PAY 10Q 7/31/2013


 
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 July 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
The number of shares outstanding of each of the issuer's classes of common stock, as of the close of business on August 30, 2013:
Class
 
 
Number of shares
 
Common Stock, $0.01 par value per share
109,236,844
 
 




VERIFONE SYSTEMS, INC.
TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION
 
 
 
Item 1
 
 
 
 
Condensed Consolidated Statements of Operations
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
 
 
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 July 31,
 
Nine Months Ended July 31,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited, in thousands, except per share data)
Net revenues:
 
 
 
 
 
 
 
System solutions
$
250,818

 
$
350,230

 
$
809,086

 
$
1,003,314

Services
165,155

 
138,820

 
461,921

 
377,278

Total net revenues
415,973

 
489,050

 
1,271,007

 
1,380,592

Cost of net revenues:
 
 
 
 
 
 
 
System solutions
168,929

 
206,213

 
524,044

 
607,238

Services
92,104

 
75,330

 
265,755

 
217,050

Total cost of net revenues
261,033

 
281,543

 
789,799

 
824,288

Total gross margin
154,940

 
207,507

 
481,208

 
556,304

Operating expenses:
 
 
 
 
 
 
 
Research and development
46,099

 
38,657

 
127,482

 
111,585

Sales and marketing
49,485

 
46,182

 
141,729

 
132,309

General and administrative
43,213

 
43,414

 
126,870

 
138,148

Litigation loss contingency expense
(5,000
)
 

 
64,000

 
17,632

Amortization of purchased intangible assets
23,862

 
23,177

 
71,680

 
60,549

Total operating expenses
157,659

 
151,430

 
531,761

 
460,223

Operating income (loss)
(2,719
)
 
56,077

 
(50,553
)
 
96,081

Interest, net
(11,638
)
 
(15,264
)
 
(34,389
)
 
(46,384
)
Other income (expense), net
(426
)
 
(721
)
 
5,820

 
(23,350
)
Income (loss) before income taxes
(14,783
)
 
40,092

 
(79,122
)
 
26,347

Income tax provision (benefit)
(12,893
)
 
2,313

 
(31,913
)
 
(12,067
)
Consolidated net income (loss)
(1,890
)
 
37,779

 
(47,209
)
 
38,414

Net (income) loss attributable to noncontrolling interests
13

 
(84
)
 
(1,206
)
 
(366
)
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
$
(1,877
)
 
$
37,695

 
$
(48,415
)
 
$
38,048

Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
 
 
 
 
 
 
 
Basic
$
(0.02
)
 
$
0.35

 
$
(0.45
)
 
$
0.36

Diluted
$
(0.02
)
 
$
0.34

 
$
(0.45
)
 
$
0.34

Weighted average number of shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic
108,638

 
107,568

 
108,295

 
106,768

Diluted
108,638

 
110,384

 
108,295

 
110,305

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 (LOSS)
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited, in thousands)
Net income (loss) attributable to VeriFone Systems, Inc. stockholders
$
(1,877
)
 
$
37,695

 
$
(48,415
)
 
$
38,048

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net change in:
 
 
 
 
 
 
 
Foreign currency translation
613

 
(75,847
)
 
4,151

 
(70,408
)
Unrealized gain (loss) on derivatives
1,071

 
(2,074
)
 
1,355

 
(5,176
)
Tax impact of unrealized gain (loss) on derivatives
(1,117
)
 
767

 
(717
)
 
1,932

Other
(129
)
 
(1,831
)
 
(118
)
 
(2,260
)
Comprehensive loss attributable to VeriFone Systems, Inc. stockholders
$
(1,439
)
 
$
(41,290
)
 
$
(43,744
)
 
$
(37,864
)

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



4


VERIFONE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
July 31, 2013
 
October 31, 2012
 
(Unaudited, in thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
309,310

 
$
454,072

Accounts receivable, net of allowances of $13,261 and $8,491
268,845

 
366,887

Inventories
171,901

 
178,274

Prepaid expenses and other current assets
148,765

 
136,210

Total current assets
898,821

 
1,135,443

Fixed assets, net
157,737

 
146,803

Purchased intangible assets, net
664,841

 
734,808

Goodwill
1,224,651

 
1,179,381

Deferred tax assets
235,530

 
215,139

Other long-term assets
83,154

 
79,033

Total assets
$
3,264,734

 
$
3,490,607

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
111,783

 
$
193,062

Accruals and other current liabilities
284,122

 
230,867

Deferred revenue, net
91,541

 
91,545

Short-term debt
79,130

 
54,916

Total current liabilities
566,576

 
570,390

Long-term deferred revenue, net
41,857

 
37,062

Long-term deferred tax liabilities
186,465

 
214,537

Long-term debt
1,040,273

 
1,252,701

Other long-term liabilities
88,946

 
70,440

Total liabilities
1,924,117

 
2,145,130

Commitments and contingencies

 

Redeemable noncontrolling interest in subsidiary
723

 
861

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

 

Common stock: $0.01 par value, 200,000 shares authorized, 109,223 and 108,074 shares issued, and 109,223 and 107,930 shares outstanding as of July 31, 2013 and October 31, 2012
1,092

 
1,081

Additional paid-in capital
1,582,482

 
1,543,127

Accumulated deficit
(252,438
)
 
(204,023
)
Accumulated other comprehensive loss
(27,719
)
 
(32,390
)
Total stockholders’ equity
1,303,417

 
1,307,795

Noncontrolling interest in subsidiaries
36,477

 
36,821

Total liabilities and equity
$
3,264,734

 
$
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
 
Nine Months Ended July 31,
 
2013
 
2012
 
(Unaudited, in thousands)
Cash flows from operating activities
 
 
 
Consolidated net income (loss)
$
(47,209
)
 
$
38,414

Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net
153,679

 
129,819

Stock-based compensation expense
31,968

 
34,171

Non-cash interest expense

 
10,290

Deferred income taxes
(61,035
)
 
(15,576
)
Gain on divestiture of assets
(4,080
)
 

Asset impairment
6,763

 

Other
(1,116
)
 
2,218

Net cash provided by operating activities before changes in operating assets and liabilities
78,970

 
199,336

Changes in operating assets and liabilities, net of effects of business acquisitions:
 
 
 
Accounts receivable, net
97,337

 
(59,562
)
Inventories, net
7,281

 
(4,233
)
Prepaid expenses and other assets
(10,980
)
 
(26,664
)
Accounts payable
(80,677
)
 
23,371

Deferred revenue, net
6,741

 
31,758

Other current and long-term liabilities
82,873

 
(18,643
)
Net change in operating assets and liabilities
102,575

 
(53,973
)
Net cash provided by operating activities
181,545

 
145,363

 
 
 
 
Cash flows from investing activities
 
 
 
Capital expenditures
(60,334
)
 
(44,555
)
Acquisition of businesses, net of cash and cash equivalents acquired
(77,048
)
 
(1,069,412
)
Proceeds from divestiture of assets
6,000

 
12,595

Other investing activities, net
1,993

 
1,111

Net cash used in investing activities
(129,389
)
 
(1,100,261
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from debt, net of issuance costs
123,174

 
1,414,447

Repayments of debt
(314,695
)
 
(357,198
)
Repayments of senior convertible notes, including interest

 
(279,159
)
Proceeds from issuance of common stock through employee equity incentive plans
9,680

 
28,683

Payments of acquisition-related contingent consideration
(9,860
)
 
(23,804
)
Distribution to noncontrolling interest stockholders
(1,689
)
 
(1,543
)
Net cash provided by (used in) financing activities
(193,390
)
 
781,426

Effect of foreign currency exchange rate changes on cash and cash equivalents
(3,528
)
 
(11,283
)
Net decrease in cash and cash equivalents
(144,762
)
 
(184,755
)
Cash and cash equivalents, beginning of period
454,072

 
594,562

Cash and cash equivalents, end of period
$
309,310

 
$
409,807

 
 
 
 
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 July 31, 2013 and October 31, 2012, and for the three and nine months ended July 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 and nine months ended July 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 on our unaudited Condensed Consolidated Balance Sheets as "Redeemable noncontrolling interest in subsidiary" when the third party ownership interest is redeemable at the option of the stockholder, outside of our control, or as "Noncontrolling interest in subsidiaries" 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.

As a result of new Company leadership and related changes in the structure of our internal organization during the three months ended April 30, 2013, we realigned our operating segments. We determined our operating segments based on the discrete financial information used by our Interim Chief Executive Officer, who is our chief operating decision maker, to assess performance, allocate resources, and make decisions regarding VeriFone's operations. We operate in three business segments: Americas, EMEA, and ASPAC. Our Americas segment is defined as our operations in North America, South America, Central America, and the Caribbean. Our EMEA segment is defined as our operations in Europe, the Middle East, and Africa. Our ASPAC segment consists of our operations in Asia, Australia, New Zealand, and other Asia Pacific Rim countries. Our reportable segments are the same as our operating segments. Our EMEA and ASPAC operating segments are also reporting units, and our other reporting units are components of the Americas operating segment. All prior period amounts reported by operating segments have been reclassified to conform to the current presentation.

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, net revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates including those related to net revenues, product returns, warranty obligations, receivables, inventories, goodwill and intangible assets, income taxes and related tax assets, 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.

7

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


Significant Accounting Policies

During the three and nine months ended July 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.

Concentrations of Credit Risk

For the three and nine months ended July 31, 2013 and 2012 no single customer accounted for more than 10% of our total net revenues. For the three months ended July 31, 2013, one customer accounted for approximately 12.6% of net revenues in our EMEA reportable segment and one customer accounted for approximately 10.7% of net revenues in our ASPAC reportable segment. No single customer accounted for more than 10% of net revenues in our Americas reportable segment for the three months ended July 31, 2013. For the nine months ended July 31, 2013, one customer accounted for approximately 10.7% of net revenues in our ASPAC reportable segment, and no single customer accounted for more than 10% of net revenues in our other reportable segments.

For the three months ended July 31, 2012, one customer accounted for approximately 14.0% of net revenues in our Americas reportable segment, one customer accounted for approximately 12.8% of net revenues in our ASPAC reportable segment, and no single customer accounted for more than 10% of net revenues in our EMEA reportable segment. For the nine months ended July 31, 2012, one customer accounted for approximately 13.7% of net revenues in our Americas reportable segment, one customer accounted for approximately 11.9% of net revenues in our ASPAC reportable segment, and no single customer accounted for more than 10% of net revenues in our EMEA reportable segment.

As of July 31, 2013 and October 31, 2012, no single customer accounted for more than 10% of our total Accounts receivable, net of allowances.

Recent Accounting Pronouncements

Effective November 1, 2012, 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, effective November 1, 2012, 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.

During February 2013, the FASB (Financial Accounting Standards Board) issued ASU 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. ASU 2013-02 requires disclosure of amounts reclassified out of accumulated other comprehensive income by component and by net income line item. The disclosure may be provided either parenthetically on the face of the financial statements or in the notes. ASU 2013-02 is effective for annual reporting periods beginning after December 15, 2012, and interim periods within those annual periods. We plan to adopt ASU 2013-02 in our first quarter of fiscal year 2014. ASU 2013-02 will impact only the financial statement presentation, and will have no impact on our financial position or results of operations.

During July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides presentation requirements for unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. ASU 2013-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. Early adoption and retrospective application is permitted. We are evaluating whether we will adopt ASU 2013-11 prior to the required adoption in our first quarter of fiscal year 2015. ASU 2013-11 may impact the asset or liability financial statement presentation of certain unrecognized tax benefits, but will not change our assessment of the realizability of our deferred tax assets, and will not have a material impact on our results of operations.


8

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

Note 2. Business Combinations

Fiscal Year 2013 Acquisitions

We completed the acquisitions of ENZ (EFTPOS New Zealand Limited), which holds the switching and terminal business of ANZ Bank New Zealand Limited, and Sektor (Sektor Payments Limited), which was our main distributor in New Zealand, during the nine months ended July 31, 2013. We anticipate that these acquisitions will provide us with software, services infrastructure, and distribution resources necessary to provide our customers in New Zealand with both electronic payment solutions and managed services. The aggregate cash consideration paid totaled $62.8 million. All of the assets, liabilities, and goodwill of the ENZ and Sektor acquisitions were assigned to our ASPAC reportable segment.

Each acquisition was accounted for using the acquisition method of accounting. VeriFone acquired all outstanding equity of ENZ. The Sektor acquisition 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. ENZ contributed approximately $5.3 million of additional net revenues in the three and nine months ended July 31, 2013. Net revenues from Sektor and earnings from both ENZ and Sektor are not material in relation to our financial results for the periods presented or our financial position as of July 31, 2013.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed (in thousands) at the acquisition date of each transaction.
 
ENZ
 
Sektor
 
Total
Acquisition date
May 31, 2013
 
April 2, 2013
 
 
Assets acquired (liabilities assumed), net
$
5,111

 
$
441

 
$
5,552

Intangible assets (1)
20,374

 
3,956

 
24,330

Goodwill (2)
29,042

 
3,851

 
32,893

Total purchase price
$
54,527

 
$
8,248

 
$
62,775


(1)
Intangible assets acquired include developed technology of $1.3 million, customer relationships of $21.2 million, and trademarks of $1.8 million, which will be amortized over their estimated useful lives of one to nine years.
(2)
Goodwill represents the expected benefits of combining the acquisitions' operations with VeriFone's operations. We do not expect the goodwill recognized to be deductible for income tax purposes. Goodwill is not amortized.

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, were immaterial in relation to our overall financial position and results of operations.

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 the 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

9

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

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, all of which were assigned to our EMEA reportable segment.

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 July 31, 2013, we have paid $19.5 million of the contingent consideration. The $1.5 million remaining balance accrued at July 31, 2013 is expected to be paid during the quarter ending October 31, 2013 and is included in acquisition contingent consideration payable in Accruals and other current liabilities on our Condensed Consolidated Balance Sheets. As of July 31, 2013, the maximum contingent consideration payable, if all operating and financial targets were met, totaled $4.6 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, unless the general representations and warranties made by the sellers as of the acquisition date were untrue, and contingent consideration having a fair value as of the respective acquisition dates totaling $3.8 million.

The holdback amounts are included in acquisition contingent 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 for these transactions, if all operating and financial targets were met, totaled $11.0 million and $8.0 million. To date, we have not paid any amounts under these arrangements although certain measurement dates have passed. We decreased the acquisition earn-out payables by $0.4 million for the ChargeSmart acquisition and $3.4 million, excluding imputed interest, for the LIFT Retail acquisition during the nine months ended July 31, 2013, as we do not expect to pay these amounts. As a result, there is no accrual remaining for these contingent consideration arrangements. If all remaining operating and financial targets were to be met, the remaining maximum payouts for this contingent consideration total $5.0 million and $6.0 million for the ChargeSmart and LIFT Retail acquisitions.

Each acquisition was accounted for using the acquisition method of accounting. No VeriFone equity was issued, and in each transaction all the outstanding equity of the applicable business were 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.


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

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


All of the assets, liabilities and goodwill of the LIFT Retail, ChargeSmart and Show Media acquisitions were assigned to our Americas reportable segment. The assets, liabilities and goodwill of the Global Bay acquisition were primarily assigned to our Americas reportable segment, with a nominal amount of assets, liabilities and goodwill assigned to our EMEA reportable segment.

Acquisition-Related Costs

Transaction costs directly related to our acquisitions were recorded as expenses in our Condensed Consolidated Statements of Operations and include expenditures for professional services such as banking, legal and accounting, as well as 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 July 31,
 
Nine Months Ended July 31,
 
 
2013
 
2012
 
2013
 
2012
Cost of net revenues
 
$

 
$
3

 
$
26

 
$
12

Sales and marketing
 
49

 
12

 
67

 
195

General and administrative
 
194

 
505

 
923

 
8,094

Total acquisition-related costs
 
$
243

 
$
520

 
$
1,016

 
$
8,301



11

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

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.

The following table presents the computation of net income (loss) per share of common stock (in thousands, except per share data):
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2013
 
2012
 
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
$
(1,877
)
 
$
37,695

 
$
(48,415
)
 
$
38,048

Denominator:
 
 
 
 
 
 
 
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - basic
108,638

 
107,568

 
108,295

 
106,768

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, RSUs and RSAs

 
2,816

 

 
3,290

Senior convertible notes (1)

 

 

 
247

Weighted average shares attributable to VeriFone Systems, Inc. stockholders - diluted
108,638

 
110,384

 
108,295

 
110,305

Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
 
 
 
 
 
 
 
    Basic
$
(0.02
)
 
$
0.35

 
$
(0.45
)
 
$
0.36

    Diluted
$
(0.02
)
 
$
0.34

 
$
(0.45
)
 
$
0.34


(1) The diluted shares from the senior convertible notes do not include the effects of note hedge transactions on those notes, as described in Note 10. Financings. The note hedge transactions would have reduced the dilution attributable to the senior convertible notes by 50% if and when those notes had been converted and the note hedge transactions exercised. These outstanding note hedge transactions expired unused in June 2012.

For the three and nine months ended July 31, 2013, equity incentive awards to purchase 6.0 million and 5.3 million weighted average shares were anti-dilutive because we incurred a net loss for those periods. For both the three and nine months ended July 31, 2012, equity incentive awards to purchase 4.0 million shares of common stock were excluded from the calculation of weighted average shares for diluted net income per share as they were anti-dilutive. Anti-dilutive awards could impact future calculations of diluted net income (loss) per share if the fair market value of our common stock increases.

The senior convertible notes, which were repaid in full in June 2012 without any conversion rights having been exercised, 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 during the three months ended July 31, 2012 was $37.42, and therefore, the senior convertible notes were anti-dilutive for that period.

Warrants to purchase 7.2 million shares of our common stock were outstanding at July 31, 2013 and 2012. The warrants were not included in the computation of diluted earnings per share because the warrants' $62.36 exercise price was greater than the average share price of our common stock during the three and nine months ended July 31, 2013 and 2012. Therefore, the effect of the warrants was anti-dilutive for those periods.


12

Table of Contents
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 a stockholder-approved equity incentive plan. Our outstanding stock awards have included vesting provisions that are based on either time or performance. These equity incentive plans are described in further detail in Note 4, Employee Benefits Plan, in the Notes to Consolidated Financial Statements of our 2012 Annual Report on Form 10-K. All stock awards granted during the nine months ended July 31, 2013 were granted under the 2006 Equity Incentive Plan, as amended. At our annual meeting of stockholders on June 20, 2013, our stockholders approved an amendment to the 2006 Equity Incentive Plan to increase the number of shares of common stock that may be issued under the plan by 9,250,000. As of July 31, 2013, the number of shares available for future grants under the 2006 Equity Incentive Plan was 8.6 million. 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 nine months ended July 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
560

 
$
24.07

 
 
 
 
Exercised
(1,037
)
 
$
9.33

 
 
 
 
Canceled
(854
)
 
$
32.56

 
 
 
 
Expired
(318
)
 
$
31.13

 
 
 
 
Outstanding at July 31, 2013
6,351

 
$
24.60

 
3.8
 
$
20,325

Vested or expected to vest at July 31, 2013
6,112

 
$
24.31

 
3.7
 
$
20,229

Exercisable at July 31, 2013
4,226

 
$
21.55

 
3.1
 
$
19,118


The weighted-average grant-date fair value per share for stock options granted during the nine months ended July 31, 2013 and 2012 was $9.26 and $17.32.

The total proceeds received from employees as a result of employee stock option exercises for the nine months ended July 31, 2013 and 2012 were $9.7 million and $28.7 million. We recognized no tax benefit during the nine months ended July 31, 2013 related to employee stock option exercises, and $0.1 million of tax benefits during the nine months ended July 31, 2012. The total intrinsic value of options exercised during the nine months ended July 31, 2013 and 2012 was $14.1 million and $61.3 million.

The following table summarizes RSU and RSA balances as of July 31, 2013 and October 31, 2012, as well as activity for the nine months ended July 31, 2013:
 
Shares
(Thousands)
 
Aggregate
Intrinsic
Value
(Thousands)
Outstanding at October 31, 2012
1,913

 
 
Granted
2,213

 
 
Released
(416
)
 
 
Canceled
(513
)
 
 
Outstanding at July 31, 2013
3,197

 
$
60,974

Expected to vest at July 31, 2013
2,722

 
$
51,908

Vested and deferred at July 31, 2013
633

 
$
12,079



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

There were no RSAs granted during the nine months ended July 31, 2013. RSUs granted during the nine months ended July 31, 2013 included grants with time and performance based vesting conditions. Except for one grant described below, the vesting conditions of the performance-based RSUs are contingent upon meeting certain internal financial and operational targets. The vesting conditions of all grants were set by the compensation committee of the board of directors at the time of the grant.

One of the performance-based RSU grants during January 2013 was a long-term incentive grant to our former Chief Executive Officer that was subject to vesting based on our achievement of total shareholder return relative to peers on a stacked-ranking basis over a three year performance period. This grant was canceled during March 2013 in connection with his resignation from the Company.

We had a total of 3.1 million RSUs and 0.1 million RSAs outstanding as of July 31, 2013.

The weighted-average grant-date fair value per share for RSUs granted during the nine months ended July 31, 2013 and 2012 was $21.79 and $39.08.

The total fair value of RSUs that vested during the nine months ended July 31, 2013 and 2012 was $8.4 million and $11.0 million.

Equity Incentive Award Valuation

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 July 31,
 
Nine Months Ended July 31,
 
2013
 
2012
 
2013
 
2012
Expected term (in years)
3.5

 
3.6

 
3.5

 
3.6

Risk-free interest rate
1.0
%
 
0.6
%
 
0.7
%
 
0.7
%
Expected dividend rate
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
Expected stock price volatility
55.0
%
 
69.6
%
 
52.9
%
 
68.3
%

The grant-date fair value of 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.

The assumptions used to value our options 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 option, and represents the period of time that awards granted are expected to be outstanding.
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 options.
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 options, and includes the elements listed below at the weighted percentages presented:
    
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2013
 
2012
 
2013
 
2012
Historical volatility of our common stock
95.0
%
 
95.0
%
 
95.0
%
 
81.7
%
Historical volatility of comparable companies' common stock
0.0
%
 
0.0
%
 
0.0
%
 
13.3
%
Implied volatility of our traded common stock options
5.0
%
 
5.0
%
 
5.0
%
 
5.0
%


14

Table of Contents
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.

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 July 31,
 
Nine Months Ended July 31,
 
2013
 
2012
 
2013
 
2012
Cost of net revenues
$
670

 
$
560

 
$
1,633

 
$
1,501

Research and development
1,994

 
1,497

 
5,001

 
3,951

Sales and marketing
3,085

 
5,177

 
10,947

 
13,844

General and administrative
3,831

 
5,211

 
14,387

 
14,875

Total stock-based compensation
$
9,580

 
$
12,445

 
$
31,968

 
$
34,171


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

As of July 31, 2013, total unrecognized compensation expense adjusted for estimated forfeitures related to unvested stock options was $26.7 million and related to unvested RSUs and RSAs was $40.7 million, which is expected to be recognized over the remaining weighted-average vesting periods of 2.2 years for stock options and 2.9 years for RSUs and RSAs.

Note 5. Income Taxes

We recorded income tax benefits of $12.9 million and $31.9 million for the three and nine months ended July 31, 2013, an income tax provision of $2.3 million for the three months ended July 31, 2012, and an income tax benefit of $12.1 million for the nine months ended July 31, 2012. The effective tax rates for the three and nine months ended July 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. The income tax benefit for the three months ended July 31, 2013 includes $5.1 million of discrete tax benefits. The income tax benefit for the nine months ended July 31, 2013 includes a discrete tax benefit of $24.1 million related to litigation loss contingency expense and a discrete tax benefit of $8.2 million related to changes in the statutory tax rates' impact on deferred taxes, offset by a discrete tax provision of $11.7 million related to an increase in uncertain tax positions. The income tax provision for the three months ended July 31, 2012 is net of a discrete tax benefit of $6.6 million related to litigation loss contingency expense. The income tax benefit for the nine months ended July 31, 2012 includes a discrete tax benefit of $8.5 million related to the foreign exchange loss on futures contracts that was incurred during December 2011 and $6.6 million related to a litigation loss contingency expense, which was incurred during June 2012.

As of July 31, 2013, on a worldwide basis we remain in a net deferred tax asset position of $83.0 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.


15

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

Our unrecognized tax benefits increased by approximately $20.5 million during the nine months ended July 31, 2013 as a result of tax positions taken in the current period. 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 $2.0 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 July 31, 2013 and October 31, 2012 included $268.8 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.

Restricted cash included in Prepaid expenses and other current assets and Other long-term assets in our Condensed Consolidated Balance Sheets as of July 31, 2013 and October 31, 2012 was mainly comprised of pledged deposits and deposits to Brazil courts related to tax proceedings pending adjudication.
 
Inventories

Inventories consisted of the following (in thousands):
 
July 31, 2013
 
October 31, 2012
Raw materials
$
48,631

 
$
50,952

Work-in-process
1,579

 
552

Finished goods
121,691

 
126,770

Total inventory
$
171,901

 
$
178,274


Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):
 
July 31, 2013
 
October 31, 2012
Deferred income taxes
$
47,130

 
$
39,072

Prepaid expenses
43,341

 
37,261

Prepaid taxes
33,375

 
36,678

Bank acceptances receivable
6,741

 
2,151

Restricted cash
5,064

 
4,149

Other receivables
3,371

 
12,715

Other current assets
9,743

 
4,184

Total prepaid expenses and other current assets
$
148,765

 
$
136,210


16

Table of Contents
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)
 
July 31, 2013
 
October 31, 2012
Revenue generating assets
5
 
$
124,889

 
$
101,589

Computer hardware and software
3-5
 
79,662

 
70,064

Machinery and equipment
3-10
 
42,155

 
35,865

Leasehold improvements
Lesser of the term of
the lease or the
estimated useful life
 
21,837

 
20,773

Office equipment, furniture, and fixtures
3-5
 
13,142

 
9,423

Buildings
40-50
 
6,773

 
6,788

Depreciable fixed assets, at cost
 
 
288,458

 
244,502

Accumulated depreciation
 
 
(141,192
)
 
(106,688
)
Depreciable fixed assets, net
 
 
147,266

 
137,814

Construction in progress
 
 
9,326

 
7,838

Land
 
 
1,145

 
1,151

Fixed assets, net
 
 
$
157,737

 
$
146,803


Total depreciation expense for depreciable fixed assets for the three months ended July 31, 2013 and 2012 was $15.5 million and $11.4 million. Total depreciation expense for depreciable fixed assets for the nine months ended July 31, 2013 and 2012 was $40.8 million and $34.4 million.

During the nine months ended July 31, 2013, we recorded a $6.8 million impairment charge to Costs of net revenues related to revenue generating assets in our taxi solutions business in our EMEA segment for which the net book value of the assets exceeded their fair value. We used the income approach to determine the fair value.

Other Long-Term Assets

Other long-term assets consisted of the following (in thousands):
 
July 31, 2013
 
October 31, 2012
Debt issuance costs, net
$
26,215

 
$
31,897

Capitalized software development costs, net
17,221

 
12,238

Deposits
12,814

 
9,068

Long-term restricted cash
10,534

 
12,754

Long-term receivables
6,289

 
7,531

Other long-term assets
10,081

 
5,545

Total other long-term assets
$
83,154

 
$
79,033



17

Table of Contents
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):
 
July 31, 2013
 
October 31, 2012
Accrued legal loss contingencies, including interest (Note 11)
$
87,528

 
$
28,026

Accrued expenses
67,798

 
68,431

Accrued compensation
53,788

 
47,019

Sales and value-added taxes payable
14,191

 
12,461

Accrued warranty
13,415

 
11,931

Deferred tax liabilities - current portion
13,177

 
9,594

Accrued liabilities for contingencies related to tax assessments, including interest (Note 11)
9,898

 
11,818

Income taxes payable
4,346

 
13,577

Acquisition contingent consideration payable - current portion
3,196

 
14,111

Other current liabilities
16,785

 
13,899

Total accruals and other current liabilities
$
284,122

 
$
230,867


Accrued Warranty

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

 
$
22,032

Warranty charged to cost of net revenues
11,263

 
12,340

Utilization of warranty accrual
(9,133
)
 
(20,494
)
Other
(273
)
 
(1,103
)
Balance at end of period
14,632

 
12,775

Less: current portion
(13,415
)
 
(11,931
)
Long-term portion
$
1,217

 
$
844


Deferred Revenue, Net

Deferred revenue, net of related costs consisted of the following (in thousands):
 
July 31, 2013
 
October 31, 2012
Deferred revenue
$
148,110

 
$
144,492

Deferred cost of revenue
(14,712
)
 
(15,885
)
Deferred revenue, net
133,398

 
128,607

Less current portion
(91,541
)
 
(91,545
)
Long-term portion
$
41,857

 
$
37,062



18

Table of Contents
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):
 
July 31, 2013
 
October 31, 2012
Long-term income tax liabilities
$
64,616

 
$
44,144

Statutory retirement and pension obligations - non-current portion
12,214

 
10,983

Other long-term liabilities
12,116

 
15,313

Total other long-term liabilities
$
88,946

 
$
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 July 31, 2013 and October 31, 2012, the carrying amount of the redeemable noncontrolling interests was $0.7 million and $0.9 million.

Noncontrolling Interest in Subsidiaries

Changes in Noncontrolling interest in subsidiaries are set forth below (in thousands):
 
Nine Months Ended July 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
(1,689
)
 
(1,673
)
Net income attributable to noncontrolling interest in subsidiaries, net
1,345

 
1,268

Balance at end of period
$
36,477

 
$
36,821


Other Income (Expense), Net

Other income (expense), net consisted of the following (in thousands):
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2013
 
2012
 
2013
 
2012
Foreign currency exchange gains (losses), net
$
(1,338
)
 
$
1,095

 
$
(7,591
)
 
$
(21,340
)
Other income (expense), net
912

 
(1,816
)
 
13,411

 
(2,010
)
Total other income (expense), net
$
(426
)
 
$
(721
)
 
$
5,820

 
$
(23,350
)

We recorded a $22.5 million foreign currency loss during the nine months ended July 31, 2012 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 was recorded in Other income (expense), net during the nine months ended July 31, 2013.


19

Table of Contents
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

The following tables present our assets and liabilities that were measured at fair value on a recurring basis and their classification within the fair value hierarchy (in thousands). Transfers between fair value measurement levels are described in the notes following the tables.
 
July 31, 2013
 
October 31, 2012
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds (1)
$
1,638

 
$
1,638

 
$

 
$

 
$
69,743

 
$
69,743

 
$

 
$

Short-term time deposits (2)
35,003

 

 
35,003

 

 

 

 

 

Prepaid expenses and other current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable equity investment (3)
1,287

 
1,287

 

 

 
2,471

 
2,471

 

 

Other
148

 

 
148

 

 
357

 

 
357

 

Total assets measured and recorded at fair value
$
38,076

 
$
2,925

 
$
35,151

 
$

 
$
72,571

 
$
72,214

 
$
357

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruals and other current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition related earn-out payables (4)
$
1,610

 
$

 
$

 
$
1,610

 
$
6,131

 
$

 
$

 
$
6,131

Interest rate swaps designated as cash flow hedges (5)
2,357

 

 
2,357

 

 
2,451

 

 
2,451

 

Other
247

 

 
247

 

 
291

 

 
291

 

Other long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related earn-out payables (4)

 

 

 

 
2,832

 

 

 
2,832

Interest rate swaps designated as cash flow hedges (5)
908

 

 
908

 

 
2,168

 

 
2,168

 

Total liabilities measured and recorded at fair value
$
5,122

 
$

 
$
3,512

 
$
1,610

 
$
13,873

 
$

 
$
4,910

 
$
8,963



20

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

(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)
Short-term time deposits are classified as Level 2 because the carrying value approximates fair value due to their short-term maturities.
(3)
The marketable equity investment was classified as Level 1 as of October 31, 2012 because we determined the fair value using quoted market prices in markets that were active. As of April 30, 2013, the marketable equity investment was reclassified from Level 1 to Level 2, as trading for this security was halted by the NASDAQ Stock Market, Inc. for the period April 17 to May 6, 2013. The investment was reclassified from Level 2 to Level 1 during the three months ended July 31, 2013, as trading resumed on May 7, 2013.
(4)
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 payables at the end of each period.
(5)
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.

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):
 
Nine Months Ended July 31, 2013
 
Year Ended October 31, 2012
Balance at beginning of period
$
8,963

 
$
6,728

Additions related to current period business acquisitions
62

 
24,149

Payments
(3,287
)
 
(23,541
)
Changes in estimates, included in Other income (expense), net
(4,584
)
 
407

Interest expense
612

 
1,079

Foreign currency adjustments
(156
)
 
141

Balance at end of period
$
1,610

 
$
8,963

Less: current portion
1,610

 
6,131

Non-current portion
$

 
$
2,832


Fair Value of Other Financial Instruments

Other financial instruments consist 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.


21

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

Note 8. Goodwill and Purchased Intangible Assets

Goodwill

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

 
$
561,414

Additions related to business combinations
43,532

 
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
2,245

 
(15,135
)
Balance at end of period
$
1,224,651

 
$
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 nine months ended July 31, 2013 and the fiscal year ended October 31, 2012, there were no indicators of impairment.

Our assessment of impairment is based on our reporting units. Where an acquisition benefits only one reporting unit, we allocate, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. When an acquisition benefits more than one reporting unit, we assign the goodwill to our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value of the acquired business (or portion thereof) to be included in that reporting unit over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit. The individual assets acquired and liabilities assumed are assigned to the reporting units that they would benefit or operate within.

As of both July 31, 2013 and October 31, 2012, the accumulated impairment losses included in total goodwill were $71.0 million for our Americas segment, $361.4 million for our EMEA segment, and $5.5 million for our ASPAC segment, excluding the impact of foreign currency fluctuations.

Purchased Intangible Assets

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

 
July 31, 2013
 
October 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
713,686

 
$
(159,437
)
 
$
554,249

 
$
686,773

 
$
(95,284
)
 
$
591,489

Developed and core technology
175,339

 
(80,000
)
 
95,339

 
173,545

 
(46,618
)
 
126,927

Trade name
20,126

 
(7,502
)
 
12,624

 
17,707

 
(4,259
)
 
13,448

Other
3,990

 
(1,361
)
 
2,629

 
4,214

 
(1,270
)
 
2,944

Total
$
913,141

 
$
(248,300
)
 
$
664,841

 
$
882,239

 
$
(147,431
)
 
$
734,808


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

 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2013
 
2012
 
2013
 
2012
Included in cost of net revenues
$
11,173

 
$
10,582

 
$
33,296

 
$
29,783

Included in operating expenses
23,862

 
23,177

 
71,680

 
60,549

Total amortization of purchased intangible assets
$
35,035

 
$
33,759

 
$
104,976

 
$
90,332


22

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


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 July 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
$
11,303

 
$
24,474

 
$
35,777

2014
43,728

 
97,252

 
140,980

2015
23,061

 
94,938

 
117,999

2016
15,177

 
88,973

 
104,150

2017
2,380

 
62,850

 
65,230

Thereafter
108

 
200,597

 
200,705

Total future amortization expense
$
95,757

 
$
569,084

 
$
664,841


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. 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. Our derivative financial instruments do not include a right of offset, and we do not offset derivative financial assets against derivative financial liabilities.

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 July 31, 2013 and October 31, 2012.


23


The following tables present the amounts of gains and losses on our derivative instruments (in thousands):
 
 
 
Three Months Ended July 31, 2013
 
Nine Months Ended July 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
 
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 designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements (1)
 
$
1,071

 
$
(655
)
 
$

 
$
1,355

 
$
(1,914
)
 
$

 
 
 
1,071

 
(655
)
 

 
1,355

 
(1,914
)
 

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

 

 
1,255

 

 

 
143

 
Other
 

 

 
(98
)
 

 

 
(128
)
 
 
 

 

 
1,157

 

 

 
15

 
 
 
$
1,071

 
$
(655
)
 
$
1,157

 
$
1,355

 
$
(1,914
)
 
$
15


 
 
 
Three Months Ended July 31, 2012
 
Nine Months Ended July 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
 
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 designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements (1)
 
$
(2,043
)
 
$
(597
)
 
$

 
$
(5,145
)
 
$
(804
)
 
$

 
Other
 
(31
)
 
48

 
(214
)
 
(31
)
 
48

 
(214
)
 
 
 
(2,074
)
 
(549
)
 
(214
)
 
(5,176
)
 
(756
)
 
(214
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts (2)
 

 

 
4,940

 

 

 
(19,451
)
 
Other
 

 

 
(303
)
 

 

 
(449
)
 
 
 

 

 
4,637

 

 

 
(19,900
)
 
 
 
$
(2,074
)
 
$
(549
)
 
$
4,423

 
$
(5,176
)
 
$
(756
)
 
(20,114
)

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

24



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 July 31, 2013 and October 31, 2012 were $500.0 million.

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 July 31, 2013 and October 31, 2012 were $247.4 million and $188.3 million.

During the nine months ended July 31, 2012 we incurred a $19.5 million net loss on foreign exchange forward contracts not designated as hedging instruments, which consisted primarily of 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.

Note 10. Financings

Borrowings under our financing arrangements consisted of the following (in thousands):
 
July 31, 2013
 
October 31, 2012
2011 Credit Agreement
 
 
 
     Term A loan
$
935,006

 
$
993,557

     Term B loan
48,680

 
99,763

     Revolving loan
133,000

 
210,000

Other
2,717

 
4,297

Total borrowings
1,119,403

 
1,307,617

Less: current portion
(79,130
)
 
(54,916
)
Long-term portion
$
1,040,273

 
$
1,252,701



25

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

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 a credit extension amendment to the 2011 Credit Agreement consisting of $109.5 million additional Term A loans and $75.5 million revolving loan commitment increase. On July 19, 2013, VeriFone, Inc. entered into an amendment (the "Second Amendment") to the 2011 Credit Agreement, which extended from November 1, 2013 to November 1, 2014, the date on which the required total leverage ratio declines from 3.75 to 3.50, and revised the definition of cash on hand used in calculating the total leverage ratio. As a condition to the effectiveness of the Second Amendment, on July 19, 2013 we prepaid the Term A loan in the aggregate principal amount of $20.0 million and the Term B loan in the aggregate principal amount of $50.0 million.

Other key terms of the 2011 Credit Agreement, as previously amended, including additional financial maintenance covenants and certain representations, warranties, covenants, and conditions that are customarily required for similar financings, were unchanged, and are described in Note 12, Financings, in the Notes to Consolidated Financial Statements of our 2012 Annual Report on Form 10-K. We were in compliance with all financial covenants under the 2011 Credit Agreement, as amended, as of July 31, 2013.

The interest rate of each of the Term A loan and the Revolving loan is one month LIBOR plus the applicable margin, and the interest rate on the Term B loan is the higher of one month LIBOR or 1.00% plus the applicable margin. As of July 31, 2013, we elected the "Eurodollar Rate" margin option for our borrowings under the 2011 Credit Agreement and the interest margins were 2.50% for the Term A loan and the Revolving loan, and 3.25% for the Term B loan. Accordingly, as of July 31, 2013, the interest rate on the Term A and Revolving loan was 2.69%, and the interest rate on the Term B loan was 4.25%. As of July 31, 2013, the unused Revolving loan facility's commitment fee was 0.375% per annum, payable quarterly in arrears, and the amount available to draw under the Revolving loan was $292.5 million.

We have outstanding a number of interest rate swap agreements to effectively convert $500.0 million of our 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 and are effective for the period from March 30, 2012 to March 31, 2015.

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.

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 of these notes was as follows (in thousands, except percentages):
 
Three Months Ended July 31, 2012
 
Nine Months Ended July 31, 2012
Interest rate on the liability component
7.6
%
 
7.6
%
 
 
 
 
Interest expense related to contractual interest coupon
$
466

 
$
2,372

Interest expense related to amortization of debt discount
2,087

 
10,269