Hypercom Corporation Annual Report - CiteSeer

needed, may be used as collateral for additional debt. The Company’s obligations as guarantor under the Loan Agreement are
unsecured.
Acquisition Financing
In February 2008, in connection with the acquisition of TeT, the Company entered into a credit agreement (the “Credit
Agreement”) with Francisco Partners pursuant to a commitment letter dated December 20, 2007 between the Company and Francisco
Partners. See Note 2 for additional information related to the TeT acquisition. The Credit Agreement provided for a loan of up to
$60.0 million to partially fund the acquisition at closing. The loan under the Credit Agreement bears interest at 10% per annum,
provided that, at the election of the Company, interest may be capitalized and added to the principal of the loan to be repaid at
maturity. The loan was funded on April 1, 2008 by an affiliate of Francisco Partners, FP Hypercom Holdco, LLC. All amounts
outstanding under the Credit Agreement are due four years from the funding date. On funding of the loan under the Credit Agreement
and the closing of the acquisition, the lender was granted a five-year warrant to purchase approximately 10.5 million shares (the
“Warrant”) of the Company’s common stock at $5.00 per share. The Warrant contains a cashless exercise provision that can be
utilized by the lender at its sole option. The cashless exercise provision permits the lender, in lieu of making the cash payment
otherwise contemplated to be made to the Company upon exercise of the Warrant in whole or in part, to receive upon such exercise
the “net number” of shares of the Company’s common stock determined according to the agreement. In the event the lender elects a
cashless exercise of the Warrant, the Company will not receive any cash payment for the shares delivered to the lender pursuant to
such cashless exercise.
The estimated fair value of the Warrant at the date issued was $1.68 per share using a Black-Scholes option pricing model. The
valuation date for the Warrant was February 14, 2008, when all relevant terms and conditions of the debt agreement had been reached.
The total fair value of the Warrant of $17.8 million was recorded as a discount to the acquisition financing and has been recognized
in equity as additional paid in capital. The loan discount is being amortized as interest expense over the life of the loan and amounted
to $3.8 and $1.7 million for the years ended December 31, 2009 and 2008.
In accordance with the loan agreement, the Company added to the loan balance interest of $6.7 million and $4.6 million during
2009 and 2008.
In addition to representations and warranties, covenants, conditions and other terms customary for instruments of this type, the
Credit Agreement includes negative covenants that prohibit the Company from, among other things, incurring certain types of
indebtedness, granting liens on assets, engaging in transactions with affiliates and disposing of certain assets. The Credit Agreement
provides for customary events of default, including failure to pay any principal or interest when due, failure to comply with covenants,
any representation made by the Company that is incorrect in any material respect, certain defaults relating to other material
indebtedness, certain insolvency and receivership events affecting the Company, judgments in excess of $3.0 million in the aggregate
being rendered against the Company, and the incurrence of certain ERISA liabilities in excess of $5.0 million in the aggregate.
In the event of a default by the Company, the Lender may declare the obligations under the Credit Agreement immediately due
and payable and enforce any and all of its rights under the Credit Agreement and related documents.
The Company’s long term debts are classified within a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1), then to significant observable inputs (Level 2) and the lowest priority to significant unobservable inputs (Level 3).
See Note 8 for further discussion of the different levels of the fair value hierarchy.
The Company’s fair value of long-term debt at December 31, 2009 is as follows (dollars in thousands):
Level 1 Level 2 Level 3 Total
FP II Credit Agreement $ — $ 56,075 $ — $ 56,075
Other — 1 — 1
$ — $ 56,076 $ — $ 56,076
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