<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: June 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 August 14, 2000, was 34,566,359.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
------- --------------------- ----
<S> <C>
ITEM 1. Financial Statements 3
Notes to Condensed Consolidated Financial
Statements 6
Independent Accountants' Review Report 11
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 18
ITEM 4. Submission of Matters to a Vote of Securities Holders 18
ITEM 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYPERCOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
(unaudited)
ASSETS June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,017 $ 26,093
Marketable securities, at market 2,524 23,015
Accounts receivable (net of allowance for
doubtful accounts of $2,430 and $1,589) 83,992 57,370
Net investment in direct financing leases 16,876 --
Inventories, net 86,753 72,897
Deferred income taxes 9,885 10,972
Prepaid taxes 4,519 5,045
Prepaid expenses and other current assets 21,428 17,344
--------- ---------
Total current assets 231,994 212,736
Property, plant and equipment, net 37,791 35,511
Investment in equity affiliates 2,091 5,776
Long-term marketable securities, at market 7,015 13,762
Net investment in direct financing leases 37,098 --
Deferred income taxes 3,848 3,613
Goodwill, net of amortization of $2,742 and $1,062 32,258 9,208
Intangible assets, net of amortization of $1,691 and $1,018 6,440 5,693
Other assets 14,602 11,478
--------- ---------
Total assets $ 373,137 $ 297,777
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,075 $ 28,538
Accrued liabilities 21,931 19,379
Deferred revenue 2,704 4,770
Income taxes payable 1,111 2,180
Current portion of long-term obligations 77,981 878
--------- ---------
Total current liabilities 128,802 55,745
Long-term obligations 10,915 10,298
--------- ---------
Total liabilities 139,717 66,043
Stockholders' equity:
Common stock, $.001 par value; 100,000,000 shares
authorized; 34,228,293 and 33,234,525 shares issued
and outstanding for June 30, 2000 and December 31,
1999, respectively 14 13
Additional paid-in capital 152,400 146,040
Receivables from stockholder (1,498) (1,498)
Retained earnings 85,764 90,873
--------- ---------
236,680 235,428
Treasury stock, 310,486 and 360,141 shares (at cost)
at June 30, 2000 and December 31, 1999, respectively (3,260) (3,694)
--------- ---------
Total stockholders' equity 233,420 231,734
--------- ---------
Total liabilities and stockholders' equity $ 373,137 $ 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 INCOME
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $ 89,817 $ 68,634 $ 167,150 $ 124,938
Costs and expenses:
Costs of revenue 52,484 40,970 99,130 72,948
Research and development 10,607 7,465 21,310 14,400
Selling, general and administrative 23,890 20,382 46,707 39,518
--------- --------- --------- ---------
Total costs and expenses 86,981 68,817 167,147 126,866
--------- --------- --------- ---------
Income (loss) from operations 2,836 (183) 3 (1,927)
Interest and other income 188 1,351 874 3,072
Interest and other expense (1,282) (442) (1,472) (734)
Foreign currency loss (517) (758) (899) (5,758)
Hypercom's equity share of Cirilium
Corporation's net loss (2,215) -- (3,914) --
--------- --------- --------- ---------
Loss before income taxes (990) (32) (5,408) (5,347)
Income tax (expense) benefit (245) 512 299 2,161
--------- --------- --------- ---------
Net (loss) income $ (1,235) $ 480 $ (5,109) $ (3,186)
========= ========= ========= =========
Net income (loss) per share:
Basic (loss) earnings per share $ (0.04) $ 0.01 $ (0.15) $ (0.10)
========= ========= ========= =========
Weighted average basic common shares 34,216 33,191 34,088 33,144
========= ========= ========= =========
Diluted (loss) earnings per share $ (0.04) $ 0.01 $ (0.15) $ (0.10)
========= ========= ========= =========
Weighted average diluted common shares 34,216 34,186 34,088 33,144
========= ========= ========= =========
</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>
Six Months Ended
----------------
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,109) $ (3,186)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation/amortization 5,815 3,646
Bad debt expense (recovery) 1,094 (806)
Deferred components of direct financing leases 705 --
Provision for losses on direct-finance leases 2,194 --
Provision for excess and obsolete inventory 1,080 2,925
Equity loss in affiliates 3,914 --
Foreign currency loss 899 5,758
Deferred income taxes 853 (1,457)
Other 23 123
Increase in accounts receivable, inventories, prepaid income taxes,
prepaid expenses and other current assets & other assets (46,467) (5,778)
Increase (decrease) in accounts payable, accrued liabilities,
deferred revenue & income taxes payable (5,112) 4,197
--------- ---------
Net cash (used in) provided by operating activities (40,111) 5,422
Cash flows from investing activities:
Advances to related parties (1,185) --
Repayments from related parties -- 322
Notes receivable -- (3,900)
Payments received on notes receivable 535 723
Principal payments received on direct-finance leases 4,407 --
Funding of direct-finance leases (22,415) --
Acquisition of controlling interests in subsidiaries,
net of cash acquired (25,793) (9,279)
Acquisition of other assets (1,301) (1,558)
Proceeds from disposal of property,
plant & equipment 1,672 (21)
Purchase of property, plant & equipment (6,821) (7,481)
Purchase of marketable securities (708) (213,649)
Proceeds from maturity of marketable securities 27,947 219,019
--------- ---------
Net cash used in investing activities (23,662) (15,824)
Cash flows from financing activities:
Proceeds of bank notes payable
and other debt instruments 128,099 35,565
Repayment of bank notes payable
and other debt instruments (90,926) (27,071)
Proceeds from issuance of common stock 6,795 746
Other -- (19)
--------- ---------
Net cash provided by financing activities 43,968 9,221
Effect of exchange rate changes (271) 113
--------- ---------
Net decrease in cash (20,076) (1,068)
Cash & equivalents, beginning of period 26,093 37,795
--------- ---------
Cash & equivalents, end of period $ 6,017 $ 36,727
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS)
NOTE 1 - 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 six-month period ended June 30, 2000, are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
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 June 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 October
2000. 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)
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
net incremental common shares issuable upon the exercise of stock options. Due
to losses for the three months ended June 30, 2000, as well as the six months
ended June 30, 2000 and 1999, 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>
June 30, December 31,
2000 1999
-------- -----------
<S> <C> <C>
Purchased parts $39,304 $31,827
Work in progress 9,820 5,581
Finished goods 37,629 35,489
------- -------
$86,753 $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 as 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 six month period ended June 30, 2000:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 2000 June 30, 2000
---------------------------------------- ----------------------------------------
POS Equipment POS Equipment
Systems Leasing Total Systems Leasing Total
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $ 83,978 $ 5,838 $ 89,817 $156,092 $ 11,058 $167,150
Intersegment revenues -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total revenues $ 83,978 $ 5,838 $ 89,817 $156,092 $ 11,058 $167,150
======== ======== ======== ======== ======== ========
Segment income from operations $ 10,019 $ (987) $ 9,032 $ 13,277 $ (978) $ 12,299
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Reconciliation June 30, 2000 June 30, 2000
-------------- ------------- -------------
<S> <C> <C>
Net revenues
Net revenue from reportable segments $ 89,817 $ 167,150
Elimination of intersegment revenue -- --
--------- ---------
Total consolidated revenue $ 89,817 $ 167,150
========= =========
Income from operations
Income from operations for reportable segments $ 9,032 $ 12,299
Elimination of intersegment profit -- --
Corporate expenses (6,196) (12,296)
--------- ---------
Consolidated income from operations $ 2,836 $ 3
========= =========
</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 a 8.5% note
receivable due the earlier of December 10, 2002, a qualifying initial public
offering, the sale of more than 50% of the voting stock of Cirilium or the
merger of Cirilium into another corporation.
The Company has reported its 45% investment in Cirilium on the equity method and
reported a loss of $2,215,000 and $3,914,000 for the three and six-month periods
ended June 30, 2000, respectively.
The investment in Cirilium consisted of the following:
<TABLE>
<S> <C>
Investment in common stock $ 1,005,000
Notes receivable 5,000,000
-----------
6,005,000
Cumulative net loss (3,914,000)
-----------
$ 2,091,000
===========
</TABLE>
NOTE 5 - ACQUISITIONS
On January 8, 2000, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets and business and the assumption of 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 $0.14 million and identifiable intangibles and
goodwill amounting to $22.36 million, which is being amortized over 15 years.
Concurrent with the closing of the Golden Eagle acquisition, the Company entered
into an additional $25.0 million revolving line of credit agreement with Bank
One, to provide a temporary funding source for certain of Golden Eagle's
borrowings that were not assumed under the purchase transaction to facilitate
the acquisition closing. The Company's accounts receivables and inventory have
been utilized as security interests in connection with the expanded line. The
interest rate under the line was at the prime rate.
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 six month periods ended June 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 as if the acquisition occurred at the beginning of
each period is as follows;
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues $167,586 $133,706
Net loss $ (5,108) $ (3,449)
Basic loss per share $ (0.15) $ (0.10)
Diluted loss per share $ (0.15) $ (0.10)
</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
represents 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 direct financing leases:
<TABLE>
<CAPTION>
At June 30, 2000
----------------
<S> <C>
Lease contracts receivable $ 64,866
Estimated residual value 15,146
Unearned income (26,038)
--------
Net investment $ 53,974
========
</TABLE>
NOTE 7 - SUBSEQUENT EVENTS
In July 2000, the Company increased its revolving line of credit to $35 million
from $25 million with Bank One Arizona, N.A. The loan agreement contains various
restrictions on the Company, including the prohibitions of declaring or paying
dividends, limitations on the incurrence of additional debt, liens, or
encumbrances and restricting the Company's ability to consolidate or merge into
any other entity. The loan agreement also contains certain financial covenants,
including a minimum current ratio, minimum working capital, minimum tangible net
worth, and minimum shareholders' equity and debt coverage ratios.
10
<PAGE> 11
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 June 30, 2000, and the related condensed consolidated
statements of income and cash flows for the three-month and six-month periods
then ended June 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
July 27, 2000
11
<PAGE> 12
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 June 30, 2000 increased $21.2
million or 30.9% to $89.8 million from $68.6 million in the three months ended
June 30, 1999. This increase resulted from $17.9 million of increased revenues
in Latin America, Europe and Asia. Additionally, the new business unit, Golden
Eagle Leasing, added new revenue of $5.8 million over the prior quarter. The
Company's Multi-lane product line within its POS Systems segment contributed
$1.1 million of sales over the prior quarter and the government sector
added $1.7 million of new revenue relative to the same quarter in the
prior year. These revenue increases were partially offset by a decrease of $5.3
million of revenue from the United States, Australia and Network Systems.
Net revenue for the six-month period ended June 30, 2000 increased $42.3 million
or 33.8% from $124.9 million for the six-months ended June 30, 1999 to $167.2
million. The change resulted from $54.4 million of additional revenues in Latin
America, Europe, Asia, Multi-lane POS, Golden Eagle Leasing and Emerging
Business Global Markets. The increases were partially offset by a $12.2 million
decrease in revenue from the United States, Australia and Network Systems.
12
<PAGE> 13
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 June 30, 2000 increased $11.5 million or 28.1% to $52.4
million from $41.0 million in the three-months ended June 30, 1999. As a
percentage of revenue, gross margin increased from 40.3% in the quarter ended
June 30, 1999 to 41.6% for the quarter ended June 30, 2000. This increase was
principally the result of improved production efficiency from higher production
volumes. The Company had expected a larger increase in gross margin percentage,
however rapidly increasing demand for ICE terminals necessitated a large
quantity of production be manufactured in the US plant instead of its lower
cost factory in China. Coupled with certain higher component costs, the
increase in gross margin percentage was less than anticipated.
Cost of revenue for the six-month period ended June 30, 2000 increased $26.2
million or 35.9% to $99.1 million from $72.9 million in the six-months ended
June 30, 1999. As a percentage of revenue, gross margin decreased from 41.6% in
the six-months ended June 30, 1999 to 40.7% for the six-months ended June 30,
2000. This decrease was primarily the result of certain higher component costs
and increased competitive price pressures.
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 $3.1 million from $7.5 million in the quarter ended June 30,
1999 to $10.6 million in the quarter ended June 30, 2000. Expenses increased
$6.9 million from $14.4 million in the six-months ended June 30, 1999 to $21.3
million in the six-months ended June 30, 2000. These increases are attributable
to increased R&D activities related to the ICE product family and to the ePic
initiative. Additionally, the impact of ICL Sweden, Microtrax, and JTS has
resulted in new R&D 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 $23.9 million for the quarter ended June 30, 2000 compared to
$20.4 for the comparative quarter in the prior year. This $3.5 million or 17.2%
increase is primarily attributable to the acquisition of Golden Eagle Leasing
which has added incremental selling, general and administrative expenses of $2.8
million in the three-months ended June 30, 2000. Excluding the effect of Golden
Eagle, selling, general and administrative expenses increased by 3.4% for the
quarter ended June 30, 2000. As a percentage of revenue, selling, general and
administrative expenses were 26.6% and 29.7% for the three-months ended June 30,
2000 and 1999, respectively.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Selling, general and administrative expenses increased $7.2 million or 18.2%
from $39.5 million for the six-months ended June 30, 1999 to $46.7 million in
the six-month period ended June 30, 2000. Again the increase is primarily
attributable to the acquisition of Golden Eagle Leasing which has added
incremental selling and administrative expenses of $5.3 million in the
six-months ended June 30, 2000. Excluding the effect of Golden Eagle, selling,
general and administrative expenses increased by 4.8% for the six-months ended
June 30, 2000. As a percentage of revenue, selling, general and administrative
expenses were 27.9% and 31.6% for the six-months ended June 30, 2000 and 1999,
respectively.
INCOME (LOSS) FROM OPERATIONS
Income from operations for the quarter ended June 30, 2000 was $2.8 million
compared to a loss of $0.2 million for the same quarter in the prior year. As a
percentage of revenue, income from operations for the quarter ended June 30,
2000 was 3.2% compared to a -0.3% for the same quarter in the prior year.
Income from operations for the six-months ended June 30, 2000 was $3,000
compared to a $1.9 million loss for the six-months ended June 30, 1999. As a
percentage of revenue, income from operations for the six-months ended June 30
was 0% and -1.5% for 2000 and 1999 respectively.
NET INTEREST, FOREIGN CURRENCY LOSSES AND OTHER ITEMS
For the three-months ended June 30, 2000, interest income ($0.2 million)
consisted primarily of returns on short and long-term investments. Interest
expense ($1.3 million) related to borrowings on real property, bank lines of
credit, and foreign currency hedging instruments. Foreign currency losses ($0.5
million) resulted from operating in foreign economic markets, principally Latin
America, Europe and Australia. Additionally, the Company incurred a $2.2 million
loss as a result of an equity share of the joint venture in Cirilium
Corporation.
During the three-month period ended June 30, 2000, the net interest, foreign
currency losses, and equity loss amounted to expense of $1.6 million compared to
income of $0.2 million for the same quarter in the prior year.
For the six-month period ended June 30, 2000, the net interest, foreign currency
losses, and equity losses amounted to expense of $5.4 million compared to
expense of $3.4 million in the comparable period in the prior year.
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
HYPERCOM'S EQUITY SHARE OF CIRILIUM CORPORATION'S NET LOSS
The loss from Hypercom's equity interest in Cirilium represents its 45% share of
Cirilium losses for the three and six-months ended June 30, 2000. Cirilium began
its development and operations activities during this six-month period and such
initial losses were expected by the Company.
INCOME TAX (EXPENSE) BENEFIT
The income tax (expense) benefit for federal, state and foreign taxes were
$(0.2) million and $0.5 million for the three month period ended June 30, 2000
and 1999, respectively. Additionally, the income tax benefit for the six-months
ended June 30, 2000 and 1999 was $0.3 million and $2.2 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 six-months ended June 30, 2000 period was lower
than the statutory rate due to the factors mentioned above, coupled with the
loss on Hypercom's equity share of Cirilium which provides no income tax
benefit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed it operations primarily through cash
generated from operations and from borrowings under a line of credit.
Additionally, in November 1997, the Company completed its initial public
offering, which provided $125.7 million in cash. The Company's principal uses of
cash historically have been to support inventory and accounts receivable growth,
pay operating expenses and fund capital expenditures and acquisitions.
The Company's working capital was $103.2 million as of June 30, 2000 compared to
$162.1 million at June 30, 1999. The decrease relates primarily to the
acquisition of substantially all the assets of Microtrax, Ltd., Inc. and Golden
Eagle LLC. Additionally, the Company entered into a joint venture agreement with
Inter-Tel, Incorporated to form a jointly owned company called Cirilium
Corporation. The Company has loaned $5.0 million to Cirilium for start-up
expenses.
Capital expenditures totaled $6.8 million and $7.5 million in the six-month
periods ended June 30, 2000 and 1999, respectively, while depreciation was $3.5
million and $3.4 million in the respective periods.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company believes that its net capital position, cash from operations and
borrowing capacity are sufficient to fund operations for the foreseeable future.
The Company also has a revolving line of credit of $35 million with Bank One,
Arizona, N.A. The balance outstanding at June 30, 2000 was $21.3 million. The
loan agreement contains various restrictions on the Company, including the
prohibition of declaring or paying dividends, limitations on the incurrence of
additional debt, liens, or encumbrances and restricting the Company's ability to
consolidate or merge into any other entity. In addition, the loan agreement
contains certain financial covenants, including a minimum current ratio, minimum
working capital, minimum tangible net worth and minimum owner's equity and debt
coverage ratios.
The Company's wholly owned subsidiary, Golden Eagle Leasing has a $25 million
line of credit with Bank One, AZ to provide a temporary funding source for
certain of Golden Eagle's borrowings that were not assumed at the time of the
purchase transaction. The Company's accounts receivables, and inventory have
been utilized as security interests in connection with the line. The balance
outstanding as of June 30, 2000 was $25 million and interest is at the prime
rate. The line expires in April 2001.
Additionally, as of June 30, 2000, Golden Eagle has $35.5 million of lease
warehouse facilities with various other lenders including Fleet National Bank,
Tokyo Leasing, and Webster Bank. These lines are secured by the lease
receivables of Golden Eagle as well as a guaranty by the Company. The combined
balance outstanding as of June 30, 2000 for these warehouse lines was $30.1
million and interest rates range from Libor plus 250 basis points to the U.S.
Treasury rate plus 285 basis points. The lines expire at various dates through
June 30, 2001.
The Company intends to increase the borrowing capacity of Golden Eagle Leasing
to adequately allow for continued growth as it becomes necessary.
BACKLOG
As of June 30, 2000, Hypercom had backlog of $117 million, an increase of 19.1%,
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.
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<PAGE> 17
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.
The following summarizes outstanding foreign currency forward contracts and
their fair value as of June 30, 2000. The forward contracts will settle through
October 2000.
<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 $16,940 1.8678 $(324)
Austrailian Dollar $ 641 0.6558 $(147)
Argentine Peso $ 750 1.0395 $ (16)
</TABLE>
17
<PAGE> 18
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 2000, the Company held their Annual Meeting of Stockholders, at
which Albert A. Irato and George Wallner were re-elected as Class I Directors
to serve for a two-year term which expires at the Annual Meeting of
Stockholders in 2002. Voting results for these nominees are summarized as
follows:
<TABLE>
<CAPTION>
Votes For Votes Witheld
--------- -------------
<S> <C> <C>
Albert A. Irato 32,695,050 79,385
George Wallner 32,698,665 75,770
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
10.1 (b) Modification Agreement to Revolving Credit Agreement by and
between Hypercom Corporation and Bank One, Arizona, N.A.,
dated July 28, 2000
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 June
30, 2000.
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<PAGE> 19
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: August 14, 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)
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<PAGE> 20
LIST OF EXHIBITS
Exhibit
No. Exhibit Description
--- -------------------
3.1* Amended and Restated Certificate of Incorporation of the
Company.
3.2* Amended and Restated Bylaws of the Company.
4* Amended and Restated Certificate of Incorporation of the
Company.
10.1(a)** Revolving Credit Agreement by and between Hypercom Corporation
and Bank One, Arizona, NA, dated January 20, 1998.
10.1(b) Modification Agreement to Revolving Credit Agreement by
and between Hypercom Corporation and Bank One, Arizona, NA,
dated July 28, 2000.
10.2* Lease, as amended, dated June 14, 1996, by and between
Estes-Samuelson Partnership and Hypercom, Inc.
10.3* Hypercom Corporation Long-Term Incentive Plan.+
10.4* Hypercom Corporation 1997 Employee Stock Purchase Plan.+
10.5* Promissory Note, dated October 17, 1994, by and between
Hypercom, Inc., and George Wallner.+
10.6* Hypercom Corporation Non-employee Directors' Stock Option
Plan.+
10.7* Employment Agreement with Jairo Gonzalez, dated January 1,
1997.+
10.8* Employment Agreement with Albert A. Irato, dated January 1,
1997.+
10.9* Loan Agreement, dated October 12, 1996, by and between
Hypercom Pty. Ltd., and George Wallner.+
10.10* Loan Agreement, dated October 12, 1996, by and between
Hypercom Pty. Ltd., and Paul Wallner.+
10.11* Description of lease by and between Hypercom Pty. Ltd., and
Hypercom Unit Trust.
10.12*** Severance agreement, dated June 1, 1999 by and between Thomas
Linnen and Hypercom Corporation.
10.13*** Promissory Note by and between Hypercom Corporation and
Capital One Funding Corporation, dated April 1, 1999.
10.14*** Reimbursement Agreement by and between Hypercom Corporation,
Bank One, Arizona, NA, and Capital One Funding Corporation,
dated April 1, 1999,
10.15**** Agreement of Purchase and Sale of Assets by and Among Hypercom
Corporation, Hypercom Financial, Inc., Golden Eagle LLC,
Golden Corporation, Lawrence T. Lawler, Jr., and Leonard E.
Friedlander dated as of December 14, 1999.
11.1 Statement re Computation of Per Share Earnings
15.1 Letter re Unaudited Interim Financial Information
16***** Letter re Change in Certifying Accountant
21****** Subsidiaries of the Company
27.1 Financial Data Schedule
99.1 Cautionary Statement Regarding Forward-Looking Statements and
Risk Factors
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-35641).
** Incorporated by reference to the Company's Annual Report on Form 10-K/A
filed on November 3, 1998.
*** Incorporated by reference to the Company's Annual Report on Form 10-K
filed on September 23, 1999.
**** Incorporated by reference to the Company's Current Report on Form 8-K
filed on January 12, 2000.
***** Incorporated by reference to the Company's Current Report on Form 8-K
filed on February 4, 2000.
****** Incorporated by reference to the Company's Transition Report on Form
10K filed on March 30, 2000
+ Management or Compensatory Plan Agreement.
20
