UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-49790
Verint Systems Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-3200514
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 South Service Road, Melville, NY 11747
(Address of principal executive offices) (Zip Code)
(631) 962-9600
(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.
[X} Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The number of shares of Common Stock, par value $0.001 per share,
outstanding as of December 10, 2003 was 29,963,806.
1
TABLE OF CONTENTS
-----------------
PART I
Financial Information
Page
ITEM 1. Financial Statements.
1. Condensed Consolidated Balance Sheets as
of January 31, 2003 and October 31, 2003 3
2. Condensed Consolidated Statements of Income
for the Three and Nine Month Periods Ended October 31, 2002
and October 31, 2003 4
3. Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended
October 31, 2002 and October 31, 2003 5
4. Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. 31
ITEM 4. Controls and Procedures. 32
PART II
Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders. 32
ITEM 6. Exhibits and Reports on Form 8-K. 33
SIGNATURES 34
2
PART I
ITEM 1. Financial Statements.
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
January 31, October 31,
2003* 2003
----- ----
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 133,933 $ 223,686
Accounts receivable, net 27,279 33,533
Inventories 8,866 15,621
Prepaid expenses and other current assets 4,079 6,714
--------- ---------
TOTAL CURRENT ASSETS 174,157 279,554
PROPERTY AND EQUIPMENT, net 12,965 13,787
OTHER ASSETS 19,928 30,582
--------- ---------
TOTAL ASSETS $ 207,050 $ 323,923
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 43,622 $ 55,687
Advance payments from customers 19,013 22,612
Current maturities of long-term bank loans 42,199 431
Convertible note -- 2,200
--------- ---------
TOTAL CURRENT LIABILITIES 104,834 80,930
LONG-TERM BANK LOANS 1,678 1,821
CONVERTIBLE NOTE 2,200 --
OTHER LIABILITIES 2,172 2,751
--------- ---------
TOTAL LIABILITIES 110,884 85,502
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value - authorized, 120,000,000 shares;
issued and outstanding, 23,665,717 and 29,950,351 shares 24 30
Additional paid-in capital 130,748 260,242
Accumulated deficit (34,855) (22,699)
Cumulative translation adjustment 249 848
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 96,166 238,421
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 207,050 $ 323,923
========= =========
*The Condensed Consolidated Balance Sheet as of January 31, 2003 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.
3
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Nine months ended Three months ended
October 31, October 31,
2002 2003 2002 2003
------- ------ ------ -----
Sales $115,458 $140,319 $ 40,671 $ 49,012
Cost of sales 57,701 65,238 19,749 22,560
-------- -------- -------- --------
Gross profit 57,757 75,081 20,922 26,452
Operating expenses:
Research and development, net 12,594 16,979 4,464 5,952
Selling, general and administrative 38,139 46,014 13,741 16,044
-------- -------- -------- --------
Income from operations 7,024 12,088 2,717 4,456
Interest and other income, net 1,310 1,813 637 878
-------- -------- -------- --------
Income before income taxes 8,334 13,901 3,354 5,334
Income tax provision 1,646 1,745 595 667
-------- -------- -------- --------
Net income $ 6,688 $ 12,156 $ 2,759 $ 4,667
======== ======== ======== ========
Earnings per share:
Basic $ 0.31 $ 0.45 $ 0.12 $ 0.16
======== ======== ======== ========
Diluted $ 0.29 $ 0.42 $ 0.11 $ 0.15
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
4
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine months ended
October 31,
2002 2003
------- -------
Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $ 12,999 $ 20,237
Changes in operating assets and operatingliabilities:
Accounts receivable 3,942 (5,439)
Inventories 360 (6,090)
Prepaid expenses and other current assets
(219) (1,864)
Accounts payable and accrued expenses 7,858 10,573
Advance payments from customers 523 3,599
Other, net (251) (790)
--------- ---------
Net cash provided by operating activities 25,212 20,226
--------- ---------
Cash flows from investing activities:
Cash paid for a business combination (9,706) (6,115)
Purchases of property and equipment (2,920) (4,815)
Capitalization of software development costs (3,685) (3,324)
--------- ---------
Net cash used in investing activities (16,311) (14,254)
--------- ---------
Cash flows from financing activities:
Net repayments of bank loans (93) (42,617)
Net proceeds from the issuances of common stock 65,655 126,398
--------- ---------
Net cash provided by financing activities 65,562 83,781
--------- ---------
Net increase in cash and cash equivalents 74,463 89,753
Cash and cash equivalents, beginning of period 49,860 133,933
--------- ---------
Cash and cash equivalents, end of period $ 124,323 $ 223,686
========= =========
The accompanying notes are an integral part of these financial statements.
5
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 software-based solutions
for communications interception, digital video security and
surveillance, and enterprise business intelligence. The Company is a
majority-owned subsidiary of Comverse Technology, Inc. ("CTI").
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, 2003. 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 and nine month
periods ended October 31, 2003 are not necessarily indicative of the
Company's results to be expected for the full year. The condensed
consolidated balance sheet as of January 31, 2003 has been summarized
from the Company's audited consolidated balance sheet as of that date.
Certain prior periods amounts have been reclassified to conform to the
manner of presentation in the current periods.
2. Public Offering
In June 2003, the Company completed a public offering of 5,750,000
shares of its common stock at a price of $23.00 per share. The shares
offered included 149,731 shares issued to Smartsight Networks Inc.'s
("Smartsight") former shareholders in connection with its acquisition
(see also note 11). The net proceeds of the offering were approximately
$122.2 million. The Company intends to use the net proceeds of that
offering to finance the growth of its business and for general
corporate purposes. The Company may also use a portion of the proceeds
for acquisitions or other investments.
3. Stock-Based Employee Compensation
The Company applies the intrinsic-value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
stock-based employee compensation. Accordingly, stock-based employee
compensation cost is recognized only when employee stock options are
granted with exercise prices below the fair market value at the date of
grant. Any resulting stock-based
6
employee compensation cost is recognized ratably over the associated
service period, which is generally the option vesting period. The
Company recognized stock-based employee compensation cost in the
condensed consolidated statements of income of approximately $16,000
and $48,000 in the three month and nine month periods ended October
31, 2002, respectively, and $13,000 and $40,000 in the three month and
nine month periods ended October 31, 2003, respectively. These costs
were recognized in connection with certain employee stock options
granted with exercise prices below the fair market value at the date
of grant. As of October 31, 2003, 42,174 employee stock options were
outstanding with exercise prices below the fair market value at the
date of the grant. All other employee stock options have been granted
at exercise prices equal to fair market value on the date of grant,
and, accordingly, no compensation expense has been recognized by the
Company in the consolidated statement of income.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation for all periods:
Nine Months Ended Three Months Ended
October 31, October 31,
2002 2003 2002 2003
---- ---- ---- ----
(In thousands, except per share data)
Net income, as reported $ 6,688 $ 12,156 $ 2,759 $ 4,667
Less: Stock-based employee
compensation cost determined under the
fair value method, net of related tax
effects 3,132 3,863 1,123 1,482
--------- ---------- -------- ---------
Pro forma net income $ 3,556 $ 8,293 $ 1,636 $ 3,185
========= ========== ======== =========
Earnings per share:
Basic - as reported $ 0.31 $ 0.45 $ 0.12 $ 0.16
========= ========== ======== =========
Basic - pro forma $ 0.16 $ 0.31 $ 0.07 $ 0.11
========= ========== ======== =========
Diluted - as reported $ 0.29 $ 0.42 $ 0.11 $ 0.15
========= ========== ======== =========
Diluted - pro forma $ 0.15 $ 0.29 $ 0.07 $ 0.10
========= ========== ======== =========
7
4. Inventories
The composition of inventories at January 31, 2003 and October 31,
2003 is as follows:
January 31, October 31,
2003 2003
----- ----
(In thousands)
Raw materials $ 5,337 $ 7,701
Work in process 1,405 1,843
Finished goods 2,124 6,077
---------- ---------
$ 8,866 $ 15,621
========== =========
5. 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, Trade and Labor 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. Under the
terms of the applicable funding agreements, products resulting from
projects funded by the OCS may not be manufactured outside of Israel
without government approval. The Company is currently involved in
several ongoing research and development projects supported by the OCS.
Reimbursements from the OCS amounted to approximately $1.4 million and
$3.9 million, in the three month and nine month periods ended October
31, 2002, respectively, and $0.8 million and $3.0 million in the three
month and nine month periods ended October 31, 2003, respectively.
6. Earnings Per Share
The computation of basic earnings per share is based on the weighted
average number of outstanding common shares. Diluted earnings per
share further assumes the issuance of common shares for all
potentially dilutive issuances of stock. The calculation for earnings
per share for the three month and nine month periods ended October 31,
2002 and 2003 was as follows:
8
Three Months ended
--------------------------------------------------------------------------------
October 31, 2002 October 31, 2003
------------------------------------ ------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
(In thousands, except per share data)
Basic EPS
Net Income $ 2,759 23,434 $ 0.12 $ 4,667 29,870 $ 0.16
======= =======
Effect of Dilutive
Securities
---------------------------
Stock Options 660 1,614
Convertible Note 137 137
------ ------ ------ ------
Diluted EPS $ 2,759 24,231 $ 0.11 $ 4,667 31,621 $ 0.15
----------- ======= ====== ======== ======= ====== ========
Nine Months ended
--------------------------------------------------------------------------------
October 31, 2002 October 31, 2003
------------------------------------ ------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
(In thousands, except per share data)
Basic EPS
Net Income $ 6,688 21,706 $ 0.31 $ 12,156 26,895 $ 0.45
======= =======
Effect of Dilutive
Securities
---------------------------
Stock Options 1,134 1,613
Convertible Note 137 137
------ ------ ------- ------
Diluted EPS $ 6,688 22,977 $ 0.29 $ 12,156 28,645 $ 0.42
----------- ======= ====== ======== ======== ====== =======
7. Comprehensive Income
Total comprehensive income was approximately $2,608,000 and $5,424,000
for the three month periods ended October 31, 2002 and October 31,
2003, respectively, and approximately $6,014,000 and $12,755,000 for
the nine month periods ended October 31, 2002 and October 31, 2003,
respectively. The elements of comprehensive income include net income
and foreign currency translation adjustments.
9
8. Workforce Reduction, Restructuring and Impairment Charges
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
October 31, 2003, the Company has paid all its accrued liabilities
related to this workforce reduction and facilities consolidation.
A roll-forward of the accrued liabilities for the workforce reduction
and facilities consolidation costs from January 31, 2003 is as follows:
Accrual Accrual
Balance at Balance at
January 31, Cash October 31,
2003 Payments 2003
---- -------- ----
(In thousands)
Severance and related $ 26 $ 26 $ 0
Facilities 189 189 0
---------- ------------ ------------
Total $ 215 $ 215 $ 0
========== ============ ============
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 consulting costs.
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.
9. Related Party Transactions and Balances
Corporate Services Agreement - The Company recorded expenses of
approximately $131,000 and $144,000 for the three month periods ended
October 31, 2002 and 2003, respectively, and $394,000 and $432,000 for
the nine month periods ended October 31, 2002 and October 31, 2003,
respectively, for the services provided by the Company's parent, CTI,
under the Corporate Services Agreement between the Company and CTI.
10
Enterprise Resource Planning Software Sharing Agreement - The Company
recorded $25,000 for each of the three month periods ended October 31,
2002 and 2003, and $75,000 for each of the nine month periods ended
October 31, 2002 and 2003, 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 - The Company recorded expenses of
approximately $405,000 and $505,000 for the three month periods ended
October 31, 2002 and 2003, respectively, and $1,502,000 and $1,366,000,
for the nine month periods ended October 31, 2002 and 2003,
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 - The Company sold products and services
to Verint Systems (Singapore) PTE LTD, an affiliated systems integrator
in which the Company holds a 50% equity interest, amounting to
approximately $196,000 and $94,000, during the three month periods
ended October 31, 2002 and 2003, respectively, and $696,000 and
$3,266,000, during the nine month periods ended October 31, 2002 and
October 31, 2003, respectively. In addition, the Company was charged
with installation, support, marketing and office service fees by that
affiliate amounting to approximately $72,000 and $172,000 for the three
month periods ended October 31, 2002 and 2003, respectively, and
$283,000 and $502,000, for the nine month periods ended October 31,
2002 and 2003, 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 $44,000 and $32,000 for the three month periods ended
October 31, 2002 and 2003, respectively, and $132,000 and $97,000 for
the nine month periods ended October 31, 2002 and October 31, 2003,
respectively.
The Company also purchased products and services from other
subsidiaries of CTI in the ordinary course of business. Purchases from
these subsidiaries were approximately $0 and $3,000 for the three month
periods ended October 31, 2002 and 2003, respectively, and $0 and
$14,000 for the nine month periods ended October 31, 2002 and 2003,
respectively.
Related Party Balances - Related party balances included in the
condensed consolidated balance sheets are as follows (in thousands):
11
January 31, October 31,
2003 2003
---- ----
Included in accounts receivable, net $ 1,750 $ 1,729
======= =========
Included in accounts payable and
accrued expenses $ 1,157 $ 867
======= =========
10. Employee Stock Purchase Plan
The Company adopted its 2002 Employee Stock Purchase Plan, which was
amended and restated on May 22, 2003, under which all employees who
have completed three months of employment are entitled, through payroll
deductions of amounts up to 10% of their base salary, to purchase
shares of the Company's common stock at 85% of the lesser of the market
price at the offering commencement date or the offering termination
date. The number of shares available under this Employee Stock Purchase
Plan is 1,000,000, of which 100,637 had been issued as of October 31,
2003.
11. Acquisitions
On May 21, 2003, the Company acquired all of the issued and outstanding
shares of Smartsight, a Canadian corporation that develops IP-based
video edge devices and software for wireless video transmission. The
purchase price consisted of approximately $7,144,000 in cash and
149,731 shares of the Company. Shares issued as part of the purchase
price were accounted for with value of approximately $3,063,000, or
$20.46 per share. In connection with this acquisition, the Company
incurred transaction costs, consisting primarily of professional fees
amounting to approximately $263,000.
The acquisition was accounted for using the purchase method. The
purchase price was allocated to the assets and liabilities of
Smartsight based on the estimated fair value of those assets and
liabilities as of May 1, 2003. Identifiable intangible assets consist
of sales backlog, acquired technology, trade name, customer
relationships and non-competition agreements and have an estimated
useful life of up to five years. The results of operations of
Smartsight have been included in the Company's results of operations
since May 1, 2003.
The following is a summary of the allocation of the purchase price for
this acquisition:
12
(In thousands)
Purchase price $ 10,207
Acquisition costs 263
--------
Total purchase price $ 10,470
========
Fair value of net assets acquired $ 1,880
Identifiable intangible assets 2,077
Goodwill 6,513
--------
Total purchase price $ 10,470
========
Purchase price paid in cash $ 7,407
Shares issued 3,063
--------
Total purchase price $ 10,470
========
The summary unaudited pro forma condensed consolidated results of
operations, assuming the acquisition had occurred at the beginning of
the periods, would have reflected consolidated revenues of
approximately $42,778,000, net income of approximately $3,318,000,
basic earnings per share of $0.14 and diluted earnings per share of
$0.14 for the three month period ended October 31, 2002. For the nine
month periods ended October 31, 2002 and 2003 the summary unaudited pro
forma condensed consolidated results of operations would have reflected
revenues of approximately $119,617,000 and $141,982,000, net income of
approximately $7,493,000 and $12,365,000, basic earnings per share of
$0.35 and $0.46 and diluted earnings per share of $0.33 and $0.43,
respectively. 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.
12. 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.
13
United United Reconciling Consolidated
States Israel Kingdom Other Items Totals
---------------------------------------------------------------------
Three months ended
October 31, 2002: (In thousands)
------------------
Sales $ 22,729 $ 14,545 $ 6,563 $ 2,040 $ (5,206) $ 40,671
Costs and expenses (20,237) (14,323) (5,807) (3,131) 5,544 (37,954)
-----------------------------------------------------------------------
Income (loss) from
operations $ 2,492 $ 222 $ 756 $ (1,091) $ 338 $ 2,717
=======================================================================
Three months ended
October 31, 2003:
------------------
Sales $ 27,218 $ 17,535 $ 5,838 $ 4,883 $ (6,462) $ 49,012
Costs and expenses (22,387) (16,394) (6,002) (5,647) 5,874 (44,556)
-----------------------------------------------------------------------
Income (loss) from
operations $ 4,831 $ 1,141 $ (164) $ (764) $ (588) $ 4,456
=======================================================================
United United Reconciling Consolidated
States Israel Kingdom Other Items Totals
---------------------------------------------------------------------------
Nine months ended
October 31, 2002: (In thousands)
-----------------
Sales $ 63,444 $ 46,032 $ 18,144 $ 7,083 $ (19,245) $ 115,458
Costs and expenses (59,835) (42,001) (17,054) (8,880) 19,336 (108,434)
--------------------------------------------------------------------------
Income (loss) from operations $ 3,609 $ 4,031 $ 1,090 $ (1,797) $ 91 $ 7,024
==========================================================================
Nine months ended
October 31, 2003:
-----------------
Sales $ 71,012 $ 58,733 $ 17,978 $ 12,136 $ (19,540) $ 140,319
Costs and expenses (62,314) (50,779) (19,045) (14,018) 17,925 (128,231)
--------------------------------------------------------------------------
Income (loss) from
operations $ 8,698 $ 7,954 $ (1,067) $ (1,882) $ (1,615) $ 12,088
==========================================================================
Total Assets:
October 31, 2002 $ 116,414 $ 82,301 $ 7,608 $ 6,078 $ (12,805) $ 199,596
==========================================================================
October 31, 2003 $ 218,385 $ 98,355 $ 10,788 $ 23,317 $ (26,922) $ 323,923
==========================================================================
Reconciling items consist of the following:
Sales -- elimination of inter-company revenues.
Operating income -- elimination of inter-company operating income.
Total assets -- elimination of inter-company receivables.
14
13. Bank Loan
In February 2003, the Company repaid a bank loan of $42 million.
14. Effect of New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("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. The adoption
of SFAS No. 143 did not have a material effect on the Company's
condensed consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145, among other things, rescinds SFAS
No. 4, which required all gains and losses from the extinguishments of
debt to be classified as an extraordinary item and amends SFAS No. 13
to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. The rescission of SFAS No. 4 is
effective for fiscal years beginning after May 15, 2002. The remainder
of the statement is generally effective for transactions occurring
after May 15, 2002. The adoption of SFAS No. 145 did not have a
material effect on the Company's condensed consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No.149
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is generally
effective for derivative instruments, including derivative instruments
embedded in certain contracts, entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 did not have a material effect on the
Company's condensed consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150
15
establishes standards for how to classify and measure certain
financial instruments with characteristics of both liabilities and
equity. The statement is effective for financial instruments entered
into or modified after May 31, 2003. The adoption of SFAS No. 150 did
not have a material effect on the Company's condensed consolidated
financial statements.
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
Nine Month and Three Month Periods Ended October 31, 2003
Compared to Nine Month and Three Month Periods Ended October 31, 2002
Sales. Sales for the nine month and three month periods ended October 31,
2003 increased by approximately $24.9 million (22%) and $8.3 million (21%),
respectively, as compared to the nine month and three month periods ended
October 31, 2002. This increase was attributable to a higher sales volume of
both product and services. Sales to international customers represented
approximately 50% and 44% of sales for the nine month and three month
periods ended October 31, 2003 as compared to approximately 50% and 52% for
the nine month and three month periods ended October 31, 2002.
Cost of Sales. Cost of sales for the nine month and three month periods
ended October 31, 2003 increased by approximately $7.5 million (13%) and
$2.8 million (14%), respectively, as compared to the nine month and three
month periods ended October 31, 2002. The increase in the nine month and
three month periods ended October 31, 2003 was attributable to an increase
in materials and overhead costs of approximately $3.4 million and $1.5
million, respectively, an increase in salaries and fringe benefits of
approximately $2.5 million and $0.7 million, respectively, an increase in
subcontractors and consultants of approximately $1.0 million and $0.3
million, respectively, and an increase in other operations costs including
royalties of approximately $0.6 million and $0.3 million, respectively.
Gross margins increased to approximately 53.5% and 54.0%, in the nine month
and three month periods ended October 31, 2003, respectively, from
approximately 50.0% and 51.4%, in the nine month and three month periods
ended October 31, 2002, respectively.
Research and Development Expenses, net. Research and development expenses,
net, for the nine month and three month periods ended October 31, 2003
increased by approximately $4.4 million (35%), and $1.5 million (33%),
respectively, as compared to the nine month and three month periods ended
October 31, 2002. This net increase was attributable to an increase in
salaries and fringe benefits of approximately $2.7 million and $0.8 million,
respectively, an increase in subcontractors and consultants of approximately
$0.6 million and $0.3 million, respectively, a decrease in government
reimbursements of approximately $0.7 million and
16
$0.5 million, respectively, and an increase (decrease) in other research
and development expenses of $0.4 million and ($0.1) million, respectively.
Research and development expenses, net, as a percentage of sales, increased
to approximately 12% for the nine month and three month periods ended
October 31, 2003 from approximately 11% for the nine month and three month
periods ended October 31, 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine month and three month periods ended
October 31, 2003 increased by approximately $7.9 million (21%), and $2.3
million (17%), respectively, as compared to the nine month and three month
periods ended October 31, 2002. This increase was attributable to an
increase in salaries and fringe benefits, primarily to sales and marketing
personnel, amounting to approximately $4.4 million and $1.9 million,
respectively, an increase in marketing expenses of approximately $1.3
million and $0.5 million, respectively, an increase in subcontractors and
consultants of approximately $1.1 million and $0.3 million, respectively, an
increase in bad debt expenses of approximately $0.5 million and $0.0
million, respectively, and an increase in other selling, general and
administrative expenses of approximately $1.3 million and $1.1 million,
respectively. This increase was partially offset by a decrease in agent
commissions of approximately $0.7 million and $1.5 million, respectively.
Selling, general and administrative expenses as a percentage of sales was
approximately 33% for the nine month and three month periods ended October
31, 2003 compared with approximately 33% and 34%, respectively, for the nine
month and three month periods ended October 31, 2002.
Interest and Other Income, net. Net interest and other income for the nine
month and three month periods ended October 31, 2003 increased by
approximately $0.5 million and $0.2 million, respectively, as compared to
the nine month and three month periods ended October 31, 2002. The increase
of approximately $0.5 million for the nine month period ended October 31,
2003 as compared to the nine month period ended October 31, 2002, was
attributable to increased interest income of approximately $0.3 million,
decreased interest expense of approximately $0.3 million, increased gains
from the Company's share in the profit of an affiliate of approximately $0.7
million and decreased other expense of approximately $0.8 million mainly due
to a write-down of a certain investment in the nine month period ended
October 31, 2002. These changes were offset by decreased foreign currency
gains of approximately $1.6 million. The increase of approximately $0.2
million for the three month period ended October 31, 2003, as compared to
the three month period ended October 31, 2002, was attributable to increased
gains from the Company's share in the profit of an affiliate of
approximately $0.2 million and an increased foreign currency gain of
approximately $0.1 million offset by increased interest expense of
approximately $0.1 million.
Income Tax Provision. Income tax provision for the nine month and three
month periods ended October 31, 2003, increased by approximately $0.1
million for each such period as compared to the nine month and three month
periods ended October 31, 2002. This increase was primarily attributable to
increased taxable income. The overall effective tax rate decreased to
approximately 13% for the nine month and three month periods ended October
31, 2003,
17
from approximately 20% and 18% for the nine month and three month periods
ended October 31, 2002, respectively. The decreased effective tax rate is
mainly attributable to preferential tax rates in Israel and to the use of
net operating losses carry forwards in certain tax jurisdictions.
Net Income. Net income for the nine month and three month periods ended
October 31, 2003 increased by approximately $5.5 million (82%) and $1.9
million (69%), respectively, as compared to the nine month and three month
periods ended October 31, 2002. As a percentage of sales, net income was
approximately 8.7% and 9.5% in the nine month and three month periods ended
October 31, 2003, respectively, as compared to approximately 5.8% and 6.8%
in the nine month and three month periods ended October 31, 2002,
respectively. The increase resulted primarily from the factors described
above.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2003, the Company had cash and cash equivalents of
approximately $223.7 million and working capital of approximately $198.6
million, including net proceeds of approximately $122.2 million, following the
completion of the Company's secondary public offering in June 2003. As of
January 31, 2003, the Company had cash and cash equivalents of approximately
$133.9 million and working capital of $69.3 million.
Operating activities for the nine month periods ended October 31, 2002 and 2003,
after adjustment for non-cash items, provided cash of approximately $13.0
million, and $20.2 million, respectively. Other changes in operating assets and
liabilities provided cash of approximately $12.2 million and $0.0 million for
the nine month periods ended October 31, 2002 and 2003, respectively. This
resulted in cash provided by operating activities of approximately $25.2 million
and $20.2 million for the nine month periods ended October 31, 2002 and 2003,
respectively.
Investing activities for the nine month periods ended October 31, 2002 and 2003,
used cash of approximately $16.3 million and $14.3 million, respectively. For
the nine month period ended October 31, 2002 these amounts include cash paid for
a business combination of approximately $9.7 million, purchases of property and
equipment of approximately $2.9 million, and capitalization of software
development costs of approximately $3.7 million. For the nine month period ended
October 31, 2003 these amounts include cash paid for a business combination of
approximately $6.1 million, purchases of property, equipment and proprietyar
technology of approximately $4.8 million and capitalization of software
development costs of approximately $3.3 million.
Financing activities for the nine month periods ended October 31, 2002 and 2003
provided cash of approximately $65.6 million and $83.8 million, respectively.
For the nine month periods ended October 31, 2002 and 2003 net proceeds from the
issuances of common stock in connection with the Company's public offerings of
common stock in May 2002 and June 2003, the exercise of stock options, and
shares issued from the employee stock purchase plan provided
18
cash of approximately $65.7 million and $126.4 million, respectively. Net
repayments of bank loans and other debt used cash of approximately $0.1 million
and $42.6 million in the nine month periods ended October 31, 2002 and 2003,
respectively.
On February 1, 2002, the Company's wholly-owned subsidiary, Loronix, 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 approximately $9.5 million in cash and a $2.2
million convertible note issued by the Company to Lanex. 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 21, 2003, the Company acquired all of the issued and outstanding shares
of Smartsight Networks Inc., a Canadian corporation that develops IP-based video
edge devices and software for wireless video transmission. The purchase price
consisted of approximately $7.1 million in cash and 149,731 shares of the
Company with a value of approximately $3.1 million.
In June 2003, the Company completed a public offering of 5,750,000 shares of its
common stock at a price of $23.00 per share. The shares offered included 149,731
shares issued to Smartsight Networks Inc.'s former shareholders in connection
with its acquisition. The net proceeds of the offering were approximately $122.2
million. The Company intends to use the net proceeds of that offering to finance
the growth of its business and for general corporate purposes. The Company may
also use a portion of the proceeds for acquisitions or other investments.
The Company believes that 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. If current sources are not sufficient to meet the Company's
needs, the Company may seek additional debt or equity financing. 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. 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 public facilities such as airports. However, the Company cannot
be assured that
19
these legislative and regulatory actions will result in increased demand
for or purchasing of solutions such as those offered by the Company or, if it
does, that such solutions will be purchased from the Company. If demand for or
purchasing of the Company's solutions does not increase as anticipated, the
Company may not be able to sustain or increase profitability on a quarterly or
annual basis.
The market for the Company's enterprise business intelligence products has been
adversely affected 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, its revenues from sales of its enterprise business
intelligence products may decrease. The information technology spending of its
customers in the near term remains uncertain and the Company is uncertain
whether it will be able to increase or maintain its revenues. Although the
Company was profitable for fiscal 2002 and for the first three quarters of
fiscal 2003, it has incurred operating and net losses every other year since
1997. 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 its
products before purchasing them and, in the case of governmental customers,
sales are dependent on budgetary and other bureaucratic processes. The period
between initial customer contact and a purchase by a customer may vary from
three 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) deferrals in anticipation of
enhancements or new products; (iv) introduction of products by its competitors;
and (v) lower prices offered by its competitors.
The Company derives a significant amount of its revenues from various government
contracts worldwide. The Company expects that government contracts will continue
to be a significant source of its revenues for the foreseeable future. The
Company's business generated from government contracts may be materially and
adversely affected if: (i) its reputation or relationship with government
agencies is impaired; (ii) it is suspended or otherwise prohibited from
contracting with a domestic or foreign government or any significant law
enforcement agency; (iii) levels of government expenditures and authorizations
for law enforcement and security related programs decrease, remain constant or
shift to programs in areas where it does not provide products and services; (iv)
it is prevented from entering into new government contracts or extending
existing government contracts based on violations or suspected violations of
laws or regulations, including those related to procurement; (v) it is not
granted security clearances that are required to sell its products to domestic
or foreign governments or such security clearances are revoked; or (vi) there is
a change in government procurement procedures.
The Company's quarterly operating results are difficult to predict and may
fluctuate significantly in the future, which in turn may result in volatility in
its stock price. The following factors,
20
among others, many of which are outside its control, can cause fluctuations
in operating results and stock price volatility: (i) the size, timing, terms and
conditions of orders from and shipments to its customers; (ii) unanticipated
delays or problems in releasing new products; (iii) the timing and success of
its customers' deployment of its products and services; and (iv) the amount and
timing of its 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 bases its current and future
expense levels on its internal operating plans and sales forecasts, and its
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 its products decrease, remain constant or
grow slower than the Company anticipates, the Company will not be able to
maintain its growth. Continued growth in the demand for the Company's products
is uncertain as, among other reasons, its existing customers and potential
customers may: (i) not achieve a return on their investment in its products;
(ii) experience technical difficulty in utilizing its 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 a material adverse
effect on the Company's ability to maintain its 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 for it
to be able 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 be assured 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 its competitors
will not render its products obsolete. 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 and
results of operations.
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,
21
including design, development and marketing activities, required to prepare
bids and proposals for contracts that may not be awarded to the Company.
The Company's 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 it, 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 continue to emerge and there continues to be consolidation among
existing competitors which may reduce the Company's market share. In addition,
some of the Company's customers may in the future decide to develop internally
their own solutions instead of purchasing them from the Company. Increased
competition could force the Company to lower its prices or take other actions to
differentiate its products.
Many of the Company's government contracts contain provisions that give the
governments party to those contracts rights and remedies not typically found in
private commercial contracts, including provisions enabling the governments to:
(i) terminate or cancel existing contracts for convenience; (ii) in the case of
the U.S. government, suspend the Company from doing business with a foreign
government or prevent the Company from selling its products in certain
countries; (iii) audit and object to it's the Company's contract-related costs
and expenses, including allocated indirect costs; and (iv) change specific terms
and conditions in its contracts, including changes that would reduce the value
of its contracts. In addition, many jurisdictions have laws and regulations that
deem government contracts in those jurisdictions to include these types of
provisions, even if the contract itself does not contain them. If a government
terminates a contract with the Company for convenience, the Company may not
recover its incurred or committed costs, any settlement expenses or profit on
work completed prior to the termination. If a government terminates a contract
for default, the Company may not recover those amounts, and, in addition, it may
be liable for any costs incurred by a government in procuring undelivered items
and services from another source.
The Company must comply with domestic and foreign laws and regulations relating
to the formation, administration and performance of government contracts. These
laws and regulations affect how the Company does business with government
agencies in various countries and may impose added costs on its business. For
example, in the United States the Company is subject to the Federal Acquisition
Regulations, which comprehensively regulate the formation, administration and
performance of federal government contracts, and to the Truth in Negotiations
Act, which requires certification and disclosure of cost and pricing data in
connection with contract negotiations. The Company is subject to similar
regulations in foreign countries as well.
If a government review or investigation uncovers improper or illegal activities,
the Company may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeiture of profits, suspension
of payments, fines and suspension or debarment from doing business with
government agencies, which could materially and adversely affect its business,
financial condition and results of operations. In addition, a government may
reform its
22
procurement practices or adopt new contracting rules and regulations
that could be costly to satisfy or that could impair the Company's ability to
obtain new contracts.
The Company's subsidiary, Verint Technology Inc. ("Verint Technology") which
markets, sells and supports its communications interception solutions to various
U.S. government agencies, is required by the National Industrial Security
Program to maintain facility security clearances and to be insulated from
foreign ownership, control or influence. To comply with the National Industrial
Security Program requirements, in January 1999 the Company, Verint Technology,
Comverse Technology and the Department of Defense entered into a proxy agreement
with respect to the ownership and operations of Verint Technology, which
agreement was superceded in May 2001 to comply with the Department of Defense's
most recent requirements. Under the proxy agreement, the Company, among other
things, appointed three individuals who are U.S. citizens holding the requisite
security clearances as holders of proxies to vote the Verint Technology stock.
The proxy holders have the power to exercise all prerogatives of ownership of
Verint Technology. These three individuals are responsible for the oversight of
Verint Technology's security arrangements.
The proxy agreement may be terminated and Verint Technology's facility security
clearance may be revoked in the event of a breach of the proxy agreement, or if
it is determined by the Department of Defense that termination is in the
national interest. If Verint Technology's facility security clearance is
revoked, the Company may lose all or a substantial portion of its sales to U.S.
government agencies and its business, financial condition and results of
operations would be harmed. In addition, concerns about the security of the
Company or its products can materially and adversely affect Verint Technology's
sales to U.S. government agencies.
As the communications industry continues to evolve, governments may
increasingly regulate products that monitor and record voice, video and data
transmissions over public communications networks, such as the Company's
solutions. For example, products which the Company sells in the United States to
law enforcement agencies and which interface with a variety of wireline,
wireless and Internet protocol networks, must comply with the technical
standards established by the Federal Communications Commission pursuant to the
Communications Assistance for Law Enforcement Act and products that it sells in
Europe must comply with the technical standards established by the European
Telecommunications Standard Institute. The adoption of new laws governing the
use of the Company's products or changes made to existing laws could cause a
decline in the use of its products and could result in increased expenses for
the Company, particularly if it is required to modify or redesign its products
to accommodate these new or changing laws.
The Company is required to obtain export licenses from the Israeli and German
governments to export some of its products that it develops or manufactures in
these countries. The Company cannot be assured that it will be successful in
obtaining or maintaining the licenses and other authorizations required to
export its products from applicable governmental authorities. The Company's
failure to receive or maintain any required export license or authorization
would hinder its ability to sell its products and could materially and adversely
affect its business,
23
financial condition and results of operations.
The Company's ability to achieve revenue growth depends to some extent on adding
new partners to expand its sales channels, as well as leveraging its
relationships with existing partners. If the Company's relationships with these
value added resellers, systems integrators and strategic and technology partners
deteriorate or terminate, the Company may lose important sales and marketing
opportunities.
As part of the Company's growth strategy, it intends to pursue new strategic
alliances. The Company considers and engages in strategic transactions from time
to time and may be evaluating alliances or joint ventures at any time. The
Company competes with other analytic solution providers for these opportunities.
The Company cannot be assured that it will be able to effect these transactions
on commercially reasonable terms or at all. If the Company enters into these
transactions, it also cannot be sure that it will realize the benefits it
anticipates.
The Company's products involve sophisticated hardware and software technology
that performs critical functions to highly demanding standards. The Company
cannot be assured that current or future products will not develop operational
problems, which could have a material adverse effect on it. The Company offers
complex products that may contain undetected defects or errors, particularly
when first introduced or as new versions are released. The Company may not
discover such defects or errors until after a product has been released and used
by the customer. Significant costs may be incurred to correct undetected defects
or errors in the Company's products and these defects or errors could result in
future lost sales. In addition, defects or errors in the Company's products may
result in product liability claims, which could cause adverse publicity and
impair their market acceptance.
The Company incorporates in the vast majority of its products software that it
licenses from third parties. If the Company loses or is unable to maintain any
software licenses, it could incur additional costs or experience unexpected
delays until equivalent software can be developed or licensed and integrated
into its products.
While the Company occasionally files patent applications, it cannot be assured
that patents will be issued on the basis of such applications or that, if such
patents are issued, they will be sufficiently broad to protect its technology.
In addition, the Company cannot be assured that any patents issued to it will
not be challenged, invalidated or circumvented.
In order to safeguard its unpatented proprietary know-how, trade secrets and
technology, the Company relies primarily upon trade secret protection and
non-disclosure provisions in agreements with employees and others having access
to confidential information. The Company cannot be assured that these measures
will adequately protect it from improper disclosure or misappropriation of its
proprietary information.
The Company's products are often used by customers to compile and analyze highly
sensitive or confidential information and data. The Company may come into
contact with such information or data when it performs support or maintenance
functions for its customers. While it has internal policies,
24
procedures and training for employees in connection with performing these
functions, even the perception that any of its employees has improperly handled
sensitive or confidential information and data of a customer could harm its
reputation and could inhibit market acceptance of its products.
While the Company implements sophisticated security measures, third parties may
attempt to breach its security or inappropriately use its products through
computer viruses, electronic break-ins and other disruptions. If successful,
confidential information, including passwords, financial information, or other
personal information may be improperly obtained and the Company may be subject
to lawsuits and other liability. Even if the Company is not held liable, such
security breaches could harm its reputation, and even the perception of security
risks, whether or not valid, could inhibit market acceptance of its products
with both government and commerical purchasers.
The information technology industry is characterized by frequent allegations of
intellectual property infringement. In the past, third parties have asserted
that certain of the Company's products infringe their intellectual property and
similar claims may be made in the future. Any allegation of infringement against
the Company could be time consuming and expensive to defend or resolve, result
in substantial diversion of management resources, cause product shipment delays,
or force it to enter into royalty or license agreements rather than dispute the
merits of such allegation. If patent holders or other holders of intellectual
property initiate legal proceedings against the Company, it may be forced into
protracted and costly litigation. The Company may not be successful in defending
such litigation and it may not be able to procure any required royalty or
license agreements on terms acceptable to it, or at all.
The Company generally indemnifies its customers with respect to infringement by
its products of the proprietary rights of third parties. Third parties may
assert infringement claims against the Company's customers. These claims may
require the Company to initiate or defend protracted and costly litigation,
regardless of the merits of these claims. If any of these claims succeed, the
Company may be forced to pay damages or may be required to obtain licenses for
the products its customers use. If the Company cannot obtain all necessary
licenses on commercially reasonable terms, its customers may be forced to stop
using, or, in the case of value added resellers, selling, its products.
Although the Company generally uses standard parts and components in its
products, it does use some non-standard parts and equipment. The Company relies
on non-affiliated suppliers for the supply of certain standard and non-standard
components and on manufacturers of assemblies that are incorporated in all of
its products. The Company does not have long term supply or manufacturing
agreements with all of these suppliers and manufacturers. If these suppliers or
manufacturers experience financial, operational, manufacturing capacity or
quality assurance difficulties, or if there is any other disruption in its
relationships with these suppliers or manufacturers, the Company will be
required to locate alternative sources of supply. The Company's inability to
obtain sufficient quantities of these components, if and as required in the
future, entails the following risks: (i) delays in delivery or shortages in
components could interrupt and delay manufacturing and result in cancellations
of orders for its products; (ii)
25
alternative suppliers could increase component prices significantly and
with immediate effect; (iii) it may not be able to develop alternative sources
for product components; (iv) it may be required to modify its products, which
may cause delays in product shipments, increased manufacturing costs and
increased product prices; and (v) it may be required to hold more inventory than
it otherwise might in order to avoid problems from shortages or discontinuance.
In May 2003, the Company acquired SmartSight. If the Company is unable to
successfully integrate SmartSight with its business, it may be unable to realize
the anticipated benefits of this acquisition. The Company may experience
technical difficulties that could delay the integration of SmartSight's products
into the Company's solutions, resulting in business disruptions.
The Company may in the future pursue acquisitions of businesses, products and
technologies, or the establishment of joint venture arrangements. The
negotiation of potential acquisitions or joint ventures as well as the
integration of an acquired or jointly developed business, technology or product
could result in a substantial diversion of management resources. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, amortization of
certain identifiable intangible assets, research and development write-offs and
other acquisition-related expenses. These investments may be made in immature
businesses with unproven track records and technologies. Such investments have a
high degree of risk, with the possibility that the Company may lose the total
amount of its investments, or more than its total investment if such businesses
have liabilities not identified by the Company. The Company may not be able to
identify suitable investment candidates, and, even if it does, it may not be
able to make those investments on acceptable terms, or at all. In addition, the
Company also may fail to successfully integrate acquired businesses with its
operations or successfully realize the intended benefits of any acquisition. Due
to rapidly changing market conditions, the Company may find the value of its
acquired technologies and related intangible assets, such as goodwill, as
recorded in its financial statements, to be impaired, resulting in charges to
operations. The Company may also fail to retain the acquired or merged company's
key employees and customers.
The Company depends on the continued services of its executive officers and
other key personnel. In addition, the Company may need to attract and retain a
substantial number of new employees, particularly sales and marketing personnel
and technical personnel, who understand and have experience with its products
and services. If the Company is unable to attract and retain qualified
employees, its ability to grow could be impaired. Competition for personnel for
certain positions in the Company's industry is intense, and in the past the
Company has experienced difficulty in recruiting qualified personnel due to the
market demand for their services. The Company has also experienced difficulty in
locating qualified candidates within desired geographic locations and on
occasion it has had to relocate personnel to fill positions in locations where
it could not attract qualified experienced personnel.
The Company conducts significant sales and research and development operations
in foreign countries, including Israel, Germany, the United Kingdom and Canada,
and it intends to continue to expand its operations internationally. The
Company's business may suffer if it is unable to successfully expand and
maintain foreign operations. The Company's foreign operations are, and
26
any future foreign expansion will be, subject to a variety of risks, many of
which are beyond its control, including risks associated with: (i) foreign
currency fluctuations; (ii) customizing products for foreign countries; (iii)
political and economic instability in foreign countries; (iv) potentially
adverse tax consequences of operating in foreign countries; (v) legal
uncertainties regarding liability, export and import restrictions, tariffs and
other trade barriers; (vi) compliance with local laws and regulations, including
labor laws, employee benefits, currency restrictions and other requirements;
(vii) hiring qualified foreign employees; and (viii) difficulty in accounts
receivable collection and longer collection periods.
To date, most of the Company's sales have been denominated in U.S. dollars,
while a significant portion of its expenses, primarily labor expenses in Israel,
Germany, the United Kingdom and Canada, are incurred in the local currencies of
these countries. As a result, the Company is exposed to the risk that
fluctuations in the value of these currencies relative to the U.S. dollar could
increase, the dollar cost of its operations in Israel, Germany, the United
Kingdom and Canada, and would therefore have a material adverse effect on its
results of operations.
In addition, since a portion of the Company's sales are made in foreign
currencies, primarily the British pound and the Euro, fluctuation in the value
of these currencies relative to the U.S. dollar could decrease its revenues and
materially and adversely affect its results of operations. In addition, the
Company's costs of operations have at times been negatively affected by changes
in the cost of its operations in Israel, resulting from changes in the value of
the New Israeli Shekel relative to the U.S. dollar.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and the
continued state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. While Israel has signed peace accords
with both Egypt and Jordan, since October 2000, there has been a significant
increase in violence, primarily in the West Bank and Gaza Strip, and more
recently Israel has experienced terrorist incidents within its borders. During
this period, negotiations between Israel and representatives of the Palestinian
Authority have been sporadic and have failed to result in peace. The Company
could be materially and adversely affected by hostilities involving Israel, the
interruption or curtailment of trade between Israel and its trading partners, or
a significant downturn in the economic or financial condition of Israel. In
addition, the sale of products manufactured in Israel may be materially and
adversely affected in certain countries by restrictive laws, policies or
practices directed toward Israel or companies having operations in Israel. The
continuation or exacerbation of violence in Israel or the outbreak of violent
conflicts involving Israel may impede the Company's ability to sell its products
and may otherwise materially and adversely affect it.
In addition, many of the Company's Israeli employees are required to perform
annual compulsory military reserve duty in Israel and are subject to being
called to active duty at any time under emergency circumstances. The absence of
these employees may have a material adverse effect on the Company's operations.
27
The Company receives conditional grants from the Government of Israel through
the Office of the Chief Scientist of the Ministry of Industry and Trade, or the
OCS, for the financing of a portion of its research and development expenditures
in Israel. The terms of these conditional grants limit the Company's ability to
manufacture products, and prohibit it from transferring technologies, outside of
Israel if such products or technologies were developed using these grants. Even
if the Company receives approval to manufacture products developed using these
conditional grants outside of Israel, it may be required to pay a significantly
increased amount of royalties on an accelerated basis to the Government of
Israel, depending on the manufacturing volume that is performed outside of
Israel. This restriction may impair the Company's ability to outsource
manufacturing or engage in similar arrangements for those products or
technologies. In addition, if the Company fails to comply with any of the
conditions imposed by the OCS, it may be required to refund any grants
previously received together with interest and penalties, and it may be subject
to criminal charges. In recent years, the Government of Israel has accelerated
the rate of repayment of OCS grants and may further accelerate them in the
future. The Company currently pays royalties of between 3% and 5% (or 6% under
certain circumstances) of associated product revenues (including service and
other related revenues) to the Government of Israel for repayment of benefits
received under this program. Such royalty payments by the Company are currently
required to be made until the government has been reimbursed the amounts
received by it, linked to the U.S. dollar, plus, for amounts received under
projects approved by the OCS after January 1, 1999, interest on such amounts at
a rate equal to the 12-month LIBOR rate in effect on January 1 of the year in
which approval is obtained. As of October 31, 2003, the Company has received
approximately $51 million in cumulative grants and has recorded approximately
$21 million in cumulative royalties to the OCS. Further, the Government of
Israel has reduced the benefits available under these programs in recent years
and these programs may be discontinued or curtailed in the future. In addition,
the Company expects that OCS grants as a percentage of its consolidated research
and development expenses will decrease in future periods due to an expected
increase in the portion of research and development activities that will not be
reimbursed by the OCS and an expected increase in research and development
activities outside of Israel. The continued reduction in these benefits or the
termination of the Company's eligibility to receive these benefits may
materially and adversely affect the Company's business, financial condition and
results of operations.
The Company's investment programs in manufacturing equipment and leasehold
improvements at its facility in Israel have been granted approved enterprise
status and it is therefore eligible for tax benefits under the Israeli Law for
Encouragement of Capital Investments. The Government of Israel may reduce or
eliminate the tax benefits available to approved enterprise programs such as the
programs provided to the Company. The Company cannot be assured that these tax
benefits will be continued in the future at their current levels or at all. If
these tax benefits are reduced or eliminated, the amount of taxes that the
Company pays in Israel will increase. In addition, if the Company fails to
comply with any of the conditions and requirements of the investment programs,
the tax benefits it has received may be rescinded and it may be required to
refund the amounts it received as a result of the tax benefits, together with
interest and penalties.
CTI beneficially owns a majority of the Company's outstanding shares of common
stock. Consequently, CTI effectively controls the outcome of all matters
submitted for stockholder
28
action, including the composition of the Company's board of directors and
the approval of significant corporate transactions. Through its representation
on the Company's board of directors, CTI has a controlling influence on the
Company's management, direction and policies, including the ability to appoint
and remove its officers. As a result, CTI may cause the Company to take actions
which may not be aligned with the Company's interests or those of its other
stockholders. For example, Comverse Technology may prevent or delay any
transaction involving a change in control or in which stockholders might receive
a premium over the prevailing market price for their shares.
The Company receives insurance, legal and certain administrative services from
CTI under a corporate services agreement. The Company's enterprise resource
planning software is maintained and supported by Comverse, Ltd., a subsidiary of
CTI, under an enterprise resource planning software sharing agreement. The
Company also obtains personnel and facility services from Comverse, Inc. under a
satellite services agreement. If these agreements are terminated, the Company
may be required to obtain similar services from other entities or,
alternatively, it may be required to hire qualified personnel and incur other
expenses to obtain these services. The Company may not be able to hire such
personnel or to obtain comparable services at prices and on terms as favorable
as it currently has under these agreements.
The Company has entered into a business opportunities agreement with CTI that
addresses potential conflicts of interest between CTI and the Company. This
agreement allocates between CTI and the Company opportunities to pursue
transactions or matters that, absent such allocation, could constitute corporate
opportunities of both companies. As a result, the Company may lose valuable
business opportunities. In general, the Company is precluded from pursuing
opportunities offered to officers or employees of CTI who may also be its
directors, officers or employees unless CTI fails to pursue these opportunities.
Six of the Company's thirteen directors are officers and/or directors or
employees of CTI, or otherwise affiliated with CTI. These directors have
fiduciary duties to both companies and may have conflicts of interest on matters
affecting both the Company and CTI and in some circumstances may have interests
adverse to the Company. The Company's Chairman, Kobi Alexander, is the chairman
of CTI. This position with CTI imposes significant demands on Mr. Alexander's
time and presents potential conflicts of interest.
Prior to the Company's initial public offering in May 2002, it was included in
the CTI consolidated group for federal income tax purposes and did not file its
own federal income tax return. Following the Company's initial public offering,
it ceased to be included in the CTI consolidated group for federal income tax
purposes. To the extent CTI or other members of the group fail to make any
federal income tax payments required of them by law in respect of years for
which CTI filed a consolidated federal income tax return which included the
Company, the Company would be liable for the shortfall. Similar principles apply
for state income tax purposes in many states. In addition, by virtue of its
controlling ownership and its tax sharing agreement with the Company, CTI
effectively controls all of the Company's tax decisions for periods ending prior
to the completion of its initial public offering. For periods during which the
Company was included in the CTI consolidated group for federal income tax
purposes, CTI
29
has sole authority to respond to and conduct all federal income
tax proceedings and audits relating to the Company, to file all federal income
tax returns on its behalf and to determine the amount of its liability to, or
entitlement to payment from, CTI under its tax sharing agreement. Despite this
agreement, federal law provides that each member of a consolidated group is
liable for the group's entire tax obligation and the Company could, under
certain circumstances, be liable for taxes of other members of the CTI
consolidated group.
The trading price of the Company's shares of common stock has been affected by
the factors disclosed in this section as well as prevailing economic and
financial trends and conditions in the public securities markets. Share prices
of companies in technology-related industries, such as the Company's, tend to
exhibit a high degree of volatility. The announcement of financial results that
fall short of the results anticipated by the public markets could have an
immediate and significant negative effect on the trading price of the Company's
shares in any given period. Such shortfalls may result from events that are
beyond the Company's immediate control, can be unpredictable and, since a
significant proportion of its sales during each fiscal quarter tend to occur in
the latter stages of the quarter, may not be discernible until the end of a
financial reporting period. These factors may contribute to the volatility of
the trading value of the Company's shares regardless of its long-term prospects.
The trading price of the Company's shares may also be affected by developments,
including reported financial results and fluctuations in trading prices of the
shares of other publicly-held companies in its industry generally, and its
business segment in particular, which may not have any direct relationship with
its business or prospects.
In the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
The Company could be the target of similar litigation in the future. Securities
litigation could result in the expenditure of substantial costs, divert
management's attention and resources, harm the Company's reputation in the
industry and the securities markets and reduce its profitability.
Terrorist attacks and other acts of war, and any response to them, may lead
to armed hostilities and such developments would likely cause instability in
financial markets. Armed hostilities and terrorism may directly impact the
Company's facilities, personnel and operations which are located in the United
States, Israel, Europe, the Far East, Australia and South America, as well as
those of its clients. Furthermore, severe terrorist attacks or acts of war may
result in temporary halts of commercial activity in the affected regions, and
may result in reduced demand for its products. These developments could have a
material adverse effect on the Company's business and the trading price of its
common stock.
The Company's board of directors' ability to designate and issue up to 2,500,000
shares of preferred stock and to issue additional shares of common stock could
adversely affect the voting power of the holders of common stock, and could have
the effect of making it more difficult for a person to acquire, or could
discourage a person from seeking to acquire, control of the Company. If this
occurs, investors could lose the opportunity to receive a premium on the sale of
their shares in a change of control transaction.
30
FORWARD-LOOKING STATEMENTS
The Company may include forward-looking statements in its periodic reports to
the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its
annual report to stockholders, in its proxy statements, in its Registration
Statement on Form S-3 filed with the Securities and Exchange Commission, in its
press releases, in other written materials, and in statements made by employees
to analysts, investors, representatives of the media, and others.
Forward-looking statements include information concerning the Company's possible
or assumed future results of operations, business strategies, financing plans,
competitive position, potential growth opportunities and the effects of
competition and regulation. Forward-looking statements include all statements
that are not historical facts. These statements can be identified by the use of
forward-looking terminology, such as the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "may" or "might" or other
similar expressions.
Forward-looking statements involve significant risks, uncertainties and
assumptions. Although the Company believes that the expectations reflected in
the forward-looking statements are reasonable, actual results may differ
materially from those expressed in these forward-looking statements. Undue
reliance should not be placed on any forward-looking statements. The Company
does not have any intention or obligation to update forward-looking statements,
even if new information becomes available or other events occur in the future.
Many important factors, in addition to those discussed in the section entitled
"Certain Trends and Uncertainties" and elsewhere, could cause the Company's
results to differ materially from those expressed or suggested in
forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk from changes in foreign currency exchange
rates that could impact its results of operations and financial condition. The
Company considers the foreign currency exchange rate risk, in particular that of
the U.S. dollar versus the British pound, the Euro and the New Israeli Shekel,
to be its primary market risk exposure. From time to time, the Company may enter
into material foreign currency exchange contracts or other derivative
instruments to reduce its exposure to the foreign currency exchange risks. In
the future, the Company may use foreign currency exchange contracts and other
derivative instruments to reduce its exposure to this risk.
The Company currently maintains its surplus cash in short-term, interest-bearing
investment-grade instruments or bank deposits. The Company does not expect that
a 100 basis point increase nor decrease from current interest rates would have a
material effect on its financial position, results of operations or cash flows.
31
ITEM 4. Controls and Procedures.
As of the end of the period covered by this report, the Company conducted
an evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a--15(e) and 15d--15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this
evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms. There was no change in the Company's internal
control over financial reporting during the Company's most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II
Other Information
-----------------
ITEM 4. Submission of Matters to a Vote of Security Holders.
The 2003 Annual Meeting of the Stockholders of the Company (the "Meeting") was
held on August 12, 2003. The total number of outstanding shares of Common Stock
entitled to vote at the Meeting was 29,719,735 and there were present at the
Meeting in person or by proxy 28,736,896 shares of the Company's Common Stock,
which number constituted a quorum for the Meeting, and were entitled to vote and
acted as follows with respect to the following proposals:
Approved, (1) by a vote of 25,461,909 votes cast in favor of the election
of Kobi Alexander as a director, 3,274,987 votes were cast against, holders of 0
shares indicated that they abstained from voting on this matter and holders of 0
shares indicated no-vote on this item; (2) by a vote of 25,459,707 votes cast in
favor of the election of Dan Bodner as a director, 3,277,189 votes were cast
against, holders of 0 shares indicated that they abstained from voting on this
matter and holders of 0 shares indicated no-vote on this item; (3) by a vote of
25,281,696 votes cast in favor of the election of Paul Baker as a director,
3,455,200 votes were cast against, holders of 0 shares indicated that they
abstained from voting on this matter and holders of 0 shares indicated no-vote
on this item; (4) by a vote of 27,654,950 votes cast in favor of the election of
Victor DeMarines as a director, 1,081,946 votes were cast against, holders of 0
shares indicated that they abstained from voting on this matter and holders of 0
shares indicated no-vote on this item; (5) by a vote of 25,472,577 votes cast in
favor of the election of David Kreinberg as a director, 3,264,319 votes were
cast against, holders of 0 shares indicated that they abstained from voting on
this matter and holders of 0 shares indicated no-vote on this item; (6) by a
vote of 25,292,658 votes cast in favor of the election of David Ledwell as a
director, 3,444,238 votes were cast against, holders of 0 shares indicated that
they abstained from voting on this matter and holders of 0 shares indicated
no-vote on this item; (7) by a vote of 27,671,174 votes cast in favor of the
election of Kenneth
32
Minihan as a director, 1,065,722 votes were cast against, holders of 0
shares indicated that they abstained from voting on this matter and holders of 0
shares indicated no-vote on this item; (8) by a vote of 27,865,193 votes cast in
favor of the election of Larry Myers as a director, 871,703 votes were cast
against, holders of 0 shares indicated that they abstained from voting on this
matter and holders of 0 shares indicated no-vote on this item; (9) by a vote of
25,247,858 votes cast in favor of the election of Igal Nissim as a director,
3,489,038 votes were cast against, holders of 0 shares indicated that they
abstained from voting on this matter and holders of 0 shares indicated no-vote
on this item; (10) by a vote of 25,470,130 votes cast in favor of the election
of Harris Oliner as a director, 3,266,766 votes were cast against, holders of 0
shares indicated that they abstained from voting on this matter and holders of 0
shares indicated no-vote on this item; (11) by a vote of 25,514,930 votes cast
in favor of the election of Paul Robinson as a director, 3,221,966 votes were
cast against, holders of 0 shares indicated that they abstained from voting on
this matter and holders of 0 shares indicated no-vote on this item; (12) by a
vote of 27,646,974 votes cast in favor of the election of Howard Safir as a
director, 1,089,922 votes were cast against, holders of 0 shares indicated that
they abstained from voting on this matter and holders of 0 shares indicated
no-vote on this item; and (13) by a vote of 25,290,211 votes cast in favor of
the election of William Sorin as a director, 3,446,685 votes were cast against,
holders of 0 shares indicated that they abstained from voting on this matter and
holders of 0 shares indicated no-vote on this item.
Approved, by a vote of 28,293,721 votes cast in favor of the ratification of the
Company's 2003 Employee Stock Purchase Plan, with 438,480 votes cast against,
holders of 4,695 shares indicated that they abstained from voting on this matter
and holders of 0 shares indicated no-vote on this item.
Approved, by a vote of 28,004,612 votes cast in favor of the ratification of the
Deloitte & Touche LLP, with 693,604 votes cast against, holders of 38,680 shares
indicated that they abstained from voting on this matter and holders of 0 shares
indicated no-vote on this item.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index.
--------------
31.1 Certification of the Chief Executive Officer pursuant to Securities
Exchange Act Rule 13a-14(a)
31.2 Certification of the Chief Financial Officer pursuant to Securities
Exchange Act Rule 13a-14(a)
32.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350*
32.2 Certification Chief Financial Officer pursuant to Securities Exchange
Act Rule 13a-14(b) and 18 U.S.C. Section 1350*
* These exhibits are being "furnished" with this periodic report and are
not deemed "filed" with the Securities and Exchange Commission and are
not incorporated by reference in any filing of the Company under the
Securities Act of 1933 or the Securities Exchange
33
Act of 1934, whether made before or after the date hereof and
irrespective of any general incorporation by reference language in any
such filings.
(b) Reports on Form 8-K.
--------------------
On September 8, 2003, the Company filed a Form 8-K that was
accompanied by a press release reporting the Company's financial results from
the second fiscal quarter of 2003.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERINT SYSTEMS INC.
Dated: December 12, 2003 By: /s/Dan Bodner
--------------------------------------
Dan Bodner
President and Chief Executive Officer
Principal Executive Officer
Dated: December 12, 2003 By: /s/Igal Nissim
--------------------------------------
Igal Nissim
Vice President and Chief Financial Officer
Principal Financial Officer
35