##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 2004. OR [  ]
    
    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 (Exact name of registrant as specified in its charter)
 Delaware
    
    86-0828608(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number )
 2851 West Kathleen Road
Phoenix, Arizona 85053
(Address of principal executive offices) (Zip Code) (602) 504-5000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Number of shares of the registrants common stock, $.001 par value per share,
outstanding as of August 3, 2004, was 51,838,087.




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INDEX PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial StatementsConsolidated Balance Sheets  June 30, 2004 and
December 31, 2003
    
    
    3Consolidated Statements of Operations  Three and six
months ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows  Six months ended
June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market
Risk
    
    
    12Item 4. Controls and Procedures
    
    
    13PART II. OTHER INFORMATIONItem 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14Item 6. Exhibits and Reports on Form 8-K
    
    
    14SIGNATURES
    
    
    15EXHIBIT INDEX
    
    
    16Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2Exhibit 99.1
  2




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##### Table of Contents



PART I - FINANCIAL INFORMATION 
 Item 1. Financial Statements HYPERCOM CORPORATION 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 June 30, 2004(unaudited)
    
    December 31, 2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    56,894
    
    
    $
    65,415Marketable securities
    
    
    31,900
    
    
    
    17,400Accounts receivable, net of allowance for doubtful
accounts of $3,150 and $993, respectively
    
    
    56,958
    
    
    
    55,252Current
portion of net investment in sales-type leases
    
    
    9,412
    
    
    
    8,783Inventories
    
    
    39,475
    
    
    
    42,262Prepaid expenses and other current assets
    
    
    8,118
    
    
    
    13,769Long-lived assets held for sale
    
    
    782
    
    
    
    852Total current assets
    
    
    203,539
    
    
    
    203,733Property, plant and equipment, net
    
    
    28,869
    
    
    
    28,217Long-term marketable securities
    
    
    153
    
    
    
    153Net investment in sales-type leases
    
    
    19,457
    
    
    
    20,236Intangible assets, net
    
    
    4,413
    
    
    
    3,731Other assets
    
    
    3,873
    
    
    
    8,498Total assets
    
    $
    260,304
    
    
    $
    264,568LIABILITIES
AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    22,641
    
    
    $
    21,733Accrued payroll and related expenses
    
    
    7,517
    
    
    
    8,267Accrued sales and other taxes
    
    
    5,128
    
    
    
    6,359Accrued liabilities
    
    
    7,414
    
    
    
    7,534Deferred revenue
    
    
    3,063
    
    
    
    2,044Income taxes payable
    
    
    2,899
    
    
    
    1,690Current portion of long-term debt
    
    
    661
    
    
    
    1,058Total current liabilities
    
    
    49,323
    
    
    
    48,685Long-term debt
    
    
    8,545
    
    
    
    8,799Other liabilities
    
    
    2,960
    
    
    
    2,787Total liabilities
    
    
    60,828
    
    
    
    60,271Stockholders equity:Common stock,
$.001 par value; 100,000,000 shares authorized;
51,525,979 and 49,930,803 shares outstanding at
June 30,
2004 and December 31, 2003, respectively
    
    
    31
    
    
    
    29Additional paid-in capital
    
    
    225,916
    
    
    
    220,004Receivables from stockholders
    
    
    
    
    
    
    (1,056
    )Accumulated deficit
    
    
    (22,964
    )
    
    
    (11,307
    )Unearned deferred compensation
    
    
    (734
    )
    
    
    (600
    )Treasury stock, 290,211 shares (at cost)
    
    
    (2,773
    )
    
    
    (2,773
    )Total stockholders equity
    
    
    199,476
    
    
    
    204,297Total liabilities and stockholders equity
    
    $
    260,304
    
    
    $
    264,568
 The accompanying notes are
an integral part of the consolidated financial statements. 3




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HYPERCOM CORPORATION 
  Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net revenue
    
    $
    64,691
    
    
    $
    58,899
    
    
    $
    115,454
    
    
    $
    108,695Costs of revenue
    
    
    36,743
    
    
    
    34,979
    
    
    
    66,260
    
    
    
    64,855Provision for deferred
contract costs
    
    
    11,305
    
    
    
    
    
    
    
    11,305
    
    
    
    Gross profit
    
    
    16,643
    
    
    
    23,920
    
    
    
    37,889
    
    
    
    43,840Operating expenses:Research and development
    
    
    6,444
    
    
    
    6,422
    
    
    
    13,269
    
    
    
    12,235Selling, general and
administrative
    
    
    16,962
    
    
    
    14,708
    
    
    
    31,847
    
    
    
    29,763Total operating expenses
    
    
    23,406
    
    
    
    21,130
    
    
    
    45,116
    
    
    
    41,998Income (loss) from continuing operations
    
    
    (6,763
    )
    
    
    2,790
    
    
    
    (7,227
    )
    
    
    1,842Interest income
    
    
    221
    
    
    
    97
    
    
    
    494
    
    
    
    147Interest expense
    
    
    (445
    )
    
    
    (544
    )
    
    
    (936
    )
    
    
    (1,136
    )Other income (expense)
    
    
    2
    
    
    
    68
    
    
    
    20
    
    
    
    (89
    )Foreign currency loss
    
    
    (911
    )
    
    
    (483
    )
    
    
    (1,639
    )
    
    
    (946
    )Income (loss) before income taxes and
discontinued operations
    
    
    (7,896
    )
    
    
    1,928
    
    
    
    (9,288
    )
    
    
    (182
    )Provision for income taxes
    
    
    (1,540
    )
    
    
    (952
    )
    
    
    (2,369
    )
    
    
    (1,642
    )Income (loss) before discontinued operations
    
    
    (9,436
    )
    
    
    976
    
    
    
    (11,657
    )
    
    
    (1,824
    )Income (loss) from discontinued operations
(including $1.6 million loss on disposal in 2003)
    
    
    
    
    
    
    (484
    )
    
    
    
    
    
    
    286Net income (loss)
    
    $
    (9,436
    )
    
    $
    492
    
    
    $
    (11,657
    )
    
    $
    (1,538
    )Basic and diluted income (loss) per share:Income (loss) before discontinued operations
    
    $
    (0.18
    )
    
    $
    0.02
    
    
    $
    (0.23
    )
    
    $
    (0.04
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    0.01Basic and diluted income (loss) per share
    
    $
    (0.18
    )
    
    $
    0.01
    
    
    $
    (0.23
    )
    
    $
    (0.03
    )Weighted average common shares -
basic
    
    
    51,412
    
    
    
    48,829
    
    
    
    50,813
    
    
    
    48,438Weighted average common shares -
diluted
    
    
    51,412
    
    
    
    49,966
    
    
    
    50,813
    
    
    
    48,438
 The accompanying notes are an integral part of the consolidated financial statements. 4




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HYPERCOM CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 30,2004
    
    2003Cash flows from continuing operations:Net loss from continuing operations
    
    $
    (11,657
    )
    
    $
    (1,824
    )Adjustments to reconcile net loss from continuing
operations to net cash provided by operating activities:Amortization of deferred financing costs
    
    
    448
    
    
    
    448Depreciation/amortization
    
    
    4,246
    
    
    
    4,601Provision for bad debts
    
    
    661
    
    
    
    1,048Provision for long-term contract accounts receivable
    
    
    1,635
    
    
    
    Provision for deferred contract costs
    
    
    11,305
    
    
    
    Provision for losses on sales-type leases
    
    
    643
    
    
    
    314Provision for excess and obsolete inventory
    
    
    3,462
    
    
    
    2,014Noncash stock compensation
    
    
    227
    
    
    
    Foreign currency loss
    
    
    1,639
    
    
    
    946Changes in operating assets and liabilities, net
    
    
    (6,337
    )
    
    
    10,067Net cash provided by operating activities
    
    
    6,272
    
    
    
    17,614Cash flows from investing activities:Purchases of marketable securities
    
    
    (22,000
    )
    
    
    Proceeds from the sale or maturity of marketable securities
    
    
    7,500
    
    
    
    Purchase of property, plant, and equipment
    
    
    (2,925
    )
    
    
    (2,832
    )Acquisition of other assets
    
    
    (2,768
    )
    
    
    (709
    )Net cash used in investing activities
    
    
    (20,193
    )
    
    
    (3,541
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (621
    )
    
    
    (728
    )Proceeds from issuance of common stock
    
    
    5,553
    
    
    
    5,029Payments received on advances to stockholders
    
    
    1,056
    
    
    
    Advances from discontinued operations
    
    
    
    
    
    
    802Net cash provided by financing activities
    
    
    5,988
    
    
    
    5,103Effect of exchange rate changes on cash
    
    
    (110
    )
    
    
    412Net (decrease) increase in cash flows from continuing operations
    
    
    (8,043
    )
    
    
    19,588Net (decrease) increase in cash flows from discontinued operations
    
    
    (478
    )
    
    
    4,489Cash and cash equivalents, beginning of period
    
    
    65,415
    
    
    
    23,069Cash and cash equivalents, end of period
    
    $
    56,894
    
    
    $
    47,146The accompanying notes are an integral part of the consolidated financial
statements.
 5




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HYPERCOM CORPORATION 
 
 NOTE 1  BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Hypercom
Corporation (Hypercom or the Company) have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for
a fair presentation have been included. During the second quarter of 2004, the
Company recorded a nonrecurring charge to operations to fully reserve all
deferred contract costs and accounts receivable related to the Companys
contract with the Brazilian Health Ministry (see Note 7). Operating results
for the six months ended June 30, 2004, are not necessarily indicative of the
results to be expected for the year ending December 31, 2004. Certain prior year amounts have been reclassified to conform to the current
period presentation, including the results of operations and cash flows of the
Companys former direct finance lease subsidiary, Golden Eagle Leasing. This financial information is intended to be read in conjunction with
Hypercoms audited financial statements and footnotes thereto included in
Hypercoms Annual Report on Form 10-K for the year ended December 31, 2003. NOTE 2  STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) defines a fair value based method of accounting for
employee stock options or similar equity instruments. However, it also allows
an entity to continue to account for these plans according to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,(APB
25) and related interpretations, provided pro forma disclosures of net income
(loss) are made as if the fair value based method of accounting, defined by
SFAS 123, had been applied. The Company has elected to continue to measure compensation expense related to
employee stock options using the intrinsic value method prescribed by APB 25
and related interpretations. The following table represents the effect on net
income (loss) and income (loss) per share as if the Company had applied the
fair value method and the recognition provisions of SFAS 123 to stock based
employee compensation (amounts in thousands, except per share data): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    (9,436
    )
    
    $
    492
    
    
    $
    (11,657
    )
    
    $
    (1,538
    )Add: Stock-based employee compensation expense
included in reported net income (loss)
    
    
    127
    
    
    
    
    
    
    
    227
    
    
    
    Deduct: Total stock-based employee compensation expense
determined under fair value methods for all awards
    
    
    (697
    )
    
    
    (1,273
    )
    
    
    (1,421
    )
    
    
    (2,732
    )Pro forma net loss
    
    $
    (10,006
    )
    
    $
    (781
    )
    
    $
    (12,851
    )
    
    $
    (4,270
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.18
    )
    
    $
    0.01
    
    
    $
    (0.23
    )
    
    $
    (0.03
    )Basic and diluted, pro forma
    
    $
    (0.19
    )
    
    $
    (0.02
    )
    
    $
    (0.25
    )
    
    $
    (0.09
    )Weighted average shares used in pro forma computation:Basic and
diluted
    
    
    51,412
    
    
    
    48,829
    
    
    
    50,813
    
    
    
    48,438
 For
purposes of this pro forma disclosure, the value of the options is
estimated using a Black-Scholes option pricing model and amortized
ratably to expense over the options vesting periods. Because the
estimated value is determined as of the date of grant, the actual
value ultimately realized by the employee may be significantly
different. See Note 16 of the Companys Annual
Report on Form 10-K for the year ended December 31, 2003 for further discussion
of the Companys stock-based employee compensation. 6




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NOTE 3  INVENTORIES Inventories consist of the following (amounts in thousands): June 30, 2004
    
    December 31, 2003Purchased parts
    
    $
    19,842
    
    
    $
    17,990Work in progress
    
    
    4,228
    
    
    
    4,581Finished goods
    
    
    15,405
    
    
    
    19,691$
    39,475
    
    
    $
    42,262
 NOTE 4  RECEIVABLES FROM STOCKHOLDERS During March 2004, the Company received $1.1 million in cash from two former
principal stockholders to repay notes that came due. These notes were
historically reflected as a separate component of stockholders equity. NOTE 5  UNEARNED DEFERRED COMPENSATION In February 2004, the Company granted 60,000 shares of restricted common stock
to the Companys Chief Executive Officer under the 2000 Plan. The Company
recorded deferred compensation of $360,000, representing the market price of
the shares at the date of grant and a weighted-average fair value of $6.00 per
share. The deferred compensation is presented as a reduction of stockholders
equity and is being amortized ratably over the service period. The Company
expects to record compensation expense related to this stock grant of
approximately $27,000 per quarter through February 2007. Expense with respect
to the grants could be reduced and/or reversed if the Chief
Executive Officer leaves the Company prior to vesting in the award. NOTE 6  EQUITY TRANSACTIONS During April 2004, the Company issued 742,257 shares of common stock, par value
$0.001 per share, upon the conversion of 742,257 Series C Warrants at an
exercise price of $3.91 per share. Proceeds from the conversion amounted to
$2.9 million. During the second quarter of 2003, the Company issued 1,366,250 shares of its
common stock, par value $0.001 per share, upon the conversion of its Series A
Warrants (1,000,000 million shares at an exercise price of $3.19 per share) and
Series B Warrants (366,250 shares at an exercise price of $3.16 per share).
Proceeds from the conversions amounted to $4.3 million. Additional equity activity during the first half of 2004 and 2003 related to
the issuance of common stock under our Employee Stock Purchase Plan and stock
option plans. NOTE 7  BRAZILIAN HEALTH MINISTRY CONTRACT The Company has been involved in a long-term contract with the Brazilian Health
Ministry requiring substantial delivery of customized software and hardware.
Revenue and a resulting margin under this contract have been recorded based on
the achievement of contract milestones approved by the Brazilian Health
Ministry in accordance with Statement of Position 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. The
margin for the entire contract was estimated to be 9%. Inherent in this margin
was an expectation of realizing all amounts owed under the terms of the
original contract and recovering claims for additional contract revenue, due to
changes in the scope of the contract and additional currency exchange variation
adjustments. Scope changes involved expanding the overall design
specifications requiring additional hours and administration costs. The
currency adjustments represented the inflation of cost on imported equipment
caused by currency movements. At the end of 2003, the Company formally
presented a claim to the Brazilian Health Ministry detailing the amount and
nature of the scope changes and currency variation impact. While additional revenues above the original contract amount have not been
recorded, under the percentage-of-completion milestone approach, contract costs
associated with the scope changes and currency adjustments have been deferred
in anticipation of recognizing contract revenue. Deferred contract costs were
reported within other current assets and other long-term assets and treated as
normal costs of contract performance. Such costs amounted to $11.3 million as
of June 30, 2004. During April 2004, the final maintenance phase of the contract expired and the
Brazilian Health Ministry informed the Company of their intent to extend the
maintenance element of the contract. However, as of the end of the second quarter of
2004, no formal agreement had 7




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been entered into regarding the extension of the maintenance element of the
contract and no official authoritative answer had been received regarding the
pending claim. The Company believes that the delay in payment and extension of
the maintenance element of the contract relates to a recent on-going internal
scandal within the Brazilian Health Ministry, which in no way relates to the
Company or the Companys pending claim, but nevertheless, casts doubt and
concern over the ability to recover, timely, the amounts owed under the
contract. Accordingly, due to the lack of timely acknowledgement and
acceptance of the pending claim, the expiration of the contract during April
2004 and the delay in the negotiation of the extension of the maintenance
element of the contract, the Company recorded a $12.9 million charge to
operations during the second quarter of 2004 to fully reserve all remaining
amounts recorded under the contract. The charge consists of an $11.3 million
reserve against deferred contract costs, which was recorded in cost of revenues
and presented separately in the statement of operations, and a $1.6 million
reserve against accounts receivables, which was recorded in selling expense.
The Company is actively pursuing discussions with the Brazilian Health Ministry
regarding both the collection of the reserved balances as well as renewal of
the maintenance element of the contract, however, there is no certainty as to
how much will ultimately be collected or if the maintenance element of the
contract will ultimately be extended. NOTE 8  DISCONTINUED OPERATIONS The Companys discontinued operations include the results of operations of
certain under-performing operating units previously identified and reported as
discontinued operations together with the results of operations of the
Companys former direct finance lease subsidiary, Golden Eagle Leasing,
initially reported in discontinued operations during the third quarter of 2003.
All periods prior to the third quarter of 2003 have been reclassified to
present the operating results of Golden Eagle Leasing in discontinued
operations. Net revenues and pretax income (loss) of the operating units
classified as discontinued operations for the three and six months ended June
30, 2003 was $8.4 million and ($0.5) million, and $16.7 million and $0.3
million, respectively, which includes net revenue and pretax income of Golden
Eagle Leasing in the amount of $5.5 million and $2.0 million, and $11.4 million
and $3.7 million, respectively. During June 2003, the Company disposed of all the assets of Hypercom Horizon,
Inc., initially held for sale in September 2002, resulting in a loss on
disposal of $1.6 million comprised of $1.1 million in non-cash asset and
inventory write-downs, $0.4 million in one-time severance costs, and $0.1
million in remaining facility lease costs. NOTE 9  INCOME TAXES The Companys income tax expense is principally comprised of income taxes
associated with its profitable foreign locations. As discussed in the Companys 2003 Annual Report on Form 10-K, the Company has
recorded a full valuation reserve against its deferred tax asset balances
existing at December 31, 2003. Facts and circumstances have lead to the
Companys conclusion to continue to provide a full valuation reserve against
its deferred tax assets as of June 30, 2004. The valuation reserve is subject
to reversal in future years at such time that the benefits are actually
utilized or, the operating profits in the U.S. become sustainable at a level
that meets the recoverability criteria under SFAS 109. Due to the Companys net operating loss position and the provision of full
valuation reserves against the Companys deferred tax assets, the consolidated
effective tax rates for the first half of 2004 and 2003 are not meaningful. 8




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NOTE 10  EARNINGS PER SHARE DISCLOSURES The table below provides a reconciliation of the numerators and denominators of
the basic and diluted per-share computations for income (loss) before
discontinued operations (amounts in thousands, except per share data). Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Income (loss) before discontinued operations
    
    $
    (9,436
    )
    
    $
    976
    
    
    $
    (11,657
    )
    
    $
    (1,824
    )Weighted average shares of common stock
outstanding:Basic
    
    
    51,412
    
    
    
    48,829
    
    
    
    50,813
    
    
    
    48,438Effect of stock options and warrants
    
    
    
    
    
    
    1,137
    
    
    
    
    
    
    
    Diluted
    
    
    51,412
    
    
    
    49,966
    
    
    
    50,813
    
    
    
    48,438Income (loss) per share before discontinued
operationsBasic:
    
    $
    (0.18
    )
    
    $
    0.02
    
    
    $
    (0.23
    )
    
    $
    (0.04
    )Diluted:
    
    $
    (0.18
    )
    
    $
    0.02
    
    
    $
    (0.23
    )
    
    $
    (0.04
    )
 Weighted average shares
issuable upon the exercise of stock options and warrants which were
not included in the computation of diluted income (loss) per share
because they were anti-dilutive amounted to 9,798,300 and 10,360,623,
and 6,322,498 and 12,821,850, for the three and six months ended
June 30, 2004 and 2003, respectively. 9




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995. Words such
as believe, expect, intend, anticipate, estimate, project, and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. These forward-looking statements may include,
but are not limited to, projections of revenue or net income and issues that
may affect revenue or net income, projections of capital expenditures, future
levels of research and development expenditures, plans for future operations,
products or services, our ability to fund our projected liquidity and capital
requirements from our cash flow from operations and our current cash reserves,
and general economic conditions, as well as assumptions relating to the
foregoing. Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Statements in this Quarterly Report,
including the Notes to the Consolidated Financial Statements and Managements
Discussion and Analysis of Financial Condition and Results of Operations
describe factors, among others, that could contribute to or cause such
differences. Additional risk factors that could cause actual results to differ
materially from those expressed in such forward-looking statements, and that
could affect the Companys results of operations and financial position
generally, are set forth in Exhibit 99.1, which is attached hereto and
incorporated by reference into this Quarterly Report on Form 10-Q. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise. RESULTS OF CONTINUING OPERATIONS The results of continuing operations exclude the operations of the operating
units being reported as discontinued operations (see Note 8 to the financial
statements). NET REVENUE Net revenue increased $5.8 million or 9.8% and $6.8 million or 6.3% to $64.7
million and $115.5 million for the three and six months ended June 30, 2004,
respectively, from $58.9 million and $108.7 million for the three and six
months ended June 30, 2003, respectively. The year over year increase is
principally attributable to additional product sales in our European region as
well as incremental service revenues reflective of additional equipment
installations performed by our NetSet service business in Brazil when compared
to the same periods a year ago. COST OF REVENUE Cost of revenue includes the cost of raw materials, manufacturing labor,
overhead and subcontracted manufacturing costs, as well as loan loss provisions
with respect to sales-type leases. During the second quarter, costs of revenue
increased $1.8 million to $36.7 million in the second quarter 2004. On a year
to date basis, cost of revenues increased $1.4 million to $66.3 million for the
six months ended June 30, 2004. Cost of revenues as a percent of revenues
declined to 56.7% and 57.4% from 59.4% and 59.7% for the three and six months
ended June 30, 2004 and 2003, respectively. The decrease in cost of revenue as
a percent of revenues was principally the result of manufacturing efficiencies
attributable to lower negotiated raw material component prices, engineered
hardware cost reductions, as well as greater absorption of fixed overhead
expenses given higher current year revenues. Future component prices are
subject to supply and demand in the worldwide economy and therefore, cannot be
easily predicted. PROVISION FOR DEFERRED CONTRACT COSTS During the second quarter 2004, we recorded an $11.3 million charge to cost of
revenue to reserve all costs previously deferred under our long-term contract
with the Brazilian Health Ministry (see Note 7). Our decision to record the
provision was principally due to the lack of timely acknowledgement and
acceptance of the pending claim, the expiration of the contract during April
2004 and the delay in the negotiation of the extension of the maintenance
element of the contract. We believe the delay is due to an on-going
internal scandal within the Brazilian Health Ministry, which in no way relates
to Hypercom or our pending claim, but nevertheless, casts doubt and concern
over the ability to recover, timely, the amounts owed under the contract. We
are actively pursuing discussions with the Brazilian Health Ministry regarding
both the collection of the reserved contract costs as well as renewal of the
maintenance element of the contract, however, there is no certainty as to how
much will ultimately be collected or that the maintenance will ultimately be
extended. 10




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GROSS PROFIT Gross profit as a percent of revenue declined to 25.7% and 32.8% from 40.6%
and 40.3% for the three and six months ended June 30, 2003 and 2004,
respectively. The decline in gross profit as a percent of revenue is related
to the provision recorded to reserve all costs previously deferred under our
contract with the Brazilian Health Ministry. Excluding the contract provision,
gross profit as a percent of revenue increased to 43.2% and 42.6% for the
three and six months ended June 30, 2004. These increases are principally due
to favorable raw material component prices, engineered hardware cost
reductions, and greater absorption of fixed overhead expenses given higher
current year revenues. RESEARCH AND DEVELOPMENT Research and development expenses consist mainly of software and hardware
engineering costs and the cost of development personnel. Research and
development expenses for the three months ended June 30, 2004 and 2003 remained
flat at $6.4 million. On a year to date basis, research and development
expense increased $1.1 million or 9.0% to $13.3 million for the first half of
2004. The year to date increase in research and development spending is
reflective of new products launched during the first half of 2004 including
several new terminals under our Optimum product family and an internet protocol
(IP) enabling device, IN-tact, that converts existing Hypercom terminals
into faster IP-enabled card payment terminals. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Sales and marketing expenses, administrative personnel costs, and facilities
operations make up the selling, general and administrative expenses. These
expenses totaled $17.0 million and $31.8 million for the three and six months
ended June 30, 2004, compared to $14.7 million and $29.8 million for the three
and six months in the prior year. This $2.3 million or 15.6% and $2.0 million
or 6.7% increase for the three and six months ended June 30, 2004 principally
relates to a $1.6 million charge incurred during the second quarter of 2004 to
reserve all outstanding account receivable balances with the Brazilian Health
Ministry (see Note 7). We are actively pursuing discussions with the
Brazilian Health Ministry regarding the collection of the receivables however,
there is no certainty as to how much will ultimately be collected. Excluding
the reserve against the Brazilian Health Ministry accounts receivable, Selling,
General and Administrative Expense increased $0.7 million or 4.8% and $0.4
million or 1.3% for the three and six months ended June 30, 2004. This
increase is principally related to additional costs incurred to
support our increase in sales during the first half of 2004. INCOME (LOSS) FROM CONTINUING OPERATIONS Our loss from continuing operations for the three and six months ended June 30,
2004 increased $9.6 million and $9.0 million to a loss of $6.8 million and $7.2
million compared to income of $2.8 million and a $1.8 million in the same
periods a year ago. This decrease in operating income is principally the result
of a $12.9 million charge recorded during the second quarter of 2004 to fully
reserve all deferred contract costs and accounts receivable recorded under our Brazilian
Health Ministry contract (see Note 7). INTEREST EXPENSE, FOREIGN CURRENCY LOSSES, AND INCOME TAXES We incurred interest expense of $0.4 million and $0.9 million for the three and
six months ended June 30, 2004 compared to $0.5 million and $1.1 million for
the three and six months ended June 30, 2003. The decline in interest expense
is primarily due to the continued decline in our long-term debt and reduced
fees under our Senior Secured Credit Facility, which was amended effective
December 31, 2003. Interest expense is comprised of interest on long-term
borrowings and the amortization of debt issuance costs. Foreign currency loss
for the three and six months ended June 30, 2004 and 2003 was $0.9 million and
$1.6 million, and $0.5 million and $0.9 million, respectively. The increase in
foreign currency loss is principally related to additional hedging fees and
premiums associated with our hedging program as well as additional
transactional costs incurred during the first half of 2004 than in the same
period a year ago. Income tax expense before discontinued operations for federal, state and
foreign taxes was $1.5 million and $1.0 million for the three months ended June
30, 2004 and 2003, respectively, and $2.4 million and $1.6 million for the six
months ended June 30, 2004 and 2003, respectively. The income tax expense is
principally comprised of income taxes associated with our profitable foreign
locations. As discussed in our 2003 Annual Report on Form 10-K, we recorded a full
valuation reserve against our deferred tax asset balance existing at December
31, 2003. Facts and circumstances have lead to our conclusion to continue to
provide a full valuation reserve against our deferred tax assets as of June 30,
2004. The valuation reserve is subject to reversal in future years at such
time that the benefits are actually utilized or, the operating profits in the
U.S. become sustainable at a level that meets the recoverability criteria 11




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under SFAS 109. Due to our net operating loss position and our provision for a full valuation
reserve against our deferred tax assets, the consolidated effective tax rates
for the first half of 2004 and 2003 are not meaningful. CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations primarily through cash generated
from operations and from borrowings under a line of credit and/or other debt
facilities. Cash provided by continuing operations for the six months ended June 30, 2004
was $6.3 million compared to $17.6 million for the six months ended June 30,
2003. The year over year substantial decline is principally due to the receipt
of a $9.1 million income tax refund related to a U.S. net operating loss
carryback claim filed during the first quarter of 2003 combined with positive
cash flow resulting from declining inventory balances coming out of 2002 into
2003. Inventory balances have since stabilized and remain at sufficient levels
to support our core products. Other year over year changes in operating assets
and liabilities reflect normal variations in the customer collection and vendor
payment process. Cash used in investing activities increased $16.7 million to $20.2 million for
the six months ended June 30, 2004 from $3.5 million for the six months ended
June 30, 2003. The increase in cash used in investing activities is primarily
related to the investment of surplus cash in marketable securities. Capital
expenditures remained flat on a year over year basis. Capital expenditures for
the first half of 2004 were principally for upgrades to computer software and
hardware as well as manufacturing related expenditures related to new products
recently launched. Capital expenditures are expected to rise during the second
half of 2004, to approximately $4.0 million, principally due to the expansion
of our manufacturing facilities in China. Cash provided by financing activities increased $0.9 million from $5.1 million
in the first half of 2003 to $6.0 million in the first half of 2004. This
increase was principally the result of cash proceeds from the exercise of stock
options and warrants of $5.6 million in the six months
ended June 30, 2004 compared to $5.0 million in the same
period a year ago. In addition the Company received $1.1 million in cash from two former principal shareholders to
repay notes which came due during the first quarter of 2004. Long-term debt
decreased $0.7 million to $9.2 million at June 30, 2004, from $9.9 million at
December 31, 2003. At June 30, 2004, working capital and cash and cash
equivalents was $154.2 million and $56.9 million, respectively, compared to
$155.0 and $65.4 million, respectively, at December 31, 2003. During April 2004, the Company issued 742,257 shares of common stock, par value
$0.001 per share, upon the conversion of 742,257 Series C Warrants at an
exercise price of $3.91 per share. During the second quarter of 2003,
the Company issued 1,366,250 shares of its common stock, par
value $0.001 per share, upon the conversion of its Series A
Warrants (1,000,000 million shares at an exercise price of
$3.19 per share) and Series B Warrants (366,250 shares
at an exercise price of $3.16 per share). Proceeds from the
conversions amounted to $2.9 million and $4.3 million for
the six months ended June 30, 2004 and 2003, respectively. We continue to accelerate cash generation through aggressively pursuing
collection of trade receivables and sales-type lease receivables, maintaining
inventories and controlling expenses. We believe our cash flow from operations,
together with our current cash reserves, will be sufficient to fund our
projected liquidity and capital resource requirements through 2004. If
operating results are unfavorable we may need to use additional capital sources
to meet our short-term liquidity and capital resource requirements. In August 2003, the Board of Directors approved a stock repurchase program of
up to $10 million of our common stock from time to time when warranted by
market conditions. As of the end of fiscal 2003, the Company had repurchased
60,000 shares of common stock at an average price per share of $4.50. There
were no purchases made under this program during the first half of 2004. BACKLOG As of June 30, 2004, we had backlog of $51.8 million, compared to $83.3 million
at June 30, 2003. The decrease in backlog is primarily related to the timing
associated with the renewal of contracts with major customers in the U.S. and a
general trend towards purchase commitments with shorter delivery schedules. We include in backlog all revenue specified in signed contracts and purchase
orders to the extent that we contemplate recognition of the related revenue
within one year. There can be no assurance that the contracts included in
backlog will actually generate the specified revenues or that the actual
revenues will be generated within the one-year period. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk At June 30, 2004, our cash equivalent investments were primarily in money
market accounts and certificates of deposit and were reflected as cash
equivalents because all maturities were within 90 days. Our interest rate risk
with respect to existing investments is limited due to the short-term duration
of these arrangements and the yields earned which approximate current interest
rates. Our marketable securities, consisting of fixed income securities, were $31.9
million as of June 30, 2004. These securities, like all fixed 12




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income instruments, are subject to interest rate risk and will decline in value
if market interest rates increase. If market rates were to increase immediately
and uniformly by 10% from the levels of June 30, 2004 the decline in the fair
value of our investment portfolio would not be material given that our
investments typically have interest rate reset features that regularly adjust
to current market rates. Additionally, we have the ability to hold our fixed
income investments until maturity and, therefore, we would not expect to
recognize any material adverse impact in income or cash flows. We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates in connection with our foreign operations
and markets. Nevertheless, the fair value of our investment portfolio or
related income would not be significantly impacted by either a 100 basis point
increase or decrease in interest rates, due primarily to the short-term nature
of the major portion of our investment portfolio. A substantial portion of our revenue and capital spending is transacted in U.S.
dollars. However, we do at times enter into these transactions in other
currencies, such as the Hong Kong dollar, Australian dollar, Brazilian real,
British pound and other Asian and European currencies. As a policy, we hedge
the translation of our net investment in foreign subsidiaries in an attempt to
neutralize the effect of translation gains or losses in the statement of
operations. Financial hedging instruments are limited by Company policy to
foreign-currency forward or option contracts and foreign-currency debt. We
enter into forward or option contracts with our bank or other financial
institutions to accomplish our hedging strategy. At June 30, 2004, we had
foreign currency forward contracts outstanding in the amount of $29.5 million,
denominated principally in the Brazilian real and British pound. Gains and
losses on these contracts principally consist of mark-to-market adjustments,
recorded in earnings as foreign currency gains or losses. We do not purchase or hold any derivative financial instruments for the purpose
of speculation or arbitrage. See information/discussion appearing in subcaption
Risks Associated with International Operations and Foreign Currency
Fluctuations of CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND
RISK FACTORS set forth in Exhibit 99.1, attached hereto. At present, we have $9.2 million in debt obligations and there are no
borrowings under our line of credit facility at June 30, 2004. As such, our
interest rate risk is limited with respect to existing debt. During the normal course of business we are routinely subjected to a variety of
market risks, examples of which include, but are not limited to, interest rate
movements and foreign currency fluctuations, as we discuss in this Item 3, and
collectability of accounts receivable. We continuously assess these risks and
have established policies and procedures to protect against the adverse effects
of these and other potential exposures. Although we do not anticipate any
material losses in these risk areas, no assurance can be made that material
losses will not be incurred in these areas in the future. 
 Item 4. Controls and Procedures Management conducted an evaluation, under the supervision and with the
participation of the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are sufficient and operating effectively. In
addition, Hypercom management, including the Companys Chief Executive Officer
and Chief Financial Officer, reviewed our internal controls, and there have
been no significant changes in the Companys internal controls or in other
factors that could significantly affect those controls. 
 PART II  OTHER INFORMATION 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities In August 2003, the Board of Directors approved a stock repurchase program of
up to $10 million of our common stock from time to time when warranted by
market conditions. As of the end of fiscal 2003, the Company had repurchased
60,000 shares of common stock at an average price per share of $4.50. There
were no purchases made under this program during the first half of 2004. 13




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Item 4. Submission of Matters to a Vote of Security Holders. (a) On May 19, 2004, the Company held its Annual Meeting of Stockholders at
which the following matters were voted upon: (b) Election of Directors. Both nominees for election as Class I Directors
were unopposed and elected as follows: Director
    
    Shares For
    
    Shares WithheldDaniel Diethelm
    
    
    43,853,179
    
    
    
    783,297Norman Stout
    
    
    43,853,179
    
    
    
    783,297
 The terms of the Class II Directors (Christopher S. Alexander, William Keiper
and Jock Patton) expire in 2005. 
 Item 6. Exhibits and Reports on Form 8-K a) 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
    
    
    Amended and Restated Bylaws of Hypercom Corporation (incorporated by
reference to Exhibit 3.2 to Hypercom Corporations Quarterly Report on Form
10-Q for the quarter ended September 30, 2002)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 *32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*99.1
    
    
    Cautionary Statement Regarding Forward-Looking Statements and Risk Factors *
 * Filed herewith. (b) Reports on Form 8-K. The Company filed the following reports on Form 8-K during the quarter
ended June 30, 2004:  a)
    
    Form 8-K dated April 30, 2004, furnishing under Item 12, the Companys
press release, dated April 30, 2004, announcing the Companys results
of operations for the quarter ended March 31, 2004. 14




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. HYPERCOM CORPORATIONDate: August 9, 2004
    
    By: /s/ John W. SmolakJohn W. Smolak
Executive Vice President and Chief Financial and
Administrative Officer (duly authorized officer and
Principal Financial Officer)
 15




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EXHIBIT INDEX 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
    
    
    Amended and Restated Bylaws of Hypercom Corporation (incorporated by
reference to Exhibit 3.2 to Hypercom Corporations Quarterly Report on Form
10-Q for the quarter ended September 30, 2002)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 *32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*99.1
    
    
    Cautionary Statement Regarding Forward-Looking Statements and Risk Factors *
 * Filed herewith. 16