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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number 000-22167
EURONET WORLDWIDE, INC.
(Exact name of the Registrant as specified in its charter)
DELAWARE
(State of other jurisdiction of incorporation or organization)
74-2806888
(I.R.S. employer identification no.)
4601 COLLEGE BOULEVARD
SUITE 300
LEAWOOD, KANSAS 66211
(913) 327-4200
(Address and telephone number of the Registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.02 par value
Preferred Stock Purchase Rights
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
At February 28, 2003, the Registrant had 26,473,206 shares of common stock (the
"Common Stock") outstanding. As of June 28, 2002, the aggregate market value of
the Common Stock held by non-affiliates of the Registrant was approximately $373
million. The aggregate market value was determined based on the closing price of
the Common Stock on June 28, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders in 2003, which will be filed with the Securities and Exchange
Commission no later than 120 days after December 31, 2002, are incorporated by
reference into Part III.
PART I
ITEM 1. BUSINESS
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. We process transactions for
a network of 3,005 automated teller machines (ATMs) across Europe (and until
January 2002 in the United States). 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. 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. Through our subsidiary, e-pay Ltd. which we acquired on
February 19, 2003, we operate a network of point-of-sale (POS) terminals
providing electronic processing of prepaid mobile phone airtime ("top-up")
services in the U.K. and in Australia through its wholly owned subsidiary e-pay
Australia Pty Ltd. Our principal customers are banks, mobile phone operators and
retailers that require electronic financial transaction processing services. Our
solutions are used in more than 60 countries around the world. As of December
31, 2002, we had ten offices in Europe, two in the United States and one each in
India, Indonesia, and Egypt.
The first company in the Euronet group was established in 1994 as a Hungarian
limited liability company. We began operations in 1995, setting up a processing
center and installing our first ATMs in Budapest, Hungary. We commenced
operations in Poland and Germany in 1995 and 1996, respectively. The Euronet
group was reorganized on March 6, 1997 in connection with its initial public
offering, and at that time the operating entities of the Euronet group became
wholly owned subsidiaries of Euronet Services, Inc., a Delaware corporation. We
changed our name from Euronet Services, Inc. to Euronet Worldwide, Inc. in
August 2001.
Until December 1998, we devoted substantially all of our resources to
establishing and expanding an ATM network and outsourced ATM management services
business in Central Europe (including Hungary, Poland, the Czech Republic,
Croatia and Romania) and Germany. On December 2, 1998, we acquired Euronet USA
(formerly Arkansas Systems, Inc.), a U.S. company that produces electronic
payment systems software for retail banks and is the leading electronic payment
software system for the IBM iSeries (formerly AS/400) platform. As a result of
this acquisition, we were able to offer a broader and more complete line of
services and solutions to the retail banking market, including software
solutions related not only to ATMs, but also to POS devices, credit and debit
card operations and Internet, telephone and mobile banking. We have invested in
software research, development and delivery capabilities and have integrated our
ATM processing business and software business. These two complementary
businesses present strong cross-selling opportunities within our combined
customer base. Also, since this software is used in our operations center,
opportunities exist to leverage the core infrastructure and software to provide
innovative value-added e-commerce products and services.
Between 1999 and 2001, we expanded our presence to Egypt and to Western and
Southern Europe including Greece, France and in particular the U.K., where we
established a sizeable independent ATM network. As of December 31, 2002, we
operated 772 ATMs in the U.K. of which 640 were owned by us. As described
further below, in January 2003, we sold our U.K. subsidiary but we will continue
to operate all of the ATMs through a five-year outsourcing agreement. (See Note
29 - Subsequent Events to the Consolidated Financial Statements.) We sold our
ATM operations in France in May 2002 due to the imposition of stringent new
safety requirements for the operation of ATMs, which made it difficult to
operate ATMs profitably in that market.
Throughout 2001 and 2002, Euronet has focused on product developments that would
add transaction functionality via new and existing products, including mobile
banking and event messaging. Another new product line was the Electronic
Recharge line, which enabled 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. 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.
As of December 31, 2002, we operated in two principal business segments. The
first is the Processing Services Segment, which comprises our proprietary ATM
network and outsourced management of ATMs for banks. It includes various new
processing services that we provide for banks and mobile phone companies through
our ATM network and managed ATMs, such as mobile phone recharge services. Our
second principal segment is the Software Solutions Segment, which provides
transaction processing software solutions to banks that enable them to operate
ATMs and POS terminals and process financial transactions from those devices and
the Internet.
Subsequent to December 31, 2002, we entered into two transactions that will
significantly impact our results for the years 2003 and beyond.
First, on January 17, 2003, we sold our U.K. ATM network and simultaneously
signed an ATM outsourcing agreement with the buyer. From that date forward, we
will operate the ATMs in that network under a five year outsourcing agreement.
With this transaction, we in effect sold our UK subsidiary, and all our
employees working in that office transitioned to the new company. This
transaction will significantly decrease the revenues we realize from the ATM
Processing Services Segment. However, because revenues from the outsourcing
agreement are high margin revenues, this transaction will not decrease operating
profits going forward as significantly, as described in Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Second, on February 19, 2003, we acquired e-pay, Ltd. (See Note 29 - Subsequent
Events to the Consolidated Financial Statements.) 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 airtime to their subscribers through POS
terminals in retail outlets. e-pay currently processes top-up sales at more than
50,000 POS terminals in approximately 18,000 retail locations, including the
mobile operators' own retail outlets, major retail chains and independent retail
outlets. 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. With this
acquisition, we gained offices in London and Sydney.
We will maintain e-pay's data center in Basildon, U.K. but will establish a
connection between that center and Euronet's existing data center in Budapest.
We intend to market e-pay's services in selected countries in which we currently
operate. With the e-pay acquisition, Euronet will add a third principal business
segment, called the Prepaid Processing Services Segment.
Our website address is www.euronetworldwide.com. We make available free of
charge through our website all SEC public filings including our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports filed or furnished pursuant to Section 13(d) or
15(d) of the Exchange Act as soon as reasonably practicable after these
documents are electronically filed with, or furnished to, the SEC. The
information on our website is not, and shall not be deemed to be, a part of this
report or incorporated into any other filings we make with the SEC.
MARKET OPPORTUNITY
PROCESSING SERVICES SEGMENT
Our Processing Services Segment provides services to banks and mobile phone
companies primarily in the developing markets of Central and Southern Europe
(Hungary, Poland, Czech Republic, Croatia, Romania, Slovakia, Serbia and
Greece), Egypt, Indonesia and India, as well as in the developed countries of
Western Europe (Germany and the U.K.) and, until January 2002, the United
States. Although all of these markets present market opportunities for expanding
the sales of our services, we believe opportunities for transaction growth in
our core ATM services business are greater in the developing countries.
Our ATM network enables cardholders to make cash withdrawals, balance inquiries
and other transactions with cards issued by banks. The number of transactions
made on our ATMs depends on the number of bankcards issued in the country where
the ATM is located. In the developing markets, the number of cards currently
issued per person is substantially lower than in the developed markets but is
increasing rapidly. We believe transaction levels in the developing markets will
increase eventually to approximate those of the developed markets as banks bring
new customers into the banking system and issue more cards to their existing
customers. Therefore, the growth rates that we expect to achieve from
transaction-based revenues in developing markets are higher than in developed
markets.
In the developed European markets, ATMs are located primarily at bank branches
as compared to a broader array of sites in the United States. We believe there
are opportunities in these markets to provide ATM access in places where our
experience suggests that customers use ATMs often, such as in shopping malls and
large retail outlets.
Economic development in the developing markets also influences the growth rates
we expect for certain other services we offer. For example, banks that are
seeking to expand and develop their business in developing markets are good
potential clients for our existing ATM network, as we can provide their
customers access to ATMs we have already installed in those markets so the banks
do not have to install ATMs themselves. Likewise, we offer banks outsourced ATM
services whereby we will establish a network of ATMs for banks and operate those
ATMs for a fixed monthly fee or a combination of a fixed fee and a monthly fee.
In all of our markets except the U.K., when a bank cardholder conducts a
transaction on one of the ATMs in our network, we receive a fee from the
cardholder's bank for that transaction. The bank pays us this fee either
directly or indirectly through a central switching and settlement network. When
paid indirectly, this fee is referred to as the "interchange fee." All of the
banks in a shared ATM and POS switching system establish the amount of the
interchange fee by agreement.
In the U.K., where we previously owned ATMs directly, we were permitted to
charge a transaction fee directly to the person using the ATMs (which is
referred to as "surcharging"). This surcharge was in place of the interchange
fee and we determined its amount. The surcharge ranged from GBP 1 to GBP 1.5
(approximately $1.59 to $2.39), which is substantially higher than the
interchange fee determined by banks in the U.K., which is currently GBP 0.43
(approximately $0.68). This permitted us to realize more income per transaction
in the U.K. than most of our other markets and made it possible to operate
profitable ATMs in locations with lower transaction levels. Our aggressive
roll-out of ATMs in the U.K. during 2001 and 2002 was based on the ability to
surcharge there. However, in January 2003, we sold our U.K. subsidiary to focus
more on outsourcing rather than owning ATMs, and we now receive fees for
outsourced management of those same U.K. ATMs rather than a surcharge fee. The
sale of our U.K. subsidiary enabled us to focus more on outsourcing in our most
profitable regions rather than on deploying ATMs. (See Note 29 - Subsequent
Events to the Consolidated Financial Statements.)
We believe banks in both the developing and developed markets are becoming more
receptive to outsourcing the operation of their ATMs and POS networks. The
operation of these devices requires expensive hardware and software and
specialized personnel. We have these resources available and offer them to banks
under outsourcing contracts that provide that the banks pay a monthly and/or
transaction-based fee to us. This arrangement reduces substantially the
investment a bank needs to make to operate its ATMs and POS terminals. We
believe opportunities exist for developing our outsourcing business in all of
our markets.
SOFTWARE SOLUTIONS SEGMENT
Although our Software Solutions Segment is headquartered in the United States,
approximately 75% of our software customers are international and in particular
located in developing markets. This distribution is largely because our software
products, based on the Integrated Transaction Management ("ITM") core system, is
a relatively small and inexpensive package that is appropriate for banks with
smaller transaction processing needs. Euronet Software is the preferred
transaction-processing software for banks that operate their back office
software using the IBM iSeries platform, which is also a relatively inexpensive,
expandable hardware platform. The software offering includes modules for ATM
management, POS management, merchant management, debit card and credit card
systems, telephone banking, Internet banking and mobile banking. We believe
demand will continue for our Euronet software from smaller banks in the
developed markets and throughout the developing world as new banks are
established. Once a customer purchases our software and installs the core
system, we provide a series of modules, upgrades and maintenance services that
often result in recurring revenues for us.
PREPAID PROCESSING SERVICES SEGMENT (COMMENCING FROM FIRST QUARTER 2003)
We acquired e-pay Ltd. in February 2003 and will report its results in a
separate segment, referred to as the Prepaid Processing Services Segment
beginning in the first quarter of 2003. Disclosure of separate financial segment
information is not reflected in this report, which relates to the 2002 year.
(See Note 29 - Subsequent Events to the Consolidated Financial Statements.)
Customers using mobile phones pay for their usage in two ways: through
"postpaid" accounts where usage is billed at the end of each billing period, and
through "prepaid" accounts where customers must pay in advance by crediting
their accounts prior to usage. Although operators in the United States and
certain European countries have provided service principally through postpaid
accounts, the trend in Europe has shifted toward prepaid accounts because mobile
operators of those accounts do not
take the credit risk with respect to payment for airtime usage. In many
developing markets, the majority of mobile phones are prepaid. As of February
2003, mobile phone penetration in the countries in which Euronet has operations
and mobile operator agreements ranges from 1 percent in India to 88 percent in
Slovakia. Last year's prepaid service growth rates in these countries ranged
from 19 percent in Greece to 80 percent in Indonesia. In 2001, many countries
doubled their numbers of prepaid subscribers, and in 2002, the countries in
which Euronet operates increased prepaid services collectively by 12 percent.
Currently two principal methods are available to credit prepaid accounts
(referred to as "top-up" of accounts). The first is through the purchase of
"scratch cards" bearing code numbers, that when entered into a customer's mobile
phone account, credit the account by a certain value of airtime. Scratch cards
are sold predominantly through retail outlets. The second is through various
electronic means of crediting accounts using POS terminals. Electronic top-up or
"e-top-up" methods have several advantages over scratch cards, primarily because
electronic methods do not require the creation, distribution and management of a
physical inventory of cards. Currently scratch cards are the predominant method
of crediting mobile phone accounts in most developed markets, but a shift is
occurring in such markets away from usage of scratch cards to the usage of
electronic top-up methods. In the U.K., for example, we estimate that
approximately 10% of all top-ups were performed through electronic top-ups in
early 2002. By December 2002, we estimate that as much as 40% of all U.K.
top-ups were performed through e-top-ups.
We believe substantial opportunity exists to provide services to the mobile
operators with respect to electronic top-up transactions. We intend to use the
technology and business methods of e-pay in developing markets to leverage this
opportunity. In addition, we are developing similar capabilities in the U.S.
through a service branded "PaySpot."
STRATEGY
The expansion and enhancement of our outsourced management solutions, both in
existing markets and new markets, will remain a core business strategy. We also
have been and will continue to focus heavily on the development of our
outsourced management solutions with fixed fee arrangements. We believe
increasing the number of bank-owned ATMs that we operate under management
agreements will provide continued growth while minimizing the capital we place
at risk. We continually strive to make our own ATM networks more efficient by
eliminating the underperforming ATMs and installing ATMs in more desirable
locations.
We have expanded our outsourced management solutions beyond ATMs to include card
management and additional services such as POS terminal management, bill
payment, and prepaid mobile operator solutions. We support these services using
our proprietary software products. The introduction of value-added services for
delivery over our ATM network has resulted in increased transactions and
revenues. In the last two years, we developed and entered into a number of
agreements for a new line of services involving the use of our ATM networks and
central processing infrastructure to provide users of mobile phones the ability
to purchase prepaid mobile phone time on ATMs and on the mobile phones
themselves. We contract with mobile phone providers to facilitate their sale of
mobile phone time, and we are paid a commission on each sale, often a percentage
of the value of the mobile phone time purchased. In this regard, we also
contract with banks to be able to use their ATMs for the distribution of mobile
phone time, thereby expanding the distribution networks we can offer to mobile
phone operators. We offer these transaction types as a service enhancement to
existing clients, or as a "pass-through" service on ATMs that are owned and
operated by others.
This ATM and Mobile Recharge line of services has been substantially
strengthened through complementary services obtained by our acquisition of
e-pay. We can now provide top-up services through POS terminals. We intend to
expand e-pay's technology and business methods into other markets where we
operate and hope to leverage our relationships with mobile phone companies and
banks in those markets to cross-sell and to facilitate that expansion.
We downsized our Software Solutions Segment in January 2001 to bring expenses in
line with revenues, and this segment's improved results have contributed to our
overall results in 2002. We have made significant progress in reducing software
delivery times and adding resources to enhance and expand our software products.
Software products are now an integral part of our product lines, and our
investment in research, development, delivery and customer support reflects our
ongoing commitment to an expanded customer base. We have found significant
opportunities for cross-selling processing services to our software solutions
customers and that our ability to develop, adapt and control our own software
gives us credibility with our processing services customers. In addition, during
2001 we signed agreements under which we used our software in lieu of cash as
our initial capital contributions to new transaction processing joint ventures
that launched in 2002 (for example, one in Serbia). This type of contribution is
permitting us to enter these new markets without any cash outlay. Therefore,
although revenues from our Software Solutions Segment are not currently growing
significantly, we view it as a valuable piece of our overall business strategy.
Our strategy in the Software Segment in 2002 included improvement of the
application functionality for our core debit and credit solutions. Our software
was upgraded to become compliant with certain new mandates of the international
card organizations involving initiatives such as EMV (Europay, MasterCard and
Visa) chip card support and Triple DES (Data Encryption Standard) support. EMV
standards define the issuance and acceptance of chip card technology. Triple DES
security standards represent a significant strengthening of encryption
requirements to further protect sensitive data that is transmitted in
transactions. These emerging industry standards have been jointly developed by
the three major card associations and will have a significant influence over
EFT-related hardware and software decisions throughout the next five years. Our
ability to provide support for mandated initiatives such as EMV and Triple DES
will provide significant opportunities to sell updated software to our existing
customers and will enable Euronet to replace competitors' non-compliant
solutions.
In the last two years, we also undertook a strategy of signing customers to
extended long-term maintenance agreements. We continue to invest in emerging
markets and technologies that complement our processing and software solutions.
DISCONTINUED OPERATIONS
On January 4, 2002, we sold substantially all of the assets of our ATM
processing business in the United States, known as DASH, to ALLTEL Information
Services, Inc. ("AIS") for $6.8 million in cash. AIS is a wholly owned
subsidiary of ALLTEL Corporation. We recorded a pre-tax gain of approximately
$4.8 million related to this transaction.
On July 15, 2002, we sold substantially all of the non-current assets and
capital lease obligations of our processing business in France to Atos.
Non-current assets and capital lease obligations related to the France business
have been removed from continuing operations and classified under discontinued
operations. We incurred a loss on disposal of the France business of $0.1
million.
In previous filings, we reported France under the Western European Sub-segment
and DASH under the Other Operations Sub-segment. All operating amounts, ATM
counts, transaction numbers and statistics reported in this filing exclude
France and DASH.
OPERATIONS
PROCESSING SERVICES SEGMENT
OVERVIEW
At December 31, 2002 and 2001, we operated 3,005 and 2,400 ATMs, respectively.
The major source of revenue generated by our ATM network is transaction revenue.
The transactions processed by the ATM network increased by 39% from 57.1 million
transactions in 2001 to 79.2 million transactions in 2002. Revenue sources of
the Processing Services Segment also include outsourced management revenue,
which is revenue from operating ATMs that we do not own, prepaid mobile phone
recharge revenue and advertising revenue. The number of ATMs operated under
outsourced management agreements increased from 458 at December 31, 2001 to 635
ATMs at December 31, 2002.
Our experience is that the level of transactions on our networks is subject to
seasonal variation. Transactions tend to drop in the first quarter, as compared
to the preceding fourth quarter, to levels per ATM that are the lowest we
experience during the year. Since revenues of the Processing Services Segment
are primarily transaction based, this segment is directly affected by this
seasonality. In years prior to 2002, we believe our aggressive roll-out of ATMs
lessened the impact of seasonal variations on our overall transaction levels and
revenues as transactions from new ATMs compensated for the reduction in overall
transaction levels.
ATM network growth in 2002 is attributable to transaction growth and additional
outsourcing contracts in our established markets, in particular Poland, Hungary,
the Czech Republic, and Croatia as well as the rollout of additional ATMs in the
U.K. Of the net 605 ATMs added to the network during 2002, 205 ATMs were located
in the U.K.
ATM TRANSACTION PROCESSING
Our operations center uses our Integrated Transaction Management System. The
ATMs in our networks are able to process transactions for holders of credit and
debit cards issued by or bearing the logos of banks and international card
organizations such as American Express, Diners Club International, Visa,
MasterCard and Europay. This ability is accomplished through our agreements and
relationships with these banks, international credit and debit card issuers and
international associations of card issuers.
In a typical ATM transaction, the transaction is routed from the ATM to our
processing center, and then to the card issuer for authorization. Once
authorization is received, the authorization message is routed back to the ATM
and the transaction is completed. The card issuer is responsible for
authorization of ATM transactions processed on our ATMs.
The card issuer pays us a transaction-processing fee, even for certain
transactions that are not completed because they fail to receive authorization.
The fees we charge to the card issuers are independent of any fees charged by
the card issuers to cardholders in connection with the ATM transactions. We do
not charge cardholders a fee for using our ATMs, except in the U.K. where we
charged prior to the disposition of our U.K. subsidiary, a "surcharge" fee that
ranged between GBP 1.00 and GBP 1.50 on each cash withdrawal transaction.
We monitor the number of transactions made by cardholders on our network. These
include cash withdrawals, balance inquiries, deposits, mobile phone airtime
recharge purchases and certain denied (unauthorized) transactions. We do not
bill certain transactions on our network to banks, and we have excluded these
transactions for reporting purposes. The number of transactions processed over
our entire ATM network increased as follows: 29.7 million in 1999, 43.5 million
in 2000, 57.2 million in 2001 and 79.2 million in 2002. The number of
transactions processed monthly grew from approximately 6.6 million in December
2001 to approximately 7.0 million in December 2002.
A number of factors affect the transaction volumes processed on any given ATM,
including location of the ATM and the amount of time the ATM has been installed
at that location. Our experience is that the number of transactions on a newly
installed ATM is initially very low. It increases for varying periods ranging
from three to twelve months after installation, depending upon the market, as
consumers become familiar with the location of the machine. As the ATM network
has matured, the number of transactions per ATM has increased. We have an
ongoing policy of re-deploying under-performing ATMs to locations that we
believe are better for transaction volumes. We anticipate that future
transaction growth at our ATMs will depend heavily upon increased card issuance
in developing markets and continued re-deployment of ATMs to better locations.
We believe that the location of ATMs is one of the most important factors in
determining the success of an ATM network. Key target locations for our ATMs
include:
. major shopping malls
. busy intersections
. local smaller shopping areas offering grocery stores
. supermarkets and services where people routinely shop
. mass transportation hubs such as city bus and subway stops, rail and
bus stations, airports and gas stations
. tourist and entertainment centers such as historical sections of
cities, cinemas, and recreational facilities
Recognizing that convenience and reliability are principal factors in attracting
and retaining ATM customers, we have invested in the establishment of advanced
ATM machines and monitoring systems, as well as redundancies to protect against
network interruption. We centrally monitor the performance and cash positions of
our ATMs around the clock, and we dispatch local operations and maintenance
contractors to service the machines. Our ATMs in all markets except Germany are
linked by satellite or land-based telecommunications lines to our processing
centers.
OTHER PRODUCTS AND SERVICES
Our network constitutes a distribution network through which financial and other
products or services may be sold at a low incremental cost. We have developed
value-added services in addition to basic cash withdrawal and balance inquiry
transactions. These new services include bill payment, "mini-statement" and
recharge (purchasing prepaid airtime from ATM
and mobile phone devices) transactions. We are committed to the ongoing
development of innovative new products and services to offer our Processing
Services customers and will implement additional services as markets develop.
In our central European markets (including Poland, Hungary, Croatia, Romania and
the Czech Republic), as well as the U.K., Egypt, India and Indonesia, we have
established electronic connections to some or all of the major mobile phone
operators. These connections permit us to transmit to them electronic requests
to recharge mobile phone accounts. We have either established or adapted
networks of ATMs in these markets to offer customers of the mobile operators the
ability to credit their prepaid mobile phone accounts. We began to distribute
prepaid mobile telephone vouchers on our networks in Hungary and Poland in
November 1999. In May and October 2000, we added this service to our Czech
Republic and Croatian ATM networks, respectively. As of December 31, 2002, we
had 18 mobile operators contracted to use our electronic recharge solutions in
various markets. In Poland, Hungary, Croatia and Indonesia, we have signed
contracts with all of the local mobile operators. In September 2001, we entered
into a joint venture with a Malaysian group to establish a company to provide
this service in Malaysia and other Asian countries, including China, but that
joint venture was terminated in 2002.
In an automatic ATM recharge transaction, our ATM prompts a consumer through a
series of ATM screens, during which the customer's credit or debit card is used
to make payment for the recharge transaction. The card transaction is processed
and settled to us in the same fashion as a typical ATM transaction, and we then
send a signal to the mobile operator requesting credit to the customer's account
in the amount of the transaction. The credit takes place automatically and the
customer receives a message confirming the transaction. Similarly, our Mobile
Recharge transaction uses the same workflow, but the transaction occurs with
screens directly on the mobile phone. These recharge transactions are similar to
the new Prepaid Processing Segment, but since they are processed through our
existing operations center, they will continue to be reported in the current
Processing Services Segment.
Since 1996, we have been selling advertising on our network. Advertising clients
can put their advertisements on the video screens of our ATMs, on the receipts
issued by the ATMs and on coupons dispensed with cash from the ATMs.
CARD ACCEPTANCE OR SPONSORSHIP AGREEMENTS
Our agreements with banks and international card organizations generally provide
that all credit and debit cards issued by the customer bank or organization may
be used at all ATM machines we operate in a given market. In many markets, we
have agreements with a bank under which we are designated as a service provider
(which we refer to as "sponsorship agreements") for the acceptance of cards
bearing international logos, such as Visa and MasterCard. These card acceptance
or sponsorship agreements allow us to receive transaction authorization directly
from the card issuing bank or international card organization. Our agreements
generally provide for a term of three to seven years and are automatically
renewed unless either party gives notice of non-renewal prior to the termination
date. In some cases, the agreements are terminable by either party upon six
months notice. We are generally able to connect a bank to our network within 30
to 90 days of signing a card acceptance agreement. Generally, the bank provides
the cash needed to complete transactions on the ATM, although we have contracted
for cash supply with a cash supply bank in the Czech Republic.
Under our card acceptance agreements and many of our outsourced management
agreements, we are required to maintain insurance on the cash in the ATMs. We
also maintain insurance against vandalism and theft of the ATMs themselves.
During 2001 and 2002, the number of incidents of theft and vandalism grew in
certain markets, and claims for all ATM-related losses during the year
(including cash losses, property, and business interruption from inoperable
ATMs) were approximately $0.9 million. Insurance costs for ATM-related risks are
increasing, both as a result of these losses and overall increases in insurance
rates following the September 11, 2001 terrorist attacks.
Under our card acceptance agreements the ATM transaction fees we charge vary
depending on the type of transaction (which are currently cash withdrawals,
balance inquiries, GSM airtime recharge purchases, deposits and transactions
not completed because authorization is not given by the relevant card issuer)
and the number of transactions attributable to a particular card issuer.
Our agreements generally provide for payment in local currency. Transaction fees
are sometimes denominated in U.S. dollars or inflation adjusted. Transaction
fees are billed to banks and card organizations with payment terms no longer
than one month.
OUTSOURCED MANAGEMENT SOLUTIONS
We offer complete outsourced management services to banks and other
organizations using our processing center's full suite of secure electronic
financial transaction processing software. Our outsourced management services
include management of an existing bank network of ATMs, development of new ATM
networks on a complete turn-key basis (as we are doing for Citibank in Greece),
management of POS networks, management of charge and debit card databases and
other financial processing services. These services include 24-hour monitoring
from our processing centers of each individual ATM's status and cash condition,
coordinating the cash delivery and management of cash levels in the ATM and
automatic dispatch for necessary service calls. They also include realtime
transaction authorization, advanced monitoring, network gateway access, network
switching, 24-hour customer services, maintenance services, settlement and
reporting. We already provide these services to existing customers and we have
invested in the necessary infrastructure to support many additional
transactions. As a result, any new agreements we sign for outsourced management
services would provide additional revenue with lower incremental cost.
Our outsourced management agreements, other than in Germany, provide for fixed
monthly management fees in addition to fees payable for each transaction.
Therefore, the transaction fees under these agreements are generally lower than
under card acceptance agreements. The fees payable under our outsourced
management agreement in Germany are purely transaction based and include no
fixed component.
Our agreements with mobile operators for the non-POS recharge business vary in
term from one to five years. They provide for the maintenance of the electronic
connection necessary to provide recharge transactions to customers and define
operational and commercial terms regarding the method by which we will provide
that transaction (ATM and mobile phone), settlement and the liability for
transactions processed.
SEGMENT RESULTS
The cost of operating ATMs varies from country to country. On a per ATM or
transaction basis, the operating cost depends on the proportions of fixed and
variable cost, and therefore the stage of development of a new country market,
the number of ATMs in that market and the number of transactions. As the network
reaches a more mature stage, the operating costs begin to resemble fixed costs,
with increases in revenue generating incrementally less operating costs.
Direct operating costs as a percentage of ATM network revenue decreased from 69%
in 2000 to 57% in 2001 and 54% in 2002. We intend to continue to improve the
ratio of direct operating costs to revenue as the network continues to mature
and growth continues in higher margin outsourcing management solutions.
For a discussion of revenues, operating profits/losses and total assets of the
Processing Services Segment during each of the last three fiscal years,
including a breakdown for each geographic sub-segment and the percentages
thereof attributable to ATM transaction processing, please see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Operating Results for the Years Ended December 31,
2002, 2001, and 2000--Processing Services Segment" and Note 20 - Business
Segment Information to the Consolidated Financial Statements.
SOFTWARE SOLUTIONS SEGMENT
OVERVIEW
Through our subsidiary Euronet USA, we offer an integrated suite of card and
retail transaction delivery applications for the IBM i-Series (formerly AS/400)
platform and some applications on NT server environments. These applications are
generally referred to as Euronet Software. The core system of this product,
called "Integrated Transaction Management" (ITM), provides for transaction
identification, transaction routing, security, transaction detail logging,
network connections, authorization interfaces and settlement. Front-end systems
in this product support ATM and POS management, telephone banking, Internet
banking, mobile banking and event messaging. These systems provide a
comprehensive solution for ATM, debit or credit card management and bill payment
facilities. We also offer increased functionality to authorize, switch and
settle transactions for multiple banks through our GoldNet module. We use
GoldNet for our own EFT requirements, processing transactions across ten
countries in Europe.
We have invested significant resources in increasing the delivery capacity for
our software solutions and expanding customer service. We have expanded our
European headquarters in Budapest to provide comprehensive delivery and support
for our
European customer base. We have made further investments in research and
development of a number of new electronic- and mobile-commerce products that
should enhance the segment's performance in the future. We established a
customer service center in Asia to expand our "follow-the-sun" support
initiatives, which represent the company's commitment to providing same time
zone support for our customers worldwide. With the addition of the customer
support personnel in Asia, we have three centers covering EMEA, the Americas,
and Asia-Pacific. This coverage presents several benefits to our customers
including immediate access to live technical support, infrastructure expansion
to aid in faster problem resolution and a more in-depth knowledge and allowance
for the uniqueness of conducting business in the various regions.
SEGMENT RESULTS AND SOFTWARE SALES BACKLOG
Software Solutions Segment revenue is derived from three main sources: software
license fees, professional service fees and software maintenance fees. Software
license fees are the initial fees we charge for the licensing of our proprietary
application software to customers. We charge professional service fees for
customization, installation and consulting services provided to customers.
Software maintenance fees are the ongoing fees we charge to customers for the
maintenance of the software products.
The Software Solutions Segment revenue for the year ended December 31, 2002 was
approximately $17.4 million, of which software license fees accounted for 36.6%,
professional service fees accounted for 26.7% and software maintenance fees
accounted for 33.1%. The remaining 3.6% of revenue was miscellaneous revenue
including margins on hardware sales. We do not break down revenues for this
segment on a geographic basis.
Revenues from software licensing contracts are recognized over the contract term
using the percentage of completion method based on the percentage of services
that are provided compared with the total estimated services to be provided over
the entire contract. Revenue from time and material service contracts is
recognized as the services are provided. Revenues from software licensing
contracts representing newly released products deemed to have a higher than
normal risk of failure during installation are recognized on a completed
contract basis whereby revenues and related costs are deferred until the
contract is complete. Maintenance revenue is recognized over the contractual
period or as services are performed. Revenue in excess of billings on software
licensing contracts is recorded as unbilled receivables and is included in
current assets. Billings in excess of revenue on software licensing contracts is
recorded as deferred revenue and is included in current liabilities until such
time the above revenue recognition criteria are met.
We define "software sales backlog" as fees specified in contracts which have
been executed by us and for which we expect recognition of the related revenue
within one year. At December 31, 2002 the revenue backlog was $4.9 million, as
compared to December 31, 2001 when the revenue backlog was $2.5 million and at
December 31, 2000, when the revenue backlog was $3.5 million. The increase in
backlog from December 31, 2001 results principally from the timing of software
sales. We intend to continue to focus on expediting the delivery and
implementation of software in an effort to deliver existing backlog sales, while
simultaneously replenishing the backlog through continuing product sales growth.
The decrease in backlog from December 31, 2000 as compared to 2001 resulted
principally from the decrease in software sales during 2001.
For a discussion of revenues, operating losses and total assets of the Software
Solutions Segment during each of the last three fiscal years, please see "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -Comparison of Operating Results for the Years Ended December 31,
2002, 2001, and 2000 - Software Solutions Segment" and Note 20 - Business
Segment Information to the Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
We have made an ongoing commitment to the development, maintenance and
enhancement of our products and services. We regularly engage in research and
development activities aimed at the development and delivery of new products,
services and processes to our customers, including bill payment and presentment,
telephone and Internet banking products, applications for mobile devices,
wireless banking products, prepaid mobile phone recharge products and
browser-based ATM software products. We are also making significant improvements
to our core software products.
Our research and development costs for software products to be sold, leased or
otherwise marketed totaled $4.0 million for 2002, $5.0 million for 2001, and
$6.7 million for 2000. Of this figure, as of December 31, 2002, $2.9 million was
capitalized and is included on our balance sheet in other long-term assets, net
of accumulated amortization of $1.3 million. These costs were capitalized under
our accounting policy requiring the capitalization of development costs on a
product-by-product basis once technological feasibility is established through
the completion of a detailed program design or the creation of a working model
of the product. Technological feasibility of computer software products is
established when we have completed all
planning, designing, coding, and testing activities necessary to establish that
the product can be produced to meet its design specifications including
functions, features, and technical performance requirements. Technological
feasibility is evidenced by the existence of a working model of the product or
by completion of a detailed program design.
PREPAID PROCESSING SERVICES SEGMENT (COMMENCING FROM FIRST QUARTER 2003)
OVERVIEW
We acquired e-pay Ltd. in February 2003, and will report its results in a
separate segment, referred to as the Prepaid Processing Services Segment,
beginning in the first quarter, 2003. Disclosure of separate financial segment
information is not reflected in this report, which relates to the 2002 year.
(See Note 29 - Subsequent Events to the Consolidated Financial Statements.)
In a typical POS top-up transaction in the U.K., a consumer in a retail shop
will use an electronic card issued by the mobile phone operator to identify the
consumer's mobile phone number. The consumer uses this card with a specially
programmed POS terminal in the shop that is connected to our network. The
consumer will make a payment of a defined amount to the retailer (in cash or by
adding to the amount of a bank card transaction for other services). Using the
electronic connection we maintain with the mobile operator, the retailer will
use the POS terminal to credit the purchased amount of airtime directly to the
account of the consumer. We receive a commission on each transaction that is
withheld from the payments made and we share that commission with the retailers.
In a typical POS top-up transaction in Australia, we top-up the consumers
account by issuing a voucher from the POS terminal. The voucher includes PIN
numbers used to access the mobile phone time. The retailers settle the
transaction by paying us the amount received from the consumer, and we pay that
amount to the mobile phone operators. As is the case in the U.K., we receive a
commission on each transaction that is withheld from the payments made, and we
share that commission with the retailers.
Our agreements with major retailers for the POS business typically have two-year
terms. These agreements include terms regarding the connection of our networks
to the respective retailer's registers or payment terminals or the maintenance
of POS terminals, and obligations concerning settlement and liability for
transactions processed. Generally, our agreements with individual or small
retailers regarding the installation and operation of the POS terminals have
terms of two years, but with the ability of either party to terminate the
agreement upon three months' notice and include provisions similar to those with
major retailers.
TECHNOLOGY AND PROCESSING FACILITIES
HARDWARE
We use IBM/Diebold and NCR ATMs in our ATM network. We currently have long-term
contracts with these manufacturers to purchase ATMs at contractually defined
prices that include quantity discounts. However, we have no contractually
defined commitments with respect to quantities to be purchased. Because we
operate one of the largest Pan-European ATM network, we have substantial
negotiating leverage with ATM manufacturers and we believe we have received
favorable prices as compared to lower volume purchasers. The wide range of
advanced technology available from IBM/Diebold and NCR provides our customers
with state-of-the-art electronics features and reliability through sophisticated
diagnostics and self-testing routines. Our ATMs are modular and upgradeable so
that they can be adapted to provide additional services in response to changing
technology and consumer demand. This allows us to modify our ATMs to provide new
services without replacing our existing network infrastructure.
e-pay's POS terminals are primarily acquired from Verifone and Dione PLC. We
find the development environment for these products to be well suited to our
services. We do not have any long-term supply agreement with any manufacturer,
and we negotiate on an ad hoc basis for our terminal requirements. The market
for terminals is highly competitive, and we believe this manner of procurement
is in our best interests.
TELECOMMUNICATIONS
Strong back office central processing support is a critical factor in the
successful operation of an ATM network. Each ATM (other than ATMs in Germany) is
connected to a Euronet processing center through satellite or land-based
telecommunications depending upon physical location, reliability of the
communications supplier and cost. Because we strive to ensure very high levels
of reliability for our network, we rely primarily on satellite
telecommunications to the processing
center in Budapest for most of our ATM connections in Central Europe. Our
Budapest processing center is, in most cases, linked by VSAT (very small
aperture terminal) telecommunications to the card issuers. The VSAT
telecommunications providers generally guarantee uninterrupted service for 99.9%
of the time.
We continually strive to improve the terms of our agreements with our
telecommunications providers and have entered into multi-country agreements with
lower rates for service. In this regard, new agreements are negotiated
periodically with our VSAT suppliers, establishing a lower communication cost
per ATM that takes into account transaction volume growth.
Our agreements with our satellite telecommunications providers contain certain
assurances with respect to the repair of satellite malfunction to ensure
continuous reliable communications for the network. As the reliability of land
based telecommunications improves in the emerging economies in which we do
business, we may rely more heavily on them because they are generally less
expensive than satellite telecommunications.
Our newly acquired e-pay operations center uses Transaction Network Services
(TNS) that provides fast, cost-effective data communication services for
transaction-oriented applications. TNS proprietary technology has been
deployed worldwide. TNS claims to be 99.99% reliable and claims to have
processed over 10 billion transactions worldwide in 2002.
e-pay operates two fully live data centers in the U.K. and receives
transactional traffic from TNS via multiple fixed private circuits. The circuits
between e-pay and TNS are delivered in a diverse routed fashion which ensures
different serving exchanges are used throughout. Inbound traffic is balanced
across all available links providing maximum resilience and efficient use of
bandwidth.
Using this infrastructure e-pay is capable of receiving transactions from Dial
POS solutions (PSTN, ISDN B & D Channel), Host to Host, and ATMs in most
countries around the world.
PROCESSING CENTERS
Our primary EFT processing center for the Processing Services Segment is located
in Budapest, Hungary. It is staffed 24 hours a day, seven days a week and
consists of two production IBM iSeries computers which run the Euronet GoldNet
ATM software package, as well as an off-site realtime back up iSeries computer.
The back up machine provides high availability during a failure of either
production iSeries computer. The Budapest processing center also includes two
iSeries computers used for product and connection testing and development. Our
software is a state-of-the-art software package that conforms to all relevant
industry standards and has been installed in at least 60 countries worldwide.
The Budapest processing center's computers operate our ATMs and interface with
the local bank and international transaction authorization centers.
To protect against power fluctuations or short-term interruptions, the Budapest
processing center has full uninterruptible power supply systems with battery
back-up to service the network in case of a power failure. The Budapest
processing center's data back-up systems are designed to prevent the loss of
transaction records due to power failure and permit the orderly shutdown of the
switch in an emergency. The center also has a diesel-powered generator available
to supply electrical power to the processing center in the event of a prolonged
power outage.
In July 2001, our Budapest processing center was certified by LINK Interchange
Network Limited, the national ATM network in the U.K., to process transactions
made on U.K. ATMs through the LINK switch. We thus became the only foreign-based
processing company that has been certified in this fashion. We view this
certification as significant and as a validation of the high quality of our
processing center.
e-pay's primary prepaid processing center for the Prepaid Processing Services
Segment is located in Basildon, U.K. It is staffed 24 hours a day, seven days a
week, and provides the processing for all of our e-top-up services in the U.K.
and Australia. The operation of e-pay's POS based recharge business involves the
maintenance of a central processing computer that maintains the connections to
the mobile operators, on the one hand, and POS terminals or retail billing
systems on the other. e-pay uses a combination of off-the-shelf and proprietary
software to operate the system. e-pay has methods for monitoring the volumes of
transactions handled by each retailer and managing merchant settlement risk. To
protect against power fluctuations or short-term interruptions, the Basildon
processing center has full uninterruptible power supply systems with battery
back-up to service the network in case of a power failure. The processing
center's data back-up systems are designed to prevent the loss of transaction
records due to power failure and permit the orderly shutdown of the switch in an
emergency. The center also has a diesel-powered generator available to supply
electrical power to the processing center in the event of a prolonged power
outage.
COMPETITION
PROCESSING SERVICES SEGMENT
Our principal Processing Services competitors include ATM networks owned by
banks and national switches consisting of consortiums of local banks that
provide outsourcing and transaction services only to banks and independent ATM
deployers in that country. Large, well-financed companies that operate ATMs,
such as EDS, American Express, First Data Corporation or Concord EFS may also
establish ATM networks or offer outsourcing services that compete with us in
various markets. Competitive factors in our Processing Services business include
network availability and response time, price to both the bank and to its
customers, ATM location and access to other networks.
There are certain independent (non bank-owned) companies providing electronic
recharge on ATMs in individual markets in which we provide this service. We are
not aware of any individual independent companies providing electronic recharge
on ATMs across multiple markets in which we provide this service. In this area,
we believe competition will come principally from the banks providing such
services on their own ATMs through relationships with mobile operators or from
card transaction switching networks that add recharge transaction capabilities
to their offerings (as is the case in the U.K. through the LINK network).
SOFTWARE SOLUTIONS SEGMENT
We believe we are the leading supplier of electronic financial transaction
processing software for the IBM iSeries (formerly AS/400) platform. Other
suppliers service the software requirements of large mainframe systems and
UNIX-based platforms.
Competitors of the Software Solutions Segment compete across all EFT software
components in the following areas: (i) ATM, network and point-of-sale software
systems, (ii) Internet banking software systems, (iii) credit card software
systems and (iv) wireless banking software systems. One competitor is Applied
Communications Inc. ("ACI") based in Omaha, Nebraska which enjoys a large market
share due to its early entry into the financial systems software market and a
client base of larger banks and financial institutions. Other competitors
include Mosaic Software and Oasis Software International.
Competitive factors in the Software Solutions business include price, technology
development and the ability of software systems to interact with other leading
products.
PREPAID PROCESSING SERVICES SEGMENT (COMMENCING FROM FIRST QUARTER 2003)
Several companies offer electronic recharge services for mobile phone airtime on
POS terminals in the markets where we do business. These companies include
Alphyra, Paypoint, Omega Logic, Barclays Merchant Services and Anpost in the
U.K., and On-Q and Ezipin in Australia. In our target markets within Central
Europe companies such as Sonera, Smart Trust, Hypercom and others are attempting
to obtain footholds, but are not currently enjoying any significant market
share.
We believe, however, that we have a competitive advantage due to various
factors. First, in the U.K. and Australia, our newly acquired subsidiary has
been in existence for longer than most of our competitors and has significant
market share in those markets. e-pay currently has approximately 35% of the POS
recharge market in the U.K. and 70% in Australia. In addition, we offer
complementary ATM and mobile recharge solutions through our processing center.
We believe this will improve our ability to solicit the use of networks of
devices owned by third parties (for example, banks and switching networks) to
deliver recharge services. In selected developing markets we hope to establish a
first to market advantage by rolling out terminals rapidly before competition is
established. We also have an extremely flexible technical platform that enables
us to tailor POS solutions to individual merchant requirements where
appropriate.
The principal competitive factors in this area include price (that is, the level
of commission charged for each recharge transaction) and uptime offered on the
system. Major retailers with high volumes are in a position to demand a larger
share of the commission, which increases the amount of competition among service
providers.
As the volume of transactions increases, we believe the principal factor in
competition will be quality and price, as competitors may offer lower
commissions to secure business.
EMPLOYEES
Our business is highly automated and we outsource many of its specialized,
repetitive functions such as ATM maintenance and installation, cash delivery and
security. As a result, our labor requirements for operation of the network are
relatively modest and are centered on monitoring activities to ensure service
quality and cash reconciliation and control. We also have a customer service
department to interface with cardholders to investigate and resolve reported
problems in processing transactions.
Our rollout of ATMs, our development of new products and individual bank
connections and our expansion into new markets creates a need for qualified
staff on many levels. We require skilled staff to identify desirable locations
for ATMs and negotiate ATM lease agreements. In addition, ensuring consistency
in quality and approach to new markets as well as proper coordination and
administration of our expansion requires staff in the areas of technical
operations, financial analysis, project management, human resources,
communications, marketing and sales. We believe our future success will depend
in part on our ability to continue to recruit, retain and motivate qualified
management, technical and administrative employees. The success of our Software
Solutions business in particular depends upon the ability to hire and retain
highly qualified computer engineers and programmers.
As of December 31, 2000, we had 478 employees. In the first quarter of 2001, we
reduced staffing, primarily in Little Rock and Budapest, in a reorganization of
our software business. We had 384 employees as of December 31, 2001 and 385
employees as of December 31, 2002.
In January 2003, we sold our U.K. subsidiary. All of the 20 employees of this
subsidiary transferred to the buyer. In February 2003, we acquired e-pay and its
83 employees.
We have a European head office organization, European software delivery and
support center and European processing center in Budapest, Hungary. We have an
office in Little Rock, Arkansas where Euronet USA is based. Our corporate
headquarters is located in Leawood, Kansas. We have Euronet offices in 14
countries and e-pay offices in three countries, including joint ventures. None
of our employees is currently represented by a union. We have never experienced
any work stoppages or strikes by our workforce.
GOVERNMENT REGULATION
We have received advice from banking supervisory authorities or local counsel in
certain markets in which we do business to the effect that our business
activities in those markets do not constitute "financial activities" subject to
licensing. Any expansion of our activity into areas, which are qualified as
"financial activity" under local legislation may subject us to licensing and we
may be required to comply with various conditions to obtain such licenses.
Moreover, the interpretations of bank regulatory authorities as to the activity
we currently conduct might change in the future. We monitor our business for
compliance with applicable laws or regulations regarding financial activities.
Under German law, only licensed financial institutions may operate ATMs in
Germany. Therefore, we may not operate our own ATM network in Germany. In that
market, we act only as a subcontractor providing certain ATM-related services to
a sponsor bank. As a result, our activities in the German market currently are
entirely dependent upon the continuance of the agreement with our sponsor bank,
or the ability to enter into a similar agreement with another bank in the event
of the termination of such agreement. In April 2000, we entered into a new
sponsorship agreement with DiBa Bank canceling an agreement with Service Bank,
our previous sponsor bank. We believe, based on our experience, that we should
be able to find a replacement for DiBa if the agreement with DiBa is terminated
for any reason. The inability to maintain the DiBa agreement or to
enter into a similar agreement with another bank upon a termination of the DiBa
agreement could have a material adverse effect on our operations in Germany.
TRADEMARKS
We have registered or applied for registration of our trademarks including the
names "Euronet" and "Bankomat" and/or the blue diamond logo in any markets in
which we use those trademarks. Certain trademark authorities have notified us
that they consider the trademarks "Euronet" and "Bankomat" to be generic and
therefore not protected by trademark laws. This determination does not affect
our ability to use the Euronet trademark in those markets but it would prevent
us from stopping other parties from using it in competition with Euronet. We
have purchased a registration of the "Euronet" trademark in the class of ATM
machines in Germany, France, the U.K. and certain other Western European
countries. We have registered the "e-pay logo" trademark in the U.K., Australia,
and Malaysia and will be extending such registration as we expand that
business to new markets. We cannot be sure that we will be entitled to use the
e-pay trademark in any markets other than those in which we have registered the
trademark. Other trademarks Euronet has registered or has registrations pending
in various countries include Integrated Transaction Management; ITM; PaySpot;
Arksys; Bank24 and Bank Access 24.
During 2000 and 2001, we filed patent applications for a number of our new
software products and processes, including our recharge services and a
browser-based ATM operating system. As of the date of this report, these patents
are still pending. Technology in the areas in which we operate is developing
very rapidly and we are aware that many other companies have filed patent
applications for similar products. The procedures of the U.S. patent office make
it impossible for us to predict whether our patent applications will be approved
or will be granted priority dates that are earlier than other patents that have
been filed for similar products or services. If other applicants are granted
priority dates that are earlier than ours, and if their patents are considered
to cover technology that has been incorporated into our systems, we may be
required to pay royalties to the holders of such patents to continue to use the
affected technology. This scenario could materially and adversely affect our
business.
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, period of service and position held by each of our Executive
Officers as of March 15, 2003 are as follows:
NAME AGE SERVED SINCE POSITION HELD
- ------------------------ --- ----------------- -----------------------------------------------------------------
Michael J. Brown 46 July 1994 Chairman and Chief Executive Officer
Daniel R. Henry 37 July 1994 Director, President and Chief Operating Officer
Jeffrey B. Newman 48 December 1996 Executive Vice President - General Counsel
Rick L. Weller 45 November 2002 Executive Vice President - Chief Financial Officer
Miro I. Bergman 40 March 1997 Executive Vice President - Managing Director EMEA
James P. Jerome 45 October 1999 Executive Vice President - Managing Director - Software Division
Paul S. Althasen 38 March 2003 Executive Vice President - Joint Managing Director e-pay
John A. Gardiner 39 March 2003 Executive Vice President - Joint Managing Director e-pay
Michael J. Brown is one of the founders of our Company and has served as its
Chief Executive Officer since 1994. In 1979 Mr. Brown founded Innovative
Software, a computer software company that was merged with Informix in 1988. Mr.
Brown served as President and Chief Operating Officer of Informix from February
1988 to January 1989. He served as President of the Workstation Products
Division of Informix from January 1989 until April 1990. In 1993, Mr. Brown was
a founding investor of Visual Tools, Inc. Sybase Software acquired Visual Tools,
Inc. in February 1996. Mr. Brown received a B.S. in Electrical Engineering from
the University of Missouri-Columbia in 1979 and a M.S. in Molecular and Cellular
Biology at the University of Missouri-Kansas City in 1996. Mr. Brown has been a
Director of Euronet since its incorporation in December 1996 and he previously
served on the boards of Euronet's predecessor companies. Mr. Brown's term will
expire in July 2004. Mr. Brown is married to the sister of Mr. Henry's wife.
Daniel R. Henry founded our predecessor Company with Michael Brown in 1994 and
serves as Chief Operating Officer. In September 2001 he was also appointed
President. Mr. Henry is responsible for all of our operations, including the
United States and overseas. He is also responsible for our expansion into other
countries and the development of new markets. Prior to joining us, Mr. Henry was
a commercial real estate broker for five years in the Kansas City metropolitan
area where he specialized in the development and leasing of premiere office
properties. Mr. Henry received a B.S. in Business Administration from the
University of Missouri-Columbia in 1988. Mr. Henry has been a Director of the
Company since its incorporation in December 1996 and he previously served on the
boards of our predecessor companies. His term as Director will expire in May
2003. Mr. Henry is married to the sister of Mr. Brown's wife.
Jeffrey B. Newman serves as Executive Vice President and General Counsel. He
joined the Company in December 1996 as Vice President and General Counsel. Prior
to this, he practiced law in Paris with the law firm of Salans Hertzfeld &
Heilbronn and then with the Washington, D.C. based law firm of Arent Fox Kintner
Plotkin & Kahn, PLLC, of which he was a partner from 1993 until joining the
Company in December 1996. He established the Budapest office of Arent Fox
Kintner Plotkin & Kahn, PLLC in 1991. He is a member of the Virginia, District
of Columbia and Paris bars. He received a B.A. in Political Science and French
from Ohio University and law degrees from Ohio State University and the
University of Paris.
Rick L Weller joined us in November 2002 as Executive Vice President and Chief
Financial Officer. From January 2002 to October 2002 he was the sole proprietor
of Pivotal Associates, a business development firm. From November 1999 to
December 2001, Mr. Weller held the position of Chief Operating Officer of ionex
telecommunications, inc., a local exchange company. From April 1999 to November
1999, Mr. Weller was a founder and Chief Financial Officer of Compass Partners,
a venture that lead to the formation of ionex telecommunications, inc. From
January 1999 to March 1999 he was Chief Financial Officer of USA Global Link, an
international long distance company. Mr. Weller served as Chief Financial
Officer of Intek Information, Inc., an outsource service provider from 1997 to
December 1998. From January 1990 to September 1997, he held various positions at
Sprint Communications Inc., including Vice President Finance for the Consumer
Services Long Distance Group, Assistant Vice President Finance for Sprint's
Business Services Long Distance Group and Assistant Vice President for Sprint's
Corporate-wide Internal Audit Group. Prior to joining Sprint, Mr. Weller served
as Senior Manager in the Financial Service Industry Practice of Price
Waterhouse, an international public accounting firm. He is a certified public
accountant and received his bachelor's degree from Central Missouri State
University.
Miro I. Bergman joined us in 1997 as country manager for the Czech Republic. He
subsequently became an area director responsible for our operations in Central
Europe, and is now the Managing Director for the entire Europe, Middle East, and
Africa region. Prior to joining us, Mr. Bergman was with First Bank System from
1992 to 1996 as vice president in charge of the bank's off-premise ATM business
of over 1,200 ATMs. He also served as vice president of new Visa Co-Brand card
program initiatives. From 1988 to 1992, Mr. Bergman worked for Citicorp-Diners
Club in various card management and marketing positions. Mr. Bergman received a
bachelors degree in business administration from the University of New York at
Albany and an M.B.A. from Cornell University.
James P. Jerome currently serves as Executive Vice President and Managing
Director of our software division. He joined us in October 1999, managing the
delivery of products and services until he was appointed Managing Director
Software in 2001. From 1994-1999, he served in various capacities with
Electronic Banking Services with BISYS, Inc. From 1992 to 1994 he was a senior
account executive, responsible for commercial banks and west-coast clients, and
from 1990 to 1992 he was conversion manager for the Houston Regional Service
Center. Prior to that, Mr. Jerome was a senior systems analyst at First City
National Bank in Austin, Texas. Mr. Jerome served in various profitability
systems capacities with Republic Bank of Houston from 1982 to 1983. His industry
affiliations include serving as a director on the Electronic Funds Transfer
Association Board, the Base24 User Group, and as a board member of the Exchange
Network Advisory Council. He received his degree in business administration from
the State University of New York in 1979.
Paul S. Althasen currently serves as Executive Vice President and Joint Managing
Director of e-pay. He joined Euronet in February 2003 pursuant to Euronet's
acquisition of e-pay Limited. Mr. Althasen is a co-founder and former CEO of
e-pay, where he was responsible for the strategic direction of the company since
its formation in 1999. From 1989 to 1999, Mr. Althasen was a co-founder and
Managing Director of MPC Mobile Phone Center, a franchised retailer of cellular
phones in the U.K. Previously, Mr. Althasen worked for Chemical Bank in London
where he traded financial securities. Mr. Althasen has a B.A. (Honors) degree in
business studies.
John A. Gardiner currently serves as Executive Vice President and Joint Managing
Director of e-pay. He joined Euronet in February 2003 pursuant to Euronet's
acquisition of e-pay Limited. Mr. Gardiner co-founded e-pay in 1999 and was
formerly Managing Director of e-pay where he has been responsible for the
creation and evolution of the company and its Asia Pacific operations in
Australia and Malaysia. Mr. Gardiner had previously worked for 11 years in the
wireless communications industry, initially as Managing Director of Twinchoice
Ltd, one of the U.K.'s largest cellular accessory companies, and later as Chief
Executive of Banner Telecom Group PLC, a U.K. based cellular distribution
company.
ITEM 2. PROPERTIES
Our executive offices are located in Leawood, Kansas, U.S.A. The European head
office and European Processing Center are located in Budapest, Hungary. As of
December 31, 2002, we also maintained offices in the major metropolitan areas of
Little Rock, Arkansas, U.S.A.; Warsaw, Poland; Zagreb, Croatia; Prague, Czech
Republic; Berlin, Germany; Bucharest, Romania; Bratislava, Slovakia; Athens,
Greece; Cairo, Egypt; Mumbai, India; Jakarta, Indonesia; and London, U.K.
Subsequent to the year end, Euronet removed the London office, and with the
acquisition of e-pay, added new offices in London and Sydney. For more
information see Note 29 - Subsequent Events to the Consolidated Financial
Statements. All of our offices are leased. Our office leases provide for initial
terms of 24 to 84 months.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
From March 1997 to November 8, 1999, the Common Stock was quoted on the Nasdaq
National Market under the symbol EEFT. On November 8, 1999, our listing was
shifted to the Nasdaq SmallCap Market. On July 3, 2002, our listing was again
transferred to the Nasdaq National Market. The following table sets forth the
high and low closing prices for our Common Stock for the periods indicated:
2002 2001
--------------------- -----------------------
For the three months ended High Low High Low
--------------------------- ------- ------- ------- -------
December 31 $ 7.98 $ 4.59 $ 18.20 $ 11.54
September 30 $ 13.71 $ 4.61 $ 14.00 $ 8.45
June 30 $ 18.30 $ 11.34 $ 9.00 $ 5.40
March 31 $ 22.09 $ 16.91 $ 8.06 $ 4.50
DIVIDENDS
Since our inception, no dividends have been paid on our Common Stock. We do not
intend to distribute dividends for the foreseeable future.
HOLDERS
At December 31, 2002 and 2001, there were approximately 103 and 107 record
holders of the Common Stock, respectively.
PRIVATE PLACEMENTS AND ISSUANCES OF EQUITY
On February 19, 2003, we purchased all of the share capital of e-pay Limited
from its shareholders for approximately $76.2 million. Of the total purchase
price, $30.2 million was paid in cash at closing, $19.0 million was paid through
the issuance at closing of 2,497,504 shares of our Common Stock, and the
remaining $27 million will be paid as deferred purchase price or under
promissory notes executed at closing with 24-month maturity dates bearing
interest rates averaging approximately 7.25% per annum. Approximately $7.4
million of the notes are convertible into our Common Stock at the option of the
holders at a conversion price of $11.43 per share, or approximately 647,000
shares. We may redeem the convertible notes under certain conditions. 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.
These transactions were exempt from registration pursuant to the exemption
provided by Regulation S of the Securities Act; however, the Stock Purchase
Agreement, by which we purchased e-pay, requires us to file a registration
statement to register these shares within 30 days of filing this report.
EQUITY COMPENSATION PLAN INFORMATION
The table below sets forth information with respect to shares of Euronet Common
Stock that may be issued under our equity compensation plans as of December 31,
2002.
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted average equity compensation
issued upon exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan category (a) (b) (c)
Equity compensation plans approved by security
holders 5,859,164 $ 7.26 486,392
Equity compensation plans not approved by security
holders - - -
-------------------------- -------------------- -------------------------
Total 5,859,164 $ 7.26 486,392
========================== ==================== =========================
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data set forth below have been derived from,
and are qualified by reference to, our audited consolidated financial statements
and the notes thereto, prepared in conformity with generally accepted accounting
principles as applied in the United States ("U.S. GAAP"), which have been
audited by KPMG Polska Sp. z o.o., independent public accountants. We believe
that the period-to-period comparisons of our financial results are not
necessarily meaningful due to our significant acquisitions in December 1998 and
January 1999, and should not be relied upon as an indication of future
performance. Our future results will also be affected by the sale of our U.K.
subsidiary and the acquisition of e-pay Ltd. after December 31, 2002. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
As of December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(in thousands, except for Summary Network Data)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 12,021 $ 8,820 $ 6,760 $ 14,598 $ 55,611
Restricted cash 4,401 1,877 2,103 10,929 12,972
All other current assets 12,677 14,646 13,639 12,802 13,384
------------ ------------ ------------ ------------ ------------
Total current assets 29,099 25,343 22,502 38,329 81,967
Assets held for sale 10,767 9,351 6,597 8,627 773
Property, plant and equipment, net 21,394 21,398 26,304 29,933 32,472
Other long term assets, net 5,299 5,299 5,487 19,955 18,226
------------ ------------ ------------ ------------ ------------
Total assets $ 66,559 $ 61,391 $ 60,890 $ 96,844 $ 133,438
============ ============ ============ ============ ============
Total current liabilities 16,232 20,159 18,005 24,412 18,040
Liabilities held for sale 3,537 4,594 2,751 3,402 780
Notes payable 36,318 38,146 77,191 72,800 83,720
Other long term liabilities 4,301 6,179 7,744 5,723 6,728
------------ ------------ ------------ ------------ ------------
Total liabilities 60,388 69,078 105,691 106,337 109,268
Total stockholders' equity/(deficit) 6,171 (7,687) (44,801) (9,493) 24,170
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' $ 66,559 $ 61,391 $ 60,890 $ 96,844 $ 133,438
============ ============ ============ ============ ============
equity/(deficit)
Summary Network Data:
Number of operational ATMs at end of period 3,005 2,400 2,081 1,776 1,271
ATM transactions during the period 79,193,580 57,185,231 43,531,830 29,661,329 15,467,000
Year Ended December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(in thousands, except for share and per share data)
Consolidated Statements of Operations Data:
Revenues:
ATM network and related revenue $ 53,918 $ 45,941 $ 34,201 $ 25,367 $ 11,523
Software and related revenue 17,130 15,042 15,827 14,969 356
------------ ------------ ------------ ------------ ------------
Total 71,048 60,983 50,028 40,336 11,879
------------ ------------ ------------ ------------ ------------
Operating expenses:
Direct operating costs 29,609 26,469 24,162 22,491 10,029
All other operating expenses 41,858 40,564 61,321 43,836 23,809
------------ ------------ ------------ ------------ ------------
Total operating expenses 71,467 67,033 85,483 66,327 33,838
------------ ------------ ------------ ------------ ------------
Operating loss (419) (6,050) (35,455) (25,991) (21,959)
------------ ------------ ------------ ------------ ------------
Other (expense)/income (11,626) 5,994 (12,930) (8,262) (4,297)
Income tax benefit/(expense) 2,312 807 (1,181) 4,244 (1,692)
Minority interest 100 - - - -
------------ ------------ ------------ ------------ ------------
(Loss)/income from continuing operations (9,633) 751 (49,566) (30,009) (27,948)
Income/(loss) from discontinued operations 3,119 (81) 15 (906) (427)
------------ ------------ ------------ ------------ ------------
Net (loss)/income (6,514) 670 (49,551) (30,915) (28,375)
Translation adjustment 769 (406) - (2,515) -
------------ ------------ ------------ ------------ ------------
Comprehensive (loss)/income $ (5,745) $ 264 $ (49,551) $ (33,430) $ (28,375)
============ ============ ============ ============ ============
(Loss)/income per share - basic
(Loss)/income from continuing operations $ (0.42) $ 0.04 $ (3.00) $ (1.97) $ (1.84)
Income/(loss) from discontinued operations 0.14 (0.01) - (0.06) (0.03)
------------ ------------ ------------ ------------ ------------
Net (loss)/income $ (0.28) $ 0.03 $ (3.00) $ (2.03) $ (1.87)
============ ============ ============ ============ ============
Basic weighted average outstanding shares 23,156,129 19,719,253 16,499,699 15,252,030 15,180,651
============ ============ ============ ============ ============
(Loss)/income per share - diluted
(Loss)/income from continuing operations $ (0.42) $ 0.03 $ (3.00) $ (1.97) $ (1.84)
Income/(loss) from discontinued operations 0.14 - - (0.06) (0.03)
------------ ------------ ------------ ------------ ------------
Net (loss)/income $ (0.28) $ 0.03 $ (3.00) $ (2.03) $ (1.87)
============ ============ ============ ============ ============
Diluted weighted average outstanding shares 23,156,129 22,413,408 16,499,699 15,252,030 15,180,651
============ ============ ============ ============ ============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND
2000 -- OVERVIEW
The following description of our operating results compares the fiscal year
ended December 31, 2002 with prior periods. As indicated elsewhere in this
report, after December 31, 2002, we entered into two significant transactions
that will substantially impact our future results. The first transaction was the
sale of our network of ATMs in the U.K. and the simultaneous outsourcing
agreement for those ATMs on January 17, 2003. Results of the U.K. operations are
included in the 2002 Financial Statements. The second transaction was the
purchase of e-pay Ltd. on February 19, 2003. These transactions are described in
full in the section entitled "Subsequent Events" and in Note 29 - Subsequent
Events to the Consolidated Financial Statements. These transactions make it
difficult to use the financial results for the year 2002 to predict our results
for the years 2003 and beyond and thus need to be considered when analyzing the
financial information presented in this report for the year 2002. These
transactions are described in full in the section entitled "Subsequent Events"
and in Note 29 - Subsequent Events to the Consolidated Financial Statements.
Our total revenues increased by $10.0 million or 17% to $71.0 million, compared
to $61.0 million for 2001. Our 2001 total revenues increased by $11.0 million or
22% to $61.0 million, compared to $50.0 million for 2000. The increase in
revenues from 2001 to 2002 was primarily due to two factors: (1) an $8.4 million
increase in Processing Services Segment revenues resulting from the increase in
transaction volumes in ATMs owned by us and an increase in the number of ATMs
operated by us during this period; and (2) a $2.2 million increase in Software
Solutions Segment revenues. The increase in revenues from 2000 to 2001 was
primarily due to two factors: (1) an $11.7 million increase in Processing
Services Segment revenues
resulting from the increase in transaction volumes in ATMs owned by us and an
increase in the number of ATMs operated by us during this period; and (2) offset
in part by a decrease of $0.8 million in Software Solutions Segment revenues.
Revenues for 2002, 2001 and 2000 are discussed more fully in the Segment Results
of Operations sections below.
Effective November 1, 2001, we entered into an agreement with ABN AMRO under
which ABN AMRO agreed to pay us $1.1 million to terminate an ATM management
agreement for 106 ATMs and a card agreement between our Hungarian subsidiary and
ABN AMRO. This amount has been included in annual revenue in the fourth quarter
2001. The contract that was terminated would have generated revenues in 2002 and
2003 of $0.9 million and $0.4 million, respectively. The principal reason for
the termination of these agreements was that ABN AMRO merged with K&H Bank, and
K&H Bank had existing relationships with a competing transaction processing
switch service in Hungary.
Our 2002 total operating expenses increased by $4.4 million or 7% to $71.5
million compared to $67.0 million for 2001. Our 2001 total operating expenses
decreased by $18.5 million or 22% to $67.0 million compared to $85.5 million for
2000. The increase from 2001 to 2002 can be broken down by segment as follows:
(1) a $6.0 million increase in Processing Services Segment operating costs due
to an increase of 472 ATMs together with related transactional costs and other
costs associated with the overall growth in the size of the network operations
in 2002; (2) a $0.1 million decrease in Software Services Segment operating
costs due to cost reductions in personnel and resources in 2002; and (3) a $0.9
million decrease in Corporate Services Segment operating costs due to reductions
in personnel and resources in 2002.
The decrease in operating expenses from 2000 to 2001 can be broken down by
segment as follows: (1) a $3.3 million increase in Processing Services Segment
operating costs due to growth in the size of the network operations in 2001; (2)
a $20.4 million decrease in Software Services Segment operating costs due to the
write-down of certain intangible assets of $11.2 million in 2000 and reductions
in personnel and resources in 2001; and (3) a $1.3 million decrease in Corporate
Services Segment operating costs due to reductions in personnel and resources in
2001. Operating expenses for 2002, 2001, and 2000 are discussed more fully in
the Segment Results of Operations sections below.
We generated an operating loss of $0.4 million for 2002 compared to operating
losses of $6.0 million for 2001 and $35.5 million for 2000. The change from 2001
to 2002 was due to (1) a $2.5 million improvement in operating income in our
Processing Services Segment; (2) a $2.3 million improvement in the operating
results of our Software Solutions Segment; and (3) a $0.9 million decrease in
the operating loss from our Corporate Services Segment. The change from 2000 to
2001 was due to three factors: (1) an $8.5 million improvement in the operating
results of our Processing Services Segment; (2) a $19.6 million decrease in the
operating loss from our Software Solutions Segment; and (3) a $1.3 million
decrease in the operating loss from our Corporate Services Segment. Operating
expenses for 2002, 2001 and 2000 are discussed more fully in the Segment Results
of Operations section below.
Subsequent to December 31, 2002, we entered into two significant transactions
that will significantly impact our results for the years 2003 and beyond. These
transactions make it difficult to use the financial results for the year 2002 to
predict our results for the years 2003 and beyond and thus need to be considered
when analyzing the financial information presented in this report for the year
2002. These transactions are described in full in the section entitled
"Subsequent Events" and in Note 29 - Subsequent Events to the Consolidated
Financial Statements.
First, on January 17, 2003, we sold our U.K. ATM network and simultaneously
signed an outsourcing contract for those ATMs and thereafter. We will operate
the ATMs in that network under a five year outsourcing agreement. This
transaction will significantly decrease the revenues we realize from the
Processing Services Segment. However, because revenues from the outsourcing
agreement are high margin revenues, this transaction will not significantly
decrease operating profits going forward. The services to be provided are
substantially identical to existing services previously provided to the U.K.
subsidiary prior to the sale. In accordance with SFAS 144, the assets and
liabilities have been recorded as held for sale. The U.K.'s operations continue
to be included in continuing operations due to the ongoing revenues to be
generated by the services agreement.
We earned revenues of $14.4 million from our ATM network in the U.K. in 2002. We
estimate that we would have earned $1.4 million in revenue from this U.K.
outsourcing agreement had it been in place for 2002. Our operating income from
operation of our U.K. ATM network was approximately $2.4 million for the full
year 2002 and we estimate that we would have realized an operating profit of
$1.4 million if the outsourcing agreement had been in place for the full year
2002. Therefore, on a pro forma basis, we estimate that our consolidated
revenues would have been approximately $58 million and our consolidated
operating loss would have been approximately $1.3 million in 2002 if the sale of
U.K. ATM network had occurred on January 1, 2002.
Second, on February 19, 2003, we purchased e-pay Limited ("e-pay"), an
electronic payments processor of prepaid mobile phone airtime recharge, or
"top-up," services in the U.K and Australia. e-pay's revenues and cash flow will
be included in Euronet's results going forward. For the fourth quarter of 2002,
e-pay's unaudited revenues were approximately $23.7 million and its unaudited
operating income was approximately $2.5 million.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us
to make judgments, assumptions, and estimates that affect the amounts reported
in the Consolidated Financial Statements and accompanying notes. Note 3 -
Summary of Significant Accounting Policies and Practices to the Consolidated
Financial Statements describes the significant accounting policies and methods
used in the preparation of the Consolidated Financial Statements. Estimates are
used for, but not limited to, the accounting for the impairment of goodwill and
other intangibles, acquisition related costs, income taxes, and contingency
accruals. Actual results could differ from these estimates. The following
critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the Consolidated Financial
Statements.
Software Revenue Recognition
Revenues from software licensing agreement contracts are recognized over the
contract term using the percentage of completion method based on the percentage
of services that are provided compared with the total estimated services to be
provided over the entire contract. Revenue from time and material service
contracts is recognized as the services are provided. Revenues from software
licensing contracts representing newly released products deemed to have a higher
than normal risk of failure during installation are recognized on a completed
contract basis whereby revenues and related costs are deferred until the
contract is complete. Maintenance revenue is recognized over the contractual
period or as services are performed. Revenue in excess of billings on software
licensing contracts is recorded as unbilled receivables and is included in
current assets. Billings in excess of revenue on software licensing contracts
are recorded as deferred revenue and included in current liabilities until such
time the above revenue recognition criteria are met.
Capitalization of Software Development Costs
We apply SFAS 2 and SFAS 86 in recording research and development costs.
Research costs aimed at the discovery of new knowledge with the hope that such
knowledge will be useful in developing a new product or service or a new process
or technique or in bringing about significant improvement to an existing product
or process are expensed as incurred (see Note 25 - Research and Development to
the Consolidated Financial Statements). Development costs aimed at the
translation of research findings or other knowledge into a plan or design for a
new product or process or for a significant improvement to an existing product
or process whether intended for sale or use are capitalized on a
product-by-product basis when technological feasibility is established.
Technological feasibility of computer software products is established when we
have completed all planning, designing, coding, and testing activities necessary
to establish that the product can be produced to meet its design specifications
including functions, features, and technical performance requirements.
Technological feasibility is evidenced by the existence of a working model of
the product or by completion of a detailed program design. The detailed program
design must (a) establish that the necessary skills, hardware, and software
technology are available to produce the product, (b) be complete and consistent
with the product design, and (c) have been reviewed for high-risk development
issues, with any uncertainties related to identified high-risk development
issues being adequately resolved.
Accounting for Income Taxes
We have significant tax loss carryforwards and other temporary differences,
which are recorded as deferred tax assets and liabilities. Deferred tax assets
realizable in future periods are recorded, net of a valuation allowance based on
an assessment of each entity or group of entities' ability to generate
sufficient taxable income within an appropriate period in a specific tax
jurisdiction.
In assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will be
realized. As more fully described in Note 16 - Taxes to the Consolidated
Financial Statements, gross deferred tax assets were $30.3 million as of
December 31, 2002, substantially offset by a valuation allowance of $28.1
million. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. We consider the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
Based upon the level of historical taxable income and current projections for
future taxable income over the periods in which the deferred tax assets are
deductible, we believe it is more likely than not that we will realize the
benefits of these deductible differences, net of the existing valuation
allowance at December 31, 2002.
As requisite history of taxable income is established in certain of the
countries in which we operate and baseline forecasts project continued taxable
income in these countries, we will reduce the valuation allowance for those
deferred tax assets that will be considered realizable.
Estimating the Impairment of Long-Lived Assets
We are required to evaluate long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to projected undiscounted future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets on a discounted cash
flow basis. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Future adverse changes in market
conditions could result in an inability to recover the carrying amount of an
asset, thereby possibly requiring an impairment charge in the future.
Goodwill and Other Intangible Assets
We apply SFAS 142 in accounting for goodwill and other intangible assets. Under
SFAS 142, goodwill and intangible assets with indefinite lives are not amortized
but are reviewed annually (or more frequently if impairment indicators arise)
for impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives and
evaluated for impairment in accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The amortization and
non-amortization provisions of SFAS 142 apply upon issuance to all goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, we adopted SFAS 142 effective
January 1, 2002.
In accordance with SFAS 142, we have performed an evaluation and determined that
all intangible assets recorded in our consolidated financial statements comprise
only goodwill. We have completed the impairment tests required by SFAS 142 and
determined that there is no impairment of goodwill. The goodwill is reported in
the Processing Services Segment and in the Germany reporting unit.
BUSINESS SEGMENT INFORMATION
As of December 31, 2002, we operated in two principal business segments. The
first is the Processing Services Segment, which comprises our proprietary ATM
network and outsourced management of ATMs for banks. It includes various new
processing services that we provide for banks and mobile phone companies through
our ATM network and managed ATMs, such as mobile phone recharge services. Our
second principal segment is the Software Solutions Segment, which provides
transaction processing software solutions to banks that enable them to operate
ATMs and POS terminals and process financial transactions from those devices and
the Internet.
Our management divides the Processing Services Segment into three geographic
sub-segments:
. Central European Sub-segment (including Hungary, Poland, the Czech
Republic, Croatia, Greece, Slovakia and Romania)
. Western European Sub-segment (including Germany and the U.K.)
. Other Operations Sub-segment (including Indonesia, Egypt, India and
unallocated processing center costs)
We also operate a "Corporate Services Segment" that provides the Company's two
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 described in the summary of significant accounting policies. We
evaluate performance based on income or loss from continuing operations before
income taxes and minority interest.
On January 4, 2002, we sold substantially all of the assets of our ATM
processing business in the United States, known as DASH, to ALLTEL Information
Services, Inc. ("AIS") for $6.8 million in cash. AIS is a wholly owned
subsidiary of ALLTEL Corporation. We recorded a pre-tax gain of approximately
$4.8 million related to this transaction.
On July 15, 2002, we sold substantially all of the non-current assets and
capital lease obligations of our processing business in France to Atos.
Non-current assets and capital lease obligations related to the France business
have been removed from continuing operations and classified under discontinued
operations. We incurred a loss on disposal of the France business of $0.1
million.
In previous filings, we reported France under the Western European Sub-segment
and DASH under the Other Operations Sub-segment. All operating amounts, ATM
counts, transaction numbers and statistics reported in this filing exclude
France and DASH.
We have restated prior period segment information to conform to the current
period's presentation (see Note 20 - Business Segment Information to the
Consolidated Financial Statements).
On January 17, 2003, we sold our ATM network in the U.K. We will continue to
operate all of the ATMs that we formerly owned in the U.K. though a five year
ATM outsourcing agreement with the purchaser.
On February 19, 2003, we acquired e-pay Ltd., a U.K.-based company that operates
a network of point-of-sale ("POS") terminals providing electronic processing of
prepaid mobile phone airtime recharge (or "top-up") services in the U.K. and
Australia. Beginning in the first quarter of 2003, we intend to report that
business as a separate segment, which we will call the Prepaid Processing
Services Segment.
SEGMENT RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
2000
Revenues Operating income/(loss)
-------------------------------- --------------------------------
Year Ended December 31, 2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
(in thousands) (in thousands)
Processing Services:
Central Europe $ 26,376 $ 25,237 $ 18,599 $ 2,085 $ 1,612 $ (3,070)
Western Europe 26,573 20,702 15,519 4,482 2,289 (1,823)
Other 1,434 3 84 (1,758) (1,555) (1,231)
-------- -------- -------- -------- -------- --------
Total Processing Services 54,383 45,942 34,202 4,809 2,346 (6,124)
Software Solutions 17,410 15,221 16,006 434 (1,875) (21,469)
Corporate Services - - - (5,621) (6,521) (7,862)
Inter segment eliminations (745) (180) (180) (41) - -
-------- -------- -------- -------- -------- --------
Total $ 71,048 $ 60,983 $ 50,028 $ (419) $ (6,050) $(35,455)
======== ======== ======== ======== ======== ========
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
2000 - BY BUSINESS SEGMENT
PROCESSING SERVICES SEGMENT
Processing Services Revenues
Total segment revenues increased by $8.4 million or 18.4% to $54.4 million for
2002 compared to $45.9 million for 2001. Total segment revenues increased by
$11.7 million or 34% to $45.9 million for 2001 compared to $34.2 million for
2000. The increase in revenues in 2002 and 2001was due primarily to the
significant increase in transaction volume and an increase in the number of ATMs
operated by us during these periods. We had 2,081 ATMs installed as of December
31 2000, 2,400 ATMs installed as of December 31, 2001 and 3,005 ATMs installed
as of December 31, 2002. In 2002, our owned and operated ATM network increased
by 605 ATMs, or 25%, over 2001 to a total of 3,005 ATMs, of which 81% are owned
by us and 19% are owned by banks or other financial institutions but operated by
us through management agreements. We processed 79.2 million transactions for
2002, an increase of 22.0 million transactions, or 38%, over 2001. We processed
43.5 million transactions in 2000, and processed 57.2 million transactions in
2001.
Revenues for the Central European Sub-segment increased by $1.1 million or 5% to
$26.4 million for 2002 from $25.2 million for 2001. Revenues for this
sub-segment increased by $6.6 million or 36% to $25.2 million for 2001 from
$18.6 million for 2000. The increase in revenues in 2002 and 2001 was largely
the result of an increase in the number of ATMs
operated by us over this period and increased transaction volumes. We increased
the number of ATMs that we operated from 1,391 at December 31, 2000 to 1,440 at
December 31, 2001 and to 1,736 at December 31, 2002.
In the Czech Republic, beginning November 1, 2002 a new, single intra-regional
interchange fee for ATM cash withdrawals was agreed to by Czech issuer banks for
both Visa and Europay cards. For VISA cards, the new fee is $1.00 and for
Europay cards the new fee is 1.20 euro. Prior to these changes, we were
averaging fees of approximately $1.40 per cash withdrawal in the Czech Republic.
This intra-regional interchange fee reduction is expected to reduce revenues for
our deployed machines in the Czech Republic by approximately $0.8 million in
2003 based upon forecasted 2003 transaction levels. Additionally, the
transactions per ATM in the Czech Republic trended downward during 2002 by
approximately 15% from the first as compared to the fourth quarters, partially
due to the increase in the interchange fee in late 2001 as well as certain
competitive and other economic conditions. We are actively monitoring this trend
and will take appropriate action, including deinstallation of any
under-performing ATMs, as conditions and further trends warrant to protect
deployment margins.
In 2002, revenues for the Western European Sub-segment increased by $5.9 million
or 28% to $26.6 million, compared to for 2002 from $20.7 million for 2001. In
2001, revenues for this sub-segment increased by $5.2 million or 33% to $20.7
million from $15.5 million. The increase in revenues in 2002 and 2001 was
largely the result of an increase in the number of ATMs operated by us over this
period and increased transaction volumes. We increased the number of ATMs that
we operated from 690 at December 31, 2000 to 941 at December 31, 2001 and to
1,181 at December 31, 2002. During this period we also increased transaction
fees in certain markets.
Of the net 605 ATMs added to the network during 2002, 205 ATMs are located in
the U.K. Our aggressive rollout of ATMs in the U.K. during 2001 and early 2002
was based on the ability to charge a transaction fee directly to the person
using the ATMs in this market. As noted elsewhere in this report, in January
2003 we sold our U.K. subsidiary and simultaneously entered into a five-year
service agreement pursuant to which we will continue to provide substantially
similar ATM processing services in the U.K.
Our 2002 revenues for the Other Processing Services Sub-segment were $1.4
million as compared to nil in 2001 and $0.1 million in 2000. All revenues from
this segment are generated by countries not specifically included in the other
European sub-segments. The increase in revenues in 2002 is mainly a result of
one time set up revenues associated with contracts in Egypt and Indonesia, where
we began operations in 2002. We previously reported our revenue from the DASH
network under this segment but we sold this network in January 2002 (see Note 26
- - Discontinued Operations and Assets Held for Sale to the Consolidated Financial
Statements). Therefore, no further revenues were realized in continuing
operations from the DASH business for the year 2002, and for comparative
purposes, DASH revenues have also been eliminated from continuing operations for
all periods presented.
Of total segment revenue, approximately 88% was attributable to ATMs owned by us
for the year 2002, 91% for 2001 and 91% for the year 2000. Of total transactions
processed, approximately 83% were attributable to ATMs owned by us for the year
2002, 86% for 2001 and 90% for the year 2000. We expect that in the future there
will be a shift from a largely proprietary ATM network owned by us to a more
balanced mix between proprietary ATMs and customer-owned ATMs. We believe the
shift from a largely proprietary, Euronet-owned ATM network to a more balanced
mix between proprietary ATMs and customer-owned ATMs is a positive development
and will provide higher marginal returns on investments.
We generally charge fees for four types of ATM transactions that are currently
processed on our ATMs:
. cash withdrawals
. balance inquiries
. transactions not completed because the relevant card issuer does not
give authorization
. recharges for prepaid mobile phone airtime
Transaction fees for cash withdrawals vary from market to market but generally
range from $0.60 to $2.15 per transaction. Transaction fees for the other three
types of transactions are generally substantially less. We include in Processing
Services Segment revenues transaction fees payable under the electronic recharge
solutions that we sell. Fees for recharge transactions vary substantially from
market to market and are based on the specific prepaid solution, the
denomination of prepaid hours purchased and whether the transactions are on our
ATMs or bank-owned ATMs. Generally, transaction fees vary from $0.10 to $1.80
per prepaid mobile recharge purchase and are shared with the financial
institution. These fees may come under pricing pressure in the future.
Operating Expenses
In 2002, total segment operating expenses increased by $6.0 million or 14% to
$49.6 million compared to $43.6 million for 2001. In 2001, such expenses
increased by $3.3 million or 8% to $43.6 million compared to $40.3 million for
2000. The increase is primarily due to increased salaries to support our
operational growth during the period. However, as a percentage of revenues,
operating expenses decreased from 95% of revenues in 2001 to 91% of revenues in
2002, reflecting our improvement in operational efficiency.
In 2000, we recorded a $0.8 million write-down of certain ATM hardware assets
associated with the purchase of the Budapest Bank ATM network in May 2000 and
the Service Bank ATM network in March 1999 (see Note 10 - Asset Write-down to
the Consolidated Financial Statements). In addition, we recorded a one-time gain
in our Central European Sub-segment of $1.2 million in 2000. The gain was
related to a change in Hungarian law that eliminates a major portion of our
liability for import taxes on ATM hardware to the Hungarian government. The gain
was included as an element of direct operating costs.
The 2002 operating expenses for the Central European Sub-segment increased by
$0.7 million or 3% to $24.3 million compared to $23.6 million for 2001. In 2001,
such expenses increased by $1.9 million or 9% to $23.6 million for 2001 compared
to $21.7 million for 2000. The increase in operating expenses in 2002 is
primarily the result of increased salary expenses of $0.6 million or 5% in 2002
as compared to 2001. We also increased the number of ATMs that we operated from
1,391 at December 31, 2000 to 1,440 at December 31, 2001 and 1,736 at December
31, 2002.
The operating expenses for the Western European Sub-segment increased by $3.7
million or 20% to $22.1 million for 2002, compared to $18.4 million for 2001.
These expenses increased by $1.1 million or 6% to $18.4 million for 2001 from
$17.3 million for 2000. The increase in operating expenses was largely the
result of increased salary expense of $0.6 million due to increased ATM
deployment in the U.K. We increased the number of ATMs that we operated from 690
at December 31, 2000 to 941 at December 31, 2001 and to 1,181 at December 31,
2002. The 2002 operating expenses of the Western European sub-segment includes
approximately $12 million of operating expenses of our U.K. subsidiary that will
not recur in 2003.
We have not included France in this sub-segment because we sold substantially
all of the non-current assets and capital lease obligations of our processing
business in France on July 15, 2002, as further described in Note 26 -
Discontinued Operations and Assets Held for Sale to the Consolidated Financial
Statements.
The 2002 operating expenses for the Other Processing Services Sub-segment
increased by $1.6 million or 100% to $3.2 million compared to $1.6 million for
2001. These expenses increased in 2001 by $0.3 million or 18% to $1.6 million
from $1.3 million for 2000. These increases in 2001 and 2002 are due to an
increase in operating expenses in new markets and the European processing center
partially offset by increased allocation of switching fees to direct operating
expenses in the Central and Western Sub-segments.
We have not included the U.S.-based DASH network expenses in this sub-segment
because we sold DASH in January 2002 as further described in Note 26 -
Discontinued Operations and Assets Held for Sale to the Consolidated Financial
Statements.
Direct operating costs in the Processing Services Segment consist primarily of:
. ATM installation costs
. ATM site rentals
. Costs associated with maintaining ATMs
. ATM telecommunications
. Interest on network cash and cash delivery
. Security services to ATMs
. Insurance on ATMs
In 2002, these costs increased by $2.9 million or 11% to $29.3 million compared
to $26.4 million for 2001. In 2001, these costs increased by $2.8 million or 12%
to $26.4 million for 2001 compared to $23.5 million for 2000. These increases
are primarily attributable to operating the increased number of ATMs mentioned
above. Also, allocations were made within the Euronet operating companies to
charge the ATM network operations for transaction switching fees and bank
connection fees incurred by our central processing center in Budapest. These
allocations totaled $5.4 million, $4.8 million and $3.5 million for 2002, 2001
and 2000, respectively. Direct operating costs for 2000 include a one-time
benefit of $1.2 million due to a change in Hungarian law that eliminates a major
portion of our liability for import taxes on ATM hardware.
The components of direct operating costs for 2002, 2001 and 2000 were:
Year Ended December 31,
2002 2001 2000
-------- -------- --------
(in thousands)
ATM communication $ 4,171 $ 4,456 $ 4,047
ATM cash filling and interest on network cash 7,335 7,375 7,292
ATM maintenance 4,529 4,129 3,842
ATM site rental 3,879 2,486 2,220
ATM installation 575 238 649
Transaction processing and ATM monitoring 6,442 6,180 4,677
Other 2,400 1,516 818
-------- -------- --------
Total direct operating expenses $ 29,331 $ 26,380 $ 23,545
======== ======== ========
As a percentage of network revenue, direct operating costs have continued to
fall. These costs fell from 69% in 2000 to 57% in 2001 and to 54% for 2002. On a
per ATM basis, direct operating costs fell from $11,314 per ATM and $10,992
per ATM for 2000 and 2001, respectively, to $9,761 per ATM for 2002, an
improvement of 11% over 2001. On a per transaction basis, the direct operating
costs fell from $0.54 per transaction and $0.46 per transaction for 2000 and
2001 respectively to $0.37 per transaction for 2002, an improvement of 20% over
2001. Costs per transaction have decreased because transaction volumes increase
on existing sites with fixed direct operating expenses. Increasing transaction
volumes on existing sites that have fixed direct operating expenses decreases
our costs per ATM and per transaction. In addition, we increased the number of
ATMs that we operate under ATM management agreements, and these ATMs generally
have lower direct operating expenses (telecommunications, cash delivery,
security, maintenance and site rental). ATM site rental costs increased from
$2.5 million for 2001 to $3.9 million in 2002, an increase of 56%, due to
increases in the number of ATMs as well as an increase in rental rates per ATM
for new and renewed rental contracts.
In 2002, costs for segment salaries and benefits increased by $2.8 million or
33% to $11.2 million from $8.4 million for 2001. In 2001, these expenses
increased by $1.9 million or 29% to $8.4 million from $6.5 million for 2000.
This increase reflects the continued expansion of the operations to Western
European markets with significantly higher labor costs than Central Europe, as
well as increases in staff levels at the processing center, which were required
to maintain quality service in line with rising transaction volumes. As a
percentage of Processing Services Segment revenue, salaries and benefits
increased from 19% in 2000 and 18% in 2001 to 21% for 2002.
In 2002, selling, general and administrative costs allocated to the Processing
Services Segment decreased $0.5 million or 55% to $0.4 million compared to $0.9
million for 2001. In 2001, these expenses decreased $1.0 million or 53% to $0.9
million compared to $1.9 million for 2000. The 2002 cost decrease resulted from
(1) a $0.7 million increase in the allocation of costs from the selling, general
and administrative line of the Budapest processing center to the operating cost
line, from $4.7 million for 2001 to $5.4 million for 2002 and (2) a $0.3 million
increase in costs associated with the expansion of our network operations. The
2001 cost decrease resulted from (1) a $1.3 million increase in the allocation
of costs from the selling, general and administrative line of the Budapest
processing center to the operating cost line, from $3.5 million for 2000 to $4.8
million for 2001 and (2) a $0.2 million increase in costs associated with the
expansion of our network operations.
In 2002, depreciation and amortization increased by $0.7 million or 9% to $8.6
million compared to $7.9 million for 2001. In 2001, these expenses increased by
$0.3 million or 4% to $7.9 million compared to $7.6 million for 2000. These
increases were due to the new European operations center in Budapest and
increased ATMs in service as compared to the previous periods. We recorded a
$0.8 million write-down of certain ATM hardware assets for the year ended
December 31, 2000, as previously discussed. Beginning January 1, 2002, goodwill
is no longer amortized but instead evaluated for impairment at least annually.
Goodwill amortization in 2001 amounted to $0.9 million. See Note 3 - Summary of
Significant Accounting Policies and Practices to the Consolidated Annual
Financial Statements.
Operating Income/Loss
The total Processing Services Segment posted operating income of $4.8 million
for 2002 as compared to operating income of $2.3 million in 2001 and an
operating loss of $6.1 million in 2000, as a result of the factors discussed
above. The Central
European Sub-segment recorded operating income of $2.1 million for 2002 compared
to operating income of $1.6 million in 2001 and an operating loss of $3.1
million in 2000, as a result of the factors discussed above. The Western
European Sub-segment had an operating income of $4.5 million for 2002 compared
to operating income of $2.3 million in 2001 and an operating loss of $1.8
million in 2000, as a result of the factors discussed above. We expect operating
income for this segment to be negatively impacted in 2003 as a result of the
disposition of our U.K. subsidiary. The pro forma impact of the sale of our U.K.
subsidiary would have been approximately a $2.4 million decrease of the
operating income of Western European sub-segment during 2002 and approximately a
$1.0 million decrease of operating income in the fourth quarter 2002, exclusive
of any benefits of the ATM outsourcing agreement.
The Other Processing Services Sub-segment incurred an operating loss of $1.8
million for 2002, compared to operating losses of $1.6 million in 2001 and $1.2
million in 2000, as a result of the factors discussed above.
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 $1.2 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 million related to
these operations. We are exploring methods for limiting losses and capital
investments arising from the commencement of operations in Asia, including
seeking participation in our Asian operations by outside investors.
As part of an overall change in our financial budgeting procedures, commencing
for the year 2003, we will establish the level of our expenditures for the
Processing Services 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.
SOFTWARE SOLUTIONS SEGMENT
Software Solutions Revenue
Revenues from the Software Solutions Segment increased by $2.2 million or 14% to
$17.4 million before inter-segment eliminations for 2002 compared to $15.2
million for 2001. Revenues from this segment decreased $0.8 million or 5% to
$15.2 million for 2001 compared to $16.0 million for 2000. The increase in
revenues from 2001 to 2002 is due to the revenues from a significant software
license agreement with ALLTEL Information Systems (AIS). The decrease in
revenues from 2000 to 2001 is due to a decrease in license sales, which were
partially offset by increased maintenance fees earned from sales in 2000 and
prior.
Software revenues are grouped into four broad categories:
. Software license fees
. Professional service fees
. Maintenance fees
. Hardware sales
Software license fees are the initial fees charged for the licensing of our
proprietary application software to customers. Professional service fees are
charged for customization, installation and consulting services provided to
customers. Software maintenance fees are the ongoing fees charged to customers
for the maintenance of the software products. Hardware sales revenues are
derived from the sale of computer products.
In January 2002, we entered into a significant software license agreement (the
"License Agreement") whereby we granted AIS 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, AIS agreed to pay license 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 customers
or new AIS network processing customers. Revenue from the license fee and
related services will be recognized under the percentage of completion contract
accounting method.
The components of software solutions revenue for 2002, 2001 and 2000 were:
Year Ended December 31,
2002 2001 2000
------- ------- -------
(in thousands)
Software license fees $ 6,365 $ 3,030 $ 4,117
Professional service fees 4,648 6,765 6,867
Maintenance fees 5,756 5,045 4,487
Hardware sales 641 382 535
------- ------- -------
Total Software Revenue $17,410 $15,222 $16,006
======= ======= =======
The increase in software license fees from 2001 to 2002 reflects the license fee
revenue that we obtained as part of the software license agreement with AIS. We
recognized $3.5 million of revenues related to the AIS software license
agreement in 2002. Approximately $0.4 million of license fees remain to be
earned and recognized related to the AIS software license agreement. The
decrease in software license fees from 2000 to 2001 reflects a decrease in sales
and a change in the mix of contracts signed. In 2001, we signed an increasing
number of contracts that have a larger share of professional services relative
to the license fee. We believe that the revenues of the Software Solutions
Segment will increasingly be derived from our new set of software solutions,
including our wireless banking and credit card solutions.
The decrease in professional service fees of $2.1 million from 2001 to 2002 is
due to fewer billable hours, service and consulting contract work that we
performed in connection with the sale and installation of software during 2002
compared to 2001. Certain professional service fees are bundled in software
license contracts and reported as license fees using the percentage of
completion method.
The increase in maintenance fees of $0.7 million from 2001 to 2002 is due to the
completion of software delivery contracts, thereby initiating the maintenance
aspect of these contracts. Additionally, almost $0.3 million of the increase is
due to recognition of maintenance revenues from the software license agreement
with AIS. Approximately $0.6 million of maintenance revenues remain to be earned
and recognized related to the AIS software license agreement through 2003. We
intend to continue to secure long-term revenue streams through multiyear
maintenance agreements with existing and new customers.
Hardware sales are usually sporadic as they are generally an incidental
component to our software license and professional services offerings. Hardware
sales increased $0.3 from 2001 to 2002 due almost entirely to one significant
hardware sale of $0.3 million related to the AIS software license agreement. 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 which have
been executed by us and for which we expect recognition of the related revenue
within one year. At December 31, 2002, the revenue backlog was $4.9 million, as
compared to December 31, 2001 when the revenue backlog was $2.5 million and to
December 31, 2000 when the revenue backlog was $3.5 million. The increase in
backlog from December 31, 2001 is the result of strong sales activity in the
fourth quarter of 2002 and from the AIS software license agreement, which
comprises approximately $0.4 million of the balance. The decrease in backlog
from December 31, 2000 resulted principally from the timing of software sales.
We intend to continue to focus on expediting delivery and implementing of
software in an effort to deliver existing backlogged sales, while simultaneously
replenishing the backlog through continuing product sales growth. We cannot
assure you that the contracts included in backlog will actually generate the
specified revenues or that the revenues will be generated within a one-year
period.
Operating Expenses
Software Solutions Segment operating expenses consist primarily of:
. direct operating costs
. salaries and benefits
. selling, general and administrative
. depreciation and amortization
In 2000, we recorded a one-time write-down of goodwill and other identifiable
intangible assets associated with our purchase of Euronet USA in December 1998.
As a result of our inability to achieve operating improvements, including
software license and service orders for Euronet USA's traditional core product
(ITM) and cost reductions, the Software Solutions Segment continued operating at
a loss through 2000. We calculated the expected cash flows of our Software
Solutions Segment, which identified an impairment of its long-lived assets.
Accordingly, in 2000, we recorded an impairment charge based on the present
value of expected cash flows of $11.2 million for the write-down of goodwill and
other identifiable intangible assets recorded upon the acquisition of Euronet
USA (see Note 10 - Asset Write-down to Consolidated Financial Statements).
Total segment operating expenses decreased marginally to $17.0 million for 2002
from $17.1 million for 2001. This slight decrease from 2001 to 2002 is due to
increases in direct operating costs and depreciation, offset entirely by
decreases in salaries and benefits, and selling, general and administrative
costs. The decrease from 2000 to 2001 of $20.4 million is primarily the result
of (i) the $11.2 million one-time write-down during 2000 discussed above, (ii) a
reduction in staffing in the first quarter of 2001, and (iii) general
cost-reduction efforts in our general operations.
The components of the Software Solutions Segment operating expenses for 2002,
2001 and 2000 were:
Year Ended December 31,
----------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Direct operating costs $ 788 $ 269 $ 800
Salaries and benefits 12,095 12,329 18,004
Selling, general and administrative 3,062 3,754 5,266
Depreciation and amortization 1,031 744 2,215
Asset write-down - - 11,190
-------- -------- --------
Total operating expenses $ 16,976 $ 17,096 $ 37,475
======== ======== ========
The increase in direct operating costs of $0.5 million or 193% from 2001 to 2002
is a result of increased distributor commissions and hardware sales. Hardware
costs in 2002 include costs associated with a significant one-time hardware sale
of $0.3 million related to the AIS software license agreement.
Salary and benefits marginally decreased $0.2 million for 2002 from 2001. During
the first quarter of 2001 we reduced our workforce significantly with the
primary objective of reducing costs in our Software Solutions Segment to bring
them more in line with the anticipated revenue. The financial impact of these
reductions can be seen throughout the results for 2001 and were maintained in
2002.
Selling, general and administrative expenses decreased $0.7 million to $3.1
million for 2002 from $3.8 million 2001. This decrease was primarily due to our
expense control efforts. Some of the cost reductions were one-time credits and
incentives that are not expected to continue in the future.
Depreciation and amortization expense increased $0.3 million for 2002 from 2001
due to the addition of $0.4 million in leasehold improvements in late 2001 and
the first quarter of 2002, as well as the addition of $1.0 million in
capitalized software development costs during 2001. Depreciation of improvements
and amortization of capitalized software development costs was $0.7 million for
2002 and $0.4 million for 2001.
We have made an ongoing commitment to the development, maintenance and
enhancement of our products and services. In particular, we have invested and
will continue to invest in new software products that will serve as the
underlying application software that permits additional features and
transactions on our ATM network. In addition, we continue to invest in the
on-going development of products that were recently introduced to the market.
Our research and development costs incurred for software products to be sold,
leased or otherwise marketed decreased $1.0 million or 20% to $4.0 million for
2002 compared to $5.0 million for 2001. These costs decreased $1.7 million or
25% to $5.0 million for 2001 compared to $6.7 million for 2000 due to a
reduction in our research and development efforts.
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 capitalized $0.6 million, $1.3
million and $1.0 million during the years ended December 31, 2002, 2001 and 2000
respectively, in accordance with our accounting policy requiring the
capitalization of 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 necessary to establish that the product can be produced
to meet its design specifications including functions, features, and technical
performance requirements.
Operating Income/Loss
The Software Solutions Segment posted operating income of $0.4 million for 2002,
and operating losses of $1.9 million for 2001 and $21.5 million for 2000, as a
result of the factors discussed above.
CORPORATE SERVICES SEGMENT
Operating Expenses
Operating expenses for the Corporate Services Segment decreased by $0.9 million
or 14% to $5.6 million for 2002 compared to $6.5 million for 2001. Such costs
decreased $1.4 million or 17% to $6.5 million for 2001 compared to $7.9 million
for 2000. The components of the Corporate Services Segment operating costs for
2002, 2001, and 2000 were:
Year Ending December 31,
-------------------------
2002 2001 2000
------- ------- -------
(in thousands)
Salaries and benefits $ 1,989 $ 3,362 $ 3,813
Selling, general and administrative 3,576 3,017 3,841
Depreciation and amortization 56 142 208
------- ------- -------
Total direct operating expenses $ 5,621 $ 6,521 $ 7,862
======= ======= =======
The cost control measures that were implemented in 2001 are the primary reasons
for these decreased expenditures, including the workforce reductions during the
first quarter of 2001. In January 2001, we began to reclassify certain salary
and benefits expense to the Processing Services Other Sub-segment to better
reflect the actual job responsibilities performed. The effect of these changes
is fully realized in 2002. Selling, general and administrative expenses
increased by $0.6 million or 19% to $3.6 million for 2002 from $3.0 million for
2001. Approximately $0.2 million of this increase is due to professional fees
incurred in connection with an unsuccessful acquisition effort. Other legal and
accounting fees also increased due to increased compliance and audit services.
NON-OPERATING RESULTS
Interest Income
Interest income decreased to $0.2 million in 2002 from $0.3 million in 2001 and
from $1.1 million in 2000. The marginal decrease from 2001 to 2002 is primarily
the result of lower interest rates. Our average cash balances were higher in
2002 but this improvement was offset by significantly lower market interest
rates. The decrease from 2000 to 2001 is primarily the result of lower average
cash balances during 2001.
Interest Expense
Interest expense decreased to $6.3 million in 2002 from $9.4 million in 2001 and
from $10.8 million in 2000. The decrease from 2001 to 2002 was due to a
reduction in notes payable as a result of significant debt/equity swaps during
2001 and the
cash retirement of approximately $9.0 million in July 2002 offset partially by
exchange rate differences as the majority of the debt is denominated in euro.
The decrease from 2000 to 2001 was due to a reduction in notes payable as a
result of significant debt/equity swaps during 2001 and exchange rate
differences.
On February 19, 2003, we incurred approximately $27 million ((pound)17 million)
of indebtedness in connection with the acquisition of e-pay, which is described
in full in the section entitled "Subsequent Events." The amount of interest that
we will accrue quarterly on such indebtedness is approximately $0.5 million. We
expect this amount to be offset by incremental net operating income of e-pay.
Loss on Facility Sublease
We incurred a loss of $0.3 million in 2002 related to the sublease of excess
office space. We subleased approximately 5,400 square feet in August 2002 to an
unrelated third-party under a non-cancelable sublease agreement at lease rates
lower than those being paid by the Company for the space.
Equity in losses from Equity Investees
We incurred a loss of $0.1 million in 2002 resulting from our share of losses of
CashNet.
Gain/Loss on Early Retirement of Debt
We had a loss on early retirement of debt of $1.0 million for 2002 compared to a
gain on early retirement of debt of $9.6 million for 2001. The 2001 gains were
the result of significant notes payable early retirement transactions as
described in Note 11 - Notes Payable to the Consolidated Financial Statements.
Foreign Exchange Gain/Loss
We had a net foreign exchange loss of $4.2 million for 2002 as compared to an
exchange gain of $5.4 million for 2001 and an exchange loss of $3.2 million for
2000. Exchange gains and losses that result from re-measurement of certain
assets and liabilities are recorded in determining net income or loss. A portion
of our assets and liabilities are denominated in euros, including capital lease
obligations, notes payable (including the notes issued in our public bond
offering), cash and cash equivalents, investments, and forward foreign exchange
contracts. The significant loss of value of the U.S. dollar against the euro
during 2002 is the primary source of the loss in 2002. The strengthening of the
U.S. dollar against the euro is the primary source of the gain in 2001. It is
our policy to attempt to match local currency receivables and payables. 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 Taxes
We had an income tax benefit of $2.3 million for 2002 compared to benefit of
$0.9 for 2001 and an income tax expense of $1.2 million for 2000. This tax
benefit is the result of being able to use U.S. tax loss carryforwards generated
in prior years to offset the taxable gain resulting from the DASH sale, as well
as the recognition of deferred tax benefits from foreign tax loss carryforwards
anticipated to be utilized over the next two years.
Minority Interest
We recorded the minority interest in losses from P. T. Euronet Sigma Nusantara,
an Indonesia company. We own 80% of P. T. Euronet Sigma Nusantara's shares.
Discontinued Operations
On January 4, 2002, we sold substantially all of the DASH assets to AIS for $6.8
million in cash. We recorded a pre-tax gain of approximately $4.8 million
related to this transaction. We reported income (net of tax) from the
discontinued operations of DASH of $3.1 million in 2002 (including the gain on
sale), $0.6 million in 2001 and $0.4 million in 2000.
On July 15, 2002, we sold substantially all of the non-current assets and
capital lease obligations of our processing business in France to Atos Origin,
S.A. for 1 euro plus reimbursement of certain operating expenses. A pre-tax loss
on disposal of the France business of $0.1 million was recorded in 2002. We
reported a loss (net of tax) from the discontinued operations of France of nil
in 2002 (including the loss on sale), $0.7 million in 2001 and $0.3 million in
2000.
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 under the Western European Sub-segment and
DASH under the Other Operations Sub-segment.
Net Income/Loss
We recorded a net loss of $6.5 million for 2002, as compared to net income of
$0.7 million for 2001 and a $49.6 million net loss for 2000, as a result of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 2001, we had sustained negative cash flows from operations. We financed
our operations and capital expenditures primarily through the proceeds from the
1998 issue of Deutsche Mark denominated notes payable, the 1997 public equity
offering, equipment lease financing, private placements of equity securities
and, in 2002, the sale of our U.S. processing business. Through December 31,
2002, the net proceeds of such transactions, together with revenues from
operations and interest income have been used to fund aggregate net losses of
approximately $129.7 million, investments in property, plant and equipment of
approximately $58.1 million and acquisitions of approximately $24.6 million.
As of December 31, 2002, we had cash and cash equivalents of $12.0 million
included in working capital of $20.1 million. We had $4.4 million of restricted
cash held as security with respect to cash provided by banks participating in
our ATM network, to cover guarantees on financial instruments and as deposits
with customs officials (See Note 6 - Restricted Cash to the Consolidated
Financial Statements).
On June 28, 2000 we entered into an unsecured revolving credit agreement
providing a facility of up to $4.0 million from three shareholders, one of which
was Michael J. Brown, Euronet's CEO and a director. This credit facility was
renewed twice and was due and payable on June 28, 2002. We issued 300,000
warrants in conjunction with the issuance and extensions to this facility. On
May 29, 2001, we drew $2.0 million and issued an additional 160,000 warrants
based on the terms of the credit agreement. The warrant strike price was set at
the average share price, as quoted on Nasdaq for 10 trading days prior to the
warrant issue date, less 10%.
The exercise price for Michael J. Brown was originally the same as for the other
lenders. It was revised by an amendment to the Credit Agreement on January 27,
2002 to be no less than the full trading price of our stock on Nasdaq as of the
date of the agreement providing for grant of the warrants, with the amount of
the discount that would have resulted from the original terms of the Credit
Agreement to be paid to Michael J. Brown in cash.
The exercise prices for the warrants for the other two shareholders were $7.00
per share for the 100,000 warrants issued as of June 28, 2000, $4.12 per share
for the 100,000 warrants issued as of December 29, 2000, $5.92 per share for the
160,000 warrants issued as of May 29, 2001 and $6.70 per share for the 100,000
warrants issued as of June 28, 2001. The exercise prices for the warrants for
Michael J. Brown were $8.25 per share for the 100,000 warrants issued as of June
28, 2000, $4.12 per share for the 100,000 warrants issued as of December 29,
2000, $7.05 per share for the 160,000 warrants issued as of May 29, 2001 and
$9.00 per share for the 100,000 warrants issued as of June 28, 2001.
In 2001, two participants in the revolving credit agreement elected to exercise
a total of 361,000 warrants for an equal number of shares. We received a total
amount of $2.1 million in cash from these transactions.
In 2002, two participants in the revolving credit agreement elected to exercise
a total of 99,000 warrants for an equal number of shares. We received a total
amount of $0.7 million in cash from these transactions.
We elected not to renew the credit agreement in December 2001 and, on March 21,
2002, we repaid the outstanding credit facility debt in full. Payment consisted
of $2.0 million in principal and interest. As of December 31, 2002, no warrants
remain outstanding with respect to this credit facility.
In January 2001, we entered into an unsecured credit facility loan agreement
under which we borrowed $0.5 million from Michael J. Brown to fund transactions
on our Czech Republic ATM network. Amounts advanced under this loan agreement
mature six months from the date an advance is made, but the amounts were
extended for a second six-month period. Amounts advanced bear interest of 10%
per annum. In January 2002, we paid in full the loan principal and related
interest totaling $0.5 million.
In 2000, Michael J. Brown pledged approximately $4.0 million of marketable
securities that he owns (not including any of our Common Stock) to obtain the
release of cash collateral of $4.8 million held by a bank providing cash to our
ATM network in Hungary. We did not have to pay any consideration for this
security pledge. On March 14, 2002, we obtained a letter of credit supported by
a certificate of deposit for $5.0 million that replaced Michael J. Brown's
security pledge, as well as a related $0.8 million letter of credit and
certificate of deposit. The original $5.0 million letter of credit was
subsequently reduced to a $2.0 million letter of credit as more fully described
in Note 13 - Credit Facilities to the Consolidated Financial Statements.
On December 20, 2002, we entered into a secured revolving credit agreement (the
"Bank Credit Agreement") providing a facility of up to $5.0 million from a bank.
The facility is available to be drawn upon until March 14, 2003 at which time
any draws and accrued interest is due. Amounts outstanding under the facility
accrue interest at 4.45% per annum, payable quarterly. The credit facility is
secured by an existing $5.0 million certificate of deposit held by the bank. On
December 20, 2002, the Company drew $0.9 million on the facility and repaid it
in full on December 31, 2002. As of December 31, 2002, no amounts were
outstanding under the facility.
During January and February 2003, net draws were made for $2.6 million. The Bank
Credit Agreement expired on March 14, 2003 and was repaid in full at that time.
See Note 29 - Subsequent Events to the Consolidated Financial Statements.
We lease many of our ATMs under capital lease agreements that expire between
2002 and 2007 and that bear interest at rates between 8% and 12%. As of December
31, 2002, we owed $7.7 million under such capital lease arrangements (see Note
15 - Leases to the Consolidated Financial Statements).
We expect that our capital requirements will continue in the future at a much
lower rate as we implement strategies that promote outsourcing and redeployment
of under-performing ATMs. Acquisitions of related ATM businesses and investments
in new markets may require additional capital expenditures. Fixed asset
purchases for 2003 are currently estimated to be in the range of $6 million to
$9 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, Visa and MasterCard. Accordingly, we
expect additional capital expenditures over the next few years to maintain
compliance with these regulations. Upgrades and modifications to the ATM
software and hardware will also be required on or before 2005 to enable certain
chip card technology. 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 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 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 Stock all
of which we had issued as of December 31, 2002. During 2002, we issued 325,370
shares at an average price of $6.28 per share, resulting in proceeds to us of
$2.0 million. During 2001, we issued 174,570 shares at an average price of $9.12
per share, resulting in proceeds to us of $1.6 million. In February 2003, we
reserved an additional 500,000 shares of Common Stock for the ESPP to continue
the plan.
In 2002, we made matching contributions of 9,647 shares of stock in conjunction
with our 401(k) employee benefits plan for the plan year 2001. 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 December 31, 2002,
total employer matching contributions since inception of the plan has consisted
of 25,922 shares under the basic match and 16,275 shares under the discretionary
matching contribution. We made employer-matching contributions of 27,230 shares
of stock under the Plan for year 2002 in February 2003 (See Note 19 - Employee
Benefit Plans to the Consolidated Financial Statements).
We reduced the aggregate amount of our 12 3/8% Senior Discount Notes payable
from $38.1 million at December 31, 2001 to $36.3 million at December 31, 2002
through a series of debt-for-equity exchanges and a cash redemption as more
fully described in Note 11 - Notes Payable to the Consolidated Financial
Statements. Due to market and other factors, we may not be able to continue to
successfully implement such debt-for-equity exchanges in 2003 and beyond. 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 million (2.2 million 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 $38
million face value (approximately 35 million euro) will be due and payable on
July 2006.
Subsequent to December 31, 2002, on January 17, 2003, we received net proceeds
from the sale of our UK subsidiary of $28.3 million. We used all of those funds
to pay the cash portion of the purchase price of e-pay Limited, which we
acquired on February 17, 2003. In connection with the acquisition of e-pay, we
incurred indebtedness to the former e-pay shareholders of $27 million, which is
composed of three separate elements:
. Deferred purchase price in the amount of $8.6 million, bearing interest
at an annual rate of 6% and payable quarterly in an amount equal to 90%
of contractually defined excess cash flows generated by e-pay. Based
upon current expected results of e-pay, we expect to be able to repay
this amount in approximately one year.
. Indebtedness of $7.4 million under promissory notes bearing interest
at an annual rate of 7%, with accrued interest payable on March 31 and
September 30 of each year, beginning on September 30, 2003, until
maturity on February 18, 2005. The amount outstanding under these
notes is convertible in the aggregate into 647,282 shares of our
Common Stock at the option of the holders, based upon an initial
conversion price (subject to adjustment) of $11.43 per share. We may
compel conversion of the entire amount of this indebtedness
(effectively repaying it through the issuance of our Common Stock)
when the average market price on the Nasdaq National Market of our
Common Stock for 30 consecutive trading days exceeds $15.72 (subject
to adjustment based on adjustments to the initial conversion price).
We expect to repay this indebtedness through conversion or by
compelling conversion if this benchmark is reached. If the debt does
not convert or we are unable to compel conversion, we will either seek
to repay it through available cash flows, if any, from our business or
to refinance this debt.
. Indebtedness of $11.0 million under promissory notes bearing interest
at an annual rate of 8%, with accrued interest payable on March 31 and
September 30 of each year, beginning on September 30, 2003, until
maturity on February 18, 2005. Our current cash flow levels would be
sufficient to make the semi-annual interest payments but would not be
sufficient to repay this debt at maturity. We expect our cash flows to
increase sufficiently to permit full repayment of this debt when it
falls due. If our cash flows are insufficient for this purpose, we
will seek to refinance this debt.
In addition to the above, we have outstanding indebtedness of $36.3 million
under our 12 3/8% Senior Discount Notes, which falls due on July 1, 2006. We
intend to reduce this indebtedness 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 do not 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.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ITEMS
We have no significant off balance sheet items (see Note 28 - Commitments and
Contingencies to the Consolidated Financial Statements).
The following table summarizes our contractual obligations as of December 31,
2002 (in thousands):
Payments due by period
------------------------------------------------------------
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
-------- ----------- --------- --------- -----------
Senior notes (including interest) $ 52,402 $ 4,525 $ 9,050 $ 38,827 $ -
Capital leases (including interest) 11,077 5,668 4,583 694 132
Operating leases 10,922 2,486 3,887 3,281 1,268
Purchase obligations 19,792 8,021 10,427 993 351
Other long-term liabilities - - - - -
-------- ----------- --------- --------- -----------
Total $ 94,193 $ 20,700 $ 27,947 $ 43,795 $ 1,751
======== =========== ========= ========= ===========
These amounts do not include the contractual obligations arising from the e-pay
acquisition. For additional information on each of these items, see Notes 11 -
Notes Payable, Note 15 - Leases and Note 29 - Subsequent Events to the
Consolidated Financial Statements. Purchase obligations include contractual
amounts for ATM maintenance, cleaning, telecommunication and cash replenishment
operating expenses. While 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.
SUBSEQUENT EVENTS
Sale of our U.K. subsidiary
On January 17, 2003, we sold 100% of the shares in our U.K. subsidiary, Euronet
Services (UK) Ltd., or Euronet U.K., to Bridgepoint Capital Limited for
approximately $29.6 million (or (pound)18.5 million) in cash, subject to certain
working capital adjustments. Of this amount, $1.3 million ((pound)0.8 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 Company expects to record a gain of approximately
$17 million related to this transaction. The acquisition agreement provides that
the benefits and burdens of ownership of the shares and all employees of Euronet
U.K. are transferred to Bridgepoint, effective as of January 1, 2003. The
acquisition agreement includes certain representations, warranties and
indemnification obligations of Euronet concerning Euronet U.K., which are
customary in transactions of this nature in the U.K., including a "Tax Deed"
providing for the indemnification of Bridgepoint by Euronet against tax
liabilities of Euronet U.K. that relate to the periods prior to January 1, 2003,
but arise after the sale.
Simultaneous with this transaction, Euronet and Bridgepoint signed an ATM and
Gateway Services Agreement, or the "Services Agreement." Under the Services
Agreement, Euronet will provide ATM operating, monitoring, and transaction
processing services through December 31, 2007. The services to be provided by
Euronet are substantially identical to existing services being provided to
Euronet U.K. prior to the sale of Euronet U.K. to Bridgepoint. We estimate that
approximately $4.5 million of the total sale proceeds of $29.6 million will be
allocated to the Services Agreement and accrued to revenues from continuing
operations on a straight-line basis over the five-year contract term beginning
January 1, 2003.
For further description of this transaction, see Note 29 - Subsequent Events to
the Consolidated Financial Statements.
Purchase of e-pay
On February 19, 2003, we purchased all of the share capital of e-pay Limited
("e-pay"), a company based in the U.K.
The purchase price for the e-pay shares was approximately $76.2 million. Of the
total purchase price, $30.2 million was paid in cash at closing, $19.0 million
was paid through issuance at closing of 2,497,504 shares of our Common Stock,
and the remaining $27 million will be paid in deferred purchase price or under
promissory notes executed at closing with 24 month maturity dates bearing
interest rates averaging approximately 7.25% per annum. The deferred portion of
the purchase price, approximately $8.6 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 are
convertible into our Common Stock at the option of the holders at a conversion
price of $11.43 per share, or approximately 647,000 shares. We may redeem the
convertible notes under certain conditions. 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 cash
portion of the purchase price was primarily funded using the proceeds of our
sale of our former U.K. subsidiary with the balance funded with working capital.
All of the amounts described above are consideration amounts as included in the
acquisition agreement and may differ from the consideration determined in
accordance with U.S. generally accepted accounting principles.
We agreed to file with the SEC a registration statement to enable the public
resale of the Common Stock received by the former shareholders of e-pay. The
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. The Common Stock issuable upon the
redemption of the convertible notes may be transferred prior to February 18,
2004.
In connection with the acquisition, we also agreed to increase the size of our
Board of Directors by one member. We will nominate and recommend for election
the director candidate designated by a committee representing the former
shareholders of e-pay (the "Committee"). This director will be a Class III
director. In addition, the Committee may designate one former shareholder of
e-pay as a non-voting observer at our board of directors' meetings during the
three-year period immediately following the closing of the acquisition.
The Acquisition Agreement provides that the benefits and burdens of ownership of
the shares were transferred to us effective as of February 3, 2003.
For further description of this transaction, see Note 29 - Subsequent Events to
the Consolidated Financial Statements.
Contract Termination
In January 2003, one of our customers with whom we had signed a new contract for
outsourcing services decided to terminate the agreement with us. The financial
institution was unable to proceed with the contract due to certain conflicting
business considerations, and has confirmed that this termination does not
reflect on or relate at all to our performance. We have agreed to a severance
payment of approximately $1.0 million that will compensate us, among other
things, for approximately $0.3 million of setup costs were incurred and
capitalized through December 31, 2002. These costs will be expensed in 2003. We
expect full payment of the $1.0 million severance amount in the second quarter
of 2003.
BALANCE SHEET ITEMS
Cash and Cash Equivalents
The increase of cash and cash equivalents to $12.0 million at December 31, 2002
from $8.8 million at December 31, 2001 is due primarily to the following
activity:
. cash flow from operations of $0.6 million
. net proceeds from the sale of DASH of $5.8 million as described in
Note 26 - Discontinued Operations and Assets Held for Sale to our
Consolidated Financial Statements
. net proceeds from the private placement of equity in February 2002 of
$11.7 million as described in Note 12 - Private Placement of Common
Shares to our Consolidated Financial Statements
. net proceeds from exercise of stock options, warrants and employee
share purchases of $6.2 million
. offset by the cash purchase of $4.9 million of fixed assets and other
long-term assets
. offset by debt and lease repayments of $15.9 million
See Note 22 - Reconciliation of Net Income/(Loss) to Net Cash Provided by/(Used
in) Operating Activities to the Consolidated Financial Statements and the
Consolidated Statements of Cash Flows for further description of these items.
Restricted Cash
Restricted cash increased to $4.4 million at December 31, 2002 from $1.9 million
at December 31, 2001. The majority of restricted cash was held as security with
respect to cash provided in Hungary and Poland by banks participating in our ATM
network. The increase is primarily due to the pledge of cash to purchase a $2.0
million surety bond as cash collateral for the Hungarian ATM network, to replace
Michael J. Brown's $4.0 million security pledge and a related $0.8 million
certificate of deposit previously obtained for the same purpose.
Trade Accounts Receivable
Trade accounts receivable decreased marginally to $8.4 at December 31, 2002 from
$8.9 million at December 31, 2001 due primarily to continued improvements in
collections in 2002 and 2001.
Assets Held for Sale
Assets held for sale represent the net assets of our U.K. subsidiary as of
December 31, 2002, and U.K, France and DASH as of December 31, 2001.
Substantially all of France's and DASH's assets were sold in 2002 as discussed
in Note 26 - Discontinued Operations and Assets Held for Sale to our
Consolidated Financial Statements. Our U.K. subsidiary was sold in January 2003
as discussed in Note 29 - Subsequent Events to our Consolidated Financial
Statements.
Property, Plant and Equipment
Net property, plant and equipment remained constant at $21.4 million at December
31, 2002 and December 31, 2001. This is the result of fixed asset purchases, the
completion of our new processing center in Budapest, offset in part by current
period depreciation.
Intangible Assets
Net intangible assets increased to $1.8 million at December 31, 2002 from $1.6
million at December 31, 2001. The intangible asset is goodwill related to the
1999 acquisition of SBK, a German ATM company. The increase from 2001 to 2002 is
due to remeasurement of assets due to foreign exchange rate movement. In
accordance with SFAS 142, we no longer amortize goodwill but will review at
least annually for possible impairment.
Current Liabilities
Current liabilities decreased to $19.8 million at December 31, 2002 from $24.8
million at December 31, 2001. The decrease was primarily due to i) the $2.0
million repayment of the shareholder credit facility discussed in Note 11 -
Notes Payable to our Consolidated Financial statements, and ii) decreases in
trade accounts payable and other accrued expenses of $2.0 million.
Liabilities Held for Sale
Liabilities held for sale represent the net liabilities of our U.K. subsidiary
as of December 31, 2002, and U.K, France and DASH as of December 31, 2001.
Substantially all of France's and DASH's liabilities were sold in 2002 as
discussed in Note 26 - Discontinued Operations and Assets Held for Sale to our
Consolidated Financial Statements. Our U.K. subsidiary was sold in January 2003
as discussed in Note 29 - Subsequent Events to our Consolidated Financial
Statements.
Capital Leases
Total capital lease obligations including current installments decreased to $7.7
million at December 31, 2002 from $10.0 million at December 31, 2001. This
decrease is due primarily to an excess of 2002 lease payments of $4.0 million
over additional fixed assets lease obligations of $1.7 million. The new capital
leases are generally for a term of 3 to 5 years.
Notes Payable
Notes payable decreased to $36.3 million at December 31, 2002 from $38.1 million
at December 31, 2001. This result is from several transactions as follows (in
millions):
Balance at December 31, 2001 $ 38.1
Unrealized foreign exchange loss (EUR vs. USD) 6.7
Early retirement of debt with cash (9.1)
Early retirement of debt with equity swaps (1.9)
Accretion of bond interest 2.5
-------
Balance at December 31, 2002 $ 36.3
=======
Stockholders' Equity/(Deficit)
Stockholders' equity increased to $6.2 million at December 31, 2002 from a
deficit of $7.7 million at December 31, 2001. This results primarily from the
following activity:
. $6.5 million in net losses for 2002
. Net proceeds from the private placement of equity in February 2002 of
$11.7 million as described in Note 12 - Private Placement of Common
Shares to our Consolidated Financial Statements
. Net proceeds from exercise of stock options, warrants and employee
share purchases of $7.3 million
. $0.8 million decrease in the accumulated comprehensive loss
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
SFAS 143
In June 2001, Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). We adopted SFAS 143 on January 1, 2003. We do not
expect the adoption of SFAS 143 to have a material impact on our 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. We will apply SFAS 146
prospectively to activities initiated after December 31, 2002. We do not expect
the adoption of SFAS 146 to have a material impact on our 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 would require that, at the inception of a guarantee, we 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. We have no obligations
under guarantees as of December 31, 2002. We do not expect the adoption of FIN
45 to have a material impact on our financial position or result of operations.
FIN 46
In January 2003, the Financial Accounting Standards Board 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. It applies in the first fiscal year
or interim period beginning after June 15, 2003 for variable interest entities
created or acquired prior to February 1, 2003. We are currently evaluating the
potential impact, if any, the adoption of FIN 46 will have on our financial
position and results of operations.
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 June 15, 2003. We will adopt
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.
FORWARD-LOOKING STATEMENTS
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, as amended. All statements other than
statements of historical facts included in this document are forward-looking
statements, including statements regarding the following:
. our business plans and financing plans and requirements
. trends affecting our business plans and financing plans and
requirements
. trends affecting our business
. the adequacy of capital to meet our capital requirements and expansion
plans
. the assumptions underlying our business plans
. business strategy
. government regulatory action
. technological advances
. projected costs and revenues
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to be correct. Forward-looking statements are typically identified by the
words believe, expect, anticipated, 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:
. technological and business developments in the local card, electronic
and mobile banking and mobile phone markets affecting transaction and
other fees that we are able to charge for our services
. foreign exchange fluctuations
. competition from bank-owned ATM networks, outsource providers of ATM
services, software providers and providers of outsourced mobile phone
services
. our relationships with our major customers, sponsor banks in various
markets and international card organizations
. changes in laws and regulations affecting our business
These risks and other risks are described elsewhere in this document, including
in Exhibit 99.1, and our other filings with the Securities and Exchange
Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Operational Risk; Security
Our business involves the operation and maintenance of a sophisticated computer
network and telecommunications connections with banks, financial institutions,
retailers and mobile operators. This, in turn, requires the maintenance of
computer equipment and infrastructure, including telecommunications and
electrical systems, and the integration and enhancement of complex software
applications. Certain operational risks inherent in this type of business can
require a temporary shut-down of parts or all of our processing systems,
including failure of electrical supply, failure of computer hardware and
software errors. All of our ATMs other than our ATMs in Germany are operated
through our processing center in Budapest and all of our e-top-up transactions
are processed through our Basildon operations center so any operational problem
there may have a significant adverse impact on the operation of our network
generally.
We have experienced operations and computer development staff and have created
redundancies and procedures, particularly in our Budapest and Basildon (from
February 2003) processing centers, to mitigate such risks, but they cannot be
eliminated entirely. Any technical failure that prevents operation of our
systems for a significant period of time will prevent us from processing
transactions during that period of time and will directly and adversely affect
our revenues and financial results.
Our ATM and POS network systems process electronic financial transactions using
information read by ATMs or POS terminals from bank debit and credit cards or
input into our systems by our customers in the registration process for mobile
phone recharge services. We capture, transmit, handle and store this sensitive
bankcard information in performing services for our customers. In addition, our
software is designed to permit the operation by our customers of electronic
financial transaction networks similar to our network, so our software is used
in handling such information. These businesses involve certain inherent security
risks and in particular the risk of electronic interception and theft of the
information for use in fraudulent card transactions. We have incorporated
industry standard encryption technology and processing methodology into our
systems and software to maintain high levels of security. Although this
technology and methodology mitigates security risks, they cannot be eliminated
entirely as criminal elements apply increasingly sophisticated technology to
attempt to obtain unauthorized access to the information handled by ATM and
electronic financial transaction networks.
Any breach in our security systems could result in the perpetration of
fraudulent financial transactions for which we may be found liable. We are
insured against various risks, including theft and negligence, but such
insurance is subject to deductibles, exclusions and limitations that may leave
us bearing some or all of any losses arising from security breaches.
In addition to electronic fraud issues, theft and vandalism of ATMs presents
risks for our ATM business. We install ATMs at sites that are high foot traffic
sites and are exposed to theft and vandalism. Vandalism during the year 2001
increased in some of our markets, particularly in Hungary where a series of
incidents were attributed to an organized gang that we believe has been
apprehended. Although we are insured against such risks, deductibles, exclusions
or limitations in such insurance may leave us bearing some or all of any losses
arising from theft or vandalism of ATMs. In addition, we have experienced
increases in claims under our insurance, which has increased our insurance
premiums.
Foreign Exchange Exposure
In 2002, 66% of our total revenues were generated in Poland Hungary, the U.K.
and Germany as compared to 68% in 2001 and 62% in 2000. This decrease is due to
the overall increase in revenues for our operations, including in these four
countries. 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 U.K. and Germany,
100% of the revenues received are denominated in the British pound and the euro,
respectively. Although a significant portion of our expenditures in these
countries are still made in or denominated in U.S. dollars, we are striving to
achieve more of our expenses in local currencies to match our revenues.
We estimate that a 10% depreciation in foreign exchange rates of the euro,
Hungarian forint, Polish zloty and the British pound sterling against the U.S.
dollar would have the combined effect of a $2.5 million decrease in the reported
net loss. This effect was 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.
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.
The information above does not include the effects of e-pay, ltd., which was
acquired subsequent to December 31, 2002. e-pay's revenues and expenses are
denominated in British pound and Australian dollar, and the acquisition
indebtedness related to the purchase is denominated in British pounds.
Accordingly, this natural matching of revenue, expense and the related
indebtedness reduces the additional exposure to adverse changes in these local
currency valuations against the U.S. dollar as it relates to e-pay's inclusion
in our consolidated Statement of Operations.
Inflation and Functional Currencies
Generally, the countries we operate in have experienced low and stable inflation
in recent years. Therefore, the local currency in each of these markets is the
functional currency. Although Croatia has maintained relatively stable inflation
and exchange rates, the functional currency of our Croatian subsidiary is the
U.S. dollar due to the significant level of U.S. dollar denominated revenues and
expenses. Due to these factors, we do not believe that inflation will have a
significant effect on our results of operations or financial position. We
continually review inflation and the functional currency in each of the
countries where we operate.
Interest Rate Risk
The fair market value of our long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. The
estimated fair value of our notes payable at December 31, 2002 was approximately
$38.8 million compared to a carrying value of $36.3 million. A 1% increase from
prevailing interest rates at December 31, 2001 would result in a decrease in
fair value of notes payable by approximately $1.1 million. Fair values were
determined based on the current early redemption premium of approximately 6% of
face value as defined in the note agreement and as evidenced by the recent
redemption in July 2002. (See Note 21 - Financial Instruments to the
Consolidated Financial Statements.)
First Interest Payment
Beginning January 1, 2003, interest payments of approximately 2.2 million euro
(estimated $2.3 million as of December 31, 2002) will be payable semi-annually
on our outstanding 12 3/8% senior debt. Payment dates will be January 1 and July
1, with the final interest payment due on July 1, 2006. The first payment due
January 1, 2003 was made on December 30, 2002. 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. We currently anticipate making
these interest payments 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 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.
New Debt Incurred
As described in "Subsequent Events" in this filing, in February 2003, we
acquired e-pay Ltd. and incurred indebtedness comprised of three separate
elements totaling approximately $27 million. The terms of this indebtedness are
more fully described in the section entitled "Liquidity and Capital Resources"
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. Repayment terms vary for each of the debt elements but
are due in full on February 18, 2005 unless otherwise repaid prior to that date.
We currently expect to repay all amounts due from available cash flows or, if
necessary, will seek to refinance the debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EURONET WORLDWIDE, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report 44
Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001 45
Consolidated Statements of Operations and Comprehensive (Loss)/Income for the years ended December 31, 2002, 2001 and
2000 46
Consolidated Statements of Changes in Stockholders' Equity/(Deficit) for the years ended December 31, 2002, 2001 and
2000 47
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 49
Notes to Consolidated Financial Statements 50
Independent Auditors' Report
The Board of Directors and Stockholders
Euronet Worldwide, Inc.:
We have audited the accompanying consolidated balance sheets of Euronet
Worldwide, Inc. and subsidiaries as of December 31, 2002 and 2001 and the
related consolidated statements of operations and comprehensive (loss)/income,
changes in stockholders' equity/(deficit), and cash flows for each of the years
in the three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Euronet Worldwide,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002 in conformity with generally accepted accounting
principles in the United States of America.
KPMG Polska Sp. z o.o.
Warsaw, Poland
February 7, 2003, except Note 29 which is dated February 19, 2003.
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
-------------------------------------
2002 2001
--------- ---------
(in thousands, except for share data)
ASSETS
Current assets:
Cash and cash equivalents $ 12,021 $ 8,820
Restricted cash (note 6) 4,401 1,877
Trade accounts receivable, net of allowances for doubtful
accounts of $484 at December 31, 2002 and $675 at December 31,
2001 (note 17) 8,380 8,862
Earnings in excess of billings on software installation
contracts (note 8) 334 331
Assets held for sale (note 26) 10,767 9,351
Prepaid expenses and other current assets (note 7) 3,963 5,453
--------- ---------
Total current assets 39,866 34,694
Property, plant and equipment, net (notes 10, 15, 20, 28 and 29):
21,394 21,398
Intangible assets, net (notes 9 and 10) 1,834 1,551
Deferred income taxes (note 16) 1,064 429
Other assets, net (note 3(h)) 2,401 3,319
--------- ---------
Total assets $ 66,559 $ 61,391
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Trade accounts payable 2,989 3,033
Current installments of obligations under capital leases (note 15) 3,447 3,781
Accrued expenses and other current liabilities 4,979 7,019
Short-term borrowings 380 513
Advance payments on contracts 2,966 2,295
Income taxes payable - 61
Liabilities held for sale (note 26) 3,537 4,594
Billings in excess of earnings on software installation
contracts (note 8) 1,471 1,457
Credit facility (note 13) - 2,000
--------- ---------
Total current liabilities 19,769 24,753
Obligations under capital leases, excluding current installments
(note 15) 4,301 6,179
Notes payable (note 11) 36,318 38,146
--------- ---------
Total liabilities 60,388 69,078
--------- ---------
Stockholders' equity/(deficit):
Common stock, $0.02 par value. Authorized 60,000,000 shares;
issued and outstanding 23,883,072 shares at December 31, 2002
and 22,038,073 at December 31, 2001 (note 12) 480 441
Additional paid in capital 137,426 117,940
Treasury stock (145) (145)
Employee loans for stock (note 18) (427) (463)
Subscription receivable 42 -
Accumulated deficit (129,655) (123,141)
Restricted reserve (note 5) 784 784
Accumulated other comprehensive loss (2,334) (3,103)
--------- ---------
Total stockholders' equity/(deficit) 6,171 (7,687)
--------- ---------
Total liabilities and stockholders' equity/(deficit) $ 66,559 $ 61,391
========= =========
See accompanying notes to the consolidated financial statements.
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive (Loss)/Income
Year Ended December 31,
2002 2001 2000
------------ ------------ ------------
(in thousands, except for share and
per share data)
Revenues:
ATM network and related revenue $ 53,918 $ 45,941 $ 34,201
Software and related revenue 17,130 15,042 15,827
------------ ------------ ------------
Total 71,048 60,983 50,028
------------ ------------ ------------
Operating expenses:
Direct operating costs 29,609 26,469 24,162
Salaries and benefits 25,282 24,091 28,318
Selling, general and administrative 6,917 7,688 11,047
Depreciation and amortization 9,659 8,785 9,988
Asset write-down - - 11,968
------------ ------------ ------------
Total operating expenses 71,467 67,033 85,483
------------ ------------ ------------
Operating loss (419) (6,050) (35,455)
------------ ------------ ------------
Other income/expenses:
Interest income 247 278 1,073
Interest expense (6,253) (9,386) (10,760)
Loss on facility sublease (249) - -
Equity in losses from investee companies (183) - -
(Loss)/gain on early retirement of debt (955) 9,677 -
Foreign exchange (loss)/gain, net (4,233) 5,425 (3,243)
------------ ------------ ------------
Total other (expense)/income (11,626) 5,994 (12,930)
------------ ------------ ------------
Loss from continuing operations before income taxes and
minority interest (12,045) (56) (48,385)
Income tax benefit/(expense) 2,312 807 (1,181)
------------ ------------ ------------
(Loss)/income from continuing operations before minority
interest (9,733) 751 (49,566)
Minority interest 100 - -
------------ ------------ ------------
(Loss)/income from continuing operations (9,633) 751 (49,566)
------------ ------------ ------------
Discontinued operations:
Income/(loss) from operations of discontinued U.S. and
France components (including gain on disposal of
$4,726 for 2002) 5,054 (123) 22
Income tax expense (1,935) 42 (7)
------------ ------------ ------------
Income/(loss) from discontinued operations 3,119 (81) 15
------------ ------------ ------------
Net (loss)/income (6,514) 670 (49,551)
Translation adjustment 769 (406) -
------------ ------------ ------------
Comprehensive (loss)/income $ (5,745) $ 264 $ (49,551)
============ ============ ============
(Loss)/income per share - basic
(Loss)/income from continuing operations $ (0.42) $ 0.04 $ (3.00)
Income/(loss) from discontinued operations 0.14 (0.01) -
------------ ------------ ------------
Net (loss)/income $ (0.28) $ 0.03 $ (3.00)
============ ============ ============
Basic weighted average outstanding shares 23,156,129 19,719,253 16,499,699
============ ============ ============
(Loss)/income per share - diluted
(Loss)/income from continuing operations $ (0.42) $ 0.03 $ (3.00)
Income/(loss) from discontinued operations 0.14 - -
------------ ------------ ------------
Net (loss)/income $ (0.28) $ 0.03 $ (3.00)
============ ============ ============
Diluted weighted average outstanding shares 23,156,129 22,413,408 16,499,699
============ ============ ============
See accompanying notes to the consolidated financial statements.
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity/(Deficit)
Employee Loans Additional
No. of Common for Paid in Treasury
Shares Stock Stock Capital Stock
---------- --------- --------- --------- --------
(in thousands, except share data)
BALANCE DECEMBER 31, 1999 15,541,956 $ 311 $ (794) $ 66,969 $ (3)
Stock options exercised (note 18) 390,231 8 - 941 -
Sale of Common Stock (note 12) 1,882,723 37 - 13,045 -
Warrants issue (note 12 and 13) - - - 372 -
Subscriptions - - - - -
Employee loans for stock (note 18) - - 233 - (137)
Translation adjustment - - - - -
Net loss for 2000 - - - - -
---------- --------- --------- --------- --------
BALANCE DECEMBER 31, 2000 17,814,910 $ 356 $ (561) $ 81,327 $ (140)
Stock options exercised (note 18) 292,643 6 - 1,446 -
Shares issued for retirement of debt 3,343,400 67 - 30,961 -
Private placement of shares 19,000 1 - 104 -
Warrants exercised 361,000 7 - 2,112 -
Employee loans for stock (note 18) - - 98 - (5)
Sale of Common Stock (note 12) 207,120 4 - 1,990 -
Other - - - - -
Translation adjustment - - - - -
Net income for 2001 - - - - -
---------- --------- --------- --------- --------
BALANCE DECEMBER 31, 2001 22,038,073 $ 441 $ (463) $ 117,940 $ (145)
Stock options exercised (note 18) 957,170 19 - 4,586 -
Shares issued for retirement of debt 131,483 4 - 2,122 -
Private placement of shares 625,000 13 - 11,935 -
Warrants exercised 131,346 3 - 843 -
Employee loans for stock (note 18) - - 36 - -
Other - - - - -
Translation adjustment - - - - -
Net loss for 2002 - - - - -
---------- --------- --------- --------- --------
BALANCE DECEMBER 31, 2002 23,883,072 $ 480 $ (427) $ 137,426 $ (145)
========== ========= ========= ========= ========
See accompanying notes to the consolidated financial statements.
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders'
Equity/(Deficit) (continued)
Accumulated
Other
Subscription Accumulated Restricted Comprehensive
Receivable Deficit Reserve (Loss)/Income Total
------------ ----------- ---------- ------------- ---------
(in thousands, except share data)
BALANCE DECEMBER 31, 1999 $ (50) $ (74,260) $ 784 $ (2,450) $ (9,493)
Stock options exercised (note 18) - - - - 949
Sale of Common Stock (note 12) - - - - 13,082
Warrants issue (note 12 and 13) - - - - 372
Subscriptions (9) - - - (9)
Employee loans for stock (note 18) - - - - 96
Translation adjustment - - - (247) (247)
Net loss for 2000 - (49,551) - - (49,551)
------------ ----------- ---------- ------------- ---------
BALANCE DECEMBER 31, 2000 $ (59) $ (123,811) $ 784 $ (2,697) $ (44,801)
Stock options exercised (note 18) - - - - 1,452
Shares issued for retirement of debt - - - - 31,028
Private placement of shares - - - - 105
Warrants exercised - - - - 2,119
Employee loans for stock (note 18) - - - - 93
Sale of Common Stock (note 12) - - - - 1,994
Other 59 - - - 59
Translation adjustment - - - (406) (406)
Net income for 2001 - 670 - - 670
------------ ----------- ---------- ------------- ---------
BALANCE DECEMBER 31, 2001 $ - $ (123,141) $ 784 $ (3,103) $ (7,687)
Stock options exercised (note 18) - - - - 4,605
Shares issued for retirement of debt - - - - 2,126
Private placement of shares - - - - 11,948
Warrants exercised - - - - 846
Employee loans for stock (note 18) - - - - 36
Other 42 - - - 42
Translation adjustment - - - 769 769
Net loss for 2002 - (6,514) - - (6,514)
------------ ----------- ---------- ------------- ---------
BALANCE DECEMBER 31, 2002 $ 42 $ (129,655) $ 784 $ (2,334) $ 6,171
============ =========== ========== ============= =========
See accompanying notes to the consolidated financial statements.
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Net cash provided by/(used in) operating activities
(note 22) $ 626 $ (34) $(16,436)
-------- -------- --------
Cash flows from investing activities:
Fixed asset purchases (4,712) (1,758) (2,305)
Proceeds from sale of fixed assets 240 339 843
Purchase of intangible and other long term assets (378) - -
Net decrease in loan receivable - - (13)
-------- -------- --------
Net cash used in investing activities (4,850) (1,419) (1,475)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the sale and leaseback of fixed assets - 1,234 -
Proceeds from issuance of shares and other capital
contributions 17,917 5,608 13,889
(Repayment of)/proceeds from issuance of notes payable and
warrants (9,456) (845) 378
Repayment of credit facility (2,000) - -
Repayment of obligations under capital leases (4,412) (4,587) (3,260)
(Repayment of)/proceeds from borrowings (133) 2,321 192
Decrease/(increase) in subscriptions receivable 42 59 (9)
Cash repaid by employees for purchase of
common stock 37 98 233
-------- -------- --------
Net cash provided by financing activities 1,995 3,888 11,423
-------- -------- --------
Effect of exchange differences on cash (442) 99 200
Proceeds from sale of discontinued operations 5,872 - -
Cash used in discontinued operations - (474) (1,550)
-------- -------- --------
Net increase/(decrease) in cash and cash equivalents 3,201 2,060 (7,838)
Cash and cash equivalents at beginning of period 8,820 6,760 14,598
-------- -------- --------
Cash and cash equivalents at end of period $ 12,021 $ 8,820 $ 6,760
======== ======== ========
Interest paid during year $ 6,668 $ 2,292 $ 2,076
Income taxes refunded during year $ - $ 894 $ -
See accompanying notes to the consolidated financial statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
2002, 2001 AND 2000
(1) ORGANIZATION
Euronet Worldwide, Inc. was established as a Delaware corporation on December
13, 1997 and capitalized on March 6, 1998. Euronet Worldwide, Inc. succeeded
Euronet Holding N.V. as the group holding company.
Euronet Worldwide, Inc. and its subsidiaries (the "Company" or "Euronet") is a
leading provider of secure electronic financial transaction solutions. Euronet
provides financial payment middleware, financial network gateways, outsourcing,
and consulting services to financial institutions, retailers and mobile phone
operators. Euronet operates an independent automated teller machine (ATM)
network of 3,005 ATMs across Europe (and until January 2002 in the United
States). 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. Euronet provides
comprehensive electronic payment solutions consisting of ATM network
participation, outsourced ATM management solutions, electronic top-up services
(for prepaid mobile airtime) and software solutions. Through its newly acquired
subsidiary, e-pay Ltd., which the Company acquired on February 19, 2003, Euronet
operates a network of point-of-sale (POS) terminals providing electronic
processing of prepaid mobile phone airtime "top-up" services in the U.K. and
Australia, through its wholly owned subsidiary e-pay Australia Pty Ltd. .
Euronet's principal customers are banks and other companies such as mobile phone
operators that require electronic financial transaction processing services.
Euronet's solutions are used in more than 60 countries around the world. As of
December 31, 2002, the Company had ten offices in Europe, two in the United
States and one each in India, Indonesia, and Egypt.
As of December 31, 2002, the Euronet's wholly owned subsidiaries were:
.EFT Services Holding B.V., incorporated in the Netherlands
.Euronet Banktechnikai Szolgaltato Kft. ("Bank Tech"), incorporated in
Hungary
.Euronet Adminisztracios Szolgaltato Kft. ("Administrative Services")
(formerly SatComNet), incorporated in Hungary
.Bankomat 24/Euronet Sp. z o.o. ("Bankomat"), incorporated in Poland
.EFT-Usluge d o.o., incorporated in Croatia
.Euronet Services GmbH, incorporated in Germany
.EFT Services France SAS, incorporated in France
.Euronet Services spol. s.r.o., incorporated in the Czech Republic
.Euronet Services SRL, incorporated in Romania
.Euronet Services (UK) Limited, incorporated in the U.K. (sold in January
2003. See Note 29 - Subsequent Events to the Consolidated Financial
Statements.)
.Euronet USA Inc. (formerly Arkansas Systems, Inc.) ("Euronet USA")
incorporated in Arkansas, United States of America
.EFT Processing Services LLC ("Dash"), incorporated in Arkansas, United
States of America (in liquidation)
.Euronet Holding N.V., incorporated in the Netherlands Antilles (in
liquidation)
.Euronet EFT Services Hellas, incorporated in Greece
.Euronet Services Private Limited, incorporated in India
.Euronet Services Slovakia, spol. s r.o., incorporated in Slovakia
As of December 31, 2002, Euronet also had shareholdings in the following
companies that are not wholly owned:
.Euronet Sigma Nusantara, incorporated in Indonesia, of which 80% of the
shares are owned by EFT Services Holdings B.V.
.CashNet Telecommunications Egypt SAE ("CashNet"), an Egyptian company
limited by shares, of which 10% of the shares are owned by EFT Services
Holdings B.V.
.Europlanet a.d. ("Europlanet"), incorporated in the Federal Republic of
Serbia, of which 36% of the shares are owned by our wholly owned subsidiary
EFT Services Holdings B.V.
(2) BASIS OF PREPARATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America. The
preparation of the consolidated financial statements requires management of the
Company to make a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and
expenses during the period. Significant items subject to such estimates and
assumptions include software revenue recognition, software development costs,
income taxes and impairment of long-lived assets and goodwill. Actual results
could differ from those estimates.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) Principles of consolidation
The consolidated financial statements include the accounts of Euronet Worldwide,
Inc. and its wholly owned and majority owned subsidiaries. All significant
inter-company balances and transactions have been eliminated. The Company's
investments in companies that it does not control but has the ability to
exercise significant influence over operating and financial policies are
accounted for under the equity method.
(b) Foreign currencies
Foreign currency transactions are recorded at the exchange rate prevailing on
the date of the transactions. Assets and liabilities denominated in foreign
currencies are remeasured at rates of exchange on the balance sheet date.
Resulting gains and losses on foreign currency transactions are included in the
consolidated statement of operations and comprehensive loss.
The financial statements of foreign subsidiaries where the local currency is the
functional currency are translated to U.S. dollars using (i) exchange rates in
effect at period end for assets and liabilities, and (ii) average exchange rates
during the period for results of operations. Adjustments resulting from
translation of such financial statements are reflected in accumulated other
comprehensive income as a separate component of consolidated stockholders'
equity. The financial statements of foreign subsidiaries where the functional
currency is the U.S. dollar are remeasured using historical exchange rates for
nonmonetary items while current exchange rates are used for monetary items.
Foreign exchange gains and losses arising from the remeasurement are reported in
the consolidated statement of operations and comprehensive loss.
(c) Cash equivalents
For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
(d) Derivative financial instruments
Prior to the adoption of SFAS No. 133 (Accounting for Derivative Instruments and
Hedging Activities) on January 1, 2001, forward foreign exchange contracts were
recorded at fair values in the consolidated balance sheet in other current
assets or other current liabilities with the related gain or loss recognized in
the consolidated statement of operations, unless the contracts met certain
hedging criteria. A foreign exchange contract was considered a hedge of an
identifiable foreign currency commitment if (i) the contract was designated as,
and was effective as, a hedge of foreign currency commitment and (ii) the
foreign currency commitment was firm.
Gains and losses on foreign exchange contracts meeting these hedge accounting
criteria were deferred and included in the measurement of the related foreign
currency transaction. Losses were not deferred if, however, it was estimated
that the deferral would lead to recognition of losses in later periods.
In 2000, the Company settled all outstanding forward foreign exchange contracts.
As of December 31, 2002 and 2001, the Company had not entered into any forward
foreign exchange contracts or any other derivative contracts.
(e) Property, plant and equipment
Property, plant, and equipment are stated at cost. Equipment under capital
leases is stated at the lesser of fair value of the leased equipment and the
present value of future minimum lease payments.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets. Equipment held under capital leases and leasehold
improvements are amortized straight line over the shorter of their estimated
useful lives or the lease term.
Depreciation and amortization rates are as follows:
Automated teller machines 5-7 years
Computers and software 3-5 years
Vehicles and office equipment 5 years
Cassettes 1 year
Leasehold improvements Over the lesser of the lease term or estimated useful life
(f) Goodwill and other intangible assets
The Company adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," as of January 1, 2002. Goodwill and intangible assets
acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets.
Goodwill
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Company performed an assessment of whether there was an indication that
goodwill is impaired as of the date of adoption. To accomplish this, the Company
was required to identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of January
1, 2002. The Company was required to determine the fair value of each reporting
unit and compare it to the carrying amount of the reporting unit within six
months of January 1, 2002. To the extent the carrying amount of a reporting unit
exceeded the fair value of the reporting unit, the Company would be required to
perform the second step of the transitional impairment test, as this is an
indication that the reporting unit goodwill may be impaired. The second step was
required for one reporting unit. In this step, the Company compared the implied
fair value of the reporting unit goodwill with the carrying amount of the
reporting unit goodwill, both of which were measured as of the date of adoption.
The implied fair value of goodwill was determined by allocating the fair value
of the reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141, Business Combinations. The residual
fair value after this allocation was the implied fair value of the reporting
unit goodwill. The implied fair value of this reporting unit exceeded its
carrying amount and the Company was not required to recognize an impairment
loss.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line
basis over the expected periods to be benefited, generally 7-10 years, and
assessed for recoverability by determining whether the amortization of the
goodwill balance over its remaining life could be recovered through undiscounted
future operating cash flows of the acquired operation. All other intangible
assets were amortized on a straight-line basis from 5 to 10 years .The amount of
goodwill and other intangible asset impairment, if any, was measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.
Other Intangibles
In accordance with SFAS 142, intangible assets with definite useful lives are
amortized over their respective useful lives to their estimated residual values
and reviewed for impairment in accordance with SFAS 144. The Company evaluates
the recoverability of definite life intangible assets when events or
circumstances indicate that these assets might be impaired. The Company
determines impairment by comparing an asset's respective carrying value to
estimates of undiscounted future cash flows expected to be generated by the
asset. If the carrying amount is less than the recoverable amount, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the asset on a discounted cash flow basis.
Amortization of definite life intangible assets is calculated using the
straight-line method over the estimated useful lives of the assets as follows:
Developed software technology 3 - 5 years
Trade name 10 years
See Note 9 for additional information regarding SFAS No. 142 and the treatment
of goodwill and other intangibles.
(g) Impairment or disposal of long-lived assets
SFAS No. 144 provides a single accounting model for long-lived assets to be
disposed of. SFAS No. 144 also changes the criteria for classifying an asset as
held for sale; and broadens the scope of businesses to be disposed of that
qualify for reporting as discontinued operations and changes the timing of
recognizing losses on such operations. The Company adopted SFAS No. 144 on
January 1, 2002.
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposal group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested annually
for impairment, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset's fair
value.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
(h) Other assets
Other assets include deferred financing costs, investments in affiliates, and
capitalized software development costs. Deferred financing costs represent
expenses incurred to obtain financing that have been deferred and amortized over
the life of the loan using the effective interest method.
(i) Investments in affiliates
The Company accounts for investments in affiliates using the equity method of
accounting when the Company exercises significant influence over the business
activities of the affiliate.
(j) Income taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(k) Reclassifications
Certain amounts have been reclassified in the prior year consolidated financial
statements to conform to the 2002 consolidated financial statement presentation.
(l) Revenue recognition
Euronet recognizes revenue at the point at which the service is performed.
Revenue from time and material service contracts is recognized as the services
are provided. Revenues from software licensing agreement contracts are
recognized over the contract term using the percentage of completion method
based on the percentage of services that are provided compared with the total
estimated services to be provided over the entire contract. The effect of
changes to total estimated contract costs is recognized in the period such
changes are determined. Provisions for estimated losses are made in the period
in which the loss first becomes probable and estimable. Revenues from software
licensing agreement contracts representing newly released products deemed to
have a higher than normal risk of failure during installation are recognized on
a completed contract basis whereby revenues and related costs are deferred until
the contract is complete. Maintenance revenue is recognized over the contractual
period or as services are performed. Revenue in excess of billings on software
licensing agreements contracts is recorded as unbilled receivables and is
included in current assets. Billings in excess of revenue on software license
agreements contracts are recorded as deferred revenue and included in current
liabilities until such time the above revenue recognition criteria are met (see
Note 8).
(m) Research and development costs
The Company applies SFAS 2 and SFAS 86 in recording research and development
costs. Research costs aimed at the discovery of new knowledge with the hope that
such knowledge will be useful in developing a new product or service or a new
process or technique or in bringing about significant improvement to an existing
product or process are expensed as incurred (see Note 25). Development costs
aimed at the translation of research findings or other knowledge into a plan or
design for a new product or process or for a significant improvement to an
existing product or process whether intended for sale or use are capitalized on
a product-by-product basis when technological feasibility is established.
Technological feasibility of computer software products is established when the
Company has completed all planning, designing, coding, and testing activities
that are necessary to establish that the product can be produced to meet its
design specifications including functions, features, and technical performance
requirements. Technological feasibility is evidenced by the existence of a
working model of the product or by completion of a detail program design. The
detail program design must (i) establish that the necessary skills, hardware,
and software technology are available to produce the product, (ii) be complete
and consistent with the product design, and (iii) have been reviewed for
high-risk development issues, with any uncertainties related to identified
high-risk development issues being adequately resolved.
Capitalized software costs are amortized on a product-by-product basis equal to
the greater of the amount computed using (i) the ratio that current gross
revenues for a product bear to the total of current and anticipated future gross
revenues for that product or (ii) the straight line method over the remaining
estimated economic life of the product, generally three years, including the
period being reported on. Amortization commences in the period when the product
is available for general release to customers.
(n) Net loss/income per share
Net (loss)/income per share has been computed by dividing net (loss)/income by
the weighted average number of common shares outstanding. The effect 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:
As of December 31
---------------------------------------
2002 2001 2000
---------- ----------- ----------
Basic weighted average outstanding shares 23,156,129 19,719,253 16,499,699
Outstanding convertible warrants 162,738 209,839 239,771
Outstanding stock options 2,838,609 2,484,316 1,906,020
---------- ----------- ----------
Potentially diluted weighted average outstanding
shares 26,157,476 22,413,408 18,645,490
========== =========== ==========
(o) Stock-based compensation
At December 31, 2002, the Company had stock-based employee compensation plans,
which are more fully described in Note 18. The Company accounts for those 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. Such compensation cost is charged to
expense on a straight-line basis over the vesting period of the respective
options. If vesting is accelerated as a result of certain milestones, the
unrecognized compensation would be recorded as expense on the date such
milestones have or have been deemed to be achieved.
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:
Year Ended December 31
---------------------------------------
2002 2001 2000
--------- --------- ---------
(in thousands, except per share data)
Net (loss)/income, as reported $ (6,514) $ 670 $ (49,551)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (5,840) (3,773) (3,055)
--------- --------- ---------
Pro forma net (loss) $ (12,354) $ (3,103) $ (52,606)
========== ========= ==========
Earnings per share:
Basic - as reported $ (0.28) $ 0.03 $ (3.00)
Basic - pro forma $ (0.53) $ (0.16) $ (3.19)
Diluted - as reported $ (0.28) $ 0.03 $ (3.00)
Diluted - pro forma $ (0.53) $ (0.14) $ (3.19)
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. See Note 18 for additional information.
(4) ACQUISITIONS
On February 19, 2003, the Company acquired 100% of the shares of e-pay Limited.
See Note 29 - Subsequent Events.
(5) RESTRICTED RESERVE
The restricted reserve arose from the provisions of Hungarian accounting law in
relation to share capital contributed in foreign currency to Bank Tech and
Administrative Services. Under these rules, a foreign currency capital
contribution is recorded in the local accounting records of the companies using
the rate when the capital was contributed. The foreign currency gain (or loss),
which arises upon usage of the foreign currency, is recorded as a separate
non-distributable reserve.
The reserve has remained frozen as the laws in Hungary have now changed and no
longer require this accounting. However, the change in the law is not
retroactive and the historical reserve remains undistributable.
(6) RESTRICTED CASH
The restricted cash balances as of December 31, 2002 and 2001 were as follows:
As of December 31
-----------------
2002 2001
------- --------
(in thousands)
ATM deposits $ 1,422 $ 674
Collateral on standby letters of credit 2,596 891
Other 383 312
------ ------
Total $ 4,401 $ 1,877
======= ========
The ATM deposit balances held are equivalent to the value of certain banks' cash
held in Euronet's ATM network. The Company also has deposits with commercial
banks to cover guarantees and deposits with customs officials to cover future
charges. The letters of credit described above are securing borrowings of the
Company's consolidated subsidiaries.
(7) Prepaid Expenses and Other Current Assets
The balances as of December 31, 2002 and 2001 were as follows:
As of December 31,
------------------
2002 2001
-------- ---------
(in thousands)
Prepayments $ 3,963 $ 4,053
Non trade receivable - 1,400
-------- ---------
Total $ 3,963 $ 5,453
======== =========
(8) CONTRACTS IN PROGRESS
Amounts included in the consolidated financial statements, which relate to
recoverable costs and accrued profits not yet billed on contracts are classified
as current assets under earnings in excess of billings on software installation
contracts. Amounts received from customers in excess of revenues recognized to
date are classified as current liabilities under billings in excess earnings of
software installation contracts.
The software installation contracts in progress consist of the following:
As of December 31,
----------------------
2002 2001
---------- ----------
(in thousands)
Earnings on software installation contracts $ 10,225 $ 8,746
Less billings to date (11,362) (9,872)
---------- ----------
$ (1,137) $ (1,126)
========== ==========
Components are included in the accompanying consolidated balance sheets under
the following captions
As of December 31,
-----------------------
2002 2001
---------- ----------
(in thousands)
Earnings in excess of billings on software installation contracts $ 334 $ 331
Billings in excess of earnings on software installation contracts (1,471) (1,457)
---------- ----------
$ (1,137) $ (1,126)
========== ==========
(9) GOODWILL AND INTANGIBLES ASSETS
In accordance with SFAS 142, we have performed an evaluation and determined that
all intangible assets recorded in our consolidated financial statements comprise
only goodwill. We have completed the transitional impairment tests required by
SFAS 142 and determined that there is no impairment of goodwill. The goodwill is
reported in the Processing Services Segment and in the Germany reporting unit.
Amortization of goodwill ceased on December 31, 2001. Goodwill is now carried at
amortized cost and consists of the following:
As of December 31,
------------------
2002 2001
------- -------
(in thousands)
Goodwill $ 1,551 $ 2,429
Less accumulated amortization - (878)
Effects of exchange rate 283 -
------- -------
Total $ 1,834 $ 1,551
======= =======
The impact to net (loss)/income of implementation of SFAS 142 is as follows:
Year Ended December 31,
-----------------------------------
2002 2001 2000
---------- ---------- ----------
(in thousands, except per
share data)
Net (loss)/income, as reported $ (6,514) $ 670 $ (49,551)
Add back: Goodwill amortization - 509 577
---------- ---------- ----------
Adjusted net (loss)/income $ (6,514) $ 1,179 $ (48,974)
========== ========== ==========
Earnings per share:
Basic - as reported $ (0.28) $ 0.03 $ (3.00)
Basic - pro forma $ (0.28) $ 0.06 $ (2.97)
Diluted - as reported $ (0.28) $ 0.03 $ (3.00)
Diluted - pro forma $ (0.28) $ 0.05 $ (2.97)
See Note 10 for details of the write-down of goodwill and intangible assets in
2000.
(10) ASSET WRITE-DOWN
During the third quarter of 2000, the Company reduced the carrying value of
certain assets in accordance with SFAS No. 121. The asset write-downs totaled
$12.0 million, of which $11.2 million related to goodwill and other identifiable
intangible assets associated with the Company's acquisition of Arkansas Systems,
Inc. ("Euronet USA") in December 1998. The remaining $0.8 million write-down
related to the Company's ATM hardware inventory acquired associated with the
Company's acquisition of the SBK ATM network in Germany and the Budapest Bank
ATM network in Hungary.
As a result of the Company's inability to achieve operating improvements,
including software license and service orders for Euronet USA's traditional core
product (ITM) and cost reductions, the Software Solutions Segment continued
operating at a loss through 2000. The Company calculated the expected cash flows
of the Company's Software Solutions Segment, which identified an impairment of
its long-lived assets. Accordingly, in 2000, the Company recorded an impairment
charge based on the present value of expected cash flows of $11.2 million for
the write-down of goodwill and other identifiable intangible assets recorded
upon the acquisition of Euronet USA. The Company considers the rapidly changing
business environment surrounding electronic transaction payment systems software
to be a primary indicator of any potential impairment of goodwill and other
identifiable intangible assets related to the Company's Software Solutions
Segment.
To determine the extent of the asset impairment and the related asset
write-down, the Company estimated the discounted cash flows of the Software
Solutions Segment products and services in determining the fair value of the
goodwill and related identifiable intangible assets. The Company's estimate was
based on historical results, which have shown recurring operating losses since
acquisition, current projections, and internal earnings targets, net of
applicable taxes. The Company's discounted cash flow analysis indicated that the
carrying value of intangible assets related to Euronet USA should be reduced to
zero as of September 30, 2000. The net book value of the intangible assets prior
to the write-down was $11.2 million.
The asset write-down was disclosed as a separate operating expense item in the
Company's Consolidated Statements of Operations and Comprehensive Loss.
The Company periodically reviews the recorded values of its long-lived assets to
determine if future cash flows to be derived from these assets will be
sufficient to recover the remaining recorded asset values. A portion of the ATM
hardware assets acquired with the Budapest Bank and Service Bank ATM network
purchases were deemed technologically inferior relative to the Company's
standards. Specifically, these assets were not technologically advanced enough
to support the entire current and future set of transactions the Company
typically offers to users of its ATM network. As a result of this analysis, the
Company recorded a non-cash charge of $0.8 million in 2000 related to a
reduction in the carrying value of ATM hardware, adjusting to its net realizable
value. The Company continues to sell these ATM software at amounts in excess of
their current carrying value and expects to continue to do so. Should current
disposal activity lessen or start to occur at below carrying value,
consideration will be given to further adjustments.
(11) Notes Payable
On June 22, 1998, the Company sold 243,211 units in a public offering, each
consisting of 511 euro principal amount at maturity of 12 3/8% Senior Discount
Notes due on July 1, 2006 and 729,633 warrants to purchase 766,114 shares of
Common Stock. Each warrant entitles the holder to purchase, on or after June 22,
1998 and prior to July 1, 2006, 1.05 shares of Common Stock at an exercise price
of $5.00 per share. Cash interest on the notes will not be payable prior to July
1, 2002. Commencing January 1, 2003, cash interest will be payable semi-annually
on January 1 and July 1 of each year. The notes and the warrants are separately
transferable. The gross proceeds to the Company were 76.7 million euro
(approximately $83.1 million) representing an issue price of 315.33 euro per 511
euro principal amount at maturity. Of this amount, $1.7 million has been
allocated to the warrants within stockholders' equity to reflect their fair
market value on the date of issuance. Net proceeds to the Company after
underwriting discount and offering expenses were 74.2 million euro
(approximately $81.3 million). Pursuant to the Company's indenture, the Company
is subject to certain restrictions and covenants, including, without limitation,
covenants with respect to the following matters:
. limitation on additional indebtedness
. limitation on restricted payments
. limitation on issuance and sales of capital stock of restricted
subsidiaries
. limitation on transactions with affiliates
. limitation on liens
. limitation on guarantees of indebtedness by restricted subsidiaries
. purchase of Euronet notes upon a change of control
. limitation on sale of assets
. limitation on dividends and other payment restrictions affecting
restricted subsidiaries
. limitation on investments in unrestricted subsidiaries
. limitation lines of business
. provision of financial statements and reports
The Company is in compliance with these covenants at December 31, 2002.
During 2001, in sixteen separate transactions, the Company exchanged 97,700
units (principal amount of 50.0 million euro) of our Senior Discount Notes and
293,100 warrants for 3,238,650 shares of Common Stock. These exchanges were
accounted for as an early retirement of debt with a resulting $8.8 million
recognized as a gain on such retirement. The retirement gain represents the
difference between the allocated carrying value of the debt and any related
warrants extinguished ($39.0 million) and the fair market value of the Common
Stock issued ($29.3 million), offset by the write-off of the allocated
unamortized deferred financing costs ($0.9 million). These transactions were
exempt from registration in accordance with Section 3(a)(9) of the Securities
Act.
During March 2001, the Company exchanged 8,750 units (principal face amount of
4.5 million euro) of its Senior Discount Notes for two new Senior Discount Notes
having an aggregate face amount of $3.0 million (the "New Notes"). The interest,
repayment and other terms of the New Notes are identical to those of the Senior
Discount Notes for which they were exchanged, except that (i) the principal
amount was reduced as indicated in the previous sentence, (ii) the Company has
the right to prepay the New Notes at any time at its option by paying the
"Accreted Value" of the Notes, and (iii) the New Notes are governed by a new
Note Purchase Agreement rather than the indenture under which the Senior
Discount Notes were issued; therefore, the New Notes are not covered by any of
the provisions of such indenture relating to action by the trustee, voting or
maintenance of listing on a stock exchange. This exchange has been accounted for
as an early retirement of debt and issuance of new debt with a resulting $0.7
million recognized as a gain on such early retirement. The early retirement gain
represents the difference between the allocated carrying value of the debt
retired ($3.3 million) and the fair market value of the New Notes issued ($2.5
million), offset by the write-off of the allocated unamortized deferred
financing costs ($0.1 million). This transaction was exempt from registration in
accordance with the Securities Act. The Senior Discount Notes that were acquired
by the Company in the above exchanges have been retired.
During 2001, in a single transaction, the Company exchanged bonds with face
amount $2.1 million of our Senior Discount Notes for 104,750 shares of Common
Stock. This exchange has been accounted for as an early retirement of debt with
a resulting $0.2 million recognized as a gain on such retirement. The retirement
gain (pre-tax) represents the difference between the allocated carrying value of
the debt and any related warrants extinguished ($2.0 million) and the fair
market value of the Common Stock issued ($1.8 million). These transactions were
exempt from registration in accordance with Section 3(a)(9) of the Securities
Act.
During May 2002, in a single transaction, the Company exchanged 2,500 units
(principal amount of 1.3 million euro) of its 12 3/8% Senior Discount Notes for
75,000 shares of its Common Stock, par value $0.02 per share. This exchange has
been accounted for as an early retirement of debt with a resulting $0.1 million
recognized as a loss on such early retirement. The loss on such early retirement
is calculated as the difference between the allocated carrying value of the debt
and any related warrants retired ($1.2 million) and the fair market value of the
Common Stock issued ($1.3 million), offset by the write-off of the allocated
unamortized deferred financing costs. The transaction is exempt from
registration in accordance with the Securities Act.
During June 2002, in a single transaction, the Company exchanged $0.8 million of
the New Notes for 56,483 shares of its Common Stock, par value $0.02 per share.
This exchange has been accounted for as an early retirement of debt with no
significant gain or loss resulting from such early retirement. The gain or loss
on such an early retirement is calculated as the difference between the
allocated carrying value of the debt and any related warrants retired ($0.8
million) and the fair market value of the Common Stock issued ($0.8 million).
The transaction is exempt from registration in accordance with the Securities
Act.
The Senior Discount Notes that were acquired by the Company in the above
exchanges have been retired.
On July 19, 2002, the Company exercised its right to partially redeem its 12
3/8% Senior Discount Notes. The Company redeemed 17,700 Senior Discount Notes
(principal amount of 9.0 million euro) for $9.7 million cash plus accrued
interest from July 1, 2002 through July 18, 2002. This partial redemption has
been accounted for as an early retirement of debt with approximately $0.8
million recognized as a loss on such early retirement. The loss on such an early
retirement is calculated as the difference between the allocated carrying value
of the debt ($9.0 million), the write-off of the allocated unamortized deferred
financing costs ($0.1 million), and the cash paid ($9.7 million). The cash
payment included an early redemption premium of approximately 6% of the
principal amount as defined in the Senior Discount Notes indenture. No warrants
associated with these units were repurchased or otherwise retired in this
transaction.
As of July 1, 2002, the Company may at any time exercise its 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.
The following table provides the composition of notes payable at December 31,
2002 and 2001:
As of December 31
--------------------
2002 2001
-------- --------
(in thousands)
Principal amount $ 36,565 $ 40,885
Unamortized discount (247) (2,739)
-------- --------
Carrying balance $ 36,318 $ 38,146
======== ========
The effective interest rate relating to the aforementioned notes payable was
13.06% for the years 2002 and 2001 and 13.09% for the year 2000. The interest
expense was approximately $5.0 million, $6.8 million, and $8.8 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
(12) PRIVATE PLACEMENT OF COMMON SHARES
In February 2002, the Company entered into seven subscription agreements for the
sale of an aggregate of 625,000 new Common Shares. These agreements were signed
with certain accredited investors in transactions exempt from registration under
the Act pursuant to exemptions under Section 4(2) and Regulation D of the
Securities Act. The purchase price of each share was $20.00. The aggregate
amount of proceeds to the Company from the private placement was $12.5 million.
Net proceeds after $0.8 million in commission fees, legal fees, and Nasdaq
registration and filing fees were approximately $11.7 million.
In July 2000, the Company entered into subscription agreements for the sale of
877,946 new shares of Common Stock. Closing with respect to such sale took place
on July 14, 2000 and August 29, 2000. These agreements were signed with
accredited investors in transactions exempt from registration pursuant to the
exemptions provided in Section 4(2) and
Regulation D of the Securities Act. The purchase price of each share was $6.97.
The aggregate amount of proceeds to the Company from the private placement was
$6.1 million.
In April 2000, the Company entered into two separate subscription agreements for
the sale of an aggregate of 354,777 new shares of Common Stock. Of the total new
shares, closing with respect to 254,777 shares took place on April 10, 2000, and
closing with respect to 100,000 shares took place on May 4, 2000. These
agreements were signed with certain foreign persons in transactions exempt from
registration under the United States Securities Act of 1933 (the "Act") pursuant
the exemption provided in Regulation S of the Securities Act. The weighted
average purchase price of each share was $7.50. The aggregate amount of proceeds
to the Company from the private placement was $2.7 million. Under each of the
agreements, for each two shares of Common Stock purchased in the private
placement, the accredited investors were issued one warrant, expiring in each
case on the one year anniversary date of the subscription agreement, to purchase
a share of Euronet Common Stock at a weighted average exercise price of $12.50.
The warrants issued under this agreement expired in 2001.
In February 2000, the Company entered into two subscription agreements for the
sale of an aggregate of 650,000 new common shares of the Company. Closing under
these agreements took place on March 13, 2000. These agreements were signed with
certain accredited investors in transactions exempt from registration pursuant
to the exemptions provided in Section 4(2) and Regulation D of the Act. The
purchase price of each share was $6.615, which represents 90% of the average
closing price for the ten trading days prior to and including February 15, 2000.
The aggregate amount of proceeds to the Company from the private placement was
$4.3 million. Under each of the agreements, for each two shares of Common Stock
purchased in the private placement, the purchasers were issued one warrant to
purchase a share of Common Stock at an exercise price of $11.615, expiring in
each case on the one year anniversary date of the subscription agreement. The
warrants issued under this agreement expired in 2001.
(13) CREDIT FACILITY
On June 28, 2000 the Company entered into an unsecured revolving credit
agreement (the "Credit Agreement") providing a facility of up to $4.0 million
from three shareholders as follows: DST Systems, Inc. in the amount of $2.4
million; Hungarian-American Enterprise Fund in the amount of $1.0 million; and
Michael J. Brown, the CEO and a Director of the Company, in the amount of $0.6
million. The facility was originally available to be drawn upon until December
28, 2000, and repayment of any draws was due June 28, 2001. The Credit Agreement
was amended and renewed for six-month periods on December 28, 2000 and June 28,
2001.
A commitment fee was paid for the initial facility of 100,000 warrants issued
pro-rata to the lenders with a warrant strike price set at the average share
price, as quoted on Nasdaq for 10 trading days prior to the warrant issue date,
less 10%. An additional 100,000, and 100,000 warrants, on the same terms, were
issued on January 2, 2001 and June 28, 2001, respectively, for the subsequent
extensions of the facility. The exercise price for Michael J. Brown was
originally the same as for the other lenders. It was revised by an amendment to
the Credit Agreement on January 27, 2002 to be no less than the full trading
price of our Common Stock on Nasdaq as of the date of the agreement providing
for grant of the warrants, with the amount of the discount that would have
resulted from the original terms of the Credit Agreement to be paid to Mr. Brown
in cash. Warrants were issuable on similar terms and conditions for each draw on
the facility at the rate of 80,000 warrants for each $1.0 million of funds
drawn. On May 29, 2001, the Company drew $2.0 million and issued 160,000
warrants in respect of such draw. Amounts outstanding under the facility accrue
interest at 10% per annum, payable quarterly. The Credit Agreement was not
renewed in December 2001 and was repaid in full on March 21, 2002.
The exercise prices for the warrants for DST Systems and Hungarian-American
Enterprise Fund were $7.00 per share for the 100,000 warrants issued as of June
28, 2000, $4.12 per share for the 100,000 warrants issued as of December 29,
2000, $5.92 per share for the 160,000 warrants issued as of May 29, 2001 and
$6.70 per share for the 100,000 warrants issued as of June 28, 2001. The
exercise prices for the warrants for Michael J. Brown were $8.25 per share for
the 100,000 warrants issued as of June 28, 2000, $4.12 per share for the 100,000
warrants issued as of December 29, 2000, $7.05 per share for the 160,000
warrants issued as of May 29, 2001 and $9.00 per share for the 100,000 warrants
issued as of June 28, 2001.
In 2001, two participants in the revolving credit agreement, in three separate
transactions, elected to exercise a total of 361,000 warrants for an equal
number of shares. The total amount of cash received from these transactions was
$2.1 million.
In 2002, two participants in the Credit Agreement, in two separate transactions,
elected to exercise warrants to purchase a total of 99,000 shares. The total
amount of cash received from these transactions was $0.7 million.
There are no further warrants outstanding related to this credit facility.
On December 20, 2002, the Company entered into a secured revolving credit
agreement (the "Bank Credit Agreement") providing a facility of up to $5.0
million from a bank. The facility is available to be drawn upon until March 14,
2003 at which time any draws and accrued interest is due. Amounts outstanding
under the facility accrue interest at 4.45% per annum, payable quarterly. The
credit facility is secured by an existing $5.0 million certificate of deposit
held by the bank.
On December 20, 2002, the Company drew $0.9 million on the facility and repaid
it in full on December 31. As of December 31, 2002, no amounts were outstanding
under the facility.
During January and February 2003, net draws were made for $2.6 million. The Bank
Credit Agreement expired on March 14, 2003 and was repaid in full at that time.
(See Note 29.)
(14) DERIVATIVE FINANCIAL INSTRUMENTS
On May 26, 1999, the Company entered into foreign currency call options with
Merrill Lynch to purchase 79.3 million euro for $85.9 million and foreign
currency put options to sell $83.6 million for 79.3 million euro on May 26, 2000
(the "Settlement Date"). Under such contracts, the Company would be required to
make a cash payment to Merrill Lynch on May 31, 2000, should the euro weaken
against the U.S. dollar and fall below $1.055 (the "Floor Rate") on the
Settlement Date. At the same time, should the euro strengthen against the U.S.
dollar and rise above $1.0835 to the euro (the "Ceiling Rate") the Company would
receive a cash payment from Merrill Lynch depending upon the euro/dollar
exchange rate on such Settlement Date.
In the week of March 13, 2000, the Company entered into put options with Merrill
Lynch to sell 79.0 million euro for $75.1 million on May 26, 2000. The contracts
were purchased to limit the Company's exposure on the call option described
above against a fall of the euro below $0.95.
The Company was required to cash collateralize the net fair value of such
options contracts measured on a mark-to-market basis, and on May 26, 2000, the
Company had on deposit $8.3 million with Merrill Lynch.
On May 26, 2000, the rate of the euro was $0.9118 and the Company settled the
above option contracts in the amount of $8.3 million resulting in a total net
loss on such contracts of $10.3 million inclusive of the cost of the contracts.
At December 31, 2002 and 2001, the Company had not entered into any option or
other foreign exchange contracts.
(15) LEASES
(a) Capital leases
The Company leases many of its ATMs under capital lease agreements that expire
between 2003 and 2008 and bear interest at rates between 8% and 12%. The lessors
for these leases hold a security interest in the ATMs leased under the
respective capital lease agreements. Lease installments are paid on a monthly,
quarterly or semi-annual basis. Euronet has the right to extend the term of
certain leases at the conclusion of the basic lease period.
The gross amount of the ATMs and computer equipment and related accumulated
amortization recorded under capital leases were as follows:
As of December 31,
--------------------
2002 2001
-------- --------
(in thousands)
ATMs $ 18,983 $ 16,373
Other 742 938
-------- --------
19,725 17,311
Less accumulated amortization (8,691) (3,528)
-------- --------
Net book value $ 11,034 $ 13,783
======== ========
Depreciation of assets held under capital leases amounted to $3.1 million, $2.0
million, and $2.0 million for the years ended December 31, 2002, 2001 and 2000
respectively, and is included in depreciation and amortization expense.
(b) Operating leases
The Company also has noncancelable operating rental leases for office space,
which expire over the next 2 to 8 years. Rent expense under these leases
amounted to $2.7 million, $1.6 million, and $1.4 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
(c) Future minimum lease payments
Future minimum lease payments under the capital leases and the noncancelable
operating leases (with initial or remaining lease terms in excess of one year)
as of December 31, 2002 are:
Capital Operating
Leases Leases
-------- ---------
(in thousands)
Year ending December 31,
2003 $ 5,668 $ 2,486
2004 $ 3,360 $ 2,076
2005 $ 1,223 $ 1,811
2006 $ 505 $ 1,743
2007 $ 189 $ 1,538
2008 and thereafter $ 132 $ 1,268
-------- ---------
Total minimum lease payments $ 11,077 $ 10,922
=========
Less amounts representing interest (1,522)
--------
Present value of net minimum capital lease payments 9,555
Less current installments of obligations under capital leases (4,583)
--------
Long-term capital lease obligations $ 4,972
========
These amounts include future minimum lease payments under capital leases of $671
and noncancelable operating leases of $1,357 related to our U.K. subsidiary,
which was sold in January 2003. See Notes 27 and 29.
(16) TAXES
The sources of income/(loss) before income taxes are presented as follows:
Year Ended December 31,
-----------------------------------
2002 2001 2000
--------- ---------- ---------
(in thousands)
(Loss)/income from continuing operations
United States $ (8,914) $ 6,662 $ (30,763)
Europe (2,204) (6,718) (17,622)
Asia Pacific (927) - -
--------- ---------- ---------
Loss from continuing operations before income taxes,
extraordinary items and minority interest (12,045) (56) (48,385)
--------- ---------- ---------
Income/(loss) from discontinued operations
United States 4,943 861 536
Europe 111 (984) (514)
Asia Pacific - - -
- - -
Income/(loss) from discontinued operations before income
taxes 5,054 (123) 22
--------- ---------- ---------
Total loss before income taxes, extraordinary
items and minority interest $ (6,991) $ (179) $ (48,363)
========= ========== =========
Total income tax benefit/(expense) for the years ended December 31, 2002, 2001
and 2000 was allocated as follows:
Year Ended December 31,
-----------------------------------
2002 2001 2000
--------- ---------- ---------
(in thousands)
Income/(loss) from continuing operations $ 2,312 $ 807 $ (1,181)
(Loss)/income from discontinued operations (1,935) 42 (7)
--------- ---------- ---------
Total tax benefit/(expense) $ 377 $ 849 $ (1,188)
========= ========== =========
The income tax benefit/(expense) from continuing operations consisted of the
following:
Year Ended December 31,
-----------------------------------
2002 2001 2000
--------- ---------- ---------
(in thousands)
Current tax benefit/(expense):
U.S. Federal $ 1,747 $ 1,266 $ (656)
Europe 6 (459) (525)
--------- ---------- ---------
Total current 1,753 807 (1,181)
--------- ---------- ---------
Deferred tax benefit/(expense)
U.S. Federal - - -
Europe 559 - -
--------- ---------- ---------
Total deferred 559 - -
--------- ---------- ---------
Total tax benefit/(expense) $ 2,312 $ 807 $ (1,181)
========= ========== =========
The differences that caused Euronet's effective income tax rates related to
continuing operations to vary from the 34% federal statutory rate applicable to
corporations with taxable income less than $10 million were as follows:
Year Ended December 31,
-----------------------------------
2002 2001 2000
--------- ---------- ---------
(in thousands)
U.S. federal income tax benefit at statutory rates $ 4,095 $ 19 $ 16,451
State income tax (expense)/benefit at statutory rates (158) (323) 1,297
Permanent differences (359) (501) (186)
Foreign tax rate differential (129) (852) (1,777)
Adjustment to deferred tax asset for enacted changes in tax
rates 53 (260) (1,910)
Deferred tax assets not previously recognized (2,478) 1,339 (2,525)
Utilization of tax loss carryforwards 535 869 (716)
Tax refund received - 973 -
Other - (166) (220)
Change in valuation allowance 753 (291) (11,595)
--------- ---------- ---------
Actual income tax benefit/(expense) $ 2,312 $ 807 $ (1,181)
========= ========== =========
The tax effect of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities from continuing operations are as follows:
Year Ended December 31,
------------------------
2002 2001
--------- -----------
(in thousands)
Deferred tax assets:
Tax loss carryforwards $ 16,689 $ 17,300
Unrealized exchange rate differences 3,692 2,466
Accrued interest 2,606 3,081
Accrued expenses 2,000 2,234
Billings in excess of earnings 559 565
Property and equipment 1,023 -
Other 3,800 4,653
--------- -----------
Gross deferred tax assets 30,369 30,299
Valuation allowance (28,119) (28,872)
--------- -----------
Net deferred tax assets 2,250 1,427
--------- -----------
Deferred tax liabilities:
Property and equipment - -
Capitalized research and development costs 1,060 920
Earnings in excess of billings 126 78
--------- -----------
Total deferred tax liabilities 1,186 998
--------- -----------
Net deferred tax assets/liabilities $ 1,064 $ 429
========= ===========
The valuation allowance for deferred tax assets as of December 31, 2002, 2001
and 2000 was $28.1 million, $28.9 million and $30.7 million, respectively. The
net change in the total valuation allowance for the year ended December 31, 2002
was a decrease of $0.7 million. For the years ended December 31, 2001 and 2000,
the net change in the total valuation allowance was a decrease of $1.8 million
and an increase of $11.6 million, respectively.
The valuation allowance relates to deferred tax assets established under SFAS
No. 109 for U.S. federal and foreign tax loss carryforwards from continuing
operations at December 31, 2002, 2001 and 2000 of $60.3 million, $61.6 million
and $46.9 million, respectively, and U.S. state tax loss carryforwards from
continuing operations of $13.0 million, $15.3 million and $12.6 million,
respectively.
In assessing the Company's ability to realize deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will only realize the
benefits of these deductible differences, net of the existing valuation
allowances at December 31, 2002. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
At December 31, 2002 the Company had net operating loss carry forwards from
continuing operations of approximately $60.3 million, which will expire as
follows:
Year Ending December 31, (in thousands)
----------------------- --------------
2003 $ 7,911
2004 10,793
2005 6,016
2006 6,100
2007 3,398
2008 564
2009 and thereafter 25,514
-------------
Total $ 60,296
=============
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 2002 will be allocated to income taxes in
the consolidated statements of operations, except for $0.1 million, which will
be allocated to additional paid in capital.
(17) VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to Amounts Balance at
January 1 expense written off December 31
---------- ---------- ----------- -----------
(in thousands)
2000 Allowance for doubtful accounts $ 381 $ 408 $ 49 $ 740
2001 Allowance for doubtful accounts $ 740 $ 717 $ 782 $ 675
2002 Allowance for doubtful accounts $ 675 $ 447 $ 638 $ 484
(18) STOCK PLANS
(a) Employee stock option plans
The Company has established a share compensation plan (the "SCP") that provides
certain employees options to purchase shares of its Common Stock. The options
vest over a period of five years from the date of grant. Options are exercisable
during the term of employment or consulting arrangements with the Company and
its subsidiaries. At December 31, 2002, the Company has authorized options for
the purchase of 8,463,991 shares of Common Stock, of which 7,977,599 have been
awarded to employees and 2,674,654 are currently exercisable.
Within the SCP and in accordance with a shareholders' agreement dated February
15, 1996 and amended on October 14, 1996, Euronet reserved 2,850,925 shares of
Common Stock for the purpose of awarding common shares ("milestone awards") to
certain investors and options to acquire shares of Common Stock ("milestone
options") to the founders, management and key employees. The Company granted
800,520 milestone awards at an exercise price of $0.02 per share and 2,050,405
milestone options at an exercise price of $2.14 per share.
Upon the initial public offering of the Company on March 6, 1997, all milestone
awards and milestone options granted under the milestone arrangement (with the
exception of 49,819 options to certain key employees which vested equally over
the two years following the initial public offering) vested and all shares
became immediately issuable to beneficiaries of milestone awards and options. At
that time, 800,520 milestone awards and 232,078 milestone options were
exercised. As of December 31, 2002, 1,201,304 milestone options remain
unexercised.
Share option activity of the SCP during the periods indicated is as follows:
Number of
Weighted-Average
Shares Exercise Price
---------------- --------------
Balance at December 31, 1999 (2,379,729 shares exercisable) 4,301,724 $ 3.87
Granted 1,237,000 7.24
Exercised (390,231) 2.43
Forfeited (563,985) 6.00
---------------- --------------
Balance at December 31, 2000 (2,441,928 shares exercisable) 4,584,508 $4.65
Granted 1,321,968 8.32
Exercised (292,643) 4.41
Forfeited (693,698) 6.35
---------------- --------------
Balance at December 31, 2001 (2,594,744 shares exercisable) 4,920,135 $5.41
Granted 1,720,178 $11.39
Exercised (622,154) $3.33
Forfeited (158,995) $10.46
---------------- --------------
Balance at December 31, 2002 (2,674,654 shares exercisable) 5,859,164 $7.26
================ ==============
At December 31, 2002, the range of exercise prices, weighted-average remaining
contractual life and number exercisable of outstanding options under the SCP was
as follows:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------- ------------------------------
Weighted Average Range of Number of Remaining Life Weighted Average Number Weighted Average
Exercise Prices Shares (Years) Exercise Price Exercisable Exercise Price
-------------------------- ----------- -------------- ---------------- ----------- ----------------
$ 0.0000 $ 1.8500 217,586 1.6 $ 0.7733 217,586 $ 0.7733
$ 1.8501 $ 3.7000 1,273,520 4.1 $ 2.1786 1,262,212 $ 2.1685
$ 3.7001 $ 5.5500 824,590 8.1 $ 5.1298 223,504 $ 5.1082
$ 5.5501 $ 7.4000 1,898,238 7.9 $ 6.0831 641,809 $ 6.0645
$ 7.4001 $ 9.2500 381,000 8.1 $ 7.9513 102,300 $ 8.0524
$ 9.2501 $ 11.1000 49,214 4.6 $ 10.6738 48,214 $ 10.6878
$ 11.1001 $ 12.9500 110,651 7.2 $ 12.2833 54,651 $ 11.8768
$ 12.9501 $ 14.8000 84,782 4.3 $ 13.9400 84,782 $ 13.9400
$ 14.8001 $ 16.6500 247,980 8.9 $ 16.4000 39,596 $ 16.4000
$ 16.6501 $ 18.5000 771,603 9.3 $ 17.6709 0 $ 0.0000
----------- -------------- ---------------- ----------- ----------------
5,859,164 7.0 $ 7.2566 2,674,654 $ 4.3964
=========== ============== ================ =========== ================
The Company applies APB Opinion No. 25 in accounting for its share option plans.
The exercise price of the options is established generally based on the
estimated fair value of the underlying shares at grant date.
(b) Employee stock purchase plans
In 2001, the Company established a qualified Employee Stock Purchase Plan (the
"2001 ESPP") which allows qualified employees (as defined by the plan documents)
to participate in the purchase of designated shares of the Company's Common
Stock at a price equal to the lower of 85% of the closing price at the beginning
or end of each quarterly offering period. The Company reserved 500,000 shares of
Common Stock for purchase under the plan. The Company issued 325,370 shares of
Common Stock during 2002 pursuant to the 2001 ESPP at an average price per share
of $6.28 and issued 174,570 shares of Common Stock during 2001 at an average
price per share of $9.12. As of December 31, 2002, all shares available under
the
plan had been purchased. In February 2003, the Company established a new
qualified Employee Stock Purchase Plan (the "2003 ESPP") and reserved an
additional 500,000 shares of Common Stock for purchase under the plan.
(c) Fair value of options granted
The following table provides the fair value of options granted under the SCP and
shares granted under the ESPP during 2002, 2001 and 2000 together with a
description of the assumptions used to calculate the fair value using the
Black-Scholes pricing model:
Year Ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
Expected volatility 78.3% 62.7% 82.0%
Average risk-free rate 3.82% 5.63% 7.21%
Average expected lives 5 years 5 years 5 years
Weighted-average fair value (per share) $ 6.72 $ 4.59 $ 5.10
(d) Employee Loans for Common Stock
In October 1999 the Company's Board of Directors approved and implemented a Loan
Agreement Program ("Program") for certain employees, under which the Company has
loaned sums of money to participating employees in order for them to purchase
shares of the Company's stock on the open market. The shares are pledged to the
Company to secure the loans. As of December 31, 2002, the Company holds 132,444
shares as collateral for the loans. The loans carry five-year terms and are
non-recourse, non-interest bearing loans. The shares vest to the employees in
five equal tranches of 20% of the shares for five years, commencing at the date
each employee began employment with the Company. As the shares vest, the
employees are entitled to pay off the loans and free the shares of the pledge.
These loans are considered an award of stock options as the loans are non-
recourse and the employee is not obligated to pay any interest on the loans. The
loans have been accounted for as a separate component of stockholders' deficit.
In the event that any one of the employees defaults on the terms of the loans,
or leaves the Company prior to vesting, the shares received by the Company or
the unvested shares will be recorded as treasury stock.
(19) EMPLOYEE BENEFIT PLANS
The Company has established a Profit Sharing and 401(k) plan for all employees
who have completed six months of service and are not otherwise covered by a
retirement benefit plan (national or private) outside of the U.S. Each plan
participant can contribute up to the maximum amount allowed by the Internal
Revenue Service to the plan through payroll deductions. The Company's matching
contributions to the plan are made in stock and are discretionary and are
determined each year by the Board of Directors. The employee's vested percentage
regarding the employer's contribution varies according to years of service. The
Company's contribution accrual to the plan for the years ended December 31,
2002, 2001 and 2000 was $0.1 million, $0.3 million and $0.2 million,
respectively.
The Company maintains a health insurance program, which covers all regular
full-time and regular part-time employees at no charge to the employee. Coverage
for eligible family members is available through employee contributions.
(20) BUSINESS SEGMENT INFORMATION
Euronet and its subsidiaries operate in two business segments: (i) a segment
that provides an independent shared ATM network and other electronic payment
processing services to banks, retail and financial institutions (the "Processing
Services Segment"); and (ii) 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 two 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 not including nonrecurring gains and losses.
Prior period segment information has been restated to conform to the current
period's presentation.
The Company divides the Processing Services Segment into three Sub-segments:
"Central European Sub-segment" (including Hungary, Poland, the Czech Republic,
Croatia, Greece and Romania), "Western European Sub-segment" (including Germany
and the U.K.) and "Other Operations Sub-segment" (including the U.S., Indonesia,
Egypt and India and unallocated processing center costs). Where practical,
certain amounts have been reclassified to reflect the change in internal
reporting.
On January 4, 2002, the Company sold substantially all of the assets of its ATM
processing business (known as DASH) in the U.S.
On July 15, 2002, the Company sold substantially all of the non-current assets
and capital lease obligations of its processing business in France.
The results from operations from France and DASH have been removed from
continuing operations for all reported periods in accordance with SFAS 144.
France was reported in previous filings under the Western European Sub-Segment
and DASH was previously reported under the Other Operations Sub-segment. See
Note 26 for additional information on these business components sold during
2002.
The following tables present the segment results of the Company's operations for
the years ended December 31, 2002, 2001 and 2000 (in thousands).
Processing Services
-----------------------------------------------
Central Western Software Corporate
Europe Europe Other Total Solutions Services Total
---------- --------- -------- --------- --------- ---------- ---------
For the year ended December 31, 2002
Total revenues $ 26,376 $ 26,573 $ 1,434 $ 54,383 $ 17,410 $ - $ 71,793
Total operating expenses 24,291 22,091 3,192 49,574 16,976 5,621 72,171
---------- --------- -------- --------- --------- ---------- ---------
Operating income/(loss) 2,085 4,482 (1,758) 4,809 434 (5,621) (378)
---------- --------- -------- --------- --------- ---------- ---------
Interest income 34 12 5 51 137 59 247
Interest expense (792) (314) (2) (1,108) (13) (5,132) (6,253)
Loss on facility sublease - - - - (249) - (249)
Equity in losses from investee
companies - - - - - (183) (183)
Loss on early retirement of debt - - - - - (955) (955)
Foreign exchange gain/(loss), net 695 641 1,264 2,600 - (6,833) (4,233)
---------- --------- -------- --------- --------- ---------- ---------
Total other (expense)/income (63) 339 1,267 1,543 (125) (13,044) (11,626)
---------- --------- -------- --------- --------- ---------- ---------
Income/(loss) from continuing
operations before income taxes and
minority interest $ 2,022 $ 4,821 $ (491) $ 6,352 $ 309 $ (18,665) $ (12,004)
========== ========= ======== ========= ========= ========== =========
Minority interest $ - $ - $ 100 $ 100 $ - $ - $ 100
Income from discontinued operations
before income taxes $ - $ 111 $ 4,943 $ 5,054 $ - $ - $ 5,054
Assets as of December 31, 2002:
Segment assets $ 25,874 $ 18,850 $ 5,623 $ 50,347 $ 6,955 $ 9,257 $ 66,559
Fixed assets $ 14,270 $ 2,905 $ 3,256 $ 20,431 $ 854 $ 109 $ 21,394
Depreciation and amortization $ 4,251 $ 3,334 $ 1,046 $ 8,631 $ 1,031 $ 56 $ 9,718
Processing Services
-----------------------------------------------
Central Western Software Corporate
Europe Europe Other Total Solutions Services Total
---------- --------- -------- --------- --------- ---------- ---------
For the year ended December 31, 2001
Total revenues $ 25,237 $ 20,702 $ 3 $ 45,942 $ 15,221 $ - $ 61,163
Total operating expenses 23,625 18,413 1,558 43,596 17,096 6,521 67,213
---------- --------- -------- --------- --------- ---------- ---------
Operating income/(loss) 1,612 2,289 (1,555) 2,346 (1,875) (6,521) (6,050)
---------- --------- -------- --------- --------- ---------- ---------
Interest income 81 51 6 138 36 104 278
Interest expense (977) (284) - (1,261) - (8,125) (9,386)
Gain on early retirement of debt - - - - - 8,496 8,496
Foreign exchange gain/(loss), net 237 (91) 545 691 (26) 4,760 5,425
---------- --------- -------- --------- --------- ---------- ---------
Total other (expense)/income (659) (324) 551 (432) 10 5,235 4,813
---------- --------- -------- --------- --------- ---------- ---------
Income/(loss) from continuing
operations before income taxes and
minority interest $ 953 $ 1,965 $ (1,004) $ 1,914 $ (1,865) $ (1,286) $ (1,237)
========== ========= ======== ========= ========= ========== =========
(Loss)/income from discontinued
operations before income taxes $ - $ (984) $ 861 $ (123) $ - $ - $ (123)
Assets as of December 31, 2001:
Segment assets $ 25,548 $ 17,561 $ 4,150 $ 47,259 $ 8,409 $ 5,723 $ 61,391
Fixed assets $ 14,956 $ 4,056 $ 1,085 $ 20,097 $ 1,243 $ 58 $ 21,398
Depreciation and amortization $ 3,969 $ 3,039 $ 887 $ 7,895 $ 744 $ 146 $ 8,785
Processing Services
-----------------------------------------------
Central Western Software Corporate
Europe Europe Other Total Solutions Services Total
---------- --------- -------- --------- --------- ---------- ---------
For the year ended December 31, 2000
Total revenues $ 18,599 $ 15,519 $ 84 $ 34,202 $ 16,006 $ - $ 50,208
Total operating expenses 21,669 17,342 1,315 40,326 37,475 7,862 85,663
---------- --------- -------- --------- --------- ---------- ---------
Operating loss (3,070) (1,823) (1,231) (6,124) (21,469) (7,862) (35,455)
---------- --------- -------- --------- --------- ---------- ---------
Interest income 289 65 174 528 103 442 1,073
Interest expense (1,016) (101) (148) (1,265) - (9,495) (10,760)
Foreign exchange (loss)/gain, net (616) (510) (155) (1,281) 1 (1,963) (3,243)
---------- --------- -------- --------- --------- ---------- ---------
Total other (expense)/income (1,343) (546) (129) (2,018) 104 (11,016) (12,930)
---------- --------- -------- --------- --------- ---------- ---------
Loss from continuing
operations before income taxes and
minority interest $ (4,413) $ (2,369) $ (1,360) $ (8,142) $ (21,365) $ (18,878) $ (48,385)
========== ========= ======== ========= ========= ========== =========
Loss from discontinued operations
before income taxes $ - $ (514) $ 536 $ 22 $ - $ - $ 22
Assets as of December 31, 2000:
Segment assets $ 25,697 $ 16,755 $ 3,652 $ 46,104 $ 9,433 $ 5,353 $ 60,890
Fixed assets $ 17,147 $ 6,371 $ 1,664 $ 25,182 $ 967 $ 155 $ 26,304
Depreciation and amortization $ 3,976 $ 2,634 $ 954 $ 7,564 $ 2,216 $ 208 $ 9,988
Asset write-down $ 668 $ 110 $ - $ 778 $ 11,190 $ - $ 11,968
The following is a reconciliation of the segment information to the consolidated
financial statements (in thousands):
Year Ended December 31,
-----------------------------------
2002 2001 2000
--------- ---------- ---------
Revenues:
Total revenues for reportable segments $ 71,793 $ 61,163 $ 50,208
Elimination of inter-segment revenues (745) (180) (180)
--------- ---------- ---------
Total consolidated revenues $ 71,048 $ 60,983 $ 50,028
========= ========== =========
Operating expenses:
Total operating expenses for reportable segments $ 72,171 $ 67,213 $ 85,663
Elimination of inter-segment expenses (704) (180) (180)
--------- ---------- ---------
Total consolidated operating expenses $ 71,467 $ 67,033 $ 85,483
========= ========== =========
Total revenues and long-lived assets for the years ended December 31, 2002, 2001
and 2000 for the Company analyzed by geographical location is as follows (in
thousands):
Total Revenues Long-lived Assets
Year Ended December 31, December 31,
--------------------------------- --------------------
2002 2001 2000 2002 2001
--------- --------- --------- --------- --------
United States $ 17,410 $ 15,221 $ 16,006 $ 854 $ 1,243
Germany 12,093 10,492 9,984 2,741 3,705
Hungary 7,139 8,323 6,524 6,703 4,306
U.K. 14,480 10,210 1,140 - -
Poland 12,899 12,309 9,147 8,223 9,275
Other 7,027 4,428 7,227 2,873 2,869
--------- --------- --------- --------- --------
Total $ 71,048 $ 60,983 $ 50,028 $ 21,394 $ 21,398
========= ========= ========= ========= ========
Total revenues are attributed to countries based on location of customer for the
Processing Services Segment. For revenues generated by the Euronet USA software
solutions segment, all revenues are attributed to the United States. Long-lived
assets consist of property, plant, and equipment, net of accumulated
depreciation.
(21) FINANCIAL INSTRUMENTS
Most of Euronet's financial instruments (cash and cash equivalents, trade
accounts receivable, prepaid expenses and other current assets, trade accounts
payable, accrued expenses and other current liabilities, advance payments on
contracts, billings in excess of costs and estimated earnings on software
installation contracts, costs and estimated earnings in excess of billings on
software installation contracts) are short-term in nature. Accordingly, the
carrying value of these instruments approximates their fair values. The fair
value of notes payable amounted to $38.8 million (carrying value of $36.3) at
December 31, 2002 based on the current early redemption premium of approximately
6% of face value as defined in the note agreement and as evidenced by the recent
redemption in July 2002. The fair value of notes payable amounted to $32.7
million (carrying value of $38.1 million) at December 31, 2001 and was
determined based on quoted market prices for the same issue.
(22) RECONCILIATION OF NET INCOME/(LOSS) TO NET CASH PROVIDED BY/(USED IN)
OPERATING ACTIVITIES
The reconciliation of net income/(loss) to net cash provided by/(used in)
operating activities for the years ended December 31, 2002, 2001 and 2000
follows.
Year ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Net (loss)/income $ (6,514) $ 670 $(49,551)
-------- -------- --------
Adjustments to reconcile net (loss)/income to net cash used in
operating activities:
Depreciation and amortization 9,659 7,650 9,183
Asset write downs - 454 11,968
Unrealized foreign exchange gain / (losses) 6,743 (4,596) (4,261)
Loss on facility sub-lease 216 - -
Equity in losses from investee companies 183 - -
Loss on disposal of fixed assets 144 109 1,545
(Gain)/loss on sale of discontinued operations, net of tax (2,988) 123 (22)
(Increase)/decrease in deferred income tax (2,491) - 36
(Increase)/decrease in assets and liabilities held for sale (5,162) 2,173 3,747
Amortization of deferred financing costs 486 (116) 232
Accretion of discount on notes payable 2,490 6,813 8,753
Gain on retirement of debt - (8,496) -
Tax effect of gain on retirement of debt - (1,181) -
Increase/(decrease) in income tax payable, net 83 (849) 818
(Increase)/decrease in restricted cash (2,524) 222 9,755
Decrease/(increase) in trade accounts receivable 544 624 (1,311)
(Increase)/decrease in costs and estimated earnings in
excess of billings on software installation contracts (3) 786 (450)
Decrease/(increase) in prepaid expenses and other current 1,277 (1,765) (438)
assets
Decrease in deposits for ATM leases - - 1,314
Decrease in trade accounts payable (42) (1,971) (2,158)
(Decrease)/increase in advance payments on contracts (146) 1,018 834
Decrease in accrued expenses and other liabilities (1,380) (287) (6,322)
Increase/(decrease) in billings in excess of costs and
estimated earnings on software installation costs 14 (1,417) (155)
Other 37 2 47
-------- -------- --------
Total adjustments 7,140 (704) 33,115
-------- -------- --------
Net cash provided by / (used in) operating activities $ 626 $ (34) $(16,436)
======== ======== ========
(23) NON-CASH FINANCING AND INVESTING ACTIVITIES
Capital lease obligations of $2.8 million, $5.7 million and $5.1 million during
the years ended December 31, 2002, 2001 and 2000, respectively, were incurred
when the Company entered into leases primarily for new ATMs.
During the years ended December 31, 2002, 2001 and 2000, the Company issued
warrants to purchase Common Stock totaling nil, $0.9 million and $0.4 million,
respectively.
During 2002, there were various non-cash extinguishments of the 12 3/8% Senior
Discount Notes (see Note 11).
(24) CONCENTRATIONS OF BUSINESS AND CREDIT RISK
Euronet is subject to concentrations of business and credit risk. Euronet's
financial instruments mainly include trade accounts receivables and cash and
cash equivalents. Euronet's customer base, although limited, includes the most
significant international card organizations and certain banks in the markets in
which it operates. Therefore, the Company's operations are directly affected by
the financial condition of those entities.
Cash and cash equivalents are placed with high credit quality financial
institutions or in short-term duration, high quality debt securities. Euronet
does not require collateral or other security to support financial instruments
subject to credit risk. Management believes that the credit risk associated with
its financial instruments is minimal due to the control procedures, which
monitor credit worthiness of customers and financial institutions.
(25) RESEARCH AND DEVELOPMENT
The Company regularly engages in research and development activities aimed at
the development and delivery of new products, services and processes to our
customers, including bill payment and presentment, telephone banking products,
applications for wireless application protocol ("WAP") enabled customer
touchpoints, other wireless banking products, prepaid mobile phone recharge
products, browser-based ATM software products and Internet banking solutions. We
are also making significant improvements to our core software products.
The Company's research and development costs incurred for computer software
products to be sold, leased or otherwise marketed totaled $4.0 million, $5.0
million and $6.7 million for the years ended December 31, 2002, 2001 and 2000,
respectively. As of December 31, 2002, $2.9 million was capitalized and appears
on the Company's balance sheet in other long-term assets, net of accumulated
amortization of $1.3 million. As of 2001 and 2000, $2.3 million and $1.0 million
was capitalized, net of accumulated amortization of $0.6 million and $0.1
million, respectively. Related amortization expense of capitalized software
costs amounted to $0.7 million, $0.5 million and $0.1 million for the years
2002, 2001, and 2000, respectively. During 2000, approximately $0.3 million of
previous capitalized costs were written down to reflect estimated net realizable
value.
(26) DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Sale of U.S. Processing Services Business
On January 4, 2002, the Company concluded an asset purchase agreement with AIS,
whereby EFT Network Services, LLC (also known as DASH) sold substantially all of
its assets to AIS for $6.8 million 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-tax gain of approximately $4.8 million related
to this transaction.
The Company also entered into a significant software license agreement (the
"License Agreement") whereby Euronet USA granted ALLTEL Information Systems
("AIS") a nonexclusive license to use, distribute and develop versions 1.5 and
2.2 of Euronet USA's GoldNet ATM Network Processing Software ("GoldNet
Software"). The License Agreement includes certain territorial and other
restrictions on the use and distribution of the GoldNet Software by AIS. 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
customers or new AIS network processing customers.
Sale of France Processing Services Business
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 removed 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 for all reported periods in accordance
with SFAS 144. France was previously reported under the Western European
Sub-segment and DASH was previously reported under the Other Operations
Sub-segment.
Sale of U.K. Processing Services Business
On January 17, 2003, the Company sold 100% of the shares in its U.K. subsidiary.
Simultaneous with this transaction, the Company signed a services agreement with
the buyer under which the Company will provide ATM operating, monitoring, and
transaction processing services to the buyer through December 31, 2007. The
services to be provided are substantially identical to existing services
previously provided to the U.K. subsidiary prior to the sale. In accordance with
SFAS 144, the assets and liabilities have been recorded as held for sale. The
U.K.'s operations continue to be included in continuing operations due to the
ongoing revenues to be generated by the services agreement. See Note 29 for
further explanation of this transaction.
The summary operating results of discontinued operations for the years ended
December 31, 2002, 2001 and 2000 are as follows (in thousands):
Twelve Months Ended
December 31, 2002
-----------------------------
DASH France Total
------- ------- -------
Revenues $ 101 $ 563 $ 664
Operating expenses 3 648 651
------- ------- -------
Operating income/(loss) 98 (85) 13
Other income - 315 315
Gain/(loss) on disposal 4,845 (119) 4,726
------- ------- -------
Income before taxes 4,943 111 5,054
Income tax expense (1,857) (78) (1,935)
------- ------- -------
Net income of discontinued operations $ 3,086 $ 33 $ 3,119
======= ======= =======
Twelve Months Ended
December 31, 2001
-----------------------------
DASH France Total
------- ------- -------
Revenues $ 2,295 $ 893 $ 3,188
Operating expenses 1,413 1,692 3,105
------- ------- -------
Operating income/(loss) 882 (799) 83
Other expense (21) (185) (206)
Gain/(loss) on disposal - - -
------- ------- -------
Income/(loss) before taxes 861 (984) (123)
Income tax (benefit)/expense (293) 335 42
Net income/(loss) of discontinued
operations $ 568 $ (649) $ (81)
======= ======= =======
Twelve Months Ended
December 31, 2000
-----------------------------
DASH France Total
------- ------- -------
Revenues $ 1,616 $ 1,096 $ 2,712
Operating expenses 1,094 1,559 2,653
------- ------- -------
Operating income/(loss) 522 (463) 59
Other income/(expense) 14 (51) (37)
------- ------- -------
Income/(loss) before taxes 536 (514) 22
Income tax (expense)/benefit (182) 175 (7)
------- ------- -------
Net income/(loss) of discontinued
operations $ 354 $ (339) $ 15
======= ======= =======
The components of assets and liabilities held for sale as of December 31, 2002
and 2001 are as follows:
As of December 31, 2002
------------------------------------
DASH France U.K. Total
------- ------ -------- --------
(in thousands)
Current assets $ - $ - $ 1,240 $ 1,240
Fixed assets - - 9,527 9,527
------- ------ -------- --------
Total assets from discontinued operations $ - $ - $ 10,767 $ 10,767
======= ====== ======== ========
Current liabilities $ - $ - $ 2,866 $ 2,866
Long-term liabilities - - 671 671
------- ------ -------- --------
Total liabilities from discontinued
operations $ - $ - $ 3,537 $ 3,537
======= ====== ======== ========
As of December 31, 2001
------------------------------------
DASH France U.K. Total
------- ------ -------- --------
(in thousands)
Current assets $ 384 $ - $ 390 $ 774
Fixed assets - 434 7,688 8,122
Long-term assets 455 - - 455
------- ------ -------- --------
Total assets from discontinued operations $ 839 $ 434 $ 8,078 $ 9,351
======= ====== ======== ========
Current liabilities $ 70 $ 138 $ 2,922 $ 3,130
Long-term liabilities - 290 1,174 1,464
------- ------ -------- --------
Total liabilities from discontinued
operations $ 70 $ 428 $ 4,096 $ 4,594
======= ====== ======== ========
(27) RELATED PARTY TRANSACTIONS
In January 2001, the Company entered into a Credit Facility Loan Agreement under
which it borrowed an aggregate of $0.5 million from Michael J. Brown, the CEO
and a Director of the Company, to fund transactions on its Czech Republic ATM
network. Amounts advanced under this loan agreement mature six months from the
date an advance is made, but were extended for a second six-month period. The
loans were unsecured. Amounts advanced bear interest of 10% per annum. In
January 2002, the loan of $0.5 million and related interest were paid in full.
In 2000, Michael J. Brown, the CEO and a Director of the Company, pledged
approximately $4.0 million of marketable securities (not including any Common
Stock of the Company) that he owns to obtain the release to the Company of cash
collateral in the amount of $4.8 million held by a bank providing cash to the
Company's ATM networking Hungary. No consideration was payable for providing
this security. On March 14, 2002, a letter of credit was obtained by the Company
in the amount of $5.0 million, which replaced the above security pledge by
Michael J. Brown and a related $0.8 million letter of credit supported by a
certificate of deposit that had been obtained for the same purpose. The $5.0
million letter of credit has subsequently been replaced by a new letter of
credit for $2.0 million (see Note 13).
For the year ended December 31, 2002, the Company recorded $0.1 million in
revenue related to CashNet with respect to a data processing and technical
services agreement.
For the year ended December 31, 2002, the Company recorded $0.2 million in
revenue related to Europlanet with respect to a data processing and technical
services agreement.
(28) COMMITMENTS AND CONTINGENCIES
The following table summarizes our contractual obligations as of December 31,
2002 (in thousands):
Payments due by period
--------------------------------------------------------------
Contractual Obligations Total Less than 1 More than 5
year 1-3 years 3-5 years years
---------- ----------- ---------- ---------- -----------
Senior notes (including interest) $ 52,402 $ 4,525 $ 9,050 $ 38,827 $ -
Capital leases (including interest) 11,077 5,668 4,583 694 132
Operating leases 10,922 2,486 3,887 3,281 1,268
Purchase obligations 19,792 8,021 10,427 993 351
Other long-term liabilities - - - - -
---------- ----------- ---------- ---------- -----------
Total $ 94,193 $ 20,700 $ 27,947 $ 43,795 $ 1,751
========== =========== ========== ========== ===========
These amounts do not include the contractual obligations arising from the e-pay
acquisition. For additional information on each of these items, see Note 11,
Note 15 and Note 29. Purchase obligations include contractual amounts for ATM
maintenance, cleaning, telecommunication and cash replenishment operating
expenses. While 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.
As of December 31, 2002, the Company's UK subsidiary had caused the issuance of
a performance bond on its behalf and has collateralized the obligation under the
performance bond to the extent of $0.4 million. The collateral consisted of
certain assets in the U.K. This obligation was transferred with the sale of the
U.K. subsidiary on January 19, 2003, and the Company is no longer bound by this
obligation.
The Company has commitments to make capital contributions to CashNet
Telecommunications Egypt of $0.2 million.
As of December 31, 2002, the Company has standby letters of credit issued on its
behalf in the amount of approximately $2.6 million. These standby letters of
credit are fully collateralized by cash deposits held by the respective issuing
banks.
The Company has excess office space, which it is considering subleasing to a
third-party. In the event that this excess space is subleased to a third-party,
the excess of the total costs that will be incurred related to the subleased
space over the revenue received on the space will be recognized as a loss at
that time. The potential loss could range from nil to $0.3 million depending on
a number of factors including term of the sublease, the amount of space
subleased, and current market conditions at the time the sublease is executed.
No loss contingency has been recognized related to the possible sublease of the
remaining space.
(29) SUBSEQUENT EVENTS
Sale of U.K. Subsidiary
On January 17, 2003, the Company sold 100% of the shares in its U.K. subsidiary,
Euronet Services (UK) Limited ("Euronet U.K.") to Bridgepoint Capital Limited
("Bridgepoint") for approximately $29.6 million (or (pound)18.5 million) in
cash, subject to certain working capital adjustments. Of this amount, $1.3
million ((pound)0.8 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 Company expects to
record a gain of approximately $17 million related to this transaction. The
agreement provided that the benefits and burdens of ownership of the shares and
all employees of Euronet U.K. were transferred to Bridgepoint effective as of
January 1, 2003. The acquisition agreement included certain representations,
warranties and indemnification obligations of Euronet concerning Euronet U.K.,
which are customary in transactions of this nature in the U.K., including a "Tax
Deed" providing for the indemnification of Bridgepoint by Euronet against tax
liabilities of Euronet U.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 U.K. following the acquisition) signed an ATM and
Gateway Services Agreement (the "Services Agreement") under which Euronet will
provide ATM operating, monitoring, and transaction processing services ("ATM
Services") to Bank Machine Limited through December 31, 2007. The services to be
provided by Euronet Hungary are substantially identical to existing services
being provided to Euronet U.K. prior to the sale of Euronet U.K. to Bridgepoint.
Euronet Hungary is a wholly owned subsidiary of Euronet Holding.
Acquisition of e-pay Limited
On February 19, 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 processes top-up sales at
more than 50,000 POS terminals in approximately 18,000 retail locations,
including the mobile operators' own retail outlets, major retail chains and
independent retail outlets. 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.
The assets acquired include tangible long-term assets, such as computer
equipment and other fixed assets, working capital, and intangible assets, such
as computer software, trademarks and trade names, service agreements, customer
contracts, customer relationships, non-compete covenants and goodwill. A
substantial amount of the purchase price is expected to be allocated to
intangible assets including goodwill.
The purchase price for the e-pay shares was approximately $76.2 million. Of the
total purchase price, $30.2 million was paid in cash at closing, $19.0 million
was paid through issuance at closing of 2,497,504 shares of Common Stock, and
the remaining $27 million will be paid in deferred purchase price or under
promissory notes executed at closing with 24 month maturity dates bearing
interest rates averaging approximately 7.25% per annum. The deferred portion of
the purchase price, approximately $8.6 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 Stock at the option of the
holders at a conversion price of $11.43 per share, or approximately 647,000
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 Stock over a thirty consecutive trading day period exceeds $15.72, for
Common Stock at a redemption price of $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.
All of the amounts described above are consideration amounts as included in the
Acquisition Agreement ("Contract Consideration"). Consideration determined in
accordance with U.S. generally accepted accounting principles may differ from
Contract Consideration.
The 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. Common Stock issuable upon the redemption
of the Convertible Notes may be transferred prior to February 18, 2004.
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 acquisition agreement provides that the benefits and burdens of ownership of
the shares were transferred to Euronet effective as of February 3, 2003.
Contract Termination
In January 2003, one of our customers with whom we had signed a new contract for
outsourcing services decided to terminate the agreement with us. The financial
institution was unable to proceed with the contract due to certain conflicting
business considerations, and has confirmed that this termination does not
reflect on or relate at all to our performance. We have agreed to a severance
payment of approximately $1.0 million that will compensate us for approximately
$0.3 million of setup costs were incurred and capitalized through December 31,
2002. These costs will be expensed in 2003. We expect full payment of the $1.0
million severance amount in the second quarter of 2003.
Borrowings Under Line of Credit
During January and February 2003, net draws against the Bank Credit Agreement
were made for $2.6 million (see Note 13 - Credit Facilities). The Bank Credit
Agreement expired on March 14, 2003 and was repaid in full at that time.
Employee Stock Purchase Plan
In February 2003, the Board of Directors approved a new qualified Employee Stock
Purchase Plan (the "2003 ESPP") and reserved 500,000 shares of Common Stock for
the plan. The characteristics of the 2003 ESPP are essentially identical to the
2001 ESPP.
SELECTED QUARTERLY DATA (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(in thousands, except per share data)
Year Ended December 31, 2002
Net revenues $ 17,040 $ 17,525 $ 17,889 $ 18,594
Operating income/(loss) $ 146 $ 953 $ (615) $ (903)
Net income/(loss) from continuing operations $ 675 $ (4,888) $ (2,496) $ (2,924)
Net income/(loss) per common share from continuing operations:
Basic $ 0.03 $ (0.21) $ (0.11) $ (0.12)
Diluted $ 0.03 $ (0.21) $ (0.11) $ (0.12)
Year Ended December 31, 2001
Net revenues $ 14,158 $ 15,083 $ 14,893 $ 16,849
Operating (loss)/income $ (3,290) $ (1,724) $ (1,083) $ 47
Net (loss)/income from continuing operations $ (472) $ 7,671 $ (5,604) $ (849)
Net (loss)/income per common share from continuing operations:
Basic $ (0.03) $ 0.40 $ (0.27) $ (0.04)
Diluted $ (0.03) $ 0.37 $ (0.27) $ (0.04)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information under "Election of Directors" in the Proxy Statement for the
Annual Meeting of Shareholders for 2003, which will be filed with the Securities
and Exchange Commission no later than 120 days after December 31, 2002, is
incorporated herein by reference. Information concerning executive officers is
set forth under "Executive Officers of the Registrant" in Part I.
ITEM 11. EXECUTIVE COMPENSATION
The information under "Executive Compensation" in the Proxy Statement for the
Annual Meeting of Shareholders for 2003, which will be filed with the Securities
and Exchange Commission no later than 120 days after December 31, 2002, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information under "Ownership of Common Stock by Directors and Executive
Officers" and "Election of Directors" in the Proxy Statement for the Annual
Meeting of Shareholders for 2003, which will be filed with the Securities and
Exchange Commission no later than 120 days after December 31, 2002, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under "Election of Directors" and "Executive Compensation" in
the Proxy Statement for the Annual Meeting of Shareholders for 2003, which will
be filed with the Securities and Exchange Commission no later than 120 days
after December 31, 2002, is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, 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 and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures 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.
CHANGE IN INTERNAL CONTROLS
Since the date of the evaluation, no significant changes have occurred in the
Company's internal controls or in other factors that could significantly affect
these controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of this Report.
1. Financial Statements
The consolidated financial statements and related notes, together with
the report of KPMG Polska Sp. z o.o., appear in Part II Item 8
Financial Statements and Supplementary Data of this Form 10-K.
2. Schedules
None.
3. Exhibits
Exhibit Number Exhibit Description
Exhibit 21.1 Euronet's Subsidiaries
Exhibit 99.1 Risk Factors
Exhibit 99.2 Certification of Chief Executive Officer
Exhibit 99.3 Certification of Chief Financial Officer
(b) Euronet filed a report on Form 8-K on November 1, 2002. The item reported
was "Item 5. Other Events."
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
EURONET WORLDWIDE, INC.
Date: March 31, 2003 /s/ Rick L. Weller
----------------------------------
Rick L. Weller
Chief Financial Officer and Chief
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on this xxth day of March 2003 by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title
/s/ Michael J. Brown Chairman of the Board of Directors, Chief
- --------------------
Michael J. Brown Executive Officer and Director (principal
executive officer)
/s/ Daniel R. Henry Chief Operating Officer, President and Director
- -------------------
Daniel R. Henry
/s/ Andzrej Olechowski Director
- ----------------------
Andzrej Olechowski
/s/ Eriberto R. Scocimara Director
- -------------------------
Eriberto R. Scocimara
/s/ Thomas A. McDonnell Director
- -----------------------
Thomas A. McDonnell
/s/ M. Jeannine Strandjord Director
- --------------------------
M. Jeannine Strandjord
/s/ Rick L. Weller Chief Financial Officer and Chief Accounting
- ------------------ Officer (principal financial officer and
principal accounting officer)
Rick L. Weller
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
I, Michael J. Brown, Chairman and Chief Executive Officer, certify that:
1) I have reviewed this annual report on Form 10-K of Euronet Worldwide,
Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Michael J. Brown
Michael J. Brown
Chairman and Chief Executive Officer
CERTIFICATIONS OF PRINCIPAL ACCOUNTING OFFICER
I, Rick L. Weller, Chief Financial Officer, certify that:
1) I have reviewed this annual report on Form 10-K of Euronet Worldwide,
Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Rick L. Weller
Rick L. Weller
Chief Financial Officer and Chief Accounting Officer