Hypercom posts Q1 results

The first quarter 2005 results reflect a number of charges resulting from an on-going business review of the Company's operations being conducted by recently appointed interim executive management. Based on this business review, the Company has recorded certain write-downs, provisions and accruals for specific slow-moving and obsolete inventory, potential warranty and product return liabilities, lease portfolio provisions and other expenses given management's best assessment of existing circumstances. Based on the business review completed thus far, the Company has recorded charges totaling approximately $5.8 million ($3.7 million impact to gross profit and $2.1 million related to operating expenses) in the first quarter of 2005. These charges are also discussed in the Company's Form 10-Q filed today with the Securities and Exchange Commission.

The Company reported:

First quarter revenue was $54.5 million, up 9.8% from $49.6 million in the same quarter last year. The quarter-over-quarter increase in revenue is attributable to increased POS terminal sales in the U.S. and Asia-Pacific regions. Consistent with prior years and industry trends, first quarter revenues were seasonally lower reflecting lower POS deployments by channel partners, particularly in international markets.

Gross profit for the quarter was $18.6 million versus $20.5 million last year. The current year gross profit was negatively impacted by a variety of specific charges totaling $3.7 million. The aggregation of these charges resulted in a lowering of gross margin percentage by 6.6% to 34.0% compared to 41.3% in the same quarter of the prior year. Gross profit is 40.6% when normalized for the $3.7 million of charges noted below. These charges included:

• $0.7 million of warranty related reserves related to older POS equipment
• $0.7 of reserves for inventory related to products at or near end-of-life that may not be saleable
• $1.4 million of charges related to inventory obsolescence
• $0.6 million of charges related to its UK lease portfolio. The charges include incremental reserves for anticipated default losses and expectations regarding realizable value of residuals. These charges are unrelated to the Company's prior restatement relating to an accounting reclassification of sales-type leases to operating leases in 2004
• $0.3 million of various other gross profit related charges.

First quarter operating expenses increased $6.2 million to $27.9 million compared to the same quarter in the prior year. As noted earlier, $2.1 million of the increase reflects expenses related to interim executive management's business review including:

• $1.5 million related to recent severance agreements with certain former executives and employees
• $0.2 million of accrued liabilities related to the costs of certain on-going litigation and foreign tax matters
• $0.4 million of expensed software costs, previously capitalized, as they are no longer expected to have continuing value

The remaining $4.1 million of the incremental operating expenses over the comparable quarter in the prior year relate to:

• $1.7 million of incremental costs related to Sarbanes-Oxley compliance efforts and audit fees not incurred in the prior year
• $0.5 million of incremental general legal costs including defense costs related to recent shareholder lawsuits
• $0.3 million of incremental settlement charges related to certain accounts receivables
• Incremental variable selling costs related to higher revenues

Below the operating income from continuing operations line, the Company had a combined $1.4 million improvement from the same comparable quarter in the prior year related to interest income, foreign currency expense, income tax and discontinued operations.

First quarter net loss was $9.6 million, or -$0.18 per share, compared to a loss of $3.0 million, or -$0.06 per share for the same quarter in the prior year.

Cash and short-term investment balances increased to $98.6 million at March 31, 2005, compared to $93.4 million at December 31, 2004, and $85.2 million at March 31, 2004. Concurrently, the Company continues to reduce its long-term debt, primarily comprised of building mortgage financing, from $9.5 million at March 31, 2004 to $8.7 million at March 31, 2005.

"The interim executive management team has spent a great deal of time reviewing asset valuation assumptions, current product, warranty, and customer satisfaction issues. As a result of this review, the Company has determined that it is appropriate to adjust certain assumptions to reflect the interim management's plans to resolve these issues," stated Chairman and Interim CEO Will Keiper. "Due to interim executive management's appointment at the end of the first quarter, we are in the process of considering additional strategic priorities related to customer relationships that may result in additional charges. We estimate certain strategic decisions could result in additional charges of approximately $2.5 million; however, these decisions and related estimated charges are uncertain. Further, it is possible that there may be additional charges in excess of this amount which have not yet been identified. Until we complete our business review, we are unable to estimate the ultimate impact these strategic decisions may have on our financial statements. We anticipate completing our business review during the second quarter of 2005," concluded Keiper.

The Company closed the first quarter with a sales backlog of $36.8 million versus $35.4 million as of December 31, 2004, and $54.9 million as of March 31, 2004. Backlog includes those orders to be delivered within the following twelve months and fluctuates seasonally, as well as with the timing of new annual contracts with significant customers. The backlog is predominately related to contracts with certain North American customers and the Company has seen a change in order patterns, such that most sales contracts are now signed and fulfilled within the same quarter. Accordingly, the current backlog is not necessarily a strong indicator of short-term revenue.

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