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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
VERIFONE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
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[LOGO]
THREE LAGOON DRIVE
REDWOOD CITY, CALIFORNIA 94065
March 27, 1997
Dear Stockholder:
On behalf of VeriFone, Inc. (the "Company"), I cordially invite you to
attend the Annual Meeting of Stockholders to be held on May 9, 1997, at 10:00
a.m. local time, at the Stanford Park Hotel, 100 El Camino Real, Menlo Park,
California 94025. At the meeting, stockholders will be asked to elect directors,
approve amendments to the Company's employee stock option plans and employee
stock purchase plan, approve the adoption of an employee restricted stock bonus
plan, and ratify the selection of Ernst & Young LLP as the Company's independent
auditors for 1997. The accompanying Notice and Proxy Statement describe these
proposals. We urge you to read this information carefully.
The directors and officers of the Company hope that as many stockholders as
possible will be present at the meeting. Because the vote of each stockholder is
important, we ask that you sign and return the enclosed proxy card in the
envelope provided, whether or not you now plan to attend the meeting. This will
not affect your right to attend the meeting or to change your vote at the
meeting.
We appreciate your cooperation and interest in the Company. To assist us in
preparation for the meeting, please return your proxy card at your earliest
convenience.
Sincerely,
/s/ Hatim A. Tyabji,
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
<PAGE>
[LOGO]
THREE LAGOON DRIVE
REDWOOD CITY, CALIFORNIA 94065
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 9, 1997
------------------------
To the Stockholders of VeriFone, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of VeriFone, Inc., a Delaware corporation (the "Company"), will be
held on May 9, 1997, at 10:00 a.m. local time, at the Stanford Park Hotel, 100
El Camino Real, Menlo Park, California 94025, for the following purposes:
1. To elect three Class I directors to serve until the 2000 Annual Meeting
of Stockholders and until each director's successor is elected and
qualified;
2. To approve the Company's Incentive Stock Option Plan and 1987
Supplemental Stock Option Plan, as amended, to increase the number of
shares issuable pursuant to options granted under such plans by 1,440,000
shares;
3. To approve the Company's Employee Stock Purchase Plan, as amended, to
increase the number of shares issuable pursuant to such plan by 480,000
shares;
4. To approve the adoption of the Company's Employee Restricted Stock Bonus
Plan, which provides for the issuance under such plan of 100,000 shares;
5. To ratify the selection of Ernst & Young LLP as the Company's
independent auditors for 1997; and
6. To transact such other business as may properly come before the Annual
Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors of the Company has fixed the close of business on
March 7, 1997, as the record date for the determination of stockholders entitled
to notice of and to vote at the Annual Meeting and at any adjournment thereof.
By Order of the Board of Directors
/s/ William G. Barmeier
SENIOR VICE PRESIDENT, GENERAL
COUNSEL AND SECRETARY
Redwood City, California
March 27, 1997
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ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE
YOUR REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS
POSTAGE-PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT
PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF
YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD
OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE
MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
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VERIFONE, INC.
THREE LAGOON DRIVE
REDWOOD CITY, CALIFORNIA 94065
------------------------
PROXY STATEMENT
---------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors (the
"Board of Directors" or the "Board") of VeriFone, Inc., a Delaware corporation
(the "Company"), for use at the Annual Meeting of Stockholders to be held on May
9, 1997, at 10:00 a.m. local time (the "Annual Meeting") and at any adjournment
or postponement thereof, for the purposes set forth herein and in the
accompanying Notice of Annual Meeting. The Annual Meeting will be held at the
Stanford Park Hotel, 100 El Camino Real, Menlo Park, California 94025. The
Company intends to mail this proxy statement and accompanying proxy on or about
March 27, 1997, to all stockholders entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. The Company has
engaged the firm of McCormick & Pryor, Ltd. to assist the Company in the
distribution and solicitation of proxies and has agreed to pay McCormick &
Pryor, Ltd. a fee of $6,000 plus expenses for its services. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their name shares of the Company's common stock (the
"Common Stock") beneficially owned by others to forward to such beneficial
owners. The Company may reimburse persons representing beneficial owners of
Common Stock for their costs of forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail and by McCormick &
Pryor, Ltd. may be supplemented by telephone, telegram or personal solicitation
by directors, officers or other regular employees of the Company. No additional
compensation will be paid to directors, officers or other regular employees for
such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on March 7,
1997 (the "Record Date") will be entitled to notice of and to vote at the Annual
Meeting. At the close of business on the Record Date, the Company had
outstanding and entitled to vote 23,310,685 shares of Common Stock. Each holder
of record of Common Stock on such date will be entitled to one vote for each
share held on all matters to be voted upon at the Annual Meeting.
The presence at the Annual Meeting, in person or by proxy, of a majority of
the outstanding shares of Common Stock as of the Record Date will constitute a
quorum for transacting business at the Annual Meeting. Abstentions and broker
non-votes are counted towards a quorum. Provided a quorum exists, directors will
be elected by a plurality of the votes present in person or represented by proxy
and entitled to vote at the Annual Meeting, and the affirmative vote of a
majority of the shares present in person or represented by proxy and entitled to
vote at the Annual Meeting will be required for approval of all other matters
acted on by the stockholders at the Annual Meeting.
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All votes will be tabulated by the inspector of elections appointed for the
Annual Meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes, whereas broker non-votes will not be
counted for any purposes in determining whether a matter has been approved.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, Three
Lagoon Drive, Redwood City, California 94065, a written notice of revocation or
a duly executed proxy bearing a later date, or it may be revoked by attending
the Annual Meeting and voting in person. Attendance at the meeting will not, by
itself, revoke a proxy.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Board of Directors is presently comprised of eight directors.
In the event of a vacancy on the Board resulting from death, resignation,
disqualification, removal or other causes, such vacancy shall be filled by
either (i) the affirmative vote of the holders of a majority of the voting power
of the then outstanding shares of capital stock of the Company entitled to vote
generally in the election of directors voting together as a single class or (ii)
the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum of the Board. Newly created directorships
resulting from any increase in the number of directors shall, unless the Board
determines by resolution that any such newly created directorship shall be
filled by the stockholders, be filled only by the affirmative vote of the
directors then in office, even though less than a quorum of the Board. Any
director who is duly elected shall hold office for the remainder of the full
term of the class of directors (explained below) in which the new directorship
was created or the vacancy occurred and until such director's successor shall
have been elected and qualified.
The Company's Restated Certificate of Incorporation and Bylaws provide that
the Company's Board of Directors shall be divided into three classes, with Class
II presently consisting of two directors and Classes I and III each presently
consisting of three directors, and each class having a staggered term of three
years. The term of office of the Class I directors expires at the Annual
Meeting. To fill the positions held by these directors, the Board has nominated
three persons for election as Class I directors: John R. C. Porter, Clinton V.
Silver and A. Michael Spence, all of whom are currently directors of the
Company, with Messrs. Porter and Spence having been elected by the stockholders
and Mr. Silver having been elected by the directors. If elected at the Annual
Meeting, each of the nominees would serve until the 2000 Annual Meeting and
until his successor is elected and qualified or until such director's earlier
death, resignation or removal.
Shares of Common Stock represented by executed proxies will be voted, if
authority to do so is not withheld, for the election of the nominees named
below. If any nominee should become unavailable for election as a result of an
unexpected occurrence, such shares will be voted for the election of such
substitute nominee as management may propose. Each person nominated for election
has agreed to serve if elected, and management has no reason to believe that any
nominee will be unavailable to serve.
Set forth below is biographical information for each person nominated and
each person whose term of office as a director will continue after the Annual
Meeting.
NOMINEES FOR ELECTION AS CLASS I DIRECTORS FOR A THREE-YEAR TERM EXPIRING AT
THE 2000 ANNUAL MEETING
JOHN R. C. PORTER
Mr. Porter, age 44, has been a director of the Company since 1985 and was
Chairman of the Board from 1985 until 1986. He has been Chairman of the Board of
Directors of Cast Alloys, Inc., a precision
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stainless steel foundry with operations in California and Mexico, since 1986. He
has also been Chairman of the Board of Party America, Inc., a specialty retailer
in California, Utah and Colorado, since 1990.
CLINTON V. SILVER
Mr. Silver, age 67, has been a director of the Company since 1997. He is
currently a consultant in the retailing industry. From 1991 to 1994, he was
Deputy Chairman and Joint Managing Director of Marks & Spencer Plc., a retailing
firm. Mr. Silver is a director of three other public companies: Hillsdown
Holdings Plc., Pentland Group Plc. and Tommy Hilfiger Corp.
A. MICHAEL SPENCE
Dr. Spence, age 53, has been a director of the Company since 1992. He has
been the Dean of the Stanford Graduate School of Business since 1990. From 1984
until 1990, he was Dean of the Faculty of Arts and Sciences at Harvard
University. Dr. Spence is a director of five other public companies: BankAmerica
Corporation, General Mills, Inc., Nike, Inc., Siebel Systems and Sun
Microsystems, Inc.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE.
CLASS II DIRECTORS CONTINUING IN OFFICE UNTIL THE 1998 ANNUAL MEETING
H. H. HAIGHT IV
Mr. Haight, age 63, has been a director of the Company since 1986. He has
been Senior Vice President of Advent International Corporation, an international
investment company, since 1985. Mr. Haight is a director of two other public
companies: Genelabs Technologies, Inc., and China Treasure Telecom, Ltd.
J. ROBERT HARCHARIK
Mr. Harcharik, age 56, has been a director of the Company since 1995. He is
currently an independent consultant in the telecommunications industry. From
1993 to 1995, he was General Manager of the Data Services Division, MCI
Telecommunications. From 1986 to 1993, he was an independent consultant in the
telecommunications industry, and prior to 1986, he held several senior positions
in the telecommunications industry, including President of MCI Digital
Information Services Company from 1982 to 1986, President of Tymnet from 1978 to
1981, and Co-Founder, Vice President and Director of Comnet from 1967 to 1972.
CLASS III DIRECTORS CONTINUING IN OFFICE UNTIL THE 1999 ANNUAL MEETING
THOMAS E. PETERSON
Mr. Peterson, age 61, has been a director of the Company since 1996. He has
been Vice Chairman of BankAmerica Corporation and Bank of America NT&SA since
1990, and held various other senior management positions with BankAmerica
Corporation and Bank of America NT&SA from 1987 to 1990. Mr. Peterson is a
director of another public company, BankAmerica Merchant Services, Inc., and is
a director of Visa International and Visa U.S.A.
HATIM A. TYABJI
Mr. Tyabji, age 52, has been a director of the Company since 1986. He has
also served as President and Chief Executive Officer of the Company since 1986
and as Chairman of the Board since 1992.
R. ELTON WHITE
Mr. White, age 54, has been a director of the Company since 1996. He is
currently a private investor. He was President of NCR Corporation from 1991 to
1994, and held various other senior management positions with NCR Corporation
from 1967 to 1991. Mr. White is a director of three other public companies:
Duriron Corporation, Keithley Instruments, Inc. and Kohl's Corporation.
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BOARD COMMITTEES AND MEETINGS
During 1996, the Board of Directors held four meetings and had several
standing Committees, including an Audit Committee and a Compensation Committee.
No incumbent Board member attended fewer than 75 percent of the aggregate of (i)
the total number of meetings of the Board of Directors which such director was
eligible to attend during 1996 and (ii) the total number of meetings held by any
committee of the Board upon which such director served and was eligible to
attend during 1996.
The Audit Committee reviews services provided by the Company's independent
auditors, reviews and evaluates the Company's accounting system and its system
of internal controls, and performs other related duties delegated to such
committee by the Board. The Audit Committee met three times during 1996. The
Audit Committee presently consists of Mr. Haight, Mr. Peterson and Mr. Porter.
The Compensation Committee performs such duties regarding compensation for
employees as the Board may delegate to such committee from time to time. The
Compensation Committee met five times during 1996. The Compensation Committee
presently consists of Mr. Harcharik, Dr. Spence and Mr. White. The Board has
delegated to Mr. Tyabji the authority to grant stock options under the Company's
employee stock option plans to Company employees who are not executive officers,
provided such grants are in accordance with guidelines approved by the
Compensation Committee.
The Company has a procedure for considering director nominees recommended by
stockholders. A stockholder may nominate one or more persons for election as
directors at a meeting only if the stockholder has given timely notice in proper
written form of his intent to make such nomination or nominations. To be timely,
a stockholder's notice must be delivered to or mailed and received by the
Secretary of the Company not later than 90 days prior to such meeting; provided,
however, that in the event that less than 100 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be received not later than the close of
business on the tenth day following the date on which such notice of the date of
such meeting was mailed or such public disclosure was made. To be in proper
written form, a stockholder's notice to the Secretary shall set forth: (i) the
name and address of the stockholder who intends to make the nominations and, as
the case may be, of the person or persons to be nominated; (ii) a representation
that the stockholder is a holder of record of Common Stock entitled to vote at
such meeting and, if applicable, intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (iii) if
applicable, a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (iv) such other information regarding each nominee to be
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission ("SEC") had the nominee been nominated, or intended to be nominated,
by the Board of Directors and (v) the consent of each nominee to serve as
director of the Company if so elected. The chairman of the meeting may refuse to
acknowledge the nomination of any person not made in compliance with the
foregoing procedure.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From August 1995 until July 1996, Mr. Tyabji, who is a director and the
Chief Executive Officer and President of the Company, served as a director of
CyberCash, Inc. and a member of the Compensation Committee of the CyberCash
Board of Directors. Mr. Melton, a director of the Company until July 1996, is a
director and the Chief Executive Officer of CyberCash, Inc.
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PROPOSAL 2
APPROVAL OF EMPLOYEE STOCK OPTION PLANS, AS AMENDED
In 1985, the Board of Directors adopted, and the stockholders subsequently
approved, the Company's Incentive Stock Option Plan, and in 1987, the Board of
Directors adopted, and the stockholders subsequently approved, the Company's
1987 Supplemental Stock Option Plan (collectively, as amended and restated, the
"Employee Option Plans"). As a result of a series of amendments, at December 31,
1996, there were 7,075,000 shares of the Company's Common Stock authorized for
issuance under the Employee Option Plans.
At December 31, 1996, options (net of canceled or expired options) covering
an aggregate of approximately 6,578,572 shares of the Company's Common Stock had
been granted under the Employee Option Plans, and only approximately 496,428
shares (plus any shares that might in the future be returned to the plans as a
result of cancellations or expiration of options) remained available for future
grant under the Employee Option Plans. In January 1997, the Board approved an
amendment to the Employee Option Plans, subject to stockholder approval, to
increase the number of shares authorized for issuance under the Employee Option
Plans from a total of 7,075,000 shares to 8,515,000 shares. The Board adopted
this amendment to ensure that the Company can continue to grant stock options to
employees at levels determined appropriate by the Board and the Compensation
Committee. During the last fiscal year, under the Employee Option Plans, the
Company granted to all current executive officers as a group options to purchase
279,500 shares at exercise prices of $32.63 to $50.75 per share and to all
employees (excluding executive officers) as a group options to purchase 953,328
shares at exercise prices of $29.25 to $49.50 per share.
Stockholders are requested in this Proposal 2 to approve the Employee Option
Plans, as amended. If the stockholders fail to approve this Proposal 2, the
number of shares authorized for issuance under the Employee Option Plans will
not be increased. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and entitled to vote at the
meeting will be required to approve the Employee Option Plans, as amended.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2.
The essential features of the Employee Option Plans are outlined below:
GENERAL DESCRIPTION AND PURPOSE
The Employee Option Plans together provide for the grant of both incentive
and nonstatutory stock options. Incentive stock options granted under the
Employee Option Plans are intended to qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code (the "Code").
Nonstatutory stock options granted under the Employee Option Plans are intended
not to qualify as incentive stock options under the Code. See "Federal Income
Tax Information" below for a discussion of the tax treatment of incentive and
nonstatutory stock options.
The Employee Option Plans were adopted to provide a means by which selected
directors, officers and employees of and consultants to the Company and its
affiliates could be given an opportunity to purchase stock in the Company, to
assist in retaining the services of employees holding key positions, to secure
and retain the services of persons capable of filling such positions and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
The Employee Option Plans, as amended prior to January 1997, provided that a
total of 7,075,000 shares of the Company's Common Stock may be issued pursuant
to options granted under the Employee Option Plans, subject to certain
adjustments described below. If options granted under the Employee Option Plans
expire or otherwise terminate without being exercised in full, the stock not
purchased pursuant to such options again becomes available for issuance pursuant
to exercises of options granted under the Employee Option Plans.
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ADMINISTRATION
The Employee Option Plans are administered by the Board of Directors of the
Company. The Board has the power to construe and interpret the Employee Option
Plans and, subject to the provisions of the Employee Option Plans, to determine
the persons to whom and the dates on which options will be granted, the number
of shares to be subject to each option, the time or times during the term of
each option within which all or a portion of such option may be exercised, the
exercise price, the type of consideration and other terms of the option. The
Board of Directors is authorized to delegate administration of the Employee
Option Plans to a committee composed of not fewer than two members of the Board,
and with respect to grants to employees who are not executive officers of the
Company, to a committee composed of one or more members of the Board. The Board
has delegated administration of the Employee Option Plans to the Compensation
Committee of the Board and has delegated to the Company's Chief Executive
Officer the authority to grant stock options to employees who are not executive
officers of the Company in accordance with guidelines approved by the
Compensation Committee. As used herein with respect to the Employee Option
Plans, the "Board" refers to the Compensation Committee as well as to the Board
of Directors itself.
Regulations under Section 162(m) of the Code require that the directors who
serve as members of the Compensation Committee must be "outside directors" if
option grants are to qualify as performance-based compensation. The Employee
Option Plans provide that, in the Board's discretion, directors serving on the
Committee will also be "outside directors" within the meaning of Section 162(m).
This limitation excludes from the Compensation Committee (i) current employees
of the Company, (ii) former employees of the Company receiving compensation for
past services (other than benefits under a tax-qualified pension plan), (iii)
current and former officers of the Company, (iv) certain directors currently
receiving direct or indirect remuneration from the Company in any capacity
(other than as a director), and (v) any person who is otherwise not considered
an "outside director" for purposes of Section 162(m). The Company's Compensation
Committee is composed of outside directors.
ELIGIBILITY FOR GRANT OF OPTIONS
Only selected key employees (including officers) of the Company and its
affiliates are eligible to receive incentive stock options under the Incentive
Stock Option Plan. Selected key employees (including officers) and consultants
of the Company and its affiliates are eligible to receive nonstatutory stock
options under the 1987 Supplemental Stock Option Plan. Directors who are not
salaried employees of or consultants to the Company or to any affiliate of the
Company are not eligible to participate in the Incentive Stock Option Plan, and
any director must expressly be made eligible to participate in the 1987
Supplemental Stock Option Plan. As of December 31, 1996, approximately 2,022
persons were eligible to participate under the Employee Option Plans.
No incentive stock option may be granted under the Incentive Stock Option
Plan to any person who, at the time of the grant, owns (or is deemed to own)
stock possessing more than 10 percent of the total combined voting power of the
Company or any affiliate of the Company, unless the option exercise price is at
least 110 percent of the fair market value of the stock subject to the option on
the date of grant, and the term of the option does not exceed five years from
the date of grant. Furthermore, the aggregate fair market value, determined at
the time of grant, of the shares of Common Stock with respect to which incentive
stock options are exercisable for the first time by an optionee during any
calendar year (under all such plans of the Company and its affiliates) may not
exceed $100,000.
The Employee Option Plans contain an annual per-employee limitation that no
employee may be granted options during a calendar year to purchase more than
750,000 shares of the Company's Common Stock. The purpose of this limitation is
generally to permit the Company to continue to be able to deduct for tax
purposes the compensation attributable to the exercise of options granted under
the Employee Option Plans or certain dispositions of stock purchased by the
exercise of such options.
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TERMS OF OPTIONS
The following is a description of the permissible terms of options under the
Employee Option Plans. Individual option grants may be more restrictive as to
any or all of the permissible terms described below.
EXERCISE PRICE; PAYMENT. The exercise price of incentive stock options
under the Incentive Stock Option Plan may not be less than the fair market value
of the Common Stock subject to the option on the date of the option grant, and
in some cases (see "Eligibility" above), may not be less than 110 percent of
such fair market value. The exercise price of nonstatutory options under the
1987 Supplemental Stock Option Plan may not be less than the fair market value
of the Common Stock subject to the option on the date of the option grant. At
March 14, 1997, the closing price of the Company's Common Stock as reported on
the New York Stock Exchange was $36.50 per share.
The exercise price of options granted under the Employee Option Plans must
be paid either: (a) in cash at the time the option is exercised; or (b) at the
discretion of the Board, (i) by delivery of other Common Stock of the Company,
(ii) pursuant to a deferred payment arrangement or (iii) in any other form of
legal consideration acceptable to the Board.
OPTION EXERCISE. Options granted under the Employee Option Plans may become
exercisable in cumulative increments ("vest") as determined by the Board. Shares
covered by currently outstanding options under the Employee Option Plans
typically vest in equal monthly or quarterly installments over four years (i.e.,
a cumulative 25 percent per year) during the optionee's employment or services
as a director or consultant. Shares covered by options granted in the future
under the Employee Option Plans may be subject to different vesting terms. The
Board has the power to accelerate the time during which an option may be
exercised. In addition, options granted under the Employee Option Plans may
permit exercise prior to vesting, but in such event the optionee may be required
to enter into an early exercise stock purchase agreement that allows the Company
to repurchase shares not yet vested at the optionee's cost. To the extent
provided by the terms of an option, an optionee may satisfy any federal, state
or local tax withholding obligation relating to the exercise of such option by a
cash payment upon exercise, by authorizing the Company to withhold a portion of
the stock otherwise issuable to the optionee, by delivering already-owned stock
of the Company, or by a combination of these means.
TERM. The maximum term of options under the Employee Option Plans is 10
years, except that in certain cases (see "Eligibility" above) the maximum term
for incentive stock options is five years. Options under the Employee Option
Plans generally terminate three months after the optionee ceases to provide
services to the Company or any affiliate of the Company, except as follows: (a)
the termination of employment is due to such person's permanent and total
disability (as defined in the Code), in which case options generally terminate
one year following such termination (and most options granted within the last 18
months generally terminate three years following such termination); (b) the
optionee dies while employed by the Company or any affiliate of the Company, in
which case options generally may be exercised (to the extent the option was
exercisable at the time of the optionee's death) within 18 months of the
optionee's death by the person or persons to whom the rights to such option pass
by will or by the laws of descent and distribution (and most options granted
within the last 18 months generally may be exercised for three years following
such termination); (c) the optionee retires from service with the Company after
having reached age 55, in which case most options granted within the last 18
months generally may be exercised for three years following retirement; (d) the
optionee is terminated with cause, in which case most options granted within the
last 18 months generally may be exercised for only 30 days following such
termination; (e) termination of service is involuntary (or for good cause as
defined) and occurs within one year of the date of a change in control of the
Company's ownership, in which case most options granted within the last 18
months generally may be exercised for three years following such termination; or
(f) termination of service occurs as a result of a reduction in force initiated
by the Company or an affiliate, in which case most options granted within the
last 18 months generally may be exercised for 180 days following such
termination. Individual options by their terms may provide for exercise for
longer or shorter periods of time following termination of service. The option
term may also be extended in the event that exercise of the option within these
periods is prohibited by law or Company policy for specified reasons or
10
<PAGE>
would result in liability under Section 16(b) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Employee Option Plans or
subject to any option granted under the Employee Option Plans (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or similar
transaction), the Employee Option Plans and options outstanding thereunder will
be appropriately adjusted as to the type of security and the maximum number of
shares subject to such plan, the maximum number of shares which may be granted
to on an annual basis and the type of security or other property, number of
shares and price per share of stock subject to such outstanding options.
EFFECT OF CERTAIN CORPORATE EVENTS
The Employee Option Plans provide that, in the event of a dissolution or
liquidation of the Company, sale of assets, specified type of merger or other
corporate reorganization, to the extent permitted by law, any surviving
corporation will be required either to assume options outstanding under the
Employee Option Plans or to substitute similar options for those outstanding
under such plan, or the time during which such options may be exercised shall be
accelerated and the options terminated if not exercised during such time, or
such outstanding options will continue in full force and effect. The
acceleration of an option in the event of an acquisition or similar corporate
event may be viewed as an anti-takeover provision, which may have the effect of
discouraging a proposal to acquire or otherwise obtain control of the Company.
In addition, options granted within the last 18 months generally provide that
unvested options will vest in full upon an involuntary termination without cause
(or a voluntary termination for good cause) within one year of a change in
control (as such terms are defined in the option grant).
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Employee Option Plans without
stockholder approval or ratification at any time or from time to time. Unless
sooner terminated, the Employee Option Plans will terminate on December 31,
2005.
The Board may also amend the Employee Option Plans at any time or from time
to time. However, no amendment will be effective unless approved by the
stockholders of the Company within 12 months before or after its adoption by the
Board if the amendment would: (a) modify the requirements as to eligibility for
participation (to the extent such modification requires stockholder approval in
order for the Plan to satisfy Section 422 of the Code, if applicable; (b)
increase the number of shares reserved for issuance upon exercise of options; or
(c) change any other provision of the Plan in any other way if such modification
requires stockholder approval in order to satisfy the requirements of Section
422 of the Code.
RESTRICTIONS ON TRANSFER
Under the Employee Option Plans, an incentive stock option may not be
transferred by the optionee otherwise than by will or by the laws of descent and
distribution, and the transfer of a nonstatutory stock option is similarly
restricted unless the Board provides for broader transferability in the
optionee's particular agreement. In addition, shares subject to repurchase by
the Company under an early exercise stock purchase agreement may be subject to
restrictions on transfer which the Board deems appropriate.
FEDERAL INCOME TAX INFORMATION
INCENTIVE STOCK OPTIONS. Incentive stock options under the Employee Option
Plans are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
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<PAGE>
There generally are no federal income tax consequences to the optionee or
the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
more than one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be long-term capital gain or loss. Generally, if the optionee
disposes of the stock before the expiration of either of these holding periods
(a "disqualifying disposition"), at the time of disposition, the optionee will
realize taxable ordinary income equal to the lesser of (a) the excess of the
stock's fair market value on the date of exercise over the exercise price, or
(b) the optionee's actual gain, if any, on the purchase and sale. The optionee's
additional gain, or any loss upon the disqualifying disposition, will be a
capital gain or loss which will be long-term or short-term depending on whether
the stock was held for more than one year. Long-term capital gains currently are
generally subject to lower tax rates than ordinary income. The maximum capital
gains rate for federal income tax purposes is currently 28 percent while the
maximum ordinary income rate is effectively 41.05 percent at the present time.
Slightly different rules may apply to optionees who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code,
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
NONSTATUTORY STOCK OPTIONS. Nonstatutory stock options granted under the
Employee Option Plans generally have the following federal income tax
consequences:
There are no tax consequences to the optionee or the Company by reason of
the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionee normally will recognize taxable ordinary income equal to
the excess of the stock's fair market value on the date of exercise over the
option exercise price. Generally, with respect to employees, the Company is
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. Subject to the requirement of
reasonableness, the provisions of Section 162(m) of the Code and the
satisfaction of a tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the optionee. Upon disposition of the stock, the optionee will
recognize a capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock plus any amount recognized
as ordinary income upon exercise of the option. Such gain or loss will be long
or short-term depending on whether the stock was held for more than one year.
Slightly different rules may apply to optionees who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. As part of the Omnibus Budget
Reconciliation Act of 1993, the U.S. Congress amended the Code to add Section
162(m), which denies a deduction to any publicly held corporation for
compensation paid to certain employees in a taxable year to the extent that
compensation exceeds $1,000,000 for a covered employee. It is possible that
compensation attributable to stock options, when combined with all other types
of compensation received by a covered employee from the Company, may cause this
limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options will qualify as performance-based compensation,
provided that the option is granted by a committee comprised solely of two or
more "outside directors" and: (i) the option plan contains a per-employee
limitation on the number of shares for which options may be granted during a
specified period, the per-employee limitation is approved by the stockholders,
and the exercise price of the option is no less than the fair market value of
the stock on the date of grant; or (ii) the option is granted (or becomes
exercisable) only upon the achievement (as certified
12
<PAGE>
by the committee of outside directors) of an objective performance goal
established by that committee while the outcome is substantially uncertain and
the stockholders approve the option grant. As noted above, the Employee Option
Plans contain a per-employee limitation on the number of shares for which
options may be granted annually and are intended to qualify as
"performance-based" compensation.
PROPOSAL 3
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED
In 1990, the Board of Directors adopted, and the stockholders subsequently
approved, the Company's Employee Stock Purchase Plan (as amended and restated,
the "Employee Purchase Plan"). As a result of a series of amendments, at
December 31, 1996, there were 1,000,000 shares of the Company's Common Stock
authorized for issuance under the Employee Purchase Plan.
As of February 1, 1997, the Company had issued 982,265 of these authorized
shares, leaving 17,735 shares remaining to be issued under the Employee Purchase
Plan. In January 1997, the Company's Board of Directors adopted an amendment to
the Employee Purchase Plan, subject to stockholder approval, to increase the
number of shares authorized for issuance by 480,000 shares. The purpose of this
amendment is to ensure that the Company can continue to provide stock incentives
to employees at levels determined appropriate by the Board. During the last
fiscal year, shares were purchased in the amounts and at the weighted average
prices per share under the Employee Purchase Plan as follows: Mr. Palmer, 1,039
shares ($24.02); Mr. Calvert, 942 shares ($26.50); Mr. Bertman, 732 shares
($25.60); all current executive officers as a group, 4,638 shares ($24.83) and
all employees (excluding executive officers) as a group, 161,431 shares
($25.26).
Stockholders are requested in this Proposal 3 to approve the Employee
Purchase Plan, as amended. If the stockholders fail to approve this Proposal 3,
the number of shares authorized for issuance under the Employee Purchase Plan
will not be increased. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and entitled to vote at the
meeting will be required to approve the Employee Purchase Plan, as amended.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3.
The essential features of the Employee Purchase Plan are outlined below:
GENERAL DESCRIPTION AND PURPOSE
The purpose of the Employee Purchase Plan is to provide a means by which
eligible employees of the Company (and any subsidiary of the Company designated
by the Board of Directors to participate in the Employee Purchase Plan) may be
given an opportunity to purchase Common Stock of the Company through payroll
deductions, to assist the Company in retaining the services of its employees, to
secure and retain the services of new employees, and to provide incentives for
such persons to exert maximum efforts for the success of the Company.
The rights to purchase Common Stock granted under the Employee Purchase Plan
are intended to qualify as options issued under an "employee stock purchase
plan" as that term is defined in Section 423(b) of the Code.
The Employee Purchase Plan, as amended prior to January 1997, provided that
a total of 1,000,000 shares of the Company's Common Stock may be issued pursuant
to the Plan, subject to certain adjustments described below. As of February 1,
1997, the Company had issued 982,265 of the authorized shares under the Employee
Purchase Plan, leaving 17,735 shares remaining to be issued. The Company's Board
of Directors has amended the Employee Purchase Plan to increase the number of
shares authorized for issuance by 480,000 shares, subject to stockholder
approval. Accordingly, upon such approval, a total of 497,735 shares would be
authorized for future issuance under the Employee Purchase Plan.
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<PAGE>
If rights granted under the Employee Purchase Plan expire, lapse or
otherwise terminate without being exercised, the Common Stock not purchased
under such rights again becomes available for issuance under such plan.
ADMINISTRATION
The Employee Purchase Plan is administered by the Board of Directors, which
has the final power to construe and interpret the Employee Purchase Plan and the
rights granted under it. The Board has the power, subject to the provisions of
the Employee Purchase Plan, to determine when and how rights to purchase Common
Stock of the Company will be granted, the provisions of each offering of such
rights (which need not be identical), and whether any subsidiary of the Company
shall be eligible to participate in such plan. The Board has delegated
administration of the Employee Purchase Plan to the Compensation Committee of
the Board. The Board may terminate this delegation of authority at any time and
revest in the Board the administration of the Employee Purchase Plan.
ELIGIBILITY FOR PARTICIPATION
Any person who is customarily employed at least 20 hours per week and 5
months per calendar year by the Company (or by any parent or subsidiary of the
Company designated from time to time by the Board) on the first day of an
offering period is eligible to participate in that offering under the Employee
Purchase Plan, provided such employee has been in the continuous employ of the
Company at least three months prior to the beginning of that offering period.
Notwithstanding the foregoing, no employee is eligible for the grant of any
rights under the Employee Purchase Plan if, immediately after such grant, the
employee would own, directly or indirectly, stock possessing 5 percent or more
of the total combined voting power or value of all classes of stock of the
Company or of any parent or subsidiary of the Company (including any stock which
such employee may purchase under all outstanding rights and options), nor will
any employee be granted rights that would permit him to buy more than $25,000
worth of stock (determined at the fair market value of the shares at the time
such rights are granted) under all employee stock purchase plans of the Company
in any calendar year.
As of December 31, 1996, approximately 2,407 employees of the Company or its
subsidiaries were eligible to participate in the Employee Purchase Plan.
PARTICIPATION IN THE PLAN
The Employee Purchase Plan is implemented by offerings, which need not be
identical, of rights to all eligible employees from time to time by the Board.
Eligible employees become participants in the Employee Purchase Plan by
delivering to the Company, prior to the date selected by the Board as the
offering date for the offering, an agreement authorizing payroll deductions of
up to 15 percent of such employees' earnings during the purchase period.
PURCHASE OF STOCK
The purchase price per share at which shares are sold in an offering under
the Employee Purchase Plan is the lower of (a) 85 percent of the fair market
value of a share of Common Stock on the date of commencement of the offering, or
(b) 85 percent of the fair market value of a share of Common Stock on the date
of purchase.
The purchase price of the shares is accumulated by payroll deductions over
the offering period. At any time during the offering period, a participant may
terminate his or her payroll deductions. A participant may not begin such
payroll deductions after the beginning of any offering period, and may increase
or reduce such payroll deductions during the offering period subject to
restrictions determined by the Board. All payroll deductions made for a
participant are credited to his or her account under the Employee
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<PAGE>
Purchase Plan and deposited with the general funds of the Company. A participant
may not make any additional payments into such account.
By executing an agreement to participate in the Employee Purchase Plan, the
employee is entitled to purchase shares of Common Stock under such plan. In
connection with offerings made under the Employee Purchase Plan, the Board may
specify a maximum number of shares any employee may be granted the right to
purchase and the maximum aggregate number of shares which may be purchased
pursuant to such offering by all participants. If the aggregate number of shares
to be purchased upon exercise of rights granted in the offering would exceed the
maximum aggregate number, the Board would make a pro rata allocation of shares
available in a uniform and equitable manner. Unless the employee's participation
is discontinued, his right to purchase shares is exercised automatically on each
specified exercise date during the offering period at the applicable price. See
"Withdrawal" below.
WITHDRAWAL FROM PLAN
While each participant in the Employee Purchase Plan is required to sign an
agreement authorizing payroll deductions, the participant may withdraw from a
given offering by terminating his or her payroll deductions and by delivering to
the Company a notice of withdrawal from the Employee Purchase Plan. Such
withdrawal may be elected at any time prior to the end of the applicable
offering period.
Upon any withdrawal from an offering by the employee, the Company will
distribute to the employee his or her accumulated payroll deductions without
interest, and such employee's interest in the offering will be automatically
terminated. The employee is not entitled to again participate in such offering.
An employee's withdrawal from an offering will not have any effect upon such
employee's eligibility to participate in subsequent offerings under the Employee
Purchase Plan.
TERMINATION OF EMPLOYMENT
Rights granted pursuant to any offering under the Employee Purchase Plan
terminate immediately upon cessation of an employee's employment for any reason,
and the Company will distribute to such employee all of his or her accumulated
payroll deductions, without interest, upon such termination.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event of a dissolution, liquidation, sale of assets, or specified
type of merger or other reorganization of the Company, either the surviving
corporation will assume the outstanding rights under the Employee Purchase Plan
or substitute similar rights, such rights will continue in full force and
effect, or the exercise date of any ongoing offering will be accelerated such
that the outstanding rights may be exercised immediately prior to any such
event.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Employee Purchase Plan at any time.
Unless terminated earlier, the Employee Purchase Plan will terminate on January
25, 2000.
The Board may amend the Employee Purchase Plan at any time. Any amendment of
the Employee Purchase Plan must be approved by the stockholders within 12 months
of its adoption by the Board if the amendment would (a) increase the number of
shares of Common Stock reserved for issuance under the Employee Purchase Plan,
(b) modify the requirements relating to eligibility for participation in the
Employee Purchase Plan (to the extent such modification requires stockholder
approval under Section 423 of the Code), or (c) modify any other provision of
the Employee Purchase Plan, if such modification requires stockholder approval
under Section 423 of the Code.
Rights granted before amendment or termination of the Employee Purchase Plan
will not be impaired by any amendment or termination of such plan without
consent of the person to whom such rights were granted.
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<PAGE>
RESTRICTIONS ON TRANSFER
Rights granted under the Employee Purchase Plan are not transferable and may
be exercised only by the person to whom such rights are granted, or, in the case
of death, by the person designated by the decedent's will or the laws of descent
and distribution.
FEDERAL INCOME TAX INFORMATION
Rights granted under the Employee Purchase Plan are intended to qualify for
favorable federal income tax treatment associated with rights granted under an
employee stock purchase plan which qualifies under provisions of Section 423 of
the Code.
A participant will be taxed on amounts withheld for the purchase of shares
as if such amounts were actually received. Other than this, no income will be
taxable to a participant until disposition of the shares acquired, and the
method of taxation will depend upon the holding period of the purchased shares.
If the stock is disposed of at least two years after the beginning of the
offering period and more than one year after the stock is transferred to the
participant, then the lesser of (a) the excess of the fair market value of the
stock at the time of such disposition over the exercise price or (b) 15% of the
fair market value of the stock as of the beginning of the offering will be
treated as ordinary income. Any further gain or any loss will be taxed as a
long-term capital gain or loss. Net long-term capital gains for individuals are
currently subject to a maximum marginal federal income tax rate of 28 percent,
and the maximum marginal rate for ordinary income is effectively 41.05 percent
at the present time.
If the stock is sold or disposed of before the expiration of either of the
holding periods described above, then the excess of the fair market value of the
stock on the exercise date over the exercise price will be treated as ordinary
income at the time of such disposition, and the Company may, in the future, be
required to withhold income taxes relating to such ordinary income from other
payments made to the participant. The balance of any gain will be treated as
capital gain. Even if the stock is later disposed of for less than its fair
market value on the exercise date, the same amount of ordinary income is
attributed to the participant, and a capital loss is recognized equal to the
difference between the sales price and the fair market value of the stock on
such exercise date. Any capital gain or loss will be long or short-term
depending on whether the stock has been held for more than one year.
There are no federal income tax consequences to the Company by reason of the
grant or exercise of rights under the Employee Purchase Plan. The Company is
generally entitled to a deduction to the extent amounts are taxed as ordinary
income to a participant by reason of a disposition before the expiration of the
holding periods described above (subject to the requirement of reasonableness
and the satisfaction of a reporting obligation).
PROPOSAL 4
APPROVAL OF EMPLOYEE RESTRICTED STOCK BONUS PLAN
In January 1997, the Board of Directors adopted, subject to stockholder
approval, the Company's Employee Restricted Stock Bonus Plan (the "Stock Bonus
Plan"). There are 100,000 shares of the Company's Common Stock authorized for
issuance under the Stock Bonus Plan.
Stockholders are requested in this Proposal 4 to approve the Stock Bonus
Plan. If the stockholders fail to approve this Proposal 4, no stock bonuses will
be granted under the Stock Bonus Plan in the future and any stock bonuses
already granted will automatically terminate. The affirmative vote of the
holders of a majority of the shares present in person or represented by proxy
and entitled to vote at the meeting will be required to approve the Stock Bonus
Plan.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 4.
The essential features of the Stock Bonus Plan are outlined below:
GENERAL DESCRIPTION AND PURPOSE
The Stock Bonus Plan provides for the grant or issuance of restricted stock
bonuses to selected employees of and consultants to the Company and its
affiliates. See "Federal Income Tax Information" below for a discussion of the
tax treatment of restricted stock bonuses granted under the Stock Bonus Plan.
16
<PAGE>
The Stock Bonus Plan was adopted to provide a means by which selected
employees of and consultants to the Company and its affiliates (the
"Participants") could be given an opportunity to benefit from increases in value
of the stock of the Company through the granting of restricted stock bonuses, to
assist in retaining the services of employees holding key positions and of
consultants, to secure and retain the services of persons capable of filling
such positions and to provide incentives for such persons to exert maximum
efforts for the success of the Company.
If any shares of the Company's Common Stock granted under the terms of a
stock bonus shall for any reason be reacquired by the Company from the
Participant under the terms of the stock bonus agreement, then the stock so
reacquired shall revert to and again become available for issuance under the
Stock Bonus Plan.
ADMINISTRATION
The Stock Bonus Plan is administered by the Board of Directors of the
Company. The Board has the power to construe and interpret the Stock Bonus Plan
and, subject to the provisions of the Stock Bonus Plan, to determine which of
the persons eligible under the Stock Bonus Plan shall be granted a stock bonus,
when and how each stock bonus shall be granted, the terms and provisions of each
stock bonus granted, including the time or times when a person shall be
permitted to receive unrestricted stock pursuant to a stock bonus, and the
number of shares with respect to which a stock bonus shall be granted to each
person. The Board of Directors is authorized to delegate administration of the
Stock Bonus Plan to a committee composed of not fewer than two members of the
Board.
ELIGIBILITY FOR GRANT OF STOCK
Stock bonuses may be granted to any person who is an employee or consultant
of the Company or a parent or subsidiary corporation of the Company. The grant
of a stock bonus shall be in the sole discretion of the Board or the committee
of the Board to which the Board has delegated its authority.
TERMS OF STOCK BONUSES
CONSIDERATION. A Participant shall not be required to pay any amount in
exchange for the grant of a stock bonus. Eligible Participants may be awarded
stock pursuant to a stock bonus agreement in consideration of past services
actually rendered to the Company or for its benefit.
REACQUISITION. Shares of the Common Stock sold or awarded under the Stock
Bonus Plan may, but need not, be subject to a reacquisition option in favor of
the Company in accordance with a vesting schedule determined by the Board. In
the event a person ceases to be an employee of or ceases to serve as a
consultant to the Company or parent or subsidiary of the Company, the Company
may reacquire any or all of the shares of the Common Stock held by that person
that have not vested as of the date of termination under the terms of the stock
bonus agreement between the Company and such person.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Stock Bonus Plan or
subject to any award granted under the Stock Bonus Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or similar
transaction), the Stock Bonus Plan will be appropriately adjusted in the type(s)
and number of securities or other property subject to such outstanding stock
bonuses.
EFFECT OF CERTAIN CORPORATE EVENTS
The Stock Bonus Plan provides that, in the event of a dissolution or
liquidation of the Company, sale of assets, specified type of merger or other
corporate reorganization, to the extent permitted by law, any surviving
corporation will be required either to assume stock bonuses outstanding under
the Stock Bonus Plan or to substitute similar stock bonuses for those
outstanding under such plan, or such outstanding
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stock bonuses will continue in full force and effect, or the time over which the
Company's reacquisition right lapses will be accelerated. The acceleration of
the lapse of the Company's reacquisition right in the event of an acquisition or
similar corporate event may be viewed as an anti-takeover provision, which may
have the effect of discouraging a proposal to acquire or otherwise obtain
control of the Company.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Stock Bonus Plan without stockholder
approval or ratification at any time or from time to time.
The Board may also amend the Stock Bonus Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
stockholders of the Company within 12 months before or after its adoption by the
Board if the amendment would: (a) increase the number of shares reserved for
issuance; or (b) change any other provision of the Plan in any other way if such
modification requires stockholder approval under applicable law. The Board may
submit any other amendment to the Stock Bonus Plan for stockholder approval.
RESTRICTIONS ON TRANSFER
Under the Stock Bonus Plan, no rights under a stock bonus agreement are
transferable except where required by law or expressly authorized by the terms
of the applicable stock bonus agreement.
FEDERAL INCOME TAX INFORMATION
RESTRICTED STOCK BONUSES. Restricted stock bonuses granted under the Stock
Bonus Plan generally have the following federal income tax consequences: Upon
acquisition of stock under a restricted stock bonus award, the recipient
normally will recognize taxable ordinary income equal to the stock's fair market
value. However, to the extent the stock is subject to certain types of vesting
restrictions, the taxable event will be delayed until the vesting restrictions
lapse unless the recipient elects to be taxed on receipt of the stock.
Generally, with respect to employees, the Company is required to withhold from
regular wages or supplemental wage payments an amount based on the ordinary
income recognized. Subject to the requirement of reasonableness, Section 162(m)
of the Code, and the satisfaction of a tax reporting obligation, the Company
will generally be entitled to a business expense deduction equal to the taxable
ordinary income realized by the recipient. Upon disposition of the stock, the
recipient will recognize a capital gain or loss equal to the difference between
the selling price and any amount recognized as ordinary income upon acquisition
(or vesting) of the stock. Such gain or loss will be long or short-term
depending on whether the stock was held for more than one year from the date
ordinary income is measured. Slightly different rules may apply to persons who
acquire stock subject to forfeiture under Section 16(b) of the Exchange Act.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. The Company does not intend
that any income recognized by Participants with respect to a stock bonus granted
under the Stock Bonus Plan satisfy the requirements for the exemption for
"performance-based compensation" under Section 162(m) of the Code.
PROPOSAL 5
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP as the Company's
independent auditors for the Company's 1997 fiscal year and has further directed
that management submit the selection of independent auditors for ratification by
the stockholders at the Annual Meeting. Ernst & Young LLP has audited the
Company's consolidated financial statements since 1984. Representatives of Ernst
& Young LLP are expected to be present at the Annual Meeting, will have an
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions.
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Stockholder ratification of the selection of Ernst & Young LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of Ernst & Young LLP
to the stockholders for ratification as a matter of good corporate practice. If
the stockholders fail to ratify the selection, the Board will reconsider whether
or not to retain that firm. Even if the selection is ratified, the Board in its
discretion may direct the appointment of a different auditing firm at any time
during the year if the Board determines that such a change would be in the best
interests of the Company and its stockholders.
The affirmative vote of holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of Ernst & Young LLP.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 5.
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SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of January 1, 1997 (except as
otherwise noted) by (i) each director of the Company and nominee, (ii) each
executive officer named in the table below labeled "Summary Compensation Table,"
(iii) all directors and executive officers of the Company as a group, and (iv)
all those known by the Company to be beneficial owners of more than five percent
of the Company's Common Stock. This table is based on information provided to
the Company or filed with the SEC by the Company's directors, executive officers
and principal stockholders. Unless otherwise indicated in the footnotes below,
and subject to community property laws where applicable, each of the named
persons has sole voting and investment power with respect to the shares shown as
beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
BENEFICIAL OUTSTANDING
OWNERSHIP OF COMMON STOCK
BENEFICIAL OWNER COMMON STOCK(1) OWNED
- ------------------------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Kopp Investment Advisors, Inc.(2) ............................................. 2,977,632 12.76%
6600 France Avenue South, Suite 672
Edina, MN 55435
J.&W. Seligman & Co. Incorporated(3) .......................................... 1,333,500 5.71%
100 Park Avenue
New York, NY 10017
Hatim A. Tyabji(4)............................................................. 238,267 1.02%
Roger Bertman.................................................................. 57,770 *
James A. Palmer................................................................ 49,948 *
Denis A. Calvert............................................................... 33,705 *
John R. C. Porter(5)........................................................... 31,887 *
H. H. Haight IV................................................................ 28,333 *
A. Michael Spence.............................................................. 27,778 *
R. Elton White................................................................. 14,111 *
C. Lloyd Mahaffey.............................................................. 12,290 *
J. Robert Harcharik............................................................ 12,167 *
Thomas E. Peterson............................................................. 8,889 *
Clinton V. Silver.............................................................. 556 *
All directors and executive officers as a group (16 persons)................... 629,649 2.70%
</TABLE>
- ------------------------
* Less than one percent
(1) The figures shown include the following numbers of shares that the named
persons have the right to acquire pursuant to options exercisable within 60
days following January 1, 1997: Mr. Tyabji, 75,212; Mr. Bertman, 55,457; Mr.
Palmer, 38,073; Mr. Calvert, 32,110; Mr. Porter, 28,333; Mr. Haight, 28,333;
Dr. Spence, 27,778; Mr. White, 11,111; Mr. Mahaffey, 12,290 Mr. Harcharik,
11,667; Mr. Peterson, 8,889; Mr. Silver, 556; and all directors and
executive officers as a group, 441,646.
(2) This figure is from the Schedule 13G filed by Kopp Investment Advisors, Inc.
in January 1997.
(3) This figure is from the Schedule 13G filed by J.&W. Seligman & Co.
Incorporated in February 1997.
(4) This figure includes 162,832 shares as to which Mr. Tyabji has shared voting
and investment power.
(5) This figure includes 3,554 shares as to which Mr. Porter has shared voting
and investment power.
20
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT
Executive officers are elected by the Board, or in some cases appointed by
the Chief Executive Officer, and serve at the discretion of the Board or the
Chief Executive Officer, as the case may be. Set forth below is information
regarding executive officers of the Company.
<TABLE>
<CAPTION>
NAME POSITION
- ----------------------------------- -----------------------------------------------------------------------------
<S> <C>
Hatim A. Tyabji.................... Chairman of the Board, President and Chief Executive Officer
William G. Barmeier................ Senior Vice President, General Counsel and Secretary
Katherine B. Beall................. Vice President, Human Resources
Roger B. Bertman................... Vice President, Corporate Development
Eldon M. Bullington................ Vice President and Corporate Controller
C. Lloyd Mahaffey.................. Senior Vice President and General Manager, Global Marketing and Software
Systems Division
James A. Palmer.................... Executive Vice President, Development and Manufacturing
Joseph M. Zaelit................... Senior Vice President, Finance and Administration, and Chief Financial
Officer
</TABLE>
Mr. Tyabji's biography is set forth above in the section entitled "Election
of Directors."
Mr. Barmeier, age 43, has served as Senior Vice President, General Counsel
and Secretary since 1996; and served as Vice President, General Counsel and
Secretary from 1994 to 1996; and Associate General Counsel from 1993 to 1994.
Prior to joining the Company, he was a partner in the law firm of Pettit &
Martin, a position he held from 1986 to 1992.
Ms. Beall, age 39, has served as Vice President, Human Resources, since
1994; and served as Vice President, Administration, during 1994; Director, Human
Resources and Training, from 1992 to 1994; and Director, ISC Systems and
Training, from 1990 to 1992.
Mr. Bertman, age 52, has served as Vice President, Corporate Development,
since 1997; and served as Vice President and General Manager, Internet Commerce
Division, from 1996 to 1997; Vice President, Corporate Development, during 1996;
Vice President, Marketing, and General Manager, Network Systems Division from
1992 to 1996; and Vice President and General Manager of the Network Systems
Division during 1992. Prior to joining the Company, he served as Vice President
of Marketing for Ungermann-Bass from 1990 to 1992.
Mr. Bullington, age 45, has served as Vice President and Corporate
Controller, since 1996; and served as Corporate Controller, from 1995 to 1996.
Prior to joining the Company, he served as Corporate Controller for Radius from
1994 to 1995 and served in a number of management positions with IBM and ROLM
Telecommunications, a subsidiary of IBM, from 1982 to 1994.
Mr. Mahaffey, age 42, has served as Senior Vice President and General
Manager, Global Marketing and Software Systems Division, since 1997; and served
as Vice President, Global Marketing, from 1996 to 1997; and Vice President and
General Manager, Consumer Systems Division from 1995 to 1996. Prior to joining
the Company, he served as Managing Partner of the Dynamis Group from 1994 to
1996, and Chief Executive Officer of Start, Inc. from 1990 to 1994.
Mr. Palmer, age 60, has served as Executive Vice President, Development and
Manufacturing, since 1996; and served as Senior Vice President, Operations, from
1994 to 1996; Vice President, Operations, from 1989 to 1994; Vice President,
Systems Development and Manufacturing, from 1988 to 1989; Vice President,
Development and Manufacturing, from 1987 to 1988; and Vice President,
Operations, during 1987.
Mr. Zaelit, age 51, has served as Senior Vice President, Finance and
Administration, and Chief Financial Officer since 1996; and served as Vice
President, Finance and Administration, and Chief Financial Officer from 1994 to
1996; and Vice President, Controller, from 1993 to 1994. Prior to joining the
21
<PAGE>
Company, he held a number of senior financial management positions with
Hewlett-Packard Company from 1973 to 1993.
COMPENSATION OF DIRECTORS
Non-employee directors are eligible for reimbursement (in accordance with
Company policy) for out-of-pocket travel and related expenses in connection with
their attendance at meetings of the Board of Directors and committees of the
Board, and at other Company events to which they are invited. The aggregate
amount reimbursed or otherwise paid to non-employee directors for such expenses
during 1996 varied from director to director, but did not exceed $5,815 for any
director. In addition, each non-employee director receives an annual director's
fee of $10,000 and a fee of $1,000 for each Board or committee meeting attended.
Each non-employee director of the Company is also granted stock options
under the Non-Employee Directors' Stock Option Plan (the "Directors' Plan").
Upon adoption of the Directors' Plan in 1992, each person who was then a
non-employee director of the Company was automatically granted, as of such date,
an option to purchase 20,000 shares of the Company's Common Stock. Thereafter,
upon the initial election of any non-employee director, such person is
automatically granted, as of the date of his or her election, an option to
purchase 20,000 shares of the Company's Common Stock. In addition, upon the
third anniversary of the grant of an option to a non-employee director under the
Directors' Plan, such person will be automatically granted, as of such
anniversary, another option to purchase 20,000 shares of the Company's Common
Stock (assuming such person is still a director of the Company). The exercise
price for each option granted under the Directors' Plan will be the fair market
value of the Common Stock underlying the option on the date of grant. Each
option granted under the Directors' Plan vests in 36 equal monthly installments
commencing the month after the date of grant, provided that as of each vesting
date the option holder remains a director, employee or consultant to the
Company. In the event of the dissolution or liquidation of the Company or
certain specified mergers or reorganizations, unvested options will accelerate
and the options will terminate upon such event unless assumed by the acquiring
corporation or unless similar options are substituted by the acquiring
corporation. The term of each option is 10 years after the date of grant.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for fiscal years 1996, 1995 and 1994 certain
compensation, including salary, bonuses, stock options and certain other
compensation, paid by the Company to its Chief Executive Officer and each of its
four other most highly compensated executive officers at December 31, 1996
(collectively the "Named Executive Officers").
22
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ---------------------- -----------------------
---------------------------------- SECURITIES LONG-TERM
OTHER RESTRICTED UNDERLYING INCENTIVE
ANNUAL STOCK OPTIONS PLAN ALL OTHER
NAME/POSITION AT 12/31/96 YEAR SALARY(A) BONUS(B) COMP AWARD(S) (#) PAYOUTS COMP(C)
- ----------------------------- --------- ---------- ----------- --------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hatim A. Tyabji ............. 1996 $ 512,923 $ 188,795 -- -- -- -- $ 6,855
Chairman, President and 1995 482,693 210,071 -- -- 135,000 -- 4,500
Chief Executive Officer 1994 436,154 -- -- -- -- -- 4,500
James A. Palmer ............. 1996 $ 271,477 $ 59,128 -- -- 20,000 -- $ 4,914
Executive Vice President, 1995 247,039 74,536 -- -- 33,000 -- 4,500
Development and 1994 226,115 -- -- -- 18,000 -- 4,500
Manufacturing
Denis A. Calvert ............ 1996 $ 280,155 $ 11,025 -- -- 27,500 -- $ 82,704(d)
Vice President and General 1995 247,990 75,000(e) -- -- 29,000 -- 4,500
Manager, United States 1994 -- -- -- -- -- -- 4,500
Division(f)
C. Lloyd Mahaffey, .......... 1996 $ 297,684 $ 18,986 -- -- 45,000 -- $ 236,866(d)
Vice President, 1995 82,885 -- -- -- 30,000 -- 66,407(d)
Global Marketing 1994 -- -- -- -- -- -- --
Roger Bertman, .............. 1996 $ 279,756 $ 13,161 -- -- 20,000 -- --
Vice President and General 1995 237,161 15,000 -- -- 17,000 -- 4,201
Manager, Internet Commerce 1994 233,173 -- -- -- 10,000 -- 1,876
Division
</TABLE>
- ------------------------------
(a) In the case of Mr. Calvert, Mr. Mahaffey and Mr. Bertman, column includes
base salary and variable compensation. Mr. Mahaffey joined the Company in
1995, and Mr. Calvert was appointed as an executive officer of the Company
in 1995.
(b) Except as noted in footnote (e) below, amounts shown for 1996 relate to
performance bonuses accrued in 1996 and paid in 1997, and amounts shown for
1995 relate to performance bonuses accrued in 1995 and paid in 1996. No
bonuses were awarded or accrued for 1994 performance.
(c) Except as noted in footnote (d) below, amounts shown in "All Other
Compensation" represent contributions made by the Company to the person's
401(k) accounts in accordance with the Company's 401(k) Plan.
(d) Amount shown as "All Other Compensation" for this year includes relocation
expenses paid.
(e) Amount shown as "Bonus" is a housing allowance.
(f) Mr. Calvert has resigned from the Company effective March 31, 1997.
23
<PAGE>
STOCK OPTION GRANTS, EXERCISES AND HOLDINGS
The Company grants options to its executive officers under the Employee
Option Plans, which are more fully described in Proposal 2 above. The following
tables show for fiscal year 1996 certain information regarding the options
granted to, exercised by and held at year end by the Named Executive Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE TERM
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION ------------------------
NAME GRANTED(A) FISCAL YEAR SHARE(B) DATE 5%(C) 10%(C)
- -------------------------------------- ----------- --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Hatim A. Tyabji(d).................... 50,000 7.3% $ 50.75 N/A $ 0 $ 0
40,000 $ 49.13 $ 0 $ 0
James A. Palmer....................... 20,000 1.6% $ 39.00 3/12/06 $ 490,538 $ 1,243,119
Denis A. Calvert...................... 25,000 2.2% $ 39.00 3/12/06 $ 613,172 $ 1,553,899
2,500 $ 41.00 7/22/06 $ 64,462 $ 163,359
C. Lloyd Mahaffey..................... 20,000 3.7% $ 39.00 3/12/06 $ 490,538 $ 1,243,119
25,000 $ 32.63 10/21/06 $ 513,146 $ 1,299,896
Roger B. Bertman...................... 20,000 1.6% $ 38.50 2/07/06 $ 484,249 $ 1,227,182
</TABLE>
- ------------------------
(a) Options granted in 1996 are exercisable starting one month after the grant
date with 2.08% of the options thereby becoming exercisable at that time and
with an additional 2.08% of the options becoming exercisable on each of the
successive monthly anniversary dates, with full vesting occurring 48 months
after the grant. See Proposal 2 above for a more detailed description of the
Employee Option Plans.
(b) The exercise price represents the fair market value of the shares at the
date of grant.
(c) The assumed annual rates of appreciation of 5% and 10% would result in the
price of the Company's Common Stock increasing to approximately $63.53 and
$101.16, respectively, over the option terms. Over the last five years, the
market price of the Company's Common Stock has increased at a compound
annual rate of 6.92% percent.
(d) Mr. Tyabji was granted options covering 90,000 shares in 1996, but
subsequently voluntarily canceled these options. See "Compensation Committee
Report" below.
24
<PAGE>
1996 AGGREGATED OPTION EXERCISES AND
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FY-END(#) AT FY-END($)(A)(B)
NAME EXERCISE REALIZED(A) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------ ----------------- ------------ ----------------------- -----------------------
<S> <C> <C> <C> <C>
Hatim A. Tyabji............... 50,000 $ 1,403,291 68,496/83,904 $ 352,590/$391,810
James A. Palmer............... 15,000 $ 484,875 34,965/43,235 $ 229,089/$131,111
Denis A. Calvert.............. 5,188 $ 146,412 28,567/42,995 $ 43,967/$ 69,732
C. Lloyd Mahaffey............. 3,750 $ 67,969 8,540/62,710 $ 8,906/$ 53,438
Roger B. Bertman.............. 45,000 $ 1,054,954 52,519/30,481 $ 229,624/$ 70,922
</TABLE>
- ------------------------
(a) This amount reflects the fair market value on the date of exercise less the
exercise price and does not indicate that the optionee sold such stock or
received such amounts.
(b) This amount was computed based on the closing price for the Company's Common
Stock on the New York Stock Exchange on December 27, 1996 ($29.00), less the
exercise price.
25
<PAGE>
COMPENSATION COMMITTEE REPORT
The following is a report by the Compensation Committee of the Board
concerning the compensation policies applicable to the Company's executive
officers:
The Compensation Committee of the Board (the "Committee") is presently
composed of three non-employee directors: Mr. Harcharik, Dr. Spence and Mr.
White. Among other things, the Committee reviews and approves annual executive
officer compensation.
GENERAL COMPENSATION POLICIES
In general, the compensation policies adopted by the Committee are designed
to attract and retain executives capable of leading the Company to meet its
business objectives, and to motivate the Company's executives to enhance
long-term stockholder value.
Toward these ends, in carrying out its duties, the Committee makes a
substantial effort to review surveys regarding compensation practices at
comparable companies (i.e., technology companies which are generally of the same
size as the Company) and to be aware of particular competitive conditions which
affect the hiring and retention of individual executive officers. In addition,
the Committee takes into account its subjective assessment of each officer's
individual performance. Information on individual performance is provided to the
Committee by the Chief Executive Officer.
The annual compensation of the Company's executive officers normally
consists of a combination of cash salary (and in the case of certain officers,
variable cash compensation), cash bonuses and stock options. Those officers who
receive variable cash compensation are generally involved in sales or marketing
functions; and the variable compensation is based on achievement of certain
financial objectives (typically the gross revenues, gross margins, operating
income and/or "economic value added" (EVA) measures of the Company or a
particular business unit) agreed upon between the Company and each such officer.
SALARIES
The Committee sets salaries for the Company's executive officers based
principally on the Committee's subjective assessment of the individual
performance of each officer and the Committee's understanding of executive
compensation practices at comparable companies as noted above. The Committee
uses the comparative compensation information only as a general reference,
however, and not to set specific salary amounts.
BONUSES
The Committee sometimes awards cash bonuses to the Company's executive
officers depending on the Company's performance. The Committee awarded cash
bonuses to the executive officers in January 1997 for their performance during
1996, with the amount of the bonuses depending on the Company's performance
during 1996. To appropriately relate the amount of any bonus to the Company's
performance, the Committee adopted bonus guidelines at the beginning of 1996
which (i) set each officer's target bonus for 1996 as a percentage of the
officer's annual salary and (ii) linked each officer's actual 1996 bonus to the
Company's achievement of a specified earnings per share (EPS) objective for 1996
(weighted 75%) and a specified "economic value added" (EVA) objective for 1996
(weighted 25%). The Company's actual performance for 1996 was approximately 93
percent of the EPS objective and 114 percent of the EVA objective specified by
the Committee. The Committee took into account these measures of the Company's
performance, along with broader performance measures--including the Company's
revenue growth in 1996 (which was 22.1 percent over 1995) and net income growth
in 1996 (which was 20.8 percent over 1995)--in determining the final 1996 bonus
amounts for the executive officers.
26
<PAGE>
EQUITY-BASED COMPENSATION
The Committee provides equity-based compensation--principally stock
options--to the Company's executive officers under the Company's equity-based
compensation plans. The Committee uses these plans to further align the
interests of management and stockholders by creating common incentives based on
management's ownership of a substantial economic interest in the long-term
appreciation of the Company's Common Stock.
The Committee's determination of the number of stock options to award to an
individual executive officer is made in a manner similar to that described above
with respect to the setting of salaries. That is, the Committee takes into
account principally the Committee's subjective assessment of the individual
performance of each officer and the Committee's understanding of executive
compensation practices at comparable companies. The Committee uses the
comparative compensation information only as a general reference, however, and
not to set specific option amounts.
COMPENSATION FOR CHIEF EXECUTIVE OFFICER
The Committee considers with particular care the compensation of the
Company's Chief Executive Officer, Mr. Tyabji. In this regard:
- The Committee increased Mr. Tyabji's annual salary to $520,000 (from
$500,000) effective May 1996. This action was based principally on the
Committee's subjective assessment of Mr. Tyabji's individual performance
and the Committee's understanding of executive compensation practices at
comparable companies. The Committee used the comparative compensation
information only as a general reference, however, and not to set Mr.
Tyabji's specific salary.
- In addition, the Committee awarded Mr. Tyabji a cash bonus of $188,975 in
January 1997 for his performance during 1996. This action was based on the
same factors that applied to bonus awards to other executive officers as
described above.
- The Committee also granted to Mr. Tyabji a total of 90,000 stock options
during 1996. Mr. Tyabji voluntarily canceled these options, however, so
that the options would return to the Company's stock option pool and could
be granted to other employees.
By the Compensation Committee
J. Robert Harcharik
A. Michael Spence
R. Elton White
Pursuant to SEC regulations, this report is not "soliciting material," is
not deemed filed with the SEC and is not to be incorporated by reference in any
filing of the Company under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
27
<PAGE>
PERFORMANCE MEASUREMENT COMPARISON
The following chart shows the Company's cumulative total stockholder return
over the past five years compared to the Center for Research in Security Prices
(CRSP) Total Return Index For Nasdaq Stock Market Companies (U.S. & Foreign) and
CRSP Total Return Index For Computer Manufacturer Companies (comprising Nasdaq
companies in SIC code 357). (The Company will provide upon request a list of the
companies included in the CRSP Total Return Index For Computer Manufacturer
Companies.)
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN* AMONG VERIFONE, INC., CRSP
TOTAL RETURN INDEX FOR NASDAQ STOCK MARKET COMPANIES (U.S. & FOREIGN) AND CRSP
TOTAL RETURN INDEX FOR COMPUTER MANUFACTURER COMPANIES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VERIFONE, INC. NASDAQ STOCK MARKET COMPANIES (U.S. & FOREIGN) COMPUTER MANUFACTURER COMPANIES
<S> <C> <C> <C>
12/91 $ 100 $ 100 $ 100
12/92 98 134 116
12/93 93 127 134
12/94 107 140 130
12/95 138 220 183
12/96 140 296 224
</TABLE>
- ------------------------
Assumes $100 Invested On December 31, 1991 In:
1. VeriFone, Inc.
2. CRSP Total Return Index For Nasdaq Stock Market Companies (U.S. & Foreign)
3. CRSP Total Return Index For Computer Manufacturer Companies
* Total Return Assumes Reinvestment Of Dividends
28
<PAGE>
Pursuant to SEC regulations, the above chart is not "soliciting material,"
is not deemed filed with the SEC and is not to be incorporated by reference in
any filing of the Company under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
CERTAIN TRANSACTIONS
Upon Mr. Tyabji's employment with the Company, the Company agreed that, upon
any involuntary termination of Mr. Tyabji's employment, he will be paid in
severance an amount equal to half his annual compensation.
In 1996, Mr. Bertman was granted interests under a Restricted Phantom Stock
Plan, pursuant to which the Company is obligated to pay Mr. Bertman certain cash
amounts in 1998 and 2000 provided that Mr. Bertman remains an employee of the
Company as of the scheduled payment dates. However, if, before all amounts
payable to Mr. Bertman under this plan are paid, there is a change in control of
the Company and Mr. Bertman is involuntarily terminated without cause, the
Company is obligated to pay Mr. Bertman upon such termination an amount equal to
the then unpaid benefits under the plan.
In 1997, Mr. Mahaffey was granted interests under a Restricted Phantom Stock
Plan, pursuant to which the Company is obligated to issue to Mr. Mahaffey a
certain number of shares of the Company's Common Stock in 2001 or upon a change
in control of the Company (if earlier), provided that Mr. Mahaffey remains an
employee of the Company as of the scheduled issuance date.
As indicated in the description of the Employee Option Plans in Proposal 2,
options granted within the last 18 months generally provide that unvested
options will vest in full upon a termination without cause (or a voluntary
termination for good cause) within one year following a change of control (as
such terms are defined in the option grant).
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than 10
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and NYSE. Directors, executive officers and greater than 10 percent
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received or written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that, during 1996, all filing requirements
under Section 16(a) applicable to its directors and executive officers were met.
OTHER MATTERS
The Board does not know of any other matters that may come before the Annual
Meeting. If any other matters are properly presented to the meeting, it is the
intention of the persons named in the accompanying proxy to vote, or otherwise
to act, in accordance with their best judgment on such matters.
29
<PAGE>
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the Company's
1998 Annual Meeting of Stockholders must be received by the Company no later
than November 28, 1997 in order to be included in the proxy statement and proxy
relating to that Annual Meeting.
The Board hopes that stockholders will attend the Annual Meeting. Whether or
not you plan to attend, you are urged to complete, sign and return the enclosed
proxy in the accompanying envelope. A prompt response will greatly facilitate
arrangements for the Annual Meeting, and your cooperation will be appreciated.
Stockholders who attend the Annual Meeting may vote their shares personally,
even though they have sent in their proxies.
By Order of the Board of Directors
/s/ William G. Barmeier
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
Redwood City, California
March 27, 1997
30
<PAGE>
DETACH HERE
VERIFONE, INC.
ANNUAL MEETING OF STOCKHOLDERS -- MAY 9, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
P OF VERIFONE, INC. (the "COMPANY")
R The undersigned hereby appoints Hatim A. Tyabji and Joseph M. Zaelit,
and each of them, as attorneys-in-fact and proxies of the undersigned,
O with full power of substitution, to vote all of the shares of the
Company's common stock which the undersigned may be entitled to vote at the
X Annual Meeting of Stockholders of the Company to be held at the Stanford
Park Hotel, 100 El Camino Real, Menlo Park, California 94025, on May 9,
Y 1997 at 10:00 a.m. local time, and at any and all adjournments or
postponements thereof, with all of the powers the undersigned would
possess if personally present, upon and in respect of the following
proposals and in accordance with the following instructions, with
discretionary authority as to any and all other matters that may properly
come before the meeting. The proposals referred to herein are described in
detail in the accompanying proxy statement.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3, 4 AND 5. IF A
SPECIFIC DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE
THEREWITH.
-------------
| SEE REVERSE |
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE) | SIDE |
<PAGE>
DETACH HERE
----
PLEASE MARK |
/X/ VOTES AS IN
THIS EXAMPLE.
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
POSTPAID RETURN ENVELOPE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
NOMINEES FOR DIRECTOR LISTED BELOW AND FOR PROPOSALS 2, 3, 4 AND 5.
<TABLE>
<CAPTION>
<S> <C> <C>
FOR AGAINST ABSTAIN
1. TO ELECT THREE CLASS I DIRECTORS TO SERVE UNTIL THE 2000 2. TO APPROVE THE COMPANY'S
ANNUAL MEETING OF STOCKHOLDERS, AND UNTIL EACH DIRECTOR'S EMPLOYEE STOCK OPTION PLANS, / / / / / /
SUCCESSOR IS ELECTED AND QUALIFIED. AS AMENDED.
CLASS I DIRECTORS: JOHN R.C. PORTER, CLINTON V. SILVER, 3. TO APPROVE THE COMPANY'S
AND A. MICHAEL SPENCE EMPLOYEE STOCK PURCHASE PLAN, AS / / / / / /
FOR WITHHOLD AMENDED.
ALL / / / / AUTHORITY TO
NOMINEES VOTE FOR 4. TO APPROVE THE COMPANY'S
ALL NOMINEES EMPLOYEE RESTRICTED STOCK / / / / / /
BONUS PLAN.
TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S), WRITE
SUCH NOMINEE(S) NAME(S) BELOW. 5. TO RATIFY THE SELECTION OF ERNST &
YOUNG LLP AS THE COMPANY'S / / / / / /
INDEPENDENT AUDITORS FOR 1997.
MARK HERE
FOR ADDRESS / /
CHANGE AND
NOTE AT LEFT
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. IF THE STOCK
IS REGISTERED IN THE NAMES OF TWO OR MORE PERSONS, EACH
SHOULD SIGN. EXECUTORS, ADMINISTRATORS, TRUSTEES, GUARDIANS
AND ATTORNEYS-IN-FACT SHOULD ADD THEIR TITLES. IF SIGNER IS A
CORPORATION, PLEASE GIVE FULL CORPORATE NAME AND HAVE A DULY
AUTHORIZED OFFICER SIGN, STATING TITLE. IF SIGNER IS A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED
PERSON.
SIGNATURE:___________________________________ DATE:________________ SIGNATURE:____________________________ DATE:________________
</TABLE>
<PAGE>
[LETTER HEAD]
March 27, 1997
Dear VeriFone Stockholder:
Enclosed is your personal copy of the 1996 VeriFone Annual Report. During the
year, your company produced solid operating results and made substantial
progress in new areas such as software, systems and services. We continue to
expand our position as the leading provider of secure payment solutions.
I have also enclosed the notice of our Annual Meeting of Stockholders. I hope
you will be able to join me on May 9, 1997.
Thank you for your support during the past year. If you would like additional
information regarding your Company's business, please feel free to call
VeriFone Investor Relations at (415) 598-5653.
Again, thank you for your support.
Sincerely,
/s/ Hatim A. Tyabji
- -------------------------
Hatim A. Tyabji
Enclosures
<PAGE>
1996 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
WE MOVE MONEY: DELIVERING A WORLD OF ELECTRONIC PAYMENT
[SEAL]
VERIFONE 1996 ANNUAL REPORT
[LOGO] VERIFONE
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VeriFone provides hardware and software systems that enable secure electronic
payment among consumers, merchants and financial institutions. As the leader in
electronic payment systems for the merchant countertop, we support the broadest
range of applications in the industry. Our products access all the principal
payment networks. And we have formed strong relationships with major banks, card
issuers, transaction processors, technology companies and value-added resellers.
Our comprehensive product line includes credit, debit and smart card
payment systems; application, network and communications software; and
Internet commerce products. In addition, we offer the most comprehensive
customer service in our industry, as well as product financing and consulting
services. VeriFone solutions are being used by retail merchants, healthcare
providers, government agencies, restaurants, service stations, convenience
stores, Internet merchants, transaction processors and consumers.
VeriFone's strategy is to continue to pursue market opportunities on a
global scale. In addition to automating traditional merchant point-of-sale
applications worldwide, we are driving developments in the rapidly evolving
consumer systems and Internet commerce markets.
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FINANCIAL HIGHLIGHTS
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<TABLE>
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SELECTED FINANCIAL AND OTHER DATA
YEARS ENDED DECEMBER 31,
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(IN THOUSANDS, EXCEPT PER SHARE DATA AND EMPLOYEES) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Net revenues $472,460 $387,016 $316,108 $264,227 $228,928
Operating income 53,517 41,737 37,469 30,409 31,409
Net income 39,264 32,505 28,110 21,946 24,439
Earnings per share 1.53 1.32 1.14 0.88 0.99
Working capital 145,239 210,999 182,229 167,555 154,503
Total assets 404,980 379,516 330,552 292,505 241,153
Global employees 2,850 2,471 1,932 1,750 1,562
</TABLE>
Annual Net Revenues
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[GRAPH]
Annual Net Income
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[GRAPH]
R&D Expenditure
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[GRAPH]
Earning Per Share
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[GRAPH]
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TO OUR STOCKHOLDERS
WHEN I TALK ABOUT VERIFONE--to our customers, stockholders or employees--I often
like to begin by underscoring what it is we do, and in our view do better than
anyone else. VeriFone develops, markets and supports the hardware and software
systems that enable electronic payment, on a global scale, among consumers,
merchants and financial institutions. To describe our business in a phrase--WE
MOVE MONEY.
Nineteen ninety-six was a significant year for VeriFone, as we delivered
solid operating results, made substantial investments in opportunities for
future growth, and overall, strengthened our position as the leading provider
of end-to-end electronic payment systems.
These are very exciting times for the Company. The nature of electronic
payment is expanding rapidly, with emerging technologies creating new
opportunities in markets like Internet and consumer systems. As the global
leader in electronic payment systems, we are in a unique position to leverage
our competencies, our customer and technology partner relationships, and our
resources in pursuit of these opportunities.
NEW MARKETS, PRODUCTS AND SERVICES
Many of you have probably tracked our progress in the world of Internet
commerce, because that is where so much industry attention has been focused.
After almost two years in this fast-moving market, we have concluded that, while
the growth of Internet commerce may not be an overnight phenomenon, the market
potential is truly vast.
We believe that we are well positioned for success in the Internet
commerce market. I am proud to say that we are on schedule in accomplishing
our mission of deploying secure payment solutions to enable commerce on the
World Wide Web. In 1996 we unveiled the first Internet payment product suite,
including our vGATE and vPOS software, that allows the use of the
MasterCard/Visa Secure Electronic Transaction (SET) protocol between the
merchant and the financial institution. SET is expected to become the
industry standard for handling secure Internet credit card transactions. Just
as we made "Slide and Go" credit and debit card transactions fast, secure and
easy, we are aiming to make "Click and Go" secure Internet transactions a
standard payment solution.
To facilitate our progress in this new market, we have entered into
strategic relationships with several key Internet technology providers, such
as Hewlett Packard, Microsoft, Netscape and Oracle. For example, our vPOS
Internet payment solution is currently embedded in the new Microsoft Merchant
Server for Internet retailing. The list of customers that have selected our
vPOS and vGATE software for their Internet commerce strategies is impressive
as well--and includes Bank of America, First USA Paymentech, Royal Bank of
Canada, Sumitomo Credit and Wells Fargo Bank.
Last year our focus on the consumer market also sharpened. We announced plans
to develop our new VeriSmart system, which will be the first software-centric
smart card solution that is independent of particular card programs and hardware
devices. Combining smart card technology with client/server software and
consumer applications, VeriSmart is being designed to link consumers to their
banks, telephones, utility companies, merchants and other personal services.
Through our VeriFone Personal ATM, telephones, TV set-top boxes, PCs and other
devices, consumers will be able to access multiple stored value card schemes,
shopper-loyalty programs, information services and healthcare applications.
In addition, we made substantial progress last year in the development and
deployment of our Omnihost software, which is a client/server solution for
transaction processing. Our financial institution customers, who have looked to
us for traditional merchant point-of-sale (POS) solutions, are starting to
migrate their legacy back-end systems to more modern technology, such as
Omnihost software, which is now being deployed worldwide. A significant
development in this area was the global agreement that we entered into last year
with Hewlett Packard to jointly market our Omnihost software as an application
running on the HP 9000 family of enterprise servers. The agreement calls for
collaborative activities in other areas, including Internet commerce and smart
card applications.
TWO
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Our continued metamorphosis into a complete hardware, software and services
company led to the creation last year of our Centum Consulting group, which
advises customers on a range of electronic payment strategies and alternatives,
and our Professional Services group, which helps design, build, support and
manage electronic payment solutions for our customers. These organizations
complement the extensive customer service offered through VeriFone Support
Services as well as the leasing, rental and equipment management programs
offered through VeriFone finance.
CONTINUED PROFITABILITY
While pursuing new markets, products and services, we have not lost sight of the
necessity of delivering solid revenues and profits from our traditional
business. Our business remained strong last year, as we shipped our 5 millionth
system, established our 100th country market and maintained our profitability.
Net revenues for the full year 1996 rose 22.1 percent to $472.5 million,
compared with net revenues of $387.0 million in 1995. Income from operations
grew 28.2 percent to $53.5 million in 1996, compared with $41.7 million a year
ago. Net income increased 20.8 percent to $39.3 million, or $1.53 per share,
compared with $32.5 million, or $1.32 per share in 1995.
Our growth last year continued to be global in nature. Our U.S. revenues
increased by 16.9 percent year-over-year, and our international revenues
increased by 31.1 percent year-over-year. Consistent with these results, the
portion of our revenues generated from countries outside the U.S. increased to
39.1 percent last year.
FOCUS ON STOCKHOLDER VALUE
Underscoring our confidence in the fundamentals of our business, we repurchased
2.5 million shares of outstanding Common Stock for $100.0 million in open market
transactions last year. We also adopted economic value-added (EVA) principles of
financial measurement, which focus on the efficient management of capital.
Through EVA, we will strive to further improve the overall strength of our
balance sheet.
As managers, our ultimate responsibility is to maximize stockholder value.
Our strategy of building businesses in varied markets--horizontal, vertical and
geographic--has allowed us to deliver solid operating results. These results, in
turn, have allowed us to make significant investments in new opportunities--like
the ones mentioned above--that provide the foundation for our future growth. It
is through this dual focus on current operating results and long-term
opportunities that we intend to carry out our responsibility to the Company's
stockholders.
LOOKING TO THE FUTURE
We look forward to the challenges that lie ahead in the rapidly changing world
of electronic payment. I would like to extend my personal thanks to our
stockholders and our customers for the major role you have played in our success
throughout this exciting and productive year. I would also like to thank our
employees, whose commitment to excellence has made VeriFone the leading company
it is today.
/s/ Hatim A. Tyabji
Hatim A. Tyabji
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
This letter contains forward-looking statements concerning the Company's
performance and plans. Important factors to consider in this regard are
discussed on pages 15 to 17 of this annual report.
THREE
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Page four - Foreign language letter
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Page five - Foreign language letter
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Page six - Foreign language letter
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Page seven - Foreign language letter
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Page eight - Foreign language letter
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Page nine - Foreign language letter
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SELECTED CONSOLIDATED FINANCIAL DATA
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Consolidated Statements of Income Data:
YEARS ENDED DECEMBER 31,
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(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Net revenues $472,460 $387,016 $316,108 $264,227 $228,928
Costs and expenses:
Cost of revenues 256,250 202,356 160,776 129,644 109,576
Research and development 53,434 45,036 38,442 33,546 28,322
Selling, general and administrative 109,259 97,887 79,421 70,628 59,621
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Total costs and expenses 418,943 345,279 278,639 233,818 197,519
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Income from operations 53,517 41,737 37,469 30,409 31,409
Interest income and other, net 1,785 4,045 2,712 2,610 2,344
Minority interest in consolidated
subsidiary -- -- (615) (2,082) --
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Income before income taxes 55,302 45,782 39,566 30,937 33,753
Provision for income taxes 16,038 13,277 11,456 8,991 9,314
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Net Income $ 39,264 $ 32,505 $ 28,110 $ 21,946 $ 24,439
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Net income per share $ 1.53 $ 1.32 $ 1.14 $ 0.88 $ 0.99
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Common and common equivalent shares
used in computing per share amounts 25,737 24,543 24,596 24,875 24,606
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Consolidated Balance Sheet Data:
Working capital $145,239 $210,999 $182,229 $ 167,555 $154,503
Total assets 404,980 379,516 330,552 292,505 241,153
Long-term debt and obligations under
capital leases--non-current portion 517 2,205 7,515 12,180 2,216
Stockholders' equity 239,566 264,385 218,372 195,177 174,092
</TABLE>
TEN
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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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 and the Market
Price of the Company's Stock" (which are also discussed in the Company's Annual
Report on Form 10-K for 1996). The Company cautions investors that its business
is subject to significant risks and uncertainties.
The following table sets forth, for the fiscal years indicated, selected
operational data as a percentage of net revenues:
YEARS ENDED DECEMBER 31,
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(PERCENTAGES MAY NOT TOTAL DUE TO ROUNDING) 1996 1995 1994
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Net revenues 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues 54.2 52.3 50.9
Research and development 11.3 11.6 12.2
Selling, general and administrative 23.1 25.3 25.1
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Total costs and expenses 88.7 89.2 88.1
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Income from operations 11.3 10.8 11.9
Interest income and other, net 0.4 1.0 0.9
Minority interest in consolidated subsidiary 0.0 0.0 (0.2)
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Income before income taxes 11.7 11.8 12.5
Provision for income taxes 3.4 3.4 3.6
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Net income 8.3% 8.4% 8.9%
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The Company's net revenues were $472.5 million in 1996, $387.0 million in 1995
and $316.1 million in 1994, reflecting growth of 22.1% from 1995 to 1996 and
22.4% from 1994 to 1995.
UNITED STATES OPERATIONS--The following table sets forth, by market, revenues
from sales in the United States and the percentage change year-over-year for the
fiscal years indicated:
<TABLE>
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YEARS ENDED DECEMBER 31,
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REVENUES PERCENTAGE CHANGE
(IN MILLIONS) (FROM PRIOR YEAR)
MARKET 1996 1995 1994 1996 1995
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<S> <C> <C> <C> <C> <C>
Financial retail $187.4 $171.3 $156.4 9.4% 9.5%
Petroleum/convenience store 43.3 29.8 21.0 45.3 41.9
Multi-lane retail* 39.8 34.5 30.2 15.4 14.2
Healthcare/government 12.6 11.1 8.0 13.5 38.8
Other 4.4 (0.7) 0.4 -- --
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United States net revenues $287.5 $246.0 $216.0 16.9% 13.9%
--------------------------------- -------------------
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* THE MULTI-LANE FIGURES ABOVE HAVE BEEN RESTATED YEAR-TO-DATE TO REFLECT THE
COMBINATION OF MULTI-LANE RETAIL AND LABOR MANAGEMENT SYSTEMS.
ELEVEN
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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The increase in revenues from sales in the United States during 1996 and 1995
was due primarily to increased sales in the financial retail market,
petroleum/convenience-store market and multi-lane market.
Revenue from the financial retail market increased in 1996 and 1995, although
it declined as a percentage of total United States revenues, accounting for
65.2% of total United States revenues in 1996, compared with 69.6% in 1995 and
72.4% in 1994. Revenue growth (in absolute dollars) in the financial retail
market in 1996 and 1995 was due primarily to continued acceptance of credit and
debit card transaction systems.
Revenue growth in the petroleum/convenience-store market in 1996 and 1995
was due primarily to demand for the integrated Ruby SuperSystem-Registered
Trademark- and OMNI-Registered Trademark- 490 terminals sold to major oil
companies and OEM resellers, and sold via distributors--which resell products
to petroleum/convenience-store dealers and jobbers.
Revenue growth in the multi-lane market in 1996 and 1995 reflected revenues
from both the multi-lane retail and labor management markets. Revenue from the
multi-lane retail market was $28.5 million in 1996, $27.6 million in 1995 and
$21.6 million in 1994. Revenue from labor management systems was $11.3 million
in 1996, $6.9 million in 1995 and $8.6 million in 1994.
Revenue from the healthcare and government market was relatively stable in
1996 after growth in 1995. In 1995, revenue growth from the
government/healthcare market was due primarily to increased shipments to various
states for food stamp programs, fish and game licensing programs, and Medicaid
patient eligibility verification programs.
INTERNATIONAL OPERATIONS--The following table sets forth, by geographic region,
revenues from sales outside the United States, and the percentage change year-
over-year for the fiscal years indicated:
<TABLE>
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REVENUES PERCENTAGE CHANGE
(IN MILLIONS) (FROM PRIOR YEAR)
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GEOGRAPHIC REGION 1996 1995 1994 1996 1995
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<S> <C> <C> <C> <C> <C>
Asia-Pacific $ 64.4 $ 40.9 $ 22.7 57.5% 80.2%
Europe, Middle East and Africa 69.1 57.0 47.4 21.2 20.3
Americas 51.5 43.1 30.0 19.5 43.7
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International net revenues $185.0 $141.0 $100.1 31.2% 40.9%
----------------------------------- ---------------------
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</TABLE>
The increase in revenues from sales outside the United States during 1996 and
1995 was driven primarily by worldwide demand for electronic payments, the
expansion of chip-card opportunities outside the United States, and the
continued development of new country markets. International sales represented
39.1%, 36.4% and 31.7% of the Company's net revenues in 1996, 1995 and 1994,
respectively.
Growth in international sales during 1996 and 1995 occurred in all geographic
regions. International revenue growth during 1996 was due in significant part to
shipments to Australia, the People's Republic of China, Japan, Spain and Canada.
In contrast, Mexico, Germany and Italy had lower shipments in 1996.
International revenue growth during 1995 was due in significant part to
shipments to the People's Republic of China, Mexico, Italy, Canada and Japan. In
contrast, Saudi Arabia, Korea and Brazil had lower shipments in 1995.
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, including local economic conditions, as discussed below under "Factors
That May Affect Future Results and the Market Price of the Company's Stock."
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 United
States dollars.
TWELVE
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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PRODUCT ANALYSIS--The following table sets forth, by product type, net revenues
and the percentage change year-over-year for the fiscal years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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REVENUES PERCENTAGE CHANGE
(IN MILLIONS) (FROM PRIOR YEAR)
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PRODUCT TYPE 1996 1995 1994 1996 1995
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<S> <C> <C> <C> <C> <C>
Basic terminals $ 13.7 $ 15.9 $ 17.6 (13.8)% (9.7)%
High-functionality terminals 201.0 164.9 136.6 21.9 20.7
Fully integrated systems 44.1 27.4 23.3 60.9 17.6
Printers and PIN pads 123.9 122.7 98.8 1.0 24.2
Smart card systems 18.6 8.5 1.1 118.8 672.7
Other* 71.2 47.6 38.7 49.6 23.0
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$472.5 $387.0 $316.1 22.1% 22.4%
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</TABLE>
* "OTHER" INCLUDES CERTAIN SOFTWARE, SERVICES, LEASING, ACCESSORIES AND OTHER
REVENUE.
The increase in net revenues in 1996 and 1995 was due, in part, to a shift in
product mix from basic terminals to high-functionality systems (such as
TRANZ-Registered Trademark- 330 and TRANZ 460 products), fully integrated
systems (such as OMNI 490 and the Ruby SuperSystem), and smart card systems
(such as SC-TM- 552 and SC 542 Smart Card Reader/Writers). The increase in
other revenues in 1996 and 1995 was due to several factors, including growth
in software revenue and VeriFone Finance's recurring revenue stream
(consisting primarily of revenue related to sales-type lease arrangements and
term and month-to-month rental programs).
GROSS MARGINS (NET REVENUES LESS COST OF REVENUES)--Gross margins were 45.8%,
47.7% and 49.1% in 1996, 1995 and 1994, respectively. The decrease in gross
margins was due in part to a higher proportion of sales to international
markets, which typically have lower gross margins. The decrease was also due to
other factors, including general competitive pricing pressures and shifts in the
Company's overall business and product mix.
The Company currently expects its gross margins to continue to be affected by
changes in business segment mix, product mix, competition and other factors, as
discussed below under "Factors That May Affect Future Results and the Market
Price of the Company's Stock."
R&D EXPENSES--Research and development expenses increased 18.6% in 1996 and
17.2% in 1995. R&D expenses, as a percentage of net revenues, decreased to 11.3%
in 1996, compared with 11.6% in 1995 and 12.2% in 1994. The increase in R&D
expenses in 1996 and 1995 was due, in part, to the development of software
applications for new markets (including the Internet and labor management
markets), the development of new software applications for existing markets and
the development of new system platforms. The Company currently 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.
SG&A EXPENSES--Selling, general and administrative (SG&A) expenses increased
11.6% in 1996 and 23.3% in 1995. As a percentage of net revenues, SG&A expenses
were 23.1%, compared with 25.3% in 1995 and 25.1% in 1994. The increase in SG&A
expenses during 1996 and 1995 was due primarily to the expansion of the
Company's domestic and international sales and support forces, increased
spending for marketing and sales programs to support new and existing products,
and the development of additional international markets. In addition, in 1995,
the Company incurred a $1.4 million, before tax, one-time charge related to the
acquisition of EIT and TimeCorp.
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 and the Market Price of the Company's Stock.") The Company
currently expects that, in the long term, SG&A expenses will continue to
increase in absolute dollars but may decline as a percentage of net revenues.
THIRTEEN
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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INTEREST INCOME AND OTHER, NET--Interest income and other, net, was $1.8 million
in 1996, compared with $4.0 million in 1995 and $2.7 million in 1994. The
decrease in interest income and other, net, in 1996 was due primarily to lower
investment balances as a result of the repurchase of treasury shares. The
increase in interest income and other, net, in 1995 was due primarily to the
sale of a portion of EIT's interest in Terisa Systems for a net gain of $2.5
million. This gain is partially offset by a reduction in interest income
resulting from a decline in investment balances.
TAX RATE--The Company's combined federal, state and foreign effective income tax
rate was 29% for 1996, 1995 and 1994. The combined tax rate differs from the
federal statutory rate primarily because the Company does not provide for United
States federal income taxes on the undistributed earnings of its foreign
subsidiaries, which the Company intends to permanently reinvest in those
operations.
NET INCOME--Net income increased 20.8% during 1996 and 15.6% during 1995.
Earnings per share were $1.53 in 1996, $1.32 in 1995 and $1.14 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments at December 31, 1996
decreased to $47.9 million from $82.8 million at December 31, 1995. The
Company experienced positive cash flow from operations of $64.1 million
during 1996 as a result of net income, a decrease in inventory, an increase
in trade payables and other accrued liabilities, and depreciation and
amortization. The Company used $35.5 million for investing in 1996 as a
result of 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 $54.1 million for financing activities during 1996, which
included the repurchase of shares partially offset by proceeds from issuance
of shares.
During 1996, the Company repurchased 2,495,500 shares of outstanding Common
Stock in the open market for an aggregate purchase price of $100.0 million.
The Company's Board of Directors has authorized the Company to repurchase
during the first quarter of 1997 up to 200,000 shares of outstanding Common
Stock in the open market for an aggregate purchase price of up to $9.0 million.
At December 31, 1996, the Company's principal sources of liquidity included
$47.9 million in cash, cash equivalents and short-term investments; $30.0
million available under an unsecured United States currency bank line of credit,
expiring in April 1997; $17.0 million available under an unsecured foreign
currency bank line of credit, expiring in May 1997; and $3.0 million available
under an unsecured foreign currency bank line of credit, expiring in January
1998. At December 31, 1996, $20.0 million was outstanding under the $30.0
million line of credit, $15.7 million was outstanding under the $17.0 million
line of credit, and $1.2 million was outstanding under the $3.0 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 9.3%. 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 December 31, 1996, the Company
had $1.3 million outstanding under these notes. In addition, at December 31,
1996, the Company had obligations under capital leases of $900,000.
Inventories at December 31, 1996 decreased to $59.5 million, compared with
$76.6 million at December 31, 1995. This decline was due primarily to inventory
management programs.
Net trade accounts receivable at December 31, 1996 increased to $131.2
million from $96.4 million at December 31, 1995. This increase was due, in part,
to growth in total net revenues, conditions in a number of markets resulting in
longer payment terms, and a greater percentage of international revenues which
typically have longer payment terms and cycles. Days sales outstanding were 95
days at December 31, 1996, compared with 79 days at December 31, 1995.
The Company currently expects to have significant cash needs during 1997 in
connection with various events, including the repurchase of shares, development
of new products 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 (including expected renewals of and substitutes for
such arrangements), will be sufficient to meet its projected cash needs.
FOURTEEN
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE MARKET PRICE OF THE COMPANY'S
STOCK
The Company's operations are subject to various risks and uncertainties, many of
which are beyond the Company's control. The following highlights some of these
risks.
VARIATIONS IN QUARTERLY RESULTS--The Company's quarterly operating results are
subject to various risks and uncertainties, including risks and uncertainties
related to: local economic conditions; competitive pressures; 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; and other factors as discussed
below. Accordingly, the Company's operating results may vary materially from
quarter to quarter.
The Company operates with little backlog and, as a result, net revenues in
any quarter are substantially dependent on the orders booked and shipped in that
quarter. Because the Company's operating expenses are based on anticipated
revenue levels and because a high percentage of the Company's expenses are
relatively fixed, if anticipated shipments in any quarter do not occur as
expected, the Company's operating results may be adversely affected and fall
significantly short of expectations. Any other unanticipated decline in the
growth rate of the Company's net revenues, without a corresponding and timely
reduction in the growth of operating expenses, could also have an adverse effect
on the Company and its future operating results.
The Company aims to prudently control its operating expenses. However, there
is no assurance that, in the event of any revenue, gross margin or other
shortfall in a quarter, the Company will be able to control expenses
sufficiently to meet profitability objectives for the quarter.
Compounding these risks is the fact that a substantial portion of the
Company's net revenues in each quarter generally results from shipments during
the latter part of the quarter. For this and other reasons, the Company may not
learn of shortfalls in revenues, earnings or other financial results relative to
expectations until very 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's business may be characterized as showing a pattern, in that,
historically, net revenues during the first calendar quarter of a year have
generally been less than net revenues during the fourth quarter of the preceding
year.
CHANGES IN GROSS MARGINS--Certain of the Company's net revenues are derived from
products and markets--such as international and government markets--which
typically have lower gross margins compared to other products and markets, due
to higher costs and/or lower prices associated with the lower gross margin
products and markets. The Company currently expects that its net revenues from
international markets will continue to increase as a percentage of total net
revenues, and its net revenues from government markets may increase. In
addition, the Company is currently experiencing pricing pressures due to a
number of factors, including competitive conditions and consolidation within
certain groups of customers. To the extent that these factors continue, the
Company's gross margins would decline, which would adversely affect the Company
and its future operating results.
Downward pressure on the Company's gross margins may be mitigated by other
factors, such as a reduction in product costs and/or an increased percentage of
net revenues from higher gross margin products, such as software. The Company is
aiming to reduce its product costs and to increase its percentage of net
revenues from software. However, there is no assurance that these efforts will
be successful.
NEW MARKETS AND PRODUCTS--The Company is entering new markets, including the
Internet commerce market and the consumer smart card market. At present, these
new markets are relatively small and rapidly changing, and the development of
these markets depends in significant part on the widespread adoption of new
technologies by financial institutions, merchants and consumers; the emergence
of industry standards; and other factors. There is no assurance that these
markets will develop as expected by the Company. If these 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 and its future
operating results may be adversely affected.
The Company is developing a number of products for these new markets--
including a number of Internet commerce and consumer products. There is no
assurance that these development efforts will be successful or that, if
successfully developed, these products will achieve commercial success.
Similarly, in connection with entering these new markets, the Company has
entered into or expects to enter into relationships with a number of companies
in these markets--including Microsoft, Netscape, Oracle and others. These
relationships may not develop as expected by the Company, and thus, the
expected benefits from the relationships may not be obtained.
FIFTEEN
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
GROWTH DEPENDENCIES--In general, the Company's future growth is 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.
ACQUISITIONS--The Company may acquire or make substantial investments in other
businesses in the future. Any such acquisition or investment would entail
various risks, including the difficulty of assimilating the operations and
personnel of the acquired business; the potential disruption of the Company's
ongoing business; and generally, the potential inability of the Company to
obtain the desired financial and strategic benefits from the acquisition or
investment. These factors could have a material adverse effect on the Company
and its future operating results. Future acquisitions and investments by the
Company could also result in substantial cash expenditures, potentially dilutive
issuances 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.
INTERNATIONAL OPERATIONS--The Company's international operations, including
international sales and manufacturing, have grown substantially, and thus,
the Company is increasingly affected by the risks associated with
international operations. Such risks include managing an organization spread
over various countries; fluctuations in currency exchange rates (as discussed
further below); the burden of complying with international laws and other
regulatory and product certification requirements, and changes in such laws
and requirements; tariffs and other trade barriers; import and export
controls; international staffing and employment issues; political and
economic instability; and longer payment cycles in certain countries. The
Company's manufacturing facilities outside the United States, which are 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.
The majority of the Company's international sales are denominated in United
States currency. An increase in the value of the United States dollar relative
to foreign currencies could make the Company's products sold internationally
less competitive. The Company has offices in a number of foreign countries, the
operating expenses of which are also subject to the effects of fluctuations in
foreign currency exchange rates. Although the Company engages in hedging
transactions that may partially offset the effects of fluctuations in foreign
currency exchange rates, financial exposure may nonetheless result primarily due
to the timing of transactions and movement of exchange rates.
COMPETITION--The various markets in which the Company operates are becoming
increasingly competitive as a number of other companies develop and sell
products that compete with the Company's products in these markets. Certain of
these competitors have significantly more financial and technical resources than
the Company. The Company faces additional competitive factors in foreign
countries, including preferences for national vendors and difficulties in
obtaining necessary certifications and in meeting the requirements of government
policies. These competitive factors may result in, among other things, price
discounts by the Company and sales lost by the Company to competitors that may
adversely affect the Company and its future operating results.
THIRD-PARTY DISTRIBUTORS--The Company uses various channels to market and
distribute its products, including direct sales to end-users and sales to end-
users via third-party distributors. Third-party distributors are a substantial
channel for distribution internationally and are increasingly becoming a
substantial channel for distribution in the United States. Accordingly, the
Company's ability to market and distribute its products depends in significant
part on its relationship with third-party distributors, as well as the
performance and financial condition of these distributors. In the event that the
Company's relationship with its distributors deteriorates, or the performance or
financial condition of the distributors becomes unsatisfactory, the Company and
its future operating results could be adversely affected.
SOLE SUPPLIERS--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 continue to provide these components to the Company could
result in significant manufacturing delays that could adversely affect the
Company and its future operating results.
SIXTEEN
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
EXCESS OR OBSOLETE INVENTORY--Managing the Company's inventory of components and
finished products is a complex task. A number of factors--including the need to
maintain a significant inventory of certain components which are in short supply
or which must be purchased in bulk to obtain favorable pricing, the general
unpredictability of demand for specific products and customer requests for quick
delivery schedules--may result in the Company maintaining excess inventory.
Other factors--including changes in market demand and technology--may cause
inventory to become obsolete. Any excess or obsolete inventory could result in
price reductions and inventory write-downs, which in turn could adversely affect
the Company and its operating results.
SECURITY FEATURES OF PRODUCTS--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.
PROPRIETARY TECHNOLOGY--The Company seeks to establish and protect the
proprietary aspects of its products by relying on applicable patent, copyright,
trademark and trade secret laws and on confidentiality, licensing and other
contractual arrangements. Notwithstanding the Company's efforts to protect its
proprietary rights, it may be possible for unauthorized third parties to copy
certain portions of the Company's products or to reverse engineer or obtain and
use technology that the Company regards as proprietary. In addition, the laws of
certain countries do not protect the Company's proprietary rights to the same
extent as the laws of the United States. Accordingly, there can be no assurance
that the Company will be able to protect its proprietary technology against
unauthorized third-party copying or use, which could adversely affect the
Company's competitive position.
The Company from time to time receives notices from third parties claiming
that the Company's products infringe such parties' proprietary rights.
Regardless of its merit, any such claim can be time-consuming, result in costly
litigation and require the Company to enter into royalty and licensing
agreements. Such royalty or licensing agreements may not be offered or may not
be available on terms acceptable to the Company. If a successful claim is made
against the Company and the Company fails to develop or license a substitute
technology, the Company and its future operating results could be adversely
affected.
HIRING AND RETENTION OF EMPLOYEES--The Company's continued growth and success
depend to a significant extent on the continued service of senior management and
other key employees and the hiring of new qualified employees. Competition for
highly skilled business, technical, marketing and other personnel is intense,
particularly in the strong economic cycle currently prevailing for high
technology companies. The loss of one or more key employees or the Company's
inability to attract additional qualified employees or retain other employees
could have an adverse effect on the Company and its future operating results.
In addition, the Company may experience increased compensation costs in order to
compete for skilled employees.
REGULATORY REQUIREMENTS--The Company's operations are subject to various 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.
SEISMIC RISKS--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 earth quake faults. In the event of a major
earthquake, the Company and its future operating results could be adversely
affected.
STOCK MARKET FLUCTUATIONS--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. The market price of the
Company's Common Stock may be significantly affected by various factors such as
quarterly variations in the Company's operating results; changes in revenue
growth rates for the Company as a whole or for specific geographic areas,
business units or products; changes in earnings estimates by market analysts;
the announcement of new products or product enhancements by the Company or its
competitors; speculation in the press or analyst community; and general market
conditions or market conditions specific to particular industries. There can be
no assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future.
SEVENTEEN
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,395 $ 72,882
Short-term investments 515 9,939
Accounts receivable, net of allowance for doubtful accounts
of $3,842 and $4,675 at 1996 and 1995, respectively 131,192 96,419
Net investment in sales-type leases 13,450 10,487
Inventories 59,524 76,611
Deferred income taxes 11,079 16,827
Prepaid expenses and other current assets 9,163 7,158
----------------------
Total current assets 272,318 290,323
Net investment in sales-type leases 19,329 15,360
Property, plant and equipment, net 64,722 50,942
Other assets, net 48,611 22,891
----------------------
$404,980 $379,516
----------------------
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,641 $ 20,693
Accrued compensation 12,612 11,072
Other accrued liabilities 26,790 18,805
Income taxes payable 7,504 12,910
Deferred revenue 9,951 5,275
Notes payable and capital leases 38,581 10,569
----------------------
Total current liabilities 127,079 79,324
Non-current portion of capital leases 517 2,205
Deferred income taxes 37,818 33,602
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value; 2,000 shares authorized; none issued
and outstanding -- --
Common Stock, $0.01 par value; 50,000 shares authorized; 23,341 and
24,906 shares issued and outstanding at 1996 and 1995, respectively 248 244
Additional paid-in capital 109,101 110,911
Less treasury stock at cost; 1,924 shares at 1996 (72,700) --
Retained earnings 191,666 152,402
Other 11,251 828
----------------------
Total stockholders' equity 239,566 264,285
----------------------
$404,980 $379,516
----------------------
----------------------
</TABLE>
SEE ACCOMPANYING NOTES.
EIGHTEEN
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
(IN THOUSAND, EXCEPT PER SHARE DATA) 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $472,460 $387,016 $316,108
Costs and expenses:
Cost of revenues 256,250 202,356 160,776
Research and development 53,434 45,036 38,442
Selling, general and administrative 109,259 97,887 79,421
--------------------------------------
Total costs and expenses 418,943 345,279 278,639
--------------------------------------
Income from operations 53,517 41,737 37,469
Interest and other income 2,875 4,993 3,331
Interest expense (1,090) (948) (619)
Minority interest in consolidated subsidiary -- -- (615)
--------------------------------------
Income before income taxes 55,302 45,782 39,566
Provision for income taxes 16,038 13,277 11,456
--------------------------------------
Net income $ 39,264 $ 32,505 $ 28,110
--------------------------------------
--------------------------------------
Net income per share $ 1.53 $ 1.32 $ 1.14
--------------------------------------
--------------------------------------
Common and common equivalent shares used
in computing per share amounts 25,737 24,543 24,596
--------------------------------------
--------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
NINETEEN
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
-----------------------------------------------------------------------------------
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN TREASURY RETAINED STOCKHOLDERS'
(IN THOUSANDS) STOCK STOCK CAPITAL STOCK EARNINGS OTHER EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $-- $243 $110,475 $ (7,895) $ 91,980 $ 374 $ 195,177
Repurchase of 451 shares of
Common Stock -- -- -- (9,280) -- -- (9,280)
Reissuance of 433 shares of
Common Stock under the Employee
Stock Purchase Plan (ESPP), and
pursuant to option and
other activity -- -- (3,470) 6,882 -- -- 3,412
Issuance of 19 shares of Common
Stock for cash, notes receivable
and services -- -- 35 -- -- (20) 15
Tax benefit from stock options -- -- 700 -- -- -- 700
Unrealized loss on available-
for-sale investments,
net of tax -- -- -- -- -- (156) (156)
Accumulated translation adjustment -- -- -- -- -- 394 394
Net income -- -- -- -- 28,110 -- 28,110
-----------------------------------------------------------------------------------
Balance, December 31, 1994 -- 243 107,740 (10,293) 120,090 592 218,372
Repurchase of 600 shares of
Common Stock -- -- -- (14,543) -- -- (14,543)
Reissuance of 447 shares of
Common Stock under the ESPP, and
pursuant to option and other
activity -- 1 (809) 8,948 -- -- 8,140
Issuance of 115 shares of Common
Stock pursuant to option activity -- -- 69 -- -- -- 69
Sale of 738 shares of Common Stock -- -- 2,680 15,888 -- -- 18,568
Tax benefit from stock options -- -- 1,038 -- -- -- 1,038
TimeCorp stock dividend -- -- 193 -- (193) -- --
Unrealized gain on available-
for-sale investments, net of tax -- -- -- -- -- 175 175
Accumulated translation adjustment -- -- -- -- -- 61 61
Net income -- -- -- -- 32,505 -- 32,505
-----------------------------------------------------------------------------------
Balance, December 31, 1995 -- 244 110,911 -- 152,402 828 264,385
Repurchase of 2,496 shares of
Common Stock -- -- -- (99,991) -- -- (99,991)
Reissuance of 572 shares of
Common Stock under the ESPP and
pursuant to option activity -- -- (14,488) 27,291 -- -- 12,803
Issuance of 359 shares of
Common Stock under the ESPP and
pursuant to option activity -- 4 6,728 -- -- -- 6,732
Tax benefit from stock options -- -- 5,950 -- -- -- 5,950
Unrealized gain on available-
for-sale investments, net of tax -- -- -- -- -- 10,825 10,825
Accumulated translation adjustment -- -- -- -- -- (402) (402)
Net income -- -- -- -- 39,264 -- 39,264
-----------------------------------------------------------------------------------
Balance, December 31, 1996 $-- $248 $109,101 $(72,700) $191,666 $11,251 $ 239,556
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
TWENTY
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $39,264 $32,505 $28,110
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 23,291 19,857 18,055
Deferred income taxes 2,883 2,558 (2,238)
Net increase in receivables, inventories and prepaid expenses (26,623) (37,313) (14,097)
Net increase in payables, accruals and other current liabilities 25,693 9,281 16,514
Other, net (402) 62 674
-------------------------------------
Net cast provided by operating activities 64,106 26,950 47,018
-------------------------------------
Cash flows from investing activities:
Capital expenditures (31,111) (26,469) (12,642)
Acquisition of other assets (13,741) (8,607) (623)
Acquisition of subsidiary, net of cash acquired -- -- (10,361)
Available-for-sale investments:
Purchases (70,663) (10,686) (54,547)
Maturities 74,350 38,917 58,777
Held-to-maturity investments:
Purchases -- (3,666) --
Maturities 5,704 9,194 --
-------------------------------------
Net cash used for investing activities (35,461) (1,317) (19,396)
-------------------------------------
Cash flows from financing activities:
Proceeds from notes payable and capital leases 31,497 3,294 11,490
Payments on notes payable and capital leases (5,173) (12,110) (15,333)
Proceeds from issuance of Common Stock 19,535 26,777 3,437
Purchase of treasury stock (99,991) (14,5430 (9,280)
-------------------------------------
Net cash (used for) provided by financial activities (54,132) 3,418 (9,686)
-------------------------------------
Net increase (decrease) in cash and cash equivalents (25,487) 29,051 17,936
Cash and cash equivalents at beginning of year 72,882 43,831 25,895
-------------------------------------
Cash and cash equivalents at end of year $47,395 $72,882 $43,831
-------------------------------------
-------------------------------------
Schedule of non-cash transactions:
Tax benefits from stock options $ 5,950 $ 1,038 $ 700
-------------------------------------
-------------------------------------
Write-off of fully depreciated fixed assets $ 5,277 $ 4,298 $ 2,552
-------------------------------------
-------------------------------------
Write-off of fully amortized other assets $ 7,452 $ 840 $ 4,434
-------------------------------------
-------------------------------------
Acquisition of minority interest $ -- $ -- $ 3,667
-------------------------------------
-------------------------------------
Acquisition of equipment under capital leases $ -- $ -- $ 279
-------------------------------------
-------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 986 $ 885 $ 1,584
-------------------------------------
-------------------------------------
Income taxes paid $11,706 $ 6,691 $ 8,424
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
TWENTY-ONE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE ONE--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The consolidated financial statements comprise the
accounts of VeriFone, Inc. and its worldwide subsidiaries (collectively, the
"Company"), including Enterprise Integration Technologies Corporation ("EIT")
and TimeCorp Systems, Inc. ("TimeCorp"), which were merged into the Company
effective November 1995 (see Note 2). The mergers have been accounted for as
poolings of interests, and prior periods have been restated to include both
EIT and TimeCorp. All significant intercompany balances and transactions have
been eliminated.
For purposes of presentation, the Company has indicated its fiscal year as
ending on December 31; as of calendar year 1996 the Company operates and
reports on a 52-53 week fiscal year which ends on the last Friday in the
calendar year. Prior to 1996, the Company's fiscal year ended on the Friday
closest to December 31. Fiscal years 1996, 1995 and 1994 are 52-week years.
INDUSTRY SEGMENT AND CONCENTRATION OF CREDIT RISK--The Company, which
operates in a single industry segment, designs, manufactures, markets and
services transaction automation systems. The Company sells its products to
customers in diversified industries globally. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses, and
such losses have been within management's expectations. No customer accounted
for 10% or more of net revenues in 1996, 1995 or 1994.
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash investments, trade
receivables and foreign exchange contracts. The Company invests its excess
cash in deposits with major banks, in local and state government obligations,
commercial paper, and in money market instruments issued by companies with
strong credit ratings and in a variety of industries. The counterparties to
the agreements relating to the Company's foreign exchange contracts consist
of financial institutions of high credit standing. The Company does not
believe there is significant risk of non-performance by these counterparties.
CONCENTRATION OF OTHER RISKS--The Company's operating results are subject to
various risks and uncertainties as discussed in the Company's Annual Report
on Form 10-K, including risks and uncertainties related to local economic
conditions; competitive pressures; 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; and other factors. Accordingly, the Company's
operating results may vary materially from quarter to quarter.
The Company operates with little backlog and, as a result, net revenues in
any quarter are substantially dependent on the orders booked and shipped in
that quarter. Because the Company's operating expenses are based on
anticipated revenue levels and because a high percentage of the Company's
expenses are relatively fixed, if anticipated shipments in any quarter do not
occur as expected, the Company's operating results may be adversely affected
and fall significantly short of expectations. Any other unanticipated decline
in the growth rate of the Company's net revenues, without a corresponding and
timely reduction in the growth of operating expenses, could also have an
adverse effect on the Company and its future operating results.
Compounding these risks is the fact that a substantial portion of the
Company's net revenues in each quarter generally results from shipments
during the latter part of the quarter. For this and other reasons, the
Company may not learn of shortfalls in revenues, earnings or other financial
results relative to expectations until very 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's international operations, including international sales and
manufacturing, have grown substantially, and thus, the Company is
increasingly affected by the risks associated with international operations.
Such risks include managing an organization spread over various countries;
fluctuations in currency exchange rates (as discussed further below); the
burden of complying with international laws and other regulatory and product
certification requirements, and changes in such laws and requirements;
tariffs and other trade barriers; import and export controls; international
staffing and employment issues; political and economic instability; and
longer payment cycles in certain countries. The Company's manufacturing
facilities outside the United States, which are 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.
TWENTY-TWO
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The majority of the Company's international sales are denominated in U.S.
currency. An increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products sold internationally less
competitive. The Company has offices in a number of foreign countries, the
operating expenses of which are also subject to the effects of fluctuations
in foreign currency exchange rates. Although the Company engages in hedging
transactions which may partially offset the effects of fluctuations in
foreign currency exchange rates, financial exposure may nonetheless result,
primarily due to the timing of transactions and movement of exchange rates.
Most components used in the Company's products are purchased from outside
sources. 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 continue to provide these components to the Company
could result in significant manufacturing delays that could adversely affect
the Company and its future operating results.
Managing the Company's inventory of components and finished products is a
complex task. A number of factors--including the need to maintain a
significant inventory of certain components that are in short supply or that
must be purchased in bulk to obtain favorable pricing, the general
unpredictability of demand for specific products and customer requests for
quick delivery schedules--may result in the Company maintaining excess
inventory. Other factors--including changes in market demand and
technology--may cause inventory to become obsolete. Any excess or obsolete
inventory could result in price reductions and inventory write-downs, which
in turn could adversely affect the Company and its operating results.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
REVENUE RECOGNITION AND DEFERRED REVENUE--The Company utilizes direct sales
and both sales-type and operating lease arrangements to provide product to
its customers. Revenue from both direct sales and sales-type leases is
recognized when product shipment terms are met. Operating lease revenue is
recognized ratably over the term of the lease.
Under sales-type lease accounting, the present value of the minimum lease
payments computed at the interest rate implicit in the lease is recorded as
sales revenue. The cost of the leased property less the present value of the
unguaranteed residual value accruing to the benefit of the Company, computed
at the interest rate implicit in the lease, is charged against income. The
net investment in sales-type leases is carried at the present value of the
minimum lease payments plus the present value of the unguaranteed residual
value accruing to the benefit of the Company over the life of the lease. The
excess of the sum of the future minimum lease payments to be received, over
the carrying value of the lease, represents unearned interest income.
Unearned interest income is amortized into income using the interest method
over the lives of the leases.
Software licenses are recognized as revenues, either after execution of a
license agreement and certain terms of the agreement have been met, or upon
receipt of a definitive purchase order and shipment of the product. In either
case, software licenses are recognized as revenue only if no significant
vendor obligations remain and collection of the resulting receivable is
probable. Revenue for software services is recognized using the percentage of
completion method.
Extended warranty revenue is deferred and recognized ratably over the
warranty contract period. Service revenue is recognized when services are
performed.
PRODUCT WARRANTY OBLIGATIONS--The Company provides, at the time of sale, for
the estimated cost to warranty its products against defects in materials and
workmanship. The term of the Company's warranty is generally one year.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS--Cash and cash equivalents
consists of cash and highly liquid investments on deposit with banks maturing
within 90 days or less from the date of purchase. Short-term investments
consist of high-quality money market instruments with original maturities
greater than 90 days.
Marketable securities held as collateral against the Company's line of
credit for foreign currency transactions are classified as held-to-maturity
and are carried at the amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Available-for-sale securities are
carried at fair market value with unrealized gains or losses, net of tax,
included in "Other" in stockholders' equity. In 1995 the Company realized a
gain of $2.5 million from the sale of EIT's interest in Terisa Systems. The
Company did not realize any material gains or losses on investments during
1994 and 1996.
TWENTY-THREE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS--For certain of the Company's financial
instruments, including cash and cash equivalents, short-term investments,
accounts receivable and payable, and accrued liabilities, the carrying
amounts approximate fair value due to their short maturities. The carrying
value of long-term debt approximates its fair value, determined by using
discounted cash flow analysis based upon quoted market rates for similar types
of borrowing arrangements. The carrying amounts of the Company's forward
exchange contracts approximate the estimated fair market value of the
contracts outstanding at December 31, 1996 and 1995; differences in such
amounts are immaterial.
The following tables summarize the Company's marketable investments as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1996
Available-for-sale securities
Foreign corporate debt $ 5,000 $ -- $ -- $ 5,000
Obligations of state and local government agencies 594 2 -- 596
Money market mutual funds 20,609 -- -- 20,609
Investment in Cybercash, Inc. 4,000 17,939 -- 21,939
----------------------------------------------------------
$ 30,203 $ 17,941 $ -- $ 48,144
----------------------------------------------------------
----------------------------------------------------------
As of December 31, 1995
Available-for-sale securities
Obligations of state and local government agencies $ 41,404 $ 33 $ -- $ 41,437
Money market mutual funds 20,175 -- -- 20,175
Investment in Cybercash, Inc. 4,000 -- -- 4,000
----------------------------------------------------------
$ 65,579 $ 33 $ -- $ 65,612
----------------------------------------------------------
----------------------------------------------------------
Held-to-maturity securities
Obligations of state and local government agencies $ 5,704 $ -- $ -- $ 5,704
----------------------------------------------------------
----------------------------------------------------------
Balance sheet classification as of December 31, 1996
Cash equivalent $ 25,690 $ -- $ -- $ 25,690
Short-term investments 513 2 -- 515
Other assets 4,000 17,939 -- 21,939
----------------------------------------------------------
Total $ 30,203 $ 17,941 $ -- $ 48,144
----------------------------------------------------------
----------------------------------------------------------
Balance sheet classification as of December 31, 1995
Cash equivalent $ 57,344 $ 33 $ -- $ 57,377
Short-term investments 9,939 -- -- 9,939
Other assets 4,000 -- -- 4,000
----------------------------------------------------------
----------------------------------------------------------
$ 71,283 $ 33 $ -- $ 71,316
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
ALL INVESTMENTS AT DECEMBER 31, 1995 AND 1996 MATURE IN ONE YEAR OR LESS.
INVENTORIES--Inventories are stated at the lower of cost (principally first-in,
first-out) or market. Inventories at December 31, 1996 and 1995 are composed of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 28,992 $ 39,183
Work in process 4,741 6,369
Finished goods 25,791 31,059
------------------------
$ 59,524 $ 76,611
------------------------
------------------------
</TABLE>
TWENTY-FOUR
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of 20 years for buildings and 3 to 5 years or the
remaining life of the lease for other property and equipment. For equipment on
rental under operating leases, depreciation is computed using the straight-line
method over the life of the lease. Property, plant and equipment, including
equipment on rental under operating leases, at December 31, 1996 and 1995 are as
follows:
DECEMBER 31,
----------------------
(IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------
Buildings $20,265 $11,587
Machinery and equipment 72,870 55,300
Furniture and fixtures 8,901 7,320
Leasehold improvements 11,068 12,650
Equipment under capitalized leases 5,343 5,558
Equipment on rental under operating leases 5,039 5,237
----------------------
123,486 97,652
Accumulated depreciation and amortization (58,764) (46,710)
----------------------
$64,722 $50,942
----------------------
----------------------
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires recognition
of impairment of long-lived assets in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable to such assets.
The effect of adopting the statement was immaterial.
OTHER ASSETS--Other assets include the following at December 31, 1996 and 1995:
DECEMBER 31,
----------------------
(IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------
Capitalized software costs $22,070 $17,552
Purchased intangibles 17,903 24,875
Investment in Cybercash, Inc. 21,939 4,000
Other investments 3,000 --
Other 9,481 3,738
----------------------
74,393 50,165
Accumulated depreciation and amortization (25,782) (27,274)
----------------------
$48,611 $22,891
----------------------
----------------------
The Company capitalizes certain costs for internally developed software in
accordance with SFAS No. 86. Such costs are amortized, commencing upon first
customer shipment, over the greater of either the straight-line basis with
estimated useful lives of three to five years, or the ratio of current revenue
to the total of current and anticipated future revenue. Capitalized software
costs are stated at the lower of cost or net realizable value. Amortization
expense was $2,357,000, $3,726,000 and $4,016,000 in 1996, 1995 and
1994, respectively, and is included in cost of revenues.
Purchased intangibles consist of amounts relating to the acquisition of
VeriFone Finance and other purchased technology, and are being amortized over
useful lives of four to ten years. Amortization of purchased intangibles was
$3,603,000, $4,012,000 and $4,586,000 in 1996, 1995 and 1994, respectively.
FOREIGN CURRENCY TRANSLATION--The Company translates the assets and liabilities
of its foreign sales subsidiaries at year-end exchange rates. Gains and losses
from this translation are credited or charged to "Other" in stockholders'
equity. The foreign manufacturing entities use the U.S. dollar as the functional
currency and translate monetary assets and liabilities at year-end exchange
rates, and inventories, property, and non-monetary assets and liabilities at
historical rates. Adjustments resulting from these translations are included in
the results of operations and are immaterial.
TWENTY-FIVE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXPOSURE MANAGEMENT--The Company enters into foreign exchange
contracts designed to hedge against changes in foreign currency exchange rates
to reduce the impact of currency fluctuations on recorded monetary assets and
liabilities denominated in currencies other than the entity's functional
currency. The monetary accounts subject to currency exchange rate fluctuations
are primarily cash, trade receivables and intercompany accounts receivable and
payable. Amounts receivable and payable on forward foreign exchange contracts
are not reflected on the balance sheet. Gains and losses on these contracts,
which equal the difference between the foreign exchange contract rate and the
prevailing market spot rate at the time of valuation, are recognized in the
consolidated statements of operations.
The Company does not trade foreign exchange contracts or act as a broker of
foreign exchange contracts to incur trading profit. Because the impact of
movements in currency exchange rates on foreign exchange contracts offsets the
related impact on the underlying items being hedged, these instruments do not
subject the Company to risk that would otherwise result from changes in currency
exchange rates. At December 31, 1996, the Company had eight forward contracts
open in nine currencies maturing in January 1997. Currencies hedged include the
British Pound, French Franc, Canadian Dollar, Australian Dollar, Singapore
Dollar and Spanish Peseta. The Company had forward foreign exchange contracts to
buy foreign currencies with notional amounts of $5,132,000 and $4,934,000 at
December 31, 1996 and 1995, respectively. The Company had forward foreign
exchange contracts to sell foreign currencies with notional amounts of
$8,500,000 and $11,439,000 at December 31, 1996 and 1995, respectively. Foreign
exchange contracts require the company to buy and sell foreign currencies and
generally mature within one to three months, and as a result the notional value
approximates the fair market value.
NET INCOME PER SHARE--Net income per common and common equivalent share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of stock options (using the treasury stock method). Fully
dilutive earnings per share have not been presented as the differences are
immaterial.
ACCOUNTING FOR STOCK-BASED COMPENSATION--In 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 provides an alternative to the Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
accounts for its employee stock plans in accordance with the provisions of APB
No. 25 (see Note 7).
RECLASSIFICATION--The Company has reclassified certain prior year balances to
conform with current year presentation.
NOTE TWO--BUSINESS COMBINATIONS
In November 1995, the Company merged with EIT and TimeCorp. VeriFone outstanding
stock was exchanged for Common Stock of EIT and TimeCorp 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 was issued in connection with the mergers. The mergers were accounted for
as a pooling 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.
The Company incurred costs in connection with the mergers and consolidation
of operations. Included in "Selling, general and administrative" expenses in
1995 are merger-related expenses totaling $1,425,000, consisting primarily of
charges for transaction and professional fees, before tax.
TWENTY-SIX
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE THREE--NET INVESTMENT IN SALES-TYPE LEASES
The following lists the components of the net investment in sales-type leases:
DECEMBER 31,
----------------------
(IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------
Total minimum lease payments receivable $38,120 $30,226
Residual values 1,765 1,208
----------------------
39,885 31,434
Less unearned interest income (7,106) (5,587)
----------------------
Net investment in sales-type leases $32,779 $25,847
----------------------
----------------------
Net investment classified as:
Current $13,450 $10,487
Non-current 19,329 15,360
----------------------
$32,779 $25,847
----------------------
----------------------
Future minimum lease payments to be received on sales-type leases at December
31, 1996 are as follows (in thousands): 1997-$16,066; 1998-$10,376; 1999-$5,895;
2000-$3,704; 2001-$2,079.
NOTE FOUR--NOTES PAYABLE AND CAPITAL LEASES
Notes payable and capital leases include the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable under a $30,000,000 million unsecured line of credit expiring
April 1997, interest rate at 5.86% $ 20,000 $ --
Notes payable to financing companies, non-recourse, due in monthly installments,
interest applies at rates ranging from 7.93% to 9.32%, maturing at various
dates through June 1998, secured by all rights in certain leases including a
security interest in equipment under certain lease agreements and future
minimum lease payments 1,344 3,002
Notes payable due in Australian and Japanese currencies, under a $17,000,000 million
unsecured line of credit for foreign currency transactions, expiring May 1997,
interest rate at bank's cost plus 0.50% (6.29% at December 31, 1996) 15,656 --
Notes payable in Australian currency, under a $8,500,000 unsecured line
of credit expired May 1996, interest rate at bank's cost plus 0.75%
(8.48% at December 31, 1995) -- 6,508
Notes payable in Japanese currency, under a $3,000,000 million line of credit in Japan,
for foreign currency transactions expiring January 1998, secured by short-term
investments equal to 110% of borrowings, interest rate at bank's cost plus 0.50%
(4.41% at December 31, 1996) 1,224 1,555
Obligations under capital leases 874 1,709
-----------------------
Total notes payable and capital leases, including current maturities 39,098 12,774
Less current maturities (38,581) (10,569)
-----------------------
Total non-current portion of capital leases $ 517 $ 2,205
-----------------------
-----------------------
</TABLE>
Principal maturities of notes payable and capital leases at December 31, 1996
are as follows (in thousands): 1997-$38,581; 1998-$476; and 1999-$41. The
weighted average interest rate for borrowings was 6.50% and 6.71% in 1996 and
1995, respectively.
The fair value of notes payable to a financing company and obligations under
the lines of credit in the U.S., Australia and Japan were $38,213,000 and
$10,610,000 at December 31, 1996 and 1995, respectively. Fair market value is
determined by using discounted cash flow analysis based upon quoted market rates
for similar types of borrowing arrangements.
Covenants governing the Company's lines of credit require the maintenance of
certain financial ratios. At December 31, 1996, the Company was in compliance
with these covenants.
The Company leases certain equipment under non-cancelable leases. Accumulated
amortization related to assets under capital leases was $4,862,000 and
$4,257,000 at December 31, 1996 and 1995, respectively.
TWENTY-SEVEN
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE FIVE--INCOME TAXES
Income before income taxes consisted of the following:
YEARS ENDED DECEMBER 31,
----------------------------------
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------
Income before income taxes:
United States $22,937 $16,554 $19,318
Foreign 32,365 29,228 20,248
----------------------------------
Total income before income taxes $55,302 $45,782 $39,566
----------------------------------
----------------------------------
The provision for income taxes is computed in accordance with SFAS No. 109,
"Accounting for Income Taxes," and consists of the following:
YEARS ENDED DECEMBER 31,
----------------------------------
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------
Current income taxes:
U.S. federal $ 8,150 $ 5,123 $ 8,352
Foreign 2,351 3,874 2,132
State 1,879 1,846 3,107
----------------------------------
12,380 10,843 13,591
----------------------------------
Deferred income taxes:
U.S. federal 2,391 1,022 (2,455)
Foreign 412 40 24
State 855 1,372 296
----------------------------------
3,658 2,434 (2,135)
----------------------------------
$16,038 $13,277 $11,456
----------------------------------
----------------------------------
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes. The sources and
tax effects of the differences are as follows:
YEARS ENDED DECEMBER 31,
----------------------------------
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------
Tax at U.S. federal statutory rate based on
pre-tax income before minority interest $19,356 $16,024 $14,055
State income taxes, net of federal benefits 1,777 2,091 2,213
Research tax credits -- -- (43)
Tax-exempt income (527) (422) (846)
Permanently invested profits of foreign
subsidiaries (6,650) (6,685) (3,500)
Purchased intangibles 969 2,019 --
Other 1,113 250 (423)
----------------------------------
Provision for income taxes $16,038 $13,277 $11,456
----------------------------------
----------------------------------
TWENTY-EIGHT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred income taxes result from differences in the timing of certain revenue
and expense items for tax and financial reporting purposes. Significant
components of deferred tax assets and liabilities are as follows:
DECEMBER 31,
-----------------------
(IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------------------
Deferred tax assets:
Deferred income $ 2,378 $ 2,120
Inventory valuation and reserves 5,544 4,597
Other reserves and accruals 5,615 5,033
Fixed assets and leases 701 --
State income taxes 2,100 1,871
Other -- 83
-----------------------
Total deferred tax assets 16,338 13,704
-----------------------
Deferred tax liabilities:
Undistributed profits of foreign subsidiaries (31,558) (27,194)
Software and intangibles (3,910) (2,280)
Fixed assets and leases -- (928)
Unrealized gain on available-for-sale securities (7,095) --
Other (514) (77)
-----------------------
Total deferred tax liabilities (43,077) (30,479)
-----------------------
Net deferred tax liabilities $(26,739) $(16,775)
-----------------------
-----------------------
The cumulative unrecognized deferred tax liability related to undistributed
earnings of foreign subsidiaries which the Company intends to permanently invest
is approximately $30.5 million.
The Internal Revenue Service is currently examining the Company's tax returns
for each of the years ended December 31, 1991, 1990 and 1989. Management
believes that adequate provision has been made for any adjustments that might
result.
NOTE SIX--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company leases certain of its facilities under
non-cancelable operating leases. Rent expense was approximately $9,385,000,
$7,687,000 and $6,314,000 in 1996, 1995 and 1994, respectively.
Future minimum operating lease payments and commitments associated with the
Company's new facilities at December 31, 1996 are as follows (in thousands):
1997-$10,856; 1998-$10,665; 1999-$8,568; 2000-$7,581; 2001-$6,881; thereafter-
$29,772.
CONTINGENCIES--In the ordinary course of business, various claims are made
against the Company. Historically, the liability associated with the resolution
of such claims has not been significant. The Company is not aware of any claims
pending against it, the resolution of which is expected to have a material
impact on the Company's financial condition.
TWENTY-NINE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE SEVEN--STOCKHOLDERS' EQUITY
STOCK OPTIONS--In 1985, the Company adopted an Incentive Stock Option Plan.
Options under this Plan may be granted to any employee (including officers) of
the Company. In 1987, the Company adopted a Supplemental Stock Option Plan which
allows for options other than incentive stock options to be granted to any
employee (including officers) or consultant to the Company. In 1992, the Company
adopted a Non-employee Directors' Stock Option Plan. As amended, there were
7,737,617 shares of Common Stock authorized for issuance under these Plans. As
of December 31, 1996, there remained 3,851,261 shares reserved for issuance
under these Plans.
Options may be granted at prices generally not lower than fair market value
of the Company's Common Stock at the date of grant. Options vest over varying
terms of up to four years, as determined by the Board of Directors, and expire
five or ten years after the date of grant or upon certain events. At December
31, 1996, options for 1,148,146 shares were exercisable at prices ranging from
$0.32 to $49.50 per share.
Information with respect to activity under the Plans is as follows:
<TABLE>
<CAPTION>
SHARES UNDER OUTSTANDING OPTIONS
--------------------------------
WEIGHTED-
SHARES AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES PRICE PER SHARE EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 765,001 1,729,092 $ 0.05-$29.50 $ 18.53
Increase in shares reserved 154,573 -- -- --
Options cancelled 141,587 (141,587) $ 0.25-$29.50 $ 20.58
Options granted (887,473) 887,473 $ 1.94-$21.75 $ 16.27
Options exercised -- (295,747) $ 0.05-$22.00 $ 4.77
--------------------------------------------------------------------------
Balance, December 31, 1994 173,688 2,179,231 $ 0.05-$29.50 $ 19.26
Increase in shares reserved 2,270,403 -- -- --
Options cancelled 170,056 (170,056) $ 0.32-$29.75 $ 22.20
Options granted (1,418,772) 1,418,772 $ 1.94-$29.75 $ 27.18
Options exercised -- (407,230) $ 0.05-$28.50 $ 16.55
--------------------------------------------------------------------------
Balance, December 31, 1995 1,195,375 3,020,717 $ 0.32-$29.75 $ 22.50
Increase in shares reserved 400,000 -- -- --
Options cancelled 377,047 (377,047) $ 0.32-$49.50 $ 33.31
Options granted (1,228,828) 1,228,828 $ 29.25-$49.50 $ 39.37
Options exercised -- (764,831) $ 0.32-$42.25 $ 20.06
--------------------------------------------------------------------------
Balance, December 31, 1996 743,594 3,107,667 $ 0.32-$49.50 $ 28.45
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
The options outstanding at December 31, 1996 have been segregated into four
price ranges for additional disclosure as follows (option amounts are recorded
in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------
WEIGHTED-AVG WEIGHTED- OPTIONS WEIGHTED-
RANGE OF OPTIONS REMAINING AVERAGE CURRENTLY AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PRICES DEC. 31, 1996 LIFE PRICE DEC. 31, 1996 PRICE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.32-$ 1.94 96 7.64 $ 1.84 46 $ 1.74
$15.00-$25.50 1,145 7.06 $21.36 684 $20.91
$26.23-$39.00 1,740 8.93 $33.42 406 $31.17
$41.00-$49.50 127 9.45 $44.22 12 $44.05
-----------------------------------------------------------------------------------
3,108 8.22 $28.45 1,148 $24.03
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN--In 1990, the Company adopted its Employee Stock
Purchase Plan, for which permanent, full-time employees who meet certain minimum
employment criteria are eligible. As amended, there were 1,000,000 shares of
Common Stock authorized for issuance under the Plan. As of December 31, 1996,
889,329 shares had been issued under the Plan (166,069 shares were issued in
1996), with 110,671 shares remaining reserved for issuance under the Plan.
Eligible employees may purchase stock at 85% of the lower of the closing price
at the beginning or end of the Plan offering period (six-month periods beginning
February and August). Through January 1995, Plan purchases were limited to 10%
of each employee's compensation; thereafter, Plan purchases are limited to 15%
of each employee's compensation.
THIRTY
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK COMPENSATION--The Company has elected to follow APB No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
SFAS No. 123 requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Pro forma information regarding the net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options granted subsequent to 1994 under the
fair value method of that statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model for
the multiple-option approach, with the following weighted-average assumptions
for 1996 and 1995: risk-free interest rate of 5.71% and 5.81%, respectively;
volatility factor of the expected market price of the Company's Common Stock of
45%; no expected dividend payments; and a weighted-average expected life of the
option of one year.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income over the options' vesting period.
The Company's pro forma information follows:
DECEMBER 31,
----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
- ------------------------------------------------------------------------
Pro forma net income $32,174 $29,852
Pro forma earnings per share $ 1.27 $ 1.28
Because SFAS No. 123 is applicable only to options granted subsequent to 1994,
its pro forma effect will not be fully reflected until 1998.
STOCK REPURCHASE/SALE--In 1996 and 1995, 2,496,000 and 600,000 shares were
repurchased for an aggregate purchase price of $99,991,000 and $14,543,000,
respectively. In October 1995, 660,000 shares were issued for an aggregate price
of $17,302,000.
401(K) RETIREMENT SAVINGS AND INVESTMENT PLAN--The Company has a 401(k) Plan
which, effective January 1, 1994, the Company began matching contributions to
the Plan equal to 50% of the first 6% of a participant's salary deferral
contribution, subject to a maximum of 3% of the participant's qualifying
contribution.
THIRTY-ONE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE EIGHT--GEOGRAPHIC SEGMENT DATA
United States operations primarily consist of product development, sales and
marketing, distribution and service. European operations consist of product
distribution through the Company's subsidiaries located in the United Kingdom,
France, Germany, Italy and Spain, and via third-party distributors in other
countries. The Americas, consisting of Latin America, the Caribbean and Canada,
engage primarily in product distribution via third-party distributors and
direct sales in Mexico and Canada. The Pacific Basin is primarily engaged in
product development and manufacturing through the Company's subsidiaries in
Taiwan and Kunshan and product distribution through the Company's subsidiaries
in Singapore, Hong Kong, Japan, Australia and the People's Republic of China,
and via third-party distributors.
Net sales to unaffiliated customers are based on the location of the
customer. Transfers between geographic areas are recorded at amounts generally
above cost and in accordance with the rules and regulations of the respective
governing tax authorities. Thus, the information may not be indicative of
results if the geographic areas were independent organizations. Geographic
information for the three years ended December 31, 1996 is presented in the
table below.
<TABLE>
<CAPTION>
GEOGRAPHIC AREA
------------------------------------------------------
UNITED PACIFIC BASIN
(IN THOUSANDS) STATES EUROPE AMERICAS AND OTHER ELIMINATIONS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated customers $ 287,518 $ 69,048 $ 51,478 $ 64,416 $ -- $ 472,460
Intercompany transfers 28,016 17,971 2,191 262,163 (310,341) --
------------------------------------------------------------------------------------
Net revenues $ 315,534 $ 87,019 $ 53,669 $ 326,579 $ (310,341) $ 472,460
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Income from operations $ 693 $ 4,369 $ 10,849 $ 35,326 $ 2,280 $ 53,517
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Income before income taxes $ 13,295 $ 4,363 $ 10,833 $ 36,388 $ (9,577) $ 55,302
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Identifiable assets $ 242,973 $ 57,350 $ 11,696 $ 263,160 $( 170,199) $ 404,980
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
1995
Sales to unaffiliated customers $ 245,988 $ 57,018 $ 43,111 $ 40,899 $ -- $ 387,016
Intercompany transfers 20,620 6,850 12 210,659 (238,141) --
------------------------------------------------------------------------------------
Net revenues $ 266,608 $ 63,868 $ 43,123 $ 251,558 $ (238,141) $ 387,016
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Income from operations $ 2,489 $ 6,261 $ 10,370 $ 21,740 $ 877 $ 41,737
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Income before income taxes $ 8,664 $ 6,189 $ 10,396 $ 22,505 $ (1,972) $ 45,782
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Identifiable assets $ 225,765 $ 43,031 $ 13,681 $ 177,600 $ (80,561) $ 379,516
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
1994
Sales to unaffiliated customers $ 216,055 $ 47,395 $ 29,996 $ 22,662 $ -- $ 316,108
Intercompany transfers 6,987 3,900 224 153,718 (164,829) --
------------------------------------------------------------------------------------
Net revenues $ 223,042 $ 51,295 $ 30,220 $ 176,380 $ (164,829) $ 316,108
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Income from operations $ 7,326 $ 3,370 $ 2,938 $ 20,054 $ 3,781 $ 37,469
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Income before income taxes $ 16,543 $ 3,410 $ 2,938 $ 21,559 $ (4,884) $ 39,566
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Identifiable assets $ 233,303 $ 37,151 $ 2,023 $ 149,768 $ (91,693) $ 330,552
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
THIRTY-TWO
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
VERIFONE, INC.
We have audited the accompanying consolidated balance sheets of VeriFone, Inc.
at December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of VeriFone,
Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
PALO ALTO, CALIFORNIA
JANUARY 17, 1997
STOCK PERFORMANCE
- --------------------------------------------------------------------------------
The following tables set forth, for the periods indicated, the high, low and
closing prices for the Company's Common Stock as reported by the New York Stock
Exchange and the Nasdaq Stock Market. VeriFone, Inc. began trading on the New
York Stock Exchange on August 10, 1995. The prices shown for the period that
VeriFone's Common Stock was traded on the Nasdaq Stock Market represent
quotations among dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions.
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW CLOSE
- -------------------------------------------------------------------------------
First quarter 47 1/2 25 3/4 42
Second quarter 52 5/8 35 1/4 42 1/4
Third quarter 50 1/2 34 1/8 46
Fourth quarter 45 3/8 28 3/4 29
FISCAL YEAR ENDED DECEMBER 31, 1995 HIGH LOW CLOSE
- -------------------------------------------------------------------------------
First quarter 27 20 3/4 24 1/2
Second quarter 24 3/4 19 3/4 24 1/2
Third quarter 31 3/8 23 3/4 27 7/8
Fourth quarter 30 3/8 24 3/4 28 5/8
As of December 31, 1996, there were approximately 1,396 holders of record of the
Company's Common Stock. The Company has never paid cash dividends on its Common
Stock. The Company currently intends to retain earnings, if any, for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.
THIRTY-THREE
<PAGE>
QUARTERLY DATA (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------
Net revenues $102,927 $124,959 $120,897 $123,677
Costs and expenses:
Cost of revenues 54,368 66,661 65,928 69,293
Research and development 12,573 14,004 13,070 13,787
Selling, general and administrative 27,134 29,210 27,007 25,908
--------------------------------------------
Total costs and expenses 94,075 109,875 106,005 108,988
--------------------------------------------
Income from operations 8,852 15,084 14,892 14,689
Interest income, net 609 750 578 (152)
--------------------------------------------
Income before income taxes 9,461 15,834 15,470 14,537
Provision for income taxes 2,744 4,591 4,487 4,216
-------------------------------------------
Net income $ 6,717 $ 11,243 $ 10,983 $ 10,321
--------------------------------------------
--------------------------------------------
Net income per share $ 0.26 $ 0.43 $ 0.42 $ 0.42
--------------------------------------------
--------------------------------------------
Shares used in per share calculations 26,039 26,322 26,073 24,515
--------------------------------------------
--------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 80,156 $ 94,850 $102,742 $109,268
Costs and expenses:
Cost of revenues 41,233 48,626 54,011 58,486
Research and development 10,833 11,109 11,467 11,627
Selling, general and administrative 21,235 23,127 26,238 27,287
--------------------------------------------
Total costs and expenses 73,301 82,862 91,716 97,400
--------------------------------------------
Income from operations 6,855 11,988 11,026 11,868
Interest income, net 496 391 2,060 1,098
--------------------------------------------
Income before income taxes 7,351 12,379 13,086 12,966
Provision for income taxes 2,132 3,590 3,795 3,760
--------------------------------------------
Net income $ 5,219 $ 8,789 $ 9,291 $ 9,206
--------------------------------------------
--------------------------------------------
Net income per share $ 0.21 $ 0.36 $ 0.38 $ 0.37
--------------------------------------------
--------------------------------------------
Shares used in per share calculations 24,389 24,173 24,423 25,186
--------------------------------------------
--------------------------------------------
</TABLE>
THIRTY-FOUR
<PAGE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Hatim A. Tyabji
Chairman of the Board, President
and Chief Executive Officer
VeriFone, Inc.
H.H. Haight IV*
Venture Capitalist
Advent International Corporation
J. Robert Harcharik**
Private Consultant in Telecommunications
Thomas E. Peterson*
Vice Chairman
BankAmerica Corporation and
Bank of America NT&SA
John R.C. Porter*
Chairman of the Board
Cast Alloys, Inc.
Clinton W. Silver
Former Deputy Chairman
Marks & Spencer Plc.
A. Michael Spence**
Dean, Graduate School of Business
Stanford University
R. Elton White**
Former President
NCR Corporation
* Audit Committee
** Compensation Committee
VERIFONE MANAGEMENT TEAM
Hatim A. Tyabji
Chairman of the Board, President
and Chief Executive Officer
Robin A. Abrams
Vice President and General Manager,
Americas Group
William G. Barmeier
Senior Vice President, General Counsel
and Secretary
Katherine B. Beall
Vice President, Human Resources
Roger B. Bertman
Vice President, Corporate Development
Eugene K. Buechele
Vice President, Software Development
Eldon M. Bullington
Vice President and Corporate Controller
Gary L. Grant
Vice President, Asia-Pacific, Sales Operations
and Marketing
George C. Hoyem
Vice President and General Manager,
Internet Commerce
Larry W. Kessler
Vice President and General Manager,
Asia-Pacific
Thomas J. Kilcoyne
Vice President, Consumer Systems Division
Curtis A. Lindemer
Treasurer
Patrick A. McGill
Vice President and Special Assistant
to the Chairman of the Board
C. Lloyd Mahaffey
Senior Vice President and General Manager,
Global Marketing and Software Systems
Division
James A. Palmer
Executive Vice President, Development and
Manufacturing
Alexander Pappas
Vice President and Chief Information Officer
Anthony T.M. Robertson
Vice President, Development
Jan-Erik Rottinghuis
Vice President, Europe, Middle East and Africa
Michael J. Shade
Vice President, Centum Consulting Services
William L. Smith
Vice President, U.S. Field Technical Support
Elmore E. Waller
Vice President and General Manager,
Petroleum Division
John Weitzner
Vice President, Operations
Robert L. Wilson
Vice President, Business Development,
Chip Card Adoption
Joseph M. Zaelit
Senior Vice President, Finance and
Administration, and Chief Financial Officer
INDEPENDENT AUDITORS
Ernst & Young LLP
Palo Alto, California
STOCKHOLDER INFORMATION
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders will be held on Friday, May 9, 1997 at 10:00
a.m. at the Stanford Park Hotel, 100 El Camino Real, Menlo Park, California
94025.
TRANSFER AGENT AND REGISTRAR
For questions concerning stock certificates, transfer of ownership and other
matters pertaining to stock registration, please contact:
The First National Bank of Boston
c/o Boston EquiServe
Shareholder Services
m/s 45-01-20
P.O. Box 644
Boston, MA 02101-0644
Phone: 617-575-3120
COMMON STOCK
The Company's stock is listed on the New York Stock Exchange and Pacific Stock
Exchange under the ticker symbol VFI.
INVESTOR INFORMATION
A copy of the Company's annual report, proxy statement, SEC Form 10-K, quarterly
SEC Form 10-Qs and press releases are available free of charge by writing
VeriFone's Investor Relations Department at Three Lagoon Drive, Redwood City,
CA 94065, or calling 415-598-5653.
This information is also available on our Web site: www.verifone.com.
THIRTY-FIVE
<PAGE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
VERIFONE, INC.
Three Lagoon Drive
Redwood City, CA 94065-1561
TEL: 415-591-6500
FAX: 415-598-5504
NET: www.verifone.com
RESEARCH & DEVELOPMENT
One Northwinds Center
2475 Northwinds Parkway, Suite 600
Alpharetta, GA 30201
12830 Earhart Avenue
Auburn, CA 95602-9027
16001 Bay Vista Drive, Suite 200
Clearwater, FL 34620-3102
14881 Quorum Drive, Suite 800
Dallas, TX 75240-7018
2000 West Commercial Blvd., Suite 202
Ft. Lauderdale, FL 33309-3060
Old Dispensary Road
Lapahoehoe, HI 96764-9027
800 El Camino Real
Menlo Park, CA 94025-4800
100 Kahelu Avenue
Mililani, HI 96789-3909
530 Lytton Avenue
Palo Alto, CA 94301-2539
Three Lagoon Drive
Redwood City, CA 94065-1561
VeriFone India Pvt. Ltd.
Indian Express Building, 2nd Floor
Dr. B.R. Ambedkar Road
Bangalore-560 001, India
VeriFone Technology Park
Golf View Homes
Wind Tunnel Road
Murgesh Palya
Bangalore-560 017, India
VeriFone S.A. & VeriFone B.V.
117/119 Quai de Valmy
75484 Paris, Cedex 10, France
VeriFone Pte. Ltd.
24 Raffles Place #14-01/06
Clifford Centre
Singapore 048621
VeriFone Technology Pte. Ltd.
CTS Building, 4th Floor
102 Kuang Fu South Road
10553 Taipei, Taiwan, R.O.C.
VeriFone (UK) Ltd.
Salamander Quay West
Park Lane, Harefield
Uxbridge, Middlesex
UB9 6NZ United Kingdom
MANUFACTURING
3080 Airway Avenue
Costa Mesa, CA 92626-4540
VeriFone Electronics (Kunshan) Co., Ltd.
312, Chin-Yang South Rd.
E.T.D.Z.
Kunshan, Jiang-Su Province, China
215300
VeriFone Taiwan Ltd.
6-2, Hsin Kai Fa Road
N.E.P.Z.
Kaohsiung, Taiwan, R.O.C.
VeriFone Technology Pte. Ltd.
CTS Building, 4th Floor
102 Kuang Fu South Road
10553 Taipei, Taiwan, R.O.C.
DISTRIBUTION
3080 Airway Avenue
Costa Mesa, CA 92626-4540
VeriFone Taiwan Ltd.
6-2, Hsin Kai Fa Road
N.E.P.Z.
Kaohsiung, Taiwan, R.O.C.
CUSTOMER SERVICE
3080 Airway Avenue
Costa Mesa, CA 92626-4540
12540 Westport Road
Louisville, KY 40245-3860
Transaction Technology Pty. Ltd.
Unit 8 552-560 Church Street
North Parramatta NSW 2151
U.S. SALES OFFICES
ATLANTA
USA Division Headquarters
One Northwinds Center
2475 Northwinds Parkway, Suite 600
Alpharetta, GA 30201
CHICAGO
3701 Algonquin Road, Suite 710
Rolling Meadows, IL 60008-3121
DALLAS
14881 Quorum Drive, Suite 800
Dallas, TX 75240-7018
DAYTON
580 Lincoln Park Blvd. East, Suite 222
Dayton, OH 45429-3493
LOS ANGELES
3080 Airway Avenue
Costa Mesa, CA 92626-4540
NEW YORK
One Mountain Blvd., Suite 201
Warren, NJ 07059-5613
PALO ALTO
530 Lytton Avenue
Palo Alto, CA 94301-2539
PORTLAND
VeriFone Finance, Inc.
Oregon Business Park
16100 SW 72nd Avenue, Building 18
Portland, OR 97224-7745
SAN FRANCISCO
Three Lagoon Drive
Redwood City, CA 94065-1561
TAMPA
16001 Bay Vista Drive, Suite 200
Clearwater, FL 34620-3102
INTERNATIONAL SALES OFFICES
ARGENTINA
VeriFone Argentina S.A.
Florida 375-5 Piso Of. "C"
1005 Buenos Aires, Argentina
AUSTRALIA
VeriFone Australia Pty. Ltd.
Level 9, 275 Alfred Street North
North Sydney NSW 2060, Australia
VeriFone Australia Pty. Ltd.
14 Hamilton Street
Mont Albert VIC 3127
Australia
INTERNATIONAL SALES OFFICES
BRAZIL
VeriFone de Brasil, Ltda.
Av. Dr. Chucri Zaidan, 920-90. Andar
Sao Paulo, S.P. Barsil 04583-904
CANADA
VeriFone Ltd.
33 Yonge Street, Suite 730
Toronto, Ontario M5E 1S9, Canada
FRANCE
VeriFone S.A. & VeriFone B.V.
117/119 Quai de Valmy
75484 Paris, Cedex 10, France
GERMANY
VeriFone GmbH
Otto-von-Guericke-Ring 13-15
65205 Wiesbaden-Nordenstadt, Germany
HONG KONG
VeriFone North Asia Ltd.
20/F Chinachem Century Tower
178 Gloucester Road
Wanchai, Hong Kong
INDIA
VeriFone India Pvt. Ltd.
Indian Express Building
Dr. B.R. Ambedkar Road
Bangalore-560 001, India
ITALY
VeriFone S.r.l.
Via Cesare Cantu, 19
I-20092 Cinisello Balsamo
Milan, Italy
JAPAN
Nihon VeriFone K.K.
Gobancho Center Bldg. 3rd Fl.
10-2, Gobancho, Chiyoda-ku
Tokyo 102, Japan
Latin America & the Caribbean
One Datran Center
9100 South Dadeland Blvd.
Miami, FL 33156-7852
MEXICO
VeriFone, S.A. de C.V.
Monte Elbruz, No. 124, 3rd Floor
Deleg. Miguel Hidalgo
Mexico D.F. 11560
PEOPLE'S REPUBLIC OF CHINA
VeriFone (Beijing)
Rm. 1860 New Century Office Tower
No. 6 Southern Road, Capital Gym.
100044 Beijing, China
SINGAPORE
VeriFone Pte. Ltd.
24 Raffles Place #14-01/06
Clifford Centre
Singapore 048621
SOUTH AFRICA
VeriFone (Pty) Limited
4 Pybus Road
Wierda Valley
Sandton 2146
Republic of South Africa
SPAIN
VeriFone Espana S.A.
Francisco Giralte, 2
28002 Madrid, Spain
VeriFone Espana S.A.
Diputacion, 279 3 3
08007 Barcelona, Spain
UNITED KINGDOM
VeriFone (UK) Ltd.
Salamander Quay West
Park Lane, Harefield
Uxbridge, Middlesex
UB9 6NZ United Kingdom
THIRTY-SIX
<PAGE>
VeriFone is an equal employment opportunity and affirmative action employer.
VeriFone, the VeriFone logo, OMNI, Omnihost, Ruby SuperSystem and TRANZ are
United States registered trademarks. VeriFone and the VeriFone logo are
registered or pending registration in most of the foreign jurisdictions where
the Company does business. In addition, SC, vGATE and vPOS are trademarks of
the Company. All other brand names or trademarks appearing in this Annual Report
are the property of their respective holders.
<PAGE>
[LOGO] VERIFONE
GLOBAL HEADQUARTERS
Three Lagoon Drive
Redwood City, CA 94065-1561 #14-01/06
TEL: 415-591-6500
FAX: 415-598-5504
NET: www.verifone.com
USA DIVISION SALES & SUPPORT
One Northwinds Center
2475 Northwinds Parkway, Suite 600
Alpharetta, GA 30301
TEL: 770-410-0890
FAX: 770-754-3478
ASIA-PACIFIC SALES & SUPPORT
VeriFone Pte. Ltd.
24 Raffles Place #14-01/06
Clifford Centre
Singapore, 048821
TEL: 65-538-5110
FAX: 85-538-5120
CANADA SALES & SUPPORT
VeriFone Ltd.
33 Yonge Street, Suite 730
Toronto, Ontario M5E 1S9, Canada
TEL: 416-214-1334
FAX: 416-214-5599
EUROPE, MIDDLE EAST & AFTICA SALES & SUPPORT
VeriFone S.A. & VeriFone B.V.
117/119 Quaide Valmy
75484 Parie, Cadex 10, France
TEL: 33-153-356-000
FAX: 33-153-358-002
LATIN AMERICA & THE CARIBBEAN SALES & SUPPORT
One Datran Center
9100 South Dadeland Blvd.
Miami, FL 33156-7852
TEL: 305-670-1820
FAX: 305-670-1699
