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1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-13521
HYPERCOM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 86-0828608
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
2851 WEST KATHLEEN ROAD,
PHOENIX, ARIZONA 85053
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (602) 504-5000
Securities registered pursuant to Section 12(b) of the Act: Common stock, $0.001 par value
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $65,573,058 as of September 22, 1998.
The number of shares of Common Stock outstanding at September 22, 1998 was
33,594,166.
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Documents Incorporated By Reference
Material from the Company's Proxy Statement relating to its 1998 Annual Meeting
of Shareholders have been incorporated by reference into Part III, Items 10, 11,
12, and 13.
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TABLE OF CONTENTS
ITEM NO. CAPTION PAGE
PART I
1. Business............................................................................................1
2. Properties.........................................................................................15
3. Legal Proceedings..................................................................................16
4. Submission of Matters to a Vote of Security Holders................................................16
PART II
5. Market for Common Equity and Related Shareholder Matters...........................................17
6. Selected Financial Data............................................................................17
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............18
8. Financial Statements and Supplementary Data........................................................35
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............35
PART III
10. Directors and Executive Officers of the Company....................................................36
11. Executive Compensation.............................................................................36
12. Security Ownership of Certain Beneficial Owners and Management.....................................36
13. Certain Relationships and Related Transactions.....................................................36
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................................37
Signatures........................................................................................38
List of Exhibits.............................................................................EXHIBIT
INDEX
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PART I
ITEM 1. BUSINESS
Hypercom Corporation ("Hypercom" or the "Company") develops,
manufactures, markets and supports a broad line of Point of Sale ("POS")
payments systems and enterprise networking products. Worldwide, Hypercom is the
number two provider of Point of Sale payment terminals. Cards are becoming a
primary form of value and information exchange, which enable users to engage in
payment and non-payment activities such as credit and debit payments, electronic
benefits transfers (EBT), loyalty systems and couponing, medical claims and
payments.
Hypercom provides the infrastructure to support this exchange as a
leading developer and manufacturer of POS terminals, POS networking equipment,
POS transaction software (Ascendent) and POS services including deployment, help
desk, repair and telecommunications. The Company's POS products and services,
which accounted for 89.7% and 87.8% of Hypercom's net revenues in fiscal 1998
and 1997, respectively, are sold in more than 50 countries through its direct
sales force and a variety of third-party distribution channels.
Through its Network Systems division, which accounted for
approximately 10.3% and 12.2% of Hypercom's net revenues in fiscal 1998 and
1997, the Company also designs and manufacturers multiservice, wide area
networking (WAN) solutions for complex enterprise networks requiring
consolidation of legacy, LAN, voice and video traffic. Its Integrated Enterprise
Network ("IEN") family of products gives users flexibility, high performance and
low costs for the life of the network. Declining revenues caused by rapidly
changing market conditions caused Network Systems to incur losses in the second
half of fiscal 1998.
Hypercom Corporation is the successor to an Australian company
founded by George Wallner, the Company's Chairman of the Board, in 1978. The
company's operations were primarily focused on Asian markets until 1987, when
the Australian company expanded its operations into the United States. On June
5, 1996, the Company was reincorporated in Delaware, and shortly thereafter,
through a series of corporate restructurings, became a U.S. holding company for
the operations of the Australian company and its subsidiaries and affiliates.
These restructurings were completed in July 1997.
INDUSTRY BACKGROUND
POS PAYMENT SYSTEMS. In recent years, consumers demanding fast,
convenient and secure methods of payment have increasingly substituted
card-based payments, such as debit, credit and charge cards, for traditional
forms of payments, such as checks and cash. According to The Nilson Report, a
payment systems industry newsletter, retail consumer payments using credit,
debit, electronic benefits transfer and
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prepaid cards increased from approximately 15% in 1990 to approximately 21% of
transactions (measured in dollars) in the U.S. in 1995, and are projected to
account for approximately 33% and 43% of transactions by 2000 and 2005,
respectively. The Company believes that the worldwide growth rate for POS
transactions over the same periods could exceed projected U.S. growth rates. It
is anticipated that convenience, security and financial incentives, such as
loyalty programs, will continue to encourage increased use of card-based payment
methods.
To accommodate consumer preferences for card-based payments and to
facilitate the electronic delivery of such payments, automated POS systems were
introduced in the early 1980s. Prior to that time, most POS credit and debit
card transactions were processed manually, using paper-based systems. As the
volume of credit card transactions increased, card issuing banks, through their
associations with VISA and MasterCard, offered financial incentives to encourage
the deployment of new POS technologies to improve accuracy, reduce costs,
enhance efficiency, improve settlement procedures and reduce credit abuse and
fraud. These new capabilities included electronic authorization, data capture,
transaction transmission and settlement. These functions require the use of a
POS terminal capable of reading a cardholder's account information from the
card's magnetic stripe and combining this information with the amount of the
sale entered via a POS terminal keypad. The terminal electronically transmits
this transaction information over a communications network to an authorized
computer data center and then displays the returned authorization or
verification response on the POS terminal.
New electronic payment technologies are expected to facilitate the
introduction of additional electronic payment applications, such as
sophisticated customer loyalty programs and stored value cards, and the use of
POS systems in new vertical industries, such as health care and the electronic
payment of government benefits, which is already available in several states and
required to be available for federal programs by 1999. In addition, the
infrastructure development of emerging markets, such as those in Eastern Europe,
Russia and China, is expected to contribute to the increasing demand for
electronic payment products.
The increasing use of debit, credit and charge cards and the
proliferation of new electronic payment methods and programs are driving the
need for POS payment systems which (i) support a wide array of payment and
program options, (ii) are scalable, flexible and cost-effective, (iii) provide
fast, secure data transmission and (iv) can work with existing legacy systems,
which form the backbone of the electronic payments industry. Many of today's
installed base of POS terminals are relatively old and in need of replacement to
handle the increased volumes projected for POS transactions, new payment
programs that may be offered in the future, new technologies such as chip cards
and new modems and other interfaces to faster telecommunications facilities. In
addition, the components of current POS payment systems typically are supplied
by numerous vendors who may impair interoperability, scalability and
upgradeability.
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ENTERPRISE NETWORKING MARKET. As requirements for the transmission
of data, voice, fax and video have become more complex, many enterprises have
developed multiple networks which carry different types of traffic (data, voice,
fax and video) using a range of protocols (SNA and TCP/IP) and networking
technologies (X.25, frame relay, asynchronous transfer mode ("ATM")).
Historically, large organizations have performed business-critical data
processing predominantly on hierarchical, centralized computer systems, mainly
IBM mainframe (legacy) systems. Wide area networks ("WANs") have been built to
provide access to these systems and databases from geographically dispersed
branch offices.
As users increasingly demand both savings and quality, carriers and
service providers are rolling out new competitive voice and data services
supported by packet-based infrastructures and central offices. Hypercom Network
Systems service provider solutions enable competitive carriers and Internet
service providers (ISPs) to transmit voice, fax and data traffic using frame
relay, IP and other services.
THE HYPERCOM SYSTEMS SOLUTION
Hypercom has successfully deployed its core competencies in
hardware engineering and manufacturing, software development and international
operations to deliver comprehensive, POS payment system solutions that maximize
performance and minimize costs. As a result, Hypercom has emerged as a leading
worldwide developer, manufacturer and supplier of high performance,
comprehensive POS payment systems and sophisticated enterprise networking
products.
POS SYSTEMS
The Company believes that its core business, POS systems, has the
following key competitive advantages:
TECHNOLOGY LEADER AND INNOVATOR. The Company has established itself
as a technology leader and innovator in the electronic payments industry by
developing a number of state-of-the-art POS payment terminals and peripheral
products, transaction networking products and transaction processing software.
Since the introduction of POS payment terminals in the early 1980s, Hypercom has
delivered a series of innovations, such as fast-dial techniques, SDLC terminals,
bit-map message formats, dual-track card readers and on-line terminal
management. The Company also introduced technology that reduced transaction
response times from 20 seconds to less than 10 seconds, which has resulted in
substantial savings for Hypercom customers and better service to consumers.
Hypercom has developed a comprehensive base of terminal and networking
technologies that will enable it to remain a leading innovator in the POS
payment systems market. In fiscal 1998, Hypercom's technology leadership
continued with the announcement of a new generation of POS payment systems with
its Interactive
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Customer Equipment (ICE) product line; a new modem technology, FastPOS, which
operates at 9600 bps allowing not only faster transactions but new applications
such as signature capture; and Ascendent transaction software.
COMPREHENSIVE POS PAYMENT SYSTEMS PROVIDER. The Company
differentiates itself from its competitors by developing, manufacturing and
providing complete POS payment system solutions. With its POS payment terminal
technology, networking hardware and software and transaction processing software
the Company is a systems-level supplier. Most competitors offer only certain
components of a POS payment system. In contrast, Hypercom products offer
comprehensive payment systems, enabling seamless integration and
interoperability with other Hypercom or competitors' products.
LOWER TOTAL COST OF OWNERSHIP. The Company designs its products to
provide customers with a lower total cost of ownership, enabling Hypercom
products to command premium pricing. The Company's core products typically
feature multi-functionality, robust construction, scalability to facilitate
system growth and ready upgradeability to accommodate new technological
developments that can extend product life. The Company's technologically
advanced, easy-to-use products also provide faster transaction processing times,
reduce the time and costs needed to train merchant personnel who operate
Hypercom products and ensure the secure transmission of financial transactions.
INTERNATIONAL EXPERIENCE AND GLOBAL PRESENCE. Hypercom was founded
in Australia 20 years ago. It became the largest supplier of POS systems in the
Asia/Pacific region prior to its move to the United States. The Company
currently sells its products in more than 50 countries. According to the Nilson
Report, the Company has the second largest installed base of POS terminals in
the U.S. and worldwide, and the largest installed base in Latin America and
Asia/Pacific. The Company has gained significant expertise in adapting to local
customs, addressing local regulatory, certification and telecommunications
requirements and establishing key partnering arrangements with local
distributors and resellers. Further, because the Company's products incorporate
advanced communications technology, the Company believes that its POS payment
systems perform better than its competitors' products in less developed
telecommunications environments, most of which support only earlier generations
of communications protocols.
INTEGRATED DESIGN AND PRODUCTION. The Company designs, develops and
manufactures substantially all of its products in-house, enabling it to control
the product development process at all levels. In addition, the Company works
closely with its customers, distribution channels and related industry
participants to identify products that respond to market needs. Company
officials actively engage in standards-setting efforts and participate in a wide
variety of user groups and industry forums to facilitate product identification
and development efforts. The Company believes that its integrated approach to
product identification, development and manufacturing will
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continue to reduce research and development costs and time to market and
facilitate its manufacture of high quality products at low cost.
NETWORK SYSTEMS
Hypercom Network Systems has leveraged its extensive branch
networking expertise in POS payment systems to develop, manufacture, market and
support a family of flexible, stackable, multi-service switch/routers under the
trade name Integrated Enterprise Network. The Company believes that its Network
Systems business has the following key competitive advantages:
TECHNOLOGICALLY ADVANCED, MULTI-SERVICE ARCHITECTURE. Hypercom's
IEN products feature a modular and distributed processing architecture, which
supports legacy and client/server environments and multiple traffic types. Each
IEN device incorporates a switch, router, Frame Relay Assembler/Disassembler
("FRAD"), protocol converter, dial back-up unit and Channel Service Unit/Data
Service Unit ("CSU/DSU"), and performs data compression and encryption. These
products support all WAN services critical for global networking, including
frame relay, X.25 and ISDN, enabling networks to capitalize on the lowest
available telecommunications tariffs. IEN products integrate legacy data, LAN,
voice, fax and video applications over a single network. The benefits of IEN
products include reduced telecommunications costs through the elimination of
duplicate networks, consolidation of customer premises equipment, common
management interface, optimized network performance, added reliability and
system integrity for mission-critical applications.
EXTENSIVE VOICE/DATA EXPERTISE. In addition to designing and
building multiservice networks for fortune 1000 companies, Hypercom Network
Systems has extensive expertise that comes from installing packetized voice
solutions for almost 200 companies. IP and Frame Relay have been embraced by the
enterprise for both voice and data. With huge cost savings possible, packetized
voice technology will also draw users and providers of voice and data services
away from traditional circuit-switched systems. Putting voice traffic on the
Internet and other packet networks is progressing quickly and Hypercom Network
Systems' IP.tel product line offers an effective packetized voice solution for
carriers and alternate providers.
PRODUCTS AND SERVICES
POS PAYMENT SYSTEMS. The Company's POS payment systems are
comprised of a comprehensive range of (i) POS terminals and peripherals, (ii)
POS network products, which provide efficient, accurate and fast transaction
transport and (iii) software products, including terminal application software
and terminal management software, that enable remote and automated downloading
of terminal application software. This comprehensive range of products provides
Hypercom customers with
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turnkey capability to supply high performance POS payment system solutions to
merchants and consumers.
TERMINALS AND PERIPHERALS. The Company's terminal products include
stand-alone terminals, compact terminals that have integrated printers and
wireless terminals for specific industry applications, such as automobile
rental, restaurants and temporary merchant locations. The Company's terminal
products are designed for use with magnetic-stripe cards, such as typical
credit, debit or charge cards, as well as with smart or chip cards. Terminal
functionality ranges from routine tasks, such as credit or debit authorization,
electronic draft capture and electronic batch submission and settlement, to high
level functions, such as customer loyalty programs, eligibility checking for
health insurance or government benefits and time and attendance data collection
reporting. These products feature a modular design to allow for easy upgrading
as new technologies become available.
The principal peripheral products that interface with Hypercom
terminals include printers, personal identification number entry devices (known
as PIN pads), signature capture devices and communications products. Printers
enable printing of customer receipts. PIN pads allow acceptance of
magnetic-stripe and chip card-based debit cards and other forms of payment
requiring a personal identification number, and allow for support of
customer-activated stored value. The Company's S7 PIN Pad can be connected to
any Hypercom T Series terminal, turning it into a full-feature debit or combined
debit and data capture terminal. Hypercom's S7 and S8 line of PIN pads provide a
range of hardware and software features that ensure encryption-key and PIN
security. In addition, Hypercom offers the CS7GC Signature Capture PIN Pad,
which enables cost-effective digital capture and storage of signature
information for credit card transactions.
Electronic payment technology is evolving at a rapid pace. Hypercom
has recently announced a new generation of POS payment systems with its
Interactive Customer Equipment (ICE) product line. ICE is a multi-function
touch-screen terminal that combines a terminal, PIN Pad, and signature capture
in a single unit and incorporates a high-speed thermal printer and paper cutter,
and Hypercom's new FastPOS 9600 bits per second (bps) modem. ICE's easy to
operate touch-screen simplifies the most complex tasks and provides the
opportunity to deliver promotional, advertising and other visual messages.
POS NETWORK PRODUCTS. The Company's POS network products consist of
a family of Network Access Controller ("NAC") products, which facilitate
transaction delivery from the point of sale to processors of electronic
payments. NACs are intelligent communications products which provide a wide
range of digital and analog interfaces, line concentration, protocol conversion,
data concentration, transaction routing, backup transmission paths and multiple
device interface capabilities that allow access to high-performance data
communications networks. The NAC product line also includes the MiniNAC2, which
connects automated teller machines, POS terminals and
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peripherals and PCs or in-store controllers to existing hosts utilizing standard
dial access services.
SOFTWARE PRODUCTS. The three principal categories of the Company's
software products are transaction processing software, terminal application
software and terminal management software.
Transaction Processing Software. Hypercom's Ascendent brand
transaction software was developed to meet market demand for new payment
methodologies, value-added programs and increased transaction volumes. Developed
by Hypercom, Ascendent software is a comprehensive family of front-end
client/server payment and data transaction processing software solutions. The
Ascendent client/server software line includes: Ascendent Loyalty Management
System(LMS), Ascendent Advanced Transaction Processor(ATP), Ascendent Network
Terminal Server(NTS), Ascendent SigCap, Ascendent ChipStrip System(CSS) and
Ascendent Internet Commerce.
Terminal Application Software. The Company works closely with its
clients to develop standard and customized applications that operate on Hypercom
terminals. To date, the Company has developed over 80 terminal software
applications, ranging from entry-level credit and debit solutions to complex
systems that support a comprehensive range of electronic payment and medical
transaction functions. Among these software applications are specialized
applications for specific markets such as lodging, restaurants, multi-lane
retail and health care.
Terminal Management Software. Every terminal application software
program produced by the Company has a management and control module that
interacts with the Company's Term-Master Terminal Network Management System.
Term-Master is designed to provide mission-critical functionality to users of
Hypercom's T Series terminals. Term-Master is the basis for an integrated
terminal management approach that supports multiple merchant locations, remote
and automated downloading of terminal application software, multiple application
software management, merchant terminal set-ups, performance monitoring and
on-line diagnostics.
ENTERPRISE NETWORKING PRODUCTS. The Company's IEN products consist
of a modular family of multi-service switch/routers that enable the integration
of business-critical legacy data, LAN, voice, fax and video traffic transmitted
among central and remote locations, allowing enterprises to eliminate duplicate
networks and facilitate migration to cost-effective switched services. Each IEN
device incorporates a switch, router, FRAD, protocol converter, dial back-up
unit and CSU/DSU, and performs data compression and encryption.
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IEN is a modular system consisting of base chassis with plug-in
cards. Plug-in cards support a range of functions, including ISDN BRI, V.32
bis/V.34 dial backup, DSU 56/64 kbps, data compression and encryption, dual V.35
uplink, T1/E1 interface, 4-port voice card, 2 channel serial user or WAN
interface card and single RS232C/V.24 serial I/O.
The Company also offers the IEN500, a single-slot chassis which
supports two configurations: 2 WAN and 1 serial port and 1 WAN and 2 serial
ports. IEN products work with all WAN services critical for global networking,
including X.25, ISDN, frame relay and others, using them cost-effectively to
capitalize on the lowest available telecommunications tariffs. These products
also support a comprehensive range of legacy protocols, including SNA/SDLC, 3270
Bisync, 2780/3780 Bisync, Burroughs Poll Select, X.25 and asynchronous
protocols.
The Company also provides software applications that centralize
management, automate routine tasks and integrate with clients' existing network
management environments. Hypercom's IENView software is a suite of
standards-based applications that allow users to manage their networks from a
single integrated console. IENView software provides applications for enterprise
and switched internetwork management, remote monitoring, device management,
simulation-based planning and problem-solving and performance analysis.
SERVICES
The Company provides a broad range of services related to its POS
payment systems and enterprise networking products. The Company provides
consulting services (i) to assist with strategies and alternatives for POS
payment systems, (ii) to assist in the design, installation, integration and
management of POS payment systems and (iii) to design customized software
applications, and deployment, training, technical assistance and maintenance
services for its products.
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CUSTOMERS
Hypercom POS Systems' customers are predominantly large domestic
and international financial institutions, electronic payment processors,
independent service organizations ("ISOs") and resellers. These customers
generally have substantial POS payment system requirements. Representative
direct and indirect POS customers include American Express Company, BA Merchant
Services, Inc., Banamex, CrediCard Brazil, First Data Merchant Services, TASQ
Technologies, National Bank of Australia and Concord Equipment Sales. In any
given year, select customers may account for a significant percentage of net
revenue. Although no one customer accounted for more than 10% of the Company's
net revenue in fiscal 1998, the two largest customers accounted for 17.9% of the
Company's net revenue in fiscal 1998 and the five largest customers accounted
for 28.9% of the Company's net revenue.
Hypercom Network Systems' customers generally consist of large
financial institutions, retailers, electronic payment processors, resellers and
other enterprises that have substantial branch networking requirements spanning
an average of 200 sites. Representative direct and indirect network customers
include Alamo Rent A Car, Inc., American Express Company, AT&T Corp., First Data
Merchant Services, The Home Depot, Inc., The Hong Kong and Shanghai Banking
Corporation Group and Lucent Technologies, Inc.
The Company places special emphasis on offering high-performance,
technologically-advanced POS payment system solutions and enterprise branch
networking products to enable its customers to gain market share in their
respective industries.
SALES, MARKETING AND DISTRIBUTION
The Company sells its POS payment system solutions through its
direct sales force and through independent third-party resellers, including
financial institutions, electronic payment processors and service providers. The
Company's domestic sales and marketing personnel, which consist of 30 persons
located throughout the country, are managed from its Phoenix, Arizona
headquarters. To support its international operations, which also are
headquartered in Phoenix, the Company has sales and support facilities in Miami
(serving Latin America), Hong Kong, China, Singapore, Japan, Australia, Brazil,
Chile, Argentina, Venezuela, Mexico, Hungary, Russia, the United Kingdom and
France.
The Company sells its enterprise networking products primarily
through a 14-person direct sales force, distributors, value-added resellers and
system integrators, who resell the Company's networking products along with
other computer and communications equipment. Because the sale of networking
products is highly technical, the sales cycle can be as long as 18 months. The
technical nature of the sale also results in increased reliance on resellers who
work closely with the Company's customers to
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identify the benefits that Hypercom enterprise networking products can provide
to their businesses and support the Company's products locally.
The Company's marketing programs include trade shows, press
releases, press interviews, speaker engagements, training and technology
seminars, sales collateral and white papers, print advertising, articles and
newsletters supported by Hypercom's technical publications group.
For a description of operating profit or loss attributable to each
of the Company's industry segments and information relating to geographic areas
and export sales, see the Consolidated Financial Statements and Notes thereto
included elsewhere in this document. For information relating to the Company's
backlog, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Backlog."
CUSTOMER SERVICE AND SUPPORT
The Company believes that it has established a reputation for
manufacturing high quality, reliable products and for providing excellent
service and support for its products. Through its facilities in Phoenix,
Arizona, the Company provides pre- and post-sales consulting, application
software development and support, installation services, customer support and
comprehensive repair facilities for its products. The Company also supports its
enterprise networking products through remote access to customer installations.
Remote access is accomplished either through a dial-up network connection
directly to a customer's installation or through a modem connection to the
central part of the customer's system. This connection allows Company support
personnel to analyze and correct installation and configuration problems
remotely. Field support engineers are available to assist with customer
emergencies, and third-party field personnel provide additional support for the
Company's products.
The Company provides a five-year warranty on its POS terminal
products and one to five-year warranties on other products. The Company has not
incurred significant warranty expense to date. The Company believes that its
five-year warranty on POS terminal products has contributed significantly to its
reputation for manufacturing high quality, reliable products, and that this
warranty results in a lower total cost of ownership than competitors' products.
MANUFACTURING
The Company's principal manufacturing facility is located in
Phoenix, Arizona, where the Company manufactures both POS payment systems and
enterprise networking products. The Company also manufactures POS products at
its facilities in Brazil, and certain POS payment systems are manufactured in
China. The Company also relies on certain third-party suppliers for certain
components of its POS payment system products.
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The Company's enterprise networking products are manufactured and
assembled at its Phoenix facility. The Company also manufactures certain
networking product components in Australia and other components are manufactured
by various third parties.
To control product costs, the Company centrally manages its
material requirements planning and bills of material from its Phoenix facility
on an integrated computer system, which is networked to all Hypercom
manufacturing centers. By managing its purchasing centrally, the Company is able
to obtain discounts on volume purchases. The Company also maintains sufficient
flexibility in its purchasing to allow it to take advantage of favorable pricing
in regional markets. Central management of purchases also assists the Company in
ensuring quality control of components used in its products.
For information relating to the Company's dependence on suppliers,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Dependence on Certain Suppliers and Third-Party Distributors".
RESEARCH AND PRODUCT DEVELOPMENT
Since its inception, the Company has made substantial investments
in research and development. With respect to its POS payment system products,
the Company's development efforts are focused on products that support new
technologies and payment products emerging in the electronic payments industry.
With respect to enterprise networking products, the Company's efforts are
focused on developing new capabilities to support real-time integrated data,
voice and multimedia communications. The Company works closely with its
customers to define new product concepts and identify emerging applications for
its products. Development projects are evaluated through a management review
process and assigned to the Company's development centers based upon the
potential value of the target markets, as well as the technology, manpower and
engineering expertise requirements.
The Company designs and develops all of its products and
incorporates, where appropriate, technologies from third parties and those
available in the public domain. The Company's product development units for both
POS payment system products and enterprise networking products are headquartered
in Phoenix, Arizona. Development staffs also are located in Australia, Hong
Kong, Singapore, Brazil, Russia and the United Kingdom. The Company maintains a
separate development group dedicated to electronic commerce transaction
software, which is located in Australia, where it benefits from certain research
and experimentation tax credits.
The markets for the Company's products are characterized by
changing technology, evolving industry standards and frequent product
introductions. Management believes that the Company's future success depends in
large part upon its ability to continue to enhance its existing products and to
develop new products. The Company is
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dedicated to complying with industry standards and supporting important new
standards as they emerge.
At September 1, 1998, 333 employees of the Company were engaged in
research and product development, including 208 in POS payment systems
development, 44 in Ascendent development and 81 in enterprise networking systems
development. In 1998, 1997 and 1996, the Company's research and development
expenditures were $23.5 million, $12.9 million, and $8.5 million respectively.
To date, all of the Company's research and development costs have been expensed
as incurred. The Company expects that it will continue to expend substantial
resources on research and product development.
COMPETITION
The markets in which the Company operates are highly competitive
and are becoming increasingly competitive. With respect to its POS payment
system products, the Company competes primarily on the basis of ease-of-use,
product performance, price, features, quality, the availability of application
software programs, the number of third-party network host and telephone system
certifications it has obtained for its products and application programs, rapid
development, release and delivery of software products and customer support and
responsiveness. Software products compete on the basis of functionality,
scalability, quality and support.
Although the market for the Company's POS payment system products
is competitive, the need for highly reliable and fully certified software
creates a barrier to entry by new competitors. For example, electronic payment
processors have specific requirements that POS payment systems software must
meet, including requirements relating to security, host communications and
message format. Accordingly, POS terminal devices must accurately capture
information required to process the transaction, package this information,
transmit it to the processor's host system in the specified format and receive
the host system's response. Each processor has its own unique requirements that
require the development of different software applications and the successful
completion of a lengthy certification process. As a result, to compete
effectively, competitors must be able to develop software applications
compatible with the diverse requirements of numerous processors of electronic
transactions and that satisfy the diverse certification standards of these
processors. The Company's primary competitor in the POS payment systems market
is VeriFone, Inc., which was acquired by Hewlett-Packard Company in 1997.
With respect to its enterprise networking products, the Company
competes primarily on the basis of product features, quality, flexibility,
reliability, scalability and interoperability. The market for the Company's
enterprise networking products is intensely competitive and is characterized by
rapid technological development. The Company's competitors with respect to
networking products include (i) internetworking companies, such as Cisco
Systems, Inc. and 3Com Corporation, (ii) FRAD providers, such as Sync Research,
Inc., Motorola Information Systems Group, and Netlink, Inc. and
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(iii) circuit management providers, such as Visual Networks, Inc. and NetScout
Systems, Inc. The Company expects that the number of competitors in both the POS
payment systems and enterprise networking systems markets will grow due to the
growth opportunities in both markets.
Many of the Company's current and potential competitors have
significantly greater financial, technical and marketing resources than the
Company, as well as better name recognition and a larger customer base than the
Company. As a result, they may be able to devote greater resources to the
development, promotion, sale and support of their products than the Company. The
Company often faces additional competitive factors in foreign countries,
including preferences for national vendors and difficulties in obtaining
necessary certifications and in meeting the requirements of government policies.
PROPRIETARY RIGHTS
The Company's success is dependent upon its proprietary technology.
The Company relies upon copyrights, trademark and trade secret laws and more
recently upon patent law protection, to establish and maintain its proprietary
rights in its technology and products.
The Company currently holds a patent issued in the US (and several
other countries) relating to a POS terminal configured with a substantial
portion of its functionality at a remote processor, and has several patents
pending. Foreign patents have also issued on several other patent applications,
including the replaceable printer mechanism which has been instituted by
Hypercom in its integrated POS terminals containing a printer. Hypercom has
pending a number of US and foreign patent applications relating to both the POS
terminal products as well as the IEN product family.
The Company has U.S. federal registration for its "Hypercom"
trademark. In addition, Hypercom trademark is registered in 26 countries and has
registration pending in 7 countries. In addition to the registered trademark of
the Hypercom(R) name and logo, the Company has U.S. federal registrations for
the following trademarks: MEGANAC(R), MININAC(R), MINIROUTER(R), TERM-MASTER(R),
VIRTUAL MAPPED SNA(R) and VIRTUAL POS(R). The Company's trademark applications
for U.S. registration include: A-TAC(TM), ASCENDENT(TM), CHIPSTRIPE(TM),
EPASSAGE(TM), FASTBATCH(TM), FASTLOAD(TM), HYPERCOM FASTPOS(TM),
HYPER-FORMANCE(TM), HYPER-FORMANCE GATEWAY(TM), REALPAY(TM), TransEN(TM),
QUIX(TM), TOKEN TRACKING SYSTEM(TM), and VIRTUAL TERMINAL(TM).
The Company embeds copyright notices in its software products
advising all users that the software is owned by Hypercom. The Company also
places copyright notices on documentation related to these products. The Company
routinely relies on contractual arrangements to protect its proprietary software
programs, including written contracts prior to product distribution or through
the use of shrink-wrap license
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agreements. The Company typically does not obtain federal copyright
registrations for its software.
There can be no assurance that others will not develop products or
technologies that are equivalent or superior to those of the Company, or that
any patents, copyrights, confidentiality agreements and internal safeguards upon
which the Company relies will be adequate to protect its interests.
GOVERNMENT REGULATION
The Company's products must meet industry standards, such as those
imposed by VISA and MasterCard, and receive certification for connection to
certain public telecommunications networks prior to their sale. In the U.S., the
Company's products must comply with various regulations defined by the FCC and
Underwriters Laboratories. Internationally, the Company's products must comply
with standards established by telecommunications authorities in various
countries, as well as with recommendations of quasi-regulatory authorities and
standards-setting committees. In addition, public carriers require that
equipment connected to their networks comply with their own standards, which in
part reflect their currently installed equipment. Some public carriers have
installed equipment that does not fully comply with current industry standards,
and this noncompliance must be addressed in the design of the Company's
enterprise networking products. Any future inability to obtain on a timely basis
or retain domestic or foreign regulatory approvals or certifications or to
comply with existing or evolving industry standards could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, rates for public telecommunications services, including
features and capacity of such services, are governed by tariffs determined by
carriers and subject to regulatory approval. Changes in these tariffs could have
a material adverse effect on the Company's business, operating results and
financial condition.
The Company's operations are subject to various state, federal and
international laws governing, among other things, occupational health and
safety, minimum wages, overtime, retirement plans and profit-sharing and
severance payments, and the use, storage, handling and disposal of certain
chemicals used in the Company's production processes. Although the Company
believes that its operations comply in all material respects with such
regulatory requirements, any failure to comply with applicable requirements, or
the adoption of new regulations or changes in existing regulations, could impose
additional compliance costs on the Company, require a cessation of certain
activities or otherwise have a material adverse effect on the Company's
business, operating results and financial condition.
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EMPLOYEES
At September 1, 1998, the Company employed 1,166 persons, including
342 in manufacturing, service and support, 256 in sales and marketing, 333 in
engineering and 235 in finance and administration. Approximately 488 employees
were in international locations.
None of the Company's employees is represented by a labor union,
and the Company considers its relations with its employees to be positive. The
Company has experienced no work stoppages.
Competition for technical personnel in the Company's industry is
intense. To date, the Company has been successful in recruiting and retaining
qualified employees, but there is no assurance that it will continue to be
successful in doing so in the future. The Company's future success depends in
part on its continued ability to hire, assimilate and retain qualified
personnel.
Item 2. PROPERTIES
The Company's principal administrative, assembly and warehouse
facilities are located in Phoenix, Arizona, where it owns an approximate 84,000
square foot building and leases an adjacent 23,800 square foot building. The
lease expires August 31, 2011. In addition, the Company recently purchased a
10.4-acre lot adjacent to this facility. The Company has constructed a parking
lot on 3.3 acres of this land to allow for the expansion of its existing
facility with the construction of an additional 58,000 square feet to be
utilized as office, storage, and manufacturing.
The Company leases an approximate 20,000 square foot facility in
Sydney, Australia, and an approximate 17,000 square foot facility in Brazil. In
addition, the Company maintains an approximate 12,400 square foot warehouse
facility in Phoenix under a lease that expires December 31, 2002. The Company
also leases office space in Arizona, Florida, Georgia, Maryland, Texas, Hong
Kong, China, Singapore, Japan, Chile, Argentina, Venezuela, Mexico, Russia,
Hungary and the United Kingdom, all of which are dedicated primarily to sales
and support. The Company believes that its facilities are adequate for its
operations as now conducted and, upon completion of the expansion of its
Phoenix, Arizona corporate and manufacturing facilities, will be sufficient for
the foreseeable future.
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Item 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to claims and litigation
incident to its business. As of the date of this filing, there is no material
legal proceeding to which the Company is a party.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
COMMON STOCK PRICES/DIVIDENDS
The Company's common stock trades on the New York Stock Exchange under the
symbol "HYC". The following table sets forth, for the fiscal quarters indicated,
the high and low sales prices for the common stock as reported on the NYSE.
High Low
First Quarter (1) 16.063 16.000
Second Quarter 17.313 12.750
Third Quarter 18.938 11.118
Fourth Quarter 13.818 9.938
(1) Prior to November 13, 1997, there was no public market for the Company's
securities.
The Company has not paid any cash dividends on its Common Stock. The Company
currently intends to retain its earnings for its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
The approximate number of shareholders of record as of September 25, 1998 was
2,200.
Item 6. SELECTED FINANCIAL DATA
Selected Historical Financial Data 1998 1997 1996 1995 1994
Net revenue $ 257,227 $ 196,742 $ 163,556 $ 146,168 $ 91,183
Cost of revenue 130,475 103,672 92,349 83,016 57,301
------------------------------------------------------------------------------
Gross margin 126,752 93,070 71,207 63,152 33,882
Percent of net revenue 49.3% 47.3% 43.5% 43.2% 37.2%
Selling, general and administrative 72,506 52,530 44,741 27,687 14,929
Research and development 23,495 12,926 8,509 5,422 4,429
Non-cash compensation (1) 10,963 4,784 2,061 698 --
------------------------------------------------------------------------------
106,964 70,240 55,311 33,807 19,358
Income from operations 19,788 22,830 15,896 29,345 14,524
------------------------------------------------------------------------------
Net income 13,898 15,562 12,289 19,556 9,149
==============================================================================
Income per share (diluted) 0.44 0.60 0.33 0.53 0.25
Shares used in calculation 31,829,855 25,753,921 37,105,563 36,601,078 36,480,577
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Cash and equivalents 55,659 16,318 16,113
Working capital 186,799 61,972 48,693
Total assets 259,577 138,741 101,829
Short and long term debt 1,797 24,570 20,362
Total stockholders' equity 220,431 60,894 45,232
(1) Non cash compensation was charged in connection with stock options granted
to an executive officer. Upon completion of the Company's initial public
offering in November 1997, this form of compensation ceased and no charge was
incurred in the third and fourth quarters of fiscal 1998.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Hypercom Corporation is a global provider of point-of-sale (POS)
payment systems and enterprise networking products. The Company was founded in
Australia in 1978 where its POS payment systems business originated. During the
1980's Hypercom's POS terminals and POS networking products became the preferred
systems in several Asian countries where banks and merchants were implementing
credit and debit card payments. While continuing to grow in the Asian markets
the Company expanded its POS business to the United States in 1988 and Latin
America in 1991. These three markets have established Hypercom as the number two
worldwide supplier of POS terminals. Recently the Company has expanded into
Europe. Growth in Asia slowed, which reduced earnings in fiscal 1998 due to
currency devaluation and economic uncertainties, and the Company anticipates
that the slowness will continue.
In 1993 the Company, leveraging its strengths in POS networking, formed
its Network Systems division to develop and manufacture enterprising networking
products. The division's initial focus was on providing high quality legacy
(IBM) support. Routing, branch access and voice/data integration functions were
subsequently added. In early calendar 1998 packetized voice capability was added
which provides Hypercom with products to serve the emerging voice-over-internet
(VOIP) markets. Network Systems revenues were 10% of consolidated revenues in
fiscal 1998 and 12% in fiscal 1997. In the second half of fiscal 1998, Network
Systems losses totaled $0.15 per share, caused by declining revenues due to
rapid changes in market conditions. Adjustments are being made to redirect the
sales force and deduce expenses, but it is uncertain when Network Systems will
return to profitability, if at all.
In addition to expansion into new markets such as Europe, Hypercom's
current focus is to expand its technology leadership in the POS terminal and
networking businesses by introducing new product lines. The new ICE terminals
with graphic touch screens; its FastPOS 9600 bps modems soon to be available in
all Hypercom terminals;
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and its Ascendent client/server software for financial transaction processing
are recent product introductions from Hypercom.
Net revenues by geographic region are presented in the following
table as a percentage of net revenues for the periods indicated:
FISCAL YEAR ENDED JUNE 30, 1998 1997 1996
- ----------------------------------------------------------------------
REVENUES BY REGION
United States 43% 44% 42%
Latin America(includes Mexico) 29 24 27
Asia/Pacific 22 30 30
Europe 6 2 1
-------------------------------
Totals 100% 100% 100%
RESULTS OF OPERATION
The following table sets forth the operating results expressed as a
percentage of net revenue for the periods indicated and the percentage change in
such operating results between periods. Results for any one or more periods are
not necessarily indicative of future results
PERIOD TO PERIOD
INCREASE (DECREASE)
1998 1997
PERCENTAGE OF NET REVENUE COMPARED
FISCAL YEAR ENDED JUNE 30, 1998 1997 1996 TO 1997 TO 1996
- ---------------------------------------------------------------------------------------
Net revenue 100.0% 100.0% 100.0% 30.7% 20.3%
Cost of revenue 50.7 52.7 56.5 25.9 12.3
------------------------
Gross profit 49.3 47.3 43.5 36.2 30.7
Selling, general and administrative 28.2 26.7 27.4 38.0 17.4
Research and development 9.1 6.6 5.2 81.8 51.9
Non-cash compensation expense 4.3 2.4 1.2 129.2 132.1
------------------------
Income from operations 7.7 11.6 9.7 (13.3) 43.6
Interest income/(expense) 0.7 0.1 0.1
Foreign currency exchange gain/(loss) (0.7) 0.2 1.6
------------------------
Income before income taxes 7.7 11.9 11.5 (15.1) 24.8
Income taxes 2.3 4.0 3.8
------------------------
Net income 5.4% 7.9% 7.6% (10.1%) 26.6%
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
Net revenue in fiscal 1998 increased $60.5 million or 30.7% due to
increased POS Systems revenue of $58.1 million. The increase in POS Systems
revenue reflected strong growth in Europe where the Company has been
establishing new sales and service
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operations. Latin American also experienced strong growth and benefited from a
new manufacturing facility in Sao Paolo, Brazil. Growth in Asia slowed due to
local currency devaluation and the Company anticipates that this slowness will
continue. Network Systems revenue growth was also slowed due to economic
uncertainties in Asia and increased competition in its branch access networking
equipment markets.
Gross profit as a percentage of net revenue increased to 49.3% in
fiscal 1998 from 47.3% in fiscal 1997. This increase was due to lower costs
realized from a transfer of the Australian manufacturing operations to
manufacturing in China and to the Company's facilities in Phoenix, Arizona.
Selling, general and administrative expense increased $20.0 million, or
38.0%, to $72.5 million in fiscal 1998. $6.6 million of this increase was the
continued expansion of selling and administrative activities in Network Systems;
$2.7 million of this increase was related to the introduction of the Company's
new Ascendent POS client/server software products; and $2.5 million of the
increase was for the establishment of a new POS sales and service infrastructure
in Europe. The remaining increases related to normal growth caused by increased
business with a $6.3 million increase for ongoing expansion of sales operations
in the United States, Latin America and Asia and $1.9 million increase in the
Company's corporate, general and administrative areas.
Research and development expense increased $10.6 million, or 81.8%,
to $23.5 million in fiscal 1998. $9.2 million of the increase was for POS
product development as the Company prepared to introduce in fiscal 1999 its new
ICE terminal products; its FastPOS 9600 bps terminals; and Ascendent
client/server software.
Non-cash compensation was charged in connection with a grant of
stock options which included a stock repurchase arrangement. The Company
recorded a non-cash compensation charge of $11.0 million in the first half of
fiscal 1998 and incurred no further charge during the year as the repurchase
arrangement terminated upon the closing of the Company's initial public offering
(IPO) in November, 1997.
Income from operations decreased $3.0 million to $19.8 million in
fiscal 1998 due primarily to an increase of $6.2 million in non-cash
compensation and higher selling, general and administrative expense and higher
research and development expense.
COMPARISON OF FISCAL YEARS ENDED JUNE 30 1997 AND 1996
Net revenue in fiscal 1997 increased $33.1 million or 20.3% due
primarily to increased POS Systems revenue of $17.6 million and increased
Network Systems revenue of $15.6 million. The increase in POS Systems sales
reflected continued growth and price stability in the market and the increase in
Network Systems revenue was a function of continuing market acceptance of the
Company's enterprise networking products.
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Gross profit as a percentage of net revenue increased to 47.3% in
fiscal 1997 from 43.5% in fiscal 1996. This increase was due to reduced costs
realized from the centralization of manufacturing operations in Phoenix, Arizona
and the increased use of lower cost subcontractors for certain operations that
were previously performed internally.
Selling, general and administrative expense increased $7.8 million, or
17.4%, to $52.5 million in fiscal 1997. The increase in 1997 reflects ongoing
restructuring costs of $0.8 million relating to the consolidation of principal
manufacturing operations in Phoenix, Arizona begun in 1996, and $3.0 million
relating to the implementation of an Oracle management information platform for
the Company's worldwide manufacturing, sales and finance functions and the
related expansion of its management information systems staff. In addition, $2.0
million of the increase was attributable to the Company's expansion of its
Network Systems sales and service organization and an additional $2.0 million
related to the establishment of Hypercom International, which manages all POS
international sales and distribution activities.
Research and development expense increased $4.4 million, or 51.9% to
$12.9 million in fiscal 1997 as a result of development efforts relating to the
Company's Network Systems business as well as development of new POS payment
systems products.
Non-cash compensation was charged in connection with a grant of
certain stock options, which included a stock repurchase arrangement. The
Company recorded a non-cash compensation charge of $4.8 million in fiscal 1997
and $2.1 million in fiscal 1996 respectively.
Income from operations increased $6.9 million, or 43.6%. to $22.8
million in fiscal 1997. The increase resulted primarily from lower manufacturing
costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations primarily
through cash generated from operations and from borrowings under a line of
credit and term notes. The Company's principal uses of cash historically have
been to support inventory and accounts receivable, pay operating expenses and
fund capital expenditures.
The Company's working capital was $186.8 million on June 30, 1998
and increased $124.8 million in fiscal 1997. $80.2 million of this increase was
in cash and was caused by the Company completing its IPO in November 1997, which
raised $125.7 million for the Company. $23.1 million of these proceeds were used
to substantially eliminate the Company's debt.
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Capital expenditures totaled $10.2 million and $6.9 million in
fiscal years 1998 and 1997, respectively, while depreciation was $4.1 million in
fiscal 1998 and $2.9 million in fiscal 1997.
The Company believes that its current funds are sufficient to fund
operations for the foreseeable future. The Company also has a revolving line of
credit of $10 million with Bank One, Arizona, N.A. The balance outstanding was
zero at June 30, 1998. 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.
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.
NEW PRONOUNCEMENTS
During October 1997, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 97-2, Software Revenue Recognition. The SOP is effective for
fiscal years beginning after December 15, 1997. The SOP provides guidance on
when revenue should be recognized and in what amounts for licensing, selling,
leasing, or otherwise marketing computer software. The provisions of this SOP
should be applied prospectively and retroactive application is prohibited. The
Company is in the process of evaluating the impact of the SOP on its financial
position and results of operation.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, Reporting Comprehensive Income. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. Management intends to
comply with this statement which is effective for periods beginning after
December 15, 1997 and is currently evaluating the format for the financial
statement in which comprehensive income will be reported.
YEAR 2000 ISSUES
The Company's internal Information Systems department has been
conducting an analysis of the systems used within the Company, from desktop
software to the software used within the PBX system. There have been a few
softwares identified that are not capable of making the transition from the year
1999 to year 2000. In some cases, upgrading the software has already been
initiated. In those cases where there is no feasibility of upgrading the
software, alternative systems have been analyzed, with a transition program
already under review. The Company does not believe that cost of
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making the transition to different applications, nor the cost of upgrading the
existing applications, will be significant and material. Because of the
additional functionality that can be obtained by making such transition, it is
believed that cost saving incurred by the increased productivity and ability to
generate internal reports will exceed the actual costs expended.
The Company does develop and distributes computer hardware and
software, and has thoroughly reviewed such systems. Because of the interaction
between the Company's hardware/software with other manufacturer's
hardware/software, the Company refrains from warranting Year 2000 compliance. In
order to make the Company's POS terminal customers aware of potential issues
with the transition from 1999 to 2000, the Company has, at its own expense,
provided over ten thousand test cards to enable the Company's customers to fully
test the ability of the Company's products, when interacting with other vendors
software/hardware, to ascertain whether or not a Year 2000 compliance issue is
present. The Company's IEN/NAC products do not utilize an internal "clock", and
there are no Year 2000 compliance issues with such products. Workstation
software products may have a Year 2000 compliance issue because of the operating
system and database program utilized by the Company's customers, but not because
of the applications developed and distributed by the Company.
Nevertheless, the Company makes no warranty regarding Year 2000
compliance and believes it is the customer's ultimate responsibility to verify
whether or not there is a Year 2000 compliance issue, and the Company expressly
disclaims any warranty or representation made in the foregoing regarding the
Company's products, and provides this information in compliance with Staff Legal
Bulletin No. 5 (CF/IM).
BACKLOG
As of June 30, 1998, the Company had a backlog of $77 million. Backlog
was $111 million at June 30, 1997. The Company has taken steps to reduce
terminal manufacturing lead time. This reduction also reduces the customers'
required lead time. These shorter lead times eliminate the prior requirements
for customers to book orders covering longer periods. Decline in backlog may be
due to these changes and is not an indication of lower future revenues.
The Company includes in its backlog all revenue specified in signed
contracts and purchase 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.
SEASONALITY
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Historically, the Company's net revenue and results of operations have
been stronger in the first half of the fiscal year reflecting (i) increased
purchases of POS payment systems to satisfy increased retail demand during the
holiday season, (ii) incentive programs offered by VISA and MasterCard from July
to December of each year that encourage merchants to offer card-based payment
systems and (iii) allocation of customers' capital budgets which typically
occurs by the end of March with volume shipments commencing in July.
SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, including the Notes to the
Consolidated Financial Statements and in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contains forward
looking statements. Additional written or oral forward looking statements may be
made by the Company from time to time in filings with the Securities and
Exchange Commission, in its press releases, or otherwise. The words "believe,"
"expect," "anticipate," "intends," "forecast," "project," and similar
expressions identify forward looking statements. Such statements may include,
but not be limited to, the anticipated outcome of contingent events, including
litigation, projections of revenues, income or loss, capital expenditures, plans
for future operations, growth and acquisitions, financing needs or plans and the
availability of financing, and plans relating to services of the Company, as
well as assumptions relating to the foregoing. Such forward looking statements
are within the meaning of that term in Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended.
Forward looking statements reflect the Company's current views with
respect to future events and financial performance and speak only as of the date
the statements are made. Such 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 in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," describe factors, among others,
that could contribute to or cause such differences. Other factors that could
cause actual results to differ materially from those expressed in such forward
looking statements are set forth below under the caption "Factors That May
Affect Future Operating Results and Financial Condition." In addition, new
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from forward looking statements. The
Company undertakes no obligation to publicly update or review any forward
looking statements, whether as a result of new information, future events, or
otherwise.
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION.
The Company's future operating results and financial condition are
dependent on a number of factors that the Company must successfully manage in
order to achieve favorable future operating results and financial condition. The
following potential risks and uncertainties, together with those mentioned
elsewhere herein, could affect the Company's future operating results, financial
condition, and the market price of its Common Stock.
Risks Associated with International Operations and Foreign Currency Fluctuations
For the fiscal years 1998, 1997 and 1996, net revenue from
international sales comprised approximately 57%, 56% and 58%, respectively, of
the Company's net revenues. The Company expects that international sales will
continue to account for a significant percentage of the Company's net revenue in
the foreseeable future. Accordingly, the Company is subject to risks associated
with international operations, including management of a multinational
organization, fluctuations in currency exchange rates, compliance with local
laws and other regulatory and product certification requirements and changes in
such 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 and economic instability,
war or other hostilities, expropriation or nationalization of assets, overlap of
tax structures, renegotiation or nullification of contracts and longer payment
cycles in certain countries. The Company's manufacturing facilities in
Australia, Brazil, and China are subject to particular risks relating to
political developments, tariffs, duties, taxes, local content requirements,
embargoes, boycotts and other trade barriers in or directed at those countries.
During fiscal year 1998, growth of revenues in Asia were slower due to lower
shipments into the Asia markets caused by economic uncertainty in that region.
The inability to effectively manage these and other risks could adversely affect
the Company's business, operating results and financial condition.
The Company generally does not engage in hedging transactions which
could partially offset the effects of fluctuations in currency exchange rates.
However, as the Company continues to expand its international operations,
exposure to gains and losses on foreign currency transactions may increase. The
Company may choose to limit such exposure by entering into forward foreign
exchange contracts or engaging in similar hedging strategies. There can be no
assurance that any currency exchange strategy would be successful in avoiding
exchange-related losses or that the failure to manage currency risks will not
have a material adverse effect on the Company's business, operating results or
financial condition.
Uncertainty of Profitability for Hypercom Network Systems
The Company 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
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sums on research and development and on establishing distinct manufacturing
operations and distribution channels. Hypercom Network Systems has recently
incurred losses as a standalone business, and 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.
Difficulty in Forecasting Net Revenue; Significant Fluctuations in Quarterly
Results; Seasonality
The Company's net revenue in a given period is difficult to forecast as
a result of a variety of factors, including the timing of product purchases by
the Company's customers, the length of the sales cycle for the Company's
products and quarterly fluctuations. Hypercom POS Systems and its customers
enter into purchase agreements, which generally have a one-year term and minimum
purchase commitments. However, under the terms of these agreements, the
Company's customers are not required to make purchases at any particular times
during the term of the agreement or to purchase products exclusively from the
Company. Because the timing of product purchases in any given period is solely
within the customers' discretion and control, net revenue attributable to POS
payment systems products is difficult to forecast in any given period. This
difficulty in forecasting net revenue is compounded in certain international
markets in which large orders for complete systems sales occur more frequently
than in the U.S. Due to the significant commitment of capital associated with
complete systems sales, the sales cycle for such systems is generally lengthy
and difficult to predict. With respect to Hypercom Network Systems, the Company
generally operates with little backlog and, as a result, net revenue
attributable to enterprise networking products in any quarter is substantially
dependent on the orders booked and shipped in that quarter. Further, the highly
technical nature of these sales generally results in a sales cycle that ranges
from 12 to 18 months.
The Company's operating results also are subject to other
uncertainties, including risks and uncertainties related to general industry and
economic conditions, competitive pressures, the composition, timing and size of
orders from and shipments to major customers, variations in product mix and
product cost, overhead costs, obsolescence of inventory, manufacturing or
production difficulties, certain nonrecurring charges and other factors.
Accordingly, the Company's operating results vary materially from quarter to
quarter. Because a high percentage of the Company's operating expenses are
relatively fixed, if anticipated sales and shipments in any quarter do not occur
as expected, the Company's operating results may be adversely affected and fall
significantly short of expectations. Any unanticipated decline in the growth of
the Company's net revenue, without a corresponding and timely reduction in the
growth of operating expenses, could have a material adverse effect on the
Company's business, operating results and financial condition. There is no
assurance that, in the event of any shortfall of sales or reduction in gross
margin in a quarter, the Company will be able to control expenses sufficiently
or promptly to meet profitability objectives for that quarter.
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30
Historically, the Company's business has experienced, and is expected
to continue to experience some degree of seasonality. In this regard, the
Company's net revenue and results of operations have been stronger in the first
half of the fiscal year reflecting (i) increased purchases of POS payment
systems to satisfy increased retail demand during the holiday season, (ii)
incentive programs offered by VISA and MasterCard from July to December of each
year that encourage merchants to offer card-based payment systems and (iii)
allocation of customers' capital budgets which typically occurs by the end of
March with volume shipments commencing in July.
Industry and Technological Changes; Dependence on Development and Market
Acceptance of New Products
The market for POS payment systems products in the electronic payments
industry is driven by consumers who want to use a variety of payment options and
the merchant's need to offer new payment options as required to remain
competitive. Although the technologies and payment options used in the
electronic payment industry have not changed substantially in recent years, the
Company believes that demand for lower cost products that feature greater
functionality at the point of sale, more rapid and accurate processing of
transactions and improvements in security features, as well as emerging
technologies and payment programs, will result in significant changes in the
electronic payments industry over the next few years. In addition, the
enterprise networking industry has been, and continues to be, characterized by
rapidly changing technologies and new product introductions. The Company's
success, particularly in the enterprise networking industry, will depend to a
substantial degree upon its continued ability to develop and introduce, in a
timely fashion, enhancements to its existing products and new products that meet
changing market and industry requirements.
The development of new products and technologies is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will be able to identify, develop, manufacture, market or support
new products and technologies successfully, that such new products and
technologies will gain market acceptance and be successful or that the Company
will be able to respond effectively to technological changes, emerging industry
standards or product announcements by competitors. In addition, the Company
occasionally has experienced delays in the introduction of product enhancements
and new products. There can be no assurance that the Company will be able to
introduce product enhancements or new products on a timely basis in the future.
Further, from time to time, the Company may announce new products, capabilities
or technologies that have the potential to replace or shorten the life cycle of
the Company's existing product offerings. There can be no assurance that
announcements of product enhancements or new product offerings will not cause
customers to defer purchasing existing Company products or cause distributors or
other resellers to return products to the Company. Failure to introduce new
products or product enhancements effectively and on a timely basis, customer
delays in purchasing products in anticipation of new
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31
product introductions and any inability of the Company to respond effectively to
technological changes, emerging industry standards or product announcements by
competitors could have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on Current Management and Key Personnel
George Wallner, Albert A. Irato, Paul Wallner, and Jairo Gonzalez have
been, and will continue to be, instrumental in the development, growth, and
operations of the Company. The Company has employment agreements with Messrs.
Irato and Gonzalez, but does not have employment agreements with George Wallner
and Paul Wallner or any other member of senior management. Although the Company
has no current plans to enter into employment agreements with any other
executive officers or key employees, the Company intends to review the
desirability of such employment agreements from time to time in the future. The
Company maintains and is the beneficiary of key man life insurance of $1.0
million on each of George Wallner and Paul Wallner. The loss of any of Messrs.
Wallner, Irato, Wallner, or Gonzalez could have a material adverse effect on the
Company's business, operating results, and financial condition.
The Company's continued growth and operations also depend to a
significant extent on the continued service of other key employees and the
hiring of new qualified employees. Competition for highly skilled business,
technical, marketing, and other personnel is intense, particularly in the strong
economic cycle currently prevailing for high technology companies. The loss of
one or more key employees or the Company's inability to attract additional
qualified employees or retain other employees could have an adverse effect on
the Company's business, operating results, and financial condition. In addition,
the Company may experience increased compensation costs in order to compete for
skilled employees.
Excess or Obsolete Inventory
Managing the Company's inventory of components and finished products is
a complex task. A number of factors, including the need to maintain a
significant inventory of certain components which are in short supply or which
must be purchased in bulk to obtain favorable pricing, the general
unpredictability of demand for specific products and customer requests for quick
delivery schedules, may result in the Company maintaining excess inventory.
Other factors, including changes in market demand and technology, and new
product introductions that may replace or shorten the life cycle of the
Company's existing product offerings, may cause the Company's inventory to
become obsolete. Any excess or obsolete inventory could result in price
reductions and inventory write-downs, which in turn could adversely affect the
Company's business, operating results and financial condition.
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32
Implementation of Information Systems; Management of Quarterly Financial
Reporting
The Company's predecessor was started in Australia in 1978, and
expanded into other international markets and the U.S. through a number of
affiliated or subsidiary companies or divisions that operated as autonomous
business units. These business units were responsible for their own financial
reporting and cash management and, in some cases, manufacturing. Typically,
detailed financial statements were prepared only on an annual basis. In 1996,
the Company was formed as a U.S. holding company for these various business
operations, which were restructured into new operating units. In addition, the
Company centralized certain functions such as purchasing and manufacturing,
implemented an Oracle-based management information system to improve financial
reporting and budgeting and began to manage its business toward quarterly
reporting. There can be no assurance that these efforts will result in improved
quarterly reporting, more consistent operating results or that they will not
adversely affect the Company's business, operating results and financial
condition.
Competition
The markets in which the Company operates are highly competitive and
are becoming increasingly competitive. Principal competitive factors include
product quality, reliability, performance, functionality, pricing,
certification, and upgradeability. In the electronic payment industry the
Company competes primarily against VeriFone, Inc., which was recently acquired
by Hewlett-Packard Company, and in the enterprise networking market competes
with Cisco Systems, Inc., 3Com Corporation, Motorola Information Systems Group,
and other providers. Certain of the Company's competitors have significantly
greater financial and technical resources than the Company, as well as better
name recognition and a larger customer base than the Company. The Company faces
additional competitive factors in foreign countries, including preferences for
national vendors, and difficulties in obtaining necessary certifications and in
meeting the requirements of government policies. Competitive factors may result
in, among other things, price discounts or other concessions by the Company and
sales lost by the Company to competitors, which could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to compete successfully
in the future.
Dependence on Certain Suppliers and Third-Party Distributors
The Company utilizes a contract manufacturer to build networking
products and is dependent on sole-source suppliers for certain product
components, including microprocessors, certain integrated circuits and other
electronic components, while certain other components are available from only a
limited number of sources. Although to date the Company generally has been able
to obtain adequate supplies of products and components, the Company's inability
to obtain sufficient products or components or to develop alternative sources
could result in delays in product introductions or shipments,
Page 29
33
which could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company uses various channels to market and distribute its
products, including sales to end-users via third-party distributors. Third-party
distributors are a substantial channel for distribution in some international
markets and increasingly are becoming a substantial channel for distribution in
the U.S., particularly with respect to the Company's enterprise networking
products. Accordingly, the Company's ability to market and distribute its
products depends significantly on its relationship with third-party
distributors, as well as the performance and financial condition of these
distributors. In the event that the Company's relationship with its distributors
deteriorates, or the performance or financial condition of the distributors
affects their performance or ability to pay the Company, the Company's business,
operating results and financial condition could be materially adversely
affected. Further, the Company's ability to terminate poorly performing
distributors in certain markets or countries could be restricted under local
laws.
Reliance on Certain Hypercom POS Systems Customers
A significant portion of Hypercom POS Systems sales has resulted, and
is expected to continue to result, from substantial purchases made by a limited
number of large organizations. Although no one customer accounted for more than
10% of the Company's net revenue in fiscal 1998, the two largest customers
accounted for 17.9% of the Company's net revenue in fiscal 1998 and the five
largest customers accounted for 28.9% of the Company's net revenue.
The Company typically enters into purchase agreements with its larger
customers which generally have a one-year term and provide for minimum purchase
commitments. However, these agreements do not require such customers to purchase
POS payment system products exclusively from the Company. The failure of any of
the Company's larger POS payment system customers to continue to purchase such
products from the Company, or any significant delay in purchases by such
customers, could have a material adverse effect on the Company's business,
operating results and financial condition. The Company expects that in the
future it will continue to rely on a limited number of customers in any given
period for a significant portion of its net revenue. Further, customer demand
can be adversely affected by numerous variables, including budgetary
constraints, changes in the customers' competitive environment, mergers or other
strategic alignments involving customers, pricing policies by the Company or its
competitors, personnel changes, the number, timing and significance of new
product and product enhancement announcements by the Company and its
competitors, the ability of the Company to develop, introduce and market new and
enhanced products on a timely basis and general economic factors. There can be
no assurance that the Company's significant customers will continue to purchase
products from the Company at historical or any particular levels.
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34
Impact of Industry Regulation and Standards
The Company's products must meet industry standards, such as those
imposed by VISA and MasterCard, and receive certification for connection to
certain public telecommunications networks prior to their sale. In the U.S., the
Company's products must comply with various regulations defined by the Federal
Communications Commission (the "FCC") and Underwriters Laboratories.
Internationally, the Company's products must comply with standards established
by telecommunications authorities in various countries, as well as with
recommendations of quasi-regulatory authorities and standards-setting
committees. In addition, public carriers require that equipment connected to
their networks comply with their own standards, which in part reflect their
currently installed equipment. Some public carriers have installed equipment
that does not fully comply with current industry standards, and this
noncompliance must be addressed in the design of the Company's enterprise
networking products. Although the Company believes that its products currently
comply with all applicable industry standards in the markets in which the
Company competes, there can be no assurance that the Company's products will
comply with any future changes in such industry standards or with standards in
markets in which the Company may seek to compete in the future. Any future
inability to obtain on a timely basis or retain domestic or foreign regulatory
approvals or certifications or to comply with industry standards could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, rates for public telecommunications services,
including features and capacity of such services, are governed by tariffs
determined by carriers and subject to regulatory approval. Changes in these
tariffs could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's operations are subject to various state, federal and
international laws governing, among other things, occupational health and
safety, minimum wages, overtime, retirement and profit-sharing plans and
severance payments, and the use, storage, handling and disposal of certain
chemicals used in the Company's production processes. Any failure to comply with
applicable requirements, or the adoption of new regulations or changes in
existing regulations, could impose additional compliance costs on the Company,
require a cessation of certain activities or otherwise have a material adverse
effect on the Company's business, operating results and financial condition.
Product Defects
Products as complex as those offered by the Company may contain
undetected design defects of software or hardware errors that could be difficult
to detect and correct when first introduced or as new versions are released.
Such errors have occurred in the past, and there can be no assurance that,
despite testing by the Company and customers, errors will not be found in new or
enhanced products after commencement of commercial shipments. Moreover, there
can be no assurance that once detected, such errors can be corrected in a timely
manner, if at all. Software errors may take several months to correct, if they
can be corrected at all, and hardware errors may take even longer to rectify.
The
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35
occurrence of any such software or hardware errors, as well as any delay in
correcting them, could result in delays in shipment of products, loss of market
acceptance of the Company's products, additional warranty expense, diversion of
engineering and other resources from the Company's product development efforts
or the loss of credibility with the Company's distributors and customers, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company's POS payment systems products are used to process payment
transactions and, as a result, the security features of the such products are
important. In general, the Company's POS payment systems products are designed
to comply with industry practices relating to security in payment transactions.
Any failure of the security features of the Company's products could adversely
affect the marketing of its products and any violation of its product warranties
resulting from security breaches could result in claims against the Company.
Dependence on Proprietary Technology
The Company seeks to establish and protect the proprietary aspects of
its products by relying on applicable patent, copyright, trademark and trade
secret laws and on confidentiality, licensing and other contractual
arrangements, all of which may afford only limited protection. Notwithstanding
the Company's efforts to protect its proprietary rights, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to reverse engineer or obtain and use technology that the Company regards as
proprietary. In addition, the laws of certain countries do not protect the
Company's proprietary rights to the same extent as do the laws of the U.S.
Accordingly, there can be no assurance that the Company will be able to protect
its proprietary technology against unauthorized copying or use, which could
adversely affect the Company's competitive position. The Company has
applications for certain patents and trademarks pending. There can be no
assurance that any patents or trademarks will be granted or, if granted, that
any patents will cover all claims sought to be protected. Further, there can be
no assurance that any patent or trademark held by or granted to the Company, if
challenged, will be found valid or enforceable.
The Company's products and technologies incorporate subject matter that
the Company believes is in the public domain or are otherwise within the rights
of the Company to use, such as products and technologies designed and provided
by third parties. There can be no assurance, however, that third parties will
not assert patent or other intellectual property infringement claims against the
Company with respect to its products and technologies. From time to time, the
Company receives notices from third parties claiming that the Company's products
infringe such parties' proprietary rights, and the Company may receive such
notices in the future. Regardless of its merit, any such claim can be
time-consuming, result in costly litigation and require the Company to enter
into royalty and licensing agreements. Such royalty or licensing agreements may
not be offered or be available on terms acceptable to the Company. If a
successful claim is made against the Company and the Company fails to timely
develop or license a
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36
substitute technology, the Company's business, operating results and financial
condition could be materially adversely affected.
Risks of Potential Acquisitions
The Company may acquire or make substantial investments in
complementary businesses, technologies or products in the future. Any such
acquisition or investment would entail various risks, including the difficulty
of assimilating the technologies, operations and personnel of the acquired
business, technology or product, the potential disruption of the Company's
ongoing business and, generally, the potential inability of the Company to
obtain the desired financial and strategic benefits from the acquisition or
investment. These factors could have a material adverse effect on the Company's
business, operating results and financial condition. Future acquisitions and
investments by the Company also could result in substantial cash expenditures,
potentially dilutive issuances of equity securities, the incurrence of
additional debt and contingent liabilities, and amortization expenses related to
goodwill and other intangible assets, which could adversely affect the Company's
business, operating results and financial condition. Although the Company
engages from time to time in discussions with respect to potential acquisitions,
the Company has no current plans, commitments or agreements with respect to any
potential acquisitions.
Voting Control by Existing Stockholders
George Wallner and Paul Wallner in the aggregate, beneficially own
63.4% of the Company's outstanding Common Stock following the completion of the
Offering, assuming no exercise of the underwriters' over-allotment option.
Accordingly, George Wallner and Paul Wallner, acting together, will have the
ability to control the affairs of the Company, including the election of all of
the directors to the Company's Board of Directors and, except as otherwise
provided by law, approving or disapproving other matters submitted to a vote of
the Company'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 the Company and may affect the price that investors might be
willing to pay in the future for shares of the Company's Common Stock.
Potential Volatility of Stock Price
In recent years, the stock market in general, and the market for
technology stocks in particular, have experienced extreme price fluctuations.
The market price of the Company's Common Stock may be significantly affected by
various factors such as quarterly variations in the Company's operating results,
changes in revenue growth rates for the Company as a whole or for specific
geographic areas, business units or products, earnings estimates or changes in
estimates by market analysts, speculation in the press or analyst community, the
announcement of new products or product enhancements by the Company or its
competitors and general market conditions or market conditions specific
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37
to particular industries. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future.
Anti-takeover Effect of Certain Charter and Bylaw Provisions and Delaware Law
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws may have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. Such provisions could limit
the price that certain investors may be willing to pay in the future for shares
of the Company's Common Stock. Certain of these provisions allow the Company to
issue Preferred Stock without any vote or further action by the stockholders,
provide for a classified Board of Directors and regulate nominations for the
Board of Directors. These provisions may make it more difficult for stockholders
to take certain corporate actions and could have the effect of delaying or
preventing a change in control of the Company. In addition, certain provisions
of Delaware law applicable to the Company also could delay or make more
difficult a merger, tender offer or proxy contest involving the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes
in interest rates and foreign currently exchange rates. Nevertheless, the fair
value of the Company'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
the Company's investment portfolio.
A substantial portion of the Company's revenue and capital spending
is transacted in U.S. dollars. However, the Company 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. Although no
hedging transactions were entered into during the fiscal year ended June 30,
1998, the Company has since 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.
The Company does not purchase or hold any such 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 Management's
Discussion and Analysis of Financial Condition and Results of Operation in Item
7.
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38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 (a) beginning on Page 40
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
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39
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The information set forth in the Company's 1998 Proxy Statement
under the caption "Information Concerning Directors, Nominees and Officers" is
incorporated herein by reference. Each of the executive officers of the Company
is also a director of the Company; thus the required information regarding
executive officers of the Company is included in the 1998 Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information set forth in the Company's 1998 Proxy Statement
under the caption "Executive Compensation" is incorporated herein by reference.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the Company's 1998 Proxy Statement
under the caption "Security Ownership of Principal Stockholders and Management"
is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Company's 1998 Proxy Statement
under the caption "Certain Transactions and Relationships" is incorporated
herein by reference.
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40
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1.Consolidated Financial Statements of Hypercom Corporation
Report of Independent Accountants .............................. 40
Consolidated Balance Sheets as of June 30, 1998 and 1997 ....... 41
Consolidated Statements of Income for the Years Ending June
30, 1998, 1997 and 1996 ........................................ 42
Consolidated Statement of Stockholders' Equity for the Years
Ending June 30, 1998, 1997 and 1996 ............................ 43
Consolidated Statement of Cash Flows for the Years Ending
June 30, 1998, 1997 and 1996 ................................... 44
Notes to Consolidated Financial Statements ..................... 46
2.Financial Statement Schedule
Report of Independent Accounts on Financial Statement
Schedule ....................................................... 67
Financial Statement Schedule ................................... 68
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) The Index to Exhibits and required Exhibits are included following the
Consolidated Financial Statements Schedules Beginning on Page 69 of this
report.
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41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 25, 1998 Hypercom Corporation
By /s/ Albert A. Irato
------------------------
Albert A. Irato
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on August 1, 1998.
Signature Title
(1) Principal Executive, Financial
and Accounting Officers
/s/ Albert A. Irato Director, President and Chief Executive Officer
--------------------------
Albert A. Irato
/s/ Thomas E. Linnen Director, and Chief Financial Officer
--------------------------
Thomas E. Linnen
(2) Directors
/s/ George Wallner Chairman of the Board
--------------------------
George Wallner
/s/ Paul Wallner Director
--------------------------
Paul Wallner
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42
/s/ Jairo Gonzalez Director
--------------------------
Jairo Gonzalez
/s/ William E. Fisher Director
--------------------------
William E. Fisher
/s/ Peter J. Hart Director
--------------------------
Peter J. Hart
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43
Item 14 (a) 1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Hypercom Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Hypercom
Corporation and its subsidiaries at June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Phoenix, Arizona
July 24, 1998
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44
HYPERCOM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
June 30,
---------------------
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 55,659 $ 16,318
Marketable securities, at market 42,641 206
Accounts receivable, net of allowance for doubtful accounts of
$3,729 and $779 at June 30, 1998 and 1997, respectively 43,989 31,074
Inventories 60,539 55,921
Deferred income taxes 10,991 5,580
Prepaid taxes 2,893 6,127
Prepaid expenses and other current assets 7,173 5,942
-------- --------
Total current assets 223,885 121,168
Property, plant and equipment, net 23,570 16,424
Advances to related parties 258 279
Long-term investments 9,931
Other assets 1,933 870
-------- --------
$259,577 $138,741
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank notes payable $ -- $ 9,900
Accounts payable 17,134 21,963
Accrued liabilities 16,537 12,829
Deferred revenue 608 8,279
Income taxes payable 2,209 2,061
Current portion of long-term obligations 598 2,164
Current portion of long-term obligations, related party -- 2,000
-------- --------
Total current liabilities 37,086 59,196
-------- --------
Long-term obligations 1,199 8,952
Long-term obligations, related party 1,554
Deferred income taxes 861 602
-------- --------
Total liabilities 39,146 70,304
Commitments and contingencies (Note 13)
Redeemable common stock -- 7,543
-------- --------
Stockholders' equity:
Common stock, $.001 par value; 100,000,000 shares authorized;
33,548,625 and 25,000,000 shares issued and outstanding at
June 30, 1998 and 1997, respectively 13 4
Additional paid-in capital 145,601 965
Receivables from stockholders (1,498) (2,401)
Retained earnings 76,315 62,326
-------- --------
Total stockholder's equity 220,431 60,894
-------- --------
Total liabilities, redeemable common stock and stockholders' equity $259,577 $138,741
======== ========
The accompanying notes are an integral part of these financial statements.
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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
YEAR ENDED JUNE 30,
--------------------------------------------
1998 1997 1996
----------- ------------ ------------
Net revenue....................................................... $ 257,227 $ 196,742 $ 163,556
Cost and expenses:
Cost of revenue................................................. 130,475 103,672 92,349
Research and development........................................ 23,495 12,926 8,509
Selling, general and administrative............................. 72,506 52,530 44,741
Non-cash compensation expense................................... 10,963 4,784 2,061
----------- ----------- -----------
Total costs and expenses...................................... 237,439 173,912 147,660
----------- ----------- -----------
Income from operations............................................ 19,788 22,830 15,896
Interest and other income......................................... 4,435 2,248 864
Interest expense.................................................. (2,155) (1,718) (667)
Interest expense, related party................................... (446) (422)
Foreign currency gain (loss)...................................... (1,760) 445 2,639
----------- ----------- -----------
Income before income taxes and minority interest..............
19,862 23,383 18,732
Minority interest in earnings of subsidiary, net of tax........... -- -- (246)
Income taxes...................................................... (5,873) (7,821) (6,197)
----------- ----------- -----------
Net income.................................................... $ 13,989 $ 15,562 $ 12,289
=========== =========== ===========
Basic shares outstanding...................................... 30,214,677 25,000,000 36,650,000
Basic earnings per share...................................... $ 0.46 $ 0.62 $ 0.34
Diluted shares outstanding.................................... 31,829,855 25,753,921 37,105,563
Diluted earnings per share.................................... $ 0.44 $ 0.60 $ 0.33
The accompanying notes are an integral part of these financial statements.
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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 1998 and 1997
(Dollars in thousands)
Common Stock Additional Receivables Total
------------ Paid-In from Retained Stockholders'
Shares Balance Capital Stockholders Earnings Equity
------------ -------- ---------- ------------ --------- ------------
Balance as of June 30, 1995 $ 36,650,000 $ 4 $ 425 $ (1,200) $ 45,607 $ 44,836
Repurchase of common stock (11,650,000) (11,132) (11,132)
Advances to stockholders (761) (761)
Net income 12,289 12,289
------------ -------- ---------- ------------ --------- ------------
Balance as of June 30, 1996 25,000,000 4 425 (1,961) 46,764 45,232
Contributions from stockholders 540 540
Advances to stockholders (440) (440)
Net income 15,562 15,562
------------ -------- ---------- ------------ --------- ------------
Balance as of June 30, 1997 25,000,000 4 965 (2,401) 62,326 60,894
Issuance of common stock 8,500,000 9 127,491 127,500
Costs of public offering (1,768) (1,768)
Reclassification of redeemable
common stock 18,506 18,506
Exercise of options 38,625 247 247
Payment of advances to stockholders 2,276 2,276
Advances to stockholders (1,373) (1,373)
Acquisition of investee 10,000 160 160
Net income 13,989 13,989
------------ -------- ---------- ------------ --------- ------------
Balance as of June 30, 1998 $33,548,625 $ 13 $ 145,601 $ (1,498) $ 76,315 $ 220,431
============ ======== ========== ============ ========= ============
The accompanying notes are an integral part of these financial statements.
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47
HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended June 30,
-----------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities
Cash received from customers $234,333 $190,955 $155,563
Interest received 3,308 1,327 919
Other income received 438 (121)
Cash paid to suppliers and consultants (230,351) (171,398) (133,229)
Interest paid (2,543) (2,247) (702)
Income taxes paid (4,837) (15,880) (11,356)
--------- --------- ---------
Net cash provided by (used in) operating activities (90) 3,195 11,074
--------- --------- ---------
Cash flows from investing activities:
Advances to related parties (518) (369)
Repayments from related parties 641 2,091
Acquisition of controlling interest in subsidiary (net of cash received) 302
Notes receivable 1,180
Acquisition of other assets (44)
Proceeds from disposal of property, plant and equipment 120 1,260 667
Purchase of property, plant and equipment (10,162) (6,930) (8,011)
Purchase of investments (242,164) (546)
Proceeds from maturity of investments 189,559 61
--------- --------- ---------
Net cash used in investing activities (62,647) (6,032) (4,184)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from bank notes payable and other debt instruments 65,795 76,746 40,375
Repayment of bank notes payable and other debt instruments (89,266) (72,761) (33,229)
Advances to stockholders (1,373) (530) (761)
Payment of advances to stockholders 2,276
Proceeds from sale of common stock 127,500
Proceeds from exercise of stock options 247
Repurchase of common stock (6,000)
Contributions from stockholders 540
Stock offering costs (1,768)
--------- --------- ---------
Net cash provided by financing activities 103,411 3,995 385
--------- --------- ---------
Effect of exchange rate changes (1,333) (953) 820
--------- --------- ---------
Net increase in cash 39,341 205 8,095
Cash and cash equivalents, beginning of year 16,318 16,113 8,018
--------- --------- ---------
Cash and cash equivalents, end of year $55,659 $16,318 $16,113
========= ========= =========
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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
Year Ended June 30,
-------------------------------------
1998 1997 1996
-------- -------- -------
Reconciliation of net income to net cash provided by (used in) operating activities
Net income $ 13,989 $ 15,562 $12,289
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non-cash compensation expense 10,963 4,784 2,061
Depreciation and amortization 4,164 2,888 2,375
Bad debt expense 2,972 1,427 494
Provision for excess and obsolete inventory 2,510 994 2,133
Foreign currency (gain) loss 1,760 (445) (2,639)
Gain on sale leaseback (120) (120)
Equity in investee loss (income) 135 (39) (37)
Deferred income taxes (5,153) (2,948) (1,386)
Amortization of premium on investments 239
Minority interest in subsidiary 246
(Gain) loss on disposal of fixed assets (120) (130) 162
Loss on sale of investments 58
(Increase) decrease) in:
Accounts receivable (16,102) (7,316) (4,481)
Inventories (7,222) (15,290) (1,302)
Prepaid income taxes 3,281 (6,127)
Prepaid expenses and other current assets (1,351) (2,715) (157)
Increase (decrease) in:
Accounts payable (5,272) 2,208 6,498
Accrued liabilities 2,869 5,930 250
Deferred revenue (7,782) 6,707 (1,335)
Income taxes payable 150 (2,163) (4,097)
Other liabilities (70)
-------- -------- -------
Net cash provided by (used in) operating activities $ (90) $ 3,195 $11,074
======== ======== =======
Cash and non-cash investing and financing activities:
Acquisition of property and equipment through capital leases $ 698 $ 133 $ 181
Changes in accounts payable related to the purchase of property, plant and equipment 367 36 587
Repurchase of common stock for note payable net of debt discount 5,132
Acquisition of controlling interest in subsidiaries:
Assets acquired (net of seller financing) $ 744 $ $ 6,224
Liabilities assumed (244) (4,505)
Previous ownership interest (903)
Remaining minority interest (316)
-------- -------- -------
Net cash paid $ 500 $ $ 500
======== ======== =======
The accompanying notes are an integral part of these financial statements.
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49
1. DESCRIPTION OF BUSINESS:
Hypercom Corporation (with its subsidiaries, the "Company") is a
worldwide developer, manufacturer, and supplier of point-of-sale ("POS")
payment systems and enterprise networking products.
The U.S. operations, headquartered in Phoenix, Arizona, primarily consist
of product development, manufacturing, sales and marketing, distribution
and customer service. The European operations consist of product
distribution through the Company's sales and support offices located in
the United Kingdom, Russia and Hungary. Latin American operations engage
primarily in product distribution through the Company's subsidiaries in
Mexico, Brazil, Chile, Argentina and Venezuela; however, certain
manufacturing operations exist in Brazil. The Company's primary
manufacturing is performed at a contract manufacturer in China and is
coordinated by the Hong Kong office. The Asia/Pacific operations are also
engaged in product development and product distribution through the
Company's subsidiaries or business units in Singapore, Hong Kong, Japan
and Australia.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are comprised of the accounts of
Hypercom Corporation and all subsidiaries in which a controlling interest
is held. All significant intercompany balances and transactions have been
eliminated.
The Company carries its investments in subsidiaries, less than 50% owned,
under the equity method of accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FOREIGN CURRENCY
The foreign subsidiaries use the U.S. dollar as the functional currency.
Their local currency financial statements are remeasured as follows;
monetary assets and liabilities at year-end exchange rates, and
inventories, property and nonmonetary assets and liabilities at
historical rates. During the years ended June 30, 1998, 1997 and 1996,
the Company recorded net gains (losses) on remeasurement of approximately
($2,084,000), $630,000 and $2,520,000 respectively. For the same periods,
the Company recorded net gains (losses) on transactions denominated in
foreign currencies of approximately $324,000, ($185,000) and 119,000,
respectively. These amounts are included in the results of operations.
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50
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all investment instruments purchased with an
original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase. Securities for
which the Company does not have the intent of or ability to hold to
maturity are classified as available for sale and are carried at fair
value, with the unrealized holding gain and losses, net of tax, reported
in a separate component of stockholders' equity. Cost is determined based
on specific identification. Securities classified as available for sale
include both securities due within one year and securities with maturity
dates beyond one year. Securities with a maturity date within one year
are classified as Marketable Securities as a part of Current Assets.
Securities with a maturity date beyond one year are classified as
long-term Investments.
INVENTORIES
Inventories are stated at the lower of standard cost or market. Standard
costs approximate first-in, first-out ("FIFO") costs.
CAPITALIZED SOFTWARE
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
requires capitalization of certain software development costs subsequent
to the establishment of technological feasibility. The Company's product
development process is such that technological feasibility is established
upon completion of a working model. Costs incurred between completion of
the working model and the point at which the product is ready for initial
shipment have not been significant. To date, all software development
costs have been expensed as incurred and included in research and
development expense.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided on straight-line and accelerated methods over
the following useful lives:
Building 31.5 years
Machinery and equipment 2.5-7 years
Furniture and fixtures 5-7 years
Vehicles 4.5-5 years
Leasehold improvements 2.5-10 years
For assets sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in income for the period.
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2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax laws (including
rates) is recognized in income in the period that includes the enactment
date.
The Company does not provide for federal income taxes on the
undistributed earnings of its international subsidiaries because earnings
are reinvested and, in the opinion of management, will continue to be
reinvested indefinitely.
REVENUE RECOGNITION
The Company generally recognizes product revenue, including sales to
distributors, upon shipment of product; however, revenue on certain
network contracts is recognized upon customer acceptance. 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.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, ("SFAS No. 123") which defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, it also allows an entity to continue to account for
these plans according to Accounting Principles Board Opinion No. 25 ("APB
25"), provided pro forma disclosures of net income are made as if the
fair value based method of accounting, defined by SFAS No. 123, had been
applied. The Company has elected to continue to measure compensation
expense related to employee stock purchase options using APB 25, and has
provided the required pro forma disclosures.
NET INCOME PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128") and the
Securities and Exchange Commission Staff Accounting Bulletin 98 ("SAB
98") effective December 31, 1997. SFAS No. 128 requires the presentation
of basic and diluted earnings per share (EPS). Basic EPS is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is
computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares consist
of the incremental common shares issuable upon the exercise of stock
options. SAB 98 requires certain stock issued in conjunction with an
initial public offering for nominal consideration to be included in basic
EPS calculations as if it were outstanding for all periods presented;
additionally, certain stock and potential common stock issued for nominal
consideration are required to be included in diluted EPS calculations as
if they were outstanding for all periods. SAB 98 does not affect the
Company's EPS calculations. All prior period earnings per share amounts
have been restated to comply with the SFAS No. 128.
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52
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts):
YEAR ENDED JUNE 30,
1998 1997 1996
Numerator - Basic and Diluted EPS:
Net income $ 13,989 $ 15,562 $ 12,289
Denominator - Basic EPS:
Common stock outstanding 30,215 25,000 36,650
Basic EPS 0.46 0.62 0.34
========= ========= =========
Denominator - Diluted EPS:
Denominator - Basic EPS 30,215 25,000 36,650
Effect of Dilutive Securities:
Common stock options 1,615 754 456
--------- --------- ---------
31,830 25,754 37,106
Diluted EPS 0.44 0.60 0.33
========= ========= =========
SELF-INSURANCE
The Company self-insures, with certain stop loss insurance coverages, for
short-term disability, life and employee health care. Claims expense is
recorded in the year of occurrence through the accrual of claim reserves
based on estimates of ultimate claims costs. Claims incurred but not yet
reported are estimated and reserved for based on historical claims data.
OPERATING SEGMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information ("SFAS No. 131"), superseding SFAS
No. 14, Financial Reporting for Segments of a Business Enterprise ("SFAS
No. 14"). SFAS No. 131 establishes standards for the way public business
enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial statements. It
also requires disclosures about products and services, geographic areas
and major customers. The Company adopted SFAS No. 131 for the fiscal year
ended June 30, 1997, and has provided the required disclosures.
The accounting policies of the reportable segments are the same as those
used for the consolidated entity. Performance is evaluated based on
profit or loss from operations. Intersegment sales and transfers are
accounted for based on defined transfer prices.
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53
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NEW PRONOUNCEMENTS
During October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 97-2, Software Revenue Recognition. The SOP is effective
for fiscal years beginning after December 15, 1997. The SOP provides
guidance on when revenue should be recognized and in what amounts for
licensing, selling, leasing, or otherwise marketing computer software.
The provisions of this SOP should be applied prospectively and
retroactive application is prohibited. The Company is in the process of
evaluating the impact of the SOP on it's financial position and results
of operation.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income. This Statement requires
that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 does not require a specific format for
the financial statement in which comprehensive income is reported, but
does require that an amount representing total comprehensive income be
reported in that statement. Management intends to comply with this
statement which is effective for periods beginning after December 15,
1997 and is currently evaluating the format for the financial statement
in which comprehensive income will be reported.
3. CONCENTRATIONS OF CREDIT AND OTHER RISKS:
FINANCIAL INSTRUMENTS
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, accounts
receivable, marketable securities, and long-term investments.
The Company's cash and cash equivalents are in high quality securities
placed with major international banks and financial institutions. The
Company, in the normal course of business, maintains balances in excess
of the Federal Deposit Insurance Corporation's insurance limit. The
balance in excess of the insurance limit at June 30, 1998 and 1997 was
$5,201,064 and $2,315,036 respectively. In addition, the Company also
maintains investments in excess of applicable insurance limits. The
Company also maintains balances in foreign banks that are used for
current operations of subsidiaries located abroad. Foreign deposits that
are uninsured amounted to $8,321,090 and $13,587,260 as of June 30, 1998
and 1997, respectively.
The Company's accounts receivable results primarily from credit sales to
a broad customer base, both nationally and internationally. The Company
routinely assesses the financial strength of its customers, requiring
letters of credit from certain foreign customers, and provides an
allowance for doubtful accounts as necessary.
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54
3. CONCENTRATIONS OF CREDIT AND OTHER RISKS: (CONTINUED)
INVENTORIES
Most components used in the Company's systems are purchased from outside
sources. Certain components are purchased from single suppliers. The
failure of any such supplier to meet its commitment on schedule could
have a material adverse effect on the Company's business, operating
results and financial condition. If a sole-source supplier were to go out
of business or otherwise become unable to meet its supply commitments,
the process of locating and qualifying alternate sources could require up
to several months, during which time the Company's production could be
delayed. Such delays could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company estimates inventory provisions for potentially excess and
obsolete inventory based on forecasted demand. Actual demand may differ
from such anticipated demand and may have a material adverse effect on
inventory valuation.
INTERNATIONAL OPERATIONS
The Company's international business is an important contributor to the
Company's net revenue and profits. However, the majority of the Company's
international sales are denominated in the U.S. dollar, and an increase
in the value of the U.S. dollar relative to foreign currencies could make
products sold internationally less competitive. The operating expenses of
the Company's overseas offices are paid in local currencies and are
subject to the effects of fluctuations in foreign currency exchange
rates.
The Company conducts manufacturing operations in Brazil, Australia, and
China. Foreign manufacturing is subject to certain risks, including the
imposition of tariffs and import and export controls, together with
changes in governmental policies. The occurrence of any of these events
could have a material adverse effect on the Company's business, operating
results and financial condition.
As of June 30, 1998, the Company maintained significant Account
Receivable balances in the Asia Pacific region, which are subject to the
economic risks inherent to that region.
YEAR 2000 ISSUES
The Company's internal Information Systems Department is conducting an
analysis of its Year 2000 issues. Costs relating to Year 2000 issues are
charged to operations as incurred and were not significant for the years
ended 1998 and 1997.
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4. MARKETABLE SECURITIES:
As of June 30, 1998 and 1997, the difference between amortized cost and
fair market value of the Company's marketable securities and long-term
investments was not material. Accordingly, the Company has not disclosed
unrealized gains and losses. The municipal bonds and corporate notes have
maturities that range from three months to two years. As of June 30, 1998
and 1997, marketable securities consist of the following (dollars in
thousands):
1998 1997
Municipal bonds $ 34,201 $ -
Corporate notes 6,671 -
Mutual funds 1,769 206
-------- -------
Total marketable securities 42,641 206
Municipal bonds 3,740 -
Corporate notes 6,191 -
-------- -------
Total long-term investments $ 9,931 $ 0
======== =======
5. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company values financial instruments as required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments ("SFAS No. 107").
The carrying amounts of cash and cash equivalents and bank notes payable
approximate fair value due to the short maturity of those instruments.
The fair value of marketable securities and long-term investments is
determined based on quoted market prices. The fair value of long-term
obligations is estimated by discounting the future cash flows required
under the terms of each respective debt agreement by current market rates
for the same or similar issues of debt with similar remaining maturities.
A summary of carrying amounts and fair values as of June 30, 1998 and
1997 are as follows (dollars in thousands):
1998 1997
----------------------------------- ---------------------------------
CARRYING AMOUNT ESTIMATED FAIR CARRYING AMOUNT ESTIMATED FAIR
VALUE VALUE
--------------- -------------- --------------- --------------
Financial assets:
Cash and cash equivalents $ 55,659 $ 55,659 $ 16,318 $16,318
Marketable securities 42,641 42,641 206 206
Long-term investments 9,931 9,931
Financial liabilities:
Bank notes payable 9,900 9,900
Long-term obligations 1,797 1,822 14,670 13,980
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6. INVENTORIES:
Inventories consist of the following (dollars in thousands):
JUNE 30,
---------------------------
1998 1997
-------- ---------
Purchased parts $ 18,710 $ 24,765
Work-in-process 11,388 9,604
Finished goods 30,441 21,552
-------- ---------
$ 60,539 $ 55,921
======== =========
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (dollars in
thousands):
JUNE 30,
-------------------------
1998 1997
------- ---------
Land $ 4,264 $ 1,194
Building 6,027 5,349
Machinery and equipment 17,022 11,730
Furniture and fixtures 2,826 1,236
Vehicles 1,096 1,010
Leasehold improvements 1,617 1,402
------- ---------
32,852 21,921
Less accumulated depreciation and amortization (9,282) (5,497)
------- ---------
$23,570 $ 16,424
======= =========
During 1997, the Company sold certain equipment and leased it back under
two leases of 54 and 60 months, respectively. The transaction resulted in
a gain of $505,109. The leases are classified as operating, and the gain
will be recognized pro rata over their terms. For each of the years ended
June 30, 1998 and 1997, the Company recognized $120,228 of the gain,
which was included in interest and other income in the accompanying
consolidated statements of income. Under the leases, the Company is
obligated to pay $270,972, $270,972 and $201,552 for the years ending
June 30, 1999, 2000 and 2001, respectively.
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8. BANK NOTES PAYABLE:
During fiscal 1998, the Company entered into a $10.0 million revolving
line of credit agreement with Bank One, Arizona. Under the terms of the
agreement, the Company may borrow up to an amount equal to 80% of its
accounts receivable under ninety days past due and 35% of its raw
material (purchased parts) and finished goods inventory. Interest is
charged at the bank's prime rate. The weighted average interest rate for
fiscal 1998 was 8.10%. There was no outstanding balance as of June 30,
1998. (See Note 10.)
The Company had a $20.0 million revolving line of credit agreement with
Bank One, Arizona which expired in December 1997. Interest was charged at
the bank's prime rate. The weighted average interest rate for fiscal 1997
was 8.25%. Accounts receivable and inventory collateralized the loan. The
outstanding balance as of June 30, 1997 was $9.9 million.
9. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following (dollars in thousands):
JUNE 30,
--------------------
1998 1997
------- -------
Note payable to Bank One, Arizona; payable in monthly
installments of $5,208, plus interest at 8.92%; due
January 2001; collateralized by deed of trust on land and
building.
$ 972 $ 1,031
Capital leases 825 385
Note payable to Bank One, Arizona; payable in a lump
sum on June 14, 1997, interest at 8.46% is due monthly;
collateralized by inventory, receivables and equipment. 6,000
Industrial development bonds; principal payable in annual
installments based on stated maturities; interest payable
at a variable rate, approximately 3.75% as of June 1997;
Repaid in fiscal year 1998. 3,700
------- -------
1,797 11,116
Current portion of long-term obligations (598) (2,164)
------- -------
$ 1,199 $ 8,952
======= =======
A note payable to a stockholder with a balance of $3,554,000 (net of debt
discount of $446,000) as of June 30, 1997 was repaid during fiscal 1998.
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9. LONG-TERM OBLIGATIONS: (CONTINUED)
The loan agreements relating to the notes payable and line of credit
(Note 8) with Bank One, Arizona, NA impose 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. 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. At June 30, 1998, the Company would have been in violation of
covenants restricting advances to related parties had the Company not
obtained a debt covenant waiver.
The aggregate principal payments due on long-term obligations are as
follows (dollars in thousands):
YEAR ENDING
JUNE 30,
-----------
1999 $ 598
2000 211
2001 150
2002 112
2003 66
Thereafter 660
------
$ 1,797
=======
10. INCOME TAXES:
Income before income taxes consisted of the following (dollars in
thousands):
YEAR ENDED JUNE 30,
----------------------------------
1998 1997 1996
--------- -------- --------
Income (loss) before income taxes:
United States $ 21,149 $ 13,621 $ 8,919
Foreign (1,287) 9,762 9,813
--------- -------- --------
$ 19,862 $ 23,383 $ 18,732
========= ======== ========
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10. INCOME TAXES: (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows (dollars in thousands):
JUNE 30,
--------------------
1998 1997
-------- -------
Deferred tax assets:
Inventory valuation and reserves $ 2,948 $ 2,406
Compensation accruals 7,268 2,927
Allowance for doubtful accounts 247
Other 775
-------- -------
Deferred tax assets, current $ 10,991 $ 5,580
======== =======
Deferred tax assets (liabilities), noncurrent:
Tax loss carry forwards $ 1,004
Property, plant and equipment (747) $ (508)
Other (1,118) (94)
-------- -------
Net deferred tax liabilities, noncurrent $ (861) $ (602)
======== =======
The components of income tax expense (benefit) are as follows (dollars in
thousands):
YEAR ENDED JUNE 30,
------------------------------
1998 1997 1996
------- ------- -------
Current:
Federal $ 8,473 $ 6,904 $ 3,638
State 1,239 1,227 862
Foreign 1,314 2,638 3,083
------- ------- -------
11,026 10,769 7,583
Deferred:
Federal (3,810) (2,601) (1,128)
State (653) (446) (212)
Foreign (690) 99 (46)
------- ------- -------
(5,153) (2,948) (1,386)
------- ------- -------
$ 5,873 $ 7,821 $ 6,197
======= ======= =======
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10. INCOME TAXES: (CONTINUED)
Consolidated income tax expense differed from the amount computed by
applying the U.S. federal income tax rate to income taxes before income
as shown below:
YEAR ENDED JUNE 30,
--------------------------
1998 1997 1996
---- ---- ----
Tax expense at the federal statutory rate 35.0 % 35.0 % 35.0 %
State income taxes, net of federal income tax benefit 4.1 3.4 3.0
Foreign taxes attributable to foreign operations less than
federal statutory (2.5) (3.3) (1.4)
Research and experimentation credit (4.5) (2.1)
Foreign Sales Corporation (7.0) (2.7)
Tax exempt interest (1.4)
Translation loss 9.1
Other (3.2) 3.1 (3.1)
---- ---- ----
Effective tax rate 29.6 % 33.4 % 33.5 %
==== ==== ====
As of June 30, 1998, 1997 and 1996, the Company had not provided federal
income tax benefits on cumulative losses of individual international
subsidiaries of $2,109,000, $2,109,000, and $881,000, respectively. Upon
distribution of earnings in the form of dividends or otherwise, the
Company may be subject to both U.S. income taxes and withholding taxes in
the various international jurisdictions.
11. PROFIT SHARING PLANS:
The Company has a 401(k) profit sharing plan covering all eligible
full-time employees of the Company. Contributions to the 401(k) plan are
made by the participants to their individual accounts through payroll
withholding. Additionally, the plan provides for the Company to make
profit sharing contributions to the plan in amounts at the discretion of
management. The employer contribution for the years ended June 30, 1998
and 1997 was $36,000 and $21,000.
Beginning with fiscal year 1999, the Company will pay a matching
contribution each pay period of 50% of the employee's contributions, up
to 6% of employee's compensation, to the Federal limit of $10,000 per
calendar year.
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12. STOCKHOLDERS' EQUITY:
STOCK SPLITS
On November 25, 1996, the Company declared a 10,000-for-1 stock split,
effected in the form of a stock dividend. On September 10, 1997, the
Company declared a 5-for-4 stock split, effected in the form of a stock
dividend. All references to the number of common shares outstanding,
common shares reserved for issuance under the Plan, and per share
information have been adjusted to reflect the stock splits on a
retroactive basis.
STOCK OPTIONS AND NON-CASH COMPENSATION
In connection with an officer's employment agreement (the "Agreement"),
as amended, the Company provided for stock options to be granted to an
officer equal to 1.0% of the outstanding common shares of the Company as
of June 30, 1992, 1993 and 1994 with exercise prices equal to the fair
market values defined by a net income formula in the Agreement ("Defined
Fair Market Value") at the respective dates. The options are exercisable
as of July 1, 1995, 1996 and 1997, respectively, and remain exercisable
for 10 years from these dates. The Agreement also provides for additional
stock options immediately exercisable to purchase 1.0% of the outstanding
common stock of the Company on January 1, 1994 and 1995 with an exercise
price equal to the Defined Fair Market Value as of the respective dates;
the options remain exercisable for 10 years. In accordance with variable
plan accounting, compensation expense of $10,963,000, $4,784,000, and
$2,061,000 was recognized for the years ended June 30, 1998, 1997 and
1996, respectively.
Prior to the completion of the Company's IPO, the Agreement required the
Company to purchase all or part of any shares then owned by the officer
under certain circumstances. The purchase obligation terminated at the
completion of the Company's IPO in November 1997. No compensation expense
related to the options was recognized after that date. Since the Company
was obligated to repurchase the officer's shares, the estimated value of
the shares was recorded as redeemable common stock. Upon termination of
the obligation, this amount was reclassified to additional paid-in
capital.
During fiscal 1997, the Company's board of directors approved the
Hypercom Corporation Long-Term Incentive Plan (the "Plan") which
allocates 5,000,000 shares of common stock for issuance at the Company's
discretion. The Plan authorizes issuance of "incentive stock options" (as
defined by the Internal Revenue Code of 1986), non-qualified stock
options, stock appreciation rights, restricted stock awards, performance
share awards, dividend equivalent awards and other stock-based awards.
Stock options issued under the Plan become exercisable over a period
determined by the Board of Directors (generally over five years) and
expire ten years after the date of grant.
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12. STOCKHOLDERS' EQUITY: (CONTINUED)
A summary of the Company's stock option activity and related information
follows:
Year Ended June 30,
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Shares Under Average Exercise Shares Under Average Exercise Shares Under Average Exercise
Option Price Option Price Option Price
------------ ---------------- ------------ ---------------- ------------ ----------------
Beginning balance outstanding.... $2,943,750 $4.75 $1,030,000 $1.62 $1,030,000 $1.62
Granted.......................... 860,750 9.65 1,913,750 6.43
Exercised........................ (38,625) 6.40
Forfeited........................ (20,000) 9.60
---------- ----- ---------- ----- ---------- -----
Ending balance outstanding....... 3,745,875 5.83 2,943,750 4.75 1,030,000 1.62
---------- ----- ---------- ----- ---------- -----
Exercisable at end of year....... $1,917,125 $3.84 $1,436,250 $3.77 $ 515,000 $1.68
========== ===== ========== ===== ========== =====
The following table summarizes additional information about the Company's
stock options outstanding as of June 30, 1998:
Options Outstanding Options Exercisable
------------------------------- ---------------------
Weighted Weighted
Shares Average Weighted Shares Average
Under Remaining Average Under Exercise
Range of Exercise Prices Option Contractual Exercise Option Price
- ------------------------ --------- ----------- -------- ---------- --------
$ 0.66 - $ 2.66 1,030,000 4.5 years $ 1.62 $1,030,000 $ 1.62
$ 5.00 - $ 8.00 1,885,125 7.2 years 6.42 887,125 6.41
$ 9.60 - $12.94 825,750 9.0 years 9.66
$18.00 5,000 9.7 years 18.00
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock option plans under the fair value based method of
that Statement.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes valuation method with the following assumptions:
risk free interest rates from 6.50% to 6.76%; an average expected time to
exercise of five years; and no dividends.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro
forma information for the year ended June 30, 1998 and 1997 follows
(dollars in thousands except for net income per share information):
1998 1997
-------- ---------
Pro forma net income $ 11,713 $ 14,834
Pro forma net income per share .37 0.54
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12. STOCKHOLDERS' EQUITY: (CONTINUED)
The above pro forma disclosure is not necessarily representative of the
effects on reported net income for future years.
EMPLOYEE STOCK PURCHASE PLAN
On September 8, 1997, the Company's Board of Directors adopted and the
stockholders of the Company approved the Hypercom Corporation 1997
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan
allows eligible employees of the Company to purchase shares of the Common
Stock through periodic payroll deductions. The initial offering period
commences immediately following the Initial Public Offering and extends
through June 30, 1998, with subsequent offering periods beginning every
six months thereafter. At the end of each offering period, payroll
deductions for the offering period will be used to purchase shares of
Common Stock for each participant's account at a price equal to 90% of
the fair market value of the Common Stock on either the first or last day
of the offering period, whichever is less. Payroll deductions under the
Purchase Plan are limited to 10% of each eligible employee's earnings
during the offering period, and no single participant will be granted an
option to purchase shares with a value in excess of $25,000 for each
calendar year. The Board has reserved 625,000 shares of Common Stock for
issuance under the Purchase Plan, subject to adjustment in the event of a
stock split, reverse stock split, stock dividend or similar event. During
July 1998, the Company issued 45,541 shares to employees at a price of $9
a share.
PREFERRED STOCK
On September 8, 1997, the Company's board of directors authorized
10,000,000 shares of $0.001 par value preferred stock. As of June 30,
1998, no shares were outstanding.
DIRECTORS' STOCK PLAN
On September 8, 1997, the Company's Board of Directors adopted and the
stockholders of the Company approved the Hypercom Corporation Directors'
Stock Plan (the "Director Plan"). The Director Plan is administered by a
committee appointed by the Board and provides for an initial grant to
each Director of an option to purchase 6,250 shares of Common Stock
immediately following the Offering. In addition, each individual who
first becomes a Director after the date of the initial grant of options
will be granted an option to purchase 6,250 shares of Common Stock, and
will receive an annual grant of options to purchase 6,250 shares of
Common Stock. The aggregate number of shares of Common Stock subject to
the Director Plan may not exceed 93,750, subject to adjustment in the
event of a stock split, reverse stock split, stock dividend or similar
event. Options granted under the Director Plan are fully vested and
become fully exercisable on the first anniversary of the date of grant
and have a term of ten years. The exercise price per share under the
Director Plan is equal to the fair market value of such shares upon the
date of grant. In general, options may be exercised by payment in cash or
a cash equivalent, previously acquired shares having a fair market value
at the time of exercise equal to the total option exercise price or a
combination thereof.
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12. STOCKHOLDERS' EQUITY: (CONTINUED)
INITIAL PUBLIC OFFERING
On November 19, 1997, the Company completed an initial public offering
("IPO") of its common stock, in which it sold 8,500,000 shares of common
stock for $16 per share. Net proceeds received by the Company were
approximately $125.7 million, of which approximately $23.1 million were
used to repay indebtedness.
13. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company leases office and warehouse space, equipment and vehicles
under noncancelable operating leases. The office space leases provide for
annual rent payments plus a share of taxes, insurance and maintenance on
the properties. The Company also leases various equipment and vehicles
under capital leases. Future minimum payments under the operating and
capital leases are as follows (dollars in thousands):
YEAR ENDING OPERATING CAPITAL
JUNE 30, LEASES LEASES
1999 $1,317 $ 374
2000 1,233 302
2001 779 128
2002 563 51
2003 323 16
Thereafter 1,939
------ -----
Total minimum lease payments 6,154 871
======
Less imputed interest (46)
-----
Present value of net minimum lease payments $ 825
=====
Rent expense charged to operations was $3,573,000, $1,929,000 and
$2,220,000 for the years ended June 30, 1998, 1997 and 1996,
respectively.
LITIGATION
In the ordinary course of business, various claims are filed against the
Company. Historically, costs associated with the resolution of such
claims have not been significant. The Company is not currently aware of
any claims pending against it that would have a material impact on the
Company's business, operating results or financial condition.
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14. RELATED PARTY TRANSACTIONS:
DIGITECH RESEARCH, INC.
The Company provided advances of $107,188 and $32,812 during the years
ended June 30, 1997 and 1996, respectively, to Digitech Research, Inc.
("Digitech"), an entity controlled by a stockholder of the Company. No
advances were made during 1998 and Digitech paid $8,261 to the Company.
As of June 30, 1998 and 1997, amounts due from Digitech were $191,739 and
$200,000, respectively. In addition, during fiscal 1997 the Company paid
Digitech $580,000 for research and development services which were
expensed as paid.
REPURCHASE OF COMMON STOCK
In June 1996, the Company purchased substantially all of the outstanding
shares of a minority stockholder for $12 million, $6 million in cash and
a $6 million non-interest bearing note payable. This repurchase was
accounted for as a charge to retained earnings. The note payable was
discounted at 8.25% and the discounted amounts of $1,706,767 and
$1,847,575 were included in long-term obligations, current and long-term,
respectively as of June 30, 1997. The debt discount is being amortized
using the effective interest method. The note payable was due in three
equal annual installments beginning on June 30, 1997. The balance of the
note was paid in full in November, 1997, and an interest charge of
$445,658 was recorded for the year ending June 30, 1998.
HYPERCOM UNIT TRUST
During fiscal 1998, 1997 and 1996, the Company paid $97,439, $108,619 and
$252,800 in rent to Hypercom Unit Trust, a trust fund controlled by
certain stockholders.
EXPRESS CARD SYSTEMS, INC.
A relative of an officer of the Company is a Vice President of Express
Card Systems, Inc. ("ECS"), a sales company, which derives a significant
portion of its revenues from products sold to the Company. During fiscal
1998, 1997 and 1996, ECS was paid $313,600, $340,400, $248,700,
respectively, with respect to sales of product to the Company.
15. SEGMENT INFORMATION:
The Company has two reportable segments: 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 that interconnect and consolidate
through wide area networks, geographically dispersed legacy data, local
area network, voice, fax and video traffic into a single networked
system.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technologies and marketing strategies.
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15. SEGMENT INFORMATION: (CONTINUED)
The following table presents certain segment financial information and the
reconciliation of segment financial information to consolidated totals as of
and for the year ended June 30, 1998 and 1997 (dollars in thousands):
FISCAL YEAR ENDED JUNE 30, 1998 POS SYSTEMS NETWORK SYSTEMS TOTAL
- ---------------------------------------------------------------------------
Revenue from external customers $230,839 $26,388 $257,227
Intersegment revenues 1,680 1,680
----------------------------------------
Total revenues $230,839 $28,068 $258,907
========================================
Segment income (loss) from
operations $ 55,118 $(4,828) $ 50,290
========================================
Depreciation expense $ 2,157 $ 453 $ 2,610
========================================
Segment assets $311,011 $28,350 $339,361
========================================
FISCAL YEAR ENDED JUNE 30, 1997 POS SYSTEMS NETWORK SYSTEMS TOTAL
- ---------------------------------------------------------------------------
Revenue from external customers $172,682 $24,060 $196,742
Intersegment revenues 10,468 10,468
---------------------------------------
Total revenues $172,682 $34,528 $207,210
=======================================
Segment income from operations $ 32,005 $ 3,933 $ 35,938
=======================================
Depreciation expense $ 2,199 $ 435 $ 2,634
=======================================
Segment assets $186,863 $31,455 $218,318
=======================================
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15. SEGMENT INFORMATION: (CONTINUED)
YEAR ENDED JUNE 30,
--------------------------
1998 1997
------------ -----------
Reconciliation:
Net revenues
Net revenues for reportable segments $ 258,907 $207,210
Elimination of intersegment (1,680) (10,468)
--------- --------
Total consolidated revenues $ 257,227 $196,742
========= ========
Income from operations
Income from operations for reportable segments $ 50,290 $ 35,938
Elimination of intersegment profits (3,021) (5,341)
Unallocated amounts
Corporate expenses (27,481) (7,767)
--------- --------
Consolidated income from operations $ 19,788 $ 22,830
========= ========
Depreciation
Depreciation expense from reportable segments $ 2,610 $ 2,634
Unallocated amounts:
Corporate depreciation 1,471 254
--------- --------
Consolidated depreciation expense $ 4,081 $ 2,888
========= ========
Assets
Segment assets $ 339,361 $218,318
Unallocated amounts
Corporate assets 140,697 17,851
Eliminations
Intercompany receivables (131,840) (45,435)
Investments in related parties (34,707) (28,045)
Advances to related parties (43,742) (16,519)
Profit in ending inventory (10,192) (7,429)
--------- --------
Consolidated assets $ 259,577 $138,741
========= ========
Prior to fiscal 1997, the Company's financial reporting system did not
provide separate information on Network Systems, and the Company has
determined that it would be impracticable to develop that information.
Accordingly, no segment information is provided for 1996.
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16. GEOGRAPHIC SEGMENT DATA:
Net revenues to external customers are based on the location of the
customer. Geographic information as of June 30, 1998, 1997 and for each
of the three years ended June 30, 1998, 1997 and 1996 is presented in the
table below (dollars in thousands):
UNITED LATIN ASIA/
STATES AMERICA PACIFIC EUROPE TOTAL
Year ending June 30, 1998
Revenues $110,410 $74,632 $57,909 $14,276 $257,227
Long-lived assets $ 16,096 $ 4,774 $ 3,188 $ 595 $ 24,653
Year ending June 30, 1997
Revenues $ 86,904 $47,482 $58,233 $ 4,123 $196,742
Long-lived assets $ 11,769 $ 2,748 $ 1,754 $ 153 $ 16,424
Year ending June 30, 1996
Revenues $ 68,596 $43,582 $50,119 $ 1,259 $163,556
17. SUBSEQUENT EVENTS:
During August 1998, the Company repurchased 587,700 shares of the
Company's stock for an aggregate cost of $5,376,794. The Company's
repurchases of shares will be recorded as treasury stock and result in a
reduction of stockholders' equity.
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18. INTERIM FINANCIAL RESULTS (UNAUDITED):
The following tables set forth certain unaudited consolidated financial
information for each of the four quarters in fiscal 1998 and 1997. In
management's opinion, this unaudited quarterly information has been prepared on
the same basis as the audited consolidated financial statements and includes all
necessary adjustments, consisting only of normal recurring adjustments, that
management considers necessary for a fair presentation of the unaudited
quarterly results when read in conjunction with the Consolidated Financial
Statements and Notes. The Company believes that quarter-to-quarter comparisons
of its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance. (Dollars in thousands, except per
share amounts.)
Fiscal 1998
------------------------------------------------------
September 30, December 31, March 31, June 30, Fiscal Year
------------- ------------ --------- -------- -----------
Net revenue $78,937 $71,209 $54,339 $52,742 $257,227
Gross margin 38,106 36,919 25,894 25,833 126,752
Income (loss) from operations 14,698 3,865 3,160 (1,935) 19,788
Net income (loss) 9,110 1,841 4,034 (996) 13,989
Basic earnings (loss) per share 0.36 0.06 0.12 (0.03) 0.46
Diluted earnings (loss) per share 0.35 0.06 0.11 (0.03) 0.44
Fiscal 1997
------------------------------------------------------
September 30, December 31, March 31, June 30, Fiscal Year
------------- ------------ --------- -------- -----------
Net revenue $47,690 $57,742 $45,912 $45,398 $196,742
Gross margin 21,874 29,225 20,174 21,797 93,070
Income from operations 6,309 10,309 3,600 2,612 22,830
Net Income 4,499 7,030 2,166 1,867 15,562
Basic earnings per share 0.18 0.28 0.09 0.07 0.62
Diluted earnings per share 0.18 0.27 0.08 0.07 0.60
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Item 14 (a) 2 Financial Statement Schedule
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and Stockholders
of Hypercom Corporation
Our audits of the consolidated financial statements referred to in our report
dated July 24, 1998 which report and consolidated financial statements are
included in this Annual Report on Form 10-K also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Phoenix, Arizona
July 24, 1998
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Financial Statement Schedule
(Dollars in thousands)
Additions
------------------------
Balance at Charged to Charged to
Beginning of Costs and Other Balance at end
Period Expenses Accounts Deductions of Period
------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1996:
Allowance for doubtful accounts 267 494 761
Inventory reserves - 2,133 2,133
YEAR ENDED JUNE 30, 1997:
Allowance for doubtful accounts 761 1,427 (1,409) 779
Inventory reserves 2,133 994 (525) 2,602
YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts 779 2,972 (22) 3,729
Inventory reserves 2,602 2,510 (469) 4,643
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List of Exhibits
Exhibit No. Exhibit Description
3.1 Amended and Restated Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 3.1 of the Company's Form S-1
Registration Statement Under The Securities Act Of 1933.
3.2 Amended and Restated Bylaws of the Company. Incorporated by reference to
Exhibit 3.2 of the Company's Form S-1 Registration Statement Under The
Securities Act Of 1933.
4 Amended and Restated Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 3.1 of the Company's Form S-1
Registration Statement Under The Securities Act Of 1933.
21 Subsidiaries of the Company
23 Consent of Independent Public Accountants
27 Financial Data Schedule
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