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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: March 31, 2004. OR (  )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____ to ____. Commission file number: 1-13521 HYPERCOM CORPORATION (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    86-0828608
(I.R.S. Employer
Identification Number )
 2851 West Kathleen Road
Phoenix, Arizona 85053
(Address of principal executive offices) (Zip Code) (602) 504-5000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  [X]   No  [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  [X]   No  [   ] Number of shares of the registrants common stock, $.001 par value per share,
outstanding as of May 5, 2004, was 50,963,717.




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INDEX  
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial StatementsConsolidated
Balance Sheets  March 31, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations  Three months ended March 31, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flow  Three months ended March 31, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    8Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    10Item 4.
    
    Controls and Procedures
    
    
    11PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal proceedings
    
    
    12Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    12Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    12SIGNATURES
    
    
    13EXHIBIT INDEX
    
    
    14EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
  2




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PART I - FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 HYPERCOM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) March 31, 2004(unaudited)
    
    December 31, 2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    64,290
    
    
    $
    65,415Marketable securities
    
    
    20,900
    
    
    
    17,400Accounts receivable, net of allowance for doubtful
accounts of $1,059 and $993, respectively
    
    
    52,252
    
    
    
    55,252Current portion of net investment in sales-type leases
    
    
    11,147
    
    
    
    10,477Inventories
    
    
    40,729
    
    
    
    42,262Prepaid expenses and other current assets
    
    
    11,169
    
    
    
    13,769Long-lived assets held for sale
    
    
    851
    
    
    
    852Total current assets
    
    
    201,338
    
    
    
    205,427Property, plant and equipment, net
    
    
    28,474
    
    
    
    28,217Long-term marketable securities
    
    
    153
    
    
    
    153Net investment in sales-type leases
    
    
    17,376
    
    
    
    18,542Intangible assets, net
    
    
    4,131
    
    
    
    3,731Other long-term assets
    
    
    8,761
    
    
    
    8,498Total assets
    
    $
    260,233
    
    
    $
    264,568LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    18,545
    
    
    $
    21,733Accrued payroll and related expenses
    
    
    6,759
    
    
    
    8,267Accrued sales and other taxes
    
    
    5,584
    
    
    
    6,359Accrued liabilities
    
    
    6,943
    
    
    
    7,534Deferred revenue
    
    
    3,096
    
    
    
    2,044Income taxes payable
    
    
    1,387
    
    
    
    1,690Current portion of long-term debt
    
    
    901
    
    
    
    1,058Total current liabilities
    
    
    43,215
    
    
    
    48,685Long-term debt
    
    
    8,636
    
    
    
    8,799Other non-current liabilities
    
    
    2,982
    
    
    
    2,787Total liabilities
    
    
    54,833
    
    
    
    60,271Stockholders equity:Common stock, $.001 par value; 100,000,000 shares authorized;
50,649,693 and 49,930,803 shares outstanding at March 31,
2004 and December 31, 2003, respectively
    
    
    30
    
    
    
    29Additional paid-in capital
    
    
    222,531
    
    
    
    220,004Receivables from stockholders
    
    
    
    
    
    
    (1,056
    )Accumulated deficit
    
    
    (13,528
    )
    
    
    (11,307
    )Unearned deferred compensation
    
    
    (860
    )
    
    
    (600
    )Treasury stock, 290,211 shares (at cost)
    
    
    (2,773
    )
    
    
    (2,773
    )Total stockholders equity
    
    
    205,400
    
    
    
    204,297Total liabilities and stockholders equity
    
    $
    260,233
    
    
    $
    264,568
 The accompanying notes are an integral part of the consolidated financial statements. 3




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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share data) Three Months Ended March 31,2004
    
    2003Net revenue
    
    $
    50,763
    
    
    $
    49,796Costs and expenses:Costs of revenue
    
    
    29,517
    
    
    
    29,876Research and development
    
    
    6,825
    
    
    
    5,813Selling, general and administrative
    
    
    14,885
    
    
    
    15,055Total costs and expenses
    
    
    51,227
    
    
    
    50,744Loss from continuing operations
    
    
    (464
    )
    
    
    (948
    )Interest income
    
    
    273
    
    
    
    50Interest expense
    
    
    (491
    )
    
    
    (592
    )Other income (expense)
    
    
    18
    
    
    
    (157
    )Foreign currency loss
    
    
    (728
    )
    
    
    (463
    )Loss before income taxes and
discontinued operations
    
    
    (1,392
    )
    
    
    (2,110
    )Provision for income taxes
    
    
    (829
    )
    
    
    (690
    )Loss before discontinued operations
    
    
    (2,221
    )
    
    
    (2,800
    )Income from discontinued operations
    
    
    
    
    
    
    770Net loss
    
    $
    (2,221
    )
    
    $
    (2,030
    )Loss per
share - basic and diluted:Loss before discontinued operations
    
    $
    (0.04
    )
    
    $
    (0.06
    )Income from discontinued operations
    
    
    
    
    
    
    0.02Loss per share
    
    $
    (0.04
    )
    
    $
    (0.04
    )Weighted
average common shares - basic and diluted
    
    
    50,213
    
    
    
    48,043
 The accompanying notes are an integral part of the consolidated financial statements. 4




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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands) Three Months Ended March 31,2004
    
    2003Cash flows from continuing operations:Net loss from continuing operations
    
    $
    (2,221
    )
    
    $
    (2,800
    )Adjustments to reconcile net loss from continuing operations to net
cash provided by operating activities:Amortization of deferred financing costs
    
    
    224
    
    
    
    224Depreciation/amortization
    
    
    2,159
    
    
    
    2,375Bad debt expense
    
    
    194
    
    
    
    1,120Provision for losses on sales-type leases
    
    
    290
    
    
    
    161Provision for excess and obsolete inventory
    
    
    1,231
    
    
    
    706Noncash stock compensation
    
    
    100
    
    
    
    Foreign currency loss
    
    
    728
    
    
    
    463Changes in operating assets and liabilities
    
    
    (730
    )
    
    
    11,699Net cash provided by operating activities
    
    
    1,975
    
    
    
    13,948Cash flows from investing activities:Purchases of marketable securities
    
    
    (6,000
    )
    
    
    Proceeds from the sale or maturity of marketable securities
    
    
    2,500
    
    
    
    Acquisition of other assets
    
    
    (856
    )
    
    
    (465
    )Purchase of property, plant and equipment
    
    
    (1,273
    )
    
    
    (1,884
    )Net cash used in investing activities
    
    
    (5,629
    )
    
    
    (2,349
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (313
    )
    
    
    (371
    )Payments received on advances to stockholders
    
    
    1,056
    
    
    
    Proceeds from issuance of common stock
    
    
    2,168
    
    
    
    92Advances from discontinued operations
    
    
    
    
    
    
    278Net cash provided by (used in) financing activities
    
    
    2,911
    
    
    
    (1
    )Effect of exchange rate changes on cash
    
    
    (24
    )
    
    
    69Net (decrease) increase in cash flows from continuing operations
    
    
    (767
    )
    
    
    11,667Net (decrease) increase in cash flows from discontinued operations
    
    
    (358
    )
    
    
    2,593Cash and cash equivalents, beginning of period
    
    
    65,415
    
    
    
    23,069Cash and cash equivalents, end of period
    
    $
    64,290
    
    
    $
    37,329
 The accompanying notes are an integral part of the consolidated financial statements. 5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) NOTE 1  BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2004, are not necessarily
indicative of the results to be expected for the year ending December 31, 2004. Certain prior year amounts have been reclassified to conform to the current
period presentation, including the results of operations and cash flows of the
Companys former direct finance lease subsidiary, Golden Eagle Leasing. This financial information is intended to be read in conjunction with
Hypercoms audited financial statements and footnotes thereto included in
Hypercoms Annual Report on Form 10-K for the year ended December 31, 2003. NOTE 2  STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) defines a fair value based method of accounting for
employee stock options or similar equity instruments. However, it also allows
an entity to continue to account for these plans according to Accounting
Principles Board Opinion No. 25 (APB 25) and related interpretations, provided
pro forma disclosures of net income are made as if the fair value based method
of accounting, defined by SFAS 123, had been applied. The Company has elected to continue to measure compensation expense related to
employee stock options using the intrinsic value method prescribed by
APB 25 and related interpretations. The following table represents the effect
on net loss and loss per share as if the Company had applied the fair value
method and the recognition provisions of SFAS 123 to stock based employee
compensation (amounts in thousands, except per share data): Three Months Ended March 31,2004
    
    2003Net loss, as reported
    
    $
    (2,221
    )
    
    $
    (2,030
    )Add: Stock-based employee compensation expense included
in reported net income
    
    
    100
    
    
    
    Deduct: Total stock-based employee compensation expense
determined under fair value methods for all awards
    
    
    (724
    )
    
    
    (1,459
    )Pro forma net loss
    
    $
    (2,845
    )
    
    $
    (3,489
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.04
    )
    
    $
    (0.04
    )Basic and diluted, pro forma
    
    $
    (0.06
    )
    
    $
    (0.07
    )Weighted average shares used in pro forma computation:Basic and diluted
    
    
    50,213
    
    
    
    48,043
 As required, the pro forma disclosures above include options granted since
January 1, 1995. Consequently, the effects of applying SFAS 123 for providing
pro forma disclosures may not be representative of the effects on reported net
income (loss) for future years until all options outstanding are included in
the pro forma disclosures. For purposes of pro forma disclosures, the estimated
fair value of stock-based compensation plans and other options is amortized to
expense primarily over the vesting
period. See Note 16 of the Companys Annual Report on Form 10-K for the year
ended December 31, 2003 for further discussion of the Companys stock-based
employee compensation. 6




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NOTE 3  POTENTIALLY DILUTIVE SECURITIES Options and warrants that could potentially dilute income (loss) per share in
the future that were not included in the computation of diluted loss per share
because they were anti-dilutive amounted to 10,556,009 and 13,091,917
for March 31, 2004 and March 31, 2003, respectively. NOTE 4  INVENTORIES Inventories consist of the following (amounts in thousands): March 31, 2004
    
    December 31, 2003Purchased parts
    
    $
    17,425
    
    
    $
    17,990Work in progress
    
    
    4,651
    
    
    
    4,581Finished goods
    
    
    18,653
    
    
    
    19,691$
    40,729
    
    
    $
    42,262
 NOTE 5  DISCONTINUED OPERATIONS The Companys discontinued operations include the results of operations of
certain under-performing operating units previously identified and reported as
discontinued operations together with the results of operations of the
Companys former direct finance lease subsidiary, Golden Eagle Leasing,
initially reported in discontinued operations during the third quarter of 2003.
All periods prior to the third quarter of 2003 have been reclassified to
present the operating results of Golden Eagle Leasing in discontinued
operations. Net revenues and pretax income of the operating units classified
as discontinued operations for the three months ended March 31, 2003 was $8.3
million and $0.8 million, respectively, which includes net revenue and pretax
income of Golden Eagle Leasing in the amount of $5.9 million and $1.7 million,
respectively. NOTE
6  RECEIVABLES FROM STOCKHOLDERS During the first quarter of 2004, the Company received $1.1 million in cash
from two former principal stockholders to repay notes that came due during the
quarter. These notes were reflected as a separate component of Stockholders
Equity. NOTE
7 - INCOME TAXES Income tax expense before discontinued operations for federal, state and
foreign taxes was $0.8 million and $0.7 million for the three months ended
March 31, 2004 and 2003, respectively. The income tax expense is principally
comprised of income taxes associated with the Companys profitable foreign
locations. As
discussed in the Companys 2003 Annual Report on Form 10-K, the Company has
recorded full valuation reserves against its deferred tax asset balance
existing at December 31, 2003. Consistent with the facts and circumstances
leading to the Companys conclusion to provide a full valuation reserve against
its deferred tax assets, the Company has provided a further valuation reserve
against any net increases in deferred tax assets principally attributable to
U.S. operating losses generated during the first quarter of 2004. Accordingly,
the effective tax rate for the first quarter of 2004 is not meaningful. These
valuation reserves are subject to reversal in future years at such time that
the benefits are actually utilized or, the operating profits in the U.S. become
sustainable at a level that meets the recoverability criteria under SFAS 109. As noted above, the Company provided full valuation reserves against all net
increases in deferred tax assets attributable to U.S. operating losses
generated during 2003 and, therefore, the effective tax rate for the
first quarter of 2003 is not
meaningful. NOTE
8  UNEARNED DEFERRED COMPENSATION In
February 2004, the Company granted 60,000 shares of restricted common
stock to the Companys Chief Executive Officer under the 2000
Plan. The Company recorded deferred compensation of $360,000,
representing the market price of the shares at the date of grant and
a weighted-average fair value of $6.00 per share. The deferred
compensation is presented as a reduction of stockholders equity
and is being amortized ratably over the service period. The Company
expects to record compensation expense related to deferred
compensation of approximately $27,000 per quarter through February
2007. Expense with respect to the grants could be reduced and/or
reversed to the extent the Chief Executive Officer leaves the Company prior
to vesting in the award. NOTE
9  CONTRACT ACCOUNTING The Company is involved in one long-term contract with the
Brazilian Health Ministry requiring substantial performance of
customized software and hardware. The final maintenance phase of this
contract expired on April 30, 2004. The Brazilian Health
Ministry has informed the Company of their intent to extend the
maintenance element of the contract and the Company is in the process
of finalizing the terms of such extension. As of March 31,
2004, the Company has a receivable balance outstanding under this
contract of approximately $3.4 million, which was recorded based
on the Company achieving contract milestones approved by the
Brazilian Health Ministry. In addition, the Company
has made a claim for $4.6 million of revenue as allowed for under
the contract, and identified and made a claim for approximately
$6.7 million of revenue in excess of the agreed upon contract.
The Company believes it is probable the claims will result in
additional revenue and have reasonably estimated such amount in
accordance with Statement of Position 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts. While the revenue related to these claims has not been
recorded under the percentage-of-completion milestone approach,
contract costs to be recovered by these revenue claims amounting to
approximately $9.4 million have been deferred within other
current assets and other long-term assets at March 31, 2004 and
treated as normal costs of contract performance. If the revenue
claims are denied or results in revenue less than the associated
costs, the operating results would be significantly impacted. 7




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995. Words such
as believe, expect, intend, anticipate, estimate, project, and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. These forward-looking statements may include,
but not be limited to, projections of revenue or net income and issues that may
affect revenue or net income, projections of capital expenditures,
future levels of research and development expenditures, plans for
future operations, products or services, our ability to fund our projected liquidity and capital requirements from our cash flow from operations and our current cash reserves, and
general economic conditions, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Statements in this Quarterly Report,
including the Notes to the Consolidated Financial Statements and Managements
Discussion and Analysis of Financial Condition and Results of Operations
describe factors, among others, that could contribute to or cause such
differences. Additional risk factors that could cause actual results to differ
materially from those expressed in such forward-looking statements, and that
could affect the Companys results of operations and financial position
generally, are set forth in Exhibit 99.1, which is attached hereto and
incorporated by reference into this Quarterly Report on Form 10-Q. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise. RESULTS OF CONTINUING OPERATIONS The results of continuing operations exclude the operations of the operating
units being reported as discontinued operations (see Note 5 to the financial
statements). NET REVENUE Net revenue for our seasonally lower first quarter increased $1.0 million or
2%, to $50.8 million for the first quarter of 2004 from $49.8 million in the
first quarter of 2003. The year over year slight increase is reflective of an
improvement in the global economy compared to a year ago. COST OF REVENUE Cost of revenue includes the cost of raw materials, manufacturing labor,
overhead and subcontracted manufacturing costs, as well as loan loss provisions
with respect to sales-type leases. For the three months ended March 31, 2004,
costs of revenue declined $0.4 million or 1%, to $29.5 million from $29.9
million for the three months ended March 31, 2003. The decrease in cost of
revenue, albeit on higher revenues, was principally the result of manufacturing
efficiencies attributable to lower negotiated raw material component prices and
engineered hardware cost reductions. Although we do not anticipate further
declines in raw material component prices, component prices are subject to
supply and demand in the worldwide economy and, therefore, cannot be easily
predicted. Gross margin increased from 40.0% to 41.9% for the three months ended March 31,
2003 and 2004, respectively, and is primarily due to favorable raw material
component costs as previously discussed. RESEARCH AND DEVELOPMENT Research and development expenses consist mainly of software and hardware
engineering costs and the cost of development personnel. Research and
development expenses for the three months ended March 31, 2004 increased $1.0
million or 17% to $6.8 million from $5.8 for the three months ended March 31,
2003. The increase in research and development spending is reflective of new
products we recently launched including several new terminals under our Optimum
product family and an internet protocol (IP) enabling
device, IN-tactTM, that
converts existing Hypercom terminals into faster IP-enabled card payment
terminals. This level of quarterly spending in research and development, on a
relative dollar basis, is expected to continue for the remaining quarters in
2004. 8




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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Sales and marketing expenses, administrative personnel costs, and facilities
operations make up the selling, general and administrative expenses. These
expenses totaled $14.9 million for the three months ended March 31, 2004,
compared to $15.1 for the three months in the prior year. This $0.2 million or
1% decrease for the three months ended March 31, 2004 is reflective of our
continued focus on containing costs in this area. LOSS FROM CONTINUING OPERATIONS Our loss from continuing operations for the quarter ended March 31, 2004
decreased $0.4 million to a loss of $0.5 million from a loss of $0.9 million in
the same period a year ago. This decrease is principally the result of margin
gains resulting from higher revenues and lower component costs partially offset
by an increase in research and development spending. NET INTEREST, FOREIGN CURRENCY LOSSES AND OTHER ITEMS We incurred interest expense of $0.5 for the three months ended March 31, 2004
compared to $0.6 million for the three months ended March 31, 2003, which is
reflective of the continued decline in our long-term debt and reduced fees
under our Senior Secured Credit Facility which was amended effective December
31, 2003. Interest expense is comprised of interest on long-term borrowings
and the amortization of debt issuance costs. Foreign currency loss for the
three months ended March 31, 2004 and 2003 was $0.7 million and $0.5 million,
respectively. The increased foreign currency loss was principally the result
of additional hedging costs associated with the expansion of our hedging
program and certain product returns resulting in the reversal of translation
gains previously recognized on accounts receivable. Income tax expense before discontinued operations for federal, state and
foreign taxes was $0.8 million and $0.7 million for the three months ended
March 31, 2004 and 2003, respectively. The income tax expense is principally
comprised of income taxes associated with our profitable foreign locations. As discussed in our 2003 Annual Report on Form 10-K, we have recorded full
valuation reserves against our deferred tax asset balance existing at December
31, 2003. Consistent with the facts and circumstances leading to our conclusion
to provide a full valuation reserve against our deferred tax assets, we
provided a further valuation reserve against any net increases in deferred tax
assets principally attributable to U.S. operating losses generated during the
first quarter of 2004. Accordingly, the effective tax rate for the first
quarter of 2004 is not meaningful. These valuation reserves are subject to
reversal in future years at such time that the benefits are actually utilized
or, the operating profits in the U.S. become sustainable at a level that meets
the recoverability criteria under SFAS 109. As noted above, we provided full valuation reserves against all net increases
in deferred tax assets attributable to U.S. operating losses generated during
2003 and, therefore, the effective tax rate for the first quarter of 2003 is not meaningful. LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations primarily through cash generated
from operations and from borrowings under a line of credit or other
bank notes payable. Cash provided by continuing operations for the three months ended March 31,
2004 was $2.0 million compared to $13.9 million for the three months ended
March 31, 2003. The year over year decline is principally due to the receipt
of an $8.3 million income tax refund related to a U.S. net operating loss
carryback claim filed during the first quarter 2003 combined with $6.1 million
in positive cash flow resulting from declining inventory balances coming out of
2002 into 2003. Inventory balances have since stabilized and remain at
sufficient levels to support our core products. Other year over year changes
in operating assets and liabilities reflect normal variations in the customer
collection and vendor payment process. Cash used in investing activities increased $3.3 million from $2.3 million for
the three months ended March 31, 2003 to $5.6 million for the three months
ended March 31, 2004. The increase in cash used in investing activities is
primarily related to the investment of surplus cash in marketable securities.
Capital expenditures declined $0.6 million from $1.9 million to $1.3 million
for the three months ended March 31, 2003 and 2004, respectively. This decline
is reflective of the normal variations in the timing of capital expenditures.
Capital expenditures in the first quarter of 2004 were principally for upgrades
to computer software and hardware as well as equipment purchases. 9




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Cash provided by financing activities was $2.9 million and zero for the three
months ended March 31, 2004 and 2003, respectively. The increase in cash
provided by financing activities was the result of $2.2 million in cash
proceeds from stock option exercises and purchases under our Employee Stock
Purchase Plan as well as $1.1 million in cash received from two former
principal shareholders to repay notes which came due during the quarter.
Long-term debt decreased $0.4 million to $9.5 million at March 31, 2004, from
$9.9 million at December 31, 2003, principally as a result of repayments on
debt related to mortgages on our facilities. At March 31, 2004, working
capital and cash and cash equivalents was $158.1 million and $64.3 million,
respectively, compared to $156.7 and $65.4 million respectively, at December
31, 2003. We continue to accelerate cash generation through aggressively pursuing
collection of trade receivables, reducing inventories and controlling expenses.
We believe our cash flow from operations, together with our current cash
reserves, will be sufficient to fund our projected liquidity and capital
resource requirements through 2004. If operating results are unfavorable we
may need to use additional capital sources to meet our short-term liquidity and
capital resource requirements. BACKLOG As of March 31, 2004, we had backlog of $54.9 million, compared to $83.7
million at March 31, 2003. The decrease in backlog is primarily related to the
fulfillment of orders for major customers within the United States that are
subject to a customer approved delivery schedule and a general trend towards
purchase commitments with shorter delivery schedules. We include in backlog all revenue specified in signed contracts and purchase
orders to the extent that we contemplate recognition of the related revenue
within one year. There can be no assurance that the contracts included in
backlog will actually generate the specified revenues or that the actual
revenues will be generated within the one-year period. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk At March 31, 2004, our cash equivalent investments were primarily in money
market accounts and certificates of deposit and were reflected as cash
equivalents because all maturities were within 90 days. Our interest rate risk
with respect to existing investments is limited due to the short-term duration
of these arrangements and the yields earned which approximate current interest
rates. Our marketable securities, consisting of fixed income securities, were $21.1
million as of March 31, 2004. These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if
market interest rates increase. If market rates were to increase immediately
and uniformly by 10% from the levels of March 31, 2004 the decline in the fair
value of our investment portfolio would not be material given that our
investments typically have interest rate reset features that regularly adjust
to current market rates. Additionally, we have the ability to hold our fixed
income investments until maturity and, therefore, we would not expect to
recognize any material adverse impact in income or cash flows. We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates in connection with our foreign operations
and markets. Nevertheless, the fair value of our investment portfolio or
related income would not be significantly impacted by either a 100 basis point
increase or decrease in interest rates, due primarily to the short-term nature
of the major portion of our investment portfolio. A substantial portion of our revenue and capital spending is transacted in U.S.
dollars. However, we do at times enter into these transactions in other
currencies, such as the Hong Kong dollar, Australian dollar, Brazilian real,
British pound and other Asian and European currencies. Beginning in June 2002,
we resumed our foreign currency risk management strategy, which had been
suspended starting the fourth quarter of 2000 due to credit limitations imposed
by our banks. As a policy, we hedge the translation of our net investment in
foreign subsidiaries in an attempt to neutralize the effect of translation
gains or losses in the statement of operations. Financial hedging instruments
are limited by Company policy to foreign-currency forward or option contracts
and foreign-currency debt. We enter into forward or option contracts with our
bank or other financial institutions to accomplish our hedging strategy. At
March 31, 2004, we had foreign currency forward contracts outstanding in the
amount of $31.7 million, denominated principally in the Brazilian real and
British pound. Gains and losses on these contracts principally consist of
mark-to-market adjustments, recorded in earnings as foreign currency gains or
losses. We do not purchase or hold any derivative financial instruments for the purpose
of speculation or arbitrage. See information/discussion appearing in subcaption
Risks Associated with International Operations and Foreign Currency
Fluctuations of CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND
RISK 10




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FACTORS set forth in Exhibit 99.1, attached hereto. At present, we have $9.5 million in debt obligations and there are no
borrowings under our line of credit facility at March 31, 2004. As such, our
interest rate risk is limited with respect to existing debt. During the normal course of business we are routinely subjected to a variety of
market risks, examples of which include, but are not limited to, interest rate
movements and foreign currency fluctuations, as we discuss in this Item 3, and
collectability of accounts receivable. We continuously assess these risks and
have established policies and procedures to protect against the adverse effects
of these and other potential exposures. Although we do not anticipate any
material losses in these risk areas, no assurance can be made that material
losses will not be incurred in these areas in the future. 
 Item 4. Controls and Procedures Management conducted an evaluation, under the supervision and with the
participation of the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective. In addition, Hypercom
management, including the Companys Chief Executive Officer and Chief Financial
Officer, reviewed our internal controls, and there have been no significant
changes in the Companys internal controls or in other factors that could
significantly affect those controls. 11




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings. Colleen
E. Ryan v. Hypercom Corporation, et. al.On April 26, 2004,
a jury verdict
in this action in the Superior Court of Maricopa County, Arizona, upheld the
enforceability of the 1997 settlement agreement between the Company and a
former employee, thereby barring certain claims made by her in 1998 against the Company, a
former executive, and a current executive. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities In August 2003, the Board of Directors approved a stock repurchase program of
up to $10 million of our common stock from time to time when warranted by
market conditions. As of the end of fiscal 2003, the Company had repurchased
60,000 shares of common stock at an average price per share of $4.50. There
were no purchases made under this program during the first quarter of 2004. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits Exhibit Number
    
    Description of Exhibit3.1
    
    Amended and Restated Certificate of Incorporation of Hypercom Corporation
(incorporated by reference to Exhibit 3.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-35641))3.2
    
    Amended and Restated Bylaws of Hypercom Corporation (incorporated by
reference to Exhibit 3.2 to Hypercom Corporations Quarterly Report on Form
10-Q for the quarter ended September 30, 2002)4
    
    Amended and Restated Certificate of Incorporation of Hypercom Corporation
(incorporated by reference to Exhibit 3.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-35641))10.1
    
    Amended and Restated Hypercom 1997 Employee Stock Purchase Plan * 10.2
    
    Amendment to Deferred Compensation Agreement, dated March 16, 2004, between
Hypercom Corporation and Christopher S. Alexander * 31.1
    
    Certification of Chief Executive
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
 2002 *31.2
    
    Certification of Chief Financial Officer, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 *32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*99.1
    
    Cautionary Statement Regarding Forward-Looking Statements and Risk Factors *
   *
    
    Filed herewith.
    
    Management or compensatory plan or agreement.  (b)
    
    Reports onForm 8-K. The Company filed the following reports on Form 8-K during the quarter
ended March 31, 2004:  a)
    
    Form 8-K dated February 6, 2004, furnishing under Item 12, the
Companys press release, dated February 6, 2004, announcing the
Companys results of operations for the fiscal year and quarter ended
December 31, 2003. 12




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. HYPERCOM CORPORATIONDate:
May 7, 2004
    
    By: /s/ John W. SmolakJohn W. SmolakExecutive Vice President and Chief
Financial and Administrative Officer
(duly authorized officer and
Principal Financial Officer)
 13




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EXHIBIT INDEX Exhibit Number
    
    Description of Exhibit3.1
    
    Amended and Restated Certificate of Incorporation of Hypercom Corporation
(incorporated by reference to Exhibit 3.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-35641))3.2
    
    Amended and Restated Bylaws of Hypercom Corporation (incorporated by
reference to Exhibit 3.2 to Hypercom Corporations Quarterly Report on Form
10-Q for the quarter ended September 30, 2002)4
    
    Amended and Restated Certificate of Incorporation of Hypercom Corporation
(incorporated by reference to Exhibit 3.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-35641))10.1
    
    Amended and Restated Hypercom 1997 Employee Stock Purchase Plan * 10.2
    
    Amendment to Deferred Compensation Agreement, dated March 16, 2004, between
Hypercom Corporation and Christopher S. Alexander * 31.1
    
    Certification of Chief Executive Officer, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 *31.2
    
    Certification of Chief Financial Officer, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 *32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*99.1
    
    Cautionary Statement Regarding Forward-Looking Statements and Risk Factors *
   *
    
    Filed herewith.
    
    Management or compensatory plan or agreement. 14