SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File No. 1-13521
HYPERCOM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 86-0828608
(State or Other Jurisdiction (IRS Employer ID Number)
of Incorporation or Organization)
2851 WEST KATHLEEN ROAD, PHOENIX, ARIZONA 85053
(Address of Principal Executive Offices) (Zip Code)
(602) 504-5000
(Registrant's telephone number)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No[ ]
Number of shares of the registrant's common stock, $.001 par value per share,
outstanding as of February 11, 1999, was 33,095,767.
<PAGE> 1
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION..................................3
ITEM 1. FINANCIAL STATEMENTS...................................3
Consolidated Balance Sheet.................................3
Consolidated Statement of Income...........................5
Consolidated Statement of Cash Flow........................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...........................................16
PART II OTHER INFORMATION.....................................17
ITEM 1. LEGAL PROCEEDINGS.....................................17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...17
ITEM 5. OTHER INFORMATION.....................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................18
<PAGE> 2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
HYPERCOM CORPORATION
Consolidated Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
(Unaudited)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 37,795 $ 55,659
Marketable securities, at market 35,808 42,641
Accounts receivable
(Net of allowance for doubtful
accounts of $5,028 and $3,729) 56,567 43,989
Inventories 58,214 60,539
Deferred income taxes 11,962 10,991
Prepaid taxes 3,594 2,893
Prepaid expenses and
other current assets 12,241 7,173
-------- ---------
Total current assets 216,181 223,885
Property, plant and equipment, net 26,527 23,570
Advances to related parties 286 258
Long-term investments 17,535 9,931
Other assets 9,881 1,933
--------- ---------
Total assets $ 270,410 $ 259,577
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 11,578 $ 17,134
Accrued liabilities 17,448 16,537
Deferred revenue 1,378 608
Income taxes payable 6,629 2,209
Current portion of
Long-term obligations 269 598
--------- ---------
Total current liabilities 37,302 37,086
Bank notes payable (line of credit) 1,000 -
Deferred income taxes 1,866 861
Long term obligations 1,919 1,199
--------- ---------
Total liabilities 42,087 39,146
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Stockholders' equity:
Common stock 13 13
Paid-in capital 146,011 145,601
Receivables from stockholders (1,498) (1,498)
Retained earnings 88,674 76,315
--------- ---------
233,200 220,431
Treasury Stock, (at cost) (4,877) -
--------- ---------
Total stockholders' equity 228,323 220,431
--------- ---------
Total liabilities and
stockholders' equity $ 270,410 $ 259,577
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
HYPERCOM CORPORATION
Consolidated Statement of Income
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
12/31/98 12/31/97 12/31/98 12/31/97
<S> <C> <C> <C> <C>
Net revenue $ 70,594 $ 71,209 $136,577 $150,146
Costs and expenses:
Costs of revenue 36,256 34,290 68,884 75,121
Research and development 8,218 6,399 15,850 10,918
Selling, general and administrative 16,854 17,462 35,253 34,581
Non-cash compensation 0 9,193 0 10,963
________ ________ ________ ________
Total costs and expenses 61,328 67,344 119,987 131,583
Income from operations 9,266 3,865 16,590 18,563
Interest and other income 1,369 1,179 2,814 1,407
Interest and other expense (312) (858) (493) (1,504)
Interest expense - related party 0 (446) 0 (372)
Foreign currency loss (751) (907) (999) (1,246)
________ ________ ________ ________
Income before income taxes 9,572 2,833 17,912 16,848
Income taxes (2,968) (992) (5,553) (5,897)
________ ________ ________ ________
Net income $ 6,604 $ 1,841 $ 12,359 $ 10,951
======== ======== ======== ========
Net income per share:
Basic earnings per share $0.20 $0.06 $0.37 $0.39
======== ======== ======== ========
Weighted Average Basic Common Shares 33,033 29,518 33,151 27,850
======== ======== ======== ========
Diluted earnings per share $0.19 $0.06 $0.36 $0.38
======== ======== ======== ========
Weighted Average Diluted Common Shares 34,502 30,768 34,549 28,826
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 5
HYPERCOM CORPORATION
Consolidated Statement of Cash Flow
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Six months ended Six months ended
December 31, 1998 December 31, 1997
Cash flow from (used in) operating activities:
<S> <C> <C>
Cash received from customers $125,362 $132,063
Interest received 3,071 1,407
Cash paid to suppliers/consultants (127,904) (129,297)
Interest paid (549) (1,741)
Income taxes paid (4,031) (3,156)
--------- --------
Net cash used in operating activities (4,051) (724)
Cash flow from (used in) investing activities:
Advances to related parties (220) (171)
Repayments from related parties 192 -
Acquisition of other assets (510) (40)
Proceeds from disposal of property,
plant & equipment 459 35
Purchase of property,plant & equipment (5,287) (4,320)
Purchase of investmen (33,750) (16,569)
Proceeds from maturityof investments 32,981 -
--------- ---------
Net cash used in investing activities (6,135) (21,065)
Cash flow from (used in) financing activities:
Proceeds of bank notes payable
and other debt instruments 37,272 54,707
Repayment of bank notes payable
and other debt instruments (39,394) (78,023)
Proceeds from sale of
common stock 127,500
Repurchase of common stock (5,377) -
Stock offering costs - (1,370)
-------- --------
Net cash from (used in)
financing activities (7,499) 102,814
Effect of exchange rate changes (179) 961
Net increase (decrease) in cash (17,864) 81,986
Cash & equivalents, beginning of period 55,659 16,318
-------- --------
Cash & equivalents, end of period $ 37,795 $ 98,304
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 6
Notes to Consolidated Financial Statements
(Unaudited and in thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normally recurring accruals) considered
necessary for a fair statement of results for the periods have been included.
Operating results for the six month period ended December 31, 1998, are not
necessarily indicative of the results that may be expected for the year
ending June 30, 1999.
This financial information is intended to be read in conjunction with
Hypercom's audited financial statements and footnotes thereto included in
Hypercom's Annual Report on Form 10-K for the year ended June 30, 1998.
NOTE 2 - INVENTORIES
Inventories, stated at the lower of cost on a first-in, first-out basis or
market value, consisted of the following amounts:
December 31, 1998 June 30, 1998
<TABLE>
<S> <C> <C>
Purchased parts $20,951 $18,710
Work in process 8,223 11,388
Finished goods 29,040 30,441
------- -------
$58,214 $60,539
======== ========
</TABLE>
NOTE 3 - EARNINGS PER SHARE (EPS) DISCLOSURES:
Hypercom has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128), and the Securities and
Exchange Commission Staff Accounting Bulletin 98 (SAB 98) effective December
31, 1997.
SFAS 128 requires the presentation of basic and diluted earnings per share.
Basic EPS is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon the exercise of stock
options. All prior period earnings per share amounts have been restated to
comply with the SFAS 128.
NOTE 4 - SEGMENT INFORMATION
Hypercom has two reportable segments: Point-of-Sale (POS) Systems and Network
Systems. POS Systems develops, manufactures, markets, and supports products
that automate electronic payment transactions at the point of sale in
merchant establishments. Network Systems develops, manufactures, markets, and
supports enterprise-networking systems.
<PAGE> 7
Hypercom's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
requires different technologies and marketing strategies.
The following table presents certain segment financial information unaudited
and in thousands for the three month and six month periods ended December 31,
1998, and December 31, 1997:
<TABLE>
<CAPTION>
(Unaudited and in thousands, except per share amounts)
Three months ended 12/31/98 Six months ended 12/31/98
POS Network POS Network
Systems Systems Total Systems Systems Total
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $63,721 $6,873 $70,594 $120,642 $15,935 $136,577
Intersegment revenues 3,758 1,113 4,871 4,907 2,316 7,223
------- ------ ------- -------- ------- --------
Total revenues 67,479 7,986 75,465 125,549 18,251 143,800
======= ======= ======= ======== ======= ========
Segment income from operations $10,720 $ 201 $10,921 $ 23,597 $ 320 $ 23,917
======= ======= ======= ======== ======= ========
Segment assets $314,588 $ 29,937 $344,525
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Three months ended 12/31/97 Six months ended 12/31/97
POS Network POS Network
Systems Systems Total Systems Systems Total
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $62,514 $8,695 $71,209 $132,644 $17,502 $150,146
Intersegment revenues - 2,239 2,239 - 7,882 7,882
------- ------ ------- -------- ------- --------
Total revenues 62,514 10,934 73,448 132,644 25,384 158,028
======= ======= ======= ======== ======= ========
Segment income from operations $16,575 $ 244 $ 16,819 $ 37,368 $ 1,959 $ 39,327
======= ======= ======= ======== ======= ========
Segment assets $269,583 $33,720 $303,303
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Reconciliation
Three months ended Six months ended
12/31/98 12/31/97 12/31/98 12/31/97
<S> <C> <C> <C> <C>
Income from operations
Income from operations for reportable segments $10,921 $16,819 $23,917 $39,327
Elimination of intersegment profits 3,084 567 2,799 (843)
Unallocated amounts
Corporate expenses (4,739) (13,521) (10,126) (19,921)
------- -------- -------- --------
Consolidated income from operations $9,266 $ 3,865 $16,590 $18,563
======= ======== ======== ========
<PAGE> 8
NOTE 5 SOFTWARE REVENUE RECOGNITION
In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. This SOP modified SOP 97-
2 to permit recognition of revenue for the delivered elements of a contract
when 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 fiscal years beginning after March 15,
1999. Hypercom is currently evaluating this SOP's impact on it financial
statements
NOTE 6 ACQUISITIONS
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 equipment manufacturers. In addition to
sales of new equipment, the company provides a variety of services, including
refurbishing equipment, help desk, PIN pad key loading, terminal deployment
and other custom programs. The acquisition will allow Hypercom to meet the
needs of a segment of its customer base that requires direct-from-manufacturer
terminal services.
The acquisition is being accounted for under the purchase method of accounting.
The results of Horizon's operations will be included in Hypercom's consolidated
statements of Income and Cash Flows beginning with the date of acquisition.
Horizon was acquired for $5 million in cash and $.5 million in Hypercom common
stock. The agreement provides for additional payments up to $7 million, based
on Horizon's earnings over the three-year period subsequent to the acquisition
date. The additional payments are to be in the form of Hypercom common stock.
The intangible assets arising from this transaction will be amortized over
periods ranging from five to twenty years.
NOTE 7 SUBSEQUENT EVENTS
Foreign Currency Fluctuations
At the end of January 1998, Hypercom had $10.7 million net monetary assets
subject to foreign currency translation in Brazil. Since December 31, 1999,
the value of the Brazilian Real has declined significantly compared to the US
Dollar. Such valuation declines have been subject to large fluctuations and
at any given moment it is difficult to measure the ultimate impact of
decline. However, such declines could have a materially negative impact on
Hypercom's quarterly results for the period ending March 31, 1999. Hypercom
is taking current action to mitigate negative impacts caused by such currency
fluctuations and the related monetary exposure.
<PAGE> 9
Report of Independent Accountants
To the Board of Directors and Stockholders of
Hypercom Corporation
We have reviewed the accompanying consolidated balance sheet of
Hypercom Corporation as of December 31, 1998 and 1997 and the consolidated
statements of income, and cash flows for the three-month and six-month
periods then ended. These financial statements are the responsibility of
the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of June 30, 1998, and the related
consolidated statements of income, stockholders' equity and cash flow for the
year then ended (not presented herein); and in our report dated July 24, 1998,
we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ PricewaterhouseCoopers L.L.P
Phoenix, Arizona
January 31, 1999
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995. Words
such as "believe", "expect", "intend", "anticipate", "estimate", "project",
and similar expressions identify forward-looking statements, which speak only
as of the date the statement was made. These forward-looking statements may
include, but not be limited to, projections of revenue or net income and
issues that may affect revenue or net income, projections of capital
expenditures, plans for future operations, products or services, financing
needs of the Company, and economic conditions, as well as assumptions
relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Statements in this Quarterly
Report, including the Notes to the Consolidated Financial Statements and
Management's Discussion and Analysis of Results of Operations describe
factors, among others, that could contribute to or cause such differences.
Additional risk factors that could cause actual results to differ materially
from those expressed in such forward-looking statements are set forth in
Exhibit 99 which is attached hereto and incorporated by reference into this
Quarterly Report on Form 10-Q. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events, or otherwise.
Results of Operations
Net Revenue
Net revenues for the three month period ended December 31, 1998, decreased
0.9% to $70.6 million from $71.2 million in the three months ended December
31, 1997. The decline was primarily due to decreased revenue in the Network
Systems business segment. The Network Systems division's net revenue declined
21.0% to $6.9 million from $8.7 million during the three month period ended
December 31, 1998. The Point of Sale (POS) business segments grew
approximately 2% to $63.7 million from $62.5 million in the same period.
Included in the total net revenue for the three month period ended December
31, 1998, was $7.6 million of net revenue from The Horizon Group, Inc., which
was acquired by Hypercom effective October 1, 1998.
Within the POS segment, for the three month period ended December 31, 1998,
strong revenue performance in the United States ($31.4 million) and Europe
($5.4 million) offset the revenue decline in Asia ($9.2 million, which was
56% below the three month period ended December 31, 1997) and Latin America
($17.5 million, or 4% below the three month period ended December 31, 1997).
For the six month period ended December 31, 1998, net revenue decreased $13.5
million to $136.6 million from $150.1 million for the six month period ended
December 31, 1997. This decrease in sales was primarily attributable to
decreases in the Asia/Pacific region. Revenue for the Point of Sale (POS)
division in this region declined 52% for the six months ended December 31,
1998 to $17.9 million from $37.3 million for the six months ended December
31, 1997.
<PAGE> 11
Cost of Revenue
Hypercom's cost of revenue includes the cost of raw materials, manufacturing
labor, overhead, and subcontracted manufacturing costs. The cost of revenue
increased by nearly $2.0 million from $34.3 million to $36.3 million for the
three month period ended December 31, 1998, compared to the same three month
period ended December 31, 1997. The mix of products purchased by POS
customers and the shift in relative margins caused this increase in cost as a
percentage of revenue.
In addition, The Horizon Group accounted for $6.2 million of the previously
mentioned $36.3 million, thus increasing Hypercom's cost of revenue as a
percentage of revenue to 51.4% for the three months ended December 31, 1998,
up from 48.2% for the three months ended December 31, 1997. The cost of
revenue for the six months ended December 31, 1998, was 50.4%, or 0.4% higher
than cost of revenue as a percentage of revenue for the six months ended
December 31, 1997.
Research and Development Expense
Research and development expenses consist mainly of software and hardware
engineering costs and the cost of development personnel. Research and
development expense increased by $1.8 million, to $8.2 million in the three
month period ended December 31, 1998, compared to $6.4 million for the three
month period ended December 31, 1997. This increase reflects Hypercom's
continued investment in new product development.
For the six month period ended December 31, 1998, Hypercom's research and
development expense increased 45% to $15.8 million compared to $10.9 million
for the same period ended December 31, 1997. The overall increase is a
result of higher development costs for new POS products including the
Interactive Customer Environment (ICE) terminal family and the Ascendant
Server software.
Selling, General, and Administrative Expense
Sales and marketing expenses, administrative personnel costs, and facilities
operation make up the selling, general, and administrative expenses. These
expenses totaled $16.9 million for the three month period ended December 31,
1998, or $0.6 million less than the three month period ended December, 31
1997. The expense reduction in the three month period ended December 31,
1998, was due to the realization of expense reduction initiatives begun in
the three month period ended September 30, 1998. As a percentage of revenues,
these expenses decreased from 24.5% of revenue for the three month period
ended December 31, 1997, to 23.9% for three month period ended December 31,
1998.
<PAGE> 12
For the six month period ended December 31, 1998, selling, general and
administrative expenses were up $0.7 million to $35.3 million from $34.6
million for the six month period ended December 31, 1997. The $0.7 million
increase was attributable to the following factors:
* $1.4 million of additional selling, general and administrative expenses
incurred by Hypercom Network Systems,
* $1.1 million of selling, general and administrative expenses relating to
the operations of The Horizon Group, Inc. and
* $1.8 million of expense reduction initiatives.
For the six month period ended December 31, 1998, selling, general and
administrative expenses increased 2.0% to $35.3 million from $34.6 million
during the six month period ended December 31, 1997. For the six month period
ended December 31, 1998, selling, general and administrative expenses
increased to 25.8% of revenue from 23.0% of revenue for the six month period
ended December 31, 1998.
Non-cash Compensation
Hypercom did not have any non-cash compensation expenses for the three or six
month periods ended December 31, 1998. The non-cash charges for the three and
six month periods ended December 31, 1997, resulted from specific provisions
of a compensation package for the President and Chief Executive Officer which
terminated upon completion of Hypercom's initial public offering.
Income from Operations
Income from operations increased by $5.4 million from $3.9 million in the
three month period ended December 31, 1997, to $9.3 million for the three
month period ended December 31, 1998. As a percentage of revenue, income from
operations rose from 5.4% to 13.1%, respectively. This increase was
attributable to the following:
* $9.2 million reduction in non-cash compensation,
* $1.8 million in additional research and development expenses,
* $0.6 million of reductions in selling, general and administrative expenses,
and
* $2.6 million reduction in gross margin.
Income from operations decreased to $16.6 million for the six month period
ended December 31, 1998, from $18.6 million in the six month period ended
December 31, 1997. The decrease in income from operations was attributable
to the following factors noted in the discussion above:
* During the six month period ended December 31, 1998, revenue decreased
9.0%, or $13.5 million, compared to the six month period ended December 31,
1998.
* Research and development expense increased 45% to $15.8 million for the six
month period ended December 31, 1998, compared to $10.9 million for the six
month period ended December 31, 1997.
* The Horizon Group reduced income from operations as a percent of revenue
nearly 0.5% based on The Horizon Group's increased cost of revenue as a
percentage of revenue and the resulting reduction of income from operations.
<PAGE> 13
Net Interest, Other Items and Foreign Currency Losses
Interest income consisted primarily of returns on short-term investments and
cash balances, while foreign currency losses resulted from operations in
volatile markets, principally in Brazil. During the three month period ended
December 31, 1998, income of $0.3 million was generated compared to a loss of
$1 million for the same period ended December 31, 1997. This increase was
due primarily to a $0.9 million decrease in interest expenses.
During the six month period ended December 31, 1998, net interest and other
items were a net gain of $1.3 million, as compared to a loss of $1.7 million
during the same period ended December 31, 1997.
Because volatility in foreign currencies continues, particularly in Brazil,
future earnings may be adversely impacted by foreign currency losses.
Income Taxes
The provisions for Federal, State and foreign taxes were $2.9 million and
$0.9 million in the three months ended December 31, 1998, and December 31,
1997, respectively, with Hypercom's effective tax rates being 31.0% and 35.0%
for the three month periods ended December 31, 1998 and 1997, respectively.
Hypercom's tax rate is typically lower than the US federal statutory rate due
to the following factors:
* Research and experimentation tax credits in Australia and the US,
* Sales in foreign jurisdictions with lower tax rates and
* The use of foreign sales corporations offering lower taxes on certain
international sales.
Liquidity and Capital Resources
Hypercom requires working capital to support inventory, maintain accounts
receivable balances and fund capital expenditures needed to support its
operations and net growth.
As of December 31, 1998, Hypercom's working capital was $178.9 million, which
included cash, cash equivalents, and short-term investments of $73.6 million.
Hypercom funds working capital requirements with cash from operations and
short-term borrowing when necessary. Net cash used in operating activities
was $4.1 million for the six months ended December 31, 1998, and $0.7 million
for the same period in 1997.
Hypercom's capital commitments primarily consist of the purchase or lease of
facilities and equipment. Hypercom used $5.3 million in the six months ended
December 31, 1998, to purchase fixed assets. The main items acquired were
manufacturing equipment, facilities, computer hardware and software to
support growth.
Hypercom maintains a two-year $10.0 million revolving line of credit that
expires in December 2000. Hypercom believes that its current net capital
position combined with the cash generated by operations and available
borrowings are sufficient to fund operations for the foreseeable future.
<PAGE> 14
Year 2000 Issues
Hypercom began a comprehensive project in 1996 to prepare its internal
computer systems for the year 2000. Hypercom believes it 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, Hypercom makes no warranty or representation regarding Year
2000 compliance and believes it is the customer's ultimate responsibility to
verify whether or not there is a Year 2000 compliance issue.
Hypercom faces risk to the extent that suppliers of products and services
purchased by the Company and others with whom Hypercom transacts business on
a worldwide basis do not have business products and services that comply with
the year 2000 requirements. The Company is in the process of obtaining
assurances from most of its key suppliers that their products and services
are year 2000 compliant. In the event any such third party cannot in a
timely manner, provide Hypercom with products and services that meet the year
2000 requirements, the Company's could be materially adversely affected.
<PAGE> 15
Backlog
As of December 31, 1998, Hypercom had backlog of $118 million, or an increase
of 47% compared to the same date in 1997. September 30, 1998, backlog was
$92.2 million and June 30, 1998, was $77.6 million. Backlog includes all
revenue specified in signed contracts and purchase orders expected to be
realized within one year.
Forward-Looking Statements
Certain statements made above, which are summarized below, are forward-
looking statements that involve risks and uncertainties, and actual results
may be materially different. Factors that could cause actual results to
differ include those identified as follows:
THE BELIEF THAT HYPERCOM'S EFFECTIVE TAX RATE IS TYPICALLY LOWER THAN THE US
FEDERAL STATUTORY RATE Changes in the mix of sales to or away from foreign
jurisdictions with lower tax rates and changes in US or foreign tax laws may
inhibit Hypercom's ability to maintain its overall effective tax rate at
present levels.
THE BELIEF THAT HYPERCOM'S CURRENT NET CAPITAL POSITION, COMBINED WITH THE
CASH GENERATED BY OPERATIONS AND AVAILABLE BORROWINGS, IS SUFFICIENT TO FUND
OPERATIONS FOR THE FORSEEABLE FUTURE Changes in anticipated operating
results, credit availability and equity market conditions may inhibit
Hypercom's ability to maintain or raise appropriate levels of cash.
THE BELIEF THAT THE COST OF TRANSITIONING TO YEAR 2000 COMPATITABLE
INFORMATION SYSTEMS WILL BE OFFSET BY COST SAVINGS GENERATED THROUGH
INCREASED PRODUCTIVITY AND THE ABILITY TO ENHANCE INTERNAL REPORTING
Changes in anticipated levels of expenditures, degrees of difficulty in
implementing new systems and amounts of cost savings may inhibit Hypercom's
ability to offset the cost of transitioning to year 2000 compatible systems.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Hypercom is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. Nevertheless, the fair value of
Hypercom's investment portfolio or related income would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates,
due primarily to the short-term nature of the major portion of Hypercom's
investment portfolio.
A substantial portion of Hypercom's revenue and capital spending is
transacted in U.S. dollars. However, Hypercom does at times enter into these
transactions in other currencies, such as the Hong Kong dollar, Australian
dollar, Brazilian Real and other Asian and European currencies. Hypercom has,
from time to time, established revenue and balance sheet hedging programs to
protect against reductions in value and cash flow volatility caused by
changes in foreign exchange rates. Such programs are intended to reduce
market risks, but do not always eliminate the impact of foreign currency
exchange volatility.
Hypercom does not purchase or hold any derivative financial instruments for
the purpose of speculation or arbitrage. See information/discussion appearing
in subcaption "Risks Associated with International Operations and Foreign
Currency Fluctuations" of "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS AND RISK FACTORS" set forth in Exhibit 99.1, attached hereto.
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 1 of Part II of Hypercom's Form 10-Q for the three month period
ended September 30, 1998, for disclosures regarding pending matters.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) On November 18, 1998, Hypercom issued 55,709 shares of its treasury
stock in connection with the purchase of substantially all of the assets of
The Horizon Group, Inc. The sale of this treasury stock was exempt from the
registration provisions of the Securities Act of 1933 (the Act), pursuant
to Section 4(2) of the Act for transactions not involving a public offering,
based on the fact that the treasury stock was offered and sold to a limited
number of investors who had access to financial and other relevant data
concerning Hypercom, its financial condition, business and assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on November 12, 1998.
(b)(1) The following individuals were elected to the Board of Directors as
Class I Directors for two-year terms expiring at Hypercom's Annual Meeting in
2000: George Wallner, Albert A. Irato, and William E. Fisher.
(b)(2) The following individuals' terms continued after the Annual Meeting as
Class II Directors. Their terms will expire at Hypercom's Annual Meeting in
1999: Paul Wallner, Jairo Gonzalez, Peter J. Hart and newly appointed
director Jock Patton.
(c) The matters submitted for vote at the Annual Meeting were as follows:
Election of Class I Directors for two-year terms expiring at
Hypercom's Annual Meeting in 2000. See Item 4(b)(1) above. The shares were
voted as follows:
Nominee Number of Shares
George Wallner
For 31,390,666
Withheld 34,695
Abstentions 0
Broker Non-Votes 0
Albert A. Irato
For 31,390,666
Withheld 34,695
Abstentions 0
Broker Non-Votes 0
William E. Fisher
For 31,399,766
Withheld 24,595
Abstentions 0
Broker Non-Votes 0
(d) None
<PAGE> 17
ITEM 5. OTHER INFORMATION
Jonathon E. Killmer was appointed Senior Vice President and Chief Financial
Officer (CFO) on January 20, 1999. Mr. Killmer succeeded Thomas E. Linnen,
who assumed responsibility for strategic planning and corporate development.
On January 19, 1999 Hypercom appointed Jock Patton to its Board of Directors.
Mr. Patton succeeded John C. Elliott who resigned for personal reasons
effective September 1, 1998.
For additional information of foreign currency risks, see Note 7 to the
unaudited, consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
11.1 Statement re Computation of Per Share Earnings
15.1 Letter re Unaudited Interim Financial Information
27.1 Financial Data Schedule
99.1 Cautionary Statement Regarding Forward-Looking
Statements and Risk Factors
(b) Reports on Form 8-K
None.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYPERCOM CORPORATION
Date: February 8, 1999 By: /s/ Jonathon E. Killmer
__________________
Jonathon E. Killmer
Senior Vice President and
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
EXHIBIT INDEX
Exhibit No. Description
- ------------ -----------
11.1 Statement re Computation of Per Share Earnings
15.1 Letter re Unaudited Interim Financial Information
27.1 Financial Data Schedule
99.1 Cautionary Statement Regarding Forward Looking
Statements and Risk Factors
<PAGE> 19
</TABLE>
In accordance with the disclosure requirements of SFAS 128,
a reconciliation of the numerator and denominator of basic
and diluted EPS is provided below.
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Ended Six months Ended
December 31 December 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Numerator - Basic and Diluted EPS:
Net income $ 6,604 $ 1,841 $ 12,359 $10,951
Denominator - Basic EPS:
Common stock outstanding 33,033 29,518 33,151 27,850
Basic earnings per share $ 0.20 $ 0.06 $ 0.37 $ 0.39
======= ======= ======= =======
Denominator - Diluted EPS:
Denominator - Basic EPS 33,033 29,518 33,151 27,850
Effect of Dilutive Securities
Common stock options 1,469 1,250 1,398 976
------ ------- ------- ------
Diluted shares outstanding 34,502 30,768 34,549 28,826
------ ------- ------- ------
Diluted earnings per share $ 0.19 $ 0.06 $ 0.36 $ 0.38
======= ======= ======= =======
<PAGE> 20
</TABLE>
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
We are aware that our report dated January 31, 1999 on our review of interim
consolidated financial information of Hypercom Corporation (the "Company")
for the three month and six month periods ended December 31, 1998 and 1997,
and included in the Company's Form 10-Q for the quarter ended December 31,
1998, is incorporated by reference in the Company's registration statements
on Form S-8 (Registration Nos. 333-40457, 333-40459, 333-40461 and 333-
40333). Pursuant to Rule 436(c), under the Securities Act of 1933, this
report should not be considered a part of the registration statements
prepared or certified by us within the meaning of Sections 7 and 11 of that
Act.
PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
February 11, 1999
<PAGE> 21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 37,794,611
<SECURITIES> 35,808,120
<RECEIVABLES> 61,595,107
<ALLOWANCES> 5,027,670
<INVENTORY> 58,213,689
<CURRENT-ASSETS> 216,181,216
<PP&E> 38,187,064
<DEPRECIATION> 11,660,017
<TOTAL-ASSETS> 270,409,758
<CURRENT-LIABILITIES> 37,301,516
<BONDS> 0
0
0
<COMMON> 12,564
<OTHER-SE> 228,311,135
<TOTAL-LIABILITY-AND-EQUITY> 270,409,758
<SALES> 136,577,124
<TOTAL-REVENUES> 136,577,124
<CGS> 68,884,170
<TOTAL-COSTS> 119,987,284
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,027,670
<INTEREST-EXPENSE> 549,554
<INCOME-PRETAX> 17,911,711
<INCOME-TAX> 5,552,649
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,359,122
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
</TABLE>
EXHIBIT-99
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 Quarterly Report on Form
10-Q 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> 23
It is also difficult to forecast net revenue in certain international markets
where large orders for complete systems occur more frequently than in the
U.S. Due to the significant cost of buying complete systems, their sales
cycle is long and difficult to predict.
Hypercom Network Systems operates with little backlog and, as a result, net
revenue in any quarter is substantially dependent on the orders booked and
shipped in that quarter. The highly technical nature of these sales generally
results in a sales cycle that ranges from 12 to 18 months.
Hypercom's operating results are subject to other uncertainties, including
the following:
* Industry and economic conditions;
* Competitive pressures;
* Type, timing, and size of orders and shipments for major customers;
* Variations in product mix and cost;
* Overhead costs;
* Obsolescence of inventory;
* Manufacturing or production difficulties; and
* Nonrecurring charges.
Significant Fluctuations in Quarterly Results
Hypercom's operating results vary from quarter to quarter. If sales and
shipments in any quarter do not meet expectations, the results may be
adversely affected. Any unexpected decline in the growth of the net revenue
without a quick reduction in the growth of operating expenses could have a
serious negative effect on operating results and financial condition.
Hypercom cannot be sure that it will meet profitability objectives for a
quarter if sales fall or the gross margin is reduced.
Seasonality
Hypercom continues to experience some degree of seasonality. For this reason,
net revenue and results of operations are stronger in the first half of the
fiscal year reflecting:
* Increased POS purchases to satisfy increased retail demand during the
holiday season,
* Incentive programs VISA and MasterCard offer from July to December to
encourage merchants to offer card-based payment systems, and
* Allocation of customers' capital budgets by the end of March with volume
shipments beginning in July.
Risks Associated with International Operations and Foreign Currency
Fluctuations
Hypercom's net revenue from international sales for fiscal years 1996, 1997
and 1998 was approximately 58%, 56% and 57%, respectively, of Hypercom's net
revenue. Hypercom expects that international sales will continue to account
for a significant percentage of its net revenue in the foreseeable future.
Accordingly, Hypercom is subject to risks associated with international
operations. Examples of these risks include:
* Management of a multinational organization,
* Fluctuations in currency exchange rates,
* Compliance with local laws,
* Regulatory and product certification requirements,
* Changes in international laws and requirements,
* Tariffs and other trade barriers,
* Import and export controls,
* Restrictions on the repatriation of funds,
* Inflationary conditions,
* Staffing, employment, and severance issues,
* Political instability and economic downturns, which include the impact of
revenue generated from Hypercom's shipments into Asia,
* 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> 25
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, Albert A. Irato, Paul Wallner, and Jairo
Gonzalez are instrumental in Hypercom's development, growth, and operations.
Hypercom has employment agreements with Mr. Irato and Mr. Gonzalez. However
it does not have employment agreements with George Wallner, Paul Wallner, or
any other member of senior management. Although 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> 26
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,
* 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.
PAGE> 27
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 1998, the two largest customers accounted
for 17.9% of the net that year. The five largest accounted for 28.9% 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.
<PAGE> 28
Further, customer demand can be adversely affected by many factors including
the following:
* Budgetary constraints,
* Changes in the customer's competitive environment,
* Customer involvement in mergers or other strategic alignments,
* Price increases by Hypercom or its competitors,
* Personnel changes,
* The number, timing, and significance of new and enhanced products,
* The ability of Hypercom to market new and enhanced products, and
* General economic factors.
Hypercom cannot be assured that its important customers will continue to buy
its products at historical or any particular level.
Impact of Industry Regulation and Standards
Before sales are completed in the United States, Hypercom's products must:
* Meet industry standards as imposed by VISA, MasterCard, and others,
* Be certified to connect to some public telecommunications networks,
* Comply with Federal Communications Commission (FCC) regulations, and
* Comply with Underwriters Laboratories regulations.
Similarly, before completing sales in foreign countries, Hypercom's products
must comply with:
* Local telecommunications standards,
* Recommendations of quasi-regulatory authorities and
* Recommendations of standards-setting committees.
In addition, public carriers require that equipment connected to their
networks comply with their own standards. These standards in part reflect
their currently installed equipment. Some public carriers have equipment that
does not fully meet current industry standards. Hypercom must address this
issue in designing enterprise-networking products.
Although Hypercom believes its products currently meet all applicable
industry standards, it has no assurance that its products will comply with
future standards. Negative impacts to Hypercom's business and financial
condition could result in the future if Hypercom cannot:
* Obtain needed regulatory approvals or certifications,
* Retain domestic or foreign approvals or certifications, and
* Meet new industry standards.
In addition, carriers set the tariffs that govern rates for public
telecommunications services, including their features and capacity.
These services are subject to regulatory approval. Changes in the tariffs
could have a serious negative effect on Hypercom's business and financial
condition.
Hypercom must comply with state, federal, and international
laws governing such areas as:
* Occupational health and safety,
* Minimum wages,
* Work hours and overtime,
* Retirement and profit-sharing plans and severance payments, and
* The use, storage, handling, and disposal of dangerous chemicals.
<PAGE> 29
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 able to copy some portions of or to reverse engineer products to obtain
technology that Hypercom regards as proprietary.
In addition, the laws of certain countries do not protect
Hypercom's proprietary rights to the same extent as U.S. laws. Accordingly,
Hypercom may not be able to protect its proprietary technology against
unauthorized copying or use, which could adversely affect Hypercom's
competitive position.
Hypercom has applied for patents and trademarks that may not be granted. If
they are granted, the patents may not cover all claims Hypercom is trying to
protect. Further, a challenge could find any Company patent or trademark
invalid and unenforceable.
<PAGE> 30
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 business of The Horizon Group, Inc. has
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 its 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 Horizon's existing management and
employees for the day-to-day management and future operation results of the
business.
Voting Control by Existing Stockholders
George Wallner and Paul Wallner together own 63.4% of Hypercom's outstanding
Common Stock. 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.
<PAGE> 31
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.
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