INVESTOR RELATIONS


SEC Filings

10-Q
VERIFONE SYSTEMS, INC. filed this Form 10-Q on 03/11/2013
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PAY 10Q 1/31/2013
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended January 31, 2013
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to           
Commission file number: 001-32465
VERIFONE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3692546
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2099 Gateway Place, Suite 600
San Jose, CA 95110
(Address of principal executive offices with zip code)
(408) 232-7800
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
 
 
Accelerated filer  ¨
Non-accelerated filer  ¨    (Do not check if a smaller reporting company)
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
At February 28, 2013, the number of shares outstanding of the registrant’s common stock, $0.01 par value was 108,336,269.
 




VERIFONE SYSTEMS, INC.
TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION
 
 
 
Item 1
 
 
 
 
Condensed Consolidated Statements of Operations
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
PART II — OTHER INFORMATION
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
Mine Safety Disclosures
 
 
 
Item 5
 
 
 
Item 6
 
 


2


PART I — FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS (Unaudited)

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended January 31,
 
2013
 
2012
 
(Unaudited, in thousands, except per share data)
Net revenues:
 
 
 
System solutions
$
281,708

 
$
312,641

Services
147,039

 
106,883

Total net revenues
428,747

 
419,524

Cost of net revenues:
 
 
 
System solutions
174,243

 
198,752

Services
82,542

 
64,134

Total cost of net revenues
256,785

 
262,886

Gross margin
171,962

 
156,638

Operating expenses:
 
 
 
Research and development
39,802

 
35,079

Sales and marketing
45,748

 
39,986

General and administrative
39,981

 
46,038

Amortization of purchased intangible assets
24,696

 
13,615

Total operating expenses
150,227

 
134,718

Operating income
21,735

 
21,920

Interest expense
(12,590
)
 
(14,634
)
Interest income
1,088

 
1,007

Other income (expense), net
3,940

 
(20,849
)
Income (loss) before income taxes
14,173

 
(12,556
)
Provision for (benefit from) income taxes
2,463

 
(9,782
)
Consolidated net income (loss)
11,710

 
(2,774
)
Net (income) loss attributable to noncontrolling interests
128

 
(350
)
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
$
11,838

 
$
(3,124
)
Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
 
 
 
Basic
$
0.11

 
$
(0.03
)
Diluted
$
0.11

 
$
(0.03
)
Weighted average number of shares used in computing net income per share:
 
 
 
Basic
107,934

 
105,833

Diluted
110,558

 
105,833

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended January 31,
 
2013
 
2012
 
(Unaudited, in thousands)
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
$
11,838

 
$
(3,124
)
Other comprehensive income (loss):
 
 
 
Net change in:
 
 
 
Foreign currency translation
48,275

 
6,958

Unrealized gain (loss) on marketable equity investment
484

 
(100
)
Unrealized loss on derivatives designated as cash flow hedges, net of $253 tax
927

 

Pension plan obligations
(174
)
 
142

Comprehensive income attributable to VeriFone Systems, Inc. stockholders
$
61,350

 
$
3,876


The accompanying notes are an integral part of these condensed consolidated financial statements.



4


VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
January 31, 2013
 
October 31, 2012
 
(Unaudited, in thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
476,668

 
$
454,072

Accounts receivable, net of allowances of $9,424 and $8,491
355,119

 
366,887

Inventories
188,783

 
178,274

Prepaid expenses and other current assets
138,175

 
136,210

Total current assets
1,158,745

 
1,135,443

Fixed assets, net
152,107

 
146,803

Purchased intangible assets, net
719,134

 
734,808

Goodwill
1,206,008

 
1,179,381

Deferred tax assets
215,963

 
215,139

Other long-term assets
82,109

 
79,033

Total assets
$
3,534,066

 
$
3,490,607

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
154,598

 
$
193,062

Accruals and other current liabilities
221,172

 
230,867

Deferred revenue, net
119,003

 
91,545

Short-term debt
52,585

 
54,916

Total current liabilities
547,358

 
570,390

 
 
 
 
Long-term deferred revenue, net
39,056

 
37,062

Long-term deferred tax liabilities
216,494

 
214,537

Long-term debt
1,238,966

 
1,252,701

Other long-term liabilities
71,110

 
70,440

Total liabilities
2,112,984

 
2,145,130

Commitments and contingencies

 

Redeemable noncontrolling interest in subsidiary
817

 
861

Stockholders’ equity:
 
 
 
Preferred stock: 10,000 shares authorized, no shares issued and outstanding as of January 31, 2013 and October 31, 2012

 

Common stock: $0.01 par value, 200,000 shares authorized, 108,409 and 108,074 shares issued, and 108,265 and 107,930 shares outstanding as of January 31, 2013 and October 31, 2012
1,084

 
1,081

Additional paid-in capital
1,557,640

 
1,543,127

Accumulated deficit
(192,185
)
 
(204,023
)
Accumulated other comprehensive income (loss)
17,123

 
(32,390
)
Total stockholders’ equity
1,383,662

 
1,307,795

Noncontrolling interest in subsidiaries
36,603

 
36,821

Total liabilities and equity
$
3,534,066

 
$
3,490,607

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended January 31,
 
2013
 
2012
 
(Unaudited, in thousands)
Cash flows from operating activities
 
 
 
Consolidated net income (loss)
$
11,710

 
$
(2,774
)
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net
50,932

 
31,859

Stock-based compensation expense
12,359

 
10,704

Non-cash interest expense

 
4,112

Deferred income taxes
(3,934
)
 
(8,490
)
Gain on divestiture of assets
(4,080
)
 

Write-off of debt issuance costs upon debt extinguishment

 
2,115

Other
(987
)
 
(1,804
)
Net cash provided by operating activities before changes in operating assets and liabilities
66,000

 
35,722

Changes in operating assets and liabilities, net of effects of business acquisitions:
 
 
 
Accounts receivable, net
13,235

 
17,154

Inventories, net
(8,072
)
 
(1,994
)
Prepaid expenses and other assets
(1,832
)
 
(10,694
)
Accounts payable
(39,297
)
 
(10,913
)
Deferred revenue, net
28,175

 
28,589

Other current and long term liabilities
(4,778
)
 
(25,696
)
Net change in operating assets and liabilities
(12,569
)
 
(3,554
)
Net cash provided by operating activities
53,431

 
32,168

 
 
 
 
Cash flows from investing activities
 
 
 
Capital expenditures
(20,789
)
 
(8,010
)
Acquisition of businesses, net of cash and cash equivalents acquired
(1,000
)
 
(1,067,517
)
Proceeds from divestiture of assets
6,000

 

Other investing activities, net
132

 
7

Net cash used in investing activities
(15,657
)
 
(1,075,520
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from debt, net of issuance costs
2,427

 
1,409,177

Repayments of debt
(18,506
)
 
(307,760
)
Repayments of senior convertible notes, including interest

 
(279,159
)
Proceeds from issuance of common stock through employee equity incentive plans
2,965

 
8,812

Payments of acquisition-related contingent consideration
(4,993
)
 

Distribution to noncontrolling interest stockholders
(134
)
 
(135
)
Net cash provided by (used in) financing activities
(18,241
)
 
830,935

Effect of foreign currency exchange rate changes on cash and cash equivalents
3,063

 
(2,166
)
Net increase (decrease) in cash and cash equivalents
22,596

 
(214,583
)
Cash and cash equivalents, beginning of period
454,072

 
594,562

Cash and cash equivalents, end of period
$
476,668

 
$
379,979

 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited

Note 1. Principles of Consolidation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of VeriFone Systems, Inc. (“we,” “us,” “our,” "VeriFone," and “the Company” refer to VeriFone Systems, Inc. and its consolidated subsidiaries) as of January 31, 2013 and October 31, 2012, and for the three months ended January 31, 2013 and 2012, have been prepared in accordance with GAAP (U.S. generally accepted accounting principles) for interim financial information and with the instructions on Form 10-Q pursuant to the rules and regulations of the SEC (U.S. Securities and Exchange Commission). In accordance with those rules and regulations, we have omitted certain information and notes normally provided in our annual consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring items, necessary for the fair presentation of our financial position and results of operations for the interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012. The results of operations for the three months ended January 31, 2013 are not necessarily indicative of the results expected for the entire fiscal year.
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of VeriFone Systems, Inc. and our wholly-owned and majority-owned subsidiaries. The accompanying unaudited Condensed Consolidated Financial Statements also include the results of companies acquired by us from the date of each acquisition. All significant inter-company accounts and transactions have been eliminated. Amounts pertaining to the noncontrolling ownership interests held by third parties in the operating results and financial position of our majority-owned subsidiaries are reported as "Net income (loss) attributable to noncontrolling interests" in our unaudited Condensed Consolidated Statements of Operations and as "Redeemable noncontrolling interest in subsidiary" on our unaudited Condensed Consolidated Balance Sheets when the third party ownership interest is redeemable at the option of the stockholder, outside of our control, and as "Noncontrolling interest in subsidiaries" on our unaudited Condensed Consolidated Balance Sheets in all other cases.
The condensed consolidated balance sheet at October 31, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

Certain prior period amounts reported in our unaudited Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the current period presentation, with no impact on previously reported operating results or financial position.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions about future events that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying Notes to Condensed Consolidated Financial Statements. The estimates and judgments affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates including those related to revenues, product returns, warranty obligations, bad debts, inventories, goodwill and intangible assets, income taxes, contingencies, share-based compensation, and litigation, among others. We base our estimates on historical experience and information available to us at the time these estimates are made. Actual results could differ materially from these estimates.

Significant Accounting Policies

During the three months ended January 31, 2013, there have been no changes in our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012.


7

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Concentrations of Credit Risk

For the three months ended January 31, 2013 and 2012, no single customer accounted for more than 10% of our total net revenues. For the three months ended January 31, 2013 and 2012, no single customer accounted for more than 10% of net revenues in either of our two reportable segments. As of January 31, 2013 and October 31, 2012, no single customer accounted for more than 10% of our total net accounts receivable.

Recent Accounting Pronouncements

During the three months ended January 31, 2013, we adopted ASU (Accounting Standards Update) 2011-05, Comprehensive Income (Topic 22)-Presentation of Comprehensive Income, which changed our condensed consolidated financial statements to present components of other comprehensive income in a separate statement. This change impacted only the financial statement presentation and had no impact on our financial position or results of operations.

We also adopted ASU 2012-02, Intangibles-Goodwill and Other (Topic 350)-Testing Indefinite-Lived Intangible Assets for Impairment, which provides us with the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired. Adoption of this guidance had no impact on our financial position or results of operations.

In February 2013, the FASB (Financial Accounting Standards Board) issued ASU (Accounting Standards Update) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires presentation of the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source, and the income statement line items affected by the reclassification. The information may be presented either in a single note or parenthetically on the face of the financial statements, provided that all of the required information is presented in a single location. If a component is not required to be reclassified to net income in its entirety, we may instead provide a reference to the related footnote. ASU 2013-02 is effective for us in our second quarter of fiscal year 2013, and will only change our financial statement presentation.

Note 2. Business Combinations

Pending Fiscal Year 2013 Acquisitions

EFTPOS New Zealand Limited and Sektor Payment Limited

On December 17, 2012, we signed a sale and purchase agreement with ANZ Bank New Zealand Limited to acquire all the outstanding shares of EFTPOS (EFTPOS New Zealand Limited) for approximately 70.0 million New Zealand dollars (approximately $58.6 million at foreign exchange rates as of January 31, 2013). Upon completion of the acquisition, EFTPOS will be our wholly-owned subsidiary and will hold the switching and terminal business of ANZ Bank New Zealand Limited.

Also, on December 17, 2012, we signed an asset sale and purchase agreement to acquire the business of Sektor Payments Limited for approximately $8.0 million. Sektor Payments Limited is our main distributor in New Zealand.

We expect to close these acquisitions during our second or third quarter of fiscal year 2013.
  
Fiscal Year 2013 Divestiture

On January 25, 2013, we signed an agreement to sell to a third party for $6.0 million certain assets and business operations related to our SAIL mobile payment product. The transaction closed on January 31, 2013. The results of operations of the SAIL product from its launch in May 2012 until its divestiture in January 2013, as well as the gain on the sale, are immaterial in relation to our overall financial position and results of operations.


8

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Fiscal Year 2012 Acquisitions

Point Acquisition

On December 30, 2011, we completed our acquisition of Point (Electronic Transaction Group Nordic Holding AB), a Swedish company operating the Point International business, Northern Europe's largest provider of payment and gateway services and solutions for retailers. The purchase price was approximately €600.0 million (approximately USD $774.3 million at foreign exchange rates on the acquisition date), plus repayment of Point's outstanding multi-currency debt of €193.3 million (approximately $250.2 million at exchange rates on the acquisition date), for a total cash purchase price of $1,024.5 million, based on exchange rates at the acquisition date. The source of funds for the cash consideration was the 2011 Credit Agreement that is described further in Note 10, Financings. We acquired Point to, among other things, provide a broader set of product and service offerings to customers globally, including expansion in the Northern European markets.

As a result of the acquisition, Point became our wholly-owned subsidiary. One subsidiary of Point, Babs Paylink AB, is owned 51% by Point and 49% by a third party that has a noncontrolling interest. The acquisition of Point was accounted for using the acquisition method of accounting. The results of operations for the acquired businesses have been included in our financial results since the acquisition date.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands) as part of our acquisition of Point.
Liabilities assumed, net of assets acquired
$
(81,415
)
Intangible assets
567,007

Goodwill
575,704

Noncontrolling interest in Babs Paylink AB
(36,764
)
Total purchase price
$
1,024,532


The estimated fair value of acquired contingent consideration owed by Point related to its prior acquisitions was $20.4 million as of the acquisition date. This contingent consideration is payable in cash if certain operating and financial targets are achieved in the two years following the dates of those acquisitions. The payout criteria for the contingent consideration contain provisions for prorated payouts if the target criteria are not met, provided that certain minimum thresholds are achieved. Subsequent to the acquisition of Point, through January 31, 2013, we have paid $19.5 million of the contingent consideration. The $1.0 million remaining balance accrued at January 31, 2013 is expected to be paid during the quarter ending October 31, 2013 and is presented as acquisition earn-out payables in Accruals and Other Current Liabilities on our Condensed Consolidated Balance Sheets. As of January 31, 2013, the maximum contingent consideration payable, if all the financial performance targets were met totals $4.7 million.

Other Fiscal Year 2012 Acquisitions

During fiscal year 2012, in addition to Point, we completed acquisitions of other businesses and net assets described in the table below for an aggregate purchase price of $81.5 million. The $81.5 million aggregate purchase price includes $6.4 million of holdback payments that will be paid between 12 to 15 months after the date the respective acquisitions closed, and contingent consideration having a fair value as of the respective acquisition dates totaling $3.8 million.

The holdback amounts will be paid out to selling stockholders unless the general representations and warranties made by the sellers as of the acquisition date were untrue and are presented as deferred acquisition consideration payable in Accruals and Other Current Liabilities on our Condensed Consolidated Balance Sheets. The contingent consideration will be payable in cash for the ChargeSmart and LIFT Retail acquisitions, if certain operating and financial targets are achieved in the first three years of operations after the acquisition. The payout criteria for the contingent consideration contain provisions for prorated payouts if the target criteria are not met, provided that certain minimum thresholds are achieved. The contingent consideration was valued at $0.4 million and $3.4 million for the ChargeSmart and LIFT Retail acquisitions as of the respective acquisition dates, and the maximum contingent consideration payable under the purchase agreements, if all the financial performance targets were met, totaled $11.0 million and $8.0 million for the ChargeSmart and LIFT Retail acquisitions. To date, we have not paid any amounts under these arrangements although certain measurement dates have passed. Including imputed interest, the amount accrued for this contingent consideration at January 31, 2013 totals $2.7 million and is presented as acquisition-related earn-out payables in Other long-term liabilities on our Condensed Consolidated Balance Sheets. The remaining maximum payouts for this contingent

9

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

consideration, if all remaining financial performance targets are met, total $5.0 million and $8.0 million for the ChargeSmart and LIFT Retail acquisitions.

The acquisition of each company was accounted for using the acquisition method of accounting. No VeriFone equity interests were issued, and in each transaction 100% of the voting equity interests of the applicable business was acquired, except for Show Media, which was an acquisition of assets and assumption of certain liabilities. The results of operations for the acquired businesses have been included in our financial results since their respective acquisition dates.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands) at the acquisition date of each transaction.
 
LIFT Retail
 
ChargeSmart
 
Show Media
 
Global Bay
 
Total
Acquisition date
March 1, 2012

 
January 3, 2012

 
November 1, 2011

 
November 1, 2011

 
 
Assets acquired (liabilities assumed), net
$
477

 
$
(4,225
)
 
$
1,593

 
$
(4,608
)
 
$
(6,763
)
Intangible assets
1,600

 
9,770

 
6,660

 
14,490

 
32,520

Goodwill
4,417

 
13,829

 
19,871

 
17,630

 
55,747

Total purchase price
$
6,494

 
$
19,374

 
$
28,124

 
$
27,512

 
$
81,504


Acquisition-Related Costs

Certain costs directly related to our acquisitions are recorded as expenses in our Condensed Consolidated Statements of Operations. These acquisition-related costs consist of external expenses directly related to our acquisitions and include expenditures for professional fees such as banking, legal, accounting and other directly related incremental costs incurred to close the acquisition.

The following table presents a summary of acquisition-related costs included in our Condensed Consolidated Statements of Operations (in thousands):
 
 
Three Months Ended January 31,
 
 
2013
 
2012
Sales and marketing
 
$

 
$
118

General and administrative
 
463

 
6,934

Total acquisition-related costs
 
$
463

 
$
7,052


Note 3. Net Income (Loss) per Share of Common Stock

Basic net income (loss) per share of common stock is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per share of common stock is computed using the weighted average number of shares of common stock outstanding plus the effect of common stock equivalents, unless the common stock equivalents are anti-dilutive. The potential dilutive shares of our common stock resulting from assumed exercises of equity related instruments are determined using the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock will result in a greater number of dilutive securities.


10

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

The following table presents the computation of net income (loss) per share of common stock (in thousands, except per share data):
 
Three Months Ended January 31,
 
2013
 
2012
Basic and diluted net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
 
 
 
Numerator:
 
 
 
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
$
11,838

 
$
(3,124
)
Denominator:
 
 
 
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - basic
107,934

 
105,833

Weighted average effect of dilutive securities:
 
 
 
Employee equity incentive plans
2,624

 

Weighted average shares attributable to VeriFone Systems, Inc. stockholders - diluted
110,558

 
105,833

Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
 
 
 
    Basic
$
0.11

 
$
(0.03
)
    Diluted
$
0.11

 
$
(0.03
)

For the three months ended January 31, 2013 and 2012, equity incentive awards to purchase 4.3 million and 10.0 million shares of common stock were excluded from the calculation of weighted average shares for diluted net income (loss) per share as they were anti-dilutive. These awards could impact future calculations of diluted net income (loss) per share if the fair market value of our common stock increases.

The diluted weighted average shares attributable to VeriFone Systems, Inc. stockholders for the three months ended January 31, 2012 does not include the anti-dilutive effects of the senior convertible notes or the note hedge transactions on those notes, both of which were outstanding as of January 31, 2012. The senior convertible notes were considered to be Instrument C securities, and therefore, only the conversion spread relating to the notes would be included in our diluted earnings per share calculation, if dilutive. The conversion spread of the notes had a dilutive effect when the average share price of our common stock during any quarter exceeded $44.02. The average share price of our common stock for the three months ended January 31, 2012 did not exceed $44.02, and therefore the effect of the senior convertible notes was anti-dilutive for that period. The senior convertible notes were repaid in full in June 2012 without any conversion rights having been exercised. In connection with the offering of the senior convertible notes, we entered into note hedge transactions. The note hedge transactions would have reduced the dilution attributable to the senior convertible notes by 50% if and when the notes had been converted and the note hedge transactions exercised. The note hedge transactions outstanding at January 31, 2012 expired unused in June 2012.

Warrants to purchase 7.2 million shares of our common stock were outstanding at January 31, 2013 and 2012. The warrants were not included in the computation of diluted earnings per share because the warrants' $62.356 exercise price was greater than the average share price of our common stock during the three months ended January 31, 2013 and 2012. Therefore, the effect of the warrants was anti-dilutive for those periods.

Additionally, all shares attributable to the equity incentive awards, senior convertible notes and warrants at January 31, 2012 were anti-dilutive because we incurred a net loss for the three months ended January 31, 2012.


11

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Note 4. Employee Benefit Plans

Equity Incentive Plans

We grant stock awards, including stock options, RSUs (restricted stock units) and RSAs (restricted stock awards) pursuant to stockholder-approved equity incentive plans. Our stock awards include vesting provisions that are based on either time, performance, or market conditions. These equity incentive plans are described in further detail in Note 4, Employee Benefits Plan, of Notes to Consolidated Financial Statements in our 2012 Annual Report on Form 10-K. All stock awards granted during the three months ended January 31, 2013 were granted under the 2006 Equity Incentive Plan, as amended. The number of shares available for future grants under the 2006 Equity Incentive Plan was 0.7 million as of January 31, 2013. Shares issued to employees on the exercise or vesting of equity incentive awards are issued from authorized unissued common stock.

Equity Incentive Plan Activity

The following table provides a summary of stock option activity for the three months ended January 31, 2013:
 
Shares
Under
Option
(Thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(Years)
 
Aggregate
Intrinsic
Value
(Thousands)
Outstanding at October 31, 2012
8,000

 
$
23.93

 
 
 
 
Granted
302

 
$
29.75

 
 
 
 
Exercised
(249
)
 
$
11.90

 
 
 
 
Canceled
(216
)
 
$
34.94

 
 
 
 
Expired
(54
)
 
$
36.12

 
 
 
 
Outstanding at January 31, 2013
7,783

 
$
24.15

 
4.6
 
$
95,073

Vested or expected to vest at January 31, 2013
7,460

 
$
23.71

 
4.5
 
$
94,210

Exercisable at January 31, 2013
4,441

 
$
19.51

 
3.7
 
$
72,433


The weighted-average grant-date fair value per share for stock options granted during the three months ended January 31, 2013 and 2012 was $11.29 and $17.65.

The total proceeds received from employees as a result of employee stock option exercises for the three months ended January 31, 2013 and 2012 were $3.0 million and $8.8 million. We recognized no tax benefit in the three months ended January 31, 2013 related to employee stock option exercises, and $0.1 million of tax benefits in the three months ended January 31, 2012. The total intrinsic value of options exercised during the three months ended January 31, 2013 and 2012 was $5.0 million and $13.0 million.
 
The following table summarizes RSU and RSA balances as of January 31, 2013 and October 31, 2012, as well as activity for the three months ended January 31, 2013:
 
Shares
(Thousands)
 
Aggregate
Intrinsic
Value
(Thousands)
Outstanding at October 31, 2012
1,913

 
 
Granted
703

 
 
Released
(132
)
 
 
Canceled
(37
)
 
 
Outstanding at January 31, 2013
2,447

 
$
84,948

Expected to vest at January 31, 2013
2,148

 
$
74,582

Ending vested and deferred at January 31, 2013
623

 
$
21,636



12

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

There were no RSAs granted during the three months ended January 31, 2013. RSUs granted during the three months ended January 31, 2013 included grants with time and performance based vesting conditions. The vesting conditions of the performance-based RSUs are contingent upon meeting certain financial and operational targets. One of these performance-based RSUs is a long-term incentive grant to our Chief Executive Officer that vests based on our achievement of total shareholder return relative to peers on a stacked-ranking basis over a three year performance period ("LTIG"). All other performance grants vest upon meeting internal financial and operational targets. The vesting conditions of all of these grants were set by the compensation committee of the board of directors at the time of the grant.

We had a total of 2.4 million RSUs and 0.1 million RSAs outstanding as of January 31, 2013.

The weighted-average grant-date fair value per share for RSUs granted during the three months ended January 31, 2013 and 2012, was $31.00 and $38.54.

The total fair value of RSUs and RSAs that vested in the three months ended January 31, 2013 and 2012 was $4.0 million and $7.4 million.

Equity Incentive Award Valuations

We estimate the grant-date fair value of stock options using the Black-Scholes-Merton valuation model, using the following weighted-average assumptions:
 
Three Months Ended January 31,
 
2013
 
2012
Expected term (in years)
3.5

 
3.6

Risk-free interest rate
0.6
%
 
0.7
%
Expected dividend rate
0.0
%
 
0.0
%
Expected stock price volatility over option expected term
51.0
%
 
67.4
%

The grant-date fair value of the LTIG granted in January 2013 is determined using the Monte Carlo simulation method assuming the following (i) expected term of 3.0 years, (ii) risk free interest rate of 0.37%, (iii) expected dividend rate of zero and (iv) expected stock price volatility over the expected term of the LTIG of 47.24%. The grant-date fair value of all other RSUs is equal to the closing market price of our common stock on the date of grant. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.

These assumptions used to value our awards are determined as follows:

The expected term of the options granted is derived from the historical actual term of previous grants and an estimate of future exercises during the remaining contractual period of the award, and represents the period of time that awards granted are expected to be outstanding.
The expected term of the LTIG is the contractual term of the award.
The average risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the awards.
The dividend yield assumption is based on our dividend history and future expectations of dividend payouts.
The expected stock price volatility considers the historical volatility of common stock for the expected term of the awards, and includes the elements listed below at the weighted percentages presented:
 
Three Months Ended January 31,
 
2013
 
2012
Historical volatility of our common stock
95.0
%
 
75.0
%
Historical volatility of comparable companies' common stock
0.0
%
 
20.0
%
Implied volatility of our traded common stock options
5.0
%
 
5.0
%


13

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

We placed the greatest weighting on the historic volatility of our common stock because we believe that, in general, it is representative of our expected volatility. However, our stock price during the second half of calendar year 2007 and most of calendar year 2008 was significantly impacted by our announcement on December 3, 2007 of a restatement of certain of our financial statements. Our restated financial statements were filed on August 19, 2008. Given that the historic volatility of our common stock over the then-expected term of the awards included the volatility during this restatement period, which we do not believe is representative of our expected volatility, we also used peer group data and implied volatility in our stock price volatility calculation during fiscal quarters ended prior to July 31, 2012. We included peer group data in an effort to capture a broader view of the marketplace over the expected term of the awards. We included the implied volatility of our traded options to capture market expectations regarding our stock price. In determining the weighting between our peer group data and implied volatility, we accorded less weighting to our implied volatility because there is a relatively low volume of trades and the terms of the traded options are shorter than the expected term of our share awards. Beginning with our fiscal quarter ended July 31, 2012, we have historical volatility data for our common stock for a period of time that covers the expected term of the awards, and that we believe provides a reasonable basis for an estimation of our expected volatility. Accordingly, as of the fiscal quarter ended July 31, 2012 we no longer use historic volatility of comparable companies' common stock in our weighting percentages.

Our computation of stock-based compensation expense also includes an estimate of award forfeitures based on historical experience. We record compensation expense only for those awards that are expected to vest.

Stock-Based Compensation Expense

The following table presents the stock-based compensation expense recognized in our Condensed Consolidated Statements of Operations (in thousands):
 
Three Months Ended January 31,
 
2013
 
2012
Cost of net revenues
$
547

 
$
479

Research and development
1,617

 
1,253

Sales and marketing
4,093

 
4,262

General and administrative
6,102

 
4,710

Total stock-based compensation
$
12,359

 
$
10,704


As of January 31, 2013, total unrecognized compensation expense adjusted for estimated forfeitures related to unvested stock options was $38.4 million and related to unvested RSUs and RSAs was $42.5 million, which is expected to be recognized over the remaining weighted-average vesting periods of 2.4 years for stock options and 2.3 years for RSUs and RSAs.

Note 5. Income Taxes

We recorded income tax expense of $2.5 million for the three months ended January 31, 2013 and an income tax benefit of $9.8 million for the three months ended January 31, 2012. The effective tax rates for the three months ended January 31, 2013 and 2012 are lower than the U.S. statutory tax rate primarily due to earnings in countries where we are taxed at lower rates compared to the U.S. federal and state statutory rates, reversal of uncertain tax position liabilities as statutes of limitations expired and reinstatement of a prior year research credit as a result of the American Taxpayer Relief Act of 2012. The income tax expense for the three months ended January 31, 2013 includes a discrete tax benefit of $1.3 million related to the reinstatement of such prior year research credit. The income tax benefit for the three months ended January 31, 2012 includes a discrete tax benefit of $8.5 million related to the foreign exchange loss on future contracts that was incurred during December 2011.

As of January 31, 2013, on a worldwide basis we remain in a net deferred tax asset position of $30.0 million. The realization of our deferred tax assets depends primarily on our ability to generate sufficient U.S. and foreign taxable income in future periods. The amount of deferred tax assets considered realizable may increase or decrease in future periods as we continue to evaluate the underlying basis for our estimates of future U.S. and foreign taxable income in subsequent matters.


14

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Our unrecognized tax benefits increased by approximately $0.1 million during the three months ended January 31, 2013 as a result of tax positions taken in prior periods. The amount of unrecognized tax benefits could be reduced upon closure of tax examinations or if the statute of limitations on certain tax filings expires without assessment from the relevant tax authorities. We believe that it is reasonably possible that there could be a reduction in unrecognized tax benefits due to statute of limitation expirations in multiple tax jurisdictions during the next twelve months of approximately $1.5 million. Interest and penalties accrued on these uncertain tax positions will also be released upon the expiration of statutes of limitations.

Note 6. Balance Sheet and Statement of Operations Details

Cash

Cash and cash equivalents as of January 31, 2013 and October 31, 2012 included $392.1 million and $410.3 million held by our foreign subsidiaries. If we decide to distribute or use such cash and cash equivalents outside those foreign jurisdictions, including a distribution to the U.S., we may be subject to additional taxes or costs.

We had $5.2 million and $4.1 million of restricted cash included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets as of January 31, 2013 and October 31, 2012. We had $13.5 million and $12.8 million of restricted cash included in Other long-term assets in our Condensed Consolidated Balance Sheets as of January 31, 2013 and October 31, 2012. These restricted cash balances were mainly comprised of pledged deposits, deposits for irrevocable standby letters of credit, and deposits to secure bank guarantees to customers, other counterparties to contractual relationships, and government agencies.
 
Inventories

Inventories consisted of the following (in thousands):
 
January 31, 2013
 
October 31, 2012
Raw materials
$
53,430

 
$
50,952

Work-in-process
1,820

 
552

Finished goods
133,533

 
126,770

Total inventory
$
188,783

 
$
178,274


Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):
 
January 31, 2013
 
October 31, 2012
Prepaid expenses
$
43,818

 
$
37,261

Deferred income taxes
40,193

 
39,072

Prepaid taxes
29,483

 
36,678

Other receivables
7,483

 
12,715

Restricted cash
5,181

 
4,149

Bankers acceptances receivable
5,079

 
2,151

Investment in equity security and warrants
3,073

 
2,667

Other current assets
3,865

 
1,517

Total prepaid expenses and other current assets
$
138,175

 
$
136,210


15

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)


Fixed Assets, Net

Fixed assets, net consisted of the following (in thousands): 
 
Estimated Useful Life (Years)
 
January 31, 2013
 
October 31, 2012
Revenue generating assets
5
 
$
113,725

 
$
101,589

Computer hardware and software
3-5
 
72,700

 
70,064

Machinery and equipment
3-10
 
39,174

 
35,865

Leasehold improvements
Lesser of the term of
the lease or the
estimated useful life
 
22,471

 
20,773

Office equipment, furniture, and fixtures
3-5
 
9,993

 
9,423

Buildings
40-50
 
6,801

 
6,788

Depreciable fixed assets, at cost
 
 
264,864

 
244,502

Accumulated depreciation
 
 
(122,152
)
 
(106,688
)
Depreciable fixed assets, net
 
 
142,712

 
137,814

Construction in progress
 
8,247

 
7,838

Land
 
1,148

 
1,151

Fixed assets, net
 
 
$
152,107

 
$
146,803


Total depreciation expense for depreciable fixed assets for the three months ended January 31, 2013 and 2012 was $12.3 million and $9.0 million.

Other Long-Term Assets

Other long-term assets consisted of the following (in thousands):
 
January 31, 2013
 
October 31, 2012
Debt issuance costs, net
$
29,786

 
$
31,897

Capitalized software development costs, net
14,329

 
12,238

Long-term restricted cash
13,541

 
12,754

Deposits
7,479

 
9,068

Long-term receivables
6,990

 
7,531

Other long-term assets
9,984

 
5,545

Total other long-term assets
$
82,109

 
$
79,033



16

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Accruals and Other Current Liabilities

Accruals and other current liabilities consisted of the following (in thousands):
 
January 31, 2013
 
October 31, 2012
Accrued expenses
$
68,200

 
$
68,431

Accrued compensation
44,410

 
47,019

Accrued patent litigation loss contingency, including interest (Note 11)
19,323

 
18,981

Sales and value-added taxes payable
17,733

 
12,461

Accrued liabilities for contingencies
17,183

 
20,863

Accrued warranty
12,791

 
11,931

Deferred tax liabilities - current portion
9,684

 
9,594

Income taxes payable
8,776

 
13,577

Deferred acquisition consideration payable - current portion
5,739

 
7,980

Acquisition-related earn-out payables - current portion
1,249

 
6,131

Other current liabilities
16,084

 
13,899

Total accruals and other current liabilities
$
221,172

 
$
230,867


Accrued Warranty

Activity related to Accrued warranty consisted of the following (in thousands):
 
Three months ended January 31, 2013
 
Year Ended October 31, 2012
Balance at beginning of period
$
12,775

 
$
22,032

Warranty charged to cost of net revenues
3,282

 
12,340

Utilization of warranty accrual
(2,992
)
 
(20,494
)
Acquired warranty obligations

 
348

Changes in estimates
441

 
(1,451
)
Balance at end of period
13,506

 
12,775

Less: current portion
(12,791
)
 
(11,931
)
Long-term portion
$
715

 
$
844


Deferred Revenue, Net

Deferred revenue, net of related costs consisted of the following (in thousands):
 
January 31, 2013
 
October 31, 2012
Deferred revenue
$
185,647

 
$
144,492

Deferred cost of revenue
(27,588
)
 
(15,885
)
Deferred revenue, net
158,059

 
128,607

Less current portion
(119,003
)
 
(91,545
)
Long-term portion
$
39,056

 
$
37,062



17

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Other Long-Term Liabilities

Other long-term liabilities consisted of the following (in thousands):
 
January 31, 2013
 
October 31, 2012
Long-term income tax liabilities
$
44,275

 
$
44,144

Statutory retirement and pension obligations - non-current portion
12,017

 
10,983

Acquisition-related earn-out payables - non-current portion
2,739

 
2,832

Other long-term liabilities
12,079

 
12,481

Total other long-term liabilities
$
71,110

 
$
70,440


Redeemable Noncontrolling Interest in Subsidiary

The redeemable noncontrolling interest related to ABS (All Business Solutions S.R.L.) is recognized at the greater of the initial carrying amount increased or decreased for the noncontrolling interest's share of net income or loss or its redemption value. As of January 31, 2013 and October 31, 2012, the carrying amount of the redeemable noncontrolling interests was $0.8 million and $0.9 million.

Noncontrolling Interest in Subsidiaries

Changes in Noncontrolling interest in subsidiaries are set forth below (in thousands):
 
Three months ended January 31, 2013
 
Year Ended October 31, 2012
Balance at beginning of period
$
36,821

 
$
445

Additions due to acquisitions

 
36,781

Distributions to noncontrolling interest stockholders
(134
)
 
(1,673
)
Net income attributable to noncontrolling interest in subsidiaries, net
(84
)
 
1,268

Balance at end of period
$
36,603

 
$
36,821


Other Income (Expense), net

Other income (expense), net consisted of the following (in thousands):
 
Three Months Ended January 31,
 
2013
 
2012
Foreign currency exchange losses, net
$
(3,519
)
 
$
(21,005
)
Gain on divestiture
4,080

 

Gain on reversal of pre-acquisition contingency
1,858

 

Other income (expense), net
1,521

 
156

Total other income (expense), net
$
3,940

 
$
(20,849
)

We recorded a $22.5 million foreign currency loss in December 2011 related to the difference between the forward rate on contracts purchased to fix the U.S. dollar equivalent of the purchase price for our Point acquisition, and the actual rate on the date of derivative settlement. This loss was partially offset by a $1.5 million gain on the currency we held from the date of the derivative settlement until the funds were transferred to purchase Point.

On January 25, 2013, VeriFone signed an agreement to sell to a third party for $6.0 million certain assets and business operations related to our SAIL mobile payment product. The transaction closed on January 31, 2013 and resulted in a $4.1 million gain, which is recorded within Other Income (Expense), net.


18

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Note 7. Fair Value Measurements

Our financial assets and liabilities are measured and recorded at fair value on a recurring basis, except for our debt. Our non-financial assets, such as goodwill, purchased intangible assets, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

We follow a three-level fair value hierarchy based on the inputs used in measuring fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little or no market activity. 

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

There were no transfers between fair value measurement levels during the three months ended January 31, 2013. The following table presents our assets and liabilities that were measured at fair value on a recurring basis as of January 31, 2013 and October 31, 2012, and their classification within the fair value hierarchy (in thousands):
 
January 31, 2013
 
Carrying
Value
 
Quoted Price in
Active Market for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds (1)
$
49,766

 
$
49,766

 
$

 
$

Prepaid expenses and other current assets
 
 
 
 
 
 
 
Marketable equity investment (2)
2,840

 
2,840

 

 

Equity warrants (3)
232

 

 
232

 

Foreign exchange forward contracts not designated as cash flow hedges (4)
59

 

 
59

 

Total assets measured and recorded at fair value
$
52,897

 
$
52,606

 
$
291

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accruals and other current liabilities
 
 
 
 
 
 
 
Acquisition related earn-out payables (5)
$
1,249

 
$

 
$

 
$
1,249

Interest rate swaps designated as cash flow hedges (6)
2,404

 

 
2,404

 

Foreign exchange forward contracts not designated as cash flow hedges (4)
364

 

 
364

 

Other long-term liabilities
 
 
 
 
 
 
 
Acquisition related earn-out payables (5)
2,739

 

 

 
2,739

Interest rate swaps designated as cash flow hedges (6)
1,541

 

 
1,541

 

Total liabilities measured and recorded at fair value
$
8,297

 
$

 
$
4,309

 
$
3,988



19

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

 
October 31, 2012
 
Carrying
Value
 
Quoted Price in
Active Market for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds (1)
$
69,743

 
$
69,743

 
$

 
$

Prepaid expenses and other current assets
 
 
 
 
 
 
 
Marketable equity investment (2)
2,471

 
2,471

 

 

Equity warrants (3)
196

 

 
196

 

Foreign exchange forward contracts not designated as cash flow hedges (4)
161

 

 
161

 

Total assets measured and recorded at fair value
$
72,571

 
$
72,214

 
$
357

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accruals and other current liabilities
 
 
 
 
 
 
 
Acquisition related earn-out payables (5)
$
6,131

 
$

 
$

 
$
6,131

Interest rate swaps designated as cash flow hedges (6)
2,451

 

 
2,451

 

Foreign exchange forward contracts not designated as cash flow hedges (4)
291

 

 
291

 

Other long-term liabilities
 
 
 
 
 
 
 
Acquisition related earn-out payables (5)
2,832

 

 

 
2,832

Interest rate swaps designated as cash flow hedges (6)
2,168

 

 
2,168

 

Total liabilities measured and recorded at fair value
$
13,873

 
$

 
$
4,910

 
$
8,963


1.
Money market funds are classified as Level 1 because we determine the fair value of the funds using quoted market prices in markets that are active.
2.
The marketable equity investment is classified as Level 1 because we determine the fair value using quoted market prices in markets that are active.
3.
The equity warrants are classified as Level 2 because we determine the fair value using the Black-Scholes-Merton valuation model considering quoted market prices for the underlying shares, the treasury risk free interest rate, historic volatility and the remaining contractual term of the warrant.
4.
The foreign exchange forward contracts are classified as Level 2 because we determine the fair value using quoted market prices and other observable data for similar instruments in an active market.
5.
The acquisition related earn-out payables are classified as Level 3 because we use a probability-weighted expected payout model to determine the expected payout and an appropriate discount rate to calculate the fair value. The key assumptions in applying the approach are the internally forecasted net revenues, contributions, and other performance measures for the acquired businesses, the probability of achieving the net revenues, contribution, and other performance targets and an appropriate discount rate. Significant increases in the probability of achieving net revenues, contribution, and other performance targets in isolation would result in a significantly higher fair value measurement while significant decreases in the probability of success in isolation would result in a significantly lower fair value measurement. Similarly, significant increases in the discount rate in isolation would result in a significantly lower fair value measurement while significant decreases in the discount rate in isolation would result in a significantly higher fair value measurement. We evaluate changes in each of the assumptions used to calculate fair values of our earn-out payable at the end of each period.
6.
Interest rate swaps are classified as Level 2 because we determine the fair value using observable market inputs, such as the one month LIBOR forward pricing curve, as well as credit default spreads reflecting nonperformance risks of counterparties.

20

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)


Fair Value of Acquisition-Related Earn-out Payables

The following table presents a reconciliation for our earn-out payables measured and recorded at fair value on a recurring basis, using Level 3 significant unobservable inputs (in thousands):
 
Three months ended January 31, 2013
 
Year Ended October 31, 2012
Balance at beginning of period
$
8,963

 
$
6,728

Additions related to current period business acquisitions

 
24,149

Payments
(3,287
)
 
(23,541
)
Changes in estimates, included in Other income (expense), net
(1,858
)
 
407

Interest expense
307

 
1,079

Foreign currency adjustments
(137
)
 
141

Balance at end of period
$
3,988

 
$
8,963

Less: current portion
1,249

 
6,131

Non-current portion
$
2,739

 
$
2,832


As of January 31, 2013, the total gross earn-out payable, if all the financial performance targets were met would have been $18.0 million.

Fair Value of Other Financial Instruments

Other financial instruments consisted principally of cash, accounts receivable, accounts payable and long-term debt. The estimated fair value of cash, accounts receivable, and accounts payable approximates their carrying value. The estimated fair value of our Term A loan, Term B loan, and Revolving loan approximates the carrying value because the interest rate on such debt adjusts to market rates on a periodic basis.

Note 8. Goodwill and Purchased Intangible Assets

Goodwill

Activity related to goodwill consisted of the following (in thousands):
 
Three months ended January 31, 2013
 
Year Ended October 31, 2012
Balance at beginning of period
$
1,179,381

 
$
561,414

Additions related to business combinations
538

 
631,470

Divestiture of certain assets related to SAIL mobile payment product
(507
)
 

Adjustment related to prior fiscal year acquisitions

 
1,632

Currency translation adjustments
26,596

 
(15,135
)
Balance at end of period
$
1,206,008

 
$
1,179,381


Goodwill is not amortized. We review goodwill for impairment annually, and whenever events or changes in circumstances indicate its carrying amount may not be recoverable. Based on our review for potential indicators of impairment performed during the three months ended January 31, 2013 and the fiscal year ended October 31, 2012, there were no indicators of impairment.

As of both January 31, 2013 and October 31, 2012, the accumulated impairment losses included in total goodwill were $372.4 million for our International segment and $65.5 million for our North America segment, excluding impacts of foreign currency fluctuations.


21

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Purchased Intangible Assets

Purchased intangible assets consisted of the following (in thousands):

 
January 31, 2013
 
October 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
704,302

 
$
(118,125
)
 
$
586,177

 
$
686,773

 
$
(95,284
)
 
$
591,489

Developed and core technology
175,392

 
(58,235
)
 
117,157

 
173,545

 
(46,618
)
 
126,927

Trade name
18,397

 
(5,434
)
 
12,963

 
17,707

 
(4,259
)
 
13,448

Other
3,987

 
(1,150
)
 
2,837

 
4,214

 
(1,270
)
 
2,944

Total
$
902,078

 
$
(182,944
)
 
$
719,134

 
$
882,239

 
$
(147,431
)
 
$
734,808


Amortization of purchased intangible assets was allocated as follows (in thousands):

 
Three Months Ended January 31,
 
2013
 
2012
Included in cost of net revenues
$
11,061

 
$
8,489

Included in operating expenses
24,696

 
13,615

Total amortization of purchased intangible assets
$
35,757

 
$
22,104


Total future amortization expense for purchased intangible assets that have finite lives, based on our existing intangible assets and their current estimated useful lives as of January 31, 2013, is estimated as follows (in thousands):

Fiscal Years Ending October 31:
Cost of
Net Revenues
 
Operating
Expenses
 
Total
Remainder of fiscal year 2013
$
33,337

 
$
70,033

 
$
103,370

2014
43,601

 
92,773

 
136,374

2015
22,851

 
91,517

 
114,368

2016
14,993

 
86,948

 
101,941

2017
2,281

 
61,111

 
63,392

Thereafter
94

 
199,595

 
199,689

Total future amortization expense
$
117,157

 
$
601,977

 
$
719,134


Note 9. Derivative Financial Instruments

We use derivative financial instruments, primarily forward contracts and swaps, to manage certain of our exposures to foreign currency exchange rate and interest rate risks. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates and interest rates.

Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. However, we do seek to mitigate such risks by limiting our counterparties to major financial institutions. We do not expect losses as a result of defaults by counterparties. We use derivative financial instruments to hedge or mitigate commercial risk, and our board of directors has approved the Company's qualification for and election of the Commodity Futures Trading Commission's End User Exception to the mandatory requirement under the Dodd-Frank Wall Street Reform and Consumer Protection Act to clear derivative transactions through a registered derivatives clearing organization. We do not use derivative financial instruments for speculative or trading purposes, nor do we hold or issue leveraged derivative financial instruments.


22

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

We recognize the fair value of our outstanding derivative financial instruments at the end of each reporting period as either assets or liabilities on our Condensed Consolidated Balance Sheets. See Note 7, Fair Value Measurements, for a presentation of the fair value of our outstanding derivative instruments as of January 31, 2013 and October 31, 2012.
 
The following tables present the amounts of gains and losses on our derivative instruments for the three months ended January 31, 2013 and 2012 (in thousands):
 
 
 
Three Months Ended January 31, 2013
 
 
 
Net amount of gain (loss) deferred as a component of accumulated other comprehensive income (loss)
 
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income
 
Amount of gain (loss) recognized in net income immediately
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap agreements (1)
 
$
(3,945
)
 
$
(674
)
 
$

 
 
 
(3,945
)
 
(674
)
 

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts (2)
 

 

 
(2,397
)
 
Equity warrants (2)
 

 

 
36

 
 
 

 

 
(2,361
)
 
 
 
$
(3,945
)
 
$
(674
)
 
$
(2,361
)

 
 
 
Three Months Ended January 31, 2012
 
 
 
Net amount of gain (loss) deferred as a component of accumulated other comprehensive income (loss)
 
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income
 
Amount of gain (loss) recognized in net income (loss) immediately
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts (2)
 
$

 
$

 
$
(23,156
)
 
Equity warrants (2)
 

 

 
(48
)
 
 
 
$

 
$

 
$
(23,204
)

(1)
The effective portion of gains or losses on interest rate swap agreements designated as hedging instruments is recognized in Interest expense on our Condensed Consolidated Statements of Operations.
(2)
Gains or losses on foreign exchange forward contracts not designated as hedging instruments and on equity warrants are recognized in Other income (expense), net on our Condensed Consolidated Statements of Operations.

Interest Rate Swap Agreements Designated as Cash Flow Hedges

We use interest rate swap agreements to hedge the variability in cash flows related to interest rate payments. On March 23, 2012, we entered into a number of interest rate swap agreements to effectively convert $500.0 million of the Term A loan from a floating rate to a 0.71% fixed rate plus applicable margin. The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. The interest rate swaps are effective for the period from March 30, 2012 to March 31, 2015, or 36 months. The notional amounts of interest rate swap agreements outstanding as of January 31, 2013 and October 31, 2012 were $500.0 million.


23

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Foreign Exchange Forward Contracts Not Designated as Hedging Instruments

We primarily utilize foreign exchange forward contracts to offset the risks associated with certain of our foreign currency balance sheet exposures. The foreign exchange forward contracts are arranged and maintained so as to yield gains or losses to offset changes in foreign currency denominated assets or liabilities due to movements in foreign exchange rates, in an attempt to mitigate the volatility associated with foreign currency transaction gains or losses. Our foreign currency exposures are predominantly inter-company receivables and payables arising from product sales from one of our entities to another. Our foreign exchange forward contracts generally mature within 90 days. We do not use these foreign exchange forward contracts for trading purposes. The notional amounts of such contracts outstanding as of January 31, 2013 and October 31, 2012 were $187.3 million and $188.3 million.

In the three months ended January 31, 2012, we recorded a $22.5 million foreign currency loss related to the difference between the forward rate on contracts purchased to lock in the U.S. dollar equivalent purchase price for our Point acquisition, and the actual rate on the date of derivative settlement.

Equity Warrants

We hold warrants to purchase 0.5 million shares of Trunkbow International Holdings, Ltd. common stock. These warrants are derivative financial instruments, and are reported at fair value.

Note 10. Financings
 
Borrowings under our financing arrangements consisted of the following (in thousands):
 
January 31, 2013
 
October 31, 2012
2011 Credit Agreement
 
 
 
     Term A loan
$
980,706

 
$
993,557

     Term B loan
99,185

 
99,763

     Revolving loan
210,000

 
210,000

Point overdraft facility

 
2,340

Other
1,660

 
1,957

Total borrowings
1,291,551

 
1,307,617

Less: current portion
(52,585
)
 
(54,916
)
Long-term portion
$
1,238,966

 
$
1,252,701


2011 Credit Agreement

On December 28, 2011, VeriFone, Inc. entered into a credit agreement (the "2011 Credit Agreement"), which initially consisted of a $918.5 million Term A loan, $231.5 million Term B loan, and $350.0 million Revolving loan commitment. On October 15, 2012, VeriFone, Inc. entered into an additional credit extension amendment to the 2011 Credit Agreement consisting of $109.5 million add-on Term A loans and $75.5 million add-on revolving commitment increase. The key terms of the 2011 Credit Agreement and additional credit extension amendment are described in Note 12, Financings, in Notes to Consolidated Financial Statements of our 2012 Annual Report on Form 10-K. These key terms include financial maintenance covenants and certain representations, warranties, covenants, and conditions that are customarily required for similar financings. We were in compliance with all financial covenants under the 2011 Credit Agreement as of January 31, 2013.

As of January 31, 2013, we elected the "Eurodollar Rate" margin option for our borrowings under the 2011 Credit Agreement. As such, the interest rate on the Term A and Revolving loan was 2.46%, which was one month LIBOR plus 2.25% margin, and the interest rate on the Term B loan was 4.25%, which was the higher of one month LIBOR or 1.00% plus 3.25% margin. At January 31, 2013, the unused revolving loan facility's commitment fee was 0.375% and the amount available to draw under the Revolving loan was $215.5 million.

As of January 31, 2013, interest margins are 2.25% for the Term A loan and the Revolving loan, and 3.25% for the Term B loan.


24

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

We have outstanding a number of interest rate swap agreements to effectively convert $500.0 million loan from a floating rate to a 0.71% fixed rate plus applicable margin. The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. The interest rate swaps are effective for the period from March 30, 2012 to March 31, 2015 or 36 months.

Senior Convertible Notes

Our 1.375% senior convertible notes issued and sold on June 22, 2007 matured on June 15, 2012. Holders of these notes had the right under certain conditions to convert their notes prior to maturity at any time on or after March 15, 2012. There were no such conversions of these notes. Upon maturity of the notes on June 15, 2012, we repaid the remaining principal amount of $277.3 million, together with accrued and unpaid interest of $4.0 million, in cash.

As of January 31, 2012, the equity component of the notes totaled $77.9 million, and the liability component was comprised of $277.3 million principal and $6.2 million unamortized debt discount, or $271.1 million net carrying amount.

During the term of the notes, we paid 1.375% interest per annum on the principal amount of the notes, semi-annually in arrears on June 15 and December 15 of each year, subject to increase in certain circumstances.

A summary of the interest rate and interest expense on the liability component related to these notes was as follows (in thousands, except percentages):
 
Three Months Ended January 31, 2012
Interest rate on the liability component
7.6
%
 
 
Interest expense related to contractual interest coupon
$
961

Interest expense related to amortization of debt discount
4,099

Total interest expense recognized
$
5,060


In connection with the offering of the senior convertible notes, we entered into note hedge transactions with certain counterparties. We terminated the note hedge transaction with one counterparty in June 2011, and the remaining note hedge transactions expired unused on June 15, 2012.

In addition, we sold warrants to the counterparties whereby they have the option to purchase up to approximately 7.2 million shares of our common stock at a price of $62.356 per share. The warrants expire in equal amounts on each trading day from December 19, 2013 to February 3, 2014.

Point Overdraft Facility

Our 51% majority owned subsidiary of Point, Babs Paylink AB, has an unsecured overdraft facility with Swedbank, the 49% stockholder of Babs Paylink AB. The overdraft facility limit is SEK (Swedish Krona) 60.0 million (approximately $9.4 million at foreign exchange rates as of January 31, 2013). The interest rate is the bank's published rate plus a margin of 2.55%. At January 31, 2013, the interest rate was 3.63%. There is a 0.25% commitment fee payable annually in advance, and the overdraft facility is renewable annually on December 31. As of January 31, 2013, there were no borrowings outstanding under this overdraft facility, and SEK 60.0 million (approximately $9.4 million at foreign exchange rates as of January 31, 2013) was available.


25

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Principal Payments

Principal payments due for financings over the next five years are as follows (in thousands):
Years Ending October 31:
 
2013
$
39,668

2014
91,832

2015
103,836

2016
180,928

2017
780,536

Thereafter
94,751

 
$
1,291,551


Note 11. Commitments and Contingencies

Commitments

We lease certain facilities under non-cancelable operating leases that contain free rent periods, leasehold improvement rebates or rent escalation clauses. Rent expense under these leases has been recorded on a straight-line basis over the lease term. We are committed to pay a portion of the related actual operating expenses under certain of these lease agreements. These operating expenses are not included in the table below. The difference between amounts paid and rent expense is recorded as deferred rent and the short-term and long-term portions are included in Accruals and other current liabilities and Other long-term liabilities in our Condensed Consolidated Balance Sheets. Additionally, we sublease certain of these facilities to third parties.

In connection with our taxi media businesses, we enter into operating lease arrangements for the right to place advertising in or on taxicabs. In general, these lease arrangements are non-cancelable for terms ranging from 3 to 10 years, require us to pay minimum lease amounts based on the type and locations of the advertising displays in or on the taxicabs and are subject to fee escalation clauses. Based upon the number of operational taxicabs with our advertising displays at January 31, 2013, we had total lease commitments of $110.4 million relating to such lease arrangements, which are included in the future minimum lease payments in the table below.

Future minimum lease payments and sublease rental income under these leases as of January 31, 2013 were as follows (in thousands):
Years Ending October 31:
Minimum
Lease Payments
 
Sublease
Rental Income
 
Net Minimum
Lease Payments
2013
$
32,685

 
$
(426
)
 
$
32,259

2014
34,447

 
(511
)
 
33,936

2015
27,100

 
(489
)
 
26,611

2016
22,096

 
(259
)
 
21,837

2017
20,243

 

 
20,243

Thereafter
36,634

 

 
36,634

Total
$
173,205

 
$
(1,685
)
 
$
171,520



26

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Rent expense consisted of the following (in thousands):
 
Three Months Ended January 31,
 
2013
 
2012
Rent expense for non-cancelable taxi operating leases
$
7,640

 
$
6,603

Other rent expense
6,987

 
6,154

Total rent expense
$
14,627

 
$
12,757


Manufacturing Agreements

We work on a purchase order basis with our primary electronic manufacturing services providers, which are located in China, Singapore, Malaysia, Brazil, Germany, Romania, and France, and component suppliers located throughout the world, to supply nearly all of our finished goods inventories, spare parts, and accessories. We provide each such supplier with a purchase order to cover the manufacturing requirements, which generally constitutes a binding commitment by us to purchase materials and finished goods produced by the manufacturer as specified in the purchase order. Most of these purchase orders are considered to be non-cancelable and are expected to be paid within one year of the issuance date. As of January 31, 2013, the amount of purchase commitments issued to contract manufacturers and component suppliers totaled approximately $110.3 million. Of this amount, $16.5 million has been recorded in Accruals and other current liabilities in the accompanying Condensed Consolidated Balance Sheets because these commitments are not expected to have future value to us.

We utilize a limited number of third parties to manufacture our products and rely upon these contract manufacturers to produce and deliver products to our customers on a timely basis and at an acceptable cost. Furthermore, a majority of our manufacturing activities are concentrated in China. As a result, disruptions to the business or operations of the contract manufacturers or to their ability to produce the required products in a timely manner, and particularly disruptions to these manufacturing facilities located in China, could significantly impact our business and operations. In addition, a number of components that are necessary to manufacture and assemble our systems are specifically customized for use in our products and are obtained from sole source suppliers on a purchase order basis. Because of the customized nature of these components and the limited number of available suppliers, if we were to experience a supply disruption, it would be difficult and costly to find alternative sources in a timely manner.

Bank Guarantees

We have issued bank guarantees to certain of our customers and vendors as required in some countries to support certain performance obligations under our service or other agreements with these respective customers or vendors. As of January 31, 2013, the maximum amounts that may become payable under these guarantees was $5.6 million, of which $1.5 million is collateralized by restricted cash deposits.

Letters of Credit

We provide standby letters of credit in the ordinary course of business to third parties as required for certain transactions. As of January 31, 2013, the maximum amounts that may become payable under these letters of credit was $9.6 million.

Contingencies

We evaluate the circumstances regarding outstanding and potential litigation and other contingencies on a quarterly basis to determine whether there is at least a reasonable possibility that a loss exists requiring accrual or disclosure, and if so, whether an estimate of the possible loss or range of loss can be made, or whether such an estimate cannot be made. When a loss is probable and reasonably estimable, we accrue for such amount based on our estimate of the probable loss considering information available at the time. When a loss is reasonably possible, we disclose the estimated possible loss or range of loss in excess of amounts accrued. Except as otherwise disclosed below, we did not believe that losses were probable or that there was a reasonable possibility that a material loss may have been incurred with respect to the matters disclosed.


27

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Fire Loss

In July 2012 a fire occurred in one of our repair and staging facilities in Brazil, and we recorded an $8.3 million insurance receivable, which represents the expected probable recoverable amounts for quantified losses. During the three months ended January 31, 2013, we received payments totaling $4.8 million on the insurance receivable, and the remaining $3.5 million was in Prepaid and other current assets in our Condensed Consolidated Balance Sheets at January 31, 2013. Although final determination of the losses incurred and the actual insurance coverage under our policies are not yet complete, we expect our losses associated with this event to be substantially covered, and therefore we have recorded no net loss related to the fire during the fiscal year ended October 31, 2012 or the three months ended January 31, 2013. We do not expect this event to have a material impact on our results of operations or ongoing business operations.

Brazilian Tax Assessments

State Value Added Tax

The Brazilian subsidiary we acquired as part of our acquisition of Hypercom in August 2011 received an unfavorable administrative decision on a tax enforcement action against it filed by the São Paulo State Revenue Department for collection of state sales taxes related to purported sales of software for the 1998 and 1999 tax years. In 2004 an appeal against this unfavorable administrative decision was filed in a judicial proceeding. The first level decision in the judicial proceeding was issued in our favor. The São Paulo State Revenue Department has filed an appeal of this decision, and the proceeding is now pending second level decision. Based on our current understanding of the underlying facts of this matter, we believe it is reasonably possible that we may receive an unfavorable decision in this proceeding. The tax assessment including estimated interest through January 31, 2013 for this matter totals approximately 7.1 million Brazilian reais (approximately $3.6 million at the foreign exchange rate as of January 31, 2013). As of January 31, 2013, we have not accrued for this matter.

Importation of Goods Assessments

Two of our Brazilian subsidiaries that were acquired as a part of the November 2006 Lipman (Lipman Electronic Engineering Ltd.) acquisition have been notified of assessments regarding Brazilian customs penalties that relate to alleged infractions in the importation of goods. The assessments were issued by the Federal Revenue Department in the City of Vitória, the City of São Paulo, and the City of Itajai. In each of these cases, the tax authorities allege that the structure used for the importation of goods was simulated with the objective of evading taxes levied on the importation by under-invoicing the imported goods. The tax authorities allege that the simulation was created through a fraudulent interposition of parties, where the real sellers and buyers of the imported goods were hidden.

In the Vitória tax assessment, the fines were reduced from 4.7 million Brazilian reais (approximately $2.4 million at the foreign exchange rate as of January 31, 2013) to 1.5 million Brazilian reais (approximately $0.7 million at the foreign exchange rate as of January 31, 2013) on a first level administrative decision on January 26, 2007. Both the tax authorities and the Company filed appeals of the first level administrative decision. In this appeal, we argued that the tax authorities did not have enough evidence to determine that the import transactions were indeed fraudulent and that, even if there were some irregularities in such importations, they could not be deemed to be our responsibility since all the transactions were performed by the third-party importer of the goods. On June 30, 2010, the Taxpayers Administrative Council of Tax Appeals decided to reinstate the original claim amount of 4.7 million Brazilian reais (approximately $2.4 million at the foreign exchange rate as of January 31, 2013) against us. A formal ruling on the decision of the Taxpayers Administrative Council of Tax Appeals has not yet been issued. In addition, the federal attorney in this proceeding has filed a motion to clarify, which is also pending a decision. Once a formal ruling is issued by the Taxpayers Administrative Council of Tax Appeals, we will decide whether or not to appeal to the judicial level. Based on our current understanding of the underlying facts of this matter, we believe that it is probable that our Brazilian subsidiary will be required to pay some amount of fines. Accordingly, at January 31, 2013, we have accrued 4.7 million Brazilian reais (approximately $2.4 million at the foreign exchange rate as of January 31, 2013) for this matter, plus approximately 3.4 million Brazilian reais (approximately $1.7 million at the foreign exchange rate as of January 31, 2013) for estimated interest.


28

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

On July 12, 2007, we were notified of a first level administrative decision rendered in the São Paulo tax assessment, which maintained the total fine of 20.2 million Brazilian reais (approximately $10.2 million at the foreign exchange rate as of January 31, 2013) as imposed. On August 10, 2007, we appealed the first level administrative decision to the Taxpayers Council. A hearing was held on August 12, 2008 before the Taxpayers Council, and on October 14, 2008, the Taxpayers Council granted our appeal and dismissed the São Paulo assessment based upon the assessment being erroneously calculated on the value of the sale of the products in question to end customers in the local market rather than on the declared importation value of such products. We were subsequently notified of the Taxpayers Council's decision and the case was dismissed on May 19, 2009. In August 2009, the Brazilian tax authorities requested additional materials from us. In October 2009, we received a revised assessment in this matter of 1.9 million Brazilian reais (approximately $1.0 million at the foreign exchange rate as of January 31, 2013). On May 20, 2010, we were notified of a first level administrative decision canceling the revised tax assessment. The second level administrative decision maintained the first level administrative decision. No further appeal was filed prior to the deadline, and thus this revised assessment is now canceled and at January 31, 2013, we reversed the 1.6 million Brazilian reais (approximately $0.8 million at the foreign exchange rate as of January 31, 2013) we had previously accrued for this matter.

On January 18, 2008, we were notified of a first level administrative decision rendered in the Itajai assessment, which maintained the total fine of 2.0 million Brazilian reais (approximately $1.0 million at the foreign exchange rate as of January 31, 2013) as imposed, excluding interest. On May 27, 2008, we appealed the first level administrative decision to the Taxpayers Council. This matter is currently pending second level decision. Based on our current understanding of the underlying facts of this matter, we believe that it is probable that our Brazilian subsidiary will be required to pay some amount of fines. Accordingly, at January 31, 2013, we have accrued 2.0 million Brazilian reais (approximately $1.0 million at the foreign exchange rate as of January 31, 2013) for this matter, plus approximately 1.8 million Brazilian reais (approximately $0.9 million at the foreign exchange rate as of January 31, 2013) for estimated interest.

Municipality Tax on Services Assessment

In December 2009, one of the Brazilian subsidiaries that was acquired as part of the Lipman acquisition was notified of a tax assessment regarding alleged nonpayment of tax on services rendered for the period from September 2004 to December 2004. This assessment was issued by the municipality of São Paulo (the "municipality"), and asserts a services tax deficiency and related penalties totaling 0.9 million Brazilian reais (approximately $0.4 million at the foreign exchange rate as of January 31, 2013), excluding interest. The municipality claims that the Brazilian subsidiary rendered certain services within the municipality of São Paulo but simulated that those services were rendered in another city. At the end of December 2010 the municipality issued further tax assessments alleging the same claims for 2005 through June 2007. These additional subsequent claims assert services tax deficiencies and related penalties totaling 5.9 million Brazilian reais (approximately $3.0 million at the foreign exchange rate as of January 31, 2013), excluding interest. We received unfavorable decisions from the administrative courts, which ruled to maintain the tax assessments for each of these matters. No further grounds of appeal are available to us for these assessments within the administrative courts. In October 2012, as a result of the decision at the administrative level, the tax authorities filed an enforcement action in the civil courts to collect on the services tax assessments amounts awarded by the administrative court, and seeking other related costs and fees. On March 6, 2013, we filed our defensive claims in the civil courts in response to the tax authorities' enforcement action. Based on our understanding of the underlying facts of this matter and our evaluation of the potential outcome at the judicial level, we believe it is reasonably possible that our Brazilian subsidiary will be required to pay some amount of the alleged tax assessments and penalties, as well as amounts of interest and certain costs and fees imposed by the court, related to these matters.

The Brazilian subsidiary we acquired as part of our acquisition of Hypercom in August 2011 received an unfavorable administrative decision on a tax enforcement action against it filed by the municipality of Curitiba for collection of alleged services tax deficiency. An appeal against this unfavorable administrative decision was filed in a judicial proceeding and currently the case is pending the municipality of Curitiba's compliance with the writ of summons. As of January 31, 2013, the underlying assessment, including estimated interest, was approximately 6.3 million Brazilian reais (approximately $3.2 million at the foreign exchange rate as of January 31, 2013). Based on our current understanding of the underlying facts of this matter, we believe it is reasonably possible that we may receive an unfavorable decision in this proceeding. As of January 31, 2013, we have not accrued for this matter.


29

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Brazilian Federal Tax Assessments

The Brazilian subsidiary we acquired as part of our acquisition of Hypercom in August 2011 is the subject of outstanding tax assessments by the federal tax authorities alleging unpaid IRPJ, CSL, COFINS and PIS taxes from 2002 and 2003. Three of the four claims for the 2002 assessments were previously settled prior to our acquisition of Hypercom. The first level administrative court issued an unfavorable decision for the remaining claim related to the 2002 tax assessments, which we have appealed to the Administrative Tax Appeals Council. This claim is currently pending judgment by the Administrative Tax Appeals Council. We received a partially favorable ruling with respect to the 2003 tax assessments. Our appeal of the partial unfavorable ruling for the 2003 assessments is currently pending decision in the civil courts. Based on our current understanding of the underlying facts of this matter, we believe it is reasonably possible we may receive an unfavorable decision related to these proceedings. The outstanding tax assessments for these proceedings total 11.0 million Brazilian reais (approximately $5.5 million at the foreign exchange rate as of January 31, 2013), including estimated penalties and interest as of January 31, 2013.

Patent Infringement and Commercial Litigation

Cardsoft, Inc. et al v. VeriFone Holdings, Inc., VeriFone, Inc., Hypercom Corporation, et al.

On March 6, 2008, Cardsoft (Cardsoft, Inc. and Cardsoft (Assignment for the Benefit of Creditors), LLC) commenced an action in the United States District Court for the Eastern District of Texas, Marshall Division, against us and Hypercom Corporation, among others, alleging infringement of U.S. Patents No. 6,934,945 and No. 7,302,683 purportedly owned by Cardsoft. Cardsoft sought, in its complaint, a judgment of infringement, and an injunction against further infringement, damages, interest and attorneys' fees. The Markman hearing was held on August 8, 2011. Based on the court's ruling after the Markman hearing we filed motions for summary judgment on the claims prior to the scheduled trial, moving that, based on the court's construction of the key claims of the patents-in-suit, our products do not infringe on the patents-in-suit and moving for summary judgment based on our contentions the patents-in-suit are invalid. However, the court did not rule on these motions before trial, nor did the court rule on Cardsoft's summary judgment motions. Similarly, the court did not rule on the substantive pre-trial motions in favor of ruling on the matters at trial. The jury trial for this case commenced on June 4, 2012. On June 8, 2012, the jury completed its deliberations and returned an unfavorable verdict finding that Cardsoft's patents were valid and were infringed by the accused VeriFone and Hypercom devices, and further determined that a royalty rate of $3 per unit should be applied. Accordingly, the jury awarded Cardsoft infringement damages and royalties of $15.4 million covering past sales of the accused devices by VeriFone and Hypercom. The jury concluded there was no willful infringement by either VeriFone or Hypercom. We moved for judgment as a matter of law prior to the submission of the case to the jury, but the District Court did not rule on those motions.

Following the jury's verdict, we determined that it is probable we will incur a loss on this litigation based on the jury's verdict and current status of the litigation proceedings. As a result, we have accrued an estimated loss through January 31, 2013, including estimated pre-judgment interest and potential ongoing royalties, totaling $19.3 million as of January 31, 2013 related to this ongoing litigation. Our estimate of pre-judgment interest applies a rate of 4.12% which represents the seven year Treasury rate as of August 23, 2005, the date of the relevant hypothetical negotiation of the underlying claims.

A judgment has not yet been entered in this case, and we and Cardsoft have filed our post-verdict briefings with the District Court. We filed our motions for judgment as a matter of law to overturn the jury's verdict and motions for a new trial. Cardsoft filed a motion for permanent injunction or in the alternative for a future royalty of $8 per unit on our future U.S. sales of the accused products through the March 16, 2018 expiration date of the patents. Cardsoft also filed a motion seeking pre-judgment interest at a rate of 5%. The District Court is expected to rule on these matters before it enters judgment. We believe that there is a remote chance of the District Court granting an injunction under relevant U.S. Supreme Court case law. We cannot at this time estimate the per unit future royalty that the District Court will order in its final judgment, but it is probable the court will order a future royalty of at least $3 per unit based on the jury's verdict. In addition, based on our discussions with our litigation counsel for this matter, it is possible the court may order a future royalty that is higher than the per unit royalty awarded by the jury for future sales of the products determined by the jury to be infringing. Given that an ongoing royalty is probable and estimable, effective in our fiscal quarter ended July 31, 2012, when the jury verdict was issued, we accrued $3 per unit to cost of net revenues for potential ongoing royalties. During the fiscal quarter ended October 31, 2012, we completed redesigns of the terminals subject to the jury's verdict specifically to address the Cardsoft allegations, and implemented such redesign in the U.S. We obtained the legal opinion of independent intellectual property counsel that our terminals, as redesigned, do not infringe the Cardsoft patents-in-suit, taking into account the claim construction of the District Court in the Cardsoft action. Accordingly, although the question of whether our products, as redesigned, infringe the Cardsoft patents-in-suit is subject to determination by a court, whether the District Court in the underlying trial or another court, we concluded based on the procedures taken and legal reviews obtained, that it is not probable that an ongoing royalty based on the jury's verdict applies to our terminals as redesigned, and ceased accruing

30

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

an ongoing royalty on the basis for our implementation of the redesigns. We will continue to accrue for prejudgment interest until judgment is entered.

As noted above, Cardsoft has filed a motion claiming royalties on our future U.S. sales of the accused products at a royalty rate higher than the rate awarded by the jury and prejudgment interest at a rate higher than used in our estimates. In addition to the higher royalty rate and higher rate of prejudgment interest sought by Cardsoft, it is possible that, notwithstanding the jury's finding of no willful infringement, Cardsoft may seek to recover its attorneys' fees or other amounts in this lawsuit or may appeal the finding of non-willful infringement. Any damages award that is maintained after appeal would be additionally subject to post-judgment interest. We intend to vigorously pursue our appeal of any unfavorable judgment issued by the District Court as a result of the jury's verdict and to defend any further claims related to this litigation. At this time we are unable to estimate the range of additional loss exceeding amounts already recognized, if any, related to any further amounts Cardsoft may seek and the District Court may award in post-trial motions. Unfavorable rulings on such motions could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Class Action and Derivative Lawsuits

In re VeriFone Holdings, Inc. Securities Litigation

On or after December 4, 2007, several securities class action claims were filed against us and certain of our officers, former officers, and a former director. These lawsuits were consolidated in the U.S. District Court for the Northern District of California as In re VeriFone Holdings, Inc. Securities Litigation, C 07-6140 MHP. The original actions were: Eichenholtz v. VeriFone Holdings, Inc. et al., C 07-6140 MHP; Lien v. VeriFone Holdings, Inc. et al., C 07-6195 JSW; Vaughn et al. v. VeriFone Holdings, Inc. et al., C 07-6197 VRW (Plaintiffs voluntarily dismissed this complaint on March 7, 2008); Feldman et al. v. VeriFone Holdings, Inc. et al., C 07-6218 MMC; Cerini v. VeriFone Holdings, Inc. et al., C 07-6228 SC; Westend Capital Management LLC v. VeriFone Holdings, Inc. et al., C 07-6237 MMC; Hill v. VeriFone Holdings, Inc. et al., C 07-6238 MHP; Offutt v. VeriFone Holdings, Inc. et al., C 07-6241 JSW; Feitel v. VeriFone Holdings, Inc., et al., C 08-0118 CW. On August 22, 2008, the court appointed plaintiff National Elevator Fund lead plaintiff and its attorneys lead counsel. Plaintiff filed its consolidated amended class action complaint on October 31, 2008, which asserts claims under the Securities Exchange Act Sections 10(b), 20(a), and 20A and SEC Rule 10b-5 for securities fraud and control person liability against us and certain of our current and former officers and directors, based on allegations that we and the individual defendants made false or misleading public statements regarding our business and operations during the putative class periods and seeks unspecified monetary damages and other relief. We filed our motion to dismiss on December 31, 2008. The court granted our motion on May 26, 2009 and dismissed the consolidated amended class action complaint with leave to amend within 30 days of the ruling. The proceedings were stayed pending a mediation held in October 2009 at which time the parties failed to reach a mutually agreeable settlement. Lead plaintiff's first amended complaint was filed on December 3, 2009 followed by a second amended complaint filed on January 19, 2010. We filed a motion to dismiss the second amended complaint and the hearing on our motion was held on May 17, 2010. In July 2010, prior to any court ruling on our motion, lead plaintiff filed a motion for leave to file a third amended complaint on the basis that it had newly discovered evidence. Pursuant to a briefing schedule issued by the court we submitted our motion to dismiss the third amended complaint and lead plaintiff filed its opposition, following which the court took the matter under submission without further hearing. On March 8, 2011, the court ruled in our favor and dismissed the consolidated securities class action without leave to amend. On April 5, 2011, lead plaintiff filed its notice of appeal of the district court's ruling to the U.S. Court of Appeals for the Ninth Circuit. On June 24 and June 27, 2011, lead plaintiff dismissed its appeal as against defendants Paul Periolat, William Atkinson, and Craig Bondy. Lead plaintiff filed its opening brief on appeal on July 28, 2011. We filed our answering brief on September 28, 2011 and lead plaintiff filed its reply brief on October 31, 2011. A hearing on oral arguments for this appeal was held before a judicial panel of the Ninth Circuit on May 17, 2012. On December 21, 2012, the Ninth Circuit issued its opinion reversing the district court's dismissal of the consolidated shareholder securities class actions against us and certain of our officers and directors, with the exception of the dismissal of plaintiffs' claims under Section 20(a) of the Securities and Exchange Act, which the Ninth Circuit affirmed. On January 4, 2013, we filed a petition for en banc rehearing with the Ninth Circuit. On January 30, 2013, the Ninth Circuit denied the petition for rehearing. On February 8, 2013, the Ninth Circuit issued a mandate returning this case to the U.S. District Court for the Northern District of California for further proceeding on plaintiffs' claims, except for the dismissed Section 20(a) claim. We have agreed with lead plaintiff to hold a mediation on March 26, 2013.


31

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Shareholder Derivative Litigation Proceedings

Beginning on December 13, 2007, several actions were also filed against certain current and former directors and officers derivatively on our behalf. These derivative lawsuits were filed in: (1) the U.S. District Court for the Northern District of California, as In re VeriFone Holdings, Inc. Shareholder Derivative Litigation, Lead Case No. C 07-6347 MHP, which consolidates King v. Bergeron, et al. (Case No. 07-CV-6347), Hilborn v. VeriFone Holdings, Inc., et al. (Case No. 08-CV-1132), Patel v. Bergeron, et al. (Case No. 08-CV-1133), and Lemmond, et al. v. VeriFone Holdings, Inc., et al. (Case No. 08-CV-1301); and (2) California Superior Court, Santa Clara County, as In re VeriFone Holdings, Inc. Derivative Litigation, Lead Case No. 1-07-CV-100980, which consolidates Catholic Medical Mission Board v. Bergeron, et al. (Case No. 1-07-CV-100980) and Carpel v. Bergeron, et al. (Case No. 1-07-CV-101449). We prevailed in our motion to dismiss the federal derivative claims before the U.S. District Court for the Northern District of California and, on November 28, 2011, in ruling on lead plaintiff's appeal against the district court's judgment dismissing plaintiffs' derivative claims, the Ninth Circuit issued judgment affirming the dismissal of lead plaintiff's complaint against us. Lead plaintiff did not appeal the Ninth Circuit's judgment and the federal derivative action is now closed.

On October 31, 2008, the state derivative plaintiffs filed their consolidated derivative complaint in California Superior Court for the County of Santa Clara naming us as a nominal defendant and bringing claims for insider selling, breach of fiduciary duty, unjust enrichment, waste of corporate assets and aiding and abetting breach of fiduciary duty against certain of our current and former officers and directors and our largest stockholder as of October 31, 2008, GTCR Golder Rauner LLC. In November 2008, we filed a motion to stay the state court action pending resolution of the parallel federal actions, and the parties have agreed by stipulation to delay briefing on the motion to stay until after the issue of demand futility is resolved in the federal derivative case. On June 2, 2011, the court entered a stipulated order requiring the parties to submit a case status report on August 1, 2011 and periodically thereafter. The parties submitted status reports to the court through February 1, 2013 as requested by the court. On January 30, 2013, counsel for plaintiff informed us that Mr. Carpel, the nominal plaintiff, had sold his shares in the company and therefore no longer had standing to maintain a derivative action against us. On February 15, 2013, the court entered an order setting a briefing schedule and setting a hearing for any demurrers to the consolidated complaint and setting a May 31, 2013 hearing date for any such demurrers. Also on February 15, plaintiff filed a motion for leave to publish notice to our stockholders seeking a new nominal plaintiff with a noticed hearing date of April 12, 2013.

Israel Class Action

On January 27, 2008, a class action complaint was filed against us in the Central District Court in Tel Aviv, Israel on behalf of purchasers of our stock on the Tel Aviv Stock Exchange. The complaint seeks compensation for damages allegedly incurred by the class of plaintiffs due to the publication of erroneous financial reports. We filed a motion to stay the action, in light of the proceedings already filed in the United States, on March 31, 2008. A hearing on the motion was held on May 25, 2008. Further briefing in support of the stay motion, specifically with regard to the threshold issue of applicable law, was submitted on June 24, 2008. On September 11, 2008, the Israeli District Court ruled in our favor, holding that U.S. law would apply in determining our liability. On October 7, 2008, plaintiffs filed a motion for leave to appeal the Israeli District Court's ruling to the Israeli Supreme Court. Our response to plaintiffs' appeal motion was filed on January 18, 2009. The Israeli District Court has stayed its proceedings until the Israeli Supreme Court rules on plaintiffs' motion for leave to appeal. On January 27, 2010, after a hearing before the Israeli Supreme Court, the court dismissed the plaintiffs' motion for leave to appeal and addressed the case back to the Israeli District Court. The Israeli Supreme Court instructed the Israeli District Court to rule whether the Israeli class action should be stayed, under the assumption that the applicable law is U.S. law. Plaintiffs subsequently filed an application for reconsideration of the Israeli District Court's ruling that U.S. law is the applicable law. Following a hearing on plaintiffs' application, on April 12, 2010, the parties agreed to stay the proceedings pending resolution of the U.S. securities class action, without prejudice to plaintiffs' right to appeal the Israeli District Court's decision regarding the applicable law to the Israeli Supreme Court. On May 25, 2010, plaintiff filed a motion for leave to appeal the decision regarding the applicable law with the Israeli Supreme Court. In August 2010, plaintiff filed an application to the Israeli Supreme Court arguing that the U.S. Supreme Court's decision in Morrison et al. v. National Australia Bank Ltd., 561 U.S. __, 130 S. Ct. 2869 (2010), may affect the outcome of the appeal currently pending before the Court and requesting that this authority be added to the Court's record. Plaintiff concurrently filed an application with the Israeli District Court asking that court to reverse its decision regarding the applicability of U.S. law to the Israeli class action, as well as to cancel its decision to stay the Israeli proceedings in favor of the U.S. class action in light of the U.S. Supreme Court's decision in Morrison. On August 25, 2011, the Israeli District Court issued a decision denying plaintiff's application and reaffirming its ruling that the law applicable to the Israeli class action is U.S. law. The Israeli District Court also ordered that further proceedings in the case be stayed pending the decision on appeal in the U.S. class action.


32

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

On November 13, 2011, plaintiff filed an amended application for leave to appeal addressing the Israeli District Court's ruling. VeriFone filed an amended response on December 28, 2011. On January 1, 2012, the Israeli Supreme Court ordered consideration of the application by three justices. On July 2, 2012, the Israeli Supreme Court ordered VeriFone to file an updated notice on the status of the proceedings in the U.S. securities class action pending in the U.S. Court of Appeals for the Ninth Circuit by October 1, 2012. On October 11, 2012, VeriFone filed an updated status notice in the Israeli Supreme Court on the proceedings in the U.S. securities class action pending in the U.S. Court of Appeals for the Ninth Circuit. On January 9, 2013, the Israeli Supreme Court held a further hearing on the status of the appeal in the U.S. Court of Appeals for the Ninth Circuit and recommended that the parties meet and confer regarding the inclusion of the Israeli plaintiffs in the federal class action pending in the U.S. On February 10, 2013, the Israeli Supreme Court issued an order staying the case pursuant to the joint notice submitted to the court by the parties on February 4, 2013.

Sanders v. VeriFone Systems, Inc. et al.

On March 7, 2013, a putative securities class action was filed in the U.S. District Court for the Northern District of California against us and certain of our current and former officers. The action, captioned Sanders v. VeriFone Systems, Inc. et al., Case No. C 13-1038, is brought on behalf of a putative class of purchasers of VeriFone securities between December 14, 2011 and February 19, 2013 and asserts claims under the Securities Exchange Act Sections 10(b) and 20(a) and SEC Rule 10b-5 for securities fraud and control person liability. The claims are brought against us and certain of our current and former officers, and are based on allegations that we and the individual defendants made false or misleading public statements regarding our business, operations, and financial controls during the putative class period. The complaint seeks unspecified monetary damages and other relief.

If any of these class action or derivative lawsuits are resolved adversely to us, this could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Other Litigation

After termination of their services, several former contractors of one of our Brazilian subsidiaries filed individual lawsuits in the Labor Court of São Paulo against the subsidiary alleging an employer-employee relationship and wrongful termination, and claiming, among other damages, statutorily-imposed salaries, vacations, severance and bonus amounts, social contributions and penalties and moral damages. In October 2012, we received a partially unfavorable judgment for one of these lawsuits, with the court ruling that an employer-employee relationship existed. Both we and the plaintiff have appealed this first level administrative ruling. In October 2012, without admitting any wrongdoing or violation of law, we settled one of these lawsuits for a cash payment. The amount of this settlement is not material to our results of operations and has been recorded in our results of operations for the fiscal year ended October 31, 2012. While the plaintiffs in these proceedings have made similar allegations, some of these lawsuits are in the earlier stage of proceedings with some not having reached the discovery stage. Our evaluation of these proceedings with Brazilian labor counsel is ongoing, and we intend to vigorously defend these actions. Based on our review and understanding of the available facts and circumstances related to these matters and applicable Brazilian labor laws, we believe that it is probable that we may not prevail as to one or more of these claims against us. As of January 31, 2013, we have accrued 2.7 million Brazilian reais (approximately $1.3 million at the foreign exchange rate as of January 31, 2013), including estimated accrued interest, in Sales and marketing operating expenses, based on our current assessment of these matters.

Certain of the foregoing cases are still in the preliminary stages, and we are not able to quantify the extent of our potential liability, if any. Further, the outcome of litigation is inherently unpredictable and subject to significant uncertainties. If any of these matters are resolved adversely to us, this could have a material adverse effect on our business, financial condition, results of operations, and cash flows. In addition, defending these legal proceedings is likely to be costly, which may have a material adverse effect on our financial condition, results of operations and cash flows, and may divert management's attention from the day-to-day operations of our business.

We are subject to various other legal proceedings related to commercial, customer, and employment matters that have arisen during the ordinary course of business, including a number of pending labor-related claims that arose in the ordinary course of business against the Hypercom Brazilian subsidiary prior to our acquisition of Hypercom. The outcome of such legal proceedings is inherently unpredictable and subject to significant uncertainties. Although there can be no assurance as to the ultimate disposition of these matters, our management has determined, based upon the information available at the date of these financial statements, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.


33

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Export Control Matters

As disclosed below in Part II Item 5, Other Information of this Quarterly Report on Form 10-Q, we have discovered certain unauthorized activities which may potentially constitute violations of U.S. export control laws and regulations that prohibit the shipment of our products and the provision of our services to countries, governments and persons targeted by U.S. sanctions. In connection with our discoveries we have made a voluntary disclosure to the U.S. Department of Treasury's Office of Foreign Assets Control (“OFAC”) regarding these potential violations. This voluntary disclosure process with OFAC is in the initial stages and we cannot predict whether or when OFAC would review this matter or what enforcement action, if any, it may take. If we were found to be in violation of U.S. sanctions or export control laws, it could result in fines or penalties for us, which could harm our results of operations. See further disclosures in Part II Item 5, Other Information of this Quarterly Report on Form 10-Q.

Income Tax Uncertainties

As of January 31, 2013, the amount payable of our unrecognized tax benefits was $44.3 million, including accrued interest and penalties, of which none is expected to be paid within one year. We are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority may occur. We believe that it is reasonably possible that there could be a reduction in unrecognized tax benefits due to statute of limitations expirations in multiple tax jurisdictions during the next 12 months that is not material.

Note 12. Stockholders’ Equity

Common and Preferred Stock

We have 200.0 million authorized shares of common stock at $0.01 per share par value. There were 108.3 million and 107.9 million shares of common stock outstanding as of January 31, 2013 and October 31, 2012.

We have 10.0 million authorized shares of preferred stock at $0.01 per share par value. There were no shares of preferred stock outstanding as of January 31, 2013 and October 31, 2012.

We have 0.1 million shares of treasury stock as of January 31, 2013 and October 31, 2012.

Warrants to purchase 7.2 million shares of our common stock at an exercise price of $62.356 per share were outstanding at January 31, 2013 and 2012. The warrants were sold in connection with the offering of our 1.375% senior convertible notes. The warrants expire in equal share amounts on each trading day from December 19, 2013 to February 3, 2014.

Accumulated Other Comprehensive Income (Loss)
 
Accumulated other comprehensive income (loss), net of tax, consisted of the following (in thousands):
 
January 31, 2013

 
October 31, 2012

Foreign currency translation adjustments
$
20,218

 
$
(28,057
)
Unrealized gain on marketable equity investment
484

 

Unrealized loss on derivatives designated as cash flow hedges, net of tax
(1,746
)
 
(2,674
)
Adjustments of pension plan obligations
(1,833
)
 
(1,659
)
Accumulated other comprehensive income (loss)
$
17,123

 
$
(32,390
)


34

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Note 13. Segment and Geographic Information

Segment Information

We operate in two business segments: International and North America. Our International segment is defined as our operations in countries other than the U.S. and Canada, and our North America segment is defined as our operations in the U.S. and Canada. We determined our operating segments based on the discrete financial information used by our Chief Executive Officer, who is our chief operating decision maker, to assess performance and allocate resources. Our reportable segments are the same as our operating segments.

Net revenues and operating income of each segment reflect net revenues and expenses that directly benefit only that segment. Examples of these segment expenses are: standard inventory costs of System solutions net revenues, costs of Services net revenues, distribution center costs, royalty expense and warranty expense.

Corporate net revenues and operating loss reflect amortization of purchased intangible assets, increase to fair value (step-up) of inventory at acquisition, fair value decrease (step-down) in deferred revenue at acquisition, impairment, stock-based compensation, acquisition, integration and restructuring costs, and other corporate charges, including inventory obsolescence and scrap, rework, specific warranty provisions, non-standard freight, and over-and-under absorption of materials management overhead. Since Corporate costs are generally incurred on a company-wide basis, it is impractical to allocate them to either the International or North America segments.

The following table sets forth net revenues and operating income (loss) for our segments (in thousands):
 
Three Months Ended January 31,
 
2013
 
2012
Net revenues:
 
 
 
International
$
296,927

 
$
305,235

North America
132,727

 
119,965

Corporate
(907
)
 
(5,676
)
Total net revenues
$
428,747

 
$
419,524

Operating income (loss):
 
 
 
International
$
78,976

 
$
85,462

North America
42,710

 
40,979

Corporate
(99,951
)
 
(104,521
)
Total operating income (loss)
$
21,735

 
$
21,920


Our goodwill by segment was as follows (in thousands):
 
January 31, 2013
 
October 31, 2012
International
$
988,743

 
$
962,148

North America
217,265

 
217,233

Total goodwill
$
1,206,008

 
$
1,179,381


Our total assets by segment, based on the location of the assets, were as follows (in thousands): 
 
January 31, 2013
 
October 31, 2012
International
$
2,618,829

 
$
2,616,662

North America
915,237

 
873,945

Total assets
$
3,534,066

 
$
3,490,607



35

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Geographic Information

Our net revenues by country with net revenues over 10% of total net revenues were as follows (in thousands):
 
Three Months Ended January 31,
 
2013
 
2012
United States
$
128,558

 
$
116,228

Brazil
33,918

 
61,116

Other countries
266,271

 
242,180

Total net revenues
$
428,747

 
$
419,524


Net revenues, including corporate net revenues, are allocated to the geographic regions based on the shipping destination or service delivery location of customer orders.

Note 14. Related-Party Transactions

For the three months ended January 31, 2013 and 2012, we recorded $5.3 million and $2.3 million of net revenues from certain companies of which one of the members of their board of directors also serve on our board of directors. As of January 31, 2013 and October 31, 2012, we had outstanding accounts receivable balances of $1.5 million and $3.7 million related to those certain companies.
Our 51% majority owned subsidiary of Point, Babs Paylink AB, has an unsecured overdraft facility with Swedbank, the 49% stockholder of Babs Paylink AB. As of January 31, 2013, no amounts were outstanding and SEK 60.0 million (approximately $9.4 million at foreign exchange rates as of January 31, 2013) was available. See Note 10, Financings, for further information on the Point Overdraft Facility. In addition, in the normal course of business, we have other immaterial transactions with Swedbank.

Note 15. Subsequent Events

Sanders v. VeriFone Systems, Inc. et al.

On March 7, 2013, a putative securities class action was filed in the U.S. District Court for the Northern District of California against us and certain of our current and former officers. See further disclosure under the caption Sanders v. VeriFone Systems, Inc. et al., in Note 11, Commitments and Contingencies.

36


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “intends,” “potential,” “continues,” “plans,” “predicts,” and similar terms. Such forward-looking statements are based on current expectations, estimates, and projections about our business and industry, and management's beliefs and assumptions, and do not reflect the potential impact of any mergers, acquisitions, or other business combinations or divestitures, that have not been completed. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A Risk Factors in our 2012 Annual Report on Form 10-K and in Part II, Item 1A Risk Factors of this Quarterly Report on Form 10-Q, our disclosures of Critical Accounting Policies and Estimates in Part II, Item 7 in our 2012 Annual Report on Form 10-K and in Part I, Item 2 of this Quarterly Report on Form 10-Q, and our disclosures in Item 3, Quantitative and Qualitative Disclosures About Market Risk of this Quarterly Report on Form 10-Q, as well as in our unaudited Condensed Consolidated Financial Statements and Notes thereto. The following discussion should be read in conjunction with our consolidated financial statements and related notes included in our 2012 Annual Report on Form 10-K and the unaudited Condensed Consolidated Financial Statements and Notes thereto included in Part I, Item I of this Quarterly Report on Form 10-Q. Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events, or otherwise.

When we use the terms “VeriFone,” “we,” “us,&