##### Table of Contents



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 1934For the quarterly period ended
    January 31, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to    Commission file number:
    001-32465
  VERIFONE HOLDINGS,
    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)
   þ o
  Rule 12b-2
  Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o(Do not check if a smaller reporting
    company)   Rule 12b-2 o þ




---



##### 



TABLE OF
    CONTENTS
  VERIFONE
    HOLDINGS, INC.
  INDEX
   
 PART I  FINANCIAL
    INFORMATIONItem 1


Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of
    January 31, 2008 and October 31, 2007


1Condensed Consolidated Statements of Operations
    for the Three Months Ended January 31, 2008 and 2007


2Condensed Consolidated Statements of Cash Flows
    for the Three Months Ended January 31, 2008 and 2007


3Notes to Condensed Consolidated Financial
    Statements


4Item 2


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


26Item 3


Quantitative and Qualitative Disclosures About
    Market Risk


38Item 4


Controls and Procedures


39PART II OTHER
    INFORMATIONItem 1


Legal Proceedings


41Item 1A


Risk Factors


41Item 2


Unregistered Sales of Equity Securities and Use
    of Proceeds


41Item 3


Defaults Upon Senior Securities


41Item 4


Submission of Matters to a Vote of Security
    Holders


41Item 5


Other Information


41Item 6


Exhibits


41Signatures


42Exhibit Index


43EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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##### Table of Contents



PART I 
    FINANCIAL INFORMATION  ITEM 1.
    FINANCIAL
    STATEMENTS  VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  CONDENSED
    CONSOLIDATED BALANCE SHEETS
  January 31,


October 31,2008


2007(1)(Unaudited)(In thousands, except par value)ASSETSCurrent assets:Cash and cash equivalents

$
209,310


$
215,001Accounts receivable, net of allowance of $4,694 and $4,270


182,559



194,146Inventories


116,711



107,168Deferred tax assets


21,670



23,854Prepaid expenses and other current assets


79,003



63,413Total current assets


609,253



603,582Property, plant and equipment, net


50,600



48,293Purchased intangible assets, net


155,365



170,073Goodwill


612,489



611,977Deferred tax assets


64,782



67,796Debt issuance costs, net


12,744



12,855Other assets


41,376



32,733Total assets

$
1,546,609


$
1,547,309LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
100,610


$
105,215Income taxes payable


9,041



19,530Accrued compensation


22,223



21,201Accrued warranty


10,265



11,012Deferred revenue, net


59,857



43,049Deferred tax liabilities


6,123



6,154Accrued expenses


9,149



8,755Other current liabilities


88,877



86,465Current portion of long-term debt


5,202



5,386Total current liabilities


311,347



306,767Accrued warranty


644



655Deferred revenue, net


11,691



11,274Long-term debt


547,211



547,766Deferred tax liabilities


90,977



87,142Other long-term liabilities


32,690



10,296Total liabilities


994,560



963,900Minority interest


2,164



2,487Stockholders equity:Preferred stock: 10,000 shares authorized at
    January 31, 2008 and October 31, 2007; zero issued and
    outstanding at January 31, 2008 and October 31, 2007






Common stock: $0.01 par value; 100,000 shares
    authorized at January 31, 2008 and October 31, 2007;
    84,194 and 84,060 shares issued and outstanding at
    January 31, 2008 and October 31, 2007


842



841Additional paid-in capital


642,690



635,404Accumulated deficit


(112,349
)


(77,484
)Accumulated other comprehensive income


18,702



22,161Total stockholders equity


549,885



580,922Total liabilities and stockholders equity

$
1,546,609


$
1,547,309     (1)
    
    Amounts as of October 31, 2007 were derived from the
    October 31, 2007 audited consolidated financial statements.   1




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES



CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS  Three Months EndedJanuary 312008


2007(Unaudited)(In thousands, except per share data)Net revenues:Systems Solutions

$
155,601


$
188,966Services


29,920



27,397Total net revenues


185,521



216,363Cost of net revenues:Systems Solutions


109,604



133,291Services


18,553



14,449Total cost of net revenues


128,157



147,740Gross profit


57,364



68,623Operating expenses:Research and development


22,462



16,898Sales and marketing


24,643



23,040General and administrative


26,066



17,376Amortization of purchased intangible assets


5,890



5,351In-process research and development






6,560Total operating expenses


79,061



69,225Operating loss


(21,697
)


(602
)Interest expense


(6,440
)


(9,756
)Interest income


2,088



991Other expense, net


(4,520
)


(261
)Loss before income taxes


(30,569
)


(9,628
)Provision for (benefit from) income taxes


2,929



(3,949
)Net loss

$
(33,498
)

$
(5,679
)Net loss per share:Basic

$
(0.40
)

$
(0.07
)Diluted

$
(0.40
)

$
(0.07
)Weighted average shares used in computing net loss per share:Basic


84,153



80,993Diluted


84,153



80,993    2




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES



CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS  Three Months EndedJanuary 312008


2007(Unaudited)(In thousands)Cash flows from operating activities:Net loss

$
(33,498
)

$
(5,679
)Adjustments to reconcile net loss to net cash provided by
    operating activities:Amortization of purchased intangible assets


14,065



14,960Depreciation and amortization of property, plant and equipment


3,027



2,004Amortization of capitalized software development costs


471



295In-process research and development






6,560Write-off of capitalized software development costs


2,700



Amortization of debt issuance costs


616



328Stock-based compensation


5,470



7,796Minority interest and equity in earnings of affiliates


(227
)


24Net cash provided (used in) by operating activities before
    changes in working capital


(7,376
)


26,288Changes in operating assets and liabilities:Accounts receivable, net


11,703



(2,623
)Inventories


(9,543
)


35,289Deferred tax assets


5,707



(1,903
)Prepaid expenses and other current assets


(16,421
)


(14,458
)Other assets


(11,370
)


(2,362
)Accounts payable


(4,605
)


(6,905
)Income taxes payable


8,179



(1,705
)Tax benefit from stock-based compensation


(957
)


(2,342
)Accrued compensation


934



(3,762
)Accrued warranty


(758
)


(1,226
)Deferred revenue, net


17,225



6,862Deferred tax liabilities


3,930



4,981Accrued expenses and other liabilities


5,373



(13,796
)Net cash provided by operating activities


2,021



22,338Cash flows from investing activities:Software development costs capitalized


(662
)


(1,145
)Purchase of property, plant and equipment


(5,383
)


(6,571
)Acquisition of businesses, net of cash acquired


(2,858
)


(259,857
)Net cash used in investing activities


(8,903
)


(267,573
)Cash flows from financing activities:Proceeds from exercise of stock options


1,704



12,986Tax benefit from stock-based compensation


957



2,342Proceeds from long-term debt, net of costs


439



304,950Repayment of long-term debt


(1,250
)


(13
)Payment of debt amendment fees


(740
)


Other


(31
)


22Net cash provided by financing activities


1,079



320,287Effect of foreign exchange rate on cash and cash equivalents


112



273Net increase (decrease) in cash and cash equivalents


(5,691
)


75,325Cash and cash equivalents at beginning of period


215,001



86,564Cash and cash equivalents at end of period

$
209,310


$
161,889Supplemental disclosure for cash flow information:Cash paid for interest

$
6,238


$
3,556Cash paid for income taxes

$
2,232


$
2,404Supplemental schedule for non-cash transaction:Issuance of common stock and stock options for acquisition

$



$
435,228    3




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 1.
    Basis of
    Presentation  The
    Company
    Principles
    of Consolidation
    Unaudited
    Interim Financial Statements
  Rule 10-01 Regulation S-X Form 10-Q Form 10-K
  Summary
    of Significant Accounting Policies
  Accounting for Uncertainty in Income Taxes Accounting for Income Taxes.
  Form 10-K
 4




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Use of
    Estimates
    Concentrations
    of Credit Risk
    Recent
    Accounting Pronouncements
  Fair Value Measurements. FAS 157-2, Effective Date of FASB Statement No. 157 FAS 157-2 FAS 157-2
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities.
  Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of ARB No. 51 and/or
  Business Combinations and/or
 5




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for
    Income Taxes
  14-1, Accounting for Convertible Debt Instruments That May Be
    Settled in Cash upon Conversion (Including Partial Cash
    Settlement) 14-1 14-1
  Note 2.
    Balance
    Sheet and Statement of Operations Details  Inventories
    January 31,


October 31,2008


2007Raw materials

$
36,276


$
29,548Work-in-process


6,911



3,849Finished goods


73,524



73,771$
116,711


$
107,168   Prepaid
    Expenses and Other Current Assets
    January 31,


October 31,2008


2007Prepaid taxes

$
54,467


$
38,390Prepaid expenses


14,047



15,266Other receivables


6,420



7,827Other current assets


4,069



1,930$
79,003


$
63,413    6




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Purchased
    Intangible Assets, net
    January 31, 2008


October 31, 2007Gross





Net


Gross





NetCarrying


Accumulated


Carrying


Carrying


Accumulated


CarryingValue


Amortization


Value


Value


Amortization


ValueDeveloped technology

$
172,160


$
(73,098
)

$
99,062


$
172,564


$
(64,981
)

$
107,583Core technology


14,442



(14,442
)






14,442



(14,442
)


Trade name


22,225



(22,225
)






22,225



(22,225
)


Internal use software


4,399



(1,097
)


3,302



4,485



(853
)


3,632Customer relationships


90,696



(37,695
)


53,001



91,023



(32,165
)


58,858Total

$
303,922


$
(148,557
)

$
155,365


$
304,739


$
(134,666
)

$
170,073     Three Months EndedJanuary 31,2008


2007Included in cost of net revenues

$
8,175


$
9,609Included in operating expenses


5,890



5,351$
14,065


$
14,960     Cost of Net


OperatingFiscal Year

Revenues


Expenses


Total2008 (remaining 9 months)

$
23,721


$
19,791


$
43,5122009


31,754



20,469



52,2232010


24,853



11,995



36,8482011


15,061



3,293



18,3542012


2,683



466



3,149Thereafter


990



289



1,279Total

$
99,062


$
56,303


$
155,365  7




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Goodwill
    Three MonthsEnded


Year EndedJanuary 31,


October 31,2008


2007Balance at beginning of period

$
611,977


$
52,689Additions related to acquisitions


2,757



540,043Resolution of tax contingencies and adjustments to tax reserves
    and valuation allowances established in purchase accounting


1,326



(5,229
)Currency translation adjustments


(3,571
)


24,474Balance at end of period

$
612,489


$
611,977   Accrued
    Warranty
    Three MonthsEnded


Year EndedJanuary 31,


October 31,2008


2007Balance at beginning of period

$
11,667


$
5,432Warranty charged to cost of net revenues


2,329



3,664Utilization of warranty


(3,434
)


(13,089
)Change in estimates


312



4,768Warranty liabilities assumed in acquisitions


35



10,892Balance at end of period


10,909



11,667Less current portion


(10,265
)


(11,012
)Long-term portion

$
644


$
655   Deferred
    Revenue, net
    January 31,


October 31,2008


2007Deferred revenue

$
91,228


$
58,992Deferred cost of revenue


(19,680
)


(4,669
)71,548



54,323Less current portion


(59,857
)


(43,049
)Long-term portion

$
11,691


$
11,274  8




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Other
    Current Liabilities
    January 31,


October 31,2008


2007Other tax liabilities(1)

$
39,686


$
39,310Interest payable


1,538



2,620Accounts payable related accrual


17,553



16,246Accrued legal and audit fees


7,463



4,693Other liabilities


22,637



23,596Total other current liabilities

$
88,877


$
86,465     Other
    Income (Expense), net
    Three MonthsEnded January 31,2008


2007Foreign currency transaction gains (losses), net

$
(5,363
)

$
27Foreign currency contract gains (losses), net


642



(214
)Other, net


201



(74
)$
(4,520
)

$
(261
)   Note 3.
    Financings    January 31,


October 31,2008


2007Term B Loan

$
235,000


$
236,2501.375% Senior Convertible Notes


316,250



316,250Capital lease and other notes payable


1,163



652Total


552,413



553,152Less current portion


(5,202
)


(5,386
)Long-term portion

$
547,211


$
547,766   Secured
    Credit Facility
   9




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                 10




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  1.375% Senior
    Convertible Notes
    business-day trading-day trading-day
   11




---



##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Form 10-K
       12




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    No. 00-19 (EITF 00-19), Accounting for Derivative Financial Instruments Indexed to,
    and Potentially Settled in, a Companys Own Stock
  Earnings per
    Share
  Note 4.
    Comprehensive
    Income (Loss)    Three Months Ended January 31,2008


2007Net loss

$
(33,498
)

$
(5,679
)Other comprehensive income (loss):Foreign currency translation adjustments


(3,466
)


6,335Unrealized gain (loss) on interest rate hedge, net of tax


7



(19
)Comprehensive income (loss)

$
(36,957
)

$
637     January 31,


October 31,2008


2007Foreign currency translation adjustments

$
18,758


$
22,224Unrecorded loss on interest rate hedges


(56
)


(63
)Accumulated other comprehensive income

$
18,702


$
22,161   Note 5.
    Stockholders
    Equity  Form 10-K
 13




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Stock-Based
    Compensation
  Share-Based
    Payment
  Three Months Ended January 31,2008


2007Cost of net revenues

$
626


$
917Research and development


1,496



1,466Sales and marketing


1,803



1,829General and administrative


1,545



3,584Total stock-based compensation

$
5,470


$
7,796   Valuation
    Assumptions
  Share-Based
    Payment
  Three Month Ended January 31,2008


2007Expected term of the options (in years)


3.0



2.5Risk-free interest rate


2.9
%


4.9
%Expected stock price volatility


40.6
%


41.1
%Expected dividend rate


0.0
%


0.0
%              14




---



##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Performance
    Restricted Stock Units for the Companys CEO
      Form 10-K
     15




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Equity
    Award Activity
    WeightedAverageWeighted


RemainingNumber of


Average


Contractual


AggregateShares


Exercise Price


Term


Intrinsic Value(In Years)


(In Thousands)Balance at November 1, 2007


8,331,637


$
27.10Granted


22,500



19.81Exercised


(104,575
)


8.84Cancelled


(171,790
)


25.76Balance at January 31, 2008


8,077,772


$
27.35



5.5


$
16,346Vested or expected to vest at January 31, 2008


6,809,091


$
27.28



5.5


$
13,936Exercisable at January 31, 2008


1,887,301


$
21.64



5.0


$
7,499     Number of


AggregatedShares


Intrinsic Value(In Thousands)Outstanding at November 1, 2007


749,750Granted


7,500Vested


(7,500
)Cancelled


Balance at January 31, 2008


749,750


$
2,914Vested or expected to vest at January 31, 2008


615,776


$
2,285         Note 6.
    Net
    Income (Loss) Per Share   16




---



##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended January 31,2008


2007Basic and diluted net loss per share:Numerator:Net loss

$
(33,498
)

$
(5,679
)Denominator:Weighted-average common shares outstanding


84,153



81,994Less: Weighted-average shares subject to repurchase






(1,001
)Weighted-average shares used in computing basic net loss per
    share


84,153



80,993Add dilutive securities:Weighted-average shares subjects to repurchase






Stock options and restricted stock units






Weighted-average shares used in computing diluted net loss per
    share


84,153



80,993Net loss per share:Basic

$
(0.40
)

$
(0.07
)Diluted

$
(0.40
)

$
(0.07
)     EITF No. 90-19, Convertible Bonds with Issuer Option to Settle for Cash upon
    Conversion (EITF 90-19); EITF 90-19.
    Note 7.
    Segment
    and Geographic Information  Segment
    Information
  Disclosures About Segments of an
    Enterprise and Related Information.
 17




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    step-up over-and-under
    Three Months Ended January 31,2008


2007Net revenues:International

$
118,019


$
128,797North America


67,720



89,081Corporate


(218
)


(1,515
)Total net revenues

$
185,521


$
216,363Operating income (loss):International

$
16,104


$
31,424North America


21,166



31,728Corporate


(58,967
)


(63,754
)Total operating loss

$
(21,697
)

$
(602
)     January 31,


October 31,2008


2007International

$
23,987


$
24,271North America


29,164



26,549Total

$
53,151


$
50,820     January 31


October 31,2008


2007International

$
542,643


$
542,186North America


69,846



69,791Total

$
612,489


$
611,977  18




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    January 31,


October 31,2008


2007International

$
1,124,524


$
1,122,411North America


422,085



424,898Total

$
1,546,609


$
1,547,309     Three Months Ended January 31,2008


2007International

$
1,732


$
1,332North America


1,295



672Total

$
3,027


$
2,004   Geographic
    Information
    Three Months Ended January 31,2008


2007United States

$
60,530


$
79,585Europe


57,683



71,155Latin America


44,609



40,671Asia


15,727



16,971Canada


6,972



7,981Total revenues

$
185,521


$
216,363       January 31,


October 31,2008


2007North America

$
29,164


$
26,549Europe


20,254



20,694Asia


2,307



2,160Latin America


1,426



1,417Total

$
53,151


$
50,820   Note 8.
    Income
    Taxes   19




---



##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
             20




---



##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 9.
    Commitments
    and Contingencies  Commitments
    NetMinimum


Sublease


MinimumLease


Rental


LeaseFiscal Year

Payments


Income


Payments2008 (remaining 9 months)

$
7,710


$
100


$
7,6102009


7,433



86



7,3472010


6,248



4



6,2442011


4,905







4,9052012


4,436







4,436Thereafter


10,489







10,489Total

$
41,221


$
190


$
41,031   FASB Interpretation No. 48 (FIN 48)
    Liabilities
    Contingencies
  Manufacturing
    Agreements
    Litigation
  Brazilian
    State Tax Assessments
  State
    Value Added Tax
   21




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Importation
    of Goods Assessments
         22




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Department
    of Justice Investigation
    Patent
    Infringement Lawsuits
  SPA
    Syspatronic AG v. VeriFone Holdings, Inc., VeriFone, Inc.,
    et al.
    Cardsoft,
    Inc. et al v. VeriFone Holdings, Inc., VeriFone, Inc.,
    et al.
    Class Action
    and Derivative Lawsuits
  In re VeriFone
    Holdings, Inc. Securities Litigation 07-6140 Eichenholtz v. VeriFone Holdings,
    Inc. et al. C 07-6140 Lien v. VeriFone Holdings, Inc. et al. 07-6195 Vaughn et al. v. VeriFone Holdings, Inc. et al. 07-6197 Feldman et al. v. VeriFone Holdings,
    Inc. et al. 07-6218 MMC; Cerini v. VeriFone Holdings, Inc. et al. 07-6228 Westend Capital Management LLC v. VeriFone Holdings, Inc. et
    al. 07-6237 MMC; Hill v. VeriFone Holdings, Inc. et al. C 07-6238 Offutt v. VeriFone Holdings, Inc. et al. C 07-6241 Feitel v. VeriFone Holdings, Inc., et al. C 08-0118
 23




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Rule 10b-5
  In re VeriFone Holdings, Inc. Shareholder
    Derivative Litigation 07-6347, King v. Bergeron, et al No. 07-CV-6347), Hilborn v. VeriFone Holdings, Inc., et al. No. 08-CV-1132), Patel v. Bergeron, et al No. 08-CV-1133), Lemmond, et al. v. VeriFone Holdings, Inc., et
    al No. 08-CV-1301); In re VeriFone Holdings, Inc. Derivative Litigation No. 1-07-CV-100980, Catholic Medical Mission Board v.
    Bergeron, et al. No. 1-07-CV-100980), Carpel v. Bergeron, et al No. 1-07-CV-101449).
      Regulatory
    Actions
    Other
    Litigation
   24




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##### Table of Contents



VERIFONE
    HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 10.
    Restructuring
    Charges  Accounting for Costs Associated
    with Exit or Disposal Activities
  Form 10-K
  Note 11.
    Business
    Combination  Peripheral
    Computer Industries Pty Limited
  36-month
 25




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##### Table of Contents



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  This section and other parts of this Quarterly Report on
    Form 10-Q
    contain forward-looking statements that involve risks and
    uncertainties. In some cases, forward-looking statements can be
    identified by words such as anticipates,
    expects, believes, plans,
    predicts, and similar terms. Such forward-looking
    statements are based on current expectations, estimates, and
    projections about our industry, managements beliefs, and
    assumptions made by management. Forward-looking statements are
    not guarantees of future performance and our actual results may
    differ significantly from the results discussed in the
    forward-looking statements. Factors that might cause such
    differences include, but are not limited to, those discussed in
    Part II, Item 1A Risk Factors below and in
    Item 1A of our Annual Report on
    Form 10-K
    for the year ended October 31, 2007 filed with the SEC. The
    following discussion should be read in conjunction with our
    consolidated financial statements and related notes included in
    our 2007 Annual Report on
    Form 10-K
    and the condensed Consolidated Financial Statements and Notes
    thereto included elsewhere in this Quarterly Report on
    Form 10-Q.
    Unless required by law, we expressly disclaim any obligation to
    update publicly any forward-looking statements, whether as
    result of new information, future events, or otherwise.
    Restatement
       26




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##### Table of Contents



Overview
  26-year
           27




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##### Table of Contents



Results
    of Operations
  Net
    Revenues
      Three Months Ended January 31,Net


Percentage2008


2007


Change


ChangeSystems Solutions

$
155,601


$
188,966


$
(33,365
)


(17.7
)%Services


29,920



27,397



2,523



9.2
%Total

$
185,521


$
216,363


$
(30,842
)


(14.3
)%   System
    Solutions
    top-ups,
  multi-lane
 28




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##### Table of Contents



Services
    Gross
    Profit
    Amounts


Gross Profit PercentageThree Months Ended January 31,2008


2007


2008


2007Systems Solutions

$
45,997


$
55,675



29.6
%


29.5
%Services


11,367



12,948



38.0
%


47.3
%Total

$
57,364


$
68,623



30.9
%


31.7
%   step-up
        step-up step-up over-and-under
   29




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##### Table of Contents



Research
    and Development Expenses
    Three Months Ended January 31,Net


Percentage2008


2007


Change


ChangeResearch and development

$
22,462


$
16,898


$
5,564



32.9
%Percentage of net revenues


12.1
%


7.8
%     Sales
    and Marketing Expenses
    Three Months Ended January 31,Net


Percentage2008


2007


Change


ChangeSales and marketing

$
24,643


$
23,040


$
1,603



7.0
%Percentage of net revenues


13.3
%


10.6
%     General
    and Administrative Expenses
    Three Months Ended January 31,Net


Percentage2008


2007


Change


ChangeGeneral and administrative

$
26,066


$
17,376


$
8,690



50.0
%Percentage of net revenues


14.1
%


8.0
%    30




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##### Table of Contents



Amortization
    of Purchased Intangible Assets
    Interest
    Expense
    14-1, Accounting for Convertible Debt Instruments That May Be
    Settled in Cash upon Conversion (Including Partial Cash
    Settlement) 14-1 14-1
  Interest
    Income
    Other
    Income (Expense), Net
    Provision
    for Income Taxes
     31




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##### Table of Contents



Segment
    Information
  step-up over-and-under
  Three Months Ended January 31,Net


Percentage2008


2007


Change


Change(In thousands, except for percentages)Net revenuesInternational

$
118,019


$
128,797


$
(10,778
)


(8.4
)%North America


67,720



89,081



(21,361
)


(24.0
)%Corporate


(218
)


(1,515
)


1,297



85.6
%Total net revenues

$
185,521


$
216,363


$
(30,842
)


(14.3
)%Operating income (loss)International

$
16,104


$
31,424


$
(15,320
)


(48.8
)%North America


21,166



31,728



(10,562
)


(33.3
)%Corporate


(58,967
)


(63,754
)


4,787



7.5
%Total operating loss

$
(21,697
)

$
(602
)

$
(21,095
)


(3,504.2
)%        32




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##### Table of Contents



step-up
  Liquidity
    and Capital Resources
  Three Months Ended January 31,2008


2007(In thousands)Net cash provided by (used in):Operating activities

$
2,021


$
22,338Investing activities


(8,903
)


(267,573
)Financing activities


1,079



320,287Effect of exchange rate fluctuation on cash and cash equivalents


112



273Net increase (decrease) in cash and cash equivalents

$
(5,691
)

$
75,325     Operating
    Activities
        
    A $17.2 million increase in deferred revenue primarily due
    to the deferral of revenues from certain distribution channels
    as a result of not meeting all necessary revenue recognition
    criteria;
    A $11.7 million decrease in accounts receivable due to
    lower revenues;
    A $9.6 million decrease in net deferred tax assets;
    A $8.2 million increase in income taxes payable; and
    A $5.4 million increase in accrued expenses and other
    liabilities mainly due to accrued investigation and restatement
    related costs and audit fees.    
    A $16.4 million increase in prepaid expenses and other
    current assets primarily due to an increase in prepaid income
    taxes;
    A $11.4 million increase in other assets primarily due to
    the deferral of costs for goods for inventory delivered to
    customers for which the net revenues and associated cost of net
    revenues is recognized as the customers are billed; 33




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##### Table of Contents




    A $9.5 million increase in inventories for projected
    sales; and
    A $4.6 million decrease in accounts payable due to timing
    of purchases of inventory and services.  Investing
    Activities
    Financing
    Activities
      Contractual
    Obligations:
    Less Than


1 to


3 to


More ThanTotal


1 Year


3 Years


5 Years


5 YearsTerm B Loan (including interest)(1)

$
302,626


$
21,650


$
33,843


$
32,810


$
214,323Senior convertible notes (including interest)


336,516



5,046



8,697



322,773



Capital lease obligations


166



38



128







Operating leases


41,221



7,710



13,681



9,341



10,489Minimum purchase obligations


71,440



71,440











$
751,969


$
105,884


$
56,349


$
364,924


$
224,812     (1)
    
    Interest in the above table has been calculated using the rate
    effective at January 31, 2008.  FASB
    Interpretation No. 48 (FIN 48)
    Liabilities
    Earnings
    before Interest, Taxes, Depreciation and Amortization (EBITDA),
    as adjusted
   34




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##### Table of Contents




    Provision for (benefit from) income
    taxes.  While income taxes are directly related to
    the amount of pre-tax income, they are also impacted by tax laws
    and the companys tax structure. As the tax laws and our
    tax structure are not under the control of our operational
    managers, management believes that the provision for (benefit
    from) income taxes should be excluded when evaluating our
    operational performance.
    Interest expense and interest income.  While
    working capital supports the business, management does not
    believe that related interest expense or interest income is
    directly attributable to the operating performance of our
    business.
    Depreciation of property, plant and
    equipment.  Management excludes depreciation
    because while tangible assets support the business, management
    does not believe the related depreciation costs are directly
    attributable to the operating performance of our business. In
    addition, depreciation may not be indicative of current or
    future capital expenditures.
    Amortization of capitalized
    software.  Management excludes amortization of
    capitalized software because while capitalized software supports
    the business, management does not believe the related
    amortization costs are directly attributable to the operating
    performance of our business. In addition, amortization of
    capitalized software may not be indicative of current or future
    expenditures to develop software.
    Amortization of certain acquisition related
    items.  We incur amortization of purchased core
    and developed technology assets, amortization of purchased
    intangible assets, amortization of step-down in deferred revenue
    on acquisition, and amortization of
    step-up in
    inventory on acquisition in connection with acquisitions.
    Management excludes these items because it does not believe
    these expenses are reflective of ongoing operating results in
    the period incurred. These amounts arise from prior acquisitions
    and management does not believe that they have a direct
    correlation to the operation of our business.
    In-process research and development.  We incur
    IPR&D expenses when technological feasibility for acquired
    technology has not been established at the date of acquisition
    and no future alternative use for such technology exists. These
    amounts arise from prior acquisitions and management does not
    believe they have a direct correlation to the operation of
    VeriFones business.
    Stock-based compensation.  These expenses
    consist primarily of expenses for employee stock options and
    restricted stock units under SFAS 123(R). Management
    excludes stock-based compensation expenses from 35




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##### Table of Contents



non-GAAP financial measures primarily because they are non-cash
    expenses which management believes are not reflective of ongoing
    operating results.  
    Acquisition related charges and restructuring
    costs.  This represents charges incurred for
    consulting services and other professional fees associated with
    acquisition related activities. These expenses also include
    charges related to restructuring activities, including costs
    associated with severance, benefits, and excess facilities. As
    management does not believe that these charges directly relate
    to the operation of our business, management believes they
    should be excluded when evaluating our operating performance.
    Capitalized software write-off.  This
    represents charges related to the
    write-off of
    previously incurred and capitalized software development costs
    due to restructuring activities and changes in our market
    approach in certain areas. As management does not believe that
    these charges directly relate to the operation of our business,
    management believes they should be excluded when evaluating our
    operating performance.    Three Months Ended January 312008(1)


2007U.S. GAAP net loss

$
(33,498
)

$
(5,679
)Provision for (benefit from) income taxes


2,929



(3,949
)Interest expense


6,440



9,756Interest income


(2,088
)


(991
)Depreciation and amortization of property, plant and equipment


3,027



2,004Amortization of capitalized software


471



295Amortization of intangible assets


14,065



14,960Amortization of step-down in deferred revenue on acquisition


218



1,514Amortization of
    step-up in
    inventory on acquisition






10,448In-process research and development






6,560Stock-based compensation


5,470



7,796Acquisition related charges and restructuring costs






794Capitalized software write-off


2,700



EBITDA as adjusted

$
(266
)

$
43,508     (1)
    
    Net loss for the three months ended January 31, 2008 was
    negatively impacted by $6.1 million of costs related to the
    restatement and $2.1 million in restructuring costs. None
    of the $8.3 million has been added back in calculating
    EBITDA.  Off-Balance
    Sheet Arrangements
  Regulation S-K,
  Recent
    Accounting Pronouncements
  Form 10-Q,
 36




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##### Table of Contents



Critical
    Accounting Policies and Estimates
      Accounting for Uncertainty in
    Income Taxes
  Income
    Taxes
    non-U.S. net
     37




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##### Table of Contents



Form 10-K
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    Interest
    Rates
    Foreign
    Currency Risk
  non-U.S. dollar
    non-U.S. denominated
  Equity
    Price Risk
   38




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##### Table of Contents



ITEM 4.
    CONTROLS
    AND PROCEDURES  Evaluation
    of Disclosure Controls and Procedures
  Rule 13a-15(e)
      Form 10-Q.
    
    A transaction-level material weakness in the design and
    operation of control activities, relating to the preparation,
    review, approval and entry of manual, non-standard, journal
    entries. This material weakness contributed to adjustments in
    several accounts and the restatement of the interim condensed
    consolidated financial statements for the quarterly periods
    during the fiscal year ended October 31, 2007. The accounts
    most affected in the restatement included inventory and cost of
    net revenues; however, this material weakness could impact all
    financial statement accounts.
    An entity-level material weakness in the control environment
    related to our period-end financial reporting process due to an
    insufficient number of qualified personnel with the required
    proficiency to apply our accounting policies in accordance with
    U.S. GAAP following the November 1, 2006 acquisition
    of Lipman Electronic Engineering Ltd. This material weakness
    contributed to adjustments in several accounts and the
    restatement of the interim condensed consolidated financial
    statements for the quarterly periods during the fiscal year
    ended October 31, 2007. The accounts most affected in the
    restatement include inventories and cost of net revenues;
    however, this material weakness could impact all financial
    statement accounts, with a higher likelihood for accounts
    subject to non-routine or estimation processes, such as
    inventory reserves and income taxes. 39




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##### Table of Contents




    An entity-level material weakness in control activities related
    to the design and operation of our supervision, monitoring and
    monthly financial statement review processes. This material
    weakness contributed to adjustments in several accounts and the
    restatement of interim condensed consolidated financial
    statements for the quarterly periods during the fiscal year
    ended October 31, 2007. The accounts most affected in the
    restatement include inventory and cost of net revenues; however,
    this material weakness could impact all financial statement
    accounts.
    A transaction-level material weakness in the design and
    operating effectiveness of controls related to income taxes.
    Specifically, our processes and procedures were not designed to
    provide for adequate and timely identification, documentation
    and review of various income tax calculations, reconciliations
    and related supporting documentation required to apply our
    accounting policy for income taxes in accordance with
    U.S. GAAP, particularly following the November 1, 2006
    acquisition of Lipman Electronic Engineering Ltd. This material
    weakness impacted our ability to report financial information
    related to income tax accounts and resulted in adjustments to
    income tax expense, income taxes payable, deferred tax assets
    and liabilities, and goodwill accounts during the fiscal year
    ended October 31, 2007.  Managements
    Remediation Initiatives
    
    We have enhanced our manual journal entry policy, including a
    more stringent manual journal entry review and approval process
    that requires tiered approval levels in which escalating dollar
    amounts require additional approval by increasingly more senior
    personnel;
    We migrated to a new worldwide, integrated, enterprise resource
    planning (ERP) system. The new ERP system is our principal
    computing platform and provides for a single unified chart of
    accounts worldwide. This system was activated for the majority
    of our worldwide operations in the first fiscal quarter of 2008
    and by the end of the second fiscal quarter of 2008 over 90% of
    our consolidated net revenues and cost of net revenues were
    processed on this system;
    We have added and expect to continue to add qualified accounting
    and finance personnel having sufficient knowledge and experience
    in general accepted accounting principles, cost accounting, tax,
    and management of financial systems;
    We intend to enhance our review process over the monthly
    financial results by requiring additional documentation and
    analysis to be provided that will then be reviewed by
    appropriate key senior personnel from both finance and
    non-finance areas;
    We expect to enhance the segregation of duties between the
    financial planning and the accounting and control functions; and
    We intend to enhance our governance and compliance functions to
    improve control consciousness and prevention of errors in
    financial reporting, as well as to improve tone, communication,
    education, and training for employees involved in the financial
    reporting process, including the appointment of a chief legal
    and compliance officer.  Changes
    in Internal Control over Financial Reporting
  Rule 13a-15(f)
  
    We have communicated our enhanced manual journal entry policy
    worldwide and have implemented additional controls to validate
    that all manual journal entries recorded are in compliance with
    the policy;
    We implemented Oracle 11i as our new integrated enterprise
    resource planning system effective November 1, 2007 for a
    significant number of our subsidiaries; and 40




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##### Table of Contents




    We have added additional qualified accounting and finance
    personnel having sufficient knowledge and experience in general
    accepted accounting principles to the corporate accounting group.   PART II 
    OTHER INFORMATION  ITEM 1.
    LEGAL
    PROCEEDINGS  Form 10-Q,
  ITEM 1A.
    RISK
    FACTORS  Form 10-K
  ITEM 2.
    UNREGISTERED
    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    ITEM 3.
    DEFAULTS
    UPON SENIOR SECURITIES    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS    ITEM 5.
    OTHER
    INFORMATION    ITEM 6.
    EXHIBITS    ExhibitNumber

Description10
.1

Amendment and Waiver to Credit Agreement, dated as of
    January 25, 2008 (incorporated by reference to the Current
    Report on
    Form 8-K
    filed by VeriFone Holdings, Inc. on January 28, 2008).31
.1

Certification of the Chief Executive Officer, as required by
    Section 302 of the Sarbanes-Oxley Act of 2002.31
.2

Certification of the Chief Financial Officer, as required by
    Section 302 of the Sarbanes-Oxley Act of 2002.32
.1

Certification of the Chief Executive Officer and the Chief
    Financial Officer as required by Section 906 of the
    Sarbanes-Oxley Act of 2002.  41




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##### Table of Contents



SIGNATURES      By:
    /s/  Douglas
    G. Bergeron     By:
    /s/  Barry
    Zwarenstein       42




---



##### Table of Contents



EXHIBIT INDEX  ExhibitNumber

Description10
.1

Amendment and Waiver to Credit Agreement, dated as of
    January 25, 2008 (incorporated by reference to the Current
    Report on
    Form 8-K
    filed by VeriFone Holdings, Inc. on January 28, 2008).31
.1

Certification of the Chief Executive Officer, as required by
    Section 302 of the Sarbanes-Oxley Act of 2002.31
.2

Certification of the Chief Financial Officer, as required by
    Section 302 of the Sarbanes-Oxley Act of 2002.32
.1

Certification of the Chief Executive Officer and the Chief
    Financial Officer as required by Section 906 of the
    Sarbanes-Oxley Act of 2002.  43