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8-K/A - FORM 8-K AMENDMENT - VERIFONE SYSTEMS, INC.d8ka.htm
EX-99.1 - AUDITED HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS - VERIFONE SYSTEMS, INC.dex991.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - VERIFONE SYSTEMS, INC.dex231.htm
EX-99.2 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - VERIFONE SYSTEMS, INC.dex992.htm

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information is based on the historical financial statements of VeriFone and Hypercom after giving effect to the merger between VeriFone and Hypercom and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined financial information also reflects the divestiture of Hypercom’s U.S., U.K., and Spain businesses, which Hypercom disposed of in connection with the merger.

VeriFone’s fiscal year ends on October 31 while Hypercom’s fiscal year ends on December 31. The unaudited pro forma condensed combined balance sheet as of April 30, 2011 is based on the historical balance sheet of VeriFone as of April 30, 2011 and of Hypercom as of March 31, 2011 and has been prepared to reflect the merger as if it had occurred on April 30, 2011. The unaudited pro forma condensed combined statement of operations for the year ended October 31, 2010 combines the results of operations of VeriFone for the year ended October 31, 2010 and of Hypercom for the year ended September 30, 2010, as though the merger had occurred on November 1, 2009, the first day of VeriFone’s 2010 fiscal year. The unaudited pro forma condensed combined statement of operations for the six months ended April 30, 2011 combines the results of operations of VeriFone for the six months ended April 30, 2011 and of Hypercom for the six months ended March 31, 2011, as though the merger had occurred on November 1, 2009, the first day of VeriFone’s 2010 fiscal year.

The unaudited pro forma condensed combined financial information reflects the fact that, at closing, (i) each outstanding share of Hypercom common stock was converted into 0.23 shares of VeriFone common stock, (ii) each restricted stock award (“RSA”) was vested and converted into 0.23 shares of VeriFone common stock and (iii) each Hypercom stock option was converted into an option to purchase a number of shares of VeriFone common stock equal to the product of (x) the number of shares of Hypercom common stock subject to such option immediately prior to the effective time of the merger and (y) 0.23, at an exercise price equal to the exercise price for such option prior to the merger divided by 0.23.

The estimated number of shares of VeriFone common stock to be issued in the proposed merger is approximately 14 million shares based on Hypercom stock outstanding as of March 31, 2011, assuming that none of the 3,777,556 Hypercom stock options outstanding as of March 31, 2011 were exercised after March 31, 2011. Any stock option exercised after March 31, 2011 will increase the number of VeriFone stock issued by the product of 0.23 times the number of shares issued as a result of option exercises.

The preliminary allocation of the purchase price used in the unaudited pro forma condensed combined financial information is based on preliminary estimates and currently available information. These assumptions and estimates, which cannot be finalized at the time of this filing, will be revised as additional information becomes available and the finalization of the valuation of Hypercom’s assets and liabilities.

Certain reclassification adjustments to the pro forma financial information were made to the Hypercom pro forma financial information to conform to VeriFone’s financial statement presentation.

The unaudited pro forma condensed combined financial information should be read in conjunction with (i) VeriFone’s historical consolidated financial statements and related notes contained in VeriFone’s Annual Report on Form 10-K for the year ended October 31, 2010 and VeriFone’s unaudited consolidated financial statements contained in VeriFone’s Quarterly Reports on Form 10-Q for the period ended April 30, 2011, which are incorporated herein by reference, and (ii) Hypercom’s historical consolidated financial statements and related notes for the year ended December 31, 2010 and for the period ended March 31, 2011.


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF APRIL 30, 2011

(DOLLARS IN THOUSANDS)

 

                 Adjustments        
     VeriFone     Hypercom     Purchase Price
Allocation (1)
    Divestitures
(2)
    Pro forma
Combined
 

ASSETS

          

Current Assets:

          

Cash and cash equivalents

   $ 531,542      $ 47,400      $ (68,915 )  (G)    $ —        $ 510,027   

Accounts receivable, net of allowances

     208,373        95,134        —          (16,458     287,049   

Current portion of net investment in sales-type leases

     —          5,357        —          (1,648     3,709   

Inventories

     106,411        46,649        9,954    (D)      (11,887     151,127   

Deferred tax assets, net

     12,456        552        —          (407     12,601   

Prepaid expenses and other current assets

     76,613        13,300        —          (530     89,383   

Assets held for sale

     —          5,045        —          32,826        37,871   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     935,395        213,437        (58,961     1,896        1,091,767   

Property, plant, and equipment, net

     46,289        23,076        —          (817     68,548   

Net investment in sales-type leases

     —          7,450        —          (1,079     6,371   

Purchased intangible assets, net

     39,105        43,736        196,264    (C)      —          279,105   

Goodwill

     177,076        24,013        336,112    (B)      —          537,201   

Deferred tax assets, net

     10,593        —          —          —          10,593   

Debt issuance costs, net

     3,921        —          —          —          3,921   

Other assets

     39,910        9,294        —          —          49,204   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,252,289      $ 321,006      $ 473,415      $ —        $ 2,046,710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Current liabilities:

          

Accounts payable

   $ 93,367      $ 47,888      $ —        $ (1,451   $ 139,804   

Income taxes payable

     3,749        6,593        —          —          10,342   

Accrued compensation

     32,165        16,784        —          (2,359     46,590   

Accrued warranty

     14,288        6,992        —          (770     20,510   

Deferred revenue, net

     56,129        18,664        (4,221 )  (E)      (3,113     67,459   

Other current liabilities

     98,685        31,317        —          (2,504     127,498   

Liabilities held for sale

     —          547        —          13,349        13,896   

Current portion of long-term debt

     5,207        —          —          —          5,207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     303,590        128,785        (4,221     3,152        431,306   

Accrued warranty

     2,094        —          —          —          2,094   

Deferred revenue, net

     26,103        —          —          —          26,103   

Long-term debt, less current portion

     473,259        63,049        (63,049 )  (F)(G)      —          473,259   

Deferred tax liabilities

     66,561        12,819        67,881    (H)      —          147,261   

Other long-term liabilities

     47,626        14,494        —          (3,152     58,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

     919,233        219,147        611        —          1,138,991   

Commitments and contingencies

          

Redeemable noncontrolling interest

     884        —          —          —          884   

Stockholders’ equity:

          

Preferred stock

     —          —          —          —          —     

Common stock

     894        66        (66 )  (A)      —          894   

Additional paid-in-capital

     815,800        286,552        288,111     (A)      —          1,390,463   

Accumulated deficit

     (494,229     (142,845     142,845     (A)      —          (494,229

Treasury Stock

     —          (23,123     23,123     (A)      —          —     

Accumulated other comprehensive loss

     9,219        (18,791     18,791     (A)      —          9,219   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     331,684        101,859        472,804        —          906,347   

Noncontrolling interests

     488        —          —          —          488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     332,172        101,859        472,804        —          906,835   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,252,289      $ 321,006      $ 473,415      $ —        $ 2,046,710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these pro forma combined financial statements


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED APRIL 30, 2011

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

 

                  Adjustments        
     VeriFone     Hypercom     Divestitures
of
Operations (2)
    Combined
Adjustments
(3)
    Pro forma
Combined
 

Net revenues:

          

System Solutions

   $ 461,041      $ 200,402      $ (41,423   $ —        $ 620,020   

Services

     115,170        59,559        (10,018     —          164,711   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     576,211        259,961        (51,441     —          784,731   

Cost of net revenues:

          

System Solutions

     277,736        133,536        (26,455     4,521   (I)      389,338   

Services

     64,399        43,704        (6,361     —          101,742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of net revenues

     342,135        177,240        (32,816     4,521        491,080   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     234,076        82,721        (18,625     (4,521     293,651   

Operating expenses:

          

Research and development

     47,044        25,929        (2,896     —          70,077   

Selling, general and administrative

     110,502        49,571        (9,330     —          150,743   

Amortization of purchased intangible assets

     3,981        2,671        —          8,580   (I)      15,232   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     161,527        78,171        (12,226     8,580        236,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     72,549        4,550        (6,399     (13,101     57,599   

Interest expense

     (15,035     (6,554     —          6,359   (J)      (15,230

Interest income

     570        315        —          —          885   

Other income, net

     (223     1,918        —          —          1,695   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     57,861        229        (6,399     (6,742     44,949   

Provision for (benefit from) income taxes

     630        629        —          (1,348 )  (K)      (89
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 57,231      $ (400   $ (6,399   $ (5,394   $ 45,038   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

          

Basic

   $ 0.65      $ (0.01       $ 0.44   

Diluted

   $ 0.62      $ (0.01       $ 0.42   

Weighted average number of shares used in computing net income per share:

          

Basic

     87,744        54,909        —          (40,536 )  (L)      102,117   

Diluted

     92,368        54,909        —          (39,667 )  (L)      107,610   

The accompanying notes are an integral part of these pro forma combined financial statements


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED OCTOBER 31, 2010

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

 

                  Adjustments        
     VeriFone     Hypercom     Divestitures of
Operations (2)
    Combined
Adjustments
(3)
    Pro forma
Combined
 

Net revenues:

          

System Solutions

   $ 828,949      $ 344,537      $ (88,540   $ —        $ 1,084,946   

Services

     172,588        100,614        (16,481     —          256,721   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     1,001,537        445,151        (105,021     —          1,341,667   

Cost of net revenues:

          

System Solutions

     530,821        227,144        (55,734     8,087    (I)      710,318   

Services

     100,404        74,269        (9,782     —          164,891   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of net revenues

     631,225        301,413        (65,516     8,087        875,209   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     370,312        143,738        (39,505     (8,087     466,458   

Operating expenses:

          

Research and development

     74,227        46,249        (5,101     —          115,375   

Selling, general and administrative

     179,037        76,929        (15,925     —          240,041   

Amortization of purchased intangible assets

     14,624        5,730        —          16,769    (I)      37,123   

Gain on sale of real property

     —          (1,515     —          —          (1,515
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     267,888        127,393        (21,026     16,769        391,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     102,424        16,345        (18,479     (24,856     75,434   

Interest expense

     (28,344     (12,333     —          11,818    (J)      (28,859

Interest income

     1,278        393        —          —          1,671   

Other income, net

     2,887        17        —          —          2,904   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     78,245        4,422        (18,479     (13,038     51,150   

Benefit from income taxes

     (20,582     (391     —          (2,608 )   (K)      (23,581
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 98,827      $ 4,813      $ (18,479   $ (10,430   $ 74,731   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

          

Basic

   $ 1.16      $ 0.09          $ 0.75   

Diluted

   $ 1.13      $ 0.09          $ 0.73   

Weighted average number of shares used in computing net income per share:

          

Basic

     85,203        53,787        —          (39,414 )   (L)      99,576   

Diluted

     87,785        54,768        —          (39,526 )   (L)      103,027   

The accompanying notes are an integral part of these pro forma combined financial statements


NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Basis of Presentation

On November 17, 2010, VeriFone and Hypercom entered into a definitive merger agreement that resulted in Hypercom becoming a wholly owned subsidiary of VeriFone on August 4, 2011.

The unaudited pro forma condensed combined financial information reflects the effects of VeriFone acquiring Hypercom for an aggregate preliminary estimated consideration of $644 million as calculated below (in millions):

 

Value of common stock to be issued by VeriFone for Hypercom common stock

   $ 554   

Estimated fair value of Hypercom’s debt that is assumed to be repaid at closing

     69   

Value of stock options to be issued by VeriFone for Hypercom stock options

     21   
  

 

 

 

Total

   $ 644   
  

 

 

 

The preliminary estimated consideration was calculated with the following significant assumptions:

 

  1) Hypercom had 62,491,118 shares of common stock outstanding at the closing of the merger consistent with the number of Hypercom shares outstanding as of March 31, 2011.

 

  2) The fair value of VeriFone common stock at closing was $38.52, which was VeriFone’s closing common stock price on August 4, 2011, the acquisition close date.

 

  3) The merger agreement between VeriFone and Hypercom did not require the repayment of Hypercom’s debt balance at closing, however, the debt agreement classifies the merger as a default event and requires the immediate repayment of the debt. Therefore, VeriFone has included the repayment of debt in the purchase price and has assumed that the principal debt balance outstanding at closing is the same as the balance outstanding as of March 31, 2011.

 

  4) Hypercom had stock options outstanding at the closing of the merger convertible into 3,777,556 shares of Hypercom common stock, consistent with the number of Hypercom’s stock options outstanding as of March 31, 2011, all of which were converted into VeriFone stock options on the close date. VeriFone used the weighted average exercise price of $4.67 and a weighted average term of 7.26 years for all the outstanding stock options consistent with the weighted average exercise price and weighted average term of Hypercom’s stock options that were outstanding as of March 31, 2011. The Hypercom stock options were presumed converted into stock options to purchase 868,838 shares of VeriFone common stock with an average strike price of $20.30 and an average term of 7.26 years. VeriFone used the Black Scholes valuation model to calculate the fair value of the VeriFone stock options. The fair value of each option was estimated at $24.19. The major assumptions VeriFone used were as follows:

 

   

expected term of 2.76 years;

 

   

volatility of 73.11% which was based on VeriFone’s historic stock volatility over the past 2.76 years;

 

   

strike price of $20.30; and

 

   

market price of $38.52.


  5) VeriFone has assumed that there was no incremental fair value to Hypercom option holders on the exchange given the current terms and all the options were fully vested at the time of the close of the transaction due to Hypercom’s initiated change in control clauses. As a result, the full amount of the fair value of the options were assigned to the purchase consideration.

The final purchase consideration at closing is expected to change because the exact number of employee stock awards and common stock outstanding have changed from March 31, 2011 due to exercises and cancellations as a result of Hypercom staff turnover that occurred before the transaction was closed, and the finalization of the actual assumptions to be used in the valuation of the stock options.

The merger will be accounted for as a business combination using the acquisition method of accounting and, accordingly, will result in the recognition of assets acquired and liabilities assumed at fair value. The preliminary allocation of the purchase price used in the unaudited pro forma condensed combined financial information is based on preliminary estimates and currently available information. These assumptions and estimates, some of which cannot be finalized until after the consummation of the merger, will be revised as additional information becomes available, and after finalization of the valuation of Hypercom’s assets and liabilities. The final determination of the allocation of the purchase price will be based on the actual intangible assets, net tangible assets and in-process research and development of Hypercom existing as of the closing date of the merger.

The unaudited pro forma condensed combined financial information included herein does not give effect to any potential cost reductions or other operating efficiencies that could result from the merger, including but not limited to, those associated with potential (i) reductions of corporate overhead, (ii) eliminations of duplicate functions and (iii) increased operational efficiencies through the adoption of best practices and capabilities from each company.

The unaudited pro forma condensed combined financial information is not intended to represent what VeriFone’s financial position or results of operations would actually have been if the merger had occurred on those dates. Since VeriFone and Hypercom were not under common control or management for any period presented, the unaudited pro forma condensed combined financial results may not be comparable to, or indicative of, future performance. The unaudited pro forma condensed combined financial information does not include any adjustments for liabilities resulting from integration planning. Management of VeriFone is in the process of assessing the costs associated with integration.


Notes to Unaudited Pro Forma Condensed Combined Financial Information

(1) Basis of Preliminary Purchase Price Allocation

The following preliminary allocation of the Hypercom purchase price is based on VeriFone’s preliminary estimates of the fair value of the tangible and intangible assets and liabilities of Hypercom as of March 31, 2011. The final determination of the allocation of the purchase price will be based on the fair value of such assets and liabilities as of the consummation date of the acquisition, August 4, 2011, and the finalization of the valuation of Hypercom’s assets and liabilities. Such final determination of the purchase price allocation may be different than the preliminary used in these pro forma condensed combined financial statements.

The estimated purchase price of Hypercom (as calculated in the manner described above) is allocated to the assets to be acquired and liabilities to be assumed based on the following preliminary basis (in thousands):

 

Net assets of Hypercom as of March 31, 2011

   $ 101,859   

Add: Debt to be repaid at closing

     68,915   
  

 

 

 

Adjusted net assets of Hypercom at closing

     170,774   

Acquisition method adjustments:

  

Less: existing intangible assets, net

     (43,736

Add: estimated developed technology intangible asset

     60,000   

Add: estimated customer relationships intangible asset

     150,000   

Add: estimated trademarks and trade names intangible asset

     30,000   

Less: existing goodwill

     (24,013

Add: estimated goodwill

     360,125   

Add: mark up inventory to estimated fair value

     9,954   

Add: reduce deferred revenue to estimated fair value

     4,221   

Less: deferred tax liability assigned to acquired intangibles

     (67,881

Less: discounts on warrants netted with long-term debt

     (5,866
  

 

 

 

Total estimated purchase price

   $ 643,578   
  

 

 

 

Other considerations in the preliminary allocation of the estimated purchase price of Hypercom include the following:

 

  1) Our preliminary valuation used to allocate the purchase price uses a third-party market participant view and assumes there are no synergies unique to VeriFone. If there were any synergies unique to VeriFone, then a higher portion of the purchase consideration would be allocated to goodwill;

 

  2) The preliminary valuation relies on publicly available information and general statistics from prior acquisitions within our industry;

 

  3) Accounts receivable book value approximates fair value;

 

  4) The effective interest rate of the net investment in sales-type leases was assumed to approximate current market interest rate and therefore no fair value adjustments were required;

 

  5) Operating leases for facilities on average are assumed to be at market prices;

 

  6) The property, plant and equipment’s current carrying value approximates the fair value of the assets;

 

  7) The location of the intangibles determine the tax rate used to determine the deferred tax liabilities, VeriFone assumed that the developed technology and trademarks and trade name will be located in the United States and the customer relationships intangibles will be in locations where Hypercom generates their revenues; and

 

  8) Carrying value of debt is assumed to approximate fair value.


(2) Divestitures of Certain Operations

As part of the merger agreement, VeriFone and Hypercom have sold or otherwise disposed of, businesses or assets in the U.S, U.K and Spain. VeriFone has made general assumptions as to the value of Hypercom’s businesses that were included in the divestitures based upon currently available information.

The divestitures of the U.S., U.K. and Spain operations are reflected in the unaudited pro forma condensed combined balance sheet as an adjustment that classifies those assets and liabilities that VeriFone and Hypercom intend to divest as “Assets held for sale” and “Liabilities held for sale”. No pro forma adjustments have been made to reflect any anticipated gain or loss from the dispositions of these operations because the value of the businesses disposed has not been finalized. Any such effect could be material with respect to earnings in any given period. However, it is not expected that the dispositions will materially affect the combined company’s financial position or negatively affect the combined company’s liquidity.

The unaudited pro forma condensed combined statements of operations for the fiscal year ended October 31, 2010 and six months ended April 30, 2011 include adjustments to eliminate Hypercom’s operating results attributable to the divestitures of the U.S., U.K. and Spain operations. Additionally, no pro forma adjustments have been made to reflect any earnings benefits from the reinvestment of any proceeds which might be recovered, or the reduction of debt which may arise as a consequence of the dispositions.

(3) Pro Forma Combined Adjustments

The following pro forma combined adjustments have been reflected in the unaudited pro forma condensed combined financial information. These adjustments give effect to pro forma events that are (i) directly attributable to the merger, (ii) factually supportable and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined company.

All adjustments are based on current assumptions and are subject to change upon completion of the final purchase price allocation.

VeriFone and Hypercom’s consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States and the accounting policies of VeriFone and Hypercom are substantially comparable. Thus, no accounting policy conformance adjustments have been made to the unaudited pro forma condensed combined financial information.

Balance Sheet Adjustments

(A) To reflect the fair value of the common shares, stock options and restricted stock awards issued to Hypercom stockholders and employees by VeriFone as consideration to acquire Hypercom of $575 million and the elimination of Hypercom’s stockholders’ equity balances.

(B) To reflect the establishment of goodwill of $336 million, estimated as a result of the preliminary purchase price allocation described in Note (1). This adjustment also includes the elimination of the carrying value of Hypercom’s existing goodwill that has been adjusted to fair value in the purchase price allocation process.

(C) To reflect the preliminary estimates of fair value of the identifiable intangible assets of Hypercom which were estimated based on preliminary fair value review and benchmarked against recent comparable acquisitions of related industries. These allocations may materially change once a final appraisal is performed and the assets to be divested are finally determined. The estimated useful life of the developed technology, customer relationships and trademarks and trade names were assumed to be 6 years, 8 years and 8 years, respectively. This adjustment also includes the elimination of the carrying value of Hypercom’s existing intangible assets that has been adjusted to fair value in the purchase price allocation process.

 

     Increase (Decrease)
(in thousands)
 

Establish developed technology asset

   $ 60,000   

Establish customer relationships asset

     150,000   

Establish trademarks and trade name

     30,000   

Elimination of intangible assets from prior Hypercom acquisitions

     (43,736
  

 

 

 

Net pro forma combined adjustment

   $ 196,264   
  

 

 

 


(D) To increase inventory to estimated fair value. The estimated fair value is calculated using the estimated selling price less a reasonable margin.

(E) To reflect a decrease in deferred revenue as required by acquisition accounting. The estimated fair value represents the cost to provide services under contractual obligations plus a reasonable margin.

(F) To eliminate the remaining value of $6 million assigned to the 10.5 million warrants that were issued by Hypercom in connection with issuing debt. The fair value of the warrants was recorded as debt issuance costs and resulted in an unamortized discount to the debt. In purchase accounting, the debt discount has been eliminated and the debt is recorded at its estimated fair value. For purposes of the condensed combined pro forma financial information it has been assumed that the carrying value of the Hypercom debt approximates fair value.

(G) To reflect the extinguishment of Hypercom’s $69 million outstanding debt. The merger agreement does not require the repayment of debt. However, Hypercom’s credit agreement defines a change of control event as an event of default which requires immediate repayment of the debt; therefore VeriFone has assumed the repayment of the debt in full at closing.

(H) Adjustment to reflect the expected deferred tax liability for the intangible assets. VeriFone has assumed the developed technology and trademarks and trade name will use its U.S. tax rate of 38% and for the customer relationship intangible asset a foreign tax rate of 31%.

Statement of Operations Adjustments

(I) To reflect amortization expense associated with the developed technology, customer relationships and trademarks and trade names in Note (C) above assuming an estimated life of 6 years, 8 years and 8 years, respectively. These expenses are offset by the elimination of the amortization expense associated with Hypercom’s acquisitions.

 

     Year Ended
October 31, 2010
    Six Months Ended
April 30, 2011
 
     (in thousands)     (in thousands)  

Amortization of developed technology

   $ 10,000      $ 5,000   

Amortization of customer relationships

     18,750        9,375   

Amortization of trademarks and trade names

     3,750        1,875   

Hypercom acquisitions

     (7,644     (3,149
  

 

 

   

 

 

 
   $ 24,856      $ 13,101   
  

 

 

   

 

 

 

Amortized to cost of net revenues – system solutions

   $ 8,087      $ 4,521   
  

 

 

   

 

 

 

Amortized to operating expenses

   $ 16,769      $ 8,580   
  

 

 

   

 

 

 


(J) To eliminate the amortization of the deferred warrant costs to interest expense associated with the warrants described in Note (F) above and interest expense associated with the loan as described in Note (G). The effect was $3.0 million and $3.4 million, respectively, for the six months ended April 30, 2011 and $4.9 million and $6.9 million, respectively, for the fiscal year ended October 31, 2010.

(K) To reflect the tax effects of adjustments using an estimated effective income tax rate of 20% for the fiscal year ended October 31, 2010.

(L) To reflect (i) the elimination of Hypercom’s basic and diluted shares outstanding, net of (ii) the assumed issuance of VeriFone common stock as a result of the transaction calculated by multiplying 62,491,118 of Hypercom common stock outstanding as of March 31, 2011 by the 0.23 exchange ratio and (iii) full dilution from the new VeriFone stock options issued in exchange for Hypercom stock options. The exercise price of all stock options was below the market price of the underlying VeriFone common stock as of April 20, 2011.

In relation to the inventory and deferred revenue fair value adjustments described above in Note (D) and Note (E), the items represent one-time adjustments directly attributed to the merger that will not have recurring significant ongoing impact in excess of one year. Therefore, the impact on gross margins due to the write-up of inventory and the reduction in revenues due to the fair value adjustment made to deferred revenue are not reflected in the unaudited pro forma condensed combined statement of operations.

Although all of the employee awards of Hypercom will be fully vested, VeriFone did not reflect pro-forma adjustments to reduce the stock-based compensation expense recorded by Hypercom because VeriFone granted new options to Hypercom’s employees in the ordinary course of business that will result in the future stock-based compensation expense for the Hypercom employees.

The unaudited pro forma condensed combined financial information has not been adjusted for merger costs expected to be incurred by VeriFone as these costs are directly attributed to the merger and will not have a continuing impact in excess of one year. These merger costs are not readily predictable but are anticipated to be significant.