##### 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 June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 1-13521
 HYPERCOM CORPORATION
  Delaware
    
    86-0828608(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)2851 West Kathleen Road, Phoenix, Arizona
    
    85053(Address of principal executive offices)
    
    (Zip Code)
 (602) 504-5000
 þ o
  o þ o
 o þ
  Class
    
    Outstanding at August 3, 2007Common Stock, $.001 par value per share
    
    53,032,115 shares




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##### Table of Contents



INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets  June 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations  Three and six months ended June 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows  Three and six months ended June 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 6. Exhibits
    
    
    30Signatures
    
    
    31EX-31.1EX-31.2EX-32
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements.
 HYPERCOM CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 June 30, 2007
    
    
    December 31,(unaudited)
    
    
    2006(Amounts in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    40,530
    
    
    $
    34,190Restricted cash
    
    
    257
    
    
    
    201Short-term investments
    
    
    40,668
    
    
    
    47,228Accounts receivable, net of allowance for doubtful accounts of
$2,449 and $1,934, respectively
    
    
    58,563
    
    
    
    52,777Inventories
    
    
    33,843
    
    
    
    52,632Prepaid expenses and other current assets
    
    
    13,324
    
    
    
    8,001Deferred tax assets, net
    
    
    921
    
    
    
    691Total current assets
    
    
    188,106
    
    
    
    195,720Property, plant and equipment, net
    
    
    17,508
    
    
    
    27,261Intangible assets, net
    
    
    11,142
    
    
    
    5,733Other long-term assets
    
    
    16,330
    
    
    
    8,002Total assets
    
    $
    233,086
    
    
    $
    236,716LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19,869
    
    
    $
    22,931Accrued payroll and related expenses
    
    
    8,015
    
    
    
    6,201Accrued sales and other taxes
    
    
    7,847
    
    
    
    7,781Product warranty liabilities
    
    
    3,766
    
    
    
    2,636Accrued other liabilities
    
    
    11,911
    
    
    
    9,603Deferred revenue
    
    
    3,982
    
    
    
    2,185Income taxes payable
    
    
    1,129
    
    
    
    2,460Total current liabilities
    
    
    56,519
    
    
    
    53,797Deferred tax liabilities
    
    
    608
    
    
    
    380Other long-term liabilities
    
    
    3,794
    
    
    
    3,608Total liabilities
    
    
    60,921
    
    
    
    57,785Stockholders equity:Common stock, $.001 par value; 100,000,000 shares authorized;
53,202,656 and 53,127,205 shares outstanding, respectively
    
    
    56
    
    
    
    56Additional paid-in capital
    
    
    249,491
    
    
    
    247,989Accumulated deficit
    
    
    (54,633
    )
    
    
    (46,365
    )Treasury stock, 3,162,248 shares (at cost)
    
    
    (22,749
    )
    
    
    (22,749
    )Total stockholders equity
    
    
    172,165
    
    
    
    178,931Total liabilities and stockholders equity
    
    
    233,086
    
    
    $
    236,716
  3




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##### Table of Contents



HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Amounts in thousands, except share data)Net revenue:Products
    
    $
    47,865
    
    
    $
    51,379
    
    
    $
    96,033
    
    
    $
    98,219Services
    
    
    19,612
    
    
    
    14,765
    
    
    
    36,271
    
    
    
    28,894Total net revenue
    
    
    67,477
    
    
    
    66,144
    
    
    
    132,304
    
    
    
    127,113Costs of revenue:Products
    
    
    41,296
    
    
    
    29,324
    
    
    
    71,042
    
    
    
    56,850Services
    
    
    17,467
    
    
    
    9,426
    
    
    
    31,820
    
    
    
    19,350Total costs of revenue
    
    
    58,763
    
    
    
    38,750
    
    
    
    102,862
    
    
    
    76,200Gross profit
    
    
    8,714
    
    
    
    27,394
    
    
    
    29,442
    
    
    
    50,913Operating expenses:Research and development
    
    
    8,108
    
    
    
    6,504
    
    
    
    15,437
    
    
    
    12,498Selling, general and administrative
    
    
    11,355
    
    
    
    16,481
    
    
    
    27,527
    
    
    
    31,096Gain on sale of real property
    
    
    (3,774
    )
    
    
    
    
    
    
    (3,774
    )
    
    
    Total operating expenses
    
    
    15,689
    
    
    
    22,985
    
    
    
    39,190
    
    
    
    43,594Income (loss) from continuing operations
    
    
    (6,975
    )
    
    
    4,409
    
    
    
    (9,748
    )
    
    
    7,319Interest income
    
    
    842
    
    
    
    1,383
    
    
    
    1,726
    
    
    
    2,330Interest expense
    
    
    (58
    )
    
    
    (468
    )
    
    
    (103
    )
    
    
    (637
    )Foreign currency loss
    
    
    (411
    )
    
    
    (309
    )
    
    
    (1,029
    )
    
    
    (533
    )Other income (expense)
    
    
    2
    
    
    
    8
    
    
    
    6
    
    
    
    (8
    )Income (loss) before income taxes and
discontinued operations
    
    
    (6,600
    )
    
    
    5,023
    
    
    
    (9,148
    )
    
    
    8,471(Provision) benefit for income taxes
    
    
    896
    
    
    
    (813
    )
    
    
    229
    
    
    
    (1,472
    )Income (loss) before discontinued operations
    
    
    (5,704
    )
    
    
    4,210
    
    
    
    (8,919
    )
    
    
    6,999Income (loss) from discontinued operations
    
    
    (39
    )
    
    
    2,018
    
    
    
    651
    
    
    
    2,367Net income (loss)
    
    $
    (5,743
    )
    
    $
    6,228
    
    
    $
    (8,268
    )
    
    $
    9,366Basic income (loss) per share:Income (loss) before discontinued operations
    
    $
    (0.11
    )
    
    $
    0.08
    
    
    $
    (0.17
    )
    
    $
    0.13Income from discontinued operations
    
    
    
    
    
    
    0.04
    
    
    
    0.01
    
    
    
    0.05Basic income (loss) per share
    
    $
    (0.11
    )
    
    $
    0.12
    
    
    $
    (0.16
    )
    
    $
    0.18Diluted income (loss) per share:Income (loss) before discontinued operations
    
    $
    (0.11
    )
    
    $
    0.08
    
    
    $
    (0.17
    )
    
    $
    0.13Income from discontinued operations
    
    
    
    
    
    
    0.03
    
    
    
    0.01
    
    
    
    0.04Diluted income (loss) per share
    
    $
    (0.11
    )
    
    $
    0.11
    
    
    $
    (0.16
    )
    
    $
    0.17Basic weighted average common shares
    
    
    53,167,875
    
    
    
    53,405,144
    
    
    
    53,172,190
    
    
    
    52,852,047Diluted weighted average common shares
    
    
    53,167,875
    
    
    
    54,370,400
    
    
    
    53,172,190
    
    
    
    53,785,674
  4




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##### Table of Contents



HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six Months Ended June 30,2007
    
    
    2006(Amounts
in thousands)Cash flows from continuing operations:Net income (loss) from continuing operations
    
    $
    (8,919
    )
    
    $
    6,999Adjustments to reconcile net income (loss)
from continuing operations to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    4,368
    
    
    
    3,837Amortization of deferred financing costs
    
    
    
    
    
    
    4Amortization of discounts on short-term
investments
    
    
    (553
    )
    
    
    (686
    )Provision for doubtful accounts
    
    
    577
    
    
    
    469Provision for excess and obsolete inventory
    
    
    6,632
    
    
    
    970Provision (benefit) for warranty and other product charges
    
    
    1,893
    
    
    
    (680
    )Deferred income tax benefit (provision)
    
    
    (2
    )
    
    
    37Non-cash share-based compensation expense
    
    
    1,045
    
    
    
    2,879Foreign currency losses
    
    
    (259
    )
    
    
    (481
    )Gain on sale of real property
    
    
    (3,774
    )
    
    
    Other non-cash write-off of intangibles and other assets
    
    
    427
    
    
    
    336Changes in operating assets and
liabilities, net
    
    
    (637
    )
    
    
    (8,335
    )Net cash provided by operating activities
    
    
    798
    
    
    
    5,349Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (4,717
    )
    
    
    (3,773
    )Proceeds from the sale of real property
    
    
    16,250
    
    
    
    Cash paid for acquisitions, net of cash acquired
    
    
    (12,707
    )
    
    
    Software development costs capitalized
    
    
    (902
    )
    
    
    (501
    )Net increase in restricted cash
    
    
    (56
    )
    
    
    (133
    )Purchase of short-term investments
    
    
    (97,722
    )
    
    
    (152,649
    )Proceeds from the sale or maturity of
short-term investments
    
    
    104,835
    
    
    
    135,675Net cash provided by (used in) investing activities
    
    
    4,981
    
    
    
    (21,381
    )Cash flows from financing activities:Repayments of bank notes payable and other
debt instruments
    
    
    (5
    )
    
    
    (8,330
    )Proceeds from issuance of common stock
    
    
    271
    
    
    
    4,394Purchase of treasury stock
    
    
    
    
    
    
    (671
    )Net cash provided by (used in) financing activities
    
    
    266
    
    
    
    (4,607
    )Effect of exchange rate changes on cash
    
    
    295
    
    
    
    296Net increase (decrease) in cash flows from
continuing operations
    
    
    6,340
    
    
    
    (20,343
    )Net cash provided by operating
activities  discontinued operations
    
    
    
    
    
    
    4,597Net cash provided by investing activities -
discontinued operations
    
    
    
    
    
    
    12,137Cash and cash equivalents, beginning of period
    
    
    34,190
    
    
    
    35,940Cash and cash equivalents, end of period
    
    $
    40,530
    
    
    $
    32,331
  5




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##### Table of Contents



HYPERCOM CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2007
 (Unaudited)
 1. Basis of Presentation
   2. Restructuring and Other Charges
 2007
   
 
 
 
  6




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##### Table of Contents



CostsIncurredDuring the
    
    
    Costs IncurredTotal Costs
    
    
    three months
    
    
    During the six
    
    
    AccruedExpected to be
    
    
    ended June 30,
    
    
    months ended
    
    
    Liability atIncurred
    
    
    2007
    
    
    June 30, 2007
    
    
    June 30, 2007Costs of revenues:Severance Reserve
    
    $
    308
    
    
    $
    308
    
    
    $
    308
    
    
    $
    308Cost associated with transition
to contract manufacturing
    
    
    437
    
    
    
    437
    
    
    
    437
    
    
    
    Research and development:Severance Reserve
    
    
    399
    
    
    
    399
    
    
    
    399
    
    
    
    399Selling, general and administrative:Severance Reserve
    
    
    230
    
    
    
    230
    
    
    
    230
    
    
    
    230Total charges
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    937
 2005 Business Review
   7




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##### Table of Contents



TotalCosts
    
    
    Costs
    
    
    Costs
    
    
    Costs
    
    
    AccrualsExpected
    
    
    Incurred
    
    
    Incurred
    
    
    Incurred
    
    
    Reversed
    
    
    Balance atto be
    
    
    During
    
    
    During
    
    
    During
    
    
    During
    
    
    June 30,Incurred
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2007Costs of revenues:Warranty charges and product
replacement accruals
    
    $
    7,374
    
    
    $
    3,832
    
    
    $
    2,702
    
    
    $
    146
    
    
    $
    
    
    
    $
    694
    (a)Inventory write-downs, primarily
for product end-of-life
decisions
    
    
    12,111
    
    
    
    12,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    One-time termination benefits and
related employment costs
    
    
    469
    
    
    
    351
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    Total costs of revenue charges
    
    
    19,954
    
    
    
    16,294
    
    
    
    2,820
    
    
    
    146
    
    
    
    
    
    
    
    694Operating expenses:One-time termination benefits and
related employment costs
    
    
    3,370
    
    
    
    2,551
    
    
    
    819
    
    
    
    
    
    
    
    
    
    
    
    Idled facility lease charge
    
    
    1,013
    
    
    
    195
    
    
    
    267
    
    
    
    536
    
    
    
    15
    (b)
    
    
    Total operating expenses
    
    
    4,383
    
    
    
    2,746
    
    
    
    1,086
    
    
    
    536
    
    
    
    15
    
    
    
    Total charges
    
    $
    24,337
    
    
    $
    19,040
    
    
    $
    3,906
    
    
    $
    682
    
    
    $
    15
    
    
    $
    694
 
 (a)
    
    These accrued liability balances are recorded as current product warranty liabilities
as these amounts are expected to be paid during 2007.(b)
    
    The Company negotiated an
early termination of the lease with the landlord. The
difference between the amount paid and the balance in the accrual was $15,000. 3. Discontinued Operations
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues
    
    $
    
    
    
    $
    1,119
    
    
    $
    
    
    
    $
    3,230Costs (Reversal) of revenue
    
    
    39
    
    
    
    (103
    )
    
    
    (651
    )
    
    
    1,195Gross profit
(loss) (a)
    
    
    (39
    )
    
    
    1,222
    
    
    
    651
    
    
    
    2,035Selling, general and administrative
expenses
    
    
    
    
    
    
    (525
    )
    
    
    
    
    
    
    (886
    )Foreign currency loss
    
    
    
    
    
    
    (240
    )
    
    
    
    
    
    
    (343
    )Gain on sale
    
    
    
    
    
    
    1,561
    
    
    
    
    
    
    
    1,561(39
    )
    
    
    2,018
    
    
    
    651
    
    
    
    2,367Income (loss) from discontinued
operations
    
    $
    (39
    )
    
    $
    2,018
    
    
    $
    651
    
    
    $
    2,367
 
 (a)
    
    The Company recorded a gain during the six months ended June 30, 2007 from a rebate of
previously paid lease origination commission payments related to the U.K. lease portfolio that
was sold in 2006. 8




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##### Table of Contents



4. Business Acquisition
   Business Combinations
 Goodwill and Other Intangible Assets
 5. Share-Based Compensation
 Share-Based Payment
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Costs of revenue  Products
    
    $
    33
    
    
    $
    79
    
    
    $
    82
    
    
    $
    98Costs of revenue  Services
    
    
    
    
    
    
    
    
    
    $
    1
    
    
    $
    Research and
development costs (reversals)
    
    
    (176
    )
    
    
    222
    
    
    
    (25
    )
    
    
    409Selling, general and administrative
expenses (reversals)
    
    
    (550
    )
    
    
    1,711
    
    
    
    987
    
    
    
    2,372Total
share-based compensation (reversals)
    
    $
    (693
    )
    
    $
    2,012
    
    
    $
    1,045
    
    
    $
    2,879
 9




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##### Table of Contents



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 June 30, 2007
    
    
    3,520,575
    
    
    $
    7.85
    
    
    
    6.10
    
    
    $
    1,383Vested and expected to vest at
June 30, 2007
    
    
    3,415,400
    
    
    $
    7.88
    
    
    
    5.94
    
    
    $
    1,375Exercisable at June 30, 2007
    
    
    2,357,272
    
    
    $
    7.82
    
    
    
    4.82
    
    
    $
    1,310
   10




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006Weighted average fair value of
options granted
    
    $
    5.58
    
    
    $
    6.35
    
    
    $
    5.77
    
    
    $
    6.01Key assumptions used in determining
the fair value:Weighted average risk free
interest rate
    
    
    4.53
    %
    
    
    4.88
    %
    
    
    4.54
    %
    
    
    4.82
    %Expected life of the option (in
years)
    
    
    5.51
    
    
    
    5.49
    
    
    
    5.47
    
    
    
    5.48Expected stock price volatility
    
    
    59.6
    %
    
    
    65.1
    %
    
    
    59.9
    %
    
    
    67.0
    %Expected dividend rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Restricted Stock Awards
  Number of
    
    WeightedNonvested
    
    AverageRestricted
    
    Grant DateStock Awards
    
    Fair ValueBalance at December 31, 2006
    
    
    342,432
    
    
    $
    6.92Granted
    
    
    85,000
    
    
    
    5.90Vested
    
    
    (35,000
    )
    
    
    5.90Forfeited
    
    
    (75,000
    )
    
    
    7.36Balance at June 30, 2007
    
    
    317,432
    
    
    
    6.66
 Employee Stock Purchase Plan
  6. Restricted Cash
  11




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##### Table of Contents



7. Short-term Investments
    June 30,
    
    
    December 31,2007
    
    
    2006Municipal debt securities
    
    $
    9,975
    
    
    $
    10,400U.S. government and agency debt securities
    
    
    4,982
    
    
    
    5,977Asset backed auction rate securities
    
    
    6,600
    
    
    
    Corporate debt securities
    
    
    19,111
    
    
    
    23,001Preferred equity securities
    
    
    
    
    
    
    7,850$
    40,668
    
    
    $
    47,228
 8. Inventories
  June 30,
    
    
    December 31,2007
    
    
    2006Purchased parts
    
    $
    13,505
    
    
    $
    24,367Work in progress
    
    
    6,084
    
    
    
    6,008Finished goods
    
    
    14,254
    
    
    
    22,257$
    33,843
    
    
    $
    52,632
  9. Product Warranty
  12




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    2,486
    
    
    $
    4,301
    
    
    $
    2,636
    
    
    $
    5,534Warranty charges (reversals)
from normal operations
    
    
    1,597
    
    
    
    523
    
    
    
    1,893
    
    
    
    (680
    )Warranty reversals related to
the 2005 Business Review
    
    
    
    
    
    
    (1,384
    )
    
    
    (100
    )
    
    
    (1,384
    )Utilization of warranty liability
    
    
    (317
    )
    
    
    (257
    )
    
    
    (663
    )
    
    
    (287
    )Balance at end of period
    
    $
    3,766
    
    
    $
    3,183
    
    
    $
    3,766
    
    
    $
    3,183
    10. Sale of Headquarter Facilities
  11. Equity Transactions
   12. Earnings per Share
  13




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006Shares used in basic income (loss) per
share calculation (weighted average
common shares outstanding)
    
    
    53,167,875
    
    
    
    53,405,144
    
    
    
    53,172,190
    
    
    
    52,852,047Dilutive effect of stock options and
warrants
    
    
    
    
    
    
    965,256
    
    
    
    
    
    
    
    933,627Shares used in diluted income per
share calculation
    
    
    53,167,875
    
    
    
    54,370,400
    
    
    
    53,172,190
    
    
    
    53,785,674Options, stock awards and warrants that
could potentially dilute income per share
in the future that were not included
in the computation of diluted income per share
    
    
    3,580,709
    
    
    
    3,797,072
    
    
    
    3,572,954
    
    
    
    3,995,606
    (a)
 
 (a)
    
    These options, restricted stock awards and warrants were not included in the
computation of diluted income (loss) per share because they were anti-dilutive. 13. Segment and Geographic Information
 Disclosures about
Segments of an Enterprise and Related Information
  14




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net RevenueAmericas
    
    $
    34,535
    
    
    $
    38,020
    
    
    $
    68,803
    
    
    $
    74,208EMEA
    
    
    20,440
    
    
    
    18,652
    
    
    
    39,381
    
    
    
    34,011Asia-Pacific
    
    
    12,502
    
    
    
    9,472
    
    
    
    24,120
    
    
    
    18,894Shared cost
centers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    67,477
    
    
    $
    66,144
    
    
    $
    132,304
    
    
    $
    127,113Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating IncomeAmericas
    
    $
    (2,631
    )
    
    $
    9,405
    
    
    $
    369
    
    
    $
    17,794EMEA
    
    
    51
    
    
    
    3,847
    
    
    
    5,122
    
    
    
    6,626Asia-Pacific
    
    
    1,334
    
    
    
    4,142
    
    
    
    3,723
    
    
    
    7,512Shared cost
centers
    
    
    (5,729
    )
    
    
    (12,985
    )
    
    
    (18,962
    )
    
    
    (24,613
    )Total segment profit
    
    $
    (6,975
    )
    
    $
    4,409
    
    
    $
    (9,748
    )
    
    $
    7,319Interest income
    
    
    842
    
    
    
    1,383
    
    
    
    1,726
    
    
    
    2,330Interest expense
    
    
    (58
    )
    
    
    (468
    )
    
    
    (103
    )
    
    
    (637
    )Foreign currency loss
    
    
    (411
    )
    
    
    (309
    )
    
    
    (1,029
    )
    
    
    (533
    )Other Income (expense)
    
    
    2
    
    
    
    8
    
    
    
    6
    
    
    
    (8
    )Income (loss) before income taxes
and discontinued operations
    
    $
    (6,600
    )
    
    $
    5,023
    
    
    $
    (9,148
    )
    
    $
    8,471
 June 30,
    
    
    December 31,2007
    
    
    2006Total AssetsAmericas
    
    $
    75,748
    
    
    $
    68,578EMEA
    
    
    28,647
    
    
    
    35,710Asia-Pacific
    
    
    56,165
    
    
    
    60,031Shared cost
centers
    
    
    72,526
    
    
    
    72,397$
    233,086
    
    
    $
    236,716
 14. Income Taxes
    15




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##### Table of Contents



Accounting
for Income Taxes
 Accounting for Uncertainty in Income
Taxes
    15. Commitments and Contingencies
 Litigation
  Verve LLC v. Hypercom Corporation (United States District Court for the District of Arizona, Civil
Action No. 05-CV-0365-PHX-FJM, filed on February 4, 2004)
  16




---



##### Table of Contents



Hypercom Corporation vs. Omron Corporation (United States District Court for the District of
Arizona, Civil Action No. 04-CV-0400-PHX-PGR, filed on February 25, 2004)
  International Taxes
  17




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Cautionary Statements Regarding Forward-looking Statements
    
    
    the volatility of our financial results and our stock price;
    
    the loss of a key customer;
    
    defects in our products;
    
    the accumulation of obsolete inventory;
    
    breaches in the security of transactions involving our products;
    
    our inability to adequately protect our proprietary technology;
    
    our technology infringing the proprietary rights of third parties;
    
    a disruption in our manufacturing capabilities or those of our third-party manufacturers or suppliers;
    
    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;
    
    our expected transition to a contract manufacturing model;
    
    the challenges posed by conducting business in international markets;
    
    fluctuations in currency exchange rates;
    
    the loss of members of our senior management team or other key employees;
    
    risks associated with acquisitions and other strategic investments;
    
    force majeure events;
    
    country-specific changing economic 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;
 18




---



##### Table of Contents




    
    our ability to assimilate and integrate acquired technologies or businesses;
    
    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; and
    
    incurring debt to meet the future capital requirements of our business.
  Critical Accounting Policies and Estimates
  Business Acquisition
   Business Combinations
 Goodwill and Other Intangible Assets,
 19




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##### Table of Contents



2007
Restructuring
   
 
 
 
  Results of Operations
 Three Months Ended June 30,% of
    
    
    
    
    
    
    % of
    
    
    Dollar(Dollars in thousands, except per share data)
    
    2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    ChangeNet revenue:Products
    
    $
    47,865
    
    
    
    70.9
    %
    
    $
    51,379
    
    
    
    77.7
    %
    
    $
    (3,514
    )Services
    
    
    19,612
    
    
    
    29.1
    %
    
    
    14,765
    
    
    
    22.3
    %
    
    
    4,847Total net revenue
    
    
    67,477
    
    
    
    100.0
    %
    
    
    66,144
    
    
    
    100.0
    %
    
    
    1,333Costs of revenue:Products
    
    
    41,296
    
    
    
    86.3
    %
    
    
    29,324
    
    
    
    57.1
    %
    
    
    11,972Services
    
    
    17,467
    
    
    
    89.1
    %
    
    
    9,426
    
    
    
    63.8
    %
    
    
    8,041Total costs of revenue
    
    
    58,763
    
    
    
    87.1
    %
    
    
    38,750
    
    
    
    58.6
    %
    
    
    20,013Gross profit:Products
    
    
    6,569
    
    
    
    13.7
    %
    
    
    22,055
    
    
    
    42.9
    %
    
    
    (15,486
    )Services
    
    
    2,145
    
    
    
    10.9
    %
    
    
    5,339
    
    
    
    36.2
    %
    
    
    (3,194
    )Total gross profit
    
    
    8,714
    
    
    
    12.9
    %
    
    
    27,394
    
    
    
    41.4
    %
    
    
    (18,680
    )Operating expenses:Research and development
    
    
    8,108
    
    
    
    12.0
    %
    
    
    6,504
    
    
    
    9.8
    %
    
    
    1,604Selling, general and administrative
    
    
    11,355
    
    
    
    16.8
    %
    
    
    16,481
    
    
    
    24.9
    %
    
    
    (5,126
    )Gain on sale of real property
    
    
    (3,774
    )
    
    
    -5.6
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (3,774
    )Total operating expenses
    
    
    15,689
    
    
    
    23.3
    %
    
    
    22,985
    
    
    
    34.7
    %
    
    
    (7,296
    )Income (loss) from continuing operations
    
    
    (6,975
    )
    
    
    -10.3
    %
    
    
    4,409
    
    
    
    6.7
    %
    
    
    (11,384
    )Non-operating income
    
    
    375
    
    
    
    0.6
    %
    
    
    614
    
    
    
    0.9
    %
    
    
    (239
    )Income (loss) before income taxes and
discontinued operations
    
    
    (6,600
    )
    
    
    -9.8
    %
    
    
    5,023
    
    
    
    7.6
    %
    
    
    (11,623
    )(Provision) benefit for income taxes
    
    
    896
    
    
    
    1.3
    %
    
    
    (813
    )
    
    
    -1.2
    %
    
    
    1,709Income (loss) before discontinued operations
    
    
    (5,704
    )
    
    
    -8.5
    %
    
    
    4,210
    
    
    
    6.4
    %
    
    
    (9,914
    )Income (loss) from discontinued operations
    
    
    (39
    )
    
    
    -0.1
    %
    
    
    2,018
    
    
    
    3.1
    %
    
    
    (2,057
    )Net income (loss)
    
    $
    (5,743
    )
    
    
    -8.5
    %
    
    $
    6,228
    
    
    
    9.4
    %
    
    $
    (11,971
    )Diluted income (loss) per share
    
    $
    (0.11
    )
    
    
    
    
    
    $
    0.11
    
    
    
    
    
    
    $
    (0.22
    )
 20




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##### Table of Contents



Six Months Ended June 30,% of
    
    
    
    
    
    
    % of(Dollars in thousands, except per share data)
    
    2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollar ChangeNet revenue:Products
    
    $
    96,033
    
    
    
    72.6
    %
    
    $
    98,219
    
    
    
    77.3
    %
    
    $
    (2,186
    )Services
    
    
    36,271
    
    
    
    27.4
    %
    
    
    28,894
    
    
    
    22.7
    %
    
    
    7,377Total net revenue
    
    
    132,304
    
    
    
    100.0
    %
    
    
    127,113
    
    
    
    100.0
    %
    
    
    5,191Costs of revenue:Products
    
    
    71,042
    
    
    
    74.0
    %
    
    
    56,850
    
    
    
    57.9
    %
    
    
    14,192Services
    
    
    31,820
    
    
    
    87.7
    %
    
    
    19,350
    
    
    
    67.0
    %
    
    
    12,470Total costs of revenue
    
    
    102,862
    
    
    
    77.7
    %
    
    
    76,200
    
    
    
    59.9
    %
    
    
    26,662Gross profit:Products
    
    
    24,991
    
    
    
    26.0
    %
    
    
    41,369
    
    
    
    42.1
    %
    
    
    (16,378
    )Services
    
    
    4,451
    
    
    
    12.3
    %
    
    
    9,544
    
    
    
    33.0
    %
    
    
    (5,093
    )Total gross profit
    
    
    29,442
    
    
    
    22.3
    %
    
    
    50,913
    
    
    
    40.1
    %
    
    
    (21,471
    )Operating expenses:Research and development
    
    
    15,437
    
    
    
    11.7
    %
    
    
    12,498
    
    
    
    9.8
    %
    
    
    2,939Selling, general and administrative
    
    
    27,527
    
    
    
    20.8
    %
    
    
    31,096
    
    
    
    24.5
    %
    
    
    (3,569
    )Gain on sale of real property
    
    
    (3,774
    )
    
    
    -2.9
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (3,774
    )Total operating expenses
    
    
    39,190
    
    
    
    29.6
    %
    
    
    43,594
    
    
    
    34.3
    %
    
    
    (4,404
    )Income (loss) from continuing operations
    
    
    (9,748
    )
    
    
    -7.4
    %
    
    
    7,319
    
    
    
    5.8
    %
    
    
    (17,067
    )Non-operating income
    
    
    600
    
    
    
    0.5
    %
    
    
    1,152
    
    
    
    0.9
    %
    
    
    (552
    )Income (loss) before income taxes and
discontinued operations
    
    
    (9,148
    )
    
    
    -6.9
    %
    
    
    8,471
    
    
    
    6.7
    %
    
    
    (17,619
    )(Provision) benefit for income taxes
    
    
    229
    
    
    
    0.2
    %
    
    
    (1,472
    )
    
    
    -1.2
    %
    
    
    1,701Income (loss) before discontinued operations
    
    
    (8,919
    )
    
    
    -6.7
    %
    
    
    6,999
    
    
    
    5.5
    %
    
    
    (15,918
    )Income (loss) from discontinued operations
    
    
    651
    
    
    
    0.5
    %
    
    
    2,367
    
    
    
    1.9
    %
    
    
    (1,716
    )Net income (loss)
    
    $
    (8,268
    )
    
    
    -6.2
    %
    
    $
    9,366
    
    
    
    7.4
    %
    
    $
    (17,634
    )Diluted income (loss) per share
    
    $
    (.16
    )
    
    
    
    
    
    $
    0.17
    
    
    
    
    
    
    $
    (.33
    )
 Net Revenue
   21




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##### Table of Contents



Costs of Revenue and Gross Profit
   
    
    A total of $9.6 million of charges, including increased inventory reserves related to
non-PCI compliant current finished goods inventory and components of $6.8 million; a product warranty settlement
paid to a European customer of $1.3 million; $0.5 million of costs associated with the
transition to contract manufacturing; the write-off of $0.4 million of capitalized
software; and $0.6 million of various other charges. These charges reduced the product
gross profit by 20.1 percentage points from 33.8% to 13.7%.
    
    A change in the mix of product sales from mature, cost-reduced, high margin T7Plus
terminals, to lower margin, newer terminals such as the T2100 and L4100. New terminals have
traditionally been introduced
 22




---



##### Table of Contents



at higher cost with the assumption that they will be cost
engineered over time, eventually increasing gross margins.
    
    Global price pressure has reduced average selling prices in virtually all terminal
categories.
    Operating Expenses
    23




---



##### Table of Contents



Non-Operating Income
  Provision for Income Taxes
    Income from Discontinued Operations
  24




---



##### Table of Contents



Segment Information
     Three Months Ended June 30,Dollar2007
    
    
    % of Revenue
    
    
    2006
    
    
    % of Revenue
    
    
    ChangeNet revenues:Americas
    
    $
    34,535
    
    
    
    51.2
    %
    
    $
    38,020
    
    
    
    57.5
    %
    
    $
    (3,485
    )EMEA
    
    
    20,440
    
    
    
    30.3
    %
    
    
    18,652
    
    
    
    28.2
    %
    
    
    1,788Asia-Pacific
    
    
    12,502
    
    
    
    18.5
    %
    
    
    9,472
    
    
    
    14.3
    %
    
    
    3,031Total net revenues
    
    $
    67,477
    
    
    
    100.0
    %
    
    $
    66,144
    
    
    
    100.0
    %
    
    $
    1,334Operating income:Americas
    
    $
    (2,631
    )
    
    
    -3.9
    %
    
    $
    9,405
    
    
    
    14.2
    %
    
    $
    (12,036
    )EMEA
    
    
    51
    
    
    
    0.1
    %
    
    
    3,847
    
    
    
    5.8
    %
    
    
    (3,796
    )Asia-Pacific
    
    
    1,334
    
    
    
    2.0
    %
    
    
    4,142
    
    
    
    6.3
    %
    
    
    (2,808
    )Shared Cost Centers
    
    
    (5,729
    )
    
    
    -8.5
    %
    
    
    (12,985
    )
    
    
    -19.6
    %
    
    
    7,256Total operating income
    
    $
    (6,975
    )
    
    
    -10.3
    %
    
    $
    4,409
    
    
    
    6.7
    %
    
    $
    (11,384
    )Six Months Eneded June 30,Dollar2007
    
    
    % of Revenue
    
    
    2006
    
    
    % of Revenue
    
    
    ChangeNet revenues:Americas
    
    $
    68,803
    
    
    
    52.0
    %
    
    $
    74,208
    
    
    
    58.4
    %
    
    $
    (5,405
    )EMEA
    
    
    39,381
    
    
    
    29.8
    %
    
    
    34,011
    
    
    
    26.8
    %
    
    
    5,370Asia-Pacific
    
    
    24,120
    
    
    
    18.2
    %
    
    
    18,894
    
    
    
    14.9
    %
    
    
    5,226Total net revenues
    
    $
    132,304
    
    
    
    100.0
    %
    
    $
    127,113
    
    
    
    100.0
    %
    
    $
    5,191Operating income:Americas
    
    $
    369
    
    
    
    0.3
    %
    
    $
    17,794
    
    
    
    14.0
    %
    
    $
    (17,425
    )EMEA
    
    
    5,122
    
    
    
    3.9
    %
    
    
    6,626
    
    
    
    5.2
    %
    
    
    (1,504
    )Asia-Pacific
    
    
    3,723
    
    
    
    2.8
    %
    
    
    7,512
    
    
    
    5.9
    %
    
    
    (3,789
    )Shared Cost Centers
    
    
    (18,962
    )
    
    
    -14.3
    %
    
    
    (24,613
    )
    
    
    -19.4
    %
    
    
    5,651Total operating income
    
    $
    (9,748
    )
    
    
    -7.4
    %
    
    $
    7,319
    
    
    
    5.8
    %
    
    $
    (17,067
    )
 25




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##### Table of Contents



Cash Flows, Liquidity and Capital Resources
  Cash Flows
  26




---



##### Table of Contents



Liquidity and Capital Resources
 Contractual Obligations
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
     27




---



##### 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.
  28




---



##### Table of Contents



Verve LLC v. Hypercom Corporation
 Hypercom Corporation vs. Omron Corporation
 
 Item 1A. Risk Factors.
  Our future success is substantially dependent on the continued service of our senior management and
other key employees.
   
 Item 4. Submission of Matters to a Vote of Security Holders.
  29




---



##### Table of Contents



Election of DirectorsNominee
    
    For
    
    WithheldWilliam
Keiper (1)
    
    
    33,034,123
    
    
    
    14,322,064Phillip J. Riese
    
    
    33,624,111
    
    
    
    13,732,076
 
 (1)
    
    Mr. Keiper will be
resigning from the Companys Board of Directors effective
August 15, 2007. 
 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)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. 30




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##### Table of Contents



SIGNATURES
  HYPERCOM CORPORATIONDate: August 9, 2007
    By:
    /s/ William KeiperWilliam KeiperChief Executive Officer (duly authorized officer and principal executive officer)Date: August 9, 2007
    By:
    /s/ Thomas LiguoriThomas LiguoriSenior Vice President and Chief Financial Officer (principal financial and accounting officer) 31