e10vqza
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q/A
(Amendment
No. 1)
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
April 30, 2007
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-32465
VERIFONE HOLDINGS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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04-3692546
(I.R.S. Employer
Identification No.)
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2099
Gateway Place, Suite 600
San Jose, CA 95110
(Address
of principal executive offices with zip code)
(408) 232-7800
(Registrants telephone
number, including area code)
N/A
(Former
name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. YES 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. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(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
At May 25, 2007, the number of shares outstanding of the
registrants common stock, $0.01 par value per share
was 82,967,716.
EXPLANATORY
NOTE
This Amendment No. 1 (the Amended
10-Q)
to the Quarterly Report on
Form 10-Q
of VeriFone Holdings, Inc. (the Company or
VeriFone) for the three and six months ended
April 30, 2007 is being filed to correct certain errors in
VeriFones Condensed Consolidated Financial Statements and
the related disclosures.
As discussed in Note 2, Restatement of Condensed
Consolidated Financial Statements, of the notes to the
accompanying Condensed Consolidated Financial Statements in this
Amended
10-Q, the
correction of these errors from previously reported information
for the three months ended April 30, 2007 has resulted in a
reduction in income (loss) before income taxes of
$9.9 million, primarily as a result of a $12.2 million
increase in total cost of net revenues offset by a
$2.7 million reduction in operating expenses. The
correction of these errors from previously reported information
for the six months ended April 30, 2007 has resulted in a
reduction in income (loss) before income taxes of
$22.4 million, primarily as a result of a
$24.7 million increase in total cost of net revenues offset
by a $3.1 million reduction in operating expenses.
On December 3, 2007, we announced that our management had
identified errors in accounting related to the valuation of
in-transit inventory and the allocation of manufacturing and
distribution overhead to inventory and that as a result of these
errors we anticipated that a restatement of our unaudited
condensed consolidated financial statements would be required
for the following interim periods:
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the three months ended January 31, 2007;
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the three and six months ended April 30, 2007; and
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the three and nine months ended July 31, 2007.
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On December 3, 2007, following our announcement, the Audit
Committee approved the commencement of an independent
investigation into the errors in accounting that led to the
anticipated restatement. The Audit Committee engaged independent
counsel, Simpson Thacher & Bartlett LLP (Simpson
Thacher), to conduct the independent investigation under
the supervision of the Audit Committee. Simpson Thacher engaged
Navigant Consulting, Inc. (Navigant) as independent
forensic accountants. The scope of the investigation was
proposed by Simpson Thacher in consultation with Navigant and
approved by the Audit Committee.
On April 2, 2008, the Company announced that its Audit
Committee had completed the independent investigation. The Audit
Committee investigation found no evidence that any period prior
to fiscal year 2007 required restatement.
Concurrently with the Audit Committee investigation, we also
conducted an internal review for the purpose of restating our
fiscal 2007 interim financial statements and preparing our
fiscal 2007 annual financial statements and fiscal 2008 interim
financial statements. This review included evaluations of the
previously made accounting determinations and judgments. As a
result, we have also corrected additional errors, including
errors that had previously not been corrected because our
management believed that individually and in the aggregate such
errors were not material to our consolidated financial
statements. Management also made additional adjustments to
reduce certain accruals which had been recorded, such as
bonuses, which were accrued based upon information which,
following the restatement, was no longer accurate.
The following items have been amended principally as a result
of, and to reflect, the restatements:
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Part I Item 1. Financial Statements
(Unaudited);
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Part I Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations;
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Part I Item 4. Controls and Procedures;
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Part II Item 1. Legal Proceedings;
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2
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Part II Item 1A. Risk Factors;
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Part II Item 6. Exhibits.
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For the convenience of the reader, this Amended
10-Q amends
and restates in its entirety the Quarterly Report on
Form 10-Q
for the three and six months ended April 30, 2007 (the
10-Q).
However, this Amended
10-Q amends
only the items referred to above, in each case as a result of
and to reflect the adjustments discussed above and more fully in
Note 2 of the accompanying Condensed Consolidated Financial
Statements and related disclosures. No other information in the
10-Q is
amended hereby. The foregoing items have not been updated to
reflect other events occurring after the filing of the
10-Q, or to
modify or update those disclosures affected by other subsequent
events. In particular, forward-looking statements included in
this Amended
10-Q
represented managements views as of the date of filing of
the 10-Q for
the quarterly period ended April 30, 2007 on May 31,
2007. Such forward-looking statements should not be assumed to
be accurate as of any future date. VeriFone undertakes no duty
to update such information whether as a result of new
information, future events or otherwise.
As required by
Rule 12b-15
under the Securities Exchange Act of 1934, VeriFones
principal executive officer and principal financial officer are
providing
Rule 13a-14(a)
certifications dated August 19, 2008 in connection with
this Amended
10-Q (but
otherwise identical to their prior certifications) and are also
furnishing, but not filing, written statements pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated
August 19, 2008 (but otherwise identical to their prior
statements).
3
TABLE OF
CONTENTS
VERIFONE
HOLDINGS, INC.
INDEX
4
PART I
FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL
STATEMENTS
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VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
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April 30,
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October 31,
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2007
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2006
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(Restated)(1)
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(Unaudited)
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(In thousands, except
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par value)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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175,760
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$
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86,564
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Accounts receivable, net of allowances of $3,746 and $2,364
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168,199
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119,839
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Inventories
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101,449
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86,631
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Deferred tax assets
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15,885
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13,267
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Prepaid expenses and other current assets
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45,001
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12,943
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Total current assets
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506,294
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319,244
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Property, plant and equipment, net
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33,492
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7,300
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Purchased intangible assets, net
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193,606
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16,544
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Goodwill
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583,038
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52,689
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Deferred tax assets
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26,030
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21,706
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Debt issuance costs, net
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10,328
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10,987
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Transaction costs
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12,350
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Other assets
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21,058
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12,125
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Total assets
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$
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1,373,846
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$
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452,945
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LIABILITIES AND STOCK HOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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72,558
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$
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66,685
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Income taxes payable
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4,573
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5,951
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Accrued compensation
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20,758
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16,202
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Accrued warranty
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11,461
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4,902
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Deferred revenue, net
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36,599
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23,567
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Accrued expenses
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5,565
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4,752
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Accrued transaction costs
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12,000
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Other current liabilities
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50,036
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13,661
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Current portion of long-term debt
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5,416
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1,985
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Restructuring liabilities
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2,808
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2,963
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Total current liabilities
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209,774
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152,668
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Accrued warranty
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670
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530
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Deferred revenue
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9,807
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7,371
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Long-term debt, less current portion
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494,036
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190,904
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Deferred tax liabilities
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75,646
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859
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Other long-term liabilities
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10,408
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1,872
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Total liabilities
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800,341
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354,204
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Minority interest
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437
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Stockholders equity:
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Preferred Stock: 10,000 shares authorized as of
April 30, 2007 and October 31, 2006; no shares issued
and outstanding as of April 30, 2007 and October 31,
2006
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Common Stock: $0.01 par value, 100,000 shares
authorized at April 30, 2007 and October 31, 2006;
82,865 and 68,148 shares issued and outstanding as of
April 30, 2007 and October 31, 2006
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828
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682
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Additional
paid-in-capital
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615,007
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140,569
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Accumulated deficit
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(53,965
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(43,468
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)
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Accumulated other comprehensive income
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11,198
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958
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Total stockholders equity
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573,068
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98,741
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Total liabilities and stockholders equity
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$
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1,373,846
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$
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452,945
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(1) |
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See Note 2, Restatement of Condensed Consolidated
Financial Statements, of the Notes to Condensed
Consolidated Financial Statements. |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
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Six Months Ended
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Three Months Ended April 30,
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April 30,
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2007
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2006
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2007
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2006
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(Restated)(1)
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(Restated)(1)
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(Unaudited)
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(In thousands, except per share data)
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Net revenues:
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System Solutions
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$
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191,469
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$
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128,136
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$
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380,435
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$
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246,821
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Services
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25,414
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14,054
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52,811
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29,999
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Total net revenues
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216,883
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142,190
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433,246
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276,820
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Cost of net revenues:
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System Solutions
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125,951
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71,765
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259,242
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138,880
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Services
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13,286
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7,026
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27,735
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14,939
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Total cost of net revenues
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139,237
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78,791
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286,977
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153,819
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Gross profit
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77,646
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63,399
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146,269
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123,001
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Operating expenses:
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Research and development
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16,009
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12,221
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32,907
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23,628
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Sales and marketing
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22,823
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14,404
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45,863
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28,605
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General and administrative
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25,565
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9,993
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42,941
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19,691
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Amortization of purchased intangible assets
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5,690
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1,159
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11,041
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2,318
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In-process research and development
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90
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6,650
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Total operating expenses
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70,177
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37,777
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139,402
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74,242
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Operating income
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7,469
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25,622
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6,867
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48,759
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Interest expense
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(9,507
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)
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(3,197
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)
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(19,263
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)
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(6,476
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)
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Interest income
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1,534
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927
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2,525
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1,614
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Other income (expense), net
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(2
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)
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65
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(263
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)
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266
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Income (loss) before income taxes
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(506
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)
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23,417
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(10,134
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)
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44,163
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Provision for income taxes
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4,312
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8,381
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363
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15,333
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Net income (loss)
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$
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(4,818
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)
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$
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15,036
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$
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(10,497
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)
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$
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28,830
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Net income (loss) per share:
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Basic
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$
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(0.06
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)
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$
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0.23
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$
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(0.13
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)
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$
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0.44
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Diluted
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$
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(0.06
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)
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$
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0.22
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$
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(0.13
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)
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$
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0.42
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Weighted average shares used in computing net income (loss) per
share:
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Basic
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81,705
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65,799
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81,343
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65,751
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Diluted
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81,705
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68,959
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81,343
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68,887
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(1) |
|
See Note 2, Restatement of Condensed Consolidated
Financial Statements, of the Notes to Condensed
Consolidated Financial Statements. |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
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|
|
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|
|
Six Months Ended
|
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)(1)
|
|
|
|
|
|
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(Unaudited)
|
|
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(In thousands)
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Cash flows from operating activities
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|
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|
|
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Net income (loss)
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$
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(10,497
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)
|
|
$
|
28,830
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|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Amortization of purchased intangible assets
|
|
|
30,236
|
|
|
|
5,330
|
|
Depreciation and amortization of property, plant and equipment
|
|
|
3,765
|
|
|
|
1,651
|
|
Amortization of capitalized software
|
|
|
570
|
|
|
|
598
|
|
In-process research and development
|
|
|
6,650
|
|
|
|
|
|
Amortization of interest rate caps
|
|
|
2
|
|
|
|
139
|
|
Amortization of debt issuance costs
|
|
|
660
|
|
|
|
539
|
|
Stock-based compensation
|
|
|
16,095
|
|
|
|
2,112
|
|
Minority interest and equity in earnings of affiliates
|
|
|
63
|
|
|
|
|
|
Other
|
|
|
(71
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities before changes in
working capital
|
|
|
47,473
|
|
|
|
39,118
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(13,490
|
)
|
|
|
(19,639
|
)
|
Inventories
|
|
|
52,228
|
|
|
|
(14,450
|
)
|
Deferred tax assets
|
|
|
(3,366
|
)
|
|
|
(1,871
|
)
|
Prepaid expenses and other current assets
|
|
|
(21,405
|
)
|
|
|
(607
|
)
|
Other assets
|
|
|
(3,034
|
)
|
|
|
42
|
|
Accounts payable
|
|
|
(5,251
|
)
|
|
|
17,096
|
|
Income taxes payable
|
|
|
151
|
|
|
|
4,593
|
|
Tax benefit from stock-based compensation
|
|
|
(4,672
|
)
|
|
|
(1,374
|
)
|
Accrued compensation
|
|
|
(3,030
|
)
|
|
|
(621
|
)
|
Accrued warranty
|
|
|
(1,037
|
)
|
|
|
(674
|
)
|
Deferred revenue
|
|
|
6,532
|
|
|
|
5,133
|
|
Deferred tax liabilities
|
|
|
9,206
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
(20,179
|
)
|
|
|
(2,083
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
40,126
|
|
|
|
24,663
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Software development costs capitalized
|
|
|
(2,921
|
)
|
|
|
(1,078
|
)
|
Purchase of property, plant and equipment, net
|
|
|
(12,045
|
)
|
|
|
(2,161
|
)
|
Purchase of other assets
|
|
|
(500
|
)
|
|
|
(1,114
|
)
|
Purchases of marketable securities
|
|
|
|
|
|
|
(102,508
|
)
|
Sales and maturities of marketable securities
|
|
|
|
|
|
|
106,625
|
|
Acquisition of businesses, net of cash and cash equivalents
acquired
|
|
|
(264,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(279,800
|
)
|
|
|
(236
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt, net of costs
|
|
|
305,335
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(1,250
|
)
|
|
|
(925
|
)
|
Repayments of capital leases
|
|
|
(34
|
)
|
|
|
(106
|
)
|
Tax benefit of stock-based compensation
|
|
|
4,672
|
|
|
|
1,374
|
|
Proceeds from exercises of stock options
|
|
|
18,412
|
|
|
|
508
|
|
Other
|
|
|
23
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
327,158
|
|
|
|
936
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
1,712
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
89,196
|
|
|
|
26,153
|
|
Cash and cash equivalents, beginning of period
|
|
|
86,564
|
|
|
|
65,065
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
175,760
|
|
|
$
|
91,218
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
18,039
|
|
|
$
|
5,875
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
13,381
|
|
|
$
|
13,289
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash transactions:
|
|
|
|
|
|
|
|
|
Issuance of common stock and stock options for business
acquisition
|
|
$
|
435,228
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2, Restatement of Condensed Consolidated
Financial Statements, of the Notes to Condensed
Consolidated Financial Statements. |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
(UNAUDITED)
|
|
Note 1.
|
Description
of Business
|
VeriFone Holdings, Inc. (VeriFone or the
Company) was incorporated in the state of Delaware
on June 13, 2002. VeriFone designs, markets, and services
electronic payment solutions that enable secure electronic
payments among consumers, merchants, and financial institutions.
On November 1, 2006, the Company acquired all of the
outstanding ordinary shares of Lipman Electronic Engineering
Ltd. (Lipman). The consideration paid to acquire
Lipman was $344.7 million in cash, 13,462,474 shares
of common stock of the Company and assumption of all outstanding
Lipman stock options. See Note 4 of Notes to Condensed
Consolidated Financial Statements for additional information
related to this business combination.
|
|
Note 2.
|
Restatement
of Condensed Consolidated Financial Statements
|
Background
On December 3, 2007, the Company announced that its
management had identified errors in accounting related to the
valuation of in-transit inventory and the allocation of
manufacturing and distribution overhead to inventory and that as
a result of these errors, the Company anticipated that a
restatement of its unaudited condensed consolidated financial
statements would be required for the following interim periods:
|
|
|
|
|
the three months ended January 31, 2007;
|
|
|
|
the three and six months ended April 30, 2007; and
|
|
|
|
the three and nine months ended July 31, 2007.
|
On December 3, 2007, following the announcement, the
Companys Audit Committee approved the commencement of an
independent investigation into the errors in accounting that led
to the anticipated restatement. The Audit Committee engaged
independent counsel, Simpson Thacher & Bartlett LLP
(Simpson Thacher), to conduct the independent
investigation under the Audit Committees supervision.
Simpson Thacher engaged Navigant Consulting, Inc.
(Navigant) as independent forensic accountants. The
scope of the investigation was proposed by Simpson Thacher in
consultation with Navigant and approved by the Audit Committee.
The investigation involved a program of forensic analysis
designed to investigate, among other things:
|
|
|
|
|
the circumstances surrounding the errors identified by
management and described in the Companys December 3,
2007 announcement;
|
|
|
|
whether additional errors existed requiring further restatement
in the interim periods of fiscal 2007 and the adjustments
required to correct and restate the Companys interim
financial statements; and
|
|
|
|
whether evidence existed indicating that periods prior to fiscal
2007 may also be required to be restated.
|
Simpson Thacher and Navigant assembled an investigative team
that ultimately consisted of approximately
70 professionals. Information and documents were gathered
from current and former employees worldwide. Using search
technology, the investigative team evaluated over five million
documents in physical and electronic form. Navigant also
reviewed relevant accounting databases and journal entries. The
investigative team also conducted more than 25 interviews of
senior executives, former senior executives of Lipman, and
current and former finance, accounting and supply chain
personnel.
The Company announced on April 2, 2008 that the
investigation was complete and that the investigation had
confirmed the existence of the errors in accounting identified
in the Companys December 3, 2007 announcement. In
particular, the investigation confirmed that incorrect manual
journal and elimination entries had been made primarily by the
Companys Sacramento, California supply chain accounting
team with respect to several inventory-related matters.
8
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The investigation also concluded that existing policies with
respect to manual journal entries were not followed and that the
review processes and controls in place were not sufficient to
identify and correct the errors in a timely manner. The
investigation found no evidence that any period prior to fiscal
year 2007 required restatement.
Among the most significant errors giving rise to the restatement
were:
|
|
|
|
|
manual journal entries made for the three months ended
January 31, 2007 that erroneously added manufacturing and
distribution overhead to inventory held at former Lipman
subsidiaries, notwithstanding that overhead had already been
allocated to that inventory. This duplication erroneously
increased reported inventory and reduced reported cost of net
revenues by $7.7 million in the three months ended
January 31, 2007;
|
|
|
|
manual journal entries made for the periods ended April 30,
2007 and July 31, 2007 that erroneously recorded in-transit
inventory of an additional $12.7 million at April 30,
2007 and an additional $7.3 million at July 31, 2007
based on erroneous methodology and application of source
documents; and
|
|
|
|
$6.3 million in errors made in the elimination of
intercompany profit in inventory for the nine months ended
July 31, 2007.
|
Concurrently with the Audit Committee investigation, the Company
also conducted an internal review for the purpose of restating
the Companys fiscal 2007 interim financial statements and
preparing the Companys fiscal 2007 annual financial
statements and fiscal 2008 interim financial statements. This
review included evaluations of the previously made accounting
determinations and judgments. As a result, the Company has also
corrected additional errors, including errors that had
previously not been corrected because management believed that
individually and in the aggregate such errors were not material
to the Companys consolidated financial statements.
Management also made additional adjustments to reduce certain
accruals which had been recorded, such as bonuses, which were
accrued based upon information which, following the restatement,
was no longer accurate.
Restatement
Adjustments
The following tables present the impact of the restatement
adjustments on the Companys previously reported condensed
consolidated balance sheet as of April 30, 2007, condensed
consolidated statements of operations for the three and six
months ended April 30, 2007, and condensed consolidated
statement of cash flows for the six months ended April 30,
2007. The impact to the statement of cash flows is the result of
the adjustments to the condensed consolidated balance sheet and
condensed consolidated statements of operations described below.
9
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2007
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Ref.
|
|
|
Restated
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
175,760
|
|
|
$
|
|
|
|
|
|
|
|
$
|
175,760
|
|
Accounts receivable, net of allowances
|
|
|
168,375
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
168,199
|
|
Inventories
|
|
|
125,390
|
|
|
|
(23,941
|
)
|
|
|
(b
|
)
|
|
|
101,449
|
|
Deferred tax assets
|
|
|
14,726
|
|
|
|
1,159
|
|
|
|
(e
|
)
|
|
|
15,885
|
|
Prepaid expenses and other current assets
|
|
|
33,291
|
|
|
|
11,710
|
|
|
|
(e
|
)
|
|
|
45,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
517,542
|
|
|
|
(11,248
|
)
|
|
|
|
|
|
|
506,294
|
|
Property, plant and equipment, net
|
|
|
36,236
|
|
|
|
(2,744
|
)
|
|
|
(f
|
)
|
|
|
33,492
|
|
Purchased intangible assets, net
|
|
|
199,517
|
|
|
|
(5,911
|
)
|
|
|
(f
|
)
|
|
|
193,606
|
|
Goodwill
|
|
|
549,073
|
|
|
|
33,965
|
|
|
|
(f
|
)
|
|
|
583,038
|
|
Deferred tax assets
|
|
|
46,198
|
|
|
|
(20,168
|
)
|
|
|
(e
|
)
|
|
|
26,030
|
|
Debt issuance costs, net
|
|
|
10,328
|
|
|
|
|
|
|
|
|
|
|
|
10,328
|
|
Other assets
|
|
|
18,207
|
|
|
|
2,851
|
|
|
|
(f
|
)
|
|
|
21,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,377,101
|
|
|
$
|
(3,255
|
)
|
|
|
|
|
|
$
|
1,373,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
72,566
|
|
|
$
|
(8
|
)
|
|
|
|
|
|
$
|
72,558
|
|
Income taxes payable
|
|
|
4,573
|
|
|
|
|
|
|
|
|
|
|
|
4,573
|
|
Accrued compensation
|
|
|
21,208
|
|
|
|
(450
|
)
|
|
|
|
|
|
|
20,758
|
|
Accrued warranty
|
|
|
11,461
|
|
|
|
|
|
|
|
|
|
|
|
11,461
|
|
Deferred revenue, net
|
|
|
36,175
|
|
|
|
424
|
|
|
|
|
|
|
|
36,599
|
|
Accrued expenses
|
|
|
5,565
|
|
|
|
|
|
|
|
|
|
|
|
5,565
|
|
Other current liabilities
|
|
|
51,975
|
|
|
|
(1,939
|
)
|
|
|
(f
|
)
|
|
|
50,036
|
|
Current portion of long-term debt
|
|
|
5,416
|
|
|
|
|
|
|
|
|
|
|
|
5,416
|
|
Restructuring liabilities
|
|
|
2,808
|
|
|
|
|
|
|
|
|
|
|
|
2,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
211,747
|
|
|
|
(1,973
|
)
|
|
|
|
|
|
|
209,774
|
|
Accrued warranty
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
670
|
|
Deferred revenue
|
|
|
9,807
|
|
|
|
|
|
|
|
|
|
|
|
9,807
|
|
Long-term debt, less current portion
|
|
|
494,036
|
|
|
|
|
|
|
|
|
|
|
|
494,036
|
|
Deferred tax liabilities
|
|
|
70,060
|
|
|
|
5,586
|
|
|
|
(e
|
)
|
|
|
75,646
|
|
Other long-term liabilities
|
|
|
11,967
|
|
|
|
(1,559
|
)
|
|
|
(f
|
)
|
|
|
10,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
798,287
|
|
|
|
2,054
|
|
|
|
|
|
|
|
800,341
|
|
Minority interest
|
|
|
5,632
|
|
|
|
(5,195
|
)
|
|
|
(f
|
)
|
|
|
437
|
|
Total stockholders equity
|
|
|
573,182
|
|
|
|
(114
|
)
|
|
|
(g
|
)
|
|
|
573,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,377,101
|
|
|
$
|
(3,255
|
)
|
|
|
|
|
|
$
|
1,373,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, 2007
|
|
|
Six Months Ended April 30, 2007
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Ref.
|
|
|
Restated
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Ref.
|
|
|
Restated
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System Solutions
|
|
$
|
191,800
|
|
|
$
|
(331
|
)
|
|
|
(a
|
)
|
|
$
|
191,469
|
|
|
$
|
381,029
|
|
|
$
|
(594
|
)
|
|
|
(a
|
)
|
|
$
|
380,435
|
|
Services
|
|
|
25,413
|
|
|
|
1
|
|
|
|
|
|
|
|
25,414
|
|
|
|
52,810
|
|
|
|
1
|
|
|
|
|
|
|
|
52,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
217,213
|
|
|
|
(330
|
)
|
|
|
|
|
|
|
216,883
|
|
|
|
433,839
|
|
|
|
(593
|
)
|
|
|
|
|
|
|
433,246
|
|
Cost of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System Solutions
|
|
|
114,110
|
|
|
|
11,841
|
|
|
|
|
|
|
|
125,951
|
|
|
|
236,759
|
|
|
|
22,483
|
|
|
|
|
|
|
|
259,242
|
|
Services
|
|
|
12,903
|
|
|
|
383
|
|
|
|
|
|
|
|
13,286
|
|
|
|
25,500
|
|
|
|
2,235
|
|
|
|
|
|
|
|
27,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenues
|
|
|
127,013
|
|
|
|
12,224
|
|
|
|
(c
|
)
|
|
|
139,237
|
|
|
|
262,259
|
|
|
|
24,718
|
|
|
|
(c
|
)
|
|
|
286,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
90,200
|
|
|
|
(12,554
|
)
|
|
|
|
|
|
|
77,646
|
|
|
|
171,580
|
|
|
|
(25,311
|
)
|
|
|
|
|
|
|
146,269
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16,238
|
|
|
|
(229
|
)
|
|
|
|
|
|
|
16,009
|
|
|
|
33,044
|
|
|
|
(137
|
)
|
|
|
|
|
|
|
32,907
|
|
Sales and marketing
|
|
|
23,323
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
22,823
|
|
|
|
45,846
|
|
|
|
17
|
|
|
|
|
|
|
|
45,863
|
|
General and administrative
|
|
|
27,181
|
|
|
|
(1,616
|
)
|
|
|
(d
|
)
|
|
|
25,565
|
|
|
|
45,586
|
|
|
|
(2,645
|
)
|
|
|
(d
|
)
|
|
|
42,941
|
|
Amortization of purchased intangible assets
|
|
|
6,061
|
|
|
|
(371
|
)
|
|
|
|
|
|
|
5,690
|
|
|
|
11,389
|
|
|
|
(348
|
)
|
|
|
|
|
|
|
11,041
|
|
In-process research and development
|
|
|
110
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
90
|
|
|
|
6,640
|
|
|
|
10
|
|
|
|
|
|
|
|
6,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
72,913
|
|
|
|
(2,736
|
)
|
|
|
|
|
|
|
70,177
|
|
|
|
142,505
|
|
|
|
(3,103
|
)
|
|
|
|
|
|
|
139,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,287
|
|
|
|
(9,818
|
)
|
|
|
|
|
|
|
7,469
|
|
|
|
29,075
|
|
|
|
(22,208
|
)
|
|
|
|
|
|
|
6,867
|
|
Interest expense
|
|
|
(9,595
|
)
|
|
|
88
|
|
|
|
|
|
|
|
(9,507
|
)
|
|
|
(19,351
|
)
|
|
|
88
|
|
|
|
|
|
|
|
(19,263
|
)
|
Interest income
|
|
|
1,553
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
1,534
|
|
|
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
2,525
|
|
Other income (expense), net
|
|
|
106
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(31
|
)
|
|
|
(232
|
)
|
|
|
|
|
|
|
(263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
9,351
|
|
|
|
(9,857
|
)
|
|
|
|
|
|
|
(506
|
)
|
|
|
12,218
|
|
|
|
(22,352
|
)
|
|
|
|
|
|
|
(10,134
|
)
|
Provision for (benefit from) income taxes
|
|
|
4,492
|
|
|
|
(180
|
)
|
|
|
(e
|
)
|
|
|
4,312
|
|
|
|
8,343
|
|
|
|
(7,980
|
)
|
|
|
(e
|
)
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,859
|
|
|
$
|
(9,677
|
)
|
|
|
|
|
|
$
|
(4,818
|
)
|
|
$
|
3,875
|
|
|
$
|
(14,372
|
)
|
|
|
|
|
|
$
|
(10,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.06
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
0.05
|
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
0.06
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
0.05
|
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
81,705
|
|
|
|
|
|
|
|
|
|
|
|
81,705
|
|
|
|
81,343
|
|
|
|
|
|
|
|
|
|
|
|
81,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
84,180
|
|
|
|
(2,475
|
)
|
|
|
|
|
|
|
81,705
|
|
|
|
83,861
|
|
|
|
(2,518
|
)
|
|
|
|
|
|
|
81,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended April 30, 2007
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
3,875
|
|
|
$
|
(14,372
|
)
|
|
$
|
(10,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
50,210
|
|
|
$
|
(10,084
|
)
|
|
$
|
40,126
|
|
Net cash used in investing activities
|
|
|
(289,672
|
)
|
|
|
9,872
|
|
|
|
(279,800
|
)
|
Net cash provided by financing activities
|
|
|
326,947
|
|
|
|
211
|
|
|
|
327,158
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
1,711
|
|
|
|
1
|
|
|
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
89,196
|
|
|
|
|
|
|
|
89,196
|
|
Cash and cash equivalents, beginning of period
|
|
|
86,564
|
|
|
|
|
|
|
|
86,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
175,760
|
|
|
$
|
|
|
|
$
|
175,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary restatement adjustments to the Companys
previously reported condensed consolidated balance sheet as of
April 30, 2007 and condensed consolidated statements of
operations for the three and six months ended April 30,
2007 are as follows:
|
|
|
|
a)
|
Net revenues for the three and six months ended April 30,
2007 were reduced primarily by errors in the timing of the
recognition of revenue.
|
|
|
b)
|
The changes to inventories as of April 30, 2007 are as
follows:
|
|
|
|
|
|
$12.7 million decrease to eliminate intercompany in-transit
inventory that did not exist, which was originally recorded
based upon erroneous methodology and application of source
documents. Intercompany in-transit inventory is inventory which
is in the process of being shipped between VeriFone entities,
primarily from either Israel or Singapore to the United States;
|
|
|
|
$7.7 million decrease due to the duplicate recording of
manufacturing and distribution overhead to inventories at former
Lipman subsidiaries;
|
|
|
|
$3.9 million decrease to eliminate intercompany profit in
inventory. Inventory at the end of a quarter in one VeriFone
entity purchased from another VeriFone entity contains
intercompany profit which must be eliminated upon consolidation;
|
|
|
|
$0.5 million increase to correct errors in recording and
eliminating intercompany transactions; and
|
|
|
|
$0.1 million net decrease as a result of various
adjustments, each individually less than $0.5 million.
|
c) The changes to total cost of net revenues for the six
months ended April 30, 2007 are as follows:
|
|
|
|
|
$11.6 million increase to eliminate intercompany in-transit
inventory that did not exist, which was originally recorded
based upon erroneous methodology and application of source
documents. Intercompany in-transit inventory is inventory which
is in the process of being shipped between VeriFone entities,
primarily from either Israel or Singapore to the United States;
|
|
|
|
$7.7 million increase due to the duplicate recording of
manufacturing and distribution overhead to inventories at former
Lipman subsidiaries;
|
12
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
$3.9 million increase to eliminate intercompany profit in
inventory. Inventory at the end of a quarter in one VeriFone
entity purchased from another VeriFone entity contains
intercompany profit which must be eliminated upon consolidation;
|
|
|
|
$0.9 million increase due to an error in determining
replacement costs of component inventory at former Lipman
entities;
|
|
|
|
$0.6 million increase to correct errors in recording and
eliminating intercompany transactions; and
|
|
|
|
Other adjustments, each individually less than $0.5 million.
|
The changes to total cost of net revenues for the three months
ended April 30, 2007 are as follows:
|
|
|
|
|
$11.5 million increase to eliminate intercompany in-transit
inventory that did not exist, which was originally recorded
based upon erroneous methodology and application of source
documents. Intercompany in-transit inventory is inventory which
is in the process of being shipped between VeriFone entities,
primarily from either Israel or Singapore to the United States;
|
|
|
|
$3.5 million increase to eliminate intercompany profit in
inventory. Inventory at the end of a quarter in one VeriFone
entity purchased from another VeriFone entity contains
intercompany profit which must be eliminated upon consolidation;
|
|
|
|
$0.8 million increase to correct errors in the
capitalization of overhead;
|
|
|
|
$2.2 million decrease related to inventory recorded in the
second fiscal quarter for a change in inventories at former
Lipman entities due to standards revaluation which should have
been recorded in the first fiscal quarter; and
|
|
|
|
Other adjustments, each individually less than $0.5 million.
|
|
|
|
|
d)
|
The changes to general and administrative expenses for the six
months ended April 30, 2007 are as follows:
|
|
|
|
|
|
$2.6 million decrease in general and administrative
expenses as a result of a reversal of executive bonuses and
stock-based compensation, which were originally based upon
information that, following the restatement, was no longer
accurate; and
|
|
|
|
Other adjustments were each individually less than
$0.5 million.
|
The changes to general and administrative expenses for the three
months ended April 30, 2007 are as follows:
|
|
|
|
|
$1.9 million decrease in general and administrative
expenses as a result of a reversal of executive bonuses and
stock-based compensation, which was originally based upon
information that, following the restatement, was no longer
accurate; and
|
|
|
|
Other adjustments were each individually less than
$0.5 million.
|
|
|
|
|
e)
|
Prepaid expenses and other current assets (prepaid taxes),
deferred tax assets and income tax expense adjustments reflect
the tax impact of the restatement adjustments, and the
application of the intraperiod accounting rules to tax expense.
|
|
|
|
|
f)
|
The changes to these balance sheet accounts relate to
adjustments and corrections of various errors to the purchase
price allocations of the Lipman, Payware and VTS acquisitions
and/or reclassifications.
|
13
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The changes to goodwill as of April 30, 2007 are as follows:
|
|
|
|
|
$27.3 million increase as a result of adjustments in
long-term deferred tax liabilities;
|
|
|
|
$5.0 million increase to correct errors related to Lipman
stock options assumed at acquisition;
|
|
|
|
$8.4 million decrease as a result of corrections related to
Lipman, Payware and VTS assets and liabilities assumed at
acquisition; and
|
|
|
|
$10.1 million increase as a result of cumulative
translation adjustments related to the above adjustments and
correction of errors.
|
g) The changes to total stockholders equity as of
April 30, 2007 are as follows:
|
|
|
|
|
$14.4 million decrease as a result of the restatement
adjustments to the consolidated statement of operations;
|
|
|
|
$2.4 million decrease due to correction of errors related
to stock compensation expense;
|
|
|
|
$5.0 million increase to correct errors related to Lipman
stock options assumed at acquisition; and
|
|
|
|
$11.7 million increase as a result of cumulative
translation adjustments related to adjustments and correction of
various errors noted above.
|
|
|
Note 3.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying condensed consolidated financial statements
include the accounts of the Company and its majority owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Unaudited
Interim Financial Information
The accompanying condensed consolidated balance sheet as of
April 30, 2007 and the condensed consolidated statements of
operations for the three and six months ended April 30,
2007 and 2006 and the condensed consolidated statements of cash
flows for the six months ended April 30, 2007 and 2006 are
unaudited. These unaudited interim condensed consolidated
financial statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim
financial information and
Form 10-Q
and Article 10 of
Regulation S-X.
In the opinion of the Companys management, the unaudited
interim condensed consolidated financial statements have been
prepared on the same basis as the annual consolidated financial
statements and include all adjustments of a normal recurring
nature necessary for the fair presentation of the Companys
financial position as of April 30, 2007 and its results of
operations for the three and six months ended April 30,
2007 and 2006, and its cash flows for the six months ended
April 30, 2007 and 2006. The results for the interim
periods are not necessarily indicative of the results to be
expected for any future period or for the fiscal year ended
October 31, 2007. The condensed consolidated balance sheet
as of October 31, 2006 has been derived from the audited
consolidated balance sheet as of that date. Certain amounts
reported in previous periods have been reclassified to conform
to the current period presentation. The reclassifications did
not impact previously reported revenues, total operating
expense, operating income, net income, or stockholders
equity.
These unaudited interim condensed consolidated financial
statements should be read in conjunction with the Companys
consolidated financial statements and related notes included in
the Companys 2006 Annual Report on
Form 10-K
filed with the Securities and Exchange Commission
(SEC) on December 18, 2006.
14
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. The Company bases its estimates on
historical experience and various other assumptions that are
believed to be reasonable under the circumstances. Actual
results could differ from those estimates, and such differences
may be material to the consolidated financial statements.
Revenue
Recognition
The Companys revenue recognition policy is consistent with
applicable revenue recognition guidance and interpretations,
including the requirements of Emerging Issues Task Force Issue
No. 00-21
(EITF 00-21),
Revenue Arrangements with Multiple Deliverables,
Statement of Position
97-2
(SOP 97-2),
Software Revenue Recognition, Statement of Position
81-1
(SOP 81-1),
Accounting for Performance of Construction-Type and Certain
Production Type Contracts, Staff Accounting
Bulletin No. 104 (SAB 104),
Revenue Recognition, and other applicable revenue
recognition guidance and interpretations.
The Company records revenue when all four of the following
criteria are met: (i) there is persuasive evidence that an
arrangement exists; (ii) delivery of the products
and/or
services has occurred; (iii) the selling price is fixed or
determinable; and (iv) collectibility is reasonably
assured. Cash received in advance of revenue recognition is
recorded as deferred revenue, net.
Net revenues from System Solutions sales to end-users,
resellers, value added resellers and distributors are recognized
upon shipment of the product with the following exceptions:
|
|
|
|
|
if a product is shipped free on board destination, revenue is
recognized when the shipment is delivered, or
|
|
|
|
if an acceptance or a contingency clause exists, revenue is
recognized upon the earlier of receipt of the acceptance letter
or when the clause lapses.
|
End-users, resellers, value added resellers and distributors
generally have no rights of return, stock rotation rights or
price protection.
The Companys System Solutions sales include software that
is incidental to the electronic payment devices and services
included in its sales arrangements.
The Company enters into revenue arrangements for individual
products or services. As a System Solutions provider, the
Companys sales arrangements often include support services
in addition to electronic payment devices (multiple
deliverables). These services may include installation,
training, consulting, customer support, product maintenance
and/or
refurbishment arrangements.
Revenue arrangements with multiple deliverables are evaluated to
determine if the deliverables (items) should be divided into
more than one unit of accounting. An item can generally be
considered a separate unit of accounting if all of the following
criteria are met:
|
|
|
|
|
the delivered item(s) has value to the customer on a standalone
basis;
|
|
|
|
there is objective and reliable evidence of the fair value of
the undelivered item(s); and
|
|
|
|
if the arrangement includes a general right of return relative
to the delivered item(s), delivery or performance of the
undelivered item(s) is considered probable and substantially in
the control of the Company.
|
Deliverables that do not meet these criteria are combined into a
single unit of accounting.
If there is objective and reliable evidence of fair value for
all units of accounting, the arrangement consideration is
allocated to the separate units of accounting based on their
relative fair values. In cases where there is
15
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
objective and reliable evidence of the fair value(s) of the
undelivered item(s) in an arrangement but no such evidence for
one or more of the delivered item(s), the residual method is
used to allocate the arrangement consideration. In cases in
which there is no objective and reliable evidence of the fair
value(s) of the undelivered item(s), the Company defers all
revenues for the arrangement until the period in which the last
item is delivered. However, items which do not meet these
criteria are combined into a single unit of accounting.
For revenue arrangements with multiple deliverables, upon
shipment of its electronic payment devices, the Company
allocates the fair value for all remaining undelivered elements
and recognizes the residual amount within the arrangement as
revenue for the delivered items as prescribed in
EITF 00-21.
Revenues for the Companys arrangements that include
multiple elements are allocated to each undelivered element
based on the fair value of each element. Fair value is
determined based on the price charged when each element is sold
separately
and/or the
price charged by third parties for similar services.
Net revenues from services such as customer support and product
maintenance are initially deferred and then recognized on a
straight-line basis over the term of the contract. Net revenues
from services such as installations, equipment repairs,
refurbishment arrangements, training and consulting are
recognized as the services are rendered.
For software development contracts, the Company recognizes
revenue using the completed contract method pursuant to
SOP 81-1.
During the period of performance of such contracts, billings and
costs are accumulated on the balance sheet, but no profit is
recorded before completion or substantial completion of the
work. The Company uses customers acceptance of such
products as the specific criteria to determine when such
contracts are substantially completed. Provisions for losses on
software development contracts are recorded in the period they
become evident.
For operating lease arrangements, the Company recognizes the
revenue ratably over the term of the lease.
In addition, the Company sells products to leasing companies
that, in turn, lease these products to end-users. In
transactions where the leasing companies have no recourse to the
Company in the event of default by the end-user, the Company
recognizes revenue at the point of shipment or point of
delivery, depending on the shipping terms and when all the other
revenue recognition criteria have been met. In arrangements
where the leasing companies have substantive recourse to the
Company in the event of default by the end-user, the Company
recognizes both the product revenue and the related cost of the
product as the payments are made to the leasing company by the
end-user, generally ratably over the lease term.
Foreign
Currency Translation
The assets and liabilities of foreign subsidiaries, where the
local currency is the functional currency, are translated from
their respective functional currencies into U.S. dollars at
the rates in effect at the balance sheet date, with resulting
foreign currency translation adjustments recorded as accumulated
other comprehensive income in the accompanying condensed
consolidated balance sheets. Revenue and expense amounts are
translated at average rates during the period.
Gains and losses realized from transactions, including
intercompany balances not considered to be a permanent
investment, and denominated in currencies other than an
entitys functional currency are included in other income
(expense), net in the accompanying condensed consolidated
statements of operations.
Concentrations
of Credit Risk
Cash is placed on deposit in major financial institutions in the
United States and other countries. Such deposits may be in
excess of insured limits. Management believes that the financial
institutions that hold the Companys cash are financially
sound and, accordingly, minimal credit risk exists with respect
to these balances.
The Company invests cash not required for use in operations in
high credit quality securities based on its investment policy.
The investment policy has restrictions based on credit quality,
investment concentration,
16
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
investment type and maturity that the Company believes will
result in reduced risk of loss of capital. Investments are of a
short-term nature and include investments in money market funds
and corporate debt securities.
The Company has not experienced any investment losses due to
institutional failure or bankruptcy.
The Companys accounts receivable are derived from sales to
a large number of direct customers, resellers, and distributors
in the Americas, Europe, and the Asia Pacific region. The
Company performs ongoing evaluations of its customers
financial condition and limits the amount of credit extended
when deemed necessary, but generally requires no collateral.
An allowance for doubtful accounts is determined with respect to
those amounts that the Company has determined to be doubtful of
collection using specific identification of doubtful accounts
and an aging of receivables analysis based on invoice due dates.
Actual collection losses may differ from managements
estimates, and such differences could be material to the
consolidated financial position, results of operations and cash
flows. Uncollectible receivables are written off against the
allowance for doubtful accounts when all efforts to collect them
have been exhausted and recoveries are recognized when they are
received. Generally, accounts receivable are past due
30 days after the invoice date unless special payment terms
are provided.
In the three and six months ended April 30, 2007, no
customer accounted for more than 10% of net revenues. In each of
the three and six months ended April 30, 2006, one
customer, First Data Corporation and its affiliates accounted
for 12% of net revenues. At April 30, 2007, no customer
accounted for more than 10% of accounts receivable. At
October 31, 2006, First Data Corporation and its affiliates
accounted for 13% of accounts receivable and no other customer
accounted for 10% or more of accounts receivable at that date.
The Company is exposed to credit loss in the event of
nonperformance by counterparties on the foreign currency forward
contracts used to mitigate the effect of exchange rate changes
and interest rate caps used to mitigate the effect of interest
rate changes. These counterparties are large international
financial institutions and to date, no such counterparty has
failed to meet its financial obligations to the Company. The
Company does not anticipate nonperformance by these
counterparties.
Besides those noted above, the Company had no other
off-balance-sheet concentrations of credit risk, such as option
contracts or other derivative arrangements as of April 30,
2007 or October 31, 2006.
Product
Manufacturing
The Company outsources a majority of the manufacturing of its
products to contract manufacturers with facilities in China,
Singapore, and Brazil. The Company also utilizes third-party
service providers in the United States, Canada, United Kingdom,
Poland, France, Italy, Spain, and Mexico for its equipment
repair service. In November 2006, the Company added in-house
manufacturing and services capabilities in Israel and Turkey as
a result of the Lipman acquisition.
Fair
Value of Financial Instruments
Financial instruments consist principally of cash and cash
equivalents, marketable securities, accounts receivable,
accounts payable, long-term debt, foreign currency forward
contracts and interest rate caps. Foreign currency forward
contracts and interest rate caps are recorded at fair value. The
estimated fair value of cash, accounts receivable and accounts
payable approximates their carrying value due to the short
period of time to their maturities. The estimated fair value of
long-term debt approximates its carrying value since the rate of
interest on the long-term debt adjusts to market rates on a
periodic basis. The fair value of cash equivalents, marketable
securities, foreign currency forward contracts and interest rate
caps are based on quotes from brokers using market prices for
those or similar instruments.
17
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Derivative
Financial Instruments
The Company uses foreign currency forward contracts to hedge
certain existing and anticipated foreign currency denominated
transactions. The terms of foreign currency forward contracts
used are generally consistent with the timing of the foreign
currency transactions. Under its foreign currency risk
management strategy, the Company utilizes derivative instruments
to protect its interests from unanticipated fluctuations in
earnings and cash flows caused by volatility in currency
exchange rates. This financial exposure is monitored and managed
by the Company as an integral part of its overall risk
management program which focuses on the unpredictability of
financial markets and seeks to reduce the potentially adverse
effects that the volatility of these markets may have on its
operating results. The Company also enters into interest rate
caps in order to manage its variable interest rate risk on its
secured credit facility.
The Company records derivatives, namely foreign currency forward
contracts and interest rate caps, on the balance sheet at fair
value. Changes in the fair value of derivatives which do not
qualify or are not effective as hedges are recognized currently
in earnings. The Company does not use derivative financial
instruments for speculative or trading purposes, nor does it
hold or issue leveraged derivative financial instruments.
The Company formally documents relationships between hedging
instruments and associated hedged items. This documentation
includes: identification of the specific foreign currency asset,
liability or forecasted transaction being hedged; the nature of
the risk being hedged; the hedge objective; and the method of
assessing hedge effectiveness. Hedge effectiveness is formally
assessed, both at hedge inception and on an ongoing basis, to
determine whether the derivatives used in hedging transactions
are highly effective in offsetting changes in foreign currency
denominated assets, liabilities and anticipated cash flow of
hedged items. When an anticipated transaction is no longer
likely to occur, the corresponding derivative instrument is
ineffective as a hedge, and changes in fair value of the
instrument are recognized in net income.
The Companys international sales are generally denominated
in currencies other than the U.S. dollar. For sales in
currencies other than the U.S. dollar, the volatility of
the foreign currency markets represents risk to the
Companys margins. The Company defines its exposure as the
risk of changes in the functional-currency-equivalent cash flows
(generally U.S. dollars) attributable to changes in the
related foreign currency exchange rates. From time to time the
Company enters into certain foreign currency forward contracts
with terms designed to substantially match those of the
underlying exposure. The Company does not qualify these foreign
currency forward contracts as hedging instruments and, as such,
records the changes in the fair value of these derivatives
immediately in other income (expense), net in the accompanying
condensed consolidated statements of operations. As of
April 30, 2007 and October 31, 2006, the Company did
not have any outstanding foreign currency forward contracts. On
May 1, 2007 the Company entered into foreign currency
forward contracts with aggregate notional amounts of
$40.0 million to hedge exposures to non-functional
currencies. The Companys foreign currency forward
contracts have maturities of 95 days or less.
The Company is exposed to interest rate risk related to its
debt, which bears interest based upon the three-month LIBOR
rate. On October 31, 2006, the Companys principal
subsidiary, VeriFone, Inc., entered into a Credit Agreement (the
Credit Facility) with a syndicate of financial
institutions, led by J.P. Morgan Chase Bank, N.A. and
Lehman Commercial Paper Inc. The Credit Facility provided by the
Credit Agreement consists of a Term B Loan facility of
$500 million and a revolving credit facility permitting
borrowings of up to $40 million. Under the Credit Facility,
the Company is required to fix the interest rate through swaps,
rate caps, collars and similar agreements with respect to at
least 30% of the outstanding principal amount of all loans and
other indebtedness that have floating interest rates.
In May and December 2006, the Company purchased two-year
interest rate caps for a total premium of $118,000. The interest
rate caps have an initial notional amount of $200 million
declining to $150 million after one year under which the
Company will receive interest payments if the three-month LIBOR
rate exceeds 6.5%. The interest rate caps were purchased to fix
the interest rate related to the existing secured credit
facility, or any
18
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
refinancing thereof which is explained in Note 6. The fair
value of the interest rate caps as of April 30, 2007 was
$3,000 which was recorded in prepaid expenses and other current
assets in the condensed consolidated balance sheets with the
related $113,000 unrealized loss recorded as a component of
accumulated other comprehensive income, net of a $44,000 tax
benefit.
For the three and six months ended April 30, 2006, the
Company received payments of $81,000 and $112,000, respectively,
as a result of the three-month LIBOR rate on its previous Term B
Loan exceeding the cap rate which amounts were recorded as
offsets to interest expense in the statements of operations.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds,
and other highly liquid investments with maturities of three
months or less when purchased.
Marketable
Securities
The Company classifies its marketable securities as
available-for-sale in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. Available-for-sale securities are carried at
fair value, with unrealized holding gains and losses reported in
accumulated other comprehensive income, which is a separate
component of stockholders equity, net of tax, in the
accompanying condensed consolidated balance sheets. The
amortization of premiums and discounts on the investments and
realized gains and losses, determined by specific identification
based on the trade date of the transactions, are recorded in
interest income in the accompanying condensed consolidated
statements of operations.
Minority
Interest
The Company made a minority investment in VeriFone
Transportation Systems, Inc. (VTS) in October 2005.
Prior to the fiscal quarter ended April 30, 2007, the
investment in VTS was accounted for under the equity method and
was included in other assets in the accompanying condensed
consolidated balance sheets. In February 2007, the Company made
an additional investment in VTS, which increased its ownership
percentage in VTS to 51% at which time the Company began
consolidating this investment.
The Company owns the majority of its Chinese subsidiary which it
acquired in the acquisition of Lipman and as such consolidated
its Chinese subsidiary. For the three and six months ended
April 30, 2007 the minority interest in income of the
subsidiary is immaterial.
Debt
Issuance Costs
Debt issuance costs are stated at cost, net of accumulated
amortization. Amortization expense is calculated using the
effective interest method and recorded in interest expense in
the accompanying condensed consolidated statements of operations.
Inventories
Inventories are stated at the lower of standard cost or market.
Standard costs approximate the
first-in,
first-out (FIFO) method. The Company regularly
monitors inventory quantities on hand and records write-downs
for excess and obsolete inventories based primarily on the
Companys estimated forecast of product demand and
production requirements. Such write-downs establish a new
cost-basis of accounting for the related inventory. Actual
inventory losses may differ from managements estimates.
19
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shipping
and Handling Costs
Shipping and handling costs are expensed as incurred and are
included in cost of net revenues in the accompanying condensed
consolidated statements of operations. In those instances where
the Company bills shipping and handling costs to customers, the
amounts billed are classified as revenue.
Warranty
Costs
The Company accrues for estimated warranty obligations when
revenue is recognized based on an estimate of future warranty
costs for delivered products. Such estimates are based on
historical experience and expectations of future costs. The
Company periodically evaluates and adjusts the accrued warranty
costs to the extent actual warranty costs vary from the original
estimates. The Companys warranty period typically extends
from 13 months to five years from the date of shipment.
Costs associated with maintenance contracts, including extended
warranty contracts, are expensed when they are incurred. Actual
warranty costs may differ from managements estimates.
Research
and Development Costs
Research and development costs are generally expensed as
incurred. Costs eligible for capitalization under
SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, were
$1.8 million and $2.9 million for the three and six
months ended April 30, 2007, respectively, compared to
$0.7 million and $1.1 million for the comparable
periods in fiscal 2006. Capitalized software development costs
of $10.4 million and $7.5 million as of April 30,
2007 and October 31, 2006, respectively, are being
amortized on a straight-line basis over the estimated three-year
life of the product to which the costs relate. These costs, net
of accumulated amortization of $3.8 million and
$3.2 million as of April 30, 2007 and October 31,
2006, respectively, are recorded in other assets in the
accompanying condensed consolidated balance sheets.
Advertising
Costs
Advertising costs are expensed as incurred and totaled
approximately $446,000 and $864,000 for the three and six months
ended April 30, 2007, respectively, compared to $40,000 and
$61,000 for the comparable periods in fiscal 2006, respectively.
Income
Taxes
Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the
tax bases of assets and liabilities and their reported amounts
using enacted tax rates in effect for the year the differences
are expected to reverse. The Company records a valuation
allowance to reduce deferred tax assets to the amount that is
expected to be realized on a more likely than not basis.
Comprehensive
Income (Loss)
Comprehensive income (loss) consists of net income (loss) and
other comprehensive income (loss). Other comprehensive income
(loss) includes certain changes in equity that are excluded from
results of operations. Specifically, foreign currency
translation adjustments, changes in the fair value of
derivatives designated as hedges and unrealized gains and losses
on available-for-sale marketable securities are included in
accumulated other comprehensive income in the accompanying
condensed consolidated balance sheets.
Property,
Plant and Equipment, net
Property, plant and equipment are stated at cost, net of
accumulated depreciation and amortization. Property, plant and
equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets, generally two to ten
years, except buildings which are depreciated over
40 years. The cost of equipment under capital leases is
recorded at the lower of the present value of the minimum lease
payments or the fair value of the assets and is
20
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amortized on a straight-line basis over the shorter of the term
of the related lease or the estimated useful life of the asset.
Amortization of assets under capital leases is included with
depreciation expense.
Goodwill
and Other Purchased Intangible Assets
Goodwill and other purchased intangible assets have been
recorded as a result of the Companys acquisitions.
Goodwill is not amortized for accounting purposes. Purchased
intangible assets are amortized over their estimated useful
lives, generally one and one-half to seven years.
The Company is required to perform an annual impairment test of
goodwill. Should certain events or indicators of impairment
occur between annual impairment tests, the Company performs the
impairment test of goodwill when those events or indicators
occur. In the first step of the analysis, the Companys
assets and liabilities, including existing goodwill and other
intangible assets, are assigned to the identified reporting
units to determine their carrying value. Based on how the
business is managed, the Company has five reporting units.
Goodwill is allocated to the reporting unit based on its
relative contribution to the Companys operating results.
If the carrying value of a reporting unit is in excess of its
fair value, an impairment may exist, and the Company must
perform the second step of comparing the implied fair value of
the goodwill to its carrying value to determine the impairment
charge, if any.
The fair value of the reporting units is determined using the
income approach. The income approach focuses on the
income-producing capability of an asset, measuring the current
value of the asset by calculating the present value of its
future economic benefits such as cash earnings, cost savings,
tax deductions, and proceeds from disposition. Value indications
are developed by discounting expected cash flows to their
present value at a rate of return that incorporates the
risk-free rate for the use of funds, the expected rate of
inflation, and risks associated with the particular investment.
For the three and six months ended April 30, 2007, no
impairment charges have been recorded.
Accounting
for Impairment of Long-Lived Assets
The Company periodically evaluates whether changes have occurred
that would require revision of the remaining useful life of
property, plant and equipment and purchased intangible assets or
render them not recoverable. If such circumstances arise, the
Company uses an estimate of the undiscounted value of expected
future operating cash flows to determine whether the long-lived
assets are impaired. If the aggregate undiscounted cash flows
are less than the carrying amount of the assets, the resulting
impairment charge to be recorded is calculated based on the
excess of the carrying value of the assets over the fair value
of such assets, with the fair value determined based on an
estimate of discounted future cash flows. For the three and six
months ended April 30, 2007, no impairment charges have
been recorded.
Stock-Based
Compensation
The Company follows the fair value recognition and measurement
provisions of SFAS No. 123(R), Share-Based
Payment. SFAS No. 123(R) is applicable for
stock-based awards exchanged for employee services and in
certain circumstances for non-employee directors. Pursuant to
SFAS No. 123(R), stock-based compensation cost is
measured at the grant date, based on the fair value of the
award, and is recognized as expense over the requisite service
period.
Severance
Pay
The Companys liability for severance pay to its Israeli
employees is calculated pursuant to Israeli severance pay law
based on the most recent salary of the employee multiplied by
the number of years of employment of such employee as of the
applicable balance sheet date. Employees are entitled to one
months salary for each year of employment, or a pro-rata
portion thereof. The Company funds the liability by monthly
deposits in insurance
21
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
policies and severance pay funds. The expense for the three and
six months ended April 30, 2007 was $448,000 and $798,000,
respectively.
Segment
Reporting
The Company maintains two reportable segments, North America,
consisting of the United States and Canada, and International,
consisting of all other countries in which the Company makes
sales outside of the United States and Canada.
Net
Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing
income (loss) attributable to common stockholders by the
weighted average number of common shares outstanding for the
period, less the weighted average number of common shares
subject to repurchase. Diluted net income (loss) per common
share is computed using the weighted average number of common
shares outstanding plus the effect of common stock equivalents,
unless the common stock equivalents are anti-dilutive.
The following table sets forth the computation of basic and
diluted net income (loss) per share (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,818
|
)
|
|
$
|
15,036
|
|
|
$
|
(10,497
|
)
|
|
$
|
28,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of voting common stock outstanding
|
|
|
82,706
|
|
|
|
67,801
|
|
|
|
82,344
|
|
|
|
67,753
|
|
Less: weighted-average shares subject to repurchase
|
|
|
(1,001
|
)
|
|
|
(2,002
|
)
|
|
|
(1,001
|
)
|
|
|
(2,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic net income
(loss) per share
|
|
|
81,705
|
|
|
|
65,799
|
|
|
|
81,343
|
|
|
|
65,751
|
|
Add dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares subject to repurchase
|
|
|
|
|
|
|
2,002
|
|
|
|
|
|
|
|
2,002
|
|
Stock options and restricted stock units
|
|
|
|
|
|
|
1,158
|
|
|
|
|
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing diluted net income
(loss) per share
|
|
|
81,705
|
|
|
|
68,959
|
|
|
|
81,343
|
|
|
|
68,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
0.22
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2007, options and restricted stock units to
purchase 8,939,000 common shares were excluded from the
calculation of weighted average shares for diluted net loss per
share as they were anti-dilutive. For the three and six months
ended April 30, 2006, options and restricted stock units to
purchase 1,009,825 common shares were excluded from the
calculation of weighted average shares for diluted net income
per share as they were anti-dilutive.
22
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
In June 2006, FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, which clarifies the accounting for uncertainty in
income taxes recognized in accordance with
SFAS No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position. FIN 48 indicates that an
enterprise shall initially recognize the financial statement
effects of a tax position when it is more likely than not of
being sustained on examination, based on the technical merits of
the position. In addition, FIN 48 indicates that the
measurement of a tax position that meets the more likely than
not threshold shall consider the amounts and probabilities of
the outcomes that could be realized upon ultimate settlement.
This interpretation is effective for fiscal years beginning
after December 15, 2006 and interim periods within those
fiscal years. The Company is in the process of evaluating the
impact of adopting FIN 48 on the Companys
consolidated results of operations, financial position or cash
flows.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements.
SAB 108 provides guidance on the consideration of the
effects of prior year misstatements in quantifying current year
misstatements for the purpose of determining whether the current
years financial statements are materially misstated.
SAB 108 is effective for fiscal years ending after
November 15, 2006. The implementation of SAB 108 did
not have a material impact on the Companys consolidated
results of operations, financial position or cash flows.
In September 2006, FASB issued SFAS No. 157, Fair
Value Measurements. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and
expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those
fiscal years. The implementation of SFAS No. 157 is
not expected to have a material impact on the Companys
consolidated results of operations, financial position or cash
flows.
In February 2007, FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to
choose to measure financial assets and liabilities at fair
value. The objective of the guidance is to improve financial
reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is
effective for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years, provided the
provisions of SFAS No. 157 are applied. The Company is
evaluating SFAS No. 159 and has not yet determined the
impact, if any, that the adoption will have on the
Companys consolidated financial statements.
|
|
Note 4.
|
Business
Combinations
|
Lipman
Electronic Engineering Ltd. (Lipman)
On November 1, 2006, the Company acquired all of the
outstanding common stock of Lipman. The Company acquired Lipman
to enhance the Companys ability to reach certain of its
strategic and business objectives, which include
(i) extending the Companys product and service
offerings to include Lipmans products, (ii) enabling
the Company to leverage its distribution channels, international
presence, customer base, and brand recognition to accelerate
Lipmans market penetration and growth, (iii) enabling
the Company to enhance its position in areas where the Company
is already strong by offering complementary products and
services developed by Lipman, (iv) enhancing its product
offerings in a variety of its core product areas, and
(v) enhancing the Companys manufacturing capacity.
The consideration paid to acquire Lipman was $344.7 million
in cash, 13,462,474 shares of common stock of the Company
and assumption of all outstanding Lipman stock options. To fund
a portion of the cash consideration,
23
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company used $307.2 million of the Term B Loan proceeds
under its Credit Facility on November 1, 2006. See
Note 6 of Notes to Condensed Consolidated Financial
Statements for additional information related to the Credit
Facility.
The purchase price is as follows (in thousands):
|
|
|
|
|
|
|
(Restated)
|
|
|
Cash
|
|
$
|
344,747
|
|
Value of common stock issued
|
|
|
417,606
|
|
Value of Lipman vested and unvested options assumed
|
|
|
38,008
|
|
Transaction costs and expenses
|
|
|
14,837
|
|
|
|
|
|
|
Sub-total
|
|
|
815,198
|
|
Less: Value of unvested Lipman options assumed
|
|
|
(19,356
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
795,842
|
|
|
|
|
|
|
Pursuant to the proration and allocation provisions of the
merger agreement, the total merger consideration consisted of
(i) a number of shares of the Company common stock equal to
the product of 0.50 multiplied by the number of Lipman ordinary
shares issued and outstanding on the closing date and
(ii) an amount in cash equal to the product of $12.804
multiplied by the number of Lipman ordinary shares issued and
outstanding on the closing date, as reduced by the aggregate
amount of the special cash dividend paid by Lipman prior to the
merger. The Company issued 13,462,474 shares of common
stock and paid $344.7 million (excluding the aggregate
amount of the special cash dividend).
The 13,462,474 shares have been valued at $31.02 per share
based on an average of the closing prices of the Companys
common stock for a range of trading days two days before
April 10, 2006, the announcement date of the proposed
merger, the announcement date, and two days after the
announcement date.
Pursuant to the merger agreement, the Company assumed, generally
on a one-for-one basis, all Lipman share options outstanding at
closing. The Company assumed options to purchase approximately
3,375,527 shares of Lipman ordinary shares at a weighted
average exercise price of $24.47. The fair value of the
outstanding vested and unvested options of $38.0 million
was determined using a Black-Scholes valuation model using the
following weighted-average assumptions: stock price of $31.02
per share (determined as described above), expected term of
2.5 years, expected volatility of 41% and risk free
interest rate of 4.7%.
For accounting purposes the fair value of unvested options as of
the closing date is considered unrecognized share-based
compensation and is deducted in determining the purchase price.
This unrecognized share-based compensation is being recognized
as compensation expense on a straight-line basis over the
estimated remaining service period of 2.8 years. The fair
value of the outstanding unvested options of $19.4 million
was determined using a Black-Scholes valuation model using the
assumptions noted above, except that the stock price on the
closing date of $30.00 per share was used, as required, instead
of the average price around the announcement date of $31.02 per
share. The Company determined the number of unvested options
based on the ratio of the number of months of service remaining
to be provided by employees as of November 1, 2006 to the
total vesting period for the options.
Under the purchase method of accounting, the total estimated
purchase price as shown in the table above is allocated to
Lipmans tangible and intangible assets acquired and
liabilities assumed as well as in-process research and
development based on their estimated fair values as of the
closing date. The excess of the purchase price over the net
tangible and intangible assets is recorded as goodwill. The
preliminary allocation of the purchase price is based on
preliminary estimates and currently available information.
24
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Based on the preliminary valuation which has not been finalized
and other information currently available, the preliminary
estimated purchase price is allocated as follows (in thousands):
|
|
|
|
|
|
|
(Restated)
|
|
|
Cash
|
|
$
|
95,931
|
|
Accounts receivable
|
|
|
33,257
|
|
Inventories
|
|
|
66,359
|
|
Property, plant and equipment
|
|
|
18,601
|
|
Other assets
|
|
|
12,865
|
|
Deferred revenue
|
|
|
(8,936
|
)
|
Other current liabilities
|
|
|
(74,233
|
)
|
Net deferred tax liabilities
|
|
|
(63,189
|
)
|
Non current liabilities
|
|
|
(9,635
|
)
|
|
|
|
|
|
Net tangible assets
|
|
|
71,020
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
Developed and core technology
|
|
|
133,480
|
|
Customer backlog
|
|
|
50
|
|
Customer relationships
|
|
|
64,870
|
|
Internal use software
|
|
|
3,460
|
|
|
|
|
|
|
Sub-total intangible assets
|
|
|
201,860
|
|
|
|
|
|
|
In-process research and development
|
|
|
6,650
|
|
Excess over fair value of vested options
|
|
|
1,030
|
|
Goodwill
|
|
|
515,282
|
|
|
|
|
|
|
Total preliminary estimated purchase price allocation
|
|
$
|
795,842
|
|
|
|
|
|
|
Net
Tangible Assets
Of the total estimated purchase price, a preliminary estimate of
approximately $71.0 million has been allocated to net
tangible assets acquired. Except for inventories, property,
plant and equipment, deferred revenue, accrued liabilities and
deferred taxes, the Company has valued net tangible assets at
their respective carrying amounts as of November 1, 2006 as
the Company believes these amounts approximate their current
fair values or the fair values have not yet been determined.
The Company has increased Lipmans historical value of
inventories by $13.9 million to adjust inventories to an
amount equivalent to the selling price less an appropriate sales
margin. The Company reduced Lipmans historical value of
deferred revenue by $3.6 million to adjust deferred revenue
to an amount equivalent to the estimated cost plus an
appropriate profit margin to perform the services related to
Lipmans service contracts. The Company reduced
Lipmans historical net book value of property, plant and
equipment by $1.4 million to adjust property, plant and
equipment to estimated fair value. As of April 30, 2007,
the purchase price allocation is preliminary and is subject to
adjustment.
The Company has identified and recorded provisions related to
certain pre-acquisition contingencies of $10.4 million
related to liabilities that are probable and the amount of the
liability is reasonably estimable. With respect to certain other
identified pre-acquisition contingencies, including the tax
assessments referred to in Note 8 with respect to the
Companys Brazilian subsidiaries acquired as a part of the
acquisition, the Company continues to accumulate information to
assess whether or not the related asset, liability or impairment
is probable and the amount
25
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the asset, liability or impairment can be reasonably
estimated and as such accrued in the purchase price allocation
prior to the end of the purchase price allocation period.
Pursuant to a detailed restructuring plan which is not complete,
the Company accrued $6.2 million of costs for severance,
costs of vacating facilities and costs to exit or terminate
other duplicative activities in accordance with the requirement
of
EITF 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination (see Note 7). As the Company
finalizes its restructuring plan, additional amounts may be
accrued.
Certain deferred tax liabilities have been recorded based upon
preliminary conclusions regarding the tax positions expected to
be taken. Included in the amounts recorded on a preliminary
basis is an approximate $32.8 million foreign deferred tax
liability recorded in connection with undistributed
pre-acquisition foreign earnings subject to an approved
enterprise status in Israel.
Intangible
Assets
Developed and core technology, which comprises products that
have reached technological feasibility, includes products in
Lipmans product lines, principally the Nurit product line.
Lipmans technology and products are designed for hardware,
software, solutions and services, serving the point of sale
market internationally. This proprietary know-how can be
leveraged by the Company to develop new technology and improved
products and manufacturing processes. The Company expects to
amortize the developed and core technology over estimated lives
of 18 months to 7 years.
Customer relationships represent the distribution channels
through which Lipman sells the majority of its products and
services. The Company expects to amortize the fair value of
these assets over estimated lives of 4 to 6 years.
Internal use software represents the internal use software
assets which have been developed internally but have not
previously been capitalized. The Company expects to amortize the
fair value of these assets over estimated lives of 5 to
7 years.
The fair value of intangible assets was based on a preliminary
valuation using an income approach, as well as discussions with
Lipman management and a review of certain transaction-related
documents and forecasts prepared by the Company and Lipman
management. The rate utilized to discount net cash flows to
their present values is 13%. These discount rates were
determined after consideration of the Companys weighted
average cost of capital specific to this transaction.
Estimated useful lives for the intangible assets were based on
historical experience with technology life cycles, product
roadmaps, branding strategy, historical and projected
maintenance renewal rates, historical treatment of the
Companys acquisition-related intangible assets and the
Companys intended future use of the intangible assets.
In-Process
Research and Development
Of the total estimated purchase price, $6.7 million was
allocated to in-process research and development and was charged
to expense in the six months ended April 30, 2007.
In-process research and development represents incomplete Lipman
research and development projects that had not reached
technological feasibility and had no alternative future use.
Lipman was developing new products that qualify as in-process
research and development in multiple product areas.
Lipmans research and development projects were focused on
developing new products, integrating new technologies, improving
product performance and broadening features and functionalities.
The principal research and development efforts of Lipman are
related primarily to three products. There is a risk that these
developments and enhancements will not be competitive with other
products using alternative technologies that offer comparable
functionality.
The value assigned to in-process research and development was
determined by considering the importance of each project to the
overall development plan, estimating costs to develop the
purchased in-process research and
26
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
development into commercially viable products, estimating the
resulting net cash flows from the projects when completed and
discounting the net cash flows to their present value. The
revenue estimates used to value the purchased in-process
research and development were based on estimates of relevant
market sizes and growth factors, expected trends in technology
and the nature and expected timing of new product introductions
by Lipman and its competitors.
The rates utilized to discount the net cash flows to their
present value were based on the Companys weighted average
cost of capital. The weighted average cost of capital was
adjusted to reflect the difficulties and uncertainties in
completing each project and thereby achieving technological
feasibility, the percentage of completion of each project,
anticipated market acceptance and penetration, market growth
rates and risks related to the impact of potential changes in
future target markets. Based on these factors, a discount rate
of 19% was deemed appropriate for valuing the in-process
research and development.
Excess
Over Fair Value of Vested Options
The Company assumed Lipman options to purchase shares based
generally on a one-for-one exchange ratio, which differed from
the all-stock exchange ratio of 0.9336 (the all stock
consideration exchange ratio of 0.9844 as reduced by the per
share value of the $1.50 per share special cash dividend) for
Lipman ordinary shares. As a result, the Company recognized
$1.0 million of share-based compensation for the excess
fair value of vested options in the six months ended
April 30, 2007.
Goodwill
Of the total purchase price, approximately $515.3 million
is estimated to be allocated to goodwill. Goodwill represents
the excess of the purchase price of an acquired business over
the fair value of the underlying net tangible and intangible
assets, in-process research and development and excess of fair
value of vested options. Goodwill will not be amortized but
instead will be tested for impairment at least annually (more
frequently if certain indicators are present). In the event that
the management of the combined company determines that the value
of goodwill has become impaired, the combined company will incur
an accounting charge for the amount of impairment during the
fiscal quarter in which the determination is made. The goodwill
has been allocated $508.8 million to the International
segment and $6.5 million to the North America segment. Most
of the goodwill is expected to be deductible for income tax
purposes.
The results of operations of Lipman are included in the
Companys consolidated financial statements from November
2006. The following table presents pro forma results of
operations and gives effect to the acquisition of Lipman as if
the acquisition had been consummated at the beginning of fiscal
year 2006. The unaudited pro forma results of operations are not
necessarily indicative of what would have occurred had the
acquisition been made as of the beginning of the period or of
the results that may occur in the future. Net income includes
the write-off of acquired in process research and development of
$90,000 and $6.7 million for the three and six months ended
April 30, 2007, respectively, additional interest expense
of $5.8 million and $11.6 million for the three and
six months ended April 30, 2007, respectively,
deferred revenue step down of $0.9 million and
$2.4 million for the three and six months ended
April 30, 2007, respectively, fair value step up of
inventory of $3.5 million and $13.9 million for the
three and six months ended April 30, 2007, respectively,
stock-based compensation for the excess fair value on vested
options of zero and $1.0 million for the three and six
months ended April 30, 2007, respectively, and
27
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amortization of intangible assets related to the acquisition of
$12.2 million and $24.2 million for the three and six
months ended April 30, 2007, respectively. The unaudited
pro forma information is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
April 30, 2006
|
|
|
April 30, 2006
|
|
|
|
(Restated)
|
|
|
|
(In millions, except per share amounts)
|
|
|
Total net revenue
|
|
$
|
198.9
|
|
|
$
|
400.8
|
|
Net income
|
|
$
|
6.6
|
|
|
$
|
5.4
|
|
Net income per share basic
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
Net income per share diluted
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
The pro forma amounts above were compiled using the three and
six-month periods ended March 31, 2006 for Lipman and the
three and six-month periods ended April 30, 2006 for
VeriFone.
PayWare
On September 1, 2006, the Company acquired PayWare, the
payment systems business of Trintech Group PLC for approximately
$11.0 million, comprised of $9.9 million in cash
consideration and $1.1 million of transaction costs. The
cash consideration includes $2.0 million which has been
placed in an escrow account pending resolution of certain items.
The Company acquired PayWare to broaden the Companys EMEA
presence at the point of sale beyond its core solutions. The
Companys consolidated financial statements include the
operating results of the business acquired from the date of
acquisition. Pro forma results of operations have not been
presented because the effect of the acquisition was not material.
The total estimated purchase price of $11.0 million was
allocated as follows: $11.5 million to goodwill (not
deductible for income tax purposes); $7.7 million to
intangible assets, comprised of developed technology of
$3.0 million, backlog of $1.4 million, and customer
relationships of $3.3 million; and $8.2 million to net
tangible liabilities assumed. The estimated useful economic
lives of the identifiable intangible assets acquired are 3 to
5 years for the developed technology, one year for backlog,
and 4 to 6 years for the customer relationship. The
weighted average amortization period for developed technology
and customer relationships was 3.7 years. As of
April 30, 2007, the purchase price allocation is
preliminary and subject to adjustment for any pre-acquisition
contingencies or changes in allocations.
VeriFone
Transportation Systems, Inc.
In February 2007, the Company made an additional investment in
VeriFone Transportation Systems, Inc. (VTS) to
increase its ownership percentage to 51%. The total purchase
price of $5 million was allocated to the net assets of VTS.
As of April 30, 2007, the purchase price allocation is
preliminary and is subject to adjustment for any changes in
valuations of net assets. Pro forma results of operations have
not been presented because the effect of the acquisition was not
material.
28
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5.
|
Balance
Sheet and Statements of Operations Detail
|
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
Raw materials
|
|
$
|
24,147
|
|
|
$
|
4,095
|
|
Work-in-process
|
|
|
3,492
|
|
|
|
808
|
|
Finished goods
|
|
|
73,810
|
|
|
|
81,728
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,449
|
|
|
$
|
86,631
|
|
|
|
|
|
|
|
|
|
|
Prepaid
Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
Prepaid taxes
|
|
$
|
24,367
|
|
|
$
|
5,241
|
|
Prepaid expenses
|
|
|
13,798
|
|
|
|
3,208
|
|
Other receivables
|
|
|
5,980
|
|
|
|
750
|
|
Other current assets
|
|
|
856
|
|
|
|
3,744
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,001
|
|
|
$
|
12,943
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment, net
Property, plant and equipment, net consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
Computer hardware and software
|
|
$
|
11,011
|
|
|
$
|
7,049
|
|
Office equipment, furniture and fixtures
|
|
|
3,508
|
|
|
|
3,972
|
|
Machinery and equipment
|
|
|
9,408
|
|
|
|
5,602
|
|
Leasehold improvements
|
|
|
6,543
|
|
|
|
3,897
|
|
Construction in progress
|
|
|
8,745
|
|
|
|
966
|
|
Land
|
|
|
1,633
|
|
|
|
|
|
Buildings
|
|
|
5,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
46,054
|
|
|
|
21,486
|
|
Accumulated depreciation and amortization
|
|
|
(12,562
|
)
|
|
|
(14,186
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
33,492
|
|
|
$
|
7,300
|
|
|
|
|
|
|
|
|
|
|
At each of April 30, 2007 and October 31, 2006,
equipment amounting to $1.3 million was capitalized under
capital leases. Related accumulated amortization as of
April 30, 2007 and October 31, 2006 amounted to
$1.3 million and $1.2 million, respectively.
29
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Purchased
Intangible Assets, net
Purchased intangible assets subject to amortization consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2007
|
|
|
October 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
170,221
|
|
|
$
|
(46,291
|
)
|
|
$
|
123,930
|
|
|
$
|
35,164
|
|
|
$
|
(28,616
|
)
|
|
$
|
6,548
|
|
Core technology
|
|
|
14,442
|
|
|
|
(13,960
|
)
|
|
|
482
|
|
|
|
14,442
|
|
|
|
(12,517
|
)
|
|
|
1,925
|
|
Trade name
|
|
|
22,225
|
|
|
|
(21,712
|
)
|
|
|
513
|
|
|
|
22,225
|
|
|
|
(19,942
|
)
|
|
|
2,283
|
|
Internal use software
|
|
|
4,101
|
|
|
|
(427
|
)
|
|
|
3,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
87,384
|
|
|
|
(22,377
|
)
|
|
|
65,007
|
|
|
|
19,314
|
|
|
|
(13,526
|
)
|
|
|
5,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
298,373
|
|
|
$
|
(104,767
|
)
|
|
$
|
193,606
|
|
|
$
|
91,145
|
|
|
$
|
(74,601
|
)
|
|
$
|
16,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of purchased intangibles was allocated as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Included in cost of net revenues
|
|
$
|
9,586
|
|
|
$
|
1,419
|
|
|
$
|
19,195
|
|
|
$
|
3,012
|
|
Included in operating expenses
|
|
|
5,690
|
|
|
|
1,159
|
|
|
|
11,041
|
|
|
|
2,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,276
|
|
|
$
|
2,578
|
|
|
$
|
30,236
|
|
|
$
|
5,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future amortization expense of intangible assets
recorded as of April 30, 2007 was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
|
|
|
Operating
|
|
|
|
|
Fiscal Year
|
|
Revenues
|
|
|
Expenses
|
|
|
Total
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
2007 (remaining six months)
|
|
$
|
19,024
|
|
|
$
|
9,025
|
|
|
$
|
28,049
|
|
2008
|
|
|
31,746
|
|
|
|
24,719
|
|
|
|
56,465
|
|
2009
|
|
|
31,137
|
|
|
|
19,897
|
|
|
|
51,034
|
|
2010
|
|
|
24,281
|
|
|
|
11,603
|
|
|
|
35,884
|
|
Thereafter
|
|
|
18,224
|
|
|
|
3,950
|
|
|
|
22,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
124,412
|
|
|
$
|
69,194
|
|
|
$
|
193,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
Activity related to goodwill consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
52,689
|
|
|
$
|
47,260
|
|
Additions related to acquisitions
|
|
|
523,210
|
|
|
|
6,352
|
|
Resolution of tax contingencies and adjustments to tax reserves
and valuation allowances established in purchase accounting
|
|
|
(2,722
|
)
|
|
|
(923
|
)
|
Currency translation adjustments
|
|
|
9,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
583,038
|
|
|
$
|
52,689
|
|
|
|
|
|
|
|
|
|
|
30
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warranty
Activity related to warranty consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance, beginning of year
|
|
$
|
5,432
|
|
|
$
|
5,243
|
|
Warranty charged to cost of net revenues
|
|
|
1,740
|
|
|
|
3,311
|
|
Utilization of warranty
|
|
|
(2,918
|
)
|
|
|
(3,815
|
)
|
Changes in estimates
|
|
|
43
|
|
|
|
693
|
|
Warranty assumed in acquisitions
|
|
|
7,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
12,131
|
|
|
|
5,432
|
|
Less current portion
|
|
|
(11,461
|
)
|
|
|
(4,902
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
670
|
|
|
$
|
530
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue, net
Deferred revenue, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
Deferred revenue
|
|
$
|
49,112
|
|
|
$
|
34,309
|
|
Less long-term portion
|
|
|
(9,807
|
)
|
|
|
(7,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
39,305
|
|
|
|
26,938
|
|
Deferred cost of revenue
|
|
|
(2,706
|
)
|
|
|
(3,371
|
)
|
|
|
|
|
|
|
|
|
|
Current portion, net
|
|
$
|
36,599
|
|
|
$
|
23,567
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense), net
Other income (expense), net consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Refund of foreign customs fees
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
288
|
|
Foreign currency transaction gains, net
|
|
|
1,866
|
|
|
|
192
|
|
|
|
1,893
|
|
|
|
172
|
|
Foreign currency contract losses, net
|
|
|
(1,801
|
)
|
|
|
(113
|
)
|
|
|
(2,014
|
)
|
|
|
(189
|
)
|
Other, net
|
|
|
(67
|
)
|
|
|
(14
|
)
|
|
|
(142
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2
|
)
|
|
$
|
65
|
|
|
$
|
(263
|
)
|
|
$
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys financing consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Secured credit facility:
|
|
|
|
|
|
|
|
|
Revolver
|
|
$
|
|
|
|
$
|
|
|
Term B loan
|
|
|
498,750
|
|
|
|
192,780
|
|
Capital leases and other
|
|
|
702
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,452
|
|
|
|
192,889
|
|
Less current portion
|
|
|
(5,416
|
)
|
|
|
(1,985
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
494,036
|
|
|
$
|
190,904
|
|
|
|
|
|
|
|
|
|
|
Secured
Credit Facility
On October 31, 2006, the Companys principal
subsidiary, VeriFone, Inc., entered into a credit agreement
consisting of a Term B Loan facility of $500 million and a
revolving credit facility permitting borrowings of up to
$40 million (the Credit Facility). The proceeds
from the Term B loan were used to repay all outstanding amounts
relating to an existing senior secured credit agreement, pay
certain transaction costs and partially fund the cash
consideration in connection with the acquisition of Lipman on
November 1, 2006. As of April 30, 2007, the Company
had drawn all $500 million of the Term B Loan.
The Credit Facility is guaranteed by the Company and certain of
its subsidiaries and is secured by collateral including
substantially all of the Companys assets and stock of the
Companys subsidiaries. At April 30, 2007 and
October 31, 2006, the interest rates were 7.11% and 7.12%
on the Term B Loan and 6.61% and 6.87% on the revolving loan,
respectively. The Company pays a commitment fee on the unused
portion of the revolving loan under its Credit Facility at a
rate that varies between 0.375% and 0.30% per annum depending
upon its consolidated total leverage ratio. At April 30,
2007 and October 31, 2006, the Company was paying a
commitment fee at a rate of 0.30% and 0.375% per annum,
respectively. The Company pays a letter of credit fee on the
unused portion of any letter of credit issued under the Credit
Facility at a rate that varies between 1.50% and 1.25% per annum
depending upon its consolidated total leverage ratio. At
April 30, 2007 and October 31, 2006, the Company was
subject to a letter of credit fee at a rate of 1.25% and 1.50%
per annum, respectively.
As of April 30, 2007, at the Companys option, the
revolving loan bears interest at a rate of 1.25% over the
three-month LIBOR, which was 5.36%, or 0.25% over the
lenders base rate, which was 8.25%. As of October 31,
2006, at the Companys option, the revolving loan bore
interest at a rate of 1.50% over the three-month LIBOR, which
was 5.37%, or 0.50% over the lenders base rate, which was
8.25%. As of April 30, 2007, the entire $40 million
revolving loan was available for borrowing to meet short-term
working capital requirements. At the Companys option, the
Term B Loan bears interest at a rate of 1.75% over the
three-month LIBOR or 0.75% over the base rate.
Interest payments are generally paid quarterly but can be based
on one, two, three or six month periods. The lenders base
rate is the greater of the Fed Funds rate plus 50 basis
points or the JPMorgan prime rate. The respective maturity dates
on the components of the Credit Facility are October 31,
2012 for the revolving loan and October 31, 2013 for the
Term B Loan. Payments on the Term B Loan are due in equal
quarterly installments of $1.2 million over the seven-year
term on the last business day of each calendar quarter with the
balance due on maturity.
The terms of the Credit Facility require the Company to comply
with financial covenants, including maintaining leverage and
fixed charge coverage ratios at the end of each fiscal quarter,
obtaining protection against fluctuation in interest rates, and
limits on annual capital expenditure levels. As of
April 30, 2007, the
32
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company was required to maintain a total leverage ratio of not
greater than 4.0 to 1.0 and a fixed charge coverage ratio of at
least 2.0 to 1.0. Total leverage ratio is equal to total debt
less cash as of the end of a reporting fiscal quarter divided by
the consolidated EBITDA for the most recent four consecutive
fiscal quarters. Some of the financial covenants become more
restrictive over the term of the Credit Facility. Noncompliance
with any of the financial covenants without cure or waiver would
constitute an event of default under the Credit Facility. An
event of default resulting from a breach of a financial covenant
may result, at the option of lenders holding a majority of the
loans, in an acceleration of repayment of the principal and
interest outstanding and a termination of the revolving loan.
The Credit Facility also contains non-financial covenants that
restrict some of the Companys activities, including its
ability to dispose of assets, incur additional debt, pay
dividends, create liens, make investments, make capital
expenditures and engage in specified transactions with
affiliates. The terms of the Credit Facility permit prepayments
of principal and require prepayments of principal upon the
occurrence of certain events including, among others, the
receipt of proceeds from the sale of assets, the receipt of
excess cash flow as defined, and the receipt of proceeds of
certain debt issues. The Credit Facility also contains customary
events of default, including defaults based on events of
bankruptcy and insolvency; nonpayment of principal, interest or
fees when due, subject to specified grace periods; breach of
specified covenants; change in control; and material inaccuracy
of representations and warranties. The Company was in compliance
with its financial and non-financial covenants as of
April 30, 2007.
|
|
Note 7.
|
Restructuring
Charges
|
Fiscal
Year 2002 Restructuring Plan
In connection with the acquisition of VeriFone, Inc. by the
Company on July 1, 2002, the Company assumed the liability
for a restructuring plan (fiscal 2002 restructuring plan). The
remaining accrued restructuring balance represents primarily
future facilities lease obligations, net of estimated future
sublease income, which are expected to be paid through mid-2008.
The payment of the restructuring costs for the International
segment was zero for both six months ended April 30, 2007
and 2006, respectively. The Company paid restructuring costs of
$182,000 and $361,000 for the six months ended April 30,
2007 and 2006, respectively, in the North America segment. As of
April 30, 2007, the Company had a liability of $54,000 and
$64,000 for the North America segment and International segment,
respectively.
Activities related to the fiscal 2002 restructuring plan are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
Portion
|
|
|
Portion
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Balance at October 31, 2006
|
|
$
|
486
|
|
|
$
|
60
|
|
|
$
|
546
|
|
|
$
|
503
|
|
|
$
|
43
|
|
Additions (reductions)
|
|
|
(248
|
)
|
|
|
2
|
|
|
|
(246
|
)
|
|
|
(235
|
)
|
|
|
(11
|
)
|
Cash payments
|
|
|
(182
|
)
|
|
|
|
|
|
|
(182
|
)
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
$
|
56
|
|
|
$
|
62
|
|
|
$
|
118
|
|
|
$
|
86
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
Portion
|
|
|
Portion
|
|
|
Balance at October 31, 2005
|
|
$
|
1,200
|
|
|
$
|
60
|
|
|
$
|
1,260
|
|
|
$
|
765
|
|
|
$
|
495
|
|
Additions (reductions)
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
360
|
|
|
|
(353
|
)
|
Cash payments
|
|
|
(353
|
)
|
|
|
(8
|
)
|
|
|
(361
|
)
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2006
|
|
$
|
847
|
|
|
$
|
59
|
|
|
$
|
906
|
|
|
$
|
764
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GO
Software Restructuring Plan
In connection with the acquisition of the assets of the GO
Software business on March 1, 2005, the Company accrued in
the purchase price allocation $313,000 of restructuring costs
related to the integration of GO Softwares Savannah
helpdesk facility with the Companys helpdesk facility in
Clearwater, Florida, of which $269,000 has been paid as of both
April 30, 2007 and October 31, 2006.
Fiscal
Year 2006 Restructuring Plan
In the first quarter of fiscal 2006, the Company implemented a
restructuring plan that established Singapore supply chain
operations to leverage a favorable tax environment and
manufacturing operations in the Asia Pacific region (fiscal 2006
restructuring plan). For the six months ended April 30,
2006, the Company incurred and paid restructuring costs of
$546,000 and $389,000, respectively, in severance related
expenses for employees. During the six months ended
April 30, 2007, the Company reversed the remaining reserve
of $8,000.
Activities related to the fiscal 2006 restructuring plan are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Severance
|
|
|
Portion
|
|
|
Portion
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Balance at October 31, 2006
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
|
|
|
|
|
|
Reductions
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Severance
|
|
|
Portion
|
|
|
Portion
|
|
|
|
|
|
Balance at October 31, 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Additions
|
|
|
546
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(389
|
)
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2006
|
|
$
|
157
|
|
|
$
|
157
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PayWare
Restructuring Plan
In the fourth quarter of fiscal 2006, the Company completed the
acquisition of PayWare. During the first six months of fiscal
2007, the Company accrued additional restructuring costs,
primarily related to reduction in workforce and future
facilities lease obligations, of $806,000, which were included
in the purchase price allocation of PayWare. The payment of the
restructuring costs for the International segment was
$2.3 million for the six months ended April 30, 2007.
Activities related to the PayWare acquisition restructuring plan
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Severance
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
Portion
|
|
|
Portion
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Balance at October 31, 2006
|
|
$
|
1,234
|
|
|
$
|
1,098
|
|
|
$
|
76
|
|
|
$
|
2,408
|
|
|
$
|
2,408
|
|
|
$
|
|
|
|
|
|
|
Additions
|
|
|
547
|
|
|
|
154
|
|
|
|
105
|
|
|
|
806
|
|
|
|
806
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(1,781
|
)
|
|
|
(309
|
)
|
|
|
(181
|
)
|
|
|
(2,271
|
)
|
|
|
(2,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
$
|
|
|
|
$
|
943
|
|
|
$
|
|
|
|
$
|
943
|
|
|
$
|
943
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fiscal
Year 2007 Restructuring Plan
In the first quarter of 2007, the Company implemented a
restructuring plan that included reductions in workforce of
employees in the United States, China, Hong Kong, Mexico and the
Philippines with an expected cost of $821,000. The Company
incurred $726,000 and paid restructuring costs of $359,000 in
the North America segment for the six months ended
April 30, 2007. For the six months ended April 30,
2007, the Company incurred $95,000 and paid restructuring costs
$94,000, respectively, in the International segment.
Activities related to the fiscal 2007 restructuring plan are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Severance
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
Portion
|
|
|
Portion
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Balance at October 31, 2006
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Additions
|
|
|
807
|
|
|
|
10
|
|
|
|
4
|
|
|
|
821
|
|
|
|
821
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(440
|
)
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
|
(453
|
)
|
|
|
(453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
$
|
367
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
368
|
|
|
$
|
368
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lipman
Restructuring Plan
In the first quarter of fiscal 2007, the Company completed the
acquisition of Lipman and began formulating a restructuring plan
which is expected to be completed by the end of the fiscal year.
For those portions of the plan completed during the six months
ended April 30, 2007, the Company accrued into the purchase
price allocation restructuring costs related to reduction in
workforce and future facilities lease obligations of
$6.2 million. The payment of the restructuring costs for
the International segment was $4.2 million for the six
months ended April 30, 2007.
Activities related to the Lipman acquisition restructuring plan
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
|
|
|
Severance
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
Portion
|
|
|
Portion
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Balance at October 31, 2006
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Additions
|
|
|
3,102
|
|
|
|
3,097
|
|
|
|
2
|
|
|
|
6,201
|
|
|
|
3,706
|
|
|
|
2,495
|
|
|
|
|
|
Cash payments
|
|
|
(1,750
|
)
|
|
|
(3,082
|
)
|
|
|
(2
|
)
|
|
|
(4,834
|
)
|
|
|
(2,339
|
)
|
|
|
(2,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
$
|
1,352
|
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
1,367
|
|
|
$
|
1,367
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8.
|
Commitments
and Contingencies
|
The Company leases certain real and personal property under
non-cancelable operating leases. Additionally, the Company
subleases certain real property to third parties. Future minimum
lease payments and sublease rental income under these leases as
of April 30, 2007 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease
|
|
|
Sublease Rental
|
|
|
Net Minimum
|
|
Fiscal Year
|
|
Payments
|
|
|
Income
|
|
|
Lease Payments
|
|
|
Remainder of 2007
|
|
$
|
4,633
|
|
|
$
|
68
|
|
|
$
|
4,565
|
|
2008
|
|
|
7,839
|
|
|
|
137
|
|
|
|
7,702
|
|
2009
|
|
|
5,877
|
|
|
|
89
|
|
|
|
5,788
|
|
2010
|
|
|
5,271
|
|
|
|
4
|
|
|
|
5,267
|
|
2011
|
|
|
4,150
|
|
|
|
|
|
|
|
4,150
|
|
Thereafter
|
|
|
14,348
|
|
|
|
|
|
|
|
14,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,118
|
|
|
$
|
298
|
|
|
$
|
41,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain leases require the Company to pay property taxes,
insurance and routine maintenance, and include rent escalation
clauses and options to extend the term of certain leases. Rent
expense was approximately $3.3 million and
$6.2 million for the three and six months ended
April 30, 2007, respectively, compared to $2.3 million
and $4.4 million for the comparable periods in fiscal 2006.
Sublease rental income was approximately $52,000 and $122,000
for the three and six months ended April 30, 2007,
respectively, compared to $73,000 and $144,000 for the
comparable periods in fiscal 2006.
Manufacturing
Agreements
The Company works on a purchase order basis with third-party
contract manufacturers and component suppliers with facilities
in China, Singapore and Brazil to manufacture a majority of the
Companys inventories. The Company issues a forecast to the
third-party contract manufacturers and subsequently agrees to a
build schedule to drive component material purchases and
capacity planning. In conjunction with this, the Company issues
a combination of purchase order and written direction to drive
manufacturing activity for finished goods product. The Company
provides each manufacturer with a purchase order on a monthly
basis to cover the following months manufacturing
requirements, which constitutes a binding commitment by the
Company to purchase materials produced by the manufacturer as
specified in the purchase order. The total amount of purchase
commitments as of April 30, 2007 and October 31, 2006
was approximately $39.7 million and $17.9 million,
respectively, and are generally paid within one year. Of this
amount, $2.5 million and $1.4 million has been
recorded in other current liabilities in the accompanying
condensed consolidated balance sheets as of April 30, 2007
and October 31, 2006, respectively, because the commitment
is expected not to have future value to the Company.
Employee
Health and Dental Costs
The Company is primarily self-insured for employee health and
dental costs and has stop-loss insurance coverage to limit
per-incident liability for health costs. The Company believes
that adequate accruals are maintained to cover the retained
liability. The accrual for self-insurance is determined based on
claims filed and an estimate of claims incurred but not yet
reported.
Litigation
The Company is subject to various legal proceedings related to
commercial, customer, and employment matters that have arisen
during the ordinary course of its business. Although there can
be no assurance as to the ultimate disposition of these matters,
the Companys management has determined, based upon the
information available at the date of these financial statements,
that the expected outcome of these matters, individually or in
the aggregate, will not have a material adverse effect on the
Companys consolidated financial position, results of
operations or cash flows.
One of the Companys Brazilian subsidiaries has been
notified of a tax assessment regarding Brazilian state value
added tax (VAT), for the periods from January 2000
to December 2001 that relates to products supplied to the
Company by a contract manufacturer. The assessment relates to an
asserted deficiency of 7.7 million Brazilian reais
(approximately $3.8 million) including interest and
penalties. The tax assessment was based on a clerical error in
which the Companys Brazilian subsidiary omitted the
required tax exemption number on its invoices. Management does
not expect that the Company will ultimately incur a material
liability in respect of this assessment, because they believe,
based in part on advice of the Companys Brazilian tax
counsel, that the Company is likely to prevail in the
proceedings relating to this assessment. On May 25, 2005,
the Company had an administrative hearing with respect to this
audit. Management expects to receive the decision of the
administrative body sometime in 2007. In the event the Company
receives an adverse ruling from the administrative body, the
Company will decide whether or not to appeal and would reexamine
the determination as to whether an accrual is necessary. It is
currently uncertain what impact this state tax examination may
have with respect to the Companys use of a corresponding
exemption to reduce the Brazilian federal VAT.
36
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Two of the Companys Brazilian subsidiaries that were
acquired as a part of the Lipman acquisition have been notified
of tax assessments regarding Brazilian customs penalties that
relate to alleged infractions in the importation of goods. The
assessments were issued in the City of Vitória and the
State of São Paulo and relate to asserted deficiencies
totaling 24.9 million Brazilian reais (approximately
$12.3 million) excluding interest. The tax authorities
allege that the structure used for the importation of goods was
simulated with the objective to hide the real seller and buyer
of the imported goods and that the simulation was created
through a fraudulent interposition of parties.
In the Vitória tax assessment, the fines were reduced from
4.7 million Brazilian reais (approximately
$2.3 million) to 1.5 million Brazilian reais
(approximately $0.7 million) on a first level
administrative decision on January 26, 2007. The proceeding
has been remitted to the Taxpayers Council to adjudicate the
appeal of the first level administrative decision filed by the
tax authorities. The Company also appealed the first level
administrative decision on February 26, 2007. In this
appeal, the Company argued that the tax authorities did not have
enough evidence to determine that the import transactions were
indeed fraudulent and that, even if there were some
irregularities in such importations, they could not be deemed to
be the Companys responsibility since all the transactions
were performed by the third-party importer of the goods.
Management expects to receive the decision of the Taxpayers
Council sometime in 2007. In the event the Company receives an
adverse ruling from the administrative body, the Company will
decide whether or not to appeal to the judicial level. Based on
the Companys current understanding of the underlying
facts, the Company believes that it is probable that its
Brazilian subsidiary will be required to pay some amount of
fines. At April 30, 2007, the Company has accrued
4.7 million Brazilian reais (approximately
$2.3 million), excluding interest, which it believes is the
probable payment.
The São Paulo tax assessment is pending first
administrative level decision, which may maintain the total fine
imposed of 20.2 million Brazilian reais (approximately
$10.0 million) or reduce it (as happened in the
Vitória tax assessment). In the event the Company receives
an adverse ruling from the administrative body, the Company will
also decide whether or not to appeal in the administrative level
to the Taxpayers Council. Based on the Companys current
understanding of the underlying facts, the Company believes
that, although it is possible that the amount claimed may be
reduced at the administrative level, it is probable that its
Brazilian subsidiary will be required to pay some amount of
fines.
With regard to the Vitória and São Paulo assessments,
the Company continues to accumulate information to assess
whether or not the liabilities are probable and whether the
amount of the liabilities can be reasonably estimated. If such
estimates are determined prior to the end of the purchase price
allocation period, the amounts will be accrued in the purchase
price allocation.
On December 11, 2006, the Company received a civil
investigative demand from the U.S. Department of Justice
regarding an investigation into its acquisition of Lipman which
requests certain documents and other information, principally
with respect to the companies integration plans and
communications prior to the completion of this acquisition. The
Company is producing documents in response to this request, but
cannot predict what actions, if any, will result from this
investigation.
37
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 9.
|
Comprehensive
Income (Loss)
|
The components of comprehensive income (loss) were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,818
|
)
|
|
$
|
15,036
|
|
|
$
|
(10,497
|
)
|
|
$
|
28,830
|
|
Foreign currency translation adjustments, net of tax
|
|
|
3,928
|
|
|
|
231
|
|
|
|
10,263
|
|
|
|
318
|
|
Unrecognized gain (loss) on interest rate hedges, net of tax
|
|
|
(4
|
)
|
|
|
25
|
|
|
|
(22
|
)
|
|
|
52
|
|
Unrealized gain (loss) on marketable securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
(894
|
)
|
|
$
|
15,292
|
|
|
$
|
(257
|
)
|
|
$
|
29,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax of $2,460
and $1,068
|
|
$
|
11,266
|
|
|
$
|
1,003
|
|
Unrecognized loss on interest rate hedges, net of tax of $44 and
$29
|
|
|
(68
|
)
|
|
|
(46
|
)
|
Unrealized gain on marketable securities, net of tax of zero and
$1
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
11,198
|
|
|
$
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10.
|
Stockholders
Equity
|
Common
and Preferred Stock
The Company has authorized 100,000,000 shares of Common
Stock, par value $0.01 per share, and 10,000,000 shares of
Preferred Stock, par value $0.01 per share. The board of
directors has the authority to issue the undesignated Preferred
Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof. The holder of each share of
Common Stock has the right to one vote. As of April 30,
2007 and October 31, 2006, there were no shares of
Preferred Stock outstanding and there were 82,864,709 and
68,148,245 shares of Common Stock outstanding, respectively.
On November 1, 2006, the Company completed its acquisition
of Lipman. As part of the acquisition consideration, the Company
issued 13,462,474 shares of its common stock. See
Note 4 of Notes to Condensed Consolidated Financial
Statements for additional information.
Restricted
Common Stock
The Company has a right to repurchase shares of Common Stock
sold to the Companys Chief Executive Officer (the
CEO) at the original sale price, $0.0333 per share,
in the event the CEO ceases to be employed by the Company or any
of its subsidiaries. This right lapses at a rate of 20% of the
original 3,910,428 shares per year. Upon the sale of the
Company, any remaining unvested shares will become vested. At
April 30, 2007, 782,085 shares of Common Stock issued
to the CEO remained subject to this repurchase right which will
lapse in July 2007.
The Company has a right to repurchase shares of Common Stock
sold to certain executives of the Company pursuant to the
Companys 2002 Securities Purchase Plan at the lesser of
the original sale price, $0.0333 per share, or the fair value on
the date of separation in the event that the executive ceases to
be employed by the Company or any of its subsidiaries. This
right lapses at a rate of 20% of the original
1,929,145 shares per year. Upon the sale of
38
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company, all remaining unvested shares will become vested.
At April 30, 2007, 218,985 shares of Common Stock
remained subject to this repurchase right which will lapse in
July 2007 and October 2007.
Stock
Option Plans
As of April 30, 2007, the Company had a total of 7,879,500
stock options outstanding with a weighted average exercise price
of $23.12 per share. The number of shares that remained
available for future grants was 3,841,855 as of April 30,
2007.
New
Founders Stock Option Plan
On April 30, 2003, the Company adopted the New
Founders Stock Option Plan (the New Founders
Plan) for executives and employees of the Company. A total
of 1,500,000 shares of the Companys Common Stock were
reserved for issuance under the New Founders Plan. The
Company will no longer grant options under the New
Founders Plan and will retire any options cancelled
hereafter. Option awards under the New Founders Plan were
generally granted with an exercise price equal to the market
price of the Companys stock on the date of grant. Those
option awards generally vest in equal annual amounts over a
period of five years from the date of grant and have a maximum
term of 10 years.
The following table summarizes option activity under the New
Founders Plan during the six months ended April 30,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
Option
|
|
|
Price
|
|
|
(Years)
|
|
|
(Thousands)
|
|
|
|
(Restated)
|
|
|
Balance at November 1, 2006
|
|
|
898,062
|
|
|
$
|
4.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(202,285
|
)
|
|
|
3.17
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(5,605
|
)
|
|
|
4.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
|
690,172
|
|
|
$
|
4.53
|
|
|
|
6.97
|
|
|
$
|
21,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at April 30, 2007
|
|
|
649,573
|
|
|
$
|
4.49
|
|
|
|
6.96
|
|
|
$
|
20,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2007
|
|
|
320,617
|
|
|
$
|
4.26
|
|
|
|
6.87
|
|
|
$
|
9,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options expected to vest are the result of applying the
pre-vesting forfeiture rate assumptions to total outstanding
options. The total intrinsic value of options exercised during
the six months ended April 30, 2007 was $6.8 million.
As of April 30, 2007, pursuant to
SFAS No. 123(R), there was $831,000 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the New Founders
Plan. The cost is expected to be recognized over a remaining
weighted average period of 2.2 years. The total fair value
of shares vested during the six months ended April 30, 2007
was $223,000.
Outside
Directors Stock Option Plan
In January 2005, the Company adopted the Outside Directors
Stock Option Plan (the Directors Plan) for
members of the Board of Directors of the Company who are not
employees of the Company or representatives of major
stockholders of the Company. A total of 225,000 shares of
the Companys Common Stock had been reserved for issuance
under the Directors Plan. The Company will no longer grant
options under the Directors Plan and will retire any
options cancelled hereafter. Option grants for members of the
Board of Directors of the Company who are
39
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
not employees of the Company or representatives of major
stockholders of the Company will be covered under the 2006
Equity Incentive Plan.
The following table summarizes option activity under the
Directors Plan during the six months ended April 30,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
Option
|
|
|
Price
|
|
|
(Years)
|
|
|
(Thousands)
|
|
|
Balance at November 1, 2006
|
|
|
90,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,875
|
)
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
|
73,125
|
|
|
$
|
10.00
|
|
|
|
4.73
|
|
|
$
|
1,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at April 30, 2007
|
|
|
73,125
|
|
|
$
|
10.00
|
|
|
|
4.73
|
|
|
$
|
1,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2007
|
|
|
31,875
|
|
|
$
|
10.00
|
|
|
|
4.74
|
|
|
$
|
806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options expected to vest are the result of applying the
pre-vesting forfeiture rate assumptions to total outstanding
options. The total intrinsic value of options exercised during
the six months ended April 30, 2007 was $406,000.
As of April 30, 2007, pursuant to
SFAS No. 123(R), there was $236,000 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Directors
Plan. The cost is expected to be recognized over a remaining
weighted average period of 1.7 years. The total fair value
of shares vested during the six months ended April 30, 2007
was $69,000.
2005
Equity Incentive Option Plan
On April 29, 2005, the Company adopted the 2005 Equity
Incentive Option Plan (the EIP Plan) for executives
and employees of the Company and other individuals who perform
services to the Company. A total of 3,100,000 shares of the
Companys Common Stock have been reserved for issuance
under the EIP Plan. The Company will no longer grant options
under the EIP Plan and will retire any options cancelled
hereafter. Option awards were generally granted with an exercise
price equal to the market price of the Companys stock at
the date of grant. Those options generally vest over a period of
four years from the date of grant and have a maximum term of
7 years.
40
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes option activity under the EIP
Plan during the six months ended April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
Option
|
|
|
Price
|
|
|
(Years)
|
|
|
(Thousands)
|
|
|
|
(Restated)
|
|
|
Balance at November 1, 2006
|
|
|
1,878,801
|
|
|
$
|
12.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(278,674
|
)
|
|
|
11.24
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(43,101
|
)
|
|
|
11.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
|
1,557,026
|
|
|
$
|
12.31
|
|
|
|
4.65
|
|
|
$
|
35,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at April 30, 2007
|
|
|
1,389,959
|
|
|
$
|
12.30
|
|
|
|
4.64
|
|
|
$
|
31,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2007
|
|
|
412,716
|
|
|
$
|
12.55
|
|
|
|
4.52
|
|
|
$
|
9,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options expected to vest are the result of applying the
pre-vesting forfeiture rate assumptions to total outstanding
options. The total intrinsic value of options exercised during
the six months ended April 30, 2007 was $7.1 million.
As of April 30, 2007, pursuant to
SFAS No. 123(R), there was $5.9 million of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the EIP Plan. The cost
is expected to be recognized over a remaining weighted average
period of 2.1 years. The total fair value of shares vested
during the six months ended April 30, 2007 was
$1.8 million.
2006
Equity Incentive Plan
On March 22, 2006, the stockholders of VeriFone approved
the 2006 Equity Incentive Plan (the 2006 Plan) for
officers, directors, employees and consultants of the Company. A
total of 9,000,000 shares of the Companys Common
Stock have been reserved for issuance under the 2006 Plan.
Awards are granted with an exercise price equal to the market
price of the Companys Common Stock at the date of grant
except for restricted stock units (RSUs). The awards generally
vest over a period of four years from the date of grant and have
a maximum term of seven years. Any shares granted as stock
options and stock appreciation rights shall be counted as one
share for every share granted. Any awards granted other than
stock options or stock appreciation rights are counted, for the
purpose of the number of shares issuable under the 2006 Plan, as
1.75 shares for every share granted.
The following table summarizes option activity under the 2006
Plan during the six months ended April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
|
(Thousands)
|
|
|
|
(Restated)
|
|
|
Balance at November 1, 2006
|
|
|
2,539,245
|
|
|
$
|
29.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,069,000
|
|
|
|
34.99
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,125
|
)
|
|
|
29.23
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(329,600
|
)
|
|
|
31.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
|
3,273,520
|
|
|
$
|
30.91
|
|
|
|
6.03
|
|
|
$
|
14,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at April 30, 2007
|
|
|
3,008,684
|
|
|
$
|
30.90
|
|
|
|
6.03
|
|
|
$
|
13,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2007
|
|
|
137,148
|
|
|
$
|
28.94
|
|
|
|
5.49
|
|
|
$
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The options expected to vest are the result of applying the
pre-vesting forfeiture rate assumptions to total outstanding
options. The total intrinsic value of options exercised during
the six months ended April 30, 2007 was $40,000. The
weighted average grant date fair value of options granted during
the six months ended April 30, 2007 was $10.04 per share.
As of April 30, 2007, pursuant to
SFAS No. 123(R), there was $25.6 million of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the 2006 Plan. The cost
is expected to be recognized over the remaining weighted average
period of 3.3 years. The total fair value of shares vested
during the six months ended April 30, 2007 was
$1.4 million.
In March 2006, September 2006 and January 2007, the Company
issued 90,000, 80,000 and 14,000 RSUs, respectively, to its
executive officers and key employees with a zero value exercise
price. Twenty-five percent of these awards shall vest one year
from the date of grant and 1/16th vest quarterly
thereafter. The fair value of the RSUs granted is the stock
price on March 22, 2006, September 12, 2006 and
January 3, 2007 of $28.86, $27.50 and $35.45, respectively.
As of April 30, 2007, 159,500 RSUs are vested or are
expected to vest, with an aggregate intrinsic value of
$5.6 million. Pursuant to SFAS No. 123(R), there
was $3.7 million of total unrecognized compensation cost
related to non-vested RSUs. The cost is expected to be
recognized over the remaining weighted average period of
3.2 years.
In January 2007, the Company made an award of up to 900,000 RSUs
to the Companys CEO. These RSUs may vest in three tranches
over a four-year period based upon annual growth in the
Companys net income, as adjusted, per share and its share
price. The RSUs are allocated between performance
units related to achievement of net income, as adjusted,
targets, and market units related to achievement of
net income, as adjusted, targets and the performance of the
Companys stock. The performance RSUs are earned in three
annual tranches of up to 200,000 each in the event that the
Company meets or exceeds specified annual increases in net
income per share, as adjusted, for fiscal years 2007, 2008 and
2009, based on a target of 20% annual increases. In addition, in
each of the three years, the CEO may earn a further 100,000 RSUs
if the Company achieves both the targeted improvement in net
income, as adjusted, per share results and there is a
corresponding improvement in the Companys share price,
with a final target of $62.20, for fiscal 2009. Each years
RSUs will not vest until the end of the fiscal year following
the year for which the specified target is met.
As of April 30, 2007, the Company had not recognized any
compensation expense related to these RSUs as achievement of the
fiscal 2007 financial targets was not considered probable. Since
the financial targets for the 2008 and 2009 tranches have not
yet been determined, no measurement date has occurred. When all
the factors for measurements are determined, the Company will
value the 2008 and 2009 tranches, respectively. Since these
shares are contingently issuable, they are excluded from the
earnings per share calculation.
42
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Lipman
Plans
As part of the acquisition of Lipman on November 1, 2006,
VeriFone assumed all of Lipmans outstanding options. The
Company will no longer grant options under the Lipman Plans. The
following table summarizes option activity under the Lipman
Electronic Engineering, Ltd. Plans (Lipman Plans) during the six
months ended April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
|
(Thousands)
|
|
|
|
(Restated)
|
|
|
Options assumed on acquisition of Lipman on November 1, 2006
|
|
|
3,375,527
|
|
|
$
|
24.47
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(736,192
|
)
|
|
|
20.07
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(353,678
|
)
|
|
|
27.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
|
2,285,657
|
|
|
$
|
25.33
|
|
|
|
4.45
|
|
|
$
|
22,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at April 30, 2007
|
|
|
2,040,944
|
|
|
$
|
24.98
|
|
|
|
4.44
|
|
|
$
|
21,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2007
|
|
|
674,166
|
|
|
$
|
20.21
|
|
|
|
4.58
|
|
|
$
|
10,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options expected to vest are the result of applying the
pre-vesting forfeiture rate assumptions to total outstanding
options. The total intrinsic value of options exercised during
the six months ended April 30, 2007 was $12.1 million.
As of April 30, 2007, pursuant to
SFAS No. 123(R), there was $13.1 million of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Lipman Plan. The
cost is expected to be recognized over remaining weighted
average period of 2.5 years. The total fair value of shares
vested during the six months ended April 30, 2007 was
$6.3 million.
All
Plans
The total cash received from employees as a result of employee
stock option exercises under all plans for the six months ended
April 30, 2007 was approximately $18.9 million. In
connection with these exercises, the tax benefits realized by
the Company and credited to equity for the six months ended
April 30, 2007 were $4.7 million.
The Company estimates the grant-date fair value of stock options
using a Black-Scholes valuation model, consistent with the
provisions of SFAS No. 123(R) and SEC Staff Accounting
Bulletin No. 107, Share-Based
Payment. Expected volatility of the stock is based on
a blend of the Companys peer group in the industry in
which it does business and the Companys historical
volatility data for its own stock. The expected term of options
granted is estimated by the Company considering vesting periods
and historical trends within the Companys equity plans and
represents the period of time that options granted are expected
to be outstanding. The risk-free rate is based on the
U.S. Treasury zero-coupon issues with a remaining term
equal to the expected term of the options used in the
Black-Scholes valuation model. Estimates of fair value are not
intended to predict actual future events or the value ultimately
realized by employees who receive equity awards, and subsequent
events are not indicative of the reasonableness of the original
estimates of fair value made by the Company under
SFAS No. 123(R).
43
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each stock option was estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
Six Months Ended April 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Expected term of the options
|
|
2 years
|
|
3 years
|
|
2 years
|
|
3 years
|
Risk-free interest rate
|
|
4.6%
|
|
4.8%
|
|
4.8%
|
|
4.7%
|
Expected stock price volatility
|
|
40%
|
|
41%
|
|
41%
|
|
45%
|
Expected dividend rate
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
The following table presents the stock-based compensation
expense recognized in accordance with SFAS No. 123(R)
during the three and six months ended April 30, 2007 and
2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Cost of net revenues
|
|
$
|
930
|
|
|
$
|
162
|
|
|
$
|
1,847
|
|
|
$
|
315
|
|
Research and development
|
|
|
1,433
|
|
|
|
210
|
|
|
|
2,899
|
|
|
|
390
|
|
Sales and marketing
|
|
|
1,683
|
|
|
|
409
|
|
|
|
3,512
|
|
|
|
740
|
|
General and administrative
|
|
|
4,253
|
|
|
|
408
|
|
|
|
7,837
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,299
|
|
|
$
|
1,189
|
|
|
$
|
16,095
|
|
|
$
|
2,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the six months ended April 30, 2007, stock-based
compensation expense includes $1.0 million related to the
excess over fair value of the vested Lipman options assumed.
The following table presents the stock-based compensation
expense recognized by plan in accordance with
SFAS No. 123(R) during the following periods (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(Restated)
|
|
|
New Founders Stock Option Plan
|
|
$
|
109
|
|
|
$
|
220
|
|
Executive Plan
|
|
|
16
|
|
|
|
33
|
|
Outside Directors Stock Option Plan
|
|
|
34
|
|
|
|
69
|
|
2005 Equity Incentive Option Plan
|
|
|
768
|
|
|
|
1,472
|
|
2006 Equity Incentive Plan
|
|
|
2,316
|
|
|
|
4,240
|
|
Lipman Plans
|
|
|
5,056
|
|
|
|
10,061
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,299
|
|
|
$
|
16,095
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11.
|
Segment
and Geographic Information
|
Segment
Information
The Company is primarily structured in a geographic manner. The
Companys Chief Executive Officer has been identified as
the Chief Operating Decision Maker (CODM) as defined
by SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The CODM reviews
consolidated financial information on revenues and gross profit
percentage for System Solutions and Services. The CODM also
reviews operating expenses, certain of which are allocated to
the Companys two segments described below.
44
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company operates in two business segments: North America and
International. The Company defines North America as the United
States and Canada, and International as the countries in which
it makes sales outside the United States and Canada.
Net revenues and operating income of each business segment
reflect net revenues generated within the segment, standard cost
of System Solutions net revenues, actual cost of Services net
revenues and expenses that directly benefit only that segment.
Corporate net revenues and operating income (loss) reflect
non-cash acquisition charges, including amortization of
purchased core and developed technology assets,
step-up of
inventory and step-down in deferred revenue, and other Corporate
charges, including inventory obsolescence and scrap at corporate
distribution centers, rework, specific warrant provisions,
non-standard freight,
over-and-under
absorption of materials management, and supply chain engineering
overhead. Corporate operating income also reflects the
difference between the actual and standard cost of System
Solutions net revenues and shared operating costs that benefit
both segments, predominately research and development expenses
and centralized supply chain management.
The following table sets forth net revenues and operating income
for the Companys segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Three Months Ended April 30,
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
121,948
|
|
|
$
|
61,845
|
|
|
$
|
250,745
|
|
|
$
|
119,502
|
|
North America
|
|
|
95,857
|
|
|
|
80,466
|
|
|
|
184,938
|
|
|
|
157,641
|
|
Corporate
|
|
|
(922
|
)
|
|
|
(121
|
)
|
|
|
(2,437
|
)
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
216,883
|
|
|
$
|
142,190
|
|
|
$
|
433,246
|
|
|
$
|
276,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
30,402
|
|
|
$
|
14,066
|
|
|
$
|
61,826
|
|
|
$
|
28,233
|
|
North America
|
|
|
39,098
|
|
|
|
31,002
|
|
|
|
70,826
|
|
|
|
61,505
|
|
Corporate
|
|
|
(62,031
|
)
|
|
|
(19,446
|
)
|
|
|
(125,785
|
)
|
|
|
(40,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
7,469
|
|
|
$
|
25,622
|
|
|
$
|
6,867
|
|
|
$
|
48,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys long-lived assets which consist primarily of
property, plant and equipment, net by segment were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
International
|
|
$
|
21,617
|
|
|
$
|
3,277
|
|
North America
|
|
|
14,853
|
|
|
|
6,270
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,470
|
|
|
$
|
9,547
|
|
|
|
|
|
|
|
|
|
|
The Companys goodwill by segment was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
International
|
|
$
|
516,203
|
|
|
$
|
19,102
|
|
North America
|
|
|
66,835
|
|
|
|
33,587
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
583,038
|
|
|
$
|
52,689
|
|
|
|
|
|
|
|
|
|
|
45
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys total assets by segment were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
International
|
|
$
|
1,055,606
|
|
|
$
|
125,681
|
|
North America
|
|
|
318,240
|
|
|
|
327,264
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,373,846
|
|
|
$
|
452,945
|
|
|
|
|
|
|
|
|
|
|
The Companys depreciation and amortization expense by
segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
International
|
|
$
|
1,052
|
|
|
$
|
193
|
|
|
$
|
2,382
|
|
|
$
|
352
|
|
North America
|
|
|
711
|
|
|
|
684
|
|
|
|
1,383
|
|
|
|
1,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,763
|
|
|
$
|
877
|
|
|
$
|
3,765
|
|
|
$
|
1,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Information
The net revenues by geographic area were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Europe
|
|
$
|
68,808
|
|
|
$
|
26,151
|
|
|
$
|
139,963
|
|
|
$
|
49,200
|
|
Latin America
|
|
|
41,497
|
|
|
|
26,529
|
|
|
|
82,168
|
|
|
|
50,445
|
|
Asia
|
|
|
11,643
|
|
|
|
9,165
|
|
|
|
28,614
|
|
|
|
19,857
|
|
United States
|
|
|
85,472
|
|
|
|
76,387
|
|
|
|
165,057
|
|
|
|
151,424
|
|
Canada
|
|
|
9,463
|
|
|
|
3,958
|
|
|
|
17,444
|
|
|
|
5,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
216,883
|
|
|
$
|
142,190
|
|
|
$
|
433,246
|
|
|
$
|
276,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are allocated to the geographic areas based on the
shipping destination of customer orders. Corporate revenues are
included in the United States geographic area revenues.
The Companys long-lived assets exclusive of intercompany
accounts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
Europe
|
|
$
|
20,195
|
|
|
$
|
2,191
|
|
North America
|
|
|
14,853
|
|
|
|
6,409
|
|
Asia
|
|
|
747
|
|
|
|
270
|
|
Latin America
|
|
|
675
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,470
|
|
|
$
|
9,547
|
|
|
|
|
|
|
|
|
|
|
46
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 12.
|
Related-Party
Transactions
|
In June 2004, the Company paid a placement fee of $2,920,000 to
GTCR Golder Rauner, L.L.C., the manager of equity funds that are
stockholders of the Company, for services related to the Credit
Facility acquired from Banc of America Securities and Credit
Suisse First Boston. The debt issuance costs were amortized over
the term of the related debt. The Company recorded amortization
of debt issuance costs related to these costs of $67,000 and
$132,000 for the three and six months ended April 30, 2006,
respectively, which is included in interest expense, in the
accompanying condensed consolidated statements of operations. On
October 31, 2006, the Company entered into a new secured
credit facility with a syndicate of financial institutions, led
by JPMorgan Chase Bank, N.A. and Lehman Commercial Paper Inc.
The proceeds were used to repay the outstanding amounts due from
the existing secured credit facility, pay the transaction costs
and fund the cash consideration in connection with the merger
with Lipman on November 1, 2006. The Company wrote off the
remaining balance of unamortized debt issuance cost of the
credit facility acquired from Banc of America Securities and
Credit Suisse First Boston in the amount of $6.4 million in
October 2006 of which $1.6 million relates to the placement
fee with GTCR Golden Rauner, L.L.C.
For the three and six months ended April 30, 2007, the
Company recorded sales of $0.8 million and
$3.6 million, respectively, to affiliates of related
parties which are included in System Solutions net revenues in
the accompanying condensed consolidated statements of operations
compared to $429,000 in each of the comparable periods in fiscal
2006.
The Company expects to provide for taxes in fiscal year 2007
notwithstanding an expected loss on its consolidated statement
of operations for the full fiscal year. This is because, in
significant part, it has net profits in its international
operations and a loss in the United States. The tax benefit of
the U.S. financial reporting loss is also offset by an
expected increase in the valuation allowance on
U.S. deferred tax assets. The application of the
intraperiod tax accounting rules of FIN 18 coupled with
losses at certain entities results in a computed tax provision
of $4.3 million and $0.4 million for the three and six
months ended April 30, 2007, respectively. For the three
and six months ended April 30, 2006, the tax provision was
$8.4 million and $15.3 million, respectively. The
Company expects to report a tax provision for fiscal year 2007
estimated at approximately $24.7 million.
The Company is currently under audit by the Internal Revenue
Service (IRS) for its fiscal years 2002 to 2004.
Although the Company believes it has correctly provided income
taxes for the years subject to audit, the IRS may adopt
different interpretations. The Company has not yet received any
final determinations with respect to this audit.
|
|
Note 14.
|
Employee
Benefit Plans
|
The Company maintains a defined contribution 401(k) plan that
allows eligible employees to contribute up to 60% of their
pretax salary up to the maximum allowed under Internal Revenue
Service regulations. Discretionary employer matching
contributions of $0.5 million and $1.0 million were
made to the plan during the three and six months ended
April 30, 2007, respectively, compared to $0.5 million
and $0.9 million for the comparable periods in fiscal 2006.
|
|
Note 15.
|
Subsequent
Events
|
Class Action
and Derivative Lawsuits
On or after December 4, 2007, several securities class
action claims were filed against the Company and certain of the
Companys officers. The various complaints specify
different class periods, with the longest proposed class period
being August 31, 2006 through December 3, 2007. These
lawsuits have been consolidated in the U.S. District Court
for the Northern District of California as In re VeriFone
Holdings, Inc. Securities Litigation,
C 07-6140
MHP. The original actions were: Eichenholtz v.
VeriFone Holdings, Inc. et al., C
07-6140 MHP;
Lien v.
47
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
VeriFone Holdings, Inc. et al.,
C 07-6195
JSW; Vaughn et al. v. VeriFone Holdings, Inc. et
al., C
07-6197 VRW
(Plaintiffs voluntarily dismissed this complaint on
March 7, 2008); Feldman et al. v. VeriFone
Holdings, Inc. et al., C
07-6218 MMC;
Cerini v. VeriFone Holdings, Inc. et al., C
07-6228 SC;
Westend Capital Management LLC v. VeriFone Holdings,
Inc. et al.,
C 07-6237 MMC;
Hill v. VeriFone Holdings, Inc. et al., C
07-6238 MHP;
Offutt v. VeriFone Holdings, Inc. et al.,
C 07-6241
JSW; Feitel v. VeriFone Holdings, Inc., et al., C
08-0118 CW.
On March 17, 2008, the Court held a hearing on
Plaintiffs motions for Lead Plaintiff and Lead Counsel and
in May 2008, the Court requested additional briefing on these
matters, which was submitted in June 2008. The Company currently
expects that following the Courts order appointing Lead
Plaintiff and Lead Counsel, a Consolidated Complaint will be
filed. Each of the consolidated actions alleges, among other
things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and
Rule 10b-5
thereunder, based on allegations that the Company and the
individual defendants made false or misleading public statements
regarding the Companys business and operations during the
putative class periods and seeks unspecified monetary damages
and other relief. At this time, the Company has not recorded any
liabilities as it is unable to estimate any potential liability.
Beginning on December 13, 2007, several derivative actions
were also filed against certain current and former directors and
officers. These derivative lawsuits were filed in: (1) the
U.S. District Court for the Northern District of
California, as In re VeriFone Holdings, Inc. Shareholder
Derivative Litigation, Lead Case No. C
07-6347,
which consolidates King v. Bergeron, et al. (Case
No. 07-CV-6347),
Hilborn v. VeriFone Holdings, Inc., et al.
(Case No. 08-CV-1132),
Patel v. Bergeron, et al. (Case
No. 08-CV-1133),
and Lemmond, et al. v. VeriFone Holdings, Inc., et al.
(Case
No. 08-CV-1301);
and (2) California Superior Court, Santa Clara County,
as In re VeriFone Holdings, Inc. Derivative Litigation,
Lead Case
No. 1-07-CV-100980,
which consolidates Catholic Medical Mission Board v.
Bergeron, et al. (Case
No. 1-07-CV-100980),
and Carpel v. Bergeron, et al.
(Case No. 1-07-CV-101449).
The complaints allege, among other things, that certain of the
Companys current and former directors and officers
breached their fiduciary duties to the Company and violated
provisions of the California Corporations Code and certain
common law doctrines by engaging in alleged wrongful conduct
complained of in the securities class action litigation
described above. The Company is named solely as a nominal
defendant against whom the plaintiffs seek no recovery. Amended
consolidated complaints are expected to be filed in September
2008 in each set of consolidated cases.
On January 27, 2008, a class action complaint was filed
against the Company in the Central District Court in Tel Aviv,
Israel on behalf of purchasers of the Companys stock on
the Tel Aviv Stock Exchange. The complaint seeks compensation
for damages allegedly incurred by the class of plaintiffs due to
the publication of erroneous financial reports. On May 25,
2008, the Court held a hearing on the Companys motion to
dismiss or stay the proceedings, after which the Court requested
that the plaintiff and the Company submit additional information
to the Court with respect to the applicability of Israeli law to
dually registered companies. This additional information was
submitted to the Court in June 2008 and the parties are
currently awaiting the Courts ruling on this issue. At
this time, the Company has not recorded any liabilities as it is
unable to estimate the potential liabilities.
The foregoing cases are still in the preliminary stages, and the
Company is not able to quantify the extent of its potential
liability, if any. An unfavorable outcome in any of these
matters could have a material adverse effect on the
Companys business, financial condition and results of
operations. In addition, defending this litigation is likely to
be costly and may divert managements attention from the
day-to-day operations of the Companys business.
Regulatory
Actions
The Company has responded to inquiries and provided information
and documents related to the restatement of its fiscal year 2007
interim financial statements to the Securities and Exchange
Commission, the Department of Justice, the New York Stock
Exchange and the Chicago Board Options Exchange. The SEC has
also expressed an interest in interviewing several current and
former officers and employees of the Company, and the Company is
continuing to cooperate with the SEC in responding to the
SECs requests for information. The Company is unable to
predict what consequences, if any, any investigation by any
regulatory agency may have on the Company. There
48
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is no assurance that other regulatory inquiries will not be
commenced by other U.S. federal, state or foreign
regulatory agencies.
With regard to the civil investigative demand from the
Department of Justice discussed in Note 8, on June 20,
2008, counsel for the Company received written confirmation from
the Department of Justice that it had closed its civil
investigation into the Companys acquisition of Lipman.
Brazilian
Tax Assessment
On July 12, 2007, the Company was notified of a first
administrative level decision rendered in the São Paulo tax
assessment, which maintained the total fine of 20.2 million
Brazilian reais (approximately $10.0 million) imposed. On
August 10, 2007, the Company appealed the first
administrative level decision to the Taxpayers Council. A
hearing was held on August 12, 2008 before the Taxpayers
Council, but the Taxpayers Council did not render a decision
pending its further review of the records. Management expects to
receive the decision of the Taxpayers Council sometime in 2008.
In the event the Company receives an adverse ruling from the
Taxpayers Council, the Company will decide whether or not to
appeal to the judicial level.
Two of the Companys Brazilian subsidiaries that were
acquired as a part of the Lipman acquisition have been notified
of an additional assessment regarding Brazilian customs
penalties that relates to alleged infractions in the importation
of goods. The assessment was issued by the Federal Revenue
Department in the City of Itajai. On May 22, 2008, the
Company was notified of a first administrative level decision
rendered in the Itajai assessment, which maintained the total
fine of 2.0 million Brazilian reais (approximately
$1.0 million) imposed, excluding interest. On May 27,
2008, the Company appealed the first level administrative level
decision to the Taxpayers Council.
Senior
Convertible Notes
On June 22, 2007, the Company entered into an Indenture
with U.S. Bank National Association, as trustee, to issue
$316.25 million 1.375% Senior Convertible Notes due
2012 (the Notes). The Company will pay 1.375%
interest per annum on the principal amount of the Notes, subject
to increase in certain circumstances as described below. The
Notes are convertible into the Companys common stock based
on an initial conversion rate of 22.7190 shares per $1,000
principal amount of Notes at any time on or prior to the close
of business on the second business day immediately preceding the
maturity date of the Notes when certain conditions are met. The
Notes are senior unsecured obligations and rank equal in right
of payment with all of the Companys existing and future
senior unsecured indebtedness.
In connection with the sale of the Notes, the Company entered
into a registration rights agreement with the initial purchasers
of the Notes whereby the Company made certain commitments with
regard to the shelf registration statements related to the Notes
and the common stock issuable upon conversion of the Notes.
Under the Registration Rights Agreement, the Company agreed to
register the Notes and the shares underlying the Notes by
December 19, 2007 or pay additional interest on the Notes.
Due to the delay in the filing of the Companys Annual
Report on
Form 10-K
for the fiscal year ended October 31, 2007 (the 2007
Annual Report), the Company has not been able to register
the Notes and the shares underlying the Notes. Accordingly, the
interest rate on the Notes increased by 0.25% per annum on
December 20, 2007 and by an additional 0.25% per annum on
March 19, 2008 relating to the Companys obligations
under the Registration Rights Agreement. Once a registration
statement covering the Notes and shares underlying the Notes is
declared effective, such additional interest will cease to
accrue.
The Company also entered into note hedge transactions with
affiliates of the initial purchasers of the Notes whereby the
Company has the option to purchase up to 7,184,884 shares
of its common stock at a price of approximately $44.02 per share.
49
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, the Company sold warrants to the counterparties
whereby they have the option to purchase up to approximately
7.2 million shares of VeriFone common stock at a price of
$62.356 per share. The Company received approximately
$31.2 million in cash proceeds from the sale of these
warrants.
Because the Company did not increase its authorized capital to
permit conversion of all of the Notes at the initial conversion
rate by June 21, 2008, beginning on June 21, 2008 the
Notes began to bear additional interest at a rate of 2.0% per
annum (in addition to the additional interest described herein)
on the principal amount of the Notes, which will increase by
0.25% per annum on each anniversary thereafter if the authorized
capital has not been increased. If stockholder approval to
increase the Companys authorized capital is received, such
additional interest will cease to accrue.
In addition, the interest rate on the Notes increased an
additional 0.25% per annum on May 1, 2008 (in addition to
the additional interest described above) because the Company
failed to file and deliver the 2007 Annual Report. Such
additional 0.25% interest will cease to accrue upon the filing
of the 2007 Annual Report.
Amendments
to the Credit Facility
On January 25, 2008, the Companys subsidiaries,
VeriFone, Inc. (the Borrower) and VeriFone
Intermediate Holdings, Inc. entered into a First Amendment to
the Credit Agreement and Waiver (the First
Amendment) with the Lenders under its Credit Facility,
dated October 31, 2006. The First Amendment extends the
deadlines for delivery of certain required financial information
for the three-month periods ended January 31, April 30 and
July 31, 2007, the year ended October 31, 2007, and
the three-month period ended January 31, 2008. In
connection with the First Amendment, the Borrower paid to
consenting Lenders a fee of $0.7 million, or 0.25% of the
aggregate amount outstanding under the Term B loan and revolving
credit commitment made available by the consenting Lenders, and
agreed to an increase in the interest rate payable on the term
loan of 0.25% per annum.
On April 28, 2008, the Borrower and VeriFone Intermediate
Holdings, Inc. entered into a Second Amendment to the Credit
Agreement (the Second Amendment) with the Lenders
under its Credit Facility. The Second Amendment extends the time
periods for delivery of certain required financial information
for the three-month periods ended January 31, April 30 and
July 31, 2007, the year ended October 31, 2007, and
the three-month periods ended January 31 and April 30,
2008. In connection with the Second Amendment, the Borrower paid
to consenting Lenders a fee of $0.7 million, or 0.25% of
the aggregate amount outstanding under the term loan and
revolving credit commitment made available by the consenting
Lenders, agreed to an additional increase in the interest rate
payable on the Term B loan and any revolving commitments of
0.75% per annum, agreed to an increase of 0.125% per annum to
the commitment fee for unused revolving commitments, and agreed
to an increase of 0.75% per annum to the letter of credit fees,
each of which are effective from the date of the Second
Amendment.
On July 31, 2008, the Borrower and VeriFone Intermediate
Holdings, Inc. entered into a Third Amendment to the Credit
Agreement (the Third Amendment) with the Lenders
under its Credit Facility. The Third Amendment extends the time
periods for delivery of certain required financial information
for the three-month periods ended January 31, April 30, and
July 31, 2007, the year ended October 31, 2007, and
the three-month periods ended January 31 and April 30, 2008
to August 31, 2008. In connection with the Third Amendment,
the Borrower paid to consenting Lenders a fee of
$0.3 million, or 0.125% of the aggregate amount outstanding
under the Term B loan and the amount of the revolving credit
commitment made available by the consenting Lenders. Following
the Third Amendment, the Borrower pays interest on the Term B
loan at a rate of 2.75% over three-month LIBOR (the Borrower may
elect at the end of an interest period to have the term loan
bear interest at 1.75% over the lenders base rate) and any
revolving loans would bear interest, at the Borrowers
option, at either 2.0% over LIBOR or 1.0% over the lenders
base rate, assuming the Borrower remains in the lowest rate tier
based on its total consolidated leverage ratio.
50
VERIFONE
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Patent
Infringement Lawsuits
On September 18, 2007, SPA Syspatronic AG (SPA)
commenced an action in the United States District Court for the
Eastern District of Texas, Marshall Division, against the
Company and others, alleging infringement of U.S. Patent
No. 5,093,862 purportedly owned by SPA. The plaintiff is
seeking a judgment of infringement, an injunction against
further infringement, damages, interest and attorneys
fees. The Company filed an answer and counterclaims on
November 8, 2007, and intend to vigorously defend this
litigation. On January 28, 2008, the Company requested that
the U.S. Patent and Trademark Office (the PTO)
perform a re-examination of the patent. The PTO granted the
request on April 4, 2008. The Company then filed a motion
to stay the proceedings with the Court and on April 25,
2008, the Court agreed to stay the proceedings pending the
re-examination.
On March 6, 2008, Cardsoft, Inc. and Cardsoft (Assignment
for the Benefit of Creditors), LLC (Cardsoft)
commenced an action in the United States District Court for the
Eastern District of Texas, Marshall Division, against the
Company and others, alleging infringement of U.S. Patents
No. 6,934,945 and No. 7,302,683 purportedly owned by
Cardsoft. The plaintiff is seeking a judgment of infringement,
an injunction against further infringement, damages, interest
and attorneys fees. The Company intends to vigorously
defend this litigation.
Investment
in VeriFone Transportation Systems, Inc.
(VTS)
During the three months ended July 31, 2007, the Company
invested an additional $5.0 million and increased its
equity interest in VTS to 60.1%.
51
|
|
ITEM 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Forward-Looking
Statements
This section and other parts of this Quarterly Report on
Form 10-Q
contain forward-looking statements that involve risks and
uncertainties. In some cases, forward-looking statements can be
identified by words such as anticipates,
expects, believes, plans,
predicts, and similar terms. Such forward-looking
statements are based on current expectations, estimates and
projections about our industry, managements beliefs and
assumptions made by management. Forward-looking statements are
not guarantees of future performance and our actual results may
differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such
differences include, but are not limited to, those discussed in
Part II, Item 1A Risk Factors below and in
Item 1A of our Annual Report on
Form 10-K
for the year ended October 31, 2006 filed with the SEC on
December 18, 2006. The following discussion should be read
in conjunction with our consolidated financial statements and
related notes included in our 2006 Annual Report on
Form 10-K
and the condensed consolidated financial statements and notes
thereto included elsewhere in this Quarterly Report on
Form 10-Q.
Unless required by law, we expressly disclaim any obligation to
update publicly any forward-looking statements, whether as
result of new information, future events or otherwise.
When we use the terms VeriFone, we,
us and our in this item, we mean
VeriFone Holdings, Inc., a Delaware corporation, and its
consolidated subsidiaries.
The discussion and analysis set forth below in this Item 2
has been amended to reflect the restatement as described above
in the Explanatory Note to this amended Quarterly Report on
Form 10-Q/A
and in Note 2, Restatement of Condensed Consolidated
Financial Statements, to the Notes to Condensed
Consolidated Financial Statements. For this reason, the data set
forth in this section may not be comparable to discussions and
data in our previously filed Quarterly Reports.
Restatement
and Audit Committee Investigation
Background
On December 3, 2007, we announced that our management had
identified errors in accounting related to the valuation of
in-transit inventory and allocation of manufacturing and
distribution overhead to inventory and that as a result of these
errors, we anticipated that a restatement of our unaudited
condensed consolidated financial statements would be required
for the following interim periods:
|
|
|
|
|
the three months ended January 31, 2007;
|
|
|
|
the three and six months ended April 30, 2007; and
|
|
|
|
the three and nine months ended July 31, 2007.
|
Our management originally estimated that the restatement would
result in changes to previously reported results as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended
|
|
|
|
January 31,
|
|
|
April 30,
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Reduction in Inventories
|
|
$
|
7.7
|
|
|
$
|
16.5
|
|
|
$
|
30.2
|
|
Reduction in Income before income taxes
|
|
$
|
8.9
|
|
|
$
|
7.0
|
|
|
$
|
13.8
|
|
Audit
Committee Investigation
On December 3, 2007, following our announcement, the Audit
Committee approved the commencement of an independent
investigation into the errors in accounting that led to the
anticipated restatement. The Audit Committee engaged independent
counsel, Simpson Thacher & Bartlett LLP (Simpson
Thacher), to conduct the independent investigation under
the Audit Committees supervision. Simpson Thacher engaged
Navigant Consulting, Inc.
52
(Navigant) as independent forensic accountants. The
scope of the investigation was proposed by Simpson Thacher in
consultation with Navigant and approved by the Audit Committee.
The investigation involved a program of forensic analysis
designed to investigate, among other things:
|
|
|
|
|
the circumstances surrounding the errors identified by
management and described in our December 3, 2007
announcement;
|
|
|
|
whether additional errors existed requiring further restatement
in the interim periods of fiscal 2007 and the adjustments
required to correct and restate our interim financial
statements; and
|
|
|
|
whether evidence existed indicating that periods prior to fiscal
2007 may also be required to be restated.
|
Simpson Thacher and Navigant assembled an investigative team
that ultimately consisted of approximately
70 professionals. Information and documents were gathered
from current and former employees worldwide. Using search
technology, the investigative team evaluated over five million
documents in physical and electronic form. Navigant also
reviewed relevant accounting databases and journal entries. The
investigative team also conducted more than 25 interviews of
senior executives, former senior executives of Lipman and
current and former finance, accounting and supply chain
personnel.
We announced on April 2, 2008 that the investigation was
complete and that the investigation had confirmed the existence
of the errors in accounting identified in our December 3,
2007 announcement. In particular, the investigation confirmed
that incorrect manual journal and elimination entries had been
made primarily by our Sacramento supply chain accounting team
with respect to several inventory-related matters.
The investigation also concluded that existing policies with
respect to manual journal entries were not followed and that the
review processes and controls in place were not sufficient to
identify and correct the errors in a timely manner. The
investigation found no evidence that any period prior to fiscal
year 2007 required restatement.
Restatement
Concurrently with the Audit Committee investigation, we also
conducted an internal review for the purpose of restating our
fiscal 2007 interim condensed consolidated financial statements
and preparing our fiscal 2007 annual consolidated financial
statements and fiscal 2008 interim condensed consolidated
financial statements. This review included evaluations of the
previously made accounting determinations and judgments. As a
result, we have also corrected additional errors, including
errors that had previously not been corrected because our
management believed that individually and in the aggregate such
errors were not material to our consolidated financial
statements. Management also made additional adjustments to
reduce certain accruals which had been recorded, such as
bonuses, which were accrued based upon information which,
following the restatement, was no longer accurate.
The restatements of fiscal 2007 interim results resulted in the
following adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended
|
|
|
January 31,
|
|
April 30,
|
|
July 31,
|
|
|
2007
|
|
2007
|
|
2007
|
|
|
(In millions)
|
|
Reduction in Inventories
|
|
$
|
13.3
|
|
|
$
|
23.9
|
|
|
$
|
40.6
|
|
Reduction in Income before income taxes
|
|
$
|
12.5
|
|
|
$
|
9.9
|
|
|
$
|
14.4
|
|
Reduction in Net Income
|
|
$
|
4.7
|
|
|
$
|
9.7
|
|
|
$
|
55.8
|
|
A complete analysis of the adjustments reflected in the
restatement as of and for the three and six months ended
April 30, 2007 is included in Note 2,
Restatement of Condensed Consolidated Financial
Statements, to the Notes to Condensed Consolidated
Financial Statements.
Among the most significant errors giving rise to the restatement
were:
|
|
|
|
|
manual journal entries made for the three months ended
January 31, 2007 that erroneously added manufacturing and
distribution overhead to inventory held at former Lipman
subsidiaries, notwithstanding that overhead had already been
allocated to that inventory. This duplication erroneously
increased reported
|
53
|
|
|
|
|
inventory and reduced reported cost of net revenues by
$7.7 million in the three months ended January 31,
2007;
|
|
|
|
|
|
manual journal entries made for the periods ended April 30,
2007 and July 31, 2007 that erroneously recorded in-transit
inventory of an additional $12.7 million at April 30,
2007 and an additional $7.3 million at July 31, 2007
based on erroneous methodology and application of source
documents; and
|
|
|
|
$6.3 million in errors made in the elimination of
intercompany profit in inventory for the nine months ended
July 31, 2007.
|
In connection with the Audit Committee investigation and
restatement process, we identified material weaknesses in our
internal control over financial reporting, as a result of which
our senior management has concluded that our disclosure controls
and procedures were not effective as of April 30, 2007.
These material weaknesses and managements remediation
efforts are summarized under Item 4, Controls and
Procedures in this Quarterly Report.
Overview
We are a global leader in secure electronic payment solutions.
We provide expertise, solutions and services that add value to
the point of sale with merchant-operated, consumer-facing and
self-service payment systems for the financial, retail,
hospitality, petroleum, government and healthcare vertical
markets. Since 1981, we have designed and marketed system
solutions that facilitate the long-term shift toward electronic
payment transactions and away from cash and checks. We believe
that we have one of the leading electronic payment solutions
brands and, supported by our recent acquisition of Lipman
Electronic Engineering Ltd, (Lipman), we are one of
the largest providers of electronic payment systems worldwide in
terms of revenues and research and development spending.
Our System Solutions consist of point of sale electronic payment
devices that run our proprietary and third-party operating
systems, security and encryption software and certified payment
software as well as third-party, value-added applications. Our
System Solutions are able to process a wide range of payment
types including signature and PIN-based debit cards, credit
cards, contactless / radio frequency identification,
or RFID, cards and tokens, smart cards, pre-paid gift and other
stored-value cards, electronic bill payment, check authorization
and conversion, signature capture and electronic benefits
transfer, or EBT. Our proprietary architecture was the first to
enable multiple value-added applications, such as gift card and
loyalty card programs, healthcare insurance eligibility and time
and attendance tracking, to reside on the same system without
requiring recertification when new applications are added to the
system. We are an industry leader in multi-application payment
system deployments and we believe we have the largest selection
of third-party certified value-add applications.
We design our System Solutions to meet the demanding
requirements of our direct and indirect customers. Our
electronic payment systems are available in several distinctive
modular configurations, offering our customers flexibility to
support a variety of connectivity options, including wireline
and wireless internet protocol, or IP, technologies. We also
offer our customers support for installed systems, consulting
and project management services for system deployment and
customization of integrated software solutions.
Our customers are primarily global financial institutions,
payment processors, petroleum companies, large retailers,
government organizations and healthcare companies, as well as
independent sales organizations, or ISOs. The functionality of
our System Solutions includes transaction security,
connectivity, compliance with certification standards and the
flexibility to execute a variety of payment and non-payment
applications on a single system solution.
Results
of Operations
Net
Revenues
We generate net revenues through the sale of our electronic
payment systems and solutions that enable electronic payments,
which we identify as System Solutions, and to a lesser extent,
warranty and support services, field deployment, installation
and upgrade services, and customer specific application
development, which we identify as Services.
54
Net revenues, which include System Solutions and Services, are
summarized in the following table (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
In Dollars
|
|
|
In Percent
|
|
|
2007
|
|
|
2006
|
|
|
In Dollars
|
|
|
In Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems Solutions
|
|
$
|
191,469
|
|
|
$
|
128,136
|
|
|
$
|
63,333
|
|
|
|
49
|
%
|
|
$
|
380,435
|
|
|
$
|
246,821
|
|
|
$
|
133,614
|
|
|
|
54
|
%
|
Services
|
|
|
25,414
|
|
|
|
14,054
|
|
|
|
11,360
|
|
|
|
81
|
%
|
|
|
52,811
|
|
|
|
29,999
|
|
|
|
22,812
|
|
|
|
76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
216,883
|
|
|
$
|
142,190
|
|
|
$
|
74,693
|
|
|
|
53
|
%
|
|
$
|
433,246
|
|
|
$
|
276,820
|
|
|
$
|
156,426
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System
Solutions
System Solutions net revenues increased $63.3 million, or
49%, to $191.5 million in the three months ended
April 30, 2007, from $128.1 million in the three
months ended April 30, 2006. System Solutions net revenues
comprised 88% of total net revenues in the three months ended
April 30, 2007, as compared to 90% in the three months
ended April 30, 2006.
International System Solutions net revenues for the three months
ended April 30, 2007 increased $48.1 million, or 80%
to $108.3 million. The increase was largely attributable to
growth across emerging economies, in particular the countries of
Brazil, Turkey and Eastern Europe, and to a lesser extent
Western Europe. Factors driving the emerging economies increase
were the addition of the Nurit, Secura and Xplorer product
lines, acquired in the Lipman acquisition, and the continued
desire of these countries to modernize their infrastructure and
improve collection of VAT. In Western Europe,
acquisition-related sales in the UK, Spain and Italy were the
primary reason for growth.
North America System Solutions net revenues for the three months
ended April 30, 2007 increased $15.2 million, or 22%,
to $83.2 million. This increase was primarily attributable
to an increase in demand for wireless products due to our
customers interest in differentiating the service they
provide to merchants, and higher sales in Canada, where
customers are preparing for a transition to EMV and Interac Chip
acceptance. Partially offsetting this increase was a decline in
sales for a legacy check processing solution.
System Solutions net revenues increased $133.6 million, or
54%, to $380.4 million in the six months ended
April 30, 2007, from $246.8 million in the six months
ended April 30, 2006. System Solutions net revenues
comprised 88% of total net revenues in the six months ended
April 30, 2007, as compared to 89% in the six months ended
April 30, 2006.
International System Solutions net revenues for the six months
ended April 30, 2007 increased $106.4 million, or 92%,
to $222.1 million. The increase was largely attributable to
growth across emerging economies, in particular the countries of
Brazil, Eastern Europe, Turkey and China, and to a lesser extent
Western Europe. Factors driving the emerging economies increase
were the addition of the Nurit product line, acquired in the
Lipman acquisition, and continued desire of these countries to
modernize their infrastructure and improve collection of VAT. In
Western Europe, acquisition related sales in the UK, Spain and
Italy were the primary reason for growth. We expect that the
proportion of International System Solutions net revenues,
relative to North America System Solutions net revenues, will
increase at a higher growth rate for at least the next year. In
addition, we may experience periodic variations in sales to our
International markets.
North America System Solutions net revenues for the six months
ended April 30, 2007 increased $27.8 million, or 21%,
to $158.9 million. This increase was primarily attributable
to an increase in demand for wireless products due to our
customers interest in differentiating the service they
provide to merchants, and higher sales in Canada, where
customers are preparing for a transition to EMV and Interac Chip
acceptance, and growth of
multi-lane
retail solutions, due to the increasing acceptance of the Mx870
product line. Partially offsetting this increase was a decline
in sales for a legacy check processing solution.
55
Services
Services net revenues increased $11.4 million, or 81%, to
$25.4 million in the three months ended April 30, 2007
from $14.1 million in the three months ended April 30,
2006. This growth occurred mainly in International Services due
to higher growth in maintenance and refurbishment revenues in
Europe and Brazil associated with the acquisition of Lipman.
North America revenues were unchanged from the prior year.
Services net revenues increased $22.8 million, or 76%, to
$52.8 million in the six months ended April 30, 2007
compared to the same period ended April 30, 2006. This
growth occurred entirely in International, while
North America had a slight decline. International growth
was due to higher growth in maintenance revenues and deployment
revenues in Europe and Brazil associated with the acquisition of
Lipman. The North America decline was due to lower installations
for quick service restaurant customers and lower repairs.
Gross
Profit
The following table shows the gross profit for System Solutions
and Services (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
Amount
|
|
|
Gross Profit Percentage
|
|
|
Amount
|
|
|
Gross Profit Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Systems Solutions
|
|
$
|
65,518
|
|
|
$
|
56,371
|
|
|
|
34.2
|
%
|
|
|
44.0
|
%
|
|
$
|
121,193
|
|
|
$
|
107,941
|
|
|
|
31.9
|
%
|
|
|
43.7
|
%
|
Services
|
|
|
12,128
|
|
|
|
7,028
|
|
|
|
47.7
|
%
|
|
|
50.0
|
%
|
|
|
25,076
|
|
|
|
15,060
|
|
|
|
47.5
|
%
|
|
|
50.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77,646
|
|
|
$
|
63,399
|
|
|
|
35.8
|
%
|
|
|
44.6
|
%
|
|
$
|
146,269
|
|
|
$
|
123,001
|
|
|
|
33.8
|
%
|
|
|
44.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on System Solutions, increased $9.1 million,
or 16.2%, to $65.5 million in the quarter ended
April 30, 2007, from $56.4 million in the three months
ended April 30, 2006. Gross profit on System Solutions
represented 34.2% of System Solutions net revenues in the three
months ended April 30, 2007, down from 44.0% in the three
months ended April 30, 2006.
North America gross profit percentage declined primarily due to
the lower proportion of Petroleum system solution sales, which
carry higher than average gross margins and growth in single
application solution sales, which carry lower than average gross
margins. Wireless solutions, which increased year over year and
carry above average gross margins, partially offset these
declines.
International gross profit percentage increased slightly,
primarily due to an improved gross profit performance in Brazil.
Brazil benefited from a shift towards vertical solutions and
wireless solutions, which carry higher than average gross
margins relative to other system solutions.
Corporate costs increased as a percentage of System Solutions
net revenues in part due to amortization of purchased core and
developed technology assets and
step-up in
inventory fair value. Corporate costs increased to 11.4% of
Systems Solutions net revenues in the three months ended
April 30, 2007 from 2.3% in the three months ended
April 30, 2006, as a result of the Lipman acquisition.
Partially offsetting this increase were lower air freight costs
as a percentage of Systems Solutions net revenues and a
reduction in Singapore International headquarters expenses,
which were high in the three months ended April 30, 2006 as
operations were ramping. Corporate costs are comprised of
non-cash acquisition charges, including amortization of
purchased core and developed technology assets,
step-up of
inventory and step-down in deferred revenue, and other Corporate
charges, including inventory obsolescence and scrap at corporate
distribution centers, rework, specific warranty provisions,
non-standard freight,
over-and-under
absorption of materials management, and supply chain engineering
overhead. Since these costs are generally incurred on a company
wide basis, it is impractical to allocate them to either North
America or International segments.
Gross profit on System Solutions, including amortization of
purchased core and developed technology assets, increased
$13.3 million, or 12%, to $121.2 million for the six
months ended April 30, 2007 from $107.9 million for
56
the six months ended April 30, 2006. Gross profit on System
Solutions represented 31.9% of System Solutions net revenues for
the six months ended April 30, 2007 down from 43.7% for the
six months ended April 30, 2006.
Gross profit percentage declined due to the higher proportion of
international net revenues, which typically carry a lower margin
than North American net revenues. This decline was partially
offset by higher sales of wireless solutions, which typically
carry a higher margin than landline solutions.
North America gross profit percentage declined primarily due to
the lower proportion of Petroleum system solution sales, which
carry higher than average gross margins, and the growth in
Retail system solutions and single application solutions sales,
which carry lower than average margins.
International gross profit percentage slightly declined
primarily due to a shift in sales towards China, Brazil, and
Eastern European countries, where price competition is
significant, and the inclusion of Secura and Xplorer system
solutions, which carry lower than average gross margins relative
to other International system solutions. In addition, with our
acquisition of Lipman, international sales, which typically
carry lower gross profit percentages relative to domestic
margins, increased with a resulting adverse impact on gross
margins.
Corporate costs increased as a percentage of System Solutions
revenues due in part to amortization of purchased core and
developed technology assets and
step-up of
inventory fair value. Corporate costs increased to 12.0% of
System Solutions net revenues in the six months ended
April 30, 2007 compared to 3.5% in the six months ended
April 30, 2006, as a result of the Lipman acquisition. In
addition, inventory write-downs relating to the winding down of
two former Lipman distribution centers were recorded. Partially
offsetting this increase were lower air freight costs as a
percentage of System Solutions net revenues and a reduction in
Singapore International headquarters expenses, which were high
in the six months ended April 30, 2006 as operations were
ramping.
Gross profit on Services increased $5.1 million, or 72.6%
to $12.1 million in the three months ended April 30,
2007, from $7.0 million in the three months ended
April 30, 2006. Gross profit on Services represented 47.7%
of Services net revenues in the three months ended
April 30, 2007, as compared to 50.0% in the three months
ended April 30, 2006. This decline was due to the inclusion
of service revenues related to the Lipman acquisition which
earned a gross margin percent below our historical averages.
Gross profit on Services increased $10.0 million, or 66.5%,
to $25.1 million for the first six months ended
April 30, 2007, from $15.1 million in the same period
of fiscal 2006. Gross profit represented 47.5% of Services net
revenues in the six months ended April 30, 2007, as
compared to 50.2% for the same periods in fiscal 2006. The
decline was due to the inclusion of service revenues related to
the Lipman acquisition which earned a gross margin percent below
our historical averages.
Research
and Development Expense
Research and development (R&D) expenses are
summarized in the following table (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
In Dollars
|
|
|
In Percent
|
|
|
2007
|
|
|
2006
|
|
|
In Dollars
|
|
|
In Percent
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
16,009
|
|
|
$
|
12,221
|
|
|
$
|
3,788
|
|
|
|
31
|
%
|
|
$
|
32,907
|
|
|
$
|
23,628
|
|
|
$
|
9,279
|
|
|
|
39
|
%
|
Percentage of net revenues
|
|
|
7.4
|
%
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
7.6
|
%
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
R&D expenses increased $3.8 million, to
$16.0 million in the three months ended April 30, 2007
from $12.2 million in the three months ended April 30,
2006. The increased expenses were primarily due to
$3.0 million of expenses incurred at Lipman entities,
$1.2 million due to stock-based compensation and
$0.8 million of expenses incurred at PayWare entities, all
partially offset by $1.1 million of higher software costs
required to be capitalized under SFAS No. 86 in the
three months ended April 30, 2007 as compared to the three
months ended April 30, 2006 due to an increase in the
number of projects which have software spending.
R&D expenses increased $9.3 million to
$32.9 million in the six months ended April 30, 2007
compared to the same period ended April 30, 2006. R&D
expenses increased primarily due to $8.7 million of
increased personnel expenses, $2.5 million of increased
stock-based compensation expense, and $0.5 million
increased consulting
57
expenses, partially offset by $1.8 million of higher
software costs required to be capitalized under
SFAS No. 86 in the six months ended April 30,
2007 as compared to the six months ended April 30, 2006 due
to an increase in the number of projects which have software
spending.
Sales
and Marketing Expense
Sales and marketing expenses are summarized in the following
table (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
Six Months Ended April 30,
|
|
|
|
|
|
|
Change
|
|
Change
|
|
|
|
|
|
Change
|
|
Change
|
|
|
2007
|
|
2006
|
|
In Dollars
|
|
In Percent
|
|
2007
|
|
2006
|
|
In Dollars
|
|
In Percent
|
|
|
(Restated)
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
22,823
|
|
|
$
|
14,404
|
|
|
$
|
8,419
|
|
|
|
58
|
%
|
|
$
|
45,863
|
|
|
$
|
28,605
|
|
|
$
|
17,258
|
|
|
|
60
|
%
|
Percentage of net revenues
|
|
|
10.5
|
%
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
10.6
|
%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
Sales and marketing expense increased $8.4 million, to
$22.8 million in the three months ended April 30, 2007
from $14.4 million in the three months ended April 30,
2006. The higher expenses, due primarily to the acquisitions of
Lipman and PayWare, included $3.4 million of increased
personnel costs, $1.5 million of increased outside services
expenses, $1.3 million of increased stock-based
compensation expenses, and $0.5 million of increased
marketing communication expenses.
Sales and marketing expenses increased $17.3 million to
$45.9 million for the first six months ended April 30,
2007 compared to the same period ended April 30, 2006. The
higher expenses, due primarily to the acquisitions of Lipman and
PayWare, included $7.4 million of increased personnel
costs, $2.8 million of increased stock-based compensation,
$2.7 million of increased outside services, and
$1.2 million of increased marketing communication expenses,
and $0.9 million of increased travel expenses. The
remainder of the increase reflects a general increase in other
expenses as a result of the growth of the company on a year over
year basis.
General
and Administrative Expense
General and administrative expenses are summarized in the
following table (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
Six Months Ended April 30,
|
|
|
|
|
|
|
Change
|
|
Change
|
|
|
|
|
|
Change
|
|
Change
|
|
|
2007
|
|
2006
|
|
In Dollars
|
|
In Percent
|
|
2007
|
|
2006
|
|
In Dollars
|
|
In Percent
|
|
|
(Restated)
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
25,565
|
|
|
$
|
9,993
|
|
|
$
|
15,572
|
|
|
|
156
|
%
|
|
$
|
42,941
|
|
|
$
|
19,691
|
|
|
$
|
23,250
|
|
|
|
118
|
%
|
Percentage of net revenues
|
|
|
11.8
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
9.9
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
General and administrative expenses increased
$15.6 million, to $25.6 million in the three months
ended April 30, 2007 from $10.0 million in the three
months ended April 30, 2006. The higher expenses were
primarily due to the acquisition of Lipman and PayWare and
included $5.7 million of consulting and legal integration
expenses supporting a review of the operational controls of
former Lipman entities, production of documents in response to
the U.S. Department of Justice investigation related to the
Lipman acquisition and a $1.0 million charge to terminate a
distributor agreement where there was a channel conflict between
Lipman and VeriFone. In addition, we incurred $3.8 million
of increased stock-based compensation and $3.2 million of
increased personnel expenses, and $0.5 million of increased
outside contracted services. The remainder of the increase
reflects a general increase in other expenses as a result of the
growth of the company on a year over year basis.
General and administrative expenses in the first six months
ended April 30, 2007 increased $23.3 million, to
$42.9 million compared to the same period ended
April 30, 2006. The higher expenses were primarily due to
the acquisition of Lipman and PayWare and included
$7.4 million of integration expenses relating to the
acquisition of Lipman and restructuring charges in VeriFone
entities, including the $1.0 million termination charge
described above, $4.6 million of increased personnel costs,
$7.2 million of increased stock-based compensation
expenses, $0.7 million of increased insurance expenses,
$0.7 million of increased outside contracted services, and
$0.5 million of increased legal expenses. The remainder of
the increase reflects a general increase in other expenses as a
result of the growth of the company on a year over year basis.
58
Amortization
of Purchased Intangible Assets
Amortization of purchased intangible assets increased
$4.5 million to $5.7 million in the second quarter of
fiscal 2007 compared with $1.2 million in the second
quarter of fiscal 2006. For the first six months of fiscal 2007,
amortization of purchased intangible assets increased
$8.7 million to $11.0 million from $2.3 million
for the comparable period in fiscal 2006. The increase for both
periods was primarily due to additional purchased intangible
assets relating to the acquisition of Lipman, which was
completed on November 1, 2006.
In-Process
Research and Development (IPR&D)
We recognized IPR&D expense of $6.7 million during the
six months ended April 31, 2007 in connection with our
Lipman acquisition. The products considered to be IPR&D
were in our consumer-activated and countertop communication
modules which have subsequently reached technological
feasibility.
Consumer-activated systems. We had two
projects involving consumer-activated systems in process. The
first involved a new category of PIN pad devices with debit,
credit and smart card payment capabilities with interfaces to
countertop systems and ECRs. The project was 75% complete at
October 31, 2006. The estimated cost of completion at
October 31, 2006 was $0.3 million and the expected
completion date was December 2006. The project was completed
during the three months ended January 31, 2007 for
approximately the expected cost.
The second project was a new product family of
consumer-activated payment systems for
multi-lane
retailers. New features include a faster processor, more memory,
modular design, a signature capture option, Ethernet/USB option
and smart card option. The project was in the pilot stage. The
estimated cost of completion at October 31, 2006 was less
than $0.1 million and was completed for approximately the
estimated cost during the three months ended January 31,
2007.
Countertop communication modules. This project
was developing new modem, Ethernet and ISDN communication
modules for countertop system solutions, consisting of customer
firmware and circuit board design intended to achieve desired
functions, operating system drivers, library and application
modifications. The project was 50% complete at October 31,
2006. The estimated cost of completion at the acquisition date
was $0.2 million and the expected completion date was
December 2006. The project was completed during the three months
ended January 31, 2007 for approximately the expected
remaining cost.
We prepared cash flow forecasts for the acquired projects and
those forecasts were used to develop a discounted cash flow
model. The discount rate assigned to in-process technologies was
19% with consideration given to the risk associated with these
in-process projects.
Interest
Expense
Interest expense of $9.5 million in the second quarter of
fiscal 2007 increased from $3.2 million in the second
quarter of fiscal 2006. For the first six months of fiscal 2007,
interest expense increased $12.8 million to
$19.3 million from $6.5 million for the comparable
period in fiscal 2006. The increase in both periods was
primarily attributable to the increase of our Term B Loan due to
the completion of our acquisition of Lipman.
Interest
Income
Interest income of $1.5 million in the second quarter of
fiscal 2007 increased from $0.9 million in the second
quarter of fiscal 2006. For the first six months of fiscal 2007,
interest income increased $0.9 million to $2.5 million
from $1.6 million for the comparable period in fiscal 2006.
The increase in both periods was attributable to higher cash
balances in the fiscal 2007 periods relative to the same periods
in fiscal 2006.
Other
Income (Expense), net
Other income (expense), net in the second quarter of fiscal 2007
was an expense of $2,000. Foreign currency gains of
$1.9 million were offset by foreign currency contract
losses of $1.8 million and a loss of $0.1 million on
our investment accounted for under the equity method. For the
first six months of fiscal 2007, other income (expense), net was
expense of $0.3 million consisting of foreign currency
gains of $1.9 million, offset by foreign currency
59
contract losses of $2.0 million and a loss of
$0.1 million on our investment accounted for under the
equity method. Other income, net in the second quarter of fiscal
2006 of $65,000 resulted primarily from $192,000 associated with
foreign currency transaction gains. This was partially offset by
foreign currency contract losses of $113,000 and a loss of
$14,000 on our investment accounted for under the equity method.
For the first six months of fiscal 2006, other income, net was
$266,000 resulting primarily from $172,000 associated with
foreign currency transaction gains and a $288,000 refund
associated with an Indian customs appeal resolution. This was
partially offset by foreign currency contract losses of $189,000
and a loss of $5,000 on our investment accounted for under the
equity method.
Provision
for (Benefit from) Income Taxes
We expect to provide for taxes in fiscal year 2007
notwithstanding an expected loss on our consolidated statement
of operations for the full fiscal year. This is because, in
significant part, we have net profits in our international
operations and a loss in the United States. The tax benefit of
the U.S. financial reporting loss is also offset by an
expected increase in the valuation allowance on
U.S. deferred tax assets. The application of the
intraperiod tax accounting rules of FIN 18 coupled with
losses at certain entities results in a computed tax provision
of $4.3 million in the three months ended April 30,
2007. For the three months ended April 30, 2006, the tax
provision was $8.4 million. We expect to report a tax
provision for fiscal year 2007 estimated at approximately
$24.7 million.
For the six months ended April 30, 2007, the tax provision
is $0.4 million. For the six months ended April 30,
2006 the tax provision was $15.3 million.
As of April 30, 2007, we have recorded deferred tax assets
on our consolidated balance sheet, net of valuation allowance,
the realization of which is dependent on our generating
sufficient U.S. and certain foreign taxable income.
Although realization is not assured, our management believes
that it is more likely than not that these deferred tax assets
will be realized. The amount of deferred tax assets considered
realizable may increase or decrease in subsequent quarters when
we reevaluate the underlying basis for our estimates of future
domestic and certain foreign taxable income.
We are currently under audit by the Internal Revenue Service
(IRS) for our fiscal years 2002 to 2004. Although we
believe we have correctly provided income taxes for the years
subject to audit, the IRS may adopt different interpretations.
We have not yet received any final determinations with respect
to this audit.
Segment
Information
We are primarily structured in a geographic manner. Our Chief
Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) as defined by
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The CODM reviews
consolidated financial information on revenues and gross profit
percentage for System Solutions and Services. The CODM also
reviews operating expenses, certain of which are allocated to
our two segments described below.
We operate in two business segments: North America and
International. We define North America as the United States and
Canada, and International as the countries in which we make
sales outside the United States and Canada.
Net revenues and operating income of each business segment
reflect net revenues generated within the segment, standard cost
of System Solutions net revenues, actual cost of Services net
revenues and expenses that directly benefit only that segment.
Corporate revenues and operating income reflect non-cash
acquisition charges, including amortization of purchased core
and developed technology assets,
step-up of
inventory and step-down in deferred revenue, and other Corporate
charges, including inventory obsolescence and scrap at corporate
distribution centers, rework, specific warranty provisions,
non-standard freight,
over-and-under
absorption of materials management, and supply chain engineering
overhead.
60
The following table sets forth net revenues and operating income
for our segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
In Dollars
|
|
|
In Percent
|
|
|
2007
|
|
|
2006
|
|
|
In Dollars
|
|
|
In Percent
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
121,948
|
|
|
$
|
61,845
|
|
|
$
|
60,103
|
|
|
|
97
|
%
|
|
$
|
250,745
|
|
|
$
|
119,502
|
|
|
$
|
131,243
|
|
|
|
110
|
%
|
North America
|
|
|
95,857
|
|
|
|
80,466
|
|
|
|
15,391
|
|
|
|
19
|
%
|
|
|
184,938
|
|
|
|
157,641
|
|
|
|
27,297
|
|
|
|
17
|
%
|
Corporate
|
|
|
(922
|
)
|
|
|
(121
|
)
|
|
|
(801
|
)
|
|
|
662
|
%
|
|
|
(2,437
|
)
|
|
|
(323
|
)
|
|
|
(2,114
|
)
|
|
|
654
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
216,883
|
|
|
$
|
142,190
|
|
|
$
|
74,693
|
|
|
|
53
|
%
|
|
$
|
433,246
|
|
|
$
|
276,820
|
|
|
$
|
156,426
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
30,402
|
|
|
$
|
14,066
|
|
|
$
|
16,336
|
|
|
|
116
|
%
|
|
$
|
61,826
|
|
|
$
|
28,233
|
|
|
$
|
33,593
|
|
|
|
119
|
%
|
North America
|
|
|
39,098
|
|
|
|
31,002
|
|
|
|
8,096
|
|
|
|
26
|
%
|
|
|
70,826
|
|
|
|
61,505
|
|
|
|
9,321
|
|
|
|
15
|
%
|
Corporate
|
|
|
(62,031
|
)
|
|
|
(19,446
|
)
|
|
|
(42,585
|
)
|
|
|
219
|
%
|
|
|
(125,785
|
)
|
|
|
(40,979
|
)
|
|
|
(84,806
|
)
|
|
|
207
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
7,469
|
|
|
$
|
25,622
|
|
|
$
|
(18,153
|
)
|
|
|
(71
|
)%
|
|
$
|
6,867
|
|
|
$
|
48,759
|
|
|
$
|
(41,892
|
)
|
|
|
(86
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues growth in International for the three months ended
April 30, 2007 as compared to the three months ended
April 30, 2006 was primarily driven by an increase of
approximately $48.1 million in System Solutions and
$12.0 million in Services net revenues. Net revenues
growth in International for the six months ended April 30,
2007 as compared to the six months ended April 30, 2006 was
primarily driven by an increase of approximately
$106.4 million in System Solutions and $24.9 million
in Services net revenues. See Results of
Operations Net Revenues for additional
commentary.
Net revenues growth in North America for the three months ended
April 30, 2007 as compared to the three months ended
April 30, 2006 was primarily driven by an increase of
approximately $15.2 million in System Solutions. Net
revenues growth in North America for the six months ended
April 30, 2007 as compared to the six months ended
April 30, 2006 was primarily driven by an increase of
approximately $27.8 million in System Solutions. See
Results of Operations Net Revenues for
additional commentary.
The increase in International operating income for the three
months ended April 30, 2007 compared to the three months
ended April 30, 2006 was mainly due to higher revenues and
gross profit percentage partially offset by higher operating
expenses. See Results of Operations Gross
Profit for additional commentary.
The increase in operating income for North America for the three
months ended April 30, 2007 as compared to the three months
ended April 30, 2006 was mainly due to higher system
solutions revenues, partially offset by a declining gross profit
percentage. See Results of Operations Gross
Profit for additional commentary. In addition, North
America research and development expenses for the three months
ended April 30, 2006 included $1.9 million for
projects which have since been broadened in scope and will
benefit customers outside the North America segment. As a
result, the expenses for these projects for the three months
ended April 30, 2007 are charged to Corporate.
The increase in International operating income for the six
months ended April 30, 2007 compared to the six months
ended April 30, 2006 was mainly due to higher revenues as a
result of both the acquisition of Lipman and organic growth,
partially offset by a declining gross profit percentage and
higher operating expenses. See Results of
Operations Gross Profit for additional
commentary.
The increase in operating income for North America for the six
months ended April 30, 2007 as compared to the six months
ended April 30, 2006 was mainly due to higher system
solutions revenues, partially offset by declining gross profit
percentage. The decline in gross profit percentage was due to
product mix shifts away from Petroleum solutions and towards
Retail and Single Application solutions. See Results of
Operations Gross Profit for additional
commentary. In addition, North America research and development
expenses for the six months ended April 30, 2006 included
$4.2 million for projects which have since been broadened
in scope and will
61
benefit customers outside the North America segment. As a
result, the expenses for these projects for the three months
ended April 30, 2007 are charged to Corporate.
The decrease in Corporate operating income for the three months
ended April 30, 2007 was primarily due to higher non-cash
acquisition related charges including increases of
$8.2 million of amortization of purchased core and
developed technology assets, $4.5 million of amortization
of purchased intangible assets, $3.5 million of
amortization of
step-up in
inventory on acquisition, and $0.8 million of amortization
of step-down in deferred revenue on acquisition. In addition,
stock-based compensation increased by $7.1 million.
Furthermore, Corporate costs, comprised of non-cash acquisition
charges, including amortization of purchased core and developed
technology assets, step-up of inventory and step-down in
deferred revenue, and other Corporate charges, including
inventory obsolescence and scrap at corporate distribution
centers, rework, non-standard freight,
over-and-under
absorption of materials management, and supply chain engineering
overhead increased due to inventory write-downs associated with
the winding down of former Lipman sales distribution centers,
partially offset by reduced air freight expenses and the non
recurrence of 2006 setup charges relating to the Singapore
International headquarters. Approximately $1.9 million of
engineering expenses were incurred as projects which previously
benefited North American in the three months ended
April 30, 2006 were broadened in scope, managed by the
Corporate engineering function and charged to Corporate in the
three months ended April 30, 2007. Furthermore, Corporate
operating expenses increased $13.3 million primarily due to
the acquisitions of Lipman and PayWare and the related
integration expenses.
The decrease in Corporate operating income for the six months
ended April 30, 2007 was primarily due to higher non-cash
acquisition related charges including increases of
$16.2 million of amortization of Core Technology,
$14.0 million of amortization of
step-up in
inventory on acquisition, $8.7 million of amortization of
purchased intangible assets, $6.7 million of in-process
research and development charges, and $2.1 million of
amortization of step-down in deferred revenue on acquisition. In
addition, stock-based compensation increased by
$14.0 million. Furthermore, Corporate costs, comprised of
non-cash acquisition charges, including amortization of
purchased core and developed technology assets, step-up of
inventory and step-down in deferred revenue, and other Corporate
charges, including inventory obsolescence and scrap at corporate
distribution centers, rework, non-standard freight,
over-and-under
absorption of materials management, and supply chain engineering
overhead, increased due to inventory write-downs associated with
the winding down of former Lipman sales distribution centers,
partially offset by reduced air freight expenses and the
non-recurrence of 2006 setup charges relating to the Singapore
International headquarters. Approximately $4.2 million of
engineering expenses for projects which previously benefited
North America in the six months ended April 30, 2006 were
broadened in scope, managed by the Corporate engineering
function and charged to Corporate in the six months ended
April 30, 2007. Furthermore, Corporate operating expenses
increased $20.8 million primarily due to the acquisitions
of Lipman and PayWare and the related integration expenses.
Liquidity
and Capital Resources
Our primary liquidity and capital resource needs are to service
our debt, finance working capital, and to make capital
expenditures and investments. At April 30, 2007, our
primary sources of liquidity were cash and cash equivalents of
$175.8 million and our $40 million unused revolving
credit facility.
Cash flow from operations before changes in working capital
amounted to $47.5 million. Net loss was $10.5 million.
This loss was substantially the result of non-cash charges of
$58.0 million consisting primarily of acquisition related
charges of $36.9 million, stock-based compensation expense
of $16.1 million and depreciation and amortization of
property, plant and equipment, as well as capitalized software
and debt issuance cost totaling $5.0 million.
Cash flow from operations due to changes in working capital
netted to an outflow of $7.4 million. The main drivers are
as follows:
|
|
|
|
|
A reduction in inventories of $52.2 million following the
restatement;
|
|
|
|
A reduction in accounts payable of $5.3 million due to the
reduction of inventory levels;
|
62
|
|
|
|
|
An increase in deferred revenue of $6.5 million due to an
increase in deferred service such as customer support and
installations;
|
|
|
|
An increase in accounts receivable of $13.5 million due to
higher sales;
|
|
|
|
A decrease in accrued compensation of $3.0 million;
|
|
|
|
Increases in prepaid expenses and other current assets of
$21.4 million and in other assets of $3.0 million;
|
|
|
|
A decrease in accrued expenses and other liabilities of
$20.2 million; and
|
|
|
|
Increases in deferred tax liabilities of $9.2 million and
income taxes payable of $0.2 million substantially offset
by an increase in deferred tax assets of $3.4 million and
the reclassification of tax benefits from stock-based
compensation of $4.7 million.
|
Investing activities used cash of $279.8 million, primarily
due to the acquisition of Lipman, net of cash and cash
equivalents acquired, of $260.2 million and a
$4.0 million investment in VTS. Additional uses included
the purchases of property, plant and equipment totaling
$12.0 million and the capitalization of software
development costs of $2.9 million.
Financing activities primarily consisted of proceeds from
long-term debt (net of costs) of $305.3 million which were
used to fund the Lipman acquisition, proceeds of exercises of
stock options of $18.4 million, and the tax benefit derived
from stock-based compensation of $4.7 million.
We believe that we have the financial resources to meet our
business requirements for the next twelve months, including
capital expenditures, working capital requirements and future
strategic investments, and to comply with our financial
covenants.
Contractual
Obligations
The following table summarizes our contractual obligations as of
April 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Term B loan (including interest)
|
|
$
|
725,267
|
|
|
$
|
40,887
|
|
|
$
|
80,497
|
|
|
$
|
79,149
|
|
|
$
|
524,734
|
|
Capital lease obligation
|
|
|
74
|
|
|
|
20
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
41,820
|
|
|
|
4,565
|
|
|
|
13,491
|
|
|
|
9,417
|
|
|
|
14,347
|
|
Minimum purchase obligations
|
|
|
38,112
|
|
|
|
38,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
805,273
|
|
|
$
|
83,584
|
|
|
$
|
94,042
|
|
|
$
|
88,566
|
|
|
$
|
539,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Interest, Taxes, Depreciation and Amortization (EBITDA),
as adjusted
We define earnings before interest, taxes, depreciation and
amortization, or EBITDA, as adjusted, as the sum of (1) net
income (loss) (excluding extraordinary items of gain or loss and
any gain or loss from discontinued operations),
(2) interest expense, (3) income taxes,
(4) depreciation, amortization, goodwill impairment and
other non-recurring charges, (5) non-cash charges,
including non-cash stock-based compensation expense and purchase
accounting items and (6) acquisition related charges and
restructuring costs. EBITDA, as adjusted, is a primary component
of the financial covenants to which we are subject under our
Credit Facility. If we fail to maintain required levels of
EBITDA, as adjusted, we could have a default under our credit
Credit Facility, potentially resulting in an acceleration of all
of our outstanding indebtedness. Management uses EBITDA, as
adjusted, only in addition to and in conjunction with results
presented in accordance with generally accepted accounting
principles (GAAP). Management believes that the use
of this non-GAAP financial measure, in conjunction with results
presented in accordance with GAAP, helps it to evaluate our
performance and to compare our current results with those for
prior periods as well as with the results of other companies in
our industry. Our competitors may, due to differences in capital
structure and investment history, have interest, tax,
depreciation, amortization, and other non-cash expenses that
differ significantly from ours. Management also uses this
non-GAAP financial measure in our
63
budget and planning process. Management believes that the
presentation of this non-GAAP financial measure may be useful to
investors for many of the same reasons that management finds
these measures useful.
Our EBITDA, as adjusted, contains limitations and should be
considered as a supplement to, and not as a substitute for, or
superior to, disclosures made in accordance with GAAP. EBITDA,
as adjusted, may be different from EBITDA or EBITDA, as
adjusted, calculated by other companies and is not based on any
comprehensive set of accounting rules or principles. In
addition, EBITDA, as adjusted, does not reflect all amounts and
costs, such as employee stock-based compensation costs, periodic
costs of assets used to generate net revenues and costs to
replace those assets, cash expenditures or future requirements
for capital expenditures or contractual commitments, cash
requirements for working capital needs, interest expense or the
cash requirements necessary to service interest or principal
payments on our debt, income taxes and the related cash
requirements, restructuring and impairment charges and losses
from discontinued operations, associated with our results of
operations as determined in accordance with GAAP. Furthermore,
we expect to continue to incur expenses similar to those amounts
excluded from EBITDA, as adjusted. Management compensates for
these limitations by also relying on the comparable GAAP
financial measure.
As noted above, management excludes the following items from
EBITDA, as adjusted:
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Provision for (benefit from) income
taxes. While income taxes are directly related to
the amount of pre-tax income, they are also impacted by tax laws
and the companys tax structure. As the tax laws and our
tax structure are not under the control of our operational
managers, management believes that the provision for (benefit
from) income taxes should be excluded when evaluating our
operational performance.
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Interest expense and interest income. While working
capital supports the business, management does not believe that
related interest expense or interest income is directly
attributable to the operating performance of our business.
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Depreciation of property, plant and equipment. Management
excludes depreciation because while tangible assets support the
business, management does not believe the related depreciation
costs are directly attributable to the operating performance of
our business. In addition, depreciation may not be indicative of
current or future capital expenditures.
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Amortization of capitalized software. Management excludes
amortization of capitalized software because while capitalized
software supports the business, management does not believe the
related amortization costs are directly attributable to the
operating performance of our business. In addition, amortization
of capitalized software may not be indicative of current or
future expenditures to develop software.
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Amortization of certain acquisition related items. We
incur amortization of purchased core and developed technology
assets, amortization of purchased intangible assets,
amortization of step-down in deferred revenue on acquisition,
and amortization of
step-up in
inventory on acquisition in connection with acquisitions.
Management excludes these items because it does not believe
these expenses are reflective of ongoing operating results in
the period incurred. These amounts arise from prior acquisitions
and management does not believe that they have a direct
correlation to the operation of our business.
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In-process research and development. We incur IPR&D
expenses when technological feasibility for acquired technology
has not been established at the date of acquisition and no
future alternative use for such technology exists. These amounts
arise from prior acquisitions and management does not believe
they have a direct correlation to the operation of
VeriFones business.
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Stock-based compensation. These expenses consist
primarily of expenses for employee stock options and restricted
stock units under SFAS No. 123 (R). Management excludes
stock-based compensation expenses from non-GAAP financial
measures primarily because they are non-cash expenses which
management believes are not reflective of ongoing operating
results.
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Acquisition related charges and restructuring costs. This
represents charges incurred for consulting services and other
professional fees associated with acquisition related
activities. These expenses also include charges related to
restructuring activities, including costs associated with
severance, benefits, and excess
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64
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facilities. As management does not believe that these charges
directly relate to the operation of our business, management
believes they should be excluded when evaluating our operating
performance.
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Non-cash portion of loss on debt extinguishment. This
represents the non-cash portion of loss incurred on the
extinguishment of our credit facility. While this credit
facility supported our business, management does not believe the
related loss on extinguishment is a cost directly attributable
to the operating performance of our business.
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A reconciliation of net income (loss), the most directly
comparable U.S. GAAP measure, to EBITDA, as adjusted, for
the three and six months ended April 30, 2007 and 2006 is
as follows (in thousands):
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Three Months Ended
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Six Months Ended
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April 30,
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April 30,
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2007
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|
|
2006
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|
2007
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|
|
2006
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|
|
|
(Restated)
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(Restated)
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U.S. GAAP net income (loss)
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$
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(4,818
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)
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$
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15,036
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$
|
(10,497
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)
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|
$
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28,830
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Provision for income taxes
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|
|
4,312
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|
|
|
8,381
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|
|
|
363
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|
|
|
15,333
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Interest expense
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|
|
9,507
|
|
|
|
3,197
|
|
|
|
19,263
|
|
|
|
6,476
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|
Interest income
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|
|
(1,534
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)
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|
|
(927
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)
|
|
|
(2,525
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)
|
|
|
(1,614
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)
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Depreciation and amortization of property, plant and equipment
|
|
|
1,761
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|
|
|
877
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|
|
|
3,765
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|
|
|
1,651
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Amortization of capitalized software
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|
|
275
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|
|
|
323
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|
|
|
570
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|
|
|
598
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Amortization of purchased intangible assets
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|
|
15,276
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|
|
|
2,578
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|
|
|
30,236
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|
|
|
5,330
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|
Amortization of step-down in deferred revenue on acquisition
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|
|
922
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|
|
|
121
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|
|
|
2,436
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|
|
|
323
|
|
Amortization of
step-up in
inventory on acquisition
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|
|
3,513
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|
|
|
|
|
|
|
13,961
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|
|
|
|
|
In-process research and development
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|
|
90
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|
|
|
|
|
|
|
6,650
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|
|
|
|
|
Stock-based compensation
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|
|
8,299
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|
|
|
1,189
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|
|
|
16,095
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|
|
|
2,112
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|
Acquisition related charges and restructuring costs
|
|
|
6,623
|
|
|
|
|
|
|
|
7,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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EBITDA as adjusted
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|
$
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44,226
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|
|
$
|
30,775
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|
|
$
|
87,734
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$
|
59,039
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|
|
|
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|
|
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|
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|
|
|
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Off-Balance
Sheet Arrangements
Our only off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of the SECs
Regulation S-K,
consist of interest rate cap agreements and forward foreign
currency exchange agreements described under Quantitative
and Qualitative Disclosures about Market Risk. See
Item 3.
Recent
Accounting Pronouncements
In June 2006, FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, which clarifies the accounting for
uncertainty in income taxes recognized in accordance with
SFAS No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position. FIN 48 indicates that an
enterprise shall initially recognize the financial statement
effects of a tax position when it is more likely than not of
being sustained on examination, based on the technical merits of
the position. In addition, FIN 48 indicates that the
measurement of a tax position that meets the more likely than
not threshold shall consider the amounts and probabilities of
the outcomes that could be realized upon ultimate settlement.
This interpretation is effective for fiscal years beginning
after December 15, 2006 and interim periods within those
years. We are in the process of evaluating the impact of
adopting FIN 48 on our consolidated results of operations,
financial position or cash flows.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements. SAB 108
65
provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements for
the purpose of determining whether the current years
financial statements are materially misstated. SAB 108 is
effective for fiscal years ending after November 15, 2006.
The implementation of SAB 108 did not have a material
impact on our consolidated results of operations, financial
position or cash flows.
In September 2006, FASB issued SFAS No. 157, Fair
Value Measurements. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and
expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those
fiscal years. The implementation of SFAS No. 157 is
not expected to have a material impact on our consolidated
results of operations, financial position or cash flows.
In February 2007, FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to
choose to measure financial assets and liabilities at fair
value. The objective of the guidance is to improve financial
reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is
effective for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years, provided the
provisions of SFAS No. 157 are applied. We are
evaluating SFAS No. 159 and have not yet determined
the impact of the adoption, if any, it will have on our
consolidated financial statements.
Critical
Accounting Policies
The discussion and analysis of our financial condition and
results of operations are based upon our condensed consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of assets and liabilities. On an on-going
basis, we evaluate our critical accounting policies and
estimates, including those related to revenue recognition, bad
debts, income taxes and intangible assets. We base our estimates
on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions. For further
information on our critical accounting policies, see the
discussion of critical accounting policies in our Annual Report
on
Form 10-K
for the fiscal year ended October 31, 2006, which was filed
with the SEC on December 18, 2006.
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ITEM 3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We are exposed to market risk related to changes in interest
rates and foreign currency exchange rates. To mitigate some of
these risks, we utilize derivative financial instruments to
hedge these exposures. We do not use derivative financial
instruments for speculative or trading purposes nor do we issue
or hold leveraged derivative financial instruments.
Interest
Rates
We are exposed to interest rate risk related to our debt, which
bears interest based upon the three-month LIBOR rate. We have
reduced our exposure to interest rate fluctuations through the
purchase of interest rate caps covering a portion of our
variable rate debt. In 2006, we purchased two-year interest rate
caps for $118,000 with an initial notional amount of
$200 million declining to $150 million after one year
with an effective date of November 1, 2006 under which we
will receive interest payments if the three-month LIBOR rate
exceeds 6.5%. Based on effective interest rates at
April 30, 2007, a 50 basis point increase in interest
rates on our borrowings subject to variable interest rate
fluctuations would increase our interest expense by
approximately $2.5 million annually.
66
Foreign
Currency Risk
A majority of our business consists of sales made to customers
outside the United States. A substantial portion of the net
revenues we receive from such sales is denominated in currencies
other than the U.S. dollar. Additionally, portions of our
costs of net revenues and our other operating expenses are
incurred by our International operations and denominated in
local currencies. While fluctuations in the value of these net
revenues, costs and expenses as measured in U.S. dollars
have not materially affected our results of operations
historically, we cannot assure you that adverse currency
exchange rate fluctuations will not have a material impact in
the future. In addition, our balance sheet reflects
non-U.S. dollar
denominated assets and liabilities which can be adversely
affected by fluctuations in currency exchange rates. In certain
periods, we have not hedged our exposure to these fluctuations.
We have entered into foreign currency forward contracts and
other arrangements intended to hedge our exposure to adverse
fluctuations in exchange rates. As of April 30, 2007, we
had no foreign currency forward contracts outstanding. On
May 1, 2007, the Company entered into foreign currency
forward contracts with aggregate notional amounts of
$40.0 million to hedge exposures to non-functional
currencies. If we chose not to enter into foreign currency
forward contracts to hedge against these exposures and if the
hedge currencies were to devalue 5% to 10% against the
U.S. dollar, results of operations would include a foreign
exchange loss of approximately $2.0 million to
$4.0 million.
Hedging arrangements of this sort may not always be effective to
protect our results of operations against currency exchange rate
fluctuations, particularly in the event of imprecise forecasts
of
non-U.S. denominated
assets and liabilities. Accordingly, if there is an adverse
movement in exchange rates, we might suffer significant losses.
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ITEM 4.
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CONTROLS
AND PROCEDURES
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Evaluation
of Disclosure Controls and Procedures
VeriFone maintains disclosure controls and procedures (as
defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)), that are designed to ensure that
information required to be disclosed in the reports that we file
or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO),
as appropriate, to allow timely decisions regarding required
disclosure.
Our management is responsible for establishing and maintaining
our disclosure controls and procedures. Our CEO and CFO
participated with our management in evaluating the effectiveness
of our disclosure controls and procedures as of April 30,
2007.
At the time that our Quarterly Report on
Form 10-Q
for the three months ended April 30, 2007 was filed on
May 31, 2007, our CEO and CFO concluded that our disclosure
controls and procedures were effective as of April 30,
2007. Subsequent to that evaluation, our management, including
our CEO and CFO, concluded that our disclosure controls and
procedures were not effective at a reasonable level of assurance
as of April 30, 2007 because of the material weaknesses in
our internal control over financial reporting discussed below.
Notwithstanding the material weaknesses described below, we have
performed additional analyses and other procedures to enable
management to conclude that our consolidated financial
statements as restated included in this amended report were
prepared in accordance with accounting principles generally
accepted in the United States of America
(U.S. GAAP). Based in part on these additional
efforts, our CEO and CFO have included their certifications as
exhibits to this
Form 10-Q/A.
A material weakness is a control deficiency, or combination of
control deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a
material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis.
Managements assessment identified the following material
weaknesses in our internal control over financial reporting as
of April 30, 2007. As set forth below, management has taken
or will take steps to remediate each of these material
weaknesses.
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A transaction-level material weakness in the design and
operation of control activities relating to the preparation,
review, approval, and entry of manual, non-standard, journal
entries. This material weakness
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67
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contributed to adjustments in several accounts and the
restatement of the interim condensed consolidated financial
statements for the quarterly periods during the fiscal year
ended October 31, 2007. The accounts most affected in the
restatement included inventories and cost of net revenues;
however, this material weakness could impact all financial
statement accounts.
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An entity-level material weakness in the control environment
related to our period-end financial reporting process due to an
insufficient number of qualified personnel with the required
proficiency to apply our accounting policies in accordance with
U.S. GAAP following the November 1, 2006 acquisition
of Lipman Electronic Engineering Ltd. This material weakness
contributed to adjustments in several accounts and the
restatement of the interim condensed consolidated financial
statements for the quarterly periods during the fiscal year
ended October 31, 2007. The accounts most affected in the
restatement include inventories and cost of net revenues;
however, this material weakness could impact all financial
statement accounts, with a higher likelihood for accounts
subject to non-routine or estimation processes, such as
inventory reserves and income taxes.
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An entity-level material weakness in control activities related
to the design and operation of our supervision, monitoring, and
monthly financial statement review processes. This material
weakness contributed to adjustments in several accounts and the
restatement of interim condensed consolidated financial
statements for the quarterly periods during the fiscal year
ended October 31, 2007. The accounts most affected in the
restatement include inventories and cost of net revenues;
however, this material weakness could impact all financial
statement accounts.
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A transaction-level material weakness in the design and
operating effectiveness of controls related to income taxes.
Specifically, our processes and procedures were not designed to
provide for adequate and timely identification, documentation
and review of various income tax calculations, reconciliations
and related supporting documentation required to apply our
accounting policy for income taxes in accordance with
U.S. GAAP, particularly following the November 1, 2006
acquisition of Lipman Electronic Engineering Ltd. This material
weakness impacted our ability to report financial information
related to income tax accounts and resulted in adjustments to
income tax expense, income taxes payable, deferred tax assets
and liabilities and goodwill accounts during the fiscal year
ended October 31, 2007.
|
Management has determined that each of these control
deficiencies constitutes a material weakness.
These control deficiencies gave rise to the required
restatements of VeriFones interim consolidated financial
statements for the first three quarters of fiscal 2007.
Additionally, notwithstanding VeriFones remediation
initiatives described below, these control deficiencies could
result in additional misstatements in the aforementioned
accounts that might result in a material misstatement to
VeriFones interim or annual consolidated financial
statements that might not be prevented or detected.
Managements
Remediation Initiatives
Following the Audit Committee independent investigation and in
response to the material weaknesses discussed above, we plan to
continue the efforts already underway to review and make
necessary changes to improve our internal control over financial
reporting, including:
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We have enhanced our manual journal entry policy, including a
more stringent manual journal entry review and approval process
that requires tiered approval levels in which escalating dollar
amounts require additional approval by increasingly more senior
personnel;
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We migrated to a new worldwide, integrated, enterprise resource
planning (ERP) system. The new ERP system is our
principal computing platform and provides for a single unified
chart of accounts worldwide. This system was activated for the
majority of our worldwide operations in the first fiscal quarter
of 2008 and by the end of the second fiscal quarter of 2008 over
90% of our consolidated net revenues and cost of net revenues
were processed on this system;
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68
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We have added and expect to continue to add qualified accounting
and finance personnel having sufficient knowledge and experience
in general accepted accounting principles, cost accounting, tax,
and management of financial systems;
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We intend to enhance our review process over the monthly
financial results by requiring additional documentation and
analysis to be provided that will then be reviewed by
appropriate key senior personnel from both finance and
non-finance areas;
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We expect to enhance the segregation of duties between the
financial planning and the accounting and control
functions; and
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We intend to enhance our governance and compliance functions to
improve control consciousness and prevention of errors in
financial reporting, as well as to improve tone, communication,
education, and training for employees involved in the financial
reporting process, including the appointment of a chief legal
and compliance officer.
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Changes
in internal control over financial reporting
No change in our internal control over financial reporting (as
defined in
Rule 13a-15(f)
under the Securities and Exchange Act of 1934) occurred
during the three months ended April 30, 2007 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
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|
ITEM 1.
|
LEGAL
PROCEEDINGS
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In the ordinary course of our business, we are subject to
periodic lawsuits, investigations and claims. Although we cannot
predict with certainty the ultimate resolution of lawsuits,
investigations and claims asserted against us, we do not believe
that any currently pending legal proceeding to which we are a
party is likely to have a material adverse effect on our
business, results of operations, cash flows or financial
condition.
One of our Brazilian subsidiaries has been notified of a tax
assessment regarding Brazilian state value added tax, or VAT,
for the periods from January 2000 to December 2001 that relates
to products supplied to us by a contract manufacturer. The
assessment relates to an asserted deficiency of 7.7 million
Brazilian reais (approximately $3.8 million) including
interest and penalties. The tax assessment was based on a
clerical error in which our Brazilian subsidiary omitted the
required tax exemption number on its invoices. Management does
not expect that we will ultimately incur a material liability in
respect of this assessment, because we believe, based in part on
advice of our Brazilian tax counsel, that we are likely to
prevail in the proceedings relating to this assessment. On
May 25, 2005, we had an administrative hearing with the
Brazilian Tax Authority with respect to this audit. Management
expects to receive the decision of the administrative judges
sometime in 2007. In the event we receive an adverse ruling from
the administrative body, we will decide whether or not to appeal
and would reexamine the determination as to whether an accrual
is necessary. It is currently uncertain what impact this state
tax examination may have with respect to our use of a
corresponding exemption to reduce the Brazilian federal VAT.
Two of our Brazilian subsidiaries that were acquired as a part
of the Lipman acquisition have been notified of tax assessments
regarding Brazilian customs penalties that relate to alleged
infractions in the importation of goods. The assessments were
issued in the City of Vitória and the State of São
Paulo and relate to an asserted deficiency of a total of
24.9 million Brazilian reais (approximately
$12.4 million) excluding interest. The tax authorities
allege that the structure used for the importation of goods was
simulated with the objective to hide the real seller and buyer
of the imported goods and that the simulation was created
through a fraudulent interposition of parties.
In the Vitória tax assessment, the fines were reduced on a
first level administrative decision on January 26, 2007.
The proceeding has been remitted to the Taxpayers Council to
adjudicate the appeal of the first level administrative decision
filed by the tax authorities. We also appealed the first level
administrative decision on February 26, 2007. In this
appeal, we argued that the tax authorities did not have enough
evidence to determine that the import transactions were indeed
fraudulent and that, even if there were some irregularities in
such importations,
69
they could not be deemed to be our responsibility since all the
transactions were performed by the third party importer of the
goods. Management expects to receive the decision of the
Taxpayers Council sometime in 2007. In the event we receive an
adverse ruling from the administrative body, we will decide
whether or not to appeal to the judicial level. Based on our
current understanding of the underlying facts, we believe that
it is probable that our Brazilian subsidiary will be required to
pay some amount of fines.
The São Paulo tax assessment is pending first
administrative level decision, which may maintain the total fine
imposed or reduce it (as happened in the Vitória tax
assessment). In the event we receive an adverse ruling from the
administrative body, we will also decide whether or not to
appeal in the administrative level to the Taxpayers Council.
Based on our current understanding of the underlying facts, we
believe that, although it is possible that the amount claimed
may be reduced at the administrative level, it is probable that
our Brazilian subsidiary will be required to pay some amount of
fines. Until the first administrative level decision is
rendered, we are not able to estimate the range of possible
fines. As part of our integration activities with respect to the
Lipman acquisition, we are reviewing operations in other Lipman
entities to ensure that we have in place business and financial
controls that are consistent with those we have historically
applied to our operations.
On December 11, 2006, we received a civil investigative
demand from the U.S. Department of Justice regarding an
investigation into our acquisition of Lipman which requests
certain documents and other information, principally with
respect to the companies integration plans and
communications prior to the completion of this acquisition. We
are producing documents in response to this request, but cannot
predict what actions, if any, will result from this
investigation.
The following discussion supplements and amends the risk
factors previously disclosed as Item 1A in our Annual
Report on
Form 10-K
for the year ended October 31, 2006 which are incorporated
herein by reference.
Risks
Related to Our Business
Although
we expect that the acquisition of Lipman will result in benefits
to our Company, those benefits may not occur because of
integration and other challenges.
Achieving the benefits we expect from the acquisition of Lipman
depends in part on our ability to integrate VeriFones and
Lipmans technology, operations and personnel in a timely
and efficient manner. Although much of this integration has
already occurred, some of the more complex aspects of
integration will take time to complete. The challenges involved
in this integration include:
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incorporating Lipmans technology and products into our
next generation of products;
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integrating Lipmans technical team in Israel with our
larger and more widely dispersed engineering organization;
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coordinating research and development activities to enhance
introduction of new products, services and technologies;
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integrating Lipmans in-house manufacturing model with the
outsource model employed by VeriFone;
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integrating Lipmans international operations with those of
VeriFone; and
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persuading the employees in various jurisdictions that
Lipmans business cultures are compatible with ours,
maintaining employee morale and retaining key employees.
|
If our operations after the acquisition do not meet the
expectations of existing customers of VeriFone or Lipman, then
these customers may cease doing business with the company
altogether, which would harm our results of operations and
financial condition.
70
Costs associated with the acquisition are difficult to estimate,
may be higher than expected and may harm the financial results
of the combined company. We have incurred substantial direct
expenses associated with the merger, and expect to incur
additional costs associated with consolidation and integration
of operations. If the total costs of the acquisition exceed
estimates or the benefits of the acquisition do not exceed the
total costs of the acquisition, our financial results could be
adversely affected.
A
significant percentage of our business is executed towards the
end of our fiscal quarters. This could negatively impact our
business and results of operations.
Revenues recognized in our fiscal quarters tend to be back end
loaded. This means that sales orders are received and revenue
recognized disproportionately towards the end of each fiscal
quarter. This back end loading, particularly if it becomes more
pronounced, could adversely affect our business and results of
operations due to the following factors:
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the manufacturing processes in our internal manufacturing could
become concentrated in a shorter time period. This concentration
of manufacturing could increase labor and other manufacturing
costs and negatively impact gross margins. The risk of inventory
write offs could also increase if we were to hold higher
inventory levels to counteract this;
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the higher concentration of orders may make it difficult to
accurately forecast component requirements and, as a result, we
could experience a shortage of the components needed for
production, possibly delaying shipments and causing lost
orders; and
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if we are unable to fill orders at the end of a quarter,
shipments may be delayed. This could cause us to fail to meet
our revenue and operating profit expectations for a particular
quarter and could increase the fluctuation of quarterly results
if shipments are delayed from one fiscal quarter to the next or
orders are cancelled by customers.
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We
face risks related to a planned migration to a common enterprise
resource planning information system to integrate all business
and finance activities.
We are in the process of migrating to a new enterprise resource
planning information system, which will replace our existing
system. We plan to integrate all business and finance activities
into this new system by the first quarter of fiscal year 2008.
Due to the size and complexity of our business, which is
compounded by the recent acquisition of Lipman, the conversion
process will be very challenging. Any disruptions and problems
that occur during the system conversion could adversely impact
our ability to finish the conversion in a timely and cost
effective way and could, moreover, interfere with the normal
operations of our business and finance activities. Even if we do
succeed in completing the conversion on a timely basis, the
implementation may be much more costly than we anticipated. If
we are unable to successfully implement our new information
system as planned, in addition to adversely impacting our
financial position, results of operations and cash flows in the
short and long term, it could also affect our ability to collect
the information necessary to timely file our financial reports
with the SEC.
A
majority of our net revenues is generated outside of North
America and we intend to continue to expand our operations
internationally. Our results of operations could suffer if we
are unable to manage our international expansion and operations
effectively.
During the three months ended April 30, 2007, 56% of
VeriFones net revenues were generated outside of North
America. We expect our percentage of net revenues generated
outside of North America to continue to increase in the coming
years. Part of our strategy is to expand our penetration in
existing foreign markets and to enter new foreign markets. Our
ability to penetrate some international markets may be limited
due to different technical standards, protocols or product
requirements. Expansion of our International business will
require significant management attention and financial
resources. Our International net revenues will depend on our
continued success in the following areas:
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securing commercial relationships to help establish our presence
in international markets;
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71
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hiring and training personnel capable of marketing, installing
and integrating our solutions, supporting customers and managing
operations in foreign countries;
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localizing our solutions to target the specific needs and
preferences of foreign customers, which may differ from our
traditional customer base in the United States;
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building our brand name and awareness of our services among
foreign customers; and
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implementing new systems, procedures and controls to monitor our
operations in new markets on a basis consistent with our
domestic operations.
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In addition, we are subject to risks associated with operating
in foreign countries, including:
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multiple, changing and often inconsistent enforcement of laws
and regulations;
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satisfying local regulatory or industry imposed security or
other certification requirements;
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competition from existing market participants that may have a
longer history in and greater familiarity with the foreign
markets we enter;
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tariffs and trade barriers;
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laws and business practices that favor local competitors;
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fluctuations in currency exchange rates;
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extended payment terms and the ability to collect account
receivables;
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economic and political instability in foreign countries;
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imposition of limitations on conversion of foreign currencies
into U.S. dollars or remittance of dividends and other
payments by foreign subsidiaries;
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changes in a specific countrys or regions political
or economic conditions; and
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greater difficulty in safeguarding intellectual property in
areas such as China, Russia and Latin America.
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In addition, compliance with foreign and U.S. laws and
regulations that are applicable to our international operations
is complex and may increase our cost of doing business in
international jurisdictions and our international operations
could expose us to fines and penalties if we fail to comply with
these regulations. These laws and regulations include import and
export requirements, U.S. laws such as the Foreign Corrupt
Practices Act, and local laws prohibiting corrupt payments to
governmental officials. Although we have implemented policies
and procedures designed to ensure compliance with these laws,
there can be no assurance that our employees, contractors and
agents will not take actions in violation of our policies,
particularly as we expand our operations through organic growth
and acquisitions. Any such violations could subject us to civil
or criminal penalties, including substantial fines or
prohibitions on our ability to offer our products and services
to one or more countries, and could also materially damage our
reputation, our brand, our international expansion efforts, our
business and our operating results. In addition, if we fail to
address the challenges and risks associated with international
expansion and acquisition strategy, we may encounter
difficulties implementing our strategy, which could impede our
growth or harm our operating results.
A
significant portion of our gross finished goods consists of
non-PCI compliant products. Due to an upcoming PCI deadline, we
must successfully deplete the non-PCI inventory while
transitioning customers to PCI products. Our results of
operations could suffer if we are unable to manage our inventory
and marketing programs to meet this objective.
The major card associations have introduced new security
standards to address the growing demand for transaction
security. Visa International, MasterCard International and JCB
Co., Ltd. continue to cooperate on the development and release
of more stringent Payment Card Industry, or PCI, specification
and test methods for the certification of electronic payment
systems for secure debit transactions. This new set of standards
applies wherever Visa, MasterCard, and JCB cards are accepted
and must be adhered to by December 31, 2007, which means
that we
72
will not be able to sell non-PCI compliant products after this
date. A significant portion of our gross finished goods consist
of non-PCI compliant products. While we do not believe that we
will have a material exposure, if we are not able to
successfully deplete this non-PCI inventory, our financial
results could be adversely affected.
We are
exposed to various risks related to legal proceedings or claims
that may harm our operating results or financial
condition.
In the ordinary course of our business, we are subject to
periodic lawsuits, investigations and claims. Although we cannot
predict with certainty the ultimate resolution of lawsuits,
investigations and claims asserted against us, we do not believe
that any currently pending legal proceeding to which we are a
party is likely to have a material adverse effect on our
business, results of operations, cash flows or financial
condition.
One of our Brazilian subsidiaries has been notified of a tax
assessment regarding Brazilian state value added tax, or VAT,
for the periods from January 2000 to December 2001 that relates
to products supplied to us by a contract manufacturer. The
assessment relates to an asserted deficiency of 7.7 million
Brazilian reais (approximately $3.8 million) including
interest and penalties. The tax assessment was based on a
clerical error in which our Brazilian subsidiary omitted the
required tax exemption number on its invoices. On May 25,
2005, we had an administrative hearing with respect to this
audit. Management expects to receive the decision of the
administrative judges sometime in 2007. In the event we receive
an adverse ruling from the administrative body, we will decide
whether or not to appeal and would reexamine the determination
as to whether an accrual is necessary. It is currently uncertain
what impact this state tax examination may have with respect to
our use of a corresponding exemption to reduce the Brazilian
federal VAT.
Two of our Brazilian subsidiaries that were acquired as a part
of the Lipman acquisition have been notified of tax assessments
regarding Brazilian customs penalties that relate to alleged
infractions in the importation of goods. The assessments were
issued in the City of Vitória and the State of São
Paulo and relate to an asserted deficiency of a total
24.9 million Brazilian reais (approximately
$12.4 million) excluding interest. The tax authorities
allege that the structure used for the importation of goods was
simulated with the objective to hide the real seller and buyer
of the imported goods and that the simulation was created
through a fraudulent interposition of parties.
In the Vitória tax assessment, the fines were reduced on a
first level administrative decision on January 26, 2007.
The proceeding has been remitted to the Taxpayers Council to
adjudicate the appeal of the first level administrative decision
filed by the tax authorities. We also appealed the first level
administrative decision on February 26, 2007. In this
appeal, we argued that the tax authorities did not have enough
evidence to determine that the import transactions were indeed
fraudulent and that, even if there were some irregularities in
such importations, they could not be deemed to be our
responsibility since all the transactions were performed by the
third party importer of the goods. Management expects to receive
the decision of the Taxpayers Council sometime in 2007. In the
event we receive an adverse ruling from the administrative body,
we will decide whether or not to appeal to the judicial level.
Based on our current understanding of the underlying facts, we
believe that it is probable that our Brazilian subsidiary will
be required to pay some amount of fines.
The São Paulo tax assessment is pending first
administrative level decision, which may maintain the total fine
imposed or reduce it (as happened in the Vitória tax
assessment). In the event we receive an adverse ruling from the
administrative body, we will also decide whether or not to
appeal in the administrative level to the Taxpayers Council.
Based on our current understanding of the underlying facts, we
believe that, although it is possible that the amount claimed
may be reduced at the administrative level, it is probable that
our Brazilian subsidiary will be required to pay some amount of
fines. Until the first administrative level decision is
rendered, we are not able to estimate the range of possible
fines. As part of our integration activities with respect to the
Lipman acquisition, we are reviewing operations in other Lipman
entities to ensure that we have in place business and financial
controls that are consistent with those we have historically
applied to our operations.
On December 11, 2006, we received a civil investigative
demand from the U.S. Department of Justice regarding an
investigation into our acquisition of Lipman which requests
certain documents and other information, principally with
respect to the companies integration plans and
communications prior to the completion of this acquisition. We
are producing documents in response to this request, but cannot
predict what actions, if any, will result from this
investigation.
73
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ITEM 2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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None
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ITEM 3.
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DEFAULTS
UPON SENIOR SECURITIES
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None
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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The following is a tabulation of the votes on proposals
considered at our annual meeting of stockholders held on
March 27, 2007:
1. To elect eight directors to serve on our Board of
Directors for one-year term.
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For
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Withheld
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Douglas G. Bergeron
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53,888,382
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482,940
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Craig A. Bondy
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49,518,821
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4,852,501
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Dr. James C. Castle
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54,185,832
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185,490
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Dr. Leslie G. Denend
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51,477,158
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2,894,164
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Alex W. Hart
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54,207,004
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164,318
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Robert B. Henske
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51,477,474
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2,893,848
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Charles R. Rinehart
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54,271,981
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99,341
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Collin E. Roche
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50,616,140
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3,755,182
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2. To ratify the selection of Ernst & Young LLP
as our independent registered public accounting firm for the
fiscal year ended October 31, 2007.
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For
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54,348,118
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Against
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12,954
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Abstain
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10,249
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ITEM 5.
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OTHER
INFORMATION
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None
The following documents are filed as Exhibits to this report:
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Exhibit
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Number
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Description
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31
|
.1
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Certification of the Chief Executive Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
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31
|
.2
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Certification of the Chief Financial Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
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32
|
.1
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Certification of the Chief Executive Officer and the Chief
Financial Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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74
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this amended
report to be signed on its behalf by the undersigned thereunto
duly authorized.
VERIFONE HOLDINGS, INC
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By: /s/ Douglas
G. Bergeron
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Douglas G. Bergeron
Chief Executive Officer
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By: /s/ Barry
Zwarenstein
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Barry Zwarenstein
Executive Vice President and
Chief Financial Officer
Date: August 19, 2008
75
EXHIBIT INDEX
|
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|
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Exhibit
|
|
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Number
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|
Description
|
|
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31
|
.1
|
|
Certification of the Chief Executive Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer and the Chief
Financial Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
76