##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 1-13521
 HYPERCOM CORPORATION
  Delaware
    
    86-0828608(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)2851 West Kathleen Road, Phoenix, Arizona
    
    85053(Address of principal executive offices)
    
    (Zip Code)
 (602) 504-5000
  þ o
  o þ o
  o þ
  Class
    
    Outstanding at August 4, 2006Common Stock, $.001 par value per share
    
    54,197,877 shares




---



##### 



INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial StatementsConsolidated Balance Sheets  June 30, 2006 and
December 31, 2005
    
    
    3Consolidated Statements of Operations  Three and six
months ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows  Six months
ended June 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market
Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    24PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Unregistered Sales of Equity Securities and Use of
Proceeds
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 6.
    
    Exhibits
    
    
    27Signatures
    
    
    28EXHIBITSExhibit 31.1Exhibit 31.2Exhibit 32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements.
 HYPERCOM CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 June 30, 2006
    
    
    December 31,Amounts in thousands, except share data
    
    (unaudited)
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,331
    
    
    $
    35,940Restricted cash
    
    
    133
    
    
    
    Short-term investments
    
    
    75,610
    
    
    
    57,951Accounts receivable, net of allowance for doubtful accounts of
$2,909 and $3,266, respectively
    
    
    58,235
    
    
    
    48,852Inventories
    
    
    39,622
    
    
    
    39,414Prepaid expenses and other current assets
    
    
    9,556
    
    
    
    8,946Deferred tax assets, net
    
    
    598
    
    
    
    122Assets of discontinued operations held for sale
    
    
    
    
    
    
    12,613Total current assets
    
    
    216,085
    
    
    
    203,838Property, plant and equipment, net
    
    
    26,119
    
    
    
    27,746Intangible assets, net
    
    
    3,109
    
    
    
    3,503Other long-term assets
    
    
    4,216
    
    
    
    3,827Total assets
    
    $
    249,529
    
    
    $
    238,914LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    21,644
    
    
    $
    17,721Accrued payroll and related expenses
    
    
    9,010
    
    
    
    8,460Accrued sales and other taxes
    
    
    9,519
    
    
    
    9,479Product warranty liabilities
    
    
    3,183
    
    
    
    5,534Accrued liabilities
    
    
    8,121
    
    
    
    6,837Deferred revenue
    
    
    1,618
    
    
    
    2,762Income taxes payable
    
    
    2,639
    
    
    
    1,651Liabilities of discontinued operations
    
    
    659
    
    
    
    Current portion of long-term debt
    
    
    26
    
    
    
    8,355Total current liabilities
    
    
    56,419
    
    
    
    60,799Long-term debt
    
    
    21
    
    
    
    22Deferred tax liabilities, net
    
    
    856
    
    
    
    341Other long-term liabilities
    
    
    6,037
    
    
    
    6,978Total liabilities
    
    
    63,333
    
    
    
    68,140Stockholders equity:Common stock, $.001 par value; 100,000,000 shares authorized;
53,906,678 and 52,991,959 shares outstanding, respectively
    
    
    56
    
    
    
    55Additional paid-in capital
    
    
    242,788
    
    
    
    238,186Accumulated deficit
    
    
    (43,968
    )
    
    
    (53,335
    )Unearned deferred compensation
    
    
    
    
    
    
    (2,123
    )Treasury stock (at cost), 1,900,720 and 1,815,620 shares, respectively
    
    
    (12,680
    )
    
    
    (12,009
    )Total stockholders equity
    
    
    186,196
    
    
    
    170,774Total liabilities and stockholders equity
    
    $
    249,529
    
    
    $
    238,914
  3




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##### Table of Contents



HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Amounts in thousands, except share data)Net revenue:Product and other
    
    $
    56,983
    
    
    $
    52,852
    
    
    $
    108,024
    
    
    $
    96,506Services
    
    
    9,161
    
    
    
    7,302
    
    
    
    19,089
    
    
    
    14,081Total net revenue
    
    
    66,144
    
    
    
    60,154
    
    
    
    127,113
    
    
    
    110,587Costs of revenue:Product and other
    
    
    32,303
    
    
    
    45,905
    
    
    
    62,632
    
    
    
    74,514Services
    
    
    6,447
    
    
    
    6,516
    
    
    
    13,568
    
    
    
    11,803Total costs of revenue
    
    
    38,750
    
    
    
    52,421
    
    
    
    76,200
    
    
    
    86,317Gross profit
    
    
    27,394
    
    
    
    7,733
    
    
    
    50,913
    
    
    
    24,270Operating expenses:Research and development
    
    
    6,504
    
    
    
    7,592
    
    
    
    12,498
    
    
    
    14,850Selling, general and administrative
    
    
    16,481
    
    
    
    17,641
    
    
    
    31,096
    
    
    
    37,828Total operating expenses
    
    
    22,985
    
    
    
    25,233
    
    
    
    43,594
    
    
    
    52,678Income (loss) from continuing operations
    
    
    4,409
    
    
    
    (17,500
    )
    
    
    7,319
    
    
    
    (28,408
    )Interest income
    
    
    1,383
    
    
    
    637
    
    
    
    2,330
    
    
    
    1,194Interest expense
    
    
    (468
    )
    
    
    (209
    )
    
    
    (637
    )
    
    
    (383
    )Foreign currency loss
    
    
    (309
    )
    
    
    (437
    )
    
    
    (533
    )
    
    
    (709
    )Other income (expense)
    
    
    8
    
    
    
    (14
    )
    
    
    (8
    )
    
    
    (59
    )Income (loss) before income taxes and
discontinued operations
    
    
    5,023
    
    
    
    (17,523
    )
    
    
    8,471
    
    
    
    (28,365
    )Provision for income taxes
    
    
    (813
    )
    
    
    (626
    )
    
    
    (1,472
    )
    
    
    (1,431
    )Income (loss) before discontinued operations
    
    
    4,210
    
    
    
    (18,149
    )
    
    
    6,999
    
    
    
    (29,796
    )Income from discontinued operations
    
    
    2,018
    
    
    
    1,493
    
    
    
    2,367
    
    
    
    3,500Net income (loss )
    
    $
    6,228
    
    
    $
    (16,656
    )
    
    $
    9,366
    
    
    $
    (26,296
    )Basic income (loss) per share:Income (loss) before discontinued operations
    
    $
    0.08
    
    
    $
    (0.35
    )
    
    $
    0.13
    
    
    $
    (0.57
    )Income from discontinued operations
    
    
    0.04
    
    
    
    0.03
    
    
    
    0.05
    
    
    
    0.07Basic income (loss) per share
    
    $
    0.12
    
    
    $
    (0.32
    )
    
    $
    0.18
    
    
    $
    (0.50
    )Diluted income (loss) per share:Income (loss) before discontinued operations
    
    $
    0.08
    
    
    $
    (0.35
    )
    
    $
    0.13
    
    
    $
    (0.57
    )Income from discontinued operations
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.04
    
    
    
    0.07Diluted income (loss) per share
    
    $
    0.11
    
    
    $
    (0.32
    )
    
    $
    0.17
    
    
    $
    (0.50
    )Basic weighted average common shares
    
    
    53,405,144
    
    
    
    52,478,165
    
    
    
    52,852,047
    
    
    
    52,434,880Diluted weighted average common shares
    
    
    54,370,400
    
    
    
    52,478,165
    
    
    
    53,785,674
    
    
    
    52,434,880
  4




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##### Table of Contents



HYPERCOM CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six Months Ended June 30,2006
    
    
    2005(Amounts in thousands)Cash flows from continuing operations:Net income (loss) from continuing operations
    
    $
    6,999
    
    
    $
    (29,796
    )Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by (used in) operating activities:Depreciation/amortization
    
    
    3,837
    
    
    
    3,568Amortization of deferred financing costs
    
    
    4
    
    
    
    7Amortization of discounts on short-term investments
    
    
    (686
    )
    
    
    (476
    )Provision for bad debts
    
    
    469
    
    
    
    1,329Write-down of excess and obsolete inventory
    
    
    970
    
    
    
    10,731Net provision (benefit) for warranty expense
    
    
    (680
    )
    
    
    7,093Deferred income taxes
    
    
    37
    
    
    
    Noncash share-based compensation
    
    
    2,879
    
    
    
    273Foreign currency loss (gain)
    
    
    (481
    )
    
    
    73Other non-cash
    
    
    336
    
    
    
    480Changes in operating assets and liabilities, net
    
    
    (8,335
    )
    
    
    992Net cash provided by (used in) operating activities
    
    
    5,349
    
    
    
    (5,726
    )Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (3,773
    )
    
    
    (2,565
    )Capitalized software and other development costs
    
    
    (501
    )
    
    
    (558
    )Net increase in restricted cash
    
    
    (133
    )
    
    
    Purchase of short-term investments
    
    
    (152,649
    )
    
    
    (84,021
    )Proceeds from the sale or maturity of short-term investments
    
    
    135,675
    
    
    
    93,993Net cash provided by (used in) investing activities
    
    
    (21,381
    )
    
    
    6,849Cash flows from financing activities:Repayments of bank notes payable and other debt instruments
    
    
    (8,330
    )
    
    
    (247
    )Proceeds from issuance of common stock
    
    
    4,394
    
    
    
    2,747Purchase of treasury stock
    
    
    (671
    )
    
    
    (2,474
    )Net cash provided by (used in) financing activities
    
    
    (4,607
    )
    
    
    26Effect of exchange rate changes on cash
    
    
    296
    
    
    
    (148
    )Net increase (decrease) in cash flows from continuing operations
    
    
    (8,206
    )
    
    
    1,001Net cash provided by operating activities  discontinued operations
    
    
    4,597
    
    
    
    8,441Net cash provided by investing activities  discontinued operations
    
    
    12,137
    
    
    
    Cash and cash equivalents, beginning of period
    
    
    35,940
    
    
    
    23,445Cash and cash equivalents, end of period
    
    $
    32,331
    
    
    $
    32,887
  5




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##### Table of Contents



HYPERCOM CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2006
 (Unaudited)
 1. Basis of Presentation
  Share-Based Payment
 2. 2005 Business Review
  
    
    Implementing an end-of-product-life cycle strategy, including identifying products and
related inventory 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, including members of the senior management
team, sales, operations and manufacturing personnel, as well as moving certain research and
development resources to lower cost foreign geographies, and compensation plan changes;
    
    Vacating a leased building in Phoenix, Arizona due to the reductions in force;
    
    Evaluating other assets and liabilities and evaluating the past underlying operating
decisions or strategies supporting the future benefit of the assets or the probability of a
liability;
    
    Addressing individual country/regional sales and profitability performance, and
reallocating resources based upon market share growth objectives by country to support the
new strategies going forward;
    
    Investing in the implementation of a comprehensive product marketing function within the
Companys organization; and
    
    Evaluating opportunities for short, medium and long-term improvements in manufacturing
costs.
  6




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##### Table of Contents



Costs
    
    
    AccrualsIncurred
    
    
    ReversedDuring the
    
    
    During theSix Month
    
    
    Six Month
    
    
    LiabilityTotal Costs
    
    
    Costs
    
    
    Period
    
    
    Period
    
    
    Balance atExpected to be
    
    
    Incurred
    
    
    Ended June
    
    
    Ended June
    
    
    June 30,Incurred
    
    
    During 2005
    
    
    30, 2006
    
    
    30, 2006
    
    
    2006Costs of revenues:Warranty charges and product
replacement accruals (a)$
    7,374
    
    
    $
    3,832
    
    
    $
    1,207
    
    
    $
    1,384
    
    
    $
    951Inventory write-downs, primarily
for product end-of-life
decisions12,111
    
    
    
    12,111
    
    
    
    
    
    
    
    
    
    
    
    One-time termination benefits
and
related employment costs
    
    
    469
    
    
    
    351
    
    
    
    118
    
    
    
    
    
    
    
    Total costs of revenue charges
    
    
    19,954
    
    
    
    16,294
    
    
    
    1,325
    
    
    
    1,384
    
    
    
    951Operating expenses:One-time termination benefits
and
related employment costs (b)
    
    
    3,370
    
    
    
    2,551
    
    
    
    290
    
    
    
    53
    
    
    
    476Idled facility lease charge (c)
    
    
    1,013
    
    
    
    195
    
    
    
    139
    
    
    
    
    
    
    
    679Total operating expenses
    
    
    4,383
    
    
    
    2,746
    
    
    
    429
    
    
    
    53
    
    
    
    1,155Total charges
    
    $
    24,337
    
    
    $
    19,040
    
    
    $
    1,754
    
    
    $
    1,437
    
    
    $
    2,106
 
 (a)
    
    These accrued liability balances are recorded as current product warranty liabilities
as these amounts are expected to be paid during 2006. Two customers
that agreed to participate in the trade-in program in June 2005 for the replacement of certain electronic
payment equipment ultimately opted out of the program.
Accordingly, the Company reduced its product warranty liabilities by $1.4 million in June
2006 upon the expiration of the program.(b)
    
    These accrued liability balances are recorded in current accrued liabilities as these
amounts are expected to be paid during 2006. The reversal of accrued termination benefits
relates primarily to outplacement services offered to employees that were not actually
utilized.(c)
    
    The idled facility lease charge accrued liability is recorded in current accrued
liabilities ($229,000) and other long-term liabilities ($450,000) based on the timing of
the projected lease payments that are scheduled through 2011.  
    
    $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;
    
    $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.
 7




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##### Table of Contents



3. Discontinued Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005United Kingdom Lease Business:Net revenues
    
    $
    1,119
    
    
    $
    3,861
    
    
    $
    3,230
    
    
    $
    7,959Costs of revenue
    
    
    (103
    )
    
    
    1,756
    
    
    
    1,195
    
    
    
    3,832Gross profit
    
    
    1,222
    
    
    
    2,105
    
    
    
    2,035
    
    
    
    4,127Selling, general and administrative
expenses
    
    
    (525
    )
    
    
    (309
    )
    
    
    (886
    )
    
    
    (725
    )Foreign currency loss
    
    
    (240
    )
    
    
    (303
    )
    
    
    (343
    )
    
    
    (301
    )Gain on sale
    
    
    1,561
    
    
    
    
    
    
    
    1,561
    
    
    
    2,018
    
    
    
    1,493
    
    
    
    2,367
    
    
    
    3,101Golden Eagle Leasing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    399Income from discontinued operations
    
    $
    2,018
    
    
    $
    1,493
    
    
    $
    2,367
    
    
    $
    3,500
  June 30,
    
    
    December 31,2006
    
    
    2005United Kingdom Lease Business:Prepaid expenses and other current assets
    
    $
    
    
    
    $
    57Net investment in sales-type leases
    
    
    
    
    
    
    12,556Assets of discontinued operations held for sale
    
    $
    
    
    
    $
    12,613Liabilities of discontinued operations (a)
    
    $
    659
    
    
    $
    
 
 (a)
    
    These accrued liability balances consist of severance and professional service fees
incurred as part of the United Kingdom Lease Business sale but not yet paid as of June 30,
2006. United Kingdom Lease Business
 Accounting for the Impairment or Disposal of Long-Lived
Assets
  Golden Eagle Leasing
  8




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##### Table of Contents



4. Share-Based Compensation
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Costs of revenue
    
    $
    79
    
    
    $
    
    
    
    $
    98
    
    
    $
    Research and development costs
    
    
    222
    
    
    
    
    
    
    
    409
    
    
    
    Selling, general and administrative
expenses
    
    
    1,711
    
    
    
    58
    
    
    
    2,372
    
    
    
    273Total share-based compensation
    
    $
    2,012
    
    
    $
    58
    
    
    $
    2,879
    
    
    $
    273
  Stock Options
 Accounting for Stock Appreciation Rights and
other Variable Stock Option Award Plans
  9




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##### Table of Contents



WeightedWeighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    Value (InOptions
    
    
    Price
    
    
    Term
    
    
    Thousands)Stock options:Outstanding at December 31, 2005
    
    
    4,321,744
    
    
    $
    6.88Granted
    
    
    993,500
    
    
    
    9.70Exercised
    
    
    (977,686
    )
    
    
    4.31Terminated or expired
    
    
    (281,890
    )
    
    
    8.46Outstanding at June 30, 2006
    
    
    4,055,668
    
    
    
    8.06
    
    
    
    6.66
    
    
    $
    7,994Expected to vest at June 30, 2006
    
    
    3,778,481
    
    
    $
    8.05
    
    
    
    6.46
    
    
    $
    7,542Vested and exercisable at June 30, 2006
    
    
    2,278,829
    
    
    $
    7.96
    
    
    
    4.50
    
    
    $
    5,097
   Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Weighted average fair value of
options granted
    
    $
    6.35
    
    
    $
    3.85
    
    
    $
    6.01
    
    
    $
    3.48Key assumptions used in determining
the fair value:Weighted average risk free
interest rate
    
    
    4.88
    %
    
    
    3.92
    %
    
    
    4.82
    %
    
    
    3.98
    %Expected life of the option (in
years)
    
    
    5.49
    
    
    
    5.80
    
    
    
    5.48
    
    
    
    5.40Expected stock price volatility
    
    
    65.1
    %
    
    
    75.1
    %
    
    
    67.0
    %
    
    
    76.2
    %Expected dividend rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   10




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005Net loss, as reported
    
    $
    (16,656
    )
    
    $
    (26,296
    )Add stock-based employee compensation expense included
in reported net loss
    
    
    58
    
    
    
    273Deduct total stock-based employee compensation expense
determined under fair value methods for all awards
    
    
    (342
    )
    
    
    (856
    )Add reversal of stock-based compensation expense for options
forfeited prior to vesting
    
    
    588
    
    
    
    2,086Pro forma net loss
    
    $
    (16,352
    )
    
    $
    (24,793
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.32
    )
    
    $
    (0.50
    )Basic and diluted, pro forma
    
    $
    (0.31
    )
    
    $
    (0.47
    )Weighted average shares used in pro forma computation:Basic and diluted
    
    
    52,478,165
    
    
    
    52,434,880
 Restricted Stock Awards
  Number of
    
    WeightedNonvested
    
    AverageRestricted
    
    Grant DateStock Awards
    
    Fair ValueBalance at December 31, 2005
    
    
    402,000
    
    
    $
    6.38Granted
    
    
    42,432
    
    
    
    8.97Vested
    
    
    (52,000
    )
    
    
    6.47Forfeited
    
    
    (50,000
    )
    
    
    6.42Balance at June 30, 2006
    
    
    342,432
    
    
    
    6.68
 Employee Stock Purchase Plan
  5. Restricted Cash
  6. Short-term Investments
  11




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##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005Municipal debt securities
    
    $
    6,500
    
    
    $
    10,500U.S. government and agency debt securities
    
    
    8,469
    
    
    
    23,439Asset backed auction rate securities
    
    
    9,500
    
    
    
    Corporate debt securities
    
    
    33,041
    
    
    
    10,012Preferred equity securities
    
    
    18,100
    
    
    
    14,000$
    75,610
    
    
    $
    57,951
 7. Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Purchased parts
    
    $
    22,691
    
    
    $
    24,118Work in progress
    
    
    3,504
    
    
    
    3,609Finished goods
    
    
    13,427
    
    
    
    11,687$
    39,622
    
    
    $
    39,414
 8. Sale of Hong Kong Office Building
  9. Product Warranty
  12




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    4,301
    
    
    $
    2,150
    
    
    $
    5,534
    
    
    $
    1,434Warranty charges from normal operations
    
    
    523
    
    
    
    215
    
    
    
    704
    
    
    
    769Warranty charges (reversals) related to
the 2005 Business Review
    
    
    (1,384
    )
    
    
    6,076
    
    
    
    (1,384
    )
    
    
    6,782Utilization of warranty liability
    
    
    (257
    )
    
    
    (667
    )
    
    
    (1,671
    )
    
    
    (1,211
    )Balance at end of period
    
    $
    3,183
    
    
    $
    7,774
    
    
    $
    3,183
    
    
    $
    7,774
   10. Long-term Debt
  11. Earnings per Share
  Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Shares used in basic income (loss) per
share calculation (weighted average
common shares outstanding)
    
    
    53,405,144
    
    
    
    52,478,165
    
    
    
    52,852,047
    
    
    
    52,434,880Effect of dilutive stock options, awards
and warrants
    
    
    965,256
    
    
    
    
    
    
    
    933,627
    
    
    
    Shares used in diluted income (loss)
per share calculation
    
    
    54,370,400
    
    
    
    52,478,165
    
    
    
    53,785,674
    
    
    
    52,434,880Options and warrants that could potentially
dilute income (loss) per share in the future
that were not included in the computation
of diluted income (loss) per share (a)
    
    
    3,797,072
    
    
    
    5,845,327
    
    
    
    3,995,606
    
    
    
    5,760,552
 13




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##### Table of Contents



(a)
    
    These options and warrants were not included in the computation of diluted income
(loss) per share because they were anti-dilutive. 12. Equity Transactions
   13. Income Taxes
   Accounting for Income Taxes
 14. Commitments and Contingencies
 14




---



##### Table of Contents



15. Subsequent Event
  15




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Cautionary Statements Regarding Forward-looking Statements
    
    
    the volatility of our financial results and our stock price;
    
    the loss of a key customer;
    
    defects in our products;
    
    the accumulation of obsolete inventory;
    
    breaches in the security of transactions involving our products;
    
    our inability to adequately protect our proprietary technology;
    
    our technology infringing the proprietary rights of third parties;
    
    a disruption in our manufacturing capabilities or those of our third-party manufacturers or suppliers;
    
    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;
    
    Chinas changing economic environment;
    
    uncertainties related to the Chinese legal system;
    
    our ability to maintain the quality of our internal control over financial reporting;
    
    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 and government regulations to which our products are subject;
    
    the volatility of our stock price;
 16




---



##### Table of Contents




    
    the impact of SEC regulations and SEC review of our periodic filings;
    
    the anti-takeover effects of certain provisions in our charter, bylaws and Delaware law;
    
    dilution of our stock price caused by the exercise of outstanding warrants and options;
    
    lack of a plan to pay dividends on our common stock in the foreseeable future; and
    
    incurring debt to meet the future capital requirements of our business.
  Critical Accounting Policies and Estimates
  Share-Based Compensation
 Share-Based
Payment
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Costs of revenue
    
    $
    79
    
    
    $
    
    
    
    $
    98
    
    
    $
    Research and development costs
    
    
    222
    
    
    
    
    
    
    
    409
    
    
    
    Selling, general and administrative
expenses
    
    
    1,711
    
    
    
    58
    
    
    
    2,372
    
    
    
    273Total share-based compensation
    
    $
    2,012
    
    
    $
    58
    
    
    $
    2,879
    
    
    $
    273
  17




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##### Table of Contents



Results of Operations
 Three Months Ended June 30,% of
    
    
    
    
    
    
    % of
    
    
    Dollar(Dollars in thousands, except per share data)
    
    2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    ChangeNet revenue:Product and other
    
    $
    56,983
    
    
    
    86.1
    %
    
    $
    52,852
    
    
    
    87.9
    %
    
    $
    4,131Services
    
    
    9,161
    
    
    
    13.9
    %
    
    
    7,302
    
    
    
    12.1
    %
    
    
    1,859Total net revenue
    
    
    66,144
    
    
    
    100.0
    %
    
    
    60,154
    
    
    
    100.0
    %
    
    
    5,990Costs of revenue:Product and other
    
    
    32,303
    
    
    
    56.7
    %
    
    
    45,905
    
    
    
    86.9
    %
    
    
    (13,602
    )Services
    
    
    6,447
    
    
    
    70.4
    %
    
    
    6,516
    
    
    
    89.2
    %
    
    
    (69
    )Total costs of revenue
    
    
    38,750
    
    
    
    58.6
    %
    
    
    52,421
    
    
    
    87.1
    %
    
    
    (13,671
    )Gross profit:Product and other
    
    
    24,680
    
    
    
    43.3
    %
    
    
    6,947
    
    
    
    13.1
    %
    
    
    17,733Services
    
    
    2,714
    
    
    
    29.6
    %
    
    
    786
    
    
    
    10.8
    %
    
    
    1,928Total gross profit
    
    
    27,394
    
    
    
    41.4
    %
    
    
    7,733
    
    
    
    12.9
    %
    
    
    19,661Operating expenses:Research and development
    
    
    6,504
    
    
    
    9.8
    %
    
    
    7,592
    
    
    
    12.6
    %
    
    
    (1,088
    )Selling, general and administrative
    
    
    16,481
    
    
    
    24.9
    %
    
    
    17,641
    
    
    
    29.3
    %
    
    
    (1,160
    )Total operating expenses
    
    
    22,985
    
    
    
    34.7
    %
    
    
    25,233
    
    
    
    41.9
    %
    
    
    (2,248
    )Income (loss) from continuing operations
    
    
    4,409
    
    
    
    6.7
    %
    
    
    (17,500
    )
    
    
    -29.1
    %
    
    
    21,909Non-operating income
    
    
    614
    
    
    
    0.9
    %
    
    
    (23
    )
    
    
    0.0
    %
    
    
    637Income (loss) before income taxes and
discontinued operations
    
    
    5,023
    
    
    
    7.6
    %
    
    
    (17,523
    )
    
    
    -29.1
    %
    
    
    22,546Provision for income taxes
    
    
    (813
    )
    
    
    -1.2
    %
    
    
    (626
    )
    
    
    -1.0
    %
    
    
    (187
    )Income (loss) before discontinued
operations
    
    
    4,210
    
    
    
    6.4
    %
    
    
    (18,149
    )
    
    
    -30.2
    %
    
    
    22,359Income from discontinued operations
    
    
    2,018
    
    
    
    3.1
    %
    
    
    1,493
    
    
    
    2.5
    %
    
    
    525Net income (loss)
    
    $
    6,228
    
    
    
    9.4
    %
    
    $
    (16,656
    )
    
    
    -27.7
    %
    
    $
    22,884Dilued income (loss) per share
    
    $
    0.11
    
    
    
    
    
    
    $
    (0.32
    )
    
    
    
    
    
    $
    0.43
 18




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##### Table of Contents



Six Months Ended June 30,% of
    
    
    
    
    
    
    % of
    
    
    Dollar(Dollars in thousands, except per share data)
    
    2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    ChangeNet revenue:Product and other
    
    $
    108,024
    
    
    
    85.0
    %
    
    $
    96,506
    
    
    
    87.3
    %
    
    $
    11,518Services
    
    
    19,089
    
    
    
    15.0
    %
    
    
    14,081
    
    
    
    12.7
    %
    
    
    5,008Total net revenue
    
    
    127,113
    
    
    
    100.0
    %
    
    
    110,587
    
    
    
    100.0
    %
    
    
    16,526Costs of revenue:Product and other
    
    
    62,632
    
    
    
    58.0
    %
    
    
    74,514
    
    
    
    77.2
    %
    
    
    (11,882
    )Services
    
    
    13,568
    
    
    
    71.1
    %
    
    
    11,803
    
    
    
    83.8
    %
    
    
    1,765Total costs of revenue
    
    
    76,200
    
    
    
    59.9
    %
    
    
    86,317
    
    
    
    78.1
    %
    
    
    (10,117
    )Gross profit:Product and other
    
    
    45,392
    
    
    
    42.0
    %
    
    
    21,992
    
    
    
    22.8
    %
    
    
    23,400Services
    
    
    5,521
    
    
    
    28.9
    %
    
    
    2,278
    
    
    
    16.2
    %
    
    
    3,243Total gross profit
    
    
    50,913
    
    
    
    40.1
    %
    
    
    24,270
    
    
    
    21.9
    %
    
    
    26,643Operating expenses:Research and development
    
    
    12,498
    
    
    
    9.8
    %
    
    
    14,850
    
    
    
    13.4
    %
    
    
    (2,352
    )Selling, general and administrative
    
    
    31,096
    
    
    
    24.5
    %
    
    
    37,828
    
    
    
    34.2
    %
    
    
    (6,732
    )Total operating expenses
    
    
    43,594
    
    
    
    34.3
    %
    
    
    52,678
    
    
    
    47.6
    %
    
    
    (9,084
    )Income (loss) from continuing operations
    
    
    7,319
    
    
    
    5.8
    %
    
    
    (28,408
    )
    
    
    -25.7
    %
    
    
    35,727Non-operating income
    
    
    1,152
    
    
    
    0.9
    %
    
    
    43
    
    
    
    0.0
    %
    
    
    1,109Income (loss) before income taxes and
discontinued operations
    
    
    8,471
    
    
    
    6.7
    %
    
    
    (28,365
    )
    
    
    -25.6
    %
    
    
    36,836Provision for income taxes
    
    
    (1,472
    )
    
    
    -1.2
    %
    
    
    (1,431
    )
    
    
    -1.3
    %
    
    
    (41
    )Income (loss) before discontinued
operations
    
    
    6,999
    
    
    
    5.5
    %
    
    
    (29,796
    )
    
    
    -26.9
    %
    
    
    36,795Income from discontinued operations
    
    
    2,367
    
    
    
    1.9
    %
    
    
    3,500
    
    
    
    3.2
    %
    
    
    (1,133
    )Net income (loss)
    
    $
    9,366
    
    
    
    7.4
    %
    
    $
    (26,296
    )
    
    
    -23.8
    %
    
    $
    35,662Diluted income (loss) per share
    
    $
    0.17
    
    
    
    
    
    
    $
    (0.50
    )
    
    
    
    
    
    $
    0.67
 Net Revenue
   19




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##### Table of Contents



Costs of Revenue
   Gross Profit
   Operating Expenses
 20




---



##### Table of Contents



Income (Loss) from Continuing Operations
  Non-Operating Income
  Provision for Income Taxes
   21




---



##### Table of Contents



Income from Discontinued Operations
   Cash Flows, Liquidity and Capital Resources
  Cash Flows
    22




---



##### Table of Contents



Liquidity and Capital Resources
    Contractual Obligations
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    23




---



##### Table of Contents



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
   Internal Control over Financial Reporting.
  24




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 Shareholder Class Action
  
 Item 1A. Risk Factors
   We may be required to indemnify third parties according to the terms of legal agreements to which
we are a party and if our insurance does not cover these obligations, in part or in their entirety,
our financial results may suffer.
  Adverse resolution of litigation, including litigation arising out of the restatement of certain of
our 2004 consolidated financial statements, may adversely affect our business or financial results.
  25




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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(c) Total Number
    
    Number (orof Shares (or
    
    ApproximatelyUnits) Purchased
    
    Dollar Value) ofas Part of
    
    Shares that May(a) Total Number
    
    (b) Average Price
    
    Publicly
    
    Yet Be Purchasedof Shares (or
    
    Paid per Share
    
    Announced Plans
    
    Under the PlansPeriod
    
    Units) Purchased
    
    (or Unit)
    
    or Programs
    
    or ProgramsMonth #1 (April 1,
2006 to April 30,
2006)
    
    
    
    

    
    
    
    

    
    
    
    

    
    
    Month #2 (May 1,
2006 to May 31,
2006)
    
    
    
    

    
    
    
    

    
    
    
    

    
    
    Month #3 (June 1,
2006 to June 30,
2006)
    
    
    
    

    
    
    
    

    
    
    
    

    
    
    Total
    
    
    
    
    
    
    
    

    
    
    
    

    
    $
    19,888,209
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  Election of Directors
 26




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##### Table of Contents



Election of Directors
    
    
    For
    
    
    WithholdDaniel D. Diethelm
    
    
    43,720,814
    
    
    
    1,843,958Todd Nelson
    
    
    45,118,085
    
    
    
    446,687Norman Stout
    
    
    44,006,041
    
    
    
    1,558,731
 Proposal to Amend Hypercoms Nonemployee Directors Stock Option Plan.
 For
    
    Against
    
    Abstain
    

    Non-Votes30,178,855

    
    
    2,675,171
    
    
    
    1,418,117
    
    
    
    11,292,685
 
 Item 6. Exhibits.
 Exhibit Number
    
    Description of Exhibit2.1
    
    Business Sale Agreement dated June 27, 2006, by and among Hypercom Corporation, Hypercom EMEA
Ltd., Forrester UK Holdings, LLC and Northern Leasing Systems, Inc. (incorporated by reference
to Exhibit 2.1 to Hypercom Current Report on Form 8-K filed on July 3, 2006)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 3.1
to Hypercom Current Report on Form 8-K filed on May 30, 2006)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
    
    Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to Hypercom
Current Report on Form 8-K filed on May 30, 2006)31.1
    
    Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 *31.2
    
    Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 *32
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 27




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##### Table of Contents



SIGNATURES
  HYPERCOM CORPORATIONDate: August 9, 2006
    
    By:
    
    /s/ William KeiperWilliam KeiperChief Executive Officer and President (duly
authorized officer and principal executive
officer)Date: August 9, 2006
    
    By:
    
    /s/ Thomas LiguoriThomas LiguoriSenior Vice President and Chief Financial
Officer (principal financial and accounting
officer)
 28




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description of Exhibit2.1
    
    Business Sale Agreement dated June 27, 2006, by and among Hypercom Corporation, Hypercom EMEA
Ltd., Forrester UK Holdings, LLC and Northern Leasing Systems, Inc. (incorporated by reference
to Exhibit 2.1 to Hypercom Current Report on Form 8-K filed on July 3, 2006)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 3.1
to Hypercom Current Report on Form 8-K filed on May 30, 2006)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
    
    Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to Hypercom
Current Report on Form 8-K filed on May 30, 2006)31.1
    
    Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 *31.2
    
    Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 *32
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 27