##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2005.
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number: 1-13521
 HYPERCOM CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    86-0828608
(I.R.S. Employer
Identification Number )
 2851 West Kathleen Road
Phoenix, Arizona 85053
(Address of principal executive offices) (Zip Code)
 (602) 504-5000
(Registrants telephone number, including area code)
  þ o
  þ o
  o þ




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Table of Contents
 PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial StatementsConsolidated Balance Sheets  September 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations  Three and nine months ended September 30, 2005 and 2004, as restated
    
    
    4Consolidated Statements of Cash Flows  Nine months ended September 30, 2005 and 2004, as restated
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    29EXHIBIT INDEX
    
    
    30EX-10.1EX-10.2EX-31.1EX-31.2EX-32EX-99.1
  2




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##### Table of Contents








PART I. FINANCIAL INFORMATION





Item 1. Financial Statements


HYPERCOM CORPORATION





CONSOLIDATED BALANCE SHEETS




September 30, 2005
    
    
    December 31, 2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    47,080
    
    
    $
    23,445Marketable securities
    
    
    43,453
    
    
    
    69,962Accounts receivable, net of allowance for doubtful accounts of
$2,845 and $2,390, respectively
    
    
    52,925
    
    
    
    59,776Current portion of net investment in sales-type leases
    
    
    6,028
    
    
    
    9,441Inventories
    
    
    42,301
    
    
    
    44,455Prepaid expenses and other current assets
    
    
    8,381
    
    
    
    12,955Total current assets
    
    
    200,168
    
    
    
    220,034Property, plant and equipment, net
    
    
    29,560
    
    
    
    29,920Net investment in sales-type leases
    
    
    15,003
    
    
    
    17,668Intangible assets, net
    
    
    3,875
    
    
    
    4,475Other long-term assets
    
    
    5,303
    
    
    
    5,163Total assets
    
    $
    253,909
    
    
    $
    277,260LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    24,389
    
    
    $
    27,817Accrued payroll and related expenses
    
    
    10,391
    
    
    
    8,679Accrued sales and other taxes
    
    
    9,417
    
    
    
    8,792Accrued liabilities
    
    
    12,919
    
    
    
    8,308Deferred revenue
    
    
    2,862
    
    
    
    2,768Income taxes payable
    
    
    2,246
    
    
    
    3,411Current portion of long-term debt
    
    
    8,443
    
    
    
    470Total current liabilities
    
    
    70,667
    
    
    
    60,245Long-term debt
    
    
    20
    
    
    
    8,359Other long-term liabilities
    
    
    4,218
    
    
    
    3,284Total liabilities
    
    
    74,905
    
    
    
    71,888Stockholders equity:Common stock, $.001 par value; 100,000,000 shares authorized;
52,214,636 and 52,254,935 shares outstanding at September 30,
2005 and December 31, 2004, respectively
    
    
    54
    
    
    
    52Additional paid-in capital
    
    
    234,638
    
    
    
    228,567Accumulated deficit
    
    
    (42,764
    )
    
    
    (19,969
    )Unearned deferred compensation
    
    
    (1,210
    )
    
    
    (505
    )Treasury stock, 1,768,520 and 290,211 shares (at cost) at September
30, 2005 and December 31, 2004, respectively
    
    
    (11,714
    )
    
    
    (2,773
    )Total stockholders equity
    
    
    179,004
    
    
    
    205,372Total liabilities and stockholders equity
    
    $
    253,909
    
    
    $
    277,260
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HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Amounts in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(restated)
    
    
    
    
    
    
    (restated)Net revenue:Product and other
    
    $
    60,419
    
    
    $
    56,682
    
    
    $
    164,884
    
    
    $
    155,777Services
    
    
    9,390
    
    
    
    6,069
    
    
    
    23,471
    
    
    
    19,675Total net revenue
    
    
    69,809
    
    
    
    62,751
    
    
    
    188,355
    
    
    
    175,452Costs of revenue:Product and other
    
    
    37,121
    
    
    
    33,306
    
    
    
    115,467
    
    
    
    88,737Services
    
    
    6,187
    
    
    
    5,146
    
    
    
    17,990
    
    
    
    15,064Write-off of deferred contract costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,305Total costs of revenue
    
    
    43,308
    
    
    
    38,452
    
    
    
    133,457
    
    
    
    115,106Gross profit
    
    
    26,501
    
    
    
    24,299
    
    
    
    54,898
    
    
    
    60,346Operating expenses:Research and development
    
    
    6,296
    
    
    
    6,637
    
    
    
    21,146
    
    
    
    19,906Selling, general and administrative
    
    
    15,374
    
    
    
    15,413
    
    
    
    53,927
    
    
    
    47,260Total operating expenses
    
    
    21,670
    
    
    
    22,050
    
    
    
    75,073
    
    
    
    67,166Income (loss) from continuing operations
    
    
    4,831
    
    
    
    2,249
    
    
    
    (20,175
    )
    
    
    (6,820
    )Interest income
    
    
    611
    
    
    
    289
    
    
    
    1,805
    
    
    
    783Interest expense
    
    
    (221
    )
    
    
    (392
    )
    
    
    (604
    )
    
    
    (1,328
    )Other income (expense)
    
    
    (88
    )
    
    
    (1
    )
    
    
    (147
    )
    
    
    19Foreign currency loss
    
    
    (265
    )
    
    
    (929
    )
    
    
    (1,275
    )
    
    
    (2,568
    )Income (loss) before income taxes and
discontinued operations
    
    
    4,868
    
    
    
    1,216
    
    
    
    (20,396
    )
    
    
    (9,914
    )Provision for income taxes
    
    
    (1,367
    )
    
    
    (907
    )
    
    
    (2,798
    )
    
    
    (3,276
    )Income (loss) before discontinued operations
    
    
    3,501
    
    
    
    309
    
    
    
    (23,194
    )
    
    
    (13,190
    )Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    399
    
    
    
    Net income (loss)
    
    $
    3,501
    
    
    $
    309
    
    
    $
    (22,795
    )
    
    $
    (13,190
    )Basic and
diluted income (loss) per share:Income (loss) before discontinued
operations
    
    $
    0.07
    
    
    $
    0.01
    
    
    $
    (0.44
    )
    
    $
    (0.26
    )Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    Basic income (loss) per share
    
    $
    0.07
    
    
    $
    0.01
    
    
    $
    (0.43
    )
    
    $
    (0.26
    )Weighted average common shares  basic
    
    
    52,496,333
    
    
    
    51,568,171
    
    
    
    52,412,285
    
    
    
    51,066,345Weighted average common shares -
diluted
    
    
    53,632,008
    
    
    
    53,946,710
    
    
    
    52,412,285
    
    
    
    51,066,345
  4




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HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedSeptember 30,(Amounts in thousands)
    
    2005
    
    
    2004(restated)Cash flows from continuing operations:Net loss from continuing operations
    
    $
    (23,194
    )
    
    $
    (13,190
    )Adjustments to reconcile net loss from continuing operations
to net cash provided by operating activities:Depreciation/amortization
    
    
    6,442
    
    
    
    6,783Amortization of deferred financing costs
    
    
    11
    
    
    
    526Amortization of discount on marketable securities
    
    
    (767
    )
    
    
    Provision for bad debts
    
    
    1,440
    
    
    
    1,109Provision for long-term contract accounts receivable
    
    
    
    
    
    
    1,385Provision for losses on sales-type leases
    
    
    3,341
    
    
    
    485Write-down of excess and obsolete inventory
    
    
    11,083
    
    
    
    6,292Provision for warranty and other product charges
    
    
    7,666
    
    
    
    318Noncash stock compensation
    
    
    485
    
    
    
    329Foreign currency loss
    
    
    533
    
    
    
    664Write-off of capitalized software and other assets
    
    
    482
    
    
    
    56Write-off of deferred contract costs
    
    
    
    
    
    
    11,305Changes in operating assets and liabilities, net
    
    
    (2,485
    )
    
    
    (4,445
    )Net cash provided by operating activities
    
    
    5,037
    
    
    
    11,617Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (3,583
    )
    
    
    (4,505
    )Acquisition of other assets
    
    
    
    
    
    
    (1,443
    )Software development costs capitalized
    
    
    (558
    )
    
    
    (2,152
    )Purchase of marketable securities
    
    
    (136,242
    )
    
    
    (54,407
    )Proceeds from the sale or maturity of marketable securities
    
    
    163,518
    
    
    
    7,500Net cash provided by (used in) investing activities
    
    
    23,135
    
    
    
    (55,007
    )Cash flows from financing activities:Repayments of bank notes payable and other debt instruments
    
    
    (337
    )
    
    
    (803
    )Proceeds from issuance of common stock
    
    
    4,883
    
    
    
    6,023Purchase of treasury stock
    
    
    (8,941
    )
    
    
    Payments received on advances to stockholders
    
    
    
    
    
    
    1,056Net cash (used in) provided by financing activities
    
    
    (4,395
    )
    
    
    6,276Effect of exchange rate changes on cash
    
    
    (110
    )
    
    
    (31
    )Net increase (decrease) in cash flows from continuing operations
    
    
    23,667
    
    
    
    (37,145
    )Net decrease in cash flows from discontinued operations
    
    
    (32
    )
    
    
    (746
    )Cash and cash equivalents, beginning of period
    
    
    23,445
    
    
    
    65,415Cash and cash equivalents, end of period
    
    $
    47,080
    
    
    $
    27,524
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HYPERCOM CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Reclassification and Restatement
    Three Months Ended
    
    
    Nine Months EndedAs previously
    
    
    
    
    
    
    As previouslySelected Statement of Operations Data:
    
    reported
    
    
    As Restated
    
    
    reported
    
    
    As RestatedNet revenue
    
    $
    63,173
    
    
    $
    62,571
    
    
    $
    178,627
    
    
    $
    175,452Cost of revenue
    
    
    38,560
    
    
    
    38,452
    
    
    
    116,125
    
    
    
    115,106Gross profit
    
    
    24,613
    
    
    
    24,299
    
    
    
    62,502
    
    
    
    60,346Foreign currency loss
    
    
    (968
    )
    
    
    (929
    )
    
    
    (2,607
    )
    
    
    (2,568
    )Basic and diluted income (loss) per share
    
    
    0.01
    
    
    
    0.01
    
    
    
    (0.22
    )
    
    
    (0.26
    )Selected Statement of Cash Flows Data:Net loss from continuing operations
    
    
    
    
    
    
    
    
    
    $
    (11,073
    )
    
    $
    (13,190
    )Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    6,386
    
    
    
    6,783Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    2,607
    
    
    
    664Changes in
operating assets and liabilities, net
    
    
    
    
    
    
    
    
    
    
    (9,492
    )
    
    
    (4,445
    )Net cash provided by operating activities
    
    
    
    
    
    
    
    
    
    
    10,737
    
    
    
    11,617Purchase of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (3,783
    )
    
    
    (4,505
    )Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (54,127
    )
    
    
    (55,007
    )
  6




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
    
    Implementing an end-of-product-life cycle strategy, including identifying products with
near term end-of-life requirements;
    
    More aggressively addressing and correcting product performance issues, including
negotiated warranty and product trade-in / trade-out programs required for the
end-of-product-life cycle strategies;
    
    Implementing certain workforce reductions and compensation plan changes;
    
    Addressing individual country / regional sales and profitability performance;
    
    Reallocating resources based upon market share growth objectives by country in each
sales region;
    
    Investing in the implementation of comprehensive product marketing function within the
Companys organization; and
    
    Evaluation of opportunities for short, medium and long-term improvements in cost of
revenues.
  Revisions to theCost EstimatesCosts Expected
    
    
    During the Three
    
    
    Costs Incurred
    
    
    Accrued Liabilityto be Incurred
    
    
    Months Ended
    
    
    Through
    
    
    Balance atas of
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,June 30, 2005
    
    
    2005
    
    
    2005
    
    
    2005 (a)Revenues and cost of revenues:Warranty charges and product replacement
accruals
    
    $
    6,782
    
    
    $
    (15
    )
    
    $
    733
    
    
    $
    6,034Inventory
write-downs, primarily for product end-of-life decisions
    
    
    9,222
    
    
    
    
    
    
    
    9,222
    
    
    
    One-time termination benefits and related
employment costs
    
    
    177
    
    
    
    
    
    
    
    177
    
    
    
    Total charges in revenues and cost of revenues
    
    
    16,181
    
    
    
    (15
    )
    
    
    10,132
    
    
    
    6,034Charges in operating expenses:One-time termination benefits and related
employment costs
    
    
    2,021
    
    
    
    9
    
    
    
    1,653
    
    
    
    377Total charges
    
    $
    18,202
    
    
    $
    (6
    )
    
    $
    11,785
    
    
    $
    6,411
 
 a)
    
    All accrued liability balances associated with the 2005 Business Review are classified as
current liabilities as these amounts are expected to be paid primarily during the fourth
quarter of 2005 with the balance of costs expected to be paid in the first half of 2006  
    
    $4.8 million of replacement cost provisions recorded in the second quarter related to
certain POS equipment that the Company has elected to provide to certain customers to
reduce future warranty costs, increase customer satisfaction, drive future revenue
opportunities, and protect the Companys competitive positioning;
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
    
    $2.0 million ($0.7 million in the first quarter and $1.3 million in the second quarter)
of charges related to additional negotiated warranty work and replacement cost provisions
for customer owned product as a result of higher than expected repair costs;
    
    $9.2 million ($2.1 million in the first quarter and $7.1 million in the second quarter)
of write-downs for inventory primarily related to products at or near end-of-life; and
    
    $2.2 million of severance and related provisions in the second quarter related to
recent termination and severance of certain executives and employees, and the elimination
of certain executive benefits.
   Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss), as reported
    
    $
    3,501
    
    
    $
    309
    
    
    $
    (22,795
    )
    
    $
    (13,190
    )Add: Stock-based employee compensation
expense included in reported net income
(loss)
    
    
    212
    
    
    
    102
    
    
    
    485
    
    
    
    329Deduct: Total stock-based employee
compensation expense determined under fair
value methods for all awards
    
    
    (1,012
    )
    
    
    (609
    )
    
    
    (1,868
    )
    
    
    (2,138
    )Add: Reversal of stock-based compensation
expense for options forfeited prior to vesting
    
    
    390
    
    
    
    37
    
    
    
    2,477
    
    
    
    132Pro forma net income (loss)
    
    $
    3,091
    
    
    $
    (161
    )
    
    $
    (21,701
    )
    
    $
    (14,867
    )Net income (loss) per share:Basic and
diluted, as reported
    
    $
    0.07
    
    
    $
    0.01
    
    
    $
    (0.43
    )
    
    $
    (0.26
    )Basic and
diluted, pro forma
    
    
    0.06
    
    
    
    0.00
    
    
    
    (0.41
    )
    
    
    (0.29
    )Weighted average shares used in pro forma
computation:Basic
    
    
    52,496,333
    
    
    
    51,568,171
    
    
    
    52,412,285
    
    
    
    51,066,345Diluted
    
    
    53,632,008
    
    
    
    51,568,171
    
    
    
    52,412,285
    
    
    
    51,066,345
  8




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Share-Based Payment
     September 30, 2005
    
    
    December 31, 2004Municipal debt securities
    
    $
    8,755
    
    
    $
    14,900U.S. government and agency debt securities
    
    
    23,448
    
    
    
    35,962Preferred equity securities
    
    
    11,250
    
    
    
    19,100$
    43,453
    
    
    $
    69,962
    9




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September 30, 2005
    
    
    December 31, 2004Purchased parts
    
    $
    26,395
    
    
    $
    21,083Work in progress
    
    
    4,447
    
    
    
    5,134Finished goods
    
    
    11,459
    
    
    
    18,238$
    42,301
    
    
    $
    44,455
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    1,162
    
    
    $
    827
    
    
    $
    1,434
    
    
    $
    879Warranty charges to cost of revenue
    
    
    430
    
    
    
    448
    
    
    
    1,199
    
    
    
    1,409Utilization of warranty
    
    
    (390
    )
    
    
    (278
    )
    
    
    (1,431
    )
    
    
    (1,291
    )Balance at end of period
    
    $
    1,202
    
    
    $
    997
    
    
    $
    1,202
    
    
    $
    997
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Income
(loss) before discontinued operations
    
    $
    3,501
    
    
    $
    309
    
    
    $
    (23,194
    )
    
    $
    (13,190
    )Denominator:Weighted average shares of common stock
outstanding for basic income (loss) per share
    
    
    52,496,333
    
    
    
    51,568,171
    
    
    
    52,412,285
    
    
    
    51,066,345Effect of dilutive stock options and warrants
    
    
    1,135,675
    
    
    
    2,378,539
    
    
    
    
    
    
    
    Weighted average shares of common stock
outstanding for diluted income (loss) per share
    
    
    53,632,008
    
    
    
    53,946,710
    
    
    
    52,412,285
    
    
    
    51,066,345Basic and
diluted income (loss) per share:Income
(loss) before discontinued operations
    
    $
    0.07
    
    
    $
    0.01
    
    
    $
    (0.44
    )
    
    $
    (0.26
    )
    10




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Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans
     Accounting for Performance
of Construction-Type and Certain Production-Type Contracts.
 11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
   OVERVIEW
    CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  14




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RESULTS OF OPERATIONS  Third Quarter
 Three Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Increase2005
    
    
    Revenue
    
    
    2004 (a)
    
    
    Revenue
    
    
    (Decrease)(restated)Net revenue:Product and other
    
    $
    60,419
    
    
    
    86.5
    %
    
    $
    56,682
    
    
    
    90.3
    %
    
    $
    3,737Services
    
    
    9,390
    
    
    
    13.5
    %
    
    
    6,069
    
    
    
    9.7
    %
    
    
    3,321Total net revenue
    
    
    69,809
    
    
    
    100.0
    %
    
    
    62,751
    
    
    
    100.0
    %
    
    
    7,058Costs of revenue:Product and other
    
    
    37,121
    
    
    
    61.4
    %
    
    
    33,306
    
    
    
    58.8
    %
    
    
    3,815Services
    
    
    6,187
    
    
    
    65.9
    %
    
    
    5,146
    
    
    
    84.8
    %
    
    
    1,041Total costs of revenue
    
    
    43,308
    
    
    
    62.0
    %
    
    
    38,452
    
    
    
    61.3
    %
    
    
    4,856Gross profit
    
    
    26,501
    
    
    
    38.0
    %
    
    
    24,299
    
    
    
    38.7
    %
    
    
    2,202Operating expenses:Research and development
    
    
    6,296
    
    
    
    9.0
    %
    
    
    6,637
    
    
    
    10.6
    %
    
    
    (341
    )Selling, general and administrative
    
    
    15,374
    
    
    
    22.0
    %
    
    
    15,413
    
    
    
    24.6
    %
    
    
    (39
    )Total operating expenses
    
    
    21,670
    
    
    
    31.0
    %
    
    
    22,050
    
    
    
    35.1
    %
    
    
    (380
    )Income from operations
    
    
    4,831
    
    
    
    6.9
    %
    
    
    2,249
    
    
    
    3.6
    %
    
    
    2,582Non-operating income (expense)
    
    
    37
    
    
    
    0.1
    %
    
    
    (1,033
    )
    
    
    -1.6
    %
    
    
    1,070Income before income taxes
    
    
    4,868
    
    
    
    7.0
    %
    
    
    1,216
    
    
    
    1.9
    %
    
    
    3,652Provision for income taxes
    
    
    (1,367
    )
    
    
    -2.0
    %
    
    
    (907
    )
    
    
    -1.4
    %
    
    
    (460
    )Net income
    
    $
    3,501
    
    
    
    5.0
    %
    
    $
    309
    
    
    
    0.5
    %
    
    $
    3,192Income per
basic and diluted share
    
    $
    0.07
    
    
    
    
    
    
    $
    0.01
    
    
    
    
    
    
    $
    0.06
 15




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##### Table of Contents



RESULTS OF OPERATIONS Year-to-date
 Nine Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Increase2005
    
    
    Rev
    
    
    2004 (a)
    
    
    Rev
    
    
    (Decrease)(restated)Net revenue:Product and other
    
    $
    164,884
    
    
    
    87.5
    %
    
    $
    155,777
    
    
    
    88.8
    %
    
    $
    9,107Services
    
    
    23,471
    
    
    
    12.5
    %
    
    
    19,675
    
    
    
    11.2
    %
    
    
    3,796Total net revenue
    
    
    188,355
    
    
    
    100.0
    %
    
    
    175,452
    
    
    
    100.0
    %
    
    
    12,903Costs of revenue:Product and other
    
    
    115,467
    
    
    
    70.0
    %
    
    
    88,737
    
    
    
    57.0
    %
    
    
    26,730Services
    
    
    17,990
    
    
    
    76.6
    %
    
    
    15,064
    
    
    
    76.6
    %
    
    
    2,926Provision for deferred contract costs
    
    
    
    
    
    
    0.0
    %
    
    
    11,305
    
    
    
    7.3
    %
    
    
    (11,305
    )Total costs of revenue
    
    
    133,457
    
    
    
    70.9
    %
    
    
    115,106
    
    
    
    65.6
    %
    
    
    18,351Gross profit
    
    
    54,898
    
    
    
    29.1
    %
    
    
    60,346
    
    
    
    34.4
    %
    
    
    (5,448
    )Operating expenses:Research and development
    
    
    21,146
    
    
    
    11.2
    %
    
    
    19,906
    
    
    
    11.3
    %
    
    
    1,240Selling, general and administrative
    
    
    53,927
    
    
    
    28.6
    %
    
    
    47,260
    
    
    
    26.9
    %
    
    
    6,667Total operating expenses
    
    
    75,073
    
    
    
    39.9
    %
    
    
    67,166
    
    
    
    38.3
    %
    
    
    7,907Loss from continuing operations
    
    
    (20,175
    )
    
    
    -10.7
    %
    
    
    (6,820
    )
    
    
    -3.9
    %
    
    
    (13,355
    )Non-operating expenses
    
    
    (221
    )
    
    
    -0.1
    %
    
    
    (3,094
    )
    
    
    -1.8
    %
    
    
    2,873Loss before income taxes and discontinued operations
    
    
    (20,396
    )
    
    
    -10.8
    %
    
    
    (9,914
    )
    
    
    -5.7
    %
    
    
    (10,482
    )Provision for income taxes
    
    
    (2,798
    )
    
    
    -1.5
    %
    
    
    (3,276
    )
    
    
    -1.9
    %
    
    
    478Loss before discontinued operations
    
    
    (23,194
    )
    
    
    -12.3
    %
    
    
    (13,190
    )
    
    
    -7.5
    %
    
    
    (10,004
    )Income from discontinued operations
    
    
    399
    
    
    
    0.2
    %
    
    
    
    
    
    
    0.0
    %
    
    
    399Net loss
    
    $
    (22,795
    )
    
    
    -12.1
    %
    
    $
    (13,190
    )
    
    
    -7.5
    %
    
    $
    (9,605
    )Loss per basic and diluted share
    
    $
    (0.43
    )
    
    
    
    
    
    $
    (0.26
    )
    
    
    
    
    
    $
    (0.17
    )
 
 (a)
    
    During the fourth quarter of 2004, the Company determined that certain leases originated during
the first three-quarters of 2004 were incorrectly accounted for as sales-type leases, rather than
operating leases. This accounting error, which relates to approximately 3,200 leases, resulted in
an overstatement of net revenue and net operating profit for the first three quarters of 2004.
Accordingly, the operating results for the three and nine months ended September 30, 2004 have been
restated to properly account for the leases as operating leases. See Note 1 to our Consolidated
Financial Statements. BUSINESS REVIEW, RESTRUCTURING AND RELATED CHARGES
  16




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##### Table of Contents




    
    Implementing an end-of-product-life cycle strategy, including identifying products with
near term end-of-life requirements;
    
    More aggressively addressing and correcting product performance issues, including
negotiated warranty and product trade-in / trade-out programs required for the
end-of-product-life cycle strategies;
    
    Implementing certain workforce reductions and compensation plan changes;
    
    Addressing individual country / regional sales and profitability performance;
    
    Reallocating resources based upon market share growth objectives by country in each
sales region;
    
    Investing in the implementation of a comprehensive product marketing function within
the Companys organization; and
    
    Evaluation of opportunities for short, medium and long-term
improvements in cost of revenues.
The following table sets forth the restructuring and other charges relating to ongoing operations
recorded in conjunction with the 2005 Business Review (in
thousands):
 First Quarter
    
    
    Second Quarter2005
    
    
    2005
    
    
    TotalRevenue and cost of revenues:Warranty charges and product
replacement accruals
    
    $
    706
    
    
    $
    6,076
    
    
    $
    6,782Inventory write-downs, primarily for
product end-of-life decisions
    
    
    2,132
    
    
    
    7,090
    
    
    
    9,222One-time termination benefits and
    
    
    
    
    
    
    
    
    
    
    related employment costs
    
    
    
    
    
    
    177
    
    
    
    177Lease portfolio charges
    
    
    749
    
    
    
    140
    
    
    
    889Other
    
    
    148
    
    
    
    161
    
    
    
    309Revenue and cost of revenues total
    
    
    3,735
    
    
    
    13,644
    
    
    
    17,379Operating expenses and other:One-time termination benefits and
related employment costs
    
    
    1,543
    
    
    
    2,021
    
    
    
    3,564Other
    
    
    525
    
    
    
    524
    
    
    
    1,049Operating expenses and other total
    
    
    2,068
    
    
    
    2,545
    
    
    
    4,613$
    5,803
    
    
    $
    16,189
    
    
    $
    21,992
   
    
    $0.7 million of charges related to negotiated warranty work for customer owned product
as a result of higher than expected repair costs;
    
    $2.1 million of write-downs for inventory primarily related to products at or near
end-of-life;
    
    $0.8 million of incremental charges and reserves related to realizability of lease
receivables and residual values related to the UK lease portfolio;
    
    $1.5 million of severance and related provisions in the first quarter related to
terminations and severance of certain executives and employees; and
    
    $0.7 million of other individually immaterial charges and provisions.
  
    
    $4.8 million of replacement cost provisions recorded in the second quarter related to
certain POS equipment that the Company has elected to provide to certain customers to
reduce future warranty costs, increase
customer satisfaction, drive future revenue opportunities, and protect the Companys
competitive positioning;
 17




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##### Table of Contents




    
    $1.3 million of charges related to additional negotiated warranty work and replacement
cost provisions for customer owned product as a result of higher than expected repair
costs;
    
    $6.2 million of write-downs for product inventory primarily as a result of implementing
an end-of-product-life cycle strategy, including identifying products with near term
end-of-life requirements;
    
    $0.9 million for write-downs of inventory used in our service businesses primarily as a
result of the end-of-life strategy;
    
    $2.2 million of severance and related provisions in the second quarter related to
recent termination and severance of certain executives and employees, and the elimination
of certain executive benefits; and
    
    $0.8 million of other individually immaterial charges and provisions.
   NET REVENUE
   COSTS OF REVENUE
   18




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##### Table of Contents



WRITE-OFF OF DEFERRED CONTRACT COSTS
  GROSS PROFIT
    OPERATING EXPENSES
    19




---



##### Table of Contents



OPERATING
INCOME (LOSS) FROM CONTINUING OPERATIONS
   NON-OPERATING EXPENSES
   PROVISION FOR INCOME TAXES
   20




---



##### Table of Contents



INCOME FROM DISCONTINUED OPERATIONS
  CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES
       21




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##### Table of Contents



BACKLOG
   DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
     22




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
   Managements Remediation Initiatives and Interim Measures.
   
    
    an inappropriate level of review of certain significant financial statement accounts
requiring a higher degree of judgment and estimates;
    
    insufficient analysis, documentation, review, and oversight of the financial statements
of certain foreign subsidiaries during consolidation; and
    
    insufficient staffing of the accounting and financial reporting function.
 23




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##### Table of Contents



Internal Control Over Financial Reporting.
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Verve Matters
 24




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##### Table of Contents



Shareholder Class Actions
 Shareholder Derivative Actions
  Ryan Appeal
 25




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##### Table of Contents



26




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 ISSUER PURCHASES OF EQUITY SECURITIES
 (d) Maximum Number(c) Total Number of
    
    (or ApproximatelyShares (or Units)
    
    Dollar Value) ofPurchased as Part
    
    Shares that May(a) Total Number of
    
    (b) Average Price
    
    of Publicly
    
    Yet Be PurchasedShares (or Units)
    
    Paid per Share (or
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    Unit)
    
    or Programs
    
    ProgramsMonth #1 (July 1,
2005 to July 31,
2005)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #2 (August 1,
2005 to August 31,
2005)
    
    
    1,079,409
    
    
    $
    5.95
    
    
    
    1,079,409
    
    
    
    849,153Month #3 (September
1, 2005 to
September 30, 2005)
   27




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##### Table of Contents



Item 6. Exhibits
 Exhibit Number
    
    Description of Exhibit3.1
    
    Amended and Restated Certificate of Incorporation of Hypercom Corporation
(incorporated by reference to Exhibit 3.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-35641))3.2
    
    Amended and Restated Bylaws of Hypercom Corporation (incorporated by
reference to Exhibit 3.2 to Hypercom Corporations Quarterly Report on Form
10-Q for the quarter ended September 30, 2002)4
    
    Amended and Restated Certificate of Incorporation of Hypercom Corporation
(incorporated by reference to Exhibit 3.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-35641))10.1
    
    First Amendment to Employment Agreement, dated August 23, 2005 by and
between G. Grant Lyon and Hypercom Corporation*10.2
    
    Second Amendment to Employment Agreement, dated October 19, 2005 by and
between G. Grant Lyon and Hypercom Corporation*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 *99.1
    
    Cautionary Statement Regarding Forward-Looking Statements and Risk Factors *
 
 *
    
    Filed herewith.
    
    Management or compensatory plan or agreement. 28




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##### Table of Contents



SIGNATURES
  HYPERCOM CORPORATIONDate: November 9, 2005
    By: /s/ William KeiperWilliam KeiperChief Executive Officer and President (duly authorized officer and 
principal executive officer)Date: November 9, 2005
    By: /s/ G. Grant LyonG. Grant LyonInterim Chief Financial Officer
(principal financial and accounting officer) 29




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##### Table of Contents



Index to Exhibits
 3.1
    
    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
    
    First Amendment to Employment Agreement, dated August 23, 2005 by and
between G. Grant Lyon and Hypercom Corporation*10.2
    
    Second Amendment to Employment Agreement, dated October 19, 2005 by and
between G. Grant Lyon and Hypercom Corporation*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 *99.1
    
    Cautionary Statement Regarding Forward-Looking Statements and Risk Factors *
 
 *
    
    Filed herewith.
    
    Management or compensatory plan or agreement.