According to a press release July 7, 2006, Hypercom Corporation announced that the U.S. District Court for the District of Arizona entered judgment dismissing with prejudice the Second Consolidated Amended Class Action Complaint ("Amended Complaint") that was filed against Hypercom and John W. Smolak, the Company's former Chief Financial Officer. The Amended Complaint related to Hypercom's restatement of its financial statements for the first three quarters of 2004 because certain leases generated by Hypercom's U.K. subsidiary were incorrectly accounted for as sales-type leases, rather than operating leases. In its July 5, 2006, Order, the District Court found that the Amended Complaint failed to state claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
On February 23, 2006, the plaintiffs filed a Second Consolidated Amended Class Action Complaint.
In a press release dated January 26, 2006, Hypercom Corp. announced that Judge Neil Wake of the U.S. District Court for the District of Arizona has entered an Order dismissing the amended class action complaint that was initially filed in 2005 alleging securities violations by Hypercom and two former executives. The complaint related to Hypercom's restatement of its financial statements for the first three quarters of 2004 because certain terminal leases generated by a Hypercom subsidiary in the United Kingdom were accounted for as sales-type leases, rather than operating leases. In its Jan. 24, 2006, Order dismissing the complaint, the Court stated that the plaintiffs failed to plead particularized facts establishing a strong inference that the company and the other defendants acted with scienter, as required by the Private Securities Litigation Reform Act of 1995. Under the terms of the Court's Order, the complaint was dismissed without prejudice and the plaintiffs will have 30 days, or until Feb. 23, 2006, to file a further amended complaint in an attempt to cure the deficiency.
The original complaint charges Hypercom and certain of its officers and directors with violations of the Securities Exchange Act of 1934. Hypercom Corporation manufactures, designs and sells end-to-end electronic payment solutions that include point-of-sale (POS)/point-of-transaction terminals, peripheral devices, transaction networking devices, transaction management systems and application software and provides related support and services. The Complaint alleges that the Company failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: (1) that the Company's leases originated during the Class Period, by the Company's UK subsidiary, Hypercom EMEA, Inc., were improperly accounted for as "sales-type leases," rather than "operating leases;" (2) that as a result of this, the Company materially overstated its net revenue for the first three quarters of 2004 by at least $4.0 million; (3) that the Company had materially overstated its operating profit by at least 65-75% during the Class Period; (4) that the Company's financial statements were not prepared in accordance with Generally Accepted Accounting Principles ("GAAP"); (5) that the Company lacked adequate internal controls and was therefore unable to ascertain the true financial condition of the Company; and (6) that as a result, the value of the Company's net income and financial results were materially overstated at all relevant times.
The complaint further alleges that on or around February 4, 2005, prior to the opening of the market, Hypercom announced a restatement of prior 2004 quarterly financials. More specifically, the Company stated that certain leases originated during that period by the Company's UK subsidiary, Hypercom EMEA, Inc., were incorrectly accounted for as sales-type leases, rather than operating leases. This accounting error, which related to approximately 3,200 leases, resulted in an overstatement of net revenue for the first three quarters of 2004. The Company currently estimated that the adjustment to its financial statements would decrease net revenue for the nine months ended September 30, 2004 by up to $4.0 million as compared to previously announced results, and that operating profit for the same period would decrease by approximately 65 to 75% of the amount of the net revenue reduction. The Company had also determined that the internal control deficiency that gave rise to this restatement represented a material weakness, as defined by the PCAOB's Auditing Standard No. 2. Consequently, management would be unable to conclude that the Company's internal controls over financial reporting were effective as of December 31, 2004, and the Company's independent auditors, Ernst & Young LLP, were expected to issue an adverse opinion with respect to the Company's internal controls over financial reporting.
News of this shocked the market. As a result, shares of Hypercom fell $1.00 per share, or 18.32 percent, to close at $4.46 per share on unusually high trading volume.