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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended April 30, 2002

or

Commission File Number: 000-49790

Verint Systems Inc.
(Exact name of registrant as specified in its charter)

(516) 677-7300
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o    No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of Common Stock, par value $0.001 per share,
outstanding as of June 26, 2002 was 23,430,426

PART I

Financial Information

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VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)

*The Condensed Consolidated Balance Sheet as of January 31, 2002 has been summarized
from the Company's audited Consolidated Balance Sheet as of that date.

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

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VERINT SYSTEMS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)
(In thousands, except per share data)

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

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VERINT SYSTEMS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

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

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VERINT SYSTEMS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

        Verint Systems Inc. ("Verint" and, together with its subsidiaries, the "Company") is engaged in providing analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence.

        The accompanying financial information should be read in conjunction with the audited financial statements, including the notes thereto, for the annual period ended January 31, 2002 (included in the Company's registration statement on Form S-1, as filed with the Securities and Exchange Commission (the "SEC"), dated May 15, 2002). See Note 11, "Subsequent Event," below. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of the Company's management, necessary for a fair statement of the results for the interim periods presented herein. The Company's results of operations for the three month period ended April 30, 2002 are not necessarily indicative of the Company's results to be expected for the full year.

2. Inventories

        The composition of inventories at January 31, 2002 and April 30, 2002 is as follows:

3. Research and Development Expenses

        The Company's research and development activities include projects partially funded by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel (the "OCS") under which the OCS reimburses a portion of the Company's research and development expenditures under approved project budgets. The Company is currently involved in several ongoing research and development projects supported by the OCS. During the three month periods ended April 30, 2001 and 2002, reimbursement from the OCS amounted to approximately $1.5 million and $1.2 million respectively.

4. Earnings (Loss) Per Share

        The computation of basic earnings (loss) per share is based on the weighted average number of outstanding common shares. Diluted earnings per share further assumes the issuance of common shares

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for all potentially dilutive issuances of stock. The calculation for earnings per share for the three month periods ended April 30, 2001 and 2002 was as follows:

        The diluted loss per share computation for the three months ended April 30, 2001 excludes approximately 1,672,000 incremental shares related to employee stock options. These shares are excluded due to their antidilutive effect as a result of the Company's loss during the period.

5. Comprehensive Income (Loss)

        For the three month periods ended April 30, 2001 and 2002, total comprehensive income (loss) was $(1,021,000) and $1,448,000, respectively. The elements of comprehensive income (loss) include net income (loss) and foreign currency translation adjustments.

6. Workforce Reduction and Facilities Consolidation

        During the year ended January 31, 2002, the Company took steps to better align its cost structure with the business environment, to improve the efficiency of its operations and to increase its profitability. These steps included reductions in the Company's workforce and the consolidation of its facilities in the United Kingdom, which were announced in April and December 2001.

        As of April 30, 2002, the Company had accrued liabilities of approximately $542,000 related to the workforce reduction and facilities consolidation costs. A roll forward of the accrued liabilities for the workforce reduction and facilities consolidation costs from January 31, 2002 is as follows:

        Severance and related costs consist primarily of severance payments to terminated employees and fringe related costs associated with severance payments, other termination costs and legal and

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consulting costs. The balance of the severance and related costs is expected to be paid by January 31, 2003.

        Facilities costs consist primarily of contractually obligated lease liabilities and operating expenses related to facilities vacated in the United Kingdom as a result of the facilities consolidation. The balance of the facilities cost is expected to be paid by October 31, 2003.

7. Related Party Transactions and Balances

        Corporate Services Agreement—For the three month periods ended April 30, 2001 and 2002, the Company recorded expenses of $125,000 and $131,250, respectively, for the services provided by the Company's parent, Comverse Technology, Inc. ("CTI"), under the Corporate Services Agreement between the Company and CTI.

        Enterprise Resource Planning Software Sharing Agreement—The Company recorded $25,000 for each of the three month periods ended April 30, 2001 and 2002, for support services rendered by Comverse Ltd., a subsidiary of CTI, under the Enterprise Resource Planning Software Sharing Agreement between the Company and Comverse Ltd.

        Satellite Services Agreement—For the three month periods ended April 30, 2001 and 2002, the Company recorded expenses of $522,000, and $476,000, respectively, for services rendered by Comverse, Inc., a subsidiary of CTI, and its subsidiaries under the Satellite Services Agreement between the Company and Comverse, Inc.

        Transactions with an Affiliate—During the three month periods ended April 30, 2001 and 2002, the Company sold products and services to Verint Systems (Singapore) PTE LTD (formerly Comverse Infosys (Singapore) PTE LTD), an affiliated systems integrator in which the Company holds a 50% equity interest, amounting to approximately $473,000 and $69,000, respectively. In addition, the Company was charged with marketing and office service fees by that affiliate amounting to approximately $89,000 and $115,000 for the three month periods ended April 30, 2001 and 2002, respectively.

        Transactions with Other Subsidiaries of CTI—The Company charges subsidiaries of CTI for services relating to the use of the Company's facilities and employees. Charges to these subsidiaries were approximately $587,000 and $43,000 for the three month periods ended April 30, 2001 and 2002, respectively.

        Intercompany Loan—The Company was charged interest on balances owed to CTI amounting to $488,000 for the three month period ended April 30, 2001. The principal amount of the indebtedness to CTI and related accrued and unpaid interest were repaid on January 31, 2002.

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        Related Party Balances—Related party balances included in the condensed consolidated balance sheets are as follows (in thousands):

8. Acquisitions

        On February 1, 2002, the Company acquired the digital video recording business of Lanex LLC. The Lanex business provides digital video recording solutions for security and surveillance applications. The purchase price consisted of $9,510,000 in cash and a $2,200,000 convertible note issued by the Company. The note is non-interest bearing and matures on February 1, 2004. The holders of the note may elect to convert the note, in whole or in part, into shares of the Company's common stock at a conversion price of $16.06 per share. The note is guaranteed by CTI. In connection with this acquisition, the Company incurred transaction costs, consisting primarily of professional fees amounting to approximately $196,000.

        The acquisition was accounted for using the purchase method. The purchase price was allocated to those assets acquired and liabilities assumed based on the estimated fair value of those assets and liabilities as of February 1, 2002. Identifiable intangible assets consist of sales backlog, acquired technology, trade name and non-competition agreements and have an estimated useful life of up to six years. The results of operations of Lanex's acquired business have been included in the Company's results of operations since February 1, 2002.

        The following is a summary of the allocation of the purchase price for this acquisition:

        The summary unaudited pro forma condensed consolidated results of operations for the three month period ended April 30, 2001 assuming the acquisition had occurred at the beginning of such period, would have reflected consolidated revenues of approximately $36,013,000, a net loss of approximately $870,000 and a loss per share of $0.05. These pro forma results are not necessarily indicative of what would have occurred if the acquisition had been in effect for the period presented. In addition, the pro forma results are not necessarily indicative of the results that will occur in the future and do not reflect any potential synergies that might arise from the combined operations.

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9. Business Segment Information

        The Company is engaged in providing analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence. The Company operates in one business segment and manages its business on a geographic basis. Summarized financial information for the Company's reportable geographic segments is presented in the following table. Sales in each geographic segment represents sales originating from that segment.

        Long-lived assets by country of domicile consist of:

10. Effect of New Accounting Pronouncements

        In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized, but rather reviewed for impairment on a periodic basis. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. This Statement is required to be applied at the beginning of the Company's fiscal year and is to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and certain intangible assets that arise due to the initial application of this Statement are to be reported as resulting from a change in accounting principle. Goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the provisions of this Statement. The adoption of SFAS No. 142 did not have a material effect on the Company's consolidated financial statements.

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        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, development and/or normal operation of a long-lived asset. This Statement is effective for fiscal years beginning after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes certain provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years; however, early adoption is encouraged. The adoption of SFAS No. 144 did not have a material effect on the Company's consolidated financial statements.

11. Subsequent Event

        Initial Public Offering. On May 15, 2002, the Company completed an initial public offering of 4,500,000 shares of its common stock at a price of $16.00 per share. The net proceeds of the offering were approximately $65.5 million. The Company intends to use the net proceeds of this offering to finance the growth of its business, as working capital and for general corporate purposes and capital expenditures. The Company also may use a significant portion of such proceeds to repay outstanding bank debt. In addition, the Company may also use a portion of the proceeds for acquisitions or other investments.

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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

Three Month Period Ended April 30, 2002
Compared to Three Month Period Ended April 30, 2001

        Sales.    Sales for the three month period ended April 30, 2002 increased by approximately $1.8 million, or 5%, as compared to the three month period ended April 30, 2001. This increase was attributable to an increased sales volume of both products and service revenues. Sales to international customers represented approximately 48% of sales for the three month period ended April 30, 2002 as compared to approximately 63% for the three month period ended April 30, 2001.

        Cost of Sales.    Cost of sales for the three month period ended April 30, 2002 did not substantially change as compared to the three month period ended April 30, 2001. Gross margins increased to approximately 51.0% in the three month period ended April 30, 2002 from approximately 48.4% in the three month period ended April 30, 2001. The main changes in the composition of the cost of sales for the three month period ended April 30, 2002, as compared to the three month period ended April 30, 2001, were a decrease in material costs of approximately $0.3 million and a decrease in salaries and fringe benefits of approximately $0.3 million. These decreases were offset by an increase in other expenses of approximately $0.6 million.

        Research and Development Expenses, net.    Research and development expenses, net, for the three month period ended April 30, 2002 decreased by approximately $0.1 million, or 3%, compared to the three month period ended April 30, 2001. This net decrease was attributable to a decrease in salaries and fringe benefits of approximately $0.5 million offset by a decrease in government reimbursements of approximately $0.3 million and an increase in other research and development expenses of approximately $0.1 million. Research and development expenses, net, as a percentage of sales, decreased to approximately 10.7% for the three month period ended April 30, 2002 from approximately 11.6% for the three month period ended April 30, 2001.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the three month period ended April 30, 2002 decreased by approximately $0.2 million, or 2%, compared to the three month period ended April 30, 2001. This decrease was attributable to lower agent commissions of approximately $0.3 million, lower bad debt expense of approximately $0.2 million and a decrease in other expenses of approximately $0.5 million offset by an increase in salaries and fringe benefits of approximately $0.8 million related to the sales and marketing personnel. Selling, general and administrative expenses as a percentage of sales decreased to approximately 32.5% for the three month period ended April 30, 2002 from approximately 34.8% for the three month period ended April 30, 2001.

        Royalties and License Fees.    Royalties and license fees for the three month period ended April 30, 2002 did not substantially change as compared to the three month period ended April 30, 2001.

        Interest and Other Income (Expense), net.    Net interest and other income (expense) for the three month period ended April 30, 2002 increased by approximately $0.4 million as compared to the three month period ended April 30, 2001. This increase was attributable to increased net foreign currency gains of approximately $0.8 million and decreased interest expense of approximately $0.3 million, offset by decreased interest income of approximately $0.4 million and increased other expenses of approximately $0.3 million attributable to increased net losses of the Company's affiliate in Singapore. The decrease in interest income and expense is primarily due to the decline in interest rates in the three month period ended April 30, 2002 as compared to the three month period ended April 30, 2001.

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        Income Tax Provision.    During the three month period ended April 30, 2002, income tax provision decreased by approximately $0.1 million compared to the three month period ended April 30, 2001. This decrease was attributable to a decrease in state income tax provision due to lower taxable income in certain state jurisdictions. The overall effective tax rate was approximately 22% in the three month period ended April 30, 2002. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of its Israeli subsidiary, which is entitled to favorable income tax rates under a program of the Israeli Government for "Approved Enterprise" investments in that country.

        Net Income (Loss).    Net income was approximately $1.7 million for the three month period ended April 30, 2002 as compared to a net loss of approximately $0.9 million for the three month period ended April 30, 2001, an increase of approximately $2.6 million. As a percentage of sales, net income (loss) was approximately 4.7% in the three month period ended April 30, 2002 as compared to approximately (2.6)% in the three month period ended April 30, 2001. The increase resulted primarily from the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

        As of April 30, 2002, the Company had cash and cash equivalents of approximately $45.1 million. As of April 30, 2002 the Company had a working capital deficit of approximately $5.8 million due primarily to the Company's $42 million bank loan being classified as a current liability as of April 30, 2002. On May 15, 2002 the Company completed an initial public offering which provided approximately $65.5 million of additional working capital. On a pro forma basis, after giving effect to the net proceeds of the Company's initial public offering, working capital at April 30, 2002 would have been approximately $59.6 million.

        Operating activities for the three month periods ended April 30, 2001 and 2002, after adjustment for non-cash items, provided cash of approximately $0.8 million, and $3.7 million, respectively. Other changes in operating assets and liabilities provided (used) cash of approximately ($0.6) million and $3.2 million for the three month periods ended April 30, 2001 and 2002, respectively. This resulted in cash provided by operating activities of approximately $0.2 million and $6.8 million for the three month periods ended April 30, 2001 and 2002, respectively.

        Investing activities for the three month periods ended April 30, 2001 and 2002, used cash of approximately $2.7 million and $11.7 million, respectively. For the three month period ended April 30, 2001 these amounts primarily include additions to property and equipment of approximately $1.6 million and capitalization of software development costs of approximately $1.1 million. For the three month period ended April 30, 2002 these amounts primarily include cash paid for a business combination of approximately $9.7 million, additions to property and equipment of approximately $0.8 million and capitalization of software development costs of approximately $1.3 million.

        Financing activities for the three month periods ended April 30, 2001 and 2002, provided cash of approximately $0.4 million and $0.2 million, respectively. For the three month periods ended April 30, 2001 and 2002 proceeds from the issuances of common stock provided cash of approximately $0.1 million and $0.2 million, respectively, and net proceeds from bank loans and other debt provided cash of approximately $0.3 million in the three month period ended April 30, 2001.

        In January 2002, the Company obtained a $42 million bank loan. This loan matures in February 2003, bears interest at LIBOR plus 0.55%, and may be prepaid without penalty at the end of any interest period. The proceeds of this loan were used to repay amounts owed to CTI. This loan is guaranteed by CTI.

        On February 1, 2002, the Company acquired the digital video recording business of Lanex, LLC. The Lanex business provides digital video recording solutions for security and surveillance applications.

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The purchase price consisted of $9.5 million in cash and a $2.2 million convertible note. The note is non-interest bearing and matures on February 1, 2004. The holders of the note may elect to convert the note, in whole or in part, into shares of the Company's common stock at a conversion price of $16.06 per share. The note is guaranteed by CTI.

        On May 15, 2002, the Company completed an initial public offering of 4,500,000 shares of its common stock at a price of $16.00 per share. The net proceeds of the offering were approximately $65.5 million.

        The following table summarizes the Company's balance sheet as of April 30, 2002:

•

on an actual basis; and



•

on an as adjusted basis to give effect to the sale of 4,500,000 shares of common stock sold by the company in its initial public offering, which was completed on May 15, 2002, after deducting the underwriting discounts and commissions and estimated offering expenses.

        The Company believes that the net proceeds from the Company's initial public offering together with its current cash balances and potential cash flows from operations, will be sufficient to meet the Company's anticipated cash needs for working capital, capital expenditures and other activities for at least the next 12 months. Thereafter, if current sources are not sufficient to meet the Company's needs, the Company may seek additional debt or equity financing. In addition, although there is no present understanding, commitment or agreement with respect to any acquisition of other businesses, products, or technologies, the Company may in the future consider such transactions, which may require additional debt or equity financing and could result in a decrease of the Company's working capital. There can be no assurance that such additional financing would be available on acceptable terms, if at all.

CERTAIN TRENDS AND UNCERTAINTIES

        The Company's primary business is providing analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence. Since the terrorist attacks of September 11, 2001, heightened awareness surrounding homeland defense and security, both in the U.S. and globally, has increased the demand for analytic solutions for communications interception and digital video security and surveillance solutions such as those provided by the Company. Recent legislative and regulatory actions have provided greater surveillance powers to law enforcement agencies, imposed strict requirements on communications service providers to facilitate interception of communications over public networks, and increased the security measures being implemented at airports and other public facilities. In contrast, the market for the Company's enterprise business intelligence products has been adversely affected in the past by the global economic slowdown and the decline in information technology spending, which has caused many companies to reduce or, in extreme cases, eliminate altogether, information technology spending. If the Company's customers do not increase their spending on information technology or if such spending declines, the Company's revenues from sales of its enterprise business intelligence products may decrease.

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The information technology spending of the Company's customers in the near term remains uncertain and the Company is uncertain whether it will be able to increase or maintain its revenues. The Company has incurred operating and net losses every year since 1997, and as of April 30, 2002, its accumulated deficit was $43.3 million. If sales do not increase as anticipated or if expenses increase at a greater pace than revenues, the Company may not be able to sustain or increase profitability on a quarterly or annual basis.

        It is difficult for the Company to forecast the timing of revenues from product sales because customers often need a significant amount of time to evaluate the Company's products before purchasing them. The period between initial customer contact and a purchase by a customer may vary from six months to more than one year. During the evaluation period, customers may defer or scale down proposed orders of the Company's products for various reasons, including: (i) changes in budgets and purchasing priorities; (ii) reduced need to upgrade existing systems; (iii) customer deferrals in anticipation of enhancements or new products; (iv) introduction of products by competitors; and (v) lower prices offered by competitors.

        Quarterly operating results are difficult to predict and may fluctuate significantly in the future, which in turn may result in volatility in the Company's stock price. The following factors, many of which are outside the Company's control, can cause fluctuations in operating results and stock price volatility: (i) the size, timing, terms and conditions of orders from and shipments to customers; (ii) unanticipated delays or problems in releasing new products; (iii) the timing and success of the customers' deployment of the Company's products and services; and (iv) the amount and timing of investments in research and development activities.

        The deferral or loss of one or more significant sales could materially and adversely affect the Company's operating results in any fiscal quarter, particularly if there are significant sales and marketing expenses associated with the deferred or lost sales. The Company's current and future expense levels are based on internal operating plans and sales forecasts, and the Company's operating costs are to a large extent fixed. As a result, the Company may not be able to sufficiently reduce its costs in any quarter to compensate for an unexpected near-term shortfall in revenues.

        The markets for the Company's digital security and surveillance and enterprise business intelligence products are still emerging. The Company's growth is dependent on, among other things, the size and pace at which the markets for its products develop. If the markets for the Company's products decrease, remain constant or grow slower than anticipated, the Company will not be able to maintain its growth. Continued growth in the demand for the Company's products is uncertain as a result of, among other reasons, existing customers and potential customers may: (i) not achieve a return on their investment in the Company's products; (ii) experience technical difficulty in utilizing the Company's products; or (iii) use alternative solutions to achieve their security, intelligence or business objectives. In addition, as the Company's enterprise business intelligence products are sold primarily to contact centers, slower than anticipated growth or a contraction in the number of contact centers will have an adverse effect on the Company's ability to maintain growth.

        The markets for the Company's products are characterized by rapidly changing technology and evolving industry standards. The introduction of products embodying new technology and the emergence of new industry standards can render the Company's existing products obsolete and unmarketable and can exert price pressures on existing products. It is critical to the Company's success to anticipate changes in technology or in industry standards and to successfully develop and introduce new, enhanced and competitive products on a timely basis. The Company cannot guaranty that it will successfully develop new products or introduce new applications for existing products, that new products and applications will achieve market acceptance or that the introduction of new products or technological developments by competitors will not render the Company's products obsolete. Thus, the Company's inability to develop products that are competitive in technology and price and meet customer needs could have a material adverse effect on its business, financial condition or results of operations.

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        The global market for analytical solutions for security and business applications is intensely competitive, both in the number and breadth of competing companies and products and the manner in which products are sold. For example, the Company often competes for customer contracts through a competitive bidding process that subjects it to risks associated with: (i) the frequent need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and cost overruns; and (ii) the substantial time and effort, including design, development and marketing activities, required to prepare bids and proposals for contracts that may not be awarded to the Company.

        Competitors may be able to develop more quickly or adapt faster to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products. Some of the Company's competitors have, in relation to the Company, longer operating histories, larger customer bases, longer standing relationships with customers, greater name recognition and significantly greater financial, technical, marketing, customer service, public relations, distribution and other resources. New competitors or alliances among competitors could emerge and rapidly take signific