##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 1-13521
 HYPERCOM CORPORATION
  Delaware
    
    86-0828608(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)2851 West Kathleen Road, Phoenix, Arizona
    
    85053(Address of principal executive offices)
    
    (Zip Code)
 (602) 504-5000
 þ o
  o þ o
 o þ
  Class
    
    Outstanding at November 3, 2006Common Stock, $.001 par value per share
    
    53,094,896 shares




---



##### 



INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial StatementsConsolidated Balance Sheets  September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations  Three and nine months ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows  Nine months ended September 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    25PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 6.
    
    Exhibits
    
    
    27Signatures
    
    
    28EXHIBITSEX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements.
 HYPERCOM CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 September 30, 2006
    
    
    December 31,Amounts in thousands, except share data
    
    (unaudited)
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    44,944
    
    
    $
    35,940Restricted cash
    
    
    189
    
    
    
    Short-term investments
    
    
    53,010
    
    
    
    57,951Accounts receivable, net of allowance for doubtful accounts of
$1,714 and $3,266, respectively
    
    
    55,372
    
    
    
    48,852Inventories
    
    
    49,616
    
    
    
    39,414Prepaid expenses and other current assets
    
    
    8,314
    
    
    
    8,946Deferred tax assets, net
    
    
    598
    
    
    
    122Assets of discontinued operations held for sale
    
    
    
    
    
    
    12,613Total current assets
    
    
    212,043
    
    
    
    203,838Property, plant and equipment, net
    
    
    26,108
    
    
    
    27,746Intangible assets, net
    
    
    3,026
    
    
    
    3,503Other long-term assets
    
    
    4,044
    
    
    
    3,827Total assets
    
    $
    245,221
    
    
    $
    238,914LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    24,103
    
    
    $
    17,721Accrued payroll and related expenses
    
    
    7,953
    
    
    
    8,460Accrued sales and other taxes
    
    
    9,573
    
    
    
    9,479Product warranty liabilities
    
    
    3,467
    
    
    
    5,534Accrued liabilities
    
    
    10,175
    
    
    
    6,837Deferred revenue
    
    
    2,241
    
    
    
    2,762Income taxes payable
    
    
    2,851
    
    
    
    1,651Liabilities of discontinued operations
    
    
    343
    
    
    
    Current portion of long-term debt
    
    
    9
    
    
    
    8,355Total current liabilities
    
    
    60,715
    
    
    
    60,799Long-term debt
    
    
    14
    
    
    
    22Deferred tax liabilities, net
    
    
    776
    
    
    
    341Other long-term liabilities
    
    
    3,709
    
    
    
    6,978Total liabilities
    
    
    65,214
    
    
    
    68,140Stockholders equity:Common stock, $.001 par value; 100,000,000 shares authorized;
53,080,305 and 52,991,959 shares outstanding, respectively
    
    
    56
    
    
    
    55Additional paid-in capital
    
    
    246,321
    
    
    
    238,186Accumulated deficit
    
    
    (43,621
    )
    
    
    (53,335
    )Unearned deferred compensation
    
    
    
    
    
    
    (2,123
    )Treasury stock (at cost), 3,162,248 and 1,815,620 shares, respectively
    
    
    (22,749
    )
    
    
    (12,009
    )Total stockholders equity
    
    
    180,007
    
    
    
    170,774Total liabilities and stockholders equity
    
    $
    245,221
    
    
    $
    238,914
  3




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##### Table of Contents



HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Amounts in thousands, except share data)Net revenue:Product and other
    
    $
    46,927
    
    
    $
    57,156
    
    
    $
    154,952
    
    
    $
    153,663Services
    
    
    9,742
    
    
    
    9,391
    
    
    
    28,830
    
    
    
    23,471Total net revenue
    
    
    56,669
    
    
    
    66,547
    
    
    
    183,782
    
    
    
    177,134Costs of revenue:Product and other
    
    
    30,411
    
    
    
    34,881
    
    
    
    93,043
    
    
    
    109,395Services
    
    
    7,336
    
    
    
    6,187
    
    
    
    20,903
    
    
    
    17,990Total costs of revenue
    
    
    37,747
    
    
    
    41,068
    
    
    
    113,946
    
    
    
    127,385Gross profit
    
    
    18,922
    
    
    
    25,479
    
    
    
    69,836
    
    
    
    49,749Operating expenses:Research and development
    
    
    7,049
    
    
    
    6,296
    
    
    
    19,547
    
    
    
    21,146Selling, general and administrative
    
    
    14,599
    
    
    
    15,086
    
    
    
    45,696
    
    
    
    52,914Gain on sale of real property in Hong Kong
    
    
    (2,958
    )
    
    
    
    
    
    
    (2,958
    )
    
    
    Total operating expenses
    
    
    18,690
    
    
    
    21,382
    
    
    
    62,285
    
    
    
    74,060Income (loss) from continuing operations
    
    
    232
    
    
    
    4,097
    
    
    
    7,551
    
    
    
    (24,311
    )Interest income
    
    
    1,237
    
    
    
    611
    
    
    
    3,566
    
    
    
    1,805Interest expense
    
    
    (413
    )
    
    
    (221
    )
    
    
    (1,050
    )
    
    
    (604
    )Foreign currency loss
    
    
    (104
    )
    
    
    (187
    )
    
    
    (637
    )
    
    
    (896
    )Other expense
    
    
    (23
    )
    
    
    (88
    )
    
    
    (31
    )
    
    
    (147
    )Income (loss) before income taxes and
discontinued operations
    
    
    929
    
    
    
    4,212
    
    
    
    9,399
    
    
    
    (24,153
    )Provision for income taxes
    
    
    (456
    )
    
    
    (1,367
    )
    
    
    (1,928
    )
    
    
    (2,798
    )Income (loss) before discontinued operations
    
    
    473
    
    
    
    2,845
    
    
    
    7,471
    
    
    
    (26,951
    )Income (loss) from discontinued operations
    
    
    (127
    )
    
    
    656
    
    
    
    2,241
    
    
    
    4,156Net income (loss)
    
    $
    346
    
    
    $
    3,501
    
    
    $
    9,712
    
    
    $
    (22,795
    )Basic and diluted income (loss) per share:Income (loss) before discontinued operations
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.14
    
    
    $
    (0.51
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    0.02
    
    
    
    0.04
    
    
    
    0.08Basic and diluted income (loss) per share
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    0.18
    
    
    $
    (0.43
    )Basic weighted average common shares
    
    
    53,524,064
    
    
    
    52,496,333
    
    
    
    53,247,041
    
    
    
    52,412,285Diluted weighted average common shares
    
    
    54,161,546
    
    
    
    53,632,008
    
    
    
    54,066,308
    
    
    
    52,412,285
  4




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##### Table of Contents



HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine Months Ended September 30,2006
    
    
    2005(Amounts in thousands)Cash flows from continuing operations:Net income (loss) from continuing operations
    
    $
    7,471
    
    
    $
    (26,951
    )Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by (used in) operating activities:Depreciation/amortization
    
    
    5,682
    
    
    
    5,473Amortization of deferred financing costs
    
    
    4
    
    
    
    11Amortization of discounts on short-term investments
    
    
    (990
    )
    
    
    (767
    )Provision for bad debts
    
    
    615
    
    
    
    1,440Write-down of excess and obsolete inventory
    
    
    1,630
    
    
    
    11,083Net provision (benefit) for warranty expense
    
    
    (89
    )
    
    
    7,666Deferred income taxes
    
    
    (41
    )
    
    
    Non-cash share-based compensation
    
    
    4,689
    
    
    
    485Foreign currency gain
    
    
    (660
    )
    
    
    (287
    )Gain on sale of real property in Hong Kong
    
    
    (2,958
    )
    
    
    Other non-cash charges
    
    
    264
    
    
    
    1,974Changes in operating assets and liabilities, net
    
    
    (15,525
    )
    
    
    (7,008
    )Net cash provided by (used in) operating activities
    
    
    92
    
    
    
    (6,881
    )Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (5,198
    )
    
    
    (3,583
    )Proceeds from the sale of real property in Hong Kong
    
    
    5,190
    
    
    
    Capitalized software and other development costs
    
    
    (787
    )
    
    
    (558
    )Net increase in restricted cash
    
    
    (189
    )
    
    
    Purchase of investments
    
    
    (228,344
    )
    
    
    (136,242
    )Proceeds from the sale or maturity of investments
    
    
    234,275
    
    
    
    163,518Net cash provided by investing activities
    
    
    4,947
    
    
    
    23,135Cash flows from financing activities:Repayments of bank notes payable and other debt instruments
    
    
    (8,354
    )
    
    
    (337
    )Proceeds from issuance of common stock
    
    
    6,393
    
    
    
    4,883Purchase of treasury stock
    
    
    (10,740
    )
    
    
    (8,941
    )Net cash used in financing activities
    
    
    (12,701
    )
    
    
    (4,395
    )Effect of exchange rate changes on cash
    
    
    337
    
    
    
    (110
    )Net increase (decrease) in cash flows from continuing operations
    
    
    (7,325
    )
    
    
    11,749Net cash provided by operating activities  discontinued operations
    
    
    4,192
    
    
    
    11,886Net cash provided by investing activities  discontinued operations
    
    
    12,137
    
    
    
    Cash and cash equivalents, beginning of period
    
    
    35,940
    
    
    
    23,445Cash and cash equivalents, end of period
    
    $
    44,944
    
    
    $
    47,080
  5




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##### Table of Contents



HYPERCOM CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2006
(Unaudited)
 1. Basis of Presentation
  Share-Based Payment
 2. 2005 Business Review
  
    
    Implementing an end-of-product-life cycle strategy, including identifying products and
related inventory with near term end-of-life requirements;
    
    More aggressively addressing and correcting product performance issues, including
negotiated warranty and product trade-in/trade-out programs required for the
end-of-product-life cycle strategies;
    
    Implementing certain workforce reductions, including members of the senior management
team, sales, operations and manufacturing personnel, as well as moving certain research and
development resources to lower cost foreign geographies, and compensation plan changes;
    
    Vacating a leased building in Phoenix, Arizona due to the reductions in force;
    
    Evaluating other assets and liabilities and evaluating the past underlying operating
decisions or strategies supporting the future benefit of the assets or the probability of a
liability;
    
    Addressing individual country/regional sales and profitability performance, and
reallocating resources based upon market share growth objectives by country to support the
new strategies going forward;
    
    Investing in the implementation of a comprehensive product marketing function within the
Companys organization; and
    
    Evaluating opportunities for short, medium and long-term improvements in manufacturing
costs.
  6




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##### Table of Contents



Costs
    
    
    AccrualsIncurred
    
    
    ReversedDuring the
    
    
    During theTotal
    
    
    
    
    
    
    Nine Month
    
    
    Nine MonthCosts
    
    
    Costs
    
    
    Period
    
    
    Period
    
    
    LiabilityExpected to
    
    
    Incurred
    
    
    Ended
    
    
    Ended
    
    
    Balance atbe
    
    
    During
    
    
    September
    
    
    September
    
    
    SeptemberIncurred
    
    
    2005
    
    
    30, 2006
    
    
    30, 2006
    
    

30, 2006Costs of revenues:Warranty charges and product
replacement accruals (a)
    
    $
    7,374
    
    
    $
    3,832
    
    
    $
    1,207
    
    
    $
    1,408
    
    
    $
    927Inventory write-downs, primarily
for product end-of-life
decisions
    
    
    12,111
    
    
    
    12,111
    
    
    
    
    
    
    
    
    
    
    
    One-time termination benefits and
related employment costs
    
    
    469
    
    
    
    351
    
    
    
    118
    
    
    
    
    
    
    
    Total costs of revenue charges
    
    
    19,954
    
    
    
    16,294
    
    
    
    1,325
    
    
    
    1,408
    
    
    
    927Operating expenses:One-time termination benefits and
related employment costs
    
    
    3,370
    
    
    
    2,551
    
    
    
    623
    
    
    
    196
    
    
    
    Idled facility lease charge (b)
    
    
    1,013
    
    
    
    195
    
    
    
    200
    
    
    
    
    
    
    
    618Total operating expenses
    
    
    4,383
    
    
    
    2,746
    
    
    
    823
    
    
    
    196
    
    
    
    618Total charges
    
    $
    24,337
    
    
    $
    19,040
    
    
    $
    2,148
    
    
    $
    1,604
    
    
    $
    1,545
 
 (a)
    
    These accrued liability balances are recorded as current product warranty liabilities
as these amounts are expected to be paid during 2006. Two customers that agreed to
participate in the trade-in program in June 2005 for the replacement of certain electronic
payment equipment ultimately opted out of the program. Accordingly, the Company reduced
its product warranty liabilities by $1.4 million in June 2006 upon the expiration of the
program.(b)
    
    The idled facility lease charge accrued liability is recorded in current accrued
liabilities ($0.2 million) and other long-term liabilities ($0.4 million) based on the
timing of the projected lease payments that are scheduled through 2011.  
    
    $4.8 million of replacement cost provisions recorded in the second quarter related to
certain POS equipment that the Company has elected to provide to certain customers to
reduce future warranty costs, increase customer satisfaction, drive future revenue
opportunities, and protect the Companys competitive positioning;
    
    $2.0 million ($0.7 million in the first quarter, $1.3 million in the second quarter) of
charges related to additional negotiated warranty work and replacement cost provisions for
customer owned product as a result of higher than expected repair costs;
    
    $9.2 million ($2.1 million in the first quarter and $7.1 million in the second quarter)
of write-downs for inventory primarily related to products at or near end-of-life; and
    
    $2.2 million of severance and related provisions in the second quarter related to recent
termination and severance of certain executives and employees, and the elimination of
certain executive benefits.
 7




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##### Table of Contents



3. Discontinued Operations
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005United Kingdom Lease Business:Net revenues
    
    $
    
    
    
    $
    3,262
    
    
    $
    3,230
    
    
    $
    11,221Costs of revenue
    
    
    
    
    
    
    2,240
    
    
    
    1,195
    
    
    
    6,072Gross profit
    
    
    
    
    
    
    1,022
    
    
    
    2,035
    
    
    
    5,149Selling, general and administrative
expenses
    
    
    (127
    )
    
    
    (288
    )
    
    
    (1,012
    )
    
    
    (1,013
    )Foreign currency loss
    
    
    
    
    
    
    (78
    )
    
    
    (343
    )
    
    
    (379
    )Gain on sale
    
    
    
    
    
    
    
    
    
    
    1,561
    
    
    
    (127
    )
    
    
    656
    
    
    
    2,241
    
    
    
    3,757Golden Eagle Leasing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    399Income (loss) from discontinued
operations
    
    $
    (127
    )
    
    $
    656
    
    
    $
    2,241
    
    
    $
    4,156
  September 30,
    
    
    December 31,2006
    
    
    2005United Kingdom Lease Business:Prepaid expenses and other current assets
    
    $
    
    
    
    $
    57Net investment in sales-type leases
    
    
    
    
    
    
    12,556Assets of discontinued operations held for sale
    
    $
    
    
    
    $
    12,613Liabilities of discontinued operations (a)
    
    $
    343
    
    
    $
    
 
 (a)
    
    These accrued liability balances consist of severance and professional service fees
incurred as part of the United Kingdom Lease Business sale but not yet paid as of September
30, 2006. United Kingdom Lease Business
 Accounting for the Impairment or Disposal of Long-Lived
Assets
  8




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##### Table of Contents



Golden Eagle Leasing
  4. Share-Based Compensation
  Accounting for Stock-Based Compensation
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Costs of revenue
    
    $
    40
    
    
    $
    
    
    
    $
    138
    
    
    $
    Research and development costs
    
    
    305
    
    
    
    
    
    
    
    714
    
    
    
    Selling, general and
administrative
expenses
    
    
    1,465
    
    
    
    212
    
    
    
    3,837
    
    
    
    485Total share-based compensation
    
    $
    1,810
    
    
    $
    212
    
    
    $
    4,689
    
    
    $
    485
  Stock Options
 Accounting
for Stock Appreciation Rights and other Variable Stock Option Award Plans
  9




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##### Table of Contents



WeightedAverage
    
    AggregateWeighted
    
    Remaining
    
    IntrinsicNumber of
    
    Average
    
    Contractual
    
    Value (InOptions
    
    Exercise Price
    
    Term
    
    Thousands)Stock options:Outstanding at December 31, 2005
    
    
    4,321,744
    
    
    $
    6.88Granted
    
    
    1,053,500
    
    
    
    9.63Exercised
    
    
    (1,029,143
    )
    
    
    4.34Terminated or expired
    
    
    (488,325
    )
    
    
    8.88Outstanding at September 30, 2006
    
    
    3,857,776
    
    
    
    8.03
    
    
    
    6.51
    
    
    $
    2,562Expected to vest at September 30, 2006
    
    
    3,597,579
    
    
    $
    8.01
    
    
    
    6.31
    
    
    $
    2,504Vested and exercisable at September 30, 2006
    
    
    2,189,848
    
    
    $
    7.80
    
    
    
    4.42
    
    
    $
    2,190
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Weighted average fair value of
options granted
    
    $
    5.04
    
    
    $
    4.17
    
    
    $
    5.96
    
    
    $
    3.71Key assumptions used in determining
the fair value:Weighted average risk free
interest rate
    
    
    4.57
    %
    
    
    4.02
    %
    
    
    4.81
    %
    
    
    4.00
    %Expected life of the option (in
years)
    
    
    5.48
    
    
    
    5.59
    
    
    
    5.48
    
    
    
    5.46Expected stock price volatility
    
    
    64.2
    %
    
    
    74.2
    %
    
    
    66.8
    %
    
    
    75.6
    %Expected dividend rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   10




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income (loss), as reported
    
    $
    3,501
    
    
    $
    (22,795
    )Add stock-based employee compensation expense included
in reported net income (loss)
    
    
    212
    
    
    
    485Deduct total stock-based employee compensation expense
determined under fair value methods for all awards
    
    
    (1,012
    )
    
    
    (1,868
    )Add reversal of stock-based compensation expense for options
forfeited prior to vesting
    
    
    390
    
    
    
    2,477Pro forma net income (loss)
    
    $
    3,091
    
    
    $
    (21,701
    )Basic and diluted income (loss) per share:As reported
    
    $
    0.07
    
    
    $
    (0.43
    )Pro forma
    
    $
    0.06
    
    
    $
    (0.41
    )Weighted average common shares:Basic
    
    
    52,496,333
    
    
    
    52,412,285Dilued
    
    
    53,632,008
    
    
    
    52,412,285
 Restricted Stock Awards
  Number of
    
    
    WeightedNonvested
    
    
    AverageRestricted
    
    
    Grant DateStock Awards
    
    
    Fair ValueBalance at December 31, 2005
    
    
    402,000
    
    
    $
    6.38Granted
    
    
    92,432
    
    
    
    8.40Vested
    
    
    (102,000
    )
    
    
    6.36Forfeited
    
    
    (50,000
    )
    
    
    6.42Balance at September 30, 2006
    
    
    342,432
    
    
    
    6.92
 Employee Stock Purchase Plan
  5. Restricted Cash
  11




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##### Table of Contents



6. Short-term Investments
    September 30,
    
    
    December 31,2006
    
    
    2005Municipal debt securities
    
    $
    6,100
    
    
    $
    10,500U.S. government and agency debt securities
    
    
    
    
    
    
    23,439Corporate debt securities
    
    
    42,410
    
    
    
    10,012Preferred equity securities
    
    
    4,500
    
    
    
    14,000$
    53,010
    
    
    $
    57,951
 7. Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Purchased parts
    
    $
    27,782
    
    
    $
    24,118Work in progress
    
    
    4,014
    
    
    
    3,609Finished goods
    
    
    17,820
    
    
    
    11,687$
    49,616
    
    
    $
    39,414
 8. Product Warranty
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    3,183
    
    
    $
    7,774
    
    
    $
    5,534
    
    
    $
    1,434Warranty charges from normal operations
    
    
    615
    
    
    
    430
    
    
    
    1,319
    
    
    
    1,199Warranty charges (reversals) related to
the 2005 Business Review
    
    
    (24
    )
    
    
    
    
    
    
    (1,408
    )
    
    
    6,782Utilization of warranty liability
    
    
    (307
    )
    
    
    (703
    )
    
    
    (1,978
    )
    
    
    (1,914
    )Balance at end of period
    
    $
    3,467
    
    
    $
    7,501
    
    
    $
    3,467
    
    
    $
    7,501
 12




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##### Table of Contents



9. Long-term Debt
  10. Equity Transactions
    11. Sale of Real Property in Hong Kong
  12. Earnings per Share
  13




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Shares used in basic income (loss) per
share calculation (weighted average
common shares outstanding)
    
    
    53,524,064
    
    
    
    52,496,333
    
    
    
    53,247,041
    
    
    
    52,412,285Dilutive effect of stock options and
warrants
    
    
    637,481
    
    
    
    1,135,675
    
    
    
    819,267
    
    
    
    Shares used in diluted income per
share calculation
    
    
    54,161,545
    
    
    
    53,632,008
    
    
    
    54,066,308
    
    
    
    52,412,285Options and warrants that could potentially
dilute income per share in the future
that were not included in the computation
of diluted income per share
    
    
    3,584,985
    
    
    
    1,751,824
    
    
    
    3,559,917
    
    
    
    4,723,829
    (a)
 
 (a)
    
    These options and warrants were not included in the computation of diluted income
(loss) per share because they were anti-dilutive. 13. Income Taxes
   Accounting for Income Taxes
 14. Commitments and Contingencies
   14




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##### Table of Contents



15.
Recent Accounting Pronouncement
 Accounting for
Uncertainty in Income Taxes
 15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Cautionary Statements Regarding Forward-looking Statements
    
    
    the volatility of our financial results and our stock price;
    
    the loss of a key customer;
    
    defects in our products;
    
    the accumulation of obsolete inventory;
    
    breaches in the security of transactions involving our products;
    
    our inability to adequately protect our proprietary technology;
    
    our technology infringing the proprietary rights of third parties;
    
    a disruption in our manufacturing capabilities or those of our third-party manufacturers or suppliers;
    
    the challenges posed by conducting business in international markets;
    
    fluctuations in currency exchange rates;
    
    the loss of a member of our senior management team or other key employees;
    
    risks associated with acquisitions and other strategic investments;
    
    force majeure events;
    
    Chinas changing economic environment;
    
    uncertainties related to the Chinese legal system;
    
    our ability to maintain the quality of our internal control over financial reporting;
    
    the highly-competitive nature of the markets in which we compete;
    
    industry and technological developments in the markets in which we sell our products and services;
    
    the impact of industry standards and government regulations to which our products are subject;
    
    the impact of SEC regulations and SEC review of our periodic filings;
 16




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##### Table of Contents




    
    the anti-takeover effects of certain provisions in our charter, bylaws and Delaware law;
    
    dilution of our stock price caused by the exercise of outstanding warrants and options;
    
    lack of a plan to pay dividends on our common stock in the foreseeable future; and
    
    incurring debt to meet the future capital requirements of our business.
  Critical Accounting Policies and Estimates
  Share-Based Compensation
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Costs of revenue
    
    $
    40
    
    
    $
    
    
    
    $
    138
    
    
    $
    Research and development costs
    
    
    305
    
    
    
    
    
    
    
    714
    
    
    
    Selling, general and
administrative
expenses
    
    
    1,465
    
    
    
    212
    
    
    
    3,837
    
    
    
    485Total share-based compensation
    
    $
    1,810
    
    
    $
    212
    
    
    $
    4,689
    
    
    $
    485
 17




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##### Table of Contents



Results of Operations
 Three Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Dollar(Dollars in thousands, except per share data)
    
    2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    ChangeNet revenue:Product and other
    
    $
    46,927
    
    
    
    82.8
    %
    
    $
    57,156
    
    
    
    85.9
    %
    
    $
    (10,229
    )Services
    
    
    9,742
    
    
    
    17.2
    %
    
    
    9,391
    
    
    
    14.1
    %
    
    
    351Total net revenue
    
    
    56,669
    
    
    
    100.0
    %
    
    
    66,547
    
    
    
    100.0
    %
    
    
    (9,878
    )Costs of revenue:Product and other
    
    
    30,411
    
    
    
    64.8
    %
    
    
    34,881
    
    
    
    61.0
    %
    
    
    (4,470
    )Services
    
    
    7,336
    
    
    
    75.3
    %
    
    
    6,187
    
    
    
    65.9
    %
    
    
    1,149Total costs of revenue
    
    
    37,747
    
    
    
    66.6
    %
    
    
    41,068
    
    
    
    61.7
    %
    
    
    (3,321
    )Gross profit:Product and other
    
    
    16,516
    
    
    
    35.2
    %
    
    
    22,275
    
    
    
    39.0
    %
    
    
    (5,759
    )Services
    
    
    2,406
    
    
    
    24.7
    %
    
    
    3,204
    
    
    
    34.1
    %
    
    
    (798
    )Total gross profit
    
    
    18,922
    
    
    
    33.4
    %
    
    
    25,479
    
    
    
    38.3
    %
    
    
    (6,557
    )Operating expenses:Research and development
    
    
    7,049
    
    
    
    12.4
    %
    
    
    6,296
    
    
    
    9.5
    %
    
    
    753Selling, general and administrative
    
    
    14,599
    
    
    
    25.8
    %
    
    
    15,086
    
    
    
    22.7
    %
    
    
    (487
    )Gain on sale of real property in Hong Kong
    
    
    (2,958
    )
    
    
    -5.2
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (2,958
    )Total operating expenses
    
    
    18,690
    
    
    
    33.0
    %
    
    
    21,382
    
    
    
    32.1
    %
    
    
    (2,692
    )Income from continuing operations
    
    
    232
    
    
    
    0.4
    %
    
    
    4,097
    
    
    
    6.2
    %
    
    
    (3,865
    )Non-operating income
    
    
    697
    
    
    
    1.2
    %
    
    
    115
    
    
    
    0.2
    %
    
    
    582Income before income taxes and
discontinued operations
    
    
    929
    
    
    
    1.6
    %
    
    
    4,212
    
    
    
    6.3
    %
    
    
    (3,283
    )Provision for income taxes
    
    
    (456
    )
    
    
    -0.8
    %
    
    
    (1,367
    )
    
    
    -2.1
    %
    
    
    911Income before discontinued operations
    
    
    473
    
    
    
    0.8
    %
    
    
    2,845
    
    
    
    4.3
    %
    
    
    (2,372
    )Income (loss) from discontinued operations
    
    
    (127
    )
    
    
    -0.2
    %
    
    
    656
    
    
    
    1.0
    %
    
    
    (783
    )Net income
    
    $
    346
    
    
    
    0.6
    %
    
    $
    3,501
    
    
    
    5.3
    %
    
    $
    (3,155
    )Dilued income per share
    
    $
    0.01
    
    
    
    
    
    
    $
    0.07
    
    
    
    
    
    
    $
    (0.06
    )
 18




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Nine Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Dollar(Dollars in thousands, except per share data)
    
    2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    ChangeNet revenue:Product and other
    
    $
    154,952
    
    
    
    84.3
    %
    
    $
    153,663
    
    
    
    86.7
    %
    
    $
    1,289Services
    
    
    28,830
    
    
    
    15.7
    %
    
    
    23,471
    
    
    
    13.3
    %
    
    
    5,359Total net revenue
    
    
    183,782
    
    
    
    100.0
    %
    
    
    177,134
    
    
    
    100.0
    %
    
    
    6,648Costs of revenue:Product and other
    
    
    93,043
    
    
    
    60.0
    %
    
    
    109,395
    
    
    
    71.2
    %
    
    
    (16,352
    )Services
    
    
    20,903
    
    
    
    72.5
    %
    
    
    17,990
    
    
    
    76.6
    %
    
    
    2,913Total costs of revenue
    
    
    113,946
    
    
    
    62.0
    %
    
    
    127,385
    
    
    
    71.9
    %
    
    
    (13,439
    )Gross profit:Product and other
    
    
    61,909
    
    
    
    40.0
    %
    
    
    44,268
    
    
    
    28.8
    %
    
    
    17,641Services
    
    
    7,927
    
    
    
    27.5
    %
    
    
    5,481
    
    
    
    23.4
    %
    
    
    2,446Total gross profit
    
    
    69,836
    
    
    
    38.0
    %
    
    
    49,749
    
    
    
    28.1
    %
    
    
    20,087Operating expenses:Research and development
    
    
    19,547
    
    
    
    10.6
    %
    
    
    21,146
    
    
    
    11.9
    %
    
    
    (1,599
    )Selling, general and administrative
    
    
    45,696
    
    
    
    24.9
    %
    
    
    52,914
    
    
    
    29.9
    %
    
    
    (7,218
    )Gain on sale of real property in Hong Kong
    
    
    (2,958
    )
    
    
    -1.6
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (2,958
    )Total operating expenses
    
    
    62,285
    
    
    
    33.9
    %
    
    
    74,060
    
    
    
    41.8
    %
    
    
    (11,775
    )Income (loss) from continuing operations
    
    
    7,551
    
    
    
    4.1
    %
    
    
    (24,311
    )
    
    
    -13.7
    %
    
    
    31,862Non-operating income
    
    
    1,848
    
    
    
    1.0
    %
    
    
    158
    
    
    
    0.1
    %
    
    
    1,690Income (loss) before income taxes and
discontinued operations
    
    
    9,399
    
    
    
    5.1
    %
    
    
    (24,153
    )
    
    
    -13.6
    %
    
    
    33,552Provision for income taxes
    
    
    (1,928
    )
    
    
    -1.0
    %
    
    
    (2,798
    )
    
    
    -1.6
    %
    
    
    870Income (loss) before discontinued
operations
    
    
    7,471
    
    
    
    4.1
    %
    
    
    (26,951
    )
    
    
    -15.2
    %
    
    
    34,422Income from discontinued operations
    
    
    2,241
    
    
    
    1.2
    %
    
    
    4,156
    
    
    
    2.3
    %
    
    
    (1,915
    )Net income (loss)
    
    $
    9,712
    
    
    
    5.3
    %
    
    $
    (22,795
    )
    
    
    -12.9
    %
    
    $
    32,507Diluted income (loss) per share
    
    $
    0.18
    
    
    
    
    
    
    $
    (0.43
    )
    
    
    
    
    
    $
    0.61
 Net Revenue
   19




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Costs of Revenue
   Gross Profit
  20




---



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Operating Expenses
    21




---



##### Table of Contents



Income (Loss) from Continuing Operations
  Non-Operating Income
  Provision for Income Taxes
    Income from Discontinued Operations
  22




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Cash Flows, Liquidity and Capital Resources
  Cash Flows
     23




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##### Table of Contents



Liquidity and Capital Resources
  Contractual Obligations
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
     24




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##### Table of Contents



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
   Internal Control over Financial Reporting.
  25




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 Shareholder Derivative Actions.
  Verve, L.L.C. vs. Hypercom Corporation
  Hypercom Corporation vs. Omron Corporation
  
 Item 1A. Risk Factors
  26




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 ISSUER PURCHASES OF EQUITY SECURITIES
 (d) Maximum(c) Total Number
    
    Number (orof Shares (or
    
    ApproximateUnits) Purchased
    
    Dollar Value) ofas Part of
    
    Shares that May(a) Total Number of
    
    (b) Average Price
    
    Publicly or
    
    Yet Be PurchasedShares (or
    
    Paid per Share
    
    Announced Plans
    
    Under the PlansPeriod
    
    Units) Purchased
    
    (or Unit)
    
    Programs
    
    or ProgramsMonth #1 (July 1,
2006 to July 31,
2006)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #2 (August 1,
2006 to August 31,
2006)
    
    
    503,578
    
    
    $
    8.58
    
    
    
    503,578
    
    
    $
    15,566,204Month #3 (September
1, 2006 to
September 30, 2006)
    
    
    757,950
    
    
    $
    7.51
    
    
    
    757,950
    
    
    $
    9,870,925Total
    
    
    1,261,528
    
    
    $
    7.94
    
    
    
    1,261,528
    
    
    $
    9,870,925
  
 Item 6. Exhibits.
 Exhibit Number
    
    Description of Exhibit3.1
    
    Amended and Restated Certificate of Incorporation of
Hypercom Corporation (incorporated by reference to Exhibit
3.1 to Hypercom Corporations Registration Statement on
Form S-1 (Registration No. 333-35641))3.2
    
    Second Amended and Restated Bylaws of Hypercom Corporation
(incorporated by reference to Exhibit 3.1 to Hypercom
Corporations Current Report on Form 8-K filed on November
6, 2006)4
    
    Amended and Restated Certificate of Incorporation of
Hypercom Corporation (incorporated by reference to Exhibit
3.1 to Hypercom Corporations Registration Statement on
Form S-1 (Registration No. 333-35641))31.1
    
    Certification of Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2
    
    Certification of Chief Financial Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32
    
    Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 **
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 27




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##### Table of Contents



SIGNATURES
  HYPERCOM CORPORATIONDate: November 9, 2006
    
    By:
    
    /s/ William KeiperWilliam KeiperChief Executive Officer and President (duly
authorized officer and principal executive
officer)Date: November 9, 2006
    
    By:
    
    /s/ Thomas LiguoriThomas LiguoriSenior Vice President and Chief Financial
Officer (principal financial and accounting
officer)
 28