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EX-32.2 - EXHIBIT 32.2 - VERINT SYSTEMS INCvrnt-ex322_20141031xform10.htm
EX-31.2 - EXHIBIT 31.2 - VERINT SYSTEMS INCvrnt-ex312_20141031xform10.htm
EX-31.1 - EXHIBIT 31.1 - VERINT SYSTEMS INCvrnt-ex311_20141031xform10.htm
EX-32.1 - EXHIBIT 32.1 - VERINT SYSTEMS INCvrnt-ex321_20141031xform10.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 31, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                                to                                     .
 
Commission File No. 001-34807
Verint Systems Inc.
(Exact Name of Registrant as Specified in its Charter) 
Delaware
 
11-3200514
(State or Other Jurisdiction of Incorporation or
Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
330 South Service Road, Melville, New York
 
11747
(Address of Principal Executive Offices)
 
(Zip Code)
 
(631) 962-9600
 
(Registrant’s Telephone Number, Including Area Code)
 
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 þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer þ
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
There were 60,714,350 shares of the registrant’s common stock outstanding on November 14, 2014.
 




Verint Systems Inc. and Subsidiaries
Index to Form 10-Q
October 31, 2014
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

i


Cautionary Note on Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are often identified by future or conditional words such as "will", "plans", "expects", "intends", "believes", "seeks", "estimates", or "anticipates", or by variations of such words or by similar expressions. There can be no assurances that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:
 
uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in information technology spending and government budgets, on our business;
risks associated with our ability to keep pace with technological changes and evolving industry standards in our 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 due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient levels of investment in our business;
risks created by the continued consolidation of our competitors or the introduction of large competitors in our markets with greater resources than we have;
risks associated with our ability to successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with capital constraints, valuations, costs and expenses, maintaining profitability levels, management distraction, post-acquisition integration activities, and potential asset impairments;
risks relating to our ability to effectively and efficiently execute on our growth strategy, including managing investments in our business and operations and enhancing and securing our internal and external operations;
risks associated with our ability to effectively and efficiently allocate limited financial and human resources to business, development, strategic, or other opportunities that may not come to fruition or produce satisfactory returns;
risks that we may be unable to maintain and enhance relationships with key resellers, partners, and systems integrators;
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 our 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 a significant amount of our business coming from domestic and foreign government customers, including the ability to maintain security clearances for certain projects;
risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we operate;
risks associated with our ability to recruit and retain qualified personnel in regions in which we operate;
challenges associated with selling sophisticated solutions, long sales cycles, and emphasis on larger transactions, including in assisting customers in realizing the benefits of our solutions and in accurately forecasting revenue and expenses and in maintaining profitability;
risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make claims on our intellectual property or claim infringement on their intellectual property rights;

ii


risks that our products may contain defects, which could expose us to substantial liability;
risks associated with our dependence on a limited number of suppliers or original equipment manufacturers ("OEMs") for certain components of our products, including companies that may compete with us or work with our competitors;
risks that our 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 we may experience liquidity or working capital issues and related risks that financing sources may be unavailable to us on reasonable terms or at all;
risks associated with significant leverage resulting from our current debt position, including with respect to liquidity considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with respect to our convertible notes), and our ability to maintain our credit ratings;
risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent company, Comverse Technology, Inc. (“CTI”), or associated with formerly being consolidated with, and part of a consolidated tax group with, CTI, or as a result of CTI's former subsidiary, Comverse, Inc. ("Comverse"), being unwilling or unable to provide us with certain indemnities or transition services to which we are entitled;
risks relating to our ability to successfully implement and maintain adequate systems and internal controls for our current and future operations and reporting needs and related risks of financial statement omissions, misstatements, restatements, or filing delays; and
risks associated with changing tax rates, tax laws and regulations, and the continuing availability of expected tax benefits, including those expected as a result of acquisitions.
 
These risks, uncertainties, assumptions, and challenges, as well as other factors, are discussed in greater detail in "Risk Factors" under Part II, Item 1A of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended January 31, 2014. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.



iii


PART I

Item 1.     Financial Statements
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
October 31,
 
January 31,
(in thousands, except share and per share data)
 
2014
 
2014
Assets
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
192,335

 
$
378,618

Restricted cash and bank time deposits
 
39,930

 
6,423

Short-term investments
 
40,136

 
32,049

Accounts receivable, net of allowance for doubtful accounts of $1.1 million and $1.2 million, respectively
 
252,003

 
194,312

Inventories
 
21,502

 
10,693

Deferred cost of revenue
 
11,149

 
10,818

Prepaid expenses and other current assets
 
70,111

 
61,478

  Total current assets
 
627,166

 
694,391

Property and equipment, net
 
59,541

 
40,145

Goodwill
 
1,221,004

 
853,389

Intangible assets, net
 
336,297

 
132,847

Capitalized software development costs, net
 
9,031

 
8,483

Long-term deferred cost of revenue
 
12,730

 
9,843

Other assets
 
41,341

 
33,809

  Total assets
 
$
2,307,110

 
$
1,772,907

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
69,271

 
$
65,656

Accrued expenses and other current liabilities
 
217,847

 
179,148

Current maturities of long-term debt
 
36

 
6,555

Deferred revenue
 
157,581

 
162,124

  Total current liabilities
 
444,735

 
413,483

Long-term debt
 
734,316

 
635,830

Long-term deferred revenue
 
13,680

 
13,661

Other liabilities
 
93,917

 
76,815

  Total liabilities
 
1,286,648

 
1,139,789

Commitments and Contingencies
 
 
 
 
Stockholders' Equity:
 
 

 
 

Preferred Stock - $0.001 par value; authorized 2,207,000 shares at October 31, 2014 and January 31, 2014; none issued.
 

 

Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 61,055,000 and 53,907,000 shares; outstanding 60,707,000 and 53,605,000 shares at October 31, 2014 and January 31, 2014, respectively.
 
61

 
54

Additional paid-in capital
 
1,305,883

 
924,663

Treasury stock, at cost - 348,000 and 302,000 shares at October 31, 2014 and January 31, 2014, respectively.
 
(10,251
)
 
(8,013
)
Accumulated deficit
 
(223,657
)
 
(250,005
)
Accumulated other comprehensive loss
 
(61,209
)
 
(39,725
)
Total Verint Systems Inc. stockholders' equity
 
1,010,827

 
626,974

Noncontrolling interest
 
9,635

 
6,144

  Total stockholders' equity
 
1,020,462

 
633,118

  Total liabilities and stockholders' equity
 
$
2,307,110

 
$
1,772,907


See notes to condensed consolidated financial statements.

1


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited) 
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands, except per share data)
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 

 
 

 
 
 
 
Product
 
$
118,346

 
$
101,974

 
$
339,657

 
$
287,189

Service and support
 
164,228

 
122,340

 
477,126

 
364,358

  Total revenue
 
282,574

 
224,314

 
816,783

 
651,547

Cost of revenue:
 
 

 
 

 
 
 
 
Product
 
32,925

 
33,322

 
104,524

 
94,584

Service and support
 
60,082

 
36,900

 
178,939

 
115,568

Amortization of acquired technology and backlog
 
8,096

 
1,935

 
23,018

 
7,920

  Total cost of revenue
 
101,103

 
72,157

 
306,481

 
218,072

Gross profit
 
181,471

 
152,157

 
510,302

 
433,475

Operating expenses:
 
 

 
 

 
 
 
 
Research and development, net
 
43,008

 
30,704

 
128,408

 
91,935

Selling, general and administrative
 
102,738

 
77,472

 
310,946

 
240,540

Amortization of other acquired intangible assets
 
11,367

 
6,150

 
34,124

 
18,193

  Total operating expenses
 
157,113

 
114,326

 
473,478

 
350,668

Operating income
 
24,358

 
37,831

 
36,824

 
82,807

Other income (expense), net:
 
 

 
 

 
 
 
 
Interest income
 
208

 
242

 
683

 
563

Interest expense
 
(8,494
)
 
(7,416
)
 
(28,103
)
 
(21,987
)
Losses on early retirements of debt
 

 

 
(12,546
)
 
(9,879
)
Other income (expense), net
 
167

 
(646
)
 
1,266

 
(5,013
)
  Total other expense, net
 
(8,119
)
 
(7,820
)
 
(38,700
)
 
(36,316
)
Income (loss) before provision for (benefit from) income taxes
 
16,239

 
30,011

 
(1,876
)
 
46,491

Provision for (benefit from) income taxes
 
4,766

 
5,957

 
(31,788
)
 
11,869

Net income
 
11,473

 
24,054

 
29,912

 
34,622

Net income attributable to noncontrolling interest
 
803

 
1,567

 
3,564

 
3,752

Net income attributable to Verint Systems Inc.
 
10,670

 
22,487

 
26,348

 
30,870

Dividends on preferred stock
 

 

 

 
(174
)
Net income attributable to Verint Systems Inc. common shares
 
$
10,670


$
22,487

 
$
26,348

 
$
30,696

 
 
 
 
 
 
 
 
 
Net income per common share attributable to Verint Systems Inc.:
 
 

 
 

 
 
 
 
Basic
 
$
0.18

 
$
0.42

 
$
0.46

 
$
0.58

Diluted
 
$
0.17

 
$
0.42

 
$
0.45

 
$
0.57

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
60,644

 
53,374

 
57,222

 
52,781

Diluted
 
61,492

 
53,946

 
58,332

 
53,561

 
See notes to condensed consolidated financial statements.





2


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) 
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net income
 
$
11,473

 
$
24,054

 
$
29,912

 
$
34,622

Other comprehensive income (loss), net of reclassification adjustments:
 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
(28,355
)
 
12,232

 
(13,363
)
 
1,537

Net unrealized gains on available-for-sale securities
 

 
125

 
13

 
3

Net unrealized (losses) gains on derivative financial instruments designated as hedges
 
(9,632
)
 
(870
)
 
(9,047
)
 
283

Benefit from income taxes on net unrealized (losses) gains on derivative financial instruments designated as hedges
 
998

 
96

 
840

 
31

Other comprehensive (loss) income
 
(36,989
)
 
11,583

 
(21,557
)
 
1,854

Comprehensive (loss) income
 
(25,516
)
 
35,637

 
8,355

 
36,476

Comprehensive income attributable to noncontrolling interest
 
627

 
1,618

 
3,491

 
3,632

Comprehensive (loss) income attributable to Verint Systems Inc.
 
$
(26,143
)
 
$
34,019

 
$
4,864

 
$
32,844

 
See notes to condensed consolidated financial statements.

3


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited) 
 
 
Verint Systems Inc. Stockholders’ Equity
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Total Verint Systems Inc. Stockholders' Equity
 
 
 
Total Stockholders' Equity
(in thousands) 
 
Shares
 
Par
Value
 
 
Treasury
Stock
 
Accumulated
Deficit
 
 
 
Non-controlling
Interest
 
Balances as of January 31, 2013
 
40,158

 
$
40

 
$
580,762

 
$
(8,013
)
 
$
(303,762
)
 
$
(44,225
)
 
$
224,802

 
$
4,874

 
$
229,676

Net income
 

 

 

 

 
30,870

 

 
30,870

 
3,752

 
34,622

Other comprehensive income (loss)
 

 

 

 

 

 
1,974

 
1,974

 
(120
)
 
1,854

Stock-based compensation - equity portion
 

 

 
22,304

 

 

 

 
22,304

 

 
22,304

Exercises of stock options
 
246

 

 
6,432

 

 

 

 
6,432

 

 
6,432

Common stock issued for stock awards and stock bonuses
 
776

 
1

 
2,850

 

 

 

 
2,851

 

 
2,851

Stock issued for CTI Merger
 
12,274

 
13

 
299,626

 

 

 

 
299,639

 

 
299,639

Tax effects from stock award plans
 

 

 
(3
)
 

 

 

 
(3
)
 

 
(3
)
Balances as of October 31, 2013
 
53,454

 
$
54

 
$
911,971

 
$
(8,013
)
 
$
(272,892
)
 
$
(42,251
)
 
$
588,869

 
$
8,506

 
$
597,375

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of January 31, 2014
 
53,605

 
$
54

 
$
924,663

 
$
(8,013
)
 
$
(250,005
)
 
$
(39,725
)
 
$
626,974

 
$
6,144

 
$
633,118

Net income
 

 

 

 

 
26,348

 

 
26,348

 
3,564

 
29,912

Other comprehensive loss
 

 

 

 

 

 
(21,484
)
 
(21,484
)
 
(73
)
 
(21,557
)
Common stock issued in public offering, net of issuance costs
 
5,750

 
6

 
264,927

 

 

 

 
264,933

 

 
264,933

Equity component of convertible notes, net of issuance costs
 

 

 
78,209

 

 

 

 
78,209

 

 
78,209

Purchase of convertible note hedges
 

 

 
(60,800
)
 

 

 

 
(60,800
)
 

 
(60,800
)
Issuance of warrants
 

 

 
45,188

 

 

 

 
45,188

 

 
45,188

Stock-based compensation - equity portion
 

 

 
35,702

 

 

 

 
35,702

 

 
35,702

Exercises of stock options
 
378

 

 
13,135

 

 

 

 
13,135

 

 
13,135

Common stock issued for stock awards and stock bonuses
 
1,020

 
1

 
4,531

 

 

 

 
4,532

 

 
4,532

Purchases of treasury stock
 
(46
)
 

 

 
(2,238
)
 

 

 
(2,238
)
 

 
(2,238
)
Tax effects from stock award plans
 

 

 
328

 

 

 

 
328

 

 
328

Balances as of October 31, 2014
 
60,707

 
$
61

 
$
1,305,883

 
$
(10,251
)
 
$
(223,657
)
 
$
(61,209
)
 
$
1,010,827


$
9,635

 
$
1,020,462

 
See notes to condensed consolidated financial statements.

4


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited) 
 
 
Nine Months Ended
October 31,
(in thousands) 
 
2014
 
2013
Cash flows from operating activities:
 
 

 
 

Net income
 
$
29,912

 
$
34,622

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
74,298

 
40,230

Stock-based compensation - equity portion
 
35,048

 
22,006

Amortization of discount on convertible notes
 
3,565

 

Reduction of valuation allowance resulting from acquisition of KANA
 
(45,171
)
 

Non-cash (gains) losses on derivative financial instruments, net
 
(1,666
)
 
44

Losses on early retirements of debt
 
12,546

 
9,879

Other non-cash items, net
 
8,387

 
1,783

Changes in operating assets and liabilities, net of effects of business combinations:
 
 

 
 

Accounts receivable
 
(41,717
)
 
(8,820
)
Inventories
 
(7,801
)
 
(861
)
Deferred cost of revenue
 
(3,177
)
 
(1,951
)
Prepaid expenses and other assets
 
13,111

 
24,822

Accounts payable, accrued expenses, and other current liabilities
 
26,472

 
1,607

Deferred revenue
 
(10,903
)
 
(7,918
)
Other, net
 
(2,663
)
 
(424
)
Net cash provided by operating activities
 
90,241

 
115,019

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Cash paid for business combinations, including adjustments, net of cash acquired
 
(602,943
)
 
(10,457
)
Purchases of property and equipment
 
(15,831
)
 
(9,439
)
Purchases of short-term investments
 
(21,175
)
 
(195,509
)
Sales and maturities of short-term investments
 
11,363

 
70,000

Cash paid for capitalized software development costs
 
(4,510
)
 
(3,892
)
Change in restricted cash and bank time deposits, including long-term portion
 
(37,023
)
 
5,935

Other investing activities, net
 
(1,466
)
 
205

Net cash used in investing activities
 
(671,585
)
 
(143,157
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from borrowings, net of original issuance discounts
 
1,526,750

 
646,750

Repayments of borrowings and other financing obligations
 
(1,361,777
)
 
(584,309
)
Proceeds from public issuance of common stock
 
274,563

 

Proceeds from issuance of warrants
 
45,188

 

Payments for convertible note hedges
 
(60,800
)
 

Payments of equity issuance, debt issuance and other debt-related costs
 
(29,164
)
 
(7,754
)
Proceeds from exercises of stock options
 
13,081

 
6,432

Purchases of treasury stock
 
(2,238
)
 

Cash received in CTI Merger
 

 
10,370

Payments of contingent consideration for business combinations (financing portion)
 
(8,684
)
 
(16,087
)
Net cash provided by financing activities
 
396,919

 
55,402

Effect of exchange rate changes on cash and cash equivalents
 
(1,858
)
 
223

Net (decrease) increase in cash and cash equivalents
 
(186,283
)
 
27,487

Cash and cash equivalents, beginning of period
 
378,618

 
209,973

Cash and cash equivalents, end of period
 
$
192,335

 
$
237,460

 
See notes to condensed consolidated financial statements.

5


VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Description of Business

Unless the context otherwise requires, the terms "Verint", "we", "us", and "our" in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.

Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more timely and effective decisions. Today, more than 10,000 organizations in over 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place.

Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of information from numerous data types and sources, use analytics to glean insights from the information, and leverage the resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.

Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.

We conduct our business through three operating segments—Enterprise Intelligence, Communications and Cyber Intelligence ("Communications Intelligence"), and Video and Situation Intelligence ("Video Intelligence"). Organizing our business through three operating segments allows us to align our resources and domain expertise to effectively address the Actionable Intelligence market. We address the Customer Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the Security Intelligence market opportunity through solutions from our Communications Intelligence segment and Video Intelligence segment, and we address the Fraud, Risk, and Compliance market opportunity through solutions from all three operating segments.

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) for the year ended January 31, 2014. The condensed consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the periods ended October 31, 2014 and 2013, and the condensed consolidated balance sheet as of October 31, 2014, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown. The condensed consolidated balance sheet as of January 31, 2014 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2014. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K filed with the SEC for the year ended January 31, 2014. The results for interim periods are not necessarily indicative of a full year’s results.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned subsidiaries, and a joint venture in which we hold a 50% equity interest.  This joint venture functions as a systems integrator for Asian markets and is a variable interest entity in which we are the primary beneficiary.  Investments in companies in which we have less than a 20% ownership interest and do not exercise significant influence are accounted for at cost.  We include the results of operations of acquired companies from the date of acquisition.  All significant intercompany transactions and balances are eliminated.
 

6


Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Significant Accounting Policies

Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2014. There were no significant changes to our significant accounting policies during the nine months ended October 31, 2014. Additional disclosures regarding our policy for calculating net income per common share attributable to Verint Systems Inc. appear below.

Net Income Per Common Share Attributable to Verint Systems Inc.

Shares used in the calculation of basic net income per common share are based on the weighted-average number of common shares outstanding during the accounting period. Shares used in the calculation of basic net income per common share include vested but unissued shares underlying awards of restricted stock units when all necessary conditions for earning those shares have been satisfied at the award's vesting date, but exclude unvested shares of restricted stock because they are contingent upon future service conditions.

Shares used in the calculation of diluted net income per common share are based on the weighted-average number of common shares outstanding, adjusted for potentially dilutive common shares outstanding during the period. Potentially dilutive common shares from warrants and stock-based compensation plans are determined using the treasury stock method.

We have the option to pay cash, issue shares of common stock, or any combination thereof for the aggregate amount due upon conversion of our 1.50% convertible senior notes due June 1, 2021 (the “Notes”), further details for which appear in Note 6, “Long-Term Debt”. We currently intend to settle the principal amount of the Notes in cash upon conversion and as a result, only the amounts payable in excess of the principal amounts of the Notes, if any, are assumed to be settled with shares of common stock for purposes of computing diluted net income per share.

Potentially dilutive common shares also included the assumed conversion of our Series A Convertible Perpetual Preferred Stock ("Preferred Stock"), if dilutive, for periods prior to cancellation of the Preferred Stock on February 4, 2013 in connection with the CTI Merger. The CTI Merger is further discussed in Note 14, "Merger with CTI".

In periods for which we report a net loss, basic net loss per common share and diluted net loss per common share are identical since the effect of potential common shares is anti-dilutive and therefore excluded.

Recent Accounting Pronouncements
 
New Accounting Pronouncements Implemented

In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 was effective prospectively for us on February 1, 2014. The adoption of this standard did not impact our condensed consolidated financial statements.

New Accounting Pronouncements To Be Implemented

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual reporting periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in previously issued financial statements. We are currently reviewing this standard, but we do not expect its

7


adoption to materially impact our condensed consolidated financial statements, absent any disposals of components or groups of components that have a material effect on our financial results in future periods.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities may choose from two adoption methods, with certain practical expedients. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements and evaluating the available adoption methods.

In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. ASU No. 2014-10 removes the financial reporting distinction between development stage entities and other reporting entities from GAAP and it eliminates an exception provided in the consolidation guidance for development stage enterprises. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. ASU No. 2014-12 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The provisions of ASU No. 2014-15 are effective for annual periods ending after December 15, 2016 and for annual and interim periods thereafter, and early adoption is permitted. The adoption of ASU No. 2014-15 is not expected to have a material effect on our future condensed consolidated financial statements.


2.
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
 
The following table summarizes the calculation of basic and diluted net income per common share attributable to Verint Systems Inc. for the three and nine months ended October 31, 2014 and 2013:
 

8


 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands, except per share amounts) 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
11,473

 
$
24,054

 
$
29,912

 
$
34,622

Net income attributable to noncontrolling interest
 
803

 
1,567

 
3,564

 
3,752

Net income attributable to Verint Systems Inc.
 
10,670

 
22,487

 
26,348

 
30,870

Dividends on preferred stock
 

 

 

 
(174
)
Net income attributable to Verint Systems Inc. for basic net income per common share
 
10,670

 
22,487

 
26,348

 
30,696

Dilutive effect of dividends on preferred stock
 

 

 

 

Net income attributable to Verint Systems Inc. for diluted net income per common share
 
$
10,670

 
$
22,487

 
$
26,348

 
$
30,696

Weighted-average shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
60,644

 
53,374

 
57,222

 
52,781

Dilutive effect of employee equity award plans
 
848

 
572

 
1,110

 
780

Dilutive effect of 1.50% convertible senior notes
 

 

 

 

Dilutive effect of warrants
 

 

 

 

Dilutive effect of preferred stock
 

 

 

 

Diluted
 
61,492

 
53,946

 
58,332

 
53,561

Net income per common share attributable to Verint Systems Inc.:
 
 

 
 

 
 
 
 
Basic
 
$
0.18

 
$
0.42

 
$
0.46

 
$
0.58

Diluted
 
$
0.17

 
$
0.42

 
$
0.45

 
$
0.57


We excluded the following weighted-average potential common shares from the calculations of diluted net income per common share during the applicable periods because their inclusion would have been anti-dilutive: 
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands) 
 
2014
 
2013
 
2014
 
2013
Weighted average potential common shares excluded from calculation:
 
 

 
 

 
 
 
 
Stock options and restricted stock-based awards
 
464

 
343

 
403

 
263

1.50% convertible senior notes
 
6,205

 

 
3,091

 

Warrants
 
6,205

 

 
3,091

 

Series A Convertible Preferred Stock
 

 

 

 
164


The 1.50% convertible senior notes will not impact the calculation of diluted net income per share unless the average price of our common stock, as calculated in accordance with the terms of the indenture governing the 1.50% convertible senior notes, exceeds the conversion price of $64.46 per share. Likewise, diluted net income per share will not include any effect from the warrants unless the average price of our common stock, as calculated under the terms of the warrants, exceeds the exercise price of $75.00 per share. Further details regarding the 1.50% convertible senior notes and the warrants appear in Note 6, "Long-Term Debt".

Our Series A Convertible Preferred Stock was canceled in conjunction with the CTI Merger on February 4, 2013, as further discussed in Note 9, "Convertible Preferred Stock" and Note 14, "Merger with CTI". The weighted-average common shares underlying the assumed conversion of the Series A Convertible Preferred Stock for the nine months ended October 31, 2013 in the table above reflect the Series A Convertible Preferred Stock as outstanding for only four days during that period.


3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The following tables summarize our cash, cash equivalents and short-term investments as of October 31, 2014 and January 31, 2014:

9


 
 
October 31, 2014
(in thousands) 
 
Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and bank time deposits
 
$
189,142

 
$

 
$

 
$
189,142

Money market funds
 
194

 

 

 
194

Commercial paper
 
2,999

 

 

 
2,999

Total cash and cash equivalents
 
$
192,335

 
$

 
$

 
$
192,335

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities (available-for-sale)
 
$
13,774

 
$
22

 
$

 
$
13,796

Bank time deposits
 
26,340

 

 

 
26,340

Total short-term investments
 
$
40,114

 
$
22

 
$

 
$
40,136

 
 
January 31, 2014
(in thousands)
 
Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and bank time deposits
 
$
314,604

 
$

 
$

 
$
314,604

Money market funds
 
14,023

 

 

 
14,023

Commercial paper
 
49,986

 
5

 

 
49,991

Total cash and cash equivalents
 
$
378,613

 
$
5

 
$

 
$
378,618

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities (available-for-sale)
 
$
9,402

 
$
4

 
$

 
$
9,406

Bank time deposits
 
22,643

 

 

 
22,643

Total short-term investments
 
$
32,045

 
$
4

 
$

 
$
32,049


Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with maturities of greater than three months, or without specified maturity dates which we intend to hold for periods in excess of three months. All other bank deposits are included within cash and cash equivalents.

As of October 31, 2014 and January 31, 2014, all of our available-for-sale investments had contractual maturities of less than one year. We report our available-for-sale securities at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of applicable income taxes, are included in accumulated other comprehensive income (loss) within stockholders’ equity on our condensed consolidated balance sheets. Realized gains or losses, if applicable, are recorded in other income (expense), net in our condensed consolidated statement of operations, using the specific identification method. Gains and losses on sales of available-for-sale securities during the nine months ended October 31, 2014 and 2013 were not significant.

During the nine months ended October 31, 2014 and 2013, proceeds from sales and maturities of available-for-sale securities were $11.4 million and $70.0 million, respectively.

We periodically review our investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held at October 31, 2014 were not other-than-temporarily impaired. We held no available-for-sale securities with unrealized losses at October 31, 2014. We do not intend to sell our available-for-sale securities and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity.


4.
BUSINESS COMBINATIONS

Nine Months Ended October 31, 2014

10



KANA Software, Inc.

On February 3, 2014, we completed the acquisition of KANA Software, Inc. and its subsidiaries through the merger of KANA Software, Inc.'s parent holding company, Kay Technology Holdings, Inc. (collectively, "KANA"), with an indirect, wholly owned subsidiary of Verint, with KANA continuing as the surviving company and as our wholly owned subsidiary. The purchase price consisted of $542.4 million of cash paid at the closing, partially offset by $25.1 million of KANA’s cash received in the acquisition, and a $0.7 million post-closing purchase price adjustment, resulting in net cash consideration of $516.6 million. The post-closing purchase price adjustment resulted from the final determination of KANA's February 3, 2014 cash, debt, net working capital, transaction expenses and taxes, and was received in cash in May 2014.

The merger consideration was funded by a combination of cash on hand, $300.0 million of incremental term loans incurred in connection with an amendment to our Credit Agreement, and $125.0 million of borrowings under our 2013 Revolving Credit Facility (further details for which appear in Note 6, "Long-Term Debt").

KANA, based in Sunnyvale, California and with global operations, is a leading provider of on-premises and cloud-based solutions which create differentiated, personalized, and integrated customer experiences for large enterprises and mid-market organizations. KANA is being integrated into our Enterprise Intelligence operating segment.

Among the factors contributing to the recognition of goodwill as a component of the KANA purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Enterprise Intelligence segment and while generally not deductible for income tax purposes, certain goodwill related to previous business combinations by KANA will be deductible for income tax purposes.

In connection with the purchase price allocation for KANA, the estimated fair value of undelivered performance obligations under customer contracts assumed in the merger was determined utilizing a cost build-up approach. The cost build-up approach calculates fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $7.9 million of current and long-term deferred revenue, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not yet been received, we recorded an $18.6 million asset within prepaid expenses and other current assets as a component of the purchase price allocation. We are amortizing this asset over the underlying delivery periods for these obligations as a reduction to revenue, which reduces the revenue we recognize for providing these services to its estimated fair value.

As a result of the ongoing integration of KANA into our Enterprise Intelligence operating segment, including the integration of the KANA and legacy Verint global sales organizations and the resulting impact to the marketing and sales of our Enterprise Intelligence products, we are unable to provide a meaningful measure of the impact on revenue and net income attributable to KANA in our condensed consolidated statements of operations for the three and nine months ended October 31, 2014.

Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to the merger, totaled $1.8 million and $6.4 million for the three and nine months ended October 31, 2014, respectively, and were expensed as incurred.

UTX Technologies Limited

On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX Technologies Limited (“UTX”), a provider of certain mobile device tracking solutions for security applications, from UTX Limited. UTX Limited was our supplier of these products to our Communications Intelligence operating segment prior to the acquisition. The purchase price consisted of $82.9 million of cash paid at closing, subject to adjustment, and $1.3 million for the fair value of potential future contingent consideration payments to UTX Limited of up to $1.5 million. Contingent consideration of $1.5 million was paid to UTX Limited during the three months ended October 31, 2014, in consideration of UTX achieving certain performance targets. The cash paid to acquire UTX was funded with cash on hand.

UTX is based in the Europe, the Middle East and Africa (“EMEA”) region and is being integrated into our Communications Intelligence operating segment.


11


Among the factors contributing to the recognition of goodwill as a component of the UTX purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Communications Intelligence segment and is not deductible for income tax purposes.

For the nine months ended October 31, 2014, we recorded a charge of $0.2 million within selling, general and administrative expenses to increase the fair value of the UTX contingent consideration obligation to $1.5 million, which reflected the achievement of the underlying performance targets. This amount was paid to UTX Limited during the three months ended October 31, 2014.

Revenue and income before provision for income taxes attributable to UTX from March 31, 2014 through October 31, 2014 were not significant to our consolidated operating results.

Transaction and related costs (or benefits) directly related to the acquisition of UTX, consisting primarily of professional fees, integration expenses and related adjustments, were a benefit of $0.9 million and a charge of $2.1 million for the three and nine months ended October 31, 2014. All transaction and related costs were expensed as incurred.

As a result of the UTX acquisition, we recorded a $2.6 million charge for the impairment of certain capitalized software development costs during the three months ended April 30, 2014, reflecting strategy changes in certain product development initiatives. This charge is reflected within cost of product revenue.

Other Business Combination

On April 16, 2014, we completed the acquisition of certain technology and other assets for use in our Communications Intelligence operating segment in a transaction that qualified as a business combination. This business combination was not material to our condensed consolidated financial statements.

Purchase Price Allocations

The purchase price allocations for the business combinations completed during the nine months ended October 31, 2014 have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement periods (up to one year from the respective acquisition dates). Fair values still under review include values assigned to identifiable intangible assets, deferred income taxes and reserves for uncertain income tax positions. Adjustments identified and recorded subsequent to the initial purchase price allocations for both KANA and UTX have not been material.

The purchase prices were allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices 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 following table sets forth the components and the allocations of the purchase prices for our acquisitions of KANA and UTX, including adjustments identified subsequent to the respective acquisition dates:

12


(in thousands)
 
KANA
 
UTX
Components of Purchase Prices:
 
 

 
 
Cash, including post-closing adjustments
 
$
541,685

 
$
82,901

Fair value of contingent consideration
 

 
1,347

Total purchase prices
 
$
541,685

 
$
84,248

 
 
 
 
 
Allocation of Purchase Prices:
 
 

 
 
Net tangible assets (liabilities):
 
 

 
 
Accounts receivable
 
$
18,473

 
$

Other current assets, including cash acquired
 
48,948

 
3,873

Other assets
 
12,124

 
924

Current and other liabilities
 
(16,509
)
 
(263
)
Deferred revenue - current and long-term
 
(7,932
)
 
(340
)
Deferred income taxes - current and long-term
 
(63,184
)
 
(4,882
)
Net tangible liabilities
 
(8,080
)
 
(688
)
Identifiable intangible assets:
 
 

 
 
Customer relationships
 
152,700

 
2,000

Developed technology
 
55,500

 
37,400

Trademarks and trade names
 
11,500

 

Other intangible assets
 

 
1,100

Total identifiable intangible assets
 
219,700

 
40,500

Goodwill
 
330,065

 
44,436

Total purchase price allocations
 
$
541,685

 
$
84,248


The weighted-average estimated useful life of all finite-lived identifiable intangible assets acquired during the nine months ended October 31, 2014 is 7.4 years.

For the acquisition of KANA, the acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of five to ten years, three to five years, and five years, respectively, the weighted average of which is approximately 8.1 years.

For the acquisition of UTX, the acquired customer relationships, developed technology and other intangible assets were assigned estimated useful lives of three years, four years, and four years, respectively, the weighted average of which is approximately 4.0 years.

The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.

We have included the financial results of these business combinations in our condensed consolidated financial statements from their respective acquisition dates.

Pro Forma Information

The following table provides unaudited pro forma operating results for the three and nine months ended October 31, 2014 and 2013, as if KANA and UTX had been acquired on February 1, 2013. These unaudited pro forma results reflect certain adjustments related to these acquisitions, including amortization expense on finite-lived intangible assets acquired from KANA and UTX, interest expense and fees associated with additional long-term debt incurred to partially fund the acquisition of KANA, and adjustments to recognize the fair value of revenue associated with performance obligations assumed in the acquisition of KANA.

For purposes of the following unaudited pro forma operating results, a $45.2 million income tax benefit resulting from a reduction of valuation allowances associated from the acquisition of KANA is reflected in the pro forma operating results for the nine months ended October 31, 2013. The actual tax benefit was recorded during the nine months ended October 31, 2014, as further described in Note 10, "Income Taxes".


13


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, 2013, nor are they indicative of future operating results.
 
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
(in thousands, except per share amounts) 
 
2014
 
2013
 
2014
 
2013
Revenue
 
$
288,279

 
$
256,879

 
$
842,784

 
$
737,706

Net income
 
$
17,650

 
$
15,826

 
$
15,419

 
$
37,146

Net income attributable to Verint Systems Inc.
 
$
16,847

 
$
14,259

 
$
11,855

 
$
33,394

Net income per common share attributable to Verint Systems Inc.:
 
 
 
 
 
 
 
 
Basic
 
$
0.28

 
$
0.27

 
$
0.21

 
$
0.63

Diluted
 
$
0.27

 
$
0.26

 
$
0.20

 
$
0.62


Business Combinations in Prior Periods

In connection with certain business combinations completed in prior periods, we have agreed to make contingent cash payments to the former shareholders or asset holders of the acquired businesses based upon achievement of performance targets following the acquisition dates. These obligations are measured at fair value at each reporting date.

For the three and nine months ended October 31, 2014, we recorded charges of $0.3 million and $0.5 million, respectively, within selling, general and administrative expenses for changes in the fair values of these obligations, which primarily reflected the impacts of revised expectations of achieving the performance targets. For the three and nine months ended October 31, 2013, we recorded benefits of $1.9 million and $1.6 million, respectively, within selling, general and administrative expenses for changes in the fair values of these obligations.

Payments of contingent consideration earned under these agreements were $1.6 million and $8.5 million for the three and nine months ended October 31, 2014, respectively. Payments of contingent consideration earned under these agreements were $0.9 million and $17.1 million for the three and nine months ended October 31, 2013, respectively.

For a certain business combination completed during the year ended January 31, 2012, the purchase price allocation included liabilities for uncertain tax positions and certain other liabilities associated with pre-acquisition business activities of the acquired company. Corresponding indemnification assets were also recorded as components of the purchase price allocation for this acquisition, recognizing the selling shareholders’ contractual obligation to indemnify us for these pre-acquisition liabilities and were measured on the same basis as the corresponding liabilities. As of October 31, 2014 and January 31, 2014, the combined current and long-term liabilities for these matters were $2.9 million and $3.4 million, respectively. The corresponding current and long-term indemnification assets associated with these liabilities were $1.8 million and $2.3 million at October 31, 2014 and January 31, 2014, respectively.


5.
INTANGIBLE ASSETS AND GOODWILL
 
Acquisition-related intangible assets consisted of the following as of October 31, 2014 and January 31, 2014:
 

14


 
 
October 31, 2014
(in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Intangible assets with finite lives:
 
 

 
 

 
 

Customer relationships
 
$
388,008

 
$
(169,745
)
 
$
218,263

Acquired technology
 
200,078

 
(98,097
)
 
101,981

Trade names
 
19,801

 
(9,007
)
 
10,794

Non-competition agreements
 
3,625

 
(2,149
)
 
1,476

Distribution network
 
4,440

 
(2,416
)
 
2,024

Backlog
 
386

 
(327
)
 
59

Total intangible assets with finite lives
 
616,338

 
(281,741
)
 
334,597

In-process research and development, with indefinite lives
 
1,700

 

 
1,700

    Total
 
$
618,038

 
$
(281,741
)
 
$
336,297

 
 
 
January 31, 2014
(in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Intangible assets with finite lives:
 
 

 
 

 
 

Customer relationships
 
$
240,208

 
$
(141,714
)
 
$
98,494

Acquired technology
 
106,361

 
(76,922
)
 
29,439

Trade names
 
13,378

 
(11,378
)
 
2,000

Non-competition agreements
 
5,514

 
(4,970
)
 
544

Distribution network
 
2,440

 
(1,840
)
 
600

Backlog
 
386

 
(316
)
 
70

Total intangible assets with finite lives
 
368,287

 
(237,140
)
 
131,147

In-process research and development, with indefinite lives
 
1,700

 

 
1,700

    Total
 
$
369,987

 
$
(237,140
)
 
$
132,847


The following table presents net acquisition-related intangible assets by reportable segment as of October 31, 2014 and January 31, 2014: 
 
 
October 31,
 
January 31,
(in thousands)

2014

2014
Enterprise Intelligence

$
285,037


$
115,928

Communications Intelligence

50,050


14,856

Video Intelligence

1,210


2,063

Total

$
336,297


$
132,847

 
The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign exchange rates on intangible assets not denominated in U.S. dollars.

Total amortization expense recorded for acquisition-related intangible assets was $19.5 million and $57.1 million for the three and nine months ended October 31, 2014, respectively, and $8.1 million and $26.1 million for the three and nine months ended October 31, 2013, respectively.
 
Estimated future amortization expense on finite-lived acquisition-related intangible assets as of October 31, 2014 was as follows:

15


(in thousands)

 

Years Ending January 31,

Amount
2015 (remainder of year)

$
20,921

2016

77,033

2017

73,604

2018

54,078

2019

25,107

2020 and thereafter

83,854

   Total

$
334,597

 
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and identifiable intangible assets acquired. At the acquisition date, goodwill resulting from a business combination is assigned to those reporting units expected to benefit from the synergies of the combination. Reporting units may either be at, or one level below, our operating segment level.

Goodwill activity for the nine months ended October 31, 2014, in total and by reportable segment, was as follows: 
 
 
 
 
Reportable Segment
(in thousands)
 
Total
 
Enterprise
Intelligence
 
Communications
Intelligence
 
Video
Intelligence
Year Ended January 31, 2014:
 
 
 
 
 
 
 
 
Goodwill, gross, at January 31, 2014
 
$
920,254

 
$
795,722

 
$
47,838

 
$
76,694

Accumulated impairment losses through January 31, 2014
 
(66,865
)
 
(30,791
)
 

 
(36,074
)
   Goodwill, net, at January 31, 2014
 
853,389

 
764,931

 
47,838

 
40,620

Business combinations
 
378,576

 
330,065

 
48,511

 

Foreign currency translation and other
 
(10,961
)
 
(9,792
)
 
(37
)
 
(1,132
)
   Goodwill, net, at October 31, 2014
 
$
1,221,004

 
$
1,085,204

 
$
96,312

 
$
39,488

 
 
 
 
 
 
 
 
 
Balance at October 31, 2014:
 


 
 

 
 

 
 

Goodwill, gross, at October 31, 2014
 
$
1,287,869

 
$
1,115,995

 
$
96,312

 
$
75,562

Accumulated impairment losses through October 31, 2014
 
(66,865
)
 
(30,791
)
 

 
(36,074
)
   Goodwill, net, at October 31, 2014
 
$
1,221,004

 
$
1,085,204

 
$
96,312

 
$
39,488

 
No events or circumstances indicating the potential for goodwill impairment were identified during the nine months ended October 31, 2014.


6.
LONG-TERM DEBT
 
The following table summarizes our long-term debt at October 31, 2014 and January 31, 2014: 

16


 
 
October 31,
 
January 31,
(in thousands)
 
2014
 
2014
1.50% Convertible Senior Notes:
 
 
 
 
   Principal amount
 
$
400,000

 
$

   Unamortized debt discount
 
(76,535
)
 

1.50% Convertible Senior Notes, net
 
323,465

 

February 2014 Term Loans:
 
 
 
 
Gross amount
 
130,729

 

Unamortized debt discount
 
(289
)
 

February 2014 Term Loans, net
 
130,440

 

March 2014 Term Loans
 
280,413

 

March 2013 Term Loans:
 
 

 
 

Gross amount
 

 
645,125

Unamortized debt discount
 

 
(2,827
)
March 2013 Term Loans, net
 

 
642,298

Other debt
 
34

 
87

Total debt
 
734,352

 
642,385

Less: current maturities
 
36

 
6,555

Long-term debt
 
$
734,316

 
$
635,830


1.50% Convertible Senior Notes

On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021 (the "Notes"), unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were $391.9 million. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.
The Notes were issued concurrently with our public issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under our Credit Agreement, as further described below. Additional details regarding our June 18, 2014 issuance of common stock appear in Note 8, “Stockholders’ Equity”.
The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to indebtedness and other liabilities of our subsidiaries.
The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in respect of the principal amount of the Notes.
The conversion price of the Notes at any time is equal to $1,000 divided by the then-applicable conversion rate. The Notes have an initial conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an initial effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately 6,205,000 shares if all of the Notes were converted. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding December 1, 2020, only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on September 30, 2014, if the closing sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than 130% of the conversion price of the Notes in effect on each applicable trading day;

during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then-current conversion rate; or

17



upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a consolidation, merger, or binding share exchange.

On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have been satisfied.
As of October 31, 2014, the Notes were not convertible.

In accordance with accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the Notes in a manner that reflects our estimated nonconvertible debt borrowing rate. We estimated the carrying amount of the debt component of the Notes to be $319.9 million at the issuance date, assuming a 5.00% non-convertible borrowing rate. The carrying amount of the equity component was determined to be approximately $80.1 million by deducting the carrying amount of the debt component from the principal amount of the Notes, and was recorded as an increase to additional paid-in capital. The excess of the principal amount of the debt component over its carrying amount (the “debt discount”) is being amortized as interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

We allocated transaction costs related to the issuance of the Notes, including underwriting discounts, of $7.6 million and $1.9 million to the debt and equity components, respectively. Issuance costs attributable to the debt component were recorded within other assets and are being amortized as interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital. The carrying amount of the equity component, net of issuance costs, was $78.2 million at October 31, 2014. Including the impact of the related deferred debt issuance costs, the effective interest rate on the Notes was approximately 5.29% at October 31, 2014.

Based on the closing market price of our common stock on October 31, 2014, the if-converted value of the Notes was less than the aggregate principal amount of the Notes.

Note Hedges and Warrants

Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold warrants (the “Warrants”). The combination of the Note Hedges and the Warrants serves to increase the effective initial conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of October 31, 2014, we had not purchased any shares under the Note Hedges.
Warrants
We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. The Warrants expire incrementally on a series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants could have a dilutive effect on net income per share to the extent that the market value of our common stock exceeds the strike price of the Warrants. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of October 31, 2014, no Warrants had been exercised and all Warrants remained outstanding.

18


The Note Hedges and Warrants both meet the requirements for classification within stockholders’ equity, and their respective fair values will not be subsequently remeasured and adjusted as long as these instruments continue to qualify for stockholders’ equity classification.
Credit Agreement
Background
In April 2011, we entered into a credit agreement (together with the subsequent amendments discussed herein, the “Credit Agreement") with our lenders and concurrently terminated a prior credit agreement. The Credit Agreement provided for $770.0 million of secured credit facilities, comprised of $600.0 million of term loans maturing in October 2017 (the “April 2011 Term Loans") and a $170.0 million revolving credit facility maturing in April 2016 (the “2011 Revolving Credit Facility”), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time.
We incurred debt issuance costs of $14.8 million associated with the Credit Agreement, which were deferred and were classified within other assets, and were being amortized as interest expense over the term of the Credit Agreement.

2013 Amendment and Restatement of Credit Agreement
On March 6, 2013, we entered into an amendment and restatement agreement with our lenders, providing for the amendment and restatement of the Credit Agreement. The amendment and restatement agreement provided for $850.0 million of senior secured credit facilities, comprised of $650.0 million of term loans maturing in September 2019 (the "March 2013 Term Loans") and a $200.0 million revolving credit facility maturing in March 2018 (the “2013 Revolving Credit Facility”), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time.

The March 2013 Term Loans were subject to an original issuance discount of 0.50%, or $3.3 million, resulting in net proceeds of $646.7 million. The discount was being amortized as interest expense over the term of the March 2013 Term Loans using the effective interest method.

The majority of the proceeds of the March 2013 Term Loans were used to repay all $576.0 million of outstanding April 2011 Term Loans at the March 6, 2013 closing date of the amendment and restatement agreement.  There were no outstanding borrowings under the 2011 Revolving Credit Facility at the March 6, 2013 closing date.

As further described below, on March 7, 2014, the March 2013 Term Loans were extinguished and replaced with the March 2014 Term Loans, and the basis for determining the interest rate on borrowings under the 2013 Revolving Credit Facility was also amended.

From March 6, 2013 through March 6, 2014, the March 2013 Term Loans and borrowings under the 2013 Revolving Credit Facility, if any, incurred 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 our election:

in the case of Eurodollar loans, the Adjusted LIBO Rate plus 3.00% (or, if our corporate credit ratings are BB- and Ba3 or better, 2.75%). The Adjusted LIBO Rate is the greater of (i) 1.00% per annum and (ii) the product of the LIBO Rate and Statutory Reserves (both as defined in the Credit Agreement), and

in the case of Base Rate loans, the Base Rate plus 2.00% (or, if our corporate credit ratings are BB- and Ba3 or better, 1.75%). The Base Rate is the greatest of (i) the administrative agent's prime rate, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus 1.00%.

As of January 31, 2014, the interest rate on the March 2013 Term Loans was 4.00%.

At the March 6, 2013 closing date of the amendment and restatement agreement, there were $11.0 million of unamortized deferred debt issuance costs and $2.2 million of unamortized discount associated with the April 2011 Term Loans and the 2011 Revolving Credit Facility. Of the $11.0 million of unamortized deferred debt issuance costs, $3.5 million were associated with commitments under the 2011 Revolving Credit Facility provided by lenders that continued to provide revolving credit commitments under the 2013 Revolving Credit Facility and therefore continued to be deferred, and were being amortized over the remaining term of the Credit Agreement. The remaining $7.5 million of unamortized deferred debt issuance costs and the

19


$2.2 million unamortized discount, all of which related to the April 2011 Term Loans, were written off as a $9.7 million loss on early retirement of debt for the year ended January 31, 2014.

We incurred debt issuance costs of approximately $7.5 million associated with the March 2013 Term Loans and the 2013 Revolving Credit Facility, which were deferred and classified within other assets and were being amortized as interest expense over the remaining term of the Credit Agreement. Of these deferred debt issuance costs, $5.0 million were associated with the March 2013 Term Loans and were being amortized using the effective interest rate method, and $2.5 million were associated with the 2013 Revolving Credit Facility and were being amortized on a straight-line basis.

We are required to pay a commitment fee equal to 0.50% per annum of the undrawn portion on the 2013 Revolving Credit Facility, payable quarterly, and customary administrative agent and letter of credit fees. These fees were unchanged from the 2011 Revolving Credit Facility.

2014 Amendments to Credit Agreement

During the nine months ended October 31, 2014, we entered into five separate amendments to the Credit Agreement as described below.

On February 3, 2014, in connection with the acquisition of KANA, we borrowed $125.0 million under the 2013 Revolving Credit Facility and entered into Amendment No. 1 pursuant to which, on such date, we incurred $300.0 million of incremental term loans (the “February 2014 Term Loans”). The net proceeds of these borrowings were used to fund a portion of the KANA purchase price.

The February 2014 Term Loans were subject to an original issuance discount of 0.25%, or $0.8 million. In June 2014, we wrote off $0.4 million of the unamortized discount in connection with the early retirement of a portion of the February 2014 Term Loans, as further described below. This discount is amortized as interest expense over the term of the February 2014 Term Loans using the effective interest method.

The February 2014 Term Loans bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months or less, at the end of the applicable interest period, at a per annum rate of, at our election:

in the case of Eurodollar loans, the Adjusted LIBO Rate plus 2.75%. The Adjusted LIBO Rate is the greater of (i) 0.75% per annum and (ii) the product of (x) the LIBO Rate and (y) Statutory Reserves (both as defined in the Credit Agreement), and

in the case of Base Rate loans, the Base Rate plus 1.75%. The Base Rate is the greatest of (i) the administrative agent’s prime rate, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus 1.00%.

We incurred debt issuance costs of approximately $7.1 million associated with the February 2014 Term Loans, which were deferred and classified within other assets. In June 2014, we wrote off $3.8 million of these deferred costs in connection with the early retirement of a portion of the February 2014 Term Loans, as further described below. These deferred costs are amortized as interest expense over the term of the February 2014 Term Loans using the effective interest rate method.
On February 3, 2014, we also entered into Amendment No. 2 to, among other things, (i) permit us to increase the permitted amount of additional incremental term loans and revolving credit commitments under the Credit Agreement (beyond the February 2014 Term Loans borrowed under Amendment No. 1) by up to, in the aggregate, $200.0 million plus an additional amount such that the First Lien Leverage Ratio (as defined in Amendme