10. DERIVATIVES AND FINANCIAL INSTRUMENTS

The Company entered into derivative arrangements to manage a variety of risk exposures during the nine months ended October 31, 2010 and 2009, 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 Comverse, Verint and Starhome subsidiaries. The Company assessed the counterparty credit risk for each party related to its derivative financial instruments for the periods presented.

All derivatives outstanding as of October 31, 2010 are short-term in nature and generally have maturities of no longer than twelve months. As of October 31, 2010, Verint had several contracts which extended beyond twelve months, settling at various dates through February 2012.

Forward Contracts

During the nine months ended October 31, 2010 and 2009, Comverse entered into a series of short-term foreign currency forward contracts to limit the variability in exchange rates between the U.S. dollar (the "USD") and the new Israeli shekels ("NIS") to hedge probable cash flow exposure from expected future payroll expense. The transactions qualified for cash flow hedge accounting under the FASB's guidance and there was no hedge ineffectiveness. Accordingly, the Company recorded all changes in fair value of the forward contracts as part of other comprehensive income or loss. Such amounts are reclassified to the condensed consolidated statements of operations when the effects of the item being hedged are recognized in the condensed consolidated statements of operations.

Verint periodically enters 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'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. Verint also periodically utilizes foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency. These foreign currency forward contracts generally have maturities of no longer than twelve months. 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 condensed 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 or loss. Such amounts are reclassified to the consolidated statements of operations when the effects of the item being hedged are recognized in the condensed consolidated statements of operations.

During the nine months ended October 31, 2010 and 2009, Starhome entered into short-term foreign currency forward contracts to mitigate risk of fluctuations in foreign currency exchange rates mainly relating to payroll costs denominated in the NIS. Certain of these foreign currency forward contracts were not designated as hedging instruments, and therefore, gains and losses from changes in their fair values were reported in "Other income (expense), net" in the condensed consolidated statements of operations.

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, under which Verint paid fixed interest at 5.18% and received variable interest equal to three-month LIBOR on a notional amount of $450.0 million. The original term of the interest rate swap agreement extended through May 2011, and cash settlements with the counterparty occurred on a quarterly basis. 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 income (expense), net" in the condensed consolidated statements of operations. On July 30, 2010, Verint terminated the interest rate swap agreement in exchange for a payment of $21.7 million to the counterparty, representing the approximate present value of the expected remaining quarterly settlement payments Verint otherwise would have owed under the interest rate swap agreement. This obligation was paid on August 3, 2010.

The following tables summarize the Company's derivative positions and their respective fair values as of October 31, 2010 and January 31, 2010:


	October 31, 2010
Type of Derivative	Notional Amount		Balance Sheet Classification	Fair Value
			(In thousands)
Assets

Derivatives not designated as hedging instruments
Short-term foreign currency forward	$	6,495	Prepaid expenses and other current assets	$	254

Derivatives designated as hedging instruments
Short-term foreign currency forward		75,939	Prepaid expenses and other current assets		3,398

Total assets				$	3,652


Liabilities
Derivatives not designated as hedging instruments
Short-term foreign currency forward		30,904	Other current liabilities	$	2,041

Total liabilities				$	2,041


	January 31, 2010
Type of Derivative	Notional Amount		Balance Sheet Classification	Fair Value
			(In thousands)
Assets

Derivatives not designated as hedging instruments
Short-term foreign currency forward	$	11,079	Prepaid expenses and other current assets	$	758

Derivatives designated as hedging instruments
Short-term foreign currency forward		93,015	Prepaid expenses and other current assets		864

Total assets				$	1,622


Liabilities
Derivatives not designated as hedging instruments
Short-term interest rate swap ⁽¹⁾			Other current liabilities	$	20,988
Short-term foreign currency forward		26,500	Other current liabilities		598
Long-term interest rate swap ⁽¹⁾			Other long-term liabilities		8,824

Derivatives designated as hedging instruments
Short-term foreign currency forward		5,187	Other current liabilities		38

Total liabilities				$	30,448

(1)	The total notional amount of the interest rate swap was $450.0 million.

The following tables summarize the Company's classification of gains and losses on derivative instruments for the three and nine months ended October 31, 2010 and 2009:


	Three Months Ended October 31, 2010
	Gain (Loss)
Type of Derivative	Recognized in Other Comprehensive Income		Reclassified from Accumulated Other Comprehensive Income into Statement of Operations ⁽¹⁾		Recognized in Other Income (Expense), Net
			(In thousands)
Derivatives not designated as hedging instruments
Foreign currency forward	$	—	$	—	$	(924	)

Derivatives designated as hedging instruments
Foreign currency forward		3,175		1,003		—

Total	$	3,175	$	1,003	$	(924	)


	Three Months Ended October 31, 2009
	Gain (Loss)
Type of Derivative	Recognized in Other Comprehensive Income		Reclassified from Accumulated Other Comprehensive Income into Statement of Operations ⁽¹⁾		Recognized in Other Income (Expense), Net
			(In thousands)
Derivatives not designated as hedging instruments
Foreign currency forward	$	—	$	—	$	(194	)
Interest rate swap		—		—		(4,434	)

Derivatives designated as hedging instruments
Foreign currency forward		1,374		2,852		—

Total	$	1,374	$	2,852	$	(4,628	)

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


	Nine Months Ended October 31, 2010
	Gain (Loss)
Type of Derivative	Recognized in Other Comprehensive Income		Reclassified from Accumulated Other Comprehensive Income into Statement of Operations ⁽¹⁾		Recognized in Other Income (Expense), Net
			(In thousands)

Derivatives not designated as hedging instruments
Foreign currency forward	$	—	$	—	$	(628	)
Interest rate swap		—		—		(3,102	)

Derivatives designated as hedging instruments
Foreign currency forward		2,772		619		—

Total	$	2,772	$	619	$	(3,730	)


	Nine Months Ended October 31, 2009
	Gain (Loss)
Type of Derivative	Recognized in Other Comprehensive Income		Reclassified from Accumulated Other Comprehensive Income into Statement of Operations ⁽¹⁾		Recognized in Other Income (Expense), Net
			(In thousands)

Derivatives not designated as hedging instruments
Foreign currency forward	$	—	$	—	$	(454	)
Interest rate swap		—		—		(11,005	)

Derivatives designated as hedging instruments
Foreign currency forward		8,370		3,556		—

Total	$	8,370	$	3,556	$	(11,459	)

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

The components of other comprehensive income related to cash flow hedges are as follows:


	Three Months Ended October 31,						Nine Months Ended October 31,
	2010			2009			2010			2009
				(In thousands)
Accumulated OCI related to cash flow hedges, beginning of the period	$	747		$	3,264		$	785		$	(3,028	)
Unrealized gains on cash flow hedges		3,575			887			3,191			8,500
Reclassification adjustment for gains included in net loss		(1,003	)		(2,852	)		(619	)		(3,556	)

Unrealized gains (losses) on cash flow hedges, before tax		2,572			(1,965	)		2,572			4,944
Other comprehensive (loss) income attributable to noncontrolling interest		(400	)		487			(419	)		(130	)
Deferred income tax provision		(23	)		—			(42	)		—
Unrealized gains (losses) on cash flow hedges, net of tax		2,149			(1,478	)		2,111			4,814

Accumulated OCI related to cash flow hedges, end of the period	$	2,896		$	1,786		$	2,896		$	1,786