Edgar Filing: VERIFONE SYSTEMS, INC.

PAY 10Q 4/30/2013

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended April 30, 2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission file number: 001-32465

VERIFONE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



Delaware		04-3692546
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2099 Gateway Place, Suite 600

San Jose, CA 95110

(Address of principal executive offices with zip code)

(408) 232-7800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ			Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)			Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

At May 31, 2013, the number of shares outstanding of the registrant’s common stock, $0.01 par value was 108,529,037.

VERIFONE SYSTEMS, INC.

TABLE OF CONTENTS



PART I — FINANCIAL INFORMATION

Item 1	Financial Statements (Unaudited):	3

	Condensed Consolidated Statements of Operations	3

	Condensed Consolidated Statements of Comprehensive Income	4

	Condensed Consolidated Balance Sheets	5

	Condensed Consolidated Statements of Cash Flows	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3	Quantitative and Qualitative Disclosures About Market Risk	62

Item 4	Controls and Procedures	64

PART II — OTHER INFORMATION

Item 1	Legal Proceedings	65

Item 1A	Risk Factors	65

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	86

Item 3	Defaults Upon Senior Securities	86

Item 4	Mine Safety Disclosures	86

Item 5	Other Information	86

Item 6	Exhibits	87

Signatures		88

PART I — FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS (Unaudited)

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



	Three Months Ended April 30,						Six Months Ended April 30,
	2013			2012			2013			2012
	(Unaudited, in thousands, except per share data)
Net revenues:
System solutions	$	276,560		$	340,443		$	558,268		$	653,084
Services	149,727			131,575			296,766			238,458
Total net revenues	426,287			472,018			855,034			891,542
Cost of net revenues:
System solutions	180,872			202,273			355,115			401,025
Services	91,109			77,586			173,651			141,720
Total cost of net revenues	271,981			279,859			528,766			542,745
Total gross margin	154,306			192,159			326,268			348,797
Operating expenses:
Research and development	41,581			37,849			81,383			72,928
Sales and marketing	46,496			46,141			92,244			86,127
General and administrative	43,676			48,696			83,657			94,734
Litigation loss contingency expense	69,000			17,632			69,000			17,632
Amortization of purchased intangible assets	23,122			23,757			47,818			37,372
Total operating expenses	223,875			174,075			374,102			308,793
Operating income (loss)	(69,569		)	18,084			(47,834		)	40,004
Interest expense	(11,979		)	(18,636		)	(24,569		)	(33,270		)
Interest income	730			1,143			1,818			2,150
Other income (expense), net	2,306			(1,780		)	6,246			(22,629		)
Loss before income taxes	(78,512		)	(1,189		)	(64,339		)	(13,745		)
Income tax benefit	(21,483		)	(4,598		)	(19,020		)	(14,380		)
Consolidated net income (loss)	(57,029		)	3,409			(45,319		)	635
Net (income) loss attributable to noncontrolling interests	(1,347		)	68			(1,219		)	(282		)
Net income (loss) attributable to VeriFone Systems, Inc. stockholders	$	(58,376	)	$	3,477		$	(46,538	)	$	353
Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
Basic	$	(0.54	)	$	0.03		$	(0.43	)	$	—
Diluted	$	(0.54	)	$	0.03		$	(0.43	)	$	—
Weighted average number of shares used in computing net income (loss) per share:
Basic	108,314			106,898			108,122			106,359
Diluted	108,314			111,148			108,122			110,349

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

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended April 30,						Six Months Ended April 30,
	2013			2012			2013			2012
	(Unaudited, in thousands)
Net income (loss) attributable to VeriFone Systems, Inc. stockholders	$	(58,376	)	$	3,477		$	(46,538	)	$	353
Other comprehensive income (loss):
Net change in:
Foreign currency translation	(44,737		)	(1,519		)	3,538			5,439
Unrealized gain (loss) on marketable equity investment	(327		)	(500		)	157			(600		)
Unrealized gain (loss) on derivatives designated as cash flow hedges	(391		)	(3,102		)	284			(3,102		)
Tax impact of unrealized gain (loss) on derivatives designated as cash flow hedges	147			1,165			400			1,165
Pension plan obligations	28			29			(146		)	171
Comprehensive income (loss) attributable to VeriFone Systems, Inc. stockholders	$	(103,656	)	$	(450	)	$	(42,305	)	$	3,426

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

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	April 30, 2013			October 31, 2012
	(Unaudited, in thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	505,953		$	454,072
Accounts receivable, net of allowances of $10,934 and $8,491	315,908			366,887
Inventories	181,348			178,274
Prepaid expenses and other current assets	139,514			136,210
Total current assets	1,142,723			1,135,443
Fixed assets, net	147,173			146,803
Purchased intangible assets, net	672,244			734,808
Goodwill	1,186,163			1,179,381
Deferred tax assets	240,135			215,139
Other long-term assets	78,978			79,033
Total assets	$	3,467,416		$	3,490,607

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	151,469		$	193,062
Accruals and other current liabilities	288,613			230,867
Deferred revenue, net	97,965			91,545
Short-term debt	67,054			54,916
Total current liabilities	605,101			570,390
Long-term deferred revenue, net	41,783			37,062
Long-term deferred tax liabilities	198,597			214,537
Long-term debt	1,212,213			1,252,701
Other long-term liabilities	81,039			70,440
Total liabilities	2,138,733			2,145,130
Commitments and contingencies	—			—
Redeemable noncontrolling interest in subsidiary	758			861
Stockholders’ equity:
Preferred stock: 10,000 shares authorized, no shares issued and outstanding as of April 30, 2013 and October 31, 2012	—			—
Common stock: $0.01 par value, 200,000 shares authorized, 108,657 and 108,074 shares issued, and 108,513 and 107,930 shares outstanding as of April 30, 2013 and October 31, 2012	1,086			1,081
Additional paid-in capital	1,569,102			1,543,127
Accumulated deficit	(250,561		)	(204,023		)
Accumulated other comprehensive loss	(28,157		)	(32,390		)
Total stockholders’ equity	1,291,470			1,307,795
Noncontrolling interest in subsidiaries	36,455			36,821
Total liabilities and equity	$	3,467,416		$	3,490,607

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

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended April 30,
	2013			2012
	(Unaudited, in thousands)
Cash flows from operating activities
Consolidated net income (loss)	$	(45,319	)	$	635
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:
Depreciation and amortization, net	101,224			83,525
Stock-based compensation expense	22,388			21,727
Non-cash interest expense	—			8,537
Deferred income taxes	(42,216		)	(13,321		)
Gain on divestiture of assets	(4,080		)	—
Asset impairment	6,763			—
Other	(1,683		)	3,158
Net cash provided by operating activities before changes in operating assets and liabilities	37,077			104,261
Changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable, net	50,140			(18,128		)
Inventories, net	(1,646		)	8,212
Prepaid expenses and other assets	(3,294		)	(18,632		)
Accounts payable	(41,537		)	(25,098		)
Deferred revenue, net	12,043			27,343
Other current and long term liabilities	79,798			(15,037		)
Net change in operating assets and liabilities	95,504			(41,340		)
Net cash provided by operating activities	132,581			62,921

Cash flows from investing activities
Capital expenditures	(42,213		)	(26,986		)
Acquisition of businesses, net of cash and cash equivalents acquired	(11,953		)	(1,069,762		)
Proceeds from divestiture of assets	6,000			—
Other investing activities, net	1,989			(127		)
Net cash used in investing activities	(46,177		)	(1,096,875		)

Cash flows from financing activities
Proceeds from debt, net of issuance costs	30,053			1,412,028
Repayments of debt	(58,402		)	(339,873		)
Repayments of senior convertible notes, including interest	—			(279,159		)
Proceeds from issuance of common stock through employee equity incentive plans	5,075			27,423
Payments of acquisition-related contingent consideration	(9,280		)	(14,209		)
Distribution to noncontrolling interest stockholders	(1,689		)	(1,543		)
Net cash provided by (used in) financing activities	(34,243		)	804,667
Effect of foreign currency exchange rate changes on cash and cash equivalents	(280		)	(4,238		)
Net increase (decrease) in cash and cash equivalents	51,881			(233,525		)
Cash and cash equivalents, beginning of period	454,072			594,562
Cash and cash equivalents, end of period	$	505,953		$	361,037

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

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited

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

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of VeriFone Systems, Inc. (“we,” “us,” “our,” "VeriFone," and “the Company” refer to VeriFone Systems, Inc. and its consolidated subsidiaries) as of April 30, 2013 and October 31, 2012, and for the three and six months ended April 30, 2013 and 2012, have been prepared in accordance with GAAP (U.S. generally accepted accounting principles) for interim financial information and with the instructions on Form 10-Q pursuant to the rules and regulations of the SEC (U.S. Securities and Exchange Commission). In accordance with those rules and regulations, we have omitted certain information and notes normally provided in our annual consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring items, necessary for the fair presentation of our financial position and results of operations for the interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012. The results of operations for the three and six months ended April 30, 2013 are not necessarily indicative of the results expected for the entire fiscal year.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of VeriFone Systems, Inc. and our wholly-owned and majority-owned subsidiaries. The accompanying unaudited Condensed Consolidated Financial Statements also include the results of companies acquired by us from the date of each acquisition. All significant inter-company accounts and transactions have been eliminated. Amounts pertaining to the noncontrolling ownership interests held by third parties in the operating results and financial position of our majority-owned subsidiaries are reported as "Net income (loss) attributable to noncontrolling interests" in our unaudited Condensed Consolidated Statements of Operations and as "Redeemable noncontrolling interest in subsidiary" on our unaudited Condensed Consolidated Balance Sheets when the third party ownership interest is redeemable at the option of the stockholder, outside of our control, and as "Noncontrolling interest in subsidiaries" on our unaudited Condensed Consolidated Balance Sheets in all other cases.

The Condensed Consolidated Balance Sheet at October 31, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

As a result of new Company leadership and related changes in the structure of our internal organization during the three months ended April 30, 2013, we have realigned our operating segments. We determined our operating segments based on the discrete financial information used by our Interim Chief Executive Officer, who is our chief operating decision maker, to assess performance, allocate resources, and make decisions regarding VeriFone's operations. Under our current operational structure, we operate in three business segments: Americas, EMEA, and ASPAC. Our Americas segment is defined as our operations in North America, South America, Central America, and the Caribbean. Our EMEA segment is defined as our operations in Europe, the Middle East, and Africa. Our ASPAC segment consists of our operations in Asia, Australia, New Zealand, and other Asia Pacific Rim countries. Our reportable segments are the same as our operating segments. Our reporting units did not change. Our EMEA and ASPAC operating segments are also reporting units. Our other reporting units are components of the Americas operating segment. All prior period amounts reported by segment have been reclassified to conform to the current period presentation.

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

Use of Estimates

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

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Significant Accounting Policies

During the three and six months ended April 30, 2013, there have been no changes in our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012.

Concentrations of Credit Risk

For the three and six months ended April 30, 2013 and 2012 no single customer accounted for more than 10% of our total net revenues. For the three months ended April 30, 2013, one customer accounted for approximately 14.2% of net revenues in our Americas reportable segment and one customer accounted for approximately 15.5% of net revenues in our ASPAC reportable segment. No single customer accounted for more than 10% of net revenues in our EMEA reportable segment for the three months ended April 30, 2013. For the six months ended April 30, 2013, three customers accounted for approximately 11.2%, 10.7% and 10.2% of net revenues in our ASPAC reportable segment, and no single customer accounted for more than 10% of net revenues in our other reportable segments. For the three months ended April 30, 2012, one customer accounted for approximately 15.6% of net revenues in our Americas reportable segment, one customer accounted for approximately 12.1% of net revenues in our ASPAC reportable segment, and no single customer accounted for more than 10% of net revenues in our EMEA reportable segment. For the six months ended April 30, 2012, one customer accounted for approximately 13.5% of net revenues in our Americas reportable segment, one customer accounted for approximately 11.2% of net revenues in our ASPAC reportable segment, and no single customer accounted for more than 10% of net revenues in our EMEA reportable segment.

As of April 30, 2013 and October 31, 2012, no single customer accounted for more than 10% of our total Accounts receivable, net of allowances.

Recent Accounting Pronouncements

Effective November 1, 2012, we adopted ASU (Accounting Standards Update) 2011-05, Comprehensive Income (Topic 22)-Presentation of Comprehensive Income, which changed our condensed consolidated financial statements to present components of other comprehensive income in a separate statement. This change impacted only the financial statement presentation and had no impact on our financial position or results of operations.

We also adopted ASU 2012-02, Intangibles-Goodwill and Other (Topic 350)-Testing Indefinite-Lived Intangible Assets for Impairment, effective November 1, 2012, which provides us with the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired. Adoption of this guidance had no impact on our financial position or results of operations.

In February 2013, the Financial Accounting Standards Board issued ASU 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. ASU 2013-02 requires presentation of the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source, and the income statement line items affected by the reclassification. The information may be presented either in a single note or in some instances, parenthetically on the face of the financial statements, provided that all of the required information is presented in a single location. If a component is not required to be reclassified to net income in its entirety, we may instead provide a reference to the related footnote. ASU 2013-02 is effective for annual reporting periods beginning after December 15, 2012, and interim periods within those annual periods. We plan to adopt ASU 2013-02 in our first quarter of fiscal year 2014. ASU 2013-02 will impact only the financial statement presentation, and will have no impact on our financial position or results of operations.

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Note 2. Business Combinations

Fiscal Year 2013 Acquisitions

EFTPOS New Zealand Limited Acquisition

On May 31, 2013, we acquired all the outstanding shares of ENZ (EFTPOS New Zealand Limited), which holds the switching and terminal business of ANZ Bank New Zealand Limited, for approximately 70.0 million New Zealand dollars (approximately $55.6 million at the foreign exchange rate as of May 31, 2013). We anticipate that this acquisition, along with our recent acquisition of Sektor, as discussed below, will provide us with the software, services infrastructure and distribution resources necessary to serve New Zealand with both electronic payment solutions and managed services. The acquisition will be accounted for using the acquisition method of accounting. We have not completed our purchase price allocation for this acquisition given the short time since the acquisition closed. The results of operations of ENZ will be included in our financial results effective May 31, 2013.

Sektor Acquisition

On December 17, 2012, we signed an asset sale and purchase agreement to acquire certain assets and liabilities of Sektor (Sektor Payments Limited) for approximately $8.2 million, including holdback payments of approximately $0.4 million. The transaction closed on April 2, 2013. Sektor was our main distributor in New Zealand. The results of operations for the acquired business were included in our financial results from the acquisition date, and are immaterial in relation to our overall financial position and results of operations.

The acquisition was accounted for using the acquisition method of accounting. The assigned fair values of the assets acquired and liabilities assumed included $4.0 million intangible assets, $0.3 million other assets net of liabilities, and $3.9 million goodwill. The intangible assets consisted primarily of customer relationships, with an estimated useful life of 3 years. The goodwill represented the expected benefits of combining Sektor's operations with VeriFone's operations and was assigned to our ASPAC reportable segment. We do not expect the goodwill recognized to be deductible for income tax purposes.

Fiscal Year 2013 Divestiture

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

Fiscal Year 2012 Acquisitions

Point Acquisition

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

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

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands) as part of our acquisition of Point, all of which were assigned to our EMEA reportable segment.



Liabilities assumed, net of assets acquired	$	(81,415	)
Intangible assets	567,007
Goodwill	575,704
Noncontrolling interest in Babs Paylink AB	(36,764		)
Total purchase price	$	1,024,532

The estimated fair value of acquired contingent consideration owed by Point related to its prior acquisitions was $20.4 million as of the acquisition date. This contingent consideration is payable in cash if certain operating and financial targets are achieved in the two years following the dates of those acquisitions. The payout criteria for the contingent consideration contain provisions for prorated payouts if the target criteria are not met, provided that certain minimum thresholds are achieved. Subsequent to the acquisition of Point, through April 30, 2013, we have paid $19.5 million of the contingent consideration. The $1.4 million remaining balance accrued at April 30, 2013 is expected to be paid during the quarter ending October 31, 2013 and is presented as acquisition earn-out payables in Accruals and other current liabilities on our Condensed Consolidated Balance Sheets. As of April 30, 2013, the maximum contingent consideration payable, if all the financial performance targets were met, totals $4.6 million.

Other Fiscal Year 2012 Acquisitions

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

The holdback amounts will be paid out to selling stockholders unless the general representations and warranties made by the sellers as of the acquisition date were untrue and are presented as deferred acquisition consideration payable in Accruals and other current liabilities on our Condensed Consolidated Balance Sheets. The contingent consideration will be payable in cash for the ChargeSmart and LIFT Retail acquisitions, if certain operating and financial targets are achieved in the first three years of operations after the acquisition. The payout criteria for the contingent consideration contain provisions for prorated payouts if the target criteria are not met, provided that certain minimum thresholds are achieved. The contingent consideration was valued at $0.4 million and $3.4 million for the ChargeSmart and LIFT Retail acquisitions as of the respective acquisition dates, and the maximum contingent consideration payable under the purchase agreements, if all the financial performance targets were met, totaled $11.0 million and $8.0 million for the ChargeSmart and LIFT Retail acquisitions. To date, we have not paid any amounts under these arrangements although certain measurement dates have passed. We decreased the acquisition earn-out payables by $0.4 million for the ChargeSmart acquisition and $3.1 million for the LIFT Retail acquisition during the six months ended April 30, 2013, as we do not expect to pay these amounts. Including imputed interest, the amounts accrued for this contingent consideration at April 30, 2013 totaled $1.3 million, and were included in Other long-term liabilities on our Condensed Consolidated Balance Sheets. The remaining maximum payouts for this contingent consideration, if all remaining financial performance targets are met, total $5.0 million and $6.0 million for the ChargeSmart and LIFT Retail acquisitions.

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

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands) at the acquisition date of each transaction.



	LIFT Retail		ChargeSmart			Show Media		Global Bay			Total
Acquisition date	March 1, 2012		January 3, 2012			November 1, 2011		November 1, 2011
Assets acquired (liabilities assumed), net	$	477	$	(4,225	)	$	1,593	$	(4,608	)	$	(6,763	)
Intangible assets	1,600		9,770			6,660		14,490			32,520
Goodwill	4,417		13,829			19,871		17,630			55,747
Total purchase price	$	6,494	$	19,374		$	28,124	$	27,512		$	81,504

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

Acquisition-Related Costs

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

The following table presents a summary of acquisition-related costs included in our Condensed Consolidated Statements of Operations (in thousands):



	Three Months Ended April 30,				Six Months Ended April 30,
	2013		2012		2013		2012
Cost of net revenues	$	24	$	9	$	26	$	9
Sales and marketing	18		65		18		183
General and administrative	268		655		729		7,589
Total acquisition-related costs	$	310	$	729	$	773	$	7,781

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

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

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

The following table presents the computation of net income (loss) per share of common stock (in thousands, except per share data):



	Three Months Ended April 30,					Six Months Ended April 30,
	2013			2012		2013			2012
Basic and diluted net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
Numerator:
Net income (loss) attributable to VeriFone Systems, Inc. stockholders	(58,376		)	$	3,477	$	(46,538	)	$	353
Denominator:
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - basic	108,314			106,898		108,122			106,359
Weighted average effect of dilutive securities:
Stock options, RSUs and RSAs	—			3,508		—			3,619
Senior convertible notes (1)	—			742		—			371
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - diluted	108,314			111,148		108,122			110,349
Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
Basic	$	(0.54	)	$	0.03	$	(0.43	)	$	—
Diluted	$	(0.54	)	$	0.03	$	(0.43	)	$	—

(1) The diluted shares from the senior convertible notes do not include the effects of note hedge transactions on those notes, as described in Note 10. Financings. The note hedge transactions would have reduced the dilution attributable to the senior convertible notes by 50% if and when those notes had been converted and the note hedge transactions exercised. Part of the note hedge transactions were terminated in June 2011 and the remainder expired unused in June 2012.

For the three and six months ended April 30, 2013, equity incentive awards to purchase 6.8 million and 6.7 million weighted average shares were anti-dilutive because we incurred a net loss for those periods. For the three and six months ended April 30, 2012, equity incentive awards to purchase 2.3 million and 2.7 million shares of common stock were excluded from the calculation of weighted average shares for diluted net income (loss) per share as they were anti-dilutive. These awards could impact future calculations of diluted net income (loss) per share if the fair market value of our common stock increases.

The senior convertible notes were considered to be Instrument C securities, and therefore, only the conversion spread relating to the notes would be included in our diluted earnings per share calculation, if dilutive. The conversion spread of the notes had a dilutive effect when the average share price of our common stock during any quarter exceeded $44.02. The average share price of our common stock during the three months ended April 30, 2012 was $49.89 and therefore, the senior convertible notes were dilutive for those periods. The senior convertible notes were repaid in full in June 2012 without any conversion rights having been exercised. In connection with the offering of the senior convertible notes, we entered into note hedge transactions. The note hedge transactions would have reduced the dilution attributable to the senior convertible notes by 50% if and when the notes had been converted and the note hedge transactions exercised. The note hedge transactions outstanding at April 30, 2012 expired unused in June 2012.

Warrants to purchase 7.2 million shares of our common stock were outstanding at April 30, 2013 and 2012. The warrants were not included in the computation of diluted earnings per share because the warrants' $62.36 exercise price was greater than the average share price of our common stock during the three and six months ended April 30, 2013 and 2012. Therefore, the effect of the warrants was anti-dilutive for those periods.

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Note 4. Employee Benefit Plans

Equity Incentive Plans

We grant stock awards, including stock options, RSUs (restricted stock units) and RSAs (restricted stock awards) pursuant to a stockholder-approved equity incentive plan. Our stock awards have included vesting provisions that are based on either time, performance, or performance relative to market indices. These equity incentive plans are described in further detail in Note 4, Employee Benefits Plan, of Notes to Consolidated Financial Statements in our 2012 Annual Report on Form 10-K. All stock awards granted during the six months ended April 30, 2013 were granted under the 2006 Equity Incentive Plan, as amended. The number of shares available for future grants under the 2006 Equity Incentive Plan was 1.3 million as of April 30, 2013. Shares issued to employees on the exercise or vesting of equity incentive awards are issued from authorized unissued common stock.

Equity Incentive Plan Activity

The following table provides a summary of stock option activity for the six months ended April 30, 2013:



	Shares Under Option (Thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (Thousands)
Outstanding at October 31, 2012	8,000		$	23.93
Granted	338		$	28.84
Exercised	(437	)	$	11.62
Canceled	(718	)	$	32.17
Expired	(188	)	$	30.48
Outstanding at April 30, 2013	6,995		$	23.74	3.6	$	35,199
Vested or expected to vest at April 30, 2013	6,782		$	23.41	3.5	$	35,175
Exercisable at April 30, 2013	4,370		$	19.45	2.8	$	31,522

The weighted-average grant-date fair value per share for stock options granted during the six months ended April 30, 2013 and 2012 was $10.89 and $18.16.

The total proceeds received from employees as a result of employee stock option exercises for the six months ended April 30, 2013 and 2012 were $5.1 million and $27.4 million. We recognized no tax benefit during the six months ended April 30, 2013 related to employee stock option exercises, and $0.1 million of tax benefits during the six months ended April 30, 2012. The total intrinsic value of options exercised during the six months ended April 30, 2013 and 2012 was $7.7 million and $58.3 million.

The following table summarizes RSU and RSA balances as of April 30, 2013 and October 31, 2012, as well as activity for the six months ended April 30, 2013:



	Shares (Thousands)		Aggregate Intrinsic Value (Thousands)
Outstanding at October 31, 2012	1,913
Granted	967
Released	(240	)
Canceled	(392	)
Outstanding at April 30, 2013	2,248		$	48,673
Expected to vest at April 30, 2013	1,958		$	42,051
Ending vested and deferred at April 30, 2013	631		$	13,561

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

There were no RSAs granted during the six months ended April 30, 2013. RSUs granted during the six months ended April 30, 2013 included grants with time and performance based vesting conditions. The vesting conditions of the performance-based RSUs are contingent upon meeting certain financial and operational targets. The vesting conditions of all grants were set by the compensation committee of the board of directors at the time of the grant.

One of the performance-based RSUs granted during January 2013 was a long-term incentive grant to our former Chief Executive Officer that was subject to vesting based on our achievement of total shareholder return relative to peers on a stacked-ranking basis over a three year performance period. This grant was canceled during March 2013 in connection with his resignation from the Company. All other performance grants vest upon meeting internal and financial operational targets.

We had a total of 2.2 million RSUs and 0.1 million RSAs outstanding as of April 30, 2013.

The weighted-average grant-date fair value per share for RSUs granted during the six months ended April 30, 2013 and 2012 was $28.21 and $44.20.

The total fair value of RSUs and RSAs that vested in the six months ended April 30, 2013 and 2012 was $5.7 million and $9.3 million.

Equity Incentive Award Valuation

We estimate the grant-date fair value of stock options using the Black-Scholes-Merton valuation model, using the following weighted-average assumptions:



	Three Months Ended April 30,				Six Months Ended April 30,
	2013		2012		2013		2012
Expected term (in years)	3.5		3.6		3.5		3.6
Risk-free interest rate	0.6	%	0.8	%	0.6	%	0.7	%
Expected dividend rate	0.0	%	0.0	%	0.0	%	0.0	%
Expected stock price volatility over option expected term	48.0	%	66.7	%	50.7	%	67.3	%

The grant-date fair value of RSUs is equal to the closing market price of our common stock on the date of grant. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.

The assumptions used to value our options are determined as follows:


•	The expected term of the options granted is derived from the historical actual term of previous grants and an estimate of future exercises during the remaining contractual period of the option, and represents the period of time that awards granted are expected to be outstanding.


•	The average risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options.


•	The dividend yield assumption is based on our dividend history and future expectations of dividend payouts.


•	The expected stock price volatility considers the historical volatility of common stock for the expected term of the options, and includes the elements listed below at the weighted percentages presented:



	Three Months Ended April 30,				Six Months Ended April 30,
	2013		2012		2013		2012
Historical volatility of our common stock	95.0	%	75.0	%	95.0	%	75.0	%
Historical volatility of comparable companies' common stock	0.0	%	20.0	%	0.0	%	20.0	%
Implied volatility of our traded common stock options	5.0	%	5.0	%	5.0	%	5.0	%

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

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

Stock-Based Compensation Expense

The following table presents the stock-based compensation expense recognized in our Condensed Consolidated Statements of Operations (in thousands):



	Three Months Ended April 30,				Six Months Ended April 30,
	2013		2012		2013		2012
Cost of net revenues	$	417	$	463	$	963	$	942
Research and development	1,390		1,201		3,007		2,454
Sales and marketing	3,769		4,405		7,862		8,667
General and administrative	4,454		4,954		10,556		9,664
Total stock-based compensation	$	10,030	$	11,023	$	22,388	$	21,727

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

As of April 30, 2013, total unrecognized compensation expense adjusted for estimated forfeitures related to unvested stock options was $30.1 million and related to unvested RSUs and RSAs was $32.1 million, which is expected to be recognized over the remaining weighted-average vesting periods of 2.2 years for stock options and 2.0 years for RSUs and RSAs.

Note 5. Income Taxes

We recorded income tax benefits of $21.5 million and $19.0 million for the three and six months ended April 30, 2013 and income tax benefits of $4.6 million and $14.4 million for the three and six months ended April 30, 2012. The effective tax rates for the three and six months ended April 30, 2013 and 2012 are lower than the U.S. statutory tax rate primarily due to earnings in countries where we are taxed at lower rates compared to the U.S. federal and state statutory rates. The income tax benefit for the six months ended April 30, 2013 includes a discrete tax benefit of $21.3 million related to litigation loss contingency expense and a discrete tax benefit of $7.2 million related to changes in the statutory tax rates impact on deferred taxes offset by a discrete tax expense of $10.7 million related to an increase in uncertain tax positions. The income tax benefit for the six months ended April 30, 2012 includes a discrete tax benefit of $8.5 million related to the foreign exchange loss on futures contracts that was incurred during December 2011 and $6.6 million related to a litigation loss contingency expense which was incurred during June 2012.

As of April 30, 2013, on a worldwide basis we remain in a net deferred tax asset position of $71.8 million. The realization of our deferred tax assets depends primarily on our ability to generate sufficient U.S. and foreign taxable income in future periods. The amount of deferred tax assets considered realizable may increase or decrease in future periods as we continue to evaluate the underlying basis for our estimates of future U.S. and foreign taxable income in subsequent matters.

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Our unrecognized tax benefits increased by approximately $10.7 million during the six months ended April 30, 2013 as a result of tax positions taken in the current period. The amount of unrecognized tax benefits could be reduced upon closure of tax examinations or if the statute of limitations on certain tax filings expires without assessment from the relevant tax authorities. We believe that it is reasonably possible that there could be a reduction in unrecognized tax benefits due to statute of limitation expirations in multiple tax jurisdictions during the next twelve months of approximately $1.5 million. Interest and penalties accrued on these uncertain tax positions will also be released upon the expiration of statutes of limitations.

Note 6. Balance Sheet and Statement of Operations Details

Cash

Cash and cash equivalents as of April 30, 2013 and October 31, 2012 included $426.8 million and $410.3 million held by our foreign subsidiaries. If we decide to distribute or use such cash and cash equivalents outside those foreign jurisdictions, including a distribution to the U.S., we may be subject to additional taxes or costs.

We had $4.7 million and $4.1 million of restricted cash included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets as of April 30, 2013 and October 31, 2012. We had $12.1 million and $12.8 million of restricted cash included in Other long-term assets in our Condensed Consolidated Balance Sheets as of April 30, 2013 and October 31, 2012. These restricted cash balances were mainly comprised of pledged deposits, deposits for irrevocable standby letters of credit, and deposits to secure bank guarantees to customers, other counterparties to contractual relationships and government taxing authorities, as well as deposits to Brazil courts related to tax proceedings pending adjudication.

Inventories

Inventories consisted of the following (in thousands):



	April 30, 2013		October 31, 2012
Raw materials	$	50,097	$	50,952
Work-in-process	344		552
Finished goods	130,907		126,770
Total inventory	$	181,348	$	178,274

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):



	April 30, 2013		October 31, 2012
Prepaid expenses	$	43,710	$	37,261
Deferred income taxes	39,772		39,072
Prepaid taxes	27,832		36,678
Bank acceptances receivable	7,694		2,151
Restricted cash	4,729		4,149
Other receivables	9,507		12,715
Investment in equity security and warrants	2,005		2,667
Other current assets	4,265		1,517
Total prepaid expenses and other current assets	$	139,514	$	136,210

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Fixed Assets, Net

Fixed assets, net consisted of the following (in thousands):



	Estimated Useful Life (Years)	April 30, 2013			October 31, 2012
Revenue generating assets	5	$	109,623		$	101,589
Computer hardware and software	3-5	76,693			70,064
Machinery and equipment	3-10	39,531			35,865
Leasehold improvements	Lesser of the term of the lease or the estimated useful life	22,406			20,773
Office equipment, furniture, and fixtures	3-5	12,097			9,423
Buildings	40-50	6,768			6,788
Depreciable fixed assets, at cost		267,118			244,502
Accumulated depreciation		(130,347		)	(106,688		)
Depreciable fixed assets, net		136,771			137,814
Construction in progress		9,256			7,838
Land		1,146			1,151
Fixed assets, net		$	147,173		$	146,803

Total depreciation expense for depreciable fixed assets for the three months ended April 30, 2013 and 2012 was $13.0 million and $14.0 million. Total depreciation expense for depreciable fixed assets for the six months ended April 30, 2013 and 2012 was $25.3 million and $23.0 million.

During the three months ended April 30, 2013, we recorded a $6.8 million impairment charge to Costs of net revenues related to revenue generating assets in our taxi solutions business in our EMEA segment for which the net book value of the assets exceeded their fair value. We used the income approach to determine the fair value.

Other Long-Term Assets

Other long-term assets consisted of the following (in thousands):



	April 30, 2013		October 31, 2012
Debt issuance costs, net	$	27,695	$	31,897
Capitalized software development costs, net	16,323		12,238
Long-term restricted cash	12,061		12,754
Deposits	6,868		9,068
Long-term receivables	6,400		7,531
Other long-term assets	9,631		5,545
Total other long-term assets	$	78,978	$	79,033

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Accruals and Other Current Liabilities

Accruals and other current liabilities consisted of the following (in thousands):



	April 30, 2013		October 31, 2012
Accrued legal loss contingencies, including interest (Note 11)	$	93,291	$	28,026
Accrued expenses	76,269		68,431
Accrued compensation	48,423		47,019
Sales and value-added taxes payable	12,546		12,461
Accrued warranty	12,037		11,931
Accrued liabilities for contingencies related to tax assessments, including interest (Note 11)	11,000		11,818
Deferred tax liabilities - current portion	9,529		9,594
Income taxes payable	5,849		13,577
Deferred acquisition consideration payable - current portion	2,207		7,980
Acquisition-related earn-out payables - current portion	1,387		6,131
Other current liabilities	16,075		13,899
Total accruals and other current liabilities	$	288,613	$	230,867

Accrued Warranty

Activity related to Accrued warranty consisted of the following (in thousands):



	Six months ended April 30, 2013			Year Ended October 31, 2012
Balance at beginning of period	$	12,775		$	22,032
Warranty charged to cost of net revenues	6,920			12,340
Utilization of warranty accrual	(6,143		)	(20,494		)
Acquired warranty obligations	—			348
Changes in estimates	(842		)	(1,451		)
Balance at end of period	12,710			12,775
Less: current portion	(12,037		)	(11,931		)
Long-term portion	$	673		$	844

Deferred Revenue, Net

Deferred revenue, net of related costs consisted of the following (in thousands):



	April 30, 2013			October 31, 2012
Deferred revenue	$	159,152		$	144,492
Deferred cost of revenue	(19,404		)	(15,885		)
Deferred revenue, net	139,748			128,607
Less current portion	(97,965		)	(91,545		)
Long-term portion	$	41,783		$	37,062

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Other Long-Term Liabilities

Other long-term liabilities consisted of the following (in thousands):



	April 30, 2013		October 31, 2012
Long-term income tax liabilities	$	54,809	$	44,144
Statutory retirement and pension obligations - non-current portion	11,902		10,983
Acquisition-related earn-out payables - non-current portion	1,252		2,832
Other long-term liabilities	13,076		12,481
Total other long-term liabilities	$	81,039	$	70,440

Redeemable Noncontrolling Interest in Subsidiary

The redeemable noncontrolling interest related to ABS (All Business Solutions S.R.L.) is recognized at the greater of the initial carrying amount increased or decreased for the noncontrolling interest's share of net income or loss or its redemption value. As of April 30, 2013 and October 31, 2012, the carrying amount of the redeemable noncontrolling interests was $0.8 million and $0.9 million.

Noncontrolling Interest in Subsidiaries

Changes in Noncontrolling interest in subsidiaries are set forth below (in thousands):



	Six months ended April 30, 2013			Year Ended October 31, 2012
Balance at beginning of period	$	36,821		$	445
Additions due to acquisitions	—			36,781
Distributions to noncontrolling interest stockholders	(1,689		)	(1,673		)
Net income attributable to noncontrolling interest in subsidiaries, net	1,323			1,268
Balance at end of period	$	36,455		$	36,821

Other Income (Expense), net

Other income (expense), net consisted of the following (in thousands):



	Three Months Ended April 30,						Six Months Ended April 30,
	2013			2012			2013			2012
Foreign currency exchange losses, net	$	(2,734	)	$	(1,430	)	$	(6,253	)	$	(22,435	)
Adjustments of acquisition-related earn-out payables	1,531			(111		)	3,389			(199		)
Gain on divestiture	—			—			4,080			—
Other income (expense), net	3,509			(239		)	5,030			5
Total other income (expense), net	$	2,306		$	(1,780	)	$	6,246		$	(22,629	)

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

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

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Note 7. Fair Value Measurements

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

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

We follow a three-level fair value hierarchy based on the inputs used in measuring fair value:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Other inputs that are directly or indirectly observable in the marketplace.

Level 3 — Unobservable inputs which are supported by little or no market activity.

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

The only transfer between fair value measurement levels during the three and six months ended April 30, 2013, relates to the marketable equity investment, which was reclassified from Level 1 to Level 2 during April 2013, because the active market in which the investment was traded became inactive for the period April 17 to May 6, 2013. The following tables present our assets and liabilities that were measured at fair value on a recurring basis and their classification within the fair value hierarchy (in thousands):



	April 30, 2013
	Carrying Value		Quoted Price in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Current assets:
Cash and cash equivalents
Money market funds (1)	$	55,778	$	55,778	$	—	$	—
Short-term time deposits (2)	83,434		—		83,434		—
Prepaid expenses and other current assets
Marketable equity investment (3)	1,839		—		1,839		—
Equity warrants (4)	166		—		166		—
Foreign exchange forward contracts not designated as cash flow hedges (5)	46		—		46		—
Total assets measured and recorded at fair value	$	141,263	$	55,778	$	85,485	$	—

Liabilities
Current liabilities:
Accruals and other current liabilities
Acquisition related earn-out payables (6)	$	1,387	$	—	$	—	$	1,387
Interest rate swaps designated as cash flow hedges (7)	2,493		—		2,493		—
Foreign exchange forward contracts not designated as cash flow hedges (5)	483		—		483		—
Other long-term liabilities:
Acquisition related earn-out payables (6)	1,252		—		—		1,252
Interest rate swaps designated as cash flow hedges (7)	1,843		—		1,843		—
Total liabilities measured and recorded at fair value	$	7,458	$	—	$	4,819	$	2,639

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)



	October 31, 2012
	Carrying Value		Quoted Price in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Current assets:
Cash and cash equivalents
Money market funds (1)	$	69,743	$	69,743	$	—	$	—
Prepaid expenses and other current assets
Marketable equity investment (3)	2,471		2,471		—		—
Equity warrants (4)	196		—		196		—
Foreign exchange forward contracts not designated as cash flow hedges (5)	161		—		161		—
Total assets measured and recorded at fair value	$	72,571	$	72,214	$	357	$	—

Liabilities
Current liabilities:
Accruals and other current liabilities
Acquisition related earn-out payables (6)	$	6,131	$	—	$	—	$	6,131
Interest rate swaps designated as cash flow hedges (7)	2,451		—		2,451		—
Foreign exchange forward contracts not designated as cash flow hedges (5)	291		—		291		—
Other long-term liabilities:
Acquisition-related earn-out payables (6)	2,832		—		—		2,832
Interest rate swaps designated as cash flow hedges (7)	2,168		—		2,168		—
Total liabilities measured and recorded at fair value	$	13,873	$	—	$	4,910	$	8,963


1.	Money market funds are classified as Level 1 because we determine the fair value of the funds using quoted market prices in markets that are active.


2.	Short-term time deposits are classified as Level 2 because the carrying value approximates fair value due to their short-term maturities.


3.	The marketable equity investment was classified as Level 1 as of October 31, 2012 because we determined the fair value using quoted market prices in markets that were active. As of April 30, 2013, the marketable equity investment was reclassified from Level 1 to Level 2, as the market which was previously active became inactive for the period April 17 to May 6, 2013.


4.	The equity warrants are classified as Level 2 because we determine the fair value using the Black-Scholes-Merton valuation model considering quoted market prices for the underlying shares, the treasury risk-free interest rate, historic volatility and the remaining contractual term of the warrant.


5.	The foreign exchange forward contracts are classified as Level 2 because we determine the fair value using quoted market prices and other observable data for similar instruments in an active market.

The acquisition-related earn-out payables are classified as Level 3 because we use a probability-weighted expected payout model to determine the expected payout and an appropriate discount rate to calculate the fair value. The key assumptions in applying the approach are the internally forecasted net revenues, contributions, and other performance measures for the acquired businesses, the probability of achieving the net revenues, contribution, and other performance targets and an appropriate discount rate. Significant increases in the probability of achieving net revenues, contribution, and other performance targets in isolation would result in a significantly higher fair value measurement while significant decreases in the probability of success in isolation would result in a significantly lower fair value measurement. Similarly, significant increases in the discount rate in isolation would result in a significantly lower fair value measurement while significant decreases in the discount rate in isolation would result in a significantly higher fair value measurement. We evaluate changes in each of the assumptions used to calculate fair values of our earn-out payables at the end of each period.


7.	Interest rate swaps are classified as Level 2 because we determine the fair value using observable market inputs, such as the one month LIBOR forward pricing curve, as well as credit default spreads reflecting nonperformance risks of counterparties.

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Fair Value of Acquisition-Related Earn-out Payables

The following table presents a reconciliation for our earn-out payables measured and recorded at fair value on a recurring basis, using Level 3 significant unobservable inputs (in thousands):



	Six Months Ended April 30, 2013			Year Ended October 31, 2012
Balance at beginning of period	$	8,963		$	6,728
Additions related to current period business acquisitions	—			24,149
Payments	(3,287		)	(23,541		)
Changes in estimates, included in Other income (expense), net	(3,389		)	407
Interest expense	496			1,079
Foreign currency adjustments	(144		)	141
Balance at end of period	$	2,639		$	8,963
Less: current portion	1,387			6,131
Non-current portion	$	1,252		$	2,832

As of April 30, 2013, the maximum earn-out payable, if all the financial performance targets were met, would have been $15.6 million.

Fair Value of Other Financial Instruments

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

Note 8. Goodwill and Purchased Intangible Assets

Goodwill

Activity related to goodwill consisted of the following (in thousands):



	Six Months Ended April 30, 2013			Year Ended October 31, 2012
Balance at beginning of period	$	1,179,381		$	561,414
Additions related to business combinations	6,181			631,470
Divestiture of certain assets related to SAIL mobile payment product	(507		)	—
Adjustment related to prior fiscal year acquisitions	—			1,632
Currency translation adjustments	1,108			(15,135		)
Balance at end of period	$	1,186,163		$	1,179,381

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Goodwill is not amortized. We review goodwill for impairment annually, and whenever events or changes in circumstances indicate its carrying amount may not be recoverable. Based on our review for potential indicators of impairment performed during the six months ended April 30, 2013 and the fiscal year ended October 31, 2012, there were no indicators of impairment.

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

As of both April 30, 2013 and October 31, 2012, the accumulated impairment losses included in total goodwill were $71.0 million for our Americas segment, $361.4 million for our EMEA segment, and $5.5 million for our ASPAC segment, excluding the impact of foreign currency fluctuations.

Purchased Intangible Assets

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



	April 30, 2013							October 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	690,379	$	(136,846	)	$	553,533	$	686,773	$	(95,284	)	$	591,489
Developed and core technology	172,661		(68,315		)	104,346		173,545		(46,618		)	126,927
Trade name	17,941		(6,313		)	11,628		17,707		(4,259		)	13,448
Other	3,996		(1,259		)	2,737		4,214		(1,270		)	2,944
Total	$	884,977	$	(212,733	)	$	672,244	$	882,239	$	(147,431	)	$	734,808

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



	Three Months Ended April 30,				Six Months Ended April 30,
	2013		2012		2013		2012
Included in cost of net revenues	$	11,062	$	10,715	$	22,123	$	19,201
Included in operating expenses	23,122		23,757		47,818		37,372
Total amortization of purchased intangible assets	$	34,184	$	34,472	$	69,941	$	56,573

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Total future amortization expense for purchased intangible assets that have finite lives, based on our existing intangible assets and their current estimated useful lives as of April 30, 2013, is estimated as follows (in thousands):



Fiscal Years Ending October 31:	Cost of Net Revenues		Operating Expenses		Total
Remainder of fiscal year 2013	$	22,085	$	46,221	$	68,306
2014	43,084		91,803		134,887
2015	22,612		90,306		112,918
2016	14,738		85,541		100,279
2017	2,210		59,520		61,730
Thereafter	108		194,016		194,124
Total future amortization expense	$	104,837	$	567,407	$	672,244

Note 9. Derivative Financial Instruments

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

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

We recognize the fair value of our outstanding derivative financial instruments at the end of each reporting period as either assets or liabilities on our Condensed Consolidated Balance Sheets. See Note 7, Fair Value Measurements, for a presentation of the fair value of our outstanding derivative instruments as of April 30, 2013 and October 31, 2012.

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

The following tables present the amounts of gains and losses on our derivative instruments (in thousands):



		Three Months Ended April 30, 2013									Six Months Ended April 30, 2013
		Net amount of gain (loss) deferred as a component of accumulated other comprehensive income (loss)			Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income			Amount of gain (loss) recognized in net income immediately			Net amount of gain (loss) deferred as a component of accumulated other comprehensive income (loss)		Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income			Amount of gain (loss) recognized in net income (loss) immediately
Derivatives designated as hedging instruments:
	Interest rate swap agreements (1)	$	(391	)	$	(624	)	$	—		$	284	$	(1,259	)	$	—
		(391		)	(624		)	—			284		(1,259		)	—

Derivatives not designated as hedging instruments:
	Foreign exchange forward contracts (2)	—			—			1,285			—		—			(1,112		)
	Equity warrants (2)	—			—			(66		)	—		—			(30		)
		—			—			1,219			—		—			(1,142		)
		$	(391	)	$	(624	)	$	1,219		$	284	$	(1,259	)	$	(1,142	)



		Three Months Ended April 30, 2012									Six Months Ended April 30, 2012
		Net amount of gain (loss) deferred as a component of accumulated other comprehensive income (loss)			Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income			Amount of gain (loss) recognized in net income (loss) immediately			Net amount of gain (loss) deferred as a component of accumulated other comprehensive income (loss)			Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income			Amount of gain (loss) recognized in net income (loss) immediately
Derivatives designated as hedging instruments:
	Interest rate swap agreements (1)	$	(3,102	)	$	(207	)	$	—		$	(3,102	)	$	(207	)	$	—
		(3,102		)	(207		)	—			(3,102		)	(207		)	—

Derivatives not designated as hedging instruments:
	Foreign exchange forward contracts (2)	—			—			(1,235		)	—			—			(24,391		)
	Equity warrants (2)	—			—			(98		)	—			—			(146		)
		—			—			(1,333		)	—			—			(24,537		)
		$	(3,102	)	$	(207	)	$	(1,333	)	$	(3,102	)	$	(207	)	(24,537		)


(1)	The effective portion of gains or losses on interest rate swap agreements designated as hedging instruments is recognized in Interest expense on our Condensed Consolidated Statements of Operations. The ineffective portion of such gains or losses is recognized in Other income (expense).


(2)	Gains or losses on foreign exchange forward contracts not designated as hedging instruments and on equity warrants are recognized in Other income (expense), net on our Condensed Consolidated Statements of Operations.

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

Interest Rate Swap Agreements Designated as Cash Flow Hedges

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

Foreign Exchange Forward Contracts Not Designated as Hedging Instruments

We primarily utilize foreign exchange forward contracts to offset the risks associated with certain of our foreign currency balance sheet exposures. The foreign exchange forward contracts are arranged and maintained so as to yield gains or losses to offset changes in foreign currency denominated assets or liabilities due to movements in foreign exchange rates, in an attempt to mitigate the volatility associated with foreign currency transaction gains or losses. Our foreign currency exposures are predominantly inter-company receivables and payables arising from product sales from one of our entities to another. Our foreign exchange forward contracts generally mature within 90 days. We do not use these foreign exchange forward contracts for trading purposes. The notional amounts of such contracts outstanding as of April 30, 2013 and October 31, 2012 were $191.2 million and $188.3 million.

During the six months ended April 30, 2012 we incurred a $24.4 million net loss on foreign exchange forward contracts not designated as hedging instruments, which consisted primarily of a $22.5 million foreign currency loss related to the difference between the forward rate on contracts purchased to lock in the U.S. dollar equivalent purchase price for our Point acquisition, and the actual rate on the date of derivative settlement.

Equity Warrants

We hold warrants to purchase 0.5 million shares of Trunkbow International Holdings, Ltd. common stock, which expire October 6, 2015. These warrants are derivative financial instruments, and are reported at fair value.

Note 10. Financings

Borrowings under our financing arrangements consisted of the following (in thousands):



	April 30, 2013			October 31, 2012
2011 Credit Agreement
Term A loan	$	967,856		$	993,557
Term B loan	98,933			99,763
Revolving loan	210,000			210,000
Point overdraft facility	867			2,340
Other	1,611			1,957
Total borrowings	1,279,267			1,307,617
Less: current portion	(67,054		)	(54,916		)
Long-term portion	$	1,212,213		$	1,252,701

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS— Unaudited (Continued)

2011 Credit Agreement

On December 28, 2011, VeriFone, Inc. entered into a credit agreement (the "2011 Credit Agreement"), which initially consisted of a $918.5 million Term A loan, $231.5 million Term B loan, and $350.0 million Revolving loan commitment. On October 15, 2012, VeriFone, Inc. entered into a credit extension amendment to the 2011 Credit Agreement consisting of $109.5 million additional Term A loans and $75.5 million revolving loan commitment increase. The key terms of the 2011 Credit Agreement and additional credit extension amendment are described in Note 12, Financings, in Notes to Consolidated Financial Statements of our 2012 Annual Report on Form 10-K. These key terms include financial maintenance covenants and certain representations, warranties, covenants, and conditions that are customarily required for similar financings. We were in compliance with all financial covenants under the 2011 Credit Agreement as of April 30, 2013.

As of April 30, 2013, we elected the "Eurodollar Rate" margin option for our borrowings under the 2011 Credit Agreement. As such, the interest rate on the Term A and Revolving loan was 2.70%, which was one month LIBOR plus 2.50% margin, and the interest rate on the Term B loan was 4.25%, which was the higher of one month LIBOR or 1.00% plus 3.25% margin. At April 30, 2013, the unused Revolving loan facility's commitment fee was 0.375% and the amount available to draw under the Revolving loan was $215.5 million.

As of April 30, 2013, interest margins are 2.50% for the Term A loan and the Revolving loan, and 3.25% for the Term B loan.

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

Senior Convertible Notes

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

As of April 30, 2012, the equity component of the notes totaled $77.9 million