SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File No. 1-13521
HYPERCOM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 86-0828608
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
2851 WEST KATHLEEN ROAD, PHOENIX, ARIZONA 85053
(Address of Principal Executive Offices) (Zip Code)
(602) 504-5000
(Registrant's telephone number)
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 past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No[ ]
Number of shares of the registrant's common stock, $.001 par value per
share, outstanding as of November 10, 1998 was 32,960,925.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Consolidated balance sheets...................................3
as of September 30, 1998 and June 30, 1998
(b) Consolidated statements of income.............................5
for the three months ended September 30, 1998
and 1997
(c) Consolidated statements of cash flow.........................6
for the three months ended September 30, 1998 and 1997
(d) Notes to consolidated financial statements....................7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................9
Item 3 Quantitative and Qualitative Discussions About Market
Risk.....................................................21
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................22
Item 2. Changes in Securities and use of Proceeds.......... 22
Item 5. Other Events....................................... 22
Item 6. Exhibits and Reports on Form 8K.....................23
27.1 Financial Data Schedule ......................... ..24
99.1 Press Release.......................................25
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYPERCOM CORPORATION
Consolidated Balance Sheets
(Unaudited and in thousands)
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 35,681 $ 55,659
Marketable Securities, at market 43,204 42,641
Accounts receivable
(net of allowance for doubtful
accounts of $4,720 and $3,729) 56,970 43,989
Inventories 59,406 60,539
Deferred income taxes 11,948 10,991
Prepaid taxes 3,573 2,893
Prepaid expenses and 9,776 7,173
other current assets -------- ---------
Total current assets $ 220,558 $ 223,885
Property, plant and equipment, net $ 24,508 $ 23,570
Advances to related parties 218 258
Long-term investments 14,407 9,931
Other assets 1,703 1,933
--------- ---------
Total assets $ 261,394 $ 259,577
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 15,331 17,134
Accrued liabilities 15,667 16,537
Deferred revenue 1,227 608
Income taxes payable 4,738 2,209
Current portion of
long term obligations 607 598
--------- ---------
Total current liabilities $ 37,570 $ 37,086
Deferred income taxes $ 1,776 $ 861
Long term obligations 1,239 1,199
--------- ---------
Total liabilities $ 40,585 $ 39,146
Stockholders' equity
Common stock $ 12 $ 13
Additional paid-in capital 145,601 145,601
Treasury Stock (5,376) -
Receivables from stockholders (1,498) (1,498)
Retained earnings 82,070 76,315
--------- ---------
Total stockholders' equity $ 220,809 $ 220,431
--------- ---------
Total liabilities and
stockholders' equity $ 261,394 $ 259,577
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
HYPERCOM CORPORATION
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
<S> <C> <C>
Net revenue $ 65,983 $ 78,937
Costs and expenses:
Cost of revenue 32,628 40,831
Research and development 7,632 4,519
Selling, general and administrative 18,399 17,119
Noncash compensation - 1,770
-------- --------
Total costs and expenses $ 58,659 $ 64,239
-------- --------
Income from operations $ 7,324 $ 14,698
Interest and other income 1,445 228
Interest expense (181) (560)
Interest and other expense, related party - 122
Equity in related party - (134)
Foreign currency gain (loss) (248) (339)
-------- --------
Income before income taxes $ 8,340 $ 14,015
Income taxes (2,585) (4,905)
-------- --------
Net income $ 5,755 $ 9,110
========= =========
Earnings per share:
Basic Shares Outstanding 33,229 25,000
Basic Earnings per Share $ 0.17 $ 0.36
Diluted Shares Outstanding 34,412 26,194
Diluted Earnings per Share $ 0.17 $ 0.35
</TABLE>
The accompanying notes are an integral part of these financial statements
HYPERCOM CORPORATION
Consolidated Statements of Cash Flow
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
Cash flow from operating activities:
<S> <C> <C>
Cash received from customers $ 52,574 $ 59,836
Interest received 1,453 99
Other income received - 115
Cash paid to suppliers & consultants (59,207) (59,796)
Interest paid (181) (573)
Income taxes paid (2,206) (87)
--------- --------
Net cash used in operating activities (7,567) (406)
Cash flow from investing activities:
Advances to related parties - (253)
Repayments from related parties 40 -
Acquisition of other assets - 13
Proceeds from disposal of property, 484 118
plant & equipment
Purchase of property, plant & equipment (2,568) (2,522)
Purchase of long-term investments (4,476) -
Purchase of marketable securities (563) -
--------- ---------
Net cash used in investing activities (7,083) (2,644)
Cash flow from financing activities:
Proceeds of bank notes payable 22,478 34,906
and other debt instruments
Repayment of bank notes payable (22,433) (34,927)
and other debt instruments
Proceeds from sale of common stock 159 -
Stock offering costs - (480)
Repurchase of common stock (5,376) -
Net cash used in financing -------- --------
activities (5,172) (501)
Effect of exchange rate changes (156) (288)
Net decrease in cash (19,978) (3,839)
Cash & equivalents, beginning of period 55,659 16,318
------- --------
Cash & equivalents, end of period $ 35,681 $ 12,479
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
Notes to Consolidated Financial Statements
(Unaudited and in thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial
statements do not include all the information that usually
accompanies complete financial statements. These reflect all
normal recurring adjustments necessary for a fair
presentation of the financial condition and results of
operations for the interim periods covered. These results
do not necessarily indicate the results expected for the
year ending June 30, 1999.
This financial information is intended to be read in
conjunction with the Company's audited financial statements
and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.
NOTE 2 - INVENTORIES
Inventories, stated at the lower of cost on a first-in,
first-out basis or market value, consisted of the following
amounts:
September 30, 1998 June 30, 1998
<TABLE>
<S> <C> <C>
Purchased parts $19,144 $18,710
Work in process 12,440 11,388
Finished goods 27,822 30,441
------- -------
$59,406 $60,539
</TABLE>
NOTE 3 - EARNINGS PER SHARE (EPS) DISCLOSURES:
Hypercom has adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128), and the Securities and Exchange Commission Staff
Accounting Bulletin 98 (SAB 98) effective December 31, 1997.
SFAS 128 requires the presentation of basic and diluted
earnings per share. Basic EPS is computed by dividing
income available to common stockholders by the weighted
average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive
potential common shares that were outstanding during the
period. Dilutive potential common shares consist of the
incremental common shares issuable upon the exercise of
stock options. SAB 98 requires certain stock issued in
conjunction with an initial public offering for nominal
consideration to be included in basic EPS calculations as if
it were outstanding for all periods presented. Additionally,
certain stock and potential common stock issued for nominal
considerations are required to be included in diluted EPS
calculations as if they were outstanding for all periods.
SAB 98 does not affect the Company's EPS calculations. All
prior period earnings per share amounts have been restated
to comply with the SFAS 128.
In accordance with the disclosure requirements of SFAS 128,
a reconciliation of the numerator and denominator of basic
and diluted EPS is provided below.
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
Numerator - Basic and Diluted EPS:
<S> <C> <C>
Net income $ 5,755 $ 9,110
Common stock outstanding 33,229 25,000
Basic earnings per share 0.17 0.36
====== ======
Denominator - Diluted EPS:
Denominator - Basic EPS 33,229 25,000
Effect of Dilutive Securities
Common stock options 1,183 1,194
------ ------
Diluted shares outstanding 34,412 26,194
------ ------
Diluted earnings per share 0.17 0.35
====== ======
</TABLE>
NOTE 4 - SEGMENT INFORMATION
Hypercom has two reportable segments: Point-of-Sale (POS)
Systems and Network Systems. POS Systems develops,
manufactures, markets, and supports products that automate
electronic payment transactions at the point of sale in
merchant establishments.
Network Systems develops, manufactures, markets, and
supports enterprise-networking systems. These systems
interconnect and consolidate the following through wide-area
networks into a single networked system:
* Geographically dispersed legacy data,
* Local-area networks and
* Voice, fax, and video traffic.
Hypercom's reportable segments are strategic business units
that offer different products and services. They are managed
separately because each requires different technologies and
marketing strategies.
The following table presents certain segment financial
information unaudited and in thousands for the three-month
periods that ended September 30, 1998, and September 30,
1997:
<TABLE>
<CAPTION>
Three months ended 9/30/98
POS Network
Systems Systems Total
<S> <C> <C> <C>
Revenue from external customers $ 56,921 $ 9,062 $ 65,983
Intersegment revenues 1,149 1,203 2,352
-------- ------- --------
Total revenues 58,070 10,2 68,335
======== ======= ========
Segment income from operations $ 12,876 $ 120 $ 12,996
======== ======= ========
Segment assets $305,962 $28,202 $334,164
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Three months ended 9/30/97
POS Network
Systems Systems Total
<S> <C> <C> <C>
Revenue from external customers $ 70,130 $ 8,807 $ 78,937
Intersegment revenues - 5,643 5,643
-------- ------- --------
Total revenues 70,130 14,450 84,580
======== ======= ========
Segment income from operations $ 15,689 $ 1,628 $ 17,318
======== ======= ========
Segment assets $262,707 $42,113 $304,820
======== ======= ========
</TABLE>
Reconciliation
<TABLE>
<CAPTION>
Three months Three months
ended 9/30/98 ended 9/30/97
Net Revenues
<S> <C> <C>
Net revenue for reportable segments $ 68,335 $ 84,580
Elimination of intersegment revenue (2,352) (5,643)
-------- -------
Total consolidated revenue $ 65,983 $ 79,937
======== ========
Income from Operations
Income from operations for reportable segments $ 12,996 $ 17,318
Elimination of intersegment profit (285) (1,410)
Unallocated amounts
Corporate expenses
(Including translation gains/losses) (5,387) (1,210)
-------- --------
Consolidated income from operations $ 7,324 $ 14,698
======== ========
</TABLE>
NOTE 5 - SUBSEQUENT EVENTS
On November 3, 1998 Hypercom purchased substantially all the assets of
The Horizon Group, Inc. (Horizon). Horizon is a national distributor
of equipment for Hypercom and other POS equipment manufacturers. In
addition to sales of new equipment, the company provides a variety of
services, including refurbishing equipment, help desk, PIN pad key
loading, terminal deployment and other custom programs. The acquisition
will allow Hypercom to meet the needs of a segment of its customer base
that requires direct-from-manufacturer terminal services.
The acquisition will be accounted for under the purchase method of
accounting. The results of Horizon's operations will be included in
Hypercom's consolidated statements of Income and Cash Flows beginning
with the date of acquisition.
Horizon was acquired for $5 million in cash and $.5 million in Hypercom
common stock. The agreement provides for additional payments up to $7
million, based on Horizon's earnings over the three-year period
subsequent to the acquisition date. The additional payments are to be
in the form of Hypercom common stock. The intangible assets arising from
this transaction will be amortized over periods ranging from five to
twenty years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This analysis of financial condition should be read in conjunction
with the unaudited, condensed financial statements above and the
related disclosures included elsewhere herein and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" included as part of the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.
Results of Operations
Net Revenue
Net revenues for the three-months that ended September 30, 1998,
decreased by 16.4% (from $78.9 million to $65.9 million) compared
to the period that ended September 30, 1997. The decline was
mainly due to unusually high revenue last year caused by a one-
time event that delayed $6.0 million in POS shipments from the
fourth quarter of fiscal year 1998 to the first quarter of fiscal
1998. The Asian economic crisis also caused a 44%, $7.2 million,
decline in POS revenues for that region.
Cost of Revenue
Hypercom's cost of revenue includes the cost of raw materials,
manufacturing labor, overhead, and subcontracted manufacturing
costs. The cost of revenue decreased by $8.2 million from $40.8
million to $32.6 million for the three months that ended September
30, 1998 compared to the same quarter in the prior year. Cost of
revenue as a percentage of revenue decreased slightly from 51.7%
for the three months ended September 30, 1997, to 49.4% for the
three months ended September 30, 1998. Improved manufacturing
productivity caused lower labor and overhead costs per unit and
the decline in the cost of revenue.
Research and Development Expense
Research and development expenses consist mainly of software and
hardware engineering costs and the cost of development personnel.
Research and development expense increased by $3.1 million, to
$7.6 million in the first quarter of fiscal 1999 compared to $4.5
million in the same quarter of fiscal 1998. This increase was a
result of higher development costs for new POS payment system
products including the Ascendant Server Environment.
To date, all Hypercom software development costs have been
expensed as incurred and included in research and development. The
product development process establishes technological feasibility
when a working model is complete. Costs incurred between that time
and the point at which the product is ready for the initial
shipment have not been significant.
Selling, General, and Administrative Expense
Sales and marketing expenses, administrative personnel costs, and
facilities operation make up the selling, general, and
administrative expenses. These expenses totaled $18.4 million for
the first quarter of fiscal year 1998, up by $1.3 million from a
year ago but substantially lower than the fourth quarter of fiscal
1998. The $1.3 million increase included a $1.2 million increase
in POS sales and marketing expense, a $1.1 million increase in
administrative expense and a $1.0 million decrease in Network
Systems expenses. As a percentage of revenues, these expenses
increased from 21.7% of revenues in the first quarter of fiscal
1998 to 27.9% for the first quarter in fiscal 1999; primarily due
to lower revenues in the 1999 quarter.
Income from Operations
Income from operations decreased by $7.4 million from $14.7
million in the three months that ended September 30, 1997, to $7.3
million for the three months that ended September 30, 1998. As a
percentage of revenue, income from operations was 18.6% in the
three months that ended September 30, 1997 compared to 11.1% for
the three months that ended September 30, 1998. The majority of
this decrease was due to the lower revenue level this year with
the remainder of the decrease due to higher operating expense
levels.
Net Interest and Other Income
Interest income consisted primarily of returns on short-term
investments and cash balances. During the quarter ending September
30, 1998, income of $1.4 million was generated compared to $.2
million in the period ending September 30, 1997. Interest expense
decreased by nearly $.4 million to only $.2 million compared to
$.6 million the previous year.
This change was primarily due to decreased short-term borrowing
and higher cash balances generated by the Company's initial public
offering of common stock in November 1997.
Income Taxes
The provisions for Federal, State and foreign taxes were $2.6
million and $4.9 million in the three months ended September 30,
1998 and 1997, respectively. The effective tax rates were 31.0%
and 35.0% for these periods. The Company's tax rate is typically
lower than the US federal statutory rate due to the following:
* Research and experimentation tax credits in Australia and the
US,
* Sales in foreign jurisdictions with lower tax rates and
* The use of foreign sales corporations offering lower taxes on
certain international sales.
Liquidity and Capital Resources
Hypercom requires working capital to support inventory, maintain
accounts receivable balances and fund capital expenditures needed
to support its' operations and net growth.
As of September 30, 1998, the Company's working capital was
$183.0 million, which included cash, cash equivalents, and short-
term investments of $78.9 million. The Company funds working
capital requirements with cash from operations and short-term
borrowing when necessary. Net cash used in operating activities
was $0.4 million for the three months that ended September 30,
1997, and $7.6 million for the same period in 1998.
Hypercom's capital commitments primarily consist of the purchase
or lease of facilities and equipment. The Company used $2.6
million in the three months that ended September 30, 1998 to
purchase fixed assets.
The main items acquired were manufacturing equipment, facilities,
computer hardware and software to support growth.
Hypercom maintains a $10.0 million revolving line of credit
secured by accounts receivable and inventories. This line expires
in December 1999. Under the terms of the agreement, the Company
can borrow amounts up to the following:
* 80.0% of domestic accounts receivable less than 90 days past due
and
* 35.0% of its raw material and finished goods inventories.
There was no outstanding balance as of September 30, 1998.
The Company believes that its current net capital position
combined with the cash generated by operations and available
borrowings are sufficient to fund operations for the foreseeable
future.
Year 2000 Issues
The Company's internal Information Systems department has been
conducting an analysis of the systems used within the Company,
from desktop software to the software used within the PBX system.
There have been a few software applications identified that are
not capable of making the transition from the year 1999 to year
2000. In some cases, upgrading the software has already been
initiated. In those cases where there is no feasibility of
upgrading the software, alternative systems have been analyzed,
with a transition program already under review. The Company does
not believe that cost of making the transition to different
applications, nor the cost of upgrading the existing applications,
will be significant and material. Because of the additional
functionality that can be obtained by making such transition, it
is believed that cost saving incurred by the increased
productivity and ability to generate internal reports will exceed
the actual costs expended.
The Company does develop and distributes computer hardware and
software, and has thoroughly reviewed such systems. Because of
the interaction between the Company's hardware/software with other
manufacturer's hardware/software, the Company refrains from
warranting Year 2000 compliance. In order to make the Company's
POS terminal customers aware of potential issues with the
transition from 1999 to 2000, the Company has, at its own expense,
provided over ten thousand test cards to enable the Company's
customers to fully test the ability of the Company's products,
when interacting with other vendors software/hardware, to
ascertain whether or not a Year 2000 compliance issue is present.
The Company's IEN/NAC products do not utilize an internal "clock",
and there are no Year 2000 compliance issues with such products.
Workstation software products may have a Year 2000 compliance
issue because of the operating system and database program
utilized by the Company's customers, but not because of the
applications developed and distributed by the Company.
Nevertheless, the Company makes no warranty regarding Year 2000
compliance and believes it is the customer's ultimate
responsibility to verify whether or not there is a Year 2000
compliance issue, and the Company expressly disclaims any warranty
or representation made in the foregoing regarding the Company's
products, and provides this information in compliance with
published guidance of the Securities and Exchange Commission.
Backlog
As of September 30, 1998, the Company had increased backlog by
$14.6 million or 19% since the previous quarter end. September
30, 1998 backlog was $92.2 million compared to $77.6 million at
June 30, 1998. Backlog includes all revenue specified in signed
contracts and purchase orders expected to be realized within one
year. The Company cannot be sure that the contracts included in
backlog will actually generate the specified revenues within the
subsequent calendar year.
Seasonality
Historically, the Company's net revenue and results of operations
are stronger in the first half of the fiscal year due to the
following factors:
* Increased purchases of POS payment systems for the holiday
season,
* Incentive programs VISA and MasterCard offer from July to
December to encourage merchants to offer card-based payment
systems and
* Allocation of customers' capital budgets occurring by
the end of March with volume shipments beginning in July.
The seasonal impact is expected to be less in the next two quarters
due to expected high demand for new POS terminal products being
released by the Company.
Special Note Concerning Forward-Looking Statements
The Quarterly Report on Form 10-Q contains forward-looking statements.
Hypercom may include additional written or oral forward-looking
statements in filings with the Securities and Exchange Commission,
press releases, and elsewhere. The words "believe", "expect",
"anticipate", "intend", "forecast", "project", and similar
expressions identify these statements. They may relate to any of
the following:
* Acceptance of new products,
* Projections of revenues,
* Income or loss,
* Capital expenditures,
* Plans for future operations,
* Growth and acquisitions,
* Financing needs or plans,
* Availability of financing,
* Plans relating to Company services and
* Anticipated outcome of litigation.
Forward-looking statements are within the meaning of the term in
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements reflect the Company's current views
regarding future events and financial performance. Such statements
apply only as of the date they are made. They are subject to risks
and uncertainties, some of which cannot be predicted or measured.
Future events and actual results may differ greatly from those
predicted in forward-looking statements.
Statements in this Quarterly Report describe factors that could
cause such differences. In addition, new factors emerge that are
impossible for management to predict. The impact of each factor or
combination of factors on the business causes actual results to
differ greatly from those predicted in forward-looking statements.
The Company accepts no obligation to publicly update or review any
forward-looking statements as a result of new information or
future events.
Factors That May Affect Future Operating Results and Financial
Condition.
The Company's future operating results and financial condition is
dependent on a number of factors that the Company must successfully
manage in order to achieve favorable future operating results and
financial condition. The following potential risks and uncertainties,
together with those mentioned elsewhere herein, could affect the
Company's future operating results, financial condition, and the
market price of its Common Stock.
Difficulty in Forecasting Net Revenue
Hypercom's net revenue in any period is difficult to forecast.
Some of the factors affecting net revenue include the timing of
product purchases and the length of the sales cycle for the
Company's products.
Hypercom POS Systems and its customers enter into purchase
agreements that generally have a one-year term and minimum
purchase commitments. However, customers are not required to make
purchases at any particular times during the term of the agreement
or to purchase products exclusively from Hypercom. Because the timing
of product purchases in any given period is at the customers' exclusive
discretion and control, net revenue for POS products is difficult to
forecast.
It is also difficult to forecast net revenue in certain
international markets where large orders for complete systems
occur more frequently than in the U.S. Due to the significant cost
of buying complete systems, their sales cycle is long and
difficult to predict.
Hypercom Network Systems operates with little backlog and, as a
result, net revenue in any quarter is substantially dependent on
the orders booked and shipped in that quarter. The highly
technical nature of these sales generally results in a sales cycle
that ranges from 12 to 18 months.
Hypercom's operating results are subject to other uncertainties,
including the following:
* Industry and economic conditions;
* Competitive pressures;
* Type, timing, and size of orders and shipments for major
customers;
* Variations in product mix and cost;
* Overhead costs;
* Obsolescence of inventory;
* Manufacturing or production difficulties and
* Nonrecurring charges.
Significant Fluctuations in Quarterly Results
Hypercom's operating results vary from quarter to quarter. If
sales and shipments in any quarter do not meet expectations, the
results may be adversely affected. Any unexpected decline in the
growth of the net revenue without a quick reduction in the growth
of operating expenses could have a serious negative effect on
operating results and financial condition. Hypercom cannot be sure
that it will meet profitability objectives for a quarter if sales
fall or the gross margin is reduced.
Seasonality
Hypercom continues to experience some degree of seasonality. For
this reason, net revenue and results of operations are stronger in
the first half of the fiscal year reflecting:
* Increased POS purchases to satisfy increased retail demand
during the holiday season,
* Incentive programs VISA and MasterCard offer from July to
December to encourage merchants to offer card-based payment
systems and
* Allocation of customers' capital budgets by the end of March
with volume shipments beginning in July.
Risks Associated with International Operations and Foreign
Currency Fluctuations
Hypercom's net revenue from international sales for fiscal years
1996, 1997 and 1998 was approximately 58%, 56% and 57%,
respectively, of the Company's net revenue. Hypercom expects that
international sales will continue to account for a significant
percentage of its net revenue in the foreseeable future.
Accordingly, the Company is subject to risks associated with
international operations. Examples of these risks include:
* Management of a multinational organization,
* Fluctuations in currency exchange rates,
* Compliance with local laws,
* Regulatory and product certification requirements,
* Changes in international laws and requirements,
* Tariffs and other trade barriers,
* Import and export controls,
* Restrictions on the repatriation of funds,
* Inflationary conditions,
* Staffing, employment, and severance issues,
* Political instability and economic downturns, which include the
impact of revenue generated from the Company's shipments into
Asia,
* War or other hostilities,
* Expropriation or nationalization of assets,
* Overlap of tax structures,
* Renegotiations or nullification of contracts and
* Longer payment cycles.
In some countries these risks and other factors that relate to
doing business abroad may have negative effects on the Company.
Hypercom takes steps such as hedging to partially offset changes
in currency exchange rates. However, there is no assurance that
such strategies enable the Company to avoid losses due to changes
in the exchange rate. In addition, the inability to effectively
manage these and other risks could have a serious negative effect
on Hypercom's business or financial condition.
The Company generally does not engage in hedging transactions that
could partially offset the effects of fluctuations in currency
exchange rates. However, as the Company continues to expand its
international operations, exposure to gains and losses on foreign
currency transactions may increase. The Company may choose to
limit such exposure by entering into forward foreign exchange
contracts or engaging in similar hedging strategies. There can be
no assurance that any currency exchange strategy would be
successful in avoiding exchange related losses or that the failure
to manage currency risks will not have a material adverse effect
on the Company's business, operating results or financial
condition.
Uncertainty of Profitability for Hypercom Network Systems
The Company established Hypercom Network Systems in 1994 to
continue to develop enterprise networking products and
technologies for the electronic payments industry and to leverage
these technologies to address other enterprise networking
opportunities. Since its formation, Hypercom Network Systems has
expended substantial sums on research and development and on
establishing distinct manufacturing operations and distribution
channels. Hypercom Network Systems has recently incurred losses as
a standalone business, and there can be no assurance that it will
return to profitability, particularly in light of the competitive
nature of the industry in which it operates.
Industry and Technological Changes; Dependence on Development and
Market Acceptance of New Products
Hypercom believes that in the next few years the following factors
will create major changes in the POS industry:
* Lower-cost products,
* Greater functionality at the point of sale,
* Faster and more accurate transaction processing,
* Improvements in security features and
* Emerging technologies and payment programs.
In addition, the enterprise networking industry is characterized
by rapid changes in technology and numerous new product
introductions. Hypercom's success, particularly in the enterprise
networking industry, will depend to a large degree upon its
continued ability to offer new products and enhancements to its
existing products to meet changing market and industry requirements.
New products and technologies may have an effect on the sales of
existing products and technologies. There can be no assurance that
the introduction of new products and technologies will not have a
material adverse affect on the Company's business and financial
condition.
Developing new products and technologies is a complex, uncertain
process requiring innovation and accurate anticipation of
technological and market trends. The Company cannot provide
complete assurance of its ability to successfully:
* Identify, develop, or manufacture new products and technologies,
* Market or support these new products and technologies,
* Control delays in introducing new products,
* Gain market acceptance for the new products and technologies,
* Respond to technological changes and new industry standards and
* Respond to competitors' announcements of new products.
The inability to respond effectively to any of these challenges
may have a negative impact on Hypercom's business and financial
success. Hypercom may suffer other business and financial losses if
it is successful in marketing new products and responding to
competitive and industry changes. When changes to the product line
are announced, the Company will be challenged to:
* Manage possible shortened life cycles for existing products,
* Continue to sell existing products and
* Prevent customers from returning existing products.
Dependence on Current Management and Key Personnel
George Wallner, Albert A. Irato, Paul Wallner, and Jairo Gonzalez
are instrumental in Hypercom's development, growth, and
operations. The Company has employment agreements with Mr. Irato
and Mr. Gonzalez. However it does not have employment agreements
with George Wallner, Paul Wallner, or any other member of senior
management. Although the Company has no plans to enter into
employment agreements with other executive officers or key
employees, the Company may review the value of such employment
agreements in the future.
Hypercom is the beneficiary of key-man life insurance of $1.0
million on both George Wallner and Paul Wallner. The loss of any
of the key executives of Hypercom could have a negative effect on
Hypercom's business and financial condition.
Hypercom's continued growth and operations also depend on the
continued service of other key employees and the hiring of
qualified new employees. Competition for highly skilled business,
technical, marketing, and other staff is intense. Competition is
particularly fierce given the current strong economy for high-
technology companies. In addition, competing for skilled employees
may result in increased compensation costs. If Hypercom is not
successful in retaining and hiring qualified staff, negative
effects on its business and financial condition may result.
Excess or Obsolete Inventory
Managing Hypercom's inventory of components and finished products
is a complex task. The Company must avoid maintaining excess
inventory as a result of:
* The need to inventory of components that are in limited supply,
* Buying components in bulk for the best pricing,
* Responding to the unpredictable demand for products,
* Responding to customer requests for quick delivery schedules and
* Storing products made obsolete by new product offerings.
If the Company accumulates excess or obsolete inventory, price
reductions and inventory write-downs may result. Such a situation
could adversely affect the Company's business and financial
condition.
Competition
Hypercom is active in very competitive markets. Among the main
competitive factors are the following:
* Product quality
* Reliability
* Performance
* Functionality
* Pricing
* Certification
* Upgradeability
Hypercom's main competition in the electronic payment industry is
VeriFone, Inc. Hewlett-Packard Company acquired VeriFone, Inc. in
1997. In enterprise networking, competitors include Cisco Systems,
Inc., 3Com Corporation, and Motorola Information Systems Group.
Some competitors have significantly greater financial and
technical resources, better name recognition, and a larger
customer base than Hypercom.
Hypercom faces additional competitive challenges in foreign
countries. These factors include the following:
* Preferences for national vendors,
* Difficulties in obtaining necessary certifications and
* Difficulties in meeting the requirements of government policies
These competitive challenges may result in price discounts or
other concessions and in sales lost to competitors. As a result,
Hypercom's business and financial condition could suffer. In
addition, the Company cannot be certain of its ability to compete
successfully in the future.
Dependence on Certain Suppliers and Third-Party Distributors
Hypercom contracts with an independent manufacturer to build
networking products. It is also dependent on sole-source suppliers
for microprocessors, some integrated circuits, and other
electronic components. Other components are available from only a
limited number of sources. Hypercom has generally been able to
obtain adequate supplies of these products. However, in the future
if the Company could not secure enough products or develop
alternate sources, product introductions or shipments could be
delayed. Significant delays could have a serious negative effect
on Hypercom's business and financial condition.
The Company markets and distributes its products to end-users
through third-party distributors. Third-party distributors are a
prime channel for distribution in some international markets. In
the U.S. they are becoming more important, especially for the
enterprise networking products. Therefore, the ability to market
and distribute products depends significantly on Hypercom's
relationship with third-party distributors.
The performance and financial condition of distributors could have
a negative impact on the Company's business and financial
condition if:
* Hypercom's relationships with them were to deteriorate,
* They could not perform as expected or pay the Company or
* Local laws prevented Hypercom from using distributors that
perform poorly.
Reliance on Certain Hypercom POS Systems Customers
Many Hypercom POS Systems sales result from large purchases by a
few large organizations. Although no one customer accounted for
more than 10% of the Company's net revenue in fiscal 1998, the two
largest customers accounted for 17.9% of the net that year. The
five largest accounted for 28.9% of net revenue.
The Company typically enters into one-year purchase agreements
with its larger customers. These agreements generally provide for
minimum purchase commitments and do not require the customers to
buy POS products from Hypercom exclusively.
Serious negative impacts could result if any of the larger POS
customers delayed or stopped buying from Hypercom. The Company
expects to continue to rely on a limited number of customers in
any given period for a significant part of its net revenue.
Further, customer demand can be adversely affected by many factors
including the following:
* Budgetary constraints,
* Changes in the customer's competitive environment,
* Customer involvement in mergers or other strategic alignments,
* Price increases by Hypercom or its competitors,
* Personnel changes,
* The number, timing, and significance of new and enhanced
products,
* The ability of Hypercom to market new and enhanced products and
* General economic factors.
Hypercom cannot be assured that its important customers will
continue to buy its products at historical or any particular
level.
Impact of Industry Regulation and Standards
Before sales are completed in the United States, Hypercom's
products must:
* Meet industry standards as imposed by VISA, MasterCard, and
others,
* Be certified to connect to some public telecommunications
networks,
* Comply with Federal Communications Commission (FCC) regulations
and
* Comply with Underwriters Laboratories regulations.
Similarly, before completing sales in foreign countries,
Hypercom's products must comply with:
* Local telecommunications standards,
* Recommendations of quasi-regulatory authorities and
* Recommendations of standards-setting committees.
In addition, public carriers require that equipment connected to
their networks comply with their own standards. These standards in
part reflect their currently installed equipment. Some public
carriers have equipment that does not fully meet current industry
standards. Hypercom must address this issue in designing
enterprise-networking products.
Although Hypercom believes its products currently meet all
applicable industry standards, it has no assurance that its
products will comply with future standards. Negative impacts to
Hypercom's business and financial condition could result in the
future if the Company cannot:
* Obtain needed regulatory approvals or certifications,
* Retain domestic or foreign approvals or certifications and
* Meet new industry standards.
In addition, carriers set the tariffs that govern rates for public
telecommunications services, including their features and
capacity. These services are subject to regulatory approval.
Changes in the tariffs could have a serious negative effect on
Hypercom's business and financial condition.
Hypercom must comply with state, federal, and international laws
governing such areas as:
* Occupational health and safety,
* Minimum wages,
* Work hours and overtime,
* Retirement and profit-sharing plans and severance payments and
* The use, storage, handling, and disposal of dangerous chemicals.
Failure to comply with requirements could impose additional costs
on the Company. Such failure could also require Hypercom stop some
activities or otherwise have a serious negative effect on
Hypercom's business and financial condition.
Product Defects
Hypercom offers very complex products. When they are first
introduced or released in new versions, they may contain software
or hardware defects that are difficult to detect and correct. Even
though the Company and customers test all these products, it is
likely that such errors will continue to be identified after
products are shipped.
When they are detected, correcting these defects can be a time-
consuming or impossible task. Software errors may take several
months to correct, and hardware errors may take even longer. The
existence of defects and delays in correcting them could result in
negative consequences including:
* Delays in shipping products,
* Loss of market acceptance for Hypercom products,
* Additional warranty expenses,
* Diversion of resources from product development and
* Loss of credibility with distributors and customers.
Because Hypercom's POS products are used to process payment
transactions, the security features of the such products are
important. In general, these products are designed to comply
with industry practices relating to transaction security. Failure
of the security features could adversely affect the marketing of
Hypercom products. Any violation of its product warranties
resulting from security breaches could result in claims
against the Company.
Dependence on Proprietary Technology
Hypercom seeks to establish and protect the proprietary aspects of
its products by relying on patent, copyright, trademark, and trade
secret laws. It also relies on confidentiality, licensing, and
other contractual arrangements, all of which may provide only
limited protection. Although the Company tries to protect its
proprietary rights, unauthorized third parties may able to copy
some portions of or to reverse engineer products to obtain
technology that the Company regards as proprietary.
In addition, the laws of certain countries do not protect
Hypercom's proprietary rights to the same extent as U.S. laws.
Accordingly, the Company may not be able to protect its
proprietary technology against unauthorized copying or use, which
could adversely affect the Company's competitive position.
Hypercom has applied for patents and trademarks that may not be
granted. If they are granted, the patents may not cover all claims
the Company is trying to protect. Further, a challenge could find
any Company patent or trademark invalid and unenforceable.
Hypercom products and technologies incorporate some subject matter
it believes is in the public domain or otherwise within the rights
of the Company to use. Such products and technologies include some
designed and provided by third parties. These third parties could
assert patent or other intellectual property infringement claims
against Hypercom with respect to its products and technologies.
From time to time, third parties claim that Hypercom's products
infringe their proprietary rights. The Company may experience
similar claims in the future. Regardless of its merit, any claim
can be time-consuming, result in costly litigation, and require
the Company to enter into royalty and licensing agreements. The
terms of these agreements may not be acceptable to the Company. If
a claim against Hypercom is successful and the Company fails to
develop or license a substitute technology quickly, it could be
adversely affected.
Risks of Potential Acquisitions
In addition to the acquisition of The Horizon Group, Inc.
("Horizon"), the Company may acquire or make substantial
investments in related businesses, technologies, or products in
the future. Any acquisition or investment would entail various
risks including the following:
* The difficulty of assimilating the technologies, operations and
personnel of the acquired business, technology or product,
* The potential disruption of the Company's ongoing business and
* The possible inability of the Company to obtain the desired
financial and strategic benefits from the acquisition or
investment.
These factors could have a serious negative effect on the
Company's business and financial condition. Future acquisitions
and investments could also result in the following:
* Substantial cash expenditures,
* Potentially dilutive issuance of equity securities,
* The incurring of additional debt and contingent liabilities and
* Amortization expenses related to goodwill and other intangible
assets that could adversely affect the Company's business,
operating results, and financial condition.
The acquisition of the assets and business of Horizon after the
fiscal quarter end has consumed and will continue to consume
substantial management attention and resources of the Company, and
will require substantial efforts and entail certain risks in the
integration of its operations. There can be no assurance that
anticipated cost savings or synergies will be achieved. The
Company will be dependent on the retention and performance of
Horizon's existing management and employees for the day-to-day
management and future operation results of the business.
Voting Control by Existing Stockholders
George Wallner and Paul Wallner together own 63.4% of Hypercom's
outstanding Common Stock following the completion of the Offering
if the underwriters do not exercise their over-allotment option.
Accordingly, the Wallners have the ability to control the affairs
of the Company, including the election of all directors to the
Company's Board of Directors. They can also, except as otherwise
provided by law, approve or disapprove other matters submitted to
a vote of the Company's stockholders, including a merger,
consolidation, or sale of assets. This voting control also may
have the effect of delaying or preventing a change in control of
the Company and may affect the price investors are willing to pay
in the future for shares of Hypercom's Common Stock.
Potential Volatility of Stock Price
In recent years, the stock market has experienced extreme price
changes. The market price of the Company's Common Stock has been
and may continue to be affected by various factors such as the
following:
* Quarterly variations in the Company's operating results,
* Changes in revenue growth rates for specific geographic areas,
business units, products, or the Company as a whole,
* Earnings estimates or changes in estimates by market analysts,
* Speculation in the press or analyst community,
* Announcement of new or enhanced products by the Company or its
competitors and
* General market conditions or market conditions specific to
particular industries.
Anti-takeover Effect of Certain Charter and Bylaw Provisions and
Delaware Law
The Company has provisions in its Amended and Restated Certificate
of Incorporation and Amended and Restated Bylaws, which:
* Make it more difficult for a third party to take control of the
Company,
* Discourage a third party from attempting to take control of the
Company or
* Limit the price some investors are willing to pay for shares of
the Company's Common Stock,
* Enable the Company to issue Preferred Stock without a vote or
other stockholder action,
* Provide for a classified Board of Directors and regulate
nominations for the Board of Directors,
* Make it more difficult for stockholders to take certain
corporate actions and
* Delay or prevent a change in control of the Company.
In addition, certain provisions of Delaware law applicable to the
Company could also delay a merger, tender offer, or proxy contest
or make one more difficult.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
The Company is exposed to financial market risks, including
changes in interest rates and foreign currency exchange rates.
Nevertheless, the fair value of the Company's investment portfolio
or related income would not be significantly impacted by either a
100 basis point increase or decrease in interest rates, due
primarily to the short-term nature of the major portion of the
Company's investment portfolio.
A substantial portion of the Company's revenue and capital
spending is transacted in U.S. dollars. However, the Company does
at times enter into these transactions in other currencies, such
as the Hong Kong dollar, Australian dollar, Brazilian Real and
other Asian and European currencies. Although no hedging
transactions were entered into during the first fiscal quarter of
this year, the Company has established revenue and balance sheet
hedging programs to protect against reductions in value and cash
flow volatility caused by changes in foreign exchange rates. Such
programs are intended to reduce market risks, but do not always
eliminate the impact of foreign currency exchange volatility.
The Company does not purchase or hold any such derivative
financial instruments for the purpose of speculation or arbitrage.
See information/discussion appearing in subcaption "Risks
Associated with International Operations and Foreign Currency
Fluctuations" of Management's Discussion and Analysis of Financial
Condition and Results of Operation in Item 2.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 23, 1998, an employee of the Company filed a lawsuit
in the Maricopa County Superior Court against a senior executive
of the Company and the Company alleging sexual misconduct by the
executive and is seeking damages, including punitive damages. The
employee has also filed a claim with the Equal Employment
Opportunity Commission (EEOC). Subsequent to the filing of the
lawsuit, the employee changed counsel and new counsel has, orally,
threatened to file a shareholder's derivative lawsuit, presumably
arising out of the same alleged misconduct. The lawsuit that is
currently on file stems out of alleged misconduct for which the
employee has already released the Company and the senior
executive. The employee is alleging, among other things, that the
release is invalid. Based upon a variety of factors, the release
previously executed by the employee and the Company's evaluation
of the merits of the claims against it, the Company believes that
the lawsuit will not have a material adverse effect on its
financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company purchased 587,700 shares of Common Stock on the open
market during the quarter that ended September 30, 1998. These
purchases were made to increase the Company's treasury stock to
meet future obligations under the Company's stock purchase and
stock option plans when employees buy stock and exercise stock
options.
ITEM 5. OTHER EVENTS
On November 3, 1998, and pursuant to an Agreement of Purchase and
Sale of Assets dated as of October 1, 1998 (the "Purchase
Agreement"), by and among Hypercom Corporation ("the Company"),
The Horizon Group, Inc. ("Horizon"), Kenneth Boody and Beverly
Boody, the Company acquired substantially all of the assets and
business of Horizon. Horizon's business will be operated by the
Company as an independent subsidiary with sales, distribution and
support operations based in St. Louis, Missouri.
Horizon is a national distributor of equipment from Hypercom and
other POS equipment manufacturers. In addition to sales of new
equipment, Horizon provides a variety of services, including
refurbishing equipment, help desk, PIN pad key loading, terminal
deployment, and other custom programs.
On November 3, 1998, the Company issued a press release relating
to the completion of the acquisition. A copy of the press release
is filed herewith as Exhibit 99.1 and is hereby incorporated
herein by reference.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
27.1 Financial Data Schedule
99.1 Press Release
(b) Reports on Form 8-K
None.
SIGNATURES
As required by the Securities Exchange Act of 1934, the following
authorized officials sign this report on behalf of Hypercom:
HYPERCOM CORPORATION
Date: November 9, 1998 By: /s/Albert A. Irato
__________________
Albert A. Irato
Chief Executive Officer
Date: November 9, 1998 By: /s/Thomas E. Linnen
__________________
Thomas E. Linnen
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
- ------------ -----------
27.1 Financial Data Schedule
99.1 Press Release
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HYPERCOM ACQUIRES NATIONAL PROVIDER OF POS SUPPORT SERVICES
Acquisition To Complement Existing Service Capabilities, Shorten
Supply Chain
PHOENIX, ARIZONA November 3, 1998 Hypercom Corporation (NYSE:
HYC), a global provider of electronic payment solutions, has
acquired the assets and business of The Horizon Group, Inc., one
of the leading national providers of value-added, point-of-sale
support services. The Horizon Group will be operated by Hyperco
as an independent subsidiary with sales, distribution and support
operations based in St. Louis, Mo. Horizon will retain its current
management structure and corporate identity.
The Horizon Group is a national distributor of equipment from
Hypercom and other POS equipment manufacturers. In addition to
sales of new equipment, the company provides a variety of
services, including refurbishing equipment, help desk, PIN pad key
loading, terminal deployment and other custom programs. The
acquisition will allow Hypercom to meet the needs of a segment of
its customer base that requires direct-from-manufacturer terminal
services. Hypercom will continue to work closely with other
leading distributors in reaching a wide variety of customers.
"This acquisition will allow us to expand our distribution
channels and more effectively meet the changing needs of customers
as we continue to accelerate shipments in the U.S. market," said
Al Irato, president and CEO of Hypercom Corporation. "Many large-
volume customers today require a one-stop-shopping model that
provides them with efficiencies in managing the procurement and
upgrading of equipment and related software. In fact, Hypercom has
implemented distribution and service models such as this in eight
other countries around the world to meet our customers'
requirements. The Horizon Group will be instrumental in our
efforts to improve the effectiveness of the POS supply chain, and
will enhance the level of service and support we can offer our
customers.
"Moreover, the transaction represents an important milestone in
the execution of Hypercom's strategy to build recurring revenue
streams. Additionally, it will contribute to the achievement of
Hypercom's aggressive growth objectives," Mr. Irato said. "Most
important, it allows us to provide services and supplies directly
to merchants, thereby shortening the supply chain and increasing
efficiency."
"The Horizon Group's acquisition by Hypercom represents an
important milestone in the company's history," said Ken Boody,
founder and CEO of The Horizon Group. "Since we will be retaining
our own identity and management structure, our customers will see
only an enhancement to the already robust capabilities that they
currently enjoy."
About The Horizon Group
Based in St. Louis, Mo., The Horizon Group is recognized as one of
the industry's largest point-of-sale terminal suppliers and
service providers. Founded in 1991 by Ken Boody, the company's
CEO, Horizon is a leader in customer service, having developed a
number of industry firsts such as same-day shipping and
deployment, as well as on-line warranty and repair tracking. The
company currently has 66 employees and had annual sales of
approximately $24 million in the year ending Dec. 31, 1997,
including $5 million in sales of Hypercom products.
About Hypercom Corporation
Celebrating its 20th anniversary, Hypercom Corporation (NYSE: HYC)
is a global provider of electronic payment solutions, including
multi-functional point-of-sale terminals, peripherals, network
products, transaction software, Internet-based and electronic
commerce payment solutions. On a global basis Hypercom delivers
the services and technology infrastructure required to quickly
integrate and deploy new payment applications for competitive
value-add programs, improved business performance and low total
cost of ownership.
Headquartered in Phoenix, Ariz., Hypercom markets its products in
more than 60 countries through a global network of offices and
affiliates in Argentina, Australia, Brazil, Chile, China, Hong
Kong, Hungary, Japan, Mexico, Russia, Singapore, the United
Kingdom and Venezuela. Hypercom's Internet address is
www.hypercom.com.
Hypercom is a registered trademark of Hypercom Corporation. All
other products or services mentioned in this document are
trademarks, service marks, registered trademarks or registered
service marks of their respective owners.
Certain matters discussed within this press release are forward-
looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although management of Hypercom
believes the expectations reflected in such forward-looking
statements are based on reasonable assumptions, it can give no
assurance that its expectations will be attained. Factors that
could cause actual results to differ materially from expectations
include the ability of Hypercom and Horizon to successfully
integrate their operations, which could, among other factors,
affect the combined company's earnings, the ability of Hypercom to
effectively manage the geographically dispersed operations of
Hypercom, including Horizon's business; the ability of Horizon to
retain suppliers which are competitors of Hypercom following the
acquisition, including VeriFone, Inc.; industry, competitive and
technological changes; risks associated with international
operations and foreign currency fluctuations; the composition,
timing and size of orders from and shipments to major customers;
inventory obsolescence; market acceptance of new products and
other risks detailed from time to time in Hypercom's SEC reports,
including the company's Quarterly Reports or Form 10Q, Annual
Report or Form 10K, and Prospectus dated November 13, 1997.
In light of the significant uncertainties inherent in the forward-
looking statements included herein, the inclusion of such
information should not be regarded as a representation or
assurance by Hypercom that the objectives, plans, and expectations
of Hypercom will be achieved.
