New York 11747 and its telephone number at that address is (631)
962-9600. Verint has over 1,000 customers in 50 countries, and has operations in
13 countries. Approximately 79% of Verint's common stock is owned by Comverse
Technology, Inc.
The Company makes available through Verint's website at
WWW.VERINTSYSTEMS.COM its Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and will make available this Annual Report on Form 10-K, as well as
amendments to these and other reports filed or furnished by the Company pursuant
to Section 13 (a) or Section 15 (d) of the Securities Exchange Act of 1934 free
of charge, as soon as reasonably practicable after the Company files such
materials with the Securities and Exchange Commission.
1
Industry Background
Overview
Verint provides its analytic software-based solutions to enable customers
to generate actionable intelligence from voice, video and data transmissions.
The two markets to which the Company applies actionable intelligence solutions
are digital security and surveillance and enterprise business intelligence. The
process of generating actionable intelligence is comprised of the following five
components: collection, retention, analysis, decision and distribution.
-- 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.
-- Retention consists of storage of the collected multimedia information.
Collected information can be processed concurrently with its storage.
-- 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.
-- Decision criteria are established by users to filter and prioritize
processed data. By applying decision criteria, the processed data
becomes actionable intelligence.
-- 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 digital
video security utilized by government agencies and public and private
organizations for use in airports, public buildings, correctional facilities and
corporate sites and communications interception by law enforcement agencies.
Digital Video Security
Organizations are increasingly recognizing the need for surveillance of
their facilities and operations to ensure the proper level of security. In
addition, there is 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 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.
2
Traditionally, video security consisted of connecting surveillance cameras
to analog monitors and VCR 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, and
the capability to interface with other digital systems, such as access control.
Additionally, as video data is digitized and compressed, a variety of
intelligent video analysis tools can be applied, including advanced motion
detection technologies and analysis of the behavior of individuals and objects.
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.
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. Laws governing electronic surveillance vary significantly by country,
and within many countries at the state or provincial levels. Verint provides
governmental entities turnkey solutions intended to 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 for communications
interception. 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 unilateral
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
driven the demand for CALEA and ETSI compliant solutions. By outsourcing their
need for a compliant communications interception solution to companies such as
Verint, communications service providers and equipment vendors are able to focus
on their core business activities.
3
Traditionally, lawful communications interception activities consisted of a
law enforcement or other authorized official eavesdropping on the telephone
conversation of a suspected target. 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 for
intelligence gathering purposes 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.
Altogether, the recent legislative, regulatory and technological
developments surrounding communications interception activities have led to an
increased interest in sophisticated communications interception solutions.
Today, utilizing advanced communications interception technologies, voice and
data transmissions of a target can be intercepted through multiple
communications channels.
The Enterprise Business Intelligence Market
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.
The Company believes that 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 will become
increasingly important.
4
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 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.
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, but 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.
5
Verint's Solution
Verint's solution enables the intelligent recording and analysis of voice,
video and data transmissions for digital security and surveillance and
enterprise business intelligence. Verint's products are utilized by government
agencies, leading corporations, financial institutions and telecommunications
service and equipment providers.
Verint's solutions provide its customers with the following key benefits:
-- Robust functionality with advanced features. Verint's solutions
address the needs of its customers by providing a wide range of
functions. In addition, the Company has developed a number of
applications that enhance the functionality of its base product
offerings. For example, Verint's digital video systems incorporate
object-tracking software that analyzes real-time video for specific
motion, such as an individual walking in the wrong direction through a
monitored checkpoint at an airport. In addition, Verint's
communications interception products feature a cell-phone tracking
program that can identify the location of a wireless caller.
-- End-to-end systems. Verint's products are designed to deliver complete
solutions for both access to and delivery from communications networks
and the collection, storage, management and processing of multimedia
communications by Verint's end users.
-- Turnkey solutions. Verint's solutions can be quickly and efficiently
deployed by its customers. The Company offers integrated hardware and
software as well as training and project management services. In
addition, the Company offers comprehensive documentation, installation
and maintenance services.
-- Intuitive user interface. Verint's products utilize standard user
interfaces, such as web-browser and email software, which allow
customers to operate Verint's software in a familiar and easy to use
framework.
-- Scalable network-based solution with centralized control. Verint's
solutions are network-based, so that customers can access recorded
information from any network connection. By allowing for centralized
monitoring, the Company believes that its solutions enable customers
to more efficiently manage their security and business information
located at dispersed sites. Verint's products can also be scaled to
support thousands of inputs, both locally and across a customer
networked site.
-- Open, extendable platform. Verint's software runs on standard
platforms and integrates with standard storage, compression and
database technologies. The Company integrates with communications
switches and customer relationship management software, as applicable,
from multiple vendors across both traditional and next-generation
communications networks. In addition, the Company has developed
application programming interfaces, which enable Verint's customers to
easily incorporate their proprietary database information into its
solutions.
-- Global support and service. The Company is 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.
-- Expertise in national and international standards and laws. Verint's
products are designed to comply with intricate local, national and
international standards regarding the lawful interception of
communications.
6
Digital Security and Surveillance Solutions
The following table summarizes Verint's digital security and surveillance
product lines:
- --------------------- -------------------------- ---------------------------- ----------------------------- -----------------------
Product Line Market Served Type of Customer Purpose/Description Location of Product
- --------------------- -------------------------- ---------------------------- ----------------------------- -----------------------
- --------------------- -------------------------- ---------------------------- ----------------------------- -----------------------
STAR-GATE Communications -- Communications Access, delivery and Embedded in circuit or
interception service providers administrative functions of packet-based switch
-- Internet communications interception infrastructure
service providers
-- Switch
manufacturers
- --------------------- -------------------------- ---------------------------- ----------------------------- -----------------------
- --------------------- -------------------------- ---------------------------- ----------------------------- -----------------------
RELIANT Communications -- Law enforcement Collection, delivery, Law enforcement or
interception agencies storage, and analysis of intelligence agency
-- Intelligence data from communications monitoring center
agencies interception
- --------------------- -------------------------- ---------------------------- ----------------------------- -----------------------
- --------------------- -------------------------- ---------------------------- ----------------------------- -----------------------
LORONIX Digital video -- Government Intelligent recording of Networked to customer
digital video security agencies video from CCTV CCTV or IP cameras
security -- Public agencies camera transmissions
-- Transportation
agencies
-- Corporations
- --------------------- -------------------------- ---------------------------- ----------------------------- -----------------------
STAR-GATE
Verint's STAR-GATE product line enables communications service providers,
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 in
receipt of proper legal authorization 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.
7
Verint's STAR-GATE product line performs two primary functions:
-- Administration. STAR-GATE automates the implementation of proper legal
authorization 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.
-- 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 is designed to be compliant with CALEA and the ETSI standards for
both circuit switched and IP networks.
RELIANT
Verint's RELIANT product line provides intelligent recording and analysis
solutions for communications interception activities to law enforcement
organizations and intelligence agencies. Verint's 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
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, an operator workstation, and collection and storage databases and
servers. RELIANT collects intercepted communications from multiple channels and
stores them for immediate access, further analysis and 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:
-- Open database architecture, which enables the application of external
analysis tools, with advanced security measures to maintain the
integrity of intercepted information against penetration and
unauthorized access;
-- Long-term session archiving for use in court playback and submission
of evidence;
-- Location tracking capabilities for wireless network interception; and
-- Maintenance and fault management.
8
LORONIX Digital Video Security
Verint's LORONIX digital video security product line provides intelligent
recording and analysis of video for security and surveillance applications to
government agencies, public organizations and corporations. Verint's 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.
Verint's 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:
-- 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;
-- 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;
-- An image toolkit that allows users to enhance, annotate, print, and
save images in a variety of formats from live or recorded video;
-- 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;
-- A video export application that can send live and recorded video for
review at any time;
-- Scalability allowing for the monitoring of thousands of cameras at the
same moment;
-- Open architecture allowing for the application of intelligent video
tools such as biometric identification and motion detection
technologies;
-- Operation capabilities whereby users can conduct diversified tasks,
such as playback, archiving and live review simultaneously; and
-- Advanced compression technologies.
9
Enterprise Business Intelligence Solutions
The following table summarizes Verint's enterprise business intelligence
product lines:
- -------------------------- ---------------------- ------------------------- ------------------------------ -------------------------
Product Line Market Served Type of Customer Purpose/Description Location of Product
- -------------------------- ---------------------- ------------------------- ------------------------------ -------------------------
- -------------------------- ---------------------- ------------------------- ------------------------------ -------------------------
ULTRA Contact centers -- 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 financia
institutions
-- Outsourced contact
centers
- -------------------------- ---------------------- ------------------------- ------------------------------ -------------------------
- -------------------------- ---------------------- ------------------------- ------------------------------ -------------------------
LORONIX video business Business intelligence -- Large organizations Analysis of digital video to Networked to customer
intelligence and enterprises improve business processes CCTV or IP cameras
and performance
- -------------------------- ---------------------- ------------------------- ------------------------------ -------------------------
ULTRA
Verint's 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, Verint's 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.
10
The ULTRA product line offers the following key features:
-- Advanced analytical tools for efficient data mining of call content
for customer intelligence;
-- Proprietary 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 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;
-- Open architecture, allowing for quick and easy integration with
leading CRM applications; and
-- 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
Verint's LORONIX video business intelligence products enable its 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 Verint's 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 Verint's software with other video analysis
technologies that actively monitor customer and employee behavior and responses.
Sales and Marketing
The Company sells its products primarily through a combination of its
direct sales force and agents, distributors, value added resellers and systems
integrators. As of January 31, 2003, the Company had several sales offices in
the United States and offices in Australia, Canada, France, Germany, Hong Kong,
India, Israel, Japan, the Netherlands, Singapore and the United Kingdom.
Verint's direct sales force consists of account executives, solutions
consultants, and regional sales directors, that possess industry-specific
experience.
11
Verint's sales force pursues potential sales leads identified internally or
provided by systems integrators. The Company develops strategic marketing
alliances with leading companies in its industry to expand the coverage and
support of its direct sales force. Verint's business development personnel are
responsible for the initiation, negotiation and completion of these marketing
alliances. The Company currently has such relationships with ADT, Avaya, British
Telecom, Nortel, and Siemens. In addition, the Company has established
technological alliances with leading software and hardware companies including
Genesys, Identix and Siebel, which enable it to offer complementary solutions to
their products.
Verint's direct sales cycle typically begins with its 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 Verint's
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 Verint's product to the
customer.
The Company uses 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, seminars, and a public
relations program that includes demonstrations of Verint's products. To support
sales efforts, the Company also produces promotional materials that include
brochures, video presentations, data sheets and other technical descriptions.
Customers
Verint's products are currently used by over 1,000 organizations and are
deployed in over 50 countries, across many industries and markets. Many users of
Verint's products are large corporations or government agencies that operate
from multiple locations and facilities across large geographic areas and
sometimes across several countries. These organizations typically implement
Verint's solutions in stages, with implementation in one or more sites and then
gradually expanding to a full enterprise, networked-based solution. None of
Verint's customers, including systems integrators and value added resellers,
individually accounted for more than 10% of its revenues in fiscal 2002.
The Company derived approximately 22%, 26% and 32% of its revenues in
fiscal 2000, 2001 and 2002, respectively, from contracts with various local,
regional and national governments worldwide. Verint's business generated from
such government contracts may be adversely affected for various reasons
including if levels of government expenditures and authorizations for law
enforcement and security related programs decrease, remain constant or shift to
programs in areas where it does not provide products and services or if changes
in government procurement procedures preclude the Company from participating in
such government procurement processes. See "Certain Trends and Uncertainties."
12
Research and Development
The Company continues to enhance the features and performance of its
existing products and introduce new solutions by extensive research and
development activities in its facilities in the United States, Israel and
Germany. As of January 31, 2003, the Company had approximately 300 employees
engaged in its research and development activities. The Company believes that
its future success depends on a number of factors, which include its ability to:
-- identify and respond to emerging technological trends in its target
markets;
-- develop and maintain competitive solutions that meet its customers'
changing needs; and
-- enhance its existing products by adding features and functionality to
meet specific customer's needs, or that differentiate its products
from those of its competitors.
As a result, the Company has made significant investments in research and
development. The Company allocates its research and development resources in
response to market research and customer demands for additional features and
solutions. Verint's development strategy involves rolling out initial releases
of its products and adding features over time. The Company incorporates product
feedback it receives from its customers into its product development process.
While the Company expects that new products will continue to be developed
internally, it may, based on timing and cost considerations, acquire or license
technologies, products or applications from third parties.
As mentioned above, part of Verint's research and development occurs in
Israel. The Government of Israel, through the Office of the Chief Scientist,
encourages research and development projects which result in products for
export. Verint's gross research and development expenses were approximately
$21.7 million for fiscal 2000, $21.0 million for fiscal 2001 and $22.6 million
for fiscal 2002. In fiscal 2000, 2001 and 2002, the Company received from the
Office of the Chief Scientist conditional grants totaling $7.5 million, $5.8
million and $5.2 million, respectively, representing 34.5%, 27.6% and 23.1% of
its total research and development expenditures in these periods.
Manufacturing and Suppliers
Verint's manufacturing operations, which are performed in its U.S.,
Israeli, and German facilities, consist primarily of installing its 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. The Company relies on several
unaffiliated subcontractors for the supply of specific proprietary components
and assemblies that are incorporated in all of its products. Although the
Company has experienced delays and shortages in the supply of proprietary
components on more than one occasion in the past, to date, it has been able to
obtain adequate supplies of all components in a timely manner, when necessary,
from alternative sources. See "Certain Trends and Uncertainties."
13
The Company maintains organization-wide quality assurance procedures,
coordinating the quality control activities of its research and development,
manufacturing and service departments. Verint's primary manufacturing and
research and development facilities in Israel, Germany, and Colorado have
received certification to Quality Standard ISO 9001.
Intellectual Property Rights
The Company has accumulated a significant amount of proprietary know-how
and expertise in developing multimedia analytic solutions for digital security
and surveillance and enterprise business intelligence. The Company regularly
reviews new areas of technology to determine whether they are patentable.
The Company licenses certain software, technology and related rights for
use in the manufacture and marketing of its products, and pay royalties to third
parties under such licenses and other agreements. The Company believes that its
rights under such licenses and other agreements are sufficient for the
manufacturing and marketing of its 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 Verint and
Comverse Technology, Lucent is entitled to non-exclusive royalty-free licenses
under any patents granted to Verint or which it obtains the right to license
during the term of the agreement, while Verint is entitled to a non-exclusive
royalty-free sublicense to all patents that are licensed by Lucent to Comverse
Technology.
Competition
The Company faces strong competition in the markets for its products, both
in the United States and internationally. The Company expects competition to
persist and intensify in the digital security and surveillance market, primarily
due to increased demand for homeland defense and security solutions. Verint's
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, the Company faces
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
Verint's competitors specialize in a subset of its portfolio of products and
services. Primary competitors include, among others, SS8 Networks, ECtel,
e-talk, ETI, JSI Telecom, NICE-Systems, Pelco, Raytheon, Sensormatic and Witness
Systems. The Company believes it competes principally on the basis of:
14
-- product performance and functionality;
-- knowledge and experience in Verint's industry;
-- product quality and reliability;
-- customer service and support; and
-- price.
The Company believes that its success depends primarily on its ability to
provide technologically advanced and cost effective solutions. Verint's
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. The Company expects that competition will increase as other
established and emerging companies enter its market, and as new products,
services and technologies are introduced.
Employees
As of January 31, 2003, the Company had approximately 900 employees. A
majority of its employees are scientists, engineers or technicians engaged in
research and development, sales and marketing, and operations. The Company
considers its relationship with its employees to be good. Verint's employees in
the United States are not covered by any collective bargaining agreement.
Verint's 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
the Company provides 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.
Proxy Agreement with the Department of Defense
One of Verint's subsidiaries, Verint Technology Inc., or Verint Technology,
is engaged in the development, marketing and sale of Verint'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 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. In January 1999, the
Company, Comverse Technology and the Department of Defense 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.
15
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
its affiliates. As proxy holders, these individuals have the power to exercise
all prerogatives of ownership of Verint Technology, except that without
obtaining Verint'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 by the
Company, any of its affiliates or others. In addition, the proxy agreement
establishes procedures regarding meetings, visits and communications between
Verint Technology, the Company and its other affiliates. The Department of
Defense continually reviews the technology control plan and receives an annual
report from the proxy holders.
Export Regulations
The Company is subject to export restrictions in Israel with respect to
certain components of its RELIANT products which are developed and manufactured
in Israel. In order to export its RELIANT products from Israel, the Company is
required to obtain export licenses from the Israeli Ministry of Defense prior to
marketing these products in foreign countries. The Company is also required to
obtain an additional license prior to the completion of each sale. To date, the
Company has been successful in obtaining necessary permits.
The Company is also subject to export restrictions in Germany with respect
to components of its RELIANT products which are developed and manufactured in
Germany. To date, the Company has 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, the Company is also required to
report to German authorities each shipment of these components outside of the
European Union.
16
ITEM 2. PROPERTIES.
The Company leases approximately 73,000 square feet of office space in the
United States. Through April 2003, the Company had approximately 32,000 square
feet in Woodbury, New York, where its headquarters and some of its support and
sales facilities were located. Beginning April 30, 2003, the Company
relinquished its space in Woodbury, New York and moved its headquarters to
approximately 25,000 square feet in Melville, New York. The lease of Verint's
Melville, New York facilities expires in June 2013. The Company leases
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 March 2004. Additionally, the Company leases approximately 10,000
square feet of office space for sales, installation and support in the United
Kingdom. The Company also leases small office facilities in Germany and The
Netherlands.
The Company owns approximately 25 acres of land, including 40,000 square
feet of office space for the development, manufacturing, support and sales of
its LORONIX product lines in Durango, Colorado. The Company also owns
approximately 25,000 square feet of office and storage space for sales,
manufacturing, support and development in Bexbach, Germany.
The Company believes that its owned and leased facilities are adequate for
its current operations, and that additional facilities can be acquired or
developed to provide for expansion of its operations in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is subject to claims in legal proceedings
arising in the normal course of its business. The Company does not believe that
it is party to any pending legal action that could reasonably be expected to
have a material adverse effect on its business or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of Verint trades on the NASDAQ National Market System
under the symbol VRNT. The following table sets forth the range of closing
prices of the Common Stock as reported on NASDAQ since Verint became publicly
traded on May 16, 2002.
17
Year Fiscal Quarter Low High
2002 5/16/02 - 7/31/02 $ 6.13 $14.49
8/1/02 - 10/31/02 $ 6.60 $11.38
11/1/02 - 1/31/03 $ 10.60 $23.20
There were 120 holders of record of Common Stock at April 28, 2003. Such
record holders include a number of holders who are nominees for an undetermined
number of beneficial owners. The Company believes that the number of beneficial
owners of the shares of Common Stock outstanding at such date was approximately
5,000.
The Company has not declared or paid any cash dividends on its equity
securities and does not expect to pay any cash dividends in the foreseeable
future, but rather intends to retain its earnings to finance the development of
its business. Any future determination as to the declaration and payment of
dividends will be made by the Board of Directors in its discretion, and will
depend upon the Company's earnings, financial condition, capital requirements
and other relevant factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Also, see "Certain Trends and Uncertainties" regarding Comverse Technology's
control of the Board of Directors.
18
ITEM 6. SELECTED FINANCIAL DATA.
The Company derived the selected consolidated financial data
presented below from its consolidated financial statements and related notes
included in this Form 10-K. You should read the selected consolidated financial
data together with Verint's consolidated financial statements and related notes
and the section of this Form 10-K entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Statement of operations data for the years ended January 31, 2001, 2002 and
2003, and the balance sheet data at January 31, 2002 and 2003 have been derived
from Verint's audited consolidated financial statements included in Item 15 of
this Form 10-K. Statement of operations data for the year ended January 31, 2000
and balance sheet data at January 31, 2000 and 2001 have been derived from
Verint's audited financial statements not included herein. Statement of
operations data for the year ended January 31, 1999, and the balance sheet data
at January 31, 1999, have been derived from Verint's unaudited consolidated
financial statements not included herein.
Year Ended January 31,
---------------------------------------------------------
1999 2000 2001 2002 2003
------------ ---------- --------- -------- ----------
(in thousands, except per share data)
Statement of Operations Data:
Sales................................. $ 89,282 $ 120,612 $ 141,677 $131,235 $ 157,775
Cost of sales......................... 51,572 63,939 81,793 69,907 78,053
------------ ---------- --------- --------- ----------
Gross profit.......................... 37,710 56,673 59,884 61,328 79,722
Research and development, net......... 16,412 21,307 14,249 15,184 17,357
Selling, general and administrative... 31,924 44,914 48,162 45,923 52,314
Acquisition expenses.................. - - 3,510 - -
Workforce Reduction, Restructuring and
impairment charges................... - - 1,528 2,754 -
------------ ---------- --------- --------- ----------
Income (Loss) from operations......... (10,626) (9,548) (7,565) (2,533) 10,051
Interest and other income (expense),
net.................................. (753) (641) (497) (564) 2,266
------------ ---------- --------- --------- ----------
Income (Loss) before income taxes..... (11,379) (10,189) (8,062) (3,097) 12,317
Income tax provision.................. 280 355 497 1,552 2,170
------------ ---------- --------- --------- ----------
Net income (loss)..................... $ (11,659) $ (10,544) $ (8,559) $ (4,649) $ 10,147
============ ========== ========= ========= ==========
Net income (loss) per share - basic... $ (0.63) $ (0.57) $ (0.46) $ (0.25) $ 0.46
============ ========== ========= ========= ==========
Net income (loss) per share - diluted. $ (0.63) $ (0.57) $ (0.46) $ (0.25) $ 0.43
============ ========== ========= ========= ==========
Weighted average shares:
Basic.............................. 18,618 18,619 18,704 18,767 22,165
Diluted............................ 18,618 18,619 18,704 18,767 23,542
As of January 31,
---------------------------------------------------------
1999 2000 2001 2002 2003
------------ --------- --------- -------- ----------
Balance Sheet Data:
Cash and cash equivalents............ $ 32,456 $ 35,933 $ 43,330 $ 49,860 $ 133,933
Working capital...................... 22,189 10,804 3,512 41,160 69,323
Total assets......................... 88,942 103,410 117,554 116,726 207,050
Long-term bank loans, including
current maturities.................. 1,161 1,323 2,806 43,623 43,877
Stockholders' equity................. 40,075 30,896 22,525 18,735 96,166
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of Verint's financial condition and results of
operations should be read in conjunction with its consolidated financial
statements and the related notes thereto which appear elsewhere in this
document.
Overview
The Company is engaged in providing analytic software-based solutions for
the collection and analysis of unstructured data to the digital security
surveillance and enterprise business intelligence markets. The Company operates
in one business segment and manages its business on a geographic basis.
Verint's analytic software-based solutions for digital security and
surveillance include its STAR-GATE and RELIANT communications interception
products and Verint's LORONIX digital video security products. STAR-GATE enables
communications service providers to intercept communications over a variety of
wireline, wireless and 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. Verint's 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.
Verint's analytic software-based solutions for enterprise business
intelligence include its ULTRA contact center business intelligence products and
LORONIX video business intelligence products. Verint's 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. Verint's 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.
Critical Accounting Policies
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 effect 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.
The Company generally recognizes revenue at the time of shipment for sales
of systems that do not require significant customization and when collection of
the resulting receivable is deemed probable. Verint's systems generally consist
of a bundled hardware and software solution that is shipped together. Customers
may also purchase separate maintenance contracts, which generally consist of
bug-fixing, telephone access to Verint's technical personnel and replacement of
hardware components, but in certain circumstances may also include the right to
receive unspecified product updates, upgrades and enhancements. The Company
recognizes revenue from these maintenance contracts ratably over the contract
period. The Company recognizes revenue from certain long-term contracts under
the percentage-of-completion method on the basis of physical completion or using
actual costs incurred relative 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. Accounts receivable are generally diversified
due to the number of commercial and government entities comprising Verint's
customer base and their dispersion across many geographical regions. At the end
of each accounting period, the Company records a reserve for estimated bad debts
included in accounts receivable based upon its current and historical collection
history.
20
Verint's cost of sales includes costs of materials, subcontractor costs,
royalties and license fees, 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, travel, depreciation and amortization of research
and development equipment, an overhead allocation, and 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, and other costs associated with sales,
marketing, finance and administrative departments.
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 has been four years or less to
date. Amortization begins in the period in which the related product is
available for general release to customers. The Company reviews software
development costs for impairment at the end of each fiscal year, or whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss would be recognized when the estimated net
realizable value of the software is less than its carrying amount. The net
realizable value is the estimated future gross revenue from the software reduced
by the estimated future costs of completing and supporting the software.
In July 2000, Verint's parent, Comverse Technology, acquired all of the
outstanding stock of Loronix, Inc., or Loronix, a company that develops
software-based digital video recording and management systems and Syborg
Informationsysteme bescrakt haftende OHG, or 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, the
Company issued 6,759,277 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 Verint's 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.
21
For a discussion of Verint's relationship and transactions with Comverse
Technology and its subsidiaries, see "Certain Relationships and Related
Transactions - Relationship with Comverse Technology and its Subsidiaries," and
note 13 to Verint's consolidated financial statements.
Results of Operations
Year Ended January 31, 2003 Compared to Year Ended January 31, 2002
Sales. Sales for the year ended January 31, 2003, or fiscal 2002, increased
by approximately $26.5 million, or 20%, compared to the year ended January 31,
2002, or fiscal 2001. This increase reflected an increase in both sales of
products of $20.4 million and service revenue of $6.1 million. This increase was
principally due to an increase in sales volume in the United States of
approximately $22.7 million as a result of increased sales of Verint's digital
security and surveillance solutions. The Company sells its products in multiple
configurations and the price of any particular product varies depending on the
configuration of the product sold. Due to the variety of customized
configurations for each product that the Company sells, it is unable to quantify
the effects of a change in the price of any particular product and/or a change
in the number of products sold on its revenues. Sales to international customers
represented 51% of sales for fiscal 2002 as compared to 58% of sales for fiscal
2001.
Cost of Sales. Cost of sales for fiscal 2002 increased by approximately
$8.1 million, or 12%, compared to fiscal 2001. This increase was attributable to
an increase in materials and overhead costs of $6.1 million, increase in
personnel related costs of $1.3 million and an increase in other production and
service costs of $0.7 million. Gross margin increased to 50.5% in fiscal 2002
from 46.7% in fiscal 2001.
Research and Development Expenses, net. Research and development expenses,
net, for fiscal 2002 increased by approximately $2.2 million, or 14%, compared
to fiscal 2001. The net increase was attributable to an increase in work done by
subcontractors amounting to $1.0 million, decrease in government reimbursement
of $0.6 million, an increase in travel related expenses of $0.5 million and an
increase of $0.1 million in other expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2002 increased by approximately $6.4 million,
or 14%, compared to fiscal 2001. This increase was attributable to an increase
in compensation and benefits for existing personnel and increase in headcount to
support the increased level of sales in fiscal 2002 totaling $3.4 million, an
increase in agent commissions of $1.2 million, an increase in travel expenses of
$1.2 million and an increase in other expenses of $0.6 million. Selling, general
and administrative expenses as a percentage of sales decreased to 33.2% for
fiscal 2002 from 35.0% for fiscal 2001.
Interest and Other Income (Expense), net. Net interest and other income
(expense) for fiscal 2002 increased by approximately $2.8 million as compared to
fiscal 2001. The increase was attributable to an increase in currency exchange
gains of $3.2 million resulting mainly from fluctuations in the exchange rates
of the US dollars against European and Israeli currencies, an increase in
interest income of $0.2 million due to the increase in interest bearing cash
balances following the Company's initial public offering and a decrease in
interest expense of $0.4 million due to decrease in interest rates. These
changes were partially offset by a decrease in the Company's share in the profit
of an affiliate of $0.4 million and a write down of an investment of $0.6
million.
22
Income Tax Provision. During fiscal 2002, the income tax provision
increased by approximately $0.6 million compared to fiscal 2001. This increase
was attributable to an increase in pre-tax income after giving effect to
available net operating loss carry-forwards. The effective tax rate for fiscal
2002 was 18% reflecting the use of net operating loss carry-forwards in certain
tax jurisdictions and preferential tax rates in Israel.
Net Income (Loss). Net income increased by approximately $14.8 million for
fiscal 2002 compared to fiscal 2001. Net income (loss) as a percentage of sales
improved to 6.4% for fiscal 2002 compared to a loss of 3.5% in fiscal 2001. This
increase was attributable to the factors described above.
Year Ended January 31, 2002 Compared to Year Ended January 31, 2001
Sales. Sales for the year ended January 31, 2002, or fiscal 2001 decreased
by approximately $10.4 million, or 7%, compared to the year ended January 31,
2001, or fiscal 2000. This decrease was attributable to a decrease in sales of
products of approximately $14.5 million offset by an increase in service
revenues which increased by approximately $4.0 million. Such decrease was
principally due to a decrease in sales volume as a result of a general slowdown
in information technology spending. To a lesser extent, the Company was able to
negotiate lower material prices from its vendors and passed these cost savings
on to its customers. The Company sells its products in multiple configurations
and the price of any particular product varies depending on the configuration of
the product sold. Due to the variety of customized configurations for each
product that the Company sells, it is unable to quantify the effects of a change
in the price of any particular product and/or a change in the number of products
sold on its revenues. Sales to international customers represented 58% of sales
for fiscal 2001 as compared to 51% for fiscal 2000.
Cost of Sales. Cost of sales for fiscal 2001 decreased by approximately
$11.9 million, or 15%, as compared to fiscal 2000. This decrease was
attributable to a decrease in material costs of $8.5 million due to the decrease
in product sales. This decrease was offset by an increase in subcontractor costs
of $1.2 million and an increase in other expenses of $1.3 million. Additionally,
during fiscal 2000, the Company incurred costs of $3.7 million relating to the
write-off and abandonment of inventories that were considered obsolete and
duplicative and $2.2 million relating to the write-off of certain capitalized
software that became obsolete due to the existence of duplicative technology as
a result of the Loronix and Syborg mergers. Gross margin increased to
approximately 46.7% in fiscal 2001 from approximately 42.3% in fiscal 2000.
Research and Development Expenses, net. Research and development expenses,
net, for fiscal 2001 increased by approximately $0.9 million, or 7%, compared to
fiscal 2000. This net increase was attributable to a decrease in government
reimbursements of $1.7 million offset by a decrease in research and development
expenses of $0.8 million.
23
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2001 decreased by approximately $2.2 million,
or 5%, compared to fiscal 2000. This decrease was attributable to lower agent
commissions of $1.1 million and bad debt expense of $2.7 million offset by
increases in other expenses of $1.6 million. Selling, general and administrative
expenses as a percentage of sales increased to 35% for fiscal 2001 from 34% for
fiscal 2000.
Acquisition Expenses. In connection with the acquisitions of Loronix and
Syborg in fiscal 2000, the Company charged $3.5 million of merger related
expenses to operations. These expenses are primarily related to 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, Restructuring and Impairment Charges. In connection
with the acquisitions of Loronix and Syborg in fiscal 2000, the Company charged
$1.5 million of restructuring and impairment related charges to operations for
the write-off of certain demonstration, laboratory and production equipment that
was abandoned as a result of the mergers.
During fiscal 2001, the Company recorded a charge to operations of $2.8
million for workforce reduction costs and for costs to consolidate its offices
in the United Kingdom. These charges were necessary as a result of the difficult
economic and capital spending environment and were designed to improve Verint's
cost structure by reducing its workforce in the United States, Israel, and
Germany by approximately 65, 45, and 35 employees, respectively. The workforce
reduction and consolidation of Verint's United Kingdom offices provided cost
savings of approximately $4.0 million in fiscal 2001.
Interest and Other Income (Expense), net. Net interest and other expense
for fiscal 2001 increased by approximately $0.1 million as compared to fiscal
2000. This increase was attributable to decreased interest income of $0.6
million and increased net foreign currency losses of $0.2 million, offset by
decreased interest expense of $0.7 million. The decrease in interest income and
expense is due to the decrease in interest rates that occurred during fiscal
2001.
Income Tax Provision. During fiscal 2001, the income tax provision
increased by approximately $1.1 million compared to fiscal 2000. This increase
was 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 $3.9 million, or 46%, for
fiscal 2001 compared to fiscal 2000, and as a percentage of sales it decreased
to approximately 3.5% for fiscal 2001 from approximately 6.0% for fiscal 2000.
This decrease was attributable to the factors described above.
Geographic Information
Summarized financial information for Verint's reportable geographic
segments is presented in the following table. Sales in each geographic segment
represents sales originating from that segment.
24
Reconciling Consolidated
United States Israel United Kingdom Other Items Totals
------------- ------------ -------------- ---------- ------------ -------------
Year Ended January 31, 2001 (In thousands)
- ---------------------------
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)
========== ========== ========== ========== ========== ==========
Year Ended January 31, 2002
- ---------------------------
Sales......................... $ 65,731 $ 62,712 $ 18,848 $ 6,023 $ (22,079) $ 131,235
Costs and expenses............ (70,290) (58,813) (19,349) (7,882) 22,566 (133,768)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)....... $ (4,559) $ 3,899 $ (501) $ (1,859) $ 487 $ (2,533)
========== ========== ========== ========== ========== ==========
Year Ended January 31, 2003
- ---------------------------
Sales......................... $ 85,817 $ 62,622 $ 22,897 $ 11,616 $ (25,177) $ 157,775
Costs and expenses............ (80,847) (57,477) (21,624) (12,881) 25,105 (147,724)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)....... $ 4,970 $ 5,145 $ 1,273 $ (1,265) $ (72) $ 10,051
========== ========== ========== ========== ========== ==========
Year Ended January 31, 2003 Compared to Year Ended January 31, 2002
Sales for fiscal 2002 increased in all geographic segments, except Israel,
as compared to fiscal 2001 due to an overall increase in sales volume of
products and services. Sales originating from the United States and the United
Kingdom increased by $20.1 million or 31% and by $4.0 million, or 21%,
respectively, in fiscal 2002 as compared with fiscal 2001. Costs and expenses in
the United States and the United Kingdom increased by $10.6 million or 15% and
by $2.3 million or 12% respectively. The higher increase in sales accompanied by
lower increase in cost and expenses created an operating profit for fiscal 2002
as compared with an operating loss in fiscal 2001, in those geographies.
Year Ended January 31, 2002 Compared to Year Ended January 31, 2001
Sales for fiscal 2001 decreased in all geographic segments except Israel
compared to fiscal 2000 due to decreased product sales volumes. Sales
originating from Israel increased by approximately $9.5 million due to an
increase in product sales to international markets excluding the United States
and the United Kingdom. Operating costs and expenses in Israel increased by $4.8
million due to the increase in cost of sales and other expenses supporting the
increased sales. Operating costs and expenses in the United States decreased
approximately $14.4 million due to the one-time merger, restructuring and
impairment charges and inventory write-off and abandonment of approximately $6.0
million incurred during fiscal 2000 and due to a decrease in operating expenses
which resulted from the decrease in sales. Operating costs and expenses in the
United Kingdom decreased by $1.6 million due to the decrease in sales.
Liquidity and Capital Resources
As of January 31, 2003, the Company had cash and cash equivalents of
approximately $133.9 million and working capital of approximately $69.3 million.
Operating activities for fiscal 2000, 2001 and 2002, after adding back
non-cash items, provided cash of approximately $8.8 million, $2.3 million, and
$19.6 million, respectively. For fiscal 2000, cash used by other changes in
assets and liabilities of $0.2 million primarily consisted of an increase in
accounts receivable of $6.4 million, an increase in prepaid expenses and other
current assets of $3.9 million and a decrease in due to/from related parties of
$2.9 million, partially offset by an increase in accounts payable and accrued
liabilities of $5.6 million and an increase in advance payments from customers
of $6.9 million. For fiscal 2001, cash provided from other changes in assets and
liabilities of $7.5 million primarily consisted of an increase in accounts
payable and accrued liabilities of $3.6 million, a decrease in accounts
receivable of $2.0 million, a decrease in inventories of $3.5 million, and a
decrease in prepaid expenses and other current assets of $2.8 million, partially
offset by a change in due to/from related parties of $3.6 million. For fiscal
2002, cash provided from other changes in assets and liabilities of $16.7
million primarily consisted of an increase in advances from customers of $5.0
million, an increase in accounts payable and accrued liabilities of $4.7
million, a decrease in accounts receivable of $3.2 million and a change in due
to/from related parties of $2.4 million.
25
Investing activities for fiscal 2000, 2001 and 2002 used cash of
approximately $10.6 million, $8.5 million and $19.3 million, respectively. These
amounts primarily include additions to property and equipment in fiscal 2000,
2001 and 2002 of approximately $6.3 million, $4.3 million and $ 4.9 million,
respectively, capitalization of software development costs of approximately $4.3
million, $4.1 million and $4.8 million, respectively, and cash paid for business
combination of approximately $0 million, $0 million and $9.7 million,
respectively.
Financing activities for fiscal 2000, 2001 and 2002 provided cash of
approximately $9.4 million, $5.2 million and $67.1 million, respectively. For
fiscal 2000, 2001, and 2002 proceeds from the issuances of common stock provided
$0.9 million, $0.3 million and $67.2 million cash, respectively. For fiscal 2002
net cash provided from issuances of common stock is mainly attributable to the
completion of the Company's initial public offering which generated net cash of
$65.4 million. Net proceeds (repayments) from bank loans and related party loans
provided (used) cash of $8.6 million, $4.9 million and $(0.1) million,
respectively.
In January 2002, the Company obtained a $42 million bank loan. This loan
matured in February 2003 and bore interest at LIBOR plus 0.55%. The proceeds of
this loan were used to repay amounts owed to Comverse Technology. The loan was
guaranteed by Comverse Technology and was repaid on February 28, 2003.
The Company has obtained bank guaranties primarily to secure its
performance of certain obligations under contracts with customers. These
guaranties, which aggregated $5.9 million at January 31, 2003, are to be
released by Verint's performance of specified contract milestones, which are
scheduled to be completed in the next year.
The following table sets forth Verint's contractual obligations and
commercial commitments as of January 31, 2003:
26
Year Ending January 31,
----------------------------------------
Contractual Obligations There
- ----------------------- Total 2004 2005 2006 2007 2008 after
----- ---- ---- ---- ---- ---- -----
(in thousands)
--------------
Long-term debt..............................$ 43,877 $42,199 $ 200 $ 202 $ 203 $ 205 $ 868
Rent and other operating lease obligations.. 7,933 3,290 1,933 1,422 644 644 -
-------- ------- ------ ------ ----- ----- -------
Total.......................................$ 51,810 $45,489 $2,133 $1,624 $ 847 $ 849 $ 868
======== ======= ====== ====== ===== ===== =======
On February 1, 2002, Verint's 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 Verint 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 Verint's
common stock at a conversion price of $16.06 per share at any time on or after
the completion of Verint's initial public offering. The note is guaranteed by
Comverse Technology.
The Company believes that its 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 Verint's
needs, the Company may seek additional debt or equity financing. The Company
does not expect to depend on Comverse Technology for its financing needs for the
foreseeable future, nor is Comverse Techology required to provide any financing.
In addition, although there is no present understanding, commitment or agreement
with respect to any acquisition of other businesses, products, or technologies,
the Company may in the future consider such transactions, which may require
additional debt or equity financing and could result in a decrease of its
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 ("FASB") issued
Statement of Financial Accounting Standards ("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
were required to be applied starting with fiscal years beginning after December
15, 2001. The adoption of SFAS No. 142 did not 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 establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 applies to legal
obligations associated with the retirement of a tangible long-lived asset that
result from the acquisition, construction, development and/or normal operation
of a long-lived asset. This Statement is effective for fiscal years beginning
after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS
No. 143 is not expected to have a material effect on the Company's consolidated
financial statements.
27
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 certain provisions of
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 was effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. The adoption of SFAS No. 144 did not have a material impact on the
Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which
required all gains and losses from the extinguishments of debt to be classified
as an extraordinary item and amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be in the same manner as sale-leaseback transactions. The rescission of SFAS No.
4 is effective for fiscal years beginning after May 15, 2002. The remainder of
the statement is generally effective for transactions occurring after May 15,
2002 with earlier application encouraged. The adoption of SFAS No. 145 is not
expected to have a material effect on the Company's consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." This statement addresses the recognition, measurement and
reporting of costs that are associated with exit and disposal activities. This
statement includes the restructuring activities that are currently accounted for
pursuant to the guidance set forth in Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)", costs related to terminating a contract that is not a capital
lease and one-time benefit arrangements received by employees who are
involuntarily terminated - nullifying the guidance under EITF Issue No. 94-3.
Under SFAS No. 146 the cost associated with an exit or disposal activity is
recognized in the periods in which it is incurred rather than at the date a
company committed to the exit plan. This statement is effective for exit or
disposal activities initiated after December 31, 2002 with earlier application
encouraged. The adoption of SFAS No. 146 did not have a material effect on the
Company's consolidated financial statements.
28
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and does not permit the use of the original SFAS No. 123
prospective method of transition in fiscal years beginning after December 15,
2003. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results, regardless of whether,
when, or how an entity adopts the preferable, fair value based method of
accounting. SFAS No. 148 improves the prominence and clarity of the pro forma
disclosures required by SFAS No. 123 by prescribing a specific tabular format
and by requiring disclosure in the "Summary of Significant Accounting Policies"
or its equivalent and improves the timeliness of those disclosures by requiring
their inclusion in financial reports for interim periods. The Company has
adopted the disclosure requirements of SFAS No. 148 for the year ended January
31, 2003. The Company will continue to account for stock-based employee
compensation under APB Opinion No. 25 and its related interpretations.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirement for Guarantees, Including Indirect
Guarantees and indebtedness of Others." The Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guaranties that it has issued.
The Interpretation also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurements provisions of the Interpretation are applicable on a prospective
basis to guaranties issued or modified after December 31, 2002. The Company has
made no material guaranties subject to the liability recognition and disclosure
provisions of the Interpretation.
29
CERTAIN TRENDS AND UNCERTAINTIES
The Company's primary business is providing analytic solutions for
communications interception, digital video security and surveillance, and
enterprise business intelligence. Heightened awareness surrounding homeland
defense and security, both in the U.S. and globally, has increased the need for
analytic solutions for communications interception and digital video security
and surveillance solutions such as those provided by the Company. 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 public facilities such as
airports. However, there is no assurance that these legislative and regulatory
actions will result in increased demand for or purchasing of solutions such as
Verint's or, if it does, that such solutions will be purchased from the Company.
If demand for or purchasing of solutions such as Verint's does not increase as
anticipated, the Company may not be able to sustain or increase profitability on
a quarterly or annual basis.
The market for the Company's enterprise business intelligence products has
been adversely affected by the global economic slowdown and the decline in
information technology spending, which has caused many companies to reduce or,
in extreme cases, eliminate altogether, information technology spending. If the
Company's customers do not increase their spending on information technology or
if such spending declines, the Company's revenues from sales of its enterprise
business intelligence products may decrease. The information technology spending
of the Company's customers in the near term remains uncertain and the Company is
uncertain whether it will be able to increase or maintain its revenues. Although
the Company was profitable for fiscal 2002, the Company has incurred operating
and net losses every other year since 1997. If sales do not increase as
anticipated or if expenses increase at a greater pace than revenues, the Company
may not be able to sustain or increase profitability on a quarterly or annual
basis.
It is difficult for the Company to forecast the timing of revenues from
product sales because customers often need a significant amount of time to
evaluate the Company's products before purchasing them and, in the case of
governmental customers, sales are dependent on budgetary and other bureaucratic
processes. The period between initial customer contact and a purchase by a
customer may vary from three months to more than one year. During the evaluation
period, customers may defer or scale down proposed orders of the Company's
products for various reasons, including: (i) changes in budgets and purchasing
priorities; (ii) reduced need to upgrade existing systems; (iii) customer
deferrals in anticipation of enhancements or new products; (iv) introduction of
products by competitors; and (v) lower prices offered by competitors.
The Company derives a significant amount of its revenues from various
government contracts worldwide. The Company expects that government contracts
will continue to be a significant source of revenues for the foreseeable future.
Business generated from government contracts may be adversely affected if: (i)
the Company's reputation or relationship with government agencies is impaired;
(ii) the Company is suspended or otherwise prohibited from contracting with a
domestic or foreign government or any significant law enforcement agency; (iii)
levels of government expenditures and authorizations for law enforcement and
security related programs decrease, remain constant or shift to programs in
areas where the Company does not provide products and services; (iv) the Company
is prevented from entering into new government contracts or extending existing
government contracts based on violations or suspected violations of laws or
regulations, such as those related to procurement; (v) the Company is not
granted security clearances that are required to sell products to domestic or
foreign governments or such security clearances are revoked; or (vi) there is a
change in government procurement procedures.
30
Quarterly operating results are difficult to predict and may fluctuate
significantly in the future, which in turn may result in volatility in the
Company's stock price. The following factors, among others, many of which are
outside the Company's control, can cause fluctuations in operating results and
stock price volatility: (i) the size, timing, terms and conditions of orders
from and shipments to customers; (ii) unanticipated delays or problems in
releasing new products; (iii) the timing and success of the customers'
deployment of the Company's products and services; and (iv) the amount and
timing of investments in research and development activities.
The deferral or loss of one or more significant sales could materially and
adversely affect the Company's operating results in any fiscal quarter,
particularly if there are significant sales and marketing expenses associated
with the deferred or lost sales. The Company's current and future expense levels
are based on internal operating plans and sales forecasts, and the Company's
operating costs are to a large extent fixed. As a result, the Company may not be
able to sufficiently reduce its costs in any quarter to compensate for an
unexpected near-term shortfall in revenues.
The markets for the Company's digital security and surveillance and
enterprise business intelligence products are still emerging. The Company's
growth is dependent on, among other things, the size and pace at which the
markets for its products develop. If the markets for the Company's products
decrease, remain constant or grow slower than anticipated, the Company will not
be able to maintain its growth. Continued growth in the demand for the Company's
products is uncertain as a result of, among other reasons, existing customers
and potential customers may: (i) not achieve a return on their investment in the
Company's products; (ii) experience technical difficulty in utilizing the
Company's products; or (iii) use alternative solutions to achieve their
security, intelligence or business objectives. In addition, as the Company's
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 the Company's ability to maintain growth.
The markets for the Company's 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 the Company's existing products obsolete and unmarketable and can
exert price pressures on existing products. It is critical to the Company's
success to anticipate changes in technology or in industry standards and to
successfully develop and introduce new, enhanced and competitive products on a
timely basis. The Company cannot guaranty that it 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 new
products or technological developments by competitors will not render the
Company's products obsolete. Thus, the Company's inability to develop products
that are competitive in technology and price and meet customer needs could have
a material adverse effect on its business, financial condition or results of
operations.
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, the Company often competes for customer contracts through a competitive
bidding process that subjects it to risks associated with: (i) 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 (ii) the
expenditure of substantial time, effort and money, including design, development
and marketing activities, required to prepare bids and proposals for contracts
that may not be awarded to the Company.
31
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 the
Company's competitors have, in relation to the Company, 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 the Company's customers may in
the future decide to develop internally their own solutions instead of
purchasing products from the Company. Increased competition could force the
Company to lower prices or take other actions to differentiate its products.
Many of the Company's contracts with governments contain provisions that
give those governments rights and remedies not typically found in private
commercial contracts, including provisions enabling the governments to: (i)
terminate or cancel existing contracts for convenience; (ii) in the case of the
U.S. government, suspend the Company from doing business with certain foreign
governments or prevent it from selling products in certain countries; (iii)
audit and object to contract-related costs and expenses, including allocated
indirect costs; and (iv) change specific terms and conditions in the Company's
contracts, including changes that would reduce a contract's value. 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 for convenience,
the Company may not recover incurred or committed costs, any settlement expenses
or profit on work completed prior to the termination. If a government terminates
a contract for default, the Company may not recover even those amounts, and
instead it may be liable for any costs incurred by a government in procuring
undelivered items and services from another source.
The Company also 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 the Company does business with
government agencies in various countries and may impose added costs on its
business. For example, in the United States, the Company is 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. The Company is subject to
similar regulations in certain foreign countries as well.
32
If a government review or investigation uncovers improper or illegal
activities, the Company 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
the Company's 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 the Company's ability to obtain new contracts.
The Company's subsidiary, Verint Technology Inc. ("Verint Technology"),
which markets, sells and supports 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, in January 1999 the Company, Verint
Technology, the Company's parent corporation, Comverse Technology, and the
Department of Defense entered into a proxy agreement with respect to the
ownership and operations of Verint Technology, which was superceded in May 2001
to comply with the Department of Defense's most recent requirements. Under the
proxy agreement, the Company, 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
is in the national interest. If Verint Technology's facility security clearance
is revoked, the Company may lose all or a substantial portion of its sales to
U.S. government agencies and its business, financial condition and results of
operations would be harmed.
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 the Company's
solutions. For example, when sold in the United States, products the Company
sells to law enforcement agencies and which interface with a variety of
wireline, wireless and Internet protocol networks must comply with the technical
standards established by the Federal Communications Commission pursuant to the
Communications Assistance for Law Enforcement Act and, when sold in Europe, must
comply with those established by the European Telecommunications Standard
Institute. The adoption of new laws governing the use of the Company's products
or changes made to existing laws could cause a decline in the use of the
Company's products and could result in increased expenses, particularly if the
Company is required to modify or redesign products to accommodate these new or
changing laws.
33
The Company is required to obtain export licenses from the Israeli and
German governments to export some of the products developed or manufactured in
these countries. The Company cannot guaranty that it will be successful in
obtaining or maintaining the licenses and other authorizations required to
export products from applicable governmental authorities. The failure to receive
or maintain any required export license or authorization would hinder the
Company's ability to sell its products and could adversely affect its business,
financial condition and results of operations.
The Company's ability to achieve revenue growth depends to some extent on
adding new partners to expand sales channels, as well as leveraging its
relationships with existing partners. If the relationships with these value
added resellers, systems integrators and strategic and technology partners
deteriorate or terminate, the Company may lose important sales and marketing
opportunities. As part of the Company's growth strategy, it intends to pursue
new strategic alliances. The Company considers and engages in strategic
transactions from time to time and may be evaluating alliances or joint ventures
at any time. The Company competes with other analytic solution providers for
these opportunities and cannot guaranty that it will be able to effect these
transactions on commercially reasonable terms or at all, and it cannot be sure
that it will realize the anticipated benefits.
The Company's products involve sophisticated hardware and software
technology that performs critical functions to highly demanding standards. There
can be no assurance that the Company's current or future products will not
develop operational problems, which could have a material adverse effect on the
Company. The Company offers complex products that may contain undetected defects
or errors, particularly when first introduced or as new versions are released.
The Company may not discover such defects or errors until after a product has
been released and used by the customer. Significant costs may be incurred to
correct undetected defects or errors in the Company's products and these defects
or errors could result in future lost sales. In addition, defects or errors in
the Company's products may result in product liability claims, which could cause
adverse publicity and impair their market acceptance.
Software licensed from third parties is incorporated into the vast majority
of the Company's products. If the Company loses or is unable to maintain any
software licenses, it could incur additional costs or experience unexpected
delays until equivalent software can be developed or licensed and integrated
into the Company's products.
While the Company occasionally files patent applications, it cannot
guaranty that patents will be issued on the basis of such applications or that,
if such patents are issued, they will not be challenged, invalidated or
circumvented or be sufficiently broad to protect the Company's technology. In
order to safeguard the Company's unpatented proprietary know-how, trade secrets
and technology, the Company relies primarily upon trade secret protection and
non-disclosure provisions in agreements with employees and others having access
to confidential information. The Company cannot guaranty that these measures
will provide adequate protection from improper disclosure or misappropriation of
proprietary information.
34
The occurrence or perception of security breaches within the Company or by
third parties using the Company's products could harm the Company's business,
financial condition and operating results. While the Company implements
sophisticated security measures, third parties may attempt to breach the
Company's security or inappropriately use the Company's products through
computer viruses, electronic break-ins and other disruptions. If successful,
confidential information, including passwords, financial information, or other
personal information may be improperly obtained and the Company may be subject
to lawsuits and other liability. Even if the Company is not held liable, such
security breaches could harm the Company's reputation, and even the perception
of security risks, whether or not valid, could inhibit market acceptance of the
Company's products.
The Company's products are often used by customers to compile and analyze
highly sensitive or confidential information and data. The Company may come into
contact with such information or data when it performs support or maintenance
functions for its customers. While the Company has internal policies, procedures
and training for employees in connection with performing these functions, even
the perception that an employee of the Company has improperly handled sensitive
or confidential information and data of a customer could harm the Company's
reputation and could inhibit market acceptance of the Company's products.
The information technology industry is characterized by frequent
allegations of intellectual property infringement. In the past, third parties
have asserted that certain of the Company's products infringe their intellectual
property and similar claims may be made in the future. Any allegation of
infringement could be time consuming and expensive to defend or resolve, result
in substantial diversion of management resources, cause product shipment delays,
or force the Company 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 the Company, it may be
forced into protracted and costly litigation. The Company may not be successful
in defending such litigation and it may not be able to procure any required
royalty or license agreements on acceptable terms, or at all.
The Company generally indemnifies customers with respect to infringement by
its products of the proprietary rights of third parties. Third parties may
assert infringement claims against the Company's customers and these claims may
require the initiation of or defense against protracted and costly litigation,
regardless of the merits of these claims. If any of these claims succeed, the
Company may be forced to pay damages or may be required to obtain licenses. If
the Company cannot obtain all necessary licenses on commercially reasonable
terms, customers may be forced to stop using or, in the case of value added
resellers, selling, the Company's products.
Although the Company generally uses standard parts and components in its
products, it does use some non-standard parts and equipment. The Company relies
on non-affiliated suppliers for the supply of certain standard and non-standard
components, and on manufacturers of assemblies that are incorporated in all of
its products. The Company does not have long-term supply or manufacturing
agreements with all of these suppliers or manufacturers. If these suppliers or
manufacturers experience financial, operational, manufacturing capacity or
quality assurance difficulties, or if there is any other disruption in these
relationships, the Company will be required to locate alternative sources of
supply. The inability to obtain sufficient quantities of these components, if
and as required in the future entails the following risks: (i) delays in
delivery or shortages in components could interrupt and delay manufacturing and
result in cancellations of product orders; (ii) alternative suppliers could
increase component prices significantly and with immediate effect; (iii) the
Company may not be able to develop alternative sources for product components;
(iv) the Company may be required to modify products, which may cause delays in
product shipments, increased manufacturing costs and increased product prices;
and (v) the Company may be required to hold more inventory than it otherwise
might in order to avoid problems from shortages or discontinuance.
35
On February 1, 2002, the Company acquired the digital video recording
business of Lanex, LLC. If the Company is unable to successfully integrate Lanex
with its business, it may be unable to realize the anticipated benefits of this
acquisition. The Company may experience technical difficulties that could delay
the integration of Lanex's products into its solutions, resulting in business
disruptions.
The Company 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. These investments may be made in immature
businesses with unproven track records and technologies. Such investments have a
high degree of risk, with the possibility that the Company may lose the total
amount of its investments. The Company may not be able to identify suitable
investment candidates, and, even if it does, the Company may not be able to make
those investments on acceptable terms, or at all. In addition, the Company also
may fail to successfully integrate acquired businesses with its operations or
successfully realize the intended benefits of any acquisition. Due to rapidly
changing market conditions, the Company may find the value of its acquired
technologies and related intangible assets, such as goodwill, as recorded in the
Company's financial statements, to be impaired, resulting in charges to
operations. The Company may also fail to retain the acquired or merged company's
key employees and customers.
The Company depends on the continued services of its executive officers and
other key personnel. In addition, the Company 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 the Company's
products and services. If the Company is unable to attract and retain qualified
employees, its ability to grow could be impaired. Competition for personnel in
the Company's industry for certain positions is intense, and in the past it has
experienced difficulty in recruiting qualified personnel due to the market
demand for their services. The Company has also experienced difficulty in
locating qualified candidates within desired geographic locations and, on
occasion, has had to relocate personnel to fill positions in locations where it
could not attract qualified experienced personnel.
36
The Company conducts significant sales and research and development
operations in foreign countries, including in Israel, Germany and the United
Kingdom, and intends to continue to expand operations internationally. Business
may suffer if the Company is unable to successfully expand and maintain foreign
operations. Foreign operations are, and any future foreign expansion will be,
subject to a variety of risks, many of which are beyond the Company's control,
including risks associated with: (i) foreign currency fluctuations; (ii)
customizing products for foreign countries; (iii) political and economic
instability in foreign countries; (iv) potentially adverse tax consequences of
operating in foreign countries; (v) legal uncertainties regarding liability,
export and import restrictions, tariffs and other trade barriers; (vi)
compliance with local laws and regulations, including labor laws, employee
benefits, currency restrictions and other requirements; (vii) hiring qualified
foreign employees; and (viii) difficulty in accounts receivable collection and
longer collection periods.
To date, most of the Company's sales have been denominated in U.S. dollars,
while a significant portion of expenses, primarily labor expenses in Israel,
Germany and the United Kingdom, are incurred in the local currencies of these
countries. As a result, the Company is exposed to the risk that fluctuations in
the value of these currencies relative to the U.S. Dollar could increase the
dollar cost of operations in Israel, Germany or the United Kingdom and would
therefore have an adverse effect on the results of the Company's operations.
Since a portion of the Company's 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 revenues and adversely effect the
results of operations. In addition, the Company's costs of operations have at
times been affected by changes in the cost of its operations in Israel,
resulting from changes in the value of the New Israeli Shekel relative to the
U.S. Dollar, which for certain periods had a negative impact.
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. While Israel has signed peace accords
with both Egypt and Jordan, 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. During
this period, negotiations between Israel and representatives of the Palestinian
Authority have been sporadic and are currently suspended. The Company 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, the sale
of products manufactured in Israel may be adversely affected in certain
countries by restrictive laws, policies or practices directed toward Israel or
companies having operations in Israel. The continuation or exacerbation of
violence in Israel or the outbreak of violent conflicts involving Israel may
impede the Company's ability to sell its products or otherwise adversely affect
the Company. In addition, many of the Company's Israeli employees are required
to perform annual compulsory military reserve duty in Israel and are subject to
being called to active duty at any time under emergency circumstances. The
absence of these employees may have an adverse effect upon the Company's
operations. These conditions could disrupt the Company's operations in Israel
and could have a material adverse effect on the Company's business, results of
operations, and financial condition.
37
The Company receives conditional grants from the Government of Israel
through the Office of the Chief Scientist of the Ministry of Industry and Trade,
or OCS, for the financing of a portion of the Company's research and development
expenditures in Israel. The terms of these conditional grants limit the
Company's ability to manufacture products and prohibit it from transferring
technologies outside of Israel if such products or technologies were developed
using these grants. Even if the Company received approval to manufacture
products developed using these conditional grants outside of Israel, it 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 the Company's ability
to outsource manufacturing or engage in similar arrangements for those products
or technologies. In addition, if the Company fails to comply with any of the
conditions imposed by the OCS, it may be required to refund any grants
previously received together with interest and penalties, and it 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. Verint currently pays royalties, of between 3% and 5% (or 6%
under certain circumstances) of associated product revenues (including service
and other related revenues) to the Government of Israel for repayment of
benefits received under this program. Such royalty payments by Verint are
currently required to be made until the government has been reimbursed the
amounts received by the Company plus, for amounts received under projects
approved by the OCS after January 1, 1999, interest on such amount at a rate
equal to the 12-month LIBOR rate in effect on January 1 of the year in which
approval is obtained. 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.The continued reduction in these
benefits or the termination of the Company's eligibility to receive such
benefits may adversely affect the Company's operating results.
The Company's investment programs in manufacturing equipment and leasehold
improvements at its facility in Israel has been granted approved enterprise
status and is therefore eligible for tax benefits under the Israeli Law for
Encouragement of Capital Investments. The Government of Israel may reduce or
eliminate the tax benefits available to approved enterprise programs such as the
programs provided to the Company. The Company cannot guaranty 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 the
Company pays in Israel will increase. In addition, if the Company fails to
comply with any of the conditions and requirements of the investment programs,
the tax benefits it has received may be rescinded and it may be required to
refund the amounts it received as a result of the tax benefits, together with
interest and penalties.
Comverse Technology beneficially owns a majority of the Company's
outstanding shares of common stock. Consequently, Comverse Technology
effectively controls the outcome of all matters submitted for stockholder
action, including the composition of the Company's board of directors and the
approval of significant corporate transactions. Through its representation on
the Company's board of directors, Comverse Technology has a controlling
influence on the Company's management, direction and policies, including the
ability to appoint and remove officers. As a result, Comverse Technology may
cause the Company to take actions that may not be aligned with the Company's
interests or those of its other stockholders. For example, Comverse Technology
may prevent or delay any transaction involving a change in control of the
Company's or in which the Company's stockholders might receive a premium over
the prevailing market price for their shares.
38
The Company receives insurance, legal and certain administrative services
from Comverse Technology under a corporate service agreement. The Company's
enterprise resource planning software is maintained and supported by Comverse,
Ltd., a subsidiary of Comverse Technology, under an enterprise resource planning
software sharing agreement. The Company also obtains personnel and facility
services from Comverse, Inc. under a satellite services agreement. If these
agreements are terminated, the Company may be required to obtain similar
services from other entities or, alternatively, may be required to hire
qualified personnel and incur other expenses to obtain these services. The
Company may not be able to hire such personnel or to obtain comparable services
at prices and on terms as favorable as it currently has under these agreements.
The Company has entered into a business opportunity agreement with Comverse
Technology that addresses potential conflicts of interest between the companies.
This agreement allocates opportunities to pursue transactions or matters between
the companies that, absent such allocation, could constitute corporate
opportunities of both companies. As a result, the Company may lose valuable
business opportunities. In general, the Company is precluded from pursuing
opportunities offered to officers or employees of Comverse Technology who may
also be the Company's directors, officers or employees, unless Comverse
Technology fails to pursue these opportunities. In addition, six of the
Company's twelve directors are officers and/or directors or employees of
Comverse Technology, or otherwise affiliated with Comverse Technology. These
directors have fiduciary duties to both companies and may have conflicts of
interest on matters affecting both companies and, in some circumstances, may
have interests adverse to the Company. The Company's Chairman, Mr. Kobi
Alexander, is the Chairman of Comverse Technology. This position imposes
significant demands on Mr. Alexander's time and presents potential conflicts of
interest.
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. The Company could be the target of similar litigation in the future.
Securities litigation could result in the expenditure of substantial costs,
divert management's attention and resources, harm the Company's reputation in
the industry and the securities markets and reduce profitability.
39
Geopolitical, economic and military conditions could directly affect the
Company's operations. The recent outbreak of severe acute respiratory syndrome
("SARS") has curtailed travel to and from certain countries. Continued or
additional restrictions on travel to and from these and other regions on account
of SARS could have a material adverse effect on our business, results of
operations, and financial condition, which adversely could affect our stock
price. The continued threat of terrorism and heightened security and military
action in response to this threat, or any future acts of terrorism, may cause
disruptions to our business. To the extent that such disruptions result in
delays or cancellations of customer orders, or the manufacture or shipment of
our products, our business, operating results and financial condition could be
materially and adversely affected.
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 the
Company's facilities, personnel and operations that are located in the United
States, Israel, Europe, the Far East, Australia and South America, as well as
those of the Company's clients. These developments could have a material adverse
effect on the Company's business and the trading price of its common stock.
The Company's board of directors' ability to designate and issue up to
2,500,000 shares of preferred stock and to issue additional 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 the Company. If
this occurs, investors could lose the opportunity to receive a premium on the
sale of their shares in a change of control transaction.
The trading price of the Company's shares has been affected by the factors
disclosed herein as well as prevailing economic and financial trends and
conditions in the public securities markets. Share prices of companies in
technology-related industries, such as the Company, tend to exhibit a high
degree of volatility. The announcement of financial results that fall short of
the results anticipated by the public markets could have an immediate and
significant negative effect on the trading price of the Company's shares in any
given period. Such shortfalls may result from events that are beyond the
Company's immediate control, can be unpredictable and, since a significant
proportion of the Company's sales during each fiscal quarter tend to occur in
the latter stages of the quarter, may not be discernible until the end of a
financial reporting period. These factors may contribute to the volatility of
the trading value of its shares regardless of the Company's long-term prospects.
The trading price of the Company's shares may also be affected by developments,
including reported financial results and fluctuations in trading prices of the
shares of other publicly-held companies in its industry generally, and the
Company's business segments in particular, which may not have any direct
relationship with the Company's business or prospects.
FORWARD-LOOKING STATEMENTS
From time to time, the Company makes forward-looking statements.
Forward-looking statements include financial projections, statements of plans
and objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto.
The Company may include forward-looking statements in its periodic reports
to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its
annual report to shareholders, in its proxy statements, in its press releases,
in other written materials, and in statements made by employees to analysts,
investors, representatives of the media, and others.
40
By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist those predictions,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors,
including without limitation those discussed under "Certain Trends and
Uncertainties" and elsewhere in this report. Investors and others should
carefully consider these and other uncertainties and events, whether or not the
statements are described as forward-looking.
Forward-looking statements made by the Company are intended to apply only
at the time they are made, unless explicitly stated to the contrary. Moreover,
whether or not stated in connection with a forward-looking statement, the
Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were in any particular instance to update or correct a
forward-looking statement, investors and others should not conclude that the
Company would make additional updates or corrections thereafter.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in foreign currency
exchange rates that could impact its results of operations and financial
condition. The Company considers the foreign currency exchange rate risk, in
particular that of the U.S. Dollar versus the British Pound, the Euro and the
New Israeli Shekel, to be its primary market risk exposure. To date, the Company
has not used any material foreign currency exchange contracts or other
derivative instruments to reduce its exposure to the foreign currency exchange
risks. In the future, the Company may use foreign currency exchange contracts
and other derivative instruments to reduce its exposure to this risk.
The Company currently maintains its surplus cash in short-term,
interest-bearing investment-grade instruments or bank deposits. The Company does
not expect that a 100 basis point increase or decrease from current interest
rates would have a material effect on its financial position, results of
operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is included elsewhere in this
report.
See Part IV, Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
41
PART III
The information required by Part III is omitted pursuant to instruction
G(3) in that the Company will file the Proxy statement no later than
120 days after the end of the fiscal year covered by this Annual Report on Form
10-K, and certain information included therein is incorporated by reference into
Part III of this Annual Report on Form 10-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the information in the Proxy Statement under the captions "Election of
Directors," "Relationships Among Directors or Executive Officers," "Management"
and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the information in the Proxy Statement under the captions "Director
Compensation," "Compensation Committee Interlocks and Insider Participation,"
"Executive Compensation," "Compensation Committee Report on Executive
Compensation," and "Stock Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference
to the information in the Proxy Statement under the captions "Security Ownership
of Certain Beneficial Owners and Management" and "Equity Compensation Plan
Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the information in the Proxy Statement under the caption "Certain
Relationships and Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
(a) The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, including the
principal executive officer and the principal financial officer, recognizes that
any set of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives.
42
Within 90 days prior to the filing date of this annual report on Form 10-K,
the Company has carried out an evaluation, under the supervision and the
participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
43
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Page(s)
(a) Documents filed as part of this report.
---------------------------------------
(1) Financial Statements.
---------------------
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
January 31, 2002 and 2003 F-3
Consolidated Statements of Operations
for the Years Ended
January 31, 2001, 2002 and 2003 F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended
January 31, 2001, 2002 and 2003 F-5
Consolidated Statements of Cash Flows
for the Years Ended
January 31, 2001, 2002 and 2003 F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedules.
------------------------------
None
(3) Exhibits.
---------
The Index of Exhibits commences on the following page.
44
Exhibits
Number Description
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
10.1+ Corporate Services Agreement, dated as of January 31, 2002,
between Comverse Technology and the Registrant 10.2+ Federal
Income Tax Sharing Agreement, dated as of January 31, 2002,
between Comverse Technology and the Registrant
10.3+ Patent License Agreement, dated as of January 17, 2000, between
Comverse Patent Holding and the Registrant 10.4+ Registration
Rights Agreement, dated as of January 31, 2002, between Comverse
Technology and the Registrant
10.5+ Contribution Agreement, dated as of February 1, 2001, between
Comverse Technology and the Registrant 10.6+ Enterprise Resource
Planning Software Sharing Agreement, dated as of January 31,
2002, between Comverse Ltd. and the Registrant
10.7+ Satellite Services Agreement, dated as of January 31, 2002,
between Comverse, Inc. and the Registrant
10.8+ Proxy Agreement, dated as of May 21, 2001, between Comverse
Technology, the Registrant and the United Stated Department of
Defense
10.9 Verint Systems Inc. Stock Incentive Compensation Plan (as
amended through December 12, 2002)
10.10+ Stock Purchase Agreement, dated as of January 31, 2002, between
Comverse, Inc. and the Registrant
10.11+ Distribution Agreement, dated as of July 1, 2001 between
Comverse Infosys (Singapore) PTE LTD and the Registrant
10.12+ Business Opportunities Agreement dated as of March 19, 2002,
between Comverse Technology and the Registrant
10.13+ Form of an Indemnification Agreement
10.14+ Verint Systems Inc. 2002 Employee Stock Purchase Plan
21.1+ Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
24.1 Powers of Attorney (see signature page to this report)
+ = Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Commission File No. 333-82300) which became effective on May 16, 2002.
(b) Reports on Form 8-K.
On December 13, 2002, the Company filed a Form 8-K, Item 9 that was
accompanied by certifications by each of the principal executive officer,
Dan Bodner, and principal financial officer, Igal Nissim, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
45
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VERINT SYSTEMS INC.
(Registrant)
April 30, 2003 By:/S/ Dan Bodner
---------------------------------------
Dan Bodner, Chief Executive Officer
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dan Bodner and Igal Nissim and each of
them, jointly and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each said attorneys-in-fact or his
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/S/ Dan Bodner April 30, 2003
- ----------------------------------------------------
Dan Bodner, Chief Executive Officer
and President; Director
(Principal Executive Officer)
/S/ Igal Nissim April 30, 2003
- ----------------------------------------------------
Igal Nissim, Chief Financial Officer;
Director
(Principal Financial and Accounting Officer)
/S/ Kobi Alexander April 30, 2003
- ----------------------------------------------------
Kobi Alexander, Chairman of the Board
of Directors; Director
/S/ Paul Baker April 30, 2003
- ----------------------------------------------------
Paul Baker, Director
/S/ Victor A. De Marines April 30, 2003
- ----------------------------------------------------
Victor A. De Marines, Director
/S/ David Kreinberg April 30, 2003
- ----------------------------------------------------
David Kreinberg, Director
46
/S/ David Ledwell April 30, 2003
- ----------------------------------------------------
David Ledwell, Director
/S/ Kenneth A. Minihan April 30, 2003
- ----------------------------------------------------
Kenneth A. Minihan, Director
/S/ Harris Oliner April 30, 2003
- ----------------------------------------------------
Harris Oliner, Director
/S/ Paul Robinson April 30, 2003
- ----------------------------------------------------
Paul Robinson, Director
/S/ Howard Safir April 30, 2003
- ----------------------------------------------------
Howard Safir, Director
/S/ William F. Sorin April 30, 2003
- ----------------------------------------------------
William F. Sorin, Director
47
CERTIFICATIONS
--------------
I, Dan Bodner, the Chief Executive Officer of Verint Systems Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Verint Systems Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and the Company
has:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 30, 2003 /s/Dan Bodner
-------------
Name: Dan Bodner
Title: Chief Executive Officer
48
I, Igal Nissim, the Chief Financial Officer of Verint Systems Inc., certify
that:
1. I have reviewed this Annual Report on Form 10-K of Verint Systems Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and the Company
has:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
49
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 30, 2003 /s/Igal Nissim
--------------
Name: Igal Nissim
Title: Chief Financial Officer
50
VERINT SYSTEMS INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report of Deloitte & Touche LLP............................................................. F-2
Consolidated Balance Sheets as of January 31, 2002 and 2003....................................................... F-3
Consolidated Statements of Operations for the Years Ended January 31, 2001, 2002 and 2003......................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2001, 2002 and 2003............... F-5
Consolidated Statements of Cash Flows for the Years Ended January 31, 2001, 2002 and 2003......................... F-6
Notes to Consolidated Financial Statements........................................................................ F-7
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, 2002 and 2003,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 31,
2002 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Jericho, New York
March 10, 2003
F-2
VERINT SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2002 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
2002 2003
ASSETS ------------- ---------------
Current Assets:
Cash and cash equivalents............................................ $ 49,860 $ 133,933
Accounts receivable, net............................................. 27,005 25,529
Inventories.......................................................... 7,488 8,866
Due from related parties............................................. 3,813 1,763
Prepaid expenses and other current assets............................ 4,987 4,066
------------- -------------
Total current assets.............................................. 93,153 174,157
Property and equipment, net.......................................... 12,486 12,965
Other assets......................................................... 11,087 19,928
------------- -------------
Total assets...................................................... $ 116,726 $ 207,050
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses................................ $ 37,508 $ 42,465
Advance payments from customers...................................... 13,518 19,013
Current maturities of long-term bank loans........................... 167 42,199
Due to related parties............................................... 800 1,157
------------- -------------
Total current liabilities......................................... 51,993 104,834
Convertible note..................................................... - 2,200
Long-term bank loans................................................. 43,456 1,678
Liability for severance pay.......................................... 1,265 1,173
Other liabilities.................................................... 1,277 999
------------- -------------
Total liabilities................................................. 97,991 110,884
------------- -------------
Commitments and Contingencies (Note 16)
Stockholders' Equity:
Preferred stock; $0.001 par value - authorized
2,500,000 shares; no shares issued and outstanding................ - -
Common stock, $0.001 par value - authorized
120,000,000 shares; issued and outstanding,
18,890,630, and 23,665,717 shares................................. 19 24
Additional paid-in capital........................................... 63,447 130,748
Accumulated deficit.................................................. (45,002) (34,855)
Cumulative translation adjustment.................................... 271 249
------------- -------------
Total stockholders' equity........................................ 18,735 96,166
------------- -------------
Total liabilities and stockholders' equity........................ $ 116,726 $ 207,050
============= =============
See notes to consolidated financial statements.
F-3
VERINT SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2002 2003
------------ ------------ ------------
Sales:
Product revenues....................................... $ 124,420 $ 109,964 $ 130,360
Service revenues....................................... 17,257 21,271 27,415
------------ ------------ ------------
141,677 131,235 157,775
------------ ------------ ------------
Cost of sales:
Product costs.......................................... 66,622 51,557 56,484
Service costs.......................................... 15,171 18,350 21,569
------------ ------------ ------------
81,793 69,907 78,053
------------ ------------ ------------
Gross profit............................................. 59,884 61,328 79,722
Operating expenses:
Research and development, net.......................... 14,249 15,184 17,357
Selling, general and administrative.................... 48,162 45,923 52,314
Acquisition expenses................................... 3,510 - -
Workforce Reduction, Restructuring and impairment
charges............................................. 1,528 2,754 -
------------ ------------ ------------
Income (loss) from operations.......................... (7,565) (2,533) 10,051
Interest income........................................ 2,151 1,542 1,781
Interest expense....................................... (2,409) (1,714) (1,270)
Other, net............................................. (239) (392) 1,755
------------ ------------ ------------
Income (loss) before income taxes...................... (8,062) (3,097) 12,317
Income tax provision................................... 497 1,552 2,170
------------ ------------ ------------
Net income (loss)...................................... $ (8,559) $ (4,649) $ 10,147
============ ============ ============
Earnings (loss) per share:
Basic................................................... $ (0.46) $ (0.25) $ 0.46
============ ============ ============
Diluted................................................. $ (0.46) $ (0.25) $ 0.43
============ ============ ============
See notes to consolidated financial statements.
F-4
VERINT SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
(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, 2000..... 18,619,846 $ 19 $ 61,511 $ (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..... 117,714 269 269
---------- ------- ---------- ----------- ----------- ---------------
Balance, January 31, 2001 18,737,560 19 62,822 (40,353) 37 22,525
Comprehensive loss:
Net loss...................... (4,649)
Translation adjustment........ 234
Total comprehensive loss...... (4,415)
Exercise of stock options..... 153,070 327 327
Sale of subsidiary shares to
affiliate.................... 298 298
---------- ------ --------- ----------- ----------- ---------------
Balance, January 31, 2002..... 18,890,630 19 63,447 (45,002) 271 18,735
Comprehensive income:
Net income.................... 10,147
Translation adjustment........ (22)
Total comprehensive income.... 10,125
Net proceeds from initial
public offering.............. 4,500,000 4 65,351 65,355
Exercise of stock options..... 275,087 1 1,891 1,892
Stock-based employee
compensation cost............ 59 59
---------- ------ --------- ----------- ----------- ---------------
Balance, January 31, 2003..... 23,665,717 $ 24 $ 130,748 $ (34,855) $ 249 $ 96,166
========== ====== ========= =========== =========== ===============
See notes to consolidated financial statements.
F-5
VERINT SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
(IN THOUSANDS)
2001 2002 2003
---- ---- ----
Cash flows from operating activities:
Net income (loss)...................................................... $ (8,559) $ (4,649) $ 10,147
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.................................... 7,740 7,394 9,407
Provision for doubtful accounts.................................. 2,183 (468) 12
Asset write-downs and impairments................................ 7,399 - -
Changes in assets and liabilities:
Accounts receivable.............................................. (6,413) 1,964 3,234
Inventories...................................................... 461 3,473 (203)
Prepaid expenses and other current assets........................ (3,877) 2,809 963
Accounts payable and accrued expenses............................ 5,551 3,600 4,677
Advance payments from customers.................................. 6,888 (148) 5,044
Liability for severance pay...................................... (43) 141 (92)
Due to/from related parties...................................... (2,868) (3,639) 2,407
Other............................................................ 85 (652) 698
------------ ------------ ------------
Net cash provided by operating activities.............................. 8,547 9,825 36,294
------------ ------------ ------------
Cash flows from investing activities:
Cash paid for business combination..................................... - - (9,706)
Purchase of property and equipment..................................... (6,332) (4,330) (4,855)
Capitalization of software development costs........................... (4,252) (4,146) (4,767)
------------ ------------ ------------
Net cash used in investing activities.................................. (10,584) (8,476) (19,328)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock in connection with an initial
public offering..................................................... - - 65,355
Proceeds from issuance of common stock in connection with exercise of
stock options....................................................... 607 327 1,892
Proceeds from issuance of common stock of subsidiary................... 250 - -
Proceeds from long-term bank loan...................................... - 42,000 -
Net proceeds (repayments) of other bank debt........................... 1,336 (115) (140)
Proceeds from related party loans...................................... 7,241 - -
Repayments of related party loans...................................... - (37,031) -
------------ ------------ ------------
Net cash provided by financing activities.............................. 9,434 5,181 67,107
------------ ------------ ------------
Net increase in cash and cash equivalents.............................. 7,397 6,530 84,073
Cash and cash equivalents, beginning of year........................... 35,933 43,330 49,860
------------ ------------ ------------
Cash and cash equivalents, end of year................................. $ 43,330 $ 49,860 $ 133,933
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest........................... $ 85 $ 5,142 $ 1,054
============ ============ ============
Cash paid during the year for income taxes....................... $ 938 $ 889 $ 1,086
============ ============ ============
See notes to consolidated financial statements.
F-6
VERINT SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
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 software-based 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, 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.
On April 19, 2002, the Board of Directors declared a reverse stock split of
the Company's outstanding common stock at the rate of one share of common stock
for each 5.11 shares of common stock outstanding. All references to per share
amounts and number of shares in these financial statements have been adjusted to
reflect this reverse stock split. In addition, the Company amended its
certificate of incorporation to change its authorized common stock, $0.001 par
value, from 300,000,000 to 120,000,000 and to authorize 2,500,000 shares of
preferred stock, $0.001 par value.
In May 2002, the Company completed an initial public offering of 4,500,000
shares of its common stock at a price of $16.00 per share. The net proceeds of
the offering were approximately $65.4 million. The Company intends to use the
net proceeds of this offering to finance the growth of its business, as working
capital and for general corporate purposes and capital expenditures. In
addition, the Company may also use a portion of the proceeds for acquisitions or
other investments. In February 2003 the Company repaid a bank loan of $42
million dollars (see note 9).
2. Summary of Significant Accounting Policies
Basis of Presentation--The Company is a majority owned subsidiary of
Comverse Technology, Inc. ("Comverse Technology"). Comverse Technology has
provided certain corporate and administrative services to the Company and is
expected to continue to provide such services for the foreseeable future. See
note 13 to the consolidated financial statements. Management believes the
consolidated financial statements include all the costs of doing business on a
stand-alone basis. The Company believes that its current cash balances and
potential cash flow from operations will be sufficient to meet the Company's
anticipated working capital, capital expenditures and other activities for at
least the next 12 months.
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. Investments in business entities in which the Company does not have
control, but has the ability to exercise significant influence over the
operating and financing policies, are accounted for under the equity method.
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.
F-7
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 and high credit ranking debt securities held to maturity.
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, 2002 and 2003,
the Company's allowance for doubtful accounts was approximately $2,909,000 and
$2,545,000 respectively. The Company believes no significant concentration of
credit risk exists with respect to these cash investments and accounts
receivable. The carrying amounts 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, other than buildings, transportation equipment, and leasehold
improvements, on a straight-line basis over periods ranging from two to ten
years. Buildings are depreciated over periods ranging from thirty to fifty
years. Transportation equipment is depreciated over a period ranging from three
to fifteen 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 using 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 in the years ended January 31,
2001 and 2002 and for the period from February 1, 2002 until May 15, 2002, the
Company's results were included in the Comverse Technology consolidated tax
return, due to Comverse Technology retaining beneficial ownership of more than
80% of the total voting power and value of outstanding common stock of the
Company. Income taxes were determined as if the Company was a separate taxpayer.
Income taxes payable, have been charged to the related parties account in the
period that the liability arose, if any.
Upon completion of the Company's initial public offering on May 15, 2002,
Comverse Technology's ownership was reduced below 80% of the voting power and
value of the outstanding common stock. The Company will prepare its income tax
return on a standalone basis for the period from May 16, 2002 through January
31, 2003. Subsequent to May 15, 2002, income taxes currently payable are charged
to accounts payable and accrued expenses in the period the liability arose, if
any.
Revenue and Expense Recognition--Revenue is generally recognized at the
time of shipment for sales of systems which do not require significant
customization 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 is shipped together. Amounts received from 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.
F-8
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 maintenance
contracts is recognized ratably over the contract period. Amounts received from
customers in excess of revenues earned under maintenance contracts are recorded
as advance payments from customers.
Revenue from certain long-term contracts is recognized under the
percentage-of-completion method on the basis of physical completion or using
actual costs incurred relative 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.
Cost of Sales--Product costs include the costs associated with
manufacturing the Company's products. Service costs include the costs associated
with the installation, warranty, and maintenance of the Company's products.
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 has
been four years or less to date. Amortization begins in the period in which the
related product is available for general release to customers. Amortization
expenses amounted to $2,967,000, $2,892,000 and $3,721,000 for the years ended
January 31, 2001, 2002 and 2003, respectively.
The Company reviews software development costs for impairment at the end of
each fiscal year, or whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. An impairment loss would be
recognized when the estimated net realizable value of the software is less than
its carrying amount. The net realizable value is the estimated future gross
revenue from the software reduced by the estimated future costs of completing
and supporting the software.
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 $(541,000), $(741,000), and
$2,505,000 for the years ended January 31, 2001, 2002 and 2003, respectively.
The Company may occasionally enter 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 that 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 that limit, but do not
eliminate, the effect of purchased options as a hedge. As of January 31, 2001,
2002 and 2003, the Company had no outstanding foreign exchange contracts.
F-9
Long-Lived Assets--The Company reviews property, equipment, and certain
identifiable intangibles for impairment 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.
Stock-Based Employee Compensation--The Company applies the intrinsic-value
based method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based employee compensation. Accordingly, stock-based
employee compensation cost is recognized only when employee stock options are
granted with exercise prices below the fair market value at the date of grant.
Any resulting stock-based employee compensation cost is recognized ratably over
the associated service period, which is generally the option vesting period.
During the year ended January 31, 2003, the Company recognized stock-based
employee compensation cost in the consolidated statement of operations of
$59,000 relating to certain employee stock options granted with exercise prices
below the fair market value at the date of grant. As of January 31, 2003, 65,898
employee stock options were outstanding with exercise prices below the fair
market value at the date of the grant. All other employee stock options have
been granted at exercise prices equal to fair market value on the date of grant,
and, accordingly, no compensation expenses has been recognized by the Company in
the consolidated statement of operations.
The following table illustrates the effect on net income (loss) and net
income (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation for all periods:
Year Ended January 31,
-------------------------------------------------
2001 2002 2003
------------ ------------ ------------
(In thousands, except per share amounts)
Net income (loss) as reported.......................................... $ (8,559) $ (4,649) $ 10,147
Less: Stock- based employee compensation cost determined under the fair
value method, net of related tax effects ........................... (1,760) (2,962) (4,192)
------------ ------------ ------------
Pro forma net income (loss)............................................ $ (10,319) $ (7,611) $ 5,955
============ ============ ============
Net income (loss) per share:
Basic - as reported.............................................. $ (0.46) $ (0.25) $ 0.46
============ ============ ============
Basic - pro forma................................................ $ (0.55) $ (0.41) $ 0.27
============ ============ ============
Diluted - as reported............................................ $ (0.46) $ (0.25) $ 0.43
============ ============ ============
Diluted - pro forma.............................................. $ (0.55) $ (0.41) $ 0.25
============ ============ ============
The fair value of these options was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions:
F-10
Year Ended January 31,
------------------------------------------
2001 2002 2003
----- ------ ------
Risk free rate ....................................................... 6.53% 4.66% 4.27%
Dividend yield ....................................................... 0% 0% 0%
Volatility............................................................ 73.5% 79.2% 77.7%
Expected option life.................................................. 5 years 5 years 5 years
The weighted-average fair value of options granted for the years ended
January 31, 2001, 2002 and 2003 is estimated at $5.72, $5.77 and $12.69 per
share, respectively.
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.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the manner of presentation in the current year.
Effect of New Accounting Pronouncements--In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("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 were required to be applied starting with
fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 did
not have a material effect on the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 applies to legal
obligations associated with the retirement of a tangible long-lived asset that
result from the acquisition, construction, development and/or normal operation
of a long-lived asset. This Statement is effective for fiscal years beginning
after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS
No. 143 is not expected to have a material effect on the Company's consolidated
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 certain provisions of
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 was effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. The adoption of SFAS No. 144 did not have a material impact on the
Company's consolidated financial statements.
F-11
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be classified
as an extraordinary item and amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be in the same manner as sale-leaseback transactions. The rescission of SFAS No.
4 is effective for fiscal years beginning after May 15, 2002. The remainder of
the statement is generally effective for transactions occurring after May 15,
2002 with earlier application encouraged. The adoption of SFAS No. 145 is not
expected to have a material effect on the Company's consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." This statement addresses the recognition, measurement and
reporting of costs that are associated with exit and disposal activities. This
statement includes the restructuring activities that are currently accounted for
pursuant to the guidance set forth in Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)", costs related to terminating a contract that is not a capital
lease and one-time benefit arrangements received by employees who are
involuntarily terminated - nullifying the guidance under EITF Issue No. 94-3.
Under SFAS No. 146 the cost associated with an exit or disposal activity is
recognized in the periods in which it is incurred rather than at the date a
company committed to the exit plan. This statement is effective for exit or
disposal activities initiated after December 31, 2002 with earlier application
encouraged. The adoption of SFAS No. 146 did not have a material effect on the
Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and does not permit the use of the original SFAS No. 123
prospective method of transition in fiscal years beginning after December 15,
2003. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results, regardless of whether,
when, or how an entity adopts the preferable, fair value based method of
accounting. SFAS No. 148 improves the prominence and clarity of the pro forma
disclosures required by SFAS No. 123 by prescribing a specific tabular format
and by requiring disclosure in the "Summary of Significant Accounting Policies"
or its equivalent and improves the timeliness of those disclosures by requiring
their inclusion in financial reports for interim periods. The Company has
adopted the disclosure requirements of SFAS No. 148 for the year ended January
31, 2003. The Company will continue to account for stock-based employee
compensation under APB Opinion No. 25 and its related interpretations.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirement for Guarantees, Including Indirect
Guarantees and indebtedness of Others." The interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guaranties that it has issued.
The interpretation also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurements provisions of the interpretation are applicable on a prospective
basis to guaranties issued or modified after December 31, 2002. The Company has
made no material guaranties subject to the liability recognition and disclosure
provisions of the interpretation.
F-12
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 OCS 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 funding, 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, 2001, 2002 and 2003 were $7,499,000, $5,802,000, and $5,221,000,
respectively.
4. Inventories
Inventories consist of:
January 31,
-----------------------------
2002 2003
-------------- ------------
(In thousands)
Raw materials............................................................... $ 3,640 $ 5,337
Work in process............................................................. 1,249 1,405
Finished goods.............................................................. 2,599 2,124
------------- ---------
$ 7,488 $ 8,866
============= =========
5. Property and Equipment
Property and equipment consist of:
January 31,
-----------------------------
2002 2003
------------- -----------
(In thousands)
Fixtures and equipment...................................................... $ 20,352 $ 23,454
Land........................................................................ 458 515
Building and building improvements.......................................... 3,891 4,590
Software.................................................................... 1,828 2,603
Transportation vehicles..................................................... 912 824
Leasehold improvements...................................................... 581 1,009
------------- ----------
28,022 32,995
Less accumulated depreciation and amortization 15,536 20,030
------------- ----------
$ 12,486 $ 12,965
============= ==========
F-13
6. Other Assets
Other assets consist of:
January 31,
-----------------------------
2002 2003
-------------- -----------
(In thousands)
Software development costs.............................................. $ 25,203 $ 29,856
Accumulated amortization................................................ (15,748) (19,355)
-------------- ----------
Software development costs, net......................................... 9,455 10,501
Goodwill................................................................ - 7,711
Other assets............................................................ 1,632 1,716
-------------- ----------
$ 11,087 $ 19,928
============== ==========
7. Business Combinations
On February 1, 2002, the Company acquired the digital video recording
business of Lanex LLC. The Lanex business provides digital video recording
solutions for security and surveillance applications. The purchase price
consisted of $9,510,000 in cash and a $2,200,000 convertible note issued by the
Company. The note is non-interest bearing and matures on February 1, 2004. The
holders 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 $16.06 per share.
The note is guaranteed by Comverse Technology. In connection with this
acquisition, the Company incurred transaction costs, consisting primarily of
professional fees amounting to approximately $196,000.
The acquisition was accounted for using the purchase method. The purchase
price was allocated to those assets acquired and liabilities assumed based on
the estimated fair value of those assets and liabilities as of February 1, 2002.
Identifiable intangible assets consist of sales backlog, acquired technology,
trade name and non-competition agreements and have an estimated useful life of
up to six years. The results of operations of Lanex's acquired business have
been included in the Company's results of operations since February 1, 2002.
The following is a summary of the allocation of the purchase price for this
acquisition:
(In thousands)
Purchase price....................... $11,710
Acquisition costs.................... 196
-------
Total purchase price............. $11,906
=======
Fair value of net assets acquired.... $ 2,810
Identifiable intangible assets....... 1,385
Goodwill............................. 7,711
-------
Total purchase price.............. $11,906
=======
Purchase price paid in cash.......... $ 9,706
Convertible note..................... 2,200
-------
Total purchase price............. $11,906
=======
F-14
The summary unaudited pro forma condensed consolidated results of
operations, assuming the acquisition had occurred on February 1, 2001 would have
reflected consolidated revenues of approximately $140,953,000, net loss of
approximately $3,112,000 and net loss per share of $0.17 for the year ended
January 31, 2002. These pro forma results are not necessarily indicative of what
would have occurred if the acquisition had been in effect for the period
presented.
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
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 6,759,277 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.
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. Loronix's and Syborg's sales for the period from July 1, 2000 through
July 31, 2000 were $1,568,000 and $139,000, respectively.
In connection with the mergers in the year ended January 31, 2001, the
Company incurred merger related costs of $3,510,000 consisting of professional
fees to lawyers, investment bankers and accountants, as well as other merger
costs, such as printing costs and filing fees. The Company also incurred
$1,528,000 of impairment charges in the year ended January 31, 2001 for the
write-off of certain demonstration, laboratory and production equipment that was
abandoned as a result of the mergers. In addition, the Company has charged
approximately $5,871,000 to cost of sales in the year ended January 31, 2001.
These charges consisted of: (i) $3,685,000 relating to the write-off and
abandonment of inventories that were considered obsolete and duplicative as a
result of the mergers; and (ii) $2,186,000 for the write-off of certain
capitalized software, which became obsolete due to the existence of duplicative
technology as a result of the mergers.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of:
F-15
January 31,
-------------------------------
2002 2003
-------------- --------------
(In thousands)
Accounts payable................................................................. $ 14,593 $ 17,051
Accrued salaries................................................................. 6,283 5,892
Accrued royalties................................................................ 3,862 6,429
Accrued vacation................................................................. 3,018 3,463
Accrued warranty costs........................................................... 1,111 1,210
Other accrued expenses........................................................... 8,641 8,420
-------------- -------------
$ 37,508 $ 42,465
============== =============
In April 2001, the Company announced a plan to reduce its workforce and
recorded a charge of $1,164,000. In December 2001, the Company announced a plan
to further reduce its workforce and consolidate its offices in the United
Kingdom and recorded a charge of $1,590,000. These charges totaling $2,754,000
for the year ended January 31, 2002, were charged to expense and are included in
the caption restructuring and impairment charges in the consolidated statement
of operations. These reductions were necessary as a result of the difficult
economic and capital spending environment and were designed to improve the
Company's cost structure and to increase its profitability. These plans included
reducing the workforce in the United States, Israel and Germany by 65, 45 and 35
employees, respectively. These workforce reductions included employees within
all departments of the Company. As of January 31, 2002, substantially all of the
employees identified in the plan have been terminated in accordance with the
terms of the plan.
In December 2001, the Company notified the landlord of its United Kingdom
office of its intention to terminate the Company's lease. The Company recorded a
charge for the remaining lease payments from the vacancy date through the
expiration date of the lease. The Company vacated the facility in March 2002.
As of January 31, 2003 the Company had accrued liabilities of approximately
$ 215,000 related to the workforce reduction and facilities consolidation costs.
The changes in the accrued liabilities for the workforce reduction and
facilities consolidation costs starting from January 31, 2001 are as follows:
Accrual Accrual Accrual
Balance at Balance at Balance at
January 31, Cash January 31, Cash January 31,
2001 Provision Payments 2002 Payments 2003
----- --------- -------- ---- -------- ----
(In thousands)
Severance and related $ - $ 2397 $ 1,710 $ 687 $ 661 $ 26
Facilities - 357 - 357 168 189
-------------- ----------- ----------- ---------- ---------- ------------
Total $ - $ 2,754 $ 1,710 $ 1,044 $ 829 $ 215
============== =========== =========== ========== ========== ============
Severance and related costs consist primarily of severance payments to
terminated employees and fringe related costs associated with severance
payments, other termination costs and legal and consulting costs. The balance of
the severance and related costs is expected to be paid by April 30, 2003.
Facilities and related costs consist primarily of contractually obligated
lease liabilities and operating expenses related to facilities vacated in the
United Kingdom as a result of the facility consolidation. The balance of the
facilities and related costs is expected to be paid by October 31, 2003.
F-16
9. Long-term bank loans
Bank loans consist of the following:
January 31,
----------------------------------
2002 2003
------------- ------------
(In thousands)
Long-term bank loan............................................... $ 42,000 $ 42,000
Other bank debt................................................... 1,623 1,877
------------- ------------
43,623 43,877
Less: current maturities......................................... 167 42,199
------------- ------------
Long-term bank loans.............................................. $ 43,456 $ 1,678
============= ============
In January 2002, the Company took a long-term bank loan in the amount of
$42 million. This loan matured in February 2003 and bore interest at LIBOR plus
0.55% . The proceeds of this loan were used to repay amounts owed to Comverse
Technology. The loan was guaranteed by Comverse Technology and was repaid on
February 28, 2003.
Other bank debt is secured by certain land and buildings. Restricted cash
balance that was required to be maintained at these banks in the amount of
$679,000 and $0 as of January 31, 2002, and 2003, respectively, was included in
the caption of other assets on the consolidated balance sheets.
Maturities of long-term bank loans are as follows:
Year Ending January 31, Amount
- ------------------------------------------- -----------------
(In thousands)
2004....................................... $ 42,199
2005....................................... 200
2006....................................... 202
2007....................................... 203
2008....................................... 205
2009 and thereafter........................ 868
-----------------
$ 43,877
=================
10. 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.
11. Stock Options
Employee Stock Options--As of January 31, 2003, 2,853,671 shares of common
stock were reserved for issuance upon the exercise of stock options then
outstanding and 1,598,990 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-17
The changes in the number of options were as follows:
Year Ended January 31,
--------------------------------------------------
2001 2002 2003
---------- ----------- ----------
Outstanding at beginning of period.................. 1,980,586 2,322,888 2,788,776
Granted during the period........................... 704,892 873,209 581,249
Exercised during the period......................... (117,714) (153,070) (275,087)
Cancelled, terminated and expired................... (244,876) (254,251) (241,267)
--------- --------- ---------
Outstanding at end of period........................ 2,322,888 2,788,776 2,853,671
========= ========= =========
At January 31, 2003, options to purchase an aggregate of 1,341,497 shares
were vested and currently exercisable under the option plan and options to
purchase an additional 1,512,174 shares, vest at various dates extending through
the year 2006.
Weighted average option exercise price information was as follows:
Year Ended January 31,
----------------------------------------------
2001 2002 2003
---- ---- ----
Outstanding at beginning of period.................. $5.37 $6.44 $ 7.26
Granted during the period........................... $8.84 $8.69 $15.05
Exercised during the period......................... $2.30 $2.10 $ 6.88
Canceled, terminated and expired.................... $6.54 $8.02 $ 8.78
Outstanding at end of period........................ $6.44 $7.26 $ 8.75
Exercisable at end of period........................ $4.70 $6.08 $ 6.60
Significant option groups outstanding at January 31, 2003 and related
weighted average exercise price and life information were as follows:
F-18
Weighted Average
Remaining
Exercise Price Number Outstanding Contractual Life Number Exercisable
----------------- ---------------------- ---------------- ------------------
$ 0.56 104,990 3.30 104,990
$ 2.56 16,619 1.20 16,619
$ 5.88 943,244 5.80 772,807
$ 6.90 401,274 6.70 198,344
$ 8.69 698,991 8.10 160,043
$ 8.86 59,050 9.20 -
$ 12.01 4,108 5.60 2,058
$ 14.90 84,948 9.80 3,800
$ 15.33 107,178 7.00 51,300
$ 16.00 414,483 9.20 12,750
$ 17.02 9,002 3.90 9,002
$ 23.00 9,784 4.90 9,784
---------------------- ------------------ -------------------
2,853,671 7.20 1,341,497
====================== ================== ===================
12. Earnings (Loss) Per Share (EPS)
Basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted-average number of common shares outstanding during the period.
Diluted earnings per share further assumes the issuance of common shares for all
potentially dilutive issuances of stock. The calculation for earnings (loss) per
share for the years ended January 31, 2001, 2002 and 2003 is as follows:
Year ended January 31, 2001 Year ended January 31, 2002 Year ended January 31, 2003
------------------------------- ----------------------------------- -------------------------------------
Net Per Share Net Per Share Net Per Share
Loss Shares Amount Loss Shares Amount Income Shares Amount
====== ====== ======
(In thousands, except per share data)
Basic EPS
Net Income (Loss) $(8,559) 18,704 $ (0.46) $ (4,649) 18,767 $ (0.25) $ 10,147 22,165 $ 0.46
======= ========= ======= ======
Effect of Dilutive
Securities
- ------------------------
Stock Options 1,240
Convertible Note 137
-------- ------ --------- ------ -------- ------
Diluted EPS $(8,559) 18,704 $ (0.46) $ (4,649) 18,767 $ (0.25) $ 10,147 23,542 $ 0.43
======== ====== ========= ========= ====== ======== ======== ====== =======
F-19
The diluted loss per share computation for the years ended January 31,
2001, and 2002 excludes, approximately 1,235,000 and 1,280,000 incremental
shares related to employee stock options, respectively. These shares are
excluded from the dilutive net loss per share calculation due to their
antidilutive effect as a result of the Company's net loss during these periods.
13. 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:
-- maintaining in effect general liability and other insurance policies
providing coverage for the Company;
-- maintaining in effect a policy of directors' and officers' insurance
covering the Company's directors and officers;
-- administration of employee benefit plans;
-- routine legal services; and
-- consulting services with respect to the Company's public relations.
For the years ended January 31, 2001, 2002 and 2003, the Company recorded
expenses of $500,000, $500,000, and $525,000, respectively, for the services
provided by Comverse Technology. As of February 1, 2003, the Company will pay
Comverse Technology a quarterly fee of $143,750, 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 years ended January 31, 2001, 2002 and 2003, 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--In January 2002,
the Company entered into an enterprise resource planning ("ERP") software
sharing agreement with Comverse, Ltd., a subsidiary of Comverse Technology.
Under this agreement, Comverse Ltd. agreed to continue to share the use of
specific ERP software with the Company and undertook to exert its reasonable
commercial efforts to arrange for the ongoing operation, maintenance and support
of the software for an annual fee of $100,000. The terms of the ERP Software
Sharing Agreement and the fee payable to Comverse Ltd. were determined by arm's
length negotiations between the Company and Comverse Ltd. The Company recorded
expenses of $200,000, $100,000, and $100,000 for the years ended January 31,
2001, 2002 and 2003, respectively, for ERP support services. This agreement
expires February 1, 2004, and automatically renews for successive one year terms
unless terminated upon six months prior written notice. The first time notice of
termination may be given is on February 1, 2004.
Satellite Services Agreement--In January 2002, the Company entered into a
services agreement with Comverse Inc., a subsidiary of Comverse Technology,
pursuant to which Comverse Inc. and its 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, 2001, 2002 and 2003, the Company recorded expenses of $1,193,000,
$1,817,000, and $1,809,000, respectively, for these services provided by
Comverse, Inc. during these periods.
F-20
The Company believes that the terms of the Corporate Services Agreement,
the Enterprise Resource Planning Software Sharing Agreement and the Satellite
Services Agreement are fair to the Company and are not materially different than
those they could have obtained from an unaffiliated third party.
Other Transactions with Other Subsidiaries of Comverse Technology--The
Company charges subsidiaries of Comverse Technology for services relating to the
use of the Company's facilities and employees. Charges to these subsidiaries
were approximately $1,006,000, $1,030,000, and $175,000 for the years ended
January 31, 2001, 2002 and 2003, respectively. In addition the Company sold
products to subsidiaries of Comverse Technology. Sales to these subsidiaries
were approximately $0, $0 and $8,000 for the years ended January 31, 2001, 2002
and 2003, 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 $0, $2,000, and $18,000 for the years ended
January 31, 2001, 2002 and 2003, respectively.
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 a consolidated federal income tax return. Under the terms of
the tax sharing agreement, during years in which Comverse Technology filed a
consolidated federal income tax return which includes the Company, the Company
was 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 was 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
provided for certain payments in the event of adjustments to the 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. Upon
completion of the Company's initial public offering in May 2002 Comverse
Technology's ownership was reduced below 80% of the voting power and value of
outstanding common stock of the Company. The Company started filing federal tax
returns on a stand-alone basis starting May 16, 2002.
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
the 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.
F-21
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.
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.
Business Opportunities Agreement--The Company has a business opportunities
agreement with Comverse Technology, which addresses potential conflicts of
interest between Comverse Technology and the Company. This agreement allocates
between Comverse Technology and the Company opportunities to pursue transactions
or matters that, absent such allocation, could constitute corporate
opportunities of both companies. The Company is precluded from pursuing an
opportunity offered to any person who is a director of the Company but not an
officer or employee of the Company and who is also an officer or employee of
Comverse Technology, unless Comverse Technology fails to pursue such opportunity
diligently. Comverse Technology is precluded from pursuing an opportunity
offered to any person who is a director of Comverse Technology but not an
officer or employee of Comverse Technology and who is also an officer or
employee of the Company, unless the Company fails to pursue such opportunity
diligently. The Company is also precluded from pursuing an opportunity offered
to any person who is an employee or officer of both companies or a director of
both companies, unless Comverse Technology fails to pursue such opportunity
diligently. Accordingly, the Company may be precluded from pursuing transactions
or opportunities that the Company would otherwise be able to pursue if the
Company was not affiliated with Comverse Technology. The Company has agreed to
indemnify Comverse Technology and its directors, officers, employees and agents
against any liabilities arising out of any claim that any provision of the
agreement or the failure to offer any business opportunity to the Company
violates or breaches any duty that may be owed to the Company by Comverse
Technology or any such person.
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
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.
F-22
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. for
$100,000. The Company increased stockholders' equity for the year ended January
31, 2002 by $298,000, which represents the excess of the consideration given and
the carrying amount of the net liabilities of Comverse Media Holding Inc.
Indemnification Agreement with Comverse Technology--On January 31, 2002,
the Company entered into an indemnification agreement with Comverse Technology
pursuant to which Comverse Technology agreed to indemnify the Company for any
damages that may arise from two specified disputes, which are not material to
the Company. In return, the Company granted to Comverse Technology the exclusive
control of the settlement and defense of these disputes, and the Company agreed
to fully cooperate with Comverse Technology in any such settlement or defense.
Transactions with an Affiliate--The Company sells products and services to
Verint Systems (Singapore) PTE LTD (formerly - Comverse Infosys (Singapore) PTE
LTD) ("Verint Singapore") an affiliated systems integrator in which the Company
holds 50% equity interest. Sales to Verint Singapore were approximately
$4,271,000, $4,024,000, and $2,286,000 for the years ended January 31, 2001,
2002 and 2003, respectively. The Company sells its products and services to
Verint Singapore on the same terms the Company sells similar products and
services to their non-affiliated customers. In addition, the Company was charged
marketing and office service fees by that affiliate. These fees were
approximately $270,000, $490,000, and $361,000 for the years ended January 31,
2001, 2002 and 2003, respectively. The Company believes that Verint Singapore
has determined these charges on the basis of its estimated costs in providing
such services.
Intercompany Loan--The Company was charged interest on balances owed to
Comverse Technology amounting to $2,142,000 and $1,458,000 for the years ended
January 31, 2001 and 2002, respectively. The interest rate on the indebtedness
to Comverse Technology was the three-month LIBOR rate. The principal amount of
the indebtedness to Comverse Technology and related accrued and unpaid interest
was due on demand and was repaid on January 31, 2002 with the proceeds of a bank
loan. The Company does not expect to be dependent on Comverse Technology for its
financing needs for the foreseeable future.
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 which expires June 2003 and the lease for the
Company's vacated facility in the United Kingdom.
F-23
14. Income taxes
The provision for income taxes consists of the following:
Year Ended January 31,
------------------------------------------
2001 2002 2003
--------- --------- ---------
(In thousands)
Current provision:
Federal................................................... $ 2 $ - $ -
State..................................................... 91 145 360
Foreign................................................... 624 1,393 1,729
--------- --------- --------
Total current.......................................... 717 1,538 2,089
--------- --------- --------
Deferred provision (benefit):
Federal................................................... - - -
State..................................................... - - -
Foreign................................................... (220) 14 81
--------- --------- --------
Total deferred......................................... (220) 14 81
--------- --------- --------
$ 497 $ 1,552 $ 2,170
========= ========= =========
The reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate is as follows:
Year Ended January 31
-------------------------------------------
2001 2002 2003
---------- --------- --------
U.S. Federal statutory rate 34% 34% 34%
Change in valuation allowance (34) (34) (34)
Foreign and state income taxes (6) (50) 18
---------- --------- --------
Company's effective tax rate (6)% (50)% 18%
========== ========= ========
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)
operating loss carry forwards. The tax effects of significant items comprising
the Company's deferred tax assets and liabilities at January 31, 2002 and 2003
are as follows:
January 31,
-------------------------------
2002 2003
-------------- ------------
(In thousands)
Deferred tax liabilities:
Expenses deductible for tax purposes and not for $ (418) $ (585)
-------------- ------------
financial reporting purposes..........................
Deferred tax assets:
Reserves not currently deductible.............................. 4,360 4,316
Tax loss carry-forwards........................................ 7,154 13,982
-------------- ------------
11,514 18,298
Less: valuation allowance........................................ (11,115) (17,813)
-------------- ------------
Net deferred tax liabilities...................................... $ (19) $ (100)
============== ============
As of January 31, 2003 the Company had approximately $35.0 million of net
operating loss carry forwards for federal income tax purposes. These carry
forwards will begin to expire in 2020 if not utilized.
F-24
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.
15. 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.
Sales in each geographic segment represents sales originating from that segment.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
Reconciling Consolidated
United States Israel United Kingdom Other Items Totals
Year Ended January 31, 2001 ------------- ----------- ----------- ----------- ----------- -----------
- --------------------------- (In thousands)
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)
========== ========== ========== ========== ========== ==========
Year Ended January 31, 2002
Sales......................... $ 65,731 $ 62,712 $ 18,848 $ 6,023 $ (22,079) $ 131,235
Costs and expenses............ (70,290) (58,813) (19,349) (7,882) 22,566 (133,768)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)....... $ (4,559) $ 3,899 $ (501) $ (1,859) $ 487 $ (2,533)
========== ========== ========== ========== ========== ==========
Year Ended January 31, 2003
Sales......................... $ 85,817 $ 62,622 $ 22,897 $ 11,616 $ (25,177) $ 157,775
Costs and expenses............ (80,847) (57,477) (21,624) (12,881) 25,105 (147,724)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)....... $ 4,970 $ 5,145 $ 1,273 $ (1,265) $ (72) $ 10,051
========== ========== ========== ========== ========== ==========
Long-lived assets by country of domicile consist of:
January 31,
------------------------------
2002 2003
------------ ----------
(In thousands)
Israel.................................................................... $ 12,632 $ 12,795
United States............................................................. 8,014 15,936
Germany................................................................... 2,463 3,100
United Kingdom............................................................ 273 816
Other..................................................................... 191 246
------------ ----------
$ 23,573 $ 32,893
============ ==========
Sales by country, based on end-user location, as a percentage of total
sales were as follows:
January 31,
------------------------------------------
2001 2002 2003
-------- -------- --------
United States........................................................... 49% 42% 49%
United Kingdom.......................................................... 15% 14% 16%
Other................................................................... 36% 44% 35%
-------- -------- --------
100% 100% 100%
======== ======== ========
F-25
No single customer accounted for 10% or more of sales for the years ended
January 31, 2001, 2002 and 2003.
16. Commitments and Contingencies
Leases--The Company leases office, manufacturing, and warehouse space under
non-cancelable operating leases. Rent expense for all leased premises
approximated $2,596,000, $2,887,000 and $3,385,000 in the years ended January
31, 2001, 2002 and 2003, respectively.
As of January 31, 2003, the minimum annual rent obligations of the Company
were approximately as follows:
Year Ending January 31, Amount
- ----------------------------------------------- --------------
(In thousands)
2004........................................... $ 3,290
2005........................................... 1,933
2006........................................... 1,422
2007........................................... 644
2008........................................... 644
-------
$ 7,933
=======
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 to secure
its performance of certain obligations under contracts with customers. These
guaranties, which aggregated approximately $5,942,000 at January 31, 2003, are
to be released by the Company's performance of specified contract milestones,
which are scheduled to be completed primarily during 2003.
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 consolidated financial statements.
17. Selected Quarterly Data (Unaudited)
The following table shows selected results of operations for each of the
quarters during the years ended January 31, 2002 and 2003:
Fiscal Quarter ended
--------------------
April 30, July 31, Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31,
-------- -------- -------- -------- --------- --------- -------- --------
2001 2001 2001 2002 2002 2002 2002 2003
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share amounts)
Sales $ 34,558 $ 32,017 $ 31,039 $ 33,621 $ 36,317 $ 38,470 $ 40,671 $ 42,317
Gross profit(1) 15,999 14,985 14,249 16,095 17,753 19,082 20,922 21,965
Net income (loss) (892) (1,742) (1,023) (992) 1,707 2,222 2,759 3,459
Diluted earnings (loss)
per share $ (0.05) $ (0.09) $ (0.05) $ (0.05) $ 0.08 $ 0.09 $ 0.11 $ 0.14
======== ======== ======== ======== ======== ========= ======== ========
((1)) Gross profit for all periods is calculated as sales minus cost of goods
sold, which includes royalties and license fees, an expense which
historically has been included as a separate line item in the statement of
operations.
Royalties and license fees included in cost of goods sold were as follows:
Royalties and license fees $719 $697 $670 $765 $765 $806 $793 $853
==== ==== ==== ==== ==== ==== ==== ====
F-26
INDEX TO EXHIBITS
Number Description
------ -----------
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
10.1+ Corporate Services Agreement, dated as of January 31, 2002,
between Comverse Technology and the Registrant 10.2+ Federal Income Tax
Sharing Agreement, dated as of January 31, 2002, between Comverse
Technology and the Registrant
10.3+ Patent License Agreement, dated as of January 17, 2000, between
Comverse Patent Holding and the Registrant 10.4+ Registration Rights
Agreement, dated as of January 31, 2002, between Comverse Technology
and the Registrant
10.5+ Contribution Agreement, dated as of February 1, 2001, between
Comverse Technology and the Registrant 10.6+ Enterprise Resource
Planning Software Sharing Agreement, dated as of January 31, 2002,
between Comverse Ltd. and the Registrant
10.7+ Satellite Services Agreement, dated as of January 31, 2002, between Comverse, Inc. and the Registrant
10.8+ Proxy Agreement, dated as of May 21, 2001, between Comverse Technology, the Registrant and the United
Stated Department of Defense
10.9 Verint Systems Inc. Stock Incentive Compensation Plan (as amended through December 12, 2002)
10.10+ Stock Purchase Agreement, dated as of January 31, 2002, between Comverse, Inc. and the Registrant
10.11+ Distribution Agreement, dated as of July 1, 2001 between Comverse Infosys (Singapore) PTE LTD and the
Registrant
10.12+ Business Opportunities Agreement dated as of March 19, 2002, between Comverse Technology and the
Registrant
10.13+ Form of an Indemnification Agreement
10.14+ Verint Systems Inc. 2002 Employee Stock Purchase Plan
21.1+ Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
24.1 Powers of Attorney (see signature page to this report)
+ = Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Commission File No. 333-82300) which became effective on May 16, 2002.
VERINT SYSTEMS INC. STOCK INCENTIVE COMPENSATION PLAN
Amended as of December 12, 2002
(formerly Comverse Infosys, Inc. Stock Option Plan)
1. Purpose.
--------
The purpose of this Stock Incentive Compensation Plan (the "Plan") is to
induce key personnel, including employees, directors, independent contractors,
and other persons rendering valued services, to remain in the employ or service
of Verint Systems Inc. (the "Company"), and its present and future subsidiary
corporations, sister and parent corporations, and other affiliated companies
(each of which is hereinafter referred to as an "Affiliate"), to attract new
personnel and to encourage such personnel to secure or increase on reasonable
terms their stock ownership in the Company. The Board of Directors of the
Company (the "Board") believes that the granting of options (the "Options"),
stock appreciation rights (the "SARs"), restricted stock and deferred stock
awards (collectively, the Options, the SARs, restricted stock and deferred stock
are referred to as "Awards") under the Plan will promote continuity of
management and increased incentive and personal interest in the welfare of the
Company by those who are or may become primarily responsible for shaping and
carrying out the long range plans of the Company and securing its continued
growth and financial success. Options granted hereunder are intended to be
either (a) "incentive stock options" (which term, when used herein, shall have
the meaning ascribed thereto by the provisions of Section 422(b) of the Internal
Revenue Code of 1986, as amended (the "Code")) or (b) options which are not
incentive stock options or (c) a combination thereof, as determined by the
Committee (the "Committee") (referred to in Section 5 hereof) at the time of the
grant thereof.
2. Effective Date of the Plan.
---------------------------
The Plan became effective on September 10, 1996, by resolution of the
Board, subject to ratification of the Plan by the vote of the holders of a
majority of the outstanding shares of the common stock of the Company present in
person or by proxy at the 1996 Annual Meeting of Shareholders of the Company.
The Plan was amended on May 5, 1999, February 1, 2001, and by this amendment on
April 19, 2002.
3. Stock Subject to Plan.
----------------------
Five million (5,000,000) of the authorized but unissued shares of the
Company's common stock, par value $.001 per share (the "Common Stock") are
hereby reserved for issuance pursuant to Awards granted hereunder; provided,
however, that the number of shares so reserved may from time to time be reduced
to the extent that a corresponding number of issued and outstanding shares of
the Common Stock are purchased by the Company and set aside for issuance
pursuant to Awards. If any Awards expire or terminate for any reason without
having been exercised in full, the outstanding shares subject thereto shall
again be available for the purposes of the Plan.
1
4. Administration.
---------------
The Plan shall be administered by the Committee referred to in Section 5
hereof. If a Committee shall not be so established, the Board shall perform the
duties and functions ascribed herein to the Committee. Subject to the express
provisions of the Plan, the Committee shall have complete authority, in its
discretion, to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, to determine the terms and provisions of the
respective Award agreements (which need not be identical), to determine the
individuals (the "Participants") to whom and the times and the prices at which
Awards shall be granted, to establish the option periods, the number of shares
of the Common Stock to be subject to each Award, whether each Award shall be
exercisable or otherwise vest immediately or in installments and, if in
installments, the time and size thereof, whether each Option shall be an
incentive stock option or an Option which is not an incentive stock option, and
to make all other determinations necessary or advisable for the administration
of the Plan. In making such determinations, the Committee may take into account
the nature of the services rendered by the respective Participants, their
present and potential contributions to the success of the Company and the
Subsidiaries and such other factors as the Committee, in its discretion, shall
deem relevant. The Committee's determination on all of the matters referred to
in this Section 4 shall be conclusive.
5. Committee.
----------
The Committee shall consist of at least three individuals who may, but need
not, be members of the Board and all of whom shall be "disinterested persons"
within the meaning of Rule 16b-3(c)(2)(i) promulgated under the Securities
Exchange Act of 1934, as amended (the "34 Act"). The Committee shall be
appointed by the Board, which may at any time and from time to time remove any
member of the Committee, with or without cause, appoint additional members of
the Committee and fill vacancies, however caused, in the Committee. A majority
of the members of the Committee shall constitute a quorum. All determinations of
the Committee shall be made by a majority of its members. Any decision or
determination of the Committee reduced to writing and signed by all of the
members of the Committee shall be fully as effective as if it had been made at a
meeting duly called and held. If at any time no Committee has been appointed,
the Board shall act as the Committee.
6. Eligibility.
------------
A. An Option that is an incentive stock option may be granted only to
key employees of the Company or an Affiliate.
B. An Option that is not an incentive stock option and other Awards
may be granted to key employees of the Company or an Affiliate,
non-employee directors and to independent contractors rendering services to
the Company or an Affiliate.
2
7. Options. Options give a Participant the right to purchase a specified number
of shares of Common Stock, Deferred Stock or Restricted Stock (as selected by
the Committee) from the Company for a specified time period at a fixed price.
Options granted to Participants who are Employees may be either incentive stock
options or Options not intended to qualify as incentive stock options. Option
granted to Participants who are not employees shall be Options not intended to
qualify as incentive stock options. The grant of Options shall be subject to the
following terms and conditions:
A. The initial per share option price of any Option which is an
incentive stock option shall not be less than the Fair Market Value,
defined below, of a share of the Common Stock on the date of grant;
provided, however, that, in the case of a Participant who owns more than
10% of the total combined voting power of the Common Stock at the time an
incentive stock option is granted to him, the initial per share option
price shall not be less than 110% of the fair market value of the Common
Stock.
B. The initial per share option price of any Option which is not an
incentive stock option shall not be less than $0.001.
C. Participants shall be granted Options for such term as the
Committee shall determine, not in excess of ten (10) years from the date of
the granting thereof; provided, however, that in the case of a Participant
who owns more than 10% of the total combined voting power of the Common
Stock at the time an Option which is an incentive stock option is granted
to him, the term with respect to such Option shall not be in excess of five
(5) years from the date of the granting thereof.
D. The aggregate fair market value (determined at the date of grant)
of the shares of the Common Stock for which any Participant may be granted
incentive stock options which are exercisable for the first time in any
calendar year (whether under the terms of the Plan or any other stock
option plan of the Company) shall not exceed $100,000. To the extent that
any Option which is intended to be an incentive stock option fails to
satisfy the requirements of this Section, the Option shall be treated as an
Option which is not an incentive stock option. This Section shall be
applied by taking Options into account in the order in which they are
granted.
E. For the purposes hereof, the "Fair Market Value" of a share of the
Common Stock on any date shall be equal to (i) in the case of Options
granted effective upon completion of an initial public offering of the
Common Stock, the initial public offering price of such Common Stock, and
(ii) in all other cases, the closing sale price of a share of the Common
Stock as published by a national securities exchange on which the shares of
the Common Stock are traded on such date or, if there is no sale of the
Common Stock on such date, the average of the bid and asked prices on such
exchange at the close of trading on such date or, if the shares of the
Common Stock are not listed on a national securities exchange on such date,
the closing price in the over the counter market, or if the Common Stock is
not traded on a national securities exchange or the over the counter
market, the fair market value of a share of the Common Stock on such date
as shall be determined in good faith by the Committee in compliance with
Section 422(b)(4) of the Code and the applicable regulations promulgated
thereunder.
3
F. Options granted to employees of and consultants to the Company or
any Affiliate shall become exercisable at such times and in such
installments as the Committee shall determine at the time of the grant
thereof.
G. Except as hereinbefore otherwise set forth, or as set forth in the
applicable Award agreement, an Option may be exercised either in whole or
in part at any time or from time to time.
H. An Option may be exercised only by a written notice of intent to
exercise such Option with respect to a specified number of shares of the
Common Stock and payment to the Company of the amount of the option price
for the number of shares of the Common Stock so specified (such amount
being the "Exercise Price") in accordance with this Section 7.H. The
Exercise Price may be paid in cash or, in the discretion of the Committee,
(i) by delivery of shares of Common Stock then owned by the Participant,
(ii) by the withholding of shares of Common Stock for which an Option is
exercisable, (iii) to the extent permitted by law, by delivering to the
Company an executed promissory note (or such other form of indebtedness) on
such terms and conditions as the Committee shall determine in its sole
discretion, or (iv) by a combination of these methods. In addition, at the
discretion of the Committee, payment may also be made by delivering a
properly executed exercise notice to the Company together with a copy of
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds to pay the Exercise Price. To facilitate
the foregoing, the Company may enter into agreements for coordinated
procedures with one or more brokerage firms and, if necessary to effectuate
such agreements, the Committee may waive the delivery of any notices or
instructions required to be delivered by a Participant under this Section;
provided that such Participant complies with the procedures established by
any such brokerage firm for the exercise of Options pursuant to any such
agreement. The Committee may prescribe any other method of paying the
Exercise Price that it determines to be consistent with applicable law and
the purposes of the Plan, including, without limitation, in lieu of the
exercise of an Option by delivery of shares of Common Stock then owned by a
Participant, providing the Company with a notarized statement attesting to
the number of shares owned, where, upon verification by the Company, the
Company would issue to the Participant only the number of incremental
shares to which the Participant is entitled upon exercise of the Option. In
determining which methods a Participant may utilize to pay the Exercise
Price, the Committee may consider such factors as it deems appropriate. If
the Committee determines that all or any portion of the payment of the
Exercise Price may be made in kind by the delivery of shares of the Common
Stock having a Fair Market Value (as determined in the manner set forth in
paragraph E of Section 7 hereof) on the date of delivery equal to the
portion of the Exercise Price so paid; any such determination shall not
result in other than "fixed" accounting for purposes of the Company's
financial accounting."
4
I. No Option intended to qualify as an incentive stock option shall be
transferable otherwise than by will or the laws of descent and distribution
and, during the lifetime of the Participant, shall be exercisable only by
the Participant. Upon the death of a Participant, the person to whom the
rights have passed by will or by the laws of descent and distribution may
exercise an Option intended to qualify as an incentive stock option only in
accordance with this Section 7.
8. Deferred Stock.
---------------
An Award of Deferred Stock is an agreement by the Company to deliver to the
recipient a specified number of shares of Common Stock at the end of a specified
deferral period or periods. Such an Award shall be subject to the following
terms and conditions:
A. Deferred Stock Awards shall be evidenced by Deferred Stock
agreements. Such agreements shall conform to the requirements of the Plan
and may contain such other provisions as the Committee shall deem
advisable.
B. Upon determination of the number of shares of Deferred Stock to be
awarded to a Participant, the Committee shall direct that the same be
credited to the Participant's account on the books of the Company but that
issuance and delivery of the same shall be deferred until the date or dates
provided in Section 8(E) hereof. Prior to issuance and delivery hereunder
the Participant shall have no rights as a stockholder with respect to any
shares of Deferred Stock credited to the Participant's account.
C. Amounts equal to any dividends declared during the Deferral Period
with respect to the number of shares covered by a Deferred Stock Award will
be paid to the Participant currently, or deferred and deemed to be
reinvested in additional Deferred Stock, or otherwise reinvested on such
terms as are determined at the time of the Award by the Committee, in its
sole discretion, and specified in the Deferred Stock agreement.
D. The Committee may condition the grant of an Award of Deferred Stock
or the expiration of the Deferral Period upon the Participant's achievement
of one or more performance goal(s) specified in the Deferred Stock
agreement. If the Participant fails to achieve the specified performance
goal(s), either the Committee shall not grant the Deferred Stock Award to
the Participant or the Participant shall forfeit the Award and no Common
Stock shall be transferred to him pursuant to the Deferred Stock Award.
Unless otherwise determined by the Committee at the time of an Award,
dividends paid during the Deferral Period on Deferred Stock subject to a
performance goal shall be reinvested in additional Deferred Stock and the
lapse of the Deferral Period for such Deferred Stock shall be subject to
the performance goal(s) previously established by the Committee.
E. The Deferred Stock agreement shall specify the duration of the
Deferral Period taking into account termination of employment on account of
death, disability, retirement or other cause. The Deferral Period may
consist of one or more installments. At the end of the Deferral Period or
any installment thereof the shares of Deferred Stock applicable to such
installment credited to the account of a Participant shall be issued and
delivered to the Participant (or, where appropriate, the Participant's
legal representative) in accordance with 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 a Deferred Stock Award.
5
9. Restricted Stock.
-----------------
A. An Award of Restricted Stock is a grant by the Company of a
specified number of shares of Common Stock to the Participant, which shares
are subject to forfeiture upon the happening of specified events. Such an
Award shall be subject to the following terms and conditions:
B. Restricted Stock shall be evidenced by Restricted Stock agreements.
Such agreements shall conform to the requirements of the Plan and may
contain such other provisions as the Committee shall deem advisable.
C. Upon determination of the number of shares of Restricted Stock to
be granted to the Participant, the Committee shall direct that a
certificate or certificates representing the number of shares of Common
Stock be issued to the Participant with the Participant designated as the
registered owner. The certificate(s) representing such shares shall be
legended as to sale, transfer, assignment, pledge or other encumbrances
during the restriction period and deposited by the Participant, together
with a stock power endorsed in blank, with the Company, to be held in
escrow during the restriction period.
D. Unless otherwise determined by the Committee at the time of an
Award, during the restriction period the Participant shall have the right
to receive dividends from and to vote the shares of Restricted Stock.
E. The Committee may condition the grant of an Award of Restricted
Stock or the expiration of the restriction period upon the Participant's
achievement of one or more performance goal(s) specified in the Restricted
Stock Agreement. If the Employee fails to achieve the specified performance
goal(s), either the Committee shall not grant the Restricted Stock to the
Participant or the Participant shall forfeit the Award of Restricted Stock
and the Common Stock shall be forfeited to the Company. K. The Restricted
Stock agreement shall specify the duration of the restriction period and
the performance, employment or other conditions (including termination of
employment on account of death, disability, retirement or other cause)
under which the Restricted Stock may be forfeited to the Company. At the
end of the restriction period the restrictions imposed hereunder shall
lapse with respect to the number of shares of Restricted Stock as
determined by the Committee, and the legend shall be removed and such
number of shares delivered to the Participant (or, where appropriate, the
Participant's legal representative). The Committee may, in its sole
discretion, modify or accelerate the vesting and delivery of shares of
Restricted Stock.
6
10. Stock Appreciation Rights.
--------------------------
SARs are rights to receive a payment in cash, Common Stock, Restricted
Stock or Deferred Stock (as selected by the Committee) 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 SAR to the date of exercise. The grant of SARs shall be
subject to the following terms and conditions:
A. SARs shall be evidenced by SAR agreements. Such agreements shall
conform to the requirements of the Plan and may contain such other
provisions as the committee shall deem advisable. A SAR may be granted in
tandem with all or a portion of a related Option under the Plan ("Tandem
SAR"), or may be granted separately ("Freestanding SAR"). A Tandem SAR 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 shall be exercisable only to
the extent that the related Option is exercisable. In no event shall any
SAR be exercisable within the first six (6) months of its grant.
B. The base price of a Tandem SAR shall be the option price under the
related Option. The base price of a Freestanding SAR shall be not less than
100% of the Fair Market Value of the Common Stock, as determined by the
Committee, on the date of grant of the Freestanding SAR.
C. A SAR shall entitle the recipient to receive a payment equal to the
excess of the Fair Market Value of the shares of Common Stock covered by
the SAR on the date of exercise over the base price of the SAR. Such
payment may be in cash, shares of Common Stock, shares of Deferred Stock,
shares of Restricted Stock or any combination, as the Committee shall
determine. Upon exercise of a Tandem SAR as to some or all of the shares of
Common Stock covered by the grant, the related Option shall be canceled
automatically to the extent of the number of shares of Common Stock covered
by such exercise, and such shares shall no longer be available for purchase
under the Option pursuant to Section 7. Conversely, if the related Option
is exercised as to some or all of the shares of Common Stock covered by the
Award, the related Tandem SAR, if any, shall be canceled automatically to
the extent of the number of shares of Common Stock covered by the Option
exercise.
D. SARs shall be subject to the same terms and conditions applicable
to Options as stated in Section 7 above.
11. Transferability of Awards.
--------------------------
Except as provided above, Awards may not be pledged, assigned or
transferred for any reason during the Participant's lifetime, and any attempt to
do so shall be void and the relevant Award shall be forfeited. The Committee may
grant Awards (except Incentive Stock Options) that are transferable by the
Participant during his or her lifetime, but such Awards shall be transferable
only to the extent specifically provided in the agreement entered into with the
Participant. The transferee of the Participant shall, in all cases, be subject
to the provisions of the agreement between the Company and the Participant.
7
12. Termination of Employment.
--------------------------
A. Except as otherwise determined by the Committee, in the event a
Participant leaves the employ or service of the Company or any Affiliate
for any reason other than death, retirement or disability (as such term is
defined in Section 22(e) of the Code), whether voluntarily or otherwise,
each Award theretofore granted to him which shall not have expired or
otherwise been canceled shall, to the extent it is exercisable on the date
of such termination of employment or service and to the extent it shall not
have theretofore been exercised or become unexercisable, terminate upon the
earlier to occur of (i) the expiration of a period of ninety (90) days
after such termination of employment or service or (ii) the date specified
in said Award.
B. In the event a Participant's employment or service with the Company
or any Affiliate terminates by reason of his death, each Award theretofore
granted to him which shall not have expired or otherwise been canceled
shall, to the extent it is exercisable on the date of such Participant's
death and to the extent it shall not have theretofore been exercised or
become unexercisable, terminate upon the earlier to occur of (i) the
expiration of a period of one year after such Participant's death or (ii)
the date specified in said Award.
C. In the event a Participant's employment or service with the Company
or any Affiliate terminates by reason of his retirement, whether
voluntarily or as may be required by any pension plan, or by reason of his
disability (as such term is defined in Section 22(e) of the Code), each
Award theretofore granted to him which shall not have expired or otherwise
been canceled shall become immediately exercisable in full and shall, to
the extent it shall not have theretofore been exercised or become
unexercisable, terminate upon the earlier to occur of (i) the expiration of
ninety (90) days after the date of such Participant's retirement or
disability or (ii) the date specified in said Award.
D. The Committee or the Board may in its discretion extend the period
during which an Option held by any employee of or consultant to the Company
or any Affiliate may be exercised to such period, not to exceed three years
following the termination of a Participant's employment or service with the
Company or any Affiliate, as the Committee or the Board may determine to be
appropriate in any particular instance.
13. Adjustments Upon a Change in Control
------------------------------------
A. Except as otherwise provided in an applicable agreement, upon the
occurrence of a Change in Control (other than a Hostile Change of Control),
the Committee may elect to provide that all outstanding Options and Stock
Appreciation Rights shall immediately vest and become exercisable, each
Deferral Period and restriction period shall immediately lapse or all
shares of Deferred Stock subject to outstanding Awards shall be issued and
delivered to the Participant. In the event of a Hostile Change in Control,
each of the foregoing actions shall occur automatically upon the occurrence
of such Hostile Change in Control. At any time before a Change in Control,
the Committee may, without the consent of any Participant, (i) require the
entity effecting the Change in Control or a parent or subsidiary of such
entity to assume each outstanding Award or substitute an equivalent option
therefor or (ii) terminate and cancel all outstanding Awards upon the
Change in Control and pay the Participant 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 such Option and (y) the
number of shares of Common Stock subject to such Award. For the purposes of
this Section, an Award shall be considered assumed if, following the
merger, the award confers the right to purchase, for each share of Common
Stock subject to the Award immediately prior to the merger, the
consideration (whether stock, cash, or other securities or property)
received in the merger by holders of Common Stock for each share held on
the effective date of the transaction (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger was not solely common stock of the
successor corporation or its parent, the Committee may, with the consent of
the successor corporation, provide for the consideration to be received
upon the exercise of the Award, for each share of Common Stock subject to
the Award, to be solely common stock of the successor corporation or its
parent equal in fair market value to the per share consideration received
by holders of Common Stock in the merger.
8
B. "Change in Control" means (i) the Board (or, if approval of the
Board is not required as a matter of law, the shareholders of the Company)
shall approve (a) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of Common
Stock immediately prior to the merger have the same proportionate ownership
of common stock of the surviving corporation immediately after the merger,
or (b) any sale, lease, exchange or other transfer (on one transaction or a
series of related transactions) of all, or substantially all, the assets of
the Company or (c) the adoption of any plan or proposal for the liquidation
or dissolution of the Company; (ii) any person (as such term is defined in
Section 13(d) of the 1934 Act), corporation or other entity other than the
Company shall make a tender offer or exchange offer to acquire any Common
Stock (or securities convertible into Common Stock) for cash, securities or
any other consideration, provided that (a) at least a portion of such
securities sought pursuant to the offer in question is acquired and (b)
after consummation of such offer, the person, corporation or other entity
in question is the "beneficial owner" (as such term is defined in Rule
13d-3 under the 1934 Act), directly or indirectly, of 20% or more of the
outstanding shares of Common Stock (calculated as provided in paragraph (d)
of such Rule 13d-3 in the case of rights to acquire Common Stock); (iii)
during any period of two consecutive years, individuals who at the
beginning of such period constituted the entire Board ceased for any reason
to constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved
by a vote of at least two-thirds of the directors then still in office who
were directors at the beginning of the period; or (iv) the occurrence of
any other event the Committee determines shall constitute a "Change in
Control" hereunder.
9
C. "Hostile Change in Control" means any Change in Control described
in Section 13(B) above that is not approved or recommended by the Board.
14. Adjustment of Number of Shares.
-------------------------------
A. In the event that a dividend shall be declared upon the Common
Stock payable in shares of the Common Stock, the number of shares of the
Common Stock then subject to any Award and the number of shares of the
Common Stock reserved for issuance in accordance with the provisions of the
Plan but not yet covered by an Award shall be adjusted by adding to each
share the number of shares which would be distributable thereon if such
share had been outstanding on the date fixed for determining the
shareholders entitled to receive such stock dividend. In the event that the
outstanding shares of the Common Stock shall be changed into or exchanged
for a different number or kind of shares of stock or other securities of
the Company or of another corporation, whether through reorganization,
recapitalization, stock split-up, combination of shares, sale of assets,
merger or consolidation, then, there shall be substituted for each share of
the Common Stock then subject to any Award and for each share of the Common
Stock reserved for issuance in accordance with the provisions of the Plan
but not yet covered by an Award, the number and kind of shares of stock or
other securities into which each outstanding share of the Common Stock
shall be so changed or for which each such share shall be exchanged;
provided, however, that, in the event of a merger or consolidation in which
the Company is not the surviving corporation or of a sale by the Company of
all or substantially all of its assets to a corporation not controlled by
the Company (within the meaning of Section 1563(a)(1) of the Code)
immediately prior to such transaction, the Board determines, in its
discretion, that such change or exchange cannot be effected or would be
inappropriate, then, each Option theretofore granted to a Participant which
shall not have expired or otherwise been canceled shall become immediately
exercisable in full and shall terminate upon the later to occur of (i) the
expiration of thirty (30) days following notice to the Participant by the
Company of such merger, consolidation or sale, or (ii) the date of such
merger, consolidation or sale.
B. In the event that there shall be any change, other than as
specified in this Section 14, in the number or kind of outstanding shares
of the Common Stock, or of any stock or other securities into which the
Common Stock shall have been changed, or for which it shall have been
exchanged, then, if the Committee shall, in its sole discretion, determine
that such change equitably requires an adjustment in the number or kind of
shares then subject to any Award and the number or kind of shares reserved
for issuance in accordance with the provisions of the Plan but not yet
covered by an Award, such adjustment shall be made by the Committee and
shall be effective and binding for all purposes of the Plan and of each
Award agreement entered into in accordance with the provisions of the Plan.
10
C. In the case of any substitution or adjustment in accordance with
the provisions of this Section 14, the option price in each stock option
agreement for each share covered thereby prior to such substitution or
adjustment shall be the option price for all shares of stock or other
securities which shall have been substituted for such share or to which
such share shall have been adjusted in accordance with the provisions of
this Section 14. No adjustment or substitution provided for in this Section
14 shall require the Company to sell a fractional share under any stock
option agreement.
15. Purchase for Investment and Waivers.
------------------------------------
Unless the shares to be issued upon the exercise of an Option or other
Award by a Participant shall be registered prior to the issuance thereof under
the Securities Act of 1933, as amended, such Participant shall, as a condition
of the Company's obligation to issue such shares, be required to give a
representation in writing that he is acquiring such shares for his own account
as an investment and not with a view to, or for sale in connection with, the
distribution of any thereof.
16. Amendment of Plan.
------------------
The Board may at any time make such modifications of the Plan as it shall
deem advisable; provided, however, that (i) the provisions hereof relating to
the receipt of Options by directors of the Company who are not employees of the
Company or any Affiliate, the exercise price and terms and conditions of the
exercise thereof may not be amended more than once in any period of six (6)
months, except as may be required to comply with changes in the Code or other
applicable law, and (ii) the Board may not without further approval of
shareholders representing a majority of the voting power present in person or by
proxy at any special or annual meeting of shareholders increase the number of
shares of the Common Stock as to which Options may be granted under the Plan (as
adjusted in accordance with the provisions of Section 14 hereof), or change the
class of persons eligible to participate in the Plan or change the manner of
determining the option prices which would result in a decrease in the price of
Options or other Awards, or extend the period during which Awards may be granted
or exercised. Except as otherwise provided in Section 17 hereof, no termination
or amendment of the Plan may, without the consent of the Participant to whom any
Option shall theretofore have been granted, adversely affect the rights of such
Participant under such Option.
17. Expiration and Termination of the Plan.
---------------------------------------
The Plan shall terminate on March 10, 2012 or at such earlier time as the
Board may determine. Awards may be granted under the Plan at any time and from
time to time prior to its termination. Any Awards outstanding under the Plan at
the time of the termination of the Plan shall remain in effect until such Awards
shall have been exercised or shall have expired in accordance with its terms.
11
18. Awards Granted in Connection with Acquisitions.
-----------------------------------------------
In the event that the Committee determines that, in connection with the
acquisition by the Company of another corporation which shall become an
Affiliate of the Company (such corporation being hereinafter referred to as an
"Acquired Affiliate"), Awards may be granted hereunder to key employees of an
Acquired Affiliate in exchange for then outstanding options to purchase
securities of the Acquired Affiliate, such Awards may be granted at such option
prices, may be exercisable immediately or at any time or times either in whole
or in part, may be granted without the requirement that the Participant enter
into an agreement with the Company that he will remain in the employ or service
of the Company or an Affiliate for any required period of time and may contain
such other provisions not inconsistent with the Plan, or the requirement set
forth in Section 16 hereof that certain amendments to the Plan must be approved
by the shareholders of the Company, as the Committee, in its discretion, shall
deem appropriate at the time of the granting of such Awards.
19. Withholding.
------------
A. In connection with the transfer of shares of Common Stock as a
result of the exercise or vesting of an Award or upon any other event that
would subject the Participant to taxation, the Company shall have the right
to require the Participant to pay an amount in cash or to retain or sell
without notice, or to demand surrender of, shares of Common Stock in value
sufficient to cover any tax, including any Federal, state or local income
tax, required by any governmental entity to be withheld or otherwise
deducted and paid with respect to such transfer ("Withholding Tax"), and to
make payment (or to reimburse itself for payment made) to the appropriate
taxing authority of an amount in cash equal to the amount of such
Withholding Tax, remitting any balance to the employee. For purposes of
this Section 19, the value of shares of Common Stock so retained or
surrendered shall be the Fair Market Value on the date that the amount of
the Withholding Tax is to be determined (the "Tax Date"), and the value of
shares of Common Stock so sold shall be the actual net sale price per share
(after deduction of commissions) received by the Company.
B. Notwithstanding the foregoing, the Participant shall be entitled to
satisfy the obligation to pay any Withholding Tax, in whole or in part, by
providing the Company with funds sufficient to enable the Company to pay
such Withholding Tax or by requiring the Company to retain or to accept
upon delivery thereof shares of Common Stock (other than unvested
Restricted Stock) sufficient in value (determined in accordance with the
last sentence of the preceding paragraph) to cover the amount of such
Withholding Tax. Each election by a Participant to have shares retained or
to deliver shares for this purpose shall be subject to the following
restrictions: (i) the election must be in writing and made on or prior to
the Tax Date; and (ii) the election shall be subject to the disapproval of
the Committee.
12
C. In the event of the death of a Participant, an additional condition
of exercising any Option or other Award shall be the delivery to the
Company of such tax waivers and other documents as the Committee shall
determine.
20. General.
--------
A. For purposes of this Plan, transfer of employment between the
Company and its Affiliates shall not be deemed termination of employment.
B. With respect to Holders subject to Section 16 of the 1934 Act,
transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the 1934 Act. To the
extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Committee.
C. Without amending the Plan, Awards may be granted to Participants
who are foreign nationals or employed outside the United States or both, on
such terms and conditions different from those specified in the Plan as
may, in the judgment of the Committee, be necessary or desirable to further
the purpose of the Plan.
D. To the extent that Federal laws (such as the 1934 Act, or the Code)
do not otherwise control, the Plan and all determinations made and actions
taken pursuant hereto shall be governed by the corporate law of the State
of Delaware and construed accordingly. The Plan is not intended to be an
"employee benefit plan" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-98967 and 333-98965 of Verint Systems Inc. on Form S-8 of our report dated
March 10, 2003, appearing in this Annual Report on Form 10-K of Verint Systems
Inc. for the year ended January 31, 2003.
/s/ DELOITTE & TOUCHE LLP
Jericho, New York
April 24, 2003
