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 March 31, 1997 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
May 6, 1997, was 23,436,640.
FORM 10-Q
VERIFONE, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 . . . . . . . . . . . 1
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 1997 and
March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997
and March 31, 1996. . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated
Financial Statements. . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERIFONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1997 1996
------ -----
(unaudited) (see note below)
Assets
Current assets:
Cash and cash equivalents $ 60,813 $ 47,395
Short-term investments 0 515
Accounts receivable, net 137,974 131,192
Net investment in sales-type leases 12,633 13,450
Inventories 62,326 59,524
Deferred income taxes 11,957 11,079
Prepaid expenses and other current assets 8,718 9,163
-------- --------
Total current assets 294,421 272,318
Net investment in sales-type leases 19,874 19,329
Property and equipment, at cost 128,604 123,486
Less accumulated depreciation
and amortization (62,582) (58,764)
-------- --------
Net property and equipment 66,022 64,722
Other assets, net 47,194 48,611
-------- --------
$427,511 $404,980
-------- --------
-------- --------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable 35,549 31,641
Accrued compensation 11,029 12,612
Other accrued liabilities 23,172 26,790
Income taxes payable 9,879 7,504
Deferred revenue 7,182 9,951
Notes payable and capital leases 65,077 38,581
-------- --------
Total current liabilities 151,888 127,079
Non-current portion of capital leases 266 517
Deferred income taxes 35,916 37,818
Stockholders' equity 239,441 239,566
-------- --------
$427,511 $404,980
-------- --------
-------- --------
Note: The balance sheet at December 31, 1996 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, in thousands,
except per share data)
Three Months Ended
------------------
March 31, 1997 March 31, 1996
-------------- --------------
Net revenues $116,013 $102,927
Costs and expenses:
Cost of revenues 64,199 54,368
Research and development 14,332 12,573
Selling, general and administrative 27,149 27,134
------ ------
Total costs and expenses 105,680 94,075
Income from operations 10,333 8,852
Interest income (expense), net (179) 609
------ ------
Income before income taxes 10,154 9,461
Provision for income taxes 2,945 2,744
------ ------
NET INCOME $7,209 $6,717
------ ------
------ ------
NET INCOME PER SHARE $ 0.30 $ 0.26
------ ------
------ ------
Common and common equivalent shares used in
computing per share amounts 23,868 26,039
------ ------
------ ------
See notes to condensed consolidated financial statements.
2
VERIFONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Increase (decrease) in cash and cash equivalents
Three Months Ended
------------------------
March 31, March 31,
1997 1996
-------- --------
Cash flows from operating activities:
Net income $7,209 $6,717
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,408 5,792
Deferred income taxes (331) (149)
Net increase in receivables,
inventories and prepaid expenses (8,867) 13,098
Net increase in payables, accruals
and other current liabilities (1,687) (2,839)
Other, net (605) (133)
------ ------
Net cash provided by operating activities 2,127 22,486
------ ------
Cash flows from investing activities:
Capital expenditures (5,940) (6,082)
Acquisition of other assets (6,540) (654)
Available-for-sale investments:
Purchases - (41,592)
Maturities 515 268
------ ------
Net cash used for investing activities (11,965) (48,060)
------ ------
Cash flows from financing activities:
Proceeds from notes payable and
capital leases 30,009 2,389
Payments on notes payable and
capital leases (3,764) (2,016)
Proceeds from issuance of common stock 4,329 6,743
Purchase of treasury stock (7,318) (2,443)
------ ------
Net cash provided by financing activities 23,256 4,673
------ ------
Net increase (decrease) in cash and cash
equivalents 13,418 (20,901)
Cash and cash equivalents at beginning
of period 47,395 72,882
------ ------
Cash and cash equivalents at end of period $60,813 $51,981
------ ------
------ ------
See notes to condensed consolidated financial statements.
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, 1996 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):
March 31, December 31,
1997 1996
--------- ----------
Raw materials $31,167 $28,992
Work in process 6,955 4,741
Finished goods 24,204 25,791
------ ------
$62,326 $59,524
------ ------
------ ------
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
$10,445,000 and $25,690,000 of cash equivalents, and $0 and $515,000 of
short-term investments at March 31, 1997 and December 31, 1996, respectively.
Available-for-sale securities are carried at fair market value with unrealized
gains or losses, net of tax, included in the Stockholders' Equity section of the
Balance Sheet. The Company had an unrealized gain of $2,000 on its
available-for-sale securities at December 31, 1996.
OTHER ASSETS
Included in other assets is an investment in available-for-sale securities
carried at fair market value of $15,750,000 and $21,939,000 at March 31, 1997
and December 31, 1996, respectively, with unrealized gains or losses, net of
tax, included in the Stockholders' Equity section of the Balance Sheet. The
Company had unrealized gains of $11,750,000 and $17,939,000 on its
available-for-sale securities at March 31, 1997 and December 31, 1996,
respectively.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share for the first
quarter ended March 31, 1997 and March 31, 1996 of $0.01 and $0.01 per share,
respectively. The impact of Statement No. 128 on the calculation of fully
diluted earnings per share for these quarters is not expected to be material.
5
SUBSEQUENT EVENTS
On April 22, 1997, the Company entered into a definitive agreement to be
acquired by Hewlett-Packard Company (HP). Under the terms of the agreement,
each share of Company Common Stock will be exchanged for one share of HP common
stock. In accordance with the same conversion ratio, each option to purchase
shares of Company Common Stock will be assumed by HP. Based on the number of
outstanding shares of Company Common Stock on April 21, 1997, it is anticipated
that HP will issue approximately 23.3 million shares of HP Common Stock upon the
closing of the transaction.
The transaction is intended to be a tax-free reorganization and is intended to
be accounted for as a pooling of interests. Consummation of the transaction is
subject to, among other things, approval of the stockholders of the Company.
Upon completion of the transaction, the Company will become a wholly-owned
subsidiary of HP.
6
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.
Forward-looking statements in this Management's Discussion and Analysis --
including statements regarding international markets; gross margins; research
and development expenses; selling, general and administrative expenses;
liquidity and cash needs; and the Company's plans and strategies -- are all
based on current expectations, and the Company assumes no obligation to update
this information. Numerous factors could cause actual results to differ from
those described in the forward-looking statements, including the factors set
forth below under the heading "Factors That May Affect Future Results and the
Market Price of the Company's Stock" (which are also discussed in the Company's
Annual Report on Form 10-K for 1996). The Company cautions investors that its
business is subject to significant risks and uncertainties.
Total Company net revenues during the first quarter of 1997 increased 12.7% to
$116.0 million, from $102.9 million during the first quarter of 1996.
The following table sets forth revenues from sales by geographic region and the
percentage change year-over-year for the first quarter:
Revenues
First Quarter of:
(IN MILLIONS) Percentage
1997 1996 Change
---- ---- ------
United States net revenues $73.6 $65.0 13.2%
Europe, Middle East & Africa 17.4 $14.8 17.6
Asia Pacific 14.5 11.7 23.9
Americas 10.5 11.4 (7.9)
---- ---- ------
International net revenues 42.4 37.9 11.9
---- ---- ------
Total Company net revenues $116.0 $102.9 12.7%
----- ----- ----
----- ----- ----
7
UNITED STATES OPERATIONS -- The increase in revenues from sales in the United
States during the first quarter of 1997 was due primarily to increased sales in
the petroleum/convenience-store and healthcare and government markets. Revenue
growth in the petroleum/convenience-store market was due primarily to demand for
Ruby SuperSystems sold to major oil companies and OEM resellers, and sold via
distributors -- which resell products to petroleum/convenience-store dealers and
jobbers. Revenue from the healthcare and government markets was due primarily
to increased sales to various states for food stamp programs, fish and game
licensing programs, and Medicaid patient eligibility verification programs.
Revenues from the financial retail market and the multi-lane market declined in
the first quarter of 1997, compared to the first quarter of 1996, due primarily
to reduced demand in these markets.
INTERNATIONAL OPERATIONS -- The increase in revenues from sales outside the
United States during the first quarter of 1997 was due to worldwide demand for
electronic payments and the continued development of new country markets. In
the first quarter of 1997, sales outside the United States represented 36.6% of
net revenues, compared with 36.8% of net revenues in the same period of 1996.
Growth in international sales during the first quarter of 1997 occurred in the
Europe, Middle East and Africa region and the Asia Pacific region. Growth in
the Europe, Middle East and Africa region was due in significant part to sales
in the United Kingdom, Netherlands and Spain. Growth in the Asia Pacific
region was due in significant part to sales in the People's Republic of China,
Australia/New Zealand and Thailand, which offset a decline in sales in Japan.
Sales in the Americas region declined in the first quarter of 1997, compared to
the first quarter of 1996, due primarily to lower demand in Mexico and
Argentina.
The Company plans to continue to expand its global infrastructure with the aim
of increasing market share in established country markets, as well as opening
new country markets. Achievement of these plans is subject to various risks,
including local economic conditions, as discussed below under "Factors That May
Affect Future Results and the Market Price of the Company's Stock."
International growth has increased the Company's exposure to the effects of
foreign currency fluctuations. The Company engages in a foreign currency
management program that is intended to minimize the effects of these
fluctuations. This program includes the use of foreign exchange contracts to
hedge its intercompany balances. The gains and losses on these contracts were
immaterial as the majority of the Company's sales are denominated in U.S.
dollars.
PRODUCT ANALYSIS -- The following table sets forth, by product type, net
revenues and the percentage change year-over-year for the first quarter:
8
Net Revenues
First Quarter of:
(IN MILLIONS) Percentage
1997 1996 Change
----- ----- ------
Terminal products $64.4 $56.6 13.8%
Peripheral products* 29.1 27.7 5.1
Chip card products 4.0 3.8 5.3
Software products** 10.8 4.8 125.0
Services 8.3 6.9 20.3
Other*** (0.6) 3.1 (119.4)
----- ----- -----
$116.0 $102.9 12.7%
----- ----- -----
----- ----- -----
* "Peripheral products" includes printers and pin pads.
** "Software products" includes revenue from professional services such
as software customization.
*** "Other" includes certain accessories and other revenue.
The increase in net revenues in the first quarter of 1997, viewed by product
type, generally reflected the overall growth in the Company's net revenues
during the quarter. Growth in software revenues exceeded growth in other
product revenues due primarily to the increase in revenues from terminal
applications and licenses of Omnihost and Internet Commerce products.
Unit shipments of terminal products and chip card products increased 5.5% with
231,000 units shipped in the first quarter of 1997, compared with 219,000 units
shipped in the first quarter of 1996.
GROSS MARGINS (net revenues less cost of revenues) -- Gross margins were 44.7%
and 47.2% in the first quarter of 1997 and 1996, respectively. The decrease in
gross margins was due in part to competitive pricing pressures in the Americas
region. The decrease was also due to other factors, including general
competitive pricing pressures and shifts in the Company's overall business and
product mix. The Company currently expects its gross margins to continue to be
affected by changes in business segment mix, product mix, competition and other
factors, as discussed below under "Factors That May Affect Future Results and
the Market Price of the Company's Stock."
R&D EXPENSES -- Research and development (R&D) expenses increased 14.0% in the
first quarter of 1997 over the same period in 1996, and represented 12.4% of net
revenues in the first quarter of 1997, compared with 12.2% of net revenues for
the same period in 1996. 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.
9
SG&A EXPENSES -- Selling, general and administrative (SG&A) expenses increased
0.1% in the first quarter of 1997 over the same period in 1996, and represented
23.4% of net revenues in the first quarter of 1997, compared with 26.4% of net
revenues for the same period in 1996.
The Company currently expects to make additional investments in sales and
marketing to further develop established international markets, to introduce
products to new international markets, and to develop additional vertical
markets and distribution channels on a global basis. (Achievement of these
plans is subject to various risks, as discussed below under "Factors That May
Affect Future Results and the Market Price of the Company's Stock.") The
Company also expects that, in the long term, SG&A expenses will continue to
increase in absolute dollars but may decline as a percentage of net revenues.
INTEREST INCOME (EXPENSE) AND OTHER, NET -- Net interest income (expense) and
other, net for the first quarter of 1997 was ($0.2) million compared with net
interest income of $0.6 million for the same period in 1996. The decease for
the first quarter of 1997, compared to the first quarter of 1996, was due
primarily to lower investment balances and higher debt balances as a result of
the repurchase of shares.
TAX RATE -- The Company's combined federal, state and foreign effective income
tax rate was 29.0% for both the first quarter of 1997 and 1996. 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 first quarter of 1997, net income increased 7.3% over the
same period in 1996. Earnings per share increased 15.4% to $0.30 in the first
quarter of 1997, compared with $0.26 in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and short-term investments at March 31, 1997
increased to $60.8 million from $47.9 million at December 31, 1996. The
Company experienced positive cash flow from operations of $2.1 million during
the first quarter of 1997 as a result of net income and depreciation and
amortization, partially offset by increases in inventory and accounts
receivable. The Company used $12.0 million for investing in the first
quarter of 1997, which included the purchase of fixed assets for operations
and the construction of new facilities in Bangalore, India. Cash provided by
financing activities was $23.3 million during the first quarter of 1997,
primarily due to borrowings under notes payable, partially offset by the
repurchase of shares of outstanding Common Stock.
10
In the first quarter of 1997, the Company's Board of Directors authorized the
repurchase of up to 200,000 shares of outstanding Common Stock, which was
completed during the quarter for an aggregate purchase price of $7.3 million.
Currently, due to the contemplated pooling of interests (see Subsequent Events
below), the Company does not anticipate repurchasing any additional shares.
At March 31, 1997, the Company's principal sources of liquidity included
$60.8 million in cash, cash equivalents, and short-term investments. The
Company had $50.0 million under an unsecured bank line of credit, all of
which was fully utilized, that expires in August 1997. In connection with
the activities of VeriFone Finance, the Company 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 March 31, 1997, the Company had $0.9 million
outstanding under these notes. The Company also has $17.0 million and
$3.0 million unsecured lines of credit for foreign exchange transactions
that expire in August 1997 and January 1998, respectively. At March 31, 1997,
$11.1 million and $2.7 million were outstanding under the $17.0 million and
$3.0 million lines of credit, respectively. In addition, at March 31, 1997,
the Company had obligations under capital leases of $0.6 million.
With respect to the $50.0 and $17.0 million unsecured bank lines of credit
mentioned above, during the first quarter of 1997, the Company was not in
compliance with one of the loan covenants requiring that the Company maintain a
specified current asset ratio. The banks have waived this non-compliance on
both lines of credit and amended the loan agreements to reduce the specified
current ratio in the future.
Inventories at March 31, 1997 increased to $62.3 million, compared with
$59.5 million at December 31, 1996.
Net trade accounts receivable at March 31, 1997 increased to $138.0 million from
$131.2 million at December 31, 1996. This increase was due, in part, to
conditions in a number of markets resulting in longer payment terms. Days sales
outstanding were 107 days at March 31, 1997, compared with 95 days at
December 31, 1996.
The Company currently expects to have significant cash needs during 1997 in
connection with various events, including the development of new products and
possible acquisitions. However, the Company currently believes that the
liquidity provided by its ongoing operations, existing cash, cash equivalents,
and short-term investments, as well as the borrowing arrangements described
above (including expected renewals of and substitutes for such arrangements),
will be sufficient to meet its projected cash needs.
11
SUBSEQUENT EVENTS
On April 22, 1997, the Company entered into a definitive agreement to be
acquired by Hewlett-Packard Company (HP). Under the terms of the agreement,
each share of Company Common Stock will be exchanged for one share of HP common
stock. In accordance with the same conversion ratio, each option to purchase
shares of Company Common Stock will be assumed by HP. Based on the number of
outstanding shares of Company Common Stock on April 21, 1997, it is anticipated
that HP will issue approximately 23.3 million shares of HP Common Stock upon the
closing of the transaction.
The transaction is intended to be a tax-free reorganization and is intended to
be accounted for as a pooling of interests. Consummation of the transaction is
subject to, among other things, approval of the stockholders of the Company.
Upon completion of the transaction, the Company will become a wholly-owned
subsidiary of HP.
12
FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS AND THE MARKET PRICE OF THE
COMPANY'S STOCK
The Company's operations are subject to various risks and
uncertainties, many of which are beyond the Company's control. The following
highlights some of these risks.
RISKS RELATED TO THE HEWLETT-PACKARD TRANSACTION
An noted above (see "Subsequent Events"), the Company has entered
into an agreement to be acquired by Hewlett-Packard Company ("HP"). Closing
of this transaction is subject to certain conditions, including approval of
the Company's stockholders. The Company and its business may be adversely
affected by the pendency of the HP transaction as the result of, among other
circumstances (i) the delay or loss of customer orders from customers who may
view the acquisition unfavorably, (ii) increased employee turnover, (iii)
diversion of management time and focus from day-to-day activities, and (iv)
the requirement that certain business actions of the Company receive HP
consent, pursuant to the agreement with HP. In addition, failure of the
transaction to close, whether due to the failure of either party to meet a
closing condition or to the termination of the definitive agreement between
HP and the Company, would have a material adverse effect on the Company,
including on the price of the Company's Common Stock. Furthermore, pending
the closing of the HP transaction, any decrease in the price of HP's Common
Stock will likely have an adverse effect on the Company's stock price.
VARIATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results are subject to various risks
and uncertainties, including risks and uncertainties related to: local economic
conditions; competitive pressures; the composition, timing and size of orders
from and shipments to major customers; variations in product mix and the mix
between leases and sales; variations in product cost; infrastructure costs;
obsolescence of inventory; and other factors as discussed below. Accordingly,
the Company's operating results may vary materially from quarter to quarter.
The Company operates with little backlog and, as a result, net
revenues in any quarter are substantially dependent on the orders booked and
shipped in that quarter. Because the Company's operating expenses are based on
anticipated revenue levels and because a high percentage of the Company's
expenses are relatively fixed, if anticipated shipments in any quarter do not
occur as expected, the Company's operating results may be adversely affected and
fall significantly short of expectations. Any other unanticipated decline in the
growth rate of the Company's net revenues, without a corresponding and timely
reduction in the growth of operating expenses, could also have an adverse effect
on the Company and its future operating results.
The Company aims to prudently control its operating expenses. However,
there is no assurance that, in the event of any revenue, gross margin or other
shortfall in a quarter, the Company will be able to control expenses
sufficiently to meet profitability objectives for the quarter.
Compounding these risks is the fact that a substantial portion of the
Company's net revenues in each quarter generally results from shipments during
the latter part of the quarter. For
13
this and other reasons, the Company may not learn of shortfalls in revenues,
earnings or other financial results relative to expectations until very late in
a quarter. Any such shortfall could have an immediate and significant adverse
effect on the trading price of the Company's Common Stock.
The Company's business may be characterized as showing a pattern -- in
that, historically, net revenues during the first calendar quarter of a year
have generally been less than net revenues during the fourth quarter of the
preceding year.
CHANGES IN GROSS MARGINS
Certain of the Company's net revenues are derived from products and
markets -- such as international and government markets -- which typically have
lower gross margins compared to other products and markets, due to higher costs
and/or lower prices associated with the lower gross margin products and markets.
The Company currently expects that its net revenues from international markets
will continue to increase as a percentage of total net revenues, and its net
revenues from government markets may increase. In addition, the Company is
currently experiencing pricing pressures due to a number of factors, including
competitive conditions and consolidation within certain groups of customers. To
the extent that these factors continue, the Company's gross margins would
decline, which would adversely affect the Company and its future operating
results.
Downward pressure on the Company's gross margins may be mitigated by
other factors, such as a reduction in product costs and/or an increased
percentage of net revenues from higher gross margin products, such as software.
The Company is aiming to reduce its product costs and to increase its percentage
of net revenues from software. However, there is no assurance that these efforts
will be successful.
NEW MARKETS AND PRODUCTS
The Company is entering new markets, including the Internet commerce
market and the consumer smart card market. At present, these new markets are
relatively small and rapidly changing, and the development of these markets
depends in significant part on the widespread adoption of new technologies by
financial institutions, merchants and consumers, the emergence of industry
standards, and other factors. There is no assurance that these markets will
develop as expected by the Company. If these markets do not develop as expected
by the Company, or the Company's strategies for these markets are unsuccessful,
or the Company fails to successfully and timely develop and introduce products
suitable for these markets, the Company and its future operating results may be
adversely affected.
The Company is developing a number of products for these new markets --
including a number of Internet commerce and consumer products. There is no
assurance that these development efforts will be successful or that, if
successfully developed, these products will achieve commercial success.
14
Similarly, in connection with entering these new markets, the Company
has entered into or expects to enter into relationships with a number of
companies in these markets, including Microsoft, Netscape, Oracle and others.
These relationships may not develop as expected by the Company, and thus, the
expected benefits from the relationships may not be obtained.
GROWTH DEPENDENCIES
In general, the Company's future growth is dependent on the Company's
ability to successfully and timely enhance existing products, develop and
introduce new products, establish new distribution channels, develop
affiliations with leading market participants in order to facilitate product
development and distribution, and certify its existing and new products with
service providers, telephone companies and others. The failure to achieve these
and other objectives could limit future growth and have an adverse effect on the
Company and its future operating results.
On a related note, the pressure to develop and enhance products, and
to establish and expand markets, may cause the Company's research and
development expenses and selling, general and administrative expenses to
increase substantially, which could also have an adverse effect on the Company
and its future operating results.
ACQUISITIONS
The Company may acquire or make substantial investments in other
businesses in the future. Any such acquisition or investment would entail
various risks, including: the difficulty of assimilating the operations and
personnel of the acquired business; the potential disruption of the Company's
ongoing business; and generally, the potential inability of the Company to
obtain the desired financial and strategic benefits from the acquisition or
investment. These factors could have a material adverse effect on the Company
and its future operating results. Future acquisitions and investments by the
Company could also result in substantial cash expenditures, potentially dilutive
issuances of equity securities, the incurrence of additional debt and contingent
liabilities, and amortization expenses related to goodwill and other intangible
assets, which could adversely affect the Company and its future operating
results.
INTERNATIONAL OPERATIONS
The Company's international operations, including international sales
and manufacturing, have grown substantially, and thus, the Company is
increasingly affected by the risks associated with international operations.
Such risks include: managing an organization spread over various countries;
fluctuations in currency exchange rates (as discussed further below); the burden
of complying with international laws and other regulatory and product
certification requirements, and changes in such laws and requirements; tariffs
and other trade barriers; import and export controls; international staffing and
employment issues; political and economic instability; and longer payment cycles
in certain countries. The Company's manufacturing facilities outside of the
United States, which are in Taiwan and the People's Republic of China, are
subject to particular risks
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relating to political developments and trade barriers. The inability to
effectively manage these and other risks could adversely affect the Company and
its future operating results.
The majority of the Company's international sales are denominated in
United States currency. An increase in the value of the United States dollar
relative to foreign currencies could make the Company's products sold
internationally less competitive. The Company has offices in a number of foreign
countries, the operating expenses of which are also subject to the effects of
fluctuations in foreign currency exchange rates. Although the Company engages in
hedging transactions which may partially offset the effects of fluctuations in
foreign currency exchange rates, financial exposure may nonetheless result
primarily due to the timing of transactions and movement of exchange rates.
COMPETITION
The various markets in which the Company operates are becoming
increasingly competitive as a number of other companies are developing and
selling products which compete with the Company's products in these markets.
Certain of these competitors have significantly more financial and technical
resources than the Company. The Company faces additional competitive factors in
foreign countries, including preferences for national vendors, and difficulties
in obtaining necessary certifications and in meeting the requirements of
government policies. These competitive factors may result in, among other
things, price discounts by the Company and sales lost by the Company to
competitors, which may adversely affect the Company and its future operating
results.
THIRD-PARTY DISTRIBUTORS
The Company uses various channels to market and distribute its
products, including direct sales to end-users and sales to end-users via
third-party distributors. Third-party distributors are a substantial channel
for distribution internationally and are increasingly becoming a substantial
channel for distribution in the United States. Accordingly, the Company's
ability to market and distribute its products depends in significant part on
its relationship with third-party distributors, as well as the performance and
financial condition of these distributors. In the event that the Company's
relationship with its distributors deteriorates, or the performance or financial
condition of the distributors becomes unsatisfactory, the Company and its future
operating results could be adversely affected.
SOLE SUPPLIERS
The Company is currently dependent on single suppliers for certain
product components, including mask-programmed microcontrollers, various printer
mechanisms, display devices, certain integrated circuits, and certain magnetic
parts. The failure of any such supplier to continue to provide these components
to the Company could result in significant manufacturing delays that could
adversely affect the Company and its future operating results.
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EXCESS OR OBSOLETE INVENTORY
Managing the Company's inventory of components and finished products
is a complex task. A number of factors -- including the need to maintain a
significant inventory of certain components which are in short supply or which
must be purchased in bulk to obtain favorable pricing, the general
unpredictability of demand for specific products, and customer requests for
quick delivery schedules -- may result in the Company maintaining excess
inventory. Other factors -- including changes in market demand and technology --
may cause inventory to become obsolete. Any excess or obsolete inventory could
result in price reductions and inventory write-downs, which in turn could
adversely affect the Company and its operating results.
SECURITY FEATURES OF PRODUCTS
Most of the Company's products are used to process payment
transactions, and thus, the security features of the products are important. In
general, the Company's products are designed to comply with industry practices
relating to security in payment transactions. However, no security feature,
whether or not an industry practice, is infallible. In the event of a
significant breach of the security features in the Company's products, the
Company and its future operating results could be adversely affected.
PROPRIETARY TECHNOLOGY
The Company seeks to establish and protect the proprietary aspects of
its products by relying on applicable patent, copyright, trademark and trade
secret laws and on confidentiality, licensing and other contractual
arrangements. Notwithstanding the Company's efforts to protect its proprietary
rights, it may be possible for unauthorized third parties to copy certain
portions of the Company's products or to reverse engineer or obtain and use
technology that the Company regards as proprietary. In addition, the laws of
certain countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. Accordingly, there can be no
assurance that the Company will be able to protect its proprietary technology
against unauthorized third party copying or use, which could adversely affect
the Company's competitive position.
The Company from time to time receives notices from third parties
claiming that the Company's products infringe such parties' proprietary rights.
Regardless of its merit, any such claim can be time-consuming, result in costly
litigation and require the Company to enter into royalty and licensing
agreements. Such royalty or licensing agreements may not be offered or may not
be available on terms acceptable to the Company. If a successful claim is made
against the Company and the Company fails to develop or license a substitute
technology, the Company and its future operating results could be adversely
affected.
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HIRING AND RETENTION OF EMPLOYEES
The Company's continued growth and success depends to a significant
extent on the continued service of senior management and other key employees and
the hiring of new qualified employees. Competition for highly skilled business,
technical, marketing and other personnel is intense, particularly in the strong
economic cycle currently prevailing for high technology companies. The loss of
one or more key employees or the Company's inability to attract additional
qualified employees or retain other employees could have an adverse effect on
the Company and its future operating results. In addition, the Company may
experience increased compensation costs in order to compete for skilled
employees.
REGULATORY REQUIREMENTS
The Company's operations are subject to various laws, regulations,
governmental policies and product certification requirements worldwide. Changes
in such laws, regulations, policies or requirements could affect the demand for
the Company's products or result in the need to modify products, which may
involve substantial costs or delays in sales and could have an adverse effect on
the Company and its future operating results.
SEISMIC RISKS
The Company's manufacturing and distribution facilities, as well as a
portion of the Company's research and development, sales and administrative
functions, are located near major earthquake faults. In the event of a major
earthquake, the Company and its future operating results could be adversely
affected.
STOCK MARKET FLUCTUATIONS
In recent years, the stock market in general, and the market for
technology stocks in particular, including the Company's Common Stock, have
experienced extreme price fluctuations. The market price of the Company's Common
Stock may be significantly affected by various factors such as: quarterly
variations in the Company's operating results; changes in revenue growth rates
for the Company as a whole or for specific geographic areas, business units or
products; changes in earnings estimates by market analysts; the announcement of
new products or product enhancements by the Company or its competitors;
speculation in the press or analyst community; and general market conditions or
market conditions specific to particular industries. There can be no assurance
that the market price of the Company's Common Stock will not experience
significant fluctuations in the future.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.1 - Amended and Restated Incentive Stock Option Plan
Exhibit 10.2 - Amended and Restated 1987 Supplemental Stock
Option Plan
Exhibit 10.3 - Amended and Restated 1992 Non-Employee Stock
Option Plan
Exhibit 10.4 - Amended and Restated Employee Stock Purchase Plan
Exhibit 10.5 - 1997 Restricted Phantom Stock Plan
Exhibit 11.1 - Statement of Computation of Earnings per Share
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERIFONE, INC.
(Registrant)
By: /s/ Joseph M. Zaelit
--------------------------------
Joseph M. Zaelit
Senior Vice President, Finance
and Administration, and Chief
Financial Officer (Authorized
Officer and Principal
Financial Officer)
Date: May 9 , 1997
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