SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended JUNESEPTEMBER 30, 1996 or

/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to __________



COMMISSION FILE NUMBER 0-18376


                                 VERIFONE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

     DELAWARE                                          99-0206064
     (State or other jurisdiction of                   (I.R.S. Employer
     incorporation or organization)                    Identification No.)

              THREE LAGOON DRIVE, SUITE 400, REDWOOD CITY, CA 94065
                    (Address of principal executive offices)

                                 (415) 591-6500
              (Registrant's telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  X  No
                                        ---    ---


The number of shares of the registrant's Common Stock outstanding on July 30,October 31,
1996, was 25,204,809.24,446,732.




                                    FORM 10-Q

                                 VERIFONE, INC.

                                      INDEX



                                                                            Page
                                                                          Number

PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements

            Condensed Consolidated Balance Sheets as of
            JuneSeptember 30, 1996 and December 31, 1995 . . . . . . . . . . . . . .   1

            Condensed Consolidated Statements of Income
            for the Three Months Ended JuneSeptember 30, 1996 and 1995
            and for the SixNine Months Ended JuneSeptember 30, 1996 and 1995 . . .1995. . . .   2

            Condensed Consolidated Statements of Cash Flows
            for the SixNine Months Ended JuneSeptember 30, 1996
            and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3

            Notes to Condensed Consolidated
            Financial Statements . . . . . . . . . . . . . . . . . . . . . .   4

Item 2.     Management's Discussion and Analysis of Financial
            Condition and Results of OperationsOperations. . . . . . . . . . . . . . .   6



PART II.    OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders . . . . . .   15

Item 6.     Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 16.  15

Signature    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.  16

Exhibit 11.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18. .  17





PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS


                                 VERIFONE, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)



                                                  JuneSeptember 30,   December 31,
                                                      1996            1995
                                                      ------         ------
                                                   (unaudited)  (see note below)

Assets
Current assets:
     Cash and cash equivalents                      $47,601          $72,882$ 43,109        $ 72,882
     Short-term investments                           57,85429,106           9,939
     Accounts receivable, net                        100,710112,573          96,419
     Net investment in sales-type leases              11,58011,675          10,487
     Inventories                                      66,91867,317          76,611
     Deferred income taxes                            18,75018,715          16,827
     Prepaid expenses and other current assets         8,9959,772           7,158
                                                    ------           --------------        --------
          Total current assets                       312,408292,267         290,323

Net investment in sales-type leases                   16,98518,483          15,360
Property and equipment, at cost                      108,564114,876          97,652
     Less accumulated depreciation
          and amortization                           (52,033)(54,956)        (46,710)
                                                    ------           --------------        --------
     Net property and equipment                       56,53159,920          50,942
Other assets, net                                     70,03952,006          22,891
                                                    ------           ------
                                                    $455,963--------        --------
                                                    $422,676        $379,516
                                                    ------           ------
                                                      ------           --------------        --------
                                                    --------        --------
Liabilities and stockholders' equity
Current liabilities:
     Accounts payable                               $29,179          $20,693$ 29,025        $ 20,693
     Accrued compensation                             12,11212,615          11,072
     Other accrued liabilities                        23,70023,283          18,805
     Income taxes payable                             14,61814,609          12,910
     Deferred revenue                                  5,3996,379           5,275
     Long-term debt                                   12,91015,112          10,569
                                                    ------           --------------        --------
          Total current liabilities                  97,918101,023          79,324

Long-term debt                                           1,132774           2,205
Deferred income taxes                                 51,43742,759          33,602
Stockholders' equity                                 305,476278,120         264,385
                                                    ------           ------
                                                    $455,963--------        --------
                                                    $422,676        $379,516
                                                    ------           ------
                                                      ------           --------------        --------
                                                    --------        --------


Note: The balance sheet at December 31, 1995 has been derived from the
      audited financial statements at that date but does not include all of the
      information and footnotes required by generally accepted accounting
      principles for complete financial statements.

            See notes to condensed consolidated financial statements.


                                        1



                                 VERIFONE, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                        (unaudited, dollars in thousands,
                             except per share data)


THREE MONTHS ENDED JUNESEPTEMBER 30, SIXNINE MONTHS ENDED JUNESEPTEMBER 30, --------------------------- --------------------------------------------------------- ------------------------------- 1996 1995 1996 1995 ------ ------ ------ -------------- -------- -------- -------- Net revenues $124,959 $94,850 $227,886 $175,006$120,897 $102,742 $348,783 $277,748 Costs and expenses: Cost of revenues 66,661 48,626 121,029 89,85965,928 54,011 186,957 143,870 Research and development 14,004 11,109 26,577 21,94213,070 11,467 38,477 33,409 Selling, general and administrative 29,210 23,127 56,344 44,362 ------- ------- ------- -------27,007 26,238 84,521 70,600 ------ ------ ------ ------ Total costs and expenses 109,875 82,862 203,950 156,163106,005 91,716 309,955 247,879 Income from operations 15,084 11,988 23,936 18,84314,892 11,026 38,828 29,869 Interest income, net 750 391 1,359 887 ------- ------- ------- -------578 2,060 1,937 2,947 ------ ------ ------ ------ Income before income taxes 15,834 12,379 25,295 19,73015,470 13,086 40,765 32,816 Provision for income taxes 4,591 3,590 7,335 5,722 ------- ------- ------- -------4,487 3,795 11,822 9,517 ------ ------ ------ ------ NET INCOME $ 11,24310,983 $ 8,7899,291 $ 17,96028,943 $ 14,008 ------- ------- ------- ------- ------- ------- ------- -------23,299 ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME PER SHARE $ 0.430.42 $ 0.360.38 $ 0.691.11 $ 0.58 ------- ------- ------- ------- ------- ------- ------- -------0.96 ------ ------ ------ ------ Common and common equivalent shares used in computing per share amounts 26,322 24,173 26,180 24,281 ------- ------- ------- ------- ------- ------- ------- -------26,073 24,423 26,145 24,328 ------ ------ ------ ------
See notes to condensed consolidated financial statements. The Company has reclassified certain prior-year balances to conform with current-year presentation. 2 VERIFONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Increase (decrease) in cash and cash equivalents
SIX MONTHS ENDED JUNE 30, -------------------------------- 1996 1995 ------ ------ Cash flows from operating activities: Net income $17,960 $14,008 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,383 9,588 Deferred income taxes (1,929) (22) Net decrease (increase) in receivables, inventories and prepaid expenses 847 (28,838) Net increase in payables, accruals and other current liabilities 16,253 6,352 Other, net (442) 311 --- --- Net cash provided by operating activities 43,072 1,399 ------ ----- Cash flows from investing activities: Capital expenditures (13,853) (11,645) Acquisition of other assets (3,992) (1,726) Available-for-sale investments: Purchases (56,242) (10,542) Maturities 8,327 29,574 Held-to-maturity investments: Maturities ----- 7,885 ------ ----- Net cash (used for) provided by investing activities (65,760) 13,546 ------ ------ Cash flows from financing activities: Proceeds of long-term debt 3,932 1,283 Payments of long-term debt (2,664) (9,536) Proceeds from issuance of common stock 12,997 4,174 Purchase of treasury stock (16,858) (14,543) ------ ------ Net cash used for financing activities (2,593) (18,622) ----- ------ Net decrease in cash and cash equivalents (25,281) (3,677) Cash and cash equivalents at beginning of period 72,882 43,831 ------ ------ Cash and cash equivalents at end of period $47,601 $40,154 ------ ------ ------ ------
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1996 1995 -------- -------- Cash flows from operating activities: Net income $ 28,943 $ 23,299 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,272 14,358 Deferred income taxes (1,755) 108 Net increase in receivables, inventories and prepaid expenses (13,785) (39,153) Net increase in payables, accruals and other current liabilities 17,156 5,933 Other, net (337) 255 -------- -------- Net cash provided by operating activities 46,494 4,800 -------- -------- Cash flows from investing activities: Capital expenditures (21,706) (17,406) Acquisition of other assets (9,659) (6,709) Available-for-sale investments: Purchases (58,151) (13,919) Maturities 38,804 36,311 Held-to-maturity investments: Maturities --- 10,785 -------- -------- Net cash (used for) provided by investing activities (50,712) 9,062 -------- -------- Cash flows from financing activities: Proceeds of long-term debt 7,115 1,793 Payments of long-term debt (4,003) (10,584) Proceeds from issuance of Common Stock 18,881 8,186 Purchase of treasury stock (47,548) (14,543) -------- -------- Net cash used for financing activities (25,555) (15,148) -------- -------- Net decrease in cash and cash equivalents (29,773) (1,286) Cash and cash equivalents at beginning of period 72,882 43,831 -------- -------- Cash and cash equivalents at end of period $ 43,109 $ 42,545 -------- -------- -------- -------- See notes to condensed consolidated financial statements. The Company has reclassified certain prior-year balances to conform with current-year presentation. 3 VERIFONE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) INTERIM FINANCIAL STATEMENTS The interim financial information furnished is unaudited. In the opinion of management, financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered. The interim results are not necessarily indicative of the results to be expected for the entire year. This financial information should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1995 filed with the Company's Annual Report on Form 10-K. INVENTORIES Inventories, stated at the lower of cost (first-in, first-out) or market, consist of (in thousands): JuneSeptember 30, December 31, 1996 1995 ---- ---------- ------ Raw materials $38,493$37,158 $39,183 Work in process 7,0744,959 6,369 Finished goods 21,35125,200 31,059 ------- ------- $66,918------ ------ $67,317 $76,611 ------- ------- ------- ------------- ------ ------ ------ BUSINESS COMBINATION In November 1995, the Company merged with Enterprise Integration Technologies Corporation ("EIT") and TimeCorp Systems, Inc. ("TimeCorp"). EIT and TimeCorp outstanding stock was exchanged for Common Stock of VeriFone at rates of approximately 0.77 and 0.15 VeriFone share for each share of outstanding EIT and TimeCorp stock, respectively. A total of 1,188,757 shares of VeriFone's Common Stock were issued in connection with the mergers. The mergers were accounted for as poolings of interests and, accordingly, the Company's consolidated financial statements and notes to consolidated financial statements have been restated to include the results of EIT and TimeCorp. 4 CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS Cash and cash equivalents consist of cash on deposit with banks and highly liquid investments with a maturity from date of purchase of 90 days or less. Short-term investments consist of high-quality money market instruments with original maturities greater than 90 days. Marketable investments include $13,427,000$954,000 and $57,344,000 of cash equivalents, and $57,854,000$29,106,000 and $9,939,000 of short-term investments at JuneSeptember 30, 1996 and December 31, 1995, respectively. Available-for-sale securities are carried at fair market value with unrealized gains or losses, net of tax, included in the Stockholder'sStockholders' Equity section of the Balance Sheet. The Company had an unrealized loss of $129,000$88,000 and an unrealized gain of $33,000, net of tax, on its available-for-sale securities at JuneSeptember 30, 1996 and December 31, 1995, respectively. OTHER ASSETS Included in other assets is an investment in available-for-sale securities carried at fair market value with unrealized gains or losses, net of tax, included in the Stockholder'sStockholders' Equity section of the Balance Sheet. The Company had an unrealized gain of $27,435,000,$13,904,000, net of tax, on its available-for-sale securities at JuneSeptember 30, 1996. RECLASSIFICATION The Company has reclassified certain prior-year balances to conform with current-year presentation. 5 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS All references herein to the "Company" mean VeriFone, Inc. and its consolidated subsidiaries. In November 1995, the Company merged with Enterprise Integration Technologies Corporation ("EIT") and TimeCorp Systems, Inc. ("TimeCorp"). The mergers have been accounted for as poolings of interest, and accordingly, the financial results for all periods have been restated to include the results of EIT and TimeCorp. Forward-looking statements in this Management's Discussion and Analysis -- including statements regarding international markets; gross margins; research and development expenses; selling, general and administrative expenses; liquidity and cash needs; and the Company's plans and strategies -- are all based on current expectations, and the Company assumes no obligation to update this information. Numerous factors could cause actual results to differ from those described in the forward-looking statements, including the factors set forth below under the heading "Factors That May Affect Future Results" (which are also discussed in the Company's Annual Report on Form 10-K for 1995). The Company cautions investors that its business is subject to significant risks and uncertainties. The Company's net revenues during the secondthird quarter of 1996 increased 31.7%17.7% to $125.0$120.9 million, from $94.9$102.7 million during the secondthird quarter of 1995. The Company's net revenues in the first sixnine months of 1996 increased 30.2%25.6% to $227.9$348.8 million, from $175.0$277.7 million in the same period in 1995. UNITED STATES OPERATIONS -- The following table sets forth, by market, revenues from sales in the United States for the secondthird quarter and first sixnine months of 1996 and 1995, and the percentage change year-over-year: 6
Revenues Second Quarter of: (IN MILLIONS) Percentage 1996 1995 Change ---- ---- ------ Financial retail $51.8 $41.1 26.0% Petroleum/convenience-store 12.8 8.5 50.6 Multi-lane retail 6.3 6.4 (1.6) Healthcare and Government 2.1 1.9 10.5 Other 2.5 2.2 13.6 ----- ----- ----- United States net revenues $75.5 $60.1 25.6% ----- ----- ----- ----- ----- ----- Revenues Six Months of: (IN MILLIONS) Percentage 1996 1995 Change ---- ---- ------ Financial retail $96.2 $79.9 20.4% Petroleum/convenience-store 20.5 13.5 51.9 Multi-lane retail 14.7 13.5 8.9 Healthcare and Government 3.4 3.1 9.7 Other 5.7 4.4 29.5 ----- ----- ----- United States net revenues $140.5 $114.4 22.8%Revenues Third Quarter of: (IN MILLIONS) ------------------- Percentage 1996 1995 Change ---- ---- ------ Financial retail $47.5 $44.5 6.7% Petroleum/convenience-store 11.0 8.1 35.8 Healthcare and Government 5.0 4.0 25.0 Multi-lane * 8.1 8.4 (3.6) Other 1.7 (0.4) 525.0 ----- ----- ----- United States net revenues $73.3 $64.6 13.5% ----- ----- ----- ----- ----- -----
Revenues Nine Months of: (IN MILLIONS) ------------------- Percentage 1996 1995 Change ---- ---- ------ Financial retail $143.7 $124.4 15.5% Petroleum/convenience-store 31.5 21.6 45.8 Healthcare and Government 8.4 7.1 18.3 Multi-lane * 27.4 26.5 3.4 Other 2.7 (0.6) 550.0 ----- ----- ----- United States net revenues $213.7 $179.0 19.4% ------ ------ ----- ------ ------ ----- * The multi-lane retail figures above have been restated year-to-date to reflect the combination of multi-lane retail and labor management systems. The increase in revenues from sales in the United States during the secondthird quarter and first sixnine months of 1996 was due primarily to increased sales in the financial retail market and petroleum/convenience-store market. Revenue from the financial retail market as a percentage of total United States revenue was relatively flatdeclined during the secondthird quarter and first sixnine months of 1996 when compared to the same periods in 1995. Revenue growth (in absolute dollars) in the financial retail market during the secondthird quarter and first sixnine months of 1996 was due primarily to continued acceptance of credit and debit card transaction systems. Revenue growth in the petroleum/convenience-store market during the secondthird quarter and first sixnine months of 1996 was due primarily to demand for Ruby SuperSystems and OMNI 490 terminals by distributor organizations -- which place products in independent service stations, major oil companies, independent service stations, and convenience-store chains. Revenue from the government/healthcare and government market as a percentage of total United States revenue was relatively stable during the third quarter and first sixnine months of 1996 when compared to the first six months of 1995, was relatively stable.7 same periods in 1995. Revenue from the government/healthcare market in the secondthird quarter of 1996 was due primarily to shipmentsthe strength of Emerald SuperSystemselectronic benefits transfer programs in Oklahoma, Illinois, and Kansas. Revenue from the multi-lane market declined during the third quarter of 1996 and remained relatively stable for the expansionfirst nine months of 1996 when compared to the Arkansas Medicaid programsame period in 1995. These results were due primarily to lower demand for the Company's OMNI 490 system by supermarket chains and Southeastern Pennsylvania Transit Authority. 7 mass merchandisers, partially offset by an increase in labor management system sales. Revenue from the multi-lane retail market was relatively flat in$4.7 million and $7.4 million for the secondthird quarter of 1996 while increasing inand 1995, respectively, and $19.4 million and $20.9 million for the first sixnine months of 1996 compared toand 1995, respectively. Revenue from labor management systems was $3.4 million and $1.0 million for the same periods inthird quarter of 1996 and 1995, due primarily to salesrespectively, and $8.0 million and $5.6 million for the first nine months of the Company's OMNI 490 system to supermarket chains1996 and mass merchandisers.1995, respectively. INTERNATIONAL OPERATIONS -- The following table sets forth, by geographic region, revenues from sales outside the United States for the secondthird quarter and first sixnine months of 1996 and 1995, and the percentage change year-over-year:
Revenues Second Quarter of: (IN MILLIONS) Percentage 1996 1995 Change ---- ---- ------ Europe, Middle East, Africa $15.3 $18.0 (15.0)% Americas 14.6 7.5 94.7 Asia-Pacific 19.6 9.3 110.8 ----- ----- ----- International net revenues $49.5 $34.8 42.2% ----- ----- ----- ----- ----- ----- Revenues Six Months of: (IN MILLIONS) Percentage 1996 1995 Change ---- ---- ------ Europe, Middle East, Africa $30.1 $28.4 6.0% Americas 26.0 15.7 65.6 Asia-Pacific 31.3 16.5 89.7 ----- ----- ----- International net revenues $87.4 $60.6 44.2%Revenues Third Quarter of: (IN MILLIONS) ------------------- Percentage 1996 1995 Change ---- ---- ------ Europe, Middle East, Africa $20.4 $13.3 53.4% Asia-Pacific 16.8 10.6 58.5 Americas 10.4 14.2 (26.8) ----- ----- ----- International net revenues $47.6 $38.1 24.9% ----- ----- ----- ----- ----- -----
Revenues Nine Months of: (IN MILLIONS) ------------------- Percentage 1996 1995 Change ---- ---- ------ Europe, Middle East, Africa $50.5 $41.8 20.8% Asia-Pacific 48.1 27.0 78.1 Americas 36.5 29.9 22.1 ----- ----- ----- International net revenues $135.1 $98.7 36.9% ------ ----- ----- ------ ----- ----- The increase in revenues from sales outside the United States during the secondthird quarter of 1996 was driven by worldwide demand for electronic payments, the expansion of chip-card opportunities, and the continued development of new country markets. In the secondthird quarter of 1996, sales outside the 8 United States represented 39.7%39.4% of net revenues, compared with 36.6%37.1% of net revenues in the same period of 1995. For the first sixnine months of 1996, sales outside the United States represented 38.4%38.7% of the Company's net revenues, compared with 34.6%35.5% of net revenues in the same period of 1995. Growth in international sales during the secondthird quarter and first sixnine months of 1996 occurred in the Asia-PacificEurope, Middle East, and Africa region and Americasin the Asia- Pacific region. Growth in the Europe, Middle East and Africa region was primarily due to sales in Netherlands, Spain, the United Kingdom and France, partially offset by lower demand in Germany. Growth in the Asia-Pacific region was due primarily to sales in the People's Republic of China, Japan, Australia and Australia. GrowthHong Kong. Sales in the Americas region was due primarily to sales in Canada, Mexico and Argentina. Sales in the 8 Europe, Middle East and Africa region declined in the secondthird quarter of 1996 due primarily to lower demand in Germany and Italy.Mexico. The Company plans to continue to expand its global infrastructure with the aim of increasing market share in established country markets, as well as opening new country markets. Achievement of these plans is subject to various risks, including local economic conditions, as discussed below under "Factors That May Affect Future Results." International growth has increased the Company's exposure to the effects of foreign currency fluctuations. The Company engages in a foreign currency management program that is intended to minimize the effects of these fluctuations. This program includes the use of foreign exchange contracts to hedge its intercompany balances. The gains and losses on these contracts were immaterial as the majority of the Company's sales are denominated in U.S. dollars. PRODUCT ANALYSIS -- The following table sets forth, by product type, net revenues for the secondthird quarter and first sixnine months of 1996 and 1995, and the percentage change year-over-year:
Net Revenues SecondNet Revenues Third Quarter of: (IN MILLIONS) ------------------- Percentage 1996 1995 Change ---- ---- ------ High-Functionality Systems $ 51.1 $ 43.0 18.8% Basic Terminals 3.2 3.7 (13.5) Fully Integrated Systems 9.9 6.7 47.8 Printers and PinPads 30.1 35.6 (15.4) Smart Card Systems 8.1 2.6 211.5 Other 18.5 11.1 66.7 ------ ------ ---- $120.9 $102.7 17.7% ------ ------ ---- ------ ------ ---- 9 Net Revenues Nine Months of: (IN MILLIONS) -------------------- Percentage 1996 1995 Change ---- ---- ------ High-Functionality Systems $50.1 $39.3 27.5% Related Products (such as Printers and PIN Pads) 35.5 29.7 19.5 Fully Integrated Systems 13.1 7.5 74.7 Basic Terminals 4.9 4.6 6.5 Other 21.4 13.8 55.1 ----- ----- ----- $125.0 $94.9 31.7% ----- ----- ----- ----- ----- ----- Net Revenues Six Months of: (IN MILLIONS) Percentage 1996 1995 Change ---- ---- ------ High-Functionality Systems $92.8 $72.4 28.2% Related Products (such as Printers and PIN Pads) 63.2 52.9 19.5 Fully Integrated Systems 22.8 12.4 83.9 Basic Terminals 9.1 9.7 (6.2) Other 40.0 27.6 44.9 ----- ----- ----- $227.9 $175.0 30.2% ----- ----- ----- ----- ----- -----
------ High-Functionality Systems $143.9 $116.7 23.3% Basic Terminals 12.3 13.3 (7.5) Fully Integrated Systems 32.7 19.1 71.2 Printers and PinPads 93.3 91.1 2.4 Smart Card Systems 15.5 6.8 127.9 Other 51.1 30.7 66.4 ------ ------ ---- $348.8 $277.7 25.6% ------ ------ ---- ------ ------ ---- The increase in net revenues in the secondthird quarter and first sixnine months of 1996 was due to a number of factors, including among them a shift in product mix from basic terminals to high-functionality systems (such as TRANZ 330 and TRANZ 460 products), fully integrated systems (such as the OMNI 490 and the Ruby Super-System), and increased demand 9 for related productssmart card systems (such as printersSC 552 and PIN pads)SC 542 Smart Card Reader/Writers). The increase in high-functionality systems and related products was due primarily to increased demand for complete transaction automation systems (which include related products), increased demand for stand-alone printers for integration with other systems, and growth in the international markets and in the United States multi-lane retail and petroleum/convenience-store markets, which have a greater demand for high-functionality systems and fully integrated products. Unit shipments of products, other than related products,printers and pinpads, increased 28.2%12.6% with 250,000233,000 units shipped in the secondthird quarter of 1996, compared with 195,000207,000 units shipped in the secondthird quarter of 1995. Unit shipments of products, other than related products,printers and pinpads, increased 26.8%21.5% to 464,000696,000 in the first sixnine months of 1996, compared with 366,000573,000 in the first sixnine months of 1995. GROSS MARGINS (NET REVENUES LESS COST OF REVENUES)(net revenues less cost of revenues) -- Gross margins were 46.7%45.5% and 48.7%47.4% in the secondthird quarter of 1996 and 1995, respectively. Gross margins for the first sixnine months of 1996 and 1995 were 46.9%46.4% and 48.7%48.2%, respectively. The decrease in gross margins was due primarilyin part to shifts in the Company's business and product mix, including a shift toward higher volumes of lower margin-related products (such as printers and PIN pads). Factors affecting gross margins during the first six months of 1996 also included a higher proportion of sales to international markets, which tend to have lower gross margins due to competitive pricing pressures. The decrease was also due to other factors, including general competitive pricing pressures and shifts in the Company's overall business and product mix. The Company currently expects its gross margins to continue to be affected by changes in business segment mix, product mix, competition and other factors. R&D EXPENSES -- Research and development (R&D) expenses increased 26.1%14.0% in the secondthird quarter of 1996 over the same period in 1995, and represented 11.2%10.8% of net revenues in the secondthird quarter of 1996, compared with 11.7%11.2% of net revenues for the same period in 1995. R&D expenses represented 11.7%11.0% and 12.5%12.0% of net revenues for the first sixnine months of 1996 and 1995, respectively. The increase in R&D expenses was due to a number of factors, including among them investments in product development for the Company's core products, and the development of new system platforms in the Internet commerce and chip-card markets. The Company currently expects that, in the long term, R&D expenses will continue to increase in absolute dollars but may decline as a percentage of net revenues. The Company expects that, in the short-term, R&D expenses may increase both in absolute dollars and as a percentage of net revenues as the Company invests in R&D for new markets such as Internet commerce. In this regard, the Company currently plans to spend an additional $2 million in operating expenses in the third quarter of 1996 for its Internet commerce division (above the Company's previously planned spending levels), a significant portion of which will be for R&D expenses. SG&A EXPENSES -- Selling, general and administrative (SG&A) expenses increased 26.3%2.9% in the secondthird quarter of 1996 over the same period in 1995, and represented 23.4%10 22.3% of net revenues in the secondthird quarter of 1996, compared with 24.4%25.5% of net revenues for the same period in 1995. SG&A expenses represented 24.7%24.2% and 25.3%25.4% of net revenues for the sixnine months of 1996 and 1995, respectively. 10 The Company currently expects to make additional investments in sales and marketing to further develop established international markets, introduce products to new international markets, and to develop additional vertical markets and distribution channels on a global basis. (Achievement of these plans is subject to various risks, as discussed below under "Factors That May Affect Future Results.") Accordingly, the Company currently expects that, in the long-term, its SG&A expenses will continue to increase in absolute dollars. However, the Company also expects that its SG&A expenses may decline as a percentage of net revenues in the future. INTEREST INCOME AND OTHER, NET -- Net interest income and other, net for the secondthird quarter of 1996 was $0.8$0.6 million compared with $0.4$2.1 million for the same period in 1995. Net interest income and other, net was $1.4$1.9 million and $0.9$2.9 million for the first sixnine months of 1996 and 1995, respectively. The increaseDuring the third quarter of 1995, the Company recorded a gain of $1.8 million due to a cash distribution from EIT's interest in interestTerisa Systems. Interest income and other, net, excluding the one-time transaction involving Terisa Systems, increased for the secondthird quarter and first sixnine months of 1996 was due primarily to higher investment balances. TAX RATE -- The Company's combined federal, state and foreign effective income tax rate was 29.0% for both the secondthird quarter of 1996 and 1995. The combined tax rate differs from the federal statutory rate primarily because the Company does not provide for U.S. federal income taxes on the undistributed earnings of its foreign subsidiaries, which the Company intends to permanently reinvest in those operations. NET INCOME -- In the secondthird quarter of 1996, net income increased 27.9%18.2% over the same period in 1995. For the first sixnine months of 1996, net income increased 28.2%24.2% over the same period in 1995. Earnings per share increased 19.4%10.5% to $0.43$0.42 in the secondthird quarter of 1996, compared with $0.36$0.38 in the secondthird quarter of 1995. Earnings per share were $0.69$1.11 and $0.58$0.96 for the first sixnine months of 1996 and 1995, respectively. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents, and short-term investments at JuneSeptember 30, 1996 increaseddecreased to $105.5$72.2 million from $82.8 million at December 31, 1995. The Company experienced positive cash flow from operations of $43.1$48.8 million during the first sixnine months of 1996 as a result of net income, an increase in trade payables and other accrued liabilities, and depreciation and amortization. The Company used $65.8$50.7 million for investing in the first sixnine months of 1996, which included an increase in investments of $47.9$19.1 million, as well as the purchase of fixed 11 assets for operations and the construction of the new manufacturing facility in Kunshan, People's Republic of China. The Company used $2.6$27.9 million for financing activities during the first sixnine months of 1996, which included the repurchase of shares partially offset by proceeds from issuance of shares. During the first nine months of 1996, the Company repurchased 995,500 shares of outstanding Common Stock in the open market for an aggregate purchase price of $47.5 million, of which 640,300 shares were repurchased for an aggregate purchase price of $30.6 million in the third quarter of 1996. The Company's Board of Directors has authorized the Company to repurchase during the fourth quarter of 1996 up to 1,500,000 shares of outstanding Common Stock in the open market for an aggregate purchase price of up to $67.5 million. At JuneSeptember 30, 1996, the Company's principal sources of liquidity included $105.5$72.2 million in cash, cash equivalents, and short-term investments; $30.0 million available under an unsecured bank line of credit, expiring in April 1997; and $5.0 million available under a bank line of credit for foreign 11 exchange transactions, expiring in January 1997. At JuneSeptember 30, 1996, no borrowings were outstanding under the $30.0 million line of credit, and $1.5$1.1 million was outstanding under the $5.0 million line of credit. In connection with the activities of VeriFone Finance, the Company also has non-recourse notes payable to a financing company due in monthly installments, with interest rates ranging from 7.93% to 9.32%. These notes mature at various dates through June 1998 and are secured by all rights to certain leases, including a security interest in equipment under certain lease agreements and future minimum lease payments. At JuneSeptember 30, 1996, the Company had $2.2$1.8 million outstanding under these notes. The Company also has a $12.0$15.0 million unsecured line of credit for foreign exchange transactions that expires in May 1997. At JuneSeptember 30, 1996, $9.2$12.0 million was outstanding under this line of credit. In addition, at JuneSeptember 30, 1996, the Company had obligations under capital leases of $1.2$1.0 million. Inventories at JuneSeptember 30, 1996 decreased to $66.9$67.3 million, compared with $76.6 million at December 31, 1995. This decline was due primarily to inventory management programs. Net trade accounts receivable at JuneSeptember 30, 1996 increased to $100.7$112.6 million from $96.4 million at December 31, 1995. Days sales outstanding were 7384 days at JuneSeptember 30, 1996, compared with 79 days at December 31, 1995. During the first six months of 1996, the Company repurchased 355,200 shares of outstanding Common Stock in the open market for an aggregate purchase price of $16.9 million. In accordance with the Company's stock repurchase program, these shares were used primarily for issuance under the Company's employee stock purchase plan and stock option plans. The Company is authorized to repurchase up to 1.5 million additional shares, for a purchase price of up to $67.5 million, during the third and fourth quarters of 1996. The Company currently expects to have significant cash needs during 1996 and 1997 in connection with various events, including the repurchase of shares, development of new products, repurchase of shares, and possible acquisitions. However, the Company currently believes that the liquidity provided by its ongoing operations, existing cash, cash equivalents, and short-term investments, as well as the borrowing arrangements described above, will be sufficient to meet its projected cash needs. 12 FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's quarterly operating results -- including revenues; gross margins; research and development expenses; selling, general and administrative expenses; and net income -- are subject to various risks and uncertainties, including risks and uncertainties related to the composition, timing and size of orders from and shipments to major customers; variations in product mix and the mix between leases and sales; variations in product cost; infrastructure costs; obsolescence of inventory; local economic conditions; competitive pressures; and other factors discussed below. Accordingly, the Company's operating results may vary materially from quarter to quarter. 12 One of the more significant risks potentially affecting the Company's operating results is that a substantial portion of the Company's net revenues in each quarter generally results from shipments during the latter part of the quarter. Because the Company establishes its operating expense level primarily based on expected revenue, if anticipated shipments in any quarter do not occur as expected, net profits may be adversely affected. For these and other reasons, the Company may not learn of shortfalls in revenues, earnings or other financial results relative to the expectations of securities analysts until late in a quarter. Any such shortfall could have an immediate and significant adverse effect on the trading price of the Company's Common Stock. The Company has recently enteredaims to prudently control its operating expenses. However, there is no assurance that, in the event of any revenue, gross margin or other shortfalls in a quarter, the Company will be able to control expenses sufficiently to meet profitability objectives for the quarter. The Company is entering new markets, including the internetInternet commerce market, and the labor management software market primarily throughand the acquisition of other businesses.consumer market. The Company does not expect that the net revenues or profits from these new markets and businesses will be material in the near term. At present, in addition to being relatively small, these new markets are undeveloped and rapidly changing. If the markets do not develop as expected by the Company, or the Company's strategies for these markets are unsuccessful, or the Company fails to successfully and timely develop and introduce products suitable for these markets, the Company may be adversely affected. The Company is currently developing a number of products for these new markets -- including the vPOS, vGATE and vWALLET Internet commerce products, the VeriSmart system and the Personal ATM device. There is no assurance that these development efforts will be successful or that, if successfully developed, these products will achieve commercial success. Similarly, in connection with entering these new markets, the Company has entered into or expects to enter into relationships with a number of companies in these markets - including Netscape, Microsoft, Oracle and others. These relationships may make additional acquisitionsnot develop as expected by the Company, and thus, the expected benefits from the relationships may not be obtained. The Company may acquire other businesses in the future. Acquisitions require significant financial and management resources both at the time of the transaction and during the process of integrating the newly acquired businesses into the Company's operations. The Company's operating results could be adversely affected if it is unable to successfully integrate such new companies into its operations. Future acquisitions by the Company could also result in 13 substantial cash expenditures, potentially dilutive issuance of equity securities, the incurrence of additional debt and contingent liabilities, and amortization expenses related to goodwill and other intangible assets, which could adversely affect the Company and its future operating results. In general, as discussed above (under "Results of Operations"), the Company's future results are dependent on its ability to successfully develop, manufacture and market products for customers worldwide. In this regard, the Company's future growth is very dependent on the Company's ability to successfully and timely enhance existing products, develop and introduce new products, establish new distribution channels, develop affiliations with leading market participants in order to facilitate product development and distribution, and certify its existing and new products with service providers, telephone companies and others. The failure to achieve these and other objectives could limit future growth and have an adverse effect on the Company and its future operating results. On a related note, the pressure to develop and enhance products, and to establish and expand markets, may cause the Company's research and development expenses and selling, general and administrative expenses to increase substantially, which could also have an adverse effect on the Company and its future operating results. As discussed above (under "Results of Operations -- International Operations"), international operations, including sales and manufacturing, is an increasingly important contributor to the Company's overall operations. As a result, operating results are increasingly affected by the risks of such activities, including fluctuations in currency exchange rates, changes in international regulatory requirements, international staffing and employment issues, tariffs and other trade barriers, import and export controls, the burden of complying 13 with foreign laws, and political and economic instability. The Company's manufacturing facilities, which are located in Taiwan and the People's Republic of China, are subject to particular risks relating to political developments and trade barriers. The inability to effectively manage these and other risks could adversely affect the Company and its future operating results. Most of the Company's products are used to process payment transactions, and thus, the security features of the products are important. In general, the Company's products are designed to comply with industry practices relating to security in payment transactions. However, no security feature, whether or not an industry practice, is infallible. In the event of a significant breach of the security features in the Company's products, the Company and its future operating results could be adversely affected. The Company is currently dependent on single suppliers for certain product components, including mask-programmed microcontrollers, various printer mechanisms, display devices and certain magnetic parts. The failure of any such supplier to meet its obligations could result in significant manufacturing delays that could adversely affect the Company and its future operating results. The Company's manufacturing and distribution facilities, as well as a portion of the Company's research and development, sales and administrative functions, are located near major earthquake faults. In the event of a major earthquake, the Company and its future operating results could be adversely affected. 14 The Company's operations are also subject to laws, regulations, governmental policies and product certification requirements worldwide. Changes in such laws, regulations, policies or requirements could affect the demand for the Company's products or result in the need to modify products, which may involve substantial costs or delays in sales and could have an adverse effect on the Company and its future operating results. In recent years, the stock market in general, and the market for technology stocks in particular, including the Company's Common Stock, have experienced extreme price fluctuations. There can be no assurance that the market price of the Company's Common Stock will not experience significant fluctuations in the future. 14 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The 1996 annual meeting of the Company's stockholders was held on May 10, 1996. (b) Management's nominees to the Board of Directors for Class III Directors were elected. Following the 1996 annual meeting, the Board of Directors consisted of: CLASS TERM EXPIRES ----- ------------ H. H. Haight IV II 1998 J. Robert Harcharik II 1998 William N. Melton II 1998 Thomas E. Peterson III 1999 John R. C. Porter I 1997 A. Michael Spence I 1997 Hatim A. Tyabji III 1999 R. Elton White III 1999 Mr. Melton resigned as a director effective July 19, 1996. (c) Management's nominees to the Board of Directors for Class III Directors were elected by the following vote: For all nominees 22,595,917; Withheld authority for all nominees 104,503; Other 5,682. The amendment and restatement of the Company's Non-Employee Director Stock Option Plan was approved by the following vote: For 18,627,682; Against 3,895,833; Abstain 181,887; No vote 700. The amendment and restatement of the Company's Incentive Stock Option Plan and 1987 Supplemental Stock Option Plan was approved by the following vote: For 17,087,082; Against 5,440,048; Abstain 178,972; No vote 0. The ratification of the selection of Ernst & Young as the Company's independent auditors for 1996 was approved by the following vote: For 22,539,779; Against 56,320; Abstain 110,003; No vote 0. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 11.1 - Statement of Computation of Earnings per Share 1615 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VERIFONE, INC. (Registrant) By: /S/JOSEPH/s/ Joseph M. ZAELIT --------------------Zaelit -------------------------------- Joseph M. Zaelit Senior Vice President, Finance and Administration, and Chief Financial Officer (Authorized Officer and Principal Financial Officer) Date: July 30,November 6, 1996 1716