<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended JUNE 30, 1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to __________
COMMISSION FILE NUMBER 0-18376
VERIFONE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 99-0206064
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
THREE LAGOON DRIVE, SUITE 400, REDWOOD CITY, CA 94065
(Address of principal executive offices)
(415) 591-6500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's Common Stock outstanding on July 30,
1996, was 25,204,809.
<PAGE>
FORM 10-Q
VERIFONE, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Income
for the Three Months Ended June 30, 1996 and 1995
and for the Six Months Ended June 30, 1996 and 1995 . . . . . . 2
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1995 . . . . . . . . 3
Notes to Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 6
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 16
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit 11.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERIFONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1996 1995
------ ------
(unaudited) (see note below)
Assets
Current assets:
Cash and cash equivalents $47,601 $72,882
Short-term investments 57,854 9,939
Accounts receivable, net 100,710 96,419
Net investment in sales-type leases 11,580 10,487
Inventories 66,918 76,611
Deferred income taxes 18,750 16,827
Prepaid expenses and other current assets 8,995 7,158
------ ------
Total current assets 312,408 290,323
Net investment in sales-type leases 16,985 15,360
Property and equipment, at cost 108,564 97,652
Less accumulated depreciation
and amortization (52,033) (46,710)
------ ------
Net property and equipment 56,531 50,942
Other assets, net 70,039 22,891
------ ------
$455,963 $379,516
------ ------
------ ------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $29,179 $20,693
Accrued compensation 12,112 11,072
Other accrued liabilities 23,700 18,805
Income taxes payable 14,618 12,910
Deferred revenue 5,399 5,275
Long-term debt 12,910 10,569
------ ------
Total current liabilities 97,918 79,324
Long-term debt 1,132 2,205
Deferred income taxes 51,437 33,602
Stockholders' equity 305,476 264,385
------ ------
$455,963 $379,516
------ ------
------ ------
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
1
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VERIFONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues $124,959 $94,850 $227,886 $175,006
Costs and expenses:
Cost of revenues 66,661 48,626 121,029 89,859
Research and development 14,004 11,109 26,577 21,942
Selling, general and administrative 29,210 23,127 56,344 44,362
------- ------- ------- -------
Total costs and expenses 109,875 82,862 203,950 156,163
Income from operations 15,084 11,988 23,936 18,843
Interest income, net 750 391 1,359 887
------- ------- ------- -------
Income before income taxes 15,834 12,379 25,295 19,730
Provision for income taxes 4,591 3,590 7,335 5,722
------- ------- ------- -------
NET INCOME $ 11,243 $ 8,789 $ 17,960 $ 14,008
------- ------- ------- -------
------- ------- ------- -------
NET INCOME PER SHARE $ 0.43 $ 0.36 $ 0.69 $ 0.58
------- ------- ------- -------
------- ------- ------- -------
Common and common equivalent shares used in
computing per share amounts 26,322 24,173 26,180 24,281
------- ------- ------- -------
------- ------- ------- -------
See notes to condensed consolidated financial statements.
The Company has reclassified certain prior-year balances to conform with current-year presentation.
2
</TABLE>
<PAGE>
VERIFONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $17,960 $14,008
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,383 9,588
Deferred income taxes (1,929) (22)
Net decrease (increase) in receivables,
inventories and prepaid expenses 847 (28,838)
Net increase in payables, accruals
and other current liabilities 16,253 6,352
Other, net (442) 311
--- ---
Net cash provided by operating activities 43,072 1,399
------ -----
Cash flows from investing activities:
Capital expenditures (13,853) (11,645)
Acquisition of other assets (3,992) (1,726)
Available-for-sale investments:
Purchases (56,242) (10,542)
Maturities 8,327 29,574
Held-to-maturity investments:
Maturities ----- 7,885
------ -----
Net cash (used for) provided by investing activities (65,760) 13,546
------ ------
Cash flows from financing activities:
Proceeds of long-term debt 3,932 1,283
Payments of long-term debt (2,664) (9,536)
Proceeds from issuance of common stock 12,997 4,174
Purchase of treasury stock (16,858) (14,543)
------ ------
Net cash used for financing activities (2,593) (18,622)
----- ------
Net decrease in cash and cash equivalents (25,281) (3,677)
Cash and cash equivalents at beginning of period 72,882 43,831
------ ------
Cash and cash equivalents at end of period $47,601 $40,154
------ ------
------ ------
</TABLE>
See notes to condensed consolidated financial statements.
The Company has reclassified certain prior-year balances to conform with
current-year presentation.
3
<PAGE>
VERIFONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
INTERIM FINANCIAL STATEMENTS
The interim financial information furnished is unaudited. In the opinion of
management, financial statements included in this report reflect all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the results of operations for the interim
periods covered. The interim results are not necessarily indicative of the
results to be expected for the entire year.
This financial information should be read in conjunction with the Company's
audited financial statements for the year ended December 31, 1995 filed with the
Company's Annual Report on Form 10-K.
INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of (in thousands):
June 30, December 31,
1996 1995
---- ----
Raw materials $38,493 $39,183
Work in process 7,074 6,369
Finished goods 21,351 31,059
------- -------
$66,918 $76,611
------- -------
------- -------
BUSINESS COMBINATION
In November 1995, the Company merged with Enterprise Integration Technologies
Corporation ("EIT") and TimeCorp Systems, Inc. ("TimeCorp"). EIT and TimeCorp
outstanding stock was exchanged for Common Stock of VeriFone at rates of
approximately 0.77 and 0.15 VeriFone share for each share of outstanding EIT and
TimeCorp stock, respectively. A total of 1,188,757 shares of VeriFone's Common
Stock were issued in connection with the mergers. The mergers were accounted
for as poolings of interests and, accordingly, the Company's consolidated
financial statements and notes to consolidated financial statements have been
restated to include the results of EIT and TimeCorp.
4
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CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash on deposit with banks and highly
liquid investments with a maturity from date of purchase of 90 days or less.
Short-term investments consist of high-quality money market instruments with
original maturities greater than 90 days. Marketable investments include
$13,427,000 and $57,344,000 of cash equivalents, and $57,854,000 and $9,939,000
of short-term investments at June 30, 1996 and December 31, 1995, respectively.
Available-for-sale securities are carried at fair market value with unrealized
gains or losses, net of tax, included in the Stockholder's Equity section of the
Balance Sheet. The Company had an unrealized loss of $129,000 and an unrealized
gain of $33,000, net of tax, on its available-for-sale securities at June 30,
1996 and December 31, 1995, respectively.
OTHER ASSETS
Included in other assets is an investment in available-for-sale securities
carried at fair market value with unrealized gains or losses, net of tax,
included in the Stockholder's Equity section of the Balance Sheet. The Company
had an unrealized gain of $27,435,000, net of tax, on its available-for-sale
securities at June 30, 1996.
RECLASSIFICATION
The Company has reclassified certain prior-year balances to conform with
current-year presentation.
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
All references herein to the "Company" mean VeriFone, Inc. and its consolidated
subsidiaries.
In November 1995, the Company merged with Enterprise Integration Technologies
Corporation ("EIT") and TimeCorp Systems, Inc. ("TimeCorp"). The mergers have
been accounted for as poolings of interest, and accordingly, the financial
results for all periods have been restated to include the results of EIT and
TimeCorp.
Forward-looking statements in this Management's Discussion and Analysis --
including statements regarding international markets; gross margins; research
and development expenses; selling, general and administrative expenses;
liquidity and cash needs; and the Company's plans and strategies -- are all
based on current expectations, and the Company assumes no obligation to update
this information. Numerous factors could cause actual results to differ from
those described in the forward-looking statements, including the factors set
forth below under the heading "Factors That May Affect Future Results" (which
are also discussed in the Company's Annual Report on Form 10-K for 1995). The
Company cautions investors that its business is subject to significant risks and
uncertainties.
The Company's net revenues during the second quarter of 1996 increased 31.7% to
$125.0 million, from $94.9 million during the second quarter of 1995. The
Company's net revenues in the first six months of 1996 increased 30.2% to
$227.9 million, from $175.0 million in the same period in 1995.
UNITED STATES OPERATIONS -- The following table sets forth, by market, revenues
from sales in the United States for the second quarter and first six months of
1996 and 1995, and the percentage change year-over-year:
6
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<TABLE>
<CAPTION>
Revenues
Second Quarter of:
(IN MILLIONS) Percentage
1996 1995 Change
---- ---- ------
<S> <C> <C> <C>
Financial retail $51.8 $41.1 26.0%
Petroleum/convenience-store 12.8 8.5 50.6
Multi-lane retail 6.3 6.4 (1.6)
Healthcare and Government 2.1 1.9 10.5
Other 2.5 2.2 13.6
----- ----- -----
United States net revenues $75.5 $60.1 25.6%
----- ----- -----
----- ----- -----
Revenues
Six Months of:
(IN MILLIONS) Percentage
1996 1995 Change
---- ---- ------
Financial retail $96.2 $79.9 20.4%
Petroleum/convenience-store 20.5 13.5 51.9
Multi-lane retail 14.7 13.5 8.9
Healthcare and Government 3.4 3.1 9.7
Other 5.7 4.4 29.5
----- ----- -----
United States net revenues $140.5 $114.4 22.8%
----- ----- -----
----- ----- -----
</TABLE>
The increase in revenues from sales in the United States during the second
quarter and first six months of 1996 was due primarily to increased sales in
the financial retail market and petroleum/convenience-store market.
Revenue from the financial retail market as a percentage of total United
States revenue was relatively flat during the second quarter and first six
months of 1996 when compared to the same periods in 1995. Revenue growth in
the financial retail market during the second quarter and first six months of
1996 was due primarily to continued acceptance of credit and debit card
transaction systems.
Revenue growth in the petroleum/convenience-store market during the second
quarter and first six months of 1996 was due primarily to demand for Ruby
SuperSystems and OMNI 490 terminals by major oil companies, independent
service stations, and convenience-store chains.
Revenue from the government/healthcare market during the first six months of
1996, compared to the first six months of 1995, was relatively stable.
Revenue from the government/healthcare market in the second quarter of 1996
was due primarily to shipments of Emerald SuperSystems for the expansion of
the Arkansas Medicaid program and Southeastern Pennsylvania Transit Authority.
7
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Revenue from the multi-lane retail market was relatively flat in the second
quarter of 1996 while increasing in the first six months of 1996, compared to
the same periods in 1995, due primarily to sales of the Company's OMNI 490
system to supermarket chains and mass merchandisers.
INTERNATIONAL OPERATIONS -- The following table sets forth, by geographic
region, revenues from sales outside the United States for the second quarter
and first six months of 1996 and 1995, and the percentage change
year-over-year:
<TABLE>
<CAPTION>
Revenues
Second Quarter of:
(IN MILLIONS) Percentage
1996 1995 Change
---- ---- ------
<S> <C> <C> <C>
Europe, Middle East, Africa $15.3 $18.0 (15.0)%
Americas 14.6 7.5 94.7
Asia-Pacific 19.6 9.3 110.8
----- ----- -----
International net revenues $49.5 $34.8 42.2%
----- ----- -----
----- ----- -----
Revenues
Six Months of:
(IN MILLIONS) Percentage
1996 1995 Change
---- ---- ------
Europe, Middle East, Africa $30.1 $28.4 6.0%
Americas 26.0 15.7 65.6
Asia-Pacific 31.3 16.5 89.7
----- ----- -----
International net revenues $87.4 $60.6 44.2%
----- ----- -----
----- ----- -----
</TABLE>
The increase in revenues from sales outside the United States during the
second quarter of 1996 was driven by worldwide demand for electronic
payments, the expansion of chip-card opportunities, and the continued
development of new country markets. In the second quarter of 1996, sales
outside the United States represented 39.7% of net revenues, compared with
36.6% of net revenues in the same period of 1995. For the first six months
of 1996, sales outside the United States represented 38.4% of the Company's
net revenues, compared with 34.6% of net revenues in the same period of 1995.
Growth in international sales during the second quarter and first six months
of 1996 occurred in the Asia-Pacific region and Americas region. Growth in
the Asia-Pacific region was due primarily to sales in the People's Republic
of China, Japan and Australia. Growth in the Americas region was due
primarily to sales in Canada, Mexico and Argentina. Sales in the
8
<PAGE>
Europe, Middle East and Africa region declined in the second quarter of 1996
due primarily to lower demand in Germany and Italy.
The Company plans to continue to expand its global infrastructure with the
aim of increasing market share in established country markets, as well as
opening new country markets. Achievement of these plans is subject to
various risks, as discussed below under "Factors That May Affect Future
Results."
International growth has increased the Company's exposure to the effects of
foreign currency fluctuations. The Company engages in a foreign currency
management program that is intended to minimize the effects of these
fluctuations. This program includes the use of foreign exchange contracts to
hedge its intercompany balances. The gains and losses on these contracts
were immaterial as the majority of the Company's sales are denominated in
U.S. dollars.
PRODUCT ANALYSIS -- The following table sets forth, by product type, net
revenues for the second quarter and first six months of 1996 and 1995, and
the percentage change year-over-year:
<TABLE>
<CAPTION>
Net Revenues
Second Quarter of:
(IN MILLIONS) Percentage
1996 1995 Change
---- ---- ------
<S> <C> <C> <C>
High-Functionality Systems $50.1 $39.3 27.5%
Related Products (such as Printers
and PIN Pads) 35.5 29.7 19.5
Fully Integrated Systems 13.1 7.5 74.7
Basic Terminals 4.9 4.6 6.5
Other 21.4 13.8 55.1
----- ----- -----
$125.0 $94.9 31.7%
----- ----- -----
----- ----- -----
Net Revenues
Six Months of:
(IN MILLIONS) Percentage
1996 1995 Change
---- ---- ------
High-Functionality Systems $92.8 $72.4 28.2%
Related Products (such as Printers
and PIN Pads) 63.2 52.9 19.5
Fully Integrated Systems 22.8 12.4 83.9
Basic Terminals 9.1 9.7 (6.2)
Other 40.0 27.6 44.9
----- ----- -----
$227.9 $175.0 30.2%
----- ----- -----
----- ----- -----
</TABLE>
The increase in net revenues in the second quarter and first six months of
1996 was due to a number of factors, including among them a shift in product
mix from basic terminals to high-functionality systems and fully integrated
systems (such as the OMNI 490 and the Ruby Super-System), and increased demand
9
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for related products (such as printers and PIN pads). The increase in
high-functionality systems and related products was due primarily to
increased demand for complete transaction automation systems (which include
related products), increased demand for stand-alone printers for integration
with other systems, and growth in the international markets and in the United
States multi-lane retail and petroleum/convenience-store markets, which have
a greater demand for high-functionality systems and fully integrated products.
Unit shipments of products, other than related products, increased 28.2% with
250,000 units shipped in the second quarter of 1996, compared with 195,000
units shipped in the second quarter of 1995. Unit shipments of products,
other than related products, increased 26.8% to 464,000 in the first six
months of 1996, compared with 366,000 in the first six months of 1995.
GROSS MARGINS (NET REVENUES LESS COST OF REVENUES) -- Gross margins were
46.7% and 48.7% in the second quarter of 1996 and 1995, respectively.
Gross margins for the first six months of 1996 and 1995 were 46.9% and
48.7%, respectively. The decrease in gross margins was due primarily to shifts
in the Company's business and product mix, including a shift toward higher
volumes of lower margin-related products (such as printers and PIN pads).
Factors affecting gross margins during the first six months of 1996 also
included a higher proportion of sales to international markets, which tend
to have lower gross margins due to competitive pricing pressures.
The Company currently expects its gross margins to continue to be affected by
changes in business segment mix, product mix, competition and other factors.
R&D EXPENSES -- Research and development (R&D) expenses increased 26.1% in the
second quarter of 1996 over the same period in 1995, and represented 11.2% of
net revenues in the second quarter of 1996, compared with 11.7% of net revenues
for the same period in 1995. R&D expenses represented 11.7% and 12.5% of net
revenues for the first six months of 1996 and 1995, respectively. The increase
in R&D expenses was due to a number of factors, including among them investments
in product development for the Company's core products, and the development of
new system platforms in the Internet commerce and chip-card markets.
The Company expects that, in the long term, R&D expenses will continue to
increase in absolute dollars but may decline as a percentage of net revenues.
The Company expects that, in the short-term, R&D expenses may increase both in
absolute dollars and as a percentage of net revenues as the Company invests in
R&D for new markets such as Internet commerce. In this regard, the Company
currently plans to spend an additional $2 million in operating expenses in the
third quarter of 1996 for its Internet commerce division (above the Company's
previously planned spending levels), a significant portion of which will be for
R&D expenses.
SG&A EXPENSES -- Selling, general and administrative (SG&A) expenses
increased 26.3% in the second quarter of 1996 over the same period in 1995,
and represented 23.4% of net revenues in the second quarter of 1996, compared
with 24.4% of net revenues for the same period in 1995. SG&A expenses
represented 24.7% and 25.3% of net revenues for the six months of 1996 and
1995, respectively.
10
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The Company currently expects to make additional investments in sales and
marketing to further develop established international markets, introduce
products to new international markets, and to develop additional vertical
markets and distribution channels on a global basis. (Achievement of these
plans is subject to various risks, as discussed below under "Factors That May
Affect Future Results.") Accordingly, the Company currently expects that its
SG&A expenses will continue to increase in absolute dollars. However, the
Company also expects that its SG&A expenses may decline as a percentage of net
revenues in the future.
INTEREST INCOME AND OTHER, NET -- Net interest income for the second quarter of
1996 was $0.8 million compared with $0.4 million for the same period in 1995.
Net interest income was $1.4 million and $0.9 million for the first six months
of 1996 and 1995, respectively. The increase in interest income for the second
quarter and first six months of 1996 was due primarily to higher investment
balances.
TAX RATE -- The Company's combined federal, state and foreign effective income
tax rate was 29.0% for both the second quarter of 1996 and 1995. The combined
tax rate differs from the federal statutory rate primarily because the Company
does not provide for U.S. federal income taxes on the undistributed earnings of
its foreign subsidiaries, which the Company intends to permanently reinvest in
those operations.
NET INCOME -- In the second quarter of 1996, net income increased 27.9% over the
same period in 1995. For the first six months of 1996, net income increased
28.2% over the same period in 1995. Earnings per share increased 19.4% to $0.43
in the second quarter of 1996, compared with $0.36 in the second quarter of
1995. Earnings per share were $0.69 and $0.58 for the first six months of 1996
and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and short-term investments at June 30, 1996 increased
to $105.5 million from $82.8 million at December 31, 1995. The Company
experienced positive cash flow from operations of $43.1 million during the
first six months of 1996 as a result of net income, an increase in trade
payables and other accrued liabilities, and depreciation and amortization.
The Company used $65.8 million for investing in the first six months of 1996,
which included an increase in investments of $47.9 million, as well as the
purchase of fixed assets for operations and the construction of the new
manufacturing facility in Kunshan, People's Republic of China. The Company
used $2.6 million for financing activities during the first six months of
1996, which included the repurchase of shares partially offset by proceeds
from issuance of shares.
At June 30, 1996, the Company's principal sources of liquidity included
$105.5 million in cash, cash equivalents, and short-term investments;
$30.0 million available under an unsecured bank line of credit, expiring in
April 1997; and $5.0 million available under a bank line of credit for foreign
11
<PAGE>
exchange transactions, expiring in January 1997. At June 30, 1996, no
borrowings were outstanding under the $30.0 million line of credit, and
$1.5 million was outstanding under the $5.0 million line of credit. In
connection with the activities of VeriFone Finance, the Company also has
non-recourse notes payable to a financing company due in monthly installments,
with interest rates ranging from 7.93% to 9.32%. These notes mature at various
dates through June 1998 and are secured by all rights to certain leases,
including a security interest in equipment under certain lease agreements and
future minimum lease payments. At June 30, 1996, the Company had $2.2 million
outstanding under these notes. The Company also has a $12.0 million
unsecured line of credit for foreign exchange transactions that expires in
May 1997. At June 30, 1996, $9.2 million was outstanding under this line of
credit. In addition, at June 30, 1996, the Company had obligations under
capital leases of $1.2 million.
Inventories at June 30, 1996 decreased to $66.9 million, compared with
$76.6 million at December 31, 1995. This decline was due primarily to
inventory management programs.
Net trade accounts receivable at June 30, 1996 increased to $100.7 million
from $96.4 million at December 31, 1995. Days sales outstanding were 73 days
at June 30, 1996, compared with 79 days at December 31, 1995.
During the first six months of 1996, the Company repurchased 355,200 shares
of outstanding Common Stock in the open market for an aggregate purchase
price of $16.9 million. In accordance with the Company's stock repurchase
program, these shares were used primarily for issuance under the Company's
employee stock purchase plan and stock option plans. The Company is
authorized to repurchase up to 1.5 million additional shares, for a purchase
price of up to $67.5 million, during the third and fourth quarters of 1996.
The Company currently expects to have significant cash needs during 1996 and
1997 in connection with various events, including the development of new
products, repurchase of shares, and possible acquisitions. However, the Company
currently believes that the liquidity provided by its ongoing operations,
existing cash, cash equivalents, and short-term investments, as well as the
borrowing arrangements described above, will be sufficient to meet its projected
cash needs.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's quarterly operating results -- including revenues; gross margins;
research and development expenses; selling, general and administrative expenses;
and net income -- are subject to various risks and uncertainties, including
risks and uncertainties related to the composition, timing and size of orders
from and shipments to major customers; variations in product mix and the mix
between leases and sales; variations in product cost; infrastructure costs;
obsolescence of inventory; competitive pressures; and other factors discussed
below. Accordingly, the Company's operating results may vary materially from
quarter to quarter.
12
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One of the more significant risks potentially affecting the Company's operating
results is that a substantial portion of the Company's net revenues in each
quarter generally results from shipments during the latter part of the quarter.
Because the Company establishes its operating expense level based on expected
revenue, if anticipated shipments in any quarter do not occur as expected, net
profits may be adversely affected. For these and other reasons, the Company may
not learn of shortfalls in revenues, earnings or other financial results
relative to the expectations of securities analysts until late in a quarter.
Any such shortfall could have an immediate and significant adverse effect on the
trading price of the Company's Common Stock.
The Company has recently entered new markets, including the internet commerce
market and the labor management software market, primarily through the
acquisition of other businesses. The Company does not expect that the net
revenues or profits from these new markets and businesses will be material in
the near term. At present, in addition to being relatively small, these new
markets are undeveloped and rapidly changing. If the markets do not develop as
expected by the Company, or the Company's strategies for these markets are
unsuccessful, or the Company fails to successfully and timely develop and
introduce products suitable for these markets, the Company may be adversely
affected.
The Company may make additional acquisitions in the future. Acquisitions
require significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired businesses
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to successfully integrate such new companies
into its operations. Future acquisitions by the Company could also result in
substantial cash expenditures, potentially dilutive issuance of equity
securities, the incurrence of additional debt and contingent liabilities, and
amortization expenses related to goodwill and other intangible assets, which
could adversely affect the Company and its future operating results.
In general, as discussed above (under "Results of Operations"), the Company's
future results are dependent on its ability to successfully develop, manufacture
and market products for customers worldwide. In this regard, the Company's
future growth is very dependent on the Company's ability to successfully and
timely enhance existing products, develop and introduce new products, establish
new distribution channels, develop affiliations with leading market participants
in order to facilitate product development and distribution, and certify its
existing and new products with service providers, telephone companies and
others. The failure to achieve these and other objectives could limit future
growth and have an adverse effect on the Company and its future operating
results. On a related note, the pressure to develop and enhance products, and
to establish and expand markets, may cause the Company's research and
development expenses and selling, general and administrative expenses to
increase substantially, which could also have an adverse effect on the Company
and its future operating results.
As discussed above (under "Results of Operations -- International Operations"),
international operations, including sales and manufacturing, is an increasingly
important contributor to the Company's overall operations. As a result,
operating results are increasingly affected by the risks of such activities,
including fluctuations in currency exchange rates, changes in international
regulatory requirements, international staffing and employment issues, tariffs
and other trade barriers, import and export controls, the burden of complying
13
<PAGE>
with foreign laws, and political and economic instability. The Company's
manufacturing facilities, which are located in Taiwan and the People's
Republic of China, are subject to particular risks relating to political
developments and trade barriers. The inability to effectively manage these
and other risks could adversely affect the Company and its future operating
results.
Most of the Company's products are used to process payment transactions, and
thus, the security features of the products are important. In general, the
Company's products are designed to comply with industry practices relating to
security in payment transactions. However, no security feature, whether or not
an industry practice, is infallible. In the event of a significant breach of
the security features in the Company's products, the Company and its future
operating results could be adversely affected.
The Company is currently dependent on single suppliers for certain product
components, including mask-programmed microcontrollers, various printer
mechanisms, display devices and certain magnetic parts. The failure of any such
supplier to meet its obligations could result in significant manufacturing
delays that could adversely affect the Company and its future operating results.
The Company's manufacturing and distribution facilities, as well as a portion of
the Company's research and development, sales and administrative functions, are
located near major earthquake faults. In the event of a major earthquake, the
Company and its future operating results could be adversely affected.
The Company's operations are also subject to laws, regulations, governmental
policies and product certification requirements worldwide. Changes in such
laws, regulations, policies or requirements could affect the demand for the
Company's products or result in the need to modify products, which may involve
substantial costs or delays in sales and could have an adverse effect on the
Company and its future operating results.
In recent years, the stock market in general, and the market for technology
stocks in particular, including the Company's Common Stock, have experienced
extreme price fluctuations. There can be no assurance that the market price of
the Company's Common Stock will not experience significant fluctuations in the
future.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1996 annual meeting of the Company's stockholders was held on
May 10, 1996.
(b) Management's nominees to the Board of Directors for Class III
Directors were elected. Following the 1996 annual meeting, the Board
of Directors consisted of:
CLASS TERM EXPIRES
----- ------------
H. H. Haight IV II 1998
J. Robert Harcharik II 1998
William N. Melton II 1998
Thomas E. Peterson III 1999
John R. C. Porter I 1997
A. Michael Spence I 1997
Hatim A. Tyabji III 1999
R. Elton White III 1999
Mr. Melton resigned as a director effective July 19, 1996.
(c) Management's nominees to the Board of Directors for Class III
Directors were elected by the following vote: For all nominees
22,595,917; Withheld authority for all nominees 104,503; Other
5,682.
The amendment and restatement of the Company's Non-Employee Director
Stock Option Plan was approved by the following vote: For
18,627,682; Against 3,895,833; Abstain 181,887; No vote 700.
The amendment and restatement of the Company's Incentive Stock Option
Plan and 1987 Supplemental Stock Option Plan was approved by the
following vote: For 17,087,082; Against 5,440,048; Abstain 178,972;
No vote 0.
The ratification of the selection of Ernst & Young as the Company's
independent auditors for 1996 was approved by the following vote: For
22,539,779; Against 56,320; Abstain 110,003; No vote 0.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11.1 - Statement of Computation of Earnings per Share
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERIFONE, INC.
(Registrant)
By: /S/JOSEPH M. ZAELIT
--------------------
Joseph M. Zaelit
Senior Vice President, Finance and
Administration, and Chief Financial
Officer (Authorized Officer and
Principal Financial Officer)
Date: July 30, 1996
17
<PAGE>
EXHIBIT 11.1
SHARES USED IN EARNINGS PER SHARE COMPUTATION
(unaudited, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary
Average shares outstanding 25,218 23,770 25,159 23,834
Net effect of dilutive stock options-
based on the treasury stock method
using average market price 1,104 403 1,021 447
------ ------ ------ ------
Total 26,322 24,173 26,180 24,281
------ ------ ------ ------
------ ------ ------ ------
Net Income $11,243 $8,789 $17,960 $14,008
------- ------- ------- -------
------- ------- ------- -------
Per share amount $0.43 $0.36 $0.69 $0.58
------ ------ ------ ------
------ ------ ------ ------
Fully diluted
Average shares outstanding 25,218 23,770 25,159 23,834
Net effect of dilutive stock options-
based on the treasury stock method
using the year-end market price, if
higher than average market price 1,107 490 1,111 501
------ ------ ------ ------
------
Total 26,325 24,260 26,270 24,335
------ ------ ------ ------
------ ------ ------ ------
Net Income $11,243 $8,789 $17,960 $14,008
------- ------ ------- -------
------- ------ ------- -------
Per share amount $0.43 $0.36 $0.68 $0.58
------ ------ ------ ------
------ ------ ------ ------
18
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 47,601
<SECURITIES> 57,854
<RECEIVABLES> 105,387
<ALLOWANCES> (4,677)
<INVENTORY> 66,918
<CURRENT-ASSETS> 312,408
<PP&E> 108,564
<DEPRECIATION> (52,033)
<TOTAL-ASSETS> 455,963
<CURRENT-LIABILITIES> 97,918
<BONDS> 0
0
0
<COMMON> 253
<OTHER-SE> 305,223
<TOTAL-LIABILITY-AND-EQUITY> 455,963
<SALES> 124,959
<TOTAL-REVENUES> 124,959
<CGS> 66,661
<TOTAL-COSTS> 109,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,834
<INCOME-TAX> 4,591
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,243
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
