<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 1-13521
HYPERCOM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 86-0828608
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
2851 West Kathleen Road
Phoenix, Arizona 85053
(Address of principal executive offices) (Zip Code)
(602) 504-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Number of shares of the registrant's common stock, $.001 par value per share,
outstanding as of November 8, 1999, was 33,195,767.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C> <C>
ITEM 1. Financial Statements ......................................... 3
Notes to Condensed Consolidated Financial
Statements ................................................... 6
Review Report of Independent Accountants ..................... 10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ... 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................ 17
ITEM 2. Changes in Securities and Use of Proceeds .................... 17
ITEM 4. Submission of Matters to a Vote of Securities Holders ........ 17
ITEM 6. Exhibits and Reports on Form 8-K ............................. 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYPERCOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited and in thousands)
<TABLE>
<CAPTION>
ASSETS September 30 June 30
1999 1999
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 40,335 $ 36,727
Marketable securities, at market 19,299 26,731
Accounts receivable (net of allowance for
doubtful accounts of $3,193 and $3,082) 55,954 52,589
Inventories 60,116 57,482
Deferred income taxes 11,421 11,430
Prepaid taxes 4,727 4,762
Prepaid expenses and other current assets 14,722 11,894
--------- ---------
Total current assets 206,574 201,615
Property, plant and equipment, net 34,448 30,756
Long-term investments 19,529 21,344
Goodwill, net of amortization of $624 and $361 5,829 6,062
Intangible assets, net of amortization of $838 and $361 4,964 4,886
Other assets 14,005 11,617
--------- ---------
Total assets $ 285,349 $ 276,280
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,968 $ 18,316
Accrued liabilities 14,628 14,599
Deferred revenue 9,173 3,824
Income taxes payable 3,523 2,234
Current portion of long-term obligations 448 490
--------- ---------
Total current liabilities 44,740 39,463
Long-term obligations 10,868 10,794
--------- ---------
Total liabilities 55,608 50,257
Stockholders' equity:
Common stock, $.001 par value; 100,000,000 shares authorized;
33,199,517 and 33,548,625 shares issued and outstanding for
June 30, 1999 and 1998, respectively 13 13
Additional paid-in capital 146,011 146,011
Receivables from stockholder (1,498) (1,498)
Retained earnings 88,909 85,488
--------- ---------
233,435 230,014
Treasury stock (at cost) (3,694) (3,991)
--------- ---------
Total stockholders' equity 229,741 226,023
--------- ---------
Total liabilities and stockholders' equity $ 285,349 $ 276,280
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE> 4
HYPERCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
September 30,1999 September 30,1998
------------------- -----------------
<S> <C> <C>
Net revenue $ 73,302 $ 65,983
Costs and expenses:
Costs of revenue 39,969 32,628
Research and development 9,345 7,632
Selling, general and administrative 19,948 18,399
-------- --------
Total costs and expenses 69,262 58,659
-------- --------
Income from operations 4,040 7,324
Interest and other income 1,152 1,445
Interest and other expense (465) (181)
Foreign currency gain (loss) (165) (248)
-------- --------
Income before income taxes 4,562 8,340
Provision for income taxes (1,140) (2,585)
-------- --------
Net income $ 3,422 $ 5,755
======== ========
Net income per share:
Basic earnings per share $ 0.10 $ 0.17
======== ========
Weighted average basic common shares 33,231 33,229
======== ========
Diluted earnings per share $ 0.10 $ 0.17
======== ========
Weighted average diluted common shares 34,415 34,412
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE> 5
HYPERCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 3,422 $ 5,755
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation/Amortization 2,298 1,171
Bad debt expense 194 1,780
Provision for excess and obsolete inventory 443
Foreign currency gain 165 427
Deferred income taxes 9 915
Other 3 (144)
Decrease in accounts receivable, inventories, prepaid income taxes
& prepaid expenses and other current assets (11,856) (17,868)
Increase in accounts payable, accrued liabilities, deferred revenue
& income taxes payable 5,740 397
-------- --------
Net cash provided by (used in) operating activities 418 (7,567)
Cash flow from investing activities:
Repayments from related parties -- 40
Payments received on Notes receivables 397 --
Acquisition of other assets (903) --
Proceeds from disposal of property, 130 484
plant & equipment
Purchase of property, plant & equipment (5,382) (2,568)
Purchase of investments (51,127) (5,039)
Proceeds from maturity of investments 60,373 --
-------- --------
Net cash provided by (used in) investing activities 3,488 (7,083)
Cash flow from financing activities:
Proceeds of bank notes payable 10,388 22,478
and other debt instruments
Repayment of bank notes payable (10,356) (22,433)
and other debt instruments
Proceeds from sale of common stock -- 159
Repurchase of common stock -- (5,376)
-------- --------
Net cash used in financing activities 32 (5,172)
Effect of exchange rate changes (330) (156)
-------- --------
Net increase (decrease) in cash 3,608 (19,978)
Cash & equivalents, beginning of period 36,727 55,659
-------- --------
Cash & equivalents, end of period $ 40,335 $ 35,681
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair statement of results for the periods have been included.
Operating results for the three month period ended September 30, 1999, are not
necessarily indicative of the results that may be expected for the six-month
stub period ending December 31, 1999 (see Note 5 regarding Hypercom's change to
a calendar year fiscal year).
This financial information is intended to be read in conjunction with Hypercom's
audited financial statements and footnotes thereto included in Hypercom's Annual
Report on Form 10-K for the year ended June 30, 1999.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company generally recognizes product revenue, including sales to
distributors, upon shipment of product. Revenue from service obligations is
recognized over the lives of the contracts. The Company accrues for warranty
costs, sales returns and other allowances at the time of shipment.
SOFTWARE CAPITALIZATION
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed (SFAS No. 86),
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. The Company's product development
process is such that technological feasibility is established upon completion of
a working model. Costs incurred between completion of the working model and the
point at which the product is ready for initial shipment have not been
significant in the past. Accordingly, all software development costs have been
expensed as incurred and included in research and development costs. However,
during the fiscal year ended June 30, 1999, the Company began to capitalize
software development costs in relation to the development of software
enhancements. The amount that was capitalized in the first quarter ended
September 30, 1999 was approximately $0.6 million.
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF DERIVATIVE FINANCIAL INSTRUMENTS
Due to the increasing market risks resulting from fluctuations in foreign
currencies, the Company has begun to use derivative financial instruments to
reduce exposures to its net investments in certain foreign locations
(principally Brazil). The Company does not enter into financial instruments for
trading or speculative purposes. The derivative financial instruments entered
into generally include forward exchange contracts and foreign currency options
maturing in less than one year. The counterparties to these contracts are major
financial institutions and management believes the risk of loss from
nonperformance by any counterparty is remote.
Any premiums or discounts related to forward exchange contracts are reported in
the balance sheet at cost and amortized to results of operations over the life
of the contract. Foreign currency options are reported in the balance sheet at
quoted market values. Changes in the market value of foreign currency options
are reported in results of operations in the period in which the change occurs.
Gains and losses on the forward contracts arising from changes in foreign
currency exchange rates are included in results of operations in the period as
the rate changes. As of September 30, 1999, the Company had contracts totaling
$7 million in Brazilian Reals outstanding to hedge against its net investment in
Brazil. These contracts expire in April of 2000. Management intends to continue
to hedge its net investments in foreign locations as deemed necessary on an
ongoing basis.
NOTE 3 - INVENTORIES
Inventories, stated at the lower of cost on a first-in, first-out basis or
market value, consisted of the following amounts (in thousands.):
<TABLE>
September 30 June 30
1999 1999
------- -------
<S> <C> <C>
Purchased parts $21,962 $20,308
Work in progress 7,781 5,249
Finished goods 30,373 31,925
------- -------
$60,116 $57,482
======= =======
</TABLE>
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - SEGMENT INFORMATION
Hypercom has two 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.
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 ended September 30, 1999, and September
30, 1998:
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------------------------------
September 30, 1999 September 30, 1998
---------------------------------------- --------------------------------------
POS Network POS Network
Systems Systems Total Systems Systems Total
---------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $ 67,366 $ 5,936 $ 73,302 $ 56,921 $ 9,062 $ 65,983
Intersegment revenues 3,999 3,440 $ 7,439 1,149 1,203 $ 2,352
-------- -------- -------- -------- -------- --------
Total revenues $ 71,365 $ 9,376 $ 80,741 $ 58,070 $ 10,265 $ 68,335
======== ======== ======== ======== ======== ========
Segment income from operations $ 8,037 $ 1,542 $ 9,579 $ 12,876 $ 120 12,996
======== ======== ======== ======== ======== ========
Segment assets $311,189 $ 29,254 $340,443 $305,962 $ 28,202 $334,164
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
Reconciliation September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net revenues
Net revenue for reportable segments $ 80,741 $ 68,335
Elimination of intersegment revenue (7,439) (2,352)
-------- --------
Total consolidated revenue $ 73,302 $ 65,983
======== ========
Income from operations
Income from operations for reportable segments $ 9,579 $ 12,996
Elimination of intersegment profit 10 (285)
Unallocated amounts
Corporate expenses (including translation gains/losses) (5,549) (5,387)
-------- --------
Consolidated income from operations $ 4,040 $ 7,324
======== ========
</TABLE>
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CHANGE OF YEAR-END
On April 20, 1999 the Company's Board of Directors approved the change of
Hypercom's fiscal year end from June 30 to December 31. This change will be
implemented as of December 31, 1999.
NOTE 6 - FORMATION OF JOINT COMPANY
On September 22, 1999, the Company announced that it had entered into a
memorandum of understanding with Inter-Tel, Incorporated to form a jointly owned
company to be called Cirilium. This company will combine each of the company's
existing VoIP technology and each will contribute certain assets and personnel.
The formation of Cirilium is scheduled to take place in the second quarter of
the 1999 stub period, and will be accounted for on the equity basis.
NOTE 7 - SUBSEQUENT EVENTS
On October 19, 1999, the Company announced it had acquired the assets and
business of MicroTrax, Ltd., Inc., a leading provider of Windows NT electronic
payment software systems for approximately $3.5 million in cash, which will be
consolidated into the Company's financial statements from the date of
acquisition.
9
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Hypercom Corporation
We have reviewed the related condensed consolidated balance sheet of Hypercom
Corporation and subsidiaries as of September 30, 1999, and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended September 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of June 30, 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated July 20, 1999,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of June 30, 1999 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
October 19, 1999
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995. Words such
as "believe", "expect", "intend", "anticipate", "estimate", "project", and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. These forward-looking statements may include,
but not be limited to, projections of revenue or net income and issues that may
affect revenue or net income, projections of capital expenditures, plans for
future operations, products or services, financing needs of the Company, and
economic conditions, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Statements in this Quarterly Report,
including the Notes To The Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Results of Operations describe factors,
among others, that could contribute to or cause such differences. Additional
risk factors that could cause actual results to differ materially from those
expressed in such forward-looking statements are set forth in Exhibit 99 which
is attached hereto and incorporated by reference into this Quarterly Report on
Form 10-Q. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
RESULTS OF OPERATIONS
NET REVENUE
Net revenue for the three-month period ended September 30, 1999, increased $7.3
million or 11% to $73.3 million from $65.9 million in the three months ended
September 30, 1998. Within Hypercom's Point of Sales (POS) business segment, net
revenues from the United States increased $3.6 million due to $7.5 million
generated from the Horizon Group, Inc., which was acquired by Hypercom effective
October 1, 1998. Net revenues from the POS segment also increased in POS Europe
by $5.4 million. POS Asia showed signs of recovery with an increase in revenues
for the three month period ended September 30,1999 of $2.4 million. In addition,
although Latin America is also showing signs of recovery, revenues showed a
slight decline of $.8 million in the first quarter of 1999 as compared to the
same period for 1998. The POS net increases were offset by a $3.1 million
decline in revenues from Hypercom's Network Systems business segment. This
decline primarily stems from a large portion of the Network System's activity
being focused on supplying VoIP product to the Company's newly created
e-commerce division. Hypercom will derive a future recurring revenue stream for
such equipment based upon usage.
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
increased by $7.3 million for the
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COST OF REVENUE (CONTINUED)
three-month period ended September 30, 1999, compared to the same three-month
period ended September 30, 1998. Hypercom's cost of revenue as a percentage of
revenue increased to 54.5% for the three months ended September 30, 1999, up
from 49.4% for the three months ended September 30,1998.
This increase in the cost of revenue as a percentage of revenue is the result of
the increased revenues from the Horizon Group, which carry lower margins than
those historically enjoyed by Hypercom, as well as continued pricing pressure
due to the competitive nature of the POS business.
RESEARCH AND DEVELOPMENT
Research and development expenses consist mainly of software and hardware
engineering cost and the cost of development personnel. Research and development
expenses dramatically increased by $1.7 million or 22%, to $9.3 million in the
three month period ended September 30, 1999, compared to $7.6 million for the
three month period ended September 30, 1998. This increase reflects an intense
effort by the Company to take advantage of emerging market conditions in several
areas. Hypercom is presently developing a "value added" strategy where certain
features, sought by merchants, are being made available to them through
processors or directly by Hypercom. These features include electronic receipt
capture and the ability to do screen advertising, couponing, loyalty programs
and e-commerce through the touch screen of the POS terminal. In addition,
through its Network Systems Division, Hypercom continues to develop its VoIP
carrier class gateway product. This product, along with approximately 50
personnel, is planned to be contributed to a new company, Cirilium, to be
jointly owned by Hypercom and Inter-Tel Incorporated and certain of its
officers. The formation of this company is scheduled to take place in the second
quarter of the 1999 stub period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Sales and marketing expenses, administrative personnel costs, and facilities
operations make up the selling, general and administrative expenses. These
expenses totaled $19.9 million for the three-month period ended September 30,
1999, or $1.5 million more than the three-month period ended September 30, 1998.
As a percentage of revenues, theses expenses declined from 27.9% of revenue for
the three month period ended September 30, 1998, to 27.1% for the three month
period ended September 30, 1999. The $1.5 million increase in absolute dollars
was attributable to the following:
- - $0.8 million in selling, general and administrative expenses related to
the operations of The Horizon Group, Inc.
- - $0.3 million in selling expenses related to the newly formed Multi-Lane
Division
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (CONTINUED)
- - $0.4 million in selling, general and administrative expenses related to
expansion of Hypercom's e-commerce efforts
INCOME FROM OPERATIONS
Income from operations decreased by $3.3 million from $7.3 million in the three
month period ended September 30, 1998, to $4.0 million for the three month
period ended September 30,1999. As a percentage of revenue, income from
operations decreased from 11.1% to 5.5%, respectively. This decline was
attributable to the following:
- - $0.1 million decrease in gross margin
- - $1.7 million increase in research and development expenses
- - $1.5 million increase in selling, general and administrative expenses
NET INTEREST, FOREIGN CURRENCY LOSSES AND OTHER ITEMS
Interest income consisted primarily of returns on short and long-term
investments. Interest expense related to borrowings, principally in connection
with borrowings on real property, while foreign currency losses resulted from
operating in volatile markets, principally Brazil. The majority of the currency
losses are the cost of hedging instruments entered into to mitigate the impact
of future foreign currency fluctuations. During the three month period ended
September 30, 1999, the net interest income, less foreign currency losses,
amounted to $0.5 million compared to income of $1.0 million for the same period
ended September 30, 1998. The decline relates primarily to increased interest
expense, as a result of additional borrowings of $10 million related to the
Company's land and buildings in Arizona.
INCOME TAXES
The provisions for federal, state and foreign taxes were $1.1 million and $2.6
million for the three month period ended September 30, 1999 and 1998,
respectively. The Company's effective rate of tax was 25% and 31% for the three
months ended September 30, 1999 and 1998. The 1999 period has been favorably
affected by advantageous tax rates the Company is receiving in connection with
its manufacturing facility located in China. In addition, Hypercom's tax rate
has been typically lower than the U.S. federal statutory rate due to:
- - Research and experimentation credits
- - Sales in foreign jurisdictions with lower tax rates
- - The use of foreign sales corporations offering lower taxes on certain
international sales
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed it operations primarily through cash
generated from operations and from borrowings under a line of credit.
Additionally, in November 1997, the Company completed its initial public
offering, which provided $125.7 million in cash. The Company's principal uses of
cash historically have been to support inventory and accounts receivable growth,
pay operating expenses and fund capital expenditures and acquisitions.
The Company's working capital was $161.8 million as of September 30, 1999
compared to $183.0 million at September 30, 1998. The decrease in working
capital relates to the acquisition of the assets of The Horizon Group Inc., JTS
ChequeOut Solutions, Inc., and ICL Sverige AB during the second, third and
fourth quarter of fiscal 1999, as well as a shift in investments from short to
long-term.
Capital expenditures totaled $5.4 million and $2.6 million in the three month
periods ended September 30, 1999 and 1998, respectively, while depreciation was
$1.6 million and $1.1 million in the respective periods.
The Company, in connection with the formation of Cirilium, as discussed under
Research and Development, will loan the new company $5 million for working
capital needs.
The Company believes that its net capital position, cash from operations and
borrowing capacity are sufficient to fund operations for the foreseeable future.
The Company also has a revolving line of credit of $10 million with Bank One,
Arizona, N.A. There was no borrowing outstanding at September 30, 1999. The loan
agreement contains various restrictions on the Company, including the
prohibition of declaring or paying dividends, limitations on the incurrence of
additional debt, liens, or encumbrances and restricting the Company's ability to
consolidate or merge into any other entity. In addition, the loan agreement
contains certain financial covenants, including a minimum current ratio, minimum
working capital, minimum tangible net worth and minimum owner's equity and debt
coverage ratios.
YEAR 2000 ISSUES
Hypercom began a comprehensive project in 1996 to prepare its internal computer
systems for the year 2000. Hypercom believes its implementation of a new
enterprise-wide information management system, principally installed to improve
operating efficiency, will address Hypercom's internal year 2000 compliance
issues, and therefore does not believe the year 2000 will have a significant
impact on operations.
Hypercom has also reviewed other systems within the Company, from desktop
applications to the software utilized within Hypercom's telecommunications
system, and has concluded that only a few applications are not capable of making
the transition from 1999 to 2000. The costs associated with such upgrades are
minimal, and will be substantially offset through savings generated through
increased productivity and enhanced functionality.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 ISSUES (CONTINUED)
At this time, Hypercom does not believe it is necessary to adopt a contingency
plan covering the possibility that the remaining year 2000 upgrades will not be
completed on a timely manner, but will continue to assess the need for such a
plan.
Hypercom develops and distributes computer hardware and software, and has
thoroughly reviewed such systems for year 2000 compliance. Because of the
interaction between Hypercom's hardware/software with other manufacturer's
hardware/software, Hypercom refrains from warranting year 2000 compliance. In
order to make Hypercom's POS terminal customers aware of potential issues with
the transition from 1999 to 2000, Hypercom has, at its own expense, provided
over ten thousand test cards to enable Hypercom's customers to fully test the
ability of Hypercom's products, when interacting with other vendors
software/hardware, to ascertain whether or not a year 2000 compliance issue is
present.
Hypercom'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 Hypercom's customers, not related to the
applications developed and distributed by Hypercom.
Nevertheless, Hypercom makes no warranty or representation 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.
Hypercom faces risk to the extent that suppliers of products and services
purchased by the Company and others with whom Hypercom transacts business on a
worldwide basis do not have business products and services that comply with the
year 2000 requirements. The Company is in the process of obtaining assurances
from most of its key suppliers that their products and services are year 2000
compliant. In the event any such third party cannot in a timely manner provide
Hypercom with products and services that meet the year 2000 requirements, the
Company could be materially adversely affected.
BACKLOG
As of September 30, 1999, Hypercom had backlog of $108.8 million, or an increase
of 18%, compared to the same date in 1998. As of June 30, 1999, the backlog was
$99 million.
The Company includes in its backlog all revenue specified in signed contracts
and purchaser orders to the extent that the Company contemplates recognition of
the related revenue within one year. There can be no assurance that the
contracts included in backlog will actually generate the specified revenues or
that the actual revenues will be generated within the one-year period.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS
Certain statements made above, which are summarized below, are forward-looking
statements that involve risks and uncertainties and actual results may be
materially different. Factors that could cause actual results to differ include
those identified as follows:
The belief that a new company to be jointly owned by Hypercom and Inter-Tel
Incorporated to further develop Hypercom's VoIP carrier class gateway product
will be formed during the second quarter of the 1999 stub period. The
anticipated timing of the new company's formation may be delayed or the joint
venture may not be formed due to unforeseen difficulties or differences with the
selected joint venture partner.
The belief that Hypercom's effective tax rate is typically lower that the U.S.
federal statutory rate. Changes in the mix of sales to or away from foreign
jurisdictions with lower tax rates and changes in U.S. or foreign tax laws may
inhibit Hypercom's ability to maintain its overall effective tax rate at present
levels.
The belief that Hypercom's current net capital position, combined with the cash
generated by operations and available borrowings, is sufficient to fund
operations for the foreseeable future. Changes in anticipated operating results,
credit availability and equity market conditions may inhibit Hypercom's ability
to maintain or raise appropriate levels of cash.
The belief that the cost of transitioning to year 2000 compatible information
systems will be offset by cost saving generated through increased productivity
and the ability to enhance internal reporting. Changes in anticipated levels of
expenditures, degrees of difficulty in implementing new systems and amounts of
cost savings may inhibit Hypercom's ability to offset the cost of transitioning
to year 2000 compatible systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Hypercom is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. Nevertheless, the fair value of
Hypercom'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 Hypercom's investment
portfolio.
A substantial portion of Hypercom's revenue and capital spending is transacted
in U.S. dollars. However, Hypercom 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. Hypercom has, from time to time,
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.
16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
Hypercom does not purchase or hold any 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 "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND
RISK FACTORS" set forth in Exhibit 99.1, attached hereto.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 3 of Part I of Hypercom's Form 10-K for the year ended June 30, 1999,
for disclosures regarding pending matters.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
- -------------- ----------------------
<S> <C>
11.1 Statement re Computation of Per Share Earnings
15.1 Letter re Unaudited Interim Financial Information
27.1 Financial Data Schedule
99.1 Cautionary Statement Regarding Forward-Looking Statements and Risk Factors
</TABLE>
(b) Reports on Form 8-K
None
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYPERCOM CORPORATION
<TABLE>
<S> <C>
Date: November 8, 1999 By: /s/ Jonathon E. Killmer
---------------------------
Jonathon E. Killmer
Executive Vice President, Chief Financial Officer
And Chief Administrative Officer
(duly authorized officer and Principal Financial Officer)
</TABLE>
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
- -------------- ----------------------
<S> <C>
11.1 Statement re Computation of Per Share Earnings
15.1 Letter re Unaudited Interim Financial Information
27.1 Financial Data Schedule
99.1 Cautionary Statement Regarding Forward-Looking Statements and Risk Factors
</TABLE>
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
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
------------------
Numerator - Basic and Diluted EPS: September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net income $ 3,422 $ 5,755
Denominator - Basic EPS:
Common stock outstanding 33,231 33,229
------- -------
Basic earnings per share $ 0.10 $ 0.17
======= =======
Denominator - Diluted EPS:
Demoninator - basic EPS 33,231 33,229
Effect of dilutive securities
Common stock options 1,184 1,183
------- -------
Diluted shares outstanding 34,415 34,412
------- -------
Diluted earnings per share $ 0.10 $ 0.17
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 15.1
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated October 19, 1999, on our review of interim
condensed consolidated financial information of Hypercom Corporation (the
"Company") for the three month period ended September 30, 1999 and 1998, and
included in the Company's quarterly report on Form 10-Q for the quarters then
ended, is incorporated by reference in the Company's registration statements on
Form S-8 (Registration Nos. 333-40457, 333-40459, 333-40461 and 333-40333).
Pursuant to Rule 436(c), under the Securities Act of 1933, this report should
not be considered part of the registration statements prepared or certified by
us within the meaning of Sections 7 and 11 of that Act.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
November 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 40,335
<SECURITIES> 19,299
<RECEIVABLES> 59,147
<ALLOWANCES> 3,193
<INVENTORY> 60,116
<CURRENT-ASSETS> 206,574
<PP&E> 49,862
<DEPRECIATION> 15,414
<TOTAL-ASSETS> 258,349
<CURRENT-LIABILITIES> 44,740
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 229,728
<TOTAL-LIABILITY-AND-EQUITY> 285,349
<SALES> 73,302
<TOTAL-REVENUES> 73,302
<CGS> 39,969
<TOTAL-COSTS> 69,262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 194
<INTEREST-EXPENSE> 465
<INCOME-PRETAX> 4,562
<INCOME-TAX> 1,140
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,422
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
In passing the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), Congress encouraged public companies to make "forward-looking statements"
by creating a safe harbor to protect companies from securities law liability in
connection with forward-looking statements. Hypercom Corporation intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking Statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties that could cause actual
events or results to differ materially from those projected. Due to those and
other uncertainties and risks, the investment community is urged not to place
undue reliance on written or oral forward-looking statements of Hypercom.
Hypercom undertakes no obligation to update or revise this Cautionary Statement
Regarding Forward-Looking Statements to reflect future developments. In
addition, Hypercom undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events, or changes to future operating results over time.
Hypercom provides the following risk factor disclosure in connection with its
continuing effort to qualify its written and oral forward-looking statements
under the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the disclosures contained in the Company's Annual Report on
Form 10-K to which this statement is appended as an exhibit and also include the
following:
RISK FACTORS
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 Hypercom'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.
<PAGE> 2
DIFFICULTY IN FORECASTING NET REVENUE (CONTINUED)
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 from July to December
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.
<PAGE> 3
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY FLUCTUATIONS
Hypercom's net revenue from international sales for fiscal years 1997, 1998 and
1999 was approximately 56%, 57%, and 46% respectively, of Hypercom'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, Hypercom 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 Hypercom's shipments into
Asia or other international markets, including Latin America,
- 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 Hypercom. Hypercom takes steps such as
hedging to partially offset changes in currency exchange rates. However, there
is no assurance that such strategies enable Hypercom 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.
<PAGE> 4
UNCERTAINTY OF PROFITABILITY FOR HYPERCOM NETWORK SYSTEMS
Hypercom 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 management is
implementing plans to return it to profitability. However, 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 TECHNOLOGY 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 Hypercom's
business and financial condition.
<PAGE> 5
INDUSTRY AND TECHNOLOGY CHANGES; DEPENDENCE ON DEVELOPMENT AND MARKET ACCEPTANCE
OF NEW PRODUCTS (CONTINUED)
Developing new products and technologies is a complex, uncertain process
requiring innovation and accurate anticipation of technological and market
trends. Hypercom 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, Hypercom 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, Jairo Gonzalez and Jonathon Killmer are instrumental in
Hypercom's development, growth, and operations. Hypercom has an employment
agreement with Mr. Gonzalez. However it does not have employment agreements with
George Wallner, Jonathon Killmer, or any other member of senior management.
Although Hypercom has no plans to enter into employment agreements with other
executive officers or key employees, Hypercom 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 George
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
<PAGE> 6
DEPENDENCE ON CURRENT MANAGEMENT AND KEY PERSONNEL (CONTINUED)
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. Hypercom must avoid maintaining excess inventory as a result of:
- The need to maintain significant 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 Hypercom accumulates excess or obsolete inventory, price reductions and
inventory write-downs may result. Such a situation could adversely affect
Hypercom'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. 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.
<PAGE> 7
COMPETITION (CONTINUED)
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, Hypercom 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
Hypercom 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.
Currently, Hypercom is experiencing some delays and increases in process in
certain components as a result of recent earthquakes in Taiwan.
Hypercom 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 Hypercom's business and financial condition if:
- Hypercom's relationships with them were to deteriorate,
- They could not perform as expected or pay Hypercom, 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
Hypercom's net revenue in fiscal
<PAGE> 8
RELIANCE ON CERTAIN HYPERCOM POS SYSTEMS CUSTOMERS (CONTINUED)
1999, the two largest customers accounted for 12.6% of the net revenue that
year. The five largest accounted for 24.2% of net revenue.
Hypercom 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. Hypercom 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.
<PAGE> 9
IMPACT OF INDUSTRY REGULATION AND STANDARDS (CONTINUED)
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 Hypercom 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 Hypercom.
Such failure could also require Hypercom to 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 Hypercom and customers test all
these products, it is likely that such errors will continue to be identified
after products are shipped.
<PAGE> 10
PRODUCT DEFECTS (CONTINUED)
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 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 Hypercom.
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 Hypercom tries to protect
its proprietary rights, unauthorized third parties may be able to copy some
portions of or to reverse engineer products to obtain technology that Hypercom
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, Hypercom may not be able to
protect its proprietary technology against unauthorized copying or use, which
could adversely affect Hypercom'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 Hypercom 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 Hypercom to use. Such
products and technologies
<PAGE> 11
DEPENDENCE ON PROPRIETARY TECHNOLOGY (CONTINUED)
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. Hypercom may experience similar claims in the future.
Regardless of its merit, any claim can be time-consuming, result in costly
litigation, and require Hypercom to enter into royalty and licensing agreements.
The terms of these agreements may not be acceptable to Hypercom. If a claim
against Hypercom is successful and Hypercom fails to develop or license a
substitute technology quickly, it could be adversely affected.
RISKS OF POTENTIAL ACQUISITIONS
Hypercom 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 Hypercom's ongoing business and
- The possible inability of Hypercom to obtain the desired
financial and strategic benefits from the acquisition or
investment.
These factors could have a serious negative effect on Hypercom'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 Hypercom's business,
operating results, and financial condition.
The acquisition of the assets and businesses of The Horizon Group, Inc., SP/RJ
Service Company, JTS ChequeOut Solutions Inc., and ICL Sverige AB have consumed
and will continue to consume substantial management attention and resources of
Hypercom, and will require substantial efforts and entail certain risks in the
integration of these operations. There can be no assurance that anticipated cost
savings or synergies will be achieved. Hypercom will be dependent on the
retention and performance of these businesses existing management and employees
for the day-to-day management and future operation results of the business.
<PAGE> 12
VOTING CONTROL BY EXISTING STOCKHOLDERS
George Wallner and Paul Wallner together own 63.4% of Hypercom's outstanding
Common Stock. Accordingly, the Wallners have the ability to control the affairs
of Hypercom, including the election of all directors to Hypercom's Board of
Directors. They can also, except as otherwise provided by law, approve or
disapprove other matters submitted to a vote of Hypercom'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 Hypercom
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 Hypercom's Common Stock has been and may continue to be affected
by various factors such as the following:
- Quarterly variations in Hypercom's operating results,
- Changes in revenue growth rates for specific geographic areas,
business units, products, or Hypercom as a whole,
- Earnings estimates or changes in estimates by market financial
analysts,
- Speculation in the press or analyst community,
- Announcement of new or enhanced products by Hypercom 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
Hypercom 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
Hypercom,
- Discourage a third party from attempting to take control of
Hypercom or
- Limit the price some investors are willing to pay for shares
of Hypercom's Common Stock,
- Enable Hypercom 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 Hypercom.
In addition, certain provisions of Delaware law applicable to Hypercom could
also delay a merger, tender offer, or proxy contest or make one more difficult.
