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EXHIBIT 99.1 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK
FACTORS
In passing the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), Congress encouraged public companies to make "forward-looking statements"
by creating a safe harbor to protect companies from securities law liability in
connection with forward-looking statements. Hypercom Corporation intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking Statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties that could cause actual
events or results to differ materially from those projected. Due to those and
other uncertainties and risks, the investment community is urged not to place
undue reliance on written or oral forward-looking statements of Hypercom.
Hypercom undertakes no obligation to update or revise this Cautionary Statement
Regarding Forward-Looking Statements to reflect future developments. In
addition, Hypercom undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events, or changes to future operating results over time.
Hypercom provides the following risk factor disclosure in connection with its
continuing effort to qualify its written and oral forward-looking statements
under the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the disclosures contained in the Company's Transition Report
on Form 10-K to which this statement is appended as an exhibit and also include
the following:
RISK FACTORS
LOSSES, LIQUIDITY CONCERNS AND CREDIT AGREEMENTS
The Company incurred losses of $26.7 million and $21.6 million for the
three-months and nine-months ended September 30, 2000, and is cash flow
negative.
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, 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. Sales or disposals of assets or operations could result
in further material write-downs or charges.
The Company's current financial situation could adversely affect its ability to
retain key employees, as well as relationships with customers and vendors.
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.
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DIFFICULTY IN FORECASTING NET REVENUE (CONTINUED)
It is also difficult to forecast net revenue in certain international markets
where large orders for complete systems occur more frequently than in the U.S.
Due to the significant cost of buying complete systems, the International 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.
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, quarterly 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.
Hypercom's operating results are subject to various uncertainties, including
the following:
- Type, timing, and size of orders and shipments for major customers;
- Variations in product mix and cost;
- Manufacturing or production difficulties;
- Availability of Financing;
- Industry and economic conditions;
- Competitive pressures;
- Overhead costs;
- Obsolescence of inventory; and
- Nonrecurring charges.
In the third quarter of 2000, the Company experienced delays in shipments to
customers, changes in product mix, and manufacturing difficulties in connection
with new product introductions and a transition of manufacturing to China.
SEASONALITY
Hypercom continues to experience some degree of seasonality. For this reason,
net revenue and results of operations tend to be stronger from July to December
reflecting:
- Increased POS purchases to satisfy increased retail demand during
the holiday season;
- Incentive programs VISA and MasterCard offer from July to December
to encourage merchants to offer card-based payment systems; and
- Allocation of customers' capital budgets by the end of March with
volume shipments beginning in July.
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY FLUCTUATIONS
Hypercom's net revenue from international sales for fiscal years 1997, 1998 and
1999 was approximately 56%, 57%, and 46% respectively, of Hypercom's net
revenue. For the six-month period ended December 31, 1999 and for the nine-month
period ended September 30, 2000, such international sales were 55% and 57% of
total new revenues, respectively. Hypercom expects that international sales will
continue to account for a significant percentage of its net revenue in the
foreseeable future. Accordingly, Hypercom is subject to risks associated with
international operations. Examples of these risks include:
- Management of a multinational organization,
- Fluctuations in currency exchange rates;
- Compliance with local laws;
- Regulatory and product certification requirements;
- Changes in international laws and requirements;
- Tariffs and other trade barriers;
- Import and export controls;
- Restrictions on the repatriation of funds;
- Inflationary conditions;
- Staffing, employment, and severance issues;
- Political instability and economic downturns, which include the
impact of revenue generated from Hypercom's shipments into Asia or
other international markets, including Latin America;
- War or other hostilities;
- Expropriation or nationalization of assets;
- Overlap of tax structures;
- Renegotiations or nullification of contracts; and
- Longer payment cycles.
In some countries these risks and other factors that relate to doing business
abroad may have negative effects on Hypercom. Hypercom takes steps such as
hedging to partially offset changes in currency exchange rates. However, there
is no assurance that such strategies enable Hypercom to avoid losses due to
changes in the exchange rate. In addition, the inability to effectively manage
these and other risks could have a serious negative effect on Hypercom's
business or financial condition.
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UNCERTAINTIES RELATING TO GOLDEN EAGLE LEASING
Earlier this year, the Company purchased a microticket leasing operation, Golden
Eagle Leasing. This operation effectively finances terminal and other products
by merchants. Golden Eagle Leasing requires substantial cash to fund its
operations. The Company refinanced its revolving line of credit and entered into
a conduit facility in conjunction with the acquisition and has been seeking to
obtain a permanent term facility to further support Golden's operations. Efforts
to obtain a term loan were deferred until the new line of credit and conduit
facilities were finalized. The Company's recent losses and covenant defaults may
now impair its ability to find the permanent financing necessary to grow and
support Golden Eagle's leasing operations, and the Company may be forced to
review various alternatives, including new or alternative financing
arrangements, or the sale of Golden Eagle Leasing's lease portfolio or
operations. Any disposition of its portfolio or operations could result in a
substantial write off of the Company's investment in Golden Eagle Leasing.
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 establishing distinct
manufacturing operations and distribution channels. Although Hypercom Network
Systems has recently become profitable, there can be no assurance that it will
remain profitable particularly in light of the competitive nature of the
industry in which it operates.
INDUSTRY AND TECHNOLOGY CHANGES; DEPENDENCE ON DEVELOPMENT AND MARKET ACCEPTANCE
OF NEW PRODUCTS
Hypercom believes that the following factors are creating 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.
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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.
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.
During the third quarter of 2000, the Company experienced various issues in
connection with product launches, including the need to rework new products and
stabilize product designs.
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
- 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.
DEPENDENCE ON CURRENT MANAGEMENT AND KEY PERSONNEL
George Wallner, Chris Alexander, Jairo Gonzalez and Jonathon Killmer are
instrumental in Hypercom's development, growth, and operations. Hypercom has an
employment agreement with Mr. Gonzalez; however, it does not have employment
agreements with George Wallner, Chris Alexander, Jonathon Killmer, or any other
member of senior management. Although Hypercom has no plans to enter into
employment agreements with other executive officers or key employees, Hypercom
may review the value of such employment agreements in the future.
Hypercom is the beneficiary of key-man life insurance of $1.0 million on George
Wallner. The loss of any of the key executives of Hypercom could have a negative
effect on Hypercom's business and financial condition.
Hypercom's continued growth and operations also depend on the continued service
of other key employees and the hiring of qualified new employees. Competition
for highly skilled business, technical, marketing, and other staff is intense.
Competition is particularly fierce given the 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.
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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.
In 1997, Hewlett-Packard Company acquired VeriFone, Inc. 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 and may be able to respond more quickly to market changes 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.
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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 suppliers. Hypercom has generally been
able to obtain adequate supplies of these products. However, in the future if
Hypercom could not secure enough products or develop alternate sources, product
introductions or shipments could be delayed. Significant delays could have a
serious negative effect on Hypercom's business and financial condition.
Hypercom markets and distributes its products to end-users through third-party
distributors. Third-party distributors are a prime channel for distribution in
some international markets. In the U.S. they are becoming more important,
especially for the enterprise networking products. Therefore, the ability to
market and distribute products depends significantly on Hypercom's relationship
with third-party distributors.
The performance and financial condition of distributors could have a negative
impact on Hypercom's business and financial condition if:
- Hypercom's relationships with them were to deteriorate;
- They could not perform as expected or pay Hypercom; or
- Local laws prevented Hypercom from using distributors that perform
poorly.
RELIANCE ON CERTAIN HYPERCOM POS SYSTEMS CUSTOMERS
Many Hypercom POS Systems sales result from large purchases by a few large
organizations. Although no one customer accounted for more than 10% of
Hypercom's net revenue in fiscal 1999, the two largest customers accounted for
12.6% of the net revenue that year. The five largest accounted for 24.2% of net
revenue. For the nine-month period ended September 30, 2000, the two largest
customers accounted for 8.7% of the net revenues and the five largest customers
accounted for 16.4% of the Company's 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.
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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.
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Although Hypercom believes its products currently meet all applicable industry
standards, it has no assurance that its products will comply with future
standards. Negative impacts to Hypercom's business and financial condition could
result in the future if Hypercom cannot:
- Obtain needed regulatory approvals or certifications;
- Retain domestic or foreign approvals or certifications; and
- Meet new industry standards.
In addition, carriers set the tariffs that govern rates for public
telecommunications services, including their features and capacity. These
services are subject to regulatory approval. Changes in the tariffs could have a
serious negative effect on Hypercom's business and financial condition.
Hypercom must comply with state, federal, and international laws governing such
areas as:
- Occupational health and safety;
- Minimum wages;
- Work hours and overtime;
- Retirement and profit-sharing plans and severance payments; and
- The use, storage, handling, and disposal of dangerous chemicals.
Failure to comply with requirements could impose additional costs on Hypercom.
Such failure could also require Hypercom to stop some activities or otherwise
have a serious negative effect on Hypercom's business and financial condition.
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DEPENDENCE ON PROPRIETARY TECHNOLOGY
Hypercom seeks to establish and protect the proprietary aspects of its products
by relying on patent, copyright, trademark, and trade secret laws. It also
relies on confidentiality, licensing, and other contractual arrangements, all of
which may provide only limited protection. Although Hypercom tries to protect
its proprietary rights, unauthorized third parties may be able to copy some
portions of or to reverse engineer products to obtain technology that Hypercom
regards as proprietary.
In addition, the laws of certain countries do not protect Hypercom's proprietary
rights to the same extent as U.S. laws. Accordingly, Hypercom may not be able to
protect its proprietary technology against unauthorized copying or use, which
could adversely affect Hypercom's competitive position.
Hypercom has applied for patents and trademarks that may not be granted. If they
are granted, the patents may not cover all claims Hypercom is trying to protect.
Further, a challenge could find any Company patent or trademark invalid and
unenforceable.
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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, Hypercom could be adversely affected.
RISKS OF ACQUISITIONS
Hypercom may acquire or make substantial investments in related businesses,
technologies, or products in the future. Any acquisition or investment would
entail various risks including the following:
- The difficulty of assimilating the technologies, operations and
personnel of the acquired business, technology or product;
- The potential disruption of Hypercom's ongoing business; and
- The possible inability of Hypercom to obtain the desired financial
and strategic benefits from the acquisition or investment.
These factors could have a serious negative effect on Hypercom's business and
financial condition. Future acquisitions and investments could also result in
the following:
- Substantial cash expenditures;
- Potentially dilutive issuance of equity securities;
- The incurring of additional debt and contingent liabilities; and
- Amortization expenses related to goodwill and other intangible
assets that could adversely affect Hypercom's business, operating
results, and financial condition.
The acquisition of the assets and businesses of The Horizon Group, Inc., SP/RJ
Service Company, JTS ChequeOut Solutions Inc., ICL Sverige AB, and Golden Eagle
LLC have consumed and will continue to consume substantial management attention
and resources of Hypercom, and will require substantial efforts and entail
certain risks in the integration of these operations. There can be no assurance
that anticipated cost savings or synergies will be achieved. In this regard, to
date, the Company has not achieved expected results from certain acquisitions,
particularly Golden Eagle Leasing.
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Hypercom will be dependent on the retention and performance of these businesses
existing management and employees for the day-to-day management and future
operation results of the business.
VOTING CONTROL BY EXISTING STOCKHOLDERS
George Wallner and Paul Wallner together own 63.4% of Hypercom's outstanding
Common Stock. Accordingly, the Wallners have the ability to control the affairs
of Hypercom, including the election of all directors to Hypercom's Board of
Directors. They can also, except as otherwise provided by law, approve or
disapprove other matters submitted to a vote of Hypercom's stockholders,
including a merger, consolidation, or sale of assets. This voting control also
may have the effect of delaying or preventing a change in control of Hypercom
and may affect the price investors are willing to pay in the future for shares
of Hypercom's Common Stock.
POTENTIAL VOLATILITY OF STOCK PRICE
In recent years, the stock market has experienced extreme price changes. The
market price of Hypercom's Common Stock has been and may continue to be affected
by various factors such as the following:
- Quarterly variations in Hypercom's operating results;
- Changes in revenue growth rates for specific geographic areas,
business units, products, or Hypercom as a whole;
- Earnings estimates or changes in estimates by market financial
analysts;
- Speculation in the press or analyst community;
- Announcement of new or enhanced products by Hypercom or its
competitors; and
- General market conditions or market conditions specific to
particular industries.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
Hypercom has provisions in its Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws, which:
- Make it more difficult for a third party to take control of
Hypercom;
- Discourage a third party from attempting to take control of Hypercom
or;
- Limit the price some investors are willing to pay for shares of
Hypercom's Common Stock;
- Enable Hypercom to issue Preferred Stock without a vote or other
stockholder action;
- Provide for a classified Board of Directors and regulate nominations
for the Board of Directors;
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- 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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