**EXHIBIT 99.1**
**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS**
In passing the Private Securities Litigation Reform Act of 1995 (the “ReformAct”), Congress encouraged public companies to make “forward-lookingstatements” by creating a safe harbor to protect companies from securities lawliability in connection with forward-looking statements. We intend to qualifyboth our written and oral forward-looking statements for protection under theReform Act and any other similar safe harbor provisions.
“Forward-looking statements” are defined by the Reform Act. Generally,forward-looking statements include expressed expectations of future events andthe assumptions on which the expressed expectations are based. The words“believe,” “expect,” “anticipate,” “intend,” “forecast,” “estimate,” “project,”and similar expressions identify forward-looking statements. Such statementsmay include, but are not limited to, the state of the electronic paymentsindustry and competition within the industry; projections regarding specificdemand for our products and services; the commercial feasibility of newproducts, services and market development initiatives; our future financialperformance and financial condition; the adequacy of our current facilities andmanagement systems infrastructure to meet our operational needs; the status ofour relationship with and condition of third parties upon whom we rely in theconduct of our business; the sufficiency of reserves for assets and obligationsexposed to revaluation; our ability to successfully expand our business; ourability to effectively hedge our exposure to foreign currency exchange ratefluctuations; our ability to sustain our current income tax structure; theimpact of current litigation matters on our business; our ability to fund ourprojected liquidity need from cash flow from operations and our current cashreserves; and future access to capital on terms that are acceptable, as well asassumptions related to the foregoing. Such forward-looking statements arewithin 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.All forward-looking statements are inherently uncertain as they are based onvarious expectations and assumptions concerning future events and they aresubject to numerous known and unknown risks and uncertainties that could causeactual events or result to differ materially from those projected. Due to thoseand other uncertainties and risks, you are urged not to place undue reliance onour written or oral forward-looking statements. We undertake no obligation toupdate or revise this Cautionary Statement Regarding Forward-Looking Statementsto reflect future developments. In addition, we undertake no obligation toupdate or revise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events, or changes to future operating results overtime.
We provide the following risk factor disclosure in connection with ourcontinuing effort to qualify our written and oral forward-looking statementsunder the safe harbor protection of the Reform Act and any other similar safeharbor provisions. Important factors currently known to management that couldcause actual results to differ materially from those in forward-lookingstatements include the disclosures contained in our Annual Report on Form 10-K,Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and alsoinclude the following:
**RISK FACTORS**
**Risks Related To Our Business**
***We have incurred significant losses in the past. If our financial performanceis not in line with investor expectations, the price of our common stock willsuffer and our access to future capital may be impaired.***
 

 

Although we had net income from continuing operations of $11.2 million for theyear ended December 31, 2003, we incurred losses from continuing operations of$61.1 and $19.9 million for the years ended December 31, 2002 and 2001,respectively. If the results of our continuing efforts to improveprofitability, increase our cash flow and strengthen our balance sheet do notmeet or exceed the expectations of our investors or stock analysts, the priceof our common stock will suffer.
***We expect our results of operations to vary from quarter to quarter and, as aresult, we may not meet the expectations of our investors and stock analysts,which could cause the price of our common stock to fluctuate or decline.***
Our revenues and results of operations have fluctuated significantly in thepast and are likely to fluctuate significantly in the future. Accordingly, webelieve that period-to-period comparisons of our results of operations may bemisleading. You should not rely upon the results of one quarter as anindication of future performance. Our revenue and operating results may fallbelow the expectations of securities analysts or investors in some futurequarter or quarters. Our failure to meet these expectations could cause themarket price of our common stock to decline.
Our quarterly revenue and operating results may vary depending on a number offactors, including:
• variations in product mix, timing and size of fulfilled orders;
• customer deferral of purchases in anticipation of future product or service enhancements;
• accomplishment of certain performance parameters embedded in our service level agreements;
• the market’s demand for new product offerings;
• delays in the delivery of our products and services;
• product returns;
• incremental costs incurred as a result of product quality and/or performance issues;
• write-off of doubtful accounts receivable;
• inventory obsolescence;
• manufacturing or production difficulties;
• restructuring activities;
• variations in income tax as a function of income recognition by tax jurisdiction;
• foreign currency exchange rate fluctuations;
• availability and cost of financing; and
• industry and economic conditions, including competition, industrystandards, product certification requirements, trade restrictions andother regulations.
***The loss of one or more of our key customers could significantly reduce ourrevenues and profits.***
We have derived, and believe that we may continue to derive, a significantportion of our revenues from a limited number of large customers. For thefiscal year ended December 31, 2003, our two largest customers accounted for16.3% of our net income from continuing operations, and our five largestcustomers accounted for 24.6% of our net income from continuing operations. Asof December 31, 2003, three customers represented 54%, or $30.9 million, of ourtotal backlog of $57.0 million. Our customers may buy less of our products orservices depending on their own technological developments, end-user demand forour products and internal budget cycles. A major customer in one year may notpurchase any of our products or services in another year, which may negativelyaffect our financial performance.
***Our products may contain defects that may be difficult or even impossible tocorrect. Product defects could result in sales delays, lost sales, delays inour collection of receivables and claims against us.***
 

 

We offer technically complex products which, when first introduced or releasedin new versions, may contain software or hardware defects that are difficult todetect and correct. The existence of defects and delays in correcting themcould result in negative consequences, including the following:
• delays in shipping products;
• loss of market acceptance for our products;
• product returns;
• additional warranty expense; and
• diversion of R&D resources from new product development.
Even though we test all of our products, defects may continue to be identifiedafter products are shipped. In past periods, we have experienced various issuesin connection with product launches, including the need to rework certainproducts and stabilize product designs. Correcting defects can be atime-consuming and difficult task. Software errors may take several months tocorrect, and hardware errors may take even longer. Such issues may result insales delays, delays in the collection of receivables, cancellation of orders,and lost sales, which could adversely affect our results of operations,financial condition and future business.
***We may accumulate excess or obsolete inventory that could result inunanticipated price reductions and write downs and adversely affect our resultsof operation and financial condition.***
Managing the proper inventory levels for components and finished products ischallenging. In formulating our product offerings, we have focused our effortson providing to our customers products with greater capability andfunctionality, which requires us to develop and incorporate the most currenttechnologies in our products. This approach tends to increase the risk ofobsolescence for products and components we hold in inventory and may compoundthe difficulties posed by other factors that affect our inventory levels,including the following:
• the need to maintain significant inventory of components that are in limited supply;
• buying components in bulk for the best pricing;
• responding to the unpredictable demand for products;
• responding to customer requests for quick delivery schedules;
• failure of customers to take delivery of ordered products; and
• product returns.
If we accumulate excess or obsolete inventory, price reductions and inventorywrite downs may result, which could adversely affect our results of operationand financial condition.
***If we are unable to adequately protect our proprietary technology, ourcompetitors may develop products substantially similar to our products and usesimilar technologies, which may result in the loss of customers.***
We rely on patent, copyright, trademark and trade secret laws, as well asconfidentiality, licensing and other contractual arrangements, to establish andprotect the proprietary aspects of our products. Our efforts may result in onlylimited protection, and our competitors may develop, market and sell productssubstantially equivalent to our products, or utilize technologies similar tothose used by us. If we are unable to adequately protect our proprietarytechnology, these third parties will be able to compete more effectivelyagainst us, which could result in the loss of customers and adversely affectour business.
 

 

***Our products and other proprietary rights may infringe on the proprietaryrights of third parties, which may expose us to litigation.***
Although we believe that our products do not infringe on any third party’spatents, from time to time we have become involved in claims and/or litigationinvolving patents or proprietary rights. Patent and proprietary rightslitigation entails substantial legal and other costs, and there can be noassurance that we will have the necessary financial resources to appropriatelydefend or prosecute our rights in connection with any such litigation.Responding to, defending or bringing claims related to intellectual propertyrights may require our management to redirect our human and financial resourcesto address these matters.
***A disruption in the manufacturing capabilities of our third-party manufacturersor suppliers would negatively impact our ability to meet customer demands.***
We rely on third-party manufacturers to manufacture and assemble our products.We also depend upon third-party suppliers to deliver components that are freefrom defects, competitive in functionality and cost, and in compliance with ourspecifications and delivery schedules. Since we generally do not maintain largeinventories of our products or components, any termination of, or significantdisruption in, our relationship with our third-party manufacturers or suppliersmay prevent us from filling customer orders in a timely manner.
We have occasionally experienced, and may in the future experience, delays indelivery of products and delivery of products of inferior quality fromthird-party manufacturers. Although alternate manufacturers and suppliers aregenerally available to produce our products and product components, the numberof manufacturers or suppliers of some of our products and components islimited, and qualifying a replacement manufacturer or supplier could takeseveral months. In addition, our use of third-party manufacturers reduces ourdirect control over product quality, manufacturing timing, yields and costs.Disruption of the manufacture or supply of our products and components, or athird-party manufacturer’s or supplier’s failure to remain competitive infunctionality, quality or price, could delay or interrupt our ability tomanufacture or deliver our products to customers on a timely basis, which wouldhave a material adverse effect on our business and financial performance.
***Force Majeure events, such as terrorist attacks, other acts of violence or war,and health epidemics may affect the markets in which our common stock trades,the markets in which we operate and our profitability.***
Domestic and international terrorist attacks, wars and regional conflicts maycause instability in the global financial markets, and contribute to downwardpressure on securities prices of United States publicly traded companies, suchas us. Future terrorist attacks or armed conflicts, and epidemics, such asSARS, could result in economic, political and other uncertainties that couldadversely affect our revenues and operating results, and further depresssecurities prices, including the price of our common stock. Such events maydisrupt the global insurance and reinsurance industries, and adversely affectour ability to obtain or renew certain insurance policies, and may result insignificantly increased costs of maintaining insurance coverage. Further, wemay not be able to obtain insurance coverage at historical or acceptable levelsfor all of our facilities. Future terrorist attacks, armed conflicts andepidemics could affect our domestic and international sales, disrupt our supplychain and impair our ability to produce and deliver our products. Such eventscould directly impact our physical facilities or those of our suppliers orcustomers in the United States and elsewhere. Our primary facilities includeadministrative, sales and R&D facilities in the United States, andmanufacturing facilities in China. Acts of terrorism, wars and epidemics maymake transportation of our supplies and products more difficult or costprohibitive.
 

 

***If we cannot manage the additional challenges presented by our internationaloperations, our revenues and profitability may suffer.***
For the year ended December 31, 2003, we derived approximately 67% of our totalnet income from continuing operations outside of the United States, principallyin Latin America and Europe. We expect that international sales will continueto account for a significant percentage of our net income from continuingoperations in the foreseeable future. Accordingly, we face numerous risksassociated with conducting international operations, any of which couldnegatively affect our results of operations and financial condition. Theserisks include the following:
• changes in foreign country regulatory requirements;
• various import/export restrictions and the availability of required import/export licenses;
• imposition of foreign tariffs and other trade barriers;
• political and economic instability;
• foreign currency exchange rate fluctuations;
• availability of qualified staff with which to manage our foreign operations;
• extended payment terms and the ability to collect accounts receivable; and
• the ability to repatriate cash.
Additionally, we are subject to the Foreign Corrupt Practices Act which mayplace us at a competitive disadvantage to foreign companies that are notsubject to similar regulations.
***We sell our POS products directly to end-user merchants in the United Kingdomunder sales-type leases that are subject to governmental regulation and involvea risk of default that, if excessive, could result in a substantial write-offof that lease portfolio and impair our profitability.***
Our subsidiary in the United Kingdom sells POS equipment directly to end-usermerchants under capital lease arrangements accounted for as sales-type leases.The customer base of this leasing business is characterized by higherincidences of delinquencies and defaults and is distinctly different from theCompany’s predominant customer base of large domestic and internationalfinancial institutions, electronic payment processors, independent salesorganizations, distributors and resellers. We maintain an allowance forestimated uncollectible sales-type lease receivables at an amount that webelieve is sufficient to provide adequate protection against losses in oursales-type lease portfolio. Our allowance is determined principally on thebasis of historical loss experience and management’s assessment of the creditquality of the sales-type lease customer base. The value of this leaseportfolio and the profitability of this leasing activity could be substantiallyimpaired if our existing lease loss reserves prove inadequate or future leaseswe originate experience a default rate greater than that for which weestablished reserves at the time of inception. This business activity is alsosubject to governmental regulation. Our failure to comply with such regulationcould adversely affect our ability to enforce the sales-type leases, whichcould negatively impact our results of operation and financial condition.
***Ifwe fail to recover our claims for approximately $11.3 millionof revenue that we believe is due to us under our long term contractwith the Brazilian Health Ministry, it will have a material adverseeffect on our operating results.***
TheCompany is involved in a long-term contract with the Brazilian HealthMinistry requiring substantial performance of customized software andhardware. The final maintenance phase of this contract expired onApril 30, 2004. The Brazilian Health Ministry has informed theCompany of their intent to extend the maintenance element of thecontract and the Company is in the process of finalizing the terms ofsuch extension.
 

 

Asof March 31, 2004, the Company has a receivable balanceoutstanding under this contract of approximately $3.4 million,which was recorded based on the Company achieving contract milestonesapproved by the Brazilian Health Ministry. In addition, the Companyhas made a claim for $4.6 million of revenue as allowed forunder the contract, and identified and made a claim for approximately$6.7 million of revenue in excess of the agreed upon contract.The Company believes it is probable the claims will result inadditional revenue and have reasonably estimated such amount inaccordance with applicable accounting standards. While the revenuerelated to these claims has not been recorded under thepercentage-of-completion milestone approach, contract costs to berecovered by these revenue claims amounting to approximately$9.4 million have been deferred within other current assets andother long-term assets at March 31, 2004 and treated as normalcosts of contract performance. If the revenue claims are denied orresults in revenue less than the associated costs, our operatingresults would be significantly impacted.
***Adverse resolution of litigation may adversely affect our business, operatingresults or financial condition.***
We are party to litigation in the normal course of our business. Litigationcan be expensive, lengthy and disruptive to normal business operations.Moreover, the results of complex legal proceedings are difficult to predict.An unfavorable resolution of a particular lawsuit could have a material adverseeffect on our business, operating results, or financial condition. Foradditional information regarding certain of the lawsuits in which we areinvolved, see Item 3, “Legal Proceedings,” contained in Part I of our mostrecent Annual Report on Form 10-K.
***We are dependent on current management and key personnel. The loss of certainof these individuals could cause material harm to the operation and futureprospects of our business.***
Christopher Alexander, our Chairman, President and Chief Executive Officer, andJohn W. Smolak, our Executive Vice President and Chief Financial andAdministrative Officer, are instrumental in the continuing development andoperations of Hypercom. The loss of either of these key executives could have amaterial adverse effect on the operation and future prospects of our business.
We also believe our future success will depend largely upon our ability toattract and retain highly-skilled hardware and software engineers, managerial,and sales and marketing personnel. We compete against numerous companies,including larger, more established companies, for our personnel. We do not knowif we will be successful in attracting or retaining skilled personnel. Further,the loss of certain key employees or our inability to attract and retain otherqualified employees could negatively affect our financial performance.
 

 

***We have in the past and may in the future make acquisitions and strategicinvestments, which will involve numerous risks. We may not be able to addressthese risks without substantial expense, delay or other operational orfinancial problems.***
We may acquire or make substantial investments in related businesses,technologies, products or services in the future. These acquisitions orinvestments involve various risks, such as:
• the inability to assimilate the technologies, operations andpersonnel of the acquired business;
• the potential disruption of our existing business, including thediversion of management attention and the redeployment of additionalresources;
• the loss of key employees of an acquired business; and
• the inability to obtain the desired strategic and financialbenefits from the acquisition or investment.
Future acquisitions and investments could also result in substantial cashexpenditures, potentially dilutive issuance of our equity securities, ourincurring of additional debt and contingent liabilities, and amortizationexpenses related to other intangible assets that could adversely affect ourbusiness, operating results and financial condition.
**Risks Related To The Industry**
***The markets in which we compete are highly competitive, maturing, and subjectto price erosion.***
The markets in which we operate are maturing and highly competitive. Increasedcompetition from manufacturers or distributors of products similar to orcompetitive with our products, or from service providers that provide servicessimilar to our services, could result in price reductions, extended terms,reduced margins and a loss of market share.
We expect to continue to experience significant and increasing levels ofcompetition in the future. With respect to our POS payment system products, wecompete primarily on the basis of ease-of-use, product performance, price,features, quality, the availability of application software programs, thenumber of third-party network host and telecommunication system certificationswe have obtained for our products and application 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.
• In the POS terminal market, our global competitors are Ingenico, aFrance-based company, VeriFone, Inc., a privately-held domesticcompany, and Lipman, an Israel-based, publicly-held company. Accordingto *The Nilson Report*(September 2003), the top three manufacturers(Hypercom, VeriFone and Ingenico) accounted for approximately 65% ofPOS terminals shipped in 2002, while 46 other manufacturers accountedfor the remaining 35%. In any particular market, we may also findourselves in competition with participants that compete on either aregional or local country basis, within certain market segments or witha limited range of products and services.
• In the multi-lane POS market, we offer terminals designedspecifically for the multi-lane retailer environment. Our multi-laneterminals compete with integrated electronic cash register/POS terminalproducts from companies such as IBM, Siemens, NCR, ICL and Micros.
• In the transaction network products market, our primary competitorsare Cisco and UTStarcom, both of which are U.S.-based.
 

 

We often face additional competitive factors in foreign countries, includingbut not limited to preferences for national vendors, difficulties in obtainingrequired certifications, conformity with local government policies and tradepractices, and compliance with the Foreign Corrupt Practices Act. Some of ourcompetitors and potential competitors are more established, benefit fromgreater name recognition and have significantly greater resources than we do.Moreover, there are limited barriers to entry that could keep our competitorsfrom developing products or services and technology similar to ours, or fromselling competing products or services in our markets.
***We are subject to industry and technology changes and are dependent ondevelopment and market acceptance of new products. If we are unable toadequately respond to these changes and to market demands in a timely manner,our business will not be successful.***
The industry in which we operate is characterized by rapid changes intechnology and numerous new product introductions. Our success depends to alarge degree upon our continued ability to offer new products and enhancementsto our existing products to meet changing market requirements, includingconformity with imposed standards. The introduction of new products andtechnologies by third parties could have an adverse effect on the sales of ourexisting products and technologies. We cannot be certain of our ability tosuccessfully:
• identify, develop, or manufacture new products and technologies in a cost effective manner;
• market or support these new products and technologies on a timely basis;
• eliminate defects in new products;
• gain market acceptance for the new products and technologies; or
• respond to technological changes, new industry standards, andannouncements of new products by competitors.
Developing new products and technologies is a complex, uncertain processrequiring innovation and accurate anticipation of technological and markettrends. When changes to the product line are announced, we will be challengedto manage possible shortened life cycles for existing products, continue tosell existing products and prevent customers from returning existing products.Our inability to respond effectively to any of these challenges may have amaterial adverse effect on our business and financial success. We may sufferother business and financial losses if we are not successful in marketing newproducts and responding to industry changes and new product introductions orenhancements by our competitors.
***We are subject to extensive industry standards and government regulations. Ourfailure to properly comply with these standards and regulations could adverselyaffect our production and sales.***
Our product sales are subject to a substantial and complex array of industrydriven standards and governmental regulation, both domestic and foreign,including:
• industry standards imposed by EuroPay International, MastercardInternational, VISA International, and others;
• certification standards required for connection to some public telecommunications networks;
• Federal Communications Commission regulations;
• Underwriters Laboratories’ regulations; and
• certification standards set by domestic processors.
 

 

Our failure to properly comply with these standards and regulations couldresult in lost product sales, significant costs associated with requiredremedial measures or production stoppages, any of which could have a materialadverse effect on our business and financial performance.
**Risks Related To Our Common Stock**
***Our stock price has been and may continue to be volatile.***
The market price of our common stock has been, and is likely to continue to be,volatile. When we or our competitors announce new products, services, orcustomer orders, change pricing policies, experience quarterly fluctuations inoperating results, announce strategic relationships, acquisitions ordispositions, change earnings estimates, experience government regulatoryactions or suffer from generally adverse economic conditions, our stock priceis often affected. Recently, companies similar to ours have experienced extremeprice fluctuations, often for reasons unrelated to their performance.
***We are subject to anti-takeover effects of certain charter and bylaw provisionsand Delaware law.***
We have provisions in our certificate of incorporation and bylaws which:
• make it more difficult for a third party to acquire control of us,and discourage a third party from attempting to acquire control of us;
• may limit the price some investors are willing to pay for ourcommon stock;
• enable us to issue preferred stock without a vote of ourstockholders or other stockholder action;
• provide for a classified Board of Directors and regulatenominations for the Board of Directors;
• make it more difficult for stockholders to take certain corporate actions; and
• may delay or prevent a change of control.
These and other provisions of our charter documents, as well as certainprovisions of Delaware law, could delay or make more difficult certain types oftransactions involving a change of control of Hypercom or our management. As aresult, the price of our common stock may be adversely affected.
***Our stock price could be affected because a substantial number of shares of ourcommon stock will be available for sale in the future.***
Asof May 5, 2004, we had 50,963,717 shares of our common stock outstanding,all of which have been listed for trading according to the rules of the NewYork Stock Exchange. We also had outstanding, as of May 5, 2004, options andwarrants to acquire an additional 9,799,627 shares of our common stock. Allof the shares underlying the outstanding options and warrants have beenregistered for resale. Future public sales of our common stock, or theavailability of such shares for sale, including the shares subject tooutstanding options and warrants, could adversely affect the prevailing marketprice of our common stock and impair our ability to raise capital through thesale of additional equity securities.
***We do not plan to pay any dividends on our common stock.***
We do not anticipate paying any dividends on our common stock for theforeseeable future.
**Risks Related To Our Indebtedness**
***Our indebtedness and the restrictions imposed by the terms of our debt couldadversely affect our financial condition and our ability to respond to changesin our business.***
 

 

As a result of the terms of our revolving credit facility and otherindebtedness:
• our vulnerability to adverse economic conditions and competitivepressures is heightened;
• we are and will continue to be governed by restrictive covenantsthat limit our ability to incur additional indebtedness and require usto maintain a certain level of liquidity;
• our flexibility in planning for, or reacting to, changes in ourbusiness and industry will be limited;
• we are sensitive to fluctuations in interest rates because some ofour debt obligations are subject to variable interest rates; and
• our ability to obtain additional financing in the future forworking capital, capital expenditures, acquisitions, general corporatepurposes or other purposes may be impaired.
We cannot assure you that our leverage and such restrictions will notmaterially and adversely affect our ability to finance our future operations orcapital needs or to engage in other business activities. In addition, wecannot assure you that additional financing will be available when required or,if available, will be on terms satisfactory to us. Further, even if we wereable to obtain additional financing, we may be required to use proceeds torepay a portion of our debt.