STOCK-BASED COMPENSATION

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



	Three Months Ended October 31,				Nine Months Ended October 31,
	2012		2011		2012		2011
	(In thousands)
Stock options:
Product costs	$	—	$	4	$	26	$	122
Service costs	19		28		108		230
Research and development	22		32		132		378
Selling, general and administrative	45		222		486		2,032
	86		286		752		2,762
Restricted/Deferred stock awards:
Product costs	257		242		557		564
Service costs	545		491		1,423		1,445
Research and development	747		625		1,774		1,865
Selling, general and administrative	6,108		5,928		16,701		18,444
	7,657		7,286		20,455		22,318
Total	$	7,743	$	7,572	$	21,207	$	25,080

Stock-based compensation expense associated with awards granted by CTI and options granted by Starhome to Comverse's and Starhome's employees are included in discontinued operations and therefore not presented in the table above. For the three months ended October 31, 2012 and 2011, such stock-based compensation expense was $2.2 million and $1.1 million, respectively. For the nine months ended October 31, 2012 and 2011, such stock-based compensation expense was $6.0 million and $3.0 million, respectively.

CTI

Replacement and Modification of Equity-Based Compensation Awards

In connection with the Share Distribution, CTI's equity-based compensation awards held by CTI employees were modified and CTI 's equity-based compensation awards held by Comverse employees were replaced with Comverse's equity-based compensation awards. The modification and replacement of CTI's equity- based compensation awards occurred on November 1, 2012. The change in terms of CTI's equity-based awards held by CTI employees was considered a modification of an award. As a result, the Company compared the fair value of the awards immediately prior to the Share Distribution to the fair value of the awards immediately after the Share Distribution to measure incremental compensation cost. The modification resulted in an increase in the fair value of the awards. The amount of non-cash compensation expense was negligible. For a description of the treatment of CTI's equity-based compensation awards see Note 20, Subsequent Events, Equity-Based Compensation Awards.

CTI’s Restricted Period

As a result of the delinquency in the filing of periodic reports under the Exchange Act since April 2006, CTI had been ineligible to use its registration statements on Form S-8 for the offer and sale of equity securities, including equity securities issuable upon exercise of stock options by employees. Consequently, to ensure that it did not violate the federal securities laws, CTI prohibited the exercise of vested stock options from April 2006 until such time as it was determined that CTI has filed all periodic reports required in a 12-month period and had an effective registration statement on Form S-8 on file with the SEC. This period is referred to as the “restricted period.” In October 2011, CTI resumed option exercises.

Restricted Awards and Stock Options

CTI granted restricted stock unit ("RSU") awards, deferred stock unit (“DSU”) awards (collectively “Restricted Awards”) and stock options under its various stock incentive plans. The information below includes stock option activity for CTI and Comverse included in continuing operations and discontinued operations.

During the three and nine months ended October 31, 2012, CTI granted RSU awards covering an aggregate of 95,242 shares and 3,701,696 shares, respectively, of CTI’s common stock to certain executive officers and key employees.

During the three and nine months ended October 31, 2011, CTI granted DSU awards covering an aggregate of 35,000 shares and 1,360,116 shares, respectively, of CTI’s common stock to certain executive officers and key employees.

During the three and nine months ended October 31, 2012, CTI granted stock options to purchase an aggregate of 296,356 shares and 1,385,000 shares, respectively, of CTI's common stock to certain executive officers.

During the three and nine months ended October 31, 2012, 4,562 shares and 9,064 shares, respectively, of CTI common stock were issued upon exercise of stock options under CTI’s stock incentive plans. Total proceeds for these shares were negligible.

As of October 31, 2012, stock options to purchase 3,772,076 shares of CTI’s common stock and Restricted Awards with respect to 4,428,943 shares of CTI’s common stock were outstanding and 16,960,924 shares of CTI’s common stock were available for future grant under CTI’s Stock Incentive Compensation Plans.

The total fair value of Restricted Awards vested during the three and nine months ended October 31, 2012 was $0.7 million and $7.2 million, respectively, and during the three and nine months ended October 31, 2011 was $0.4 million and $9.2 million, respectively. As of October 31, 2012, the unrecognized compensation expense, net of estimated forfeitures, related to unvested Restricted Awards was $22.6 million, which is expected to be recognized over a weighted-average period of 2.19 years.

Outstanding stock options as of October 31, 2012 include unvested stock options to purchase 1,385,000 shares of CTI’s common stock with a weighted-average grant date fair value of $2.01, an expected term of 4 years and a total fair value of $2.8 million. The unrecognized compensation expenses related to the remaining unvested stock options to purchase CTI’s common stock was $2.5 million, which is expected to be recognized over a weighted-average period of 2.67 years.

The fair value of stock options to purchase CTI’s common stock vested during the three and nine months ended October 31, 2012 was $0 and $0.3 million respectively. The fair value of stock options to purchase CTI’s common stock vested during the three and nine months ended October 31, 2011 was $0 and $0.4 million, respectively.

Verint

Stock Options

Verint Systems has generally not granted stock options subsequent to January 31, 2006. However, in connection with Verint’s acquisition of Vovici on August 4, 2011, stock options to purchase shares of Vovici common stock were converted into stock options to purchase approximately 42,000 shares of Verint Systems’ common stock. In addition, in connection with Verint’s acquisition of Witness on May 25, 2007, stock options to purchase shares of Witness common stock were converted into stock options to purchase approximately 3.1 million shares of Verint Systems’ common stock.

During the three and nine months ended October 31, 2012, approximately 19,000 and 78,000 common shares of Verint Systems’ common stock were issued pursuant to stock option exercises, respectively, for total proceeds of $0.4 million and $1.4 million, respectively. During the three and nine months ended October 31, 2011, approximately 55,000 and 487,000 shares of Verint Systems' common stock were issued pursuant to stock option exercises, respectively, for total proceeds of $1.0 million and $9.7 million, respectively. As of October 31, 2012, Verint Systems had approximately 1.0 million stock options outstanding, of which all but 20,000 were exercisable as of such date.

Restricted Stock Units and Restricted Stock Awards

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

During the nine months ended October 31, 2012 and 2011, Verint Systems granted 1.2 million and 0.9 million restricted stock units, respectively, substantially all of which were granted during the three months ended April 30, 2012 and 2011, respectively. Forfeitures of restricted stock units in each period were not significant. As of October 31, 2012, Verint Systems had 1.5 million of restricted stock units outstanding, with a weighted-average grant date fair value of $31.52 per unit. Verint Systems did not grant any restricted stock awards during the nine months ended October 31, 2012 and 2011, and there were no unvested restricted stock awards outstanding as of October 31, 2012.

Substantially all of the restricted stock units granted during the nine months ended October 31, 2012 include a provision which allows these awards to be settled with cash payments upon vesting, rather than with delivery of common stock, at the discretion of Verint Systems' board of directors. As of October 31, 2012, settlement of these awards with cash payments was not considered probable, and therefore these awards have been accounted for as equity-classified awards.

As of October 31, 2012, there was approximately $34.5 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.1 years.

Phantom Stock Units

Awards under Verint's stock bonus program are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of Verint's common stock. Verint's other liability-classified awards include Verint's phantom stock awards, the values of which track the market price of Verint's common stock and are therefore subject to volatility, and which are settled with cash payments equivalent to the market value of Verint's common stock upon vesting. Upon settlement of other liability-classified awards with equity, compensation expense associated with those awards is reported within equity.

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

During the nine months ended October 31, 2012 and 2011, grants and forfeitures of phantom stock units by Verint Systems were not significant. Total cash payments made upon vesting of phantom stock units were $2.3 million for the nine months ended October 31, 2012, of which only a negligible amount occurred during the three months ended October 31, 2012. Total cash payments made upon vesting of phantom stock units were $10.3 million for the nine months ended October 31, 2011, of which only a negligible amount occurred during the three months ended October 31, 2011. Total accrued liabilities for phantom stock units were $0.2 million and $1.9 million as of October 31, 2012 and January 31, 2012, respectively.

Stock Bonus Program

In September 2011, Verint Systems’ board of directors approved, and in December 2011 revised, a stock bonus program under which eligible Verint employees may receive a portion of their annual or quarterly bonuses (depending on the employee’s bonus plan) in the form of fully vested shares of Verint Systems’ common stock. As of October 31, 2012, executive officers of Verint were not eligible to participate in this program. This program is subject to annual funding approval by Verint Systems’ board of directors and an annual cap on the number of shares that can be issued. Subject to these limitations, the number of shares to be issued under the program for a given year is determined using a five-day trailing average price of Verint Systems’ common stock when the awards are calculated, reduced by a discount to be determined by Verint Systems’ board of directors each year (the "discount"). To the extent that this program is not funded in a given year or the number of shares of common stock needed to fully satisfy employee enrollment exceeds the annual cap, the applicable portion of the employee bonuses will generally revert to being paid in cash. Obligations under this program are accounted for as liabilities, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of Verint's common stock determined using a discounted average price of Verint's common stock, as described above.

For the fiscal year ended January 31, 2012, Verint Systems’ board of directors has approved up to 150,000 shares of Verint Systems’ common stock for awards under this program and a discount of 20% (the "2012 stock bonus program"). The total accrued liability for Verint's 2012 stock bonus program was $3.2 million as of January 31, 2012. Approximately 132,000 shares of common stock earned under Verint's 2012 stock bonus program were issued during the three months ended July 31, 2012, which, along with $0.1 million of awards settled with cash payments, settled Verint Systems’ obligations under Verint's 2012 stock bonus program.

In August 2012, Verint Systems' board of directors approved up to 150,000 shares of Verint Systems' common stock, and a discount of 15%, for awards under a stock bonus program for the fiscal year ending January 31, 2013 (the "2013 stock bonus program"). The total accrued liability for the 2013 stock bonus program was $2.0 million as of October 31, 2012. Shares of Verint Systems' common stock earned under the 2013 stock bonus program in respect of the three months ended October 31, 2012 are expected to be issued during the three months ending January 31, 2013, and awards earned under the 2013 stock bonus program in respect of the three months and the fiscal year ending January 31, 2013 are expected to be issued during the first half of the fiscal year ending January 31, 2014.