UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





ý
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended September 30, 2009ORo
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ________________ to
      ________________





Commission
file number:  1-13521








HYPERCOM
CORPORATION


(Exact
name of registrant as specified in its charter)





Delaware
            
            86-0828608(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)8888
      East Raintree Drive, Suite 300
              Scottsdale,
      Arizona
            
            85260(Address
      of principal executive offices)
            
            (Zip
      Code)





(480)
642-5000


(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 [ √
]                                           No  [   ]





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes
[   ]                                           No  [   ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer
[   ]                                                                                                Accelerated
filer [ √ ]





Non-accelerated
filer  [   ]                                                                                                Smaller
reporting company  [   ]


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes
[   ]No  [ √ ]





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.








Class
            
            Outstanding
      at November 6, 2009Common
      Stock, $.001 par value per share
            
            54,672,478
      shares







INDEX





PagePART
      I.
            FINANCIAL
      INFORMATIONItem 1.
            Financial Statements
            1Consolidated Balance Sheets – September 30, 2009 and December
      31, 2008
            1Consolidated Statements of Operations – Three and nine months
      ended September 30, 2009 and 2008
            2Consolidated Statements of Cash Flows – Three and nine months
      ended September 30, 2009 and 2008
            3Notes to Consolidated Financial
    Statements
            4Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            17Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            28Item 4.
            Controls and Procedures
            28PART
      II.
            OTHER
      INFORMATIONItem 1.
            Legal Proceedings
            29Item 1A.
            Risk Factors
            29Item 6.
            Exhibits
            29Signatures
            30Exhibit 31.1Exhibit 31.2Exhibit 32




Table of Contents


PART I — FINANCIAL INFORMATION





Item 1.  Financial Statements.


HYPERCOM CORPORATION
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)





September 30,
              
              
              December 31,2009
              
              
              2008Amounts in thousands, except share dataASSETSCurrent assets:Cash and cash equivalents
              
              $
              51,202
              
              
              $
              35,978Short-term investments
              
              
              -
              
              
              
              499Accounts receivable, net of allowance for
      doubtfulaccounts of $5,258 and $4,799,
      respectively
              
              
              83,624
              
              
              
              96,986Current portion of net investment in sales-type
      leases
              
              
              7,168
              
              
              
              9,915Inventories
              
              
              29,285
              
              
              
              31,681Prepaid expenses and other current
    assets
              
              
              7,964
              
              
              
              7,106Deferred income taxes
              
              
              1,344
              
              
              
              1,320Total current assets
              
              
              180,587
              
              
              
              183,485Property, plant and equipment, net
              
              
              27,211
              
              
              
              26,870Net investment in sales-type leases
              
              
              6,036
              
              
              
              4,869Intangible assets, net
              
              
              52,223
              
              
              
              57,311Goodwill
              
              
              28,036
              
              
              
              26,715Other long-term assets
              
              
              8,186
              
              
              
              7,050Total assets
              
              $
              302,279
              
              
              $
              306,300LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable
              
              $
              40,206
              
              
              $
              52,929Accrued payroll and related expenses
              
              
              16,644
              
              
              
              16,619Accrued sales and other taxes
              
              
              6,123
              
              
              
              7,709Product warranty liabilities
              
              
              6,309
              
              
              
              6,597Restructuring liabilities
              
              
              8,798
              
              
              
              7,724Accrued other liabilities
              
              
              24,789
              
              
              
              22,866Deferred revenue
              
              
              13,369
              
              
              
              12,177Deferred tax liabilities
              
              
              3,165
              
              
              
              4,828Income taxes payable
              
              
              7,248
              
              
              
              5,201Current portion of long-term debt
              
              
              126,651
              
              
              
              136,650Total current liabilitiesLong-term debt
              
              
              55,874
              
              
              
              48,769Deferred tax liabilities
              
              
              16,788
              
              
              
              15,999Other liabilities
              
              
              10,888
              
              
              
              11,094Total liabilities
              
              
              210,201
              
              
              
              212,512Commitments and contingenciesStockholders' equity:Common stock, $.001 par value; 100,000,000
      sharesauthorized; 54,672,478 and 53,442,799 shares
      outstandingat September 30, 2009 and December 31 2008,
      respectively
              
              
              58
              
              
              
              57Additional paid-in capital
              
              
              274,649
              
              
              
              272,869Accumulated deficit
              
              
              (146,737
              )
              
              
              (139,245
              )Treasury stock, 3,162,248 shares (at cost)
      atSeptember 30, 2009 and December 31, 2008
              
              
              (22,749
              )
              
              
              (22,749
              )Accumulated other comprehensive loss
              
              
              (13,143
              )
              
              
              (17,144
              )Total stockholders' equity
              
              
              92,078
              
              
              
              93,788Total liabilities and stockholders' equity
              
              $
              302,279
              
              
              $
              306,300




The accompanying notes are an integral part of these consolidated
financial statements.


- 1
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HYPERCOM CORPORATION


CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


Three Months Ended September 30,
              
              
              Nine Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008(Amounts in thousands, except share and per share
      data)Net revenue:Products
              
              $
              76,558
              
              
              $
              86,992
              
              
              $
              213,585
              
              
              $
              229,350Services
              
              
              25,857
              
              
              
              34,068
              
              
              
              79,274
              
              
              
              86,395Total net revenue
              
              
              102,415
              
              
              
              121,060
              
              
              
              292,859
              
              
              
              315,745Costs of revenue:Products
              
              
              49,370
              
              
              
              56,495
              
              
              
              138,571
              
              
              
              154,398Services
              
              
              18,499
              
              
              
              24,652
              
              
              
              59,913
              
              
              
              67,150Amortization of purchased intangible
    assets
              
              
              760
              
              
              
              1,025
              
              
              
              2,141
              
              
              
              2,166Total costs of revenue
              
              
              68,629
              
              
              
              82,172
              
              
              
              200,625
              
              
              
              223,714Gross profit
              
              
              33,786
              
              
              
              38,888
              
              
              
              92,234
              
              
              
              92,031Operating expenses:Research and development
              
              
              10,853
              
              
              
              13,637
              
              
              
              32,240
              
              
              
              34,641Selling, general and administrative
              
              
              18,254
              
              
              
              19,967
              
              
              
              55,774
              
              
              
              60,281Amortization of purchased intangible
    assets
              
              
              1,580
              
              
              
              1,898
              
              
              
              4,509
              
              
              
              3,990Total operating expenses
              
              
              30,687
              
              
              
              35,502
              
              
              
              92,523
              
              
              
              98,912Operating income (loss)
              
              
              3,099
              
              
              
              3,386
              
              
              
              (289
              )
              
              
              (6,881
              )Interest income
              
              
              61
              
              
              
              248
              
              
              
              190
              
              
              
              1,367Interest expense
              
              
              (2,643
              )
              
              
              (1,951
              )
              
              
              (7,619
              )
              
              
              (4,463
              )Foreign currency loss
              
              
              (128
              )
              
              
              (45
              )
              
              
              (198
              )
              
              
              (250
              )Other income
              
              
              35
              
              
              
              6
              
              
              
              356
              
              
              
              155Income (loss) before income taxes anddiscontinued operations
              
              
              424
              
              
              
              1,644
              
              
              
              (7,560
              )
              
              
              (10,072
              )Income tax benefit (provision)
              
              
              728
              
              
              
              (749
              )
              
              
              (24
              )
              
              
              (759
              )Income (loss) before discontinued operations
              
              
              1,152
              
              
              
              895
              
              
              
              (7,584
              )
              
              
              (10,831
              )Income (loss) from discontinued operations
              
              
              26
              
              
              
              (270
              )
              
              
              92
              
              
              
              229Net income (loss)
              
              $
              1,178
              
              
              $
              625
              
              
              $
              (7,492
              )
              
              $
              (10,602
              )Basic and diluted loss per share:Income (loss) before discontinued
      operations
              
              $
              0.02
              
              
              $
              0.02
              
              
              $
              (0.14
              )
              
              $
              (0.20
              )Income (loss) from discontinued
    operations
              
              
              -
              
              
              
              (0.01
              )
              
              
              -
              
              
              
              -Basic and diluted income (loss) per
    share
              
              $
              0.02
              
              
              $
              0.01
              
              
              $
              (0.14
              )
              
              $
              (0.20
              )Basic weighted average common shares
              
              
              53,573,480
              
              
              
              53,352,596
              
              
              
              53,497,633
              
              
              
              53,306,873Diluted weighted average common shares
              
              
              54,345,929
              
              
              
              53,418,622
              
              
              
              53,497,633
              
              
              
              53,306,873


The accompanying notes are an integral part of these consolidated
financial statements.


- 2
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HYPERCOM CORPORATION


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended September 30,(Amounts in thousands)
              
              2009
              
              
              2008Cash flows from continuing operations:Net loss from continuing operations
              
              $
              (7,584
              )
              
              $
              (10,831
              )Adjustments to reconcile net lossfrom continuing operations to net
      cashprovided by operating
      activities:Depreciation and
    amortization
              
              
              7,332
              
              
              
              7,140Amortization of purchased
      intangibles
              
              
              6,650
              
              
              
              6,156Interest conversion to debt
              
              
              4,968
              
              
              
              3,038Amortization of debt issuance
    costs
              
              
              96
              
              
              
              64Amortization of discount on notes
      payable
              
              
              2,323
              
              
              
              1,090Amortization of discounts on
      short-terminvestments
              
              
              -
              
              
              
              (61
              )Provision (reversal) for doubtful
      accounts
              
              
              930
              
              
              
              (651
              )Provision for excess and obsolete
      inventory
              
              
              2,193
              
              
              
              2,431Provision for warranty and other product
      charges
              
              
              2,865
              
              
              
              3,192Deferred income tax benefit
      (provision)
              
              
              (899
              )
              
              
              761Non-cash share-based
      compensation
              
              
              1,634
              
              
              
              2,681Foreign currency gains (losses)
              
              
              (1,719
              )
              
              
              615Non-cash write-off of intangibles and other
      assets
              
              
              578
              
              
              
              606Changes in operating assets andliabilities, net
              
              
              (2,190
              )
              
              
              (2,668
              )Net cash provided by operating
    activities
              
              
              17,177
              
              
              
              13,563Cash flows from investing activities:Purchase of property, plant and
    equipment
              
              
              (4,652
              )
              
              
              (6,209
              )Cash paid for acquisitions including acquisition costs
      deferred, net of cash acquired
              
              
              (37
              )
              
              
              (115,168
              )Software development costs capitalized
              
              
              (250
              )
              
              
              (57
              )Purchase of short-term investments
              
              
              (1,376
              )
              
              
              (37,375
              )Proceeds from the sale or maturity ofshort-term investments
              
              
              1,875
              
              
              
              41,925Net cash used in investing activities
              
              
              (4,440
              )
              
              
              (116,884
              )Cash flows from financing activities:Borrowings on revolving line of credit
              
              
              7,800
              
              
              
              -Repayments of bank notes payable and
    otherdebt instruments
              
              
              (7,985
              )
              
              
              (434
              )Debt issuance cost
              
              
              -
              
              
              
              (687
              )Proceeds from issuance of common stock
              
              
              131
              
              
              
              639Proceeds from long term debt
              
              
              -
              
              
              
              60,000Net cash provided by (used in) financing
      activities
              
              
              (54
              )
              
              
              59,518Effect of exchange rate changes on cash
              
              
              2,315
              
              
              
              (2,405
              )Net increase (decrease) in cash flows fromcontinuing operations
              
              
              14,998
              
              
              
              (46,208
              )Net cash provided by operatingactivities - discontinued operations
              
              
              226
              
              
              
              394Cash and cash equivalents, beginning of period
              
              
              35,978
              
              
              
              76,925Cash and cash equivalents, end of period
              
              $
              51,202
              
              
              $
              31,111




The accompanying notes are an integral part of these consolidated
financial statements.


- 3
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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009


(Unaudited)




1.  Basis
of Presentation


The consolidated financial statements include the accounts of Hypercom
Corporation and its wholly-owned subsidiaries (“Hypercom” or the “Company”). The
Company owns 100% of the outstanding stock of all of its subsidiaries with the
exception of one subsidiary in Thailand. For this subsidiary, the Company owns a
controlling interest and certain nominee shareholders own the remaining shares.
The Company is in the process of acquiring the remaining shares from the nominee
shareholders. All of the Company’s subsidiaries are included in the consolidated
financial statements and all significant intercompany accounts and transactions
have been eliminated in consolidation.
 
 The accompanying interim consolidated financial statements have
been prepared in conformity with U.S. generally accepted accounting principles
(“GAAP”), consistent in all material respects with those applied in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2008. The financial information is unaudited but reflects all adjustments,
consisting only of normal recurring accruals, which are, in the opinion of the
Company’s management, necessary to a fair statement of the results for the
interim periods presented. Interim results are not necessarily indicative of
results for a full year. The information included in this Quarterly Report on
Form 10-Q should be read in conjunction with the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2008.


The Company has evaluated subsequent events through the date of
issuance, November 9, 2009, and concluded that no subsequent events have
occurred that would require recognition in the financial statements or
disclosure in the notes to the financial statements.


Certain prior period amounts have been reclassified to conform to the
current period presentation.


Impact of Recently Issued Accounting Pronouncements





On January 1, 2009, the Company adopted a new accounting standard
regarding the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset.The implementation of
this guidance did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.





On January 1, 2009, the Company adopted a new accounting standard that
requires additional disclosures about transfers of financial assets and
involvement with variable interest entities. The implementation of this standard
did not have a material impact on the Company’s consolidated financial position,
results of operations or cash flows.





In December 2008, Financial Accounting Standards Board (“FASB”) issued
guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other postretirement plan. The standard is effective for fiscal years
ending after December 15, 2009. The Company is currently assessing the impact of
this standard on its consolidated financial position, results of operations and
cash flows.





On January 1, 2009, the Company adopted a new accounting standard
regarding business combinations that apply to all transactions and other events
in which one entity obtains control over one or more other businesses. The
standard requires the fair value of the purchase price, including the issuance
of equity securities, to be determined on the acquisition date. The standard
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interests in the acquiree at the acquisition date
measured at their fair value as of that date with limited exceptions specified
in the standard. This standard also requires acquisition costs to be expensed as
incurred and restructuring costs to be expensed in periods after the acquisition
date. Earn-outs and other forms of contingent consideration are to be recorded
at fair value on the acquisition date. Changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period will be recognized in earnings rather than as an adjustment
to the cost of the acquisition. This standard generally applies prospectively to
business combinations for which the acquisition date is on or after January 1,
2009. The implementation of this standard did not have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows.





On January 1, 2009, the Company adopted a new standard that requires
non-controlling interests or minority interests to be treated as a separate
component of equity, not as a liability or other item outside of permanent
equity. Upon a loss of control, the interest sold, as well as any interest
retained, is required to be measured at fair value, with any gain or loss
recognized in earnings. Assets and liabilities will not change for subsequent
purchase or sale transactions with non-controlling interests as long as control
is maintained. Differences between the fair value of consideration paid or
received and the carrying value of non-controlling interests are to be
recognized as an adjustment to the parent interest’s equity. The implementation
of this standard did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.


- 4
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In September 2006, FASB issued guidance that defines fair value,
establishes a framework for measuring fair value in GAAP and expands disclosures
about fair value measurements. This standard is generally effective for years
beginning after December 15, 2007. The Company adopted this standard on
January 1, 2008 with respect to the Company’s financial assets and
liabilities that did not have a material impact on its consolidated financial
position, results of operations or cash flows. The Company adopted this standard
with respect to its non-financial assets and non-financial effective
January 1, 2009. The implementation of this standard did not have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.





In April 2009, FASB issued guidance that requires fair value disclosures
in interim and annual financial statements to provide for more timely
information about the effects of current market conditions on financial
instruments. This standard is effective for interim and annual periods ending
after June 15, 2009. The implementation of this standard did not have a material
impact on the Company’s consolidated financial position, results of operations
or cash flows. All the required disclosures are included in Note
4.





In June 2009, the FASB Accounting Standards Codification (the
“Codification”) was issued. The Codification is the authoritative source of GAAP
recognized by the FASB applied by nongovernmental entities. The Codification is
effective for financials statements issued for interim and annual periods ending
after September 15, 2009. The Codification did not have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows.





In October 2009, the FASB issued amendments to the accounting and
disclosure requirements for revenue recognition. These amendments,
effective for fiscal years beginning on or after June 15, 2010 (early adoption
is permitted), modify the criteria for recognizing revenue in multiple element
arrangements and the scope of what constitutes a non-software deliverable. The
Company is currently assessing the impact on the Company’s consolidated
financial position, results of operations or cash flows.





2.  Business Acquisitions





Thales e-Transactions





On April 1, 2008, the Company acquired all of the outstanding
shares of Thales E-Transactions SA, Thales E-Transactions GmbH, Thales
E-Transactions Ltd, and Thales E-Transactions España (collectively, “TeT”). The
Company acquired the TeT business line to expand its geographic reach in Europe
and increase the Company’s size and scale, with the expectation of accelerating
product cost reductions by converging towards a single, combined product
family.





The consideration paid to acquire TeT was $149.4 million in cash.
To fund a portion of the acquisition price, the Company entered into a credit
agreement (the “Credit Agreement”) with Francisco Partners II, L.P. (“FP II”),
which provided funding of $60.0 million.
 
 Cash reconciliation of total purchase price (amounts in
thousands):
  Cash paid
                
                
                Balance Accrued
                
                
                Cash paid
                
                
                Cash paid
                
                
                Cash paidTotal
                
                
                as of September 30, 2009
                
                
                2009
                
                
                2008
                
                
                2007Cash paid to purchase TeT shares, working capital and assumed
      debt
                
                $
                133,611
                
                
                $
                -
                
                
                $
                -
                
                
                $
                133,611
                
                
                $
                -Cash paid for transaction costs
                
                
                3,827
                
                
                
                -
                
                
                
                37
                
                
                
                3,422
                
                
                
                368Cash deposit
                
                
                10,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10,000Preliminary working capital adjustment
                
                
                2,000
                
                
                
                2,000
                
                
                
                -
                
                
                
                -
                
                
                
                -Subtotal
                
                
                149,438
                
                
                
                2,000
                
                
                
                37
                
                
                
                137,033
                
                
                
                10,368Cash acquired from TeT
                
                
                (21,865
                )
                
                
                -
                
                
                
                -
                
                
                
                (21,865
                )
                
                
                -Total cash paid, net of cash acquired
                
                $
                127,573
                
                
                $
                2,000
                
                
                $
                37
                
                
                $
                115,168
                
                
                $
                10,368





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As of September 30, 2009, the Company has recorded a preliminary amount
of $2.0 million for the closing net debt true up and the final working capital
adjustment related to the TeT acquisition as set forth in the share
purchase agreement between Hypercom and Thales SA. Such true up and final
working capital adjustment is the subject of ongoing negotiations between the
parties, which could result in further changes. None of the goodwill associated
with the TeT acquisition is expected to be deductible for tax
purposes.





The
following represents the Company’s results of operations for the nine months
ended September 30, 2009, pro forma results for the nine months ended
September 30, 2008, and gives effect to the TeT acquisition as if the
transaction was consummated at the beginning of fiscal year 2008. The unaudited
pro forma results of operations are not necessarily indicative of what would
have occurred had the acquisition been made as of the beginning of the period or
of the results that may occur in the future. Net loss includes additional
interest expense of $2.4 million and amortization of intangible assets
related to the acquisition of $2.8 million for the first quarter of 2008.
The unaudited pro forma information is as follows (amounts in
thousands):


Nine
      Months Ended September 30,2009
              
              
              2008Total
      net revenue
              
              $
              292,859
              
              
              $
              358,891Net
      loss
              
              $
              (7,492
              )
              
              $
              (19,262
              )Net
      loss per share - basic and diluted
              
              $
              (0.14
              )
              
              $
              (0.36
              )





3.  Intangible
Assets and
Goodwill





Intangible
assets consist of the following at September 30, 2009 and December 31, 2008
(amounts in thousands):


Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              
              NetSeptember
      30,
              
              
              December
      31,
              
              
              September
      30,
              
              
              December
      31,
              
              
              September
      30,
              
              
              December
      31,2009
              
              
              2008
              
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Capitalized
      software
              
              $
              4,949
              
              
              $
              4,699
              
              
              $
              (4,062
              )
              
              $
              (3,597
              )
              
              $
              887
              
              
              $
              1,102Customer
      and supplier relationships
              
              
              57,735
              
              
              
              55,517
              
              
              
              (10,062
              )
              
              
              (4,266
              )
              
              
              47,673
              
              
              
              51,251Unpatented
      technology
              
              
              3,156
              
              
              
              3,039
              
              
              
              (2,781
              )
              
              
              (1,851
              )
              
              
              375
              
              
              
              1,188Trademarks,
      trade names
              
              
              3,663
              
              
              
              3,562
              
              
              
              (1,390
              )
              
              
              (930
              )
              
              
              2,273
              
              
              
              2,632Service
      know-how
              
              
              1,330
              
              
              
              1,330
              
              
              
              (355
              )
              
              
              (255
              )
              
              
              975
              
              
              
              1,075Other
              
              
              149
              
              
              
              149
              
              
              
              (109
              )
              
              
              (86
              )
              
              
              40
              
              
              
              63$
              70,982
              
              
              $
              68,296
              
              
              $
              (18,759
              )
              
              $
              (10,985
              )
              
              $
              52,223
              
              
              $
              57,311


Amortization
expense related to intangible assets used in continuing operations was
$7.1 million for the nine months ended September 30, 2009 and 2008. Based
on the intangible assets recorded at September 30, 2009, and assuming no
subsequent impairment of the underlying assets, the annual amortization expense
for each period is expected to be as follows: $2.4 million for the remainder of
2009, $7.0 million for 2010, $6.5 million for 2011, $6.5 million for
2012 and $5.6 million for 2013.





Activity
related to goodwill consisted of the following for the quarter ended September
30, 2009 (amounts in thousands):







September
      30, 2009Balance,
      beginning of year
            
            $
            26,715Additions
      related to acquisitions
            
            
            219Currency
      translation adjustment
            
            
            1,102Balance,
      end of year
            
            $
            28,036





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4.  Restructuring
and Other Charges





2009
Restructuring





During
the second and third quarter of 2009, the Company incurred employee severance
and benefits-related charges as a result of the following
initiatives:





·
            Reorganization
      of the Company’s service business in
Brazil;


·
            Consolidation
      of the Company’s U.K. operations in the Salisbury facility, resulting in
      the closing of the Woking facility;


·
            Reorganization
      of the Company’s operations in
Asia-Pacific;


·
            Reorganization
      of the Company’s management team in the Company’s offices in Arizona,
      Mexico and the Caribbean; and


·
            Reorganization
      of the Company’s research and development team in
  Spain.




As a result
of these actions, the Company incurred charges of $0.4 million and $2.3 million
during the three and nine months ended September 30, 2009. The $0.4 million in
the third quarter of 2009 was recorded in operating expenses and included in
SEMEA, while, of the $2.3 million year-to-date in 2009, $0.8 million was
recorded in costs of revenue and $1.5 million was recorded in operating
expenses. Of the $2.3 million, $0.9 million was recorded in the Americas, $0.7
million in SEMEA, $0.4 million in NEMEA, and $0.3 million in Shared Cost
Centers. See Note 14 for additional information related to the Company’s
business segments.


The
following table summarizes these charges and activities during the nine months
ended September 30, 2009 (amounts in thousands):


SeveranceBalance
      at December 31, 2008
              
              $
              -Additions
              
              
              2,282Cash
      payments
              
              
              (1,442
              )Currency
      translation adjustment
              
              
              55Balance
      at September 30, 2009
              
              $
              895


The Company
expects to pay the amounts accrued in 2009. The Company also expects to incur
additional restructuring charges of approximately $0.6
million. The amounts recorded and expected additional restructuring charges are
subject to change based on the negotiation of severance with employees and
related work groups.





Thales
e-Transactions Restructuring





On
April 1, 2008, the Company completed the acquisition of TeT and began
formulating a restructuring plan. At the acquisition date, the Company accrued
into the purchase price allocation restructuring costs related to reduction in
workforce and future facilities lease obligations of approximately $9.2 million
as part of its restructuring plan.


Activities
related to the TeT acquisition restructuring plan are as follows (amounts in
thousands):





SeveranceBalance
      at December 31, 2008
              
              $
              7,724Additions
              
              
              124Cash
      payments
              
              
              (329
              )Currency
      translation adjustment
              
              
              384Balance
      at September 30, 2009
              
              $
              7,903


The Company
expects the remaining amounts accrued to be paid in 2009 and early 2010. The
restructuring plan and the amounts recorded are subject to change based on
several factors including, but not limited to, the negotiation of severance and
other workforce reduction negotiations with employees and related work groups.
Accordingly, additional restructuring expense may need to be
recorded.





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5.  Discontinued
Operations





Australian
Courier Business





During
the fourth quarter of 2008, the Company decided to sell its courier business in
Australia (the “Australian Courier Business”). As of December 31, 2008, the
Australian Courier Business qualified as discontinued operations. Accordingly,
the income from discontinued operations for the three and nine months ended
September 30, 2009 and 2008 includes direct revenue and direct expenses. General
corporate overhead costs have not been allocated to discontinued business. A
summary of the operating results included in discontinued operations in the
accompanying consolidated statements of operations is as follows (amounts in
thousands):




Three
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      revenue
              
              $
              -
              
              
              $
              1,187
              
              
              $
              554
              
              
              $
              3,623Costs
      of revenue
              
              
              -
              
              
              
              997
              
              
              
              482
              
              
              
              3,039Gross
      profit
              
              
              -
              
              
              
              190
              
              
              
              72
              
              
              
              584Selling,
      general and administrative expenses
              
              
              -
              
              
              
              (121
              )
              
              
              (14
              )
              
              
              (301
              )Income
      from discontinued operations
              
              $
              -
              
              
              $
              69
              
              
              $
              58
              
              
              $
              283
  On March 1,
2009, the Company sold the assets of the Australian Courier Business for $0.3
million. Pursuant to the asset sale agreement, the buyer assumed all of the
rights and obligations of the Australian Courier Business. The asset sale
agreement contains general warranty and indemnification provisions, which could
result in additional liabilities to the Company if certain events occur or fail
to occur in the future.





There are
no assets or liabilities held for sale at September 30, 2009. Assets and
liabilities held for sale included in accounts receivable and accrued other
liabilities amounted to $0.4 million and $0.1 million, respectively in the
Company’s consolidated balance sheet at December 31, 2008.





6.  Leases





Sales-Type
Leases





The
Company’s net investments in sales-type leases consist of the following at
September 30, 2009 and December 31, 2008 (amounts in thousands):




September
      30,
              
              
              December
      31,2009
              
              
              2008Lease
      contracts receivable
              
              $
              17,417
              
              
              $
              18,919Unearned
      revenue
              
              
              (2,650
              )
              
              
              (2,899
              )Allowance
      for bad debt
              
              
              (1,563
              )
              
              
              (1,236
              )Net
      investment in sales-type leases
              
              $
              13,204
              
              
              $
              14,784


7. 
Fair Value Measurements





Effective
January 1, 2008, the Company adopted a new FASB standard that provides a
fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy are described
below:





Level 1:
Inputs to the valuation methodology are unadjusted quoted prices for identical
assets or liabilities in active markets that the Company has the ability to
access.




Level 2:
Inputs to the valuation methodology include:





·
            Quoted
      prices for similar assets or liabilities in active
  markets;




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·
            Quoted
      prices for identical or similar assets or liabilities in inactive
      markets;




·
            Inputs
      other than quoted prices that are observable for the asset or liability;
      and




·
            Inputs
      that are derived principally from or corroborated by observable market
      data by correlation or other means.





Level 3:
Inputs to the valuation methodology are unobservable and significant to the fair
value measurement.




The asset’s
or liability’s fair value measurement level within the fair value hierarchy is
based on the lowest level of any input that is significant to the fair value
measurement. Valuation techniques used need to maximize the use of observable
inputs and minimize the use of unobservable inputs.





The Company’s
assets that were measured at fair value consist of the following at September
30, 2009 (amounts in thousands):




Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalMoney
      market funds
            
            $
            14,507
            
            
            $
            -
            
            
            $
            -
            
            
            $
            14,507Total
      assets at fair value
            
            $
            14,507
            
            
            $
            -
            
            
            $
            -
            
            
            $
            14,507





The Company’s
liabilities are reported at fair value in the Company’s consolidated balance
sheets at September 30, 2009 and December 31, 2008.




8.  Inventories





Inventories
consist of the following at September 30, 2009 and December 31, 2008 (amounts in
thousands):




September
      30,
              
              
              December
      31,2009
              
              
              2008Purchased
      parts
              
              $
              8,308
              
              
              $
              4,039Work
      in progress
              
              
              161
              
              
              
              353Finished
      goods
              
              
              20,816
              
              
              
              27,289$
              29,285
              
              
              $
              31,681


9.  Product
Warranty Liability





The
following table reconciles the changes to the product warranty liability for the
three and nine months ended September 30, 2009 and 2008 (amounts in
thousands):




Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Balance
      at beginning of period
              
              $
              6,666
              
              
              $
              6,940
              
              
              $
              6,597
              
              
              $
              1,754Warranty
      liability assumed on acquisitions
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,344Warranty
      chargesfrom normal operations
              
              
              386
              
              
              
              1,352
              
              
              
              2,865
              
              
              
              3,192Utilization
      of warranty liability
              
              
              (1,029
              )
              
              
              (1,389
              )
              
              
              (3,560
              )
              
              
              (3,387
              )Currency
      translation adjustment
              
              
              286
              
              
              
              -
              
              
              
              407
              
              
              
              -Balance
      at end of period
              
              $
              6,309
              
              
              $
              6,903
              
              
              $
              6,309
              
              
              $
              6,903


Deferred
revenue associated with the Company’s extended warranty programs was
$3.0 million and $3.3 million as of September 30, 2009 and December
31, 2008, respectively.





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10. 
Long-term Debt




Revolving
Credit Facilities





On
March 31, 2006, the Company entered into a $5.0 million line of credit
agreement with a bank pursuant to which the Company had access to a
$5.0 million line of credit. Borrowings under the credit agreement were
fully collateralized by short-term investments held in the Company’s investment
accounts with the bank. Any borrowings bore interest at a rate set forth in each
promissory note issued at the time of the advance. The credit agreement
contained customary default provisions and expired as planned on March 31,
2009 with no amounts outstanding.





On January 15, 2008, certain of the Company’s subsidiaries
(the “Borrowers”) entered into a Loan and Security Agreement (the “Loan
Agreement”) with a bank and other financial institutions. The Company and
certain other subsidiaries are guarantors (together with the Borrowers, the
“Obligors”) of the Borrowers’ obligations under the Loan Agreement. The bank
also serves as agent for the lenders under the Loan Agreement (the “Agent”). The
Loan Agreement provides for a revolving credit facility of up to
$25.0 million. Under the Loan Agreement, if certain conditions are met, the
Borrowers may request an increase in the credit facility to an aggregate total
of up to $40.0 million. Amounts borrowed under the Loan Agreement and
repaid or prepaid during the term may be reborrowed. Outstanding amounts under
the Loan Agreement will bear interest, at the Borrower’s option, at either
(i) LIBOR plus 175 basis points or (ii) the bank’s prime rate. All
amounts outstanding under the Loan Agreement are due on January 15,
2011.





No
amounts were borrowed against the revolving credit facility as of September 30,
2009. The Borrowers had availability of $13.2 million as of September 30, 2009,
less the amount of outstanding letters of credit totaling $3.1 million as
of September 30, 2009.





Availability
of borrowings and the issuance of letters of credit under the Loan Agreement are
subject to a borrowing base calculation based upon a valuation of the Company’s
eligible inventories (including raw materials, finished and semi-finished goods,
and certain in-transit inventory) and eligible accounts receivable, each
multiplied by an applicable advance rate.





In
addition to representations and warranties, covenants, conditions and other
terms customary for instruments of this type, the Loan Agreement includes
negative covenants that prohibit the Obligors from, among other things,
incurring certain types of indebtedness (excluding indebtedness secured by
certain assets of the Company and its subsidiaries in an aggregate amount not to
exceed $50.0 million for working capital purposes), making annual capital
expenditures in excess of prescribed amounts, or disposing of certain assets.
The Loan Agreement provides for customary events of default, including failure
to pay any principal or interest when due, failure to comply with covenants,
failure of any representation made by the Borrowers to be correct in any
material respect, certain defaults relating to other material indebtedness,
certain insolvency and receivership events affecting the Obligors, judgments in
excess of $2.5 million in the aggregate being rendered against the
Obligors, and the incurrence of certain liabilities under the Employee
Retirement Income Security Act (“ERISA”) in excess of $1.0 million in the
aggregate.





In the
event of a default by the Borrowers, the Agent may, at the direction of the
lenders, terminate the lenders’ commitments to make loans under the Loan
Agreement, declare the obligations under the Loan Agreement immediately due and
payable and enforce any and all rights of the lenders or Agent under the Loan
Agreement and related documents. For certain events of default related to
insolvency and receivership, the commitments of the lenders are automatically
terminated and all outstanding obligations become immediately due and payable.
The obligations of the Obligors under the Loan Agreement are secured by certain
Company subsidiaries’ inventory and accounts receivable in the U.S. and the U.K.
The remaining balance of the Company’s consolidated assets, including the
subsidiaries acquired in connection with the TeT acquisition, is unencumbered
under the Loan Agreement and, if needed, may be used as collateral for
additional debt. The Company’s obligations as guarantor under the Loan Agreement
are unsecured.





Acquisition
Financing





In
February 2008, in connection with the acquisition of TeT, the Company
entered into the Credit Agreement with FP II. See Note 2 for additional
information related to the TeT acquisition. The Credit Agreement provided for a
loan of up to $60.0 million to partially fund the acquisition at closing.
The loan under the Credit Agreement bears interest at 10% per annum, provided
that, at the election of the Company, interest may be capitalized and added to
the principal of the loan to be repaid at maturity on April 1, 2012. The Company
can voluntarily make prepayments in increments of $5.0 million without premium
or penalty.





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Long-term
debt consists of the following at September 30, 2009 and December 31, 2008
(amounts in thousands):




September
      30,
              
              
              December
      31,2009
              
              
              2008Credit
      Agreement
              
              $
              60,000
              
              
              $
              60,000Interest
      conversion to debt
              
              
              9,581
              
              
              
              4,613Discount
      on warrants issued to FP II
              
              
              (17,758
              )
              
              
              (17,758
              )Amortization
      of warrant discount
              
              
              4,049
              
              
              
              1,726Debt
      assumed on acquisitions
              
              
              -
              
              
              
              185Other
              
              
              2
              
              
              
              3$
              55,874
              
              
              $
              48,769


On funding of the loan under the Credit Agreement
and the closing of the TeT acquisition, FP II was granted a five-year warrant
(the “Warrant”) to purchase approximately 10.5 million shares of the
Company’s common stock at $5.00 per share. The estimated fair value of the
Warrant at the date issued was $1.68 per share using a Black-Scholes option
pricing model. The Warrant valuation date was February 14, 2008, when all
relevant terms and conditions of the debt agreement had been reached.The total fair value of
the Warrant of $17.8 million was recorded as a discount to the acquisition
financing and has been recognized in equity as additional paid in capital. The
loan discount is being amortized as interest expense over the life of the loan
and amounted to $2.3 million and $1.1 for the nine months ended September
30, 2009 and 2008, respectively.





11. 
Share Based Compensation





The
following table summarizes share-based compensation expense included in the
consolidated statements of operations for the three and nine months ended
September 30, 2009 and 2008 (amounts in thousands):




Three
      Months Ended September 30,
                
                
                Nine
      Months Ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Costs
      of revenue
                
                $
                40
                
                
                $
                69
                
                
                $
                163
                
                
                $
                71Research
      and development
                
                
                24
                
                
                
                36
                
                
                
                48
                
                
                
                162Selling,
      general and administrative
                
                
                440
                
                
                
                823
                
                
                
                1,423
                
                
                
                2,448Total
                
                $
                504
                
                
                $
                928
                
                
                $
                1,634
                
                
                $
                2,681


As of
September 30, 2009, total unrecognized compensation cost, net of
forfeiture, related to stock-based options and restricted stock awards was
$2.0 million and the related weighted-average period over which it is
expected to be recognized is approximately 1.4 years.





Stock
Options





At
September 30, 2009, the Company had four active share-based employee
compensation plans. Stock option awards granted from these plans are granted at
the fair market value on the date of grant, and vest over a period determined at
the time the options are granted, generally ranging from one to five years, and
generally have a maximum term of ten years. For stock options with graded
vesting terms, the Company recognizes compensation cost using the accelerated
method over the requisite service period.





- 11
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A summary
of the Company’s stock option balances at September 30, 2009 is as
follows:




Number
      of Options
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term
              
              
              Aggregate
      Intrinsic Value (In Thousands)Outstanding
      at September 30, 2009
              
              
              4,555,361
              
              
              $
              5.03
              
              
              
              7.39
              
              
              $
              1,314Vested
      and expected to vest at September 30, 2009
              
              
              4,359,232
              
              
              $
              5.12
              
              
              
              7.29
              
              
              $
              1,154Exercisable
      at September 30, 2009
              
              
              2,947,745
              
              
              $
              6.10
              
              
              
              6.20
              
              
              $
              803


The
aggregate intrinsic value of options exercised during the nine months ended
September 30, 2009 and 2008 was zero and $0.2 million,
respectively.





The key
assumptions used in the Black-Scholes valuation model to calculate the fair
value are as follows:


Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Weighted
      average risk free interest rate
              
              
              0.00
              %
              
              
              3.14
              %
              
              
              1.83
              %
              
              
              2.88
              %Expected
      life of the options (in years)
              
              
              0
              
              
              
              5.51
              
              
              
              5.19
              
              
              
              4.72Expected
      stock price volatility
              
              
              0.0
              %
              
              
              48.5
              %
              
              
              71.2
              %
              
              
              47.8
              %Expected
      dividend yield
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -


The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. The risk-free interest rate is based on the U.S. treasury security
rate in effect as of the date of grant. The expected lives of options and stock
price volatility are based on historical data of the Company. The weighted
average fair value of options granted in the nine months ended
September 30, 2009 and 2008 was $0.66 and $1.90, respectively.
 
 There
were no stock options granted in the three months ended September 30, 2009 and
505,000 during the nine months ended September 30, 2009.





Restricted
Stock Awards





The
Company grants restricted stock awards to certain employees. Restricted stock
awards are valued at the closing market value of the Company’s common stock on
the date of grant, and the total value of the award is expensed ratably over the
service period of the employees receiving the grants. Share-based compensation
expense related to all restricted stock awards outstanding at September 30, 2009
and 2008 was approximately $0.2 million and $0.3 million, respectively. As
of September 30, 2009, the total amount of unrecognized compensation cost
related to nonvested restricted stock awards was $1.2 million, which is
expected to be recognized over a weighted-average period of 1.6 years.
Compensation expense with respect to the grants could be reduced or reversed to
the extent employees receiving the grants leave the Company prior to vesting in
the award.
 
 - 12
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 Table of Contents
 
 A summary
of nonvested restricted stock activity for the three months ended September 30,
2009 is as follows:


Nonvested
      Shares Outstanding
              
              
              Weighted
      Average Grant Date Fair Value per ShareBalance
      at December 31, 2008
              
              
              50,000
              
              
              
              4.94Shares
      granted
              
              
              1,129,000
              
              
              
              1.20Shares
      vested
              
              
              (70,000
              )
              
              
              3.83Balance
      at September 30, 2009
              
              
              1,109,000
              
              
              
              1.20


The total
fair value of restricted shares granted during the nine months ended September
30, 2009 and 2008 was $1.4 million and $0.3 million,
respectively.





12. 
Income Taxes





Income
tax benefit (expense) before discontinued operations for federal, state and
foreign taxes was $0.7 million and $(0.7) million for the three months ended
September 30, 2009 and 2008, respectively and less than $(0.1) million and
$(0.8) million for the nine months ended September 30, 2009 and 2008,
respectively. The Company’s effective tax rate is determined by the level
and composition of pre-tax income subject to varying foreign, state and local
taxes and other items. The Company’s consolidated effective tax rate for the
three and nine months ended September 30, 2009 is not meaningful due to the
Company’s cumulative net operating loss position and its provision for a full
valuation reserve against the deferred tax assets. The Company continues to
provide a full valuation reserve against substantially all of its deferred tax
asset balances as of September 30, 2009. 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 established under FASB.





The total
amount of unrecognized tax benefits at September 30, 2009 was $38.9 million, of
which $3.5 million would impact the Company’s effective tax rate were it to be
recognized.





The Company files income tax returns in the U.S. federal jurisdiction, and
various state and foreign jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations for years prior to 2000. The Company’s policy is to recognize
interest related to unrecognized tax benefits as interest expense and penalties
as operating expenses. Accrued interest and penalties are insignificant at
September 30, 2009. The Company believes that it has appropriate support for the
income tax positions taken and to be taken on its tax returns and that its
accruals for tax liabilities are adequate for all open years based on an
assessment of many factors including past experience and interpretations of tax
law applied to the facts of each matter.


13. 
Commitments and Contingencies





Litigation





The Company
is currently a party to various legal proceedings, including those noted below.
While the Company presently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect on the Company’s financial position, results of operations or cash flows,
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 the
Company’s consolidated results of operations or financial position in the period
in which the ruling occurs or in future periods.





SPA
Syspatronic AG v. Hypercom Corporation, et al.(United States District Court for
the Eastern District of Texas, Marshall Division, Civil Action No. 2:07-CV-416
(LED), filed on September 18, 2007). SPA Syspatronic AG (“SPA”) commenced
this action in the United States District Court for the Eastern District of
Texas against the Company and others, alleging that certain of the Company’s
products infringe U.S. Patent No. 5,093,862 entitled “Data Carrier – Controlled
Terminal in a Data Exchange System” issued on March 3, 1992 (the “‘862 Patent”)
allegedly owned by SPA. SPA is seeking a judgment of infringement, an injunction
against further infringement, damages, interest and attorneys’ fees. The Company
has filed an answer denying liability on the basis of a lack of infringement,
invalidity of the ‘862 Patent, laches, waiver, equitable estoppel and unclean
hands, lack of damages, failure to state a claim, and inequitable conduct during
the prosecution of the ‘862 Patent. The Company has also counterclaimed seeking
a declaratory judgment of non-infringement and invalidity of the ‘862 Patent,
and seeking attorneys’ fees and costs as an exceptional case due to the
plaintiff’s inequitable conduct during the prosecution of the ‘862 Patent. On
April 4, 2008, the U.S. Patent and Trademark Office (the “Patent Office”)
granted the defendants’ request for re-examination of the ‘862 Patent. On April
24, 2008, the Court granted the defendants’ motion to stay proceedings in this
case until the Patent Office completed its re-examination of the ‘862 Patent. On
December 22, 2008, the Patent Office filed an office action rejecting all ten
claims of the ‘862 Patent as invalid because they were anticipated by prior art
references.On March
19, 2009, SPA filed a response to the office action. The Patent Office has not
yet issued a final ruling on the office action.





- 13
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 Table of Contents





CardSoft,
Inc., et al. v. Hypercom Corporation, et al.(United States District Court for
the Eastern District of Texas, Marshall Division, Civil Action No.
2:08-CV-00098, filed on March 6, 2008). CardSoft, Inc. (“CardSoft”) filed
this action on March 6, 2008 in the United States District Court for the Eastern
District of Texas against the Company and others, alleging that certain of the
Company’s terminal products infringe two patents allegedly owned by CardSoft:
U.S. Patent No. 6,934,945 (the “‘945 Patent”), entitled “Method and Apparatus
for Controlling Communications,” issued on August 23, 2005 and U.S. Patent No.
7,302,683 (the “‘683 Patent”), also entitled “Method and Apparatus for
Controlling Communications”, issued on November 27, 2007, which is a
continuation of the ‘945 Patent. CardSoft is seeking a judgment of infringement,
an injunction against further infringement, damages, interest and attorneys’
fees. In June 2008, the Company filed its answer to the complaint in this
action, denying liability on the basis of a lack of infringement, invalidity of
the ‘945 Patent and the ‘683 Patent, laches, waiver, equitable estoppel and
unclean hands, lack of damages and failure to state a claim. The Company has
also counterclaimed seeking a declaratory judgment of non-infringement and
invalidity of the ‘945 Patent and the ‘683 Patent. The parties have exchanged
their respective infringement contentions and invalidity contentions, and
produced related documents. A Markman claim construction hearing is scheduled
for July 11, 2011, with trial scheduled to commence on November 7,
2011.





Lisa
Shipley v. Hypercom Corporation(United States District Court for
the Northern District of Georgia, Civil Action No. 1:09-CV-0265, filed on
January 30, 2009). Lisa Shipley, a former employee, filed this action in
the United States District Court for the Northern District of Georgia on January
30, 2009 against the Company, alleging that the Company violated (i) Title VII
of the Civil Rights Act by discriminating against her on the basis of her
gender, (ii) the Georgia Wage Payment laws by failing to pay certain sales
commissions, and (iii) the Equal Pay Act and Georgia law by paying her lower
compensation than the Company paid males who performed the same work. Ms.
Shipley is seeking compensatory damages for emotional distress, damage to
reputation, embarrassment, lost wages, back pay, accrued interest, punitive
damages, attorney’s fees and expenses, and interest. On June 30, 2009, the
Company filed its answer, generally denying the material allegations of the
plaintiff’s complaint.  On October 20, 2009, Ms. Shipley filed an
amended complaint adding an allegation that Hypercom unlawfully retaliated
against Ms. Shipley in violation of Title VII of the Civil Rights
Act.  On November 3, 2009, the Company filed its answer, denying the
material allegations of the amended complaint.  Discovery has
commenced in this action.





14. 
Segment, Geographic, and Customer Information





The
Company’s Chief Operating Decision Maker (“CODM”) has been identified as the
Chief Executive Officer of the Company. For each of the segments described
below, the CODM has access to discrete financial information regarding the
revenues, gross margins (using fully burdened manufacturing costs), direct local
service costs, direct operating expenses consisting of expenses directly
associated with the business segment and indirect operating expenses consisting
of global Shared Cost Centers such as global R&D, marketing, corporate
general and administrative expenses, and stock-based compensation. The Company
operations are managed by Managing Directors for each region that report
directly to the CODM. These Managing Directors have responsibility for all
business activities and combined operating results of their regions and these
individuals are compensated and evaluated based on the performance (Direct
Trading Profit) of their respective business segments.





During
the fourth quarter of 2008, the Company initiated new organizational changes and
made enhancements to the Company’s internal management reporting and began to
report information pertaining to its four business segments as follows:
(i) the Americas, (ii) NEMEA, (iii) SEMEA, and
(iv) Asia-Pacific. The Americas consists of the U.S., Canada, Mexico, the
Caribbean, Central America, and South America. NEMEA consists of Belgium,
Sweden, Turkey, Austria and Germany. SEMEA consists of France, Spain, the U.K.,
Western and Central Eastern Europe, Russia, Hungary, the Middle East, and
Africa. Asia-Pacific consists of China, Hong Kong, Singapore, Thailand,
Australia and New Zealand. As required in SFAS 131, prior year segment data has
been restated below for comparative purposes (amounts in
thousands):
  - 14
-
 Table of Contents




Three
      Months Ended September 30,
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net RevenueAmericas
              
              $
              32,198
              
              
              $
              42,436
              
              
              $
              93,456
              
              
              $
              122,243NEMEA
              
              
              26,311
              
              
              
              28,689
              
              
              
              72,756
              
              
              
              62,269SEMEA
              
              
              32,644
              
              
              
              35,995
              
              
              
              91,940
              
              
              
              92,095Asia-Pacific
              
              
              11,262
              
              
              
              13,940
              
              
              
              34,707
              
              
              
              39,138$
              102,415
              
              
              $
              121,060
              
              
              $
              292,859
              
              
              $
              315,745Three
      Months Ended September 30,
              
              Nine
      Months Ended September 30,2009
              
              
              
              2008
              
              
              
              2009
              
              
              
              2008Operating IncomeAmericas
              
              $
              6,992
              
              
              $
              5,746
              
              
              $
              15,262
              
              
              $
              17,057NEMEA
              
              
              4,912
              
              
              
              6,236
              
              
              
              12,384
              
              
              
              10,809SEMEA
              
              
              5,601
              
              
              
              7,112
              
              
              
              17,150
              
              
              
              15,770Asia-Pacific
              
              
              1,659
              
              
              
              2,617
              
              
              
              6,775
              
              
              
              7,227Shared
      cost centers
              
              
              (16,065
              )
              
              
              (18,325
              )
              
              
              (51,860
              )
              
              
              (57,744
              )Total
      segment income (loss)
              
              $
              3,099
              
              
              $
              3,386
              
              
              $
              (289
              )
              
              $
              (6,881
              )Interest
      income
              
              
              61
              
              
              
              248
              
              
              
              190
              
              
              
              1,367Interest
      expense
              
              
              (2,643
              )
              
              
              (1,951
              )
              
              
              (7,619
              )
              
              
              (4,463
              )Foreign
      currency loss
              
              
              (128
              )
              
              
              (45
              )
              
              
              (198
              )
              
              
              (250
              )Other
      expense
              
              
              35
              
              
              
              6
              
              
              
              356
              
              
              
              155Income
      (loss) before income taxesand discontinued
    operations
              
              $
              424
              
              
              $
              1,644
              
              
              $
              (7,560
              )
              
              $
              (10,072
              )
  September
      30,
              
              
              December
      31,2009
              
              
              2008Total AssetsAmericas
              
              $
              53,212
              
              
              $
              61,813NEMEA
              
              
              112,890
              
              
              
              99,909SEMEA
              
              
              83,934
              
              
              
              79,132Asia-Pacific
              
              
              27,491
              
              
              
              35,840Shared
      cost centers
              
              
              24,752
              
              
              
              29,606$
              302,279
              
              
              $
              306,300


15. 
Other Comprehensive Income (loss)





Other
comprehensive income (loss) for the three and nine months ended September 30,
2009 and 2008 consists of the following (amounts in thousands):


Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      income (loss)
              
              $
              1,178
              
              
              $
              625
              
              
              $
              (7,492
              )
              
              $
              (10,602
              )Foreign
      currency translation adjustment
              
              
              2,083
              
              
              
              (18,137
              )
              
              
              4,001
              
              
              
              (16,638
              )Total
      comprehensive income (loss)
              
              $
              3,261
              
              
              $
              (17,512
              )
              
              $
              (3,491
              )
              
              $
              (27,240
              )


- 15
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 Table of Contents





16. 
Earnings per Share





Basic
income (loss) per share was computed by dividing net income (loss) by
the weighted-average number of common shares outstanding during the period.
Diluted income (loss) per share reflects the potential dilution that could
occur if the income were divided by the weighted-average number of common shares
outstanding and potentially dilutive common shares from outstanding stock
options and warrants. Potentially dilutive common shares were calculated using
the treasury stock method and represent incremental shares issuable upon
exercise of the Company’s outstanding options and warrants. Potentially dilutive
securities are not considered in the calculation of dilutive loss per share as
their impact would not be dilutive. The following table reconciles the weighted
average shares used in computing basic and diluted income (loss) per share
for the three and nine months ended September 30, 2009 and 2008:




Three
      Months Ended September 30,
              
              
              
              Nine
      Months Ended September 30,2009
              
              
              
              2008
              
              
              
              2009
              
              
              
              2008Shares
      used in basic income (loss) pershare computation (weighted averagecommon shares outstanding)
              
              
              53,573,480
              
              
              
              
              53,352,596
              
              
              
              
              53,497,633
              
              
              
              
              53,306,873Dilutive
      effect of stock options andwarrants
              
              
              772,449
              
              
              
              
              66,026
              
              
              
              
              -
              
              
              
              
              -Shares
      used in diluted income (loss) pershare computation
              
              
              54,345,929
              
              
              
              
              53,418,622
              
              
              
              
              53,497,633
              
              
              
              
              53,306,873Options,
      stock awards and warrants thatcould potentially dilute income per sharein the future that were not includedin the computation of diluted income per share
              
              
              15,435,911
              
              (a)
              
              
              14,922,199
              
              (a)
              
              
              15,824,820
              
              (b)
              
              
              14,936,917
              
              (b)





(a)      Outstanding
stock options with exercise prices greater than the average market price of the
Company’s common stock during the period are excluded from the computation of
diluted net income per share of common stock.





(b)      These
options, restricted stock awards and warrants were not included in the
computation of diluted loss per share because they were
anti-dilutive.


- 16
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 Table of Contents


Item 2.  Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.





Cautionary
Statements Regarding Forward-looking Statements




This
report, including this “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” includes statements that may
constitute forward-looking statements (including financial projections) that we
believe are subject to the safe harbor provisions of Section 27A of the
Securities Act of 1933 as amended, and Section 21G of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,”
“expect,” “anticipate,” “estimate,” “will,” “project,” and other similar
expressions identify forward-looking statements pertaining to, among other
things, the state of the electronic payment industry and competition within the
industry; projections regarding specific demand for our products and services;
the timeliness of introduction, commercial feasibility and acceptance of new
products and product families, services and market development initiatives; our
ability to successfully penetrate the markets that we have targeted; our ability
to expand our business and increase our market share in the markets in which we
compete; our ability to improve our cost structure, including reducing our
product and operating costs; our ability to successfully manage our contract
manufacturing model and the impact on inventories; the timing and impact of our
transition to a joint development model for certain products; the timing and
success of integration activities related to the TeT acquisition and the
expected results and benefits of such transaction; our ability to allocate
research and development resources to new product and service offerings; our
future financial performance and financial condition; the adequacy of our
current facilities and management systems infrastructure to meet our operational
needs; the status and condition of our relationship with third parties upon whom
we rely in the conduct of our business; the sufficiency of reserves for assets
and obligations exposed to revaluation; our ability to effectively manage our
exposure to foreign currency exchange rate fluctuations (including through the
use of hedging transactions in periods prior to March 2009); our ability to
sustain our current income tax structure; the impact of current litigation
matters on our business; our ability to fund our projected liquidity needs from
cash flow from operations and our current cash reserves; our ability to generate
the cash required to repay our debt to FP II when due or our ability to
refinance all or a portion of such debt at or prior to maturity; our future
access to capital on terms that are acceptable to us, and all assumptions
related to the foregoing.




Our
actual results may differ materially from those set forth in our forward-looking
statements. We refer you to documents filed by us with the SEC, specifically our
most recent Annual Report on Form 10-K, as well as our subsequent reports on
Forms 10-Q and 8-K, as may be amended from time to time, which identify events
and important risk factors that could cause actual results to differ materially
from those contained in our forward-looking statements. Other factors could also
materially affect our actual results.




Without
limitation of the foregoing, the existence or occurrence of any of the following
factors or risks could cause our actual results to differ from those contained
in our 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 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;
      and (vii) the
      ultimate outcome of the negotiations regarding the closing net debt true
      up and the final working capital adjustment, which could result in a
      payment by us to Thales SA that differs materially from the $2.0
      million we have currently accrued for this
  amount;•
            
            the
      volatility of our financial results and our stock
price;•
            
            the
      loss of  key customers;•
            
            defects
      in our products;•
            
            the
      accumulation of excess and 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 manufacturing of our third-party manufacturers or
      suppliers;  - 17
-
 Table of Contents
  •
            
            a
      disruption, including those caused by changes in component lead-times,
      obsolescence or bankruptcy, in the supply of components to our third-party
      manufacturers by their suppliers;•
            
            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;•
            
            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, including any such events that may cause interruptions or
      delays in service from our data center hosting facilities or those of
      third parties we contract with for such facilities, which could impair the
      delivery of our services and harm our business;•
            
            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;•
            
            the
      dilution of our stock price caused by the exercise of outstanding warrants
      and options;•
            
            the
      risks associated with moving to a joint development model in the design
      and manufacture of certain product
hardware;





•
            
            our
      lack of a plan to pay dividends on our common stock in the foreseeable
      future;•
            
            the
      impact of the current global economic downturn on our ability to acquire
      sufficient capital to support our operations;•
            
            our
      ability to repay outstanding debt, including amounts owed to FP II;
      and•
            
            our
      ability to obtain additional financing, if needed, to meet future capital
      and working capital requirements of our business on satisfactory
      terms.




Information
included in this report is made as of the date hereof. We undertake no
obligation, and specifically disclaim any duty, to update our forward-looking
statements, including any financial projections we may make. We do not endorse
any projections regarding future performance that may be made by third
parties.





- 18
-
 Table of Contents





Critical
Accounting Policies and Estimates




Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, we evaluate past judgments and our estimates,
including those related to bad debts, product returns, long-term contracts,
inventories, goodwill and other intangible assets, income taxes, financing
operations, foreign currency, and contingencies and litigation.




We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The accounting
policies and related risks described in our Annual Report on Form 10-K depend
most heavily on these judgments and estimates. As of September 30, 2009,
there have been no material changes to any of the critical accounting policies
contained therein.





2009 Overview




Operations. Hypercom is
one of the largest global providers of complete electronic payment solutions and
value-added services at the point of transaction. Our vision is to be the
world’s most recognized and trusted brand for electronic transaction solutions
through a suite of secure and certified end-to-end electronic payment products
and software, together with a wide range of support and maintenance services.
Our customers include domestic and international financial institutions,
electronic payment processors, retailers, independent sales organizations
(“ISOs”) and distributors. We also sell our products to companies in the
hospitality, transportation, healthcare, prepaid card and restaurant industries.
Customers around the globe select us because of our proven leadership and
expertise in the global electronic payments industry, commitment to our
customers’ success, continued support of past and future technologies and the
quality and reliability of our products and services. We deliver convenience and
value to businesses that require reliable, secure, high-speed and high-volume
information/data transfers.




Net
revenue for the nine months ended September 30, 2009 was $292.9 million, a 7.3%
decrease over the nine months ended September 30, 2008. The primary reasons for
the decrease were the following: (i) reduced demand; (ii) lower foreign currency
exchange rates on foreign denominated revenue in Europe; (iii) component
shortages that impacted our ability to fully meet our third quarter demand,
which we estimate would have contributed up to approximately $5.0 million in
additional third quarter revenue; and (iv) our exit of a marginally profitable
service contract with a large customer in Brazil, which reduced service revenue
in the nine month period by approximately $6.5 million. These factors were
offset by incremental revenue from the acquisition of TeT, which was not
included in our results for the first quarter of 2008.




Gross
profit for the nine months ended September 30, 2009 was $92.2 million or 31.5%
of revenue, compared to $92.0 million or 29.1% of revenue for the nine months
ended September 30, 2008. Gross margin, net of amortization of purchased
intangible assets, for the nine months ended September 30, 2009 includes a 35.3%
product gross margin and a 23.9% service gross margin, compared to product and
service gross margins of 32.7% and 22.3%, respectively, for the same period in
2008. The increase in product gross margin was due to improved contract
manufacturing pricing, a favorable product mix selling higher margin networking
and unattended products, as well as the lack of transition costs for our move to
third party manufacturing during the nine months ended September 30, 2009,
compared to the same period in 2008. The increase in service gross margin
results primarily from higher margin service revenue in Europe from the TeT
acquisition and the exit of a marginally profitable $18.0 to $20.0 million
annual-revenue service contract in Brazil during the third quarter of
2009.




Operating
expenses, net of amortization of purchased intangible assets, for the nine
months ended September 30, 2009 were $92.5 million or 31.6% of revenue, compared
to $98.9 million or 31.3% of revenue for the same period in 2008. The decrease
relates to reduced R&D costs, variable selling and marketing expenses, as
well as lower general and administrative costs due to the exclusion of TeT from
our first quarter results in 2008, along
with cost saving synergies associated with the restructuring of the TeT
operations after the acquisition.




While we believe our results for the
nine months ended September 30, 2009 are the product of challenging global
economic conditions, our results for the past six months show that we have
expanded our customer base, improved margins and profitability, and generated significant free cash flow
that has strengthened our balance sheet. We are seeing improvements in some
areas of the global economy, although this quarter’s increased number of sales
wins were partially offset by the inability of some our suppliers to meet our
forecasted demands, which resulted in less revenue for the third quarter than
anticipated. Although we see competitive pressures on a global basis, as we and
our major competitors try to maintain and expand our respective market shares,
we expect to continue to gain market share with our Optimum product line. These
pressures will generally serve to decrease average prices for certain products
within certain geographies for the foreseeable future. We are tightly
controlling operating expenses and continuing to improve our supply chain, while
remaining focused on delivering the highest security and first class quality
solutions to our customers. As part of our effort to improve gross margin, we
intend to move to a joint development manufacturing model where we will provide
hardware specifications to a third party to design, develop and manufacture
certain hardware. We will continue to develop our software to the highest level
of security and compliance. We will also continue to effectively manage our
balance sheet and leverage our working capital to help meet the objectives of
our key initiatives in light of the current global economic
environment.




- 19
-
 Table of Contents





Restructuring





During
the second and third quarter of 2009, we incurred in employee severance and
benefits-related charges as a result of the following initiatives:





·
            Reorganization
      of our service business in Brazil;


·
            Consolidation
      of our U.K. operations in our Salisbury facility, which will result in the
      closing of the Woking facility;


·
            Reorganization
      of our operations in Asia-Pacific;


·
            Reorganization
      of our management team in our offices in Arizona, Mexico and the
      Caribbean; and


·
            Reorganization
      of our research and development team in
Spain.





As a
result of these actions, we incurred charges of $0.4 million and $2.3 million
during the three and nine months ended September 30, 2009. The $0.4 million in
the third quarter of 2009 was recorded in operating expenses and included in
SEMEA, while, of the $2.3 million year-to-date in 2009, $0.8 million was
recorded in costs of revenue and $1.5 million was recorded in operating
expenses. Of the $2.3 million, $0.9 million was recorded in the Americas, $0.7
million in SEMEA, $0.4 million in NEMEA, and $0.3 million in Shared Cost
Centers.





The
following table summarizes these charges and activities during the three months
ended September 30, 2009 (amounts in thousands):




SeveranceBalance
      at December 31, 2008
              
              $
              -Additions
              
              
              2,282Cash
      payments
              
              
              (1,442
              )Currency
      translation adjustment
              
              
              55Balance
      at September 30, 2009
              
              $
              895
  We expect to
pay the amounts accrued in 2009. We expect to incur additional restructuring
charges of approximately $0.6
million. The amounts recorded and expected additional restructuring
charges are subject to change based on the negotiation of severance with
employees and related work groups.




- 20
-
 Table of Contents




Results
of Operations





In
addition to the general information set forth in the following table, tabular
and narrative segment specific information is presented under the heading
“Segment Information” below.




Three
      Months Ended September 30,(Amounts
      in thousands)
              
              2009
              
              
              %
      of Revenue
              
              
              2008
              
              
              %
      of Revenue
              
              
              Dollar
      ChangeNet
      revenue:Product
              
              $
              76,558
              
              
              
              74.8
              %
              
              $
              86,992
              
              
              
              71.9
              %
              
              $
              (10,434
              )Service
              
              
              25,857
              
              
              
              25.2
              %
              
              
              34,068
              
              
              
              28.1
              %
              
              
              (8,211
              )Total net revenue
              
              
              102,415
              
              
              
              100.0
              %
              
              
              121,060
              
              
              
              100.0
              %
              
              
              (18,645
              )Costs
      of revenue:Product
              
              
              49,370
              
              
              
              64.5
              %
              
              
              56,495
              
              
              
              64.9
              %
              
              
              (7,125
              )Service
              
              
              18,499
              
              
              
              71.5
              %
              
              
              24,652
              
              
              
              72.4
              %
              
              
              (6,153
              )Amortization of purchased intangible assets
              
              
              760
              
              
              
              0.7
              %
              
              
              1,025
              
              
              
              0.8
              %
              
              
              (265
              )Total costs of revenue
              
              
              68,629
              
              
              
              67.0
              %
              
              
              82,172
              
              
              
              67.9
              %
              
              
              (13,543
              )Gross
      profit:Product
              
              
              27,188
              
              
              
              35.5
              %
              
              
              30,497
              
              
              
              35.1
              %
              
              
              (3,309
              )Service
              
              
              7,358
              
              
              
              28.5
              %
              
              
              9,416
              
              
              
              27.6
              %
              
              
              (2,058
              )Amortization of purchased intangible assets
              
              
              -
              
              
              
              0.0
              %
              
              
              -
              
              
              
              0.0
              %
              
              
              -Total gross profit
              
              
              33,786
              
              
              
              33.0
              %
              
              
              38,888
              
              
              
              32.1
              %
              
              
              (5,102
              )Operating
      expenses:Research and development
              
              
              10,853
              
              
              
              10.6
              %
              
              
              13,637
              
              
              
              11.3
              %
              
              
              (2,784
              )Selling, general and administrative
              
              
              18,254
              
              
              
              17.8
              %
              
              
              19,967
              
              
              
              16.5
              %
              
              
              (1,713
              )Amortization of purchased intangible assets
              
              
              1,580
              
              
              
              1.5
              %
              
              
              1,898
              
              
              
              1.6
              %
              
              
              (318
              )Total operating expenses
              
              
              30,687
              
              
              
              30.0
              %
              
              
              35,502
              
              
              
              29.3
              %
              
              
              (4,815
              )Operating
      income
              
              
              3,099
              
              
              
              3.0
              %
              
              
              3,386
              
              
              
              2.8
              %
              
              
              (287
              )Interest
      income
              
              
              61
              
              
              
              0.1
              %
              
              
              248
              
              
              
              0.2
              %
              
              
              (187
              )Interest
      expense
              
              
              (2,643
              )
              
              
              -2.6
              %
              
              
              (1,951
              )
              
              
              -1.6
              %
              
              
              (692
              )Foreign
      currency loss
              
              
              (128
              )
              
              
              -0.1
              %
              
              
              (45
              )
              
              
              0.0
              %
              
              
              (83
              )Other
      income
              
              
              35
              
              
              
              0.0
              %
              
              
              6
              
              
              
              0.0
              %
              
              
              29Non-operating
      expense, net
              
              
              (2,675
              )
              
              
              -2.6
              %
              
              
              (1,742
              )
              
              
              -1.4
              %
              
              
              (933
              )Income
      before income taxes anddiscontinued operations
              
              
              424
              
              
              
              0.4
              %
              
              
              1,644
              
              
              
              1.4
              %
              
              
              (1,220
              )Income
      tax benefit (provision)
              
              
              728
              
              
              
              0.7
              %
              
              
              (749
              )
              
              
              -0.6
              %
              
              
              1,477Income
      before discontinued operations
              
              
              1,152
              
              
              
              1.1
              %
              
              
              895
              
              
              
              0.7
              %
              
              
              257Income
      (loss) from discontinued operations
              
              
              26
              
              
              
              0.0
              %
              
              
              (270
              )
              
              
              -0.2
              %
              
              
              296Net
      income
              
              $
              1,178
              
              
              
              1.2
              %
              
              $
              625
              
              
              
              0.5
              %
              
              $
              553Basic
      and diluted income per share
              
              $
              0.02
              
              
              
              
              
              
              $
              0.01


- 21
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 Table of Contents





Nine
      Months Ended September 30,(Amounts
      in thousands)
            
            2009
            
            
            %
      of Revenue
            
            
            2008
            
            
            %
      of Revenue
            
            
            Dollar
      ChangeNet
      revenue:Product
            
            $
            214,135
            
            
            
            73.1
            %
            
            $
            229,350
            
            
            
            72.6
            %
            
            $
            (15,215
            )Service
            
            
            78,724
            
            
            
            26.9
            %
            
            
            86,395
            
            
            
            27.4
            %
            
            
            (7,671
            )Total net revenue
            
            
            292,859
            
            
            
            100.0
            %
            
            
            315,745
            
            
            
            100.0
            %
            
            
            (22,886
            )Costs
      of revenue:Product
            
            
            138,571
            
            
            
            64.7
            %
            
            
            154,398
            
            
            
            67.3
            %
            
            
            (15,827
            )Service
            
            
            59,913
            
            
            
            76.1
            %
            
            
            67,150
            
            
            
            77.7
            %
            
            
            (7,237
            )Amortization of purchased intangible assets
            
            
            2,141
            
            
            
            0.7
            %
            
            
            2,166
            
            
            
            0.7
            %
            
            
            (25
            )Total costs of revenue
            
            
            200,625
            
            
            
            68.5
            %
            
            
            223,714
            
            
            
            70.9
            %
            
            
            (23,089
            )Gross
      profit:Product
            
            
            75,564
            
            
            
            35.3
            %
            
            
            74,952
            
            
            
            32.7
            %
            
            
            612Service
            
            
            18,811
            
            
            
            23.9
            %
            
            
            19,245
            
            
            
            22.3
            %
            
            
            (434
            )Amortization of purchased intangible assets
            
            
            (2,141
            )
            
            
            -0.7
            %
            
            
            (2,166
            )
            
            
            -0.7
            %
            
            
            25Total gross profit
            
            
            92,234
            
            
            
            31.5
            %
            
            
            92,031
            
            
            
            29.1
            %
            
            
            203Operating
      expenses:Research and development
            
            
            32,240
            
            
            
            11.0
            %
            
            
            34,641
            
            
            
            11.0
            %
            
            
            (2,401
            )Selling, general and administrative
            
            
            55,774
            
            
            
            19.0
            %
            
            
            60,281
            
            
            
            19.1
            %
            
            
            (4,507
            )Amortization of purchased intangible assets
            
            
            4,509
            
            
            
            1.5
            %
            
            
            3,990
            
            
            
            1.3
            %
            
            
            519Total operating expenses
            
            
            92,523
            
            
            
            31.6
            %
            
            
            98,912
            
            
            
            31.3
            %
            
            
            (6,389
            )Operating
      loss
            
            
            (289
            )
            
            
            -0.1
            %
            
            
            (6,881
            )
            
            
            -2.2
            %
            
            
            6,592Interest
      income
            
            
            190
            
            
            
            0.1
            %
            
            
            1,367
            
            
            
            0.4
            %
            
            
            (1,177
            )Interest
      expense
            
            
            (7,619
            )
            
            
            -2.6
            %
            
            
            (4,463
            )
            
            
            -1.4
            %
            
            
            (3,156
            )Foreign
      currency loss
            
            
            (198
            )
            
            
            -0.1
            %
            
            
            (250
            )
            
            
            -0.1
            %
            
            
            52Other
      income
            
            
            356
            
            
            
            0.1
            %
            
            
            155
            
            
            
            0.0
            %
            
            
            201Non-operating
      expense, net
            
            
            (7,271
            )
            
            
            -2.5
            %
            
            
            (3,191
            )
            
            
            -1.0
            %
            
            
            (4,080
            )Loss
      before income taxes anddiscontinued operations
            
            
            (7,560
            )
            
            
            -2.6
            %
            
            
            (10,072
            )
            
            
            -3.2
            %
            
            
            2,512Income
      tax provision
            
            
            (24
            )
            
            
            0.0
            %
            
            
            (759
            )
            
            
            -0.2
            %
            
            
            735Loss
      before discontinued operations
            
            
            (7,584
            )
            
            
            -2.6
            %
            
            
            (10,831
            )
            
            
            -3.4
            %
            
            
            3,247Income
      from discontinued operations
            
            
            92
            
            
            
            0.0
            %
            
            
            229
            
            
            
            0.1
            %
            
            
            (137
            )Net
      loss
            
            $
            (7,492
            )
            
            
            -2.6
            %
            
            $
            (10,602
            )
            
            
            -3.4
            %
            
            $
            3,110Basic
      and diluted loss per share
            
            $
            (0.14
            )
            
            
            
            
            
            $
            (0.20
            )





Net Revenue.
Net revenue for the three months ended September 30, 2009 was
$102.4 million, an $18.6 million or 15.4% decrease, compared to net
revenue of $121.1 million for the three months ended September 30, 2008.
This decrease was comprised of a decrease of $10.4 million or 12.0% in
product revenue and a decrease of $8.2 million or 24.1% in service revenue.
Net revenue for the nine months ended September 30, 2009 was $292.9 million, a
$22.9 million or 7.3% decrease, compared to net revenue for the nine months
ended September 30, 2008 of $315.7 million. This decrease was comprised of a
decrease of $15.2 million or 6.6% in product revenue and a decrease of $7.7
million or 8.9% in service revenue.




Product
Revenue. Product revenue decreased by $10.4 million to $76.6 million for
the three months ended September 30, 2009, compared to $87.0 million for the
three months ended September 30, 2008. The decrease was primarily due to
declines in North America and Europe of $5.7 million and $4.6 million,
respectively. In addition, there was a decrease of revenue of $2.2 million in
Asia-Pacific, which was offset by an increase in new product sales in Brazil of
$2.9 million.




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 Table of Contents




The
decrease in revenue in North America for the three months ended September 30,
2009 was principally due to lower countertop revenue as a result of adverse
economic conditions and component shortages impacting the fulfillment of demand,
which resulted in less revenue for the quarter. The decrease in revenue in
Europe was primarily driven by economic conditions, component shortages that
resulted in less revenue for the quarter, and lower foreign currency exchange
rates on foreign denominated revenue. The decrease in revenue in Asia-Pacific
was primarily related to lower sales in countertop and networking equipment in
Hong Kong and Thailand.




Product
revenue decreased by $15.2 million to $214.1 million for the nine months ended
September 30, 2009, compared to $229.4 million for the nine months ended
September 30, 2008. The decrease was primarily due to declines in North America
and Europe of $16.3 million and $8.0 million, respectively. In addition there
was a decrease in revenue of $2.9 million in Asia-Pacific, which was offset by
an increase in new product sales in Brazil of $5.7 million. This was offset by
incremental revenue from the acquisition of TeT, which was not included in our
results for the first quarter of 2008.




The
decrease in revenue in North America for the three months ended September 30,
2009 was principally due to lower countertop revenue as result of the retail
slowdown and also due to component shortages impacting the fulfillment of
demand. The decrease in revenue in Europe was primarily due to lower pinpad
sales as a result of the economic downturn, component shortages, and lower
foreign currency exchange rates on foreign denominated revenue. The decrease in
revenue in Asia-Pacific was primarily related to lower sales in countertop and
networking equipment in China, Hong Kong and Thailand.




Service Revenue. Service revenue decreased by $8.2 million to $25.9
million for the three months ended September 30, 2009, compared to $34.1 million
for the three months ended September 30, 2008. The decrease was due to lower
sales in Brazil, primarily due to a reduction of approximately $4.8 million of
service revenue from one large customer resulting from our exiting a marginally
profitable service contract.




Service
revenue decreased by $7.7 million to $78.7 million for the nine months ended
September 30, 2009, compared to $86.4 million for the nine months ended
September 30, 2008. The decrease was due to lower sales in Brazil, primarily due
to a reduction of approximately $6.5 million of service revenue from a large
customer resulting from our exiting a marginally profitable service contract,
offset by additional revenue from TeT included in the first quarter of 2009, but
not in the same period in 2008.




The
current global economic uncertainties, along with challenges in the banking
industry and fluctuations in foreign currency exchange, have negatively impacted
our net revenue and we continue to have limited visibility to project our
revenue.




Costs of Revenue and Gross
Profit. Our costs of revenue include the cost of raw materials,
manufacturing, supply chain, service labor, overhead and subcontracted
manufacturing costs, telecommunications costs, inventory valuation provisions
and loan loss provisions with respect to sales-type leases included in
continuing operations. Total gross profit as a percent of revenue increased to
33.0% for the three months ended September 30, 2009 from 32.1% for the
three months ended September 30, 2008. Total gross profit as a percent of
revenue increased to 31.5% for the nine months ended September 30, 2009
from 29.1% for the nine months ended September 30, 2008.




The
increase in gross profit for the three months ended September 30, 2009, compared
to the same period in 2008, was primarily due to improvements in our contract
manufacturing pricing, a one-time extended warranty sale to a third party that
met the criteria of revenue recognition and a reduction in warranty charges,
compared to the same period in 2008.




The
increase in gross profit for the nine months ended September 30, 2009, compared
to the same period in 2008, was primarily due to improvements in our contract
manufacturing pricing, higher service margins in TeT and a favorable product mix
from selling higher margin networking and unattended products.




Product Gross Profit. Product
gross profit, net of amortization of purchased intangible assets, was 35.5% for
the three months ended September 30, 2009, compared to 35.1% for the three
months ended September 30, 2008. The product gross profit increase is
reflective of improvements in our contract manufacturing pricing and a reduction
in warranty charges of $1.0 million, compared to the same period in
2008.




Product
gross profit, net of amortization of purchased intangible assets, was 35.3% for
the nine months ended September 30, 2009, compared to 32.7% for the nine
months ended September 30, 2008. The gross profit improvement was primarily
due to improvements in our contract manufacturing pricing, and a favorable
product mix with higher margins on the TeT products




- 23
-
 Table of Contents





Service Gross Profit. Service
gross profit, net of amortization of purchased intangible assets, was 28.5% for
the three months ended September 30, 2009, compared to 27.6% for the three
months ended September 30, 2008. This increase in gross profit was
primarily due to the aforementioned extended warranty sale and the decision to
exit a marginally profitable service contract in Brazil, offset by lower margins
in Europe.




Service
gross profit, net of amortization of purchased intangible assets, was 23.9% for
the nine months ended September 30, 2009, compared to 22.3% for the nine
months ended September 30, 2008. This increase in gross profit was
primarily due to higher margin revenue from TeT and an increase in the service
margins in Brazil, which was partially offset by $0.8 million of restructuring
charges in the second quarter of 2009.




Operating
Expenses—Research and Development. R&D
expenses consist mainly of software and hardware engineering costs and the cost
of development personnel. R&D expenses decreased $2.8 million or 20.4% for
the three months ended September 30, 2009, compared to the three months
ended September 30, 2008. The decrease was primarily due to lower labor expenses
of $0.9 million and lower consulting and certification costs of $1.0
million.




R&D
expenses decreased $2.4 million or 6.9% for the nine months ended
September 30, 2009, compared to the nine months ended September 30, 2008.
The net decrease was due to lower labor and consulting expenses of $2.3
million.





Operating Expenses—Selling, General
and Administrative. Selling,
general and administrative (“SG&A”) expenses consist primarily of sales and
marketing expenses, administrative personnel costs, and facilities operations.
SG&A expenses decreased $1.7 million or 8.6% for the three months ended
September 30, 2009, compared to the three months ended September 30, 2008.
This decline represents a decrease in bad debt expense of $0.8 million related
to improvement of our aged receivables and lower commission expenses of $0.7
million as a result of lower revenue, compared to the same period in
2008.





SG&A
expense decreased $4.5 million or 7.5% for the nine months ended September 30,
2009, compared to the nine months ended September 30, 2008. This decline
represents a reduction in professional fees of $4.3 million, primarily due to
the non-recurring fees related to the TeT acquisition in 2008. In addition,
there were decreases in commission expenses of $1.1 million as a result of lower
revenue, compared to the same period in 2008, and $1.8 million of marketing
expenses. This was offset by TeT expenses included in the first quarter of 2009
and not in the same period in 2008.





Non-Operating
Income. Non-operating
income consists of net interest income, foreign currency gains and losses, and
other income and losses. For the three and nine months ended September 30,
2009, our interest expense net of interest income was $2.6 million and $7.6
million, respectively, compared to $1.7 million and $3.2 million for the
same periods, respectively, in the prior year. The increase in interest expense
was primarily due to the debt related to the TeT acquisition. The increase in
foreign currency income was primarily due to our decision in the first
quarter of 2009 to indefinitely suspend hedging activities related to
translational and transactional currencies, which continued during the
three months ended September 30, 2009. The suspension was due to the cost of
entering into forward contracts, the possible short term cash requirements for
forward contract payables and the potential inability to repatriate cash from
foreign countries on a short term basis to offset any hedge forward contract
payable. We are currently reviewing our hedging strategy for the remainder of
2009 and for 2010.




Provision for Income Taxes.
Income tax benefit (expense), before discontinued operations for federal, state
and foreign taxes, was $0.7 million for the three months ended
September 30, 2009, compared to $(0.7) million for the three months
ended September 30, 2008.




Our
effective tax rate is determined by the level and composition of pre-tax income
subject to varying foreign, state and local taxes and other items. We do not
believe the consolidated effective tax rate for the three months ended
September 30, 2009 is a meaningful measure of our effective tax rate due to
the loss before income taxes recorded, our cumulative net operating loss
position and the provision for a full valuation reserve against our deferred tax
assets.




As of
September 30, 2009, we continue to provide a valuation reserve against
substantially all deferred tax asset balances as of September 30, 2009. 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. and other
jurisdictions become sustainable.




Income from Discontinued
Operations. During the three months ended September 30, 2009 and
2008, we recorded income from discontinued operations of less than $0.1 million
and $0.2 million, respectively, related to our U.K. leasing operations and
our discontinuance of the Australian Courier Business.




- 24
-
 Table of Contents





Segment
Information





During
the fourth quarter of 2008, we initiated organizational changes, which included
enhancements to our internal management reporting structure. As a result, we
began reporting information pertaining to the following four business segments:
(i) the Americas, (ii) NEMEA, (iii) SEMEA, and
(iv) Asia-Pacific. The Americas consists of the U.S., Canada, Mexico, the
Caribbean, Central America, and South America. NEMEA consists of Belgium,
Turkey, Sweden, Austria and Germany. SEMEA consists of France, Spain, the U.K.,
Western and Central Eastern Europe, Russia, Hungary, the Middle East, and
Africa. Asia-Pacific consists of China, Hong Kong, Singapore, Thailand,
Australia and New Zealand. Prior year segment data has been restated for
comparative purposes.




The
following table sets forth the revenues and operating results by business
segment for the three and nine months ended September 30, 2009 and 2008
(amounts in thousands):




Three
      Months Ended September 30,%
      of
              
              
              
              
              
              %
      of
              
              
              Dollar2009
              
              
              Revenue
              
              
              2008
              
              
              Revenue
              
              
              ChangeNet
      revenue:Americas
              
              $
              32,198
              
              
              
              31.4
              %
              
              $
              42,436
              
              
              
              35.1
              %
              
              $
              (10,238
              )NEMEA
              
              
              26,311
              
              
              
              25.7
              %
              
              
              28,689
              
              
              
              23.7
              %
              
              $
              (2,378
              )SEMEA
              
              
              32,644
              
              
              
              31.9
              %
              
              
              35,995
              
              
              
              29.7
              %
              
              $
              (3,351
              )Asia-Pacific
              
              
              11,262
              
              
              
              11.0
              %
              
              
              13,940
              
              
              
              11.5
              %
              
              $
              (2,678
              )Total
      net revenue
              
              $
              102,415
              
              
              
              100.0
              %
              
              $
              121,060
              
              
              
              100.0
              %
              
              $
              (18,645
              )Operating
      income (loss):Americas
              
              $
              6,992
              
              
              
              6.8
              %
              
              $
              5,746
              
              
              
              4.7
              %
              
              
              1,246NEMEA
              
              
              4,912
              
              
              
              4.8
              %
              
              
              6,236
              
              
              
              5.2
              %
              
              
              (1,324
              )SEMEA
              
              
              5,601
              
              
              
              5.5
              %
              
              
              7,112
              
              
              
              5.9
              %
              
              
              (1,511
              )Asia-Pacific
              
              
              1,659
              
              
              
              1.6
              %
              
              
              2,617
              
              
              
              2.2
              %
              
              
              (958
              )Shared
      Cost Centers
              
              
              (16,065
              )
              
              
              -15.7
              %
              
              
              (18,325
              )
              
              
              -15.1
              %
              
              
              2,260Total
      operating income
              
              $
              3,099
              
              
              
              3.0
              %
              
              $
              3,386
              
              
              
              2.8
              %
              
              $
              (287
              )


- 25
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 Table of Contents




Nine
      Months Ended September 30,%
      of
              
              
              
              
              
              %
      of
              
              
              Dollar2009
              
              
              Revenue
              
              
              2008
              
              
              Revenue
              
              
              ChangeNet
      revenue:Americas
              
              $
              93,456
              
              
              
              31.9
              %
              
              $
              122,243
              
              
              
              38.7
              %
              
              $
              (28,787
              )NEMEA
              
              
              72,756
              
              
              
              24.8
              %
              
              
              62,269
              
              
              
              19.7
              %
              
              $
              10,487SEMEA
              
              
              91,940
              
              
              
              31.4
              %
              
              
              92,095
              
              
              
              29.2
              %
              
              $
              (155
              )Asia-Pacific
              
              
              34,707
              
              
              
              12.0
              %
              
              
              39,138
              
              
              
              12.4
              %
              
              $
              (4,431
              )Total
      net revenue
              
              $
              292,859
              
              
              
              100.0
              %
              
              $
              315,745
              
              
              
              100.0
              %
              
              $
              (22,886
              )Operating
      income (loss):Americas
              
              $
              15,262
              
              
              
              5.2
              %
              
              $
              17,057
              
              
              
              5.4
              %
              
              
              (1,795
              )NEMEA
              
              
              12,384
              
              
              
              4.2
              %
              
              
              10,809
              
              
              
              3.4
              %
              
              
              1,575SEMEA
              
              
              17,150
              
              
              
              5.9
              %
              
              
              15,770
              
              
              
              5.0
              %
              
              
              1,380Asia-Pacific
              
              
              6,775
              
              
              
              2.3
              %
              
              
              7,227
              
              
              
              2.3
              %
              
              
              (452
              )Shared
      Cost Centers
              
              
              (51,860
              )
              
              
              -17.7
              %
              
              
              (57,744
              )
              
              
              -18.3
              %
              
              
              5,884Total
      operating loss
              
              $
              (289
              )
              
              
              -0.1
              %
              
              $
              (6,881
              )
              
              
              -2.2
              %
              
              $
              6,592




Net Revenue. Net
revenue for the Americas decreased 24.1% and 23.6% for the three and nine months
ended September 30, 2009, respectively, from the same periods in 2008,
principally due to decreases in countertop, multilane and pinpad sales in North
America caused by the retail slowdown in the U.S. and component shortages, which
resulted in less revenue for the third quarter of 2009. Other factors
contributing to the decrease in net revenue in the Americas include a $1.6
million decrease in mobile sales in Mexico during the nine months ended
September 30, 2009, primarily due to lower customer demand. The decrease in net
revenue for the Americas was partially offset by new product sales in Brazil.
Service revenue also decreased in the Americas due to lower volumes of service
revenue and lower foreign currency exchange rates in Mexico and
Brazil.





Net revenue
for NEMEA decreased 8.3% for the three months ended September 30, 2009 from the
same period in 2008, principally due to decline of pinpad sales in Sweden and
component shortages, which resulted in less revenue for the third quarter of
2009. Net revenue for NEMEA increased 16.8% for the nine months ended September
30, 2009 from the same period in 2008, principally as a result of the
acquisition of TeT.




Net
revenue for SEMEA decreased 9.3% for the three months ended September 30, 2009
from the same period in 2008, principally as a result of decreases in pinpad
sales in Russia, Hungary and component shortages that resulted in less revenue
for the quarter. Net revenue for SEMEA decreased 0.2% for the nine months
ended September 30, 2009 from the same period in 2008, principally as a result
of decreases in pinpad sales in Russia, Hungary and component shortages, offset
by additional revenue in 2009 from the acquisition of TeT, compared to
2008.




Net
revenue for Asia-Pacific decreased 19.2% and 11.3% for the three and nine months
ended September 30, 2009, respectively, from the same periods in 2008,
principally due to lower countertop and networking sales in Hong Kong, Thailand
and China as a result of the weak economic environment in the
region.




Operating
Income. Operating
income in the Americas increased 21.7% for the three months ended September 30,
2009 from the same period in 2008, principally as a result of increased gross
margin due to the sales mix, as well as bad debt recoveries. Also, the third
quarter of 2009 included a $1.1 million one-time extended warranty sale to a
third party. Operating income in the Americas decreased 10.5% for the nine
months ended September 30, 2009 from the same period in 2008, principally due to
decrease in sales in countertop as a result of adverse economic conditions
and component shortages, which resulted in less revenue for the
quarter.




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Operating
income in NEMEA decreased 21.2% for the three months ended September 30, 2009
from the same period in 2008. The decrease was principally due to a decline of
pinpad sale in Sweden and component shortages, which resulted in less
revenue for the quarter. Operating income in NEMEA for the nine months ended
September 30, 2009 increased 14.6% from the same period in 2008, principally due
to the acquisition of TeT, since the operating income for the first quarter of
2009 includes TeT and did not in the same period of 2008.




Operating
income in SEMEA decreased 23.0% for the three months ended September 30, 2009,
compared to the same period in 2008, principally as a result of decreases in
pinpad sales in Russia, Hungary and component shortages that resulted in less
revenue for the quarter. Operating income in SEMEA increased 7.9% for the nine
months ended September 30, 2009 from the same period in 2008, principally due to
the acquisition of TeT, since the operating income for the first quarter of 2009
includes TeT and did not in the same period of 2008.




Operating
income in Asia-Pacific decreased 36.6% and 6.3% for the three and nine months
ended September 30, 2009, respectively, compared to the same periods in 2008,
principally due to lower countertop and networking sales in Hong Kong, Thailand
and China as a result of the weak economic environment in the
region.




Shared
Cost Centers expenses decreased 13.0% and 10.4% for the three and nine months
ended September 30, 2009, respectively, from the same periods in 2008. Such
decreases were principally as a result of lower global R&D activity and
reduced global supply chain costs as a result of moving internal production to
contract manufacturing. This was partially offset by the fact that expenses
associated with the TeT acquisition were not included in the first quarter of
2008. General and administrative expenses decreased, principally due to the
acquisition costs incurred in the first quarter of 2008 and lower amortization
expense in 2009 as a result of an impairment of intangible assets of $8.8
million during the fourth quarter of 2008.





Cash
Flows, Liquidity and Capital Resources




We have
historically financed our operations primarily through cash generated from
operations and from borrowings under a revolving credit facility or other debt
facilities.




Cash Flows. Cash provided by
or used in operating activities includes net income (loss) adjusted for
non-cash items and changes in operating assets and liabilities. Cash provided by
operating activities for the nine months ended September 30, 2009 was
$17.2 million, compared to cash provided by operations of
$13.6 million for the nine months ended September 30, 2008. The principal
reason for the increase in cash provided by operations was better inventory
management and improved collection of our accounts receivable year-to-date
in 2009, compared to the same time period in 2008.




Cash used
in investing activities was $4.4 million for the nine months ended
September 30, 2009, compared to $116.9 million for the nine months
ended September 30, 2008. Cash used in investing for the nine months ended
September 30, 2009 consisted principally of purchases of property, plant
and equipment of $4.7 million. Cash used in investing for the nine months
ended September 30, 2008 consisted principally of cash paid for the TeT
acquisition of $115.2 million and purchases of property and equipment of
$6.2 million.




Financing
cash flows for the nine months ended September 30,2009
consisted principally of cash received from borrowings and repayment of our
revolving credit facility, the issuance of common stock due to the exercise of
employee stock options, and cash used to repay debt.




We
believe that our cash reserves, available financing and operating cash flows, as
well as certain investing and financing cash outlays, will be sufficient to fund
our projected liquidity and capital resource requirements through 2009. However,
should operating results be unfavorable, we may need to obtain additional
capital sources to meet our short-term liquidity and capital resource
requirements.




Liquidity and Capital
Resources. At September 30, 2009, cash and cash equivalents and
short-term investments were $51.2 million and zero, respectively, compared
to $36.0 million and $0.5 million, respectively, at December 31,
2008. Working capital increased $7.1 million from $46.8 million at
December 31, 2008 to $53.9 million at September 30, 2009. We had
availability of $13.2 million under our revolving credit facility as of
September, 30, 2009, which was decreased by outstanding letters of credit
totaling $3.1 million as of September 30, 2009.




Contractual
Obligations




Other
than changes in the ordinary course of business, our estimates as to future
contractual obligations have not materially changed from the disclosure included
under the subheading “Contractual Obligations” in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008.




Effect of
Inflation





Inflation has
not had a significant effect on our operations for any period presented
above.





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Item 3.  Quantitative and Qualitative Disclosures about
Market Risk.





At
September 30, 2009, 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 for similar investments. We have no
short-term investments at September 30, 2009.





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 a 100 basis point increase or
decrease in interest rates, primarily due 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 either
U.S. dollars or Euros. However, we do at times enter into transactions in other
currencies, such as the Hong Kong Dollar, Australian Dollar, Brazilian Real,
British Pound and other Central and South American, Asian and European
currencies. In March 2009, we suspended hedging activities due to the cost of
entering into forward contracts, the possible short term cash requirements for
forward contract payables, along with the inability to repatriate cash from
foreign countries on a short term basis to offset any hedge forward contract
payable. We are currently reviewing our hedging strategy for the remainder of
2009 and for 2010. Prior to our decision to suspend hedging in March 2009,
we hedged 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. We also entered into hedge contracts to mitigate certain
significant transactional exposures. Financial hedging instruments were limited
by our previous policy regarding foreign currency forward or option contracts
and foreign currency debt. At September 30, 2009, we had no foreign currency
forward contracts.





All of
our long-term debt obligations are at a fixed interest rate over the term of the
agreement and there are no borrowings under our revolving credit facility at
September 30, 2009. However, as of September 30, 2009, we have $3.1 million
outstanding against the line of credit to cover various letters of credit
guarantees at an interest rate of 3.25%.





During
the normal course of business, we are routinely subjected to a variety of market
risks, examples of which include, but are not limited to, interest rate
movements and fluctuations in foreign currency exchange rates, as we discuss in
this Item 3, and collectability of accounts receivable. We continuously assess
these risks and have established policies and procedures to protect against the
adverse effects of these and other potential exposures. Although we do not
anticipate any material losses in these risk areas, no assurance can be made
that material losses will not be incurred in these areas in the
future.





Item 4.  Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) designed
to ensure information required to be disclosed in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and timely reported as
specified in the SEC’s rules and forms. They are also designed to ensure that
such information is accumulated and communicated to our management, including
our Chief Executive Officer, Chief Financial Officer and Chief Accounting
Officer, as appropriate, to allow timely decisions regarding required
disclosure.





Our
management, with the participation of our Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer, has evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by
this report. Based on such evaluation, our Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer have concluded that, as of the
end of such period, our disclosure controls and procedures were effectively
designed to ensure that information we are required to disclose in reports we
file or submit under the Exchange Act is (i) recorded, processed,
summarized and reported timely as specified in SEC rules and forms and
(ii) accumulated and communicated to our management, including our
certifying officers, as appropriate to allow timely decisions regarding required
disclosures.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal control over financial reporting, as defined in
the Exchange Act Rules 13a-15(f) and 15d-15(f), that occurred during our most
recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





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PART
II — OTHER INFORMATION





Item 1.  Legal Proceedings.





We are
currently a party to various legal proceedings, including those noted below.
While we presently believe that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
our financial position, results of operations or cash flows, 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, results of operations or cash flows in the period in which the ruling
occurs or in future periods.





Lisa
Shipley v. Hypercom Corporation. (United States District Court for the Northern
District of Georgia, Civil Action No. 1:09-CV-0265, filed on January 30,
2009)





Lisa
Shipley, a former employee, filed this action against us in the United States
District Court for the Northern District of Georgia on January 30, 2009,
alleging that we violated (i) Title VII of the Civil Rights Act by
discriminating against her on the basis of her gender, (ii) the Georgia Wage
Payment laws by failing to pay certain sales commissions, and (iii) the Equal
Pay Act and Georgia law by paying her lower compensation than we paid males who
performed the same work. Ms. Shipley is seeking compensatory damages for
emotional distress, damage to reputation, embarrassment, lost wages, back pay,
accrued interest, punitive damages, attorney’s fees and expenses, and interest.
We deny the allegations and intend to vigorously defend this litigation. On June
30, 2009, we filed our answer, generally denying the material allegations of the
plaintiff’s complaint. On October 20, 2009, Ms. Shipley filed an amended
complaint adding an allegation that we unlawfully retaliated against Ms. Shipley
in violation of Title VII of the Civil Rights Act.  On November 3,
2009, we filed our answer, denying the material allegations of the amended
complaint.  Discovery has commenced in this action.




Item 1A.  Risk Factors.





We refer you
to documents filed by us with the SEC, specifically “Item 1A. Risk Factors” in
our most recent annual report on Form 10-K for the fiscal year ended December
31, 2008, which identifies important risk factors that could materially affect
our business, financial condition and future results. We also refer you to the
factors and cautionary language set forth in the section entitled “Cautionary
Statements Regarding Forward-looking Statements” of this quarterly report on
Form 10-Q. This quarterly report on Form 10-Q, including the consolidated
financial statements and related notes should be read in conjunction with such
risks and other factors for a full understanding our operations and financial
condition. The risks described in our Form 10-K and herein are not the only
risks we face. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially adversely affect our
business, financial condition or operating results. The risk factors included in
our annual report on Form 10-K for the fiscal year ended December 31, 2008 have
not materially changed.




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
            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)4.2
            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)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.




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SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





HYPERCOM
CORPORATION





Date:
      November 9, 2009
            By: /s/ Philippe
      Tartavull
              Philippe
      Tartavull
              Chief
      Executive Officer and President (duly authorized officer and principal
      executive officer)








Date:
      November 9, 2009
            By: /s/ Thomas B.
      Sabol
              Thomas
      B. Sabol
              Chief
      Financial Officer (principal financial
officer)








Date:
      November 9, 2009
            By: /s/ Shawn C.
      Rathje
              Shawn
      C. Rathje
              Chief
      Accounting Officer and Controller (principal accounting
      officer)