-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RQ5qcP9jH+M2jo3LlPerZDnx6WvA+IULrCRUNC9YPJ8oB1EqMgHYQ4ZT9sLJxH2o 8Uqi6N3S1DDqjkgNNAkT5A== 0000912057-97-010233.txt : 19970327 0000912057-97-010233.hdr.sgml : 19970327 ACCESSION NUMBER: 0000912057-97-010233 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERIFONE INC CENTRAL INDEX KEY: 0000820580 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] IRS NUMBER: 990206064 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-13874 FILM NUMBER: 97563730 BUSINESS ADDRESS: STREET 1: THREE LAGOON DR STE 400 CITY: REDWOOD CITY STATE: CA ZIP: 94065 BUSINESS PHONE: 4155916500 MAIL ADDRESS: STREET 1: THREE LAGOON DRIVE STE 400 CITY: REDWOOD CITY STATE: CA ZIP: 94065 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________ Commission file number 0-18376 VERIFONE, INC. (Exact name of registrant as specified in its charter) Delaware 99-0206064 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Three Lagoon Drive, Redwood City, CA 94065 (Address of principal executive offices) (415) 591-6500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value Securities registered pursuant to Section 12(g) of the Act: None 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. \ X \ The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on March 7, 1997, as reported by the New York Stock Exchange, was approximately $807,176,000. The number of shares of the registrant's Common Stock outstanding on March 24, 1997, was 23,298,640. DOCUMENTS INCORPORATED BY REFERENCE (1) The registrant's definitive proxy statement to be filed with the Securities and Exchange Commission relating to the Company's 1997 Annual Meeting of Stockholders to be held on May 9, 1997 (Part III of Form 10-K). (2) Portions of the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1996 (Parts II and IV of Form 10-K). 2 PART I ITEM 1. BUSINESS INDEX SECTION PAGE Company Summary 4 Industry and Company Background 5 Products 6 Markets 8 Sales Organization 10 Manufacturing and Distribution 10 Research and Product Development 11 Proprietary Rights 11 Competition 12 Government Regulation 13 Factors That May Affect Future Results And The Market Price Of The Company's Stock 13 FORWARD-LOOKING STATEMENTS Forward-looking statements in this report -- including statements regarding 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." The Company cautions investors that its business is subject to significant risks and uncertainties. 3 COMPANY SUMMARY VeriFone, Inc. (herein "VeriFone" or the "Company") is a corporation organized in Hawaii in 1981 and reincorporated in Delaware in 1986. The Company develops, manufactures, markets and supports hardware and software systems which automate transactions -- principally electronic payment transactions among consumers, merchants and financial institutions. The Company's product line consists primarily of: terminal products which interface with magnetic-stripe cards; products which interface with integrated circuit cards ("chip cards"); peripherals such as printers, PIN pads and communications products; and software and services. Currently, the most prevalent use of the Company's products is to automate credit and debit card payments at the point of sale in merchant establishments. The Company's products also automate payments by check, electronic cash (i.e., stored value on a chip card) and other means, and automate payment transactions in venues other than merchant establishments, including credit card transactions over the Internet. In addition to products used at the point of sale, some of the Company's products are used by banks and payment processors, at their "back-end" facilities, to process (e.g., sort and route) payment transactions and to manage terminal operations. Other VeriFone products are used to automate non-payment transactions, such as the collection of labor management data, implementation of retail loyalty programs, submission of health insurance claims, and issuance of government permits. The services provided by the Company include consulting services (e.g., advice on system strategies and alternatives), professional services (e.g., the design, installation and integration of systems), support services (e.g., maintenance), and financing. (See "Item 1 - Business - Products", below). The Company distributes its products through direct sales and various third party distribution arrangements. In 1996, the Company sold transaction automation systems to more than 1,300 customers. No single customer accounted for more than approximately 4 percent of the Company's net revenues in 1996. Since its inception, the Company has delivered more than 5 million systems to customers in more than 100 countries. The Company's customers include banks, payment processors, retail merchants, petroleum service station and convenience-store operators, supermarkets and other mass merchandisers, healthcare providers, and government benefits disbursers (See "Item I - Business - Markets" and "Item I - Business - Sales Organization," below.) The Company employs approximately 2,800 persons in eighteen countries. These employees are located in approximately 35 facilities, including development centers, manufacturing and distribution centers, customer service centers, and sales and support offices. (See "Item 2 - Properties," below.) 4 INDUSTRY AND COMPANY BACKGROUND HISTORY Until the 1980s, automating the processing of routine transactions -- credit and debit card authorization, check verification, and the like -- was not cost-effective, and most transactions were completed manually. In the 1980s, major changes in computer and telecommunications technology supported the development of transaction automation systems that could rapidly capture and process transaction data electronically. These systems could provide greater convenience to consumers; speed settlement and customer throughput for merchants; and potentially reduce processing costs and losses from fraud for financial institutions. While the transaction automation devices introduced in the early 1980s offered significant potential benefits, they were relatively expensive, generally slow, unreliable and difficult to use. The Company was established in 1981 to develop and deliver low-cost, highly reliable, easy-to-use transaction systems, and has played a major role in developing the market for electronic payment processing. Today, the Company is a leading provider of transaction automation systems for the payment processing market. CURRENT DEVELOPMENTS The Company introduced a number of new products in 1996, including: vGATE and vPOS software, which enable payment by credit card over the Internet; the OMNI 1250, a chip card device that can handle up to four stored value/electronic purse schemes; the Smartnet 50 network controller, a controller optimized for payment applications; the PrintPak 350, a modular thermal printer that couples with the Zon Jr XL, TRANZ and OMNI 300 series of terminals to form an integrated terminal/printer system; the CR500/550 electronic check reader, a stand-alone check reading device; Softpay software, a modular software product which simplifies the development of customer applications for OMNI terminals; and the Lodgelink payment system, a software/hardware solution that allows hotels and other large properties with multiple retail outlets to consolidate credit card, reporting, settlement and funding. The Company also announced plans to develop the VeriSmart system, which is designed to enable consumers to access various chip card-based applications from their homes through a VeriFone Personal ATM or other devices. Other business developments in 1996 included the formation of two new service organizations: the Centum Consultancy, which advises customers on a range of electronic payment strategies and alternatives, and our Professional Services group, which helps design, install, integrate and manage electronic payment solutions for customers. In addition, the Company entered into a number of strategic relationships in 1996, with companies including Hewlett Packard, Microsoft, Netscape and Oracle. 5 PRODUCTS The Company develops, manufactures, markets and supports a comprehensive line of transaction automation products. The Company's product line consists principally of: terminal products; chip card products; peripheral products; and software and services. TERMINAL PRODUCTS The Company's terminal products -- which are designed for use principally with magnetic-stripe cards, such as the typical credit or debit card -- may be categorized in three groups: Some terminals have limited functionality, generally performing credit authorization only, or credit authorization and basic draft capture. The principal product in this category is the ZON Jr XL, which was introduced in 1986 and is capable of credit authorization and basic draft capture functions. Other terminals perform higher level functions, such as credit and debit card authorization, draft capture and settlement; eligibility checking for health insurance or government benefits; or time and attendance data collection reporting. This category includes terminals which have integrated printers in a single footprint, as well as stand-alone terminals with special advanced functionality. The principal products in this category are the TRANZ 330, 380, 460 and 470, and the OMNI 395, 460 and 470. The TRANZ 330 continues to be the Company's top-selling product, with approximately 264,000 units sold in 1996. Other terminals are targeted mainly at the multi-lane retail and petroleum/convenience-store markets, where the customer requirement is for logical and/or physical integration of functionality with other devices, such as in-lane electronic cash registers, pump controllers or scanning equipment. The principal products in this category are the OMNI 490 and Everest, which were developed specifically for supermarket payment systems, and the Ruby SuperSystem, which integrates the functions of a pump controller, electronic cash register and payment system. CHIP CARD PRODUCTS In addition to the Company's terminal products which are designed for use principally with magnetic-stripe cards, the Company has a line of products which are designed for use with integrated circuit cards -- also known as "chip cards" or "smart cards." The principal products in this category are: the CM 450, which reads from and writes to chip cards and functions as a secure peripheral in payment and other transactions that require memory and microprocessor chip cards; the SC 455, which supports a range of security requirements to meet different local, regional and national requirements for chip card transactions; the SC 550 and SC 552, which support memory and microprocessor chip cards as well as magnetic-stripe credit and debit cards in the same application; and the OMNI 1250, a chip card device that can handle up to four stored value/electronic purse schemes. 6 PERIPHERAL PRODUCTS The principal peripherals which interface with VeriFone terminal and chip card products are printers, personal identification number devices (known as PIN pads) and communications products. Printers enable printing of customer receipts. PIN pads allow acceptance of debit card and other forms of payment requiring a personal identification number. Communications products, such as the Smartnet line of network controllers, facilitate communications among terminals and between terminals and other devices. SOFTWARE PRODUCTS The Company has developed several families of software products which -- operating on VeriFone terminal or chip card products or on other platforms (such as client-server computer systems) -- automate payment and other transactions. TERMINAL APPLICATION SOFTWARE. The Company works closely with its customers to develop custom applications which operate on VeriFone terminals. To date, the Company has developed over 2,000 terminal software applications ranging from entry-level credit and debit solutions to complex systems to support large retail operations. Among these software applications are specialized applications for specific markets such as lodging (the Lodgelink product) and multi-lane (the PayLane product). The Company is also developing a modular software product, Softpay, which simplifies the development of customer applications for OMNI terminals. TERMINAL MANAGEMENT SOFTWARE. The Company has developed a client-server based terminal management system, VeriTalk, which enables the installation and upgrade of terminal software via telephone lines. It allows multiple, simultaneous downloading of application updates and has network diagnostic capabilities. PAYMENT PROCESSING SOFTWARE. The Company has developed a client-server based software solution, Omnihost, which can efficiently perform enterprise-wide transaction switching and electronic payment processing. This solution can replace traditional mainframe host systems. INTERNET COMMERCE SOFTWARE. The Company has developed a suite of software products, vPOS and vGATE, that enable credit card payments over the Internet. The vPOS software provides an Internet merchant the ability to capture orders and credit card payment data and to communicate with the vGATE system at a financial institution or processor. The vGATE software receives the merchant's data and interfaces this data with the financial institution's or processor's internal systems. In addition to vPOS and vGATE, the Company is developing vWALLET software, which will provide consumers with a convenient way to purchase and pay for goods purchased via the Internet. 7 CONSUMER SYSTEMS/CHIP CARD SOFTWARE. The Company is currently developing a client-server based software system, VeriSmart, which is designed to enable consumers to access various chip card-based applications -- such as stored value applications, loyalty programs and others -- expected to be offered in the future by financial institutions, telephone companies, retail merchants and others. The Company is also developing a hardware product, the Personal ATM, which is one of the devices that consumers will be able to use to access a VeriSmart system. LABOR MANAGEMENT SOFTWARE. The Company continues to develop software products that facilitate the collection and manipulation of labor management data, including data relating to time and attendance, labor scheduling and business forecasting. SERVICES The Company offers a range of services relating to its other products: CONSULTING SERVICES. The Company's Centum Consultancy group provides consulting services on strategies and alternatives for electronic payment systems. PROFESSIONAL SERVICES. VeriFone Professional Services provides services to assist in the design, installation, integration and management of electronic payment systems. SUPPORT SERVICES. VeriFone Support Services provides deployment, training, technical assistance and maintenance services for VeriFone products. The Company generally provides a one-year warranty on its systems. Extended maintenance agreements following the warranty period are also available. FINANCING PROGRAMS. VeriFone Finance provides leasing, rental and other financing programs for VeriFone systems. MARKETS The Company classifies its business into markets principally along geographic lines: the United States market and international markets. UNITED STATES MARKET The Company's business in the United States, taken as a whole, is the Company's largest market. In 1996, revenues from the United States were $287.5 million, up 16.9 percent over 1995, and represented 60.9 percent of total net revenues, compared to 63.6 percent in 1995. The Company's United States market consists of four vertical sub-markets: the financial retail market, the petroleum/convenience-store market, the multi-lane market, and the government/healthcare market. 8 * The financial retail market is referred to as such because the Company uses bank and payment processor distribution channels to reach the end-users in this market, who are typically retail merchants including specialty stores, restaurants and lodging establishments. * The petroleum/convenience-store market involves the sale of transaction automation systems to large petroleum companies and convenience-store operators, and other companies involved in the petroleum and convenience-store industries. * The multi-lane market has two components, both of which focus on the same customers, principally supermarkets, drug store chains and mass merchandisers. One component involves the sale of transaction automation systems to multi-lane customers. The other component involves the licensing of labor management software to multi-lane customers. * The government market involves the sale of transaction automation systems which are used principally in the automation of government benefits and licenses. The healthcare market involves the sale of transaction automation systems to facilitate healthcare payments, verify patient eligibility for insurance coverage and submit insurance claims for healthcare providers. The financial retail market differs in a number of respects from the petroleum/convenience-store market, multi-lane market, and government/healthcare market (which are sometimes referred to as the "emerging markets"). Relative to the financial retail market, the emerging markets are characterized by longer sales cycles, small numbers of accounts, and uneven order flows. Accordingly, the emerging markets tend to be "lumpy" and to some extent unpredictable, in that customers' orders are typically large and placed infrequently. In addition, customers in the government market face the complexity of the government procurement process, which typically extends the purchasing and implementation cycle. INTERNATIONAL MARKETS The contribution of the Company's international business to the Company's total net revenues has increased steadily. In 1996, revenues outside the United States were $185.0 million, up 31.2 percent over 1995, and represented 39.1 percent of total net revenues, compared to 36.4 percent in 1995. During 1996, the Company delivered systems in more than 100 countries. For additional financial information on the Company's international operations, see Note Eight to the consolidated financial statements contained in the Company's 1996 Annual Report to Stockholders. International markets, in the aggregate, are potentially larger than the United States market, and are currently less penetrated. However, market opportunities, conditions and requirements vary widely from country to country. In addition, international operations involve 9 a number of special risks. (See "Factors That May Affect The Company's Future Results And The Market Price Of The Company's Stock," below.) The Company's international markets are divided into three regions: the Americas, which is all of North and South America except the United States; Europe, the Middle East and Africa (EMEA); and Asia Pacific (ASPAC). The customers in these regions are principally financial retail customers, similar to the United States financial retail customers described above. SALES ORGANIZATION The Company markets its products through both direct sales to end-users and third party distribution arrangements with financial institutions, processors, service providers and other resellers. The Company's sales force is organized to address specific segments of the transaction automation market, including retail merchants, petroleum service stations/convenience stores, multi-lane retailers, healthcare providers, and state and federal government agencies. The Company has ten United States sales offices. Outside the United States, the Company's products are marketed through direct sales offices in or near Frankfurt, which serves central and eastern Europe; London, which serves northern and southern Europe, Russia, the Middle East and parts of English-speaking Africa; Barcelona, which serves Spain and Portugal; Milan, which serves Italy; Paris, which serves France and French-speaking Africa; Johannesburg, which serves South Africa and Zimbabwe; Bangalore, Beijing, Hong Kong, Singapore, Sydney, and Tokyo, which serve the Asia-Pacific region; Toronto, which serves Canada; Miami, which serves Central and South America; Mexico City, which serves Mexico; Buenos Aires, which serves Argentina; and Sao Paulo, which serves Brazil. Many of the Company's sales offices are staffed with application software programmers, technical systems analysts and customer support personnel. The Company's use of third party distribution arrangements is prevalent especially in international sales. The Company currently has a network of more than 50 international distributors. The Company's leasing programs are offered through its leasing subsidiary, VeriFone Finance. MANUFACTURING AND DISTRIBUTION The Company's manufacturing and distribution operations have been structured and geographically located with the aim to deliver high-quality, competitively priced products to customers on time. The Company owns and operates a manufacturing and distribution facility in Kaohsiung, Taiwan, R.O.C. and a newly constructed manufacturing facility in Kunshan, near Shanghai, People's Republic of China. Currently, more than 1,300 employees are producing approximately 170,000 units (including printers, PIN pads, etc.) per month at these facilities. 10 The Company conducts limited manufacturing at its facility in Costa Mesa, California, which has special-configuration and light manufacturing capabilities. The Costa Mesa facility also provides distribution to customers in North, Central and South America, and includes a distribution capability for expediting delivery to customers in Asia, Australia, Europe, Africa and the Middle East. For certain low-volume products, and to augment production capacity, the Company occasionally uses subcontractors. A few VeriFone products are procured through original equipment manufacturers (OEMs). RESEARCH AND PRODUCT DEVELOPMENT The Company conducts its major research and development at seven facilities worldwide, which are located in or near: Auburn, California; Bangalore, India; Dallas, Texas; Honolulu, Hawaii; Paris, France; San Francisco, California; Taipei, Taiwan; and Tampa, Florida. The Company works closely with its customers to define new product concepts and identify emerging applications for its products. Development projects are evaluated through a management review process and assigned to the Company's development centers based upon the potential value of the target markets as well as the manpower and engineering expertise requirements. The Company's research and development efforts are focused on new products (including products for the Internet commerce and consumer markets); modifications of and extensions to existing products for new market opportunities; and the development of applications for advanced transaction systems. There can be no assurance that any of the Company's research and product development projects will be successfully completed. In 1996, 1995 and 1994, the Company's research and product development expenses were approximately $53.4 million, $45.0 million, and $38.4 million, respectively. The Company currently expects that, in the long term, its research and development expenses will continue to increase in absolute dollars but may decline as a percentage of net revenues. PROPRIETARY RIGHTS The Company currently holds 41 United States patents, one Canadian patent and one Australian patent. These patents cover a number of inventions, including among others a magnetic-stripe card reader apparatus integrated into the card slot of the Company's transaction automation systems, a programming method for downloading an operating system into local VeriFone systems from a remote host computer, a check processing system, a print element drive control, and the unique design of several VeriFone products. In 1996, the Company filed 11 32 United States patent applications and, as of the end of the year, had a total of 37 pending United States patent applications. The Company's trademarks registered in the United States include VeriFone's name and logo, and the names of a number of VeriFone products, including ZON, TRANZ, OMNI, Ruby SuperSystem, VeriFone Folio, and Omnihost. The Company has also applied for registration in the United States for over 40 other trademarks that it is using or intends to use, including Everest, SC, Folio, PATM, Personal ATM, PrintPak, VeriTalk, SoftPay, vGATE, vPOS, vWALLET, Lodgelink and LaborDay. The Company has trademarks registered or pending registration in numerous foreign jurisdictions where the Company does business, including VeriFone's name and logo and the names of several VeriFone products. Numerous other trademarks or markings are used to identify products of VeriFone and distinguish them from products of others. The Company relies on copyrights and contractual arrangements to protect proprietary software programs, and the Company seeks to protect its trade secrets by entering into confidentiality agreements with its employees and third parties and implementing various internal safeguards. There can be no assurance that others will not develop products or technology that are equivalent or superior to those of the Company, or that the patents, trademarks, copyrights, confidentiality agreements and internal safeguards upon which the Company relies will be adequate to protect its interests. COMPETITION The Company competes in its hardware businesses primarily on the basis of product quality, features and price; the availability of application software programs; the number of network, host and telephone system certifications it obtains for it products and application programs; and customer support and responsiveness. The Company competes in its software businesses, including its Internet commerce business, primarily on the basis of the rapid development, release and delivery of its software products. The Company believes that it is competitive with respect to each of these factors. However, certain competitors have significantly larger financial, technical and marketing resources than the Company, and there can be no assurance that the Company will remain competitive in the future. Also, the Company often 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. 12 GOVERNMENT REGULATION Government regulatory policies affect charges and terms for both private-line and public network service. Therefore, changes in such policies that make it more costly to communicate on such networks could adversely affect the demand for transaction automation systems. The Company must also obtain product certification on applicable communications networks both in the United States and other countries. Any delays in obtaining necessary certifications with respect to future products could delay their introduction. In addition, the Federal Communications Commission requires that the Company's products comply with certain rules and regulations governing their performance. 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. VARIATIONS IN QUARTERLY RESULTS The Company's quarterly operating results are subject to various risks and uncertainties, including risks and uncertainties related to: local economic conditions; competitive pressures; the composition, timing and size of orders from and shipments to major customers; variations in product mix and the mix between leases and sales; variations in product cost; infrastructure costs; obsolescence of inventory; and other factors as discussed below. Accordingly, the Company's operating results may vary materially from quarter to quarter. The Company operates with little backlog and, as a result, net revenues in any quarter are substantially dependent on the orders booked and shipped in that quarter. Because the Company's operating expenses are based on anticipated revenue levels and because a high percentage of the Company's expenses are relatively fixed, if anticipated shipments in any quarter do not occur as expected, the Company's operating results may be adversely affected and fall significantly short of expectations. Any other unanticipated decline in the growth rate of the Company's net revenues, without a corresponding and timely reduction in the growth of operating expenses, could also have an adverse effect on the Company and its future operating results. The Company aims to prudently control its operating expenses. However, there is no assurance that, in the event of any revenue, gross margin or other shortfall in a quarter, the Company will be able to control expenses sufficiently to meet profitability objectives for the quarter. Compounding these risks is the fact that a substantial portion of the Company's net revenues in each quarter generally results from shipments during the latter part of the quarter. For this and other reasons, the Company may not learn of shortfalls in revenues, earnings or 13 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 15 Republic of China, are subject to particular risks relating to political developments and trade barriers. The inability to effectively manage these and other risks could adversely affect the Company and its future operating results. The majority of the Company's international sales are denominated in United States currency. An increase in the value of the United States dollar relative to foreign currencies could make the Company's products sold internationally less competitive. The Company has offices in a number of foreign countries, the operating expenses of which are also subject to the effects of fluctuations in foreign currency exchange rates. Although the Company engages in hedging transactions 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. 16 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. 17 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. 18 ITEM 2. PROPERTIES The Company's corporate offices are located in approximately 55,000 square feet of leased office space in Redwood City, California. The Company is planning to relocate these offices to a new facility in Santa Clara, California in late 1997 or early 1998. The Company's United States distribution, repair and customer service center is located in two adjacent leased office and warehouse buildings which, in the aggregate, total approximately 156,700-square-feet in Costa Mesa, California. The Company owns a 120,000-square-foot manufacturing and distribution facility in Kaohsiung, Taiwan, R.O.C. and a 180,000-square-foot manufacturing and distribution facility in Kunshan, near Shanghai, People's Republic of China. In addition, the Company leases a 65,000-square-foot software engineering center in Bangalore, India. The Company leases space for various purposes (including sales, development and customer service) in or near Atlanta, Georgia; Auburn, California; Bangalore, India; Barcelona, Spain; Beijing, People's Republic of China; Buenos Aires, Argentina; Chicago, Illinois; Dallas, Texas; Dayton, Ohio; Fort Lauderdale, Florida; Frankfurt, Germany; Guangzhou, People's Republic of China; Honolulu, Hawaii; Hong Kong; Johannesburg, South Africa; London, United Kingdom; Louisville, Kentucky; Madrid, Spain; Mexico City, Mexico; Miami, Florida; Milan, Italy; New York, New York; Palo Alto, California; Paris, France; Portland, Oregon; Sao Paulo, Brazil; Singapore; Sydney, Australia; Taipei, Taiwan; Tampa, Florida; Tokyo, Japan; and Toronto, Canada. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of business, various legal proceedings are initiated against the Company. The Company is not currently aware of any legal proceeding pending against it, the resolution of which is expected to have a material impact on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference to the section of the Company's 1996 Annual Report to Stockholders entitled "VFIC Stock Performance," page 33. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference to the section of the Company's 1996 Annual Report to Stockholders entitled "Selected Consolidated Financial Data," page 10. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Incorporated by reference to the section of the Company's 1996 Annual Report to Stockholders entitled "Management's Discussion and Analysis," pages 11 through 17. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference to the sections of the Company's 1996 Annual Report to Stockholders included in the financial statements and notes on pages 18 through 32, and in "Quarterly Data" on page 34. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to the sections of the Company's proxy statement for the 1997 Annual Meeting of Stockholders entitled "Election of Directors", "Management" and "Certain Transactions." ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the sections of the Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders entitled "Compensation of Directors" and "Compensation of Executive Officers." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the section of the Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders entitled "Security Ownership of Management and Principal Stockholders." ITEM 13. CERTAIN RELATIONS AND RELATED TRANSACTIONS Incorporated by reference to the section of the Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders entitled "Certain Transactions." 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. INDEX TO FINANCIAL STATEMENTS The following documents are incorporated in Part II of this Annual Report by reference to the 1996 Annual Report to Stockholders: Annual Report to Stockholders --------------- Consolidated Balance Sheets as of December 31, 1996 and 1995 Page 18 Consolidated Statements of Income for each of the three years in the period ended December 31, 1996 Page 19 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1996 Page 20 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996 Page 21 Notes to Consolidated Financial Statements Pages 22-32 The Report of Independent Auditors on page 33 of the 1996 Annual Report to Stockholders is also incorporated by reference. With the exception of the information expressly incorporated by reference into Items 5, 6, 7 and 8 of this Annual Report, the 1996 Annual Report to Stockholders, attached as Exhibit 13.1, is not deemed filed as part of this report. (a)2. FINANCIAL STATEMENT SCHEDULES The following financial statement schedule is filed as a part of the Annual Report and should be read in conjunction with the Financial Statements: Schedule II Valuation and Qualifying Accounts 22 All other schedules are omitted because they are not required, or not applicable, or because the required information is included in the 1996 Annual Report to Stockholders, filed as Exhibit 13.1. (a)3. EXHIBITS Exhibit Number Description ------ ----------- 3.1 Restated Certificate of Incorporation (1) 3.2 Bylaws of Registrant as currently in effect 10.1 Incentive Stock Option Plan, as amended * 10.2 1987 Supplemental Stock Option Plan, as amended * 10.3 1992 Non-Employee Directors' Stock Option Plan, as amended * 10.4 1996 Restricted Phantom Stock Plan * 10.5 Form of Indemnity Agreement between the Company and each of its directors (1) * 10.6 Form of Indemnity Agreement between the Company and each of its executive officers (3) * 10.7 Series D Preferred Stock Purchase Agreement, dated August 11, 1988, as amended on January 26, 1990 (1) 10.8 Employment letter agreement between the Company and Hatim Tyabji, dated August 26, 1986 (2) * 11.1 Statement of Computation of Net Earnings per Share 13.1 1996 Annual Report to Stockholders 21.1 List of Subsidiaries 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney. Reference is made to the signature page. 23 (1) Incorporated by reference from the exhibits in the Company's Registration Statement on Form S-l filed with the Commission (File No. 33-33304) on or about February 1, 1990. (2) Incorporated by reference from the exhibits in the Company's Annual Report on Form 10-K filed with the Commission (File No. 0-18376) on or about March 24, 1993. (3) Incorporated by reference from the exhibits in the Company's Annual Report on Form 10-K filed with the Commission (File No. 0-18376) on or about March 29, 1994. * Designates "management contract or compensatory plan." (b) REPORTS ON FORM 8-K None. 24 SIGNATURES AND POWER OF ATTORNEY Pursuant to the requirements of Section 13 or 15(d) 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. Dated: March 26, 1997 By: /S/ JOSEPH M. ZAELIT -------------------- Joseph M. Zaelit Senior Vice President, Finance and Administration, and Chief Financial Officer KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Hatim A. Tyabji and Joseph M. Zaelit, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. 25 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /S/ HATIM A. TYABJI Director, Chairman of the March 26, 1997 - ------------------- Board, President and (Hatim A. Tyabji) Chief Executive Officer /S/ JOSEPH M. ZAELIT Senior Vice President, March 26, 1997 - --------------------- Finance and Administration, (Joseph M. Zaelit) and Chief Financial Officer (principal financial officer) /S/ ELDON M. BULLINGTON Vice President and March 26, 1997 - ------------------------ Corporate Controller (Eldon M. Bullington) (principal accounting officer) /S/ H. H. HAIGHT IV Director March 10, 1997 - ------------------- (H. H. Haight IV) /S/ J. ROBERT HARCHARIK Director March 7, 1997 - ----------------------- (J. Robert Harcharik) /S/ THOMAS E. PETERSON Director March 6, 1997 - ---------------------- (Thomas E. Peterson) /S/ JOHN R. C. PORTER Director March 7, 1997 - --------------------- (John R. C. Porter) /S/ CLINTON V. SILVER Director March 10, 1997 - --------------------- (Clinton V. Silver) /S/ A. MICHAEL SPENCE Director March 6, 1997 - --------------------- (A. Michael Spence) /S/ R. ELTON WHITE Director March 26, 1997 - ------------------ (R. Elton White) 26 SCHEDULE II VERIFONE, INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Beginning of Costs and Deductions/ Balance at End Description Period Expenses Write-Offs of Period - ----------- ------ -------- ---------- --------- Year Ended December 31, 1994 $3,900 $3,250 $(2,245) $4,905 Allowance for doubtful accounts ------ ------ ------- ------ ------ ------ ------- ------ Year Ended December 31, 1995 Allowance for doubtful accounts $4,905 $5,495 $(5,725) $4,675 ------ ------ ------- ------ ------ ------ ------- ------ Year Ended December 31, 1996 Allowance for doubtful accounts $4,675 $ 371 $(1,204) $3,842 ------ ------ ------- ------ ------ ------ ------- ------
27 EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 28 BYLAWS OF VERIFONE, INC. AS AMENDED THROUGH MARCH 15, 1997 29 BYLAWS OF VERIFONE, INC. (a Delaware corporation) As amended through March 15, 1997 ARTICLE I Offices Section 1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Dover, County of Kent. Section 2. OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II Corporate Seal Section 3. CORPORATE SEAL. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE III Stockholders' Meetings Section 4. PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. 30 Section 5. ANNUAL MEETING. The annual meeting of the stockholders of the corporation, for the purpose of election of Directors and for such other business as may lawfully come before it shall be held on such date and at such time as may be designated from time to time by the Board of Directors. Section 6. SPECIAL MEETINGS. Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by the President or the Board of Directors, and shall be held at such place, on such date, and at such time as the President or the Board of Directors, as the case may be, shall fix. Section 7. NOTICE OF MEETINGS. (a) Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than 10 or more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (b) Subject to the rights of the holders of any series of Preferred Stock, (i) nominations for the election of directors may be made, and (ii) business proposed to be brought before any stockholder meeting may be initiated by the Board of Directors or a proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any such stockholder may nominate one or more persons for election as directors at a meeting or propose business to be brought before a meeting, or both, only if such stockholder has given timely notice in proper written form of his intent to make such nomination or nominations or to propose such business. To be timely, a stockholder's notice must be delivered to or mailed and received by the Secretary of the corporation not later than 120 days prior to such meeting; provided, however, that in the event that less than 130 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the 10th day following the date on which such notice of the date of such meeting was mailed or such public disclosure was made. To be in proper written form, a stockholder's notice to the Secretary shall set forth: (A) the name and address of the stockholder who intends to make the nominations or propose the business and, as the case may be, of the person or persons to be nominated or the business to be proposed; 31 (B) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (C) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (D) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the Board of Directors; and (E) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. Section 8. QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum any meeting of stockholders may be adjourned, from time to time, by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the votes cast, excluding abstentions, at any meeting at which a quorum is present shall be valid and binding upon the corporation. Section 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes (excluding abstentions). When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 32 Section 10. VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary at or before the meeting at which it is to be used. An agent so appointed need not be a stockholder. No proxy shall be voted on after three years from its date of creation unless the proxy provides for a longer period. All elections of Directors shall be by written ballot, unless otherwise provided in the Certificate of Incorporation. Section 11. JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) if only one votes, his act binds all; (ii) if more than one votes, the act of the majority so voting binds all; (iii) if more than one votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of this subsection (iii) shall be a majority or even-split in interest. Section 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 13. ACTION WITHOUT MEETING. (a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at 33 a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. (b) Notwithstanding the foregoing, no such action by written consent may be taken following the effectiveness of the registration of any class of securities of the corporation under the Securities Exchange Act of 1934, as amended. Section 14. ORGANIZATION. At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, the most senior Vice President present, or in the absence of any such officer, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE IV Directors Section 15. NUMBER AND TERM OF OFFICE. The authorized number of directors shall be fixed in the manner set forth in the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the Directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. Section 16. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. Section 17. CLASSES OF DIRECTORS. Effective at the 1990 annual meeting, the Board of Directors shall be divided into three classes: Class I, Class II and Class III. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1991; each initial director in Class II shall hold office until the annual meeting of stockholders in 1992; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1993. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 18. VACANCIES. Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, 34 removal or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of the then-outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors voting together as a single class; or (ii) by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with this Section 18 shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. Section 19. RESIGNATION. Any Director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. Section 20. REMOVAL. Any Director, or the entire Board of Directors, may be removed from office, (a) with cause by the affirmative vote of the holders of a majority of the voting power of all of the then-outstanding shares of the Company's capital stock, voting together as a single class; or (b) without cause, by the affirmative vote of the holders of at least 66-2/3% of the voting power of the Company's capital stock. Section 21. MEETINGS. (a) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held immediately after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) REGULAR MEETINGS. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all directors. 35 (c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President, or any two of the directors. (d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (e) NOTICE OF MEETINGS. Written notice of the time and place of all regular and special meetings of the Board of Directors shall be given at least one day before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the Director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (f) WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 22. QUORUM AND VOTING. (a) QUORUM. Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, but not less than one, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time in accordance with Section 15 of these Bylaws, but not less than one; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) MAJORITY VOTE. At each meeting of the Board of Directors at which a quorum is present all questions and business shall be determined by a vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. 36 Section 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 24. FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. Section 25. COMMITTEES. (a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution passed by a majority of the whole Board of Directors, appoint an Executive Committee to consist of one or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and specifically granted by the Board of Directors, shall have and may exercise when the Board of Directors is not in session all powers of the Board of Directors in the management of the business and affairs of the corporation, including, without limitation, the power and authority to declare a dividend or to authorize the issuance of stock, except such committee shall not have the power or authority to amend the Certificate of Incorporation, to adopt an agreement of merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders of the corporation a dissolution of the corporation or a revocation of a dissolution, or to amend these Bylaws. (b) OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one or more members of the Board of Directors, and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (c) TERM. The members of all committees of the Board of Directors shall serve a one year term. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Section 25, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of 37 members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at the principal office of the corporation required to be maintained pursuant to Section 2 hereof, or at any place which has been designated from time to time by resolution of such committee or by written consent of all members thereof, and may be called by any Director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. Section 26. ORGANIZATION. At every meeting of the Directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE V Officers Section 27. OFFICERS DESIGNATED. The officers of the corporation shall be the Chairman of the Board of Directors, the President, one or more Vice Presidents, the Secretary and the Chief Financial Officer, all of whom shall be elected at the annual meeting of the Board of Directors. The order of the seniority of the Vice Presidents shall be in the order of their nomination, unless otherwise determined by the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, and such other officers 38 and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. Section 28. TENURE AND DUTIES OF OFFICERS. (a) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (c) DUTIES OF PRESIDENT. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the Corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (d) DUTIES OF VICE PRESIDENTS. The Vice Presidents, in the order of their seniority, may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors, and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders, and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties 39 and have such other powers as the Board of Directors or the President shall designate from time to time. (f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner, and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct any Assistant Treasurer to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Assistant Treasurer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. Section 29. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. Section 30. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Section 31. REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the vote or written consent of a majority of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE VI Execution of Corporate Instruments and Voting of Securities Owned by the Corporation Section 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. 40 Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or Chief Financial Officer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Section 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the President, or any Vice President. ARTICLE VII Shares of Stock Section 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Chief Financial Officer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Where such certificate is countersigned by a transfer agent other than the corporation or its employee, or by a registrar other than the corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the designations, preferences, limitations, restrictions on transfer and relative rights of the shares authorized to be issued. Section 35. LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen or 41 destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. Section 36. TRANSFERS. Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. Section 37. FIXING RECORD DATES. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. If no record date is fixed: (a) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (b) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and (c) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 42 ARTICLE VIII Other Securities of the Corporation Section 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates, may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Chief Financial Officer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE IX Dividends Section 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 41. DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. 43 ARTICLE X Fiscal Year Section 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. ARTICLE XI Indemnification of Officers, Directors, Employees and Agents Section 43. INDEMNIFICATION OF DIRECTORS. The corporation shall indemnify its directors to the fullest extent permitted by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of alleged occurrences of actions or omissions preceding any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment); PROVIDED, HOWEVER, that the corporation shall not be required to indemnify any director in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors or (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law. Section 44. INDEMNIFICATION OF OFFICERS AND OTHER EMPLOYEES AND AGENTS. The corporation shall have power to indemnify its officers, employees and other agents as set forth in the Delaware General Corporation Law. Section 45. GOOD FAITH. For purposes of any determination under this Article XI, a director shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe that his conduct was unlawful, if his action is based on the records or books of account of the corporation or another enterprise, or on information supplied to him by the officers of the corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the corporation or another enterprise or on information or records given or reports made to the corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the corporation or another enterprise. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, that he had reasonable cause to believe that his conduct was unlawful. 44 The provisions of this Section 44 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the Delaware General Corporation Law. Section 46. EXPENSES. The corporation may advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by any Director in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Article XI or otherwise. Section 47. ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances under this Article XI shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the Director who serves in such capacity at any time while this Article XI and other relevant provisions of the Delaware General Corporation Law and other applicable law, if any, are in effect. Any right to indemnification or advances granted by this Article XI to a Director shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within 90 days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any proceeding in advance of its final disposition when the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 48. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Article XI shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specially authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent permitted by the Delaware General Corporation Law. 45 Section 49. SURVIVAL OF RIGHTS. The rights conferred on any person by this Article XI shall continue as to a person who has ceased to be a Director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 50. INSURANCE. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Article XI. Section 51. AMENDMENTS. Any repeal or modification of this Article XI shall only be prospective and shall not affect the rights under this Article XI in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. Section 52. SAVINGS CLAUSE. If this Article XI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each agent to the full extent permitted by any applicable portion of this Article XI that shall not have been invalidated, or by any other applicable law. Section 53. CERTAIN DEFINITIONS. For the purposes of this Article XI, the following definitions shall apply: (a) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement and appeal of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (b) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (c) The term "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article XI with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (d) References to a "director," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the 46 request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (e) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article XI. ARTICLE XII Notices Section 54. NOTICES. (a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (b) NOTICE TO DIRECTORS. Any notice required to be given to any Director may be given by the method stated in subsection (a), or by telegram or facsimile, except that such notice other than one which is delivered personally shall be sent to such address as such Director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such Director. (c) ADDRESS UNKNOWN. If no address of a stockholder or Director be known, notice may be sent to the office of the corporation required to be maintained pursuant to Section 2 hereof. (d) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or Director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. (e) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by telegram shall be deemed to have been given as at the sending time recorded by the telegraph company transmitting the notices. 47 (f) METHODS OF NOTICE. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (g) FAILURE TO RECEIVE NOTICE. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any Director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such Director to receive such notice. (h) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. ARTICLE XIII Amendments Section 55. AMENDMENTS. Except as otherwise set forth in Section 51, these Bylaws may be repealed, altered or amended or new Bylaws adopted by the stockholders. The Board of Directors shall also have the authority, if such authority is conferred upon the Board of Directors by the Certificate of Incorporation, to repeal, alter or amend these Bylaws or adopt new Bylaws. 48 EX-10.1 3 EXHIBIT 10.1 EXHIBIT 10.1 49 VERIFONE, INC. AMENDED AND RESTATED INCENTIVE STOCK OPTION PLAN Adopted by Board of Directors in November, 1985 Approved by the Stockholders in November, 1985 Amended by Board of Directors in May, 1987 Approved by the Stockholders on April 18, 1988 Amended by Board of Directors on April 30, 1990 Approved by the Stockholders on June 22, 1990 Amended by Board of Directors on February 13, 1992 Approved by the Stockholders on April 23, 1992 Amended by Board of Directors on March 15, 1995 Approved by the Stockholders on May 5, 1995 Amended by Board of Directors on January 18, 1996 Approved by the Stockholders on May 10, 1996 I. PURPOSE. A. The purpose of the Plan is to provide a means by which selected key employees of VeriFone, Inc. (the "Company") and its Affiliates, as defined in subparagraph l(b), may be given an opportunity to purchase stock of the Company. B. The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company, as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). C. The Company, by means of the Plan, seeks to retain the services of persons now holding key positions, to secure and retain the services of persons capable of filling such positions, and to provide incentives for such persons to exert maximum efforts for the success of the Company. 50 D. The Company intends that the options issued under the Plan be incentive stock options as that term is used in Section 422 of the Code. II. ADMINISTRATION. A. The Plan shall be administered by the Board of Directors (the "Board") of the Company unless and until the Board delegates administration to a committee, as provided in subparagraph 2(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. B. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: 1. To determine from time to time which of the persons eligible under the Plan shall be granted options; when and how the option shall be granted; the provisions of each option granted (which need not be identical), including the time or times during the term of each option within which all or portions of such option may be exercised; and the number of shares for which an option shall be granted to each such person. 2. To construe and interpret the Plan and options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any option agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. 3. To amend the Plan as provided in paragraph 10. 51 4. Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company. C. The Board may delegate administration of the Plan to a committee composed of not fewer than three (3) members (the "Committee"), all of the members of which Committee shall be disinterested persons, if required and as defined by the provisions of subparagraph 2(d), or may also be, in the discretion of the Board, outside directors as defined in Section 162(m) of the Code. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board and references to the Board herein shall be construed as references to the Committee. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Notwithstanding anything in this paragraph 2 to the contrary, the Board may delegate to a committee of one or more members of the Board the authority to grant options to eligible persons who (i) are not then subject to Section 16 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and (ii) are either (A) not persons expected to be subject to Section 162(m) of the code ("Section 162(m)") at the time of recognition of income from such Option or (B) not persons with respect to whom the Company desires to comply with Section 162(m). D. The term "disinterested person," as used in the Plan, shall mean an administrator of the Plan, whether a member of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subparagraph 2(c), who was not at any time within one (l) year prior to service as administrator to the Plan granted or awarded equity 52 securities pursuant to the Plan or any other plan of the Company or any of its affiliates except as permitted by Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or who is otherwise considered to be a "disinterested person" under said Rule 16b-3. E. Any requirement that an administrator of the Plan be a "disinterested person" shall not apply if the Board expressly declares it shall not apply. III. SHARES SUBJECT TO THE PLAN. A. Subject to the provisions of paragraph 9 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under either the Plan or the Company's 1987 Supplemental Stock Option Plan shall not exceed in the aggregate Seven Million Seventy-Five Thousand (7,075,000) shares of the Company's common stock. The aggregate number of shares as to which options may be granted under the Plan shall be reduced to reflect the number of shares of the Company's common stock which has been sold under, or may be sold pursuant to outstanding options granted under the Company's 1987 Amended and Restated Supplemental Stock Option Plan to the same extent as if such sales had been made or options had been granted pursuant to this Plan. If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for the Plan. B. The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. C. An option may be granted to an eligible person under the Plan only if the aggregate fair market value (determined at the time the option is granted) of the stock with 53 respect to which incentive stock options are exercisable for the first time by such optionee during any calendar year under all incentive stock option plans of the Company and its Affiliates does not exceed one hundred thousand dollars ($100,000). Should it be determined that an option granted under the Plan exceeds such maximum for any reason other than the failure of a good faith attempt to value the stock subject to the option, such option shall be considered a nonstatutory stock option to the extent, but only to the extent, of such excess; provided, however, that should it be determined that an entire option or any portion thereof does not qualify for treatment as an incentive stock option by reason of exceeding such maximum, such option or the applicable portion shall be considered a nonstatutory stock option. (D) Subject to the provisions of paragraph 9 relating to adjustments upon changes in stock, no employee shall be eligible, during any twelve (12) month period, to be granted options under the Plan to purchase in excess of 750,000 shares of common stock of the Company. The total number of shares as to which options may be granted to an employee under this paragraph 3(d) shall be reduced to reflect the total number of shares as to which options have been granted, during the same twelve (12) month period, under the Company's 1987 Amended and Restated Supplemental Stock Option Plan. IV. ELIGIBILITY. A. Options may be granted only to key employees (including officers) of the Company or its Affiliates. A director of the Company shall not be eligible for the benefits of the Plan unless such director is also a key employee (including an officer) of the Company or any Affiliate. 54 B. A director shall in no event be eligible for the benefits of the Plan unless and until such director is expressly declared eligible to participate in the Plan by action of the Board, and only if, at any time discretion is exercised by the Board in the selection of a director as a person to whom options may be granted, or in the determination of the number or maximum number of shares which may be covered by options granted to a director, the Board has delegated its discretionary authority over the Plan to a committee of disinterested directors (as defined in subparagraph 2(c)) or the Plan otherwise complies with Rule 16b-3. The Board shall otherwise comply with the requirements of Rule 16b-3 promulgated under the Exchange Act, as from time to time in effect. C. No person shall be eligible for the grant of an option under the Plan if, at the time of grant, such person owns (or is deemed to own pursuant to the attribution rules of Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the option price is at least one hundred ten percent (110%) of the fair market value of such stock at the date of grant and the term of the option does not exceed five (5) years from the date of grant. V. OPTION PROVISIONS. Each option shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The provisions of separate options need not be identical, but each option shall include (through incorporation of provisions hereof by reference in the option or otherwise) the substance of each of the following provisions: A. The term of any option shall not be greater than ten (10) years from the date it was granted. 55 B. The exercise price of each option shall be not less than one hundred percent (100%) of the fair market value of the stock subject to the option on the date the option is granted. C. The purchase price of stock acquired pursuant to an option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the option is exercised, or (ii) at the discretion of the Board or the Committee, either at the time of grant or exercise of the option (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the option is granted or to whom the option is transferred pursuant to subparagraph 5(d), or (C) in any other form of legal consideration that may be acceptable to the Board or Committee in their discretion. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. D. An option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the option is granted only by such person. E. The total number of shares of stock subject to an option may, but need not, be allotted in periodic installments (which may, but need not, be equal). From time to time during each of such installment periods, the option may be exercised with respect to some or all of the 56 shares allotted to that period, and/or with respect to some or all of the shares allotted to any prior period as to which the option was not fully exercised. During the remainder of the term of the option (if its term extends beyond the end of the installment periods), the option may be exercised from time to time with respect to any shares then remaining subject to the option. The option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subparagraph 5(e) are subject to any option provisions governing the minimum number of shares as to which an option may be exercised. F. The Company may require any optionee, or any person to whom an option is transferred under subparagraph 5(d), as a condition of exercising any such option: (l) to give written assurances satisfactory to the Company as to the optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then currently effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii), as to any particular requirement, a 57 determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. G. An option shall terminate three (3) months after termination of the optionee's employment with the Company or an Affiliate, unless (i) the termination of employment of the optionee is due to such person's permanent and total disability, within the meaning of Section 422(c)(7) of the Code, in which case the option may, but need not, provide that it may be exercised at any time within one (l) year following such termination of employment; or (ii) the optionee dies while in the employ of the Company or an Affiliate, or within not more than three (3) months after termination of such employment, in which case the option may, but need not, provide that it may be exercised at any time within eighteen (18) months following the death of the optionee by the person or persons to whom the optionee's rights under such option pass by will or by the laws of descent and distribution; or (iii) the option by its terms specifies either (a) that it shall terminate sooner than three (3) months after termination of the optionee's employment, or (b) that it may be exercised more than three (3) months after termination of the optionee's employment with the Company or an Affiliate. This subparagraph 5(g) shall not be construed to extend the term of any option or to permit anyone to exercise the option after expiration of its term, nor shall it be construed to increase the number of shares as to which any option is exercisable from the amount exercisable on the date of termination of the optionee's employment. H. The option may, but need not, include a provision whereby the optionee may elect at any time during the term of his or her employment with the Company or any Affiliate to exercise the option as to any part or all of the shares subject to the option prior to the stated 58 vesting date of the option or of any installment or installments specified in the option. Any shares so purchased from any unvested installment or option may be subject to a repurchase right in favor of the Company or to any other restriction the Board or the Committee determines to be appropriate. (I). To the extent provided in the terms of an Option Agreement, an optionee may satisfy any federal, state, or local tax withholding obligation relating to the exercise of such option by any of the following means or by a combination of such means: (i) tendering a cash payment, (ii) authorizing the Company to withhold from the shares of common stock otherwise issuable to the optionee as a result of the exercise of the option or (iii) delivering to the Company owned and unencumbered shares of the common stock of the Company. VI. COVENANTS OF THE COMPANY. A. During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such options. B. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the options granted under the Plan; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any option granted under the Plan or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any 59 liability for failure to issue and sell stock upon exercise of such options unless and until such authority is obtained. VII. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to options granted under the Plan shall constitute general funds of the Company. VIII. MISCELLANEOUS. A. The Board or the Committee shall have the power to accelerate the time during which an option may be exercised, or the time during which an option or any portion thereof will vest pursuant to subparagraph 5(e), notwithstanding the provisions in the option stating the time during which it may be exercised or the time during which it will vest. B. Neither an optionee nor any person to whom an option is transferred under subparagraph 5(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. C. Throughout the term of any option granted pursuant to the Plan, the Company shall make available to the holder of such option, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the option term, upon request, such financial and other information regarding the Company as comprises the annual report to the shareholders of the Company provided for in the bylaws of the Company. D. Nothing in the Plan or any instrument executed or option granted pursuant thereto shall confer upon any eligible employee or optionee any right to continue in the employ 60 of the Company or any Affiliate or shall affect the right of the Company or any Affiliate to terminate the employment of any eligible employee or optionee with or without cause. IX. ADJUSTMENTS UPON CHANGES IN STOCK. A. If any change is made in the stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding options will be appropriately adjusted in the type of security and maximum number of shares subject to the Plan, the maximum number of shares subject to option that can be granted to any single person under subparagraph 3(d) and the type of security and number of shares and price per share of stock subject to outstanding options. B. In the event of: (l) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then, at the sole discretion of the Board and to the extent permitted by applicable law: (i) any surviving corporation shall assume any options outstanding under the Plan or shall substitute similar options for those outstanding under the Plan, or (ii) the time during which such options may be exercised shall be accelerated and the options terminated if not exercised prior to such event, or (iii) such options shall continue in full force and effect. 61 X. AMENDMENT OF THE PLAN. A. The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 9 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the vote of a majority of the outstanding shares of the Company entitled to vote, or by the written consent of the holders of the outstanding shares of the Company entitled to vote to the extent necessary under applicable laws to obtain incentive stock option treatment under Section 422 of the Code, within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares reserved for options under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or Rule 16b-3 ; or (iii) Otherwise modify the Plan to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or Rule 16b-3. The Board may, in its discretion, submit any other amendment to the Plan for stockholder approval. (B) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide optionees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to employee incentive stock options and/or to bring the Plan and/or options granted under it into compliance therewith. 62 (C) Rights and obligations under any option granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing. XI. TERMINATION OR SUSPENSION OF THE PLAN. (A) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on December 31, 2005. No options may be granted under the Plan while the Plan is suspended or after it is terminated. (B) Rights and obligations under any option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted. XII. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no options granted under the Plan shall be exercised unless and until the Plan has been approved by the vote of the holders of a majority of the outstanding shares of the Company entitled to vote, or by the written consent of the holders of the outstanding shares of the Company entitled to vote to the extent necessary under applicable laws to obtain incentive stock option treatment under Section 422 of the Code. 63 EX-10.2 4 EXHIBIT 10.2 EXHIBIT 10.2 64 VERIFONE, INC AMENDED AND RESTATED 1987 SUPPLEMENTAL STOCK OPTION PLAN ----------------------------------- Adopted by Board of Directors in May, 1987 Approved by the Stockholders on April 18, 1988 Amended by Board of Directors on April 30, 1990 Approved by the Stockholders on June 22, 1990 Amended by Board of Directors on February 13, 1992 Approved by the Stockholders on April 23, 1992 Amended by Board of Directors on March 15, 1995 Approved by the Stockholders on May 5, 1995 Amended by Board of Directors on January 18, 1996 Approved by the Stockholders on May 10, 1996 I. PURPOSE A. The purpose of the Plan is to provide a means by which selected employees, directors and consultants of VeriFone, Inc. (the "Company") and its Affiliates, as defined in subparagraph 1(b), may be given an opportunity to purchase stock of the Company. B. The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the company as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue code of 1986, as amended from time to time (the "Code"). C. The Company, by means of the Plan, seeks to retain the services of persons now employed by or serving as consultants or directors to the Company, to secure and retain the services of new employees/persons capable of filling such positions, and to provide incentives for such persons to exert maximum efforts for the success of the Company. 65 D. The Company intends that the options issued under the Plan not be incentive stock options as that term is used in Section 422 of the Code. II. ADMINISTRATION A. The Plan shall be administered by the Board of Directors (the "Board") of the Company unless and until the Board delegates administration to a committee, as provided in subparagraph 2(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. B. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: 1. To determine from time to time which of the persons eligible under the Plan shall be granted options; when and how the option shall be granted; the provisions of each option granted (which need not be identical), including the time or times during the term of each option within which all or portions of such option may be exercised; and the number of shares for which an option shall be granted to each such person. 2. To construe and interpret the Plan and options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any option agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. 3. To amend the Plan as provided in paragraph 10. 66 4. Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company. C. The Board may delegate administration of the Plan to a committee composed of not fewer than three (3) members (the "Committee"), all of the members of which Committee shall be disinterested persons, if required and as defined by the provisions of subparagraph 2(d), or may also be, in the discretion of the Board, outside directors as defined in Section 162(m) of the Code. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board and references to the Board herein shall be construed as references to the Committee. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Notwithstanding anything in this paragraph 2 to the contrary, the Board may delegate to a committee of one or more members of the Board the authority to grant options to eligible persons who (i) are not then subject to Section 16 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and (ii) are either (A) not persons expected to be subject to Section 162(m) of the code ("Section 162(m)") at the time of recognition of income from such Option or (B) not persons with respect to whom the Company desires to comply with Section 162(m). D. The term "disinterested person," as used in the Plan, shall mean an administrator of the Plan, whether a member of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subparagraph 2(c), who was not at any time within one (l) year prior to service as administrator to the Plan granted or awarded equity 67 securities pursuant to the Plan or any other plan of the Company or any of its affiliates except as permitted by Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or who is otherwise considered to be a "disinterested person" under said Rule 16b-3. E. Any requirement that an administrator of the Plan be a "disinterested person" shall not apply if the Board expressly declares it shall not apply. III. SHARES SUBJECT TO THE PLAN A. Subject to the provisions of paragraph 9 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under either the Plan or the Company's Amended and Restated Incentive Stock Option Plan shall not exceed in the aggregate Seven Million Seventy-Five Thousand (7,075,000) shares of the Company's common stock. The aggregate number of shares as to which options may be granted under the Plan shall be reduced to reflect the number of shares of the Company's common stock which has been sold under, or may be sold pursuant to outstanding options granted under the Company's Amended and Restated Incentive Stock Option Plan to the same extent as if such sales had been made or option had been granted pursuant to this Plan. If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for the Plan. B. The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. C. Subject to the provisions of paragraph 9 relating to adjustments upon changes in stock, no employee shall be eligible, during any twelve (12) month period, to be granted options 68 under the Plan to purchase in excess of 750,000 shares of common stock of the Company. The total number of shares as to which options may be granted to an employee under this paragraph 3(c) shall be reduced to reflect the total number of shares as to which options have been granted, during the same twelve (12) month period, under the Company's Amended and Restated Incentive Stock Option Plan. IV. ELIGIBILITY A. Options may be granted only to employees (including officers) of, directors of or consultants to the Company or its Affiliates. B. A director shall in no event be eligible for the benefits of the Plan unless and until such director is expressly declared eligible to participate in the Plan by action of the Board, and only if, at any time discretion is exercised by the Board in the selection of a director as a person to whom options may be granted, or in the determination of the number or maximum number of shares which may be covered by options granted to a director, the Board has delegated its discretionary authority over the Plan to a committee of disinterested directors (as defined in subparagraph 2(c)) or the Plan otherwise complies with Rule 16b-3. The Board shall otherwise comply with the requirements of Rule 16b-3 promulgated under the Exchange Act, as from time to time in effect. C. No person shall be eligible for the grant of an option under the Plan if, at the time of grant, such person owns (or is deemed to own pursuant to the attribution rules of Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the option price is 69 at least one hundred ten percent (110%) of the fair market value of such stock at the date of grant and the term of the option does not exceed five (5) years from the date of grant. V. OPTION PROVISIONS Each option shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The provisions of separate options need not be identical, but each option shall include (through incorporation of provisions hereof by reference in the option or otherwise) the substance of each of the following provisions: A. The term of any option shall not be greater than ten (10) years from the date it was granted. B. The exercise price of each option shall be not less than eighty-five percent (85%) of the fair market value of the stock subject to the option on the date the option is granted. C. The purchase price of stock acquired pursuant to an option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the option is exercised, or (ii) at the discretion of the Board or the Committee, either at the time of grant or exercise of the option (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the option is granted or to whom the option is transferred pursuant to subparagraph 5(d), or (C) in any other form of legal consideration that may be acceptable to the Board or the Committee in their discretion. In the case of any deferred payment arrangement, any interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as 70 interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. D. An option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the option is granted only by such person. E. The total number of shares of stock subject to an option may, but need not, be allotted in periodic installments (which may, but need not, be equal). From time to time during each of such installment periods, the option may be exercised with respect to some or all of the shares allotted to that period, and/or with respect to some or all of the shares allotted to any prior period as to which the option was not fully exercised. During the remainder of the term of the option (if its term extends beyond the end of the installment periods), the option may be exercised from time to time with respect to any shares then remaining subject to the option. The option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subparagraph 5(e) are subject to any option provisions governing the minimum number of shares as to which an option may be exercised. F. The Company may require any optionee, or any person to whom an option is transferred under subparagraph 5(d), as a condition of exercising any such option: (l) to give written assurances satisfactory to the Company as to the optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters that he or she is capable of evaluating, alone or together with the purchaser 71 representative, the merits and risks of exercising the option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then currently effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii), as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. G. An option shall terminate three (3) months after termination of the optionee's employment with the Company or an Affiliate, unless (i) the termination of employment of the optionee is due to such person's permanent and total disability, within the meaning of Section 422(c)(7) of the Code, in which case the option may, but need not, provide that it may be exercised at any time within one (l) year following such termination of employment; or (ii) the optionee dies while in the employ of the Company or an Affiliate, or within not more than three (3) months after termination of such employment, in which case the option may, but need not, provide that it may be exercised at any time within eighteen (18) months following the death of the optionee by the person or persons to whom the optionee's rights under such option pass by will or by the laws of descent and distribution; or (iii) the option by its terms specifies either (a) that it shall terminate sooner than three (3) months after termination of the optionee's employment, or (b) that it may be exercised more than three (3) months after termination of the optionee's employment with the Company or an Affiliate. This subparagraph 5(g) shall not be 72 construed to extend the term of any option or to permit anyone to exercise the option after expiration of its term, nor shall it be construed to increase the number of shares as to which any option is exercisable from the amount exercisable on the date of termination of the optionee's employment. H. The option may, but need not, include a provision whereby the optionee may elect at any time during the term of his or her employment with the Company or any Affiliate to exercise the option as to any part or all of the shares subject to the option prior to the stated vesting date of the option or of any installment or installments specified in the option. Any shares so purchased from any unvested installment or option may be subject to a repurchase right in favor of the Company or to any other restriction the Board or the Committee determines to be appropriate. I. To the extent provided in the terms of an Option Agreement, an optionee may satisfy any federal, state, or local tax withholding obligation relating to the exercise of such option by any of the following means or by a combination of such means: (i) tendering a cash payment, (ii) authorizing the Company to withhold from the shares of common stock otherwise issuable to the optionee as a result of the exercise of the option or (iii) delivering to the Company owned and unencumbered shares of the common stock of the Company. VI. COVENANTS OF THE COMPANY A. During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such options. B. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of 73 stock upon exercise of the options granted under the Plan; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any option granted under the Plan or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such options unless and until such authority is obtained. VII. USE OF PROCEEDS FROM STOCK Proceeds from the sale of stock pursuant to options granted under the Plan shall constitute general funds of the Company. VIII. MISCELLANEOUS A. The Board or the Committee shall have the power to accelerate the time during which an option may be exercised or the time during which an option or any portion thereof will vest pursuant to subparagraph 5(e), notwithstanding the provisions in the option stating the time during which it may be exercised or the time during which it will vest. B. Neither an optionee nor any person to whom an option is transferred under subparagraph 5(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. C. Throughout the term of any option granted pursuant to the Plan, the Company shall make available to the holder of such option, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the option term, upon request, such 74 financial and other information regarding the Company as comprises the annual report to the shareholders of the Company provided for in the bylaws of the Company. D. Nothing in the Plan or any instrument executed or option granted pursuant thereto shall confer upon any eligible person or optionee any right to continue in the employ of the Company or any Affiliate or shall affect the right of the Company or any Affiliate to terminate the employment of any eligible person or optionee with or without cause. IX. ADJUSTMENTS UPON CHANGES IN STOCK A. If any change is made in the stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding options will be appropriately adjusted in the type of security and maximum number of shares subject to the Plan the maximum number of shares subject to option that may be granted to any single person under subparagraph 3(c) and the type of security and number of shares and price per share of stock subject to outstanding options. B. In the event of: (l) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then, at the sole discretion of the Board and to the extent permitted by applicable 75 law: (i) any surviving corporation shall assume any options outstanding under the Plan or shall substitute similar options for those outstanding under the Plan, or (ii) the time during which such options may be exercised shall be accelerated and the option terminated if not exercised prior to such event, or (iii) such options shall continue in full force and effect. X. AMENDMENT OF THE PLAN A. The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 9 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the vote of a majority of the outstanding shares of the Company entitled to vote, or by the written consent of the holders of the outstanding shares of the Company entitled to vote to the extent necessary under applicable laws to obtain incentive stock option treatment under Section 422 of the Code, within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares reserved for options under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or Rule 16b-3 ; or (iii) Otherwise modify the Plan to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or Rule 16b-3. B The Board may, in its discretion, submit any other amendment to the Plan for stockholder approval. 76 C. Rights and obligations under any option granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan, except with the consent of the person to whom the option was granted. 11. TERMINATION OR SUSPENSION OF THE PLAN A. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on December 31, 2005. No options may be granted under the Plan while the Plan is suspended or after it is terminated. B. Rights and obligations under any option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted. 12. EFFECTIVE DATE OF PLAN The Plan shall become effective as determined by the Board, but no options granted under the Plan shall be exercised unless and until the Plan has been approved by the vote or written consent of the holders of a majority of the outstanding shares of the Company entitled to vote. 77 EX-10.3 5 EXHIBIT 10.3 EXHIBIT 10.3 78 VERIFONE, INC. AMENDED AND RESTATED 1992 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Adopted by the Board of Directors on November 16, 1992 Approved by the Stockholders on April 22, 1993 Amended by the Board of Directors on October 19, 1995 Approved by the Stockholders on May 10, 1996 1. PURPOSE. (a) The purpose of the 1992 Non-Employee Directors' Stock Option Plan (the "Plan") is to provide a means by which each director of VeriFone, Inc., a Delaware corporation (the "Company"), who is not otherwise an employee of the Company or of any Affiliate of the Company (each such person being hereafter referred to as a "Non-Employee Director") will be given an opportunity to purchase stock of the Company. (b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). (c) The Company, by means of the Plan, seeks to retain the services of persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company. (d) The Company intends that the options issued under the Plan not be incentive stock options as that term is used in Section 422 of the Code. 79 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors of the Company (the "Board") unless and until the Board delegates administration to a committee, as provided in subparagraph 2(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To construe and interpret the Plan and options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any option agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (2) To amend the Plan as provided in paragraph 11. (3) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than three (3) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 80 3. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under the Plan shall not exceed in the aggregate four hundred ninety thousand (490,000) shares of the Company's Common Stock. If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall revert to and again become available for issuance pursuant to exercises of options granted under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. ELIGIBILITY. Options shall be granted only to Non-Employee Directors of the Company. 5. NON-DISCRETIONARY GRANTS. (a) Each person who is, on the date of approval of the Plan by the Board (the "Adoption Date"), a Non-Employee Director of the Company shall, upon the Adoption Date and upon each third anniversary date thereafter (each, a "Grant Date"), be granted an option to purchase twenty thousand (20,000) shares of Common Stock of the Company pursuant to the terms and conditions set forth herein. (b) Each person who is, after the Adoption Date, elected for the first time to be a Non-Employee Director of the Company shall, upon the date of his or her initial election to be a Non-Employee Director by the Board or stockholders of the Company and upon each third anniversary of such date thereafter (each, a "Grant Date"), be granted an option to purchase 81 twenty thousand (20,000) shares of Common Stock of the Company on the terms and conditions set forth herein. (c) Each person who, having previously been a Director who is not a Non-Employee Director, becomes a Non-Employee Director of the Company shall, upon the date he or she becomes a Non-Employee Director and upon each third anniversary of such date thereafter (a "Grant Date"), be granted an option to purchase twenty thousand (20,000) shares of Common Stock of the Company on the terms and conditions set forth herein. 6. OPTION PROVISIONS. Each option shall contain the following terms and conditions: (a) No option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) The exercise price of each option shall be one hundred percent (100%) of the fair market value on the Grant Date of the stock subject to such option. (c) The purchase price of stock acquired pursuant to an option shall be paid, to the extent permitted by applicable statutes and regulations, either (1) in cash at the time the option is exercised, or (2) by delivery to the Company of shares of the Company's Common Stock that have been held for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at the fair market value on the date of exercise, or (3) by a combination of such methods of payment. (d) An option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the option is granted only by such person or by his or her guardian or legal representative. 82 (e) An option shall vest with respect to each optionee in thirty-six (36) equal monthly installments commencing on the date one month after the Grant Date of the option, provided that the optionee has, during the entire period prior to such vesting date, continuously served as a Non-Employee Director or as an employee of or consultant to the Company or any Affiliate of the Company, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment. (f) The Company may require any optionee, or any person to whom an option is transferred under subparagraph 6(d), as a condition of exercising any such option: (1) to give written assurances satisfactory to the Company as to the optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then-currently-effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii), as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then-applicable securities laws. 83 (g) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. 7. COVENANTS OF THE COMPANY. (a) During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such options. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the options granted under the Plan; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any option granted under the Plan, or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such options. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to options granted under the Plan shall constitute general funds of the Company. 84 9. MISCELLANEOUS. (a) Neither an optionee nor any person to whom an option is transferred under subparagraph 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. (b) Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Company or any Affiliate or shall affect any right of the Company, its Board or stockholders or any Affiliate to terminate the service of any Non-Employee Director with or without cause. (c) No Non-Employee Director, individually or as a member of a group, and no beneficiary or other person claiming under or through him, shall have any right, title or interest in or to any option reserved for the purposes of the Plan except as to such shares of Common Stock, if any, as shall have been reserved for him pursuant to an option granted to him. (d) In connection with each option made pursuant to the Plan, it shall be a condition precedent to the Company's obligation to issue or transfer shares to a Non-Employee Director, or an affiliate of such Non-Employee Director, or to evidence the removal of any restrictions on transfer, that such Non-Employee Director make arrangements satisfactory to the Company to insure that the amount of any federal or other withholding tax required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax. 85 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding options will be appropriately adjusted in the type of security and maximum number of shares subject to the Plan and the type of security and number of shares and price per share of stock subject to outstanding options. (b) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then, (i) the time during which such options may be exercised shall be accelerated to immediately prior to such event and (ii) either (A) any surviving corporation shall assume any options outstanding under the Plan or shall substitute similar options for those outstanding under the Plan, or (B) the options shall be terminated if not exercised prior to such event. 11. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan, provided, however, that the Board shall not amend the plan more than once every six months, with respect 86 to the provisions of the plan which relate to the amount, price and timing of grants, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. Except as provided in paragraph 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (1) Increase the number of shares reserved for options under the Plan; (2) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act); or (3) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act. (b) Rights and obligations under any option granted before any amendment of the Plan shall not be altered or impaired by such amendment of the Plan unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on November 15, 2002. No options may be granted under the Plan while the Plan is suspended or after it is terminated. 87 (b) Rights and obligations under any option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted. 13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE. (a) The Plan shall become effective upon adoption by the Board of Directors, but no options granted under the Plan or any amendment thereto shall be exercised or exercisable until the Plan or such amendment is approved by the stockholders of the Company in accordance with applicable law. 88 EX-10.4 6 EXHIBIT 10.4 EXHIBIT 10.4 89 VERIFONE, INC. 1996 RESTRICTED PHANTOM STOCK PLAN 1. PURPOSE. To attract and maintain key employees who are and will be providing services to the Company, the Company desires to establish a compensatory plan for grants of restricted phantom stock in which participants will have the opportunity to receive cash incentive compensation based on the value of the Company's common stock. 2. DEFINITIONS. The following words and phrases as used herein shall have the following meanings, unless a different meaning is plainly required by the context: (A) "CHANGE IN CONTROL" means: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged. (B) "COMPANY" means VeriFone, Inc. (C) "COMPENSATION COMMITTEE" means the Compensation Committee of the Board of Directors of the Company. (D) "COMMON STOCK" means the Company's shares of common stock. (E) "EMPLOYEE" means any person employed by the Company and its subsidiaries. (F) "PARTICIPANT" means an Employee who has received a Restricted Phantom Grant. (G) "PLAN" means this 1996 Restricted Phantom Stock Plan. (H) "REDEMPTION VALUE PER SHARE" means the closing sales price for a share of common stock (or the mean between the closing bid and asked prices, if no sales were reported) on the New York Stock Exchange on the last trading day prior to the applicable redemption date, as reported in THE WALL STREET JOURNAL or such other source as the Company deems reliable or, if greater, the average of such mean prices over the 90 calendar days preceding the applicable redemption date. 90 (I) "RESTRICTED PHANTOM STOCK AGREEMENT" means an agreement evidencing the terms of a Restricted Phantom Stock Grant under the Plan. (J) "RESTRICTED PHANTOM STOCK GRANT" means a grant of Shares of Restricted Phantom Stock under the Plan. (K) "SHARE OF RESTRICTED PHANTOM STOCK" means a single unit of value based on the value of a share of Common Stock, which is equal in value to the Redemption Value Per Share and which cannot be redeemed prior to completion of vesting and redemption conditions set forth in a Restricted Phantom Stock Agreement. 3. ADMINISTRATION. The Plan shall be administered by the Compensation Committee. Subject to the provisions of the Plan, the Compensation Committee shall have exclusive power to select the Employees to receive Restricted Phantom Stock Grants, to determine the number of Shares of Restricted Phantom Stock subject to each Restricted Phantom Stock Grant, the time or times of Restricted Phantom Stock Grants, and the vesting and redemption conditions of Restricted Phantom Stock Grants. In addition, the Compensation Committee shall have authority to interpret the Plan, establish and revise rules and regulations relating to the Plan and make any other determination in connection with the administration of the Plan. All decisions and determinations by the Compensation Committee and any action taken by it in respect of the Plan and within the powers granted to it herein shall be conclusive and binding on all persons', including Participants', interests. 4. ELIGIBILITY AND AWARD OF RESTRICTED PHANTOM STOCK GRANTS. All Employees shall be eligible for Restricted Phantom Stock Grants. Restricted Phantom Stock Grants shall be credited to a bookkeeping account to be maintained for the Employee receiving the grant. An Employee may receive more than one Restricted Phantom Stock Grant under the Plan. 5. VESTING OF RESTRICTED PHANTOM STOCK GRANTS. The Compensation Committee shall determine the manner in which Shares of Restricted Phantom Stock subject to each Restricted Phantom Stock Grant shall become vested (i.e., become redeemable). The vesting provisions of individual Restricted Phantom Stock Grants may vary. The Compensation Committee may determine to accelerate the vesting date(s) for an outstanding Restricted Phantom Stock Grant. 6. REDEMPTION OF RESTRICTED PHANTOM STOCK GRANTS. Awards under the Plan shall be in the form of Restricted Phantom Stock Grants, which will entitle the holder to receive a cash payment from the Company upon redemption in an 91 amount equal to the Redemption Value Per Share on the redemption date established under the Participant's Restricted Phantom Stock Agreement, multiplied by the number of Shares of Restricted Phantom Stock redeemed, less applicable withholding taxes and authorized payroll deductions. Notwithstanding the foregoing, a Restricted Phantom Stock Grant may provide, with approval of the Compensation Committee, that payments in redemption of Shares of Restricted Phantom Stock may be made in the form of Common Stock, provided that: (i) such provision does not impair the ability of other Restricted Phantom Stock Grants under the Plan to qualify for the exemption from the definition of "derivative security" set forth in Rule 16(a)-1(c)(3)(ii) under the Securities Exchange Act of 1934 ("Rule 16(a)-1(c)(3)(ii)"); and (ii) the Compensation Committee determines that it is not desirable for the Restricted Phantom Stock Grant with this provision to qualify for the exemption of Rule 16(a)-1(c)(3)(ii). The Company will treat any cash payments due upon redemption of Shares of Restricted Phantom Stock in the same manner as other cash compensation for services rendered by the Participant to the Company for purposes of applicable law, including applicable tax and labor laws. Payments due upon redemption of Shares of Restricted Phantom Stock will be paid to the Participant by the Company as soon as administratively reasonably practicable following the redemption date. 7. NONASSIGNABILITY OF RESTRICTED PHANTOM STOCK GRANTS. No Restricted Phantom Stock Grant under the Plan shall be assignable or transferable in any manner by a Participant. During the lifetime of a Participant, Restricted Phantom Stock Grants held by such Participant shall be redeemed only by such Participant or his or her guardian or legal representative. To the extent provided in a Restricted Phantom Stock Agreement, a Participant may designate a beneficiary who may redeem the Participant's Restricted Phantom Stock Grants following the Participant's death. 8. ADJUSTMENTS UPON CHANGES IN STOCK. (A) If any change is made in the capital structure of the Company in a transaction not involving the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and the Shares of Restricted Phantom Stock subject to outstanding Restricted Phantom Stock Grants will be appropriately adjusted in class, number and value. The issuance of equity securities of the Company in order to raise additional financial capital shall not be treated as a change which shall trigger the adjustments provided for under this subsection 8(A). (B) In the event of a Change in Control, (i) any surviving corporation shall assume any Restricted Phantom Stock Grants outstanding under the Plan or shall substitute similar rights for those outstanding under the Plan, or (ii) such Restricted Phantom Stock Grants shall continue in full force and effect. In the event any surviving corporation refuses to assume such Restricted Phantom Stock Grants, or to substitute similar rights for those outstanding under the 92 Plan, then such Restricted Phantom Stock Grants shall become immediately redeemable prior to such event and shall be terminated if not redeemed at or prior to the occurrence of such event. 9. MISCELLANEOUS PROVISIONS. (A) No Employee or other person shall have any claim or right to Restricted Phantom Stock Grants under the Plan. The Plan shall not confer upon any Employee or Participant any right with respect to continuation of employment by the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment at any time. (B) The Compensation Committee may cancel Restricted Phantom Stock Grants with the written consent of the Participant who holds such Restricted Phantom Stock Grants, and, upon any such cancellation, all rights of Participant in respect of such canceled Restricted Phantom Stock Grants shall terminate and such canceled Restricted Phantom Stock Grants shall be available for further grant under the Plan. In addition, the Compensation Committee may modify, amend or terminate the Plan at any time, and amend the terms of one or more Restricted Phantom Stock Grants at any time, except that no such action shall impair any rights or obligations theretofore granted under the Plan without the holder's written consent. (C) The Plan shall not be funded, the Company shall not be required to segregate any funds representing the value of Restricted Phantom Stock Grants, and nothing in the Plan shall be construed as providing for such segregation. A Participant's rights to amounts received upon the redemption of Restricted Phantom Stock Grants under the Plan shall be those of an unsecured general creditor of the Company. The liability for payment upon the redemption of a Restricted Phantom Stock Grant is a liability of the Company alone and is not a liability of any officer, director, shareholder, or affiliate of the Company. (D) No Participant or successor in interest shall be deemed to be a shareholder of the Company or have any right to receive any securities of the Company by virtue of having received a Restricted Phantom Stock Grant. 10. EFFECTIVE DATE. The Plan shall be effective on the date approved by the Compensation Committee. 93 EX-11.1 7 EXHIBIT 11.1 EXHIBIT 11.1 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE Year Ended December 31 1996 1995 1994 ---------------------------------- (In thousands, except per share data) Primary Average shares outstanding 24,823 24,048 24,277 Net effect of dilutive stock options-- based on the treasury stock method using average market price 914 495 319 ------- ------- ------- Total 25,737 24,543 24,596 ------- ------- ------- ------- ------- ------- Net Income $39,264 $32,505 $28,110 ------- ------- ------- ------- ------- ------- Per share amount $ 1.53 $ 1.32 $ 1.14 ------- ------- ------- ------- ------- ------- Fully Diluted Average shares outstanding 24,823 24,048 24,277 Net effect of dilutive stock options-- based on the treasury stock method using the year-end market price, if higher than average market price 967 549 320 ------- ------- ------- Total 25,790 24,597 24,597 ------- ------- ------- ------- ------- ------- Net Income $39,264 $32,505 $28,110 ------- ------- ------- ------- ------- ------- Per share amount $ 1.52 $ 1.32 $ 1.14 ------- ------- ------- ------- ------- ------- 94 EX-13.1 8 EXHIBIT 13.1 EXHIBIT 13.1 1996 ANNUAL REPORT TO STOCKHOLDERS WE MOVE MONEY: DELIVERING A WORLD OF ELECTRONIC PAYMENT [SEAL] VERIFONE 1996 ANNUAL REPORT [LOGO] VERIFONE VeriFone provides hardware and software systems that enable secure electronic payment among consumers, merchants and financial institutions. As the leader in electronic payment systems for the merchant countertop, we support the broadest range of applications in the industry. Our products access all the principal payment networks. And we have formed strong relationships with major banks, card issuers, transaction processors, technology companies and value-added resellers. Our comprehensive product line includes credit, debit and smart card payment systems; application, network and communications software; and Internet commerce products. In addition, we offer the most comprehensive customer service in our industry, as well as product financing and consulting services. VeriFone solutions are being used by retail merchants, healthcare providers, government agencies, restaurants, service stations, convenience stores, Internet merchants, transaction processors and consumers. VeriFone's strategy is to continue to pursue market opportunities on a global scale. In addition to automating traditional merchant point-of-sale applications worldwide, we are driving developments in the rapidly evolving consumer systems and Internet commerce markets. FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA YEARS ENDED DECEMBER 31, --------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND EMPLOYEES) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Net revenues $472,460 $387,016 $316,108 $264,227 $228,928 Operating income 53,517 41,737 37,469 30,409 31,409 Net income 39,264 32,505 28,110 21,946 24,439 Earnings per share 1.53 1.32 1.14 0.88 0.99 Working capital 145,239 210,999 182,229 167,555 154,503 Total assets 404,980 379,516 330,552 292,505 241,153 Global employees 2,850 2,471 1,932 1,750 1,562
Annual Net Revenues - ----------------------------------- [GRAPH] Annual Net Income - ----------------------------------- [GRAPH] R&D Expenditure - ----------------------------------- [GRAPH] Earning Per Share - ----------------------------------- [GRAPH] TO OUR STOCKHOLDERS WHEN I TALK ABOUT VERIFONE--to our customers, stockholders or employees--I often like to begin by underscoring what it is we do, and in our view do better than anyone else. VeriFone develops, markets and supports the hardware and software systems that enable electronic payment, on a global scale, among consumers, merchants and financial institutions. To describe our business in a phrase--WE MOVE MONEY. Nineteen ninety-six was a significant year for VeriFone, as we delivered solid operating results, made substantial investments in opportunities for future growth, and overall, strengthened our position as the leading provider of end-to-end electronic payment systems. These are very exciting times for the Company. The nature of electronic payment is expanding rapidly, with emerging technologies creating new opportunities in markets like Internet and consumer systems. As the global leader in electronic payment systems, we are in a unique position to leverage our competencies, our customer and technology partner relationships, and our resources in pursuit of these opportunities. NEW MARKETS, PRODUCTS AND SERVICES Many of you have probably tracked our progress in the world of Internet commerce, because that is where so much industry attention has been focused. After almost two years in this fast-moving market, we have concluded that, while the growth of Internet commerce may not be an overnight phenomenon, the market potential is truly vast. We believe that we are well positioned for success in the Internet commerce market. I am proud to say that we are on schedule in accomplishing our mission of deploying secure payment solutions to enable commerce on the World Wide Web. In 1996 we unveiled the first Internet payment product suite, including our vGATE and vPOS software, that allows the use of the MasterCard/Visa Secure Electronic Transaction (SET) protocol between the merchant and the financial institution. SET is expected to become the industry standard for handling secure Internet credit card transactions. Just as we made "Slide and Go" credit and debit card transactions fast, secure and easy, we are aiming to make "Click and Go" secure Internet transactions a standard payment solution. To facilitate our progress in this new market, we have entered into strategic relationships with several key Internet technology providers, such as Hewlett Packard, Microsoft, Netscape and Oracle. For example, our vPOS Internet payment solution is currently embedded in the new Microsoft Merchant Server for Internet retailing. The list of customers that have selected our vPOS and vGATE software for their Internet commerce strategies is impressive as well--and includes Bank of America, First USA Paymentech, Royal Bank of Canada, Sumitomo Credit and Wells Fargo Bank. Last year our focus on the consumer market also sharpened. We announced plans to develop our new VeriSmart system, which will be the first software-centric smart card solution that is independent of particular card programs and hardware devices. Combining smart card technology with client/server software and consumer applications, VeriSmart is being designed to link consumers to their banks, telephones, utility companies, merchants and other personal services. Through our VeriFone Personal ATM, telephones, TV set-top boxes, PCs and other devices, consumers will be able to access multiple stored value card schemes, shopper-loyalty programs, information services and healthcare applications. In addition, we made substantial progress last year in the development and deployment of our Omnihost software, which is a client/server solution for transaction processing. Our financial institution customers, who have looked to us for traditional merchant point-of-sale (POS) solutions, are starting to migrate their legacy back-end systems to more modern technology, such as Omnihost software, which is now being deployed worldwide. A significant development in this area was the global agreement that we entered into last year with Hewlett Packard to jointly market our Omnihost software as an application running on the HP 9000 family of enterprise servers. The agreement calls for collaborative activities in other areas, including Internet commerce and smart card applications. TWO Our continued metamorphosis into a complete hardware, software and services company led to the creation last year of our Centum Consulting group, which advises customers on a range of electronic payment strategies and alternatives, and our Professional Services group, which helps design, build, support and manage electronic payment solutions for our customers. These organizations complement the extensive customer service offered through VeriFone Support Services as well as the leasing, rental and equipment management programs offered through VeriFone finance. CONTINUED PROFITABILITY While pursuing new markets, products and services, we have not lost sight of the necessity of delivering solid revenues and profits from our traditional business. Our business remained strong last year, as we shipped our 5 millionth system, established our 100th country market and maintained our profitability. Net revenues for the full year 1996 rose 22.1 percent to $472.5 million, compared with net revenues of $387.0 million in 1995. Income from operations grew 28.2 percent to $53.5 million in 1996, compared with $41.7 million a year ago. Net income increased 20.8 percent to $39.3 million, or $1.53 per share, compared with $32.5 million, or $1.32 per share in 1995. Our growth last year continued to be global in nature. Our U.S. revenues increased by 16.9 percent year-over-year, and our international revenues increased by 31.1 percent year-over-year. Consistent with these results, the portion of our revenues generated from countries outside the U.S. increased to 39.1 percent last year. FOCUS ON STOCKHOLDER VALUE Underscoring our confidence in the fundamentals of our business, we repurchased 2.5 million shares of outstanding Common Stock for $100.0 million in open market transactions last year. We also adopted economic value-added (EVA) principles of financial measurement, which focus on the efficient management of capital. Through EVA, we will strive to further improve the overall strength of our balance sheet. As managers, our ultimate responsibility is to maximize stockholder value. Our strategy of building businesses in varied markets--horizontal, vertical and geographic--has allowed us to deliver solid operating results. These results, in turn, have allowed us to make significant investments in new opportunities--like the ones mentioned above--that provide the foundation for our future growth. It is through this dual focus on current operating results and long-term opportunities that we intend to carry out our responsibility to the Company's stockholders. LOOKING TO THE FUTURE We look forward to the challenges that lie ahead in the rapidly changing world of electronic payment. I would like to extend my personal thanks to our stockholders and our customers for the major role you have played in our success throughout this exciting and productive year. I would also like to thank our employees, whose commitment to excellence has made VeriFone the leading company it is today. /s/ Hatim A. Tyabji Hatim A. Tyabji CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER This letter contains forward-looking statements concerning the Company's performance and plans. Important factors to consider in this regard are discussed on pages 15 to 17 of this annual report. THREE Page four - Foreign language letter Page five - Foreign language letter Page six - Foreign language letter Page seven - Foreign language letter Page eight - Foreign language letter Page nine - Foreign language letter SELECTED CONSOLIDATED FINANCIAL DATA - --------------------------------------------------------------------------------
Consolidated Statements of Income Data: YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------- Net revenues $472,460 $387,016 $316,108 $264,227 $228,928 Costs and expenses: Cost of revenues 256,250 202,356 160,776 129,644 109,576 Research and development 53,434 45,036 38,442 33,546 28,322 Selling, general and administrative 109,259 97,887 79,421 70,628 59,621 --------------------------------------------------------------------- Total costs and expenses 418,943 345,279 278,639 233,818 197,519 --------------------------------------------------------------------- Income from operations 53,517 41,737 37,469 30,409 31,409 Interest income and other, net 1,785 4,045 2,712 2,610 2,344 Minority interest in consolidated subsidiary -- -- (615) (2,082) -- --------------------------------------------------------------------- Income before income taxes 55,302 45,782 39,566 30,937 33,753 Provision for income taxes 16,038 13,277 11,456 8,991 9,314 --------------------------------------------------------------------- Net Income $ 39,264 $ 32,505 $ 28,110 $ 21,946 $ 24,439 --------------------------------------------------------------------- --------------------------------------------------------------------- Net income per share $ 1.53 $ 1.32 $ 1.14 $ 0.88 $ 0.99 --------------------------------------------------------------------- --------------------------------------------------------------------- Common and common equivalent shares used in computing per share amounts 25,737 24,543 24,596 24,875 24,606 --------------------------------------------------------------------- --------------------------------------------------------------------- Consolidated Balance Sheet Data: Working capital $145,239 $210,999 $182,229 $ 167,555 $154,503 Total assets 404,980 379,516 330,552 292,505 241,153 Long-term debt and obligations under capital leases--non-current portion 517 2,205 7,515 12,180 2,216 Stockholders' equity 239,566 264,385 218,372 195,177 174,092
TEN MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS All references herein to the "Company" mean VeriFone, Inc. and its consolidated subsidiaries. In November 1995, the Company merged with Enterprise Integration Technologies Corporation ("EIT") and TimeCorp Systems, Inc. ("TimeCorp"). The mergers have been accounted for as poolings of interest, and accordingly, the financial results for all periods have been restated to include the results of EIT and TimeCorp. Forward-looking statements in this Management's Discussion and Analysis-- including statements regarding international markets; gross margins; research and development expenses; selling, general and administrative expenses; liquidity and cash needs; and the Company's plans and strategies--are all based on current expectations, and the Company assumes no obligation to update this information. Numerous factors could cause actual results to differ from those described in the forward-looking statements, including the factors set forth below under the heading "Factors That May Affect Future Results and the Market Price of the Company's Stock" (which are also discussed in the Company's Annual Report on Form 10-K for 1996). The Company cautions investors that its business is subject to significant risks and uncertainties. The following table sets forth, for the fiscal years indicated, selected operational data as a percentage of net revenues: YEARS ENDED DECEMBER 31, -------------------------------------- (PERCENTAGES MAY NOT TOTAL DUE TO ROUNDING) 1996 1995 1994 - ------------------------------------------------------------------------------ Net revenues 100.0% 100.0% 100.0% Costs and expenses: Cost of revenues 54.2 52.3 50.9 Research and development 11.3 11.6 12.2 Selling, general and administrative 23.1 25.3 25.1 ------------------------------ Total costs and expenses 88.7 89.2 88.1 ------------------------------ Income from operations 11.3 10.8 11.9 Interest income and other, net 0.4 1.0 0.9 Minority interest in consolidated subsidiary 0.0 0.0 (0.2) ------------------------------ Income before income taxes 11.7 11.8 12.5 Provision for income taxes 3.4 3.4 3.6 ------------------------------ Net income 8.3% 8.4% 8.9% ------------------------------ ------------------------------ The Company's net revenues were $472.5 million in 1996, $387.0 million in 1995 and $316.1 million in 1994, reflecting growth of 22.1% from 1995 to 1996 and 22.4% from 1994 to 1995. UNITED STATES OPERATIONS--The following table sets forth, by market, revenues from sales in the United States and the percentage change year-over-year for the fiscal years indicated:
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- REVENUES PERCENTAGE CHANGE (IN MILLIONS) (FROM PRIOR YEAR) MARKET 1996 1995 1994 1996 1995 - ------------------------------------------------------------------- ------------------- Financial retail $187.4 $171.3 $156.4 9.4% 9.5% Petroleum/convenience store 43.3 29.8 21.0 45.3 41.9 Multi-lane retail* 39.8 34.5 30.2 15.4 14.2 Healthcare/government 12.6 11.1 8.0 13.5 38.8 Other 4.4 (0.7) 0.4 -- -- --------------------------------- ------------------- United States net revenues $287.5 $246.0 $216.0 16.9% 13.9% --------------------------------- ------------------- --------------------------------- -------------------
* THE MULTI-LANE FIGURES ABOVE HAVE BEEN RESTATED YEAR-TO-DATE TO REFLECT THE COMBINATION OF MULTI-LANE RETAIL AND LABOR MANAGEMENT SYSTEMS. ELEVEN MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- The increase in revenues from sales in the United States during 1996 and 1995 was due primarily to increased sales in the financial retail market, petroleum/convenience-store market and multi-lane market. Revenue from the financial retail market increased in 1996 and 1995, although it declined as a percentage of total United States revenues, accounting for 65.2% of total United States revenues in 1996, compared with 69.6% in 1995 and 72.4% in 1994. Revenue growth (in absolute dollars) in the financial retail market in 1996 and 1995 was due primarily to continued acceptance of credit and debit card transaction systems. Revenue growth in the petroleum/convenience-store market in 1996 and 1995 was due primarily to demand for the integrated Ruby SuperSystem-Registered Trademark- and OMNI-Registered Trademark- 490 terminals sold to major oil companies and OEM resellers, and sold via distributors--which resell products to petroleum/convenience-store dealers and jobbers. Revenue growth in the multi-lane market in 1996 and 1995 reflected revenues from both the multi-lane retail and labor management markets. Revenue from the multi-lane retail market was $28.5 million in 1996, $27.6 million in 1995 and $21.6 million in 1994. Revenue from labor management systems was $11.3 million in 1996, $6.9 million in 1995 and $8.6 million in 1994. Revenue from the healthcare and government market was relatively stable in 1996 after growth in 1995. In 1995, revenue growth from the government/healthcare market was due primarily to increased shipments to various states for food stamp programs, fish and game licensing programs, and Medicaid patient eligibility verification programs. INTERNATIONAL OPERATIONS--The following table sets forth, by geographic region, revenues from sales outside the United States, and the percentage change year- over-year for the fiscal years indicated:
REVENUES PERCENTAGE CHANGE (IN MILLIONS) (FROM PRIOR YEAR) ---------------------------------- ------------------- GEOGRAPHIC REGION 1996 1995 1994 1996 1995 - ------------------------------------------------------------------- ------------------- Asia-Pacific $ 64.4 $ 40.9 $ 22.7 57.5% 80.2% Europe, Middle East and Africa 69.1 57.0 47.4 21.2 20.3 Americas 51.5 43.1 30.0 19.5 43.7 ----------------------------------- --------------------- International net revenues $185.0 $141.0 $100.1 31.2% 40.9% ----------------------------------- --------------------- ----------------------------------- ---------------------
The increase in revenues from sales outside the United States during 1996 and 1995 was driven primarily by worldwide demand for electronic payments, the expansion of chip-card opportunities outside the United States, and the continued development of new country markets. International sales represented 39.1%, 36.4% and 31.7% of the Company's net revenues in 1996, 1995 and 1994, respectively. Growth in international sales during 1996 and 1995 occurred in all geographic regions. International revenue growth during 1996 was due in significant part to shipments to Australia, the People's Republic of China, Japan, Spain and Canada. In contrast, Mexico, Germany and Italy had lower shipments in 1996. International revenue growth during 1995 was due in significant part to shipments to the People's Republic of China, Mexico, Italy, Canada and Japan. In contrast, Saudi Arabia, Korea and Brazil had lower shipments in 1995. The Company plans to continue to expand its global infrastructure with the aim of increasing market share in established country markets, as well as opening new country markets. Achievement of these plans is subject to various risks, including local economic conditions, as discussed below under "Factors That May Affect Future Results and the Market Price of the Company's Stock." International growth has increased the Company's exposure to the effects of foreign currency fluctuations. The Company engages in a foreign currency management program that is intended to minimize the effects of these fluctuations. This program includes the use of foreign exchange contracts to hedge its intercompany balances. The gains and losses on these contracts were immaterial as the majority of the Company's sales are denominated in United States dollars. TWELVE MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- PRODUCT ANALYSIS--The following table sets forth, by product type, net revenues and the percentage change year-over-year for the fiscal years indicated:
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- REVENUES PERCENTAGE CHANGE (IN MILLIONS) (FROM PRIOR YEAR) --------------------------------- -------------------- PRODUCT TYPE 1996 1995 1994 1996 1995 - ------------------------------------------------------------------- -------------------- Basic terminals $ 13.7 $ 15.9 $ 17.6 (13.8)% (9.7)% High-functionality terminals 201.0 164.9 136.6 21.9 20.7 Fully integrated systems 44.1 27.4 23.3 60.9 17.6 Printers and PIN pads 123.9 122.7 98.8 1.0 24.2 Smart card systems 18.6 8.5 1.1 118.8 672.7 Other* 71.2 47.6 38.7 49.6 23.0 ---------------------------------- -------------------- $472.5 $387.0 $316.1 22.1% 22.4% ---------------------------------- -------------------- ---------------------------------- --------------------
* "OTHER" INCLUDES CERTAIN SOFTWARE, SERVICES, LEASING, ACCESSORIES AND OTHER REVENUE. The increase in net revenues in 1996 and 1995 was due, in part, to a shift in product mix from basic terminals to high-functionality systems (such as TRANZ-Registered Trademark- 330 and TRANZ 460 products), fully integrated systems (such as OMNI 490 and the Ruby SuperSystem), and smart card systems (such as SC-TM- 552 and SC 542 Smart Card Reader/Writers). The increase in other revenues in 1996 and 1995 was due to several factors, including growth in software revenue and VeriFone Finance's recurring revenue stream (consisting primarily of revenue related to sales-type lease arrangements and term and month-to-month rental programs). GROSS MARGINS (NET REVENUES LESS COST OF REVENUES)--Gross margins were 45.8%, 47.7% and 49.1% in 1996, 1995 and 1994, respectively. The decrease in gross margins was due in part to a higher proportion of sales to international markets, which typically have lower gross margins. The decrease was also due to other factors, including general competitive pricing pressures and shifts in the Company's overall business and product mix. The Company currently expects its gross margins to continue to be affected by changes in business segment mix, product mix, competition and other factors, as discussed below under "Factors That May Affect Future Results and the Market Price of the Company's Stock." R&D EXPENSES--Research and development expenses increased 18.6% in 1996 and 17.2% in 1995. R&D expenses, as a percentage of net revenues, decreased to 11.3% in 1996, compared with 11.6% in 1995 and 12.2% in 1994. The increase in R&D expenses in 1996 and 1995 was due, in part, to the development of software applications for new markets (including the Internet and labor management markets), the development of new software applications for existing markets and the development of new system platforms. The Company currently expects that, in the long term, R&D expenses will continue to increase in absolute dollars but may decline as a percentage of net revenues. SG&A EXPENSES--Selling, general and administrative (SG&A) expenses increased 11.6% in 1996 and 23.3% in 1995. As a percentage of net revenues, SG&A expenses were 23.1%, compared with 25.3% in 1995 and 25.1% in 1994. The increase in SG&A expenses during 1996 and 1995 was due primarily to the expansion of the Company's domestic and international sales and support forces, increased spending for marketing and sales programs to support new and existing products, and the development of additional international markets. In addition, in 1995, the Company incurred a $1.4 million, before tax, one-time charge related to the acquisition of EIT and TimeCorp. The Company currently expects to make additional investments in sales and marketing to further develop established international markets, introduce products to new international markets, and to develop additional vertical markets and distribution channels on a global basis. (Achievement of these plans is subject to various risks, as discussed below under "Factors That May Affect Future Results and the Market Price of the Company's Stock.") The Company currently expects that, in the long term, SG&A expenses will continue to increase in absolute dollars but may decline as a percentage of net revenues. THIRTEEN MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- INTEREST INCOME AND OTHER, NET--Interest income and other, net, was $1.8 million in 1996, compared with $4.0 million in 1995 and $2.7 million in 1994. The decrease in interest income and other, net, in 1996 was due primarily to lower investment balances as a result of the repurchase of treasury shares. The increase in interest income and other, net, in 1995 was due primarily to the sale of a portion of EIT's interest in Terisa Systems for a net gain of $2.5 million. This gain is partially offset by a reduction in interest income resulting from a decline in investment balances. TAX RATE--The Company's combined federal, state and foreign effective income tax rate was 29% for 1996, 1995 and 1994. The combined tax rate differs from the federal statutory rate primarily because the Company does not provide for United States federal income taxes on the undistributed earnings of its foreign subsidiaries, which the Company intends to permanently reinvest in those operations. NET INCOME--Net income increased 20.8% during 1996 and 15.6% during 1995. Earnings per share were $1.53 in 1996, $1.32 in 1995 and $1.14 in 1994. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments at December 31, 1996 decreased to $47.9 million from $82.8 million at December 31, 1995. The Company experienced positive cash flow from operations of $64.1 million during 1996 as a result of net income, a decrease in inventory, an increase in trade payables and other accrued liabilities, and depreciation and amortization. The Company used $35.5 million for investing in 1996 as a result of the purchase of fixed assets for operations and the construction of the new manufacturing facility in Kunshan, People's Republic of China. The Company used $54.1 million for financing activities during 1996, which included the repurchase of shares partially offset by proceeds from issuance of shares. During 1996, the Company repurchased 2,495,500 shares of outstanding Common Stock in the open market for an aggregate purchase price of $100.0 million. The Company's Board of Directors has authorized the Company to repurchase during the first quarter of 1997 up to 200,000 shares of outstanding Common Stock in the open market for an aggregate purchase price of up to $9.0 million. At December 31, 1996, the Company's principal sources of liquidity included $47.9 million in cash, cash equivalents and short-term investments; $30.0 million available under an unsecured United States currency bank line of credit, expiring in April 1997; $17.0 million available under an unsecured foreign currency bank line of credit, expiring in May 1997; and $3.0 million available under an unsecured foreign currency bank line of credit, expiring in January 1998. At December 31, 1996, $20.0 million was outstanding under the $30.0 million line of credit, $15.7 million was outstanding under the $17.0 million line of credit, and $1.2 million was outstanding under the $3.0 million line of credit. In connection with the activities of VeriFone Finance, the Company also has non-recourse notes payable to a financing company due in monthly installments, with interest rates ranging from 7.93% to 9.3%. These notes mature at various dates through June 1998 and are secured by all rights to certain leases, including a security interest in equipment under certain lease agreements and future minimum lease payments. At December 31, 1996, the Company had $1.3 million outstanding under these notes. In addition, at December 31, 1996, the Company had obligations under capital leases of $900,000. Inventories at December 31, 1996 decreased to $59.5 million, compared with $76.6 million at December 31, 1995. This decline was due primarily to inventory management programs. Net trade accounts receivable at December 31, 1996 increased to $131.2 million from $96.4 million at December 31, 1995. This increase was due, in part, to growth in total net revenues, conditions in a number of markets resulting in longer payment terms, and a greater percentage of international revenues which typically have longer payment terms and cycles. Days sales outstanding were 95 days at December 31, 1996, compared with 79 days at December 31, 1995. The Company currently expects to have significant cash needs during 1997 in connection with various events, including the repurchase of shares, development of new products and possible acquisitions. However, the Company currently believes that the liquidity provided by its ongoing operations, existing cash, cash equivalents and short-term investments, as well as the borrowing arrangements described above (including expected renewals of and substitutes for such arrangements), will be sufficient to meet its projected cash needs. FOURTEEN MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE MARKET PRICE OF THE COMPANY'S STOCK The Company's operations are subject to various risks and uncertainties, many of which are beyond the Company's control. The following highlights some of these risks. VARIATIONS IN QUARTERLY RESULTS--The Company's quarterly operating results are subject to various risks and uncertainties, including risks and uncertainties related to: local economic conditions; competitive pressures; the composition, timing and size of orders from and shipments to major customers; variations in product mix and the mix between leases and sales; variations in product cost; infrastructure costs; obsolescence of inventory; and other factors as discussed below. Accordingly, the Company's operating results may vary materially from quarter to quarter. The Company operates with little backlog and, as a result, net revenues in any quarter are substantially dependent on the orders booked and shipped in that quarter. Because the Company's operating expenses are based on anticipated revenue levels and because a high percentage of the Company's expenses are relatively fixed, if anticipated shipments in any quarter do not occur as expected, the Company's operating results may be adversely affected and fall significantly short of expectations. Any other unanticipated decline in the growth rate of the Company's net revenues, without a corresponding and timely reduction in the growth of operating expenses, could also have an adverse effect on the Company and its future operating results. The Company aims to prudently control its operating expenses. However, there is no assurance that, in the event of any revenue, gross margin or other shortfall in a quarter, the Company will be able to control expenses sufficiently to meet profitability objectives for the quarter. Compounding these risks is the fact that a substantial portion of the Company's net revenues in each quarter generally results from shipments during the latter part of the quarter. For this and other reasons, the Company may not learn of shortfalls in revenues, earnings or other financial results relative to expectations until very late in a quarter. Any such shortfall could have an immediate and significant adverse effect on the trading price of the Company's Common Stock. The Company's business may be characterized as showing a pattern, in that, historically, net revenues during the first calendar quarter of a year have generally been less than net revenues during the fourth quarter of the preceding year. CHANGES IN GROSS MARGINS--Certain of the Company's net revenues are derived from products and markets--such as international and government markets--which typically have lower gross margins compared to other products and markets, due to higher costs and/or lower prices associated with the lower gross margin products and markets. The Company currently expects that its net revenues from international markets will continue to increase as a percentage of total net revenues, and its net revenues from government markets may increase. In addition, the Company is currently experiencing pricing pressures due to a number of factors, including competitive conditions and consolidation within certain groups of customers. To the extent that these factors continue, the Company's gross margins would decline, which would adversely affect the Company and its future operating results. Downward pressure on the Company's gross margins may be mitigated by other factors, such as a reduction in product costs and/or an increased percentage of net revenues from higher gross margin products, such as software. The Company is aiming to reduce its product costs and to increase its percentage of net revenues from software. However, there is no assurance that these efforts will be successful. NEW MARKETS AND PRODUCTS--The Company is entering new markets, including the Internet commerce market and the consumer smart card market. At present, these new markets are relatively small and rapidly changing, and the development of these markets depends in significant part on the widespread adoption of new technologies by financial institutions, merchants and consumers; the emergence of industry standards; and other factors. There is no assurance that these markets will develop as expected by the Company. If these markets do not develop as expected by the Company, or the Company's strategies for these markets are unsuccessful, or the Company fails to successfully and timely develop and introduce products suitable for these markets, the Company and its future operating results may be adversely affected. The Company is developing a number of products for these new markets-- including a number of Internet commerce and consumer products. There is no assurance that these development efforts will be successful or that, if successfully developed, these products will achieve commercial success. Similarly, in connection with entering these new markets, the Company has entered into or expects to enter into relationships with a number of companies in these markets--including Microsoft, Netscape, Oracle and others. These relationships may not develop as expected by the Company, and thus, the expected benefits from the relationships may not be obtained. FIFTEEN MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- GROWTH DEPENDENCIES--In general, the Company's future growth is dependent on the Company's ability to successfully and timely enhance existing products, develop and introduce new products, establish new distribution channels, develop affiliations with leading market participants in order to facilitate product development and distribution, and certify its existing and new products with service providers, telephone companies and others. The failure to achieve these and other objectives could limit future growth and have an adverse effect on the Company and its future operating results. On a related note, the pressure to develop and enhance products, and to establish and expand markets, may cause the Company's research and development expenses and selling, general and administrative expenses to increase substantially, which could also have an adverse effect on the Company and its future operating results. ACQUISITIONS--The Company may acquire or make substantial investments in other businesses in the future. Any such acquisition or investment would entail various risks, including the difficulty of assimilating the operations and personnel of the acquired business; the potential disruption of the Company's ongoing business; and generally, the potential inability of the Company to obtain the desired financial and strategic benefits from the acquisition or investment. These factors could have a material adverse effect on the Company and its future operating results. Future acquisitions and investments by the Company could also result in substantial cash expenditures, potentially dilutive issuances of equity securities, the incurrence of additional debt and contingent liabilities, and amortization expenses related to goodwill and other intangible assets, which could adversely affect the Company and its future operating results. INTERNATIONAL OPERATIONS--The Company's international operations, including international sales and manufacturing, have grown substantially, and thus, the Company is increasingly affected by the risks associated with international operations. Such risks include managing an organization spread over various countries; fluctuations in currency exchange rates (as discussed further below); the burden of complying with international laws and other regulatory and product certification requirements, and changes in such laws and requirements; tariffs and other trade barriers; import and export controls; international staffing and employment issues; political and economic instability; and longer payment cycles in certain countries. The Company's manufacturing facilities outside the United States, which are in Taiwan and the People's Republic of China, are subject to particular risks relating to political developments and trade barriers. The inability to effectively manage these and other risks could adversely affect the Company and its future operating results. The majority of the Company's international sales are denominated in United States currency. An increase in the value of the United States dollar relative to foreign currencies could make the Company's products sold internationally less competitive. The Company has offices in a number of foreign countries, the operating expenses of which are also subject to the effects of fluctuations in foreign currency exchange rates. Although the Company engages in hedging transactions that may partially offset the effects of fluctuations in foreign currency exchange rates, financial exposure may nonetheless result primarily due to the timing of transactions and movement of exchange rates. COMPETITION--The various markets in which the Company operates are becoming increasingly competitive as a number of other companies develop and sell products that compete with the Company's products in these markets. Certain of these competitors have significantly more financial and technical resources than the Company. The Company faces additional competitive factors in foreign countries, including preferences for national vendors and difficulties in obtaining necessary certifications and in meeting the requirements of government policies. These competitive factors may result in, among other things, price discounts by the Company and sales lost by the Company to competitors that may adversely affect the Company and its future operating results. THIRD-PARTY DISTRIBUTORS--The Company uses various channels to market and distribute its products, including direct sales to end-users and sales to end- users via third-party distributors. Third-party distributors are a substantial channel for distribution internationally and are increasingly becoming a substantial channel for distribution in the United States. Accordingly, the Company's ability to market and distribute its products depends in significant part on its relationship with third-party distributors, as well as the performance and financial condition of these distributors. In the event that the Company's relationship with its distributors deteriorates, or the performance or financial condition of the distributors becomes unsatisfactory, the Company and its future operating results could be adversely affected. SOLE SUPPLIERS--The Company is currently dependent on single suppliers for certain product components, including mask-programmed microcontrollers, various printer mechanisms, display devices and certain magnetic parts. The failure of any such supplier to continue to provide these components to the Company could result in significant manufacturing delays that could adversely affect the Company and its future operating results. SIXTEEN MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- EXCESS OR OBSOLETE INVENTORY--Managing the Company's inventory of components and finished products is a complex task. A number of factors--including the need to maintain a significant inventory of certain components which are in short supply or which must be purchased in bulk to obtain favorable pricing, the general unpredictability of demand for specific products and customer requests for quick delivery schedules--may result in the Company maintaining excess inventory. Other factors--including changes in market demand and technology--may cause inventory to become obsolete. Any excess or obsolete inventory could result in price reductions and inventory write-downs, which in turn could adversely affect the Company and its operating results. SECURITY FEATURES OF PRODUCTS--Most of the Company's products are used to process payment transactions, and thus, the security features of the products are important. In general, the Company's products are designed to comply with industry practices relating to security in payment transactions. However, no security feature, whether or not an industry practice, is infallible. In the event of a significant breach of the security features in the Company's products, the Company and its future operating results could be adversely affected. PROPRIETARY TECHNOLOGY--The Company seeks to establish and protect the proprietary aspects of its products by relying on applicable patent, copyright, trademark and trade secret laws and on confidentiality, licensing and other contractual arrangements. Notwithstanding the Company's efforts to protect its proprietary rights, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to reverse engineer or obtain and use technology that the Company regards as proprietary. In addition, the laws of certain countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. Accordingly, there can be no assurance that the Company will be able to protect its proprietary technology against unauthorized third-party copying or use, which could adversely affect the Company's competitive position. The Company from time to time receives notices from third parties claiming that the Company's products infringe such parties' proprietary rights. Regardless of its merit, any such claim can be time-consuming, result in costly litigation and require the Company to enter into royalty and licensing agreements. Such royalty or licensing agreements may not be offered or may not be available on terms acceptable to the Company. If a successful claim is made against the Company and the Company fails to develop or license a substitute technology, the Company and its future operating results could be adversely affected. HIRING AND RETENTION OF EMPLOYEES--The Company's continued growth and success depend to a significant extent on the continued service of senior management and other key employees and the hiring of new qualified employees. Competition for highly skilled business, technical, marketing and other personnel is intense, particularly in the strong economic cycle currently prevailing for high technology companies. The loss of one or more key employees or the Company's inability to attract additional qualified employees or retain other employees could have an adverse effect on the Company and its future operating results. In addition, the Company may experience increased compensation costs in order to compete for skilled employees. REGULATORY REQUIREMENTS--The Company's operations are subject to various laws, regulations, governmental policies and product certification requirements worldwide. Changes in such laws, regulations, policies or requirements could affect the demand for the Company's products or result in the need to modify products, which may involve substantial costs or delays in sales and could have an adverse effect on the Company and its future operating results. SEISMIC RISKS--The Company's manufacturing and distribution facilities, as well as a portion of the Company's research and development, sales and administrative functions, are located near major earth quake faults. In the event of a major earthquake, the Company and its future operating results could be adversely affected. STOCK MARKET FLUCTUATIONS--In recent years, the stock market in general, and the market for technology stocks in particular, including the Company's Common Stock, have experienced extreme price fluctuations. The market price of the Company's Common Stock may be significantly affected by various factors such as quarterly variations in the Company's operating results; changes in revenue growth rates for the Company as a whole or for specific geographic areas, business units or products; changes in earnings estimates by market analysts; the announcement of new products or product enhancements by the Company or its competitors; speculation in the press or analyst community; and general market conditions or market conditions specific to particular industries. There can be no assurance that the market price of the Company's Common Stock will not experience significant fluctuations in the future. SEVENTEEN CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
DECEMBER 31, ------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 - --------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 47,395 $ 72,882 Short-term investments 515 9,939 Accounts receivable, net of allowance for doubtful accounts of $3,842 and $4,675 at 1996 and 1995, respectively 131,192 96,419 Net investment in sales-type leases 13,450 10,487 Inventories 59,524 76,611 Deferred income taxes 11,079 16,827 Prepaid expenses and other current assets 9,163 7,158 ---------------------- Total current assets 272,318 290,323 Net investment in sales-type leases 19,329 15,360 Property, plant and equipment, net 64,722 50,942 Other assets, net 48,611 22,891 ---------------------- $404,980 $379,516 ---------------------- ---------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 31,641 $ 20,693 Accrued compensation 12,612 11,072 Other accrued liabilities 26,790 18,805 Income taxes payable 7,504 12,910 Deferred revenue 9,951 5,275 Notes payable and capital leases 38,581 10,569 ---------------------- Total current liabilities 127,079 79,324 Non-current portion of capital leases 517 2,205 Deferred income taxes 37,818 33,602 Commitments and contingencies Stockholders' equity: Preferred Stock, $0.01 par value; 2,000 shares authorized; none issued and outstanding -- -- Common Stock, $0.01 par value; 50,000 shares authorized; 23,341 and 24,906 shares issued and outstanding at 1996 and 1995, respectively 248 244 Additional paid-in capital 109,101 110,911 Less treasury stock at cost; 1,924 shares at 1996 (72,700) -- Retained earnings 191,666 152,402 Other 11,251 828 ---------------------- Total stockholders' equity 239,566 264,285 ---------------------- $404,980 $379,516 ---------------------- ----------------------
SEE ACCOMPANYING NOTES. EIGHTEEN CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, -------------------------------------- (IN THOUSAND, EXCEPT PER SHARE DATA) 1996 1995 1994 - ------------------------------------------------------------------------------------- Net revenues $472,460 $387,016 $316,108 Costs and expenses: Cost of revenues 256,250 202,356 160,776 Research and development 53,434 45,036 38,442 Selling, general and administrative 109,259 97,887 79,421 -------------------------------------- Total costs and expenses 418,943 345,279 278,639 -------------------------------------- Income from operations 53,517 41,737 37,469 Interest and other income 2,875 4,993 3,331 Interest expense (1,090) (948) (619) Minority interest in consolidated subsidiary -- -- (615) -------------------------------------- Income before income taxes 55,302 45,782 39,566 Provision for income taxes 16,038 13,277 11,456 -------------------------------------- Net income $ 39,264 $ 32,505 $ 28,110 -------------------------------------- -------------------------------------- Net income per share $ 1.53 $ 1.32 $ 1.14 -------------------------------------- -------------------------------------- Common and common equivalent shares used in computing per share amounts 25,737 24,543 24,596 -------------------------------------- --------------------------------------
SEE ACCOMPANYING NOTES. NINETEEN CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 ----------------------------------------------------------------------------------- ADDITIONAL TOTAL PREFERRED COMMON PAID-IN TREASURY RETAINED STOCKHOLDERS' (IN THOUSANDS) STOCK STOCK CAPITAL STOCK EARNINGS OTHER EQUITY - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 $-- $243 $110,475 $ (7,895) $ 91,980 $ 374 $ 195,177 Repurchase of 451 shares of Common Stock -- -- -- (9,280) -- -- (9,280) Reissuance of 433 shares of Common Stock under the Employee Stock Purchase Plan (ESPP), and pursuant to option and other activity -- -- (3,470) 6,882 -- -- 3,412 Issuance of 19 shares of Common Stock for cash, notes receivable and services -- -- 35 -- -- (20) 15 Tax benefit from stock options -- -- 700 -- -- -- 700 Unrealized loss on available- for-sale investments, net of tax -- -- -- -- -- (156) (156) Accumulated translation adjustment -- -- -- -- -- 394 394 Net income -- -- -- -- 28,110 -- 28,110 ----------------------------------------------------------------------------------- Balance, December 31, 1994 -- 243 107,740 (10,293) 120,090 592 218,372 Repurchase of 600 shares of Common Stock -- -- -- (14,543) -- -- (14,543) Reissuance of 447 shares of Common Stock under the ESPP, and pursuant to option and other activity -- 1 (809) 8,948 -- -- 8,140 Issuance of 115 shares of Common Stock pursuant to option activity -- -- 69 -- -- -- 69 Sale of 738 shares of Common Stock -- -- 2,680 15,888 -- -- 18,568 Tax benefit from stock options -- -- 1,038 -- -- -- 1,038 TimeCorp stock dividend -- -- 193 -- (193) -- -- Unrealized gain on available- for-sale investments, net of tax -- -- -- -- -- 175 175 Accumulated translation adjustment -- -- -- -- -- 61 61 Net income -- -- -- -- 32,505 -- 32,505 ----------------------------------------------------------------------------------- Balance, December 31, 1995 -- 244 110,911 -- 152,402 828 264,385 Repurchase of 2,496 shares of Common Stock -- -- -- (99,991) -- -- (99,991) Reissuance of 572 shares of Common Stock under the ESPP and pursuant to option activity -- -- (14,488) 27,291 -- -- 12,803 Issuance of 359 shares of Common Stock under the ESPP and pursuant to option activity -- 4 6,728 -- -- -- 6,732 Tax benefit from stock options -- -- 5,950 -- -- -- 5,950 Unrealized gain on available- for-sale investments, net of tax -- -- -- -- -- 10,825 10,825 Accumulated translation adjustment -- -- -- -- -- (402) (402) Net income -- -- -- -- 39,264 -- 39,264 ----------------------------------------------------------------------------------- Balance, December 31, 1996 $-- $248 $109,101 $(72,700) $191,666 $11,251 $ 239,556 ----------------------------------------------------------------------------------- -----------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. TWENTY CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $39,264 $32,505 $28,110 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,291 19,857 18,055 Deferred income taxes 2,883 2,558 (2,238) Net increase in receivables, inventories and prepaid expenses (26,623) (37,313) (14,097) Net increase in payables, accruals and other current liabilities 25,693 9,281 16,514 Other, net (402) 62 674 ------------------------------------- Net cast provided by operating activities 64,106 26,950 47,018 ------------------------------------- Cash flows from investing activities: Capital expenditures (31,111) (26,469) (12,642) Acquisition of other assets (13,741) (8,607) (623) Acquisition of subsidiary, net of cash acquired -- -- (10,361) Available-for-sale investments: Purchases (70,663) (10,686) (54,547) Maturities 74,350 38,917 58,777 Held-to-maturity investments: Purchases -- (3,666) -- Maturities 5,704 9,194 -- ------------------------------------- Net cash used for investing activities (35,461) (1,317) (19,396) ------------------------------------- Cash flows from financing activities: Proceeds from notes payable and capital leases 31,497 3,294 11,490 Payments on notes payable and capital leases (5,173) (12,110) (15,333) Proceeds from issuance of Common Stock 19,535 26,777 3,437 Purchase of treasury stock (99,991) (14,5430 (9,280) ------------------------------------- Net cash (used for) provided by financial activities (54,132) 3,418 (9,686) ------------------------------------- Net increase (decrease) in cash and cash equivalents (25,487) 29,051 17,936 Cash and cash equivalents at beginning of year 72,882 43,831 25,895 ------------------------------------- Cash and cash equivalents at end of year $47,395 $72,882 $43,831 ------------------------------------- ------------------------------------- Schedule of non-cash transactions: Tax benefits from stock options $ 5,950 $ 1,038 $ 700 ------------------------------------- ------------------------------------- Write-off of fully depreciated fixed assets $ 5,277 $ 4,298 $ 2,552 ------------------------------------- ------------------------------------- Write-off of fully amortized other assets $ 7,452 $ 840 $ 4,434 ------------------------------------- ------------------------------------- Acquisition of minority interest $ -- $ -- $ 3,667 ------------------------------------- ------------------------------------- Acquisition of equipment under capital leases $ -- $ -- $ 279 ------------------------------------- ------------------------------------- Supplemental disclosure of cash flow information: Interest paid $ 986 $ 885 $ 1,584 ------------------------------------- ------------------------------------- Income taxes paid $11,706 $ 6,691 $ 8,424 ------------------------------------- -------------------------------------
SEE ACCOMPANYING NOTES. TWENTY-ONE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE ONE--SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--The consolidated financial statements comprise the accounts of VeriFone, Inc. and its worldwide subsidiaries (collectively, the "Company"), including Enterprise Integration Technologies Corporation ("EIT") and TimeCorp Systems, Inc. ("TimeCorp"), which were merged into the Company effective November 1995 (see Note 2). The mergers have been accounted for as poolings of interests, and prior periods have been restated to include both EIT and TimeCorp. All significant intercompany balances and transactions have been eliminated. For purposes of presentation, the Company has indicated its fiscal year as ending on December 31; as of calendar year 1996 the Company operates and reports on a 52-53 week fiscal year which ends on the last Friday in the calendar year. Prior to 1996, the Company's fiscal year ended on the Friday closest to December 31. Fiscal years 1996, 1995 and 1994 are 52-week years. INDUSTRY SEGMENT AND CONCENTRATION OF CREDIT RISK--The Company, which operates in a single industry segment, designs, manufactures, markets and services transaction automation systems. The Company sells its products to customers in diversified industries globally. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses, and such losses have been within management's expectations. No customer accounted for 10% or more of net revenues in 1996, 1995 or 1994. Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash investments, trade receivables and foreign exchange contracts. The Company invests its excess cash in deposits with major banks, in local and state government obligations, commercial paper, and in money market instruments issued by companies with strong credit ratings and in a variety of industries. The counterparties to the agreements relating to the Company's foreign exchange contracts consist of financial institutions of high credit standing. The Company does not believe there is significant risk of non-performance by these counterparties. CONCENTRATION OF OTHER RISKS--The Company's operating results are subject to various risks and uncertainties as discussed in the Company's Annual Report on Form 10-K, including risks and uncertainties related to local economic conditions; competitive pressures; the composition, timing and size of orders from and shipments to major customers; variations in product mix and the mix between leases and sales; variations in product cost; infrastructure costs; obsolescence of inventory; and other factors. Accordingly, the Company's operating results may vary materially from quarter to quarter. The Company operates with little backlog and, as a result, net revenues in any quarter are substantially dependent on the orders booked and shipped in that quarter. Because the Company's operating expenses are based on anticipated revenue levels and because a high percentage of the Company's expenses are relatively fixed, if anticipated shipments in any quarter do not occur as expected, the Company's operating results may be adversely affected and fall significantly short of expectations. Any other unanticipated decline in the growth rate of the Company's net revenues, without a corresponding and timely reduction in the growth of operating expenses, could also have an adverse effect on the Company and its future operating results. Compounding these risks is the fact that a substantial portion of the Company's net revenues in each quarter generally results from shipments during the latter part of the quarter. For this and other reasons, the Company may not learn of shortfalls in revenues, earnings or other financial results relative to expectations until very late in a quarter. Any such shortfall could have an immediate and significant adverse effect on the trading price of the Company's Common Stock. The Company's international operations, including international sales and manufacturing, have grown substantially, and thus, the Company is increasingly affected by the risks associated with international operations. Such risks include managing an organization spread over various countries; fluctuations in currency exchange rates (as discussed further below); the burden of complying with international laws and other regulatory and product certification requirements, and changes in such laws and requirements; tariffs and other trade barriers; import and export controls; international staffing and employment issues; political and economic instability; and longer payment cycles in certain countries. The Company's manufacturing facilities outside the United States, which are in Taiwan and the People's Republic of China, are subject to particular risks relating to political developments and trade barriers. The inability to effectively manage these and other risks could adversely affect the Company and its future operating results. TWENTY-TWO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The majority of the Company's international sales are denominated in U.S. currency. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products sold internationally less competitive. The Company has offices in a number of foreign countries, the operating expenses of which are also subject to the effects of fluctuations in foreign currency exchange rates. Although the Company engages in hedging transactions which may partially offset the effects of fluctuations in foreign currency exchange rates, financial exposure may nonetheless result, primarily due to the timing of transactions and movement of exchange rates. Most components used in the Company's products are purchased from outside sources. The Company is currently dependent on single suppliers for certain product components, including mask-programmed microcontrollers, various printer mechanisms, display devices and certain magnetic parts. The failure of any such supplier to continue to provide these components to the Company could result in significant manufacturing delays that could adversely affect the Company and its future operating results. Managing the Company's inventory of components and finished products is a complex task. A number of factors--including the need to maintain a significant inventory of certain components that are in short supply or that must be purchased in bulk to obtain favorable pricing, the general unpredictability of demand for specific products and customer requests for quick delivery schedules--may result in the Company maintaining excess inventory. Other factors--including changes in market demand and technology--may cause inventory to become obsolete. Any excess or obsolete inventory could result in price reductions and inventory write-downs, which in turn could adversely affect the Company and its operating results. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION AND DEFERRED REVENUE--The Company utilizes direct sales and both sales-type and operating lease arrangements to provide product to its customers. Revenue from both direct sales and sales-type leases is recognized when product shipment terms are met. Operating lease revenue is recognized ratably over the term of the lease. Under sales-type lease accounting, the present value of the minimum lease payments computed at the interest rate implicit in the lease is recorded as sales revenue. The cost of the leased property less the present value of the unguaranteed residual value accruing to the benefit of the Company, computed at the interest rate implicit in the lease, is charged against income. The net investment in sales-type leases is carried at the present value of the minimum lease payments plus the present value of the unguaranteed residual value accruing to the benefit of the Company over the life of the lease. The excess of the sum of the future minimum lease payments to be received, over the carrying value of the lease, represents unearned interest income. Unearned interest income is amortized into income using the interest method over the lives of the leases. Software licenses are recognized as revenues, either after execution of a license agreement and certain terms of the agreement have been met, or upon receipt of a definitive purchase order and shipment of the product. In either case, software licenses are recognized as revenue only if no significant vendor obligations remain and collection of the resulting receivable is probable. Revenue for software services is recognized using the percentage of completion method. Extended warranty revenue is deferred and recognized ratably over the warranty contract period. Service revenue is recognized when services are performed. PRODUCT WARRANTY OBLIGATIONS--The Company provides, at the time of sale, for the estimated cost to warranty its products against defects in materials and workmanship. The term of the Company's warranty is generally one year. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS--Cash and cash equivalents consists of cash and highly liquid investments on deposit with banks maturing within 90 days or less from the date of purchase. Short-term investments consist of high-quality money market instruments with original maturities greater than 90 days. Marketable securities held as collateral against the Company's line of credit for foreign currency transactions are classified as held-to-maturity and are carried at the amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Available-for-sale securities are carried at fair market value with unrealized gains or losses, net of tax, included in "Other" in stockholders' equity. In 1995 the Company realized a gain of $2.5 million from the sale of EIT's interest in Terisa Systems. The Company did not realize any material gains or losses on investments during 1994 and 1996. TWENTY-THREE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FAIR VALUE OF FINANCIAL INSTRUMENTS--For certain of the Company's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable and payable, and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. The carrying value of long-term debt approximates its fair value, determined by using discounted cash flow analysis based upon quoted market rates for similar types of borrowing arrangements. The carrying amounts of the Company's forward exchange contracts approximate the estimated fair market value of the contracts outstanding at December 31, 1996 and 1995; differences in such amounts are immaterial. The following tables summarize the Company's marketable investments as of December 31, 1996 and 1995:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED (IN THOUSANDS) COST GAINS LOSSES FAIR VALUE - ------------------------------------------------------------------------------------------------------------------- As of December 31, 1996 Available-for-sale securities Foreign corporate debt $ 5,000 $ -- $ -- $ 5,000 Obligations of state and local government agencies 594 2 -- 596 Money market mutual funds 20,609 -- -- 20,609 Investment in Cybercash, Inc. 4,000 17,939 -- 21,939 ---------------------------------------------------------- $ 30,203 $ 17,941 $ -- $ 48,144 ---------------------------------------------------------- ---------------------------------------------------------- As of December 31, 1995 Available-for-sale securities Obligations of state and local government agencies $ 41,404 $ 33 $ -- $ 41,437 Money market mutual funds 20,175 -- -- 20,175 Investment in Cybercash, Inc. 4,000 -- -- 4,000 ---------------------------------------------------------- $ 65,579 $ 33 $ -- $ 65,612 ---------------------------------------------------------- ---------------------------------------------------------- Held-to-maturity securities Obligations of state and local government agencies $ 5,704 $ -- $ -- $ 5,704 ---------------------------------------------------------- ---------------------------------------------------------- Balance sheet classification as of December 31, 1996 Cash equivalent $ 25,690 $ -- $ -- $ 25,690 Short-term investments 513 2 -- 515 Other assets 4,000 17,939 -- 21,939 ---------------------------------------------------------- Total $ 30,203 $ 17,941 $ -- $ 48,144 ---------------------------------------------------------- ---------------------------------------------------------- Balance sheet classification as of December 31, 1995 Cash equivalent $ 57,344 $ 33 $ -- $ 57,377 Short-term investments 9,939 -- -- 9,939 Other assets 4,000 -- -- 4,000 ---------------------------------------------------------- ---------------------------------------------------------- $ 71,283 $ 33 $ -- $ 71,316 ---------------------------------------------------------- ----------------------------------------------------------
ALL INVESTMENTS AT DECEMBER 31, 1995 AND 1996 MATURE IN ONE YEAR OR LESS. INVENTORIES--Inventories are stated at the lower of cost (principally first-in, first-out) or market. Inventories at December 31, 1996 and 1995 are composed of the following:
DECEMBER 31, ------------------------ (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Raw materials $ 28,992 $ 39,183 Work in process 4,741 6,369 Finished goods 25,791 31,059 ------------------------ $ 59,524 $ 76,611 ------------------------ ------------------------
TWENTY-FOUR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of 20 years for buildings and 3 to 5 years or the remaining life of the lease for other property and equipment. For equipment on rental under operating leases, depreciation is computed using the straight-line method over the life of the lease. Property, plant and equipment, including equipment on rental under operating leases, at December 31, 1996 and 1995 are as follows: DECEMBER 31, ---------------------- (IN THOUSANDS) 1996 1995 - ---------------------------------------------------------------------- Buildings $20,265 $11,587 Machinery and equipment 72,870 55,300 Furniture and fixtures 8,901 7,320 Leasehold improvements 11,068 12,650 Equipment under capitalized leases 5,343 5,558 Equipment on rental under operating leases 5,039 5,237 ---------------------- 123,486 97,652 Accumulated depreciation and amortization (58,764) (46,710) ---------------------- $64,722 $50,942 ---------------------- ---------------------- On January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. The effect of adopting the statement was immaterial. OTHER ASSETS--Other assets include the following at December 31, 1996 and 1995: DECEMBER 31, ---------------------- (IN THOUSANDS) 1996 1995 - ---------------------------------------------------------------------- Capitalized software costs $22,070 $17,552 Purchased intangibles 17,903 24,875 Investment in Cybercash, Inc. 21,939 4,000 Other investments 3,000 -- Other 9,481 3,738 ---------------------- 74,393 50,165 Accumulated depreciation and amortization (25,782) (27,274) ---------------------- $48,611 $22,891 ---------------------- ---------------------- The Company capitalizes certain costs for internally developed software in accordance with SFAS No. 86. Such costs are amortized, commencing upon first customer shipment, over the greater of either the straight-line basis with estimated useful lives of three to five years, or the ratio of current revenue to the total of current and anticipated future revenue. Capitalized software costs are stated at the lower of cost or net realizable value. Amortization expense was $2,357,000, $3,726,000 and $4,016,000 in 1996, 1995 and 1994, respectively, and is included in cost of revenues. Purchased intangibles consist of amounts relating to the acquisition of VeriFone Finance and other purchased technology, and are being amortized over useful lives of four to ten years. Amortization of purchased intangibles was $3,603,000, $4,012,000 and $4,586,000 in 1996, 1995 and 1994, respectively. FOREIGN CURRENCY TRANSLATION--The Company translates the assets and liabilities of its foreign sales subsidiaries at year-end exchange rates. Gains and losses from this translation are credited or charged to "Other" in stockholders' equity. The foreign manufacturing entities use the U.S. dollar as the functional currency and translate monetary assets and liabilities at year-end exchange rates, and inventories, property, and non-monetary assets and liabilities at historical rates. Adjustments resulting from these translations are included in the results of operations and are immaterial. TWENTY-FIVE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FOREIGN CURRENCY EXPOSURE MANAGEMENT--The Company enters into foreign exchange contracts designed to hedge against changes in foreign currency exchange rates to reduce the impact of currency fluctuations on recorded monetary assets and liabilities denominated in currencies other than the entity's functional currency. The monetary accounts subject to currency exchange rate fluctuations are primarily cash, trade receivables and intercompany accounts receivable and payable. Amounts receivable and payable on forward foreign exchange contracts are not reflected on the balance sheet. Gains and losses on these contracts, which equal the difference between the foreign exchange contract rate and the prevailing market spot rate at the time of valuation, are recognized in the consolidated statements of operations. The Company does not trade foreign exchange contracts or act as a broker of foreign exchange contracts to incur trading profit. Because the impact of movements in currency exchange rates on foreign exchange contracts offsets the related impact on the underlying items being hedged, these instruments do not subject the Company to risk that would otherwise result from changes in currency exchange rates. At December 31, 1996, the Company had eight forward contracts open in nine currencies maturing in January 1997. Currencies hedged include the British Pound, French Franc, Canadian Dollar, Australian Dollar, Singapore Dollar and Spanish Peseta. The Company had forward foreign exchange contracts to buy foreign currencies with notional amounts of $5,132,000 and $4,934,000 at December 31, 1996 and 1995, respectively. The Company had forward foreign exchange contracts to sell foreign currencies with notional amounts of $8,500,000 and $11,439,000 at December 31, 1996 and 1995, respectively. Foreign exchange contracts require the company to buy and sell foreign currencies and generally mature within one to three months, and as a result the notional value approximates the fair market value. NET INCOME PER SHARE--Net income per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options (using the treasury stock method). Fully dilutive earnings per share have not been presented as the differences are immaterial. ACCOUNTING FOR STOCK-BASED COMPENSATION--In 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 provides an alternative to the Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." The Company accounts for its employee stock plans in accordance with the provisions of APB No. 25 (see Note 7). RECLASSIFICATION--The Company has reclassified certain prior year balances to conform with current year presentation. NOTE TWO--BUSINESS COMBINATIONS In November 1995, the Company merged with EIT and TimeCorp. VeriFone outstanding stock was exchanged for Common Stock of EIT and TimeCorp at rates of approximately 0.77 and 0.15 VeriFone share for each share of outstanding EIT and TimeCorp stock, respectively. A total of 1,188,757 shares of VeriFone's Common Stock was issued in connection with the mergers. The mergers were accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements and notes to consolidated financial statements have been restated to include the results of EIT and TimeCorp. The Company incurred costs in connection with the mergers and consolidation of operations. Included in "Selling, general and administrative" expenses in 1995 are merger-related expenses totaling $1,425,000, consisting primarily of charges for transaction and professional fees, before tax. TWENTY-SIX NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE THREE--NET INVESTMENT IN SALES-TYPE LEASES The following lists the components of the net investment in sales-type leases: DECEMBER 31, ---------------------- (IN THOUSANDS) 1996 1995 - ---------------------------------------------------------------------- Total minimum lease payments receivable $38,120 $30,226 Residual values 1,765 1,208 ---------------------- 39,885 31,434 Less unearned interest income (7,106) (5,587) ---------------------- Net investment in sales-type leases $32,779 $25,847 ---------------------- ---------------------- Net investment classified as: Current $13,450 $10,487 Non-current 19,329 15,360 ---------------------- $32,779 $25,847 ---------------------- ---------------------- Future minimum lease payments to be received on sales-type leases at December 31, 1996 are as follows (in thousands): 1997-$16,066; 1998-$10,376; 1999-$5,895; 2000-$3,704; 2001-$2,079. NOTE FOUR--NOTES PAYABLE AND CAPITAL LEASES Notes payable and capital leases include the following at December 31, 1996 and 1995:
(IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Notes payable under a $30,000,000 million unsecured line of credit expiring April 1997, interest rate at 5.86% $ 20,000 $ -- Notes payable to financing companies, non-recourse, due in monthly installments, interest applies at rates ranging from 7.93% to 9.32%, maturing at various dates through June 1998, secured by all rights in certain leases including a security interest in equipment under certain lease agreements and future minimum lease payments 1,344 3,002 Notes payable due in Australian and Japanese currencies, under a $17,000,000 million unsecured line of credit for foreign currency transactions, expiring May 1997, interest rate at bank's cost plus 0.50% (6.29% at December 31, 1996) 15,656 -- Notes payable in Australian currency, under a $8,500,000 unsecured line of credit expired May 1996, interest rate at bank's cost plus 0.75% (8.48% at December 31, 1995) -- 6,508 Notes payable in Japanese currency, under a $3,000,000 million line of credit in Japan, for foreign currency transactions expiring January 1998, secured by short-term investments equal to 110% of borrowings, interest rate at bank's cost plus 0.50% (4.41% at December 31, 1996) 1,224 1,555 Obligations under capital leases 874 1,709 ----------------------- Total notes payable and capital leases, including current maturities 39,098 12,774 Less current maturities (38,581) (10,569) ----------------------- Total non-current portion of capital leases $ 517 $ 2,205 ----------------------- -----------------------
Principal maturities of notes payable and capital leases at December 31, 1996 are as follows (in thousands): 1997-$38,581; 1998-$476; and 1999-$41. The weighted average interest rate for borrowings was 6.50% and 6.71% in 1996 and 1995, respectively. The fair value of notes payable to a financing company and obligations under the lines of credit in the U.S., Australia and Japan were $38,213,000 and $10,610,000 at December 31, 1996 and 1995, respectively. Fair market value is determined by using discounted cash flow analysis based upon quoted market rates for similar types of borrowing arrangements. Covenants governing the Company's lines of credit require the maintenance of certain financial ratios. At December 31, 1996, the Company was in compliance with these covenants. The Company leases certain equipment under non-cancelable leases. Accumulated amortization related to assets under capital leases was $4,862,000 and $4,257,000 at December 31, 1996 and 1995, respectively. TWENTY-SEVEN NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE FIVE--INCOME TAXES Income before income taxes consisted of the following: YEARS ENDED DECEMBER 31, ---------------------------------- (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------- Income before income taxes: United States $22,937 $16,554 $19,318 Foreign 32,365 29,228 20,248 ---------------------------------- Total income before income taxes $55,302 $45,782 $39,566 ---------------------------------- ---------------------------------- The provision for income taxes is computed in accordance with SFAS No. 109, "Accounting for Income Taxes," and consists of the following: YEARS ENDED DECEMBER 31, ---------------------------------- (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------- Current income taxes: U.S. federal $ 8,150 $ 5,123 $ 8,352 Foreign 2,351 3,874 2,132 State 1,879 1,846 3,107 ---------------------------------- 12,380 10,843 13,591 ---------------------------------- Deferred income taxes: U.S. federal 2,391 1,022 (2,455) Foreign 412 40 24 State 855 1,372 296 ---------------------------------- 3,658 2,434 (2,135) ---------------------------------- $16,038 $13,277 $11,456 ---------------------------------- ---------------------------------- The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the differences are as follows: YEARS ENDED DECEMBER 31, ---------------------------------- (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------- Tax at U.S. federal statutory rate based on pre-tax income before minority interest $19,356 $16,024 $14,055 State income taxes, net of federal benefits 1,777 2,091 2,213 Research tax credits -- -- (43) Tax-exempt income (527) (422) (846) Permanently invested profits of foreign subsidiaries (6,650) (6,685) (3,500) Purchased intangibles 969 2,019 -- Other 1,113 250 (423) ---------------------------------- Provision for income taxes $16,038 $13,277 $11,456 ---------------------------------- ---------------------------------- TWENTY-EIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Deferred income taxes result from differences in the timing of certain revenue and expense items for tax and financial reporting purposes. Significant components of deferred tax assets and liabilities are as follows: DECEMBER 31, ----------------------- (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------- Deferred tax assets: Deferred income $ 2,378 $ 2,120 Inventory valuation and reserves 5,544 4,597 Other reserves and accruals 5,615 5,033 Fixed assets and leases 701 -- State income taxes 2,100 1,871 Other -- 83 ----------------------- Total deferred tax assets 16,338 13,704 ----------------------- Deferred tax liabilities: Undistributed profits of foreign subsidiaries (31,558) (27,194) Software and intangibles (3,910) (2,280) Fixed assets and leases -- (928) Unrealized gain on available-for-sale securities (7,095) -- Other (514) (77) ----------------------- Total deferred tax liabilities (43,077) (30,479) ----------------------- Net deferred tax liabilities $(26,739) $(16,775) ----------------------- ----------------------- The cumulative unrecognized deferred tax liability related to undistributed earnings of foreign subsidiaries which the Company intends to permanently invest is approximately $30.5 million. The Internal Revenue Service is currently examining the Company's tax returns for each of the years ended December 31, 1991, 1990 and 1989. Management believes that adequate provision has been made for any adjustments that might result. NOTE SIX--COMMITMENTS AND CONTINGENCIES OPERATING LEASES--The Company leases certain of its facilities under non-cancelable operating leases. Rent expense was approximately $9,385,000, $7,687,000 and $6,314,000 in 1996, 1995 and 1994, respectively. Future minimum operating lease payments and commitments associated with the Company's new facilities at December 31, 1996 are as follows (in thousands): 1997-$10,856; 1998-$10,665; 1999-$8,568; 2000-$7,581; 2001-$6,881; thereafter- $29,772. CONTINGENCIES--In the ordinary course of business, various claims are made against the Company. Historically, the liability associated with the resolution of such claims has not been significant. The Company is not aware of any claims pending against it, the resolution of which is expected to have a material impact on the Company's financial condition. TWENTY-NINE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE SEVEN--STOCKHOLDERS' EQUITY STOCK OPTIONS--In 1985, the Company adopted an Incentive Stock Option Plan. Options under this Plan may be granted to any employee (including officers) of the Company. In 1987, the Company adopted a Supplemental Stock Option Plan which allows for options other than incentive stock options to be granted to any employee (including officers) or consultant to the Company. In 1992, the Company adopted a Non-employee Directors' Stock Option Plan. As amended, there were 7,737,617 shares of Common Stock authorized for issuance under these Plans. As of December 31, 1996, there remained 3,851,261 shares reserved for issuance under these Plans. Options may be granted at prices generally not lower than fair market value of the Company's Common Stock at the date of grant. Options vest over varying terms of up to four years, as determined by the Board of Directors, and expire five or ten years after the date of grant or upon certain events. At December 31, 1996, options for 1,148,146 shares were exercisable at prices ranging from $0.32 to $49.50 per share. Information with respect to activity under the Plans is as follows:
SHARES UNDER OUTSTANDING OPTIONS -------------------------------- WEIGHTED- SHARES AVAILABLE NUMBER OF AVERAGE FOR GRANT SHARES PRICE PER SHARE EXERCISE PRICE - ------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1993 765,001 1,729,092 $ 0.05-$29.50 $ 18.53 Increase in shares reserved 154,573 -- -- -- Options cancelled 141,587 (141,587) $ 0.25-$29.50 $ 20.58 Options granted (887,473) 887,473 $ 1.94-$21.75 $ 16.27 Options exercised -- (295,747) $ 0.05-$22.00 $ 4.77 -------------------------------------------------------------------------- Balance, December 31, 1994 173,688 2,179,231 $ 0.05-$29.50 $ 19.26 Increase in shares reserved 2,270,403 -- -- -- Options cancelled 170,056 (170,056) $ 0.32-$29.75 $ 22.20 Options granted (1,418,772) 1,418,772 $ 1.94-$29.75 $ 27.18 Options exercised -- (407,230) $ 0.05-$28.50 $ 16.55 -------------------------------------------------------------------------- Balance, December 31, 1995 1,195,375 3,020,717 $ 0.32-$29.75 $ 22.50 Increase in shares reserved 400,000 -- -- -- Options cancelled 377,047 (377,047) $ 0.32-$49.50 $ 33.31 Options granted (1,228,828) 1,228,828 $ 29.25-$49.50 $ 39.37 Options exercised -- (764,831) $ 0.32-$42.25 $ 20.06 -------------------------------------------------------------------------- Balance, December 31, 1996 743,594 3,107,667 $ 0.32-$49.50 $ 28.45 -------------------------------------------------------------------------- --------------------------------------------------------------------------
The options outstanding at December 31, 1996 have been segregated into four price ranges for additional disclosure as follows (option amounts are recorded in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------------------------------- WEIGHTED-AVG WEIGHTED- OPTIONS WEIGHTED- RANGE OF OPTIONS REMAINING AVERAGE CURRENTLY AVERAGE EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE PRICES DEC. 31, 1996 LIFE PRICE DEC. 31, 1996 PRICE - ---------------------------------------------------------------------------------------------------------------------- $ 0.32-$ 1.94 96 7.64 $ 1.84 46 $ 1.74 $15.00-$25.50 1,145 7.06 $21.36 684 $20.91 $26.23-$39.00 1,740 8.93 $33.42 406 $31.17 $41.00-$49.50 127 9.45 $44.22 12 $44.05 ----------------------------------------------------------------------------------- 3,108 8.22 $28.45 1,148 $24.03 ----------------------------------------------------------------------------------- -----------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN--In 1990, the Company adopted its Employee Stock Purchase Plan, for which permanent, full-time employees who meet certain minimum employment criteria are eligible. As amended, there were 1,000,000 shares of Common Stock authorized for issuance under the Plan. As of December 31, 1996, 889,329 shares had been issued under the Plan (166,069 shares were issued in 1996), with 110,671 shares remaining reserved for issuance under the Plan. Eligible employees may purchase stock at 85% of the lower of the closing price at the beginning or end of the Plan offering period (six-month periods beginning February and August). Through January 1995, Plan purchases were limited to 10% of each employee's compensation; thereafter, Plan purchases are limited to 15% of each employee's compensation. THIRTY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STOCK COMPENSATION--The Company has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding the net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options granted subsequent to 1994 under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model for the multiple-option approach, with the following weighted-average assumptions for 1996 and 1995: risk-free interest rate of 5.71% and 5.81%, respectively; volatility factor of the expected market price of the Company's Common Stock of 45%; no expected dividend payments; and a weighted-average expected life of the option of one year. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to pro forma net income over the options' vesting period. The Company's pro forma information follows: DECEMBER 31, ---------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 - ------------------------------------------------------------------------ Pro forma net income $32,174 $29,852 Pro forma earnings per share $ 1.27 $ 1.28 Because SFAS No. 123 is applicable only to options granted subsequent to 1994, its pro forma effect will not be fully reflected until 1998. STOCK REPURCHASE/SALE--In 1996 and 1995, 2,496,000 and 600,000 shares were repurchased for an aggregate purchase price of $99,991,000 and $14,543,000, respectively. In October 1995, 660,000 shares were issued for an aggregate price of $17,302,000. 401(K) RETIREMENT SAVINGS AND INVESTMENT PLAN--The Company has a 401(k) Plan which, effective January 1, 1994, the Company began matching contributions to the Plan equal to 50% of the first 6% of a participant's salary deferral contribution, subject to a maximum of 3% of the participant's qualifying contribution. THIRTY-ONE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE EIGHT--GEOGRAPHIC SEGMENT DATA United States operations primarily consist of product development, sales and marketing, distribution and service. European operations consist of product distribution through the Company's subsidiaries located in the United Kingdom, France, Germany, Italy and Spain, and via third-party distributors in other countries. The Americas, consisting of Latin America, the Caribbean and Canada, engage primarily in product distribution via third-party distributors and direct sales in Mexico and Canada. The Pacific Basin is primarily engaged in product development and manufacturing through the Company's subsidiaries in Taiwan and Kunshan and product distribution through the Company's subsidiaries in Singapore, Hong Kong, Japan, Australia and the People's Republic of China, and via third-party distributors. Net sales to unaffiliated customers are based on the location of the customer. Transfers between geographic areas are recorded at amounts generally above cost and in accordance with the rules and regulations of the respective governing tax authorities. Thus, the information may not be indicative of results if the geographic areas were independent organizations. Geographic information for the three years ended December 31, 1996 is presented in the table below.
GEOGRAPHIC AREA ------------------------------------------------------ UNITED PACIFIC BASIN (IN THOUSANDS) STATES EUROPE AMERICAS AND OTHER ELIMINATIONS TOTAL - ----------------------------------------------------------------------------------------------------------------------------- 1996 Sales to unaffiliated customers $ 287,518 $ 69,048 $ 51,478 $ 64,416 $ -- $ 472,460 Intercompany transfers 28,016 17,971 2,191 262,163 (310,341) -- ------------------------------------------------------------------------------------ Net revenues $ 315,534 $ 87,019 $ 53,669 $ 326,579 $ (310,341) $ 472,460 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ Income from operations $ 693 $ 4,369 $ 10,849 $ 35,326 $ 2,280 $ 53,517 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ Income before income taxes $ 13,295 $ 4,363 $ 10,833 $ 36,388 $ (9,577) $ 55,302 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ Identifiable assets $ 242,973 $ 57,350 $ 11,696 $ 263,160 $( 170,199) $ 404,980 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ 1995 Sales to unaffiliated customers $ 245,988 $ 57,018 $ 43,111 $ 40,899 $ -- $ 387,016 Intercompany transfers 20,620 6,850 12 210,659 (238,141) -- ------------------------------------------------------------------------------------ Net revenues $ 266,608 $ 63,868 $ 43,123 $ 251,558 $ (238,141) $ 387,016 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ Income from operations $ 2,489 $ 6,261 $ 10,370 $ 21,740 $ 877 $ 41,737 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ Income before income taxes $ 8,664 $ 6,189 $ 10,396 $ 22,505 $ (1,972) $ 45,782 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ Identifiable assets $ 225,765 $ 43,031 $ 13,681 $ 177,600 $ (80,561) $ 379,516 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ 1994 Sales to unaffiliated customers $ 216,055 $ 47,395 $ 29,996 $ 22,662 $ -- $ 316,108 Intercompany transfers 6,987 3,900 224 153,718 (164,829) -- ------------------------------------------------------------------------------------ Net revenues $ 223,042 $ 51,295 $ 30,220 $ 176,380 $ (164,829) $ 316,108 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ Income from operations $ 7,326 $ 3,370 $ 2,938 $ 20,054 $ 3,781 $ 37,469 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ Income before income taxes $ 16,543 $ 3,410 $ 2,938 $ 21,559 $ (4,884) $ 39,566 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ Identifiable assets $ 233,303 $ 37,151 $ 2,023 $ 149,768 $ (91,693) $ 330,552 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------
THIRTY-TWO REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS VERIFONE, INC. We have audited the accompanying consolidated balance sheets of VeriFone, Inc. at December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VeriFone, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP PALO ALTO, CALIFORNIA JANUARY 17, 1997 STOCK PERFORMANCE - -------------------------------------------------------------------------------- The following tables set forth, for the periods indicated, the high, low and closing prices for the Company's Common Stock as reported by the New York Stock Exchange and the Nasdaq Stock Market. VeriFone, Inc. began trading on the New York Stock Exchange on August 10, 1995. The prices shown for the period that VeriFone's Common Stock was traded on the Nasdaq Stock Market represent quotations among dealers without adjustments for retail markups, markdowns or commissions, and may not represent actual transactions. FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW CLOSE - ------------------------------------------------------------------------------- First quarter 47 1/2 25 3/4 42 Second quarter 52 5/8 35 1/4 42 1/4 Third quarter 50 1/2 34 1/8 46 Fourth quarter 45 3/8 28 3/4 29 FISCAL YEAR ENDED DECEMBER 31, 1995 HIGH LOW CLOSE - ------------------------------------------------------------------------------- First quarter 27 20 3/4 24 1/2 Second quarter 24 3/4 19 3/4 24 1/2 Third quarter 31 3/8 23 3/4 27 7/8 Fourth quarter 30 3/8 24 3/4 28 5/8 As of December 31, 1996, there were approximately 1,396 holders of record of the Company's Common Stock. The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. THIRTY-THREE QUARTERLY DATA (UNAUDITED) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 -------------------------------------------- FIRST SECOND THIRD FOURTH (IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------- Net revenues $102,927 $124,959 $120,897 $123,677 Costs and expenses: Cost of revenues 54,368 66,661 65,928 69,293 Research and development 12,573 14,004 13,070 13,787 Selling, general and administrative 27,134 29,210 27,007 25,908 -------------------------------------------- Total costs and expenses 94,075 109,875 106,005 108,988 -------------------------------------------- Income from operations 8,852 15,084 14,892 14,689 Interest income, net 609 750 578 (152) -------------------------------------------- Income before income taxes 9,461 15,834 15,470 14,537 Provision for income taxes 2,744 4,591 4,487 4,216 ------------------------------------------- Net income $ 6,717 $ 11,243 $ 10,983 $ 10,321 -------------------------------------------- -------------------------------------------- Net income per share $ 0.26 $ 0.43 $ 0.42 $ 0.42 -------------------------------------------- -------------------------------------------- Shares used in per share calculations 26,039 26,322 26,073 24,515 -------------------------------------------- -------------------------------------------- YEAR ENDED DECEMBER 31, 1995 -------------------------------------------- FIRST SECOND THIRD FOURTH (IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------- Net revenues $ 80,156 $ 94,850 $102,742 $109,268 Costs and expenses: Cost of revenues 41,233 48,626 54,011 58,486 Research and development 10,833 11,109 11,467 11,627 Selling, general and administrative 21,235 23,127 26,238 27,287 -------------------------------------------- Total costs and expenses 73,301 82,862 91,716 97,400 -------------------------------------------- Income from operations 6,855 11,988 11,026 11,868 Interest income, net 496 391 2,060 1,098 -------------------------------------------- Income before income taxes 7,351 12,379 13,086 12,966 Provision for income taxes 2,132 3,590 3,795 3,760 -------------------------------------------- Net income $ 5,219 $ 8,789 $ 9,291 $ 9,206 -------------------------------------------- -------------------------------------------- Net income per share $ 0.21 $ 0.36 $ 0.38 $ 0.37 -------------------------------------------- -------------------------------------------- Shares used in per share calculations 24,389 24,173 24,423 25,186 -------------------------------------------- --------------------------------------------
THIRTY-FOUR CORPORATE INFORMATION - -------------------------------------------------------------------------------- BOARD OF DIRECTORS Hatim A. Tyabji Chairman of the Board, President and Chief Executive Officer VeriFone, Inc. H.H. Haight IV* Venture Capitalist Advent International Corporation J. Robert Harcharik** Private Consultant in Telecommunications Thomas E. Peterson* Vice Chairman BankAmerica Corporation and Bank of America NT&SA John R.C. Porter* Chairman of the Board Cast Alloys, Inc. Clinton W. Silver Former Deputy Chairman Marks & Spencer Plc. A. Michael Spence** Dean, Graduate School of Business Stanford University R. Elton White** Former President NCR Corporation * Audit Committee ** Compensation Committee VERIFONE MANAGEMENT TEAM Hatim A. Tyabji Chairman of the Board, President and Chief Executive Officer Robin A. Abrams Vice President and General Manager, Americas Group William G. Barmeier Senior Vice President, General Counsel and Secretary Katherine B. Beall Vice President, Human Resources Roger B. Bertman Vice President, Corporate Development Eugene K. Buechele Vice President, Software Development Eldon M. Bullington Vice President and Corporate Controller Gary L. Grant Vice President, Asia-Pacific, Sales Operations and Marketing George C. Hoyem Vice President and General Manager, Internet Commerce Larry W. Kessler Vice President and General Manager, Asia-Pacific Thomas J. Kilcoyne Vice President, Consumer Systems Division Curtis A. Lindemer Treasurer Patrick A. McGill Vice President and Special Assistant to the Chairman of the Board C. Lloyd Mahaffey Senior Vice President and General Manager, Global Marketing and Software Systems Division James A. Palmer Executive Vice President, Development and Manufacturing Alexander Pappas Vice President and Chief Information Officer Anthony T.M. Robertson Vice President, Development Jan-Erik Rottinghuis Vice President, Europe, Middle East and Africa Michael J. Shade Vice President, Centum Consulting Services William L. Smith Vice President, U.S. Field Technical Support Elmore E. Waller Vice President and General Manager, Petroleum Division John Weitzner Vice President, Operations Robert L. Wilson Vice President, Business Development, Chip Card Adoption Joseph M. Zaelit Senior Vice President, Finance and Administration, and Chief Financial Officer INDEPENDENT AUDITORS Ernst & Young LLP Palo Alto, California STOCKHOLDER INFORMATION ANNUAL MEETING OF STOCKHOLDERS The annual meeting of stockholders will be held on Friday, May 9, 1997 at 10:00 a.m. at the Stanford Park Hotel, 100 El Camino Real, Menlo Park, California 94025. TRANSFER AGENT AND REGISTRAR For questions concerning stock certificates, transfer of ownership and other matters pertaining to stock registration, please contact: The First National Bank of Boston c/o Boston EquiServe Shareholder Services m/s 45-01-20 P.O. Box 644 Boston, MA 02101-0644 Phone: 617-575-3120 COMMON STOCK The Company's stock is listed on the New York Stock Exchange and Pacific Stock Exchange under the ticker symbol VFI. INVESTOR INFORMATION A copy of the Company's annual report, proxy statement, SEC Form 10-K, quarterly SEC Form 10-Qs and press releases are available free of charge by writing VeriFone's Investor Relations Department at Three Lagoon Drive, Redwood City, CA 94065, or calling 415-598-5653. This information is also available on our Web site: www.verifone.com. THIRTY-FIVE CORPORATE INFORMATION - -------------------------------------------------------------------------------- VERIFONE, INC. Three Lagoon Drive Redwood City, CA 94065-1561 TEL: 415-591-6500 FAX: 415-598-5504 NET: www.verifone.com RESEARCH & DEVELOPMENT One Northwinds Center 2475 Northwinds Parkway, Suite 600 Alpharetta, GA 30201 12830 Earhart Avenue Auburn, CA 95602-9027 16001 Bay Vista Drive, Suite 200 Clearwater, FL 34620-3102 14881 Quorum Drive, Suite 800 Dallas, TX 75240-7018 2000 West Commercial Blvd., Suite 202 Ft. Lauderdale, FL 33309-3060 Old Dispensary Road Lapahoehoe, HI 96764-9027 800 El Camino Real Menlo Park, CA 94025-4800 100 Kahelu Avenue Mililani, HI 96789-3909 530 Lytton Avenue Palo Alto, CA 94301-2539 Three Lagoon Drive Redwood City, CA 94065-1561 VeriFone India Pvt. Ltd. Indian Express Building, 2nd Floor Dr. B.R. Ambedkar Road Bangalore-560 001, India VeriFone Technology Park Golf View Homes Wind Tunnel Road Murgesh Palya Bangalore-560 017, India VeriFone S.A. & VeriFone B.V. 117/119 Quai de Valmy 75484 Paris, Cedex 10, France VeriFone Pte. Ltd. 24 Raffles Place #14-01/06 Clifford Centre Singapore 048621 VeriFone Technology Pte. Ltd. CTS Building, 4th Floor 102 Kuang Fu South Road 10553 Taipei, Taiwan, R.O.C. VeriFone (UK) Ltd. Salamander Quay West Park Lane, Harefield Uxbridge, Middlesex UB9 6NZ United Kingdom MANUFACTURING 3080 Airway Avenue Costa Mesa, CA 92626-4540 VeriFone Electronics (Kunshan) Co., Ltd. 312, Chin-Yang South Rd. E.T.D.Z. Kunshan, Jiang-Su Province, China 215300 VeriFone Taiwan Ltd. 6-2, Hsin Kai Fa Road N.E.P.Z. Kaohsiung, Taiwan, R.O.C. VeriFone Technology Pte. Ltd. CTS Building, 4th Floor 102 Kuang Fu South Road 10553 Taipei, Taiwan, R.O.C. DISTRIBUTION 3080 Airway Avenue Costa Mesa, CA 92626-4540 VeriFone Taiwan Ltd. 6-2, Hsin Kai Fa Road N.E.P.Z. Kaohsiung, Taiwan, R.O.C. CUSTOMER SERVICE 3080 Airway Avenue Costa Mesa, CA 92626-4540 12540 Westport Road Louisville, KY 40245-3860 Transaction Technology Pty. Ltd. Unit 8 552-560 Church Street North Parramatta NSW 2151 U.S. SALES OFFICES ATLANTA USA Division Headquarters One Northwinds Center 2475 Northwinds Parkway, Suite 600 Alpharetta, GA 30201 CHICAGO 3701 Algonquin Road, Suite 710 Rolling Meadows, IL 60008-3121 DALLAS 14881 Quorum Drive, Suite 800 Dallas, TX 75240-7018 DAYTON 580 Lincoln Park Blvd. East, Suite 222 Dayton, OH 45429-3493 LOS ANGELES 3080 Airway Avenue Costa Mesa, CA 92626-4540 NEW YORK One Mountain Blvd., Suite 201 Warren, NJ 07059-5613 PALO ALTO 530 Lytton Avenue Palo Alto, CA 94301-2539 PORTLAND VeriFone Finance, Inc. Oregon Business Park 16100 SW 72nd Avenue, Building 18 Portland, OR 97224-7745 SAN FRANCISCO Three Lagoon Drive Redwood City, CA 94065-1561 TAMPA 16001 Bay Vista Drive, Suite 200 Clearwater, FL 34620-3102 INTERNATIONAL SALES OFFICES ARGENTINA VeriFone Argentina S.A. Florida 375-5 Piso Of. "C" 1005 Buenos Aires, Argentina AUSTRALIA VeriFone Australia Pty. Ltd. Level 9, 275 Alfred Street North North Sydney NSW 2060, Australia VeriFone Australia Pty. Ltd. 14 Hamilton Street Mont Albert VIC 3127 Australia INTERNATIONAL SALES OFFICES BRAZIL VeriFone de Brasil, Ltda. Av. Dr. Chucri Zaidan, 920-90. Andar Sao Paulo, S.P. Barsil 04583-904 CANADA VeriFone Ltd. 33 Yonge Street, Suite 730 Toronto, Ontario M5E 1S9, Canada FRANCE VeriFone S.A. & VeriFone B.V. 117/119 Quai de Valmy 75484 Paris, Cedex 10, France GERMANY VeriFone GmbH Otto-von-Guericke-Ring 13-15 65205 Wiesbaden-Nordenstadt, Germany HONG KONG VeriFone North Asia Ltd. 20/F Chinachem Century Tower 178 Gloucester Road Wanchai, Hong Kong INDIA VeriFone India Pvt. Ltd. Indian Express Building Dr. B.R. Ambedkar Road Bangalore-560 001, India ITALY VeriFone S.r.l. Via Cesare Cantu, 19 I-20092 Cinisello Balsamo Milan, Italy JAPAN Nihon VeriFone K.K. Gobancho Center Bldg. 3rd Fl. 10-2, Gobancho, Chiyoda-ku Tokyo 102, Japan Latin America & the Caribbean One Datran Center 9100 South Dadeland Blvd. Miami, FL 33156-7852 MEXICO VeriFone, S.A. de C.V. Monte Elbruz, No. 124, 3rd Floor Deleg. Miguel Hidalgo Mexico D.F. 11560 PEOPLE'S REPUBLIC OF CHINA VeriFone (Beijing) Rm. 1860 New Century Office Tower No. 6 Southern Road, Capital Gym. 100044 Beijing, China SINGAPORE VeriFone Pte. Ltd. 24 Raffles Place #14-01/06 Clifford Centre Singapore 048621 SOUTH AFRICA VeriFone (Pty) Limited 4 Pybus Road Wierda Valley Sandton 2146 Republic of South Africa SPAIN VeriFone Espana S.A. Francisco Giralte, 2 28002 Madrid, Spain VeriFone Espana S.A. Diputacion, 279 3 3 08007 Barcelona, Spain UNITED KINGDOM VeriFone (UK) Ltd. Salamander Quay West Park Lane, Harefield Uxbridge, Middlesex UB9 6NZ United Kingdom THIRTY-SIX VeriFone is an equal employment opportunity and affirmative action employer. VeriFone, the VeriFone logo, OMNI, Omnihost, Ruby SuperSystem and TRANZ are United States registered trademarks. VeriFone and the VeriFone logo are registered or pending registration in most of the foreign jurisdictions where the Company does business. In addition, SC, vGATE and vPOS are trademarks of the Company. All other brand names or trademarks appearing in this Annual Report are the property of their respective holders. [LOGO] VERIFONE GLOBAL HEADQUARTERS Three Lagoon Drive Redwood City, CA 94065-1561 #14-01/06 TEL: 415-591-6500 FAX: 415-598-5504 NET: www.verifone.com USA DIVISION SALES & SUPPORT One Northwinds Center 2475 Northwinds Parkway, Suite 600 Alpharetta, GA 30301 TEL: 770-410-0890 FAX: 770-754-3478 ASIA-PACIFIC SALES & SUPPORT VeriFone Pte. Ltd. 24 Raffles Place #14-01/06 Clifford Centre Singapore, 048821 TEL: 65-538-5110 FAX: 85-538-5120 CANADA SALES & SUPPORT VeriFone Ltd. 33 Yonge Street, Suite 730 Toronto, Ontario M5E 1S9, Canada TEL: 416-214-1334 FAX: 416-214-5599 EUROPE, MIDDLE EAST & AFTICA SALES & SUPPORT VeriFone S.A. & VeriFone B.V. 117/119 Quaide Valmy 75484 Parie, Cadex 10, France TEL: 33-153-356-000 FAX: 33-153-358-002 LATIN AMERICA & THE CARIBBEAN SALES & SUPPORT One Datran Center 9100 South Dadeland Blvd. Miami, FL 33156-7852 TEL: 305-670-1820 FAX: 305-670-1699 EX-21.1 9 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF VERIFONE, INC. 1. VeriFone (Argentina) S.A. (Argentina) 2. VeriFone (Australia) Pty Limited (Australia) 3. Transaction Technology Pty Ltd. (Australia) 4. VeriFone do Brasil Ltda (Brazil) 5. VeriFone Limited (Canada) 6. VeriFone S.A. (France) 7. VeriFone GmbH (Germany) 8. VeriFone Hong Kong Limited (Hong Kong) 9. VeriFone North Asia Limited (Hong Kong) 10. VeriFone India Private Ltd. (India) 11. VeriFone S.r.l. (Italy) 12. Nihon VeriFone K.K. (Japan) 13. VeriFone S.A. de C.V. (Mexico) 14. VeriFone B.V. (Netherlands) 15. VeriFone Electronics (Kushan) Co., Ltd. (People's Republic of China) 16. VeriFone Sp. z O.O. (Poland) 17. VeriFone Pte Ltd. (Singapore) 18. VeriFone Technology Pte. Ltd. (Singapore) 19. VeriFone (South Africa) Pty Ltd. (South Africa) 20. VeriFone Esp na, S.A. (Spain) 21. VeriFone Taiwan Ltd. (Taiwan R.O.C.) 22. VeriFone (UK) Ltd. (United Kingdom) 23. Enterprise Integration Technologies Corporation (California, USA) 24. VeriFone Finance, Inc. (Delaware, USA) 25. VeriFone VeriGem, Inc. (Delaware, USA) 26. TimeCorp Systems, Inc. (Georgia, USA) 96 EX-23.1 10 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of VeriFone, Inc. of our report dated January 17, 1997, included in the 1996 Annual Report to Stockholders of VeriFone, Inc. Our audits also included the financial statement schedule of VeriFone, Inc. listed in item 14(a)2. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to incorporation by reference in the Registration Statements (Form S-8 Nos. 33-48833 and 333-08839) pertaining to the Incentive Stock Option Plan and 1987 Supplemental Stock Option Plan, Registration Statement (Form S-8, No. 33-81698) pertaining to the Non-employee Directors Stock Option Plan, Registration Statement (Form S-8 No. 33-81704) pertaining to the Employee Stock Purchase Plan, Registration Statement (Form S-8, No. 333-00194) pertaining to stock options issued in connection with the acquisition of Enterprise Integration Technology, Inc., Registration Statements (Form S-3, Nos. 33-97510, 333-02810 and 333-20455) pertaining to the sale of Common Stock, of our report dated January 17, 1997, with respect to the consolidated financial statements incorporated herein by reference and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Palo Alto, California March 24, 1997 97 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 DEC-31-1996 47,395 515 135,034 3,842 13,450 272,318 123,486 58,764 404,980 127,079 0 0 0 248 239,318 404,980 472,460 472,460 256,250 418,943 0 0 1,090 55,302 16,038 39,264 0 0 0 39,264 1.53 1.52
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