<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 1-13521
HYPERCOM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 86-0828608
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2851 West Kathleen Road
Phoenix, Arizona 85053
(Address of principal executive offices) (Zip Code)
(602) 504-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Number of shares of the registrant's common stock, $.001 par value per share,
outstanding as of November 14, 2000, was 34,576,499.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
------- --------------------- ----
<S> <C> <C>
ITEM 1. Financial Statements............................................................... 3
Notes to Condensed Consolidated Financial
Statements......................................................................... 6
Review Report of Independent Accountants........................................... 13
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................... 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......................... 20
PART II. OTHER INFORMATION
-------- -----------------
ITEM 1. Legal Proceedings.................................................................. 21
ITEM 2. Changes in Securities and Use of Proceeds.......................................... 21
ITEM 4. Submission of Matters to a Vote of Securities Holders.............................. 21
ITEM 6. Exhibits and Reports on Form 8-K................................................... 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYPERCOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
(unaudited)
ASSETS September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,768 $ 26,093
Marketable securities, at market 922 23,015
Accounts receivable (net of allowance for
doubtful accounts of $2,375 and $1,589) 86,249 57,370
Net investment in direct financing leases 18,774 --
Inventories, net 79,941 72,897
Deferred income taxes 9,884 10,972
Prepaid taxes 7,370 5,045
Prepaid expenses and other current assets 21,452 17,344
--------- ---------
Total current assets 230,360 212,736
Property, plant and equipment, net 40,198 35,511
Investment in equity affiliates -- 5,776
Long-term marketable securities, at market 2,671 13,762
Net investment in direct financing leases 40,623 --
Deferred income taxes 3,848 3,613
Goodwill, net of amortization of $3,719 and $1,062 33,117 9,208
Intangible assets, net of amortization of $2,094 and $1,018 6,474 5,693
Other assets 14,416 11,478
--------- ---------
Total assets $ 371,707 $ 297,777
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,996 $ 28,538
Accrued liabilities 26,151 19,379
Deferred revenue 2,767 4,770
Income taxes payable -- 2,180
Current portion of long-term obligations 85,555 878
--------- ---------
Total current liabilities 146,469 55,745
Long-term obligations 13,124 10,298
--------- ---------
Total liabilities 159,593 66,043
Stockholders' equity:
Common stock, $.001 par value; 100,000,000 shares authorized;
34,271,636 and 33,234,525 shares issued and outstanding for
September 30, 2000 and December 31, 1999, respectively 14 13
Additional paid-in capital 152,599 146,040
Receivables from stockholder (1,498) (1,498)
Retained earnings 64,131 90,873
--------- ---------
215,246 235,428
Treasury stock, 296,363 and 360,141 shares (at cost)
at September 30, 2000 and December 31, 1999, respectively (3,132) (3,694)
--------- ---------
Total stockholders' equity 212,114 231,734
--------- ---------
Total liabilities and stockholders' equity $ 371,707 $ 297,777
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
<PAGE> 4
HYPERCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 75,915 $ 73,302 $ 243,065 $ 198,240
Costs and expenses:
Costs of revenue 57,941 39,969 157,071 112,917
Research and development 10,280 9,345 31,590 23,745
Selling, general and administrative 25,472 19,948 72,179 59,465
--------- --------- --------- ---------
Total costs and expenses 93,693 69,262 260,840 196,127
--------- --------- --------- ---------
Income (loss) from operations (17,778) 4,040 (17,775) 2,113
Interest and other income 363 1,152 1,237 4,224
Interest and other expense (1,806) (465) (3,278) (1,199)
Foreign currency loss (394) (165) (1,293) (5,923)
Loss from Cirilium Corporation (5,941) -- (9,855) --
--------- --------- --------- ---------
Income (loss) before income taxes (25,556) 4,562 (30,964) (785)
Income tax (expense) benefit 3,923 (1,140) 4,222 1,021
--------- --------- --------- ---------
Net (loss) income $ (21,633) $ 3,422 $ (26,742) $ 236
========= ========= ========= =========
Net (loss) income per share:
Basic (loss) income per share $ (0.63) $ 0.10 $ (0.78) $ 0.01
========= ========= ========= =========
Weighted average basic common shares 34,264 33,231 34,147 33,174
========= ========= ========= =========
Diluted (loss) income per share $ (0.63) $ 0.10 $ (0.78) $ 0.01
========= ========= ========= =========
Weighted average diluted common shares 34,264 34,415 34,147 34,392
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE> 5
HYPERCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net (loss) income $ (26,742) $ 236
Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities:
Depreciation/amortization 9,247 5,944
Bad debt expense 1,369 (612)
Deferred components of direct-finance leases (2,864) --
Provision for losses on direct-finance leases 8,388 --
Provision for excess and obsolete inventory 1,901 3,368
Loss from Cirilium Corporation 9,855 --
Foreign currency loss 1,293 5,923
Deferred income taxes 847 (1,448)
Other 103 126
Increase in accounts receivable, inventories, prepaid taxes,
prepaid expenses and other current assets, and other assets (49,321) (17,634)
Increase in accounts payable, accrued liabilities, deferred revenue,
income taxes payable and other liabilities 5,384 9,937
--------- ---------
Net cash (used in) provided by operating activities (40,540) 5,840
Cash flow from investing activities:
Advances to affiliates (2,305) --
Repayments from related parties -- 322
Notes receivable -- (3,900)
Payments received on notes receivable 678 1,120
Principal payments received on direct-finance leases 7,012 --
Funding of direct-finance leases (32,949) --
Acquisition of controlling interest in subsidiaries, net of cash acquired (22,996) (9,279)
Acquisition of other assets (2,040) (2,461)
Proceeds from disposal of property,
plant and equipment 57 109
Purchase of property, plant and equipment (9,424) (12,863)
Purchase of investments (94) (264,776)
Proceeds from maturity of investments 33,279 279,392
--------- ---------
Net cash used in investing activities (28,782) (12,336)
Cash flow from financing activities:
Proceeds of bank notes payable 191,780 45,953
and other debt instruments
Repayment of bank notes payable (145,258) (37,427)
and other debt instruments
Proceeds from sale of common stock 3,122 746
Other -- (19)
--------- ---------
Net cash provided by financing activities 49,644 9,253
Effect of exchange rate changes 647 (217)
--------- ---------
Net (decrease) increase in cash (20,325) 2,540
Cash and equivalents, beginning of period 26,093 37,795
--------- ---------
Cash and equivalents, end of period $ 5,768 $ 40,335
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair statement of results for the periods have been included.
Operating results for the nine-month period ended September 30, 2000, are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. (See Note 7).
Certain prior year amounts have been reclassified to conform with the current
period presentation.
This financial information is intended to be read in conjunction with Hypercom's
audited financial statements and footnotes thereto included in Hypercom's
Transition Report on Form 10-K for the six-month period ended December 31, 1999.
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.
FOREIGN CURRENCY
Due to the increasing market risks resulting from fluctuations in foreign
currencies, the Company uses derivative financial instruments to reduce
exposures to its net investments in certain foreign locations (principally
Brazil). The Company does not acquire, hold or issue derivative financial
instruments for trading purposes. The derivative financial instruments entered
into generally include forward exchange contracts maturing in less than one
year. The counterparties to these contracts are major financial institutions and
management believes the risk of loss from nonperformance by any counterparty is
remote.
Any premiums or discounts related to forward exchange contracts are reported in
the balance sheet at cost and amortized to results of operations over the life
of the contract. Gains and losses on the forward contracts arising from changes
in foreign currency exchange rates are included in results of operations in the
period as the rate changes. As of September 30, 2000, the Company had contracts
totaling 30 million Brazilian Reals outstanding to hedge against its net
investment in Brazil. These contracts expire at various dates through March
2001. Management intends to continue to hedge its net investments in foreign
locations as deemed necessary on an ongoing basis.
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted income (loss) per share is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of the net incremental common shares
issuable upon the exercise of stock options. Due to losses for the three and
nine-months ended September 30, 2000, there was no dilutive effect, as any such
effect would have been anti-dilutive.
NEW PRONOUNCEMENTS
In December 1999, the Securities Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements. The effective
date of SAB 101 for the Company is no later than the fourth fiscal quarter of
the year ending December 31, 2000. The Company is currently evaluating the
effect of this SAB on its financial statements.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands)
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Purchased parts $38,562 $31,827
Work in progress 7,221 5,581
Finished goods 34,158 35,489
------- -------
$79,941 $72,897
======= =======
</TABLE>
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - SEGMENT INFORMATION
As of December 31, 1999 Hypercom had two segments: Point-of-Sale (POS) Systems
and Network Systems. POS Systems develops, manufactures, markets, and supports
products that automate electronic payment transactions at the point of sale in
merchant establishments. Network Systems develops, manufactures, markets, and
supports enterprise-networking systems. In conjunction with the establishment of
the Cirilium joint venture on December 31, 1999, Network Systems became
immaterial to Hypercom's consolidated financial position and results of
operations and, accordingly, is no longer a separate reportable segment.
With the acquisition of Golden Eagle LLC, a direct-financing lease business,
direct-finance leasing activities became a new reportable segment.
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 and nine-month period ended September 30, 2000:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
-------------------------------------- ------------------------------------
POS Equipment POS Equipment
Systems Leasing Total Systems Leasing Total
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $ 69,052 $ 6,893 $ 75,915 $225,144 $ 17,921 $243,065
Intersegment revenues -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total revenues $ 69,052 $ 6,893 $ 75,915 $225,144 $ 17,921 $243,065
======== ======== ======== ======== ======== ========
Segment (loss) income from operations $(11,146) $ (979) $(12,125) $ 2,131 $ (1,957) $ 174
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Reconciliation September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Net revenues
Net revenue from reportable segments $ 75,915 $ 243,065
Elimination of intersegment revenue -- --
--------- ---------
Total consolidated revenue $ 75,915 $ 243,065
========= =========
Income (loss) from operations
Income (loss) from operations for reportable segments $ (12,125) $ 174
Elimination of intersegment profit -- --
Corporate expenses (5,653) (17,949)
--------- ---------
Consolidated loss from operations $ (17,778) $ (17,775)
========= =========
</TABLE>
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - INVESTMENT IN CIRILIUM CORPORATION
In December 1999, the Company, along with Inter-Tel Incorporated formed a
jointly owned company called Cirilium Corporation. The Company contributed
certain assets and intellectual property with a net book value of $1,005,000 and
advanced funds totaling $5,000,000. The advance is in the form of an 8.5% note
receivable that is due (in whole or in part depending on certain conditions)
upon certain triggering events, such as a sale of Cirilium or a major financing.
Interest on the note is capped at $870,000.
The Company reported its initial investment in Cirilium on the equity method and
reported a loss of $5,941,000 and $9,855,000 for the three and nine-month
periods ended September 30, 2000, respectively. During the quarter ended
September 30, 2000, as a result of continuing losses by Cirilium the Company
fully reserved operating advances made to Cirilium and also established a 100%
reserve on all inventory dedicated to Cirilium production. The total of the
charges, related to these actions, which are included in the $5,941,000 loss,
amounted to $4,100,000. Accordingly, the Company currently has no remaining
basis in this investment. In addition, as a result of an investment during the
quarter by Cirilium's CEO, Hypercom's interest was diluted to less than 20% and
it will discontinue accounting for its investment under the equity method.
NOTE 5 - ACQUISITIONS
On January 8, 2000, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets and business and assumed certain liabilities of
Golden Eagle LLC ("Golden Eagle"). Golden Eagle is a lessor of POS equipment.
The purchase price paid was $18.5 million in cash and $4 million in the
Company's common stock. The purchase agreement provides for additional payments
up to $32.5 million, payable in the Company's common stock based on Golden
Eagle's earnings over the next three-year period subsequent to the acquisition
date.
The acquisition was accounted for under the purchase method of accounting.
Substantially all the purchase price was allocated to identifiable net tangible
assets and liabilities of $140,000 and identifiable intangibles and
goodwill amounting to $22,360,000, which is being amortized over 15 years.
9
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma information with respect to the acquisition of Golden Eagle includes
the historical financial information of the Company and Golden Eagle for each of
the nine-month periods ended September 30, as if the acquisition occurred at the
beginning of each period. Pro forma adjustments include only those adjustments
directly attributable to the transaction, and as such, are for illustrative
purposes only and are not necessarily indicative of the results of operations
that would have been reported had the acquisition actually occurred on such
dates. Pro forma information (in thousands) as if the acquisition occurred at
the beginning of each period is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues $243,501 $210,684
Net income (loss) $(26,741) $ 730
Basic loss per share $ (0.78) $ 0.02
Diluted loss per share $ (0.78) $ 0.02
</TABLE>
NOTE 6 - NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in direct financing leases consists of lease
contract receivables, plus the estimated residual value of the equipment at the
lease termination date, less unearned income. Lease contract receivables
represent the total rent to be received over the term of the lease reduced by
rent already collected. Initial unearned income is the amount by which the
original sum of the lease contract receivable and the estimated residual value
exceeds the original cost of the leased equipment. Unearned income is amortized
to lease income over the lease term in a manner that produces a constant rate of
return on the net investment in the lease.
The following summarized the Company's investment (in thousands) in direct
financing leases:
<TABLE>
<CAPTION>
At September 30, 2000
--------------------
<S> <C>
Lease contracts receivable $ 71,326
Estimated residual value 15,829
Unearned income (27,758)
--------
Net investment $ 59,397
========
</TABLE>
10
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - FINANCING
In August 2000, the Company entered into a $60 million revolving credit
agreement ("Credit Agreement") provided by a syndicate of banks, including Bank
One, expiring in August 2002. At the Company's option, the facility bears
interest at either prime or LIBOR based rates payable on a monthly basis. The
loan agreement is secured by domestic trade receivables, inventories and
marketable securities. Concurrent with this agreement, the Company also entered
into a $50 million Receivables Purchase Agreement (the "Conduit") that allows
the Company to borrow against certain lease receivables generated through its
wholly owned subsidiary, Golden Eagle Leasing. This agreement expires in August
2001, and at the Company's option, bears interest at either prime or LIBOR based
rates, payable monthly. These agreements replaced the prior revolving lines of
credit with Bank One.
The Company has a $10 million loan agreement with Webster Bank that expires in
June 2001. The loan bears interest at either prime or LIBOR based rates, payable
on a monthly basis. Additionally, the Company has a $20 million loan agreement
with Tokyo Leasing that bears interest at 285 basis points over US Treasury
yield, payable monthly, and expires on December 31, 2000. These loan agreements
are secured by certain lease receivables of Golden Eagle Leasing.
All loan agreements contain various restrictions on the Company, including a
prohibition on declaring or paying dividends, limitations on the incurrence of
additional debt, and restrictions on the Company's ability to consolidate or
merge into any other entity. The Credit Agreement, Conduit and Webster loan
agreement also contain certain financial covenants, including a minimum tangible
net worth requirement, interest coverage and funded debt to EBIDTA ratios. The
Conduit contains financial covenants relating to delinquencies and other
measurements.
As of September 30, 2000 the Company was not in compliance with certain
covenants of the Credit Agreement, Conduit and Webster loan agreement, as well
as delinquency restrictions under the Conduit. Such defaults created
cross-defaults under the Tokyo loan agreement. The Company and its lenders are
presently negotiating to obtain waivers of non-compliance for the third quarter.
The Company will not be in compliance with these ratios for the fourth quarter
and into 2001. Consequently the balances outstanding under the Credit Agreement
and Conduit of $44.1 million and $19.6 million, respectively, have been
classified as current debt at September 30, 2000.
The waivers being finalized in conjunction with the third quarter defaults are
expected to include the following terms:
1. A reduction in the amount of lending amounts generally, and
specifically with respect to Golden Eagle Leasing;
2. An increase in the interest rate;
3. Limits on other borrowings or liens;
4. That the loans are fully secured;
5. That plans be developed to sell assets and to refinance the
indebtedness; and
6. That any asset sales or financings be used to pay down the loan.
The Company is in the process of seeking to refinance its current lending
arrangements. Even assuming it receives the waivers under discussion, if the
Company is unable to refinance its credit agreements by January 15, 2001, it
will need to obtain additional waivers from its current lending group. There can
be no assurance that the Company will obtain alternative financing, or that if
it does not, waivers will be granted by its current lenders. In such event, the
Company's ability to continue to operate in the ordinary course will be
materially adversely affected.
11
<PAGE> 12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the interim, the Company is in the process of accelerating cash generation
through aggressively pursuing collection of trade receivables, reducing
inventories, and reducing costs, such as selectively reducing its workforce,
closing underperforming offices, curtailing capital expenditures and research
and development. It is also reviewing the possible sale of various assets and
operations.
12
<PAGE> 13
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of Hypercom Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Hypercom Corporation as of September 30, 2000, and the related condensed
consolidated statements of operations for the three-month and nine-month periods
then ended September 30, 2000 and the related condensed consolidated statement
of cash flows for the nine month period ended September 30, 2000. 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 auditing standards generally accepted in the United States, which will be
performed for the full year with the objective of expressing 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 condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Hypercom
Corporation as of December 31, 1999, and the related consolidated statements of
income, stockholders' equity, and cash flows for the six-month period ended
December 31, 1999, not presented herein, and in our report dated March 24, 2000,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Ernst & Young LLP
Phoenix, Arizona
November 10, 2000
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995. Words such
as "believe", "expect", "intend", "anticipate", "estimate", "project", and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. These forward-looking statements may include,
but not be limited to, projections of revenue or net income and issues that may
affect revenue or net income, projections of capital expenditures, plans for
future operations, products or services, financing needs of the Company, and
economic conditions, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Statements in this Quarterly Report,
including the Notes To The Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Results of Operations describe factors,
among others, that could contribute to or cause such differences. Additional
risk factors that could cause actual results to differ materially from those
expressed in such forward-looking statements are set forth in Exhibit 99.1 which
is attached hereto and incorporated by reference into this Quarterly Report on
Form 10-Q. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
RESULTS OF OPERATIONS
NET REVENUE
Net revenue for the three-month period ended September 30, 2000 increased $2.6
million or 3.6% to $75.9 million from $73.3 million in the three months ended
September 30, 1999. This increase resulted from $6.9 million of revenues from
the Company's new business unit, Golden Eagle Leasing. Sales of the Company's
new multi-lane products, which are included within its POS Systems segment,
contributed $4.0 million of sales, sales in Europe increased $1.6 million over
the comparable 1999 period, and sales to the government sector added $2.0
million of new revenue relative to the same quarter in the prior year. These
revenue increases were partially offset by a decrease of $3.7 million of revenue
from the United States, $5.2 million from Latin America and $2.2 million from
Network Systems compared to last year's third quarter.
Net revenue for the nine-month period ended September 30, 2000 increased $44.8
million or 22.6% from $198.2 million for the nine-months ended September 30,
1999 to $243.1 million. The increase reflects $54.8 million of additional
revenues from Latin America, Europe, Asia, multi-lane POS, Golden Eagle Leasing
and the Company's Emerging Business Global Markets group. The increases were
partially offset by a $10.0 million decrease in revenue from the United States,
Australia and Network Systems.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COST OF REVENUE
Cost of revenue includes the cost of raw materials, manufacturing labor,
overhead, and subcontracted manufacturing costs. Cost of revenue for the
three-month period ended September 30, 2000 increased $18.0 million or 45.0% to
$57.9 million from $40.0 million in the three-months ended September 30, 1999.
As a percentage of revenue, gross margin decreased from 45.5% in the quarter
ended September 30, 1999 to 23.7% for the quarter ended September 30, 2000. This
decrease was due to a number of factors, as follows:
<TABLE>
<S> <C>
Gross margin impact:
Volume decline in legacy products 7.8 %
Change in product mix 8.8
Warranty reserve increases 3.3
Increased manufacturing costs attributable to greater
than anticipated U.S. production, components, and
product rework and stabilization of several new products 1.9
------
Total margin decline for the three-month period
ended 2000 compared to 1999 21.8 %
======
</TABLE>
The margin decline related to product mix was effected by two factors. First,
during the three-month period ended September 30, 2000, there was a significant
shift of revenues generated through lower margin operations, principally Golden
Eagle Leasing, which produced a margin of 28.4% on revenues of $6.9 million.
Secondly, the September 30, 2000 quarter had a larger portion of its revenues
generated through the sales of its new screen based family of terminals, which
at this time produce a significantly lower gross margin than the Company's
legacy products, sales of which declined. This difference in gross margin
amounted to $5.8 million.
The Company increased warranty reserves during the quarter ended September 30,
2000, reflecting the anticipated growth in warranty claims due to the
significantly expanded product line and new product introductions that occurred
during the same period.
Increased manufacturing expenses were attributable to greater than anticipated
manufacturing volumes in the U.S. versus China, transition costs in moving
manufacturing to China, higher component costs resulting from an increase in
purchases through distributors which offer extended credit terms but higher
prices than manufacturers, and costs related to the reworking and stabilization
of several new products, as well as initial tooling costs for the ICE(TM)
(Interactive Consumer Environment) 5500 and follow-on models that utilize the
Company's new ePic platform.
Cost of revenue for the nine-month period ended September 30, 2000 increased
$44.2 million or 39.1% to $157.1 million from $112.9 million in the nine-months
ended September 30, 1999. As a percentage of revenue, gross margin decreased
from 43.0% in the nine-months ended September 30, 1999 to 35.4% for the
nine-months ended September 30, 2000. This decrease was primarily attributable
to the issues arising in the three month period ended September 30, 2000
described above, and to continuing price competition on legacy products.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of software and hardware
engineering cost and the cost of development personnel. Research and development
expenses increased $0.9 million from $9.4 million in the quarter ended September
30, 1999 to $10.3 million in the quarter ended September 30, 2000. Expenses
increased $7.8 million from $23.7 million in the nine-months ended September 30,
1999 to $31.6 million in the nine-months ended September 30, 2000. These
increases are attributable to increased research and development activities
related to the ICE product family and to the ePic initiative. Additionally, the
impact of ICL Sweden, Microtrax, and JTS acquisitions resulted in new research
and development expenditures relative to the comparable periods in the prior
year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Sales and marketing expenses, administrative, personnel costs, and facilities
make up the majority of the selling, general and administrative expenses. These
expenses totaled $25.5 million for the quarter ended September 30, 2000 compared
to $19.9 for the comparative quarter in the prior year. This $5.5 million or
27.7% increase is primarily attributable to the acquisition of Golden Eagle
Leasing, which has added incremental selling, general and administrative
expenses of $2.9 million in the three-months ended September 30, 2000. Excluding
the effect of Golden Eagle, selling, general and administrative expenses
increased by 13.6% for the quarter ended September 30, 2000. This increase was
primarily related to increased operating levels, and to a lessor extent, the
impact of two small acquisitions made in Brazil. As a percentage of revenue,
selling, general and administrative expenses were 33.6% and 27.2% for the
three-months ended September 30, 2000 and 1999, respectively.
Selling, general and administrative expenses increased $12.7 million or 21.4%
from $59.5 million for the nine-months ended September 30, 1999 to $72.2 million
in the nine-month period ended September 30, 2000. Like the three-month period,
the increase is primarily attributable to the acquisition of Golden Eagle
Leasing which has added incremental selling, general and administrative expenses
of $8.2 million in the nine-months ended September 30, 2000. Excluding the
effect of Golden Eagle, selling, general and administrative expenses increased
by 7.6% for the nine-months ended September 30, 2000. Such percentage growth
primarily related to the growth in revenues in the nine-months ended September
30, 2000. As a percentage of revenue, selling, general and administrative
expenses were 29.7% and 30.0% for the nine-months ended September 30, 2000 and
1999, respectively.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME (LOSS) FROM OPERATIONS
The loss from operations for the quarter ended September 30, 2000 was $17.8
million compared to income of $4.0 million for the same quarter in the prior
year. The primary reason for the loss for the three-months ended September 30,
2000 related to the significant decline in gross margin, as previously
discussed.
The loss from operations for the nine-months ended September 30, 2000 was $17.8
compared to income of $2.1 million for the nine-months ended September 30, 1999.
NET INTEREST, FOREIGN CURRENCY LOSSES AND OTHER ITEMS
For the three-months ended September 30, 2000, interest income ($0.4 million)
consisted primarily of returns on short and long-term investments. Interest
expense ($1.8 million) related to borrowings on real property, bank lines of
credit, and foreign currency hedging instruments. Foreign currency losses ($0.4
million) resulted from operating in foreign economic markets, principally Latin
America, Europe and Australia. Additionally, the Company incurred a $5.9 million
loss related to its investment in Cirilium Corporation.
During the three-month period ended September 30, 2000, the net interest,
foreign currency losses, and the loss related to Cirilium amounted to expense of
$7.8 million compared to income of $0.5 million for the same quarter in the
prior year. The principal difference between the three-month periods ended
September 30, 2000 and 1999 reflects that loss attributable to Cirilium was
included only in 2000 ($5.9 million). In addition, in 2000, the Company incurred
increased interest expense of $1.3 million in 2000.
For the nine-month period ended September 30, 2000, the net interest, foreign
currency losses, and losses related to Cirilium Corporation amounted to expense
of $13.2 million compared to expense of $2.9 million in the comparable period in
the prior year, with the Cirilium losses of $9.9 million accounting for the
majority of the increase.
LOSS FROM CIRILIUM CORPORATION
The loss from Cirilium Corporation represents the Company's equity share of
Cirilium losses for the three and nine-months ended September 30, 2000, plus an
additional charge of $4.1 million, related to reserves against operating
advances made to Cirilium and inventory used for Cirilium production recorded
during the three-months ended September 30, 2000. As of September 30, 2000, the
Company has no remaining basis in its investment in Cirilium. The write-offs
were taken as a result of Cirilium's continuing losses. In addition, as a result
of an investment during the quarter by Cirilium's CEO, Hypercom has become less
than a 20% owner of Cirilium and will discontinue accounting for its investment
under the equity method.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX (EXPENSE) BENEFIT
The income tax (expense) benefit for federal, state and foreign taxes were $3.9
million and $(1.1) million for the three month period ended September 30, 2000
and 1999, respectively. Additionally, the income tax benefit for the nine-months
ended September 30, 2000 and 1999 was $4.2 million and $1.0 million,
respectively. The Company is receiving advantageous tax rates in connection with
its manufacturing facility located in China. In addition, Hypercom's tax rate
has been typically lower than the U.S. federal statutory rate due to:
- Research and experimentation credits in Australia and the
U.S.,
- Sales in foreign jurisdictions with lower rates; and
- The use of foreign sales corporations offering lower taxes on
certain international sales.
The income tax benefit for the nine-months ended September 30, 2000 was even
lower than the typical rate due to larger than anticipated loses in Brazil,
where the Company does not provide deferred tax benefits.
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. In recent
periods, the Company has also used a securitization conduit to partially finance
lease receivables generated by its Golden Eagle Leasing subsidiary. Due to the
demands for funds to grow Golden Eagle Leasing, combined with operating losses
over the last two quarters, the Company is currently experiencing negative cash
flow. The Company had planned to increase the borrowing capacity of Golden Eagle
through the addition of a term loan agreement. These efforts were delayed until
a new revolving credit agreement and the conduit loan facility were completed.
(See Note 7 to the Consolidated Condensed Financial Statements, page 11). The
Company intends to pursue alternative sources of funding for Golden Eagle
Leasing, but its cash flow situation and covenant defaults described below
may hinder its efforts.
Capital expenditures totaled $9.4 million and $12.9 million in the nine-month
periods ended September 30, 2000 and 1999, respectively, while depreciation was
$9.2 million and $5.9 million in the respective periods.
CREDIT AGREEMENTS AND LIQUIDITY CONCERNS
Due to the loss incurred in the third quarter of 2000, the Company was not in
compliance with certain debt covenants under various loan agreements, including
the ratio of funded debt to EBITDA, the interest coverage ratio and a minimum
tangible net worth requirement. The Company and its lenders are presently
negotiating to obtain waivers of noncompliance for the third quarter. However,
the Company will not be in compliance with these ratios in the fourth quarter
and into 2001.
The Company is in the process of seeking to refinance its current lending
arrangements. Even assuming it receives the waivers under discussion, if the
Company is unable to refinance its credit agreements by January 15, 2001, it
will need to obtain additional waivers from its current lending group. There can
be no assurance that the Company will obtain alternative financing, or that if
it does not, waivers will be granted by its current lenders. In such event, the
Company's ability to continue to operate in the ordinary course would be
materially adversely affected.
In the interim, the Company is in the process of accelerating cash generation
through aggressively pursuing collection of trade receivables, reducing
inventories, and reducing costs, such as selectively reducing its work force and
closing underperforming offices and curtailing capital expenditures and research
and development. If is also reviewing the possible sale of various assets and
operations.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
BACKLOG
As of September 30, 2000, Hypercom had backlog of $157 million, an increase of
44.3%, compared to the same date in 1999. As of December 31, 1999, the backlog
was $89 million.
The Company includes in its backlog all revenue specified in signed contracts
and purchaser orders to the extent that the Company contemplates recognition of
the related revenue within one year. There can be no assurance that the
contracts included in backlog will actually generate the specified revenues or
that the actual revenues will be generated within the one-year period.
19
<PAGE> 20
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, and Note 1 to the
Condensed Consolidated Financial Statements-Foreign Currency.
The following summarizes outstanding foreign currency forward contracts and
their fair value as of September 30, 2000. The forward contracts will settle
through March 2001.
<TABLE>
<CAPTION>
Notional Average Fair
Contract Amount Rate Value
----------------- ----------------- -----------------
(In US dollars (In US dollars
and in thousands) and in thousands)
----------------- ----------------- ------------------
<S> <C> <C> <C>
Brazilian Real $16,830 1.8868 $(112)
Australian Dollar $ 641 0.6558 $ 135
Argentine Peso $ 750 1.0180 $ (13)
</TABLE>
20
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 3 of Part I of Hypercom's Form 10-K for the year ended December 31,
1999, for disclosures regarding pending matters.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 7 to the Condensed Consolidated Financial Statements, page 11.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
10.16 Credit Agreement by and between Hypercom Corporation and Bank
One, Arizona, N.A., Fleet National Bank and Imperial Bank
dated August 31, 2000
10.17 Receivables Sale Agreement by and between Golden Eagle
Leasing, Inc and Golden Eagle Receivables LLC dated August
31, 2000
10.18 Receivables Purchase Agreement by and between Golden Eagle
Receivables LLC and Falcon Asset Securitization Corporation
dated August 31, 2000
10.19 Warehouse and Security Agreement between Tokyo Leasing
(U.S.A.), Inc. and Hypercom Corporation dated January 7, 2000
10.20 Loan and Security Agreement between Webster Bank and Golden
Eagle Leasing, Inc dated December 22, 1999
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) The Company filed Form 8-K's as follows:
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2000.
21
<PAGE> 22
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: November 20, 2000 By: /s/ Jonathon E. Killmer
---------------------------
Jonathon E. Killmer
Executive Vice President,
Chief Financial Officer
And Chief Administrative Officer
(duly authorized officer and
Principal Financial Officer)
22
<PAGE> 23
LIST OF EXHIBITS
Exhibit
No. Exhibit Description
--- -------------------
10.16 Credit Agreement by and between Hypercom Corporation and Bank
One, Arizona, N.A., Fleet National Bank and Imperial Bank
dated August 31, 2000
10.17 Receivables Sale Agreement by and between Golden Eagle
Leasing, Inc and Golden Eagle Receivables LLC dated August
31, 2000
10.18 Receivables Purchase Agreement by and between Golden Eagle
Receivables LLC and Falcon Asset Securitization Corporation
dated August 31, 2000
10.19 Warehouse and Security Agreement between Tokyo Leasing
(U.S.A.), Inc. and Hypercom Corporation dated January 7, 2000
10.20 Loan and Security Agreement between Webster Bank and Golden
Eagle Leasing, Inc dated December 22, 1999
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
