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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
[ ] 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)
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DELAWARE 86-0828608
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2851 WEST KATHLEEN ROAD,
PHOENIX, ARIZONA 85053
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER: (602) 504-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $94,854,472 as of September 16, 1999 (based on the closing
price of the common stock on the New York Stock Exchange on that date).
The number of shares of Common Stock outstanding at September 16, 1999 was
33,199,517.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement relating to its 1999 Annual
Meeting of Stockholders to be held on November 16, 1999 are incorporated by
reference into Part I, Part II and Part III, Items 10, 11, 12, and 13.
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TABLE OF CONTENTS
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ITEM
NO. CAPTION PAGE
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PART I
1. Business.................................................... 1
2. Properties.................................................. 11
3. Legal Proceedings........................................... 11
4. Submission of Matters to a Vote of Security Holders......... 12
PART II
5. Market for Common Equity and Related Shareholder Matters.... 13
6. Selected Financial Data..................................... 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
8. Financial Statements and Supplementary Data................. 20
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 20
PART III
10. Directors and Executive Officers of the Registrant.......... 21
11. Executive Compensation...................................... 21
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 21
13. Certain Relationships and Related Transactions.............. 21
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 22
Signatures......................................................... 23
List of Exhibits .......................................... EXHIBIT INDEX
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PART I
ITEM 1. BUSINESS
THE COMPANY
Hypercom Corporation ("Hypercom" or the "Company") is a global provider of
electronic payment solutions, including multi-function point-of-sale terminals,
peripherals, network products, Ascendent payment and transaction software and
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. These applications provide
competitive value-added programs, improved business performance and low total
cost of ownership. Hypercom markets its products in more than 70 countries
through a global network of affiliates and offices in Argentina, Australia,
Brazil, Chile, China, Hong Kong, Hungary, Germany, Japan, Mexico, Russia,
Sweden, Singapore, the United Kingdom and Venezuela.
Worldwide, Hypercom is the number two provider of Point of Sale ("POS")
payment terminals. Card-based payment is becoming a primary form of value and
information exchange, which enables users to engage in payment and non-payment
activities such as credit and debit payments, electronic benefits transfers
("EBT"), loyalty systems and couponing, medical claims and payments.
The Company's POS products -- POS terminals, POS networking equipment, POS
transaction software (Ascendent), Internet software, and its POS services, which
include deployment, help desk, repair and telecommunications, accounted for
88.3% and 89.7% of Hypercom's net revenues in fiscal 1999 and 1998,
respectively, and are sold in more than 70 countries through its direct sales
force and a variety of third-party distribution channels.
Through its Network Systems division, which accounted for approximately
11.7% and 10.3% of Hypercom's net revenues in fiscal 1999 and 1998,
respectively, the Company designs and manufactures multi-service, wide area
networking ("WAN") solutions for complex enterprise networks requiring
consolidation of legacy, local area networking ("LAN"), voice (including voice
over Internet protocol ("VoIP")) and video traffic. Its Integrated Enterprise
Network ("IEN") family of products gives users flexibility, high performance and
low costs for the life of the network.
Hypercom Corporation is the successor to an Australian company founded by
George Wallner, the Company's President and Chief Executive Officer, in 1978.
The company's operations were primarily focused on Asian markets until 1987,
when the Australian company expanded its operations into the United States. On
June 5, 1996, the Company was reincorporated in Delaware, and shortly
thereafter, through a series of corporate restructurings, became a U.S. holding
company for the operations of the Australian company and its subsidiaries and
affiliates. These restructurings were completed in July 1997.
INDUSTRY BACKGROUND
POS PAYMENT SYSTEMS. In recent years, consumers demanding fast, convenient
and secure methods of payment have increasingly substituted card-based payments,
such as debit, credit and charge cards, for traditional forms of payments, such
as checks and cash. According to The Nilson Report, a payment systems industry
newsletter, retail consumer payments using credit, debit, electronic benefits
transfer and prepaid cards increased from approximately 15% in 1990 to
approximately 21% of transactions (measured in dollars) in the U.S. in 1995, and
are projected to account for approximately 33% and 43% of transactions by 2000
and 2005, respectively. The Company believes that the worldwide growth rate for
POS transactions over the same periods could exceed projected U.S. growth rates.
It is anticipated that convenience, security and financial incentives, such as
loyalty programs, will continue to encourage increased use of card-based payment
methods.
To accommodate consumer preferences for card-based payments and to
facilitate the electronic delivery of such payments, automated POS systems were
introduced in the early 1980s. Prior to that time, most POS credit and debit
card transactions were processed manually, using paper-based systems. As the
volume of credit card transactions increased, card issuing banks, through their
associations with VISA and MasterCard, offered financial incentives to encourage
the deployment of new POS technologies to improve accuracy,
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reduce costs, enhance efficiency, improve settlement procedures and reduce
credit abuse and fraud. These new capabilities included electronic
authorization, data capture, transaction transmission and settlement. These
functions require the use of a POS terminal capable of reading a cardholder's
account information from the card's magnetic stripe and combining this
information with the amount of the sale entered via a POS terminal keypad. The
terminal electronically transmits this transaction information over a
communications network to an authorized computer data center and then displays
the returned authorization or verification response on the POS terminal.
New electronic payment technologies are expected to facilitate the
introduction of additional electronic payment applications, such as
sophisticated customer loyalty programs and stored value cards, and the use of
POS systems in new vertical industries, such as health care and the electronic
payment of government benefits, which is already available in several states and
is required to be available for federal programs. In addition, merchants and
banks are working together to eliminate processes which are costly and time
consuming through the use of the current infrastructure and new POS systems,
including the use of the POS terminal for processing checks (check truncation)
and retrieval of electronic signatures or receipts in the advent of customer
disputes. In addition, the infrastructure development of emerging markets, such
as those in Eastern Europe, Russia and China, is expected to contribute to the
increasing demand for electronic payment products.
The increasing use of debit, credit and charge cards and the proliferation
of new electronic payment methods and programs are driving the need for POS
payment systems which (i) support a wide array of payment and program options,
(ii) are scalable, flexible and cost-effective, (iii) provide fast, secure data
transmission and (iv) can work with existing legacy systems, which form the
backbone of the electronic payments industry. Many of today's installed base of
POS terminals are relatively old and in need of replacement to handle the
increased volumes projected for POS transactions, new payment programs that may
be offered in the future, new technologies such as chip cards, and new modems
and other interfaces to faster telecommunications facilities. In addition, the
components of current POS payment systems typically are supplied by multiple
vendors which may affect interoperability, scalability and upgradeability.
ENTERPRISE NETWORKING MARKET. As requirements for the transmission of
data, voice, fax and video have become more complex, many enterprises have
developed multiple networks which carry different types of traffic (data, voice,
fax and video) using a range of protocols (SNA and TCP/IP) and networking
technologies (X.25, frame relay, asynchronous transfer mode ("ATM")).
Historically, large organizations have performed business-critical data
processing predominantly on hierarchical, centralized computer systems, mainly
IBM mainframe (legacy) systems. WANs have been built to provide access to these
systems and databases from geographically dispersed branch offices.
As users increasingly demand both savings and quality, carriers and service
providers are rolling out new competitive voice and data services supported by
packet-based infrastructures and central offices. Hypercom Network Systems
service provider solutions enable competitive carriers and Internet service
providers ("ISPs") to transmit voice, fax and data traffic using frame relay,
Internet Protocol ("IP") and other services.
THE HYPERCOM SYSTEMS SOLUTION
Hypercom has successfully deployed its core competencies in hardware
engineering and manufacturing, software development and international operations
to deliver comprehensive, POS payment system solutions that maximize performance
and minimize costs. As a result, Hypercom has emerged as a leading worldwide
developer, manufacturer and supplier of high-performance, comprehensive POS
payment systems and sophisticated enterprise networking products, tailored
primarily to POS payment systems networks.
POS SYSTEMS
The Company believes that its core business, POS systems, has the following
key competitive advantages:
TECHNOLOGY LEADER AND INNOVATOR. The Company has established itself
as a technology leader and innovator in the electronic payments industry by
developing a number of state-of-the-art POS payment
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terminals and peripheral products, transaction networking products and
transaction processing software. Since the introduction of POS payment
terminals in the early 1980s, Hypercom has delivered a series of
innovations, such as fast-dial techniques, SDLC terminals, bit-map message
formats, dual-track card readers and on-line terminal management. The
Company also introduced technology that reduced transaction response times
from 20 seconds to less than 10 seconds, which has resulted in substantial
savings for Hypercom customers and better service to consumers. Hypercom
has developed a comprehensive base of terminal and networking technologies
that will enable it to remain a leading innovator in the POS payment
systems market. In fiscal 1999, Hypercom's technology leadership continued
with the announcement of a new generation of POS payment systems with its
Interactive Customer Equipment ("ICE") product line; a new modem
technology, FastPOS, which operates at 9600 bits per second ("bps"),
allowing not only faster transactions but new applications such as
electronic receipt capture; and Ascendent transaction software, which
includes functionality for secure Internet payments.
COMPREHENSIVE POS PAYMENT SYSTEMS PROVIDER. The Company
differentiates itself from its competitors by developing, manufacturing and
providing total electronic transaction solutions. With its POS payment
terminal technology, networking hardware and software and transaction
processing software the Company is a systems-level supplier. Most
competitors offer only certain components of a POS payment system. In
contrast, Hypercom products offer comprehensive payment systems, enabling
seamless integration and interoperability with other Hypercom or
competitors' products.
LOWER TOTAL COST OF OWNERSHIP. The Company designs its products to
provide customers with a lower total cost of ownership, enabling Hypercom
products to command premium pricing. The Company's core products typically
feature multi-functionality, robust construction, scalability to facilitate
system growth and ready upgradeability to accommodate new technological
developments that can extend product life. The Company's technologically
advanced, easy-to-use products also provide faster transaction processing
times, reduce the time and costs needed to train merchant personnel who
operate Hypercom products and ensure the secure transmission of financial
transactions.
INTERNATIONAL EXPERIENCE AND GLOBAL PRESENCE. Hypercom was founded in
Australia 21 years ago. It became the largest supplier of POS systems in
the Asia/Pacific region prior to its move to the United States. The Company
currently sells its products in more than 70 countries. According to the
May, 1999 Nilson Report, the Company has the second largest installed base
of POS terminals in the U.S. and worldwide, and the largest installed base
in Latin America and Asia/Pacific. The Company has gained significant
expertise in adapting to local customs, addressing local regulatory,
certification and telecommunications requirements and establishing key
partnering arrangements with local distributors and resellers. Further,
because the Company's products incorporate advanced communications
technology, the Company believes that its POS payment systems perform
better than its competitors' products in less developed telecommunications
environments, most of which support only earlier generations of
communications protocols.
INTEGRATED DESIGN AND PRODUCTION. The Company designs, develops and
manufactures substantially all of its products in-house, enabling it to
control the product development process at all levels. In addition, the
Company works closely with its customers, distribution channels and related
industry participants to identify products that respond to market needs.
Company officials actively engage in standards-setting efforts and
participate in a wide variety of user groups and industry forums to
facilitate product identification and development efforts. The Company
believes that its integrated approach to product identification,
development and manufacturing will continue to reduce research and
development costs and time to market and facilitate its manufacture of high
quality products at low cost.
NETWORK SYSTEMS
Hypercom Network Systems has leveraged its extensive branch networking
expertise in POS payment systems to develop, manufacture, market and support a
family of flexible, stackable, multi-service
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switch/routers under the trade name Integrated Enterprise Network ("IEN"). The
Company believes that its Network Systems business has the following key
competitive advantages:
TECHNOLOGICALLY ADVANCED, MULTI-SERVICE ARCHITECTURE. Hypercom's IEN
products feature a modular and distributed processing architecture, which
supports legacy and client/server environments and multiple traffic types.
Each IEN device incorporates a switch, router, Frame Relay Assembler/
Disassembler, protocol converter, dial back-up unit and Channel Service
Unit/Data Service Unit, and performs data compression and encryption. These
products support all WAN services critical for global networking, including
frame relay, X.25 and ISDN, enabling networks to capitalize on the lowest
available telecommunications tariffs. IEN products integrate legacy data,
LAN, voice, fax and video applications over a single network. The benefits
of IEN products include reduced telecommunications costs through the
elimination of duplicate networks, consolidation of customer premises
equipment, common management interface, optimized network performance,
added reliability and system integrity for mission-critical applications.
EXTENSIVE VOICE/DATA EXPERTISE. In addition to designing and building
multi-service networks for Fortune 1000 companies, Hypercom Network Systems
has extensive expertise that comes from installing packetized voice
solutions for almost 200 companies. IP and Frame Relay technologies have
been embraced by the industry for both voice and data. With huge cost
savings possible, packetized voice technology will also draw users and
providers of voice and data services away from traditional circuit-
switched systems. Putting voice traffic on the Internet and other packet
networks is progressing quickly and Hypercom Network Systems' IP.tel
product line offers an effective packetized voice solution for carriers and
alternative providers.
PRODUCTS AND SERVICES
POS PAYMENT SYSTEMS. The Company's POS payment systems are comprised of a
comprehensive range of client/server solutions including: (i) POS terminals and
peripherals, (ii) POS network products, which provide efficient, accurate and
fast transaction transport, (iii) software products, including terminal
application software and terminal management software, that enable remote and
automated downloading of terminal application software, and (iv) software
products which support ISPs. This comprehensive range of products provides
Hypercom customers with turn-key capability to supply high-performance POS
payment system solutions to merchants and consumers.
TERMINALS AND PERIPHERALS. The Company's terminal products include
stand-alone terminals, compact terminals that have integrated printers and
wireless terminals for specific industry applications, such as automobile
rental, restaurants and temporary merchant locations. The Company's terminal
products are designed for use with magnetic stripe cards, such as typical
credit, debit or charge cards, as well as with smart or chip cards. Terminal
functionality ranges from routine tasks, such as credit or debit authorization,
electronic draft capture and electronic batch submission and settlement, to high
level functions, such as customer loyalty programs, eligibility checking for
health insurance or government benefits and time and attendance data collection
reporting. These products feature a modular design to allow for easy upgrading
as new technologies become available.
The principal peripheral products that interface with Hypercom terminals
include printers, personal identification number entry devices (known as
PINpads), signature capture devices and communications products. Printers enable
printing of customer receipts. PINpads allow acceptance of magnetic-stripe and
chip card-based debit cards and other forms of payment requiring a personal
identification number, and allow for support of customer-activated stored value.
The Company's S7 PINpad can be connected to any Hypercom T Series terminal,
turning it into a full-feature debit or combined debit and data capture
terminal. Hypercom's S7 and S8 line of PINpads provide a range of hardware and
software features that ensure encryption-key and PIN security. In addition,
Hypercom offers the CS7GC Signature Capture PINpad, which enables cost-effective
digital capture and storage of signature information for credit card
transactions.
Electronic payment technology is evolving at a rapid pace. Hypercom has
recently announced a new generation of POS payment systems with its ICE product
line. ICE is a multi-function touch-screen terminal
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that combines a terminal, PINpad, and signature capture in a single unit and
incorporates a high-speed thermal printer and paper cutter, and Hypercom's new
FastPOS 9600 bps modem. ICE's easy to operate touch-screen simplifies the most
complex tasks and provides the opportunity to deliver promotional, advertising
and other visual messages, in addition to electronic receipt capture
capabilities.
POS NETWORK PRODUCTS. The Company's POS network products consist of a
family of Network Access Controller ("NAC") products, which facilitate
transaction delivery from the point of sale to processors of electronic
payments. NACs are intelligent communications products which provide a wide
range of digital and analog interfaces, line concentration, protocol conversion,
data concentration, transaction routing, backup transmission paths and multiple
device interface capabilities that allow access to high-performance data
communications networks. The NAC product line also includes the MiniNAC2, which
connects automated teller machines, POS terminals and peripherals and PCs or
in-store controllers to existing hosts utilizing standard dial access services.
SOFTWARE PRODUCTS. The four principal categories of the Company's POS
software products are transaction processing software, terminal application
software, terminal management software, and Internet software.
Transaction Processing Software. Hypercom's Ascendent brand transaction
software was developed to meet market demand for new payment methodologies,
value-added programs and increased transaction volumes. Developed by Hypercom,
Ascendent software is a comprehensive family of front-end client/server payment
and data transaction processing software solutions. The Ascendent client/server
software line includes: Loyalty Management System, Advanced Transaction
Processor, Network Terminal System, Electronic Receipt Capture, and the Internet
product, RealPay.
Terminal Application Software. The Company works closely with its clients
to develop standard and customized applications that operate on Hypercom
terminals. To date, the Company has developed over 80 terminal software
applications, ranging from entry-level credit and debit solutions to complex
systems that support a comprehensive range of electronic payment and medical
transaction functions. Among these software applications are specialized
applications for specific markets such as lodging, restaurants, multi-lane
retail and health care.
Terminal Management Software. Every terminal application software program
produced by the Company has a management and control module that interacts with
the Company's Term-Master Terminal Network Management System. Term-Master is
designed to provide mission-critical functionality to users of Hypercom's T
Series terminals. Term-Master is the basis for an integrated terminal management
approach that supports multiple merchant locations, remote and automated
downloading of terminal application software, multiple application software
management, merchant terminal set-ups, performance monitoring and on-line
diagnostics.
Internet Software. The Company has begun to develop and distribute
software which can be used by small businesses on the Internet, allowing them to
establish and support stores on the Internet. Limited distribution of the
software has received favorable results, and it is expected that Hypercom's
expertise in transaction processing will separate Hypercom's software from its
competitors. Such software will be marketed to banks, card processors, and ISPs,
who will in turn market directly to merchants.
ENTERPRISE NETWORKING PRODUCTS. The Company's IEN products consist of a
modular family of multi-service switch/routers that enable the integration of
business-critical legacy data, LAN, voice, fax and video traffic transmitted
among central and remote locations, allowing enterprises to eliminate duplicate
networks and facilitate migration to cost-effective switched services. Each IEN
device incorporates a switch, router, frame relay access device, protocol
converter, dial back-up unit and CSU/DSU, and performs data compression and
encryption IEN in a modular system consisting of base chassis with plug-in
cards. Plug-in cards support a range of functions, including ISDN, BRI, V.32
bis/V.34 dial backup, DSU 56/64 kbps, data compression and encryption, dual V.35
uplink, T1/E1 interface, 4-port voice card, 2 channel serial user or WAN
interface card and single RS232C/V.24 serial I/O.
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The Company also offers the IEN500, a single-slot chassis, which supports
two configurations: 2 WAN and 1 serial port and 1 WAN and 2 serial ports. IEN
products work with all WAN services critical for global networking, including
X.25, ISDN, frame relay and others, using them cost-effectively to capitalize on
the lowest available telecommunications tariffs. These products also support a
comprehensive range of legacy protocols, including SNA/SDLC, 3270 Bisync,
2780/3780 Bisync, Burroughs Poll Select, X.25 and asynchronous protocols.
The Company also provides software applications that centralize management,
automate routine tasks and integrate with clients' existing network management
environments. Hypercom's IENView software is a suite of industry-standards-based
applications that allow users to manage their networks from a single integrated
console. IENView software provides applications for enterprise and switched
internetwork management, remote monitoring, device management, simulation-based
planning and problem-solving and performance analysis.
SERVICES
The Company provides a broad range of services related to its POS payment
systems and enterprise networking products. The Company provides consulting
services: (i) to assist with strategies and alternatives for POS payment
systems, (ii) to assist in the design, installation, integration and management
of POS payment systems, and (iii) to design customized software applications.
The Company also provides deployment, training, technical assistance, help desk
and maintenance services for its products.
CUSTOMERS
Hypercom POS Systems' customers are predominantly large domestic and
international financial institutions, electronic payment processors, independent
service organizations ("ISOs") and resellers. These customers generally have
substantial POS payment system requirements. Representative direct and indirect
POS customers include American Express Company, Bank of America Merchant
Services, Banamex, CrediCard Brazil, First Data Merchant Services, TASQ
Technologies, National Bank of Australia and Concord Equipment Sales. In any
given year, select customers may account for a significant percentage of net
revenue. Although no one customer accounted for more than 10% of the Company's
net revenue in fiscal 1999, the two largest customers accounted for 12.6% of the
Company's net revenue in fiscal 1999 and the five largest customers accounted
for 24.2% of the Company's net revenue.
Hypercom Network Systems' customers generally consist of large financial
institutions, retailers, electronic payment processors, resellers and other
enterprises that have substantial branch networking requirements spanning an
average of 200 sites. Representative direct and indirect network customers
include Alamo Rent A Car, American Express Company, AT&T Corp., First Data
Merchant Services, The Home Depot, Inc., and The Hong Kong and Shanghai Banking
Corporation Group.
The Company places special emphasis on offering high-performance,
technologically-advanced POS payment system solutions and enterprise branch
networking products to enable its customers to gain market share in their
respective industries.
SALES, MARKETING AND DISTRIBUTION
The Company sells its POS payment system solutions through its direct sales
force and through independent third-party resellers, including financial
institutions, electronic payment processors and service providers. The Company
recently merged its domestic and international sales, marketing and operations
personnel which are now managed from its Phoenix, Arizona headquarters.
The Company sells its enterprise networking products primarily through a
14-person direct sales force, as well as through distributors, value-added
resellers and system integrators, who resell the Company's networking products
along with other computer and communications equipment. Because the sale of
networking products is highly technical, the sales cycle can be as long as 18
months. The technical nature of the sale also results in increased reliance on
resellers who work closely with the Company's customers to
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identify the benefits that Hypercom enterprise networking products can provide
to their businesses. The resellers support the Company's products locally.
The Company's marketing programs include trade shows, press releases, press
interviews, speaker engagements, training and technology seminars, sales
collateral and white papers, print advertising, articles and newsletters
supported by Hypercom's technical publications group.
FINANCIAL INFORMATION ABOUT INDUSTRY AND GEOGRAPHIC SEGMENTS
For detailed financial information concerning the Company's industry
segments and foreign and domestic operations and export sales, reference is made
to Note 15 of the Consolidated Financial Statements included in Part II of this
form 10-K.
BACKLOG
As of June 30, 1999, the Company had a backlog of $99 million. Backlog was
$77 million at June 30, 1998. The Company has taken steps to reduce terminal
manufacturing lead time which reduces the customers' required lead time. These
shorter lead times eliminate the prior requirements for customers to book orders
covering longer periods.
The Company includes in its backlog all revenue specified in signed
contracts and purchase 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.
CUSTOMER SERVICE AND SUPPORT
The Company believes that it has established a reputation for manufacturing
high quality, reliable products and for providing excellent service and support
for its products. Through its facilities in Phoenix, Arizona, the Company
provides pre- and post-sales consulting, application software development and
support, installation services, deployment, customer support and comprehensive
repair facilities for its products. The Company also supports its enterprise
networking products through remote access to customer installations. Remote
access is accomplished either through a dial-up network connection directly to a
customer's installation or through a modem connection to the central part of the
customer's system. This connection allows Company support personnel to analyze
and correct installation and configuration problems remotely. Field support
engineers are available to assist with customer emergencies, and third-party
field personnel provide additional support for the Company's products.
The Company provides a five-year warranty on its POS terminal products and
one to five-year warranties on other products. The Company has not incurred
significant warranty expenses to date. The Company believes that its five-year
warranty on POS terminal products has contributed significantly to its
reputation for manufacturing high quality, reliable products, and that this
warranty results in a lower total cost of ownership than competitors' products.
MANUFACTURING
The Company's primary manufacturing facility is in China, where the Company
manufactures POS payment systems. The Company also manufactures POS products at
its facilities in Arizona and Brazil. The Company also relies on third-party
suppliers for certain components of its POS payment system products.
The Company's enterprise networking products are assembled at its Phoenix
facility. Certain networking product components are manufactured in Australia.
The Company also uses certain components manufactured by various third parties.
To control product costs, the Company centrally manages its material
requirements planning and bills of material from its Phoenix facility on an
integrated computer system, which is networked to all Hypercom manufacturing
centers. By managing its purchasing centrally, the Company is able to obtain
discounts on
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volume purchases. The Company also maintains sufficient flexibility in its
purchasing to allow it to take advantage of favorable pricing in regional
markets. Central management of purchases also assists the Company in ensuring
that quality components are used in its products.
For information relating to the Company's dependence on suppliers, see
"Dependence On Certain Suppliers And Third-Party Distributors" in Exhibit 99.1
which is attached hereto and incorporated by reference into this Annual Report
on Form 10-K.
RESEARCH AND PRODUCT DEVELOPMENT
Since its inception, the Company has made substantial investments in
research and development. With respect to its POS payment system products, the
Company's development efforts are focused on products, including both hardware
and software, that support new technologies and payment products emerging in the
electronic payments industry. With respect to enterprise networking products,
the Company's efforts are focused on developing new capabilities to support
real-time integrated data, voice and multimedia communications. The Company
works closely with its customers to define new product concepts and identify
emerging applications for both its hardware and software products. Development
projects are evaluated through a management review process and assigned to the
Company's development centers based upon the potential value of the target
markets, as well as the technology, staff resources and engineering expertise
requirements.
The Company designs and develops all of its products and incorporates,
where appropriate, technologies from third parties and those available in the
public domain. The Company's product development units for both POS payment
system products and enterprise networking products are principally headquartered
in Phoenix, Arizona. Development staffs also are located in Australia; Dallas,
TX; Rochester, NY; Hong Kong; Singapore; Sweden; Brazil; Russia and the United
Kingdom. The Company maintains a separate development group dedicated to
electronic commerce transaction software, which has been located in Australia,
but is currently relocating to Atlanta, Georgia, to enhance the ability to hire
additional software developers. In addition, relocating in the United States
will enhance marketing efforts where it benefits from certain research and
experimentation tax credits.
The markets for the Company's products are characterized by changing
technology, evolving industry standards and frequent product introductions.
Management believes that the Company's future success depends in large part upon
its ability to continue to enhance its existing products and to develop new
products. The Company is dedicated to complying with industry standards and
supporting important new standards as they emerge.
At June 30, 1999, 437 employees of the Company were engaged in research and
product development, including 265 in POS payment systems development, 64 in
Ascendent development and 108 in enterprise networking systems development. In
fiscal 1999, 1998 and 1997, the Company's research and development expenditures
were $30.2 million, $23.5 million, and $12.9 million respectively. To date,
substantially all of the Company's research and development costs have been
expensed as incurred. Beginning in the third quarter of fiscal 1999, the Company
began capitalizing costs in relation to the development of specific software
enhancements related to its Ascendent software products. The amount capitalized
in fiscal 1999 amounted to approximately $2.0 million. The Company expects that
it will continue to expend substantial resources on research and product
development.
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.
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<PAGE> 11
COMPETITION
The markets in which the Company operates are highly competitive and are
becoming increasingly more competitive. With respect to its POS payment system
products, the Company competes primarily on the basis of ease-of-use, product
performance, price, features, quality, the availability of application software
programs, the number of third-party network host and telephone system
certifications it has obtained for its products and application programs, rapid
development, release and delivery of software products and customer support and
responsiveness. Software products compete on the basis of functionality,
scalability, quality and support.
Although the market for the Company's POS payment system products is
competitive, the need for highly-reliable and fully-certified software creates a
barrier to entry by new competitors. For example, electronic payment processors
have specific requirements that POS payment systems software must meet,
including requirements relating to security, host communications and message
format. Accordingly, POS terminal devices must accurately capture information
required to process the transaction, package the information, transmit it to the
processor's host system in the specified format and receive the host system's
response. Each processor has its own unique requirements that requires the
development of different software applications and the successful completion of
a lengthy certification process. As a result, to compete effectively,
competitors must be able to develop software applications compatible with the
diverse requirements of numerous processors of electronic transactions and
satisfy the diverse certification standards of these processors. The Company's
primary competitor in the POS payment systems market is VeriFone, Inc., which
was acquired by Hewlett-Packard Company in 1997.
With respect to its enterprise networking products, the Company competes
primarily on the basis of product features, quality, flexibility, reliability,
scalability and interoperability. The market for the Company's enterprise
networking products is intensely competitive and is characterized by rapid
technological development. The Company's competitors with respect to networking
products include: (i) internetworking companies, such as Cisco Systems, Inc. and
3Com Corporation, (ii) FRAD providers, such as Sync Research, Inc., Motorola
Information Systems Group, and Netlink, Inc. and (iii) circuit management
providers, such as Visual Networks, Inc. and NetScout Systems, Inc. The Company
expects that the number of competitors in both the POS payment systems and
enterprise networking systems markets will grow due to the growth opportunities
in both markets.
Many of the Company's current and potential competitors have significantly
greater financial, technical and marketing resources than the Company, as well
as better name recognition and a larger customer base than the Company. As a
result, they may be able to devote greater resources to the development,
promotion, sale and support of their products than the Company. The Company
often faces additional competitive factors in foreign countries, including
preferences for national vendors and difficulties in obtaining necessary
certifications and in meeting the requirements of government policies.
PROPRIETARY RIGHTS
The Company's success is dependent upon its proprietary technology. The
Company relies upon copyrights, trademark and trade secret laws and more
recently upon patent law protection, to establish and maintain its proprietary
rights in its technology and products.
The Company currently holds a patent issued in the U.S. (and several other
countries) relating to a POS terminal configured with a substantial portion of
its functionality at a remote processor, a POS terminal with replaceable printer
cartridge, and has several patents pending. Foreign patents have also been
issued on several other patent applications, including the replaceable printer
mechanism which has been instituted by Hypercom in its integrated POS terminals
containing a printer. Hypercom has pending a number of U.S. and foreign patent
applications relating to both the POS terminal products as well as the IEN
product family.
The Company has U.S. federal registration for its "Hypercom" trademark. In
addition, the Hypercom trademark is registered in 33 countries and has
registration pending in 7 countries. In addition to the registered trademark of
the Hypercom(R) name and logo, the Company has U.S. federal registrations for
the following trademarks: MEGANAC(R), MININAC(R), MINIROUTER(R), TERM-MASTER(R),
VIRTUAL MAPPED
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<PAGE> 12
SNA(R), PAYSEC(R), CHIPSTRIPE(R) and VIRTUAL POS(R). The Company's trademark
applications for U.S. registration include: ASCENDENT(TM), HYPERCOM FASTPOS(TM),
HYPERWARE(TM), ICE(TM), ICEPAC(TM), IEN 2000(TM), IP.TEL(TM), IP.TELVIEW(TM),
REALPAY(TM), and TOKEN TRACKING SYSTEM(TM).
The Company embeds copyright notices in its software products advising all
users that the software is owned by Hypercom. The Company also places copyright
notices on documentation related to these products. The Company routinely relies
on contractual arrangements to protect its proprietary software programs,
including written contracts prior to product distribution or through the use of
shrink-wrap license agreements. The Company typically does not obtain federal
copyright registrations for its software.
There can be no assurance that others will not develop products or
technologies that are equivalent or superior to those of the Company, or that
any patents, copyrights, confidentiality agreements and internal safeguards upon
which the Company relies will be adequate to protect its interests.
GOVERNMENT REGULATION
The Company's products must meet industry standards, such as those imposed
by VISA and MasterCard, and receive certification for connection to certain
public telecommunications networks prior to their sale. In the U.S., the
Company's products must comply with various regulations defined by the FCC and
Underwriters Laboratories. Internationally, the Company's products must comply
with standards established by telecommunications authorities in various
countries, as well as with recommendations of quasi-regulatory authorities and
standards-setting committees. In addition, public carriers require that
equipment connected to their networks comply with their own standards, which in
part reflect their currently installed equipment. Some public carriers have
installed equipment that does not fully comply with current industry standards,
and this noncompliance must be addressed in the design of the Company's
enterprise networking products. Any future inability to obtain on a timely basis
or retain domestic or foreign regulatory approvals or certifications or to
comply with existing or evolving industry standards could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, rates for public telecommunications services, including
features and capacity of such services, are governed by tariffs determined by
carriers and subject to regulatory approval. Changes in these tariffs could have
a material adverse effect on the Company's business, operating results and
financial condition.
The Company's operations are subject to various state, federal and
international laws governing, among other things, occupational health and
safety, minimum wages, overtime, retirement plans and profit-sharing and
severance payments, and the use, storage, handling and disposal of certain
chemicals used in the Company's production processes. Although the Company
believes that its operations comply in all material respects with such
regulatory requirements, any failure to comply with applicable requirements, or
the adoption of new regulations or changes in existing regulations, could impose
additional compliance costs on the Company, require a cessation of certain
activities or otherwise have a material adverse effect on the Company's
business, operating results and financial condition.
EMPLOYEES
At June 30, 1999, the Company employed 1,166 persons, including 342 in
manufacturing, service and support, 256 in sales and marketing, 333 in
engineering and 235 in finance and administration. Approximately 488 employees
were in international locations.
None of the Company's employees is represented by a labor union, and the
Company considers its relations with its employees to be positive. The Company
has experienced no work stoppages.
Competition for technical personnel in the Company's industry is intense.
To date, the Company has been successful in recruiting and retaining qualified
employees, but there is no assurance that it will continue to be successful in
doing so in the future. The Company's future success depends in part on its
continued ability to hire, assimilate and retain qualified personnel.
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<PAGE> 13
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company as of September 1,
1999:
Albert A. Irato, 61: Chairman of the Board of Directors since July 1,
1999; and Vice Chairman, Chief Executive Officer, and President from
October 1992 until June 30, 1999.
George Wallner, 48: President and Chief Executive Officer since July 1,
1999; Chief Technologist since he founded the Company in 1978; and
Chairman of the Board of Directors from 1978 until June 30, 1999.
Paul Wallner, 45: President of Hypercom Network Systems, since 1995.
Jairo Gonzalez, 37: Managing Director, Global Sales and Marketing, since
July 1, 1999; and President of Hypercom International from 1990 to June
30, 1999.
Jonathon Killmer, 58: Executive Vice President, Chief Financial Officer
and Chief Administrative Officer of Hypercom Corporation since January,
1999; Senior Vice President, Chief Financial Officer and Treasurer of
Digi International Inc. from October 1996 to October 1998; Managing
Partner of the Minneapolis/St. Paul Coopers & Lybrand L.L.P. office from
October 1990 to September 1996.
Chris Alexander, 51: President of Hypercom Transaction Systems Group
since July 1, 1999; Chief Operating Officer Hypercom Corporation from
October 1, 1998 to June 30, 1999; and Chief Operating Officer of
Hypercom International from 1993 to September 30, 1998.
Peter J. Stutsman, 46: General Counsel, Corporate Secretary, Senior Vice
President, Legal and Contract Affairs since September 1998, Secretary
and Vice President, Legal and Contract Affairs since September 1997, and
Corporate Secretary since October 1995.
ITEM 2. PROPERTIES
The Company's principal administrative, assembly and warehouse facilities
are located in Phoenix, Arizona, where it owns an approximate 142,000 square
foot building. The Company leases an adjacent 23,800 square foot building for
Hypercom Network Systems. The lease expires August 31, 2011.
The Company leases an approximate 20,000 square foot facility in Sydney,
Australia, and owns an approximate 17,000 square foot facility in Brazil which
are utilized for additional POS manufacturing capacity. The Company also leases
office space in Arizona, Florida, Georgia, Maryland, Missouri, New York, Texas,
Hong Kong, China, Singapore, Sweden, Japan, Chile, Argentina, Venezuela, Mexico,
Russia, Hungary and the United Kingdom, all of which are dedicated primarily to
POS sales and support. The Company believes that its facilities are adequate for
its operations and will be sufficient for the foreseeable future. Reference is
hereby made to Note 13 of the Consolidated Financial Statements on page 42 for
detailed information relating to the Company's lease commitments.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is also subject to claims and litigation
incident to its business. On September 23, 1998, an employee of the Company
filed a lawsuit in the Maricopa County Superior Court against two senior
executives of the Company and the Company alleging sexual misconduct by the
executives and is seeking damages, including punitive damages. The employee also
filed a claim with the Equal Employment Opportunity Commission (EEOC), which was
later dismissed. 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 executives. The
employee is alleging, among other things, that the release is invalid. The court
has scheduled an evidentiary hearing to determine the enforceability of the
parties' settlement agreement for October 1999. Based upon a variety of factors,
the release previously executed by the employee and the Company's
11
<PAGE> 14
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock trades on the New York Stock Exchange ("NYSE")
under the symbol "HYC". The following table sets forth, for the fiscal quarters
indicated, the high and low sales prices for the common stock as reported by the
NYSE.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR 1999
First Quarter.................................... $10.500 $ 4.938
Second Quarter................................... 12.000 4.375
Third Quarter.................................... 13.938 5.313
Fourth Quarter................................... 9.563 5.563
FISCAL YEAR 1998
First Quarter.................................... -- --
Second Quarter................................... 17.313 12.750
Third Quarter.................................... 18.938 11.118
Fourth Quarter................................... 13.818 9.938
</TABLE>
The Company has not paid any cash dividends on its Common Stock. The
Company currently intends to retain its earnings for its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company's ability to pay cash dividends on its common stock is also
limited by certain covenants contained in a loan agreement to which the Company
is a party. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" on page 17.
The approximate number of shareholders of record as of September 16, 1999
was 2,200.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of Hypercom
at the dates and for each of the periods indicated. The selected financial data
should be read in conjunction with the Company's Consolidated Financial
Statements and notes thereto included elsewhere herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Historical consolidated financial data may not be indicative of the Company's
future performance.
13
<PAGE> 16
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenue.................. $ 261,515 $ 257,227 $ 196,742 $ 163,556 $ 146,168
Cost of revenue.............. 141,831 130,475 103,672 92,349 83,016
---------- ---------- ---------- ---------- ----------
Gross margin................. $ 119,684 $ 126,752 $ 93,070 $ 71,207 $ 63,152
========== ========== ========== ========== ==========
Percent of net revenue....... 45.8% 49.3% 47.3% 43.5% 43.2%
Selling, general and
administrative............. $ 74,772 $ 72,506 $ 52,530 $ 44,741 $ 27,687
Research and development..... 30,249 23,495 12,926 8,509 5,422
Non-cash compensation(1)..... -- 10,963 4,784 2,061 698
---------- ---------- ---------- ---------- ----------
$ 105,021 $ 106,964 $ 70,240 $ 55,311 $ 33,807
========== ========== ========== ========== ==========
Income from operations....... $ 14,663 $ 19,788 $ 22,830 $ 15,896 $ 29,345
========== ========== ========== ========== ==========
Net income................... $ 9,173 $ 13,989 $ 15,562 $ 12,289 $ 19,556
========== ========== ========== ========== ==========
Income per share (diluted)... $ 0.27 $ 0.44 $ 0.60 $ 0.33 $ 0.53
Shares used in calculation... 34,428,468 31,829,855 25,753,921 37,105,563 36,601,078
Cash and equivalents......... $ 36,727 $ 55,659 $ 16,318
Working capital.............. 162,152 186,799 61,972
Total assets................. 276,280 259,577 138,741
Short and long term debt..... 11,284 1,797 24,570
Total stockholders' equity... 226,023 220,431 60,894
</TABLE>
- ---------------
(1) Non-cash compensation was charged in connection with stock options granted
to an executive officer. Upon completion of the Company's initial public
offering in November 1997, this form of compensation ceased and no charge
was incurred in the third and fourth quarters of fiscal 1998.
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the operating results expressed as a
percentage of net revenue for the periods indicated and the percentage change in
such operating results between periods. Results for any one or more periods are
not necessarily indicative of future results:
<TABLE>
<CAPTION>
PERIOD TO PERIOD
INCREASE (DECREASE)
PERCENTAGE OF NET REVENUE FISCAL YEAR ENDED JUNE 30, 1999 1998
-------------------------- COMPARED TO
1999 1998 1997 1998 1997
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Net revenue..................................... 100.0% 100.0% 100.0% 1.7% 30.7%
Costs of revenue................................ 54.2 50.7 52.7 8.7 25.9
----- ----- -----
Gross profit.................................... 45.8 49.3 47.3 (5.6) 36.2
Selling, general and administrative............. 28.6 28.2 26.7 3.1 38.0
Research and development........................ 11.6 9.1 6.6 28.7 81.8
Non-cash compensation........................... -- 4.3 2.4 (100.0) 129.2
----- ----- -----
Income from operations.......................... 5.6 7.7 11.6 (25.9) (13.3)
Interest income net of interest expense......... 1.8 0.7 0.1
Foreign currency exchange gain(loss)............ (2.6) (0.7) 0.2
----- ----- -----
Income before income taxes...................... 4.8 7.7 11.9 (36.7) 15.1
Income taxes.................................... 1.3 2.3 4.0
----- ----- -----
Net income...................................... 3.5% 5.4% 7.9% (34.4) (10.1)
===== ===== =====
</TABLE>
Net revenues by geographic region are presented in the following table as a
percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30,
--------------------
1999 1998 1997
Revenues by Region ---- ---- ----
<S> <C> <C> <C>
United States............................................. 54% 43% 44%
Latin America (includes Mexico)........................... 23 29 24
Asia/Pacific.............................................. 13 22 30
Europe.................................................... 10 6 2
--- --- ---
Totals............................................ 100% 100% 100%
</TABLE>
Comparison of Fiscal Years Ended June 30, 1999 and 1998
Net revenue in fiscal 1999 increased $4.3 million or 1.7% primarily due to
the acquisition of the Horizon Group, Inc. ("Horizon") in fiscal 1999. The
increase in revenue reflected growth in the United States and Europe where the
Company has been establishing new sales and service operations. Revenues in Asia
and Latin America have slowed due to regional economic conditions and currency
devaluation.
Gross profit as a percentage of net revenue decreased from 49.3% in fiscal
1998 to 45.8% in fiscal 1999. This decrease was due in part to the impact of
Horizon which is a national distributor of equipment for Hypercom and other POS
manufacturers. Horizon historically operates at margins significantly less
(12%-15%) than the Company's historical gross profit margin. In addition, gross
profit also declined due to reduced selling prices as a result of increased
worldwide competitive factors as well as declining economic conditions in some
foreign countries.
Selling, general and administrative expense increased $2.3 million, or
3.1%, to $74.8 million in fiscal 1999 as the Company continued to invest in its
worldwide operations, including expanding its headquarter facilities
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<PAGE> 18
in Phoenix, Arizona as well as a new distribution center, opening new
international sales and support offices, and expanding and improving its
worldwide administrative, financial, and information technology related
infrastructure.
Research and development expense increased $6.7 million, or 28.7%, to $30.2
million in fiscal 1999. The increase was primarily for POS product development
as the Company prepared to introduce in fiscal 1999 its new ICE terminal
products; its FastPOS 9600 bps terminals; and Ascendent client/server software.
Beginning in the third quarter of fiscal 1999, the Company began capitalizing
costs in relation to the development of specific software enhancements related
to its Ascendent software products. The amount capitalized in fiscal 1999 was
approximately $2.0 million.
Non-cash compensation was previously charged in connection with a grant of
stock options which included a stock repurchase arrangement. The Company
recorded a non-cash compensation charge of $11.0 million in the first half of
fiscal 1998 and incurred no further charge during the year as the repurchase
arrangement terminated upon the closing of the Company's initial public offering
in November, 1997. There was no non-cash compensation charge for fiscal 1999.
Income from operations decreased $5.1 million, or 25.9%, to $14.7 million
in fiscal 1999 due primarily to reduced gross margins, higher selling, general
and administrative expenses and higher research and development expense.
Net interest income for fiscal 1999 increased $2.8 million to $4.6 million
from $1.8 million in fiscal 1998. Interest income consisted primarily of returns
on short and long-term investments net of interest expense incurred related to
short term bank borrowings.
Foreign currency losses resulted from operating in volatile markets,
principally Brazil. During fiscal 1999 the Company recorded a $4.4 million loss
related to the net monetary asset exposure in Brazil. The Company has entered
into hedging strategies to mitigate the impact of future foreign currency
fluctuations.
The provisions for federal, state, and foreign income taxes were $3.4
million and $5.9 million for the fiscal years ended June 30, 1999 and 1998,
respectively. The Company's effective rate of tax was 27% and 30% for the fiscal
years ended June 30, 1999 and 1998. The Company tax rate is typically lower than
the US federal statutory rate due to:
- Research and experimentation credits in Australia and the US.
- Sales in foreign jurisdictions with lower tax rates.
- The use of foreign sales corporations offering lower taxes on certain
international sales.
Comparison of Fiscal Years Ended June 30, 1998 and 1997
Net revenue in fiscal 1998 increased $60.5 million or 30.7% due to
increased POS Systems revenue of $58.1 million. The increase in POS Systems
revenue reflected strong growth in Europe where the Company established new
sales and service operations. Latin America also experienced strong growth and
benefited from a new manufacturing facility in Sao Paulo, Brazil. Growth in Asia
slowed due to local currency devaluation. Network Systems revenue growth was
also slowed due to economic uncertainties in Asia and increased competition in
its branch access networking equipment markets.
Gross profit as a percentage of net revenue increased to 49.3% in fiscal
1998 from 47.3% in fiscal 1997. This increase was due to lower costs realized
from a transfer of the Australian manufacturing operations to manufacturing in
China and to the Company's facilities in Phoenix, Arizona.
Selling, general and administrative expense increased $20.0 million, or
38.0%, to $72.5 million in fiscal 1998. $6.6 million of this increase was the
continued expansion of selling and administrative activities in Network Systems;
$2.7 million of this increase was related to the introduction of the Company's
Ascendent POS client/server software products; and $2.5 million of the increase
was for the establishment of a new POS sales and service infrastructure in
Europe. The remaining increases related to normal growth caused by increased
business with a $6.3 million increase for ongoing expansion of sales operations
in the United States,
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<PAGE> 19
Latin America and Asia and $1.9 million increase in the Company's corporate,
general and administrative areas.
Research and development expense increased $10.6 million, or 81.8%, to
$23.5 million in fiscal 1998, of which $9.2 million of the increase was for POS
product development as the Company prepared to introduce in fiscal 1999 its new
ICE terminal products; its FastPOS 9600 bps terminals; and Ascendent
client/server software.
Non-cash compensation was charged in connection with a grant of stock
options which included a stock repurchase arrangement. The Company recorded a
non-cash compensation charge of $11.0 million in the first half of fiscal 1998
and incurred no further charge during the year as the repurchase arrangement
terminated upon the closing of the Company's initial public offering in
November, 1997.
Income from operations decreased $3.0 million to $19.8 million in fiscal
1998 due primarily to an increase of $6.2 million in non-cash compensation and
higher selling, general and administrative expense and higher research and
development expense
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its 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.
The Company's working capital was $162.1 million as of June 30, 1999
compared to $186.8 million at June 30, 1998. The decrease in working capital in
1999 primarily relates to the acquisition of the assets of The Horizon Group
Inc., JTS ChequeOut Solutions, Inc., and ICL Sverige AB during the fiscal year,
as well as a shift in investments from short to long-term.
Capital expenditures totaled $12.8 million and $10.0 million in fiscal
years 1999 and 1998, respectively, while depreciation was $5.5 million in fiscal
1999 and $4.1 million in fiscal 1998.
The Company believes that its current funds 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. The balance outstanding was
zero at June 30, 1999. The loan agreement contains various restrictions on the
Company, including the prohibitions 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.
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
requires recognition of all derivatives as either assets or liabilities on the
balance sheet and measurement of those instruments at fair value. Changes in
fair value of derivatives are recorded each period in current earnings or other
comprehensive income (loss). Proper accounting for changes in fair value of
derivatives held, is dependent on whether the derivative transaction qualifies
as an accounting hedge and on the classification of the hedge transaction. The
statement was originally required to be adopted and is effective for all fiscal
years beginning after June 15, 2000. The Company is evaluating the effect
Statement 133 will have on its financial reporting and disclosures as well as on
its derivative and hedging activities.
In December 1998, SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions was issued. This SOP modified
SOP 97-2 to permit recognition of revenue for the delivered elements of a
contract when the vendor-specific objective evidence of fair value exists for
the
17
<PAGE> 20
undelivered elements of the contract. The SOP will be effective for transactions
that are entered into in the fiscal years beginning after March 15, 1999.
Hypercom is currently evaluating this SOP's impact on its financial statements.
In April 1998, SOP 98-5, Reporting on the Costs of Start-up Activities, was
issued and provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. This SOP is effective for fiscal years
beginning after December 15, 1998. The adoption of this standard will have no
material effect on the Company's financial reporting and disclosures.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, relating to the treatment of costs incurred to develop software
for internal use. This SOP is effective for the financial statements for fiscal
years beginning after December 15, 1998, and should be applied to internal-use
computer software costs incurred in those fiscal years for all projects,
including those projects in progress upon initial application of this SOP. The
Company will adopt the SOP in the first quarter of Fiscal Year 2000. The Company
is evaluating the effect this SOP will have on the Company's financial reporting
and disclosures.
YEAR 2000 ISSUES
Hypercom began a comprehensive project in 1996 to prepare its internal
computer systems for the year 2000. Hypercom believes it's 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.
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, the Company disclaims financial liability 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.
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
18
<PAGE> 21
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's could be materially adversely
affected.
BACKLOG
As of June 30, 1999, the Company had a backlog of $99 million. Backlog was
$77 million at June 30, 1998. The Company has taken steps to reduce terminal
manufacturing lead time which reduces the customers' required lead time. These
shorter lead times eliminate the prior requirements for customers to book orders
covering longer periods.
The Company includes in its backlog all revenue specified in signed
contracts and purchase 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.
SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, including the Notes to the Consolidated
Financial Statements and in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contains forward looking
statements. Additional written or oral forward looking statements may be made by
the Company from time to time in filings with the Securities and Exchange
Commission, in its press releases, or otherwise. The words "believe," "expect,"
"anticipate," "intends," "forecast," "project," and similar expressions identify
forward looking statements. Such statements may include, but not be limited to,
the anticipated outcome of contingent events, including litigation, projections
of revenues, income or loss, capital expenditures, plans for future operations,
growth and acquisitions, financing needs or plans and the availability of
financing, and plans relating to services of the Company, as well as assumptions
relating to the foregoing. Such forward looking statements are within the
meaning of that 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 with respect
to future events and financial performance and speak only as of the date the
statements are made. Such 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 Annual Report, including the Notes to the Consolidated Financial Statements
and in this "Management's Discussion and Analysis of Financial Condition and
Results of Operations," describe factors, among others, that could contribute to
or cause such differences. Additional factors that could cause actual results to
differ materially from those expressed in such forward looking statements are
set forth in Exhibit 99.1 which is attached hereto and incorporated by reference
into this Annual Report on Form 10-K. In addition, new factors emerge from time
to time and it is not possible for management to predict all of such factors,
nor can it assess the impact of each such factor on the business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from forward looking statements. The Company undertakes no
obligation to publicly update or review any forward looking statements, whether
as a result of new information, future events, or otherwise.
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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
19
<PAGE> 22
transactions were entered into during the fiscal year ended June 30, 1999, the
Company has since 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 "Cautionary
Statement Regarding Forward Looking Statements and Risk Factors" set forth in
Exhibit 99.1 attached hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X
are included in this Annual Report on Form 10-K commencing on page 25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
20
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors: The information set forth in the Company's
1999 Proxy Statement under the caption "Board of Directors" is
incorporated herein by reference.
(b) Identification of Executive Officers: See Part I of this Form 10-K.
(c) Compliance with Section 16(a) of the Securities Exchange Act of 1934:
The information set forth in the Company's 1999 Proxy Statement under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance"
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the Company's 1999 Proxy Statement under the
caption "Executive Compensation" is incorporated herein by reference. The
sections captioned "Report of the Compensation Committee on Executive
Compensation" and "Stock Price Performance Graph" in the Company's 1999 Proxy
Statement are not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the Company's 1999 Proxy Statement under the
caption "Security Ownership of Principal Stockholders and Management" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Company's 1999 Proxy Statement under the
caption "Certain Transactions and Relationships" is incorporated herein by
reference.
21
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<S> <C>
1. Consolidated Financial Statements of Hypercom Corporation
Report of Independent Accountants...................... 25
Consolidated Balance Sheets as of June 30, 1999 and
1998.................................................. 26
Consolidated Statements of Income for the Years Ending
June 30, 1999, 1998 and 1997.......................... 27
Consolidated Statements of Stockholders' Equity for the
Years Ending June 30, 1999, 1998 and 1997............. 28
Consolidated Statements of Cash Flows for the Years
Ending June 30, 1999, 1998 and 1997................... 29
Notes to Consolidated Financial Statements............. 30
2. Financial Statement Schedule
Report of Independent Accountants on Financial
Statement Schedule.................................... 48
Financial Statement Schedule........................... 49
</TABLE>
(b) The Company filed a Form 8-K on April 27, 1999, regarding the change in
the Company's fiscal year end from June 30 to December 31.
(c) The Index to Exhibits and required Exhibits are included following the
Financial Statement Schedule beginning on Page 49 of this report.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 15, 1999
Hypercom Corporation
By /s/ GEORGE WALLNER
------------------------------------
George Wallner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on September 15, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
(1) Principal Executive, Financial and Accounting Officers
/s/ GEORGE WALLNER President, Chief Executive Officer and
- ----------------------------------------------------- Director
George Wallner
/s/ JONATHON E. KILLMER Executive Vice President, Chief Financial
- ----------------------------------------------------- Officer
Jonathon E. Killmer and Chief Administrative Officer
(2) Directors
/s/ ALBERT IRATO Chairman of the Board
- -----------------------------------------------------
Albert Irato
/s/ PAUL WALLNER Director
- -----------------------------------------------------
Paul Wallner
/s/ JAIRO GONZALEZ Director
- -----------------------------------------------------
Jairo Gonzalez
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ WILLIAM E. FISHER Director
- -----------------------------------------------------
William E. Fisher
/s/ PETER J. HART Director
- -----------------------------------------------------
Peter J. Hart
/s/ JOCK PATTON Director
- -----------------------------------------------------
Jock Patton
</TABLE>
24
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Hypercom Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity, and of cash
flows present fairly, in all material respects, the financial position of
Hypercom Corporation and its subsidiaries at June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Phoenix, Arizona
July 20, 1999
25
<PAGE> 28
HYPERCOM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------
(DOLLARS IN THOUSANDS) 1999 1998
---------------------- -------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 36,727 $ 55,659
Marketable securities, at market.......................... 26,731 42,641
Accounts receivable, net of allowance for doubtful
accounts of $4,470 and $3,729.......................... 52,589 43,989
Inventories, net.......................................... 57,482 60,539
Deferred income taxes..................................... 11,430 10,991
Prepaid taxes............................................. 4,762 2,893
Prepaid expenses and other current assets................. 11,894 7,173
-------- --------
Total current assets........................................ 201,615 223,885
Property, plant and equipment, net........................ 30,756 23,570
Advances to related parties............................... -- 258
Long-term investments..................................... 21,344 9,931
Goodwill, net of amortization of $361..................... 6,062 --
Intangible assets, net of amortization of $361............ 4,886 --
Other assets.............................................. 11,617 1,933
-------- --------
Total assets................................................ $276,280 $259,577
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 18,316 $ 17,134
Accrued liabilities....................................... 14,599 16,537
Deferred revenue.......................................... 3,824 608
Income taxes payable...................................... 2,234 2,209
Current portion of long-term obligations.................. 490 598
-------- --------
Total current liabilities................................... 39,463 37,086
Deferred income taxes..................................... -- 861
Long term obligations..................................... 10,794 1,199
-------- --------
Total liabilities........................................... 50,257 39,146
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................................ 146,011 145,601
Receivables from stockholders............................. (1,498) (1,498)
Retained earnings......................................... 85,488 76,315
-------- --------
230,014 220,431
Treasury stock (at cost).................................. (3,991) --
-------- --------
Total stockholders' equity.................................. 226,023 220,431
-------- --------
Total liabilities and stockholders' equity.................. $276,280 $259,577
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 29
HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -----------------------------------------
1999 1998 1997
-------- ------------------- --------
<S> <C> <C> <C>
Net revenue............................................. $261,515 $257,227 $196,742
Costs and expenses:
Costs of revenue...................................... 141,831 130,475 103,672
Research and development.............................. 30,249 23,495 12,926
Selling, general and administrative................... 74,772 72,506 52,530
Non-cash compensation................................. -- 10,963 4,784
-------- -------- --------
Total costs and expenses................................ 246,852 237,439 173,912
-------- -------- --------
Income from operations.................................. 14,663 19,788 22,830
Interest and other income............................... 5,888 4,435 2,248
Interest expense........................................ (1,228) (2,155) (1,718)
Interest expense -- related party....................... -- (446) (422)
Foreign currency (loss) gain............................ (6,757) (1,760) 445
-------- -------- --------
Income before income taxes.............................. 12,566 19,862 23,383
Provision for income taxes.............................. (3,393) (5,873) (7,821)
-------- -------- --------
Net income.............................................. $ 9,173 $ 13,989 $ 15,562
======== ======== ========
Net income per share:
Basic earnings per share.............................. $ 0.28 $ 0.46 $ 0.62
Weighted average basic common shares.................. 33,148 30,215 25,000
Diluted earnings per share............................ $ 0.27 $ 0.44 $ 0.60
Weighted average diluted common shares................ 34,428 31,830 25,754
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
27
<PAGE> 30
HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLES TOTAL
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) -------------------- PAID-IN FROM RETAINED TREASURY STOCKHOLDER
SHARES BALANCE CAPITAL STOCKHOLDERS' EARNINGS STOCK EQUITY
---------- ------- ---------- ------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1996............ 25,000,000 $ 4 $ 425 $(1,961) $46,764 $ -- $ 45,232
Contributions from stockholders...... 540 540
Advances to stockholders............. (440) (440)
Net income........................... 15,562 15,562
---------- --- -------- ------- ------- ------- --------
Balance as of June 30, 1997............ 25,000,000 4 965 (2,401) 62,326 -- 60,894
Issuance of common stock............. 8,500,000 9 127,491 127,500
Costs of public offering............. (1,768) (1,768)
Reclassification of redeemable common
stock............................. 18,506 18,506
Exercise of options.................. 38,625 247 247
Payment of advances to stockholders.. 2,276 2,276
Advances to stockholders............. (1,373) (1,373)
Acquisition of investee.............. 10,000 160 160
Net income........................... 13,989 13,989
---------- --- -------- ------- ------- ------- --------
Balance as of June 30, 1998............ 33,548,625 13 145,601 (1,498) 76,315 -- 220,431
Purchase of treasury stock........... (587,700) (5,396) (5,396)
Issuance of common stock............. 45,541 410 410
Issuance of treasury stock........... 189,301 1,369 1,369
Exercise of options.................. 3,750 36 36
Net income........................... 9,173 9,173
---------- --- -------- ------- ------- ------- --------
Balance as of June 30, 1999............ 33,199,517 $13 $146,011 $(1,498) $85,488 $(3,991) $226,023
========== === ======== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
28
<PAGE> 31
HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
(DOLLARS IN THOUSANDS) --------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 9,173 $ 13,989 $ 15,562
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-cash compensation expense........................... -- 10,963 4,784
Depreciation/amortization............................... 6,566 4,164 2,888
Bad debt expense........................................ 1,386 2,972 1,427
Provision for excess and obsolete inventory............. 2,925 2,510 994
Foreign currency (gain) loss............................ 6,757 1,760 (445)
Deferred income taxes................................... (1,446) (5,153) (2,948)
Other................................................... -- 134 (231)
(Increase) decrease in:
Accounts receivable..................................... (9,837) (16,102) (7,316)
Inventories............................................. 4,940 (6,617) (15,290)
Prepaid income taxes.................................... (1,932) 3,281 (6,127)
Prepaid expenses and other current assets............... (4,567) (1,351) (2,715)
Other assets............................................ (6,767) -- --
Increase (decrease) in:
Accounts payable........................................ (6,647) (5,272) 2,208
Accrued liabilities..................................... (2,421) 2,625 5,930
Deferred revenue........................................ 3,216 (7,782) 6,707
Income taxes payable.................................... 25 150 (2,163)
Other liabilities....................................... -- 0 (70)
--------- --------- --------
Net cash provided by operating activities................... 1,371 271 3,195
--------- --------- --------
Cash flow used in investing activities:
Advances to related parties............................... -- -- (518)
Repayments from related parties........................... 294 -- 641
Notes receivable.......................................... (3,900) -- --
Payments received on notes receivables.................... 723 -- --
Acquisition of controlling interest in subsidiaries, (net
of cash acquired)....................................... (9,279) (500) --
Acquisition of other assets............................... (2,068) -- --
Proceeds from disposal of property, plant and equipment... 438 120 1,260
Purchase of property, plant and equipment................. (12,768) (10,023) (6,930)
Purchase of investments................................... (247,399) (242,164) (546)
Proceeds from maturity of investments..................... 252,000 189,559 61
--------- --------- --------
Net cash used in investing activities....................... (21,959) (63,008) (6,032)
--------- --------- --------
Cash flow provided by financing activities:
Proceeds of bank notes payable and other debt
instruments............................................. 72,837 65,795 76,746
Repayment of bank notes payable and other debt
instruments............................................. (66,465) (89,266) (72,761)
Advances to stockholders.................................. -- (1,373) (530)
Payment of advances to stockholders....................... -- 2,276 --
Proceeds from issuance of common stock.................... 746 127,747 --
Purchase of treasury stock................................ (5,396) -- --
Contributions from stockholders........................... -- -- 540
Stock offering costs...................................... -- (1,768) --
--------- --------- --------
Net cash provided by financing activities................... 1,722 103,411 3,995
--------- --------- --------
Effect of exchange rate changes............................. (66) (1,333) (953)
--------- --------- --------
Net increase (decrease) in cash............................. (18,932) 39,341 205
Cash and equivalents, beginning of period................... 55,659 16,318 16,113
--------- --------- --------
Cash and equivalents, end of period......................... $ 36,727 $ 55,659 $ 16,318
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Hypercom Corporation (with its subsidiaries, the "Company") is a worldwide
developer, manufacturer, and supplier of point-of-sale ("POS") payment systems
and enterprise networking products.
The U.S. operations, headquartered in Phoenix, Arizona, primarily consist
of product development, manufacturing, sales and marketing, distribution and
customer service. The European operations consist of product distribution
through the Company's sales and support offices located in the United Kingdom,
Russia, Sweden, and Hungary. Latin American operations engage primarily in
product distribution through the Company's subsidiaries in Mexico, Brazil,
Chile, Argentina and Venezuela; however, certain manufacturing operations exist
in Brazil. The Company's primary manufacturing is performed in China and is
coordinated by the Hong Kong office. The Asia/Pacific operations are also
engaged in product development and product distribution through the Company's
subsidiaries or business units in Singapore, Hong Kong, Japan and Australia.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements are comprised of the accounts of
Hypercom Corporation and all subsidiaries in which a controlling interest is
held. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency
The foreign subsidiaries use the U.S. dollar as the functional currency.
Their local currency financial statements are remeasured as follows; monetary
assets and liabilities at year-end exchange rates, and inventories, property and
nonmonetary assets and liabilities at historical rates. During the years ended
June 30, 1999, 1998 and 1997, the Company recorded net gains (losses) on
remeasurement of approximately ($5,275,000), ($2,084,000) and $630,000,
respectively. For the same periods, the Company recorded net gains (losses) on
transactions denominated in foreign currencies of approximately ($1,482,000),
$324,000 and ($185,000), respectively. These amounts are included in the results
of operations.
Cash and Cash Equivalents
The Company considers all investment instruments purchased with an original
maturity of three months or less to be cash equivalents.
Marketable Securities and Long-Term Investments
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase. Securities for which the
Company does not have the intent of or ability to hold to maturity are
classified as available for sale and are carried at fair value, with the
unrealized holding gain and losses, net of tax, reported in a separate component
of stockholders' equity. Cost is determined based on specific identification.
Securities classified as available for sale include both securities due within
one year and securities with maturity dates beyond one year. Securities with a
maturity date within one year are classified as
30
<PAGE> 33
Marketable Securities as a part of Current Assets. Securities with a maturity
date beyond one year are classified as long-term Investments.
Fair Value of Financial Instruments
The Company values financial instruments as required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments ("SFAS No. 107"). The
carrying amounts of cash and cash equivalents and bank notes payable approximate
fair value due to the short maturity of those instruments. The fair value of
marketable securities and long-term investments is determined based on quoted
market prices. The fair value of long-term obligations is estimated by
discounting the future cash flows required under the terms of each respective
debt agreement by current market rates for the same or similar issues of debt
with similar remaining maturities. The fair value of financial hedge instruments
are based on quotes from brokers using market prices for those or similar
instruments. The Corporation does not acquire, hold, or issue derivative
financial instruments for trading purposes. Derivative financial instruments are
used to manage foreign exchange and interest rate risks that arise out of the
Company's core business activities.
Inventories
Inventories are stated at the lower of standard cost or market. Standard
costs approximate first-in, first-out ("FIFO") costs.
Capitalized Software
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 historical product
development process was such that technological feasibility was established upon
completion of a working model. Costs incurred between completion of the working
model and the point at which the product was ready for initial shipment were not
historically significant. Accordingly, prior to fiscal year 1999 all software
development costs were expensed as incurred and included in research and
development costs. However, due to a change in certain software development
documentation during the fiscal year ended June 30, 1999, certain software
development costs required capitalization. The amount that was capitalized in
the year ended June 30, 1999, was approximately $2.0 million.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided on straight-line and accelerated methods over the
following useful lives:
<TABLE>
<S> <C>
Building....................................... 31.5 years
Machinery and equipment........................ 5-7 years
Furniture and fixtures......................... 5-7 years
Vehicles....................................... 5 years
Leasehold improvements......................... 2.5-15 years
</TABLE>
For assets sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income for the period.
Goodwill
Goodwill represents the excess of purchase price and related costs over the
fair value assigned to the net tangible and identifiable intangible assets of
businesses acquired, which is being amortized on a straight-line basis over
periods ranging from 5 to 20 years.
31
<PAGE> 34
Intangible assets
Intangible assets represent capitalized software costs, acquired customer
lists, work force and covenants not to compete, which are being amortized on a
straight-line basis over periods ranging from 5 to 7.5 years.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax laws (including rates) is recognized
in income in the period that includes the enactment date.
The Company does not provide for federal income taxes on the undistributed
earnings of its international subsidiaries because earnings are reinvested and,
in the opinion of management, will continue to be reinvested indefinitely.
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.
The Company has a contract in which it provides a warranty to the customer
during the third party installation period. If the product does not function
properly during this period, the Company is obligated to repair it. At
initiation of this contract, the Company recognized revenue at the end of the
installation period due to its lack of history with the customer and contract,
and resulting inability to estimate warranty costs. During the year ended June
30, 1999, the Company began recognizing revenue upon shipment for this contract
based on the history provided by a large number of sales and its resulting
ability to accurately estimate such warranty costs. During the year, revenues
recognized under this contract totaled $11.7 million, which included incremental
revenues of $4.4 million, resulting from recognition of revenue upon shipment.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS No. 123") which defines a fair value based method of
accounting for employee stock options or similar equity instruments. However, it
also allows an entity to continue to account for these plans according to
Accounting Principles Board Opinion No. 25 ("APB 25"), provided pro forma
disclosures of net income are made as if the fair value based method of
accounting, defined by SFAS No. 123, had been applied. The Company has elected
to continue to measure compensation expense related to employee stock purchase
options using APB 25, and has provided the required pro forma disclosures.
Net Income Per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS No. 128") and the Securities and
Exchange Commission Staff Accounting Bulletin 98 ("SAB 98") effective December
31, 1997. SFAS No. 128 requires the presentation of basic and diluted earnings
per share (EPS). 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 does not affect the Company's EPS calculations. All prior period
earnings per share amounts have been restated to comply with the SFAS No. 128.
32
<PAGE> 35
In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED EPS:
Net income............................................ $ 9,173 $13,989 $15,562
======= ======= =======
Denominator -- Basic EPS:
Weighted average common shares outstanding.......... 33,148 30,215 25,000
======= ======= =======
Basic earnings per share.............................. $0.28 $0.46 $0.62
======= ======= =======
DENOMINATOR -- DILUTED EPS:
Denominator -- Basic EPS............................ 33,148 30,215 25,000
Effect of Dilutive Securities -- Common stock
options.......................................... 1,280 1,615 754
------- ------- -------
Weighted average diluted common shares outstanding.... 34,428 31,830 25,754
======= ======= =======
Diluted earnings per share............................ $0.27 $0.44 $0.60
======= ======= =======
</TABLE>
Treasury Stock
In June, 1998, the Board of Directors authorized the repurchase, at
management's discretion, of up to 1,000,000 shares of the Company's stock.
Shares repurchased under this authorization were used to offset dilution caused
by the Employees Stock Purchase Plan and Stock Option Plan. The Company's
repurchases of shares of common stock are recorded as treasury stock and result
in a reduction of stockholders equity. When treasury shares are issued, the
Company uses a first-in, first-out method and any excess of repurchase costs
over the reissue price is treated as a reduction of retained earnings.
Self-Insurance
The Company self-insures, with certain stop loss insurance coverages, for
short-term disability, life and employee health care. Claims expense is recorded
in the year of occurrence through the accrual of claim reserves based on
estimates of ultimate claims costs. Claims incurred but not yet reported are
estimated and reserved for based on historical claims data.
Operating Segments
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information ("SFAS No. 131"), superseding SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise ("SFAS No. 14"). SFAS
No. 131 establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial statements. It also requires disclosures about products and
services, geographic areas and major customers. The Company adopted SFAS No. 131
for the fiscal year ended June 30, 1997, and has provided the required
disclosures.
The accounting policies of the reportable segments are the same as those
used for the consolidated entity. Performance is evaluated based on profit or
loss from operations. Intersegment sales and transfers are accounted for based
on defined transfer prices.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
33
<PAGE> 36
New Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
requires recognition of all derivatives as either assets or liabilities on the
balance sheet and measurement of those instruments at fair value. Changes in
fair value of derivatives are recorded each period in current earnings or other
comprehensive income (loss). The statement was originally required to be adopted
and is effective for all fiscal years beginning after June 15, 2000. The Company
is evaluating the effect Statement 133 will have on its financial reporting and
disclosures as well as on its derivative and hedging activities.
In December 1998, SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions was issued. This SOP modified
SOP 97-2 to permit recognition of revenue for the delivered elements of a
contract when the vendor-specific objective evidence of fair value exists for
the undelivered elements of the contract. The SOP will be effective for
transactions that are entered into in the fiscal years beginning after March 15,
1999. Hypercom is currently evaluating this SOP's impact on it financial
statements.
In April 1998, SOP 98-5, Reporting on the Costs of Start-up Activities, was
issued and provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. This SOP is effective for fiscal years
beginning after December 15, 1998. The adoption of this standard will have no
material effect on the Company's financial reporting and disclosures.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, relating to the treatment of costs incurred to develop software
for internal use. This SOP is effective for the financial statements for fiscal
years beginning after December 15, 1998, and should be applied to internal-use
computer software costs incurred in those fiscal years for all projects,
including those projects in progress upon initial application of this SOP. The
Company is evaluating the effect this SOP will have on the Company's financial
reporting and disclosures.
3. CONCENTRATIONS OF CREDIT AND OTHER RISKS:
Financial Instruments
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, accounts receivable,
marketable securities, and long-term investments.
The Company's cash and cash equivalents are in high quality securities
placed with major international banks and financial institutions. The Company,
in the normal course of business, maintains balances in excess of the Federal
Deposit Insurance Corporation's insurance limit. The balance in excess of the
insurance limit at June 30, 1999 and 1998 was approximately $1.5 million and
$5.2 million, respectively. The Company also maintains balances in foreign banks
that are used for current operations of subsidiaries located abroad. Foreign
deposits that are uninsured amounted to approximately $12.5 million and $8.3
million as of June 30, 1999 and 1998, respectively.
The Company's accounts receivable results primarily from credit sales to a
broad customer base, both nationally and internationally. The Company routinely
assesses the financial strength of its customers, requiring letters of credit
from certain foreign customers, and provides an allowance for doubtful accounts
as necessary.
Inventories
Most components used in the Company's systems are purchased from outside
sources. Certain components are purchased from single suppliers. The failure of
any such supplier to meet its commitment on schedule could have a material
adverse effect on the Company's business, operating results and financial
condition. If a sole-source supplier were to go out of business or otherwise
become unable to meet its supply
34
<PAGE> 37
commitments, the process of locating and qualifying alternate sources could
require up to several months, during which time the Company's production could
be delayed. Such delays could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company estimates inventory provisions for potentially excess and
obsolete inventory based on forecasted demand. Actual demand may differ from
such anticipated demand and may have a material adverse effect on inventory
valuation.
International Operations
The Company's international business is an important contributor to the
Company's net revenue and profits. However, the majority of the Company's
international sales are denominated in the U.S. dollar, and an increase in the
value of the U.S. dollar relative to foreign currencies could make products sold
internationally less competitive. The operating expenses of the Company's
overseas offices are paid in local currencies and are subject to the effects of
fluctuations in foreign currency exchange rates.
The Company conducts manufacturing operations in Brazil, Australia, and
China. Foreign manufacturing is subject to certain risks, including the
imposition of tariffs and import and export controls, together with changes in
governmental policies. The occurrence of any of these events could have a
material adverse effect on the Company's business, operating results and
financial condition.
As of June 30, 1999, the Company maintained significant accounts receivable
balances in the Asia Pacific region, which are subject to the economic risks
inherent to that region.
4. MARKETABLE SECURITIES:
As of June 30, 1999 and 1998, the difference between amortized cost and
fair market value of the Company's marketable securities and long-term
investments was not material. Accordingly, the Company has not disclosed
unrealized gains and losses. The municipal bonds and corporate notes have
maturities that range from three months to two years. As of June 30, 1999 and
1998, marketable securities consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Municipal bonds and government securities................ $ 8,053 $34,201
Corporate bonds.......................................... 8,443 6,671
Commercial paper......................................... 10,235 --
Mutual funds............................................. -- 1,769
------- -------
Total marketable securities......................... $26,731 $42,641
======= =======
Municipal bonds and government securities................ $13,070 $ 3,740
Corporate bonds.......................................... 8,274 6,191
------- -------
Total long-term investments......................... $21,344 $ 9,931
======= =======
</TABLE>
35
<PAGE> 38
5. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of carrying amounts and fair values as of June 30, 1999 and 1998
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents............... $36,727 $36,727 $55,659 $55,659
Marketable securities................... 26,731 26,731 42,641 42,641
Long-term investments................... 21,344 21,344 9,931 9,931
Financial Liabilities:
Long-term obligations................... 11,284 11,284 1,797 1,822
</TABLE>
6. INVENTORIES:
Inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Purchased parts.......................................... $20,308 $18,710
Work in process.......................................... 5,249 11,388
Finished goods........................................... 31,925 30,441
------- -------
$57,482 $60,539
======= =======
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Land and improvements................................... $ 4,664 $ 4,264
Building................................................ 10,791 6,027
Machinery and equipment................................. 22,721 17,022
Furniture and fixtures.................................. 4,224 2,826
Vehicles................................................ 1,142 1,096
Leasehold improvements.................................. 1,710 1,617
-------- -------
45,252 32,852
Less accumulated depreciation........................... (14,496) (9,282)
-------- -------
$ 30,756 $23,570
======== =======
</TABLE>
36
<PAGE> 39
8. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1999 1998
-------- ------
<S> <C> <C>
Floating Rate Option note payable to Bank One, Arizona;
payable in semi-annual installments plus interest at a
variable rate, due April 1, 2019; collateralized by
unconditional, irrevocable, direct pay letter of
credit. ................................................ $10,220 $ --
Capital leases............................................ 658 825
Note payable to Bank One, Arizona; interest at 8.92%; due
January 2001; collateralized by deed of trust on land
and building. Repaid in fiscal year 1999. .............. -- 972
Other..................................................... 406 --
------- ------
11,284 1,797
Current portion of long-term obligations.................. (490) (598)
------- ------
$10,794 $1,199
======= ======
</TABLE>
In connection with the floating rate option note, the letter of credit is
subject to renewal on April 1, 2006. If the letter of credit is not renewed, the
entire remaining principal balance will become due and payable. The letter of
credit is collateralized by land and buildings. The Company is required to make
increasing monthly deposits of $18,490 up to $81,752 over the life of the note
into a sinking fund to provide periodic repayment of the notes. The Company has
entered into an interest rate swap agreement to fix the interest rate at 7.895%.
The interest rate swap agreement matures at the time the related note matures.
The Corporation is exposed to credit loss in the event of non-performance by the
other parties to the interest rate swap agreement. However, the Corporation does
not anticipate nonperformance by the counterparties.
During fiscal 1999, the Company entered into a $10.0 million revolving line
of credit agreement with Bank One, Arizona. Under the terms of the agreement,
the Company may borrow up to an amount equal to 80% of its accounts receivable
under ninety days past due and 35% of its raw material (purchased parts) and
finished goods inventory. There was no outstanding balance at June 30, 1999.
The loan agreements relating to the floating rate option notes and line of
credit with Bank One, Arizona, NA impose various restrictions on the Company,
including the prohibitions 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 agreements contain certain financial covenants, including a minimum
current ratio, minimum working capital, minimum tangible net worth, and minimum
owner's equity and debt coverage ratios.
The aggregate principal payments due on long-term obligations are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- --------------------
<S> <C>
2000............................................... $ 490
2001............................................... 779
2002............................................... 524
2003............................................... 297
2004............................................... 314
Thereafter......................................... 8,880
-------
$11,284
=======
</TABLE>
37
<PAGE> 40
9. INCOME TAXES:
Income before income taxes consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes:
United States............................... $13,702 $21,149 $13,621
Foreign..................................... (1,136) (1,287) 9,762
------- ------- -------
$12,566 $19,862 $23,383
======= ======= =======
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets, current:
Inventory valuation and reserves....................... $ 2,471 $ 2,948
Compensation accruals.................................. 7,437 7,268
Allowance for doubtful accounts........................ 662 --
Other.................................................. 860 775
-------- -------
Deferred tax assets, current........................ $ 11,430 $10,991
======== =======
Deferred tax assets (liabilities), non-current:
Tax loss carry forwards................................ $ 2,384 $ 1,004
Property, plant and equipment.......................... (1,035) (747)
Other.................................................. (1,203) (1,118)
-------- -------
Net deferred tax assets (liabilities), non-current....... $ 146 $ (861)
======== =======
</TABLE>
The components of income tax expense are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 3,584 $ 8,473 $ 6,904
State............................................... 277 1,239 1,227
Foreign............................................. 978 1,314 2,638
------- ------- -------
4,839 11,026 10,769
Deferred:
Federal............................................. (35) (3,810) (2,601)
State............................................... (5) (653) (446)
Foreign............................................. (1,406) (690) 99
------- ------- -------
(1,446) (5,153) (2,948)
------- ------- -------
$ 3,393 $ 5,873 $ 7,821
======= ======= =======
</TABLE>
38
<PAGE> 41
Consolidated income tax expense differed from the amount computed by
applying the U.S. federal income tax rate to income taxes before income as shown
below:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1999 1998 1997
-------- ---- ----
<S> <C> <C> <C>
Tax expense at the federal statutory rate................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 1.4 4.1 3.4
Foreign taxes attributable to foreign operations less than
federal statutory......................................... (3.2) (2.5) (3.3)
Research and experimentation credit......................... (9.0) (4.5) (2.1)
Foreign Sales Corporation................................... (2.2) (7.0) (2.7)
Tax Exempt interest......................................... (3.5) (1.4)
Translation loss............................................ 11.8 9.1
Other....................................................... (3.4) (3.2) 3.1
---- ---- ----
Effective tax rate.......................................... 26.9% 29.6% 33.4%
==== ==== ====
</TABLE>
As of June 30, 1999, 1998 and 1997, the Company had not provided deferred
income tax benefits on cumulative losses of individual international
subsidiaries of $29,200,000, $5,620,000, $2,109,000, respectively. If deferred
income tax assets were recognized for these net operating losses, they would be
approximately $7,855,000, $1,663,000, $704,000 respectively. Upon distribution
of earnings in the form of dividends or otherwise, the Company may be subject to
both U.S. income taxes and withholding taxes in the various international
jurisdictions.
10. PROFIT SHARING PLANS:
The Company has a 401(k) profit sharing plan covering all eligible
full-time employees of the Company. Contributions to the 401(k) plan are made by
the participants to their individual accounts through payroll withholding.
Additionally, the plan provides for the Company to make profit sharing
contributions to the plan in amounts at the discretion of management. The
employer contribution for the years ended June 30, 1999 and 1998 was $867,000
and $36,000, respectively.
Beginning with fiscal year 1999, the Company will pay a matching
contribution each pay period of 50% of the employee's contributions, up to 6% of
employee's compensation, to the Federal limit of $10,000 per calendar year.
11. STOCKHOLDERS' EQUITY:
Stock Splits
On November 25, 1996, the Company declared a 10,000-for-1 stock split,
effected in the form of a stock dividend. On September 10, 1997, the Company
declared a 5-for-4 stock split, effected in the form of a stock dividend. All
references to the number of common shares outstanding, common shares reserved
for issuance under the Plan, and per share information have been adjusted to
reflect the stock splits on a retroactive basis.
Stock Options and Non-cash Compensation
In connection with an officer's employment agreement (the "Agreement"), as
amended, the Company provided for stock options to be granted to an officer
equal to 1.0% of the outstanding common shares of the Company as of June 30,
1992, 1993 and 1994 with exercise prices equal to the fair market values defined
by a net income formula in the Agreement ("Defined Fair Market Value") at the
respective dates. The options are exercisable as of July 1, 1995, 1996 and 1997,
respectively, and remain exercisable for 10 years from these dates. The
Agreement also provides for additional stock options immediately exercisable to
purchase 1.0% of the outstanding common stock of the Company on January 1, 1994
and 1995 with an exercise price equal to the Defined Fair Market Value as of the
respective dates; the options remain exercisable for 10 years. In
39
<PAGE> 42
accordance with variable plan accounting, compensation expense of $0,
$10,963,000, and $4,784,000 was recognized for the years ended June 30, 1999,
1998 and 1997, respectively.
Prior to the completion of the Company's IPO, the Agreement required the
Company to purchase all or part of any shares then owned by the officer under
certain circumstances. The purchase obligation terminated at the completion of
the Company's IPO in November 1997. No compensation expense related to the
options was recognized after that date. Since the Company was obligated to
repurchase the officer's shares, the estimated value of the shares was recorded
as redeemable common stock. Upon termination of the obligation, this amount was
reclassified to additional paid-in capital.
During fiscal 1997, the Company's board of directors approved the Hypercom
Corporation Long-term Incentive Plan (the "Plan") which allocates 5,000,000
shares of common stock for issuance at the Company's discretion. The Plan
authorizes issuance of "incentive stock options" (as defined by the Internal
Revenue Code of 1986), non-qualified stock options, stock appreciation rights,
restricted stock awards, performance share awards, dividend equivalent awards
and other stock-based awards. Stock options issued under the Plan become
exercisable over a period determined by the Board of Directors (generally over
five years) and expire ten years after the date of grant.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISED UNDER EXERCISED UNDER EXERCISED
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance
outstanding................. 3,745,875 $5.83 2,943,750 $4.75 1,030,000 $1.62
Granted....................... 1,520,304 9.98 860,750 9.65 1,913,750 6.43
Exercised..................... (3,750) 9.60 (38,625) 6.40 --
Forfeited..................... (177,750) 9.12 (20,000) 9.60 --
--------- --------- ---------
Ending balance outstanding.... 5,084,679 6.96 3,745,875 5.83 2,943,750 4.75
========= ========= =========
Exercisable at end of year.... 2,179,971 $4.41 1,917,125 $3.84 1,436,250 $3.77
========= ========= =========
</TABLE>
The following table summarizes additional information about the Company's
stock options outstanding as of June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ---------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE SHARES AVERAGE
UNDER REMAINING EXERCISE UNDER EXERCISE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL PRICE OPTIONS PRICE
- ------------------------ --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.66 - 2.66......................... 1,030,000 4.5 years $ 1.62 1,030,000 $ 1.62
$5.00 - 8.00......................... 2,006,375 7.7 years 6.43 992,877 6.42
$8.50 - 12.94........................ 2,043,304 9.1 years 10.14 156,094 9.99
$18.00............................... 5,000 8.7 years 18.00 1,000 18.00
--------- ---------
5,084,679 2,179,971
========= =========
</TABLE>
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock option plans under the fair value based method of that
Statement.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes valuation method with the following assumptions: risk free
interest rates of 6.50%; an average expected time to exercise of five years;
expected volatility of 88%; and no dividends.
40
<PAGE> 43
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
information for the year ended June 30, 1999 and 1998 follows (dollars in
thousands except for net income per share information):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Pro forma net income................................... $7,078 $11,713 $14,834
Pro forma net income per share -- Basic................ 0.21 0.39 0.59
Pro forma net income per share -- Diluted.............. 0.21 0.37 0.58
</TABLE>
The above pro forma disclosure is not necessarily representative of the
effects on reported net income for future years.
Employee Stock Purchase Plan
On September 8, 1997, the Company's Board of Directors adopted and the
stockholders of the Company approved the Hypercom Corporation 1997 Employee
Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan allows eligible
employees of the Company to purchase shares of the Common Stock through periodic
payroll deductions. The initial offering period commenced immediately following
the Initial Public Offering and extended through June 30, 1998, with subsequent
offering periods beginning every six months thereafter. At the end of each
offering period, payroll deductions for the offering period are used to purchase
shares of Common Stock for each participant's account at a price equal to 90% of
the fair market value of the Common Stock on either the first or last day of the
offering period, whichever is less. Payroll deductions under the Purchase Plan
are limited to 10% of each eligible employee's earnings during the offering
period, and no single participant will be granted an option to purchase shares
with a value in excess of $25,000 for each calendar year. The Board has reserved
625,000 shares of Common Stock for issuance under the Purchase Plan, subject to
adjustment in the event of a stock split, reverse stock split, stock dividend or
similar event. Under the plan, for the fiscal years ended June 30, 1999 and 1998
the Company sold 68,100 and 45,541 shares to employees at weighted average
prices of $8.77 and $9.00 a share, respectively.
Preferred Stock
On September 8, 1997, the Company's board of directors authorized
10,000,000 shares of $0.001 par value preferred stock. As of June 30, 1999, no
shares were outstanding.
Directors' Stock Plan
On September 8, 1997, the Company's Board of Directors adopted and the
stockholders of the Company approved the Hypercom Corporation Directors' Stock
Plan (the "Director Plan"). The Director Plan is administered by a committee
appointed by the Board and provides for an initial grant to each Director of an
option to purchase 6,250 shares of Common Stock immediately following the
Offering. In addition, each individual who first becomes a Director after the
date of the initial grant of options will be granted an option to purchase 6,250
shares of Common Stock, and will receive an annual grant of options to purchase
6,250 shares of Common Stock. The aggregate number of shares of Common Stock
subject to the Director Plan may not exceed 93,750, subject to adjustment in the
event of a stock split, reverse stock split, stock dividend or similar event.
Options granted under the Director Plan are fully vested and become fully
exercisable on the first anniversary of the date of grant and have a term of ten
years. The exercise price per share under the Director Plan is equal to the fair
market value of such shares upon the date of grant. In general, options may be
exercised by payment in cash or a cash equivalent, previously acquired shares
having a fair market value at the time of exercise equal to the total option
exercise price or a combination thereof.
41
<PAGE> 44
Initial Public Offering
On November 19, 1997, the Company completed an initial public offering
("IPO") of its common stock, in which it sold 8,500,000 shares of common stock
for $16 per share. Net proceeds received by the Company were approximately
$125.7 million, of which approximately $23.1 million were used to repay
indebtedness.
12. BRAZIL DEVALUATION:
As a result of the devaluation of the Brazilian Real, the Company recorded
a pretax loss of $4.4 million related to the net monetary asset exposure for the
fiscal year ended June 30, 1999. This loss is included in the $6.7 million
foreign currency loss for the fiscal year ended June 30, 1999.
13. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases office and warehouse space, equipment and vehicles under
non-cancelable operating leases. The office space leases provide for annual rent
payments plus a share of taxes, insurance and maintenance on the properties. The
Company also leases various equipment and vehicles under capital leases. Future
minimum payments under the operating and capital leases are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING JUNE 30, LEASES LEASES
- -------------------- --------- -------
<S> <C> <C>
2000...................................................... $2,060 $260
2001...................................................... 1,137 311
2002...................................................... 670 73
2003...................................................... 297 10
2004...................................................... 215 4
Thereafter................................................ 449
------ ----
Total minimum lease payments.............................. $4,828 $658
======
Less imputed interest..................................... 69
----
Present value of minimum lease payments................... $589
====
</TABLE>
Litigation
In November 1997, the Company entered into a settlement agreement with a
then employee (now a former employee) in which the former employee agreed to
waive any and all claims against the Company and its employees arising from or
relating to past employment in exchange for certain monetary and non-monetary
consideration. The former employee subsequently filed a lawsuit against the
Company. The Company has filed a counterclaim and a motion to enforce settlement
based on the former employee's apparent breach of the settlement agreement. The
counsel for the plaintiff has submitted alternative settlement proposals to the
Company including a structured payment of $4 million over up to 35 years, or a
cash settlement of $1.75 million plus establishment of an educational trust. The
Company intends to vigorously defend the lawsuit, however the Company's
management is currently unable to predict the outcome with certainty and
accordingly, has not accrued any liability.
The Company is subject to other legal demands, which have arisen in the
ordinary course of its business. Although there can be no assurance as the
ultimate disposition of these matters and the proceedings disclosed above, it is
the opinion of the Company's management, based upon the information available at
this time, that the expected outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the results of operations
and financial condition of the Company.
42
<PAGE> 45
14. RELATED PARTY TRANSACTIONS:
Hypercom Unit Trust
During fiscal 1999, 1998 and 1997, the Company paid approximately $92,000,
$97,000, and $109,000 in rent to Hypercom Unit Trust, a trust fund controlled by
certain stockholders.
Express Card Systems, Inc.
A relative of an officer of the Company is a Vice President of Express Card
Systems, Inc. ("ECS"), a sales company, which derives a significant portion of
its revenues from products sold to the Company. During fiscal 1999, 1998 and
1997, ECS was paid $246,000, $314,000 and $340,000, respectively, with respect
to sales of product to the Company.
15. SEGMENT INFORMATION:
The Company has two reportable segments: 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.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technologies and marketing strategies.
The following table presents certain segment financial information and the
reconciliation of segment financial information to consolidated totals as of and
for the years ended June 30, 1999, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1999
------------------------------------------
POS SYSTEMS NETWORK SYSTEMS TOTAL
----------- --------------- --------
<S> <C> <C> <C>
Revenue from external customers.............. $231,011 $30,504 $261,515
Intersegment revenues........................ 8,976 5,506 14,482
-------- ------- --------
Total revenues............................... $239,987 $36,010 $275,997
======== ======= ========
Segment income from operations............... $ 30,586 $ (80) $ 30,506
======== ======= ========
Depreciation and amortization expense........ $ 4,398 $ 529 $ 4,927
======== ======= ========
Segment assets............................... $303,561 $23,116 $326,677
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1998
------------------------------------------
POS SYSTEMS NETWORK SYSTEMS TOTAL
----------- --------------- --------
<S> <C> <C> <C>
Revenue from external customers.............. $230,839 $26,388 $257,227
Intersegment revenues........................ -- 1,680 1,680
-------- ------- --------
Total revenues............................... $230,839 $28,068 $258,907
======== ======= ========
Segment income (loss) from operations........ $ 55,118 $(4,828) $ 50,290
======== ======= ========
Depreciation and amortization expense........ $ 2,157 $ 453 $ 2,610
======== ======= ========
Segment assets............................... $311,011 $28,350 $339,361
======== ======= ========
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1997
------------------------------------------
POS SYSTEMS NETWORK SYSTEMS TOTAL
----------- --------------- --------
<S> <C> <C> <C>
Revenue from external customers.............. $172,682 $24,060 $196,742
Intersegment revenues........................ -- 10,468 10,468
-------- ------- --------
Total revenues............................... $172,682 $34,528 $207,210
======== ======= ========
Segment income (loss) from operations........ $ 32,005 $ 3,933 $ 35,938
======== ======= ========
Depreciation and amortization expense........ $ 2,199 $ 435 $ 2,634
======== ======= ========
Segment assets............................... $186,863 $31,455 $218,318
======== ======= ========
</TABLE>
RECONCILIATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
NET REVENUES
Net Revenues for reportable segments...................... $275,997 $ 258,907 $207,210
Elimination of intersegment profits..................... (14,482) (1,680) (10,468)
-------- --------- --------
Total Consolidated Revenues........................ $261,515 $ 257,227 $196,742
======== ========= ========
INCOME FROM OPERATIONS
Income from Operations for reportable segments............ $ 30,506 $ 50,290 $ 35,938
Elimination of intersegment profits..................... 4,813 (3,021) (5,341)
Unallocated amounts:
Corporate expenses................................... (20,656) (27,481) (7,767)
-------- --------- --------
Consolidated income from Operations................ $ 14,663 $ 19,788 $ 22,830
======== ========= ========
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses from reportable
segments................................................ $ 4,927 $ 2,610 $ 2,634
Unallocated amounts:
Corporate depreciation and amortization.............. 1,639 1,554 254
-------- --------- --------
Consolidated depreciation and amortization
expense......................................... $ 6,566 $ 4,164 $ 2,888
======== ========= ========
ASSETS
Segment Assets............................................ $326,677 $ 339,361
Unallocated amounts:
Corporate Assets..................................... 143,057 140,697
Eliminations:
Intercompany receivables............................. (94,432) (131,840)
Investments in related parties....................... (49,937) (34,707)
Advances to related parties.......................... (43,380) (43,742)
Profit in ending inventory........................... (4,841) (10,192)
Other profit eliminations............................ (864)
-------- ---------
Consolidated assets................................ $276,280 $ 259,577
======== =========
</TABLE>
44
<PAGE> 47
Net revenues to external customers are based on the location of the
customer. Geographic information as of June 30, 1999, 1998 and for each of the
three years ended June 30, 1999, 1998 and 1997 is presented in the table below
(dollars in thousands):
<TABLE>
<CAPTION>
UNITED STATES LATIN AMERICA ASIA/PACIFIC EUROPE TOTAL
------------- -------------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDING JUNE 30, 1999
Revenues....................... $141,100 $59,461 $34,253 $26,701 $261,515
Long-lived assets.............. 52,924 7,576 7,995 6,799 75,294
YEAR ENDING JUNE 30, 1998
Revenues....................... 110,410 74,632 57,909 14,276 257,227
Long-lived assets.............. 16,096 4,774 3,188 595 24,653
YEAR ENDING JUNE 30, 1997
Revenues....................... 86,904 47,482 58,233 4,123 196,742
</TABLE>
16. ACQUISITIONS:
Horizon Sales Group, Inc.
Effective October 1, 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 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.
Horizon was acquired for $5.0 million in cash and $0.5 million in Hypercom
common stock issued from Treasury Stock. The agreement provides for additional
payments up to $7.0 million, based on Horizon's earnings over the three-year
period subsequent to the acquisition date. The additional payments, if
applicable, are to be in the form of Hypercom common stock.
The acquisition was accounted for under the purchase method of accounting.
The purchase price, including direct costs incurred in connection with the
acquisition was allocated to identifiable net tangible assets and liabilities of
$1.0 million, identifiable intangibles of $3.2 million and goodwill of $1.6
million. The results of Horizon's operations are included in Hypercom's
consolidated statements of income and cash flows beginning with the date of the
acquisition.
SP/RJ Service Company
Effective January 1, 1999 Hypercom's Brazilian subsidiary purchased
substantially all of the assets of SP/RJ Service Company (SP/RJ) for $900,000 in
cash. SP/RJ is primarily involved in the installation and maintenance of POS
terminals in Southern Brazil.
The acquisition was accounted for under the purchase method of accounting.
The purchase price, including direct costs incurred in connection with the
acquisition, was allocated to identifiable net tangible assets and liabilities
of ($0.3) million and goodwill of $1.2 million. The results of the operations
are included in Hypercom's consolidated statements of income and cash flows
beginning with the date of the acquisition.
JTS ChequeOut Solutions Inc.
Effective April 8, 1999, Hypercom purchased substantially all the assets of
the Rochester, N.Y.-based JTS ChequeOut Solutions Inc., a provider of
card-based, multi-lane financial and marketing systems for U.S. supermarket
chains for $1.5 million in cash and $0.569 million in common stock issued from
treasury stock.
The acquisition was accounted for under the purchase method of accounting.
The purchase price, including direct costs incurred in connection with the
acquisition, was allocated to identifiable net tangible assets and liabilities
of ($40,000) and goodwill of $2.1 million. The results of the operations are
included in Hypercom's consolidated statements of income and cash flows
beginning with the date of the acquisition.
45
<PAGE> 48
ICL Financial Terminals
Effective April 14, 1999, Hypercom purchased substantially all the assets
of the payment security business of ICL's Financial Terminals division in
Sweden. ICL Financial Terminals is a provider of secure payment devices, smart
card products and self-service point-of-sale (POS) terminals.
The acquisition was accounted for under the purchase method of accounting.
The purchase price, including direct costs incurred in connection with the
acquisition, was allocated to identifiable net tangible assets and liabilities
of $0.3 million and goodwill of $1.3 million. The results of the operations are
included in Hypercom's consolidated statements of income and cash flows
beginning with the date of the acquisition.
The purchase price was $1.5 million in cash. The acquisition agreement also
provides for a contingent payment of $0.5 million cash to be paid to ICL upon
Hypercom's collection of $6 million from ICL relating to ICL meeting an annual
purchase requirement of $6 million in product from Hypercom by April 1, 2000.
17. 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.
18. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Interest paid............................................... $ (455) $(2,543) $ (2,247)
======= ======= ========
Income taxes paid........................................... $(5,652) $(4,837) $(15,880)
======= ======= ========
Cash and Noncash Investing and Financing Activities
Acquisition of plant and equipment through capital leases... -- $ 698 $ 133
======= ========
Changes in accounts payable related to the purchase of
property,
plant & equipment......................................... $ 210 $ 367 $ 36
======= ======= ========
Acquisition of controlling interest in subsidiaries:
Assets acquired (net of seller financing)................. $18,290 $ 744
Liabilities assumed....................................... (7,942) (244)
------- -------
Net assets acquired....................................... 10,348 500
Less issuance of Treasury Stock........................... (1,069) --
------- -------
Net cash paid for acquisition of controlling interest in
subsidiaries.............................................. $ 9,279 $ 500
======= =======
</TABLE>
46
<PAGE> 49
19. INTERIM FINANCIAL RESULTS (UNAUDITED):
The following tables set forth certain unaudited consolidated financial
information for each of the four quarters in fiscal 1999 and 1998. In
management's opinion, this unaudited quarterly information has been prepared on
the same basis as the audited consolidated financial statements and includes all
necessary adjustments, consisting only of normal recurring adjustments, that
management considers necessary for a fair presentation of the unaudited
quarterly results when read in conjunction with the Consolidated Financial
Statements and Notes. The Company believes that quarter-to-quarter comparisons
of its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance. (Dollars in thousands, except per
share amounts.)
<TABLE>
<CAPTION>
FISCAL 1999
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, FISCAL YEAR
------------- ------------ --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue...................... $65,983 $70,594 $56,304 $68,634 $261,515
Gross margin..................... 33,355 34,338 24,327 27,664 119,684
Income (loss) from operations.... 7,324 9,266 (1,744) (183) 14,663
Net income (loss)................ 5,755 6,604 (3,666) 480 9,173
Basic earnings (loss) per
share.......................... 0.17 0.20 (0.11) 0.01 0.28
Diluted earnings (loss) per
share.......................... 0.17 0.19 (0.11) 0.01 0.27
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, FISCAL YEAR
------------- ------------ --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue...................... $78,937 $71,209 $54,339 $52,742 $257,227
Gross margin..................... 38,106 36,919 25,894 25,833 126,752
Income (loss) from operations.... 14,698 3,865 3,160 (1,935) 19,788
Net income (loss)................ 9,110 1,841 4,034 (996) 13,989
Basic earnings (loss) per
share.......................... 0.36 0.06 0.12 (0.03) 0.46
Diluted earnings (loss) per
share.......................... 0.35 0.06 0.11 (0.03) 0.44
</TABLE>
47
<PAGE> 50
ITEM 14(a)2 FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Hypercom Corporation
Our audits of the consolidated financial statements referred to in our
report dated July 20, 1999 which report and consolidated financial statements
are included in this Annual Report on Form 10-K also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Phoenix, Arizona
July 20, 1999
48
<PAGE> 51
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------ ---------- ---------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997:
Allowance for doubtful accounts...... $ 761 $1,427 $(1,409) $ 779
Inventory reserves................... 2,133 994 (525) 2,602
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts...... 779 2,972 (22) 3,729
Inventory reserves................... 2,602 2,510 (469) 4,643
YEAR ENDED JUNE 30, 1999:
Allowance for doubtful accounts...... 3,729 1,386 (645) 4,470
Inventory reserves................... 4,643 2,925 (2,295) 5,273
</TABLE>
49
<PAGE> 52
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company. Incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1 (Registration
No. 333-35461).
3.2 Amended and Restated Bylaws of the Company. Incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1 (Registration No. 333-35461).
4 Amended and Restated Certificate of Incorporation of the
Company. Incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1 (Registration
No. 333-35461).
10.1(a)** Revolving Credit Agreement by and between Hypercom
Corporation and Bank One, Arizona, NA, dated January 20,
1998.
10.1(b) Modification Agreement to Revolving Credit Agreement by and
between Hypercom Corporation and Bank One, Arizona, NA,
dated January 25, 1999.
10.2* Lease, as amended, dated June 14, 1996, by and between
Estes-Samuelson Partnership and Hypercom, Inc.
10.3* Hypercom Corporation Long-Term Incentive Plan.+
10.4* Hypercom Corporation 1997 Employee Stock Purchase Plan.+
10.5* Promissory Note, dated October 17, 1994, by and between
Hypercom, Inc., and George Wallner.+
10.6* Hypercom Corporation Nonemployee Directors' Stock Option
Plan.+
10.7* Employment Agreement with Jairo Gonzalez, dated January 1,
1997.+
10.8* Employment Agreement with Albert A. Irato, dated January 1,
1997.+
10.9* Loan Agreement, dated October 12, 1996, by and between
Hypercom Pty. Ltd., and George Wallner.+
10.10* Loan Agreement, dated October 12, 1996, by and between
Hypercom Pty. Ltd., and Paul Wallner.+
10.11* Description of lease by and between Hypercom Pty. Ltd., and
Hypercom Unit Trust.
10.12 Severance agreement, dated June 1, 1999 by and between
Thomas Linnen and Hypercom Corporation.
10.13 Promissory Note by and between Hypercom Corporation and
Capital One Funding Corporation, dated April 1, 1999.
10.14 Reimbursement Agreement by and between Hypercom Corporation,
Bank One, Arizona, NA, and Capital One Funding Corporation,
dated April 1, 1999.
21 Subsidiaries of the Company
23 Consent of Independent Public Accountants
27 Financial Data Schedule
99.1 Cautionary Statement Regarding Forward-Looking Statements
and Risk Factors
</TABLE>
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form S-1
(Registration No. 333-35641).
** Incorporated by reference to the Company's Annual Report on Form 10-K/A filed
on November 3, 1998.
+ Management or Compensatory Plan Agreement.
<PAGE> 1
Exhibit 10.1(b)
MODIFICATION AGREEMENT
DATE: January 25, 1999
PARTIES: Borrower: HYPERCOM CORPORATION, a Delaware corporation.
Bank: BANK ONE, ARIZONA, NA, a national banking association
RECITALS:
A. Bank has extended to Borrower credit ("Loan") in the principal amount of
$10,000,000.00 pursuant to the Revolving Credit Agreement, dated January 20,
1998 ("Loan Agreement"), and evidenced by the Revolving Commitment Note, dated
January 20, 1998 ("Note"). The unpaid principal of the Loan as of the date
hereof is $1,550,000.00.
B. The Loan and/or guaranty of Loan is secured by, among other things, (i)
the Security Agreement, dated January 20, 1998 ("Security Agreement #1") by
Borrower for the benefit of Bank, (ii) the Continuing Security Agreement dated
April 4,1996 ("Security Agreement #2") by HYPERCOM MANUFACTURING RESOURCES,
INC., an Arizona corporation for the benefit of Bank, (iii) the Continuing
Security Agreement dated March 13, 1996 ("Security Agreement #3") by HYPERCOM,
INC., an Arizona corporation for the benefit of Bank, and (iv) the Continuing
Security Agreement dated April 4,1996 ("Security Agreement #4") by HYPERCOM
LATINO AMERICA, INC., an Arizona corporation for the benefit of Bank (the
agreements, documents, and instruments securing the Loan and the Note are
referred to individually and collectively as the ("Security Documents").
C. Bank and Borrower have executed and delivered previously the following
agreements ("Modifications") modifying the terms of the Loan, the Note, the Loan
Agreement, and/or the Security Documents: (i) Modification Agreement, dated
November 11, 1998, (ii) Modification of Security Agreement, dated January 20,
1998 between HYPERCOM, INC., an Arizona corporation and Bank, (iii) Modification
of Security Agreement, dated January 20, 1998 between HYPERCOM MANUFACTURING
RESOURCES, INC., an Arizona corporation and Bank, and (iv) Modification of
Security Agreement, dated January 20, 1998 between HYPERCOM LATINO AMERICA,
INC., an Arizona corporation and Bank. (The Note, the Loan Agreement, the
Security Documents, any arbitration resolution, and all other agreements,
documents, and instruments evidencing, securing, or otherwise relating to the
Loan, as modified in the Modifications, are sometimes referred to individually
and collectively as the "Loan Documents". Hereinafter, "Note", "Loan Agreement",
and "Security Documents" shall mean such documents as modified in the
Modifications.)
D. Borrower has requested that Bank modify the Loan and the Loan Documents
as provided herein. Bank is willing to so modify the Loan and the Loan
Documents, subject to the terms and conditions herein.
AGREEMENT:
For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Borrower and Bank agree as follows:
1. ACCURACY OF RECITALS.
Borrower acknowledges the accuracy of the Recitals.
1
<PAGE> 2
2.1 The Loan Documents are modified as follows:
2.1.1 The RLC Maturity Date shall remain December 5, 2000. On the
maturity date Borrower shall pay to Bank the unpaid principal, accrued and
unpaid interest, and all other amounts payable by Borrower under the Loan
Documents as modified herein.
2.1.2 Contemporaneously with the execution and delivery of this
Agreement, Bank has released all property, rights to property, or interests in
property from the Security Documents.
2.2 Each of the Loan Documents is modified to provide that it shall be a
default or an event of default thereunder if Borrower shall fail to comply with
any of the covenants of Borrower herein or if any representation or warranty by
Borrower herein is materially incomplete, incorrect, or misleading as of the
date hereof.
2.3 Each reference in the Loan Documents to any of the Loan Documents shall
be a reference to such document as modified herein.
3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.
The Loan Documents are ratified and affirmed by Borrower and shall remain in
full force and effect as modified herein. Any property or rights to or interests
in property granted as security in the Loan Documents shall remain as security
for the Loan and the obligations of Borrower in the Loan Documents.
4. BORROWER REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Bank:
4.1 No default or event of default under any of the Loan Documents as
modified herein, nor any event, that, with the giving of notice or the passage
of time or both, would be a default or an event of default under the Loan
Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change in the financial
condition of Borrower or any other person whose financial statement has been
delivered to Bank in connection with the Loan from the most recent financial
statement received by Bank.
4.3 Each and all representations and warranties of Borrower in the
Loan Documents are accurate on the date hereof.
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loan or the Loan Documents as modified herein.
4.5 The Loan Documents as modified herein are the legal, valid, and
binding obligations of Borrower, enforceable against Borrower in accordance with
their terms.
4.6 Borrower is validly existing under the laws of the State of its
formation or organization and has the requisite power and authority to execute
and deliver this Agreement and to perform the Loan Documents as modified herein.
The execution and delivery of this Agreement and the performance of the Loan
Documents as modified herein have been duly authorized by all requisite action
by or on behalf of Borrower. This Agreement has been duly executed and delivered
on behalf of Borrower.
2
<PAGE> 3
Borrower covenants with Bank:
5.1 Borrower shall execute, deliver, and provide to Bank such
additional agreements, documents, and instruments as reasonably required by Bank
to effectuate the intent of this Agreement.
5.2 Borrower fully, finally, and forever releases and discharges Bank
and its successors, assigns, directors, officers, employees, agents, and
representatives from any and all actions, causes of action, claims, debts,
demands, liabilities, obligations, and suits, of whatever kind or nature, in law
or equity of Borrower, whether now known or unknown to Borrower, (i) in respect
of the Loan, the Loan Documents, or the actions or omissions of Bank in respect
of the Loan or the Loan Documents and (ii) arising from events occurring prior
to the date of this Agreement.
5.3 Contemporaneously with the execution and delivery of this
Agreement, Borrower has paid to Bank:
5.3.1 All accrued and unpaid interest under the Note and all
amounts, other than interest and principal, due and payable by Borrower under
the Loan Documents as of the date hereof.
5.3.2 All the internal and external costs and expenses incurred
by Bank in connection with this Agreement (including, without limitation, inside
and outside attorneys, title, filing, and recording costs, expenses, and fees).
6. EXECUTION AND DELIVERY OF AGREEMENT BY BANK.
Bank shall not be bound by this Agreement until (i) Bank has executed and
delivered this Agreement, (ii) Borrower has performed all of the obligations of
Borrower under this Agreement to be performed contemporaneously with the
execution and delivery of this Agreement, (iii) if required by Bank, Borrower
and any guarantor(s) of the Loan have executed and delivered to Bank an
arbitration resolution, and (iv) each guarantor of the Loan has executed the
Consent of Guarantor(s) below.
7. INTEGRATION. ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION. OR WAIVER.
The Loan Documents as modified herein contain the complete understanding and
agreement of Borrower and Bank in respect of the Loan and supersede all prior
representations, warranties, agreements, arrangements, understandings, and
negotiations. No provision of the Loan Documents as modified herein may be
changed, discharged, supplemented, terminated, or waived except in a writing
signed by the parties thereto.
8. BINDING EFFECT.
The Loan Documents as modified herein shall be binding upon and shall inure to
the benefit of Borrower and Bank and their respective successors and assigns.
9. CHOICE OF LAW.
This Agreement shall be governed by and construed in accordance with the laws of
the State of Arizona, without giving effect to conflicts of law principles.
3
<PAGE> 4
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original and all of which together shall constitute one and the
same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
DATED as of the date first above stated.
HYPERCOM CORPORATION, a Delaware corporation
By:
/Albert A. Irato, President
BANK ONE, ARIZONA, NA,
a national banking association
By: Scott T. Schaefer
Scott T. Schaefer, Senior Vice President
4
<PAGE> 5
The undersigned (i) consent to the modification of the Loan Documents and all
other matters in the foregoing Agreement, (ii) reaffirm the Continuing
Guarantee, dated January 20, 1998 and any other agreements, documents and
instruments securing or otherwise relating thereto ("Guarantor Documents"),
(iii) acknowledge that the Guarantor Documents continue in full force and
effect, remain unchanged, except as specifically modified hereby, and are valid,
binding and enforceable in accordance with their respective terms, (iv) agree
that all references, if any, in the Guarantor Documents to any of the Loan
Documents are modified to refer to those documents as modified by the Agreement,
and (v) agree to be bound by the release of Bank set forth in the Agreement.
Dated as of the date of the Agreement.
HYPERCOM Inc., an Arizona corporation
By: Albert A. Irato, President and CEO
CONSENT OF GUARANTOR(S)
The undersigned (i) consent to the modification of the Loan Documents and all
other matters in the foregoing Agreement, (ii) reaffirm the Continuing
Guarantee, dated January 20, 1998 and any other agreements, documents and
instruments securing or otherwise relating thereto ("Guarantor Documents"),
(iii) acknowledge that the Guarantor Documents continue in full force and
effect, remain unchanged, except as specifically modified hereby, and are valid,
binding and enforceable in accordance with their respective terms, (iv) agree
that all references, if any, in the Guarantor Documents to any of the Loan
Documents are modified to refer to those documents as modified by the Agreement,
and (v) agree to be bound by the release of Bank set forth in the Agreement.
Dated as of the date of the Agreement.
HYPERCOM LATINO AMERICA, an Arizona corporation
By: Albert A. Irato, President
CONSENT OF GUARANTOR(S)
The undersigned (i) consent to the modification of the Loan Documents and all
other matters in the foregoing Agreement, (ii) reaffirm the Continuing
Guarantee, dated January 20, 1998 and any other agreements, documents and
instruments securing or otherwise relating thereto ("Guarantor Documents"),
(iii) acknowledge that the Guarantor Documents continue in full force and
effect, remain unchanged, except as specifically modified hereby, and are valid,
binding and enforceable in accordance with their respective terms, (iv) agree
that all references, if any, in the Guarantor Documents to any of the Loan
Documents are modified to refer to those documents as modified by the Agreement,
and (v) agree to be bound by the release of Bank set forth in the Agreement.
Dated as of the date of the Agreement.
HYPERCOM MANUFACTURING RESOURCES, an
Arizona corporation
By: Albert A. Irato, President
5
<PAGE> 1
Exhibit 10.12
SEVERANCE AGREEMENT
This Severance Agreement (Agreement) is entered into this 1st day of
June, 1999, between Mr. Thomas Linnen (Linnen) and Hypercom Corporation
(Company).
RECITALS:
The parties have mutually agreed it is in their best interest to bring
their employment relationship to a conclusion effective June 1, 1999, pursuant
to the following terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
set forth below, and intending to be legally bound thereby, the parties covenant
and agree as follows:
I.
In exchange for Linnen's promises set forth below, the Company agrees
to pay him his regular base salary, less all required and authorized deductions,
and continue his medical and dental benefits coverage through July 31, 1999. The
Company further agrees to allow Linnen continued use of the office space,
voicemail account and Company car issued to him through July 31, 1999. In
addition, Linnen will have until July 31, 2000 to exercise the vested portion of
Company stock options previously granted.
II.
In exchange for the promises of the Company set forth in Paragraph I
above, by execution of this Agreement, Linnen releases, on behalf of himself and
his heirs, executors, administrators, and assigns, any and all claims of any
nature whatsoever against the Company and its corporate affiliates,
predecessors, successors, agents, officers, owners, directors, employees,
insurers, and assigns, arising out of, or relating in any manner whatsoever to,
the employment of Linnen, or based upon any event or asserted event occurring,
or alleged to have occurred, prior to the date of this Agreement. This FULL
WAIVER AND RELEASE includes, without limitation, all rights and claims arising
under the Civil Rights Act of 1964 and 1991, as amended, the Americans with
Disabilities Act of 1990, the Family Medical Leave Act of 1993, or any other
applicable local, state, or federal statute, or any common law cause of action,
including claims for breach of express or implied contract, promissory estoppel,
harassment, retaliation, defamation, emotional distress, any personal injury or
tort, or any claims for attorney's fees or other costs, except as provided for
herein.
1
<PAGE> 2
III.
Linnen agrees to keep the terms of this Agreement confidential and not
to disclose the terms of this Agreement to anyone, including, but not limited
to, any other Company employee or former employee without the express written
permission of the Chairman of the Company.
IV.
The Company advises Linnen to consult with an attorney prior to
executing this Agreement.
V.
By his signature below, Linnen affirms he has been given at least
twenty-one (21) days within which to consider this Agreement.
VI.
Linnen may revoke this Agreement at any time within seven (7) days
following his execution of this Agreement. This Agreement shall not become
effective or enforceable until the forgoing revocation period has expired. To
revoke this Agreement, written notice must be delivered to Mr. John P. Murphy,
Senior Vice President of Human Resources, and Peter J. Stutsman, General
Counsel, 2851 West Kathleen Road, Phoenix, Arizona, 85053, within this seven (7)
day period.
VII.
This Agreement shall be governed in all respects, whether as to
validity, construction, capacity, performance, or otherwise, by the laws of the
State of Arizona, and no action involving this Agreement may be brought except
in the Superior Court of Arizona or in the United Stated District Court for the
District of Arizona. If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void, or unenforceable for whatever
reason, the remaining provisions of this Agreement shall nevertheless continue
in full force and effect without being impaired in any manner whatsoever.
2
<PAGE> 3
VIII.
This Agreement constitutes the sole and entire agreement between the
parties hereto, and supersedes any and all understandings and agreements made
prior hereto, if any. There are no collateral understandings, representations,
or agreements other than those contained herein. No provision of this Agreement
shall be amended, waived, or modified except by an instrument in writing, signed
by the parties hereto. It is expressly understood and agreed that by entering
into this Agreement, the Company is not admitting any wrongdoing or liability on
its part to Linnen, other than to comply with the terms of this Agreement.
IX.
Linnen hereby represents that he has read and understands the contents
of this Agreement, that no representations other than those contained herein
have been made to him to induce his execution of this Agreement, but that he
executes this Agreement knowingly and voluntarily and upon independent advice of
his own choosing. The provisions pertaining to payment of sales commissions
contained herein shall supersede and replace the terms of any former Commission
Accrual Policy Statements applicable to Linnen only to the extent the terms
contained in this Agreement are inconsistent with the terms of such Commission
Accrual Policy Statements.
-------------------------------------------------------------
Thomas Linnen Date
-------------------------------------------------------------
By: John Murphy Date
Its Senior Vice President, Human Resources
3
<PAGE> 1
Exhibit 10.13
PROMISSORY NOTE
$10,238,000.00 April 1, 1999
FOR VALUE RECEIVED, the undersigned, HYPERCOM CORPORATION, a Delaware
corporation ("Borrower"), promises to pay to the order of CAPITAL ONE FUNDING
CORPORATION, a Delaware corporation (the "Lender"), (i) the principal sum of TEN
MILLION TWO HUNDRED THIRTY-EIGHT THOUSAND DOLLARS ($10,238,000.00), (ii)
interest, determined and calculated as provided in paragraph 2 of this Note, on
the outstanding principal amount of this Note from the date hereof until the
principal of this Note is paid in full, and (iii) certain other payments as
provided in paragraph 3 of this Note. The principal sum of this Note shall be
payable in semi-annual installments in the amounts and on the dates set forth in
Schedule I attached hereto, subject to acceleration as provided in paragraph 7
of this Note; provided, however, if the Letter of Credit is not extended as
provided in the Reimbursement Agreement (defined below) the entire unpaid
principal and interest amount will be due and payable on April 1, 2006. Interest
on the outstanding principal balance of this Note shall be payable monthly, in
arrears, on the first Business Day of each month ("Interest Payment Date"),
commencing on the 1st day of May, 1999.
1. Background.
Borrower has executed and delivered this Note to the Lender in
order to evidence a $10,238,000.00 loan, made effective as of April 1, 1999 from
the Lender to Borrower. The Lender made the loan evidenced by this Note from
proceeds received from the sale of the Lender's Floating Rate Option Notes. The
Floating Rate Option Notes are secured by a letter of credit issued by Bank One,
NA ("BOC"). Borrower and Bank One, Arizona, NA (the "Bank") have entered into a
Reimbursement Agreement with an effective date as of April 1, 1999 (the
"Reimbursement Agreement") which describes in further detail the transactions
underlying this Note. All capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to them in the Reimbursement
Agreement.
2. Interest Rate Provisions.
(a) General. This Note shall bear interest from time to
time according to the Interest Rate Option (i.e., the Weekly Rate, the One Year
Rate, the Three Year Rate, the Five Year Rate, the Seven Year Rate, the Ten Year
Rate or the Fixed Rate) selected by Borrower pursuant to Section 2.07 of the
Reimbursement Agreement. All provisions of Section 2.07 of the Reimbursement
Agreement applicable to the determination and computation of interest are
incorporated herein by reference.
(b) Initial and Subsequent Interest Rates. This Note
shall initially bear interest at the Weekly Rate. Thereafter, this Note shall
continue to bear interest at the Weekly Rate until Borrower makes a Rate
Election as provided in paragraph 2(c) of this Note and Section 2.07 of the
Reimbursement Agreement.
<PAGE> 2
(C) Rate Election. Pursuant to the provisions and upon
compliance with the procedures set forth in Section 2.07 of the Reimbursement
Agreement, Borrower shall have the right to make a Rate Election (i.e., an
election to continue or change the then current interest rate determination
method) for this Note, in whole or in parts, and for equal principal amounts of
Floating Rate Option Notes, with each such Rate Election to take place and
become effective in accordance with the provisions and procedures set forth in
Section 2.07 of the Reimbursement Agreement. Borrower understands that (i) no
Rate Election to a One Year Rate, a Three Year Rate, a Five Year Rate, a Seven
Year Rate, a Ten Year Rate or a Fixed Rate will be permitted unless the
unexpired or remaining term of the letter of credit furnished by the Bank will
exceed on the Rate Election Date the term of the Rate Period selected, (ii) when
this Note bears interest at the One Year Rate, the Three Year Rate, the Five
Year Rate, the Seven Year Rate, or the Ten Year Rate, no Rate Election may be
made until the end of the applicable Rate Period and Borrower's failure to make
a timely Rate Election at the conclusion of the then current Rate Period will be
deemed to be a Rate Election to the Weekly Rate, (iii) no action, consent or
notice is required on the part of Borrower to continue the Weekly Rate from Rate
Period to Rate Period, and (iv) should Borrower make a Rate Election to the
Fixed Rate, no further Rate Elections will be permitted. Also, in connection
with Borrower's Rate Election, Borrower may select more than one Interest Rate
Option and designate the principal amount of the Floating Rate Option Notes to
be affected by each such Interest Rate Option; provided, however, that if
Borrower selects more than one Interest Rate Option, then Borrower must
designate at least $5,000,000 in principal amount of Floating Rate Option Notes
for each Interest Rate Option selected. In the event that a Rate Election by
Borrower results in only a portion of the Floating Rate Option Notes bearing
interest at the Interest Rate Option selected by Borrower because the
Remarketing Agent is unable to remarket all of such Floating Rate Option Notes,
then, for such time as this condition continues, all references in paragraphs 2,
3 and 4 of this Note to "Floating Rate Option Notes" shall be deemed to mean
that principal portion of Floating Rate Option Notes that the Remarketing Agent
is able to remarket which Bank One Trust Company, NA (the "Trustee") designates
as being owed under this Note. Any Floating Rate Option Notes the Remarketing
Agent fails to remarket shall bear interest for such time as that condition
continues at the Interest Rate as contemplated in Section 2.03(b) of the
Reimbursement Agreement.
3. Program, Remarketing and Other Fees. Borrower shall pay to the
Lender a program fee (the "Program Fee"), a rating agency fee ("Rating Agency
Fee"), a remarketing fee (the "Remarketing Fee"), and certain remarketing
expenses as follows:
(a) Program Fee. Borrower shall pay to the Lender on each
Fee Payment Date, as defined below, an annual Program Fee, payable in quarterly
installments in arrears, calculated at a rate per annum equal to five-hundredths
of one percent (0.05%) of the outstanding principal amount of this Note existing
on the first day of each quarter immediately preceding the applicable Fee
Payment Date (a "Note Balance Date"). A Fee Payment Date shall be defined as
each March 1, June 1, September 1 and December 1, with the first Fee Payment
Date commencing June 1, 1999. The Program Fee shall be computed on the basis of
a year of 360 days (comprised of twelve 30-day months) for the actual number of
days in such quarterly period from the Note Balance Date.
<PAGE> 3
(b) Rating Agency Fee. Borrower shall pay to the Lender a
Rating Agency Fee on each Fee Payment Date equal to $1,250 divided by the number
of borrowers with loans outstanding on each such Fee Payment Date that
correspond to the Floating Rate Option Notes.
(c) Weekly Rate and One Year Rate Remarketing Fee.
Whenever this Note or a portion thereof bears interest at the Weekly Rate or the
One Year Rate, Borrower shall pay to the Lender on each Fee Payment Date, an
annual Weekly Rate and One Year Rate Remarketing Fee, payable in quarterly
installments in arrears, calculated at a rate per annum equal to one-tenth of
one percent (0.10%) of the outstanding principal amount of this Note or so much
thereof as bears interest at the Weekly Rate or the One Year Rate on each Note
Balance Date. The Weekly Rate and the One Year Rate Remarketing Fee shall be
computed on the basis of a year of 360 days (comprised of twelve 30-day months)
for the actual number of days elapsed in such quarterly period from the Note
Balance Date.
(d) Rate Election Remarketing Fee. Whenever Borrower
makes a Rate Election to the Three Year Rate, the Five Year Rate, the Seven Year
Rate, the Ten Year Rate or the Fixed Rate and the related Floating Rate Option
Notes are remarketed to different holders, Borrower shall pay to the Lender on
the applicable Rate Adjustment Date a Remarketing Fee in an amount equal to
fifty-hundredths of one percent (0.50%) of the outstanding principal amount of
this Note or such portion thereof which relates to Floating Rate Option Notes
actually remarketed at such rate as selected as of the Rate Adjustment Date.
(e) Remarketing Expenses. Borrower also agrees to pay to
the Lender the extraordinary expenses incurred in connection with the
remarketing of the Floating Rate Option Notes related to this Note, including
without limitation the preparation, amendment, supplementation or replacement of
an initial offering or remarketing disclosure document and related materials.
Any such expenses shall be assessed to each borrower as the Trustee shall
reasonably determine; provided, however, that, to the extent that more than one
borrower benefits from the remarketing giving rise to such expenses, such
expenses shall be allocated among the borrowers involved on a pro rata basis and
provided, further, that not more than $500.00 shall be allocated to Borrower.
(f) Partial Quarter. If this Note is executed or paid in
full on other than a Fee Payment Date, the initial or final payment of the
annual Program Fee, Rating Agency Fee or Weekly Rate and One Year Rate
Remarketing Fee shall be prorated for the actual number of days elapsed in such
quarterly period.
4. Optional Prepayment. Borrower shall have the option to prepay
without premium or penalty all or any part (equal to an integral multiple of
$1,000) of this Note as set forth in this. paragraph. In order to exercise such
prepayment option, Borrower shall give written notice of Borrower's election to
prepay this Note (the "Prepayment Notice") to the Trustee, BOC and the
Remarketing Agent at least 45 days prior to any Prepayment Date, as defined
herein. A Prepayment Date shall be defined as either: (i) an Interest Payment
Date when this Note is bearing interest at the Weekly Rate at the time the
Prepayment Notice is given, or (ii) a Rate
<PAGE> 4
Adjustment Date in the event that this Note is bearing interest at any other
rate of interest at the time the Prepayment Notice is given. The Prepayment
Notice shall specify the Prepayment Date and shall specify the principal amount
of this Note to be prepaid (the "Prepayment"). At least 15 days prior to the
Prepayment Date as specified in the Prepayment Notice, Borrower shall make a
payment to the Bank in an amount equal to the Prepayment. BORROWER SHALL NOT BE
PERMITTED TO PREPAY THIS NOTE ON ANY OTHER THAN A PREPAYMENT DATE AS
CONTEMPLATED IN THIS PARAGRAPH ALL PREPAYMENTS SHALL BE APPLIED TO REMAINING
PRINCIPAL AMOUNTS DUE ON THE LATEST SCHEDULED LOAN PAYMENT DATE SET FORTH IN
SCHEDULE 1 TO THIS NOTE.
5. Procedure for Payments: All loan and other payments to be made
by Borrower hereunder in respect of payments of principal of and premium, if
any, and interest on this Note shall be made to the Lender c/o the Bank at Bank
One, Arizona, NA, P.O. Box 71, Phoenix, Arizona 85001, Attention: Commercial
Banking, AZl-1 178 (or at such other address as the Lender, any assignee hereof
or the Bank may have specified for such purpose in a written notice to
Borrower). All payments to be made by Borrower to Lender hereunder in respect of
the Program Fee, the Rating Agency Fee and the Remarketing Fee shall be made to
the Lender at Capital One Funding Corporation, c/o J.H. Management Corporation,
Post Office Box 4024, Boston, Massachusetts 02101-4024, Attention: Doug
Donaldson (or at such other address as the Lender may have specified for such
purpose in a written notice to Borrower). All payments made by Borrower
hereunder shall be in immediately available funds and in lawful currency of the
United States. All such payments shall be made to the Bank or the Lender as
applicable, by not later than 3:00 p.m., Phoenix, Arizona time, on the date due
and any payments received after that time shall be deemed received on the next
Business Day. Whenever any payment to be made under this Note shall be due on a
day which is not a Business Day, such payment shall be due on the next
succeeding Business Day, with interest continuing to accrue thereon until such
payment is made.
6. Interest on Overdue Amounts. Borrower agrees to pay, on
demand, interest on any principal or interest payment, Program Fee payment,
Rating Agency Fee, Remarketing Fee or other obligation payable by Borrower under
this Note which is not paid when due, for the period from and including the date
on which such interest payment is due to but not including the date on which
interest payment is made, at the Default Rate of Interest as specified in the
Reimbursement Agreement.
7. Acceleration.
(a) If an Event of Default under the Reimbursement
Agreement shall have occurred and the Bank shall have instructed the Trustee to
accelerate the Floating Rate Option Notes, the maturity of this Note shall be
accelerated and the unpaid principal amount of and accrued interest on this Note
shall be immediately due and payable.
(b) If BOC fails to reinstate the Letter of Credit in
accordance with its terms following a draw under the Letter of Credit and the
Trustee accelerates the maturity date for the
<PAGE> 5
Floating Rate Option Notes, the maturity of this Note shall be accelerated and
the unpaid principal amount of and accrued interest on this Note shall be due
and payable on the date which is the accelerated maturity date for the Floating
Rate Option Notes as specified in a notice of acceleration to Borrower from the
Lender or the Bank acting on behalf of the Lender; provided, however, that the
annulment of the declaration of acceleration with respect to the Floating Rate
Option Notes shall also constitute an annulment of a corresponding declaration
with respect to this Note.
8. Misce1laneous. The obligation of Borrower to make the loan and
other payments required hereunder shall be absolute, unconditional and
irrevocable and Borrower shall make such payments without abatement, diminution
or deduction regardless of any cause or circumstances whatsoever, including
without limitation any defense, set-off, recoupment or counterclaim which
Borrower may have or assert against the Lender, BOC, the Bank, the Remarketing
Agent or any other Person.
The Note may not be amended, supplemented or restated except by an
instrument in writing signed by Borrower and the Lender, and approved in writing
by BOC. No requirement of this Note may be waived at any time except by a
writing signed by the Lender and BOC, nor shall any waiver be deemed a waiver of
any subsequent breach or default by Borrower. Borrower waives presentment,
demand, protest and all other demands in connection with the delivery,
acceptance, performance, default or enforcement of this Note.
9. Interest Rate. Borrower agrees to an effective rate of
interest that is the rate contemplated in this Note plus any additional rate of
interest resulting from any other charges in the nature of interest paid or to
be paid by or on behalf of Borrower, or any benefit received or to be received
by Lender, in connection with this Note.
10. [Intentionally left blank.]
11. Arbitration.
(a) The Borrower and the Bank (by its acceptance hereof)
agree that upon the written demand of either party, made before the institution
of any legal proceedings, all disputes, claims and controversies between them,
whether individual, joint, or class in nature, arising from this Note, the
Reimbursement Agreement, and the Security Documents, or otherwise, including
without limitation contract disputes and tort claims, may be resolved by
non-binding arbitration pursuant to the Commercial Rules of the American
Arbitration Association. Any arbitration proceeding held pursuant to this
arbitration provision shall be conducted in the city nearest the Borrower's
address having an AAA regional office, or at any other place selected by mutual
agreement of the parties. No act to take or dispose of any collateral
contemplated in the Security Agreement ("Collateral") shall constitute a waiver
of this arbitration agreement or be prohibited by this arbitration agreement.
This arbitration provision shall not limit the right of either party during any
dispute, claim or controversy to seek, use, and employ ancillary, or preliminary
rights and/or remedies, judicial or otherwise, for the purposes of realizing
upon, preserving, protecting, foreclosing upon or proceeding under forcible
entry and detainer for
<PAGE> 6
possession of, any real or personal property, and any such action shall not be
deemed an election of remedies. Such remedies include, without limitation,
obtaining injunctive relief or a temporary restraining order, invoking a power
of sale under any deed of trust or mortgage, obtaining a writ of attachment or
imposition of a receivership, or exercising any rights relating to personal
property, including exercising any right of set-off or taking or disposing of
such property with or without judicial process pursuant to the Uniform
Commercial Code. Any disputes, claims or controversies concerning the lawfulness
or reasonableness of an act, or exercise of any right or remedy concerning any
collateral, including any claim to rescind, reform, or otherwise modify any
agreement relating to the collateral, shall also be subject to non-binding
arbitration; provided, however, that no arbitrator shall have the right or the
power to enjoin or restrain any act of either party. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction. The
statute of limitations, estoppel, waiver, laches and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of any action for these purposes.
The Federal Arbitration Act (Title 9 of the United States Code) shall apply to
the construction, interpretation, and enforcement of this arbitration provision.
(b) Notwithstanding anything to the contrary in this
arbitration provision, either party may at any time elect to terminate the
arbitration proceeding and require that the dispute, claim and controversy be
resolved solely by legal proceedings.
THIS NOTE HAS BEEN DELIVERED IN PHOENIX, ARIZONA, AND SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA.
HYPERCOM CORPORATION, a Delaware corporation
/s/ Albert A. Irato
President and CEO
<PAGE> 7
FOR VALUE RECEIVED, BANK ONE, NA ("Assignor") hereby assigns to BANK
ONE, ARIZONA, NA ("Assignee") all of its right, title and interest in the
Promissory Note, dated April 1, 1999. in the amount of $10,238,000.00 executed
and delivered by Hypercom Corporation, a Delaware corporation (the "Note");
provided, however, that should Assignee fail to reimburse Assignor in accordance
with the Affiliate Reimbursement Agreement by and between Assignor and Assignee
of even date herewith, then this Assignment shall, without the necessity for any
action or notice on the part of Assignor or any notice or consent on the part of
Assignee, immediately be null, void, rescinded and of no further force and
effect.
IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment
to be duly executed and delivered all as of the 1st day of April, 1999.
BANK ONE, NA
as Assignor
By:___________________________
Title:
BANK ONE, ARIZONA, NA
as Assignee
By:___________________________
Title: Senior Vice President
<PAGE> 1
Exhibit 10.14
REIMBURSEMENT AGREEMENT
This Reimbursement Agreement (the "Agreement") is made and entered into
as of April 1, 1999 and is effective as of April 1, 1999, by and between BANK
ONE, ARIZONA, NA (the "Bank") and HYPERCOM CORPORATION, a Delaware corporation
(the "Borrower").
RECITALS
A. The Borrower has requested that CAPITAL ONE FUNDING
CORPORATION, a Delaware corporation (the "Lender"), make a loan to the Borrower
in the original principal amount of $10,238,000.00 (the "Loan") for the purpose
of permanent financing for the hereinafter defined Project;
B. The Lender has agreed to make the Loan provided that it is
able to obtain the funds necessary to make the Loan by placing with investors
through the Underwriter, floating rate option notes (the "Floating Rate Option
Notes"), which Floating Rate Option Notes shall be secured by an unconditional,
irrevocable, direct pay letter of credit (the "Letter of Credit") issued by Bank
One, NA (the "LC Bank");
C. As a condition to the issuance of the Letter of Credit, the LC
Bank has required that the Bank reimburse the LC Bank in the full amount of any
draws upon the Letter of Credit;
D. In consideration of the Bank's agreement to reimburse the LC
Bank for any draws upon the Letter of Credit, the Bank and the Borrower desire
to enter into this Agreement pursuant to which the Borrower agrees to observe
certain covenants and conditions and to reimburse the Bank for any amounts paid
by the Bank to the LC Bank as a result of a draw upon the Letter of Credit.
NOW, THEREFORE, in consideration of the premises and in order to induce
the Bank to enter into a certain Affiliate Reimbursement Agreement, the parties
hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Definitions. The following terms, as used herein, have the
following meaning unless the context otherwise requires. Capitalized terms used
but not otherwise defined herein or in Exhibit C attached hereto shall have the
meaning provided in the Letter of Credit.
"Affiliate Reimbursement Agreement" means the Affiliate Reimbursement
Agreement by and between the Bank and the LC Bank, as the same may from time to
time be amended, supplemented or extended, including all exhibits thereto and
any other documents executed and delivered as a part thereof, pursuant to which
the Bank is obligated to reimburse the LC Bank for any draws on the Letter of
Credit attributable to the Borrower.
<PAGE> 2
"Agency Agreement" means that Agency Agreement by and among the Bank,
the Borrower and the Trustee dated as of April 1, 1999, as the same may from
time to time be amended, modified, extended, revised or restated.
"Agreement" means this Reimbursement Agreement, as the same may from
time to time be amended, modified, extended, revised or restated, including all
exhibits hereto and any other documents executed and delivered as a part hereof.
"Annual Fee" has the meaning set forth in Section 2.02 hereof.
"Appraisal" means a current appraisal of the Project by an appraiser
acceptable to Bank in its sole and absolute discretion, reviewed and approved by
Bank in its sole and absolute discretion.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or
state law for the relief of debtors.
"Borrower Account" has the meaning set forth in Section 2.03(c) hereof.
"Borrower Note" means the Promissory Note effective April 1, 1999,
executed and delivered by the Borrower to the Lender in the original principal
amount of the Loan as the same may from time to time be amended, modified,
extended, revised or restated.
"Business Day" means a day of the year, other than (i) a Saturday,
Sunday or legal holiday on which banking institutions in the State of Ohio are
authorized or required by law to close or (ii) a day on which The New York Stock
Exchange is closed.
"Code" means the Internal Revenue Code of 1986, as amended, and
references to the Code and Sections of the Code shall include relevant
regulations and proposed regulations thereunder and any successor provisions to
such Sections, regulations or proposed regulations.
"Collateral" means the property subject to the Security Documents.
"Date of Issuance" means the date on which the Letter of Credit is
issued and becomes effective.
"Deed of Trust" means that Deed of Trust, Assignment of Leases and
Rents, Security Agreement, and Financing Statement dated December 8, 1993 and
recorded on December 17, 1993 in the records of Maricopa County, Arizona
Recorder at Recording Number 93-0885532 as amended from time to time and further
amended as of the Effective Date.
"Default Rate of Interest" means a rate per annum equal to the sum of
the Interest Rate plus 3.0% (computed on the basis of a year of 360 days and the
actual number of days elapsed).
"Depository" means any security depository that is a clearing agency
under federal law operating and maintaining, with participants or otherwise, a
book entry system to record ownership
-2-
<PAGE> 3
of book entry interest in the Floating Rate Option Notes, and to effect
transfers of book entry interest in the Floating Rate Option Notes in book entry
form, and includes and means The Depository Trust Company, New York, New York.
"Dollars" and the sign "$" mean freely transferable money of the United
States of America.
"Drawing" means any Principal Drawing, Remarketing Drawing or Interest
Drawing.
"Effective Date" means the date upon which interest starts to accrue
under the Borrower Note.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means any of the events specified in Article VI of
this Agreement, provided that any requirement for the giving of notice or for
the lapse of time has been satisfied in connection with such event.
"Expiration Date" means the date on which the Trustee's right to draw
under the Letter of Credit with respect to the Borrower expires and is the date
set forth in Section 2.01(d) of this Agreement.
"Financial Covenants" means the Financial Covenants described in
Exhibit C.
"Five Year Rate" means the fixed rate of interest per annum determined
by the Remarketing Agent and in effect for the period commencing on the
Effective Date or a Rate Adjustment Date, as applicable, and ending on (but not
including) the first Business Day of the month which is sixty months after such
Effective Date or Rate Adjustment Date.
"Fixed Rate" means the fixed rate of interest per annum determined by
the Remarketing Agent and in effect for the period commencing on the Effective
Date or a Rate Adjustment Date, as applicable, and ending on (but not including)
the final maturity date of the Borrower Note.
"Floating Rate Option Notes" has the meaning set forth in paragraph B
of the Recitals.
"GAAP" means generally accepted accounting principles consistently
applied.
"Guarantors" means HYPERCOM (ARIZONA), INC., an Arizona corporation,
HYPERCOM LATINO AMERICA, INC., an Arizona corporation, and HYPERCOM
MANUFACTURING RESOURCES, INC., an Arizona corporation, jointly and severally.
"Guaranty" means collectively those Unconditional Guarantees of Payment
dated as of April 1, 1999, given and executed and delivered by the Guarantors
for the benefit of the Bank as the same may from time to time be amended,
modified, extended, revised or restated.
"Holder" or "Holders" means the holder or holders of the Floating Rate
Option Notes.
-3-
<PAGE> 4
"Interest Drawing" has the meaning set forth in the Letter of Credit.
"Interest Rate" means a rate per annum equal to the sum of the Prime
Rate plus 1.0% (computed on the basis of a year of 360 days and the actual
number of days elapsed).
"Interest Rate Option" means the Weekly Rate, the One Year Rate, the
Three Year Rate, the Five Year Rate, the Seven Year Rate, the Ten Year Rate or
the Fixed Rate. The foregoing Rates are sometimes collectively referred to as
the "Interest Rate Options."
"LC Bank" has the meaning set forth in paragraph B of the Recitals.
"Lender" has the meaning set forth in paragraph A of the Recitals.
"Letter of Credit" means a direct pay irrevocable letter of credit,
issued by the LC Bank as of the date hereof to the Trustee as agent for the
Holders, as the same may from time to time be amended, modified, replaced,
reinstated, reconfirmed, reissued or extended.
"Loan" has the meaning set forth in paragraph A of the Recitals.
"LTV Requirement" means eighty percent (80.0%).
"Master Agreement" means the ISDA Master Agreement by and between the
Bank and the Borrower (and any schedules or confirmations thereunder entered
into by the parties at any time), which is necessary for the Borrower to make an
interest rate swap.
"Maximum Loan Amount" means an amount not to exceed$10,429,963.00.
"Maximum Rate" means the maximum interest rate per annum at which the
Floating Rate Option Notes may bear interest, which is 15% per annum.
"Note Payment Date" has the meaning set forth in Section 2.03(c)
hereof.
"One Year Rate" means the fixed rate of interest per annum determined
by the Remarketing Agent and in effect for the period commencing on the
Effective Date or a Rate Adjustment Date, as applicable, and ending on (but not
including) the first Business Day of the month which is twelve months after such
Effective Date or Rate Adjustment Date.
"Payment Deficiency" has the meaning set forth in Section 2.03(c)
hereof.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or trustee thereof or any other
entity, fiduciary or organization, including a government or political
subdivision thereof.
"Pledged Notes" means the Pledged Notes as defined in Section 2.06
hereof.
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"Prime Rate" means such rate of interest as publicly announced from
time to time by the Bank as its prime rate, which may not be the Bank's lowest
rate of interest charged to borrowers, such rate changing automatically and
immediately from time to time effective as of the effective date of each such
announced change.
"Principal Drawing" has the meaning set forth in the Letter of Credit.
"Project" means the Real Property, any improvements located thereon and
any personal property located thereat.
"Rate Adjustment Date" means the date on which an interest rate,
determined on the related Rate Determination Date, applicable to the Borrower
Note becomes effective. In the case of the Weekly Rate, a Rate Adjustment Date
shall occur on each Thursday or on such other day as may be necessary as
provided in the last sentence of the first paragraph of Section 2.07(d) of this
Agreement. Each Rate Election Date shall also be a Rate Adjustment Date.
"Rate Determination Date" means the day on which the Remarketing Agent
determines the Weekly Rate, the One Year Rate, the Three Year Rate, the Five
Year Rate, the Seven Year Rate, the Ten Year Rate and the Fixed Rate, as
applicable, for any Rate Period. In the case of the Weekly Rate, the Rate
Determination Date for a Rate Period shall be the first Business Day next
preceding the Rate Adjustment Date or such other day as may be necessary as
provided in the last sentence of the first paragraph of Section 2.07(d) of this
Agreement. In the case of the One Year Rate, the Three Year Rate, the Five Year
Rate, the Seven Year Rate, the Ten Year Rate and the Fixed Rate, the Rate
Determination Date for a Rate Period shall be a Business Day selected by the
Remarketing Agent and occurring not earlier than 15 days and not later than two
days prior to the Rate Adjustment Date.
"Rate Election" means (i) the Borrower's right to select from time to
time one or more of the Interest Rate Options as the interest rate applicable to
the Borrower Note and (ii) in the absence of the exercise of the right referred
to in clause (i) of this definition, the automatic conversion of the Interest
Rate Option applicable to the Borrower Note to the Weekly Rate.
"Rate Election Date" means the date on which a Rate Election becomes
effective. In the case of a Rate Election from the Weekly Rate, the Rate
Election Date may be the first Business Day of any month. In the case of a Rate
Election from the One Year Rate, the Three Year Rate, the Five Year Rate, the
Seven Year Rate or the Ten Year Rate, the Rate Election Date must be the date
upon which the final interest payment is due and payable for that Rate Period.
"Rate Period" means the period commencing with the Rate Election Date
during which a particular Interest Rate Option as determined on a particular
Rate Determination Date is effective. In the case of the Weekly Rate, with the
exception (i) if applicable, of the initial Rate Period, (ii) of a Rate Period
whose last day is a Rate Election Date or (iii) of a Rate Period whose last day
is occasioned by the circumstances described in the last sentence of the first
paragraph of Section 2.07(d) of this Agreement, each Rate Period shall commence
on a Thursday and end on the following Wednesday or the maturity date of the
Borrower Note, whichever shall first occur (the "Weekly Rate Period"). In the
case of the One Year Rate, the Three Year Rate, the Five Year Rate,
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the Seven Year Rate and the Ten Year Rate, with the exception, if applicable, of
the initial Rate Period, each Rate Period shall commence on the Rate Election
Date establishing any such Interest Rate Option and shall continue for the
number of months (i.e. 12, 36, 60, 84 and 120) applicable to such Interest Rate
Option and shall end on (but such Rate Period will not include) the next Rate
Election Date or the maturity date of the Borrower Note, whichever shall first
occur. In the case of the Fixed Rate, the Rate Period shall begin on the
Effective Date or a Rate Election Date, as applicable, and shall end on (but
such Rate Period shall not include) the maturity date of the Borrower Note.
"Real Property" means the real property located at 2851 West Kathleen
Road, Phoenix, Arizona 85023-4053, which is subject to and legally described in
the Deed of Trust granted by the Borrower to the Bank to secure repayment of the
Borrower Note.
"Remarketing Agent" means, initially, Banc One Capital Markets, Inc.
and its successors and assigns, and any other person appointed and acting as
remarketing agent under the Remarketing Agreement.
"Remarketing Agreement" means the Master Remarketing Agreement dated as
of March 1, 1998 between the Lender and the Remarketing Agent, relating to the
remarketing of the Floating Rate Option Notes, as such agreement may be amended
as permitted therein.
"Remarketing Drawing" has the definition set forth in the Letter of
Credit.
"Security Documents" means the following documents which have been
executed by the Borrower or Guarantors and delivered to the Bank as security for
the Borrower's obligations hereunder: the Borrower Note, the Master Agreement,
the Deed of Trust and any and all other present or future obligations,
agreements, or indebtedness between the Borrower and the Bank.
"Seven Year Rate" means the fixed rate of interest per annum determined
by the Remarketing Agent and in effect for the period commencing on the
Effective Date or a Rate Adjustment Date, as applicable, and ending on (but not
including) the first Business Day of the month which is eighty-four months after
such Effective Date or Rate Adjustment Date.
"Stated Amount" means the unpaid principal balance of the Borrower Note
from time to time plus 45 days of interest thereon calculated at the rate of 15%
per annum, based on 360 days. The Stated Amount is originally $10,429,963.00
being $10,238,000.00 of principal and $191,963.00 of interest.
"Systems" has the meaning as defined in Section 4.01(r) hereof.
"Ten Year Rate" means the fixed rate of interest per annum determined
by the Remarketing Agent and in effect for the period commencing on the
Effective Date or a Rate Adjustment Date, as applicable, and ending on (but not
including) the first Business Day of the month which is one hundred twenty
months after such Effective Date or Rate Adjustment Date.
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"Three Year Rate" means the fixed rate of interest per annum determined
by the Remarketing Agent and in effect for the period commencing on the
Effective Date or a Rate Adjustment Date, as applicable, and ending on (but not
including) the first Business Day of the month which is thirty-six months after
such Effective Date or Rate Adjustment Date.
"Trust Agreement" means the Master Trust Indenture dated as of March 1,
1998 between the Lender and the Trustee pursuant to which the Trust will be
created and the Floating Rate Option Notes will be issued, as amended as
permitted therein.
"Trustee" means, initially, Bank One Trust Company, NA and its
successors and assigns, and any other Person appointed and acting as trustee
under the Trust Agreement.
"UCC Financing Statements" means the Uniform Commercial Code Financing
Statement given by the Borrower to the Bank from time to time, as reasonably
required by the Bank.
"Underwriter" means Bank One Capital Markets, Inc.
"Weekly Rate" means the rate of interest per annum determined by the
Remarketing Agent and generally in effect for a period of one week, subject to
adjustment as provided in Section 2.07 of this Agreement. The Weekly Rate shall
be the minimum rate of interest which, in the opinion of the Remarketing Agent,
would be necessary to sell the Floating Rate Option Notes on the Rate Adjustment
Date in a secondary market sale at the principal amount thereof plus accrued
interest.
"Year 2000 Compliant" has the meaning as defined in Section 4.01(r)
hereof.
ARTICLE II
AMOUNT AND TERMS OF LETTER OF CREDIT
Section 2.01 The Letter of Credit.
(a) The LC Bank has agreed, upon the terms and conditions
set forth herein, to issue and deliver the Letter of Credit in the Stated Amount
to the Trustee as agent for the Holders under the Trust Agreement and under the
Remarketing Agreement.
(b) The Letter of Credit may be transferred to a
successor or substitute Trustee in accordance with the provisions set forth in
the Letter of Credit.
(c) The Stated Amount shall be reduced and reinstated in
accordance with the provisions of the Letter of Credit.
(d) The Letter of Credit shall expire on April 6, 2006,
unless sooner terminated in accordance with the terms and conditions contained
in the Letter of Credit. The LC Bank shall not be required to enter into any
extension or to otherwise amend, modify or supplement the Letter of Credit;
provided, however, the LC Bank may, in its sole and absolute discretion, extend
the Expiration Date upon the request of the Borrower made to the Bank on or
before 90 days prior to
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the Expiration Date and with the written consent of the Bank. Each extension
period if agreed to by the Bank and the LC Bank shall be for a minimum period of
one year unless sooner terminated in accordance with the terms and conditions of
the Letter of Credit. Without limitation of the absolute discretion of the Bank
whether to extend the Expiration Date, any such extension shall be conditioned
upon no Event of Default existing at the time thereof and the receipt by the
Bank of an update of the initial Appraisal and may be subject to such amendments
or modifications to this Agreement and/or any of the Security Documents as are
required by the Bank and/or the LC Bank in their sole discretion. In addition,
any extension, if granted, shall be subject to payment by the Borrower of an
extension fee together with all out-of-pocket expenses, including legal fees, of
the Bank and the LC Bank.
Section 2.02 Fees.
(a) The Borrower shall pay to the Bank on the date of
execution of this Agreement and on the date of issuance of any additional Letter
of Credit by the LC Bank, an Issuance Fee of $150.00. The Borrower shall also
pay a fee of $35.00 to the Trustee in accordance with the Agency Agreement for
each draw upon the Letter of Credit. In addition, if a substitute Trustee is
appointed at any time and the Letter of Credit is transferred to such substitute
Trustee, the Borrower shall pay to the Bank the LC Bank's customary Letter of
Credit transfer fee.
(b) The Borrower shall pay to the Bank on the date of
execution of this Agreement an origination fee equal to $104,300.00.
(c) The Borrower shall also pay to the Bank on the Date
of Issuance an annual letter of credit fee (the "Annual Fee") equal to 1.50% of
the Stated Amount prorated for the period from the Effective Date through June
30, 1999. Thereafter, and as long as the Letter of Credit is in effect, the
Borrower shall pay to the Bank in advance on each October 1 (for the period of
October 1 to and including December 31), January 1 (for the period of January 1
to and including March 31), April 1 (for the period of April 1 to and including
June 30), and July 1 (for the period from July 1 to and including September 30),
commencing on July 1, 1999, an Annual Fee equal to the quotient of (i) 1.50% of
the Stated Amount, calculated as of each October 1, January 1, April 1 and July
1, respectively, times the number of days in the applicable calendar quarter and
(ii) 360.
The Borrower hereby acknowledges and agrees that if any change
in any law or regulation or in the interpretation thereof by any court or
administrative or governmental authority charged with the administration
thereof, or in GAAP, shall either (i) impose, modify or deem applicable any
reserve, special deposit or similar requirement against letters of credit issued
by, or assets held by, or deposits in or for the account of, the LC Bank, or
(ii) impose on the LC Bank any other condition relating, directly or indirectly,
to the Letter of Credit, and the result of any event referred to in the
preceding clause (i) or (ii) shall be to increase the cost to the LC Bank of
issuing or maintaining the Letter of Credit (which increase in cost shall be
determined by the LC Bank's reasonable allocation of the aggregate of such cost
increase resulting from such event), then the LC Bank shall present to the Bank
a certificate stating the amount of the LC Bank's increased costs reasonably
allocable to the Letter of Credit, and the Borrower shall immediately pay to the
Bank, from time to time as specified by the LC Bank in such certificate, such
additional amounts as shall
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be sufficient to compensate for such increased cost. A copy of such certificate
shall be presented to the Borrower by the Bank, and any such additional amount
to be paid to the Bank shall be immediately due and payable to the Bank by the
Borrower. The certificate referred to hereinabove shall be conclusive as to the
amount thereof.
(d) In addition to the foregoing, the Borrower shall pay
to the Lender the fees set forth in paragraph 3 of the Borrower Note.
(e) The Borrower shall also pay all reasonable fees and
expenses incurred by the Bank, the Lender, the LC Bank or the Borrower in
connection with this Agreement, the Loan or the issuance of the Floating Rate
Option Notes, whether or not the Loan closes, including without limitation, the
Bank's counsel fees, the Lender's counsel fees, the LC Bank's counsel fees,
placement fees, the Lender's acceptance fee, trustee fees, trustee's counsel
fees, rating agency fees, and private placement memorandum and Floating Rate
Option Notes printing costs. In addition, the Borrower shall pay such additional
fees and expenses, including title insurance premiums, appraisal fees, survey
costs, environmental reports costs, and other fees and expenses as are incurred
in connection with any security for the Loan.
(f) All payments of fees to be made by the Borrower to
the Bank shall be made in immediately available funds. With respect to the
payment of the Annual Fee, the Bank shall notify the Borrower of the amount of
such payment not less than 10 days prior to the date upon which such payment is
due but failure to provide such notice shall not affect the Borrower's
obligations to make the payment when due.
Section 2.03 Reimbursement and Other Payments.
(a) Principal or Interest Drawing. In the event of any
Principal Drawing or Interest Drawing, the Borrower shall immediately pay to the
Bank or cause the Trustee to pay to the Bank the amount paid by the Bank to duly
honor such Drawing, and failure to so immediately reimburse the Bank shall
constitute an Event of Default under this Agreement. Without limitation of the
preceding sentence, if such amount has not been previously paid under the
Borrower Note and is outstanding, such amount shall constitute a loan to and
indebtedness of the Borrower to the Bank. If the Borrower does not reimburse the
Bank for such drawing on the same day of the Drawing or if the Borrower shall
otherwise fail to reimburse the Bank under this Section 2.03(a) as a result of a
Principal Drawing as honored or an Interest Drawing as honored, such
unreimbursed amount shall bear interest until payment in full of such amount,
and the Borrower shall be obligated to pay interest to the Bank, payable on
demand, or, if demand is not made, monthly in arrears on the last day of each
month following such Principal Drawing or Interest Drawing on any and all such
amounts remaining unpaid at the Default Rate of Interest. Accrual of such
interest and the acceptance of payment of such interest by the Bank thereof on
any one or more occasions shall not constitute a waiver of the Event of Default
occurring upon the failure of the Borrower to immediately reimburse the Bank for
the amount of the Drawing(s) that accrued such interest.
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(b) Remarketing Drawing. In the event of any Remarketing
Drawing, the amount of such Remarketing Drawing as honored shall constitute a
loan to and indebtedness of the Borrower to the Bank upon the following terms:
(i) The amount of any Remarketing Drawing as
honored relating to interest under the Borrower Note shall be
immediately due and payable by the Borrower to the Bank and if such
amount is not immediately paid to the Bank, such amount shall bear
interest at the Interest Rate from and after the date such amount
becomes payable hereunder. Such interest shall be payable upon demand
of the Bank, or, if demand is not made, monthly in arrears on the last
day of each month.
(ii) The amount of any Remarketing Drawing
representing the principal amount of any Floating Rate Option Notes not
remarketed shall be repaid as provided below. At any time that any
Remarketing Drawing is outstanding on any loan payment date set forth
in Schedule 1 of the Borrower Note, the Bank shall apply any payment of
principal on the Borrower Note in an amount equal to the principal
amount of Pledged Notes to be redeemed on such date as a repayment of
the Remarketing Drawing. The unpaid balance of the Remarketing Drawing
shall bear interest at the Interest Rate, which interest shall be paid
to the Bank monthly in arrears on the first Business Day of each month
commencing the month following the month in which the Remarketing
Drawing occurs. Any payments on or of the purchase price for the
Pledged Notes shall be applied as a payment of the outstanding amount
of the Remarketing Drawing.
(c) Monthly Payments. Notwithstanding the Borrower Note
to the contrary, the Borrower has agreed to make monthly principal and monthly
interest payments to the Bank. All of such payments shall be made (i) with
respect to interest payments, not later than the Business Day prior to the day
on which interest payments are due and payable under the Borrower Note and (ii)
with respect to principal payments, each such principal payment shall be made
not later than the Business Day prior to the dates set forth in Exhibit A
attached hereto and made a part hereof. The amount of the interest payments
shall be the amount payable under the Borrower Note, and the amount of each
principal payment is set forth on Exhibit A attached hereto. Such payments when
made by the Borrower shall be deposited by the Bank into a segregated account
(the "Borrower Account"). The Trustee shall make withdrawals from the Borrower
Account in order to reimburse the LC Bank for any draws upon the Letter of
Credit and to pay to Trustee its fees all in accordance with the Agency
Agreement. All payments of principal and interest by the Borrower into the
Borrower Account shall be applied as a credit against the amount of the Borrower
Note. If as of any date provided for in the Borrower Note for a payment of
principal or interest (a "Note Payment Date") there are insufficient funds in
the Borrower Account in order for the Trustee to reimburse the LC Bank for
principal and interest draws upon the Letter of Credit due on a Note Payment
Date, the difference between the amount in the Borrower Account and the amount
due as reimbursement to the LC Bank for such principal and interest draws (the
"Payment Deficiency") shall be immediately due and payable by the Borrower to
the Bank and if such amount is not immediately paid to the Bank, the same shall
constitute an Event of Default under this Agreement and, without limitation of
the foregoing, such amount shall bear interest at the Default Rate of Interest
from and after the
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Note Payment Date such amount becomes payable hereunder. Interest on the Payment
Deficiency shall be payable upon demand of the Bank, or, if demand is not made,
monthly in arrears as the last day of each month. If any payment due under this
paragraph is not made within 10 calendar days of its due date, a late fee equal
to 5.0% of such payment or $25, whichever is greater, up to a maximum of $1,500
for each such late payment shall be immediately due and payable to the Bank from
the Borrower. The collection of principal, interest and/or late fees by the Bank
on any one or more occasions shall not constitute a waiver of the Event of
Default arising upon failure by the Borrower to make payment to the Bank when
due of the amounts with respect to which such principal, interest and late
charges accrue.
(d) Interest Rate Changes. Any change in the Default Rate
of Interest or the Interest Rate resulting from a change in the Prime Rate shall
be effective on the effective date of the change in the Prime Rate. The Default
Rate of Interest shall be computed on the basis of the actual number of days
elapsed over a year of 360 days.
(e) Fees and Expenses. The Borrower hereby agrees to pay
to the Bank upon demand therefor sums equal to any and all amounts paid to the
LC Bank by the Bank for reasonable charges and expenses (including reasonable
attorneys' fees) attributable to the Borrower which the LC Bank may pay or incur
relative to the transfer, drawing upon, change in terms, maintenance, renewal,
extension or cancellation of the Letter of Credit or to any payment by the LC
Bank thereunder. The Borrower hereby agrees to pay to the Bank on demand sums
equal to any and all amounts which the Bank has paid or incurred (including
reasonable attorneys' fees) relative to the Bank's curing of any Event of
Default resulting from the acts or omissions of the Borrower under this
Agreement or under the Security Documents.
(f) Final Payment. The Borrower hereby absolutely,
unconditionally and irrevocably agrees to pay all amounts due to the Bank
pursuant to the provisions of this Agreement, the Borrower Note and the Security
Documents, including without limitation, amounts payable pursuant to Sections
2.02 and 2.03 hereof, on the Expiration Date, or at such earlier time as may be
provided for herein.
(g) Discharge of Obligations Upon Payment Under the
Borrower Note. Payments made under the Borrower Note shall discharge the
Borrower's obligations under this Agreement to the extent of such payments.
(h) Application of Payments. Unless otherwise agreed to,
in writing, or otherwise required by applicable law, payments will be applied
first to accrued, unpaid interest, then to principal, and any remaining amount
to any unpaid collection costs, late charges and other charges, provided,
however, upon an Event of Default, the Bank reserves the right to apply payments
among principal, interest, late charges, collection costs and other charges at
its discretion. All prepayments shall be applied to the indebtedness owing
hereunder in such order and manner as the Bank may from time to time determine
in its sole discretion.
Section 2.04 Payment on Non-Business Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Business Day,
such payment may be
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made on the preceding Business Day, but in no event shall be made later than the
next succeeding Business Day with interest (if such payment accrues interest)
continuing to accrue thereon until such payment is made.
Section 2.05 Security Documents. As security for all of the Borrower's
obligations to the Bank under this Agreement, the Borrower Note and the Master
Agreement, and any and all other obligations, agreements, or indebtedness
between the Borrower and the Bank, the Borrower shall execute and deliver and
cause the Guarantors to execute and deliver on the date hereof the Security
Documents required to be executed and delivered as one of the conditions
precedent to the obligation of the LC Bank to issue the Letter of Credit.
Section 2.06 Pledge of Remarketing Notes.
(a) As security for the payment and performance of all
obligations of the Borrower to the Bank hereunder and under the Borrower Note
and the Security Documents, the Borrower hereby agrees that upon the making of a
Remarketing Drawing with respect to the Loan, the Trustee shall cause to be
registered with the Depository in the name of Lender, as pledgor, and in the
name of the Bank, as pledgee, and transferred from the Depository account of
Lender to a separate Depository account of the Trustee, as custodian, the
Floating Rate Option Notes free and clear of all other liens and encumbrances in
an aggregate principal amount equal to the amount of such Remarketing Drawing
with respect to the Loan, less (i) any portion of such Remarketing Drawing
representing interest on the Floating Rate Option Notes so purchased, and (ii)
the amount the Bank is reimbursed by 2:00 p.m. Phoenix, Arizona time on the date
of such Remarketing Drawing (the "Pledged Notes"), and the Borrower hereby
consents to the grant to the Bank of a security interest in the Pledged Notes
and in the proceeds thereof. Pledged Notes registered with the Depository in the
name of the Lender shall be for the benefit of the Borrower as pledgor and the
Bank as pledgee. If a Depository is not used, the Borrower agrees that the
Remarketing Agent shall deliver such Pledged Notes to Trustee and the Trustee
shall register such Pledged Notes in the name of Lender for the benefit of the
Borrower, as pledgor and in the name of the Bank as pledgee with Lender's
endorsement of the Pledged Notes to the order of the Bank, and deliver such
Pledged Notes to the Bank or its designated custodian.
(b) The Borrower further agrees to the Trustee entering
into its registration books as the address to which payments of interest with
respect to Pledged Notes are to be sent, the Bank's address for notices pursuant
to Section 7.04 hereof as in effect from time to time.
(c) If the Borrower shall become entitled to receive or
shall receive any Pledged Notes, any payment of interest with respect to the
Pledged Notes from the Trustee, or any and all other proceeds thereof, it shall
accept any such items as the Bank's agent, shall hold them in trust for the
Bank, and shall deliver them forthwith to the Bank in the exact form received,
with the Borrower's endorsement to the order of the Bank when necessary, to be
held by the Bank, subject to the terms hereof, as security for the payment and
performance of all obligations of the Borrower hereunder, the Borrower Note and
under the Security Documents, except that the Bank shall credit all payments and
proceeds received by the Bank directly against the Borrower's obligations under
Sections 2.02 and 2.03 of this Agreement.
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(d) All principal and interest paid on the Pledged Notes
shall be retained by the Bank (or if received by the Borrower shall be forthwith
delivered by it to the Bank in the original form received) and applied by the
Bank to the payment of amounts due the Bank from the Borrower hereunder, the
Borrower Note and under the Security Documents.
(e) If the Borrower makes or causes to be made to the
Bank a prepayment or payment of a Remarketing Drawing pursuant to Section 2.03
hereof, or the Remarketing Agent resells Pledged Notes on behalf of the
Borrower, the Bank agrees to release from the lien of this Agreement and to
instruct the Trustee by telephone (confirmed in writing) to cause the
appropriate transfer of Pledged Notes on the books of the Depository (or, if a
Depository is not used, to deliver to the Borrower or the Remarketing Agent, as
the case may be, Pledged Notes endorsed in blank without recourse) in an
aggregate principal amount equal to the amount of such prepayment or payment
with respect to principal so made, or the principal amount of the Pledged Notes
so resold to the extent that the proceeds of such resale are delivered to the
Bank. Any such payment or prepayment of the Remarketing Drawing shall constitute
a payment or prepayment of the Borrower Note for all purposes hereof and of the
Borrower Note.
(f) In addition to the rights and remedies granted to the
Bank in this Agreement, the Bank shall have all of the rights and remedies of a
secured party under the applicable Uniform Commercial Code and such other rights
and remedies as are granted to a secured party in similar situations to the
extent of the security interest granted under paragraph (a) above. In addition,
if Pledged Notes are issued in "book entry form", the Bank shall be a
"Registered Pledgee" as defined by, and having the rights designated by Article
VIII and Article IX of the New York and, if applicable, the Arizona Uniform
Commercial Code.
(g) The Borrower shall be liable for the deficiency if
the proceeds of any sale or other disposition of the Pledged Notes by the Bank
are insufficient to pay all amounts to which the Bank is entitled, including
principal and interest as provided herein, and the reasonable fees and expenses
of any outside attorneys employed by the Bank to collect such deficiency.
Section 2.07 Interest Rate Determination Under the Borrower Note.
Following execution and delivery of the Borrower Note to Lender, the following
provisions shall apply to the determination of the interest rate under the
Borrower Note:
(a) Interest Rate Options. The Borrower Note may bear
interest at one or more Interest Rate Options selected by the Borrower as
hereinafter provided. Once an Interest Rate Option is selected, it may be
changed only in accordance with the provisions of Section2.07(c), below.
(b) Selection of Initial Interest Rate Option. The entire
principal balance of the Borrower Note shall initially bear interest at the
Weekly Rate, and, until another Interest Rate Option is timely and properly
selected, shall thereafter bear interest at the Weekly Rate pursuant to
Section2.07(c), below.
(c) Changes in Interest Rate Option Selected. The
Borrower may change the Interest Rate Option initially selected with respect to
all or part of the Borrower Note by making one
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or more Rate Elections in accordance with the provisions of this Section2.07(c).
During any Rate Period when the Borrower Note or a portion thereof bears
interest at the Weekly Rate or on the last day of any Rate Period when the
Borrower Note bears interest at the One Year Rate, the Three Year Rate, the Five
Year Rate, the Seven Year Rate or the Ten Year Rate, the Borrower shall have the
right to make a Rate Election to any Interest Rate Option. However, the Fixed
Rate once selected may not be changed. The Borrower may select more than one
Interest Rate Option and designate the principal amount of the Floating Rate
Option Notes to be effected by each such Interest Rate Option; provided,
however, that if the Borrower selects more than one Interest Rate Option, the
Borrower must designate at least $1,000,000 in principal amount of Floating Rate
Option Notes for each Interest Rate Option selected. The Borrower may make a
Rate Election by giving written notice to the Bank, the Lender, the Trustee, the
LC Bank and the Remarketing Agent. Such notice shall (i) state the Borrower's
intention to make a Rate Election (specifying the applicable Interest Rate
Option selected, which shall be an Interest Rate Option permitted hereunder),
(ii) specify the Rate Election Date, and (iii) designate the portion of the
Borrower Note, if less than all, to which such Interest Rate Option shall apply
(as such the "Notice of Rate Election"); provided, however, that no Rate
Election to a One Year Rate, a Three Year Rate, a Five Year Rate, a Seven Year
Rate, a Ten Year Rate or a Fixed Rate shall be permitted unless, after giving
effect to such Rate Election, the unexpired term of the Letter of Credit will
exceed the term of the proposed Rate Period by at least five days determined as
of the proposed Rate Election Date. The Notice of Rate Election shall be given
at least 45 days prior to the Rate Election Date. If the Borrower Note or any
portion thereof bears interest at the One Year Rate, the Three Year Rate, the
Five Year Rate, the Seven Year Rate or the Ten Year Rate and the Borrower
declines or fails to make a Rate Election at the end of such Rate Period with
respect to any such portion, a Rate Election shall nevertheless be deemed to
have been made with respect thereto and the Borrower Note or such portion
thereof, as applicable, shall, from and after the end of the expiring Rate
Period until another Rate Election is made by the Borrower and becomes
effective, bear interest at the Weekly Rate. In addition, if the Borrower Note
bears interest at the Weekly Rate, a continuation of the Weekly Rate into the
next Rate Period shall not constitute a Rate Election, and neither the Trustee,
the Lender nor the Borrower shall be required to take any action, or give notice
or consent, in order to effect the continuation of the Weekly Rate applicable to
the Borrower Note. If the Remarketing Agent shall not have determined a Weekly
Rate for any Weekly Period, the Weekly Rate shall be the same as the Weekly Rate
for the immediately preceding Weekly Period. Assuming compliance with the
procedures set forth herein and in Section 2.07(d) hereof, the Interest Rate
Option selected by a Rate Election shall become effective on the Rate Election
Date and shall stay continuously in effect until (i) in the case of the Weekly
Rate, the Borrower makes another Rate Election, (ii) in the case of the One Year
Rate, the Three Year Rate, the Five Year Rate, the Seven Year Rate or the Ten
Year Rate, the conclusion of the Rate Period or (iii) in the case of the Fixed
Rate, the Borrower Note is paid in full.
A Rate Election which results in a continuation of the same
Interest Rate Option from the immediately preceding Rate Period shall permit the
optional tender of the Floating Rate Option Notes which correspond to the
principal amount of the Borrower Note which bears that Interest Rate Option on
the Borrower Note. Fixed Rate notes are not subject to optional redemption. A
Rate Election from one Interest Rate Option to another shall require a mandatory
tender of the Floating Rate Option Notes which correspond to the principal
amount of the Borrower Note which bears that Interest Rate Option on the
Borrower Note. A tender of Floating Rate Option Notes will cause a
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Remarketing Drawing in the event of the failed remarketing of any of the
Floating Rate Option Notes tendered as a result of the Rate Election.
(d) Determination of Interest Rate. For all Rate Periods
after the initial Rate Period, the interest rate (i.e. the Weekly Rate, the One
Year Rate, the Three Year Rate, the Five Year Rate, the Seven Year Rate, the Ten
Year Rate or the Fixed Rate, as applicable) shall be determined in the following
manner. At or before 5:00 p.m., Columbus, Ohio time, on each Rate Determination
Date, the Remarketing Agent shall determine the applicable interest rate which
the Floating Rate Option Notes shall bear during the next Rate Period. Such
interest rate shall be that interest rate which, in the sole and exclusive
judgment of the Remarketing Agent (having due regard for the length of the Rate
Period, tender options (if any) available to the Holders of the Floating Rate
Option Notes during the Rate Period, prevailing financial conditions and the
yields at which comparable securities are then being sold), would equal (but not
exceed) the interest rate necessary to enable the Remarketing Agent to sell the
Floating Rate Option Notes (exclusive of accrued interest, if any) on the Rate
Adjustment Date at a price equal to one hundred percent (100%) of the principal
amount thereof. The interest rate so determined shall be effective on the next
Rate Adjustment Date, or if the Rate Determination Date and the Rate Adjustment
Date are the same day, then on such day. If Floating Rate Option Notes bearing
interest at the Weekly Rate are tendered during a Rate Period, then the Weekly
Rate may be increased (but not decreased) if, in the sole and exclusive judgment
of the Remarketing Agent, such an increase in the Weekly Rate is necessary to
enable the Remarketing Agent to remarket such Floating Rate Option Notes
(exclusive of accrued interest, if any) at a price equal to one hundred percent
(100%) of the principal amount thereof.
On each Rate Determination Date for the Weekly Rate and on any
date on which the Weekly Rate is increased pursuant to the last sentence of the
preceding paragraph, the Remarketing Agent shall give the Trustee telephonic
notice, promptly confirmed in writing, of the Weekly Rate determined by the
Remarketing Agent on such date; provided, however, that such notice need not be
given unless the Weekly Rate so determined is different from the Weekly Rate for
the preceding Rate Period. The Trustee shall, promptly after having been
informed of the Weekly Rate, notify the Borrower of the Weekly Rate. In the case
of the One Year Rate, the Three Year Rate, the Five Year Rate, the Seven Year
Rate, the Ten Year Rate or the Fixed Rate, the Remarketing Agent shall, by not
later than the Business Day following the Rate Determination Date, notify the
Trustee of the One Year Rate, the Three Year Rate, the Five Year Rate, the Seven
Year Rate, the Ten Year Rate or the Fixed Rate, as applicable, determined by the
Remarketing Agent. The Trustee shall, within one Business Day after having been
so informed, notify the Borrower of the One Year Rate, the Three Year Rate, the
Five Year Rate, the Seven Year Rate, the Ten Year Rate or the Fixed Rate, as
applicable, as determined by the Remarketing Agent.
(e) Calculation of Interest. During any Rate Period when
the Borrower Note bears interest at the Weekly Rate, interest on the Borrower
Note shall be computed on the basis of a 365-day year (366 days during any
period containing a February 29) for the actual number of days elapsed during
such Rate Period. During any Rate Period when the Borrower Note bears interest
at the One Year Rate, the Three Year Rate, the Five Year Rate, the Seven Year
Rate, the Ten Year Rate or the Fixed Rate, interest on the Borrower Note shall
be computed on the basis of a 360-day year, consisting of twelve 30-day months.
In no event shall any Weekly Rate, any One Year Rate,
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any Three Year Rate, any Five Year Rate, any Seven Year Rate, any Ten Year Rate
or any Fixed Rate exceed the Maximum Rate. All determinations of any Weekly
Rate, any One Year Rate, any Three Year Rate, any Five Year Rate, any Seven Year
Rate, any Ten Year Rate or any Fixed Rate shall be rounded to the nearest
one-hundredth of one percent (0.01%) and shall be conclusive and binding upon
the Borrower.
Section 2.08 Rate of Interest. Borrower expressly agrees to an
effective rate of interest that is the rate stated in this Article II plus any
additional rate of interest resulting from any other charges in the nature of
interest paid or to be paid in connection with this Agreement and the Borrower
Note.
ARTICLE III
CONDITIONS OF ISSUANCE
Section 3.01 Conditions Precedent to this Agreement. The obligation of
the Bank to enter into this Agreement is subject to the condition precedent that
the Bank shall have received on or before the date hereof all such documents,
instruments, approvals (and, if requested by the Bank, certified duplicates of
executed copies thereof) or opinions addressed to the Bank as the Bank may
request and payment of all fees and costs required to be paid hereunder,
including, without limitation, the following, each dated such date, in form and
substance satisfactory to the Bank:
(a) If the Borrower is a corporation, a certificate of
the Secretary or Assistant Secretary of the Borrower, or if the Borrower is a
partnership, a certificate of the managing general partner certifying the
accuracy and completeness of copies of the resolutions or actions by unanimous
written consent of the board of directors or partners, as the case may be, of
the Borrower authorizing or ratifying the execution, delivery and performance of
this Agreement, the Borrower Note and the Security Documents.
(b) If the Borrower is a corporation, a certificate of
the Secretary or Assistant Secretary of the Borrower, or if the Borrower is a
partnership, a certificate of the managing general partner certifying the names
and true signatures of the officers or other representatives of the Borrower
authorized to sign this Agreement, the Borrower Note and the Security Documents.
(c) If the Borrower is a corporation, certified copies of
the articles of incorporation, code of regulations and certificate of good
standing of the corporation, or if the Borrower is a partnership, certified
copies of the above corporation documents for any corporate general partner and
the recorded certificate of partnership for the Borrower.
(d) Opinion of counsel for the Borrower and the
Guarantors, addressed to the Bank and to other applicable parties, in
substantially the form of Exhibit B hereto.
(e) Executed copies of this Agreement, the Borrower Note,
the Guaranty, an amendment to the Deed of Trust, and all other Security
Documents and other documents required to be delivered as a condition to
issuance of the Floating Rate Option Notes and Letter of Credit.
(f) Fees specified in Section 2.02 hereof.
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<PAGE> 17
(g) An Environmental Indemnity Agreement, executed by
Borrower and the Guarantors.
(h) If requested by the Bank, current as-built survey of
the Real Property by a licensed surveyor acceptable to the Bank describing the
boundaries of the Real Property and showing the location of the improvements
upon the Real Property and all means of ingress and egress, rights-of-way,
easements (each of which shall be identified by docket and page or recording
number where recorded) and all other customary and relevant information pursuant
to ALTA standards and any title company requirements. All surveys shall be
certified to the Bank and the title company issuing the Title Policy.
(i) An ALTA extended coverage mortgagee's title insurance
policy [ALTA Loan Policy - 1970 (Rev. 10-17-70)] or similar policy acceptable to
the Bank (the "Title Policy"), with such endorsements as the Bank may require,
issued by a title insurance company satisfactory to the Bank in the amount of
the Loan insuring the lien of the Deed of Trust to be a first and prior lien
upon the Real Property as security for the Loan, subject only to such exceptions
as the Bank may expressly approve in writing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01 Representations and Warranties of the Borrower. The
Borrower hereby represents and warrants to the Bank as follows:
(a) The Borrower has not incurred any material
accumulated funding deficiency as defined in ERISA and the regulations
promulgated thereunder and no Reportable Event has occurred with respect to any
Pension Plan involving the Borrower. Neither has the Pension Benefit Guaranty
Corporation asserted that the Borrower has incurred any material liability in
connection with any such pension plan nor has any lien attached nor any Person
threatened to attach a lien on any property of the Borrower as a result of the
Borrower's failure to comply with ERISA or regulations promulgated thereunder.
(b) Except as previously disclosed to the Bank in
writing, the Borrower has filed all Federal, state and local tax returns
required to be filed and has paid all taxes shown to be due on such returns, and
has made provision for all liabilities not so paid or accrued under returns not
yet due. Except as previously disclosed to the Bank in writing, the Borrower has
no knowledge of any pending assessments or adjustments to its taxes payable with
respect to any year.
(c) The Borrower's obligations under this Agreement, the
Borrower Note, the Master Agreement and the applicable Security Documents are
not subordinate in any manner to any other obligation of the Borrower.
(d) There is no claim, action, temporary restraining
order, injunction, suit, proceeding, inquiry or investigation, at law or in
equity, before or by any judicial or administrative court, governmental agency,
public board or body, pending or, to the best of the Borrower's
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<PAGE> 18
knowledge, threatened against or affecting, or involving the properties or
businesses, or any securities of, the Borrower nor, to the best of the
Borrower's knowledge, is there any basis therefore, (i) contesting the existence
or powers of the Borrower or the authority of its directors, officers, managers,
members or partners, as the case may be, or (ii) wherein an unfavorable
decision, ruling or finding would in any way adversely affect the Borrower's
ability to carry out its obligations under this Agreement, the Borrower Note,
the Master Agreement or the Security Documents.
(e) The transactions contemplated by this Agreement,
including the grant by the Borrower to the Bank of a security interest in the
Pledged Notes pursuant to Section 2.06 hereof, and the transactions contemplated
by the Borrower Note, the Master Agreement, or the Security Documents have not
been entered into by the Borrower in contemplation of the Borrower's insolvency
nor have such transactions been entered into with the intent to hinder, delay or
defraud the equity holders or the creditors of the Borrower.
(f) The Borrower is not regularly engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System).
(g) Neither this Agreement, the Borrower Note nor any of
the other Security Documents, nor any certificate or other document furnished to
the Bank by or on behalf of the Borrower pursuant to any Security Document
contains, or will contain, as of its date, any untrue statement of a material
fact or omits to state or will omit to state, as of its date, a material fact
necessary in order to make the statements contained herein and therein not
misleading. There are no facts known to the Borrower which, individually or in
the aggregate, materially adversely affect or involve any substantial
possibility of materially adversely affecting the condition, business or affairs
of the Borrower or its respective properties and assets considered as an
entirety which have not been disclosed herein or in written materials previously
delivered to the Bank.
(h) The Borrower owns good and marketable title to all
collateral pledged as security for the Loan as identified in the Security
Documents free and clear of all liens and encumbrances, except as disclosed in
writing to the Bank.
(i) The Borrower is a corporation, duly formed, validly
existing and in good standing under the laws of Delaware, has the corporate
power to own its properties and assets, to carry on the businesses in which it
is engaged, and to execute and perform this Agreement, the Borrower Note and all
applicable Security Documents and other documents in connection therewith to be
executed by it, and is duly qualified to do business in all jurisdictions where
such qualification is necessary or advisable.
(j) The execution, delivery and performance by the
Borrower of this Agreement, the Borrower Note and the execution and delivery of
all applicable Security Documents and other documents in connection therewith to
which the Borrower is a party, have been duly authorized by all requisite action
of the Borrower and will not violate any provisions of law or of the articles of
incorporation, regulations or bylaws of the Borrower, or any amendments thereto;
will not be in conflict with, result in a breach of, or constitute a default
under, any agreement to which the
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<PAGE> 19
Borrower is a party or any order, writ, injunction or decree of any court or
governmental instrumentality; and will not result in the creation or imposition
of any lien, charge or encumbrance upon any property of the Borrower other than
as created by the Security Documents.
(k) No registration with, notice to, consent or approval
of any third party, including any governmental agency of any kind, is required
for the due execution and delivery of, or for the enforceability of, this
Agreement, the Security Agreements or other documents in connection therewith.
The person or persons executing and delivering this Agreement, the Borrower
Note, the Security Documents or other documents in connection therewith on
behalf of the Borrower have been duly authorized to do so, and this Agreement,
the Borrower Note and the Security Agreements are legally binding upon the
Borrower and are enforceable in accordance with their terms.
(l) No litigation or proceeding involving the Borrower,
material to the business operations or financial condition of the Borrower, is
pending or threatened in any court or before any administrative agency, federal,
state or local.
(m) The Borrower's financial statements for the period
ending December 31, 1998, heretofore furnished to the Bank, are true and
complete, have been prepared in accordance with generally accepted accounting
principles consistent with the respective prior fiscal periods of the Borrower,
omit no material contingent liabilities of any kind that are not disclosed or
otherwise reflected therein, and fairly present the Borrower's financial
condition as of the date thereof and the results of their operations for the
period then ended. Since the date thereof, there has been no material adverse
change in the Borrower's financial condition, properties or businesses which has
not been disclosed in writing by the Borrower to the Bank. The Borrower has no
reason to believe that the fair market values of the Real Property subject to
the Appraisal are less than the fair market value thereof determined by the
Appraisal.
(n) The Borrower has obtained all governmental,
administrative and other licenses, permits and other authorizations required by
law to be obtained or made in order to permit the operation of the Borrower's
operations, including the Project, and as are necessary to the carrying on of
its businesses, except for any such authorizations or filings which are not
currently so required and which, in the reasonable judgment of the Borrower, can
be obtained or made without difficulty prior to the time so required. The
Borrower is in material compliance with all laws and regulations, including
without limitation all environmental, occupational safety and health, and
workers' compensation laws and regulations, applicable to the Project and its
other businesses where failure to comply would have a material adverse effect on
the business or financial condition of the Borrower. The Borrower has not
received any notice from, or has any knowledge of any notice received by any
other person from, any governmental or public body, agency or instrumentality
alleging that the operation of the Project is not in compliance with regulations
affecting its operations and licenses.
(o) The Borrower possesses all trademarks, trademark
rights, patents, patent rights, licenses, permits, trade names, trade name
rights, copyrights and approvals which are required to conduct its business as
now conducted without conflicting with the rights of others.
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(p) The Borrower is not a party to or bound by any
agreement, contract, instrument or understanding or commitment of any kind or
subject to any corporate or other restriction, the performance or observance of
which by the Borrower now or, as far as the Borrower can reasonably foresee,
will have a material adverse effect, financial or otherwise, upon the assets or
business of the Borrower taken as a whole. The Borrower, nor any other person or
party to a contract or agreement material to the financial condition or
operations of the Borrower taken as a whole, is in default under any such
contract or agreement, and to the knowledge of the Borrower, no event has
occurred which, but for the giving of notice or the passage of time, or both,
would constitute a default thereunder.
(q) No portion of any advance or loan made hereunder
shall be used directly or indirectly to purchase ineligible securities, as
defined by applicable regulations of the Federal Reserve Board, underwritten by
any affiliate of Banc One Corporation during the underwriting period for 30 days
thereafter.
(r) For purposes of these representations and warranties,
"Systems" means all devices, systems, machinery, information technology,
computer software and hardware, and other date sensitive technology (jointly and
severally the "Systems") under the control of or owned by the Borrower, and
"Year 2000 Compliant" means that such Systems are designed to be used prior to,
during and after the Gregorian calendar year 2000 A.D. and will operate during
each such time period without error relating to date data, specifically
including any error relating to, or the product of, date data which represents
or references different centuries or more than one century.
(s) The Borrower's internal Information Systems
department has been conducting an analysis of the Systems within the Borrower,
from desktop software to the software used within the PBX system. There have
been a few softwares 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 Borrower 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, the
Borrower believes that cost saving incurred by the increased productivity and
ability to generate internal reports will exceed the actual costs expended.
(t) The Borrower does develop and distributes computer
hardware and software, and has thoroughly reviewed such systems. Because of the
interaction between the Borrower's hardware/software with other manufacturer's
hardware/software, the Borrower refrains from warranting Year 2000 compliance.
In order to make the Borrower's POS terminal customers aware of potential issues
with the transition from 1999 to 2000, the Borrower has, at its own expense,
provided over ten thousand test cards to enable the Borrower's customers to
fully test the ability of the Borrower's products, when interacting with other
vendors software/ hardware, to ascertain whether or not a Year 2000 compliance
issue is present. The Borrower'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 Borrower's customers,
but not because of the
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<PAGE> 21
applications developed and distributed by the Borrower. Nevertheless, the
Borrower 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.
(u) The fair market value of all real and personal
property, if any, pledged to the Bank as collateral to secure the obligations
contemplated in this Agreement is not and shall not be less than currently
anticipated or subject to substantial deterioration in value because of the
failure of such collateral to be Year 2000 Compliant.
ARTICLE V
COVENANTS OF THE BORROWER
Section 5.01 Financial Statements.
(a) The Borrower shall furnish to the Bank as soon as
practicable after the end of each calendar quarter, and in any event within 60
days thereafter, consolidated operating statements and financial statements of
the Borrower. All of such statements shall be prepared in accordance with GAAP
or consistent with Securities and Exchange Commission filing requirements and
shall be certified by the Borrower as being true, complete and correct in all
material respects. On each occasion on which the Borrower is required to furnish
an operating statement or financial statements to the Bank pursuant to this
Section 5.01(a), the Borrower shall also furnish to the Bank a certificate of
the Borrower (i) stating that the Borrower has reviewed the provisions of this
Agreement and, after reasonable investigation, has no knowledge of the
occurrence of any event or condition which either constitutes or with the lapse
of time or giving of notice or both would constitute an Event of Default, or if
the Borrower has such knowledge, specifying such event or condition and what
action the Borrower has taken, is taking or proposes to take with respect
thereto, and (ii) setting forth the calculation of the Financial Covenants as of
the date of the most recent financial statements accompanying such certificate.
The Borrower shall also furnish promptly to the Bank such other information
respecting the business, properties, condition or operations, financial or
otherwise, of the Borrower and the Guarantors as the Bank may reasonably
request.
(b) As soon as available and in any event within one
hundred twenty (120) days after the last day of each fiscal year, the Borrower
shall furnish to the Bank a copy of the Borrower's audited consolidated
financial statements, certified by independent certified public accountants,
including consolidated balance sheets and statements of financial condition as
of the end of such fiscal year, and related consolidated statements of income
and cash flows, a reconciliation of retained earnings and changes in financial
condition for the fiscal year then ended, setting forth in comparative form the
corresponding figures as of the end of or for the previous fiscal year, all in
reasonable detail and all in conformity with GAAP.
Section 5.02 Deliver Notice. Forthwith upon learning of any of the
following, the Borrower shall deliver written notice thereof to the Bank,
describing the same and the steps being taken by the Borrower with respect
thereto:
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(a) The occurrence of an Event of Default or an event or
circumstance which would constitute an Event of Default, but for the requirement
that notice be given or time elapse or both;
(b) Any action, suit or proceeding, by it or against it
at law or in equity, or before any governmental instrumentality or agency, or
any of the same which may be threatened, and which, if adversely determined,
would materially impair the right or ability of the Borrower to carry on its
business or would materially impair the right or ability of the Borrower to
perform its obligations under this Agreement and the Security Documents, or
would materially and adversely affect its business, operations, properties,
assets or condition;
(c) Any change in the name, address, identity or
structure of the Borrower; or
(d) Any uninsured or partially uninsured loss through
fire, theft, liability or property damage which may have an adverse material
effect on the Borrower's financial condition or operations.
Section 5.03 Keep Books. The Borrower shall keep true and proper books
of records and accounts in which full and correct entries are made of all
business transactions, and reflect in its financial statements adequate accruals
and appropriations to reserves, all in accordance with GAAP.
Section 5.04 Inspection of Books. The Borrower shall allow, during
reasonable business hours, the Bank or its representatives, access to the
financial books and records of the Borrower.
Section 5.05 Amendment of any Other Document. The Borrower shall not
enter into any agreement containing any provision which would be violated or
breached by the performance of its obligations hereunder or under any Security
Document or under any instrument or document delivered or to be delivered by it
hereunder or in connection herewith.
Section 5.06 Affirmative and Negative Covenants. Unless the prior
written consent of the Bank is first received, the Borrower shall comply with
all of the affirmative and negative covenants contained on Exhibit C hereto,
which are hereby incorporated herein by reference.
ARTICLE VI
EVENTS OF DEFAULT
Section 6.01 Events of Default. The occurrence of any of the following
events shall be an "Event of Default" hereunder:
(a) The Borrower shall fail to pay when due any amount
payable pursuant to Sections 2.02 or 2.03 hereof; or
(b) The Borrower shall fail to pay when due, and such
failure to pay shall continue for ten (10) Business Days after notice thereof to
the Borrower by the Bank, any amount,
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other than pursuant to Sections 2.02 or 2.03 hereof, payable by the Borrower to
the Bank hereunder, the Borrower Note or under any of the Security Documents; or
(c) The Borrower shall fail to perform or observe any of
the terms, covenants or agreements to be performed or observed by the Borrower
as set forth in this Agreement (other than the failures described in subsections
(a) and (b) of this Section 6.01), the Borrower Note or any of the Security
Documents, and any such failure shall continue for thirty (30) days; or
(d) The Borrower or any Guarantor shall be in default
under the Borrower Note or any of the Security Documents; or
(e) Any representation or warranty made by the Borrower
or any Guarantor (or any of its officers or shareholders or partners) herein or
in any of the Security Documents or in any other document delivered in
connection with this Agreement shall prove to have been incorrect in any
material respect when made; or
(f) The Borrower or any Guarantor pursuant to or within
the meaning of any Bankruptcy Law:
(i) commences a voluntary case;
(ii) consents to the entry of an order for relief
against it in an involuntary case;
(iii) makes a general assignment for the benefit
of its creditors; or
(iv) admits in writing that it is unable to pay
its debts as the same become due; or
(g) A court of competent jurisdiction enters an order or
decree under any Bankruptcy law that:
(i) is for relief against the Borrower or the
Guarantor in an involuntary case; or
(ii) orders the liquidation of the Borrower or
the Guarantor, and the order or decree remains unstayed and in effect
for 60 days; or
(h) The Borrower or any Guarantor shall be in default
beyond any applicable cure or grace period under any other agreement, obligation
or instrument between the Borrower or any of the Guarantors and the Bank, or any
other creditor; or
(i) The Borrower shall be in default beyond any
applicable cure or grace period under the Master Agreement.
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<PAGE> 24
(j) The liquidation, termination or dissolution of
Borrower unless the entity surviving such transaction or receiving Borrower's
assets expressly assumes in writing the liabilities of Borrower under this
Agreement, the Borrower Note and the Security Documents.
(k) Any levy or execution upon, or judicial seizure of,
any portion of any collateral or security for the Loan.
(l) Any attachment or garnishment of, or the existence or
filing of any lien or encumbrance, other than any lien or encumbrance permitted
by the Deed of Trust, against any portion of any collateral or security for the
Loan, that is not removed or released within thirty (30) days after its
creation.
(m) The institution of any legal action or proceedings to
enforce any lien or encumbrance upon any portion of any collateral or security
for the Loan, that is not dismissed within thirty (30) days after its
institution.
(n) The occurrence of a GAAP adverse change in the
financial condition of Borrower that, under GAAP, is deemed material, or if the
Bank in good faith shall believe that the prospect of payment or performance of
the Loan is impaired.
Section 6.02 Remedies Upon an Event of Default. If any Event of Default
shall have occurred and be continuing and shall not have been specifically
waived pursuant to Section 7.03 hereof, the Bank may do any one or more of the
following:
(a) Notify the Trustee to draw so much of the Letter of
Credit as is necessary to repay the Floating Rate Option Notes which relate to
the Loan and all accrued interest thereon in full;
(b) Declare the principal of all amounts owing under this
Agreement (or the Borrower Note prior to the assignment of the Borrower Note to
Lender) and the Security Documents (including any amounts drawn under the Letter
of Credit as the result of a notice from the Bank to the Trustee as provided in
subparagraph (a) above) and all other indebtedness of the Borrower to the Bank,
together with interest thereon, to be forthwith due and payable, regardless of
any other specified maturity or due date, without notice of default, presentment
or demand for payment, protest or notice of nonpayment or dishonor, or other
notices or demands of any kind or character, and without the necessity of prior
recourse to any security;
(c) Exercise any and all of its rights under the Security
Documents, or otherwise as a secured creditor, including, without limitation,
foreclosing on any security, and exercising any other rights with respect to
security whether under the Security Documents or any other agreement or as
provided by law, all in such order and in such manner as the Bank in its sole
discretion may determine; and
(d) Declare that the Default Rate of Interest shall apply
to the remaining unpaid balance of the Loan until such Event of Default is
cured.
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ARTICLE VII
MISCELLANEOUS
Section 7.01 Payments and Computations. The Borrower shall make each of
its payments due under this Agreement not later than 12:30 p.m. (Phoenix,
Arizona time) on the date when due in lawful money of the United States of
America to the Bank at its address referred to in Section 7.04 hereof in
immediately available funds. The Borrower hereby authorizes the Bank, if and to
the extent payment is not made when due hereunder, to charge from time to time
against the Borrower Account any amount so due. Except as otherwise specifically
provided in this Agreement, computations of interest and fees hereunder shall be
made by the Bank on the basis of a year of 360 days and the actual number of
days (including the first day but excluding the last day) elapsed.
Section 7.02 Obligations Absolute. The obligations of the Borrower
under this Agreement shall be absolute, unconditional and irrevocable, and all
amounts payable by the Borrower hereunder shall be paid strictly in accordance
with the terms of this Agreement under all circumstances, including without
limitation, the following circumstances:
(a) any lack of validity or enforceability of the Letter
of Credit; or
(b) any amendment, waiver of or consent to departure from
any or all of the provisions of this Agreement, the Borrower Note or any or all
of the Security Documents given pursuant to Section 7.03 hereof; or
(c) the existence of any claim, set-off, defense or other
right which the Borrower may have at any time against any Holder, the Trustee,
the LC Bank, any beneficiary or any transferee of the Letter of Credit, or any
Person for whom the Trustee, any such beneficiary or any such transferee may be
acting, the Bank or any other Person, whether in connection with this Agreement,
the transactions contemplated herein or in the other documents or any unrelated
transaction; or
(d) in the absence of gross negligence or willful
misconduct by the Bank or the LC Bank or its officers or employees, any
statement or any other document presented hereunder or with respect to or under
the Letter of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect whatsoever; or
(e) payment by the LC Bank to the Trustee under the
Letter of Credit against presentation of a draft or certificate which does not
comply with the terms of the Letter of Credit; or
(f) any nonapplication or misapplication by the Trustee
of the proceeds of any drawing on the Letter of Credit.
Section 7.03 Amendments; Waivers. No amendment or waiver of any
provision of this Agreement, nor consent to any departure by the Borrower
therefrom, shall in any event be effective
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<PAGE> 26
unless the same shall be in writing and signed by the Bank, and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.
Section 7.04 Notices. Except as otherwise provided herein, whenever
notice is required to be given pursuant to the provisions hereof, such notice
shall be in writing (including facsimile transmission) and shall be given as
follows:
(a) if to the Borrower: Hypercom Corporation
2851 West Kathleen Road
Phoenix, Arizona 85053
(b) if to the LC Bank: Bank One, NA
Six Federal Plaza West
Youngstown, Ohio 44503
Attention: Thomas Murray
(c) if to the Bank: Bank One, Arizona, NA
241 North Central Avenue
Phoenix, Arizona 85004
Attention: Scott A. Schaefer
Commercial Banking, AZ1-1178
(d) if to the Trustee: Bank One Trust Company, NA
100 East Broad Street
Columbus, Ohio 43271-0181
Attn: David B. Knox
or to such other address as any Person listed in this Section may hereafter
specify for the purpose by written notice to each other Person listed in this
Section. Each such notice shall be effective and conclusively deemed received
(i) if given by facsimile transmission, when such facsimile is transmitted and
the original copy of such notice is deposited in the U.S. mail, first class
postage prepaid, addressed as aforesaid, (ii) if given by certified or
registered U.S. mail, when confirmation of delivery is received or when notice
of refusal to accept delivery is received, or (iii) if hand delivered, when
delivered at the address specified in this Section.
Section 7.05 No Waiver; Remedies. No failure on the part of the Bank to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof, unless as permitted under Section 7.03 hereof, nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
Section 7.06 Accounting Terms. All accounting terms not specifically
defined herein or in Exhibit C hereto shall be construed in accordance with
GAAP.
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<PAGE> 27
Section 7.07 Computations. Where the character or amount of any asset,
liability or item of income or expense is required to be determined, or any
consolidation or other accounting computation is required to be made, for the
purpose of this Agreement, such determination or calculation shall, to the
extent applicable and except as otherwise specified in this Agreement, be made
in accordance with GAAP.
Section 7.08 Indemnification. The Borrower hereby agrees to indemnify
and hold the Bank and the LC Bank, and their respective officers, directors,
shareholders, employees, agents and servants, harmless from and against any and
all claims, damages, losses, liabilities, costs or expenses (including, without
limitation, reasonable attorneys' fees or expenses to the extent permitted by
law) which the Bank or the LC Bank may incur or which may be claimed against the
Bank or the LC Bank by any Person by reason of or in connection with this
Agreement and the payment or failure to make lawful payment under the Letter of
Credit; provided, however, that the Borrower shall not be required to indemnify
the Bank or the LC Bank pursuant to this Section 7.08 for any claims, damages,
losses, liabilities, costs or expenses to the extent caused by the Bank's or the
LC Bank's willful misconduct or gross negligence. If any action, suit or
proceeding arising from any of the foregoing is brought against the Bank, the LC
Bank or any other Person indemnified pursuant to this Section 7.08, then the
Borrower, to the extent and in the manner directed by the Bank, will resist and
defend such action, suit or proceeding or cause the same to be resisted or
defended by counsel designated by the Person or Persons indemnified or intended
to be indemnified (which counsel shall be satisfactory to the Borrower).
Section 7.09 Costs, Expenses and Taxes. The Borrower agrees to pay on
demand such costs and expenses incurred by the Bank or the LC Bank in connection
with the preparation, issuance, delivery, filing and recording of this Agreement
and the Security Documents. In addition, the Borrower shall pay all costs and
expenses in connection with the enforcement of this Agreement and the Security
Documents and such other documents which may be delivered in connection with
this Agreement and the Security Documents. In addition, the Borrower shall pay
any and all stamp and other taxes and fees payable or determined to be payable
by the Bank in connection with the execution, delivery, filing and recording of
this Agreement and the Security Documents, and the Borrower agrees to save the
Bank and the LC Bank harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes
and fees.
Section 7.10 [Intentionally left blank].
Section 7.11 Further Assurances. The Borrower agrees to do such further
acts and things and to execute and deliver to the Bank such additional
assignments, agreements, powers and instruments, as the Bank may reasonably
require or deem advisable to carry into effect the purposes of this Agreement or
to better assure and confirm unto the Bank its rights, powers and remedies
hereunder.
Section 7.12 Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same Agreement.
-27-
<PAGE> 28
Section 7.13 Binding Effect. This Agreement shall become effective when
it shall have been executed by the Borrower and the Bank and thereafter shall be
binding upon and inure to the benefit of the Borrower and the Bank and their
respective successors and assigns. The Bank may assign to any financial
institution all or any part of, or any interest (undivided or divided) in, its
rights and benefits under this Agreement, and to the extent of that assignment
such assignee shall have the same rights and benefits against the Borrower
hereunder as it would have had if such assignee were the Bank.
Section 7.14 Severability. The parties hereto intend and believe that
each provision in this Agreement comports with all applicable local, state and
Federal laws and judicial decisions. However, if any provision or provisions, or
if any portion of any provision or provisions, in this Agreement are found by a
court of law to be in violation of any applicable local, state or Federal
ordinance, statute, law, administrative or judicial decision, or public policy,
and if such court should declare such portion, provision or provisions of this
Agreement to be illegal, invalid, unlawful, void or unenforceable as written,
then it is the intent of the parties hereto that such portion, provision or
provisions shall be given force and effect to the fullest possible extent, that
the remainder of this Agreement shall be construed as if such provision or
provisions were not contained herein and that the rights, obligations and
interests of the parties under the remainder of this Agreement shall continue in
full force and effect.
Section 7.15 Governing Law; Jurisdiction. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of Arizona.
The parties hereto consent to and by this Agreement submit themselves to the
personal jurisdiction of the Court of Common Pleas of Maricopa County, Arizona
and the United States District Court sitting in Phoenix, Arizona for the
purposes of any judicial proceedings which are instituted with respect to any
matter arising under this Agreement, or any of the Security Documents or any
other agreement, instrument or note related hereto. The parties agree that venue
is proper in said jurisdiction.
Section 7.16 [Intentionally left blank].
Section 7.17 Headings. Section headings and captions in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose and are not to be considered as
defining or limiting in any way the scope or intent of the provisions of this
Agreement.
Section 7.18 Time of Essence. Time shall be of the essence in the
performance of all the obligations of the Borrower under the Agreement and the
Security Documents.
Section 7.19 Entirety of Agreement. This Agreement and the Security
Documents contain the final, complete and exclusive agreement of the parties
pertaining to its subject matter and supersede all prior written and oral
agreements pertaining thereto.
Section 7.20 No Third Party Beneficiaries. The provisions of this
Agreement shall inure to the benefit and responsibility of the parties hereto,
their successors and assigns (but only to the extent such assignment is
permitted herein) and shall not benefit or affect any third party.
-28-
<PAGE> 29
Section 7.21 Construction of Provisions. Each covenant by the Borrower
contained in this Agreement and the Security Documents shall be construed
without reference to any other such covenant, and any determination of whether
the Borrower is in compliance with any such covenant shall be made without
reference to whether the Borrower is in compliance with any other such covenant.
In the event of any conflict between or among the provisions as contained in
this Agreement or any of the Security Documents, this Agreement shall control.
Section 7.22 Termination. The Borrower's obligations under this
Agreement (except the obligations set forth in Sections 2.03, 7.08 and 7.09 of
this Agreement and the obligation to pay fees when due under Section 2.02 of
this Agreement, all of which shall survive the termination of this Agreement)
shall terminate upon the Expiration Date.
Section 7.23 Arbitration.
(a) The Bank and the Borrower agree that upon the written
demand of either party, made before the institution of any legal proceedings,
all disputes, claims and controversies between them, whether individual, joint,
or class in nature, arising from this Agreement, the Master Agreement, the
Security Documents, and the Borrower Note or otherwise, including without
limitation contract disputes and tort claims, may be resolved by non-binding
arbitration pursuant to the Commercial Rules of the American Arbitration
Association. Any arbitration proceeding held pursuant to this arbitration
provision shall be conducted in the city nearest the Borrower's address having
an AAA regional office, or at any other place selected by mutual agreement of
the parties. No act to take or dispose of any collateral contemplated in the
Security Agreement hereunder shall constitute a waiver of this arbitration
agreement or be prohibited by this arbitration agreement. This arbitration
provision shall not limit the right of either party during any dispute, claim or
controversy to seek, use, and employ ancillary, or preliminary rights and/or
remedies, judicial or otherwise, for the purposes of realizing upon, preserving,
protecting, foreclosing upon or proceeding under forcible entry and detainer for
possession of, any real or personal property, and any such action shall not be
deemed an election of remedies. Such remedies include, without limitation,
obtaining injunctive relief or a temporary restraining order, invoking a power
of sale under any deed of trust or mortgage, obtaining a writ of attachment or
imposition of a receivership, or exercising any rights relating to personal
property, including the exercising of set off rights or taking or disposing of
such property with or without judicial process pursuant to the Uniform
Commercial Code. Any disputes, claims or controversies concerning the lawfulness
or reasonableness of an act, or exercise of any right or remedy concerning any
collateral, including any claim to rescind, reform, or otherwise modify any
agreement relating to the collateral, shall also be subject to non-binding
arbitration; provided, however that no arbitrator shall have the right or the
power to enjoin or restrain any act of either party. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction. The
statute of limitations, estoppel, waiver, laches and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of any action for these purposes.
The Federal Arbitration Act (Title 9 of the United States Code) shall apply to
the construction, interpretation, and enforcement of this arbitration provision.
-29-
<PAGE> 30
(b) Notwithstanding anything to the contrary in this
arbitration provision, either party may at any time elect to terminate the
arbitration proceeding and require that the dispute, claim and controversy be
resolved solely by legal proceedings.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective representatives thereunto duly
authorized as of the date first above written.
BANK:
BANK ONE, ARIZONA, NA
By: /s/ Scott T. Schaefer
-------------------------------
Name: Scott T. Schaefer
-----------------------------
Title: Senior Vice President
----------------------------
BORROWER:
HYPERCOM CORPORATION, a Delaware
corporation
By: /s/ Albert A. Irato
-------------------------------
Name: Albert A. Irato
----------------------------
Title: President and CEO
---------------------------
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<PAGE> 31
EXHIBIT A
PRINCIPAL PAYMENT SCHEDULE
The Borrower will deposit monthly into an account maintained at the
Bank an amount equal to:
<TABLE>
<CAPTION>
Loan
Payment Date Amount
------------ ------
<S> <C>
05/01/99 $18,489.13
06/01/99 18,604.69
07/01/99 18,720.97
08/01/99 18,837.97
09/01/99 18,955.71
10/01/99 19,391.53
11/01/99 19,193.40
12/01/99 19,313.36
01/01/00 19,434.06
02/01/00 19,555.53
03/01/00 19,677.75
04/01/00 19,825.90
05/01/00 19,924.49
06/01/00 20,049.02
07/01/00 20,174.32
08/01/00 20,300.41
09/01/00 20,427.29
10/01/00 20,124.47
11/01/00 20,683.43
12/01/00 20,812.70
01/01/01 20,942.78
02/01/01 21,073.67
03/01/01 21,205.38
04/01/01 21,282.04
05/01/01 21,471.28
06/01/01 21,605.48
07/01/01 21,740.51
08/01/01 21,876.39
09/01/01 22,013.12
10/01/01 22,293.22
11/01/01 22,289.14
12/01/01 22,428.45
01/01/02 22,568.62
02/01/02 22,709.68
03/01/02 22,851.61
04/01/02 23,152.50
05/01/02 23,138.15
06/01/02 23,282.77
</TABLE>
<PAGE> 32
<TABLE>
<CAPTION>
Loan
Payment Date Amount
------------ ------
<S> <C>
07/01/02 23,428.28
08/01/02 23,574.71
09/01/02 23,722.05
10/01/02 23,854.04
11/01/02 24,019.50
12/01/02 24,169.63
01/01/03 24,320.69
02/01/03 24,472.69
03/01/03 24,625.64
04/01/03 24,391.85
05/01/03 24,934.43
06/01/03 25,090.27
07/01/03 25,247.08
08/01/03 25,404.88
09/01/03 25,563.66
10/01/03 25,759.68
11/01/03 25,884.20
12/01/03 26,045.98
01/01/04 26,208.76
02/01/04 26,372.57
03/01/04 26,537.40
04/01/04 26,951.09
05/01/04 26,870.15
06/01/04 27,038.09
07/01/04 27,207.08
08/01/04 27,377.12
09/01/04 27,548.23
10/01/04 27,959.33
11/01/04 27,893.66
12/01/04 28,067.99
01/01/05 28,243.42
02/01/05 28,419.94
03/01/05 28,597.56
04/01/05 28,777.43
05/01/05 28,956.15
06/01/05 29,137.13
07/01/05 29,319.23
08/01/05 29,502.48
09/01/05 29,686.87
10/01/05 29,398.14
11/01/05 30,059.11
12/01/05 30,246.98
01/01/06 30,436.03
02/01/06 30,626.25
03/01/06 30,817.67
</TABLE>
-2-
<PAGE> 33
<TABLE>
<CAPTION>
Loan
Payment Date Amount
------------ ------
<S> <C>
04/01/06 * 30,813.96
05/01/06 31,204.09
06/01/06 31,399.12
07/01/06 31,595.36
08/01/06 31,792.83
09/01/06 31,991.54
10/01/06 33,017.06
11/01/06 32,392.68
12/01/06 32,595.14
01/01/07 32,798.86
02/01/07 33,003.85
03/01/07 33,210.12
04/01/07 32,999.35
05/01/07 33,626.55
06/01/07 33,836.71
07/01/07 34,048.19
08/01/07 34,260.99
09/01/07 34,475.12
10/01/07 34,752.44
11/01/07 34,907.41
12/01/07 35,125.58
01/01/08 35,345.12
02/01/08 35,566.02
03/01/08 35,788.31
04/01/08 36,267.56
05/01/08 36,237.06
06/01/08 36,463.54
07/01/08 36,691.44
08/01/08 36,920.76
09/01/08 37,151.52
10/01/08 37,535.68
11/01/08 37,617.36
12/01/08 37,852.47
01/01/09 38,089.05
02/01/09 38,327.11
03/01/09 38,566.65
04/01/09 38,547.36
05/01/09 39,050.24
06/01/09 39,294.30
07/01/09 39,539.89
08/01/09 39,787.02
09/01/09 40,035.69
10/01/09 40,292.86
11/01/09 40,537.70
12/01/09 40,791.06
</TABLE>
-3-
<PAGE> 34
<TABLE>
<CAPTION>
Loan
Payment Date Amount
------------ ------
<S> <C>
01/01/10 41,046.00
02/01/10 41,302.54
03/01/10 41,560.68
04/01/10 41,762.02
05/01/10 42,081.81
06/01/10 42,344.82
07/01/10 42,609.48
08/01/10 42,875.79
09/01/10 43,143.76
10/01/10 42,944.34
11/01/10 43,684.74
12/01/10 43,957.77
01/01/11 44,232.51
02/01/11 44,508.96
03/01/11 44,787.14
04/01/11 45,828.88
05/01/11 45,348.73
06/01/11 45,632.16
07/01/11 45,917.36
08/01/11 46,204.35
09/01/11 46,493.12
10/01/11 46,404.28
11/01/11 47,076.10
12/01/11 47,370.33
01/01/12 47,666.39
02/01/12 47,964.31
03/01/12 48,264.09
04/01/12 48,658.78
05/01/12 48,869.27
06/01/12 49,174.70
07/01/12 49,482.05
08/01/12 49,791.31
09/01/12 50,102.51
10/01/12 50,580.16
11/01/12 50,730.74
12/01/12 51,047.81
01/01/13 51,366.86
02/01/13 51,687.90
03/01/13 52,010.95
04/01/13 52,155.74
05/01/13 52,663.12
06/01/13 52,992.27
07/01/13 53,323.47
08/01/13 53,656.74
09/01/13 53,992.09
</TABLE>
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<PAGE> 35
<TABLE>
<CAPTION>
Loan
Payment Date Amount
------------ ------
<S> <C>
10/01/13 54,372.31
11/01/13 54,669.10
12/01/13 55,010.79
01/01/14 55,354.60
02/01/14 55,700.57
03/01/14 56,048.70
04/01/14 56,216.24
05/01/14 56,751.50
06/01/14 57,106.19
07/01/14 57,463.11
08/01/14 57,822.25
09/01/14 58,183.64
10/01/14 58,673.31
11/01/14 58,913.21
12/01/14 59,281.42
01/01/15 59,651.92
02/01/15 60,024.75
03/01/15 60,399.90
04/01/15 60,728.80
05/01/15 61,157.26
06/01/15 61,539.49
07/01/15 61,924.12
08/01/15 62,311.14
09/01/15 62,700.59
10/01/15 63,367.40
11/01/15 63,486.79
12/01/15 63,883.59
01/01/16 64,282.86
02/01/16 64,684.63
03/01/16 65,088.90
04/01/16 65,573.23
05/01/16 65,905.06
06/01/16 66,316.97
07/01/16 66,731.45
08/01/16 67,148.52
09/01/16 67,568.20
10/01/16 67,329.80
11/01/16 68,415.44
12/01/16 68,843.03
01/01/17 69,273.30
02/01/17 69,706.26
03/01/17 70,141.93
04/01/17 70,620.04
05/01/17 71,021.44
06/01/17 71,465.32
</TABLE>
-5-
<PAGE> 36
<TABLE>
<CAPTION>
Loan
Payment Date Amount
------------ ------
<S> <C>
07/01/17 71,911.98
08/01/17 72,361.43
09/01/17 72,813.69
10/01/17 73,426.14
11/01/17 73,726.71
12/01/17 74,187.50
01/01/18 74,651.17
02/01/18 75,117.74
03/01/18 75,587.23
04/01/18 75,729.65
05/01/18 76,535.02
06/01/18 77,013.36
07/01/18 77,494.70
08/01/18 77,979.04
09/01/18 78,466.41
10/01/18 79,511.47
11/01/18 79,450.30
12/01/18 79,946.87
01/01/19 80,446.53
02/01/19 80,949.33
03/01/19 81,455.26
04/01/19 81,751.71
$10,238,000.00
</TABLE>
* If the Letter of Credit is not extended as provided in the
Reimbursement Agreement, the entire unpaid principal amount will be due and
payable on April 1, 2006.
-6-
<PAGE> 37
EXHIBIT B
FORM OF THE BORROWER'S AND THE GUARANTORS' COUNSEL OPINION
Bank One, Arizona, NA Bank One, NA
Post Office Box 71 100 East Broad Street, 7th Floor
Phoenix, Arizona 85001 Columbus, Ohio 43271
Bank One Trust Company, NA Capital One Funding Corporation
100 East Broad Street, 8th Floor 150 East Gay Street, 24th Floor
Columbus, Ohio 43271-0181 Columbus, Ohio 43215
Subject: $10,238,000.00 Loan from Capital One Funding Corporation
Gentlemen:
We have acted as counsel to Hypercom Corporation, a Delaware corporation (the
"Borrower"), and Hypercom (Arizona), Inc., an Arizona corporation, Hypercom
Latino America, Inc., an Arizona corporation, and Hypercom Manufacturing
Services, Inc., an Arizona corporation (collectively, the "Guarantors"), with
respect to a certain loan that Capital One Funding Corporation (the "Lender") is
making to the Borrower in the amount of $10,238,000.00 (the "Loan"). The funds
for the Loan have been raised through the private placement by Banc One Capital
Corporation, as Underwriter, of the Lender's floating rate option notes (the
"Lender's Notes"). Repayment of the Lender's Notes is secured by an
unconditional, irrevocable, direct pay letter of credit issued by Bank One, NA
(the "Letter of Credit"). Bank One, Arizona, NA (the "Bank"), has entered into a
Reimbursement Agreement with the Borrower pursuant to which the Borrower has
agreed to reimburse the Bank for any amounts drawn under the Letter of Credit.
You have asked for our opinion concerning certain matters relating to the
Borrower, the Guarantors and the Loan. In that regard, we have examined the
following documents:
(a) Reimbursement Agreement by and between the Borrower and the Bank
with an effective date as of April 1, 1999 (the "Reimbursement Agreement");
(b) Promissory Note made by the Borrower in favor of the Lender with an
effective date as of April 1, 1999 in the original principal amount of
$10,238,000.00 (the "Borrower Note");
(c) Deed of Trust, Assignment of Leases and Rents, Security Agreement
and Financing Statement with an amendment thereto with an effective date as of
April 1, 1999 for the Real Property located at 2851 West Kathleen Road, Phoenix,
Arizona 85023-4053, granted by the Borrower to the Bank to secure the
obligations of the Borrower under the Reimbursement Agreement (the "Deed of
Trust");
-1-
<PAGE> 38
(d) Unconditional Guarantees of Payment with an effective date as of
April 1, 1999 from each of the Guarantors for the benefit of the Bank (the
"Guaranty");
(e) ISDA Master Agreement by and between the Bank and the Borrower and
any schedules or confirmations thereunder entered into by the parties at any
time (the "Master Agreement");
(f) UCC Financing Statements (the "Financing Statements") granted by
the Borrower to the Bank covering the collateral described therein (the
"Collateral");
(g) Environmental Indemnity Agreement dated as of April 1, 1999 from
the Borrower and the Guarantors for the benefit of the Bank ("Environmental
Agreement"); and
(h) The organizational documents of the Borrower and each Guarantor
including its Articles of Incorporation, its Code of Regulations, any other
governing documents and any amendments thereto, and resolutions.
The Deed of Trust, the Guaranty, the Master Agreement, the Financing Statements
and the Environmental Agreement are hereinafter collectively referred to as the
"Security Documents."
In rendering this opinion, we have relied upon representations made in the
foregoing documents as to various questions of fact material to the matters set
forth below.
We have not assumed any responsibility for making any independent investigation
or verification of any factual matters, including, but not limited to, any
factual matters stated or represented by any of the foregoing documents. We have
assumed the conformity to originals of all copies of all documents submitted to
us and the authenticity of all signatures thereon.
Whenever our opinion herein with respect to the existence or absence of facts is
indicated to be based on our knowledge, it is intended to signify that during
the course of our representation of the Borrower or the Guarantors, no
information has come to our attention which would give us actual knowledge of
the existence or absence of such facts.
Based upon and subject to the foregoing, it is our opinion that:
1. The Borrower (a) is duly organized and validly existing under the
laws of the State of Delaware, (b) is in good standing under the laws of, and is
qualified to do business in, the State of Arizona, (c) has all necessary power
and authority to operate the Real Property and (d) has all necessary power and
authority to own and operate its properties, including the Real Property, and
conduct its businesses in each jurisdiction where its ownership of property or
conduct of business requires such qualification.
2. All applicable licenses, if any, under Title 37 of the Ohio Revised
Code for the Real Property are in good standing and in full force and effect.
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<PAGE> 39
3. The Borrower has duly authorized (a) the execution and delivery of,
and due performance of obligations under the Reimbursement Agreement, the
Borrower Note and the applicable Security Documents and (b) the taking of any
and all actions as may be required on the part of the Borrower to carry out,
give effect to and consummate the transactions contemplated by such documents.
4. The Reimbursement Agreement, the Borrower Note and the applicable
Security Documents have been duly and validly executed and delivered by the
Borrower and, assuming that they have been duly and validly authorized, executed
and delivered by the other parties thereto, are legal, valid and binding
obligations of the Borrower enforceable in accordance with their terms, except
as the same may be limited by general principles of equity and by bankruptcy or
other applicable laws affecting the enforcement of creditors' rights generally.
5. The Borrower has obtained all requisite consents, approvals,
authorizations or orders in any court, governmental agency or body, or other
entity (whether governmental or private), required for its authorization,
execution and delivery of, or the performance by the Borrower of obligations
under the Reimbursement Agreement, the Borrower Note and the Security Documents,
or for the consummation by the Borrower of the transactions contemplated
thereby.
6. Each Guaranty has been duly and validly executed and delivered by
each of the Guarantors and, assuming that each Guaranty has been duly and
validly authorized, executed and delivered by the other parties thereto, each is
a legal, valid and binding obligation of each of the Guarantors enforceable in
accordance with its terms, except as the same may be limited by general
principles of equity and by bankruptcy or other enforceable laws affecting the
enforcement of creditors' rights generally.
7. There is no action, temporary restraining order, injunction, suit,
proceeding, inquiry or investigation at law or in equity or before or by any
court, public board, regulatory agency, or body, pending or, to the best of our
knowledge, threatened (a) against, or affecting or involving the Borrower,
either of the Guarantors, or the Real Property, businesses or any securities of
the Borrower or either of the Guarantors, or, to the best of our knowledge, any
basis for any such action, temporary restraining order, injunction, suit,
proceeding, inquiry or investigation, (b) for the purpose of (i) restraining or
enjoining or seeking to restrain or enjoin the execution and delivery of the
Reimbursement Agreement, the Borrower Note or the Security Documents, (ii) in
any way contesting or affecting any authority for the execution and delivery of
or the validity of the Reimbursement Agreement, the Borrower Note or the
Security Documents, (iii) contesting or affecting the validity or enforceability
of the Reimbursement Agreement, the Borrower Note or the Security Documents or
the transactions contemplated thereby, or (iv) in any way contesting or
affecting the existence, organization or powers of the Borrower or either of the
Guarantors or (c) which would, if successful, individually or in the aggregate,
materially adversely affect the business, condition (financial or otherwise),
prospects or assets of the Borrower or either of the Guarantors.
8. The execution and delivery of the Reimbursement Agreement, the
Borrower Note and the Security Documents and the performance by the Borrower and
the Guarantors of their respective obligations thereunder, and the consummation
of any other of the transactions
-3-
<PAGE> 40
contemplated therein, do not and will not (a) constitute a default under,
conflict with, result in a breach of or violate any of the Borrower's governing
documents or agreements or of any statute, law, court or administrative rule or
regulation, or of any indenture, mortgage, deed of trust, guaranty, agreement or
other instrument to which the Borrower or either of the Guarantors is a party or
by which the Borrower or either of the Guarantors or any of their respective
property is bound on the date hereof or (b) result in the creation of any lien,
security interest, charge or encumbrance of any nature whatsoever upon any of
the property of the Borrower or the Guarantors pursuant to the terms of any
agreement or instrument, except for liens, security interests, charges or
encumbrances to be created by the Reimbursement Agreement, the Borrower Note or
the Security Documents.
9. Neither the Borrower nor any of the Guarantors is in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of indebtedness or in
any contract, indenture, mortgage, loan agreement or lease to which any is a
party or by which any may be bound and which materially adversely affects the
business, condition (financial or otherwise), prospects or assets of the
Borrower. No Event of Default (as defined in the Reimbursement Agreement or the
Security Documents) has occurred and is continuing and no event has occurred and
is continuing which, with the lapse of time or giving of notice or both, would
constitute such an Event of Default.
10. Once the Security Documents and accompanying UCC Financing
Statements have been filed with the Secretary of State of and the Office of the
County Recorder of Maricopa County, Arizona, there is no other legal requirement
to record, re-record, file or re-file the Security Documents or the accompanying
UCC Financing Statements, in order to create, perfect, protect and maintain the
enforceability and validity of the liens and pledges created by the Security
Documents. There are no prior recorded security interest in and to such the
property covered by the Security Documents except those specifically disclosed
in writing to, and approved by, the Bank.
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<PAGE> 41
EXHIBIT C
AFFIRMATIVE AND NEGATIVE COVENANTS
AFFIRMATIVE COVENANTS
1. INSURANCE. The Borrower shall maintain hazard and other insurance
upon all of its assets and business properties and liability insurance with
responsible and reputable insurers of such character and amounts as are usually
maintained by companies engaged in like business. All insurance policies shall
be written for the benefit of the Borrower and the Bank as their interest may
appear and shall contain a provision requiring the insurance company to provide
the Bank not less than thirty days' written notice prior to cancellation of any
such policy. All insurance policies or certificates evidencing the same shall be
furnished to the Bank.
2. PAYMENT OF TAXES AND CLAIMS. The Borrower shall pay all taxes,
assessments and other governmental charges imposed upon its properties or assets
or in respect of any of its franchises, business, income or profits before any
penalty or interest accrues thereon, and all claims (including, without
limitation, claims for labor, services, materials and supplies) for sums which
have become due and payable and which by law have or might become a lien or
charge upon any of its properties or assets, provided that (unless any material
item of property would be lost, forfeited or materially damaged as a result
thereof) no such charge or claim need be paid if the amount, applicability or
validity thereof is currently being contested in good faith and if such reserve
or other appropriate provision, if any, as shall be required by GAAP shall have
been made therefor.
3. COMPLIANCE WITH LAWS. The Borrower shall comply in all substantial
respects with all applicable statutes, laws, ordinances and governmental rules,
regulations and orders and all judgments, orders, and decrees of any arbitrator
to which it is subject or which are applicable to its business, properties and
assets to specifically include any regulatory requirements relating to the
Borrower's business, properties or assets if noncompliance therewith would
materially adversely affect such businesses; provided that (unless such contest
or noncompliance would materially adversely affect such businesses) the Borrower
need not so comply if any such statute, law, ordinance, or governmental rule,
regulation or order is currently being contested in good faith.
4. MAINTENANCE OF TANGIBLE ASSETS. The Borrower shall maintain its
tangible assets in good condition and repair and shall not permit any action or
omission which might materially impair the value thereof, normal wear and tear
accepted.
5. PERFORMANCE OF CONTRACTS. The Borrower shall perform and comply with
in accordance with their terms, all material provisions of each and every
material contract, agreement or instrument now or hereafter binding upon the
Borrower, except to the extent that the Borrower shall contest the provisions
thereof in good faith and by proper proceedings.
<PAGE> 42
6. BANK DEPOSITS. The Borrower covenants that the Bank shall be the
principal bank of account and primary depository for the Borrower and any of its
subsidiaries within three (3) months after the Effective Date.
7. EMPLOYEE PENSION BENEFIT PLANS. The Borrower shall furnish to the
Bank (i) as soon as possible, and in any event within 10 days after any
executive officer or partner of the Borrower knows or has reason to know that a
reportable event with respect to any Plan has occurred, a statement of the chief
financial officer of the Borrower setting forth details as to such reportable
event and the action which is proposed to be taken with respect thereto,
together with a copy of the notice of such reportable event given to the PBGC;
(ii) promptly after distribution to Plan participants, copies of each summary
annual report with respect to each Plan; (iii) promptly after receipt thereof, a
copy of any notice the Borrower may receive from the PBGC relating to the
intention of the PBGC to terminate any Plan or to appoint a trustee to
administer any Plan; and (iv) promptly after the filing thereof with the
Internal Revenue Service and/or the PBGC, copies of Form 5310 and all other
filings relating to the termination of any Plan.
8. FURNISHING OF DISCLOSURE DOCUMENTS. The Borrower shall promptly upon
issuance furnish to the Bank all communications between it and its partners and
between it and the Securities and Exchange Commission, including without
limitation, copies of all financial information, annual reports and periodic
filings.
9. MAINTENANCE OF SERVICE CONTACT. The Borrower shall maintain service
contracts with qualified Persons for the maintenance of the Borrower's machinery
and equipment.
10. PAYOFF OF EXISTING LOAN. Contemporaneously with the execution of
this Agreement and the provision of the Loan, the Borrower agrees that the Bank
shall retain sufficient proceeds from the Loan to pay off Borrower's existing
loan with the Bank. The Borrower agrees to cooperate with the Bank and to
execute and deliver such documents as are necessary in the opinion of the Bank
to release as soon as possible any and all liens on the Collateral or any other
property of the Borrower.
11. CHANGES OF ACCOUNTING REPORTING METHODS AND/OR FINANCIAL
STATEMENTS. The Borrower shall provide to the Bank written notice of any change
in policies, rules or procedures related to accounting reporting methods or
change in the entries (or financial reporting thereunder) contained on any of
the Borrower's respective financing statements, other than simple numerical
balance entry changes for period to period from business operations. The
Borrower shall provide such notice to the Bank within ten (10) Business Days
after such change has been made. Upon such approval, the Bank shall have the
right, in its reasonable discretion, to revise the covenants and security under
this Agreement to reflect any such changes. The purpose of this Item 11 is to
allow the Bank, to the extent possible, to maintain substantially equivalent
financial covenants and security after any change by the Borrower of its
policies, rules or procedures related to accounting reporting methods and/or
financial statements.
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<PAGE> 43
12. YEAR 2000. The Borrower shall:
(A) Furnish such additional information, statements and other
reports with respect to the Borrower's activities, course of action and progress
towards becoming Year 2000 Compliant as the Bank may request from time to time.
(B) Promptly upon its becoming available, furnish to the Bank one
copy of each financial statement, report, notice, or proxy statement sent by the
Borrower to stockholders generally and of each regular or periodic report,
registration statement or prospectus filed by the Borrower with any securities
exchange or the Securities and Exchange Commission or any successor agency, and
of any order issued by any Governmental Authority in any proceeding to which the
Borrower is a party. For purposes of these provisions, "Governmental Authority"
shall mean any government (or any political subdivision or jurisdiction
thereof), court, bureau, agency or other governmental entity having or asserting
jurisdiction over the Borrower or any of its business, operations or properties.
(C) Give any representative of the Bank access during all business
hours to, and permit such representative to examine, copy or make excerpts from,
any and all books, records and documents in the possession of the Borrower and
relating to its affairs, and to inspect any of the properties and Systems of the
Borrower, and to project test the Systems to determine if they are Year 2000
Compliant in an integrated environment, all at the sole cost and expense of the
Bank.
13. CROSS-COLLATERALIZATION. At the Bank's request at any time and from
time to time, the Borrower agrees to execute and deliver such additional
agreements, documents, and instruments as the Bank determines to be necessary or
appropriate so that all Collateral shall also secure any or all (as determined
by the Bank) other obligations of the Borrower to the Bank and/or so that any or
all property, interests in property, and rights to property (as selected by
Bank) securing other obligations of the Borrower to the Bank also secure all
obligations of the Borrower hereunder. The Borrower agrees to pay all costs,
expenses, and fees incurred by the Bank in connection with any and all such
cross-collateralization requests by the Bank (including, without limitation,
costs, expenses, and fees of the Bank's attorneys).
14. FURTHER ASSURANCES. The Borrower shall promptly execute,
acknowledge, and deliver such additional agreements, documents, and instruments
and do or cause to be done such other acts as the Bank may reasonably request
from time to time to better assure, preserve, protect, and perfect the interest
of the Bank in the Collateral and the rights and remedies of the Bank hereunder.
NEGATIVE COVENANTS
1. [INTENTIONALLY LEFT BLANK].
2. LIENS AND OTHER ENCUMBRANCES. The Borrower shall not create, incur,
assume or suffer to exist any security interest, mortgage, pledge, lien or other
encumbrance of any nature whatsoever on any of its property or assets whether
now owned or hereafter acquired, except (i) liens
-3-
<PAGE> 44
securing the payment of taxes, either not yet due or the validity of which is
being contested in good faith by appropriate proceedings (so long as no material
item of property would be lost, forfeited or materially damaged as a result
thereof), and as to which the Borrower shall, as appropriate under GAAP, have
set aside on its books and records adequate reserves; (ii) deposits under
workers' compensation, unemployment insurance, social security and other similar
laws or to secure the performance of bids, tenders or contracts (other than for
the repayment of purchase price Indebtedness or borrowed money) or to secure
statutory obligations or surety or appeal bonds, or to secure indemnity,
performance or other similar bonds, all in the ordinary course of business;
(iii) liens and security interests in favor of the Bank; (iv) zoning
restrictions, easements, licenses, covenants and other restrictions affecting
the use of real property, so long as the Borrower's use of, or the value of, the
Borrower's property subject thereto is not impaired thereby; and (v) liens and
security interests securing purchase price Indebtedness permitted under the
preceding paragraph labeled "Indebtedness", provided that liens and security
interests may attach only to assets purchased with the proceeds of such
permitted Indebtedness and may first attach only at the time of the initial
acquisition of such assets by the Borrower.
3. GUARANTIES AND OTHER CONTINGENT LIABILITIES. Unless the Borrower
shall have previously provided written notice to Bank (Commercial Banking,
AZ1-1178, Attention: Scott A. Schaefer or successor), the Borrower shall not
become an indemnitor, guarantor or surety or otherwise become liable for any of
the obligations or Liabilities of any Person.
4. FUNDAMENTAL CHANGES. Unless the Borrower shall have previously
provided written notice to Bank (Commercial Banking, AZ1-1178, Attention: Scott
A. Schaefer or successor), the Borrower shall not (i) enter into any transaction
of merger or consolidation or amalgamation, or (ii) liquidate, wind up or
dissolve itself (or suffer any liquidation or dissolution), or (iii) convey,
sell, lease, transfer or otherwise dispose of, in one transaction or a series of
transactions, all or any substantial part of its business or assets, whether now
owned or hereafter acquired, or (iv) acquire by purchase or otherwise all or
substantially all the business or assets of, or stock or other evidence of
beneficial ownership of, any Person, or (v) make any material change in the
nature of its business or in the methods by which it conducts business.
5. SUBSIDIARIES OF BORROWER. Each Subsidiary shall deliver a Guaranty
for the benefit of the Bank.
6. [INTENTIONALLY LEFT BLANK].
7. [INTENTIONALLY LEFT BLANK].
8. SALE AND LEASEBACK. The Borrower shall not enter into any agreement
with any lender or investor providing for the leasing of (i) real or personal
property which has been or is to be sold or transferred by the Borrower to such
lender or investor, or (ii) other real or personal property intended to be used
for substantially the same purpose as the property sold or transferred by the
Borrower.
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<PAGE> 45
9. DISPOSITION OF ASSETS. The Borrower shall not dispose of any of its
assets in any transaction or series of transactions other than those disposed of
in the ordinary course of business and except in connection with the replacement
of assets sold by like assets.
10. SALE OF ACCOUNTS. The Borrower shall not sell, assign or exchange
any of their Accounts or notes receivable with or without recourse.
11. TRANSACTIONS WITH AFFILIATED PERSONS. The Borrower shall not:
(A) enter into any transaction, including without limitation,
the purchase, sale or exchange of property or the rendering of any
services, with any Affiliated Person or any officer or director
thereof, enter into, assume or suffer to exist any employment or
consulting contract with any Affiliated Person, except any transaction
or contract which is in the ordinary course of the Borrower's business
and which is upon fair and reasonable terms no less favorable to the
Borrower than it would obtain in a comparable arms-length transaction;
or
(B) pay any fees or expenses to, or reimburse or assume any
obligation for the reimbursement of any expenses incurred by, any
Affiliated Person or any officer or director thereof except as may be
permitted in accordance with the preceding clauses of this paragraph.
12. EMPLOYEE PENSION BENEFIT PLANS. With respect to each plan
established or maintained by the Borrower, the Borrower (a) shall maintain each
such Plan as a qualified plan under Section 401 of the Code and, in all material
respects, in accordance with its terms and with all provisions of ERISA
applicable thereto; (b) shall not permit any condition (financial or otherwise)
to exist or any event to occur which would subject such plan to termination
pursuant to Section 4042 of ERISA; (c) shall not incur any liability to the PBGC
other than for premiums not yet due and payable; (d) shall not permit the
aggregate amount of vested unfunded liabilities (for benefits which vest or
might become vested only as a result of the termination of any or all of such
Plans) to exceed ten percent of the Tangible Net Worth of the Borrower; (e) will
not engage in any transaction which could subject the Borrower to either a
material civil penalty assessed pursuant to Section 502(i) of ERISA or a
material tax imposed by Section 4975 of the Code; (f) will pay all premiums (and
all penalties and interest, if applicable) due the PBGC with respect to any
Plan; (g) will not become subject to Section 4062 of ERISA; (h) will not
withdraw as a substantial employer so as to become subject to Section 4063 of
ERISA; (i) will not make a complete or partial withdrawal from a "multi-employer
plan" as defined in Section 3(37) of ERISA so as to incur "withdrawal liability"
as defined in Section 4201 of ERISA, without regard to 4207 or 4208 of ERISA;
(j) will not cease making contributions to any Plan subject to Section 4064(a)
of ERISA to which the Borrower made contributions during the five year period
prior to the date thereof and will not terminate any Plan or have termination
proceedings instituted with respect to any Plan pursuant to Section 4041 (c) or
4042 of ERISA; and (k) will not engage in any prohibited transactions within the
meaning of Section 406 of ERISA (for which no exemption exists under Section 408
of ERISA) and Section 4975(c)(1) of the Code (for which no exemption exists
under Section 4975(c)(2) of the Code).
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<PAGE> 46
13. FINANCIAL COVENANTS. Except as otherwise noted, all capitalized
terms in this Item 13 not defined in this Agreement shall have the meanings
determined in accordance with GAAP. In addition, except as otherwise noted, all
financial computations shall be made in accordance with GAAP and on a
Consolidated basis. Until the Expiration Date and until all obligations of the
Borrower hereunder are paid and performed in full, the Borrower agrees that,
unless the Bank otherwise agrees in writing in the Bank's absolute and sole
discretion, the Borrower shall maintain at the end of each fiscal quarter the
following (the "Financial Covenants"):
(A) Tangible Net Worth. A minimum Tangible Net Worth in an
amount equal to the sum of (i) $50,000,000.00 and (ii) the aggregate of
twenty-five percent (25.0%) of the Consolidated net income of Borrower
for each fiscal year, commencing with that fiscal year ending December
31, 1998. "Tangible Net Worth" means (i) the sum of all Consolidated
capital accounts of the Borrower (including, without limitation, any
paid-in capital, capital surplus, and retained earnings), less (ii) the
sum of the value on Borrower's books of all Consolidated Intangible
Assets. "Intangible Assets" means all intangible assets under GAAP,
provided, that regardless of GAAP, Intangible Assets shall include:
copyrights; franchises; goodwill; licenses; loan origination fees;
non-competition covenants; organization or formation expenses; patents;
shares of the capital stock of Borrower; service marks; service names;
trademarks; tradenames; write-up in the book value of any asset in
excess of the acquisition cost of the asset to Borrower; any amount,
however designated on the balance sheet, representing the excess of the
purchase price paid for assets or stock acquired over the value
assigned thereto on the books of Borrower; unamortized debt discount;
deferred discount; computer software; and research and development
costs and expenses. Tangible Net Worth shall not be reduced by any net
income that is less than zero (i.e., a net deficit or loss).
(B) Owner's Equity Percentage. An Owner's Equity Percentage
equal to or exceeding 35%. "Owner's Equity Percentage" means the result
obtained by dividing (i) Owner's Equity Amount by (ii) Total Assets,
less Intangible Assets. "Owner's Equity Amount" means the sum of
Tangible Net Worth and Subordinated Indebtedness.
(C) Current Ratio. A minimum current ratio of 1.30 to 1.0
calculated by dividing Borrower's Current Assets by Borrower's Current
Liabilities where:
"Current Assets" means Consolidated current assets
under GAAP, provided that, regardless of GAAP, Current Assets
shall not include: accounts receivable other than trade
accounts receivable; receivables due from stockholders,
directors, officers, partners, members, employees,
subsidiaries, and other affiliates; promissory notes,
including the portion due within the current period, unless
the obligation evidenced thereby has been independently
verified to Bank by an independent certified public
accountant; accrued interest receivable; income tax refunds
receivable; prepaid expenses; cash
-6-
<PAGE> 47
surrender value of life insurance policies; guarantee or
performance deposits; and dealer reserves; and
"Current Liabilities" means Consolidated current
liabilities under GAAP and, in addition, the following: all
indebtedness to stockholders, directors, officers, partners,
members, employees, subsidiaries, and other affiliates that is
not subordinated to the satisfaction of Bank to the
obligations of Borrower under the Loan Documents as to Liens
and Encumbrances, time and right of payment, and rights
against Collateral.
(D) Working Capital. A minimum Working Capital in the amount
of $40,000,000.00. "Working Capital" means Borrower's Current Assets,
less Borrower's Current Liabilities, on a Consolidated basis.
(E) Debt Coverage Ratio. A minimum debt coverage ratio of 2.0
to l.0. This ratio shall be calculated on a rolling four quarter basis
by dividing (i) Borrower's Consolidated net income after interest and
taxes and before amortization and depreciation, by (ii) the prior
period current portion of long term debt, all on a Consolidated basis.
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<PAGE> 48
DEFINITIONS
with respect to Exhibit C
"ACCOUNTS" shall have the meaning given it by the Uniform Commercial
Code as in effect in the State of Arizona.
"AFFILIATED PERSON" means any Person directly or indirectly
controlling, under common control with, or controlled by the Borrower and shall
include any officer, director, or record or beneficial owner of 5% or more of
the outstanding capital stock of any class of the Borrower. For purposes of the
definition of Affiliated Person, "control" when used with respect to any
specific Person, means the power to direct the management and policies of such
person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings relative to the foregoing.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"CONSOLIDATED" means the consolidation of the accounts of the Borrower
and its Subsidiaries in accordance with generally accepted accounting principles
applied on a consistent basis; provided, however, that if there are no
Subsidiaries, the accounts of which are required under generally accepted
accounting principles to be consolidated with those of the Borrower, this term
shall not be applicable to the financial statements and financial ratios of the
Borrower referred to herein; and provided further that, the fact that there are
no Subsidiaries, the accounts of which are required to be so consolidated, shall
not relieve the Borrower from its obligations to furnish financial statements
and comply with the financial ratios set forth herein.
"ERISA" means the Employee Retirement Income Security Act of 1 974, as
amended.
"INDEBTEDNESS" as applied to any Person, means all obligations of that
Person which are included in clauses (i), (ii), (iii) and (iv) of the definition
of Liabilities below, irrespective of whether or not any such obligations also
would be included within any other clause of such definition, but including,
however, obligations properly treated as capital lease obligations or their
equivalent under GAAP.
"LIABILITIES" as applied to any Person means: (i) all obligations of
that Person to repay or pay money borrowed from another Person or the deferred
portion of the purchase price of services or property (other than inventory
purchased in the ordinary course of business unless evidenced by a note
payable); (ii) all obligations of that Person under bankers acceptances; (iii)
all obligations of that Person under letters of credit; (iv) obligations of
others which that Person has directly or indirectly guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of business),
discounted or sold with recourse or agreed (contingently or otherwise) to
purchase or repurchase or otherwise acquire, or in respect of which that Person
has agreed to supply or advance funds (whether by way of loan, stock purchase,
capital contribution or otherwise) or otherwise to become directly or indirectly
liable; (v) all obligations evidenced or secured by any mortgage, pledge, lien
or conditional sale or other title retention agreement to which any property or
asset
<PAGE> 49
owned or held by that Person is subject, whether or not the obligation
evidenced or secured thereby shall have been assumed; and (vi) all other items
(except items of capital stock, capital surplus, general contingency reserves,
deferred income taxes, retained earnings and amounts attributable to minority
interest, if any) which in accordance with GAAP would be included in determining
total liabilities as shown on the liability side of a balance sheet of that
Person as of the date Liabilities is to be determined, including, without
limitation, obligations of that Person properly treated as capital lease
obligations or their equivalent under GAAP.
"PBGC" is the Pension Benefit Guaranty Corporation.
"PLAN" means any pension or other benefit plan subject to the
provisions of ERISA.
"SUBORDINATED INDEBTEDNESS" means all of the unsecured Indebtedness of
the Borrower which is subordinated to all Indebtedness now or hereafter owed by
the Borrower to the Lender on specific terms and conditions satisfactory to and
approved in writing by the Bank.
"SUBSIDIARY" means, with respect to the Borrower, any corporation of
which more than 50% of the outstanding stock having ordinary voting power to
elect a majority of the board of directors of such corporation is at the time
directly or indirectly owned by the Borrower, or by one or more of its
Subsidiaries, or by the Borrower and one or more of its Subsidiaries taken
together.
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<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
HYPERCOM CORPORATION
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF ENTITY JURISDICTION OF ORGANIZATION
- -------------- ----------------------------
<C> <S> <C>
1. Hypercom (Arizona), Inc. ................................... Arizona
2. Hypercom U.S.A., Inc. ...................................... Delaware
3. Hypercom Latino America, Inc. .............................. Arizona
4. Hypercom Manufacturing Resources, Inc. ..................... Arizona
5. Hypercom do Brasil Industria e Comercio Limitada............ Brazil
6. Hypercom Asia Ltd. ......................................... Hong Kong
7. Hypercom Australia Pty., Ltd. .............................. Australia
8. Hypercom Europe Limited, Inc. .............................. Arizona
9. Hypercom FSC, Inc. ......................................... Barbados
10. Hypercom Financial, Inc. ................................... Arizona
11. Hypercom Net Transactions, Pty. Ltd. ....................... Australia
12. Hypercom Hungary KFT........................................ Hungary
13. Hypercom Network Systems Ltd. .............................. Hong Kong
14. Hypercom Far East Ltd. ..................................... Hong Kong
15. Hypercom Asia (Singapore) Pte Ltd. ......................... Singapore
16. Hypercom Canada Ltd. ....................................... Canada
17. Hypercom de Mexico.......................................... Mexico
18. Hypercom de Argentina....................................... Argentina
19. Hypercom de Chile, S.A. .................................... Chile
20. Hypercom de Venezuela....................................... Venezuela
21. Hypercom Horizon, Inc. ..................................... Missouri
22. Hypercom Transaction Network, Inc. ......................... Arizona
23. Hypercom France S.A.R.L. ................................... France
24. Hypercom Thailand........................................... Thailand
25. Hypercom Gmbh............................................... Germany
26. Hypercom Financial Terminals AB............................. Sweden
27. Hypercom Korea.............................................. Korea
28. Hypercom Philippines........................................ Philippines
29. Hypercom Electronics Manufacturing (Shenzhen) Co. Ltd. ..... China
30. Hypercom China Co. Ltd. .................................... Hong Kong
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Hypercom Corporation on Forms S-8 (File Nos. 333-40457, 333-40459, 333-40461
and 333-40333) of our reports dated July 20, 1999, on our audits of the
consolidated financial statements and financial statement schedule of Hypercom
Corporation as of June 30, 1999 and 1998, and for the years ended June 30, 1999,
1998 and 1997, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Phoenix, Arizona
September 20, 1999
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 36,727
<SECURITIES> 26,731
<RECEIVABLES> 57,059
<ALLOWANCES> 4,470
<INVENTORY> 57,482
<CURRENT-ASSETS> 201,615
<PP&E> 45,252
<DEPRECIATION> 14,496
<TOTAL-ASSETS> 276,280
<CURRENT-LIABILITIES> 39,463
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 226,010
<TOTAL-LIABILITY-AND-EQUITY> 276,280
<SALES> 261,515
<TOTAL-REVENUES> 261,515
<CGS> 141,831
<TOTAL-COSTS> 246,852
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,128
<INTEREST-EXPENSE> 1,228
<INCOME-PRETAX> 12,566
<INCOME-TAX> 3,393
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,173
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
</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
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.
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
<PAGE> 3
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,
- 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.
Hypercom generally does not engage in hedging transactions that could partially
offset the effects of fluctuations in currency exchange rates. However, as
Hypercom continues to expand its international operations, exposure to gains and
losses on foreign currency transactions may increase. Hypercom may choose to
limit such exposure by entering into forward foreign exchange contracts or
engaging in similar hedging strategies. For example, the Company recently
entered into hedging transactions to mitigate the adverse effects of significant
foreign currency fluctuations in Brazil. 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 Hypercom's business, operating results or financial condition.
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.
<PAGE> 4
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 Hypercom'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. 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, Paul 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, Paul 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.
<PAGE> 5
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. 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.
Hypercom faces additional competitive challenges in foreign countries. These
factors include the following:
- Preferences for national vendors,
<PAGE> 6
- 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.
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 1999, the two largest customers accounted for
12.6% of the net 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:
<PAGE> 7
- 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 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,
<PAGE> 8
- 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.
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.
<PAGE> 9
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 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> 10
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 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.
