##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 1-13521
 HYPERCOM CORPORATION
  Delaware
    
    86-0828608(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)8888 E. Raintree Drive, Suite 300, Scottsdale,Arizona
    
    85260(Address of principal executive offices)
    
    (Zip Code)
 (480) 642-5000
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
  Class
    
    Outstanding at November 3, 2008Common Stock, $.001 par value per share
    
    53,414,018 shares




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##### 



INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    3Consolidated Balance Sheets  September 30, 2008 and
December 31, 2007
    
    3Consolidated Statements of Operations  Three and nine
months ended September 30, 2008 and 2007
    
    4Consolidated Statements of Cash Flows  Three and nine
months ended September 30, 2008 and 2007
    
    5Notes to Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    32Item 4. Controls and Procedures
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    33Item 1A. Risk Factors
    
    33Item 6. Exhibits
    
    34Signatures
    
    35Exhibit 31.1Exhibit 31.2Exhibit 32EX-31.1EX-31-2EX-32EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 HYPERCOM CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
(Unaudited)
 September 30,
    
    
    December 31,Amounts in thousands, except share data
    
    2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,111
    
    
    $
    76,925Short-term investments
    
    
    499
    
    
    
    4,988Accounts receivable, net of allowance for doubtful accounts of
$7,353 and $4,034, respectively
    
    
    88,438
    
    
    
    71,341Inventories
    
    
    47,226
    
    
    
    22,343Prepaid expenses and other current assets
    
    
    20,650
    
    
    
    15,251Deferred income taxes
    
    
    
    
    
    
    497Total current assets
    
    
    187,924
    
    
    
    191,345Property, plant and equipment, net
    
    
    26,478
    
    
    
    17,694Intangible assets, net
    
    
    70,534
    
    
    
    10,502Goodwill
    
    
    87,645
    
    
    
    10,224Deferred acquisition costs
    
    
    
    
    
    
    12,529Other long-term assets
    
    
    10,839
    
    
    
    7,950Total assets
    
    $
    383,420
    
    
    $
    250,244LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    61,707
    
    
    $
    30,448Accrued payroll and related expenses
    
    
    16,158
    
    
    
    9,889Accrued sales and other taxes
    
    
    7,212
    
    
    
    7,427Product warranty liabilities
    
    
    6,903
    
    
    
    1,754Accrued other liabilities
    
    
    24,898
    
    
    
    16,154Deferred revenue
    
    
    12,747
    
    
    
    5,497Deferred tax liabilities
    
    
    3,466
    
    
    
    Income taxes payable
    
    
    4,036
    
    
    
    519Total current liabilities
    
    
    137,127
    
    
    
    71,688Deferred tax liabilities
    
    
    19,542
    
    
    
    620Long-term debt, net of discount
    
    
    46,571
    
    
    
    Other liabilities
    
    
    11,946
    
    
    
    3,437Total liabilities
    
    
    215,186
    
    
    
    75,745Commitments and contingenciesStockholders equity:Common stock, $.001 par value; 100,000,000 shares authorized;
53,414,018 and 53,167,702 shares outstanding, respectively
    
    
    57
    
    
    
    56Additional paid-in capital
    
    
    272,008
    
    
    
    251,034Accumulated deficit
    
    
    (64,444
    )
    
    
    (53,842
    )Treasury stock, 3,162,248 shares (at cost)
at September 30, 2008 and December 31, 2007
    
    
    (22,749
    )
    
    
    (22,749
    )Accumulated other comprehensive income
    
    
    (16,638
    )
    
    
    Total stockholders equity
    
    
    168,234
    
    
    
    174,499Total liabilities and stockholders equity
    
    $
    383,420
    
    
    $
    250,244
  3




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##### Table of Contents



HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Amounts in thousands, except share and per share data)Net revenue:Products
    
    $
    86,992
    
    
    $
    48,166
    
    
    $
    229,350
    
    
    $
    144,199Services
    
    
    35,255
    
    
    
    22,652
    
    
    
    90,017
    
    
    
    58,923Total net revenue
    
    
    122,247
    
    
    
    70,818
    
    
    
    319,367
    
    
    
    203,122Costs of revenue:Products
    
    
    56,314
    
    
    
    32,129
    
    
    
    153,852
    
    
    
    103,171Services
    
    
    25,822
    
    
    
    17,367
    
    
    
    70,712
    
    
    
    49,017Amortization of purchased intangible assets
    
    
    1,033
    
    
    
    91
    
    
    
    2,190
    
    
    
    261Total costs of revenue
    
    
    83,169
    
    
    
    49,587
    
    
    
    226,754
    
    
    
    152,449Gross profit
    
    
    39,078
    
    
    
    21,231
    
    
    
    92,613
    
    
    
    50,673Operating expenses:Research and development
    
    
    13,637
    
    
    
    6,104
    
    
    
    34,641
    
    
    
    21,541Selling, general and administrative
    
    
    20,059
    
    
    
    14,427
    
    
    
    60,493
    
    
    
    41,674Amortization of purchased intangible assets
    
    
    1,926
    
    
    
    161
    
    
    
    4,076
    
    
    
    441Gain on sale of real property
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    (3,796
    )Total operating expenses
    
    
    35,622
    
    
    
    20,670
    
    
    
    99,210
    
    
    
    59,860Income (loss) from continuing operations
    
    
    3,456
    
    
    
    561
    
    
    
    (6,597
    )
    
    
    (9,187
    )Interest income
    
    
    248
    
    
    
    1,141
    
    
    
    1,367
    
    
    
    2,867Interest expense
    
    
    (1,951
    )
    
    
    (5
    )
    
    
    (4,463
    )
    
    
    (108
    )Foreign currency loss
    
    
    (45
    )
    
    
    (327
    )
    
    
    (250
    )
    
    
    (1,356
    )Other income (expense)
    
    
    6
    
    
    
    (13
    )
    
    
    155
    
    
    
    (7
    )Income (loss) before income taxes and
discontinued operations
    
    
    1,714
    
    
    
    1,357
    
    
    
    (9,788
    )
    
    
    (7,791
    )Income tax provision
    
    
    (749
    )
    
    
    (966
    )
    
    
    (759
    )
    
    
    (737
    )Income (loss) before discontinued operations
    
    
    965
    
    
    
    391
    
    
    
    (10,547
    )
    
    
    (8,528
    )Income (loss) from discontinued operations
    
    
    (340
    )
    
    
    138
    
    
    
    (55
    )
    
    
    789Net income (loss)
    
    $
    625
    
    
    $
    529
    
    
    $
    (10,602
    )
    
    $
    (7,739
    )Basic and diluted income (loss) per share:Income (loss) before discontinued
operations
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    (0.20
    )
    
    $
    (0.16
    )Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    0.01Basic and diluted income (loss) per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.20
    )
    
    $
    (0.15
    )Shares used in computing
net income (loss) per share:Basic weighted average common shares
    
    
    53,352,596
    
    
    
    52,852,410
    
    
    
    53,306,873
    
    
    
    53,838,846Diluted weighted average common shares
    
    
    53,418,622
    
    
    
    53,023,085
    
    
    
    53,306,873
    
    
    
    53,838,846
  4




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##### Table of Contents



HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months Ended September 30,(Amounts in thousands)
    
    2008
    
    
    2007Cash flows from continuing operations:Net loss from continuing operations
    
    $
    (10,547
    )
    
    $
    (8,528
    )Adjustments to reconcile net loss from continuing operations to net cash provided by
operating activities:Depreciation and amortization
    
    
    7,140
    
    
    
    5,971Amortization of purchased intangibles
    
    
    6,266
    
    
    
    702Interest conversion to debt
    
    
    3,038
    
    
    
    Amortization of debt issuance costs
    
    
    64
    
    
    
    Amortization of discount on notes payable
    
    
    1,090
    
    
    
    Amortization of discounts on short-term investments
    
    
    (61
    )
    
    
    (785
    )Provision (reversal) for doubtful accounts
    
    
    (651
    )
    
    
    825Provision for excess and obsolete inventory
    
    
    2,431
    
    
    
    7,062Provision for warranty and other product charges
    
    
    3,192
    
    
    
    1,944Deferred income tax benefit
    
    
    761
    
    
    
    34Non-cash share-based compensation
    
    
    2,681
    
    
    
    1,109Foreign currency gains (losses)
    
    
    615
    
    
    
    (1,378
    )Gain on sale of real property
    
    
    
    
    
    
    (3,796
    )Non-cash write-off of intangibles and other assets
    
    
    606
    
    
    
    478Changes in operating assets and liabilities, net of effects of business acquisitions
    
    
    (2,668
    )
    
    
    2,183Net cash provided by operating activities
    
    
    13,957
    
    
    
    5,821Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (6,209
    )
    
    
    (5,319
    )Proceeds from the sale of real property
    
    
    
    
    
    
    16,250Cash paid for acquisitions including acquisition costs deferred, net of cash acquired
    
    
    (115,168
    )
    
    
    (12,707
    )Software development costs capitalized
    
    
    (57
    )
    
    
    (1,160
    )Purchase of short-term investments
    
    
    (37,375
    )
    
    
    (126,057
    )Proceeds from the sale or maturity of short term investments
    
    
    41,925
    
    
    
    165,690Net cash provided by (used in) investing activities
    
    
    (116,884
    )
    
    
    36,697Cash flows from financing activities:Repayments of bank notes payable and other debt instruments
    
    
    (434
    )
    
    
    (5
    )Debt issuance cost
    
    
    (687
    )
    
    
    Proceeds from issuance of common stock
    
    
    639
    
    
    
    544Proceeds from long term debt
    
    
    60,000
    
    
    
    Net cash provided by financing activities
    
    
    59,518
    
    
    
    539Effect of exchange rate changes on cash
    
    
    (2,405
    )
    
    
    507Net increase (decrease) in cash flows from continuing operations
    
    
    (45,814
    )
    
    
    43,564Net cash provided used in operating activities-discontinued operations
    
    
    
    
    
    
    (6
    )Cash and cash equivalents, beginning of period
    
    
    76,925
    
    
    
    34,190Cash and cash equivalents, end of period
    
    $
    31,111
    
    
    $
    77,748
  5




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##### Table of Contents



HYPERCOM CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2008
 (Unaudited)
 1. Basis of Presentation
    Recent Accounting Pronouncements
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated Financial
Statements  an amendment of ARB No. 51
 Fair Value Measurements
 6




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##### Table of Contents



Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement No. 115
 2. Business Combination
 Thales e-Transactions
    Cash paid to purchase TeT shares
    
    $
    120,000Cash paid for working capital and assumed debt
    
    
    23,611Transaction costs and expenses
    
    
    3,827Total purchase price
    
    $
    147,438
  Balance Accruedas of SeptemberTotal
    
    30, 2008
    
    2008
    
    2007Cash paid for TeT shares and working
capital
    
    $
    133,611
    
    
    $
    
    
    
    $
    133,611
    
    
    $
    Cash paid for transaction cost
    
    
    3,827
    
    
    
    37
    
    
    
    3,422
    
    
    
    368Cash deposit
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    10,000Subtotal
    
    
    147,438
    
    
    
    37
    
    
    
    137,033
    
    
    
    10,368Cash acquired from TeT
    
    
    (21,865
    )
    
    
    
    
    
    
    (21,865
    )
    
    $
    Total cash paid, net of cash acquired
    
    $
    125,573
    
    
    $
    37
    
    
    $
    115,168
    
    
    $
    10,368
   7




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##### Table of Contents



Cash
    
    $
    21,865Accounts receivable
    
    
    38,900Inventory
    
    
    9,426Property, plant and equipment
    
    
    5,757Other assets
    
    
    11,276Amortizable intangible assets:Customer relationships
    
    
    66,350Unpatented technology
    
    
    5,688Trademarks, trade names
    
    
    2,127Total assets
    
    
    161,389Deferred revenue
    
    
    (6,904
    )Other current liabilities
    
    
    (62,017
    )Net deferred tax liabilities
    
    
    (22,117
    )Non curent liabilities
    
    
    (6,615
    )Total liabilities
    
    
    (97,653
    )Fair value of tangible and intangible assets acquired, net of
liabilities assumed
    
    
    63,736Goodwill
    
    
    83,702Total purchase price
    
    $
    147,438
 Net Tangible and Intangible Assets.
 Recognition of Liabilities in Connection with a Purchase Business Combination  .
      8




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##### Table of Contents



Goodwill .
   Total net revenue
    
    $
    362,511Net loss
    
    $
    (19,262
    )Net loss per share  basic and diluted
    
    $
    (0.36
    )
 ACG Group
    Goodwill and Other Intangible Assets
 9




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##### Table of Contents



TPI Software
    3. Restructuring and Other Charges
 Restructuring
  Thales e-Transactions
   Facilities
    
    
    Severance
    
    
    TotalBalance at March 31, 2008
    
    $
    
    
    
    $
    
    
    
    $
    Additions
    
    
    409
    
    
    
    5,400
    
    
    
    5,809Cash payments
    
    
    (262
    )
    
    
    
    
    
    
    (262
    )Currency translation adjustment
    
    
    (24
    )
    
    
    (537
    )
    
    
    (561
    )Balance at September 30, 2008
    
    $
    123
    
    
    $
    4,863
    
    
    $
    4,986
 4. Leases
 Sales-Type Leases
  2008
    
    
    2007Lease contracts receivable
    
    $
    18,504
    
    
    $
    6,495Unearned revenue
    
    
    (2,812
    )
    
    
    (524
    )Net investment in sales-type leases
    
    $
    15,692
    
    
    $
    5,971
 10




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##### Table of Contents



5. Inventories
  2008
    
    
    2007Purchased parts
    
    $
    6,351
    
    
    $
    8,676Work in progress
    
    
    1,194
    
    
    
    4,566Finished goods
    
    
    39,681
    
    
    
    9,101$
    47,226
    
    
    $
    22,343
 6. Property, Plant and Equipment
  2008
    
    
    2007Buildings
    
    $
    2,524
    
    
    $
    2,524Computer equipment and software
    
    
    29,358
    
    
    
    24,955Machinery and equipment
    
    
    28,449
    
    
    
    25,793Equipment leased to customers
    
    
    7,658
    
    
    
    4,350Furniture and fixtures
    
    
    5,724
    
    
    
    4,944Leasehold improvements
    
    
    6,583
    
    
    
    3,809Construction in process
    
    
    4,413
    
    
    
    3,83284,709
    
    
    
    70,207Less accumulated depreciation
    
    
    (58,231
    )
    
    
    (52,513
    )$
    26,478
    
    
    $
    17,694
  7. Intangible Assets, Net, and Goodwill
  11




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##### Table of Contents



Gross Carrying Amount
    
    
    Accumulated Amortization
    
    
    NetSeptember 30,
    
    
    December 31,
    
    
    September 30,
    
    
    December 31,
    
    
    September 30,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Capitalized software
    
    $
    4,789
    
    
    $
    6,159
    
    
    $
    (3,536
    )
    
    $
    (3,949
    )
    
    $
    1,253
    
    
    $
    2,210Customer and supplier relationships
    
    
    62,564
    
    
    
    2,830
    
    
    
    (3,281
    )
    
    
    (263
    )
    
    
    59,283
    
    
    
    2,567Unpatented technology
    
    
    7,418
    
    
    
    2,300
    
    
    
    (2,158
    )
    
    
    (240
    )
    
    
    5,260
    
    
    
    2,060Trademarks, trade names
    
    
    4,134
    
    
    
    2,220
    
    
    
    (842
    )
    
    
    (204
    )
    
    
    3,292
    
    
    
    2,016Service know-how
    
    
    1,330
    
    
    
    1,330
    
    
    
    (222
    )
    
    
    (122
    )
    
    
    1,108
    
    
    
    1,208Other
    
    
    609
    
    
    
    609
    
    
    
    (271
    )
    
    
    (168
    )
    
    
    338
    
    
    
    441$
    80,844
    
    
    $
    15,448
    
    
    $
    (10,310
    )
    
    $
    (4,946
    )
    
    $
    70,534
    
    
    $
    10,502
  Capitalized software
    
    3 yearsCustomer relationships
    
    4-10 yearsUnpatented technology
    
    2-10 yearsTrademarks, trade names
    
    2-10 yearsService know-how
    
    10 yearsOther
    
    2-5 years
  Goodwill
  September 30,
    
    
    December 31,2008
    
    
    2007Balance, beginning of year
    
    $
    10,224
    
    
    $
    2,691Additions related to acquisitions
    
    
    83,702
    
    
    
    6,820Resolution of tax contingencies and adjustments to
tax reserves, valuation allowances and
performance holdback
established in purchase accounting
    
    
    2,184
    
    
    
    713Currency translation adjustment
    
    
    (8,465
    )
    
    
    Balance, end of period
    
    $
    87,645
    
    
    $
    10,224
 8. Long-term Debt
 Revolving Credit Facilities
  12




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##### Table of Contents



Acquisition Financing
  Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants.
 13




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##### Table of Contents



2008Francisco Partners Credit Agreement
    
    $
    60,000Interest conversion to debt
    
    
    3,038Discount on warrants issued to Francisco Partners
    
    
    (16,666
    )Debt assumed on acquisitions
    
    
    199Long-term debt
    
    $
    46,571
 9. Other Comprehensive Income (loss)
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    625
    
    
    $
    529
    
    
    $
    (10,602
    )
    
    $
    (7,739
    )Foreign currency translation adjustment
    
    
    (18,137
    )
    
    
    
    
    
    
    (16,638
    )
    
    
    Total comprehensive income (loss)
    
    $
    (17,512
    )
    
    $
    529
    
    
    $
    (27,240
    )
    
    $
    (7,739
    )
 14




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##### Table of Contents



10. Share Based Plan Compensation
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Costs of revenue
    
    $
    69
    
    
    $
    (11
    )
    
    $
    71
    
    
    $
    72Research and development
    
    
    36
    
    
    
    (169
    )
    
    
    162
    
    
    
    (194
    )Selling, general and
administrative
    
    
    823
    
    
    
    244
    
    
    
    2,448
    
    
    
    1,231Total
    
    $
    928
    
    
    $
    64
    
    
    $
    2,681
    
    
    $
    1,109
    Stock Options
 Accounting for Stock
Appreciation Rights and other Variable Stock Option Award Plans
  WeightedWeighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    Value (InOptions
    
    
    Price
    
    
    Term
    
    
    Thousands)Outstanding at September 30, 2008
    
    
    4,394,218
    
    
    $
    5.90
    
    
    
    7.54
    
    
    $
    100Vested and expected to vest at September 30, 2008
    
    
    4,114,916
    
    
    $
    5.99
    
    
    
    7.42
    
    
    $
    98Exercisable at September 30, 2008
    
    
    2,104,857
    
    
    $
    7.26
    
    
    
    5.62
    
    
    $
    89
   15




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Weighted average risk free interest rate
    
    
    3.14
    %
    
    
    4.50
    %
    
    
    2.88
    %
    
    
    4.51
    %Expected life of the options (in years)
    
    
    5.51
    
    
    
    5.38
    
    
    
    4.72
    
    
    
    5.41Expected stock price volatility
    
    
    48.5
    %
    
    
    55.5
    %
    
    
    47.8
    %
    
    
    56.8
    %
  Restricted Stock Awards
   WeightedNonvested
    
    
    Average GrantShares
    
    
    Date Fair ValueOutstanding
    
    
    per ShareBalance at December 31, 2007
    
    
    75,000
    
    
    $
    6.24Shares granted in 2008
    
    
    75,000
    
    
    
    3.99Shares vested in 2008
    
    
    (100,000
    )
    
    
    5.21Balance at September 30, 2008
    
    
    50,000
    
    
    $
    4.94
  Employee Stock Purchase Plan
  11. Earnings per Share
  16




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Shares used in basic income (loss) per
share calculation (weighted average
common shares outstanding)
    
    
    53,352,596
    
    
    
    52,852,410
    
    
    
    53,306,873
    
    
    
    52,838,846Dilutive effect of stock options and
warrants
    
    
    66,026
    
    
    
    170,675
    
    
    
    
    
    
    
    Shares used in diluted income per
share calculation
    
    
    53,418,622
    
    
    
    53,023,085
    
    
    
    53,306,873
    
    
    
    52,838,846Options and warrants that could potentially
dilute income per share in the future
that were not included in the computation
of diluted income per share (a)
    
    
    14,922,199
    
    
    
    3,199,878
    
    
    
    14,936,917
    
    
    
    3,163,814
 
 (a)
    
    These options and warrants were not included in the computation of
diluted income (loss) per share because they were not dilutive. 12. Income Taxes
 Accounting for Income Taxes
 Accounting for Uncertainty in
Income Taxes
   17




---



##### Table of Contents



13. Commitments and Contingencies
 Litigation
  SPA
Syspatronic AG v. Hypercom Corporation, et al. (United States
District Court for the Eastern District of Texas, Beaumont Division,
Civil Action No. 2:07-CV-416 (LED), filed on September 18,
2007).
 CardSoft, Inc., et al. v. Hypercom Corporation, et al. (United States District Court for the
Eastern District of Texas, Civil Action No. 2:08-CV-00098, filed on March 6, 2008).
 EEOC Charge by Former Employee.
 Appeal of Sichuan (China) Intermediate Court Actions No. 867 of 2005 and No. 145 of 2007.
 14. Segment and Geographic Information
 Disclosures about Segments of an Enterprise and
Related Information
   18




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net RevenueAmericas
    
    $
    42,436
    
    
    $
    39,218
    
    
    $
    122,243
    
    
    $
    108,022EMEA
    
    
    64,685
    
    
    
    17,581
    
    
    
    154,363
    
    
    
    56,962Asia Pacific
    
    
    15,126
    
    
    
    14,019
    
    
    
    42,761
    
    
    
    38,138Shared cost centers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    122,247
    
    
    $
    70,818
    
    
    $
    319,367
    
    
    $
    203,122
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating IncomeAmericas
    
    $
    4,299
    
    
    $
    4,393
    
    
    $
    10,955
    
    
    $
    4,732EMEA
    
    
    10,193
    
    
    
    4,392
    
    
    
    18,246
    
    
    
    9,281Asia Pacific
    
    
    1,912
    
    
    
    3,006
    
    
    
    5,996
    
    
    
    6,635Shared cost centers
    
    
    (12,948
    )
    
    
    (11,230
    )
    
    
    (41,794
    )
    
    
    (29,835
    )Total segment loss
    
    $
    3,456
    
    
    $
    561
    
    
    $
    (6,597
    )
    
    $
    (9,187
    )Interest income
    
    
    248
    
    
    
    1,141
    
    
    
    1,367
    
    
    
    2,867Interest expense
    
    
    (1,951
    )
    
    
    (5
    )
    
    
    (4,463
    )
    
    
    (108
    )Foreign currency loss
    
    
    (45
    )
    
    
    (327
    )
    
    
    (250
    )
    
    
    (1,356
    )Other income (expense)
    
    
    6
    
    
    
    (13
    )
    
    
    155
    
    
    
    (7
    )Loss before income taxes
and discontinued operations
    
    $
    1,714
    
    
    $
    1,357
    
    
    $
    (9,788
    )
    
    $
    (7,791
    )
 September 30,
    
    
    December 31,2008
    
    
    2007Total AssetsAmericas
    
    $
    75,820
    
    
    $
    79,210EMEA
    
    
    238,523
    
    
    
    29,482Asia Pacific
    
    
    51,663
    
    
    
    55,004Shared cost centers
    
    
    17,414
    
    
    
    86,548$
    383,420
    
    
    $
    250,244
 15. Product Warranty
  19




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    6,940
    
    
    $
    3,766
    
    
    $
    1,754
    
    
    $
    2,636Warranty liability assumed on acquisitions
    
    
    
    
    
    
    
    
    
    
    5,344
    
    
    
    Warranty charges
from normal operations
    
    
    1,352
    
    
    
    51
    
    
    
    3,192
    
    
    
    1,944Warranty reversals related to
the 2005 Business Review
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )Utilization of warranty liability
    
    
    (1,389
    )
    
    
    (1,683
    )
    
    
    (3,387
    )
    
    
    (2,346
    )Balance at end of period
    
    $
    6,903
    
    
    $
    2,134
    
    
    $
    6,903
    
    
    $
    2,134
  20




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Cautionary Statements Regarding Forward-looking Statements
    
    
    with regard to our recent acquisition and ongoing integration of TeT: (i) the inability to assimilate the technologies,
operations and personnel of TeT; (ii) the potential disruption of our existing business, including the diversion of
management attention and the redeployment of resources; (iii) the loss of customers; (iv) the possibility of our
entering markets in which we have limited prior experience; (v) the loss of key employees of TeT; and (vi) the
inability to obtain the desired strategic and financial benefits from the acquisition;
    
    uncertain or deteriorating global and regional economic and market conditions;
    
    the volatility of our financial results and our stock price;
    
    the loss of a key customer;
    
    defects in our products;
    
    the accumulation of obsolete inventory;
    
    breaches in the security of transactions involving our products;
    
    our inability to adequately protect our proprietary technology;
    
    our technology infringing the proprietary rights of third parties;
    
    unfavorable results of current or future litigation;
    
    a disruption in the manufacturing capabilities of our third-party manufacturers or suppliers;
 21




---



##### Table of Contents




    
    risks associated with our dependence on single-source suppliers;
    
    our ability to timely and successfully introduce new products and product families on which our future sales will be
substantially dependent, and to transition legacy products through end-of-life;
    
    operating under a contract manufacturing model;
    
    the challenges posed by conducting business in international markets;
    
    fluctuations in currency exchange rates;
    
    the loss of a member of our senior management team or other key employees;
    
    risks associated with acquisitions and other strategic investments;
    
    force majeure events;
    
    country-specific changing economic or political environment;
    
    uncertainties related to country-specific legal and regulatory requirements, including product-related regulations,
requirements and certifications, and tax assessments and interpretations;
    
    our ability to maintain the quality of our internal control over financial reporting;
    
    our ability to assimilate and integrate technologies or businesses we may acquire in the future;
    
    the highly-competitive nature of the markets in which we compete;
    
    industry and technological developments in the markets in which we sell our products and services;
    
    the impact of industry standards, certifications and government regulations to which our products are subject;
    
    the impact of SEC regulations and SEC review of our periodic filings;
    
    the anti-takeover effects of certain provisions in our charter, bylaws and Delaware law;
    
    dilution of our stock price caused by the exercise of outstanding warrants and options;
    
    lack of a plan to pay dividends on our common stock in the foreseeable future;
    
    failure to comply with covenants in our loan and credit agreements; and
    
    incurring debt to meet the future capital requirements of our business.
  Critical Accounting Policies and Estimates
  22




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##### Table of Contents



2008 Overview
 Operations
    Acquisition of Thales e-Transactions Business Line
  23




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##### Table of Contents



Result of Operations
   24




---



##### Table of Contents



Three Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Dollar(Amounts in thousands, except share and per share data)
    
    2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    ChangeNet revenue:Products
    
    $
    86,992
    
    
    
    71.2
    %
    
    $
    48,166
    
    
    
    68.0
    %
    
    $
    38,826Services
    
    
    35,255
    
    
    
    28.8
    %
    
    
    22,652
    
    
    
    32.0
    %
    
    
    12,603Total net revenue
    
    
    122,247
    
    
    
    100.0
    %
    
    
    70,818
    
    
    
    100.0
    %
    
    
    51,429Costs of revenue:Products
    
    
    56,314
    
    
    
    64.7
    %
    
    
    32,129
    
    
    
    66.7
    %
    
    
    24,185Services
    
    
    25,822
    
    
    
    73.2
    %
    
    
    17,367
    
    
    
    76.7
    %
    
    
    8,455Amortization of purchased intangible assets
    
    
    1,033
    
    
    
    0.8
    %
    
    
    91
    
    
    
    0.1
    %
    
    
    942Total costs of revenue
    
    
    83,169
    
    
    
    68.0
    %
    
    
    49,587
    
    
    
    70.0
    %
    
    
    33,582Gross profit:Products
    
    
    30,677
    
    
    
    35.3
    %
    
    
    16,037
    
    
    
    33.3
    %
    
    
    14,641Services
    
    
    9,433
    
    
    
    26.8
    %
    
    
    5,285
    
    
    
    23.3
    %
    
    
    4,148Amortization of purchased intangible assets
    
    
    (1,033
    )
    
    
    -0.8
    %
    
    
    (91
    )
    
    
    -0.1
    %
    
    
    (942
    )Total gross profit
    
    
    39,078
    
    
    
    32.0
    %
    
    
    21,231
    
    
    
    30.0
    %
    
    
    17,847Operating expenses:Research and development
    
    
    13,637
    
    
    
    11.2
    %
    
    
    6,104
    
    
    
    8.6
    %
    
    
    7,533Selling, general and administrative
    
    
    20,059
    
    
    
    16.4
    %
    
    
    14,427
    
    
    
    20.4
    %
    
    
    5,633Amortization of purchased intangible assets
    
    
    1,926
    
    
    
    1.6
    %
    
    
    161
    
    
    
    0.2
    %
    
    
    1,765Gain on sale of real property
    
    
    
    
    
    
    0.0
    %
    
    
    (22
    )
    
    
    0.0
    %
    
    
    22Total operating expenses
    
    
    35,622
    
    
    
    29.1
    %
    
    
    20,670
    
    
    
    29.2
    %
    
    
    14,952Income from continuing operations
    
    
    3,456
    
    
    
    2.8
    %
    
    
    561
    
    
    
    0.8
    %
    
    
    2,895Non-operating income (expense)
    
    
    (1,742
    )
    
    
    -1.4
    %
    
    
    796
    
    
    
    1.1
    %
    
    
    (2,539
    )Income before income taxes and
discontinued operations
    
    
    1,714
    
    
    
    1.4
    %
    
    
    1,357
    
    
    
    1.9
    %
    
    
    357Income tax provision
    
    
    (749
    )
    
    
    -0.6
    %
    
    
    (966
    )
    
    
    -1.4
    %
    
    
    217Income before discontinued operations
    
    
    965
    
    
    
    0.8
    %
    
    
    391
    
    
    
    0.6
    %
    
    
    573Income (loss) from discontinued operations
    
    
    (340
    )
    
    
    -0.3
    %
    
    
    138
    
    
    
    0.2
    %
    
    
    (478
    )Net income
    
    $
    625
    
    
    
    0.5
    %
    
    $
    529
    
    
    
    0.7
    %
    
    
    95Basic and diluted income per share
    
    $
    0.01
    
    
    
    
    
    
    $
    0.01
 25




---



##### Table of Contents



Result of Operations
 Nine Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Dollar(Amounts in thousands, except share and per share data)
    
    2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    ChangeNet revenue:Products
    
    $
    229,350
    
    
    
    71.8
    %
    
    $
    144,199
    
    
    
    71.0
    %
    
    $
    85,151Services
    
    
    90,017
    
    
    
    28.2
    %
    
    
    58,923
    
    
    
    29.0
    %
    
    
    31,094Total net revenue
    
    
    319,367
    
    
    
    100.0
    %
    
    
    203,122
    
    
    
    100.0
    %
    
    
    116,244Costs of revenue:Products
    
    
    153,852
    
    
    
    67.1
    %
    
    
    103,171
    
    
    
    71.5
    %
    
    
    50,681Services
    
    
    70,712
    
    
    
    78.6
    %
    
    
    49,017
    
    
    
    83.2
    %
    
    
    21,695Amortization of purchased intangible assets
    
    
    2,190
    
    
    
    0.7
    %
    
    
    261
    
    
    
    0.1
    %
    
    
    1,929Total costs of revenue
    
    
    226,754
    
    
    
    71.0
    %
    
    
    152,449
    
    
    
    75.1
    %
    
    
    74,305Gross profit:Products
    
    
    75,499
    
    
    
    32.9
    %
    
    
    41,028
    
    
    
    28.5
    %
    
    
    34,471Services
    
    
    19,304
    
    
    
    21.4
    %
    
    
    9,906
    
    
    
    16.8
    %
    
    
    9,398Amortization of purchased intangible assets
    
    
    (2,190
    )
    
    
    -0.7
    %
    
    
    (261
    )
    
    
    -0.1
    %
    
    
    (1,929
    )Total gross profit
    
    
    92,613
    
    
    
    29.0
    %
    
    
    50,673
    
    
    
    24.9
    %
    
    
    41,940Operating expenses:Research and development
    
    
    34,641
    
    
    
    10.8
    %
    
    
    21,541
    
    
    
    10.6
    %
    
    
    13,100Selling, general and administrative
    
    
    60,493
    
    
    
    18.9
    %
    
    
    41,674
    
    
    
    20.5
    %
    
    
    18,819Amortization of purchased intangible assets
    
    
    4,076
    
    
    
    1.3
    %
    
    
    441
    
    
    
    0.2
    %
    
    
    3,635Gain on sale of real property
    
    
    
    
    
    
    0.0
    %
    
    
    (3,796
    )
    
    
    -1.9
    %
    
    
    3,796Total operating expenses
    
    
    99,210
    
    
    
    31.1
    %
    
    
    59,860
    
    
    
    29.5
    %
    
    
    39,350Loss from continuing operations
    
    
    (6,597
    )
    
    
    -2.1
    %
    
    
    (9,187
    )
    
    
    -4.5
    %
    
    
    2,590Non-operating income (expense)
    
    
    (3,191
    )
    
    
    -1.0
    %
    
    
    1,396
    
    
    
    0.7
    %
    
    
    (4,587
    )Loss before income taxes and
discontinued operations
    
    
    (9,788
    )
    
    
    -3.1
    %
    
    
    (7,791
    )
    
    
    -3.8
    %
    
    
    (1,997
    )Provision for income taxes
    
    
    (759
    )
    
    
    -0.2
    %
    
    
    (737
    )
    
    
    -0.4
    %
    
    
    (21
    )Loss before discontinued operations
    
    
    (10,547
    )
    
    
    -3.3
    %
    
    
    (8,528
    )
    
    
    -4.2
    %
    
    
    (2,019
    )Income (loss) from discontinued operations
    
    
    (55
    )
    
    
    0.0
    %
    
    
    789
    
    
    
    0.4
    %
    
    
    (844
    )Net loss
    
    $
    (10,602
    )
    
    
    -3.3
    %
    
    $
    (7,739
    )
    
    
    -3.8
    %
    
    
    (2,863
    )Basic and diluted loss per share
    
    $
    (0.20
    )
    
    
    
    
    
    $
    (0.15
    )
 Net Revenue
  26




---



##### Table of Contents



Product and Other Revenue
   Services Revenue
   Costs of Revenue and Gross Profit
   Product Gross Margin
   27




---



##### Table of Contents



Services Gross Margin
   Operating Expenses
     Non-Operating Income
  28




---



##### Table of Contents



Provision for Income Taxes
    Income from Discontinued Operations
  Segment Information
    29




---



##### Table of Contents



Three Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Dollar2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    ChangeNet revenue :Americas
    
    $
    42,436
    
    
    
    34.7
    %
    
    $
    39,218
    
    
    
    55.4
    %
    
    $
    3,218EMEA
    
    
    64,685
    
    
    
    52.9
    %
    
    
    17,581
    
    
    
    24.8
    %
    
    $
    47,104Asia-Pacific
    
    
    15,126
    
    
    
    12.4
    %
    
    
    14,019
    
    
    
    19.8
    %
    
    $
    1,107Total net revenue
    
    $
    122,247
    
    
    
    100.0
    %
    
    $
    70,818
    
    
    
    100.0
    %
    
    $
    51,429Operating income :Americas
    
    $
    4,299
    
    
    
    3.5
    %
    
    $
    4,393
    
    
    
    6.2
    %
    
    
    (94
    )EMEA
    
    
    10,193
    
    
    
    8.3
    %
    
    
    4,392
    
    
    
    6.2
    %
    
    
    5,801Asia-Pacific
    
    
    1,912
    
    
    
    1.6
    %
    
    
    3,006
    
    
    
    4.2
    %
    
    
    (1,094
    )Shared Cost Centers
    
    
    (12,948
    )
    
    
    -10.6
    %
    
    
    (11,230
    )
    
    
    -15.9
    %
    
    
    (1,718
    )Total operating income
    
    $
    3,456
    
    
    
    2.8
    %
    
    $
    561
    
    
    
    0.8
    %
    
    $
    2,895
 Nine Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Dollar2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    ChangeNet revenue :Americas
    
    $
    122,243
    
    
    
    38.3
    %
    
    $
    108,022
    
    
    
    53.2
    %
    
    
    14,221EMEA
    
    
    154,363
    
    
    
    48.3
    %
    
    
    56,962
    
    
    
    28.0
    %
    
    
    97,401Asia-Pacific
    
    
    42,761
    
    
    
    13.4
    %
    
    
    38,138
    
    
    
    18.8
    %
    
    
    4,623Total net revenue
    
    
    319,367
    
    
    
    100.0
    %
    
    
    203,122
    
    
    
    100.0
    %
    
    $
    116,245Operating income :Americas
    
    
    10,955
    
    
    
    3.4
    %
    
    
    4,732
    
    
    
    2.3
    %
    
    
    6,223EMEA
    
    
    18,246
    
    
    
    5.7
    %
    
    
    9,281
    
    
    
    4.6
    %
    
    
    8,965Asia-Pacific
    
    
    5,996
    
    
    
    1.9
    %
    
    
    6,635
    
    
    
    3.3
    %
    
    
    (639
    )Shared Cost Centers
    
    
    (41,794
    )
    
    
    -13.1
    %
    
    
    (29,835
    )
    
    
    -14.7
    %
    
    
    (11,959
    )Total operating income
    
    
    (6,597
    )
    
    
    -2.1
    %
    
    
    (9,187
    )
    
    
    -4.5
    %
    
    $
    2,590
  30




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##### Table of Contents



Cash Flows, Liquidity and Capital Resources
  Cash Flows.
    Liquidity and Capital Resources.
  31




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##### Table of Contents



Contractual Obligations
  Effect of Inflation
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
       32




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##### Table of Contents



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  EEOC Charge by Former Employee
  Appeal of Sichuan (China) Intermediate Court Actions No. 867 of 2005 and No. 145 of 2007
  
 Item 1A. Risk Factors.
  33




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##### Table of Contents



Our business may be negatively affected by the current global credit crisis.
    
 Item 6. Exhibits.
 Exhibit Number
    
    Description of Exhibit3.1
    
    Amended and Restated Certificate of Incorporation of
Hypercom Corporation (incorporated by reference to Exhibit
3.1 to Hypercom Corporations Registration Statement on
Form S-1 (Registration No. 333-35641))3.2
    
    Second Amended and Restated Bylaws of Hypercom Corporation
(incorporated by reference to Exhibit 3.1 to Hypercom
Corporations Current Report on Form 8-K filed on November
6, 2006)4.1
    
    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))4.2
    
    Warrant to Purchase Common Stock dated April 1, 2008
(incorporated by reference to Exhibit 4.1 to Hypercom
Corporations Current Report on Form 8-K filed on April 2,
2008, as amended by the Current Report on Form 8-K/A filed
on June 16, 2008)4.3
    
    Registration Rights Agreement, dated as of April 1, 2008,
by and between Hypercom Corporation and FP Hypercom Holdco,
LLC (incorporated by reference to Exhibit 4.2 to Hypercom
Corporations Current Report on Form 8-K filed on April 2,
2008, as amended by the Current Report on Form 8-K/A filed
on June 16, 2008)10.1
    
    Employment Contract, dated March 31, 2008, by and between
Thales e-Transactions SA and Henry Gaillard (incorporated
by reference to Exhibit 10.1 to Hypercom Corporations
Current Report on Form 8-K filed on July 11, 2008)10.2
    
    Amendment to Tartavull Employment Agreement, dated October
23, 2008, by and between Hypercom Corporation and Philippe
Tartavull (incorporated by reference to Exhibit 10.1 to
Hypercom Corporations Current Report on Form 8-K filed on
October 28, 2008)31.1
    
    Certification of Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2
    
    Certification of Chief Financial Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32
    
    Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 **
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 34




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##### Table of Contents



SIGNATURES
  HYPERCOM CORPORATIONDate: November 10, 2008
    
    By:  /s/ Philippe TartavullPhilippe TartavullChief Executive Officer and President (duly
authorized officer and principal executive
officer)Date: November 10, 2008
    
    By:  /s/ Robert M. VreelandRobert M. VreelandInterim Chief Financial Officer (principal
financial officer)Date: November 10, 2008
    
    By:  /s/ Shawn C. RathjeShawn C. RathjeChief Accounting Officer and Controller
(principal accounting officer) 35