EURONET WORLDWIDE, INC. - Annual Report: 2007 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
Commission File Number 001-31648
EURONET WORLDWIDE, INC.
(Exact name of the Registrant as specified in its charter)
DELAWARE | 74-2806888 | |
(State of other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) |
4601 COLLEGE BOULEVARD
SUITE 300
LEAWOOD, KANSAS 66211
(913) 327-4200
(Address and telephone number of the Registrants principal executive offices)
SUITE 300
LEAWOOD, KANSAS 66211
(913) 327-4200
(Address and telephone number of the Registrants principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.02 par value
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes þ No o
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a small reporting company. See the definitions of large accelerated
filer, ''accelerated filer and small reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
þ
Accelerated filer
o Non-accelerated filer
o Smaller reporting company
o
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2). Yes o No þ
As of June 30, 2007, the aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $1,275 million. The aggregate market value was
determined based on the closing price of the Common Stock on June 30, 2007.
At February 22, 2008, the registrant had 48,955,047 shares of common stock (the Common Stock)
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its Annual Meeting of Shareholders in 2008, which
will be filed with the Securities and Exchange Commission no later than 120 days after December 31,
2007, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
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PART I
ITEM 1. BUSINESS
OVERVIEW
General Overview
Euronet Worldwide, Inc. (together with our subsidiaries, we, us, Euronet or the Company) is
a leading electronic payments provider, offering automated teller machine (ATM) and point-of-sale
(POS) and card outsourcing services, card issuing and merchant acquiring services, integrated
electronic financial transaction (EFT) software, network gateways, electronic distribution of
top-up services for prepaid mobile airtime and other prepaid products, electronic consumer money
transfer and bill payment services to financial institutions, mobile operators, retailers and
individual customers. The Company primarily operates in three principal business segments: EFT
Processing Segment, Prepaid Processing Segment and Money Transfer Segment.
The Companys EFT Processing Segment provides end-to-end solutions relating to operations of ATMs
and POS networks, and debit and credit card processing in Europe, Asia and the Middle-East. We are
one of the largest international providers of prepaid mobile airtime processing. Based on revenues
and volumes, through our RIA Envia, Inc. (RIA) subsidiary and its licensed operating
subsidiaries, we are also the third-largest global money transfer company.
Core Business Segments
Effective January 1, 2007, we began reporting and managing the operations of the EFT Processing
Segment and the former Software Solutions Segment on a combined basis. Additionally, as a result of
the acquisition of RIA in April 2007, we added the Money Transfer Segment. As a result of these
changes, we operate in the following three principal business segments as of December 31, 2007:
| An EFT Processing Segment, which processes transactions for a network of 11,347 ATMs and approximately 50,000 POS terminals across Europe, Asia and the Middle-East. We provide comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing, card issuing and merchant acquiring services and electronic recharge services for prepaid mobile airtime. Through this segment, we also offer a suite of integrated EFT software solutions for electronic payment, merchant acquiring, card issuing and transaction delivery systems. | |
| A Prepaid Processing Segment, which provides distribution of prepaid mobile airtime and other prepaid products and collection services for various prepaid products, cards and services. Including terminals operated by unconsolidated subsidiaries, we operate a network of approximately 396,000 POS terminals providing electronic processing of prepaid mobile airtime top-up services in the U.S., Europe, Africa, Asia Pacific and the Middle-East. The Money Transfer Segment originates and terminates transactions through a network of more than 71,000 locations, which include sending agents and Company-owned stores, and an extensive payer network across 100 countries. | |
| A Money Transfer Segment, which provides global money transfer and bill payment services. Money transfer services are offered through a sending network of agents and Company-owned stores primarily in North America, the Caribbean, Europe and Asia-Pacific, disbursing money transfers through a worldwide payer network. Bill payment services are offered primarily in the U.S. |
We have six processing centers in Europe, two in Asia and two in the U.S. We have 23 principal
offices in Europe, five in the Asia-Pacific region, three in the U.S., and one each in the Middle
East and Latin America. Our executive offices are located in Leawood, Kansas.
Historical Perspective
The first company in the Euronet group was established in 1994 as Euronet Holding N.V., a Hungarian
limited liability company. We began operations in 1995, setting up a processing center in Budapest,
Hungary and installing our first ATMs in Hungary, followed by Poland and Germany. The Euronet group
was reorganized on March 6, 1997 in connection with its initial public offering, and at that time
the operating entities of the Euronet group became wholly owned subsidiaries of Euronet Services
Inc., a Delaware corporation. We changed our name from Euronet Services, Inc. to Euronet Worldwide,
Inc. in August 2001.
Until December 1998, we devoted substantially all of our resources to establishing and expanding
the EFT Processing Segments ATM network and outsourced ATM management services business in Europe;
including Hungary, Poland, the Czech Republic, Croatia and Germany. We subsequently expanded our
presence to the Middle-East, Greece, France, the U.K., Slovakia, India, Romania, Bulgaria, Serbia,
Ukraine and China. We further expanded the product offerings of the EFT Processing Segment through
the 2005 acquisition of Instreamline S.A., a Greek company that provides credit card and POS
outsourcing services in addition to debit
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card and transaction gateway switching services in Greece
and the Balkan region, and the 2006 acquisition of Essentis Limited
(Essentis), a U.K. company that developed a leading card issuing and merchant acquiring software
system. We continue to be excited about the opportunities available in Central and Eastern European
and Asia-Pacific markets and our progress is indicative of the expansion opportunities available in
these markets.
In 2003, Euronet complemented its existing business by acquiring a third business, e-pay Limited
(e-pay), which had offices in the U.K. and Australia. e-pay processes transactions for prepaid
services, primarily prepaid mobile airtime. We started reporting e-pays results in a new segment
called the Prepaid Processing Segment. The Prepaid Processing Segment subsequently expanded as a
result of acquisitions in Germany, Spain, and the U.S. and the establishment of new offices in New
Zealand and Poland.
2007 Developments
During 2007, we established the Money Transfer Segment after completing the acquisition of Los
Angeles-based RIA Envia, Inc. (RIA), the third-largest global money transfer company. Established
in 1987, RIA originates and terminates transactions through a network of more than 71,000
locations, which include sending agents and company-owned stores located throughout 13 countries in
North America, the Caribbean, Europe and Asia and an extensive payer network across 100 countries.
We expect the acquisition to create significant opportunities for us in the growing money transfer
industry, including the opportunity to provide RIAs money transfer services to many of our prepaid
top-up locations and to provide our prepaid services through RIAs stores and agents worldwide. We
also believe the geographic, economic and relationship synergies between RIA and our business are
substantial and position us to provide remittance services across many markets around the world.
We also further expanded our Prepaid Processing Segment in 2007. In January 2007, we completed the
acquisition of Brodos Romania SRL (Brodos Romania), a subsidiary of Brodos AG, a privately held
German company providing retail and electronic distribution services to the mobile telephone
industry. Brodos Romania is a leading electronic prepaid mobile airtime processor in Romania. In
February 2007, we acquired Omega Logic Ltd. (Omega Logic). Omega Logic is a prepaid top-up
company based, and primarily operating, in the U.K. Omega Logics core business is the sale of
mobile top-up minutes through a retailers integrated Electronic Cash Registers (ECR). During 2007,
we expanded our global prepaid presence by signing agreements with retailers in Italy, the largest
prepaid market in Europe, and India to provide processing services primarily for prepaid mobile
airtime.
Subsequent Developments
During the fourth quarter 2007, in connection with our interest to acquire MoneyGram International,
Inc. (MoneyGram), we purchased 1.3 million shares of MoneyGram common stock at a cost of $20.0
million. At December 31, 2007 the value of the investment had increased to $20.6 million. However,
subsequent to December 31, 2007 the trading price for MoneyGram stock dropped significantly as a
result of MoneyGrams announcement of investment portfolio losses and its intention to recapitalize
the company. The aggregate value of our investment in MoneyGram as of February 28, 2008 was reduced
to approximately $4.9 million. On February 28, 2008, we announced that we have decided not to
submit a proposal to acquire MoneyGram and have ceased discussions with MoneyGram and its advisers
regarding a potential acquisition of MoneyGram.
BUSINESS SEGMENT OVERVIEW
For a discussion of operating results by segment, please see Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations, and Note 18, Business Segment
Information, to the Consolidated Financial Statements.
EFT PROCESSING SEGMENT
Overview
Our EFT Processing Segment provides outsourcing and network services to financial institutions and
mobile phone companies, primarily in the developing markets of central, eastern and southern Europe
(Hungary, Poland, the Czech Republic, Croatia, Romania, Slovakia, Albania, Serbia, Greece, Bulgaria
and Ukraine), the Middle East and Asia Pacific (India and China), as well as in certain developed
countries of Western Europe. We provide these services either through our Euronet-owned ATMs or
through contracts
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under which we operate ATMs on behalf of financial institutions. Although all of
these markets present opportunities for expanding the sales of our services, we believe
opportunities for growth in the ATM services business are greater in our developing markets.
The major source of revenue generated by our ATM network is recurring monthly management fees and
transaction-based fees. We receive fixed monthly fees under many of our outsourced management
contracts. This element of revenue has been increasing over the last few years. Revenue sources of
the EFT Processing Segment also include POS and credit and debit card network management revenue
and prepaid mobile phone recharge revenue from ATMs or mobile phone handsets and ATM advertising
revenue. The number of ATMs we operated increased to 11,347 at December 31, 2007 from 8,885 at
December 31, 2006.
We monitor the number of transactions made by cardholders on our ATM network. These include cash
withdrawals, balance inquiries, deposits, mobile phone airtime recharge purchases and certain
denied (unauthorized) transactions. We do not bill certain transactions on our network to financial
institutions, and we have excluded these transactions for reporting purposes. The number of
transactions processed over our entire ATM network has increased over the last five years as
indicated in the following table:
(in millions) | 2003 | 2004 | 2005 | 2006 | 2007 | |||||||||||||||
EFT processing transactions per year |
114.7 | 232.5 | 361.5 | 463.6 | 603.8 |
Our processing centers for the EFT Processing Segment are located in Budapest, Hungary; Mumbai,
India; Athens, Greece; Belgrade, Serbia; and Beijing, China. They are staffed 24 hours a day, seven
days a week and consist of production IBM iSeries computers, which run the Euronet GoldNet ATM
software package.
EFT Processing Products and Services
Outsourced Management Solutions
Euronet offers outsourced management services to financial institutions and other organizations
using our processing centers electronic financial transaction processing software. Our outsourced
management services include management of existing ATM networks, development of new ATM networks,
management of POS networks, management of credit and debit card databases and other financial
processing services. These services include 24-hour monitoring of each ATMs status and cash
condition, coordinating the cash delivery and management of cash levels in each ATM and providing
automatic dispatches for necessary service calls. We also provide real-time transaction
authorization, advanced monitoring, network gateway access, network switching, 24-hour customer
service, maintenance, cash settlement, forecasting and reporting. Since our infrastructure is
sufficiently robust to support a significant increase in transactions, any new outsourced
management services agreements should provide additional revenue with lower incremental cost.
Our outsourced management agreements generally provide for fixed monthly management fees and, in
most cases, fees payable for each transaction. The transaction fees under these agreements are
generally lower than card acceptance agreements, described below.
Euronet-Branded ATM Transaction Processing
Our Euronet-branded ATM network in Central Europe is managed by an operations center that uses our
internally developed Integrated Transaction Management (ITM) core software solution. The ATMs in
our networks are able to process transactions for holders of credit and debit cards issued by or
bearing the logos of financial institutions and international card organizations such as American
Express, Diners Club International, Visa, MasterCard/Europay and China Union Pay organizations.
This ability is accomplished through our agreements and relationships with these institutions,
international credit and debit card issuers and international associations of card issuers.
In a typical ATM transaction, the transaction is routed from the ATM to our processing center and
then to the card issuer for authorization. Once authorization is received, the authorization
message is routed back to the ATM and the transaction is completed. The card issuer is responsible
for authorizing ATM transactions processed on our ATMs. This process normally takes less than 30
seconds.
When a bank cardholder conducts a transaction on a Euronet-owned ATM, we receive a fee from the
cardholders bank for that transaction. The bank pays us this fee either directly or indirectly
through a central switching and settlement network. When paid indirectly, this fee is referred to
as the interchange fee. All of the banks in a shared ATM and POS switching system establish the
amount of the interchange fee by agreement. We receive transaction-processing fees for successful
transactions and, in certain circumstances, for transactions that are not completed because they
fail to receive authorization. The fees paid to us by the card issuers are independent of any fees
charged by the card issuers to cardholders in connection with the ATM transactions. We do not
charge cardholders a transaction or access fee for using our ATMs.
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We generally receive fees from our customers for four types of ATM transactions:
| cash withdrawals, | ||
| balance inquiries, | ||
| transactions not completed because the relevant card issuer does not give authorization, and | ||
| prepaid telecommunication recharges. |
Card Acceptance or Sponsorship Agreements
Our agreements with financial institutions and international card organizations generally provide
that all credit and debit cards issued by the customer financial institution or organization may be
used at all ATM machines we operate in a given market. In most markets, we have agreements with a
financial institution under which we are designated as a service provider (which we refer to as
sponsorship agreements) for the acceptance of cards bearing international logos, such as Visa and
MasterCard. These card acceptance or sponsorship agreements allow us to receive transaction
authorization directly from the card issuing institution or international card organization. Our
agreements generally provide for a term of three to seven years and are automatically renewed
unless either party provides notice of non-renewal prior to the termination date. In some cases,
the agreements are terminable by either party upon six months notice. We are generally able to
connect an institution to our network within 30 to 90 days of signing a card acceptance agreement.
Generally, the financial institution provides the cash needed to complete transactions on the ATM,
although we have contracted with a financial institution for cash supply in the Czech Republic.
Under our card acceptance agreements, the ATM transaction fees we charge vary depending on the type
of transaction and the number of transactions attributable to a particular card issuer. Our
agreements generally provide for payment in local currency. Transaction fees are sometimes
denominated in U.S. dollars or are adjusted for inflation. Transaction fees are billed to financial
institutions and card organizations with payment terms typically no longer than one month.
Other Products and Services
Our network of owned or operated ATMs allows for the sale of financial and other products or
services at a low incremental cost. We have developed value-added services in addition to basic
cash withdrawal and balance inquiry transactions. These value added services include electronic
bill payment, ATM advertising and the sale of prepaid mobile airtime recharge services from ATMs or
mobile phone devices. We are committed to the ongoing development of innovative new products and
services to offer our EFT processing customers and intend to implement additional services as
markets develop.
In Poland, Hungary, Croatia, Romania, Czech Republic, Slovakia, India and the U.K., we have
established electronic connections to some or all of the major mobile phone operators. These
connections permit us to transmit to them electronic requests to recharge mobile phone accounts. We
operate networks of ATMs in these markets to offer customers of the mobile operators the ability to
credit their prepaid mobile phone accounts. We began to distribute prepaid mobile telephone
vouchers on our networks in Hungary and Poland during 1999 and the Czech Republic and Croatia
during 2000. In Poland, Hungary and Croatia, we have contracts with all of the local major mobile
operators.
We have expanded our outsourced management solutions beyond ATMs to include credit and debit card
and POS terminal management and additional services, such as bill payment and prepaid mobile
operator solutions. We support these services using our proprietary software products. Since 1996,
we have sold advertising on our network. Clients can display their advertisements on our ATM video
screens, on the ATM receipts and on coupons dispensed with cash from the ATMs.
We also offer a suite of integrated EFT software solutions for electronic payments, merchant
acquiring, card issuing and transaction delivery systems. We generate revenue for our software
products from licensing, professional services and maintenance fees for software and sales of
related hardware, primarily to financial institutions around the world.
EFT Processing Segment Strategy
Financial institutions in both developing and developed markets are receptive to outsourcing the
operation of their ATM, POS and card networks. The operation of these devices requires expensive
hardware and software and specialized personnel. These resources are available to us, and we offer
them to financial institutions under outsourcing contracts. The expansion and enhancement of our
outsourced management solutions in new and existing markets will remain an important business
opportunity for Euronet. Increasing the number of non-owned ATMs that we operate under management
agreements and continued development of our credit and debit card outsourcing business should
provide continued growth while minimizing our capital investment.
We continually strive to make our own ATM networks more efficient by eliminating underperforming
ATMs and installing ATMs in more desirable locations. Moreover, we will make selective additions to
our own ATM network if we see market demand and profit opportunities.
The EFT Segments ATM and Mobile Recharge line of services was substantially strengthened through
complementary services offered by our Prepaid Processing Segment, where we provide top-up services
through POS terminals. We intend to expand our technology and business methods into other markets
where we operate and expect to leverage our relationships with mobile operators and financial
institutions to facilitate expansion.
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Additionally, our software products are an integral part of the EFT Segment product lines, and our
investment in research, development, delivery and customer support reflects our ongoing commitment
to an expanded customer base both internal and external. Our ITM software is used by our Budapest,
Mumbai, Athens, Beijing and Belgrade operations centers in our EFT Processing Segment, including
our Euronet Middle East JV processing center in Bahrain, resulting in cost savings and added value
compared to
third-party license and maintenance options. Furthermore, we have identified opportunities to
provide processing services to our software solutions customers and our ability to develop, adapt
and control our own software gains us credibility with our processing services customers. We have
been able to enter into agreements under which we use our ITM software in lieu of cash as our
initial capital contributions to new transaction processing joint ventures. Such contribution
permits us to enter new markets without significant cash outlay.
Seasonality
Our business is significantly impacted by seasonality during the fourth quarter and first quarter
of each year due to higher transaction levels during the holiday season and lower levels after the
holiday season. We have estimated that, absent unusual circumstances (such as the impact of new
acquisitions or unusually high levels of growth due to market factors), the overall revenue
realized in the EFT Processing Segments is likely to be approximately 5% to 10% lower during the
first quarter of each year than in the fourth quarter of the year. We have historically experienced
minimal differences between the second and third quarters of each year.
Segment Significant Customers and Government Contracts
No individual customer makes up greater than 10% of consolidated total revenue, and we do not have
any government contracts in the EFT Processing Segment. Our outsourcing contracts generally provide
for a term of three to seven years and are automatically renewed unless either party provides
written notice of non-renewal prior to the termination date. In some cases, the contracts are
terminable by either party upon six months notice.
Competition
Our principal EFT Processing competitors include ATM networks owned by financial institutions and
national switches consisting of consortiums of local banks that provide outsourcing and transaction
services to financial institutions and independent ATM deployers in a particular country.
Additionally, large, well-financed companies that operate ATMs offer ATM network and outsourcing
services, and those that provide card outsourcing, POS processing and merchant acquiring services
also compete with us in various markets. None of these competitors have a dominant market share in
any of our markets. Competitive factors in our EFT Processing Segment include breadth of service
offering network availability and response time, price to both the financial institution and to its
customers, ATM location and access to other networks.
Certain independent (non bank-owned) companies provide electronic recharge on ATMs in individual
markets in which we provide this service. We are not aware of any 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 banks providing such services on their own ATMs
through relationships with mobile operators or from card transaction switching networks that add
recharge transaction capabilities to their offerings (as is the case in the U.K. through the LINK
network).
PREPAID PROCESSING SEGMENT
Overview
We currently offer prepaid mobile phone top-up services and certain other prepaid products in the
U.S., Europe, Africa, Asia Pacific and Middle-East. We are one of the largest providers of prepaid
processing, or top-up services, for prepaid mobile airtime. We provide electronic top-up services
for prepaid mobile airtime primarily in the U.K., Germany, Austria, Spain, Poland, Ireland,
Australia, New Zealand, Malaysia, Indonesia, Romania, Italy, India and the U.S. on a network of
approximately 396,000 POS terminals across more than 193,000 retailer locations. Our processing
centers for the Prepaid Processing Segment are located in Basildon, U.K.; Martinsried, Germany;
Madrid, Spain; and Leawood, Kansas.
As discussed above, we have continually expanded this business and plan to further expand our
top-up business in our existing markets and other markets by taking advantage of our existing
expertise together with relationships with mobile operators and retailers. In addition, we
distribute other prepaid products across our retail networks, including prepaid debit cards, gift
cards, prepaid long distance and bill payment.
Sources of Revenue
The major source of revenue generated by our Prepaid Processing Segment is commissions or
processing fees received from telecommunications service providers for the sale and distribution of
prepaid mobile airtime. We also generate revenue from commissions earned from the distribution of
other prepaid products.
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Customers using mobile phones generally pay for their usage in two ways:
| through postpaid accounts, where usage is billed at the end of each billing period, and | ||
| through prepaid accounts, where customers pay in advance by crediting their accounts prior to usage. |
Although mobile operators in the U.S. and certain European countries have provided service
principally through postpaid accounts, the trend in many other countries in Europe and the rest of
the world is to offer wireless service on a prepaid basis. This shift is driven, according to
Ofcom, formerly Oftel (the U.K. telecommunications regulator), surveys, by customers belief that
prepaid products better meet their needs and enable them to better control their monthly wireless
expenditures.
Currently, two principal methods are available to credit prepaid accounts (referred to as top-up
of accounts). The first is through the purchase of scratch cards bearing a PIN (personal
identification number) that, when entered into a customers mobile phone account, credits the
account by the value of airtime purchased. Scratch cards are sold predominantly through retail
outlets. The second is through various electronic means of crediting accounts using POS terminals.
Electronic top-up (or e-top-up) methods have several advantages over scratch cards, primarily
because electronic methods do not require the cost of creation, distribution and management of a
physical inventory of cards or involve the risk of losses stemming from fraud, theft and
mismanagement. Prior to 2004, scratch cards were the predominant method of crediting mobile phone
accounts in most developed markets. However, a shift has occurred in these markets away from usage
of scratch cards to more efficient e-top-up methods.
Our Prepaid Processing Segment processes the sale of prepaid mobile phone minutes to consumers
through networks of POS terminals and direct connections to the electronic payment systems of
retailers. Our distribution of mobile phone airtime electronically through POS terminals varies by market. In
some markets, we connect directly to the mobile operators back-office system, which enables us to
process a direct top-up credit from the mobile operator to the customers mobile phone. In other
markets, we distribute airtime via the sales of PINs purchased from
the mobile operators. The business has
grown rapidly over the past few years as new retailers have been added and prepaid airtime
distribution has switched from scratch cards to electronic means.
In our prepaid markets, we expand our distribution networks through the signing of new contracts
with retailers, and in some markets, through acquisition of existing networks. We also seek to
improve the results of our existing networks through the addition of new mobile operators in
markets where we do not already distribute all of the available prepaid time and the addition of
other prepaid products not necessarily related to the mobile operators. In addition, in the U.S. we
are expanding our sales presence in all sales segments. We are continuing to focus on our growing
network of distributors, generally referred to as Independent Sales Organizations (ISOs) that
contract with retailers in their network to distribute PINs from their terminals. We continue to
increase our focus on direct relationships with chains of independent convenience stores and other
larger scale retailers, where we can negotiate agreements with the merchant on a multiyear basis.
To distribute PINs, we establish an electronic connection with the POS terminals and maintain
systems that monitor transaction levels at each terminal. As sales to customers of mobile airtime
are completed, the customer pays the retailer and the retailer becomes obligated to make settlement
to us of the principal amount of the phone time sold. We maintain systems that enable us to monitor
the payment practices of each retailer.
Prepaid Processing Products and Services
Prepaid Mobile Airtime Transaction Processing
We process prepaid mobile airtime top-up transactions on our POS network across the U.S., Europe,
Africa, the Middle-East and Asia Pacific for two types of clients: distributors and retailers. Both
types of client transactions start with a consumer in a retail store. The retailer uses a specially
programmed POS terminal in the store or the retailers electronic cash register (ECR) system that
is connected to our network to buy prepaid airtime. The customer will select a predefined amount of
prepaid airtime from the carrier of his choice, and the retailer enters the selection into the POS
terminal. The consumer will pay that amount to the retailer (in cash or other payment methods
accepted by the retailer). The POS device then transmits the selected transaction to our processing
center. Using the electronic connection we maintain with the mobile operator or drawing from our
inventory of PINs, the purchased amount of airtime will be either credited to the consumers
account or delivered via a PIN printed by the terminal and given to the consumer. In the case of
PINs printed by the terminal, the consumer must then call a mobile operators toll free number to
activate the purchased airtime to this consumers mobile account.
One difference in our relationships with various retailers and distributors is how we charge for
our services. For distributors and certain very large retailers we charge a processing fee.
However, the majority of our transactions occur with smaller retailer clients. With these clients,
we receive a commission on each transaction that is withheld from the payments made to the mobile
operator, and we share that commission with the retailers.
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We monitor the number of transactions made on our prepaid networks. The number of transactions
processed on our entire POS network has increased over the last five years as indicated in the
following table:
(in millions) | 2003 | 2004 | 2005 | 2006 | 2007 | |||||||||||||||
Prepaid processing transactions per year |
102.1 | 228.6 | 348.0 | 457.8 | 634.8 |
Retailer and Distributor Contracts
We provide our prepaid services through POS terminals installed in retail outlets or, in the case
of major retailers, through direct connections between their ECR systems and our processing
centers. In markets where we operate e-pay technology (the U.K., Australia, Poland, Ireland, New
Zealand and the U.S.), we generally own and maintain the POS terminals. In Germany, Austria
and Romania, the terminals are sold to the retailers or to distributors who service the retailer.
Our agreements with major retailers for the POS services typically have one to three-year terms.
These agreements include terms regarding the connection of our networks to the respective
retailers registers or payment terminals or the maintenance of POS terminals, and obligations
concerning settlement and liability for transactions processed. Generally, our agreements with
individual or small retailers have shorter terms and provide that either party can terminate the
agreement upon three to six months notice.
In Germany, distributors have historically controlled the sale of mobile phone scratch cards, and
they now are key intermediaries in the sale of e-top-up. Our business in Germany is substantially
concentrated in, and dependent upon, relationships with our major distributors. The termination of
any of our agreements with major distributors could materially and adversely affect our business in
Germany. However, we have been establishing agreements with independent retailers in order to
diversify our exposure to such distributors.
Other Products and Services
Our POS network can be used for the distribution of other products and services. Although prepaid
mobile airtime is the primary product distributed through our Prepaid Processing Segment,
additional products include prepaid long distance calling card plans, prepaid internet plans,
prepaid debit cards, prepaid gift cards, bill payment, money transfer and prepaid mobile content
such as ring tones and games. In certain locations, the terminals used for prepaid services can
also be used for electronic funds transfer (EFT) to process credit and debit card payments for
retail merchandise.
Prepaid Processing Segment Strategy
We plan to expand our prepaid processing business in our existing markets and new markets by taking
advantage of our expansive distribution network and existing relationships with mobile phone
operators and retailers. Although all of these markets present opportunities for expanding the
sales of our services, we believe opportunities for transaction growth in the Prepaid Processing
Segment are greater in Poland, Germany, Italy, Romania and India, where there is organic growth of
prepaid products in the prepaid markets.
Seasonality
Our prepaid business is significantly impacted by seasonality during the fourth quarter and first
quarter of each year due to the higher transaction levels during the holiday season and lower
levels following the holiday season. We expect that, absent unusual circumstances (such as the
impact of new acquisitions or unusually high levels of growth due to market factors), the overall
revenue realized is likely to be 5% to 10% lower during the first quarter
than in the fourth quarter of the year. We have historically experienced minimal differences
between the second and third quarters of each year. To date, the impact of seasonality has
generally been masked in the Prepaid Processing Segment by growth rates resulting from continued
shifts from scratch cards to electronic top-up and acquisitions. There can be no assurance that
this will be the case for future years.
Significant Customers and Government Contracts
No individual customer makes up greater than 10% of consolidated total revenue, and we do not have
any government contracts in any country within the Prepaid Processing Segment.
Competition
We face competition in the prepaid business in all of our markets. We compete with a few
multinational companies that operate in several of our markets. In other markets, our competition
is from smaller, local companies. None of these companies is dominant in any of the markets where
we do business.
9
We believe, however, that we currently have a competitive advantage due to various factors. First,
in the U.K., Germany and Australia, our acquired subsidiaries have been concentrating on the sale
of electronic prepaid mobile airtime for longer than most of our competitors and have significant
market presence in those markets. In addition, we offer complementary ATM and mobile recharge
solutions through our EFT processing centers. We believe this improves 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 expect to establish a first to market
advantage by rolling out terminals rapidly before competition is established. We also have an
extremely flexible technical platform that enables us to tailor POS solutions to individual
merchant and mobile operator requirements where appropriate. The GPRS (wireless) technology,
designed by our Transact subsidiary, will also give us an advantage in remote areas where landline
phone lines are of lesser quality or nonexistent.
The principal competitive factors in this area include price (that is, the level of commission paid
to retailers for each recharge transaction), breadth of mobile operator product 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. Recently, we are
seeing signs that mobile operators may wish to take over and expand their own distribution networks
of prepaid time, and in doing so, they may become our competitors.
MONEY TRANSFER SEGMENT
Overview
We began reporting the results of this segment in the second quarter 2007 after we completed the
acquisition of RIA Envia, Inc. (RIA). This acquisition makes Euronet the third-largest global
money transfer company. The Money Transfer segment also includes the Companys pre-existing money
transfer business, Euronet Payments & Remittance, Inc. (formerly TelecommUSA), which was previously
included in the Prepaid Processing Segment due to its relative insignificance.
Our Money
Transfer Segment processes more than $5.0 billion in money transfers annually. We
originate transfers through a network of sending agents, including Company-owned stores located in
the U.S., Canada, Puerto Rico, the U.K., Ireland, Spain, Italy, France, Germany, Sweden,
Switzerland and Australia and disburse money transfers through an extensive payer network in
approximately 100 countries.
Our sending agent network includes convenience stores, bodegas, multi-service shops and phone
centers, which are predominantly found in areas with a large immigrant population. Each money
transfer transaction is processed using the Companys proprietary software system and checked for
security, completeness and compliance with federal regulations at every step of the process. The
sender can track the progress of their transfer either online or through RIAs customer service
representatives, and funds are delivered quickly to their beneficiary via our extensive
payout/correspondent network, which includes large banks and non-bank financial institutions. As of
December 31, 2007, we provided consumer-to-consumer money transfer services through a network of
more than 71,000 locations. Our processing center for the Money Transfer Segment is located in
Cerritos, California and we operate call centers in the United States and Spain and provide multi-lingual
customer service for both our agents and consumers.
Our money transfer sending network can be used to offer other products and services. Additional
product offerings through our sending agents include bill payment services enabling
over-the-counter payments for utilities, wireless and cable bills; money orders; prepaid debit
cards; comprehensive check cashing service for a wide variety of issued checks; and foreign
currency exchange services.
Money Transfer Services
We offer consumer-to-consumer money transfer services primarily through two channels at agent
locations: by phone (TeleRIA), or via computer (RIA Online). Both types of transactions start
with a consumer in an agent location or owned store. Through our TeleRIA service, customers connect
to our call center from a telephone available at an agent location or RIA store and a
representative will collect the information over the telephone and enter it directly into our
secure proprietary system. As soon as the data capture is complete, our central system
automatically faxes a confirmation receipt to the agent location for the customer to review and
sign and the customer pays the agent the money to be transferred, together with a fee. In an online
transaction, customer provides the required information to the agent who enters the data into our
online platform via a computer using a unique username and password. The real-time online
connection we maintain with the agent enables the agent to generate a receipt and complete the
transaction.
We are also piloting our card-based money transfer system, which allows transactions to be
initiated primarily through POS terminals at agent locations.
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Sources of Revenue
Revenue in the Money Transfer Segment is primarily derived through the charging of a transaction
fee, as well as the difference between purchasing foreign currency at wholesale exchange rates and
selling the foreign currency to consumers at retail exchange rates. We have an origination network
in place comprised of agents and Company-owned stores in North America, the Caribbean, Europe and
Asia-Pacific and a worldwide network of distribution agents, consisting primarily of financial
institutions in the transfer destination countries. Origination and correspondent agents each earn
fees for cash collection and distribution services. These fees are recognized as direct operating
costs at the time of sale.
Money Transfer Segment Strategy
We completed the acquisition of RIA in April 2007, which significantly expanded our money transfer
business. RIA has established high-potential money transfer corridors from the U.S. and
internationally beyond the traditional U.S. to Mexico corridor. In 2007, the
Company started to leverage synergies and cross-selling opportunities between business segments to
further expand RIAs global money transfer send and receive network. Based on the successful
outcome of the cross-sell initiatives, our key focus in 2008 and beyond is to continue to take
advantage of cross-selling opportunities with our Prepaid and EFT Segments by providing prepaid
services through RIAs stores and agents in multiple countries; offering our money transfer
services at ethnically-focused prepaid retail locations in key markets; and leveraging our banking
and merchant/retailer relationships to expand our agent network in high-growth corridors in Europe
and Asia to further grow our market share in the multi-billion dollar money transfer industry.
Seasonality
Our money transfer business is significantly impacted by seasonality that varies by region. In most
of our markets we experience increased money transfer transaction levels during the month of May
and in the fourth quarter of each year, coinciding with various holidays. Additionally, in the U.S.
to Mexico corridor, we usually experience our heaviest volume during the May through October
timeframe, coinciding with the increase in worker migration patterns, and our lowest volumes during
the first quarter. During the first quarter of each year we have historically experienced a 5% to
10% decrease in overall transactions when compared to the fourth quarter.
Significant Customers and Government Contracts
No individual consumer makes up greater than 10% of consolidated total revenue, and there are no
government contracts with any country within the Money Transfer Segment.
Competition
Our primary competitors in the money transfer and bill payment business include other independent
processors and electronic money transmitters, as well as certain major national and regional banks,
financial institutions and independent sales organizations. Our competitors include Western Union,
MoneyGram, Global Payments and many other smaller competitors, some of which are larger than we are and have greater
resources and access to capital for expansion than we have. This may allow them to offer better
pricing terms to customers, agents or correspondents, which may result in a loss of our current or
potential customers or could force us to lower our prices. In addition to traditional money payment
services, new technologies are emerging that may effectively compete with traditional money payment
services, such as stored-value cards, debit networks and web-based services. Our continued growth
also depends upon our ability to compete effectively with these alternative technologies.
PRODUCT RESEARCH, DEVELOPMENT AND ENHANCEMENT
In the EFT Processing Segment, development has historically focused on expanding the range of
services offered to our bank customers from ATM and POS outsourcing to card processing and software
services. In 2007, we made significant investments to develop new cross-border merchant acquiring
capabilities that we are offering to multinational merchants. We hope to capitalize on the Single
Euro Payments Area (SEPA) that is being implemented by European financial community.
In our Prepaid Processing Segment, development has focused on expanding the types of prepaid
products and services available to consumers over our network to include, for example, prepaid gift
and debit cards, and bill payment capabilities. This is intended to make our offerings more
attractive to retailers.
We have made an ongoing commitment to the maintenance and improvement of our software products. We
regularly engage in software product development and enhancement activities aimed at the
development and delivery of new products, services and processes to our customers. Our research and
development costs for software products to be sold, leased or otherwise marketed totaled $6.5
million, $7.3 million and $2.7 million in 2007, 2006 and 2005, respectively. Amounts capitalized
were $2.9 million, $3.2 million and $0.8 million for the years ended December 31, 2007, 2006 and
2005, respectively. The increase in 2007 and 2006 as compared to
11
2005 are primarily a result of our
acquisition of Essentis in January 2006, as discussed in Note 5, Acquisitions, to the Consolidated
Financial Statements. The increase related to Essentis is primarily the result of development
resources required to replicate its mainframe product in the Unix platform. Amounts capitalized are
included on our Consolidated Balance Sheets in other long-term assets. These costs were capitalized
under our accounting policy requiring the capitalization of development costs on a
product-by-product basis once technological feasibility is established through the completion of a
detailed program design or the creation of a working model of the product. Technological
feasibility of computer software products is established when we have completed all planning,
designing, coding, and testing activities necessary to establish that the product can be produced
to meet its design specifications including functions, features and technical performance
requirements. See Note 20, Computer Software to be Sold, to the Consolidated Financial Statements
for a more detailed summary of the prior three years research and development capitalized costs and
related amortization expense.
FINANCIAL INFORMATION BY GEOGRAPHIC AREA
For a discussion of results from operations, property and equipment, and total assets by geographic
location, please see Note 18, Business Segment Information, to the Consolidated Financial
Statements.
EMPLOYEES
We had approximately 2,500, 1,100 and 900 employees as of December 31, 2007, 2006 and 2005,
respectively. The increase during 2007 is primarily the result of the acquisition of RIA, which has
a large call center staff, discussed in Note 5, Acquisitions, to the Consolidated Financial
Statements. We believe our future success will depend in part on our ability to continue to
recruit, retain and motivate qualified management, technical and administrative employees.
Currently, no union represents any of our employees, and we have never experienced any work
stoppages or strikes by our workforce and we consider relations with our employees to be good.
GOVERNMENT REGULATION
With the exception of the Money Transfer Segment business discussed below, our business activities
do not constitute financial activities subject to licensing in any of our current markets. Under
German law, only licensed financial institutions may operate ATMs in Germany. Therefore, we may not
operate our own ATM network in Germany without a sponsor, which is Bankhaus August Lenz (BAL). In
that market, we act only as a subcontractor providing certain ATM-related services to a sponsor
financial institution. As a result, our activities in the German market currently are entirely
dependent upon the continuance of our agreement with BAL, or the ability to enter into a similar
agreement with another institution in the event of the termination of such agreement. While we
believe, based on our experience, we should be able to find a replacement for BAL if the agreement
with BAL is terminated for any reason, the inability to maintain the BAL agreement or to enter into
a similar agreement with another institution upon a termination of the BAL agreement could have a
material adverse effect on our operations in Germany. For further information, see Item 1A Risk
Factors. Any expansion of our activity into areas that are qualified as financial activity under
local legislation may subject us to licensing and we may be required to comply with various
conditions to obtain such licenses. Moreover, the interpretations of bank regulatory authorities as
to the activity we currently conduct might change in the future. We monitor our business for
compliance with applicable laws or regulations regarding financial activities.
In the Money Transfer Segment we are subject to a wide variety of laws and regulations of the
individual U.S., states, foreign markets and other governmental jurisdictions where we operate.
These include international, federal and state anti-money laundering laws and regulations; money
transfer and payment instrument licensing laws, escheat laws, laws covering consumer privacy, data
protection and information security and consumer disclosure and consumer protection laws. Our
operations have also been subject to increasingly strict requirements intended to help prevent and
detect a variety of illegal financial activity, including money laundering, terrorist financing,
unauthorized access to personal customer data and other illegal activities. Noncompliance with
these laws and requirements could result in the loss or suspension of licenses or registrations
required to provide money transfer services by either RIA or its agents. For more discussion, see
Item 1A Risk Factors.
Money Transfer and Payment Instrument Licensing
Licensing requirements in the U.S. are generally driven by the various state banking departments
regulating the businesses of money transfers and issuance of payment instruments. Typical
requirements include the meeting of minimum net worth requirements, maintaining permissible
investments (e.g., cash, agent receivables, and government backed securities) at levels
commensurate with outstanding payment obligations, and the filing of a security instrument
(typically in the form of a surety bond) to offset the risk of default of trustee obligations by
the licensee. We are required by many regulators to file interim reports of licensed activity, most
often on a quarterly basis, that address changes to agent and branch locations, operating and
financial performance, permissible investments, and outstanding transmission liabilities. These
periodic reports are utilized by the regulator to monitor ongoing compliance with state licensing
laws. A number of major state regulators also conduct periodic examinations of licensees and their
authorized delegates, generally with a frequency of every one to two years. Examinations are most
often comprehensive in nature, addressing both the safety and soundness and overall compliance by
the licensee with regard to state and federal regulations. Such examinations are typically
performed on-site at the licensees headquarters or operations center; however, a number of states
will choose to perform
12
examinations off-site. Many states also require money transmitters, issuers
of payment instruments, and their agents to comply with federal and/or state anti-money laundering
laws and regulations. In summary, our Money Transfer Segment, as well as our agent network, is
subject to regulations issued by the different state regulators who license us, Office of Foreign
Assets Control (OFAC), Bank Secrecy Act as amended by the USA PATRIOT ACT (BSA), the Financial
Crimes Enforcement Network (FINCEN), as well as, any existing or future regulations that impact
any aspect of our money transfer business.
Our Money Transfer Segment is also subject to laws, regulations, including anti-money laundering
laws and regulations, and licensing requirements outside the U.S. These laws and regulations
include limits on the type of entities that may provide money transfer services, monetary limits
for money transfers into or out of a country, rules regarding the foreign currency exchange rates
offered, as well as other limitations or rules for which we must maintain compliance.
Regulatory bodies in the U.S. and abroad may impose additional rules on the conduct of our Money
Transfer Segment that could have a significant impact on our operations and our agent network.
Escheat Regulations
Our Money Transfer Segment is subject to the unclaimed or abandoned property (i.e. escheat)
regulations of the U.S. and certain foreign countries in which we operate. These laws require us to
turn over property held by the company on behalf of others remaining unclaimed after specified
periods of time (i.e., dormancy or escheat periods). Such abandoned property is generally
attributable to the failure of beneficiary parties to claim money transfers or the failure to
negotiate money orders, a form of payment instrument. We have policies and programs in place to
help us monitor the required relevant information relating to each money transfer or payment
instrument for possible eventual reporting to the jurisdiction from which the order was originally
received. In the U.S., reporting of unclaimed property by money service companies is performed
annually, generally with a due date of on or before November 1. State banking department regulators
will typically include a review of Company escheat procedures and related filings as part of their
examination protocol.
Privacy and Information Security Regulations
Our Money Transfer Segment operations involve the collection and storage of certain types of
personal customer data that are subject to privacy and security laws in the U.S. and abroad. In the
United States, we are subject to the Gramm-Leach-Bliley Act (GLBA), which requires that financial
institutions have in place policies regarding the collection, processing, storage and disclosure of
information considered nonpublic personal information. Laws in other countries include those
adopted by the member states of the European Union under Directive 95/46 EC of the European
Parliament and of the Council of 24 October 1995 (the Directive), as well as the laws of other
countries. The Directive prohibits the transfer of personal data to non-European Union member
nations that do not provide adequate protection for personal data. In some cases, the privacy laws
of an EU member state may be more restrictive than the Directive and may impose additional
requirements that we must comply with to operate in the respective country. Generally, these laws
restrict the collection, processing, storage, use and disclosure of personal information and
require that we safeguard personal customer data to prevent unauthorized access.
We comply with the GLBA and any state privacy provision by posting a privacy notice on the receipts
provided to the consumers upon completion of a transaction. In addition, we comply with the
Directive using the safe harbor permitted by the Directive by filing with the U.S. Department of
Commerce, publicly declaring our privacy policy for information collected outside of the U.S.,
posting our privacy policy on our website and requiring our agents in the European Union to notify
customers of the privacy policy.
Recently, as identity theft has been on the rise, there has been increased public attention to
concerns about information security and consumer privacy, accompanied by laws and regulations
addressing the issue. We believe we are compliant with these laws and regulations; however, this is
an area that is rapidly evolving and there can be no assurance that we will continue to meet the
existing and new regulations, which could have a material, adverse impact on our Money Transfer
Segment business.
Money Transfer Compliance Policies and Programs
We have developed risk-based policies and programs to comply with the existing, new or changed
laws, regulations and other requirements outlined above, including having dedicated compliance
personnel, training programs, automated monitoring systems, and support functions for our offices
and agents. To assist in managing and monitoring our money laundering and terrorist financing
risks, we continue to have our compliance program independently examined on an annual basis. In
addition, we continue to enhance our anti-money laundering and anti-terrorist financing compliance
policy, procedures, monitoring systems, and staffing levels.
13
INTELLECTUAL PROPERTY
Each of our three operating segments utilizes intellectual property which is protected in varying
degrees by a combination of trademark, patent and copyright laws, as well as trade secret
protection, license and confidentiality agreements.
The brand names of RIA, RIA Envia and AFEX, derivations of those brand names and certain
other brand names are material to our Money Transfer Segment and are registered trademarks and/or
service marks in most of the markets in which our Money Transfer Segment operates. Consumer
perception of these brand names is important to the growth prospects of our money transfer
business. We also hold a U.S. patent on a card-based money transfer and bill payment system that
allows transactions to be initiated primarily through POS terminals and integrated cash register
systems.
With respect to our EFT Processing Segment, we have registered or applied for registration of our
trademarks including the names Euronet and Bankomat and/or the blue diamond logo as well as
other trade names in most markets in which these trademarks are used. Certain trademark authorities
have notified us that they consider these trademarks to be generic and therefore not protected by
trademark laws. This determination does not affect our ability to use the Euronet trademark in
those markets but it would prevent us from stopping other parties from using it in competition with
Euronet. We have purchased a registration of the Euronet trademark in
the class of ATM machines in Germany, the U.K. and certain other Western European countries. We
have filed pending patent applications for a number of our new software products and our new
processing technology, including our recharge services.
With respect to our Prepaid Processing Segment, we have registered the e-pay logo trademark in
the U.K. and Australia. We also hold trademarks for our prepaid operating subsidiaries in other
jurisdictions, including PaySpot in the U.S. We cannot be certain that we will be entitled to use
the e-pay trademark in any markets other than those in which we have registered the trademark. In
2003, we filed a U.S. patent application for our POS recharge products in support of e-pay and
PaySpot technology. As of the date of this report, these patents are still pending. We also hold a
patent license covering certain of PaySpots operations in the U.S.
Technology in the areas in which we operate is developing very rapidly, and we are aware that many
other companies have filed patent applications for products, processes and services similar to
those we provide. The procedures of the U.S. patent office make it impossible for us to predict
whether our patent applications will be approved or will be granted priority dates that are earlier
than other patents that have been filed for similar products or services. Moreover, the Prepaid
Processing business is an area in which many process patents have been filed in the U.S. over
recent years covering processes that are in wide use in the industry. If their patents are
considered to cover technology that has been incorporated into our systems, we may be required to
obtain additional licenses and pay royalties to the holders of such patents to continue to use the
affected technology or be prohibited from continuing the offering of such services if licenses are
not obtained. This could materially and adversely affect our business.
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, period of service and position held by each of our Executive Officers as of February
28, 2008 are as follows:
Name |
Age | Served Since | Position Held | |||||
Michael J. Brown
|
51 | July 1994 | Chairman and Chief Executive Officer | |||||
Kevin J. Caponecchi
|
41 | July 2007 | President | |||||
Jeffrey B. Newman
|
53 | December 1996 | Executive Vice President General Counsel | |||||
Rick L. Weller
|
50 | November 2002 | Executive Vice President Chief Financial Officer | |||||
Miro I. Bergman
|
45 | January 2001 | Executive Vice President Chief Operations Officer, Prepaid Processing Segment | |||||
Juan C. Bianchi
|
37 | April 2007 | Executive Vice President Managing Director, Money Transfer Segment |
MICHAEL J. BROWN is one of the founders of Euronet and has served as our Chairman of the Board and
Chief Executive Officer since 1996. He also co-founded our predecessor in 1994. Mr. Brown has been
a Director of Euronet since our incorporation in December 1996 and previously served on the boards
of Euronets predecessor companies. Mr. Brown was our
President from December 11, 2006 to June 19, 2007. In 1979, Mr. Brown founded Innovative Software, Inc., a
computer software company that was merged in 1988 with Informix. Mr. Brown served as President and
Chief Operating Officer of Informix from February 1988 to January 1989. He served as President of
the Workstation Products Division of Informix from January 1989 until April 1990. In 1993, Mr.
Brown was a founding investor of Visual Tools, Inc. Visual Tools, Inc. was acquired by Sybase
Software in 1996. Mr. Brown received a B.S. in Electrical Engineering from the University of
Missouri Columbia in 1979 and a M.S. in Molecular and Cellular Biology at the University of
Missouri Kansas City in 1997.
KEVIN J. CAPONECCHI, President. Mr. Caponecchi joined Euronet as President in July 2007. Prior to
joining Euronet, Mr. Caponecchi served in various capacities with subsidiaries of General Electric
Company for 17 years. From 2003 until June 2007, Mr. Caponecchi served as President of GE Global
Signaling, a provider of products and services to freight, passenger and mass transit systems,
which had annual sales of nearly $600 million and employed approximately 1,500 people in over 10
countries. From 1998
14
through 2002, Mr. Caponecchi served as General Manager Technology for GE
Consumer & Industrial, a provider of consumer appliances, lighting products and electrical
products, and in that position, he supervised product development for dishwashers, ranges and new
product innovations. Mr. Caponecchi holds degrees in physics from Franklin and Marshall College and
industrial engineering from Columbia University.
JEFFREY B. NEWMAN, Executive Vice President, General Counsel. Mr. Newman has been Executive Vice
President and General Counsel of Euronet since January 2000. He joined Euronet in December 1996 as
Vice President and General Counsel. Prior to this, he practiced law with the Washington D.C. based
law firm of Arent Fox Kintner Plotkin & Kahn and the Paris based law firm of Salans Hertzfeld &
Heilbronn. He is a member of the District of Columbia and Paris bars. He received a B.A. in Political
Science and French from Ohio University in 1976 and law degrees from Ohio State University and the
University of Paris.
RICK L. WELLER, Executive Vice President, Chief Financial Officer. Mr. Weller has been Executive
Vice President and Chief Financial Officer of Euronet since he joined Euronet in November 2002.
From January 2002 to October 2002, he was the sole proprietor of Pivotal Associates, a business
development firm. From November 1999 to December 2001, Mr. Weller held the position of Chief
Operating Officer of ionex telecommunications, inc., a local exchange company. He is a certified
public accountant and received his B.S. in Accounting from University of Central Missouri.
MIRO I. BERGMAN, Executive Vice President, Chief Operating Officer Prepaid Processing Segment.
Mr. Bergman joined the company in March 1997 and has been Executive Vice President and Chief
Operating Officer Prepaid Processing Division since April 2005. He has been an Executive Vice
President since January 2001. He served as Country Manager for the Czech Republic from
1997 to 1999 and then became area manager responsible for our operations in Central Europe. From
2000 until 2005, he served as Managing Director of the EFT Division for the Europe, Middle East,
and Africa (EMEA) region. Mr. Bergman received his B.S. in Business Administration from the
University of New York at Albany and M.B.A. from Cornell University.
JUAN C. BIANCHI, Executive Vice President, Managing Director Money Transfer Segment. Mr. Bianchi
joined Euronet through the acquisition of RIA Envia, Inc. (RIA). Prior to the acquisition,
Mr. Bianchi served as the Chief Executive Officer of RIA and has spent his entire career at either
RIA or AFEX Money Express, a money transfer company purchased by RIAs founders. Mr. Bianchi began
his career at AFEX in Chile in 1992, joined AFEX USAs operations in 1996, and became chief
operating officer of AFEX-RIA in 2003. Mr. Bianchi studied business at the Universidad Andres Bello
in Chile and completed the Executive Program in Management at UCLAs John E. Anderson School of
Business.
AVAILABILITY OF REPORTS, CERTAIN COMMITTEE CHARTERS AND OTHER INFORMATION
Our website addresses are www.euronetworldwide.com and www.eeft.com. We make all
Securities and Exchange Commission (SEC) public filings, including our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act available on our
website free of charge as soon as reasonably practicable after these documents are electronically
filed with, or furnished to, the SEC. The information on our website is not, and shall not be
deemed to be a part of this report or incorporated into any other filings we make with the SEC. In
addition, the SEC maintains an internet site at www.sec.gov that contains reports, proxy
and information statements, and other information regarding Euronet.
The charters for our Audit, Compensation, and Corporate Governance and Nominating Committees, as
well as the Code of Business Conduct & Ethics for our employees, including our Chief Executive
Officer and Chief Financial Officer, are available on our website at
www.euronetworldwide.com in the Investors section.
We will also provide printed copies of these materials to any stockholders, upon request to Euronet
Worldwide, Inc., 4601 College Boulevard, Suite 300, Leawood, Kansas, U.S.A. 66211, Attention:
Investor Relations.
15
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below before making an investment decision. The
risks and uncertainties described below are not the only ones facing our company. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial may also impair
our business operations.
If any of the following risks actually occurs, our business, financial condition or results of
operations could be materially adversely affected. In that case, the trading price of our common
stock could decline substantially.
This Annual Report also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in the forward-looking statements
as a result of a number of factors, including the risks described below and elsewhere in this
Annual Report.
Risks Related to Our Business
We have a substantial amount of debt and other contractual commitments, and the cost of servicing
those obligations could adversely affect our business, and such risk could increase if we incur
more debt. We may be required to prepay our obligations under the $290 million secured syndicated
credit facility.
We have a substantial amount of indebtedness. As of December 31, 2007, total liabilities were
$1,162.3 million, of which $539.3 million represents long-term debt obligations and total assets
were $1,886.2 million. Of our total long-term debt obligations, $315.0 million is comprised of
contingently convertible debentures that may be settled in stock. We may not have sufficient funds
to satisfy all such obligations as a result of a variety of factors, some of which may be beyond
our control. If the opportunity of a strategic acquisition arises or if we enter into new contracts
that require the installation or servicing of infrastructure, such as processing centers, ATM
machines or POS terminals on a faster pace than anticipated, we may be required to incur additional
debt for these purposes and to fund our working capital needs, which we may not be able to obtain.
The level of our indebtedness could have important consequences to investors, including the
following:
| 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; and | ||
| because a portion of our indebtedness and other obligations are denominated in foreign currencies, and because a portion of our debt bears interest at a variable rate of interest, our actual debt service obligations could increase as a result of adverse changes in foreign currency exchange rates and/or interest rates. |
If we fail to make required debt payments, or if we fail to comply with other covenants in our debt
service agreements, we would be in default under the terms of these agreements. This default would
permit the holders of the indebtedness to accelerate repayment of this debt and could cause
defaults under other indebtedness that we have.
Prepayment in full of the obligations under the $290 million secured syndicated credit facility
(the Credit Facility) may be required six months prior to any required repurchase date under our
$140 million 1.625% Convertible Senior Debentures Due 2024 or our $175 million 3.5% Convertible
Debentures Due 2025, unless we are able to demonstrate that either: (i) we could borrow
unsubordinated funded debt equal to the principal amount of the applicable convertible debentures
while remaining in compliance with the financial covenants in the Credit Facility, or (ii) we will
have sufficient liquidity (as determined by the administrative agent and the lenders). Holders of
the $140 million 1.625% debentures have the option to require us to purchase their debentures at
par on December 15, 2009, 2014 and 2019, and upon a change in control of the Company. Holders of
the $175 million 3.5% debentures have the option to require us to purchase their debentures at par
on October 15, 2012, 2015 and 2020, or upon a change in control of the Company.
Restrictive covenants in our credit facilities may adversely affect us. The Credit Facility
contains three financial covenants that become more restrictive between now and September 30, 2008,
including: (1) total debt to EBITDA ratio, (2) senior secured debt to EBITDA ratio and (3) EBITDA
to fixed charge coverage ratio. Because these covenant thresholds will become more restrictive
through September 30, 2008, to remain in compliance with our debt covenants, we may be required to
increase EBITDA, repay debt, or both. We cannot assure you that we will have sufficient assets,
liquidity or EBITDA to meet or avoid these obligations, which could have an adverse impact on our
financial condition.
16
Our ability to secure additional financing for growth or to refinance any of our existing debt is
also dependent upon the availability of credit in the marketplace, which has recently come under
pressure due in part to credit concerns related to subprime mortgage-backed securities and related
debt obligations. If we are unable to secure additional financing or such financing is not
available at acceptable terms, we may be unable to secure financing for growth or refinance our
debt obligations, if necessary.
Increases in interest rates will adversely impact our results from operations.
We have entered into interest rate swap agreements covering the period from June 1, 2007 through
May 29, 2009 for a notional amount of $50 million that effectively converts that portion of our
$190 million variable rate term loan to a fixed interest rate of 7.3% per annum. For the remaining
outstanding balance of the term loan, as well as borrowings incurred under our revolving credit
facility and other variable rate borrowing arrangements, increases in variable interest rates will
increase the amount of interest expense that we pay for our borrowings and have a negative impact
on our results from operations.
Our business may suffer from risks related to our recent acquisitions and potential future
acquisitions, including our acquisition of RIA during 2007.
A substantial portion of our recent growth is due to acquisitions, and we continue to evaluate and
engage in discussions concerning potential acquisition opportunities, some of which could be
material. During 2007, we acquired RIA, which was our largest acquisition to date. We cannot assure
you that we will be able to successfully integrate, or otherwise realize anticipated benefits from,
our recent acquisitions or any future acquisitions. Failure to successfully integrate or otherwise
realize the anticipated benefits of these acquisitions could adversely impact our long-term
competitiveness and profitability. The integration of our recent acquisitions and any future
acquisitions will involve a number of risks that could harm our financial condition, results of
operations and competitive position. In particular:
| The integration plans for our acquisitions are based on benefits that involve assumptions as to future events, including leveraging our existing relationships with mobile phone operators and retailers, as well as general business and industry conditions, many of which are beyond our control and may not materialize. Unforeseen factors may offset components of our integration plans in whole or in part. As a result, our actual results may vary considerably, or be considerably delayed, compared to our estimates; | ||
| The integration process could disrupt the activities of the businesses that are being combined. The combination of companies requires, among other things, coordination of administrative and other functions. In addition, the loss of key employees, customers or vendors of acquired businesses could materially and adversely impact the integration of the acquired business; | ||
| The execution of our integration plans may divert the attention of our management from other key responsibilities; | ||
| We may assume unanticipated liabilities and contingencies; or | ||
| Our acquisition targets could fail to perform in accordance with our expectations at the time of purchase. |
Future acquisitions may be affected through the issuance of our Common Stock or securities
convertible into our Common Stock, which could substantially dilute the ownership percentage of our
current stockholders. In addition, shares issued in connection with future acquisitions could be
publicly tradable, which could result in a material decrease in the market price of our Common
Stock.
We may be required to recognize impairment charges related to long-lived assets and goodwill
recorded in connection with our acquisitions.
Our total assets include approximately $919.5 million, or 49% of total assets, in goodwill and
acquired intangible assets recorded as a result of acquisitions. We assess our goodwill, intangible
assets and other long-lived assets as and when required by accounting principles generally accepted
in the U.S. to determine whether they are impaired. If operating results in any of our key markets,
including the U.S., U.K., Germany, Spain and Australia, deteriorate or our plans do not progress as
expected when we acquired these entities, we may be required to record an impairment write-down of
goodwill, intangible assets or other long-lived assets. As previously disclosed, we have
experienced a loss of revenues and profits in Spain due to a reduction of certain exclusive
commission arrangements that were in effect until May 2006. Also, during the second quarter 2006,
we entered into distribution agreements for additional products and prepaid airtime from the two
other primary mobile operators in Spain. The projections that support goodwill from our Spanish
acquisitions include growth in profitability that is dependent on a number of factors. These
factors include: our ability to maintain or increase the level of gross margin that we earn with
each transaction; our ability to increase transaction levels through the sale of the prepaid mobile
airtime of the two other major mobile operators; our ability to increase the quantity of product
offerings included on our network of POS terminals; and our ability to avoid additional
investments. If operating results do not progress as expected, or if we are required to make
additional investments, we may be required to record an impairment write-down of goodwill,
intangible assets or other long-lived assets associated with our Spanish business. Impairment
charges would reduce reported earnings for the periods in which they are recorded. This could have
a material adverse effect on our results of operations and financial condition.
17
Like other participants in the money transfer industry, as a result of immigration developments,
downturns in certain labor markets and/or other economic factors, growth rates in money transfers
from the U.S. to Mexico have slowed. This slowing of growth began during the middle of 2006 and
continues to impact money transfer revenues for transactions from the U.S. to Mexico. Despite
recent improvement in this trend, we believe that it is too early to conclude on the impact, if
any, to our results of operations. These issues have also resulted in certain competitors lowering
transaction fees and foreign currency exchange spreads in certain markets where we do business in
an attempt to limit the impact on money transfer volumes. For 2007, money transfer transactions to
Mexico, which represented approximately 38% of total money transfer transactions, decreased by
1.1%. If this trend continues or worsens, or we experience similar trends in our international
business, we may be required to record an impairment write-down of our goodwill, intangible assets
or other long lived assets associated with the Money Transfer Segment.
A lack of business opportunities or financial or other 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 four separate areas: (i) our network of owned
and operated ATMs; (ii) outsourced ATM management contracts; (iii) our prepaid mobile airtime
services; and (iv) our money transfer and bill payment 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 outsourcing agreements with banks; | ||
| the ability to renew existing agreements with customers; | ||
| the ability to obtain sufficient numbers of ATMs on a timely basis; and | ||
| the availability of financing for the expansion. |
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 or maintain
outsourcing contracts with us. Banks are very deliberate in negotiating these agreements, and the
process of negotiating and signing outsourcing agreements typically takes six to twelve months or
longer. Moreover, banks evaluate a wide range of matters when deciding to choose an outsource
vendor and generally this decision is subject to extensive management analysis and approvals. The
process is also affected by the legal and regulatory considerations of local countries, as well as
local language complexities. These agreements tend to cover large numbers of ATMs, so significant
increases and decreases in our pool of managed ATMs could result from entry into or termination of
these management contracts. In this regard, the timing of both current and new contract revenues is
uncertain and unpredictable. Increasing consolidation in the banking industry could make this
process less predictable.
We currently offer prepaid mobile airtime top-up services in the U.S., Europe, Africa, Asia Pacific
and the Middle-East and we currently offer money transfer services from the U.S. to Latin America
and from the U.K. to India, and bill payment services within the U.S. We plan to expand in these
and other markets by taking advantage of our existing relationships with mobile phone operators,
banks and retailers. This expansion will depend on various factors, including the following:
| the ability to negotiate new agreements, and renew existing agreements, in these markets with mobile phone operators, banks and retailers; | ||
| the continuation of the trend of increased use of electronic prepaid mobile airtime among mobile phone users; | ||
| the continuation of the trend of increased use of electronic money transfer and bill payment among immigrant workers; | ||
| the increase in the number of prepaid mobile phone users; and | ||
| the availability of financing for the expansion. |
In addition, our continued expansion may involve acquisitions that could divert our resources and
management time and require integration of new assets with our existing networks and services and
could require financing that we may not be able to obtain. Our ability to manage our rapid
expansion effectively will require us eventually to expand our operating systems and employee base.
An inability to do this could have a material adverse effect on our business, growth, financial
condition or results of operations.
We are subject to business cycles, seasonality and other outside factors that may negatively affect
our business.
A recessionary economic environment or other outside factors could have a negative impact on mobile
phone operators, retailers and our customers and could reduce the level of transactions, which
could, in turn, negatively impact our financial results. If mobile phone operators and financial
institutions experience decreased demand for their products and services, or if the locations where
we provide
18
services decrease in number, we will process fewer transactions, resulting in lower
revenue. In addition, a recessionary economic environment could reduce the level of transactions
taking place on our networks, which will have a negative impact on our business.
Our experience is that the level of transactions on our networks is also subject to substantial
seasonal variation. Transaction levels have consistently been much higher in the fourth quarter of
the fiscal year due to increased use of ATMs, prepaid mobile airtime top-ups and money transfer
services during the holiday season. Generally, the level of transactions drops in the first
quarter, during which transaction levels are generally the lowest we experience during the year,
which reduces the level of revenues that we record. Additionally, in the Money Transfer Segment, we experience increased money transfer transaction
levels during the month of May and in the fourth quarter of each year, coinciding with various
holidays. In the U.S. to Mexico corridor, we usually experience our heaviest volume during the May
through October timeframe, coinciding with the increase in worker migration patterns, and our
lowest volumes during the first quarter. During the first quarter of each year we have historically
experienced a 5% to 10% decrease in overall transactions when compared to the fourth quarter. 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.
Additionally, economic or political instability, civil unrest, terrorism and natural disasters may
make money transfers to, from or within a particular country more difficult. The inability to
timely complete money transfers could adversely affect our business.
The growth and profitability of our prepaid business is dependent on certain factors that vary from
market to market.
Our Prepaid Processing Segment derives revenues based on processing fees and commissions from
mobile and other telecommunication operators and distributors of prepaid wireless products. Growth
in our prepaid business in any given market is driven by a number of factors, including the extent
to which conversion from scratch cards to electronic distribution solutions is occurring or has
been completed, the overall pace of growth in the prepaid mobile phone market, our market share of
the retail distribution capacity and the level of commission that is paid to the various
intermediaries in the prepaid mobile airtime distribution chain. In mature markets, such as the
U.K., Australia, Spain and Ireland, the conversion from scratch cards to electronic forms of
distribution is either complete or nearing completion. Therefore, these factors will cease to
provide the organic increases in the number of transactions per terminal that we have experienced
historically. Also, competition among prepaid distributors results in retailer churn and the
reduction of commissions paid by mobile operators, although a portion of such reductions can be
passed along to retailers. In the last year, processing fees and commissions per transaction have
declined in most markets, and we expect that trend to continue. We have been able to improve our
results despite that trend due to substantial growth in the number of transactions, driven by
acquisitions and organic growth. We do not expect to continue this rate of growth. If we cannot
continue to increase our transaction levels and per-transaction fees and commissions continue to
decline, the combined impact of these factors could adversely impact our financial results.
Our prepaid mobile airtime top-up and money transfer businesses may be susceptible to fraud and/or
credit risks occurring at the retailer and/or consumer level.
In our Prepaid Processing Segment, we contract with retailers that accept payment on our behalf,
which we then transfer to a trust or other operating account for payment to mobile phone operators.
In the event a retailer does not transfer to us payments that it receives for mobile airtime, we
are responsible to the mobile phone operator for the cost of the airtime credited to the customers
mobile phone. We can provide no assurance that retailer fraud will not increase in the future or
that any proceeds we receive under our credit enhancement 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.
With respect to our money transfer business, our business is primarily conducted through our agent
network, which provides money transfer services directly to consumers at retail locations. Our
agents collect funds directly from consumers and in turn we collect from the agents the proceeds
due to us resulting from the money transfer transactions. Therefore, we have credit exposure to our
agents. The failure of agents owing us significant amounts to remit funds to us or to repay such
amounts could adversely affect 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, or renewal under less
favorable terms.
Our contracts with mobile phone operators to process prepaid mobile airtime recharge services
typically have terms of less than three years. 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 three years, and our
contracts with smaller retailers typically may be canceled by either party upon three to six
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 renewal of contracts under less favorable payment terms, commission terms or other
terms could have a material adverse impact on our working capital requirements and/or results from
operations. In addition, our contracts generally permit operators to reduce our fees at any time.
Commission revenue or fee reductions
19
by any of the mobile phone operators could also have a
material adverse effect on our business, financial condition or results of operations.
The processes and systems we employ may be subject to patent protection by other parties.
In certain countries, including the U.S., patent protection legislation permits the protection of
processes and systems. We employ processes and systems in various markets that have been used in
the industry by other parties for many years, and which we or other companies that use the same or
similar processes and systems consider to be in the public domain. However, we are aware that
certain parties believe they hold patents that cover some of the processes and systems employed in
the prepaid processing industry in the U.S. and elsewhere. We believe the processes and systems we
use have been in the public domain prior to the patents we are aware of. The question of whether a
process or system is in the public domain is a legal determination, and if this issue is litigated
we cannot be certain of the outcome of any such litigation. If a person were to assert that it
holds a patent covering any of the processes or systems we use, we would be required to defend
ourselves against such claim. If unsuccessful, we may be required to pay damages for past
infringement, which could be trebled if the infringement was found to be willful. We may also be
required to seek a license to continue to use the processes or systems. Such a license may require
either a single payment or an ongoing license fee. No assurance can be given that we will be able
to obtain a license which is reasonable in fee and scope. If a patent owner is unwilling to grant
such a license, or we decide not to obtain such a license, we may be required to modify our
processes and systems to avoid future infringement. Any such occurrences could materially and
adversely affect our prepaid processing business in any affected markets and could result in our
reconsidering the rate of expansion of this business in those markets.
The stability and growth of our EFT Processing Segment 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 EFT Processing Segment depends in part on our ability to
sign card acceptance and ATM management agreements with banks and international card organizations.
Card acceptance agreements allow our ATMs to accept credit and debit cards issued by banks and
international card organizations. ATM management agreements generate service income from our
management of ATMs for banks. These agreements are the primary source of our ATM business.
These agreements have expiration dates, and banks and international card organizations are
generally not obligated to renew them. In some cases, banks may terminate their contracts prior to
the expiration of their terms. We cannot assure you that we will be able to continue to sign or
maintain these agreements on terms and conditions acceptable to us or whether those 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 founder and key executives of our company, and of companies that we acquire, and
finding and retaining qualified personnel is important to our continued success.
The development and implementation of our strategy has depended in large part on the co-founder of
our company, Michael J. Brown. The retention of Mr. Brown is important to our continued success. In
addition, the success of the expansion of businesses that we acquire may depend in large part upon
the retention of the founders of those businesses. Our success also depends in part on our ability
to hire and retain highly skilled and qualified management, operating, marketing, financial and
technical personnel. The competition for qualified personnel in the 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, which grant incentive
stock options and/or restricted stock with long-term vesting requirements. However, most of these
contracts do not guarantee that these individuals will continue their employment with us. The loss
of our key personnel could have a material adverse effect on our business, growth, financial
condition or results of operations.
Our operating results depend in part on the volume of transactions on ATMs in our network and the
fees we can collect from processing these transactions.
Transaction fees from banks and international card organizations for transactions processed on our
ATMs have historically accounted for a substantial majority of our revenues. These fees are set by
agreement among all banks in a particular market. 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; |
20
| the maintenance of the level of transaction fees we receive; | ||
| the installation of larger numbers of ATMs; and | ||
| the continued use of our ATMs by credit and debit cardholders. |
Although we believe that the volume of transactions in developing countries may 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
attempt to improve the levels of transactions on our ATM network overall by acquiring good sites
for our ATMs, eliminating poor locations, entering new less-developed markets and adding new
transactions to the sets of transactions that are available on our ATMs. However, we may not be
successful in materially increasing transaction levels through these measures. Per-transaction fees
have declined in certain markets in recent years. If we cannot continue to increase our transaction
levels and per-transaction fees generally decline, our results would be adversely affected.
Our operating results in the money transfer business depend in part on continued worker immigration
patterns, our ability to expand our share of the existing electronic market and to expand into new
markets and our ability to continue complying with regulations issued by the Office of Foreign
Assets Control (OFAC), Bank Secrecy Act (BSA), Financial Crimes Enforcement Network (FINCEN),
PATRIOT Act regulations or any other existing or future regulations that impact any aspect of our
money transfer business.
Our money transfer business primarily focuses on workers who migrate to foreign countries in search
of employment and then send a portion of their earnings to family members in their home countries.
Our ability to continue complying with the requirements of OFAC, BSA, FINCEN, the PATRIOT Act and
other regulations (both U.S. and foreign) is important to our success in achieving growth and an
inability to do this could have an adverse impact on our revenues and earnings. Changes in U.S. and
foreign government policies or enforcement toward immigration may have a negative affect on
immigration in the U.S. and other countries, which could also have an adverse impact on our money
transfer revenues.
Future growth and profitability depend upon expansion within the markets in which we currently
operate and the development of new markets for our money transfer services. Our expansion into new
markets is dependent upon our ability to successfully integrate RIA into our existing operations,
to apply our existing technology or to develop new applications to satisfy market demand. We may
not have adequate financial and technological resources to expand our distribution channels and
product applications to satisfy these demands, which may have an adverse impact on our ability to
achieve expected growth in revenues and earnings.
Changes in state, federal or foreign laws, rules and regulations could impact the money transfer
industry, making it more difficult for our customers to initiate money transfers.
We are subject to regulation by the U.S. states in which we operate, by the U.S. federal government
and by the governments of the other countries in which we operate. Changes in the laws, rules and
regulations of these governmental entities could have a material adverse impact on our results of
operations, financial condition and cash flow.
Changes in banking industry regulation and practice could make it more difficult for us and our
agents to maintain depository accounts with banks.
The banking industry, in light of increased regulatory oversight, is continually examining its
business relationships with companies who offer money transfer services and with retail agents who
collect and remit cash collected from end consumers. Should banks decide to not offer depository
services to companies engaged in processing money transfer transactions, or to retail agents who
collect and remit cash from end customers, our ability to administer and collect fees from money
transfer transactions could be adversely impacted.
Developments in electronic financial transactions could materially reduce our transaction levels
and revenues.
Certain developments in the field of electronic financial transactions may reduce the need for
ATMs, prepaid mobile phone POS terminals and money transfer agents. These developments may reduce
the transaction levels that we experience on our networks in the markets where they occur.
Financial institutions, retailers and agents could elect to increase fees to their customers for
using our services, which may cause a decline in the use of our services and have an adverse effect
on our revenues. If transaction levels over our existing network of ATMs, POS terminals, agents and
other distribution methods do not increase, growth in our revenues will depend primarily on
increased capital investment for new sites and developing new markets, which reduces the margin we
realize from our revenues.
The mobile phone industry is a rapidly evolving area, in which technological developments, in
particular the development of new methods or services, may affect the demand for other services in
a dramatic way. The development of any new technology that reduces the need or demand for prepaid
mobile phone time could materially and adversely affect our business.
21
We generally have little control over the ATM transaction fees established in the markets where we
operate, and therefore, cannot control any potential reductions in these fees.
The amount of fees we receive per transaction is set in various ways in the markets in which we do
business. We have card acceptance agreements or ATM management agreements with some banks under
which fees are set. However, we derive the bulk of our revenues in most markets from ''interchange
fees that are set by the central ATM processing switch. The banks that participate in these
switches set the interchange fee, and we are not in a position in any market to greatly influence
these fees, which may increase or decrease over time. A significant decrease in the interchange fee
in any market could adversely affect our results in that market.
In some cases, we are dependent upon international card organizations and national transaction
processing switches to provide assistance in obtaining settlement from card issuers of funds
relating to transactions on our ATMs.
Our ATMs dispense cash relating to transactions on credit and debit cards issued by banks. We have
in place arrangements for the settlement to us of all of those transactions, but in some cases, we
do not have a direct relationship with the card-issuing bank and rely for settlement on the
application of rules that are administered by international card associations (such as Visa or
MasterCard) or national transaction processing switching networks. If a bankcard association fails
to settle transactions in accordance with those rules, we are dependent upon cooperation from such
organizations or switching networks to enforce our right of settlement against such banks or card
associations. Failure by such organizations or switches to provide the required cooperation could
result in our inability to obtain settlement of funds relating to transactions and adversely affect
our business.
We derive a significant amount of revenue in our business from service agreements 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 financial institutions, mobile operators, retailers and agents.
This, in turn, requires the maintenance of computer equipment and infrastructure, including
telecommunications and electrical systems, and the integration and enhancement of complex software
applications. Our ATM segment also uses a satellite-based system that is susceptible to the risk of
satellite failure. There are operational risks inherent in this type of business that can result in
the temporary shutdown of part or all of our processing systems, such as failure of electrical
supply, failure of computer hardware and software errors. Excluding Germany, transactions in the
EFT Processing Segment are processed through our Budapest, Belgrade, Athens, Beijing and Mumbai
operations centers. Transactions in the Prepaid Processing Segment are processed through our
Basildon, Martinsried, Madrid and Leawood, Kansas operations centers. Transactions in our Money
Transfer Segment are processed through our Cerritos, California operations center. Any operational
problem in these centers may have a significant adverse impact on the operation of our networks.
Even with disaster recovery procedures in place, these risks cannot be eliminated entirely, and 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 are subject to the risks of liability for fraudulent bankcard and other card transactions
involving a breach in our security systems, breaches of our information security policies or
safeguards, as well as for ATM theft and vandalism.
We capture, transmit, handle and store sensitive information in conducting and managing electronic,
financial and mobile transactions, such as card information and PIN numbers. These businesses
involve certain inherent security risks, in particular: the risk of electronic interception and
theft of the information for use in fraudulent or other card transactions by persons outside the
Company or by our own employees; and the use of fraudulent cards on our network of owned or
outsourced ATMs and POS devices. We incorporate industry-standard encryption technology and
processing methodology into our systems and software, and maintain controls and procedures
regarding access to our computer systems by employees and others, to maintain high levels of
security. Although this technology and methodology decrease security risks, they cannot be
eliminated entirely, as criminal elements apply increasingly sophisticated technology to attempt to
obtain unauthorized access to the information handled by ATM and electronic financial transaction
networks. In addition, the cost and timeframes required for implementation of new technology may
result in a time lag between availability of such technology and our adoption of it.
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Any breach in our security systems could result in the perpetration of fraudulent financial
transactions for which we may bear the liability. We are insured against various risks, including
theft and negligence, but such insurance coverage is subject to deductibles, exclusions and
limitations that may leave us bearing some or all of any losses arising from security breaches.
We also collect, transfer and retain consumer data as part of our money transfer business. These
activities are subject to certain consumer privacy laws and regulations in the U.S. and in other
jurisdictions where our money transfer services are offered. We
maintain technical and operational safeguards designed to comply with applicable legal
requirements. Despite these safeguards, there remains a risk that these safeguards could be
breached resulting in improper access to, and disclosure of, sensitive consumer information.
Breaches of our security policies or applicable legal requirements resulting in a compromise of
consumer data could expose us to regulatory enforcement action, subject us to litigation, limit our
ability to provide money transfer services and/or cause harm to our reputation.
In addition to electronic fraud issues and breaches of our information security policies and
safeguards, 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 such risks, deductibles, exclusions or limitations in such insurance may
leave us bearing some or all of any losses arising from theft or vandalism of ATMs. In addition, we
have experienced increases in claims under our insurance, which has increased our insurance
premiums.
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 Germany or any other market could prevent us from doing business
in that market.
Under German law, only a licensed financial institution may operate ATMs. Because we are not a
licensed financial institution we are 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 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. If we are unable to secure sponsor arrangements in Germany or any
other market, we could be prevented from doing business in the applicable market.
If we are unable to maintain our money transfer agent and correspondent networks, our business may
be adversely affected.
Our money transfer based revenue is primarily generated through the use of our agent and
correspondent networks. Transaction volumes at existing locations may increase over time and new
agents provide us with additional revenue. If agents or correspondents decide to leave our network
or if we are unable to sign new agents or correspondents, our revenue and profit growth rates may
be adversely affected. Our agents and correspondents are also subject to a wide variety of laws and
regulations that vary significantly, depending on the legal jurisdiction. Changes in these laws and
regulations could adversely affect our ability to maintain the networks or the cost of providing
money transfer services. In addition, agents may generate fewer transactions or less revenue due to
various factors, including increased competition. Because our agents and correspondents are third
parties that may sell products and provide services in addition to our money transfer services,
they may encounter business difficulties unrelated to the provision of our services, which may
cause the agents or correspondents to reduce their number of locations or hours of operation, or
cease doing business altogether.
If consumer confidence in our money transfer business or brands declines, our business may be
adversely affected.
Our money transfer business relies on consumer confidence in our brands and our ability to provide
efficient and reliable money transfer services. A decline in consumer confidence in our business or
brands, or in traditional money transfer providers as a means to transfer money, may adversely
impact transaction volumes which would in turn be expected to adversely impact our business.
Our money transfer service offerings are dependent on financial institutions to provide such
offerings.
Our money transfer business involves transferring funds internationally and is dependent upon
foreign and domestic financial institutions, including our competitors, to execute funds transfers
and foreign currency transactions. Changes to existing regulations of financial institution
operations, such as those designed to combat terrorism or money laundering, could require us to
alter our operating procedures in a manner that increases our cost of doing business or to
terminate certain product offerings. In addition, as a
23
result of existing regulations and/or
changes to those regulations, financial institutions could decide to cease providing the services
on which we depend, requiring us to terminate certain product offerings.
Our competition in the EFT Processing Segment, Prepaid Processing Segment and Money Transfer
Segment include large, well financed companies and financial institutions larger than us with
earlier entry into the market. As a result, we may lack the financial resources and access to
capital needed to capture increased market share.
EFT Processing Segment Our principal EFT Processing competitors include ATM networks owned by
banks and national switches consisting of consortiums of local banks that provide outsourcing and
transaction services only to banks and independent ATM deployers in that country. Large,
well-financed companies offer ATM network and outsourcing services that compete with us in various
markets. In some cases, these companies also sell a broader range of card and processing services
than we, and are in some cases, willing to discount ATM services to obtain large contracts covering
a broad range of services. Competitive factors in our EFT Processing Segment include network
availability and response time, breadth of service offering, price to both the bank and to its
customers, ATM location and access to other networks.
For our ITM product line, we are a leading supplier of electronic financial transaction processing
software for the IBM iSeries platform in a largely fragmented market, which is made up of
competitors that offer a variety of solutions that compete with our products, ranging from single
applications to fully integrated electronic financial processing software. Additionally, for ITM,
other industry suppliers service the software requirements of large mainframe systems and
UNIX-based platforms, and accordingly are not considered competitors. We have specifically targeted
customers consisting of financial institutions that operate their back office systems with the IBM
iSeries. For Essentis, we are a strong supplier of electronic payment processing software for card
issuers and merchant acquirers on a mainframe platform. Our competition includes products owned and
marketed by other software companies as well as large, well financed companies that offer
outsourcing and credit card services to financial institutions. We believe our Essentis offering is
one of the few software solutions in this product area that has been developed as a completely new
system, as opposed to a re-engineered legacy system, taking full advantage of the latest technology
and business strategies available.
Our software solutions business has multiple types of competitors that compete across all EFT
software components in the following areas: (i) ATM, network and POS software systems, (ii)
Internet banking software systems, (iii) credit card software systems, (iv) mobile banking systems,
(v) mobile operator solutions, (vi) telephone banking and (vii) full EFT software. Competitive
factors in the software solutions business include price, technology development and the ability of
software systems to interact with other leading products.
Prepaid Processing Segment We face competition in the prepaid business in all of our markets. A
few multinational companies operate in several of our markets, and we therefore compete with them
in a number of countries. In other markets, our competition is from smaller, local companies. Major
retailers with high volumes are in a position to demand a larger share of commissions, which may
compress our margins.
Money Transfer Segment Our primary competitors in the money transfer and bill payment business
include other independent processors and electronic money transmitters, as well as certain major
national and regional banks, financial institutions and independent sales organizations. Our
competitors include Western Union, MoneyGram, Global Payments and others, some of which are larger
than we are and have greater resources and access to capital for expansion than we have. This may
allow them to offer better pricing terms to customers, which may result in a loss of our current or
potential customers or could force us to lower our prices. Either of these actions could have an
adverse impact on our revenues. In addition, our competitors may have the ability to devote more
financial and operational resources than we can to the development of new technologies that provide
improved functionality and features to their product and service offerings. If successful, their
development efforts could render our product and services offerings less desirable, resulting in
the loss of customers or a reduction in the price we could demand for our services. In addition to
traditional money payment services, new technologies are emerging that may effectively compete with
traditional money payment services, such as stored-value cards, debit networks and web-based
services. Our continued growth depends upon our ability to compete effectively with these
alternative technologies.
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, the Czech Republic, Romania, Slovakia, Spain, Greece,
Croatia, India, Serbia, Bulgaria, Egypt and China, and have operations in other countries
in Central Europe, the Middle East and Asia. We expect to continue to expand our operations to
other countries in these areas. We sell software in many other markets in the developing world.
Some of 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
24
interpretation of
existing laws or regulations, whether caused by a change in government or otherwise, could
materially adversely affect our business, growth, financial condition or results of operations.
For example, currently there are no limitations on the repatriation of profits from any of the
countries in which we have subsidiaries (although U.S. tax laws discourage repatriation), but
foreign currency exchange control restrictions, taxes or limitations may be imposed or increased in
the future with regard to repatriation of earnings and investments from these countries. If
exchange control restrictions, taxes or limitations are imposed, our ability to receive dividends
or other payments from affected subsidiaries could be reduced, which may have a material adverse
effect on us.
In addition, corporate, contract, property, insolvency, competition, securities and other laws and
regulations in Hungary, Poland, the Czech Republic, Romania, Slovakia, Croatia, Bulgaria and other
countries in Central Europe have been, and continue to be, substantially revised during the
completion of their transition to the European Union. 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.
We conduct business in many international markets with complex and evolving tax rules, including
value added tax rules, which subjects us to international tax compliance risks.
While we obtain advice from legal and tax advisors as necessary to help assure compliance with tax
and regulatory matters, most tax jurisdictions that we operate in have complex and subjective rules
regarding the valuation of intercompany services, cross-border payments between affiliated
companies and the related effects on income tax, value-added tax (VAT), transfer tax and share
registration tax. Our foreign subsidiaries frequently undergo VAT reviews, and from time to time
undergo comprehensive tax reviews and may be required to make additional tax payments should the
review result in different interpretations, allocations or valuations of our services.
As allowable under the Internal Revenue Code (the Code), the interest deduction from our
convertible debentures are based on a comparable interest rate for a traditional, nonconvertible,
fixed rate debt instrument with similar terms. This allowable deduction is in excess of the stated
interest rate. This deduction may be deferred, limited or eliminated under certain conditions.
The U.S Treasury regulations contain an anti-abuse regulation, set forth in Section 1.1275-2(g),
that grants the Commissioner of the Internal Revenue Service authority to depart from the
regulations if a result is achieved which is unreasonable in light of the original issue discount
provisions of the Code, including Section 163(e). The anti-abuse regulation further provides that
the Commissioner may, under this authority, treat a contingent payment feature of a debt instrument
as if it were a separate position. If such an analysis were applied to our convertible debentures
and ultimately sustained, our deductions attributable to the convertible debentures could be
limited to the stated interest thereon. The scope of application of the anti-abuse regulations is
unclear. However, we are of the view that application of the contingent payment debt instrument
regulations to our convertible debentures is a reasonable result such that the anti-abuse
regulation should not apply. If a contrary position were asserted and ultimately sustained, our tax
deductions would be severely diminished with a resulting adverse effect on our cash flow and
ability to service the convertible debentures.
Under the Code, no deduction is allowed for interest expense in excess of $5 million on convertible
subordinated indebtedness incurred to acquire stock or assets of another corporation reduced by any
interest paid on other obligations which have provided consideration for an acquisition of stock in
another corporation. If a significant portion of the proceeds from the issuance of the convertible
debentures, either alone or together with other debt proceeds, were used for a domestic acquisition
and the convertible debentures and other debt, if any, were deemed to be corporate acquisition
indebtedness as defined in Section 279, interest deductions for tax purposes in excess of $5
million on such debt reduced by any interest paid on other obligations which have provided
consideration for an acquisition of stock in another corporation would be disallowed. This would
adversely impact our cash flow and our ability to pay down the convertible debentures. We
previously applied a significant portion of the proceeds from our December 2004 issuance of 1.625%
Convertible Senior Debentures Due 2024 to acquisitions of foreign corporations. The interest
expense attributable to these acquisitions exhausted all of the $5 million annual interest expense
deduction permitted under the Code for certain convertible subordinated debt incurred for
corporation acquisitions. Accordingly, if this limitation were to apply, no interest deductions
would be allowed with respect to our October 2005 3.5% Convertible Debentures Due 2025. However, if
the comparable interest deduction were eliminated our future payment of U.S. Federal and state
income taxes, if any, could be accelerated.
25
In the past, the U.S. Senate has drafted proposed tax relief legislation that contained a provision
that would eliminate the comparable interest rate deduction on future issuances of convertible
debentures such as ours. Legislation containing this provision has not been passed, however, we
cannot predict if there will be future tax legislation proposed and approved that would eliminate
the comparable interest rate deduction.
Because we are an international company conducting a complex business in many markets worldwide, we
are subject to legal and operational risks related to staffing and management, as well as a broad
array of local legal and regulatory requirements.
Operating outside of the U.S. creates difficulties associated with staffing and managing our
international operations, as well as complying with local legal and regulatory requirements.
Because we operate financial transaction processing networks that offer new
products and services to customers, the laws and regulations in the markets in which operate are
subject to rapid change. Although we have local staff in countries in which we deem it appropriate,
we cannot assure you that we will continue to be found to be operating in compliance with all
applicable customs, currency exchange control regulations, data protection, transfer pricing
regulations or any other laws or regulations to which we may be subject. We also cannot assure you
that these laws will not be modified in ways that may adversely affect our business.
Because we derive our revenues from a multitude of countries with different currencies, our
business is affected by local inflation and foreign currency exchange rates and policies.
We attempt to match any assets denominated in a currency with liabilities denominated in the same
currency. However, the majority of our debt obligations are denominated in U.S. dollars, while a
significant amount of our cash outflows, including the acquisition of ATMs, executive salaries,
certain long-term contracts and a significant portion of our debt obligations, are made in U.S.
dollars, most of our revenues are denominated in other currencies. As exchange rates among the U.S.
dollar, the euro, and other currencies fluctuate, the translation effect of these fluctuations may
have a material adverse effect on our results of operations or financial condition as reported in
U.S. dollars. Moreover, exchange rate policies have not always allowed for the free conversion of
currencies at the market rate. Future fluctuations in the value of the dollar could have an adverse
effect on our results.
Our Money Transfer Segment is subject to foreign currency exchange risks because our customers
deposit funds in one currency at our retail and agent locations worldwide and we typically deliver
funds denominated in a different, destination country currency. Although we use foreign currency
forward contracts to mitigate a portion of this risk, we cannot eliminate all of the exposure to
the impact of changes in foreign currency exchange rates for the period between collection and
disbursement of the money transfers.
We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate
our stockholders ability to sell their shares for a premium in a change of control transaction.
Various provisions of our certificate of incorporation and bylaws and of Delaware corporate law may
discourage, delay or prevent a change in control or takeover attempt of our company by a third
party that is opposed to by our management and board of directors. Public stockholders who might
desire to participate in such a transaction may not have the opportunity to do so. These
anti-takeover provisions could substantially impede the ability of public stockholders to benefit
from a change of control or change in our management and board of directors. These provisions
include:
| preferred stock that could be issued by our board of directors to make it more difficult for a third party to acquire, or to discourage a third party from acquiring, a majority of our outstanding voting stock; | ||
| classification of our directors into three classes with respect to the time for which they hold office; | ||
| supermajority voting requirements to amend the provision in our certificate of incorporation providing for the classification of our directors into three such classes; | ||
| non-cumulative voting for directors; | ||
| control by our board of directors of the size of our board of directors; | ||
| limitations on the ability of stockholders to call special meetings of stockholders; and | ||
| advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings. |
We have also approved a stockholders rights agreement (the ''Rights Agreement) between Euronet
and EquiServe Trust Company, N.A., (subsequently renamed Computershare Limited) as Rights Agent.
Pursuant to the Rights Agreement, holders of our common stock are entitled to purchase one
one-thousandth (1/1,000) of a share (a ''Unit) of Junior Preferred Stock at a price of $57.00 per
Unit upon certain events. The purchase price is subject to appropriate adjustment for stock splits
and other similar events. Generally,
26
in the event a person or entity acquires, or initiates a
tender offer to acquire, at least 15% of Euronets then outstanding common stock, the Rights will
become exercisable for common stock having a value equal to two times the exercise price of the
Right, or effectively at one-half of Euronets then-current stock price. The existence of the
Rights Plan may discourage, delay or prevent a change of control or takeover attempt of our company
by a third party that is opposed to by our management and board of directors.
Our directors and officers, together with the entities with which they are associated, owned
approximately 10% of our Common Stock as of December 31, 2007, 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.
We are authorized to issue up to a total of 90 million shares of Common Stock, potentially diluting
equity ownership of current holders and the share price of our Common Stock.
We believe that it is necessary to maintain a sufficient number of available authorized shares of
our Common Stock in order to provide us with the flexibility to issue Common Stock for business
purposes that may arise as deemed advisable by our Board. These purposes could include, among other
things, (i) to declare future stock dividends or stock splits, which may increase the liquidity of
our shares; (ii) the sale of stock to obtain additional capital or to acquire other companies or
businesses, which could enhance our growth strategy or allow us to reduce debt if needed; (iii) for
use in additional stock incentive programs and (iv) for other bona fide purposes. Our Board of
Directors may issue the available authorized shares of Common Stock without notice to, or further
action by, our stockholders, unless stockholder approval is required by law or the rules of the
NASDAQ Stock Market. The issuance of additional shares of Common Stock may significantly dilute the
equity ownership of the current holders of our Common Stock. Further, over the course of time, all
of the issued shares have the potential to be publicly traded, perhaps in large blocks. This may
result in dilution of the market price of the Common Stock.
An additional 12.5 million shares of Common Stock, representing 26% of the shares outstanding as of
December 31, 2007, could be added to our total Common Stock outstanding through the exercise of
options or the issuance of additional shares of our Common Stock pursuant to existing convertible
debt and other agreements. Once issued, these shares of Common Stock could be traded into the
market and result in a decrease in the market price of our Common Stock.
As of December 31, 2007, we had an aggregate of 3.1 million options and restricted stock awards
outstanding held by our directors, officers and employees, which entitles these holders to acquire
an equal number of shares of our Common Stock upon exercise. Of this amount, 1.3 million options
are vested and exercisable as of December 31, 2007. Approximately 0.2 million additional shares of
our Common Stock may be issued in connection with our employee stock purchase plan. Another 8.5
million shares of Common Stock could be issued upon conversion of the Companys Convertible
Debentures issued in December 2004 and October 2005. Additionally, based on current trading prices
for our Common Stock, we expect to issue approximately 0.7 million shares of our Common Stock to
the sellers of RIA in settlement of the contingent value and stock appreciation rights.
Accordingly, based on current trading prices of our Common Stock, approximately 12.5 million shares
could potentially be added to our total current Common Stock outstanding through the exercise of
options or the issuance of additional shares, which could adversely impact the trading price for
our stock. The actual number of shares issuable could be higher depending upon our stock price at
the time of payment (i.e., more shares could be issuable if our share price declines).
Of the 3.1 million total options and restricted stock awards outstanding, an aggregate of 1.4
million options and restricted shares 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 or sale of shares for
which restrictions have lapsed, these affiliates shares would be subject to the trading
restrictions imposed by Rule 144. The remainder of the common shares issuable under option and
restricted stock arrangements 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.
During 2007, we purchased 1.3 million shares of MoneyGram common stock that had a value of $4.9
million as of February 28, 2008. If MoneyGrams financial situation deteriorates further, we could
lose all or a portion of the remaining $4.9 million investment.
During 2007, in connection with our interest in acquiring MoneyGram, we made an initial investment
in MoneyGram by purchasing 1.3 million shares of common stock at a cost basis of $20.0 million.
Subsequent to December 31, 2007, the market price of MoneyGram common stock declined significantly
as a result of MoneyGrams announcement of investment portfolio losses and its intention to
recapitalize the company. Based on trading prices for MoneyGram common stock on February 28, 2008,
the value of our investment decreased to $4.9 million. On February 27, 2008, we decided not to
submit a proposal to acquire MoneyGram. In connection with this decision, we expect to record
expense before income tax benefit of approximately $15 million to $20 million during the first
quarter 2008, representing the decline in value of MoneyGram stock, together with acquisition
related expenses. The actual loss could be larger if the market price of MoneyGram common stock
deteriorates further.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
27
ITEM 2. PROPERTIES
Our executive offices are located in Leawood, Kansas. As of December 31, 2007, we also maintain
principal operational offices in Little Rock, Arkansas, Leawood, Kansas; Cerritos, California;
Budapest, Hungary; Warsaw, Poland; Zagreb, Croatia; Prague, Czech Republic; Berlin and Martinsried,
Germany; Bucharest, Romania; Bratislava, Slovakia; Athens, Greece; Madrid, Spain; Belgrade, Serbia;
Sofia, Bulgaria; Basildon and Watford, U.K.; Kiev, Ukraine; Rome and Milan, Italy; Paris, France;
Geneva, Switzerland; Stockholm, Sweden; Cairo, Egypt; Mumbai, India; Sydney and Liverpool,
Australia; Auckland, New Zealand; Beijing, China; and Antiguo Cuscatlan, El Salvador. Our office
leases generally provide for initial terms ranging from two to twelve years.
Our processing centers for the EFT Processing Segment are located in Budapest, Hungary; Belgrade,
Serbia; Athens, Greece; Beijing, China; and Mumbai, India. Our processing centers for the Prepaid
Processing Segment are located in Basildon, U.K.; Martinsried, Germany; Madrid, Spain; and Leawood,
Kansas. Our processing center for the Money Transfer Segment is
located in Cerritos, California.
Our processing centers in Budapest, Basildon, Martinsried, Mumbai, Beijing and Cerritos have
off-site real time backup processing centers that are capable of providing full or partial
processing capability in the event of failure of the primary processing centers. The Belgrade
processing center and the real-time backup processing center are located at the same site and the
backup processing center is expected to be relocated offsite during 2008. Our processing centers in
Athens, Madrid and Leawood have on-site backup systems designed to prevent the loss of transaction
records due to power and/or equipment failure. The backup processing centers for our processing
centers in Madrid and Leawood will be relocated offsite during 2008.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the ordinary course of its
business.
The discussion in Part II, Item 8 Financial Statements and Supplementary Data and Note 22,
Litigation and Contingencies, to the Consolidated Financial Statements included elsewhere in this
report, regarding litigation is incorporated herein by reference.
Currently, there are no other legal proceedings that management believes, either individually or in
the aggregate, would have a material adverse effect upon the consolidated results of operations or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were
no matters submitted during the three months ended December 31, 2007, to a vote of
security holders, through the solicitation of proxies or otherwise.
28
PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MARKET INFORMATION
Our common stock, $0.02 par value per share, (Common Stock) was quoted on the Nasdaq Global
Select Market under the symbol EEFT. The following table sets forth the high and low daily sales
prices during the quarter for our Common Stock for the quarters ended:
2007 | 2006 | |||||||||||||||
For the quarters ended | High | Low | High | Low | ||||||||||||
December 31 |
$ | 33.25 | $ | 26.83 | $ | 35.14 | $ | 24.06 | ||||||||
September 30 |
$ | 31.00 | $ | 24.64 | $ | 38.70 | $ | 23.34 | ||||||||
June 30 |
$ | 30.55 | $ | 25.64 | $ | 38.64 | $ | 32.20 | ||||||||
March 31 |
$ | 30.57 | $ | 25.08 | $ | 39.78 | $ | 27.70 |
DIVIDENDS
Since our inception, no dividends have been paid on our Common Stock or Preferred Stock. We do not
intend to distribute dividends for the foreseeable future. Certain of our credit facilities contain
restrictions on the payment of dividends.
HOLDERS
At December 31, 2007, we had 120 stockholders of record of our Common Stock and none of our
Preferred Stock.
PRIVATE PLACEMENTS AND ISSUANCES OF EQUITY
During 2007, we did not issue any equity securities that were not registered under the Securities
Act of 1933, which have not been previously reported in a Quarterly Report on Form 10-Q or a
Current Report on Form 8-K.
STOCK REPURCHASES
The following table sets forth information with respect to shares of Company Common Stock purchased
by us during the three months ended December 31, 2007 (all purchases occurred during November
2007).
Total Number | |||||||||||||||||
of Shares | |||||||||||||||||
Total | Purchased as | Maximum Number | |||||||||||||||
Number of | Average | Part of Publicly | of Shares that May | ||||||||||||||
Shares | Price Paid | Announced | Yet Be Purchased | ||||||||||||||
Purchased | Per Share | Plans or | Under the Plans or | ||||||||||||||
Period | (1) | (2) | Programs | Programs | |||||||||||||
November 1 - November 30 |
1,146 | $ | 32.03 | | | ||||||||||||
Total |
1,146 | $ | 32.03 | | | ||||||||||||
(1) | For the three months ended November 30, 2007, in accordance with the 2006 Stock Incentive Plan (Amended and Restated), the Company purchased, 1,146 shares of its common stock for participant income tax withholding in conjunction with the lapse of restrictions on stock awards, as requested by the participants. | |
(2) | The price paid per share is the closing price of the shares on the vesting date. |
STOCK PERFORMANCE GRAPH
Set forth below is a graph comparing the total cumulative return on the Common Stock from December
31, 2002 through December 31, 2007 with the Center for Research in Security Prices (CRSP) Total
Returns Index for U.S. companies traded on the Nasdaq Global Select Market (the Market Group) and
an index group of peer companies, the CRSP Total Returns Index for U.S. Nasdaq Financial Stocks
(the Peer Group). The companies in each of the Market Group and the Peer Group were weighted by
market
29
capitalization. Returns are based on monthly changes in price and assume reinvested dividends.
These calculations assume the value
of an investment in the Common Stock, the Market Group and the Peer Group was $100 on December 31,
2002. Our Common Stock is traded on the Nasdaq Global Select Market under the symbol EEFT.
Comparison of FiveYear Cumulative Total Returns
Performance Graph for
Euronet Worldwide, Inc.
Performance Graph for
Euronet Worldwide, Inc.
Produced on 02/07/2008 including data to 12/31/2007
![(PERFORMANCE GRAPH)](https://www.sec.gov/Archives/edgar/data/0001029199/000095013708003100/c23775c2377501.gif)
Prepared by CRSP (www.crsp.uchicago.edu), Center for Research in Security Prices, Graduate School of Business,
The University of Chicago. Used with permission. All rights reserved.
14099 | ©Copyright 2008 |
EQUITY COMPENSATION PLAN INFORMATION
The table below sets forth information with respect to shares of Common Stock that may be issued
under our equity compensation plans as of December 31, 2007.
Number of | ||||||||||||
securities | ||||||||||||
remaining | ||||||||||||
available for | ||||||||||||
future issuance | ||||||||||||
Number of | under equity | |||||||||||
securities to be | compensation | |||||||||||
issued upon | Weighted average | plans (excluding | ||||||||||
exercise of | exercise price of | securities | ||||||||||
outstanding | outstanding | reflected in | ||||||||||
options and rights | options and rights | column (a)) | ||||||||||
Plan category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders: |
3,170,843 | |||||||||||
Stock option awards |
1,685,102 | $ | 13.64 | |||||||||
Restricted share unit awards |
1,258,957 | | ||||||||||
Equity compensation plans not approved by security holders |
| | | |||||||||
Total |
2,944,059 | $ | 7.81 | 3,170,843 | ||||||||
30
ITEM 6. SELECTED FINANCIAL DATA
The summary consolidated financial data set forth below has been derived from, and is qualified by
reference to, our audited Consolidated Financial Statements and the notes thereto, prepared in
conformity with accounting principles generally accepted in the United States (U.S. GAAP), which
have been audited by KPMG LLP, and should not be relied upon as an indication of future
performance. We believe that the period-to-period comparisons of our financial results are not
necessarily meaningful due to certain significant transactions, including numerous acquisitions
(See Note 5, Acquisitions, to the Consolidated Financial Statements) and the 2003 sale of our U.K.
subsidiary. The following information should be read in conjunction with Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Year Ended December 31, | ||||||||||||||||||||
(dollar amounts in thousands, except as noted) | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||||||
Consolidated statements of income data: |
||||||||||||||||||||
Revenues |
$ | 917,574 | $ | 629,181 | $ | 531,159 | $ | 381,080 | $ | 204,407 | ||||||||||
Operating expenses |
792,066 | 547,833 | 461,007 | 335,550 | 184,219 | |||||||||||||||
Depreciation and amortization |
48,331 | 29,494 | 22,800 | 16,216 | 12,124 | |||||||||||||||
Operating income |
77,177 | 51,854 | 47,352 | 29,314 | 8,064 | |||||||||||||||
Other income (expenses) |
$ | 5,171 | 9,169 | (10,080 | ) | (5,646 | ) | (15,649 | ) | |||||||||||
Gain on sale assets |
| | | | 18,045 | |||||||||||||||
Income from unconsolidated affiliates |
908 | 660 | 1,185 | 345 | 518 | |||||||||||||||
Income from continuing operations
before income taxes and minority interest |
83,256 | 61,683 | 38,457 | 24,013 | 10,978 | |||||||||||||||
Income tax benefit (expense) |
(28,056 | ) | (14,704 | ) | (14,843 | ) | (11,389 | ) | (4,230 | ) | ||||||||||
Minority interest |
(2,040 | ) | (977 | ) | (916 | ) | (58 | ) | | |||||||||||
Income from continuing operations |
$ | 53,160 | $ | 46,002 | $ | 22,698 | $ | 12,566 | $ | 6,748 | ||||||||||
Earnings per share from continuing operations: |
||||||||||||||||||||
Basic |
$ | 1.18 | $ | 1.24 | $ | 0.65 | $ | 0.40 | $ | 0.25 | ||||||||||
Diluted |
$ | 1.11 | $ | 1.16 | $ | 0.62 | $ | 0.38 | $ | 0.24 | ||||||||||
Consolidated balance sheet data: |
||||||||||||||||||||
Assets |
$ | 1,886,156 | $ | 1,129,640 | $ | 898,692 | $ | 642,315 | $ | 317,246 | ||||||||||
Debt obligations, long-term portion |
539,303 | 349,073 | 315,000 | 140,000 | 55,792 | |||||||||||||||
Capital lease obligations, long-term portion |
11,520 | 13,409 | 12,229 | 16,894 | 3,240 | |||||||||||||||
Summary network data: |
||||||||||||||||||||
Number of operational ATMs at end of period |
11,347 | 8,885 | 7,211 | 5,742 | 3,350 | |||||||||||||||
EFT processing transactions during the period (millions) |
603.8 | 463.6 | 361.5 | 232.5 | 114.7 | |||||||||||||||
Number of operational prepaid processing POS terminals
at end of period (rounded) |
396,000 | 296,000 | 237,000 | 175,000 | 126,000 | |||||||||||||||
Prepaid processing transactions during the period (millions) |
634.8 | 457.8 | 348.0 | 228.6 | 102.1 | |||||||||||||||
Money transfer transactions during the period (millions) |
12.0 | 0.3 | 0.1 | | |
31
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW, GEOGRAPHIC LOCATIONS AND PRINCIPAL PRODUCTS AND SERVICES
Euronet Worldwide, Inc. (together with our subsidiaries, we, us, Euronet or the Company) is
a leading electronic payments provider, offering automated teller machine (ATM) and point-of-sale
(POS) and card outsourcing services, card issuing and merchant acquiring services, integrated
electronic financial transaction (EFT) software, network gateways, electronic distribution of
top-up services for prepaid mobile airtime and other prepaid products, electronic consumer money
transfer and bill payment services to financial institutions, mobile operators, retailers and
individual customers.
Effective January 1, 2007, we began reporting and managing the operations of the EFT Processing
Segment and the former Software Solutions Segment on a combined basis. Additionally, as a result of
the acquisition of RIA in April 2007, we added the Money Transfer Segment. Previously reported
amounts have been adjusted to reflect these changes, which did not impact our Consolidated
Financial Statements. As a result of these changes, we operate in the following three principal
business segments.
| An EFT Processing Segment, which processes transactions for a network of 11,347 ATMs and approximately 50,000 POS terminals across Europe, Asia and the Middle-East. We provide comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing and electronic recharge services for prepaid mobile airtime. Through this segment, we also offer a suite of integrated EFT software solutions for electronic payment, merchant acquiring, card issuing and transaction delivery systems. | ||
| A Prepaid Processing Segment, which provides distribution of prepaid mobile airtime and other prepaid products and collection services for various prepaid products, cards and services. Including terminals operated by unconsolidated subsidiaries, we operate a network of approximately 396,000 POS terminals providing electronic processing of prepaid mobile airtime top-up services in the U.S., Europe, Africa, Asia Pacific and the Middle-East. | ||
| A Money Transfer Segment, which provides global money transfer and bill payment services through a sending network of agents and Company-owned stores primarily in North America, the Caribbean, Europe and Asia-Pacific, disbursing money transfers through a worldwide payer network. Bill payment services are offered primarily in the U.S. The Money Transfer Segment originates and terminates transactions through a network of more than 71,000 locations, which include sending agents and Company-owned stores, and an extensive payer network across 100 countries. |
We have six processing centers in Europe, two in Asia and two in the U.S. We have 23 principal
offices in Europe, five in the Asia-Pacific region, three in the U.S. and one each in the Middle
East and Latin America. Our executive offices are located in Leawood, Kansas, USA. With
approximately 76% of our revenues denominated in currencies other than the U.S. dollar, any
significant changes in currency exchange rates will likely have a significant impact on our growth
in revenues, operating income and diluted earnings per share (for more discussion, see Item 1A
Risk Factors and Item 7A Quantitative and Qualitative Disclosure About Market Risk).
SOURCES OF REVENUES AND CASH FLOW
Euronet earns revenues and income based on ATM management fees, transaction fees and commissions,
professional services, software licensing fees and software maintenance agreements. Each business
segments sources of revenue are described below.
EFT Processing Segment Revenue in the EFT Processing Segment, which represented approximately 21%
of total consolidated revenue for the year ended December 31, 2007, is derived from fees charged
for transactions effected by cardholders on our proprietary network of ATMs, as well as fixed
management fees and transaction fees we charge to banks for operating ATMs and processing credit
cards under outsourcing agreements. Through our proprietary network, we generally charge fees for
four types of ATM transactions: i) cash withdrawals, ii) balance inquiries, iii) transactions not
completed because the relevant card issuer does not give authorization, and iv) prepaid
telecommunication recharges. Revenue in this segment is also derived from license fees,
professional services and maintenance fees for software and sales of related hardware. Software
license fees are the fees we charge to license our proprietary application software to customers.
Professional service fees consist of charges for customization, installation and consulting
services to customers. Software maintenance revenue represents the ongoing fees charged for
maintenance and support for customers software products. Hardware sales are derived from the sale
of computer equipment necessary for the respective software solution.
Prepaid Processing Segment Revenue in the Prepaid Processing Segment, which represented
approximately 62% of total consolidated revenue for the year ended December 31, 2007, is primarily
derived from commissions or processing fees received from telecommunications service providers for
the sale and distribution of prepaid mobile airtime. We also generate revenue from commissions
earned from the distribution of other prepaid products. Due to certain provisions in our mobile
phone operator agreements, the operators have the ability to reduce the overall commission paid on
each top-up transaction. However, by virtue of our
32
agreements with retailers (distributors where POS terminals are located) in certain markets, not
all of these reductions are absorbed by
us because we are able to pass a significant portion of the reductions to retailers. Accordingly,
under certain retailer agreements, the effect is to reduce revenues and reduce our direct operating
costs resulting in only a small impact on gross margin and operating income. In some markets,
reductions in commissions can significantly impact our results as it may not be possible, either
contractually or commercially in the concerned market, to pass a reduction in commissions to the
retailers. In Australia, certain retailers negotiate directly with the mobile phone operators for
their own commission rates, which also limits our ability to pass through reductions in
commissions. Agreements with mobile operators are important to the success of our business. These
agreements permit us to distribute prepaid mobile airtime to the mobile operators customers. Other
products offered by this segment include prepaid long distance calling card plans, prepaid internet
plans, prepaid debit cards, prepaid gift cards and prepaid mobile content such as ring tones and
games.
Money Transfer Segment Revenue in the Money Transfer Segment, which represents approximately 17%
of total consolidated revenue for the year ended December 31, 2007, is primarily derived through
the charging of a transaction fee, as well as the difference between purchasing foreign currency at
wholesale exchange rates and selling the foreign currency to consumers at retail exchange rates. We
have an origination network in place comprised of agents and company-owned stores primarily in
North America, the Caribbean, Europe and Asia-Pacific and a worldwide network of distribution
agents, consisting primarily of financial institutions in the transfer destination countries.
Origination and distribution agents each earn fees for cash collection and distribution services.
These fees are recognized as direct operating costs at the time of sale.
OPPORTUNITIES AND CHALLENGES
Our expansion plans and opportunities are focused on five primary areas:
| outsourced ATM and POS terminal management contracts; | ||
| transactions processed on our network of owned and operated ATMs; | ||
| our prepaid mobile airtime top-up processing services; | ||
| our money transfer and bill payment services; and | ||
| development of our credit and debit card outsourcing business. |
EFT Processing Segment - The continued expansion and development of our EFT Processing Segment
business will depend on various factors including, but not necessarily limited to, the following:
| the impact of competition by banks and other ATM operators and service providers in our current target markets; | ||
| the demand for our ATM outsourcing services in our current target markets; | ||
| the ability to develop products or services to drive increases in transactions; | ||
| the expansion of our various business lines in markets where we operate and in new markets; | ||
| the entrance into additional card acceptance and ATM management agreements with banks; | ||
| the ability to obtain required licenses in markets we intend to enter or expand services; | ||
| the availability of financing for expansion; | ||
| the ability to efficiently install ATMs contracted under newly awarded outsourcing agreements; | ||
| the successful entry into the cross-border merchant processing and acquiring business; | ||
| the successful entry into the card issuing and outsourcing business; and | ||
| the continued development and implementation of our software products and their ability to interact with other leading products. |
We consistently evaluate and add prospects to our list of potential ATM outsource customers.
However, we cannot predict the increase or decrease in the number of ATMs we manage under
outsourcing agreements because this depends largely on the willingness of banks to enter into
outsourcing contracts with us. Due to the thorough internal reviews and extensive negotiations
conducted by existing and prospective banking customers in choosing outsource vendors, the process
of entering into or renewing outsourcing agreements can take approximately six to twelve months or
longer. The process is further complicated by the legal and regulatory considerations of local
countries. These agreements tend to cover large numbers of ATMs, so significant increases and
decreases in our pool of managed ATMs could result from acquisition or termination of these
management contracts. Therefore, the timing of both current and new contract revenues is uncertain
and unpredictable.
Software products are an integral part of our product lines, and our investment in research,
development, delivery and customer support reflects our ongoing commitment to an expanded customer
base. We have been able to enter into agreements under which we use our software in lieu of cash as
our initial capital contributions to new transaction processing joint ventures. Such contributions
sometimes permit us to enter new markets without significant capital investment.
33
During 2006, we established Jiayintong (Beijing) Technology Development Co. Ltd., our 75% owned
joint venture with Ray Holdings in China (Euronet China), to enter ATM outsourcing and management
in China. As of December 31, 2007, we have deployed and are providing all of the day-to-day
outsourcing services for over 250 ATMs through this joint venture. Under current agreements,
during the next 12 to 18 months, we expect that the total number of ATMs in China, for which we
will be providing all of the day-to-day outsourcing services, to increase to over 800 ATMs. We have
established a technical processing and operations center in Beijing to operate these ATMs, and we
believe we are the first, and currently the only, provider of end-to-end ATM outsourcing services
in China.
We have entered the cross-border merchant processing and acquiring business through the execution
of an agreement with a large petrol retailer in Central Europe. Since the beginning of 2007, we
have devoted significant resources to the development of the necessary processing systems and
capabilities to enter this business, which involves the purchase and design of hardware and
software. Merchant acquiring involves processing credit and debit card transactions that are made
on POS terminals, including authorization, settlement, and processing of settlement files. It
generally involves the assumption of credit risk, as the principal amount of transactions is
usually settled to merchants before settlements are received from card associations.
Prepaid Processing Segment The continued expansion and development of the Prepaid Processing
Segment business will depend on various factors, including, but not necessarily limited to, the
following:
| the ability to negotiate new agreements in additional markets with mobile phone operators, agent financial institutions and retailers; | ||
| the ability to use existing expertise and relationships with mobile operators and retailers to our advantage; | ||
| the continuation of the trend towards conversion from scratch card solutions to electronic processing solutions for prepaid mobile airtime among mobile phone users, and the continued use of third party providers such as ourselves to supply this service; | ||
| the development of mobile phone networks in these markets and the increase in the number of mobile phone users; | ||
| the overall pace of growth in the prepaid mobile phone market; | ||
| our market share of the retail distribution capacity; | ||
| the level of commission that is paid to the various intermediaries in the prepaid mobile airtime distribution chain; | ||
| our ability to add new and differentiated prepaid products in addition to those offered by mobile operators; | ||
| the ability to take advantage of cross-selling opportunities with our Money Transfer Segment, including providing money transfer services through our prepaid locations; | ||
| the availability of financing for further expansion; and | ||
| our ability to successfully integrate newly acquired operations with our existing operations. |
During the first quarter 2007, we completed the acquisitions of the stock of Omega Logic, Ltd.
(Omega Logic) and Brodos SRL in Romania (Brodos Romania). Omega Logic is a prepaid top-up
company based, and primarily operating, in the U.K. that enhanced our Prepaid Processing Segment
business in the U.K. Brodos Romania is a leading electronic prepaid mobile airtime processor in
Romania.
In mature
markets, such as the U.K., New Zealand and Spain, the conversion from scratch
cards to electronic forms of distribution is either complete or nearing completion. Because of this
factor, we are likely to cease experiencing the organic increases in the number of transactions per
terminal that we have experienced historically. Also in mature markets, competition among prepaid
distributors results in the increase of commissions paid to retailers and increases in retailer
attrition rates. The combined impact of these factors in developed markets is a flattening of
growth in the revenues and profits that we earn. In other markets in which we operate, such as
Poland, Germany and the U.S., many of the factors that may contribute to rapid growth (conversion
from scratch cards to electronic distribution, growth in the prepaid market, expansion of our
network of retailers and access to all mobile operators products) remain present.
Money Transfer Segment We completed the acquisition of RIA in April 2007, which expanded our
money transfer and bill payment services business and makes Euronet the third-largest global money
transfer company, based upon revenues and volumes. The Money Transfer Segment provides us with
additional expansion opportunities. The expansion and development of our money transfer business
will depend on various factors, including, but not necessarily limited to, the following:
| the continued growth in worker migration and employment opportunities; | ||
| the mitigation of economic and political factors that have had an adverse impact on money transfer volumes, such as the immigration developments occurring in the U.S. during 2006 and 2007; | ||
| the continuation of the trend of increased use of electronic money transfer and bill payment services among immigrant workers and the unbanked population in our markets; | ||
| the ability to maintain our agent and correspondent networks; | ||
34
| the ability to offer our products and services or develop new products and services at competitive prices to drive increases in transactions; | ||
| the expansion of our services in markets where we operate and in new markets; | ||
| the ability to strengthen our brands; | ||
| our ability to fund working capital requirements; | ||
| our ability to maintain compliance with the regulatory requirements of the jurisdictions in which we operate or plan to operate; | ||
| the ability to take advantage of cross-selling opportunities with our Prepaid Processing Segment, including providing prepaid services through our stores and agents worldwide; | ||
| the ability to leverage our banking and merchant/retailer relationships to expand money transfer corridors to Europe and Asia, including high growth corridors to Central and Eastern European countries; and | ||
| our ability to continue to successfully integrate RIA with our existing operations. |
Like other participants in the money transfer industry, as a result of immigration developments,
downturns in certain labor markets and/or other economic factors, growth rates in money transfers
from the U.S. to Mexico have slowed. This slowing of growth began during the middle of 2006 and
continues to impact money transfer revenues for transactions from the U.S. to Mexico. Despite
recent improvement in this trend, we believe that it is too early to conclude on the impact, if
any, to our results of operations.
Corporate Services, Eliminations and Other In addition to operating in our principal business
segments described above, our Corporate Services, Elimination and Other division includes
non-operating activity, certain inter-segment eliminations and the cost of providing corporate and
other administrative services to the business segments, including share-based compensation expense
related to most stock option and restricted stock grants. These services are not directly
identifiable with our business segments.
The accounting policies of each segment are the same as those referenced in the summary of
significant accounting policies (see Note 3, Summary of Significant Accounting Policies and
Practices, to the Consolidated Financial Statements). We evaluate performance of our segments based
on income or loss from continuing operations before income taxes, foreign currency exchange gain
(loss), minority interest and other nonrecurring gains and losses.
For all segments, our continued expansion may involve additional acquisitions that could divert our
resources and management time and require integration of new assets with our existing networks and
services. Our ability to effectively manage our rapid growth has required us to expand our
operating systems and employee base, particularly at the management level, which has added
incremental operating costs. An inability to continue to effectively manage expansion could have a
material adverse effect on our business, growth, financial condition or results of operations.
Inadequate technology and resources would impair our ability to maintain current processing
technology and efficiencies, as well as deliver new and innovative services to compete in the
marketplace.
35
SEGMENT REVENUES AND OPERATING INCOME FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
Revenues | Operating Income | |||||||||||||||||||||||
(in thousands) | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
EFT Processing |
$ | 188,957 | $ | 158,320 | $ | 119,880 | $ | 37,090 | $ | 35,360 | $ | 29,084 | ||||||||||||
Prepaid Processing |
569,858 | 467,651 | 409,575 | 52,813 | 37,622 | 35,313 | ||||||||||||||||||
Money Transfer |
158,759 | 3,210 | 1,704 | 7,130 | (3,295 | ) | (1,027 | ) | ||||||||||||||||
Total |
917,574 | 629,181 | 531,159 | 97,033 | 69,687 | 63,370 | ||||||||||||||||||
Corporate services |
| | | (19,856 | ) | (17,833 | ) | (16,018 | ) | |||||||||||||||
Total |
$ | 917,574 | $ | 629,181 | $ | 531,159 | $ | 77,177 | $ | 51,854 | $ | 47,352 | ||||||||||||
Operating income amounts shown above for 2005 and 2006 have been adjusted for the impact of the
correction for an immaterial error related to foreign currency translation adjustments for goodwill
and acquired intangible assets. See Note 2, Basis of Presentation, for further discussion.
SUMMARY
Our annual consolidated revenues increased by 46% for 2007 over 2006, and 18% for 2006 over 2005.
These increases reflect acquisitions, primarily RIA during 2007, as well as growth in our existing
business resulting from increases in the number of ATMs managed and transactions processed. For
further discussion regarding acquisitions, see Note 5, Acquisitions, to the Consolidated Financial
Statements.
Our operating income increased 49% for 2007 over 2006, and 10% for 2006 over 2005. These increases
were the result of growth in revenues generated by existing business and newly acquired businesses,
the impact of acquisitions and leveraging the Companys cost structure, particularly in the EFT
Processing Segment. The results for 2007 also include an increase in operating income of $12.2
million for a federal excise tax refund discussed in Note 23, Federal Excise Tax Refund, to the
Consolidated Financial Statements.
Net income for 2007 was $53.5 million, or $1.11 per diluted share, compared to net income for 2006
of $46.0 million, or $1.16 per diluted share, and net income of $22.1 million, or $0.60 per diluted
share for 2005. In addition to the explanations above, net income for 2007 and 2006 included
foreign currency exchange translation gains of $15.5 million and $10.2 million, respectively. Net
income for 2005 included foreign currency exchange translation losses of $7.5 million. Net income
for 2007 includes a gain from discontinued operations of $0.3 million, or $0.01 per diluted share,
and net income for 2005 includes a loss from discontinued operations of $0.6 million, or $0.02 per
diluted share.
Impact of changes in foreign currency exchange rates
Beginning in 2006 and continuing into 2007, the U.S. dollar has weakened compared to most of the
currencies of the countries in which we operate. Because our revenues and local expenses are
recorded in the functional currencies of our operating entities, amounts we earned for 2007 are
positively impacted by the weakening of the U.S. dollar. We estimate that, depending on the mix of
countries and currencies, our 2007 results benefited by approximately 5% to 10% when compared to
2006.
36
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 BY BUSINESS
SEGMENT
EFT PROCESSING SEGMENT
As discussed previously, effective January 1, 2007, we began reporting and managing the operations
of the EFT Processing Segment and the former Software Solutions Segment on a combined basis.
Previously reported amounts have been adjusted to reflect these changes.
2007 Compared to 2006
The following table summarizes the results of operations for the EFT Processing Segment for the
years ended December 31, 2007 and 2006:
Year Ended December 31, | Year-over-Year Change | |||||||||||||||
Increase | Increase | |||||||||||||||
(dollar amounts in thousands) | 2007 | 2006 | Amount | Percent | ||||||||||||
Total revenues |
$ | 188,957 | $ | 158,320 | $ | 30,637 | 19% | |||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
75,241 | 57,215 | 18,026 | 32% | ||||||||||||
Salaries and benefits |
41,282 | 36,057 | 5,225 | 14% | ||||||||||||
Selling, general and administrative |
17,813 | 14,884 | 2,929 | 20% | ||||||||||||
Depreciation and amortization |
17,531 | 14,804 | 2,727 | 18% | ||||||||||||
Total operating expenses |
151,867 | 122,960 | 28,907 | 24% | ||||||||||||
Operating income |
$ | 37,090 | $ | 35,360 | $ | 1,730 | 5% | |||||||||
Transactions processed (millions) |
603.8 | 463.6 | 140.2 | 30% | ||||||||||||
ATMs as of December 31 |
11,347 | 8,885 | 2,462 | 28% | ||||||||||||
Average ATMs |
10,025 | 8,066 | 1,959 | 24% |
Revenues
Our revenue for 2007 increased when compared to 2006 primarily due to increases in the number of
ATMs operated and, for owned ATMs, the number of transactions
processed. These increases were attributable to most of our operations, but primarily our operations in
Poland, India and Greece and our software operations. Additionally, beginning in 2006 and
continuing into 2007, the U.S. dollar has weakened compared to the currencies of most of the
countries in which we operate. Because our revenues are recorded in the functional currencies of
our operating entities, amounts we earn in foreign currencies are positively impacted by the
weakening of the U.S. dollar.
Partially offsetting these increases was a reduction in revenues associated with the extension of
certain customer contracts for several years beyond their original terms. In exchange for these
extensions, we paid or received up-front payments and agreed on gradually declining fee structures.
As prescribed by U.S. GAAP, revenue under these contracts is recognized based on proportional
performance of services over the term of the contract, which generally results in straight-line
(i.e., consistent value per period) revenue recognition of the contracts total cash flows,
including any up-front payment. This straight-line revenue recognition results in revenue that is
less than contractual invoices and cash receipts in the early periods of the agreement and revenue
that is greater than the contractual invoices and cash receipts in the later years of the
agreement. As a result of the revenue recognition under these contracts, amounts invoiced under the
contracts exceeded the amount of revenue that we recognized by about $2.7 million for 2007,
compared to approximately $1.6 million for 2006. We may decide to enter into similar arrangements
with other EFT Processing Segment customers.
Average monthly revenue per ATM was $1,571 for 2007, compared to $1,636 for 2006 and revenue per
transaction was $0.31 for 2007, compared to $0.34 for 2006. The decrease in revenues per ATM and
revenues per transaction was due to the addition of ATMs where related revenue has not yet
developed to mature levels, the impact of the contract extensions discussed above and the addition
of ATMs in India where revenues per ATM have been historically lower than Central and Eastern
Europe generally due to lower labor costs.
37
Direct operating costs
Direct operating costs consist primarily of site rental fees, cash delivery costs, cash supply
costs, maintenance, insurance, telecommunications and the cost of data center operations-related
personnel, as well as the processing centers facility related costs and other processing center
related expenses. The increase in direct operating cost for 2007, compared to 2006, is attributed
to the increase in the number of ATMs under operation. Additionally, 2007 includes losses of
approximately $1.9 million, primarily in Poland and Hungary, as a result of certain fraudulent
transactions on our network. We are taking remedial action to prevent similar
transactions and expect the amounts to be reduced significantly in the first quarter 2008 and
eliminated in the second quarter 2008. As of December 31, 2007, the losses include an estimated
$0.9 million in amounts related to 2007 transactions that have not yet been reported.
Gross margin
Gross margin, which is calculated as revenues less direct operating costs, increased to $113.7
million for 2007 from $101.1 million for 2006. This increase is attributable to the increase in
revenues discussed above. Gross margin as a percentage of revenues was 60% for 2007 compared to 64%
for 2006. The decrease in gross margin as a percentage of revenues is due to the impact of
accounting for certain contract renewals, the fraudulent transaction losses and other fluctuations
in revenues and direct operating costs discussed above, as well as the increased contributions of
our subsidiary in India, which has historically earned a lower gross margin than our other
operations.
Salaries and benefits
The increase in salaries and benefits for 2007 compared to 2006 was due to staffing costs to expand
in emerging markets, such as India, China and new European markets, and additional products, such
as POS, card processing and cross-border merchant processing and acquiring. Salaries and benefits
also increased as a result of general merit increases awarded to employees and certain additional
staffing requirements due to the larger number of ATMs under operation and transactions processed.
As a percentage of revenue, however, these costs remained relatively flat at 22% of revenues for
2007 compared to 23% for 2006.
Selling, general and administrative
The increase in selling, general and administrative expenses for 2007 compared to 2006 is due to
costs to expand in emerging markets, such as India, China and new European markets, and additional
products, such as POS, card processing and cross-border merchant processing and acquiring.
Additionally, during 2007, we recorded a loss of $1.2 million under an arbitral award granted by a
tribunal in Budapest, Hungary arising from a claim by a former cash supply contractor in Central
Europe. The cash supply contractor claimed it provided us with cash during the fourth quarter 1999
and first quarter 2000 that was not returned. As a percentage of revenue, selling, general and
administrative expenses were flat at 9% for both 2007 and 2006.
Depreciation and amortization
The increase in depreciation and amortization expense for 2007 compared to 2006 is due primarily to
additional equipment and software for the expansion of our Hungarian processing center incurred
during 2006, additional ATMs in Poland and India and additional software amortization recorded
related to our Essentis software product. As a percentage of revenue, these expenses remained flat
at 9% of revenues for both 2007 and 2006.
Operating income
The increase in operating income was primarily due to the increases in revenues described above,
offset by the $1.1 million decrease in revenues related to certain contract renewals, the $1.9
million fraudulent card losses and the arbitration loss described in the sections above. Operating
income as a percentage of revenues was 20% for 2007 compared to 22% for 2006 and $0.06 per
transaction for 2007 compared to $0.08 per transaction for 2006. Adjusting for the impact of the
fraudulent card losses and the arbitration loss, operating income as a percentage of revenue would
have been 21% and operating income per transaction would have been $0.07.
Operating income for 2007 and 2006 also includes $1.2 million and $1.3 million, respectively, in
losses associated with expanding operations for the Companys 75% owned joint venture in China. As
of December 31, 2007, we have deployed and are providing all of the day-to-day outsourcing services
for over 250 ATMs. Under current agreements, we expect that the total number of ATMs in China
deployed and for which we will be providing day-to-day outsourcing services will increase to over
800 during the next 12 to 18 months.
38
Software sales backlog
As of December 31, 2007, the EFT Segment had a software contract backlog of approximately $7.9
million compared to approximately $9.2 million as of December 31, 2006. Such backlog represents
software sales based on signed contracts under which we continue to have performance milestones
before the sale will be completed. We recognize revenue on a percentage of completion method, based
on certain milestone conditions, for our software solutions. As a result, we have not recognized
all the revenues associated with these sales contracts. We cannot give assurances that the
milestones under the contracts will be completed or that we will be able to recognize the related
revenue within the next year.
2006 Compared to 2005
The following table summarizes the results of operations for the EFT Processing Segment for the
years ended December 31, 2006 and 2005:
Year Ended December 31, | Year-over-Year Change | |||||||||||||||
Increase | Increase | |||||||||||||||
(dollar amounts in thousands) | 2006 | 2005 | Amount | Percent | ||||||||||||
Total revenues |
$ | 158,320 | $ | 119,880 | $ | 38,440 | 32% | |||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
57,215 | 45,164 | 12,051 | 27% | ||||||||||||
Salaries and benefits |
36,057 | 25,399 | 10,658 | 42% | ||||||||||||
Selling, general and administrative |
14,884 | 9,708 | 5,176 | 53% | ||||||||||||
Depreciation and amortization |
14,804 | 10,525 | 4,279 | 41% | ||||||||||||
Total operating expenses |
122,960 | 90,796 | 32,164 | 35% | ||||||||||||
Operating income |
$ | 35,360 | $ | 29,084 | $ | 6,276 | 22% | |||||||||
Transactions processed (millions) |
463.6 | 361.5 | 102.1 | 28% | ||||||||||||
ATMs as of December 31 |
8,885 | 7,211 | 1,674 | 23% | ||||||||||||
Average ATMs |
8,066 | 6,585 | 1,481 | 22% |
Revenues
Our revenue for 2006 increased when compared to 2005 primarily due to increases in the number of
ATMs operated and, for owned ATMs, the number of transactions processed, primarily in Poland and
India. Additionally, 2006 results include the full year impact of the acquisitions of Instreamline
(now Euronet Card Services Greece), Europlanet and Essentis, which contributed incremental revenues
of $24.3 million in 2006, compared to 2005. See Note 5, Acquisitions to the Consolidated Financial
Statements for further discussion about these acquisitions. Instreamline, acquired in October 2005,
provides credit card and POS outsourcing services and transaction gateway switching services in
Greece and the Balkan region. Our ownership in Europlanet was increased through two transactions:
one in April 2005, in which we increased our ownership from 36% to 66%; and one in December 2005,
in which we acquired the final 34% ownership. We began consolidating Europlanet after acquiring a
controlling interest in April 2005. Europlanet provides debit card processing services and manages
a network of ATMs and POS terminals in Serbia. Essentis is a U.K. company that owns a leading card
issuing and merchant acquiring software package that allows us to add additional outsourcing and
software offerings to financial institutions.
Partially offsetting these increases was a reduction in revenue associated with the extension of
certain customer contracts for several years beyond their original terms. In exchange for these
extensions, we paid or received an up-front payment and agreed on a gradually declining fee
structure. Revenue under these contracts is recognized based on proportional performance of
services over the term of the contract, which generally results in straight-line (i.e.,
consistent value per period) revenue recognition of the contracts total cash flows, including any
up-front payment. This straight-line revenue recognition results in revenue recognized in an amount
less than contractual cash receipts in the early periods of the agreement and revenue recognized in
an amount greater than the contractual cash receipts in the later years of the agreement. As a
result of the revenue recognition under these contracts, amounts invoiced under the contracts
exceeded the amount of revenue that we recognized by about $1.6 million for 2006.
Average monthly revenue per ATM was $1,636 for 2006, compared to $1,517 for 2005 and revenue per
transaction was $0.34 for 2006, compared to $0.33 for 2005. These increases are, in part, due to
increases in non-ATM revenues, primarily associated with
39
Essentis, which records revenue from the sale of software, and Euronet Card Services Greece, which
provides POS and credit card
outsourcing services and debit card transaction gateway switching services. Under outsourcing
agreements, we primarily earn revenue based on a fixed recurring monthly management fee, with less
dependence on transaction-based fees.
Direct operating costs
The increase in direct operating costs for 2006, compared to 2005, is attributed to the
acquisitions described above and an increase in the number of ATMs under operation. Direct
operating costs as a percentage of revenues was relatively flat at 36% for 2006, compared to 38%
for 2005.
Gross margin
Gross margin increased to $101.1 million for 2006 from $74.7 million for 2005. Average monthly
gross margin per ATM increased to $1,045 for 2006, compared to $946 for 2005, and gross margin per
transaction was relatively flat at $0.22 for 2006, compared to $0.21 for 2005. These increases were
primarily due to increases in non-ATM revenues related to Essentis and Euronet Card Services Greece
described above.
Salaries and benefits
The increase in salaries and benefits for 2006, compared to 2005 is due to the acquisition of
Instreamline, Europlanet and Essentis, staffing costs to expand in emerging markets, such as India,
China and new European markets, and additional products, such as POS and card processing. Salaries
and benefits also increased as a result of general merit increases awarded to employees and certain
additional staffing requirements due to the larger number of ATMs under operation and transactions
processed. As a percentage of revenue, these costs increased slightly to 23% for 2006 from 21% for
2005, primarily due to the acquisition of Essentis, which is generally a more labor intensive
business than the other EFT Processing Segment entities.
Selling, general and administrative
Similar to the increase in salaries and benefits, the increase in selling, general and
administrative expenses for 2006, compared to 2005 is also due primarily to the acquisitions of
Instreamline, Europlanet and Essentis and costs incurred to expand in emerging markets and
additional products. As a percentage of revenue, these costs increased slightly to 9% of revenue
for 2006, compared to 8% of revenue for 2005. Offsetting these costs for 2005 was $0.5 million for
an insurance recovery that related to a loss recorded in the fourth quarter 2003 on certain ATM
disbursements resulting from a card associations change in their data exchange format.
Depreciation and amortization
The increase in depreciation and amortization expense for 2006, compared to 2005 is due primarily
to depreciation and intangible amortization related to the acquisitions of Instreamline and, to a
lesser extent, Essentis and Europlanet, as well as depreciation on additional ATMs under capital
lease arrangements related to outsourcing agreements in India. As a percentage of revenue, these
expenses were 9% of revenue for both 2006 and 2005. Approximately $1.7 million of depreciation and
amortization for 2006 represents amortization of acquired intangible assets related to the
acquisitions of Instreamline, Essentis and Europlanet, compared to $0.3 million recorded during
2005.
Operating income
The increase in operating income for the segment is generally the result of increased revenue and
the related gross margins described above, combined with leveraging certain management cost
structures. Operating income as a percentage of revenue was 22% for 2006, compared to 24% for 2005
and operating income per transaction was $0.08 for both 2006 and 2005. The slight decrease in
operating income as a percentage of revenues was primarily due to Essentis, which recorded an 8%
operating income margin during 2006. Average monthly operating income per ATM was $365 for 2006,
compared to $368 for 2005. Operating income is partially offset by losses related to our 75% owned
joint venture in China of $1.3 million for 2006 and $1.2 million in 2005.
40
PREPAID PROCESSING SEGMENT
Effective in the second quarter 2007, as a result of the acquisition of RIA, we established the
Money Transfer Segment. Our previous money transfer business was relatively insignificant and was
reported and managed as part of the Prepaid Processing Segment. We have adjusted previously
reported amounts to reflect the reclassification of the money transfer business from the Prepaid
Processing Segment to Money Transfer Segment for all periods presented.
2007 Compared to 2006
The following table summarizes the results of operations for the Prepaid Processing Segment for the
years ended December 31, 2007 and 2006:
Year Ended December 31, | Year-over-Year Change | |||||||||||||||
Increase | Increase | |||||||||||||||
(dollar amounts in thousands) | 2007 | 2006 | Amount | Percent | ||||||||||||
Total revenues |
$ | 569,858 | $ | 467,651 | $ | 102,207 | 22% | |||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
464,874 | 376,329 | 88,545 | 24% | ||||||||||||
Salaries and benefits |
27,493 | 22,561 | 4,932 | 22% | ||||||||||||
Selling, general and administrative |
20,567 | 17,011 | 3,556 | 21% | ||||||||||||
Federal excise tax refund |
(12,191 | ) | | (12,191 | ) | n/m | ||||||||||
Depreciation and amortization |
16,302 | 14,128 | 2,174 | 15% | ||||||||||||
Total operating expenses |
517,045 | 430,029 | 87,016 | 20% | ||||||||||||
Operating income |
$ | 52,813 | $ | 37,622 | $ | 15,191 | 40% | |||||||||
Transactions processed (millions) |
634.8 | 457.8 | 177.0 | 39% |
n/m Not meaningful. |
Revenues
The increase in revenues for 2007 compared to 2006 was generally attributable to: (i) the increase
in total transactions processed across all of our Prepaid Processing Segment operations; (ii) $47.2
million in revenues contributed by Omega Logic and Brodos Romania, which were acquired in the first
quarter 2007; and (iii) foreign currency translations to the U.S. dollar. Beginning in 2006 and
continuing into 2007, the U.S. dollar weakened compared to most of the currencies of the countries
in which we operate. Because our revenues are recorded in the functional currencies of our
operating entities, amounts we earn are positively impacted by the weakening of the U.S. dollar.
Revenue growth was partially offset by reduced revenue growth in Spain resulting from the second
quarter 2006 expiration of a preferential commission arrangement with a Spanish mobile operator.
Additionally, in certain more mature markets, such as the U.K., New Zealand and Spain, our revenue
growth has slowed substantially and, in some cases, revenues have decreased because conversion from
scratch cards to electronic top-up is substantially complete and certain mobile operators and
retailers are driving competitive reductions in pricing and margins. We expect most of our future
revenue growth to be derived from: (i) developing markets or markets in which there is organic
growth in the prepaid sector overall, (ii) from continued conversion from scratch cards to
electronic top-up in less mature markets, (iii) from additional products sold over the base of
prepaid processing terminals, and (iv) possibly from acquisitions.
Revenues per transaction decreased to $0.90 for 2007 from $1.02 for 2006 due primarily to the
growth in revenues and transactions recorded by our ATX subsidiary, which is 51% Euronet-owned. In
accordance with U.S. GAAP, ATX is consolidated and the amounts in our financial statements and in
the table above reflect 100% of ATX. Results attributable to the 49% minority owner are reflected
in the minority interest line of our Consolidated Statements of Income. ATX provides only
transaction processing services without direct costs and other operating costs generally associated
with installing and managing terminals; therefore, the revenue we recognize from these transactions
is a fraction of that recognized on average transactions but with very low cost. Transaction
volumes for ATX in 2007 increased over 100% compared to 2006. Partially offsetting the decreases
described above was the growth in both volumes and revenues in Australia and the U.S., which
generally have higher revenues per transaction, but also pay higher commission rates to retailers,
than our other Prepaid Processing subsidiaries.
41
Direct operating costs
Direct operating costs in the Prepaid Processing Segment include the commissions we pay to retail
merchants for the distribution and sale of prepaid mobile airtime and other prepaid products, as
well as expenses required to operate POS terminals. Because of their nature, these expenditures
generally fluctuate directly with revenues and processed transactions. The increase in direct
operating costs is generally attributable to the increase in total transactions processed and
foreign currency translations to the U.S. dollar compared to the prior year.
Gross margin
Gross margin, which represents revenues less direct costs, was $105.0 million for 2007 compared to
$91.3 million for 2006. Gross margin as a percentage of revenues decreased to 18% for 2007 compared
to 20% for 2006 and gross margin per transaction was $0.17 for 2007 compared to $0.20 for 2006.
Most of the reduction in gross margin per transaction is due to the growth of revenues and
transactions at our ATX subsidiary, the expiration of preferential commission arrangements in Spain
discussed above and the general maturity of the prepaid mobile airtime business in many of our
markets.
Salaries and benefits
The increase in salaries and benefits for 2007 compared to 2006 is primarily the result of the
acquisitions of Brodos Romania and Omega Logic, as well as additional overhead to support
development in other new and growing markets. As a percentage of revenue, salaries and benefits
remained flat at 4.8% for both 2007 and 2006.
Selling, general and administrative
The increase in selling, general and administrative expenses for 2007 compared to 2006 is the
result of the acquisitions of Brodos Romania and Omega Logic, as well as additional overhead to
support development in other new and growing markets. As a percentage of revenues these selling,
general and administrative expenses remained flat at 3.6% for both 2007 and 2006.
Federal excise tax refund
During 2006, the Internal Revenue Service (IRS) announced that Internal Revenue Code Section 4251
(relating to communications excise tax) will no longer apply to, among other services, prepaid
mobile airtime services such as those offered by the Prepaid Processing Segments U.S. operations.
Additionally, companies that paid this excise tax during the period beginning on March 1, 2003 and
ending on July 31, 2006, are entitled to a credit or refund of amounts paid in conjunction with the
filing of 2006 federal income tax returns. During 2007, $12.2 million was recorded for amounts paid
during this period as a reduction to operating expenses of the Prepaid Processing Segment and as an
other current asset. In addition, approximately $1.2 million is expected to be received in interest
on the amount claimed, which will be recorded as interest income when received.
Depreciation and amortization
Depreciation and amortization expense primarily represents amortization of acquired intangibles and
the depreciation of POS terminals we install in retail stores. The increase in depreciation and
amortization for 2007 compared to 2006 was primarily due to the acquisitions of Brodos Romania and
Omega Logic. As a percentage of revenues, depreciation and amortization decreased slightly to 2.9%
for 2007 from 3.0% for 2006.
Goodwill and acquired intangible translation adjustment
During the third quarter 2007 we corrected an immaterial error related to foreign currency
translation adjustments for goodwill and acquired intangible assets recorded in connection with
acquisitions completed during periods prior to December 31, 2004. The impact of this correction on
the Prepaid Processing Segment was to increase depreciation and amortization expense and decrease
operating income by $0.4 million for each of the years ended December 31, 2006 and 2005.
Operating income
The improvement in operating income for 2007 compared to 2006 was due to the significant growth in
revenues and transactions processed, the federal excise tax refund and the benefit of foreign
currency translations to the U.S. dollar, partially offset by the impact of the events in Spain
discussed above and the costs of development in new and growing markets.
42
Excluding the benefit of the federal excise tax refund, operating income as a percentage of
revenues was 7.1% for 2007 compared to 8.0% for 2006. The decrease is primarily due to the events
in Spain and operating expenses incurred to support development in new and growing markets. Also
excluding the federal excise tax refund, operating income per transaction was $0.06 for 2007
compared to $0.08 for 2006. The decrease in operating income per transaction is due to the events
in Spain, the impact of maturing markets and the growth in revenues and transactions at our ATX
subsidiary. These decreases were partially offset by the benefit of foreign currency translations
to the U.S. dollar.
2006 Compared to 2005
The following table summarizes the results of operations for the Prepaid Processing Segment for the
years ended December 31, 2006 and 2005:
The following table summarizes the results of operations for the Prepaid Processing Segment for the
years ended December 31, 2006 and 2005:
Year Ended December 31, | Year-over-Year Change | |||||||||||||||
Increase | Increase | |||||||||||||||
(dollar amounts in thousands) | 2006 | 2005 | Amount | Percent | ||||||||||||
Total revenues |
$ | 467,651 | $ | 409,575 | $ | 58,076 | 14% | |||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
376,329 | 324,516 | 51,813 | 16% | ||||||||||||
Salaries and benefits |
22,561 | 21,941 | 620 | 3% | ||||||||||||
Selling, general and administrative |
17,011 | 15,782 | 1,229 | 8% | ||||||||||||
Depreciation and amortization |
14,128 | 12,023 | 2,105 | 18% | ||||||||||||
Total operating expenses |
430,029 | 374,262 | 55,767 | 15% | ||||||||||||
Operating income |
$ | 37,622 | $ | 35,313 | $ | 2,309 | 7% | |||||||||
Transactions processed (millions) |
457.8 | 348.0 | 109.8 | 32% |
Revenues
The increase in revenues for 2006 compared to 2005 was generally attributable to the increase in
total transactions processed across all of our Prepaid Processing operations and the full year
impact of 2005 acquisitions. Revenue growth was offset by reduced revenue in Spain resulting from
expiration of the preferential commission arrangements with a Spanish mobile operator. When we
acquired our Spanish prepaid subsidiaries, we entered into agreements with a major mobile operator
under which the subsidiaries received a preferred, exclusive distributor commission on sales of
prepaid mobile airtime. This arrangement expired in May 2006 and was not renewed. Additionally, in
mature markets, such as the U.K. and Australia, our revenue growth slowed substantially and, in
some cases, revenues have decreased because conversion from scratch cards to electronic top-up is
substantially complete and certain mobile operators and retailers are driving competitive
reductions in pricing and margins.
Revenue per transaction decreased to $1.02 for 2006 from $1.18 for 2005 due primarily to the growth
in revenues and transactions recorded by our ATX subsidiary, which was acquired at the end of the
first quarter 2005. Transaction volumes at ATX have increased by approximately 300% for 2006,
compared to 2005. For 2006, ATX transaction volumes accounted for approximately 18% of all
transaction volume for the Prepaid Processing Segment, compared to 6% for 2005. The expiration of
preferential commission arrangements in Spain discussed above also contributed to the decrease in
revenue per transaction.
Partially offsetting the decreases described above for 2006, compared to 2005, were the growth in
both volumes and revenues in the U.S.
Direct operating costs
The increase in direct operating costs is generally attributable to the increase in total
transactions processed over the prior year. Direct costs as a percentage of revenue are slightly
higher in our mature markets, such as the U.K. and Spain. These higher costs have been partially
offset during 2006 by lower direct costs as a percentage of revenue in other markets and by ATX. As
discussed above, ATX is a transaction processor, with very few direct costs and, accordingly, a
high gross margin percentage.
43
Gross margin
Gross margin was $91.3 million for 2006, compared to $85.1 million for 2005. Gross margin as a
percentage of revenue was 20% for 2006, compared to 21% for 2005 and gross margin per transaction
was $0.20 for 2006, compared to $0.24 per transaction for 2005. Most of the reduction in gross margin per transaction is due to the growth of revenues and
transactions at our ATX subsidiary and the expiration of preferential commission arrangements in
Spain discussed above. Although we were able to pass through our reduction in commission in Spain
to the retailers under our contracts with them by paying a lower distribution commission, we chose
to pass through only a portion of the reduction to guard against the loss of retailers. Also during
2006, we commenced distribution of additional products and prepaid airtime from the two other
mobile operators in Spain. As a result of the expiration of preferential commission arrangements in
Spain, partially offset by the distribution of products from the other mobile operators in Spain,
gross margin for 2006 was approximately $2.6 million lower than 2005. This reduction would have
been larger, except for the completion of a significant acquisition in Spain during March 2005.
Additional decreases in gross margin per transaction were experienced across most of our other
countries and were partially offset by increased transaction volumes in markets with higher
margins, such as Australia, New Zealand and the U.S.
Salaries and benefits
The slight increase in salaries and benefits for 2006, compared to 2005 is primarily the result of
the full year effect of 2005 acquisitions. As a percentage of revenue, salaries and benefits have
decreased slightly to 4.8% for 2006, from 5.4% for 2005. The decrease in salaries and benefits as a
percentage of revenue reflects leverage and scalability in our markets.
Selling, general and administrative
The increase in selling, general and administrative expenses generally is also the result of the
full year effect of 2005 acquisitions. As a percentage of revenue these selling, general and
administrative expenses decreased to 3.6% of revenue for 2006, compared to 3.9% of revenue for
2005, also as a result of our leverage and scalability in our markets.
Depreciation and amortization
Depreciation and amortization expense primarily represents amortization of acquired intangibles and
the depreciation of POS terminals we install in retail stores. The increase for 2006, compared to
2005, is due to the full year effect of amortization of intangible assets recorded in connection
with 2005 acquisitions. As a percentage of revenues, depreciation and amortization was relatively
flat at 3.0% for 2006, compared to 2.9% for 2005.
Goodwill and acquired intangible translation adjustment
During the third quarter 2007 we corrected an immaterial error related to foreign currency
translation adjustments for goodwill and acquired intangible assets recorded in connection with
acquisitions completed during periods prior to December 31, 2004. The impact of this correction on
the Prepaid Processing Segment was to increase depreciation and amortization expense and decrease
operating income by $0.4 million for each of the years ended December 31, 2006 and 2005.
Operating income
The increase in operating income for 2006 compared to 2005 includes a reduction of approximately
$2.6 million related to the impact of the developments in Spain discussed above. Exclusive of the
impact of Spain, the improvement in operating income for 2006 was due to the growth in revenues and
transactions processed, contributions from our 2005 acquisitions and increased leverage and
scalability in our markets.
Operating income as a percentage of revenues decreased to 8.0% for 2006 from 8.6% for 2005.
Operating income per transaction decreased to $0.08 for 2006, from $0.10 for 2005. As discussed
above, these decreases in operating income as a percentage of revenue and per transaction are the
result of the developments in Spain, the growth in revenues and transactions associated with ATX
and gross margin declines across several of our other countries. These decreases were partially
offset by increased transactions in markets with higher operating margins, such as Australia, New
Zealand and the U.S.
44
MONEY TRANSFER SEGMENT
The Money Transfer Segment was established during April 2007 with the acquisition of RIA, which is
more fully described in Note 5, Acquisitions, to the Consolidated Financial Statements included in
this report. To assist in better understanding the results of the Money Transfer Segment, unaudited
pro forma results have been provided as if RIAs results were included in our consolidated results
of operations beginning January 1, 2006. Because our results of operations for the year ended
December 31, 2006 were insignificant, and fluctuations when compared to the year ended December 31,
2007 are nearly entirely due to the acquisition of RIA, the following discussion and analysis will
focus on pro forma results of operations. The pro forma financial information is not intended to
represent, or be indicative of, the consolidated results of operations or financial condition that
would have been reported had the RIA acquisition been completed as of the beginning of the periods
presented. Moreover, the pro forma financial information should not be considered as representative
of our future consolidated results of operations or financial condition. The Money Transfer Segment
generated total revenues of $1.7 million and an operating loss of $1.0 million for the year ended
December 31, 2005. Based on the insignificance of the money transfer business prior to the
acquisition of RIA, we have not provided analysis comparing the 2006 and 2005 operations.
The following tables present the actual results of operations for the years ended December 31, 2007
and 2006 for the Money Transfer Segment.
As Reported | ||||||||||||||||
Year Ended December 31, | Year-over-Year Change | |||||||||||||||
Increase | Increase | |||||||||||||||
(dollar amounts in thousands) | 2007 | 2006 | Amount | Percent | ||||||||||||
Total revenues |
$ | 158,759 | $ | 3,210 | $ | 155,549 | 4846% | |||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
83,795 | 1,932 | 81,863 | 4237% | ||||||||||||
Salaries and benefits |
32,705 | 2,353 | 30,352 | 1290% | ||||||||||||
Selling, general and administrative |
21,459 | 1,863 | 19,596 | 1052% | ||||||||||||
Depreciation and amortization |
13,670 | 357 | 13,313 | 3729% | ||||||||||||
Total operating expenses |
151,629 | 6,505 | 145,124 | 2231% | ||||||||||||
Operating income |
$ | 7,130 | $ | (3,295 | ) | $ | 10,425 | n/m | ||||||||
Transactions processed (millions) |
12.0 | 0.3 | 11.7 | 3900% |
n/m | - Not meaningful. |
The following tables present the pro forma results of operations for the years ended December 31,
2007 and 2006 for the Money Transfer Segment:
Pro Forma (unaudited) | ||||||||||||||||
Year Ended December 31, | Year-over-Year Change | |||||||||||||||
Increase | Increase | |||||||||||||||
(dollar amounts in thousands) | 2007 | 2006 | Amount | Percent | ||||||||||||
Total revenues |
$ | 204,948 | $ | 182,082 | $ | 22,866 | 13% | |||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
108,589 | 96,926 | 11,663 | 12% | ||||||||||||
Salaries and benefits |
42,383 | 36,445 | 5,938 | 16% | ||||||||||||
Selling, general and administrative |
27,444 | 25,757 | 1,687 | 7% | ||||||||||||
Depreciation and amortization |
17,700 | 16,858 | 842 | 5% | ||||||||||||
Total operating expenses |
196,116 | 175,986 | 20,130 | 11% | ||||||||||||
Operating income |
$ | 8,832 | $ | 6,096 | $ | 2,736 | 45% | |||||||||
Pro forma transactions processed (millions) |
15.5 | 13.9 | 1.6 | 12% |
45
Comparison of pro forma operating results
During 2007, we combined our previous money transfer business with RIA and incurred total exit
costs of $0.9 million. These costs represented the accelerated depreciation and amortization of
property and equipment, software and leasehold improvements that were disposed of during 2007; the
write off of marketing materials and trademarks that have been discontinued or will not be used;
the write off of accounts receivable from agents that did not meet RIAs credit requirements; and
severance and retention payments made to certain employees. These exit costs are not included in
pro-forma operating expenses in the above table.
Revenues
Revenues from the Money Transfer Segment include a transaction fee for each transaction as well as
the difference between purchasing currency at wholesale exchange rates and selling the currency to
customers at retail exchange rates. Pro forma revenue per transaction increased slightly to $13.22
for 2007 from $13.10 for 2006. On a historical basis, about 75% of our Money Transfer Segment
revenues are derived from transaction fees, about 25% is derived from the foreign currency spread
and other small amounts of revenue are derived from sources such as fees for cashing checks,
issuing money orders and processing bill payments. For 2007, 75% of our money transfers were
initiated in the U.S., 23% in Europe and 2% in other countries, such as Canada and Australia. For
2006, 83% of our money transfers were initiated in the U.S., 16% in
Europe and 1% in other
countries. We expect that the U.S. will continue to represent our highest volume market; however,
significant future growth is expected to be derived from non-U.S. initiated sources.
The increase in pro forma revenues for 2007 compared to 2006 is due to an increase in the number of
transactions processed of 12% for 2007 compared to 2006. For 2007, money transfers to Mexico, which
represented 38% of total money transfers, decreased by 1.1%, while transfers to all other countries
increased 26% when compared to the prior year due to the expansion of our operations and continued
growth in immigrant worker populations. The decline in transfers to Mexico was largely the result
of immigration developments, downturns in certain labor markets and other economic factors
impacting the U.S. market. These issues have also resulted in certain competitors lowering
transaction fees and foreign currency exchange spreads in certain markets where we do business in
an attempt to limit the impact on money transfer volumes. During the second half of 2007, however,
total money transfers to Mexico slightly exceeded total money transfers to Mexico during the second
half of 2006.
Direct operating costs
Direct operating costs in the Money Transfer Segment primarily represent commissions paid to agents
that originate money transfers on our behalf and distribution agents that disburse funds to the
customers destination beneficiary, together with less significant costs, such as telecommunication
and bank fees to collect money from originating agents. Direct operating costs generally increase
or decrease by a similar percentage as revenues.
Gross margin
Pro forma gross margin, which represents revenues less direct costs, was $96.4 million for 2007
compared to $85.2 million for 2006. This slight improvement is primarily due to the growth in money
transfer transactions discussed above. Pro forma gross margin as a percentage of revenues was 47%
for both 2007 and 2006.
Salaries and benefits
Salaries and benefits include salaries and commissions paid to employees, the cost of providing
employee benefits, amounts paid to contract workers and accruals for incentive compensation. Pro
forma salaries and benefits for 2006 also include costs associated with our previous money transfer
business that generally have been eliminated from our cost structure beginning in the second
quarter 2007. The increase for 2007 compared to 2006 is primarily due to overall Company growth.
Selling, general and administrative
Selling, general and administrative expenses include operations support costs, such as rent,
utilities, professional fees, indirect telecommunications, advertising and other miscellaneous
overhead costs. Pro forma selling, general and administrative expenses for 2007 were relatively
flat compared to 2006. However, the prior year pro forma results include costs associated with our
previous money transfer business, which generally have been eliminated from our cost structure
beginning in the second quarter 2007. Excluding the impact of these costs, the increase in pro
forma selling, general and administrative expenses for 2007 compared to 2006 is due primarily to
overall Company growth.
46
Depreciation and amortization
Depreciation and amortization primarily represents amortization of acquired intangibles and also
includes depreciation of money transfer terminals, computers and software, leasehold improvements
and office equipment. The increase in pro forma depreciation and amortization for 2007 compared to
2006 is primarily due to additional computer equipment in our customer service centers and
increased leasehold improvements, office equipment and computer equipment for expansion.
Operating income
The increase in pro forma operating income for 2007 compared to 2006 is the result of increased pro
forma revenues, without commensurate increases in pro forma operating expenses, as discussed in
more detail in the sections above.
CORPORATE SERVICES
The components of Corporate Services operating expenses for 2007, 2006 and 2005 were as follows:
The components of Corporate Services operating expenses for 2007, 2006 and 2005 were as follows:
Year-over-Year Change | ||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||
Increase | Increase | |||||||||||||||||||
Year Ended December 31, | (Decrease) | (Decrease) | ||||||||||||||||||
(dollar amounts in thousands) | 2007 | 2006 | 2005 | Percent | Percent | |||||||||||||||
Salaries and benefits |
$ | 13,217 | $ | 13,285 | $ | 10,527 | (1 | %) | 26 | % | ||||||||||
Selling, general and administrative |
5,811 | 4,343 | 5,381 | 34 | % | (19 | %) | |||||||||||||
Depreciation and amortization |
828 | 205 | 110 | 304 | % | 86 | % | |||||||||||||
Total operating expenses |
$ | 19,856 | $ | 17,833 | $ | 16,018 | 11 | % | 11 | % | ||||||||||
Operating expenses for Corporate Services increased by 11% for both 2007 and 2006, compared to the
respective prior year. The decrease in salaries and benefits compensation for 2007 compared to 2006
was due primarily to lower incentive compensation accruals and the December 2006 resignation of our
former President and Chief Operating Officer. The increase in selling, general and administrative
expenses was mainly the result of higher professional fees and other expenses associated with
acquisitions that were not completed, including Envios de Valores La Nacional Corp. (La
Nacional). See Note 22, Litigation and Contingencies, to the Consolidated Financial Statements for
further discussion regarding La Nacional. The increase in corporate depreciation and amortization
is the result of amortization associated with the purchase of a company-wide three-year Microsoft
license.
The increase in salaries and benefits expense for 2006, compared to 2005 is primarily attributable
to additional expense recorded for share-based compensation in 2006. Share-based compensation
expense increased to $7.3 million for 2006, compared to $5.3 million for 2005. Share-based
compensation expense for 2006 is comprised of $4.0 million related to the unvested portion of stock
options granted prior to 2005 and $3.3 million for restricted stock awards granted primarily during
2005 and 2006. This increase of $2.0 million in share-based compensation expense for 2006 compared
to 2005 is due mainly to: i) $1.1 million in additional expense due to changes in the accounting
treatment for performance-based restricted stock awards that require expense to be recognized over
a graded attribution schedule, rather than a straight-line attribution schedule, resulting in
more expense in the early years of an award; and ii) $0.9 million in increased expense due to
additional performance-based awards to certain executives during 2006 and additional awards to
employees resulting from overall Company growth, including acquired businesses. The remaining
increase in $0.8 million increase in salaries and benefits expense is due to incremental expense
from overall Company growth. The decrease in selling, general and administrative expenses for 2006,
compared to 2005 was the result of lower professional fees and other expenses associated with
acquisition analysis during 2006, compared to 2005.
47
OTHER INCOME (EXPENSE)
Year Ended December 31, | Year-over-Year Change | |||||||||||||||||||
2007 | 2006 | |||||||||||||||||||
Increase | Increase | |||||||||||||||||||
(Decrease) | (Decrease) | |||||||||||||||||||
(dollar amounts in thousands) | 2007 | 2006 | 2005 | Percent | Percent | |||||||||||||||
Interest income |
$ | 16,296 | $ | 13,750 | $ | 5,874 | 19 | % | 134 | % | ||||||||||
Interest expense |
(26,213 | ) | (14,747 | ) | (8,459 | ) | 78 | % | 74 | % | ||||||||||
Income from unconsolidated affiliates |
908 | 660 | 1,185 | 38 | % | (44 | %) | |||||||||||||
Loss on early retirement of debt |
(427 | ) | | | n/m | | ||||||||||||||
Foreign currency exchange gain (loss), net |
15,515 | 10,166 | (7,495 | ) | 53 | % | n/m | |||||||||||||
Total other income (expense) |
$ | 6,079 | $ | 9,829 | $ | (8,895 | ) | (38 | %) | n/m | ||||||||||
n/m Not meaningful. |
Interest income
The increase in interest income for 2007 over 2006 was primarily due to investment of the unused
proceeds from the $154.3 million private equity placement that was completed during March 2007, as
well as cash generated from operations. The increase in interest income for 2006 over 2005 was
primarily due to interest earned on the unused proceeds from the $175 million October 2005
convertible debt issuance and cash generated from operations. Increasing average cash deposits held
in our trust accounts related to the administration of customer collections and vendor remittance
activities of the Prepaid Processing Segment have also generated increased interest income as the
Segments operations have grown. Improvements in interest income for both 2007 and 2006, when
compared to the respective previous year, were also due to higher average interest rates resulting
from a gradual shift of investments from money market accounts to commercial paper and the general
rise in short-term treasury rates throughout from 2005 through 2007. Recently this trend has
reversed and short-term interest rates have decreased substantially during the first quarter 2008.
If this trend continues, we expect that interest rates earned on our invested balances for 2008
will decrease as a result.
Interest expense
The increase in interest expense for 2007 over 2006 was primarily related to the additional
borrowings to finance the April 2007 acquisition of RIA, which comprises our new Money Transfer
Segment, and described in Note 5, Acquisitions, to the Consolidated Financial Statements.
Additionally, we incurred additional borrowings under the revolving credit facility to finance the
working capital requirements of the Money Transfer Segment. We generally borrow amounts under the
revolving credit facility several times each month to fund the correspondent network in advance of
collecting remittance amounts from the agency network. These borrowings are repaid over a very
short period of time, generally within a few days. The increase in interest expense is also due to
higher overall interest rates on our debt obligations in 2007 compared to 2006. Including
amortization of deferred financing costs, interest expense on the term loan and revolving credit
facility is approximately 7.5%, compared to approximately 4.0% for the $315 million in outstanding
convertible debentures.
The increase in interest expense for 2006 over 2005 was primarily the result of the issuance of
$175 million in convertible debt during 2005 described in Note 11, Debt Obligations, to the
Consolidated Financial Statements.
Similar to the impact on interest income, due to the recent trend of decreasing short-term interest
rates, we expect that interest rates paid on our borrowings for 2008 will also decrease.
Income from unconsolidated affiliates
The increase in income from unconsolidated affiliates recorded for 2007 compared to 2006 was
primarily because we recognized a gain of $0.4 million in 2007 from the sale of our 8% ownership
interest in CashNet Telecommunications Egypt SAE. The remainder of income from unconsolidated
affiliates represents the equity in income of our 40% equity investment in e-pay Malaysia. During
2007, we recognized $0.7 million of equity losses related to e-pay Malaysias unsuccessful
expansion efforts into Indonesia. As of December 31, 2007, our investment in e-pay Malaysia was
$2.1 million and, based on the performance of e-pay Malaysias core business, as well future
expectations, we do not believe that the amount recorded as investment in e-pay Malaysia is
impaired.
48
The decrease in income from unconsolidated affiliates for 2006 compared to 2005 was primarily due
to $0.3 million in dividends recorded during 2005 related to Europlanet and ATX, which were
declared before we obtained control of these entities. In addition, 2006 included $0.3 million in
losses recorded by Euronet Middle-East, our 49% EFT Processing Segment joint venture in Bahrain.
Loss on early retirement of debt
Loss on early retirement of debt of $0.4 million for 2007 represents the pro-rata write-off of
deferred financing costs associated with the portion of the $190 million term loan that was prepaid
during 2007. We expect to continue to prepay amounts outstanding under the term loan through
available cash flows and, accordingly, recognizing losses on early retirement of debt for the
pro-rata portion of unamortized deferred financing costs.
Net foreign currency exchange gain (loss)
Assets and liabilities denominated in currencies other than the local currency of each of our
subsidiaries give rise to foreign currency exchange gains and losses. Exchange gains and losses
that result from re-measurement of these assets and liabilities are recorded in determining net
income. We recorded a net foreign currency exchange gain of $15.5 million and $10.2 million during
2007 and 2006, respectively, and net foreign currency exchange loss of $7.5 million during 2005.
The foreign currency exchange gain or loss recorded is a result of the impact of fluctuations in
foreign currency exchange rates on the recorded value of these assets and liabilities. Throughout
both 2007 and 2006, the U.S. dollar weakened against most European-based currencies, primarily the
euro and British pound, creating realized and unrealized foreign currency exchange gains. This
compares to 2005, during which time the U.S. dollar strengthened against these currencies and we,
therefore, recorded realized and unrealized foreign currency exchange losses.
INCOME TAX EXPENSE
Year Ended December 31, | ||||||||||||
(dollar amounts in thousands) | 2007 | 2006 | 2005 | |||||||||
Income from continuing operations before income taxes
and minority interest |
$ | 83,256 | $ | 61,683 | $ | 38,457 | ||||||
Minority interest |
(2,040 | ) | (977 | ) | (916 | ) | ||||||
Income from continuing operations before income taxes |
81,216 | 60,706 | 37,541 | |||||||||
Income tax expense |
28,056 | 14,704 | 14,843 | |||||||||
Income from continuing operations |
$ | 53,160 | $ | 46,002 | $ | 22,698 | ||||||
Effective income tax rate |
34.5% | 24.2% | 39.5% | |||||||||
Income from continuing operations before income taxes |
$ | 81,216 | $ | 60,706 | $ | 37,541 | ||||||
Adjust: Foreign exchange gain (loss), net |
15,515 | 10,166 | (7,495 | ) | ||||||||
Income from continuing operations before income taxes
and foreign exchange gain (loss), net |
$ | 65,701 | $ | 50,540 | $ | 45,036 | ||||||
Effective income tax rate, excluding foreign exchange
gain (loss), net |
42.7 | % | 29.1 | % | 33.0 | % | ||||||
We calculate our effective tax rate by dividing income tax expense by pre-tax book income including
the effect of minority interest. Our effective tax rates were 34.5%, 24.2% and 39.5% for the years
ended December 31, 2007, 2006 and 2005, respectively. Excluding foreign currency exchange
translation results from pre-tax income, our effective tax rates were 42.7%, 29.1% and 33.0% for
the years ended December 31, 2007, 2006 and 2005, respectively.
The increase in the effective tax rate for 2007, excluding foreign currency gains and losses,
primarily relates to the recognition of deferred income tax expense in the U.S. attributable to the
utilization of tax net operating losses against significant pre-tax income
generated by the our U.S. operations from foreign currency gains, interest income earned on loans
to our foreign subsidiaries and the $12.2 million federal excise tax refund. The 2007 effective tax
rate was also unfavorably impacted by the acquisition of RIA, which operates in jurisdictions that
have tax rates that are higher than our historical effective tax rate, and the recognition of
deferred tax benefits for net operating losses in certain countries during 2006.
49
Tax expense in the U.S. was partly reduced by the reversal of our remaining valuation allowances
against our U.S. tax net operating loss. Consequently, should we generate pre-tax income for
financial reporting purposes in the U.S. during 2008, including income from the recognition of
additional foreign currency gains, we would be required to recognize deferred tax expense on such
income. For U.S. federal income tax purposes, however, as of December 31, 2007, we have
approximately $106.6 million of net operating losses that will offset taxable income in future
periods generated from pre-tax income produced by our U.S. operations and the recognition of the
future tax effects of temporary differences recorded as deferred tax liabilities.
We determine income tax expense and remit income taxes based upon enacted tax laws and regulations
applicable in each of the taxing jurisdictions where we conduct business. Based on our
interpretation of such laws and regulations, and considering the evidence of available facts and
circumstances and baseline operating forecasts, we have accrued the estimated tax effects of
certain transactions, business ventures, contractual and organizational structures, projected
business unit performance, and the estimated future reversal of timing differences. Should a taxing
jurisdiction change its laws and regulations or dispute our conclusions, or should management
become aware of new facts or other evidence that could alter our conclusions, the resulting impact
to our estimates could have a material adverse effect to our Consolidated Financial Statements.
OTHER
Minority interest
Minority interest was $2.0 million, $1.0 million and $0.9 million for the years ended December 31,
2007, 2006 and 2005, respectively. Minority interest represents the elimination of the net income
(loss) attributable to the minority shareholders portion of our consolidated subsidiaries that are
not wholly-owned, including Movilcarga, of which we own 80%; ATX, of which we own 51%; our
subsidiary in China, of which we own 75%; and Europlanet, of which we owned 66% until the end of
2005, when we acquired the remaining 34% ownership.
Discontinued operations
Discontinued operations for 2007 reflects a gain of $0.3 million, net of legal costs, after we
received a binding French Supreme Court decision relating to a lawsuit in France that resulted in a
cash recovery. Discontinued operations for 2005 include a $0.6 million loss on the final
liquidation of the France ATM network processing services business sold in 2002. This loss consists
primarily of the reclassification to net income of the cumulative translation adjustment that had
previously been recorded as a component stockholders equity (accumulated other comprehensive
income) due to the prior years consolidation of the operations in France. There were no assets or
liabilities held for sale at December 31, 2007 or 2006.
NET INCOME
We recorded net income of $53.5 million, $46.0 million and $22.1 million for 2007, 2006 and 2005,
respectively. The increase of $7.5 million in 2007 over 2006 was primarily the result of an
increase in operating income of $25.3 million, including the federal excise tax refund of $12.2
million, an increase in the net foreign currency exchange gain of $5.4 million, an increase in
income from unconsolidated affiliates of $0.3 million and a gain from discontinued operations of
$0.3 million. These increases were partially offset by an increase in net interest expense of $8.9
million, an increase in income tax expense of $13.4 million, a loss on early retirement of debt of
$0.4 million and an increase in income attributable to minority interest of $1.1 million.
As more fully discussed above, the increase of $23.9 million for 2006 compared to 2005 was the
result of an increase in operating income of $4.5 million, an improvement in foreign currency
exchange gain (loss) of $17.7 million, a decrease in net interest expense of $1.6 million, a
decrease in income tax expense of $0.1 million and other items of $0.5 million. These increases
were partially offset by a decrease in equity from unconsolidated subsidiaries of $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Working capital
As of December 31, 2007, we had working capital, which is the difference between total current
assets and total current liabilities, of $279.3 million, compared to working capital of $284.4
million as of December 31, 2006. Our ratio of current assets to current liabilities was 1.53 at
December 31, 2007, compared to 1.70 as of December 31, 2006. The decrease in the ratio of current
assets to current liabilities was due primarily to the reduction in cash of approximately $168.3
million for the acquisition of RIA, mostly offset by $154.3 million in net proceeds from the
private equity offering that we completed during March 2007. As of December 31, 2007, $129.5
million of the net proceeds from the offering remained unused and included in unrestricted cash.
We require substantial working capital to finance operations. The Money Transfer Segment funds the
correspondent distribution network before receiving the benefit of amounts collected from customers
by agents. Working capital needs increase due to weekends and international banking holidays. As a
result, we may report more or less working capital for the Money Transfer Segment based
50
solely upon the fiscal period ending on a particular day. As of December 31, 2007, excluding
restricted cash held in escrow in connection with the agreement to acquire La Nacional, working
capital in the Money Transfer Segment was $54.9 million. We expect that working capital needs will
increase as we expand this business.
Operating cash flows
Cash flows provided by operating activities decreased to $78.3 million for 2007, compared to $95.9
million for 2006, primarily due to fluctuations in working capital associated with the timing of
the settlement process with mobile operators in the Prepaid Processing Segment. Offsetting this
decrease, operating cash flows also reflect an increase in net
income, net of depreciation and amortization expense, and the federal
excise tax refund, which was accrued in 2007. The increase in depreciation
and amortization expense is primarily the result of the acquisition of RIA.
Investing activity cash flows
Cash flows used in investing activities were $439.9 million in 2007, compared to $26.1 million in
2006. Our investing activities for 2007 consisted of $352.7 million in cash paid related to
acquisitions, primarily RIA, $20.0 million for the purchase of MoneyGram common stock and $26.0
million placed in escrow in connection with the agreement to acquire La Nacional. See further
discussion regarding the agreement to acquire La Nacional under Contingencies below. We also
spent $42.3 million for purchases of property and equipment and
software development. Our investing activities for 2006 include $2.1 million in cash paid for
acquisitions and $25.1 million for purchases of property and
equipment and software development.
Financing activity cash flows
Cash flows from financing activities were $301.5 million in 2007, compared to $24.7 million in
2006. Our financing inflows for 2007 consisted primarily of $190.0 million in proceeds from
borrowings under our term loan agreement and $167.7 million from the equity private placement and
stock option exercises. The proceeds from the term
loan were used to finance a portion of the acquisition of RIA. Partially offsetting these increases
were repayments and early retirements of debt obligations of $30.9 million, repayments of capital
lease obligations of $10.4 million, dividends paid to minority interest stockholders of $2.8
million and debt issuance costs associated with our new syndicated credit facility of $3.8 million.
To support the short-term cash needs of our Money Transfer Segment, we generally borrow amounts
under the revolving credit facility several times each month to fund the correspondent network in
advance of collecting remittance amounts from the agency network. These borrowings are repaid over
a very short period of time, generally within a few days. Primarily as a result of this, during
2007, we had a total of $880.0 million in borrowings and $889.0 million in repayments under our
revolving credit facility. Our financing activities for 2006 consisted primarily of proceeds from
the exercise of stock options and employee share purchases of
$14.7 million and net borrowings on
short-term debt and revolving credit agreements of $16.6 million, partially offset by payments on
capital lease obligations totaling $6.4 million.
Other sources of capital
Credit Facility In connection with completing the acquisition of RIA discussed under
Opportunities and Challenges above, we entered into a $290 million secured credit facility
consisting of a $190 million seven-year term loan, which was fully drawn at closing, and a $100
million five-year revolving credit facility (together, the Credit Facility). The $190 million
seven-year term loan bears interest at LIBOR plus 200 basis points or prime plus 100 basis points
and requires that we repay $1.9 million of the balance each year, with the remaining balance
payable after seven years. We estimate that we will be able to repay the $190 million term loan
prior to its maturity date through cash flows available from operations, provided our operating
cash flows are not required for future business developments. Financing costs of $4.8 million have
been deferred and are being amortized over the terms of the respective loans.
The $100 million five-year revolving Credit Facility replaced our previously existing revolving
credit facility and bears interest at LIBOR or prime plus a margin that adjusts each quarter based
upon our consolidated total debt to earnings before interest, taxes, depreciation and amortization
(EBITDA) ratio. We intend to use the revolving credit facility primarily to fund working capital
requirements, which have increased as a result of the operations of our Money Transfer Segment.
Based on our current projected working capital requirements, we anticipate that our revolving
credit facility will be sufficient to fund our working capital needs.
We may be required to repay our obligations under the Credit Facility six months before any
potential repurchase date under our $140 million 1.625% Convertible Senior Debentures Due 2024 or
our $175 million 3.5% Convertible Debentures Due 2025, unless we are able to demonstrate that
either: (i) we could borrow unsubordinated funded debt equal to the principal amount of the
applicable convertible debentures while remaining in compliance with the financial covenants in the
Credit Facility or (ii) we will have sufficient liquidity to meet repayment requirements (as
determined by the administrative agent and the lenders). The Credit Facility contains three
financial covenants that become more restrictive through September 30, 2008: (1) total debt to
EBITDA ratio, (2) senior secured debt to EBITDA ratio and (3) EBITDA to fixed charge coverage
ratio. Because of the change to these covenants over time, in order to
remain in compliance with our debt covenants we may be required to increase our EBITDA, repay debt,
or both. These and other material terms and conditions applicable to the Credit Facility are
described in the agreement governing the Credit Facility.
51
The term loan may be expanded by up to an additional $150 million and the revolving credit facility
can be expanded by up to an additional $25 million, subject to satisfaction of certain conditions
including pro-forma debt covenant compliance.
As of December 31, 2007, after making required repayments on the term loan of $1.4 million and
voluntary prepayments of $24.6 million, we had borrowings of $164.0 million outstanding against the
term loan. We had borrowings of $62.2 million and stand-by letters of credit of $25.3 million
outstanding against the revolving credit facility. The remaining $12.5 million under the revolving
credit facility ($37.5 million if the facility were increased to $125 million) was available for
borrowing. Borrowings under the revolving credit facility are being used to fund short-term working
capital requirements in the U.S., Spain and India. As of December 31, 2007, our weighted average
interest rate under the revolving credit facility was 7.0% and under the term loan was 7.1%,
excluding amortization of deferred financing costs.
Short-term debt obligations Short-term debt obligations at December 31, 2007 consist only
of the $1.9 million annual repayment requirement under the term loan. Certain of our subsidiaries
also have available credit lines and overdraft facilities to supplement short-term working capital
requirements, when necessary. As of December 31, 2007, there were no borrowings outstanding against
any of these facilities.
Our Prepaid Processing Segment subsidiaries in Spain enter into agreements with financial
institutions to receive cash in advance of collections on customers accounts. These arrangements
can be with or without recourse and the financial institutions charge the Spanish subsidiaries
transaction fees and/or interest in connection with these advances. Cash received can be up to 40
days prior to the customer invoice due dates. Accordingly, the Spanish subsidiaries remain
obligated to the banks on the cash advance until the underlying accounts receivable are ultimately
collected. Where the risk of collection remains with Euronet, the receipt of cash continues to be
carried on the Consolidated Balance Sheet in each of trade accounts receivable and accrued expenses
and other current liabilities. Amounts outstanding under these arrangements are generally $2
million or less.
We believe that the short-term debt obligations can be refinanced at terms acceptable to us.
However, if acceptable refinancing options are not available, we believe that amounts due under
these obligations can be funded through cash generated from operations, together with cash on hand
or borrowings under our revolving credit facility.
Convertible debt We have $175 million in principal amount of 3.5% Convertible Debentures
Due 2025 that are convertible into 4.3 million shares of Euronet Common Stock at a conversion price
of $40.48 per share upon the occurrence of certain events (relating to the closing prices of
Euronet Common Stock exceeding certain thresholds for specified periods). We will pay contingent
interest for the six-month period from October 15, 2012 through April 14, 2013 and for each
six-month period thereafter from April 15 to October 14 or October 15 to April 14 if the average
trading price of the debentures for the applicable five trading-day period preceding such
applicable six-month interest period equals or exceeds 120% of the principal amount of the
debentures. Contingent interest will equal 0.35% per annum of the average trading price of a
debenture for such five trading-day periods. The debentures may not be redeemed by us until October
20, 2012 but are redeemable at par at any time thereafter. Holders of the debentures have the
option to require us to purchase their debentures at par on October 15, 2012, 2015 and 2020, or
upon a change in control of the Company. On the maturity date, these debentures can be settled in
cash or Euronet Common Stock, at our option, at predetermined conversion rates.
We also have $140 million in principal amount of 1.625% Convertible Senior Debentures Due 2024 that
are convertible into 4.2 million shares of Euronet Common Stock at a conversion price of $33.63 per
share upon the occurrence of certain events (relating to the closing prices of Euronet Common Stock
exceeding certain thresholds for specified periods). We will pay contingent interest for the
six-month period from December 20, 2009 through June 14, 2010 and for each six-month period
thereafter from June 15 to December 14 or December 15 to June 14 if the average trading price of
the debentures for the applicable five trading-day period preceding such applicable six-month
interest period equals or exceeds 120% of the principal amount of the debentures. Contingent
interest will equal 0.30% per annum of the average trading price of a debenture for such five
trading-day periods. The debentures may not be redeemed by us until December 20, 2009 but are
redeemable at any time thereafter at par. Holders of the debentures have the option to require us
to purchase their debentures at par on December 15, 2009, 2014 and 2019, and upon a change in
control of the Company. On the maturity date, these debentures can be settled in cash or Euronet
Common Stock, at our option, at predetermined conversion rates.
Should holders of the convertible debentures require us to repurchase their debentures on the dates
outlined above, we cannot guarantee that we will have sufficient cash on hand or have acceptable
financing options available to us to fund these required repurchases. An inability to be able to
finance these potential repayments could have an adverse impact on our operations. These terms and
other material terms and conditions applicable to the convertible debentures are set forth in the
indenture agreements governing these debentures and in Note 11, Debt Obligations, to the
Consolidated Financial Statements.
52
Proceeds from issuance of shares and other capital contributions We have established, and
shareholders have approved, share compensation plans (the SCP) that allow the Company to make
grants of shares of restricted Common Stock, or options to purchase shares of Common Stock, to
certain current and prospective key employees, directors and consultants. During 2007, 494,200
stock options were exercised at an average exercise price of $14.16, resulting in proceeds to us of
approximately $7.0 million.
We also sponsor a qualified Employee Stock Purchase Plan (ESPP) under which we reserved 500,000
shares of Common Stock for purchase under the plan by employees through payroll deductions
according to specific eligibility and participation requirements. This plan qualifies as an
employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. Offerings
commence at the beginning of each quarter and expire at the end of the quarter. Under the plan,
participating employees are granted options, which immediately vest and are automatically exercised
on the final date of the respective offering period. The exercise price of Common Stock options
purchased is the lesser of 85% of the fair market value (as defined in the ESPP) of the shares on
the first day of each offering or the last day of each offering. The options are funded by
participating employees payroll deductions or cash payments. During 2007, we issued 49,500 shares
at an average price of $24.19 per share, resulting in proceeds to us of approximately $1.2 million.
These plans are discussed further in Note 17, Stock Plans, to the Consolidated Financial
Statements.
Other uses of capital
Payment obligations related to acquisitions As partial consideration for the acquisition
of RIA, we granted the sellers of RIA 3,685,098 contingent value rights (CVRs) and 3,685,098
stock appreciation rights (SARs). The 3,685,098 CVRs mature on October 1, 2008 and will result in
the issuance of up to $20 million of additional shares of Euronet Common Stock or payment of
additional cash, at our option, if the price of Euronet Common Stock is less than $32.56 on the
maturity date. The 3,685,098 SARs entitle the sellers to acquire additional shares of Euronet
Common Stock at an exercise price of $27.14 at any time through October 1, 2008. Combined, the CVRs
and SARs entitle the sellers to additional consideration of at least $20 million in Euronet Common
Stock or cash. The SARS also provide potential additional value to the sellers for situations in
which Euronet Common Stock appreciates beyond $32.56 per share prior to October 1, 2008, which is
to be settled through the issuance of additional shares of Euronet Common Stock. These and other
terms and conditions applicable to the CVRs and SARs are set forth in the agreements governing
these instruments.
We have potential contingent obligations to the former owner of the net assets of Movilcarga. Based
upon presently available information, we do not believe any additional payments will be required.
The seller has disputed this conclusion and has initiated ad hoc arbitration as provided for in the
purchase agreement. A global public accounting firm has been engaged as an independent expert to
review the results of the computation. Any additional payments, if ultimately determined to be owed
the seller, will be recorded as additional goodwill and could be made in either cash or a
combination of cash and Euronet Common Stock at our option.
In connection with the acquisition of Brodos Romania, we agreed to contingent consideration
arrangements based on the achievement of certain performance criteria. If the criteria are
achieved, during 2009 and 2010, we would have to pay a total of $2.5 million in cash or 75,489
shares of Euronet Common Stock, at the option of the seller.
See the section entitled contingencies below for discussion of liquidity and capital resources
involving a settlement agreement related to a previous agreement to acquire La Nacional.
Leases We lease ATMs and other property and equipment under capital lease arrangements
that expire between 2008 and 2013. The leases bear interest between 2.5% and 12.5% per year. As of
December 31, 2007, we owed $16.6 million under these capital lease arrangements. The majority of
these lease agreements are entered into in connection with long-term outsourcing agreements where,
generally, we purchase a banks ATMs and simultaneously sell the ATMs to an entity related to the
bank and lease back the ATMs for purposes of fulfilling the ATM outsourcing agreement with the
bank. We fully recover the related lease costs from the bank under the outsourcing agreements.
Generally, the leases may be canceled without penalty upon reasonable notice in the unlikely event
the bank or we were to terminate the related outsourcing agreement. We expect that, if terms were
acceptable, we would acquire more ATMs from banks under such outsourcing and lease agreements.
Capital expenditures and needs Total capital expenditures for 2007 were $45.5 million, of
which $3.0 million were funded through capital leases. These capital expenditures were primarily
for the purchase of ATMs to meet contractual requirements in Poland and India, the purchase and
installation of ATMs in key under-penetrated markets, the purchase of POS terminals for the Prepaid
Processing and Money Transfer Segments, and office and data center computer equipment and software.
We also incurred $3.0 million during 2007 for a company-wide, three-year Microsoft license.
Included in capital expenditures for office and data center equipment and software for 2007 is
approximately $4.1 million in capital expenditures for the purchase and development of the
necessary processing systems and capabilities to enter the cross-border merchant processing and
acquiring business. Total capital expenditures for 2008 are estimated
to be approximately $35
million to $45 million.
53
An additional $2.9 million in software development cost was capitalized during 2007 for the
development and enhancement of our EFT Processing Segment software products. See Note 20, Computer
Software to be Sold, to the Consolidated Financial Statements for a further discussion.
In the Prepaid Processing Segment, approximately 93,000 of the approximately 396,000 POS devices
that we operate are Company-owned, with the remaining terminals being operated as integrated cash
register devices of our major retail customers or owned by the retailers. As our Prepaid Processing
Segment expands, we will continue to add terminals in certain independent retail locations at a
price of approximately $300 per terminal. We expect the proportion of owned terminals to total
terminals operated to remain relatively constant.
At current and projected cash flow levels, we anticipate that cash generated from operations,
together with cash on hand and amounts available under our recently amended revolving credit
facility and other existing and potential future financing will be sufficient to meet our debt,
leasing, contingent acquisition and capital expenditure obligations. If our capital resources are
insufficient to meet these obligations, we will seek to refinance our debt under terms acceptable
to us. However, we can offer no assurances that we will be able to obtain favorable terms for the
refinancing of any of our debt or other obligations.
In the EFT Processing Segment, we are required to maintain ATM hardware for Euronet-owned ATMs and
software for all ATMs in our network and in our processing centers in accordance with certain
regulations and mandates established by local country regulatory and administrative bodies as well
as EMV (Europay, MasterCard and Visa) chip card support. During the first quarter 2008, we expect
to incur approximately $0.5 million in capital expenditures at our processing center in Budapest,
Hungary for further EMV upgrades. Additionally, as regulations change or new regulations or
mandates are issued, we may have additional capital expenditures over the next few years to
maintain compliance with these regulations and/or mandates. While we do not currently have plans to
increase capital expenditures to expand our network of owned ATMs, we expect that if strategic
opportunities were available to us, we would consider increasing future capital expenditures to
expand this network in new or existing markets.
Litigation During 2005, a former cash supply contractor in Central Europe (the
Contractor) claimed that we owed approximately $2.0 million for the provision of cash during the
fourth quarter 1999 and first quarter 2000 that had not been returned. This claim was made after we
terminated our business with the Contractor and established a cash supply agreement with another
supplier. In the first quarter 2006, the Contractor initiated legal action in Budapest, Hungary
regarding the claim. In April 2007, an arbitration tribunal awarded the Contractor $1.0 million,
plus $0.2 million in interest, under the claim, which was paid and recorded as selling, general and
administrative expenses of the EFT Processing Segment during 2007.
Contingencies
Settlement agreement with La Nacional On January 12, 2007, we signed a stock purchase
agreement to acquire La Nacional and certain of its affiliates, subject to regulatory approvals and
other customary closing conditions. In connection with this agreement, on January 16, 2007 we
deposited $26 million in an escrow account created for the proposed acquisition. The escrowed funds
were not permitted to be released except upon mutual agreement between La Nacionals stockholder
and us or through legal remedies available in the agreement.
On April 5, 2007, we gave notice to the stockholder of La Nacional of the termination of the stock
purchase agreement, alleging certain breaches of the terms thereof by La Nacional and requested the
release of the $26 million held in escrow under the terms of the agreement. La Nacionals
stockholder denied such breaches occurred, contested such termination and did not consent to our
request for release of the escrowed funds. While pursuing all legal remedies available to us, we
engaged in negotiations with La Nacional and its stockholder to determine whether the dispute could
be resolved through revised terms for the acquisition or some other mutually agreeable method.
On January 10, 2008, we entered into a settlement agreement with La Nacional, certain of its
affiliates and its stockholder evidencing the parties mutual agreement not to consummate the
acquisition of La Nacional and certain of its affiliates, in exchange for payment by Euronet of a
portion of the legal fees incurred by La Nacional. Among other terms and conditions, the settlement
agreement contains mutual releases in connection with litigation and provided for the release to us
of the $26 million held in escrow, plus interest earned on the escrowed funds. In connection with
the settlement, we expensed $1.3 million in acquisition costs and other settlement costs during
2007.
From time to time, we are a party to litigation arising in the ordinary course of business.
Currently, there are no other contingencies that we believe, either individually or in the
aggregate, would have a material adverse effect upon our consolidated results of operations or
financial condition.
54
Other trends and uncertainties
Cross border merchant processing and acquiring In our EFT Processing Segment, we have
entered the cross-border merchant processing and acquiring business,
with the execution of an
agreement with a large petrol retailer in Central Europe. Since the beginning of 2007, we have
devoted significant resources, including capital expenditures of approximately $4.1 million, to the
ongoing investment in development of the necessary processing systems and capabilities to enter
this business, which involves the purchase and design of hardware and software. Merchant acquiring
involves processing credit and debit card transactions that are made on POS terminals, including
authorization, settlement, and processing of settlement files. It will involve the assumption of
credit risk, as the principal amount of transactions will be settled to merchants before
settlements are received from card associations. We expect to incur approximately $1.0 million in
additional capital expenditures associated with the development of the necessary systems and
capabilities to enter this business. We expect that the necessary systems and capabilities will be
completed and we will be processing transactions during the first quarter 2008.
Fraudulent card transactions During the fourth quarter 2007, we recorded losses of
approximately $1.9 million, primarily in Poland and Hungary, as a result of certain fraudulent
transactions on our network. We are taking remedial action to prevent similar
transactions and expect the amounts to be reduced significantly in the first quarter 2008 and
eliminated in the second quarter 2008.
Stock plans
Historically, the Compensation Committee of our Board of Directors has awarded nonvested shares or
nonvested share units (restricted stock) and stock options as an element of long-term management
incentive compensation. The amount of future compensation expense related to awards of restricted
stock is based on the market price for Euronet Common Stock at the grant date. For grants of stock
options, we used the Black-Scholes option pricing model for the determination of fair value for
stock option grants and plan to use the Black Scholes option pricing model for future stock option
grants, if any. The grant date for stock options or restricted stock is the date at which all key
terms and conditions of the grant have been determined and the Company becomes contingently
obligated to transfer assets to the employee who renders the requisite service, generally the date
at which grants are approved by our Board of Directors or Compensation Committee thereof.
Share-based compensation expense for awards with only service conditions is generally recognized as
expense on a straight-line basis over the requisite service period. For awards with performance
conditions, expense is recognized on a graded attribution method. The graded attribution method
results in expense recognition on a straight-line basis over the requisite service period for each
separately vesting portion of an award, as if the award was, in-substance, multiple awards. Expense
for stock options and restricted stock is generally recorded as a corporate expense.
We have total unrecognized compensation cost related to unvested stock option and restricted stock
awards of $24.2 million that will be recognized over a weighted average period of 4.2 years.
Inflation and functional currencies
Generally, the countries in which we operate have experienced low and stable inflation in recent
years. Therefore, the local currency in each of these markets is the functional currency. Due to
these factors, we do not believe that inflation will have a significant effect on our results of
operations or financial position. We continually review inflation and the functional currency in
each of the countries where we operate.
OFF BALANCE SHEET ARRANGEMENTS
We have certain significant off balance sheet items described below and in the following section,
Contractual Obligations (also see Note 24, Guarantees, to the Consolidated Financial
Statements).
As of
December 31, 2007 we had $30.7 million of bank guarantees issued on our behalf, of which $1.7
million are collateralized by cash deposits held by the respective
issuing banks.
On occasion we grant guarantees in support of obligations of subsidiaries. As of December 31, 2007,
we had granted guarantees for cash in various ATM networks amounting to $25.1 million over the
terms of the cash supply agreements and performance guarantees amounting to approximately $27.1
million over the terms of the agreements with the customers.
55
From time to time, we enter into agreements with unaffiliated parties that contain
indemnification provisions, the terms of which may vary depending on the negotiated terms of each
respective agreement. The amount of such obligations is not stated in the agreements. Our liability
under such indemnification provisions may be subject to time and materiality limitations, monetary
caps and other conditions and defenses. Such indemnity obligations include the following:
| In connection with contracts with financial institutions in the EFT Processing Segment, we are responsible for damages to ATMs and theft of ATM network cash that, generally, is not recorded on the Consolidated Balance Sheet. As of December 31, 2007, the balance of ATM network cash for which the we were responsible was approximately $420 million. We maintain insurance policies to mitigate this exposure; | ||
| In connection with the license of proprietary systems to customers, we provide certain warranties and infringement indemnities to the licensee, which generally warrant that such systems do not infringe on intellectual property owned by third parties and that the systems will perform in accordance with their specifications; | ||
| We have entered into purchase and service agreements with our vendors and into consulting agreements with providers of consulting services, pursuant to which we have agreed to indemnify certain of such vendors and consultants, respectively, against third-party claims arising from our use of the vendors product or the services of the vendor or consultant; | ||
| In connection with acquisitions and dispositions of subsidiaries, operating units and business assets, we have entered into agreements containing indemnification provisions, which are generally described as follows: (i) in connection with acquisitions made by Euronet, we have agreed to indemnify the seller against third party claims made against the seller relating to the subject subsidiary, operating unit or asset and arising after the closing of the transaction, and (ii) in connection with dispositions made by us, we have agreed to indemnify the buyer against damages incurred by the buyer due to the buyers reliance on representations and warranties relating to the subject subsidiary, operating unit or business assets in the disposition agreement if such representations or warranties were untrue when made; | ||
| We have entered into agreements with certain third parties, including banks that provide fiduciary and other services to Euronet or to our benefit plans. Under such agreements, we have agreed to indemnify such service providers for third party claims relating to the carrying out of their respective duties under such agreements; and | ||
| In connection with our entry into the money transfer business, we have issued surety bonds in compliance with licensing requirements of the applicable governmental authorities. |
We are also required to meet minimum capitalization and cash requirements of various regulatory
authorities in the jurisdictions in which we have money transfer operations. We are not aware of
any significant claims made by the indemnified parties or third parties to guarantee agreements
with us and, accordingly, no liabilities were recorded as of December 31, 2007.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31, 2007:
Payments due by period | ||||||||||||||||||||
Less than 1 | More than | |||||||||||||||||||
(in thousands) | Total | year | 1-3 years | 4-5 years | 5 years | |||||||||||||||
Long-term debt obligations, including interest |
$ | 667,140 | $ | 24,398 | $ | 190,227 | $ | 221,771 | $ | 230,744 | ||||||||||
Estimated contingent acquisition obligations |
22,500 | 20,000 | 1,250 | 1,250 | | |||||||||||||||
Obligations under capital leases |
19,473 | 6,501 | 9,987 | 2,761 | 224 | |||||||||||||||
Obligations under operating leases |
63,388 | 17,098 | 28,435 | 15,371 | 2,484 | |||||||||||||||
Total |
$ | 772,501 | $ | 67,997 | $ | 229,899 | $ | 241,153 | $ | 233,452 | ||||||||||
For the purposes of the above table, our $140 million convertible debentures issued in December
2004 are considered due during 2009, and our $175 million convertible debentures issued in October
2005 are considered due during 2012, representing the first years in which holders have the right
to exercise their put option. Additionally, the above table only includes interest on these
convertible debentures up to these dates. Although in certain circumstances we may be required to
repay our obligations under the Credit Facility six months before any potential repurchase date
under our $315 million in convertible debentures, the table above assumes that these
circumstances will not be met and the Credit Facility will be fully repaid at maturity. We have
assumed $62.2 million will be
56
outstanding at all times under the revolving credit facility. The computation of interest for debt
obligations with variable interest rates reflects interest rates in effect at December 31, 2007.
For additional information on debt obligations, see Note 11, Debt Obligations, to the Consolidated
Financial Statements.
Estimated contingent acquisition obligations as of December 31, 2007 include: 1) $20 million in
cash and/or Euronet Common Stock to be provided to the sellers of RIA upon the assumed settlement
of the CVRs and SARs during October 2008; and 2) additional consideration to be settled in cash or
Euronet Common Stock that we may have to pay during 2009 and 2010 in connection with the
acquisition of Brodos, totaling up to $2.5 million. See Note 5, Acquisitions, to the Consolidated
Financial Statements for a more complete description of these acquisitions.
For additional information on capital and operating lease obligations, see Note 14, Leases, to the
Consolidated Financial Statements.
Our total liability for uncertain tax positions under Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48) was $7.4 million as of December 31, 2007. We are not able to
reasonably estimate the amount by which the liability will increase or decrease over time; however,
at this time, we do not expect a significant payment related to these obligations within the next
year. See Note 15, Income Taxes, to the Consolidated Financial Statements for additional
information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the U.S. requires management to make judgments, assumptions, and
estimates, often as a result of the need to make estimates of matters that are inherently uncertain
and for which the actual results will emerge over time. These judgments, assumptions and estimates
affect the amounts of assets, liabilities, revenues and expenses reported in the Consolidated
Financial Statements and accompanying notes. Note 3, Summary of Significant Accounting Policies and
Practices, to the Consolidated Financial Statements describes the significant accounting policies
and methods used in the preparation of the Consolidated Financial Statements. Our most critical
estimates and assumptions are used for computing income taxes, estimating the useful lives and
potential impairment of long-lived assets and goodwill, as well as allocating the purchase price to
assets acquired in acquisitions, and revenue recognition. We base base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. The following descriptions
of critical accounting policies and estimates are forward-looking statements and are impacted
significantly by estimates and should be read in conjunction with Item 1A Risk Factors. Actual
results could differ materially from the results anticipated by these forward-looking statements.
Accounting for income taxes
The deferred income tax effects of transactions reported in different periods for financial
reporting and income tax return purposes are recorded under the liability method. This method gives
consideration to the future tax consequences of deferred income or expense items and immediately
recognizes changes in income tax laws upon enactment. The income statement effect is generally
derived from changes in deferred income taxes, net of valuation allowances, on the balance sheet as
measured by differences in the book and tax bases of our assets and liabilities.
We have significant tax loss carryforwards, and other temporary differences, which are recorded as
deferred tax assets and liabilities. Deferred tax assets realizable in future periods are recorded
net of a valuation allowance based on an assessment of each entitys, or group of entities,
ability to generate sufficient taxable income within an appropriate period, in a specific tax
jurisdiction.
In assessing the recognition of deferred tax assets, we consider whether it is more likely than not
that some portion or all of the deferred tax assets will be realized. As more fully described in
Note 15, Taxes, to the Consolidated Financial Statements, gross deferred tax assets were $53.3
million as of December 31, 2007, partially offset by a valuation allowance of $8.9 million. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. We make judgments
and estimates on the scheduled reversal of deferred tax liabilities, historical and projected
future taxable income in each country in which we operate, and tax planning strategies in making
this assessment.
Based upon the level of historical taxable income and current projections for future taxable income
over the periods in which the deferred tax assets are deductible, we believe it is more likely than
not that we will realize the benefits of these deductible differences, net of the existing
valuation allowance at December 31, 2007. If we have a history of generating taxable income in a
certain country in which we operate, and baseline forecasts project continued taxable income in
this country, we will reduce the valuation allowance for those deferred tax assets that we expect
to realize.
Additionally, effective January 1, 2007, we adopted the provisions of FIN 48, which is intended to
reduce the diversity associated with certain aspects of measurement and recognition related to
accounting for income taxes. FIN 48 requires substantial management judgment and use of estimates
in determining whether the impact of a tax position is more likely than not of being sustained on
57
audit by the relevant taxing authority. We consider many factors when evaluating and estimating our
tax positions, which may require periodic adjustments and which may not accurately anticipate
actual outcomes. It is reasonably possible that amounts reserved for potential exposure could
change significantly as a result of the conclusion of tax examinations and, accordingly, materially
affect our operating results.
Goodwill and other intangible assets
In accordance with SFAS No. 141, Business Combinations, we allocate the acquisition purchase
price to the tangible assets, liabilities and intangible assets acquired based on their estimated
fair values. The excess purchase price over those fair values is recorded as goodwill. The fair
value assigned to intangible assets acquired is supported by valuations using estimates and
assumptions provided by management. For larger or more complex acquisitions, management engages an
appraiser to assist in the valuation. Intangible assets with finite lives are amortized over their
estimated useful lives. As of December 31, 2007, the Consolidated Balance Sheet includes goodwill
of $762.7 million and acquired intangible assets, net of accumulated amortization, of $156.8
million.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, on an annual basis, and
whenever events or circumstances dictate, we test for impairment. Impairment tests are performed
annually during the fourth quarter and are performed at the reporting unit level. Generally, fair
value represents discounted projected future cash flows and potential impairment is indicated when
the carrying value of a reporting unit, including goodwill, exceeds its estimated fair value. If
the potential for impairment exists, the fair value of the reporting unit is subsequently measured
against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an
implied fair value of the reporting units goodwill. An impairment loss is recognized for any
excess of the carrying value of the reporting units goodwill over the implied fair value. Our
annual impairment tests during the years 2007, 2006 and 2005 indicated that there were no
impairments. Determining the fair value of reporting units requires significant management judgment
in estimating future cash flows and assessing potential market and economic conditions. It is
reasonably possible that our operations will not perform as expected, or that estimates or
assumption could change, which may result in the recording of material non-cash impairment charges
during the year in which these changes take place.
See Impact of New and Emerging Accounting Pronouncements Not Yet Adopted below for discussion
regarding issuance of SFAS No. 141R, Business Combinations, that will be effective for
acquisitions we complete after January 1, 2009.
Impairment or disposal of long-lived assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
long-lived assets, such as property and equipment and intangible assets subject to amortization,
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Factors that are considered important which could
trigger an impairment review include the following: significant underperformance relative to
expected historical or projected future operating results; significant changes in the manner of use
of the acquired assets or the strategy for the overall business; and significant negative industry
or economic trends. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by
the respective asset. The same estimates are also used in planning for our long- and short-range
business planning and forecasting. We assess the reasonableness of the inputs and outcomes of our
discounted cash flow analysis against available comparable market data. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount exceeds the fair value of the respective asset. Assets to be disposed
are required to be separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held for sale are required to be presented separately
in the appropriate asset and liability sections of the balance sheet. Reviewing long-lived assets
for impairment requires considerable judgment. Estimating the future cash flows requires
significant judgment. If future cash flows do not materialize as expected or there is a future
adverse change in market conditions, we may be unable to recover the carrying amount of an asset,
resulting in future impairment losses.
Revenue recognition
In accordance with U.S. GAAP, we recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed or determinable
and collection is reasonably assured. The majority of our revenues are comprised of monthly
recurring management fees and transaction-based fees that are recognized when the transactions are
processed or the services are performed. When determining the proper revenue recognition for
monthly management fees and transaction-based fees, we consider the guidance in Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, as amended by SAB 104,
Revenue Recognition, Emerging Issues Task Force (EITF) 99-19, Reporting Revenue Gross as
Principle versus Net as an Agent, EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables, and other various interpretations.
Certain of our noncancelable customer contracts provide for the receipt of up-front fees paid to or
received from the customer and/or decreasing or increasing fee schedules over the agreement term
for substantially the same level of services provided by the Company.
58
As prescribed by SAB 101 and SAB 104, we recognize revenue under these contracts based on
proportional performance of services over the term of the contract, which generally results in
straight-line revenue recognition of the contracts total cash flows, including any up-front
payment.
We also record certain revenues in the EFT Processing Segment related to the sale of EFT software
solutions for electronic payment and transaction delivery systems, including professional fees for
implementation and customization, ongoing software maintenance and associated computer hardware.
When determining the proper revenue recognition for these items, in addition to SAB 101, SAB 104,
and EITF 00-21, we also consider the guidance contained in Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, and SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. Applying U.S. GAAP revenue
recognition guidance to the software business requires more detailed knowledge of the rules and is
subject to more complex judgment. For the year ended December 31, 2007, revenues from software and
software-related products and services represented 3% of our total consolidated revenues.
Substantial management judgment and estimation is required in determining the proper revenue
recognition methodology for our various revenue producing activities, as well as the proper and
consistent application of our determined methodology.
SUBSEQUENT EVENTS
During 2007, in connection with our interest to acquire MoneyGram, we purchased 1.3 million shares
of MoneyGram common stock at a cost basis of $20.0 million. Subsequent to December 31, 2007, the
market price of MoneyGram common stock declined significantly. Based on trading prices for
MoneyGram common stock on February 28, 2008, the value of the Companys investment decreased to
$4.9 million. On February 27, 2008, we decided not to submit a proposal to acquire MoneyGram. In
connection with this decision, we expect to record expense before income tax benefit of
approximately $15 million to $20 million during the first quarter 2008, representing the decline in
value of MoneyGram stock, together with acquisition related expenses. The actual loss could be
larger if the market price of MoneyGram common stock deteriorates further.
IMPACT OF NEW AND EMERGING ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
During 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The Statement applies whenever other accounting pronouncements require or permit fair
value measurements. Accordingly, this Statement does not require any new fair value measurements.
SFAS No. 157 is effective for us beginning in the first quarter 2008; however, our adoption of SFAS
No. 157 is not expected to have a material impact on the Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS No. 159 expands the
use of fair value accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS No. 159, a company may elect to use fair value
to measure accounts and loans receivable, available-for-sale and held-to-maturity securities,
equity method investments, accounts payable, guarantees and issued debt. Other eligible items
include firm commitments for financial instruments that otherwise would not be recognized at
inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to
provide the warranty goods or services. If the use of fair value is elected, any upfront costs and
fees related to the item must be recognized in earnings and cannot be deferred, such as deferred
financing costs. The fair value election is irrevocable and generally made on an
instrument-by-instrument basis, even if a company has similar instruments that it elects not to
measure based on fair value. At the adoption date, unrealized gains and losses on existing items
for which fair value has been elected are reported as a cumulative adjustment to beginning retained
earnings. Subsequent to the adoption of SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for us beginning in the first quarter 2008; however, our
adoption of SFAS No. 159 is not expected to have a material impact on the Consolidated Financial
Statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which is a revision of
SFAS No. 141, Business Combinations. SFAS No. 141R will apply to all business combinations and
will require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired
in a business combination to be recorded at full fair value. SFAS No 141R will also require
transaction-related costs to be expensed in the period incurred, rather than capitalizing these
costs as a component of the
59
respective purchase price. SFAS No. 141R is effective for acquisitions
that we may complete after January 1, 2009 and early adoption
is prohibited. The adoption will have a significant impact on the accounting treatment for
acquisitions occurring after the effective date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, that replaces Accounting Research Bulletin (ARB) 51, Consolidated Financial
Statements. SFAS No. 160 will require noncontrolling interests (previously referred to as minority
interests) to be reported as a component of equity, which will change the accounting for
transactions with noncontrolling interest holders. SFAS No. 160 is effective for Euronet on January
1, 2009 and will result in a change in the classification of noncontrolling interest from a
component of liabilities to a component of equity in Consolidated Balance Sheets and will change
the accounting for transactions with noncontrolling shareholders after the effective date.
In December 2007, the Securities and Exchange Commission issued SAB 110, Certain Assumptions Used
in Valuation Methods, which extends the use of the simplified method, under certain
circumstances, in developing an estimate of expected term of plain vanilla share options in
accordance with SFAS No. 123R. Prior to SAB 110, SAB 107 stated that the simplified method was only
available for grants made up to December 31, 2007. Because we have primarily utilized restricted
stock since the beginning of 2005, the expected term has been an insignificant component of the
amount of recorded share-based compensation. However, for future grants of stock options, if any,
should the historical experience regarding the expected term of granted stock options be considered
insufficient for estimating future expected terms, we may continue to use the simplified method
for determining the expected term in situations allowed by SAB 110. Management is still analyzing
the potential impact of the adoption of SAB 110; however, the impact on the Consolidated Financial
Statements is not expected to be material.
FORWARD-LOOKING STATEMENTS
This document contains statements that constitute forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934,
as amended. All statements other than statements of historical facts included in this document are
forward-looking statements, including statements regarding the following:
| our business plans and financing plans and requirements, | ||
| trends affecting our business plans and financing plans and requirements, | ||
| trends affecting our business, | ||
| the adequacy of capital to meet our capital requirements and expansion plans, | ||
| the assumptions underlying our business plans, | ||
| business strategy, | ||
| government regulatory action, | ||
| technological advances, or | ||
| projected costs and revenues. |
Although we believe that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to be correct.
Forward-looking statements are typically identified by the words believe, expect, anticipate,
intend, estimate and similar expressions.
Investors are cautioned that any forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, including, but not limited to, those referred to
above and as set forth in Item 1A Risk Factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
In connection with completing the acquisition of RIA during the second quarter, we entered into a
$290 million secured syndicated credit facility consisting of a $190 million seven-year term loan,
which was fully drawn at closing, and a $100 million five-year revolving credit facility, which
accrue interest at variable rates. This revolving credit facility replaces our $50 million
revolving credit facility. The credit facility may be expanded by up to an additional $150 million
in term loans and up to an additional $25 million for the revolving line of credit, subject to
satisfaction of certain conditions including pro forma debt covenant compliance. This facility
substantially increases our interest rate risk.
As of December 31, 2007, our total outstanding debt was $557.8 million. Of this amount, $315
million, or 56% of our total debt obligations, relates to contingent convertible debentures having
fixed coupon rates. Our $175 million contingent convertible debentures, issued in October 2005,
accrue interest at a rate of 3.5% per annum. The $140 million contingent convertible debentures,
issued in December 2004 accrue interest at a rate of 1.625% per annum. Based on quoted market
prices, as of December 31, 2007 the fair value of our fixed rate convertible debentures was $332.6
million, compared to a carrying value of $315 million.
60
Through the use of interest rate swap agreements covering the period from June 1, 2007 to May 29,
2009, an additional $50.0 million of our variable rate term debt, or 9% of our total debt, has been
effectively converted to a fixed rate of 7.3%. As of December 31, 2007, the unrealized loss on the
interest rate swap agreements was $1.0 million. Interest expense, including amortization of
deferred
debt issuance costs, for our total $365.0 million in fixed rate debt totals approximately $13.8
million per year, or a weighted average interest rate of 3.8% annually. Additionally, approximately
$16.6 million, or 3% of our total debt obligations, relate to capitalized leases with fixed payment
and interest terms that expire between 2008 and 2013.
The remaining $176.2 million, or 32% of our total debt obligations, relates to debt that accrues
interest at variable rates. If we were to maintain these borrowings, and borrow the remaining $12.5
million currently available under the revolving credit facility, a 1% increase in the applicable
interest rate would result in additional annualized interest expense of approximately $1.9 million.
For more information regarding our debt obligations, see Note 11, Debt Obligations, to the
Consolidated Financial Statements.
Our excess cash is invested in instruments with original maturities of three months or less;
therefore, as investments mature and are reinvested, the amount we earn will increase or decrease
with changes in the underlying short term interest rates.
Foreign currency exchange rate risk
For the year ended December 31, 2007, 76% of our revenues were generated in non-U.S. dollar
countries compared to 84% for the year ended December 31, 2006. The decrease in revenues from
non-U.S. dollar countries, compared to the prior year is due primarily to the second quarter 2007
acquisition of RIA, as well as increased revenues of our U.S.-based Prepaid Processing Segment
operations. We expect to continue generating a significant portion of our revenues in countries
with currencies other than the U.S. dollar.
We are particularly vulnerable to fluctuations in exchange rates of the U.S. dollar to the
currencies of countries in which we have significant operations. We estimate that, depending on the
net foreign currency working capital position at a selected point in time, a 10% fluctuation in
these foreign currency exchange rates would have the combined annualized effect on reported net
income and working capital of up to approximately $20.0 million. This effect is estimated by
segregating revenues, expenses and working capital by currency and applying a 10% currency
depreciation and appreciation to the non-U.S. dollar amounts. We believe this quantitative measure
has inherent limitations and does not take into account any governmental actions or changes in
either customer purchasing patterns or our financing or operating strategies. Because a majority of
our revenues and expenses are incurred in the functional currencies of our international operating
entities, the profits we earn in foreign currencies have been positively impacted by the weakening
of the U.S. dollar in 2006 and 2007. Additionally, our debt obligations are primarily in U.S.
dollars, therefore, as foreign currency exchange rates fluctuate, the amount available for
repayment of debt will also increase or decrease.
We are also exposed to foreign currency exchange rate risk in our Money Transfer Segment. A
majority of the money transfer business involves receiving and disbursing different currencies, in
which we earn a foreign currency spread based on the difference between buying currency at
wholesale exchange rates and selling the currency to consumers at retail exchange rates. This
spread provides some protection against currency fluctuations that occur while we are holding the
foreign currency. Our exposure to changes in foreign currency exchange rates is limited by the fact
that disbursement occurs for the majority of transactions shortly after they are initiated.
Additionally, we enter into foreign currency forward contracts to help offset foreign currency
exposure related to the notional value of money transfer transactions collected in currencies other
than the U.S. dollar. As of December 31, 2007, we had foreign currency derivative instruments,
primarily forward contracts, outstanding with a notional value of $52.6 million, primarily in euros
that were not designated as hedges and mature in a weighted average of five days. The fair value of
these forward contracts as of December 31, 2007 was an unrealized loss of approximately $0.3
million, which was mostly offset by the unrealized gain on the related foreign currency
receivables.
61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF KPMG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders
Euronet Worldwide, Inc.:
Euronet Worldwide, Inc.:
We have audited the accompanying consolidated balance sheets of Euronet Worldwide, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income,
changes in stockholders equity and cash flows for each of the years in the three-year period ended
December 31, 2007. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Euronet Worldwide, Inc. and subsidiaries as of
December 31, 2007 and 2006, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Euronet Worldwide, Inc.s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal
Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated February 29, 2008 expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
February 29, 2008
February 29, 2008
62
CONSOLIDATED FINANCIAL STATEMENTS
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
Consolidated Balance Sheets
(in thousands, except share data)
As of December 31, | ||||||||
2007 | 2006 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 267,591 | $ | 321,058 | ||||
Restricted cash |
140,222 | 80,703 | ||||||
Inventory PINs and other |
50,265 | 49,511 | ||||||
Trade accounts receivable, net of allowances for doubtful accounts of $6,248 at
December 31, 2007 and $2,137 at December 31, 2006 |
290,378 | 212,631 | ||||||
Deferred income taxes, net |
13,570 | 9,356 | ||||||
Prepaid expenses and other current assets |
40,458 | 15,212 | ||||||
Total current assets |
802,484 | 688,471 | ||||||
Property and equipment, net of accumulated depreciation of $119,742 at
December 31, 2007 and $91,883 at December 31, 2006 |
88,984 | 55,174 | ||||||
Goodwill |
762,723 | 297,134 | ||||||
Acquired intangible assets, net of accumulated amortization of $45,561 at
December 31, 2007 and $23,072 at December 31, 2006 |
156,751 | 50,649 | ||||||
Deferred income taxes, net |
30,822 | 19,004 | ||||||
Other assets, net of accumulated amortization of $13,270 at December 31, 2007
and $10,542 at December 31, 2006 |
44,392 | 19,208 | ||||||
Total assets |
$ | 1,886,156 | $ | 1,129,640 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 307,108 | $ | 269,212 | ||||
Accrued expenses and other current liabilities |
169,246 | 99,039 | ||||||
Current portion of capital lease obligations |
5,079 | 6,592 | ||||||
Short-term debt obligations and current maturities of long-term debt obligations |
1,910 | 4,378 | ||||||
Income taxes payable |
15,619 | 9,463 | ||||||
Deferred income taxes |
7,609 | 4,108 | ||||||
Deferred revenue |
16,603 | 11,318 | ||||||
Total current liabilities |
523,174 | 404,110 | ||||||
Debt obligations, net of current portion |
539,303 | 349,073 | ||||||
Capital lease obligations, net of current portion |
11,520 | 13,409 | ||||||
Deferred income taxes |
74,641 | 44,094 | ||||||
Other long-term liabilities |
4,641 | 1,811 | ||||||
Minority interest |
8,975 | 8,350 | ||||||
Total liabilities |
1,162,254 | 820,847 | ||||||
Stockholders equity: |
||||||||
Preferred Stock, $0.02 par value. Authorized 10,000,000 shares; none issued |
| | ||||||
Common Stock, $0.02 par value. 90,000,000 shares authorized; 49,159,968 and
37,647,782 issued at December 31, 2007 and December 31, 2006, respectively |
983 | 749 | ||||||
Additional paid-in-capital |
658,047 | 338,216 | ||||||
Treasury stock, at cost, 207,065 and 207,755 shares at December 31, 2007 and
December 31, 2006, respectively |
(379 | ) | (196 | ) | ||||
Subscriptions receivable |
| (170 | ) | |||||
Accumulated deficit |
(5,905 | ) | (59,409 | ) | ||||
Restricted reserve |
957 | 780 | ||||||
Accumulated other comprehensive income |
70,199 | 28,823 | ||||||
Total stockholders equity |
723,902 | 308,793 | ||||||
Total liabilities and stockholders equity |
$ | 1,886,156 | $ | 1,129,640 | ||||
See accompanying notes to the consolidated financial statements.
63
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except share data)
Consolidated Statements of Income
(in thousands, except share data)
Year Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Revenues: |
||||||||||||
EFT Processing Segment |
$ | 188,957 | $ | 158,320 | $ | 119,880 | ||||||
Prepaid Processing Segment |
569,858 | 467,651 | 409,575 | |||||||||
Money Transfer Segment |
158,759 | 3,210 | 1,704 | |||||||||
Total revenues |
917,574 | 629,181 | 531,159 | |||||||||
Operating expenses: |
||||||||||||
Direct operating costs |
623,910 | 435,476 | 370,758 | |||||||||
Salaries and benefits |
114,697 | 74,256 | 58,760 | |||||||||
Selling, general and administrative |
65,650 | 38,101 | 31,489 | |||||||||
Federal excise tax refund |
(12,191 | ) | | | ||||||||
Depreciation and amortization |
48,331 | 29,494 | 22,800 | |||||||||
Total operating expenses |
840,397 | 577,327 | 483,807 | |||||||||
Operating income |
77,177 | 51,854 | 47,352 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
16,296 | 13,750 | 5,874 | |||||||||
Interest expense |
(26,213 | ) | (14,747 | ) | (8,459 | ) | ||||||
Income from unconsolidated affiliates |
908 | 660 | 1,185 | |||||||||
Loss on early retirement of debt |
(427 | ) | | | ||||||||
Foreign currency exchange gain (loss), net |
15,515 | 10,166 | (7,495 | ) | ||||||||
Total other income (expense) |
6,079 | 9,829 | (8,895 | ) | ||||||||
Income from continuing operations
before income taxes and minority interest |
83,256 | 61,683 | 38,457 | |||||||||
Income tax expense |
(28,056 | ) | (14,704 | ) | (14,843 | ) | ||||||
Minority interest |
(2,040 | ) | (977 | ) | (916 | ) | ||||||
Income from continuing operations |
53,160 | 46,002 | 22,698 | |||||||||
Gain (loss) from discontinued operations |
344 | | (635 | ) | ||||||||
Net income |
$ | 53,504 | $ | 46,002 | $ | 22,063 | ||||||
Earnings per share basic: |
||||||||||||
Continuing operations |
$ | 1.17 | $ | 1.24 | $ | 0.65 | ||||||
Discontinued operations |
0.01 | | (0.02 | ) | ||||||||
Total |
$ | 1.18 | $ | 1.24 | $ | 0.63 | ||||||
Basic weighted average shares outstanding |
45,260,803 | 37,037,435 | 35,020,499 | |||||||||
Earnings per share diluted: |
||||||||||||
Continuing operations |
$ | 1.10 | $ | 1.16 | $ | 0.62 | ||||||
Discontinued operations |
0.01 | $ | | (0.02 | ) | |||||||
Total |
$ | 1.11 | $ | 1.16 | $ | 0.60 | ||||||
Diluted weighted average shares outstanding |
51,014,086 | 42,456,137 | 36,831,320 | |||||||||
See accompanying notes to the consolidated financial statements.
64
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
(in thousands, except share data)
Consolidated Statements of Changes in Stockholders Equity
(in thousands, except share data)
Additional | Employee | |||||||||||||||||||||||
No. of | Common | Paid in | Treasury | Loans for | Subscription | |||||||||||||||||||
Shares | Stock | Capital | Stock | Stock | Receivable | |||||||||||||||||||
Balance at December 31, 2004 |
33,126,038 | $ | 663 | $ | 263,257 | $ | (149 | ) | $ | (47 | ) | $ | (180 | ) | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
||||||||||||||||||||||||
Translation adjustment |
||||||||||||||||||||||||
Recognition of cumulative translation
adjustment from liquidation of
France subsidiary |
||||||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||
Stock issued under employee stock plans |
1,289,922 | 26 | 8,305 | 56 | ||||||||||||||||||||
Share-based compensation |
5,582 | |||||||||||||||||||||||
Shares issued for acquisitions |
1,384,782 | 28 | 34,882 | |||||||||||||||||||||
Employee loans for stock |
(24,311 | ) | (47 | ) | 47 | |||||||||||||||||||
Other |
(1 | ) | ||||||||||||||||||||||
Balance at December 31, 2005 |
35,776,431 | 717 | 312,025 | (196 | ) | | (124 | ) | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
||||||||||||||||||||||||
Translation adjustment |
||||||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||
Stock issued under employee stock plans |
1,539,014 | 31 | 14,630 | (46 | ) | |||||||||||||||||||
Share-based compensation |
7,366 | |||||||||||||||||||||||
Shares issued for acquisitions |
109,542 | 2 | 4,123 | |||||||||||||||||||||
Other |
15,040 | (1 | ) | 72 | ||||||||||||||||||||
Balance at December 31, 2006 |
37,440,027 | 749 | 338,216 | (196 | ) | | (170 | ) | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
||||||||||||||||||||||||
Translation adjustment |
||||||||||||||||||||||||
Unrealized loss on interest rate swaps |
||||||||||||||||||||||||
Unrealized gain on available for sale securities |
||||||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||
Stock issued under employee stock plans |
809,313 | 19 | 8,177 | (191 | ) | 170 | ||||||||||||||||||
Share-based compensation |
7,799 | 8 | ||||||||||||||||||||||
Shares issued for acquisitions |
4,329,035 | 87 | 149,594 | |||||||||||||||||||||
Private placement of shares |
6,374,528 | 128 | 154,192 | |||||||||||||||||||||
Other |
69 | |||||||||||||||||||||||
Balance at December 31, 2007 |
48,952,903 | $ | 983 | $ | 658,047 | $ | (379 | ) | $ | | $ | | ||||||||||||
See accompanying notes to the consolidated financial statements.
65
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity (continued)
(in thousands)
Consolidated Statements of Changes in Stockholders Equity (continued)
(in thousands)
Accumulated Other | ||||||||||||||||||||
Comprehensive Income (Loss) | ||||||||||||||||||||
Cumulative | Other | |||||||||||||||||||
Accumulated | Restricted | Translation | Comprehensive | |||||||||||||||||
Deficit | Reserve | Adjustment | Income | Total (1) | ||||||||||||||||
Balance at December 31, 2004 |
$ | (127,474 | ) | $ | 774 | $ | 27,451 | | 164,295 | |||||||||||
Comprehensive income: |
||||||||||||||||||||
Net income |
22,063 | 22,063 | ||||||||||||||||||
Translation adjustment |
(25,690 | ) | (25,690 | ) | ||||||||||||||||
Recognition of cumulative translation
adjustment from liquidation of
France subsidiary |
691 | 691 | ||||||||||||||||||
Comprehensive income |
(2,936 | ) | ||||||||||||||||||
Stock issued under employee stock plans |
8,387 | |||||||||||||||||||
Share-based compensation |
5,582 | |||||||||||||||||||
Shares issued for acquisitions |
34,910 | |||||||||||||||||||
Employee loans for stock |
| |||||||||||||||||||
Other |
2 | 1 | ||||||||||||||||||
Balance at December 31, 2005 |
(105,411 | ) | 776 | 2,452 | | 210,239 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||
Net income |
46,002 | 46,002 | ||||||||||||||||||
Translation adjustment |
26,371 | 26,371 | ||||||||||||||||||
Comprehensive income |
72,373 | |||||||||||||||||||
Stock issued under employee stock plans |
14,615 | |||||||||||||||||||
Share-based compensation |
7,366 | |||||||||||||||||||
Shares issued for acquisitions |
4,125 | |||||||||||||||||||
Other |
4 | 75 | ||||||||||||||||||
Balance at December 31, 2006 |
(59,409 | ) | 780 | 28,823 | | 308,793 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||
Net income |
53,504 | 53,504 | ||||||||||||||||||
Translation adjustment |
41,798 | 41,798 | ||||||||||||||||||
Unrealized loss on interest rate swaps |
(994 | ) | (994 | ) | ||||||||||||||||
Unrealized gain on available for sale securities |
572 | 572 | ||||||||||||||||||
Comprehensive income |
94,880 | |||||||||||||||||||
Stock issued under employee stock plans |
8,175 | |||||||||||||||||||
Share-based compensation |
7,807 | |||||||||||||||||||
Shares issued for acquisitions |
149,681 | |||||||||||||||||||
Private placement of shares |
154,320 | |||||||||||||||||||
Other |
177 | 246 | ||||||||||||||||||
Balance at December 31, 2007 |
$ | (5,905 | ) | $ | 957 | $ | 70,621 | $ | (422 | ) | $ | 723,902 | ||||||||
See accompanying notes to the consolidated financial statements.
66
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Net income |
$ | 53,504 | $ | 46,002 | $ | 22,063 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
48,331 | 29,494 | 22,800 | |||||||||
Share-based compensation |
7,736 | 7,423 | 5,582 | |||||||||
Unrealized foreign exchange (gain) loss, net |
(9,296 | ) | (10,102 | ) | 5,745 | |||||||
Loss (gain) from discontinued operations |
(344 | ) | | 635 | ||||||||
Deferred income tax expense (benefit) |
(2,003 | ) | (188 | ) | 2,248 | |||||||
Income assigned to minority interest |
2,040 | 977 | 916 | |||||||||
Income from unconsolidated affiliates |
(908 | ) | (660 | ) | (1,185 | ) | ||||||
Amortization of debt obligations issuance expense |
2,354 | 2,031 | 1,568 | |||||||||
Changes in working capital, net of amounts acquired: |
||||||||||||
Income taxes payable, net |
(5,595 | ) | (1,392 | ) | (290 | ) | ||||||
Restricted cash |
(17,807 | ) | 2,865 | (12,358 | ) | |||||||
Inventory PINs and other |
3,619 | (21,395 | ) | (7,550 | ) | |||||||
Trade accounts receivable |
(12,511 | ) | (28,999 | ) | (53,938 | ) | ||||||
Prepaid expenses and other current assets |
(20,210 | ) | 8,403 | (16,340 | ) | |||||||
Trade accounts payable |
7,542 | 45,299 | 67,001 | |||||||||
Deferred revenue |
4,853 | 3,109 | (3,662 | ) | ||||||||
Accrued expenses and other current liabilities |
14,630 | 14,253 | 19,352 | |||||||||
Other, net |
2,401 | (1,193 | ) | (292 | ) | |||||||
Net cash provided by operating activities |
78,336 | 95,927 | 52,295 | |||||||||
Cash flows from investing activities: |
||||||||||||
Acquisitions, net of cash acquired |
(352,684 | ) | (2,069 | ) | (120,689 | ) | ||||||
Acquisition escrow |
(26,000 | ) | | | ||||||||
Purchases of
available for sale securities |
(19,990 | ) | | | ||||||||
Purchases of property and equipment |
(38,083 | ) | (20,454 | ) | (18,245 | ) | ||||||
Purchases of other long-term assets |
(4,224 | ) | (4,665 | ) | (1,284 | ) | ||||||
Other, net |
1,044 | 1,063 | 708 | |||||||||
Net cash used in investing activities |
(439,937 | ) | (26,125 | ) | (139,510 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of shares |
167,727 | 14,680 | 8,377 | |||||||||
Net borrowings (repayments) of short-term debt obligations and revolving
credit agreements classified as current liabilities |
(4,862 | ) | (12,443 | ) | 12,766 | |||||||
Borrowings from revolving credit agreements classified as non-current liabilities |
880,013 | 41,804 | | |||||||||
Repayments of revolving credit agreements classified as non-current liabilities |
(888,950 | ) | (12,761 | ) | | |||||||
Proceeds from long-term debt obligations |
190,000 | | 175,000 | |||||||||
Repayments of long-term debt obligations |
(26,000 | ) | | | ||||||||
Repayments of capital lease obligations |
(10,414 | ) | (6,375 | ) | (5,299 | ) | ||||||
Cash dividends paid to minority interest stockholders |
(2,798 | ) | | | ||||||||
Debt issuance costs |
(3,827 | ) | | (5,136 | ) | |||||||
Other, net |
648 | (183 | ) | 506 | ||||||||
Net cash provided by financing activities |
301,537 | 24,722 | 186,214 | |||||||||
Effect of exchange differences on cash |
6,597 | 6,602 | (3,265 | ) | ||||||||
Increase in cash and cash equivalents |
(53,467 | ) | 101,126 | 95,734 | ||||||||
Cash and cash equivalents at beginning of period |
321,058 | 219,932 | 124,198 | |||||||||
Cash and cash equivalents at end of period |
$ | 267,591 | $ | 321,058 | $ | 219,932 | ||||||
Interest paid during the period |
$ | 24,110 | $ | 12,851 | $ | 5,327 | ||||||
Income taxes paid during the period |
24,698 | 18,147 | 14,143 |
See accompanying notes to the consolidated financial statements.
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006, AND
2005
(1) ORGANIZATION
Euronet Worldwide, Inc. was established as a Delaware corporation on December 13, 1997. Euronet
Worldwide, Inc. succeeded Euronet Holding N.V. as the group holding company, which was founded and
established in 1994.
Euronet Worldwide, Inc. and its subsidiaries (the Company or Euronet) is an industry leader in
processing secure electronic financial transactions. Euronets Prepaid Processing Segment is one of
the worlds largest providers of top-up services for prepaid products, primarily prepaid mobile
airtime. The EFT Processing Segment provides end-to-end solutions relating to operations of
automated teller machine (ATM) and Point of Sale (POS) networks, and debit and credit card
processing in Europe, the Middle East and Asia. The Money Transfer Segment, comprised primarily of
the Companys RIA Envia, Inc. (RIA) subsidiary and its operating subsidiaries, is the
third-largest global money transfer company, based upon revenues and volumes, and provides services
through a sending network of agents and Company-owned stores in North America, the Caribbean,
Europe and Asia-Pacific, disbursing money transfers through a worldwide payer network.
(2) BASIS OF PREPARATION
The Consolidated Financial Statements have been prepared in conformity with accounting principles
generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). The Consolidated Financial Statements include the
accounts of Euronet and its wholly owned and majority owned subsidiaries and all significant
intercompany balances and transactions have been eliminated. The Companys investments in companies
that it does not control, but has the ability to exercise significant influence, are accounted for
under the equity method. Euronet is not involved with any variable interest entities, as defined by
the Financial Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation of
Variable Interest Entities. Results from operations related to entities acquired during the
periods covered by the Consolidated Financial Statements are reflected from the effective date of
acquisition. Certain amounts in prior years have been reclassified to conform to the current years
presentation.
The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires that
management make a number of estimates and assumptions relating to the reported amount of assets and
liabilities, the disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Significant items subject to such estimates and assumptions include
computing income taxes, estimating the useful lives and potential impairment of long-lived assets
and goodwill, as well as allocating the purchase price to assets acquired in acquisitions and
revenue recognition. Actual results could differ from those estimates.
Goodwill and acquired intangible translation adjustment
During the third quarter 2007 the Company corrected an immaterial error related to foreign currency
translation adjustments for goodwill and acquired intangible assets recorded in connection with
acquisitions completed during periods prior to December 31, 2004. The impact of this adjustment on
the Companys Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders
Equity is summarized in the table below:
As Previously | ||||||||||||
(in thousands) | Reported | Adjustment | As Adjusted | |||||||||
As of December 31, 2006: |
||||||||||||
Goodwill |
$ | 278,743 | $ | 18,391 | $ | 297,134 | ||||||
Acquired intangible assets, net |
$ | 47,539 | $ | 3,110 | $ | 50,649 | ||||||
Total assets |
$ | 1,108,139 | $ | 21,501 | $ | 1,129,640 | ||||||
Deferred income taxes, non-current |
$ | 43,071 | $ | 1,023 | $ | 44,094 | ||||||
Accumulated deficit |
$ | (58,480 | ) | $ | (929 | ) | $ | (59,409 | ) | |||
Accumulated other comprehensive income |
$ | 7,416 | $ | 21,407 | $ | 28,823 | ||||||
Total liabilities and stockholders equity |
$ | 1,108,139 | $ | 21,501 | $ | 1,129,640 | ||||||
As of December 31, 2005: |
||||||||||||
Accumulated deficit |
$ | (104,787 | ) | $ | (624 | ) | $ | (105,411 | ) | |||
Accumulated other comprehensive income |
$ | (2,058 | ) | $ | 4,510 | $ | 2,452 | |||||
As of December 31, 2004: |
||||||||||||
Accumulated deficit |
$ | (127,142 | ) | $ | (332 | ) | $ | (127,474 | ) | |||
Accumulated other comprehensive income |
$ | 4,738 | $ | 22,713 | $ | 27,451 |
68
The impact of this correction on the Companys statements of income was to increase depreciation
and amortization expense by $0.4 million, decrease operating income by $0.4 million and reduce net
income, net of related income tax expense, by $0.3 million for each of the years ended December 31,
2006 and 2005. The correction decreased diluted earnings per share by $0.01 for each of the years
ended December 31, 2006 and 2005. Due primarily to the impact of the correction on the Companys
foreign currency translation adjustment, total comprehensive income increased by $16.6 million for
the year ended December 31, 2006 and decreased by $18.5 million for the year ended December 31,
2005. This correction did not impact the Companys cash flows from operating, financing or
investing activities.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Foreign currencies
Assets and liabilities denominated in currencies other than the functional currency of a subsidiary
are remeasured at rates of exchange on the balance sheet date. Resulting gains and losses on
foreign currency transactions are included in the Consolidated Statements of Income.
The financial statements of foreign subsidiaries where the functional currency is not the U.S.
dollar are translated to U.S. dollars using (i) exchange rates in effect at period end for assets
and liabilities, and (ii) weighted average exchange rates during the period for revenues and
expenses. Adjustments resulting from translation of such financial statements are reflected in
accumulated other comprehensive income (loss) as a separate component of consolidated stockholders
equity.
Cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Inventory PINs and other
Inventory PINs and other is valued at the lower of cost or fair market value and represents
primarily prepaid personal identification number (PIN) inventory for prepaid mobile airtime
related to the Prepaid Processing Segment. PIN inventory is generally managed on a specific
identification basis that approximates first in, first out for the respective denomination of
prepaid mobile airtime sold. Additionally, from time to time, Inventory PINs and other may
include POS terminals, mobile phone handsets and ATMs held by the Company for resale.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation. Property and equipment
acquired in acquisitions have been recorded at estimated fair values as of the acquisition date.
Depreciation is calculated using the straight-line method over the estimated useful lives of the
respective assets. Depreciation and amortization rates are generally as follows:
Automated teller machines (ATMs) or ATM upgrades
|
5 7 years | |
Computers and software
|
3 5 years | |
POS terminals
|
2 5 years | |
Vehicles and office equipment
|
5 years | |
ATM cassettes
|
1 year | |
Leasehold improvements
|
Over the lesser of the lease term or estimated useful life |
Goodwill and other intangible assets
The Company accounts for goodwill and other intangible assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No.
142 requires that the Company test for impairment on an annual basis and whenever events or
circumstances dictate. Impairment tests are performed annually during the fourth quarter and are
performed at the reporting unit level. Generally, fair value represents discounted projected future
cash flows, and potential impairment is indicated when the carrying value of a reporting unit,
including goodwill, exceeds its estimated fair value. If potential for impairment exists, the fair
value of the reporting unit is subsequently measured against the fair value of its underlying
assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting
units goodwill. An impairment loss is recognized for any excess of the carrying value of the
reporting units goodwill over the implied fair value. The Companys annual impairment tests for
the years ended December 31, 2007, 2006 and 2005 indicated that there were no impairments.
Determining the fair value of reporting units requires significant management judgment in
estimating future cash flows and assessing potential market and economic conditions. It is
reasonably possible that the Companys operations will not perform as expected, or that estimates
or
69
assumptions could change, which may result in the Company recording material non-cash impairment
charges during the year in which these changes take place.
Other Intangibles In accordance with SFAS No. 142, intangible assets with finite lives
are amortized over their estimated useful lives. Unless otherwise noted, amortization is calculated
using the straight-line method over the estimated useful lives of the assets as follows:
Non-compete agreements
|
2 5 years | |
Trademarks and trade names
|
2 20 years | |
Developed software technology
|
5 years | |
Customer relationships
|
3 9 years | |
Patents
|
7 years |
See Note 9, Goodwill and Acquired Intangible Assets, Net, for additional information regarding SFAS
No. 142 and the treatment of goodwill and other intangible assets.
Other assets
Other assets include deferred financing costs, costs related to in process acquisitions,
investments in unconsolidated affiliates, capitalized software development costs and capitalized
payments for new or renewed contracts, contract renewals and customer conversion costs. Deferred
financing costs represent expenses incurred to obtain financing that have been deferred and
amortized over the life of the loan. Euronet capitalizes initial payments for new or renewed
contracts to the extent recoverable through future operations, contractual minimums and/or
penalties in the case of early termination. The Companys accounting policy is to limit the amount
of capitalized costs for a given contract to the lesser of the estimated ongoing future cash flows
from the contract or the termination fees the Company would receive in the event of early
termination of the contract by the customer.
The Company accounts for investments in affiliates using the equity method of accounting when the
Company has the ability to exercise significant influence over the affiliate. Equity losses in
affiliates are generally recognized until the Companys investment is zero. Euronets investment in
affiliates, primarily related to the Companys 40% investment in
e-pay Malaysia, as of December 31,
2007 and 2006 was $2.1 million and $3.3 million, respectively. Undistributed earnings in these
affiliates as of December 31, 2007 and 2006 were $2.0 million and $3.3 million, respectively.
During 2007, the Company recognized $0.7 million of equity
losses related to e-pay Malaysias business in Indonesia. Based
on the performance of e-pay Malaysias core business and expected future performance, management of
the Company does not believe that the amount recorded as investment in e-pay Malaysia is impaired.
The
Company has an investment in common stock of MoneyGram International,
Inc. (MoneyGram)[NYSE: MGI] that
is classified as available-for-sale and recorded in other assets on the Companys Consolidated
Balance Sheets. Available-for-sale securities are reported at fair value with unrealized gains and
losses excluded from earnings and recorded net of deferred taxes directly to stockholders equity
as a component of accumulated other comprehensive income. As of December 31, 2007, the value of the
investment is $20.6 million, which includes an increase in fair value of $0.6 million recorded in
accumulated other comprehensive income. There were no available-for-sale investment securities held
by the Company during 2006 or 2005. See further discussion in Note 26, Subsequent Events.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
Accounting for uncertainty in income taxes Effective January 1, 2007, the Company adopted
the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), an interpretation of SFAS No. 109, Accounting for Income Taxes. The Companys policy is to
record estimated interest and penalties related to the underpayment of income taxes as income tax
expense in the Consolidated Statements of Income. See Note 15, Income Taxes, for further discussion
regarding the adoption of FIN 48.
70
Presentation of taxes collected and remitted to governmental authorities
During 2006, the Emerging Issues Task Force (EITF) issued EITF 06-3, How Taxes Collected and
Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross
versus Net Presentation). The Company presents taxes collected and remitted to governmental
authorities on a net basis in the accompanying Consolidated Statements of Income.
Accounting for derivative instruments and hedging activities
The Company accounts for derivative instruments and hedging activities in accordance with SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended, which requires
that all derivative instruments be recognized as either assets or liabilities on the balance sheet
at fair value. During 2007, the Company entered into derivative instruments to manage exposure to
interest rate risk that are considered cash flow hedges under the provisions of SFAS No. 133. To
qualify for hedge accounting under SFAS No. 133, the details for the hedging relationship must be
formally documented at the inception of the arrangement, including the Companys hedging strategy,
risk management objective, the specific risk being hedged, the derivative instrument being used,
the item being hedged, an assessment of hedge effectiveness and how effectiveness will continue to
be assessed and measured. For the effective portion of a cash flow hedge, changes in the value of
the hedge instrument are recorded temporarily in stockholders equity as a component of other
comprehensive income and then recognized as an adjustment to interest expense over the term of the
hedging instrument.
In the Money Transfer Segment, the Company enters into foreign currency derivative contracts,
primarily forward contracts, to offset foreign currency exposure related to the notional value of
money transfer settlement assets and liabilities in currencies other than the U.S. dollar. These
contracts are considered derivative instruments under the provisions of SFAS No. 133, however, the
Company does not designate such instruments as hedges for accounting purposes. Accordingly, changes
in the value of these contracts are recognized immediately as a component of foreign currency
exchange gain (loss), net in the Consolidated Statement of Income. The impact of changes in value
of these contracts, together with the impact of the change in value of the related foreign currency
denominated settlement asset or liability, on the Companys Consolidated Statement of Income and
Consolidated Balance Sheets is not significant.
Cash flows resulting from derivative instruments are classified as cash flows from operating
activities in the Companys Consolidated Statements of Cash Flows. The Company enters into
derivative instruments with highly credit-worthy financial institutions and does not use derivative
instruments for trading or speculative purposes. See Note 12, Derivative Instruments and Hedging
Activities, for further discussion of derivative instruments.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price is fixed or determinable and collection is
reasonably assured. The majority of the Companys revenues are comprised of monthly recurring
management fees and transaction-based fees. A description of the major components of revenue, by
business segment is as follows:
EFT Processing Revenue in the EFT Processing Segment is derived from primarily two
sources: i) transaction and management fees from owned and outsourced ATM, POS and card processing
networks; and ii) from the sale of EFT software solutions for electronic payment and transaction
delivery systems.
Transaction-based fees include charges for cash withdrawals, balance inquiries, transactions not
completed because the relevant card issuer does not give authorization or prepaid mobile airtime
recharges. Outsourcing services are generally billed on the basis of a fixed monthly fee per ATM,
plus a transaction-based fee. Transaction-based fees are recognized at the time the transactions
are processed and outsourcing management fees are recognized ratably over the contract period.
Certain of the Companys non-cancelable customer contracts provide for the receipt of up-front fees
from the customer and/or decreasing or increasing fee schedules over the agreement term for
substantially the same level of services to be provided by the Company. As prescribed in SEC Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, as amended by SAB
104, Revenue Recognition, the Company recognizes revenue under these contracts based on
proportional performance of services over the term of the contract. This generally results in
straight-line (i.e., consistent value per period) revenue recognition of the contracts total
cash flows, including any up-front payment received from the customer.
Revenue from the sale of EFT software solutions represent software license fees, professional
service fees for installation and customization, ongoing software maintenance fees and revenue from
the sale of hardware associated with the system.
The Company recognizes professional service fee revenue in accordance with the provisions of
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4, SOP
98-9 and clarified by SAB 101, SAB 104, Revenue Recognition, and EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. SOP 97-2, as amended, generally
71
requires revenue earned on software arrangements involving multiple-elements to be allocated to
each element based on the relative
fair values of those elements. Revenue from multiple-element software arrangements is recognized
using the residual method. Under the residual method, revenue is recognized in a multiple-element
arrangement when vendor-specific objective evidence of fair value exists for all of the undelivered
elements in the arrangement, but does not exist for one or more of the delivered elements in the
arrangement. The Company allocates revenue to each element in a multiple-element arrangement based
on the elements respective fair value, with the fair value determined by the price charged when
that element is sold separately.
Revenues from software licensing agreement contracts are recognized over the professional services
portion of the contract term using the percentage of completion method, following the guidance in
SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts,
as prescribed by SOP 97-2. This method is based on the percentage of professional service fees that
are provided compared with the total estimated professional services to be provided over the entire
term of the contract. The effect of changes to total estimated contract costs is recognized in the
period such changes are determined and provisions for estimated losses are made in the period in
which the loss first becomes probable and estimable. Revenues from software licensing agreement
contracts representing newly released products deemed to have a higher than normal risk of failure
during installation are recognized on a completed contract basis whereby revenues and related costs
are deferred until the contract is complete. Software maintenance revenue is recognized over the
contractual period or as the maintenance-related service is performed. Revenue from the sale of
hardware is generally recognized when title passes to the customer. Revenue in excess of billings
on software licensing agreements was $1.5 million and $2.1 million as of December 31, 2007 and
2006, respectively, and is recorded in prepaid expenses and other current assets. Billings in
excess of revenue on software license agreements was $2.5 million and $5.0 million as of December
31, 2007 and 2006, respectively and is recorded as deferred revenue until such time the above
revenue recognition criteria are met.
Prepaid Processing Substantially all of the revenue generated in the Prepaid Processing
Segment is derived from commissions or processing fees associated with distribution and/or
processing of prepaid mobile airtime and other telecommunication products. These fees and
commissions are received from mobile and other telecommunication operators, top-up distributors or
retailers. In accordance with Emerging Issues Task Force (EITF) 99-19, Reporting Revenue Gross
as Principal versus Net as an Agent, commissions received from mobile and other telecommunication
operators are recognized as revenue during the period in which the Company provides the service.
The portion of the commission that is paid to retailers is recorded as a direct operating cost.
Transactions are processed through a network of POS terminals and direct connections to the
electronic payment systems of retailers. Transaction processing fees are recognized at the time the
transactions are processed.
Money Transfer In accordance with EITF 99-19, revenue for money transfer services
represents a transaction fee in addition to the difference between purchasing currency at wholesale
exchange rates and selling the currency to consumers at retail exchange rates. Revenue and the
associated direct operating cost is recognized at the time the transaction is processed. The
Company has origination and distribution agents in place, which each earn a fee for the respective
service. These fees are reflected as direct operating costs.
Software capitalization
Computer software to be sold The Company applies SFAS No. 2, Accounting for Research and
Development Costs, and SFAS No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, in recording research and development costs. Research costs related
to the discovery of new knowledge with the hope that such knowledge will be useful in developing a
new product or service, or a new process or technique, or in bringing about significant improvement
to an existing product or process, are expensed as incurred (see Note 20, Computer Software to be
Sold). Development costs aimed at the translation of research findings or other knowledge into a
plan or design for a new product or process, or for a significant improvement to an existing
product or process, whether intended for sale or use, are capitalized on a product-by-product basis
when technological feasibility is established. Capitalization of computer software costs is
discontinued when the computer software product is available to be sold, leased, or otherwise
marketed.
Technological feasibility of computer software products is established when the Company has
completed all planning, designing, coding, and testing activities that are necessary to establish
that the product can be produced to meet its design specifications including functions, features,
and technical performance requirements. Technological feasibility is evidenced by the existence of
a working model of the product or by completion of a detail program design. The detail program
design (i) establishes that the necessary skills, hardware, and software technology are available
to produce the product, (ii) is complete and consistent with the product design, and (iii) has been
reviewed for high-risk development issues, with any uncertainties related to identified high-risk
development issues being adequately resolved.
Capitalized software costs are included in other assets and are amortized on a product-by-product
basis, equal to the greater of the amount computed using (i) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross revenues for that product
or (ii) the straight-line method over the remaining estimated economic life of the product,
generally three years, including the period being reported on. Amortization commences when the
product is available for general release to customers.
72
Computer software for internal use The Company also develops software for internal use. These
software development costs are capitalized based upon AICPA Statement of Position No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.
Internal-use software development costs are capitalized after the preliminary project stage is
completed and management with the relevant authority authorizes and commits to funding a computer software
project and it is probable that the project will be completed and the software will be used to
perform the function intended. Costs incurred prior to meeting the qualifications are expensed as
incurred. Capitalization ceases when the computer software project is substantially complete and
ready for its intended use. Internal-use software development costs are amortized using an
estimated useful life of five years.
Share-based compensation
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R, Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. For equity classified awards, SFAS No. 123R requires the determination of the fair
value of the share-based compensation at the grant date and subsequent recognition of the related
expense over the period in which the share-based compensation is earned (requisite service
period). The portion of share-based compensation to be settled in cash is accounted for as a
liability classified award. The fair value of these awards is remeasured at each reporting period
and the related compensation expense is adjusted. The Company elected to adopt SFAS No. 123R
utilizing the modified retrospective application method and, accordingly, financial statement
amounts for the prior periods presented herein have been adjusted to reflect the fair value method
of expensing prescribed by SFAS No. 123R. The Company believes that this method achieves the
highest level of clarity and comparability among the presented periods.
The amount of future compensation expense related to awards of nonvested shares or nonvested share
units (restricted stock) is based on the market price for Euronet Common Stock at the grant date.
The grant date is the date at which all key terms and conditions of the grant have been determined
and the Company becomes contingently obligated to transfer assets to the employee who renders the
requisite service, generally the date at which grants are approved by the Companys Board of
Directors or Compensation Committee thereof. Share-based compensation expense for awards with only
service conditions is generally recognized as expense on a straight-line basis over the requisite
service period. For awards that vest based on achieving annual performance conditions, expense is
recognized on a graded attribution method. The graded attribution method results in expense
recognition on a straight-line basis over the requisite service period for each separately vesting
portion of an award, as if the award was, in-substance, multiple awards. The Company has elected to
use the with and without method when calculating the income tax benefit associated with its
share-based payment arrangements. See Note 17, Stock Plans, for further disclosure.
Recent accounting pronouncements
During 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The Statement applies whenever other accounting pronouncements require or permit fair
value measurements. Accordingly, this Statement does not require any new fair value measurements.
SFAS No. 157 is effective for Euronet beginning in the first quarter 2008. The Companys adoption
of SFAS No. 157 is not expected to have a material impact on the financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS No. 159 expands the
use of fair value accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS No. 159, a company may elect to use fair value
to measure accounts and loans receivable, available-for-sale and held-to-maturity securities,
equity method investments, accounts payable, guarantees and issued debt. Other eligible items
include firm commitments for financial instruments that otherwise would not be recognized at
inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to
provide the warranty goods or services. If the use of fair value is elected, any upfront costs and
fees related to the item must be recognized in earnings and cannot be deferred, such as deferred
financing costs. The fair value election is irrevocable and generally made on an
instrument-by-instrument basis, even if a company has similar instruments that it elects not to
measure based on fair value. At the adoption date, unrealized gains and losses on existing items
for which fair value has been elected are reported as a cumulative adjustment to beginning retained
earnings. Subsequent to the adoption of SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for Euronet beginning in the first quarter 2008. The Companys
adoption of SFAS No. 159 is not expected to have a material impact on the Consolidated Financial
Statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which is a revision of
SFAS No. 141, Business Combinations. SFAS No. 141R will apply to all business combinations and
will require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired
in a business combination to be recorded at full fair value At the acquisition date. SFAS No 141R
will also require transaction-related costs to be expensed in the period incurred, rather than
capitalizing these costs as a component of the respective purchase price. SFAS No. 141R is
effective for Euronet for acquisitions completed after January 1,
73
2009 and early adoption is
prohibited. The adoption will have a significant impact on the accounting treatment for
acquisitions occurring after the effective date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, that replaces Accounting Research Bulletin (ARB) 51, Consolidated Financial
Statements. SFAS No. 160 will require noncontrolling interests (previously referred to as minority
interests) to be reported as a component of equity, which will
change the accounting for transactions with noncontrolling interest holders. SFAS No. 160 is
effective for Euronet on January 1, 2009 and will result in a change in the classification of the
Companys noncontrolling interest from a component of liabilities to a component of equity in
Consolidated Balance Sheets and will change the accounting for transactions with noncontrolling
shareholders after the effective date. The adoption of SFAS No. 160 is not expected to have a
material impact on the Companys Consolidated Financial Statements.
In December 2007, the Securities and Exchange Commission issued SAB 110, Certain Assumptions Used
in Valuation Methods, which extends the use of the simplified method, under certain
circumstances, in developing an estimate of expected term of plain vanilla share options in
accordance with SFAS No. 123R. Prior to SAB 110, SAB 107 stated that the simplified method was only
available for grants made up to December 31, 2007. Because the Company has primarily utilized
restricted stock since the beginning of 2005, the expected term has been an insignificant component
of the amount of recorded share-based compensation. However, for future grants of stock options, if
any, should the historical experience regarding the expected term of granted stock options be
considered insufficient for estimating future expected terms, the Company may continue to use the
simplified method for determining the expected term in situations allowed by SAB 110. Management
of the Company is still analyzing the potential impact of the adoption of SAB 110; however, the
impact on the Consolidated Financial Statements is not expected to be material.
(4) EARNINGS PER SHARE
Basic earnings per share has been computed by dividing earnings available to common stockholders by
the weighted average number of common shares outstanding during the respective period. Diluted
earnings per share has been computed by dividing earnings available to common stockholders by the
weighted-average shares outstanding during the respective period, after adjusting for the potential
dilution of the assumed conversion of the Companys convertible debentures, shares issuable in
connection with acquisition obligations, options to purchase the Companys common stock and
restricted stock. The following table provides a reconciliation of net income to earnings available
to common stockholders and the computation of diluted weighted average number of common shares
outstanding:
As of December 31, | ||||||||||||
(dollar amounts in thousands) | 2007 | 2006 | 2005 | |||||||||
Reconciliation of net income to earnings available to common
stockholders: |
||||||||||||
Net income |
$ | 53,504 | $ | 46,002 | $ | 22,063 | ||||||
Add: interest expense of 1.625% convertible debentures |
3,175 | 3,189 | | |||||||||
Earnings available to common stockholders |
$ | 56,679 | $ | 49,191 | $ | 22,063 | ||||||
Computation of diluted weighted average shares outstanding: |
||||||||||||
Basic weighted average shares outstanding |
45,260,803 | 37,037,435 | 35,020,499 | |||||||||
Additional shares from assumed conversion of 1.625%
convertible debentures |
4,163,488 | 4,163,488 | | |||||||||
Weighted average shares issuable in connection with
acquisition obligations (See Note 5 - Acquisitions) |
478,149 | 36,514 | | |||||||||
Incremental shares from assumed conversion of stock options
and restricted stock |
1,111,646 | 1,218,700 | 1,810,821 | |||||||||
Potentially diluted weighted average shares outstanding |
51,014,086 | 42,456,137 | 36,831,320 | |||||||||
The table includes all stock options and restricted stock that are dilutive to Euronets weighted
average common shares outstanding during the period. For the years ended December 31, 2007, 2006
and 2005, the table does not include approximately 458,000, 240,000 and 762,000 options or shares
of restricted stock, respectively, that are anti-dilutive to the Companys weighted average common
shares outstanding.
The Company has $140 million of 1.625% convertible senior debentures due 2024 and $175 million of
3.5% convertible debentures due 2025 (see Note 11, Debt Obligations) outstanding that, if
converted, would have a potentially dilutive effect on the Companys stock. These debentures are
convertible into 4.2 million shares of Common Stock for the $140 million 1.625% issue, and 4.3
million
74
shares of Common Stock for the $175 million 3.5% issue, initially in December 2009 and
October 2012, respectively, or earlier upon the occurrence of certain conditions. As required by
EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share,
if dilutive, the impact of the contingently issuable shares must be included in the calculation of
diluted net income per share under the if-converted method, regardless of whether the conditions
upon which the debentures would be convertible into shares of the Companys Common Stock have been
met. Under the if-converted method, the assumed conversion of the 1.625% convertible debentures was
dilutive for the years ended December 31, 2007 and 2006 and, accordingly, the impact has
been included in the above computation of potentially diluted weighted average shares outstanding
for 2007 and 2006. The assumed conversion of the 1.625% convertible debentures was anti-dilutive
for the year ended December 31, 2005 and, accordingly, the impact has been excluded from the above
computations for 2005. Under the if-converted method, the assumed conversion of the 3.5%
convertible debentures was anti-dilutive for the years ended December 31, 2007, 2006 and 2005.
Accordingly, the impact has been excluded from the above computation of potentially dilutive
weighted average shares outstanding.
(5) ACQUISITIONS
In accordance with SFAS No. 141, Business Combinations, the Company allocates the purchase price
of its acquisitions to the tangible assets, liabilities and intangible assets acquired based on
estimated fair values. Any excess purchase price over those fair values is recorded as goodwill.
The fair value assigned to intangible assets acquired is supported by valuations using estimates
and assumptions provided by management. Generally, for certain large acquisitions management
engages an appraiser to assist in the valuation process.
2007 Acquisitions:
Acquisition of RIA
On April 4, 2007, the Company completed the acquisition of the common stock of RIA, which expanded
the Companys money transfer operations in the U.S. and internationally. The purchase price of
$505.5 million was comprised of $358.3 million in cash, 4,053,606 shares of Euronet Common Stock
valued at $110.0 million, 3,685,098 contingent value rights (CVRs) and stock appreciation rights
(SARs) valued at a total of $32.1 million and transaction costs of approximately $5.1 million.
The Company financed the cash portion of the purchase price through a combination of cash on hand
and $190 million in additional debt obligations. The following table summarizes the allocation of
the purchase price to the fair values of the acquired tangible and intangible assets at the
acquisition date, which remains preliminary while management completes its valuation of the fair
value of the net assets acquired.
Estimated | ||||||
(dollar amounts in thousands) | Life | |||||
Current assets |
$ | 78,220 | ||||
Property and equipment |
various | 10,854 | ||||
Customer relationships |
3 - 8 years | 73,280 | ||||
Weighted average life |
7.0 years | |||||
Trademarks and trade names |
20 years | 36,760 | ||||
Software |
5 years | 1,610 | ||||
Non-compete agreements |
3 years | 270 | ||||
Other non-current assets |
1,396 | |||||
Goodwill |
Indefinite | 404,599 | ||||
Assets acquired |
606,989 | |||||
Current liabilities |
(85,062 | ) | ||||
Non-current liabilities |
(1,574 | ) | ||||
Deferred income tax liability |
(14,852 | ) | ||||
Net assets acquired |
$ | 505,501 | ||||
Pursuant to the terms of the Stock Purchase Agreement, $35.0 million in cash and 276,382 shares of
Euronet Common Stock valued at $7.5 million are being held in escrow to secure certain obligations
of the sellers under the Stock Purchase Agreement. These amounts have been reflected in the
purchase price because the Company has determined beyond a reasonable doubt that the obligations
will be met. The 3,685,098 CVRs mature on October 1, 2008 and will result in the issuance of up to
$20 million of additional shares of Euronet Common Stock or payment of additional cash, at the
Companys option, if the price of Euronet Common Stock is less than $32.56 on the maturity date.
The 3,685,098 SARs entitle the sellers to acquire additional shares of Euronet Common Stock at an
exercise price of $27.14 at any time through October 1, 2008. The combination of the CVRs and SARs
entitle the sellers to additional consideration of at least $20 million in Euronet Common Stock or
cash. Management has initially estimated the total fair value of the
75
CVRs and SARs at approximately
$32.1 million using a Black Scholes pricing model. These and other terms and conditions applicable
to the CVRs and SARs are set forth in the agreements governing these instruments. Of the amount
allocated to goodwill, approximately $225.5 million is deductible for income tax purposes.
Additionally, in April 2007, the Company combined its previous money transfer business with RIA and
incurred total exit costs of approximately $0.9 million during 2007. These costs were recorded as
operating expenses and represent the accelerated depreciation and amortization of property and
equipment, software and leasehold improvements that were disposed of during 2007; the write off of
marketing materials and trademarks that have been discontinued or will not be used; the write off
of accounts receivable from agents that did not meet RIAs credit requirements; and severance and
retention payments made to certain employees. Additional costs incurred in association with exiting
the Companys previous money transfer business, if any, are not expected to be significant.
Other acquisitions:
During 2007, the Company completed three other acquisitions described below for an aggregate
purchase price of $26.5 million, comprised of $18.1 million in cash, 275,429 shares of Euronet
Common Stock valued at $7.6 million and notes payable of $0.8 million. In connection with one of
these acquisitions, the Company agreed to certain contingent consideration arrangements based on
the value of Euronet Common Stock and the achievement of certain performance criteria. Upon the
achievement of certain performance criteria, during 2009 and 2010, the Company may have to pay a
total of $2.5 million in cash or 75,489 shares of Euronet Common Stock, at the option of the
seller.
| During January 2007, EFT Services Holding BV and Euronet Adminisztracios Kft, both wholly-owned subsidiaries of Euronet, completed the acquisition of a total of 100% of the share capital of Brodos SRL in Romania (Brodos Romania). Brodos Romania is a leading electronic prepaid mobile airtime processor that expanded the Companys Prepaid Processing Segment business to Romania. | ||
| During February 2007, e-pay Holdings Limited, a wholly-owned subsidiary of Euronet, completed the acquisition of all of the share capital of Omega Logic, Ltd. (Omega Logic). Omega Logic is a prepaid top-up company based, and primarily operating, in the U.K. This acquisition enhanced our Prepaid Processing Segment business in the U.K. | ||
| During April 2007, PaySpot, Inc. (a wholly-owned subsidiary of Euronet) acquired customer relationships from Synergy Telecom, Inc. (Synergy) and Synergy agreed not to compete with PaySpot in the prepaid mobile phone top-up business in the U.S. for a period of five years. This acquisition enhances the Companys Prepaid Processing Segment business in the U.S. |
As of December 31, 2007, 75,743 shares of Euronet Common Stock issued in connection with these
acquisitions remains in escrow subject to the achievement of certain performance criteria. These
shares have been reflected in the purchase price because the Company has determined beyond a
reasonable doubt that the performance criteria will be met.
2006 Acquisition:
Acquisition of Essentis, Limited
In January 2006, the Company completed the acquisition of the assets of Essentis Limited
(Essentis) for approximately $2.9 million, which was comprised of $0.9 million in cash and
approximately $2.0 million in assumed liabilities. Essentis is a U.K. company that owns and
develops software packages that enhance Euronets outsourcing and software offerings to banks.
Essentis is reported with our software business in the Companys EFT Processing Segment. There are
no potential additional purchase price or escrow arrangements associated with the acquisition of
Essentis.
76
2005 Acquisitions:
During 2005, the Company completed seven acquisitions for an aggregate purchase price of $120.7
million. The following table summarizes the allocation of the purchase price and adjustments to
preliminary allocations, including $2.9 million paid in prior years for acquisitions accounted for
as step acquisitions, to the fair values of the acquired tangible and intangible assets at the
acquisition dates.
Estimated | Telerecarga | Other | Total | |||||||||||
(dollar amounts in thousands) | Life | Telerecarga | Acquisitions | Total | ||||||||||
Current assets |
$ | | $ | 3,841 | $ | 3,841 | ||||||||
Property and equipment |
various | 1,415 | 3,051 | 4,466 | ||||||||||
Customer relationships |
8 years | 10,295 | 14,703 | 24,998 | ||||||||||
Software |
5 years | 655 | 900 | 1,555 | ||||||||||
Patent |
7 years | | 1,699 | 1,699 | ||||||||||
Trade name |
2 years | 254 | | 254 | ||||||||||
Non-compete agreements |
5 years | 147 | | 147 | ||||||||||
Deferred income tax asset |
| 1,055 | 1,055 | |||||||||||
Goodwill |
Indefinite | 42,144 | 53,417 | 95,561 | ||||||||||
Assets acquired |
54,910 | 78,666 | 133,576 | |||||||||||
Current liabilities |
| (687 | ) | (687 | ) | |||||||||
Deferred income tax liability |
(3,892 | ) | (5,442 | ) | (9,334 | ) | ||||||||
Net assets acquired |
$ | 51,018 | $ | 72,537 | $ | 123,555 | ||||||||
Of the amounts allocated to goodwill and intangible assets (i.e., customer relationships, software,
patent, trade name and non-compete agreements), approximately $74.7 million is deductible for
income tax purposes. Of the total goodwill recorded of $95.6 million, $16.8 million relates
acquisitions recorded in the Companys EFT Processing Segment and the remaining $78.8 million
relates to acquisitions recorded in the Companys Prepaid Processing Segment.
Acquisition of Telerecarga S.L.
In March 2005, to supplement the Companys prepaid processing business in Spain, Euronet purchased
100% of the assets of Telerecarga S.L. (Telerecarga), a Spanish company that distributes prepaid
mobile airtime and other prepaid products via POS terminals throughout Spain. The purchase price of
38.1 million (approximately $51.0 million) was settled through the assumption of 25.4 million
(approximately $34.0 million) in liabilities and cash payments of 12.7 million (approximately
$17.0 million).
Other acquisitions
During 2005, Euronet completed six other acquisitions described below for a total purchase price of
$69.6 million, comprised of $39.6 million in cash, 864,131 shares of Euronet Common Stock
(including 109,542 shares issued in settlement of contingent payment arrangements discussed below),
valued at $23.6 million and $6.4 million in liabilities assumed. Additionally, the purchase price
for acquisitions accounted for as step acquisitions, in accordance with SFAS No. 141, include $2.9
million paid in prior years.
| In December 2005, EFT Services Holding B.V. (a wholly-owned subsidiary of Euronet) purchased 6.25% of Euronet Services Private Limited, the Companys subsidiary in India (Euronet India), increasing its share ownership of Euronet India to 100%. Euronet India is included in the Companys EFT Processing Segment and, since the Companys ownership share previously exceeded 50%, has been a consolidated subsidiary since inception. | ||
| In two separate transactions, one in April 2005 and one in December 2005, EFT Services Holding B.V. purchased an additional 64% of Europlanet a.d. (Europlanet), a Serbian company, increasing its share ownership in Europlanet to 100%. Europlanet is an ATM and card processor that owns, operates and manages a network of ATMs and POS terminals. Upon obtaining a controlling interest in April 2005, Euronet began consolidating Europlanets financial position and results of operations. Euronets $0.2 million share of dividends declared prior to acquiring a controlling ownership share of Europlanet was recognized as income from unconsolidated affiliates during 2005. | ||
| In October 2005, Euronet EFT Services Hellas EPE (a wholly-owned subsidiary of Euronet) acquired all of the share capital of Instreamline S.A. (Instreamline), a Greek company that provides card processing services in addition to debit card and transaction gateway switching services in Greece and the Balkan region. Instreamline will complement the Companys EFT Processing Segment. Subsequent to the acquisition, Instreamline was renamed Euronet Card Services Greece. |
77
| In May 2005, Euronet acquired all of the outstanding membership interests in Continental Transfer, LLC and a wholly-owned subsidiary, TelecommUSA, Limited (TelecommUSA), a company based in North Carolina. TelecommUSA, which became Euronet Payments & Remittance, Inc. (Euronet Payments & Remittance), provided money transfer services, primarily to consumers in the U.S. to destinations in Latin America, and bill payment services within the U.S. This acquisition launched the Companys money transfer and bill payment business. | ||
| In March 2005, to enhance the Companys U.S. prepaid processing business, PaySpot (a wholly-owned subsidiary of Euronet) purchased substantially all of the assets of Dynamic Telecom, Inc. (Dynamic Telecom), a company based in Iowa. Dynamic Telecoms distribution network in convenience store chains throughout the U.S. provides several types of prepaid products including wireless, long distance and gift cards via POS terminals. | ||
| In March 2005, the Company exercised its option to acquire an additional 41% of the shares of ATX Software, Ltd. (ATX) and increased its share ownership in ATX to 51%. Euronet originally acquired a 10% share in ATX in May 2004. Euronets $0.1 million share of dividends declared prior to acquiring the additional 41% ownership share of ATX was recognized as income from unconsolidated affiliates during 2005. Upon the increase in ownership from 10% to 51%, Euronet consolidated ATXs financial position and results of operations. |
During 2006, the Company issued 109,542 shares of Euronet Common Stock, valued at $4.1 million, in
settlement of contingent payment arrangements associated with the Companys 2005 acquisitions. This
settlement was recorded as an increase in goodwill.
Unaudited Pro Forma and Condensed Statements of Net Income:
The following unaudited pro forma financial information presents the condensed combined results of
operations of Euronet for the years ended December 31, 2007 and 2006, as if the acquisition of RIA
described above had occurred on January 1, 2006. Adjustments were made to reflect the impact of
events that are a direct result of the acquisition and are expected to have a continuing impact on
the Companys combined results of operations, including amortization of purchased intangible assets
that would have been recorded if the acquisition had occurred at the beginning of the periods
presented. The pro forma financial information is not intended to represent, or be indicative of,
the consolidated results of operations or financial condition of Euronet that would have been
reported had the acquisitions been completed as of the beginning of the periods presented.
Moreover, the pro forma financial information should not be considered as representative of the
future consolidated results of operations or financial condition of Euronet.
Pro Forma | ||||||||
Year Ended December 31, | ||||||||
(in thousands, except per share data) | 2007 | 2006 | ||||||
Revenues |
$ | 963,763 | $ | 808,134 | ||||
Operating income |
$ | 66,021 | $ | 60,496 | ||||
Net income |
$ | 40,225 | $ | 27,814 | ||||
Per share data: |
||||||||
Net income per share-basic |
$ | 0.87 | $ | 0.68 | ||||
Net income per share-diluted |
$ | 0.83 | $ | 0.65 |
(6) NON-CASH FINANCING AND INVESTING ACTIVITIES
Capital lease obligations of $3.0 million, $4.9 million and $3.8 million during the years ended
December 31, 2007, 2006 and 2005, respectively, were incurred when the Company entered into leases
primarily for new ATMs, to upgrade ATMs or for data center computer equipment.
See Note 5, Acquisitions, for a description of non-cash financing and investing activities related
to the Companys acquisitions.
78
(7) RESTRICTED CASH
The restricted cash balances as of December 31, 2007 and 2006 were as follows:
Year Ended December 31, | ||||||||
(in thousands) | 2007 | 2006 | ||||||
Cash held in trust and/or cash held on behalf of others |
$ | 108,422 | $ | 64,715 | ||||
Acquisition escrow |
27,307 | | ||||||
Collateral on bank credit arrangements |
1,725 | 14,167 | ||||||
ATM network cash |
423 | 637 | ||||||
Other |
2,345 | 1,184 | ||||||
Total |
$ | 140,222 | $ | 80,703 | ||||
Cash held in trust and/or cash held on behalf of others is in connection with the administration of
the customer collection and vendor remittance activities in the Prepaid Processing Segment. Amounts
collected on behalf of mobile operators are deposited into a restricted cash account. The Company
has deposits with commercial banks to cover guarantees. The bank credit arrangements primarily
represent cash collateral for bank guarantees. ATM network cash represents balances held that are
equivalent to the value of certain banks cash held in Euronets ATM network.
Acquisition escrow represents cash placed in escrow in connection with an agreement to acquire
Envios de Valores La Nacional Corp. and its U.S. based affiliates (La Nacional). See Note 22,
Litigation and Contingencies, for further discussion of events related to the Companys agreement
with La Nacional.
(8) PROPERTY AND EQUIPMENT, NET
The components of property and equipment, net of accumulated depreciation and amortization as of
December 31, 2007 and 2006 are as follows:
As of December 31, | ||||||||
(in thousands) | 2007 | 2006 | ||||||
ATMs |
$ | 97,361 | $ | 75,568 | ||||
POS terminals |
30,962 | 25,473 | ||||||
Vehicles and office equipment |
27,630 | 8,990 | ||||||
Computers and software |
52,773 | 37,026 | ||||||
208,726 | 147,057 | |||||||
Less accumulated depreciation and amortization |
(119,742 | ) | (91,883 | ) | ||||
Total |
$ | 88,984 | $ | 55,174 | ||||
Depreciation and amortization expense related to property and equipment, including property and
equipment recorded under capital leases, for the years ended December 31, 2007, 2006 and 2005 was
$25.5 million, $19.3 million and $14.7 million, respectively.
79
(9) GOODWILL AND ACQUIRED INTANGIBLES ASSETS, NET
Goodwill represents the excess of the purchase price of the acquired business over the estimated
fair value of the underlying net tangible and intangible assets acquired. The following table
summarizes intangible assets as of December 31, 2007 and 2006:
December 31, 2007 | December 31, 2006 | |||||||||||||||
Gross Carrying | Accumulated | Gross Carrying | Accumulated | |||||||||||||
(in thousands) | Amount | Amortization | Amount | Amortization | ||||||||||||
Customer relationships |
$ | 147,713 | $ | 37,922 | $ | 60,429 | $ | 19,202 | ||||||||
Trademarks and tradenames |
43,191 | 2,992 | 5,142 | 1,218 | ||||||||||||
Software |
8,961 | 4,125 | 6,127 | 2,381 | ||||||||||||
Patent |
1,701 | 168 | 1,701 | 58 | ||||||||||||
Non-compete agreements |
746 | 354 | 322 | 213 | ||||||||||||
Totals |
$ | 202,312 | $ | 45,561 | $ | 73,721 | $ | 23,072 | ||||||||
The following table summarizes the goodwill and amortizable intangible assets activity for the
years ended December 31, 2006 and 2007.
Amortizable | Total | |||||||||||
Intangible | Intangible | |||||||||||
(in thousands): | Assets | Goodwill | Assets | |||||||||
Balance as of January 1, 2006 (Adjusted See Note 2) |
$ | 52,060 | $ | 270,199 | $ | 322,259 | ||||||
Increases (decreases): |
||||||||||||
2006 acquisitions |
2,469 | | 2,469 | |||||||||
Earn-out payment related to 2005 acquisitions |
| 4,125 | 4,125 | |||||||||
Adjustments to other 2005 acquisitions |
232 | (628 | ) | (396 | ) | |||||||
Amortization |
(8,794 | ) | | (8,794 | ) | |||||||
Other (primarily changes in foreign currency exchange rates) |
4,682 | 23,438 | 28,120 | |||||||||
Balance as of December 31, 2006 (Adjusted See Note 2) |
$ | 50,649 | $ | 297,134 | $ | 347,783 | ||||||
Increases (decreases): |
||||||||||||
Acquisition of RIA |
111,920 | 404,599 | 516,519 | |||||||||
Other 2007 acquisitions |
8,366 | 21,553 | 29,919 | |||||||||
Adjustment to 2006 acquisition |
(116 | ) | | (116 | ) | |||||||
Amortization |
(20,932 | ) | | (20,932 | ) | |||||||
Other (primarily changes in foreign currency exchange rates) |
6,864 | 39,437 | 46,301 | |||||||||
Balance as of December 31, 2007 |
$ | 156,751 | $ | 762,723 | $ | 919,474 | ||||||
Of the total goodwill balance of $762.7 million as of December 31, 2007, $437.9 million relates to
the Money Transfer Segment, $299.9 million relates to the Prepaid Processing Segment and the
remaining $24.9 million relates to the EFT Processing Segment. Amortization expense for intangible
assets with finite lives was $20.6 million, $8.8 million and $6.9 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Estimated amortization expense on intangible assets
as of December 31, 2007 with finite lives is expected to be $24.9 million for 2008, $24.8 million
for 2009, $24.5 million for 2010, $19.2 million for 2011 and $16.5 million for 2012.
80
(10) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The balances as of December 31, 2007 and 2006 were as follows:
Year Ended December 31, | ||||||||
(in thousands) | 2007 | 2006 | ||||||
Accrued expenses |
$ | 48,831 | $ | 21,699 | ||||
Accrued amounts due to mobile operators |
94,935 | 76,713 | ||||||
Money transfer settlement obligations |
25,480 | 627 | ||||||
Total |
$ | 169,246 | $ | 99,039 | ||||
(11) DEBT OBLIGATIONS
Short-term debt obligations
Short-term debt obligations outstanding were $3.5 million at December 31, 2006 with a weighted
average interest rate of 3.5%.
Long-term debt obligations
Long-term debt obligations consist of the following as of December 31, 2007 and 2006:
Year Ended December 31, | ||||||||
(in thousands) | 2007 | 2006 | ||||||
1.625% convertible senior debentures, unsecured, due 2024 |
$ | 140,000 | $ | 40,000 | ||||
3.50% convertible debentures, unsecured, due 2025 |
175,000 | 175,000 | ||||||
Term loan, due 2014 |
164,000 | | ||||||
Revolving credit agreements |
62,203 | 34,073 | ||||||
Other |
| 923 | ||||||
541,203 | 349,996 | |||||||
Less current maturities of long-term debt obligations |
(1,900 | ) | (923 | ) | ||||
Long-term debt obligations |
$ | 539,303 | $ | 349,073 | ||||
On December 15, 2004, the Company completed the sale of $140 million of 1.625% Contingent
Convertible Senior Debentures Due 2024 (Convertible Senior Debentures). The Company received net
proceeds from the sale of $135.4 million, after fees totaling $4.6 million. The Convertible Senior
Debentures have an interest rate of 1.625% per annum payable semi-annually in June and December,
and are convertible into a total of 4.2 million shares of Euronet Common Stock at a conversion
price of $33.63 per share if certain conditions are met (relating to the closing prices of Euronet
common stock exceeding certain thresholds for specified periods). The Company will pay contingent
interest, during any six-month period commencing with the period from December 20, 2009 through
June 14, 2010, and for each six-month period thereafter for which the average trading price of the
debentures for the applicable five trading-day period preceding such applicable interest period
equals or exceeds 120% of the principal amount of the debentures. Contingent interest will equal
0.30% per annum of the average trading price of a debenture for such five trading-day periods. The
Convertible Senior Debentures may not be redeemed by the Company until December 20, 2009 but are
redeemable at any time thereafter at par. Holders of the Convertible Senior Debentures have the
option to require the Company to purchase their debentures at par on December 15, 2009, 2014 and
2019, or upon a change in control of the Company. These terms and other material terms and
conditions applicable to the Convertible Senior Debentures are set forth in the indenture governing
the debentures. In connection with the Convertible Senior Debentures, the Company recorded $4.6
million in debt issuance costs, which is being amortized over five years, the term of the initial
put option by the holders of the Convertible Senior Debentures. The Convertible Senior Debentures
are general unsecured and unsubordinated obligations and rank equally in right of payment with all
other existing and future unsecured and unsubordinated obligations and senior in right of payment
to all of the Companys future subordinated indebtedness. The
Convertible Senior Debentures are effectively subordinated to existing and future secured
indebtedness, including indebtedness under the Companys credit facilities with respect to any
collateral securing such indebtedness. The Convertible Senior Debentures are not guaranteed by any
of Euronets subsidiaries and, accordingly, are effectively subordinated to the indebtedness and
other liabilities of Euronets subsidiaries, including trade creditors. The Company and its
subsidiaries are not restricted under the indenture from incurring additional secured indebtedness
or other additional indebtedness.
81
On October 4, 2005, the Company completed the sale of $175 million of 3.5% Contingent Convertible
Debentures Due 2025 (Convertible Debentures). The Company received net proceeds from the sale of
$169.9 million, after fees totaling $5.1 million. The Convertible Debentures have an interest rate
of 3.5% per annum payable semi-annually in April and October, and are convertible into a total of
4.3 million shares of Euronet Common Stock at a conversion price of $40.48 per share if certain
conditions are met (relating to the closing prices of Euronet common stock exceeding certain
thresholds for specified periods). The Company will pay contingent interest, during any six-month
period commencing with the period from October 15, 2012 through April 14, 2013, and for each
six-month period thereafter for which the average trading price of the debentures for the
applicable five trading-day period preceding such applicable interest period equals or exceeds 120%
of the principal amount of the debentures. Contingent interest will equal 0.35% per annum of the
average trading price of a debenture for such five trading-day periods. The Convertible Debentures
may not be redeemed by the Company until October 20, 2012 but are redeemable at any time thereafter
at par. Holders of the Convertible Debentures have the option to require the Company to purchase
their debentures at par on October 15, 2012, 2015 and 2020, or upon a change in control of the
Company. These terms and other material terms and conditions applicable to the Convertible
Debentures are set forth in the indenture governing the debentures. In connection with the
Convertible Debentures, the Company recorded $5.1 million in debt issuance costs, which is being
amortized over seven years, the term of the initial put option by the holders of the Convertible
Debentures. The Convertible Debentures are general unsecured obligations, and are subordinated in
right of payment to all obligations under Senior Debt, which is defined to include secured credit
facilities (including secured replacements, renewals or refinancings thereof, including with
different lenders and in higher amounts) and will rank equally in right of payment with all other
existing and future unsecured obligations and senior in right of payment to all future subordinated
indebtedness. The Convertible Debentures will not be subordinated in right of payment to the $140
million 1.625% Convertible Senior Debentures described above. The Convertible Debentures will be
effectively subordinated to any existing and future secured indebtedness, with respect to any
collateral securing such indebtedness and all liabilities of Euronets subsidiaries. The
Convertible Debentures are not guaranteed by any of Euronets subsidiaries and, accordingly, are
effectively subordinated to the indebtedness and other liabilities of Euronets subsidiaries,
including trade creditors. The Company and its subsidiaries are not restricted under the indenture
from incurring additional secured indebtedness, Senior Debt or other additional indebtedness.
In connection with the completion of the acquisition of RIA during April 2007, the Company entered
into a $290 million secured syndicated credit facility consisting of a $190 million seven-year term
loan, which was fully-drawn at closing, and a $100 million five-year revolving credit facility (the
Credit Facility) that replaced the previous $50 million revolving credit facility. The $190
million seven-year term loan bears interest at LIBOR plus 200 basis points or prime plus 100 basis
points and contains a 1% per annum original principal amortization requirement, payable quarterly,
with the remaining balance outstanding due in April 2014. The $100 million revolving line of credit
bears interest at LIBOR or prime plus a margin that adjusts each quarter based upon the Companys
consolidated total leverage ratio, and expires in April 2012. The term loan may be expanded by up
to an additional $150 million and the revolving credit facility may be expanded by up to an
additional $25 million, subject to satisfaction of certain conditions, including pro-forma debt
covenant compliance. The new agreements contain certain mandatory prepayments, customary events of
default and financial covenants, including leverage ratios. The leverage ratios step down on
various dates through September 2008. Financing costs of $4.8 million have been deferred and are
being amortized over the terms of the respective loans. Euronet and certain subsidiaries have
guaranteed the repayment of obligations under the Credit Facility and have granted security
interests in the shares (or other equity interests) of certain subsidiaries along with a security
interest in certain other personal property collateral of Euronet and certain subsidiaries. The
weighted average interest rate of the Companys borrowings under the term loan was 7.1% as of
December 31, 2007.
As of December 31, 2007, the Company had $62.2 million in borrowings and $25.3 million in stand-by
letters of credit/bank guarantees outstanding against the revolving credit facility. Stand-by
letters of credit/bank guarantees are generally used to secure trade credit and performance
obligations. As of December 31, 2006, the Company had $34.1 million in borrowings and $2.8 million
in stand-by letters of credit/bank guarantees outstanding against the $50 million revolving credit
facility that was replaced during 2007. The Company pays an interest rate for stand-by letters of
credit/bank guarantees at a rate that adjusts each quarter based upon the Companys consolidated
total leverage ratio. At December 31, 2007 the stand-by letter of credit interest charges were
1.50% per annum. Because the revolving credit agreements expire beyond one year, the borrowings
were classified as long-term debt obligations in the December 31, 2007 and 2006 Consolidated
Balance Sheets. The weighted average interest rate of the Companys borrowings under the revolving
credit facility was 7.0% and 8.1% as of December 31, 2007 and 2006, respectively.
During the year ended December 31, 2007, the Company repaid $26.0 million of the term loan, of
which $1.4 million was pursuant to mandatory repayments, while $24.6 million represented prepayment
of amounts not yet due and resulted in the Company recognizing a $0.4 million loss on early
retirement of debt.
As of December 31, 2007, aggregate annual maturities of long-term debt are $1.9 million in 2008,
$141.9 million in 2009, $1.9 million in 2010, $1.9 million in 2011, $239.1 million in 2012 and
$154.5 million in periods thereafter. This maturity schedule reflects amounts borrowed under the
revolving credit agreement maturing in 2012 and the term loan maturing in 2014, consistent with the
contractual maturities of the agreements. For Convertible Debentures, the maturity schedule
reflects a due date that coincides with the term of the initial put option by the holders of the
Convertible Debentures.
82
(12) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
During the second quarter 2007, the Company entered into interest rate swap agreements for a total
notional amount of $50 million to manage interest rate exposure related to a portion of the term
loan as required under the agreement, which currently bears interest at LIBOR plus 200 basis
points. The interest rate swap agreements are determined to be cash flow hedges and effectively
convert $50 million of the term loan to a fixed interest rate of 7.3% through the May 2009 maturity
date of the swap agreements. As of December 31, 2007, the Company has recorded a liability of $1.0
million in the other long-term liabilities caption on the Companys Consolidated Balance Sheets to
recognize the fair value of the swap agreements. The offset is recorded in accumulated other
comprehensive income. The fair value of swap agreements is based on quotations received from the
agreement counterparties and represents the net amount the Company would have been required to pay
at December 31, 2007 to terminate the positions. If the Company does not terminate these swap
agreements prior to the maturity date, the fair value will be zero and no payment will be required
to be made.
As of December 31, 2007, the Company had foreign currency derivatives contracts, including forward
contracts and swap agreements, outstanding with a notional value of $52.6 million, primarily in
euros, which were not designated as hedges and had a weighted average maturity of five days.
(13) EQUITY PRIVATE PLACEMENT
During March 2007, the Company entered into a securities purchase agreement with certain accredited
investors to issue and sell 6,374,528 shares of Common Stock in a private placement. The offering
price for the shares was $25.00 per share and the gross proceeds of the offering were approximately
$159.4 million. The net proceeds from the sale, after deducting commissions and expenses, were
approximately $154.3 million.
(14) LEASES
(a) Capital leases
The Company leases certain of its ATMs and computer equipment under capital lease agreements that
expire between 2008 and 2013 and bear interest at rates between 2.5%
and 13.5%. The lessors for
these leases hold a security interest in the equipment leased under the respective capital lease
agreements. Lease installments are paid on a monthly, quarterly or semi-annual basis. Certain
leases contain a bargain purchase option at the conclusion of the lease period.
The gross amount of the ATMs and computer equipment and related accumulated amortization recorded
under capital leases as of December 31, 2007 and 2006 were as follows:
Year Ended December 31, | ||||||||
(in thousands) | 2007 | 2006 | ||||||
ATMs |
$ | 34,185 | $ | 31,875 | ||||
Other |
4,327 | 3,294 | ||||||
Subtotal |
38,512 | 35,169 | ||||||
Less accumulated amortization |
(26,205 | ) | (20,977 | ) | ||||
Total |
$ | 12,307 | $ | 14,192 | ||||
(b) Operating leases
The Company has non-cancelable operating leases, which expire over the next eleven years. Rent
expense for the years ended December 31, 2007, 2006 and 2005
amounted to $21.1 million, $13.4
million and $10.6 million, respectively.
83
(c) Future minimum lease payments
Future minimum lease payments under the capital leases and the noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 2007 are:
Capital | Operating | |||||||
(in thousands) | Leases | Leases | ||||||
Year ending December 31,
2008 |
$ | 6,501 | $ | 17,098 | ||||
2009 |
5,434 | 15,966 | ||||||
2010 |
4,553 | 12,469 | ||||||
2011 |
2,315 | 9,770 | ||||||
2012 |
446 | 5,601 | ||||||
thereafter |
224 | 2,484 | ||||||
Total minimum lease payments |
19,473 | $ | 63,388 | |||||
Less amounts representing interest |
(2,874 | ) | ||||||
Present value of net minimum capital lease payments |
16,599 | |||||||
Less current portion of obligations under capital leases |
(5,079 | ) | ||||||
Obligations under capital lease obligations, less
current portion |
$ | 11,520 | ||||||
(15) TAXES
Deferred tax assets and liabilities are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities as measured by the enacted tax rates
which will be in effect when these differences reverse. Deferred tax benefit (expense) is generally
the result of changes in the assets and liabilities for deferred taxes.
The sources of income before income taxes for the years ended December 31, 2007, 2006 and 2005 are
presented as follows:
Year Ended December 31, | ||||||||||||
(in thousands) | 2007 | 2006 | 2005 | |||||||||
Income (loss) from continuing operations: |
||||||||||||
United States |
$ | 32,971 | $ | 22,831 | $ | (20,508 | ) | |||||
Europe |
23,673 | 32,600 | 46,735 | |||||||||
Asia Pacific |
24,572 | 5,275 | 11,314 | |||||||||
Income from continuing operations before income taxes |
81,216 | 60,706 | 37,541 | |||||||||
Gain (loss) from discontinued operations Europe |
344 | | (635 | ) | ||||||||
Total income before income taxes |
$ | 81,560 | $ | 60,706 | $ | 36,906 | ||||||
84
There was no income tax expense or benefit associated with the Companys results from discontinued
operations in 2007 or 2005. The Companys income tax expense for the years ended December 31, 2007,
2006 and 2005 attributable to continuing operations consisted of the following:
Year Ended December 31, | ||||||||||||
(in thousands) | 2007 | 2006 | 2005 | |||||||||
Current tax expense: |
||||||||||||
U.S. |
$ | 5,720 | $ | 246 | $ | 296 | ||||||
Foreign |
24,339 | 14,646 | 12,299 | |||||||||
Total current |
30,059 | 14,892 | 12,595 | |||||||||
Deferred tax expense (benefit): |
||||||||||||
U.S. |
$ | 5,168 | $ | 439 | $ | (111 | ) | |||||
Foreign |
(7,171 | ) | (627 | ) | 2,359 | |||||||
Total deferred |
(2,003 | ) | (188 | ) | 2,248 | |||||||
Total tax expense |
$ | 28,056 | $ | 14,704 | $ | 14,843 | ||||||
The differences that caused Euronets effective income tax rates related to continuing operations
to vary from the federal statutory rate applicable to our U.S tax profile, which was 35% for 2007
and 34% for 2006 and 2005, were as follows:
Year Ended December 31, | ||||||||||||
(dollar amounts in thousands) | 2007 | 2006 | 2005 | |||||||||
U.S. federal income tax expense at applicable statutory rate |
$ | 28,546 | $ | 20,640 | $ | 12,764 | ||||||
Tax effect of: |
||||||||||||
State income tax expense (benefit) at statutory rates |
1,716 | 753 | (511 | ) | ||||||||
Non-deductible expenses |
2,680 | 2,209 | 926 | |||||||||
Share-based compensation |
1,910 | 532 | 699 | |||||||||
Other permanent differences |
2,592 | 4,343 | (4,560 | ) | ||||||||
Difference between U.S. Federal and foreign tax rates |
(5,947 | ) | (4,589 | ) | (2,868 | ) | ||||||
Impact of changes in tax rates |
(1,222 | ) | 221 | (165 | ) | |||||||
Provision in excess of foreign statutory rates |
814 | 573 | 2,050 | |||||||||
Change in valuation allowance |
(5,480 | ) | (8,066 | ) | 4,514 | |||||||
Other |
2,447 | (1,912 | ) | 1,994 | ||||||||
Total income tax expense |
$ | 28,056 | $ | 14,704 | $ | 14,843 | ||||||
Effective tax rate |
34.5 | % | 24.2 | % | 39.5 | % |
The tax effect of temporary differences and carryforwards that give rise to deferred tax assets and
liabilities from continuing operations are as follows:
85
Year Ended December 31, | ||||||||
(in thousands) | 2007 | 2006 | ||||||
Deferred tax assets: |
||||||||
Tax loss carryforwards |
$ | 31,640 | $ | 27,555 | ||||
Share-based compensation |
5,109 | 4,801 | ||||||
Accrued interest |
1,883 | 1,868 | ||||||
Accrued expenses |
5,889 | 3,001 | ||||||
Billings in excess of earnings |
675 | 573 | ||||||
Property and equipment |
3,926 | 3,855 | ||||||
Deferred financing costs |
1,378 | 741 | ||||||
Other |
2,795 | 362 | ||||||
Gross deferred tax assets |
53,295 | 42,756 | ||||||
Valuation allowance |
(8,903 | ) | (14,396 | ) | ||||
Net deferred tax assets |
44,392 | 28,360 | ||||||
Deferred tax liabilities: |
||||||||
Intangibles related to purchase accounting |
(25,989 | ) | (15,775 | ) | ||||
Tax amortizable goodwill |
(9,944 | ) | (2,401 | ) | ||||
Accrued expenses |
(2,185 | ) | (1,889 | ) | ||||
Intercompany notes |
(10,631 | ) | (5,667 | ) | ||||
Investment securities |
(2,322 | ) | (738 | ) | ||||
Accrued interest |
(22,814 | ) | (12,708 | ) | ||||
Earnings in excess of billings |
(410 | ) | (365 | ) | ||||
Capitalized research and development |
(823 | ) | (650 | ) | ||||
Property and equipment |
(2,384 | ) | (2,867 | ) | ||||
Investment in affiliates |
(935 | ) | (1,539 | ) | ||||
Other |
(3,813 | ) | (3,603 | ) | ||||
Total deferred tax liabilities |
(82,250 | ) | (48,202 | ) | ||||
Net deferred tax liabilities |
$ | (37,858 | ) | $ | (19,842 | ) | ||
Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as
of December 31, 2007 will be allocated to income taxes in the Consolidated Statements of Income
with the following exceptions. The tax benefit of net operating losses generated from share based
compensation have been excluded from the amounts disclosed for Tax Loss Carry Forwards and
Valuation Allowance to the extent the benefit will be recognized in equity if realized. The
excluded tax benefit of $21.4 million will be allocated to additional paid in capital when utilized
to offset taxable income.
As of December 31, 2007, 2006 and 2005, the Companys U.S. federal and foreign tax loss
carryforwards were $150.3 million, $135.1 million and $90.9 million, respectively, and U.S. state
tax loss carryforwards were $60.4 million, $60.7 million and $64.5 million, respectively.
In assessing the Companys ability to realize deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not the Company will only realize the
benefits of these deductible differences, net of the existing valuation allowances at December 31,
2007.
86
At December 31, 2007, the Company had U.S. federal and foreign tax net operating loss carryforwards
of $150.3 million, which will expire as follows:
Year ending December 31, (in thousands) | Gross | Tax Effected | ||||||
2008 |
$ | 458 | $ | 87 | ||||
2009 |
803 | 153 | ||||||
2010 |
3,669 | 970 | ||||||
2011 |
4,256 | 1,104 | ||||||
2012 |
3,019 | 739 | ||||||
2013 |
308 | 79 | ||||||
Thereafter |
134,628 | 39,952 | ||||||
Unlimited |
3,143 | 4,934 | ||||||
Total |
$ | 150,284 | $ | 48,018 | ||||
In addition, the Companys state tax net operating losses of $60.4 million will expire periodically
from 2008 through 2026.
Except for a portion of the earnings of e-pay Australia Pty Ltd., e-pay New Zealand Pty Ltd., and
ATX Software, Ltd., no provision has been made in the accounts as of December 31, 2007, 2006 and
2005 for U.S. federal income taxes which would be payable if the undistributed earnings of the
foreign subsidiaries were distributed to the Company since management has determined that the
earnings are permanently reinvested in these foreign operations. Determination of the amount of
unrecognized deferred U.S. income tax liabilities and foreign tax credits, if any, is not
practicable to calculate at this time.
The Company is subject to corporate income tax audits in each of its various taxing jurisdictions.
Although, the Company believes that its tax positions comply with applicable tax law, a taxing
authority could take a position contrary to that reported by the Company and assess additional
taxes due. The Company believes it has made adequate provisions for identified exposures.
On December 15, 2004, the Company completed the sale of $140 million of 1.625% stated interest
convertible senior debentures in a private offering. Additionally, on October 4, 2005, the Company
completed the sale of $175 million of 3.5% stated interest convertible debentures in a private
offering. Pursuant to the rules applicable to contingent payment debt instruments, the holders are
generally required to include amounts in their taxable income, and the issuer is able to deduct
such amounts from its taxable income, based on the rate at which Euronet would issue a
non-contingent, non-convertible, fixed-rate debt instrument with terms and conditions otherwise
similar to those of the convertible debentures. Euronet has determined that amount to be 9.05% and
8.50% for the 1.625% convertible senior debentures and 3.5% convertible debentures, respectively,
which is substantially in excess of the stated interest rate.
An issuer of convertible debt may not deduct any premium paid upon its repurchase of such debt if
the premium exceeds a normal call premium. This denial of an interest deduction, however, does not
apply to accruals of interest based on the comparable yield of a convertible debt instrument.
Nonetheless, the anti-abuse regulation, set forth in Section 1.1275(g) of the Internal Revenue Code
(Code), grants the Commissioner of the Internal Revenue Service authority to depart from the
regulation if a result is achieved which is unreasonable in light of the original issue discount
provisions of the Code, including Section 163(e). The anti-abuse regulation further provides that
the Commissioner may, under this authority, treat a contingent payment feature of a debt instrument
as if it were a separate position. If such an analysis were applied to the debentures described
above and ultimately sustained, our deductions for these debentures could be limited to the stated
interest. The scope of the application of the anti-abuse regulations is unclear. The Company
believes that the application of the Contingent Debt Regulations to the debentures is a reasonable
result such that the anti-abuse regulation should not apply. If a contrary position were asserted
and ultimately sustained, our tax deductions would be severely diminished; however, such a contrary
position would not have any adverse impact on our reported tax expense, because there has been
minimal tax benefit recognized for the difference between the stated interest and the comparable
yield of the debentures.
Under Section 279(b) of the Code, no deduction is allowed for interest expense paid or incurred on
corporate acquisition indebtedness in excess of $5 million. The $5 million interest deduction limit
is reduced by the amount of interest paid or incurred on certain obligations that do not qualify as
corporate acquisition indebtedness within the meaning ascribed by Section 279 but were issued to
provide consideration for acquisitions. If a portion of the proceeds from the issuance of the 3.5%
convertible debentures or the 1.625% convertible senior debentures, either alone or together with
other debt proceeds, were used for a domestic acquisition and the 3.5% convertible debentures or
1.625% convertible senior debentures and other debt, if any, were deemed to be corporate
acquisition
indebtedness as defined in Section 279, interest deductions on such debt would be disallowed for
tax purposes. We do not currently anticipate that this limitation would have a material impact on
our ability to deduct the interest on the debentures.
87
Accounting for Uncertainty in Income Taxes
As of January 1, 2007, the Company adopted the provisions of FIN 48 and has analyzed its filing
positions in all federal, state and foreign jurisdictions. As a result of this analysis, the
Company recognized less than $0.1 million in additional unrecognized tax benefits. A reconciliation
of the beginning and ending amount of unrecognized tax benefits is as follows:
(in thousands): | ||||
Balance as of January 1, 2007 |
$ | 5,916 | ||
Additions based on tax positions related to 2007 |
2,033 | |||
Additions for tax positions of prior years |
367 | |||
Reductions for tax positions of prior years |
(587 | ) | ||
Settlements |
(354 | ) | ||
Balance as of December 31, 2007 |
$ | 7,375 | ||
The amount of unrecognized tax benefits as of January 1, 2007 included approximately $5.9 million
of uncertain tax benefits and other items. As of December 31, 2007 and January 1, 2007,
approximately $3.3 million and $2.8 million, respectively, of the unrecognized tax benefits would
impact the Companys provision for income taxes and effective tax rate, if recognized. Total
estimated accrued interest and penalties related to the underpayment of income taxes was $0.5
million as of January 1, 2007 and December 31, 2007. The following tax years remain open in the
Companys major jurisdictions as of December 31, 2007:
Poland
|
1999 through 2007 | |
U.S. (Federal)
|
2000 through 2007 | |
Spain
|
2003 through 2007 | |
Australia
|
2003 through 2007 | |
U.K.
|
2004 through 2007 | |
Germany
|
2004 through 2007 |
The application of FIN 48 requires significant judgment in assessing the outcome of future tax
examinations and their potential impact on the Companys estimated effective tax rate and the value
of deferred tax assets, such as those related to the Companys net operating loss carryforwards. It
is reasonably possible that amounts reserved for potential exposure could significantly change as a
result of the conclusion of tax examinations and, accordingly, materially affect our operating
results.
(16) VALUATION AND QUALIFYING ACCOUNTS
Accounts receivable balances are stated net of allowance for doubtful accounts. Historically, the
Company has not experienced significant write-offs. The Company records allowances for doubtful
accounts when it is probable that the accounts receivable balance will not be collected. The
following table provides a summary of the allowance for doubtful accounts balances and activity for
the years ended December 31, 2007, 2006 and 2005:
Year Ended December 31, | ||||||||||||
(in thousands) | 2007 | 2006 | 2005 | |||||||||
Beginning balance-allowance for doubtful accounts |
$ | 2,137 | $ | 1,995 | $ | 1,373 | ||||||
Additions-charged to expense |
2,220 | 1,763 | 976 | |||||||||
Amounts written off |
(555 | ) | (1,819 | ) | (229 | ) | ||||||
Impact of acquisition of RIA (See Note 5) |
2,244 | | | |||||||||
Other (primarily changes in foreign currency exchange rates) |
202 | 198 | (125 | ) | ||||||||
Ending balance-allowance for doubtful accounts |
$ | 6,248 | $ | 2,137 | $ | 1,995 | ||||||
(17) STOCK PLANS
The Company has established, and shareholders have approved, share compensation plans (SCPs) that
allow the Company to grant restricted shares, or options to purchase shares, of Common Stock to
certain current and prospective key employees, directors and consultants of the Company. These
awards generally vest over periods ranging from three to seven years from the date of grant, are
generally exercisable during the shorter of a ten-year term or the term of employment arrangement
with the Company. With the exception of certain awards made to the Companys employees in Germany,
awards under the SCP plans are settled through the issuance of new shares under the provisions of
the SCPs. For Company employees in Germany, certain awards are settled through the issuance of
treasury shares, which also reduces the number of shares available for future issuance under the
SCPs. As of December 31, 2007, the Company has approximately 3.2 million in total shares remaining
available for issuance under the SCPs.
88
The Companys Consolidated Statements of Income includes share-based compensation expense of $7.7
million, $7.4 million and $5.6 million for the years ended December 31, 2007, 2006 and 2005,
respectively. The amounts are recorded as salaries and benefits expense in the accompanying
Consolidated Statements of Income. The Company recorded a tax benefit of $0.4 million and $0.3
million during the years ended December 31, 2007 and 2006, respectively, for the portion of this
expense that relates to foreign tax jurisdictions in which an income tax benefit is expected to be
derived. The Company did not record any tax benefit for the year ended December 31, 2005.
(a) Stock options
Summary stock options activity is presented in the table below:
Weighted | ||||||||||||||||
Weighted | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise | Contractual | Value | |||||||||||||
Shares | Price | Term (years) | (thousands) | |||||||||||||
Balance at December 31, 2006 (1,309,559 shares exercisable) |
2,213,889 | $ | 13.66 | |||||||||||||
Granted |
35,108 | $ | 29.20 | |||||||||||||
Exercised |
(494,200 | ) | $ | 14.16 | ||||||||||||
Forfeited |
(43,400 | ) | $ | 19.22 | ||||||||||||
Expired |
(26,295 | ) | $ | 17.37 | ||||||||||||
Balance at December 31, 2007 |
1,685,102 | $ | 13.64 | 5.1 | $ | 27,568 | ||||||||||
Exercisable at December 31, 2007 |
1,323,294 | $ | 11.89 | 4.7 | $ | 23,965 | ||||||||||
Vested and expected to vest at December 31, 2007 |
1,641,488 | $ | 13.47 | 5.1 | $ | 27,134 | ||||||||||
Options outstanding that are expected to vest are net of estimated future option forfeitures. The
Company received cash of $7.0 million, $12.9 million and $7.0 million in connection with stock
options exercised during the years ended December 31, 2007, 2006 and 2005, respectively. The
intrinsic value of these options exercised was $7.6 million, $34.2 million and $24.3 million during
the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007,
unrecognized compensation expense related to nonvested stock options that are expected to vest
totaled $2.0 million and will be recognized over the next 4.5 years, with an overall weighted
average period of one year. The following table provides the fair value of options granted under
the SCP during 2007, together with a description of the assumptions used to calculate the fair
value using the Black-Scholes pricing model:
Year Ended | ||||
2007 | ||||
Volatility |
53.9 | % | ||
Risk-free interest rate |
4.9 | % | ||
Dividend yield |
0.0 | % | ||
Assumed forfeitures |
0.0 | % | ||
Expected lives |
6.5 years | |||
Weighted-average fair value (per share) |
$ | 17.09 |
(b) Restricted stock
Restricted stock awards vest based on the achievement of time-based service conditions and/or
performance-based conditions. For certain awards, vesting is based on the achievement of more than
one condition of an award with multiple time-based and/or performance-based conditions.
89
Summary restricted stock activity is presented in the table below:
Weighted | ||||||||
Average Grant | ||||||||
Number of | Date Fair | |||||||
Shares | Value | |||||||
Nonvested at December 31, 2006 |
1,038,675 | $ | 27.95 | |||||
Granted |
696,198 | $ | 29.62 | |||||
Vested |
(108,176 | ) | $ | 28.96 | ||||
Forfeited |
(208,304 | ) | $ | 26.77 | ||||
Nonvested at December 31, 2007 |
1,418,393 | $ | 28.87 | |||||
The fair value of shares vested during the years ended December 31, 2007, 2006 and 2005 was $2.9
million, $0.4 million and $2.7 million, respectively. As of December 31, 2007, there was $22.2
million of total unrecognized compensation cost related to unvested restricted stock, which is
expected to be recognized over a weighted average period of 4.2 years. The weighted average grant
date fair value of restricted stock granted during the years ended December 31, 2007, 2006 and 2005
was $29.62, $28.48 and $28.87 per share, respectively.
(c) Employee stock purchase plans
In 2003, the Company established a qualified Employee Stock Purchase Plan (the ESPP), which
allows qualified employees (as defined by the plan documents) to participate in the purchase of
rights to purchase designated shares of the Companys Common Stock at a price equal to the lower of
85% of the closing price at the beginning or end of each quarterly offering period. The Company
reserved 500,000 shares of Common Stock for purchase under the ESPP. Pursuant to the ESPP, during
the years ended December 31, 2007, 2006 and 2005 the Company issued 49,500, 41,492 and 42,365
rights, respectively, to purchase shares of Common Stock at a weighted average price per share of
$24.19, $24.00 and $23.54, respectively. The grant date fair value of the option to purchase shares
at the lower of the closing price at the beginning or end of the quarterly period, plus the actual
total discount provided, are recorded as compensation expense. Total compensation expense recorded
was $0.3 million for the year ended December 31, 2007 and $0.2 million for each of the years ended
December 31, 2006 and 2005. The following table provides the weighted average fair value of the
ESPP stock purchase rights during the years ended December 31, 2007, 2006 and 2005 and the
assumptions used to calculate the fair value using the Black-Scholes pricing model:
Year Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Volatility-weighted average |
40.4 | % | 31.6 | % | 33.8 | % | ||||||
Volatility-range |
27.1% to 52.3 | % | 28.0% to 34.7 | % | 26.1% to 39.1 | % | ||||||
Risk-free interest rate-weighted average |
4.3 | % | 4.2 | % | 4.0 | % | ||||||
Risk-free interest rate-range |
3.1% to 5.0 | % | 4.0% to 4.5 | % | 4.0% - 4.0 | % | ||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected lives |
3 months | 3 months | 3 months | |||||||||
Weighted-average fair value (per share) |
$ | 5.18 | $ | 4.88 | $ | 4.73 |
(18) BUSINESS SEGMENT INFORMATION
Euronets reportable operating segments have been determined in accordance with SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. Effective January 1, 2007,
the Company began reporting and managing the operations of the EFT Processing Segment and the
former Software Solutions Segment on a combined basis. Additionally, as a result of the acquisition
of RIA in April 2007, the Company began reporting the Money Transfer Segment. The Companys former
money transfer business, which was not significant, was previously reported within the Prepaid
Processing Segment. Previously reported amounts have been adjusted to reflect these changes, which
did not impact the Companys Consolidated Financial Statements. As a result of these changes, the
Company currently operates in the following three reportable operating segments.
1) | Through the EFT Processing Segment, the Company processes transactions for a network of ATMs and POS terminals across Europe, Asia and the Middle-East. The Company provides comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing and electronic |
90
recharge services for prepaid mobile airtime. Through this segment, the Company also offers a suite of integrated electronic financial transaction (EFT) software solutions for electronic payment, merchant acquiring, card issuing and transaction delivery systems. | |||
2) | Through the Prepaid Processing Segment, the Company provides distribution of prepaid mobile airtime and other prepaid products and collection services in the U.S., Europe, Africa, Asia Pacific and the Middle-East. | ||
3) | Through the Money Transfer Segment, the Company provides global money transfer and bill payment services through a sending network of agents and Company-owned stores primarily in North America, the Caribbean, Europe and Asia Pacific, disbursing money transfers through a worldwide payer network. | ||
In addition, in its administrative division, Corporate Services, Eliminations and Other, the
Company accounts for non-operating activity, certain intersegment eliminations and the costs of
providing corporate and other administrative services to the three segments. These services are not
directly identifiable with the Companys reportable operating segments.
The following tables present the segment results of the Companys operations for the years ended
December 31, 2007, 2006 and 2005:
For the year ended December 31, 2007 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Services, | ||||||||||||||||||||
EFT | Prepaid | Money | Eliminations | |||||||||||||||||
(in thousands) | Processing | Processing | Transfer | and Other | Consolidated | |||||||||||||||
Total revenues |
$ | 188,957 | $ | 569,858 | $ | 158,759 | $ | | $ | 917,574 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Direct operating costs |
75,241 | 464,874 | 83,795 | | 623,910 | |||||||||||||||
Salaries and benefits |
41,282 | 27,493 | 32,705 | 13,217 | 114,697 | |||||||||||||||
Selling, general and administrative |
17,813 | 20,567 | 21,459 | 5,811 | 65,650 | |||||||||||||||
Federal excise tax refund |
| (12,191 | ) | | | (12,191 | ) | |||||||||||||
Depreciation and amortization |
17,531 | 16,302 | 13,670 | 828 | 48,331 | |||||||||||||||
Total operating expenses |
151,867 | 517,045 | 151,629 | 19,856 | 840,397 | |||||||||||||||
Operating income (loss) |
37,090 | 52,813 | 7,130 | (19,856 | ) | 77,177 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
295 | 5,340 | 1,566 | 9,095 | 16,296 | |||||||||||||||
Interest expense |
(4,503 | ) | (4,851 | ) | (1,257 | ) | (15,602 | ) | (26,213 | ) | ||||||||||
Income (loss) from unconsolidated affiliates |
(26 | ) | 546 | | 388 | 908 | ||||||||||||||
Loss on early retirement of debt |
| | | (427 | ) | (427 | ) | |||||||||||||
Foreign exchange gain, net |
| | | 15,515 | 15,515 | |||||||||||||||
Total other income (expense) |
(4,234 | ) | 1,035 | 309 | 8,969 | 6,079 | ||||||||||||||
Income (loss) from continuing operations
before income taxes and minority
interest |
32,856 | 53,848 | 7,439 | (10,887 | ) | 83,256 | ||||||||||||||
Income tax
expense |
171 | (12,194 | ) | 7,563 | (23,596 | ) | (28,056 | ) | ||||||||||||
Minority interest |
302 | (2,342 | ) | | | (2,040 | ) | |||||||||||||
Income (loss) from continuing operations |
$ | 33,329 | $ | 39,312 | $ | 15,002 | $ | (34,483 | ) | $ | 53,160 | |||||||||
Segment assets as of December 31, 2007 |
$ | 226,159 | $ | 781,176 | $ | 699,305 | $ | 179,516 | $ | 1,886,156 | ||||||||||
Property and equipment as of December 31, 2007 |
$ | 58,790 | $ | 13,638 | $ | 13,957 | $ | 2,599 | $ | 88,984 |
91
For the year ended December 31, 2006 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Services, | ||||||||||||||||||||
EFT | Prepaid | Money | Eliminations | |||||||||||||||||
(in thousands) | Processing | Processing | Transfer | and Other | Consolidated | |||||||||||||||
Total revenues |
$ | 158,320 | $ | 467,651 | $ | 3,210 | $ | | $ | 629,181 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Direct operating costs |
57,215 | 376,329 | 1,932 | | 435,476 | |||||||||||||||
Salaries and benefits |
36,057 | 22,561 | 2,353 | 13,285 | 74,256 | |||||||||||||||
Selling, general and administrative |
14,884 | 17,011 | 1,863 | 4,343 | 38,101 | |||||||||||||||
Depreciation and amortization |
14,804 | 14,128 | 357 | 205 | 29,494 | |||||||||||||||
Total operating expenses |
122,960 | 430,029 | 6,505 | 17,833 | 577,327 | |||||||||||||||
Operating income (loss) |
35,360 | 37,622 | (3,295 | ) | (17,833 | ) | 51,854 | |||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
485 | 4,508 | 23 | 8,734 | 13,750 | |||||||||||||||
Interest expense |
(3,304 | ) | (1,077 | ) | 3 | (10,369 | ) | (14,747 | ) | |||||||||||
Income from unconsolidated affiliates |
(402 | ) | 1,062 | | | 660 | ||||||||||||||
Foreign exchange gain, net |
| | | 10,166 | 10,166 | |||||||||||||||
Total other income (expense) |
(3,221 | ) | 4,493 | 26 | 8,531 | 9,829 | ||||||||||||||
Income (loss) from continuing operations
before income taxes and minority interest |
32,139 | 42,115 | (3,269 | ) | (9,302 | ) | 61,683 | |||||||||||||
Income tax expense |
(6,403 | ) | (7,972 | ) | (179 | ) | (150 | ) | (14,704 | ) | ||||||||||
Minority interest |
346 | (1,323 | ) | | | (977 | ) | |||||||||||||
Income (loss) from continuing operations |
$ | 26,082 | $ | 32,820 | $ | (3,448 | ) | $ | (9,452 | ) | $ | 46,002 | ||||||||
Segment assets as of December 31, 2006 |
$ | 172,191 | $ | 694,437 | $ | 18,387 | $ | 244,625 | $ | 1,129,640 | ||||||||||
Property and equipment as of December 31, 2006 |
$ | 43,972 | $ | 10,387 | $ | 613 | $ | 202 | $ | 55,174 |
92
For the year ended December 31, 2005 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Services, | ||||||||||||||||||||
EFT | Prepaid | Money | Eliminations | |||||||||||||||||
(in thousands) | Processing | Processing | Transfer | and Other | Consolidated | |||||||||||||||
Total revenues |
$ | 119,880 | $ | 409,575 | $ | 1,704 | $ | | $ | 531,159 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Direct operating costs |
45,164 | 324,516 | 1,078 | | 370,758 | |||||||||||||||
Salaries and benefits |
25,399 | 21,941 | 893 | 10,527 | 58,760 | |||||||||||||||
Selling, general and administrative |
9,708 | 15,782 | 618 | 5,381 | 31,489 | |||||||||||||||
Depreciation and amortization |
10,525 | 12,023 | 142 | 110 | 22,800 | |||||||||||||||
Total operating expenses |
90,796 | 374,262 | 2,731 | 16,018 | 483,807 | |||||||||||||||
Operating income (loss) |
29,084 | 35,313 | (1,027 | ) | (16,018 | ) | 47,352 | |||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
202 | 3,664 | | 2,008 | 5,874 | |||||||||||||||
Interest expense |
(2,205 | ) | (938 | ) | (8 | ) | (5,308 | ) | (8,459 | ) | ||||||||||
Income from unconsolidated affiliates |
50 | 1,003 | | 132 | 1,185 | |||||||||||||||
Foreign exchange loss, net |
| | | (7,495 | ) | (7,495 | ) | |||||||||||||
Total other income (expense) |
(1,953 | ) | 3,729 | (8 | ) | (10,663 | ) | (8,895 | ) | |||||||||||
Income (loss) from continuing operations
before income taxes and minority interest |
27,131 | 39,042 | (1,035 | ) | (26,681 | ) | 38,457 | |||||||||||||
Income tax expense |
(4,127 | ) | (10,761 | ) | 45 | | (14,843 | ) | ||||||||||||
Minority interest |
(227 | ) | (689 | ) | | | (916 | ) | ||||||||||||
Income (loss) from continuing operations |
$ | 22,777 | $ | 27,592 | $ | (990 | ) | $ | (26,681 | ) | $ | 22,698 | ||||||||
Total revenues for the years ended December 31, 2007, 2006 and 2005, and property and equipment and
total assets as of December 31, 2007 and 2006 summarized by geographic location, were as follows:
Revenues | Property & Equipment, net | Total Assets | ||||||||||||||||||||||||||
For the year ended | as of December 31, | as of December 31, | ||||||||||||||||||||||||||
(in thousands) | 2007 | 2006 | 2005 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||||||||
U.K. |
$ | 251,045 | $ | 198,362 | $ | 184,421 | $ | 4,737 | $ | 2,593 | $ | 327,077 | $ | 253,145 | ||||||||||||||
U.S. |
219,299 | 100,455 | 74,845 | 14,970 | 5,333 | 646,322 | 389,501 | |||||||||||||||||||||
Australia |
120,909 | 100,291 | 83,061 | 1,440 | 406 | 120,785 | 92,455 | |||||||||||||||||||||
Poland |
74,648 | 58,770 | 46,746 | 28,203 | 19,900 | 71,059 | 54,590 | |||||||||||||||||||||
Spain |
65,661 | 41,749 | 45,314 | 2,639 | 1,438 | 236,970 | 130,770 | |||||||||||||||||||||
Germany |
58,720 | 47,276 | 37,144 | 8,932 | 7,195 | 217,910 | 108,024 | |||||||||||||||||||||
India |
31,459 | 20,769 | 14,384 | 3,348 | 3,873 | 24,136 | 17,120 | |||||||||||||||||||||
Other |
95,833 | 61,509 | 45,244 | 24,715 | 14,436 | 241,897 | 84,035 | |||||||||||||||||||||
Total |
$ | 917,574 | $ | 629,181 | $ | 531,159 | $ | 88,984 | $ | 55,174 | $ | 1,886,156 | $ | 1,129,640 | ||||||||||||||
Revenues are attributed to countries based on location of the customer, with the exception of
software sales made by our software subsidiaries, which are attributed to the U.S. or the U.K.,
depending on the location of the subsidiary recording the revenue.
(19) FINANCIAL INSTRUMENTS
(a) Concentrations of credit risk
(a) Concentrations of credit risk
Euronets credit risk primarily relates to trade accounts receivable and cash and cash equivalents.
Euronets EFT Processing Segments customer base includes the most significant international card
organizations and certain banks in the Companys markets. The Prepaid Processing Segments customer
base is diverse and includes several major retailers and/or distributors in markets that
93
they
operate. The Money Transfer Segment trade accounts receivable are primarily due from independent
agents that collect cash from customers on the Companys behalf and generally remit the cash within
one week. Euronet performs ongoing evaluations of its customers financial condition and limits the
amount of credit extended, or purchases credit enhancement protection, when deemed necessary, but
generally requires no collateral. See Note 16, Valuation and Qualifying Accounts, for further
disclosure.
The Company invests excess cash not required for use in operations primarily in high credit
quality, short-term duration securities that the Company believes bear minimal risk. The two
counterparties to the Companys interest rate swap agreements are global financial institutions.
The Company limits its concentration of these financial instruments with any one institution, and
periodically reviews the credit worthiness of these financial institutions.
(b) Fair value of financial instruments
The carrying amount of cash and cash equivalents, trade accounts receivable, trade accounts payable
and short-term debt obligations approximates fair value, due to their short maturities. The
carrying value of the Companys term loan due 2014 and revolving credit agreements approximate fair
value because interest is based on LIBOR that resets at various intervals less than one year. The
following table provides the estimated fair values of the Companys other financial instruments,
based on quoted market prices or dealer quotations.
2007 | 2006 | |||||||||||||||
Carrying | Fair | Carrying | ||||||||||||||
(in thousands) | Value | Value | Value | Fair Value | ||||||||||||
Available for sale investment securities |
$ | 20,562 | $ | 20,562 | $ | | $ | | ||||||||
1.625% convertible senior debentures, unsecured, due 2024 |
140,000 | 149,804 | 140,000 | 151,795 | ||||||||||||
3.50% convertible debentures, unsecured, due 2025 |
175,000 | 182,821 | 175,000 | 183,768 | ||||||||||||
Interest rate swaps related to floating rate debt |
(994 | ) | (994 | ) | | | ||||||||||
Foreign currency derivative contracts |
(328 | ) | (328 | ) | | |
(20) COMPUTER SOFTWARE TO BE SOLD
Euronet engages in software development activities to continually improve the Companys core
software products. The following table provides the detailed activity related to capitalized
software development costs for the years ended December 31, 2007, 2006 and 2005.
Year Ended December 31, | ||||||||||||
(in thousands) | 2007 | 2006 | 2005 | |||||||||
Beginning balance-capitalized development cost |
$ | 3,509 | $ | 1,440 | $ | 1,537 | ||||||
Additions |
2,919 | 3,197 | 831 | |||||||||
Amortization |
(1,317 | ) | (1,128 | ) | (928 | ) | ||||||
Net capitalized development cost |
$ | 5,111 | $ | 3,509 | $ | 1,440 | ||||||
Research and development costs expensed for the years ending December 31, 2007, 2006 and 2005 were
$3.6 million, $4.1 million and $1.9 million, respectively.
(21) GAIN (LOSS) FROM DISCONTINUED OPERATIONS
In July 2002, the Company sold substantially all of the non-current assets and related capital
lease obligations of its ATM processing business in France to Atos S.A. During the period since the
initial sale of the business during 2002, the Company relocated certain administrative functions to
other Euronet subsidiaries and cleared liquidation procedures in France. During 2007, the Company
received a binding French Supreme Court decision relating to a lawsuit in France that resulted in a
cash recovery and gain to the Company of $0.3 million, net of legal costs. Discontinued operations
recorded during 2005 represent a $0.6 million loss on the final liquidation of the operations in
France, which consists primarily of the reclassification to net income of the Companys cumulative
translation adjustment that had previously been recorded as a component of stockholders equity
(accumulated other comprehensive income). There were no assets or liabilities held for sale at
December 31, 2007 or 2006.
94
(22) LITIGATION AND CONTINGENCIES
Litigation
During 2005, a former cash supply contractor in Central Europe (the Contractor) claimed that the
Company owed it approximately $2.0 million for the provision of cash during the fourth quarter 1999
and first quarter 2000 that had not been returned. This claim was made after the Company terminated
its business with the Contractor and established a cash supply agreement with another supplier.
During 2006, the Contractor initiated legal action in Budapest, Hungary regarding the claim. In
April 2007, an arbitration tribunal awarded the Contractor $1.0 million, plus $0.2 million in
interest, under the claim, which was recorded as selling, general and administrative expenses of
the Companys EFT Processing Segment.
Contingencies
On January 12, 2007, the Company signed a stock purchase agreement to acquire La Nacional and
certain of its affiliates (La Nacional), subject to regulatory approvals and other customary
closing conditions. In connection with this agreement, on January 16, 2007 the Company deposited
$26 million in an escrow account created for the proposed acquisition. The escrowed funds were not
permitted to be released except upon mutual agreement of the Company and La Nacionals stockholder
or through legal remedies available in the agreement.
On April 5, 2007, the Company gave notice to the stockholder of La Nacional of the termination of
the stock purchase agreement, alleging certain breaches of the terms thereof by La Nacional and
requested the release of the $26 million held in escrow under the terms of the agreement. La
Nacionals stockholder denied such breaches occurred, contested such termination and did not
consent to our request for release of the escrowed funds. While pursuing all legal remedies
available to us, we engaged in negotiations with La Nacional and its stockholder to determine
whether the dispute could be resolved through revised terms for the acquisition or some other
mutually agreeable method.
On January 10, 2008, the Company entered into a settlement agreement with La Nacional and its
stockholder evidencing the parties mutual agreement not to consummate the acquisition of La
Nacional, in exchange for payment by Euronet of a portion of the legal fees incurred by La
Nacional. Among other terms and conditions, the settlement agreement contains mutual releases in
connection with litigation and provided for the release to the Company of the $26 million held in
escrow, plus interest earned on the escrowed funds. In connection with the settlement, the Company
recorded $1.3 million in deferred acquisition costs and other settlement costs during 2007.
During 2007, the Company recorded losses of approximately $1.9 million, primarily in Poland and
Hungary, as a result of certain fraudulent transactions by card holders on our network. As of
December 31, 2007, the recorded losses include an accrual of $0.9 million for amounts related to
2007 that have not yet been reported. It is reasonably possible that actual losses could vary from
the amount accrued.
In addition, from time to time, the Company is a party to litigation arising in the ordinary course
of its business. Currently, there are no legal proceedings that management believes, either
individually or in the aggregate, would have a material adverse effect upon the consolidated
results of operations or financial condition of the Company. The Company expenses legal costs in
connection with loss contingencies when incurred.
(23) FEDERAL EXCISE TAX REFUND
During 2006, the Internal Revenue Service (IRS) announced that Internal Revenue Code Section 4251
(relating to communications excise tax) will no longer apply to, among other services, prepaid
mobile airtime services such as those offered by the Companys Prepaid Processing Segments U.S.
operations. Additionally, companies that paid this excise tax during the period beginning on March
1, 2003 and ending on July 31, 2006, are entitled to a credit or refund of amounts paid in
conjunction with the filing of 2006 federal income tax returns. During the fourth quarter 2007, the
IRS completed an initial field examination confirming the amount of the claim and, therefore, the
Company recorded $12.2 million for the amount of the refund claimed as a reduction to operating
expenses of the Prepaid Processing Segment and as an other current asset. In addition, the Company
expects to received approximately $1.2 million in interest on the amount claimed, which will be
recorded as interest income when received.
95
(24) GUARANTEES
As of December 31, 2007 and 2006, the Company had $30.7 million and $32.0 million, respectively, of
stand-by letters of credit/bank guarantees issued on its behalf. Of this amount $1.7 million and
$14.2 million, respectively, are collateralized by cash deposits held by the respective issuing
banks.
Euronet regularly grants guarantees in support of obligations of subsidiaries. As of December 31,
2007, the Company granted off balance sheet guarantees for cash in various ATM networks amounting
to $25.1 million over the terms of the cash supply agreements and performance guarantees amounting
to approximately $27.1 million over the terms of the agreements with the customers.
From time to time, Euronet enters into agreements with unaffiliated parties that contain
indemnification provisions, the terms of which may vary depending on the negotiated terms of each
respective agreement. The amount of such potential obligations is generally not stated in the
agreements. Our liability under such indemnification provisions may be mitigated by relevant
insurance coverage and may be subject to time and materiality limitations, monetary caps and other
conditions and defenses. Such indemnification obligations include the following:
| In connection with contracts with financial institutions in the EFT Processing Segment, the Company is responsible for damages to ATMs and theft of ATM network cash that, generally, is not recorded on the Companys Consolidated Balance Sheet. As of December 31, 2007, the balance of ATM network cash for which the Company was responsible was approximately $420 million. The Company maintains insurance policies to mitigate this exposure; | ||
| In connection with the license of proprietary systems to customers, Euronet provides certain warranties and infringement indemnities to the licensee, which generally warrant that such systems do not infringe on intellectual property owned by third parties and that the systems will perform in accordance with their specifications; | ||
| Euronet has entered into purchase and service agreements with vendors and consulting agreements with providers of consulting services, pursuant to which the Company has agreed to indemnify certain of such vendors and consultants, respectively, against third-party claims arising from the Companys use of the vendors product or the services of the vendor or consultant; | ||
| In connection with acquisitions and dispositions of subsidiaries, operating units and business assets, the Company has entered into agreements containing indemnification provisions, which can be generally described as follows: (i) in connection with acquisitions made by Euronet, the Company has agreed to indemnify the seller against third party claims made against the seller relating to the subject subsidiary, operating unit or asset and arising after the closing of the transaction, and (ii) in connection with dispositions made by Euronet, Euronet has agreed to indemnify the buyer against damages incurred by the buyer due to the buyers reliance on representations and warranties relating to the subject subsidiary, operating unit or business assets in the disposition agreement if such representations or warranties were untrue when made; | ||
| Euronet has entered into agreements with certain third parties, including banks that provide fiduciary and other services to Euronet or to the Companys benefit plans. Under such agreements, the Company has agreed to indemnify such service providers for third party claims relating to the carrying out of their respective duties under such agreements; and | ||
| The Company has issued surety bonds in compliance with money transfer licensing requirements of the applicable governmental authorities. |
The Company is also required to meet minimum capitalization and cash requirements of various
regulatory authorities in the jurisdictions in which the Company has money transfer operations. To
date, the Company is not aware of any significant claims made by the indemnified parties or third
parties to guarantee agreements with the Company and, accordingly, no liabilities were recorded as
of December 31, 2007 or 2006.
(25) RELATED PARTY TRANSACTIONS
See Note 5, Acquisitions, for a description of notes payable, deferred payment and additional
equity issued and contingently issuable to the former business owners (now Euronet shareholders) in
connection with various acquisitions.
The
Company leases service hours for an airplane from a company owned by Mr. Michael J. Brown, Euronets Chief
Executive Officer and Chairman of the Board of Directors, and Mr. Daniel R. Henry, who was a member
of Euronets Board of Directors until February 6, 2008. The airplane is leased for business use on
a per flight hour basis with no minimum usage requirement. Euronet incurred $0.2 million during
2007 and less than $0.1 million during 2006, in expenses for the use of this airplane.
96
(26) SUBSEQUENT EVENTS
During 2007, in connection with the Companys interest in acquiring MoneyGram, the Company made an
initial investment in MoneyGram by purchasing 1.3 million shares of common stock at a cost basis of
$20.0 million. Subsequent to December 31, 2007, the market price of MoneyGram common stock declined
significantly. Based on trading prices for MoneyGram common stock on February 28, 2008, the value
of the Companys investment decreased to $4.9 million. On February 27, 2008, the Company decided
not to submit a proposal to acquire MoneyGram. In connection with this decision, the Company
expects to record expense before income tax benefit of approximately $15 million to $20 million
during the first quarter 2008, representing the decline in value of MoneyGram stock, together with
acquisition related expenses. The actual loss could be larger if the market price of MoneyGram
common stock deteriorates further.
(27) SELECTED QUARTERLY DATA (UNAUDITED)
First | Second | Third | Fourth | |||||||||||||
(in thousands, except per share data) | Quarter (2) | Quarter (2) | Quarter | Quarter (2) | ||||||||||||
Year Ended December 31, 2007: |
||||||||||||||||
Net revenues |
$ | 170,417 | $ | 237,133 | $ | 246,317 | $ | 263,707 | ||||||||
Operating income |
$ | 11,917 | $ | 15,770 | $ | 18,434 | $ | 31,056 | ||||||||
Net income |
$ | 9,461 | $ | 8,496 | $ | 15,921 | $ | 19,626 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.25 | $ | 0.18 | $ | 0.33 | $ | 0.40 | ||||||||
Diluted (1) |
$ | 0.23 | $ | 0.17 | $ | 0.31 | $ | 0.37 | ||||||||
Year Ended December 31, 2006: |
||||||||||||||||
Net revenues |
$ | 146,970 | $ | 153,803 | $ | 161,653 | $ | 166,755 | ||||||||
Operating income |
$ | 12,253 | $ | 12,142 | $ | 13,006 | $ | 14,453 | ||||||||
Net income |
$ | 9,299 | $ | 11,054 | $ | 10,331 | $ | 15,318 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.25 | $ | 0.30 | $ | 0.28 | $ | 0.41 | ||||||||
Diluted (1) |
$ | 0.24 | $ | 0.28 | $ | 0.26 | $ | 0.38 |
(1) | With the exception of the second quarter 2007, the assumed conversion of the Companys $140 million 1.625% convertible debentures under the if-converted method was dilutive and, accordingly, the impact has been included in the computation of diluted earnings per common share for these periods. | |
(2) | Amounts shown above for the first and second quarters 2006 and 2007, as well as the fourth quarter 2006, have been adjusted from amounts previously reported for the impact of the correction of an immaterial error related to foreign currency translation adjustments for goodwill and acquired intangible assets. The impact of the adjustment was to decrease net income by approximately $0.1 million for each of these quarters. See Note 2, Basis of Presentation, for further discussion. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
97
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our executive management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Rule 13a-15(b) under the Exchange Act as of December 31, 2007. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design
and operation of these disclosure controls and procedures were effective as of such date to provide
reasonable assurance that information required to be disclosed in our reports under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the SEC, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.
CHANGE IN INTERNAL CONTROLS
There has been no change in our internal control over financial reporting during the fourth quarter
of our fiscal year ended December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
MANAGEMENTS REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
To the Stockholders of Euronet Worldwide, Inc.:
Management is responsible for establishing and maintaining an effective internal control over
financial reporting as this term is defined under Rule 13a-15(f) of the Securities and Exchange Act
(Exchange Act) and has made organizational arrangements providing appropriate divisions of
responsibility and has established communication programs aimed at assuring that its policies,
procedures and principles of business conduct are understood and practiced by its employees. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management of Euronet Worldwide, Inc. assessed the effectiveness of the Companys internal control
over financial reporting as of December 31, 2007. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal ControlIntegrated Framework. Based on these criteria and our assessment, we have
determined that, as of December 31, 2007, the Companys internal control over financial reporting
was effective.
Management has not conducted an assessment of the internal control over financial reporting of
Omega Logic, Ltd. (UK) and Omega Logic France S.a.r.l. (France) (collectively Omega Logic) and
RIA Envia, Inc. It was not possible to conduct a complete assessment of the internal control over
financial reporting for these subsidiaries in the period between the completion of the acquisition
during 2007 and the date of our managements assessment of our internal control over financial
reporting. Therefore, our conclusion in this Annual Report on Form 10-K regarding the effectiveness
of our internal control over financial reporting as of December 31, 2007 does not include the
internal controls over financial reporting of Omega Logic, and RIA Envia, Inc, which are included
in our Consolidated Financial Statements for approximately 11 months, and 9 months, respectively.
The Consolidated Statement of Income for 2007 include approximately $202.3 million, or
approximately 22%, of total revenues related to Omega Logic and RIA Envia, Inc. Additionally, the
Consolidated Balance Sheet includes total assets for Omega Logic and RIA Envia, Inc. as of December
31, 2007 of $717.8 million, or approximately 38%, of consolidated total assets.
The effectiveness of the Companys internal control over financial reporting as of December 31,
2007, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in
their audit report, which immediately follows this report.
/s/ Michael J. Brown |
||
Michael J. Brown | ||
Chairman and Chief Executive Officer | ||
/s/ Rick L. Weller | ||
Rick L. Weller | ||
Chief Financial Officer and Chief Accounting Officer | ||
February 29, 2008
98
REPORT OF KPMG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Board of Directors and Stockholders
Euronet Worldwide, Inc.:
Euronet Worldwide, Inc.:
We have audited Euronet Worldwide Inc.s internal control over financial reporting as of December
31, 2007, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Euronet Worldwide Inc.s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying managements report. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Euronet Worldwide Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
The Company acquired Omega Logic and RIA Envia, Inc. during 2007, and management excluded from its assessment of the
effectiveness of Euronet Worldwide, Inc.s internal controls over financial reporting as of
December 31, 2007. Omega Logic and RIA Envia, Inc.s internal control over financial reporting
associated with total assets of $717.8 million and total revenues of $202.3 million, included in
the consolidated financial statements of Euronet Worldwide, Inc. and subsidiaries as of and for the
year ended December 31, 2007. Our audit of internal control over financial reporting of Euronet
Worldwide, Inc. and subsidiaries also excluded an evaluation of the internal control over financial
reporting of Omega Logic and RIA Envia, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Euronet Worldwide as of December 31, 2007
and 2006, and the related consolidated statements of operations,
changes in stockholders equity, and cash flows for each of the years in the three-year period ended December
31, 2007, and our report dated February 29, 2008 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Kansas City, Missouri
February 29, 2008
February 29, 2008
ITEM 9B. OTHER INFORMATION
None.
99
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information under Election of Directors, Section 16(a) Beneficial Ownership Compliance and
Corporate Governance in the Proxy Statement for the Annual Meeting of Shareholders for 2008,
which will be filed with the Securities and Exchange Commission no later than 120 days after
December 31, 2007, is incorporated herein by reference. Information concerning our Code of Ethics
for our employees, including our Chief Executive Officer and Chief Financial Officer, is set forth
under Availability of Reports, Certain Committee Charters, and Other Information in Part I and
incorporated herein by reference. Information concerning executive officers is set forth under
Executive Officers of the Registrant in Part I and incorporated herein by reference.
We intend to satisfy the requirement under Item 5.05 of Form 8-K to disclose any amendments to our
Code of Ethics and any waiver from a provision of our Code of Ethics by posting such information on
our Web site at www.euronetworldwide.com under Investors/Corporate Governance.
ITEM 11. EXECUTIVE COMPENSATION
The information under Executive Compensation, Compensation Disclosure and Analysis and
Compensation Committee Report in the Proxy Statement for the Annual Meeting of Shareholders for
2008, which will be filed with the Securities and Exchange Commission no later than 120 days after
December 31, 2007, is incorporated herein by reference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information under Ownership of Common Stock by Directors and Executive Officers and Election
of Directors in the Proxy Statement for the Annual Meeting of Shareholders for 2008, which will be
filed with the Securities and Exchange Commission no later than 120 days after December 31, 2007,
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information under Certain Relationships and Related Transactions and Director Independence in
the Proxy Statement for the Annual Meeting of Shareholders for 2008, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2007, is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under Audit Committee Pre-Approval Policy and Fees of the Companys Independent
Auditors in the Proxy Statement for the Annual Meeting of Shareholders for 2008, which will be
filed with the Securities and Exchange Commission no later than 120 days after December 31, 2007,
is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed as Part of this Report.
1. Financial Statements
The Consolidated Financial Statements and related notes, together with the report of KPMG LLP,
appear in Part II Item 8 Financial Statements and Supplementary Data of this Form 10-K.
2. Schedules
None.
3. Exhibits
The exhibits that are required to be filed or incorporated by reference herein are listed in
the Exhibit Index below.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EURONET WORLDWIDE, INC. | ||
Date: February 29, 2008 | /s/ Michael J. Brown | |
Michael J. Brown | ||
Chairman of the Board of Directors, Chief Executive | ||
Officer and Director (principal executive officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below on this 29th day of February 2008 by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature | Title | |
/s/ Michael
J. Brown
|
Chairman of the Board of Directors,
Chief Executive Officer and Director (principal executive officer) |
|
/s/ Rick
L. Weller
|
Chief Financial Officer and Chief Accounting Officer (principal financial officer and principal accounting officer) | |
/s/ Paul
S. Althasen
|
Director | |
/s/ Andrzej
Olechowski
|
Director | |
/s/ Eriberto
R. Scocimara
|
Director | |
/s/ Thomas
A. McDonnell
|
Director | |
/s/ Andrew
B. Schmitt
|
Director | |
/s/ M.
Jeannine Strandjord
|
Director |
101
EXHIBITS
Exhibit Index
Exhibit | Description | |
2.1
|
Stock Purchase Agreement dated November 21, 2006 by and among Euronet Payments & Remittance, Inc., Euronet Worldwide, Inc.; the Fred Kunik Family Trust and the Irving Barr Living Trust (filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed on November 28, 2006, and incorporated by reference herein) | |
2.2
|
First Amendment to Stock Purchase Agreement, dated April 2, 2007, by and among Euronet Payments & Remittance, Inc., Euronet Worldwide, Inc., the Fred Kunik Family Trust and the Irving Barr Living Trust (filed as Exhibit 2.1 to the Companys Form 8-K filed on April 9, 2007, and incorporated by reference herein) | |
2.3
|
Second Amendment to Stock Purchase Agreement, dated April 4, 2007, by and among Euronet Payments & Remittance, Inc., Euronet Worldwide, Inc., the Fred Kunik Family Trust and the Irving Barr Living Trust (filed as Exhibit 2.2 to the Companys Form 8-K filed on April 9, 2007, and incorporated by reference herein) | |
3.1
|
Certificate of Incorporation of Euronet Worldwide, Inc., as amended (filed as Exhibit 4.2 to the Companys Registration Statement under the Securities Act of 1933 on Form S-8 on August 10, 2006, and incorporated by reference herein) | |
3.2
|
Amended and Restated Bylaws of Euronet Worldwide, Inc. (filed as Exhibit 3.1(b) to the Companys Form 8-K filed on February 29, 2008, and incorporated by reference herein) | |
3.3
|
Amendment No. 1 to Bylaws of Euronet Worldwide, Inc. (filed as Exhibit 3(ii) to the Companys Quarterly Report on Form 10-Q for the fiscal period ended March 31, 1997 (File No. 001-31648), and incorporated by reference herein) | |
3.4
|
Amendment No. 2 to Bylaws of Euronet Worldwide, Inc. (filed as Exhibit 3.1 to the Companys Current Report on Form 8-K filed on March 24, 2003 (File No. 001-31648), and incorporated by reference herein) | |
4.1
|
Rights Agreement, dated as of March 21, 2003, between Euronet Worldwide, Inc. and EquiServe Trust Company, N.A. (filed as Exhibit 4.1 to the Companys Current Report on Form 8-K filed on March 24, 2003 (File No. 001-31648), and incorporated by reference herein) | |
4.2
|
First Amendment to Rights Agreement, dated as of November 28, 2003, between Euronet Worldwide, Inc. and EquiServe Trust Company, N.A. (filed as Exhibit 4.1 to the Companys Current Report on Form 8-K filed on December 4, 2003 (File No. 001-31648), and incorporated by reference herein) | |
4.3
|
Indenture, dated as of December 15, 2004, between Euronet Worldwide, Inc. and U.S. Bank National Association (filed as Exhibit 4.10 to the Companys Registration Statement on Form S-3 filed on January 26, 2005, and incorporated by reference herein) | |
4.4
|
Specimen 1.625% Convertible Senior Debenture Due 2024 (Certificated Security) (filed as Exhibit 4.14 to the Companys Registration Statement on Form S-3/A filed on February 5, 2005, and incorporated by reference herein) | |
4.5
|
Indenture, dated as of October 4, 2005, between Euronet Worldwide, Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to the Companys Current Report on Form 8-K filed on October 26, 2005, and incorporated by reference herein) | |
4.6
|
Specimen 3.50% Convertible Debenture Due 2025 (Certificated Security) (included in Exhibit 4.10 to the Companys Registration Statement on Form S-3/A filed on November 10, 2005, and incorporated by reference herein) | |
4.7
|
Securities Purchase Agreement, dated as of March 8, 2007, among Euronet Worldwide, Inc. and the Purchasers as listed on Exhibit A thereto (filed as Exhibit 4.1 to the Companys Form 8-K filed March 14, 2007, and incorporated by reference herein) | |
4.8
|
Form of Contingent Value Rights Agreement, entered into April 4, 2007 with each of the Irving Barr Living Trust and the Fred Kunik Family Trust, granting each contingent value rights associated with 1,842,549 shares of common stock (included as Exhibit B to the Stock Purchase Agreement filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed on November 28, 2006, and incorporated by reference herein) | |
4.9
|
Form of Stock Appreciation Rights Agreement, entered into April 4, 2007 with each of the Irving Barr Living Trust and the Fred Kunik Family Trust, granting each stock appreciation rights with respect to 1,842,549 shares of common stock (included as Exhibit C to the Stock Purchase Agreement filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed on November 28, 2006, and incorporated by reference herein) | |
10.1
|
Employment Agreement executed in October 2003, between Euronet Worldwide, Inc. and Michael J. Brown, Chief Executive Officer (filed as Exhibit 10.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-31648), and incorporated by reference herein) (2) | |
10.2
|
Employment Agreement executed in October 2003, between Euronet Worldwide, Inc. and Jeffrey B. Newman, Executive Vice President and General Counsel (filed as Exhibit 10.3 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-31648), and incorporated by reference herein) (2) |
102
Exhibit | Description | |
10.3
|
Employment Agreement executed in June 2003, between Euronet Worldwide, Inc. and Miro Bergman, Executive Vice President & Managing Director, EMEA (filed as Exhibit 10.8 to the Companys Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated by reference herein) (2) | |
10.4
|
Employment Agreement executed in October 2003, between Euronet Worldwide, Inc. and Rick L. Weller, Executive Vice President and Chief Financial Officer (filed as Exhibit 10.9 to the Companys Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated by reference herein) (2) | |
10.5
|
Euronet Long-Term Incentive Stock Option Plan (1996), as amended (filed as Exhibit 10.7 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-31648), and incorporated by reference herein) (2) | |
10.6
|
Euronet Worldwide, Inc. Stock Incentive Plan (1998), as amended (filed as Exhibit 10.8 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-31648), and incorporated by reference herein) (2) | |
10.7
|
Euronet Worldwide, Inc. 2002 Stock Incentive Plan (Amended and Restated) (included as Appendix B to the Companys Definitive Proxy Statement filed on April 20, 2004, and incorporated by reference herein) (2) | |
10.8
|
Rules and Procedures for Euronet Matching Stock Option Grant Program (filed as Exhibit 10.3 to Companys Form 10-Q for the quarter ended September 30, 2002 (File No. 001-31648), and incorporated by reference herein) (2) | |
10.9
|
Employment Agreement executed in January 2003, between Euronet Worldwide, Inc. and John Romney, Managing Director, Europe, Middle East and Africa (EMEA) (filed as Exhibit 10.15 to the Companys Form 10-Q for the quarter ended March 31, 2005, and incorporated by reference herein) (2) | |
10.10
|
Asset Purchase Agreement among Euronet Worldwide, Inc. and Meflur S.L. dated November 3, 2004 (filed as Exhibit 10.17 to the Companys Annual Report on Form 10-K filed on March 15, 2005, and incorporated by reference herein) | |
10.11
|
Form of Employee Restricted Stock Grant Agreement pursuant to Euronet Worldwide, Inc. 2006 Stock Incentive Plan (filed as Exhibit 10.8 to the Companys Quarterly Report on Form 10-Q filed on August 4, 2006, and incorporated by reference herein) (2) | |
10.12
|
Form of Employee Restricted Stock Unit Agreement for Executives and Directors pursuant to Euronet Worldwide, Inc. 2006 Stock Incentive Plan (filed as Exhibit 10.39 to the Companys Annual Report on Form 10-K filed February 28, 2007, and incorporated by reference herein) (2) | |
10.13
|
Credit Agreement dated as of April 4, 2007 among Euronet Worldwide, Inc., and certain subsidiaries and affiliates, as borrowers, certain subsidiaries and affiliates, as guarantors, the lenders party thereto, Bank of America, N.A., as administrative agent and collateral agent, California Bank & Trust, as syndication agent and Citibank, N.A., as documentation agent (filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed on May 4, 2007, and incorporated by reference herein) | |
10.14
|
Euronet Worldwide Inc. 2006 Stock Incentive Plan (Amended and Restated) (filed as Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q filed on May 4, 2007, and incorporated by reference herein) (2) | |
10.15
|
Transition Services Agreement and General Release dated as of March 6, 2007 between Euronet Worldwide, Inc. and Daniel R. Henry (filed as Exhibit 10.1 to the Companys Form 8-K filed on March 6, 2007, and incorporated by reference herein) (2) | |
10.16
|
Employment Agreement dated April 4, 2007 between Euronet Worldwide, Inc. and Juan C. Bianchi (filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed on August 6, 2007, and incorporated by reference herein) (2) | |
10.17
|
Employment Agreement dated June 19, 2007 between Euronet Worldwide, Inc. and Kevin J. Caponecchi (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed on June 25, 2007, and incorporated by reference herein) (2) | |
10.18
|
Euronet Worldwide, Inc. Executive Annual Incentive Plan (1) (2) | |
10.19
|
Letter Agreement dated January 30, 2008 between Euronet Worldwide, Inc. and John Romney for Confirmation of Terms of Resignation (1) (2) | |
12.1
|
Computation of Ratio of Earnings to Fixed Charges (1) | |
21.1
|
Subsidiaries of the Registrant (1) | |
23.1
|
Consent of Independent Registered Public Accounting Firm (1) | |
31.1
|
Section 302 Certification of Chief Executive Officer (1) | |
31.2
|
Section 302 Certification of Chief Financial Officer (1) | |
32.1
|
Section 906 Certification of Chief Executive Officer and Chief Financial Officer (1) |
(1) | Filed herewith. | |
(2) | Management contracts and compensatory plans and arrangements required to be filed as Exhibits pursuant to Item 15(a) of this report. |
103