Euronet Worldwide 10-Q 2005
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended March 31, 2005
Commission File Number: 000-22167
EURONET WORLDWIDE, INC.
(Exact name of the registrant as specified in its charter)
4601 COLLEGE BOULEVARD, SUITE 300
LEAWOOD, KANSAS 66211
(Address of principal executive offices)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 30, 2005, the Company had 35,066,342 common shares outstanding.
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Table of Contents
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EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
See accompanying notes to the consolidated financial statements.
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EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Comprehensive Income
(Unaudited, in thousands, except share and per share data)
See accompanying notes to the unaudited consolidated financial statements.
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EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
See accompanying notes to the unaudited consolidated financial statements.
See Note 4 for details of significant non-cash transactions.
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EURONET WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited consolidated financial statements of Euronet Worldwide, Inc. and Subsidiaries (Euronet or the Company) have been prepared from the records of the Company, in conformity with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited consolidated financial statements contain all adjustments (consisting of normal interim closing procedures) necessary to present fairly the financial position of the Company at March 31, 2005 and the results of its operations and cash flows for the three-month periods ended March 31, 2005 and 2004.
The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Euronet for the year ended December 31, 2004, including the notes thereto, set forth in the Companys Form 10-K.
Certain prior year amounts have been reclassified to conform to the current year consolidated financial statement presentation.
During the third quarter 2004, the Company changed the manner in which it reports EFT Processing Segment direct costs, salaries and benefits and sales, general and administrative (SG&A) expenses. In prior periods, processing center costs were charged and then allocated from SG&A to direct costs on the basis of a standard rate per transaction. Management has evaluated the method and believes that the specific assignment of processing center salaries and related costs, together with other costs directly attributable to the center, is a preferred method and more appropriately reflects the variable and non-variable nature of the Companys operating expenses. Periods prior to the third quarter 2004 have been conformed to ensure consistent presentation. This change in presentation does not impact consolidated operating income or net income for any period presented.
The results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.
(2) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
For a description of the accounting policies of the Company, see Note 3 to the Audited Consolidated Financial Statements as of and for the year ended December 31, 2004 set forth in the Companys Form 10-K.
(3) NET INCOME PER SHARE
Basic earnings per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if dilutive stock options and warrants were exercised using the treasury stock method, where applicable. The following table provides a reconciliation of the weighted average number of common shares outstanding to the diluted weighted average number of common shares outstanding:
The table includes options with strike prices below the average fair market value of Euronet common shares during the period. The table does not reflect 125,000 options that have an exercise price in excess of the average market price of Euronet common shares during the period. These options may have an additional dilutive effect in the future if the average market value of Euronet common shares rises above the exercise price of the options. In December 2004, the Company issued convertible senior debentures that if converted in the future, would have a potentially dilutive effect on the Companys stock. The debentures are convertible into 4.2 million shares of Common Stock, subject to adjustment. As required by Emerging Issues Task Force (EITF) Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share, the dilutive impact of the contingently issuable shares must be included in the calculation of diluted net income per share under the if-converted method, regardless of whether the conditions upon which the debentures would be convertible into shares of the Companys Common Stock have been met. Since the assumed conversion of the debentures under the if-converted method is anti-dilutive for the three-months ended March 31, 2005, the impact has been excluded from the calculation of diluted net income per share.
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In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair value assigned to intangible assets acquired is supported by valuations using estimates and assumptions provided by management. For larger acquisitions management engaged an appraiser to assist in the evaluation.
Acquisition of Dynamic Telecom, Inc.
In March 2005, Payspot (a wholly-owned subsidiary of Euronet) purchased substantially all of the assets of Dynamic Telecom, Inc. (Dynamic), a company based in Iowa. Dynamic distributes several types of prepaid products including wireless, long distance and gift cards via point of sale (POS) terminals in convenience store chains throughout the U.S. The purchase price of $11.1 million consisted of 434,116 shares of Euronet Common Stock, valued at $10.8 million, and $0.3 million in cash. Of the 434,116 shares of Common Stock, 206,547 shares will be held in escrow and released, subject to certain performance criteria and indemnification claims. There are also additional earn-out payments to be calculated based on certain performance criteria for the second and fourth quarter 2005, as specified in the purchase agreement. The total of these payments is currently estimated to be between $7 million and $10 million, which will be recorded as additional goodwill when determined beyond a reasonable doubt. The Company has the option of paying the earn-out in Euronet Common Stock or a combination of cash and Euronet Common Stock.
The following table summarizes the allocation of the purchase price to the fair values of the acquired tangible and intangible assets at the acquisition date. The Companys allocation of the purchase price to the fair values of acquired tangible and intangible assets remains preliminary while management completes its evaluation of the fair value of the net assets acquired.
Acquisition of Telerecarga S.L.
In March 2005, Euronet purchased 100% of the assets of Telerecarga. S.L. (Telerecarga), a Spanish company that distributes prepaid wireless airtime and other prepaid products via POS terminals throughout Spain. The purchase price of 38.0 million (approximately $50.8 million) was settled through the assumption of 23.0 million (approximately $30.7 million) in liabilities together with, in the second quarter 2005, a cash payment of 12.6 million (approximately $16.8 million) and the assumption of 2.4 million (approximately $3.3 million) in liabilities; the second quarter cash payment and liability assumption are subject to certain performance conditions, which Euronet expects will be met. Accordingly, the Company has recorded an accrued purchase price liability of $20.1 million as of March 31, 2005, which is included in Accrued expenses and other current liabilities in the Companys consolidated balance sheet.
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The following table summarizes the allocation of the purchase price to the fair values of the acquired tangible and intangible assets at the acquisition date. The Companys allocation of the purchase price to the fair values of acquired tangible and intangible assets remains preliminary while management completes its evaluation of the fair value of the net assets acquired.
Increase in ownership of ATX Software, Ltd.
In March 2005, the Company exercised its option to acquire an additional 41% of the shares of ATX Software Ltd. (ATX) and increased its investment in ATX to 51% for a purchase price of 8.0 million, which was settled through a cash payment of 4.0 million (approximately $5.3 million) and the issuance of 215,644 shares of Euronet Common Stock with an estimated fair value of $5.6 million at the date of issuance. Of the purchase price, 1.0 million (approximately $1.3 million) is being held in escrow to be released quarterly through March 31, 2006, subject to the collection of certain trade accounts receivable. The acquisition was accounted for at fair value as a step acquisition in accordance with SFAS No. 141. Euronets $0.1 million share of dividends declared prior to acquiring control of ATX was recognized as income from unconsolidated affiliates during the first quarter 2005. As described below under 2004 Acquisitions, Euronet originally acquired a 10% investment in ATX in May 2004. With our increase in ownership from 10% to 51%, we are now required to consolidate ATXs financial position and results of operations.
The following table summarizes the allocation of the purchase price to the fair values of Euronets 51% share of the acquired tangible and intangible assets at the acquisition date. The Companys allocation of the purchase price to the fair values of acquired tangible and intangible assets remains preliminary while management completes its evaluation of the fair value of the net assets acquired.
Acquisition of Prepaid Concepts, Inc.
In January 2004, PaySpot purchased all of the share capital of Prepaid Concepts, Inc. (Precept), a company based in California that distributes prepaid services via POS terminals throughout the U.S. The purchase price of $17.8 million was settled through the issuance of 527,180 shares of Euronet Common Stock, payment of $4.0 million in cash and issuance of $4.0 million in promissory notes bearing interest at an annual rate of 7%. Of the issued shares of Common Stock, 160,000 shares were held in escrow and a portion was released in March 2005, with the remaining shares, valued at $1.4 million, retained in escrow until August 2005, subject to any indemnification claims. The promissory notes, including accrued interest, were repaid in cash during 2004.
Acquisition of Electronic Payment Solutions
In May 2004, PaySpot purchased all of the net assets of Electronic Payment Solutions (EPS), a company based in Texas that distributes prepaid services via POS terminals throughout the U.S. The purchase price of $2.2 million was settled through the issuance of 107,911 shares of Euronet Common Stock. Of the issued shares of Common Stock, 50% of the shares will be held in escrow, with 25% being released in May 2005 and the final 25% being released in May 2006, subject to certain performance
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criteria. The Company also agreed to deliver cash in consideration for the net current assets acquired. Additionally, subject to certain performance criteria, there is a potential earn-out payment payable in Common Stock, currently estimated to be approximately $0.8 million, which will be paid during the second quarter 2005 in Euronet Common Stock. The shares issued related to the earn-out payment will be held in escrow until May 2006. Goodwill will be increased by the amount of additional consideration, if any. The Companys allocation of the purchase price to the fair values of acquired tangible and intangible assets remain preliminary while management completes its evaluation of the fair value of the net assets acquired.
Initial investment in ATX Software, Ltd.
In May 2004, Euronet purchased 10% of the shares of ATX, a provider of electronic prepaid voucher solutions incorporated in the U.K. ATX offers software or outsourcing solutions for prepaid processing to existing scratch card distributors willing to switch to electronic top-up solutions. ATX has customers in more than 25 countries and works directly with scratch card distributors, who in turn contract with the mobile operators individual retailers. The purchase price of $2.9 million, including professional fees, was settled through the issuance of 125,590 shares of Euronet Common Stock for the ATX shares. Euronet was also granted an option to purchase an additional 41% of the shares of ATX at any time prior to April 1, 2005, which, as discussed above, Euronet exercised in March 2005.
Acquisition of Call Processing, Inc.
In July 2004, PaySpot purchased all of the share capital of Call Processing, Inc. (CPI), a company based in Texas that provides prepaid wireless processing and other services to convenience store chains throughout the U.S. CPI provides these services through a network of retail locations, all of which have electronic distribution of prepaid services via POS terminals. CPI provides several types of prepaid products, including prepaid wireless, prepaid long distance, prepaid gift cards, age verification and other services. The purchase price of $6.6 million was settled through a cash payment of $0.7 million and issuance of 281,916 shares of Euronet Common Stock, valued at approximately $5.9 million, to the former shareholders of CPI. Of the issued shares of Common Stock, 65,104 shares will be held in escrow and released on July 1, 2005 and 60,690 shares will be held in escrow and released on June 30, 2006, subject to certain performance criteria. If the average share price of the Companys Common Stock is less than $22.66 on the 20 trading days prior to the date the shares are released from escrow, the Company will pay the aggregate difference between $22.66 and that average share price in either cash or through the issuance of additional shares of Common Stock, at the Companys discretion. In addition, there was a potential earn-out payment payable in Common Stock. In February 2005, the Company fully settled this earn-out obligation with a cash payment of $0.3 million. Goodwill was increased for this additional consideration paid. The Companys allocation of the purchase price to the fair values of acquired tangible and intangible assets remain preliminary while management completes its evaluation of the fair value of the net assets acquired.
Acquisition of Movilcarga
In November 2004, Euronet indirectly acquired certain prepaid mobile phone top-up assets and a network of POS terminals through which mobile phone time is distributed, contracts with retailers that operate the POS terminals, certain employees, and various operating contracts from Grupo Meflur Corporacion (Meflur), a Spanish telecommunications distribution company (Movilcarga Assets). With this acquisition Euronet entered into a service agreement with Meflur to provide certain administrative and support functions necessary to operate the Movilcarga Assets, a lease agreement for office space and a license agreement for technology used to process transactions. To implement the acquisition, Euronet purchased 80% of a non-operating Spanish subsidiary (Movilcarga) that acquired the Movilcarga Assets. Meflur owns the remaining 20%. Euronet purchased the Movilcarga Assets for 18.0 million (approximately $23.1 million) in two installments: 8.0 million in cash at closing and 10.0 million in cash paid in January 2005 that was subject to certain revenue targets and adjustments. The revenue targets were met as of December 31, 2004; therefore, 10.0 million (approximately $13.0 million) was recorded as a purchase price payable, and included in the asset allocation, as of December 31, 2004. Additional payments may be due during the first quarters of 2007 and 2008, subject to the fulfillment of certain financial conditions. The Company estimates that, based on information from Meflur, these additional payments will total approximately 7.0 million to 10.0 million (approximately $9.0 million to $12.9 million). The additional payments may be made, at the option of Euronet, in either cash or a combination of cash and Euronet Common Stock. Goodwill will be increased by the amount of additional consideration, if any, when determined beyond a reasonable doubt. The Companys allocation of the purchase price to the fair values of acquired tangible and intangible assets remain preliminary while management completes its evaluation of the fair value of the net assets acquired.
Pro forma results
The following unaudited pro forma financial information presents the condensed combined results of operations of Euronet for the three months ended March 31, 2005 and 2004 as if the acquisitions described above had occurred January 1, 2004. An adjustment was made to the combined results of operations, reflecting amortization of purchased intangible assets, net of tax, which would have been recorded if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of Euronet
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that would have been reported had the acquisitions been completed as of the beginning of the periods presented, and should not be taken as representative of the future consolidated results of operations or financial condition of Euronet.
(5) GOODWILL AND INTANGIBLE ASSETS
Intangible assets and goodwill are carried at amortized cost and evaluated for impairment annually or more frequently if there is an indication of impairment. As disclosed in Note 4 Acquisitions, additions during the three months ended March 31, 2005 include $11.9 million assigned to acquired amortizable intangible assets and $64.8 million assigned to goodwill. Goodwill represents the excess of the purchase price of the acquired businesses over the fair value of the underlying net tangible and intangible assets acquired. A summary of activity in intangible assets and goodwill for the three months ended March 31, 2005 is presented below:
The additions above include adjustments to the purchase price allocations of the Companys previous acquisitions. The purchase price allocation for Transact, a Prepaid Processing Segment subsidiary based in Germany, was adjusted based on an independent appraisal of the value of Transact as of the date of acquisition finalized during the first quarter 2005. The adjustment resulted in a reclassification of the initial purchase price from goodwill to amortizable intangible assets, primarily customer relationships, of $1.8 million. The related deferred income tax liabilities related to the increase in intangible assets increased by $0.7 million, which also increased goodwill related to Transact. The impact of this reclassification on the Companys net income is an increase to amortization expense, net of the related income tax impact, of less than $0.2 million per year beginning in the first quarter 2005.
Estimated amortization expense on intangible assets, before income taxes, as of March 31, 2005 with finite lives is expected to total $5.5 million for 2005, $5.7 million for 2006, $5.7 million for 2007, $5.5 million for 2008, $5.3 million for 2009 and $5.2 million for 2010.
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(6) DEBT OBLIGATIONS
A summary of the activity for the three months ended March 31, 2005 for all debt obligations is presented below:
As of March 31, 2005, there were no amounts outstanding against the Companys $40 million revolving credit facilities, but there were stand by letters of credit outstanding against these facilities totaling $2.2 million.
(7) STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, compensation cost for stock options or restricted stock is measured as the excess, if any, of the fair market value of the Companys shares at the date of the grant over the exercise or purchase price. Such compensation cost is charged to expense on a straight-line basis over the vesting period of the respective options or restricted stock. If vesting may be accelerated as a result of achieving certain milestones, and those milestones are believed to be reasonably achievable, the compensation is recognized on a straight-line basis over the shorter accelerated vesting period.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123R supersedes APB Opinion No. 25, which requires recognition of compensation expense when stock-based incentives are awarded for services provided. SFAS No. 123R requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the period in which the share-based compensation vests. SFAS No. 123R permits a prospective or two modified versions of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by the original SFAS No. 123, Accounting for Stock-Based Compensation. After amendment of the compliance date by the United States Securities and Exchange Commission during April 2005, the Company is required to adopt the provisions of SFAS No. 123R on or before January 1, 2006. Upon adoption, the Company will begin recognizing an expense for unvested share-based compensation that has been issued or will be issued after that date. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The Company has not yet finalized its decision concerning the date of adoption, the transition option it will utilize to adopt SFAS No. 123R, or completed its analysis of the estimated impact that its adoption will have on its financial position and results from operations. However, the impact on net income is likely to be material. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of the original SFAS No. 123 as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, to stock-based employee compensation:
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Due to the Companys United States corporate income tax position, the Company currently provides a valuation allowance over its entire U.S. net deferred tax position. Therefore, no tax benefits have been attributed to stock-based compensation expense in the above table because management has not determined that it is more likely than not that such benefit would be realized.
(8) BUSINESS SEGMENT INFORMATION
The Company operates in three principal business segments:
The Company also has a Corporate Services Segment that provides the three business segments with corporate and other administrative services. These services are not directly identifiable with the Companys business segments. There are no significant inter-segment transactions.
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The following tables present the segment results of the Companys operations for the three-month periods ended March 31, 2005 and 2004:
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(9) RELATED PARTY TRANSACTIONS
See Note 4 - Acquisitions for a description of notes payable, deferred payment and additional equity issued and contingently issuable to the former business owners (now Euronet shareholders) in connection with various acquisitions.
Under the terms of certain debt agreements entered into in connection with the acquisitions of e-pay, the Company paid approximately $0.6 million in interest in the first quarter 2004 to former e-pay shareholders who now serve as a director and officers of the Company. This indebtedness was repaid in full during December 2004, accordingly, there was no interest incurred for this indebtedness during the first quarter 2005.
(10) LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the ordinary course of its business. Currently, there are no legal proceedings that management believes, either individually or in the aggregate, would have a material adverse effect upon the consolidated results of operations or financial condition of the Company.
As of March 31, 2005, the Company has $4.2 million of bank guarantees issued on its behalf, the majority of which are collateralized by cash deposits held by the respective issuing banks.
Euronet regularly grants guarantees of certain unrecorded obligations of its wholly-owned subsidiaries. As of March 31, 2005, the Company had granted guarantees in the following amounts:
From time to time, Euronet enters into agreements with unaffiliated parties that contain indemnification provisions, the terms of which may vary depending on the negotiated terms of each respective agreement. The amount of such obligations is not stated in the agreements. The liability under such indemnification provision may be subject to time and materiality limitations, monetary caps and other conditions and defenses. Such indemnity obligations include the following:
To date, the Company is not aware of any significant claims made by the indemnified parties or parties to guarantee agreements with the Company and, accordingly, no liabilities were recorded as of March 31, 2005 and December 31, 2004.
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Euronet Worldwide, Inc. (Euronet or the Company) is a leading electronic transaction processor, offering ATM and POS outsourcing services, integrated electronic financial transaction (EFT) software, network gateways, and electronic prepaid top-up services to financial institutions, mobile operators and retailers. We operate the largest independent pan-European ATM network and the largest national shared ATM network in India, and are one of the largest providers of prepaid processing, or top-up services, for prepaid mobile airtime. We have processing centers in the U.S., Europe and Asia, and process electronic top-up transactions at more than 205,000 point of sale (POS) terminals across more than 94,000 retailers with corporate headquarters in Leawood, Kansas, U.S.A., and we have 21 offices worldwide, serving clients in more than 70 countries.
ECONOMIC AND INDUSTRY FACTORS AND RISKS
Our Company faces certain economic and industry-wide factors that could materially affect our business. We are an international company, and face economic, political, technology infrastructure and legal issues in every country in which we operate that could have a positive or negative impact. Some of the more significant risk factors that our management is focused on include the following:
LINES OF BUSINESS, GEOGRAPHIC LOCATIONS AND PRINCIPAL PRODUCTS AND SERVICES
We operate in three principal business segments:
As of March 31, 2005, we had 14 principal offices in Europe, four in the Asia-Pacific region, two in the U.S. and one in Egypt. Our executive offices are located in Leawood, Kansas, USA.
SOURCES OF REVENUES AND CASH FLOW
Euronet earns revenues and income based on ATM management fees, transaction fees, professional services, software licensing fees and software maintenance agreements. Each business segments sources revenue are described below.
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EFT Processing Segment - Our revenues in the EFT Processing Segment are derived from fees charged for transactions effected by cardholders on our proprietary network of ATMs, as well as fixed management fees and transaction fees we charge to banks for operating their ATMs under outsourcing agreements.
On our proprietary network, we generally charge fees for four types of ATM transactions that are processed on our ATMs:
For the quarter ended March 31, 2005 approximately 30% of total segment revenue was derived from ATMs we owned (excluding those leased by us in connection with outsourcing agreements) and the remainder was derived from ATMs that we operate for banks on an outsourced basis. The percentage of revenues we generate from our proprietary network of ATMs has fallen significantly over the past two years. We believe this shift from a largely proprietary, Euronet-owned ATM network, to a greater focus on ATMs operated under outsourcing agreements will provide higher marginal returns on investment. This is because we bear all costs of owning and operating ATMs on our proprietary network, including the capital investment represented by the cost of the ATMs themselves, whereas customer-owned ATMs operated under outsource service agreements require a nominal up-front capital investment because we do not purchase the ATMs. Additionally, in many instances operating costs are the responsibility of the owner and, therefore, recurring operating expenses per ATM are lower. In connection with certain long-term outsourcing agreements, we lease many of our ATMs under capital lease arrangements where, generally, we purchase a banks ATMs and simultaneously sell the ATMs to an entity related to the bank and lease back the ATMs for purposes of fulfilling the ATM outsourcing agreement with the bank. We fully recover the related lease costs from the bank under the outsourcing agreements.
We include in the EFT Processing Segment revenues from transaction-based fees payable for mobile phone recharge time that we distribute through our ATMs. Fees for recharge transactions vary significantly from market to market and are based on the specific prepaid solution and the denomination of prepaid usage purchased. Any or all of these fees may come under pricing pressure in the future.
Prepaid Processing Segment - Revenue in the Prepaid Processing Segment is recognized based on commissions or processing fees received from mobile and other telecommunication operators or from distributors of prepaid wireless products for the distribution and/or processing of prepaid mobile airtime and other telecommunication products. Due to certain provisions in our mobile phone operator agreements, the operators have the ability to reduce the overall commission paid on each top-up transaction. However, by virtue of the Companys contracts with retailers in certain markets, not all of these reductions are absorbed by Euronet. In those markets, when mobile phone operators reduce overall commissions, the effect is to reduce revenues and reduce our direct operating costs resulting in only a small impact, if any, on gross margin and operating income. In Australia, certain retailers negotiate directly with the mobile phone operators for their own commission rates. Our maintenance of agreements with mobile operators is important to the success of our business, because these agreements permit us to distribute top-up to the mobile operators customers. The loss of any agreements with mobile operators in any market could materially and adversely affect our results.
Software Solutions Segment - The Software Solutions Segment recognizes revenue from licensing, professional services and maintenance fees for software and sales of related hardware. Software license fees are the initial fees we charge to license our proprietary application software to customers. Professional fees consist of charges for customization, installation and consulting services to customers. Software maintenance revenue represents the ongoing fees charged for maintenance and support for customers software products. Hardware sales are derived from the sale of computer equipment necessary for the respective software solution.
OPPORTUNITIES, CHALLENGES AND RISKS
Our expansion plans and opportunities are focused on three primary areas within our three business segments: (i) outsourced ATM management contracts; (ii) our prepaid mobile phone airtime top-up processing services; and (iii) transactions processed on our network of owned and operated ATMs.
EFT Processing Segment - The continued expansion and development of our ATM business will depend on various factors including the following:
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We carefully monitor the revenue and transactional growth of our ATM networks in each of our markets, and we adjust our plans depending on local market conditions, such as variations in the transaction fees we receive, competition, overall trends in ATM-transaction levels and performance of individual ATMs.
We consistently evaluate and add prospects to our list of potential ATM outsource customers. However, we cannot predict the increase or decrease in the number of ATMs we manage under outsourcing agreements, because this depends largely on the willingness of banks to enter into outsourcing contracts with us. Due to the thorough internal reviews and extensive negotiations conducted by existing and prospective banking customers in choosing outsource vendors, the process of entering into or renewing outsourcing agreements can take approximately six months to more than one year. The process is further complicated by the legal and regulatory considerations of local countries as well as language complexities. These agreements tend to cover large numbers of ATMs, so significant increases and decreases in our pool of managed ATMs could result from signature or termination of these management contracts. Therefore, the timing of both current and new contract revenues is uncertain and unpredictable.
Prepaid Processing Segment - We currently offer prepaid mobile phone top-up services in the U.S., Europe and Asia Pacific We plan to expand our top-up business in these and other markets by taking advantage of our existing expertise together with relationships with mobile phone operators and retailers.
This expansion will depend on various factors, including, but not necessarily limited to, the following:
Growth in our prepaid business in any given market is driven by a number of factors, including the extent to which conversion from scratch cards to electronic distribution solutions is occurring or has been completed, the overall pace of growth in the prepaid mobile telephone market, our market share of the retail distribution capacity and the level of commission that is paid to the various intermediaries in prepaid mobile airtime distribution chain. In mature markets, such as the U.K, Australia and Ireland, the conversion from scratch cards to electronic forms of distribution is either complete or nearing completion. Therefore, this factor will cease to provide the organic increases in the number of transactions per terminal that we have experienced historically. Also in mature markets, competition among prepaid distributors results in the reduction of commissions and margins by mobile operators as well as retailer churn. The combined impact of these factors in developed markets is a flattening of growth in the revenues and profits that we earn. In other markets in which we operate, such as Poland, Germany and the U.S., many of the factors that may contribute to rapid growth (conversion from scratch cards to electronic distribution, growth in the prepaid market and rapid roll out of our network of retailers) remain present.
In addition, our continued expansion may involve acquisitions that could divert our resources and management time and require integration of new assets with our existing networks and services. Our ability to effectively manage our rapid expansion will require us to expand our operating systems and employee base in 2005, particularly at the management level, which may reduce our operating income. An inability to do this could have a material adverse effect on our business, growth, financial condition or results of operations. Inadequate technology and resources would impair our ability to maintain current processing technology and efficiencies as well as deliver new and innovative services to compete in the marketplace.
Software Solutions Segment - Software products are 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 been able to enter into agreements under which we use our software in lieu of cash as our initial capital contributions to new transaction processing joint ventures. Such contribution sometimes permits us to enter new markets without significant cash outlay. Therefore, although revenues from our Software Solutions Segment are not currently growing significantly, we view it as a valuable element
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of our overall business strategy. The competitive factors in the Software Solutions business include price, technology development and the ability of software systems to interact with other leading products. Our success is dependent on our ability to design and implement software applications. Technical disruptions or errors in these systems would adversely impact our revenue and financial results.
Seasonality - Our business is significantly impacted by seasonality, as our revenues for the first quarter are generally lower than those of the last quarter of each year. We have estimated that, absent unusual circumstances (such as the impact of new acquisitions or unusually high levels of growth due to market factors), the overall revenue realized from our three business segments is likely to be approximately 5% to 10% lower during the first quarter of each year than in the last quarter of the year. The impact of this seasonality has been masked for the last two years due to significant growth rates resulting from the addition of large retailer customers in mid-fourth quarter, continued shifts from scratch cards to electronic top-up and acquisitions made in the first quarter of each year. There can be no assurance that this will be the case for future years.
Significant events in the first quarter 2005:
SEGMENT SUMMARY RESULTS OF OPERATIONS
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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
EFT PROCESSING SEGMENT
The following table presents the results of operations for the three months ended March 31, 2005 and 2004 for our EFT Processing Segment:
The increase in EFT Processing Segment revenues for the first quarter 2005 is a result of the increase in number of ATMs operated and the number of transactions processed compared to the first quarter 2004, primarily derived from ATM management agreements in Poland, Romania and India. Revenue per average ATM was $3,954 for the first quarter 2005, compared to $4,139 for the same period a year ago, or a 4% decrease. Revenue per transaction decreased 28% to $0.31 for the first quarter 2005 from $0.43 for the first quarter 2004. Generally, these decreases are the result of a continued shift from Euronet proprietarily owned ATMs to ATMs managed under outsourcing agreements. Under outsourcing agreements, the Company primarily earns revenue based on a fixed recurring monthly management fee, with less dependence on transaction-based fees because incremental transactions have little impact on the fixed or variable costs of managing ATMs. The more significant decrease in revenue per transaction is due to an overall increase in the number of transactions on ATMs that are managed under outsourcing agreements. Since revenue from these arrangements is derived primarily from a fixed monthly recurring management fee, an increase in the number of transactions processed does not generate commensurate increases in related revenue. As of March 31, 2005, the Company owned 15% of the ATMs operated (excluding those leased by us in connection with outsourcing agreements), operated 30% under capital lease and management outsourcing agreements and operated the remaining 55% under management outsourcing agreements only. This compares to 22%, 27% and 51%, respectively, as of March 31, 2004.
Of total segment revenue, for the first quarter 2005, approximately 30% was from ATMs we owned (excluding those leased by us in connection with outsourcing agreements), approximately 26% was from ATMs operated under capital lease and management outsourcing arrangements, while the remaining 44% was from other sources, primarily management outsourcing agreements. This compares to 47%, 13% and 40%, respectively, for the same period last year. We believe this shift from a largely proprietary, Euronet-owned ATM network to operating ATMs under outsourcing arrangements is a positive development in the long run and will provide higher marginal returns on investment because costs of purchasing and operating each ATM is lower for outsourced ATMs as compared to owned ATMs. Customer-owned ATMs operated under service agreements require a nominal up-front capital investment because we do not purchase the ATMs, nor do we incur the start-up costs typically incurred in the early life cycle of Euronet-owned ATM. Additionally, in many instances operating costs are the responsibility of the owner and, therefore, recurring operating expenses per ATM are lower.
Direct operating costs
Direct operating costs consist primarily of site rental fees, cash delivery costs, cash supply costs, maintenance, insurance, telecommunications and the cost of data center operations-related personnel, as well as the processing centers facility related costs and other processing center related expenses. As discussed in Note 1 General, to the Unaudited Consolidated Financial
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Statements, Euronet changed the manner in which it reports EFT Processing Segment direct costs, salaries and benefits and sales, general and administrative (SG&A) expenses during the third quarter 2004. In prior periods, processing center costs were charged to and then allocated from SG&A to direct costs on the basis of a standard rate per transaction. We have evaluated this approach and believe that the specific assignment of processing center salaries and related costs together with other costs directly attributable to the center is a preferred method and more appropriately reflects the variable and non-variable nature of our operating expenses. Prior periods have been reclassified to conform to the current year presentation. This change does not impact consolidated operating income or net income for any period presented.
The increase in direct operating cost for the first quarter 2005, compared to the first quarter 2004 is attributed to the increase in the number of ATMs under operation. Direct operating costs per ATM have decreased to $1,793 for the first quarter 2005 from $1,899 for the first quarter 2004. Direct operating costs per transaction have decreased to $0.14 per transaction for the first quarter 2005 from $0.20 per transaction during the same period last year. These improvements resulted from installing outsourced ATMs, whose direct costs per ATM and on an average per transaction basis were lower than the existing installed base of ATMs. As discussed in the Revenues section above, the number of ATMs that we operate under ATM management outsourcing agreements has increased as compared to ATMs that we own and operate. Outsourced ATMs generally have lower direct operating expenses (telecommunications, cash delivery, security, maintenance and site rental) because, depending on the customer, the customer retains the responsibility for certain operational costs.
Gross margin, which is revenue less direct operating costs, increased by $5.0 million, or 61% to $13.1 million for the first quarter 2005 compared to $8.1 million for the first quarter 2004 due to increases in revenues that exceeded the corresponding increase in direct operating costs. Gross margin per ATM was $2,161 and gross margin per transaction was $0.17 for the three months ended March 31, 2005, decreasing from $2,240 and $0.23 for the three months ended March 31, 2004. These decreases are primarily due to the addition of more ATMs added under outsourcing agreements where we generate less gross margin per ATM, but we do not have any capital investment at risk like we do for ATMs we own.
Salaries and benefits
The increase in salaries and benefits for the first quarter 2005 compared to the first quarter 2004 is due to Euronets growing businesses in Indian and Romanian markets, staffing costs to expand in emerging markets and general merit increases awarded to employees. Certain staffing increases were also necessary due to the larger number of ATMs under operation and transactions processed. These expenses as a percentage of revenue, however, continued to trend downward during the first quarter 2005 decreasing to 16%, compared to 19% for the same period in 2004. This decrease as a percentage of revenue reflects the benefits from our investment of resources in India and Romania, as well as the leverage and scalability associated with increases in revenues in our other markets without commensurate increases in salaries and benefits expense.
Selling, general and administrative
Selling, general and administrative expenses for the first quarter 2005 remained relatively flat compared to the same quarter in 2004. However, these costs were reduced by $0.5 million for an insurance recovery related to a loss recorded in the fourth quarter of 2003 on certain ATM disbursements resulting from a card associations change in their data exchange format. Adjusting for this benefit, selling, general and administrative expenses increased by approximately 34% due to increases in tax consulting fees, primarily in Poland, and software consulting fees in our growing India business.
Depreciation and amortization
The increase in depreciation and amortization expense during the first quarter 2005 compared to the first quarter 2004 is due to additional depreciation on more than 700 ATMs under capital lease arrangements related to an outsourcing agreement in Poland implemented during the second quarter 2004, additional processing center computer equipment necessary to handle increased transaction volumes and technology upgrades to certain of our owned ATMs during the last half of 2004.
The increase in operating income for the segment is generally the result of revenue increases from new ATM outsourcing and network participation agreements combined with leveraging certain management cost structures. Operating income as a percentage of revenue was 23% and 13% for the three months ended March 31, 2005 and 2004, respectively. Operating income per transaction was $0.07 and per ATM was $923 during the first quarter 2005, compared to $0.06 and $551, respectively, for the same period in 2004. The continuing increases in operating income as a percentage of revenue, per transaction and per ATM is due to significant growth in revenues and transactions without commensurate increases in operating expenses, as well as the continuing migration toward operating ATMs under management through outsourcing agreements rather than ownership arrangements. In addition, in 2004 our EFT operations in India began managing a number of ATMs under outsourcing agreements sufficient to produce positive operating results in the latter part of 2004. For the first quarter 2005, the Indian operations recorded operating profit of $0.1 million, compared to an operating loss for the first quarter 2004 of $0.2 million. Management expects to continue to produce operating income in this market during 2005.
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PREPAID PROCESSING SEGMENT
The following tables present the results of operations for the three months ended March 31, 2005 and 2004, including pro forma results for those periods as if all Prepaid Processing Segment acquired businesses were included in our consolidated results of operations as of January 1, 2004. Since the acquisitions of Telerecarga, Dynamic and ATX occurred near the end of the first quarter 2005, their contributions to the operations of the segment were not material.
The increase in Prepaid Processing Segments revenues for the first quarter 2005 compared to the first quarter 2004 was primarily attributable to the increase in total transactions processed. This transaction growth reflects growth from existing operations and the full year effects of our 2004 acquisitions. On a pro forma basis, first quarter 2005 revenues increased by 26% over the first quarter 2004 as a result of the addition of POS terminals throughout all of our markets, and increased volumes driven by mobile operators shifting from scratch card distribution to electronic distribution. The 2004 acquisitions of EPS, CPI and Movilcarga contributed revenues of $6.6 million for the first quarter 2005. Additionally, revenues have grown from the full quarter effects of retailer agreements implemented during 2004. We do not expect these growth rates at these significant levels to continue and, in certain markets, have felt the competitive effects of lower pricing and margins driven by certain mobile operators and retailers.
Revenue per transaction increased slightly to $1.33 for the first quarter 2005 from $1.30 for the first quarter 2004. Revenue growth in mature markets, such as the U.K. and Australia, has flattened substantially as conversion from scratch cards to electronic top-up approaches completion. We expect most of our growth from 2005 and beyond to be derived from developing markets or markets in which there is organic growth in the prepaid sector, overall, or continued conversion from scratch cards to electronic top-up.
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Direct operating costs
Direct operating expenses in the Prepaid Processing Segment include the commissions we pay to retail merchants for the distribution and sale of prepaid mobile airtime and other prepaid products, as well as communication and paper expenses required to operate POS terminals. These expenditures vary directly with revenues and processed transactions.
The increase in direct operating costs for the first quarter 2005 compared to the first quarter 2004 was principally due to corresponding increases in revenues and transactions processed. Direct operating expenses per transaction were $1.06 and $1.03 for the quarters ended March 31, 2005 and 2004, respectively.
Gross margin, which represents revenue less direct costs, grew by approximately $4.9 million, or 37%, to $18.1 million for the first quarter 2005 compared to $13.2 million for the first quarter 2004 due to increases in transactions processed. Gross margin per transaction remained relatively flat at $0.27 for both periods, while decreasing slightly as a percentage of revenue to 20% for the first quarter 2005, from 21% for the first quarter 2004. This slight decrease in gross margin as a percentage of revenues is largely a result of a slight shift in the mix toward transactions processed by major retailers, where our margins are lower, from independent retailers.
Salaries and benefits
The increase in segment salaries and benefits for the first quarter 2005 compared to the first quarter 2004 was primarily related to the increase in revenues and transactions processed, as well as annual merit increases for employees. As a percentage of revenue, salaries and benefits remained relatively flat at 5.5% and 5.4% for the three months ended March 31, 2005 and 2004, respectively.
Selling, general and administrative
Selling, general and administrative expense for the first quarter 2005 compared to the first quarter 2004 increased slightly as a percentage of revenue to 3.5% from 3.2% as we continue to focus resources on expanding our operations in the U.S., Poland and Australia.
Depreciation and amortization
The increase in depreciation and amortization expense, most of which represents amortization of acquired intangibles, for the first quarter 2005 compared to the first quarter 2004 was due to the full quarter impact of amortization of intangible assets acquired in 2004. Depreciation and amortization as a percentage of revenue increased slightly to 2.5% from 2.3% for the three months ended March 31, 2005 and 2004, respectively. This increase is due to higher depreciation and amortization expense as a percentage of revenue related to the Movilcarga and Telerecarga acquisitions because each of these entities owns a majority of its POS terminals. Additionally, we recorded higher amortization expense for our Transact subsidiary for the first quarter 2005, as compared to the first quarter 2004 as a result of the adjustment to our purchase price allocation increasing amortizable intangibles, such as customer relationships, and decreasing goodwill, which is not amortized. See Note 5 Goodwill and Intangible Assets, to the Unaudited Consolidated Financial Statements for further discussion of this adjustment.
The improvement in operating income for the first quarter 2005 compared to 2004 was due to the significant growth in revenues and transactions processed together with contributions from the acquisition of EPS, CPI and Movilcarga after the first quarter 2004. Operating income as a percentage of revenues decreased to 9% for the first quarter 2005 from 10% for the first quarter 2004, mainly due to our focus on expanding operations in the U.S., Poland and Australia, together with a mix shift from independent retailers to major retailers. On a pro forma basis, operating income for the first quarter 2005 improved slightly over the same period last year as a result of the acquired entities continued growth over the past year. The decrease in the pro forma operating margin percentage to 9% for the first quarter 2005 from 11% for the first quarter 2004 is a result of the inclusion of our acquisitions in the U.S. and Spain in the pro forma results for the first quarter 2004. The pro forma results for the first quarter 2004 in these markets include the positive impact on operating margin of margin-rich opportunistic, short-lived wholesale arrangements that are not necessarily ongoing in nature. Additionally, our businesses have added several large customers, thereby increasing total revenues and total operating profits, while slightly lowering overall operating margin as a percentage of revenues.
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SOFTWARE SOLUTIONS SEGMENT
The following table presents the results of operations for the three months ended March 31, 2005 and 2004 for our Software Solutions Segment:
Revenues, operating expenses and operating income
Software revenues increased in the first quarter 2005 by $0.7 million compared to the first quarter 2004. This increase is due to the addition of new contracts and the efficient implementation of several upgrades for existing customers during the first quarter 2005 compared to the first quarter 2004. Direct operating costs increased in the first quarter 2005 from the first quarter 2004, however, other costs decreased, resulting in overall operating expenses remaining flat. The combination of increased revenues, without corresponding increases in associated total operating costs resulted in an increase to operating income during the first quarter 2005 of $0.7 million compared to the same period a year ago.
Software Sales Backlog
We define software sales backlog as fees specified in contracts which we have executed and for which we expect recognition of the related revenue within one year. As of March 31, 2005, the revenue backlog was $4.1 million compared to $4.5 million as of March 31, 2004. We cannot give assurances that the contracts included in backlog will actually generate the specified revenues or that the revenues will be generated within the one-year period.
CORPORATE SERVICES AND NON-OPERATING RESULTS
The following table presents the operating expenses for the three months ended March 31, 2005 and 2004 for the Corporate Services Segment:
Corporate Operating Expenses
The increase in total operating expenses for the Corporate Services Segment is primarily attributable to increased professional fees and staffing levels required to manage overall Company growth and to continue fulfilling the requirements of the Sarbanes-Oxley Act of 2002.
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Interest income was $1.2 million for the first quarter 2005, compared to $0.6 million for the first quarter 2004, due to the significant increase in the average balance on temporary cash investments held in trust in the growing Prepaid Processing Segment and interest earned on the net proceeds from the December 2004 issuance of $140 million in convertible debentures.
Interest expense was $1.6 million for the first quarter 2005 compared to $1.8 million for the first quarter 2004. Although we had a larger
amount of interest bearing debt outstanding during the first quarter 2005 compared to the first quarter 2004, the weighted average interest rate was 4% for the first quarter 2005 compared to 12% for the first quarter 2004. The decrease was primarily
due to the 1.625% interest rate on our convertible debentures, which were outstanding for the first quarter 2005 and the retirement of our
Foreign Exchange Gain (Loss)
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. We recorded a net foreign exchange loss of $2.8 million for the first quarter 2005, compared to a gain of $0.2 million for the first quarter 2004. Exchange gains and losses that result from re-measurement of certain assets and liabilities are recorded in determining net income. Due to our global exposure, a significant portion of our assets and liabilities are denominated in currencies other than the U.S. dollar, including capital lease obligations, short-term obligations, cash and cash equivalents and investments.
Income Tax Expense
Tax expense on income from continuing operations was $3.8 million for the first quarter 2005 compared to $2.1 million for the first quarter 2004. Tax expense continues to grow due to the growing profitability of individual companies in the Prepaid Processing and EFT Processing Segments, particularly in Western Europe and Australia. The effective tax rate for the first quarter 2005 was approximately 44%.
In summary, net income of $4.8 million for the first quarter 2005 represents a $1.5 million increase over the $3.3 million recorded for the first quarter 2004. The increase was primarily due to increased operating income of $5.2 million due to the factors described above, a decrease in net interest expense of $0.9 million, improvement in equity and dividend income from unconsolidated affiliates and other items of $0.2 million, offset by a $3.1 million increase in losses related to foreign exchange and an increase in income tax expense of $1.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Our balance of cash and cash equivalents was $73.0 million and the balance of restricted cash was $107.9 million as of March 31, 2005. At March 31, 2005, we had working capital of approximately $19.2 million compared to working capital of approximately $51.6 million at December 31, 2004. The ratio of current assets to current liabilities decreased to 1.06 at March 31, 2005 from 1.18 at December 31, 2004. The decrease in working capital and the ratio of current assets to current liabilities was mainly due to cash payments for the acquisition of Movilcarga, Telerecarga and ATX and the earn-out payment to the former owners of Transact. For a detailed explanation of these items and the variances from such amounts as of December 31, 2004, see Balance Sheet Items below.
Operating cash flows
Cash flows provided by operating activities increased slightly to $9.9 million for the first quarter 2005 compared to $9.4 million for the first quarter 2004. The increase was primarily due to the increase in net income, combined with increases in depreciation and amortization and unrealized foreign exchange loss, which represent non-cash expenses.
Investing activity cash flow
Cash flows used in investing activities were $59.3 million and $4.7 million for the three months ended March 31, 2005 and 2004, respectively. The amount for the first quarter 2005 includes cash paid related to the acquisitions in the amounts of $14.7 million for Telerecarga, $13.0 million for Movilcarga and $3.5 million (net of cash acquired of $1.9 million) for ATX, as well as the cash earn-out payment of $24.5 million to the former owners of Transact. Additionally, our fixed asset purchased for the first quarter 2005 totaled $3.0 million. The amount for 2004 was primarily comprised of $2.6 million for the acquisition of Precept and $2.0 million for fixed asset purchases.
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Financing activity cash flows
Cash flows provided by financing activities were $1.1 million for the three months ended March 31, 2005, compared to the amount used in financing activities of $4.8 million for the first quarter 2004. These amounts include proceeds from the exercise of stock options and employee share purchases and repayments of obligations under capital leases.
Other Sources of Capital
Credit agreements As of March 31, 2005, we had stand by letters of credit totaling $2.2 million outstanding against our $40 million revolving credit agreements; the remaining $37.8 million was available for borrowing. The $40 million revolving credit agreement comprises a $10 million facility among our holding company, Euronet Worldwide, Inc. and certain U.S. subsidiaries and a $30 million facility among certain European subsidiaries. The revolving credit facilities have been, and can be, used to repay existing debt, for working capital needs, to make acquisitions or for other corporate purposes. These agreements expire during October 2006 and contain customary events of default and covenants related to limitations on indebtedness and the maintenance of certain financial ratios. We were in compliance with all covenants as of March 31, 2005. For more information regarding these facilities see our Annual Report on Form 10-K, Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
Overdraft facility In 2004, our Czech Republic subsidiary entered into an overdraft facility with a bank for up to approximately $3.0 million in order to support ATM network cash needs. As of March 31, 2005, the full amount of the facility was outstanding.
Convertible debt On December 15, 2004, we closed the sale of $140 million in principal amount of 1.625% Contingent Convertible Senior Debentures Due 2024 (Convertible Debentures). The net proceeds, after fees totaling $4.5 million, were $135.5 million. The $4.4 million in fees has been deferred and is being amortized over five years, the term of the initial put option by the holders of the Convertible Debentures. We have used, and plan to use the proceeds of the Convertible Debentures for debt repayment, acquisitions and other corporate purposes.
Proceeds from issuance of shares and other capital contributions In February 2003, the Company established a new qualified Employee Stock Purchase Plan (ESPP) and reserved 500,000 shares of Common Stock for purchase under the plan by employees 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. Offerings commence at the beginning of each quarter and expire at the end of the quarter. 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 day of each offering. The options are funded by participating employees payroll deductions or cash payments. During the three months ended March 31, 2005, we issued 10,907 shares at an average price of $21.50 per share, resulting in proceeds to us of approximately $0.2 million.
Other Uses of Capital
Payment obligations related to acquisitions As provided in our share purchase agreement with the selling shareholders of Transact, during the first quarter 2005, we paid an earn-out totaling $39.1 million. This payment was settled through the issuance of 598,302 shares of Company Common Stock, valued at approximately $14.6 million, and 18.7 million (approximately $24.5 million) in cash. We also recorded approximately $13.0 million as of December 31, 2004 for the second payment in connection with the acquisition of the Movilcarga assets. These payments were accrued as current liabilities as of December 31, 2004.
As of March 31, 2005, we recorded an obligation to the former shareholders of Telerecarga for 15.0 million (approximately $20.1 million) to be settled during the second quarter 2005 through a combination of cash and assumption of liabilities. This settlement is subject to certain performance conditions, which Euronet expects will be met. We also have other potential earn-out obligations to the former owners of the net assets of EPS, Movilcarga and Dynamic. These obligations, certain of which may be settled through the issuance of our Common Stock, have not been recorded in the accompanying unaudited consolidated financial statements because the final amounts cannot be estimated beyond a reasonable doubt. These potential obligations are discussed further in Note 4 Acquisitions to the Unaudited Consolidated Financial Statements and in Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations and Off Balance Sheet Items below.
ATM Leases In the EFT Processing Segment, we lease many of our ATMs under capital lease arrangements that expire between 2005 and 2011. The leases bear interest between 2.5% and 12% per year. As of March 31, 2005, we owed $20.3 million under these capital lease arrangements. The majority of these lease agreements are entered into in connection with long-term outsourcing
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agreements where, generally, we purchase a banks ATMs and simultaneously sell the ATMs to an entity related to the bank and lease back the ATMs for purposes of fulfilling the ATM outsourcing agreement with the bank. We fully recover the related lease costs from the bank under the outsourcing agreements. Generally, the leases may be canceled without penalty upon reasonable notice in the unlikely event the bank or we were to terminate the related outsourcing agreement. We expect that, if terms were acceptable, we would acquire more ATMs from banks under such outsourcing and lease agreements.
Capital expenditures and needs Total cash capital expenditures for 2005 are estimated to be approximately $10 million to $12 million, of which $3.0 million has been incurred as of March 31, 2005. These capital expenditures are required largely for the upgrade of ATMs to meet EMV requirements and micro-chip card technology, the purchase of terminals for the Prepaid Processing Segment and office and data center computer equipment and software.
In the Prepaid Processing Segment, approximately 37,500 of the more than 205,000 POS devices that we operate are Company owned, with the remaining terminals being operated as integrated cash register devices of our major retail customers or owned by the retailers. As our Prepaid Processing Segment expands, we will continue to add terminals in certain independent retail locations at a price of approximately $300 per terminal. We expect the proportion of owned terminals to total terminals operated to remain relatively constant.
We are required to maintain ATM hardware for Euronet-owned ATMs and software for all ATMs in our network in accordance with certain regulations and mandates established by local country regulatory and administrative bodies as well as Europay, MasterCard and Visa (EMV). Accordingly, we expect additional capital expenditures over the next few years to maintain compliance with these regulations and/or mandates. However, we expect hardware expenditures to be less each year as we increase the outsourcing aspect of our business and reduce the number of owned ATMs. Upgrades to our ATM software and hardware were required in 2004 and continue into 2005 to meet EMV mandates such as Triple DES (Data Encryption Standard) and microchip card technology for smart cards. We completed a plan for implementation and delivery of the hardware and software modifications; the remaining capital expenditures necessary to complete these upgrade requirements are estimated to be approximately $3.0 million to $4.0 million.
At current and projected cash flow levels together with cash on-hand and amounts available under our recently signed revolving credit agreements, we anticipate that our cash generated from operations and existing financing will be sufficient to meet our debt, leasing, acquisition earn-out and capital expenditure obligations. If our cash is insufficient to meet these obligations, we will seek to refinance our debt under terms acceptable to us. However, we can offer no assurances that we will be able to obtain favorable terms for the refinancing of any of the debt or obligations described above.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ITEMS
The following table summarizes our contractual obligations as of March 31, 2005 (unaudited, in thousands):
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.
We regularly grant guarantees of the obligations of our wholly-owned subsidiaries. As of March 31, 2005, we had granted guarantees of the following obligations and amounts:
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From time to time, Euronet enters into agreements with unaffiliated parties that contain indemnification provisions, the terms of which may vary depending on the negotiated terms of each respective agreement. The amount of such obligations is not stated in the agreements. Our liability under such indemnification provision may be subject to time and materiality limitations, monetary caps and other conditions and defenses. Such indemnity obligations include the following:
To date, we are not aware of any significant claims made by the indemnified parties or parties to guarantee agreements with us and, accordingly, no liabilities have been recorded as of March 31, 2005.
BALANCE SHEET ITEMS
Cash and cash equivalents
Cash and cash equivalents decreased to $73.0 million at March 31, 2005 from $124.2 million at December 31, 2004 primarily due to the following activity:
Sources of cash:
Uses of cash:
See the Unaudited Consolidated Statements of Cash Flows for further description of these items.
Restricted cash increased to $107.9 million at March 31, 2005 from $69.3 million at December 31, 2004, and primarily represents $103.0 million held in trust and/or cash held on behalf of others in connection with the administration of the customer collection
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and vendor remittance activities in the Prepaid Processing Segment. Amounts collected from customers that are due to the mobile operators are deposited into a restricted cash account held by our Prepaid Processing Segment companies on behalf of the mobile operators for which we process transactions. These balances are used in connection with the administration of customer collection and vendor remittance activities. The remaining balances of restricted cash represent primarily ATM deposits and collateral on bank guarantees. The increase from December 31, 2004 is primarily related to the timing of the settlement process at our e-pay subsidiaries in the U.K. and Australia.
Trade accounts receivable, net
Trade accounts receivable, net increased to $114.3 million at March 31, 2005 from $110.3 million at December 31, 2004. The primary component of our trade accounts receivable represents amounts to be collected on behalf of mobile operators in connection with the timing of the settlement process for the growing Prepaid Processing Segment. The slight growth over the prior year is due to the acquisitions of Telerecarga, Dynamic and ATX, mostly offset by a decrease related to the timing of the settlement process at our e-pay subsidiary in the U.K.
Prepaid expenses and other current assets
Prepaid expenses and other current assets increased to $19.7 million as of March 31, 2005 from $13.2 million as of December 31, 2004. The largest component of this balance is amounts recorded for our net Value Added Tax (VAT) receivable related to certain European subsidiaries. The balance of net VAT receivable as of March 31, 2005 was $12.6 million, compared to $7.0 million as of December 31, 2004. This increase of $5.6 million was primarily a result of the acquisition of Telerecarga during the first quarter 2005.
Property, plant and equipment, net
Net property, plant and equipment increased to $42.0 million as of March 31, 2005 from $39.9 million at December 31, 2004. Of this increase, approximately $2.8 million is due to the acquisition of Telerecarga and Dynamic. Other additions to property, plant and equipment during the first quarter 2005 were offset by depreciation and amortization expense.
Goodwill and intangible assets
Net intangible assets and goodwill increased to $286.2 million at March 31, 2005 from $212.6 million at December 31, 2004 due to the acquisitions of Dynamic Telecom, Telerecarga and ATX during the first quarter 2005. Additionally, the final independent appraisal of the Transact purchase price allocation resulted in an increase to the amount recorded for amortizable intangible assets of $1.8 million and a decrease to goodwill of $1.1 million, after the impact of deferred income taxes. Amortization of intangible assets for the three months ended March 31, 2005 was $1.2 million. The following table summarizes the activity for the three months ended March 31, 2005:
Deferred tax assets
Current and non-current deferred tax assets totaled $12.0 million and $10.1 million as of March 31, 2005 and December 31, 2004, respectively. The increase in these balances as of March 31, 2005 is due to the recognition of deferred tax assets generated during the first quarter.
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Other assets decreased to $9.5 million at March 31, 2005 from $12.7 million at December 31, 2004 primarily due to the Company exercising the option to purchase an additional 41% interest in ATX. As of December 31, 2004, we used the cost method of accounting for our 10% interest in ATX of $2.9 million. With our increase in ownership from 10% to 51%, we are now required to consolidate ATXs financial position and results of operations.
Accounts payable increased to $205.0 million at March 31, 2005 from $155.1 million at December 31, 2004. The primary component of our trade accounts payable represents payables to mobile operators in connection with the timing of the settlement process for the growing Prepaid Processing Segment. The increase of $49.9 million is due to the first quarter acquisition of Telerecarga, which has $36.8 million in accounts payable recorded as of March 31, 2005. The remaining increase is due to additional accounts payable recorded in our prepaid business related to the timing of the settlement process, primarily at our e-pay subsidiary in the U.K.
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities decreased to $84.6 million at March 31, 2005 from $107.6 million at December 31, 2004. This $23.0 million decrease is due to the settlement of the $39.1 million and $13.0 million purchase price liabilities for the Transact earn-out and Movilcarga acquisition, respectively, that were accrued as of December 31, 2004. This decrease was partially offset by the accrued purchase price liability related to the acquisition of Telerecarga of $20.1 million as of March 31, 2005 and an increase in the accrued liabilities recorded in our prepaid segment related to the timing of the settlement and invoicing process.
Income taxes payable
Income taxes payable increased to $10.5 million at March 31, 2005 from $9.4 million at December 31, 2004 primarily due to incremental tax expense recorded for first quarter earnings, partially offset by tax payments made during the same period.
Debt obligations and capital leases
As of March 31, 2005, total indebtedness decreased to $164.5 million from $166.2 million as of December 31, 2004. A summary of the activity in our debt obligations for the quarter ended March 31, 2005 is as follows:
Deferred income tax liabilities
Current and non-current deferred tax liabilities totaled $26.8 million and $19.4 million as of March 31, 2005 and December 31, 2004, respectively. The increase of $7.4 million as of March 31, 2005 was due to $4.3 million of additions to deferred tax liabilities in connection with the Companys first quarter acquisitions of Dynamic, Telerecarga and ATX, reduced by the amortization of all acquisition related deferred taxes of approximately $0.3 million, an addition of $0.7 million related to an adjustment of the value of the transact amortizable intangible assets and the recognition of other deferred tax liabilities generated during the first quarter.
Total stockholders equity
Total stockholders equity increased to $179.1 million at March 31, 2005 from $141.9 million at December 31, 2004. This $37.2 million increase is primarily the result of:
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This document contains statements that constitute forward-looking statements within the meaning of section 27A of the Securities Act and section 21E of the U.S. Securities Exchange Act of 1934. All statements other than statements of historical facts included in this document are forward-looking statements, including statements regarding the following:
Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct. Forward-looking statements are typically identified by the words believe, expect, anticipated, 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, but not limited to, the following:
These risks and other risks are more fully described below.
This Quarterly Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors including the ones described below and elsewhere in this Quarterly Report. The risks and uncertainties described below or elsewhere herein are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our Common Stock could decline substantially. Thus, you should carefully consider these risks before investing in our securities.
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Risks Related to Our Business
We have a substantial amount of debt and other contractual commitments, and the cost of servicing those obligations could adversely affect our business and hinder our ability to make payments on the Debentures, and such risk could increase if we incur more debt.
We have a substantial amount of indebtedness. As of March 31, 2005, our total liabilities were approximately $509.4 million and our total assets were approximately $688.5 million. In addition, we will have to pay approximately $43.4 million during the years 2005 through 2008 as deferred consideration in connection with the CPI, Movilcarga, Telerecarga and Dynamic Telecom acquisitions. A portion of these obligations may be paid in stock. While we expect to satisfy any payment obligations from available cash and operating cash flows, we may not have sufficient funds to satisfy all such obligations as a result of a variety of factors, some of which may be beyond our control. If the opportunity of a strategic acquisition arises or if we enter into new contracts that require the installation or servicing of ATM machines on a faster pace than anticipated, we may be required to incur additional debt for these purposes and to fund our working capital needs, which we may not be able to obtain.
The level of our indebtedness could have important consequences to investors, including the following:
If we fail to make required debt payments, or if we fail to comply with other covenants in our debt service agreements, we would be in default under the terms of these agreements. This default would permit the holders of the indebtedness to accelerate repayment of this debt and could cause defaults under other indebtedness that we have.
Although we have reported net income in recent periods, our concentration on expansion of our business in the future may significantly impact our ability to continue to report net income.
Prior to January 1, 2003, we reported a net loss in every fiscal year, primarily attributable to our investments for the expansion of our business. We believe these investments have recently started to produce positive results for us, as evidenced by our reporting of net income of $18.4 million for the year ended December 31, 2004 and a net income for the first quarter 2005 of approximately $4.8 million. We may experience operating losses again in the future while we continue to concentrate on the expansion of our business and increasing our market share.
Restrictive covenants in our credit facilities may adversely affect us.
Our credit facilities contain a variety of restrictive covenants that limit our ability to incur debt, make investments, pay dividends and sell assets. In addition, these facilities require us to maintain specified financial ratios, including Debt to EBITDA and EBITDAR to fixed charges, and satisfy other financial condition tests, including a minimum EBITDA test. See Description of Credit Facility. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those tests. A breach of any of these covenants could result in a default under our credit facilities. Upon the occurrence of an event of default under our credit facilities, the lenders could elect to declare all amounts outstanding under the credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. We have pledged a substantial portion of our assets as security under the credit facilities. If the lenders under either credit facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our credit facilities and our other indebtedness, including the notes.
The Debt to EBITDA ratio contained in the credit facilities limits our funded debt to not more than two times our EBITDA for the last four quarters, in each case as defined in the credit facilities. EBITDA includes the historical pro forma effect of any acquisitions to the extent agreed to by the lenders. Funded debt is defined as certain debt minus proceeds of this offering so long
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as such proceeds are deposited in designated accounts. We will deposit a substantial portion of the proceeds into such accounts in order to comply with such covenant. Following this offering, we will only be able to utilize the proceeds of this offering or incur additional debt to the extent that, after giving effect to such utilization, our debt (less the remaining amount of proceeds in such account) is less than two times our EBITDA, including historical pro forma effect of any acquisitions. Accordingly, our ability to use the proceeds of this offering or incur additional debt for purposes other than debt repayment or for acquisitions that increase our EBITDA, will be limited until such time as our EBITDA increases.
Our business may suffer from risks related to our recent acquisitions and potential future acquisitions.
A substantial portion of our recent growth is due to acquisitions, and we continue to evaluate potential acquisition opportunities. We cannot assure you that we will be able to successfully integrate, or otherwise realize anticipated benefits from, our recent acquisitions or any future acquisitions, which could adversely impact our long-term competitiveness and profitability. The integration of our recent acquisitions and any future acquisitions will involve a number of risks that could harm our financial condition, results of operations and competitive position. In particular:
Future acquisitions may be affected through the issuance of our Common Stock, or securities convertible into our Common Stock, which could substantially dilute the ownership percentage of our current stockholders. In addition, shares issued in connection with future acquisitions could be publicly tradable, which could result in a material decrease in the market price of our Common Stock.
A lack of business opportunities or financial resources may impede our ability to continue to expand at desired levels, and our failure to expand operations could have an adverse impact on our financial condition.
Our expansion plans and opportunities are focused on three separate areas: (i) our network of owned and operated ATMs; (ii) outsourced ATM management contracts; and (iii) our prepaid mobile phone airtime services.
The continued expansion and development of our ATM business will depend on various factors including the following:
We carefully monitor the growth of our ATM networks in each of our markets, and we accelerate or delay our expansion plans depending on local market conditions, such as variations in the transaction fees we receive, competition, overall trends in ATM transaction levels and performance of individual ATMs.
We cannot predict the increase or decrease in the number of ATMs we manage under outsourcing agreements, because this depends largely on the willingness of banks to enter into outsourcing contracts with us. Banks are very deliberate in negotiating these agreements and the process of negotiating and signing outsourcing agreements typically takes six to 12 months or longer. Moreover, banks evaluate a wide range of matters when deciding to choose an outsource vendor and generally this decision is
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subject to extensive management analysis and approvals. The process is exacerbated by the legal and regulatory considerations of local countries, as well as local language complexities. These agreements tend to cover large numbers of ATMs, so significant increases and decreases in our pool of managed ATMs could result from signature or termination of these management contracts. In this regard, the timing of both current and new contract revenues is uncertain and unpredictable.
We currently offer prepaid mobile phone top-up services in the U.S., Europe and Asia Pacific We plan to expand our top-up business in these and other markets by taking advantage of our existing relationships with mobile phone operators and retailers. This expansion will depend on various factors, including the following:
In addition, our continued expansion may involve acquisitions that could divert our resources and management time and require integration of new assets with our existing networks and services and could require financing that we may not be able to obtain. Our ability to manage our rapid expansion effectively will require us eventually to expand our operating systems and employee base. An inability to do this could have a material adverse effect on our business, growth, financial condition or results of operations.
We are subject to business cycles and other outside factors that may negatively affect mobile phone operators, retailers and our customers.
A recessionary economic environment or other outside factors could have a negative impact on mobile phone operators, retailers and our customers and could reduce the level of transactions, which could, in turn, negatively impact our financial results. If mobile phone operators experience decreased demand for their prepaid products and services (including due to increasing usage of postpaid services) or if the retail locations where we provide POS top-up services decrease in number, we will process fewer transactions, resulting in lower revenue. In addition, a recessionary economic environment could result in a higher rate of bankruptcy filings by mobile phone operators, retailers and our customers and could reduce the level of ATM transactions, which will have a negative impact on our business.
The growth of our prepaid business is dependent on certain factors that are variable from market to market but may reduce or eliminate growth in fully mature markets.
Growth in our prepaid business in any given market is driven by a number of factors, including the extent to which conversion from scratch cards to electronic distribution solutions is occurring or has been completed, the overall pace of growth in the prepaid mobile telephone market, our market share of the retail distribution capacity and the level of commission that is paid to the various intermediaries in the prepaid mobile airtime distribution chain. In mature markets, such as the U.K., Australia and Ireland, the conversion of scratch cards from mobile operators to electronic forms of distribution is either complete or nearing completion. Therefore, these factors will cease to provide the organic increases in the number of transactions per terminal that we have experienced historically. Also in mature markets, competition among prepaid distributors results in the reduction of commissions and margins by mobile operators as well as retailer churn. The combined impact of these factors in fully mature markets is a flattening of growth in the revenues and profits that we earn. These factors could adversely impact our financial results as the markets in which we conduct the prepaid business mature.
Our prepaid mobile airtime top-up business may be susceptible to fraud occurring at the retailer level.
In our Prepaid Processing Segment, we contract with retailers that accept payment on our behalf, which we then transfer to a trust or other operating account for payment to mobile phone operators. In the event a retailer does not transfer to us payments that it receives for mobile phone airtime, we are responsible to the mobile phone operator for the cost of the airtime credited to the customers mobile phone. Although, in certain circumstances, we maintain credit enhancement insurance polices and take other precautions to mitigate this risk, we can provide no assurance that retailer fraud will not increase in the future or that any proceeds we receive under our insurance policies will be adequate to cover losses resulting from retailer fraud, which could have a material adverse effect on our business, financial condition and results of operations.
Because we typically enter into short-term contracts with mobile phone operators and retailers, our top-up business is subject to the risk of non-renewal of those contracts.
Our contracts with mobile phone operators to process prepaid mobile phone airtime recharge services typically have terms of two to three years or less. Many of those contracts may be canceled by either party upon three months notice. Our contracts with mobile phone operators are not exclusive, so these operators may enter into top-up contracts with other service providers. In addition, our top-up service contracts with major retailers typically have terms of one to two years and our contracts with smaller retailers typically may be canceled by either party upon three months notice. The cancellation or non-renewal of one or more of our significant mobile phone operator or retail contracts, or of a large enough group of our contracts with smaller retailers, could have a material adverse effect on our business, financial condition and results of operations. In addition, our contracts generally permit operators to reduce our fees at any time. Commission revenue or fee reductions by any of the mobile phone operators could also have a material adverse effect on our business, financial condition or results of operations.
In the U.S. and certain other countries, processes we employ may be subject to patent protection by other parties.
We have commenced prepaid processing operations in the U.S. The contribution of these operations to our financial results is currently insignificant, but we hope to expand this business rapidly. In the U.S., patent protection legislation permits the protection of processes. We employ certain processes in the U.S. that have been used in the industry by other parties for many years, and which we and other companies using the same or similar processes consider to be in the public domain. However, we are aware that certain parties believe they hold patents that cover some of the processes employed in the prepaid processing industry in the
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U.S. The question whether a process is in the public domain is a legal determination, and if this issue is litigated we cannot be certain of the outcome of any such litigation. If a person were to assert that it holds a patent covering any of the processes we use, we would be required to defend ourselves against such claim and if unsuccessful, would be required to either modify our processes or pay license fees for the use of such processes. This could materially and adversely affect our U.S. prepaid processing business and could result in our reconsidering the rate of expansion of this business in the U.S.
The level of transactions on our ATM and prepaid processing networks is subject to substantial seasonal variation, which may cause our quarterly results to fluctuate materially and create volatility in the price of our shares.
Our experience is that the level of transactions on our networks is subject to substantial seasonal variation. Transaction levels have consistently been much higher in the last quarter of the year due to increased use of ATMs and prepaid top-ups during the holiday season. The level of transactions drops in the first quarter, during which transaction levels are generally the lowest we experience during the year. Since revenues of the EFT Processing and Prepaid Processing Segments are primarily transaction-based, these segments are directly affected by this seasonality. As a result of these seasonal variations, our quarterly operating results may fluctuate materially and could lead to volatility in the price of our shares.
The stability and growth of our ATM business depend on maintaining our current card acceptance and ATM management agreements with banks and international card organizations, and on securing new arrangements for card acceptance and ATM management.
The stability and future growth of our ATM business depend in part on our ability to sign card acceptance and ATM management agreements with banks and international card organizations. Card acceptance agreements allow our ATMs to accept credit and debit cards issued by banks and international card organizations. ATM management agreements generate service income from our management of ATMs for banks. These agreements are the primary source of our ATM business.
These agreements have expiration dates and banks and international card organizations are generally not obligated to renew them. In some cases, banks may terminate their contracts prior to the expiration of their terms. We cannot assure you that we will be able to continue to sign or maintain these agreements on terms and conditions acceptable to us or that international card organizations will continue to permit our ATMs to accept their credit and debit cards. The inability to continue to sign or maintain these agreements, or to continue to accept the credit and debit cards of local banks and international card organizations at our ATMs in the future, could have a material adverse effect on our business, growth, financial condition or results of operations.
Retaining the founders of our company, and of companies that we acquire, and finding and retaining qualified personnel in Europe may be important to our continued success.
Our strategy and its implementation depend in large part on the founders of our company, in particular Michael Brown and Daniel Henry, and their continued involvement in Euronet in the future. In addition, the success of the expansion of businesses that we acquire may depend in large part upon the retention of the founders of those businesses. Our success also depends in part on our ability to hire and retain highly skilled and qualified management, operating, marketing, financial and technical personnel. The competition for qualified personnel in Central Europe and the other markets where we conduct our business is intense and, accordingly, we cannot assure you that we will be able to continue to hire or retain the required personnel.
Our officers and some of our key personnel have entered into service or employment agreements containing non-competition, non-disclosure and non-solicitation covenants and providing for the granting of incentive stock options with long-term vesting requirements. However, most of these contracts do not guarantee that these individuals will continue their employment with us. The loss of our key personnel could have a material adverse effect on our business, growth, financial condition or results of operations.
Our operating results depend in part on the volume of transactions on ATMs in our network and the fees we can collect from processing these transactions.
Transaction fees from banks and international card organizations for transactions processed on our ATMs have historically accounted for a substantial majority of our revenues. These fees are set by agreement among all banks in a particular market. Although we are less dependent on these fees due to our Prepaid Processing Segment, the future operating results of our ATM business depend on the following factors:
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Although we believe that the volume of transactions in developing countries will tend to increase due to growth in the number of cards being issued by banks in these markets, we anticipate that transaction levels on any given ATM in developing markets will not increase significantly. We can improve the levels of transactions on our ATM network overall by acquiring good sites for our ATMs, eliminating poor locations, entering new less-developed markets and adding new transactions to the sets of transactions that are available on our ATMs. However, we may not be successful in materially increasing transaction levels through these measures. Per-transaction fees have declined in certain markets in recent years. If we cannot continue to increase our transaction levels and per-transaction fees generally decline, our results would be adversely affected.
Our operating results depend in part on the volume of transactions for prepaid phone services and the commissions we receive for these services.
Our Prepaid Processing Segment derives revenues based on processing fees from mobile and other telecommunication operators or distributors of prepaid wireless products. Generally, these operators have the right to reduce the overall fee paid for each transaction, although a portion of such reductions can be passed along to retailers. In the last year, processing fees per transaction have been declining in most markets, and we expect that trend to continue. We have been able to improve our results despite that trend due to substantial growth in transactions, driven by acquisitions and organic growth. We do not expect to continue this rate of growth. If we cannot continue to increase our transaction levels and per-transaction fees continue to decline, our results would be adversely affected.
Developments in electronic financial transactions, such as the increased use of debit cards by customers and pass-through of ATM transaction fees by banks to customers or developments in the mobile phone industry, could materially reduce ATM transaction levels and our revenues.
Certain developments in the field of electronic financial transactions may reduce the amount of cash that individuals need on a daily basis, including the promotion by international card organizations and banks of the use of bank debit cards for transactions of small amounts. These developments may reduce the transaction levels that we experience on our ATMs in the markets where they occur. Banks also could elect to pass through to their customers all, or a large part of, the fees we charge for transactions on our ATMs. This would increase the cost of using our ATM machines to the banks customers, which may cause a decline in the use of our ATM machines and, thus, have an adverse effect on our revenues. If transaction levels over our existing ATM network do not increase, growth in our revenues from the ATMs we own will depend primarily on rolling out ATMs at new sites and developing new markets, which requires capital investment and resources and reduces the margin we realize from our revenues.
The mobile phone industry is a rapidly evolving area, in which technological developments, in particular the development of new methods or services, may affect the demand for other services in a dramatic way. The development of any new technology that reduces the need or demand for prepaid mobile phone time could materially and adversely affect our business.
We generally have little control over the ATM transaction fees established in the markets where we operate, and therefore cannot control any potential reductions in these fees.
The amount of fees we receive per transaction is set in various ways in the markets in which we do business. We have card acceptance agreements or ATM management agreements with some banks under which fees are set. However, we derive the bulk of our revenues in most markets from interchange fees that are set by the central ATM processing switch. The banks that participate in these switches set the interchange fee, and we are not in a position in any market to greatly influence these fees, which may increase or decrease over time. A significant decrease in the interchange fee in any market could adversely affect our results in that market.
In some cases, we are dependent upon international card organizations and national transaction processing switches to provide assistance in obtaining settlement from card issuers of funds relating to transactions on our ATMs.
Our ATMs dispense cash relating to transactions on credit and debit cards issued by banks. We have in place arrangements for the settlement to us of all of those transactions, but in some cases we do not have a direct relationship with the card-issuing bank and rely for settlement on the application of rules that are administered by international card associations (such as Visa or MasterCard) or national transaction processing switching networks. If a bankcard association fails to settle transactions in accordance with those rules, we are dependent upon cooperation from such organizations or switching networks to enforce our right of settlement against such banks or card associations. Failure by such organizations or switches to provide the required cooperation could result in our inability to obtain settlement of funds relating to transactions and adversely affect our business.
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We derive a significant amount of revenue in our business from service contracts signed with financial institutions to own and/or operate their ATM machines.
Certain contracts have been and, in the future, may be terminated by the financial institution resulting in a substantial reduction in revenue. Contract termination payments, if any, may be inadequate to replace revenues and operating income associated with these contracts.
Because our business is highly dependent on the proper operation of our computer network and telecommunications connections, significant technical disruptions to these systems would adversely affect our revenues and financial results.
Our business involves the operation and maintenance of a sophisticated computer network and telecommunications connections with banks, financial institutions, mobile operators and retailers. 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. Our ATM segment also uses a satellite-based system that is susceptible to the risk of satellite failure. There are operational risks inherent in this type of business that can result in the temporary shutdown of part or all of our processing systems, such as failure of electrical supply, failure of computer hardware and software errors. Excluding our German ATMs, we operate all of our ATMs through our processing centers in Budapest, Hungary and Mumbai, India, and any operational problem in these centers may have a significant adverse impact on the operation of our network generally. In addition, we operate all of our top-up services through our processing centers in the U.K., Germany, Spain and the U.S., and any operational problem there could have a significant adverse impact on the operation of our top-up network.
We employ experienced operations and computer development staff and have created redundancies and procedures in our processing centers to decrease these risks. However, these risks 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.
We have the risk of liability for fraudulent bankcard and other card transactions involving a breach in our security systems, as well as for ATM theft and vandalism.
We capture, transmit, handle and store sensitive information in conducting and managing electronic, financial and mobile transactions, such as card information and PIN numbers. These businesses involve certain inherent security risks, in particular the risk of electronic interception and theft of the information for use in fraudulent or other card transactions, by persons outside the Company or by our own employees. We incorporate industry-standard encryption technology and processing methodology into our systems and software, and maintain controls and procedures regarding access to our computer systems by employees and others, to maintain high levels of security. Although this technology and methodology decrease 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 our insurance coverage 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, the possible theft and vandalism of ATMs present risks for our ATM business. We install ATMs at high-traffic sites and consequently our ATMs are exposed to theft and vandalism. Although we are insured against these risks, exclusions or limitations in our insurance coverage may leave us bearing some or all of any loss arising from theft or vandalism of ATMs.
We are required under German law and the rules of financial transaction switching networks in all of our markets to have sponsors to operate ATMs and switch ATM transactions. Our failure to secure sponsor arrangements in any market could prevent us from doing business in that market.
Under German law, only a licensed financial institution may operate ATMs, and we are therefore required to have a sponsor bank to conduct our German ATM operations. In addition, in all of our markets, our ATMs are connected to national financial transaction switching networks owned or operated by banks, and to other international financial transaction switching networks operated by organizations such as Citibank, Visa and MasterCard. The rules governing these switching networks require any company sending transactions through these switches to be a bank or a technical service processor that is approved and monitored by a bank. As a result, the operation of our ATM network in all of our markets depends on our ability to secure these sponsor-type arrangements with financial institutions.
To date, we have been successful in reaching contractual arrangements that have permitted us to operate in all of our target markets. However, we cannot assure you that we will continue to be successful in reaching these arrangements, and it is possible that our current arrangements will not continue to be renewed.
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Our competition in the EFT Processing Segment and Prepaid Processing Segment include large, well financed companies and banks and, in the software market, companies larger than us with earlier entry into the market. As a result, we may lack the financial resources and access needed to capture increased market share.
EFT Processing Segment Our principal EFT Processing 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 offer ATM network and outsourcing services that compete with us in various markets. None of these competitors have dominant market share. Competitive factors in our EFT Processing Segment include network availability and response time, price to both the bank and to its customers, ATM location and access to other networks.
Certain independent (non bank-owned) companies provide 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).
Prepaid Processing Segment We face competition in the prepaid business in all of our markets. A few multinational companies operate in several of our markets, and we therefore compete with them in a number of countries. In other markets, our competition is from smaller, local companies. None of these companies is dominant in any of the markets where we do business.
We believe, however, that we currently have a competitive advantage due to various factors. First, in the U.K., Germany and Australia, our acquired subsidiaries have been concentrating on the sale of prepaid airtime for longer than most of our competitors and have significant market share in those markets. We have approximately 40% of the POS recharge market in the U.K., 50% in Germany and 40% in Australia. In addition, we offer complementary ATM and mobile recharge solutions through our EFT processing centers. 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 and mobile operator requirements where appropriate. The GPRS (wireless) technology, designed by our Transact subsidiary, will also give us an advantage in remote areas where landline phone lines are of lesser quality or nonexistent.
The principal competitive factors in this area include price (that is, the level of commission charged for each recharge transaction) and up time 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.
Software Solutions Segment We are the leading supplier of electronic financial transaction processing software for the IBM iSeries (formerly AS/400) platform in a largely fragmented market, which is made up of competitors that offer a variety of solutions that compete with our products, ranging from single applications to fully integrated electronic financial processing software. Other industry suppliers service the software requirements of large mainframe systems and UNIX-based platforms, and accordingly are not considered competitors. We have specific target customers consisting of financial institutions that operate their back office systems with the IBM iSeries.
The Software Solutions Segment has multiple types of competitors. Competitors of the Software Solutions Segment compete across all EFT software components in the following areas: (i) ATM, network and POS software systems, (ii) Internet banking software systems, (iii) credit card software systems, (iv) mobile banking systems, (v) mobile operator solutions, (vi) telephone banking, and (vii) full EFT software.
Competitive factors in the Software Solutions business include price, technology development and the ability of software systems to interact with other leading products.
We conduct a significant portion of our business in Central and Eastern European countries, and we have subsidiaries in the Middle East and Asia, where the risk of continued political, economic and regulatory change that could impact our operating results is greater than in the U.S. or Western Europe.
Certain tax jurisdictions that we operate in have complex rules regarding the valuation of inter-company services, cross-border payments between affiliated companies and the related effects on income tax, value-added tax (VAT), transfer tax and share registration tax. Our foreign subsidiaries frequently undergo VAT reviews, and two of our subsidiaries are currently undergoing comprehensive tax reviews. From time to time, we may be reviewed by tax authorities and be required to make additional tax payments should the review result in different interpretations, allocations or valuations of our services. We obtain legal, tax and regulatory advice as necessary to ensure compliance with tax and regulatory matters.
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We have subsidiaries in Hungary, Poland, the Czech Republic, Romania, Slovakia, Spain, Greece, Croatia, India, Egypt and Indonesia and have operations in other countries in Central Europe, the Middle East and Asia. We sell software in many other markets in the developing world. These countries have undergone significant political, economic and social change in recent years and the risk of new, unforeseen changes in these countries remains greater than in the U.S. or Western Europe. In particular, changes in laws or regulations or in the interpretation of existing laws or regulations, whether caused by a change in government or otherwise, could materially adversely affect our business, growth, financial condition or results of operations.
For example, currently there are no limitations on the repatriation of profits from any of the countries in which we have subsidiaries (although U.S. tax laws discourage repatriation), but foreign exchange control restrictions, taxes or limitations may be imposed or increased in the future with regard to repatriation of earnings and investments from these countries. If exchange control restrictions, taxes or limitations are imposed, our ability to receive dividends or other payments from affected subsidiaries could be reduced, which may have a material adverse effect on us.
In addition, corporate, contract, property, insolvency, competition, securities and other laws and regulations in Hungary, Poland, the Czech Republic, Romania, Slovakia, Croatia and other countries in Central Europe have been, and continue to be, substantially revised during the completion of their transition to market economies. Therefore, the interpretation and procedural safeguards of the new legal and regulatory systems are in the process of being developed and defined, and existing laws and regulations may be applied inconsistently. Also, in some circumstances, it may not be possible to obtain the legal remedies provided for under these laws and regulations in a reasonably timely manner, if at all.
Transmittal of data by electronic means and telecommunications is subject to specific regulation in most Central European countries. Although these regulations have not had a material impact on our business to date, changes in these regulations, including taxation or limitations on transfers of data across national borders, could have a material adverse effect on our business, growth, financial condition or results of operations.
Because we derive our revenue from a multitude of countries with different currencies, our business is affected by local inflation and foreign exchange rates and policies.
We attempt to match any assets denominated in a currency with liabilities denominated in the same currency. Nonetheless, substantially all of our indebtedness is denominated in U.S. dollars, euro and British pounds. While a significant amount of our expenditures, including the acquisition of ATMs, executive salaries and certain long-term telecommunication contracts, are made in U.S. dollars, most of our revenues are denominated in other currencies. The U.S. dollar has recently declined significantly against these currencies. As exchange rates among the U.S. dollar, the euro, and other currencies fluctuate, the translation effect of these fluctuations may have a material adverse effect on our results of operations or financial condition as reported in U.S. dollars. Moreover, exchange rate policies have not always allowed for the free conversion of currencies at the market rate. An increase in the value of the dollar would have an adverse effect on our results.
In recent years, Hungary, Poland and the Czech Republic have experienced high levels of inflation. Consequently, these countries currencies have continued to decline in value against the major currencies of the Organization of Economic Cooperation and Development (OECD) countries over this time period. Due to the significant reduction in the inflation rate of these countries in recent years, none of these countries are considered to have a hyper-inflationary economy. Nonetheless, rates of inflation in these countries may continue to fluctuate from time to time. The majority of our subsidiaries revenues are denominated in the local currency.
Our directors and officers, together with the entities with which they are associated, owned about 13% of our Common Stock as of March 31, 2005, giving them significant control over decisions related to our Company.
This control includes the ability to influence the election of other directors of our Company and to cast a large block of votes with respect to virtually all matters submitted to a vote of our stockholders. This concentration of control may have the effect of delaying or preventing transactions or a potential change of control of our Company.
The sale of a substantial amount of our Common Stock in the public market could materially decrease the market price of our Common Stock, and about 23% of our outstanding Common Stock, cannot currently be traded publicly, but may be publicly traded in blocks in the future because we have filed resale registrations statements for a majority of such shares or such shares have been held by non-affiliates for more than two years.
If a substantial amount of our Common Stock were sold in the public market, or even targeted for sale, this could have a material adverse effect on the market price of our Common Stock and our ability to sell Common Stock in the future. As of March 31, 2005, we had approximately 35 million shares of Common Stock outstanding, of which approximately 7.9 million shares (including the shares we issued in the Transact acquisition, the Fletcher financing, and the Precept, CPI, Dynamic and ATX acquisitions), or about 23%, cannot currently be traded on the public market without compliance with Rule 144. About 4.3 million of these shares are held by persons who may be deemed to be our affiliates and who would be subject to Rule 144 of the general
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rules and regulations of the Commission. Rule 144 limits the number of shares that affiliates can publicly sell during each 90-day period. However, over the course of time, these 7.9 million shares have the potential to be freely publicly traded, perhaps in large blocks. Moreover, we have filed registration statements to permit the resale of a substantial portion of such shares, which would permit them to sell shares at any time without regard to the Rule 144 limitations.
An additional 10.1 million shares of Common Stock could be added to the total outstanding Common Stock through the exercise of options or the issuance of additional shares of our Common Stock pursuant to existing agreements. This could dilute the ownership percentage of current stockholders. Also, once they are outstanding, these shares of Common Stock could be traded in the future and result in a material decrease in the market price of our Common Stock.
As of March 31, 2005, we had an aggregate of 4.7 million options outstanding held by our directors, officers and employees, which entitles these holders to acquire an equal number of shares of our Common Stock on exercise. Of this amount, 2.0 million options are currently vested, which means they can be exercised at any time. Approximately 0.4 million additional shares of our Common Stock are issuable in connection with our employee stock purchase plan. Additionally, we may be required to issue approximately 0.8 million shares of our Common Stock (based on current prices and estimated earn-out payments) to the former shareholders or owners of EPS, Melfur and Dynamic Telecom under contingent earn-out payments in connection with these acquisitions. The number of shares issued under the earn-outs will depend upon performance of the businesses acquired and the trading price of our Common Stock at the time we make the earn-out payments. Another 4.2 million shares of Common Stock could be issued upon conversion of the Companys Convertible Debentures issued during December 2004. Accordingly, approximately 10.1 million shares (based on current prices and estimated earn-out payments) could potentially be added to the total current outstanding Common Stock through the exercise of options or the issuance of additional shares, and thereby dilute the ownership percentage of the current owners. The actual number of shares issuable could be higher depending upon the actual amounts of the earn-outs and our stock price at the time of payment (more shares could be issuable if our share price declines), which could increase dilution and reduce earnings per share. The indenture will not contain anti-dilution adjustments for such issuances.
Of the 4.7 million total options outstanding, an aggregate of 1.5 million options are held by persons who may be deemed to be our affiliates and who would be subject to Rule 144. Thus, upon exercise of their options, these affiliates shares would be subject to the trading restrictions imposed by Rule 144. For the remainder of the options and the shares issuable as earn-outs described above, the Common Stock issued on their exercise or conversion would be freely tradable in the public market. Over the course of time, all of the issued shares have the potential to be publicly traded, perhaps in large blocks.
In January 2005, we made matching contributions of 10,273 shares of stock in conjunction with our 401(k) employee benefits plan for the plan year 2004. Under the terms of this plan, employer-matching contributions consist of two parts, referred to as basic and discretionary. The basic matching contribution is equal to 50% of eligible employee elective salary deferrals between 4% and 6% of participating employee salaries for the plan year. The discretionary matching contribution is determined by our Board of Directors for a plan year and is allocated in proportion to employee elective deferrals. As of March 31, 2005, total employer matching contributions since inception of the plan have consisted of 91,966 shares.
Foreign exchange rate risk
For the three months ended March 31, 2005, 81% of our revenues were generated in Poland, Hungary, Australia, the U.K., India or various euro-denominated countries as compared to 79% for the three months ended March 31, 2004. This slight increase is due to the fourth quarter 2004 and first quarter 2005 acquisitions in Spain, where revenues are denominated in the euro. Substantially all of our revenues in these countries are denominated in the local currency; however, in countries such as Poland and Hungary, a significant portion of our revenues are also linked to either inflation or the retail price index.
We estimate that a 10% depreciation in foreign exchange rates of the euro, Australian dollar, Hungarian forint, Polish zloty, the British pound and the Indian rupee against the U.S. dollar would have the combined effect on reported net income and working capital of a $1.1 million decrease and that a 10% appreciation in foreign exchange rates of the euro, Australian dollar, Hungarian forint, Polish zloty, the British pound and the Indian rupee against the U.S. dollar would have the combined effect on reported net income and working capital of a $1.1 million increase. This effect was estimated by segregating revenues, expenses and working capital by the U.S. dollar, Hungarian forint, Polish zloty, British pound, Indian rupee and euro and applying a 10% currency depreciation and appreciation to the non-U.S. dollar amounts. We believe this quantitative measure has inherent limitations. It does not take into account any governmental actions or changes in either customer purchasing patterns or our financing or operating strategies.
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Interest rate risk
We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes. We may enter into interest rate swaps to manage our exposure to interest rate changes, and we may employ other risk management strategies, including the use of foreign currency forward contracts. Currently, we do not hold any derivative instruments.
In October 2004, the Company entered into a $40 million revolving credit agreement with a bank. The $40 million revolving credit agreement is comprised of a $10 million facility among the Company and certain U.S. subsidiaries, and a $30 million facility among the Company and certain European subsidiaries. The revolving credit facilities can be used to repay existing debt, for working capital needs, to make acquisitions or for other corporate purposes. Borrowings under the $10 million facility bear interest at either a Prime Rate, plus an applicable margin specified in the respective agreement or a rate fixed for up to 30- to 90-day periods equal to the London Interbank Offered Rate (LIBOR), plus an applicable margin, as set forth in the respective agreement, and varies based on a consolidated funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio.
Borrowings under the $30 million facility may be drawn in U.S. dollars, euros, and/or British pounds. Borrowings in U.S. dollars bear interest similar to the terms of the $10 million facility. Borrowings in euros or British pounds bear interest at a rate fixed for up to 30- to 90-day periods equal to the Euro Interbank Offered Rate (EURIBOR) or the LIBOR rate plus a margin that varies based on a consolidated debt to EBITDA ratio, plus ancillary costs. The $30 million facility may be expanded to a maximum of $33 million, resulting from certain exchange rate fluctuations. As of March 31, 2005, there were no amounts borrowed against the $40 million revolving credit agreements, however, there were $2.2 million in stand by letters of credit outstanding against these facilities as of March 31, 2005.
On December 15, 2004, the Company closed the sale of $140 million of our private offering 1.625% Contingent Convertible Senior Debentures Due 2024 (Convertible Debentures). In addition to the stated annual interest rate of 1.625%, payable semi-annually in June and December, and the Company will pay contingent interest, during any six-month period commencing with the period from December 20, 2009 through June 14, 2010, and for each six-month period thereafter from June 15 to December 14 or December 15 to June 14, for which the average trading price of the debentures for the applicable five trading-day period preceding such applicable interest period equals or exceeds 120% of the principal amount of the debentures. Contingent interest will equal 0.30% per annum of the average trading price of a debenture for such five trading-day periods. These terms and other material terms and conditions applicable to the contingent convertible senior debentures are set forth in the indenture governing the debenture. Interest payments of approximately $1.1 million, plus potential contingent interest described above, will be due and payable each June 15 and December 15, commencing June 15, 2005 related to these Convertible Debentures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including its President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our executive management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of these disclosure controls and procedures were effective as of such date.
CHANGE IN INTERNAL CONTROLS
There has been no change in our internal control over financial reporting during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
We are from time to time a party to litigation arising in the ordinary course of its business. Currently, there are no legal proceedings that management believes, either individually or in the aggregate, would have a material adverse effect upon our consolidated results of operations or financial condition.
In March 2005, we issued 215,644 shares of our Common Stock (Euronet Stock) to a shareholder of ATX Software, Ltd. (ATX) in consideration of the exercise of our option to purchase an additional 41% of the share capital of ATX from the shareholders of ATX. The shareholder to whom we issued these shares is a non-U.S. citizen and non-resident, and the issuance of
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our Common Stock in this transaction was exempt from registration pursuant to the exemptions provided in Regulation S of the Act. This transaction is described more fully in Note 4 to the Unaudited Consolidated Financial Statements.
The exhibits that are required to be filed or incorporated herein by reference are listed on the Exhibit Index below.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 4, 2005
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