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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended: June 30, 2002.

OR

		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)

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 þ     No

Number of shares of the registrant’s common stock, $.001 par value per share, outstanding as of August 6, 2002, was 47,985,196.

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INDEX

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

HYPERCOM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

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

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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)

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

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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE DATA)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements 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 considered necessary for a fair statement of results for the periods have been included and are considered of a normal recurring nature except for the impact on quarterly results and balance sheet amounts related to the extraordinary loss on early retirement of debt (see Note 6) and the cumulative effect of change in accounting principle (see Note 8). Operating results for the six months ended June 30, 2002, are not necessarily indicative of the results to be expected for the year ending December 31, 2002.

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

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, 2001.

NOTE 2 – INVENTORIES

Inventories consist of the following:

NOTE 3 – SEGMENT INFORMATION

As of December 31, 2001, Hypercom had two segments: Point-of-Sale (POS) / Network Systems and Equipment Leasing.

Hypercom’s reportable segments are strategic business units that market distinctly different products and services to a respectively different group of customers. Their business models vary and each is separately managed given their unique marketing, operations and financing strategies.

The following table presents certain segment financial information unaudited and in thousands for the three and six month periods ended June 30, 2002 and 2001, respectively:

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For the Three Months Ended June 30, 2002:

For the Three Months Ended June 30, 2001:

For the Six Months Ended June 30, 2002:

For the Six Months Ended June 30, 2001:

NOTE 4 – INCOME TAXES

The income tax (expense) benefit before extraordinary item and cumulative effect of change in accounting principle for federal, state and foreign taxes was $(0.1) million and $0.1 million for the three and six months ended June 30, 2002, respectively. The income tax benefit for federal, state and foreign taxes was $1.4 million and $4.8 million for the three and six months ended June 30, 2001, respectively. The Company’s effective rate of income tax (expense) benefit before extraordinary item and cumulative effect of change in accounting principle was (24%) and 16% for the three and six months ended June 30, 2002, and 20% for the three and six months ended June 30, 2001, respectively.

The income tax (expense) benefit for the three and six months ended June 30, 2002 and 2001, differed from the U.S. statutory rate principally due to foreign taxes, attributable to foreign operations, that are less than the U.S. statutory rate, research and experimentation credits, the non-recognition of tax benefit on foreign currency translation losses, and valuation reserves.

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NOTE 5 – COST OF REVENUES

In the three month-period ended March 31, 2001, the Company’s wholly-owned subsidiary, Golden Eagle Leasing, Inc. (Golden Eagle) recorded, in cost of revenues, an incremental charge of $7.2 million to strengthen credit reserves for certain segments of its lease receivables. This charge represented management’s estimate of potential loan losses that exceed its historical rate of loan losses based on analysis of results through March 31, 2001. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Golden Eagle’s micro ticket leasing business is characterized by high incidences of delinquencies, which in turn can lead to significant levels of loan losses. However, based on historical default rates and our credit assessments, we believe collectibility of the minimum lease payments is reasonably predictable.

NOTE 6 – DEBT AND EQUITY TRANSACTIONS

On March 22, 2002, the Company completed the issuance and sale of 7,870,000 shares of its common stock, par value $0.001 per share (the “Shares”), at a price of $5.00 per Share. The Shares were sold in a private transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. The shares were subsequently registered with the Securities and Exchange Commission effective May 2, 2002.

The net proceeds of the private offering amounted to $36.5 million and have been used to repay two term loans under the Company’s credit facility with principal balances of $15.3 million and $3.3 million, to repay $3.1 million in outstanding loans from a director and principal stockholder, and to reduce the outstanding borrowings under the Company’s $25 million revolving credit facility. The remaining proceeds have been used for general corporate purposes.

In connection with the early retirement of our term loans, we recorded an extraordinary loss on retirement of debt of $1.8 million, net of tax benefit of $0.8 million. The extraordinary loss resulted from the write-off of unamortized debt issuance costs and a loan discount associated with the term loans.

In connection with the private offering, the Company entered into an agreement with its principal lenders relating to its revolving credit facility which waived any default or event of default with respect to the delivery of certain collateral documents that the Company was obligated to deliver under the facility and permitted the Company to repay the term loans. The effective date of the Amendment was March 13, 2002.

NOTE 7 – FOREIGN CURRENCY RISK MANAGEMENT

During the second quarter of 2002 the Company resumed its foreign currency risk management strategy. The primary objectives of the strategy are to protect cash flows and net investments in foreign subsidiaries that are exposed to volatility in foreign currency exchange rates. Financial hedging instruments used in this strategy are limited by Company policy to foreign-currency forward or option contracts and foreign-currency debt. The Company does not acquire, hold or issue derivative financial instruments for trading purposes.

As of June 30, 2002 the Company had two three-month foreign-currency forward contracts in place to hedge its foreign currency denominated net monetary assets in Brazil and the United Kingdom. These net monetary assets are translated at the exchange rates in effect on the balance sheet date, with any changes in the net monetary assets resulting from changes in exchange rates reported as foreign currency gains or losses in the statement of operations. Likewise, changes in the fair value of foreign-currency forward contracts are reported as foreign currency gains or losses in the statement of operations. The change in fair value in the foreign-currency forward contracts during the second quarter ended June 30, 2002 amounted to a net foreign currency loss of $0.3 million. The Company did not hedge its foreign currency exposure during 2001 due to financing restrictions.

NOTE 8 – ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements

Effective January 1, 2002, the Company adopted Financial Accounting Standards Board Statement of Accounting Standards (SFAS) 141, Business Combinations, SFAS 142, Goodwill and Intangible Assets and SFAS 144, Accounting for the

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Impairment or Disposal of Long-Lived Assets. SFAS 141 eliminated the pooling-of-interests method of accounting for business combinations and changed the criteria to recognize intangible assets apart from goodwill. Implementation of SFAS 141 did not have an effect on the Company’s financial statements. SFAS 142 sets forth the accounting for goodwill and intangible assets already recorded. The impact of adopting SFAS 142 is discussed further in this note. SFAS 144 addresses the accounting and reporting for the impairment or disposal of long lived assets. The adoption of SFAS 144 did not have an effect on the Company’s financial statements.

The carrying amount of goodwill upon the adoption of SFAS 142 was $21.7 million at January 1, 2002, of which $20.3 million was attributed to Golden Eagle with the remaining amount of $1.4 million attributed to the POS and Network Systems segment. Under the transitional provisions of SFAS 142, the Company evaluated its reporting units for impairment of goodwill as of January 1, 2002, completing the evaluations by June 30, 2002. The impairment test relative to Golden Eagle’s goodwill was performed by an independent third party valuation firm using market multiple, comparable transaction and discounted net earnings methodologies, with the remaining amount of goodwill evaluated internally using similar valuation methodologies.

The results of the impairment tests resulted in a full write-off of the carrying value of goodwill of $21.7 million. In accordance with the transition provisions of SFAS 142, the write-off is reported as a cumulative effect of a change in accounting principle impacting the first quarter of 2002. The following table reflects the impact of the cumulative effect of a change in accounting principle on the reported results for the Company’s first quarter ended March 31, 2002:

The Company provided a full valuation reserve against the deferred tax benefit attributed to the write-off of the goodwill that has tax basis, and accordingly has not reported the cumulative effect of a change in accounting principle net of tax. Due to the goodwill balances that have tax basis with amortizable lives extending up to 13 years, the Company was uncertain as to whether the tax benefits would be realized over such an extended time period.

Additionally, with the adoption of SFAS 142, the Company reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization adjustments. No amortization adjustments were necessary.

The following table reflects the reconciliation of reported net earnings and earnings per share to adjust for the exclusion of goodwill amortization in prior year periods.

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Recently issued accounting pronouncements

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.4, 44 and 64, amendment of FASB Statement No.13, and Technical Corrections, which among other things, restricts the classification of gains and losses from extinguishment of debt as extraordinary to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30. SFAS 145 is effective January 1, 2003. Upon adoption, gains and losses on certain future debt extinguishment, if any, will be recorded in pre-tax income. In addition, the $1.8 million extraordinary loss from early extinguishment of debt, net of tax, recorded during the first quarter of 2002 will be reclassified to income before extraordinary loss to conform to the requirements under SFAS 145.

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, plans for future operations, products or services, financing needs of the

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Company, and 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 OPERATIONS

NET REVENUE

Net revenue for the three-month period ended June 30, 2002 of $75.1 million, was equal to the same period a year ago. Revenue by segment and product mix were generally consistent on a year over year basis, with a slight increase in sales at certain international operations, principally Sweden, offset by a slight decrease in domestic sales due to the timing of orders.

Net revenue for the six-month period ended June 30, 2002 increased $6.0 million or 4.1% to $152.2 million from $146.2 million in the six-month period ended June 30, 2001. This increase was principally due to the attainment of a performance milestone under our Brazilian Health Ministry contract resulting in revenue of $8.6 million during the six months ended June 30, 2002, versus $1.6 million in revenue recognized under the same contract during the same period a year ago. Remaining milestones under this contract are expected to be substantially less than the milestone achieved in the first quarter of 2002, as we are now entering the maintenance phase of this contract.

COST OF REVENUE

Hypercom’s cost of revenue includes the cost of raw materials, manufacturing labor, overhead and subcontracted manufacturing costs, as well as interest expense and loan loss provisions with respect to direct financing leases. The costs of revenue for the three-month period ended June 30, 2002 decreased $1.1 million or 2.3% to $48.2 million from $49.3 million in the three months ended June 30, 2001. Gross margin for the three months ended June 30, 2002 was 35.9% compared to 34.4% in the same period in the prior year. Improvement in the gross margin for the three months ended June 30, 2002 compared to the same period in the prior year has resulted from continued manufacturing and product cost reductions as well as improved pricing in certain service operations.

For the six-month period ended June 30, 2002, costs of revenue decreased $4.5 million or 4.3% to $98.0 million from $102.4 million in the six-month period ended June 30, 2001. Gross margin for the six months ended June 30, 2002 was 35.6% compared to 29.9% in the same period in the prior year.

In addition to the effects of our continued manufacturing and product cost reductions and improved pricing in certain service operations, the reduction in costs on higher net revenues in the six-months ended June 30, 2002, also reflects the effect of an incremental charge, in addition to the normal loan loss provisions recorded in cost of revenues, of $7.2 million in the three months ended March 31, 2001, to strengthen credit reserves for certain segments of Golden Eagles’ direct finance lease receivables. This incremental charge represented management’s estimate of potential loan losses that would exceed its historical rate of loan losses based on analysis of results through March 31, 2001.

The factors that contributed to Golden Eagle’s decision in the first quarter of 2001 to strengthen credit reserves include the following:

•

We identified several new vendor programs established in 2000, that were experiencing losses at higher than historic loss levels for other vendor programs. These programs required that independent sales organizations provide additional services to the merchants (lessees) as part of the lease program. To the extent that service levels were not as the merchants expected, the likelihood of their making required lease payments was reduced. Losses for these programs began to exceed historical levels as of the quarter ended March 31, 2001;

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