UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2003
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22167
EURONET WORLDWIDE, INC.
(Exact name of the registrant as specified in its charter)
Delaware | 74-2806888 | |
(State or other jurisdiction of | (I.R.S. employer
|
4601 COLLEGE BOULEVARD, SUITE 300
LEAWOOD, KANSAS 66211
(Address of principal executive offices)
(913) 327-4200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx No¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 30,October 31, 2003 the Company had 26,522,96626,951,393 common shares outstanding.
Page 1
Table of Contents
3 | ||
4 | ||
4 | ||
Consolidated Statements of Operations and Comprehensive Income (Loss) | 5 | |
6 | ||
7 | ||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | |
16 | ||
17 | ||
17 | ||
18 | ||
29 | ||
31 | ||
31 | ||
35 | ||
35 | ||
36 | ||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 36 | |
37 | ||
38 | ||
38 | ||
38 | ||
38 | ||
39 | ||
40 | ||
Exhibit 31(a) | 41 | |
Exhibit 31(b) | 42 | |
Exhibit 32(a) | 43 | |
Exhibit 32(b) | 44 | |
Exhibit 99.1 | 45 |
Page 2
The Condensed Consolidated Financial Statements of Euronet Worldwide, Inc. (“Euronet” or the “Company”) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Condensed Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2002.
The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year 2003.
Page 3
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands of U.S. dollars, except for share and per share data)
(Unaudited)
As of | As of | |||||||||||||||
March 31, 2003 | December 31, 2002 | Sept. 30, 2003 | Dec. 31, 2002 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 13,930 |
| $ | 12,021 |
| $ | 12,851 | $ | 12,021 | ||||||
Restricted cash and cash held on behalf of others |
| 38,048 |
|
| 4,401 |
| 43,379 | 4,401 | ||||||||
Trade accounts receivable, net of allowances for doubtful accounts of $1,073 at March 31, 2003 and $484 at December 31, 2002 |
| 36,184 |
|
| 8,380 |
| ||||||||||
Trade accounts receivable, net of allowances for doubtful accounts of $679 at September 30, 2003 and $484 at December 31, 2002 | 49,968 | 8,380 | ||||||||||||||
Earnings in excess of billings on software installation contracts |
| 763 |
|
| 334 |
| 729 | 334 | ||||||||
Deferred income taxes |
| 1,479 |
|
| 426 |
| 428 | 426 | ||||||||
Assets held for sale |
| — |
|
| 10,326 |
| — | 10,767 | ||||||||
Prepaid expenses and other current assets |
| 7,000 |
|
| 3,537 |
| 8,936 | 3,537 | ||||||||
Total current assets |
| 97,404 |
|
| 39,425 |
| 116,291 | 39,866 | ||||||||
Property, plant and equipment, net |
| 21,260 |
|
| 21,394 |
| 18,214 | 21,394 | ||||||||
Intangible assets, net |
| 80,128 |
|
| 1,834 |
| ||||||||||
Goodwill | 63,263 | 1,834 | ||||||||||||||
Deferred income taxes |
| 209 |
|
| 1,064 |
| 305 | 1,064 | ||||||||
Other assets, net |
| 2,992 |
|
| 2,842 |
| 20,366 | 2,401 | ||||||||
Total assets | $ | 201,993 |
| $ | 66,559 |
| $ | 218,439 | $ | 66,559 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Trade accounts payable | $ | 50,574 |
| $ | 2,989 |
| $ | 67,846 | $ | 2,989 | ||||||
Current installments of obligations under capital leases |
| 2,888 |
|
| 3,447 |
| ||||||||||
Current installments of obligations under capital leases and notes payable | 6,038 | 3,447 | ||||||||||||||
Accrued expenses and other current liabilities |
| 27,004 |
|
| 4,979 |
| 27,458 | 4,979 | ||||||||
Deferred income tax | — | — | ||||||||||||||
Short-term borrowings |
| 502 |
|
| 380 |
| 931 | 380 | ||||||||
Advance payments on contracts |
| 3,033 |
|
| 2,966 |
| 2,139 | 2,966 | ||||||||
Accrued interest on notes payable |
| 1,372 |
|
| — |
| 2,366 | — | ||||||||
Liabilities held for sale |
| — |
|
| 3,537 |
| — | 3,537 | ||||||||
Billings in excess of earnings on software installation contracts |
| 1,787 |
|
| 1,471 |
| 1,121 | 1,471 | ||||||||
Total current liabilities |
| 87,160 |
|
| 19,769 |
| 107,899 | 19,769 | ||||||||
Obligations under capital leases, excluding current installments |
| 3,469 |
|
| 4,301 |
| 2,336 | 4,301 | ||||||||
Notes payable |
| 64,016 |
|
| 36,318 |
| 59,383 | 36,318 | ||||||||
Other long term liabilities |
| 7,204 |
|
| — |
| ||||||||||
Deferred income tax | 3,252 | — | ||||||||||||||
Other long-term liabilities | 3,207 | — | ||||||||||||||
Total liabilities |
| 161,849 |
|
| 60,388 |
| 176,077 | 60,388 | ||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, $0.02 par value. Authorized 60,000,000 shares; issued and outstanding 26,518,966 shares at March 31, 2003 and 23,883,072 shares at December 31, 2002 |
| 532 |
|
| 480 |
| ||||||||||
Common stock, $0.02 par value. Authorized 60,000,000 shares; issued and outstanding 26,832,523 shares at September 30, 2003 and 23,883,072 shares at December 31, 2002 | 536 | 480 | ||||||||||||||
Preferred stock, $0.02 par value, Authorized 10,000,000 shares; issued and outstanding 0 shares at September 30, 2003 and December 31, 2002. | — | — | ||||||||||||||
Additional paid in capital |
| 155,956 |
|
| 137,426 |
| 158,854 | 137,426 | ||||||||
Treasury stock |
| (145 | ) |
| (145 | ) | (145 | ) | (145 | ) | ||||||
Employee loans for stock |
| (427 | ) |
| (427 | ) | (427 | ) | (427 | ) | ||||||
Subscription receivable |
| (35 | ) |
| 42 |
| ||||||||||
Accumulated deficit |
| (114,234 | ) |
| (129,655 | ) | (115,635 | ) | (129,655 | ) | ||||||
Restricted reserve |
| 784 |
|
| 784 |
| 784 | 784 | ||||||||
Accumulated other comprehensive loss |
| (2,287 | ) |
| (2,334 | ) | (1,638 | ) | (2,334 | ) | ||||||
Other | 33 | 42 | ||||||||||||||
Total stockholders’ equity |
| 40,144 |
|
| 6,171 |
| 42,362 | 6,171 | ||||||||
Total liabilities and stockholders’ equity | $ | 201,993 |
| $ | 66,559 |
| $ | 218,439 | $ | 66,559 | ||||||
See accompanying notes to unaudited consolidated financial statements.
2
Page 4
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands of U.S. dollars, except share and per share data)
(Unaudited)
Three months ended March 31, | Three months ended Sept. 30, | Nine months ended Sept. 30, | ||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
EFT processing services | $ | 11,889 |
| $ | 12,177 |
| $ | 12,925 | $ | 13,753 | $ | 36,983 | $ | 38,839 | ||||||||||
Prepaid processing services |
| 17,372 |
|
| — |
| 36,532 | — | 86,096 | — | ||||||||||||||
Software and related services |
| 3,839 |
|
| 4,863 |
| 3,604 | 4,136 | 11,223 | 13,615 | ||||||||||||||
Total |
| 33,100 |
|
| 17,040 |
| 53,061 | 17,889 | 134,302 | 52,454 | ||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Direct operating costs |
| 20,005 |
|
| 7,006 |
| 34,723 | 7,848 | 86,862 | 21,597 | ||||||||||||||
Salaries and benefits |
| 6,875 |
|
| 6,078 |
| 8,266 | 6,368 | 22,633 | 18,608 | ||||||||||||||
Selling, general and administrative |
| 2,313 |
|
| 1,501 |
| 3,315 | 1,769 | 8,263 | 4,835 | ||||||||||||||
Depreciation and amortization |
| 2,756 |
|
| 2,309 |
| 3,067 | 2,519 | 8,919 | 6,930 | ||||||||||||||
Total operating expenses |
| 31,949 |
|
| 16,894 |
| 49,371 | 18,504 | 126,677 | 51,970 | ||||||||||||||
Operating income |
| 1,151 |
|
| 146 |
| 3,690 | (615 | ) | 7,625 | 484 | |||||||||||||
Other income/expenses: | ||||||||||||||||||||||||
Other income (expenses) | ||||||||||||||||||||||||
Interest income |
| 353 |
|
| 80 |
| 300 | 63 | 926 | 227 | ||||||||||||||
Interest expense |
| (1,607 | ) |
| (1,654 | ) | (1,837 | ) | (1,446 | ) | (5,358 | ) | (4,807 | ) | ||||||||||
Gain on sale of subsidiary |
| 18,001 |
|
| — |
| ||||||||||||||||||
Loss on facility sublease | — | (249 | ) | — | (249 | ) | ||||||||||||||||||
Gain on sale of U.K. subsidiary | — | — | 18,001 | — | ||||||||||||||||||||
Equity in income from investee companies |
| 37 |
|
| — |
| 246 | (159 | ) | 380 | (159 | ) | ||||||||||||
Foreign exchange (loss)/gain, net |
| (1,839 | ) |
| 412 |
| ||||||||||||||||||
Loss on early retirement of debt | — | (791 | ) | — | (955 | ) | ||||||||||||||||||
Foreign exchange loss, net | (234 | ) | 222 | (5,193 | ) | (3,179 | ) | |||||||||||||||||
Total other income/(expense) |
| 14,945 |
|
| (1,162 | ) | ||||||||||||||||||
Total other income (expense) | (1,525 | ) | (2,360 | ) | 8,756 | (9,122 | ) | |||||||||||||||||
Income/(loss) from continuing operations before income taxes and minority interest |
| 16,096 |
|
| (1,016 | ) | ||||||||||||||||||
Income tax (expense)/benefit |
| (675 | ) |
| 1,665 |
| ||||||||||||||||||
Income (loss) from continuing operations before income taxes and minority interest | 2,165 | (2,975 | ) | 16,381 | (8,638 | ) | ||||||||||||||||||
Income tax (expense) benefit | (740 | ) | 449 | (2,310 | ) | 1,852 | ||||||||||||||||||
Income from continuing operations before minority interest |
| 15,421 |
|
| 649 |
| ||||||||||||||||||
Income (loss) from continuing operations before minority interest | 1,425 | (2,526 | ) | 14,071 | (6,786 | ) | ||||||||||||||||||
Minority interest |
| — |
|
| 26 |
| — | 30 | — | 77 | ||||||||||||||
Income from continuing operations |
| 15,421 |
|
| 675 |
| ||||||||||||||||||
Income (loss) from continuing operations | 1,425 | (2,496 | ) | 14,071 | (6,709 | ) | ||||||||||||||||||
Discontinued operations: | ||||||||||||||||||||||||
Income from operations of discontinued U.S. and France components including gain on disposal of $4,845 for the three months ended March 31, 2002 |
| — |
|
| 4,762 |
| ||||||||||||||||||
Income (loss) from operations of discontinued U.S. and France components | (49 | ) | (12 | ) | (51 | ) | 4,976 | |||||||||||||||||
Income tax expense |
| — |
|
| (1,857 | ) | — | — | — | (1,935 | ) | |||||||||||||
Income from discontinued operations |
| — |
|
| 2,905 |
| ||||||||||||||||||
Income (loss) from discontinued operations | (49 | ) | (12 | ) | (51 | ) | 3,041 | |||||||||||||||||
Net income |
| 15,421 |
|
| 3,580 |
| ||||||||||||||||||
Net income (loss) | 1,376 | (2,508 | ) | 14,020 | (3,668 | ) | ||||||||||||||||||
Translation adjustment |
| 47 |
|
| (618 | ) | (361 | ) | (220 | ) | 696 | 210 | ||||||||||||
Comprehensive income | $ | 15,468 |
| $ | 2,962 |
| ||||||||||||||||||
Comprehensive income (loss) | $ | 1,015 | $ | (2,728 | ) | $ | 14,716 | $ | (3,458 | ) | ||||||||||||||
Income per share—basic | ||||||||||||||||||||||||
Income from continuing operations per share | $ | 0.61 |
| $ | 0.03 |
| ||||||||||||||||||
Income (loss) per share – basic: | ||||||||||||||||||||||||
Income (loss) from continuing operations per share | $ | 0.05 | $ | (0.11 | ) | $ | 0.54 | $ | (0.29 | ) | ||||||||||||||
Income from discontinued operations per share |
| — |
|
| 0.13 |
| — | — | — | 0.13 | ||||||||||||||
Net income per share | $ | 0.61 |
| $ | 0.16 |
| ||||||||||||||||||
Net income (loss) per share | $ | 0.05 | $ | (0.11 | ) | $ | 0.54 | $ | (0.16 | ) | ||||||||||||||
Basic weighted average outstanding shares |
| 25,215,308 |
|
| 22,476,888 |
| 26,700,521 | 23,394,036 | 26,158,391 | 22,982,394 | ||||||||||||||
Income per share—diluted | ||||||||||||||||||||||||
Income from continuing operations per share | $ | 0.57 |
| $ | 0.03 |
| ||||||||||||||||||
Income (loss) per share – diluted: | ||||||||||||||||||||||||
Income (loss) from continuing operations per share | $ | 0.05 | $ | (0.11 | ) | $ | 0.49 | $ | (0.29 | ) | ||||||||||||||
Income from discontinued operations per share |
| — |
|
| 0.11 |
| — | — | — | 0.13 | ||||||||||||||
Net income per share | $ | 0.57 |
| $ | 0.14 |
| ||||||||||||||||||
Net income (loss) per share | $ | 0.05 | $ | (0.11 | ) | $ | 0.49 | $ | (0.16 | ) | ||||||||||||||
Diluted weighted average outstanding shares |
| 26,936,990 |
|
| 26,145,733 |
| 29,232,003 | 23,394,036 | 28,431,142 | 22,982,394 | ||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
3
Page 5
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)
Three months ended March 31, | Nine months ended Sept. 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income | $ | 15,421 |
| $ | 3,580 |
| ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Net income (loss) | $ | 14,020 | $ | (3,668 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization |
| 2,756 |
|
| 2,309 |
| 8,919 | 6,930 | ||||||||
Unrealized foreign exchange loss/(gain) |
| 904 |
|
| (792 | ) | ||||||||||
(Gain)/loss on disposal of fixed assets |
| (54 | ) |
| 18 |
| ||||||||||
Unrealized foreign exchange loss | 5,145 | 4,477 | ||||||||||||||
Gain on sale of subsidiary |
| (18,001 | ) |
| — |
| (18,001 | ) | — | |||||||
Gain on sale of discontinued operations, net of tax |
| — |
|
| (2,988 | ) | — | (2,988 | ) | |||||||
Expense/(benefit) from deferred income tax |
| 501 |
|
| (1,857 | ) | ||||||||||
Loss from discontinued operations |
| — |
|
| 83 |
| ||||||||||
Gain on disposal of fixed assets | (931 | ) | — | |||||||||||||
Deferred income tax benefit (expense) | 2,933 | (1,857 | ) | |||||||||||||
Increase in assets and liabilities held for sale |
| — |
|
| 3,052 |
| — | 863 | ||||||||
Amortization of deferred financing costs |
| 43 |
|
| — |
| ||||||||||
Accretion of discount on notes payable |
| 11 |
|
| 1,177 |
| 32 | 2,482 | ||||||||
Gain on extinguishment of debt | — | 955 | ||||||||||||||
Change in operating assets and liabilities, net of effects of acquisition: | ||||||||||||||||
Increase in income tax payable, net |
| 1,024 |
|
| — |
| ||||||||||
(Increase)/decrease in restricted cash |
| (8,049 | ) |
| 13 |
| ||||||||||
Increase in restricted cash | (13,380 | ) | — | |||||||||||||
Decrease in trade accounts receivable |
| 19,497 |
|
| 648 |
| 6,205 | 1,362 | ||||||||
(Increase)/decrease in costs and estimated earnings in excess of billings on software installation contracts |
| (429 | ) |
| 85 |
| ||||||||||
(Increase)/decrease in prepaid expenses and other current assets |
| (2,646 | ) |
| 577 |
| ||||||||||
Decrease in trade accounts payable |
| (12,185 | ) |
| (2,020 | ) | ||||||||||
Increase in advance payments on contracts |
| 884 |
|
| 406 |
| ||||||||||
Increase/(decrease) in accrued expenses and other liabilities |
| 6,297 |
|
| (1,772 | ) | ||||||||||
Increase in billings in excess of costs and estimated earnings on software installation costs |
| 316 |
|
| 815 |
| ||||||||||
Increase (decrease) in prepaid expenses and other current assets | (2,534 | ) | 1,662 | |||||||||||||
Increase (decrease) in trade accounts payable | 4,581 | (1,631 | ) | |||||||||||||
Increase (decrease) in accrued expenses and other liabilities | 5,203 | (1,740 | ) | |||||||||||||
Decrease in billings in excess of costs and estimated earnings on software installation costs | (350 | ) | 312 | |||||||||||||
Other |
| — |
|
| 55 |
| (974 | ) | 328 | |||||||
Net cash provided by operating activities |
| 6,290 |
|
| 3,389 |
| 10,868 | 7,487 | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Fixed asset purchases |
| (236 | ) |
| (484 | ) | (2,713 | ) | (3,710 | ) | ||||||
Proceeds from sale of fixed assets |
| 178 |
|
| 69 |
| 2,910 | 183 | ||||||||
Purchase of intangible and other long term assets |
| (396 | ) |
| — |
| ||||||||||
Acquisition, net of cash acquired |
| (27,967 | ) |
| — |
| ||||||||||
Purchase of intangible and other long-term assets | (966 | ) | (339 | ) | ||||||||||||
Acquisitions, net of cash acquired | (28,712 | ) | — | |||||||||||||
Proceeds from sale of subsidiary |
| 24,418 |
|
| — |
| 24,418 | — | ||||||||
Purchase of restricted certificates of deposits |
| — |
|
| (4,250 | ) | — | (1,995 | ) | |||||||
Net cash used in investing activities |
| (4,003 | ) |
| (4,665 | ) | (5,063 | ) | (5,861 | ) | ||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of shares and other capital contributions |
| 611 |
|
| 14,412 |
| 3,022 | 16,830 | ||||||||
Repayment of notes payable | (4,806 | ) | — | |||||||||||||
Repayment of credit facility |
| — |
|
| (2,000 | ) | — | (2,000 | ) | |||||||
Repayment of obligations under capital leases |
| (1,096 | ) |
| (3,269 | ) | (3,618 | ) | (5,063 | ) | ||||||
Proceeds from/(repayment of) other borrowings |
| 122 |
|
| (513 | ) | ||||||||||
Increase in subscriptions receivable |
| (77 | ) |
| (30 | ) | ||||||||||
Cash repaid by employees for purchase of common stock |
| — |
|
| 17 |
| ||||||||||
Proceeds from (repayment of) other borrowings | 551 | (10,923 | ) | |||||||||||||
Other | (10 | ) | 78 | |||||||||||||
Net cash (used in)/provided by financing activities |
| (440 | ) |
| 8,617 |
| ||||||||||
Net cash used in financing activities | (4,861 | ) | (1,078 | ) | ||||||||||||
Effect of exchange differences on cash |
| 62 |
|
| 175 |
| (114 | ) | (150 | ) | ||||||
Proceeds from sale of discontinued operations |
| — |
|
| 5,872 |
| — | 5,872 | ||||||||
Cash used in discontinued operations |
| — |
|
| (83 | ) | ||||||||||
Cash provided by discontinued operations | — | 250 | ||||||||||||||
Net increase in cash and cash equivalents |
| 1,909 |
|
| 13,305 |
| 830 | 6,520 | ||||||||
Cash and cash equivalents at beginning of period |
| 12,021 |
|
| 8,631 |
| 12,021 | 8,311 | ||||||||
Cash and cash equivalents at end of period | $ | 13,930 |
| $ | 21,936 |
| $ | 12,851 | $ | 14,831 | ||||||
See accompanying notes to unaudited consolidated financial statements.
See Note 4 for details of significant non-cash transactions.transactions
4
Page 6
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—GENERAL
Basis of Presentation
The accompanying unaudited consolidated financial statements of Euronet and subsidiaries have been prepared from the records of the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting only of normal, recurring accruals) necessary to present fairly the financial position of the Company at MarchSeptember 30, 2003 and December 31, 2003,2002, the results of its operations for the three-month and nine-month periods ended March 31,September 30, 2003 and 2002, and cash flows for the three-monthnine-month periods ended March 31,September 30, 2003 and 2002.
The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Euronet Worldwide, Inc. and subsidiaries for the year ended December 31, 2002, including the notes thereto, set forth in the Company’s Form 10-K.
The results of operations for the three-month periodand nine-month periods ended March 31,September 30, 2003 are not necessarily indicative of the results to be expected for the full year.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ADOPTED ACCOUNTING STANDARDS
For a description of the accounting policies of the Company, see Note 3 to the audited consolidated financial statements for the year ended December 31, 2002 set forth in the Company’s Form 10-K.
Revenue And Operating Expense For Prepaid Processing
The Company derives its prepaid processing revenues through processing the transactions of sales of prepaid mobile phone top-ups and international prepaid calling plans. Revenue is recognized when a transaction has been processed or delivery has been made, as there are no significant vendor obligations remaining and collection is probable.
Revenue related to the processing of sales of mobile phone top-ups and international calling cards represents commissions received from network or service providers. All revenues exclude value added tax. The related operating expense for these transactions represents the net amount due to retailers using the e-pay Ltd. (“e-pay”) infrastructure. In certain cases the Company is not responsible for collection of cash from the retailer. In such instances, no operating expense is recorded for the transaction.
SFAS 150
In May 2003, Statement of Financial Accounting Standard No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” was issued. SFAS 150 requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Many of these instruments were previously classified as equity or temporary equity. As such, SFAS 150 represents a significant change in practice in the accounting for a number of mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments for the first interim period beginning after September 15, 2003. The adoption of SFAS 150 is not expected to have a material effect on the Company’s financial statements.
SFAS 148 and SFAS 123—Stock-based Employee Compensation
The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s shares at the date of the grant over the exercise price.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” an amendment of FASB Statement 123. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for
Page 7
stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions are effective for financial statements issued for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002.
The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” to stock-based employee compensation (in thousands, except per share data):
For the three months ended Sept. 30, | For the nine months ended Sept. 30, | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||
Net income (loss), as reported | $ | 1,376 | $ | (2,508 | ) | $ | 14,020 | $ | (3,668 | ) | ||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | 886 | 1,285 | 3,085 | 3,391 | ||||||||||
Pro forma net income (loss) | $ | 490 | $ | (3,793 | ) | $ | 10,935 | $ | (7,059 | ) | ||||
Earnings (loss) per share: | ||||||||||||||
Basic—as reported | $ | 0.05 | $ | (0.11 | ) | $ | 0.54 | $ | (0.29 | ) | ||||
Basic—pro forma | $ | 0.02 | $ | (0.16 | ) | $ | 0.42 | $ | (0.31 | ) | ||||
Diluted—as reported | $ | 0.05 | $ | (0.11 | ) | $ | 0.49 | $ | (0.29 | ) | ||||
Diluted—pro forma | $ | 0.02 | $ | (0.16 | ) | $ | 0.38 | $ | (0.31 | ) |
Pro forma impact reflects only options granted since December 31, 1995; therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma amounts presented above because compensation cost is reflected over the options’ vesting periods and compensation cost for options granted prior to January 1, 1996 is not considered.
SFAS 143
In June 2001, Financial Accounting Standards Board (FASB)the FASB issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). The Company adopted SFAS 143 on January 1, 2003. The adoption of SFAS 143 did not have a material impact on the Company’s financial position or result of operations.
SFAS 146
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. This statement addresses the timing and amount of costs recognized as a result of restructuring and similar activities. The Company will apply SFAS 146 prospectively to activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Company’s financial position or result of operations.
FIN 45
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an Interpretation of FASB Statements No. 5, 57, and 107 and a Rescission of FASB Interpretation No. 34” (FIN 45). FIN 45 clarifies and expands on existing disclosure requirements for guarantees, including loan guarantees. It also requires that, at the inception of a guarantee, the Company must recognize a liability for the fair value of its obligation under that guarantee. The disclosure requirements are effective for financial statements of periods ending after December 15, 2002. The initial fair value recognition and measurement provisions will be applied on a prospective basis to certain guarantees issued or modified after December 31, 2002. The Company adopted the disclosure requirements of FIN 45 as of March 31, 2003 and evaluated the adoption of the remainder of FIN 45. The adoption of FIN 45 did not have a material impact on our financial position or result of operations.
5
FIN 46
In January 2003, the Financial Accounting Standards BoardFASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for variable interest entities created or acquired after January 31, 2003. The adoption of FIN 46 did not have a material impact on ourthe Company’s financial position and results of operations.
There have been no further significant additions to or changes in the accounting policies of the Company since December 31, 2002.
NOTE 3—EARNINGS/EARNINGS (LOSS) PER SHARE—BASIC AND DILUTED
Basic earnings per share hashave been computed by dividing net income/income (loss) by the weighted average number of common shares outstanding. Dilutive earnings per share reflectsreflect the potential dilution that could occur if dilutive stock options and warrants were exercised using the treasury stock method, where applicable. The followingeffect of potential common stock (options and warrants outstanding) is antidilutive for periods in which a net loss occurs. Accordingly, diluted net loss per share does not assume the exercise of outstanding stock options and warrants. The potentially dilutive effect of outstanding stock options and warrants is as follows:
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Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||
2003 | 2002 | 2003 | 2002 | |||||
Basic weighted average shares outstanding | 26,700,521 | 23,394,036 | 26,158,391 | 22,982,394 | ||||
Convertible warrants outstanding | 146,065 | 125,686 | 129,597 | 179,255 | ||||
Stock options outstanding* | 2,385,417 | 1,928,199 | 2,143,154 | 2,644,123 | ||||
Potentially diluted weighted average shares outstanding | 29,232,003 | 25,447,921 | 28,431,142 | 25,805,772 | ||||
* | Includes options with strike price below the average fair market value of Euronet common shares during the period. |
The table provided a reconciliationabove does not reflect options of 3,847,438 for weightedthe nine months ended September 30, 2003 and 3,605,175 for the three months ended September 30, 2003 that have an exercise price in excess of the average numbermarket price of Euronet common shares outstanding toduring the fully diluted weightedperiod. These options may have an additional dilutive effect in the future if the average numbermarket value of Euronet common shares outstanding:rises above the exercise price of the options.
As of March 31, | ||||
2003 | 2002 | |||
Weighted average common shares outstanding | 25,215,308 | 22,476,888 | ||
Dilutive effect of: | ||||
Convertible warrants | 89,802 | 294,357 | ||
Stock options | 1,631,880 | 3,374,488 | ||
Weighted average common shares outstanding, assuming dilution | 26,936,990 | 26,145,733 | ||
NOTE 4—BUSINESS COMBINATIONCOMBINATIONS
In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS 141), the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair value assigned to intangible assets acquired is based onsupported by valuations prepared by an independent third party appraisal firms using estimates and assumptions provided by management. The intangible assets recorded as a result of thisthe e-pay acquisition are not expected to be deductible for tax purposes. In accordance with the Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), goodwill and intangible assets with indefinite lives resulting from business combinations will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that the Company determines that the value of goodwill or intangible assets with indefinite lives has become impaired, the Company will incur an accounting charge for bethe amount of impairment during the fiscal quarter in which the determination is made.
6
Purchase of e-pay
In February 2003, the Company purchased 100% of the shares of e-pay Limited (“e-pay”), a company based in the U.K. e-pay is an electronic payments processor of prepaid mobile phone airtime “top-up” services in the U.K. and Australia. It has agreements with mobile operators in those markets under which it supports the distribution of prepaid airtime to their subscribers through point-of-sale (POS) terminals in retail outlets. e-pay currently processesToday, we process top-up sales at more than 50,00075,000 points of sale, in approximately 18,000 retail locations, including the mobile operators’ own retail outlets, major retail chains and independent retail outlets.outlets in 29,000 locations across eight countries. In addition to the U.K. and Australia operations, e-pay owns 40% of the shares of e-pay Malaysia, a separate company that offers electronic top-up services through approximately 2,600 POS terminals in Malaysia.
In connection with the acquisition, Euronet also agreed to increase the size of its Board of Directors by one member and nominate and recommend for election as a Class III director at Euronet’s next annual meeting of stockholders the director candidate designated by a committee representing the former shareholders of e-pay.
The assets acquired include tangible long-term assets, such as computer equipment and other fixed assets, working capital and intangible assets, such as customer relationships, computer software, trademarks and trade names and goodwill. A substantial amount of the purchase price was allocated to intangible assets including goodwill.
In connection with the acquisition, on May 28, 2003, Euronet increased the size of its Board of Directors by one member and nominated and recommended for election a new Class III director, Paul Althasen, formerly an e-pay shareholder. Subsequently, Mr. Althasen was elected to the Board of Directors.
Purchase Price
The purchase price for the e-pay shares was approximately $76.2 million, including transaction costs and fees of approximately $1.4 million. Of the total purchase price, $30.0 million was paid in cash at closing, $18.0 million was paid through issuance at closing of 2,497,504 shares of Common Stock,common stock, and the remaining $26.9 million will be paid in deferred purchase price or under promissory notes executed at closing with 24 month maturity dates bearing interest rates ranging from 6% to 8%. The deferred portion of the purchase price, approximately $8.5 million, is payable based upon e-pay’s Excess Cash Flow, as defined in the acquisition agreement, with any remaining unpaid balance due in 24 months. Approximately $7.4 million of the notes (the “Convertible Notes”) are convertible into Common Stockcommon stock at the option of the holders at a conversion price of $11.43 per share, or approximately 647,282 shares. The Convertible Notes may be redeemed by Euronet, in whole but not in part, under certain conditions, including if the average market price of the Common Stockcommon stock over a thirty consecutive trading day period exceeds $15.72, for Common Stockcommon stock at a redemption price of $11.43
Page 9
$11.43 per share. The conversion price and the redemption price are subject to customary anti-dilution provisions. The remaining $11.0 million of promissory notes are not convertible.
The following table summarizes the total cost of the acquisition of e-pay (unaudited, in thousands):
Cash paid at closing | $ | 29,996 | |
Euronet common stock: 2,497,504 shares |
| 17,972 | |
Deferred consideration, payable quarterly from 90% of free cash flow, 6% interest per annum accruing daily, 24 month maturity |
| 8,533 | |
Notes payable, 7% interest per annum, convertible into 647,282 shares of Euronet common stock, 24 month maturity |
| 7,353 | |
Notes payable, 8% interest per annum, 24 month maturity |
| 10,981 | |
Total paid to shareholders |
| 74,835 | |
Transaction costs and share registration fees |
| 1,358 | |
Total purchase price | $ | 76,193 | |
Note: All amounts are included as of the purchase price date. Certain small changes are ongoing, due to foreign exchange fluctuations and minor adjustments to acquisition costs.
7
Cash paid at closing | $ | 29,996 | |
Euronet common stock: 2,497,504 shares | 17,972 | ||
Deferred consideration, payable quarterly from 90% of free cash flow, 6% interest per annum accruing daily, 24 month maturity | 8,533 | ||
Notes payable, 7% interest per annum, convertible into 647,282 shares of Euronet common stock, 24 month maturity | 7,353 | ||
Notes payable, 8% interest per annum, 24 month maturity | 10,981 | ||
Total paid to shareholders | 74,835 | ||
Transaction costs and share registration fees | 1,358 | ||
Total purchase price | $ | 76,193 | |
Assets Acquired
Note: All amounts are included as of the purchase price date. Certain small changes are ongoing, due to foreign exchange rates and minor reallocations of consideration.
Under the purchase method of accounting, management has made a preliminary allocation of the total purchase price was allocated to the acquired tangible and intangible assets based on a preliminaryan estimate of their fair values as determined by management and a third-party appraisal at the completion ofacquisition date. Management has engaged third party appraisers to assist in this analysis and expects to finalize the acquisition.purchase price allocation prior to year end. The purchase price was allocated as follows (unaudited, in thousands):
Customer relationships | $ | 12,820 |
| |
Software |
| 1,038 |
| |
Trademark and trade name |
| 3,433 |
| |
Goodwill |
| 61,249 |
| |
Total intangible assets |
| 78,540 |
| |
Net tangible assets and working capital |
| 1,810 |
| |
Deferred tax liability |
| (4,157 | ) | |
Total purchase price | $ | 76,193 |
| |
Of the total purchase price, $1.8 million has been allocated to net tangible assets and working capital acquired and approximately $13.9 million has been allocated to amortizable intangible assets acquired. The amortizable intangible assets acquired will be amortized over their estimated useful lives, which range from 5 to 8 years.
Description | Estimated Life | Amount | ||||
Customer relationships | 8 years | $ | 12,820 | |||
Software | 5 years | 1,038 | ||||
Trademark and trade name | indefinite | 3,433 | ||||
Goodwill | N/A | 61,249 | ||||
Total intangible assets | — | 78,540 | ||||
Net tangible assets and working capital | various | 1,810 | ||||
Deferred tax liability | N/A | (4,157 | ) | |||
Total purchase price | — | $ | 76,193 | |||
Of the total estimated purchase price, approximately $64.7 million has been allocated to goodwill and other intangibles with indefinite lives. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets.
In accordance with SFAS 142, goodwill and intangible assets with indefinite lives resulting from business combinations completed subsequent to December 31, 2001, will not be amortized but instead will be testedevaluated for impairment at least annually (more frequently if certain indicators are present). In the event that the management of the combined company determines that the value of goodwill or intangible assets with indefinite lives has become impaired, the combined companyCompany will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.
Pro forma results
The following unaudited pro forma financial information presents the combined results of operations of Euronet and e-pay as if the acquisition had occurred as of the beginning of the periods presented. Adjustments have been made to the combined results of operations for the periods reflecting amortization of purchased intangibles and interest expense, net of tax, as if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of Euronet that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of Euronet.
8
The following schedule presents the pro forma combined results of operations of Euronet and e-pay as if the acquisition had occurred on January 1, 2003 (unaudited, in thousands):
For the three months ended March 31, 2003 | |||||||||
As reported | e-pay’s January results | Pro forma | |||||||
Revenues | $ | 33,100 | $ | 9,400 | $ | 42,500 | |||
Income from continuing operations |
| 15,421 |
| 828 |
| 16,249 | |||
Net income |
| 15,421 |
| 828 |
| 16,249 | |||
Income per share—basic | |||||||||
Income from continuing operations | $ | 0.61 | $ | 0.64 | |||||
Net income | $ | 0.61 | $ | 0.64 | |||||
Income per share—diluted | |||||||||
Income from continuing operations | $ | 0.57 | $ | 0.60 | |||||
Net income | $ | 0.57 | $ | 0.60 |
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Nine months ended Sept. 30, 2003 | |||||||||
As reported | Acquisition of e-pay | Pro forma | |||||||
Revenues | $ | 134,302 | $ | 9,400 | $ | 143,702 | |||
Income from continuing operations | 14,071 | 828 | 14,899 | ||||||
Net income | 14,020 | 828 | 14,848 | ||||||
Income per share—basic | |||||||||
Income from continuing operations | $ | 0.54 | $ | 0.57 | |||||
Net income | $ | 0.54 | $ | 0.57 | |||||
Income per share—diluted | |||||||||
Income from continuing operations | $ | 0.49 | $ | 0.51 | |||||
Net income | $ | 0.49 | $ | 0.51 |
The following schedule presents the pro forma combined results of operations of Euronet and e-pay as if the acquisition had occurred on January 1, 2002 (unaudited, in thousands):
Nine months ended Sept. 30, 2002 | |||||||||||||||||||||
For the three months ended March 31, 2002 | As reported | Acquisition of e-pay | Pro forma | ||||||||||||||||||
As reported | e-pay’s results | Pro forma | (adjusted for inclusion of e-pay results) | ||||||||||||||||||
Revenues | $ | 17,040 | $ | 7,314 |
| $ | 24,354 | $ | 52,454 | $ | 32,754 | $ | 85,208 | ||||||||
Income (loss) from continuing operations | (6,786 | ) | 1,859 | (4,927 | ) | ||||||||||||||||
Net income (loss) | (3,668 | ) | 1,735 | (1,933 | ) | ||||||||||||||||
Income (loss) per share—basic | |||||||||||||||||||||
Income from continuing operations |
| 675 |
| (392 | ) |
| 283 | $ | (0.29 | ) | $ | (0.21 | ) | ||||||||
Net income |
| 3,580 |
| (392 | ) |
| 3,188 | $ | (0.16 | ) | $ | (0.08 | ) | ||||||||
Income per share—basic | |||||||||||||||||||||
Income (loss) per share—diluted | |||||||||||||||||||||
Income from continuing operations | $ | 0.03 | $ | 0.01 | $ | (0.29 | ) | $ | (0.21 | ) | |||||||||||
Net income | $ | 0.16 | $ | 0.13 | $ | (0.16 | ) | $ | (0.08 | ) | |||||||||||
Income per share—diluted | |||||||||||||||||||||
Income from continuing operations | $ | 0.03 | $ | 0.01 | |||||||||||||||||
Net income | $ | 0.14 | $ | 0.11 |
Purchase of assets of Austin International Marketing and Investments, Inc.
On September 22, 2003 we purchased all of the assets and assumed certain liabilities of Austin International Marketing and Investments, Inc. (AIM), a Kansas corporation. AIM is a U.S.-based electronic “top-up” company, processing prepaid transactions via point of sale terminals in 36 states on approximately 1,900 POS terminals. Generally, this business will operate as part of the U.S.-based prepaid service branded as PaySpot.
The assets acquired include working capital and intangible assets, primarily customer relationships and goodwill. A substantial amount of the purchase price was assigned to intangible assets and goodwill.
The purchase price of the assets was $2.8 million, including assumed liabilities of $0.9 million. Of the total purchase price, $0.8 million was paid in cash at closing and $1.2 million was paid through the issuance at closing of 114,374 shares of common stock. An additional amount up to $5.5 million in stock and cash may become payable based on the achievement of defined financial results. Approximately 30% of any additional amount is payable in cash and 70% in shares of common stock. Under the purchase method of accounting, management has made a preliminary allocation of the total purchase price to the acquired tangible and intangible assets based on an estimate of their fair values at the acquisition date. Management has engaged third party appraisers to assist in this analysis and expects to finalize the purchase price allocation prior to year end.
Of the total estimated purchase price, management has made a preliminary allocation of approximately $2.0 million to goodwill and other intangibles assets at the acquisition date. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Based on preliminary valuations, approximately $0.6 million of the total purchase price will be allocated to amortizable intangible assets, primarily customer relationships, with an average life of approximately 8-9 years. Annual amortization expense is expected to approximate $0.08 million. In the event the purchase price increases due to the achievement of certain financial results, the amount of the purchase price assigned to amortizable intangibles as well as the related amortization expense may also increase.
In accordance with SFAS 142, goodwill and intangible assets with indefinite lives resulting from business combinations completed subsequent to December 31, 2001, will not be amortized but instead will be evaluated for impairment at least annually (more
Page 11
frequently if certain indicators are present). In the event that management determines that the value of goodwill or intangible assets with indefinite lives has become impaired, the Company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.
NOTE 5—SALE OF SUBSIDIARY
Sale of U.K. ATM Network
In January 2003, the Company sold 100% of the shares in its United KingdomU.K. subsidiary, Euronet Services (UK)(U.K.) Ltd. (or “Euronet UK”U.K.”) to Bridgepoint Capital Limited (or “Bridgepoint”). This transaction was effected through a Share Purchase Agreement (the “Acquisition Agreement”) whereby EFT Services Holding B.V. (“Euronet Holding”), a Netherlands corporation and a wholly owned subsidiary of Euronet, sold all of its shares of Euronet UKU.K. to Bank Machine (Acquisitions) Limited (“BMAL”), a United KingdomU.K. company owned by Bridgepoint, for approximately $29.4 million (or £18.2 million) in cash, subject to certain working capital adjustments. Of this amount, $1.0 million (£0.6 million) was placed in escrow or otherwise retained subject to the completion and settlement of certain post-closing matters and adjustments, with the remainder paid in cash at closing. The Acquisition Agreement provides that the benefits and burdens of ownership of the shares and all employees of Euronet UKU.K. were transferred to Bridgepoint effective as of January 1, 2003. Euronet Worldwide, Euronet Holding and BMAL are parties to the Acquisition Agreement. The Acquisition Agreement includes certain representations, warranties and indemnification obligations of Euronet concerning Euronet UK,U.K., which are customary in transactions of this nature in the United Kingdom,U.K., including a “Tax Deed” providing for the indemnification of Bridgepoint by Euronet against tax liabilities of Euronet UKU.K. that relate to the periods prior to January 1, 2003, but arise after the sale.
Simultaneous with this transaction, Euronet and Bank Machine Limited (which is the new name of Euronet UKU.K. following the acquisition) signed an ATM and Gateway Services Agreement (the “Services Agreement”) under
9
which Euronet’s Hungarian subsidiary, Euronet Adminisztracios Kft. (“Euronet Hungary”), will provide ATM operating, monitoring, and transaction processing services (“ATM Services”) to Bank Machine Limited through December 31, 2007. The services provided by Euronet Hungary are substantially identical to the services provided to Euronet UKU.K. prior to its sale to Bridgepoint.
Management has allocated $4.5 million of the total sale proceeds of $29.4 million to the Services Agreement. This amount will be accrued to revenues on a straight-line basis over the five-year contract term beginning January 1, 2003. This allocation was made with reference toamount represents management’s best estimate of the agreed recurring fees under the Services Agreement and the estimated fair market value on a per ATM basis of the services to be provided under the Services Agreement.agreement.
The results of operations of Euronet UKU.K. continue to be included in continuing operations due to the ongoing revenues generated under the Services Agreement.
Gain on Sale
The following table summarizes the gain on the sale of Euronet UKU.K. (unaudited, in thousands):
Sale price of Euronet UK | $ | 29,423 |
| |||||
Less: Portion of sale price attributed to value of ATM Services |
| (4,500 | ) | |||||
Sale price of Euronet U.K. | $ | 29,423 | ||||||
Less: Portion of sale price attributed to estimated fair value of ATM Services | (4,500 | ) | ||||||
Total consideration received attributed to Purchase Agreement |
| 24,923 |
| 24,923 | ||||
Less: Net transaction and settlement costs |
| (505 | ) | (505 | ) | |||
Net cash consideration received |
| 24,418 |
| 24,418 | ||||
Less: value of net assets removed as of December 31, 2002 | ||||||||
Euronet UK assets removed |
| (10,326 | ) | |||||
Euronet UK liabilities removed |
| 3,537 |
| |||||
Euronet U.K. assets removed | (10,326 | ) | ||||||
Euronet U.K. liabilities removed | 3,537 | |||||||
Other liabilities removed |
| 372 |
| 372 | ||||
Gain on sale | $ | 18,001 |
| $ | 18,001 | |||
Euronet UK’sU.K.’s assets and liabilities were classified as held for sale as of December 31, 2002, a summary of which is as follows (unaudited, in thousands):
As of December 31, 2002 | As of Dec. 31, 2002 | |||||
Current assets | $ | 1,240 | $ | 1,240 | ||
Fixed assets |
| 9,086 | 9,086 | |||
Total assets held for sale | $ | 10,326 | $ | 10,326 | ||
Current liabilities | $ | 2,866 | $ | 2,866 | ||
Long term liabilities |
| 671 | ||||
Long-term liabilities | 671 | |||||
Total liabilities held for sale | $ | 3,537 | $ | 3,537 | ||
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NOTE 6—BUSINESS SEGMENT INFORMATION
Effective forFor the quarter ended March 31, 2003, the Company changed its segment reporting by adding a third segment, the Prepaid Processing Segment, as a result of its acquisition of e-pay. In addition, due to the e-pay acquisition and the sale of the Company’s U.K. subsidiary, the Company will no longer provide geographic sub-segment information because management believes this information is not material to EFT Processing Segment disclosure.
Effective for the quarter ended March 31,September 30, 2003, Euronet and its subsidiaries operateoperated in three business segments: (1)(i) a segment that provides an independent shared ATM network and other electronic payment processing services to banks, retail and financial institutions (the “EFT Processing Segment”); (2)(ii) a segment that provides
10
electronic prepaid recharge, or top-up, services for retailer stores and mobile telephone operators (the “Prepaid Processing Segment”); and (3)(iii) a segment that produces application software and solutions for payment and transaction delivery systems (the “Software Solutions Segment”). These business segments are supported by a corporate service segment, which provides corporate and other administrative services to the three business segments (the “Corporate Services Segment”). The accounting policies of each segment are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes, foreign exchange gain (loss), and minority interest not including nonrecurring gains and losses. Prior period segment information has been restated to conform to the current period’s presentation.
The following tables present the segment results of the Company’s operations for the three-month and nine-month periods ended March 31,September 30, 2003 and 2002 (unaudited, in thousands):
For the three months ended March 31, 2003 | Three months ended Sept. 30, 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
EFT Processing | Prepaid Processing | Software Solutions | Corporate Services | Total segments | Eliminations | Consolidated | EFT Processing | Prepaid Processing | Software Solutions | Corporate Services | Total Segments | Eliminations | Consolidated | ||||||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 11,961 |
| $ | 17,372 |
| $ | 3,894 | $ | — |
| $ | 33,227 |
| $ | (127 | ) | $ | 33,100 |
| $ | 12,925 | $ | 36,532 | $ | 3,659 | $ | — | $ | 53,116 | $ | (55 | ) | $ | 53,061 | ||||||||||||||||||||
Direct operating cost |
| 5,765 |
|
| 14,007 |
|
| 307 |
| — |
|
| 20,079 |
|
| (74 | ) |
| 20,005 |
| 4,932 | 29,583 | 207 | — | 34,722 | 1 | 34,723 | ||||||||||||||||||||||||||||
Salaries and benefits |
| 3,067 |
|
| 812 |
|
| 2,375 |
| 620 |
|
| 6,874 |
|
| 1 |
|
| 6,875 |
| 3,463 | 1,954 | 2,152 | 696 | 8,265 | 1 | 8,266 | ||||||||||||||||||||||||||||
Selling, general and administrative |
| 452 |
|
| 411 |
|
| 695 |
| 809 |
|
| 2,367 |
|
| (54 | ) |
| 2,313 |
| 399 | 1,116 | 640 | 1,211 | 3,366 | (51 | ) | 3,315 | |||||||||||||||||||||||||||
Depreciation and amortization |
| 1,846 |
|
| 618 |
|
| 275 |
| 22 |
|
| 2,761 |
|
| (5 | ) |
| 2,756 |
| 1,834 | 922 | 296 | 20 | 3,072 | (5 | ) | 3,067 | |||||||||||||||||||||||||||
Total operating expenses |
| 11,130 |
|
| 15,848 |
|
| 3,652 |
| 1,451 |
|
| 32,081 |
|
| (132 | ) |
| 31,949 |
| 10,628 | 33,575 | 3,295 | 1,927 | 49,425 | (54 | ) | 49,371 | |||||||||||||||||||||||||||
Operating income/(loss) |
| 831 |
|
| 1,524 |
|
| 242 |
| (1,451 | ) |
| 1,146 |
|
| 5 |
|
| 1,151 |
| |||||||||||||||||||||||||||||||||||
Operating income (loss) | 2,297 | 2,957 | 364 | (1,927 | ) | 3,691 | (1 | ) | 3,690 | ||||||||||||||||||||||||||||||||||||||||||||||
Interest income |
| 8 |
|
| 218 |
|
| 2 |
| 125 |
|
| 353 |
|
| — |
|
| 353 |
| 6 | 276 | — | 18 | 300 | — | 300 | ||||||||||||||||||||||||||||
Interest expense |
| (192 | ) |
| (2 | ) |
| — |
| (1,413 | ) |
| (1,607 | ) |
| — |
|
| (1,607 | ) | (144 | ) | (4 | ) | — | (1,689 | ) | (1,837 | ) | — | (1,837 | ) | |||||||||||||||||||||||
Gain on sale of subsidiary |
| — |
|
| — |
|
| — |
| 18,001 |
|
| 18,001 |
|
| — |
|
| 18,001 |
| |||||||||||||||||||||||||||||||||||
Income from unconsolidated investee companies |
| — |
|
| 55 |
|
| — |
| (18 | ) |
| 37 |
|
| — |
|
| 37 |
| |||||||||||||||||||||||||||||||||||
Foreign exchange (loss)/gain, net |
| (644 | ) |
| 5 |
|
| — |
| (1,200 | ) |
| (1,839 | ) |
| — |
|
| (1,839 | ) | |||||||||||||||||||||||||||||||||||
Income—unconsolidated companies | — | 292 | — | (46 | ) | 246 | — | 246 | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange (loss) gain, net | — | — | — | (240 | ) | (240 | ) | 6 | (234 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Total other (expense)/income |
| (828 | ) |
| 276 |
|
| 2 |
| 15,495 |
|
| 14,945 |
|
| — |
|
| 14,945 |
| |||||||||||||||||||||||||||||||||||
Total other (expense) income | (138 | ) | 564 | — | (1,957 | ) | (1,531 | ) | 6 | (1,525 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Income from continuing operations before income taxes and minority interest | $ | 3 |
| $ | 1,800 |
| $ | 244 | $ | 14,044 |
| $ | 16,091 |
| $ | 5 |
| $ | 16,096 |
| |||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes and minority interest | $ | 2,159 | $ | 3,521 | $ | 364 | $ | (3,884 | ) | $ | 2,160 | $ | 5 | $ | 2,165 | ||||||||||||||||||||||||||||||||||||||||
Segment assets as of March 31, 2003 | $ | 39,895 |
| $ | 146,537 |
| $ | 6,828 | $ | 8,769 |
| $ | 202,029 |
| $ | (36 | ) | $ | 201,993 |
| |||||||||||||||||||||||||||||||||||
Fixed assets as of March 31, 2003 | $ | 18,524 |
| $ | 1,877 |
| $ | 805 | $ | 90 |
| $ | 21,296 |
| $ | (36 | ) | $ | 21,260 |
| |||||||||||||||||||||||||||||||||||
Segment assets as of September 30, 2003 | $ | 42,527 | $ | 161,016 | $ | 6,693 | $ | 8,203 | $ | 218,439 | $ | — | $ | 218,439 | |||||||||||||||||||||||||||||||||||||||||
Fixed assets as of September 30, 2003 | $ | 15,585 | $ | 1,920 | $ | 735 | $ | — | $ | 18,240 | $ | (26 | ) | $ | 18,214 | ||||||||||||||||||||||||||||||||||||||||
Three months ended Sept. 30, 2002 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
EFT Processing | Prepaid Processing | Software Solutions | Corporate Services | Total Segments | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 13,753 | $ | — | $ | 4,181 | $ | — | $ | 17,934 | $ | (45 | ) | $ | 17,889 | ||||||||||||||||||||||||||||||||||||||||
Direct operating cost | 7,622 | — | 181 | — | 7,803 | 45 | 7,848 | ||||||||||||||||||||||||||||||||||||||||||||||||
Salaries and benefits | 2,914 | — | 3,058 | 396 | 6,368 | — | 6,368 | ||||||||||||||||||||||||||||||||||||||||||||||||
Selling, general and administrative | (62 | ) | — | 1,128 | 793 | 1,859 | (90 | ) | 1,769 | ||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 2,195 | — | 248 | 84 | 2,527 | (8 | ) | 2,519 | |||||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 12,669 | — | 4,615 | 1,273 | 18,557 | (53 | ) | 18,504 | |||||||||||||||||||||||||||||||||||||||||||||||
Operating income (loss) | 1,084 | — | (434 | ) | (1,273 | ) | (623 | ) | (8 | ) | (615 | ) | |||||||||||||||||||||||||||||||||||||||||||
Interest income | 14 | — | 7 | 42 | 63 | — | 63 | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense | (281 | ) | — | — | (1,165 | ) | (1,446 | ) | — | (1,446 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Loss on facility sublease | — | — | (249 | ) | — | (249 | ) | — | (249 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Equity in losses from investee companies | (159 | ) | — | — | — | (159 | ) | — | (159 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Loss on early retirement of debt | — | — | — | (791 | ) | (791 | ) | — | (791 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange gain (loss) net | (156 | ) | — | — | 378 | 222 | — | 222 | |||||||||||||||||||||||||||||||||||||||||||||||
Total other (expense) | (582 | ) | — | (242 | ) | (1,536 | ) | (2,360 | ) | — | (2,360 | ) | |||||||||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes and minority interest | $ | 502 | $ | — | $ | (676 | ) | $ | (2,809 | ) | $ | (2,983 | ) | $ | 8 | $ | (2,975 | ) | |||||||||||||||||||||||||||||||||||||
Minority interest | $ | 30 | $ | — | $ | — | $ | — | $ | 30 | $ | — | $ | 30 | |||||||||||||||||||||||||||||||||||||||||
Segment assets as of December 31, 2002 | $ | 50,347 | $ | — | $ | 6,955 | $ | 9,257 | $ | 66,559 | $ | — | $ | 66,559 | |||||||||||||||||||||||||||||||||||||||||
Fixed assets as of December 31, 2002 | $ | 20,431 | $ | — | $ | 854 | $ | 109 | $ | 21,394 | $ | — | $ | 21,394 |
For the three months ended March 31, 2002 | ||||||||||||||||||||||||||
EFT Processing | Prepaid Processing | Software Solutions | Corporate Services | Total segments | Eliminations | Consolidated | ||||||||||||||||||||
Total revenues | $ | 12,177 |
| $ | — | $ | 4,908 | $ | — |
| $ | 17,085 |
| $ | (45 | ) | $ | 17,040 |
| |||||||
Direct operating cost |
| 6,614 |
|
| — |
| 437 |
| — |
|
| 7,051 |
|
| (45 | ) |
| 7,006 |
| |||||||
Salaries and benefits |
| 3,056 |
|
| — |
| 2,447 |
| 575 |
|
| 6,078 |
|
| — |
|
| 6,078 |
| |||||||
Selling, general and administrative |
| 235 |
|
| — |
| 570 |
| 696 |
|
| 1,501 |
|
| — |
|
| 1,501 |
| |||||||
Depreciation and amortization |
| 2,035 |
|
| — |
| 232 |
| 42 |
|
| 2,309 |
|
| — |
|
| 2,309 |
| |||||||
Total operating expenses |
| 11,940 |
|
| — |
| 3,686 |
| 1,313 |
|
| 16,939 |
|
| (45 | ) |
| 16,894 |
| |||||||
Operating income/(loss) |
| 237 |
|
| — |
| 1,222 |
| (1,313 | ) |
| 146 |
|
| — |
|
| 146 |
| |||||||
Interest income |
| 11 |
|
| — |
| 65 |
| 4 |
|
| 80 |
|
| — |
|
| 80 |
| |||||||
Interest expense |
| (284 | ) |
| — |
| — |
| (1,370 | ) |
| (1,654 | ) |
| — |
|
| (1,654 | ) | |||||||
Foreign exchange (loss)/gain, net |
| (220 | ) |
| — |
| — |
| 632 |
|
| 412 |
|
| — |
|
| 412 |
| |||||||
Total other (expense)/income |
| (493 | ) |
| — |
| 65 |
| (734 | ) |
| (1,162 | ) |
| — |
|
| (1,162 | ) | |||||||
(Loss)/income from continuing operations before income taxes and minority interest | $ | (256 | ) | $ | — | $ | 1,287 | $ | (2,047 | ) | $ | (1,016 | ) | $ | — |
| $ | (1,016 | ) | |||||||
Minority interest | $ | 26 |
| $ | — | $ | — | $ | — |
| $ | 26 |
| $ | — |
| $ | 26 |
| |||||||
Segment assets as of December 31, 2002 | $ | 50,347 |
| $ | — | $ | 6,955 | $ | 9,257 |
| $ | 66,559 |
| $ | — |
| $ | 66,559 |
| |||||||
Fixed assets as of December 31, 2002 | $ | 20,431 |
| $ | — | $ | 854 | $ | 109 |
| $ | 21,394 |
| $ | — |
| $ | 21,394 |
|
11Page 13
Nine months ended Sept. 30, 2003 | ||||||||||||||||||||||||||||
EFT Processing | Prepaid Processing | Software Solutions | Corporate Services | Total Segments | Eliminations | Consolidated | ||||||||||||||||||||||
Total revenues | $ | 37,129 | $ | 86,096 | $ | 11,403 | $ | — | $ | 134,628 | $ | (326 | ) | $ | 134,302 | |||||||||||||
Direct operating cost | 16,601 | 69,668 | 715 | — | 86,984 | (122 | ) | 86,862 | ||||||||||||||||||||
Salaries and benefits | 9,552 | 4,261 | 6,868 | 1,951 | 22,632 | 1 | 22,633 | |||||||||||||||||||||
Selling, general and administrative | 1,100 | 2,490 | 2,005 | 2,834 | 8,429 | (166 | ) | 8,263 | ||||||||||||||||||||
Depreciation and amortization | 5,554 | 2,480 | 837 | 63 | 8,934 | (15 | ) | 8,919 | ||||||||||||||||||||
Total operating expenses | 32,807 | 78,899 | 10,425 | 4,848 | 126,979 | (302 | ) | 126,677 | ||||||||||||||||||||
Operating income (loss) | 4,322 | 7,197 | 978 | (4,848 | ) | 7,649 | (24 | ) | 7,625 | |||||||||||||||||||
Interest income | 20 | 748 | 4 | 154 | 926 | — | 926 | |||||||||||||||||||||
Interest expense | (502 | ) | (8 | ) | — | (4,848 | ) | (5,358 | ) | — | (5,358 | ) | ||||||||||||||||
Gain on sale of U.K. subsidiary | — | — | — | 18,001 | 18,001 | — | 18,001 | |||||||||||||||||||||
Income from unconsolidated investee companies | (1 | ) | 461 | — | (80 | ) | 380 | — | 380 | |||||||||||||||||||
Foreign exchange gain (loss), net | — | — | — | (5,231 | ) | (5,231 | ) | 38 | (5,193 | ) | ||||||||||||||||||
Total other (expense) income | (483 | ) | 1,201 | 4 | 7,996 | 8,718 | 38 | 8,756 | ||||||||||||||||||||
Income from continuing operations before income taxes and minority interest | $ | 3,839 | $ | 8,398 | $ | 982 | $ | 3,148 | $ | 16,367 | $ | 14 | $ | 16,381 | ||||||||||||||
Segment assets as of September 30, 2003 | $ | 42,527 | $ | 161,016 | $ | 6,693 | $ | 8,203 | $ | 218,439 | $ | — | $ | 218,439 | ||||||||||||||
Fixed assets as of September 30, 2003 | $ | 15,585 | $ | 1,920 | $ | 735 | $ | — | $ | 18,240 | $ | (26 | ) | $ | 18,214 | |||||||||||||
Nine months ended Sept. 30, 2002 | ||||||||||||||||||||||||||||
EFT Processing | Prepaid Processing | Software Solutions | Corporate Services | Total Segments | Eliminations | Consolidated | ||||||||||||||||||||||
Total revenues | $ | 38,864 | $ | — | $ | 13,850 | $ | — | $ | 52,714 | $ | (260 | ) | $ | 52,454 | |||||||||||||
Direct operating cost | 20,935 | — | 732 | — | 21,667 | (70 | ) | 21,597 | ||||||||||||||||||||
Salaries and benefits | 8,105 | — | 9,117 | 1,386 | 18,608 | — | 18,608 | |||||||||||||||||||||
Selling, general and administrative | 249 | — | 2,432 | 2,244 | 4,925 | (90 | ) | 4,835 | ||||||||||||||||||||
Depreciation and amortization | 6,209 | — | 731 | 40 | 6,980 | (50 | ) | 6,930 | ||||||||||||||||||||
Total operating expenses | 35,498 | — | 13,012 | 3,670 | 52,180 | (210 | ) | 51,970 | ||||||||||||||||||||
Operating income (loss) | 3,366 | — | 838 | (3,670 | ) | 534 | (50 | ) | 484 | |||||||||||||||||||
Interest income | 39 | — | 137 | 51 | 227 | — | 227 | |||||||||||||||||||||
Interest expense | (848 | ) | — | — | (3,959 | ) | (4,807 | ) | — | (4,807 | ) | |||||||||||||||||
Loss on facility sublease | — | — | (249 | ) | — | (249 | ) | — | (249 | ) | ||||||||||||||||||
Equity in losses from investee companies | (159 | ) | — | — | — | (159 | ) | — | (159 | ) | ||||||||||||||||||
Loss on early retirement of debt | — | — | — | (955 | ) | (955 | ) | — | (955 | ) | ||||||||||||||||||
Foreign exchange loss, net | 1,089 | — | — | (4,268 | ) | (3,179 | ) | — | (3,179 | ) | ||||||||||||||||||
Total other (expense) income | 121 | — | (112 | ) | (9,131 | ) | (9,122 | ) | — | (9,122 | ) | |||||||||||||||||
Income (loss) from continuing operations before income taxes and minority interest | $ | 3,487 | $ | — | $ | 726 | $ | (12.801 | ) | $ | (8,588 | ) | $ | (50 | ) | $ | (8,638 | ) | ||||||||||
Minority interest | $ | 77 | $ | — | $ | — | $ | — | $ | 77 | $ | — | $ | 77 | ||||||||||||||
Segment assets as of December 31, 2002 | $ | 50,347 | $ | — | $ | 6,955 | $ | 9,257 | $ | 66,559 | $ | — | $ | 66,559 | ||||||||||||||
Fixed assets as of December 31, 2002 | $ | 20,431 | $ | — | $ | 854 | $ | 109 | $ | 21,394 | $ | — | $ | 21,394 |
Total revenues for the three-monthnine-month periods ended March 31,September 30, 2003 and March 31,September 30, 2002, and long-lived assets as of March 31,September 30, 2003 and December 31, 2002 for the Company, summarized by geographical location, are as follows (unaudited, in thousands):
Revenues | Revenues | |||||||||||||||||||||||
For the three month ended March 31, | Long-lived Assets | For the nine month ended Sept. 30, | Long-lived Assets | |||||||||||||||||||||
2003 | 2002 | As of March 31, 2003 | As of December 31, 2002 | 2003 | 2002 | As of Sept.30, 2003 | As of Dec. 31, 2002 | |||||||||||||||||
United States | $ | 3,894 | $ | 4,908 | $ | 805 | $ | 854 | $ | 11,546 | $ | 13,850 | $ | 736 | $ | 854 | ||||||||
Germany |
| 3,139 |
| 2,553 |
| 2,721 |
| 2,741 | 10,102 | 8,546 | 2,354 | 2,741 | ||||||||||||
Poland |
| 3,681 |
| 2,963 |
| 7,199 |
| 8,223 | 12,077 | 9,212 | 6,607 | 8,223 | ||||||||||||
Hungary |
| 1,772 |
| 1,789 |
| 5,921 |
| 6,703 | 5,406 | 5,434 | 3,834 | 6,703 | ||||||||||||
U.K. |
| 12,244 |
| 3,009 |
| 1,061 |
| — | 62,526 | 10,337 | 1,150 | — | ||||||||||||
Australia |
| 5,126 |
| — |
| 774 |
| — | 24,864 | — | 568 | — | ||||||||||||
Czech Republic |
| 1,411 |
| 602 |
| 2,015 |
| 2,014 | 2,993 | 1,874 | 1,943 | 2,014 | ||||||||||||
Other |
| 1,833 |
| 1,216 |
| 764 |
| 859 | 4,788 | 3,201 | 1,022 | 859 | ||||||||||||
Total | $ | 33,100 | $ | 17,040 | $ | 21,260 | $ | 21,394 | $ | 134,302 | $ | 52,454 | $ | 18,214 | $ | 21,394 | ||||||||
Total revenues are attributed to countries based on location of customer for the EFT Processing and Prepaid Processing segments. All revenues generated by Software Solutions Segment activities are attributed to the United States. Long-lived assets consist of property, plant, and equipment, net of accumulated depreciation.
Page 14
NOTE 7—DISCONTINUED OPERATIONS
Sale of U.S. EFT Processing Business SALE OF HUNGARIAN ATM NETWORK
On January 4, 2002,September 12, 2003, the Company concluded an asset purchase agreement with Fidelity National Financial, Inc., formerly ALLTEL Information Systems (“FNF”), whereby EFT Network Services, LLC (also known as DASH) sold substantially allcompleted the sale of its assets272 Hungarian ATMs. The sale was made to FNFa large financial institution in Hungary for $6.8 millionconsideration of approximately $2.7 million. The carrying value of the network and expected expenses of sale, including incentive compensation, totaled approximately $1.9 million. The sale resulted in cash. DASH was a wholly owned subsidiary of Euronet USA Inc., which is a wholly owned subsidiary of Euronet Worldwide, Inc. The Company recorded a pre-taxpretax gain of approximately $4.8 million related to this transaction.
The$0.8 million. In connection with the sale, the Company also entered into a significant software licenselong-term outsourcing agreement and cash sponsorship arrangement with FNF. See Note 11 to the unaudited consolidated financial statements forpurchaser under terms the Company believes are no less favorable than other similar outsourcing and cash sponsorship agreements the Company is a descriptionparty to. Of the total proceeds, approximately $1.8 million was received at closing. The balance of approximately $0.9 million is due no later than 180 days from closing. Management has estimated the fair value of all aspects of the transaction, including the outsourcing and cash sponsorship agreements, and considered this in the determination of the calculation of the gain on sale of this agreement.ATM network.
Sale of France EFT Processing BusinessNOTE 8—INCOME TAX EXPENSES
On July 15, 2002, the Company sold substantially all of the non-current assets and capital lease obligations of its processing business in France to Atos. Non-current assets and capital lease obligations related to the France business have been removedIncome tax expense on income from continuing operations and classified under discontinued operations. The Company incurred a loss on disposal of the France business of $0.1 million.
As a result of the above, the results from operations from France and DASH have been removed from continuing operations from the three months ended March 31, 2002 in accordance with SFAS 144. France and DASH were previously reported in the EFT Processing Segment.
12
The summary operating results of discontinued operationswas $0.7 million for the three months ended March 31, 2002 are as follows (unaudited,September 30, 2003, and $2.3 million for the nine months ended September 30, 2003, representing an effective tax rate of 34.1% and 14.1% for each period, respectively. The effective tax rate of 34.1% for the third quarter of 2003 was due to the existence of taxable income in thousands):
For the three months ended March 31, 2002 | ||||||||||||
Dash | France | Total | ||||||||||
Total revenues | $ | 101 |
| $ | 194 |
| $ | 295 |
| |||
Total operating expenses |
| 3 |
|
| 301 |
|
| 304 |
| |||
Operating income/(loss) |
| 98 |
|
| (107 | ) |
| (9 | ) | |||
Other income/(expense) |
| — |
|
| (74 | ) |
| (74 | ) | |||
Gain on disposal |
| 4,845 |
|
| — |
|
| 4,845 |
| |||
Total other income/(expense) |
| 4,845 |
|
| (74 | ) |
| 4,771 |
| |||
Net income before taxes |
| 4,943 |
|
| (181 | ) |
| 4,762 |
| |||
Income tax expense |
| (1,857 | ) |
| — |
|
| (1,857 | ) | |||
Net income/(loss) of discontinued operations | $ | 3,086 |
| $ | (181 | ) | $ | 2,905 |
| |||
NOTE 8—STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for its stock-based employee compensation plans undercertain tax jurisdictions partially offset by the recognition and measurement principles of Accounting Principles Board Opinion No. 25,a tax benefit resulting from a European Court of Justice decision in a Netherlands tax case that impacts the Company’s Netherlands-based holding company. Losses incurred in certain other tax jurisdictions did not meet the requirements of SFAS 109 “Accounting for Stock IssuedIncome Tax” for tax benefit recognition. The effective tax rate of 14.1% for the nine-month period ended September 30, 2003, was lower than the quarterly effective tax rate, primarily due to Employees” and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any,non-taxable gain on the sale of the fair market value of the Company’s shares at the date of the grant over the exercise price.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” to stock-based employee compensation (in thousands, except per share data):
For the three months ended March 31, | ||||||||
2003 | 2002 | |||||||
Net income, as reported | $ | 15,421 |
| $ | 3,580 |
| ||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
| (1,197 | ) |
| (827 | ) | ||
Pro forma net income | $ | 14,224 |
| $ | 2,753 |
| ||
Earnings per share: | ||||||||
Basic—as reported | $ | 0.61 |
| $ | 0.16 |
| ||
Basic—pro forma | $ | 0.56 |
| $ | 0.12 |
| ||
Diluted—as reported | $ | 0.57 |
| $ | 0.14 |
| ||
Diluted—pro forma | $ | 0.53 |
| $ | 0.11 |
|
Pro forma impact reflects only options granted since December 31, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflectedU.K. ATM network in the pro forma amounts presented above because compensation cost is reflected over the options’ vesting periods and compensation cost for options granted prior to January 1, 1996 is not considered.first quarter 2003.
NOTE 9—CREDIT FACILITIES
As of March 31,September 30, 2003, banks have issued standby letters of credit on the Company’s behalf amounting to $3.1$4.0 million. These letters of credit are fully secured by cash deposits held by the respective issuing banks. This cash is classified as restricted cash as of March 31,September 30, 2003.
13
The Company has lines of credit totaling $0.5$1.3 million to meet cash requirements for the startup of our India market. The lines of credit are fully collateralized by a portion of those letters of credit described above.
NOTE 10—RELATED PARTY TRANSACTIONS
In February 2003, the Company paid approximately $74.8 million to the former shareholders of e-pay. The amount paid to the shareholders consisted of approximately $30.0 million in cash at closing, $18.0 million through issuance at closing of 2,497,504 shares of Euronet common stock, and the remaining $26.9 million in deferred cash consideration or promissory notes executed at closing with 24 month maturity dates bearing interest rates ranging from 6% to 8%. Ten of these former shareholders are now employees and/or officers of Euronet. Paul Althasen, a former shareholder of e-pay and current nominee formember of Euronet’s Board of Directors, received $15.4 million in total consideration consisting of cash, common stock, and notes payable for his ownership in
e-pay. Subsequent to September 30, 2003, the remaining $4.0 million of the original $8.5 million e-pay acquisition deferred cash consideration was paid in full.
For the three-monthnine-month period ended March 31,September 30, 2003, the Company recorded $0.1$0.2 million in revenue related to Europlanet,EuroPlanet a.d. (“EuroPlanet”); a 36% owned joint-venturejoint venture operating ATMs in the Federal Republic of Serbia. EuroPlanet was incorporated in the Federal Republic of Serbia, and 36% of the shares are owned by our wholly owned subsidiary EFT Services Holdings BV. EuroPlanet was formed to own and/or operate and manage ATM machines and point of sale terminals both for the joint venture’s own account and the account of customer banks. The Company accounts for EuroPlanet using the equity method of accounting.
NOTE 11—SIGNIFICANT SOFTWARE LICENSE AGREEMENT
In January 2002, the Company entered into a significant software license agreement (the “License Agreement”), whereby the Company granted FNFALLTEL Information Systems (currently known as Fidelity National Financial, Inc. (“FNF”)) a nonexclusive license to use, distribute and develop versions 1.5 and 2.2 of our GoldNet ATM Network Processing Software (“GoldNet Software”). Under the terms of the License Agreement, FNF agreed to pay license, professional services and maintenance fees of $5.0 million. In January 2002, 50% of the license fees were received, with remaining payments of 40% upon acceptance of the software (received in July 2002), and 10% twelve months from the date of the agreement (received in January 2003). The License Agreement does not restrict the ability of Euronet USA to continue to sell its GoldNet Software, except that Euronet USA may not sell to former DASH
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customers or new FNF network processing customers. Revenue from the license fee and related services will be recognized under the percentage of completion contract accounting method. WeThe Company recognized $0.2 million in revenues related to the License Agreement during the three months ended March 31,September 30, 2003, and $1.6$0.3 million during the nine months ended September 30, 2003. The Company recognized $0.6 million in revenues related to the License Agreement during the three months ended March 31,September 30, 2002, and $3.5 million during the nine months ended September 30, 2002. Approximately $0.9$0.2 million of revenues remain to be earned and recognized related to the License Agreement; $0.5 million of which will be earned and recognized during the remainder of 2003 and $0.4 million of which has no specific recognition period.Agreement.
NOTE 12—RESTRICTED CASH
As of March 31,September 30, 2003, the Company has $38.0$43.4 million of restricted cash, of which $33.2$38.1 million is related to the administration of customer collection and vendor remittance activities in the Prepaid Processing Segment. The Company is responsible for the collection of cash receipts from the retailer for subsequent remittance to the telecommunication provider. Cash is collected and held in designated trust accounts classified as restricted cash balances that are not available for our operating business activities. The remaining $4.8$5.3 million is held as security with respect to cash provided by banks participating in ourthe Company’s ATM network or standby letters of credit.
NOTE 13—RECLASSIFICATION
Beginning in January 2003, the Company changed its business segment reporting to better align its financial reporting with its business operations and reflect the acquisition of e-pay. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related information” (SFAS 131), all prior segment information has been restated to conformconformed to this new financial reporting presentation.
All operating amounts, ATM counts, transaction numbers and statistics reported in this filing exclude France and DASH, which were sold in 2002.2002 discontinued operations.
14
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
OVERVIEW |
Euronet Worldwide, Inc. is a leading provider of secure electronic financial transaction solutions. We provide financial payment middleware, financial network gateways, outsourcing, and consulting services to financial institutions, retailers and mobile phone operators.
Significant Events
During the threenine months ended March 31,September 30, 2003, we entered into twofour transactions that will significantly impact our future operating results.are further described in the discussion and analysis that follows.
First, in January 2003, we sold our U.K. ATM network for $29.4 million and simultaneously signed an ATM outsourcing agreement with the buyer. Since then, we have operated the ATMs in that network under a five-year outsourcing agreement. This transaction is discussed more fully in the EFT Processing Segment discussion below and in Note 5 to the unaudited consolidated financial statements.
Second, in February 2003, we acquired e-pay Ltd., an electronic payments processor of prepaid mobile phone airtime “top-up” services in the U.K and Australia. e-pay has agreements with mobile operators in those markets under which it supports the distribution of airtime to their subscribers through point-of-sale (POS) terminals in retail outlets. This transaction is discussed more fully in the Prepaid Processing Segment discussion below and in Note 4 to the unaudited consolidated financial statements.
Third, on September 22, 2003, we purchased all of the assets and assumed certain liabilities of Austin International Investments and Marketing, Inc. (AIM), a Kansas corporation. AIM is a U.S. based electronic “top up” company, selling prepaid services via point of sale terminals in 36 states on approximately 1,900 POS terminals. This transaction is discussed more fully in the Prepaid Processing Segment discussion and in Note 4 to the unaudited consolidated financial statements. Generally, this business will operate as part of the U.S.-based prepaid service branded as PaySpot.
Fourth, in September 2003, we sold our 272 Hungarian ATMs for approximately $2.7 million to a large financial institution in Hungary, and simultaneously entered into a multi-year outsourcing agreement and cash sponsorship arrangement with the buyer. We
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will continue to operate that ATM network through the outsourcing agreement. This transaction is discussed more fully in the EFT Processing Segment and in Note 7 to the unaudited consolidated financial statements.
Business Summary
We process transactions for a network of 2,9943,254 automated teller machines (ATMs) acrossthat we own or operate for others in Europe (and until January 2002 in the United States). Through our subsidiary, e-pay Ltd., weand India. We operate a network of POS terminals providing electronic processing of prepaid mobile phone airtime (“top-up”) services in the U.K.U.K, Australia, New Zealand, Ireland, Poland and Australia.the U.S. Through our software subsidiary, Euronet USA, Inc. (“Euronet USA”), we offer a suite of integrated electronic fund transfer (EFT) software solutions for electronic payment and transaction delivery systems. Our principal customers are banks, mobile phone operators and retailers that require electronic financial transaction processing services. We provide comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM management solutions, electronic recharge services (for prepaid mobile airtime) and integrated EFT software solutions. Our solutions are used in more than 60 countries around the world. As of March 31,September 30, 2003, we had nineten offices in Europe, two in the United States and one each in India, Indonesia, Egypt, and Australia.
Throughout 2002 and continuing in 2003, Euronet has focused on product developments that would add transaction functionality via new and existing products, including mobile banking, event messaging and the new Electronic Recharge line, which enables purchasing prepaid mobile airtime from ATMs, POS terminals and directly from the mobile handset.
In 2002, we opened a small office in Slovakia to support expanding efforts in Central Europe during 2003. We also entered India, one of the largest emerging markets for ATM and card growth potential. In the India market, we will focus on ATM outsourcing and electronic recharge products for replenishing prepaid mobile airtime.
Effective for the quarter ended March 31, 2003, we changed our segment reporting by adding a third segment, the Prepaid Processing Segment, as a result of our acquisition of e-pay. In addition, due to the e-pay acquisition and the sale of our U.K. subsidiary, the we will no longer provide geographic sub-segment information because we believe this information is not material to EFT Processing Segment disclosure.
As of March 31,September 30, 2003, we operated in three principal business segments:
15
We also operate a “Corporate Services Segment” that provides our three business segments with corporate and other administrative services that are not directly identifiable with them. The accounting policies of each segment are the same as those referenced in the summary of significant accounting policies. We evaluate performance of our segments based on income or loss from continuing operations before income taxes, foreign exchange gain (loss), and minority interest.interest, excluding nonrecurring gains and losses.
SEGMENT SUMMARY RESULTS OF OPERATIONS
Three months ended March 31, (unaudited, in thousands) | Three months ended Sept. 30, | |||||||||||||||||||||||||||||||
Revenues | Operating Income/(loss) | Revenues | Operating Income (Loss) | |||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||||||
EFT Processing | $ | 11,961 |
| $ | 12,177 |
| $ | 831 |
| $ | 237 |
| $ | 12,925 | $ | 13,753 | $ | 2,297 | $ | 1,084 | ||||||||||||
Prepaid Processing |
| 17,372 |
|
| — |
|
| 1,524 |
|
| — |
| 36,532 | — | 2,957 | — | ||||||||||||||||
Software Solutions |
| 3,894 |
|
| 4,908 |
|
| 242 |
|
| 1,222 |
| 3,659 | 4,181 | 364 | (434 | ) | |||||||||||||||
Corporate Services |
| — |
|
| — |
|
| (1,451 | ) |
| (1,313 | ) | — | — | (1,927 | ) | (1,273 | ) | ||||||||||||||
Total |
| 33,227 |
|
| 17,085 |
|
| 1,146 |
|
| 146 |
| 53,116 | 17,934 | 3,691 | (623 | ) | |||||||||||||||
Inter segment eliminations |
| (127 | ) |
| (45 | ) |
| 5 |
|
| — |
| ||||||||||||||||||||
Inter-Segment Eliminations | (55 | ) | (45 | ) | (1 | ) | 8 | |||||||||||||||||||||||||
Total | $ | 33,100 |
| $ | 17,040 |
| $ | 1,151 |
| $ | 146 |
| $ | 53,061 | $ | 17,889 | $ | 3,690 | $ | (615 | ) | |||||||||||
Nine months ended Sept. 30, | ||||||||||||||||||||||||||||||||
Revenues | Operating Income (Loss) | |||||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||||||||||
EFT Processing | $ | 37,129 | $ | 38,864 | $ | 4,322 | $ | 3,366 | ||||||||||||||||||||||||
Prepaid Processing | 86,096 | — | 7,197 | — | ||||||||||||||||||||||||||||
Software Solutions | 11,403 | 13,850 | 978 | 838 | ||||||||||||||||||||||||||||
Corporate Services | — | — | (4,848 | ) | (3,670 | ) | ||||||||||||||||||||||||||
Total | 134,628 | 52,714 | 7,649 | 534 | ||||||||||||||||||||||||||||
Inter-Segment Eliminations | (326 | ) | (260 | ) | (22 | ) | (50 | ) | ||||||||||||||||||||||||
Total | $ | 134,302 | $ | 52,454 | $ | 7,627 | $ | 484 | ||||||||||||||||||||||||
Recurring and Non-Recurring Items
The following is a summary of certain significant recurring and non-recurring items and a reference to their location in this Management Discussion. This summary is provided to assist the reader in locating the detailed discussion on these matters.
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Description of Item | Management Discussion Page Reference | |
Gain on sale of U.K. ATM network | Page 18 and 28 | |
Gain on sale of Hungary ATMs | Page 21 | |
Non-recurring contract termination fee | Page 19 | |
Foreign exchange loss/gain | Page 28 | |
Income tax expense/benefit | Page 28 | |
Interest expense | Page 28 |
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2003 AND MARCH 31, 2002THE NINE MONTHS ENDED SEPTEMBER 30, 2003
EFT PROCESSING SEGMENT
Three months ended March 31, (unaudited, in thousands) | Three months ended Sept. 30, 2003 Entire Segment | Pro forma: Three months ended Sept. 30, 2002 | ||||||||||||||||||
2003 | 2002 | |||||||||||||||||||
EFT Processing (unaudited, in thousands) | Three months ended Sept. 30, 2003 Entire Segment | Entire Segment as Reported | Effects of U.K. Transaction | Adjusted for U.K. Processing | ||||||||||||||||
Total revenues | $ | 11,961 | $ | 12,177 | $ | 13,753 | $ | (3,438 | ) | $ | 10,315 | |||||||||
Direct operating cost |
| 5,765 |
| 6,614 | 4,932 | 7,622 | (2,519 | ) | 5,103 | |||||||||||
Salaries and benefits |
| 3,067 |
| 3,056 | 3,463 | 2,914 | (409 | ) | 2,505 | |||||||||||
Selling, general and administrative |
| 452 |
| 235 | 399 | (62 | ) | 125 | 63 | |||||||||||
Depreciation and amortization |
| 1,846 |
| 2,035 | 1,834 | 2,195 | (520 | ) | 1,675 | |||||||||||
Total operating expenses |
| 11,130 |
| 11,940 | 10,628 | 12,669 | (3,323 | ) | 9,346 | |||||||||||
Operating income | $ | 831 | $ | 237 | $ | 2,297 | $ | 1,084 | $ | (115 | ) | $ | 969 | |||||||
Nine months ended Sept. 30, 2003 Entire Segment | Pro forma: Nine months ended Sept. 30, 2002 | |||||||||||||||||||
EFT Processing (unaudited, in thousands) | Entire Segment as Reported | U.K. Processing | Adjusted for U.K. Processing | |||||||||||||||||
Total revenues | $ | 37,129 | $ | 38,864 | $ | (9,054 | ) | $ | 29,810 | |||||||||||
Direct operating cost | 16,601 | 20,935 | (6,425 | ) | 14,510 | |||||||||||||||
Salaries and benefits | 9,552 | 8,105 | (1,202 | ) | 6,903 | |||||||||||||||
Selling, general and administrative | 1,100 | 249 | 17 | 266 | ||||||||||||||||
Depreciation and amortization | 5,554 | 6,209 | (1,341 | ) | 4,868 | |||||||||||||||
Total operating expenses | 32,807 | 35,498 | (8,951 | ) | 26,547 | |||||||||||||||
Operating income | $ | 4,322 | $ | 3,366 | $ | (103 | ) | $ | 3,263 | |||||||||||
Sale of U.K. ATM Network
In January 2003, we sold our U.K. ATM network and simultaneously signed an ATM outsourcing agreement with the buyer.buyer of the network. We willnow operate the ATMs in that network under a five-year outsourcing agreement. With this transaction, weWe sold our U.K subsidiary, and with this transaction, all employees working in that subsidiary were transferred to the buyer. The results of operations of the U.K. ATM network operations continue to be included in continuing operations due to the ongoing revenues to be generated by the
16
outsourcing agreement. This transaction is more fully described in Note 5 to the unaudited consolidated financial statements. See the discussion below where the effects of this transaction on revenues and operating income are more fully described.
In order to provide a more meaningful comparison of the results for the three- and nine-month periods ended September 2003 compared to the same periods for 2002, we have provided a “Pro forma” schedule above that adjusts the 2002 income and expense to exclude the U.K. ATM network business and include the benefits of the outsourcing agreement as if it were in effect for those periods. This presentation is consistent with our presentation in the 8-K filing we made on January 17, 2003 relating to the sale of the U.K. ATM network.
Revenues
Total segment revenues decreased 2%6% or $0.2$0.9 million to $12.0$12.9 million for the three months ended March 31,September 30, 2003 from $12.2$13.8 million for the three months ended March 31,September 30, 2002. The decreaseTotal segment revenues decreased 4% or $ 1.8 million to $37.1 million for the nine months ended September 30, 2003 from $38.9 million for the nine months ended September 30, 2002.
As shown in the schedule above, if 2002 U.K. ATM network revenues isare excluded and the related outsourcing revenues are included in the comparative amounts due primarily to the sale of ourthe U.K. subsidiary, substantially offset byATM network in January 2003, revenues increased 25% for the three months
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ended September 30, 2003 and 25% for the nine months ended September 30, 2003 over the three and nine months ended September 30, 2002.
Included in revenues for the nine months ended September 30, 2003 are approximately $1.0 million in one-time revenues, including a one-time contract termination fee onof approximately $0.8 million for a signed but not implemented contract anthat was terminated before implementation. Increases in ATMs under management and in transactions are the primary reasons for the increase in transaction volumes fromrevenues as further quantified below. Certain new ATMsATM driving contracts and network sharingparticipation agreements and foreign exchange fluctuations. were implemented in the final nine months of 2002 that contributed to transaction growth.
We operated 2,5482,951 ATMs as of March 31September 30, 2002 and processed 15.656.5 million transactions for the threenine months ended March 31,September 30, 2002. As of March 31, 2003, weWe increased the number of ATMs we operateoperated by 446303 ATMs, or 18%10%, from March 31,September 30, 2002 to a total of 2,994 ATMs. At March 31,3,254 ATMs as of September 30, 2003. On September 30, 2003, we own 37%owned 26% of these ATMs (excluding those leased by us in connection with outsourcing agreements), while the remaining 63% are74% were operated under management outsourcing agreements. Transactions on machines owned or operated by us totaled 23.481.5 million transactions for the threenine months ended March 31,September 30, 2003, an increase of 7.824.0 million, or 50%44% over the threenine months ended March 31,September 30, 2002. The increase in transaction growth iswas greater than the increase in ATM growth and revenue growth. This iswas the result of an increase in the number of ATMs that we operate under ATM management outsourcing agreements relative to ATMs we own during this period.period together with increasing the number of ATM-based prepaid telecommunication recharge transactions. The revenues generated from ATM management agreements often have a substantial monthly recurring fee as compared to a per transaction fee for our owned ATMs. This recurringstructure fee generatesgenerated both fixed and variable revenue components. As a result, transactions on these machines increaseincreased faster than the revenues.
Of total segment revenue, approximately 57% is56% was from ATMs we owned (excluding those leased by us in connection with outsourcing agreements) for the threenine months ended March 31,September 30, 2003 and 66%60% for the threenine months ended March 31, 2002. This movement results fromSeptember 30, 2002 as adjusted for the sale of the U.K. ATM network and the simultaneous signing of therelated outsourcing agreement, offset by increases in revenue generated from our proprietary networks in Poland and Germany through network participation agreements and rate increases.agreement. We believe theour strategy to shift from a largely proprietary, Euronet-owned ATM network to a more balanced mix between proprietary ATMs and ATMs operated under outsourcing agreement, is a positive development andagreements will provide higher marginal returns on investments. Customer ownedCustomer-owned ATMs operated under service agreements require a nominal up frontup-front capital investment because we do not purchase the ATMs are not purchased by us.ATMs. Additionally, in many instances operating costs are the responsibility of the owner and, therefore, recurring operating expenses per ATM are lower.
We generally charge fees for four types of ATM transactions that are currently processed on our ATMs:
Transaction fees for cash withdrawals vary from market to market but generally range from $0.60 to $2.50$2.70 per transaction. Transaction fees for the other three types of transactions are generally substantially less. We include in EFT Processing Segment revenues transaction fees payable under the electronic recharge solutions that we distribute through our ATMs. Fees for recharge transactions vary substantially from market to market and are based on the specific prepaid solution and the denomination of prepaid hoursusage purchased. Generally, transaction fees vary from $0.40 to $1.80 per prepaid mobile recharge purchase and are shared with the financial institution and the mobile operator. Any or all of these fees may come under pricing pressure in the future.
Operating Expenses
Total segment operating expenses decreased 7%16%, or $0.8$2.1 million to $11.1$10.6 million for the three months ended March 31,September 30, 2003 from $11.9$12.7 million for the three months ended March 31,September 30, 2002. The decrease is primarilyTotal segment operating expenses decreased 8%, or $2.7 million to $32.8 million for the nine months ended September 30, 2003 from $35.5 million for the nine months ended September 30, 2002.
As shown in the schedule above, if the 2002 U.K. ATM operating expenses are excluded from the comparative figures due to the sale of ourthe U.K. ATM network offset by anin January 2003, operating expenses increased 14% for the three months ended September 30, 2003 over the three months ended September 30, 2002 and 24% for the nine months ended September 30, 2003 over the nine months ended September 30, 2002.
The increase in direct operating costs supporting revenueexpenses is primarily the result of additional expense to support increases in transactions and ATMs. Additionally, salaries increased to support our operational growth during the period and market development costcosts in Asia. Costs in Asia were approximately $0.6 million for the Asia-Pacific markets.three months ended September 30, 2003 and $1.7 million for the nine months ended September 30, 2003.
17
Page 19
Direct operating costs in the EFT Processing Segment representinclude the costs of goods and services related to processing revenues and consist primarily of:of six categories shown in the table below.
If the 2002 U.K. ATM installationdirect operating costs
These costs decreased 13% are excluded from the first quarter 2002 to the first quarter 2003. This decrease is primarily attributablecomparative amounts due to the sale of ourthe U.K. ATM network, offsetdirect operating costs decreased by 3% for the three months ended September 30, 2003 compared to the three months ended September 30, 2003 and increased cost ofby 14% compared to the nine months ended September 30, 2002.
The increased operating expenses are primarily due to the increased number of ATMs and transactions, as mentioned in the revenue discussion above. Also, allocationsAllocations within the Euronet operating companies wereare made to charge the ATM network operations for transaction switching fees and bank connection fees incurred by our central processing center in Budapest;Budapest. After excluding U.K. processing and monitoring expenses, these direct operating costs included allocations of $1.1fees increased $0.3 million and $1.2to $1.4 million for the three months ended March 31,September 30, 2003 from $1.1 million for the three months ended September 30, 2002 and March 31, 2002, respectively.increased by $0.6 million to $3.6 million for the nine months ended September 30, 2003 from $3.0 million for the nine months ended September 30, 2002.
The components of direct operating costs for the three and nine months ended March 31,September 30, 2003 and September 30, 2002 were:
Three months ended March 31, (unaudited, in thousands) | |||||||||||||||||||
EFT Processing (unaudited, in thousands) | Three months Sept. 30, | Proforma: Three months ended Sept. 30, | |||||||||||||||||
2003 | 2002 | 2002 | 2002 | ||||||||||||||||
2003 | 2002 | Entire Segment | Entire Segment as Reported | U.K. Processing | Adjusted without U.K. Processing | ||||||||||||||
ATM communication | $ | 810 | $ | 1,001 | $ | 789 | $ | 1,057 | $ | 292 | $ | 765 | |||||||
ATM cash filling and interest on network cash |
| 1,255 |
| 1,711 | 976 | 1,877 | 678 | 1,199 | |||||||||||
ATM maintenance |
| 927 |
| 1,015 | 895 | 1,269 | 355 | 914 | |||||||||||
ATM site rental |
| 692 |
| 783 | 694 | 1,005 | 398 | 607 | |||||||||||
ATM installation |
| 163 |
| 152 | 195 | 193 | 90 | 103 | |||||||||||
Transaction processing and ATM monitoring |
| 1,484 |
| 1,310 | 1,726 | 1,697 | 315 | 1,382 | |||||||||||
All other |
| 434 |
| 642 | (343 | ) | 524 | 391 | 133 | ||||||||||
Total direct operating costs | $ | 5,765 | $ | 6,614 | $ | 4,932 | $ | 7,622 | $ | 2,519 | $ | 5,103 | |||||||
EFT Processing (unaudited, in thousands) | Nine months Sept. 30, | Proforma: Nine months ended Sept. 30, | |||||||||||||||||
2003 | 2002 | 2002 | 2002 | ||||||||||||||||
Entire Segment | Entire Segment | U.K. Processing | Adjusted without U.K. Processing | ||||||||||||||||
ATM communication | $ | 2,389 | $ | 3,013 | $ | 767 | $ | 2,246 | |||||||||||
ATM cash filling and interest on network cash | 3,476 | 5,340 | 1,880 | 3,460 | |||||||||||||||
ATM maintenance | 2,814 | 3,264 | 835 | 2,429 | |||||||||||||||
ATM site rental | 2,095 | 2,664 | 963 | 1,701 | |||||||||||||||
ATM installation | 554 | 487 | 213 | 274 | |||||||||||||||
Transaction processing and ATM monitoring | 4,672 | 4,739 | 858 | 3,881 | |||||||||||||||
All other | 601 | 1,428 | 909 | 519 | |||||||||||||||
Total direct operating costs | $ | 16,601 | $ | 20,935 | $ | 6,425 | $ | 14,510 | |||||||||||
As a percentage of this segment’s revenue,The following discussion and analysis again compares certain direct operating costs, fellsalaries, selling, general and administrative costs as well as depreciation costs and performance ratios for 2003 to 2002 excluding the U.K. processing business expenses. We sold the U.K. ATM network in January 2003 and thus there are no comparable expenses in the three and nine-month periods ended September 30, 2003. We believe this presentation provides a more comparable cost structure for analysis of the changes between the periods.
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Direct operating costs decreased from 54%52% of revenues for the three months ended March 31,September 30, 2002 to 48%38% of revenues for the three months ended March 31,September 30, 2003, and decreased from 49% for the nine month periods ending September 30, 2002 to 45% of revenues for the nine months ended September 30, 2003. Excluding the one-time$0.2 million and $0.8 million in one-time contract termination fee,fees and other one-time revenues for the nine months ended September 30, 2003, and excluding a gain of $1.0 million ($0.8 million net of related incentive payments reported in salaries and benefits) from the sale of ATMs that we own in Hungary, direct operating costs for the quarter ended March 31, 2003 were 52%46% of this segment’s revenue. Onrevenue for the three months ended September 30, 2003 and 49% for the nine months ended September 30, 2003. Also excluding one-time fees and gains on a per-ATM basis, the direct operating costs fell 26%rose 5% from $2,596$1,729 per ATM for the three months ended March 31,September 30, 2002 to $1,926$1,823 per ATM for the three months ended March 31,September 30, 2003, and rose 10% from $4,917 per ATM for the nine months ended September 30, 2002 to $5,409 per ATM for the nine months ended September 30, 2003. This increase is primarily due to the increased number of transactions for the three- and nine-month periods ended September 2003 as compared to the same periods in 2002. See Note 7 to the unaudited consolidated financial statements for more information. The rate of increase in direct operating costs is less than the rate of increase in transactions due to the fact that certain costs are fixed or under contract as more fully described below.
Costs per transaction have decreased because of the combination of increasing transaction volumes onat existing sites with a large fixed direct operating cost structure oncomponent at these sites. On a per-transaction basis, the direct operating costs fell 42%30% from $0.42$0.23 per transaction for the three months ended March 31,September 30, 2002 to $0.25$0.16 per transaction for the three months ended March 31,September 30, 2003. Direct operating costs fell 19% from $0.25 per transaction for the nine months ended September 30, 2002 to $0.20 per transaction for the nine months ended September 30, 2003. Increasing transaction volumes on existing sites that have fixed direct operating expenses decreases our costs per ATM and per transaction. In addition, there was an increase in the number of ATMs that we operate under ATM management agreements increased, as compared to ATMs we own, including those in the U.K. ATM network that were previouslyshifted from owned by us.to outsourced ATMs. These ATMs generally have lower direct operating expenses (telecommunications, cash delivery, security, maintenance and site rental) because, depending on the customer, our ATM management agreements cause usshift to bearthe customer some but not necessarily all expenses required to operate the ATM. For example, in the U.K. ATM network there were approximately $1.9$6.4 million in direct operating expenses were in the first quarter ofnine months ended September 30, 2002 that were no longer incurred in the first quarter ofnine months ended September 30, 2003 as a result of the sale of the UKU.K. business and the simultaneous signing of the ATM outsourcing agreement. Finally, segment operating costs increased during the quarter ended March 31, 2003 over the quarter ended March 31, 2002 due to foreign currency fluctuations.
Segment salaries and benefits were $3.1$3.5 million for the three-month periodsperiod ended March 31,September 30, 2003 and March 31,$2.5 million for the three months ended September 30, 2002. Segment salaries and benefits decreased $0.4were $9.6 million for the nine-month period ended September 30, 2003 and $6.9 million for the nine-month period ended September 30, 2002. Segment salaries and benefits increased 38% for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002 and increased 38% for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002 due to the sale of our U.K. subsidiary and the transfer of the employees to the buyer, offset by thean increase of staff levels in our AsiaAsian markets as well as certain incentive compensation related to recent contracts and at the Budapest processing center whichexpected achievement of certain performance objectives in 2003 that were required to maintain quality servicenot achieved in line with rising transaction volumes.2002. As a percentage of this segment’s revenue, salaries and benefits increased to 27% for the three months ended September 30, 2003 from 25% for the three months ended March 31,September 30, 2002 and also increased to 26% for the nine months ended September 30, 2003 from 24% for the nine months ended September 30, 2002. Excluding one-time expenses of $0.2 million for bonuses for the three months ended March 31, 2003. ExcludingSeptember 30, 2003 and excluding one time revenues and the one-time $0.8one time expenses of $1.0 million contract termination fee,and $0.2 million respectively, for the nine months ended September 30, 2003, segment salary and benefits for the quarter ended March 31,September 30, 2003 were 28% of this segment’s revenue and for the nine months ended September 30, 2003 were 26% of segment revenue.
Selling, general and administrative costs of the EFT Processing Segment ofincreased by $0.3 million to $0.4 million increased $0.2 million fromfor the three months ended March 31,September 30, 2003 from $0.1 million for the three months ended September 30, 2002. Selling, general and administrative costs increased by $0.8 million to $1.1 million for the nine months ended September 30, 2003 from $0.3 million for the nine months ended September 30, 2002. This
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increase is largely the result of market development expenses in our Asia-Pacific business and general and administrative expense at the Budapest processing center required to maintain quality of service in line with rising transaction volumes, offset by $0.3 million due to the sale of our U.K. ATM network.Asian business.
Depreciation and amortization decreased $0.2increased 9% by $0.1 million to $1.8 million for the three months ended March 31, 2003.September 30, 2003 from $1.7 million the three months ended September 30, 2002 and increased 14% by $0.7 million to $5.6 million for the nine months ended September 30, 2003 from $4.9 million for the nine months ended September 30, 2002. This decreasechange is due to the sale of our U.K. network, offset by the increase in deprecationdepreciation of the new computer and system facilities at our European operations centerOperations Center in Budapest, which was placed in service in third quarter 2002, and increasedoffset by a decrease in depreciation of ATMs as a result of certain machines reaching the end of their depreciation lives. Finally, the shift from owned to outsourced ATMs will continue to result in service as compared to the previous periods.lower depreciation levels.
Operating Income
As a result of the factors discussed above and including the $0.8 million contract termination fee, theThe EFT Processing Segment as a whole improved operating income by $0.6$1.3 million as compared to the same three-month period last year, reporting operating income of $0.8$2.3 million for the three months ended March 31,September 30, 2003 from $1.1 million (including the U.K. ATM network business) for the three months ended September 30, 2002. The EFT Processing Segment improved operating income by $0.9 million to $4.3 million for the nine months ended September 30, 2003 from $3.4 million (including the U.K. ATM network business) for the nine months ended September 30, 2002.
As shown in the schedule above, if the 2002 U.K. ATM operating income and expenses are excluded from the comparative figures due to the sale of the U.K. ATM network in January 2003, operating income improved by $1.3 million to $2.3 million for the three
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months ended September 30, 2003 as compared to operating income of $0.2$1.0 million for the three months ended March 31,September 30, 2002 and operating income improved by $1.0 million to $4.3 million for the nine months ended September 30, 2003 as compared to $3.3 million for the nine months ended September 30, 2002. Foreign currency fluctuations had a minimal effect on the change
These increases in operating income betweenfor the periods.three- and nine-month periods are due to the factors mentioned in the discussion and analysis above, with the following two specific items contributing significantly to the increases.
We are pursuing new business opportunities in Asia. If we are successful, as we expect to be, in securing required regulatory and other approvals to provide our services there, we will incur start-up expenses in 2003 that will exceed the amount of revenues we generate there for several quarters. Operating expenses are expected to exceed revenues by approximately $2.0$1.1 million over the next 12 to 15 months as we commence and expand operations in Asia. Capital expenditures over the same
period are expected to be approximately $0.6$0.8 million related to these operations.
As part of an overall change in our financial budgeting procedures, commencing in the year 2003, we will establish the level of our expenditures for the EFT Processing Segment based on “base line” revenue assumptions that take into account only revenues from contracted business, without consideration of any new potential business. We expect that this approach will improve our ability to keep costs in line with revenues.
PREPAID PROCESSING SEGMENT
Purchase of e-pay
In February 2003, the Companywe purchased 100% of the share capital of e-pay, an electronic payments processor of prepaid mobile phone airtime “top-up” services in the U.K. and Australia. This transaction is more fully described in Note 4 to the unaudited consolidated financial statements.
Purchase of AIM
On September 22, 2003 we purchased all of the assets and assumed certain liabilities of AIM, a U.S.-based electronic “top up” company, selling prepaid services via point of sale terminals in 36 states on approximately 1,900 POS terminals. This transaction is discussed more fully in the Prepaid Processing Segment discussion and in Note 4 to the unaudited consolidated financial statements. Generally, this business will operate as part of the U.S.-based prepaid service branded as PaySpot.
Business Overview
The business of Prepaid Processing is the distribution of prepaid mobile phone minutes to consumers through a network of point of sale (POS) terminals and direct connections to the electronic payment systems of retailers. We enter into agreements with mobile phone operators in certain geographical markets and connect directly to the mobile phone operators’ back office systems. In others markets (such as the U.S.), we receive mobile phone time through the electronic delivery by mobile operators or the purchase from other sources of phone time through PIN numbers that release airtime to the mobile phone of the customers concerned. We then distribute the mobile phone time through an electronic network either through a direct credit from the mobile operator to the mobile phone, or sales of PINs. The business has grown rapidly over the past year as new retailers have been added and prepaid airtime has switched from physical vouchers to distribution by electronic means.
Our Prepaid Processing Segment consists of e-pay operations in the U.K., Australia, New Zealand and Ireland, together with e-pay’s joint venture in Malaysia, which serves the Malaysian and Indonesian markets. This segment also includes operations in Poland managed by our subsidiary there and PaySpot, Inc. (PaySpot) a newly formed U.S.-based prepaid top-up company, which recently acquired AIM. Because the AIM acquisition was completed on September 22, 2003, minimal income and expenses for AIM or the U.S. market are included in management’s discussion and the analysis of results below.
We maintain contractual relationships with the retailers or networks that operate the POS terminals through which we distribute PINs. Our agreements with major retailers generally are multi-year agreements, whereas agreements with small retailers are terminable on three months notice. In Europe, we generally provide the POS terminals free of charge and incur the expense of installing those terminals in the retail outlets. In the U.S., the retailers generally pay for the POS terminals. In the U.S., we are attempting to achieve leverage in expansion of our network by contracting with distributors or networks of POS or ATM terminals (generally referred to as Independent Sales Organizations or ISO), who are paid a commission for delivering us contracts with retailers in their networks to distribute PINs on their terminals. As a result of our agreements with ISOs in the U.S., our relationships with the retailers are sometime indirect, through the distributor or ISO.
We establish an electronic connection with the POS terminals and maintain systems that monitor transaction levels at each terminal. As sales to customers of mobile phone time are completed, the customer pays the retailer and the retailer becomes obligated to make
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settlement of the principal amount of the phone time sold. At e-pay, these amounts are deposited on accounts that are held in trust for the mobile operators. In the U.S., retailer accounts are directly debited on a contractually defined basis. No trust arrangements are required in the U.S. with respect to amounts settled to us. We maintain systems that permit us to monitor the payment practices of each retailer.
The Prepaid Processing segment now supports top-up transactions at approximately 75,000 points of sale in 29,000 locations across eight countries.
The following table presents the results of operations for the twothree months ended March 31,September 30, 2003 and the eight months ended September 30, 2003 as included in our consolidated results of operations (unaudited, in thousands):
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Three months ended Sept. 30, 2003 | Eight months ended Sept. 30, 2003 | |||||
Total revenues | $ | 36,532 | $ | 86,096 | ||
Direct operating cost | 29,583 | 69,668 | ||||
Salaries and benefits | 1,954 | 4,261 | ||||
Selling, general and administrative | 1,116 | 2,490 | ||||
Depreciation and amortization | 922 | 2,480 | ||||
Total operating expenses | 33,575 | 78,899 | ||||
Operating income | $ | 2,957 | $ | 7,197 | ||
The following table presents the pro forma condensed results of operations for the three months ended March 31,September 30, 2002 and for the nine months ended September 30, 2003 and September 30, 2002 as iffor the separate e-pay had been included in our consolidated results of operations,group, including the effect of amortization of amortizable intangible assets acquired (unaudited, in thousands):
Pro forma Three months ended March 31, | Three months ended | Nine months ended Sept. 30, | ||||||||||||||
2003 | 2002 | 2002 | 2003 | 2002 | ||||||||||||
Total revenues | $ | 26,772 | $ | 7,314 |
| $ | 15,323 | $ | 95,496 | $ | 32,754 | |||||
Total operating expenses |
| 24,299 |
| 7,508 |
| 14,102 | 87,350 | 31,801 | ||||||||
Operating income | $ | 2,473 | $ | (194 | ) | |||||||||||
Operating income (loss) | $ | 1,221 | $ | 8,146 | $ | 953 | ||||||||||
Revenues
e-pay was formed in 1999 and initiated its first transaction in the U.K. in 2000 and in Australia in 2001. The significant growth in the pro forma revenue and operating income for the quarterthree and nine months ended March 31,September 30, 2003 over March 31,September 30, 2002 is the result of the start-upramp-up of e-pay as a business complemented byduring its development stage. During the period ended September 30, 2002, e-pay was still establishing contractual relationships with many large and small retailers to distribute mobile “top-up” services through POS terminals. Revenues have grown rapidly over the past year as the level of business at the retailers concerned has ramped up to full realization. Growth in the business is also attributed to the conversion of mobile operators from prepaid “top-up” using scratch card solutions to electronic processing solutions such as those provided by e-pay. Transactions processed for the three months of Februaryended September 30, 2003 were 26.3 million and March$61.2 million for the eight months ended September 30, 2003 (the period included in our consolidated operating results for the threenine months ended March 31,September 30, 2003) were 12.0 million and, on a pro forma basis, 18.7 million for the full three month period.. We do not expect these levels of growth ratesrate levels to continue.
We recognize revenues in our Prepaid Processing SegmentRevenue is recognized based on commissioncommissions received from mobile and other telecommunication operators for the distribution and processing of prepaid mobile airtime and other telecommunication products. Due to certain provisions of the mobile phone operator agreements, mobile phone operators have the ability to reduce the overall commission paid to e-pay on each top-up transaction. However, by virtue of our contracts with retailers, not all of these reductions are absorbed by e-pay. Therefore, when mobile phone operators reduce overall commissions, the effect is to reduce revenues with only a small impact on operating income. In Australia certain retailers negotiate directly with the mobile phone operators for their own commission rates. e-pay’s maintenance of its agreements with mobile operators is important to the success of its business, because these agreements permit e-pay to distribute “top-up” to the mobile operators’ customers.
Approximately 99% of revenue is attributed to the processing of prepaid mobile airtime, and 1% is attributed to other telecommunications products. In the U.S., with the AIM acquisition, we have begun distributing small amounts of long distance phone time for use on
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landlines, and we expect to continue to do so. As other telecommunications and prepaid products are introduced, this mix is expected to gradually change.
Total segment revenue increased by 13% or $4.3 million to $36.5 million for the three months ended September 2003 from $32.2 million for the three-month period ended June 30, 2003. We processed 26.3 million transactions within the U.K., Ireland, Australia, New Zealand and Polish markets, an increase of 3.5 million transactions or 15% compared to the three-month period ended June 30, 2003. Higher transaction volumes increased revenue by $4.6 million compared to the prior three-month period ended June 30, 2003. Revenue per transaction decreased as certain mobile phone operators reduced commission rates in the U.K. market, which resulted in a revenue decrease of approximately $0.4 million compared to the three-month period ended June 30, 2003. Segment revenue increased by $21 million or 140% compared to the three-month period ended September 30, 2002. This increase is primarily due to increased transaction volume. Transaction volume increased by 15.3 million or 139% from 11 million transactions in this period.
Direct CostsOperating Expenses
Direct operating costsexpenses in the Prepaid Processing Segment representinclude the commissions we pay to retail merchants for the POS distribution and sale of prepaid mobile airtime and other telecommunicationstelecommunication products. Communication and paper expenses required to operate e-pay terminals are also included. These expenditures vary directly with processing revenues.processed transactions.
Operating ExpensesDirect operating expenses increased by $3.5 million to $29.6 million for the three-month period ended September 30, 2003 from $26.1 million for the three months ended June 30, 2003. Higher transaction volumes increased costs by $3.8 million. A reduction in commissions and certain other than Direct Coststransaction costs decreased costs by $0.4 million.
Direct operating expenses increased $17.7 million from $11.9 million for the three-month period ended September 30, 2002. The Prepaid Processing increase in direct operating costs compared to the three-month period ended September 30, 2002 is primarily due to the substantial increase in transaction volumes. Costs per transaction have increased slightly as a result of certain new contracts with large retail merchants who have contributed to transaction growth but at a higher commission cost to e-pay.
Segment salarysalaries and selling,benefits increased by $0.5 million to $2.0 million for the three months ended September 30, 2003 compared to $1.5 million for the three months ended June 30, 2003, primarily due to incentive awards based on expected achievement of certain 2003 performance objectives. Additionally, new hires necessary to staff expansion into new markets in Poland and the U.S. contributed $0.2 million to the increase. Finally, customer service and sales staff additions necessary to manage the business growth have contributed to the increase. This increase is $0.9 million over the three months ended September 30, 2002 of $1.1 million.
Selling, general and administrative expenses include sales, marketing, technicalincreased by $0.1 million to $1.1 million for the three months ended September 30, 2003 from $1.0 million for the three months ended June 30, 2003. This increase is primarily due to additional new market development expenses, during the three months ended September 30, 2003. Selling, general and otheradministrative expenses increased $0.5 million compared to the three months ended September 30, 2002, due to various overhead and professional fee increases to support substantial business support expenses. We do not expect these expenses to increase at the same rate as transactions and related processing revenues.growth during this period.
Depreciation and amortization includes $0.3remained constant at $0.9 million for the twothree months ended March 31,September 30, 2003 compared to the three months ended June 30, 2003 and increased by $0.3 million over $0.6 million for the three months ended September 30, 2002. This increase compared to the three months ended September 30, 2003 is due to a $0.5 million expense for the amortization of assigned intangible assets related to the acquisition of e-pay offset by a $0.2 million decrease due to existing terminals reaching the end of their depreciation lives.
Operating Income
Operating income in the Prepaid Processing Segment increased by $0.3 million to $3.0 million for the three months ended September 30, 2003 from $2.7 million for the three months ended June 30, 2003. This amortization relatesrepresents an increase of $1.8 million over “pro forma” operating income of $1.2 million for the three months ended September 30, 2002. Operating income was $7.2 million for the eight-month period included in the results for the nine months ended September 30, 2003. On a “pro forma” basis, operating income was $8.1 million for the full nine-month period ended September 30, 2003. This represents an increase of $7.1 million over operating income of $1.0 million for the nine months ended September 30, 2002. During the nine months ended September 30, 2002, e-pay was still establishing contractual relationships with many large and small retail stores, and the switch from physical vouchers to assigned amortizable intangible assetsdistribution via electronic networks was still in its early stages.
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Transaction growth in the U.K. is expected to slow in the following six to twelve months as described above.a result of our current association with nearly all of the larger retail merchants and as the conversion to electronic top-up from physical vouchers begins to slow.
SOFTWARE SOLUTIONS SEGMENT
Three months ended March 31, (unaudited, in thousands) | ||||||
2003 | 2002 | |||||
Total revenues | $ | 3,894 | $ | 4,908 | ||
Direct operating cost |
| 307 |
| 437 | ||
Salaries and benefits |
| 2,375 |
| 2,447 | ||
Selling, general and administrative |
| 695 |
| 570 | ||
Depreciation and amortization |
| 275 |
| 232 | ||
Total operating expenses |
| 3,652 |
| 3,686 | ||
Operating income/(loss) | $ | 242 | $ | 1,222 | ||
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Software Solutions | Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||
(unaudited, in thousands) | 2003 | 2002 | 2003 | 2002 | |||||||||
Total revenues | $ | 3,659 | $ | 4,181 | $ | 11,403 | $ | 13,850 | |||||
Direct operating cost | 207 | 181 | 715 | 732 | |||||||||
Salaries and benefits | 2,152 | 3,058 | 6,868 | 9,117 | |||||||||
Selling, general and administrative | 640 | 1,128 | 2,005 | 2,432 | |||||||||
Depreciation and amortization | 296 | 248 | 837 | 731 | |||||||||
Total operating expenses | 3,295 | 4,615 | 10,425 | 13,012 | |||||||||
Operating income (loss) | $ | 364 | $ | (434 | ) | $ | 978 | $ | 838 | ||||
Revenues
Software revenues are grouped into four broad categories:categories as shown in the table below.
Software license fees are the initial fees we charge to license our proprietary application software to customers. We charge professional service fees for providing customization, installation and consulting services to our customers. Software maintenance fees are the ongoing fees we charge for maintenance of our customers’ software products. Hardware sales revenues are derived from the sale of computer products. Total software revenues decreased $1.0 million from $4.9 million for the three months ended March 31, 2002 to $3.9 million for the three months ended March 31, 2003.
The components of Software Solutions revenue for the three-month and nine-month periods ended March 31,September 30, 2003 and 2002 were:were (unaudited, in thousands):
Three months ended March 31, (unaudited, in thousands) | ||||||||||||||||||
2003 | 2002 | |||||||||||||||||
Software Solutions | Three months ended Sept. 30, | Nine months ended Sept. 30, | ||||||||||||||||
(unaudited, in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Software license fees | $ | 684 | $ | 2,188 | $ | 1,012 | $ | 1,001 | $ | 2,420 | $ | 5,516 | ||||||
Professional service fees |
| 1,496 |
| 841 | 1,093 | 1,522 | 4,233 | 3,568 | ||||||||||
Maintenance fees |
| 1,555 |
| 1,409 | 1,483 | 1,630 | 4,427 | 4,221 | ||||||||||
Hardware sales |
| 159 |
| 469 | 71 | 28 | 323 | 545 | ||||||||||
Total | $ | 3,894 | $ | 4,907 | $ | 3,659 | $ | 4,181 | $ | 11,403 | $ | 13,850 | ||||||
Total software revenues decreased $0.5 million from $4.2 million for the three months ended September 30, 2002 to $3.7 million for the three months ended September 30, 2003 and decreased $2.4 million from $13.9 million for the nine months ended September 30, 2002 to $11.4 million for the nine months ended September 30, 2003. This decrease is generally in line with expectations for this segment and, excluding the Fidelity National Financial (FNF) software license fees in 2002, represents a marginal improvement in 2003 over 2002.
Software license fees decreased $1.5 million to $0.7increased marginally for the three-month period ended September 30, 2003 from $1.0 million for the three-month period ended March 31, 2003 from $2.2September 30, 2002. Software license fees decreased $3.1 million to $2.4 million for the three-monthnine-month period ended March 31,September 30, 2003 from $5.5 million for the nine-month period ended September 30, 2002. This decrease in the nine-month period is due primarily to license fees that we obtainedearned as part of thea software license agreement with FNF during 2002 (see Note 11 to the unaudited consolidated financial statements). We recognized nil revenuesno software license fees related to the FNF software license agreement during the three-monthnine months ended March 31, 2003September 30, 2003. We recognized $0.6 million and $1.3$3.5 million in software license fees related to the FNF software license agreement during the three monthsthree- and nine-month periods ended March 31,September 30, 2002. Approximately $0.4 million of license fees remain to be earned and recognized related to the FNF software license agreement; there is no specific date by which the services related to these fees must be utilized. Excluding the 2002 FNF license fees, software license fees increased $0.6 million for the three month ended September 30, 2003 and decreased $0.9 million for the nine months ended September 30, 2003 compared to the same periods in 2002 due to increased license agreements being signed during the first and second quarters in 2003.
Professional service fees decreased $0.4 million to $1.1 million for the three-month period ended September 30, 2003 from $1.5 million for the three-month period ended September 30, 2002. Professional services fees increased $0.6 million to $4.2 million for the nine-month period ended September 30, 2003 from $3.6 million for the nine-month period ended September 30, 2002. The increasedecrease in professional service fees of $0.7 millionfor the three months ended September 30, 2003, is partially due to morea change in product mix and timing of certain professional service fee contracts. In addition, there were fewer billable hours of service and consulting contract work that we performed in connection with the sale and installation of software during the three monthsthree-month period ended March 31,September 30, 2003. During
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the nine-month period ended September 30, 2003, comparedwe have billed more hours of service and consulting contract work resulting in a significant increase over the same period a year earlier. This is primarily due to a redeployment of resources from the three months ended March 31, 2002. CertainFNF software license agreement to certain other professional service fees are bundled in software license contracts and reported as license fees using the percentage of completion method.contracts.
Maintenance fees increaseddecreased $0.1 million to $1.5 million for the three-month period ended September 30, 2003 from $1.6 million for the three-month period ended September 30, 2002. Maintenance fees increased $0.2 million to $4.4 million for the nine months ended September 30, 2003 from $4.2 million for the nine months ended September 30, 2002. The three months and nine months ended March 31, 2002 to the same period in 2003. First quarterSeptember 30, 2002 included approximately $0.2 million in mandate fees. Mandates are fees for required changes to our software products asthat are mandated by card associations. The timing of these mandated changes varies, as does the revenue recognition. No such changes were required by the relevant card associations during the first quarter of 2003.
The FNF software license agreement resulted in an increasethe inclusion of approximately $0.2 million due to recognition of thein maintenance revenues related tofor the agreement with FNF as described inthree months ended September 30, 2003 and $0.3 million for the nine months ended September 30, 2003. (See Note 11 to the unaudited consolidated financial statements.) This is a decrease of approximately $0.2 million and $0.5 million compared to the three months and nine months ended September 30, 2002, respectively. Approximately $0.5$0.2 million of maintenance revenues remain to be earned and recognized related to the FNF software license agreement through 2003. The remaining quarterly increase is due
Hardware sales increased marginally in the three months ended September 30, 2003 compared to the completion of contracts since March 2002, thereby initiating the maintenance aspect of those contracts, partially offset by termination of maintenance contracts by existing customers. We intend to continue securing long-term revenue streams through multiyear maintenance agreements with existing and new customers.
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three months ended September 30, 2002. The decrease in hardware sales inof $0.2 million to $0.3 million for the nine months ended September 30, 2003 from $0.5 million for the nine months ended September 30, 2002 is mainly attributedprimarily due to thea $0.3 million hardware sale in 2002 related to software license agreement with FNF. Hardware sales are generally sporadic as they are an incidental component to our software license and professional services offerings. The cost for this item is included in direct costs as described below.
Software Sales Backlog
We define “software sales backlog” as fees specified in contracts whichthat we have executed and for which we expect recognition of the related revenue within one year. At March 31,September 30, 2003, the revenue backlog was $4.3$5.5 million as compared to $4.7$3.5 million at March 31,September 30, 2002. The FNF software license agreement represented $2.7$0.4 million of the March 31, 2002September 30, 2003 backlog as compared to $0.4$0.5 million as of March 31, 2003.September 30, 2002. Strong sales in 2002 and 2003 have enabled us to replace the FNF license agreement within our backlog. We cannot assure you that the contracts included in backlog will actually generate the specified revenues or that the revenues will be generated within the one-year period.
Operating Expenses
Software Solutions Segment operating expenses consist primarily of:are grouped into four categories as shown in the table above.
Direct operating costs consist of hardware costs and distributor commissions. Hardware costs are generally sporadic as they are an incidental component to our software license and professional services offerings. Direct operating costs increased marginally to $0.2 million for the three-month period ended September 30, 2003 from $0.2 million for the three-month period ended September 30, 2002. Direct operating costs decreased slightly to $0.7 million for the nine-month period ended September 30, 2003 from the nine-month period ended September 30, 2002. The increase in direct operating costs for the three months ended September 30, 2003 is primarily due to increased distributor commissions in 2003 as compared to the same period in 2002. The slight decrease in direct operating costs of $0.1 million for the threenine months ended March 31,September 30, 2003 fromas compared to the threenine months ended March 31,September 30, 2002 is primarily due to a decrease in hardware costs related to the FNF software license agreement in 2002 partially offset by increased distributor commissions in 2003. We continue to pursue strategic distributor relationships for the sale of our software products. These relationships provide an avenue for efficient sales of our products to customers or in geographic regions that may otherwise be restrictive.inaccessible.
Salary and benefits decreased marginally$0.9 million to $2.2 million for the three-month period ended March 31,September 30, 2003 from $3.1 million for the three-month period ended March 31, 2002September 30, 2002. Salary and benefits decreased $2.2 million to $6.9 million for the nine-month period ended September 30, 2003 from $9.1 million for the nine-month period ended September 30, 2002. These reductions are generally due to a slightreduced resource commitments for certain development and professional service fee contracts, as well as to an increase in staff offset by capitalization of salaries for software development costs.costs related to our credit card and U.S.-based prepaid processing software development.
Selling, general and administrative expenses increased marginallydecreased by $0.5 million to $0.7 million for the three months ended March 31, 2003 from $0.6 million for the three months ended March 31,September 30, 2003 from $1.1 million for the three months ended September 30, 2002. Selling, general and administrative expenses decreased $0.4 million to $2.0 million for the nine months ended September 30, 2003 from $2.4 million for the nine months ended September 30, 2002. This increasedecrease is primarily due to an increase in one-time credits and incentives received in 20022003 related to the renegotiation of
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certain telecommunication contracts, that did not recuras well as a reduction in 2003.certain resources committed to our development and professional service groups.
Depreciation and amortization expense marginally increased to $0.3 million for the three months ended March 31,September 2003, from $0.2and to $0.8 million for the threenine months ended March 31, 2002September 30, 2003. The increase is due to the addition of $0.6$0.8 million in capitalized software development costs during 2002. Amortization of capitalized software development costs was $0.1 million for the three months ended September 30, 2003 and $0.3 million for the nine months ended September 30, 2003. Amortization of capitalized software development costs was $0.2 million for the three months ended March 31, 2003September 30, 2002 and $0.1$0.5 million for the threenine months ended March 31,September 30, 2002.
We have made an ongoing commitment to the development, maintenance and enhancement of our products and services. In particular, we invested and will continue to invest in new software products that permit additional features and transactions on our ATM network. In addition, we continue to invest in the ongoing development of products that were recently introduced to the market. Our research and development costs for software products to be sold, leased or otherwise marketed were $0.9$1.0 million and $2.9 million for both the three months ended March 31,September 30, 2003 and March 31, 2002.nine months ended September 30, 2003, respectively, and $1.0 million and $2.7 million for the three months ended September 30, 2002 and nine months ended September 30, 2002, respectively.
We capitalize software development costs in accordance with our accounting policy of capitalizing development costs on a product-by-product basis once technological feasibility is established. We establish technological feasibility of computer software products when we complete all planning, designing, coding, and testing activities
22
necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements. We capitalized $0.3 million in the three months ended March 31,September 30, 2003, as compared to $0.1 million capitalized during the three months ended March 31,September 30, 2002. We capitalized $0.7 million in the nine months ended September 30, 2003, as compared to $0.3 million capitalized during the nine months ended September 30, 2002.
Operating Income
The Software Solutions Segment generatedreported operating income of $0.2$0.4 million for the three months ended March 31,September 30, 2003 as compared to operating income of $1.2 million for the three months ended March 31, 2002. Excluding the impact of the FNF software license agreement revenue and related hardware revenue from both periods’ results, Software Solutions would have generated operating income of $0.2 million for the three months ended March 31, 2003 and an operating loss of $0.4 million for the three months ended March 31,September 30, 2002 and $1.0 million for the nine months ended September 30, 2003 as compared to $0.8 million for the nine month period ended September 30, 2002. The increases of $0.8 million and $0.2 million for the three and nine months ended September 30, 2003, respectively, are primarily due to a reduction in salaries and benefits expenses and selling, general and administrative expenses as discussed above.
CORPORATE SERVICES
Three months ended March 31, (unaudited, in thousands) | Three months ended Sept. 30, | Nine months ended Sept. 30, | ||||||||||||||||
2003 | 2002 | |||||||||||||||||
(unaudited, in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Salaries and benefits | $ | 620 | $ | 575 | $ | 696 | $ | 396 | $ | 1,951 | $ | 1,386 | ||||||
Selling, general and administrative |
| 809 |
| 696 | 1,211 | 793 | 2,834 | 2,244 | ||||||||||
Depreciation and amortization |
| 22 |
| 42 | 20 | 84 | 63 | 40 | ||||||||||
Total operating expenses | $ | 1,451 | $ | 1,313 | $ | 1,927 | $ | 1,273 | $ | 4,848 | $ | 3,670 | ||||||
Operating Expenses
OperatingCorporate salary, general, administrative and depreciation expenses for Corporate Services marginally increased $0.6 million to $1.4$1.9 million for the three months ended March 31,September 30, 2003 from $1.3 million for the three months ended March 31,September 30, 2002, and increased $1.1 million to $4.8 million for the nine months ended September 30, 2003 from $3.7 million for the nine months ended September 30, 2002. The increases are due to increased salary and benefits costs of $0.3 million and $0.6 million for three- and nine-month periods. Corporate salaries increased due to salary increases granted for improved performance and a modest increase in headcount. General and administrative expenses increased $0.4 and $0.6 million for the three- and nine-month periods due to increases in legal and accounting fees as a result of the growth of the business and certain compliance requirements with respect to the Sarbanes-Oxley Act. Depreciation was constant for the three- and nine-month periods on a comparable basis.
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NON-OPERATING RESULTS
Interest Income
Interest income was $0.4$0.3 million for the three months ended March 31,September 30, 2003 as compared to $0.1 million for the three months ended March 31,September 30, 2002 reflecting primarilyand $0.9 million for the interestnine months ended September 30, 2003 compared to $0.2 million for the nine months ended September 30, 2002. This increase is due to an increase in temporary cash investments included in cash and restricted cash on the Consolidated Balance Sheets. e-pay earns interest on temporary cash investments.temporarily held in trust accounts. These balances are used in connection with the administration of customer collection and vendor remittance activities in the Prepaid Processing Segment.
Interest Expense
Interest expense decreased marginallyincreased to $1.6$1.8 million for the three months ended March 31,September 30, 2003 from $1.7$1.4 million for the three months ended March 31,September 30, 2002. The decreaseInterest expense increased to $5.4 million for the nine months ended September 30, 2003 from $4.8 million for the nine months ended September 30, 2002. For the nine months ended September 30, 2003, this increase was primarily due to the partial cash redemption of the euro-denominated Senior Discount Notes in July 2002, which was substantially offset by an increase of $0.2$0.3 million in interest related to the Senior Discount Notes due to a weakening of the U.SU.S. dollar relative to the euro during 20022003 as well as $0.2$1.0 million of interest on indebtedness incurred with the acquisition of e-pay. This increase was substantially offset by the resulting reduction in interest expense as a result of a $9.0 million cash redemption of the euro-denominated Senior Discount Notes that we made in July 2002 as well as payments of $2.2 million on capital lease obligations.
Gain on Sale of Subsidiary
The gain on subsidiary of $18.0 million for the threenine months ended March 31,September 30, 2003 relates to the sale of our U.K. subsidiary in January 2003. This sale is more fully described in Note 5 to the unaudited consolidated financial statements.
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Foreign Exchange Gain/(Loss)Loss/Gain
We had a net foreign exchange loss of $1.8$0.2 million for the three months ended March 31,September 30, 2003, compared to a net foreign exchange gain of $0.4$0.2 million for the three months ended March 31,September 30, 2002 and a net foreign exchange loss of $5.2 million for the nine months ended September 30, 2003, compared to a net foreign exchange gain of $3.2 million for the nine months ended September 30, 2002. This loss is primarily due to the weakening of the U.SU.S. dollar, particularly relative to the euro, duringin excess of 18% since September 30, 2002. Exchange gains and losses that result from re-measurementremeasurement of some of our assets and liabilities are recorded in determining net loss. A portion of the assets and liabilities are denominated in euros, including capital lease obligations, the Senior Discount Notes, andas well as certain cash and cash equivalents. It is our policy to attempt to match local currency receivables and payables. The foreign currency denominated assets and liabilities give rise to foreign exchange gains and losses as a result of U.S. dollar to local currency exchange movements.
Income Tax (Expense)/Expense/Benefit
Tax expense on income from continuing operations was $0.7 million for the quarterthree months ended March 31,September 30, 2003 as compared to a $0.4 million tax benefit for the three months ended September 30, 2002. Tax expense on income from continuing operations was $2.3 million for the nine months ended September 30, 2003 as compared to a tax benefit on income from continuing operations of $1.7$1.8 million for the quarternine months ended March 31,September 30, 2002. The first quarter 2003 tax expensesexpense for the nine months ended September 30, 2003 is due to $0.4comprised of $1.6 million in tax expense related to the Prepaid Processing Segment, and $0.3$1.2 million in tax expense related to the EFT Processing Segment, resulting from taxableand $0.5 million in tax benefit related to Corporate. Taxable income is now being generated in several companiestax jurisdictions within these business segments. The income tax benefit for the quarter ended March 31, 2002 of $1.7 million was primarily due to the recognition of tax benefits forfrom net operating losses. The effective tax rate in our profitable markets ranges from 20% to 40%, excluding the effects of net operating loss carryovers in other markets.
Discontinued Operations
On January 4, 2002, we sold substantially all of the DASH assets to FNF for $6.8 million in cash. We recorded a pre-tax gain of approximately $4.8 million related to this transaction. We reported net income from the discontinued operations of DASH of nilThe effective tax rate was 34.1% for the three months ended March 31,September 30, 2003 and $3.114.1% for the nine months ended September 30, 2003. The effective tax rate of 34.1% in the third quarter of 2003 is due to the existence of taxable income in certain tax jurisdictions concurrent with losses in other tax jurisdictions. These losses did not meet the requirements of SFAS 109 for tax benefit recognition. During the three months ended September 30, 2003, we also recognized a one-time tax benefit of $0.5 million as a result of a European Court of Justice decision, which permits our Netherlands’ holding company to claim formerly disallowed interest expense deductions on loans to its EU subsidiaries. The effective tax rate of 14.1% for the nine-month period ended September 30, 2003, was lower than expected on an ongoing basis primarily due to the non-taxable gain on the sale of the U.K. ATM network.
The effective tax rate was (15.1%) for the three months ended September 30, 2002 and (21.4%) for the nine months ended September 30, 2002. The effective tax rate of (15.1%) in the third quarter of 2002 was due to the recognition of benefits from tax losses in certain tax jurisdictions in accordance with SFAS 109. The effective tax rate of 21.4% for the nine months ended September 30, 2002 was primarily due to net operating loss benefits that offset the gain on the U.S. based DASH ATM network.
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Net Loss (Income)
In summary, we generated a net income of $1.4 million during the three months ended September 30, 2003 compared to net loss of $2.5 million for the three months ended March 31,September 30, 2002.
On July 15, 2002, we sold substantially all of Net income was $14.0 million during the non-current assets and capital lease obligations of its processing business in Francenine months ended September 30, 2003 compared to Atos for €1 plus reimbursement of certain operating expenses. A loss on disposal of the France business of $0.1 million was recorded in 2002. The net income from France operations reported as discontinued operations was nil for the three-month periods ended March 31, 2003 and a net loss of $0.2$3.7 million for the nine months ended September 30, 2002.
The primary differences in the net income (loss) for the three months ended March 31, 2002.
As a result of the above, we have removed the operating results of France and DASH from continuing operations for all reported periods in accordance with SFAS 144. We previously reported France and DASH under the EFT Processing Segment.
Net Income
In summary, net income was $15.4 million duringSeptember 30, 2003 as compared to the three months ended March 31,September 30, 2002 are summarized below:
- | increase in interest expense of $0.4 million |
- | increase in the foreign exchange loss of $0.5 million |
- | increase in income tax expense of $1.2 million |
- | increase in corporate expense of $0.7 million |
The primary differences in the net income (loss) for the nine months ended September 30, 2003 as compared to net income of $3.6 million for the threenine months ended March 31, 2002. This increase results primarily from:September 30, 2002 are summarized below:
- | increase in interest expense of $0.6 million |
- | increase in the foreign exchange loss of $2.0 million |
- | increase in corporate expense of $1.2 million |
- | increase in income tax expense of $4.2 million |
- | decrease in income from discontinued operations (U.S.-based Dash and France) of $3.0 million |
LIQUIDITY AND CAPITAL RESOURCES
Prior to 2002, we had negative cash flow from operations. We funded operations and capital expenditures through proceeds from debt and equity offerings as well as through capital lease financing. As more fully described above, the Companywe funded the recent acquisition of e-pay with cash, debt and equity.
24
As of March 31, 2003, the Company hadOur unrestricted cash and cash equivalents of $13.9 million, an increase of $1.9 million from $12.0balance was $12.9 million as of December 31, 2002. We have restrictedSeptember 30, 2003, compared to $13.1 million at June 30, 2003. The decrease in cash from June 30, 2003 was generally the result of cash generated from operations offset by uses of funds for capital expenditures, repayment of debt and completion of the acquisition of the assets of Austin International Marketing and Investments, Inc. at the end of the third quarter. Restricted cash of $38.0$43.4 million as of March 31,at September 30, 2003 including $33.2includes $38.1 million of cash held in trust and/or cash held on behalf of others in connection with the receipt and disbursementadministration of the customer collection activities in the Prepaid Processing Segment. Cash flow during the nine months ended September 30, 2003 was increased by approximately $28.9 million during the quarter due to net proceeds from the sale of the U.K. ATM network and decreased by $28.0$26.7 million due to the purchase of e-pay, net of cash acquired.
We reduced the amount of our long term Senior Discount Notes outstanding from $38.7 million at March 31, 2002Due to $37.4 million at March 31, 2003. We did this primarily through a partial redemption of $9.0 million as more fully described in Note 11 to our consolidated financial statements for the year ended December 31, 2002. However, the weakening of the U.S. dollar relative to the euro duringthroughout 2003, the amount of our long-term Senior Discount Notes outstanding has increased from $36.3 million at December 31, 2002 has significantly offset the impact of the partial redemption. to $39.6 million at June 30, 2003 and to $40.2 million at September 30, 2003.
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We commenced cash payments of interest on Senior Discount Notes on January 1, 2003 and are required to continue to make such payments on a semi-annual basis on January 1 and July 1 through 2006. At current debt levels, we will be required to make approximately $2.3$2.5 million (€2.2 million)million at an exchange rate of $1.16 dollars to the euro) in interest payments on a semi annual basis through 2006 on January 1 and July 1 of each year. The remaining principal balance of Senior Discount Notes of approximately $37.4
$40.2 million carrying value (approximately €35 million) will be due and payable on July 2006.
Since July 1, 2002, we may at any time exercise our right to partially or fully redeem the Senior Discount Notes for cash without restriction. Any redemption is subject to an early redemption premium as defined in the Senior Discount Notes indenture. The early redemption premium decreases throughout the term of the Senior Discount Notes. As of March 31, 2003, the early redemption premium is 6% of the face value of the Senior Discount Notes redeemed. Starting July 1, 2003, the early redemption premium decreases tois 4%, then decreases to 2% July 1, 2004 and no premium from July 1, 2005 and thereafter.
We intend to reduce our indebtedness under our Senior Discount Notes through repurchase of notes from time to time in exchange for equity as we have done in the past and/or through repayments as our cash flows permit. In January 2003,the event we received net proceeds fromare not able to exchange debt for equity or repay the sale of our UK subsidiary of $28.9 million. We used all of those fundsdebt through cash flows, we will attempt to pay the cash portion of the purchase price of e-pay, which we acquired in February 2003. refinance this debt to decrease interest costs and, if possible, extend its repayment period if reasonable terms are available.
In connection with the acquisition of e-pay, we incurred indebtedness to the former e-pay shareholders of $26.9 million (payable in British pounds sterling), which is composed of three separate elements:
25
We intend to reduce our indebtedness under our Senior Discount Notes through repurchase of notes from time to time in exchange for equity as we have done in the past and/or through repayments as our cash flows permit. In the event we are not able to exchange debt for equity or repay the debt through cash flows, we will attempt to refinance this debt to decrease interest costs and, if possible, extend its repayment period if reasonable terms are available.
We offer no assurances that we will be able to obtain favorable terms for refinancing of any of our debt as described above.
In the EFT Processing Segment, we lease many of our ATMs under capital lease arrangements that expire between 2003 and 2008. The leases bear interest between 8% and 12% per year. As of March 31,September 30, 2003, we owed $6.4$4.4 million under these capital lease arrangements. We expect that our capital requirements will continue in the future, although our strategy to focus on ATM outsourcing opportunities rather than ATM ownership and deployment as well as redeployment of under-performing ATMs will reduce capital requirements.
In the Prepaid Processing Segment, we own approximately 25% of the 50,00075,000 POS devices that we operate. The remaining 75% represent integrated cash register devices of our major retail customers. As the prepaid processing business expands, we will continue to add terminals in certain independent retail locations at a price of approximately $300 per terminal. We expect the proportion of owned terminals to remain at a similar percent of total terminals operated.
Fixed asset purchases for 2003 are currently estimated to be in the range of $5.0 to $7.0 million.
We are required to maintain ATM hardware and software in accordance with certain regulations and mandates established by local country regulatory and administrative bodies as well as Europay, VISAVisa and Mastercard.MasterCard. Accordingly, we expect additional capital
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expenditures over the next few years to maintain compliance with these regulations. Upgrades to the ATM software and hardware will also be required on or before 2005 to enable certain “micro–chip” card technology for “Smart Cards.”smart cards. Our ATM hardware and software will need to be modified to enable the use of “Smart Cards.”smart cards. We are currently developing a project plan for implementation and delivery and estimating the costs associated with the hardware and software modifications.
Effective July 1, 2001, we implemented our Employee Stock Purchase Plan, or ESPP, under which employees have the opportunity to purchase Common Stockcommon stock through payroll deductions according to specific eligibility and participation requirements. This plan qualifies as an “employee stock purchase plan” under section 423 of the Internal Revenue Code of 1986. We completed a series of offerings of three months duration with new offerings commencing on January 1, April 1, July 1, and October 1 of each year. Under the plan, participating employees are granted options, which immediately vest and are automatically exercised on the final date of the respective offering period. The exercise price of Common Stockcommon stock options purchased is the lesser of 85% of the “fair market value” (as defined in the ESPP) of the shares on the first day of each offering or the last date of each offering. The options are funded by participating employees’ payroll deductions or cash payments.
Under the provisions of the ESPP, we reserved 500,000 shares of Common Stockcommon stock all of which we had issued as of December 31, 2002. In February 2003, we adopted a new ESPP and reserved 500,000 shares of Common Stockcommon stock for issuance under that plan. During the threenine months ended March 31,September 30, 2003, we issued 11,99450,893 shares at aan average price of $6.53$7.60 per share, resulting in proceeds to us of approximately $0.1$0.4 million.
In February 2003, we made matching contributions of 28,015 shares of stock in conjunction with our 401(k) employee benefits plan for the plan year 2002. Under the terms of this plan, employer-matching contributions consist of two parts, referred to as “basic” and “discretionary.” The basic matching contribution is equal to 50% of eligible employee elective salary deferrals between 4% and 6% of participating employee salaries for the plan year. The discretionary matching contribution is determined by our Board of Directors for a plan year and is allocated in proportion to employee elective deferrals. As of March 31,September 30, 2003, total employer matching contributions since inception of the plan has consisted of 53,93755,478 shares under the basic match and 16,274 shares under the discretionary matching contribution.
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CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ITEMS
The following table summarizes our contractual obligations as of March 31,September 30, 2003 (unaudited, in thousands):
Payments due by period | Payments due by period | |||||||||||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||
Notes payable (including interest) | $ | 84,427 | $ | 6,091 | $ | 38,334 | $ | 40,002 | $ | — | $ | 81,227 | $ | 8,649 | $ | 72,578 | $ | — | $ | — | ||||||||||
Capital leases (including interest) |
| 7,370 |
| 3,771 |
| 3,049 |
| 462 |
| 88 | 5,260 | 2,643 | 2,089 | 383 | 145 | |||||||||||||||
Operating leases |
| 9,020 |
| 2,053 |
| 3,210 |
| 2,710 |
| 1,047 | 11,822 | 2,650 | 4,507 | 3,759 | 906 | |||||||||||||||
Purchase obligations |
| 15,054 |
| 6,453 |
| 8,112 |
| 489 |
| — | 18,956 | 7,208 | 9,237 | 2,319 | 192 | |||||||||||||||
Other long-term liabilities |
| — |
| — |
| — |
| — |
| — | — | — | — | — | — | |||||||||||||||
Total | $ | 115,871 | $ | 18,368 | $ | 52,705 | $ | 43,663 | $ | 1,135 | $ | 117,265 | $ | 21,150 | $ | 88,411 | $ | 6,461 | $ | 1,243 | ||||||||||
Purchase obligations include contractual amounts for ATM maintenance, cleaning, telecommunication and cash replenishment operating expenses. WhileAlthough contractual payments may be greater or less based on the number of ATMs and transaction levels, purchase obligations listed above are estimated based on current levels of such business activity. We have no other significant off-balance sheet items.
The Company’s March 31,Our September 30, 2003 balance sheet has changed significantly compared to December 31, 2002, due to the acquisition of e-pay.
Page 31
e-pay is responsible for the collection of cash receipts from the retailer for remittance to the telecommunication provider. Cash is collected into designated trust accounts classified as restricted cash balances that are not available for our operating business activities. This results in significant current assets held in restricted cash and trade accounts receivable due from retailers, and a corresponding liability to the telecommunications provider classified as accounts payable/accrued expense that substantially offsets this amount. Additionally, the acquisition of e-pay was made at a significant premium to the underlying historical cost basis of the
e-pay assets, resulting in significant goodwill and other intangible assets as further described below.
Cash and cash equivalents
Cash and cash equivalents increased to $13.9$12.9 million at March 31,September 30, 2003 from $12.0 million at December 31, 2002 primarily due to the following activity:
the purchase of e-pay of $26.7 million |
- | the purchase of AIM of $0.8 |
- | the cash purchase of |
- | lease repayments of $3.6 million |
- | e-pay shareholder note repayments of $4.8 million |
Restricted cash
Restricted cash increased to $38.0$43.4 million at March 31,September 30, 2003 from $4.4 million at December 31, 2002 primarily due to the acquisition of e-pay. Approximately $33.2$38.1 million of the restricted cash is held in trust accounts by our Prepaid Processing Segment on behalf of the mobile operators for which we process transactions. These balances are used in connection with the administration of customer collection and vendor remittance activities in the Prepaid Processing Segment. The remainder is held as security with respect to cash provided by banks participating in our ATM network.
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Trade accounts receivable
Trade accounts receivable increased to $36.2$50.0 million at March 31,September 30, 2003 from $8.4 million at December 31, 2002 primarily due to the acquisition of e-pay in February 2003. Approximately $27.6$40.0 million representsrepresented the trade accounts receivable of our Prepaid Processing Segment, which related to the administration of customer collection and vendor remittance activities in the Prepaid Processing Segment.
Assets held for sale
Assets held for sale as of December 31, 2002 representof $10.8 million include the net assets for our U.K. ATM network subsidiary, which was sold in January 2003, as discussed in Note 5 to our unaudited consolidated financial statements.
Property, plant and equipment
Net property, plant and equipment decreased to $21.3$18.2 million as of March 31,at September 30, 2003 from $21.4 million at December 31, 2002. This decrease results from depreciation and amortization of $8.9 million in excess of fixed asset purchases. This is a result of our strategy to operate ATMs under outsourcing service arrangements rather than own and deploy ATMs, thus reducing the required less capital expenditures for ATMs. Additionally this reflects the low ongoing capital requirements of our Prepaid Processing business.
Intangible assetsGoodwill
Net intangible assetsGoodwill increased to $80.2$63.3 million at March 31,September 30, 2003 from $1.8 million at December 31, 2002. The increase from December 31, 2002 to March 31,September 30, 2003 is primarily due to the purchase of e-pay in February 2003. Of the total purchase price, a preliminary estimate of $13.9 million has been allocated to amortizable intangible assets acquired (included in other assets, net) and $64.7 million has been allocated to goodwill and other intangibles with indefinite useful lives. e-pay goodwill alone is approximately $61.2 million.
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Additionally, goodwill of approximately $1.4 million was recorded during the three months ended September 30, 2003 in connection with the acquisition of AIM in August 2003.
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. The amortizable assets are being amortized over an eight year expected life. All amortizable and indefinite life intangibles are included in other assets, net.
We believe that these intangible assets and goodwill will be recoverable through cash flow from future profitable operations, and therefore, have recorded no impairment loss. These estimates are based on certain assumptions for revenue growth, market segment share and estimated costs. In accordance with new accounting rule for goodwill, our policy is to perform an annual review for impairment in the third quarter of each year. If indicators of impairment exist, the study will be performed more frequently.
Other assets
Other assets remained unchangedincreased from $2.4 million at $2.9 million from December 31, 2002 to March 31,$20.4 million at September 30, 2003. This increase was primarily due to the acquisition of intangible assets in connection with the purchase of e-pay in February 2003.
Current liabilities
Current liabilities increased to $87.2$104.9 million at March 31,September 30, 2003 from $19.8 million at December 31, 2002 due to the following activity:
Liabilities held for sale
Liabilities held for sale as of December 31, 2002 of $3.5 million represent the net liabilities for our U.K. subsidiary, which was sold in January 2003 as discussed in Note 5 to our unaudited consolidated financial statements.
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Capital leases
Total capital lease obligations including current installments decreased to $6.4$4.4 million at March 31,September 30, 2003 from $7.7 million at December 31, 2002. This results from the $2.9 million excess of lease payments of $1.1 million over new capital lease obligations of $0.1 million, and $0.4 million of leases paid on our behalf in connection with the sale of the U.K. ATM network. The new capital leases are generally for a term of 3three to 5five years. Our strategic business focustactic to operate ATM’sATMs through outsourcing contracts rather than through ownership and deployment should continue to allow for further reductions in capital leases as current lease obligations continue to be paid off.
Notes payable
Notes payable increased to $64.0$63.3 million at March 31,September 30, 2003 from $36.3 million at December 31, 2002 primarily due to the indebtedness incurred with the purchase of e-pay. A summary of the activity for the threenine months ended March 31,September 30, 2003 is as follows (unaudited, in thousands):
e-pay Notes | Senior Discount Notes | Total | ||||||||
payable in pounds sterling | payable in euros | |||||||||
Balance at December 31, 2002 | $ | — |
| $ | 36,318 | $ | 36,318 | |||
Indebtedness incurred |
| 26,867 |
|
| — |
| 26,867 | |||
Accretion of discount |
| — |
|
| 11 |
| 11 | |||
Unrealized foreign exchange (gain)/loss |
| (270 | ) |
| 1,090 |
| 820 | |||
Balance at March 31, 2003 | $ | 26,597 |
| $ | 37,419 | $ | 64,016 | |||
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Acquisition Notes | Sub- total | Senior Discount Notes | Total | ||||||||||||||||
(payable in GBPs) | (payable in euros) | ||||||||||||||||||
Deferred Purchase Price (6%) | Convertible Debt (7%) | Note Payable (8%) | (12 3/8%) | ||||||||||||||||
Balance at December 31, 2002 | $ | — | — | — | — | $ | 36,318 | $ | 36,318 | ||||||||||
Indebtedness incurred | 8,533 | 7,353 | 10,981 | 26,867 | — | 26,867 | |||||||||||||
Payments applied | (4,787 | ) | — | — | (4,787 | ) | (24 | ) | (4,811 | ) | |||||||||
Accretion of discount | — | — | — | — | 32 | 32 | |||||||||||||
Unrealized foreign exchange loss | 200 | 349 | 520 | 1,069 | 3,854 | 4,923 | |||||||||||||
Balance at September 30, 2003 | $ | 3,946 | 7,702 | 11,501 | 23,149 | $ | 40,180 | $ | 63,329 | ||||||||||
Subsequent to September 30, 2003, the remaining $4.0 million of the original $8.5 million e-pay acquisition deferred cash notes was paid in full.
Deferred Income Taxes
The long-term portion of deferred income tax liability decreased to $3.3 million at September 30, 2003, from $3.4 million at June 30, 2003, due to the deferred tax effect of the amortization of intangible assets acquired in connection with the acquisition of e-pay. The intangible assets have amortizable book value and no related tax basis.
Total Stockholders’ Equity
Total stockholders’ equity increased to $40.1$42.4 million at March 31,September 30, 2003 from $6.2 million at December 31, 2002. This results from the following activity:
We have guaranteed certain performance obligations of certain joint ventures under service agreements entered into by the joint ventures and our customers. The amount of such obligations is not stated in the agreements. Depending on the negotiated terms of the guaranty and/or on the underlying service agreement, our liability under the guaranty may be subject to time and materiality limitations, monetary caps and other conditions and defenses.
In certain instances in which we license proprietary systems to customers, we give certain warranties and infringement indemnities to the licensee, the terms of which vary depending on the negotiated terms of each respective license agreement, but which generally warrant that such systems will perform in accordance with their specifications. The amount of such obligations is not stated in the license agreements. Our liability for breach of such warranties may be subject to time and materiality limitations, monetary caps and other conditions and defenses.
From time to time, we enter into agreements with unaffiliated parties containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective agreement. The amount of such obligations is not stated in the agreements. Our liability under such indemnification provisions may be subject to time and materiality limitations, monetary caps and other conditions and defenses. Such indemnity obligations include the following:
In connection with the disposition of subsidiaries, operating units and business assets by us, we have entered into agreements containing indemnification provisions, the terms of which vary depending on the negotiated terms of each
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respective agreement, but which are generally described as follows: (i) in connection with acquisitions made by us, we have agreed to indemnify the seller against third party claims made against the seller relating to the subject subsidiary, operating unit or asset and arising after the closing of the transaction, and (ii) in connection with dispositions made by us, we have agreed to indemnify the buyer against damages incurred by the buyer due to the buyer’s reliance on representations and warranties relating to the subject subsidiary, operating unit or business assets in the disposition agreement if such representations or warranties were untrue when made.
For details of critical accounting policies please refer to the audited consolidated financial statements of Euronet Worldwide, Inc. and subsidiaries for the year ended December 31, 2002, including the notes thereto, set forth in the Company’s Form 10-K.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
SFAS 150
In May 2003, Statement of Financial Accounting Standard No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” was issued. SFAS 150 requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments for the first interim period beginning after September 15, 2003. The adoption of SFAS 150 is not expected to have a material effect on our financial statements.
EITF 00-21
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Element Deliverables” (EITF 00-21). The issue addresses how to account for arrangements that may involve multiple revenue-generating activities, i.e., the delivery or performance of multiple products, services, and/or rights to use assets. In applying this guidance, separate contracts with the same party, entered into at or near the same time, will be presumed to be a package, and the consideration will be measured and allocated to the separate units based on their relative fair values. This consensus guidance will be applicable to agreements entered into in quarters beginning after JuneSeptember 15, 2003. We will adoptadopted this new accounting effective July 1, 2003. We are currently evaluating the potential impact, if any, the adoption of EITF 00-21 will have on our financial position and results of operations.
On April 30, 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149), which amends Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), to address (1)(i) decisions reached by the Derivatives Implementation Group, (2)(ii) developments in other Board projects that address financial instruments, and (3)(iii) implementation issues related to the definition of a derivative. SFAS 149 has multiple effective date provisions depending on the nature of the amendment to SFAS 133. We are currently evaluating the potential impact, if any, the adoption of SFAS 149 will have on our financial position and results of operations.
29SFAS 149
At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF) reached consensuses on EITF 02-18 “Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition.” Issues 1 and 2 of EITF 02-18, which considered whether, (i) an investor should recognize any previously suspended losses when accounting for a subsequent investment in an investee that does not result in the ownership interest increasing from one of significant influence to one of control, and (ii), if the additional investment represents the funding of prior losses, whether all previously suspended losses should be recognized or whether only the previously suspended losses equal to the portion of the investment determined to be funding prior losses should be recognized. The EITF concluded that if the additional investment, represents, in substance, the funding of prior losses, the investor should recognize previously suspended losses only up to the amount of the additional investment determined to represent the funding of prior losses. At its February 5, 2003 meeting, the FASB ratified the consensuses reached by the Task Force in this Issue.issue. We have discontinued recording losses on the equity method investment in our subsidiary in Indonesia. If we make additional investments in
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this subsidiary, we would be required to recognize additional losses to the extent these additional investments are considered funding of unrecognized prior losses of the subsidiary.
This document contains statements that constitute forward-looking statements within the meaning of section 27A of the Securities Act and section 21E of the U.S. Securities Exchange Act of 1934. All statements other than statements of historical facts included in this document are forward-looking statements, including statements regarding the following:
Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct. Forward-looking statements are typically identified by the words believe, expect, anticipated,anticipate, intend, estimate and similar expressions.
Investors are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may materially differ from those in the forward-looking statements as a result of various factors, including the following:
These risks and other risks are described in Exhibit 99.1 to this Form 10-Q and our other filings with the Securities and Exchange Commission.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Exposure
In the threenine months ended March 31,September 30, 2003, 78%84% of our revenues were generated in Poland, Hungary, Australia, the United KingdomU.K. and Germany as compared to 61%64% in the threenine months ended March 31,September 30, 2002. This increase is due to the overall increase in revenues for our operations, including in these five countries and particularyparticularly due to the acquisition of e-pay in the U.K. and Australia, which accounted for 52%64% of the revenues for the threenine months ended March 31,September 30, 2003. In Hungary and Poland, the majority of revenues received are denominated in the Hungarian forint and Polish zloty, respectively. However, the majority of our foreign currency denominated contracts in both countries are linked to either inflation or the retail price index. In the United KingdomU.K. and Germany, 100% of the revenues received are denominated in the British pound and the euro, respectively.
We estimate that a 10% depreciation in foreign exchange rates of the euro, Australian dollar, Hungarian forint, Polish zloty and the British pound sterling against the U.S. dollar would have the combined effect of a $3.1$3.0 million increase in the reported net income. ThisWe estimate that a 10% appreciation in the foreign exchange rates of the euro, Australian dollar, Hungarian forint, Polish zloty and British pound sterling against the dollar would have a combined effect wasof a $3.8 million decrease in reported net income. These effects were estimated by segregating revenues and expenses by the U.S. dollar, Hungarian forint, Polish zloty, British pounds and euro and then applying a 10% currency devaluation to the non-U.S. dollar amounts. We believe this quantitative measure has inherent limitations. It does not take into account any governmental actions or changes in either customer purchasing patterns or our financing or operating strategies.
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As a result of continued European economic convergence, including the increased influence of the euro as opposed to the U.S. dollar on the Central European currencies, we expect that the currencies of the markets where we invest will fluctuate less against the euro than against the dollar. Accordingly, we believe that our euro-denominated debt provides, in the medium to long term, for a closer matching of assets and liabilities than would dollar-denominated debt.
Interest Payments
Beginning January 1, 2003, interest payments of approximately €2.2 million (estimated $2.3$2.5 million as of March 31,September 30, 2003) are payable semi-annually on our outstanding 12 3/8% senior debt. Payment dates are January 1 and July 1, with the final interest payment due on July 1, 2006. The first paymentPayments due January 1, 2003 wasand July 1, 2003 were made on December 30, 2002.timely. Because the bond interest is payable in euro, foreign currency fluctuations between the U.S. dollar and the euro may result in gains or losses which, in turn, may increase or decrease the amount of U.S. dollar equivalent interest paid.
In AprilOctober 2003, we made our firstthird and final principal and interest payment on our deferred purchase price debt incurred with the purchase of e-pay. Annual interest payments on the remaining e-pay acquisition notes total approximately £1.2£0.9 million (estimated $1.9$1.5 million as of March 31,September 30, 2003) with the final interest payment due on February 19, 2005. Approximately $0.5 million of theseThis interest payments are payable quarterly from the cash flows from the Prepaid Processing Segment, with the remainderis payable semi-annually.
We currently anticipate making these interest payments largely from earnings denominated in local currencies in our European markets. As a result, it may not be necessary to hedge these expected cash payments in U.S. dollars, since the source of funds used for payments would already be in pounds sterling or euro or euro-linked denominations. We will actively monitor our potential need to hedge future bond interest payments, and if required, we will initiate hedging strategies to minimize foreign currency losses resulting from payments made from U.S. dollars.
ITEM 4. CONTROLS AND PROCEDURES
WithinPursuant to Rule 13a-15(b) under the 90 days prior to the filing dateSecurities Exchange Act of this report,1934, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under(“Disclosure Controls”) as of the Securities Exchange Actend of 1934.the period covered by this report. Based upon that
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evaluation, the Company’s Chief Executive OfficerCEO and Chief Financial OfficerCFO concluded that the Company’s disclosure controls and proceduresDisclosure Controls are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
SinceDisclosure Controls are procedures designed to ensure that information required to be disclosed in our reports filed under the dateExchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake.
The evaluation we made of our Disclosure Controls included a review of the evaluation, there havecontrols’ objectives, the Company’s implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report.
There has been no significant changeschange in the Company’s internal controlscontrol over financial reporting during the quarter ended September 30, 2003 that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, these controls.the Company’s internal control over financial reporting.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In FebruarySeptember 2003, we issued 2,497,504114,374 shares of our common stock (“Euronet Stock”)to the shareholdersshareowners of e-pay, Limited. We also executed promissory notes totaling $26.9 million of which $7.4 million are convertible (the “Convertible Notes”) into Euronet Stock at the option of the holders at a conversion price of $11.43 per share, or 647,282 shares.Austin International Marketing and Investments, Inc. (AIM). The Euronet securities issued in this transactiontransactions were issued in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933 and Regulation S.D thereunder. This transaction is described more fully in Note 4 to the unaudited consolidated financial statements.
The Convertible Notes may be redeemed by Euronet, in whole but not in part, under certain conditions, including if the average market price of the Euronet Stock over a thirty consecutive trading day period exceeds $15.72, for Euronet Stock at a redemption price of $11.43 per share. The conversion price and the redemption price are subject to customary anti-dilution provisions.ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
We agreed to file with the SEC a registration statement to enable the public resale of the Euronet Stock received by the former shareholders of e-pay and to use its commercially reasonable efforts to cause such registration statement to be declared effective by the SEC (i) as promptly as practicable with respect to any Euronet Stock issued upon the redemption of the Convertible Notes and (ii) not later than 12 months following the closing of the acquisition with respect to the Euronet Stock issued at the time of closing or upon conversion of the Convertible Notes.None.
The shares of common stock issued at the closing of the transaction and issuable upon conversion of the Convertible Notes may not be transferred by the holders thereof prior to February 18, 2004. Euronet Stock issuable upon the redemption of the Convertible Notes may be transferred prior to February 18, 2004 pursuant to the registration statement as soon as it is declared effective by the SEC.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
Exhibit 31(a) | Certifications of Chief Executive Officer | |
Exhibit | Certifications of Principal Accounting Officer | |
Exhibit 32(a) |
of | |
Exhibit |
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of 2002 | ||
Exhibit 99.1 |
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(b) Reports on Form 8-K
On February 3, 2003, the Company filed a current report on Form 8-K reporting events and information under Item 2 (“Acquisition or Disposition of Assets”) and Item 7 (“Financial Statements, Pro Forma Financial Information and Exhibits”).
On February 19,July 30, 2003 the Company filed a current report on Form 8-K reporting events and information under Item 7 (“Financial Statements, Pro Forma Financial Information and Exhibits”) and Item 912 (“Regulation FD Disclosure”Results of Operations and Financial Condition”).
On March 6, 2003, the Company filed a current report on Form 8-K reporting events and information under Item 2 (“Acquisition or Disposition of Assets”) and Item 7 (“Financial Statements, Pro Forma Financial Information and Exhibits”).
On March 12, 2003, the Company filed a current report on Form 8-K reporting events under Item 5 (“Other Events”) and Item 7 (“Financial Statements, Pro Forma Financial Information and Exhibits”).
On March 24, 2003, the Company filed a current report on Form 8-K reporting events under Item 5 (“Other Events”) and Item 7 (“Financial Statements, Pro Forma Financial Information and Exhibits”).
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 15, 2003
November 14, 2003 | ||
By: | /s/ | |
Michael J. Brown | ||
Chief Executive Officer |
By: | /s/ | |
Rick L. Weller | ||
Chief Financial Officer |
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CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
I, Michael J. Brown, Chairman and Chief Executive Officer, certify that:
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CERTIFICATIONS OF PRINCIPAL ACCOUNTING OFFICER
I, Rick L. Weller, Chief Financial Officer and Chief Accounting Officer, certify that:
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Exhibit
| Description | |
Exhibit |
| |
Exhibit | Certifications of Principal Accounting Officer | |
Exhibit 32(a) |
of 2002 | |
Exhibit 32(b) | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 99.1 | Risk Factors | |
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