company profile table of contents -...

h t t p : / / w w w . h y p e r c o m . c o m

11

5 Year HighlightsYears ended June 30,

1999 1998 1997 1996 1995

Statement of Operations

Net revenue $261,515 $257,227 $196,742 $163,556 $146,168

Income from operations $ 14,663 $ 19,788 $ 22,830 $ 15,896 $ 29,345

Net income $ 9,173 $ 13,989 $ 15,562 $ 12,289 $ 19,556

Earnings per share:

Basic shares outstanding 33,148 30,215 25,000 36,650 36,650

Basic earnings per share $ 0.28 $ 0.46 $ 0.62 $ 0.34 $ 0.54

Diluted shares outstanding 34,428 31,830 25,754 37,106 36,601

Diluted earnings per share $ 0.27 $0.44 $ 0.60 $ 0.33 $ 0.53

Balance Sheet

Working capital $162,152 $186,799 $ 61,972

Total assets $276,280 $259,577 $138,741

Stockholders’ equity $226,023 $220,431 $ 60,894

Book value per share 6.57 6.93 2.36

Return on sales 3.5% 5.4% 7.9%

Number of employees 1,237 1,166 1,076

In thousands except per share data and number of employees

Company ProfileHypercom Corporation (NYSE: HYC) is the single-sourceglobal provider of end-to-end electronic payment solutions,including card payment systems, peripherals, networkproducts, Ascendent™ software and E-commerce paymentsolutions that add value at the point-of-sale for consumers,merchants and acquirers.

On a global basis Hypercom delivers the services andtechnology infrastructure required to quickly integrate anddeploy new payment applications. These applicationsprovide competitive value-add programs, improved businessperformance and low total cost of ownership.

Headquartered in Phoenix, Arizona, Hypercom markets itsproducts in more than 70 countries through a globalnetwork of affiliates and offices in Argentina, Australia, Brazil,Chile, China, Hong Kong, Hungary, Japan, Mexico, Russia,Sweden, Singapore, the United Kingdom and Venezuela.

Table of ContentsLetter to Stockholders . . . . . . . . . . . . . . . . . . . . 3

Chairman’s Letter . . . . . . . . . . . . . . . . . . . . . . . . 5

Year At A Glance . . . . . . . . . . . . . . . . . . . . . . . . 6

Transforming An Industry. . . . . . . . . . . . . . . . . . 8

Customer Stories . . . . . . . . . . . . . . . . . . . . . . . 10

Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insert

Corporate Information. . . . . . Inside Back Cover

33


Fiscal 1999 was a year of transition for Hypercom, during which we laid a solidfoundation for revenue and earnings growth. We stepped up our efforts to penetratenew markets and expand our global market share, develop products that set new

standards for the industry and add value for our customers, and strengthen Hypercom’smanagement team. Our diligent focus on these goals has already produced tangible results.Hypercom is rapidly growing its market share among providers of point-of-sale (POS) ter-minals and systems. We have also launched several new products that have positioned theCompany for rapid growth in the near future.

Industry ConditionsThe electronic payment industry, as a whole, has not done well during the past two

years. The Asian economic crisis, the Brazilian currency devaluation, customers’ focus ontheir own Year 2000 issues and the fact that the smart card initiative, particularly in the US,has not materialized yet, all contributed to stalled growth in the industry.

Despite these difficult conditions, Hypercom did grow in fiscal 1999. Indeed, for the fiscal year ended June 30, 1999, net revenues were $261.5 million, compared with $257.2million a year ago. Although net income for fiscal 1999 declined to $9.2 million, or $0.28and $0.27 per basic and diluted share, respectively, versus $14.0 million, or $0.46 and $0.44per basic and diluted share, respectively, a year ago, we grew our market share substantially.

Today, Hypercom finds itself in an enviable position. It has weathered a difficult period inits industry and was able to spend on product development while its competitors were cut-ting back. It now has a significant technological lead at a time of improving market condi-tions. It has several initiatives in Internet-enabled applications and electronic commerce thatare starting to bear the fruits of our intensive labors.

And, there are strong signs that the terminal industry is on a rebound. Asian conditionsare improving, Latin America is stable, most Year 2000 issues have been completed andEurope is implementing large national smart card projects that require faster, more sophisticated terminals.

We are continuing to move towards worldwide industry leadership at the expense ofboth the legacy market leader and would-be challengers. Hypercom’s worldwide terminalshipments in 1998 jumped 29%. This included dramatic 45% and 167% increases in the US

and Europe, respectively. Hypercom main-tained its market leader position in LatinAmerica, and held its own in Asia despite thatregion’s economic crisis. The Companyreached another milestone when it announcedthat it had shipped its three millionth point-of-sale terminal, which was one of Hypercom’srecently released and highly successful ICE 5000 terminals.

New Product DevelopmentHypercom’s R&D expense for the full

year was $30.2 million or 12% of net revenues. We will continue investing heavilyin R&D, especially in the areas of Internet-enabled applications and electronic commerce.As a direct result of our investment, Hypercomhas gained a very substantial technology lead.

To Our Stockholders

George Wallner

44

Our ICE™ (Interactive Consumer Environment) product line iscontinuing to gain market acceptance and the ICE 5000 is alreadycontributing to our top line growth. Most importantly, the underly-ing concepts of Internet-enabled, value-added applications, such aselectronic receipt capture, on-screen advertising, and loyalty pro-grams are gaining rapid market acceptance.

The recent introduction of the ICE-PAC™ software providesadditional value-added options for the merchant. The software sup-ports customized advertising and promotional messaging displayedto consumers on the ICE 5000 and SmartICE™, a hand held wire-less card payment and order entry terminal.

Our solutions use Web-server technologies to access theInternet and bring the applications within the reach of small- andmedium-size merchants who are not necessarily Web-savvy.

Hypercom has developed iMerchant, an innovative, technology-leading Internet electronic commerce product suite for small andmedium-size merchants. iMerchant has been in live beta testing trialsin the US and creates an entirely new paradigm for enabling smallmerchants to open and operate Web-based virtual stores. We givethem all the tools they need to create a virtual storefront -- withoutthe need for professional assistance -- and they can be up and run-ning in a matter of hours.

Bringing merchants Internet-enabled, value-added applicationsleverages Hypercom’s strong position on the retail counter. Thesevalue-added features and functionality justifies, and in many casesmay accelerate terminal replacement.

Organizational ChangesTo take advantage of our technology lead and

improving market conditions, we implemented sev-eral aggressive new programs coupled with man-agement and organizational changes. We areconfident that these changes will grow rev-enues and profits at an accelerated pace.

We strengthened the sales forceacross all markets. This is consistentwith our goal to increase marketshare. In addition, we combined ourpoint-of-sale businesses, formerlycomprised of separate entities,into a single global organiza-tion, Hypercom TransactionSystems Group (HTSG).Chris Alexander, formerchief operating officer forHypercom, was namedthe President of HTSG. Thenew organization integratesHypercom’s international businessunits with the US/Canada group into fourregional centers: Hypercom North America

(US, Canada, Mexico, Puerto Rico); Hypercom Latino America;Hypercom Asia and Hypercom Europe (Europe, Middle East and Africa).

In addition, we realigned Hypercom’s executive staff to bettersupport our customers in the fast-changing POS market.

I have assumed the position of President and Chief ExecutiveOfficer and remain the Company’s Technology Officer. Al Irato, for-mer president and CEO, has now assumed the position of Chairmanof the Board. I want to thank Al for his superior efforts over the pastseven years, which have positioned us so well to take advantage ofour current opportunities. We are grateful for his continued wisdomand expertise as he guides the Board of Directors going forward.

These changes, among others, have increased management’sflexibility, flattened our organizational structure, and focused notonly our sales organization but all employees on one overriding goal:to generate revenue and earnings growth by securing our position asthe world’s leading provider of POS solutions.

AcquisitionsWe will continue to pursue acquisitions that help us grow geo-

graphically and strategically. We acquired the assets of The HorizonGroup Inc., one of the leading national providers of value-added,point-of-sale support services, including sales, refurbishing equip-ment, help desk, PIN pad key loading, terminal deployment andother custom programs that allow us to generate recurring revenues.We acquired the business of JTS ChequeOut Solutions Inc., a multi-lane provider which now gives Hypercom an entry into the largenational retailer, chain drugstore and supermarket POS markets. TheCompany also acquired the payment security business of ICLFinancial Terminals Sweden AB, a leading provider of secure payment

devices, smart card products and self-service POS terminals.

Hypercom Network SystemsHypercom has long recognized

that the value inherent in theHypercom Network Systems

Division’s Voice Over InternetProtocol (VoIP) gateway and carrier

class products, and network manage-ment products have not been fully

reflected in the overall valuation of theCompany. After our fiscal year end,

Hypercom and Inter-Tel Incorporated, aPhoenix-based IP Telephony provider,

signed a memorandum of understand-ing to form a jointly owned company.

Comprised of the sum of parts of the packettelephony resources, products and services

of the two companies, the new company willcreate an end-to-end IP solution. Combining

those two complementary technologies will givethe new company the opportunity to be valued inICE Terminal


55

the IP Telephony marketplace. If concluded, the transaction will alsoallow Hypercom to concentrate its efforts in the POS and electroniccommerce marketplace.

We expect this complete IP Telephony solution to leapfrog thecompetition by creating the industry’s first turnkey IP Telephonyplatform. Over 50 HNS research and development, sales, marketingand support personnel will also join the new company, includingPaul Wallner, current president of HNS.

Final ThoughtsWith our innovation, technology lead and increasing market

dominance in POS, Hypercom management is determined to trans-late its advantages and opportunities into increased stockholdervalue. Initially, as we grow market share, we expect to increase topline revenues with continued high R&D spending. Subsequently,we expect accelerating profitability. With over 17 million terminalunits in the marketplace, at an average price of $300, an anticipatedreplacement cycle of 70% in three years, and additional potential for recurring revenues, the opportunity that exists for Hypercom in the POS marketplace is sizable. We are solidly convinced thatHypercom is uniquely poised to capitalize on these significant market opportunities.

George WallnerPresident, Chief Executive Officer and Chief Technology Officer

Chairman’s Letter

As of July 1, 1999, I assumed therole of Chairman of the Board forHypercom and George Wallner,

who had been Chairman, assumed theroles of President and CEO, in addition tohis role as Chief Technologist. At thattime, we implemented significant organi-zational changes that George has outlinedmore fully in the stockholder letter. Theyare all aimed at taking advantage of oppor-tunities we see in our POS marketplace.

As Chairman, I will be in a position to bring almost forty yearsof business experience and over seven years as Hypercom’s ChiefExecutive to bear in a number of ways. First, I will be acting as anadvisor to George Wallner and other members of our executive staff.Second, I will be focused on strategic acquisitions that will comple-ment our existing product and service offerings to benefit our cus-tomers. And, of course, I will be engaged in the activities of the Boardof Directors.

It has been my privilege to have served as Hypercom’s Presidentand Chief Executive Officer and to see customers globally benefitingfrom Hypercom’s solutions. As the Chairman of the Board, I will havethe goal of delivering stockholder value first and foremost in mind.

We have much to do in our next fiscal period and have alreadybegun to execute our strategic plans. We have the leadership, sales andmarketing momentum, leading-edge products and, I believe, arenewed sense of commitment, excitement and cooperation at all lev-els within the Company to achieve our goals. I’d like to say thank youto our stockholders, customers, vendors and employees for your con-tinued confidence in Hypercom and your ongoing support.

Albert A. IratoChairman of the Board

SmartICE

Al Irato

66

The Horizon Group, Inc.A St. Louis-based company and one ofthe leading national providers of value-added, point-of-sale support services inthe United States. In addition to salesof new equipment, the company pro-vides a variety of services, includingrefurbishing equipment, help desk, PINpad key loading, terminal deploymentand other custom programs.

JTS ChequeOut Solutions, Inc.A leading provider of card-based,multi-lane financial and marketingsystems for US-based supermarketchains became a division ofHypercom’s POS Multi-Lane Division.

ICL Financial Terminals ABOne of Europe’s leading providers of secure payment devices, smart card products and self-service point-of-sale terminals now operates as HypercomFinancial Terminals AB (HFT).

Ascendent RealPay™A versatile, high-performance transac-tion processing software solution thatallows banks and other traditionaltransaction processors to quickly andeasily become Internet paymentprocessors.

FastPOSHypercom announced a worldwideindustry-leading initiative to upgradeelectronic payment transactions fromthe existing 1200/2400 bps transmis-sion rates to 9600 bps by introducingthe Hypercom FastPOS™ technology.It enables merchants to significantlyincrease the speed of individual trans-actions, batch loads and softwaredown-line loading.

e-Telephony A turnkey business and technology solu-tion that unites networking, electroniccard payment and e-commerce capabili-ties. It allows Internet Service Providers(ISPs) and other IP Telephony carriers tolaunch services faster, with reducedcosts and fewer interoperability issues.

ICE 5000Powerful, multi-function touch-screen terminals that incorporate a high-speed thermal printer and paper cut-ter, and FastPOS. In addition to thetraditional credit and debit functions,the ICE 5000 supports a range of newvalue-added transactions, includingloyalty programs, electronic receiptcapture and a broad range of smartcard schemes.

SmartICEA hand held, wireless cardpayment and order entry terminal for a broad range ofcard payment applications at awide variety of merchants and service providers.

Product IntroductionsAcquisitions

Year At A Glance


77

Market Engineering MarketingStrategy Award from Frost & SullivanHypercom’s strategic moves to shift thefocus of the financial services industryto value-added solutions at the point-of-sale.

Credit Card ManagementSurvey data released in mid-year 1999,showed that Hypercom shipments of card payment systems in the US and Canada increased by 70% in 1998.

The Nilson ReportThe Nilson Report named Hypercom’s president, CEO and chief technologist,George Wallner, as one of the top 25 individuals who currently has “thegreatest influence on the future of thesmart card industry worldwide.”

Smart Cards ‘99 The ICE 5000 was nominatedas one of the year’s “MostInnovative Products” at theLondon-based Smart Cards ‘99convention.

N+I Category FinalistHypercom Network System’s e-Telephonysolution was named a finalist in theWAN equipment category of the Bestof Show Award competition by DataCommunications and Internet Weekeditors at the Networld+ Interop tradeshow in spring 1999.

“Best of Show”Award/CTI ExpoThe premier event in the rapidlygrowing datacom/telecom convergenceindustry, awarded Hypercom’se-Telephony solution “Spring 1999Best of Show.”

“Best of CTI Expo Fall” ‘98 Award Hypercom’s IP.tel 6000 IP TelephonyGateway garnered a Best of CTI Expoaward on the basis of technologicalinnovation, with emphasis on theproduct’s feature set, the ability towork with existing standards, and thedegree to which a product contributes to the future computer telephony inte-gration (CTI) and Internet telephony.

JPC Newspaper Group AwardHypercom Corporation received theJPC Product Innovation Award for itsICE-PAC Customization system.

Industry Awards and Recognition

88

Q: What is causing the paradigm shift in the point-of-sale terminalmarket?

Unlike most other technology industries, POS products – of whichsome 17 million are installed around the world today – have anaverage life of 6-7 years. How may people are using a six-year oldpersonal computer?

The primary reason these devices have remained in place at mer-chant locations is because, unlike the personal computer industry,the basic applications of credit and debit have remained static.Virtually no value-added applications have been added to thesedevices. Thus the replacement cycle is quite long.

Hypercom has completed extensive research with merchants to determine which additional applications would be of value to thesemerchants. And, Hypercom has invested heavily in research and development over the years to develop the “enabling technologies” to meet these emerging merchant requirements.

Q: What are some examples of value-added programs?

They are numerous. For example, what merchant wouldn’t want tohave its logo printed on the receipt – often the only piece of paperthe consumer retains after leaving the merchant!

And, today, how many consumers watch as the clerk processes acredit card transaction and see the rather arcane messages displayedon the terminal... dialing... transmitting... processing... and, finally...approved! What better opportunity while the consumer is “captive”to instead display advertising and promotional messages?

This capability is made possible because of the screen-based natureof Hypercom’s ICE family of products. This context-sensitive, inter-active, and graphics-capable screen technology also reduces clerktraining time and clerical errors.

And finally, Hypercom is able to fulfill the promise of the “paperless”payment system. While many of the participants in this systemenjoy the benefits of such a system, somehow the merchant was for-gotten. Merchants are still required to maintain copies of receipts formany years – at considerable expense and inconvenience. By captur-ing the consumer’s signature on the screen, it can be stored electroni-cally using Hypercom’s Ascendent Electronic Receipt CaptureSystem.

Q: What products and enabling technologies has Hypercomdeveloped to facilitate this paradigm shift to value-added services?

The driving force and “window” into this new paradigm is the ICEfamily of terminal products. It incorporates a number of new tech-nologies, which facilitate these value-added services. Most significantis the graphical, touch-screen display. Due to the nature of the dis-play, the user interface is far more intuitive and applications are con-text-sensitive. The display also provides the capability to displayadvertising and promotional messages while the consumer’s atten-tion is focused on the terminal. The graphical, high-speed thermalprinter also allows the merchant’s logo and other promotional mes-sages to be printed on the receipt. And, the printer employs a papercutter, virtually eliminating paper jams, which have historically beena bane to merchants, particularly in integrated POS terminals.

Additionally, Hypercom has developed a new modem technologywhich transmits data at eight times the speed of industry-standarddevices. This faster transmission speed is a critical factor in the abili-ty to transfer enriched data streams represented by ElectronicReceipt Capture, graphics and other applications.

Without Hypercom’s networking capability and its Ascendent familyof client/server applications, none of these value-added applicationswould be possible. And, Hypercom is uniquely positioned as theonly vendor to be able to offer these end-to-end solutions.

Transforming An Industry


99

Q. Where do smart cards fit in this shift?

Smart card technology has the potential to improve existing payment products and create new ones. These new or improvedproducts, however, must offer a business case for banks, con-sumers, and merchants; they must reduce costs or create new and profitable revenue streams. To create universal acceptance, terminals must be equipped to read smart cards everywhere. Thebest place to start is where credit and debit are accepted today.Stored value could be a function added gradually to credit anddebit smart cards as chip costs go down. Stored value, an applica-tion which adds little value, is responsible for most of the cost oftoday’s smart cards because it requires sophisticated security. Thefuture of stored value will materialize when, in the mind of theconsumer, pre-paid changes into electronic cash. This change willtake place gradually as applications for stored value become morecommon in daily life and add more convenience.

Q: What about the World Wide Web?

Since its inception – less than ten short years ago – the web hashad a more profound impact on our society, in a shorter period oftime, than virtually any other “technology revolution” in history.And its impact is indeed affecting Hypercom and the electronictransaction industry as well in very significant ways.

First, as a company, Hypercom has undertaken an initiative to“web-ize” many of our internal processes, to improve communica-tions with our customers, investors and employees, and toenhance the service which we provide to our constituents.

Perhaps more important, however, is the impact that the web ishaving on our products and the solutions which we deliver to ourclients. These can take the form of something as seemingly simpleas providing TCP/IP connectivity for our terminals, to the chal-lenge of “web-enabling” the seventeen million merchants todaywho don’t have a web presence or “virtual” storefront.

Truly, it is the convergence of the “physical world,” the small andmedium sized merchants with whom our partners interact everyday, with the “virtual world” created by the rapid growth of theWorld Wide Web. To capitalize on this convergence, we have created a new business unit – hypercom.com – whose role it is to“put the commerce in dot-com.” Hypercom is uniquely positionedto deliver on the promise of this convergence for a number of rea-sons. First, through our global distribution network, Hypercom “touches” the seventeen million merchants around the world whohave an investment in “brick and mortar” storefronts. Second,hypercom.com has developed a product – iMerchant – whichallows these merchants to build a virtual storefront which may behosted on the web. And iMerchant is targeted at these “brick andmortar” merchants who today may not be web-savvy and don’t

have the time or money to invest in building a virtual storefront.With iMerchant, these merchants can build their own storefronts in a matter of hours by answering less than fifty questions abouttheir business.

Hypercom’s vision is to allow a consumer to move seamlesslybetween the physical world and the virtual world...it’s somethingwe call our “clicks and mortar” strategy! For example, a consumercould visit a merchant’s physical store and browse for items.Perhaps the consumer sees something he or she likes, but wants tothink more before making a purchase. That evening, while athome, the consumer logs onto the merchant’s virtual store andorders the item, which is delivered to the home. Perhaps the itemordered is an article of clothing which doesn’t fit quite right. Theconsumer can then visit the merchant’s physical store to return theitem for one which fits better or ask for a refund. This type of realworld example illustrates our “clicks and mortar” strategy, allowinga consumer to seamlessly move from the physical world to the vir-tual world and back to the physical world.

What’s more, because the merchant’s card payment system is anICE product from Hypercom, it could perhaps have a TCP/IP con-nection – and run a browser on the terminal’s screen to checkorder status, inventory, etc., right from the store, without having toinvest in a personal computer.

So what about the World Wide Web? Everything is about the web,and its use will continue to permeate the card payment industry.Hypercom is developing the products today, which will positionour customers – and our customers’ customers – to fully exploitthe enormous opportunities that will be represented by the web.

1100

Is BankIs Bank Cashes in On HypercomTechnology Solutions

Before Hypercom entered the Turkish market 2-1/2 years ago, electronic transactiontimes averaged 33 seconds with only 67% ofthose transactions connecting successfully thefirst time. Now, thanks to Hypercom’s T7P, acompact, high-performance point-of-sale ter-minal that supports credit and debit card pro-cessing, Turkish merchants routinely obtainon-line authorizations in less than 6 seconds,with a 94% first time connection rate. Equallyimportant, the “plug and play” HypercomT7P is designed to save on cashier training,installation time and costs, processing and settlement time. Upgrades or re-configurations can be handled remotely.

The most recent agreement to provide10,000 T7P POS terminals and 52Integrated Enterprise Networking™ (IEN)nodes to Is (pronounced “Issh”) Bank is indirect support of Is Bank’s card acquisitionactivities. Is Bank is installing the 52 IENcontrollers in regional branches to extend itsgeographical network coverage and addcapacity in those areas experiencing increas-ing credit and debit card authorization trans-actions. Incorporating Hypercom’s advancedIENView™ network management system,Is Bank can remotely manage all of thenodes from its central computer center.

Is Bank’s merchants have told them that theyprefer the Hypercom terminal because it isextremely reliable, easy to operate, requiresminimal counter space and processestransactions very quickly. In addition,Hypercom’s solution allows the bank tobetter protect itself against fraudulenttransactions because every transaction isauthorized reliably on-line.

Concord EFSConcord EFS and Hypercom Deliver High-End Solution to Down-Market Retailers

Bringing signature capture to the small-to-medium sized retailer is a giant leap in thetransaction processing industry. ConcordEFS Inc. has done it with Hypercom’s signature capture solution.

Concord is a leader in providing electronictransaction authorization, processing, settle-ment and funds transfer services to thesupermarket, petroleum, convenience store,retail, and financial services industries. It provides end-to-end processing for credit,debit and electronic benefit transfer (EBT)card transactions for merchant clients. And,it provides automated teller machine (ATM)processing and MAC® network access to thefinancial services industry.

Concord purchased over 30,000 HypercomICE 5000 terminals along with theAscendent SigCap software system and ICE-PAC, a screen/printer customization

Our Customers

system, to provide a complete, end-to-endelectronic signature capture and retrievalsolution to its merchant network. The inte-grated system offers complete electronic sig-nature capture, receipt storage and retrievaland eliminates the need to retain a papercopy of the receipt. The data, stored in adatabase on the server, can be accessed toview or retrieve an image of the signedreceipt at any time. A receipt can be printed,e-mailed, faxed or transferred via EDI(Electronic Data Interchange) for disputeresolution.

As a result of implementing this Hypercomsolution, Concord has been able to differen-tiate itself from its competitors while bring-ing to down-market retailers a solutionwhich has traditionally been used only bythe nation’s largest retailers.

UNITED STATES SECURITIES ANDEXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K(Mark One)

≤ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934For the Ñscal year ended June 30, 1999

n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934For the transition period from to

Commission File No. 1-13521

HYPERCOM CORPORATION(Exact Name of Registrant as SpeciÑed in Its Charter)

DELAWARE 86-0828608(State or Other Jurisdiction (I.R.S. Employer

of Incorporation or Organization) IdentiÑcation No.)

2851 WEST KATHLEEN ROAD,

PHOENIX, ARIZONA 85053(Address of Principal Executive OÇces) (Zip Code)

Registrant's telephone number: (602) 504-5000Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.001 par value New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to Ñle such reports), and (2) has been subject to such Ñling requirements forthe past 90 days. Yes ≤ No n

Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant's knowledge, in deÑnitive proxy orinformation statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. n

The aggregate market value of the voting stock held by non-aÇliates of the registrant was $94,854,472 asof September 16, 1999 (based on the closing price of the common stock on the New York Stock Exchange onthat date).

The number of shares of Common Stock outstanding at September 16, 1999 was 33,199,517.

Documents Incorporated By Reference

Portions of the Company's Proxy Statement relating to its 1999 Annual Meeting of Stockholders to beheld on November 16, 1999 are incorporated by reference into Part I, Part II and Part III, Items 10, 11, 12,and 13.

UNTITLED1 Front 1 Black

TABLE OF CONTENTS

ItemNo. Caption Page

PART I

1. Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1

2. Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

3. Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

4. Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12

PART II

5. Market for Common Equity and Related Shareholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13

6. Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13

7. Management's Discussion and Analysis of Financial Condition and Results of OperationsÏÏÏÏÏ 15

8. Financial Statements and Supplementary DataÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20

9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ÏÏÏÏ 20

PART III

10. Directors and Executive OÇcers of the RegistrantÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21

11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21

12. Security Ownership of Certain BeneÑcial Owners and Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21

13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-KÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22

Signatures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23

List of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXHIBIT INDEX

i


PART I

Item 1. Business

The Company

Hypercom Corporation (""Hypercom'' or the ""Company'') is a global provider of electronic paymentsolutions, including multi-function point-of-sale terminals, peripherals, network products, Ascendent paymentand transaction software and Internet-based and electronic commerce payment solutions. On a global basisHypercom delivers the services and technology infrastructure required to quickly integrate and deploy newpayment applications. These applications provide competitive value-added programs, improved businessperformance and low total cost of ownership. Hypercom markets its products in more than 70 countriesthrough a global network of aÇliates and oÇces in Argentina, Australia, Brazil, Chile, China, Hong Kong,Hungary, Germany, Japan, Mexico, Russia, Sweden, Singapore, the United Kingdom and Venezuela.

Worldwide, Hypercom is the number two provider of Point of Sale (""POS'') payment terminals. Card-based payment is becoming a primary form of value and information exchange, which enables users to engagein payment and non-payment activities such as credit and debit payments, electronic beneÑts transfers(""EBT''), loyalty systems and couponing, medical claims and payments.

The Company's POS products Ì POS terminals, POS networking equipment, POS transaction software(Ascendent), Internet software, and its POS services, which include deployment, help desk, repair andtelecommunications, accounted for 88.3% and 89.7% of Hypercom's net revenues in Ñscal 1999 and 1998,respectively, and are sold in more than 70 countries through its direct sales force and a variety of third-partydistribution channels.

Through its Network Systems division, which accounted for approximately 11.7% and 10.3% ofHypercom's net revenues in Ñscal 1999 and 1998, respectively, the Company designs and manufactures multi-service, wide area networking (""WAN'') solutions for complex enterprise networks requiring consolidation oflegacy, local area networking (""LAN''), voice (including voice over Internet protocol (""VoIP'')) and videotraÇc. Its Integrated Enterprise Network (""IEN'') family of products gives users Öexibility, high performanceand low costs for the life of the network.

Hypercom Corporation is the successor to an Australian company founded by George Wallner, theCompany's President and Chief Executive OÇcer, in 1978. The company's operations were primarily focusedon Asian markets until 1987, when the Australian company expanded its operations into the United States. OnJune 5, 1996, the Company was reincorporated in Delaware, and shortly thereafter, through a series ofcorporate restructurings, became a U.S. holding company for the operations of the Australian company and itssubsidiaries and aÇliates. These restructurings were completed in July 1997.

Industry Background

POS Payment Systems. In recent years, consumers demanding fast, convenient and secure methods ofpayment have increasingly substituted card-based payments, such as debit, credit and charge cards, fortraditional forms of payments, such as checks and cash. According to The Nilson Report, a payment systemsindustry newsletter, retail consumer payments using credit, debit, electronic beneÑts transfer and prepaid cardsincreased from approximately 15% in 1990 to approximately 21% of transactions (measured in dollars) in theU.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 sameperiods could exceed projected U.S. growth rates. It is anticipated that convenience, security and Ñnancialincentives, 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 deliveryof such payments, automated POS systems were introduced in the early 1980s. Prior to that time, most POScredit and debit card transactions were processed manually, using paper-based systems. As the volume ofcredit card transactions increased, card issuing banks, through their associations with VISA and MasterCard,oÅered Ñnancial incentives to encourage the deployment of new POS technologies to improve accuracy,

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reduce costs, enhance eÇciency, improve settlement procedures and reduce credit abuse and fraud. These newcapabilities included electronic authorization, data capture, transaction transmission and settlement. Thesefunctions require the use of a POS terminal capable of reading a cardholder's account information from thecard's magnetic stripe and combining this information with the amount of the sale entered via a POS terminalkeypad. The terminal electronically transmits this transaction information over a communications network toan authorized computer data center and then displays the returned authorization or veriÑcation response onthe POS terminal.

New electronic payment technologies are expected to facilitate the introduction of additional electronicpayment applications, such as sophisticated customer loyalty programs and stored value cards, and the use ofPOS systems in new vertical industries, such as health care and the electronic payment of governmentbeneÑts, which is already available in several states and is required to be available for federal programs. Inaddition, merchants and banks are working together to eliminate processes which are costly and timeconsuming through the use of the current infrastructure and new POS systems, including the use of the POSterminal for processing checks (check truncation) and retrieval of electronic signatures or receipts in theadvent of customer disputes. In addition, the infrastructure development of emerging markets, such as those inEastern Europe, Russia and China, is expected to contribute to the increasing demand for electronic paymentproducts.

The increasing use of debit, credit and charge cards and the proliferation of new electronic paymentmethods and programs are driving the need for POS payment systems which (i) support a wide array ofpayment and program options, (ii) are scalable, Öexible and cost-eÅective, (iii) provide fast, secure datatransmission and (iv) can work with existing legacy systems, which form the backbone of the electronicpayments industry. Many of today's installed base of POS terminals are relatively old and in need ofreplacement to handle the increased volumes projected for POS transactions, new payment programs that maybe oÅered in the future, new technologies such as chip cards, and new modems and other interfaces to fastertelecommunications facilities. In addition, the components of current POS payment systems typically aresupplied by multiple vendors which may aÅect interoperability, scalability and upgradeability.

Enterprise Networking Market. As requirements for the transmission of data, voice, fax and video havebecome more complex, many enterprises have developed multiple networks which carry diÅerent types oftraÇc (data, voice, fax and video) using a range of protocols (SNA and TCP/IP) and networkingtechnologies (X.25, frame relay, asynchronous transfer mode (""ATM'')). Historically, large organizationshave performed business-critical data processing predominantly on hierarchical, centralized computer sys-tems, mainly IBM mainframe (legacy) systems. WANs have been built to provide access to these systemsand databases from geographically dispersed branch oÇces.

As users increasingly demand both savings and quality, carriers and service providers are rolling out newcompetitive voice and data services supported by packet-based infrastructures and central oÇces. HypercomNetwork Systems service provider solutions enable competitive carriers and Internet service providers(""ISPs'') to transmit voice, fax and data traÇc using frame relay, Internet Protocol (""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 solutionsthat maximize performance and minimize costs. As a result, Hypercom has emerged as a leading worldwidedeveloper, manufacturer and supplier of high-performance, comprehensive POS payment systems andsophisticated enterprise networking products, tailored primarily to POS payment systems networks.

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 andinnovator in the electronic payments industry by developing a number of state-of-the-art POS payment

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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 ofinnovations, such as fast-dial techniques, SDLC terminals, bit-map message formats, dual-track cardreaders and on-line terminal management. The Company also introduced technology that reducedtransaction response times from 20 seconds to less than 10 seconds, which has resulted in substantialsavings for Hypercom customers and better service to consumers. Hypercom has developed a comprehen-sive base of terminal and networking technologies that will enable it to remain a leading innovator in thePOS payment systems market. In Ñscal 1999, Hypercom's technology leadership continued with theannouncement of a new generation of POS payment systems with its Interactive Customer Equipment(""ICE'') product line; a new modem technology, FastPOS, which operates at 9600 bits per second(""bps''), allowing not only faster transactions but new applications such as electronic receipt capture; andAscendent transaction software, which includes functionality for secure Internet payments.

Comprehensive POS Payment Systems Provider. The Company diÅerentiates itself from itscompetitors by developing, manufacturing and providing total electronic transaction solutions. With itsPOS payment terminal technology, networking hardware and software and transaction processingsoftware the Company is a systems-level supplier. Most competitors oÅer only certain components of aPOS payment system. In contrast, Hypercom products oÅer comprehensive payment systems, enablingseamless integration and interoperability with other Hypercom or competitors' products.

Lower Total Cost of Ownership. The Company designs its products to provide customers with alower total cost of ownership, enabling Hypercom products to command premium pricing. TheCompany's core products typically feature multi-functionality, robust construction, scalability to facilitatesystem growth and ready upgradeability to accommodate new technological developments that canextend product life. The Company's technologically advanced, easy-to-use products also provide fastertransaction processing times, reduce the time and costs needed to train merchant personnel who operateHypercom products and ensure the secure transmission of Ñnancial transactions.

International Experience and Global Presence. Hypercom was founded in Australia 21 years ago. Itbecame the largest supplier of POS systems in the Asia/Pacific region prior to its move to the UnitedStates. The Company currently sells its products in more than 70 countries. According to the May, 1999Nilson Report, the Company has the second largest installed base of POS terminals in the U.S. andworldwide, and the largest installed base in Latin America and Asia/Pacific. The Company has gainedsignificant expertise in adapting to local customs, addressing local regulatory, certification and telecommu-nications requirements and establishing key partnering arrangements with local distributors and resellers.Further, because the Company's products incorporate advanced communications technology, the Companybelieves that its POS payment systems perform better than its competitors' products in less developedtelecommunications environments, most of which support only earlier generations of communicationsprotocols.

Integrated Design and Production. The Company designs, develops and manufactures substantiallyall of its products in-house, enabling it to control the product development process at all levels. Inaddition, the Company works closely with its customers, distribution channels and related industryparticipants to identify products that respond to market needs. Company oÇcials actively engage instandards-setting eÅorts and participate in a wide variety of user groups and industry forums to facilitateproduct identiÑcation and development eÅorts. The Company believes that its integrated approach toproduct identiÑcation, development and manufacturing will continue to reduce research and developmentcosts 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 paymentsystems to develop, manufacture, market and support a family of Öexible, stackable, multi-service

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switch/routers under the trade name Integrated Enterprise Network (""IEN''). The Company believes that itsNetwork Systems business has the following key competitive advantages:

Technologically Advanced, Multi-service Architecture. Hypercom's IEN products feature a modu-lar and distributed processing architecture, which supports legacy and client/server environments andmultiple traÇc types. Each IEN device incorporates a switch, router, Frame Relay Assembler/Disassembler, protocol converter, dial back-up unit and Channel Service Unit/Data Service Unit, andperforms data compression and encryption. These products support all WAN services critical for globalnetworking, including frame relay, X.25 and ISDN, enabling networks to capitalize on the lowestavailable telecommunications tariÅs. IEN products integrate legacy data, LAN, voice, fax and videoapplications over a single network. The beneÑts of IEN products include reduced telecommunicationscosts through the elimination of duplicate networks, consolidation of customer premises equipment,common management interface, optimized network performance, added reliability and system integrityfor mission-critical applications.

Extensive Voice/Data Expertise. In addition to designing and building multi-service networks forFortune 1000 companies, Hypercom Network Systems has extensive expertise that comes from installingpacketized voice solutions for almost 200 companies. IP and Frame Relay technologies have beenembraced by the industry for both voice and data. With huge cost savings possible, packetized voicetechnology will also draw users and providers of voice and data services away from traditional circuit-switched systems. Putting voice traÇc on the Internet and other packet networks is progressing quicklyand Hypercom Network Systems' IP.tel product line oÅers an eÅective packetized voice solution forcarriers and alternative providers.

Products and Services

POS Payment Systems. The Company's POS payment systems are comprised of a comprehensiverange of client/server solutions including: (i) POS terminals and peripherals, (ii) POS network products,which provide eÇcient, accurate and fast transaction transport, (iii) software products, including terminalapplication software and terminal management software, that enable remote and automated downloading ofterminal application software, and (iv) software products which support ISPs. This comprehensive range ofproducts provides Hypercom customers with turn-key capability to supply high-performance POS paymentsystem solutions to merchants and consumers.

Terminals and Peripherals. The Company's terminal products include stand-alone terminals, compactterminals that have integrated printers and wireless terminals for speciÑc industry applications, such asautomobile rental, restaurants and temporary merchant locations. The Company's terminal products aredesigned for use with magnetic stripe cards, such as typical credit, debit or charge cards, as well as with smartor 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 ascustomer loyalty programs, eligibility checking for health insurance or government beneÑts and time andattendance data collection reporting. These products feature a modular design to allow for easy upgrading asnew technologies become available.

The principal peripheral products that interface with Hypercom terminals include printers, personalidentiÑcation number entry devices (known as PINpads), signature capture devices and communicationsproducts. Printers enable printing of customer receipts. PINpads allow acceptance of magnetic-stripe and chipcard-based debit cards and other forms of payment requiring a personal identiÑcation number, and allow forsupport of customer-activated stored value. The Company's S7 PINpad can be connected to any Hypercom TSeries terminal, turning it into a full-feature debit or combined debit and data capture terminal.Hypercom's S7 and S8 line of PINpads provide a range of hardware and software features that ensureencryption-key and PIN security. In addition, Hypercom oÅers the CS7GC Signature Capture PINpad,which enables cost-eÅective 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 newgeneration of POS payment systems with its ICE product line. ICE is a multi-function touch-screen terminal

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that combines a terminal, PINpad, and signature capture in a single unit and incorporates a high-speedthermal printer and paper cutter, and Hypercom's new FastPOS 9600 bps modem. ICE's easy to operatetouch-screen simpliÑes the most complex tasks and provides the opportunity to deliver promotional,advertising and other visual messages, in addition to electronic receipt capture capabilities.

POS Network Products. The Company's POS network products consist of a family of Network AccessController (""NAC'') products, which facilitate transaction delivery from the point of sale to processors ofelectronic payments. NACs are intelligent communications products which provide a wide range of digital andanalog interfaces, line concentration, protocol conversion, data concentration, transaction routing, backuptransmission paths and multiple device interface capabilities that allow access to high-performance datacommunications networks. The NAC product line also includes the MiniNAC2, which connects automatedteller machines, POS terminals and peripherals and PCs or in-store controllers to existing hosts utilizingstandard dial access services.

Software Products. The four principal categories of the Company's POS software products aretransaction processing software, terminal application software, terminal management software, and Internetsoftware.

Transaction Processing Software. Hypercom's Ascendent brand transaction software was developed tomeet market demand for new payment methodologies, value-added programs and increased transactionvolumes. Developed by Hypercom, Ascendent software is a comprehensive family of front-end client/serverpayment and data transaction processing software solutions. The Ascendent client/server software lineincludes: Loyalty Management System, Advanced Transaction Processor, Network Terminal System, Elec-tronic Receipt Capture, and the Internet product, RealPay.

Terminal Application Software. The Company works closely with its clients to develop standard andcustomized applications that operate on Hypercom terminals. To date, the Company has developed over 80terminal software applications, ranging from entry-level credit and debit solutions to complex systems thatsupport a comprehensive range of electronic payment and medical transaction functions. Among thesesoftware applications are specialized applications for speciÑc markets such as lodging, restaurants, multi-laneretail and health care.

Terminal Management Software. Every terminal application software program produced by theCompany has a management and control module that interacts with the Company's Term-Master TerminalNetwork Management System. Term-Master is designed to provide mission-critical functionality to users ofHypercom's T Series terminals. Term-Master is the basis for an integrated terminal management approachthat supports multiple merchant locations, remote and automated downloading of terminal applicationsoftware, multiple application software management, merchant terminal set-ups, performance monitoring andon-line diagnostics.

Internet Software. The Company has begun to develop and distribute software which can be used bysmall businesses on the Internet, allowing them to establish and support stores on the Internet. Limiteddistribution of the software has received favorable results, and it is expected that Hypercom's expertise intransaction processing will separate Hypercom's software from its competitors. Such software will bemarketed to banks, card processors, and ISPs, who will in turn market directly to merchants.

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 videotraÇc transmitted among central and remote locations, allowing enterprises to eliminate duplicate networksand facilitate migration to cost-eÅective switched services. Each IEN device incorporates a switch, router,frame relay access device, protocol converter, dial back-up unit and CSU/DSU, and performs datacompression and encryption IEN in a modular system consisting of base chassis with plug-in cards. Plug-incards support a range of functions, including ISDN, BRI, V.32 bis/V.34 dial backup, DSU 56/64 kbps, datacompression and encryption, dual V.35 uplink, T1/E1 interface, 4-port voice card, 2 channel serial user orWAN interface card and single RS232C/V.24 serial I/O.

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The Company also oÅers the IEN500, a single-slot chassis, which supports two conÑgurations: 2 WANand 1 serial port and 1 WAN and 2 serial ports. IEN products work with all WAN services critical for globalnetworking, including X.25, ISDN, frame relay and others, using them cost-eÅectively to capitalize on thelowest available telecommunications tariÅs. These products also support a comprehensive range of legacyprotocols, including SNA/SDLC, 3270 Bisync, 2780/3780 Bisync, Burroughs Poll Select, X.25 and asynchro-nous protocols.

The Company also provides software applications that centralize management, automate routine tasksand integrate with clients' existing network management environments. Hypercom's IENView software is asuite of industry-standards-based applications that allow users to manage their networks from a singleintegrated console. IENView software provides applications for enterprise and switched internetwork manage-ment, remote monitoring, device management, simulation-based planning and problem-solving and perform-ance analysis.

Services

The Company provides a broad range of services related to its POS payment systems and enterprisenetworking products. The Company provides consulting services: (i) to assist with strategies and alternativesfor POS payment systems, (ii) to assist in the design, installation, integration and management of POSpayment systems, and (iii) to design customized software applications. The Company also providesdeployment, training, technical assistance, help desk and maintenance services for its products.

Customers

Hypercom POS Systems' customers are predominantly large domestic and international Ñnancialinstitutions, electronic payment processors, independent service organizations (""ISOs'') and resellers. Thesecustomers generally have substantial POS payment system requirements. Representative direct and indirectPOS customers include American Express Company, Bank of America Merchant Services, Banamex,CrediCard Brazil, First Data Merchant Services, TASQ Technologies, National Bank of Australia andConcord Equipment Sales. In any given year, select customers may account for a signiÑcant percentage of netrevenue. Although no one customer accounted for more than 10% of the Company's net revenue in Ñscal 1999,the two largest customers accounted for 12.6% of the Company's net revenue in Ñscal 1999 and the Ñve largestcustomers accounted for 24.2% of the Company's net revenue.

Hypercom Network Systems' customers generally consist of large Ñnancial institutions, retailers,electronic payment processors, resellers and other enterprises that have substantial branch networkingrequirements spanning an average of 200 sites. Representative direct and indirect network customers includeAlamo Rent A Car, American Express Company, AT&T Corp., First Data Merchant Services, The HomeDepot, Inc., and The Hong Kong and Shanghai Banking Corporation Group.

The Company places special emphasis on oÅering high-performance, technologically-advanced POSpayment system solutions and enterprise branch networking products to enable its customers to gain marketshare in their respective industries.

Sales, Marketing and Distribution

The Company sells its POS payment system solutions through its direct sales force and throughindependent third-party resellers, including Ñnancial institutions, electronic payment processors and serviceproviders. The Company recently merged its domestic and international sales, marketing and operationspersonnel which are now managed from its Phoenix, Arizona headquarters.

The Company sells its enterprise networking products primarily through a 14-person direct sales force, aswell as through distributors, value-added resellers and system integrators, who resell the Company'snetworking products along with other computer and communications equipment. Because the sale ofnetworking products is highly technical, the sales cycle can be as long as 18 months. The technical nature ofthe sale also results in increased reliance on resellers who work closely with the Company's customers to

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identify the beneÑts that Hypercom enterprise networking products can provide to their businesses. Theresellers support the Company's products locally.

The Company's marketing programs include trade shows, press releases, press interviews, speakerengagements, training and technology seminars, sales collateral and white papers, print advertising, articlesand newsletters supported by Hypercom's technical publications group.

Financial Information About Industry and Geographic Segments

For detailed Ñnancial information concerning the Company's industry segments and foreign and domesticoperations and export sales, reference is made to Note 15 of the Consolidated Financial Statements includedin Part II of this form 10-K.

Backlog

As of June 30, 1999, the Company had a backlog of $99 million. Backlog was $77 million at June 30,1998. The Company has taken steps to reduce terminal manufacturing lead time which reduces the customers'required lead time. These shorter lead times eliminate the prior requirements for customers to book orderscovering longer periods.

The Company includes in its backlog all revenue speciÑed in signed contracts and purchase orders to theextent that the Company contemplates recognition of the related revenue within one year. There can be noassurance that the contracts included in backlog will actually generate the speciÑed revenues or that the actualrevenues will be generated within the one year period.

Customer Service and Support

The Company believes that it has established a reputation for manufacturing high quality, reliableproducts 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, deployment, customer support and comprehensive repair facilities for its products. TheCompany 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'sinstallation or through a modem connection to the central part of the customer's system. This connectionallows Company support personnel to analyze and correct installation and conÑguration problems remotely.Field support engineers are available to assist with customer emergencies, and third-party Ñeld personnelprovide additional support for the Company's products.

The Company provides a Ñve-year warranty on its POS terminal products and one to Ñve-year warrantieson other products. The Company has not incurred signiÑcant warranty expenses to date. The Companybelieves that its Ñve-year warranty on POS terminal products has contributed signiÑcantly to its reputation formanufacturing high quality, reliable products, and that this warranty results in a lower total cost of ownershipthan competitors' products.

Manufacturing

The Company's primary manufacturing facility is in China, where the Company manufactures POSpayment systems. The Company also manufactures POS products at its facilities in Arizona and Brazil. TheCompany also relies on third-party suppliers for certain components of its POS payment system products.

The Company's enterprise networking products are assembled at its Phoenix facility. Certain networkingproduct components are manufactured in Australia. The Company also uses certain components manufac-tured by various third parties.

To control product costs, the Company centrally manages its material requirements planning and bills ofmaterial from its Phoenix facility on an integrated computer system, which is networked to all Hypercommanufacturing centers. By managing its purchasing centrally, the Company is able to obtain discounts on

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volume purchases. The Company also maintains suÇcient Öexibility in its purchasing to allow it to takeadvantage of favorable pricing in regional markets. Central management of purchases also assists theCompany in ensuring that quality components are used in its products.

For information relating to the Company's dependence on suppliers, see ""Dependence On CertainSuppliers And Third-Party Distributors'' in Exhibit 99.1 which is attached hereto and incorporated byreference into this Annual Report on Form 10-K.

Research and Product Development

Since its inception, the Company has made substantial investments in research and development. Withrespect to its POS payment system products, the Company's development eÅorts are focused on products,including both hardware and software, that support new technologies and payment products emerging in theelectronic payments industry. With respect to enterprise networking products, the Company's eÅorts arefocused on developing new capabilities to support real-time integrated data, voice and multimedia communi-cations. The Company works closely with its customers to deÑne new product concepts and identify emergingapplications for both its hardware and software products. Development projects are evaluated through amanagement review process and assigned to the Company's development centers based upon the potentialvalue of the target markets, as well as the technology, staÅ resources and engineering expertise requirements.

The Company designs and develops all of its products and incorporates, where appropriate, technologiesfrom third parties and those available in the public domain. The Company's product development units forboth POS payment system products and enterprise networking products are principally headquartered inPhoenix, Arizona. Development staÅs also are located in Australia; Dallas, TX; Rochester, NY; Hong Kong;Singapore; Sweden; Brazil; Russia and the United Kingdom. The Company maintains a separate developmentgroup dedicated to electronic commerce transaction software, which has been located in Australia, but iscurrently relocating to Atlanta, Georgia, to enhance the ability to hire additional software developers. Inaddition, relocating in the United States will enhance marketing eÅorts where it beneÑts from certain researchand experimentation tax credits.

The markets for the Company's products are characterized by changing technology, evolving industrystandards and frequent product introductions. Management believes that the Company's future successdepends in large part upon its ability to continue to enhance its existing products and to develop new products.The Company is dedicated to complying with industry standards and supporting important new standards asthey emerge.

At June 30, 1999, 437 employees of the Company were engaged in research and product development,including 265 in POS payment systems development, 64 in Ascendent development and 108 in enterprisenetworking systems development. In Ñscal 1999, 1998 and 1997, the Company's research and developmentexpenditures were $30.2 million, $23.5 million, and $12.9 million respectively. To date, substantially all of theCompany's research and development costs have been expensed as incurred. Beginning in the third quarter ofÑscal 1999, the Company began capitalizing costs in relation to the development of speciÑc softwareenhancements related to its Ascendent software products. The amount capitalized in Ñscal 1999 amounted toapproximately $2.0 million. The Company expects that it will continue to expend substantial resources onresearch and product development.

Seasonality

Hypercom continues to experience some degree of seasonality. For this reason, net revenue and results ofoperations are stronger from July to December reÖecting:

‚ Increased POS purchases to satisfy increased retail demand during the holiday season,‚ Incentive programs VISA and MasterCard oÅer from July to December to encourage merchants to

oÅer card-based payment systems, and‚ Allocation of customers' capital budgets by the end of March with volume shipments beginning in July.

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Competition

The markets in which the Company operates are highly competitive and are becoming increasingly morecompetitive. With respect to its POS payment system products, the Company competes primarily on the basisof ease-of-use, product performance, price, features, quality, the availability of application software programs,the number of third-party network host and telephone system certiÑcations it has obtained for its products andapplication programs, rapid development, release and delivery of software products and customer support andresponsiveness. 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 forhighly-reliable and fully-certiÑed software creates a barrier to entry by new competitors. For example,electronic payment processors have speciÑc requirements that POS payment systems software must meet,including requirements relating to security, host communications and message format. Accordingly, POSterminal devices must accurately capture information required to process the transaction, package theinformation, transmit it to the processor's host system in the speciÑed format and receive the host system'sresponse. Each processor has its own unique requirements that requires the development of diÅerent softwareapplications and the successful completion of a lengthy certiÑcation process. As a result, to competeeÅectively, competitors must be able to develop software applications compatible with the diverse require-ments of numerous processors of electronic transactions and satisfy the diverse certiÑcation standards of theseprocessors. The Company's primary competitor in the POS payment systems market is VeriFone, Inc., whichwas acquired by Hewlett-Packard Company in 1997.

With respect to its enterprise networking products, the Company competes primarily on the basis ofproduct features, quality, Öexibility, reliability, scalability and interoperability. The market for the Company'senterprise networking products is intensely competitive and is characterized by rapid technological develop-ment. The Company's competitors with respect to networking products include: (i) internetworking compa-nies, such as Cisco Systems, Inc. and 3Com Corporation, (ii) FRAD providers, such as Sync Research, Inc.,Motorola Information Systems Group, and Netlink, Inc. and (iii) circuit management providers, such asVisual Networks, Inc. and NetScout Systems, Inc. The Company expects that the number of competitors inboth the POS payment systems and enterprise networking systems markets will grow due to the growthopportunities in both markets.

Many of the Company's current and potential competitors have signiÑcantly greater Ñnancial, technicaland marketing resources than the Company, as well as better name recognition and a larger customer basethan 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 factorsin foreign countries, including preferences for national vendors and diÇculties in obtaining necessarycertiÑcations and in meeting the requirements of government policies.

Proprietary Rights

The Company's success is dependent upon its proprietary technology. The Company relies uponcopyrights, trademark and trade secret laws and more recently upon patent law protection, to establish andmaintain its proprietary rights in its technology and products.

The Company currently holds a patent issued in the U.S. (and several other countries) relating to a POSterminal conÑgured with a substantial portion of its functionality at a remote processor, a POS terminal withreplaceable printer cartridge, and has several patents pending. Foreign patents have also been issued on severalother patent applications, including the replaceable printer mechanism which has been instituted byHypercom in its integrated POS terminals containing a printer. Hypercom has pending a number of U.S. andforeign 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, the Hypercomtrademark is registered in 33 countries and has registration pending in 7 countries. In addition to the registeredtrademark of the Hypercom» name and logo, the Company has U.S. federal registrations for the followingtrademarks: MEGANAC», MININAC», MINIROUTER», TERM-MASTER», VIRTUAL MAPPED

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SNA», PAYSEC», CHIPSTRIPE» and VIRTUAL POS». The Company's trademark applications for U.S.registration include: ASCENDENT‚, HYPERCOM FASTPOS‚, HYPERWARE‚, ICE‚, ICEPAC‚,IEN 2000‚, IP.TEL‚, IP.TELVIEW‚, REALPAY‚, and TOKEN TRACKING SYSTEM‚.

The Company embeds copyright notices in its software products advising all users that the software isowned 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 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 orsuperior to those of the Company, or that any patents, copyrights, conÑdentiality agreements and internalsafeguards 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 Master-Card, and receive certiÑcation for connection to certain public telecommunications networks prior to theirsale. In the U.S., the Company's products must comply with various regulations deÑned by the FCC andUnderwriters Laboratories. Internationally, the Company's products must comply with standards establishedby telecommunications authorities in various countries, as well as with recommendations of quasi-regulatoryauthorities and standards-setting committees. In addition, public carriers require that equipment connected totheir networks comply with their own standards, which in part reÖect their currently installed equipment.Some public carriers have installed equipment that does not fully comply with current industry standards, andthis noncompliance must be addressed in the design of the Company's enterprise networking products. Anyfuture inability to obtain on a timely basis or retain domestic or foreign regulatory approvals or certiÑcations orto comply with existing or evolving industry standards could have a material adverse eÅect on the Company'sbusiness, operating results and Ñnancial condition. In addition, rates for public telecommunications services,including features and capacity of such services, are governed by tariÅs determined by carriers and subject toregulatory approval. Changes in these tariÅs could have a material adverse eÅect on the Company's business,operating results and Ñnancial condition.

The Company's operations are subject to various state, federal and international laws governing, amongother things, occupational health and safety, minimum wages, overtime, retirement plans and proÑt-sharingand severance payments, and the use, storage, handling and disposal of certain chemicals used in theCompany's production processes. Although the Company believes that its operations comply in all materialrespects with such regulatory requirements, any failure to comply with applicable requirements, or theadoption of new regulations or changes in existing regulations, could impose additional compliance costs onthe Company, require a cessation of certain activities or otherwise have a material adverse eÅect on theCompany's business, operating results and Ñnancial condition.

Employees

At June 30, 1999, the Company employed 1,166 persons, including 342 in manufacturing, service andsupport, 256 in sales and marketing, 333 in engineering and 235 in Ñnance and administration. Approximately488 employees were in international locations.

None of the Company's employees is represented by a labor union, and the Company considers itsrelations 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 hasbeen successful in recruiting and retaining qualiÑed employees, but there is no assurance that it will continueto be successful in doing so in the future. The Company's future success depends in part on its continuedability to hire, assimilate and retain qualiÑed personnel.

10


Executive OÇcers of the Registrant

The following are the executive oÇcers of the Company as of September 1, 1999:

Albert A. Irato, 61: Chairman of the Board of Directors since July 1, 1999; and Vice Chairman,Chief Executive OÇcer, and President from October 1992 until June 30, 1999.

George Wallner, 48: President and Chief Executive OÇcer since July 1, 1999; Chief Technologistsince he founded the Company in 1978; and Chairman of the Board of Directors from 1978 untilJune 30, 1999.

Paul Wallner, 45: President of Hypercom Network Systems, since 1995.

Jairo Gonzalez, 37: Managing Director, Global Sales and Marketing, since July 1, 1999; andPresident of Hypercom International from 1990 to June 30, 1999.

Jonathon Killmer, 58: Executive Vice President, Chief Financial OÇcer and Chief AdministrativeOÇcer of Hypercom Corporation since January, 1999; Senior Vice President, Chief FinancialOÇcer and Treasurer of Digi International Inc. from October 1996 to October 1998; ManagingPartner of the Minneapolis/St. Paul Coopers & Lybrand L.L.P. oÇce from October 1990 toSeptember 1996.

Chris Alexander, 51: President of Hypercom Transaction Systems Group since July 1, 1999; ChiefOperating OÇcer Hypercom Corporation from October 1, 1998 to June 30, 1999; and ChiefOperating OÇcer of Hypercom International from 1993 to September 30, 1998.

Peter J. Stutsman, 46: General Counsel, Corporate Secretary, Senior Vice President, Legal andContract AÅairs since September 1998, Secretary and Vice President, Legal and Contract AÅairssince September 1997, and Corporate Secretary since October 1995.

Item 2. Properties

The Company's principal administrative, assembly and warehouse facilities are located in Phoenix,Arizona, where it owns an approximate 142,000 square foot building. The Company leases an adjacent 23,800square foot building for Hypercom Network Systems. The lease expires August 31, 2011.

The Company leases an approximate 20,000 square foot facility in Sydney, Australia, and owns anapproximate 17,000 square foot facility in Brazil which are utilized for additional POS manufacturingcapacity. The Company also leases oÇce space in Arizona, Florida, Georgia, Maryland, Missouri, New York,Texas, Hong Kong, China, Singapore, Sweden, Japan, Chile, Argentina, Venezuela, Mexico, Russia, Hungaryand the United Kingdom, all of which are dedicated primarily to POS sales and support. The Companybelieves that its facilities are adequate for its operations and will be suÇcient for the foreseeable future.Reference is hereby made to Note 13 of the Consolidated Financial Statements on page 42 for detailedinformation relating to the Company's lease commitments.

Item 3. Legal Proceedings

From time to time, the Company is also subject to claims and litigation incident to its business. OnSeptember 23, 1998, an employee of the Company Ñled a lawsuit in the Maricopa County Superior Courtagainst two senior executives of the Company and the Company alleging sexual misconduct by the executivesand is seeking damages, including punitive damages. The employee also Ñled a claim with the EqualEmployment Opportunity Commission (EEOC), which was later dismissed. Subsequent to the Ñling of thelawsuit, the employee changed counsel and new counsel has, orally, threatened to Ñle a shareholder'sderivative lawsuit, presumably arising out of the same alleged misconduct. The lawsuit that is currently on Ñlestems out of alleged misconduct for which the employee has already released the Company and the seniorexecutives. The employee is alleging, among other things, that the release is invalid. The court has scheduledan evidentiary hearing to determine the enforceability of the parties' settlement agreement for October 1999.Based upon a variety of factors, the release previously executed by the employee and the Company's

11


evaluation of the merits of the claims against it, the Company believes that the lawsuit will not have a materialadverse eÅect on its Ñnancial condition.

Item 4. Submission of Matters to a Vote of Security Holders

None.

12


PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters

The Company's common stock trades on the New York Stock Exchange (""NYSE'') under the symbol""HYC''. The following table sets forth, for the Ñscal quarters indicated, the high and low sales prices for thecommon stock as reported by the NYSE.

High Low

Fiscal Year 1999

First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10.500 $ 4.938

Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12.000 4.375

Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.938 5.313

Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.563 5.563

Fiscal Year 1998

First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì

Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17.313 12.750

Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18.938 11.118

Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.818 9.938

The Company has not paid any cash dividends on its Common Stock. The Company currently intends toretain its earnings for its business and does not anticipate paying any cash dividends on its Common Stock inthe foreseeable future. The Company's ability to pay cash dividends on its common stock is also limited bycertain covenants contained in a loan agreement to which the Company is a party. See ""Management'sDiscussion and Analysis of Financial Condition and Results of Operations Ì Liquidity and Capital Re-sources'' on page 17.

The approximate number of shareholders of record as of September 16, 1999 was 2,200.

Item 6. Selected Financial Data

The following table presents selected historical Ñnancial data of Hypercom at the dates and for each ofthe periods indicated. The selected Ñnancial data should be read in conjunction with the Company'sConsolidated Financial Statements and notes thereto included elsewhere herein and ""Management's Discus-sion and Analysis of Financial Condition and Results of Operations.'' Historical consolidated Ñnancial datamay not be indicative of the Company's future performance.

13


(Dollars in thousands except per share amounts)

Year ended June 30

1999 1998 1997 1996 1995

Net revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 261,515 $ 257,227 $ 196,742 $ 163,556 $ 146,168

Cost of revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141,831 130,475 103,672 92,349 83,016

Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 119,684 $ 126,752 $ 93,070 $ 71,207 $ 63,152

Percent of net revenueÏÏÏÏÏÏÏÏÏ 45.8% 49.3% 47.3% 43.5% 43.2%

Selling, general andadministrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 74,772 $ 72,506 $ 52,530 $ 44,741 $ 27,687

Research and development ÏÏÏÏÏ 30,249 23,495 12,926 8,509 5,422

Non-cash compensation(1) ÏÏÏÏ Ì 10,963 4,784 2,061 698

$ 105,021 $ 106,964 $ 70,240 $ 55,311 $ 33,807

Income from operations ÏÏÏÏÏÏÏ $ 14,663 $ 19,788 $ 22,830 $ 15,896 $ 29,345

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,173 $ 13,989 $ 15,562 $ 12,289 $ 19,556

Income per share (diluted) ÏÏÏÏ $ 0.27 $ 0.44 $ 0.60 $ 0.33 $ 0.53

Shares used in calculationÏÏÏÏÏÏ 34,428,468 31,829,855 25,753,921 37,105,563 36,601,078

Cash and equivalents ÏÏÏÏÏÏÏÏÏÏ $ 36,727 $ 55,659 $ 16,318

Working capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162,152 186,799 61,972

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 276,280 259,577 138,741

Short and long term debt ÏÏÏÏÏÏ 11,284 1,797 24,570

Total stockholders' equity ÏÏÏÏÏÏ 226,023 220,431 60,894

(1) Non-cash compensation was charged in connection with stock options granted to an executive oÇcer.Upon completion of the Company's initial public oÅering in November 1997, this form of compensationceased and no charge was incurred in the third and fourth quarters of Ñscal 1998.

14


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following table sets forth the operating results expressed as a percentage of net revenue for theperiods indicated and the percentage change in such operating results between periods. Results for any one ormore periods are not necessarily indicative of future results:

Period to PeriodIncrease (Decrease)1999 1998

Percentage of Net Revenue Fiscal Year Ended June 30, Compared to1999 1998 1997 1998 1997

Net revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0% 100.0% 100.0% 1.7% 30.7%

Costs of revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54.2 50.7 52.7 8.7 25.9

Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45.8 49.3 47.3 (5.6) 36.2

Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28.6 28.2 26.7 3.1 38.0

Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.6 9.1 6.6 28.7 81.8

Non-cash compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4.3 2.4 (100.0) 129.2

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.6 7.7 11.6 (25.9) (13.3)

Interest income net of interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.8 0.7 0.1

Foreign currency exchange gain(loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2.6) (0.7) 0.2

Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.8 7.7 11.9 (36.7) 15.1

Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.3 2.3 4.0

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.5% 5.4% 7.9% (34.4) (10.1)

Net revenues by geographic region are presented in the following table as a percentage of net revenues forthe periods indicated:

Fiscal Year EndedJune 30,

1999 1998 1997Revenues by Region

United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54% 43% 44%

Latin America (includes Mexico) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 29 24

Asia/PaciÑcÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 22 30

Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 6 2

Totals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100% 100% 100%

Comparison of Fiscal Years Ended June 30, 1999 and 1998

Net revenue in Ñscal 1999 increased $4.3 million or 1.7% primarily due to the acquisition of the HorizonGroup, Inc. (""Horizon'') in Ñscal 1999. The increase in revenue reÖected growth in the United States andEurope where the Company has been establishing new sales and service operations. Revenues in Asia andLatin America have slowed due to regional economic conditions and currency devaluation.

Gross proÑt as a percentage of net revenue decreased from 49.3% in Ñscal 1998 to 45.8% in Ñscal 1999.This decrease was due in part to the impact of Horizon which is a national distributor of equipment forHypercom and other POS manufacturers. Horizon historically operates at margins signiÑcantly less(12%Ó15%) than the Company's historical gross proÑt margin. In addition, gross proÑt also declined due toreduced selling prices as a result of increased worldwide competitive factors as well as declining economicconditions in some foreign countries.

Selling, general and administrative expense increased $2.3 million, or 3.1%, to $74.8 million in Ñscal 1999as the Company continued to invest in its worldwide operations, including expanding its headquarter facilities

15


in Phoenix, Arizona as well as a new distribution center, opening new international sales and support oÇces,and expanding and improving its worldwide administrative, Ñnancial, and information technology relatedinfrastructure.

Research and development expense increased $6.7 million, or 28.7%, to $30.2 million in Ñscal 1999. Theincrease was primarily for POS product development as the Company prepared to introduce in Ñscal 1999 itsnew ICE terminal products; its FastPOS 9600 bps terminals; and Ascendent client/server software. Beginningin the third quarter of Ñscal 1999, the Company began capitalizing costs in relation to the development ofspeciÑc software enhancements related to its Ascendent software products. The amount capitalized in Ñscal1999 was approximately $2.0 million.

Non-cash compensation was previously charged in connection with a grant of stock options whichincluded a stock repurchase arrangement. The Company recorded a non-cash compensation charge of$11.0 million in the Ñrst half of Ñscal 1998 and incurred no further charge during the year as the repurchasearrangement terminated upon the closing of the Company's initial public oÅering in November, 1997. Therewas no non-cash compensation charge for Ñscal 1999.

Income from operations decreased $5.1 million, or 25.9%, to $14.7 million in Ñscal 1999 due primarily toreduced gross margins, higher selling, general and administrative expenses and higher research and develop-ment expense.

Net interest income for Ñscal 1999 increased $2.8 million to $4.6 million from $1.8 million in Ñscal 1998.Interest income consisted primarily of returns on short and long-term investments net of interest expenseincurred related to short term bank borrowings.

Foreign currency losses resulted from operating in volatile markets, principally Brazil. During Ñscal 1999the Company recorded a $4.4 million loss related to the net monetary asset exposure in Brazil. The Companyhas entered into hedging strategies to mitigate the impact of future foreign currency Öuctuations.

The provisions for federal, state, and foreign income taxes were $3.4 million and $5.9 million for the Ñscalyears ended June 30, 1999 and 1998, respectively. The Company's eÅective rate of tax was 27% and 30% forthe Ñscal years ended June 30, 1999 and 1998. The Company tax rate is typically lower than the US federalstatutory rate due to:

‚ Research and experimentation credits in Australia and the US.‚ Sales in foreign jurisdictions with lower tax rates.‚ The use of foreign sales corporations oÅering lower taxes on certain international sales.

Comparison of Fiscal Years Ended June 30, 1998 and 1997

Net revenue in Ñscal 1998 increased $60.5 million or 30.7% due to increased POS Systems revenue of$58.1 million. The increase in POS Systems revenue reÖected strong growth in Europe where the Companyestablished new sales and service operations. Latin America also experienced strong growth and beneÑtedfrom a new manufacturing facility in Sao Paulo, Brazil. Growth in Asia slowed due to local currencydevaluation. Network Systems revenue growth was also slowed due to economic uncertainties in Asia andincreased competition in its branch access networking equipment markets.

Gross proÑt as a percentage of net revenue increased to 49.3% in Ñscal 1998 from 47.3% in Ñscal 1997.This increase was due to lower costs realized from a transfer of the Australian manufacturing operations tomanufacturing 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 Ñscal1998. $6.6 million of this increase was the continued expansion of selling and administrative activities inNetwork Systems; $2.7 million of this increase was related to the introduction of the Company's AscendentPOS client/server software products; and $2.5 million of the increase was for the establishment of a new POSsales and service infrastructure in Europe. The remaining increases related to normal growth caused byincreased business with a $6.3 million increase for ongoing expansion of sales operations in the United States,

16


Latin America and Asia and $1.9 million increase in the Company's corporate, general and administrativeareas.

Research and development expense increased $10.6 million, or 81.8%, to $23.5 million in Ñscal 1998, ofwhich $9.2 million of the increase was for POS product development as the Company prepared to introduce inÑscal 1999 its new ICE terminal products; its FastPOS 9600 bps terminals; and Ascendent client/serversoftware.

Non-cash compensation was charged in connection with a grant of stock options which included a stockrepurchase arrangement. The Company recorded a non-cash compensation charge of $11.0 million in the Ñrsthalf of Ñscal 1998 and incurred no further charge during the year as the repurchase arrangement terminatedupon the closing of the Company's initial public oÅering in November, 1997.

Income from operations decreased $3.0 million to $19.8 million in Ñscal 1998 due primarily to an increaseof $6.2 million in non-cash compensation and higher selling, general and administrative expense and higherresearch and development expense

Liquidity and Capital Resources

The Company has historically Ñnanced its operations primarily through cash generated from operationsand from borrowings under a line of credit. Additionally, in November 1997, the Company completed itsinitial public oÅering which provided $125.7 million in cash. The Company's principal uses of cash historicallyhave been to support inventory and accounts receivable growth, pay operating expenses and fund capitalexpenditures.

The Company's working capital was $162.1 million as of June 30, 1999 compared to $186.8 million atJune 30, 1998. The decrease in working capital in 1999 primarily relates to the acquisition of the assets of TheHorizon Group Inc., JTS ChequeOut Solutions, Inc., and ICL Sverige AB during the Ñscal year, as well as ashift in investments from short to long-term.

Capital expenditures totaled $12.8 million and $10.0 million in Ñscal years 1999 and 1998, respectively,while depreciation was $5.5 million in Ñscal 1999 and $4.1 million in Ñscal 1998.

The Company believes that its current funds are suÇcient 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 balanceoutstanding was zero at June 30, 1999. 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. Inaddition, the loan agreement contains certain Ñnancial covenants, including a minimum current ratio,minimum working capital, minimum tangible net worth, and minimum owner's equity and debt coverageratios.

New Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting forDerivative Instruments and Hedging Activities. This statement requires recognition of all derivatives as eitherassets or liabilities on the balance sheet and measurement of those instruments at fair value. Changes in fairvalue of derivatives are recorded each period in current earnings or other comprehensive income (loss). Properaccounting for changes in fair value of derivatives held, is dependent on whether the derivative transactionqualiÑes as an accounting hedge and on the classiÑcation of the hedge transaction. The statement wasoriginally required to be adopted and is eÅective for all Ñscal years beginning after June 15, 2000. TheCompany is evaluating the eÅect Statement 133 will have on its Ñnancial reporting and disclosures as well ason its derivative and hedging activities.

In December 1998, SOP 98-9, ModiÑcation of SOP 97-2, Software Revenue Recognition, With Respectto Certain Transactions was issued. This SOP modiÑed SOP 97-2 to permit recognition of revenue for thedelivered elements of a contract when the vendor-speciÑc objective evidence of fair value exists for the

17


undelivered elements of the contract. The SOP will be eÅective for transactions that are entered into in theÑscal years beginning after March 15, 1999. Hypercom is currently evaluating this SOP's impact on itsÑnancial statements.

In April 1998, SOP 98-5, Reporting on the Costs of Start-up Activities, was issued and provides guidanceon the Ñnancial reporting of start-up costs and organization costs. It requires costs of start-up activities andorganization costs to be expensed as incurred. This SOP is eÅective for Ñscal years beginning afterDecember 15, 1998. The adoption of this standard will have no material eÅect on the Company's Ñnancialreporting and disclosures.

In March 1998, the Accounting Standards Executive Committee of the American Institute of CertiÑedPublic Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use, relating to the treatment of costs incurred to developsoftware for internal use. This SOP is eÅective for the Ñnancial statements for Ñscal years beginning afterDecember 15, 1998, and should be applied to internal-use computer software costs incurred in those Ñscalyears for all projects, including those projects in progress upon initial application of this SOP. The Companywill adopt the SOP in the Ñrst quarter of Fiscal Year 2000. The Company is evaluating the eÅect this SOP willhave on the Company's Ñnancial reporting and disclosures.

Year 2000 Issues

Hypercom began a comprehensive project in 1996 to prepare its internal computer systems for the year2000. Hypercom believes it's implementation of a new enterprise-wide information management system,principally installed to improve operating eÇciency, will address Hypercom's internal year 2000 complianceissues, and therefore does not believe the year 2000 will have a signiÑcant impact on operations.

Hypercom has also reviewed other systems within the Company, from desktop applications to thesoftware utilized within Hypercom's telecommunications system, and has concluded that only a fewapplications are not capable of making the transition from 1999 to 2000. The costs associated with suchupgrades are minimal, and will be substantially oÅset through savings generated through increased productiv-ity and enhanced functionality.

At this time, Hypercom does not believe it is necessary to adopt a contingency plan covering thepossibility that the remaining year 2000 upgrades will not be completed on a timely manner, but will continueto assess the need for such a plan.

Hypercom develops and distributes computer hardware and software, and has thoroughly reviewed suchsystems for year 2000 compliance. Because of the interaction between Hypercom's hardware/software withother manufacturer's hardware/software, Hypercom refrains from warranting Year 2000 compliance. In orderto make Hypercom's POS terminal customers aware of potential issues with the transition from 1999 to 2000,Hypercom has, at its own expense, provided over ten thousand test cards to enable Hypercom's customers tofully test the ability of Hypercom's products, when interacting with other vendors software/hardware, toascertain whether or not a Year 2000 compliance issue is present.

Hypercom's IEN/NAC products do not utilize an internal ""clock,'' and there are no Year 2000compliance issues with such products. Workstation software products may have a Year 2000 compliance issuebecause of the operating system and database program utilized by Hypercom's customers, not related to theapplications developed and distributed by Hypercom.

Nevertheless, the Company disclaims Ñnancial liability regarding Year 2000 compliance and believes it isthe customer's ultimate responsibility to verify whether or not there is a Year 2000 compliance issue, and theCompany expressly disclaims any warranty or representation made in the foregoing regarding the Company'sproducts, and provides this information in compliance with published guidance of the Securities and ExchangeCommission.

Hypercom faces risk to the extent that suppliers of products and services purchased by the Company andothers with whom Hypercom transacts business on a worldwide basis do not have business products and

18


services that comply with the year 2000 requirements. The Company is in the process of obtaining assurancesfrom most of its key suppliers that their products and services are year 2000 compliant. In the event any suchthird party cannot in a timely manner, provide Hypercom with products and services that meet the year 2000requirements, the Company's could be materially adversely aÅected.

Backlog

As of June 30, 1999, the Company had a backlog of $99 million. Backlog was $77 million at June 30,1998. The Company has taken steps to reduce terminal manufacturing lead time which reduces the customers'required lead time. These shorter lead times eliminate the prior requirements for customers to book orderscovering longer periods.

The Company includes in its backlog all revenue speciÑed in signed contracts and purchase orders to theextent that the Company contemplates recognition of the related revenue within one year. There can be noassurance that the contracts included in backlog will actually generate the speciÑed revenues or that the actualrevenues will be generated within the one year period.

Special Note Concerning Forward Looking Statements

This Annual Report on Form 10-K, including the Notes to the Consolidated Financial Statements and inthis ""Management's Discussion and Analysis of Financial Condition and Results of Operations,'' containsforward looking statements. Additional written or oral forward looking statements may be made by theCompany from time to time in Ñlings with the Securities and Exchange Commission, in its press releases, orotherwise. The words ""believe,'' ""expect,'' ""anticipate,'' ""intends,'' ""forecast,'' ""project,'' and similar expres-sions identify forward looking statements. Such statements may include, but not be limited to, the anticipatedoutcome of contingent events, including litigation, projections of revenues, income or loss, capital expendi-tures, plans for future operations, growth and acquisitions, Ñnancing needs or plans and the availability ofÑnancing, and plans relating to services of the Company, as well as assumptions relating to the foregoing. Suchforward 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 reÖect the Company's current views with respect to future events andÑnancial performance and speak only as of the date the statements are made. Such forward looking statementsare inherently subject to risks and uncertainties, some of which cannot be predicted or quantiÑed. Futureevents and actual results could diÅer materially from those set forth in, contemplated by, or underlying theforward looking statements. Statements in this Annual Report, including the Notes to the ConsolidatedFinancial Statements and in this ""Management's Discussion and Analysis of Financial Condition and Resultsof Operations,'' describe factors, among others, that could contribute to or cause such diÅerences. Additionalfactors that could cause actual results to diÅer materially from those expressed in such forward lookingstatements are set forth in Exhibit 99.1 which is attached hereto and incorporated by reference into thisAnnual Report on Form 10-K. In addition, new factors emerge from time to time and it is not possible formanagement to predict all of such factors, nor can it assess the impact of each such factor on the business orthe extent to which any factor, or combination of factors, may cause actual results to diÅer materially fromforward looking statements. The Company undertakes no obligation to publicly update or review any forwardlooking statements, whether as a result of new information, future events, or otherwise.

Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to Ñnancial market risks, including changes in interest rates and foreigncurrency exchange rates. Nevertheless, the fair value of the Company's investment portfolio or related incomewould not be signiÑcantly impacted by either a 100 basis point increase or decrease in interest rates, dueprimarily 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 Kongdollar, Australian dollar, Brazilian Real and other Asian and European currencies. Although no hedging

19


transactions were entered into during the Ñscal year ended June 30, 1999, the Company has since establishedrevenue and balance sheet hedging programs to protect against reductions in value and cash Öow volatilitycaused by changes in foreign exchange rates. Such programs are intended to reduce market risks, but do notalways eliminate the impact of foreign currency exchange volatility.

The Company does not purchase or hold any such derivative Ñnancial instruments for the purpose ofspeculation or arbitrage. See information/discussion appearing in subcaption ""Risks Associated with Interna-tional Operations and Foreign Currency Fluctuations'' of ""Cautionary Statement Regarding Forward LookingStatements and Risk Factors'' set forth in Exhibit 99.1 attached hereto.

Item 8. Financial Statements and Supplementary Data

The Ñnancial statements and supplementary data required by Regulation S-X are included in this AnnualReport on Form 10-K commencing on page 25.

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None

20


PART III

Item 10. Directors and Executive OÇcers of the Registrant

(a) IdentiÑcation of Directors: The information set forth in the Company's 1999 Proxy Statement underthe caption ""Board of Directors'' is incorporated herein by reference.

(b) IdentiÑcation of Executive OÇcers: See Part I of this Form 10-K.

(c) Compliance with Section 16(a) of the Securities Exchange Act of 1934: The information set forth inthe Company's 1999 Proxy Statement under the caption ""Section 16(a) BeneÑcial OwnershipReporting Compliance'' is incorporated herein by reference.

Item 11. Executive Compensation

The information set forth in the Company's 1999 Proxy Statement under the caption ""ExecutiveCompensation'' is incorporated herein by reference. The sections captioned ""Report of the CompensationCommittee on Executive Compensation'' and ""Stock Price Performance Graph'' in the Company's 1999Proxy Statement are not incorporated herein by reference.

Item 12. Security Ownership of Certain BeneÑcial Owners and Management

The information set forth in the Company's 1999 Proxy Statement under the caption ""SecurityOwnership 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 1999 Proxy Statement under the caption ""CertainTransactions and Relationships'' is incorporated herein by reference.

21


PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are Ñled as part of this report:

1. Consolidated Financial Statements of Hypercom Corporation

Report of Independent Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25

Consolidated Balance Sheets as of June 30, 1999 and 1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26

Consolidated Statements of Income for the Years Ending June 30, 1999, 1998and 1997ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27

Consolidated Statements of Stockholders' Equity for the Years Ending June 30,1999, 1998 and 1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28

Consolidated Statements of Cash Flows for the Years Ending June 30, 1999,1998 and 1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29

Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30

2. Financial Statement Schedule

Report of Independent Accountants on Financial Statement Schedule ÏÏÏÏÏÏÏÏ 48

Financial Statement Schedule ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49

(b) The Company Ñled a Form 8-K on April 27, 1999, regarding the change in the Company's Ñscal yearend from June 30 to December 31.

(c) The Index to Exhibits and required Exhibits are included following the Financial StatementSchedule beginning on Page 49 of this report.

22


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: September 15, 1999

Hypercom Corporation

By /s/ GEORGE WALLNER

George WallnerPresident and Chief Executive OÇcer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed belowby the following persons on behalf of the Registrant and in the capacities indicated on September 15, 1999.

Signature Title

(1) Principal Executive, Financial and Accounting OÇcers

/s/ GEORGE WALLNER President, Chief Executive OÇcer and Director

George Wallner

/s/ JONATHON E. KILLMER Executive Vice President, Chief Financial OÇcerand Chief Administrative OÇcerJonathon E. Killmer

(2) Directors

/s/ ALBERT IRATO Chairman of the Board

Albert Irato

/s/ PAUL WALLNER Director

Paul Wallner

/s/ JAIRO GONZALEZ Director

Jairo Gonzalez

23


Signature Title

/s/ WILLIAM E. FISHER Director

William E. Fisher

/s/ PETER J. HART Director

Peter J. Hart

/s/ JOCK PATTON Director

Jock Patton

24


Report of Independent Accountants

To the Board of Directors andStockholders of Hypercom Corporation

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements ofincome, stockholders' equity, and of cash Öows present fairly, in all material respects, the Ñnancial position ofHypercom Corporation and its subsidiaries at June 30, 1999 and 1998, and the results of their operations andtheir cash Öows for each of the three years in the period ended June 30, 1999, in conformity with generallyaccepted accounting principles. These Ñnancial statements are the responsibility of the Company's manage-ment; our responsibility is to express an opinion on these Ñnancial statements based on our audits. Weconducted our audits of these statements in accordance with generally accepted auditing standards whichrequire that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancialstatements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the Ñnancial statements, assessing the accounting principles usedand signiÑcant estimates made by management, and evaluating the overall Ñnancial statement presentation.We believe that our audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Phoenix, ArizonaJuly 20, 1999

25


HYPERCOM CORPORATION

CONSOLIDATED BALANCE SHEETS

June 30,

(Dollars in thousands) 1999 1998

ASSETSCurrent Assets:

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 36,727 $ 55,659Marketable securities, at market ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,731 42,641Accounts receivable, net of allowance for doubtful accounts of $4,470 and

$3,729 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,589 43,989Inventories, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,482 60,539Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,430 10,991Prepaid taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,762 2,893Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,894 7,173

Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 201,615 223,885Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,756 23,570Advances to related partiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 258Long-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,344 9,931Goodwill, net of amortization of $361ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,062 ÌIntangible assets, net of amortization of $361 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,886 ÌOther assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,617 1,933

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $276,280 $259,577

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:

Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 18,316 $ 17,134Accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,599 16,537Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,824 608Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,234 2,209Current portion of long-term obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 490 598

Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,463 37,086Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 861Long term obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,794 1,199

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,257 39,146

Stockholders' equity:Common stock, $.001 par value; 100,000,000 shares authorized; 33,199,517 and

33,548,625 shares issued and outstanding for June 30, 1999 and 1998,respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 13

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146,011 145,601Receivables from stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,498) (1,498)Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85,488 76,315

230,014 220,431Treasury stock (at cost) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,991) Ì

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 226,023 220,431

Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $276,280 $259,577

The accompanying notes are an integral part of these consolidated Ñnancial statements.

26



CONSOLIDATED STATEMENTS OF INCOME

Year Ended June 30,(Dollars in thousands, except per share amounts)

1999 1998 1997

Net revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $261,515 $257,227 $196,742

Costs and expenses:

Costs of revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141,831 130,475 103,672

Research and developmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,249 23,495 12,926

Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,772 72,506 52,530

Non-cash compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 10,963 4,784

Total costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 246,852 237,439 173,912

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,663 19,788 22,830

Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,888 4,435 2,248

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,228) (2,155) (1,718)

Interest expense Ì related party ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (446) (422)

Foreign currency (loss) gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,757) (1,760) 445

Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,566 19,862 23,383

Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,393) (5,873) (7,821)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,173 $ 13,989 $ 15,562

Net income per share:

Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.28 $ 0.46 $ 0.62

Weighted average basic common sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,148 30,215 25,000

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.27 $ 0.44 $ 0.60

Weighted average diluted common shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,428 31,830 25,754

The accompanying notes are an integral part of these consolidated Ñnancial statements

27



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Additional Receivables TotalCommon Stock Paid-in from Retained Treasury Stockholder(Dollars in thousands except share amounts)

Shares Balance Capital Stockholders' Earnings Stock Equity

Balance as of June 30, 1996 ÏÏÏÏÏÏÏÏÏÏ 25,000,000 $ 4 $ 425 $(1,961) $46,764 $ Ì $ 45,232

Contributions from stockholdersÏÏÏÏÏ 540 540

Advances to stockholders ÏÏÏÏÏÏÏÏÏÏ (440) (440)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,562 15,562

Balance as of June 30, 1997 ÏÏÏÏÏÏÏÏÏÏ 25,000,000 4 965 (2,401) 62,326 Ì 60,894

Issuance of common stock ÏÏÏÏÏÏÏÏÏ 8,500,000 9 127,491 127,500

Costs of public oÅering ÏÏÏÏÏÏÏÏÏÏÏÏ (1,768) (1,768)

Reclassification of redeemable commonstockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,506 18,506

Exercise of options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,625 247 247

Payment of advances to stockholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,276 2,276

Advances to stockholders ÏÏÏÏÏÏÏÏÏÏ (1,373) (1,373)

Acquisition of investeeÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,000 160 160


Balance as of June 30, 1998 ÏÏÏÏÏÏÏÏÏÏ 33,548,625 13 145,601 (1,498) 76,315 Ì 220,431

Purchase of treasury stockÏÏÏÏÏÏÏÏÏÏ (587,700) (5,396) (5,396)

Issuance of common stock ÏÏÏÏÏÏÏÏÏ 45,541 410 410

Issuance of treasury stock ÏÏÏÏÏÏÏÏÏÏ 189,301 1,369 1,369

Exercise of options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,750 36 36


Balance as of June 30, 1999 ÏÏÏÏÏÏÏÏÏÏ 33,199,517 $13 $146,011 $(1,498) $85,488 $(3,991) $226,023


28



CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended June 30,(Dollars in thousands)1999 1998 1997

Cash Öows from operating activities:Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,173 $ 13,989 $ 15,562Adjustments to reconcile net income to net cash provided by operating

activities:Non-cash compensation expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 10,963 4,784Depreciation/amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,566 4,164 2,888Bad debt expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,386 2,972 1,427Provision for excess and obsolete inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,925 2,510 994Foreign currency (gain) loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,757 1,760 (445)Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,446) (5,153) (2,948)Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 134 (231)

(Increase) decrease in:Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9,837) (16,102) (7,316)Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,940 (6,617) (15,290)Prepaid income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,932) 3,281 (6,127)Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,567) (1,351) (2,715)Other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,767) Ì Ì

Increase (decrease) in:Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,647) (5,272) 2,208Accrued liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,421) 2,625 5,930Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,216 (7,782) 6,707Income taxes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 150 (2,163)Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0 (70)

Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,371 271 3,195

Cash Öow used in investing activities:Advances to related parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (518)Repayments from related parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 294 Ì 641Notes receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,900) Ì ÌPayments received on notes receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 723 Ì ÌAcquisition of controlling interest in subsidiaries, (net of cash acquired) ÏÏÏÏÏ (9,279) (500) ÌAcquisition of other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,068) Ì ÌProceeds from disposal of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 438 120 1,260Purchase of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,768) (10,023) (6,930)Purchase of investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (247,399) (242,164) (546)Proceeds from maturity of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 252,000 189,559 61

Net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (21,959) (63,008) (6,032)

Cash Öow provided by Ñnancing activities:Proceeds of bank notes payable and other debt instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72,837 65,795 76,746Repayment of bank notes payable and other debt instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (66,465) (89,266) (72,761)Advances to stockholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (1,373) (530)Payment of advances to stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2,276 ÌProceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 746 127,747 ÌPurchase of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,396) Ì ÌContributions from stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 540Stock oÅering costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (1,768) Ì

Net cash provided by Ñnancing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,722 103,411 3,995

EÅect of exchange rate changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (66) (1,333) (953)

Net increase (decrease) in cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18,932) 39,341 205Cash and equivalents, beginning of periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,659 16,318 16,113

Cash and equivalents, end of periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 36,727 $ 55,659 $ 16,318


29


Notes to Consolidated Financial Statements

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 ofproduct distribution through the Company's sales and support oÇces located in the United Kingdom, Russia,Sweden, and Hungary. Latin American operations engage primarily in product distribution through theCompany's subsidiaries in Mexico, Brazil, Chile, Argentina and Venezuela; however, certain manufacturingoperations exist in Brazil. The Company's primary manufacturing is performed in China and is coordinated bythe Hong Kong oÇce. The Asia/PaciÑc operations are also engaged in product development and productdistribution through the Company's subsidiaries or business units in Singapore, Hong Kong, Japan andAustralia.

2. SigniÑcant Accounting Policies:

Principles of Consolidation

The consolidated Ñnancial statements are comprised of the accounts of Hypercom Corporation and allsubsidiaries in which a controlling interest is held. All signiÑcant intercompany balances and transactions havebeen eliminated.

Use of Estimates

The preparation of Ñnancial statements in conformity with generally accepted accounting principlesrequires management to make estimates and assumptions that aÅect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of the Ñnancial statements and thereported amounts of revenues and expenses during the reporting period. Actual results could diÅer from thoseestimates.

Foreign Currency

The foreign subsidiaries use the U.S. dollar as the functional currency. Their local currency Ñnancialstatements are remeasured as follows; monetary assets and liabilities at year-end exchange rates, andinventories, property and nonmonetary assets and liabilities at historical rates. During the years ended June 30,1999, 1998 and 1997, the Company recorded net gains (losses) on remeasurement of approximately($5,275,000), ($2,084,000) and $630,000, respectively. For the same periods, the Company recorded netgains (losses) on transactions denominated in foreign currencies of approximately ($1,482,000), $324,000 and($185,000), respectively. These amounts are included in the results of operations.

Cash and Cash Equivalents

The Company considers all investment instruments purchased with an original maturity of three monthsor less to be cash equivalents.

Marketable Securities and Long-Term Investments

Management determines the appropriate classiÑcation of its investments in debt and equity securities atthe time of purchase. Securities for which the Company does not have the intent of or ability to hold tomaturity are classiÑed as available for sale and are carried at fair value, with the unrealized holding gain andlosses, net of tax, reported in a separate component of stockholders' equity. Cost is determined based onspeciÑc identiÑcation. Securities classiÑed as available for sale include both securities due within one year andsecurities with maturity dates beyond one year. Securities with a maturity date within one year are classiÑed as

30


Marketable Securities as a part of Current Assets. Securities with a maturity date beyond one year areclassiÑed as long-term Investments.

Fair Value of Financial Instruments

The Company values Ñnancial instruments as required by SFAS No. 107, Disclosures about Fair Valueof Financial Instruments (""SFAS No. 107''). The carrying amounts of cash and cash equivalents and banknotes payable approximate fair value due to the short maturity of those instruments. The fair value ofmarketable securities and long-term investments is determined based on quoted market prices. The fair valueof long-term obligations is estimated by discounting the future cash Öows required under the terms of eachrespective debt agreement by current market rates for the same or similar issues of debt with similar remainingmaturities. The fair value of Ñnancial hedge instruments are based on quotes from brokers using market pricesfor those or similar instruments. The Corporation does not acquire, hold, or issue derivative Ñnancialinstruments for trading purposes. Derivative Ñnancial instruments are used to manage foreign exchange andinterest rate risks that arise out of the Company's core business activities.

Inventories

Inventories are stated at the lower of standard cost or market. Standard costs approximate Ñrst-in, Ñrst-out (""FIFO'') costs.

Capitalized Software

Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software tobe Sold, Leased or Otherwise Marketed (SFAS No. 86), requires capitalization of certain softwaredevelopment costs subsequent to the establishment of technological feasibility. The Company's historicalproduct development process was such that technological feasibility was established upon completion of aworking model. Costs incurred between completion of the working model and the point at which the productwas ready for initial shipment were not historically signiÑcant. Accordingly, prior to Ñscal year 1999 allsoftware development costs were expensed as incurred and included in research and development costs.However, due to a change in certain software development documentation during the Ñscal year endedJune 30, 1999, certain software development costs required capitalization. The amount that was capitalized inthe year ended June 30, 1999, was approximately $2.0 million.

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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.5 years

Machinery and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5-7 years

Furniture and Ñxtures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5-7 years

Vehicles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 years

Leasehold improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.5-15 years

For assets sold or otherwise disposed of, the cost and related accumulated depreciation are removed fromthe accounts and any resulting gain or loss is reÖected in income for the period.

Goodwill

Goodwill represents the excess of purchase price and related costs over the fair value assigned to the nettangible and identiÑable intangible assets of businesses acquired, which is being amortized on a straight-linebasis over periods ranging from 5 to 20 years.

31


Intangible assets

Intangible assets represent capitalized software costs, acquired customer lists, work force and covenantsnot to compete, which are being amortized on a straight-line basis over periods ranging from 5 to 7.5 years.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable todiÅerences between the Ñnancial statement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary diÅerences are expected to be recovered or settled.The eÅect on deferred tax assets and liabilities of a change in tax laws (including rates) is recognized inincome in the period that includes the enactment date.

The Company does not provide for federal income taxes on the undistributed earnings of its internationalsubsidiaries because earnings are reinvested and, in the opinion of management, will continue to be reinvestedindeÑnitely.

Revenue Recognition

The Company generally recognizes product revenue, including sales to distributors, upon shipment ofproduct. Revenue from service obligations is recognized over the lives of the contracts. The Company accruesfor warranty costs, sales returns and other allowances at the time of shipment.

The Company has a contract in which it provides a warranty to the customer during the third partyinstallation period. If the product does not function properly during this period, the Company is obligated torepair it. At initiation of this contract, the Company recognized revenue at the end of the installation perioddue to its lack of history with the customer and contract, and resulting inability to estimate warranty costs.During the year ended June 30, 1999, the Company began recognizing revenue upon shipment for thiscontract based on the history provided by a large number of sales and its resulting ability to accuratelyestimate such warranty costs. During the year, revenues recognized under this contract totaled $11.7 million,which included incremental revenues of $4.4 million, resulting from recognition of revenue upon shipment.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board (""FASB'') issued Statement of FinancialAccounting Standards No. 123, Accounting for Stock-Based Compensation, (""SFAS No. 123'') which deÑnesa fair value based method of accounting for employee stock options or similar equity instruments. However, italso allows an entity to continue to account for these plans according to Accounting Principles Board OpinionNo. 25 (""APB 25''), provided pro forma disclosures of net income are made as if the fair value based methodof accounting, deÑned by SFAS No. 123, had been applied. The Company has elected to continue to measurecompensation expense related to employee stock purchase options using APB 25, and has provided therequired 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 StaÅ AccountingBulletin 98 (""SAB 98'') eÅective December 31, 1997. SFAS No. 128 requires the presentation of basic anddiluted earnings per share (EPS). Basic EPS is computed by dividing income available to commonstockholders by the weighted average number of common shares outstanding for the period. Diluted EPS iscomputed giving eÅect 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 ofstock options. SAB 98 does not aÅect the Company's EPS calculations. All prior period earnings per shareamounts have been restated to comply with the SFAS No. 128.

32


In accordance with the disclosure requirements of SFAS No. 128, a reconciliation of the numerator anddenominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts):

Year ended June 30,

1999 1998 1997

Numerator Ì Basic and Diluted EPS:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,173 $13,989 $15,562

Denominator Ì Basic EPS:

Weighted average common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏ 33,148 30,215 25,000

Basic earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.28 $0.46 $0.62

Denominator Ì Diluted EPS:

Denominator Ì Basic EPS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,148 30,215 25,000

EÅect of Dilutive Securities Ì Common stock options ÏÏÏÏÏ 1,280 1,615 754

Weighted average diluted common shares outstanding ÏÏÏÏÏÏÏ 34,428 31,830 25,754

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.27 $0.44 $0.60

Treasury Stock

In June, 1998, the Board of Directors authorized the repurchase, at management's discretion, of up to1,000,000 shares of the Company's stock. Shares repurchased under this authorization were used to oÅsetdilution caused by the Employees Stock Purchase Plan and Stock Option Plan. The Company's repurchases ofshares of common stock are recorded as treasury stock and result in a reduction of stockholders equity. Whentreasury shares are issued, the Company uses a Ñrst-in, Ñrst-out method and any excess of repurchase costsover the reissue price is treated as a reduction of retained earnings.

Self-Insurance

The Company self-insures, with certain stop loss insurance coverages, for short-term disability, life andemployee health care. Claims expense is recorded in the year of occurrence through the accrual of claimreserves based on estimates of ultimate claims costs. Claims incurred but not yet reported are estimated andreserved for based on historical claims data.

Operating Segments

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and RelatedInformation (""SFAS No. 131''), superseding SFAS No. 14, Financial Reporting for Segments of a BusinessEnterprise (""SFAS No. 14''). SFAS No. 131 establishes standards for the way public business enterprisesreport information about operating segments in annual Ñnancial statements and requires those enterprises toreport selected information about operating segments in interim Ñnancial statements. It also requiresdisclosures about products and services, geographic areas and major customers. The Company adopted SFASNo. 131 for the Ñscal 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 proÑt or loss from operations. Intersegment sales and transfers areaccounted for based on deÑned transfer prices.

ReclassiÑcation

Certain prior year amounts have been reclassiÑed to conform with the current year presentation.

33


New Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting forDerivative Instruments and Hedging Activities. This statement requires recognition of all derivatives as eitherassets or liabilities on the balance sheet and measurement of those instruments at fair value. Changes in fairvalue of derivatives are recorded each period in current earnings or other comprehensive income (loss). Thestatement was originally required to be adopted and is eÅective for all Ñscal years beginning after June 15,2000. The Company is evaluating the eÅect Statement 133 will have on its Ñnancial reporting and disclosuresas well as on its derivative and hedging activities.

In December 1998, SOP 98-9, ModiÑcation of SOP 97-2, Software Revenue Recognition, With Respectto Certain Transactions was issued. This SOP modiÑed SOP 97-2 to permit recognition of revenue for thedelivered elements of a contract when the vendor-speciÑc objective evidence of fair value exists for theundelivered elements of the contract. The SOP will be eÅective for transactions that are entered into in theÑscal years beginning after March 15, 1999. Hypercom is currently evaluating this SOP's impact on itÑnancial statements.

In April 1998, SOP 98-5, Reporting on the Costs of Start-up Activities, was issued and provides guidanceon the Ñnancial reporting of start-up costs and organization costs. It requires costs of start-up activities andorganization costs to be expensed as incurred. This SOP is eÅective for Ñscal years beginning afterDecember 15, 1998. The adoption of this standard will have no material eÅect on the Company's Ñnancialreporting and disclosures.

In March 1998, the Accounting Standards Executive Committee of the American Institute of CertiÑedPublic Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use, relating to the treatment of costs incurred to develop software forinternal use. This SOP is eÅective for the Ñnancial statements for Ñscal years beginning after December 15,1998, and should be applied to internal-use computer software costs incurred in those Ñscal years for allprojects, including those projects in progress upon initial application of this SOP. The Company is evaluatingthe eÅect this SOP will have on the Company's Ñnancial reporting and disclosures.

3. Concentrations of Credit and Other Risks:

Financial Instruments

The Company's Ñnancial instruments that are exposed to concentrations of credit risk consist primarily ofcash 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 internationalbanks and Ñnancial institutions. The Company, in the normal course of business, maintains balances in excessof the Federal Deposit Insurance Corporation's insurance limit. The balance in excess of the insurance limit atJune 30, 1999 and 1998 was approximately $1.5 million and $5.2 million, respectively. The Company alsomaintains balances in foreign banks that are used for current operations of subsidiaries located abroad. Foreigndeposits that are uninsured amounted to approximately $12.5 million and $8.3 million as of June 30, 1999 and1998, respectively.

The Company's accounts receivable results primarily from credit sales to a broad customer base, bothnationally and internationally. The Company routinely assesses the Ñnancial strength of its customers,requiring letters of credit from certain foreign customers, and provides an allowance for doubtful accounts asnecessary.

Inventories

Most components used in the Company's systems are purchased from outside sources. Certaincomponents are purchased from single suppliers. The failure of any such supplier to meet its commitment onschedule could have a material adverse eÅect on the Company's business, operating results and Ñnancialcondition. If a sole-source supplier were to go out of business or otherwise become unable to meet its supply

34


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 adverseeÅect on the Company's business, operating results and Ñnancial condition.

The Company estimates inventory provisions for potentially excess and obsolete inventory based onforecasted demand. Actual demand may diÅer from such anticipated demand and may have a materialadverse eÅect on inventory valuation.

International Operations

The Company's international business is an important contributor to the Company's net revenue andproÑts. However, the majority of the Company's international sales are denominated in the U.S. dollar, and anincrease in the value of the U.S. dollar relative to foreign currencies could make products sold internationallyless competitive. The operating expenses of the Company's overseas oÇces are paid in local currencies and aresubject to the eÅects of Öuctuations in foreign currency exchange rates.

The Company conducts manufacturing operations in Brazil, Australia, and China. Foreign manufacturingis subject to certain risks, including the imposition of tariÅs and import and export controls, together withchanges in governmental policies. The occurrence of any of these events could have a material adverse eÅecton the Company's business, operating results and Ñnancial condition.

As of June 30, 1999, the Company maintained signiÑcant accounts receivable balances in the Asia PaciÑcregion, which are subject to the economic risks inherent to that region.

4. Marketable Securities:

As of June 30, 1999 and 1998, the diÅerence between amortized cost and fair market value of theCompany's marketable securities and long-term investments was not material. Accordingly, the Company hasnot disclosed unrealized gains and losses. The municipal bonds and corporate notes have maturities that rangefrom three months to two years. As of June 30, 1999 and 1998, marketable securities consist of the following(dollars in thousands):

June 30,

1999 1998

Municipal bonds and government securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,053 $34,201

Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,443 6,671

Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,235 Ì

Mutual funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,769

Total marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,731 $42,641

Municipal bonds and government securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,070 $ 3,740

Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,274 6,191

Total long-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21,344 $ 9,931

35


5. Fair Value of Financial Instruments:

A summary of carrying amounts and fair values as of June 30, 1999 and 1998 are as follows (dollars inthousands):

1999 1998

Carrying Estimated Carrying EstimatedAmount Fair Value Amount Fair Value

Financial Assets:

Cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $36,727 $36,727 $55,659 $55,659

Marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,731 26,731 42,641 42,641

Long-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,344 21,344 9,931 9,931

Financial Liabilities:

Long-term obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,284 11,284 1,797 1,822

6. Inventories:

Inventories consist of the following (dollars in thousands):

June 30,

1999 1998

Purchased parts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20,308 $18,710

Work in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,249 11,388

Finished goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,925 30,441

$57,482 $60,539

7. Property, Plant and Equipment:

Property, plant and equipment consist of the following (dollars in thousands):

June 30,

1999 1998

Land and improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,664 $ 4,264

BuildingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,791 6,027

Machinery and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,721 17,022

Furniture and Ñxtures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,224 2,826

VehiclesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,142 1,096

Leasehold improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,710 1,617

45,252 32,852

Less accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,496) (9,282)

$ 30,756 $23,570

36


8. Long-term Obligations:

Long-term obligations consist of the following (dollars in thousands):

June 30,

1999 1998

Floating Rate Option note payable to Bank One, Arizona; payablein semi-annual installments plus interest at a variable rate, dueApril 1, 2019; collateralized by unconditional, irrevocable, directpay letter of credit. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,220 $ Ì

Capital leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 658 825

Note payable to Bank One, Arizona; interest at 8.92%; dueJanuary 2001; collateralized by deed of trust on land andbuilding. Repaid in Ñscal year 1999. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 972

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 406 Ì

11,284 1,797

Current portion of long-term obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (490) (598)

$10,794 $1,199

In connection with the Öoating rate option note, the letter of credit is subject to renewal on April 1, 2006.If the letter of credit is not renewed, the entire remaining principal balance will become due and payable. Theletter of credit is collateralized by land and buildings. The Company is required to make increasing monthlydeposits of $18,490 up to $81,752 over the life of the note into a sinking fund to provide periodic repayment ofthe notes. The Company has entered into an interest rate swap agreement to Ñx the interest rate at 7.895%.The interest rate swap agreement matures at the time the related note matures. The Corporation is exposed tocredit loss in the event of non-performance by the other parties to the interest rate swap agreement. However,the Corporation does not anticipate nonperformance by the counterparties.

During Ñscal 1999, the Company entered into a $10.0 million revolving line of credit agreement withBank One, Arizona. Under the terms of the agreement, the Company may borrow up to an amount equal to80% of its accounts receivable under ninety days past due and 35% of its raw material (purchased parts) andÑnished goods inventory. There was no outstanding balance at June 30, 1999.

The loan agreements relating to the Öoating rate option notes and line of credit 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 abilityto consolidate or merge into any other entity. In addition, the loan agreements contain certain Ñnancialcovenants, including a minimum current ratio, minimum working capital, minimum tangible net worth, andminimum owner's equity and debt coverage ratios.

The aggregate principal payments due on long-term obligations are as follows (dollars in thousands):

Year Ending June 30,

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 490

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 779




Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,880

$11,284

37


9. Income Taxes:

Income before income taxes consisted of the following (dollars in thousands):

June 30,

1999 1998 1997

Income (loss) before income taxes:

United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,702 $21,149 $13,621

Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,136) (1,287) 9,762

$12,566 $19,862 $23,383

The tax eÅect of temporary diÅerences that give rise to signiÑcant portions of the deferred tax assets anddeferred tax liabilities are as follows (dollars in thousands):

June 30,

1999 1998

Deferred tax assets, current:

Inventory valuation and reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,471 $ 2,948

Compensation accruals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,437 7,268

Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 662 Ì

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 860 775

Deferred tax assets, current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,430 $10,991

Deferred tax assets (liabilities), non-current:

Tax loss carry forwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,384 $ 1,004

Property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,035) (747)

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,203) (1,118)

Net deferred tax assets (liabilities), non-current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 146 $ (861)

The components of income tax expense are as follows (dollars in thousands):

June 30,

1999 1998 1997

Current:

Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,584 $ 8,473 $ 6,904

State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 277 1,239 1,227

Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 978 1,314 2,638

4,839 11,026 10,769

Deferred:

Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (35) (3,810) (2,601)

State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5) (653) (446)

Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,406) (690) 99

(1,446) (5,153) (2,948)

$ 3,393 $ 5,873 $ 7,821

38


Consolidated income tax expense diÅered from the amount computed by applying the U.S. federalincome tax rate to income taxes before income as shown below:

June 30,

1999 1998 1997

Tax expense at the federal statutory rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 35.0% 35.0%

State income taxes, net of federal income tax beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.4 4.1 3.4

Foreign taxes attributable to foreign operations less than federalstatutoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3.2) (2.5) (3.3)

Research and experimentation credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9.0) (4.5) (2.1)

Foreign Sales Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2.2) (7.0) (2.7)

Tax Exempt interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3.5) (1.4)

Translation loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.8 9.1

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3.4) (3.2) 3.1

EÅective tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.9% 29.6% 33.4%

As of June 30, 1999, 1998 and 1997, the Company had not provided deferred income tax beneÑts oncumulative losses of individual international subsidiaries of $29,200,000, $5,620,000, $2,109,000, respectively.If deferred income tax assets were recognized for these net operating losses, they would be approximately$7,855,000, $1,663,000, $704,000 respectively. Upon distribution of earnings in the form of dividends orotherwise, the Company may be subject to both U.S. income taxes and withholding taxes in the variousinternational jurisdictions.

10. ProÑt Sharing Plans:

The Company has a 401(k) proÑt 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 payrollwithholding. Additionally, the plan provides for the Company to make proÑt sharing contributions to the planin amounts at the discretion of management. The employer contribution for the years ended June 30, 1999 and1998 was $867,000 and $36,000, respectively.

Beginning with Ñscal year 1999, the Company will pay a matching contribution each pay period of 50% ofthe employee's contributions, up to 6% of employee's compensation, to the Federal limit of $10,000 percalendar year.

11. Stockholders' Equity:

Stock Splits

On November 25, 1996, the Company declared a 10,000-for-1 stock split, eÅected in the form of a stockdividend. On September 10, 1997, the Company declared a 5-for-4 stock split, eÅected in the form of a stockdividend. All references to the number of common shares outstanding, common shares reserved for issuanceunder the Plan, and per share information have been adjusted to reÖect the stock splits on a retroactive basis.

Stock Options and Non-cash Compensation

In connection with an oÇcer's employment agreement (the ""Agreement''), as amended, the Companyprovided for stock options to be granted to an oÇcer equal to 1.0% of the outstanding common shares of theCompany as of June 30, 1992, 1993 and 1994 with exercise prices equal to the fair market values deÑned by anet income formula in the Agreement (""DeÑned Fair Market Value'') at the respective dates. The options areexercisable as of July 1, 1995, 1996 and 1997, respectively, and remain exercisable for 10 years from thesedates. The Agreement also provides for additional stock options immediately exercisable to purchase 1.0% ofthe outstanding common stock of the Company on January 1, 1994 and 1995 with an exercise price equal tothe DeÑned Fair Market Value as of the respective dates; the options remain exercisable for 10 years. In

39


accordance with variable plan accounting, compensation expense of $0, $10,963,000, and $4,784,000 wasrecognized for the years ended June 30, 1999, 1998 and 1997, respectively.

Prior to the completion of the Company's IPO, the Agreement required the Company to purchase all orpart of any shares then owned by the oÇcer under certain circumstances. The purchase obligation terminatedat the completion of the Company's IPO in November 1997. No compensation expense related to the optionswas recognized after that date. Since the Company was obligated to repurchase the oÇcer's shares, theestimated value of the shares was recorded as redeemable common stock. Upon termination of the obligation,this amount was reclassiÑed to additional paid-in capital.

During Ñscal 1997, the Company's board of directors approved the Hypercom Corporation Long-termIncentive Plan (the ""Plan'') which allocates 5,000,000 shares of common stock for issuance at the Company'sdiscretion. The Plan authorizes issuance of ""incentive stock options'' (as deÑned by the Internal RevenueCode of 1986), non-qualiÑed stock options, stock appreciation rights, restricted stock awards, performanceshare awards, dividend equivalent awards and other stock-based awards. Stock options issued under the Planbecome exercisable over a period determined by the Board of Directors (generally over Ñve years) and expireten years after the date of grant.

A summary of the Company's stock option activity and related information follows:

Year ended June 30,

1999 1998 1997

Weighted Weighted WeightedShares Average Shares Average Shares Averageunder Exercised under Exercised under Exercised

Options Price Options Price Options Price

Beginning balance outstanding ÏÏÏ 3,745,875 $5.83 2,943,750 $4.75 1,030,000 $1.62

Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,520,304 9.98 860,750 9.65 1,913,750 6.43

Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,750) 9.60 (38,625) 6.40 Ì

Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (177,750) 9.12 (20,000) 9.60 Ì

Ending balance outstandingÏÏÏÏÏÏ 5,084,679 6.96 3,745,875 5.83 2,943,750 4.75

Exercisable at end of year ÏÏÏÏÏÏÏ 2,179,971 $4.41 1,917,125 $3.84 1,436,250 $3.77

The following table summarizes additional information about the Company's stock options outstanding asof June 30, 1999:

Options Outstanding Options Exercisable

Weighted Weighted WeightedShares Average Average Shares Averageunder Remaining Exercise under Exercise

Range of Exercise Prices Options Contractual Price Options Price

$0.66 - 2.66 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,030,000 4.5 years $ 1.62 1,030,000 $ 1.62

$5.00 - 8.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,006,375 7.7 years 6.43 992,877 6.42

$8.50 - 12.94 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,043,304 9.1 years 10.14 156,094 9.99

$18.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,000 8.7 years 18.00 1,000 18.00

5,084,679 2,179,971

Pro forma information regarding net income and net income per share is required by SFAS No. 123, andhas been determined as if the Company had accounted for its stock option plans under the fair value basedmethod of that Statement.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes valuationmethod with the following assumptions: risk free interest rates of 6.50%; an average expected time to exerciseof Ñve years; expected volatility of 88%; and no dividends.

40


For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense overthe options' vesting period. The pro forma information for the year ended June 30, 1999 and 1998 follows(dollars in thousands except for net income per share information):

June 30,

1999 1998 1997

Pro forma net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $7,078 $11,713 $14,834

Pro forma net income per share Ì Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.21 0.39 0.59

Pro forma net income per share Ì DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.21 0.37 0.58

The above pro forma disclosure is not necessarily representative of the eÅects on reported net income forfuture years.

Employee Stock Purchase Plan

On September 8, 1997, the Company's Board of Directors adopted and the stockholders of the Companyapproved the Hypercom Corporation 1997 Employee Stock Purchase Plan (the ""Purchase Plan''). ThePurchase Plan allows eligible employees of the Company to purchase shares of the Common Stock throughperiodic payroll deductions. The initial oÅering period commenced immediately following the Initial PublicOÅering and extended through June 30, 1998, with subsequent oÅering periods beginning every six monthsthereafter. At the end of each oÅering period, payroll deductions for the oÅering period are used to purchaseshares of Common Stock for each participant's account at a price equal to 90% of the fair market value of theCommon Stock on either the Ñrst or last day of the oÅering period, whichever is less. Payroll deductions underthe Purchase Plan are limited to 10% of each eligible employee's earnings during the oÅering period, and nosingle participant will be granted an option to purchase shares with a value in excess of $25,000 for eachcalendar year. The Board has reserved 625,000 shares of Common Stock for issuance under the PurchasePlan, subject to adjustment in the event of a stock split, reverse stock split, stock dividend or similar event.Under the plan, for the Ñscal years ended June 30, 1999 and 1998 the Company sold 68,100 and 45,541 sharesto employees at weighted average prices of $8.77 and $9.00 a share, respectively.

Preferred Stock

On September 8, 1997, the Company's board of directors authorized 10,000,000 shares of $0.001 parvalue preferred stock. As of June 30, 1999, no shares were outstanding.

Directors' Stock Plan

On September 8, 1997, the Company's Board of Directors adopted and the stockholders of the Companyapproved the Hypercom Corporation Directors' Stock Plan (the ""Director Plan''). The Director Plan isadministered by a committee appointed by the Board and provides for an initial grant to each Director of anoption to purchase 6,250 shares of Common Stock immediately following the OÅering. In addition, eachindividual who Ñrst becomes a Director after the date of the initial grant of options will be granted an option topurchase 6,250 shares of Common Stock, and will receive an annual grant of options to purchase 6,250 sharesof Common Stock. The aggregate number of shares of Common Stock subject to the Director Plan may notexceed 93,750, subject to adjustment in the event of a stock split, reverse stock split, stock dividend or similarevent. Options granted under the Director Plan are fully vested and become fully exercisable on the Ñrstanniversary of the date of grant and have a term of ten years. The exercise price per share under the DirectorPlan is equal to the fair market value of such shares upon the date of grant. In general, options may beexercised by payment in cash or a cash equivalent, previously acquired shares having a fair market value at thetime of exercise equal to the total option exercise price or a combination thereof.

41


Initial Public OÅering

On November 19, 1997, the Company completed an initial public oÅering (""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 Companywere approximately $125.7 million, of which approximately $23.1 million were used to repay indebtedness.

12. Brazil Devaluation:

As a result of the devaluation of the Brazilian Real, the Company recorded a pretax loss of $4.4 millionrelated to the net monetary asset exposure for the Ñscal year ended June 30, 1999. This loss is included in the$6.7 million foreign currency loss for the Ñscal year ended June 30, 1999.

13. Commitments and Contingencies:

Lease Commitments

The Company leases oÇce and warehouse space, equipment and vehicles under non-cancelable operatingleases. The oÇce space leases provide for annual rent payments plus a share of taxes, insurance andmaintenance 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):

Operating CapitalYear Ending June 30, Leases Leases

2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,060 $260

2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,137 311

2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 670 73



ThereafterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 449

Total minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,828 $658

Less imputed interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69

Present value of minimum lease paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $589

Litigation

In November 1997, the Company entered into a settlement agreement with a then employee (now aformer employee) in which the former employee agreed to waive any and all claims against the Company andits employees arising from or relating to past employment in exchange for certain monetary and non-monetaryconsideration. The former employee subsequently Ñled a lawsuit against the Company. The Company has Ñleda counterclaim and a motion to enforce settlement based on the former employee's apparent breach of thesettlement agreement. The counsel for the plaintiÅ has submitted alternative settlement proposals to theCompany including a structured payment of $4 million over up to 35 years, or a cash settlement of $1.75million plus establishment of an educational trust. The Company intends to vigorously defend the lawsuit,however the Company's management is currently unable to predict the outcome with certainty andaccordingly, has not accrued any liability.

The Company is subject to other legal demands, which have arisen in the ordinary course of its business.Although there can be no assurance as the ultimate disposition of these matters and the proceedings disclosedabove, it is the opinion of the Company's management, based upon the information available at this time, thatthe expected outcome of these matters, individually or in the aggregate, will not have a material adverse eÅecton the results of operations and Ñnancial condition of the Company.

42


14. Related Party Transactions:

Hypercom Unit Trust

During Ñscal 1999, 1998 and 1997, the Company paid approximately $92,000, $97,000, and $109,000 inrent to Hypercom Unit Trust, a trust fund controlled by certain stockholders.

Express Card Systems, Inc.

A relative of an oÇcer of the Company is a Vice President of Express Card Systems, Inc. (""ECS''), asales company, which derives a signiÑcant portion of its revenues from products sold to the Company. DuringÑscal 1999, 1998 and 1997, ECS was paid $246,000, $314,000 and $340,000, respectively, with respect to salesof product to the Company.

15. Segment Information:

The Company has two reportable segments: POS Systems and Network Systems. POS Systemsdevelops, manufactures, markets and supports products that automate electronic payment transactions at thepoint of sale in merchant establishments. Network Systems develops, manufactures, markets and supportsenterprise networking systems.

The Company's reportable segments are strategic business units that oÅer diÅerent products and services.They are managed separately because each business requires diÅerent technologies and marketing strategies.

The following table presents certain segment Ñnancial information and the reconciliation of segmentÑnancial information to consolidated totals as of and for the years ended June 30, 1999, 1998 and 1997 (dollarsin thousands):

Fiscal Year Ended June 30, 1999

POS Systems Network Systems Total

Revenue from external customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $231,011 $30,504 $261,515

Intersegment revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,976 5,506 14,482

Total revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $239,987 $36,010 $275,997

Segment income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 30,586 $ (80) $ 30,506

Depreciation and amortization expense ÏÏÏÏÏÏÏÏÏÏÏ $ 4,398 $ 529 $ 4,927

Segment assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $303,561 $23,116 $326,677




Intersegment revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,680 1,680


Segment income (loss) from operations ÏÏÏÏÏÏÏÏÏÏ $ 55,118 $(4,828) $ 50,290



43





Intersegment revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 10,468 10,468


Segment income (loss) from operations ÏÏÏÏÏÏÏÏÏÏ $ 32,005 $ 3,933 $ 35,938



Reconciliation

Year Ended June 30,

1999 1998 1997

Net Revenues

Net Revenues for reportable segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $275,997 $ 258,907 $207,210

Elimination of intersegment proÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,482) (1,680) (10,468)

Total Consolidated RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $261,515 $ 257,227 $196,742

Income from Operations

Income from Operations for reportable segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 30,506 $ 50,290 $ 35,938

Elimination of intersegment proÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,813 (3,021) (5,341)

Unallocated amounts:

Corporate expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (20,656) (27,481) (7,767)

Consolidated income from Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14,663 $ 19,788 $ 22,830

Depreciation and amortization expenses

Depreciation and amortization expenses from reportable segmentsÏÏÏÏ $ 4,927 $ 2,610 $ 2,634


Corporate depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,639 1,554 254

Consolidated depreciation and amortization expense ÏÏÏÏÏÏÏ $ 6,566 $ 4,164 $ 2,888

Assets

Segment Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $326,677 $ 339,361


Corporate Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 143,057 140,697

Eliminations:

Intercompany receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (94,432) (131,840)

Investments in related parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (49,937) (34,707)

Advances to related parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (43,380) (43,742)

ProÑt in ending inventoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,841) (10,192)

Other proÑt eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (864)

Consolidated assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $276,280 $ 259,577

44


Net revenues to external customers are based on the location of the customer. Geographic information asof June 30, 1999, 1998 and for each of the three years ended June 30, 1999, 1998 and 1997 is presented in thetable below (dollars in thousands):

United States Latin America Asia/PaciÑc Europe Total

Year ending June 30, 1999

Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $141,100 $59,461 $34,253 $26,701 $261,515

Long-lived assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,924 7,576 7,995 6,799 75,294


Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 110,410 74,632 57,909 14,276 257,227

Long-lived assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,096 4,774 3,188 595 24,653


Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86,904 47,482 58,233 4,123 196,742

16. Acquisitions:

Horizon Sales Group, Inc.

EÅective October 1, 1998, Hypercom purchased substantially all the assets of the Horizon Group, Inc.(Horizon). Horizon is a national distributor of equipment for Hypercom and other POS manufacturers. Inaddition to sales of new equipment, Horizon provides a variety of services, including refurbishing equipment,help desk, PIN pad key loading, terminal deployment and other custom programs.

Horizon was acquired for $5.0 million in cash and $0.5 million in Hypercom common stock issued fromTreasury Stock. The agreement provides for additional payments up to $7.0 million, based on Horizon'searnings over the three-year period subsequent to the acquisition date. The additional payments, if applicable,are to be in the form of Hypercom common stock.

The acquisition was accounted for under the purchase method of accounting. The purchase price,including direct costs incurred in connection with the acquisition was allocated to identiÑable net tangibleassets and liabilities of $1.0 million, identiÑable intangibles of $3.2 million and goodwill of $1.6 million. Theresults of Horizon's operations are included in Hypercom's consolidated statements of income and cash Öowsbeginning with the date of the acquisition.

SP/RJ Service Company

EÅective January 1, 1999 Hypercom's Brazilian subsidiary purchased substantially all of the assets ofSP/RJ Service Company (SP/RJ) for $900,000 in cash. SP/RJ is primarily involved in the installation andmaintenance of POS terminals in Southern Brazil.

The acquisition was accounted for under the purchase method of accounting. The purchase price,including direct costs incurred in connection with the acquisition, was allocated to identiÑable net tangibleassets and liabilities of ($0.3) million and goodwill of $1.2 million. The results of the operations are includedin Hypercom's consolidated statements of income and cash Öows beginning with the date of the acquisition.

JTS ChequeOut Solutions Inc.

EÅective April 8, 1999, Hypercom purchased substantially all the assets of the Rochester, N.Y.-basedJTS ChequeOut Solutions Inc., a provider of card-based, multi-lane Ñnancial and marketing systems for U.S.supermarket chains for $1.5 million in cash and $0.569 million in common stock issued from treasury stock.

The acquisition was accounted for under the purchase method of accounting. The purchase price,including direct costs incurred in connection with the acquisition, was allocated to identiÑable net tangibleassets and liabilities of ($40,000) and goodwill of $2.1 million. The results of the operations are included inHypercom's consolidated statements of income and cash Öows beginning with the date of the acquisition.

45


ICL Financial Terminals

EÅective April 14, 1999, Hypercom purchased substantially all the assets of the payment securitybusiness of ICL's Financial Terminals division in Sweden. ICL Financial Terminals is a provider of securepayment devices, smart card products and self-service point-of-sale (POS) terminals.

The acquisition was accounted for under the purchase method of accounting. The purchase price,including direct costs incurred in connection with the acquisition, was allocated to identiÑable net tangibleassets and liabilities of $0.3 million and goodwill of $1.3 million. The results of the operations are included inHypercom's consolidated statements of income and cash Öows beginning with the date of the acquisition.

The purchase price was $1.5 million in cash. The acquisition agreement also provides for a contingentpayment of $0.5 million cash to be paid to ICL upon Hypercom's collection of $6 million from ICL relating toICL meeting an annual purchase requirement of $6 million in product from Hypercom by April 1, 2000.

17. Change of Year End:

On April 20, 1999, the Company's Board of Directors approved the change of Hypercom's Ñscal year endfrom June 30 to December 31. This change will be implemented as of December 31, 1999.

18. Supplemental Cash Flow Information:

1999 1998 1997

Interest paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (455) $(2,543) $ (2,247)

Income taxes paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(5,652) $(4,837) $(15,880)

Cash and Noncash Investing and Financing Activities

Acquisition of plant and equipment through capital leases ÏÏÏÏÏÏÏÏÏÏÏ Ì $ 698 $ 133

Changes in accounts payable related to the purchase of property,plant & equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 210 $ 367 $ 36

Acquisition of controlling interest in subsidiaries:

Assets acquired (net of seller Ñnancing) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18,290 $ 744

Liabilities assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,942) (244)

Net assets acquiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,348 500

Less issuance of Treasury Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,069) Ì

Net cash paid for acquisition of controlling interest in subsidiaries ÏÏÏÏ $ 9,279 $ 500

46


19. Interim Financial Results (Unaudited):

The following tables set forth certain unaudited consolidated Ñnancial information for each of the fourquarters in Ñscal 1999 and 1998. In management's opinion, this unaudited quarterly information has beenprepared on the same basis as the audited consolidated Ñnancial statements and includes all necessaryadjustments, consisting only of normal recurring adjustments, that management considers necessary for a fairpresentation of the unaudited quarterly results when read in conjunction with the Consolidated FinancialStatements and Notes. The Company believes that quarter-to-quarter comparisons of its Ñnancial results arenot necessarily meaningful and should not be relied upon as an indication of future performance. (Dollars inthousands, except per share amounts.)

Fiscal 1999

September 30, December 31, March 31, June 30, Fiscal Year

Net revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $65,983 $70,594 $56,304 $68,634 $261,515

Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,355 34,338 24,327 27,664 119,684

Income (loss) from operations ÏÏÏÏÏÏ 7,324 9,266 (1,744) (183) 14,663

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,755 6,604 (3,666) 480 9,173

Basic earnings (loss) per share ÏÏÏÏÏÏ 0.17 0.20 (0.11) 0.01 0.28

Diluted earnings (loss) per share ÏÏÏÏ 0.17 0.19 (0.11) 0.01 0.27

Fiscal 1998

September 30, December 31, March 31, June 30, Fiscal Year

Net revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $78,937 $71,209 $54,339 $52,742 $257,227

Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,106 36,919 25,894 25,833 126,752

Income (loss) from operations ÏÏÏÏÏÏ 14,698 3,865 3,160 (1,935) 19,788

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,110 1,841 4,034 (996) 13,989

Basic earnings (loss) per share ÏÏÏÏÏÏ 0.36 0.06 0.12 (0.03) 0.46

Diluted earnings (loss) per share ÏÏÏÏ 0.35 0.06 0.11 (0.03) 0.44

47


Item 14(a)2 Financial Statement Schedule

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholdersof Hypercom Corporation

Our audits of the consolidated Ñnancial statements referred to in our report dated July 20, 1999 whichreport and consolidated Ñnancial statements are included in this Annual Report on Form 10-K also includedan audit of the Ñnancial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, thisÑnancial statement schedule presents fairly, in all material respects, the information set forth therein whenread in conjunction with the related consolidated Ñnancial statements.

PricewaterhouseCoopers LLP

Phoenix, ArizonaJuly 20, 1999

48


FINANCIAL STATEMENT SCHEDULE

Additions

Balance at Charged to Charged toBeginning of Costs and Other Balance at End

Period Expenses Accounts Deductions of Period

(Dollars in thousands)

YEAR ENDED JUNE 30, 1997:

Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏ $ 761 $1,427 $(1,409) $ 779

Inventory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,133 994 (525) 2,602


Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏ 779 2,972 (22) 3,729

Inventory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,602 2,510 (469) 4,643


Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏ 3,729 1,386 (645) 4,470

Inventory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,643 2,925 (2,295) 5,273

49


LIST OF EXHIBITS

ExhibitNo. Exhibit Description

3.1 Amended and Restated CertiÑcate of Incorporation of the Company. Incorporated byreference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 (RegistrationNo. 333-35461).

3.2 Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.2 ofthe Company's Registration Statement on Form S-1 (Registration No. 333-35461).

4 Amended and Restated CertiÑcate of Incorporation of the Company. Incorporated byreference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 (RegistrationNo. 333-35461).

10.1(a)** Revolving Credit Agreement by and between Hypercom Corporation and Bank One, Arizona,NA, dated January 20, 1998.

10.1(b) ModiÑcation Agreement to Revolving Credit Agreement by and between HypercomCorporation and Bank One, Arizona, NA, dated January 25, 1999.

10.2* Lease, as amended, dated June 14, 1996, by and between Estes-Samuelson Partnership andHypercom, Inc.

10.3* Hypercom Corporation Long-Term Incentive Plan.‰

10.4* Hypercom Corporation 1997 Employee Stock Purchase Plan.‰

10.5* Promissory Note, dated October 17, 1994, by and between Hypercom, Inc., and GeorgeWallner.‰

10.6* Hypercom Corporation Nonemployee Directors' Stock Option Plan.‰

10.7* Employment Agreement with Jairo Gonzalez, dated January 1, 1997.‰

10.8* Employment Agreement with Albert A. Irato, dated January 1, 1997.‰

10.9* Loan Agreement, dated October 12, 1996, by and between Hypercom Pty. Ltd., and GeorgeWallner.‰

10.10* Loan Agreement, dated October 12, 1996, by and between Hypercom Pty. Ltd., and PaulWallner.‰

10.11* Description of lease by and between Hypercom Pty. Ltd., and Hypercom Unit Trust.

10.12 Severance agreement, dated June 1, 1999 by and between Thomas Linnen and HypercomCorporation.

10.13 Promissory Note by and between Hypercom Corporation and Capital One FundingCorporation, dated April 1, 1999.

10.14 Reimbursement Agreement by and between Hypercom Corporation, Bank One, Arizona, NA,and Capital One Funding Corporation, dated April 1, 1999.

21 Subsidiaries of the Company

23 Consent of Independent Public Accountants

27 Financial Data Schedule

99.1 Cautionary Statement Regarding Forward-Looking Statements and Risk Factors

* Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-35641).

** Incorporated by reference to the Company's Annual Report on Form 10-K/A Ñled on November 3, 1998.

‰ Management or Compensatory Plan Agreement.


Exhibit 99.1

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

AND RISK FACTORS

In passing the Private Securities Litigation Reform Act of 1995 (the ""Reform Act''), Congressencouraged public companies to make ""forward-looking statements'' by creating a safe harbor to protectcompanies from securities law liability in connection with forward-looking statements. Hypercom Corporationintends to qualify both its written and oral forward-looking statements for protection under the Reform Actand any other similar safe harbor provisions.

""Forward-looking statements'' are deÑned by the Reform Act. Generally, forward-looking statementsinclude expressed expectations of future events and the assumptions on which the expressed expectations arebased. All forward-looking statements are inherently uncertain as they are based on various expectations andassumptions concerning future events and they are subject to numerous known and unknown risks anduncertainties that could cause actual events or results to diÅer materially from those projected. Due to thoseand other uncertainties and risks, the investment community is urged not to place undue reliance on written ororal forward-looking statements of Hypercom. Hypercom undertakes no obligation to update or revise thisCautionary Statement Regarding Forward-Looking Statements to reÖect future developments. In addition,Hypercom undertakes no obligation to update or revise forward-looking statements to reÖect changedassumptions, the occurrence of unanticipated events, or changes to future operating results over time.

Hypercom provides the following risk factor disclosure in connection with its continuing eÅort to qualifyits written and oral forward-looking statements under the safe harbor protection of the Reform Act and anyother similar safe harbor provisions. Important factors currently known to management that could cause actualresults to diÅer materially from those in forward-looking statements include the disclosures contained in theCompany's Annual Report on Form 10-K to which this statement is appended as an exhibit and also includethe following:

RISK FACTORS

DiÇculty in Forecasting Net Revenue

Hypercom's net revenue in any period is diÇcult to forecast. Some of the factors aÅecting net revenueinclude the timing of product purchases and the length of the sales cycle for Hypercom's products.

Hypercom POS Systems and its customers enter into purchase agreements that generally have a one-yearterm and minimum purchase commitments. However, customers are not required to make purchases at anyparticular times during the term of the agreement or to purchase products exclusively from Hypercom.Because the timing of product purchases in any given period is at the customers' exclusive discretion andcontrol, net revenue for POS products is diÇcult to forecast.

It is also diÇcult to forecast net revenue in certain international markets where large orders for completesystems occur more frequently than in the U.S. Due to the signiÑcant cost of buying complete systems, theirsales cycle is long and diÇcult to predict.

Hypercom Network Systems operates with little backlog and, as a result, net revenue in any quarter issubstantially dependent on the orders booked and shipped in that quarter. The highly technical nature of thesesales generally results in a sales cycle that ranges from 12 to 18 months.

Hypercom's operating results are subject to other uncertainties, including the following:

‚ Industry and economic conditions;

‚ Competitive pressures;

‚ Type, timing, and size of orders and shipments for major customers;

‚ Variations in product mix and cost;

‚ Overhead costs;

‚ Obsolescence of inventory;

‚ Manufacturing or production diÇculties; and

‚ Nonrecurring charges.


SigniÑcant Fluctuations in Quarterly Results

Hypercom's operating results vary from quarter to quarter. If sales and shipments in any quarter do notmeet expectations, the results may be adversely aÅected. Any unexpected decline in the growth of the netrevenue without a quick reduction in the growth of operating expenses could have a serious negative eÅect onoperating results and Ñnancial condition. Hypercom cannot be sure that it will meet proÑtability objectives fora quarter if sales fall or the gross margin is reduced.

Seasonality

Hypercom continues to experience some degree of seasonality. For this reason, net revenue and results ofoperations are stronger from July to December reÖecting:

‚ Increased POS purchases to satisfy increased retail demand during the holiday season,

‚ Incentive programs VISA and MasterCard oÅer from July to December to encourage merchants tooÅer card-based payment systems, and

‚ Allocation of customers' capital budgets by the end of March with volume shipments beginning in July.

Risks Associated with International Operations and Foreign Currency Fluctuations

Hypercom's net revenue from international sales for Ñscal years 1997, 1998 and 1999 was approximately56%, 57%, and 46% respectively, of Hypercom's net revenue. Hypercom expects that international sales willcontinue to account for a signiÑcant percentage of its net revenue in the foreseeable future. Accordingly,Hypercom is subject to risks associated with international operations. Examples of these risks include:

‚ Management of a multinational organization,

‚ Fluctuations in currency exchange rates,

‚ Compliance with local laws,

‚ Regulatory and product certiÑcation requirements,

‚ Changes in international laws and requirements,

‚ TariÅs and other trade barriers,

‚ Import and export controls,

‚ Restrictions on the repatriation of funds,

‚ InÖationary conditions,

‚ StaÇng, employment, and severance issues,

‚ Political instability and economic downturns, which include the impact of revenue generated fromHypercom's shipments into Asia,

‚ War or other hostilities,

‚ Expropriation or nationalization of assets,

‚ Overlap of tax structures,

‚ Renegotiations or nulliÑcation of contracts, and

‚ Longer payment cycles.

In some countries these risks and other factors that relate to doing business abroad may have negativeeÅects on Hypercom. Hypercom takes steps such as hedging to partially oÅset changes in currency exchangerates. However, there is no assurance that such strategies enable Hypercom to avoid losses due to changes inthe exchange rate. In addition, the inability to eÅectively manage these and other risks could have a seriousnegative eÅect on Hypercom's business or Ñnancial condition.

Hypercom generally does not engage in hedging transactions that could partially oÅset the eÅects ofÖuctuations in currency exchange rates. However, as Hypercom continues to expand its internationaloperations, exposure to gains and losses on foreign currency transactions may increase. Hypercom may chooseto limit such exposure by entering into forward foreign exchange contracts or engaging in similar hedgingstrategies. For example, the Company recently entered into hedging transactions to mitigate the adverseeÅects of signiÑcant foreign currency Öuctuations in Brazil. There can be no assurance that any currencyexchange strategy would be successful in avoiding exchange-related losses or that the failure to manage


currency risks will not have a material adverse eÅect on Hypercom's business, operating results or Ñnancialcondition.

Uncertainty of ProÑtability for Hypercom Network Systems

Hypercom established Hypercom Network Systems in 1994 to continue to develop enterprise networkingproducts and technologies for the electronic payments industry and to leverage these technologies to addressother enterprise networking opportunities. Since its formation, Hypercom Network Systems has expendedsubstantial sums on research and development and on establishing distinct manufacturing operations anddistribution channels. Hypercom Network Systems has recently incurred losses as a standalone business, andmanagement is implementing plans to return it to proÑtability. However, there can be no assurance that it willreturn to proÑtability, particularly in light of the competitive nature of the industry in which it operates.

Industry and Technological Changes; Dependence on Development and Market Acceptance of New Products

Hypercom believes that in the next few years the following factors will create major changes in the POSindustry:

‚ Lower-cost products,

‚ Greater functionality at the point of sale,

‚ Faster and more accurate transaction processing,

‚ Improvements in security features, and

‚ Emerging technologies and payment programs.

In addition, the enterprise networking industry is characterized by rapid changes in technology andnumerous new product introductions. Hypercom's success, particularly in the enterprise networking industry,will depend to a large degree upon its continued ability to oÅer new products and enhancements to its existingproducts to meet changing market and industry requirements. New products and technologies may have aneÅect on the sales of existing products and technologies. There can be no assurance that the introduction ofnew products and technologies will not have a material adverse aÅect on Hypercom's business and Ñnancialcondition.

Developing new products and technologies is a complex, uncertain process requiring innovation andaccurate anticipation of technological and market trends. Hypercom cannot provide complete assurance of itsability to successfully:

‚ Identify, develop, or manufacture new products and technologies,

‚ Market or support these new products and technologies,

‚ Control delays in introducing new products,

‚ Gain market acceptance for the new products and technologies,

‚ Respond to technological changes and new industry standards, and

‚ Respond to competitors' announcements of new products.

The inability to respond eÅectively to any of these challenges may have a negative impact on Hypercom'sbusiness and Ñnancial success. Hypercom may suÅer other business and Ñnancial losses if it is successful inmarketing new products and responding to competitive and industry changes. When changes to the productline are announced, Hypercom will be challenged to:

‚ Manage possible shortened life cycles for existing products,

‚ Continue to sell existing products, and

‚ Prevent customers from returning existing products.

Dependence on Current Management and Key Personnel

George Wallner, Paul Wallner, Jairo Gonzalez and Jonathon Killmer are instrumental in Hypercom'sdevelopment, growth, and operations. Hypercom has an employment agreement with Mr. Gonzalez. Howeverit does not have employment agreements with George Wallner, Paul Wallner, Jonathon Killmer, or any othermember of senior management. Although Hypercom has no plans to enter into employment agreements withother executive oÇcers or key employees, Hypercom may review the value of such employment agreements inthe future.


Hypercom is the beneÑciary of key-man life insurance of $1.0 million on both George Wallner and PaulWallner. The loss of any of the key executives of Hypercom could have a negative eÅect on Hypercom'sbusiness and Ñnancial condition.

Hypercom's continued growth and operations also depend on the continued service of other keyemployees and the hiring of qualiÑed new employees. Competition for highly skilled business, technical,marketing, and other staÅ is intense. Competition is particularly Ñerce given the current strong economy forhigh-technology companies. In addition, competing for skilled employees may result in increased compensa-tion costs. If Hypercom is not successful in retaining and hiring qualiÑed staÅ, negative eÅects on its businessand Ñnancial condition may result.

Excess or Obsolete Inventory

Managing Hypercom's inventory of components and Ñnished products is a complex task. Hypercom mustavoid maintaining excess inventory as a result of:

‚ The need to maintain signiÑcant inventory of components that are in limited supply,

‚ Buying components in bulk for the best pricing,

‚ Responding to the unpredictable demand for products,

‚ Responding to customer requests for quick delivery schedules, and

‚ Storing products made obsolete by new product oÅerings.

If Hypercom accumulates excess or obsolete inventory, price reductions and inventory write-downs mayresult. Such a situation could adversely aÅect Hypercom's business and Ñnancial condition.

Competition

Hypercom is active in very competitive markets. Among the main competitive factors are the following:

‚ Product quality

‚ Reliability

‚ Performance

‚ Functionality

‚ Pricing

‚ CertiÑcation

‚ Upgradeability

Hypercom's main competition in the electronic payment industry is VeriFone, Inc. Hewlett-PackardCompany acquired VeriFone, Inc. in 1997. Enterprise networking competitors include Cisco Systems, Inc,3Com Corporation, and Motorola Information Systems Group. Some competitors have signiÑcantly greaterÑnancial and technical resources, better name recognition, and a larger customer base than Hypercom.

Hypercom faces additional competitive challenges in foreign countries. These factors include thefollowing:

‚ Preferences for national vendors,

‚ DiÇculties in obtaining necessary certiÑcations and

‚ DiÇculties in meeting the requirements of government policies

These competitive challenges may result in price discounts or other concessions and in sales lost tocompetitors. As a result, Hypercom's business and Ñnancial condition could suÅer. In addition, Hypercomcannot be certain of its ability to compete successfully in the future.


Dependence on Certain Suppliers and Third-Party Distributors

Hypercom contracts with an independent manufacturer to build networking products. It is also dependenton sole-source suppliers for microprocessors, some integrated circuits, and other electronic components. Othercomponents are available from only a limited number of sources. Hypercom has generally been able to obtainadequate supplies of these products. However, in the future if Hypercom could not secure enough products ordevelop alternate sources, product introductions or shipments could be delayed. SigniÑcant delays could havea serious negative eÅect on Hypercom's business and Ñnancial condition.

Hypercom markets and distributes its products to end-users through third-party distributors. Third-partydistributors are a prime channel for distribution in some international markets. In the U.S. they are becomingmore important, especially for the enterprise networking products. Therefore, the ability to market anddistribute products depends signiÑcantly on Hypercom's relationship with third-party distributors.

The performance and Ñnancial condition of distributors could have a negative impact on Hypercom'sbusiness and Ñnancial condition if:

‚ Hypercom's relationships with them were to deteriorate,

‚ They could not perform as expected or pay Hypercom, or

‚ Local laws prevented Hypercom from using distributors that perform poorly.

Reliance on Certain Hypercom POS Systems Customers

Many Hypercom POS Systems sales result from large purchases by a few large organizations. Althoughno one customer accounted for more than 10% of Hypercom's net revenue in Ñscal 1999, the two largestcustomers accounted for 12.6% of the net that year. The Ñve largest accounted for 24.2% of net revenue.

Hypercom typically enters into one-year purchase agreements with its larger customers. These agree-ments generally provide for minimum purchase commitments and do not require the customers to buy POSproducts from Hypercom exclusively.

Serious negative impacts could result if any of the larger POS customers delayed or stopped buying fromHypercom. Hypercom expects to continue to rely on a limited number of customers in any given period for asigniÑcant part of its net revenue.

Further, customer demand can be adversely aÅected by many factors including the following:

‚ Budgetary constraints,

‚ Changes in the customer's competitive environment,

‚ Customer involvement in mergers or other strategic alignments,

‚ Price increases by Hypercom or its competitors,

‚ Personnel changes,

‚ The number, timing, and signiÑcance of new and enhanced products,

‚ The ability of Hypercom to market new and enhanced products, and

‚ General economic factors.

Hypercom cannot be assured that its important customers will continue to buy its products at historical orany particular level.

Impact of Industry Regulation and Standards

Before sales are completed in the United States, Hypercom's products must:

‚ Meet industry standards as imposed by VISA, MasterCard, and others,

‚ Be certiÑed to connect to some public telecommunications networks,


‚ Comply with Federal Communications Commission (FCC) regulations, and

‚ Comply with Underwriters Laboratories regulations.

Similarly, before completing sales in foreign countries, Hypercom's products must comply with:

‚ Local telecommunications standards,

‚ Recommendations of quasi-regulatory authorities and

‚ Recommendations of standards-setting committees.

In addition, public carriers require that equipment connected to their networks comply with their ownstandards. These standards in part reÖect their currently installed equipment. Some public carriers haveequipment that does not fully meet current industry standards. Hypercom must address this issue in designingenterprise-networking products.

Although Hypercom believes its products currently meet all applicable industry standards, it has noassurance that its products will comply with future standards. Negative impacts to Hypercom's business andÑnancial condition could result in the future if Hypercom cannot:

‚ Obtain needed regulatory approvals or certiÑcations,

‚ Retain domestic or foreign approvals or certiÑcations, and

‚ Meet new industry standards.

In addition, carriers set the tariÅs that govern rates for public telecommunications services, includingtheir features and capacity. These services are subject to regulatory approval. Changes in the tariÅs could havea serious negative eÅect on Hypercom's business and Ñnancial condition.

Hypercom must comply with state, federal, and international laws governing such areas as:

‚ Occupational health and safety,

‚ Minimum wages,

‚ Work hours and overtime,

‚ Retirement and proÑt-sharing plans and severance payments, and

‚ The use, storage, handling, and disposal of dangerous chemicals.

Failure to comply with requirements could impose additional costs on Hypercom. Such failure could alsorequire Hypercom to stop some activities or otherwise have a serious negative eÅect on Hypercom's businessand Ñnancial condition.

Product Defects

Hypercom oÅers very complex products. When they are Ñrst introduced or released in new versions, theymay contain software or hardware defects that are diÇcult to detect and correct. Even though Hypercom andcustomers test all these products, it is likely that such errors will continue to be identiÑed after products areshipped.

When they are detected, correcting these defects can be a time-consuming or impossible task. Softwareerrors may take several months to correct, and hardware errors may take even longer. The existence of defectsand delays in correcting them could result in negative consequences including:

‚ Delays in shipping products,

‚ Loss of market acceptance for Hypercom products,

‚ Additional warranty expenses,

‚ Diversion of resources from product development, and

‚ Loss of credibility with distributors and customers.


Because Hypercom's POS products are used to process payment transactions, the security features ofsuch products are important. In general, these products are designed to comply with industry practices relatingto transaction security. Failure of the security features could adversely aÅect the marketing of Hypercomproducts. Any violation of its product warranties resulting from security breaches could result in claims againstHypercom.

Dependence on Proprietary Technology

Hypercom seeks to establish and protect the proprietary aspects of its products by relying on patent,copyright, trademark, and trade secret laws. It also relies on conÑdentiality, licensing, and other contractualarrangements, all of which may provide only limited protection. Although Hypercom tries to protect itsproprietary rights, unauthorized third parties may be able to copy some portions of or to reverse engineerproducts to obtain technology that Hypercom regards as proprietary.

In addition, the laws of certain countries do not protect Hypercom's proprietary rights to the same extentas U.S. laws. Accordingly, Hypercom may not be able to protect its proprietary technology againstunauthorized copying or use, which could adversely aÅect Hypercom's competitive position.

Hypercom has applied for patents and trademarks that may not be granted. If they are granted, thepatents may not cover all claims Hypercom is trying to protect. Further, a challenge could Ñnd any Companypatent or trademark invalid and unenforceable.

Hypercom products and technologies incorporate some subject matter it believes is in the public domainor otherwise within the rights of Hypercom to use. Such products and technologies include some designed andprovided by third parties. These third parties could assert patent or other intellectual property infringementclaims against Hypercom with respect to its products and technologies.

From time to time, third parties claim that Hypercom's products infringe their proprietary rights.Hypercom may experience similar claims in the future. Regardless of its merit, any claim can be time-consuming, result in costly litigation, and require Hypercom to enter into royalty and licensing agreements.The terms of these agreements may not be acceptable to Hypercom. If a claim against Hypercom is successfuland Hypercom fails to develop or license a substitute technology quickly, it could be adversely aÅected.

Risks of Potential Acquisitions

Hypercom may acquire or make substantial investments in related businesses, technologies, or productsin the future. Any acquisition or investment would entail various risks including the following:

‚ The diÇculty of assimilating the technologies, operations and personnel of the acquired business,technology or product,

‚ The potential disruption of Hypercom's ongoing business and

‚ The possible inability of Hypercom to obtain the desired Ñnancial and strategic beneÑts from theacquisition or investment.

These factors could have a serious negative eÅect on Hypercom's business and Ñnancial condition. Futureacquisitions and investments could also result in the following:

‚ Substantial cash expenditures,

‚ Potentially dilutive issuance of equity securities,

‚ The incurring of additional debt and contingent liabilities and

‚ Amortization expenses related to goodwill and other intangible assets that could adversely aÅectHypercom's business, operating results, and Ñnancial condition.

The acquisition of the assets and businesses of The Horizon Group, Inc, SP/RJ Service Company, JTSChequeOut Solutions Inc., and ICL Sverige AB have consumed and will continue to consume substantialmanagement attention and resources of Hypercom, and will require substantial eÅorts and entail certain risksin the integration of these operations. There can be no assurance that anticipated cost savings or synergies will


be achieved. Hypercom will be dependent on the retention and performance of these businesses existingmanagement and employees for the day-to-day management and future operation results of the business.

Voting Control by Existing Stockholders

George Wallner and Paul Wallner together own 63.4% of Hypercom's outstanding Common Stock.Accordingly, the Wallners have the ability to control the aÅairs of Hypercom, including the election of alldirectors to Hypercom's Board of Directors. They can also, except as otherwise provided by law, approve ordisapprove other matters submitted to a vote of Hypercom's stockholders, including a merger, consolidation,or sale of assets. This voting control also may have the eÅect of delaying or preventing a change in control ofHypercom and may aÅect the price investors are willing to pay in the future for shares of Hypercom'sCommon Stock.

Potential Volatility of Stock Price

In recent years, the stock market has experienced extreme price changes. The market price ofHypercom's Common Stock has been and may continue to be aÅected by various factors such as thefollowing:

‚ Quarterly variations in Hypercom's operating results,

‚ Changes in revenue growth rates for speciÑc geographic areas, business units, products, or Hypercomas a whole,

‚ Earnings estimates or changes in estimates by market analysts,

‚ Speculation in the press or analyst community,

‚ Announcement of new or enhanced products by Hypercom or its competitors, and

‚ General market conditions or market conditions speciÑc to particular industries.

Anti-Takeover EÅect of Certain Charter and Bylaw Provisions and Delaware Law

Hypercom has provisions in its Amended and Restated CertiÑcate of Incorporation and Amended andRestated Bylaws, which:

‚ Make it more diÇcult for a third party to take control of Hypercom,

‚ Discourage a third party from attempting to take control of Hypercom or

‚ Limit the price some investors are willing to pay for shares of Hypercom's Common Stock,

‚ Enable Hypercom to issue Preferred Stock without a vote or other stockholder action,

‚ Provide for a classiÑed Board of Directors and regulate nominations for the Board of Directors,

‚ Make it more diÇcult for stockholders to take certain corporate actions, and

‚ Delay or prevent a change in control of Hypercom.

In addition, certain provisions of Delaware law applicable to Hypercom could also delay a merger, tenderoÅer, or proxy contest or make one more diÇcult.


Board of DirectorsPeter J. Hart 60, Director since 1997Director and Vice President,Express Card Systems, Inc.

Jock Patton53, Director since 1999Private Investor

Albert A. Irato61, Director since 1992Chairman of the Board,Hypercom Corporation

George Wallner48, Director since 1978President, Chief Executive Officerand Chief Technology Officer,Hypercom Corporation

William E. Fisher 53, Director since 1997Chairman of the Board, Presidentand Chief Executive Officer,Transaction System Architects, Inc.

Paul Wallner45, Director since 1978Vice Chairman and President,Hypercom Network Systems

Jairo Gonzalez37, Director since 1997Managing Director,Hypercom Transaction Systems Group

Corporate OfficersAlbert IratoChairman of the Board

George WallnerPresident, Chief Executive Officerand Chief Technology Officer

Paul Wallner Vice Chairman and President,Hypercom Network Systems

Jonathon KillmerExecutive Vice President, Chief FinancialOfficer, Chief Administrative Officer

Chris AlexanderPresident, Hypercom Transaction Systems Group

Jairo GonzalezManaging Director, Global Sales and Marketing

Peter Stutsman Secretary, General Counsel

Scott Tsujita Treasurer

Annual MeetingThe 1999 Annual Meeting of Stockholders will be held on Tuesday,November 16, 1999 beginning at 9:00 a.m., Arizona time at:

Embassy Suites2630 East Camelback RoadPhoenix, AZ 85016

Transfer Agent and RegistrarHarris Bank & Trust Company of California

601 So. Figueroa, 49th FloorLos Angeles, CA 90017For stockholder questions: 312.588.4166

Independent AuditorsPricewaterhouseCoopers LLP2901 North Central Ave., Suite 1000Phoenix, AZ 85012602.280.1800

Outside Legal CounselSnell & Wilmer L.L.P.One Arizona CenterPhoenix, AZ 85004-0002602.382.6000

BUILD

DELIVER

CREATE

FOCUS

ACT

HYPERCOM

Corporate Information

Stockholder InformationFor additional investor information, please direct your request to:

Maureen McGarrigle (Email: [email protected])Hypercom Corporation2851 W. Kathleen RoadPhoenix, AZ 85053Tel: 602.504.4802 Fax: 602.760.0173

Stock ExchangeHypercom’s Common Stock is traded on the New York StockExchange under the symbol HYC.

Dividend PolicyThe Company has never paid cash dividends on its commonstock. The Company presently intends to retain earnings for use inthe operation and expansion of its business and does not anticipatepaying any cash dividends in the foreseeable future.

Forward-Looking StatementsThis document, including the “Letter to Our Stockholders,” may contain“forward-looking statements” as that term is defined in the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statementstypically are identified by such terms as “may,” “will,” “expect,” “antici-pate,” “estimate,” and similar words, and may relate to market share, revenue or earnings growth, the success of new product introductions,acquisitions or joint ventures, and other matters. Hypercom cautionsinvestors that a variety of factors could cause Hypercom’s actual events orresults to differ materially from those projected in Hypercom’s forward-looking statements.

The Cautionary Statements of Hypercom contained in Exhibit 99.1 toHypercom’s Annual Report on Form 10-K enclosed herein, which wasfiled with the Securities and Exchange Commission, are incorporatedinto this document by reference. Investors are referred to such CautionaryStatements for a description of factors which could affect Hypercom’soperations and any forward-looking statements in this document.

Our mission

To build increasing, long-term stockholder value by:

• delivering value-added services offering incremental revenue opportunities for our customers

• creating a nurturing and challenging work environment for our employees

• focusing on profitability and fiscal growth for our equity holders

• acting as a responsible corporate citizen for society in general.

To accomplish this mission, Hypercom® must lead the way to transform an industry through our commitment to research, development, and technical leadership.