UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002March 31, 2003
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22167
EURONET WORLDWIDE, INC.
(Exact name of the registrant as specified in its charter)
Delaware | 74-2806888 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) |
4601 COLLEGE BOULEVARD, SUITE 300
LEAWOOD, KANSAS 66211
(Address of principal executive offices)
(913) 327-4200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NONo ¨
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 October 31, 2002,April 30, 2003, the Company had 23,636,10426,522,966 common shares outstanding.
ITEM 1. FINANCIAL STATEMENTS
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except for share and per share data)
(Unaudited)
As of | ||||||||
March 31, 2003 | December 31, 2002 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 13,930 |
| $ | 12,021 |
| ||
Restricted cash and cash held on behalf of others |
| 38,048 |
|
| 4,401 |
| ||
Trade accounts receivable, net of allowances for doubtful accounts of $1,073 at March 31, 2003 and $484 at December 31, 2002 |
| 36,184 |
|
| 8,380 |
| ||
Earnings in excess of billings on software installation contracts |
| 763 |
|
| 334 |
| ||
Deferred income taxes |
| 1,479 |
|
| 426 |
| ||
Assets held for sale |
| — |
|
| 10,326 |
| ||
Prepaid expenses and other current assets |
| 7,000 |
|
| 3,537 |
| ||
Total current assets |
| 97,404 |
|
| 39,425 |
| ||
Property, plant and equipment, net |
| 21,260 |
|
| 21,394 |
| ||
Intangible assets, net |
| 80,128 |
|
| 1,834 |
| ||
Deferred income taxes |
| 209 |
|
| 1,064 |
| ||
Other assets, net |
| 2,992 |
|
| 2,842 |
| ||
Total assets | $ | 201,993 |
| $ | 66,559 |
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | 50,574 |
| $ | 2,989 |
| ||
Current installments of obligations under capital leases |
| 2,888 |
|
| 3,447 |
| ||
Accrued expenses and other current liabilities |
| 27,004 |
|
| 4,979 |
| ||
Short-term borrowings |
| 502 |
|
| 380 |
| ||
Advance payments on contracts |
| 3,033 |
|
| 2,966 |
| ||
Accrued interest on notes payable |
| 1,372 |
|
| — |
| ||
Liabilities held for sale |
| — |
|
| 3,537 |
| ||
Billings in excess of earnings on software installation contracts |
| 1,787 |
|
| 1,471 |
| ||
Total current liabilities |
| 87,160 |
|
| 19,769 |
| ||
Obligations under capital leases, excluding current installments |
| 3,469 |
|
| 4,301 |
| ||
Notes payable |
| 64,016 |
|
| 36,318 |
| ||
Other long term liabilities |
| 7,204 |
|
| — |
| ||
Total liabilities |
| 161,849 |
|
| 60,388 |
| ||
Stockholders’ equity: | ||||||||
Common stock, $0.02 par value. Authorized 60,000,000 shares; issued and outstanding 26,518,966 shares at March 31, 2003 and 23,883,072 shares at December 31, 2002 |
| 532 |
|
| 480 |
| ||
Additional paid in capital |
| 155,956 |
|
| 137,426 |
| ||
Treasury stock |
| (145 | ) |
| (145 | ) | ||
Employee loans for stock |
| (427 | ) |
| (427 | ) | ||
Subscription receivable |
| (35 | ) |
| 42 |
| ||
Accumulated deficit |
| (114,234 | ) |
| (129,655 | ) | ||
Restricted reserve |
| 784 |
|
| 784 |
| ||
Accumulated other comprehensive loss |
| (2,287 | ) |
| (2,334 | ) | ||
Total stockholders’ equity |
| 40,144 |
|
| 6,171 |
| ||
Total liabilities and stockholders’ equity | $ | 201,993 |
| $ | 66,559 |
| ||
See accompanying notes to unaudited consolidated financial statements.
2
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of U.S. dollars, except share and per share data)
(Unaudited)
September 30, 2002 | December 31, 2001 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 15,338 | $ | 8,818 | ||||
Restricted cash | 3,872 | 1,877 | ||||||
Trade accounts receivable, net of allowances for doubtful accounts of $647 at September 30, 2002 and $675 at December 31, 2001 | 7,739 | 8,908 | ||||||
Earnings in excess of billings on software installation contracts | 264 | 331 | ||||||
Assets from discontinued operations | — | 1,273 | ||||||
Prepaid expenses and other current assets | 4,598 | 5,799 | ||||||
Total current assets | 31,811 | 27,006 | ||||||
Property, plant and equipment, net | 30,074 | 29,086 | ||||||
Intangible assets, net | 1,718 | 1,551 | ||||||
Deposits | 41 | 41 | ||||||
Deferred income taxes | 467 | 429 | ||||||
Other assets, net | 3,046 | 3,278 | ||||||
Total assets | $ | 67,157 | $ | 61,391 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT) | ||||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | 4,337 | $ | 4,762 | ||||
Current installments of obligations under capital leases | 5,001 | 4,627 | ||||||
Accrued expenses and other current liabilities | 5,955 | 7,366 | ||||||
Short-term borrowings | — | 513 | ||||||
Advance payments on contracts | 2,149 | 2,266 | ||||||
Accrued interest on notes payable | 1,059 | — | ||||||
Income taxes payable | 26 | 90 | ||||||
Liabilities from discontinued operations | — | 498 | ||||||
Billings in excess of earnings on software installation contracts | 1,769 | 1,457 | ||||||
Credit facility | — | 2,000 | ||||||
Total current liabilities | 20,296 | 23,579 | ||||||
Obligations under capital leases, excluding current installments | 5,339 | 7,353 | ||||||
Notes payable | 33,980 | 38,146 | ||||||
Other long term liabilities | 172 | — | ||||||
Total liabilities | 59,787 | 69,078 | ||||||
Stockholders’ equity/(deficit): | ||||||||
Common stock, $0.02 par value. Authorized 60,000,000 shares; issued and outstanding 23,636,104 shares at September 30, 2002 and 22,038,073 at December 31, 2001 | 473 | 441 | ||||||
Additional paid in capital | 136,345 | 117,940 | ||||||
Treasury stock | (145 | ) | (145 | ) | ||||
Employee loans for stock | (446 | ) | (463 | ) | ||||
Subscription receivable | 61 | — | ||||||
Accumulated deficit | (126,809 | ) | (123,141 | ) | ||||
Restricted reserve | 784 | 784 | ||||||
Accumulated other comprehensive loss | (2,893 | ) | (3,103 | ) | ||||
Total stockholders’ equity/(deficit) | 7,370 | (7,687 | ) | |||||
Total liabilities and stockholders’ equity/(deficit) | $ | 67,157 | $ | 61,391 | ||||
Three months ended March 31, | ||||||||
2003 | 2002 | |||||||
Revenues: | ||||||||
EFT processing services | $ | 11,889 |
| $ | 12,177 |
| ||
Prepaid processing services |
| 17,372 |
|
| — |
| ||
Software and related services |
| 3,839 |
|
| 4,863 |
| ||
Total |
| 33,100 |
|
| 17,040 |
| ||
Operating expenses: | ||||||||
Direct operating costs |
| 20,005 |
|
| 7,006 |
| ||
Salaries and benefits |
| 6,875 |
|
| 6,078 |
| ||
Selling, general and administrative |
| 2,313 |
|
| 1,501 |
| ||
Depreciation and amortization |
| 2,756 |
|
| 2,309 |
| ||
Total operating expenses |
| 31,949 |
|
| 16,894 |
| ||
Operating income |
| 1,151 |
|
| 146 |
| ||
Other income/expenses: | ||||||||
Interest income |
| 353 |
|
| 80 |
| ||
Interest expense |
| (1,607 | ) |
| (1,654 | ) | ||
Gain on sale of subsidiary |
| 18,001 |
|
| — |
| ||
Equity in income from investee companies |
| 37 |
|
| — |
| ||
Foreign exchange (loss)/gain, net |
| (1,839 | ) |
| 412 |
| ||
Total other income/(expense) |
| 14,945 |
|
| (1,162 | ) | ||
Income/(loss) from continuing operations before income taxes and minority interest |
| 16,096 |
|
| (1,016 | ) | ||
Income tax (expense)/benefit |
| (675 | ) |
| 1,665 |
| ||
Income from continuing operations before minority interest |
| 15,421 |
|
| 649 |
| ||
Minority interest |
| — |
|
| 26 |
| ||
Income from continuing operations |
| 15,421 |
|
| 675 |
| ||
Discontinued operations: | ||||||||
Income from operations of discontinued U.S. and France components including gain on disposal of $4,845 for the three months ended March 31, 2002 |
| — |
|
| 4,762 |
| ||
Income tax expense |
| — |
|
| (1,857 | ) | ||
Income from discontinued operations |
| — |
|
| 2,905 |
| ||
Net income |
| 15,421 |
|
| 3,580 |
| ||
Translation adjustment |
| 47 |
|
| (618 | ) | ||
Comprehensive income | $ | 15,468 |
| $ | 2,962 |
| ||
Income per share—basic | ||||||||
Income from continuing operations per share | $ | 0.61 |
| $ | 0.03 |
| ||
Income from discontinued operations per share |
| — |
|
| 0.13 |
| ||
Net income per share | $ | 0.61 |
| $ | 0.16 |
| ||
Basic weighted average outstanding shares |
| 25,215,308 |
|
| 22,476,888 |
| ||
Income per share—diluted | ||||||||
Income from continuing operations per share | $ | 0.57 |
| $ | 0.03 |
| ||
Income from discontinued operations per share |
| — |
|
| 0.11 |
| ||
Net income per share | $ | 0.57 |
| $ | 0.14 |
| ||
Diluted weighted average outstanding shares |
| 26,936,990 |
|
| 26,145,733 |
| ||
See accompanying notes to unaudited consolidated financial statements.
3
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)CASH FLOWS
(In thousands of U.S. dollars, except share and per share data)dollars)
(Unaudited)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Revenues: | ||||||||||||||||
ATM network and related revenue | $ | 38,839 | $ | 32,297 | $ | 13,753 | $ | 11,181 | ||||||||
Software, maintenance and related revenue | 13,615 | 11,837 | 4,136 | 3,712 | ||||||||||||
Total revenues | 52,454 | 44,134 | 17,889 | 14,893 | ||||||||||||
Operating expenses: | ||||||||||||||||
Direct operating costs | 21,597 | 19,931 | 7,848 | 6,862 | ||||||||||||
Salaries and benefits | 18,608 | 18,753 | 6,368 | 5,681 | ||||||||||||
Selling, general and administrative | 4,835 | 5,250 | 1,769 | 1,269 | ||||||||||||
Depreciation and amortization | 6,930 | 6,297 | 2,519 | 2,164 | ||||||||||||
Total operating expenses | 51,970 | 50,231 | 18,504 | 15,976 | ||||||||||||
Operating income/(loss) | 484 | (6,097 | ) | (615 | ) | (1,083 | ) | |||||||||
Other (expense)/income: | ||||||||||||||||
Interest income | 227 | 214 | 63 | 70 | ||||||||||||
Interest expense | (4,807 | ) | (7,052 | ) | (1,446 | ) | (2,041 | ) | ||||||||
Loss on facility sublease | (249 | ) | — | (249 | ) | — | ||||||||||
Equity in losses from investee companies | (159 | ) | — | (159 | ) | — | ||||||||||
(Loss)/gain on early retirement of debt | (955 | ) | 9,682 | (791 | ) | 1,053 | ||||||||||
Foreign exchange (loss)/gain, net | (3,179 | ) | 3,878 | 222 | (3,757 | ) | ||||||||||
Total other (expense)/income | (9,122 | ) | 6,722 | (2,360 | ) | (4,675 | ) | |||||||||
(Loss)/income from continuing operations before income taxes and minority interest | (8,638 | ) | 625 | (2,975 | ) | (5,758 | ) | |||||||||
Income tax benefit | 1,852 | 845 | 449 | 154 | ||||||||||||
(Loss)/income from continuing operations before minority interest | (6,786 | ) | 1,470 | (2,526 | ) | (5,604 | ) | |||||||||
Minority interest | 77 | — | 30 | — | ||||||||||||
Discontinued operations: | ||||||||||||||||
Income/(loss) from operations of discontinued US and France components (including gain on disposal of $4,726 for the nine months ended September 30, 2002 and nil for the three months ended September 30, 2002) | 4,976 | (225 | ) | (12 | ) | 321 | ||||||||||
Income tax expense | (1,935 | ) | — | — | (125 | ) | ||||||||||
Income/(loss) from discontinued operations | 3,041 | (225 | ) | (12 | ) | 196 | ||||||||||
Net (loss)/income | (3,668 | ) | 1,245 | (2,508 | ) | (5,408 | ) | |||||||||
Translation adjustment | 210 | (209 | ) | (220 | ) | (3 | ) | |||||||||
Comprehensive (loss)/income | $ | (3,458 | ) | $ | 1,036 | $ | (2,728 | ) | $ | (5,411 | ) | |||||
(Loss)/earnings per share—basic | ||||||||||||||||
(Loss)/income from continuing operations before minority interest per share | $ | (0.29 | ) | $ | 0.08 | $ | (0.11 | ) | $ | (0.27 | ) | |||||
Income/(loss) from discontinued operations per share | 0.13 | (0.01 | ) | — | 0.01 | |||||||||||
Net (loss)/income per share | $ | (0.16 | ) | $ | 0.07 | $ | (0.11 | ) | $ | (0.26 | ) | |||||
Basic weighted average number of shares outstanding | 22,982,394 | 18,553,471 | 23,394,036 | 20,426,648 | ||||||||||||
(Loss)/earnings per share—diluted | ||||||||||||||||
Diluted (loss)/income from continuing operations before minority interest per share | $ | (0.29 | ) | $ | 0.07 | $ | (0.11 | ) | $ | (0.27 | ) | |||||
Diluted income/(loss) from discontinued operations per share | 0.13 | (0.01 | ) | — | 0.01 | |||||||||||
Diluted net (loss)/income per share | $ | (0.16 | ) | $ | 0.06 | $ | (0.11 | ) | $ | (0.26 | ) | |||||
Diluted weighted average number of shares outstanding | 22,982,394 | 19,860,882 | 23,394,036 | 20,426,648 | ||||||||||||
Three months ended March 31, | ||||||||
2003 | 2002 | |||||||
Net income | $ | 15,421 |
| $ | 3,580 |
| ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization |
| 2,756 |
|
| 2,309 |
| ||
Unrealized foreign exchange loss/(gain) |
| 904 |
|
| (792 | ) | ||
(Gain)/loss on disposal of fixed assets |
| (54 | ) |
| 18 |
| ||
Gain on sale of subsidiary |
| (18,001 | ) |
| — |
| ||
Gain on sale of discontinued operations, net of tax |
| — |
|
| (2,988 | ) | ||
Expense/(benefit) from deferred income tax |
| 501 |
|
| (1,857 | ) | ||
Loss from discontinued operations |
| — |
|
| 83 |
| ||
Increase in assets and liabilities held for sale |
| — |
|
| 3,052 |
| ||
Amortization of deferred financing costs |
| 43 |
|
| — |
| ||
Accretion of discount on notes payable |
| 11 |
|
| 1,177 |
| ||
Change in operating assets and liabilities, net of effects of acquisition: | ||||||||
Increase in income tax payable, net |
| 1,024 |
|
| — |
| ||
(Increase)/decrease in restricted cash |
| (8,049 | ) |
| 13 |
| ||
Decrease in trade accounts receivable |
| 19,497 |
|
| 648 |
| ||
(Increase)/decrease in costs and estimated earnings in excess of billings on software installation contracts |
| (429 | ) |
| 85 |
| ||
(Increase)/decrease in prepaid expenses and other current assets |
| (2,646 | ) |
| 577 |
| ||
Decrease in trade accounts payable |
| (12,185 | ) |
| (2,020 | ) | ||
Increase in advance payments on contracts |
| 884 |
|
| 406 |
| ||
Increase/(decrease) in accrued expenses and other liabilities |
| 6,297 |
|
| (1,772 | ) | ||
Increase in billings in excess of costs and estimated earnings on software installation costs |
| 316 |
|
| 815 |
| ||
Other |
| — |
|
| 55 |
| ||
Net cash provided by operating activities |
| 6,290 |
|
| 3,389 |
| ||
Cash flows from investing activities: | ||||||||
Fixed asset purchases |
| (236 | ) |
| (484 | ) | ||
Proceeds from sale of fixed assets |
| 178 |
|
| 69 |
| ||
Purchase of intangible and other long term assets |
| (396 | ) |
| — |
| ||
Acquisition, net of cash acquired |
| (27,967 | ) |
| — |
| ||
Proceeds from sale of subsidiary |
| 24,418 |
|
| — |
| ||
Purchase of restricted certificates of deposits |
| — |
|
| (4,250 | ) | ||
Net cash used in investing activities |
| (4,003 | ) |
| (4,665 | ) | ||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of shares and other capital contributions |
| 611 |
|
| 14,412 |
| ||
Repayment of credit facility |
| — |
|
| (2,000 | ) | ||
Repayment of obligations under capital leases |
| (1,096 | ) |
| (3,269 | ) | ||
Proceeds from/(repayment of) other borrowings |
| 122 |
|
| (513 | ) | ||
Increase in subscriptions receivable |
| (77 | ) |
| (30 | ) | ||
Cash repaid by employees for purchase of common stock |
| — |
|
| 17 |
| ||
Net cash (used in)/provided by financing activities |
| (440 | ) |
| 8,617 |
| ||
Effect of exchange differences on cash |
| 62 |
|
| 175 |
| ||
Proceeds from sale of discontinued operations |
| — |
|
| 5,872 |
| ||
Cash used in discontinued operations |
| — |
|
| (83 | ) | ||
Net increase in cash and cash equivalents |
| 1,909 |
|
| 13,305 |
| ||
Cash and cash equivalents at beginning of period |
| 12,021 |
|
| 8,631 |
| ||
Cash and cash equivalents at end of period | $ | 13,930 |
| $ | 21,936 |
| ||
See accompanying notes to unaudited consolidated financial statements.
See Note 4 for details of significant non-cash transactions.
4
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Nine Months Ended | ||||||||
September 30, 2002 | September 30, 2001 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss)/income | $ | (3,668 | ) | $ | 1,245 | |||
Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities: | ||||||||
Depreciation and amortization | 6,930 | 6,550 | ||||||
Unrealized foreign exchange loss/(gain), net | 4,477 | (1,868 | ) | |||||
Accretion of discount on notes | 2,482 | 5,465 | ||||||
Decrease in costs and estimated earnings in excess of billings on software installation contracts | 67 | — | ||||||
Loss on facility sub-lease | 219 | — | ||||||
Equity in losses from investee companies | 159 | — | ||||||
Gain on sale of discontinued operations, net of tax | (2,988 | ) | — | |||||
Benefit from deferred income tax | (1,857 | ) | — | |||||
Loss/(gain) on early retirements of debt | 955 | (9,680 | ) | |||||
(Income)/loss from discontinued operations, net of tax | (250 | ) | 225 | |||||
Decrease in restricted cash | — | 203 | ||||||
Decrease in trade accounts receivable | 1,185 | 1,280 | ||||||
Increase in tax receivable | (184 | ) | (909 | ) | ||||
Decrease/(increase) in prepaid expenses and other current assets | 1,228 | (1,782 | ) | |||||
(Decrease)/increase in trade accounts payable | (424 | ) | 6 | |||||
Increase/(decrease) in billings in excess of costs and estimated earnings on software installation contracts, net | 312 | (893 | ) | |||||
Decrease in accrued expenses and other liabilities | (411 | ) | (606 | ) | ||||
Decrease in advance payments on contracts | (117 | ) | — | |||||
Other | 415 | 673 | ||||||
Net cash provided by/(used in) operating activities | 8,530 | (91 | ) | |||||
Cash flows from investing activities: | ||||||||
Fixed asset purchases | (5,560 | ) | (2,272 | ) | ||||
Purchase of restricted certificate of deposit | (1,995 | ) | — | |||||
Purchase of intangibles and other long-term assets | (807 | ) | — | |||||
Proceeds from sale of fixed assets | 546 | 492 | ||||||
Net cash used in investing activities | (7,816 | ) | (1,780 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of shares and other capital contributions | 16,830 | 662 | ||||||
Repayments of credit facility | (2,000 | ) | — | |||||
Repayments of obligations under capital leases | (4,151 | ) | (3,018 | ) | ||||
(Repayments of)/proceeds from other borrowings | (10,923 | ) | 2,417 | |||||
Other | 78 | 157 | ||||||
Net cash provided by financing activities | (166 | ) | 218 | |||||
Effects of exchange rate differences on cash | (150 | ) | 31 | |||||
Proceeds from sale of discontinued operations | 5,872 | — | ||||||
Cash provided by/(used in) discontinued operations | 250 | (225 | ) | |||||
Net increase/(decrease) in cash and cash equivalents | 6,520 | (1,847 | ) | |||||
Cash and cash equivalents at beginning of period | 8,818 | 7,151 | ||||||
Cash and cash equivalents at end of period | $ | 15,338 | $ | 5,304 | ||||
NOTE 1- ORGANIZATION1—GENERAL
Basis of the People’s Republic of China of which 50% of the shares are owned by our wholly owned subsidiary EFT Services Holdings BV and 50% of the shares are owned by First Mobile Group Holding (“FMG”). Subsequent to the acquisition of its ownership interest in the first quarter of 2002, Euronet determined the business opportunities insufficient to support the required investment. We have no investment or continuing financial or operational obligations related to AEFT or FMG.
The accompanying unaudited consolidated financial statements of Euronet and subsidiaries have been prepared from the records of the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting only of normal, recurring accruals) necessary to present fairly the financial position of the Company at September 30, 2002,March 31, 2003, the results of its operations for the three-month and nine-month periods ended September 30,March 31, 2003 and 2002, and 2001, and cash flows for the nine-monththree-month periods ended September 30, 2002March 31, 2003 and 2001.
The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Euronet Worldwide, Inc. and subsidiaries for the year ended December 31, 2001,2002, including the notes thereto, set forth in the Company’s Form 10-K.
The results of operations for the three-month and nine-month periodsperiod ended September 30, 2002March 31, 2003 are not necessarily indicative of the results to be expected for the full year.
NOTE 3 - 2—SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ADOPTED ACCOUNTING STANDARDS
For a description of the accounting policies of the Company, see Note 3 to the audited consolidated financial statements for the year ended December 31, 2001.
SFAS 143
In June 2001, Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). Under SFAS 142 goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives.
SFAS 144 establishes accounting and reporting standards for the impairment and disposal of long-lived assets and discontinued operations. The application of this statement resulted in the classification and separate financial statement presentation of certain entities as discontinued operations, which are not included in continuing operations.
In June 2002, the Company sold substantially all of the assets of the United States ATM processing business to ALLTEL Information Services, Inc. (“AIS”) in an asset purchase agreement. The United States processing business was owned by the Company’s subsidiary EFT Network Services, LLC and was commonly known as “DASH” or the “DASH network.” DASH was accounted for as a discontinued operation in accordance with SFAS 144 and, accordingly, amounts in the financial statements and related notes for all periods shown reflect discontinued operations accounting. Related assets and liabilities have been removed from continuing operations and classified under discontinued operations. (See Note 9—Discontinued Operations to the unaudited consolidated financial statements.)
FIN 45
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an Interpretation of FASB Statements No. 4, 44,5, 57, and 64, Amendment107 and a Rescission of FASB StatementInterpretation No. 13,34” (FIN 45). FIN 45 clarifies and Technical Corrections (SFAS 145).expands on existing disclosure requirements for guarantees, including loan guarantees. It also requires that, at the inception of a guarantee, the Company must recognize a liability for the fair value of its obligation under that guarantee. The Statement coversdisclosure requirements are effective for financial statements of periods ending after December 15, 2002. The initial fair value recognition and measurement provisions will be applied on a varietyprospective basis to certain guarantees issued or modified after December 31, 2002. The Company adopted the disclosure requirements of technical issues that willFIN 45 as of March 31, 2003 and evaluated the adoption of the remainder of FIN 45. The adoption of FIN 45 did not have ana material impact on our financial statements exceptposition or result of operations.
5
FIN 46
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the rescission of SFAS 4, Reporting Gains and Lossesentity to finance its activities without additional subordinated financial support from the Extinguishment of Debt. SFAS 4 required all gains and losses from early retirement of debt to be aggregated and classified as an extraordinary item, net of related income tax effect. Under SFAS 145, gains and losses from early retirement of debt should not be classified as extraordinary unless the early retirement meets the relevant criteria of APB Opinion 30 (Opinion 30) and such instances are expected to be rare. The rescission of SFAS 4other parties. FIN 46 is effective immediately for fiscal years beginningvariable interest entities created or acquired after May 15, 2002 with earlyJanuary 31, 2003. The adoption encouraged. In accordance with SFAS 145, weof FIN 46 did not have classified gainsa material impact on our financial position and losses from early retirementresults of debt as other income for current and prior periods in lieu of classification as an extraordinary item as previously required.
There have been no further significant additions to or changes in the accounting policies of the Company since December 31, 2001.
NOTE 4 - 3—EARNINGS/(LOSS) PER SHARE - SHARE—BASIC AND DILUTED
Basic earnings per share has been computed by dividing net income/(loss) by the weighted average number of common shares outstanding. For the three-month and nine-month periods ended September 30, 2002 and the three-month period ended September 30, 2001, the effect of potential common stock is antidilutive because a net loss exists, accordingly dilutive earnings per share does not assume the exercise of outstanding stock options and warrants. For the nine-month period ended September 30, 2001, dilutiveDilutive earnings per share reflects the potential dilution that could occur if dilutive stock options and warrants were exercised using the treasury stock method, where applicable.
As of March 31, | ||||
2003 | 2002 | |||
Weighted average common shares outstanding | 25,215,308 | 22,476,888 | ||
Dilutive effect of: | ||||
Convertible warrants | 89,802 | 294,357 | ||
Stock options | 1,631,880 | 3,374,488 | ||
Weighted average common shares outstanding, assuming dilution | 26,936,990 | 26,145,733 | ||
NOTE 4—BUSINESS COMBINATION
In accordance with Statement of Financial Accounting No. 141, “Business Combinations” (SFAS 141), the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair value assigned to intangible assets acquired is based on valuations prepared by an independent third party appraisal firms using estimates and assumptions provided by management. The intangible assets recorded as a result of this acquisition are not expected to be deductible for tax purposes. In accordance with the Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), goodwill and intangible assets with indefinite lives resulting from business combinations will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that the Company determines that the value of goodwill or intangible assets with indefinite lives has become impaired, the Company will incur an accounting charge for be amount of impairment during the fiscal quarter in which the determination is made.
6
Purchase of e-pay
In February 2003, the Company purchased 100% of the shares of e-pay Limited (“e-pay”), a company based in the U.K. e-pay is an electronic payments processor of prepaid mobile phone airtime “top-up” services in the U.K. and Australia. It has agreements with mobile operators in those markets under which it supports the distribution of prepaid airtime to their subscribers through point-of-sale (POS) terminals in retail outlets. e-pay currently processes top-up sales at more than 50,000 points of sale in approximately 18,000 retail locations, including the potentially dilutive effectmobile operators’ own retail outlets, major retail chains and independent retail outlets. In addition to the U.K. and Australia operations, e-pay owns 40% of stock optionsthe shares of 1,591,616e-pay Malaysia, a separate company that offers electronic top-up services through approximately 2,600 POS terminals in Malaysia.
In connection with the acquisition, Euronet also agreed to increase the size of its Board of Directors by one member and warrantsnominate and recommend for election as a Class III director at Euronet’s next annual meeting of 423,318stockholders the director candidate designated by a committee representing the former shareholders of e-pay.
The assets acquired include tangible long-term assets, such as computer equipment and other fixed assets, working capital and intangible assets, such as customer relationships computer software, trademarks and trade names and goodwill. A substantial amount of the purchase price was allocated to intangible assets including goodwill.
Purchase Price
The purchase price for the e-pay shares was approximately $76.2 million, including transaction costs and fees of approximately $1.4 million. Of the total purchase price, $30.0 million was paid in cash at closing, $18.0 million was paid through issuance at closing of 2,497,504 shares of Common Stock, and the remaining $26.9 million will be paid in deferred purchase price or under promissory notes executed at closing with 24 month maturity dates bearing interest rates ranging from 6% to 8%. The deferred portion of the purchase price, approximately $8.5 million, is payable based upon e-pay’s Excess Cash Flow, as defined in the acquisition agreement, with any remaining unpaid balance due in 24 months. Approximately $7.4 million of the notes (the “Convertible Notes”) are convertible into Common Stock at the option of the holders at a conversion price of $11.43 per share, or approximately 647,282 shares. The Convertible Notes may be redeemed by Euronet, in whole but not in part, under certain conditions, including if the average market price of the Common Stock over a thirty consecutive trading day period exceeds $15.72, for Common Stock at a redemption price of $11.43 per share. The conversion price and the redemption price are subject to customary anti-dilution provisions. The remaining $11.0 million of promissory notes are not convertible.
The following table summarizes the total cost of the acquisition of e-pay (unaudited, in thousands):
Cash paid at closing | $ | 29,996 | |
Euronet common stock: 2,497,504 shares |
| 17,972 | |
Deferred consideration, payable quarterly from 90% of free cash flow, 6% interest per annum accruing daily, 24 month maturity |
| 8,533 | |
Notes payable, 7% interest per annum, convertible into 647,282 shares of Euronet common stock, 24 month maturity |
| 7,353 | |
Notes payable, 8% interest per annum, 24 month maturity |
| 10,981 | |
Total paid to shareholders |
| 74,835 | |
Transaction costs and share registration fees |
| 1,358 | |
Total purchase price | $ | 76,193 | |
7
Assets Acquired
Under the purchase method of accounting, the total purchase price was allocated to acquired tangible and intangible assets based on a preliminary estimate of their fair values as determined by management and a third-party appraisal at the completion of the acquisition. The purchase price was allocated as follows (unaudited, in thousands):
Customer relationships | $ | 12,820 |
| |
Software |
| 1,038 |
| |
Trademark and trade name |
| 3,433 |
| |
Goodwill |
| 61,249 |
| |
Total intangible assets |
| 78,540 |
| |
Net tangible assets and working capital |
| 1,810 |
| |
Deferred tax liability |
| (4,157 | ) | |
Total purchase price | $ | 76,193 |
| |
Of the total purchase price, $1.8 million has been allocated to net tangible assets and working capital acquired and approximately $13.9 million has been allocated to amortizable intangible assets acquired. The amortizable intangible assets acquired will be amortized over their estimated useful lives, which range from 5 to 8 years.
Of the total estimated purchase price, approximately $64.7 million has been allocated to goodwill and other intangibles with indefinite lives. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets.
In accordance with SFAS 142, goodwill and intangible assets with indefinite lives resulting from business combinations completed subsequent to December 31, 2001, will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that the management of the combined company determines that the value of goodwill or intangible assets with indefinite lives has become impaired, the combined company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.
Pro forma results
The following unaudited pro forma financial information presents the combined results of operations of Euronet and e-pay as if the acquisition had occurred as of the beginning of the periods presented. Adjustments have been made to the combined results of operations for the periods reflecting amortization of purchased intangibles and interest expense, net of tax, as if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of Euronet that would have amountedbeen reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of Euronet.
8
The following schedule presents the pro forma combined results of operations of Euronet and e-pay as if the acquisition had occurred on January 1, 2003 (unaudited, in thousands):
For the three months ended March 31, 2003 | |||||||||
As reported | e-pay’s January results | Pro forma | |||||||
Revenues | $ | 33,100 | $ | 9,400 | $ | 42,500 | |||
Income from continuing operations |
| 15,421 |
| 828 |
| 16,249 | |||
Net income |
| 15,421 |
| 828 |
| 16,249 | |||
Income per share—basic | |||||||||
Income from continuing operations | $ | 0.61 | $ | 0.64 | |||||
Net income | $ | 0.61 | $ | 0.64 | |||||
Income per share—diluted | |||||||||
Income from continuing operations | $ | 0.57 | $ | 0.60 | |||||
Net income | $ | 0.57 | $ | 0.60 |
The following schedule presents the pro forma combined results of operations of Euronet and e-pay as if the acquisition had occurred on January 1, 2002 (unaudited, in thousands):
For the three months ended March 31, 2002 | ||||||||||
As reported | e-pay’s results | Pro forma | ||||||||
Revenues | $ | 17,040 | $ | 7,314 |
| $ | 24,354 | |||
Income from continuing operations |
| 675 |
| (392 | ) |
| 283 | |||
Net income |
| 3,580 |
| (392 | ) |
| 3,188 | |||
Income per share—basic | ||||||||||
Income from continuing operations | $ | 0.03 | $ | 0.01 | ||||||
Net income | $ | 0.16 | $ | 0.13 | ||||||
Income per share—diluted | ||||||||||
Income from continuing operations | $ | 0.03 | $ | 0.01 | ||||||
Net income | $ | 0.14 | $ | 0.11 |
NOTE 5—SALE OF SUBSIDIARY
Sale of U.K. ATM Network
In January 2003, the Company sold 100% of the shares in its United Kingdom subsidiary, Euronet Services (UK) Ltd. (or “Euronet UK”) to 22,441,581Bridgepoint Capital Limited (or “Bridgepoint”). This transaction was effected through a Share Purchase Agreement (the “Acquisition Agreement”) whereby EFT Services Holding B.V. (“Euronet Holding”), a Netherlands corporation and a wholly owned subsidiary of Euronet, sold all of its shares of Euronet UK to Bank Machine (Acquisitions) Limited (“BMAL”), a United Kingdom company owned by Bridgepoint, for approximately $29.4 million (or £18.2 million) in cash, subject to certain working capital adjustments. Of this amount, $1.0 million (£0.6 million) was placed in escrow or otherwise retained subject to the completion and settlement of certain post-closing matters and adjustments, with the remainder paid in cash at closing. The Acquisition Agreement provides that the benefits and burdens of ownership of the shares and all employees of Euronet UK were transferred to Bridgepoint effective as of January 1, 2003. Euronet Worldwide, Euronet Holding and BMAL are parties to the Acquisition Agreement. The Acquisition Agreement includes certain representations, warranties and indemnification obligations of Euronet concerning Euronet UK, which are customary in transactions of this nature in the United Kingdom, including a “Tax Deed” providing for the three months ended September 30, 2001. Weighted average shares includingindemnification of Bridgepoint by Euronet against tax liabilities of Euronet UK that relate to the potentially dilutive effectperiods prior to January 1, 2003, but arise after the sale.
Simultaneous with this transaction, Euronet and Bank Machine Limited (which is the new name of stock optionsEuronet UK following the acquisition) signed an ATM and Gateway Services Agreement (the “Services Agreement”) under
9
which Euronet’s Hungarian subsidiary, Euronet Adminisztracios Kft. (“Euronet Hungary”) will provide ATM operating, monitoring, and transaction processing services (“ATM Services”) to Bank Machine Limited through December 31, 2007. The services provided by Euronet Hungary are substantially identical to the services provided to Euronet UK prior to its sale to Bridgepoint.
Management has allocated $4.5 million of 1,928,199the total sale proceeds of $29.4 million to the Services Agreement. This amount will be accrued to revenues on a straight-line basis over the five-year contract term beginning January 1, 2003. This allocation was made with reference to the agreed recurring fees under the Services Agreement and warrantsthe estimated fair market value on a per ATM basis of 125,686 would have amountedthe services to 25,447,921be provided under the Services Agreement.
The results of operations of Euronet UK continue to be included in continuing operations due to the ongoing revenues generated under the Services Agreement.
Gain on Sale
The following table summarizes the gain on the sale of Euronet UK (unaudited, in thousands):
Sale price of Euronet UK | $ | 29,423 |
| |
Less: Portion of sale price attributed to value of ATM Services |
| (4,500 | ) | |
Total consideration received attributed to Purchase Agreement |
| 24,923 |
| |
Less: Net transaction and settlement costs |
| (505 | ) | |
Net cash consideration received |
| 24,418 |
| |
Less: value of net assets removed as of December 31, 2002 | ||||
Euronet UK assets removed |
| (10,326 | ) | |
Euronet UK liabilities removed |
| 3,537 |
| |
Other liabilities removed |
| 372 |
| |
Gain on sale | $ | 18,001 |
| |
Euronet UK’s assets and liabilities were classified as held for the three months ended September 30, 2002.
As of December 31, 2002 | |||
Current assets | $ | 1,240 | |
Fixed assets |
| 9,086 | |
Total assets held for sale | $ | 10,326 | |
Current liabilities | $ | 2,866 | |
Long term liabilities |
| 671 | |
Total liabilities held for sale | $ | 3,537 | |
NOTE 5 - 6—BUSINESS SEGMENT INFORMATION
Effective for the quarter ended March 31, 2003, the Company changed its segment reporting by adding a third segment, the Prepaid Processing Segment, as a result of its acquisition of e-pay. In addition, due to the e-pay acquisition and the sale of the Company’s U.K. subsidiary, the Company will no longer provide geographic sub-segment information because management believes this information is not material to EFT Processing Segment disclosure.
Effective for the quarter ended March 31, 2003, Euronet and its subsidiaries operate in twothree business segments: (1) a segment that provides an independent shared ATM network and other electronic payment processing services to banks, retail and financial institutions (the “Processing Services“EFT Processing Segment”); (2) a segment that provides
10
electronic prepaid recharge, or top-up, services for retailer stores and mobile telephone operators (the “Prepaid Processing Segment”); and (2)(3) a segment that produces application software and solutions for payment and transaction delivery systems (the “Software Solutions Segment”). These business segments are supported by a corporate service segment, which provides corporate and other administrative services to the twothree business segments (the “Corporate Services Segment”). The accounting policies of each segment are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. Prior period segment information has been restated to conform to the current period’s presentation.
The following tables present the segment results of the Company’s operations for the three-month and nine-month periods ended September 30,March 31, 2003 and 2002 and September 30, 2001.
For the three months ended March 31, 2003 | |||||||||||||||||||||||||||
EFT Processing | Prepaid Processing | Software Solutions | Corporate Services | Total segments | Eliminations | Consolidated | |||||||||||||||||||||
Total revenues | $ | 11,961 |
| $ | 17,372 |
| $ | 3,894 | $ | — |
| $ | 33,227 |
| $ | (127 | ) | $ | 33,100 |
| |||||||
Direct operating cost |
| 5,765 |
|
| 14,007 |
|
| 307 |
| — |
|
| 20,079 |
|
| (74 | ) |
| 20,005 |
| |||||||
Salaries and benefits |
| 3,067 |
|
| 812 |
|
| 2,375 |
| 620 |
|
| 6,874 |
|
| 1 |
|
| 6,875 |
| |||||||
Selling, general and administrative |
| 452 |
|
| 411 |
|
| 695 |
| 809 |
|
| 2,367 |
|
| (54 | ) |
| 2,313 |
| |||||||
Depreciation and amortization |
| 1,846 |
|
| 618 |
|
| 275 |
| 22 |
|
| 2,761 |
|
| (5 | ) |
| 2,756 |
| |||||||
Total operating expenses |
| 11,130 |
|
| 15,848 |
|
| 3,652 |
| 1,451 |
|
| 32,081 |
|
| (132 | ) |
| 31,949 |
| |||||||
Operating income/(loss) |
| 831 |
|
| 1,524 |
|
| 242 |
| (1,451 | ) |
| 1,146 |
|
| 5 |
|
| 1,151 |
| |||||||
Interest income |
| 8 |
|
| 218 |
|
| 2 |
| 125 |
|
| 353 |
|
| — |
|
| 353 |
| |||||||
Interest expense |
| (192 | ) |
| (2 | ) |
| — |
| (1,413 | ) |
| (1,607 | ) |
| — |
|
| (1,607 | ) | |||||||
Gain on sale of subsidiary |
| — |
|
| — |
|
| — |
| 18,001 |
|
| 18,001 |
|
| — |
|
| 18,001 |
| |||||||
Income from unconsolidated investee companies |
| — |
|
| 55 |
|
| — |
| (18 | ) |
| 37 |
|
| — |
|
| 37 |
| |||||||
Foreign exchange (loss)/gain, net |
| (644 | ) |
| 5 |
|
| — |
| (1,200 | ) |
| (1,839 | ) |
| — |
|
| (1,839 | ) | |||||||
Total other (expense)/income |
| (828 | ) |
| 276 |
|
| 2 |
| 15,495 |
|
| 14,945 |
|
| — |
|
| 14,945 |
| |||||||
Income from continuing operations before income taxes and minority interest | $ | 3 |
| $ | 1,800 |
| $ | 244 | $ | 14,044 |
| $ | 16,091 |
| $ | 5 |
| $ | 16,096 |
| |||||||
Segment assets as of March 31, 2003 | $ | 39,895 |
| $ | 146,537 |
| $ | 6,828 | $ | 8,769 |
| $ | 202,029 |
| $ | (36 | ) | $ | 201,993 |
| |||||||
Fixed assets as of March 31, 2003 | $ | 18,524 |
| $ | 1,877 |
| $ | 805 | $ | 90 |
| $ | 21,296 |
| $ | (36 | ) | $ | 21,260 |
|
For the three months ended March 31, 2002 | ||||||||||||||||||||||||||
EFT Processing | Prepaid Processing | Software Solutions | Corporate Services | Total segments | Eliminations | Consolidated | ||||||||||||||||||||
Total revenues | $ | 12,177 |
| $ | — | $ | 4,908 | $ | — |
| $ | 17,085 |
| $ | (45 | ) | $ | 17,040 |
| |||||||
Direct operating cost |
| 6,614 |
|
| — |
| 437 |
| — |
|
| 7,051 |
|
| (45 | ) |
| 7,006 |
| |||||||
Salaries and benefits |
| 3,056 |
|
| — |
| 2,447 |
| 575 |
|
| 6,078 |
|
| — |
|
| 6,078 |
| |||||||
Selling, general and administrative |
| 235 |
|
| — |
| 570 |
| 696 |
|
| 1,501 |
|
| — |
|
| 1,501 |
| |||||||
Depreciation and amortization |
| 2,035 |
|
| — |
| 232 |
| 42 |
|
| 2,309 |
|
| — |
|
| 2,309 |
| |||||||
Total operating expenses |
| 11,940 |
|
| — |
| 3,686 |
| 1,313 |
|
| 16,939 |
|
| (45 | ) |
| 16,894 |
| |||||||
Operating income/(loss) |
| 237 |
|
| — |
| 1,222 |
| (1,313 | ) |
| 146 |
|
| — |
|
| 146 |
| |||||||
Interest income |
| 11 |
|
| — |
| 65 |
| 4 |
|
| 80 |
|
| — |
|
| 80 |
| |||||||
Interest expense |
| (284 | ) |
| — |
| — |
| (1,370 | ) |
| (1,654 | ) |
| — |
|
| (1,654 | ) | |||||||
Foreign exchange (loss)/gain, net |
| (220 | ) |
| — |
| — |
| 632 |
|
| 412 |
|
| — |
|
| 412 |
| |||||||
Total other (expense)/income |
| (493 | ) |
| — |
| 65 |
| (734 | ) |
| (1,162 | ) |
| — |
|
| (1,162 | ) | |||||||
(Loss)/income from continuing operations before income taxes and minority interest | $ | (256 | ) | $ | — | $ | 1,287 | $ | (2,047 | ) | $ | (1,016 | ) | $ | — |
| $ | (1,016 | ) | |||||||
Minority interest | $ | 26 |
| $ | — | $ | — | $ | — |
| $ | 26 |
| $ | — |
| $ | 26 |
| |||||||
Segment assets as of December 31, 2002 | $ | 50,347 |
| $ | — | $ | 6,955 | $ | 9,257 |
| $ | 66,559 |
| $ | — |
| $ | 66,559 |
| |||||||
Fixed assets as of December 31, 2002 | $ | 20,431 |
| $ | — | $ | 854 | $ | 109 |
| $ | 21,394 |
| $ | — |
| $ | 21,394 |
|
11
Processing Services | ||||||||||||||||||||||||||||
Central Europe | Western Europe | Other | Processing Services Total | Software Solutions | Corporate Services | Total | ||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
For the three months ended September 30, 2002 | ||||||||||||||||||||||||||||
Total revenues | $ | 6,671 | $ | 6,996 | $ | 86 | $ | 13,753 | $ | 4,181 | $ | — | $ | 17,934 | ||||||||||||||
Direct operating costs | 3,563 | 3,932 | 127 | 7,622 | 181 | — | 7,803 | |||||||||||||||||||||
Salaries and benefits | 926 | 722 | 1,266 | 2,914 | 3,058 | 396 | 6,368 | |||||||||||||||||||||
Selling, general and administrative | 415 | 345 | (822 | ) | (62 | ) | 1,128 | 793 | 1,859 | |||||||||||||||||||
Depreciation and amortization | 1,029 | 895 | 271 | 2,195 | 248 | 84 | 2,527 | |||||||||||||||||||||
Total operating expenses | 5,933 | 5,894 | 842 | 12,669 | 4,615 | 1,273 | 18,557 | |||||||||||||||||||||
Operating income/(loss) | 738 | 1,102 | (756 | ) | 1,084 | (434 | ) | (1,273 | ) | (623 | ) | |||||||||||||||||
Interest income | 8 | 4 | 2 | 14 | 7 | 42 | 63 | |||||||||||||||||||||
Interest expense | (183 | ) | (98 | ) | — | (281 | ) | — | (1,165 | ) | (1,446 | ) | ||||||||||||||||
Loss on facility sublease | — | — | — | — | (249 | ) | — | (249 | ) | |||||||||||||||||||
Equity in losses from investee companies | — | — | (159 | ) | (159 | ) | �� | — | — | (159 | ) | |||||||||||||||||
Loss on early retirement of debt | — | — | — | — | — | (791 | ) | (791 | ) | |||||||||||||||||||
Foreign exchange (loss)/gain, net | (254 | ) | 142 | (44 | ) | (156 | ) | — | 378 | 222 | ||||||||||||||||||
Income/(loss) from continuing operations before income taxes | $ | 309 | $ | 1,150 | $ | (957 | ) | $ | 502 | $ | (676 | ) | $ | (2,809 | ) | $ | (2,983 | ) | ||||||||||
Minority interest | $ | — | $ | — | $ | 30 | $ | 30 | $ | — | $ | — | $ | 30 | ||||||||||||||
Loss from discontinued operations before income taxes | $ | — | $ | (12 | ) | $ | — | $ | (12 | ) | $ | — | $ | — | $ | (12 | ) | |||||||||||
Assets as of September 30, 2002 | ||||||||||||||||||||||||||||
Segment assets | $ | 25,577 | $ | 18,587 | $ | 5,084 | $ | 49,248 | $ | 6,552 | $ | 11,357 | $ | 67,157 | ||||||||||||||
Fixed assets | $ | 14,056 | $ | 12,113 | $ | 2,938 | $ | 29,107 | $ | 924 | $ | 43 | $ | 30,074 |
Processing Services | ||||||||||||||||||||||||||||
Central Europe | Western Europe | Other | Processing Services Total | Software Solutions | Corporate Services | Total | ||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
For the three months ended September 30, 2001 | ||||||||||||||||||||||||||||
Total revenues | $ | 6,121 | $ | 5,057 | $ | 3 | $ | 11,181 | $ | 3,757 | $ | — | $ | 14,938 | ||||||||||||||
Direct operating costs | 3,543 | 3,307 | — | 6,850 | 57 | — | 6,907 | |||||||||||||||||||||
Salaries and benefits | 789 | 591 | 740 | 2,120 | 2,984 | 577 | 5,681 | |||||||||||||||||||||
Selling, general and administrative | 432 | 310 | (919 | ) | (177 | ) | 827 | 619 | 1,269 | |||||||||||||||||||
Depreciation and amortization | 1,005 | 774 | 210 | 1,989 | 138 | 37 | 2,164 | |||||||||||||||||||||
Total operating expenses | 5,769 | 4,982 | 31 | 10,782 | 4,006 | 1,233 | 16,021 | |||||||||||||||||||||
Operating income/(loss) | 352 | 75 | (28 | ) | 399 | (249 | ) | (1,233 | ) | (1,083 | ) | |||||||||||||||||
Interest income | 13 | 6 | 1 | 20 | 3 | 47 | 70 | |||||||||||||||||||||
Interest expense | (261 | ) | (54 | ) | — | (315 | ) | — | (1,726 | ) | (2,041 | ) | ||||||||||||||||
Gain on early retirement of debt | — | — | — | — | — | 1,053 | 1,053 | |||||||||||||||||||||
Foreign exchange (loss)/gain, net | (335 | ) | 224 | 161 | 50 | (25 | ) | (3,782 | ) | (3,757 | ) | |||||||||||||||||
(Loss)/income from continuing operations before income taxes | $ | (231 | ) | $ | 251 | $ | 134 | $ | 154 | $ | (271 | ) | $ | (5,641 | ) | $ | (5,758 | ) | ||||||||||
Minority interest | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Income from discontinued operations before income taxes | $ | — | $ | 37 | $ | 284 | $ | 321 | $ | — | $ | — | $ | 321 | ||||||||||||||
Assets as of December 31, 2001 | ||||||||||||||||||||||||||||
Segment assets | $ | 25,548 | $ | 17,127 | $ | 3,311 | $ | 45,986 | $ | 8,409 | $ | 5,723 | $ | 60,118 | ||||||||||||||
Fixed assets | $ | 14,956 | $ | 11,744 | $ | 1,085 | $ | 27,785 | $ | 1,243 | $ | 58 | $ | 29,086 | ||||||||||||||
Assets from discontinued operations | $ | — | $ | 434 | $ | 839 | $ | 1,273 | $ | — | $ | — | $ | 1,273 |
Processing Services | ||||||||||||||||||||||||||||
Central Europe | Western Europe | Other | Processing Services Total | Software Solutions | Corporate Services | Total | ||||||||||||||||||||||
(unaudited) (in thousands) | ||||||||||||||||||||||||||||
For the nine months ended September 30, 2002 | ||||||||||||||||||||||||||||
Total revenues | $ | 19,341 | $ | 18,883 | $ | 640 | $ | 38,864 | $ | 13,850 | $ | — | $ | 52,714 | ||||||||||||||
Direct operating costs | 10,205 | 10,473 | 257 | 20,935 | 732 | — | 21,667 | |||||||||||||||||||||
Salaries and benefits | 2,725 | 2,062 | 3,318 | 8,105 | 9,117 | 1,386 | 18,608 | |||||||||||||||||||||
Selling, general and administrative | 1,297 | 1,334 | (2,382 | ) | 249 | 2,432 | 2,244 | 4,925 | ||||||||||||||||||||
Depreciation and amortization | 3,085 | 2,403 | 721 | 6,209 | 731 | 40 | 6,980 | |||||||||||||||||||||
Total operating expenses | 17,312 | 16,272 | 1,914 | 35,498 | 13,012 | 3,670 | 52,180 | |||||||||||||||||||||
Operating income/(loss) | 2,029 | 2,611 | (1,274 | ) | 3,366 | 838 | (3,670 | ) | 534 | |||||||||||||||||||
Interest income | 25 | 10 | 4 | 39 | 137 | 51 | 227 | |||||||||||||||||||||
Interest expense | (602 | ) | (246 | ) | — | (848 | ) | — | (3,959 | ) | (4,807 | ) | ||||||||||||||||
Loss on facility sublease | — | — | — | — | (249 | ) | — | (249 | ) | |||||||||||||||||||
Equity in losses from investee companies | — | — | (159 | ) | (159 | ) | — | — | (159 | ) | ||||||||||||||||||
Loss on early retirement of debt | — | — | — | — | — | (955 | ) | (955 | ) | |||||||||||||||||||
Foreign exchange (loss)/gain, net | (155 | ) | 479 | 765 | 1,089 | — | (4,268 | ) | (3,179 | ) | ||||||||||||||||||
Income/(loss) from continuing operations before income taxes | $ | 1,297 | $ | 2,854 | $ | (664 | ) | $ | 3,487 | $ | 726 | $ | (12,801 | ) | $ | (8,588 | ) | |||||||||||
Minority interest | $ | — | $ | — | $ | 77 | $ | 77 | $ | — | $ | — | $ | 77 | ||||||||||||||
(Loss)/income from discontinued operations before income taxes | $ | — | $ | (45 | ) | $ | 98 | $ | 53 | $ | 2,988 | $ | — | $ | 3,041 | |||||||||||||
Assets as of September 30, 2002 | ||||||||||||||||||||||||||||
Segment assets | $ | 25,577 | $ | 18,587 | $ | 5,084 | $ | 49,248 | $ | 6,552 | $ | 11,357 | $ | 67,157 | ||||||||||||||
Fixed assets | $ | 14,056 | $ | 12,113 | $ | 2,938 | $ | 29,107 | $ | 924 | $ | 43 | $ | 30,074 |
Processing Services | ||||||||||||||||||||||||||||
Central Europe | Western Europe | Other | Processing Services Total | Software Solutions | Corporate Services | Total | ||||||||||||||||||||||
(unaudited) (in thousands) | ||||||||||||||||||||||||||||
For the nine months ended September 30, 2001 | ||||||||||||||||||||||||||||
Total revenues | $ | 17,544 | $ | 14,751 | $ | 3 | $ | 32,298 | $ | 11,971 | $ | — | $ | 44,269 | ||||||||||||||
Direct operating costs | 10,686 | 8,796 | — | 19,482 | 584 | — | 20,066 | |||||||||||||||||||||
Salaries and benefits | 2,307 | 1,579 | 2,389 | 6,275 | 10,239 | 2,239 | 18,753 | |||||||||||||||||||||
Selling, general and administrative | 1,324 | 884 | (1,768 | ) | 440 | 2,615 | 2,195 | 5,250 | ||||||||||||||||||||
Depreciation and amortization | 2,987 | 2,194 | 633 | 5,814 | 375 | 108 | 6,297 | |||||||||||||||||||||
Total operating expenses | 17,304 | 13,453 | 1,254 | 32,011 | 13,813 | 4,542 | 50,366 | |||||||||||||||||||||
Operating income/(loss) | 240 | 1,298 | (1,251 | ) | 287 | (1,842 | ) | (4,542 | ) | (6,097 | ) | |||||||||||||||||
Interest income | 49 | 36 | 5 | 90 | 26 | 98 | 214 | |||||||||||||||||||||
Interest expense | (738 | ) | (132 | ) | — | (870 | ) | — | (6,182 | ) | (7,052 | ) | ||||||||||||||||
Gain on early retirement of debt | — | — | — | — | — | 9,682 | 9,682 | |||||||||||||||||||||
Foreign exchange (loss)/gain, net | (235 | ) | 8 | 440 | 213 | (26 | ) | 3,691 | 3,878 | |||||||||||||||||||
(Loss)/income from continuing operations before income taxes | $ | (684 | ) | $ | 1,210 | $ | (806 | ) | $ | (280 | ) | $ | (1,842 | ) | $ | 2,747 | $ | 625 | ||||||||||
Minority interest | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
(Loss)/income from discontinued operations before income taxes | $ | — | $ | (910 | ) | $ | 685 | $ | (225 | ) | $ | — | $ | — | $ | (225 | ) | |||||||||||
Assets as of December 31, 2001 | ||||||||||||||||||||||||||||
Segment assets | $ | 25,548 | $ | 17,127 | $ | 3,311 | $ | 45,986 | $ | 8,409 | $ | 5,723 | $ | 60,118 | ||||||||||||||
Fixed assets | $ | 14,956 | $ | 11,744 | $ | 1,085 | $ | 27,785 | $ | 1,243 | $ | 58 | $ | 29,086 | ||||||||||||||
Assets from discontinued operations | $ | — | $ | 434 | $ | 839 | $ | 1,273 | $ | — | $ | — | $ | 1,273 |
For the three months ended | For the nine months ended | |||||||||||||||
Sept. 30, 2002 | Sept. 30, 2001 | Sept. 30, 2002 | Sept. 30, 2001 | |||||||||||||
(unaudited) (in thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Total revenues for reportable segments | $ | 17,934 | $ | 14,938 | $ | 52,714 | $ | 44,269 | ||||||||
Elimination of inter-segment revenues | (45 | ) | (45 | ) | (260 | ) | (135 | ) | ||||||||
Total consolidated revenues | $ | 17,889 | $ | 14,893 | $ | 52,454 | $ | 44,134 | ||||||||
For the three months ended | For the nine months ended | |||||||||||||||
Sept. 30, 2002 | Sept. 30, 2001 | Sept. 30, 2002 | Sept. 30, 2001 | |||||||||||||
(unaudited) (in thousands) | ||||||||||||||||
Operating expense: | ||||||||||||||||
Total operating expense for reportable segments | $ | 18,557 | $ | 16,021 | $ | 52,180 | $ | 50,366 | ||||||||
Elimination of inter-segment expenses | (53 | ) | (45 | ) | (210 | ) | (135 | ) | ||||||||
Total consolidated operating expenses | $ | 18,504 | $ | 15,976 | $ | 51,970 | $ | 50,231 | ||||||||
Total Revenues for the nine months ended | Long-Lived Assets as of | |||||||||||
Sept. 30, 2002 | Sept. 30, 2001 | Sept. 30, 2002 | Dec. 31, 2001 | |||||||||
(unaudited) (in thousands) | ||||||||||||
United States | $ | 13,850 | $ | 11,971 | $ | 924 | $ | 1,243 | ||||
Germany | 8,546 | 7,365 | 2,934 | 3,705 | ||||||||
Poland | 9,212 | 9,014 | 7,919 | 9,275 | ||||||||
Hungary | 5,434 | 5,449 | 6,658 | 5,391 | ||||||||
UK | 10,337 | 7,386 | 8,997 | 7,688 | ||||||||
Other | 5,075 | 2,949 | 2,642 | 1,784 | ||||||||
Total | $ | 52,454 | $ | 44,134 | $ | 30,074 | $ | 29,086 | ||||
Revenues | ||||||||||||
For the three month ended March 31, | Long-lived Assets | |||||||||||
2003 | 2002 | As of March 31, 2003 | As of December 31, 2002 | |||||||||
United States | $ | 3,894 | $ | 4,908 | $ | 805 | $ | 854 | ||||
Germany |
| 3,139 |
| 2,553 |
| 2,721 |
| 2,741 | ||||
Poland |
| 3,681 |
| 2,963 |
| 7,199 |
| 8,223 | ||||
Hungary |
| 1,772 |
| 1,789 |
| 5,921 |
| 6,703 | ||||
U.K. |
| 12,244 |
| 3,009 |
| 1,061 |
| — | ||||
Australia |
| 5,126 |
| — |
| 774 |
| — | ||||
Czech Republic |
| 1,411 |
| 602 |
| 2,015 |
| 2,014 | ||||
Other |
| 1,833 |
| 1,216 |
| 764 |
| 859 | ||||
Total | $ | 33,100 | $ | 17,040 | $ | 21,260 | $ | 21,394 | ||||
Total revenues are attributed to countries based on location of customer for the ATMEFT Processing and related services segment.Prepaid Processing segments. All revenues generated by Software Solutions Segment activities are attributed to the United States. Long-lived assets consist of property, plant, and equipment, net of accumulated depreciation.
NOTE 6 - CREDIT FACILITIES
Sale of USU.S. EFT Processing Services Business
On January 4, 2002, the Company concluded an asset purchase agreement with AIS,Fidelity National Financial, Inc., formerly ALLTEL Information Systems (“FNF”), whereby EFT Network Services, LLC (also known as DASH) sold substantially all of its assets to AISFNF for $6.8 million in cash. Of this amount, $0.7 million is being held in escrow for a period of one year under the terms of a separate escrow agreement to provide for the payment of any damages that might arise from any breach of the representations and warranties contained in the asset purchase agreement and certain post-closing adjustments. DASH iswas a wholly owned subsidiary of Euronet USA Inc., which is a wholly owned subsidiary of Euronet Worldwide, Inc. DASH, Euronet USA and AIS are parties to the asset purchase agreement. The Company recorded a pre-tax gain of approximately $4.8 million related to this transaction. As discussed in Note 10, the
The Company also entered into a separatesignificant software license agreement with AIS on January 4, 2002.
Sale of France EFT Processing Services Business
On July 15, 2002, the Company sold substantially all of the non-current assets and capital lease obligations of its processing business in France to Atos. Non-current assets and capital lease obligations related to the France business have been removed from continuing operations and classified under discontinued operations. The Company incurred a loss on disposal of the France business of $0.1 million.
As a result of the above, the results from operations from France and DASH have been removed from continuing operations for all reported periodsfrom the three months ended March 31, 2002 in accordance with SFAS 144. France wasand DASH were previously reported underin the Western European Sub-segment and DASH was previously reported under the Other Operations Sub-segment. The following pro-forma financial statements show balance sheet extracts as of September 30, 2002 and
12
The summary operating results of discontinued operations for the three months ended September 30,March 31, 2002 are as follows (unaudited, in thousands):
For the three months ended March 31, 2002 | ||||||||||||
Dash | France | Total | ||||||||||
Total revenues | $ | 101 |
| $ | 194 |
| $ | 295 |
| |||
Total operating expenses |
| 3 |
|
| 301 |
|
| 304 |
| |||
Operating income/(loss) |
| 98 |
|
| (107 | ) |
| (9 | ) | |||
Other income/(expense) |
| — |
|
| (74 | ) |
| (74 | ) | |||
Gain on disposal |
| 4,845 |
|
| — |
|
| 4,845 |
| |||
Total other income/(expense) |
| 4,845 |
|
| (74 | ) |
| 4,771 |
| |||
Net income before taxes |
| 4,943 |
|
| (181 | ) |
| 4,762 |
| |||
Income tax expense |
| (1,857 | ) |
| — |
|
| (1,857 | ) | |||
Net income/(loss) of discontinued operations | $ | 3,086 |
| $ | (181 | ) | $ | 2,905 |
| |||
NOTE 8—STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for its stock-based employee compensation plans under the recognition and 2001measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s shares at the date of the grant over the exercise price.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” to stock-based employee compensation (in thousands, except per share data):
For the three months ended March 31, | ||||||||
2003 | 2002 | |||||||
Net income, as reported | $ | 15,421 |
| $ | 3,580 |
| ||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
| (1,197 | ) |
| (827 | ) | ||
Pro forma net income | $ | 14,224 |
| $ | 2,753 |
| ||
Earnings per share: | ||||||||
Basic—as reported | $ | 0.61 |
| $ | 0.16 |
| ||
Basic—pro forma | $ | 0.56 |
| $ | 0.12 |
| ||
Diluted—as reported | $ | 0.57 |
| $ | 0.14 |
| ||
Diluted—pro forma | $ | 0.53 |
| $ | 0.11 |
|
Pro forma impact reflects only options granted since December 31, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma amounts presented above because compensation cost is reflected over the options’ vesting periods and compensation cost for options granted prior to January 1, 1996 is not considered.
NOTE 9—CREDIT FACILITIES
As of March 31, 2003, banks have issued standby letters of credit on the Company’s behalf amounting to $3.1 million. These letters of credit are fully secured by cash deposits held by the respective issuing banks. This cash is classified as restricted cash as of March 31, 2003.
13
The Company has lines of credit totaling $0.5 million to meet cash requirements for the startup of our India market. The lines of credit are fully collateralized by a portion of those letters of credit described above.
NOTE 10—RELATED PARTY TRANSACTIONS
In February 2003, the Company paid approximately $74.8 million to the former shareholders of e-pay. The amount paid to the shareholders consisted of approximately $30.0 million in cash at closing, $18.0 million through issuance at closing of 2,497,504 shares of Euronet common stock, and the nine monthsremaining $26.9 million in deferred cash consideration or promissory notes executed at closing with 24 month maturity dates bearing interest rates ranging from 6% to 8%. Ten of these former shareholders are now employees and/or officers of Euronet. Paul Althasen, a former shareholder of e-pay and current nominee for Euronet’s Board of Directors, received $15.4 million in total consideration consisting of cash, common stock, and notes payable for his ownership in
e-pay.
For the three-month period ended September 30, 2002 and 2001.
As of September 30, 2002 | As of December 31, 2001 | |||||||||||||||||
DASH | France | Total | DASH | France | Total | |||||||||||||
(unaudited) (in thousands) | ||||||||||||||||||
Current assets | $ | — | $ | — | $ | — | $ | 384 | $ | — | $ | 384 | ||||||
Fixed assets | — | — | — | — | 434 | 434 | ||||||||||||
Long term assets | — | — | — | 455 | — | 455 | ||||||||||||
Total assets from discontinued operations | $ | — | $ | — | $ | — | $ | 839 | $ | 434 | $ | 1,273 | ||||||
Current liabilities | $ | — | $ | — | $ | — | $ | 70 | $ | 138 | $ | 208 | ||||||
Long term liabilities | — | — | — | — | 290 | 290 | ||||||||||||
Total liabilities from discontinued operations | $ | — | $ | — | $ | — | $ | 70 | $ | 428 | $ | 498 | ||||||
Three months ended September 30, 2002 | Three months ended September 30, 2001 | ||||||||||||||||||||||
DASH | France | Total | DASH | France | Total | ||||||||||||||||||
(unaudited) (in thousands) | |||||||||||||||||||||||
Revenues | $ | — | $ | 128 | $ | 128 | $ | 557 | $ | 231 | $ | 788 | |||||||||||
Operating expenses | — | 105 | 105 | 262 | 381 | 643 | |||||||||||||||||
Operating income/(loss) | — | 23 | 23 | 295 | (150 | ) | 145 | ||||||||||||||||
Other (expense)/income | — | (35 | ) | (35 | ) | (11 | ) | 187 | 176 | ||||||||||||||
Gain on disposal | — | — | — | — | — | — | |||||||||||||||||
(Loss)/income before taxes | — | (12 | ) | (12 | ) | 284 | 37 | 321 | |||||||||||||||
Income tax expense | — | — | — | (111 | ) | (14 | ) | (125 | ) | ||||||||||||||
Net (loss)/income of discontinued operations | $ | — | $ | (12 | ) | $ | (12 | ) | $ | 173 | $ | 23 | $ | 196 | |||||||||
Nine months ended September 30, 2002 | Nine months ended September 30, 2001 | |||||||||||||||||||||||
DASH | France | Total | DASH | France | Total | |||||||||||||||||||
(unaudited) (in thousands) | ||||||||||||||||||||||||
Revenues | $ | 101 | $ | 563 | $ | 664 | $ | 1,690 | $ | 619 | $ | 2,309 | ||||||||||||
Operating expenses | 3 | 708 | 711 | 990 | 1,438 | 2,428 | ||||||||||||||||||
Operating income/(loss) | 98 | (145 | ) | (47 | ) | 700 | (819 | ) | (119 | ) | ||||||||||||||
Other income/(loss) | — | 297 | 297 | (15 | ) | (91 | ) | (106 | ) | |||||||||||||||
Gain/(loss) on disposal | 4,845 | (119 | ) | 4,726 | — | — | — | |||||||||||||||||
Income/(loss) before taxes | 4,943 | 33 | 4,976 | 685 | (910 | ) | (225 | ) | ||||||||||||||||
Income tax expense | (1,857 | ) | (78 | ) | (1,935 | ) | — | — | — | |||||||||||||||
Net income/(loss) of discontinued operations | $ | 3,086 | $ | (45 | ) | $ | 3,041 | $ | 685 | $ | (910 | ) | $ | (225 | ) | |||||||||
NOTE 10 - 11—SIGNIFICANT SOFTWARE LICENSE AGREEMENT
In January 4, 2002, the Company entered into a significant software license agreement (the “License Agreement”) whereby Euronet USAthe Company granted AISFNF a nonexclusive license to use, distribute and develop versions 1.5 and 2.2 of Euronet USA’sour GoldNet ATM Network Processing Software (“GoldNet Software”). The License Agreement includes certain territorial and other restrictions on the use and distribution of the GoldNet Software
NOTE 13 - SUBSEQUENT EVENTS12—RESTRICTED CASH
As of March 31, 2003, the Company was advisedhas $38.0 million of restricted cash, of which $33.2 million is related to the administration of customer collection and vendor remittance activities in the Prepaid Processing Segment. The Company is responsible for the collection of cash receipts from the retailer for subsequent remittance to the telecommunication provider. Cash is collected and held in designated trust accounts classified as restricted cash balances that are not available for our operating business activities. The remaining $4.8 million is held as security with respect to cash provided by a potential acquisition target that another potential acquirer had been selected for further purchase negotiations. For the three months ending December 31, 2002,banks participating in our ATM network or standby letters of credit.
NOTE 13—RECLASSIFICATION
Beginning in January 2003, the Company will recognize approximately $0.2 millionchanged its business segment reporting to better align its financial reporting with its business operations and reflect the acquisition of expense for costs previously capitalized that were directly associated with the Company’s acquisition efforts. These costs are included in other assets as of September 30, 2002.
All operating amounts, ATM counts, transaction numbers and statistics reported in this filing exclude France and DASH.
14
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Euronet Worldwide, Inc. is a leading provider of secure electronic financial transaction solutions. We provide financial payment middleware, financial network gateways, outsourcing, and consulting services to financial institutions, retailers and mobile phone operators.
Significant Events
During the three months ended March 31, 2003, we entered into two transactions that will significantly impact our future operating results.
First, in January 2003, we sold our U.K. ATM network for $29.4 million and simultaneously signed an ATM outsourcing agreement with the buyer. Since then, we have operated the ATMs in that network under a five-year outsourcing agreement. This transaction is discussed more fully in the EFT Processing Segment discussion below and in Note 5 to the unaudited consolidated financial statements.
Second, in February 2003, we acquired e-pay, Ltd., an electronic payments processor of prepaid mobile phone airtime “top-up” services in the U.K and Australia. e-pay has agreements with mobile operators in those markets under which it supports the distribution of airtime to their subscribers through point-of-sale (POS) terminals in retail outlets. This transaction is discussed more fully in the Prepaid Processing Segment discussion below and in Note 4 to the unaudited consolidated financial statements.
Business Summary
We operate an independentprocess transactions for a network of 2,994 automated teller machine, or ATM, network of 2,951 ATMs inmachines (ATMs) across Europe (and until January 2002 in the United States). In addition, throughThrough our subsidiary, e-pay Ltd., we operate a network of POS terminals providing electronic processing of prepaid mobile phone airtime (“top-up”) services in the U.K. and Australia. Through our software subsidiary, Euronet USA, Inc. (“Euronet USA”), we offer a suite of integrated electronic fund transfer (EFT) software solutions for electronic payment and transaction delivery systems. Our principal customers are banks, mobile phone operators and retailers that require electronic financial transaction processing services. We offerprovide comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM POS,management solutions, electronic recharge services (for prepaid mobile airtime) and debit card management and transaction software.integrated EFT software solutions. Our principal customerssolutions are banks and other companies such as mobile phone operators that require electronic financial transaction processing services. With nine offices in Europe, one in Indonesia, one in Egypt and two in the United States, Euronet serves clientsused in more than 60 countries around the world. As of March 31, 2003, we had nine offices in Europe, two in the United States and one each in India, Indonesia, Egypt, and Australia.
Throughout 2002 and continuing in 2003, Euronet has focused on product developments that would add transaction functionality via new and existing products, including mobile banking, event messaging and the new Electronic Recharge line, which enables purchasing prepaid mobile airtime from ATMs, POS terminals and directly from the mobile handset.
In 2002, we opened a small office in Slovakia to support expanding efforts in Central Europe during 2003. We also entered India, one of the largest emerging markets for ATM and card growth potential. In the India market, we will focus on ATM outsourcing and electronic recharge products for replenishing prepaid mobile airtime.
Effective for the quarter ended March 31, 2003, we changed our name from Euronet Services Inc.segment reporting by adding a third segment, the Prepaid Processing Segment, as a result of our acquisition of e-pay. In addition, due to Euronet Worldwide, Inc. in August 2001.
As of secure electronic financial transactions. TheMarch 31, 2003, we operated in three principal business segments:
15
We also operate a “Corporate Services Segment” that provides the Company’s twoour three business segments with corporate and other administrative services that are not directly identifiable with them. The accounting policies of each segment are the same as those describedreferenced in the summary of significant accounting policies. We evaluate performance based on profitincome or loss from continuing operations before income taxes not including nonrecurring gains and losses.
SEGMENT SUMMARY RESULTS OF OPERATIONS
Revenues | Operating Income (Loss) | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
(unaudited) (in thousands) | ||||||||||||||||
Three months ended September 30, | ||||||||||||||||
Processing Services: | ||||||||||||||||
Central European | $ | 6,671 | $ | 6,121 | $ | 738 | $ | 352 | ||||||||
Western European | 6,996 | 5,057 | 1,102 | 75 | ||||||||||||
Other | 86 | 3 | (756 | ) | (28 | ) | ||||||||||
Total Processing Services | 13,753 | 11,181 | 1,084 | 399 | ||||||||||||
Software Solutions | 4,181 | 3,757 | (434 | ) | (249 | ) | ||||||||||
Corporate Services | — | — | (1,273 | ) | (1,233 | ) | ||||||||||
Inter-segment eliminations | (45 | ) | (45 | ) | (53 | ) | (45 | ) | ||||||||
Total | $ | 17,889 | $ | 14,893 | $ | (676 | ) | $ | (1,128 | ) | ||||||
Revenues | Operating Income (Loss) | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
(unaudited) (in thousands) | ||||||||||||||||
Nine months ended September 30, | ||||||||||||||||
Processing Services: | ||||||||||||||||
Central European | $ | 19,341 | $ | 17,544 | $ | 2,029 | $ | 240 | ||||||||
Western European | 18,883 | 14,751 | 2,611 | 1,298 | ||||||||||||
Other | 640 | 3 | (1,274 | ) | (1,251 | ) | ||||||||||
Total Processing Services | 38,864 | 32,298 | 3,366 | 287 | ||||||||||||
Software Solutions | 13,850 | 11,971 | 838 | (1,842 | ) | |||||||||||
Corporate Services | — | — | (3,670 | ) | (4,452 | ) | ||||||||||
Inter-segment eliminations | (260 | ) | (135 | ) | (210 | ) | (135 | ) | ||||||||
Total | $ | 52,454 | $ | 44,134 | $ | 324 | $ | (6,142 | ) | |||||||
Three months ended March 31, (unaudited, in thousands) | ||||||||||||||||
Revenues | Operating Income/(loss) | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
EFT Processing | $ | 11,961 |
| $ | 12,177 |
| $ | 831 |
| $ | 237 |
| ||||
Prepaid Processing |
| 17,372 |
|
| — |
|
| 1,524 |
|
| — |
| ||||
Software Solutions |
| 3,894 |
|
| 4,908 |
|
| 242 |
|
| 1,222 |
| ||||
Corporate Services |
| — |
|
| — |
|
| (1,451 | ) |
| (1,313 | ) | ||||
Total |
| 33,227 |
|
| 17,085 |
|
| 1,146 |
|
| 146 |
| ||||
Inter segment eliminations |
| (127 | ) |
| (45 | ) |
| 5 |
|
| — |
| ||||
Total | $ | 33,100 |
| $ | 17,040 |
| $ | 1,151 |
| $ | 146 |
| ||||
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2003 AND MARCH 31, 2002 AND SEPTEMBER 30, 2001 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
EFT PROCESSING SERVICES SEGMENT
Three months ended March 31, (unaudited, in thousands) | ||||||
2003 | 2002 | |||||
Total revenues | $ | 11,961 | $ | 12,177 | ||
Direct operating cost |
| 5,765 |
| 6,614 | ||
Salaries and benefits |
| 3,067 |
| 3,056 | ||
Selling, general and administrative |
| 452 |
| 235 | ||
Depreciation and amortization |
| 1,846 |
| 2,035 | ||
Total operating expenses |
| 11,130 |
| 11,940 | ||
Operating income | $ | 831 | $ | 237 | ||
Sale of U.K. ATM Network
In January 2003, we sold our U.K. ATM network and simultaneously signed an ATM outsourcing agreement with the buyer. We will operate the ATMs in that network under a five-year outsourcing agreement. With this transaction, we sold our U.K subsidiary, and all employees working in that subsidiary were transferred to the buyer. The results of operations of the U.K. ATM network operations continue to be included in continuing operations due to the ongoing revenues to be generated by the
16
outsourcing agreement. This transaction is more fully described in Note 5 to the unaudited consolidated financial statements. See the discussion below where the effects of this transaction on revenues and operating income are more fully described.
Revenues
Total segment revenues increased 23%decreased 2% or $2.6$0.2 million to $13.8$12.0 million for the three months ended September 30, 2002March 31, 2003 from $11.2$12.2 million for the three months ended September 30, 2001, and increased 20% or $6.6 million to $38.9 million for the nine months ended September 30, 2002 from $32.3 million for the nine months ended September 30, 2001.March 31, 2002. The increasedecrease in revenues is due primarily to the significantsale of our U.K. subsidiary, substantially offset by a one-time contract termination fee on a signed but not implemented contract, an increase in transaction volumes from new ATMs and an increase in the number of ATMs that we operated during these periods.network sharing agreements and foreign exchange fluctuations. We operated 2,3512,548 ATMs as of September 30, 2001March 31 2002 and processed 15.115.6 million transactions for the three months ended September 30, 2001 and 41.6 million transactions for the nine months ended September 30, 2001.March 31, 2002. As of September 30, 2002,March 31, 2003, we increased our ATM networkthe number of ATMs we operate by 600446 ATMs, or 26%18%, from September 30, 2001March 31, 2002 to a total of 2,9512,994 ATMs. WeAt March 31, 2003, we own 82%37% of this total number ofthese ATMs (excluding those leased by us in connection with outsourcing agreements), while banks and other financial institutions own the remaining 18%, which we operate through63% are operated under management outsourcing agreements. Transactions on machines owned or operated by us totaled 22.323.4 million
Of total segment revenue, approximately 57% is from ATMs we owned (excluding those leased by us in connection with outsourcing agreements) for the three months ended September 30, 2002 from $6.1 millionMarch 31, 2003 and 66% for the three months ended September 30, 2001. The increase in revenues is largely the result of an increase in the number of ATMs operated by us from 1,481 at September 30, 2001 to 1,744 at September 30, 2002, and increased transaction volumes. Our ability to continue to increase revenues at this rate depends on our ability to sign new contracts to operate more ATMs for banks and financial institutions.
We generally charge fees for four types of ATM transactions that are currently processed on our ATMs:
Transaction fees for cash withdrawals vary from market to market but generally range from $0.60 to $2.15$2.50 per transaction. Transaction fees for the other three types of transactions are generally substantially less. We include in EFT Processing Services Segment revenues transaction fees payable under the electronic recharge solutions that we sell.distribute through our ATMs. Fees for recharge transactions vary substantially from market to market and are based on the specific prepaid solution and the denomination of prepaid hours purchased. Generally, transaction fees vary from $0.40 to $1.80 per prepaid mobile recharge purchase and are shared with the financial institution and the mobile operator. TheseAny or all of these fees may come under pricing pressure in the future.
Operating Expenses
Total segment operating expenses increased 18%decreased 7%, or $1.9$0.8 million to $12.7$11.1 million for the three months ended September 30, 2002March 31, 2003 from $10.8$11.9 million for the three months ended September 30, 2001.March 31, 2002. The increasedecrease is primarily due to increasedthe sale of our U.K. network, offset by an increase in direct operating costs supporting revenue increases, in salaries to support our operational growth during the period.
17
Direct operating costs in the EFT Processing Services Segment represent costs of goods and services related to processing revenues and consist primarily of:
These costs increased 11% or $0.8 milliondecreased 13% from the first quarter 2002 to $7.6 million for the three months ended September 30, 2002 from $6.8 million for the three months ended September 30, 2001 and increased 7% or $1.5 million to $20.9 million for the nine months ended September 30, 2002 from $19.5 million for the nine months ended September 30, 2001.first quarter 2003. This increasedecrease is primarily attributable to the sale of our U.K. network, offset by the increased cost of operating the increased number of ATMs mentioned above. Also, allocations within the Euronet operating companies were made to charge the ATM network operations for transaction switching fees and bank connection fees incurred by our central processing center in Budapest. TheseBudapest; these direct operating costs included allocations totaled $1.4of $1.1 million and $1.5$1.2 million for the three months ended September 30,March 31, 2003 and March 31, 2002, and September 30, 2001, respectively. These allocations totaled $4.0 million and $3.5 million for the nine months ended September 30, 2002 and September 30, 2001, respectively.
The components of direct operating costs for the three months ended March 31, 2003 and nine months ended September 30, 2002 and 2001 were:
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
(unaudited) | ||||||||||||
(in thousands) | ||||||||||||
ATM communication | $ | 1,057 | $ | 1,125 | $ | 3,013 | $ | 3,300 | ||||
ATM cash filling and interest on network cash | 1,877 | 1,778 | 5,340 | 5,270 | ||||||||
ATM maintenance | 1,269 | 1,003 | 3,264 | 3,076 | ||||||||
ATM site rental | 1,005 | 609 | 2,664 | 1,814 | ||||||||
ATM installation | 193 | 81 | 487 | 195 | ||||||||
Transaction processing and ATM monitoring | 1,697 | 1,855 | 4,739 | 4,658 | ||||||||
Other | 524 | 399 | 1,428 | 1,169 | ||||||||
Total direct operating expenses | $ | 7,622 | $ | 6,850 | $ | 20,935 | $ | 19,482 | ||||
Three months ended March 31, (unaudited, in thousands) | ||||||
2003 | 2002 | |||||
ATM communication | $ | 810 | $ | 1,001 | ||
ATM cash filling and interest on network cash |
| 1,255 |
| 1,711 | ||
ATM maintenance |
| 927 |
| 1,015 | ||
ATM site rental |
| 692 |
| 783 | ||
ATM installation |
| 163 |
| 152 | ||
Transaction processing and ATM monitoring |
| 1,484 |
| 1,310 | ||
All other |
| 434 |
| 642 | ||
Total direct operating costs | $ | 5,765 | $ | 6,614 | ||
As a percentage of this segment’s revenue, direct operating costs fell from 61%54% for the three months ended September 30, 2001March 31, 2002 to 55%48% for the three months ended September 30, 2002 and decreased from 60%March 31, 2003. Excluding the one-time $0.8 million contract termination fee, direct operating costs for the nine monthsquarter ended September 30, 2001 to 54% for the nine months ended September 30, 2002.March 31, 2003 were 52% of this segment’s revenue. On a per-ATM basis, the direct operating costs fell 11%26% from $2,914$2,596 per ATM for the three months ended September 30, 2001March 31, 2002 to $2,583$1,926 per ATM for the three months ended September 30, 2002 and decreased from $8,287 per ATM for the nine months ended September 30, 2001 to $7,097 per ATM for the nine months ended September 30, 2002. On a per-transaction basis, the direct operating costs fell 24% from $0.45 per transaction for the three months ended September 30, 2001 to $0.34 per transaction for the three months ended September 30, 2002 and decreased from $0.47 per transaction for the nine months ended September 30, 2001 to $0.37 per transaction for the nine months ended September 30, 2002. March 31, 2003.
Costs per transaction have decreased because of the combination of increasing transaction volumes on existing sites and havingwith a large fixed direct operating cost structure on these sites. On a per-transaction basis, the direct operating costs fell 42% from $0.42 per transaction for the three months ended March 31, 2002 to $0.25 per transaction for the three months ended March 31, 2003. Increasing transaction volumes on existing sites that have fixed direct operating expenses decreases our costs per ATM and per transaction. In addition, there was an increase in the number of ATMs that we operate under ATM management agreements and theseincluding those in the U.K. ATM network that were previously owned by us. These ATMs generally have lower direct operating expenses (telecommunications, cash delivery, security, maintenance and site rental).
Segment salaries and benefits increased 37% to $2.9were $3.1 million for the three monthsthree-month periods ended September 30, 2002 from $2.1March 31, 2003 and March 31, 2002. Segment salaries and benefits decreased $0.4 million fordue to the three months ended September 30, 2001sale of our U.K. subsidiary and increased 29% to $8.1 million for the nine months ended September 30, 2002 from $6.2 million for the nine months ended September 30, 2001. This increase reflects the continued expansiontransfer of the operationsemployees to Western European markets with significantly higher labor costs than Central Europe, as well as increases inthe buyer, offset by the increase of staff levels in our Asia markets and at the Budapest processing center which were required to maintain quality service in line with rising transaction volumes. As a percentage of this segment’s revenue, salaries and benefits increased from 19%25% for the three months ended September 30, 2001March 31, 2002 to 21%26% for the three months ended September 30, 2002March 31, 2003. Excluding the one-time $0.8 million contract termination fee, segment salary and increased from 19%benefits for the nine monthsquarter ended September 30, 2001 to 21% for the nine months ended September 30, 2002.
Selling, general and administrative costs allocatedof the EFT Processing Segment of $0.4 million increased $0.2 million from the three months ended March 31, 2002. This
18
increase is largely the result of market development in our Asia-Pacific business and general and administrative expense at the Budapest processing center required to maintain quality of service in line with rising transaction volumes, offset by $0.3 million due to the Processing Services Segment increased by $0.1sale of our U.K. ATM network.
Depreciation and amortization decreased $0.2 million from a negative $0.2to $1.8 million for the three months ended September 30, 2001 to negative $0.1 million for the three months ended September 30, 2002.March 31, 2003. This negative balancedecrease is due to the allocationsale of switching fees from selling, general and administrative costs to direct costs for eachour U.K. network, offset by the increase in deprecation of the other sub segments. Selling, generalcomputer and administrative costs decreased 50% to $0.2 million for the nine months ended September 30, 2002 from $0.4 million for the nine months ended September 30, 2001.
Operating Income/(Loss)
As a result of the factors discussed above and including the $0.8 million contract termination fee, the EFT Processing Services Segment as a whole improved operating income by $0.7$0.6 million as compared to the same three-month period last year, reporting operating income of $1.1$0.8 million for the three months ended September 30, 2002 as compared to operating income of $0.4 million for the three months ended September 30, 2001. The Processing Services Segment improved operating income by $3.1 million as compared to the same nine-month period last year reporting operating income of $3.4 million for the nine months ended September 30, 2002 as compared to operating income of $0.3 million for the nine months ended September 30, 2001. The Central European Sub-segment improved operating income by $0.3 million, reporting operating income of $0.7 million for the three months ended September 30, 2002 compared to operating income of $0.4 million for the three months ended September 30, 2001 and operating income of $2.0 million for the nine months ended September 30, 2002March 31, 2003 as compared to operating income of $0.2 million for the nine months ended September 30, 2001. The Western European Sub-segment reported operating income of $1.1 million for the three months ended September 30, 2002 up fromMarch 31, 2002. Foreign currency fluctuations had a minimal effect on the change in operating income of $0.1 million forbetween the three months ended September 30, 2001 and operating income increased 101% to $2.6 million for the nine months ended September 30, 2002 from $1.3 million for the nine months ended September 30, 2001. The Other Operations Sub-segment increased its operating loss $0.8 million for the three months ended September 30, 2002 from nil for the three months ended September 30, 2001 and operating losses remained unchanged at $1.3 million for the nine months ended September 30, 2002 from the nine months ended September 30, 2001.
We are pursuing new business opportunities in Asia. If we are successful, as we expect to be, in securing required regulatory and other approvals to provide our services there, we will incur start-up expenses in 2003 that will exceed the amount of revenues we generate there for several quarters. Operating expenses are expected to exceed revenues by approximately $1.2$2.0 million over the next 12 to 15 months as we commence and expand operations in Asia. Capital expenditures over the same period are expected to be approximately $0.6 million related to these operations. We are exploring methods for limiting losses and capital investments arising from commencement of operations in Asia, including seeking participation in our Asian operations by outside investors.
As part of an overall change in our financial budgeting procedures, commencing forin the year 2003, we will establish the level of our expenditures for the EFT Processing Services Segment based on “base line” revenue assumptions that take into account only revenues from contracted business, without consideration of any new potential business. We expect that this approach will improve our ability to keep costs in line with revenues.
SOFTWARE SOLUTIONSPREPAID PROCESSING SEGMENT
Purchase of e-pay
In February 2003, the Company purchased 100% of the Software Solutions Segment were $4.2 million before inter-segment eliminationsshare capital of e-pay, an electronic payments processor of prepaid mobile phone airtime “top-up” services in the U.K. and Australia. This transaction is more fully described in Note 4 to the unaudited consolidated financial statements.
The following table presents the results of operations for the two months ended March 31, 2003 as included in our consolidated results of operations (unaudited, in thousands):
Two months ended March 31, 2003 | ||
Total revenues | $17,372 | |
Direct operating cost | 14,007 | |
Salaries and benefits | 812 | |
Selling, general and administrative | 411 | |
Depreciation and amortization | 618 | |
Total operating expenses | 15,848 | |
Operating income | $ 1,524 | |
19
The following table presents the pro forma condensed results of operations for the three months ended September 30,March 31, 2003 and 2002 as comparedif e-pay had been included in our consolidated results of operations, including the effect of amortization of amortizable intangible assets acquired (unaudited, in thousands):
Pro forma Three months ended March 31, | |||||||
2003 | 2002 | ||||||
Total revenues | $ | 26,772 | $ | 7,314 |
| ||
Total operating expenses |
| 24,299 |
| 7,508 |
| ||
Operating income | $ | 2,473 | $ | (194 | ) | ||
Revenues
e-pay was formed in 1999 and initiated its first transaction in the U.K. in 2000 and in Australia in 2001. The significant growth in the pro forma revenue and operating income for the quarter ended March 31, 2003 over March 31, 2002 is the result of the start-up of e-pay business complemented by the conversion of mobile operators from prepaid “top-up” using scratch card solutions to $3.8 millionelectronic processing solutions such as those provided by e-pay. Transactions processed for the months of February and March 2003 (the period included in our consolidated operating results for the three months ended September 30, 2001. Segment revenuesMarch 31, 2003) were $13.812.0 million before inter-segment eliminations for the nine months ended September 30, 2002 as compared to $12.0and, on a pro forma basis, 18.7 million for the ninefull three month period. We do not expect these levels of growth rates to continue.
We recognize revenues in our Prepaid Processing Segment based on commission received from mobile and other telecommunication operators for the distribution and processing of prepaid mobile airtime and other telecommunication products.
Direct Costs
Direct operating costs in the Prepaid Processing Segment represent the commissions we pay to retail merchants for the POS distribution and sale of prepaid mobile airtime and other telecommunications products. These expenditures vary directly with processing revenues.
Operating Expenses other than Direct Costs
The Prepaid Processing Segment salary and selling, general and administrative expenses include sales, marketing, technical and other business support expenses. We do not expect these expenses to increase at the same rate as transactions and related processing revenues.
Depreciation and amortization includes $0.3 million for the two months ended September 30, 2001. March 31, 2003. This amortization relates to assigned amortizable intangible assets as described above.
SOFTWARE SOLUTIONS SEGMENT
Three months ended March 31, (unaudited, in thousands) | ||||||
2003 | 2002 | |||||
Total revenues | $ | 3,894 | $ | 4,908 | ||
Direct operating cost |
| 307 |
| 437 | ||
Salaries and benefits |
| 2,375 |
| 2,447 | ||
Selling, general and administrative |
| 695 |
| 570 | ||
Depreciation and amortization |
| 275 |
| 232 | ||
Total operating expenses |
| 3,652 |
| 3,686 | ||
Operating income/(loss) | $ | 242 | $ | 1,222 | ||
20
Revenues
Software revenues are grouped into four broad categories:
Software license fees are the initial fees we charge to license our proprietary application software to customers. We charge professional service fees for providing customization, installation and consulting services to our customers. Software maintenance fees are the ongoing fees we charge for maintenance of our customers’ software products. Hardware sales revenues are derived from the sale of computer products. Total software revenues decreased $1.0 million from $4.9 million for the three months ended March 31, 2002 to $3.9 million for the three months ended March 31, 2003.
The components of software solutionsSoftware Solutions revenue for the three-month and nine-month periods ended September 30,March 31, 2003 and 2002 and 2001 were:
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
(unaudited) (in thousands) | ||||||||||||
Software license fees | $ | 1,001 | $ | 675 | $ | 5,516 | $ | 2,706 | ||||
Professional service fees | 1,522 | 1,281 | 3,568 | 4,686 | ||||||||
Maintenance fees | 1,630 | 1,365 | 4,221 | 3,777 | ||||||||
Hardware sales | 28 | 436 | 545 | 802 | ||||||||
Total | $ | 4,181 | $ | 3,757 | $ | 13,850 | $ | 11,971 | ||||
Three months ended March 31, (unaudited, in thousands) | ||||||
2003 | 2002 | |||||
Software license fees | $ | 684 | $ | 2,188 | ||
Professional service fees |
| 1,496 |
| 841 | ||
Maintenance fees |
| 1,555 |
| 1,409 | ||
Hardware sales |
| 159 |
| 469 | ||
Total | $ | 3,894 | $ | 4,907 | ||
Software license fees increased $0.3decreased $1.5 million to $1.0$0.7 million for the three-month period ended September 30, 2002March 31, 2003 from the same period in 2001, and increased $2.8 million to $5.5$2.2 million for the nine-monththree-month period ended September 30, 2002 from the same period in 2001. These increases areMarch 31, 2002. This decrease is due primarily to license fees that we obtained as part of the software license agreement with AISFNF during 2002 (see Note 1011 to the unaudited consolidated financial statements). We recognized $0.6 million and $3.5 million ofnil revenues related to the AISFNF software license agreement during the three-month ended March 31, 2003 and nine-month periods$1.3 million during the three months ended September 30, 2002, respectively.March 31, 2002. Approximately $0.4 million of license fees remain to be earned and recognized related to the AISFNF software license agreement. We believe thatagreement; there is no specific date by which the revenues of the Software Solutions Segment will increasinglyservices related to these fees must be derived from our upgraded and new set of software solutions, including our wireless banking solutions.
The increase in professional service fees of $0.2$0.7 million is due to more billable hours, service and consulting contract work that we performed in connection with the sale and installation of software during the three months ended September 30, 2002March 31, 2003 compared to the three months ended September 30, 2001. The decrease in professional service fees of $1.1 million is due to fewer billable hours, service and consulting contract work that we performed in connection with the sale and installation of software during the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001.March 31, 2002. Certain professional service fees are bundled in software license contracts and reported as license fees using the percentage of completion method.
Maintenance fees of $0.4increased $0.1 million from the ninethree months ended September 30, 2001March 31, 2002 to the same period in 2003. First quarter 2002 is dueincluded approximately $0.2 million in mandate fees. Mandates are required changes to the completion of several large contracts since June 2001, thereby initiating the maintenance aspectour software products as mandated by card associations. The timing of these contracts, partially offsetmandated changes varies, as does the revenue recognition. No such changes were required by terminationthe relevant card associations during the first quarter of maintenance contracts by existing customers. Additionally, almost2003. The FNF software license agreement resulted in an increase of approximately $0.2 million of the increase is due to recognition of the maintenance revenues ofrelated to the software license agreement with AISFNF as described in Note 1011 to the unaudited consolidated financial statements. Approximately $0.8$0.5 million of maintenance revenues remain to be earned and recognized related to the AISFNF software license agreement through 2003. The remaining quarterly increase is due to the completion of contracts since March 2002, thereby initiating the maintenance aspect of those contracts, partially offset by termination of maintenance contracts by existing customers. We intend to securecontinue securing long-term revenue streams through multiyear maintenance agreements with existing and new customers.
21
The decrease in hardware sales in 20022003 from 20012002 is mainly attributed to the timing of$0.3 million hardware sales.sale in 2002 related to software license agreement with FNF. Hardware sales are generally sporadic as they are generally an incidental component to our software license and professional services offerings. Hardware sales for the nine months ended September 30, 2002 includes one significant hardware sale of $0.3 million related to the AIS software license agreement. The cost for this item is included in direct costs as described below.
Software Sales Backlog
We define “software sales backlog” as fees specified in contracts which we have executed and for which we expect recognition of the related revenue within one year. At September 30, 2002,March 31, 2003, the revenue backlog was $3.5$4.3 million as compared to $1.5$4.7 million at September 30, 2001. This increase resulted principally from increased sales during the three months ended September 30, 2002 and from the AISMarch 31, 2002. The FNF software license agreement which comprises approximately $0.4represented $2.7 million of the balance. There can be no assuranceMarch 31, 2002 backlog as compared to $0.4 million as of March 31, 2003. Strong sales in 2002 and 2003 have enabled us to replace the FNF license agreement within our backlog. We cannot assure you that the contracts included in backlog will actually generate the specified revenues or that the revenues will be generated within the one-year period.
Operating Expenses
Software Solutions Segment operating expenses consist primarily of:
Direct |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
(unaudited) (in thousands) | ||||||||||||
Direct operating costs | $ | 181 | $ | 57 | $ | 732 | $ | 584 | ||||
Salaries and benefits | 3,058 | 2,984 | 9,117 | 10,239 | ||||||||
Selling, general and administrative | 1,128 | 827 | 2,432 | 2,615 | ||||||||
Depreciation and amortization | 248 | 138 | 731 | 375 | ||||||||
Total operating expenses | $ | 4,615 | $ | 4,006 | $ | 13,012 | $ | 13,813 | ||||
Direct operating costs consist of hardware costs and distributor commissions. The marginal increasedecrease in direct operating costs of $0.1 million for the three months ended September 30, 2002March 31, 2003 from the three months ended September 30, 2001March 31, 2002 is primarily due to an increasea decrease in distributor commissions. The increase in direct operatinghardware costs of $0.1 million for the nine months ended September 30, 2002 from the nine months ended September 30, 2001 is duerelated to the cost of the one computer hardware sale as discussed above,FNF software license agreement in 2002 partially offset by generally lowerincreased distributor commissions.
Salary and benefits decreased marginally increased $0.1 million for the three-month period ended September 30, 2002March 31, 2003 from the three-month period ended September 30, 2001, and decreased $1.1 million for the nine-month period ended September 30,March 31, 2002 from the nine-month period ended September 30, 2001. During the first quarterdue to a slight increase in staff offset by capitalization of 2001 we reduced our workforce significantly with the primary objective of reducing costs in our Software Solutions Segment to bring them more in line with the anticipated revenue.
Selling, general and administrative expenses increased $0.3 millionmarginally to $1.1$0.7 million for the three months ended September 30, 2002March 31, 2003 from $0.8$0.6 million for the three months ended September 30, 2001.March 31, 2002. This increase is primarily due to increased expenses related to expansion into the Asia Pacific region. Costs decreased $0.2 million to $2.4 million for the nine months ended September 30, 2002 from $2.6 million for the nine months ended September 30, 2001. This decrease was primarily due to our efforts at controlling expenses. Some of the cost reductions in the nine months ended September 30, 2002 were one-time credits and incentives received in 2002 related to the renegotiation of certain telecommunication contracts that aredid not expected to continuerecur in the future.
Depreciation and amortization expense marginally increased $0.1to $0.3 million for the three months ended September 30, 2002March 31, 2003 from $0.2 million for the three months ended September 30, 2001 and $0.4 million for the nine months ended September 30,March 31, 2002 from the nine months ended September 30, 2001 due to the addition of $0.4 million in leasehold improvements in late 2001 and the first quarter of 2002, as well as the addition of $1.0$0.6 million in capitalized software development costs during 2001. Depreciation of improvements and amortization2002. Amortization of capitalized software development costs was $0.2 million for the three months ended September 30, 2002,March 31, 2003 and $0.5$0.1 million for the ninethree months ended September 30,March 31, 2002.
We have made an ongoing commitment to the development, maintenance and enhancement of our products and services. In particular, we invested and will continue to invest in new software products that permit additional features and transactions on our ATM network. In addition, we continue to invest in the ongoing development of products that were recently introduced to the market. Our research and development costs for computersoftware products to be sold, leased or otherwise marketed were $1.0$0.9 million for both the three months ended September 30, 2002 as compared to $1.6 million for the three months ended September 30, 2001. Our researchMarch 31, 2003 and development costs for computer products to be sold, leased or otherwise marketed were $2.7 million for the nine months ended September 30, 2002 as compared to $4.1 million for the nine months ended September 30, 2001.
We capitalize software development costs in accordance with our accounting policy of capitalizing development costs on a product-by-product basis once technological feasibility is established. We capitalized $0.1 million in the three months ended September 30, 2002, as compared to $0.1 million capitalized during the three months ended September 30, 2001. We capitalized $0.3 million in the nine months ended September 30, 2002, as compared to $0.3 million capitalized during the nine months ended September 30, 2001. We establish technological feasibility of computer software products when we complete all planning, designing, coding, and testing activities
22
necessary to establish that the product can be produced to meet its design specifications, including functions, features, and technical performance requirements.
Operating Income/(Loss)
The Software Solutions Segment generated operating income of $0.2 million for the three months ended March 31, 2003 as compared to operating income of $1.2 million for the three months ended March 31, 2002. Excluding the impact of the FNF software license agreement revenue and related hardware revenue from both periods’ results, Software Solutions would have generated operating income of $0.2 million for the three months ended March 31, 2003 and an operating loss of $0.4 million for the three months ended September 30, 2002 as comparedMarch 31, 2002.
CORPORATE SERVICES
Three months ended March 31, (unaudited, in thousands) | ||||||
2003 | 2002 | |||||
Salaries and benefits | $ | 620 | $ | 575 | ||
Selling, general and administrative |
| 809 |
| 696 | ||
Depreciation and amortization |
| 22 |
| 42 | ||
Total operating expenses | $ | 1,451 | $ | 1,313 | ||
Operating Expenses
Operating expenses for Corporate Services marginally increased to an operating loss of $0.2$1.4 million for the three months ended September 30, 2001 and earned operating income of $0.8 million for the nine months ended September 30, 2002 as compared to an operating loss of $1.8 million for the nine months ended September 30, 2001 as a result of the factors discussed above.
NON-OPERATING RESULTS
Interest Income
Interest income was $0.4 million for the three months ended September 30, 2001. The components of this segment’s operating costs for the three-month and nine-month periods ended September 30, 2002 and the same periods in 2001 were:
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
(unaudited) (in thousands) | ||||||||||||
Salaries and benefits | $ | 396 | $ | 577 | $ | 1,386 | $ | 2,239 | ||||
Selling, general and administrative | 793 | 619 | 2,244 | 2,195 | ||||||||
Depreciation and amortization | 84 | 37 | 40 | 108 | ||||||||
Total operating expenses | $ | 1,273 | $ | 1,233 | $ | 3,670 | $ | 4,542 | ||||
Interest Expense
Interest expense decreased marginally to $1.4$1.6 million for the three months ended September 30, 2002March 31, 2003 from $2.0$1.7 million for the three months ended September 30, 2001 and decreased to $4.8 million for the nine months ended September 30, 2002 compared to $7.1 million for the nine months ended September 30, 2001.March 31, 2002. The decrease from 2001 to 2002 was primarily due to a reductionthe partial cash redemption of the euro-denominated Senior Discount Notes in July 2002, which was substantially offset by an increase of $0.2 million in interest related to the Senior Discount Notes due to a weakening of the U.S dollar relative to the euro during 2002 as a resultwell as $0.2 million of significant debt/equity swaps during 2001 andinterest on indebtedness incurred with the partial cash redemptionacquisition of e-pay.
Gain on Sale of Subsidiary
The gain on subsidiary of $18.0 million for the three months ended March 31, 2003 relates to the sale of our U.K. subsidiary in July 2002, which areJanuary 2003. This sale is more fully described in Note 75 to the unaudited consolidated financial statements.
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Foreign Exchange Gain/(Loss)
We had a net foreign exchange gainloss of $0.2$1.8 million for the three months ended September 30, 2002, compared to a net foreign exchange loss of $3.8 million for the three months ended September 30, 2001 and a net foreign exchange loss of $3.2 million for the nine months ended September 30, 2002March 31, 2003, compared to a net foreign exchange gain of $3.9$0.4 million for the ninethree months ended September 30, 2001.March 31, 2002. This loss is primarily due to the weakening of the U.S dollar, particularly relative to the euro, during 2002. Exchange gains and losses that result from re-measurement of some of our assets and liabilities are recorded in determining net loss. A portion of the assets and liabilities isare denominated in euros, including capital lease obligations, notes payable (including the notes issued in our public bond offering),Senior Discount Notes, and cash and cash equivalents. It is our policy to attempt to match local currency receivables and payables. The foreign currency denominated assets and liabilities give rise to foreign exchange gains and losses as a result of U.S. dollar to local currency exchange movements.
Income Tax (Expense)/Benefit
Tax expense on Early Retirement of Debt
Discontinued Operations
On January 4, 2002, we sold substantially all of the DASH assets to AISFNF for $6.8 million in cash. Of this amount, $0.7 million is being held in escrow for a period of one year under the terms of a separate escrow agreement to cover certain post-closing adjustments and any damages that might arise from breach of the representations and warranties contained in the purchase agreement with AIS. We recorded a pre-tax gain of approximately $4.8
On July 15, 2002, we sold substantially all of the non-current assets and capital lease obligations of its processing business in France to Atos for 1 euro€1 plus reimbursement of certain operating expenses. A loss on disposal of the France business of $0.1 million was recorded in 2002. The net income from France operations reported as discontinued operations was nil for the three-month periods ended September 30, 2002March 31, 2003 and 2001. The income from France operations reported as discontinued operations for the nine months ended September 30, 2002 was nil as compared to a net loss of $0.9$0.2 million for the ninethree months ended September 30, 2001.
As a result of the above, we have removed the operating results of France and DASH from continuing operations for all reported periods in accordance with SFAS 144. We previously reported France under the Western European Sub-segment and DASH under the Other Operations Sub-segment.
Net Income/(Loss)
In summary, net loss of $2.5income was $15.4 million during the three months ended September 30, 2002 from aMarch 31, 2003 compared to net lossincome of $5.4$3.6 million for the three months ended September 30, 2001, as explained above.March 31, 2002. This increase results primarily from:
LIQUIDITY AND CAPITAL RESOURCES
Prior to 2002, we had negative cash flow from operations. We financed our historicalfunded operations and capital expenditures primarily through the proceeds from debt and equity offerings as well as through capital lease financing. As more fully described above, the 1998 issueCompany funded the recent acquisition of euro denominated 12 3/8% notes payable,e-pay with cash, debt and equity.
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As of March 31, 2003, the 1997 public equity offering, equipment lease financing and private placements of equity securities. We have used the net proceeds of these transactions, together with revenues from operations and interest income, to fund aggregate net losses of approximately $127 million, investments in property, plant and equipment of approximately $65.9 million and acquisitions of approximately $24.6 million.
We reduced the amount of the discount that would have resultedour long term Senior Discount Notes outstanding from the original terms of the Credit Agreement$38.7 million at March 31, 2002 to be paid to Michael J. Brown in cash.
Since July 1, 2002, we may at any time exercise our right to partially or fully redeem the Senior Discount Notes for cash without restriction. Any redemption is subject to an early redemption premium as defined in the Senior Discount Notes indenture. The early redemption premium decreases throughout the term of the Senior Discount Notes. As of March 31, 2003, the early redemption premium is 6% of the face value of the Senior Discount Notes redeemed. Starting July 1, 2003, the early redemption premium decreases to 4%, then to 2% July 1, 2004 and no premium from July 1, 2005 and thereafter.
In January 2003, we received net proceeds from the sale of our UK subsidiary of $28.9 million. We used all of those funds to pay the cash portion of the purchase price of e-pay, which we acquired in February 2003. In connection with the acquisition of e-pay, we incurred indebtedness to the former e-pay shareholders of $26.9 million (payable in British pounds sterling), which is composed of three separate elements:
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We intend to reduce our indebtedness under our Senior Discount Notes through repurchase of notes from time to time in exchange for equity as we have done in the past and/or through repayments as our cash flows permit. In the event we are not able to exchange debt for equity or repay the debt through cash flows, we will attempt to refinance this debt to decrease interest costs and, if possible, extend its repayment period if reasonable terms are available.
We offer no assurances that we will be able to obtain favorable terms for refinancing of any of our debt as described above.
In the EFT Processing Segment, we lease many of our ATMs under capital lease arrangements that expire between 20022003 and 2008. The leases bear interest between 8% and 12% per annum.year. As of September 30, 2002,March 31, 2003, we owed $10.3$6.4 million under these capital lease arrangements. We expect that our capital requirements will continue in the future, although strategies that promoteour strategy to focus on ATM outsourcing opportunities rather than ATM ownership and deployment as well as redeployment of under-performing ATMs will reduce somecapital requirements.
In the Prepaid Processing Segment, we own approximately 25% of these requirements. Acquisitionsthe 50,000 POS devices that we operate. The remaining 75% represent integrated cash register devices of related ATM businesses and investmentsour major retail customers. As the prepaid processing business expands, we will continue to add terminals in new markets will require additional capital expenditures. certain independent retail locations at a price of approximately $300 per terminal. We expect the proportion of owned terminals to remain at a similar percent of total terminals operated.
Fixed asset purchases for 20022003 are currently estimated to be in the range of $9$5.0 to $10$7.0 million.
We are required to maintain ATM hardware and software in accordance with certain regulations and mandates established by local country regulatory and administrative bodies as well as Europay, VISA and Mastercard. Accordingly, we expect additional capital expenditures over the next few years to maintain compliance with these regulations. Upgrades to the ATM software and hardware will also be required on or before 2005 to enable certain “micro–chip” card technology for “Smart Cards.” Our ATM hardware and software will need to be modified to enable the use of “Smart Cards.” We are currently developing a project plan for implementation and delivery and estimating the costs associated with the hardware and software modifications.
Effective July 1, 2001, we implemented our Employee Stock Purchase Plan, or ESPP, under which employees have the opportunity to purchase common stockCommon Stock through payroll deductions according to specific eligibility and participation requirements. This plan qualifies as an “employee stock purchase plan” under section 423 of the Internal Revenue Code of 1986. We completed a series of offerings of three months duration with new offerings commencing on January 1, April 1, July 1, and October 1 of each year. Under the plan, participating employees are granted options, which immediately vest and are automatically exercised on the final date of the respective offering period. The exercise price of common stockCommon Stock options purchased is the lesser of 85% of the “fair market value” (as defined in the ESPP) of the shares on the first day of each offering or the last date of each offering. The options are funded by participating employees’ payroll deductions or cash payments.
Under the provisions of the ESPP, we reserved 500,000 shares of common stockCommon Stock all of which we had issued 260,871 shares as of September 30,December 31, 2002. This plan qualifies as an “employee stock purchase plan”In February 2003, we adopted a new ESPP and reserved 500,000 shares of Common Stock for issuance under section 423 of the Internal Revenue Code of 1986.that plan. During the three months ended September 30, 2002,March 31, 2003, we issued 23,39611,994 shares at a price of $4.28$6.53 per share, resulting in proceeds to us of approximately $0.1 million. During the nine months ended September 30, 2002, we issued 86,301 shares at an average price of $11.60 per share, resulting in proceeds to us of $1.0 million.
In March 2002,February 2003, we made matching contributions of 9,64728,015 shares of stock in conjunction with our 401(k) employee benefits plan for the plan year 2001.2002. Under the terms of this plan, employer-matching contributions consist
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CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ITEMS
The following table summarizes our contractual obligations as of March 31, 2003 (unaudited, in thousands):
Payments due by period | |||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||
Notes payable (including interest) | $ | 84,427 | $ | 6,091 | $ | 38,334 | $ | 40,002 | $ | — | |||||
Capital leases (including interest) |
| 7,370 |
| 3,771 |
| 3,049 |
| 462 |
| 88 | |||||
Operating leases |
| 9,020 |
| 2,053 |
| 3,210 |
| 2,710 |
| 1,047 | |||||
Purchase obligations |
| 15,054 |
| 6,453 |
| 8,112 |
| 489 |
| — | |||||
Other long-term liabilities |
| — |
| — |
| — |
| — |
| — | |||||
Total | $ | 115,871 | $ | 18,368 | $ | 52,705 | $ | 43,663 | $ | 1,135 | |||||
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 total book valuenumber of our long term Senior Discount Notes from $46.2 million at September 30, 2001 to $34.0 million at September 30, 2002. We did this through a series of debt-for-debt exchanges, debt-for-equity exchanges,ATMs and a partial redemption as more fully described in Note 7 to our September 30, 2002 unaudited consolidated financial statements and in Note 11 to our consolidated financial statements for the year ended December 31, 2001. Due to market and other factors, we may not be able to continue to successfully implement these exchanges in the future. We are required to commence cash payments of interest on these notes on January 1, 2003. At current debttransaction levels, we will be required to make approximately $2.1 million in interest payments on a semi-annual basis beginning January 1, 2003. The full principal balance of these notes will be due and payable on July 1, 2006.
BALANCE SHEET ITEMS
The Company’s March 31, 2003 balance sheet has changed significantly compared to December 31, 2002, due to the acquisition of e-pay.
e-pay is responsible for the collection of cash receipts from the retailer for remittance to the telecommunication provider. Cash is collected into designated trust accounts classified as restricted cash balances that are not available for our operating business activities. This results in significant current assets held in restricted cash and trade accounts receivable due from retailers, and a corresponding liability to the telecommunications provider classified as accounts payable/accrued expense that substantially offsets this amount. Additionally, the acquisition of e-pay was made at a significant premium to the underlying historical cost basis of the e-pay assets, resulting in significant goodwill and other intangible assets as further described below.
Cash and cash equivalents
Cash and cash equivalents increased to $15.3$13.9 million at September 30, 2002March 31, 2003 from $8.8$12.0 million at December 31, 20012002 primarily due to the following activity:
• |
Restricted cash increased to $3.9$38.0 million at September 30, 2002March 31, 2003 from $1.9$4.4 million at December 31, 2001.2002 primarily due to the acquisition of e-pay. Approximately $33.2 million of the restricted cash is held in trust accounts by our Prepaid Processing Segment on behalf of the mobile operators for which we process transactions. These balances are used in connection with the administration of customer collection and vendor remittance activities in the Prepaid Processing Segment. The majority of restricted cashremainder is held as security with respect to cash provided by banks participating in our ATM network. The increase is due to the pledge of cash to purchase a $2.0 million surety bond as cash collateral for the Hungarian ATM network, to replace Michael J. Brown’s $4.0 million security pledge and a related $0.8 million certificate of deposit previously obtained for the same purpose.
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Trade accounts receivable
Trade accounts receivable decreasedincreased to $7.7$36.2 million at September 30, 2002March 31, 2003 from $8.9$8.4 million at December 31, 20012002 primarily due to improved collections.
Assets from discontinued operations
Assets from discontinued operationsheld for sale as of December 31, 2002 represent the net assets for France and DASH as of December 31, 2001. The decrease to nil as of September 30, 2002 results from the sale of substantially all of France’s and DASH’s assetsour U.K. ATM network subsidiary which was sold in January 2003 as discussed in Note 95 to our unaudited consolidated financial statements.
Property, plant and equipment
Net property, plant and equipment increaseddecreased to $30.1$21.3 million at September 30, 2002as of March 31, 2003 from $29.1$21.4 million at December 31, 2001.2002. This increasedecrease results from fixed asset purchasesdepreciation and amortization in excess of depreciation.
Intangible assets
Net intangible assets increased to $1.7$80.2 million at September 30, 2002March 31, 2003 from $1.6$1.8 million at December 31, 2001. The intangible asset is goodwill related to the 1999 acquisition of SBK, a German ATM company.2002. The increase from December 31, 20012002 to September 30, 2002March 31, 2003 is primarily due to remeasurementthe purchase of e-pay in February 2003. Of the total purchase price, $13.9 million has been allocated to amortizable intangible assets dueacquired and $64.7 million has been allocated to foreign exchange rate movement.
Other assets
Other assets marginally decreasedremained unchanged at $2.9 million from December 31, 2002 to $3.0March 31, 2003.
Current liabilities
Current liabilities increased to $87.2 million at September 30, 2002March 31, 2003 from $3.3$19.8 million at December 31, 20012002 due to the following activity:
Liabilities held for sale
Liabilities held for sale as of December 31, 2001 due to the following activity:
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Capital leases
Total capital lease obligations including current installments decreased to $10.3$6.4 million at September 30, 2002March 31, 2003 from $12.0$7.7 million at December 31, 2001.2002. This results from the excess of lease payments of $4.1$1.1 million over new capital lease obligations of $2.4 million.$0.1 million, and $0.4 million of leases paid on our behalf in connection with the sale of the U.K. ATM network. The new capital leases are generally for a term of 3 to 5 years.
Notes payable
Notes payable decreasedincreased to $34.0$64.0 million at September 30, 2002March 31, 2003 from $38.1$36.3 million at December 31, 2001.2002 primarily due to the indebtedness incurred with the purchase of e-pay. A summary of the activity for the three months ended March 31, 2003 is as follows (unaudited, in thousands):
e-pay Notes | Senior Discount Notes | Total | ||||||||
payable in pounds sterling | payable in euros | |||||||||
Balance at December 31, 2002 | $ | — |
| $ | 36,318 | $ | 36,318 | |||
Indebtedness incurred |
| 26,867 |
|
| — |
| 26,867 | |||
Accretion of discount |
| — |
|
| 11 |
| 11 | |||
Unrealized foreign exchange (gain)/loss |
| (270 | ) |
| 1,090 |
| 820 | |||
Balance at March 31, 2003 | $ | 26,597 |
| $ | 37,419 | $ | 64,016 | |||
Total Stockholders’ Equity
Total stockholders’ equity increased to $40.1 million at March 31, 2003 from $6.2 million at December 31, 2002. This results from the following activity (in thousands):activity:
Balance at December 31, 2001 | $ | 38,146 | ||
Unrealized foreign exchange loss (euro vs. U.S. dollar) | 4,413 | |||
Accretion of notes payable interest | 2,482 | |||
Early retirement of debt (see Note 7 to the unaudited consolidated financial statements) | (11,061 | ) | ||
Balance at September 30, 2002 | $ | 33,980 | ||
CRITICAL ACCOUNTING POLICIES
For details of critical accounting policies please refer to the audited consolidated financial statements of Euronet Worldwide, Inc. and subsidiaries for the year ended December 31, 2001,2002, including the notes thereto, set forth in the Company’s Form 10-K.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
EITF 00-21
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Element Deliverables” (EITF 00-21). The issue addresses how to account for arrangements that may involve multiple revenue-generating activities, i.e., the delivery or performance of multiple products, services, and/or rights to use assets. In applying this guidance, separate contracts with the same party, entered into at or near the same time, will be presumed to be a package, and the consideration will be measured and allocated to the separate units based on their relative fair values. This consensus guidance will be applicable to agreements entered into in quarters beginning after June 15, 2003. We will adopt this new accounting effective July 2002,1, 2003. We are currently evaluating the potential impact, if any, the adoption of EITF 00-21 will have on our financial position and results of operations.
On April 30, 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 146)149), which amends Statement of Financial Accounting Standards No. 133, “Accounting for Exit or Disposal Activities.”Derivative Instruments and Hedging Activities” (SFAS 133), to address (1) decisions reached by the Derivatives Implementation Group, (2) developments in other Board projects that address financial instruments, and (3) implementation issues related to the definition of a derivative. SFAS 146 addresses significant issues regarding149 has multiple effective date provisions depending on the recognition, measurement and reportingnature of costs that are associated with exit and disposal activities, including restructuring activities thatthe amendment to SFAS 133. We are currently accounted for pursuant toevaluating the guidance thatpotential impact, if any, the adoption of SFAS 149 will have on our financial position and results of operations.
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At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF) has set forthreached consensuses on EITF 02-18 “Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition.” Issues 1 and 2 of EITF 02-18 which considered whether, (i) an investor should recognize any previously suspended losses when accounting for a subsequent investment in an investee that does not result in the ownership interest increasing from one of significant influence to one of control, and (ii), if the additional investment represents the funding of prior losses, whether all previously suspended losses should be recognized or whether only the previously suspended losses equal to the portion of the investment determined to be funding prior losses should be recognized. The EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costsconcluded that if the additional investment, represents, in substance, the funding of prior losses, the investor should recognize previously suspended losses only up to Exit an Activity (including Certain Costs Incurredthe amount of the additional investment determined to represent the funding of prior losses. At its February 5, 2003 meeting, the FASB ratified the consensuses reached by the Task Force in a Restructuring).” The scopethis Issue. We have discontinued recording losses on the equity method investment in our subsidiary in Indonesia. If we make additional investments in this subsidiary, we would be required to recognize additional losses to the extent these additional investments are considered funding of SFAS 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive underunrecognized prior losses of the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS 146 will be effective for financial statements issued for fiscal years beginning after December 31, 2002. The Company has not yet determined the impact of SFAS 146 on results of operations and financial position.
FORWARD-LOOKING STATEMENTS
This document contains statements that constitute forward-looking statements within the meaning of section 27A of the Securities Act and section 21E of the U.S. Securities Exchange Act of 1934. All statements other than statements of historical facts included in this document are forward-looking statements, including statements regarding the following:
Investors are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may materially differ from those in the forward-looking statements as a result of various factors, including the following:
These risks and other risks are described elsewhere in Exhibit 99.1 to this documentForm 10-Q and our other filings with the Securities and Exchange Commission.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Exposure
In the three months ended September 30, 2002, 67%March 31, 2003, 78% of our revenues were generated in Poland, Hungary, Australia, the United Kingdom and Germany as compared to 67%61% in the three months ended September 30, 2001. In the nine months ended September 30, 2002, 64% of our revenues were generated in Poland, Hungary, the United Kingdom and Germany as compared to 66% in the nine months ended September 30, 2001.March 31, 2002. This decreaseincrease is due to the overall increase in revenues for our operations, including in these four countries.five countries and particulary due to the acquisition of e-pay in the U.K. and Australia which accounted for 52% of the revenues for the three months ended March 31, 2003. In Hungary and Poland, the majority of revenues received are denominated in the Hungarian forint and Polish zloty, respectively. However, the majority of our foreign currency denominated contracts in both countries are linked to either inflation or the retail price index. In the United Kingdom and Germany, 100% of the revenues received are denominated in the British pound and the euro, respectively. Although a significant portion of our expenditures in these countries are still made in or denominated in U.S. dollars, we are striving to achieve more of our expenses in local currencies to match our revenues.
We estimate that a 10% depreciation in foreign exchange rates of the euro, Australian dollar, Hungarian forint, Polish zloty and the British pound sterling against the U.S. dollar would have the combined effect of a $1.5$3.1 million decreaseincrease in the reported net loss.income. This effect was estimated by segregating revenues and expenses by the U.S. dollar, Hungarian forint, Polish zloty, British pounds, and euro and then applying a 10% currency devaluation to the non-U.S. dollar amounts. We believe this quantitative measure has inherent limitations. It does not take into account any governmental actions or changes in either customer purchasing patterns or our financing or operating strategies.
As a result of continued European economic convergence, including the increased influence of the euro as opposed to the U.S. dollar on the Central European currencies, we expect that the currencies of the markets where we invest will fluctuate less against the euro than against the dollar. Accordingly, we believe that our euro denominatedeuro-denominated debt provides, in the medium to long term, for a closer matching of assets and liabilities than would dollar-denominated debt.
Interest Rate Risk
Beginning January 1, 2003, interest payments of approximately 2.2€2.2 million euro (estimated $2.1$2.3 million as of September 30, 2002) will beMarch 31, 2003) are payable semi-annually on our outstanding 12 3/8% senior debt. Payment dates will beare January 1 and July 1, with the final interest payment due on July 1, 2006. The first payment due January 1, 2003 was made on December 30, 2002. Because the bond interest is payable in euro, foreign currency fluctuations between the U.S. dollar and the euro may result in gains or losses which, in turn, may increase or decrease the amount of U.S. dollar equivalent interest paid.
In April 2003, we made our first interest payment on our debt incurred with the purchase of e-pay. Annual interest payments total approximately £1.2 million (estimated $1.9 million as of March 31, 2003) with the final interest payment due on February 19, 2005. Approximately $0.5 million of these interest payments are payable quarterly from the cash flows from the Prepaid Processing Segment, with the remainder payable semi-annually.
We currently anticipate making these interest payments largely from earnings denominated in local currencies in our European markets. As a result, it may not be necessary to hedge these expected cash payments in U.S. dollars, since the source of funds used for payments would already be in pounds sterling or euro or euro-linked denominations. Throughout 2002, weWe will actively monitor our potential need to hedge future bond interest payments, and if required, we will initiate hedging strategies to minimize foreign currency losses resulting from payments made from U.S. dollars.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that
31
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2003 we issued 2,497,504 shares of our common stock (“Euronet Stock”)to the shareholders of e-pay, Limited. We also executed promissory notes totaling $26.9 million of which $7.4 million are convertible (the “Convertible Notes”) into Euronet Stock at the option of the holders at a conversion price of $11.43 per share, or 647,282 shares. The Euronet securities issued in this transaction were issued in reliance on the exemption from registration under Regulation S. This transaction is described more fully in Note 4 to the unaudited consolidated financial statements.
The Convertible Notes may be redeemed by Euronet, in whole but not in part, under certain conditions, including if the average market price of the Euronet Stock over a thirty consecutive trading day period exceeds $15.72, for Euronet Stock at a redemption price of $11.43 per share. The conversion price and the redemption price are subject to customary anti-dilution provisions.
We agreed to file with the SEC a registration statement to enable the public resale of the Euronet Stock received by the former shareholders of e-pay and to use its commercially reasonable efforts to cause such registration statement to be declared effective by the SEC (i) as promptly as practicable with respect to any Euronet Stock issued upon the redemption of the Convertible Notes and (ii) not later than 12 months following the closing of the acquisition with respect to the Euronet Stock issued at the time of closing or upon conversion of the Convertible Notes.
The shares of common stock issued at the closing of the transaction and issuable upon conversion of the Convertible Notes may not be transferred by the holders thereof prior to February 18, 2004. Euronet Stock issuable upon the redemption of the Convertible Notes may be transferred prior to February 18, 2004 pursuant to the registration statement as soon as it is declared effective by the SEC.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits –
Exhibit 3.1 | —Amendment No. 2 to the Bylaws of Euronet Worldwide, Inc. (filed as Exhibit 3.1 to Euronet Worldwide, Inc.’s current report on Form 8-K filed with the SEC on March 24, 2003, and incorporated by reference herein) | |
Exhibit 10.1 |
—Euronet Worldwide, Inc. Employee Stock Purchase Plan (as | ||
Exhibit | —Risk Factors | |
Exhibit 99.2 | —Certification by Chief Executive Officer | |
Exhibit 99.3 | —Certification by Chief Financial Officer |
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(b) Reports on Form 8-K
On July 29, 2002,February 3, 2003, the Company filed a current report on Form 8-K reporting events and information under Item 52 (“Other Events”Acquisition or Disposition of Assets”) and Item 7 (“Financial Statements, Pro Forma Financial Information and Exhibits”).
On August 15, 2002,February 19, 2003, the Company filed a current report on Form 8-K reporting events and information under Item 7 (“Financial Statements, Pro Forma Financial Information and Exhibits”) and Item 9 (“Regulation FD Disclosure”).
On September 24, 2002,March 6, 2003, the Company filed a current report on Form 8-K reporting events and information under Item 52 (“Other Events”Acquisition or Disposition of Assets”) and Item 7 (“Financial Statements, Pro Forma Financial Information and Exhibits”).
On November 1, 2002,March 12, 2003, the Company filed a current report on Form 8-K reporting events under Item 5 (“Other Events”) and Item 97 (“Regulation FD Disclosure”Financial Statements, Pro Forma Financial Information and Exhibits”).
On March 24, 2003, the Company filed a current report on Form 8-K reporting events under Item 5 (“Other Events”) and Item 7 (“Financial Statements, Pro Forma Financial Information and Exhibits”).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 15, 2003
By: | ||
| ||
Michael J. Brown | ||
Chief Executive Officer |
By: | ||
| ||
Rick L. Weller | ||
Chief Financial Officer |
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CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
I, Michael J. Brown, Chairman and Chief Executive Officer, of Euronet Worldwide, Inc., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Euronet Worldwide, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 15, 2003 |
/s/ MICHAEL J. BROWN |
Michael J. Brown |
Chairman and Chief Executive Officer |
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CERTIFICATIONS OF PRINCIPAL ACCOUNTING OFFICER
I, Kendall D. Coyne,Rick L. Weller, Chief Financial Officer of Euronet Worldwide, Inc.,and Chief Accounting Officer, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Euronet Worldwide, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 15, 2003 | ||
/s/ RICK L. WELLER | ||
Rick L. Weller | ||
Chief Financial Officer and Chief Accounting Officer |
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EXHIBIT INDEX
Exhibit Number | Description | |
Exhibit 3.1 | Amendment No. 2 to the Bylaws of Euronet Worldwide, Inc. (filed as Exhibit 3.1 to Euronet Worldwide, Inc.’s current report on Form 8-K filed with the SEC on March 24, 2003, and incorporated by reference herein) | |
Exhibit 10.1 | Euronet Worldwide, Inc. Employee Stock Purchase Plan (as | |
Exhibit 99.1 | Risk Factors | |
Exhibit 99.2 | Certification by Chief Executive Officer | |
Exhibit 99.3 | Certification by Chief Financial Officer |
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