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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: March 31, 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 May 8, 2000, was 34,523,329.
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INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C> <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........................... 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................... 17
ITEM 2. Changes in Securities and Use of Proceeds............................................ 17
ITEM 4. Submission of Matters to a Vote of Securities Holders................................ 17
ITEM 6. Exhibits and Reports on Form 8-K..................................................... 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYPERCOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
(unaudited)
ASSETS March 31, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,405 $ 26,093
Marketable securities, at market 7,032 23,015
Accounts receivable (net of allowance for
doubtful accounts of $1,744 and $1,589) 69,793 57,370
Net investment in direct financing leases 13,324 --
Inventories 80,912 72,897
Deferred income taxes 9,808 10,972
Prepaid taxes 5,184 5,045
Prepaid expenses and other current assets 22,574 17,344
--------- ---------
Total current assets 216,032 212,736
Property, plant and equipment, net 36,610 35,511
Investment in equity affiliates 4,076 5,776
Long-term marketable securities, at market 7,798 13,762
Net investment in direct financing leases 32,779 --
Deferred income taxes 3,848 3,613
Goodwill, net of amortization of $1,922 and $1,062 30,773 9,208
Intangible assets, net of amortization of $1,347 and $1,018 6,009 5,693
Other assets 12,518 11,478
--------- ---------
Total assets $ 350,443 $ 297,777
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,142 $ 28,538
Accrued liabilities 21,759 19,379
Deferred revenue 2,952 4,770
Income taxes payable 277 2,180
Current portion of long-term obligations 26,075 878
--------- ---------
Total current liabilities 68,205 55,745
Long-term obligations 47,952 10,298
--------- ---------
Total liabilities 116,157 66,043
Stockholders' equity:
Common stock, $.001 par value; 100,000,000 shares authorized;
34,190,423 and 33,234,525 shares issued and outstanding for
March 31, 2000 and December 31, 1999, respectively 14 13
Additional paid-in capital 152,219 146,040
Receivables from stockholder (1,498) (1,498)
Retained earnings 86,999 90,873
--------- ---------
237,734 235,428
Treasury stock, 332,170 and 360,141 shares (at cost) at March 31, 2000
and December 31, 1999, respectively (3,448) (3,694)
--------- ---------
Total stockholders' equity 234,286 231,734
--------- ---------
Total liabilities and stockholders' equity $ 350,443 $ 297,777
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
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HYPERCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net revenue $ 77,333 $ 56,304
Costs and expenses:
Costs of revenue 46,645 31,977
Research and development 10,703 6,935
Selling, general and administrative 22,817 19,136
-------- --------
Total costs and expenses 80,165 58,048
-------- --------
Loss from operations (2,832) (1,744)
Interest and other income 686 1,723
Interest and other expense (191) (292)
Foreign currency loss (381) (5,000)
Hypercom's equity share of Cirilium
Corporation's net loss (1,700) --
-------- --------
Loss before income taxes (4,418) (5,313)
Income tax benefit 544 1,647
-------- --------
Net loss $ (3,874) $ (3,666)
======== ========
Net loss per share:
Basic loss per share $ (0.11) $ (0.11)
======== ========
Weighted average basic common shares 33,959 33,098
======== ========
Diluted loss per share $ (0.11) $ (0.11)
======== ========
Weighted average diluted common shares 33,959 33,098
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
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HYPERCOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
March 31, 2000 March 31, 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,874) $ (3,666)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation/amortization 2,915 1,636
Bad debt expense (recovery) 196 (1,371)
Deferred components of direct financing leases (2,453) --
Provision for losses on direct financing leases 2,291
Provision for excess and obsolete inventory 671 --
Equity loss in affiliates 1,700 --
Foreign currency loss 381 5,000
Deferred income taxes 929 --
Other 6 91
(Increase) decrease in accounts receivable, inventories, prepaid income taxes,
prepaid expenses and other current assets & other assets (24,443) 4,624
Increase (decrease) in accounts payable, accrued liabilities,
deferred revenue & income taxes payable (13,793) 2,490
-------- --------
Net cash (used in) provided by operating activities (35,474) 8,804
Cash flows from investing activities:
Advances to related parties (1,170) --
Repayments from related parties -- 285
Notes receivable -- (3,900)
Payments received on notes receivable 529 523
Principal payments received on direct-finance leases 2,692
Funding of direct-finance leases (9,767)
Acquisition of controlling interests in subsidiaries,
net of cash acquired (22,912) (5,347)
Acquisition of other assets (545) (460)
Proceeds from disposal of property,
plant & equipment 379 371
Purchase of property, plant & equipment (2,550) (4,726)
Purchase of marketable securities (582) (13,958)
Proceeds from maturity of marketable securities 22,529 18,937
-------- --------
Net cash used in investing activities (11,397) (8,275)
Cash flows from financing activities:
Proceeds of bank notes payable
and other debt instruments 79,464 9,270
Repayment of bank notes payable
and other debt instruments (57,469) (10,408)
Proceeds from issuance of common stock 6,426 252
Other -- 143
-------- --------
Net cash provided by (used in) financing activities 28,421 (743)
Effect of exchange rate changes (238) (361)
-------- --------
Net decrease in cash (18,688) (575)
Cash & equivalents, beginning of period 26,093 37,795
-------- --------
Cash & equivalents, end of period $ 7,405 $ 37,220
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
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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 three month period ended March 31, 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 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 March 31, 2000, the Company had contracts
totaling $6.0 million Brazilian Reals outstanding to hedge against its net
investment in Brazil. These contracts expire in April 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
(UNAUDITED AND IN THOUSANDS)
(CONTINUED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
requires recognition of all derivatives as either assets or liabilities on the
balance sheet and measurement of those instruments at fair value. Changes in
fair value of derivatives are recorded each period in current earnings or other
comprehensive income (loss). The statement was originally required to be adopted
and is effective for all fiscal years beginning after June 15, 2000. The Company
is evaluating the effect SFAS No. 133 will have on its financial reporting and
disclosures as well as on its derivative and hedging activities.
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 the second 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>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Purchased parts $46,985 $31,827
Work in progress 5,266 5,581
Finished goods 28,661 35,489
------- -------
$80,912 $72,897
======= =======
</TABLE>
7
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS)
(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, on January 10, 2000,
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 month period ended March 31, 2000:
<TABLE>
<CAPTION>
Three months ended
March 31, 2000
--------------------------------------
POS Equipment
Systems Leasing Total
--------------------------------------
<S> <C> <C> <C>
Revenue from external customers $ 72,113 $ 5,220 $ 77,333
Intersegment revenues -- -- --
--------------------------------------
Total revenues $ 72,113 $ 5,220 $ 77,333
======================================
Segment income from operations $ 3,258 $ 9 $ 3,267
======================================
Segment assets $ 446,995 $ 71,126 $ 518,121
======================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Reconciliation March 31, 2000
------------------
<S> <C>
Net revenues
Net revenue for reportable segments $ 77,333
Elimination of intersegment revenue --
--------
Total consolidated revenue $ 77,333
========
Income from operations
Income from operations for reportable segments $ 3,267
Elimination of intersegment profit --
Corporate expenses (including translation gains/losses) (6,099)
--------
Consolidated loss from operations $ (2,832)
========
</TABLE>
8
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS)
(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 $776,000 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 $1,700,000 for the three months ended March 31, 2000. Such
loss represents 45% of the Cirilium net loss.
The investment in Cirilium consisted of the following:
<TABLE>
<S> <C>
Investment in common stock $ 776,000
Notes receivable 5,000,000
-----------
5,776,000
Cumulative net loss (1,700,000)
-----------
$ 4,076,000
===========
</TABLE>
NOTE 5 - ACQUISITIONS
On January 8, 2000, the Company acquired, through its wholly owned subsidiary,
Hypercom Financial, Inc., 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.
Pro Forma information with respect to the acquisition of Golden Eagle includes
the historical financial information of the Company and Golden Eagle for the
three months ended March 31 of each three month period as if the acquisition
occurred at the beginning of such 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>
Three months ended March 31,
----------------------------
2000 1999
------- -------
<S> <C> <C>
Revenues $77,768 $59,840
Net loss $(3,873) $(3,820)
Basic loss per share $ (0.11) $ (0.11)
Diluted loss per share $ (0.11) $ (0.11)
</TABLE>
9
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS)
(CONTINUED)
NOTE 6 - NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in direct financing leases consists of lease
contracts receivable, plus the estimated residual value of the equipment at the
lease termination date, less unearned income. Leases contracts receivable
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 March 31, 2000
-----------------
<S> <C>
Lease contracts receivable $ 54,716
Estimated residual value 14,024
Unearned income (22,637)
---------
Net investment $ 46,103
=========
</TABLE>
NOTE 7 - SUBSEQUENT EVENTS
In May 2000, the Company increased its revolving line of credit to $25 million
from $20 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 shareholder's 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 March 31, 2000, and the related condensed
consolidated statements of income and cash flows for the three-month period
ended March 31, 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
April 19, 2000
11
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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 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 March 31, 2000, increased $21.0
million or 37.3% to $77.3 million from $56.3 million in the three months ended
March 31, 1999. This increase is a result of higher sales in Latin America (up
$13.6 million), as well as Europe (up $7.0 million) and Asia (up $1.7 million).
Revenues in the United States declined (down $2.3 million) due to price
competition on legacy POS products. Network Systems revenues decreased (down
$4.2 million) principally due to the impact of the recently formed joint
venture, which transferred existing VoIP customers to Cirilium. Recently
acquired Golden Eagle Leasing added $5.2 million of new revenue for the quarter
ended March 31, 2000.
COST OF REVENUE
Hypercom's cost of revenue includes the cost of raw materials, manufacturing
labor, overhead and subcontracted manufacturing costs, and in 2000 also includes
interest expense with respect to direct-financing leases. The cost of revenue
for the three-month period ended March 31, 2000 increased $14.7 million or 45.9%
to $46.7 million from $32.0 million in the three-months ended March 31, 1999.
As a percentage of revenue, gross margin decreased from 43.2% in the quarter
ended March 31, 1999 to 39.7% for the quarter ended March 31, 2000. This decline
was a result of certain higher component costs, product mix and competitive
price pressures.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses consist mainly of software and hardware
engineering costs and the cost of development personnel. Research and
development expenses increased $3.8 million from $6.9 million in the quarter
ended March 31, 1999 to $10.7 million in the quarter ended March 31, 2000. This
increase is attributable to increased R&D activities related to the ICE product
family and to the ePic initiative. Additionally, the impact of the acquisitions
of ICL Sweden, Microtrax, and JTS has resulted in new R&D expenditures of over
$1 million relative to the comparable quarter in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Sales and marketing expenses, administrative personnel costs, and facilities
operations make up the selling, general and administrative expenses. These
expenses totaled $22.8 million for the quarter ended March 31, 2000, compared to
$19.1 for the comparative quarter in the prior year. This $3.7 million or 19.2%
increase is attributable to:
- $1.0 million in selling, general and administrative expenses
related to expansion of Hypercom's e-commerce efforts;
- $2.5 million in new selling, general, and administrative
expenses related to the acquisition of Golden Eagle Leasing;
and
- Increased selling expenses related to the $21 million increase
in revenue relative to the same quarter in the prior year.
LOSS FROM OPERATIONS
The loss from operations for the quarter ended March 31, 2000 increased $1.1
million to $2.8 million compared to a loss of $1.7 million for the same quarter
in the prior year. Historically, the first calendar quarter is the weakest
quarter due to the post Christmas, Chinese New Year, and Latin holidays. As a
percentage of revenue, the loss for the quarter ended March 31, 2000 was 3.7%
compared to 3.1% for the same quarter in the prior year.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INTEREST, FOREIGN CURRENCY LOSSES AND OTHER ITEMS
Interest income ($0.7 million) consisted primarily of returns on short and
long-term investments. Interest expense ($0.2 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 volatile
economic markets, principally Brazil and Australia. During the three-month
period ended March 31, 2000, the net interest income, less foreign currency
losses, amounted to income of $0.1 million compared to a loss of $3.6 million
for the same quarter in the prior year.
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-months ended March 31, 2000. Cirilium began its
development and operations activities during this three-month period and such
initial losses were expected by the Company.
INCOME TAX BENEFIT
The income tax benefit for federal, state and foreign taxes were $0.5 million
and $1.6 million for the three month period ended March 31, 2000 and 1999,
respectively. The Company's effective rate of income tax benefit was 12.3% and
31.0% for the three months ended March 31, 2000 and 1999. 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 2000 period was lower than the statutory rate due
to the lower overall effective rates discussed above coupled with the loss on
Hypercom's equity share of Cirilium corporation's net loss 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.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's working capital was $147.8 million as of March 31, 2000 compared
to $165.1 million at March 31, 1999. The decrease relates primarily to the
acquisition of substantially all the assets of JTS ChequeOut Solutions, Inc.,
ICL Sverige AB, and Microtrax, Ltd., Inc. during the second, third and fourth
quarters of calendar 1999, and the acquisition of Golden Eagle LLC in 2000.
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 $2.5 million and $4.7 million in the three month
periods ended March 31, 2000 and 1999, respectively, while depreciation was $1.7
million and $1.2 million in the respective periods.
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 $20 million with Bank One,
Arizona, N.A. ($25 million as of May 2000). The balance outstanding at March 31,
2000 was $16.4 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.
YEAR 2000
The Company has not experienced any significant Year 2000 disruptions, nor do we
anticipate any significant problems in the future. The Company has not expended
any significant amounts to address Year 2000 compliance, nor does it anticipate
any significant future expenditures for Year 2000 compliance. No significant
Year 2000 compliance issues have been reported on our products since the
millennium changeover. We may in the future be subject to claims based on Year
2000 problems in others' products, custom modifications made by us or third
parties to our products, or issues arising from the integration of multiple
products within an overall system. We have not been a party to any litigation or
arbitration proceeding to date alleging that our products or services are not
Year 2000 compliant. However, we are from time to time involved in payment
disputes and may be subject to Year 2000 counter claims. There can be no
assurance that we will not in the future be required to defend our products or
services in such proceedings, or to negotiate resolutions of claims based upon
Year 2000 issues.
To date, we have not encountered any Year 2000-related problems with our
financial institutions, investment advisors or suppliers of products, services
and systems purchased by us, nor others with whom we transact business on a
worldwide basis. Further, we have not encountered any Year 2000-related problems
with our internal systems. All of our financial and operational systems were
available over the millennium changeover and the integrity of the historical
information contained within those systems has not been affected.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
BACKLOG
As of March 31, 2000, Hypercom had backlog of $72 million, a decrease of 45%,
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.
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 March 31, 2000. The Brazilian Real forward contract will
settle in April 2000 while the others will settle through September 2000.
<TABLE>
<CAPTION>
Notional Average Fair
Contract Amount Rate Value
-------- ------- -----
(In thousands) (In thousands)
<S> <C> <C> <C>
Brazilian Real $ 3,056 $ 2.1350 $ 3,380
Australian Dollar $ 641 $ 0.6558 $ 612
Argentine Peso $ 750 $ 1.0145 $ 742
</TABLE>
16
<PAGE> 17
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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
11.1 Statement re Computation of Per Share Earnings
15.1 Letter re Unaudited Interim Financial Information
27.1 Financial Data Schedule
99.1 Cautionary Statement Regarding Forward-Looking Statements and
Risk Factors
(b) The Company filed Form 8-K's as follows:
- January 12, 2000 regarding the acquisition of Golden Eagle
LLC.
- February 10, 2000 regarding the changes of independent
auditors from PricewaterhouseCoopers LLP to Ernst & Young LLP.
17
<PAGE> 18
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: May 15, 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)
18
<PAGE> 19
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
10.16 Promissory Note and loan agreement by and between Hypercom
Financial, Inc. and Bank One, Arizona, NA, dated
January 6, 2000.
11.1 Statement re Computation of Per Share Earnings
15.1 Letter re Unaudited Interim Financial Information
21 Subsidiaries of the Company
27.1 Financial Data Schedule
99.1 Cautionary Statement Regarding Forward-Looking Statements and
Risk Factors
<PAGE> 1
[BANK ONE LOGO]
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,000,000.00 01-06-2000 04-30-2001 208725 326 7241424012 37776
- ----------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: HYPERCOM FINANCIAL INC., an LENDER: Bank One, Arizona, NA
Arizona corporation Phoenix Commercial Banking
2851 W. Kathleen Road 201 North Central
Phoenix, AZ 85023 Phoenix, AZ 85004
================================================================================
PRINCIPAL AMOUNT: $25,000,000.00 DATE OF NOTE: JANUARY 6, 2000
PROMISE TO PAY. FOR VALUE RECEIVED, HYPERCOM FINANCIAL, INC., AN ARIZONA
CORPORATION ("BORROWER") PROMISES TO PAY TO BANK ONE, ARIZONA, NA ("LENDER"),
OR ODER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT
OF TWENTY FIVE MILLION & 00/100 DOLLARS ($25,000,000.00) ("TOTAL PRINCIPAL
AMOUNT") OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID
OUTSTANDING PRINCIPAL BALANCE FROM THE DATE ADVANCED UNTIL PAID IN FULL.
PAYMENT. THIS NOTE SHALL BE PAYABLE AS FOLLOWS: INTEREST SHALL BE DUE AND
PAYABLE MONTHLY AS IT ACCRUES, COMMENCING ON JANUARY 31, 2000 AND CONTINUING ON
THE SAME DAY OF EACH MONTH THEREAFTER DURING THE TERM OF THIS NOTE, AND THE
OUTSTANDING PRINCIPAL BALANCE OF THIS NOTE, TOGETHER WITH ALL ACCRUED BUT
UNPAID INTEREST, SHALL BE DUE AND PAYABLE ON APRIL 30, 2001. The annual
interest rate for this Note is computed on a 365/360 basis; that is, by
applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay Lender at
the address designated by Lender from time to time in writing. If any payment
of principal or of interest on this Note shall become due on a day which is not
a Business Day, such payment shall be made on the next succeeding Business Day.
As used herein, the term "BUSINESS DAY" shall mean any day other than a
Saturday, Sunday or any other day on which national banking associations are
authorized to be closed. Unless otherwise agreed to, in writing, or otherwise
required by applicable law, payments will be applied first to accrued, unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs, late charges and other charges, provided, however, upon delinquency or
other default, Lender reserves the right to apply payments among principal,
interest, late charges, collection costs and other charges at its discretion.
The books and records of Lender shall be prima facie evidence of all
outstanding principal of and accrued but unpaid interest on this Note. If this
Note is governed by or is executed in connection with a loan agreement, this
Note is subject to the terms and provisions thereof.
VARIABLE INTEREST RATE. THE INTEREST RATE ON THIS NOTE IS SUBJECT TO FLUCTUATION
BASED UPON THE PRIME RATE OF INTEREST IN EFFECT FROM TIME TO TIME (THE "INDEX")
(WHICH RATE MAY NOT BE THE LOWEST, BEST OR MOST FAVORABLE RATE OF INTEREST
WHICH LENDER MAY CHARGE ON LOANS TO ITS CUSTOMERS). "PRIME RATE" SHALL MEAN THE
RATE ANNOUNCED FROM TIME TO TIME BY LENDER AS ITS PRIME RATE. EACH CHANGE IN
THE RATE TO BE CHARGED ON THIS NOTE WILL BECOME EFFECTIVE WITHOUT NOTICE ON THE
SAME DAY AS THE INDEX CHANGES. EXCEPT AS OTHERWISE PROVIDED HEREIN, THE UNPAID
PRINCIPAL BALANCE OF THIS NOTE WILL ACCRUE INTEREST AT A RATE PER ANNUM WHICH
WILL FROM TIME TO TIME BE EQUAL TO THE SUM OF THE INDEX, PLUS 0.000%. NOTICE:
UNDER NO CIRCUMSTANCES WILL THE INTEREST RATE ON THIS NOTE BE MORE THAN THE
MAXIMUM RATE ALLOWED BY APPLICABLE LAW.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Except for the foregoing, Borrower may pay
without fee all or a portion of the principal amount owed hereunder earlier
than it is due. All prepayments shall be applied to the indebtedness owing
hereunder in such order and manner as Lender may from time to time determine in
its sole discretion.
LATE CHARGE. If a payment IS 10 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE REGULARLY SCHEDULED PAYMENT OR $25.00, WHICHEVER IS GREATER.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment of principal or interest when due under this
Note or any other indebtedness owing now or hereafter by Borrower to Lender;
(b) failure of Borrower or any other party to comply with or perform any term,
obligation, covenant or condition contained in this Note or in any other
promissory note, credit agreement, loan agreement, guaranty, security
agreement, mortgage, deed of trust or any other instrument, agreement or
document, whether now or hereafter existing, executed in connection with this
Note (the Note and all such other instruments, agreements, and documents shall
be collectively known herein as the "RELATED DOCUMENTS"); (c) Any
representation or statement made or furnished to Lender herein, in any of the
Related Documents or in connection with any of the foregoing is false or
misleading in any material respect; (d) Borrower or any other party liable for
the payment of this Note, whether as maker, endorser, guarantor, surety or
otherwise, becomes insolvent or bankrupt, has a receiver or trustee appointed
for any part of its property, makes an assignment for the benefit of its
creditors, or any proceeding is commenced either by any such party or against
it under any bankruptcy or insolvency laws; (e) the occurrence of any event of
default specified in any of the other Related Documents or in any other
agreement now or hereafter arising between Borrower and Lender; (f) the
occurrence of any event which permits the acceleration of the maturity of any
indebtedness owing now or hereafter by Borrower to any third party; or (g) the
liquidation, termination, dissolution, death or legal incapacity of Borrower or
any other party liable for the payment of this Note, whether as maker,
endorser, guarantor, surety, or otherwise.
LENDER'S RIGHTS. Upon default, Lender may at its option, without further notice
or demand (i) declare the entire unpaid principal balance on this Note, all
accrued unpaid interest and all other costs and expenses for which Borrower is
responsible for under this Note and any other Related Document immediately due,
(ii) refuse to advance any additional amounts under this Note, (iii) foreclose
all liens securing payment hereof, (iv) pursue any other rights, remedies and
recourses available to the Lender, including without limitation, any such
rights, remedies or recourses under the Related Documents, at law or in equity,
or (v) pursue any combination of the foregoing. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note 3.000 percentage points over the Index, and (b) add
any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any increased
rate). The interest rate will not exceed the maximum rate permitted by
applicable law. Lender may hire an attorney to help collect this Note if
Borrower does not pay and Borrower will pay Lender's reasonable attorneys' fees
and all other costs of collection, unless prohibited by applicable law. This
Note has been delivered to Lender and accepted by Lender in the State of
Arizona. Subject to the provisions on arbitration, this Note shall be governed
by and construed in accordance with the laws of the State of Arizona without
regard to any conflict of laws or provisions thereof.
PURPOSE. Borrower agrees that no advances under this Note shall be used for
personal, family, or household purposes and that all advances hereunder shall
be used solely for business, commercial, agricultural or other similar purposes.
JURY WAIVER. THE BORROWER AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY
VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE
A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT
OR OTHERWISE) BETWEEN OR AMONG THE BORROWER AND LENDER ARISING OUT OF OR IN ANY
WAY RELATED TO THIS NOTE, ANY OTHER RELATED DOCUMENT, OR ANY RELATIONSHIP
BETWEEN LENDER AND BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER
TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a
nontaxable account taxable, Borrower grants to Lender a contractual security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or any other account), including without
limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Borrower may
request advances and make payments hereunder from time to time, provided that
it is understood and agreed that the aggregate principal amount outstanding
from time to time hereunder shall not at any time exceed the Total Principal
Amount. The unpaid principal balance of this Note shall increase and decrease
with each new advance or payment hereunder, as the case may be. Subject to the
terms hereof, Borrower may borrow, repay and reborrow hereunder. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender.
ARBITRATION. Lender and Borrower agree that upon the written demand of either
party, whether made before or after the institution of any legal proceedings,
but prior to the rendering of any judgment in that proceeding, all disputes,
claims and controversies between them, whether individual, joint, or class in
nature, arising from this Note, any Related Document or otherwise, including
without limitation contract disputes and tort claims, shall be resolved by
binding arbitration pursuant to the Commercial Rules of the American
Arbitration Association ("AAA"). Any arbitration proceeding held pursuant to
this arbitration provision shall be conducted in the city nearest the Borrower's
address having an AAA regional office, or at any other place selected by mutual
agreement of the parties. No act to take or dispose of any collateral shall
constitute a
<PAGE> 2
PROMISSORY NOTE Page 2
(Continued)
===============================================================================
waiver of this arbitration agreement or be prohibited by this arbitration
agreement. This arbitration provision shall not limit the right of either party
during any dispute, claim or controversy to seek, use, and employ ancillary, or
preliminary rights and/or remedies, judicial or otherwise, for the purposes of
realizing upon, preserving, protecting, foreclosing upon or proceeding under
forcible entry and detainer for possession of, any real or personal property,
and any such action shall not be deemed an election of remedies. Such remedies
include, without limitation, obtaining injunctive relief or a temporary
restraining order, invoking a power of sale under any deed of trust of
mortgage, obtaining a writ of attachment or imposition of a receivership, or
exercising any rights relating to personal property, including exercising the
right of set-off, or taking or disposing of such property with or without
judicial process pursuant to the Uniform Commercial Code. Any disputes, claims,
or controversies concerning the lawfulness or reasonableness of an act, or
exercise of any right or remedy, concerning any collateral, including any claim
to rescind, reform or otherwise modify any agreement relating to the
collateral, shall also be arbitrated; provided, however that no arbitrator
shall have the right or the power to enjoin or restrain any act of either
party. Judgment upon any award rendered by any arbitrator may be entered in any
court having jurisdiction. The statue of limitation, estoppel, waiver, laches
and similar doctrines which would otherwise be applicable in an action brought
by a party shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the commencement of
any action for these purposes. The Federal Arbitration Act (Title 9 of the
United States Code) shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
ADDITIONAL PROVISION REGARDING LATE CHARGES. In the "Late Charge" provision set
forth above, the following language is hereby added after the word "greater" "up
to the maximum amount of One Thousand Five Hundred Dollars ($1500.00) per late
charge."
ADDENDUM. An addendum, titled "ADDENDUM", is attached to this document and by
this reference is made a part of this document just as if all the provisions,
terms and conditions of the ADDENDUM had been fully set forth in this document.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signed this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this Note, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this Note
without the consent of or notice of anyone other than the party with whom the
modification is made.
EFFECTIVE RATE. Borrower agrees to an effective rate of interest that is the
rate specified in this Note plus any additional rate resulting from any other
charges in the nature of interest paid or to be paid in connection with this
Note.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
HYPERCOM FINANCIAL, INC., an Arizona corporation
By: /s/ Scott Tsujita
------------------------
Scott Tsujita, Treasurer
<PAGE> 3
ADDENDUM
===============================================================================
Borrower: HYPERCOM FINANCIAL Lender: Bank One, Arizona, NA
2851 West Kathleen Road Commercial Banking
Phoenix, AZ 85023-4053 201 N. Central Avenue
Phoenix, AZ 84004
===============================================================================
THIS ADDENDUM is executed with respect to the Promissory Note in the original
principal amount of $25,000,000.00 dated January 6, 2000 and maturing on April
30, 2001 ("Note"), made by HYPERCOM FINANCIAL, INC., an Arizona corporation
("Borrower") payable to the order of Bank One, Arizona, NA ("Lender") and is
hereby incorporated into and made a part of the Note.
1. The paragraph in the Note having the caption "VARIABLE INTEREST RATE" is
hereby deleted in its entirety.
2. The following terms shall have the following meanings when used in this
Addendum. Capitalized terms not otherwise defined herein shall have the meanings
of such terms in the Note.
"INTEREST PERIOD" means a period commencing on the date selected by Borrower and
ending on the last day of the period selected by Borrower as provided herein.
Each Interest Period shall be of a duration of either one, three or six months,
as selected by Borrower as provided herein; provided, however, that: (i)
Interest Periods commencing on the same date shall be of the same duration; (ii)
Whenever the last day of an Interest Period would otherwise occur on a day other
than a Business Day, the last day of the Interest Period shall be extended to
occur on the next succeeding Business Day, provided, however, that if the
extension would cause the last day of the Interest Period to occur in the next
following calendar month, the last day of the Interest Period shall occur on the
next preceding Business Day; and (iii) No Interest Period shall extend beyond
the maturity of the Note.
"LIBOR RATE" means the sum of (i) two and three quarters percent (2.75%) per
annum, and (ii) the offered rate for the period equal to or next greater than
the Interest Period for U.S. Dollar deposits of not less than $1,000,000.00 as
of 11:00 A.M. City of London, England time two London Business Days prior to the
first date of the Interest Period as shown on the display designated as "British
Bankers Assoc. Interest Settlement Rates" on the Telerate System ("Telerate"),
Page 3750 or 3740, or such other page or pages as may replace such pages on
Telerate for the purpose of displaying such rate. Provided, however, that if
such rate is not available on Telerate then such offered rate shall be otherwise
independently determined by Lender from an alternate, substantially similar
independent source available to Lender or shall be calculated by Lender by a
substantially similar methodology as that theretofore used to determine such
offered rate in Telerate.
"LIBOR RATE AMOUNT" means some or all of the indebtedness that bears or is
requested to bear interest at the Libor Rate.
"LONDON BUSINESS DAY" means any day other than a Saturday, Sunday or a day on
which banking institutions are generally authorized or obligated by law or
executive order to close in the City of London, England.
"VARIABLE INTEREST RATE" means the rate per annum equal to the sum of (i) zero
percent (0%) per annum, and (ii) the rate announced from time to time by Lender
as its prime rate ("Index"), which may not be the lowest, best or most favorable
rate of interest which Lender may charge on loans to its customers. Each change
in the Variable Interest Rate will become effective without notice on the same
day as the Index changes.
"VARIABLE RATE AMOUNT" means some or all or the indebtedness that bears or that
is requested to bear interest at the Variable Interest Rate.
3. Notwithstanding any provision of the Note or the Related Documents to the
contrary, Borrower may elect that, as of any Business Day designated by
Borrower, upon notice that is received by Lender not later than noon (Phoenix,
Arizona local time) two (2) Business Days prior to such designated date,
interest on a Libor Rate Amount shall accrue at a Libor Rate during an Interest
Period. Each such notice shall specify (i) such designated date, (ii) the amount
of such Libor Rate Amount, and (iii) the Interest Period. In addition, Borrower
may as of any designated Business Day, upon notice that is received by Lender
not the Interest Period. In addition, Borrower may as of any designated Business
Day, upon notice that is received by Lender not later than noon (Phoenix,
Arizona local time) two (2) Business Days prior to such designated Business Day,
convert a Libor Rate Amount into a Variable Rate Amount or continue a Libor Rate
Amount as a Libor Rate Amount for a new Interest Period, provided, that Borrower
may make such conversion or continuation only on the last day of the Interest
Period. Each such notice of conversion or continuation shall specify (A) the
date of such conversion or continuation, (B) the amount to be converted or
continued, and (C) the Interest Period. Any amount not complying with the
foregoing requirements for an amount bearing interest at the Libor Rate shall
bear interest at the Variable Interest Rate. Any Libor Rate Amount not continued
as a Libor Rate Amount in compliance with the foregoing requirements shall,
after the end of the Interest Period, bear interest at the Variable Interest
Rate, whether or not Borrower has expressly elected to convert the Libor Rate
Amount to a Variable Rate Amount. Lender shall be entitled to fund and maintain
its funding of all or any part of the Note in any manner it sees fit.
4. A Libor Rate Amount must be in a minimum amount of $1,000,000.00 with
increments of $500,000.00 thereafter and there shall be no more than five (5)
Libor Rate Amounts outstanding at any one time.
5. Borrower shall pay to Lender from time to time such amounts as Lender may
determine to be necessary to compensate Lender for any costs incurred by Lender
which Lender determines are attributable to its making or maintaining any Libor
Rate Amount hereunder or its obligation to make any such Libor Rate Amount
hereunder, or any reduction in any amount receivable by Lender under the Note in
respect of any such Libor Rate Amount or such obligation (such increases in
costs and reductions in costs and reductions in amounts receivable being herein
called "Additional Costs"), resulting from any change after the date of the Note
in U.S. federal, state, municipal, or foreign laws or regulations (including
Regulation D), or the adoption or making after such date of any interpretations,
directives, or requirements applying to a class of banks including Lender of or
under any U.S. federal, state, municipal, or any foreign laws or regulations
(whether or not having the force of law) by any court of governmental or
monetary authority charged with the interpretation or administration thereof
("Regulatory Change"),
<PAGE> 4
which: (1) changes the basis of taxation of any amounts payable to Lender under
the Note in respect of any such Libor Rate Amount (other than taxes imposed on
the overall net income of the Lender); or (2) imposes or modifies any reserve,
special deposit, compulsory loan, or similar requirements relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of Lender (including any such Libor Rate Amount or any deposits
referred to in the definition of any Libor Rate Amount); or (3) imposes any
other condition affecting this Note (or any of such extensions of credit or
liabilities). Lender will notify the Borrower of any event occurring after the
date of the Note which will entitle Lender to compensation pursuant to this
paragraph as promptly as practicable after it obtains knowledge thereof and
determines to request such compensation. Determinations by Lender for purposes
of this paragraph of the effect of any Regulatory Change in its costs of making
or maintaining Libor Rate Amount or on amounts receivable by it in respect of
Libor Rate Amount, and of the additional amounts required to compensate Lender
in respect of any Additional Costs, shall be presumed prima facie correct.
6. In respect to any Libor Rate Amount, in the event that Lender shall have
determined that dollar deposits of the relevant amount for the relevant
Interest Period for such Libor Rate Amount are not available or that, by reason
of circumstances affecting such market, adequate and reasonable means do not
exist for ascertaining the Libor Rate applicable to such Interest Period in the
manner provided in the definition of such term, as the case may be, Lender
shall promptly give notice of such determination to the Borrower and (i) any
notice of new Libor Rate Amounts (or conversion of existing Libor Rate Amounts
or Variable Rate Amounts to Libor Rate Amounts) previously given by the
Borrower and not yet borrowed (or converted, as the case may be) shall be
deemed a notice that such amounts shall bear interest at the Variable Interest
Rate, and (ii) the Borrower shall be obligated either to repay or to convert
any outstanding Libor Rate Amounts on the last day of the then current Interest
Period or Periods with respect thereto, as Borrower shall elect.
7. If at any time any new law, treaty or regulation enacted after the date
hereof, or any change after the date hereof in any existing law, treaty or
regulation, or any interpretation thereof after the date hereof by any
governmental or other regulatory authority charged with the administration
thereof, shall make it unlawful for Lender to fund any Libor Rate Amounts which
it is committed to make hereunder with moneys obtained in the London interbank
market, the commitment of Lender to fund Libor Rate Amounts shall, upon the
happening of such event forthwith be suspended for the duration of such
illegality, and Lender shall by written notice to the Borrower declare that the
commitment with respect to such loans has been so suspended and, if and when
such illegality ceases to exist, such suspension shall cease and Lender shall
similarly notify the Borrower. If any such change shall make it unlawful for
Lender to continue in effect the funding in the applicable London interbank
market of any Libor Rate Amount previously made by it hereunder, Lender shall,
upon the happening of any such event, notify the Borrower in writing stating
the reasons therefor, and the Borrower shall, on the earlier of (i) the last
day of then current Interest Period or (ii) if required by such law,
regulation, or interpretation, on such date as shall be specified in such
notice, either convert all Libor Rate Amounts to Variable Rate Amounts or
prepay all Libor Rate Amounts to Lender in full, as Borrower shall elect.
8. Notwithstanding any provision of the Note to the contrary, all accrued
interest on each Libor Rate Amount shall be due and payable (i) monthly on the
date in each month during the Interest Period which is the numerical equivalent
of the first day of the Interest Period (or if no such date in any month, then
on the last day of such month) and (ii) on the last day of the Interest Period.
Interest on Variable Rate Amounts shall be due and payable monthly as provided
in the Note.
9. The paragraph of the Note having the caption "PREPAYMENT" is hereby
deleted in its entirety and the following paragraph is here substituted in lieu
thereof:
PREPAYMENT. Borrower may prepay all or any portion of a Variable Rate Amount at
any time without payment of premium or penalty. Borrower may prepay all or any
portion of a Libor Rate Amount, provided that if Borrower makes any such
prepayment other than on the last day of the Interest Period, Borrower shall
pay all accrued interest on the principal amount prepaid with such prepayment
and, on demand, shall reimburse Lender and hold Lender harmless from all losses
and expenses incurred by Lender as a result of such prepayment, including,
without limitation, any losses and expenses arising from the liquidation or
reemployment of deposits acquired to fund or maintain the principal amount
prepaid. Such reimbursement shall be calculated as though Lender funded the
principal amount prepaid through the purchase of U.S. Dollar deposits in the
London, England interbank market having a maturity corresponding to such
Interest Period and bearing an interest rate equal to the Libor Rate for such
Interest Period, whether in fact that is the case or not. Lender's
determination of the amount of such reimbursement shall be conclusive in the
absence of manifest error.
10. Except as expressly modified by this Addendum, all of the terms and
conditions of the Note continue unchanged and in full force and effect.
Dated with effect as of the date of the Note.
LENDER
BANK ONE, ARIZONA, NA
By: /s/ Scott T. Schaefer
----------------------------------------
Scott T. Schaefer, Senior Vice President
BORROWER
HYPERCOM FINANCIAL, INC., an Arizona corporation
By: /s/ Scott Tsujita
----------------------------------------
Scott Tsujita, Treasurer
<PAGE> 5
[BANK ONE LOGO]
LOAN AGREEMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$25,000,000.00 01-06-2000 04-30-2001 108714 326 7241424012 37776
- ---------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item.
- ---------------------------------------------------------------------------------------------------------------------------------
BORROWER: HYPERCOM FINANCIAL, INC., an Arizona LENDER: Bank One, Arizona, NA
corporation Phoenix Commercial Banking
2851 W. Kathleen Road 201 North Central
Phoenix, AZ 85023 Phoenix, AZ 85004
=================================================================================================================================
</TABLE>
THIS LOAN AGREEMENT between HYPERCOM FINANCIAL, INC., an Arizona corporation
("Borrower") and Bank One, Arizona, NA ("Lender") is made and executed as of
January 6, 2000. This Agreement governs all loans, credit facilities and/or
other financial accommodations described herein and, unless otherwise agreed to
in writing by Lender and Borrower, all other present and future loans, credit
facilities and other financial accommodations provided by Lender to Borrower.
All such loans, credit facilities and other financial accommodations, together
with all renewals, extensions and modifications thereof, are referred to in
this Agreement individually as the "Loan" and collectively as the "Loans."
Borrower understands and agrees that: (a) in granting, renewing, or extending
any Loan, Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in this Agreement; and (b) all such Loans shall be and
shall remain subject to the following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of January 6, 2000, and shall
continue thereafter until all Loans and other obligations owing by Borrower to
Lender hereunder have been paid in full and Lender has no commitments or
obligations to make further Advances under the Loans to Borrower.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code as adopted in
the State of Arizona. All references to dollar amounts shall mean amounts in
lawful money of the United States of America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as may be
amended or modified from time to time, together with all exhibits and
schedules attached hereto from time to time.
ACCOUNT. The word "Account" means a trade account receivable of * for
goods sold or leased or for services rendered by Borrower in the ordinary
course of its business.
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means any advance or other disbursement of
Loan proceeds under this Agreement.
BORROWER. The word "Borrower" means HYPERCOM FINANCIAL, INC., an Arizona
corporation.
BORROWING BASE. The words "Borrowing Base" mean the sum of (i) 80.000% of
the aggregate amount of Eligible Accounts, plus (ii) 50.000% of the
aggregate amount of Eligible Inventory.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral for any Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a
security interest, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien, charge, lien or title retention contract, lease
or consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract, or otherwise.
COMMITTED SUM. The words "Committed Sum" mean an amount equal to
$25,000,000.00.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of
* Accounts which contain terms and conditions acceptable to Lender and
in which Lender has a first lien security interest, less the amount of all
returns, discounts, credits, and offsets of any nature; provided, however,
unless otherwise agreed to by Lender in writing, Eligible Accounts do not
include:
(a) Accounts with respect to which the Account Debtor is an officer,
an employee or agent of * and to which the Account Debtor is a
subsidiary of, or affiliated with or related to * or its
shareholders, officers, or directors.
(b) All Accounts with respect to which * has furnished a payment
and/or performance bond and that portion of any Accounts for or
representing retainage, if any, until all prerequisites to the
immediate payment of such retainage have been satisfied.
(c) Accounts with respect to which goods are placed on consignment or
subject to a guaranteed sale or other terms by reason of which the
payment by the Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a
resident of, or whose principal place of business is located outside
of, the United States or its territories, except to the extent such
Accounts are supported by insurance, bonds or other assurances
satisfactory to Lender in its sole and absolute discretion.
(e) Accounts with respect to which * is or may become liable to the
Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which all goods have not been shipped or
delivered, or all services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief
under any provision of any state or federal bankruptcy, insolvency,
or debtor-in-relief acts; or who has had appointed a trustee,
custodian, or receiver for the assets of such Account Debtor; or who
has made an assignment for the benefit of creditors or has become
insolvent or fails generally to pay its debts (including its
payrolls) as such debts become due.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States,
except to the extent an acknowledgement of assignment to Lender of
any such Accounts in compliance with the Federal Assignment of Claims
Act and other applicable laws has been received by Lender.
(k) Accounts which have not been paid or are not due and payable in
full within 90 days from the original invoice date.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, the
aggregate value of all of * inventory as defined below except:
(a) Inventory which is not owned by * free and clear of all security
interests, liens, encumbrances, and claims of third parties except
Lender's security interest.
(b) Inventory which Lender, in its sole and absolute discretion,
deems to be obsolete, unsalable, damaged, defective, or unfit for
further processing.
(c) Inventory which has been returned or rejected.
(d) Inventory which is held by others on consignment, sale on
approval or otherwise not in * physical possession, except upon the
written consent of Lender.
(e) Inventory located outside the United States.
(f) net of Accounts Payable.
For purposes of this Agreement, Eligible Inventory shall be valued at the
lower of cost or market value.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
GRANTOR. The word "Grantor" means and includes each and all of the persons
or entities granting a Security Interest in any Collateral for any of the
Loans.
GUARANTOR. The word "Guarantor" means and includes without limitation,
each and all of the guarantors, sureties, and accommodation parties for
any of the Loans.
- ----------
* All references to Borrower in the Definitions section shall mean HYPERCOM
CORPORATION, a Delaware corporation
<PAGE> 6
01-06-2000 LOAN AGREEMENT Page 2
Loan No (Continued)
==============================================================================
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and accrued interest thereon, together
with all other liabilities, costs and expenses for which Borrower is
responsible under this Agreement or under any of the Related Documents. In
addition, the word "Indebtedness" includes all other obligations, debts and
liabilities, plus any accrued interest thereon, owing by Borrower, or any
one or more of them, to Lender of any kind or character, now existing or
hereafter arising, as well as all present and future claims by Lender
against Borrower, or any one or more of them, and all renewals, extensions,
modifications, substitutions and rearrangements of any of the foregoing;
whether such Indebtedness arises by note, draft, acceptance, guaranty,
endorsement, letter of credit, assignment, overdraft, indemnity agreement
or otherwise; whether such Indebtedness is voluntary or involuntary, due or
not due, direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Borrower may be liable individually or jointly with
others; whether Borrower may be liable primarily or secondarily or as
debtor, maker, comaker, drawer, endorser, guarantor, surety, accommodation
party or otherwise.
INVENTORY. The word "Inventory" means all raw materials and all tangible
personal property, goods, merchandise and other personal property now owned
or hereafter acquired by * which is held for sale or lease in the ordinary
course of Borrower's business, excluding all work in progress, spare parts,
packaging materials, supplies and any advertising costs capitalized into
inventory.
LENDER. The word "Lender" means Bank One, Arizona, NA, its successors and
assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
NOTE. The word "Note" means any and all promissory note or notes which
evidence Borrower's Loans in favor of Lender, as well as any amendment,
modification, renewal or replacement thereof.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either (i) not yet due, or (ii)
being contested in good faith by appropriate proceedings and for which
Borrower has established adequate reserves; (c) purchase money liens or
purchase money security interests upon or in any property acquired or held
by Borrower in the ordinary course of business to secure any indebtedness
permitted under this Agreement; and (d) liens and security interests which,
as of the date of this Agreement, have been disclosed to and approved by
the Lender in writing.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation the Note and all credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Note.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of security interest, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
LINE OF CREDIT. Subject to the other terms and conditions herein, Lender hereby
establishes a Line of Credit for Borrower through which Lender agrees to make
advances to Borrower from time to time from the effective date of this Agreement
until the maturity date of the Note evidencing the Line of Credit, provided the
aggregate amount of such advances outstanding at any time does not exceed the
lesser of the amount equal to the Borrowing Base or an amount equal to the
Committed Sum. Within the foregoing limits, Borrower may borrow, partially or
wholly prepay, and reborrow under this Agreement.
BORROWING BASE COMPLIANCE. If at any time the aggregate principal amount
outstanding under the Line of Credit shall exceed the applicable Borrowing
Base, Borrower shall pay to Lender an amount equal to the difference
between the outstanding principal balance under the Line of Credit and the
Borrowing Base.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; and (b) All Account Information listed on reports and schedules
delivered to Lender will be true and correct, subject to immaterial
variance.
REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Inventory will be determined on a consistent accounting basis; (d)
Except as reflected in the Inventory schedules delivered to Lender, all
Eligible Inventory is now and at all times hereafter will be of good and
merchantable quality, free from defects; and (e) Lender, its assigns, or
agents shall have the right at any time and at Borrower's expense to
inspect and examine the Inventory and to check and test the same as to
quality, quantity, value, and condition.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each request for an Advance, as
of the date of any renewal, extension or modification of any Loan, and at all
times any Loans or Lender's commitment to make Loans hereunder is outstanding:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Arizona and
is duly qualified and in good standing in all other states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents to which Borrower is a party have been duly
authorized by all necessary action by Borrower; do not require the consent
or approval of any other person, regulatory authority or governmental body;
and do not conflict with, result in a violation of, or constitute a default
under (a) any provision of its articles of incorporation or organization,
or bylaws, or any agreement or other instrument binding upon Borrower or
(b) any law, governmental regulation, court decree, or order applicable to
Borrower. Borrower has all requisite power and authority to execute and
deliver this Agreement and all other Related Documents to which Borrower is
a party.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely discloses Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations excepts as disclosed in such financial statements.
LEGAL EFFECT. This Agreement and all other Related Documents to which
Borrower is a party constitute legal, valid and binding obligations of
Borrower enforceable against Borrower in accordance with their respective
terms, except as limited by bankruptcy, insolvency or similar laws of
general application relating to the enforcement of creditors' rights and
except to the extent specific remedies may generally be limited by
equitable principles.
PROPERTIES. Except for Permitted Liens, Borrower is the sole owner of, and
has good title to, all of Borrower's properties free and clear of all
Security Interests, and has not executed any security documents or
financing statements relating to such properties. All of Borrower's
properties are titled in Borrower's legal name, and Borrower has not used,
or filed a financing statement under, any other name for at least the last
six (6) years.
COMPLIANCE. Except as disclosed in writing to Lender (a) Borrower is
conducting Borrower's businesses in material compliance with all applicable
federal, state and local laws, statutes, ordinances, rules, regulations,
orders, determinations and court decisions, including without limitation,
those pertaining to health or environmental matters, and (b) Borrower
otherwise does not have any known material contingent liability in
connection with the release into the environment, disposal or the improper
storage of any toxic or hazardous substance or solid waste.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may in any one case or in the aggregate materially adversely affect
Borrower's financial condition or properties, other than litigation,
claims, or other events, if any, that have been disclosed to and
acknowledged by Lender in writing.
TAXES. All tax returns and reports of Borrower that are or were required to
be filed, have been filed, and all taxes, assessments and other
governmental charges have been paid in full, except those that have been
disclosed in writing to Lender which are presently being or to be contested
by Borrower in good faith in the ordinary course of business and for which
adequate reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to and approved by
Lender in writing, Borrower has not entered into any Security Agreements,
granted a Security Interest or permitted the filing or attachment of any
Security Interests on or affecting any of the Collateral, except in favor
of Lender.
LICENSES, TRADEMARKS AND PATENTS. Borrower possesses and will continue to
possess all permits, licenses, trademarks, patents and rights
<PAGE> 7
01-06-2000 LOAN AGREEMENT Page 3
Loan No (Continued)
================================================================================
thereto which are needed to conduct Borrower's business and Borrower's
business does not conflict with or violate any valid rights of others with
respect to the foregoing.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes approved by Lender and such
proceeds will not be used for the purchasing or carrying of "margin stock"
as defined in Regulation U issued by the Board of Governors of the Federal
Reserve System.
INELIGIBLE SECURITIES. No portion or any advance or Loan made hereunder
shall be used directly or indirectly to purchase ineligible securities, as
defined by applicable regulations of the Federal Reserve Board,
underwritten by Lender or any other affiliate of Banc One Corporation
during the underwriting period and for 30 days thereafter.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's chief executive office if Borrower has more than one place of
business, is located at 2851 W. Kathleen Road, Phoenix, AZ 85023. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated and certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending the Loans to Borrower. Borrower
further agrees that the foregoing representations and warranties shall be
continuing in nature and shall remain in full force and effect during the
term of this Agreement.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor, and (c) the creating, occurrence or assumption
by Borrower of any actual or contingent liabilities not permitted under
this Agreement.
FINANCIAL RECORDS. Maintain its books and records in accordance with n,
applied on a consistent basis, and permit Lender to examine, audit and make
and take away copies or reproductions of Borrower's books and records at
all reasonable times. If Borrower now or at any time hereafter maintains
any records (including without limitation computer generated records and
computer software programs for the generation of such records) in the
possession of a third party, Borrower, upon request of Lender, shall notify
such party to permit Lender free access to such records at all reasonable
times and to provide Lender with copies of any records it may request, all
at Borrower's expense.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least thirty (30) days' prior written notice to Lender. In connection with
all policies covering assets in which Lender holds or is offered a Security
Interest for the Loans, Borrower will provide Lender with such loss payable
or other endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy.
GUARANTIES. Prior to or contemporaneously with the execution of this
Agreement, furnish to Lender guaranty agreements executed by the guarantors
named below covering such Loans or other Indebtedness and otherwise being
in form and substance satisfactory to Lender in its sole and absolute
discretion:
GUARANTORS
HYPERCOM CORPORATIONS, A DELAWARE CORPORATION
HYPERCOM MANUFACTURING RESOURCES, INC., AN ARIZONA CORPORATION
HYPERCOM LATIN AMERICA, INC., AN ARIZONA CORPORATION
HYPERCOM, INC., AN ARIZONA CORPORATION
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN FEES AND CHARGES. In addition to all other agreed upon fees and
charges, pay the following: $10,000.00 COMMITMENT/DOCUMENTATION FEE AND
.30% UNUSED COMMITMENT FEE.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits; provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting principles. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Conduct its business affairs in a reasonable and prudent manner
and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with
the Americans with Disabilities Act, all applicable environmental statutes,
rules, regulations and ordinances and with all minimum funding standards
and other requirements of ERISA and other laws applicable to Borrower's
employee benefit plans.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all federal, state and local environmental laws, statutes, regulations
and ordinances; not cause or permit to exist, as a result of an intentional
or unintentional action or omission on its part or on the part of any third
party, on property owned and/or occupied by Borrower, any environmental
activity where damage may result to the environment, unless such
environmental activity is pursuant to and in compliance with the conditions
of a permit issued by the appropriate federal, state or local governmental
authorities; and furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien,
citation, directive, letter or other communication from any governmental
agency or instrumentality concerning any intentional or unintentional
action or omission on Borrower's part in connection with any environmental
activity whether or not there is damage to the environment and/or other
natural resources.
BORROWING BASE CERTIFICATE. Within 30 days after each month, Borrower shall
deliver to Lender a borrowing base certificate, in form and detail
satisfactory to Lender, along with such supporting documentation as Lender
may request, including without limitation, an accounts receivable aging
report and/or a list or schedule of Borrower's accounts receivable,
inventory and/or equipment.
<PAGE> 8
01-06-2000 LOAN AGREEMENT Page 4
Loan No (Continued)
================================================================================
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
MAINTAIN BASIC BUSINESS. Engage in any business activities substantially
different than those in which Borrower is presently engaged.
CONTINUITY OF OPERATIONS. Cease operations, liquidate, dissolve or merge or
consolidate with or into any other entity.
LIENS. Mortgage, assign, pledge, grant a security interest in or otherwise
encumber Borrower's assets, except as allowed as a Permitted Lien.
TRANSFER OF ASSETS. Transfer, sell or otherwise dispose of any of
Borrower's assets other than in the ordinary course of business.
CHANGE IN MANAGEMENT. Permit a change in the senior executive or management
personnel of Borrower.
TRANSFER OF OWNERSHIP. Permit the sale, pledge or other transfer of any
ownership interest in Borrower.
CONDITIONS PRECEDENT TO ADVANCES. Lender's obligation to make any Advances or
to provide any other financial accommodations to or for the benefit of Borrower
hereunder shall be subject to the conditions precedent that as of the date of
such advance or disbursement and after giving effect thereto (a) all
representations and warranties made to Lender in this Agreement and the Related
Documents shall be true and correct as of and as if made on such date, (b) no
material adverse change in the financial condition of Borrower or any Guarantor
since the effective date of the most recent financial statements furnished to
Lender, or in the value of any Collateral, shall have occurred and be
continuing, (c) no event has occurred and is continuing, or would result from
the requested advance or disbursement, which with notice or lapse of time, or
both, would constitute an Event of Default, (d) no Guarantor has sought,
claimed or otherwise attempted to limit, modify or revoke such Guarantor's
guaranty of any Loan, and (e) Lender has received all Related Documents
appropriately executed by Borrower and all other proper parties.
ADDENDUM. An addendum, titled "ADDENDUM", is attached to this document and by
this reference is made a part of this document just as if all the provisions,
terms and conditions of the ADDENDUM had been fully set forth in this document.
RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a
nontaxable account taxable, Borrower grants to Lender a contractual security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or any other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on the
Indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on any of the Indebtedness.
OTHER DEFAULTS. Failure of Borrower, any Guarantor or any Grantor to comply
with or to perform when due any other term, obligation, covenant or
condition contained in this Agreement, the Note or in any of the other
Related Documents, or failure of Borrower to comply with or to perform any
other term, obligation, covenant or condition contained in any other
agreement now existing or hereafter arising between Lender and Borrower.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender under this Agreement or the Related Documents is false
or misleading in any material respect.
DEFAULT TO THIRD PARTY. The occurrence of any event which permits the
acceleration of the maturity of any indebtedness owing by Borrower, Grantor
or any Guarantor to any third party under any agreement or undertaking.
BANKRUPTCY OR INSOLVENCY. If the Borrower, Grantor or any Guarantor: (i)
becomes insolvent, or makes a transfer in fraud of creditors, or makes an
assignment for the benefit of creditors, or admits in writing its inability
to pay its debts as they become due; (ii) generally is not paying its debts
as such debts become due; (iii) has a receiver, trustee or custodian
appointed for, or take possession of, all or substantially all of the
assets of such party or any of the Collateral, either in a proceeding
brought by such party or in a proceeding brought against such party and
such appointment is not discharged or such possession is not terminated
within sixty (60) days after the effective date thereof or such party
consents to or acquiesces in such appointment or possession; (iv) files a
petition for relief under the United States Bankruptcy Code or any other
present or future federal or state insolvency, bankruptcy or similar laws
(all of the foregoing hereinafter collectively called "APPLICABLE
BANKRUPTCY LAW") or an involuntary petition for relief is filed against
such party under any Applicable Bankruptcy Law and such involuntary
petition is not dismissed within sixty (60) days after the filing thereof,
or an order for relief naming such party is entered under any Applicable
Bankruptcy Law, or any composition, rearrangement, extension,
reorganization or other relief of debtors now or hereafter existing is
requested or consented to by such party; (v) fails to have discharged
within a period of sixty (60) days any attachment, sequestration or similar
writ levied upon any property of such party; or (vi) fails to pay within
thirty (30) days any final money judgment against such party.
LIQUIDATION, DEATH AND RELATED EVENTS. If Borrower, Grantor or any
Guarantor is an entity, the liquidation, dissolution, merger or
consolidation of any such entity or, if any of such parties is an
individual, the death or legal incapacity of any such individual.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency.
VIOLATION OF LAW. Any of the Real Property and/or Improvements, or any use
of any of the Real Property and/or Improvements violates any law,
ordinance, regulation or rule (Federal, state or local).
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, Lender may,
at its option, without further notice or demand, (a) terminate all commitments
and obligations of Lender to make Loans to Borrower, if any, (b) declare all
Loans and any other Indebtedness immediately due and payable, (c) refuse to
advance any additional amounts under the Note or to provide any other financial
accommodations under this Agreement, or (d) exercise all the rights and
remedies provided in the Note or in any of the Related Documents or available
at law, in equity, or otherwise; provided, however, if any Event of Default of
the type described in the "Bankruptcy or Insolvency" subsection above shall
occur, all Loans and any other Indebtedness shall automatically become due and
payable, without any notice, demand or action by Lender. Except as may be
prohibited by applicable law, all of Lender's rights and remedies shall be
cumulative and may be exercised singularly or concurrently. Election by Lender
to pursue any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation of
Borrower or of any Grantor shall not affect Lender's right to declare a default
and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS.
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Arizona. Subject to the provisions on arbitration,
this Agreement shall be governed by and construed in accordance with the
laws of the State of Arizona without regard to any conflict of laws or
provisions thereof.
JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY
VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO
HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON
CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER
ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT, AND ANY OTHER
RELATED DOCUMENT, OR ANY RELATIONSHIP BETWEEN LENDER AND THE BORROWER. THIS
PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING
DESCRIBED HEREIN OR IN THE OTHER RELATED DOCUMENTS.
ARBITRATION. Lender and Borrower agree that upon the written demand of
either party, whether made before or after the institution of any legal
proceedings, but prior to the rendering of any judgment in that proceeding, all
disputes, claims and controversies between them, whether individual, joint, or
class in nature, arising from this Agreement, any Related Document or
otherwise, including without limitation contract disputes and tort claims,
shall be resolved by binding arbitration pursuant to the Commercial Rules of
the American Arbitration Association ("AAA"). Any arbitration proceeding held
pursuant to this arbitration provision shall be conducted in the city nearest
the Borrower's address having an AAA regional office, or at any other place
selected by mutual agreement of the parties. No act to take or dispose of any
Collateral shall constitute a waiver of this arbitration agreement or be
prohibited by this arbitration agreement. This arbitration provision shall not
limit the right of either party during any dispute, claim or controversy to
seek, use, and employ ancillary, or preliminary rights and/or remedies, judicial
or otherwise, for the purposes of realizing upon, preserving, protecting,
foreclosing upon or
<PAGE> 9
01-06-2000 LOAN AGREEMENT Page 5
Loan No (Continued)
===============================================================================
proceeding under forcible entry and detainer for possession of, any real or
personal property, and any such action shall not be deemed an election of
remedies. Such remedies include, without limitation, obtaining injunctive
relief or a temporary restraining order, invoking a power of sale under any
deed of trust or mortgage, obtaining a writ of attachment or imposition of
a receivership, or exercising any rights relating to personal property,
including exercising the right of set-off, or taking or disposing of such
property with or without judicial process pursuant to the Uniform
Commercial Code. Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of an act, or exercise of any right or remedy,
concerning any Collateral, including any claim to rescind, reform, or
otherwise modify any agreement relating to the Collateral, shall also be
arbitrated; provided, however that no arbitrator shall have the right or
the power to enjoin or restrain any act of either party. Judgment upon any
award rendered by any arbitrator may be entered in any court having
jurisdiction. The statute of limitations, estoppel, waiver, laches and
similar doctrines which would otherwise be applicable in an action brought
by a party shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the commencement
of any action for these purposes. The Federal Arbitration Act (Title 9 of
the United States Code) shall apply to the construction, interpretation,
and enforcement of this arbitration provision.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including attorneys' fees, incurred in connection with the
preparation, execution, enforcement, modification and collection of this
Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may hire one or more attorneys to help collect the Indebtedness if
Borrower does not pay, and Borrower will pay Lender's reasonable attorneys'
fees.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, and shall be effective when actually delivered or when
deposited with a nationally recognized overnight courier or deposited in
the United States mail, first class, postage prepaid, addressed to the
party to whom the notice is to be given at the address shown above. Any
party may change its address for notices under this Agreement by giving
formal written notice to the other parties, specifying that the purpose of
the notice is to change the party's address. To the extent permitted by
applicable law, if there is more than one Borrower, notice to any Borrower
will constitute notice to all Borrowers. For notice purposes, Borrower will
keep Lender informed at all times of Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute the same document. Signature pages may be detached from the
counterparts to a single copy of this Agreement to physically form one
document.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor or Guarantor, shall constitute a waiver of any of Lender's rights
or of any obligations of Borrower or of any Grantor as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent in subsequent instances, where such consent
is required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS EXECUTED AS OF THE DATE SET
FORTH ABOVE.
BORROWER:
HYPERCOM FINANCIAL INC., an Arizona corporation
By: /s/ Scott Tsujita
---------------------------------------
Scott Tsujita, VP Finance & Treasurer
LENDER:
Bank One, Arizona, NA
By: /s/ [illegible]
----------------------------------------
Authorized Officer
===============================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver.3.27a (c) 2000 CFI ProServices, Inc.
All rights reserved.[AZ-C40 E3.27 F3.27 P3.27 HYPERCOM.LN C3.OVL]
<PAGE> 10
ADDENDUM
===============================================================================
Borrower: HYPERCOM FINANCIAL Lender: Bank One, Arizona, NA
2851 West Kathleen Road Commercial Banking
Phoenix, AZ 85023-4053 201 N. Central Avenue
Phoenix, AZ 85004
===============================================================================
This ADDENDUM is attached to and by this reference is made a part of the Loan
Agreement, dated January 6, 2000 executed by Lender and Borrower ("Agreement").
ADDITIONAL AFFIRMATIVE COVENANT -- FINANCIAL STATEMENTS OF HYPERCOM FINANCIAL.
Borrower further covenants and agrees with Lender that, while this Agreement is
in effect, Borrower will provide Lender with the annual financial statements,
including a balance sheet, income statement and statement of changes in
financial position, for the year ended, of Borrower, within one hundred twenty
(120) days after the end of its fiscal year end, such financial statements to
be prepared internally and being in a form reasonably acceptable to Lender. All
financial reports required to be provided under this Agreement shall be
prepared in accordance with generally accepted accounting principles, applied
on a consistent basis, and certified by as being true and correct.
ADDITIONAL AFFIRMATIVE COVENANT -- FINANCIAL STATEMENTS OF HYPERCOM FINANCIAL.
Borrower further covenants and agrees with Lender that, while this Agreement is
in effect, Borrower will provide Lender within forty five (45) days of each
fiscal quarter, the interim financial statements of Borrower, including a
balance sheet, income statement and statement of changes in financial position,
for the period ended, prepared and certified, subject to year end review
adjustments, as correct to the best knowledge and belief by its chief financial
officer or other person reasonably acceptable to Lender. All financial reports
required to be provided under this Agreement shall be prepared in accordance
with generally accepted accounting principles, applied on a consistent basis,
and certified by as being true and correct.
ADDITIONAL AFFIRMATIVE COVENANT -- FINANCIAL STATEMENTS OF HYPERCOM
CORPORATION. Borrower further covenants and agrees with Lender that, while this
Agreement is in effect, Borrower will provide Lender with the annual financial
statements, including a balance sheet, income statement and statement of
changes in financial position, for the year ended, of HYPERCOM CORPORATION, a
Delaware corporation within one hundred twenty (120) days after the end of its
fiscal year end, such financial statements to be audited by certified public
accountant(s) reasonably acceptable to Lender. All financial reports required
to be provided under this Agreement shall be prepared in accordance with
generally accepted accounting principles, applied on a consistent basis, and
certified by as being true and correct.
ADDITIONAL AFFIRMATIVE COVENANT -- FINANCIAL STATEMENTS OF HYPERCOM FINANCIAL.
Borrower further covenants and agrees with Lender that, while this Agreement is
in effect, Borrower will provide Lender within forty five (45) days of each
fiscal quarter, the interim financial statements of HYPERCOM CORPORATION, a
Delaware corporation, including a balance sheet, income statement and statement
of changes in financial position, for the period ended, prepared and certified,
subject to year end review adjustments, as correct to the best knowledge and
belief by its chief financial officer or other person reasonably acceptable to
Lender. All financial reports required to be provided under this Agreement
shall be prepared in accordance with generally accepted accounting principles,
applied on a consistent basis, and certified by as being true and correct.
ADDITIONAL AFFIRMATIVE COVENANT -- COVENANT COMPLIANCE OF GOLDEN EAGLE CREDIT
CORPORATION. Borrower further covenants and agrees with Lender that, while this
Agreement is in effect, GOLDEN EAGLE CREDIT CORPORATION, a New York corporation
will provide Lender with a copy of the financial covenant compliance report
prepared for Fleet Bank, within forty five (45) days of each quarter end, which
reports shall contain such information as Fleet Bank may require.
ADDITIONAL AFFIRMATIVE COVENANT -- ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE.
Borrower further covenants and agrees with Lender that, while this Agreement is
in effect, HYPERCOM CORPORATION, a Delaware corporation, will provide Lender,
within thirty (30) days of each month, an aging and listing of all accounts
receivable prepared in accordance with generally accepted accounting principles
which itemizes each account debtor by name and addresses and which states the
total amount payable to HYPERCOM CORPORATION, a Delaware corporation, and
contains a breakdown indicating future amounts due and when due, current
amounts due, amounts thirty (30) days past due, sixty (60) days past due, and
ninety (90) or more days past due, and reflecting any credit adjustments,
returns and allowances; and an aging and listing of all accounts payable-trade
prepared in a similar manner.
ADDITIONAL EVENTS OF DEFAULT. In addition to the Events of Default listed
previously in this Agreement, the default by Golden Eagle Credit Corporation
("GECC"), an affiliate of Borrower, under the terms and conditions of that
certain Loan Agreement dated November 10, 1993, between GECC and Fleet Bank, as
such Loan Agreement may be amended, modified, renewed or replaced, shall
constitute an Event of Default hereunder.
ADDITIONAL NEGATIVE COVENANT. Borrower hereby covenants and agrees not to,
without the prior written consent of Lender, pledge, assign, encumber,
transfer, or grant a security interest in any equipment leases, rents, lease
payments, or residual payments relating to any leases of equipment where
Borrower is the lessor except for those in existence as of the date hereof.
<PAGE> 11
ADDITIONAL DEFINITION -- BORROWING BASE. The section entitled "Borrowing Base"
is hereby deleted in its entirety and replaced with the following definition:
BORROWING BASE. The words "Borrowing Base" mean the sum of (i) 80.000% of
the aggregate amount of Eligible Accounts, plus (ii) 50.000% of the aggregate
amount of Eligible Inventory;
Dated this 6th day of January, 2000
HYPERCOM FINANCIAL, INC., an BANK ONE, ARIZONA, NA, a
Arizona corporation national banking association
By: /s/ Scott Tsujita By: /s/ Scott T. Schaefer
------------------------ ------------------------
Scott Tsujita, Scott T. Schaefer,
VP finance & Treasurer Senior Vice President
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
In accordance with the disclosure requirements of SFAS 128, a reconciliation of
the numerator and denominator of basic and diluted EPS is provided below.
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
Numerator - Basic and Diluted EPS: March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net loss $ 3,874 $ 3,666
Denominator - Basic EPS:
Common stock outstanding 33,959 33,098
-------- --------
Basic loss per share $ (0.11) $ (0.11)
======== ========
Denominator - Diluted EPS:
Demoninator - basic EPS 33,959 33,098
Effect of dilutive securities
Common stock options -- --
-------- --------
Diluted shares outstanding 33,959 33,098
-------- --------
Diluted loss per share $ (0.11) $ (0.11)
======== ========
</TABLE>
<PAGE> 1
EXHIBIT 15.1
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
To the Board of Directors and Stockholders of Hypercom Corporation
We are aware of the incorporation by reference in the Registration Statements on
Form S-8 (Registration Nos. 333-40457, 333-40459, 333-40461 and 333-40333) of
our report dated April 19, 2000 relating to the unaudited condensed consolidated
interim financial statements of Hypercom Corporation that are included in its
Form 10-Q for the quarter ended March 31, 2000.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 12, 2000
<PAGE> 1
SUBSIDIARIES OF THE COMPANY
HYPERCOM CORPORATION
LIST OF SUBSIDIARIES
<TABLE>
<S> <C>
NAME OF ENTITY JURISDICTION OF ORGANIZATION
- -------------- ----------------------------
1. Hypercom (Arizona), Inc. .................................. Arizona
2. Hypercom (Arizona), Inc. .................................. Delaware
3. Hypercom Latino American, Inc. ............................ Arizona
4. Hypercom Manufacturing Resources, Inc. .................... Arizona
5. Hypercom do Brasil Industria e Comercio Limitada........... Brazil
6. Hypercom Asia Ltd. ........................................ Hong Kong
7. Hypercom Australia Pty., Ltd. ............................. Australia
8. Hypercom Europe Limited, Inc. ............................. Arizona
9. Hypercom FSC, Inc. ........................................ Barbados
10. Golden Eagle Leasing, Inc. ................................ Arizona
11. Hypercom Net Transactions, Pty. Ltd. ...................... Australia
12. Hypercom Hungary KFT....................................... Hungary
13. Hypercom Network Systems Ltd. ............................. Hong Kong
14. Hypercom Far East Ltd. .................................... Hong Kong
15. Hypercom Asia (Singapore) Pte Ltd. ........................ Singapore
16. Hypercom Canada Ltd. ...................................... Canada
17. Hypercom de Mexico......................................... Mexico
18. Hypercom de Argentina...................................... Argentina
19. Hypercom de Chile, S.A. ................................... Chile
20. Hypercom de Venezuela...................................... Venezuela
21. Hypercom Horizon, Inc. .................................... Missouri
22. Hypercom Transaction Network, Inc. ........................ Arizona
23. Hypercom France S.A.R.L. .................................. France
24. Hypercom Thailand.......................................... Thailand
25. Hypercom Gmbh.............................................. Germany
26. Hypercom Financial Terminals AB............................ Sweden
27. Hypercom Korea............................................. Korea
28. Hypercom Philippines....................................... Philippines
29. Hypercom Electronics Manufacturing (Shenzhen) Co. Ltd. .... China
30. Hypercom China Co. Ltd. ................................... Hong Kong
31. ePicNetz, Inc. ............................................ Nevada
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 7,405
<SECURITIES> 7,032
<RECEIVABLES> 71,537
<ALLOWANCES> 1,744
<INVENTORY> 80,912
<CURRENT-ASSETS> 216,032
<PP&E> 55,248
<DEPRECIATION> 18,638
<TOTAL-ASSETS> 350,443
<CURRENT-LIABILITIES> 68,205
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 234,272
<TOTAL-LIABILITY-AND-EQUITY> 350,443
<SALES> 77,333
<TOTAL-REVENUES> 77,333
<CGS> 46,645
<TOTAL-COSTS> 80,165
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 196
<INTEREST-EXPENSE> 191
<INCOME-PRETAX> (4,418)
<INCOME-TAX> (544)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,874)
<EPS-BASIC> ($0.11)
<EPS-DILUTED> ($0.11)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
In passing the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), Congress encouraged public companies to make "forward-looking statements"
by creating a safe harbor to protect companies from securities law liability in
connection with forward-looking statements. Hypercom Corporation intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking Statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties that could cause actual
events or results to differ materially from those projected. Due to those and
other uncertainties and risks, the investment community is urged not to place
undue reliance on written or oral forward-looking statements of Hypercom.
Hypercom undertakes no obligation to update or revise this Cautionary Statement
Regarding Forward-Looking Statements to reflect future developments. In
addition, Hypercom undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events, or changes to future operating results over time.
Hypercom provides the following risk factor disclosure in connection with its
continuing effort to qualify its written and oral forward-looking statements
under the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the disclosures contained in the Company's Transition Report
on Form 10-K to which this statement is appended as an exhibit and also include
the following:
RISK FACTORS
DIFFICULTY IN FORECASTING NET REVENUE
Hypercom's net revenue in any period is difficult to forecast. Some of the
factors affecting net revenue include the timing of product purchases and the
length of the sales cycle for Hypercom's products.
Hypercom POS Systems and its customers enter into purchase agreements that
generally have a one-year term and minimum purchase commitments. However,
customers are not required to make purchases at any particular times during the
term of the agreement or to purchase products exclusively from Hypercom. Because
the timing of product purchases in any given period is at the customers'
exclusive discretion and control, net revenue for POS products is difficult to
forecast.
<PAGE> 2
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.
Hypercom's operating results are subject to other uncertainties, including the
following:
- Industry and economic conditions;
- Competitive pressures;
- Type, timing, and size of orders and shipments for major
customers;
- Variations in product mix and cost;
- Overhead costs;
- Obsolescence of inventory;
- Manufacturing or production difficulties; and
- Nonrecurring charges.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
Hypercom's operating results vary from quarter to quarter. If sales and
shipments in any quarter do not meet expectations, 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.
SEASONALITY
Hypercom continues to experience some degree of seasonality. For this reason,
net revenue and results of operations are stronger from July to December
reflecting:
- Increased POS purchases to satisfy increased retail demand
during the holiday season;
- Incentive programs VISA and MasterCard offer from July to
December to encourage merchants to offer card-based payment
systems; and
- Allocation of customers' capital budgets by the end of March
with volume shipments beginning in July.
<PAGE> 3
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 three
month period ended March 31, 2000, such international sales were 56% and 54% 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.
<PAGE> 4
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. Hypercom Network Systems has
recently incurred losses as a standalone business, and management is
implementing plans to return it to profitability. However, there can be no
assurance that it will return to profitability, particularly in light of the
competitive nature of the industry in which it operates.
INDUSTRY AND TECHNOLOGY CHANGES; DEPENDENCE ON DEVELOPMENT AND MARKET ACCEPTANCE
OF NEW PRODUCTS
Hypercom believes that in the next few years the following factors will create
major changes in the POS industry:
- Lower-cost products;
- Greater functionality at the point of sale;
- Faster and more accurate transaction processing;
- Improvements in security features; and
- Emerging technologies and payment programs.
In addition, the enterprise networking industry is characterized by rapid
changes in technology and numerous new product introductions. Hypercom's
success, particularly in the enterprise networking industry, will depend to a
large degree upon its continued ability to offer new products and enhancements
to its existing products to meet changing market and industry requirements. New
products and technologies may have an effect on the sales of existing products
and technologies. There can be no assurance that the introduction of new
products and technologies will not have a material adverse affect on Hypercom's
business and financial condition.
<PAGE> 5
INDUSTRY AND TECHNOLOGY CHANGES; DEPENDENCE ON DEVELOPMENT AND MARKET ACCEPTANCE
OF NEW PRODUCTS (CONTINUED)
Developing new products and technologies is a complex, uncertain process
requiring innovation and accurate anticipation of technological and market
trends. Hypercom cannot provide complete assurance of its ability to
successfully:
- Identify, develop, or manufacture new products and
technologies;
- Market or support these new products and technologies;
- Control delays in introducing new products;
- Gain market acceptance for the new products and technologies;
- Respond to technological changes and new industry standards;
and
- Respond to competitors' announcements of new products.
The inability to respond effectively to any of these challenges may have a
negative impact on Hypercom's business and financial success. Hypercom may
suffer other business and financial losses if it is successful in marketing new
products and responding to competitive and industry changes. When changes to the
product line are announced, Hypercom will be challenged to:
- Manage possible shortened life cycles for existing products;
- Continue to sell existing products; and
- Prevent customers from returning existing products.
DEPENDENCE ON CURRENT MANAGEMENT AND KEY PERSONNEL
George Wallner, 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, 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
<PAGE> 6
DEPENDENCE ON CURRENT MANAGEMENT AND KEY PERSONNEL (CONTINUED)
current strong economy for high-technology companies. In addition, competing for
skilled employees may result in increased compensation costs. If Hypercom is not
successful in retaining and hiring qualified staff, negative effects on its
business and financial condition may result.
EXCESS OR OBSOLETE INVENTORY
Managing Hypercom's inventory of components and finished products is a complex
task. Hypercom must avoid maintaining excess inventory as a result of:
- The need to maintain significant inventory of components that
are in limited supply;
- Buying components in bulk for the best pricing;
- Responding to the unpredictable demand for products;
- Responding to customer requests for quick delivery schedules;
and
- Storing products made obsolete by new product offerings.
If Hypercom accumulates excess or obsolete inventory, price reductions and
inventory write-downs may result. Such a situation could adversely affect
Hypercom's business and financial condition.
<PAGE> 7
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.
<PAGE> 8
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.
Currently, Hypercom is experiencing some delays and increases in process in
certain components as a result of recent earthquakes in Taiwan.
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 three-month period ended March 31, 2000, the two largest
customers accounted for 10.1% of the net revenues and the five largest customers
accounted for 19.5% 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.
<PAGE> 9
RELIANCE ON CERTAIN HYPERCOM POS SYSTEMS CUSTOMERS (CONTINUED)
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.
<PAGE> 10
IMPACT OF INDUSTRY REGULATION AND STANDARDS (CONTINUED)
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.
<PAGE> 11
PRODUCT DEFECTS
Hypercom offers very complex products. When they are first introduced or
released in new versions, they may contain software or hardware defects that are
difficult to detect and correct. Even though Hypercom and customers test all
these products, it is likely that such errors will continue to be identified
after products are shipped.
When they are detected, correcting these defects can be a time-consuming or
impossible task. Software errors may take several months to correct, and
hardware errors may take even longer. The existence of defects and delays in
correcting them could result in negative consequences including:
- Delays in shipping products;
- Loss of market acceptance for Hypercom products;
- Additional warranty expenses;
- Diversion of resources from product development; and - Loss of
credibility with distributors and customers.
Because Hypercom's POS products are used to process payment transactions, the
security features of such products are important. In general, these products are
designed to comply with industry practices relating to transaction security.
Failure of the security features could adversely affect the marketing of
Hypercom products. Any violation of its product warranties resulting from
security breaches could result in claims against Hypercom.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
Hypercom seeks to establish and protect the proprietary aspects of its products
by relying on patent, copyright, trademark, and trade secret laws. It also
relies on confidentiality, licensing, and other contractual arrangements, all of
which may provide only limited protection. Although Hypercom tries to protect
its proprietary rights, unauthorized third parties may be able to copy some
portions of or to reverse engineer products to obtain technology that Hypercom
regards as proprietary.
In addition, the laws of certain countries do not protect Hypercom's proprietary
rights to the same extent as U.S. laws. Accordingly, Hypercom may not be able to
protect its proprietary technology against unauthorized copying or use, which
could adversely affect Hypercom's competitive position.
Hypercom has applied for patents and trademarks that may not be granted. If they
are granted, the patents may not cover all claims Hypercom is trying to protect.
Further, a challenge could find any Company patent or trademark invalid and
unenforceable.
<PAGE> 12
DEPENDENCE ON PROPRIETARY TECHNOLOGY (CONTINUED)
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 POTENTIAL ACQUISITIONS
Hypercom may acquire or make substantial investments in related businesses,
technologies, or products in the future. Any acquisition or investment would
entail various risks including the following:
- The difficulty of assimilating the technologies, operations
and personnel of the acquired business, technology or product;
- The potential disruption of Hypercom's ongoing business; and
- The possible inability of Hypercom to obtain the desired
financial and strategic benefits from the acquisition or
investment.
These factors could have a serious negative effect on Hypercom's business and
financial condition. Future acquisitions and investments could also result in
the following:
- Substantial cash expenditures;
- Potentially dilutive issuance of equity securities;
- The incurring of additional debt and contingent liabilities;
and
- Amortization expenses related to goodwill and other intangible
assets that could adversely affect Hypercom's business,
operating results, and financial condition.
The acquisition of the assets and businesses of The Horizon Group, Inc., SP/RJ
Service Company, JTS ChequeOut Solutions Inc., 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.
<PAGE> 13
RISKS OF POTENTIAL ACQUISITIONS (CONTINUED)
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;
<PAGE> 14
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
(CONTINUED)
- 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.
