##### 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: March 31, 2005. 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 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    86-0828608
(I.R.S. Employer
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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o Number of shares of the registrants common stock, $.001 par value per share, outstanding as of May
3, 2005, was 52,593,428.




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INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial StatementsConsolidated Balance
Sheets  March 31, 2005 and December 31, 2004
    
    
    3Consolidated
Statements of Operations  Three months ended March 31, 2005 and 2004, as restated
    
    
    4Consolidated
Statements of Cash Flows  Three months ended March 31, 2005 and 2004, as restated
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4.
    
    Controls and Procedures
    
    
    14PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    14Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    14Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    15SIGNATURES
    
    
    16EXHIBIT INDEX
    
    
    17EXHIBIT 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
 March 31, 2005
    
    
    December 31,(unaudited)
    
    
    2004(Amounts in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,546
    
    
    $
    23,445Marketable securities
    
    
    70,052
    
    
    
    69,962Accounts receivable, net of allowance for doubtful
accounts of $2,011 and $2,390, respectively
    
    
    40,928
    
    
    
    59,776Current portion of net investment in sales-type leases
    
    
    7,696
    
    
    
    9,441Inventories
    
    
    48,212
    
    
    
    44,455Prepaid expenses and other current assets
    
    
    8,133
    
    
    
    12,955Total current assets
    
    
    203,567
    
    
    
    220,034Property, plant and equipment, net
    
    
    29,650
    
    
    
    29,920Net investment in sales-type leases
    
    
    17,725
    
    
    
    17,668Intangible assets, net
    
    
    4,347
    
    
    
    4,475Other long-term assets
    
    
    4,860
    
    
    
    5,163Total assets
    
    $
    260,149
    
    
    $
    277,260LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    21,255
    
    
    $
    27,817Accrued payroll and related expenses
    
    
    9,001
    
    
    
    8,679Accrued sales and other taxes
    
    
    9,298
    
    
    
    8,792Accrued liabilities
    
    
    7,375
    
    
    
    8,308Deferred revenue
    
    
    2,516
    
    
    
    2,768Income taxes payable
    
    
    1,557
    
    
    
    3,411Current portion of long-term debt
    
    
    388
    
    
    
    470Total current liabilities
    
    
    51,390
    
    
    
    60,245Long-term debt
    
    
    8,263
    
    
    
    8,359Other long-term liabilities
    
    
    3,797
    
    
    
    3,284Total liabilities
    
    
    63,450
    
    
    
    71,888Stockholders equity:Common stock, $.001 par value; 100,000,000 shares authorized;
52,463,714 and 52,254,935 shares outstanding at March 31,
2005 and December 31, 2004, respectively
    
    
    52
    
    
    
    52Additional paid-in capital
    
    
    229,195
    
    
    
    228,567Accumulated deficit
    
    
    (29,609
    )
    
    
    (19,969
    )Unearned deferred compensation
    
    
    (166
    )
    
    
    (505
    )Treasury stock, 290,211 shares (at cost)
    
    
    (2,773
    )
    
    
    (2,773
    )Total stockholders equity
    
    
    196,699
    
    
    
    205,372Total liabilities and stockholders equity
    
    $
    260,149
    
    
    $
    277,260
 The accompanying notes are an integral part of the consolidated financial statements. 3




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HYPERCOM CORPORATION 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended March 31,2005
    
    
    2004(Amounts in thousands, except share data)
    
    
    
    (Restated)Net revenue:Product and other
    
    $
    47,752
    
    
    $
    43,531Services
    
    
    6,779
    
    
    
    6,111Total net revenue
    
    
    54,531
    
    
    
    49,642Costs of revenue:Product and other
    
    
    30,685
    
    
    
    24,601Services
    
    
    5,287
    
    
    
    4,543Total costs of revenue
    
    
    35,972
    
    
    
    29,144Gross profit
    
    
    18,559
    
    
    
    20,498Operating expenses:Research and development
    
    
    7,258
    
    
    
    6,825Selling, general and administrative
    
    
    20,603
    
    
    
    14,885Total operating expenses
    
    
    27,861
    
    
    
    21,710Operating
loss
    
    
    (9,302
    )
    
    
    (1,212
    )Interest income
    
    
    557
    
    
    
    273Interest expense
    
    
    (174
    )
    
    
    (491
    )Other income (expense)
    
    
    (45
    )
    
    
    18Foreign currency loss
    
    
    (270
    )
    
    
    (732
    )Loss from
continuing operations before income taxes
    
    
    (9,234
    )
    
    
    (2,144
    )Provision for income taxes
    
    
    (805
    )
    
    
    (829
    )Loss from
continuing operations
    
    
    (10,039
    )
    
    
    (2,973
    )Income from discontinued operations
    
    
    399
    
    
    
    Net loss
    
    $
    (9,640
    )
    
    $
    (2,973
    )Basic and
diluted (loss) income per share:Loss from
continuing operations
    
    $
    (0.19
    )
    
    $
    (0.06
    )Income from discontinued operations
    
    
    0.01
    
    
    
    Basic and diluted loss per share
    
    $
    (0.18
    )
    
    $
    (0.06
    )Basic and diluted weighted average common shares
    
    
    52,391,115
    
    
    
    50,213,423
 The accompanying notes are an integral part of the consolidated financial statements. 4




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HYPERCOM CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months Ended March 31,2005
    
    
    2004(Amounts in thousands)
    
    
    
    
    
    (Restated)Cash flows from continuing operations:Net loss from continuing operations
    
    $
    (10,039
    )
    
    $
    (2,973
    )Adjustments to reconcile net loss from continuing operations
to net cash provided by operating activities:Depreciation/amortization
    
    
    2,074
    
    
    
    2,166Amortization of deferred financing costs
    
    
    4
    
    
    
    224Provision for bad debts
    
    
    474
    
    
    
    194Provision for losses on sales-type leases
    
    
    1,061
    
    
    
    56Write-down of excess and obsolete inventory
    
    
    2,656
    
    
    
    1,231Provision
for warranty and other product charges
    
    
    1,026
    
    
    
    75Noncash stock compensation
    
    
    215
    
    
    
    100Foreign currency loss (gain)
    
    
    335
    
    
    
    (496
    )Other
non-cash adjustments
    
    
    269
    
    
    
    Changes in operating assets and liabilities, net
    
    
    8,210
    
    
    
    1,614Net cash provided by operating activities
    
    
    6,285
    
    
    
    2,191Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (1,281
    )
    
    
    (1,489
    )Software development costs capitalized
    
    
    (468
    )
    
    
    (856
    )Purchase of marketable securities
    
    
    (32,318
    )
    
    
    (6,000
    )Proceeds from the sale or maturity of marketable securities
    
    
    32,400
    
    
    
    2,500Net cash used in investing activities
    
    
    (1,667
    )
    
    
    (5,845
    )Cash flows from financing activities:Repayments of bank notes payable and other debt instruments
    
    
    (161
    )
    
    
    (313
    )Proceeds from issuance of common stock
    
    
    752
    
    
    
    2,168Repayment of advances to stockholders
    
    
    
    
    
    
    1,056Net cash provided by financing activities
    
    
    591
    
    
    
    2,911Effect of exchange rate changes on cash
    
    
    (76
    )
    
    
    (24
    )Net increase (decrease) in cash flows from continuing operations
    
    
    5,133
    
    
    
    (767
    )Net decrease in cash flows from discontinued operations
    
    
    (32
    )
    
    
    (358
    )Cash and cash equivalents, beginning of period
    
    
    23,445
    
    
    
    65,415Cash and cash equivalents, end of period
    
    $
    28,546
    
    
    $
    64,290
 The accompanying notes are an integral part of the consolidated financial statements. 5




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HYPERCOM CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 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. Operating results for
the three months ended March 31, 2005, are not necessarily indicative of the results to be expected
for the year ending December 31, 2005. 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, 2004. Reclassification and
Restatement Certain prior year amounts have been reclassified to conform to the current period presentation. During the fourth quarter of
2004, the Company determined that certain leases originated during
the first three quarters of 2004 were incorrectly accounted for as
sales-type leases, rather than operating leases. This accounting
error, which relates to approximately 3,200 leases, resulted in an
overstatement of net revenue and net operating profit for the first
three quarters of 2004. Accordingly, the quarterly results for
March 31, 2004 have been restated to properly account for the
leases as operating leases. The following table reflects
the effect of certain reclassifications and the restatement on the Consolidated Statement of
Operations and Statement of Cash Flows for the three months ended
March 31, 2004 (in thousands). As PreviouslyReported
    
    
As
RestatedSelected
Statement of Operations Data:Net revenue
    
    $
    50,763
    
    
    $
    49,642Cost of
revenue
    
    
    29,517
    
    
    
    29,144Gross profit
    
    
    21,246
    
    
    
    20,498Foreign
currency loss
    
    
    (728
    )
    
    
    (732
    )Selected
Statement of Cash Flows Data:Net loss
from continuing operations
    
    $
    (2,221
    )
    
    $
    (2,973
    )Depreciation
and amortization
    
    
    2,159
    
    
    
    2,166Foreign
currency loss (gain)
    
    
    728
    
    
    
    (496
    )Changes in
operating assets and liabilities, net
    
    
    (730
    )
    
    
    1,614Net cash
provided by operating activities
    
    
    1,975
    
    
    
    2,191Purchase of
property, plant and equipment
    
    
    (1,273
    )
    
    
    (1,489
    )Net cash
used in investing activities
    
    
    (5,629
    )
    
    
    (5,845
    )
 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, and as a
result, no compensation expense is recognized for stock options granted at 100% of the market value
of the Companys stock at the date of grant. The following table represents the effect on net loss
and 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 March 31,2005
    
    
    2004(Restated)Net loss, as reported
    
    $
    (9,640
    )
    
    $
    (2,973
    )Add: Stock-based employee compensation expense included
in reported net loss
    
    
    215
    
    
    
    100Deduct:
Total stock-based employee compensation benefit (expense)
determined under fair value methods for all awards(a)
    
    
    1,003
    
    
    
    (724
    )Pro forma net loss
    
    $
    (8,422
    )
    
    $
    (3,597
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.18
    )
    
    $
    (0.06
    )Basic and diluted, pro forma
    
    $
    (0.16
    )
    
    $
    (0.07
    )Weighted average shares used in pro forma computation:Basic and diluted
    
    
    52,391,115
    
    
    
    50,213,423
 (a)  During the
first quarter of 2005, certain stock options were forfeited.
In accordance with SFAS 123, employee compensation expense
previously included in the pro forma disclosure related the
forfeited options was reversed. 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 14 of the Companys
Annual Report on Form 10-K for the year ended December 31, 2004 for further discussion of the
Companys stock-based employee compensation. In December 2004, the FASB issued SFAS 123(Revised), Share-Based Payment, which replaces SFAS 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. On April 14, 2005, the Securities and Exchange Commission adopted a new rule
that amends the compliance dates for SFAS 123(Revised). Under the new
rule, the Company is required to adopt SFAS 123 (Revised) for the
three-month period commencing January 1, 2006. SFAS
123(Revised) requires all share-based 6




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payments to employees, including grants of employee stock
options, be recognized as compensation cost in the financial statements based on their fair values.
As such, reporting employee stock options under the intrinsic value-based method prescribed by APB
25 will no longer be allowed. The Company has historically elected to use the intrinsic value
method and has not recognized expense for employee stock options granted. The Company plans to
adopt SFAS 123(Revised) on January 1, 2006 on a prospective basis. Upon adoption, all future
employee stock option grants plus the balance of the non-vested grants awarded prior to January 1,
2006, will be expensed over the stock option vesting period based on the fair value at the date the
options are granted. The Company estimates that the impact of adoption in 2006 will be an
additional expense of approximately $0.4 million after tax for employee stock options granted prior
to March 31, 2005. The Company also has an Employee Stock Purchase Plan (ESPP) that provides a
discount of 15% from the market price and an option to purchase the shares each quarter at the
lower of the stock price at the beginning of the quarter or the end of the quarter. Under the
provisions of SFAS 123(Revised), the discount and option provisions under the ESPP are considered
compensatory. The Company believes the incremental compensation cost required by SFAS 123(Revised)
for the ESSP will not be material to its operating results. NOTE 3  INVENTORIES Inventories consist of the following (amounts in thousands): March 31, 2005
    
    
    December 31, 2004Purchased parts
    
    $
    21,795
    
    
    $
    21,083Work in progress
    
    
    3,490
    
    
    
    5,134Finished goods
    
    
    22,927
    
    
    
    18,238$
    48,212
    
    
    $
    44,455
 NOTE 4  POTENTIALLY
DILUTIVE SECURITIES Options and warrants that
could potentially dilute income (loss) per share in the future that
were not included in the computation of diluted loss per share
because they were anti-dilutive amounted to
6,805,942
and 10,556,009 for March 31, 2005 and March 31, 2004,
respectively. NOTE 5  EQUITY TRANSACTIONS During March 2005, the
Company granted 50,000 shares of restricted common stock to its
Interim Chief Executive Officer. Although the restricted common stock
can not be sold for a period of one year from the grant date, the
stock was 100% vested on the grant date. Under the terms of the
agreement, the Interim Chief Executive Officer had no other
performance criteria to meet in order to earn the stock. Accordingly, the Company
recorded compensation expense of $0.2 million representing the
fair market value of the shares at the date of grant. During March 2005, the
Company recorded a reduction of compensation expense of
$0.1 million and unearned deferred compensation of $0.3 million due
to the cancellation of 60,000 shares of restricted common stock
issued to the Companys former Chief Executive Officer prior to
vesting. Additional equity activity during the three months ended March 31, 2005 and March 31, 2004 relate
to the issuance of common stock under the Companys Employee Stock Purchase Plan and stock option
plans. NOTE 6  INCOME TAXES Income tax expense before discontinued operations for federal, state and foreign taxes was $0.8
million for both the three months ended March 31, 2005 and 2004. Income tax expense is principally
comprised of income taxes associated with the Companys profitable foreign locations. As discussed in the
Companys 2004 Annual Report on Form 10-K, the Company has a full
valuation reserve against its deferred tax asset balance existing at
December 31, 2004. The Company continues to provide a full valuation reserve
against its deferred tax assets as of March 31, 2005. 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 its provision for a full valuation reserve
against its deferred tax assets, the consolidated effective tax rates for the three months ended
March 31, 2005 and 2004 are not meaningful. NOTE 7  DISCONTINUED OPERATIONS During the three months ended March 31, 2005, the Company recorded income from discontinued
operations of $0.4 million principally relating to the release of excess reserves no longer
required due to the expiration of the indemnification period under a prior purchase and sales
agreement. 7




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NOTE 8  COMMITMENTS AND CONTINGENCIES In connection with the restatement of the Companys quarterly results for the first three quarters
of 2004 (Notes 2 and 19 of the Companys Annual Report on Form
10-K for the year ended December 31, 2004), the Company, its former chief
executive officer, and its former chief financial officer have been named as defendants in several
purported shareholder class action lawsuits and, along with the Board of Directors, in two
shareholder derivative lawsuits. The Company and members of management intend to vigorously defend
the suits and any additional suits that may be filed. While the Company has tendered the defense
of these suits to its insurance carrier, its policies provide for substantial retentions, and
therefore the cost of defending the suits may affect its net income and cash flows in future
periods. In addition, there can be no assurance that the Company will be successful in its defense
of these suits, or that the carrier will ultimately provide coverage for the defendants. The Company is subject to legal proceedings and claims, which have arisen in the ordinary course of
its business. Although there can be no assurance as to the ultimate disposition of these matters
and the proceedings disclosed above, it is the opinion of the Companys management, based upon the
information available at this time, that the expected outcome of these matters, individually or in
the aggregate, will not have a material adverse effect on the Companys results of operations or
financial condition. 8




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING
STATEMENTS 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. CRITICAL ACCOUNTING
POLICIES AND ESTIMATES Our discussion of financial
condition and results of operations relies on our consolidated
financial statements that are prepared based on certain critical
accounting policies that require management to make judgments and
estimates that are subject to varying degrees of uncertainty. We
believe that investors need to be aware of these policies and how
they impact our financial statements as a whole, as well as our
related discussion and analysis presented herein. While we believe
that these accounting policies are based on sound measurement
criteria, actual future events can and often do result in outcomes
that can be materially different from these estimates or forecasts.
The accounting policies and related risks described in our annual
report on Form 10-K as filed with the Securities and Exchange
Commission on March 16, 2005 are those that depend most heavily
on these judgments and estimates. As of May 10, 2005, there have
been no material changes to any of the critical accounting policies
contained therein. RESULTS OF OPERATIONS Three Months Ended March 31,% of
    
    
    
    
    
    
    % of
    
    
    Increase(Dollars in thousands, except per share data)
    
    2005
    
    
    Revenue
    
    

2004(a)
    
    
    Revenue
    
    
    (Decrease)(Restated)Net revenue:Product and other
    
    $
    47,752
    
    
    
    87.6
    %
    
    $
    43,531
    
    
    
    87.7
    %
    
    $
    4,221Services
    
    
    6,779
    
    
    
    12.4
    %
    
    
    6,111
    
    
    
    12.3
    %
    
    
    668Total net revenue
    
    
    54,531
    
    
    
    100.0
    %
    
    
    49,642
    
    
    
    100.0
    %
    
    
    4,889Costs of revenue:Product and other
    
    
    30,685
    
    
    
    64.3
    %
    
    
    24,601
    
    
    
    56.5
    %
    
    
    6,084Services
    
    
    5,287
    
    
    
    78.0
    %
    
    
    4,543
    
    
    
    74.3
    %
    
    
    744Total costs of revenue
    
    
    35,972
    
    
    
    66.0
    %
    
    
    29,144
    
    
    
    58.7
    %
    
    
    6,828Gross profit
    
    
    18,559
    
    
    
    34.0
    %
    
    
    20,498
    
    
    
    41.3
    %
    
    
    (1,939
    )Operating
expenses:Research and development
    
    
    7,258
    
    
    
    13.3
    %
    
    
    6,825
    
    
    
    13.7
    %
    
    
    433Selling, general and administrative
    
    
    20,603
    
    
    
    37.8
    %
    
    
    14,885
    
    
    
    30.0
    %
    
    
    5,718Total
operating expenses
    
    
    27,861
    
    
    
    51.1
    %
    
    
    21,710
    
    
    
    43.7
    %
    
    
    6,151Operating
loss
    
    
    (9,302
    )
    
    
    -17.1
    %
    
    
    (1,212
    )
    
    
    -2.4
    %
    
    
    (8,090
    )Non-operating income (expenses)
    
    
    68
    
    
    
    0.1
    %
    
    
    (932
    )
    
    
    -1.9
    %
    
    
    1,000Loss from
continuing operations before income taxes
    
    
    (9,234
    )
    
    
    -16.9
    %
    
    
    (2,144
    )
    
    
    -4.3
    %
    
    
    (7,090
    )Provision for income taxes
    
    
    (805
    )
    
    
    -1.5
    %
    
    
    (829
    )
    
    
    -1.7
    %
    
    
    24Loss from
continuing operations
    
    
    (10,039
    )
    
    
    -18.4
    %
    
    
    (2,973
    )
    
    
    -6.0
    %
    
    
    (7,066
    )Income from discontinued operations
    
    
    399
    
    
    
    0.7
    %
    
    
    
    
    
    
    0.0
    %
    
    
    399Net loss
    
    $
    (9,640
    )
    
    
    -17.7
    %
    
    $
    (2,973
    )
    
    
    -6.0
    %
    
    $
    (6,667
    )Loss per
basic and diluted share
    
    $
    (0.18
    )
    
    
    
    
    
    $
    (0.06
    )
    
    
    
    
    
    $
    (0.12
    )
 9




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##### Table of Contents



(a)
    During the fourth quarter of 2004, the Company determined
that certain leases originated during the first three quarters of
2004 were incorrectly accounted for as sales-type leases, rather than
operating leases. This accounting error, which relates to
approximately 3,200 leases, resulted in an overstatement of net
revenue and net operating profit for the first three quarters of
2004. Accordingly, the quarterly results for March 31, 2004 have
been restated to properly account for the leases as operating leases.
See Note 1 to our Consolidated Financial Statements. BUSINESS REVIEW AND
RESULTING CHARGES During the later part of March 2005, a change in senior management was made at Hypercom. An
interim Chief Executive Officer and interim Chief Financial Officer (collectively Interim
Management) were appointed to replace the former Chief Executive Officer and Chief Financial
Officer. Interim Management commenced a comprehensive review of Hypercoms financial performance;
market strategy; products; product development and life cycle management; and employee, customer
and vendor relationships (the Business Review). Based on the portion of the Business Review
completed thus far, we recorded charges totaling approximately $5.8 million in the first quarter of
2005 as a consequence of decisions made by Interim Management. These charges consist of the
following:  
    Cost of revenue charges totaling $3.4 million consisting
of $2.8 million for inventory write-downs and specific
warranty and product return reserves as we implement product life
cycle plans and $0.6 million for loan loss and other provisions related to
increased risk and exposure in our UK lease portfolio;
    Research and development charges of $0.4 million for the write-off of internally
developed software costs relating to a particular market that we elected to eliminate;
    Selling, general and administrative expense charges of $1.5 million for costs related to
recent severance and employment agreements with key executives and employees; and
    Other individually immaterial revenue and selling, general
and administrative expense charges totaling $0.5 million. Interim Management is in the
process of considering additional strategic priorities related to
customer relationships and end of product life management that may result in additional charges. We
estimate that, if we implement certain strategic decisions under
consideration, we would incur charges in the second quarter of 2005
of approximately $2.5 million. However, we have not implemented
any of the pending decisions, and the amount that we might take as a
charge could vary depending on the circumstances. Until we complete the
Business Review, we are unable to estimate the ultimate impact these
strategic decisions as well as others that may arise during
completion of the Business Review may have on our financial statements. We
anticipate completing the Business Review during the second quarter
of 2005. NET REVENUE Net revenue for our seasonally lower first quarter increased $4.9 million or 9.8% to $54.5 million
for the three months ended March 31, 2005. The increase is principally attributable to POS
terminal sales in the United States to multi-lane and processor
customers and the Asia-Pacific region. The introduction of new
products, including the L4100 terminal and unattended units, has allowed us to expand into this
marketplace that was not served during the first quarter of 2004. COSTS OF REVENUE Our costs 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 three months ended March 31, 2005, costs of revenue increased approximately
$6.8 million to $36.0 million (66.0% of net revenues) compared to $29.1 million (58.7% of net
revenues) for the three months ended March 31, 2004. The increase in cost of revenue was due to
the increase in revenue and certain charges resulting from the Business Review. The
charges arising from the Business Review were approximately $3.4 million and related to inventory
write-downs, specific product charges, and loan loss provisions related to our
UK lease portfolio. Absent these incremental charges, costs of revenues as a percentage of total
revenues would have been 59.7% for the first quarter of 2005. GROSS PROFIT Gross profit as a percent of revenue decreased to 34.0% from 41.3% for the three months ended March
31, 2005 and 2004, respectively. Our product and other gross profit was 35.7% for the 2005 first
quarter compared to 43.5% for the 2004 first quarter, while services gross profit decreased to
22.0% for the 2005 first quarter from 25.7% for the 2004 first quarter. The decline in product and
other gross profit as a percent of revenue is principally due to the incremental charges of $3.7
million associated with the Business Review as well as a continual trend towards lower average
selling prices and gross profit on comparable products sold in the U.S. and other regions around
the world. Absent the incremental charges noted above, gross profit as a percentage of net
revenues would have been 40.6% during the first quarter of 2005. Fluctuations in the services gross profit are normal and are principally reflective of one-off
special projects such as software uploads and terminal enhancement programs requested by our
customers in our NetSet service business in Brazil. OPERATING EXPENSES 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 March
31, 2005 were $7.3 million (13.3% of net revenue) compared to $6.8 million (13.7% of net revenue)
for the three months ended March 31, 2004. On a relative dollar
basis, the increase was principally due to a $0.4 million
write-off of internally developed software costs relating to a
particular market that we have elected to eliminate as a result of
the Business Review. Sales and marketing expenses, administrative personnel costs, and facilities operations make up the
selling, general and administrative expenses. These expenses totaled $20.6 million (37.8% of net
revenue) for the three months ended March 31, 2005, compared to $14.9 million (30.0% of net
revenue) for the same period a year ago. This $5.7 million or 38.4% increase for the three months
ended March 31, 2005 includes $1.7 million of charges
arising from the Business Review.
The charges include $1.5 million for
severance and employment costs related to management changes and workforce reductions and $0.2
million for other charges. In addition to the charges resulting from
the Business Review, we 10




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experienced a $1.7 million increase in professional service costs to comply with the requirements
of Section 404 of the Sarbanes-Oxley Act, $0.5 million of incremental legal costs stemming from
our recent class action lawsuits and other patent related lawsuits, incremental receivable
settlement charges of $0.4 million, and an increase in variable selling expenses associated with
our increase in revenues for the quarter ended March 31, 2005
compared to the quarter ended March 31, 2004. OPERATING LOSS Our operating loss for the three months ended March 31, 2005 was $9.3 million
compared to $1.2 million in the same period a year ago. The
increased loss of $8.1 million was due to lower gross
profit ($1.9 million) and higher operating expenses ($6.2 million) as noted above. NON-OPERATING INCOME (EXPENSES) Non-operating income (expenses) consists of net interest charges, foreign currency losses, and
other income and losses. We earned net interest income of
$0.4 million for the quarter ended March 31, 2005
versus incurring net interest expense of $0.2 million for the three months ended March 31, 2004. The
increase in net interest is primarily due to higher interest income as a result of our increased
cash balance and rising interest rates as well as lower interest expense due to reduced debt fees
and the cessation of amortization of certain debt issuance costs in 2004. Foreign currency loss
for the three months ended March 31, 2005 and 2004 was $0.3 million and $0.7 million, respectively.
The decrease in foreign currency loss is principally related to favorable exchange rate movements
during the three months ended March 31, 2005. PROVISION FOR INCOME TAXES Income tax expense before discontinued operations for federal, state and foreign taxes was $0.8
million for both the three months ended March 31, 2005 and 2004. Income tax expense is principally
comprised of income taxes associated with our profitable foreign locations. As discussed in our 2004
Annual Report on Form 10-K, we have a full valuation reserve against
our deferred tax asset balance existing at December 31, 2004. We continue to provide a full valuation reserve against our deferred tax assets as
of March 31, 2005. 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 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 three months ended March 31, 2005
and 2004 are not meaningful. INCOME FROM DISCONTINUED OPERATIONS During the three months ended March 31, 2005, we recorded income from discontinued operations of
$0.4 million as accruals previously recorded were released due
to the expiration of the indemnification period under a prior purchase and
sales agreement. 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 other debt facilities. During the first quarter of
2005, our primary source of cash was cash generated by our operations as well as cash received from
the issuance of employee stock options. We had no borrowings under our revolving line of credit
during the first quarter of 2005. Cash provided by operating
activities is our net loss adjusted for non-cash items and changes in
operating assets and liabilities. Cash provided by operating
activities increased from $2.2 million to $6.3 million for the quarters ending March 31, 2004 and 2005, respectively. The
increase in operating cash flows for the quarter ended March 31, 2005 is principally due to
collections on accounts receivable resulting from our record 2004
fourth quarter sales. Payment terms for most of our customers are generally between 30 and 60 days. We also experienced changes in inventories and accounts payable during
the three months ended March 31, 2005. The
increase in inventories is principally due to the procurement of raw materials needed to
manufacture our new 32-bit products that we began shipping in the third and fourth quarters of
2004. These new products require components with significant lead times. The decline in accounts
payable is directly related to the timing of payments to vendors from which we procured raw
materials. Investing cash flows consist principally of capital expenditures and cash invested in marketable
securities. Cash used in investing activities declined $4.2 million to $1.7 million for the
quarter ended March 31, 2005. This decline is principally due to fewer 11




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##### Table of Contents



purchases of marketable securities. Purchases of property, plant and equipment amounting to $1.3
million were principally for upgrades to computer software and hardware, equipment purchases, and
leasehold improvements. We intend to spend approximately $6.0 million to $7.0 million over the
next nine months for capital expenditures related to leasehold improvements and production
equipment due to the expansion of our manufacturing facility in China, and for upgrades of computer
software and hardware. Financing cash flows consist principally of the issuance of common stock, repayment of long-term
debt, and cash received from notes receivable from two former stockholders. During 2005, cash
provided by financing activities declined $2.3 million due to fewer proceeds from stock options
exercises and note repayments from former stockholders. Cash used to repay long-term debt declined $0.2
million from 2004 and is attributable to the pay-off of debt during 2004. At March 31, 2005
working capital and cash and cash equivalents were $152.2 and $28.5 million,
respectively, compared to $159.8 and $23.4 million at December 31, 2004, respectively. Current
marketable securities increased $0.1 million from $70.0 million at December 31, 2004 to $70.1
million at March 31, 2005. We believe that these cash reserves and marketable securities combined
with our positive operating cash flow will be sufficient to fund our projected liquidity and
capital resource requirements through 2005. Additionally, we are considering opportunities to
monetize our existing lease portfolio that would substantially increase our cash reserves. Should
operating results prove unfavorable, we may need to use additional capital sources to meet our
short-term liquidity and capital resource requirements. BACKLOG 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. As of March 31, 2005, our backlog
was $36.8 million, compared to $54.9 million at March 31, 2004. The decrease in backlog is
principally related to the fulfillment of orders for major customers within the United States that
are subject to a customer approved delivery schedule. In recent years, customers have shown a reluctance to enter into long-term firm commitments that we
would include in backlog. Our backlog is heavily concentrated in the U.S. with 66% and 67%,
comprising the total backlog at March 31, 2005 and 2004, respectively. We do not believe that our
current backlog is indicative of our near-term sales given that over 63% of our recent sales were
generated by our foreign operations, which represent only a marginal percentage of our overall
backlog. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk At March 31, 2005, our cash equivalent investments are primarily in money market accounts and
certificates of deposit and are reflected as cash equivalents because all maturities are within 90
days from date of purchase. 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 investment portfolio, consisting of fixed income securities, was $70.1 million as of March 31,
2005. These securities, like all fixed 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 March 31, 2005, 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 Australian dollar, Brazilian real, British pound,
Swedish krona and other 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 our
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 March 31, 2005, we had foreign currency forward contracts outstanding in the amount
of $23.9 million, denominated principally in the Brazilian real and British pound. Gains and
losses on these contracts principally consist of mark-to-market adjustments, which are recorded, in
earnings as foreign currency gains or losses. We do not purchase or hold any such derivative financial instruments for the purpose of speculation
or arbitrage. See Risk Factors  International operations pose additional challenges and risks
that if not managed could adversely affect our financial results 12




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##### Table of Contents



elsewhere in this Report. At present, we have $8.7 million in debt obligations and there are no borrowings under our line of
credit facility at March 31, 2005. 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, foreign currency
fluctuations (as we discuss in this Item 7A) and collectibility 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 As previously reported in our Form 10-K for the fiscal year ended December 31, 2004, we conducted
an examination, under the supervision and with the participation of
management, including our former Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures. Based on that evaluation and the two material weaknesses described below, we concluded
that, as of December 31, 2004, our internal control over financial reporting was not effective. The first material weakness was identified as a result of insufficient controls over the contract
administration and accounting for certain leases that were incorrectly accounted for as sales-type
leases, rather than operating leases. As a result, quarterly financial statements for the first
three quarters in 2004 were restated. The other material weakness was identified as a result of
the year-end financial statement close procedures whereby we and our independent registered public
accounting firm identified a number of adjustments. We have concluded that controls related to our
analysis, evaluation, and review of the Companys 2004 financial information gave rise to these
adjustments and resulted in a material weakness. The specific control deficiencies consisted of:  
    an inappropriate level of review of certain significant
financial statement accounts requiring a higher degree of judgment and estimates;
    insufficient analysis, documentation, review, and oversight
of the financial statements of certain foreign subsidiaries during consolidation; and
    insufficient staffing of the accounting and financial reporting function. In aggregate, these control deficiencies result in a more than remote likelihood that a material
misstatement to our annual or interim consolidated financial statements could occur and not be
prevented or detected in a timely manner. The foregoing material weakness resulted in adjustments
to certain accounts in our 2004 financial statements, including net investment in sales-type
leases, fixed assets, other current and long-term assets, accrued liabilities, revenues, cost of
sales and other operating expenses. During the first quarter of 2005, management began implementing actions to correct these material
weaknesses. These included development and communication of new policies and procedures; increased
scrutiny and review of unusual transactions and accounting areas requiring higher levels of
management judgment; improved oversight of our financial close process (both domestically and
internationally); and actions to increase staffing of our accounting and financial reporting
function. While significant progress was made, corrective actions have not been fully completed to permit
management to conclude that the above referenced material weaknesses had been fully remediated as
of March 31, 2005. 13




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##### Table of Contents



PART II  OTHER INFORMATION Item 1. Legal Proceedings The Company currently is a party to various legal proceedings, including those noted below.
While management presently believes that the ultimate outcome of these proceedings, individually
and in the aggregate, will not have a material adverse affect on our financial position or results
of operations, litigation is subject to inherent uncertainties, and unfavorable rulings could
occur. An unfavorable ruling could include monetary damages or, in cases where injunctive relief is
sought, an injunction. Were an unfavorable ruling to occur, it is possible such a ruling could have
a material adverse impact on our financial position or results of operations in the period in which
the ruling occurs or in future periods. Shareholder
Class Actions. Since February 2005, the Company, its
former Chief Executive Officer and its
former Chief Financial Officer were named as defendants in several shareholder class action lawsuits filed
in U.S. District Court, District of Arizona, on behalf of purchasers of the Companys securities
during the period from April 30, 2004 to February 3, 2005, alleging violations of the Securities
Exchange Act of 1934. These lawsuits are based on our February 2005 announcement that certain
leases originated in the United Kingdom had been incorrectly accounted for as sales-type leases,
rather than operating leases, and that the Company would restate its financial statements for the
first three quarters of 2004. The lawsuits seek damages against the defendants in an unspecified
amount. Shareholder
Derivative Actions. Since February 2005, two shareholder derivative actions were
filed in the United States District Court, District of Arizona,
against the Company, its former Chief
Executive Officer, former Chief Financial Officer, and its board of directors alleging breach of fiduciary
duty, among other matters. These actions are based on the same facts and circumstances alleged in
the shareholder class actions discussed above, and allege that the defendants participated in
issuing misleading and inaccurate statements and failed to implement adequate internal controls.
The actions seek damages in an unspecified amount against the individual defendants, attorneys
fees and expenses, among other forms of relief. The Company is named solely as a nominal defendant
in this action, and no recovery is sought against the Company. The Company believes that it has meritorious defenses and intends to vigorously defend against
the shareholder class actions and the shareholder derivative actions. While the Company has
tendered the defense of these suits to its insurance carrier, its policies provide for substantial
retentions, and therefore the cost of defending the suits may affect its net income and cash flows
in future periods. In addition, there can be no assurance that the Company will be successful in
its defense of these suits, or that the carrier will ultimately provide coverage for the
defendants. 
 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. During 2003, the Company purchased 60,000 shares of its
common stock for $0.3 million (an average price per share of
$4.50). There were no purchases made under this program during the quarter ended March 31, 2005. 
 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
    
    
    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. 14




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##### Table of Contents



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: May 10, 2005
    By:
    /s/ William KeiperWilliam KeiperChairman and Interim Chief Executive Officer and
President (duly authorized officer and principal
executive officer) Date: May 10, 2005
    By:

/s/
G. Grant LyonG. Grant LyonInterim Chief Financial Officer
(principal financial and accounting officer) 15




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##### Table of Contents



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