EX-99.1 3 cmvt-1312012x8kcnsdiscop.htm EXHIBIT - SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CMVT - 1.31.2012 - 8k CNS Disc op
Exhibit 99.1
 
DEFINITIONS

In this Current Report on Form 8-K (or this Current Report):
•
CTI means Comverse Technology, Inc., excluding its subsidiaries;
•
Comverse, Inc. means Comverse, Inc., CTI's wholly-owned subsidiary prior to completion of the Share Distribution (as defined below) on October 31, 2012, excluding its subsidiaries;
•
Comverse means Comverse, Inc, including its subsidiaries;
•
Verint Systems means Verint Systems Inc., CTI's majority-owned subsidiary, excluding its subsidiaries;
•
Verint means Verint Systems, including its subsidiaries;
•
Ulticom, Inc. means Ulticom, Inc., CTI's majority-owned subsidiary prior to its sale on December 3, 2010, excluding its subsidiaries;
•
Ulticom means Ulticom, Inc., including its subsidiaries;
•
Starhome B.V. means Starhome B.V., CTI's majority-owned subsidiary prior to completion of the Starhome Distribution (as defined below) on October 19, 2012, excluding its subsidiaries;
•
Starhome means Starhome B.V., including its subsidiaries; and
•
we, us, our, our company and similar expressions mean CTI, including its subsidiaries.
FORWARD-LOOKING STATEMENTS
This Current Report includes “forward−looking statements.” Forward−looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. In some cases, forward−looking statements can be identified by the use of terminology such as “may,” “expects,” “plans,” “anticipates,” “estimates,” “believes,” “potential,” “projects,” “forecasts,” “intends,” or the negative thereof or other comparable terminology. By their very nature, forward−looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results, performance and the timing of events to differ materially from those anticipated, expressed or implied by the forward−looking statements in this Current Report. Such risks or uncertainties may give rise to future claims and increase exposure to contingent liabilities. These risks and uncertainties arise from (among other factors) the following:
•
risks associated with Verint's and CTI's ability to satisfy the conditions and terms of an agreement and plan of merger dated August 12, 2012 (or the "Verint Merger Agreement") pursuant to which CTI agreed to merge with and into a subsidiary of Verint (or the "Verint Merger"), and to consummate the Verint Merger in the estimated time frame, or at all;
•
uncertainties regarding the expected benefits of the Verint Merger;
•
uncertainties regarding the tax consequences of the Verint Merger;  
•
the risk that, in view of the Share Distribution, CTI is a smaller company that may be subject to increased instability and, prior to the proposed Verint Merger any elimination of the CTI holding company structure, CTI's interest in Verint will be its primary asset and CTI will be dependent on Comverse's performance of various transition services agreements necessary for its ongoing operations;
•
the risk that, if the Verint Merger is not consummated, CTI, may cease to maintain a majority of the voting power of Verint's outstanding equity securities and may cease to maintain control over Verint's operations and may be required to no longer consolidate Verint's financial statements within CTI's consolidated financial statements (in which event the presentation of its consolidated financial statements would be materially different from the presentation for the periods presented in this Current Report);
•
the continuation of a material weakness related to income taxes or the discovery of additional material weaknesses in CTI's internal control over financial reporting and any delay in the implementation of remedial measures;
•
the risk of disruption in the credit and capital markets which may limit CTI's ability to access capital;
•
the risk that CTI may need to recognize future impairment of goodwill and intangible assets;

1

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

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◦
risks associated with Verint's dependence on a limited number of suppliers or original equipment manufacturers for certain components of Verint's products, including companies that may compete with Verint or work with its competitors;
◦
risks that Verint's customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;
◦
risks that Verint may experience liquidity or working capital issues and related risks that financing sources may be unavailable to Verint on reasonable terms or at all;
◦
risks associated with significant leverage resulting from Verint's current debt position, including with respect to covenant limitations and compliance, fluctuations in interest rates, and Verint's ability to maintain its credit ratings;
◦
risks relating to Verint's ability to timely implement new accounting pronouncements or new interpretations of existing accounting pronouncements and related risks of future restatements or filing delays; and
◦
risks associated with changing tax rates, tax laws and regulations, and the continuing availability of expected tax benefits;
These risks and uncertainties discussed above, as well as others, are discussed in greater detail in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 31, 2012 (or the 2011 Form 10-K) and in Part II, Item 1A "Risk Factors" of each of our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2012 (or the Q1 2012 Form 10-Q), the fiscal quarter ended July 31, 2012 (or the Q2 2012 Form 10-Q), the fiscal quarter ended October 31, 2012 (or the Q3 2012 Form 10-Q) and this Current Report. The documents and reports we file with the SEC are available through CTI, or its website, www.cmvt.com, or through the SEC's Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) at www.sec.gov. CTI undertakes no commitment to update or revise any forward-looking statements except as required by law.
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data as of and for the fiscal years ended January 31, 2012, 2011, 2010, 2009 and 2008. The selected consolidated financial data as of January 31, 2012 and 2011 and for the fiscal years ended January 31, 2012, 2011 and 2010 were derived from the consolidated financial statements included in Exhibit 99.1 of this Current Report. The selected consolidated financial data as of January 31, 2010, 2009 and 2008 and for the fiscal years ended January 31, 2009 and 2008 were derived from unaudited consolidated financial statements not included herein.
The selected financial data reflects the impact of the distribution of all of the outstanding shares of common stock of Comverse on a pro rata basis to CTI's shareholders on October 31, 2012 (referred to as the Share Distribution), the sale of Starhome to a third party on October 19, 2012 (referred to as the Starhome Disposition) and the sale of Ulticom to a third party on December 3, 2010 (referred to as the Ulticom Sale). As a result of the Share Distribution, the Starhome Disposition and the Ulticom Sale, the results of operations of Comverse, Starhome and Ulticom, including the gain on the Ulticom Sale, are reflected in discontinued operations, less applicable income taxes, as a separate component of net loss in the consolidated statement of operations data, and the assets and liabilities of Comverse, Starhome and Ulticom are reflected in discontinued operations in the consolidated balance sheet data presented below.
The comparability of the selected consolidated financial data as of and for the fiscal years ended January 31, 2012, 2011, 2010, 2009 and 2008 has been materially affected primarily by Verint's acquisition of Witness in May 2007, the impairment of goodwill, intangible assets and short-term investments, in each of the fiscal years ended January 31, 2009 and 2008, the incurrence of significant professional fees in connection with the Special Committee investigations, the revenue recognition evaluations and efforts to become current in periodic reporting obligations under the federal securities laws, our adoption of the new accounting standard for uncertain tax positions in the fiscal year ended January 31, 2008, our adoption of the new accounting guidance relating to revenue recognition for the fiscal year ended January 31, 2012, the repurchase by CTI of $417.3 million aggregate principal amount of certain convertible debt obligations as required under the terms of the applicable indenture in the fiscal year ended January 31, 2010 and the Ulticom Sale on December 3, 2010. The selected consolidated financial data presented should be read together with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this Current Report.

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Fiscal Years Ended January 31,
  
 
2012
 
2011
 
2010
 
2009 (1)
 
2008 (1)
 
 
 
 
 
 
 
 
(UNAUDITED)
 
(UNAUDITED)
 
 
(In thousands, except per share data)
Consolidated Statement of
   Operations Data:
 
 
 
 
 
 
 
 
 
 
Total revenue (2)
 
$
782,648

 
$
726,799

 
$
703,693

 
$
669,604

 
$
541,514

(Loss) income from operations (3)
 
(1,952
)
 
(6,274
)
 
8,845

 
(38,369
)
 
(151,483
)
Net (loss) income from continuing operations (3)
 
(30,109
)
 
(28,258
)
 
11,173

 
(87,708
)
 
(312,192
)
Loss from discontinued
   operations, net of tax
 
(910
)
 
(91,028
)
 
(270,794
)
 
(271,080
)
 
(159,807
)
Net loss
 
(31,019
)
 
(119,286
)
 
(259,621
)
 
(358,788
)
 
(471,999
)
Less: Net (income) loss attributable to
   noncontrolling interest
 
(27,707
)
 
(13,820
)
 
(7,783
)
 
33,536

 
82,757

Net loss attributable to Comverse
   Technology, Inc.
 
(58,726
)
 
(133,106
)
 
(267,404
)
 
(325,252
)
 
(389,242
)
Loss per share attributable to
   Comverse Technology, Inc.’s
   shareholders:
 
 
 
 
 
 
 
 
 
 
Basic (loss) earnings per share
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.27
)
 
$
(0.22
)
 
$
0.01

 
$
(1.20
)
 
$
(0.66
)
Discontinued operations
 
(0.01
)
 
(0.43
)
 
(1.32
)
 
(0.39
)
 
(1.25
)
Basic loss per share
 
$
(0.28
)
 
$
(0.65
)
 
$
(1.31
)
 
$
(1.59
)
 
$
(1.91
)
Diluted (loss) earnings per share
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.27
)
 
$
(0.22
)
 
$
0.01

 
$
(1.20
)
 
$
(0.66
)
Discontinued operations
 
(0.01
)
 
(0.43
)
 
(1.32
)
 
(0.39
)
 
(1.25
)
Diluted loss per share
 
$
(0.28
)
 
$
(0.65
)
 
$
(1.31
)
 
$
(1.59
)
 
$
(1.91
)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of January 31,
 
 
2012
 
2011 (4)
 
2010
 
2009
 
2008
 
 
 
 
 
 
(UNAUDITED)
 
(UNAUDITED)
 
(UNAUDITED)
 
 
(In thousands)
Consolidated Balance Sheet Data:
 
 
Total assets (5)
 
$
2,657,013

 
$
2,823,875

 
$
3,101,211

 
$
3,748,268

 
$
4,169,887

Indebtedness including current
   maturities (6)
 
599,574

 
585,429

 
623,107

 
1,044,477

 
1,024,815

Comverse Technology, Inc.
   shareholders’ equity (7)
 
441,508

 
413,008

 
422,486

 
653,258

 
985,071

Total equity
 
552,752

 
485,887

 
509,722

 
763,187

 
1,123,710

Accumulated deficit
 
(1,762,517
)
 
(1,703,791
)
 
(1,575,316
)
 
(1,303,281
)
 
(978,029
)
(1)
Includes the results of operations of Witness (i) for the entire fiscal year ended January 31, 2009 and (ii) from its acquisition by Verint in May 2007 for the fiscal year ended January 31, 2008.
(2)
Total revenue for the fiscal year ended January 31, 2012 includes an additional $12.4 million of revenue recognized as a result of the adoption of revenue recognition guidance issued by the Financial Accounting Standard Board (the “FASB”) and effective for us for fiscal periods commencing February 1, 2011.
(3)
For the fiscal years ended January 31, 2012, 2011, 2010, 2009 and 2008, CTI recorded compliance-related professional fees of $26.3 million, $79.6 million, $67.2 million, $42.1 million and $40.3 million, respectively.
(4)
Excludes the balance sheet data of Ulticom which was sold on December 3, 2010.
(5)
Includes assets of discontinued operations of approximately $904.3 million, $1,062.1 million, $1,417.2 million, $1,834.1 million, and $2,129.6 million as of January 31, 2012, 2011, 2010, 2009, and 2008, respectively. Amounts related to the presentation of Comverse, Starhome and Ulticom as discontinued operations have been reflected retrospectively for all periods presented.
(6)
Includes (i) outstanding secured borrowings under (a) Verint's new credit agreement as of January 31, 2012, and (b) Verint's prior facility as of January 31, 2011, 2010, 2009, and 2008, respectively, and (ii) aggregate principal amount of convertible debt obligations outstanding as of January 31, 2012, 2011, 2010, 2009, and 2008, respectively.
(7)
CTI has not declared a dividend during the fiscal years presented.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with “Selected Financial Data,” and the consolidated financial statements and related notes included elsewhere in this Current Report. This discussion and analysis contains forward-looking statements based on current expectations relating to future events and our future financial performance that involve risks and uncertainties. See “Forward-Looking Statements.” Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A, “Risk Factors,” in the 2011 Form 10-K, Item 1, "Business" included in our 2011 Form 10-K and in our other SEC filings.
Unless otherwise stated, this discussion and analysis relates to financial data as of January 31, 2012 and 2011 and for the fiscal years ended January 31, 2012, 2011 and 2010, which were derived from the consolidated financial statements included elsewhere in this Current Report. Percentages and amounts within this section may not calculate precisely due to rounding differences.
This discussion and analysis includes the following sections:
•
OVERVIEW, which summarizes our structure and management, significant events during the fiscal year, financial highlights and the key trends, challenges and uncertainties of our Verint segment;
•
RESULTS OF OPERATIONS, which provides a comparative discussion and analysis of our consolidated results of operations and, because management views and analyzes our business through our segment, a discussion and analysis of the results of operations of our Verint segment (in each case, for the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011, and for the fiscal year ended January 31, 2011 compared to the fiscal year ended January 31, 2010). In addition, we discuss trends, events and uncertainties management currently believes are reasonably likely to have a material effect on future operational results;
•
LIQUIDITY AND CAPITAL RESOURCES, which provides an overview of recent liquidity developments, sources of liquidity, cash uses and other matters relating to our liquidity and capital resources;
•
OFF-BALANCE SHEET ARRANGEMENTS, which discloses certain material off-balance sheet arrangements;
•
CONTRACTUAL OBLIGATIONS, which discusses our long-term debt and other long-term and short-term contractual obligations as of January 31, 2012;
•
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS, which discusses our accounting policies that require significant management judgment, assumptions and estimates; and
•
RECENT ACCOUNTING PRONOUNCEMENTS, which describes accounting standards that we implemented during the fiscal year and that we may be required to implement in the future.
OVERVIEW
Corporate Structure
CTI is a holding company that conducts business through its majority-owned subsidiary, Verint Systems. Prior to the completion of the Share Distribution (disclosed below) and the Starhome Disposition (disclosed below), CTI also conducted business through its wholly-owned subsidiary, Comverse, and its majority-owned subsidiary, Starhome.
As a result of the Share Distribution and the Starhome Disposition, we have one reportable segment, Verint, comprised of Verint Systems and its subsidiaries.
The results of operations of CTI's holding company operations are included in the column captioned All Other as part of our business segment presentation. On October 31, 2012, CTI completed the Share Distribution. Accordingly, CTI no longer presents the reportable segments Comverse BSS and Comverse VAS and Comverse's operations previously included in All Other have been removed therefrom as Comverse's results of operations are included in discontinued operations for the fiscal years ended January 31, 2012, 2011 and 2010. In addition, on August 1, 2012, CTI entered into the Starhome Share Purchase Agreement with unaffiliated purchasers and completed the Starhome Disposition on October 19, 2012. Accordingly, Starhome's results of operations, which previously were included in All Other, are included in discontinued operations for the fiscal years ended January 31, 2012, 2011 and 2010.
CTI views Verint and its operations to be separate and independent from CTI. Verint has a separate management that is responsible for its day-to-day operations. Certain of CTI's officers and directors serve as members of the board of directors of Verint. Accordingly, CTI's consolidated balance sheets reflect Verint's cash and cash equivalents and indebtedness. CTI,

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however, does not view Verint's cash and cash equivalents as readily accessible to CTI and CTI does not guarantee Verint's indebtedness. In addition, CTI does not expect to receive cash dividends from Verint Systems which is precluded from paying cash dividends to CTI under its new credit agreement.
Strategic Transactions
Comverse Share Distribution
On October 31, 2012, CTI completed its previously announced spin off of Comverse as an independent, publicly traded company, accomplished by means of a pro-rata distribution of 100% of Comverse's outstanding common shares to CTI's shareholder's (the "Share Distribution"). Following the Share Distribution, CTI no longer holds any of Comverse's outstanding capital stock.
In order to govern certain ongoing relationships between CTI and Comverse after the Share Distribution and to provide mechanisms for an orderly transition, CTI and Comverse entered into agreements relating to the provision of certain services and setting forth certain rights and obligation between them for following the Share Distribution. CTI and Comverse agreed, among other things, to indemnify each other against certain liabilities arising from their respective businesses and the services that will be provided under such agreements. See note 18 to the consolidated financial statements included elsewhere in this Current Report.
As a result of the Share Distribution, the results of operations of Comverse are included in discontinued operations, less applicable income taxes, as a separate component of net loss in CTI's consolidated statements of operations for all periods presented. The assets and liabilities of Comverse are included in discontinued operations as separate components of CTI's consolidated balance sheets as of all dates presented. See note 18 to the consolidated financial statements included elsewhere in this Current Report.
Sale of Starhome
On August 1, 2012, CTI, certain other shareholders of Starhome and Starhome entered into a Share Purchase Agreement (the “Starhome Share Purchase Agreement”) with Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, “Fortissimo”) pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome (the “Starhome Disposition”). On September 19, 2012, CTI contributed to Comverse, its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Starhome Disposition was completed on October 19, 2012.
Under the terms of the Starhome Share Purchase Agreement, Starhome's shareholders received aggregate cash proceeds of approximately $81.3 million, subject to adjustment for fees, transaction expenses and certain taxes. Of this amount, $10.5 million is held in escrow to cover potential post-closing indemnification claims, with $5.5 million being released after 18 months and the remainder released after 24 months, in each case, less any claims made on or prior to such dates. Comverse received aggregate net cash consideration (including amounts deposited in escrow at closing) of approximately $37.2 million, after payments that CTI agreed to make to certain other Starhome shareholders of approximately $4.5 million.
As a result of the Starhome Disposition, the results of operations of Starhome are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in the CTI's consolidated statements of operations for all periods presented. The assets and liabilities of Starhome are included in discontinued operations as a separate component to the CTI's consolidated balance sheets as of all dates presented. See note 18 to the consolidated financial statement included elsewhere in this Current Report.
Significant Events
During the fiscal year ended January 31, 2012 and subsequent thereto, the following significant events occurred:
Timely Filing of Periodic Reports; Resolution of SEC Section 12(j) Administrative Proceeding. During the second quarter of the fiscal year ended January 31, 2012, CTI completed the filing with the SEC of the delinquent periodic reports that were required to be filed under a settlement with the SEC. In September 2011, CTI resumed the timely filing of its periodic reports commencing with the filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2011. With the filing of such delinquent reports and the timely filing of the Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2011, CTI satisfied the terms of the settlement with the SEC which resolved an administrative proceeding instituted by the SEC pursuant to Section 12(j) of the Exchange Act to revoke or suspend the registration of CTI's common stock because of CTI's failure to file certain periodic reports. Accordingly, in September 2011, the SEC ordered termination of the administrative proceeding.

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Expenses for accounting, tax and legal fees incurred during the fiscal year ended January 31, 2012 in connection with the filing of periodic reports and remediation of material weaknesses in internal control over financial reporting declined compared to the fiscal year ended January 31, 2011 but continued to be significant. During the fiscal year ended January 31, 2012, these expenses aggregated $26.3 million, of which $25.3 million was incurred by CTI and $1.0 million was incurred by Verint. We expect these expenses to continue to decline, particularly after we complete the remediation of the remaining material weaknesses in internal control over financial reporting, and be eliminated over time as we enhance our internal finance and accounting personnel to replace external consultants currently assisting us in the preparation of periodic reports.
Relisting on NASDAQ. In September 2011, NASDAQ approved CTI's application for the relisting of its common stock on The NASDAQ Global Select Market. Trading on such exchange resumed on September 23, 2011.
Final Payments under Consolidated Shareholder Class Action Settlement Agreement and Release of ARS. In December 2009, CTI entered into an agreement, which was amended in June 2010, to settle the consolidated shareholder class action. During the fiscal year ended January 31, 2012, CTI paid the remaining amounts payable under the settlement agreement of the consolidated shareholder class action aggregating $141.3 million, of which $82.5 million was paid through the issuance of 12,462,236 shares of CTI's common stock and the remainder was paid in cash. Following the payment by CTI of such amounts, the security interest for the benefit of the plaintiff class in the account in which CTI held its auction rate securities (or ARS) and cash proceeds from sales and redemptions of ARS (including interest thereon) terminated. For a more comprehensive discussion, see note 25 to the consolidated financial statements included elsewhere in this Current Report.
Sale of ARS. In the fiscal year ended January 31, 2012, CTI sold approximately $86.9 million aggregate principal amount of ARS (constituting substantially all of its ARS portfolio) for approximately $75.0 million in cash.
Settlement of Opt-Out Plaintiffs' Action. In December 2011, CTI agreed to settle an action initiated by Maverick Fund, L.D.C. and certain affiliated investment funds, which opted not to participate in the settlement of the consolidated shareholder class action. Pursuant to the settlement agreement, CTI paid the plaintiffs approximately $9.5 million. For a more detailed discussion, see note 25 to the consolidated financial statements included elsewhere in this Current Report.
FCPA Litigation Settlement. In April 2011, CTI entered into a non-prosecution agreement with the DOJ and a settlement agreement with the SEC. These agreements resolved allegations that CTI and certain of its foreign subsidiaries violated the books and records and internal controls provisions of the FCPA by inaccurately recording certain improper payments made from 2003 through 2006 by certain former employees and an external sales agent of Comverse Ltd. or its subsidiaries, in connection with the sale of certain products in foreign jurisdictions.
Under the non-prosecution agreement with the DOJ, CTI paid a fine of $1.2 million to the DOJ. Under its settlement agreement with the SEC, CTI paid approximately $1.6 million in disgorgement and pre-judgment interest. For a more detailed discussion, see note 25 to the consolidated financial statements included elsewhere in this Current Report.
Appointment of Chief Executive Officer. Effective March 4, 2011, Charles Burdick was appointed as Executive Chairman and Chief Executive Officer, replacing Andre Dahan. Prior to his appointment, Mr. Burdick served as CTI's non-executive Chairman of the Board.
Changes in Board Composition. In September 2011, Mr. Richard Nottenburg and Mr. A. Alexander Porter, Jr., each advised CTI that, for personal reasons, he will not seek re-election as a director at CTI's annual shareholder meeting held on November 16, 2011. Each of Messrs. Nottenburg and Porter indicated that his decision was not a result of any disagreement with CTI. In addition, at the annual shareholder meeting, each of Mr. Raz Alon and Mr. Joseph O'Donnell did not receive a majority of the votes cast as required by CTI's By-Laws. Consequently, and, in accordance with CTI's Corporate Governance Guidelines and Principles, each of Messrs. Alon and O'Donnell tendered his resignation from the Board, which resignations were accepted by the Board.
Approval of the 2011 Stock Incentive Compensation Plan. In September 2011, CTI's Board approved the Comverse Technology, Inc. 2011 Stock Incentive Compensation Plan (referred to as the 2011 Incentive Plan) and such plan was approved by CTI's shareholders at the annual shareholder meeting held on November 16, 2011. A total of 22,000,000 shares of CTI common stock are reserved for issuance under the 2011 Incentive Plan. Equity awards may be granted under the 2011 Incentive Plan to employees, non-employee directors and consultants as well as employees and consultants of our subsidiaries and affiliates. Upon completion of the Share Distribution, all CTI equity awards held by employees of Comverse and CTI employees that were transferred to Comverse were replaced with Comverse equity awards.
Verint Debt Refinancing. On April 29, 2011, Verint (i) entered into a credit agreement (referred to as the new credit agreement) with a group of lenders and Credit Suisse AG, as administrative agent and collateral agent for the lenders (referred

7

to in such capacities as the agent), and (ii) terminated the credit agreement, dated May 25, 2007 (referred to as the prior facility).
The new credit agreement provides for $770.0 million of secured senior credit facilities, comprised of a $600.0 million term loan maturing in October 2017 (referred to as the new term loan facility) and a $170.0 million revolving credit facility maturing in April 2016 (referred to as the new revolving credit facility), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time according to the terms of the new credit agreement. As of January 31, 2012, Verint had no outstanding borrowings under the new revolving credit facility. For additional discussion, see “—Liquidity and Capital Resources—Indebtedness—Verint Credit Facilities” and note 11 to the consolidated financial statements included elsewhere in this Current Report.
Verint's Business Acquisitions. During the fiscal year ended January 31, 2012, Verint completed seven business combinations that included the acquisitions of Global Management Technologies Corporation (or GMT), a privately-held provider of workforce management solutions, Vovici Corporation (or Vovici), a U.S.-based privately-held provider of online survey management and enterprise feedback solutions, and a privately-held provider of communications intelligence solutions, data retention services and network performance management based in the Americas region. For more information relating to these acquisitions, see note 6 to the consolidated financial statements included elsewhere in this Current Report.
Changes to Verint's Board. On March 16, 2012, the Board of Directors of CTI in its capacity as Verint's controlling stockholder, determined to propose a change in the composition of Verint's Board such that each of Charles Burdick, John Bunyan and Paul Baker, officers of CTI, would cease to serve on the Verint Board and each of Augustus Oliver, Theodore Schell and Mark Terrell, members of the CTI Board, would be appointed to the Verint Board. On March 18, 2012, at a meeting of the Verint Board, the resignations of each of Messrs. Burdick, Bunyan and Baker from the Verint Board were accepted and each of Messrs. Oliver, Schell and Terrell were appointed to fill the vacancies resulting from such resignations.
Liquidity Forecast at CTI
We currently forecast that available cash and cash equivalents will be sufficient to meet the liquidity needs of CTI for at least the next 12 months. For a more comprehensive discussion of our liquidity forecast, see “—Liquidity and Capital Resources—Financial Condition—Liquidity Forecast.”
Adoption of New Revenue Recognition Guidance
On February 1, 2011, we adopted new accounting guidance relating to revenue recognition on a prospective basis. This guidance amends the criteria for allocating consideration in multiple-deliverable revenue arrangements consisting of tangible products by establishing a selling price hierarchy. For the fiscal year ended January 31, 2012, an additional of $12.4 million of revenue was recognized by Verint classified as continuing operations and an aggregate of $51.0 million of revenue was recognized by Comverse and Starhome classified as discontinued operations, in each case, as a result of the adoption of the new guidance. For more information, see note 1 to the consolidated financial statements included elsewhere in this Current Report. Such additional revenue included $40.9 million of revenue recognized by Comverse under the new guidance as compared to the revenue that would have been recognized under prior accounting guidance for the fiscal year ended January 31, 2012 resulting from material modifications of certain existing contracts, which were entered into in connection with change orders that included the purchase of additional customer solutions and services and the expansion of projects by customers.
Segment Performance
We evaluate our business by assessing the performance of our operating segment. CTI's Chief Executive Officer is its Chief Operating Decision Maker ("CODM"). The CODM uses segment performance, as defined below, as the primary basis for assessing the financial results of the operating segment and for the allocation of resources. Segment performance, as we define it in accordance with the Financial Accounting Standard Board's (or the FASB) guidance relating to segment reporting, is not necessarily comparable to other similarly titled captions of other companies. Segment performance, as defined by management, represents operating results of a segment without the impact of significant expenditures incurred by the segment in connection with the efforts to become or remain current in periodic reporting obligations under the federal securities laws which are expected to be eliminated over time, certain non-cash charges, and certain other gains and charges.
Segment performance is computed by management as income (loss) from operations adjusted for the following: (i) stock-based compensation expense; (ii) amortization of acquisition-related intangibles; (iii) compliance-related professional fees; (iv) compliance-related compensation and other expenses; (v) strategic evaluation related costs; (vi) litigation settlements and related costs; (vii) acquisition-related charges; (viii) restructuring and integration charges; and (ix) certain other gains and charges. Compliance-related professional fees and compliance-related compensation and other expenses relate to fees and

8

expenses incurred in connection with our efforts to (a) complete current and previously issued financial statements and audits of such financial statements, (b) become current in our periodic reporting obligations under the federal securities laws, and (c) remediate material weaknesses in internal control over financial reporting. Compliance-related professional fees and compliance-related compensation and other expenses recorded for the fiscal year ended January 31, 2012 also relate to fees and expenses incurred in connection with the timely filing of certain periodic reports which fees and expenses are expected to be eliminated over time as we enhance our internal finance and accounting personnel to replace external consultants currently assisting us in the preparation of periodic reports. Strategic evaluation related costs include financial advisory, accounting, tax, consulting and legal fees incurred in connection with our evaluation of strategic alternatives, including the Comverse Share Distribution. For additional information on how we apply segment performance to evaluate the operating results of our segment for each of the fiscal years ended January 31, 2012, 2011 and 2010, see notes 1 and 22 to the consolidated financial statements included elsewhere in this Current Report.
In evaluating Verint's segment performance, management uses segment revenue, which consists of revenue generated by the segment, including intercompany revenue. Certain segment performance adjustments relate to expenses included in the calculation of income (loss) from operations, while, from time to time, certain segment performance adjustments may be presented as adjustments to revenue. In calculating Verint's segment performance for the fiscal year ended January 31, 2012, the presentation of segment revenue gives effect to segment revenue adjustments that represent the impact of fair value adjustments required under the FASB's guidance relating to acquired customer support contracts that would have otherwise been recognized as revenue on a stand-alone basis with respect to acquisitions consummated by Verint during the periods presented. Verint did not have segment revenue adjustments for the fiscal years ended January 31, 2011 and 2010.
Segment Financial Highlights
The following table presents, for the fiscal years ended January 31, 2012, 2011 and 2010, segment revenue, gross margin, income (loss) from operations, operating margin, segment performance and segment performance margin (reflecting segment performance as a percentage of segment revenue) for our Verint segment and All Other:
 
 
Fiscal Years Ended January 31,
 
 
2012

2011

2010
 
 
(Dollars in thousands)
Verint
 





Segment revenue
 
$
796,247

 
$
726,799

 
$
703,633

Gross margin
 
66.3
%
 
67.2
%
 
65.9
%
Income from operations
 
86,478

 
73,105

 
65,679

Operating margin
 
10.9
%
 
10.1
%
 
9.3
%
Segment performance
 
176,552

 
184,586

 
195,619

Segment performance margin
 
22.2
%

25.4
%

27.8
%
All Other
 





Segment revenue
 
$
—

 
$
—

 
$
60

Gross margin
 
N/A

 
N/A

 
N/A

Loss from operations
 
(88,430
)
 
(79,379
)
 
(56,834
)
Operating margin
 
N/A

 
N/A

 
N/A

Segment performance
 
(41,976
)
 
(35,865
)
 
(28,809
)
Segment performance margin
 
N/A

 
N/A

 
N/A

For a discussion of the results of our segments, see “—Results of Operations.”
Verint Segment
Business Overview
Verint is a global leader in Actionable Intelligence solutions and value-added services. Verint's solutions enable organizations of all sizes to make more timely and effective decisions to improve enterprise performance and enhance safety. More than 10,000 organizations in over 150 countries—including more than 85% of the Fortune 100—use Verint's Actionable Intelligence solutions to capture, distill, and analyze complex and underused information sources, such as voice, video and unstructured text.

9

In the enterprise intelligence market, Verint's workforce optimization and voice of the customer solutions help organizations enhance customer service operations in contact centers, branches and back-office environments to increase customer satisfaction, reduce operating costs, identify revenue opportunities, and improve profitability. In the security intelligence market, Verint's communications and cyber intelligence, video and situation intelligence and public safety solutions help government and commercial organizations in their efforts to protect people and property and neutralize terrorism and crime.
Verint's Business
Verint serves two markets through three product lines. Verint's Enterprise Intelligence product line serves the enterprise workforce optimization market, while its Video Intelligence and Communications Intelligence product lines serve the security intelligence market.
Verint is a leading provider of enterprise intelligence software and services. Verint's solutions enable organizations to extract and analyze valuable information from customer interactions and related operational data in order to make more effective, proactive decisions for optimizing the performance of their customer service operations, improving the customer experience, facilitating compliance and enhancing products and services.
Verint is a leading provider of networked IP video solutions and a provider of situation management solutions designed to optimize security and enhance operations. Verint's Video Intelligence solutions portfolio includes IP video management software and services, edge devices for capturing, digitizing, and transmitting video over different types of wired and wireless networks, video analytics, networked video recorders and physical security information management.
Verint is also a leading provider of communications intelligence solutions and a developer of cyber intelligence solutions that help law enforcement, national security, intelligence, and civilian government agencies effectively detect, investigate, and neutralize criminal and terrorist threats and detect and thwart cyber attacks. Verint's solutions are designed to handle massive amounts of unstructured and structured information from different sources, quickly make sense of complex scenarios, and generate evidence and intelligence.
Verint's Strategy
Verint's strategy to further enhance its position as a leading provider of enterprise intelligence and security intelligence solutions worldwide includes the following key elements:
•
Continue to drive the development of Actionable Intelligence solutions for unstructured data. Verint was a pioneer in the development of solutions that help businesses and governmental organizations derive intelligence from unstructured data. Verint intends to continue to drive the adoption of Actionable Intelligence solutions designed to provide a high return on investment by delivering software and services to the enterprise intelligence and security intelligence markets.
•
Maintain market leadership through innovation and customer centricity. Verint believes that to compete successfully, it must continue to introduce solutions that better enable customers to derive Actionable Intelligence from their unstructured data. In order to do this, Verint intends to continue to make significant investments in research and development, protect its intellectual property through patents and other means, and maintain a regular dialog with its customer base in order to understand their business objectives and requirements.
•
Continue to expand Verint's market presence through OEM and partner relationships. Verint has expanded its relationships with OEMs and other channel partners. Verint believes that these relationships broaden its market coverage, and intends to continue expanding its existing relationships, while creating new ones.
•
Augment Verint's organic growth with acquisitions. Verint examines acquisition opportunities regularly as a means to add technology, increase its geographic presence, enhance its market leadership or expand into adjacent markets. Historically, Verint has engaged in acquisitions for all of these purposes and expects to continue doing so in the future when strategic opportunities arise.
Key Trends and Developments in Verint's Business
Verint believes that there are many factors that affect its ability to sustain and increase both revenue and profitability, including:
•
Market acceptance of Actionable Intelligence for unstructured data, particularly analytics. Verint is in an early stage market where the value of certain aspects of its products and solutions is still in the process of market acceptance. Verint believes that its future growth depends in part on the continued and increasing acceptance of the value of its data analytics across its product offerings.

10

•
Verint's debt instruments may constrain its investment and growth. Verint is subject to various restrictive covenants under its new credit agreement, as well as a leverage ratio financial covenant. As a result, Verint's new credit agreement limits its ability to incur additional debt, engage in mergers and acquisitions or make certain investments in its business. These limitations may impede Verint's ability to execute upon its business strategy.
•
Information technology spending. Verint's growth and results depend in part on general economic conditions and the pace of growth in information technology spending.

11

RESULTS OF OPERATIONS
The following discussion provides an analysis of our consolidated results and the results of operations of our Verint segment and All Other for the fiscal years presented. The discussion of our consolidated results relates to the consolidated results of CTI and its subsidiaries. The discussion of the results of operations of our segment provides a more detailed analysis of the results of such segment. Accordingly, the discussion of our consolidated results should be read in conjunction with the discussions of the results of operations of our segment.
Fiscal Year Ended January 31, 2012 Compared to Fiscal Year Ended January 31, 2011
Consolidated Results
 
 
 
Fiscal Years Ended
January 31,
 
Change
 
 
2012
 
2011
 
Amount
 
Percent
 
 
(Dollars in thousands, except per share data)
Total revenue
 
$
782,648

 
$
726,799

 
$
55,849

 
7.7
 %
Loss from operations
 
(1,952
)
 
(6,274
)
 
4,322

 
(68.9
)%
Interest income
 
2,419

 
2,376

 
43

 
1.8
 %
Interest expense
 
(32,379
)
 
(29,913
)
 
(2,466
)
 
8.2
 %
Loss on extinguishment of debt
 
(8,136
)
 
—

 
(8,136
)
 
N/M

Other income, net
 
29,231

 
9,636

 
19,595

 
203.4
 %
Income tax provision
 
(19,292
)
 
(4,083
)
 
(15,209
)
 
372.5
 %
Net loss from continuing operations
 
(30,109
)
 
(28,258
)
 
(1,851
)
 
6.6
 %
Loss from discontinued operations, net of tax
 
(910
)
 
(91,028
)
 
90,118

 
(99.0
)%
Net loss
 
(31,019
)
 
(119,286
)
 
88,267

 
(74.0
)%
Less: Net income attributable to noncontrolling interest
 
(27,707
)
 
(13,820
)
 
(13,887
)
 
100.5
 %
Net loss attributable to Comverse Technology, Inc.
 
$
(58,726
)
 
$
(133,106
)
 
$
74,380

 
(55.9
)%
Loss per share attributable to Comverse Technology,
Inc.’s shareholders:
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.27
)
 
$
(0.22
)
 
$
(0.05
)
 

Discontinued operations
 
$
(0.01
)
 
$
(0.43
)
 
$
0.42

 

Diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.27
)
 
$
(0.22
)
 
$
(0.05
)
 

Discontinued operations
 
$
(0.01
)
 
$
(0.43
)
 
$
0.42

 

Net loss attributable to Comverse Technology, Inc.:
 
 
 
 
 
 
 
 
Net loss from continuing operations
 
$
(55,242
)
 
$
(45,382
)
 
$
(9,860
)
 

Loss from discontinued operations, net of tax
 
(3,484
)
 
(87,724
)
 
84,240

 

Net loss attributable to Comverse Technology, Inc.
 
$
(58,726
)
 
$
(133,106
)
 
$
74,380

 

Total Revenue
Total revenue was $782.6 million for the fiscal year ended January 31, 2012, an increase of $55.8 million, or 7.7%, compared to the fiscal year ended January 31, 2011. The increase was attributable to an increase in revenue at the Verint segment. Total revenue for the fiscal year ended January 31, 2012 includes $12.4 million of additional revenue that was recognized as a result of the adoption of the new accounting guidance relating to revenue recognition. For a more comprehensive discussion, see “—Overview—Adoption of New Revenue Recognition Guidance” and note 1 to the consolidated financial statements included elsewhere in this Current Report.
Loss from Operations
Loss from operations was $2.0 million for the fiscal year ended January 31, 2012, a decrease in loss of $4.3 million, or 68.9%, compared to the fiscal year ended January 31, 2011. The decrease was attributable to a $13.4 million increase in income from operations at the Verint segment partially offset by a $9.1 million increase in loss from operations at All Other.

12

Interest Income
Interest income was $2.4 million for the fiscal year ended January 31, 2012, an increase of 1.8%, compared to the fiscal year ended January 31, 2011.
Interest Expense
Interest expense was $32.4 million for the fiscal year ended January 31, 2012, an increase of $2.5 million, or 8.2%, compared to the fiscal year ended January 31, 2011. The increase was primarily attributable to a $2.5 million increase in interest expense at the Verint segment, principally due to a higher interest rate on Verint's borrowings associated with the amendment to its prior facility entered into in July 2010 and its new credit agreement entered into in April 2011.
Loss on Extinguishment of Debt
During the fiscal year ended January 31, 2012, Verint recorded an $8.1 million loss in connection with the termination of its prior facility in April 2011. For additional discussion, see “—Liquidity and Capital Resources—Indebtedness—Verint Credit Facilities.”
Other Income, Net
Other income, net was $29.2 million for the fiscal year ended January 31, 2012, an increase of $19.6 million, or 203.4%, compared to the fiscal year ended January 31, 2011. The increase was attributable to:
•
a $6.7 million impairment charge recorded for the fiscal year ended January 31, 2011 in respect of CTI's right to require UBS to repurchase from CTI eligible ARS at par value (which CTI exercised in June 2010), with no corresponding charge recorded for the fiscal year ended January 31, 2012;
•
$4.8 million of income recorded in the fiscal year ended January 31, 2012 in connection with proceeds received as part of a settlement of certain CTI claims against a third party;
•
$3.1 million of net realized and unrealized losses on Verint's interest rate swap (which was terminated in July 2010) recorded for the fiscal year ended January 31, 2011, with no corresponding losses recorded for the fiscal year ended January 31, 2012;
•
$2.1 million of impairment charges in relation to cost-basis investments recorded for the fiscal year ended January 31, 2011 with no corresponding charge recorded for the fiscal year ended January 31, 2012; and
•
a $1.9 million decrease in loss on Verint's derivative financial instruments (not designated as hedging instruments) for the fiscal year ended January 31, 2012, compared to the fiscal year ended January 31, 2011.
Income Tax Provision
Income tax provision from continuing operations was $19.3 million for the fiscal year ended January 31, 2012, representing an effective tax rate of (178.3%), compared to income tax provision from continuing operations of $4.1 million, representing an effective tax rate of (16.9%) for the fiscal year ended January 31, 2011. During the fiscal year ended January 31, 2012 and 2011, the effective tax rate was negative primarily due to the company recording income tax expense on a consolidated pre-tax loss. We did not record an income tax benefit on losses in certain jurisdictions in which we maintain valuation allowances against certain of our U.S. and foreign net deferred tax assets. Income tax provision from continuing operations for the period is comprised of income tax expense recorded in non-loss jurisdictions, certain tax contingencies and taxes recorded with respect to investments in affiliates in the fiscal years ended January 31, 2012 and 2011.
The change in our effective tax rate for the fiscal year ended January 31, 2012, compared to the fiscal year ended January 31, 2011 is primarily attributable to changes in the relative mix of income and losses across various jurisdictions.
Loss from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax, was $0.9 million for the fiscal year ended January 31, 2012, compared to $91.0 million for the fiscal year ended January 31, 2011. Loss from discontinued operations represented the results of operations of Comverse and Starhome for the fiscal years ended January 31, 2012 and 2011 and the results of operations of Ulticom for the fiscal year ended January 31, 2011, less applicable income taxes. For additional discussion, see note 18 to the consolidated financial statements included elsewhere in this Current Report.

13

Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest was $27.7 million for the fiscal year ended January 31, 2012, an increase of $13.9 million, or 100.5%, compared to the fiscal year ended January 31, 2011. The increase was primarily attributable to an increase in Verint's net income for the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011, as well as an increase in the percentage ownership of Verint by Verint's stockholders other than CTI.
Net Loss Attributable to Comverse Technology, Inc.
Net loss attributable to Comverse Technology, Inc. was $58.7 million, a decrease in loss of $74.4 million, or 55.9%, compared to fiscal year ended January 31, 2011 due primarily to the reasons discussed above.


14

Verint
 
 
 
Verint
 
 
Fiscal Years Ended
January 31,
 
Change
 
 
2012
 
2011
 
Amount
 
Percent
 
 
(Dollars in thousands)
Total revenue
 
782,648

 
726,799

 
55,849

 
7.7
 %
Costs and expenses:
 
 
 
 
 

 

Cost of revenue
 
268,361

 
238,344

 
30,017

 
12.6
 %
Research and development, net
 
111,001

 
96,525

 
14,476

 
15.0
 %
Selling, general and administrative
 
316,808

 
318,825

 
(2,017
)
 
(0.6
)%
Total costs and expenses
 
696,170

 
653,694

 
42,476

 
6.5
 %
Income from operations
 
$
86,478

 
$
73,105

 
$
13,373

 
18.3
 %
Computation of segment performance:
 
 
 
 
 

 

Total revenue
 
$
782,648

 
$
726,799

 
$
55,849

 
7.7
 %
Segment revenue adjustment
 
13,599

 
—

 
13,599

 
N/M

Segment revenue
 
$
796,247

 
$
726,799

 
$
69,448

 
9.6
 %
Total costs and expenses
 
$
696,170

 
$
653,694

 
$
42,476

 
6.5
 %
Segment expense adjustments:
 
 
 
 
 

 

Stock-based compensation expense
 
27,910

 
46,819

 
(18,909
)
 
(40.4
)%
Amortization of acquisition-related intangibles
 
35,302

 
30,554

 
4,748

 
15.5
 %
Compliance-related professional fees
 
1,012

 
28,913

 
(27,901
)
 
(96.5
)%
Acquisition-related charges
 
9,061

 
1,690

 
7,371

 
N/M

Other
 
3,190

 
3,505

 
(315
)
 
(9.0
)%
Segment expense adjustments
 
76,475

 
111,481

 
(35,006
)
 
(31.4
)%
Segment expenses
 
619,695

 
542,213

 
77,482

 
14.3
 %
Segment performance
 
$
176,552

 
$
184,586

 
$
(8,034
)
 
(4.4
)%
Revenue
Verint's product revenue consists of the sale of hardware and software products. Verint's service and support revenue consists primarily of revenue from installation, consulting and training services and post-contract customer support.
Total Revenue for the fiscal year ended January 31, 2012 includes $12.4 million of additional revenue that was recognized as a result of the adoption of the new accounting guidance relating to revenue recognition. For a more comprehensive discussion see “—Overview—Adoption of New Revenue Recognition Guidance” and note 1 to the consolidated financial statements included elsewhere in this Current Report.
Product revenue was $390.4 million for the fiscal year ended January 31, 2012, an increase of $15.2 million, or 4.1%, compared to the fiscal year ended January 31, 2011. The increase was primarily attributable to a $9.4 million increase related to Verint's Communication Intelligence solutions and an $8.5 million increase in product revenue related to Verint's Video Intelligence solutions. The increase in revenue related to Verint's Communication Intelligence solutions is primarily attributable to new communications intelligence product offerings. The increase in product revenue related to Verint's Video Intelligence solutions was attributable to an increase in product deliveries to customers and recognition of revenue associated with the completion of a project for a large customer during the fiscal year ended January 31, 2012, partially offset by a reduction in product revenue recognized from prior fiscal years' multiple-element arrangements. These arrangements are being recognized ratably and allocated between product and service revenue over several fiscal quarters or years primarily due to Verint's prior business practice of providing implied PCS to Video Intelligence customers for which Vendor Specific Objective Evidence (or VSOE) did not exist. These increases in revenue were partially offset by a $2.6 million decrease in revenue related to Enterprise Intelligence solutions due primarily to a large transaction whereby product delivery occurred during the fiscal year ended January 31, 2012 but a significant portion of the product revenue could not be recognized during the fiscal year ended January 31, 2012 due to certain contractual terms which required the remaining product revenue to be recognized in future periods. There were no comparable transactions in the prior fiscal year.

15

Service and support revenue was $392.3 million for the fiscal year ended January 31, 2012, an increase of $40.6 million, or 11.6%, compared to the fiscal year ended January 31, 2011. The increase was primarily attributable to an increase in service and support revenue of $30.1 million and $15.0 million related to Verint's Enterprise Intelligence solutions and Communication Intelligence Solutions, respectively. The increase in service and support revenue related to Verint's Enterprise Intelligence solutions was due primarily to an increase in customer installed base and the related support revenue generated from this customer base and, to a lesser extent, the inclusion of the results of operations of companies acquired during the fiscal year ended January 31, 2012 (primarily Vovici). Verint continues to experience expansion of its implementation services revenue due to the growth in its professional services organization to meet the demands of its customer base. Of the $15.0 million increase in service and support revenue related to Verint's Communications Intelligence solutions approximately $6.7 million was attributable to an increase in its customer installed base and the related support revenue generated from this customer base, and the remaining increase was primarily attributable to the progress realized during the fiscal year ended January 31, 2012 on certain large projects, some of which commenced in the previous fiscal year, which resulted in an increase in service revenue during the fiscal year ended January 31, 2012, compared to the fiscal year ended January 31, 2011. These increases in service and support revenue were partially offset by a $4.5 million decrease in service and support revenue related to Verint's Video Intelligence solutions due to a reduction in service revenue recognized from prior fiscal years' multiple-element arrangements where the entire arrangement was being recognized ratably over several fiscal quarters or years primarily due to the prior business practice of providing implied PCS to customers for which VSOE did not exist.
Revenue by Geographic Region
Revenue in the Americas, EMEA and APAC represented approximately 53%, 27%, and 20% of Verint's total revenue, respectively, for the fiscal year ended January 31, 2012 compared to approximately 53%, 26%, and 21%, respectively, for the fiscal year ended January 31, 2011.
Cost of Revenue
Cost of revenue consists of product costs and service costs. Verint's product cost of revenue primarily consists of hardware material costs, royalties due to third parties for software components that are embedded in the software solutions, amortization of capitalized software development costs, personnel-related costs associated with Verint's global operations, contractor and consulting costs, travel expenses relating to resources dedicated to project management and associated product delivery, facility costs and other allocated overhead expenses. Product costs also include amortization of acquired technology, which consists of amortization of technology assets acquired in connection with business combinations. Verint's service cost of revenue primarily consists of personnel-related costs, contractor costs, travel expenses relating to installation, training, consulting, and maintenance services, stock-based compensation expenses, facility costs and other overhead expenses.
Product cost of revenue was $138.5 million for the fiscal year ended January 31, 2012, an increase of $17.4 million, or 14.4%, compared to the fiscal year ended January 31, 2011. Verint's overall product margins decreased slightly in the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011, as a result of higher profit margins on projects recognized in the fiscal year ended January 31, 2011 as compared to the fiscal year ended January 31, 2012 due to an increase in projects requiring customized implementation services, which carry lower gross margins than Verint's standard implementation services and due to change in product mix. The decrease was partially offset by growth in sales of software licenses as Verint continues to transition to a more software-base solution as part of its Enterprise Intelligence Solutions offering. Product costs for the fiscal year ended January 31, 2012 and 2011 included amortization of acquired technology of $12.4 million and $9.1 million, respectively. The increase in amortization was primarily attributable to an increase in amortization expense of technology-based intangible assets acquired in business combinations completed during the fiscal year ended January 31, 2012.
Service cost of revenue was $129.9 million for the fiscal year ended January 31, 2012, an increase of $12.6 million, or 10.7%, compared to the fiscal year ended January 31, 2011. The increase was primarily attributable to a $14.0 million increase in personnel-related costs due to an increase in employee headcount required to deliver the increased volume of implementation services. Verint's overall service and support margins remained consistent in each of the fiscal years ended January 31, 2012 and 2011.
Research and Development, Net
Verint's research and development expenses primarily consist of personnel and subcontracting expenses, facility costs, and other allocated overhead, net of certain software development costs that are capitalized as well as reimbursements under government programs. Software development costs are capitalized upon the establishment of technological feasibility and continue to be capitalized through the general release of the related software product.

16

Research and development expenses, net were $111.0 million for the fiscal year ended January 31, 2012, an increase of $14.5 million, or 15.0%, compared to the fiscal year ended January 31, 2011.
The increase was primarily attributable to a $16.0 million increase in personnel-related costs due to an increase in employee headcount as well as the impact of the weakening U.S. dollar against the NIS and Canadian dollar on research and development wages in Verint's Israeli and Canadian research and development facilities, and a $2.0 million increase in contractor costs primarily due to additional headcount required for research and development efforts in the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011. These increases were partially offset by a $4.0 million decrease in stock-based compensation due to the decrease in the number of outstanding stock-based compensation arrangements accounted for as liability awards during the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011 and lower average amounts of outstanding RSUs, in each case, associated with research and development employees.
Selling, General and Administrative
Verint's selling, general and administrative expenses consist primarily of personnel-related costs and related expenses, professional fees, sales and marketing expenses, including travel, sales commissions and sales referral fees, facility costs, communication expenses, other administrative expenses and amortization of other acquired intangible assets. Amortization of other acquired intangible assets consists of amortization of certain intangible assets acquired in connection with business combinations, including customer relationships, distribution networks, trade names and non-compete agreements.
Selling, general, and administrative expenses were $316.8 million for the fiscal year ended January 31, 2012, a decrease of $2.0 million, or 0.6%, compared to the fiscal year ended January 31, 2011. The decrease was primarily attributable to:
•
a $27.9 million decrease in compliance-related professional fees, due to Verint becoming current in its periodic reporting obligations under the federal securities laws in June 2010; and
•
a $12.0 million decrease in stock-based compensation primarily due to a decrease in the number of outstanding stock-based compensation arrangements accounted for as liability awards and lower average amounts of outstanding RSUs during the fiscal year ended January 31, 2012.
These decreases were offset by:
•
a $19.3 million increase in personnel-related costs, and a $4.0 million increase in employee travel expenses, both of which, were due to an increase in employee headcount;
•
a $3.2 million increase in contractor costs primarily due to increased use of contractors resulting from acquisitions, as well as other internal support activities;
•
a $2.8 million increase in facilities expenses, partially due to business combinations completed during the fiscal year ended January 31, 2012; and
•
a $1.8 million increase in sales and marketing costs.
In addition, cost associated with business combinations increased by $6.2 million primarily due to $6.8 million of higher legal and other professional fees, $1.6 million of other acquisition-related costs, $1.4 million increase in amortization, all resulting principally from business combinations completed during the fiscal year ended January 31, 2012, partially offset by a $3.6 million net decrease in the change in fair value of contingent consideration arrangements.
Foreign Currency Effect on Operating Results
In the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011, fluctuations in the value of the U.S. dollar relative to the other major currencies used in Verint's business resulted in increases in revenue, cost of revenue and operating expenses on a dollar-denominated basis. Had foreign exchange rates remained constant in these periods, Verint's revenue would have been approximately $12.9 million lower and its cost of revenue and operating expenses would have been approximately $12.9 million lower, which would have resulted in a minimal impact on income from operations for the fiscal year ended January 31, 2012.
Segment Performance
Segment performance was $176.6 million for the fiscal year ended January 31, 2012 based on segment revenue of $796.2 million, representing a segment performance margin of 22.2% as a percentage of segment revenue. Segment revenue for the fiscal year ended January 31, 2012 includes a $13.6 million segment revenue adjustment that represents the impact of fair value adjustments required under the FASBs guidance relating to acquired customer support contracts that would have otherwise been recognized as revenue on a stand-alone basis with respect to acquisitions consummated by Verint during the fiscal year. Segment performance was $184.6 million for the fiscal year ended January 31, 2011 based on segment revenue of $726.8

17

million, representing a segment performance margin of 25.4% as a percentage of segment revenue. The decrease in segment performance margin was primarily attributable to the increase in segment expenses partially offset by an increase in segment revenue for the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011.

18

All Other
 
 
 
All Other
 
 
Fiscal Years Ended January 31,
 
Change
 
 
2012
 
2011
 
Amount
 
Percent
 
 
(Dollars in thousands)
Total revenue
 
$
—

 
$
—

 
$
—

 
—

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
—

 
—

 
—

 
—

Intercompany purchases
 
—

 
—

 
—

 
—

Research and development, net
 
—

 
—

 
—

 
—

Selling, general and administrative
 
83,550

 
96,879

 
(13,329
)
 
(13.8
)%
Other operating expenses
 
4,880

 
(17,500
)
 
22,380

 
(127.9
)%
Total costs and expenses
 
88,430

 
79,379

 
9,051

 
11.4
 %
Loss from operations
 
$
(88,430
)
 
$
(79,379
)
 
$
(9,051
)
 
(11.4
)%
Computation of segment performance:
 
 
 
 
 
 
 
 
Total revenue
 
$
—

 
$
—

 
$
—

 
—

Segment revenue adjustment
 
—

 
—

 
—

 
—

Segment revenue
 
$
—

 
$
—

 
$
—

 
—

Total costs and expenses
 
$
88,430

 
$
79,379

 
$
9,051

 
11.4
 %
Segment expense adjustments:
 
 
 
 
 

 

Stock-based compensation expense
 
5,040

 
6,796

 
(1,756
)
 
(25.8
)%
Compliance-related professional fees
 
25,285

 
50,668

 
(25,383
)
 
(50.1
)%
Compliance-related compensation and other expenses
 
—

 
45

 
(45
)
 
N/M

Strategic evaluation related costs
 
11,144

 
3,065

 
8,079

 
263.6
 %
Litigation settlements and related costs
 
4,968

 
(17,060
)
 
22,028

 
129.1
 %
Other
 
17

 
—

 
17

 
N/M

Segment expense adjustments
 
46,454

 
43,514

 
2,940

 
6.8
 %
Segment expenses
 
41,976

 
35,865

 
6,111

 
17.0
 %
Segment performance
 
$
(41,976
)
 
$
(35,865
)
 
$
(6,111
)
 
(17.0
)%
Selling, General and Administrative
Selling, general and administrative expenses reflect expenses incurred by CTI's holding company operations.
Selling, general and administrative expenses were $83.6 million for the fiscal year ended January 31, 2012, a decrease of $13.3 million, or 13.8%, compared to the fiscal year ended January 31, 2011. The decrease was primarily attributable to a $25.4 million decrease in compliance-related professional fees at CTI. During the fiscal year ended January 31, 2012, the Company incurred compliance-related professional fees primarily in connection with the preparation of the 2010 Form 10-K (which was filed with the SEC on May 31, 2011), the Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2011 (which was filed with the SEC on June 22, 2011), the Quarterly Reports on Form 10-Q for the fiscal quarters ended April 30, 2010, July 31, 2010 and October 31, 2010 (which were filed with the SEC on July 28, 2011), the Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2011 (which was filed with the SEC on September 8, 2011) and the Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2011 (which was filed with the SEC on December 12, 2011). Such fees were lower than the compliance-related professional fees incurred during the fiscal year ended January 31, 2011 in connection with our efforts to complete adjustments to our historical financial statements and evaluations of the application of U.S. GAAP, which were ultimately concluded with the filing of CTI's Annual Report on Form 10-K for the fiscal years ended January 31, 2009, 2008, 2007, and 2006 (referred to as the Comprehensive Form 10-K) with the SEC on October 4, 2010.
In addition, there was a $ 4.6 million decrease in personnel-related costs and stock-based compensation expenses primarily attributable to decreased severance costs.

19

These decreases were partially offset by:
•
a $10.5 million decrease in allocation to subsidiaries of professional fees primarily to outside accounting consulting firms and other external consultants that provide assistance to our finance and accounting personnel in respect of the preparation and timely filing of periodic reports; and
•
an $8.1 million increase in strategic evaluation related costs.
Other Operating Expenses 
Other operating expenses were $4.9 million for the fiscal year ended January 31, 2012, a change of $22.4 million, or 127.9%, compared to the fiscal year ended January 31, 2011. The change was primarily attributable to litigation settlement income of $17.5 million received by CTI primarily in connection with settlements of the consolidated shareholder derivative actions and consolidated shareholder class action, in the fiscal year ended January 31, 2011, compared to $4.9 million of litigation settlement costs for the fiscal year ended January 31, 2012.
Segment Performance
Segment performance was a $42.0 million loss for the fiscal year ended January 31, 2012, an increase in loss of $6.1 million, or 17.0%, compared to the fiscal year ended January 31, 2011. The increase in loss was attributable to an increase in segment expenses.

20

Fiscal Year Ended January 31, 2011 Compared to Fiscal Year Ended January 31, 2010
Consolidated Results
 
 
 
Fiscal Years Ended January 31,
 
Change
 
 
2011
 
2010
 
Amount
 
Percent
 
 
(Dollars in thousands, except per share data)
Total revenue
 
$
726,799

 
$
703,693

 
$
23,106

 
3.3
 %
(Loss) income from operations
 
(6,274
)
 
8,845

 
(15,119
)
 
(170.9
)%
Interest income
 
2,376

 
3,902

 
(1,526
)
 
(39.1
)%
Interest expense
 
(29,913
)
 
(25,067
)
 
(4,846
)
 
19.3
 %
Other income (expense), net
 
9,636

 
(23,442
)
 
33,078

 
N/M

Income tax (provision) benefit
 
(4,083
)
 
46,935

 
(51,018
)
 
(108.7
)%
Net (loss) income from continuing operations
 
(28,258
)
 
11,173

 
(39,431
)
 
352.9
 %
Loss from discontinued operations, net of tax
 
(91,028
)
 
(270,794
)
 
179,766

 
(66.4
)%
Net loss
 
(119,286
)
 
(259,621
)
 
140,335

 
(54.1
)%
Less: Net income attributable to noncontrolling interest
 
(13,820
)
 
(7,783
)
 
$
(6,037
)
 
77.6
 %
Net loss attributable to Comverse Technology, Inc.
 
$
(133,106
)
 
$
(267,404
)
 
$
134,298

 
(50.2
)%
Loss per share attributable to Comverse Technology,
Inc.’s shareholders:
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.22
)
 
$
0.01

 
$
(0.23
)
 
 
Discontinued operations
 
$
(0.43
)
 
$
(1.32
)
 
$
0.89

 
 
Diluted
 
 
 
 
 
 
 
 
Continuing operations
 
(0.22
)
 
0.01

 
(0.23
)
 
 
Discontinued operations
 
(0.43
)
 
(1.32
)
 
0.89

 
 
Net loss attributable to Comverse Technology, Inc.:
 
 
 
 
 
 
 
 
Net loss from continuing operations
 
$
(45,382
)
 
$
3,004

 
$
(48,386
)
 
 
Loss from discontinued operations, net of tax
 
(87,724
)
 
(270,408
)
 
182,684

 
 
Net loss attributable to Comverse Technology, Inc.
 
$
(133,106
)
 
$
(267,404
)
 
$
134,298

 
 
Total Revenue
Total revenue was $726.8 million for the fiscal year ended January 31, 2011, an increase of $23.1 million, or 3.3%, compared to the fiscal year ended January 31, 2010. The increase was primarily attributable to a $23.2 million increase in revenue at the Verint segment.
(Loss) Income from Operations
Loss from operations was $6.3 million for the fiscal year ended January 31, 2011, compared to income from operations of $8.8 million, a change of $15.1 million, or 170.9%, compared to the fiscal year ended January 31, 2010. The change was primarily attributable to a $22.5 million increase in loss from operations attributable to All Other partially offset by a $7.4 million increase in income from operations attributable to the Verint segment.
Interest Income
Interest income was $2.4 million for the fiscal year ended January 31, 2011, a decrease of $1.5 million, or 39.1%, compared to the fiscal year ended January 31, 2010. The decrease was primarily attributable to a $1.3 million decrease in interest income due to a lower principal value of auction rate securities (or ARS) investments held by CTI compared to the prior fiscal year due to sales and redemptions.
Interest Expense
Interest expense was $29.9 million for the fiscal year ended January 31, 2011, an increase of $4.8 million, or 19.3%, compared to the fiscal year ended January 31, 2010. The increase was primarily attributable to a $4.9 million increase in

21

interest expense due to a higher interest rate applicable to Verint's borrowings pursuant to an amendment to Verint's prior facility entered into in July 2010.
Other Income (Expense), Net
Other income, net was $9.6 million for the fiscal year ended January 31, 2011, a change of $33.1 million from other expense, net of $23.4 million for the fiscal year ended January 31, 2010. The change was primarily attributable to:
•
a $13.0 million increase in net realized gains recognized on investments;
•
a $10.5 million decrease in net realized and unrealized losses on Verint's interest rate swap; and
•
a $6.5 million decrease in other-than-temporary impairment charges associated with CTI's ARS.
Income Tax (Provision) Benefit
Income tax provision from continuing operations was $4.1 million for the fiscal year ended January 31, 2011, compared to an income tax benefit from continuing operations of $46.9 million for the fiscal year ended January 31, 2010. The change of $51.0 million in income tax was primarily due to:
•
a $4.1 million decrease in the tax benefit on the net loss at the U.S. statutory rate of 35%;
•
a $7.6 million increase in the tax benefit allocated from continuing operations to discontinued operations, additional paid-in capital and other comprehensive income;
•
a $13.6 million increase in tax expense arising due to a basis difference in investment in affiliates as a result of the sales of shares of those affiliates; and
•
a $20.3 million increase in valuation allowance.
This was partially offset a by $9.0 million increase in the U.S. tax effects of our foreign operations and a $14.7 million decrease to the foreign tax rate differential benefit in the fiscal year ended January 31, 2011, due to our operations in foreign jurisdictions with tax rates different from the U.S. tax rate.
The effective tax rate for continuing operations was (16.9%) for the fiscal year ended January 31, 2011 compared to 131.2% for the fiscal year ended January 31, 2010. The negative effective tax rate for the fiscal year ended January 31, 2011 resulted from recording income tax expense on a consolidated pre-tax loss which was primarily attributable to recording a valuation allowance against deferred tax assets and recording an income tax provision in jurisdictions with taxable income.
For the fiscal year ended January 31, 2011, significant differences impacting the effective tax rate, other than the valuation allowance, included the impact of discontinued operations, tax contingencies, the U.S. tax effect on foreign earnings and the basis difference in investment in affiliates.
Loss from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax was $91.0 million for the fiscal year ended January 31, 2011, a decrease in loss of $179.8 million, or 66.4%, compared to the fiscal year ended January 31, 2010. Loss from discontinued operations represented the results of operations of Comverse, Starhome and Ulticom for the fiscal years ended January 31, 2011 and 2010, less applicable income taxes. For additional discussion, see note 18 to the consolidated financial statements included elsewhere in this Current Report.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest was $13.8 million for the fiscal year ended January 31, 2011, an increase of $6.0 million, or 77.6%, compared to the fiscal year ended January 31, 2010. The increase was primarily attributable to an increase in Verint's net income for the fiscal year ended January 31, 2011, compared to the fiscal year ended January 31, 2010.
Net Loss Attributable to Comverse Technology, Inc.
Net loss attributable to Comverse Technology, Inc. was $133.1 million for the fiscal year ended January 31, 2011, a decrease in loss of $134.3 million, or 50.2%, compared to the fiscal year ended January 31, 2010 due primarily to the reasons discussed above.


22

Verint
 
 
Verint
 
 
Fiscal Years Ended January 31,
 
Change
 
 
2011
 
2010
 
Amount
 
Percent
 
 
(Dollars in thousands)
Total revenue
 
726,799

 
703,633

 
23,166

 
3.3
 %
Costs and expenses:
 
 
 
 
 

 

Cost of revenue
 
238,344

 
239,935

 
(1,591
)
 
(0.7
)%
Research and development, net
 
96,525

 
83,797

 
12,728

 
15.2
 %
Selling, general and administrative
 
318,825

 
314,081

 
4,744

 
1.5
 %
Other operating expenses
 
—

 
141

 
(141
)
 
N/M

Total costs and expenses
 
653,694

 
637,954

 
15,740

 
2.5
 %
Income from operations
 
$
73,105

 
$
65,679

 
$
7,426

 
11.3
 %
Computation of segment performance:
 
 
 
 
 

 

Total revenue
 
$
726,799

 
$
703,633

 
$
23,166

 
3.3
 %
Segment revenue adjustment
 
—

 
—

 
—

 
—

Segment revenue
 
$
726,799

 
$
703,633

 
$
23,166

 
3.3
 %
Total costs and expenses
 
$
653,694

 
$
637,954

 
$
15,740

 
2.5
 %
Segment expense adjustments:
 
 
 
 
 

 

Stock-based compensation expense
 
46,819

 
44,237

 
2,582

 
5.8
 %
Amortization of acquisition-related intangibles
 
30,554

 
30,289

 
265

 
0.9
 %
Compliance-related professional fees
 
28,913

 
54,472

 
(25,559
)
 
(46.9
)%
Acquisition-related charges
 
1,690

 
762

 
928

 
121.8
 %
Restructuring and integration charges
 
—

 
141

 
(141
)
 
N/M

Other
 
3,505

 
39

 
3,466

 
N/M

Segment expense adjustments
 
111,481

 
129,940

 
(18,459
)
 
(14.2
)%
Segment expenses
 
542,213

 
508,014

 
34,199

 
6.7
 %
Segment performance
 
$
184,586

 
$
195,619

 
$
(11,033
)
 
(5.6
)%
Revenue
Product revenue was $375.2 million for the fiscal year ended January 31, 2011, an increase of $0.9 million compared to the fiscal year ended January 31, 2010. The increase was primarily attributable to an increase in product revenue related to Verint's Enterprise Intelligence solutions due to an increase in customer order activity and an increase in Verint's Communication Intelligence solutions as a result of a higher volume of projects completed during fiscal year ended January 31, 2011. These increases were partially offset by a decrease in revenue from Verint's Video Intelligence solutions due to a reduction of deliveries to a major customer partially offset by an increase in revenue from other customers.
Service and support revenue was $351.6 million for the fiscal year ended January 31, 2011, an increase of $22.3 million, or 6.8%, compared to the fiscal year ended January 31, 2010. The increase was primarily attributable to an increase in Verint's Enterprise Intelligence solutions from higher support revenue due to an increase in customer installed base and from growth in Verint's professional services organization to meet the demand of Verint's customer base, increasing professional services revenue associated with installation, consulting and training.

Revenue by Geographic Region
Revenue in the Americas, EMEA and APAC represented approximately 53%, 26%, and 21% of Verint's revenue, respectively, for the fiscal year ended January 31, 2011 compared to approximately 55%, 25% and 20% respectively, for the fiscal year ended January 31, 2010.

23

Cost of Revenue
Product cost of revenue was $121.1 million for the fiscal year ended January 31, 2011, a decrease of $9.9 million, or 7.6%, compared to the fiscal year ended January 31, 2010. Verint's overall product margins increased in the fiscal year ended January 31, 2011 compared to the fiscal year ended January 31, 2010 due to the slight increase in product revenue combined with a decline in product costs and a favorable change in product mix, as higher margin software revenue accounted for a larger portion of overall product mix. Product costs for the fiscal years ended January 31, 2011 and 2010 included amortization of acquired technology of $9.1 million and $8.0 million, respectively.
Service costs were $117.3 million for the fiscal year ended January 31, 2011, an increase of $8.3 million, or 7.6%, compared to the fiscal year ended January 31, 2010. This increase was primarily attributable to an $8.0 million increase in personnel-related expenses due to an increase in employee headcount required to support increased implementation services and salary increases. Verint's overall service margins remained constant in the fiscal year ended January 31, 2011.
Research and Development, Net
Research and development expenses, net, was $96.5 million for the fiscal year ended January 31, 2011, an increase of $12.7 million, or 15.2%, compared to the fiscal year ended January 31, 2010. This increase is primarily attributable to a $15.6 million increase in personnel-related costs due to (i) an increase in employee headcount and salary increases, (ii) an increase in costs as a result of a higher portion of employees' time devoted to generic product development rather than specific customization work and (iii) the impact of the weakening U.S. dollar against the NIS and Canadian dollar on research and development wages at Verint's Israeli and Canadian research and development facilities. These increases were partially offset by a $1.4 million increase in research and development reimbursements from government programs due to new programs approved by the OCS and a $1.0 million decrease in contractor costs.
Selling, General and Administrative
Selling, general and administrative expenses were $318.8 million for the fiscal year ended January 31, 2011, an increase of $4.7 million, or 1.5%, compared to the fiscal year ended January 31, 2010. This increase is primarily attributable to:
•
an $11.8 million increase in personnel costs due to an increase in headcount and salary increases;
•
a $3.5 million increase in personnel-related expenses, including travel and entertainment and recruitment expenses, as a result of the increase in headcount;
•
a $3.1 million increase in stock-based compensation expense primarily related to an increase in Verint's stock price impacting certain stock-based compensation arrangements accounted for as liability awards;
•
a $2.0 million increase in sales commissions due to an increase in headcount and customer orders received in fiscal year ended January 31, 2011;
•
a $1.2 million increase in other expenses; and
•
a $0.7 million increase in marketing expenses due to Verint's global brand awareness campaign.
These increases were partially offset by a $17.1 million decrease in professional fees primarily due to Verint becoming current in its periodic reporting obligations under the federal securities laws in June 2010.
Other Operating Expenses
Other operating expenses were $0.1 million for the fiscal year ended January 31, 2010, due to restructuring costs related to severance and personnel-related costs from headcount reductions, with no corresponding expenses in the fiscal year ended January 31, 2011.
Income from Operations
Income from operations was $73.1 million for the fiscal year ended January 31, 2011, an increase of $7.4 million, compared to the fiscal year ended January 31, 2010, due primarily to the reasons described above.
Foreign Currency Effect on Operating Results
In the fiscal year ended January 31, 2011 compared to the fiscal year ended January 31, 2010, fluctuations in the value of the U.S. dollar relative to the other major currencies used in Verint's business resulted in a decrease in Verint's revenue and an increase in cost of revenue and operating expenses. Had foreign exchange rates remained constant in these periods, Verint's revenue would have been approximately $1.0 million higher and operating expenses and cost of revenue would have been

24

approximately $6.0 million lower, which would have resulted in approximately $7.0 million of higher income from operations in the fiscal year ended January 31, 2011.
Segment Performance
Segment performance was $184.6 million for the fiscal year ended January 31, 2011 based on segment revenue of $726.8 million, representing a segment performance margin of 25.4% as a percentage of segment revenue. Segment performance was $195.6 million for the fiscal year ended January 31, 2010 based on segment revenue of $703.6 million, representing a segment performance margin of 27.8% as a percentage of segment revenue. The decrease in segment performance margin is primarily attributable to the increase in segment expenses due to an increase in personnel-related costs only partially offset by the increase in segment revenue.

25

All Other
 
 
All Other
 
 
Fiscal Years Ended January 31,
 
Change
 
 
2011
 
2010
 
Amount
 
Percent
 
 
(Dollars in thousands)
Total revenue
 
—

 
60

 
(60
)
 
N/M

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
—

 
—

 
—

 
—

Intercompany purchases
 
—

 
—

 
—

 
—

Research and development, net
 
—

 
—

 
—

 
—

Selling, general and administrative
 
96,879

 
56,894

 
39,985

 
70.3
 %
Other operating expenses
 
(17,500
)
 
—

 
(17,500
)
 
N/M

Total costs and expenses
 
79,379

 
56,894

 
22,485

 
39.5
 %
Loss from operations
 
$
(79,379
)
 
$
(56,834
)
 
$
(22,545
)
 
(39.7
)%
Computation of segment performance:
 
 
 
 
 
 
 
 
Total revenue
 
$
—


$
60


$
(60
)

N/M

Segment revenue adjustment
 
—


—


—


—

Segment revenue
 
$
—


$
60


$
(60
)

N/M

Total costs and expenses
 
$
79,379

 
$
56,894


$
22,485


39.5
 %
Segment expense adjustments:
 
 
 
 

 

 
Stock-based compensation expense
 
6,796


7,398


(602
)

(8.1
)%
Compliance-related professional fees
 
50,668


12,704


37,964


298.8
 %
Compliance-related compensation and other expenses
 
45


3,157


(3,112
)

(98.6
)%
Strategic evaluation related costs
 
3,065

 
236

 
2,829

 
N/M

Litigation settlements and related costs
 
(17,060
)

2,771


(19,831
)

N/M

Other
 
—


1,759


(1,759
)

N/M

Segment expense adjustments
 
43,514


28,025


15,489


55.3
 %
Segment expenses
 
35,865


28,869


6,996


24.2
 %
Segment performance
 
$
(35,865
)

$
(28,809
)

$
(7,056
)

(24.5
)%
Selling, General and Administrative
Selling, general and administrative expenses were $96.9 million for the fiscal year ended January 31, 2011, an increase of $40.0 million, or 70.3% compared to the fiscal year ended January 31, 2010.
The increase was primarily attributable to a $38.0 million increase in compliance-related professional fees for the fiscal year ended January 31, 2011 due to the completion of adjustments to our historical financial statements and evaluations of the application of generally accepted accounting principles resulting in the filing with the SEC of the Comprehensive Form 10-K on October 4, 2010 and the Annual Report on Form 10-K for the fiscal year ended January 31, 2010 on January 25, 2011.
Other Operating Expense
Other operating expenses for the fiscal years ended January 31, 2011 was $17.5 million attributable to litigation settlement income received by CTI in connection with settlements of the consolidated shareholder derivative actions and consolidated shareholder class action.
Segment Performance
Segment performance was a $35.9 million loss for the fiscal year ended January 31, 2011, an increase in loss of $7.1 million, or 24.5%, compared to the loss for the fiscal year ended January 31, 2010. The increase in loss was attributable to an increase in segment expenses.

26

LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of liquidity historically have consisted of cash and cash equivalents, cash flows from operations, including changes in working capital, borrowings under term loans and revolving credit facilities, proceeds from the issuance of convertible debt obligations, the sale of investments and assets and receipt of dividends from subsidiaries. We believe that our future sources of liquidity will include cash and cash equivalents.
During the fiscal year ended January 31, 2012, our principal uses of liquidity were to fund operating expenses, make capital expenditures, repay indebtedness, service our debt obligations, complete business combinations, make cash payments under the consolidated shareholder class action settlement agreement, and pay significant professional fees and other expenses in connection with our efforts to become current in, and continue to meet our periodic reporting obligations under, the federal securities laws. In addition, we expended resources and made investments to improve our internal control over financial reporting through the hiring of additional experienced finance and accounting personnel, redesigning of processes, implementing accounting and finance systems and performing additional business analytics. These expenses declined significantly in the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011.
Financial Condition of CTI
Cash and Cash Equivalents
As of January 31, 2012, CTI had cash, cash equivalents, bank time deposits and restricted cash of approximately $171.0 million, compared to approximately $231.2 million as of January 31, 2011.
During the fiscal year ended January 31, 2012, CTI made the following significant disbursements:
•
$68.3 million paid in cash by CTI in accordance with the terms of the settlement agreements of the consolidated shareholder class action and the Opt-Out plaintiffs' action;
•
approximately $53.2 million paid for professional fees primarily in connection with CTI's efforts to become current in its periodic reporting obligations under federal securities laws, the timely filing of certain periodic reports and to remediate material weaknesses in internal control over financial reporting;
•
approximately $8.9 million paid for professional fees and other expenses in connection with our evaluation of strategic alternatives;
•
approximately $6.0 million paid by CTI in connection with a separation agreement with CTI's former President and Chief Executive Officer; and
•
approximately $2.8 million paid by CTI in connection with the settlement agreements with the SEC and the DOJ resolving allegations of improper payments.
These declines in cash and cash equivalents were partially offset primarily by:
•
approximately $75.0 million of proceeds received from sales and redemptions of ARS; and
•
approximately $3.3 million received in connection with the settlement of certain CTI claims against a third party.
Restricted Cash
Restricted cash aggregated $33.4 million as of January 31, 2011, received from sales and redemptions of ARS (including interest thereon) that were restricted under the terms of the consolidated shareholder class action settlement agreement. During the fourth quarter of the fiscal year ended January 31, 2012, CTI paid all remaining amounts under the settlement agreement using restricted cash received from sales and redemptions of ARS and shares of its common stock and, accordingly, all remaining cash proceeds received from sales and redemptions of ARS became unrestricted.
ARS
Cash, cash equivalents, bank time deposits and restricted cash excludes ARS. As of January 31, 2012 and 2011, CTI had $7.5 million and $94.4 million aggregate principal amount of ARS, respectively, with a carrying amount on each such date of approximately $0.3 million and $72.4 million, respectively. As noted above, proceeds from sales and redemptions of ARS (including interest thereon) were restricted under the terms of the consolidated shareholder class action settlement agreement. During the fiscal year ended January 31, 2012, CTI sold approximately $86.9 million aggregate principal amount of ARS with

27

a carrying amount of $72.2 million as of January 31, 2011 for approximately $75.0 million in cash. During the fourth quarter of the fiscal year ended January 31, 2012, CTI paid all remaining amounts under the settlement agreement and, accordingly, all remaining ARS and cash proceeds from sales and redemptions thereof became unrestricted.
Liquidity Forecast
We currently forecast that available cash and cash equivalents will be sufficient to meet the liquidity needs of CTI for at least the next 12 months.
Management's current forecast is based upon a number of assumptions which management believes are reasonable. However, should one or more of the assumptions prove incorrect, or should one or more of the risks or uncertainties described in Item 1A, “Risk Factors” in the 2011 Form 10-K and in other periodic reports and proxy statements subsequently filed materialize, CTI may experience a shortfall in the cash required to support working capital needs.
Financial Condition of Verint
Based on past performance and current expectations, we believe that cash and cash equivalents, and cash generated from operations by Verint will be sufficient to meet its anticipated operating costs, working capital needs, ordinary course capital expenditures, research and development spending, required payments of principal and interest and other commitments for at least the next 12 months.
Verint's liquidity could be negatively impacted by a decrease in demand for its products and service and support, including the impact of changes in customer buying behavior due to the economic environment. If Verint determines to make acquisitions or otherwise requires additional funds, it may need to raise additional capital, which could involve the issuance of equity or debt securities. There can be no assurance that Verint would be able to raise additional equity or debt in the private or public markets on terms favorable to it, or at all.
Verint incurred significant professional fees and related expenses during the past several fiscal years, including the fiscal year ended January 31, 2011, in connection with its efforts to become current in its periodic reporting obligations under the federal securities laws. By July 2010, Verint filed with the SEC annual reports for all required fiscal years and quarterly reports for certain fiscal quarters for which it had not previously filed reports, resumed making timely periodic filings with the SEC, relisted its common stock on NASDAQ and resolved certain matters with the SEC. As a result, professional fees incurred by Verint during the fiscal year ended January 31, 2012 declined significantly from those incurred during the fiscal year ended January 31, 2011.
Sources of Liquidity
The following is a discussion that highlights our primary sources of liquidity, cash and cash equivalents, and changes in those amounts due to operations, financing, and investing activities and the liquidity of our investments.

28

Cash Flows
Fiscal Year Ended January 31, 2012 Compared to Fiscal Year Ended January 31, 2011
 
 
Fiscal Years Ended
January 31,
 
 
2012
 
2011
 
 
(In thousands)
Net loss
 
$
(31,019
)
 
$
(119,286
)
Non-cash charges
 
97,911

 
208,267

Net income after non-cash charges add-back
 
66,892

 
88,981

Changes in operating assets and liabilities
 
(80,537
)
 
(84,097
)
Net cash (used in) provided by operating activities - continuing operations
 
(13,645
)
 
4,884

Net cash (used in) provided by investing activities - continuing operations
 
(19,755
)
 
44,218

Net cash used in financing activities - continuing operations
 
(336
)
 
(8,843
)
Net cash used in discontinued operations
 
(33,905
)
 
(36,473
)
Effects of exchange rates on cash and cash equivalents
 
1,888

 
2,732

Net (decrease) increase in cash and cash equivalents
 
(65,753
)
 
6,518

Cash and cash equivalents, beginning of year including the cash of discontinued operations
 
581,390

 
574,872

Cash and cash equivalents, end of year including the cash of discontinued operations
 
515,637

 
581,390

Less: Cash and cash equivalents of discontinued operations end of year
 
(193,192
)
 
(213,038
)
Cash and cash equivalents, end of year
 
$
322,445

 
$
368,352

Short-term investments, end of year
 
 
 
 
ARS
 
$
272

 
$
72,441

Long-term investments, end of year
 
 
 
 
Other (1)
 
755

 
757

Total investments, end of year
 
$
1,027

 
$
73,198

(1)
Consists of other investments recorded within “Other assets” in the consolidated balance sheets of the consolidated financial statements included elsewhere in this Current Report.
Operating Cash Flows from Continuing Operations
Our operating cash flows vary significantly from period to period based on timing of collections of accounts receivable, receipts of deposits on work-in-process and achievement of milestones. During the fiscal year ended January 31, 2012, we used net cash of $13.6 million for operating activities. Net cash used in operating activities was primarily attributable to:
•
a $67.6 million decrease in other assets and liabilities, of which $63.4 million represents payments made under the settlement agreement of the consolidated shareholder class action; and
•
a $17.6 million decrease due to changes in accounts payable and accrued expenses.
Such cash used in operating activities was partially offset by:
•
$66.9 million of net income after non-cash charges add-back; and
•
a $6.5 million decrease due to changes in prepaid expenses and other current assets.
Investing Cash Flows from Continuing Operations
During the fiscal year ended January 31, 2012, net cash used in investing activities was $19.8 million. Net cash used in investing activities was primarily attributable to (i) $109.8 million of cash used for Verint's acquisition of businesses and payments of contingent consideration associated with business combinations completed in prior periods and (ii) $16.5 million of cash used for capital expenditures, including capitalization of software development costs. These cash outflows were partially offset by proceeds of $75.5 million from sales and redemptions of investments and a $33.8 million decrease in restricted cash and bank time deposits.

29

Financing Cash Flows from Continuing Operations
During the fiscal year ended January 31, 2012, net cash used in financing activities was $0.3 million. Net cash used in financing activities is primarily attributable to (i) $587.5 million of cash used to repay bank loans, long-term debt and other financing obligations, including the repayment of $583.2 million of outstanding borrowings under Verint's prior facility, (ii) $15.3 million of debt issuance costs incurred by Verint in connection with the new credit agreement, and (iii) $6.2 million of cash used to repurchase stock of CTI and Verint from certain directors, executive officers and employees to cover tax liabilities in connection with the delivery of shares in settlement of stock awards. These were partially offset by (i) $597.1 million of Verint's borrowings under the new credit agreement representing $600.0 million of gross borrowings, net of a $3.0 million original issuance discount, and (ii) $14.6 million of proceeds received from exercises of stock options.
Cash Flows of Discontinued Operations
During the fiscal year ended January 31, 2012, net cash used in discontinued operations was $33.9 million. Net cash used in discontinued operations was attributable to $20.6 million cash used in operating activities, $8.7 million cash used in investing activities and $4.5 million cash used in financing activities.
Effects of Exchange Rates on Cash and Cash Equivalents
The majority of our cash and cash equivalents are denominated in the U.S. dollars. However, due to the nature of our global business, we also hold cash denominated in other currencies, primarily the euro, the NIS and the British pound Sterling. For the fiscal year ended January 31, 2012, the fluctuation in foreign currency exchange rates had a favorable impact of $1.9 million on cash and cash equivalents.
Liquidity of Investments
As of January 31, 2012 and 2011, the carrying amount of our ARS was $0.3 million and $72.4 million, respectively, and their aggregate principal amount was $7.5 million and $94.4 million, respectively. As of January 31, 2011, all investments in ARS (all of which were held by CTI as of such date) were restricted as CTI was prohibited from using proceeds from sales and redemptions of such ARS pursuant to the terms of the consolidated shareholder class action settlement agreement CTI entered into on December 16, 2009, as amended on June 19, 2010. During the fourth quarter of the fiscal year ended January 31, 2012, CTI paid all remaining amounts under the settlement agreement and, accordingly, all ARS and cash proceeds received from sales and redemptions thereof became unrestricted. For more information, see note 25 to the consolidated financial statements included elsewhere in this Current Report.
During the fiscal year ended January 31, 2012, CTI sold approximately $86.9 million aggregate principal amount of ARS with a carrying amount of $72.2 million as of January 31, 2011 for approximately $75.0 million in cash.

30

Fiscal Year Ended January 31, 2011 Compared to Fiscal Year Ended January 31, 2010
 
 
Fiscal Years Ended January 31,
 
 
2011
 
2010
 
 
(In thousands)
Net loss
 
$
(119,286
)
 
$
(259,621
)
Non-cash charges
 
208,267

 
327,938

Net income after non-cash charges add-back
 
88,981

 
68,317

Changes in operating assets and liabilities
 
(84,097
)
 
2,342

Net cash provided by operating activities - continuing operations
 
4,884

 
70,659

Net cash provided by (used in) investing activities - continuing operations
 
44,218

 
(25,264
)
Net cash used in financing activities - continuing operations
 
(8,843
)
 
(428,132
)
Net cash used in discontinued operations
 
(36,473
)
 
(129,237
)
Effects of exchange rates on cash and cash equivalents
 
2,732

 
7,919

Net increase (decrease) in cash and cash equivalents
 
6,518

 
(504,055
)
Cash and cash equivalents, beginning of year including the cash of discontinued operations
 
574,872

 
1,078,927

Cash and cash equivalents, end of year including the cash of discontinued operations
 
581,390

 
574,872

Less: Cash and cash equivalents of discontinued operations at end of year
 
(213,038
)
 
(342,601
)
Cash and cash equivalents, end of year
 
$
368,352

 
$
232,271

Short-term investments, end of year
 
 
 
 
ARS
 
$
72,441

 
$
35,846

Long-term investments, end of year
 
 
 
 
ARS
 
—

 
78,804

Other (1)
 
757

 
2,752

 
 
757

 
81,556

Total investments, end of year
 
$
73,198

 
$
117,402


 (1)
Consists of other investments recorded within “Other assets” in the consolidated balance sheets of the consolidated financial statements included elsewhere in this Current Report.
Operating Cash Flows from Continuing Operations
During the fiscal year ended January 31, 2011, cash provided by operating activities was $4.9 million. Net cash provided by operating activities was primarily attributable to:
•
$89.0 million of net income after non-cash charges add-back; and
•
a $16.6 million increase in deferred cost of revenue.
Such cash provided by operating activities was partially offset by:
•
a $51.2 million increase in deferred revenue;
•
a $24.6 million decrease due to changes in accounts receivable;
•
a $17.9 million increase in accounts payable and accrued expenses; and
•
a $4.6 million decrease due to due changes in prepaid expenses and other current assets.
Investing Cash Flows from Continuing Operations
During the fiscal year ended January 31, 2011, cash provided by investing activities was $44.2 million. Net cash provided by investing activities was primarily attributable to $76.5 million from the sale of shares of Verint Systems' common stock in January 2011 and $57.3 million from sales and maturities of investments. These increases were partially offset by $34.8 million of cash used to settle derivative financial instruments not designed as hedges, $23.5 million of cash used for Verint's acquisition of Iontas and payments of contingent consideration associated with business combinations consummated in prior periods, $15.7 million decrease in restricted cash and bank time deposits and $11.1 million of cash used for capital expenditures, including capitalization of software development costs.

31

Investments were $73.2 million as of January 31, 2011, a decrease of $44.2 million compared to January 31, 2010. The decrease was primarily attributable to the sales and maturities of these investments.
Financing Cash Flows from Continuing Operations
During the fiscal year ended January 31, 2011, cash used in financing activities was $8.8 million primarily attributable to $38.2 million of cash used to repay bank loans long-term debt and other financing obligations, $6.1 million of cash used to repurchase stock of CTI and Verint from certain directors, executive officers and employees to cover tax liabilities in connection with the delivery of shares in settlement of stock awards, $4.0 million of cash paid relating to debt issuance costs and $2.2 million of dividends paid by Verint's joint venture to its noncontrolling stockholders. These outflows were partially offset by $40.8 million of net proceeds from issuance of common stock by subsidiaries principally due to exercises of Verint stock options as a result of the termination of the prohibition on option exercises when Verint became current in its periodic reporting obligations under the federal securities laws in June 2010.
Cash Flows of Discontinued Operations
During the fiscal year ended January 31, 2011, net cash used in discontinued operations was $36.5 million. Net cash used in discontinued operations was attributable to $132.2 million cash used in operating activities and $8.5 million cash used in financing activities, partially offset by $104.0 million cash provided by investing activity primarily due to $105.0 million from sales and maturities of investments, net of purchases.
Effects of Exchange Rates on Cash and Cash Equivalents
The majority of our cash and cash equivalents are denominated in the U.S. dollar. However, due to the nature of our global business, we also hold cash denominated in other currencies, primarily the euro, the NIS and the British pound sterling. For the fiscal year ended January 31, 2011, the fluctuation in foreign currency exchange rates had a favorable impact of $2.7 million on cash and cash equivalents primarily due to the weakening of the U.S. dollar relative to the major foreign currencies we held during the fiscal year.
Liquidity of Investments
During the fiscal year ended January 31, 2011, the market liquidity for ARS exhibited some improvement although the price in the markets for certain classes of our ARS holdings continued to decline. Accordingly, we recorded other-than-temporary impairment charges of $0.4 million during the fiscal year ended January 31, 2011. As of January 31, 2011, the carrying amount of our $94.4 million aggregate principal amount of ARS was $72.4 million. For additional information, see notes 1 and 3 to the consolidated financial statements included elsewhere in this Current Report.
As of January 31, 2010, all investments in ARS (all of which were held by CTI as of such date) were restricted as CTI was prohibited from using proceeds from sales of such ARS pursuant to the terms of the settlement agreement of the consolidated shareholder class action CTI entered into on December 16, 2009. For more information about these restrictions, see note 25 to the consolidated financial statements included elsewhere in this Current Report.
Under the terms of the original settlement agreement of the consolidated shareholder class action prior to its amendment on June 19, 2010, CTI agreed to (i) exercise its right to sell its eligible ARS at face value to UBS during a specified period (referred to as the UBS Put) on June 30, 2010 and (ii) within 48 hours after receipt of payment, pay to the plaintiff class the proceeds received subsequent to the date of the settlement agreement from all sales of ARS held in an account with UBS (including proceeds received as a result of the exercise of the UBS Put), which would reduce the amount of a $51.5 million payment that was payable on or before August 15, 2010. For a more comprehensive discussion relating to the UBS Put, see note 3 to the consolidated financial statements included elsewhere in this Current Report.
As part of the amendment to the settlement agreement, the payment schedule under the settlement agreement was revised and the payment due on or before August 15, 2010 was reduced to $17.9 million (representing an agreed $21.5 million payment less a holdback of $3.6 million in respect of an anticipated Opt-Out Credit). Certain applicable provisions of the settlement agreement remained unchanged by the amendment. Pursuant to the amendment, CTI continued to be obligated to exercise the UBS Put on June 30, 2010 but was required to pay only such reduced payment using the proceeds received from the sales of the ARS held in an account with UBS, with any additional proceeds to remain with CTI. UBS purchased approximately $41.6 million in aggregate principal amount of ARS from CTI prior to June 30, 2010. Effective June 30, 2010, CTI exercised the UBS Put for the balance of $10.0 million aggregate principal amount of ARS that were subject to the UBS Put. In July 2010, CTI paid $17.9 million to the plaintiff class as required under the settlement agreement, as amended.
As of January 31, 2011, all investments in ARS (all of which were held by CTI as of such date) were restricted as CTI was prohibited from using proceeds from sales of such ARS pursuant to the terms of the settlement agreement of the

32

consolidated shareholder class action CTI entered into on December 16, 2009, as amended on June 19, 2010. For more information about these restrictions, see note 25 to the consolidated financial statements included elsewhere in this Current Report.
Indebtedness
Verint Credit Facilities
On May 25, 2007, Verint entered into a $675.0 million secured credit agreement (referred to as the prior facility) with a group of banks to fund a portion of the acquisition of Witness. The prior facility was comprised of a $650.0 million seven-year term loan facility and a $25.0 million six-year revolving line of credit. The borrowing capacity under the revolving line of credit was increased to $75.0 million in July 2010.
On April 29, 2011, Verint entered into a credit agreement (referred to as the new credit agreement) with a group of lenders and Credit Suisse AG, as administrative agent and collateral agent for the lenders (referred to in such capacities as the agent), and concurrently terminated the prior facility.
The new credit agreement provides for $770.0 million of secured senior credit facilities, comprised of a $600.0 million term loan maturing in October 2017 (referred to as the new term loan facility) and a $170.0 million revolving credit facility maturing in April 2016 (referred to as the new revolving credit facility), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time according to the terms of the new credit agreement. As of January 31, 2012, Verint had no outstanding borrowings under the new revolving credit facility.
The majority of the new term loan facility proceeds were used to repay all $583.2 million of outstanding term loan borrowings under the prior facility at the closing date of the new credit agreement. There were no outstanding borrowings under the prior revolving credit facility at the closing date.
The new credit agreement included an original issuance term loan facility discount of 0.50%, or $3.0 million, resulting in net term loan facility proceeds of $597.0 million. This discount is being amortized as interest expense over the term of the term loan facility using the effective interest method.
Loans under the new credit agreement bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months or shorter, at the end of any interest period, at a per annum rate of, at Verint's election:
•
in the case of Eurodollar loans, the Adjusted London Interbank Offered (or LIBO) Rate plus 3.25% (or if Verint's corporate ratings are at least BB- and Ba3 or better, 3.00%). The “Adjusted LIBO Rate” is the greater of (i) 1.25% per annum and (ii) the product of the LIBO Rate and Statutory Reserves (both as defined in the new credit agreement), and
•
in the case of base rate loans, the Base Rate plus 2.25% (or if Verint's corporate ratings are at least BB- and Ba3 or better, 2.00%). The “Base Rate” is the greatest of (i) the agent's prime rate, (ii) the Federal Funds Effective Rate (as defined in the new credit agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus 1.00%.
 
Verint incurred debt issuance costs of $14.8 million associated with the new credit agreement, which have been deferred and classified within “Other assets.” The deferred costs are being amortized as interest expense over the term of the new credit agreement. Deferred costs associated with the term loan facility were $10.2 million, and are being amortized using the effective interest rate method. Deferred costs associated with the new revolving credit facility were $4.6 million and are being amortized on a straight-line basis.
At the closing date of the new credit agreement, there were $9.0 million of unamortized deferred costs associated with the prior facility. Upon termination of the prior facility and repayment of the prior term loan, $8.1 million of these fees were expensed as a loss on extinguishment of debt. The remaining $0.9 million of these fees were associated with lenders that provided commitments under both the new and the prior revolving credit facilities, which remained deferred and are being amortized over the term of the new credit agreement.
During the fiscal year ended January 31, 2012, Verint incurred $0.5 million of fees to secure waivers of certain provisions of the new credit agreement which allowed it to structure the financing for one of its business combinations in a favorable manner, $0.2 million of which were deferred and will be amortized over the remaining term of the new credit agreement and $0.3 million of which were expensed as incurred.

33

As of January 31, 2012, the interest rate on the new term loan facility was 4.50%. Including the impact of the 0.50% original issuance term loan facility discount and the deferred debt issuance costs, the effective interest rate on Verint's new term loan facility was approximately 4.91% as of January 31, 2012.
Verint incurred interest expense on borrowings under its credit facilities of $28.1 million, $26.2 million and $22.6 million during the fiscal years ended January 31, 2012, 2011 and 2010 , respectively. Verint also recorded $2.8 million, $2.8 million and $1.9 million during the fiscal years ended January 31, 2012, 2011 and 2010, respectively, for amortization of deferred debt issuance costs, which is reported within "Interest expense." Included in the deferred debt-related cost amortization for the fiscal years ended January 31, 2011 and 2010 were $0.3 million and $0.1 million, respectively, of additional amortization associated with unscheduled principal repayments in those fiscal years. During the fiscal year ended January 31, 2012, Verint also recorded $0.3 million for amortization of the original issuance term loan discount, which is reported within “Interest expense.”
Verint is required to pay a commitment fee with respect to undrawn availability under the new revolving credit facility, payable quarterly, at a rate of 0.50% per annum, and customary administrative agent and letter of credit fees.
The new credit agreement requires Verint to make term loan principal payments of $1.5 million per quarter through August 2017, beginning in August 2011, with the remaining balance due in October 2017. Optional prepayments of the loans are permitted without premium or penalty, other than customary breakage costs associated with the prepayment of loans bearing interest based on LIBO Rates and a 1.0% premium applicable in the event of a Repricing Transaction (as defined in the new credit agreement) prior to April 30, 2012. The loans are also subject to mandatory prepayment requirements with respect to certain asset sales, excess cash flow (as defined in the new credit agreement), and certain other events. Prepayments are applied first to the eight immediately following scheduled term loan principal payments, and then pro rata to other remaining scheduled term loan principal payments, if any, and thereafter as otherwise provided in the new credit agreement.
Verint Systems' obligations under the new credit agreement are guaranteed by substantially all of Verint's domestic subsidiaries and certain foreign subsidiaries that have elected to be disregarded for U.S. tax purposes and are secured by security interests in substantially all assets of Verint and its guarantor subsidiaries, subject to certain exceptions. Verint's obligations under the new credit agreement are not guaranteed by CTI and are not secured by any of CTI's assets.
The new credit agreement contains customary negative covenants for credit facilities of this type, including limitations on Verint and its subsidiaries with respect to indebtedness, liens, nature of business, investments and loans, distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. Accordingly, the new credit agreement precludes Verint Systems from paying cash dividends and limits its ability to make asset distributions to its stockholders, including CTI. The new credit agreement also contains a financial covenant that requires Verint to maintain a Consolidated Total Debt to Consolidated Earnings before Interest, Taxes, Depreciation and Amortization (or EBITDA) (each as defined in the new credit agreement) leverage ratio until July 31, 2013 of no greater than 5.00 to 1 and, thereafter, of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions. As of January 31, 2012, Verint was in compliance with such requirements. As of January 31, 2012, Verint's consolidated leverage ratio was approximately 2.7 to 1 compared to a permitted consolidated leverage ratio of 5.00 to 1, and its EBITDA for the twelve-month period then ended exceeded by at least $80.0 million the minimum EBITDA required to satisfy the leverage ratio covenant given Verint's outstanding debt as of such date.
The new credit agreement also contains a number of affirmative covenants, including a requirement that Verint submit consolidated financial statements to the lenders within certain periods after the end of each fiscal year and quarter.
The new credit agreement provides for customary events of default with corresponding grace periods, including failure to pay principal or interest under the new credit agreement when due, failure to comply with covenants, any representation or warranty made by Verint proving to be inaccurate in any material respect, defaults under certain other indebtedness of Verint or its subsidiaries, a change of control (as defined in the new credit agreement) of Verint, and certain insolvency or receivership events affecting Verint or its significant subsidiaries. Upon an event of default, all of Verint's indebtedness under the new credit agreement may be declared immediately due and payable, and the lenders' commitments to provide loans under the new credit agreement may be terminated.
Other Verint Indebtedness
In connection with Verint's August 2, 2011 business combination, Verint assumed approximately $3.3 million of development bank and government debt in the Americas region. This debt is payable-in-periods through February 2017 and bears interest at varying rates. As of January 31, 2012, the majority of this debt bears interest at an annual rate of 7.00%. The carrying value of this debt was approximately $3.1 million as of January 31, 2012.

34

Convertible Debt Obligations
As of January 31, 2012 and 2011, CTI had $2.2 million aggregate principal amount of outstanding convertible debt obligations (referred to as the Convertible Debt Obligations). The Convertible Debt Obligations are not secured by any of our assets and are not guaranteed by any of CTI's subsidiaries. For additional information relating to the convertible debt obligation, see note 11 to the consolidated financial statements included elsewhere in this Current Report.
Settlements of Shareholder Actions
On December 16, 2009, CTI entered into a consolidated shareholder class action settlement agreement, which was amended on June 19, 2010. During the fiscal year ended January 31, 2012, CTI paid all remaining amounts payable under the settlement agreement, of which approximately $58.8 million was paid in cash and $82.5 million was paid through the issuance of 12,462,236 shares of CTI's common stock.
The consolidated shareholder class action settlement agreement included restrictions on CTI's ability to use proceeds from sales of ARS until the amounts payable under the settlement agreement are paid in full. Following the payment by CTI of the remaining amounts payable under the settlement agreement, these restrictions terminated. For more information, see note 25 to the consolidated financial statements included elsewhere in this Current Report.
In addition, on December 19, 2011, CTI and plaintiffs who opted not to participate in the settlement of the consolidated shareholder claim action described above (referred to as the Opt-Out plaintiffs) entered into a settlement agreement pursuant to which CTI paid Opt-Out plaintiffs approximately $9.5 million on December 28, 2011. For more information, see note 25 to the consolidated financial statements included elsewhere in this Current Report.
Guarantees and Restrictions on Access to Subsidiary Cash
Guarantees
We provide certain customers in the ordinary course of business with financial performance guarantees, which in certain cases are backed by standby letters of credit or surety bonds, the certain of which are cash collateralized and accounted for as restricted cash and bank time deposits. We are only liable for the amounts of those guarantees in the event of our nonperformance, which would permit the customer to exercise the guarantee. As of January 31, 2012 and 2011, we believe that we were in compliance with our performance obligations under all contracts for which there is a financial performance guarantee, and that any liabilities arising in connection with these guarantees will not have a material adverse effect on our consolidated results of operations, financial position or cash flows. We also obtained bank guarantees primarily to provide customer assurance relating to the performance of certain obligations required by customer agreements for the guarantee of certain payment obligations. These guarantees, which aggregated $41.2 million as of January 31, 2012, are generally scheduled to be released upon our performance of specified contract milestones, a majority of which are scheduled to be completed at various dates through January 31, 2013.
Dividends from Subsidiaries
The ability of our Israeli subsidiaries to pay dividends is governed by Israeli law, which provides that dividends may be paid by an Israeli corporation only out of earnings as defined in accordance with the Israeli Companies Law of 1999, provided that there is no reasonable concern that such payment will cause such subsidiary to fail to meet its current and expected liabilities as they come due.
We operate our business internationally. A significant portion of our cash and cash equivalents are held outside of the United States by various foreign subsidiaries. As of January 31, 2012, cash and cash equivalents held by Verint's foreign subsidiaries was $133.4 million. If cash and cash equivalents held outside the United States are distributed to the United States resident corporate parents in the form of dividends or otherwise, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. We may incur substantial withholding taxes if we repatriate our cash from certain foreign subsidiaries.
In addition, Verint is party to a credit agreement that contains certain restrictive covenants which, among other things, preclude Verint Systems from paying cash dividends and limit its ability to make asset distributions to its stockholders, including CTI.
Investment in Verint Systems' Preferred Stock
On May 25, 2007, in connection with Verint's acquisition of Witness, CTI entered into a Securities Purchase Agreement with Verint (referred to as the Securities Purchase Agreement), whereby CTI purchased, for cash, an aggregate of 293,000 shares of Verint's Series A Convertible Perpetual Preferred Stock (referred to as the preferred stock), which represents all of

35

Verint's outstanding preferred stock, for an aggregate purchase price of $293.0 million. Proceeds from the issuance of the preferred stock were used to partially finance the acquisition. The preferred stock is eliminated in consolidation.
Dividends
The dividend rate on the preferred stock is 3.875% per annum. Verint's prior facility contained, and the new credit agreement contains, a restrictive covenant which limits its ability to pay dividends on the preferred stock. Through the date hereof, no dividends have been declared or paid on the preferred stock. Through January 31, 2012 and 2011, cumulative, undeclared dividends on the preferred stock were $59.0 million and $45.7 million, respectively. As of January 31, 2012 and 2011, the liquidation preference of the preferred stock was $352.0 million and $338.7 million, respectively.
Voting and Conversion
Each share of preferred stock is entitled to a number of votes equal to the number of shares of common stock into which such share of preferred stock is convertible using the conversion rate that was in effect upon the issuance of the preferred stock in May 2007, on all matters voted upon by Verint Systems' common stockholders. The conversion rate was set at 30.6185 shares of common stock for each share of preferred stock.
Each share of preferred stock is convertible, at the option of CTI, into a number of shares of Verint Systems' common stock equal to the liquidation preference then in effect, divided by the conversion price then in effect, which was initially set at $32.66, and remained unchanged through January 31, 2012. As of January 31, 2012 and 2011, the preferred stock could be converted into approximately 10.8 million and 10.4 million shares of Verint Systems' common stock, respectively.
Special Rights Upon a Fundamental Change
The terms of the preferred stock also provide that upon a fundamental change, as defined in the Certificate of Designation of the preferred stock, CTI would have the right to require Verint to repurchase the preferred stock for 100% of the liquidation preference then in effect. In addition, in the event of a fundamental change, the conversion rate will be increased to provide for additional shares of common stock issuable to CTI upon conversion, based on a sliding scale depending on the acquisition price, as defined in the Certificate of Designation of the preferred stock, ranging from zero to 3.7 additional shares of common stock for every share of preferred stock converted into shares of common stock.
Registration Rights
        Pursuant to a registration rights agreement that CTI and Verint entered into concurrently with the Securities Purchase Agreement (referred to as the New Registration Rights Agreement), CTI is entitled to two demands and unlimited piggyback registration rights on certain Securities Act registrations filed by Verint.
For a more comprehensive discussion relating to the terms of the preferred stock, see note 24 to the consolidated financial statements included elsewhere in this Current Report.
Contingent Payments Associated with Business Combinations
In connection with certain of Verint's business combinations, Verint has agreed to make contingent cash payments to the former shareholders of the acquired companies based upon achievement of performance targets following the acquisition dates.
During the fiscal year ended January 31, 2012, Verint completed seven business combinations, all of which included contingent cash consideration arrangements. For more information, see note 6 in the consolidated financial statements included elsewhere in this Current Report.
As of January 31, 2012, potential future cash payments under contingent consideration arrangements aggregated $79.2 million, the estimated fair value of which was $38.6 million, of which $10.1 million is included within “Accounts payable and accrued expenses,” and $28.5 million is included within “Other long-term liabilities.” The performance periods associated with these potential payments extend through January 2015.
OFF-BALANCE SHEET ARRANGEMENTS
We lease certain of our current facilities, furniture, and equipment under non-cancelable operating lease agreements. We are typically required to pay property taxes, insurance, and normal maintenance costs for these facilities.

36

We provide certain customers in the ordinary course of business with financial performance guarantees. See “-Liquidity and Capital Resources-Guarantees and Restrictions on Access to Subsidiary Cash-Guarantees” and note 25 to the consolidated financial statements included elsewhere in this Current Report.
In the normal course of business, we provide indemnifications of varying scopes to customers against claims of intellectual property infringement made by third parties arising from the use of our products. In addition, to the extent permitted under state laws or other applicable laws, we have agreements in which we agreed to indemnify our directors and officers for certain events or occurrences while the director or officer is, or was, serving at our request in such capacity. For more information relating to indemnification agreements, see note 25 to the consolidated financial statements included elsewhere in this Current Report.
As of January 31, 2012, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
CONTRACTUAL OBLIGATIONS
The following table presents our contractual obligations as of January 31, 2012:
 
 
Payments due by period
Contractual obligations*
 
Total
 
< 1 year
 
1-3 years
 
3-5 years
 
> 5 years
 
 
(In thousands)
Long-term debt obligations, including
current portion
 
$
749,238

 
$
33,209

 
$
65,448

 
$
64,425

 
$
586,156

Operating lease obligations
 
87,422

 
14,259

 
21,042

 
16,383

 
35,738

Purchase obligations (1)
 
47,545

 
44,497

 
3,048

 
—

 
—

Other current and long-term liabilities
 
1,396

 
723

 
673

 
—

 
—

Total (2)
 
$
885,601

 
$
92,688

 
$
90,211

 
$
80,808

 
$
621,894

*The information presented excludes contractual obligations of discontinued operations
(1)
Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.
(2)
Our consolidated balance sheet as of January 31, 2012 includes $23.7 million of non-current tax liabilities for uncertain tax positions. The specific timing of any cash payments, if any, relating to this obligation cannot be projected with reasonable certainty and, therefore, no amounts for this obligation are included in the table set forth above.
The long-term debt obligations reflected above include projected interest payments over the term of the debt, assuming interest rates of 4.50%, which was the interest rate in effect for Verint’s term loan borrowings as of January 31, 2012. The interest rate on the term loan and revolving credit facility under the new credit agreement are variable. For a more detailed discussion of the interest on borrowings under the new credit agreement, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness—Verint Credit Facilities” and note 11 to the consolidated financial statements included elsewhere in this Current Report.
In connection with certain of Verint's business combinations, Verint has agreed to make contingent cash payments to the former shareholders of the acquired companies based upon achievement of performance targets following the acquisition dates. For information relating to potential future cash payments under contingent consideration arrangements, see “—Liquidity and Capital Resources—Contingent Payments Associated with Business Combinations.”
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The accounting estimates and judgments discussed in this section are those that we consider to be most critical to understand our consolidated financial statements (or the financial statements), because they involve significant judgments and uncertainties. More specifically, the accounting estimates and judgments outlined below are critical because they can materially affect our operating results and financial condition, inasmuch as they require management to make difficult and subjective judgments regarding uncertainties. Many of these estimates include determinations of fair value. All of these estimates reflect our best judgment about current and, for some estimates, future, economic and market conditions and effects based on

37

information available to us as of the date of the accompanying financial statements. As a result, the accuracy of these estimates and the likelihood of future changes depend on a range of possible outcomes and a number of underlying variables, some of which are beyond our control. See also note 1 to the consolidated financial statements included elsewhere in this Current Report for additional information on the significant accounting estimates and judgments underlying the financial results disclosed in our consolidated financial statements.
Please note that the following discussion of critical accounting estimates and judgments contains references to the FASB's guidance in effect, and applicable to our consolidated financial statements on or before January 31, 2012 (the end of the most recent fiscal year covered by financial statements included elsewhere in this Current Report).
Revenue Recognition
We report our revenue in two categories: (i) product revenue, including hardware and software products; and (ii) service revenue, including revenue from professional services, training services and post-contract customer support (or PCS). Professional services primarily include installation, customization and consulting services. Revenue arrangements may include one of these single elements, or may incorporate one or more elements in a single transaction or combination of related transactions.
In September 2009, the FASB issued revenue recognition guidance applicable to multiple element arrangements, which:
•
applies to multiple element revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of the software revenue guidance; and
•
addresses how to separate consideration related to each element in a multiple element arrangement, excluding software arrangements, and establishes a hierarchy for determining the selling price of an element. It also eliminates the residual method of allocation by requiring that arrangement consideration be allocated at the inception of the arrangement to all elements using the relative selling price method.
We adopted this guidance on a prospective basis for revenue arrangements entered into, or materially modified, on or after February 1, 2011.
Multiple element arrangements entered into or materially modified on or after February 1, 2011 that include hardware which functions together with software to provide the essential functionality of the product are accounted under the FASB's new guidance applicable to multiple element arrangements. Multiple element arrangements entered into prior to February 1, 2011 and not materially modified on or after February 1, 2011 are accounted for in accordance with the FASB's guidance relating to revenue recognition for software arrangements as the software component of most of our multiple element arrangements is more than incidental to the products being sold.
For arrangements that do not require significant customization of the underlying software, we recognize revenue when we have persuasive evidence of an arrangement, the product has been shipped and the services have been provided to the customer, the sales price is fixed or determinable, collectability is probable, and all pertinent criteria are met as required by the FASB's guidance.
For multiple element arrangements entered into prior to February 1, 2011 and not materially modified on or after February 1, 2011, we allocate revenue to the delivered elements of the arrangement using the residual method, whereby revenue is allocated to the undelivered elements based on vendor specific objective evidence (or VSOE) of fair value of the undelivered elements with the remaining arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue recognition criteria are met. If we are unable to establish VSOE of fair value for the undelivered elements of the arrangement, revenue recognition is deferred for the entire arrangement until all elements of the arrangement are delivered. However, if the only undelivered element is PCS, we recognize the arrangement fee ratably over the PCS period.
For multiple element arrangements entered into or materially modified after February 1, 2011 that include hardware which functions together with software to provide the essential functionality of the product, we allocate revenue to each element based on its selling price The selling price used for each element is based on VSOE of fair value, if available, third-party evidence (“TPE”) of fair value if VSOE is not available, or our best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. In determining the units of accounting for these arrangements, we evaluate whether each element has stand-alone value as defined in the FASB's guidance. For our Comverse subsidiary, the professional services performed prior to the product's acceptance do not have stand-alone value and are therefore combined with the related hardware and software as one non-software deliverable. After determining the fair value for each deliverable, the arrangement consideration is allocated

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using the relative selling price method. Revenue is recognized accordingly for each deliverable once the respective revenue recognition criteria are met for that deliverable.
The timing of recognition for our revenue transactions involves numerous judgments, estimates and policy determinations. The most significant are summarized as follows:
PCS revenue is derived primarily from providing technical software support services, unspecified software updates and upgrades to customers on a when and if available basis. PCS revenue is recognized ratably over the term of the PCS period.
When PCS is included within a multiple element arrangement and the arrangement is within the scope of the software revenue guidance, we primarily utilize the substantive renewal rate to establish VSOE of fair value for the PCS. To a much lesser extent, the bell-shaped curve approach is used for certain Verint arrangements, depending upon geographical region or product line.
When using the substantive renewal rate method, we may be unable to establish VSOE of fair value for PCS because the renewal rate is deemed to be non-substantive or there are no contractually-stated renewal rates. If the stated renewal rate is non-substantive, the entire arrangement fee is recognized ratably over the estimated economic life of the product (five to eight years) beginning upon delivery of all elements other than PCS. We believe that the estimated economic life of the product is the best estimate of how long the customer will renew PCS. If there is no contractually stated renewal rate, the entire arrangement fee is recognized ratably over the relevant contractual PCS term beginning upon delivery of all elements other than PCS.
For arrangements that include a stated renewal rate, determining whether the actual renewal rate is substantive is a matter of judgment. For each group of our products, we stratify our customers based on the size of the installed base and the geographic location of the customer. Based on our historical negotiations and contract experience we believe that our customers behave differently and perceive different values for PCS based on these two main factors.
Under the bell-shaped curve approach of establishing VSOE of fair value, Verint performs a VSOE of fair value compliance test to ensure that a substantial majority (75% or over) of actual PCS renewals are within a narrow range of plus or minus 15% of the median pricing.
We evaluate many factors in determining the estimated economic life of our products, including the support period of the product, technological obsolescence, average time between new product releases and upgrade activity by customers. We have concluded that the estimated economic lives of our key software products range from five to eight years.
Our policy for establishing VSOE of fair value for professional services and training is based upon an analysis of separate sales of services, which are then compared with the fees charged when the same elements are included in a multiple element arrangement. Comverse has not yet established VSOE of fair value for any element other than PCS.
In certain multiple element arrangements, we are obligated to provide training services to customers related to the operation of our software products. For Comverse, these training services are either provided to the customer on a “defined” basis (limited to a specified number of days or training classes) or on an “as-requested” basis (unlimited training over a contractual period).
For multiple element arrangements containing as-requested training obligations that are within the scope of the software revenue guidance, we recognize the total arrangement consideration ratably over the contractual period during which we are required to “stand ready” to perform such training, provided that all other criteria for revenue recognition have been met.
For multiple element arrangements containing defined training obligations, the training services are typically provided to the customer prior to the completion of the installation services. For arrangements that are within the scope of the software revenue guidance, because revenue recognition does not commence until the completion of installation, the defined training obligations do not impact the timing of recognition of revenue. In certain circumstances in which training is provided after the end of the installation period, we commence revenue recognition upon the completion of training, provided that all other criteria for revenue recognition have been met.
Some of our arrangements require significant customization of the product to meet the particular requirements of the customer. For these arrangements, revenue is recognized, in accordance with the FASB's guidance for long-term construction type contracts using the percentage-of-completion (or POC) method.
The determination of whether services entail significant customization requires judgment and is primarily based on alterations to the features and functionality to the standard release, complex or unusual interfaces as well as the amount of hours necessary to complete the customization solution relative to the size of the contract. Revenue from these arrangements is

39

recognized on the POC method based on the ratio of total hours incurred to date compared to estimated total hours to complete the contract. We are required to make judgments to estimate the total estimated costs and progress to completion. Changes to such estimates can impact the timing of the revenue recognition period to period. We use historical experience, project plans, and an assessment of the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties in these arrangements include implementation delays or performance issues that may or may not be within our control. If some level of profitability is assured, but the related revenue and costs cannot be reasonably estimated, then revenue is recognized to the extent of costs incurred until such time that the project's profitability can be estimated or the services have been completed. Subsequent to the fiscal year ended January 31, 2012, Comverse entered into a contract modification with a customer accounted for using the POC method of revenue recognition which is expected to result in approximately $9.7 million of incremental revenue in the fiscal year ending January 31, 2013.
If VSOE of fair value of PCS does not exist, revenues are recognized to the extent of costs incurred until the services have been completed, provided that we are able to make reliable cost estimates and some level of profitability is assured. Once the services are completed, the remaining unrecognized portion of the arrangement fee is recognized ratably over the remaining PCS period. For situations where we are not able to make reliable estimates or some level of profitability is not assured, all revenue will be deferred until completion of the professional services and recognized ratably over the respective PCS period. If we determine that based on our estimates our costs exceed the sales price, the entire amount of the estimated loss is accrued in the period that such losses become known.
When revenue is recognized over multiple periods in accordance with our revenue recognition policies, the material cost, including hardware and third-party software license fees are deferred and amortized over the same period that product revenue is recognized. These costs are recognized as “Deferred cost of revenue” on the consolidated balance sheets. However, we have made an accounting policy election whereby the cost for installation and other service costs are expensed as incurred, except for arrangements recognized in accordance with the FASB's guidance for long-term construction type contracts.
In the consolidated statements of operations, we classify revenue as product revenue or service revenue as prescribed by SEC Rules and Regulations. For multiple element arrangements that include both product and service elements, for which we are unable to determine VSOE of fair value for all elements of the arrangement, management evaluates various available indicators of fair value and applies its judgment to reasonably classify the arrangement fee between product revenue and service revenue. The amount of multiple element arrangement fees classified as product and service revenue based on management estimates of fair value when VSOE of fair value for all elements of an arrangement does not exist could differ from amounts classified as product and service revenue if VSOE of fair value of all elements existed. The allocation of multiple element arrangement fees between product revenue and service revenue, when VSOE of fair value of all elements does not exist, is for consolidated financial statement presentation purposes only and does not affect the timing or amount of revenue recognized.
In determining the amount of a multiple element arrangement fee that should be classified between product revenue and service revenue, Comverse first allocates the arrangement fee to product revenue and PCS (PCS is classified as service revenue) based on management's estimate of fair value for those elements. The remainder of the arrangement fee, which is comprised of all other service elements, is allocated to service revenue. The estimate of fair value of the product element is based primarily on management's evaluation of direct costs and reasonable profit margins on those products. This was determined to be the most appropriate methodology as Comverse has historically been product oriented with respect to pricing policies which facilitates the evaluation of product costs and related margins in arriving at a reasonable estimate of the product element fair value. Management's estimate of reasonable profit margins requires significant judgment and consideration of various factors, such as the impact of the economic environment on margins, the complexity of projects, the stability of product profit margins and the nature of products. The estimate of fair value for PCS is based on management's evaluation of weighted average PCS rates for arrangements for which VSOE of fair value of PCS exists.
In determining the classification of revenue between products and services, Verint reviews VSOE of fair value for training, installation and PCS services from similar transactions and stand alone services arrangements and compares them to its peers, in order to determine reasonable and consistent approximations of fair values of service revenue with the remaining amount being allocated to product revenue.
Revenue from sales to resellers and original equipment manufacturers (or OEMs) who purchase Verint's products for resale are generally recognized when such products are shipped (referred to as sell-in basis) to the reseller or OEM. This policy is predicated on Verint's ability to estimate sales returns from these customers, among other criteria. Verint is also required to evaluate whether its resellers and OEMs have the ability to honor their commitment to make fixed or determinable payments, regardless of whether they collect payment from customers. If Verint were to change any of these assumptions or judgments, it could cause a material change to reported revenue in a particular period. Verint has historically experienced insignificant product returns from resellers and OEMs and payment terms for these customers are similar to those granted to end users. If a

40

reseller or OEM develops a pattern of payment delinquency, or seeks payment terms longer than generally accepted, Verint defers the recognition of revenue until the receipt of cash.
Extended Payment Terms
One of the critical judgments that we make, related to revenue recognition, is the assessment that collectability is probable. Our recognition of revenue is based on our assessment of the probability of collecting the related accounts receivable balance at the onset of a sales arrangement. Certain of Comverse's arrangements include payment terms that depart from its customary practice. In these situations, if a customer does not have an adequate history of abiding by its contractual payment terms without concessions, the sales price is not considered fixed or determinable and revenue is recognized upon collection provided all other revenue recognition criteria have been met. We consider payment terms where more than 5% of the arrangement fees are due 120 days from customer acceptance to be extended. If the arrangement is with a new customer and the payment terms are extended, there is no evidence of collecting under the original payment terms without making concessions and therefore the presumption that the fee is not fixed and determinable cannot be overcome. If this arrangement is with an existing customer, an evaluation of the customer's payment history will take place to determine if the fee is fixed.
Stock-Based Compensation
We account for share-based payment awards, including employee stock options, restricted stock, restricted stock units, deferred stock units and employee stock purchases, made to employees and directors in accordance with the FASB's guidance for share-based payment and related interpretative guidance, which requires the measurement and recognition of compensation expense for all such awards based on estimated fair value. Options are granted by CTI as well as its Verint and Starhome subsidiaries.
We estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. Under the FASB's guidance, stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award's vesting period. We use the Black-Scholes option-pricing model to measure fair value of these stock option awards. The Black-Scholes model requires judgments regarding the assumptions used within the model, the most significant of which are the stock price volatility assumption over the term of the awards and the expected life of the option award based on the actual and projected employee stock option behaviors. The inputs noted below that are factored into the option valuation model we use to measure the fair value of our stock awards are subjective estimates. Changes to these estimates could cause the fair value of our stock awards and related stock-based compensation expenses to vary materially. Except as noted below, the following key assumptions are used for all of our stock-based compensation awards:
•
The risk-free interest rate assumption we use is based upon U.S. Treasury interest rates appropriate for the expected life of the awards.
•
Our majority-owned subsidiaries, including our publicly-traded Verint subsidiary, use historical volatility when measuring volatility in their stock options.
•
Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.
We are also required to estimate expected forfeitures of stock-based awards at the grant date and recognize compensation cost only for those awards expected to vest. Although we estimate forfeitures based on historical experience and future expectation, actual forfeitures may differ. The forfeiture assumption is adjusted to the actual forfeitures that occur.
During the fiscal years ended January 31, 2012, 2011 and 2010, our consolidated stock-based compensation expense from continuing operations was $33.0 million, $53.6 million and $51.6 million, respectively.
Business Combinations
When we acquire a business, we allocate the fair value of consideration transferred in a business combination to the estimated fair value at the acquisition date of the tangible and intangible assets acquired, the liabilities assumed and any noncontrolling interest. The intangible assets consist primarily of acquired technology and customer relationships. From time to time we engage independent third-party appraisal firms to assist management in considering their determinations of the fair values of significant net assets acquired. Any residual purchase price is recorded as goodwill. The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets, estimated restructuring liabilities and pre-acquisition contingencies.
Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and as a

41

result, there is an inherent level of uncertainty. Key critical estimates in valuing certain of the intangible assets include, but are not limited to:
•
future expected cash flows generated from acquired technology and customer relationships;
•
expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
•
the acquired company's brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used;
•
weighted average cost of capital and discount rates; and
•
estimating the useful lives of acquired assets as well as the pattern or manner in which the assets will amortize.
•
We make other significant judgments related to our business combinations including evaluating contingent consideration agreements. We review contingent consideration agreements to ensure they do not represent compensation for on-going activities of the business. We consider the reasons for the contingent consideration provisions, the terms of employment agreements and the mix of employee selling shareholders and non-employee selling shareholders when making the determination of whether contingent consideration should be accounted for as an adjustment to the purchase price or as compensation for services.
We also estimate the fair value of the contractual support obligations or deferred revenue, we are assuming from the acquired business. The estimated fair value of the support obligations is determined utilizing a cost build-up approach, which determines fair value by estimating the costs related to fulfilling the obligations plus a reasonable profit margin. The estimated costs to fulfill the support obligations are based on the historical direct costs related to providing the support services. The sum of these costs and operating profit represents an approximation of the amount that we would be required to pay a third party to assume the support obligations.
Unanticipated events and circumstances may occur that affect the accuracy or validity of such assumptions, estimates or actual results.
Recoverability of Goodwill
Goodwill represents the excess of the fair value of consideration transferred in the business combination over the fair value of tangible and intangible assets acquired net of the fair value of liabilities assumed and the fair value of any noncontrolling interest in the acquiree.
We apply the FASB's guidance when testing goodwill for impairment which permits management to make a qualitative assessment of whether goodwill is impaired, or opt to bypass the qualitative assessment, and proceed directly to performing the first step of the two-step impairment test. If management performs a qualitative assessment and concludes it is more likely than not that the fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the two-step impairment test is unnecessary. However, if management concludes otherwise, it is then required to perform the first step of the two-step impairment test.
For reporting units where we decide to perform a qualitative assessment, our management assesses and makes judgments regarding a variety of factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-specific conditions, customer behavior, cost factors, our financial performance and trends, our strategies and business plans, capital requirements, management and personnel issues, and our stock price, among others. Management then considers the totality of these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit's fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount.
For reporting units where we perform the two-step goodwill impairment test, the first step requires us to compare the fair value of each reporting unit to the carrying value of its net assets. Management considers both an income-based approach using projected discounted cash flows and a market-based approach using multiples of comparable companies to determine the fair value of its reporting units. Management's estimate of fair value of each reporting unit is based on a number of subjective factors, including: (i) the appropriate weighting of valuation approaches (income-based approach and market-based approach), (ii) estimates of the future revenue and cash flows, (iii) discount rate for estimated cash flows, (iv) selection of peer group companies for the market-based approach, (v) required levels of working capital, (vi) assumed terminal value, (vii) the time horizon of cash flow forecasts; and (viii) control premium.
We use the work of an independent third-party appraisal firm to assist us in considering our determination of the implied fair value of our goodwill. The fair values are calculated using the income approach and a market approach based on

42

comparable companies. The income approach, more commonly known as the discounted cash flow approach, estimates fair value based on the cash flows that an asset can be expected to generate over its useful life. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment charge equal to the difference is recorded. Assumptions and estimates about future values of our reporting units and implied goodwill are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.
The determination of reporting units also requires management judgment. We assess whether a reporting unit exists within a reportable segment by identifying the unit, determining whether the unit qualifies as a business under U.S. GAAP, and assessing the availability and regular review by segment management of discrete financial information for the unit.
During the fiscal year ended January 31, 2012, there were no indicators of impairment at our Verint and Starhome reporting units. As of January 31, 2012, our Verint and Starhome reporting units had $897.1 million and $7.6 million of goodwill, respectively. During the fiscal year ended January 31, 2012, we performed impairment testing for our Comverse subsidiary. As of January 31, 2012, our Comverse subsidiary had $155.5 million of goodwill. For more information, see note 1 to the consolidated financial statements included elsewhere in this Current Report.
We did not record any impairment of goodwill for the fiscal years ended January 31, 2012, 2011 and 2010.
Management's forecasts and estimates are based on assumptions that are consistent with the plans and estimates used to manage the business. Changes in these estimates could change the conclusion regarding an impairment of goodwill.
Impairment of Long-Lived and Intangible Assets
We review the recoverability of our long-lived assets, such as property and equipment, and intangible assets with finite lives, whenever events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Any impairment of these assets must be considered prior to our impairment review of goodwill. The assessment of impairment is based on our ability to recover the carrying value of the asset by analyzing the expected future undiscounted pre-tax cash flows specific to the asset or asset group.
Circumstances which could trigger a review include, but are not limited to, significant decreases in the market price of the asset, significant adverse changes in the business climate or legal factors, accumulation of costs significantly in excess of the amount expected for the acquisition of a long-lived asset, current period negative cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset.
We assess the recoverability of the carrying value of long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If these undiscounted cash flows are less than the carrying value of such asset or asset group, an impairment loss is measured based on the difference between estimated fair value and carrying value. Assets to be disposed of are written-down to the greater of their fair value or salvage value. Estimated fair values are based on assumptions regarding the amount and timing of estimated future cash flows and appropriate discount rates to reflect varying degrees of perceived risk. Significant management judgment is involved in estimating these factors, and they include inherent uncertainties. Measurement of the recoverability of these assets is dependent upon the accuracy of the assumptions used in making these estimates, as well as how the estimates compare to the eventual future operating performance of the specific reporting unit to which the assets are attributed.
In connection with the testing of the goodwill of the Netcentrex reporting unit, classified as discontinued operations, we recorded charges of $3.4 million relating to finite-lived intangible assets during the fiscal year ended January 31, 2010. This write-down reflected the impairment of all of the reporting unit's intangible assets.
Allowance for Doubtful Accounts
We estimate the collectability of our accounts receivable balances for each accounting period and adjust the allowance for doubtful accounts accordingly. We exercise judgment in assessing the collectability of accounts receivable, including consideration of the current economic conditions, creditworthiness of customers, their collection history and the related aging of past due receivables balances. We evaluate specific accounts when we become aware that a customer may be experiencing a deterioration of its financial condition due to lower credit ratings, bankruptcy or other factors that may affect such customer's ability to meet its payment obligations. Management has used all available information subsequent to the balance sheet date to evaluate the reasonableness of its estimates. We charge off uncollectible trade receivables when all collection efforts have been exhausted and we believe the amount will not be collected.

43

As of January 31, 2012 and 2011, the accounts receivable balance was $154.8 million and $151.7 million, net of allowance for doubtful accounts of $2.9 million and $5.4 million, respectively.
Unanticipated events and circumstances may occur that affect the accuracy or validity of such assumptions, estimates or actual results.
Income Taxes
We account for income taxes in accordance with the FASB's guidance relating to income taxes. Income taxes are provided using the asset and liability method, such that income taxes (i.e., deferred tax assets, deferred tax liabilities, taxes currently payable/refunds receivable and tax expense/benefit) are recorded based on amounts refundable or payable in the current year and include the results of any difference between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating losses, capital losses and general business credit carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. Valuation allowances are established when management determines that it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. The subsequent realization of net operating loss and general business credit carryforwards acquired in acquisitions accounted for using the acquisition method of accounting is recognized in the consolidated statement of operations. Research and development credits are recorded based on the amount of benefit we believe is more-likely-than-not of being earned. Additionally, we are required to recognize in the consolidated financial statements those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions.
From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Examples of such transactions include business acquisitions and dispositions and certain financing transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on our interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In determining our tax provision for financial reporting purposes, we establish a reserve for uncertain tax positions unless such positions are determined to be more-likely-than-not of being sustained upon examination, based on their technical merits. That is, for financial reporting purposes, we only recognize tax benefits taken on the tax return that we believe are more-likely-than-not of being sustained. There is considerable judgment involved in determining whether positions taken on the tax return are more-likely-than-not of being sustained.
We adjust our tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate and any related estimated interest. Our policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense. For further information, see note 21 to the consolidated financial statements included elsewhere in this Current Report.
As part of our accounting for business combinations, some of the purchase price is allocated to goodwill and intangible assets. Impairment charges associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the quarter any impairment is recorded. Amortization expenses associated with acquired intangible assets are generally not tax deductible pursuant to our existing tax structure; however, deferred taxes have been recorded for non-deductible amortization expenses as a part of the purchase price allocation process. We have taken into account the allocation of these identified intangibles among different taxing jurisdictions, including those with nominal or zero percent tax rates, in establishing the related deferred tax liabilities. Under the FASB's guidance, the income tax benefit from future releases of the acquisition date valuation allowances or income tax contingencies, if any, are reflected in the income tax provision in the consolidated statements of operations, rather than as an adjustment to the purchase price allocation.
Litigation and Contingencies
Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. We accrue for costs relating to litigation, claims and other contingent matters when such liabilities become probable and reasonably estimable. We expense legal fees associated with consultations with outside counsel and defense of lawsuits as incurred. Such estimates may be based on advice from third parties or solely on management's judgment, as appropriate. Actual amounts paid may differ materially from amounts estimated, and such differences will be charged to operations in the period in which the final determination of the liability is made.
From time to time, we receive notices that our products or processes may be infringing the patent or intellectual property rights of others; notices of shareholder litigation; and notices of other lawsuits or other claims against us. We assess each matter

44

in order to determine if a contingent liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel. Based on the information obtained combined with management's judgment regarding all the facts and circumstances of each matter, we determine whether a contingent loss is probable and whether the amount of such loss can be estimated. Should a loss be probable and estimable, we record a contingent loss. Should the judgments and estimates made by management not coincide with future events, such as a judicial action against us where we expected no merit on the part of the party bringing the action against us, we may need to record additional contingent losses that could materially adversely impact our results of operations. Alternatively, if the judgments and estimates made by management are incorrect and a particular contingent loss does not occur, the contingent loss recorded would be reversed thereby favorably impacting our results of operations.
In the fiscal year ended January 31, 2007, we recorded a $174.4 million pre-tax charge for settlement amounts payable under settlement agreements of a consolidated shareholder class action and federal and state derivative actions, which agreements were approved by the courts in which such actions were pending on June 23, 2010, July 1, 2010 and September 23, 2010, respectively. The amounts payable under the settlements consisted of up to an aggregate of $165.0 million payable under the settlement of the consolidated shareholder class action settlement and $9.4 million in legal fees and expenses of the plaintiffs under the settlement of the shareholder derivative actions. The amount of such charge was determined based on the actual amount of the settlement. We reflected the charges during the fiscal year ended January 31, 2007, the fiscal period in which the actions commenced, not the fiscal period the lawsuits were settled because the financial statements for the fiscal year ended January 31, 2007 had not been issued. Upon entering into the settlement agreement of the consolidated shareholder class action in December 2009, CTI paid $1.0 million to the plaintiff class. During the fiscal year ended January 31, 2011, CTI paid $17.9 million and $9.4 million under the agreements to settle the consolidated shareholder class action and the consolidated shareholder derivative actions, respectively. During the fiscal year ended January 31, 2012, CTI paid $68.3 million in cash and $82.5 million was paid through the issuance of 12,462,236 shares of CTI's common stock under the agreement to settle the consolidated shareholder class action. In addition, in December 2011, CTI agreed to settle an action initiated by Maverick Fund, L.D.C. and certain affiliated investment funds, which opted not to participate in the settlement of the consolidated shareholder class action and pursuant to the settlement agreement, paid the plaintiffs approximately $9.5 million. In connection with this matter, we recorded a pre-tax charge of $4.9 million for the fiscal year ended January 31, 2012, representing the amount by which the settlement amount exceeded the Opt-out Credit and certain other credits under the settlement agreement of the consolidated shareholder class action.
RECENT ACCOUNTING PRONOUNCEMENTS
Standards Implemented
Revenue recognition
As previously discussed, in September 2009, the FASB issued revenue recognition guidance applicable to multiple element arrangements. The Company adopted this guidance on a prospective basis for revenue arrangements entered into, or materially modified, on or after February 1, 2011. For a more comprehensive discussion, see "—Critical Accounting Estimates and Judgments—Revenue Recognition" and note 1 to the consolidated financial statements included elsewhere in this Current Report.
Goodwill Impairment
In September 2011, the FASB issued new accounting guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether a reporting unit's fair value is more likely than not less than its carrying value, including goodwill. In performing its qualitative assessment, an entity considers the extent to which adverse events or circumstances (or factors) identified, such as changes in economic conditions, industry and market conditions or entity specific events, could affect the comparison of the reporting unit's fair value with its carrying amount. If an entity concludes that the fair value of a reporting unit is more likely than not less than its carrying amount, the entity is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and, accordingly, measure the amount, if any, of goodwill impairment loss to be recognized for that reporting unit. The guidance is effective for us for interim and annual periods commencing February 1, 2012.
In the fourth quarter of the fiscal year ended January 31, 2012, in conjunction with management's annual testing of goodwill, we early adopted the new accounting guidance.
Under the qualitative assessment, various factors that would affect the estimated fair value of a reporting unit are identified. These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and adverse categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting.

45

During the annual testing of goodwill for the fiscal year ended January 31, 2012, management performed the qualitative assessment for its Verint and Starhome reporting units. The qualitative assessment included the review of changes of the following: recent financial performance, financial forecasts, discount rates, carrying amount, market values of comparable companies, industry conditions, and general economic conditions. Furthermore, management considered the results of the most recent two-step quantitative impairment test completed for a reporting unit (in this instance for the Company's Verint and Starhome reporting units, as of November 1, 2010). Management concluded that it was not more likely than not that the estimated fair value of the Verint and Starhome reporting unit's equity was less than its carrying value. As such, no further analysis of the Verint and Starhome reporting units was required.
Other Standards Implemented
In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in an active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a gross presentation of activity within the Level 3 (significant unobservable inputs) roll forward, presenting information on purchases, sales, issuance, and settlements separately. The guidance was effective for us for interim and annual periods that commenced February 1, 2010, except for the gross presentation of the Level 3 roll forward, which became effective for us for interim and annual periods that commenced February 1, 2011. Adoption of this guidance resulted in additional disclosures for the gross presentation of the Level 3 roll forward. See note 13 to the consolidated financial statements included in elsewhere in this Current Report.
In December 2010, the FASB issued updated accounting guidance to clarify that pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior reporting period pro forma financial information. These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. This new accounting guidance is effective for business combinations consummated in periods beginning after December 15, 2010 and should be applied prospectively as of the date of adoption, although early adoption is permitted. We adopted this new guidance effective February 1, 2011. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In December 2010, the FASB issued guidance on when to perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. Upon adoption, if the carrying amount of the reporting unit is zero or negative, the reporting entity must perform step two of the goodwill impairment test if it is more likely than not that goodwill is impaired as of the date of adoption. In determining if it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. Goodwill impairment recognized upon adoption of the guidance should be presented as a cumulative-effect adjustment to opening retained earnings as of the adoption date reflecting a change in accounting principle. This guidance was effective for us for interim and annual periods that commenced on February 1, 2011. Because the carrying value of our previously defined Comverse reporting unit was negative as of February 1, 2011 and the existence of adverse qualitative factors indicated potential impairment, step two of the goodwill impairment test was performed as of such date which did not result in an impairment. The adoption of this guidance did not have a material impact on the consolidated financial statements for the fiscal year ended January 31, 2012.
In June 2011, the FASB issued accounting guidance, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of equity. Under the new guidance, entities are required to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. In December 2011, the FASB amended and updated the guidance issued in June 2011 to defer certain presentation requirements. The amended and updated guidance was effective for us for the interim period ended April 30, 2012 with early adoption permitted. We adopted the guidance and applied it retrospectively to all periods presented. Other than the change in presentation, adoption of this guidance did not impact our consolidated financial statements.
Standards to be Implemented
In May 2011, the FASB issued updated accounting guidance to amend existing requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders' equity. The guidance is

46

effective beginning with the interim period ended April 30, 2012. We are assessing the impact that the application of this guidance may have on our consolidated financial statements.

47


 

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 


48

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of Comverse Technology, Inc.
New York, New York
 
We have audited the accompanying consolidated balance sheets of Comverse Technology, Inc. and subsidiaries (the “Company”) as of January 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2012.  Our audits also included the financial statement schedules listed in the Index to Consolidated Financial Statements. These financial statements and financial statement schedules are the responsibility of the Company's management.  Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  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 Comverse Technology, Inc. and subsidiaries as of January 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of recognizing revenue for multiple element arrangements for the year ended January 31, 2012 in accordance with the Financial Accounting Standards Board's Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements and ASU 2009-14, Certain Revenue Arrangements that include Software Elements.

Also, as described in Note 1, the Company retrospectively adjusted the consolidated financial statements and financial statement schedules for all periods presented to reflect the results of operations and the assets and liabilities of Comverse, Inc. and Starhome B.V. as discontinued operations. As disclosed in Note 2, the Company changed its method of presenting comprehensive loss in 2012 due to the adoption of FASB Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income. The changes in presentation have been applied retrospectively to all periods presented. Further, as disclosed in Note 6 related to the Verint Segment, the Company adjusted purchase price allocations for several acquisitions recorded in the year ended January 31, 2012.
 
/s/ DELOITTE & TOUCHE LLP
 
 
 
 
 
New York, New York
April 2, 2012
(December 19, 2012 as to Notes 1, 2, 6 and 18)




49

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
 
 
January 31,
  
 
2012
 
2011
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
322,445

 
$
368,352

Restricted cash and bank time deposits
 
12,863

 
47,006

Auction rate securities
 
272

 
72,441

Accounts receivable, net of allowance of $2,929 and $5,395, respectively
 
154,764

 
151,657

Inventories
 
14,414

 
16,987

Deferred cost of revenue
 
11,951

 
6,269

Deferred income taxes
 
13,447

 
14,760

Prepaid expenses and other current assets
 
47,218

 
34,081

Current assets of discontinued operations
 
489,428

 
587,443

Total current assets
 
1,066,802

 
1,298,996

Property and equipment, net
 
29,853

 
24,996

Goodwill
 
894,155

 
803,971

Intangible assets, net
 
184,230

 
157,071

Deferred cost of revenue
 
13,285

 
21,715

Deferred income taxes
 
9,467

 
6,700

Other assets
 
44,399

 
35,720

Noncurrent assets of discontinued operations
 
414,822

 
474,706

Total assets
 
$
2,657,013

 
$
2,823,875

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued expenses
 
$
188,744

 
$
170,856

Convertible debt obligations
 
2,195

 
2,195

Deferred revenue
 
156,772

 
142,465

Deferred income taxes
 
1,056

 
379

Bank loans
 
6,228

 
—

Litigation settlement
 
—

 
146,150

Income taxes payable
 
6,284

 
6,159

Other current liabilities
 
41,911

 
50,278

Current liabilities of discontinued operations
 
574,579

 
676,037

Total current liabilities
 
977,769

 
1,194,519

Bank loans
 
591,151

 
583,234

Deferred revenue
 
25,987

 
40,424

Deferred income taxes
 
36,741

 
18,471

Other long-term liabilities
 
60,166

 
32,502

Noncurrent liabilities of discontinued operations
 
412,447

 
468,838

Total liabilities
 
2,104,261

 
2,337,988

Commitments and contingencies
 
 
 
 
Equity:
 
 
 
 
Comverse Technology, Inc. shareholders’ equity:
 
 
 
 
Common stock, $0.10 par value - authorized, 600,000,000 shares; issued 219,708,779 and 204,937,882 shares, respectively; outstanding, 218,636,842 and 204,533,916 shares, respectively
 
21,971

 
20,494

Treasury stock, at cost, 1,071,937 and 403,966 shares, respectively
 
(8,011
)
 
(3,484
)
Additional paid-in capital
 
2,198,870

 
2,089,501

Accumulated deficit
 
(1,762,517
)
 
(1,703,791
)
Accumulated other comprehensive (loss) income
 
(8,805
)
 
10,288

Total Comverse Technology, Inc. shareholders’ equity
 
441,508

 
413,008

Noncontrolling interest
 
111,244

 
72,879

Total equity
 
552,752

 
485,887

Total liabilities and equity
 
$
2,657,013

 
$
2,823,875

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

50

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
Revenue:
 
 
 
 
 
 
Product revenue
 
$
390,392

 
$
375,164

 
$
374,332

Service revenue
 
392,256

 
351,635

 
329,361

Total revenue
 
782,648

 
726,799

 
703,693

Costs and expenses:
 
 
 
 
 
 
Product costs
 
138,450

 
121,083

 
130,982

Service costs
 
129,911

 
117,261

 
108,953

Research and development, net
 
111,001

 
96,525

 
83,797

Selling, general and administrative
 
400,358

 
415,704

 
370,975

Other operating expense (income):
 
 
 
 
 
 
Litigation settlements
 
4,880

 
(17,500
)
 
—

Restructuring charges
 
—

 
—

 
141

Total other operating expense (income)
 
4,880

 
(17,500
)
 
141

Total costs and expenses
 
784,600

 
733,073

 
694,848

(Loss) income from operations
 
(1,952
)
 
(6,274
)
 
8,845

Interest income
 
2,419

 
2,376

 
3,902

Interest expense
 
(32,379
)
 
(29,913
)
 
(25,067
)
Loss on extinguishment of debt
 
(8,136
)
 
—

 
—

Other income (expense), net
 
29,231

 
9,636

 
(23,442
)
Loss before income tax (provision) benefit
 
(10,817
)
 
(24,175
)
 
(35,762
)
Income tax (provision) benefit
 
(19,292
)
 
(4,083
)
 
46,935

Net (loss) income from continuing operations
 
(30,109
)
 
(28,258
)
 
11,173

Loss from discontinued operations, net of tax
 
(910
)
 
(91,028
)
 
(270,794
)
Net loss
 
(31,019
)
 
(119,286
)
 
(259,621
)
Less: Net income attributable to noncontrolling interest
 
(27,707
)
 
(13,820
)
 
(7,783
)
Net loss attributable to Comverse Technology, Inc.'s shareholders
 
$
(58,726
)
 
$
(133,106
)
 
$
(267,404
)
Weighted average common shares outstanding:
 
 
 
 
 
 
Basic 
 
208,301,686

 
205,162,720

 
204,513,420

Diluted
 
208,301,686

 
205,162,720

 
205,241,178

Loss per share attributable to Comverse Technology, Inc.’s shareholders:
 
 
 
 
 
 
Basic (loss) earnings per share
 
 
 
 
 
 
Continuing operations
 
$
(0.27
)
 
$
(0.22
)
 
$
0.01

Discontinued operations
 
(0.01
)
 
(0.43
)
 
(1.32
)
Basic loss per share
 
$
(0.28
)
 
$
(0.65
)
 
$
(1.31
)
Diluted (loss) earnings per share
 
 
 
 
 
 
Continuing operations
 
$
(0.27
)
 
$
(0.22
)
 
$
0.01

Discontinued operations
 
(0.01
)
 
(0.43
)
 
(1.32
)
Diluted (loss) per share
 
$
(0.28
)
 
$
(0.65
)
 
$
(1.31
)
Net (loss) income attributable to Comverse Technology, Inc.
 
 
 
 
 
 
Net (loss) income from continuing operations
 
$
(55,242
)
 
$
(45,382
)
 
$
3,004

Loss from discontinued operations, net of tax
 
(3,484
)
 
(87,724
)
 
(270,408
)
Net loss attributable to Comverse Technology, Inc.
 
$
(58,726
)
 
$
(133,106
)
 
$
(267,404
)
The accompanying notes are an integral part of these consolidated financial statements.

51

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


 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
Net loss
 
$
(31,019
)
 
$
(119,286
)
 
$
(259,621
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
          Foreign currency translation adjustments
 
(2,059
)
 
(840
)
 
14,569

Unrealized (loss) gain on available-for-sale securities, net of reclassification adjustments and tax
 
(21,634
)
 
(7,818
)
 
10,678

Unrealized gain (loss) on cash flow hedges, net of reclassification adjustments and tax
 
280

 
(206
)
 
3,815

Other comprehensive (loss) income
 
(23,413
)
 
(8,864
)
 
29,062

Comprehensive loss
 
(54,432
)
 
(128,150
)
 
(230,559
)
  Less: comprehensive income attributable to noncontrolling interest
 
(23,387
)
 
(9,294
)
 
(14,283
)
Comprehensive loss attributable to Comverse Technology, Inc.'s shareholders
 
$
(77,819
)
 
$
(137,444
)
 
$
(244,842
)




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


52

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
 
 
Common Stock
 
 
 
 
 
 
 
Accumulated Other
Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
Number
of
Shares
 
Par
Value
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Unrealized
Gains
(Losses) on
Available-for-Sale Securities
 
Unrealized
(Losses)
Gains on
Derivatives
 
Cumulative
Translation
Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
 
Comverse
Technology,
 Inc.’s
Shareholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
Balance, January 31, 2009
 
204,111,096

 
$
20,421

 
$
(1,219
)
 
$
1,945,273

 
$
(1,303,281
)
 
$
10,302

 
$
(3,028
)
 
$
(15,210
)
 
$
(7,936
)
 
$
653,258

 
$
109,929

 
$
763,187

Net loss
 
—

 
—

 
—

 
—

 
(267,404
)
 
—

 
—

 
—

 
—

 
(267,404
)
 
7,783

 
(259,621
)
Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
10,730

 
3,813

 
8,019

 
22,562

 
22,562

 
6,500

 
29,062

Stock-based compensation
expense
 
—

 
—

 
—

 
11,322

 
—

 
—

 
—

 
—

 
—

 
11,322

 
—

 
11,322

Common stock issued for restricted and deferred stock awards
 
158,829

 
16

 
—

 
(16
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Impact from equity transactions of subsidiaries and other
 
—

 
—

 
—

 
3,107

 
—

 
—

 
—

 
—

 
—

 
3,107

 
29,498

 
32,605

Repurchase of common stock
 
(47,901
)
 
—

 
(359
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(359
)
 
—

 
(359
)
Forfeitures of restricted stock
 
(148,639
)
 
(15
)
 
—

 
15

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Dividends to noncontrolling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(66,474
)
 
(66,474
)
Balance, January 31, 2010
 
204,073,385

 
$
20,422

 
$
(1,578
)
 
$
1,959,701

 
$
(1,570,685
)
 
$
21,032

 
$
785

 
$
(7,191
)
 
$
14,626

 
$
422,486

 
$
87,236

 
$
509,722

Net loss
 
—

 
—

 
—

 
—

 
(133,106
)
 
—

 
—

 
—

 
—

 
(133,106
)
 
13,820

 
(119,286
)
Other comprehensive income (loss), net of tax
 
—

 
—

 
—

 
—

 
—

 
(7,792
)
 
(37
)
 
3,491

 
(4,338
)
 
(4,338
)
 
(4,526
)
 
(8,864
)
Stock-based compensation expense
 
—

 
—

 
—

 
10,402

 
—

 
—

 
—

 
—

 
—

 
10,402

 
—

 
10,402

Common stock issued for restricted and deferred stock awards
 
709,513

 
72

 
—

 
(72
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Sale of Verint Systems, Inc. shares of common stock, net of tax
 
—

 
—

 
—

 
52,203

 
—

 
—

 
—

 


 
—

 
52,203

 
7,117

 
59,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

53

 
 
Common Stock
 
 
 
 
 
 
 
Accumulated Other
Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
Number
of
Shares
 
Par
Value
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Unrealized
Gains
(Losses) on
Available-for-Sale Securities
 
Unrealized
(Losses)
Gains on
Derivatives
 
Cumulative
Translation
Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
 
Comverse
Technology,
 Inc.’s
Shareholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
Impact from equity transactions of subsidiaries and other
 
—

 
—

 
—

 
67,267

 
—

 
—

 
—

 
—

 
—

 
67,267

 
886

 
68,153

Sale of Ulticom, Inc.
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7,808
)
 
(7,808
)
Repurchase of common stock
 
(248,982
)
 
—

 
(1,906
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(1,906
)
 
—

 
(1,906
)
Dividends to noncontrolling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(23,846
)
 
(23,846
)
Balance, January 31, 2011
 
204,533,916

 
$
20,494

 
$
(3,484
)
 
$
2,089,501

 
$
(1,703,791
)
 
$
13,240

 
$
748

 
$
(3,700
)
 
$
10,288

 
$
413,008

 
$
72,879

 
$
485,887

Net loss
 
—

 
—

 
—

 
—

 
(58,726
)
 
—

 
—

 
—

 
—

 
(58,726
)
 
27,707

 
(31,019
)
Other comprehensive income (loss), net of tax
 
—

 
—

 
—

 
—

 
—

 
(21,631
)
 
(234
)
 
2,772

 
(19,093
)
 
(19,093
)
 
(4,320
)
 
(23,413
)
Stock-based compensation
   expense
 
—

 
—

 
—

 
9,073

 
—

 
—

 
—

 
—

 
—

 
9,073

 
—

 
9,073

Common stock issued for restricted and deferred stock awards
 
1,931,361

 
193

 
—

 
(193
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Exercises of stock options
 
377,300

 
38

 
—

 
2,075

 
—

 
—

 
—

 
—

 
—

 
2,113

 
—

 
2,113

Impact from equity transactions of subsidiaries and other
 
—

 
—

 
—

 
17,160

 
—

 
—

 
—

 
—

 
—

 
17,160

 
16,908

 
34,068

Common stock issued for settlement of shareholders class action
 
12,462,236

 
1,246

 
—

 
81,254

 
—

 
—

 
—

 
—

 
—

 
82,500

 
—

 
82,500

Repurchase of common stock
 
(667,971
)
 
—

 
(4,527
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(4,527
)
 
—

 
(4,527
)
Dividends to noncontrolling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,930
)
 
(1,930
)
Balance, January 31, 2012
 
218,636,842

 
$
21,971

 
$
(8,011
)
 
$
2,198,870

 
$
(1,762,517
)
 
$
(8,391
)
 
$
514

 
$
(928
)
 
$
(8,805
)
 
$
441,508

 
$
111,244

 
$
552,752


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

54

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 
$
(31,019
)
 
$
(119,286
)
 
$
(259,621
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activity:
 
 
 
 
 
 
Non-cash items
 
97,911

 
208,267

 
327,938

Changes in operating assets and liabilities, net of effects of business combinations:
 
 
 
 
 
 
Accounts receivable
 
(2,942
)
 
(24,574
)
 
(13,910
)
Inventories
 
1,080

 
(5,775
)
 
3,177

Deferred cost of revenue
 
3,199

 
16,616

 
14,082

Prepaid expenses and other current assets
 
6,520

 
4,600

 
(11,450
)
Accounts payable and accrued expenses
 
(17,610
)
 
(17,853
)
 
32,096

Deferred revenue
 
(3,424
)
 
(51,226
)
 
(21,143
)
Other assets and liabilities
 
(67,615
)
 
(641
)
 
(46
)
Other, net
 
255

 
(5,244
)
 
(464
)
Net cash (used in) provided by operating activities—continuing operations
 
(13,645
)
 
4,884

 
70,659

Net cash provided by (used in) operating activities—discontinued operations
 
(20,639
)
 
(132,166
)
 
(171,379
)
Net cash used in operating activities
 
(34,284
)
 
(127,282
)
 
(100,720
)
Cash flows from investing activities:
 
 
 
 
 
 
Proceeds from sales and maturities of investments
 
75,475

 
57,256

 
26,370

Advances under promissory note with Comverse, Inc.
 
(1,500
)
 
(7,000
)
 
—

Proceeds from sale of Verint Systems, Inc. shares of common stock
 
—

 
76,475

 
—

Proceeds from sale of Ulticom, Inc., net of cash sold
 
—

 
2,627

 
—

Acquisition of businesses, net of cash acquired
 
(109,780
)
 
(23,485
)
 
(96
)
Purchase of property and equipment
 
(13,084
)
 
(8,620
)
 
(5,856
)
Capitalization of software development costs
 
(3,399
)
 
(2,527
)
 
(2,715
)
Net change in restricted cash and bank time deposits
 
33,846

 
(15,725
)
 
(23,553
)
Settlement of derivative financial instruments not designated as hedges
 
(1,313
)
 
(34,783
)
 
(19,414
)
Net cash (used in) provided by investing activities—continuing operations
 
(19,755
)
 
44,218

 
(25,264
)
Net cash (used in) provided by investing activities—discontinued operations
 
(8,735
)
 
104,160

 
105,945

Net cash (used in) provided by investing activities
 
(28,490
)
 
148,378

 
80,681

Cash flows from financing activities:
 
 
 
 
 
 
Debt issuance costs and other debt-related costs
 
(15,276
)
 
(4,039
)
 
(152
)
Repurchase of convertible debt obligations
 
—

 
—

 
(417,282
)
Advances under promissory note from Comverse, Inc.
 
—

 
—

 
200,000

Repayment of promissory note to Comverse, Inc.
 
—

 
—

 
(200,000
)
Proceeds from borrowings, net of original issuance discount
 
597,136

 
—

 
—

Repayment of bank loans, long-term debt and other financing obligations
 
(587,549
)
 
(38,163
)
 
(6,088
)
Repurchase of common stock of CTI and subsidiary
 
(6,182
)
 
(6,052
)
 
(359
)
Excess tax benefits from stock awards plans
 
847

 
815

 
—

Proceeds from exercises of stock options of CTI and subsidiary

 
14,587

 
40,787

 
—

Dividends paid to noncontrolling interest
 
(1,930
)
 
(2,191
)
 
(4,145
)
Other, net
 
(1,969
)
 
—

 
(106
)
Net cash used in financing activities—continuing operations
 
(336
)
 
(8,843
)
 
(428,132
)
Net cash used in financing activities—discontinued operations
 
(4,531
)
 
(8,467
)
 
(63,803
)
Net cash used in financing activities
 
(4,867
)
 
(17,310
)
 
(491,935
)
Effects of exchange rates on cash and cash equivalents
 
1,888

 
2,732

 
7,919

Net (decrease) increase in cash and cash equivalents
 
(65,753
)
 
6,518

 
(504,055
)
Cash and cash equivalents, beginning of year including cash of discontinued operations
 
581,390

 
574,872

 
1,078,927

Cash and cash equivalents, end of year including cash of discontinued operations
 
$
515,637

 
$
581,390

 
$
574,872

Less: cash and cash equivalents of discontinued operations , end of year
 
(193,192
)
 
(213,038
)
 
(342,601
)
Cash and cash equivalents, end of year
 
$
322,445

 
$
368,352

 
$
232,271

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

55

COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Background
Comverse Technology, Inc. (“CTI” and, together with its subsidiaries, the “Company”) is a holding company organized as a New York corporation in October 1984 that as of the dates and for the fiscal years presented conducted business through its subsidiaries, principally, its wholly-owned subsidiary, Comverse, Inc. (together with its subsidiaries, “Comverse”) and its majority-owned subsidiaries, Verint Systems Inc. (“Verint Systems” and together with its subsidiaries, “Verint”), Starhome B.V. (together with its subsidiaries, “Starhome”) and prior to its sale to a third party on December 3, 2010, Ulticom, Inc. (together with its subsidiaries, “Ulticom”). Comverse was a CTI wholly-owned subsidiary prior to the Share Distribution (as defined below) on October 31, 2012. Starhome was a CTI majority-owned subsidiary prior to the completion of the Starhome Disposition (as defined below) on October 19, 2012. The assets and liabilities and results of operations of Comverse, Starhome and Ulticom are included in discontinued operations (see Note 18, Discontinued Operations).
In September 2011, the NASDAQ Stock Market (“NASDAQ”) approved CTI's application for the relisting of its common stock on the NASDAQ Global Select Market. Trading on such exchange resumed on September 23, 2011.
Continuing Operations
Verint
Overview
Verint is a global leader in Actionable Intelligence solutions and value-added services. Verint's solutions enable organizations of all sizes to make more timely and effective decisions to improve enterprise performance and enhance safety. Verint's customers use Verint's Actionable Intelligence solutions to capture, distill, and analyze complex and underused information sources, such as voice, video and unstructured text.
In the enterprise intelligence market, Verint's workforce optimization and voice of the customer solutions help organizations enhance customer service operations in contact centers, branches and back-office environments to increase customer satisfaction, reduce operating costs, identify revenue opportunities, and improve profitability. In the security intelligence market, Verint's communications and cyber intelligence, video and situation intelligence and public safety solutions help government and commercial organizations in their efforts to protect people and property and neutralize terrorism and crime.
Verint Strategic Alternative Exploration
CTI is exploring all options to maximize the value of its equity interests in Verint for the benefit of the shareholders of both CTI and Verint. The ultimate execution of any alternative will take into account a number of considerations, including, without limitation, tax efficiency and, depending upon the circumstances, the separate recommendation of Verint's directors who are not directors or officers of CTI.
Discontinued Operations
Comverse
Overview
Comverse is a leading provider of software-based products, systems and related services that:
•
provide converged, prepaid and postpaid billing and active customer management systems ("Business Support Systems" or "BSS") for wireless, wireline and cable network operators delivering a value proposition designed to ensure timely and efficient service monetization, consistent customer experience, reduced complexity and cost, and enable real-time marketing based on all relevant customer profile information;
•
enable wireless and wireline (including cable) network-based Value-Added Services ("VAS"), comprised of two categories—Voice and Messaging—that include voicemail, visual voicemail, call completion, short messaging service ("SMS") text messaging ("texting"), multimedia picture and video messaging, and Internet Protocol ("IP") communications; and
•
provide wireless users with optimized access to Internet websites, content and applications, manage and enforce policy and generate data usage and revenue for wireless operators.

56
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Comverse's products and services are used by more than 450 wireless, wireline and cable network communication service providers in more than 125 countries, including the majority of the world's 100 largest wireless network operators. Comverse's products and services are designed to generate voice and data network traffic, increase revenue and customer loyalty, monetize services and improve operational efficiency.
Comverse Share Distribution
On October 31, 2012, CTI completed its previously announced spin-off of Comverse as an independent, publicly-traded company, accomplished by means of a pro rata distribution of 100% of Comverse's outstanding common shares to CTI's shareholders (the “Share Distribution”). Following the Share Distribution, CTI no longer holds any of Comverse's outstanding capital stock.
Immediately prior to the Share Distribution, CTI contributed to Comverse Exalink Ltd. (“Exalink”), its wholly-owned subsidiary. Other than holding certain intellectual property rights, Exalink has no operations. Following the Share Distribution, Comverse and CTI operate independently, and neither have any ownership interest in the other. In order to govern certain ongoing relationships between CTI and Comverse after the Share Distribution and to provide mechanisms for an orderly transition, CTI and Comverse entered into agreements relating to the provision of certain services and setting forth certain rights and obligations between them following the Share Distribution. CTI and Comverse agreed, among other things, to indemnify each other against certain liabilities arising from their respective businesses and the services that will be provided under such agreements (see Note 18, Discontinued Operations).
As a result of the Share Distribution, the results of operations of Comverse are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in the Company's consolidated statements of operations for all periods presented. The assets and liabilities of Comverse are included in discontinued operations as separate components to the Company's consolidated balance sheets as of all dates presented (see Note 18, Discontinued Operations).
Starhome
Starhome is a provider of wireless service mobility solutions that enhance international roaming. Wireless operators use Starhome’s software-based solutions to generate additional revenue and to improve profitability by directing international roaming traffic to preferred networks and by providing a wide range of services to subscribers traveling outside their home network.
Sale of Starhome
On August 1, 2012, CTI, certain other Starhome shareholders and Starhome entered into a Share Purchase Agreement (the “Starhome Share Purchase Agreement”) with Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, “Fortissimo”) pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome (the “Starhome Disposition”). On September 19, 2012, CTI contributed to Comverse, its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Starhome Disposition was completed on October 19, 2012.
As a result of the Starhome Disposition, the results of operations of Starhome are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in the Company's consolidated statements of operations for all periods presented. The assets and liabilities of Starhome are included in discontinued operations as separate components to the Company's consolidated balance sheets as of all dates presented (see Note 18, Discontinued Operations).
Ulticom
Ulticom, Inc. was a majority-owned publicly-traded subsidiary of CTI until it was sold to an affiliate of Platinum Equity Advisors, LLC (“Platinum Equity”) on December 3, 2010 (the “Ulticom Sale”). Ulticom was a reportable segment of the Company prior to its sale. As a result of the Ulticom Sale, the results of operations of Ulticom, including the gain on the Ulticom Sale, are reflected in discontinued operations, less applicable income taxes, as a separate component of net loss in the Company's consolidated statements of operations for the fiscal years ended January 31, 2011 and 2010 (see Note 18, Discontinued Operations).
Principles of Consolidation
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The accompanying consolidated financial statements

57
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


include CTI and its wholly-owned subsidiaries and its controlled and majority-owned subsidiaries, which include Verint Systems (in which CTI owned 41.8% of the common stock and held 52.7% of the voting power as of January 31, 2012) and Starhome (66.5% owned as of January 31, 2012). Ulticom, Inc. was a majority-owned publicly-traded subsidiary prior to its sale on December 3, 2010. For controlled subsidiaries that are not wholly-owned, the noncontrolling interest is included as a separate component of “Net loss” in the consolidated statements of operations and “Total equity” in the consolidated balance sheets. Verint Systems holds a 50% equity interest in a consolidated variable interest entity in which it is the primary beneficiary and is therefore included within the Company's consolidated financial statements. The results of operations of this variable interest entity for the fiscal years ended January 31, 2012 and 2011 were not significant to the consolidated statements of operations.
All intercompany balances and transactions have been eliminated.
The Company includes the results of operations of an acquired business from the date of acquisition.
The accompanying notes to the consolidated financial statements, except where indicated, reflect continuing operations.
Segment Reporting
The Company determines its reportable segments in accordance with the Financial Accounting Standards Board's (the “FASB”) guidance relating to disclosures about segments of an enterprise and related information. CTI's Chief Executive Officer is the Company's chief operating decision maker (the “CODM”). The CODM uses segment performance as its primary basis for assessing the financial results of the operating segment and for the allocation of resources (see Note 22, Business Segment Information, for additional discussion, including the definition of segment performance).
The Company has one reportable segment, Verint. The results of CTI's holding company operations are included in the column captioned “All Other” as part of the Company’s business segment presentation. On October 31, 2012, CTI completed the Share Distribution. Accordingly, the Company no longer presents the reportable segments Comverse BSS and Comverse VAS and Comverse's operations previously included in All Other have been removed therefrom as Comverse's results of operations are included in discontinued operations for the fiscal years ended January 31, 2012, 2011 and 2010. In addition, on August 1, 2012, CTI entered into the Starhome Share Purchase Agreement with unaffiliated purchasers and completed the Starhome Disposition on October 19, 2012. Accordingly, Starhome's results of operations, which previously were included in “All Other,” are included in discontinued operations for the fiscal years ended January 31, 2012, 2011 and 2010.
Use of Estimates
The preparation of the consolidated financial statements and the accompanying notes in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.
The most significant estimates include:
•
Estimates relating to the recognition of revenue, including the determination of vendor specific objective evidence (“VSOE”) of fair value or the determination of best estimate of selling price for multiple element arrangements;
•
Inventory reserves;
•
Allowance for doubtful accounts;
•
Fair value of stock-based compensation;
•
Valuation of assets acquired and liabilities assumed in business combinations, including contingent consideration;
•
Fair value of reporting units for the purpose of goodwill impairment test;
•
Valuation of other intangible assets;
•
Valuation of investments and financial instruments;
•
Realization of deferred tax assets; and
•
The identification and measurement of uncertain tax positions.
The Company’s actual results may differ from its estimates.
Functional Currency and Foreign Currency Translation and Transactions

58
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The determination of the functional currency for the Company’s foreign subsidiaries is made based on appropriate economic factors, including the currency in which the subsidiary sells its products, the sales market in which the subsidiary operates and the currency in which the subsidiary’s financing is denominated. For foreign subsidiaries, whose functional currency is not the U.S. dollar, assets and liabilities are translated using current exchange rates at the balance sheet date, and income and expense accounts using average exchange rates for the period, except revenue previously deferred which is translated using historical rates. The resulting foreign currency translation adjustments are reported as a separate component of “Total comprehensive loss” in the consolidated statements of equity. For foreign subsidiaries, whose functional currency is not the local currency, remeasurement gains and losses are recorded during each period in “Other income (expense), net” in the consolidated statements of operations.
Unrealized and realized foreign currency transaction gains and losses on transactions denominated in currencies other than the functional currency of the entity are included in the consolidated statements of operations in “Other income (expense), net” for the period in which the exchange rates changed.
Business Combinations
The Company allocates the fair value of consideration transferred in a business combination to the estimated fair value at the acquisition date of the tangible and intangible assets acquired, the liabilities assumed and any non-controlling interest. Acquisition costs are expensed as incurred. Any residual consideration is recorded as goodwill. The fair value of consideration includes cash, equity securities, other assets and contingent consideration. The Company estimates the fair value of contingent consideration using a probability-adjusted discounted cash flow method based on significant inputs not observable in the market. The Company remeasures the fair value of contingent consideration at each reporting period and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in earnings. The Company’s determination of the fair values of assets acquired and liabilities assumed requires the Company to make significant estimates, primarily with respect to intangible assets. These estimates are primarily derived from the historical experience and information related to the acquired business. These estimates can include, but are not limited to, cash flow projections for the acquired business, and the appropriate weighted-average cost of capital. The results of operations of the acquired business are included in the Company’s consolidated results of operations from the date of the acquisition.
Noncontrolling Interest
Noncontrolling interest represents minority shareholders’ interest in Verint and Starhome B.V., the Company’s majority-owned subsidiaries and Ulticom, Inc., prior to its sale to a third party on December 3, 2010. The Company recognizes noncontrolling interest as a separate component of total equity in the consolidated balance sheets and recognizes income attributable to the noncontrolling interest as a separate component of net loss in the consolidated statements of operations.
As of January 31, 2012 and 2011, respectively, the noncontrolling interest of Verint was 58.2% and 56.1%, respectively, and the noncontrolling interest of Starhome was 33.5%.
The Company’s majority-owned subsidiaries, Verint Systems and Starhome B.V. have share-based payment award plans that provide for the issuance of the Company’s subsidiary common shares based on service, performance or market conditions. The Company accounts for the dilution that may occur from the exercise of awards granted under these share-based payment award plans, or otherwise, as capital transactions.
Cash and Cash Equivalents
Cash primarily consists of cash on hand and bank deposits. Cash equivalents primarily consist of interest-bearing money market accounts, commercial paper, agency notes and other highly liquid investments with an original maturity of three months or less when purchased. The Company maintains cash and cash equivalents in U.S. dollars and in foreign currencies, which are subject to risks related to foreign currency exchange rate fluctuations.
Restricted Cash and Bank Time Deposits
Restricted cash and bank time deposits are pledged as collateral or restricted for use to settle specified credit-related bank instruments, vendor payables, general liability insurance, workers’ compensation insurance, pending tax judgments, warranty programs and other obligations. In addition, restricted cash as of January 31, 2011 included proceeds from sales and redemptions of auction rate securities (“ARS”) (including interest thereon) that were restricted under the terms of the settlement agreement of the consolidated shareholder class action (see Note 3, Investments and Note 25, Commitments and Contingencies).

59
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


During the fourth quarter of the fiscal year ended January 31, 2012, CTI paid all remaining amounts under the settlement agreement using restricted cash received from sales and redemptions of ARS and shares of its common stock and, accordingly, all remaining cash proceeds received from sales and redemptions of ARS became unrestricted.
Accounts Receivable
The application of revenue recognition guidance often results in circumstances for which the Company is unable to recognize revenue relating to sales transactions that have been billed. In these circumstances, the Company does not recognize the deferred revenue or the related account receivable and no amounts are recognized in the consolidated balance sheets for such transactions with the exception of certain arrangements recognized in accordance with the FASB’s guidance relating to accounting for performance of construction-type and certain production-type contracts. Only to the extent that the Company has recognized revenue and not received cash for such transactions are amounts included in “Accounts receivable, net.” Also, only to the extent that the Company has received cash for such transactions is the amount included in “Deferred revenue” in the consolidated balance sheets.
Allowance for Doubtful Accounts
The Company estimates the collectability of its accounts receivable balances for each accounting period and adjusts its allowance for doubtful accounts accordingly. The Company exercises judgment in assessing the collectability of accounts receivable, including consideration of current economic conditions, the creditworthiness of customers, their collection history and the related aging of past due receivables balances. The Company evaluates specific accounts when it becomes aware that a customer may be experiencing a deterioration of its financial condition due to lower credit ratings, bankruptcy or other factors that may affect such customer’s ability to meet its payment obligations. The Company charges off uncollectible trade receivables when all collection efforts have been exhausted and the Company believes the amount will not be collected.
Investments and Other-Than-Temporary Impairments
The Company accounts for investments in accordance with the FASB’s guidance relating to accounting for certain investments in debt and equity securities. The Company’s investments are reported at fair value as it designates all marketable securities as available-for-sale when purchased. Purchases are recorded on the settlement date.
Interest on short-term investments is recognized in the consolidated statements of operations when earned. Realized gains and losses on available-for-sale securities are recognized when securities are sold and are calculated using the specific identification method, and are recorded in “Other income (expense), net” in the consolidated statements of operations. Unrealized gains and losses, net of taxes, are recorded as a component of “Total comprehensive loss” in the consolidated statements of equity.
Generally, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments.
The Company reviews its investments for indications of impairment in value on a quarterly basis. The Company considers an investment to be impaired when the fair value is less than the carrying value (or amortized cost). The Company evaluated each impaired investment individually to determine whether such investment is other-than-temporarily impaired. For equity securities the Company considers, among other factors, the severity of the decline in value, the financial condition of the issuer, and the Company’s ability to hold the security for a length of time necessary to allow for the recovery of the market value. For debt securities the Company considers whether (i) the Company has the intent to sell the security; (ii) it is more likely than not that the Company will be required to sell the security before recovery of the fair value to amortized cost; or (iii) if a credit loss exists which is measured as the difference between the amortized cost basis of the security and the present value of projected future cash flows expected to be collected. For debt securities, if the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its fair value to amortized cost, the portion of the other-than-temporary impairment attributable to the credit loss is recognized in current earnings and the remaining portion is recognized as a component of other comprehensive income.
Inventories, Net
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out and weighted-average methods. The Company reduces the carrying value of inventory when it holds excess or obsolete inventories which is determined through an evaluation of both historical usage and expected future demand. Such charges are included as a component of “Product costs” in the consolidated statements of operations.

60
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. The Company depreciates and amortizes its property and equipment on a straight-line basis. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the related lease term. The cost of maintenance and repairs is expensed as incurred. The estimated useful lives of property and equipment are as follows:
 
 
Useful Life in Years
 
 
Shortest
 
Longest
Fixtures and equipment
 
3

 
10

Software
 
3

 
4

Buildings
 
25

 
30

Leasehold improvements
 
1

 
20

Goodwill
Goodwill represents the excess of the fair value of consideration transferred in a business combination over the fair value of tangible and intangible assets acquired net of the fair value of liabilities assumed and the fair value of any noncontrolling interest in the acquiree. The carrying amount of goodwill is reviewed annually for impairment on November 1 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. 
The Company applies the FASB's guidance when testing goodwill for impairment which permits the Company to make a qualitative assessment of whether goodwill is impaired, or opt to bypass the qualitative assessment, and proceed directly to performing the first step of the two-step impairment test. If the Company performs a qualitative assessment and concludes it is more likely than not that the fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the two-step impairment test is unnecessary. However, if the Company concludes otherwise, it is then required to perform the first step of the two-step impairment test.
The Company has the unconditional option to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period.
For reporting units where the Company decides to perform a qualitative assessment, the Company's management assesses and makes judgments regarding a variety of factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-specific conditions, customer behavior, cost factors, financial performance and trends, strategies and business plans, capital requirements, management and personnel issues, and stock price, among others. Management then considers the totality of these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit's fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount.
For reporting units where the Company performs the two-step goodwill impairment test, the first step requires the Company to compare the fair value of each reporting unit to the carrying value of its net assets. The Company considers both an income-based approach using projected discounted cash flows and a market-based approach using multiples of comparable companies to determine the fair value of its reporting units. The Company's estimate of fair value of each reporting unit is based on a number of subjective factors, including: (i) the appropriate weighting of valuation approaches (income-based approach and market-based approach), (ii) estimates of the future revenue and cash flows, (iii) discount rate for estimated cash flows, (iv) selection of peer group companies for the market-based approach, (v) required levels of working capital, (vi) assumed terminal value, (vii) the time horizon of cash flow forecasts; and (viii) control premium.
If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and no further evaluation is necessary. If the carrying value of the reporting unit is greater than the estimated fair value of the reporting unit, there is an indication that impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair value assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment charge.
The Company did not record any impairment of goodwill for the fiscal years ended January 31, 2012, 2011 and 2010.
The Company's forecasts and estimates are based on assumptions that are consistent with the plans and estimates used to manage the business. Changes in these estimates could change the conclusion regarding an impairment of goodwill.

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Impairment of Long-Lived and Intangible Assets
The Company reviews the recoverability of its long-lived assets, such as property and equipment and intangible assets with finite lives, whenever events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Any impairment of these assets must be considered prior to the Company's impairment review of goodwill. The assessment of impairment is based on the Company’s ability to recover the carrying value of the asset by analyzing the expected future undiscounted pre-tax cash flows specific to the asset or asset group.
Circumstances which could trigger a review include, but are not limited to, significant decreases in the market price of the asset, significant adverse changes in the business climate or legal factors, accumulation of costs significantly in excess of the amount expected for the acquisition of a long-lived asset, current period negative cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset.
The Company assesses the recoverability of the carrying value of long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If undiscounted cash flows are less than the carrying value of such asset or asset group, an impairment loss is measured based on the difference between estimated fair value and carrying value. An impairment loss on intangible assets is reported as a component of “Other operating income (expense)” in the consolidated statements of operations. Assets to be disposed of are written-down to the greater of fair value or salvage value. Estimated fair values are based on assumptions regarding the amount and timing of estimated future cash flows and appropriate discount rates to reflect varying degrees of perceived risk.
Acquired in-process research and development ("IPR&D") projects which have not reached technological feasibility at the date of acquisition are considered indefinite-lived intangible assets and are not subject to amortization until the completion or abandonment of the associated research and development efforts. Upon completion of the development process, the IPR&D assets are amortized over their estimated useful lives. If a project is abandoned rather than completed, the IPR&D asset is written-off. IPR&D assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. The impairment test compares the fair value of the IPR&D asset with its carrying amount. If the carrying amount of the IPR&D asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Verint acquired IPR&D assets during the fourth quarter of the fiscal year ended January 31, 2012, and did not record any impairment of these IPR&D assets for the fiscal year ended January 31, 2012.
Fair Value Measurements
Under the FASB’s guidance, fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., “the exit price”).
In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The FASB’s guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
•
Level 1—Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
•
Level 2—Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the Company’s degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability is classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.

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Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the ARS market. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition has caused, and in the future may cause, financial instruments of the Company to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.
The FASB’s guidance requires that the valuation techniques used are consistent with at least one of the three possible approaches: the market approach, income approach, and/or cost approach. Level 1 valuations are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges. The Company’s Level 2 valuations also use the market approach and are based on significant other observable inputs such as quoted prices for financial instruments not traded on a daily basis. The Company’s Level 3 valuations are based on the income approach, specifically discounted cash flow analyses that utilize significant inputs that are not observable in active markets.
The FASB’s guidance relating to the fair value option for financial assets and financial liabilities permits an instrument-by-instrument irrevocable election to account for selected financial instruments at fair value. The Company elected not to apply the fair value option to any eligible financial assets or financial liabilities.
The Company also elected not to apply the fair value option for non-financial assets and non-financial liabilities.
Derivative Instruments and Hedge Accounting
As part of the Company’s risk management strategy, it uses derivative financial instruments including forward contracts and interest rate swap agreements to hedge against certain foreign currency and interest rate exposures, respectively. The Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheets at their fair value on a trade date basis. Derivatives in a gain position are reported in “Prepaid expenses and other current assets” in the consolidated balance sheets and derivatives in a loss position are recorded in “Other current liabilities” or “Other long-term liabilities,” as applicable, in the consolidated balance sheets.
In order to qualify for hedge accounting, the Company formally documents at the inception of each hedging relationship the hedging instrument, the hedged item, the risk management objective and strategy for undertaking each hedging relationship, and the method used to assess hedge effectiveness, which includes the Company’s assessment of the creditworthiness of each party and their ability to comply with the contractual terms of the hedging derivative.
When derivative financial instruments qualify for cash flow hedge accounting, the Company records the effective portion of changes in fair value as part of other comprehensive income (loss) in the consolidated statements of equity. When the hedged item is recognized in the consolidated statements of operations, the related derivative gain or loss is reclassified from “Accumulated other comprehensive income (loss)” in the consolidated statements of equity to the consolidated statements of operations within the line item in which the hedged item is recorded. The cash flows from a derivative financial instrument qualifying for cash flow hedge accounting are classified in the consolidated statements of cash flows in the same category as the cash flows from the hedged item.
If a derivative financial instrument does not qualify for hedge accounting, the Company records the changes in fair value of derivative instruments in “Other income (expense), net” in the consolidated statements of operations.
The Company does not purchase, hold or sell derivative financial instruments for trading and speculative purposes.
Treasury Stock
Repurchased shares of common stock are recorded at cost as treasury stock. From time to time, the Company repurchases its shares of common stock upon the delivery of shares in settlement of deferred stock unit and vesting of restricted stock unit awards from employees and directors in order to provide funds for the payment of associated minimum statutory withholding taxes. During the fiscal years ended January 31, 2012, 2011 and 2010, the Company repurchased 667,971, 248,982 and 47,901 shares of common stock, respectively, that were recorded as treasury stock.
Concentration of Credit Risk
Financial instruments, which potentially expose the Company to credit risk, consist primarily of investments, derivatives and accounts receivable. From time to time, the Company invests excess cash in high credit-quality financial institutions and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


invests primarily in (i) money market funds placed with major banks and financial institutions, (ii) corporate commercial paper, (iii) corporate and municipal short and medium term notes, (iv) mortgage and asset backed securities, (v) U.S. government agency securities, (vi) repurchase agreements, and (vii) mutual funds. The Company believes no significant concentration of credit risk exists with respect to these investments. Beginning in the third quarter of the fiscal year ended January 31, 2008, auctions supporting liquidity for the Company’s investment in ARS failed, curtailing the liquidity of these investments. The Company was consequently limited in its ability to manage its exposure to ARS counterparty risk. As a result of this change in liquidity and decline in credit quality, the fair value of ARS declined and the Company recorded other-than-temporary impairment charges on these investments (see Note 3, Investments).
No customer accounted for 10% or more of total revenue for the fiscal years ended January 31, 2012, 2011 or 2010. No customer accounted for more than 10% of consolidated accounts receivable as of January 31, 2012 or 2011. The Company believes that no significant customer credit risk exists.
Revenue Recognition
The Company reports its revenue in two categories: (i) product revenue, including hardware and software products; and (ii) service revenue, including revenue from professional services, training services and post-contract customer support (“PCS”). Professional services primarily include installation, customization and consulting services.
A majority of the Company's revenue is accounted for in accordance with the FASB's guidance relating to revenue recognition for software arrangements as the software component of most of the Company's multiple element arrangements are more than incidental to the products being sold. However, multiple element arrangements entered into or materially modified on or after February 1, 2011 that include hardware which functions together with software to provide the essential functionality of the product are accounted under the FASB's new guidance applicable to multiple element arrangements. In applying the FASB's guidance, the Company exercises judgment and uses estimates in determining the revenue to be recognized in each accounting period.
For arrangements that do not require significant customization of the underlying software, the Company recognizes revenue when it has persuasive evidence of an arrangement, the product has been shipped and the services have been provided to the customer, the sales price is fixed or determinable, collectability is probable, and all other pertinent criteria are met as required by the FASB's guidance.
In certain instances, payment terms extend beyond the Company's customary practices. In these situations, if a customer does not have an adequate history of abiding by its contractual payment terms without concessions, the sales price is not considered fixed or determinable. As such, revenue recognition commences upon collection, provided all other revenue recognition criteria have been met.
Under certain contractual arrangements, the Company is required to pay a penalty or liquidated damages if delivery of the Company's products and installation services are not completed by a certain date. In other arrangements, the Company has guaranteed product performance and warranty service response rates, which, if not met, can result in penalties. The Company accounts for such penalties or liquidated damages in accordance with the FASB's guidance relating to contingencies.
Shipping and handling amounts billed to the Company's customers are included in product revenue and the related shipping and handling costs are included in product costs.
The Company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue producing transactions.
The following are the specific revenue recognition policies for each major category of revenue.
Multiple Element Arrangements
Revenue arrangements may incorporate one or more elements in a single transaction or combination of related transactions. In September 2009, the FASB issued revenue recognition guidance applicable to multiple element arrangements, which:
•
applies to multiple element revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of the software revenue guidance; and
•
addresses how to separate consideration related to each element in a multiple element arrangement, excluding software arrangements, and establishes a hierarchy for determining the selling price of an element. It also eliminates

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the residual method of allocation by requiring that arrangement consideration be allocated at the inception of the arrangement to all elements using the relative selling price method.
The Company adopted this guidance on a prospective basis for revenue arrangements entered into, or materially modified, on or after February 1, 2011.
Certain of the Company's multiple element arrangements include hardware that functions together with software to provide the essential functionality of the product. Therefore, such arrangements entered into or materially modified on or after February 1, 2011 are no longer accounted for in accordance with the FASB's software accounting guidance. Accordingly, the selling price used for each deliverable is based on vendor specific objective evidence ("VSOE") of fair value, if available, third-party evidence (“TPE”) of fair value if VSOE is not available, or the Company's best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. In determining the units of accounting for these arrangements, the Company evaluates whether each deliverable has stand-alone value as defined in the FASB's guidance. For the Company's Comverse BSS and Comverse VAS segments, the professional services performed prior to the product's acceptance do not have stand-alone value and are therefore combined with the related hardware and software as one non-software deliverable. After determining the fair value for each deliverable, the arrangement consideration is allocated using the relative selling price method. Revenue is recognized accordingly for each deliverable once the respective revenue recognition criteria are met for that deliverable.
The Company's Verint segment has established VSOE of fair value for one or more elements (installation services, training, consulting and PCS) for a majority of its arrangements. Comverse which is classified as discontinued operations, has not yet established VSOE of fair value for any element other than PCS for a portion of its arrangements. Generally, the Company is not able to determine TPE because its offerings contain a significant level of differentiation such that the comparable pricing of substantially similar products or services cannot be obtained. When the Company is unable to establish fair value of its non-software deliverables using VSOE or TPE, it uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which it would transact a sale if the product or service were sold on a stand-alone basis, which requires significant judgment. The Company determines BESP for a product or service by considering multiple factors, including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies and customer classes. The Company exercises judgment and uses estimates in determining the revenue to be recognized in each accounting period.
With the exception of arrangements that require significant customization of the product to meet the particular requirements of the customer, which are accounted for using the percentage-of-completion method, the initial revenue recognition for each non-software product deliverable is generally upon completion of the related professional services. The impact of implementing the guidance was significant for the fiscal year ended January 31, 2012. For the fiscal year ended January 31, 2012, an additional of $12.4 million of revenue was recognized by Verint classified as continuing operations and $51.0 million of revenue was recognized by Comverse and Starhome classified as discontinued operations in each case as a result of the adoption of the new guidance. Such additional revenue included $40.9 million of additional revenue recognized under the new guidance as compared to the revenue that would have been recognized under prior accounting guidance for the fiscal year ended January 31, 2012 resulting from material modifications of certain existing contracts. Deferred revenue associated with those contracts that were modified during the fiscal year ended January 31, 2012, were $19.3 million and $8.2 million as of January 31, 2012 and 2011, respectively.
For all transactions entered into prior to February 1, 2011 that have not been subsequently materially modified, as well as multiple element arrangements without hardware, the Company allocates revenue to the delivered elements of the arrangement using the residual method, whereby revenue is allocated to the undelivered elements based on VSOE of fair value of the undelivered elements with the remaining arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue recognition criteria are met. If the Company is unable to establish VSOE of fair value for the undelivered elements of the arrangement, revenue recognition is deferred for the entire arrangement until all elements of the arrangement are delivered. However, if the only undelivered element is PCS, the Company recognizes the arrangement fee ratably over the PCS period.
PCS revenue is derived primarily from providing technical software support services, unspecified software updates and upgrades to customers on a when and if available basis. PCS revenue is recognized ratably over the term of the PCS period.
When PCS is included within a multiple element arrangement and the arrangement is within the scope of the software revenue guidance, the Company primarily utilizes the substantive renewal rate to establish VSOE of fair value for the PCS. To a much lesser extent, the bell-shaped curve approach is used for certain Verint arrangements, depending upon geographical region or product line.

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The Company's policy for establishing VSOE of fair value for professional services and training is based upon an analysis of separate sales of services, which are then compared with the fees charged when the same elements are included in a multiple element arrangement. Comverse has not yet established VSOE of fair value for any element other than PCS.
When using the substantive renewal rate method, the Company may be unable to establish VSOE of fair value for PCS because the renewal rate is deemed to be non-substantive or there are no contractually-stated renewal rates. If the stated renewal rate is non-substantive, the entire arrangement fee is recognized ratably over the estimated economic life of the product (five to eight years) beginning upon delivery of all elements other than PCS. The Company believes that the estimated economic life of the product is the best estimate of how long the customer will renew PCS. If there is no contractually stated renewal rate, the entire arrangement fee is recognized ratably over the relevant contractual PCS term beginning upon delivery of all elements other than PCS.
Under the bell-shaped curve approach of establishing VSOE of fair value, Verint performs a VSOE of fair value compliance test to ensure that a substantial majority of actual PCS renewals are within a narrow range of pricing.
For certain of Verint's arrangements, it does not have an explicit obligation to provide PCS, but as a matter of business practice, has provided PCS (implied PCS). The implied PCS is accounted for as a separate element for which VSOE of fair value does not exist. Arrangements that contain implied PCS are recognized over the period the implied PCS is provided, but not to exceed the estimated economic life of the product.
In certain multiple element arrangements, the Company is obligated to provide training services to customers related to the operation of the Company's software products. For Comverse, these training services are either provided to the customer on a “defined” basis (limited to a specified number of days or training classes) or on an “as-requested” basis (unlimited training over a contractual period).
For multiple element arrangements containing as-requested training obligations that are within the scope of the software revenue guidance, the Company recognizes the total arrangement consideration ratably over the contractual period during which the Company is required to “stand ready” to perform such training, provided that all other criteria for revenue recognition have been met.
For multiple element arrangements containing defined training obligations, the training services are typically provided to the customer prior to the completion of the installation services. For arrangements that are within the scope of the software revenue guidance, because revenue recognition does not commence until the completion of installation, the defined training obligations do not impact the timing of recognition of revenue. In certain circumstances in which training is provided after the end of the installation period, the Company commences revenue recognition upon the completion of training, provided that all other criteria for revenue recognition have been met.
In its multiple element arrangements the Company may offer a discount on future purchases of products and services. A discount is considered an additional element of an arrangement if the discount is considered more than insignificant. A more-than-insignificant discount with respect to future purchases is a discount that is: (i) incremental to the range of discounts reflected in the pricing of the other elements of the arrangement, (ii) incremental to the range of discounts typically given in comparable transactions, and (iii) significant. Insignificant discounts and discounts that are not incremental do not affect revenue recognition. If the discount is considered more than insignificant, then a portion of the fee received is deferred and recognized as revenue as the future purchases are made by the customer or upon expiration of the period that the discount is available.
Some of the Company's arrangements require significant customization of the product to meet the particular requirements of the customer. For these arrangements, revenue is typically recognized in accordance with the FASB's guidance for long-term construction type contracts using the percentage-of-completion (“POC”) method.
The determination of whether services entail significant customization requires judgment and is primarily based on alterations to the features and functionality to the standard release, complex or unusual interfaces as well as the amount of hours necessary to complete the customization solution relative to the size of the contract. Revenue from these arrangements is recognized on the POC method based on the ratio of total hours incurred to date compared to estimated total hours to complete the contract.
Management is required to make judgments to estimate the total estimated costs and progress to completion. Changes to such estimates can impact the timing of the revenue recognition period to period. The Company uses historical experience, project plans, and an assessment of the risks and uncertainties inherent in the arrangement to establish these estimates.

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Uncertainties in these arrangements include implementation delays or performance issues that may or may not be within the Company's control. If some level of profitability is assured, but the related revenue and costs cannot be reasonably estimated, then revenue is recognized to the extent of costs incurred until such time that the project's profitability can be estimated or the services have been completed. If VSOE of fair value of PCS does not exist, revenues are recognized to the extent of costs incurred until the services have been completed, provided that the Company is able to make reliable cost estimates and some level of profitability is assured. Once the services are completed, the remaining unrecognized portion of the arrangement fee is recognized ratably over the remaining PCS period. For situations where the Company is not able to make reliable estimates or some level of profitability is not assured, all revenue will be deferred until completion of the professional services and recognized ratably over the respective PCS period. If the Company determines that based on its estimates its costs exceed the sales price, the entire amount of the estimated loss is accrued in the period that such losses become known.
Revenue that Comverse derives from sales to distributors, resellers, and value-added resellers are recognized when the resellers in turn sell the software product to their customers and installation of the software product has occurred, provided all other revenue recognition criteria are met. This is commonly referred to as the sell-through method. The contractual arrangements between the reseller and end user, or between the reseller and Comverse, generally obligate Comverse to provide services to the end user that are subject to end user acceptance. Further, payment terms are generally subject to the reseller's receiving payment from the end user and the end user's acceptance of the product. Therefore, Comverse defers recognition until there is a “sell-through” by the reseller to an actual end user customer and acceptance by the end user.
Product revenue that Verint derives from shipments to resellers and original equipment manufacturers (“OEMs”) who purchase their products for resale are generally recognized when such products are shipped (on a “sell-in” basis). Verint has historically experienced insignificant product returns from resellers and OEMs, and their payment terms for these customers are similar to those granted to their end users. If a reseller or OEM develops a pattern of payment delinquency, or seeks payment terms longer than generally accepted, Verint defers the recognition of revenue until the receipt of cash. Verint's arrangements with resellers and OEMs are periodically reviewed as their business and products change.
In instances where Verint derives revenue from sale of third-party vendor services and Verint is a principal in the transaction, Verint generally records revenue on a gross basis and records costs related to a sale within cost of revenue. In those cases where Verint is acting as an agent between the customer and the vendor, revenue is recorded net of costs.
In the consolidated statements of operations, the Company classifies revenue as product revenue or service revenue. For multiple element arrangements that include both product and service elements, for which the Company is unable to determine VSOE of fair value for all elements of the arrangement, management evaluates various available indicators of fair value and applies its judgment to reasonably classify the arrangement fee between product revenue and service revenue. The amount of multiple element arrangement fees classified as product and service revenue based on management estimates of fair value when VSOE of fair value for all elements of an arrangement does not exist could differ from amounts classified as product and service revenue if VSOE of fair value for all elements existed. The allocation of multiple element arrangement fees between product revenue and service revenue, when VSOE of fair value for all elements does not exist, is for consolidated financial statement presentation purposes only and does not affect the timing or amount of revenue recognized.
In determining the amount of a multiple element arrangement fee that should be classified between product revenue and service revenue, Comverse first allocates the arrangement fee to product revenue and PCS (PCS is classified as service revenue) based on management's estimate of fair value for those elements. The remainder of the arrangement fee, which is comprised of all other service elements, is allocated to service revenue. The estimate of fair value of the product element is based primarily on management's evaluation of direct costs and reasonable profit margins on those products. This was determined to be the most appropriate methodology as Comverse has historically been product-oriented with respect to pricing policies which facilitates the evaluation of product costs and related margins in arriving at a reasonable estimate of the product element fair value. Management's estimate of reasonable profit margins requires significant judgment and consideration of various factors, such as the impact of the economic environment on margins, the complexity of projects, the stability of product profit margins and the nature of products. The estimate of fair value for PCS is based on management's evaluation of the weighted-average of PCS rates for arrangements for which VSOE of fair value of PCS exists.
In determining the classification of revenue between products and services, Verint reviews VSOE of fair value for training, installation and PCS services from similar transactions and stand alone services arrangements and compares them to its peers, in order to determine reasonable and consistent approximations of fair values of service revenue with the remaining amount being allocated to product revenue.
Post-Contract Customer Support Renewals

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The Company's multiple element arrangements typically provide for renewal of PCS terms upon expiration of the original term. The amounts of these PCS renewals are recognized as revenue ratably over the specified PCS renewal period.
Professional Services Only Arrangements
Based on the type and nature of its professional-services-only arrangements, the Company recognizes revenue using either the proportional performance method, completed performance method or on a time and materials basis. For fixed-fee arrangements recognized based on the proportional performance method, the Company typically measures progress to completion based on the ratio of hours incurred to total estimated project hours, an input method. For fixed-fee arrangements recognized based on the completed performance method, the Company recognizes revenue once the services are completed and there are no other obligations of the Company. The Company recognizes revenue for time and materials arrangements as the services are performed based on contractually stipulated billing rates.
Product and Service Costs
The Company’s product and service costs include costs of materials, compensation and benefit costs for operations and service personnel, contractor and consulting costs, royalties and license fees, depreciation of equipment used in operations and service, amortization of capitalized software costs, travel expenses and certain purchased intangible assets and related overhead costs.
When revenue is recognized over multiple periods in accordance with the Company’s revenue recognition policies, the material cost, including hardware and third-party software license fees are deferred and amortized over the same period that product revenue is recognized. These costs are recognized as “Deferred cost of revenue” on the consolidated balance sheets. However, the Company has made an accounting policy election whereby the cost for installation and other service costs are expensed as incurred, except for arrangements recognized in accordance with the FASB’s guidance for long-term construction type contracts.
For certain contracts where revenue is recognized in accordance with the FASB’s guidance for long-term construction type contracts, revisions in estimates of costs are reflected in the accounting period in which the facts that require the revision become known. These costs include all direct material and labor costs and overhead related to contract performance.
Research and Development, Net
Research and development expense primarily consists of personnel costs involved in product development. Research and development expense also includes third-party development and programming costs and the amortization of purchased software code and services content used in research and development activities. Research and development costs are expensed as incurred. 
The Company receives non-refundable grants that fund a portion of research and development expenditures. These grants are recorded as a reduction to “Research and development, net” in the consolidated statements of operations.
Software Costs
Costs of software developed for internal use are capitalized in accordance with the FASB’s guidance during the application development stage and are then amortized over the estimated useful life of the software, which to date has been four years or less once the software is ready for its intended use. These costs are included in “Property and equipment, net” in the consolidated balance sheets.
Costs of software developed for sale to customers are capitalized in accordance with the FASB’s guidance relating to costs of computer software to be sold, leased, or otherwise marketed to customers. Software costs incurred are capitalized subsequent to establishing technological feasibility and continue through general release of the software products. These capitalized costs are included in “Other assets” in the consolidated balance sheets. Amortization of capitalized costs begins in the period in which the related product is available for general release to customers and is recorded on a straight-line basis over the estimated economic life of the related software products, which approximates the pattern in which the economic benefits are expected to be realized. The economic life of the related software products is generally seven years or less.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions and other programs. In

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


addition, the Company records customer acquisition and origination costs, including sales commissions, as incurred, with the exception of certain sales referral fees that are capitalized and amortized ratably over the revenue recognition period. Advertising costs are expensed as incurred.
Stock-Based Compensation
The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. Under the FASB’s guidance, stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. The Company uses the Black-Scholes option-pricing model to measure fair value of these stock option awards. The Black-Scholes model requires the Company to make judgments regarding the assumptions used within the model, the most significant of which are the stock price volatility assumption over the term of the awards and the expected life of the option award based on the actual and projected employee stock option behaviors. Other assumptions include the risk-free rate of return and dividends during the expected term.
The Company estimates expected forfeitures of stock-based awards at the grant date and recognize compensation cost only for those awards expected to vest. Forfeiture rates are estimated based on historical experience. The forfeiture assumption is adjusted to the actual forfeitures that occur. Therefore, changes in the forfeiture assumptions may impact the amount and timing of the total amount of expense recognized over the vesting period. Estimated forfeitures are reassessed in subsequent periods and may change based on new facts and circumstances.
The fair value of equity instruments issued to a nonemployee is measured by using the stock price and other measurement assumptions as of the date earlier of either: (i) a commitment for performance by the nonemployee has been reached; or (ii) the counterparty’s performance is complete. Expenses related to nonemployee awards are generally recognized in the same period and in the same manner as the Company incurs the related liability for goods and services received.
APIC Pool
The Company uses the long form method to determine its pool of excess tax benefits available within additional paid-in capital. Excess tax benefits resulting from stock option exercises are recognized as additions to APIC in the period the benefit is realized. In the event of a shortfall (that is, the tax benefit realized is less than the amount previously recognized through periodic stock-based compensation expense recognition and related deferred tax accounting), the shortfall is charged against APIC to the extent of previous excess benefits, if any, including the hypothetical APIC pool, and then to tax expense. 
Income Taxes
Income taxes are provided using the asset and liability method, such that income taxes (i.e., deferred tax assets, deferred tax liabilities, taxes currently payable/refunds receivable and tax expense/benefit) are recorded based on amounts refundable or payable in the current year and include the results of any difference between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating losses, capital losses and general business credit carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. Valuation allowances are established when management determines that it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. The subsequent realization of net operating loss and general business credit carryforwards acquired in acquisitions accounted for using the acquisition method of accounting is recognized in the consolidated statement of operations. Research and development credits are recorded based on the amount of benefit the Company believes is more-likely-than-not of being earned. Additionally, the Company is required to recognize in the consolidated financial statements those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions.
From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty. Examples of such transactions include business acquisitions and dispositions and certain financing transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. The Company prepares and files tax returns based on its interpretation of tax laws and regulations. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In determining the Company’s tax provision for financial reporting purposes, the Company establishes a liability for uncertain tax positions unless such positions are determined to be more-likely-than-not of being sustained upon examination, based on their technical merits. That is, for financial reporting purposes, the Company only recognizes tax benefits taken on the tax return that it believes are more-likely-than-not of being sustained. There is considerable judgment involved in determining whether positions taken on the tax return are more-likely-than-not of being sustained.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The Company adjusts its estimated liability for uncertain tax positions periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate and any related estimated interest. The Company’s policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense (see Note 21, Income Taxes).
As part of accounting for business combinations, some of the purchase price is allocated to goodwill and intangible assets. Impairment charges associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the quarter any impairment is recorded. Amortization expenses associated with acquired intangible assets are generally not tax deductible pursuant to the Company’s existing tax structure; however, deferred taxes have been recorded for non-deductible amortization expenses as a part of the purchase price allocation process. The Company has taken into account the allocation of these identified intangibles among different taxing jurisdictions, including those with nominal or zero percent tax rates, in establishing the related deferred tax liabilities. Under the FASB's guidance, the income tax benefit from future releases of acquisition date valuation allowances or income tax contingencies, if any, are reflected in the income tax provision in the consolidated statements of operations, rather than as an adjustment to the purchase price allocation.
Loss Per Share Attributable to Comverse Technology, Inc.’s Shareholders
Basic loss per share attributable to Comverse Technology, Inc.’s shareholders is computed by dividing net loss attributable to Comverse Technology, Inc. by the weighted-average number of CTI’s shares of common stock outstanding during the period. Diluted loss per share attributable to Comverse Technology, Inc.’s shareholders is computed using the weighted-average number of CTI’s shares of common stock and, when dilutive, common equivalent shares outstanding during the period. Common equivalent shares consist of shares of common stock issuable in respect of stock options, restricted stock, deferred stock units (“DSUs”), restricted stock units (“RSUs”) and convertible debt obligations (the “Convertible Debt Obligations,” see Note 11, Debt). The treasury stock method is used to compute the dilutive effect of options, DSUs and other similar instruments. The if-converted method is used to compute the dilutive effect of the Company’s Convertible Debt Obligations. Additionally, for purposes of calculating diluted loss per share attributable to Comverse Technology, Inc.’s shareholders, net loss attributable to Comverse Technology, Inc. is adjusted for the difference between each of Verint’s and Starhome’s reported diluted and basic earnings per share, if any, multiplied by the number of shares of common stock and common share equivalents CTI holds in each of Verint and Starhome. Basic and diluted loss per share from continuing operations and discontinued operations are computed by dividing the net loss from continuing operations and loss from discontinued operations, net of tax attributable to Comverse Technology, Inc. shareholders, respectively, by the basic and diluted weighted-average number of CTI’s shares of common stock outstanding during the period.
Contingencies
Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. The Company accrues for costs relating to litigation, claims and other contingent matters when such liabilities become probable and reasonably estimable.
Cash Position and Management’s Plans
The Company incurred substantial losses and had negative cash flows during the three fiscal years ended January 31, 2012 and had a significant accumulated deficit as of January 31, 2012.
The Company forecasts that available cash and cash equivalents will be sufficient to meet the liquidity needs of CTI for at least the next 12 months. The Company’s forecast is based upon a number of assumptions, which the Company believes are reasonable. However, should one or more of the assumptions prove incorrect, or should one or more of the risks or uncertainties attendant to the Company and its business materialize, the Company’s business and operations could be materially adversely affected. Management believes that sources of liquidity could be identified.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


2.
RECENT ACCOUNTING PRONOUNCEMENTS
Standards Implemented
Revenue Recognition
In September 2009, the FASB issued revenue recognition guidance applicable to multiple element arrangements. The Company adopted this guidance on a prospective basis for revenue arrangements entered into, or materially modified, on or after February 1, 2011 (see Note 1, Organization, Business and Summary of Significant Accounting Policies—Revenue Recognition).
Goodwill Impairment
In September 2011, the FASB issued new accounting guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether a reporting unit's fair value is more likely than not less than its carrying value, including goodwill. In performing its qualitative assessment, an entity considers the extent to which adverse events or circumstances (or factors) identified, such as changes in economic conditions, industry and market conditions or entity specific events, could affect the comparison of the reporting unit's fair value with its carrying amount. If an entity concludes that the fair value of a reporting unit is more likely than not less than its carrying amount, the entity is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and, accordingly, measure the amount, if any, of goodwill impairment loss to be recognized for that reporting unit. The guidance is effective for the Company for interim and annual periods commencing February 1, 2012.
In the fourth quarter of the fiscal year ended January 31, 2012, in conjunction with management's annual testing of goodwill, the Company early adopted the new accounting guidance.
Under the qualitative assessment, various factors that would affect the estimated fair value of a reporting unit are identified. These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and adverse categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting.
During the annual testing of goodwill for the fiscal year ended January 31, 2012, management performed the qualitative assessment for its Verint reporting unit and Starhome (included as discontinued operations). The qualitative assessment included the review of changes of the following: recent financial performance, financial forecasts, discount rates, carrying amount, market values of comparable companies, industry conditions, and general economic conditions. Furthermore, management considered the results of the most recent two-step quantitative impairment test completed for a reporting unit (in this instance for the Company's Verint and Starhome reporting units, as of November 1, 2010). Management concluded that it was not more likely than not that the estimated fair value of the Verint and Starhome reporting unit's equity was less than its carrying value. As such, no further analysis of the Verint and Starhome reporting units was required.
Other Standards Implemented
In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in an active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a gross presentation of activity within the Level 3 (significant unobservable inputs) roll forward, presenting information on purchases, sales, issuance, and settlements separately. The guidance was effective for the Company for interim and annual periods that commenced February 1, 2010, except for the gross presentation of the Level 3 roll forward, which became effective for the Company for interim and annual periods that commenced February 1, 2011. Adoption of this guidance resulted in additional disclosures for the gross presentation of the Level 3 roll forward (see Note 13, Fair Value Measurements).
In December 2010, the FASB issued updated accounting guidance to clarify that pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior reporting period pro forma financial information. These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. This new accounting guidance is effective for business combinations consummated in periods beginning after December 15, 2010 and should be applied prospectively as of the date of adoption, although early adoption is permitted. The Company adopted this

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


new guidance effective February 1, 2011. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In December 2010, the FASB issued guidance on when to perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. Upon adoption, if the carrying amount of the reporting unit is zero or negative, the reporting entity must perform step two of the goodwill impairment test if it is more likely than not that goodwill is impaired as of the date of adoption. In determining if it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. Goodwill impairment recognized upon adoption of the guidance should be presented as a cumulative-effect adjustment to opening retained earnings as of the adoption date reflecting a change in accounting principle. This guidance was effective for the Company for interim and annual periods that commenced on February 1, 2011. Because the carrying value of the Company's previously defined Comverse reporting unit was negative as of February 1, 2011 and the existence of adverse qualitative factors indicated potential impairment, step two of the goodwill impairment test was performed as of such date which did not result in an impairment. The adoption of this guidance did not have a material impact on the consolidated financial statements for the fiscal year ended January 31, 2012.
In June 2011, the FASB issued accounting guidance, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of equity. Under the new guidance, entities are required to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. In December 2011, the FASB amended and updated the guidance issued in June 2011 to defer certain presentation requirements. The amended and updated guidance was effective for the Company for the interim period ended April 30, 2012 with early adoption permitted. The Company adopted the guidance and applied it retrospectively to all periods presented. Other than the change in presentation, adoption of this guidance did not impact the Company's consolidated financial statements.
Standards to be Implemented
In May 2011, the FASB issued updated accounting guidance to amend existing requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders' equity. The guidance was effective for the interim period and annual periods commencing February 1, 2012. The adoption of this guidance did not materially impact the Company's consolidated financial statement.
3.
INVESTMENTS
The Company accounts for its investments in accordance with the FASB’s guidance relating to accounting for certain investments in debt and equity securities and related pronouncements and classifies all debt and equity securities as available-for-sale.
As of January 31, 2011, all the investments in ARS disclosed below (all of which were held by CTI as of such date) were restricted pursuant to the settlement agreement of the consolidated shareholder class action CTI entered into on December 16, 2009 and amended on June 19, 2010. As of January 31, 2011, all cash proceeds from sales and redemptions of ARS (other than ARS that were held in an account with UBS) (including interest thereon) were restricted. During the fourth quarter of the fiscal year ended January 31, 2012, the Company paid all remaining amounts under the settlement agreement and, accordingly, all ARS and cash proceeds received from sales and redemptions thereof became unrestricted (see Note 25, Commitments and Contingencies).
Auction Rate Securities
The Company invested in ARS supported by corporate issuers and student loans. The ARS portfolio supported by corporate issuers consisted of collateralized debt obligations and Regulation XXX securities (insurance industry-related ARS). The Company’s ARS supported by corporate issuers were rated between AAA and AA- by Standard & Poor’s (“S&P”) and Aaa and A3 by Moody’s Investor Service (“Moody’s”) when purchased. These corporate issued holdings were downgraded since the original purchase date, and the two remaining securities were rated A by S&P and C by Moody’s, respectively, as of January 31, 2011.

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The ARS portfolio supported by student loans was substantially guaranteed by the Federal government under the Federal Family Education Loan Program. The Company’s ARS supported by student loans were all rated AAA by S&P and Aaa by Moody’s when purchased. The ARS supported by student loans were all rated between AAA and BB+ by S&P and between Aaa and Ba1 by Moody’s as of January 31, 2011.
Classification
In August 2010, the Company began to forecast that it would sell its remaining ARS during the fourth quarter of the fiscal year ending January 31, 2012 after the expiration of the restrictions on sales of ARS and the use of proceeds from sales thereof following the final payment under the settlement agreement of the consolidated shareholder class action due on or before November 15, 2011. Accordingly, the ARS were classified as current assets as of January 31, 2011.
As of January 31, 2011, proceeds from the sales and redemptions of ARS, including interest received subsequent to the date of the settlement agreement of the consolidated shareholder class action, of $33.4 million were classified within the consolidated balance sheets as “Restricted cash and bank time deposits.”
The Company sold $86.9 million and $112.2 million of aggregate principal amount of ARS during the fiscal years ended January 31, 2012 and 2011 resulting in gains of $24.4 million and $23.8 million, respectively, recognized in “Other income (expense), net.” Such gains represent a recovery of previously recognized other-than-temporary impairments as the fair market value of the ARS recovered toward par value.
During the fourth quarter of the fiscal year ended January 31, 2012, the Company paid all remaining amounts under the settlement agreement and, accordingly, all cash proceeds received from sales and redemptions of ARS became unrestricted and are classified in “Cash and cash equivalents."
Other-Than-Temporary Impairment
As a result of historic auction failures and declines in credit quality, subsequent to their purchase by CTI the fair value of the ARS significantly declined. The fair value of the ARS were determined on a quarterly basis by the Company utilizing a discounted cash flow model, which considered, among other factors, assumptions about the (i) underlying collateral, (ii) credit risk associated with the issuer, and (iii) contractual maturity. The discounted cash flow model considered contractual future cash flows, representing both interest and principal payments. Future interest payments were projected using U.S. Treasury and swap curves over the remaining term of the ARS in accordance with the terms of each specific security and principal payments were assumed to be made at an estimated contractual maturity date taking into account applicable prepayments. Yields used to discount these payments were determined based on the specific characteristics of each security. Key considerations in the determination of the appropriate discount rate included the securities’ remaining term to maturity, capital structure subordination, quality and level of collateralization, complexity of the payout structure, credit rating of the issuer, and the presence or absence of additional insurance.
For ARS that the Company determined that it could not assert that it intended to hold such ARS until their fair value recovered to amortized cost, the Company recorded other-than-temporary impairment charges of $0.4 million and $6.9 million on a pre-tax basis during the fiscal years ended January 31, 2011 and 2010, respectively. The Company did not record other-than-temporary impairment charges during the fiscal year ended January 31, 2012. These other-than-temporary impairment charges were recorded as a component of “Other income (expense), net” in the consolidated statements of operations (see Note 20, Other Income (Expense), Net).
The carrying amount of the Company’s ARS as of January 31, 2012 and 2011 was $0.3 million and $72.4 million, with a corresponding principal amount of $7.5 million and $94.4 million, respectively, and was classified as short-term, available-for-sale investments in “Auction Rate Securities.”
UBS Put
In November 2008, CTI accepted an offer from UBS AG (“UBS”) providing rights related to $51.6 million in aggregate principal amount of ARS that were held in an account with UBS (the “UBS Put”). Under the terms of the UBS Put, CTI had the right, but not the obligation, to sell its eligible ARS at par value to UBS at any time during the period of June 30, 2010 through July 2, 2012. Additionally, UBS had the right, at its discretion and at any time until July 2, 2012, to purchase the ARS from CTI at par value, which is defined as the price equal to the principal amount of the ARS plus accrued but unpaid dividends or interest, if any. Under the terms of the settlement agreement of the consolidated shareholder class action, CTI was required to exercise the UBS Put on June 30, 2010, and apply the proceeds from such exercise toward amounts payable under

73
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


such settlement. Effective June 30, 2010, CTI exercised the UBS Put for the balance of the ARS that were subject to the UBS Put. UBS purchased from CTI, pursuant to its purchase right and upon exercise of the UBS Put by CTI, approximately $42.6 million and $9.0 million aggregate principal amount of ARS during the fiscal years ended January 31, 2011 and 2010, respectively.
In the fiscal year ended January 31, 2009, the Company recorded the UBS Put at its then fair value of $13.6 million in "Other Assets" with a corresponding gain recorded in "Other income (expense), net." Consequently, the UBS Put was carried at historical cost and assessed for impairment. The Company evaluated the UBS Put for impairment based on redemptions and changes in fair value of the related ARS subject to the UBS Put and during the fiscal years ended January 31, 2011 and 2010 recorded $6.7 million and $6.9 million, respectively, of pre-tax impairment charges, which were classified in “Other income (expense), net.” Due to its exercise on June 30, 2010, the Company had no recorded amounts in connection with the UBS Put as of January 31, 2011.
The following is a summary of available-for-sale securities as of January 31, 2012 and 2011: 
 
 
January 31, 2012
 
 
 
 
Included in Accumulated Other
Comprehensive Income
 
 
 
 
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Cumulative
Impairment
Charges
 
Estimated
Fair Value
 
 
(In thousands)
Short-term:
 
 
 
 
 
 
 
 
 
 
Auction rate securities-Corporate issuers
 
$
7,500

 
$
34

 
$
—

 
$
(7,262
)
 
$
272

Total short-term investments
 
$
7,500

 
$
34

 
$
—

 
$
(7,262
)
 
$
272


 
 
January 31, 2011
 
 
 
 
Included in Accumulated Other
Comprehensive Income
 
 
 
 
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Cumulative
Impairment
Charges
 
Estimated
Fair Value
 
 
(In thousands)
Short-term:
 
 
 
 
 
 
 
 
 
 
Auction rate securities-Student loans
 
$
71,900

 
$
16,044

 
$
—

 
$
(24,181
)
 
$
63,763

Auction rate securities-Corporate issuers
 
22,500

 
5,619

 
—

 
(19,441
)
 
8,678

Total short-term investments
 
$
94,400

 
$
21,663

 
$
—

 
$
(43,622
)

$
72,441

The ARS have stated maturities in excess of 5 years.
Investments with original maturities of three months or less, when purchased, are included in cash and cash equivalents, in “Restricted cash and bank time deposits” or in long-term restricted cash (long-term restricted cash is classified within “Other assets”) in the consolidated balance sheets. Such investments are not reflected in the tables above as of January 31, 2012 or 2011, and include money market funds totaling $208.0 million and $186.4 million as of January 31, 2012 and 2011, respectively. There were no unrealized gains (losses) as of January 31, 2012 and 2011.
The Company received cash proceeds from sales and redemptions of investments of $75.5 million, $57.3 million and $26.4 million in the fiscal years ended January 31, 2012, 2011 and 2010, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The gross realized gains and losses on the Company’s investments are as follows, for the fiscal years presented below:
(In thousands)
 
Gross Realized
Gains
 
Gross Realized
Losses
January 31, 2012
 
$
24,414

 
$
—

January 31, 2011
 
$
23,810

 
$
—

January 31, 2010
 
$
10,760

 
$
—

The components of other comprehensive income (loss) ("OCI") related to available-for-sale securities are as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands )
Accumulated OCI related to available-for-sale securities, beginning of year
 
$
13,240

 
$
21,032

 
$
10,302

Unrealized gains on available-for-sale securities
 
(305
)
 
6,950

 
20,048

Reclassification adjustment for gains included in net loss
 
(21,329
)
 
(15,483
)
 
(3,582
)
Changes in accumulated OCI on available-for-sale securities, before tax
 
(21,634
)
 
(8,533
)
 
16,466

Other comprehensive income attributable to noncontrolling interest
 
3

 
26

 
53

Deferred income tax benefit (provision)
 
—

 
715

 
(5,789
)
Changes in accumulated OCI on available-for-sale securities, net of tax
 
(21,631
)
 
(7,792
)
 
10,730

Accumulated OCI related to available-for-sale securities, end of year
 
$
(8,391
)
 
$
13,240

 
$
21,032

4.
INVENTORIES
Inventories as of January 31, 2012 and 2011, respectively, consist of:
 
 
January 31,
 
 
2012
 
2011
 
 
(In thousands)
Raw materials
 
$
4,959

 
$
7,112

Work in process
 
5,777

 
5,112

Finished goods
 
3,678

 
4,763

Total
 
$
14,414

 
$
16,987

5.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net as of January 31, 2012 and 2011 consist of:
 
 
January 31,
 
 
2012
 
2011
 
 
(In thousands)
Land
 
$
3,741

 
$
3,861

Fixtures and equipment
 
49,907

 
46,572

Software
 
27,702

 
24,055

Buildings
 
2,204

 
2,204

Leasehold improvements
 
13,159

 
11,713

 
 
92,972

 
84,544

Less accumulated depreciation and amortization
 
(66,860
)
 
(63,409
)
 
 
$
26,112

 
$
21,135

Total
 
$
29,853

 
$
24,996


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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Depreciation and amortization expense of property and equipment was $11.1 million, $11.6 million and $12.5 million for the fiscal years ended January 31, 2012, 2011 and 2010, respectively. The Company also wrote off and disposed of property and equipment, net of $0.1 million, $0.3 million and $0.6 million during the fiscal years ended January 31, 2012, 2011 and 2010, respectively.
6.
BUSINESS COMBINATIONS
The results of operations of the acquired entities are included from their respective dates of acquisition and any excess of the fair value of consideration transferred over the sum of the fair value of amounts assigned to identifiable tangible and intangible assets, liabilities assumed and any noncontrolling interest is recorded as goodwill in accordance with the FASB’s guidance.
Verint Segment
Vovici Acquisition
On August 4, 2011, Verint acquired all of the outstanding shares of Vovici Corporation (“Vovici”), a U.S.-based, privately-held provider of online survey management and enterprise feedback solutions. This acquisition enhances Verint's Enterprise Intelligence product suite to include comprehensive voice of the customer software and services offerings, designed to help organizations implement a single-vendor solution set for collecting, analyzing and acting on customer insights. The financial results of Vovici have been included in the Company's consolidated financial statements since August 4, 2011.
Verint acquired Vovici for approximately $56.1 million in cash at closing, including $0.4 million to repay Vovici's bank debt. The consideration also included the exchange of certain unvested Vovici stock options for options to acquire approximately 42,000 shares of Verint Systems' common stock with fair values totaling $1.0 million, of which $0.1 million represents compensation for pre-acquisition services and is included in the consideration transferred and $0.9 million is being recognized as stock-based compensation expense over the remaining future vesting periods of the awards. Verint also agreed to make potential additional cash payments of up to approximately $19.1 million, contingent upon the achievement of certain performance targets over the period ending January 31, 2013. The fair value of this contingent obligation was estimated to be $9.9 million at August 4, 2011.
The $9.9 million acquisition date fair value of the contingent consideration obligation was estimated based on the probability adjusted present value of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in this estimate include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, the contingent consideration obligation is revalued to its fair value and increases and decreases in fair value are recorded within “Selling, general and administrative” expenses in the Company's consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration obligation may result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
The Company recorded a benefit of approximately $2.7 million in the fiscal year ended January 31, 2012, for the change in the fair value of the contingent consideration obligation between the acquisition date and January 31, 2012, which primarily reflected the impact of revised assessments of the probability of payment. As of January 31, 2012, the fair value of this contingent consideration obligation was approximately $7.2 million, of which $2.0 million and $5.2 million were recorded within “Accounts payable and accrued expenses” and “Other long-term liabilities,” respectively.
The purchase price was allocated to the tangible assets and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair values assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. The acquired identifiable intangible assets are being amortized on a straight-line basis, which the Company believes approximates the pattern in which the assets are utilized, over their estimated useful lives.
Among the factors contributing to the recognition of goodwill in this transaction were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill is not deductible for income tax purposes.
In connection with the purchase price allocation, the estimated fair value of support obligations assumed from Vovici was determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs relating to fulfilling these obligations plus a normal profit margin, which approximates the amount that the Company believes would be required to pay a third party to assume the support obligations. The estimated costs to fulfill the support obligation were based

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


on the historical direct costs related to providing support services. These estimated costs did not include any costs associated with selling efforts or research and development or the related margins on these costs. Profit associated with selling efforts is excluded because the selling effort on the support contracts concluded prior to the August 4, 2011 acquisition date. The estimated profit margin was 15%, which the Company believes best approximates the operating profit margin to fulfill these support obligations. As a result, in allocating the purchase price, an adjustment was recorded to reduce the $5.3 million carrying value of Vovici's deferred revenue to $2.3 million, representing the estimated fair value of the support obligations assumed. As former Vovici customers renew their support contracts, revenue will be recognized at the full contract value over the remaining term of the contracts.
Revenue attributable to Vovici from August 4, 2011 through January 31, 2012 was $5.0 million. The impact of Vovici on net income for this fiscal period was not significant.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to the acquisition of Vovici, totaled $3.4 million for the fiscal year ended January 31, 2012, were expensed as incurred and recorded within “Selling, general and administrative” expenses.
Global Management Technologies Acquisition
On October 7, 2011, Verint acquired all of the outstanding shares of Global Management Technologies Corporation (“GMT”), a U.S.-based, privately-held provider of workforce management solutions whose software and services are widely used by organizations, particularly in retail branch banking environments. This acquisition adds key functionality to Verint's Enterprise Intelligence product suite. The financial results of GMT have been included in the Company's consolidated financial statements since October 7, 2011.
Verint acquired GMT for approximately $24.6 million in cash at closing. Verint also agreed to make potential additional cash payments of up to approximately $17.4 million, contingent upon the achievement of certain performance targets over the period ending January 31, 2014. The fair value of this contingent obligation was estimated to be $12.0 million as of October 7, 2011.
The $12.0 million acquisition date fair value of the contingent consideration obligation was estimated based on the probability adjusted present value of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in this estimate include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, the contingent consideration obligation is revalued to its fair value and increases and decreases in fair value are recorded within “Selling, general and administrative” expenses in the Company's consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration obligation may result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
The Company recorded a benefit of approximately $2.4 million for the fiscal year ended January 31, 2012, for the change in the fair value of the contingent consideration obligation between the acquisition date and January 31, 2012, which primarily reflected the impact of revised assessments of the probability of payment. As of January 31, 2012, the fair value of this contingent consideration obligation was approximately $9.6 million, all of which was recorded within “Other long-term liabilities.”
The purchase price was allocated to the tangible assets and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair values assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. The acquired identifiable intangible assets are being amortized on a straight-line basis, which the Company believes approximates the pattern in which the assets are utilized, over their estimated useful lives.
Among the factors contributing to the recognition of goodwill in this transaction were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill is deductible for income tax purposes.
In connection with the purchase price allocation, the estimated fair value of support obligations assumed from GMT was determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs relating to fulfilling the obligations plus a normal profit margin, which approximates the amount that the Company believes would be required to pay a third party to assume the support obligations. The estimated costs to fulfill the support obligation were based on the historical direct costs related to providing support services. These estimated costs did not include any costs associated with selling efforts or research and development or the related margins on these costs. Profit associated with selling efforts is

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


excluded because the selling effort on the support contracts was concluded prior to the October 7, 2011 acquisition date. The estimated profit margin was 20%, which the Company believes best approximates the operating profit margin to fulfill these support obligations. As a result, in allocating the purchase price, an adjustment was recorded to reduce the $4.3 million carrying value of GMT's deferred revenue to $1.2 million, representing the estimated fair value of the support obligations assumed. As former GMT customers renew their support contracts, revenue will be recognized at the full contract value over the remaining term of the contracts.
Revenue and the impact on net income attributable to GMT from October 7, 2011 through January 31, 2012 were not significant.
Transaction and related costs, consisting primarily of professional fees and integration expenses directly related to the acquisition of GMT, totaled $1.6 million for the fiscal year ended January 31, 2012, were expensed as incurred and recorded within “Selling, general and administrative” expenses.
Other Business Combinations
During the fiscal year ended January 31, 2012, Verint executed the following additional business combinations:

•
On March 30, 2011, Verint acquired all of the outstanding shares of a privately held company, based in Israel. This acquisition broadens the product portfolio of Verint's Video Intelligence product line.

•
On August 2, 2011, Verint acquired all of the outstanding shares of a privately-held provider of communications intelligence solutions, data retention services, and network performance management, based in the Americas region.  This acquisition expands Verint's Communications Intelligence product portfolio and increases its presence in this region.

•
On November 1, 2011 and November 10, 2011, Verint acquired certain technology and other assets in two separate transactions that both qualify as business combinations.

•
On January 5, 2012, Verint acquired all of the outstanding shares of a privately-held provider of web intelligence technology, based in Europe, Middle East and Africa region, that is being integrated into Verint's Communications Intelligence product portfolio.
The combined consideration for these five business combinations was approximately $55.1 million, including $33.8 million of combined cash paid at the closings. Verint also agreed to make potential additional cash payments aggregating up to approximately $41.0 million contingent upon the achievement of certain performance targets over periods ending through January 31, 2015. The combined fair values of these contingent consideration obligations were estimated to be $20.5 million as of the respective acquisition dates.
Benefits of $0.4 million were recorded within selling, general and administrative expenses for the fiscal year ended January 31, 2012 for changes in the fair values of the contingent consideration obligations associated with these acquisitions, reflecting the impacts of revised assessments of the probability of payment, as well as decreases in the discount periods since the acquisition dates. As of January 31, 2012, the combined fair values of these contingent consideration obligations were $20.1 million, of which $6.4 million and $13.7 million were recorded within “Accounts payable and accrued expenses” and “Other long-term liabilities," respectively.
The fair values assigned to identifiable intangible assets acquired in these business combinations were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. The acquired identifiable finite-lived intangible assets are being amortized on a straight-line basis, which the Company believes approximates the pattern in which the assets are utilized, over their estimated useful lives.
Intangible assets acquired in these business combinations included several IPR&D assets with estimated fair values totaling $2.5 million. IPR&D assets are considered indefinite-lived intangible assets until the completion or abandonment of the associated research and development efforts. The fair values of the IPR&D assets were estimated by projecting the costs required to develop the IPR&D assets into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present values. Verint will amortize these intangible assets once the projects are complete. Currently, Verint expects to complete these projects within the next two years. IPR&D assets are subject to impairment testing at least annually, or more frequently if circumstances are identified indicating the potential for impairment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the additions of skilled, assembled workforces. Of the $33.5 million of goodwill associated with these business combinations, $12.1 million was not deductible for income tax purposes, and $21.4 million is still being assessed for tax deductibility.
In connection with the foregoing August 2, 2011 Verint acquisition, the Company has evaluated and continues to evaluate the impact of certain liabilities associated with pre-acquisition business activities of the acquired company. Based upon this initial evaluation, the Company originally recorded liabilities of approximately $10.7 million, of which $5.5 million is classified as current and $5.2 million is classified as long-term, along with corresponding indemnification assets of the same amounts and classified in the same manner, as components of the purchase price for this acquisition, representing the Company's best estimates of these amounts at the acquisition date. The indemnification assets recognized the selling shareholders' contractual obligation to indemnify Verint for these pre-acquisition liabilities, and were measured on the same basis as the corresponding liabilities. These amounts, as adjusted for currency exchange rate fluctuations, were reflected on the Company's condensed consolidated balance sheet as of October 31, 2011. Subsequently, based upon an assessment of additional information obtained during the three months ended January 31, 2012 about facts and circumstances that existed as of the acquisition date regarding these matters, Verint reduced the estimated acquisition-date liabilities by $0.8 million, and recorded a corresponding acquisition-date reduction in the associated indemnification assets.
As of January 31, 2012, the current and long-term liabilities for these matters are $4.3 million and $4.7 million, respectively, with corresponding indemnification assets reflected within current and long-term assets. The Company is continuing to gather and assess information in this regard, and changes to the amounts recorded, if any, during the remainder of the measurement period, will be included in the purchase price allocation during the measurement period and, subsequently, in the Company's results of operations.
Revenue and the impact on net income attributable to these acquisitions for the fiscal year ended January 31, 2012 were not significant.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these acquisitions totaled $5.0 million for the fiscal year ended January 31, 2012 and were expensed as incurred.

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Components and Allocations of Purchase Prices
The following table sets forth the components and the allocations of the purchase prices, some of which are preliminary, for business combinations completed during the fiscal years ended January 31, 2012 and 2011:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
 
Vovici
 
GMT
 
Other
 
Iontas
 
 
(In thousands)
Components of purchase price:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
55,708

 
$
24,596

 
$
33,835

 
$
17,738

Fair value of contingent consideration
 
9,900

 
12,000

 
20,504

 
3,224

Fair value of stock options
 
60

 
—

 
—

 
—

Bank debt, prepaid at closing
 
435

 
—

 
—

 
—

Other purchase price adjustments
 
—

 
—

 
816

 
—

Prepaid product licenses and support services
 
—

 
—

 
—

 
1,493

Trade accounts payable
 
—

 
—

 
—

 
(712
)
Total purchase price
 
$
66,103

 
$
36,596

 
$
55,155

 
$
21,743

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

 
$
—

 
$
4,614

 
$
2,569

Account receivable
 
1,106

 
512

 
842

 
—

Other current assets
 
5,219

 
1,717

 
11,036

 
286

Other assets
 
913

 
483

 
5,579

 
89

Current and other liabilities
 
(2,931
)
 
(1,915
)
 
(15,419
)
 
(211
)
Deferred revenue
 
(2,264
)
 
(1,234
)
 
(944
)
 
—

Bank debt
 
—

 
—

 
(3,330
)
 
—

Deferred income taxes — long-term
 
(6,021
)
 
(108
)
 
186

 
(993
)
Net tangible assets (liabilities)
 
(3,799
)
 
(545
)
 
2,564

 
1,740

Identifiable intangible assets:
 
 
 
 
 
 
 
 
Developed technology
 
11,300

 
7,400

 
9,743

 
6,949

Customer relationships
 
15,400

 
6,200

 
7,040

 
—

Trademarks and trade names
 
1,700

 
400

 
1,350

 
—

In-process research and development assets
 
—

 
—

 
2,500

 
—

Other identifiable intangible assets
 
—

 
—

 
1,421

 
278

Total identifiable intangible assets (1)
 
28,400

 
14,000

 
22,054

 
7,227

Goodwill
 
41,502

 
23,141

 
30,537

 
12,776

Total purchase price
 
$
66,103

 
$
36,596

 
$
55,155

 
$
21,743

(1)
The weighted-average estimated useful life of all finite-lived identifiable intangible assets is 7.5 and 5.9 years for the fiscal year ended January 31, 2012 and 2011, respectively.
The purchase price allocations for acquisitions completed during the year ended January 31, 2012 are provisional and are based on the information that was available as of the acquisition dates to estimate the fair values of assets acquired and liabilities assumed. The purchase price allocations for these acquisitions as reported as of January 31, 2012 represent the Company's best estimates of the fair values and were based upon the information available to the Company.
The Company is gathering and reviewing additional information necessary to finalize the values assigned to the acquired identified intangible assets, goodwill and income tax assets and liabilities for these acquisitions. Therefore, the provisional measurements of fair values reported at January 31, 2012 are subject to change. The Company expects to finalize the purchase price allocations as soon as practicable but no later than one year from the respective acquisition dates.

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Based upon additional information obtained during the three months ended January 31, 2012 about facts and circumstances that existed as of the respective acquisition dates, Verint adjusted the purchase price allocations for several acquisitions completed during the year ended January 31, 2012, as described below:
•
For the Vovici purchase price allocation, Verint increased certain liabilities by $1.1 million, recorded an associated $1.0 million asset reflecting the selling shareholders' indemnification obligations related to these liabilities, and increased goodwill by $0.1 million. Verint also adjusted certain income tax assets and liabilities of Vovici which resulted in a $4.0 million increase in goodwill. These adjustments did not materially impact the Company's consolidated statement of operations.
•
For the GMT purchase price allocation, Verint refined certain assumptions in the discounted cash flow models used to estimate the fair values of certain identified intangible assets, which reduced the estimated acquisition-date fair values of the developed technology and customer relationship intangible assets identified in the acquisition of GMT by $0.1 million and $1.0 million, respectively, compared to the original estimated amounts, which resulted in a corresponding $1.1 million increase in acquisition-date goodwill. Verint also adjusted certain income tax assets and liabilities of GMT which resulted in a $0.4 million increase in goodwill. These adjustments did not materially impact the Company's consolidated statement of operations.
•
For the purchase price allocation associated with Verint's August 2, 2011, Communications Intelligence acquisition, Verint refined certain assumptions in the discounted cash flow models used to estimate the fair values of certain identified intangible assets, which increased the estimated acquisition-date fair values of the developed technology and customer relationship intangible assets identified in this acquisition by $0.2 million each, compared to the original estimated amounts, which resulted in a corresponding $0.4 million decrease in acquisition-date goodwill. Verint also increased the fair value of its contingent consideration obligation in this acquisition by $0.5 million and recorded a corresponding $0.5 million increase in acquisition-date goodwill. Additionally, Verint adjusted the acquisition-date fair value of its performance obligations under customer contracts assumed in this acquisition, which resulted in a $1.7 million decrease in acquisition-date goodwill. In addition, Verint adjusted certain acquisition-date deferred income taxes and unrecognized tax benefits, which resulted in a $3.1 million increase in acquisition-date goodwill. These adjustments combined to increase acquisition-date goodwill for this acquisition by $1.5 million.
For the acquisition of Vovici, the acquired developed technology, customer relationships, and trademarks and trade names were assigned estimated useful lives of six years, ten years, and five years, respectively, the weighted average of which is approximately 8.1 years.
For the acquisition of GMT, the acquired developed technology, customer relationships, and trademarks and trade names were assigned estimated useful lives of five years, ten years, and three years, respectively, the weighted average of which is approximately 7.2 years.
For the other acquisitions, the acquired developed technology, customer relationships, trademarks and trade names, and other identifiable intangible assets were assigned estimated useful lives of six years to seven years, from four years to ten years, from four years to five years, and from three years to four years, respectively, the weighted average of which is approximately 6.8 years.
The purchase price allocations for acquisitions completed during the year ended January 31, 2012 were provisional and were based on information that was available to the Company as of the respective acquisition dates, and represented the Company's best estimates of the fair values of the assets acquired and liabilities assumed.
Based upon additional information obtained during the three months ended April 30, 2012 about facts and circumstances that existed as of the respective acquisition dates, the Company adjusted the purchase price allocations for several acquisitions completed during the fiscal year ended January 31, 2012, as described below:
•
For the Vovici purchase price allocation, the Company reduced certain liabilities by $0.2 million and recorded a corresponding reduction of goodwill; and
•
For the purchase price allocation associated with Verint's August 2, 2011 acquisition, the Company adjusted certain acquisition-date deferred income taxes, which also required the Company to change several assumptions in the discounted cash flow models used to estimate the fair values of certain identified intangible assets. As a result, the estimated acquisition-date fair values of the developed technology and customer relationship intangible assets identified in this acquisition decreased by $0.3 million and $0.4 million, respectively, net deferred income tax liabilities decreased by $3.8 million, and goodwill decreased by $3.1 million. For the purchase price allocation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


associated with the January 5, 2012 acquisition, the Company recorded minor refinements to the purchase price and to certain liabilities, which resulted in a $0.1 million increase in goodwill.
Changes to a provisional purchase price allocation resulting from additional information obtained about facts and circumstances that existed as of the acquisition date are adjusted retrospectively to the consolidated financial statements. Accordingly, the consolidated balance sheet as of January 31, 2012 has been revised to reflect the impacts of these adjustments. These adjustments resulted in decreases in goodwill of $2.9 million, intangible assets, net of $0.6 million, accounts payable and accrued expenses of $0.2 million, and long-term deferred income tax liabilities of $3.1 million and a $0.2 million increase in long-term deferred tax assets.
For the Year Ended January 31, 2011
Iontas Limited
On February 4, 2010, Verint acquired all of the outstanding shares of Iontas Limited (“Iontas”), a privately held provider of desktop analytics solutions which measure application usage and analyze workflows to help improve staff performance in contact center, branch, and back-office operations environments. Verint acquired Iontas to, among other objectives, expand the desktop analytical capabilities of its Enterprise Intelligence solutions. The financial results of Iontas have been included in the consolidated financial statements since the acquisition date.
Verint acquired Iontas for total consideration valued at $21.7 million, including cash consideration of $17.7 million, and additional milestone-based contingent payments of up to $3.8 million, tied to certain performance targets being achieved over the two-year period following the acquisition date. The acquisition-date fair value of the contingent consideration was estimated to be $3.2 million. The purchase price also included $1.5 million of prepayments for product licenses and support services procured from Iontas prior to the acquisition date, partially offset by $0.7 million of trade accounts payable to Iontas as of the acquisition date.
The consideration paid to acquire Iontas was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, which included $6.9 million for developed technology, $0.3 million for non-competition agreements, $1.7 million for tangible net assets, and $12.8 million for goodwill. The developed technology and non-competition agreements were assigned estimated useful lives of six years and three years, respectively, the weighted average of which is 5.9 years, and are being amortized on a straight-line basis, which the Company believes approximates the pattern in which the assets are utilized, over these estimated useful lives.
Among the factors that contributed to the recognition of goodwill in this transaction were the expansion of Verint's desktop analytical capabilities, the expansion of its suite of products and services, and the addition of an assembled workforce. This goodwill is not deductible for income tax purposes.
The Company recorded the $3.2 million acquisition-date estimated fair value of the contingent consideration as a component of the purchase price of Iontas. During the fiscal year ended January 31, 2012, $2.0 million of the previously recorded contingent consideration was paid to the former shareholders of Iontas. The estimated fair value of the remaining contingent consideration was $1.7 million as of January 31, 2012 and was recorded within “Accounts payable and other accrued expenses.” Increases in the fair value of this contingent consideration of $0.2 million and $0.3 million for the fiscal years ended January 31, 2012 and 2011, respectively, were recorded within “Selling, general and administrative” expenses for those fiscal periods.
Transaction costs, consisting primarily of professional fees directly related to the acquisition of Iontas, totaled $1.3 million, were expensed as incurred and recorded within "Selling, general and administrative" expenses.
The integration of Iontas into Verint's business subsequent to the acquisition has made it impractical to quantify revenue and the impact on net income from Iontas for the fiscal years ended January 31, 2012 and 2011.
Other Business Combination
In December 2010, Verint acquired certain technology and other assets in a transaction that qualified as a business combination. Total consideration for this acquisition was less than $15.0 million. The impact of this acquisition was not material to the Company's consolidated financial statements. The fair value of the liability for contingent consideration related to this acquisition increased by $1.9 million during the fiscal year ended January 31, 2012, resulting in a corresponding charge recorded within “Selling, general and administrative” expenses for that fiscal period. The earned contingent consideration related to this acquisition was paid to the sellers during the fiscal year ended January 31, 2012, and the Company has no further contingent consideration obligations for this acquisition.

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Unaudited Pro Forma Financial Information
The following table provides unaudited pro forma total revenue and net loss attributable to Comverse Technology, Inc. for the fiscal years ended January 31, 2012 and 2011, as if Vovici and GMT had been acquired on February 1, 2010. These unaudited pro forma results reflect certain adjustments related to these acquisitions, such as amortization expense on finite-lived intangible assets acquired from Vovici and GMT. The unaudited pro forma results do not include any operating efficiencies or potential cost savings which may result from these business combinations. Accordingly, such unaudited pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on February 1, 2010, nor are they indicative of future operating results. The pro forma impact of the other business combinations discussed in this note were not material to the Company's historical consolidated operating results and is therefore not presented.
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
 
(In thousands)
Total revenue
 
$
804,006

 
$
746,097

Net loss attribute to Comverse Technology, Inc.
 
$
(56,952
)
 
$
(139,440
)

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


7.
GOODWILL
The changes in the carrying amount of goodwill in the Company's Verint segment for the fiscal years ended January 31, 2012, 2011 and 2010 are as follows:
 
 
Verint
 
 
(In thousands)
For the Year Ended January 31, 2010
 
 
Goodwill, gross, at January 31, 2009
 
$
774,931

Accumulated impairment losses at January 31, 2009
 
—

Goodwill, net, at January 31, 2009
 
774,931

Goodwill adjustments: (1)
 
 
ViewLinks
 
89

Effect of changes in foreign currencies and other
 
15,131

Goodwill, net, at January 31, 2010
 
$
790,151

For the Year Ended January 31, 2011
 
 
Goodwill, gross, at January 31, 2010
 
$
790,151

Accumulated impairment losses at January 31, 2010
 
—

Goodwill, net, at January 31, 2010
 
790,151

Acquisition of Iontas Limited (1)
 
12,776

Effect of changes in foreign currencies and other
 
1,044

Goodwill, net, at January 31, 2011
 
$
803,971

For the Year Ended January 31, 2012
 
 
Goodwill, gross, at January 31, 2011
 
$
803,971

Accumulated impairment losses at January 31, 2011
 
—

Goodwill, net, at January 31, 2011
 
803,971

Goodwill acquired:(1)
 
 
Vovici
 
41,502

GMT
 
23,141

Other
 
30,865

Effect of changes in foreign currencies and other
 
(5,324
)
Goodwill, net, at January 31, 2012
 
$
894,155

Balance at January 31, 2012
 
 
Goodwill, gross, at January 31, 2012
 
$
894,155

Accumulated impairment losses at January 31, 2012
 
—

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

(1)
During the fiscal years ended January 31, 2012, 2011 and 2010, goodwill related to certain acquisitions was adjusted due to earn-out payments or recoveries, tax adjustments and a lease abandonment settlement. 
The Company tests goodwill for impairment annually as of November 1 or more frequently if events or circumstances indicate the potential for an impairment exists. The Company performed its goodwill impairment tests for each of its reporting units as of November 1, 2011, 2010 and 2009.

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


8.
INTANGIBLE ASSETS, NET
Acquired intangible assets as of January 31, 2012 and 2011 are as follows:
 
 
 
 
January 31,
 
 
Useful Life
 
2012
 
2011
 
 
 
 
(In thousands)
Gross carrying amount:
 
 
 
 
 
 
Intangible assets with finite lives:
 
 
 
 
 
 
Acquired technology
 
2 to 7 years
 
$
94,027

 
$
66,794

Customer relationships
 
4 to 10 years
 
225,554

 
198,106

Trade names
 
3 to 5 years
 
12,824

 
9,552

Non-competition agreements
 
3 to 10 years
 
5,779

 
5,215

Distribution network
 
10 years
 
2,440

 
2,440

Backlog
 
3 years
 
843

 
—

Total intangible assets with finite lives
 
 
 
341,467

 
282,107

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

 
—

 
 
 
 
343,967

 
282,107

Accumulated amortization:
 
 
 
 
 
 
Acquired technology
 
 
 
49,732

 
37,579

Customer relationships
 
 
 
95,173

 
74,412

Trade names
 
 
 
9,805

 
9,177

Non-competition agreements
 
 
 
3,656

 
2,760

Distribution network
 
 
 
1,352

 
1,108

Backlog
 
 
 
19

 
—

 
 
 
 
159,737

 
125,036

Total
 
 
 
$
184,230

 
$
157,071

Acquired intangible assets, net relates to Verint segment for all the periods presented.
Amortization of intangible assets was $35.3 million, $30.6 million and $30.3 million for the fiscal years ended January 31, 2012, 2011 and 2010, respectively. In connection with its testing of goodwill, the Company also tested long-lived assets, including finite-lived intangible assets. The Company did not record an impairment charge related to finite-lived intangible assets for the fiscal years ended January 31, 2012 and 2011.
Estimated future amortization expense on finite-lived acquisition-related intangible assets for each of the five succeeding fiscal years and thereafter is as follows:
Fiscal Years Ending January 31,
 
(In thousands)
2013
 
$
39,577

2014
 
34,412

2015
 
30,981

2016
 
29,643

2017
 
26,881

2018 and thereafter
 
20,236

 
 
$
181,730


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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


9.
OTHER ASSETS
Other assets as of January 31, 2012 and 2011 consist of:
 
 
January 31,
 
 
2012
 
2011
 
 
(In thousands)
Deposits
 
$
5,427

 
$
6,175

Deferred financing costs, net
 
14,060

 
9,725

Capitalized software costs, net of accumulated amortization of $21,437 and $17,891, respectively
 
5,846

 
6,787

Long-term tax receivable
 
472

 
477

Long-term indemnification asset
 
4,689

 
—

Note receivable from Comverse, Inc.
 
8,536

 
7,019

Other
 
5,369

 
5,537

 
 
$
44,399

 
$
35,720

Capitalized Software Costs
Included in other assets are capitalized software costs, which represent costs incurred primarily to develop Verint’s commercial software products. The roll forward of net capitalized software costs is as follows:
 
 
Fiscal Years Ended
January 31,
 
 
2012
 
2011
 
 
(In thousands)
Capitalized software costs, net, beginning of year
 
$
6,787

 
$
8,530

Software costs capitalized during the year
 
3,399

 
2,527

Amortization of software costs
 
(4,135
)
 
(4,236
)
Effect of changes in foreign currencies and other
 
(205
)
 
(34
)
Capitalized software costs, net, end of year
 
$
5,846

 
$
6,787


86

10.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of January 31, 2012 and 2011 consist of:
 
 
January 31,
 
 
2012
 
2011
 
 
(In thousands)
Accrued compensation and benefits
 
$
59,219

 
$
59,622

Accounts payable
 
58,156

 
51,553

Accrued legal, audit and professional fees
 
10,681

 
13,343

Accrued taxes-other than income taxes
 
12,073

 
8,900

Accrued commissions
 
4,954

 
7,511

Accrued contingent consideration
 
10,182

 
2,194

Other accrued expenses (1)
 
33,479

 
27,733

 
 
$
188,744

 
$
170,856

(1)
Includes liabilities related to the Company’s 401(k) Plans.
Each of CTI and Verint maintains a 401(k) plan for its full-time employees. These plans allow eligible employees to elect to contribute up to 60% of their annual compensation, subject to the prescribed maximum amount. The respective company matches employee contributions at a rate of 50%, limited to a maximum annual matched contribution of $2,000 per employee. Employee contributions are always fully vested. The respective company’s matching contributions for each year vest on the last day of the calendar year providing the employee remains employed with the respective company on that day. The Company’s matching contributions to the 401(k) plan amounted to $1.5 million, $1.4 million, and $1.3 million for each of the fiscal years ended January 31, 2012, 2011 and 2010, respectively.
11.
DEBT
As of January 31, 2012 and 2011, debt is comprised of the following:
 
 
January 31,
 
 
2012
 
2011
 
 
(In thousands)
Convertible debt obligations
 
$
2,195

 
$
2,195

Term loan - new credit agreement:
 
 
 
 
Gross loan
 
597,000

 
—

Unamortized debt discount on term loan
 
(2,685
)
 
—

Other debt
 
3,064

 
—

Term loan - prior facility
 
—

 
583,234

Total debt
 
599,574

 
585,429

Less: current portion
 
8,423

 
2,195

Total long-term debt
 
$
591,151

 
$
583,234

Convertible Debt Obligations
As of January 31, 2012 and 2011, CTI had $2.2 million aggregate principal amount of outstanding Convertible Debt Obligations (the “Convertible Debt Obligations”). The Convertible Debt Obligations are not secured by any assets of the Company and are not guaranteed by any of CTI's subsidiaries.
Each $1,000 principal amount of the Convertible Debt Obligations is convertible, at the option of the holder upon certain circumstances, into shares of CTI's common stock at a conversion price of $17.9744 per share (equal to a conversion rate of 55.6347 shares per $1,000 principal amount of Existing Convertible Debt Obligations), subject to adjustment for certain events.

87
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The Convertible Debt Obligations are convertible upon the occurrence of certain events, including during any period, if following the date on which the credit rating assigned to the Convertible Debt Obligations by S&P is lower than “B-” or upon the withdrawal or suspension of the Convertible Debt Obligations rating at CTI's request. On August 19, 2010, S&P discontinued rating the Convertible Debt Obligations at which time they became convertible. Accordingly, the Convertible Debt Obligations are classified as current liabilities as of January 31, 2012 and 2011. The required redemption obligations in the succeeding five fiscal years are not significant to the Company.
Verint Credit Facilities
On May 25, 2007, Verint entered into a $675.0 million secured credit agreement (the "Prior Facility") with a group of banks to fund a portion of the acquisition of Witness Systems, Inc. ("Witness"). The Prior Facility comprised of a $650.0 million seven-year term loan facility and a $25.0 million six-year revolving line of credit. The borrowing capacity under the revolving line of credit was increased to $75.0 million in July 2010.
On April 29, 2011, Verint entered into a credit agreement (the “New Credit Agreement”) with a group of lenders (the “Lenders”) and Credit Suisse AG, as administrative agent and collateral agent for the Lenders (in such capacities, the “Agent”) and concurrently terminated the Prior Facility.
The New Credit Agreement provides for $770.0 million of secured senior credit facilities, comprised of a $600.0 million term loan maturing in October 2017 (the “Term Loan Facility”) and a $170.0 million revolving credit facility maturing in April 2016 (the “Revolving Credit Facility”), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time according to the terms of the New Credit Agreement. As of January 31, 2012, Verint had no outstanding borrowings under the Revolving Credit Facility.
The majority of the Term Loan Facility proceeds were used to repay all $583.2 million of outstanding term loan borrowings under the Prior Facility at the closing date of the New Credit Agreement. There were no outstanding borrowings under the prior revolving credit facility at the closing date.
The New Credit Agreement included an original issuance Term Loan Facility discount of 0.50%, or $3.0 million, resulting in net Term Loan Facility proceeds of $597.0 million. This discount is being amortized as interest expense over the term of the Term Loan Facility using the effective interest method.
Loans under the New Credit Agreement bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months or shorter, at the end of any interest period, at a per annum rate of, at Verint's election:
•
in the case of Eurodollar loans, the Adjusted London Interbank Offered (“LIBO”) Rate plus 3.25% (or if Verint's corporate ratings are at least BB- and Ba3 or better, 3.00%). The “Adjusted LIBO Rate” is the greater of (i) 1.25% per annum and (ii) the product of the LIBO Rate and Statutory Reserves (both as defined in the New Credit Agreement), and
•
in the case of Base Rate loans, the Base Rate plus 2.25% (or if Verint's corporate ratings are at least BB- and Ba3 or better, 2.00%). The “Base Rate” is the greatest of (i) the Agent's prime rate, (ii) the Federal Funds Effective Rate (as defined in the New Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus 1.00%.
Verint incurred debt issuance costs of $14.8 million associated with the New Credit Agreement, which have been deferred and classified within “Other assets.” The deferred costs are being amortized as interest expense over the term of the New Credit Agreement. Deferred costs associated with the Term Loan Facility were $10.2 million, and are being amortized using the effective interest rate method. Deferred costs associated with the Revolving Credit Facility were $4.6 million and are being amortized on a straight-line basis.
At the closing date of the New Credit Agreement, there were $9.0 million of unamortized deferred costs associated with the Prior Facility. Upon termination of the Prior Facility and repayment of the prior term loan, $8.1 million of these fees were expensed as a loss on extinguishment of debt. The remaining $0.9 million of these fees were associated with Lenders that provided commitments under both the new and the prior revolving credit facilities, which remained deferred and are being amortized over the term of the New Credit Agreement.
During the fiscal year ended January 31, 2012, Verint incurred $0.5 million of fees to secure waivers of certain provisions of the New Credit Agreement which allowed it to structure the financing for one of its business combinations in a favorable manner, $0.2 million of which were deferred and will be amortized over the remaining term of the New Credit Agreement and $0.3 million of which were expensed as incurred.

88
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


As of January 31, 2012, the interest rate on the Term Loan Facility was 4.50%. Including the impact of the 0.50% original issuance Term Loan Facility discount and the deferred debt issuance costs, the effective interest rate on Verint's Term Loan Facility was approximately 4.91% as of January 31, 2012.
Verint incurred interest expense on borrowings under its credit facilities of $28.1 million, $26.2 million and $22.6 million during the fiscal years ended January 31, 2012, 2011 and 2010, respectively. Verint also recorded $2.8 million, $2.8 million and $1.9 million during the fiscal years ended January 31, 2012, 2011 and 2010, respectively, for amortization of deferred debt issuance costs, which is reported within "Interest expense." Included in the deferred debt-related cost amortization for the fiscal years ended January 31, 2011 and 2010 were $0.3 million and $0.1 million, respectively, of additional amortization associated with unscheduled principal repayments in those fiscal years. During the fiscal year ended January 31, 2012, Verint also recorded $0.3 million for amortization of the original issuance term loan discount, which is reported within “Interest expense.”
Verint is required to pay a commitment fee with respect to undrawn availability under the Revolving Credit Facility, payable quarterly, at a rate of 0.50% per annum, and customary administrative agent and letter of credit fees.
The New Credit Agreement requires Verint to make term loan principal payments of $1.5 million per quarter through August 2017, beginning in August 2011, with the remaining balance due in October 2017. Optional prepayments of the loans are permitted without premium or penalty, other than customary breakage costs associated with the prepayment of loans bearing interest based on LIBO Rates and a 1.0% premium applicable in the event of a Repricing Transaction (as defined in the New Credit Agreement) prior to April 30, 2012. The loans are also subject to mandatory prepayment requirements with respect to certain asset sales, excess cash flow (as defined in the New Credit Agreement), and certain other events. Prepayments are applied first to the eight immediately following scheduled term loan principal payments, and then pro rata to other remaining scheduled term loan principal payments, if any, and thereafter as otherwise provided in the New Credit Agreement.
Verint Systems' obligations under the New Credit Agreement are guaranteed by substantially all of Verint's domestic subsidiaries and certain foreign subsidiaries that have elected to be disregarded for U.S. tax purposes and are secured by security interests in substantially all assets of Verint and its guarantor subsidiaries, subject to certain exceptions. Verint's obligations under the New Credit Agreement are not guaranteed by CTI and are not secured by any of CTI's assets.
The New Credit Agreement contains customary negative covenants for credit facilities of this type, including limitations on Verint and its subsidiaries with respect to indebtedness, liens, nature of business, investments and loans, distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. Accordingly, the New Credit Agreement precludes Verint Systems from paying cash dividends and limits its ability to make asset distributions to its stockholders, including CTI. The New Credit Agreement also contains a financial covenant that requires Verint to maintain a Consolidated Total Debt to Consolidated Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (each as defined in the New Credit Agreement) leverage ratio until July 31, 2013 of no greater than 5.00 to 1 and, thereafter, of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions. As of January 31, 2012, Verint was in compliance with such requirements.
The New Credit Agreement also contains a number of affirmative covenants, including a requirement that Verint submit consolidated financial statements to the Lenders within certain periods after the end of each fiscal year and quarter.
The New Credit Agreement provides for customary events of default with corresponding grace periods, including failure to pay principal or interest under the New Credit Agreement when due, failure to comply with covenants, any representation or warranty made by Verint proving to be inaccurate in any material respect, defaults under certain other indebtedness of Verint or its subsidiaries, a Change of Control (as defined in the New Credit Agreement) of Verint, and certain insolvency or receivership events affecting Verint or its significant subsidiaries. Upon an event of default, all of Verint's indebtedness under the New Credit Agreement may be declared immediately due and payable, and the Lenders' commitments to provide loans under the New Credit Agreement may be terminated.
Other Verint Indebtedness
In connection with Verint's August 2, 2011 business combination, Verint assumed approximately $3.3 million of development bank and government debt in the Americas region. This debt is payable-in-periods through February 2017 and bears interest at varying rates. As of January 31, 2012, the majority of this debt bears interest at an annual rate of 7.00%. The carrying value of this debt was approximately $3.1 million as of January 31, 2012.

89
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Debt maturities
The Company’s debt maturities are as follows:
Fiscal years ending January 31:
 
 
(In thousands)
 
 
2013
 
$
8,423

2014
 
6,624

2015
 
6,735

2016
 
6,706

2017
 
6,771

2018 and thereafter
 
567,000

 
 
$
602,259

12.
DERIVATIVES AND FINANCIAL INSTRUMENTS
The Company entered into derivative arrangements to manage a variety of risk exposures during the fiscal years ended January 31, 2012, 2011 and 2010, including interest rate risk associated with Verint’s Prior Facility and foreign currency risk related to forecasted foreign currency denominated payroll costs at the Company’s Verint subsidiary. The Company assessed the counterparty credit risk for each party related to its derivative financial instruments for the periods presented.
Forward Contracts
During the fiscal years ended January 31, 2012, 2011 and 2010, Verint entered into short-term foreign currency forward contracts to mitigate risk of fluctuations in foreign currency exchange rates primarily relating to compensation and related expenses denominated in currencies other than USD, primarily the NIS and Canadian dollar. Verint also periodically utilizes foreign currency forward contracts to manage exposure resulting from forecasted customer collections to be remitted in currencies other than applicable functional currency. Verint’s joint venture, which has a Singapore dollar functional currency, also utilizes foreign exchange forward contracts to manage its exposure to exchange rate fluctuations related to settlement of liabilities denominated in USD. Certain of these foreign currency forward contracts were not designated as hedging instruments under the FASB’s guidance, and therefore, gains and losses from changes in their fair values were reported in “Other income (expense), net” in the consolidated statements of operations. Changes in the fair value of effective forward contracts qualifying for cash flow hedge accounting under the FASB’s guidance are recorded as part of other comprehensive income (loss) in the consolidated statements of equity. Such amounts are reclassified to the consolidated statements of operations when the effects of the item being hedged are recognized in the consolidated statements of operations. The Verint derivatives outstanding as of January 31, 2012 are short-term in nature and generally have maturities of no longer than twelve months although occasionally Verint will execute a contract that extends beyond twelve months depending upon the nature of underlying risk.
Interest Rate Swap Agreement
On May 25, 2007, concurrently with entry into its Prior Facility, Verint executed a pay-fixed/receive-variable interest rate swap agreement with a multinational financial institution to mitigate a portion of the risk associated with variable interest rates on the term loan under the Prior Facility. The original term of the interest rate swap agreement extended through May 2011. On July 30, 2010, Verint terminated the interest rate swap agreement in exchange for a payment of $21.7 million to the counterparty. Verint recorded a $3.1 million loss on the interest rate swap for the fiscal year ended January 31, 2011. The interest rate swap agreement was not designated as a hedging instrument under derivative accounting guidance, and gains and losses from changes in its fair value were therefore reported in “Other (expense) income, net” in the consolidated statements of operations.

90
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following tables as of January 31, 2012 and 2011 summarize the Company’s derivative positions and their respective fair value:
 
 
January 31, 2012
Type of Derivative
 
Notional
Amount
 
Balance Sheet
Classification
 
Fair Value
 
 
(In thousands)
Assets
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
62,719

 
Prepaid expenses and other current assets
 
$
978

Total assets
 
 
 
 
 
$
978

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

 
Other current liabilities
 
$
303

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

 
Other current liabilities
 
227

Total liabilities
 
 
 
 
 
$
530


 
 
January 31, 2011
Type of Derivative
 
Notional
Amount
 
Balance Sheet Classification
 
Fair Value
 
 
 
 
(In thousands)
 
 
Assets
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
$
4,895

 
Prepaid expenses and other current assets
 
$
88

Total assets
 
 
 
 
 
$
88

Liabilities
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
24,904

 
Other current liabilities
 
$
1,490

Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
21,250

 
Other current liabilities
 
396

Total liabilities
 
 
 
 
 
$
1,886


91
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following tables summarize the Company’s classification of gains and losses on derivative instruments for the fiscal years ended January 31, 2012, 2011, and 2010:
 
 
Fiscal Year Ended January 31, 2012
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other
Comprehensive
Income (Loss)
 
Reclassified 
from
Accumulated 
Other
Comprehensive
Income (Loss) into
Statement of
Operations (1)
 
Recognized in 
Other
Income (Expense),
Net
 
 
(In thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
—

 
$
—

 
$
(896
)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
160

 
(373
)
 
—

Total
 
$
160

 
$
(373
)
 
$
(896
)
 
 
 
Fiscal Year Ended January 31, 2011
 
 
Gain (Loss)
Type of Derivative
 
Recognized in Other
Comprehensive
Income (Loss)
 
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Statement of
     Operations (1)
 
Recognized in Other
Income (Expense),
Net
 
 
(In thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
—

 
$
—

 
$
(2,761
)
Interest rate swap
 
—

 
—

 
(3,102
)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
714

 
925

 
—

Total
 
$
714

 
$
925

 
$
(5,863
)

 
 
Fiscal Year Ended January 31, 2010
 
 
Gain (Loss)
Type of Derivative
 
Recognized in
 Other
Comprehensive
Income (Loss)
 
Reclassified 
from
Accumulated 
Other
Comprehensive
Income (Loss) into
Statement of
Operations (1)
 
Recognized in 
Other
Income (Expense),
Net
 
 
(In thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
—

 
$
—

 
$
(1,118
)
Interest rate swap
 
—

 
—

 
(13,591
)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
3,045

 
3,042

 
—

Total
 
$
3,045

 
$
3,042

 
$
(14,709
)
(1)
Amounts reclassified from accumulated other comprehensive income (loss) into the statement of operations are classified as operating expenses.

92
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The components of other comprehensive income (loss), including discontinued operations, related to cash flow hedges are as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands)
Accumulated OCI related to cash flow hedges, beginning of year
 
$
748

 
$
785

 
$
(3,028
)
Unrealized gains on cash flow hedges
 
2,444

 
2,412

 
9,470

Reclassification adjustment for gains included in net loss
 
(2,016
)
 
(2,677
)
 
(5,655
)
Changes in accumulated OCI on cash flow hedges, before tax
 
428

 
(265
)
 
3,815

Other comprehensive (income) loss attributable to noncontrolling interest
 
(514
)
 
169

 
(2
)
Deferred income tax (provision) benefit
 
(148
)
 
59

 
—

Changes in accumulated OCI on cash flow hedges, net of tax
 
(234
)
 
(37
)
 
3,813

Accumulated OCI related to cash flow hedges, end of year
 
$
514

 
$
748

 
$
785

13.
FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value of financial instruments is estimated by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Commercial paper. The Company uses quoted prices for similar assets and liabilities.
Money Market Funds. The Company values these assets using quoted market prices for such funds.
ARS. The Company determines the fair value of ARS on a quarterly basis by utilizing a discounted cash flow model, which considers, among other factors, assumptions about the (i) underlying collateral, (ii) credit risk associated with the issuer, and (iii) contractual maturity. The discounted cash flow model considers contractual future cash flows, representing both interest and principal payments. Future interest payments were projected using U.S. Treasury and swap curves over the remaining term of the ARS in accordance with the terms of each specific security and principal payments were assumed to be made at an estimated contractual maturity date taking into account applicable prepayments. Yields used to discount these payments were determined based on the specific characteristics of each security. Key considerations in the determination of the appropriate discount rate include the securities’ remaining term to maturity, capital structure subordination, quality and level of collateralization, complexity of payout structure, credit rating of the issuer, and the presence or absence of additional insurance.
Contingent Consideration. The Company values contingent consideration using an estimated probability-adjusted discounted cash flow model. The fair value measurements are based on significant inputs not observable in the market. The key assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. The fair value of contingent consideration is re-measured at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in the probability of achieving the performance target, are recorded in earnings.
Derivative assets and liabilities. The fair value of derivative instruments is based on quotes or data received from counterparties and third party financial institutions. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts considering the terms and maturities of the contracts and markets rates for similar contracts using readily observable market prices thereof.

93
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following tables present financial instruments according to the fair value hierarchy as defined by the FASB’s guidance as of January 31, 2012 and 2011:
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of January 31, 2012
 
 
January 31, 2012
 
 
Quoted Prices
to Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
 
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
Money market funds (1)
 
$
207,950

 
$
—

 
$
—

 
$
207,950

Auction rate securities
 
—

 
—

 
272

 
272

Derivative assets
 
—

 
978

 
—

 
978

 
 
$
207,950

 
$
978

 
$
272

 
$
209,200

Financial Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
—

 
$
530

 
$
—

 
$
530

Contingent consideration liability for business combination
 
—

 
—

 
38,646

 
38,646

 
 
$
—

 
$
530

 
$
38,646

 
$
39,176

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of January 31, 2011
 
 
January 31, 2011
 
 
Quoted Prices
to Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
 
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
Money market funds (1)
 
$
186,414

 
$
—

 
$
—

 
$
186,414

Auction rate securities
 
—

 
—

 
72,441

 
72,441

Derivative assets
 
—

 
88

 
—

 
88

 
 
$
186,414

 
$
88

 
$
72,441

 
$
258,943

Financial Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
—

 
$
1,886

 
$
—

 
$
1,886

Contingent consideration liability for business combination
 
—

 
—

 
3,686

 
3,686

 
 
$
—

 
$
1,886

 
$
3,686

 
$
5,572

(1)
As of January 31, 2012, $205.8 million of money market funds were classified in “Cash and cash equivalents” and $2.1 million were classified in “Restricted cash and bank time deposits” within the consolidated balance sheets. As of January 31, 2011, $153.0 million of money market funds were classified in “Cash and cash equivalents” and $33.4 million of money market funds were classified in “Restricted cash and bank time deposits” within the consolidated balance sheets.
As of January 31, 2012 and 2011, $9.4 million of commercial paper for each date were classified in "Current assets of discontinued operations" and derivative assets of $0.4 million and $0.9 million, respectively, were classified in "Current assets of discontinued operations". The table above does not reflect these assets.

94
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following table is a summary of changes in the fair value of the level 3 financial assets and liabilities during the fiscal years ended January 31, 2012 and 2011:
 
 
Level Three Financial Assets and Liabilities
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
 
Asset
 
Liability
 
Asset
 
Liability
 
 
(In thousands)
Beginning balance
 
$
72,441

 
$
3,686

 
$
114,650

 
$
—

Sales
 
(49,150
)
 
—

 
(56,320
)
 
—

Redemptions
 
(25,800
)
 
—

 
(900
)
 
—

Change in realized and unrealized gains included in other income
      (expense), net
 
24,412

 
—

 
23,810

 
—

Change in unrealized (losses) gains and reclassification adjustments net of tax included in other comprehensive income
 
(21,631
)
 
—

 
(8,392
)
 
—

Impairment charges
 
—

 
—

 
(407
)
 
—

Contingent consideration liability recorded for
     business combination
 
—

 
42,404

 
—

 
3,424

Payments of contingent consideration
 
—

 
(4,107
)
 
—

 
—

Change in fair value recorded in operating expenses
 
—

 
(3,337
)
 
—

 
262

Ending balance
 
$
272

 
$
38,646

 
$
72,441

 
$
3,686

The Company did not recognize any transfers between levels of fair value measurement hierarchy during the fiscal years ended January 31, 2012 and 2011.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. The Company measures non-financial assets, including goodwill, intangible assets and property and equipment, at fair value when there is an indication of impairment. These assets are recorded at fair value only when an impairment charge is recognized. The Company also elected not to apply the fair value option for non-financial assets and non-financial liabilities. For further details regarding impairment reviews see Note 1, Organization, Business and Summary of Significant Accounting Policies.
The following table presents the fair value of financial instruments which are carried at cost in the consolidated balance sheets as of January 31, 2012 and 2011:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
(In thousands)
Liabilities:
 
 
 
 
 
 
 
 
Term loan
 
$
594,315

 
$
597,000

 
$
583,234

 
$
586,200

Other debt
 
3,064

 
3,064

 
—

 
—

Convertible debt obligations
 
2,195

 
769

 
2,195

 
801

The carrying amounts of cash and cash equivalents, restricted cash and bank time deposits, accounts receivable and accounts payable are reasonable estimates of their fair value.
As of January 31, 2012, the carrying amount of the term loan under Verint's New Credit Agreement was $594.3 million and the estimated fair value was $597.0 million. As of January 31, 2011, the carrying amount of the term loan under the Prior Facility was $583.2 million and the estimated fair value was $586.2 million. The estimated fair values are based upon the estimated bid and ask prices as determined by the agent responsible for the syndication of Verint's term loan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


In connection with Verint's August 2, 2011 business combination, the Company assumed approximately $3.3 million of development bank and government debt in the Americas region. The carrying value of this debt was approximately $3.1 million at January 31, 2012, which approximates its fair value.
The carrying amount of Convertible Debt Obligations reported in the consolidated balance sheet as of January 31, 2012 and 2011 was $2.2 million. The Company has determined their fair value as of January 31, 2012 and 2011 to be $0.8 million.
14.
LEASES
The Company leases office and warehouse space, as well as certain equipment and vehicles, under non-cancelable operating leases. Gross rent expense recognized in income (loss) from continuing operations was $17.2 million, $14.3 million and $14.1 million in the fiscal years ended January 31, 2012, 2011 and 2010, respectively. Sublease income was $0.4 million, $0.1 million and $0.1 million in the fiscal years ended January 31, 2012, 2011 and 2010, respectively.
The majority of the Company’s leases include options that allow it to renew or extend the lease term beyond the initial lease period, subject to terms and conditions agreed upon at the inception of the lease. Such terms and conditions include rental rates agreed upon at the inception of the lease that could represent below-or above-market rental rates later in the life of the lease, depending upon market conditions at the time of such renewal or extension.
In November 2011, Verint executed a lease agreement for a new facility in Alpharetta, Georgia. This new facility will be occupied in connection with the expiration of Verint's existing facility lease in Roswell, Georgia at the end of November 2012, and will also include the consolidation of the Atlanta, Georgia office of GMT, which Verint acquired in October 2011. The lease term extends through September 2026. The aggregate minimum lease commitment over the term of this new lease, excluding operating expenses, is approximately $36.1 million.
The Company has entered into various sublease agreements to lease excess space. As of January 31, 2012, the minimum annual rent obligations (excluding taxes, maintenance and other pass-throughs), sublease income to be received under non-cancelable subleases, and minimum net rentals of the Company's continuing operations are as follows for the fiscal years ending January 31:
(In thousands)
 
Minimum
Lease
Commitments
 
Noncancellable
Subleases
 
Minimum
Net
Rentals
2013
 
$
14,259

 
$
(550
)
 
$
13,709

2014
 
10,295

 
(545
)
 
9,750

2015
 
10,747

 
(521
)
 
10,226

2016
 
9,598

 
(536
)
 
9,062

2017
 
6,785

 
(553
)
 
6,232

2018 and thereafter
 
35,738

 
(46
)
 
35,692

 
 
$
87,422

 
$
(2,751
)
 
$
84,671


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


15.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities as of January 31, 2012 and 2011 consist of the following:
 
 
January 31,
 
 
2012
 
2011
 
 
(In thousands)
Liability for severance pay
 
$
3,027

 
$
3,279

Tax contingencies
 
23,693

 
20,464

Contingent consideration
 
28,494

 
1,492

Other long-term liabilities
 
4,952

 
7,267

 
 
$
60,166

 
$
32,502

Under Israeli law, the Company is obligated to make severance payments to employees of its Israeli subsidiaries on the basis of each individual’s current salary and length of employment. The Company’s liability for severance pay is calculated pursuant to Israel’s Severance Pay Law based on the most recent monthly salary of the employee multiplied by the number of years of employment, as of the balance sheet date.
16.
RESEARCH AND DEVELOPMENT ARRANGEMENTS
A portion of the Company’s research and development operations are located in Israel, where certain of the Company’s subsidiaries derive benefits from participation in programs sponsored by the Government of Israel for the support of research and development activities in Israel. Certain of the Company’s research and development activities include projects partially funded by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel (the “OCS”) under which the funding organization reimburses a portion of the Company’s research and development expenditures under approved project budgets. Although the Government of Israel does not own proprietary rights in the OCS-funded Products and there is no specific restriction by the OCS with regard to the export of the OCS-funded Products, under certain circumstances, there may be limitations on the ability to transfer technology, know-how and manufacture OCS-funded Products outside of Israel. Such limitations could result in the requirement to pay increased royalties or a redemption fee calculated according to the applicable regulations.
The Company’s gross research and development expenses for the fiscal years ended January 31, 2012, 2011 and 2010 were $115.7 million, $100.8 million and $86.7 million, respectively. Amounts reimbursable by the OCS and others for the fiscal years ended January 31, 2012, 2011 and 2010, were $4.7 million, $4.3 million and $2.9 million, respectively, which were recorded as a reduction to gross research and development expenses within “Research and development, net.”

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17.
STOCK-BASED COMPENSATION
Stock-based compensation expense associated with awards made by CTI and its subsidiaries is included in the Company’s consolidated statements of operations as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands)
Stock options:
 
 
 
 
 
 
Product costs
 
$
124

 
$
745

 
$
543

Service costs
 
292

 
2,543

 
3,099

Research and development, net
 
464

 
4,195

 
4,505

Selling, general and administrative
 
2,376

 
13,783

 
12,248

 
 
3,256

 
21,266

 
20,395

Restricted/Deferred stock awards:
 
 
 
 
 
 
Product costs
 
760

 
850

 
759

Service costs
 
2,132

 
2,069

 
1,444

Research and development, net
 
2,596

 
2,886

 
3,455

Selling, general and administrative
 
24,207

 
26,544

 
25,582

 
 
29,695

 
32,349

 
31,240

Total
 
$
32,951

 
$
53,615

 
$
51,635

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 fiscal years ended January 31, 2012, 2011 and 2010, such stock-based compensation expense was $4.1 million, $3.8 million and $6.0 million, respectively.
Consolidated stock-based compensation expense consists of expense recognized for awards related to separate CTI and Verint stock incentive plans. The following table presents the Company’s stock-based compensation expense included in the consolidated statements of operations based on the underlying subsidiary's plans for the fiscal years ended January 31, 2012, 2011 and 2010:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands)
Stock options:
 
 
 
 
 
 
CTI (1)
 
$
302

 
$
16

 
$
2,610

Verint (2)
 
3,256

 
21,237

 
20,320

Starhome
 
376

 
1,161

 
1,474

 
 
3,934

 
22,414

 
24,404

Restricted/Deferred stock awards:
 
 
 
 
 
 
CTI (1)
 
8,444

 
9,402

 
9,344

Verint (2)
 
24,655

 
25,582

 
23,917

 
 
33,099

 
34,984

 
33,261

 Total
 
$
37,033

 
$
57,398

 
$
57,665

(1)
Stock options to purchase CTI’s common stock, deferred stock unit awards and restricted stock unit awards were awarded to employees and directors of CTI’s subsidiaries, including employees of Verint, Comverse and Starhome. Accordingly, the related stock-based compensation expense has been recognized in the respective subsidiary statements of operations.

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(2)
Verint’s stock-based compensation expense consists of stock options to purchase Verint common stock, Verint phantom stock units, Verint stock bonus program and Verint restricted stock awards and restricted stock units.
Net excess tax benefits resulting from Verint's stock incentive plans were $0.7 million for the fiscal year ended January 31, 2012. No excess tax benefits were recognized by Verint for the fiscal years ended January 31, 2011 and 2010.
The following is a discussion of the material stock-based compensation plans of the Company.
CTI Plans
Overview of CTI’s Stock Incentive Plans
CTI granted stock options, deferred stock unit (“DSUs”) awards and restricted stock unit ("RSUs") awards under its various stock incentive plans during the fiscal years ended January 31, 2012, 2011 and 2010. The plans generally permit the issuance of incentive and non-qualified stock options, DSU awards, RSU awards, restricted stock and stock appreciation rights (“SARs”) to employees, officers and directors of CTI and its subsidiaries and terminate in ten years. Termination of a plan does not affect awards outstanding under such plan. These plans generally provide that unexercised options expire within 90 days of termination of service from the Company. Under CTI's 2011 Stock Incentive Compensation plan (or the 2011 plan) stock options may be granted with an exercise price of not less than the fair market value of the underlying shares. Under CTI's other plans (i) stock options which are designated as “incentive stock options” may be granted with an exercise price of not less than the fair market value of the underlying shares on the date of grant and are subject to certain limitations specified in Section 422 of the Internal Revenue Code and (ii) stock options that are not intended to qualify as incentive stock options may be granted at a price below fair market value. The stock options and the underlying shares are subject to adjustment in accordance with the terms of the plans in the event of stock dividends, recapitalizations and similar transactions. Stock options, DSUs and RSUs generally vest over a three or four-year period from the date of grant with the right to exercise up to a maximum term of ten years for all stock options granted. The stock-based compensation expense is recognized on a straight-line basis over the life of vesting period, reduced by estimated forfeitures. Upon exercise of stock options, issuance of restricted stock and issuance in settlement of DSU and RSU awards, or issuance of shares under the stock incentive plans, CTI issues authorized but unissued common stock.
1996 Stock Option Plan
CTI’s 1996 Stock Option Plan provided that stock options that qualify as incentive stock options under Section 422A of the Internal Revenue Code may be granted to key employees and non-qualifying options may be granted to other employees, independent contractors or directors of the Company. The plan authorized up to 3 million shares of CTI’s common stock to be granted. The plan provided that for qualified awards the exercise price was based on fair value of CTI’s common stock at the date of the grant, except for the individuals who hold 10% or more interest in CTI, for whom the exercise price should not be less than 110% of the share price. The plan also provided that for non-qualified awards, the exercise price was not to be lower than $0.10 per share. Due to the lapse of ten years from the date of approval, no awards may be granted by CTI under the plan.
Boston Technology, Inc. 1996 Stock Option Plan
The plan authorized the granting of awards in the form of stock options, both qualified and non-qualified, CTI’s common stock in the form of DSUs, restricted and unrestricted stock awards and SARs. The plan authorized up to 5.85 million shares or options to purchase shares of CTI’s common stock to be granted. The plan provided that for qualified stock option awards, the exercise price be based on the fair value of CTI’s common stock at the date of the grant, except for the individuals who hold more than a 10% interest in CTI, for whom the exercise price should not be less than 110% of the share price. Due to the lapse of ten years from the date of approval, no awards may be granted by CTI under the plan.
1997 and 1999 Stock Incentive Compensation Plans
CTI’s 1997 and 1999 Stock Incentive Compensation Plans, authorized the granting of awards in the form of stock options, both qualified and non-qualified, as well as CTI’s common stock in the form of DSU and restricted stock awards. Additionally, the plan provided that SARs may be issued to any officer or other key employee of the Company. The plans authorized up to 7.5 million and 7.0 million shares or options, respectively, to purchase shares of CTI’s common stock to be granted. The plans provided that for qualified awards the exercise price be based on the fair value of CTI’s common stock at the date of the grant, except for the individuals who hold 10% or more interest in CTI, for whom the exercise price should not be less than 110% of the share price. The plans also provided that the exercise price for the non-qualified awards in the form of stock options may be less than the fair market value of CTI’s common stock at the date of the grant as determined by the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


compensation committee. Due to the lapse of ten years from the dates of approval, no awards may be granted by CTI under these plans. 
2000, 2001, 2004 and 2005 Stock Incentive Compensation Plans
CTI’s 2000 and 2001 Stock Incentive Compensation Plan authorized, and the 2004 and 2005 Stock Incentive Compensation Plans authorize the granting of awards in the form of stock options, both qualified and non-qualified, as well as CTI’s common stock in the form of DSUs and restricted stock awards. Additionally, under the plans, SARs may be issued to any officer or other key employee of the Company. The 2000 and 2001 plans authorized up to 9.0 million and 9.7 million and the 2004 and 2005 plans authorize up to 2.5 million and 6.0 million shares or options to purchase shares of CTI’s common stock to be granted, respectively. The plans have a maximum term of ten years. The 2000 and 2001 plans terminated in September 2010 and June 2011, respectively, and, as such, no additional awards may be granted by CTI under such plans. The 2004 and 2005 plans are scheduled to terminate in June 2014 and 2015, respectively. The plans provide that for qualified awards the exercise price be based on the fair value of CTI’s common stock at the date of the grant, except for the individuals who hold a 10% or more interest in CTI, for whom the exercise price should not be less than 110% of the share price. The plans also provide that the exercise price for the non-qualified awards in the form of stock options may be less than the fair market value of CTI’s common stock at the date of the grant, as determined by the compensation committee of CTI’s Board of Directors, provided that the discount is expressly granted in lieu of a reasonable amount of salary or bonus and the discount shall not exceed 15% of the fair market value of CTI’s common stock at the date of the grant.
2011 Stock Inventive Compensation Plan
In September 2011, CTI's Board approved the 2011 plan and such plan was approved by CTI's shareholders at the annual shareholder meeting held on November 16, 2011.
The 2011 plan provides for the issuance of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation awards. A total of 22,000,000 shares of CTI's common stock are reserved for issuance under the 2011 plan. The plan is scheduled to terminate in September 2021. Options will be designated as either nonqualified stock options or incentive stock options. An option granted as an incentive stock option will, to the extent it fails to qualify as an incentive stock option, be treated as a nonqualified option. The exercise price of an option, either incentive stock option or nonqualified stock options may not be less than the fair market value of underlying shares on the date of grant, except for individuals who hold a 10% or more interest in CTI, for whom the exercise price may not be less than 110% of the share price. The term of each option may not exceed ten years (or, in the case of an incentive stock option granted to a 10% shareholder, five years). The maximum number of shares with respect to which any options may be granted to any grantee in any consecutive twelve (12) month period shall be 3,000,000 shares. In addition, the maximum number of shares with respect to which any stock appreciation rights may be granted to any grantee in any consecutive twelve (12) month period shall be 3,000,000 Shares. The maximum amount of compensation under an award that is intended to constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code (“Performance-Based Compensation Awards”) (other than options and stock appreciation rights) granted to any grantee in any consecutive twelve (12) month period shall be 1,500,000 shares and the maximum amount of Performance-Based Compensation Awards granted to any grantee in any consecutive twelve (12) month period shall be $10.0 million if such Performance-Based Compensation Awards are denominated in cash rather than shares.
CTI intends to grant future equity awards solely under the 2011 plan. As of January 31, 2012, 21,909,870 shares of CTI common stock were available for issuance under such plan.
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.
April 2006 Modification
During the restricted period, certain employees left the Company whose vested stock options lapsed as a result of the prohibition on exercise of the stock options during the plan-mandated post-employment exercise period. In order to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


accommodate these former employees, the Company extended their exercise rights with respect to their vested stock options until the later of (i) 90 days after the date of his or her termination of employment, or (ii) 30 days after the restricted period has expired. However, this accommodation did not extend any stock option’s term beyond its contractual termination date; typically ten years after the date of grant. The Company accounted for the additional time to exercise afforded to these employees as modifications of the original awards on the date the restricted period commenced. Certain individuals who received additional time to exercise were terminated employees at the time of the modification. Their modifications were accounted for using the liability method of accounting. This is referred to as the “April 2006 Modification.”
July 2006 Modification
Consistent with its commitment to employees and upon approval by its board of directors, CTI voluntarily compensated, in cash, current employees holding in-the-money options whose original 10-year terms expired during the restricted period, resulting in a modification charge. For the fiscal years ended January 31, 2012, 2011 and 2010, changes in fair value of these awards increased (decreased) the Company’s liability and compensation expense by $1.0 million, $(0.5) million and $0.2 million, respectively. CTI made de minimus cash payments for expired stock options during the fiscal years ended January 31, 2012, 2011 and 2010, respectively. This is referred to as the “July 2006 Modification.” 
Liability Awards
Primarily as a result of the aforementioned decision made during the restricted period to cash settle expired CTI options held by current employees and the modification of certain CTI awards held by employees terminated before the April 2006 Modification, but who could still exercise their awards as of the April 2006 Modification, such awards were accounted for under the liability method of accounting. Under the liability method, CTI measures the award at each balance sheet date based on its estimated fair value. Compensation expense for each period thereafter is based on the change in fair value of the award. As of January 31, 2012, the Company did not have a liability related to these awards because all remaining obligations expired during the fourth quarter of the fiscal year ended January 31, 2012. As of January 31, 2011, the Company had a liability related to these awards of $0.3 million. Related stock-based compensation expense for the fiscal years ended January 31, 2012, 2011 and 2010, includes (credits) expense of $1.0 million, $(0.5) million and $0.2 million, respectively.
Restricted Awards and Stock Options
CTI grants restricted stock, DSU awards and RSU awards subject to vesting provisions (collectively, “Restricted Awards”) to certain key employees and directors. For the fiscal years ended January 31, 2012, 2011 and 2010, CTI granted Restricted Awards valued at $10.6 million, $14.4 million and $7.8 million, respectively, based on the fair market value of CTI’s common stock on the date of grant. CTI’s stock-based compensation associated with Restricted Awards, net of credits for forfeitures, for the fiscal years ended January 31, 2012, 2011 and 2010 was $8.4 million, $9.4 million and $9.3 million, respectively, and was primarily included in “Selling, general and administrative” expenses in the consolidated statements of operations.
In addition to the Restricted Awards above, CTI granted DSU awards covering an aggregate 246,200 shares of common stock with vesting and delivery conditioned upon the achievement of certain performance criteria (“Performance Awards”) in the fiscal year ended January 31, 2010. These Performance Awards were valued at $1.7 million based on the fair market value of CTI’s common stock on the date of grant. However, CTI later determined that the performance criteria were unlikely to be achieved, and no stock-based compensation expense was recorded for these awards. During the fiscal quarter ended April 30, 2010, it was determined that the performance criteria were not achieved and, accordingly, the Performance Awards were forfeited.

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As of January 31, 2012, 2,705,842 stock options to purchase CTI’s common stock and 1,917,010 restricted awards were outstanding and 24,207,542 shares were available for future grant under CTI’s Stock Incentive Compensation Plans. The following table summarizes exercisable options and vested Restricted Awards:
 
 
Stock Options Exercisable
 
Restricted Awards Vested
 
 
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Shares/
Units
 
Weighted
Average
Grant Date
Fair Value
January 31, 2012
 
2,573,508

 
$
18.37

 
3.2

 
1,240,481

 
$
8.07

January 31, 2011
 
10,738,923

 
$
17.42

 
3.2

 
740,381

 
$
11.83

January 31, 2010
 
12,004,593

 
$
18.25

 
3.7

 
594,361

 
$
14.77


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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following table presents the combined activity of all the CTI stock incentive plans for the fiscal years ended January 31, 2012, 2011 and 2010:
 
 
 
 
Outstanding Options
 
Nonvested Restricted/Deferred
Stock
 
 
Shares
Available for
Grant
 
Shares (1)
 
Weighted
Average
Exercise Price
 
Shares
 
Weighted
Average Grant
Date Fair Value
Balance, January 31, 2009
 
9,961,202

 
12,898,673

 
$
18.12

 
1,364,447

 
$
15.81

Plan shares expired
 
(1,828,505
)
 
—

 
—

 
—

 
—

Options granted
 
(903,300
)
 
903,300

 
7.12

 
—

 
—

Options expired
 
—

 
(864,541
)
 
16.06

 
—

 
—

Options forfeited
 
85,339

 
(85,339
)
 
13.07

 
—

 
—

Deferred shares granted
 
(1,366,200
)
 
—

 
—

 
1,366,200

 
6.92

Restricted/deferred shares vested (2)
 
—

 
—

 
—

 
(594,361
)
 
14.77

Restricted/deferred shares forfeited
 
301,829

 
—

 
—

 
(301,829
)
 
12.83

Balance, January 31, 2010
 
6,250,365

 
12,852,093

 
17.52

 
1,834,457

 
10.01

Plan shares expired
 
(1,300,937
)
 
—

 
—

 
—

 
—

Options granted
 
—

 
—

 
—

 
—

 
—

Options expired
 
—

 
(1,378,687
)
 
22.24

 
—

 
—

Options cancelled (3)
 
143,500

 
(143,500
)
 
22.11

 
—

 
—

Options forfeited
 
191,915

 
(191,915
)
 
7.16

 
—

 
—

Deferred shares granted
 
(1,700,771
)
 
—

 
—

 
1,700,771

 
8.47

Restricted/deferred shares vested (2)
 
—

 
—

 
—

 
(740,381
)
 
11.83

Restricted/deferred shares forfeited
 
642,030

 
—

 
—

 
(642,030
)
 
8.46

Balance, January 31, 2011
 
4,226,102

 
11,137,991

 
17.05

 
2,152,817

 
8.63

2011 stock incentive compensation plan
 
22,000,000

 
—

 
—

 
—

 
—

Plan shares expired
 
(2,239,733
)
 
—

 
—

 
—

 
—

Options granted
 
—

 
—

 
—

 
—

 
—

Options expired
 
1,121,440

 
(7,950,442
)
 
17.46

 
—

 
—

Options cancelled
 
—

 
—

 
—

 
—

 
—

Options forfeited
 
104,407

 
(104,407
)
 
8.00

 
—

 
—

Options exercised
 
—

 
(377,300
)
 
5.60

 
—

 
—

Deferred shares granted
 
(1,450,246
)
 
—

 
—

 
1,450,246

 
7.32

Restricted/deferred shares vested (2)
 
—

 
—

 
—

 
(1,240,481
)
 
8.07

Restricted/deferred shares forfeited
 
445,572

 
—

 
—

 
(445,572
)
 
8.01

Balance, January 31, 2012 (4)(5)
 
24,207,542

 
2,705,842

 
$
17.81

 
1,917,010

 
$
7.54

(1)
The fair value of vested stock options was $0.4 million, $0.6 million and $2.3 million during the fiscal years ended January 31, 2012, 2011 and 2010, respectively.
(2)
The total fair value of vested Restricted Awards during the fiscal years ended January 31, 2012, 2011 and 2010 was $10.0 million, $8.8 million and $8.8 million, respectively.
(3)
As part of settlement agreements of the consolidated shareholder derivative action and another separate litigation matter, 143,500 vested stock options held by former directors and a former employee were canceled in June 2010.
(4)
The outstanding stock options as of January 31, 2012 include 135,334 nonvested stock options with a weighted-average grant date fair value of $2.34, an expected term of 4 years and a total fair value of $0.3 million. The unrecognized compensation expense related to the remaining nonvested stock options was $0.1 million which is expected to be recognized over a weighted-average period of 0.33 years. The cash received from the exercise of CTI stock options was $2.1 million during the fiscal year ended January 31, 2012.

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(5)
As of January 31, 2012, the unrecognized compensation expense related to nonvested Restricted Awards was $9.6 million which is expected to be recognized over a weighted-average period of 1.75 years.
The following table summarizes information about CTI’s stock options for the fiscal year ended January 31, 2012:
 
 
Fiscal Year Ended January 31, 2012
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Shares
Outstanding
 
Weighted
Average
Remaining
Contractual
Life
 
Weighted
Average
Exercise
Price
 
Shares
Exercisable
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life
$00.01 - $05.60
 
164,163

 
1.88

 
$
5.60

 
164,163

 
$
5.60

 
1.88

$05.61 - $10.52
 
530,491

 
5.74

 
$
7.30

 
398,157

 
$
7.39

 
5.21

$10.53 - $20.62
 
526,614

 
1.92

 
$
16.70

 
526,614

 
$
16.70

 
1.92

$20.63 - $23.69
 
674,239

 
2.86

 
$
22.40

 
674,239

 
$
22.40

 
2.86

$23.70 - $46.50
 
810,335

 
3.69

 
$
24.08

 
810,335

 
$
24.08

 
3.69

 
 
2,705,842

 
 
 
 
 
2,573,508

 
 
 
 
As of January 31, 2012, the aggregate intrinsic value was $0.1 million for both outstanding and exercisable stock options.
Fair Value Assumptions
CTI estimated the fair value of stock options on the date of grant or modification utilizing the Black-Scholes option valuation model. Assumptions for all grants and significant modifications are detailed below.
The fair value assumptions for the July 2006 Modification for the period July 2006 through January 31, 2012 were as follows:
 
 
Minimum
 
Maximum
Risk-Free Rate
 
0.15
%
 
5.18
%
Volatility
 
25.64
%
 
67.3
%
Expected Term (years)
 
0.03

 
4.39

Market Value
 
$
6.32

 
$
22.68

The fair value assumptions for stock options granted during the fiscal year ended January 31, 2010 which had a weighted-average grant date fair value of $2.34 were as follows:
Risk-Free Rate
 
1.98
%
Volatility
 
38.77
%
Expected Term (years)
 
3.99

Market Value
 
$
7.12

During the fiscal year ended January 31, 2012, CTI granted DSU and RSU awards covering an aggregate of 1,450,246 shares of CTI's common stock to directors and certain executive officers and key employees.
CTI based the risk-free interest rate on the implied yields on U.S. Treasury zero-coupon issues with an equivalent remaining term at the time of grant. 
The expected term in years represents the period of time that the awards granted are expected to be outstanding based on historical exercise patterns. The assumption for dividend yield is zero because CTI has not historically paid dividends nor does it expect to do so in the foreseeable future.

104
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Verint Plans
Overview of Verint’s Stock Incentive Plans
Verint, a consolidated subsidiary of CTI, whose common stock is publicly-traded, granted stock options and restricted stock under its various stock incentive plans. On August 4, 2011, Verint assumed a stock plan in connection with the acquisition of Vovici, which plan will continue in effect through July 2020.
The plans generally permit the issuance of awards of deferred stock, Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”), incentive and non-qualified stock options, performance awards, performance compensation awards or other awards and SARs to employees and directors of Verint and its subsidiaries and affiliates. Awards granted under the plans are generally subject to multi-year vesting periods and generally expire 10 years or less after the date of grant. Verint recognizes compensation expense for awards on a straight-line basis over the life of the vesting period, reduced by estimated forfeitures. Upon exercise of stock options, issuance of restricted stock, or issuance of shares under the plans, Verint will generally issue new shares of Verint Systems’ common stock, but occasionally may issue treasury shares.
As of January 31, 2012, 2,564,312 stock options to purchase shares of Verint Systems’ common stock were outstanding and 2,110,090 shares were available for future grants under Verint’s stock incentive plans.
Restricted Awards
Verint grants stock awards under its plans in the form of RSAs and RSUs. The fair value of these awards is equivalent to the market values of Verint Systems’ common stock on the grant date. The principal difference between these instruments is that RSUs are not shares of Verint Systems’ common stock and do not have any of the rights or privileges thereof, including voting or dividend rights. On the applicable vesting date, the holder of an RSU becomes entitled to a share of Verint Systems’ common stock. Both RSAs and RSUs are subject to certain restrictions and forfeiture provisions prior to vesting.
The unrecognized compensation expense related to unvested RSUs expected to vest as of January 31, 2012 was approximately $20.2 million with remaining weighted average vesting periods of approximately 1.3 years, over which such expense is expected to be recognized. The total fair value of restricted stock awards and units vested during the fiscal years ended January 31, 2012, 2011 and 2010 is $21.0 million, $43.5 million and $3.5 million, respectively.
The following table summarizes Verint’s exercisable options and vested restricted awards:
 
 
Stock Options Exercisable
 
Restricted Awards Vested
 
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Shares/Units
 
Weighted
Average Grant
Date
Fair Value
January 31, 2012
 
1,082,660

 
$
31.03

 
2.6

 
1,336,221

 
$
15.72

January 31, 2011
 
1,764,380

 
27.33

 
2.7

 
2,502,960

 
17.39

January 31, 2010
 
4,498,900

 
23.24

 
2.2

 
115,560

 
29.93


105
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following table presents the combined activity of certain of the Verint stock incentive plans for the fiscal years ended January 31, 2012, 2011 and 2010:
 
 
 
 
Outstanding Options
 
Nonvested Restricted Awards    
 
 
Shares
Available
for Grant
 
Shares (5)
 
Weighted
Average
Exercise
Price
 
Shares
 
Weighted
Average Grant
Date Fair Value
Balance, January 31, 2009
 
4,372,927

 
5,225,246

 
$
22.36

 
1,830,966

 
$
24.48

Options expired
 
464,025

 
(464,025
)
 
14.23

 
—

 
—

Options forfeited
 
30,102

 
(30,102
)
 
21.69

 
—

 
—

Restricted awards granted
 
(492,167
)
 
—

 
—

 
492,167

 
4.43

Restricted awards vested (1)
 
—

 
—

 
—

 
(115,560
)
 
29.93

Restricted awards forfeited
 
86,663

 
—

 
—

 
(86,663
)
 
24.03

Plan shares expired
 
(3,985,663
)
 
—

 
—

 
—

 
—

Balance, January 31, 2010
 
475,887

 
4,731,119

 
23.16

 
2,120,910

 
19.57

Additional shares authorized
 
4,000,000

 
—

 
—

 
—

 
—

Options expired
 
796,417

 
(796,417
)
 
25.56

 
—

 
—

Options forfeited
 
3,268

 
(3,268
)
 
23.94

 
—

 
—

Options exercised
 
—

 
(2,164,503
)
 
18.88

 
—

 
—

Restricted awards granted
 
(2,393,828
)
 
—

 
—

 
2,393,828

 
15.90

Restricted awards vested (1)
 
—

 
—

 
—

 
(2,502,960
)
 
17.39

Restricted awards forfeited
 
75,505

 
—

 
—

 
(75,505
)
 
13.23

Plan shares expired
 
(309,798
)
 
—

 
—

 
—

 
—

Balance, January 31, 2011
 
2,647,451

 
1,766,931

 
27.33

 
1,936,273

 
18.09

Additional shares authorized
 
317,350

 
—

 
—

 
—

 
—

Options granted (2)
 
(42,155
)
 
42,155

 
9.28

 
—

 
—

Options expired
 
72,074

 
(72,074
)
 
28.07

 
—

 
—

Options forfeited
 
—

 
—

 
—

 
—

 
—

Options exercised
 
—

 
(622,669
)
 
20.51

 
—

 
—

Restricted awards granted
 
(901,885
)
 
—

 
—

 
901,885

 
34.84

Restricted awards vested (1)
 
—

 
—

 
—

 
(1,336,221
)
 
15.72

Restricted awards forfeited
 
51,968

 
—

 
—

 
(51,968
)
 
28.85

Plan shares expired
 
(34,713
)
 
—

 
—

 
—

 
—

Balance, January 31, 2012 (3)(4)
 
2,110,090

 
1,114,343

 
$
30.40

 
1,449,969

 
$
30.25

(1)
The total fair value of restricted shares vested during the fiscal years ended January 31, 2012, 2011 and 2010 was $21.0 million, $43.5 million and $3.5 million, respectively.
(2)
Consists of options to acquire shares of Verint Systems' common stock issued in exchange of certain unvested Vovici stock options in connection with the Vovici acquisition.
(3)
The outstanding stock options to purchase Verint Systems’ common stock as of January 31, 2012 include 31,683 nonvested stock options with a weighted-average grant date fair value of $23.05, an expected term of 5.43 years and a total fair value of $0.7 million. The total unrecognized compensation cost related to nonvested options was $0.6 million and is expected to be recognized over a weighted-average period of 2.8 years.
(4)
As of January 31, 2012, the unrecognized compensation expense related to nonvested RSUs was $20.2 million and is expected to be recognized over a weighted-average period of 1.3 years.
(5)
The total fair value of vested stock options to purchase Verint Systems’ common stock was $20.4 million, $30.2 million and $69.6 million during the fiscal years ended January 31, 2012, 2011 and 2010, respectively. The intrinsic value of Verint stock options exercised was $8.0 million and the cash received from the exercise of Verint stock options was $12.5 million during the fiscal year ended January 31, 2012.

106
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following table summarizes information about Verint’s stock options as of January 31, 2012:
 
 
Fiscal Year Ended January 31, 2012
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Shares
Outstanding
 
Weighted
Average
Remaining
Contractual Life
(Years)
 
Weighted
Average
Exercise
Price
 
Shares 
Exercisable
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life (Years)
$4.93 – $17.00
 
141,302

 
2.85

 
$
13.87

 
110,871

 
$
15.28

 
1.15

$17.98 – $23.00
 
138,242

 
1.85

 
22.62

 
136,990

 
22.65

 
1.81

$28.41 – $28.41
 
42,360

 
2.22

 
28.41

 
42,360

 
28.41

 
2.22

$28.60 – $28.60
 
8,061

 
0.08

 
28.60

 
8,061

 
28.60

 
0.08

$29.27 – $29.27
 
7,500

 
0.23

 
29.27

 
7,500

 
29.27

 
0.23

$31.78 – $31.78
 
18,000

 
2.43

 
31.78

 
18,000

 
31.78

 
3.43

$32.16 – $32.16
 
15,000

 
3.27

 
32.16

 
15,000

 
32.16

 
2.69

$34.40 – $34.40
 
137,000

 
3.95

 
34.40

 
137,000

 
34.40

 
4.95

$35.11 – $35.11
 
582,878

 
2.82

 
35.11

 
582,878

 
35.11

 
2.82

$37.99 – $37.99
 
24,000

 
3.64

 
37.99

 
24,000

 
37.99

 
3.64

 
 
1,114,343

 
 
 
 
 
1,082,660

 
 
 
 
As of January 31, 2012, the aggregate intrinsic value was $2.2 million for both outstanding and exercisable stock options.
Verint generally did not grant stock options during the fiscal years ended January 31, 2012, 2011 and 2010. However, in connection with Verint's acquisition of Vovici on August 4, 2011, stock options to purchase Vovici common stock were converted into stock options to purchase approximately 42,000 shares of Verint Systems' common stock.
Verint Phantom Stock Units
During the fiscal year ended January 31, 2007, Verint began awarding phantom stock units to non-officer employees that settle, or are expected to settle, with cash payments upon vesting, pursuant to the terms of a form of a phantom stock award agreement approved by the Verint board of directors or under Verint's 2010 Plan. Phantom stock units provide for the payment of a cash bonus equivalent to the value of Verint common stock as of the vesting date of the award. Phantom stock units generally have a multi-year vesting and are generally subject to the same vesting conditions as other Verint equity awards granted on the same date. Verint recognizes compensation expense for phantom stock units on a straight-line basis, reduced by estimated forfeitures. The phantom stock units are being accounted for as liabilities and as such their value tracks Verint’s stock price and is subject to market volatility.
The total accrued liability for Verint phantom stock units was $1.9 million and $9.8 million as of January 31, 2012 and 2011, respectively. Total cash payments made upon vesting of Verint phantom stock units were $10.3 million, $22.9 million and $2.5 million for the fiscal years ended January 31, 2012, 2011 and 2010, respectively. 
The following table summarizes Verint phantom stock unit activity for the fiscal years ended January 31, 2012, 2011 and 2010:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands)
Beginning balance, in units
 
403

 
1,106

 
1,239

Granted
 
10

 
196

 
421

Released
 
(298
)
 
(865
)
 
(482
)
Forfeited
 
(25
)
 
(34
)
 
(72
)
Ending balance, in units
 
90

 
403

 
1,106

The phantom stock units granted during the fiscal years ended January 31, 2012, 2011 and 2010 primarily vest over two-year and three-year periods, subject to applicable performance conditions.

107
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The unrecognized compensation expense related to 90,000 unvested phantom stock units expected to vest as of January 31, 2012 was approximately $0.5 million, based on Verint’s stock price of $28.28 as of January 31, 2012 with a remaining weighted-average vesting period of approximately 0.7 years over which such expense is expected to be recognized.
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 bonus for the year or for the fourth quarter (depending on the employee's bonus plan) in the form of fully vested shares of Verint Systems' common stock. As of the date hereof, executive officers of Verint are 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. 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. All shares of Verint Systems' common stock awarded pursuant to this program will be issued under one of Verint's stockholder-approved equity incentive plans.
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%. Shares of Verint Systems' common stock earned under this program for the fiscal year ended January 31, 2012 are expected to be issued during the first half of the fiscal year ending January 31, 2013. Verint recognized $3.2 million of compensation expense for the Stock Bonus Program for the fiscal year ended January 31, 2012.
18.
DISCONTINUED OPERATIONS
Comverse
On October 31, 2012, CTI completed its previously announced spin-off of Comverse as an independent, publicly-traded company, accomplished by means of a pro rata distribution of 100% of Comverse's outstanding common shares to CTI's shareholders (the “Share Distribution”). Following the Share Distribution, CTI no longer holds any of Comverse's outstanding capital stock.
In order to govern certain ongoing relationships between CTI and Comverse after the Share Distribution and to provide mechanisms for an orderly transition, CTI and Comverse entered into agreements relating to the provision of certain services and setting forth certain rights and obligations between them following the Share Distribution. CTI and Comverse agreed, among other things, to indemnify each other against certain liabilities arising from their respective businesses and the services that will be provided under such agreements.
As a result of the Share Distribution, the results of operations of Comverse are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in the Company's consolidated statements of operations for all periods presented. The assets and liabilities of Comverse are included in discontinued operations as separate components to the Company's consolidated balance sheets as of all dates presented. For the purposes of the consolidated statement of cash flows, the Company has presented advances to Comverse, Inc. under a promissory note amounting to $1.5 million and $7.0 million for the years ended January 31, 2012 and 2011, respectively, as a component of cash flows from investing activities from continuing operations and as a component of cash flows from financing activities from discontinued operations.
Starhome
On August 1, 2012, CTI, certain other Starhome shareholders and Starhome entered into a Share Purchase Agreement (the “Starhome Share Purchase Agreement”) with Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, “Fortissimo”) pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome (the “Starhome Disposition”). On September 19, 2012, CTI, contributed to Comverse, its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Starhome Disposition was completed on October 19, 2012.
Under the terms of the Starhome Share Purchase Agreement, Starhome's shareholders received aggregate cash proceeds of approximately $81.3 million, subject to adjustment for fees, transaction expenses and certain taxes. Of this amount, $10.5 million is held in escrow to cover potential post-closing indemnification claims, with $5.5 million being released after 18

108
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


months (less any claims made on or prior to such date) and the remainder released after 24 months, in each case, less any claims made on or prior to such dates. Comverse received aggregate net cash consideration (including amounts deposited in escrow at closing) of approximately $37.2 million, after payments that CTI agreed to make to certain other Starhome shareholders of $4.5 million.
CTI and the other Starhome shareholders have made customary representations and warranties and covenants in the Starhome Share Purchase Agreement, including an agreement not to solicit Starhome employees or interfere with Starhome's clients, customers, suppliers, licensors or other business relationships for a period of four years following the closing. CTI has also agreed for a period of four years following the closing (October 19, 2012) that it will not, and will cause its affiliates (other than Verint) not to, create, design, develop or offer for sale any product or service which directly competes with any products or services offered by Starhome, subject to certain limited exceptions.
Sale of Ulticom
On December 3, 2010 (the “Effective Date”), Ulticom, Inc. completed a merger (the “Merger”) with an affiliate of Platinum Equity Advisors, LLC (“Platinum Equity”), pursuant to the terms and conditions of a Merger Agreement, dated October 12, 2010 (the “Merger Agreement”), with Utah Intermediate Holding Corporation (“UIHC”), a Delaware corporation, and Utah Merger Corporation (“Merger Sub”), a New Jersey corporation and wholly-owned subsidiary of UIHC. As a result of the Merger, Ulticom, Inc. became a wholly-owned subsidiary of UIHC.
Immediately prior to the effective time of the Merger, Ulticom, Inc. paid a special cash dividend in the aggregate amount of $64.1 million (the “Dividend”), amounting to $5.74 per share, to its shareholders of record on November 24, 2010. CTI received $42.4 million in respect of the Dividend.
Pursuant to the terms of the Merger, Ulticom, Inc.'s shareholders (other than CTI) received $2.33 in cash, without interest, per share of common stock of Ulticom, Inc. after payment of the Dividend.
Shares of Ulticom, Inc. common stock held by CTI were purchased by an affiliate of Platinum Equity, pursuant to the terms and conditions of a Share Purchase Agreement, dated October 12, 2010, following payment of the Dividend and immediately prior to the consummation of the Merger. In consideration thereof, CTI received aggregate consideration of up to $17.2 million, amounting up to $2.33 per share, consisting of (i) approximately $13.2 million in cash and (ii) the issuance by Merger Sub to CTI of two non-interest bearing promissory notes originally in the aggregate principal amount of $4.0 million. The first promissory note, originally in the amount of $1.4 million, was subsequently reduced to $0.8 million in connection with the purchase of certain products from Ulticom and was paid by Ulticom in February 2012. The second promissory note, in the amount of $2.6 million, is payable to CTI following the determination of Ulticom's revenue for a 24-month period beginning on January 1, 2011 and is subject to reduction by 40% of the difference between $75 million and the revenue generated by Ulticom during such period. This note has no carrying amount as of January 31, 2012 and 2011.
Prior to the sale, Ulticom, Inc. was a majority-owned subsidiary of CTI, and Ulticom constituted one of the Company's reportable segments. Ulticom, Inc. was not previously classified as held-for-sale, because the sale was not probable until December 2, 2010, the date when the noncontrolling shareholders approved the sale.
The results of operations of Ulticom, including the gain on the sale of Ulticom of $2.9 million, net of tax, are reflected in discontinued operations, less applicable income taxes, as a separate component of net loss in the Company's consolidated statements of operations for the fiscal years ended January 31, 2011 and 2010.

109
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Comverse's, Starhome's and Ulticom's results of operations included in discontinued operations are as follows:
 

Fiscal Years Ended January 31,
 

2012

2011

2010
 



(In thousands)
Total revenue

$
811,749


$
925,005


$
873,181

 
 
 
 
 
 
 
Income (loss) before income tax provision

22,749


(54,977
)

(200,536
)
Gain on sale of discontinued operations, net of tax

—


2,927


—

Income tax provision

(23,659
)
 
(38,978
)
 
(70,258
)
Total loss from discontinued operations, net of tax

$
(910
)

$
(91,028
)

$
(270,794
)
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax






Attributable to Comverse Technology, Inc.

(3,484
)

(87,724
)

(270,408
)
Attributable to noncontrolling interest

2,574


(3,304
)

(386
)
Total

$
(910
)

$
(91,028
)

$
(270,794
)

110
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Comverse's and Starhome's assets and liabilities included in assets and liabilities of discontinued operations were as follows:
 
 
January 31,

2012
 
2011
 
 
(in thousands)
ASSETS OF DISCONTINUED OPERATIONS
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
193,192

 
$
213,038

 
Restricted cash and bank time deposits
28,893

 
26,111

 
Accounts receivable, net of allowance of $2,929 and $5,395 respectively
135,835

 
167,971

 
Inventories, net
29,991

 
49,625

 
Deferred cost of revenue
35,252

 
45,201

 
Deferred income taxes
10,108

 
24,884

 
Prepaid expenses and other current assets
56,157

 
60,613

Total current assets
489,428

 
587,443

Property and equipment, net
45,860

 
41,847

Goodwill
163,076

 
163,253

Intangible assets, net
22,034

 
39,389

Deferred cost of revenue
108,107

 
136,988

Deferred income taxes
10,153

 
14,066

Other assets
65,592

 
79,163

Total assets
$
904,250

 
$
1,062,149

LIABILITIES OF DISCONTINUED OPERATIONS
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued expenses
$
196,879

 
$
232,938

 
Deferred revenue
365,803

 
417,408

 
Deferred income taxes
8,742

 
13,282

 
Bank loans
—

 
6,000

 
Income taxes payable
2,302

 
5,329

 
Other current liabilities
853

 
1,080

Total current liabilities
574,579

 
676,037

Deferred revenue
204,681

 
230,510

Deferred income taxes
45,205

 
34,482

Note payable to CTI
8,536

 
7,019

Other long-term liabilities
154,025

 
196,827

Total liabilities
$
987,026

 
$
1,144,875

19.
LOSS PER SHARE ATTRIBUTABLE TO COMVERSE TECHNOLOGY, INC.’S SHAREHOLDERS
Basic loss per share attributable to Comverse Technology, Inc.’s shareholders is computed using the weighted average number of shares of common stock outstanding. For purposes of computing diluted loss per share attributable to Comverse Technology, Inc.’s shareholders, shares issuable upon exercise of stock options and deliverable in settlement of unvested DSU and RSU awards are included in the weighted average number of shares of common stock outstanding, except when the effect would be antidilutive. The dilutive impact of subsidiary stock-based awards on Comverse Technology, Inc.’s reported net loss is recorded as an adjustment to net loss for the fiscal years ended January 31, 2012, 2011 and 2010, respectively, for the purposes of calculating loss per share.

111
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The calculation of loss per share attributable to Comverse Technology, Inc.’s shareholders for the fiscal years ended January 31, 2012, 2011 and 2010 was as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands, except per share data)
Numerator:
 
 
 
 
 
 
Net (loss) income from continuing operations attributable to
       Comverse Technology, Inc.-basic
 
$
(55,242
)
 
$
(45,382
)
 
$
3,004

Adjustment for subsidiary stock options
 
(229
)
 
(254
)
 
(176
)
Net (loss) income from continuing operations attributable to
       Comverse Technology, Inc.-diluted
 
$
(55,471
)
 
$
(45,636
)
 
$
2,828

Net loss from discontinued operations, attributable to
       Comverse Technology, Inc.-basic and diluted
 
$
(3,484
)
 
$
(87,724
)
 
$
(270,408
)
Denominator:
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
208,302

 
205,163

 
204,513

Convertible debt obligations
 
—

 
—

 
117

Stock options
 
—

 
—

 
256

Restricted awards
 
—

 
—

 
355

Diluted weighted average common shares outstanding
 
208,302

 
205,163

 
205,241

(Loss) earning per share
 
 
 
 
 
 
Basic
 
 
 
 
 
 
(Loss) earnings per share from continuing operations attributable to
       Comverse Technology, Inc.
 
$
(0.27
)
 
$
(0.22
)
 
$
0.01

Loss per share from discontinued operations attributable to
       Comverse Technology, Inc.
 
(0.01
)
 
(0.43
)
 
(1.32
)
Basic loss per share
 
$
(0.28
)
 
$
(0.65
)
 
$
(1.31
)
Diluted
 
 
 
 
 
 
(Loss) earnings per share from continuing operations attributable to
       Comverse Technology, Inc.
 
$
(0.27
)
 
$
(0.22
)
 
$
0.01

Loss per share from discontinued operations attributable to
       Comverse Technology, Inc.
 
(0.01
)
 
(0.43
)
 
(1.32
)
Diluted loss per share
 
$
(0.28
)
 
$
(0.65
)
 
$
(1.31
)
As a result of the Company’s net loss attributable to Comverse Technology, Inc. during the fiscal years ended January 31, 2012, and 2011, the diluted loss per share attributable to Comverse Technology, Inc.’s shareholders computation excludes 0.8 million and 0.9 million of contingently issuable shares, respectively, because the effect would be antidilutive.
The FASB’s guidance requires contingently convertible instruments be included in diluted earnings per share, if dilutive, regardless of whether a market price trigger has been met. The Convertible Debt Obligations meet the definition of a contingently convertible instrument. The Convertible Debt Obligations were excluded from the computation of diluted earnings per share attributable to Comverse Technology, Inc.’s shareholders because the effect would be antidilutive for the fiscal years ended January 31, 2012 and 2011.

112
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


20.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, for the fiscal years ended January 31, 2012, 2011 and 2010 is comprised of the following:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands)
Realized gains on investments, net
 
$
24,414

 
$
23,810

 
$
10,775

Impairment of auction rate securities
 
—

 
(407
)
 
(6,914
)
Foreign currency transaction losses, net
 
1,382

 
857

 
(1,898
)
Realized and unrealized losses on derivatives, net
 
(896
)
 
(2,761
)
 
(1,118
)
Realized and unrealized losses on interest rate swap, net
 
—

 
(3,102
)
 
(13,591
)
Impairment of UBS put
 
—

 
(6,696
)
 
(6,889
)
Proceeds from settlement of CTI claims
 
4,750

 
—

 
—

Impairment of investment
 
—

 
(2,110
)
 
(242
)
Dividend income
 
94

 
158

 
1,635

Other, net
 
(513
)
 
(113
)
 
(5,200
)
 
 
$
29,231

 
$
9,636

 
$
(23,442
)
21.
INCOME TAXES
The components of United States and foreign income (loss) from continuing operations before income taxes are as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
United States
 
$
(97,246
)
 
$
(48,954
)
 
$
(107,109
)
Foreign
 
86,429

 
24,779

 
71,347

Loss before income taxes
 
$
(10,817
)
 
$
(24,175
)
 
$
(35,762
)
The provision (benefit) for income taxes from continuing operations consists of the following:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Current income tax (benefit) provision:
 
 
 
 
 
 
U.S. Federal
 
$
(30,056
)
 
$
(46,164
)
 
$
(1,087
)
U.S. State
 
1,751

 
(75
)
 
524

Foreign
 
14,635

 
9,868

 
7,590

Total current income tax (benefit) provision
 
$
(13,670
)
 
$
(36,371
)
 
$
7,027

Deferred income tax provision (benefit):
 
 
 
 
 
 
U.S. Federal, net of federal benefit of state
 
$
36,911

 
$
41,970

 
$
(52,728
)
U.S. State
 
781

 
20

 
363

Foreign
 
(4,730
)
 
(1,536
)
 
(1,597
)
Total deferred income tax provision (benefit)
 
$
32,962

 
$
40,454

 
$
(53,962
)
Total income tax provision (benefit)
 
$
19,292

 
$
4,083

 
$
(46,935
)

113
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The reconciliation of the U.S. federal statutory income tax rate to the effective tax rate on loss before income tax provision and equity in (losses) earnings of consolidated affiliate from continuing operations is as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
U.S. federal statutory income tax rate
 
35.0
 %
 
35.0
 %
 
35.0
%
Income tax provision (benefit) at the U.S. statutory rate
 
$
(3,786
)
 
$
(8,461
)
 
$
(12,517
)
Valuation allowance
 
14,905

 
5,383

 
(14,896
)
Foreign rate differential
 
(9,436
)
 
(2,204
)
 
(16,865
)
U.S. tax effects of foreign operations
 
8,262

 
13,774

 
4,750

Tax contingencies
 
1,487

 
(5,332
)
 
849

Stock based and other compensation
 
841

 
3,091

 
4,760

Non-deductible expenses
 
468

 
1,762

 
(706
)
Foreign exchange
 
(5
)
 
—

 
(1,702
)
Change in tax laws
 
(486
)
 
(516
)
 
1,227

Basis difference in investment in affiliates
 
10,079

 
13,564

 
—

State tax provision
 
4,126

 
5,160

 
451

Tax credits
 
(1,474
)
 
(1,880
)
 
—

Return to provision and other adjustments
 
1,360

 
—

 
—

Gain on sale of subsidiary stock
 
—

 
1,276

 
—

Tax Incentive
 
(8,846
)
 
(2,114
)
 
—

Discontinued operations/APIC/OCI allocation
 
—

 
(20,299
)
 
(12,740
)
Transaction cost
 
2,025

 
—

 
—

Other, net
 
(228
)
 
879

 
454

Total income tax provision (benefit)
 
$
19,292

 
$
4,083

 
$
(46,935
)
Effective Income Tax Rate
 
(178.3
)%
 
(16.9
)%
 
131.2
%
The significant differences that impact the effective tax rate relate to changes to the valuation allowance, tax contingencies, the difference between the U.S. federal statutory rate and the rates in foreign jurisdictions, the U.S. tax effect on foreign earnings, and the re-measurement of certain foreign assets. In addition, other significant changes include the investments in affiliates and certain non-deductible executive compensation expenses. 

114
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Deferred income taxes are provided for the effects of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Significant components of the Company’s deferred tax assets and deferred tax liabilities from continuing operations are as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
 
(in thousands)
Deferred tax assets:
 
 
 
 
Deferred revenue
 
22,611

 
24,954

Loss carryforwards
 
108,043

 
98,395

Stock-based and other compensation
 
17,380

 
21,587

Tax credits - net of foreign withholding taxes
 
7,815

 
6,566

Other
 
20,909

 
29,933

Total deferred tax assets
 
$
176,758

 
$
181,435

Deferred tax liabilities:
 
 
 
 
Investment in affiliate
 
$
(23,782
)
 
$
(14,936
)
Goodwill and other intangible assets
 
(53,118
)
 
(50,865
)
Other
 
(4,746
)
 
(7,064
)
Total deferred tax liabilities
 
$
(81,646
)
 
$
(72,865
)
Valuation allowance
 
(109,995
)
 
(105,960
)
Net deferred income tax (liability) asset
 
$
(14,883
)
 
$
2,610

Recognized as:
 
 
 
 
Current deferred income tax assets
 
$
13,447

 
$
14,760

Noncurrent deferred income tax assets
 
9,467

 
6,700

Current deferred income tax liabilities
 
(1,056
)
 
(379
)
Noncurrent deferred income tax liabilities
 
(36,741
)
 
(18,471
)
Total
 
$
(14,883
)
 
$
2,610

The Company’s operations in Israel have been granted “Approved Enterprise” status by the Investment Center for the Israeli Ministry of Industry, Trade and Labor, which makes the Company eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the terms of the program, income attributable to an Approved Enterprise is exempt from income tax for a period of two years and is subject to a reduced income tax rate for the subsequent five to fifteen years (generally 10-15%, depending on the percentage of foreign investment in the Company).
U.S. income and foreign withholding taxes have not been recorded on permanently reinvested earnings of certain subsidiaries aggregating $173.9 million, $105.5 million and $98.1 million as of January 31, 2012, 2011 and 2010, respectively. At this time, determination of the amounts of deferred U.S. federal and state income taxes and foreign withholding taxes related to these foreign subsidiaries is not practicable.
The Company has net operating loss carryforwards for tax purposes (“NOLs”) and other deferred tax benefits that are available to offset future taxable income. 
The Company’s gross NOLs for tax return purposes from continuing operations are as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
 
(In thousands)
U.S. Federal NOLs
 
$
584,367

 
$
344,094

U.S. State NOLs
 
205,967

 
179,805

Foreign NOLs
 
39,680

 
28,300

Total
 
$
830,014

 
$
552,199

The U.S. federal net operating loss carry forwards expire in various years ending from January 31, 2017 to January 31, 2032. The U.S. state net operating loss carry forwards expire in various years ending from January 31, 2013 to January 31,

115
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


2032. As of January 31, 2012, all but $1.6 million of the foreign NOLs have indefinite carryforward periods. Certain of the federal, state and foreign loss carryforwards and credits are subject to Internal Revenue Code Section 382 or similar provisions, which impose limitations on their utilization following certain changes in ownership of the entity generating the loss carryforward. The table above reflects gross NOLs for tax return purposes which are different from the NOLs for financial statement purposes, primarily due to the reduction of NOLs for financial statement purposes under the FASB’s guidance on accounting for uncertainty in income taxes. The Company has U.S. federal, state and foreign tax credit carryforwards of approximately $9.5 million and $7.1 million as of January 31, 2012 and 2011, respectively. The utilization of these carryforwards is subject to limitations. The federal AMT credit has no expiration date.
In accordance with the FASB’s guidance relating to accounting for uncertainty in income taxes the Company recognizes unrecognized tax benefits in non-current tax liabilities. The following table reconciles the amounts recorded for unrecognized tax benefits from continuing operations for the fiscal years ended January 31, 2012 and 2011:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands)
Gross unrecognized tax benefits as of February 1
 
$
108,586

 
$
115,813

 
$
114,197

Increases related to tax positions taken in prior years
 
28,699

 
2,316

 
—

Decreases related to tax positions taken in prior years
 
(2,287
)
 
(16,851
)
 
(3,922
)
Increases related to tax positions in current year
 
6,695

 
8,351

 
5,778

Decreases related to tax positions in current year
 
—

 
—

 
—

Decreases due to settlements with taxing authorities
 
—

 
—

 
(508
)
Reductions resulting from lapse in statute of limitations
 
(3,013
)
 
(1,140
)
 
(1,277
)
Increases (decreases) related to foreign currency exchange rate fluctuations
 
(71
)
 
97

 
1,545

Gross unrecognized tax benefits as of January 31
 
$
138,609

 
$
108,586

 
$
115,813

The balances of unrecognized tax benefits as of January 31, 2012 and 2011 are $138.6 million and $108.6 million of which $30.7 million and $27.5 million represent the amounts that, if recognized, may impact the effective income tax rate in future periods.
The Company recognized interest and penalties related to unrecognized tax benefits in its income tax provision. The Company accrued $8.2 million and $6.6 million for interest and penalties as of January 31, 2012 and 2011, respectively. Certain liabilities for uncertain tax positions of the Company's consolidated federal and state tax returns have been included within noncurrent liabilities of discontinued operations.  Upon the separation of Comverse, CTI will provide for these liabilities and include an indemnity receivable from Comverse for these amounts.
The Company estimates that it is reasonably possible that the balance of unrecognized tax benefits as of January 31, 2012 may decrease by approximately $4.0 million in the next twelve months, as a result of lapse of statutes of limitation and settlements with tax authorities. These unrecognized tax benefits of $4.0 million relate to majority-owned subsidiaries.
The significant tax jurisdictions in which the Company is currently under examination by tax authorities include Canada, France, Hong Kong, India, the United Kingdom, New York State, New York City and California. The Company anticipates that it is reasonably possible that new tax matters could be raised by tax authorities that may require increases or decreases to the balance of unrecognized tax benefits; however, an estimate of such increases or decreases cannot be made.

116
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The Company files income tax returns in the U.S. federal, various state and local, and foreign jurisdictions, with varying statute of limitations. As of January 31, 2012, the Company remains subject to assessment in the event of examination in these major tax jurisdictions for the periods outlined below:
Jurisdiction
  
Tax Years Ended
United States
  
January 31, 1999 - January 31, 2012
United Kingdom
  
December 31, 2006 - January 31, 2008
India
  
March 31, 2006 - March 31, 2008, March 31,2010
Canada
  
January 31, 2010
Hong Kong
  
March 31, 2003 - March 31, 2005, January 31, 2006 - January 31, 2007  
Various U.S. States
  
January 31, 1999 - January 31, 2012
New York City
  
January 31, 2000 - January 31, 2012
Additionally, the Company is currently in discussions with the Israeli tax authorities regarding adjustments that will be made to income tax returns for the years ended January 31, 2006 through January 31, 2010 due to the Company's restated results of operations.
The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the FASB’s guidance. As a result, the Company may adjust the liabilities for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitations.
The Company maintains valuation allowances where it is more-likely-than-not that all or a portion of a deferred tax asset may not be realized. Changes in valuation allowances are included in the Company’s tax provision in the period of change except for items related to additional paid-in capital. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, reversal of existing taxable temporary differences, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.
The Company’s activity in the valuation allowance from continuing operations is as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
 
(in thousands)
Valuation allowance, beginning of the year
 
$
105,960

 
$
128,346

Additional paid-in capital
 
(477
)
 
(5,771
)
Provision for income taxes
 
14,905

 
5,383

Tax Contingencies
 
1,710

 
(1,099
)
Reductions resulting from discontinued operations/APIC
 
(13,276
)
 
(20,865
)
Cumulative translation adjustment and other
 
1,173

 
(34
)
Valuation allowance, end of the year
 
$
109,995

 
$
105,960


117
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


22.
BUSINESS SEGMENT INFORMATION
The Company has one reportable segment, Verint. The results of CTI's holding company operations, are included in the column captioned “All Other” as part of the Company's business segment presentation.
On October 31, 2012, CTI completed the Share Distribution. Accordingly, the Company no longer presents the reportable segments Comverse BSS and Comverse VAS and Comverse's operations previously included in All Other have been removed therefrom as Comverse's results of operations are included in discontinued operations for the fiscal years ended January 31, 2012, 2011 and 2010. In addition, on August 1, 2012, CTI entered into the Starhome Share Purchase Agreement with unaffiliated purchasers and completed the Starhome Disposition on October 19, 2012. Accordingly, Starhome's results of operations, which previously were included in “All Other,” are included in discontinued operations for the fiscal years ended January 31, 2012, 2011 and 2010.
For a more comprehensive discussion relating to the Company's reportable segments, see Note 1, Organization, Business, and Summary of Significant Accounting Policies.
Segment Performance
The Company evaluates its business by assessing the performance of its operating segment. CTI's Chief Executive Officer is its chief operating decision maker (“CODM”). The CODM uses segment performance, as defined below, as the primary basis for assessing the financial results of the operating segment and for the allocation of resources. Segment performance, as the Company defines it in accordance with the FASB's guidance relating to segment reporting, is not necessarily comparable to other similarly titled captions of other companies. Segment performance, as defined by management, represents operating results of a segment without the impact of significant expenditures incurred by the segment in connection with the efforts to become or remain current in periodic reporting obligations under the federal securities laws which are expected to be eliminated over time, certain non-cash charges, and certain other gains and charges.
Segment performance is computed by management as income (loss) from operations adjusted for the following: (i) stock-based compensation expense; (ii) amortization of acquisition-related intangibles; (iii) compliance-related professional fees; (iv) compliance-related compensation and other expenses; (v) strategic evaluation related costs; (vi) litigation settlements and related costs; (vii) acquisition-related charges; (viii) restructuring and integration charges; and (ix) certain other gains and charges. Compliance-related professional fees and compliance-related compensation and other expenses relate to fees and expenses incurred in connection with the Company's efforts to (a) complete current and previously issued financial statements and audits of such financial statements, (b) become current in its periodic reporting obligations under the federal securities laws, and (c) remediate material weaknesses in internal control over financial reporting. Compliance-related professional fees and compliance-related compensation and other expenses recorded for the fiscal year ended January 31, 2012 also relate to fees and expenses incurred in connection with the timely filing of certain periodic reports which fees and expenses are expected to be eliminated over time as the Company enhances its internal finance and accounting personnel to replace external consultants currently assisting it in the preparation of periodic reports. Strategic evaluation related costs include financial advisory, accounting, tax, consulting and legal fees incurred in connection with our evaluation of strategic alternatives, including the Share Distribution.
In evaluating segment performance, management uses segment revenue, which consists of revenue generated by the segment, including intercompany revenue. Certain segment performance adjustments relate to expenses included in the calculation of income (loss) from operations, while, from time to time, certain segment performance adjustments may be presented as adjustments to revenue. In calculating Verint's segment performance for the fiscal year ended January 31, 2012, the presentation of segment revenue gives effect to segment revenue adjustments that represent the impact of fair value adjustments required under the FASB's guidance relating to acquired customer support contracts that would have otherwise been recognized as revenue on a stand-alone basis with respect to acquisitions consummated by Verint during the periods presented. Verint did not have segment revenue adjustments for the fiscal years ended January 31, 2011 and 2010.


118
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The tables below present information about total revenue, total costs and expenses, income (loss) from operations, interest expense, depreciation and amortization, other non-cash items, and segment performance for the fiscal years ended January 31, 2012, 2011 and 2010:
 
 
Verint
 
All Other
 
Consolidation
 
 
(In thousands)
Fiscal Year Ended January 31, 2012:
 
 
 
 
 
 
Total revenue
 
$
782,648

 
$
—

 
$
782,648

Total costs and expenses
 
$
696,170

 
$
88,430

 
$
784,600

Income (loss) from operations
 
$
86,478

 
$
(88,430
)
 
$
(1,952
)
Computation of segment performance:
 
 
 
 
 
 
Total revenue
 
$
782,648

 
$
—

 
 
Segment revenue adjustment
 
13,599

 
—

 
 
Segment revenue
 
$
796,247

 
$
—

 
 
Total costs and expenses
 
$
696,170

 
$
88,430

 
 
Segment expense adjustments:
 
 
 
 
 
 
Stock-based compensation expense
 
27,910

 
5,040

 
 
Amortization of acquisition-related intangibles
 
35,302

 
—

 
 
Compliance-related professional fees
 
1,012

 
25,285

 
 
Strategic evaluation related costs
 
—

 
11,144

 
 
Litigation settlements and related costs
 
—

 
4,968

 
 
Acquisition-related charges
 
9,061

 
—

 
 
Other
 
3,190

 
17

 
 
Segment expense adjustments
 
76,475

 
46,454

 
 
Segment expenses
 
619,695

 
41,976

 
 
Segment performance
 
$
176,552

 
$
(41,976
)
 
 
 
 
 
 
 
 
 
Interest expense
 
$
(32,358
)
 
$
(21
)
 
$
(32,379
)
Depreciation and amortization
 
$
(53,040
)
 
$
(260
)
 
$
(53,300
)
Other non-cash items (1)
 
$
(270
)
 
$
—

 
$
(270
)
(1)
Other non-cash items consist of write-downs of property and equipment and capitalized software.




119
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


 
 
Verint
 
All Other
 
Consolidated
 
 
(In thousands)
Fiscal Year Ended January 31, 2011:
 
 
 
 
 
 
Total revenue
 
$
726,799

 
$
—

 
$
726,799

Total costs and expenses
 
$
653,694

 
$
79,379

 
$
733,073

Income (loss) from operations
 
$
73,105

 
$
(79,379
)
 
$
(6,274
)
Computation of segment performance:
 
 
 
 
 
 
Total revenue
 
$
726,799

 
$
—

 
 
Segment revenue adjustment
 
—

 
—

 
 
Segment revenue
 
$
726,799

 
$
—

 
 
Total costs and expenses
 
$
653,694

 
$
79,379

 
 
Segment expense adjustments:
 
 
 
 
 
 
Stock-based compensation expense
 
46,819

 
6,796

 
 
Amortization of acquisition-related intangibles
 
30,554

 
—

 
 
Compliance-related professional fees
 
28,913

 
50,668

 
 
Compliance-related compensation and other expenses
 
—

 
45

 
 
Strategic evaluation related costs
 
—

 
3,065

 
 
Litigation settlements and related costs
 
—

 
(17,060
)
 
 
Acquisition-related charges
 
1,690

 
—

 
 
Other
 
3,505

 
—

 
 
Segment expense adjustments
 
111,481

 
43,514

 
 
Segment expenses
 
542,213

 
35,865

 
 
Segment performance
 
$
184,586

 
$
(35,865
)
 
 
 
 
 
 
 
 
 
Interest expense
 
$
(29,896
)
 
$
(17
)
 
$
(29,913
)
Depreciation and amortization
 
$
(48,951
)
 
$
(254
)
 
$
(49,205
)
Other non-cash items (1)
 
$
(334
)
 
$
—

 
$
(334
)
(1)
Other non-cash items consist of write-downs of property and equipment.


120
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




 
 
Verint
 
All Other
 
Consolidated
 
 
(In thousands)
Fiscal Year Ended January 31, 2010:
 
 
 
 
 
 
Total revenue
 
$
703,633

 
$
60

 
$
703,693

Total costs and expenses
 
$
637,954

 
$
56,894

 
$
694,848

Income (loss) from operations
 
$
65,679

 
$
(56,834
)
 
$
8,845

Computation of segment performance:
 
 
 
 
 
 
Total revenue
 
$
703,633

 
$
60

 
 
Segment revenue adjustment
 
—

 
—

 
 
Segment revenue
 
$
703,633

 
$
60

 
 
Total costs and expenses
 
$
637,954

 
$
56,894

 
 
Segment expense adjustments:
 
 
 
 
 
 
Stock-based compensation expense
 
44,237

 
7,398

 
 
Amortization of acquisition-related intangibles
 
30,289

 
—

 
 
Compliance-related professional fees
 
54,472

 
12,704

 
 
Compliance-related compensation and other expenses
 
—

 
3,157

 
 
Strategic evaluation related costs
 
—

 
236

 
 
Litigation settlements and related costs
 
—

 
2,771

 
 
Acquisition-related charges
 
762

 
—

 
 
Restructuring and integration charges
 
141

 
—

 
 
Other
 
39

 
1,759

 
 
Segment expense adjustments
 
129,940

 
28,025

 
 
Segment expenses
 
508,014

 
28,869

 
 
Segment performance
 
$
195,619

 
$
(28,809
)
 
 
 
 
 
 
 
 
 
Interest expense
 
$
(24,964
)
 
$
(103
)
 
$
(25,067
)
Depreciation and amortization
 
$
(49,290
)
 
$
(151
)
 
$
(49,441
)
Other non-cash items (1)
 
$
(159
)
 
$
(491
)
 
$
(650
)
(1)
Other non-cash items consist of write-downs and impairments of intangible assets and property and equipment.

121
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


As of January 31, 2012, 2011 and 2010, total assets of Verint were as follows:
 
 
January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands)
Verint
 
$
1,564,923

 
$
1,441,424

 
$
1,461,818

These amounts do not reflect intercompany eliminations.
Revenue by major geographical region is based upon the geographic location of the customers who purchase the Company’s products and services. The geographical locations of distributors, resellers and systems integrators who purchase products and utilize the Company’s services may be different from the geographical locations of end customers. Revenue by geographic region and revenue by geographic region as a percentage of total revenue, for the fiscal years ended January 31, 2012, 2011 and 2010 was as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(Dollars in thousands)
United States
 
$
342,479

 
44
%
 
$
292,604

 
40
%
 
$
328,420

 
47
%
United Kingdom
 
83,787

 
11
%
 
102,389

 
14
%
 
65,793

 
9
%
Other foreign (1)
 
356,382

 
45
%
 
331,806

 
46
%
 
309,480

 
44
%
Total
 
$
782,648

 
100
%
 
$
726,799

 
100
%
 
$
703,693

 
100
%
(1) Other foreign consists of numerous countries, none of which represents more than 5% of total revenue in any fiscal year presented.
Long-lived assets primarily consist of property and equipment, net, goodwill and other intangible assets, capitalized software development costs, net, deferred costs of revenue and deferred income taxes. The Company believes that property and equipment, net, is exposed to the geographic area risks and uncertainties more than other long-lived assets, because these tangible assets are difficult to move and are relatively illiquid.
 
Property and equipment, net, by country of domicile consists of the following as of January 31, 2012 and 2011:
 
 
January 31,
 
 
2012
 
2011
 
 
(In thousands)
United States
 
$
12,970

 
$
11,137

Israel
 
10,150

 
8,226

Germany
 
2,309

 
2,474

UK
 
2,024

 
796

Canada
 
694

 
371

Other
 
1,706

 
1,992

 
 
$
29,853

 
$
24,996


122

23.
SUPPLEMENTAL CASH FLOW INFORMATION
The following represents non-cash activities and supplemental information to the consolidated statements of cash flows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(In thousands)
Non-cash operating items:
 
 
Net loss of discontinued operations
 
$
910

 
$
91,028

 
$
270,794

Depreciation and amortization
 
53,300

 
49,205

 
49,441

Impairment of auction rate securities
 
—

 
407

 
6,914

Impairment of UBS put
 
—

 
6,696

 
6,889

Loss on extinguishment of debt
 
8,136

 
—

 
—

Provision for doubtful accounts
 
1,055

 
1,863

 
845

Stock-based compensation expense
 
26,821

 
35,539

 
38,575

Excess tax benefits from stock award plans
 
(847
)
 
(815
)
 
—

Operating asset write-downs
 
270

 
334

 
650

Deferred income taxes
 
32,962

 
40,454

 
(53,962
)
Net realized gains on sale of investments
 
(24,414
)
 
(23,810
)
 
(10,760
)
Equity in losses of unconsolidated affiliates, net of tax
 
(64
)
 
20

 
6

Provision for inventory reserves
 
658

 
2,304

 
2,509

Losses on derivative financial instruments
 
896

 
5,863

 
14,709

Other non-cash items, net
 
(1,772
)
 
(821
)
 
1,328

Net non-cash operating items—continuing operations
 
$
97,911

 
$
208,267

 
$
327,938

Non-cash investing transactions—continuing operations:
 
 
 
 
 
 
Accrued but unpaid purchases of property and equipment
 
$
832

 
$
1,047

 
$
642

Inventory transfers to property and equipment
 
$
637

 
$
874

 
$
621

Liabilities for contingent consideration in business combinations
 
$
42,404

 
$
3,424

 
$
—

Stock options exercised, proceeds received subsequent to period end
 
$
383

 
$
65

 
$
—

Purchases under supplier financing arrangements
 
$
1,090

 
$
1,859

 
$
—

Cash paid during the year for interest—continuing operations
 
$
29,227

 
$
21,053

 
$
24,705

Cash paid during the year for income taxes—continuing operations
 
$
17,003

 
$
8,578

 
$
11,841

24.
RELATED PARTY TRANSACTIONS
Verint’s Series A Convertible Perpetual Preferred Stock
On May 25, 2007, in connection with Verint’s acquisition of Witness, CTI entered into a Securities Purchase Agreement with Verint (the “Securities Purchase Agreement”), whereby CTI purchased, for cash, an aggregate of 293,000 shares of Verint’s Series A Convertible Perpetual Preferred Stock (the “preferred stock”), which represents all of Verint’s outstanding preferred stock, for an aggregate purchase price of $293.0 million. Proceeds from the issuance of the preferred stock were used to partially finance the acquisition. The preferred stock is eliminated in consolidation. 
The preferred stock was issued at a purchase price of $1,000 per share and ranks senior to Verint Systems’ common stock. The preferred stock had an initial liquidation preference equal to the purchase price of the preferred stock, or $1,000 per share. In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of Verint, CTI will be entitled to receive, out of assets available for distribution to Verint’s stockholders and before any distribution of assets to the holders of Verint Systems’ common stock, an amount equal to the then-current liquidation preference, which includes accrued and unpaid dividends. As of January 31, 2012, the liquidation preference of the preferred stock was $352.0 million.

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The terms of the preferred stock provide that upon a fundamental change, as defined in the Certificate of Designation of the Preferred Stock, CTI would have the right to require Verint to repurchase the preferred stock for 100% of the liquidation preference then in effect. Fundamental change events include the sale of substantially all of Verint’s assets, certain changes in beneficial ownership or board of directors’ representation, and business reorganizations. If Verint fails to repurchase the preferred stock as required upon a fundamental change, then the number of directors constituting the board of directors will be increased by two, and CTI will have the right to elect two directors to fill such vacancies. Upon repurchase of the preferred stock subject to the fundamental change repurchase right, CTI will no longer have the right to elect additional directors, the term of office of each additional director will terminate immediately upon such repurchase, and the number of directors will, without further action, be reduced by two. In addition, in the event of a fundamental change, the conversion rate (as described in the section entitled Voting and Conversion below) will be increased to provide for additional shares of common stock issuable to CTI upon conversion, based on a sliding scale (depending on the acquisition price, as defined in the Certificate of Designation of the Preferred Stock) ranging from zero to 3.7 additional shares of common stock for every share of preferred stock converted into shares of common stock.
CTI as the holder of the preferred stock has various rights and preferences, as follows:
Dividends
Cash dividends on the preferred stock are cumulative and are calculated quarterly at a specified dividend rate on the liquidation preference in effect at such time. Dividends are paid only if declared by Verint’s board of directors. Initially, the specified annual dividend rate was 4.25% per share.
During the quarter ended January 31, 2008, the interest rate on Verint’s term loan under the Prior Facility was reduced by more than 50 basis points below the initial interest rate. Accordingly, the dividend rate on the preferred stock was reset to 3.875%, effective February 1, 2008. This rate was only subject to future change in the event Verint was unable to obtain approval of the issuance of common shares underlying the preferred stock’s conversion feature. On October 5, 2010, Verint Systems’ stockholders approved the issuance of the Verint Systems’ common stock underlying the preferred stock and accordingly, the dividend rate is no longer subject to change.
Verint was prohibited from paying cash dividends on the preferred stock under the terms of the Prior Facility and continues to be prohibited from paying cash dividends under the terms of its New Credit Agreement. Verint may elect to make dividend payments in shares of its common stock. The common stock used for dividends, when and if declared, would be valued at 95% of the volume weighted-average price of Verint Systems’ common stock for each of the five consecutive trading days ending on the second trading day immediately prior to the record date for the dividend.
The preferred stock does not participate in Verint’s earnings other than as described above.
Through January 31, 2012, no dividends had been declared or paid on the preferred stock. Through such date, cumulative, undeclared dividends on the preferred stock were $59.0 million.
Voting and Conversion
The preferred stock did not have voting or conversion rights until the underlying shares of common stock were approved for issuance by a vote of holders of a majority of Verint Systems’ common stock. On October 5, 2010, Verint Systems’ stockholders approved the issuance of the Verint Systems’ common stock underlying the preferred stock. Following receipt of such stockholder approval, each share of preferred stock became entitled to a number of votes equal to the number of shares of common stock into which the preferred stock would be convertible using the conversion rate that was in effect upon the issuance of the preferred stock in May 2007, on all matters voted upon by Verint Systems’ common stockholders. The initial conversion rate was set at 30.6185 shares of common stock for each share of preferred stock. In addition, following receipt of stockholder approval for the issuance of the underlying common shares, each share of preferred stock became convertible, at the option of CTI, into a number of shares of Verint Systems’ common stock equal to the liquidation preference then in effect, divided by the conversion price then in effect, which was initially set at $32.66, and remained unchanged through January 31, 2012. The conversion price is subject to periodic adjustment upon the occurrence of certain dilutive events. As of January 31, 2012 and 2011, the preferred stock could be converted into approximately 10.8 million and 10.4 million shares of Verint Systems’ common stock, respectively.
Since the second anniversary of the preferred stock's issue date, Verint had the right to cause the preferred stock, in whole but not in part, to be automatically converted into common stock at the conversion price then in effect. However, Verint may

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


exercise this right only if the closing sale price of its common stock immediately prior to conversion equals or exceeds the conversion price then in effect by a specified percentage, which is now fixed at 135%.
Registration Rights
CTI has had the right to sell the preferred stock since November 25, 2007 in either private or public transactions. Pursuant to a registration rights agreement that CTI and Verint entered into concurrently with the Securities Purchase Agreement (the “New Registration Rights Agreement”), subject to certain conditions which have now been satisfied, CTI is entitled to two demands to require Verint to register the preferred stock and/or the shares of common stock underlying the preferred stock for resale under the Securities Act of 1933, as amended (the “Securities Act”). Such resales may be made through underwritten offerings, upon CTI’s request. The New Registration Rights Agreement also provides CTI with unlimited piggyback registration rights on certain Securities Act registrations filed by Verint on its own behalf or on behalf of other Verint stockholders.
CTI’s rights under the New Registration Rights Agreement are in addition to its rights under a previous registration rights agreement that CTI entered into with Verint shortly before Verint’s initial public offering in 2002. This registration rights agreement (the “Original Registration Rights Agreement”) covers all shares of common stock then held by CTI and any additional shares of common stock acquired by CTI at later dates. Under the Original Registration Rights Agreement, CTI is entitled to unlimited demand registrations of its shares on registration statements on Form S-3. As long as Verint is not eligible to use a registration statement on Form S-3, CTI was also entitled to one demand registration on a registration statement on Form S-1 which CTI used to complete the sale of 2.3 million shares of Verint Systems’ common stock in a secondary public offering on January 14, 2011. In addition, similar to the New Registration Rights Agreement, the Original Registration Rights Agreement also provides CTI with unlimited piggyback registration rights.
Sale of Shares of Verint Systems’ Common Stock
Effective July 15, 2010, CTI made a demand pursuant to the Original Registration Rights Agreement to have up to 2.8 million shares of Verint Systems’ common stock registered in a registration statement on Form S-1. On January 14, 2011, CTI completed the sale of 2.3 million shares of Verint Systems’ common stock in a secondary public offering for aggregate proceeds net of underwriting discounts and commissions of $76.5 million. The offering was completed as part of the initiatives undertaken by management to improve the Company’s cash position. Following completion of the offering, CTI maintained a controlling financial interest in Verint Systems’ common stock and, in accordance with the FASB’s guidance, accounted for the sale of shares of Verint Systems’ common stock as an equity transaction. As a result, for the fiscal year ended January 31, 2011, the Company increased (a) “Additional paid-in capital” by $52.2 million, (b) “Noncontrolling interest” by $4.5 million, representing the change in ownership interest of the noncontrolling shareholders, and (c) “Accumulated other comprehensive income” by $2.6 million. The gain recognized as a result of this transaction was determined using the Company’s inside basis as its cost basis for shares held or value contributed.
Ulticom’s 2010 Special Cash Dividend
In December 2010, Ulticom, Inc. paid a special cash dividend in the aggregate amount of $64.1 million, to its shareholders, including CTI. Ulticom, Inc.’s minority shareholders were paid $21.7 million. The special cash dividend was paid immediately prior to the Ulticom Sale (see Note 18, Discontinued Operations).
Ulticom’s 2009 Special Cash Dividend and Stock Option Modification
In April 2009, Ulticom, Inc. paid a special cash dividend of $199.6 million to its shareholders, including CTI. Ulticom, Inc.’s minority shareholders were paid $64.3 million and an additional $0.2 million was payable to holders of deferred stock units awarded under Ulticom, Inc.’s equity incentive plan upon each issuance of common stock subject to such awards.
Effective as of April 21, 2009, the exercise prices of outstanding options to purchase 2,982,104 shares of Ulticom Inc.’s common stock were reduced in connection with the payment of the special cash dividend of $4.58 per share. These reductions in the option exercise prices resulted in no change in Ulticom’s share-based payment expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


25.
COMMITMENTS AND CONTINGENCIES
Guarantees
The Company provides certain customers in the ordinary course of business with financial performance guarantees which in certain cases are backed by standby letters of credit or surety bonds, the certain of which are cash collateralized and accounted for as restricted cash and bank time deposits. The Company is only liable for the amounts of those guarantees in the event of its nonperformance, which would permit the customer to exercise the guarantee. As of January 31, 2012 and 2011, the Company believes that it was in compliance with its performance obligations under all contracts for which there is a financial performance guarantee, and that any liabilities arising in connection with these guarantees will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows. The Company also obtained bank guarantees primarily to provide customer assurance relating to the performance of certain obligations required by customer agreements for the guarantee of certain payment obligations. These guarantees, which aggregated $41.2 million as of January 31, 2012, are generally scheduled to be released upon the Company’s performance of specified contract milestones, a majority of which are scheduled to be completed at various dates through January 31, 2013.
Unconditional Purchase Obligations
In the ordinary course of business, the Company enters into certain unconditional purchase obligations, which are agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. The Company had unconditional purchase obligations of approximately $47.5 million as of January 31, 2012. Of these obligations, approximately $44.5 million are due in the next twelve months and $3.0 million are due in one to three years.

Warranty Liabilities
Warranty liabilities were not significant to the Company as of January 31, 2012 and 2011.
Litigation Overview
Except as disclosed below, the Company does not believe that it is currently party to any other claims, assessments or pending legal action that could reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.
Proceedings Related to CTI’s Special Committee Investigations
Overview
On March 14, 2006, CTI announced the creation of a Special Committee of its Board of Directors (the “Special Committee”) composed of outside directors to review CTI’s historic stock option grant practices and related accounting matters, including, but not limited to, the accuracy of the stated dates of option grants and whether all proper corporate procedures were followed. In November 2006, the Special Committee’s investigation was expanded to other financial and accounting matters, including the recognition of revenue related to certain contracts, errors in the recording of certain deferred tax accounts, the misclassification of certain expenses, the misuse of accounting reserves and the misstatement of backlog. The Special Committee issued its report on January 28, 2008. Following the commencement of the Special Committee’s investigation, CTI, certain of its subsidiaries and some of CTI’s former directors and officers were named as defendants in several class and derivative actions, and CTI commenced direct actions against certain of its former officers and directors.
Petition for Remission of Civil Forfeiture
In July 2006, the U.S. Attorney filed a forfeiture action against certain accounts of Jacob “Kobi” Alexander, CTI’s former Chairman and Chief Executive Officer, that resulted in the United States District Court for the Eastern District entering an order freezing approximately $50.0 million of Mr. Alexander’s assets. In order to ensure that CTI receives the assets in Mr. Alexander’s frozen accounts, in July 2007, CTI filed with the U.S. Attorney a Petition for Remission of Civil Forfeiture requesting remission of any funds forfeited by Mr. Alexander. The United States District Court entered an order on November 30, 2010 directing that the assets in such accounts be liquidated and remitted to CTI. The process of liquidating such assets has been completed and the proceeds from the assets in such accounts have been transferred to a class action settlement fund in conjunction with the settlements of the Direct Actions (as defined below), the consolidated shareholder class action and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


shareholder derivative actions. The agreement to settle the shareholder class action was approved by the court in which such action was pending on June 23, 2010. The agreement to settle the federal and state derivative actions was approved by the courts in which such actions were pending on July 1, 2010 and September 23, 2010, respectively (see Settlement Agreements below).
Direct Actions
Based on the Special Committee’s findings, CTI commenced litigations against three former executive officers as a result of their misconduct relating to historical stock option grants. On January 16, 2008, CTI commenced an action against Mr. Alexander, its former Chairman and Chief Executive Officer, and William F. Sorin, its former Senior General Counsel and director, in the Supreme Court of the State of New York, captioned Comverse Technology, Inc. v. Alexander et al., No. 08/600142. On January 17, 2008, CTI commenced an action against David Kreinberg, its former Executive Vice President and Chief Financial Officer, in the Superior Court of New Jersey, captioned Comverse Technology, Inc. v. Kreinberg (N.J. Super. Ct.). That action was discontinued and on January 8, 2009, a separate action was commenced against Mr. Kreinberg in the Supreme Court of the State of New York, captioned Comverse Technology, Inc. v. Kreinberg, No. 09/600052. The actions captioned Comverse Technology, Inc. v. Alexander et al. and Comverse Technology, Inc. v. Kreinberg are referred to collectively as the “Direct Actions.” The Direct Actions asserted claims for fraud, breach of fiduciary duty, and unjust enrichment in connection with the defendants’ conduct related to historical stock option grants. As part of the agreement to settle the federal and state derivative actions, which was approved by the courts in which such actions were pending on July 1, 2010 and September 23, 2010, respectively, CTI dismissed the Direct Actions on September 29, 2010 (see Settlement Agreements below).
Shareholder Derivative Actions
Beginning on or about April 11, 2006, several purported shareholder derivative lawsuits were filed in the New York Supreme Court for New York County and in the United States District Court for the Eastern District of New York. The defendants in these actions included certain of CTI’s former directors and officers and a current director and, in the state court action, CTI’s independent registered public accounting firm. CTI was named as a nominal defendant only. The consolidated complaints in both the state and federal actions alleged that the defendants breached certain duties to CTI and that certain former officers and directors were unjustly enriched (and, in the federal action, violated the federal securities laws, specifically Sections 10(b) and 14(a) of the Exchange Act, and Rules 10(b)-5 and 14(a)-9 promulgated thereunder) by, among other things: (i) allowing and participating in an alleged scheme to backdate the grant dates of employee stock options to provide improper benefits to the recipients; (ii) allowing insiders, including certain of the defendants, to profit by trading in CTI's stock while allegedly in possession of material inside information; (iii) failing to oversee properly or implement procedures to detect and prevent the alleged improper practices; (iv) causing CTI to issue allegedly materially false and misleading proxy statements and to file other allegedly false and misleading documents with the SEC; and (v) exposing CTI to civil liability. The complaints sought unspecified damages and various forms of equitable relief.
The state court derivative actions were consolidated into one action captioned, In re Comverse Technology, Inc. Derivative Litigation, No. 601272/2006. On August 7, 2007, the New York Supreme Court dismissed the consolidated state court derivative action, granting CTI’s motion to dismiss. That decision was successfully appealed by the plaintiffs to the Appellate Division of the New York State Supreme Court which, in its decision issued on October 7, 2008, reinstated the action.
The federal court derivative actions were consolidated into one action captioned, In re Comverse Technology, Inc. Derivative Litigation, No. 06-CV-1849. CTI filed a motion to stay that action in deference to the state court proceeding. That motion was denied by the court. On October 16, 2007, CTI filed a motion to dismiss the federal court action based on the plaintiffs’ failure to make a demand on the Board and the state court’s ruling that such a demand was required. On the same date, various individual defendants also filed motions to dismiss the complaint. On April 22, 2008, the court ordered that all dismissal motions would be held in abeyance pending resolution of the appeal of the New York State Supreme Court’s decision in the state court derivative action.
On December 17, 2009, the parties to the shareholder derivative actions entered into an agreement to settle these actions, which settlement was approved by the courts in which the federal and state derivative actions were pending on July 1, 2010 and September 23, 2010, respectively (see Settlement Agreements below). The Company recorded a charge associated with the settlement during the fiscal year ended January 31, 2007.

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Shareholder Class Action
Beginning on or about April 19, 2006, class action lawsuits were filed by persons identifying themselves as CTI shareholders, purportedly on behalf of a class of CTI’s shareholders who purchased its publicly traded securities. Two actions were filed in the United States District Court for the Eastern District of New York, and three actions were filed in the United States District Court for the Southern District of New York. On August 28, 2006, the actions pending in the United States District Court for the Southern District of New York were transferred to the United States District Court for the Eastern District of New York. A consolidated amended complaint under the caption In re Comverse Technology, Inc. Sec. Litig., No. 06-CV- 1825, was filed by the court-appointed Lead Plaintiff, Menorah Group, on March 23, 2007. The consolidated amended complaint was brought on behalf of a purported class of CTI shareholders who purchased CTI’s publicly traded securities between April 30, 2001 and November 14, 2006. The complaint named CTI and certain of its former officers and directors as defendants and alleged, among other things, violations of Sections 10(b) and 14(a) of the Exchange Act, Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act in connection with prior statements made by CTI with respect to, among other things, its accounting treatment of stock options. The action sought compensatory damages in an unspecified amount.
The parties to this action entered into a settlement agreement on December 16, 2009, which was amended on June 19, 2010 and approved by the court in which such action was pending on June 23, 2010 (see Settlement Agreements below). The Company recorded a charge associated with the settlement during the fiscal year ended January 31, 2007.
Settlement Agreements
On December 16, 2009 and December 17, 2009, CTI entered into agreements to settle the consolidated shareholder class action and consolidated shareholder derivative actions described above, respectively. The agreement to settle the consolidated shareholder class action was amended on June 19, 2010. Pursuant to the amendment, CTI agreed to waive certain rights to terminate the settlement in exchange for a deferral of the timing of scheduled payments of the settlement consideration and the right to a credit (the “Opt-out Credit”) in respect of a portion of the settlement funds that would have been payable to a class member that elected not to participate in and be bound by the settlement. In connection with such settlements, CTI dismissed its Direct Actions against Messrs. Alexander, Kreinberg and Sorin, who, in turn, dismissed any counterclaims they filed against CTI.
As part of the settlement of the consolidated shareholder class action, as amended, CTI agreed to make payments to a class action settlement fund in the aggregate amount of up to $165.0 million that were paid as follows:
•
$1.0 million that was paid following the signing of the settlement agreement in December 2009; 
•
$17.9 million that was paid in July 2010 (representing an agreed $21.5 million payment less a holdback of $3.6 million in respect of the then anticipated Opt-out Credit);
•
$30.0 million that was paid in May 2011;
•
$20.0 million that was paid in October 2011; and
•
$91.3 million (representing the remaining $92.5 million less the amount by which the Opt-out Credit exceeded the holdback described above) that was paid during the fourth quarter of the fiscal year ended January 31, 2012, of which $82.5 million was paid through the issuance of 12,462,236 shares of CTI's common stock and the remainder paid in cash.
Under the terms of the settlement agreement, if CTI received net cash proceeds from the sale of certain ARS held by it in an aggregate amount in excess of $50.0 million, CTI was required to use $50.0 million of such proceeds to prepay the settlement amounts referred to above and, if CTI received net cash proceeds from the sale of such ARS in an aggregate amount in excess of $100.0 million, CTI was required to use an additional $50.0 million of such proceeds to prepay the settlement amounts referred to above. In addition, CTI granted a security interest for the benefit of the plaintiff class in the account in which CTI held its ARS (other than the ARS that were held in an account with UBS) and the proceeds from any sales thereof, restricting CTI’s ability to use the proceeds from sales of such ARS until the amounts payable under the settlement agreement were paid in full. As of January 31, 2011, the Company had $33.4 million of cash received from sales and redemptions of ARS (including interest thereon) to which these provisions of the settlement agreement applied, which were classified in “Restricted cash and bank time deposits” within the consolidated balance sheet. Following the payment by CTI of the remaining amounts payable under the settlement agreement, the security interest for the benefit of the plaintiff class in CTI's account terminated.
In addition, as part of the settlements of the Direct Actions, the consolidated shareholder class action and shareholder derivative actions, Mr. Alexander agreed to pay $60.0 million to CTI to be deposited into the derivative settlement fund and

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then transferred into the class action settlement fund. All amounts payable by Mr. Alexander have been paid. Also, as part of the settlement of the shareholder derivative actions, Mr. Alexander transferred to CTI shares of Starhome B.V. representing 2.5% of its outstanding share capital.
Pursuant to the amendment, Mr. Alexander agreed to waive certain rights to terminate the settlement and received the right to a credit in respect of a portion of the settlement funds that would have been payable to a class member that elected not to participate in and be bound by the settlement. CTI’s settlement of claims against it in the class action was not contingent upon Mr. Alexander satisfying his payment obligations. Certain other defendants in the Direct Actions and the shareholder derivative actions agreed to pay CTI an aggregate of $1.4 million (of which $0.9 million has been received) and certain former directors relinquished certain outstanding unexercised stock options. As part of the settlement of the shareholder derivative actions, CTI paid, in October 2010, $9.4 million to cover the legal fees and expenses of the plaintiffs. In September 2010, CTI received insurance proceeds of $16.5 million under its directors’ and officers’ insurance policies in connection with the settlements of the shareholder derivative actions and the consolidated shareholder class action.
Under the terms of the settlements, Mr. Alexander and his wife relinquished their claims to the assets in Mr. Alexander’s frozen accounts that were subject to the forfeiture action, and the United States District Court entered an order on November 30, 2010 directing that the assets in such accounts be liquidated and remitted to CTI. The process of liquidating such assets has been completed and the proceeds from the assets in such accounts have been transferred to the class action settlement fund.
The agreement to settle the consolidated shareholder class action, as amended, was approved by the court in which such action was pending on June 23, 2010. The agreement to settle the federal and state derivative actions was approved by the courts in which such actions were pending on July 1, 2010 and September 23, 2010, respectively.
As of January 31, 2011, the Company had accrued liabilities for this matter of $146.2 million. As all amounts due under the settlement of the consolidated shareholder class action were paid during the fiscal year ended January 31, 2012, no liabilities were accrued in respect of this matter as of January 31, 2012.
Opt-Out Plaintiffs’ Action
On September 28, 2010, an action was filed in the United States District Court for the Eastern District of New York under the caption Maverick Fund, L.D.C., et al. v. Comverse Technology, Inc., et al., No. 10-cv-4436. Plaintiffs alleged that they were CTI shareholders who purchased CTI's publicly traded securities in 2005, 2006 and 2007. The plaintiffs, Maverick Fund, L.D.C. and certain affiliated investment funds, opted not to participate in the settlement of the consolidated shareholder class action described above. The complaint named CTI, its former Chief Executive Officer and certain of its former officers and directors as defendants and alleged, among other things, violations of Sections 10(b), 18 and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and negligent misrepresentation in connection with prior statements made by CTI with respect to, among other things, its accounting treatment of stock options, other accounting practices at CTI and the timeline for CTI to become current in its periodic reporting obligations. The action sought compensatory damages in an unspecified amount. The Company filed a motion to dismiss the complaint in December 2010, and a hearing on the motion was conducted on March 4, 2011. On July 12, 2011, the Court dismissed the plaintiffs' claims related to their purchase of CTI's securities in 2007 and the claims against Andre Dahan, CTI's former President and Chief Executive Officer, and Avi Aronovitz, CTI's former Interim Chief Financial Officer, and otherwise denied CTI's motion to dismiss. On December 19, 2011, the parties executed a settlement agreement, pursuant to which CTI paid the plaintiffs approximately $9.5 million on December 28, 2011. On January 3, 2012, the parties filed a notice of dismissal, and on January 4, 2012, the Court dismissed the action.
In connection with this matter, the Company recorded a pre-tax charge of $4.9 million for the fiscal year ended January 31, 2012, representing the amount by which the settlement amount exceeded the Opt-out Credit and certain other credits under the settlement agreement of the consolidated shareholder class action.
Israeli Optionholder Class Actions
CTI and certain of its subsidiaries were named as defendants in four potential class action litigations in the State of Israel involving claims to recover damages incurred as a result of purported negligence or breach of contract that allegedly prevented certain current or former employees from exercising certain stock options. The Company intends to vigorously defend these actions.
Two cases were filed in the Tel Aviv District Court against CTI on March 26, 2009, by plaintiffs Katriel (a former Comverse Ltd. employee) and Deutsch (a former Verint Systems Ltd. employee). The Katriel case (Case Number 1334/09) and the Deutsch case (Case Number 1335/09) both seek to approve class actions to recover damages that are claimed to have been

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COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


incurred as a result of CTI’s negligence in reporting and filing its financial statements, which allegedly prevented the exercise of certain stock options by certain employees and former employees. By stipulation of the parties, on September 30, 2009, the court ordered that these cases, including all claims against CTI in Israel and the motion to approve the class action, be stayed until resolution of the actions pending in the United States regarding stock option accounting, without prejudice to the parties’ ability to investigate and assert the unique facts, claims and defenses in these cases. To date, the stay has not yet been lifted.
Two cases were also filed in the Tel Aviv Labor Court by plaintiffs Katriel and Deutsch, and both seek to approve class actions to recover damages that are claimed to have been incurred as a result of breached employment contracts, which allegedly prevented the exercise by certain employees and former employees of certain CTI and Verint Systems stock options, respectively. The Katriel litigation (Case Number 3444/09) was filed on March 16, 2009, against Comverse Ltd., and the Deutsch litigation (Case Number 4186/09) was filed on March 26, 2009, against Verint Systems Ltd. The Tel Aviv Labor Court has ruled that it lacks jurisdiction, and both cases have been transferred to the Tel Aviv District Court. The Katriel case has been consolidated with the Katriel case filed in the Tel Aviv District Court (Case Number 1334/09) and is subject to the stay discussed above. At the preliminary hearing in the Tel Aviv District Court in October 2011, the Deutsch case was also made subject to the stay discussed above. The Company did not accrue for these matters as the potential loss is currently not probable or reasonably estimable.
SEC Civil Actions
Promptly following the discovery of the errors and improprieties related to CTI's historic stock option grant practices and the creation of the Special Committee, CTI, through the Special Committee and its representatives, met with and informed the staff of the SEC of the underlying facts and the initiation of the Special Committee investigation. In March 2008, CTI received a “Wells Notice” from the staff of the SEC arising out of the SEC's investigation of CTI's historical stock option grant practices and certain unrelated accounting matters. The “Wells Notice” provided notification that the staff of the SEC intended to recommend that the SEC bring civil actions against CTI alleging violations of certain provisions of the federal securities laws.
On June 18, 2009, a settlement between CTI and the SEC with respect to such matters was announced. On that date, the SEC filed a civil action against CTI in the United States District Court for the Eastern District of New York alleging violations of certain provisions of the federal securities laws regarding CTI’s improper backdating of stock options and other accounting practices, including the improper establishment, maintenance, and release of reserves, the reclassification of certain expenses, and the improper calculation of backlog of sales orders. Simultaneous with the filing of the complaint, without admitting or denying the allegations therein, CTI consented to the issuance of a final judgment (the “Final Judgment”) that was approved by the United States District Court for the Eastern District of New York on June 25, 2009. Pursuant to the Final Judgment, CTI is permanently restrained and enjoined from any future violations of the federal securities laws addressed in the complaint and was ordered to become current in its periodic reporting obligations under Section 13(a) of the Exchange Act by no later than February 8, 2010. No monetary penalties were assessed against CTI in conjunction with this settlement. These matters were the result of actions principally taken by senior executives of CTI who were terminated in 2006. CTI, however, was unable to file the requisite periodic reports by February 8, 2010.
As a result of CTI's inability to become current in its periodic reporting obligations under the federal securities laws in accordance with the final judgment and court order by February 8, 2010, CTI received an additional “Wells Notice” from the staff of the SEC on February 4, 2010. The “Wells Notice” provided notification that the staff of the SEC intended to recommend that the SEC institute an administrative proceeding to determine whether, pursuant to Section 12(j) of the Exchange Act, the SEC should suspend or revoke the registration of each class of CTI's securities registered under Section 12 of the Exchange Act. Under the process established by the SEC, recipients of a “Wells Notice” have the opportunity to make a Wells Submission before the staff of the SEC makes a formal recommendation to the SEC regarding what action, if any, should be brought by the SEC. On February 25, 2010, CTI submitted a Wells Submission to the SEC in response to this Wells Notice. On March 23, 2010, the SEC issued an Order Instituting Administrative Proceedings (“OIP”) pursuant to Section 12(j) of the Exchange Act to suspend or revoke the registration of CTI's common stock because, prior to the filing of the Annual Report on Form 10-K for the fiscal years ended January 31, 2009, 2008, 2007 and 2006 with the SEC on October 4, 2010, CTI had not filed an Annual Report on Form 10-K since April 20, 2005 or a Quarterly Report on Form 10-Q since December 12, 2005. On July 22, 2010, the Administrative Law Judge issued an initial decision to revoke the registration of CTI's common stock. The initial decision did not become effective until the SEC issued a final order, which would indicate the date on which sanctions, if any, would take effect. On August 17, 2010, the SEC issued an order granting a petition by CTI for review of the Administrative Law Judge's initial decision to revoke the registration of CTI's common stock and setting forth a briefing schedule under which the final brief was filed on November 1, 2010. On February 17, 2011, the SEC issued an order directing the parties to file additional briefs in the matter and such briefs were filed on March 7, 2011. In May 2011, the SEC granted CTI's motion for oral argument and such argument was scheduled for July 14, 2011.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


On July 13, 2011, CTI entered into an agreement in principle with the SEC's Division of Enforcement regarding the terms of a settlement of the Section 12(j) administrative proceeding, which terms were subsequently reflected in an Offer of Settlement made on July 26, 2011 and which the SEC accepted on September 8, 2011. Under the terms of the settlement, the SEC's Division of Enforcement agreed to recommend that the SEC resolve the Section 12(j) administrative proceeding against CTI if CTI filed its Quarterly Reports on Form 10-Q for the fiscal quarters ended April 30, 2010, July 31, 2010 and October 31, 2010 by 5:30 p.m. EDT on September 9, 2011 (which reports were filed on July 28, 2011) and its Quarterly Report for the fiscal quarter ended July 31, 2011 on a timely basis (which report was filed timely on September 8, 2011).
On September 16, 2011, the SEC ordered termination of the Section 12(j) administrative proceeding and entry of final judgment without the imposition of a remedy under such section. With the entry of final judgment, the Section 12(j) administrative proceeding has been resolved.
Investigation of Alleged Unlawful Payments
On March 16, 2009, CTI disclosed that the Audit Committee of its Board of Directors was conducting an internal investigation of alleged improper payments made by certain Comverse employees and external sales agents in foreign jurisdictions in connection with the sale of certain products. The Audit Committee found that the conduct at issue did not involve CTI’s current executive officers. The Audit Committee also reviewed Comverse’s other existing and prior arrangements with agents. When the Audit Committee commenced the investigation, CTI voluntarily disclosed to the SEC and the Department of Justice (the "DOJ") these facts and advised that the Audit Committee had initiated an internal investigation and that the Audit Committee would provide the results of its investigation to the agencies. On April 27, 2009, the SEC advised CTI that it was investigating the matter and issued a subpoena to CTI in connection with its investigation. The Audit Committee provided information to, and cooperated fully with, the DOJ and the SEC with respect to its findings of the internal investigation and resulting remedial action.
On April 7, 2011, CTI entered into a non-prosecution agreement with the DOJ and the SEC submitted a settlement agreement with CTI to the United States District Court for the Eastern District of New York for its approval, which was obtained on April 12, 2011. These agreements resolved allegations that CTI and certain of its foreign subsidiaries violated the books and records and internal controls provisions of the U.S. Foreign Corrupt Practices Act (the "FCPA") by inaccurately recording certain improper payments made from 2003 through 2006 by certain former employees and an external sales agent of Comverse Ltd. or its subsidiaries, in connection with the sale of certain products in foreign jurisdictions.
Under the non-prosecution agreement with the DOJ, CTI paid a fine of $1.2 million to the DOJ and agreed to continue to implement improvements in its internal controls and anti-corruption practices and policies. Under its settlement agreement with the SEC, CTI paid approximately $1.6 million in disgorgement and pre-judgment interest and is required under a conduct-based injunction to comply with the books and records and internal controls provisions of the FCPA.
The Company recorded charges associated with this matter during the fiscal year ended January 31, 2009.
Other Legal Proceedings
In addition to the litigation discussed above, the Company is, and in the future, may be involved in various other lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, the Company believes that the ultimate resolution of these current matters will not have a material adverse effect on its consolidated financial statements taken as a whole.
 
Indemnifications
In the normal course of business, the Company provides indemnifications of varying scopes to customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s products. The Company evaluates its indemnifications for potential losses and in its evaluation considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Generally, the Company has not encountered significant charges as a result of such indemnification provisions. To the extent permitted under state laws or other applicable laws, the Company has agreements in which it agreed to indemnify its directors and officers for certain events or occurrences while the director or officer is, or was, serving at the Company’s request in such capacity. The indemnification period covers all pertinent events and occurrences during the Company’s director’s or officer’s lifetime. The maximum potential amount of future payments that the Company could be required to make under these indemnification agreements is unlimited; however, the Company has certain director and officer insurance coverage that limits the Company’s exposure and

131
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


enables the Company to recover a portion of any future amounts paid. The Company is not able to estimate the fair value of these indemnification agreements in excess of applicable insurance coverage, if any.

132
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


26.
QUARTERLY INFORMATION (UNAUDITED)
The following table shows selected results of operations for each of the quarters during the fiscal years ended January 31, 2012 and 2011:
 
 
Fiscal Quarters Ended
 
 
April 30, 2011
 
July 31, 2011
 
October 31, 2011
 
January 31, 2012
 
 
(In thousands, except per share data)
 
 
(UNAUDITED)
Revenue
 
$
176,332

 
$
194,959

 
$
199,364

 
$
211,993

(Loss) income from operations
 
(1,228
)
 
(3,154
)
 
(819
)
 
3,250

Net (loss) income attributable to Comverse Technology, Inc.
 
 
 
 
 
 
 
 
 Net (loss) income from continuing operations
 
(29,432
)
 
(15,417
)
 
(11,083
)
 
690

(Loss) income from discontinued operations, net of tax
 
(29,763
)
 
(24,280
)
 
46,773

 
3,786

Net (loss) income attributable to Comverse Technology, Inc.
 
$
(59,195
)
 
$
(39,697
)
 
$
35,690

 
$
4,476

Net (loss) income from continuing operations attributable to Comverse Technology, Inc.:
 
 
 
 
 
 
 
 
Basic
 
$
(29,432
)
 
$
(15,417
)
 
$
(11,083
)
 
$
690

Diluted
 
(29,434
)
 
(15,485
)
 
(11,121
)
 
564

(Loss) earnings per share from continuing operations attributable to Comverse Technology, Inc.'s shareholders:
 
 
 
 
 
 
 
 
Basic
 
(0.14
)
 
(0.07
)
 
(0.05
)
 
—

Diluted
 
(0.14
)
 
(0.07
)
 
(0.05
)
 
—

Net (loss) income from discontinued operations attributable to Comverse Technology, Inc.:
 
 
 
 
 
 
 
 
Basic
 
(29,763
)
 
(24,280
)
 
46,773

 
3,786

Diluted
 
(29,763
)
 
(24,280
)
 
46,773

 
3,786

(Loss) earnings per share from discontinued operations attributable to Comverse Technology, Inc.'s shareholders:
 
 
 
 
 
 
 
 
Basic
 
(0.15
)
 
(0.12
)
 
0.22

 
0.02

Diluted
 
(0.15
)
 
(0.12
)
 
0.22

 
0.02

(Loss) earnings per share attributable to Comverse Technology, Inc.’s shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
(0.29
)
 
$
(0.19
)
 
$
0.17

 
$
0.02

Diluted
 
$
(0.29
)
 
$
(0.19
)
 
$
0.17

 
$
0.02

 

133
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


 
 
Fiscal Quarters Ended
 
 
April 30, 2010
 
July 31, 2010
 
October 31, 2010
 
January 31, 2011
 
 
(In thousands, except per share data)
 
 
(UNAUDITED)
Revenue
 
$
172,613

 
$
180,676

 
$
186,641

 
$
186,869

(Loss) income from operations
 
(33,593
)
 
(3,785
)
 
26,852

 
4,252

Net (loss) income attributable to Comverse Technology, Inc.
 
 
 
 
 
 
 
 
Net (loss) income from continuing operations
 
(30,808
)
 
(9,594
)
 
4,936

 
(9,916
)
(Loss) income from discontinued operations, net of tax
 
(51,067
)
 
(14,579
)
 
(46,639
)
 
24,561

Net (loss) income attributable to Comverse Technology, Inc.
 
$
(81,875
)
 
$
(24,173
)
 
$
(41,703
)
 
$
14,645

Net (loss) income from continuing operations attributable to
      Comverse Technology, Inc.:
 
 
 
 
 
 
 
 
Basic
 
$
(30,808
)
 
$
(9,594
)
 
$
4,936

 
$
(9,916
)
Diluted
 
(30,808
)
 
(9,653
)
 
2,909

 
(10,149
)
(Loss) earnings per share from continuing operations
      attributable to Comverse Technology, Inc.’s shareholders:
 
 
 
 
 
 
 
 
Basic
 
(0.15
)
 
(0.05
)
 
0.02

 
(0.05
)
Diluted
 
(0.15
)
 
(0.05
)
 
0.01

 
(0.05
)
Net (loss) income from discontinued operations attributable to Comverse Technology, Inc.:
 
 
 
 
 
 
 
 
Basic
 
(51,067
)
 
(14,579
)
 
(46,639
)
 
24,561

Diluted
 
(51,067
)
 
(14,579
)
 
(46,639
)
 
24,561

(Loss) earnings per share from discontinued operations attributable to Comverse Technology, Inc.’s shareholders:
 
 
 
 
 
 
 
 
Basic
 
(0.25
)
 
(0.07
)
 
(0.22
)
 
0.12

Diluted
 
(0.25
)
 
(0.07
)
 
(0.22
)
 
0.12

(Loss) earnings per share attributable to Comverse
      Technology, Inc.’s shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
(0.40
)
 
$
(0.12
)
 
$
(0.20
)
 
$
0.07

Diluted
 
$
(0.40
)
 
$
(0.12
)
 
$
(0.21
)
 
$
0.07

The unaudited quarterly information shown above reflects the presentation of discontinued operations for the quarters in the fiscal years ended January 31, 2012 and 2011 as a result of the Share Distribution, Starhome Disposition and Ulticom Sale on December 3, 2010 (see Note 18, Discontinued Operations).

134

SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT

COMVERSE TECHNOLOGY, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
 
 
 
January 31,
 
 
2012
 
2011
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
171,046

 
$
197,840

Restricted cash
 
—

 
33,367

Auction rate securities
 
272

 
72,441

Prepaid expenses and other current assets
 
3,808

 
2,242

Total current assets
 
175,126

 
305,890

Property and equipment, net
 
1,564

 
1,815

Advances to and investments in subsidiaries
 
343,601

 
313,960

Other assets
 
800

 
1,662

Total assets
 
$
521,091

 
$
623,327

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and other current liabilities
 
$
27,757

 
$
37,797

Convertible debt obligations
 
2,195

 
2,195

Litigation settlement
 
—

 
146,150

Total current liabilities
 
29,952

 
186,142

Other long-term liabilities
 
49,631

 
24,177

Total liabilities
 
79,583

 
210,319

Commitments and contingencies
 
 
 
 
Equity:
 
 
 
 
Common stock, $0.10 par value—authorized, 600,000,000 shares;
issued, 219,708,779 and 204,937,882 shares, respectively;
outstanding, 218,636,842 and 204,553,916, respectively
 
21,971

 
20,494

Treasury stock, at cost, 1,071,937 and 403,966 shares, respectively
 
(8,011
)
 
(3,484
)
Additional paid-in capital
 
2,198,870

 
2,089,501

Accumulated deficit
 
(1,762,517
)
 
(1,703,791
)
Accumulated other comprehensive (loss) income
 
(8,805
)
 
10,288

Total equity
 
441,508

 
413,008

Total liabilities and equity
 
$
521,091

 
$
623,327

See notes to condensed financial statements.


S-1

COMVERSE TECHNOLOGY, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
 
 
 
Fiscal Years Ended January 31,
 
 
2012

2011

2010
Management fees
 
$
—


$
—


$
60

Selling, general and administrative expenses
 
(83,406
)

(96,696
)

(56,692
)
Litigation settlement
 
(4,880
)

17,500


—

Loss from operations
 
(88,286
)

(79,196
)

(56,632
)
Interest income
 
1,758


1,922


3,271

Interest expense
 
(14
)

(10
)

(103
)
Other-than-temporary impairment of investments
 
—


(407
)

(6,914
)
Other income
 
29,587


17,184


92

Loss before income taxes
 
(56,955
)

(60,507
)

(60,286
)
Income tax benefit
 
1,408


8,712


50,143

Equity in losses of subsidiaries from continuing operations, net of tax
 
305


6,413


13,147

Net loss from continuing operations
 
(55,242
)

(45,382
)

3,004

Loss from discontinued operations, net of tax
 
(3,484
)

(87,724
)

(270,408
)
Net loss
 
$
(58,726
)

$
(133,106
)

$
(267,404
)
Weighted average shares outstanding
 





Basic
 
208,301,686


205,162,720


204,513,420

Diluted
 
208,301,686

 
205,162,720

 
205,241,178

Loss per share:
 





Basic
 





Continuing operations
 
$
(0.27
)

$
(0.22
)

$
0.01

Discontinued operations
 
$
(0.01
)

$
(0.43
)

$
(1.32
)
Basic loss per share
 
$
(0.28
)

$
(0.65
)

$
(1.31
)
Diluted
 


 

 
Continuing operations
 
$
(0.27
)

$
(0.22
)

$
0.01

Discontinued operations
 
$
(0.01
)

$
(0.43
)

$
(1.32
)
Diluted loss per share
 
$
(0.28
)

$
(0.65
)

$
(1.31
)
See notes to condensed financial statements.


S-2

COMVERSE TECHNOLOGY, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
Net loss
 
$
(58,726
)
 
$
(133,106
)
 
$
(267,404
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
          Foreign currency translation adjustments
 
2,772

 
3,491

 
8,019

Unrealized (loss) gain on available-for-sale securities, net of reclassification adjustments and tax
 
(21,631
)
 
(7,792
)
 
10,730

Unrealized (loss) gain on cash flow hedges, net of reclassification adjustments and tax
 
(234
)
 
(37
)
 
3,813

Other comprehensive (loss) income
 
(19,093
)
 
(4,338
)
 
22,562

Comprehensive loss
 
$
(77,819
)
 
$
(137,444
)
 
$
(244,842
)
See notes to condensed financial statements.

S-3

COMVERSE TECHNOLOGY, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
Net cash used in operating activities
 
$
(139,642
)
 
$
(97,062
)
 
$
(23,045
)
Cash flows from investing activities:
 
 
 
 
 
 
Proceeds from sales and maturities of investments
 
74,950

 
57,218

 
26,370

Proceeds from sale of Verint Systems, Inc. shares of common stock
 
—

 
76,475

 
—

Proceeds from sale of Ulticom, Inc.
 
—

 
13,211

 
—

Purchase of property and equipment
 
(4
)
 
(84
)
 
(891
)
Payments from subsidiaries, net
 
8,449

 
75,247

 
6,150

Net change in restricted cash
 
33,367

 
(7,223
)
 
(26,144
)
Lending under note receivable with Comverse, Inc.
 
(1,500
)
 
(7,000
)
 
—

Dividend received from discontinued operations
 
—

 
42,399

 
135,323

Net cash provided by investing activities
 
115,262

 
250,243

 
140,808

Cash flows from financing activities:
 
 
 
 
 
 
Advances under promissory note from Comverse, Inc.
 
—

 
—

 
200,000

Repayment of promissory note to Comverse, Inc.
 
—

 
—

 
(200,000
)
Repurchase of convertible debt obligations
 
—

 
—

 
(417,282
)
Repurchase of common stock
 
(4,527
)
 
(1,906
)
 
(359
)
Proceeds from exercise of stock options
 
2,113

 
—

 
—

Net cash used in financing activities
 
(2,414
)
 
(1,906
)
 
(417,641
)
Net increase (decrease) in cash and cash equivalents
 
(26,794
)
 
151,275

 
(299,878
)
Cash and cash equivalents, beginning of year
 
197,840

 
46,565

 
346,443

Cash and cash equivalents, end of year
 
$
171,046

 
$
197,840

 
$
46,565

See notes to condensed financial statements.


S-4

NOTES TO CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

1.
BASIS OF PRESENTATION
Comverse Technology, Inc. (the “Parent Company”) is a holding company that conducts substantially all of its business operations through its subsidiaries. Under a parent-only presentation, the Parent Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting. Losses of a subsidiary, if any, are applied against the investment in subsidiary balance and then to the balance of the advances to the subsidiary if the investment in subsidiary balance has been reduced to zero. Accordingly, non-trade advances to subsidiaries and investments in subsidiaries are presented together as “Advances to and investments in subsidiaries” on the condensed balance sheets. These parent-only condensed financial statements should be read in conjunction with Comverse Technology, Inc.’s audited consolidated financial statements included elsewhere in this Current Report.
Comverse
On October 31, 2012, the Parent Company completed its previously announced spin-off of Comverse as an independent, publicly-traded company, accomplished by means of a pro rata distribution of 100% of Comverse's outstanding common shares to Parent Company's shareholders (the “Share Distribution”). Following the Share Distribution, the Parent Company no longer holds any of Comverse's outstanding capital stock.
Immediately prior to the Share Distribution, the Parent Company contributed to Comverse Exalink Ltd. (“Exalink”), its wholly-owned subsidiary. Other than holding certain intellectual property rights, Exalink has no operations. Following the Share Distribution, Comverse and the Parent Company operate independently, and neither have any ownership interest in the other. In order to govern certain ongoing relationships between the Parent Company and Comverse after the Share Distribution and to provide mechanisms for an orderly transition, Parent Company and Comverse entered into agreements relating to the provision of certain services and setting forth certain rights and obligations between them following the Share Distribution, and Parent Company and Comverse agreed, among other things, to indemnify each other against certain liabilities arising from their respective businesses and the services that will be provided under such agreements (see Note 8, Discontinued Operations).
As a result of the Share Distribution, the results of operations of Comverse are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in the Parent Company's condensed statements of operations for all periods presented. The net investment in Comverse is included in discontinued operations as separate components to the Parent Company's condensed balance sheets as of all dates presented (see Note 8, Discontinued Operations).
Starhome
On August 1, 2012, the Parent Company, certain other Starhome shareholders and Starhome entered into a Share Purchase Agreement (the “Starhome Share Purchase Agreement”) with Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, “Fortissimo”) pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome (the “Starhome Disposition”). On September 19, 2012, the Parent Company, contributed to Comverse its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Starhome Disposition was completed on October 19, 2012.
Under the terms of the Starhome Share Purchase Agreement, Starhome's shareholders received aggregate cash proceeds of approximately $81.3 million, subject to adjustment for fees, transaction expenses and certain taxes. Of this amount, $10.5 million is held in escrow to cover potential post-closing indemnification claims, with $5.5 million being released after 18 months (less any claims made on or prior to such date) and the remainder released after 24 months, in each case, less any claims made on or prior to such dates. Comverse received aggregate net cash consideration (including amounts deposited in escrow at closing) of approximately $37.2 million, after payments that the Parent Company agreed to make to certain other Starhome shareholders of $4.5 million.
The Parent Company and the other Starhome shareholders have made customary representations and warranties and covenants in the Starhome Share Purchase Agreement, including an agreement not to solicit Starhome employees or interfere with Starhome's clients, customers, suppliers, licensors or other business relationships for a period of four years following the closing. the Parent Company has also agreed for a period of four years following the closing (October 19, 2012) that it will not, and will cause its affiliates (other than Verint) not to, create, design, develop or offer for sale any product or service which directly competes with any products or services offered by Starhome, subject to certain limited exceptions. 
As a result of the Starhome Disposition the results of operations of Starhome are included in discontinued operations, less applicable income taxes, as a separate component of net loss in the Parent Company's condensed statements of operations for all periods presented. The net investment in Starhome is included in discontinued operations as a separate component to the Parent Company's condensed balance sheets as of all dates presented (see Note 8, Discontinued Operations).

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Sale of Ulticom
On December 3, 2010, the Parent Company sold its subsidiary, Ulticom, Inc. to a third party (the “Ulticom Sale”) for an aggregate consideration of up to $17.2 million. As a result of the Ulticom Sale, the results of operations of Ulticom, including the gain on the Ulticom sale of $2.9 million, are reflected in discontinued operations, less applicable income taxes, as a separate component of net loss in the Parent Company’s statements of operations for the fiscal years ended January 31, 2011 and 2010, respectively.
Verint Strategic Alternative Exploration
The Parent Company is exploring all options to maximize the value of its equity interests in Verint for the benefit of the shareholders of both the Parent Company and Verint. The ultimate execution of any alternative will take into account a number of considerations, including, without limitation, tax efficiency and, depending upon the circumstances, the separate recommendation of Verint's directors who are not directors or officers of the Parent Company.
Restrictions on Access to Subsidiary Cash
The Parent Company’s Verint subsidiary has long-term debt outstanding as of January 31, 2012 and 2011 under a credit agreement that contains certain restrictive covenants which, among other things, preclude Verint Systems from paying cash dividends and limit its ability to make asset distributions to its stockholders, including the Parent Company. As the restricted net assets represent a significant portion of the Company’s consolidated net assets, these condensed financial statements have been presented on a “parent-only” basis.
2.
RESTRICTED CASH AND AUCTION RATE SECURITIES
As of January 31, 2011, restricted cash includes proceeds received from sales and redemptions of auction rate securities (“ARS”) (including interest thereon) that were restricted under the terms of the consolidated shareholder class action settlement agreement. In addition, as of January 31, 2011, all ARS were restricted pursuant to such settlement agreement. See Note 3, Investments, and Note 25, Commitments and Contingencies, of the consolidated financial statements for disclosures relating to restrictions on ARS and cash proceeds from the sale and redemption of ARS. As of January 31, 2011, $33.4 million of sales proceeds (including interest thereon) were classified in “Restricted cash.”
During the fourth quarter of the fiscal year ended January 31, 2012, the Parent Company paid all remaining amounts under the settlement agreement using restricted cash received from sales and redemptions of ARS and shares of its common stock and, accordingly, all ARS and remaining cash proceeds received from sales and redemptions of ARS became unrestricted. Accordingly, as of January 31, 2012, there was no restricted cash balance on the Parent Company's condensed balance sheet.
3.
DEBT
As of January 31, 2012 and 2011, the Parent Company had $2.2 million in aggregate principal amount of outstanding convertible debt obligations (the “Convertible Debt Obligations”). During the fiscal year ended January 31, 2010, the Parent Company commenced a tender offer, in accordance with the terms of the indenture, pursuant to which the Parent Company purchased $417.3 million in aggregate principal amount of its Convertible Debt Obligations. Refer to Note 11, Debt, of the consolidated financial statements for a description of the significant provisions of the Convertible Debt Obligations.
4.
COMMITMENTS AND CONTINGENCIES
The Parent Company is a party to various actions. For a more comprehensive discussion, see Note 25, Commitments and Contingencies, of the consolidated financial statements.
Shareholder Class and Derivative Actions
In December, 2009, the Parent Company entered into agreements to settle a shareholder class action and consolidated shareholder derivative actions for an aggregate amount of $174.4 million, including legal fees and expenses of the plaintiffs of $9.4 million, which has been accrued for during the fiscal year ended January 31, 2007. The agreement to settle the consolidated shareholder class action was amended on June 19, 2010. Pursuant to the amendment, CTI agreed to waive certain rights to terminate the settlement in exchange for a deferral of the timing of scheduled payments of the settlement consideration and the right to a credit (the “Opt-out Credit”) in respect of a portion of the settlement funds that would have been payable to a class member that elected not to participate in and be bound by the settlement. Under the settlement agreement of the

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consolidated shareholder class action, the Parent Company paid the plaintiff class $160.2 million, of which $82.5 million was paid through the issuance of 12,462,236 shares of Parent Company common stock.
Opt-Out Plaintiffs' Action
On December 19, 2011, the Parent Company and the Opt-out plaintiff executed a settlement agreement, pursuant to which the Parent Company paid the plaintiffs approximately $9.5 million on December 28, 2011. On January 3, 2012, the parties filed a notice of dismissal, and on January 4, 2012, the Court dismissed the action.
In connection with this matter, the Parent Company recorded a pre-tax charge of $4.9 million for the fiscal year ended January 31, 2012, representing the amount by which the settlement amount exceeded the Opt-out Credit and certain other credits under the settlement agreement of the consolidated shareholder class action.
SEC Civil Actions
On July 13, 2011, the Parent Company entered into an agreement in principle with the SEC's Division of Enforcement regarding the terms of a settlement of the Section 12(j) administrative proceeding, which terms were subsequently reflected in an Offer of Settlement made on July 26, 2011 and which the SEC accepted on September 8, 2011. Under the terms of the settlement, the SEC's Division of Enforcement agreed to recommend that the SEC resolve the Section 12(j) administrative proceeding against the Parent Company if the Parent Company filed its Quarterly Reports on Form 10-Q for the fiscal quarters ended April 30, 2010, July 31, 2010 and October 31, 2010 by 5:30 p.m. EDT on September 9, 2011 (which reports were filed on July 28, 2011) and its Quarterly Report for the fiscal quarter ended July 31, 2011 on a timely basis (which report was filed timely on September 8, 2011). On September 16, 2011, the SEC ordered termination of the Section 12(j) administrative proceeding and entry of final judgment without the imposition of a remedy under such section. With the entry of final judgment, the Section 12(j) administrative proceeding has been resolved.
Investigation of Alleged Unlawful Payments
On April 7, 2011, the Parent Company entered into a non-prosecution agreement with the DOJ and the SEC submitted a settlement agreement with the Parent Company to the United States District Court for the Eastern District of New York for its approval, which was obtained on April 12, 2011. These agreements resolved allegations that the Parent Company and certain of its foreign subsidiaries violated the books and records and internal controls provisions of the U.S. Foreign Corrupt Practices Act (the "FCPA").
Under the non-prosecution agreement with the DOJ, the Parent Company paid a fine of $1.2 million to the DOJ and agreed to continue to implement improvements in its internal controls and anti-corruption practices and policies. Under its settlement agreement with the SEC, the Parent Company paid approximately $1.6 million in disgorgement and pre-judgment interest and is required under a conduct-based injunction to comply with the books and records and internal controls provisions of the FCPA. The Parent Company recorded charges associated with this matter during the fiscal year ended January 31, 2009.
5.
SALE OF SHARES OF VERINT SYSTEMS’ COMMON STOCK
Effective July 15, 2010, the Parent Company made a demand pursuant to the Original Registration Rights Agreement to have up to 2.8 million shares of Verint Systems’ common stock registered in a registration statement on Form S-1. On January 14, 2011, CTI completed the sale of 2.3 million shares of Verint Systems’ common stock in a secondary public offering for aggregate proceeds net of underwriting discounts and commissions of $76.5 million. The sale of shares of Verint Systems’ common stock was accounted for as an equity transaction. As a result, for the fiscal year ended January 31, 2011, the Parent Company increased “Additional paid-in capital” by $52.2 million, increased “Accumulated other comprehensive income” by $2.6 million and reduced investments in subsidiaries by $4.5 million. See Note 24, Related Party Transactions, Sale of Shares of Verint Systems’ Common Stock, of the consolidated financial statements for a more detailed discussion.
6.
PERPETUAL PREFERRED STOCK OF SUBSIDIARY
On May 25, 2007, the Parent Company entered into an agreement with its subsidiary, Verint Systems, to purchase an aggregate of 293,000 shares of Verint Systems’ Series A Convertible Perpetual Preferred Stock (the “preferred stock”) for an aggregate purchase price of $293.0 million. See Note 24, Related Party Transactions, Verint’s Series A Convertible Perpetual Preferred Stock, of the consolidated financial statements for a more comprehensive discussion, including the terms of the preferred stock.

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7.
ULTICOM’S SPECIAL CASH DIVIDENDS
In December 2010, Ulticom, Inc. paid a special cash dividend in the aggregate amount of $64.1 million to its shareholders of which the Parent Company received $42.4 million and the remaining amount was paid to Ulticom, Inc.’s minority shareholders. The special cash dividend was paid immediately prior to the Ulticom Sale.
In April 2009, Ulticom, Inc. paid a special cash dividend of $199.6 million to its shareholders, of which the Parent Company received $135.3 million and the remaining amount was paid to Ulticom, Inc.’s minority shareholders.
See Note 24, Related Party Transactions, Ulticom’s 2010 Special Cash Dividend and Ulticom’s 2009 Special Cash Dividend and Stock Option Modification, of the consolidated financial statements for further disclosure relating to Ulticom’s special cash dividends.
8.
DISCONTINUED OPERATIONS
Comverse was a wholly-owned subsidiary prior to the completion of the Share Distribution on October 31, 2012. Starhome was a majority-owned subsidiary prior to the completion of the Starhome Disposition on October 19, 2012 and Ulticom, Inc. was a majority-owned publicly-traded subsidiary of the Parent Company prior to its sale on December 3, 2010. For a more comprehensive discussion of the Comverse distribution, Starhome Disposition and Ulticom Sale, see Note 18, Discontinued Operations, of the consolidated financial statements.
The equity in losses of Comverse, Starhome and Ulticom, net of tax, and the gain on the sale of Ulticom, net of tax of $2.9 million, are reflected in discontinued operations, less applicable income taxes, as a separate component of net loss in the Parent Company’s statements of operations for the fiscal years ended January 31, 2012, 2011 and 2010, respectively.
The amounts included in discontinued operations were as follows:
 
 
Fiscal Years Ended January 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Equity in losses of discontinued operations, net of tax
 
$
(3,484
)
 
$
(90,651
)
 
$
(270,408
)
Gain on sale of discontinued operation, net of tax
 
—

 
2,927

 
—

Loss from discontinued operation, net of tax
 
$
(3,484
)
 
$
(87,724
)
 
$
(270,408
)

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SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
 
 
Balance at 
Beginning
of Fiscal Year
 
Additions 
Charged
(Credited) to 
Expenses
 
Net Deductions
(Recoveries)
 
Other (1)
 
Balance at End
of Fiscal Year
Allowance for doubtful accounts:
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended January 31, 2012
 
$
5,395

 
$
1,055

 
$
(3,568
)
 
$
47

 
$
2,929

Fiscal Year Ended January 31, 2011
 
4,706

 
1,863

 
(1,163
)
 
(11
)
 
5,395

Fiscal Year Ended January 31, 2010
 
5,989

 
845

 
(2,253
)
 
125

 
4,706

Valuation allowance on income tax assets:
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended January 31, 2012
 
$
105,960

 
$
16,615

 
$
—

 
$
(12,580
)
 
$
109,995

Fiscal Year Ended January 31, 2011
 
128,346

 
4,284

 
—

 
(26,670
)
 
105,960

Fiscal Year Ended January 31, 2010
 
156,831

 
(15,745
)
 
—

 
(12,740
)
 
128,346

Warranties: (2)
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended January 31, 2012
 
$
1,996

 
$
771

 
$
(389
)
 
$
(363
)
 
$
2,015

Fiscal Year Ended January 31, 2011
 
1,292

 
957

 
(121
)
 
(132
)
 
1,996

Fiscal Year Ended January 31, 2010
 
1,188

 
220

 
(42
)
 
(74
)
 
1,292

(1)
Primarily consists of (i) the allocation of tax from continuing operations to discontinued operations, additional paid-in capital and other comprehensive income, and (ii) translation adjustments.
(2)
Included in “Accounts payable and accrued expenses” in the consolidated balance sheets.

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