EXHIBIT 99.1
RISK FACTORS
You should consider carefully the following risk factors in evaluating us, our
business and an investment in our securities. Any of the following risks, as
well as other risks and uncertainties, could harm our business and financial
results and cause the value of our securities to decline, which in turn could
cause you to lose all or a part of your investment. The risks below are not the
only ones facing our Company. Additional risks not currently known to us or that
we currently deem immaterial also may impair our business.
We have incurred net losses for almost all of our operating history. We may
continue to generate net losses for the foreseeable future while we concentrate
on expansion of our business.
For the year ended December 31, 2002, we had net losses of approximately $6.5
million. For the year ended December 31, 2001, we had net income of
approximately $0.7 million and for the years ended 2000 and 1999, we had net
losses of approximately $49.6 million and $30.9 million, respectively. This
results in an aggregate net loss of approximately $86.3 million for the period
January 1, 1999 through December 31, 2002. We may experience operating losses
again while we continue to concentrate on expansion of our business and
increasing our market share. If we cannot achieve and sustain operating
profitability or positive cash flow from operations, we may not be able to meet
our debt service or working capital requirements.
We have substantial indebtedness, and we will need a substantial increase in
cash flows to continue to be able to meet our debt service obligations.
We have substantial indebtedness. As of December 31, 2001 and December 31, 2002,
our total indebtedness was approximately $69.1 million and $60.4 million,
respectively, and our total assets were approximately $61.4 million and $66.6
million, respectively. We incurred this indebtedness in part as a result of our
issuance of certain 12 3/8% Senior Discount Notes that fall due on July 1, 2006.
Interest payments under these notes became due beginning on January 1, 2003. In
addition, on February 19, 2003, we acquired all of the outstanding share capital
of e-pay Limited. In connection with the e-pay acquisition, we incurred
approximately $27.0 million of additional debt and increased our total assets by
approximately $78 million.
We will be required to refinance a portion of our debt to ensure that we are
able to repay such debt on a timely basis. In addition, if the opportunity of a
strategic acquisition arises or if we enter into new contracts that require the
installation or servicing of ATM machines on a faster pace than anticipated, we
may require additional financing for these purposes and to fund our working
capital needs. This additional financing may be in the form of additional
indebtedness that would increase our overall leverage.
The level of our indebtedness could have important consequences to investors,
including the following:
. we must substantially increase our net cash flow to meet our
outstanding debt service obligations and to fund adequately our
planned capital expenditures and operations
. our ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or
other purposes may be limited or financing may be unavailable
. a substantial portion of our cash flows must be dedicated to the
payment of principal and interest on our indebtedness and other
obligations and will not be available for use in our business
. our level of indebtedness could limit our flexibility in planning for,
or reacting to, changes in our business and the markets in which we
operate
. our high degree of indebtedness will make us more vulnerable to
changes in general economic conditions and/or a downturn in our
business, thereby making it more difficult for us to satisfy our
obligations
In addition, if we fail to make required debt payments, or if we fail to comply
with other covenants in our debt service agreements, we would be in default
under the terms of these agreements. This would permit the holders of the
indebtedness to accelerate repayment of this debt and could cause defaults under
other indebtedness that we have.
We face some uncertainties in integrating e-pay Limited's operations.
The success of the e-pay acquisition is in part dependent on the ability
following the acquisition to integrate operations and leverage our existing
relationships with mobile phone operators and retailers. Although the management
of our Company, with assistance of e-pay management, intends to work diligently
to effectively integrate the operations of the two companies, we can give no
assurance as to the timing or extent to which integration will be achieved. In
addition, the loss of key e-pay employees, suppliers and customers could have a
material adverse effect on our ability to successfully integrate e-pay's
operations.
A lack of business opportunities or financial resources may impede our ability
to continue to expand at desired levels, and our failure to expand operations
could have an adverse impact on our financial condition.
Our expansion plans and opportunities are focused on three separate areas: (i)
our network of owned and operated ATMs; (ii) outsourced ATM management
contracts; and (iii) our prepaid mobile phone airtime services.
The continued expansion and development of our ATM business will depend on
various factors including the following:
. the demand for our ATM services in our current target markets
. the ability to locate appropriate ATM sites and obtain necessary
approvals for the installation of ATMs
. the ability to install ATMs in an efficient and timely manner
. the expansion of our business into new countries as currently planned
. entering into additional card acceptance and ATM management agreements
with banks
. the ability to obtain sufficient numbers of ATMs on a timely basis
. the availability of financing for the expansion
We carefully monitor the growth of our ATM networks in each of our markets, and
we accelerate or delay our expansion plans depending on local market conditions
such as variations in the transaction fees we receive, competition, overall
trends in ATM-transaction levels and performance of individual ATMs.
We cannot predict the increase or decrease in the number of ATMs we manage under
outsourcing agreements, because this depends largely on the willingness of banks
to enter into outsourcing contracts with us. Banks are very careful in
negotiating these agreements and the process of negotiating and signing
outsourcing agreements typically takes six to twelve months. These agreements
tend to cover large numbers of ATMs, so significant increases and decreases in
our pool of managed ATMs could result from signature or termination of these
management contracts.
We plan to expand our prepaid mobile phone top-up business, which is currently
focused on the U.K. and Australia, into our other markets by taking advantage of
our existing relationships with mobile phone operators and retailers. This
expansion will depend on various factors, including the following:
. the ability to negotiate new agreements for those markets with mobile
phone operators and retailers
. the continuation of the trend of increased use of electronic prepaid
airtime among mobile phone users
. the development of mobile phone networks in these markets and the
increase in the number of mobile phone users
. the availability of financing for the expansion
We expect to spend between $2.5 million and $3 million on fixed asset purchases
to implement our expansion plans and necessary upgrades or modifications of our
processing system in 2003. We expect to use cash on hand and cash flows from
operations and potentially lease financing to fund these expenses.
In addition, our continued expansion may involve acquisitions that could divert
our resources and management time and require integration of new assets with our
existing networks and services. Our ability to manage our rapid expansion
effectively will require us eventually to expand our operating systems and
employee base. An inability to do this could have a material adverse effect on
our business, growth, financial condition or results of operations.
We are subject to business cycles and other outside factors that may negatively
affect mobile phone operators, retailers and our customers.
A recessionary economic environment or other outside factors could have a
negative impact on mobile phone operators, retailers and our customers, which
could, in turn, negatively impact our financial results. If mobile phone
operators
experience decreased demand for their products and services or if the retail
locations where we provide POS top-up services decrease in number, we will
process fewer transactions, resulting in lower revenue. In addition, a
recessionary economic environment could result in a higher rate of bankruptcy
filings by mobile phone operators, retailers and our customers, which will have
a negative impact on our business.
Our prepaid mobile airtime top-up business may be susceptible to fraud occurring
at the retailer level.
We contract with retailers that accept payment on our behalf, which we then
transfer to a trust account for payment to mobile phone operators. In the event
a retailer does not transfer to us payments that it receives for mobile phone
airtime, we are responsible to the mobile phone operator for the cost of the
airtime credited to the customer's mobile phone. Although we maintain insurance
polices and take other precautions to mitigate this risk, we can provide no
assurance that retailer fraud will not increase in the future or that any
proceeds we receive under our insurance policies will be adequate to cover
losses resulting from retailer fraud, which could have a material adverse effect
on our business, financial condition and results of operations.
Because we typically enter into short-term contracts with mobile phone operators
and retailers, our top-up business is subject to the risk of non-renewal of
those contracts.
Our contracts with mobile phone operators to process prepaid mobile phone
airtime recharge services typically have terms of two years or less. Many of
those contracts may be canceled by either party upon three months notice. Our
contracts with mobile phone operators are not exclusive, so these operators may
enter into top-up contracts with other service providers. In addition, our
top-up service contracts with major retailers typically have terms of one to two
years and our contracts with smaller retailers typically may be canceled by
either party upon three months' notice. The cancellation or non-renewal of one
or more of our significant mobile phone operator or retail contracts, or of a
large enough group of our contracts with smaller retailers, could have a
material adverse effect on our business, financial condition and results of
operations.
The level of transactions on our ATM networks is subject to substantial seasonal
variation, which may cause our quarterly results to fluctuate materially and
create volatility in the price of our shares.
Our experience is that the level of transactions on our networks is subject to
substantial seasonal variation. Transaction levels have consistently been much
higher in the last quarter of the year due to increased use of ATMs during the
holiday season. There is a drop in the level of transactions in the first
quarter, during which transaction levels are generally the lowest we experience
during the year. Since revenues of the "Processing Services Segment" are
primarily transaction-based, this segment is directly affected by this
cyclicality. As a result of these seasonal variations, our quarterly operating
results may fluctuate materially and could lead to volatility in the price of
our shares.
The stability and growth of our ATM business depend on maintaining our current
card acceptance and ATM management agreements with banks and international card
organizations, and on securing new arrangements for card acceptance and ATM
management.
The stability and future growth of our ATM business depend in part on our
ability to sign card acceptance and ATM management agreements with banks and
international card organizations. Card acceptance agreements allow our ATMs to
accept credit and debit cards issued by banks and international card
organizations. ATM management agreements generate service income from our
management of ATMs for banks. These agreements are the primary source of our
revenues.
These agreements have expiration dates and banks and international card
organizations are generally not obligated to renew them. In some cases, banks
may terminate their contracts prior to the expiration of their terms. We cannot
assure you that we will be able to continue to sign or maintain these agreements
on terms and conditions acceptable to us or that international card
organizations will continue to permit our ATMs to accept their credit and debit
cards. The inability to continue to sign or maintain these agreements, or to
continue to accept the credit and debit cards of local banks and international
card organizations at our ATMs in the future, could have a material adverse
effect on our business, growth, financial condition or results of operations.
Retaining the founders of our Company and of e-pay and finding and retaining
qualified personnel in Europe are essential to our continued success.
Our strategy and its implementation depend in large part on the founders of our
Company, in particular Michael Brown and Daniel Henry, and their continued
involvement in Euronet in the future. In addition, the success of the expansion
of e-pay's business depends in large part upon the retention of e-pay's
founders, Paul Althesen and John Gardiner. Our success also
depends in part on our ability to hire and retain highly skilled and qualified
management, operating, marketing, financial and technical personnel. The
competition for qualified personnel in Central Europe and the other markets
where we conduct our business is intense and, accordingly, we cannot assure you
that we will be able to continue to hire or retain the required personnel.
Our officers and some of our key personnel have entered into service or
employment agreements containing non-competition, non-disclosure and
non-solicitation covenants and providing for the granting of incentive stock
options with long-term vesting requirements. However, most of these contracts do
not guarantee that these individuals will continue their employment with us. The
loss of our key personnel could have a material adverse effect on our business,
growth, financial condition or results of operations.
Our operating results depend in part on the volume of transactions on ATMs in
our network and the fees we can collect from processing these transactions.
Transaction fees from banks and international card organizations for
transactions processed on our ATMs have historically accounted for a substantial
majority of our revenues. Although we are less dependent on these fees due to
our recent acquisition of e-pay, the future operating results of our ATM
business depend on the following factors:
. the increased issuance of credit and debit cards
. the increased acceptance of our ATM processing and management services
in our target markets
. the maintenance of the level of transaction fees we receive
. the installation of larger numbers of ATMs
. the continued use of our ATMs by credit and debit cardholders
Although we believe that the volume of transactions in developing countries will
tend to increase due to growth in the number of cards being issued by banks in
these markets, we anticipate that transaction levels on any given ATM in
developing markets will not increase significantly. We can improve the levels of
transactions on our ATM network overall by acquiring good sites for our ATMs,
eliminating poor locations, entering new less-developed markets and adding new
transactions to the sets of transactions that are available on our ATMs.
However, we may not be successful in materially increasing transaction levels
through these measures.
Developments in electronic financial transactions, such as the increased use of
debit cards by customers and pass-throughs of ATM transaction fees by banks to
customers, or in the mobile phone industry, could materially reduce ATM
transaction levels and our revenues.
Certain developments in the field of electronic financial transactions may
reduce the amount of cash that individuals need on a daily basis, including the
promotion by international card organizations and banks of the use of bank debit
cards for transactions of small amounts. These developments may reduce the
transaction levels that we experience on our ATMs in the markets where they
occur. Banks also could elect to pass through to their customers all, or a large
part of, the fees we charge for transactions on our ATMs. This would increase
the cost of using our ATM machines to the banks' customers, which may cause a
decline in the use of our ATM machines and, thus, have an adverse effect on
revenues. If transaction levels over our existing ATM network do not increase,
growth in our revenues will depend primarily on rolling out ATMs at new sites
and developing new markets, which requires capital investment and resources and
reduces the margin we realize from our revenues.
The mobile phone industry is a rapidly evolving area, in which technological
developments, in particular the development of new methods or services, may
affect the demand for other services in a dramatic way. The development of any
new technology that reduced the need or demand for prepaid mobile phone time
could materially and adversely affect our business.
We generally have little control over the ATM transaction fees established in
the markets where we operate, and therefore cannot control any potential
reductions in these fees.
The amount of fees we receive per transaction is set in various ways in the
markets in which we do business. We have card acceptance agreements or ATM
management agreements with some banks under which fees are set. However, we
derive the bulk of our revenues in most markets from "interchange fees" that are
set by the central ATM processing switch. The banks that participate in these
switches set the interchange fee, and we are not in a position in any market to
influence greatly these fees, which may increase or decrease over time. A
significant decrease in the interchange fee in any market could adversely affect
our results in that market.
In some cases, we are dependent upon interntional card organizations and
national transaction processing switches to provide assistance in obtaining
settlement from card issuers of funds relating to transactions on our ATMs.
Our ATMs dispense cash relating to transaction on credit and debit cards issued
by banks. We have in place arrangements for the settlement to us of all of those
transactions, but in some cases we do not have a direct relationship with the
card issuing bank and rely for settlement on the application of rules that are
administered by international card associations (such as Visa or MasterCard) or
national transaction processing switches. If a bank fails to settle transactions
in accordance with those rules, we are dependent upon cooperation from such
organizations or switches to enforce our right of settlement against such banks.
Failure by such organizations or switches to provide the required cooperation
could result in our inability to obtain settlement of funds relating to
transactions and adversely affect our business.
We derive a significant amount of revenue in of our business from service
contracts signed with financial institutions to own and or operate their ATM
machines.
Certain contracts have been and, in the future, may be terminated by the
financial institution resulting in a substantial reduction in revenue. Contract
termination payments, if any, may be inadequate to replace revenues and
operating income associated with these contracts.
Because our business is highly dependent on the proper operation of our computer
network and telecommunications connections, significant technical disruptions to
these systems would adversely affect our revenues and financial results.
Our business involves the operation and maintenance of a sophisticated computer
network and telecommunications connections with banks, financial institutions,
mobile operators and retailers. This, in turn, requires the maintenance of
computer equipment and infrastructure, including telecommunications and
electrical systems, and the integration and enhancement of complex software
applications. There are operational risks inherent in this type of business that
can result in the temporary shut-down of part or all of our processing systems,
such as failure of electrical supply, failure of computer hardware and software
errors. Excluding our German ATMs, we operate all of our ATMs through our
Budapest processing center, and any operational problem in Budapest may have a
significant adverse impact on the operation of our network generally. In
addition, we operate all of our top-up services through our processing center in
the U.K., and any operational problem there could have a significant adverse
impact on the operation of our top-up network.
We employ experienced operations and computer development staff and have created
redundancies and procedures, particularly in our Budapest and U.K. processing
centers, to decrease these risks. However, these risks cannot be eliminated
entirely. Any technical failure that prevents operation of our systems for a
significant period of time will prevent us from processing transactions during
that period of time and will directly and adversely affect our revenues and
financial results.
We have the risk of liability for fraudulent bankcard and other card
transactions involving a breach in our security systems, as well as for ATM
theft and vandalism.
We capture, transmit, handle and store sensitive information in conducting and
managing electronic, financial and mobile transactions, such as card information
and PIN numbers. These businesses involve certain inherent security risks, in
particular the risk of electronic interception and theft of the information for
use in fraudulent card transactions. We incorporate industry-standard encryption
technology and processing methodology into our systems and software to maintain
high levels of security. Although this technology and methodology decrease
security risks, they cannot be eliminated entirely as criminal elements apply
increasingly sophisticated technology to attempt to obtain unauthorized access
to the information handled by ATM and electronic financial transaction networks.
Any breach in our security systems could result in the perpetration of
fraudulent financial transactions for which we may be found liable. We are
insured against various risks, including theft and negligence, but our insurance
coverage is subject to deductibles, exclusions and limitations that may leave us
bearing some or all of any losses arising from security breaches.
In addition to electronic fraud issues, the possible theft and vandalism of ATMs
present risks for our ATM business. We install ATMs at high-traffic sites and
consequently our ATMs are exposed to theft and vandalism. Although we are
insured against these risks, exclusions or limitations in our insurance coverage
may leave us bearing some or all of any loss arising from theft or vandalism of
ATMs.
We are required under German law and the rules of financial transaction
switching networks in all of our markets to have "sponsors" to operate ATMs and
switch ATM transactions. Our failure to secure "sponsor" arrangements in any
market could prevent us from doing business in that market.
Under German law, only a licensed financial institution may operate ATMs, and we
are therefore required to have a "sponsor" bank to conduct our German ATM
operations. In addition, in all of our markets, our ATMs are connected to
national financial transaction switching networks owned or operated by banks,
and to other international financial transaction switching networks operated by
organizations such as Citibank, Visa and MasterCard. The rules governing these
switching networks require any company sending transactions through these
switches to be a bank or a technical service processor that
is approved and monitored by a bank. As a result, the operation of our ATM
network in all of our markets depends on our ability to secure these
"sponsor"-type arrangements with financial institutions.
To date, we have been successful in reaching contractual arrangements that have
permitted us to operate in all of our target markets. However, we cannot assure
you that we will continue to be successful in reaching these arrangements, and
it is possible that our current arrangements will not continue to be renewed.
Our competition in the Processing Services market includes large, well-financed
banks and, in the software market, companies larger than us with earlier entry
into the market. As a result, we may lack the financial resources and access
needed to capture increased market share.
Processing Services Segment - Our principal Processing Services competitors
include ATM networks owned by banks and national switches consisting of
consortiums of local banks that provide outsourcing and transaction services
only to banks and independent ATM deployers in that country. Large,
well-financed companies that operate ATMs, such as EDS, American Express, First
Data Corporation or Concord EFS may also establish ATM networks or offer
outsourcing services that compete with us in various markets. Competitive
factors in our Processing Services business include network availability and
response time, price to both the bank and to its customers, ATM location and
access to other networks. Our competitors may introduce or expand their ATM
networks in the future, which would lead to a decline in the usage of our ATMs.
There are certain independent (non bank-owned) companies providing electronic
recharge on ATMs in individual markets in which we provide this service. We are
not aware of any individual independent companies providing electronic recharge
on ATMs across multiple markets in which we provide this service. In this area,
we believe competition will come principally from the banks providing such
services on their own ATMs through relationships with mobile operators or from
card transaction switching networks that add recharge transaction capabilities
to their offerings (as is the case in the United Kingdom through the LINK
network). However, there are relatively few barriers to entry in this business
and larger companies that have more financial resources than we do could
successfully compete with us based on a number of factors, including price.
Software Solutions Segment - We believe we are the leading supplier of
electronic financial transaction processing software for the IBM iSeries
(formerly AS/400) platform. Other suppliers service the software requirements of
large mainframe systems and UNIX based platforms.
Competitors of the Software Solutions Segment compete across all EFT software
components in the following areas: (i) ATM, network and point-of-sale software
systems, (ii) Internet banking software systems, (iii) credit card software
systems and (iv) wireless banking software systems. One competitor is Applied
Communications Inc. ("ACI") based in Omaha, Nebraska, which enjoys a large
market share due to its early entry into the financial systems software market
and a client base of larger banks and financial institutions. Other competitors
include Mosaic Software and Oasis Software International.
Competitive factors in the Software Solutions business include price, technology
development and the ability of software systems to interact with other leading
products.
Prepaid Processing Services Segment - Several companies offer electronic
recharge services for mobile phone airtime on POS terminals in the markets where
we do business. These companies include Alphyra, Paypoint, Omega Logic, Barclays
Merchant Services and Anpost in the UK, and On-Q and Ezipin in Australia. In our
target markets within Central Europe companies such as Sonera, Smart Trust,
Hypercom and others are attempting to obtain footholds, but are not currently
enjoying any significant market share.
We believe, however, that we have a competitive advantage due to various
factors. First, in the UK and Australia, our newly acquired subsidiary been in
existence for longer than most of our competitors and has significant market
share in those markets. We have approximately 35% of the POS recharge market in
the UK and 70% in Australia. In addition, we offer complementary ATM and mobile
recharge solutions through our processing center. We believe this will improve
our ability to solicit the use of networks of devices owned by third parties
(for example, banks and switching networks) to deliver recharge services. In
selected developing markets we hope to establish a first to market advantage by
rolling out terminals rapidly before competition is established. We also have an
extremely flexible technical platform that enables us to tailor point of sale
solutions to individual merchant requirements where appropriate.
The principal competitive factors in this area include price (that is, the level
of commission charged for each recharge transaction) and up time offered on the
system. Major retailers with high volumes are in a position to demand a larger
share of the commission, which increases the amount of competition among service
providers.
As the volume of transactions increases, we believe the principal factor in
competition will be quality and price, as competitors may offer lower
commissions to secure business.
We conduct a significant portion of our business in Central and Eastern European
countries, and we have subsidiaries in the Middle East and Asia, where the risk
of continued political, economic and regulatory change that could impact our
operating results is greater than in the U.S. or Western Europe.
We have subsidiaries in Hungary, Poland, Czech Republic, Romania, Croatia,
India, and Indonesia and have operations in other countries in Central Europe,
the Middle East and Asia. We sell software in many other markets in the
developing world. These countries have undergone significant political, economic
and social change in recent years and the risk of new, unforeseen changes in
these countries remains greater than in the U.S. or Western Europe. In
particular, changes in laws or regulations or in the interpretation of existing
laws or regulations, whether caused by a change in government or otherwise,
could materially adversely affect our business, growth, financial condition or
results of operations.
For example, currently there are no limitations on the repatriation of profits
from all of the countries in which we have subsidiaries, but foreign exchange
control restrictions, taxes or limitations may be imposed or increased in the
future with regard to repatriation of earnings and investments from these
countries. If exchange control restrictions, taxes or limitations
are imposed, our ability to receive dividends or other payments from affected
subsidiaries could be reduced, which may have a material adverse effect on us.
In addition, corporate, contract, property, insolvency, competition, securities
and other laws and regulations in Hungary, Poland, the Czech Republic, Romania,
Croatia and other countries in Central Europe have been, and continue to be,
substantially revised during the completion of their transition to market
economies. Therefore, the interpretation and procedural safeguards of the new
legal and regulatory systems are in the process of being developed and defined,
and existing laws and regulations may be applied inconsistently. Also, in some
circumstances, it may not be possible to obtain the legal remedies provided for
under these laws and regulations in a reasonably timely manner, if at all.
Transmittal of data by electronic means and telecommunications is subject to
specific regulation in most Central European countries. Although these
regulations have not had a material impact on our business to date, changes in
these regulations, including taxation or limitations on transfers of data across
national borders, could have a material adverse effect on our business, growth,
financial condition or results of operations.
Because we derive our revenue from a multitude of countries with different
currencies, our business is affected by local inflation and foreign exchange
rates and policies.
We attempt to match any assets denominated in a currency with liabilities
denominated in the same currency. Nonetheless, substantially all of our
indebtedness is denominated in Euro and a significant amount of our
expenditures, including the acquisition of ATMs and executive salaries, are made
in U.S. dollars. As exchange rates among the U.S. dollar, the euro and other
currencies fluctuate, the translation effect of these fluctuations may have a
material adverse effect on our results of operations or financial condition as
reported in U.S. dollars. Moreover, exchange rate policies have not always
allowed for the free conversion of currencies at the market rate.
In recent years, Hungary, Poland and the Czech Republic have experienced high
levels of inflation. Consequently, these countries' currencies have continued to
decline in value against the major currencies of the OECD over this time period.
Due to the significant reduction in the inflation rate of these countries in
recent years, none of these countries are considered to have a
hyper-inflationary economy. Nonetheless, rates of inflation in these countries
may continue to fluctuate from time to time. The majority of all three of our
subsidiaries' revenues are denominated in the local currency.
The terms of our certificate of incorporation and bylaws, and of Delaware law
generally, may discourage the acquisition of our Company and may impede a change
in control of our Company.
Among other things, the provisions of our certificate of incorporation and
bylaws have the following effects:
. they classify our Board of Directors into three classes serving
staggered three-year terms
. they permit our Board of Directors, without further stockholder
approval, to issue preferred stock
. they prohibit us from engaging in some types of business combinations
with interested stockholders
. they do not permit our stockholders to call special stockholder
meetings
These provisions could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers at a price above the
market value of our Common Stock at the time of the offer. The issuance of
preferred stock could also adversely affect the voting power of the holders of
Common Stock and impede a change in control of our Company. In addition, our
Board of Directors recently adopted a stockholder rights plan which may impede a
change in control of our Company.
Our directors and officers, together with the entities with which they are
associated, owned about 23% of our Common Stock as of March 1, 2003, giving them
significant control over decisions related to our Company.
This control includes the ability to influence the election of other directors
of our Company and to cast a large block of votes with respect to virtually all
matters submitted to a vote of our stockholders. This concentration of control
may have the effect of delaying or preventing transactions or a potential change
of control of our Company.
The sale of a substantial amount of our Common Stock in the public market could
materially decrease the market price of our Common Stock, and about 31% of our
outstanding Common Stock, while not currently traded publicly, could be publicly
traded in blocks in the future. If a substantial amount of our Common Stock were
sold in the public market, or even targeted for sale, this could have a material
adverse effect on the market price of our Common Stock and our ability to sell
Common Stock in the future. As of March 1, 2003, we had 26.4 million shares of
Common Stock outstanding of which more than 8 million shares, or about 31%, are
not currently traded on the public market. About 5.9 million of these shares are
held by persons who may be deemed to be our affiliates and who would be subject
to Rule 144 of the general rules and regulations of the United States Securities
and Exchange Commission. Rule 144 limits the number of shares that affiliates
can publicly sell during each 90-day period. However, over the course of time,
these shares have the potential to be publicly traded, perhaps in large blocks.
Moreover, some of these shareholders can require us to register transactions to
sell their shares, which would permit them to sell shares without regard to the
Rule 144 limitations. In this connection, we agreed as part of the e-pay
acquisition to register 2,497,504 shares of our Common Stock for resale not
later than February 19, 2004.
An additional 8.8 million shares of Common Stock could be added to the total
outstanding Common Stock through the exercise of options and warrants or the
conversion of notes. This could dilute the ownership percentage of current
stockholders. Also, once they are outstanding, these shares of Common Stock
could be traded in the future and result in a material decrease in the market
price of our Common Stock.
As of December 31, 2002, we had an aggregate of 7.9 million options outstanding
held by our directors, officers and employees, which entitles these holders to
acquire an equal number of shares of our Common Stock on exercise. Of this
amount, 2.7 million options are currently vested, which means they can be
exercised at any time. We have 254,010 warrants outstanding in connection with
our issuance of 12 3/8% Senior Discount Notes. In addition, the convertible
notes issued in the e-pay acquisition are convertible into 647,282 shares of our
Common Stock at an initial conversion price of $11.43 per share, and may be
publicly resold commencing February 19, 2004, or earlier if we force their
conversion, pursuant to a registration statement we agreed to file with the SEC.
Therefore, approximately 8.8 million shares could potentially be added to the
total current outstanding Common Stock through the exercise of options and
warrants, or the conversion of notes, and thereby dilute the ownership
percentage of current owners.
Of these 7.9 million total options, an aggregate of 2.4 million options are
held by persons who may be deemed to be our affiliates and who would be subject
to Rule 144. Thus, upon exercise of their options, these affiliates' shares
would be subject to the trading restrictions imposed by Rule 144. For the
remainder of the options and the convertible notes, the Common Stock issued on
their exercise or conversion would be freely tradable in the public market. Over
the course of time, all of the issued shares have the potential to be publicly
traded, perhaps in large blocks.