e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-31648
EURONET WORLDWIDE, INC.
(Exact name of the registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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74-2806888
(I.R.S. employer
identification no.) |
4601 COLLEGE BOULEVARD, SUITE 300
LEAWOOD, KANSAS 66211
(Address of principal executive offices)
(913) 327-4200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the issuers common stock, $0.02 par value, outstanding as of April 30,
2007 was 48,258,627 shares.
PART IFINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
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As of March |
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As of |
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31, 2007 |
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December |
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(unaudited) |
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31, 2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
419,489 |
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$ |
321,058 |
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Restricted cash |
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122,182 |
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80,703 |
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Inventory PINs and other |
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48,896 |
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49,511 |
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Trade accounts receivable, net of allowances for doubtful accounts of $2,370 at
March 31, 2007 and $2,137 at December 31, 2006 |
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205,910 |
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212,631 |
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Deferred income taxes, net |
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9,886 |
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9,356 |
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Prepaid expenses and other current assets |
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20,055 |
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15,212 |
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Total current assets |
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826,418 |
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688,471 |
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Property and equipment, net of accumulated depreciation of $99,321 at March 31, 2007 and $91,883 at December 31, 2006 |
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55,551 |
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55,174 |
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Goodwill |
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300,911 |
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278,743 |
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Acquired intangible assets, net of accumulated amortization of $23,022 at
March 31, 2007 and $20,696 at December 31, 2006 |
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52,624 |
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47,539 |
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Deferred income taxes |
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19,045 |
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19,004 |
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Other assets, net of accumulated amortization of $11,213 at March 31, 2007
and $10,542 at December 31, 2006 |
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18,721 |
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19,208 |
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Total assets |
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$ |
1,273,270 |
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$ |
1,108,139 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Trade accounts payable |
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$ |
258,036 |
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$ |
269,212 |
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Accrued expenses and other current liabilities |
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114,099 |
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99,039 |
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Current installments on capital lease obligations |
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6,278 |
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6,592 |
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Short-term debt obligations and current maturities of long-term debt obligations |
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3,235 |
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4,378 |
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Income taxes payable |
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12,838 |
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9,463 |
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Deferred income taxes |
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4,452 |
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4,108 |
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Deferred revenue |
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12,666 |
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11,318 |
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Total current liabilities |
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411,604 |
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404,110 |
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Debt obligations, net of current portion |
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331,124 |
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349,073 |
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Capital lease obligations, excluding current installments |
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12,911 |
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13,409 |
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Deferred income taxes |
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41,260 |
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43,071 |
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Other long-term liabilities |
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5,051 |
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1,811 |
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Minority interest |
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7,208 |
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8,350 |
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Total liabilities |
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809,158 |
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819,824 |
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Stockholders equity: |
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Preferred Stock, $0.02 par value. Authorized 10,000,000 shares; none issued |
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Common Stock, $0.02 par value. Authorized 90,000,000 shares; issued and outstanding
44,173,483 shares at March 31, 2007 and 37,440,027 at December 31, 2006 |
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883 |
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749 |
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Additional paid-in-capital |
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502,796 |
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338,216 |
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Treasury stock |
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(196 |
) |
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(196 |
) |
Subscriptions receivable |
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(5 |
) |
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(170 |
) |
Accumulated deficit |
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(48,913 |
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(58,480 |
) |
Restricted reserve |
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790 |
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780 |
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Accumulated other comprehensive income |
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8,757 |
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7,416 |
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Total stockholders equity |
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464,112 |
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288,315 |
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Total liabilities and stockholders equity |
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$ |
1,273,270 |
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$ |
1,108,139 |
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See accompanying notes to the consolidated financial statements.
3
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
(Unaudited, in thousands, except share and per share data)
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Three Months Ended March 31, |
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2007 |
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2006 |
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Revenues: |
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EFT Processing Segment |
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$ |
42,047 |
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$ |
36,009 |
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Prepaid Processing Segment |
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128,370 |
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110,961 |
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Total revenues |
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170,417 |
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146,970 |
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Operating expenses: |
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Direct operating costs |
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120,664 |
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101,353 |
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Salaries and benefits |
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18,929 |
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18,034 |
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Selling, general and administrative |
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10,802 |
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8,436 |
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Depreciation and amortization |
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7,950 |
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6,819 |
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Total operating expenses |
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158,345 |
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134,642 |
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Operating income |
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12,072 |
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12,328 |
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Other income (expense): |
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Interest income |
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4,345 |
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2,722 |
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Interest expense |
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(3,581 |
) |
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(3,597 |
) |
Income from unconsolidated affiliates |
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240 |
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171 |
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Foreign currency exchange gain, net |
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433 |
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1,558 |
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Other income, net |
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1,437 |
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854 |
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Income from continuing operations before income
taxes and minority interest |
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13,509 |
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13,182 |
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Income tax expense |
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(3,933 |
) |
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(3,570 |
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Minority interest |
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(353 |
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(261 |
) |
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Income from continuing operations |
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9,223 |
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9,351 |
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Gain from discontinued operations, net |
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344 |
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Net income |
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9,567 |
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9,351 |
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Translation adjustment |
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1,341 |
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(603 |
) |
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Comprehensive income |
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$ |
10,908 |
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$ |
8,748 |
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Earnings per share basic: |
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Continuing operations |
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$ |
0.24 |
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$ |
0.26 |
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Discontinued operations |
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0.01 |
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Total |
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$ |
0.25 |
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$ |
0.26 |
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|
|
|
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Basic weighted average shares outstanding |
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38,434,178 |
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36,555,149 |
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Earnings per share diluted: |
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Continuing operations |
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$ |
0.23 |
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$ |
0.24 |
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Discontinued operations |
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0.01 |
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Total |
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$ |
0.24 |
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$ |
0.24 |
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Diluted weighted average shares outstanding |
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43,688,014 |
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42,263,748 |
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See accompanying notes to the consolidated financial statements.
4
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
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Three Months Ended March 31, |
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2007 |
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2006 |
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Net income |
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$ |
9,567 |
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$ |
9,351 |
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|
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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7,950 |
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6,819 |
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Share-based compensation |
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|
1,874 |
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|
1,894 |
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Unrealized foreign exchange (gain) loss, net |
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1,044 |
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|
(1,354 |
) |
Gain on disposal of property and equipment |
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(2 |
) |
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(53 |
) |
Gain on discontinued operations |
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(344 |
) |
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Deferred income tax benefit |
|
|
(299 |
) |
|
|
(582 |
) |
Income assigned to minority interest |
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353 |
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|
261 |
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Income from unconsolidated affiliates |
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(240 |
) |
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(171 |
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Amortization of debt obligations issuance expense |
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|
283 |
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|
598 |
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Changes in working capital, net of amounts acquired: |
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Income taxes payable, net |
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|
2,677 |
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|
1,760 |
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Restricted cash |
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(1,564 |
) |
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|
(2,110 |
) |
Inventory PINs and other |
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|
1,567 |
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|
2,609 |
|
Trade accounts receivable |
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|
12,267 |
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|
21,519 |
|
Prepaid expenses and other current assets |
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|
(3,995 |
) |
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|
(5,212 |
) |
Trade accounts payable |
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(28,253 |
) |
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|
(18,740 |
) |
Deferred revenue |
|
|
1,201 |
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|
|
2,909 |
|
Accrued expenses and other current liabilities |
|
|
3,318 |
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(12,879 |
) |
Other, net |
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|
86 |
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(340 |
) |
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Net cash provided by operating activities |
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|
7,490 |
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|
6,279 |
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Cash flows from investing activities: |
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Acquisitions, net of cash acquired |
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(14,959 |
) |
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(2,323 |
) |
Acquisition
escrow |
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(26,000 |
) |
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Proceeds from sale of property and equipment |
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|
33 |
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|
135 |
|
Purchases of property and equipment |
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(3,384 |
) |
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|
(6,631 |
) |
Purchases of other long-term assets |
|
|
(2,008 |
) |
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|
(1,063 |
) |
Other, net |
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|
18 |
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Net cash used in investing activities |
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(46,300 |
) |
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(9,882 |
) |
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Cash flows from financing activities: |
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Proceeds from issuance of shares |
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160,432 |
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|
10,415 |
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Net repayments on short-term debt obligations and revolving
credit agreements |
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|
(19,157 |
) |
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|
(1,769 |
) |
Repayment of capital lease obligations |
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|
(2,839 |
) |
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|
(1,715 |
) |
Cash dividends paid to minority interest stockholders |
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(1,572 |
) |
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Other, net |
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11 |
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(125 |
) |
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Net cash provided by financing activities |
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|
136,875 |
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|
6,806 |
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Effect of exchange differences on cash |
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|
366 |
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|
|
600 |
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|
|
|
|
|
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Increase in cash and cash equivalents |
|
|
98,431 |
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|
|
3,803 |
|
Cash and cash equivalents at beginning of period |
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|
321,058 |
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|
|
219,932 |
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Cash and cash equivalents at end of period |
|
$ |
419,489 |
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$ |
223,735 |
|
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|
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|
|
|
|
|
|
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Interest paid during the period |
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$ |
1,153 |
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|
$ |
901 |
|
Income taxes paid during the period |
|
|
2,075 |
|
|
|
1,541 |
|
See accompanying notes to the consolidated financial statements.
5
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
Basis of presentation
The accompanying unaudited consolidated financial statements of Euronet Worldwide, Inc. and its
subsidiaries (Euronet or the Company) have been prepared from the records of the Company, in
conformity with accounting principles generally accepted in the U.S. (U.S. GAAP) and pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of
management, such unaudited consolidated financial statements contain all adjustments (consisting of
normal interim closing procedures) necessary to present fairly the financial position of the
Company as of March 31, 2007, and the results of its operations and cash flows for the three-month
periods ended March 31, 2007 and 2006.
The unaudited consolidated financial statements should be read in conjunction with the audited
consolidated financial statements of Euronet for the year ended December 31, 2006, including the
notes thereto, set forth in the Companys Annual Report on Form 10-K. Certain prior year amounts
have been reclassified to conform to the current period consolidated financial statement
presentation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates. The results of operations
for the three-month period ended March 31, 2007 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2007.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
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 net in the accompanying consolidated statements of income.
Accounting for uncertainty in income taxes
Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an
interpretation of Statement of Financial Accounting Standards (SFAS) No. 9, Accounting for
Income Taxes. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of
the measurement and recognition related to accounting for income taxes. This interpretation also
requires expanded disclosures about fair value measurements.
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 11, Income
Taxes, for further discussion regarding the adoption of FIN 48.
Recent accounting pronouncements
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). 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. Euronet is currently
determining whether fair value accounting is appropriate for any of its eligible items and cannot
estimate the impact, if any, which SFAS No. 159 will have on its consolidated results of operations and
financial condition.
(3) EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income 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
6
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, 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 weighted average number of common
shares outstanding to the diluted weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
9,567 |
|
|
$ |
9,351 |
|
Add: interest expense of 1.625% convertible debentures |
|
|
737 |
|
|
|
797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings available to common stockholders |
|
$ |
10,304 |
|
|
$ |
10,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
38,434,178 |
|
|
|
36,555,149 |
|
Additional shares from assumed conversion of 1.625%
convertible debentures |
|
|
4,163,488 |
|
|
|
4,163,488 |
|
Incremental shares from assumed conversion of stock options
and restricted stock |
|
|
1,090,348 |
|
|
|
1,545,111 |
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
43,688,014 |
|
|
|
42,263,748 |
|
|
|
|
|
|
|
|
The table includes all stock options and restricted stock that are dilutive to Euronets
weighted average common shares outstanding during the period. For the three-month periods ended
March 31, 2007 and 2006, the table does not include 295,000 and 17,500, respectively, stock options
or shares of restricted stock that are anti-dilutive to the Companys weighted average common
shares outstanding.
The Company has $140 million of 1.625% convertible debentures due 2024 and $175 million of 3.50%
convertible debentures due 2025 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 shares of Common Stock for the $175
million 3.50% issue only 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 earnings
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 three-month periods ended March 31, 2007 and 2006 and, accordingly, the impact has been
included in the above computation of diluted weighted average shares outstanding. Under the
if-converted method, the assumed conversion of the 3.50% convertible debentures was anti-dilutive
for the three-month periods ended March 31, 2007 and 2006. Accordingly, the impact has been
excluded from the above computation of diluted weighted average shares outstanding.
(4) 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. For certain acquisitions, management engages an appraiser
to assist in the valuation process.
2007 Acquisitions:
During the first quarter 2007, the Company completed two acquisitions described below for an
aggregate purchase price of $25.3 million, comprised of $17.7 million in cash and 275,429 shares of
Euronet Common Stock valued at $7.6 million. In connection
with one of these acquisitions, the Company has 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 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. |
7
|
|
|
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. |
The Companys allocation of the purchase price to the fair values of acquired tangible and
intangible assets is preliminary and remains so while management completes its assessment of the
fair value of the net assets acquired and liabilities assumed. As of March 31, 2007, 75,743 shares
of Euronet Common Stock issued in connection with these acquisitions remain 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.
Agreement to acquire La Nacional
During January 2007, the Company signed a stock purchase agreement to acquire Envios de Valores La
Nacional Corp. and its U.S. based affiliates (La Nacional), a money transfer company originating
transactions through a network of sending agents and company-owned stores. In connection with
signing the agreement, the Company deposited $26 million in an escrow account created for the
proposed acquisition. The escrowed funds can only be released by mutual agreement of the Company
and La Nacional or through legal remedies available under the agreement. The Company became aware
that on February 6, 2007, two employees of La Nacional working in different La Nacional stores were
arrested for allegedly violating federal money laundering laws and certain state statutes. See Note
13, Subsequent Events, for subsequent developments relating to the Companys agreement to acquire
La Nacional.
See Note 13, Subsequent Events, for a discussion of the Companys acquisition of the common stock
of RIA Envia, Inc. (RIA) in April 2007.
2006 Acquisition:
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 in the Companys EFT Processing Segment. There are no potential additional
purchase price or escrow arrangements associated with the acquisition of Essentis.
(5) GOODWILL AND INTANGIBLE ASSETS
A summary of intangible assets and goodwill activity for the three-month period ended March 31,
2007, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable |
|
|
|
|
|
|
Total |
|
|
|
Intangible |
|
|
|
|
|
|
Intangible |
|
(in thousands): |
|
Assets |
|
|
Goodwill |
|
|
Assets |
|
Balance as of January 1, 2007 |
|
$ |
47,539 |
|
|
$ |
278,743 |
|
|
$ |
326,282 |
|
Increases (decreases): |
|
|
|
|
|
|
|
|
|
|
|
|
2007 acquisitions |
|
|
7,177 |
|
|
|
20,881 |
|
|
|
28,058 |
|
Adjustment to 2006 acquisition |
|
|
(116 |
) |
|
|
|
|
|
|
(116 |
) |
Amortization |
|
|
(2,248 |
) |
|
|
|
|
|
|
(2,248 |
) |
Other (primarily changes in foreign currency exchange rates) |
|
|
272 |
|
|
|
1,287 |
|
|
|
1,559 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2007 |
|
$ |
52,624 |
|
|
$ |
300,911 |
|
|
$ |
353,535 |
|
|
|
|
|
|
|
|
|
|
|
Estimated annual amortization expense on intangible assets with finite lives, before income taxes,
as of March 31, 2007, is expected to be $9.4 million for 2007, $9.3 million for 2008, $9.3 million
for 2009, $9.2 million for 2010, $7.1 million for 2011 and $5.6 million for 2012.
The Companys annual goodwill impairment test for the year ended December 31, 2006 indicated that
there were no impairments. Determining the fair value of reporting units for the purpose of the
goodwill impairment test 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 assumptions could change,
which may result in the Company recording material non-cash impairment charges during the year in
which these changes take place.
(6) DEBT OBLIGATIONS
A summary of the activity for the three-month period ended March 31, 2007 for all debt obligations
is presented below:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.625% |
|
|
3.50% |
|
|
|
|
|
|
Revolving |
|
|
|
|
|
|
|
|
|
|
Convertible |
|
|
Convertible |
|
|
|
|
|
|
Credit |
|
|
Other Debt |
|
|
|
|
|
|
Debentures |
|
|
Debentures |
|
|
|
|
(in thousands) |
|
Facilities |
|
|
Obligations |
|
|
Capital Leases |
|
|
Due 2024 |
|
|
Due 2025 |
|
|
Total |
|
Balance at January 1, 2007 |
|
$ |
34,073 |
|
|
$ |
4,378 |
|
|
$ |
20,001 |
|
|
$ |
140,000 |
|
|
$ |
175,000 |
|
|
$ |
373,452 |
|
Increases (decreases): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indebtedness incurred |
|
|
9,000 |
|
|
|
|
|
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
10,457 |
|
Repayments |
|
|
(26,608 |
) |
|
|
(1,114 |
) |
|
|
(2,839 |
) |
|
|
|
|
|
|
|
|
|
|
(30,561 |
) |
Capital lease interest |
|
|
|
|
|
|
|
|
|
|
461 |
|
|
|
|
|
|
|
|
|
|
|
461 |
|
Foreign exchange gain (loss) |
|
|
(341 |
) |
|
|
(29 |
) |
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
16,124 |
|
|
|
3,235 |
|
|
|
19,189 |
|
|
|
140,000 |
|
|
|
175,000 |
|
|
|
353,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less - current maturities |
|
|
|
|
|
|
(3,235 |
) |
|
|
(6,278 |
) |
|
|
|
|
|
|
|
|
|
|
(9,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations at March 31, 2007 |
|
$ |
16,124 |
|
|
$ |
|
|
|
$ |
12,911 |
|
|
$ |
140,000 |
|
|
$ |
175,000 |
|
|
$ |
344,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 13, Subsequent Events, for further discussion of additional debt obligations and
changes to existing debt obligations occurring during April 2007.
(7) 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
estimated expenses, were approximately $154.3 million.
(8) BUSINESS SEGMENT INFORMATION
Operating segments are defined by SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. During the first quarter 2007, the Company began
reporting and managing the operations of the EFT Processing Segment and the Software Solutions
Segment on a combined basis. Previously reported amounts have been restated to reflect these
changes, which did not impact consolidated results. As a result of this change, the Company
currently operates in the following two principal business segments.
|
1) |
|
Through the EFT Processing Segment, the Company processes transactions for a network of
ATMs and POS terminals across Europe, Asia and Africa. The Company provides comprehensive
electronic payment solutions consisting of ATM network participation, outsourced ATM and POS
management solutions and electronic recharge services for prepaid mobile airtime purchases
via ATM or directly from the handset. 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 prepaid processing, or
top-up services, for prepaid mobile airtime and other prepaid products. The Company operates
a network of POS terminals providing electronic processing of prepaid mobile airtime
services in the U.S., Europe, Africa and Asia Pacific. This segment also includes the
results of Euronet Payments & Remittance, a licensed money transfer and bill payment
company. |
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 two business segments. These services
are not directly identifiable with the Companys business segments.
The following tables present the segment results of the Companys operations for the three-month
periods ended March 31, 2007 and 2006:
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services, |
|
|
|
|
|
|
EFT |
|
|
Prepaid |
|
|
Eliminations |
|
|
|
|
(in thousands) |
|
Processing |
|
|
Processing |
|
|
and Other |
|
|
Consolidated |
|
Total revenues |
|
$ |
42,047 |
|
|
$ |
128,370 |
|
|
$ |
|
|
|
$ |
170,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
|
16,923 |
|
|
|
103,741 |
|
|
|
|
|
|
|
120,664 |
|
Salaries and benefits |
|
|
9,254 |
|
|
|
6,975 |
|
|
|
2,700 |
|
|
|
18,929 |
|
Selling, general and administrative |
|
|
4,864 |
|
|
|
5,028 |
|
|
|
910 |
|
|
|
10,802 |
|
Depreciation and amortization |
|
|
4,068 |
|
|
|
3,822 |
|
|
|
60 |
|
|
|
7,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
35,109 |
|
|
|
119,566 |
|
|
|
3,670 |
|
|
|
158,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
6,938 |
|
|
$ |
8,804 |
|
|
$ |
(3,670 |
) |
|
$ |
12,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of March 31, 2007 |
|
$ |
159,498 |
|
|
$ |
707,741 |
|
|
$ |
406,031 |
|
|
$ |
1,273,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services, |
|
|
|
|
|
|
EFT |
|
|
Prepaid |
|
|
Eliminations |
|
|
|
|
(in thousands) |
|
Processing |
|
|
Processing |
|
|
and Other |
|
|
Consolidated |
|
Total revenues |
|
$ |
36,009 |
|
|
$ |
110,961 |
|
|
$ |
|
|
|
$ |
146,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
|
12,866 |
|
|
|
88,487 |
|
|
|
|
|
|
|
101,353 |
|
Salaries and benefits |
|
|
8,238 |
|
|
|
6,284 |
|
|
|
3,512 |
|
|
|
18,034 |
|
Selling, general and administrative |
|
|
3,718 |
|
|
|
3,846 |
|
|
|
872 |
|
|
|
8,436 |
|
Depreciation and amortization |
|
|
3,392 |
|
|
|
3,384 |
|
|
|
43 |
|
|
|
6,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
28,214 |
|
|
|
102,001 |
|
|
|
4,427 |
|
|
|
134,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
7,795 |
|
|
$ |
8,960 |
|
|
$ |
(4,427 |
) |
|
$ |
12,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2006 |
|
$ |
172,191 |
|
|
$ |
691,323 |
|
|
$ |
244,625 |
|
|
$ |
1,108,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) 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. 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
recorded as selling, general and administrative expenses of the Companys EFT Processing Segment
during the three months ended March 31, 2007.
Loss contingencies
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.
Gain contingency
During 2006, the Internal Revenue Service announced that Internal Revenue Code Section 4251
(relating to communications excise tax) will no longer apply to, among other services, prepaid
mobile airtime such as the services offered by the Companys Prepaid Processing
10
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. The Company plans to claim refunds
for amounts paid during this period. As of March 31, 2007, the refund claim had not been
quantified. No amounts have been recorded, or will be recorded for any potential recovery, in the
Consolidated Financial Statements until such time as the refund is considered realizable as
stipulated under SFAS No. 5, Accounting for Contingencies.
(10) GUARANTEES
As of March 31, 2007, the Company had $32.9 million of bank guarantees issued on its behalf, of
which $14.0 million are collateralized by cash deposits held by the respective issuing banks.
Euronet Worldwide, Inc. regularly grants guarantees of the obligations of its wholly-owned
subsidiaries. As of March 31, 2007, the Company had granted guarantees in the following amounts:
|
|
|
Cash in various ATM networks $19.5 million over the terms of the cash supply agreements. |
|
|
|
|
Other vendor supply agreements $3.1 million over the term of the vendor agreements. |
|
|
|
|
Performance guarantees $18.8 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 obligations is not stated in the agreements. Our liability
under such indemnification provision may be subject to time and materiality limitations, monetary
caps and other conditions and defenses. Such indemnity obligations include the following:
|
|
|
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 our vendors and into
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 certain states. |
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 March 31, 2007 or December 31, 2006.
(11) 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. As of January 1, 2007 the
Company had a total of $35.2 million of unrecognized tax benefits, of which $2.8
million 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 March 31, 2007. The following tax years remain
open in the Companys major jurisdictions:
|
|
|
Poland
|
|
1999 through 2006 |
U.S. (Federal)
|
|
2000 through 2006 |
Australia
|
|
2003 through 2006 |
U.K.
|
|
2004 through 2006 |
Germany
|
|
2004 through 2006 |
11
As of March 31, 2007, there have been no material changes to the status of the Companys remaining
open tax years.
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. During the three-months ended March 31, 2007, the Companys uncertain tax
positions increased by $0.2 million.
(12) GAIN 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 first quarter
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. There
were no assets or liabilities held for sale at March 31, 2007 or December 31, 2006.
(13) SUBSEQUENT EVENTS
Acquisition of RIA
In April 2007, the Company completed the acquisition of the common stock of RIA, which will expand
the Companys money transfer operations in the U.S. and internationally. The purchase price of
approximately $504.0 million is comprised of $358.3 million in cash, 4,053,606 shares of Euronet
Common Stock valued at $108.9 million, 3,685,098 contingent value rights and stock appreciation
rights valued at approximately $32.1 million and transaction costs of approximately $4.7 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 discussed below. Pursuant to the terms of the Stock
Purchase Agreement, as amended, $35 million in cash and 276,382 shares of Euronet Common Stock are
being held in escrow to secure certain obligations of the sellers under the Stock Purchase
Agreement, as amended
As a result of the acquisition of RIA, beginning in the second quarter 2007, the Company will
separately report results for the Money Transfer Segment. Additionally, in April 2007, the Company
combined its previous money transfer business with RIA and will recognize total exit costs of
approximately $1.0 million to $1.5 million that will be recorded during the second quarter 2007.
These exit costs represent the accelerated amortization and depreciation of software, property and
equipment, and leasehold improvements that will be disposed of during the second quarter, an
accrual for the present value of future lease costs that are not expected to be recovered through
sub-lease rental income and severance and retention payments to be made to certain employees. These
costs will be reflected as operating expenses during the second quarter 2007.
Debt obligations
In connection with the completion 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). 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 principal amortization
requirement, payable quarterly, with the remaining balance outstanding due at the end of year
seven. The $100 million five-year revolving line of credit will be priced initially at LIBOR plus
200 basis points or prime plus 100 basis points, subject to a pricing grid that adjusts the spread
each quarter based upon the Companys consolidated total leverage ratio. Euronets new $100 million
five-year revolving credit facility replaces its existing $50 million revolving credit facility.
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 will step down over the next eighteen months thereby requiring the Company to
reduce its total consolidated leverage ratio. Financing costs of $4.3 million have been deferred
and are being amortized over the terms of the respective loans.
Agreement to acquire La Nacional
On April 5, 2007, the Company gave notice to the stockholders of La Nacional, Inc. of the
termination of the stock purchase agreement and requested the release of the escrowed funds under
the terms of the stock purchase agreement. La Nacional is contesting our request for release of the
escrowed funds. We are pursuing all legal remedies available to us to resolve this dispute.
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
COMPANY OVERVIEW, GEOGRAPHIC LOCATIONS AND PRINCIPAL PRODUCTS AND SERVICES
Euronet Worldwide, Inc. (we, us, Euronet or the Company) is a leading electronic
transaction processor, offering ATM and POS outsourcing services, integrated electronic financial
transaction (EFT) software, network gateways and electronic prepaid top-up services to financial
institutions, mobile operators and retailers, as well as electronic consumer money transfer and
bill payment services. We operate the largest independent pan-European ATM network, the largest
national shared ATM network in India, and we are one of the largest providers of prepaid mobile
airtime processing.
During the first quarter 2007, we began reporting and managing the operations of the EFT Processing
Segment and the Software Solutions Segment on a combined basis. Previously reported amounts have
been restated to reflect these changes, which did not impact consolidated results. As a result of
this change, we operate in the following two principal business segments.
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|
|
An EFT Processing Segment, in which we process transactions for a network of 9,182
ATMs and more than 43,000 POS terminals across Europe, Asia and Africa. We provide
comprehensive electronic payment solutions consisting of ATM network participation,
outsourced ATM and POS management solutions, credit card outsourcing and electronic
recharge services for prepaid mobile airtime. Through this segment, we also offer a suite
of integrated electronic financial transaction (EFT) software solutions for electronic
payment, merchant acquiring, card issuing and transaction delivery systems. |
|
|
|
|
A Prepaid Processing Segment, through which we provide distribution of prepaid mobile
airtime and other prepaid products and collections services for various prepaid products,
cards and services. Including terminals owned by unconsolidated subsidiaries, we operate a
network of more than 356,000 POS terminals providing electronic processing of prepaid
mobile airtime top-up services in the U.S., Europe, Africa and Asia Pacific. This segment
also includes Euronet Payments & Remittance, Inc. (Euronet Payments & Remittance), which
provides money transfer services to customers from the U.S. to destinations primarily in
Latin America, and bill payment services to customers within the U.S. |
We have six processing centers in Europe, two in Asia and one in the U.S., and we have seventeen
principal offices in Europe, four in the Asia-Pacific region, four in the U.S. and one in the
Middle East. Our executive offices are located in Leawood, Kansas, USA.
SOURCES OF REVENUES AND CASH FLOW
Euronet earns revenues and income based on ATM management fees, transaction fees 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 25%
of total consolidated revenue for the first quarter 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 licensing, professional
services and maintenance fees for software and sales of related hardware, primarily to financial
institutions around the world.
Prepaid Processing Segment - Revenue in the Prepaid Processing Segment, which represented
approximately 75% of total consolidated revenue for the first quarter 2007, is primarily derived
from commissions and processing fees received from mobile and other telecommunication operators, or
from distributors of prepaid wireless products for the distribution and/or processing of prepaid
mobile
airtime and other telecommunication products. 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. The loss of significant agreements with mobile operators in any of our
markets could materially and adversely affect our results of operations.
OPPORTUNITIES AND CHALLENGES
EFT Processing Segment - The continued expansion and development of our EFT Processing Segment
business will depend on various factors including 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; |
13
|
|
|
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; and |
|
|
|
|
the continued development and implementation of our software products and their
ability to interact with other leading products. |
Software products are also 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.
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. We are developing the necessary
processing systems, which involved the purchase 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 may involve the assumption of
credit risk, as the principal amount of transactions may be settled to merchants before settlements
are received from card associations.
Prepaid Processing Segment As of March 31, 2007, we offered prepaid mobile phone top-up services
in the U.S., Europe, Africa and Asia Pacific; money transfer services to customers from the U.S. to
destinations primarily in Latin America, and bill payment services to customers in the U.S., U.K.
and Poland. We plan to expand our top-up business in these and other markets by taking advantage of
our existing expertise together with relationships with mobile phone operators and retailers. We
plan to expand our card-based money transfer and bill payment services by offering the product on
many of our existing POS terminals in the U.S. and internationally.
Expansion 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 banks and retailers; |
|
|
|
|
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 continuation of the trend of increased use of electronic money transfer and
bill payment among immigrant workers and the unbanked population in our markets; |
|
|
|
|
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 obtain money transfer licenses to operate in many of the states within the U.S. and internationally; |
|
|
|
|
the ability to rapidly maximize the number of agents and retailers who sell our
card-based money transfer and bill payment product in the U.S. and internationally; |
|
|
|
|
the availability of financing for further expansion; and |
|
|
|
|
our ability to successfully integrate newly acquired operations with our existing operations. |
To expand our money transfer and bill payment services business, during April 2007 we completed the
acquisition of all of the stock of RIA Envia, Inc. (RIA). The purchase price of approximately
$504.0 million is comprised of $358.3 million in cash, 4,053,606 shares of Euronet Common Stock
valued at $108.9 million, 3,685,098 contingent value rights and stock appreciation rights valued at
approximately $32.1 million and transaction costs of approximately $4.7 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. Pursuant to the terms of the Stock Purchase Agreement, as
amended, $35 million in cash and 276,382 shares of Euronet Common Stock are being held in escrow to
secure certain obligations of the
sellers under the Stock Purchase Agreement, as amended. The acquisition of RIA makes Euronet the
third largest global money transfer company. RIA processes approximately $4.5 billion in money
transfers annually, originates transactions through a network of 10,000 sending agents and 98
company-owned stores located throughout 13 countries in North America, the Caribbean, Europe and
Asia and terminates transactions through a payer network of over 32,000 locations across 82
countries. The acquisition is expected to create significant cross-selling opportunities on our
network of more than 186,000 prepaid top up locations and to provide prepaid services through RIAs
stores and agents worldwide. Additionally, we expect to leverage our banking and merchant/retailer
relationships to expand money transfer services to corridors across Europe and Asia, including high
growth corridors to central and eastern European countries.
Consistent with other participants in the money transfer industry, as a result of immigration
matters, downturns in certain labor markets and/or other economic factors, growth rates in money
transfers from the U.S. to Mexico has 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 it too early to conclude on the
impact, if any, to our results of operations.
14
As a result of this acquisition, beginning in the second quarter 2007, we will separately report
results for the Money Transfer Segment. Additionally, during April 2007, we combined our previous
money transfer business with RIA and will recognize total exit costs of approximately $1.0 million
to $1.5 million in the second quarter 2007. These exit costs represent: i) the accelerated
amortization and depreciation of software, property and equipment, and leasehold improvements that
will be disposed of during the second quarter; ii) an accrual for the present value of future lease
costs that are not expected to be recovered through sub-lease rental income; and iii) severance and
retention payments to be made to certain employees. These costs will be reflected as operating
expenses during the second quarter 2007.
During the first quarter 2007, we completed the acquisition 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.
Corporate Services, Eliminations and Other - In addition to operating in our principal business
segments described above, our division, Corporate Services, Elimination and Other 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 option and restricted stock grants. These services are not directly identifiable
with our business segments. The impact of share-based compensation is recorded as an expense of the
Corporate Services division, with certain limited exceptions related to grants of restricted stock
to key members of management that vest based on the achievement of performance criteria by our
subsidiaries.
SEGMENT SUMMARY RESULTS OF OPERATIONS
Revenue and operating income by segment for the three-month periods ended March 31, 2007 and 2006
are summarized in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income for the |
|
|
Year-over-Year Change |
|
|
|
Revenues for the Three |
|
|
Year-over-Year Change |
|
|
Three Months Ended |
|
|
Increase |
|
|
Increase |
|
|
|
Months Ended March 31, |
|
|
Increase |
|
|
Increase |
|
|
March 31, |
|
|
(Decrease) |
|
|
(Decrease) |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
EFT Processing |
|
$ |
42,047 |
|
|
$ |
36,009 |
|
|
$ |
6,038 |
|
|
|
17% |
|
|
$ |
6,938 |
|
|
$ |
7,795 |
|
|
$ |
(857 |
) |
|
|
(11%) |
|
Prepaid Processing |
|
|
128,370 |
|
|
|
110,961 |
|
|
|
17,409 |
|
|
|
16% |
|
|
|
8,804 |
|
|
|
8,960 |
|
|
|
(156 |
) |
|
|
(2%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
170,417 |
|
|
|
146,970 |
|
|
|
23,447 |
|
|
|
16% |
|
|
|
15,742 |
|
|
|
16,755 |
|
|
|
(1,013 |
) |
|
|
(6%) |
|
|
Corporate services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,670 |
) |
|
|
(4,427 |
) |
|
|
757 |
|
|
|
(17%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
170,417 |
|
|
$ |
146,970 |
|
|
$ |
23,447 |
|
|
|
16% |
|
|
$ |
12,072 |
|
|
$ |
12,328 |
|
|
$ |
(256 |
) |
|
|
(2%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
COMPARISON OF OPERATING RESULTS FOR THE THREE- MONTH PERIODS ENDED MARCH 31, 2007 AND 2006
EFT PROCESSING SEGMENT
The following table presents the results of operations for the three-month periods ended March 31,
2007 and 2006 for our EFT Processing Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-over-Year Change |
|
|
|
Results for the Three |
|
|
Increase |
|
|
Increase |
|
|
|
Months Ended March 31, |
|
|
(Decrease) |
|
|
(Decrease) |
|
(dollar amounts in thousands) |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
Total revenues |
|
$ |
42,047 |
|
|
$ |
36,009 |
|
|
$ |
6,038 |
|
|
|
17% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
|
16,923 |
|
|
|
12,866 |
|
|
|
4,057 |
|
|
|
32% |
|
Salaries and benefits |
|
|
9,254 |
|
|
|
8,238 |
|
|
|
1,016 |
|
|
|
12% |
|
Selling, general and administrative |
|
|
4,864 |
|
|
|
3,718 |
|
|
|
1,146 |
|
|
|
31% |
|
Depreciation and amortization |
|
|
4,068 |
|
|
|
3,392 |
|
|
|
676 |
|
|
|
20% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
35,109 |
|
|
|
28,214 |
|
|
|
6,895 |
|
|
|
24% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
6,938 |
|
|
$ |
7,795 |
|
|
$ |
(857 |
) |
|
|
(11%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions processed (millions) |
|
|
130.7 |
|
|
|
103.1 |
|
|
|
27.6 |
|
|
|
27% |
|
ATMs as of March 31 |
|
|
9,182 |
|
|
|
7,613 |
|
|
|
1,569 |
|
|
|
21% |
|
Average ATMs |
|
|
9,040 |
|
|
|
7,394 |
|
|
|
1,646 |
|
|
|
22% |
|
As discussed previously, during the first quarter 2007, we began reporting and managing the
operations of the EFT Processing Segment and the Software Solutions Segment on a combined basis.
Previously reported amounts have been restated to reflect these changes.
Revenues
Our revenue for the first quarter 2007 increased when compared to the first quarter 2006 primarily
due to increases in the number of ATMs operated and, for owned ATMs, the number of transactions
processed and foreign currency translations to the U.S. dollar. These increases were primarily in Poland, India and Euronet Card Services Greece.
Additionally, a portion of this increase was due to higher license and maintenance revenue recorded
by our Essentis subsidiary. This 2007 increase was the result of the deferral of certain revenues
from the first quarter 2006 to the second quarter 2006 because we had not yet formalized new
contracts for projects with certain customers to replace the previous contracts that expired when
we acquired Essentis.
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. 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 contract exceeded the amount of revenue that we recognized by about $0.6 million
for the first quarter 2007. We may decide to enter into similar arrangements with other EFT
Processing Segment customers during 2007 and beyond.
Average monthly revenue per ATM was $1,308 for the first quarter 2007 compared to $1,346 for the
first quarter 2006 and revenue per transaction was $0.27 for the first quarter 2007 compared to
$0.29 for 2006. The decrease in revenue per ATM and revenue per transaction was due to the addition
of ATMs in India where revenue per ATM is generally lower than Central and Eastern Europe, the
addition of additional Euronet-owned ATMs where related revenue has not yet developed to material
levels and the extension of contracts discussed above.
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 the first quarter 2007 compared to the
first quarter 2006, is attributed to the increase in the number of
ATMs under operation, the
number of transactions processed and foreign currency translations to the U.S. dollar.
16
Gross margin
Gross margin, which is revenue less direct operating costs, increased to $25.1 million for the
first quarter 2007 from $23.1 million for the first quarter 2006. Gross margin as a percentage of
revenue was 60% for the first quarter 2007 compared to 64% for the first quarter 2006. The decrease
in gross margin as a percentage of revenue is due to the fluctuations in revenues discussed above,
as well as the increased contributions of our Indian subsidiary, which generally earns a lower
gross margin than our other operations.
Salaries and benefits
The increase in salaries and benefits for the first quarter 2007 compared to the first quarter 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 revenue the first quarter 2007 compared to 23% for first quarter 2006.
Selling, general and administrative
The increase in selling, general and administrative expenses for the first quarter 2007 compared to
the first quarter 2006 is primarily due to the $1.2 million loss recorded under a claim from a
former cash supply contractor in Central Europe. The claim loss was awarded by an arbitration
tribunal in Budapest Hungary and involved the claim that the cash supply contractor provided us
with cash during the fourth quarter 1999 and first quarter 2000 that was not returned. Excluding
this loss, as a percentage of revenues, these costs decreased to 9% of revenue for the first
quarter 2007 from 10% of revenue for the first quarter 2006.
Depreciation and amortization
The increase in depreciation and amortization expense for the first quarter 2007 compared to the
first quarter 2006 is due primarily to additional equipment and software for our Hungarian
processing center during 2006 and additional ATMs in Poland. As a percentage of revenue, these
expenses increased slightly to 10% for the first quarter 2007 from 9% for the first quarter 2006.
Operating income
Operating income decreased for the first quarter 2007 compared to the first quarter 2006, primarily
due to the arbitration loss described under selling, general and administrative expenses above.
Excluding this loss, operating income as a percentage of revenue was 19% for the first quarter 2007
compared to 22% for the first quarter 2006 and $0.06 per transaction for the first quarter 2007 and
$0.08 per transaction for the first quarter 2006. Excluding the arbitration loss, average monthly
operating income per ATM was $299 for the first quarter 2007 compared to $351 for the first quarter
2006. The decreases in operating income as a percentage of revenue, operating income per
transaction and average monthly operating income per ATM were generally the result of the decreases
in gross margin, revenue per ATM and revenue per transaction described above, combined with
additional salaries and benefits incurred to expand into emerging markets and additional products.
Software sales backlog
As of March 31, 2007, we had a software contract backlog of approximately $8.1 million compared to
approximately $6.7 million as of March 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 revenue
associated with these sales contracts. We cannot give assurances that the milestones under the
contracts will be completed within one year or that we will be able to recognize the related
revenue within the one-year period.
17
PREPAID PROCESSING SEGMENT
The following table presents the results of operations for the three-month periods ended March 31,
2007 and 2006 for our Prepaid Processing Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-over-Year Change |
|
|
|
Results for the Three Months |
|
|
Increase |
|
|
Increase |
|
|
|
Ended March 31, |
|
|
(Decrease) |
|
|
(Decrease) |
|
(dollar amounts in thousands) |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
Total revenues |
|
$ |
128,370 |
|
|
$ |
110,961 |
|
|
$ |
17,409 |
|
|
|
16% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
|
103,741 |
|
|
|
88,487 |
|
|
|
15,254 |
|
|
|
17% |
|
Salaries and benefits |
|
|
6,975 |
|
|
|
6,284 |
|
|
|
691 |
|
|
|
11% |
|
Selling, general and administrative |
|
|
5,028 |
|
|
|
3,846 |
|
|
|
1,182 |
|
|
|
31% |
|
Depreciation and amortization |
|
|
3,822 |
|
|
|
3,384 |
|
|
|
438 |
|
|
|
13% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
119,566 |
|
|
|
102,001 |
|
|
|
17,565 |
|
|
|
17% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
8,804 |
|
|
$ |
8,960 |
|
|
$ |
(156 |
) |
|
|
(2%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions processed (millions) |
|
|
139.5 |
|
|
|
96.4 |
|
|
|
43.1 |
|
|
|
45% |
|
Revenues
The increase in revenues for the first quarter 2007 compared to the first quarter 2006 was
generally attributable to the increase in total transactions processed across all of our Prepaid
Processing operations, the first quarter 2007 acquisitions of
Omega Logic and Brodos Romania and foreign currency translations to
the U.S. dollar.
Revenue growth was partially offset by reduced revenue in Spain resulting from the second quarter
2006 expiration of a preferential commission arrangement with a Spanish mobile operator. When we
acquired our Spanish prepaid subsidiaries, we entered into an agreement with a major mobile
operator under which the subsidiaries received a preferred, exclusive distributor commission on
sales of prepaid mobile airtime. Additionally, in certain mature markets, 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 revenue growth for
2007 and beyond to be derived from developing markets or markets in which there is organic growth
in the prepaid sector overall, from continued conversion from scratch cards to electronic top-up,
from additional products sold over the base of prepaid processing terminals and, possibly, from
acquisitions.
Revenue per transaction decreased to $0.92 for the first quarter 2007 from $1.15 for the first
quarter 2006 due primarily to the growth in revenues and transactions recorded by our ATX
subsidiary. 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 at ATX have increased by 286% for the first quarter 2007
compared to the first quarter 2006. 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 was the growth in both volumes and revenues related to our U.S.
subsidiary, PaySpot, Inc. (PaySpot). Revenue per transaction for PaySpot is generally higher than
most of our other Prepaid Processing subsidiaries.
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 communication and paper 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 revenue less direct costs, was $24.6 million for the first quarter
2007 compared to $22.5 million for the first quarter 2006. Gross margin as a percentage of revenue
was 19% for the first quarter 2007 compared to 20% for the first quarter 2006 and gross margin per
transaction was $0.18 for the first quarter 2007 compared to $0.23 for the first quarter 2006. 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.
18
Salaries and benefits
The increase in salaries and benefits for the first quarter 2007 compared to the first quarter 2006
is primarily the result of the acquisitions of Brodos Romania and Omega Logic. As a percentage of
revenue, salaries and benefits have decreased slightly to 5.4% for the first quarter 2007, from
5.7% for the first quarter 2006. The decrease in salaries and benefits as a percentage of revenue
reflects our growing leverage and scalability in our markets.
Selling, general and administrative
The increase in selling, general and administrative expenses for the first quarter 2007 compared to
the first quarter 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
revenue these selling, general and administrative expenses increased to 3.9% for the first quarter
2007 compared to 3.5% of revenue for the first quarter 2006 mainly due to additional expenses
incurred in new 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 the first quarter
2007 compared to the first quarter 2006 is due to the acquisitions of Brodos Romania and Omega
Logic, as well as depreciation on additional POS terminals. As a percentage of revenues,
depreciation and amortization was flat at 3.0% for both the first quarter 2007 and first quarter
2006.
Operating income
Operating income for the first quarter 2007 decreased slightly compared to the first quarter 2006.
As a result of the developments in Spain discussed above, operating income for the first quarter
2007 was approximately $1.1 million lower than the first quarter 2006. Additionally, operating
income for the first quarter 2007 includes increased losses of $0.3 million related to Euronet
Payments & Remittance, Inc. compared to the first quarter 2006. Exclusive of these two reductions,
the improvement in operating income for the first quarter 2007 was due to the growth in revenues
and transactions processed, increased leverage and scalability in our markets and foreign currency translations to
the U.S. dollar.
Operating income as a percentage of revenues decreased to 6.9% for the first quarter 2007 from 8.1%
for the first quarter 2006, primarily due to the developments in Spain and operating expenses
incurred to support development in new and growing markets. Operating income per transaction
decreased to $0.06 for the first quarter 2007 from $0.09 for the first quarter 2006. The decrease
in operating income per transaction is due to the developments in Spain and the growth in revenues
and transactions associated with ATX.
CORPORATE SERVICES
The following table presents the operating expenses for the three-month periods ended March 31,
2007 and 2006 for Corporate Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-over-Year Change |
|
|
|
Results for the Three Months |
|
|
Increase |
|
|
Increase |
|
|
|
Ended March 31, |
|
|
(Decrease) |
|
|
(Decrease) |
|
(dollar amounts in thousands) |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
Salaries and benefits |
|
$ |
2,700 |
|
|
$ |
3,512 |
|
|
$ |
(812 |
) |
|
|
(23%) |
|
Selling, general and administrative |
|
|
910 |
|
|
|
872 |
|
|
|
38 |
|
|
|
4% |
|
Depreciation and amortization |
|
|
60 |
|
|
|
43 |
|
|
|
17 |
|
|
|
40% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
3,670 |
|
|
$ |
4,427 |
|
|
$ |
(757 |
) |
|
|
(17%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate operating expenses
The decrease in salaries and benefits for the first quarter 2007 compared to the first quarter 2006
was due to lower incentive accruals, lower share-based compensation and lower salary costs.
19
OTHER INCOME, NET
Interest income
Interest income was $4.3 million for the first quarter 2007 compared to $2.7 million for the first
quarter 2006. The increase in interest income for the first quarter 2007 was primarily due to cash
generated from operations and the $154.3 million of net proceeds from the private equity placement
that we completed during March 2007. We have also benefited from higher average interest rates
during the first quarter 2007 compared to the first quarter 2006 due to a shift of investments from
money market accounts to commercial paper and the general rise in short-term interest rates.
Foreign currency exchange gain, net
The re-measurement of 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 that
are recorded in determining net income. We recorded net foreign currency exchange gains of $0.4
million and $1.6 million during the first quarter of 2007 and 2006, respectively.
INCOME TAX EXPENSE
|
|
|
|
|
|
|
|
|
|
|
Results for the Three Months |
|
|
|
Ended March 31, |
|
(dollar amounts in thousands) |
|
2007 |
|
|
2006 |
|
Income from continuing operations before income taxes
and minority interest |
|
$ |
13,509 |
|
|
$ |
13,182 |
|
Minority interest |
|
|
(353 |
) |
|
|
(261 |
) |
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
13,156 |
|
|
|
12,921 |
|
Income tax expense |
|
|
3,933 |
|
|
|
3,570 |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
9,223 |
|
|
$ |
9,351 |
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
29.9 |
% |
|
|
27.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
$ |
13,156 |
|
|
$ |
12,921 |
|
Adjust: Foreign exchange gain, net |
|
|
433 |
|
|
|
1,558 |
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
and foreign exchange gain, net |
|
$ |
12,723 |
|
|
$ |
11,363 |
|
|
|
|
|
|
|
|
Effective income tax rate, excluding foreign exchange
gain, net |
|
|
30.9 |
% |
|
|
31.4 |
% |
|
|
|
|
|
|
|
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 rate was 29.9% for the first quarter
2007 compared to 27.6% for the first quarter 2006.
We are in a net operating loss position for our U.S. operations and, accordingly have valuation
allowances to reserve for net deferred tax assets. Therefore, we do not currently recognize the tax
benefit or expense associated with foreign currency gains or losses incurred by our U.S.
operations. Excluding foreign exchange translation results from pre-tax book income, our effective
tax rate was 30.9% for the first quarter 2007 and 31.4% for the first quarter 2006.
The decrease in the year-over-year effective tax rates, excluding foreign currency gains and
losses, was also attributable to the increased profitability of individual companies located in
lower than average tax rate jurisdictions, together with increased operating profits in countries
with remaining net operating loss carryforwards, such as the U.S.
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 on our Consolidated Financial Statements.
20
DISCONTINUED OPERATIONS
In July 2002, we sold substantially all of the non-current assets and related capital lease
obligations of our ATM processing business in France to Atos S.A. During the first quarter 2007, we
received a binding French Supreme Court decision relating to a lawsuit in France that resulted in a
cash recovery and gain of $0.3 million, net of legal costs. There were no assets or liabilities
held for sale at March 31, 2007 or December 31, 2006.
NET INCOME
We recorded net income of $9.6 million for the first quarter 2007 compared to $9.4 million for the
first quarter 2006. As more fully discussed above, the increase of $0.2 million was primarily the
result of a decrease in net interest expense of $1.6 million and a gain from discontinued
operations of $0.3 million. These improvements were partially offset by a decrease in operating
income of $0.3 million, a decrease in our foreign currency exchange gain of $1.1 million and an increase in income
taxes of $0.4 million. Operating income included the impact from the arbitration loss of $1.2
million described in more detail in the discussion of operating results from the EFT Processing
Segment.
LIQUIDITY AND CAPITAL RESOURCES
Working capital
As of March 31, 2007, we had working capital, which is the difference between total current assets
and total current liabilities, of $414.8 million, compared to working capital of $284.4 million as
of December 31, 2006. Our ratio of current assets to current liabilities was 2.01 at March 31,
2007, compared to 1.70 as of December 31, 2006. The increase in working capital and the improvement
in the ratio of current assets to current liabilities were due primarily to a private equity
offering that we completed during March 2007. As of March 31, 2007, the net proceeds from the
offering remained unused and included in unrestricted cash.
Operating cash flows
Cash flows
provided by operating activities were relatively flat at $7.5 million for the first quarter 2007 compared to
$6.3 million for first quarter 2006.
Investing activity cash flow
Cash flows used in investing activities were $46.3 million for the first quarter 2007, compared to
$9.9 million for the first quarter 2006. The increase in investing activities during the first
quarter 2007 was primarily related to increased acquisition activity and the increase in restricted cash because
we deposited $26 million in an escrow account in connection with the agreement to acquire Envios de
Valores La Nacional Corp. (La Nacional). See further discussion under Subsequent Events
Agreement to acquire La Nacional below. Our investing activities for
the first quarter 2007 consisted of $15.0 million in cash paid related to acquisitions and $5.3
million for purchases of property and equipment, software development and other
investing activities. Our investing activities for the first quarter 2006 include $2.3 million in
cash paid for acquisitions and $7.6 million for purchases of property and equipment, software development and other
investing activities.
Financing activity cash flows
Cash flows from financing activities were $136.9 million during the first quarter 2007 compared to
$6.8 million during the first quarter 2006. Our financing activities for the first quarter 2007
consisted primarily of proceeds from the equity private placement of $159.4 million, offset by
dividends paid to minority interest stockholders and repayments of obligations under short term
debt, revolving credit and capital leases arrangements. Our financing activities for the first
quarter 2006 consist primarily of proceeds from the exercise of stock options and employee share
purchase of $10.4 million, partially offset by repayments of short-term borrowings and payments on
capital lease obligations totaling $3.5 million.
Expected future financing and investing cash requirements primarily depend on our acquisition
activity and the related financing needs. During April 2007, we completed the acquisition of RIA.
For further discussion see Subsequent developmentsAcquisition of RIA below.
Other sources of capital
Revolving credit agreements As of March 31, 2007, we had borrowings of $16.1 million and
stand-by letters of credit totaling $3.0 million outstanding against the revolving credit
agreements; the remaining $30.9 million ($45.9 million if the facility were increased to $65
million) was available for borrowing. Borrowings under these agreements are being used to fund
short-term working capital requirements in India and the U.S.
21
In connection with our completion of the acquisition of RIA in April 2007, we replaced the existing
revolving credit agreement with a new $100 million revolving credit facility. See Subsequent
EventsAcquisition of RIA below for further discussion.
Short-term debt obligations Short-term debt obligations consist primarily of credit
lines, overdraft facilities and short-term loans to support ATM cash needs and supplement
short-term working capital requirements. As of March 31, 2007, we had $3.2 million in short-term
debt obligations borrowed by our subsidiary in the Czech Republic that was being used to fund
short-term working capital requirements.
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 advances until the underlying account receivable is 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. As of March 31, 2007, we had $1.4 million outstanding under these
arrangements.
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.
Convertible debt As of March 31, 2007, we have $175 million in principal amount of 3.50%
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, during any six-month period commencing with the 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, 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 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. When due, 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, during any
six-month period commencing with the period from December 20, 2009 through June 14, 2010, and for
each six-month period thereafter from June 15 to December 14 or December 15 to June 14, for which
the average trading price of the debentures for the applicable five trading-day period preceding
such applicable interest period equals or exceeds 120% of the principal amount of the debentures.
Contingent interest will equal 0.30% per annum of the average trading price of a debenture for such
five trading-day periods. 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. When due, these debentures can be settled in cash or Euronet
Common Stock, at our option, at predetermined conversion rates.
These terms and other material terms and conditions applicable to the convertible debentures are
set forth in the indenture agreements governing these debentures.
Proceeds from issuance of shares and other capital contributions We have established, and
shareholders have approved, share compensation plans that allow the Company to make grants of
restricted stock, or options to purchase shares of Common Stock, to certain current and prospective
key employees, directors and consultants. During the first quarter 2007, 57,312 stock options were
exercised at an average exercise price of $11.62, resulting in proceeds to us of approximately $0.7
million.
Other uses of capital
Payment obligations related to acquisitions We have potential contingent obligations to
the former owners 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
may seek arbitration as provided for in the purchase agreement. Any additional payments, if
ultimately determined to be owed the seller, would be recorded as additional goodwill and could be
made in either cash of a combination of cash and Euronet Common Stock at our option.
In connection with the acquisition of Brodos Romania, we have agreed to certain contingent
consideration arrangements based on the achievement of certain performance criteria. During 2009
and 2010, we 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.
22
See sections entitled Subsequent developmentsAcquisition of RIA below for discussion of
liquidity and capital resources involving the completion of the acquisition of RIA during April
2007.
Leases We lease ATMs and other property and equipment under capital lease arrangements
and, as of March 31, 2007, we owed $19.2 million under these 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 the first quarter 2007 were
$5.3 million, of which $1.2 million were funded through capital leases. These capital expenditures
were required primarily for the purchase of ATMs to meet contractual requirements in Poland and
India, the purchase and installation ATMs in key under-penetrated markets, the purchase of POS
terminals for the Prepaid Processing Segment and office and data center computer equipment and
software. Total capital expenditures for 2007 are estimated to be approximately $30 million to $35
million, primarily for the purchase of ATMs to meet contractual requirements in Poland and India,
to purchase and install ATMs in future key under-penetrated markets, the purchase of terminals for
the prepaid processing and money transfer businesses and office and data center computer equipment
and software. We expect approximately $10 million of the capital expenditures will be covered
through capital leases in conjunction with ATM outsourcing agreements where we already have signed
agreements with banks. The balance of these capital expenditures will be funded through cash
generated from operations, together with cash on hand.
In the Prepaid Processing Segment, approximately 93,000 of the more than 356,000 POS devices that
we operate are Company-owned, with the remaining terminals being operated as integrated cash
register devices of our major retail customers or owned by the retailers. As our Prepaid Processing
Segment expands, we will continue to add terminals in certain independent retail locations at a
price of approximately $300 per terminal. We expect the proportion of owned terminals to total
terminals operated to remain relatively constant.
We are required to maintain ATM hardware for Euronet-owned ATMs and software for all ATMs in our
network in accordance with certain regulations and mandates established by local country regulatory
and administrative bodies as well as EMV (Europay, MasterCard and Visa) chip card support.
Accordingly, we expect additional capital expenditures over the next few years to maintain
compliance with these regulations and/or mandates. If strategic opportunities were available to us,
we would consider increasing future capital expenditures to expand our network of owned ATMs in new
or existing markets. Upgrades to our ATM software and hardware were required in 2005 to meet EMV
mandates such as Triple DES (Data Encryption Standard) and micro-chip card technology for smart
cards. We completed a plan for implementation and delivery of the hardware and software
modifications; the remaining capital expenditures necessary to complete these upgrade requirements
are estimated to be approximately $3.0 million.
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
the Company terminated its 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 recorded as selling, general and administrative expenses of
the Companys EFT Processing Segment during the three months ended March 31, 2007.
At current and projected cash flow levels, we anticipate that our cash generated from operations,
together with cash on hand and amounts available under our recently amended revolving credit
agreements and other and existing and 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 obligations.
Contingencies
From time to time, we are a party to litigation arising in the ordinary course of business.
Currently, there are no 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.
During 2006, the Internal Revenue Service announced that Internal Revenue Code Section 4251
(relating to telecommunications excise tax) will no longer apply to, among other services, prepaid
mobile airtime such as the services offered by our 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. We plan to claim refunds for amounts paid during this
period. Because of the complexity of the matter, the refund claim has not yet been quantified. No
amounts have been recorded, or will be recorded for any potential recovery, in our Consolidated
Financial Statements until
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such time as the refund is considered realizable as stipulated under
Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies.
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.
Currently, 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.
SUBSEQUENT EVENTS
Debt obligations In connection with completing the acquisition of RIA discussed under
Opportunities and Challenges above, 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 (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% of the outstanding 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. Estimated financing costs of $4.3
million have been deferred and are being amortized over the terms of the respective loans. 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 (as determined by the administrative agent and the lenders).
The Credit Facility contains three financial covenants that become more restrictive between now and
September 30, 2008. The financial covenants that become more restrictive are: (1) total debt to
earnings before interest, taxes depreciation and amortization (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 will 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,
which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
The $100 million five-year revolving line of credit replaces our existing revolving credit facility
and will initially bear interest at LIBOR plus 200 basis points or prime plus 100 basis points,
subject to a pricing grid that adjusts the spread each quarter based upon our consolidated total
debt to EBITDA ratio. This credit line will be used primarily to fund working capital requirements,
which are expected to increase as a result of our recent acquisitions. Based on our current
projected working capital requirements, we anticipate that our revolving line of credit will be
sufficient to fund our working capital needs.
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.
Agreement to acquire La Nacional During January 2007, we signed a stock purchase
agreement to acquire Envios de Valores La Nacional Corp. (La Nacional), subject to regulatory
approvals and other customary closing conditions. In connection with signing this agreement, we
deposited funds in an escrow account created for the proposed acquisition. The escrowed funds can
only be released by mutual agreement of the Company and La Nacional or through legal remedies
available in the agreement.
On February 6, 2007, two employees of La Nacional working in different La Nacional stores were
arrested for allegedly violating federal money laundering laws and certain state statutes. On April
5, 2007, we gave notice to the stockholders of La Nacional, Inc. of the termination of the stock
purchase agreement and requested the release of the $26 million in purchase price deposited in
escrow under the terms of the stock purchase agreement. La Nacional is contesting our request for
release of the escrowed funds. We are pursuing all legal remedies available to us to resolve this
dispute. We cannot predict when with dispute will be resolved or what the resolution may be.
OFF BALANCE SHEET ARRANGEMENTS
We regularly grant guarantees of the obligations of our wholly-owned subsidiaries and we sometimes
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. Our liability
under such indemnification provision may be subject to time and materiality limitations, monetary
caps and other conditions and defenses. As of March 31, 2007, there were no material changes from
the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2006. To date, we
are not aware of any significant claims made by the indemnified parties or parties to guarantee
agreements with us and, accordingly, no liabilities have been recorded as of March 31, 2007.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 2005, the Financial Accounting Standards Board (FASB) issued an exposure draft that would
amend SFAS No. 141, Business Combinations. During redeliberations, the FASB has reaffirmed
certain decisions including, among other things: 1) measuring and recognizing contingent
consideration at fair value as of the acquisition date and recording adjustments to liabilities as
adjustments in earnings; 2) identifiable intangible assets acquired in a business combination
should be measured at a current exchange value rather than at an entity-specific value; 3) the
acquiring company should measure and recognize the acquirees identifiable assets and liabilities
and goodwill in a step or partial acquisition at 100 percent of their acquisition date fair values;
and 4) accounting for transaction related costs as expenses in the period incurred, rather than
capitalizing these costs as a component of the respective purchase price. The FASB has not yet
reaffirmed decisions on other items. The FASB expects to issue the final statement during the third
quarter 2007, which will be effective for us beginning in 2009. If adopted, the changes described
above, as well as other possible changes, would likely have a significant impact on the accounting
treatment for acquisitions occurring on or after January 1, 2009.
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 159). SFAS 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 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 159, changes in fair value are recognized in earnings.
SFAS 159 will be effective beginning in our first quarter 2008. We are currently determining
whether fair value accounting is appropriate for any of our eligible items and cannot estimate the
impact, if any, which SFAS 159 will have on our consolidated results of operations and financial
condition.
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.
All statements other than statements of historical facts included in this document are
forward-looking statements, including statements regarding the following:
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Although we believe that the expectations reflected in these forward-looking statements are
reasonable, we can give no assurance that these expectations will prove to be correct.
Forward-looking statements are typically identified by the words believe, expect, anticipated,
intend, estimate and similar expressions.
Investors are cautioned that any forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may materially differ from those in
the forward-looking statements as a result of various factors, including, but not limited to, those
referred to above and as set forth and more fully described in Part II, Item 1A Risk Factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency exchange rate risk
For the three-months ended March 31, 2007, 83% of our revenues were generated in non-U.S. dollar
countries compared to 84% for the three-months ended March 31, 2006. This slight decrease in
revenues from non-U.S. dollar countries, compared to prior year is due to 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.
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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 $10.0 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.
We are also exposed to foreign currency exchange rate risk in our money transfer subsidiary,
Euronet Payments & Remittance. A majority of this 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. Additionally, 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.
Through the first quarter 2007, this portion of our business was insignificant. However, as
discussed under Liquidity and Capital Resources Subsequent Events above, during April 2007 we
completed the acquisition of the common stock of RIA, which will significantly expand our money
transfer business in the U.S. and internationally and increase our exposure to foreign currency
risk substantially.
Interest rate risk
As of March 31, 2007, we do not have significant exposure to interest rate volatility. Of the total
outstanding debt of $353.5 million, approximately 89% 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 3.50% per annum. The $140 million contingent convertible
debentures, issued in December 2004, accrue interest at a rate of 1.625% per annum. Interest
expense, including amortization of deferred debt issuance costs, for these contingent convertible
debentures is expected to total approximately $10.1 million per year, or a weighted average
interest rate of 3.2% annually.
The remaining 11% of total debt outstanding relates to debt obligations and capitalized leases with
fixed payment and interest terms that expire between 2006 and 2011. We also have $50 million in
revolving credit facilities, which can be increased to $65 million, that accrue interest at
variable rates. Should we borrow this full $65 million under the revolving credit facility, in
addition to approximately $3.2 million borrowed under other debt arrangements as of March 31, 2007,
and maintain the balance for a full year, a 1% increase in the applicable interest rate would
result in additional interest expense to the Company of approximately $0.7 million.
In connection with completing the acquisition of RIA, during April 2007, 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 loan 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 and, should interest rates increase by 1% and we
have the full $290 million outstanding for a full year our interest expense would
increase by $2.9 million. If we borrowed the full amount available under the facility of $465
million and maintained this balance for a full year, a 1% increase in interest rates would increase
interest expense by $4.7 million.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) that are designed to ensure that information required to be disclosed in our
reports under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. Any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Our executive management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure controls and procedures
as of March 31, 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.
CHANGE IN INTERNAL CONTROLS
There has been no change in our internal control over financial reporting during the three-month
period ended March 31, 2007 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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PART IIOTHER INFORMATION
ITEM 1. 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 I, Item 1. Financial Statements, Note 9 Litigation and Contingencies,
regarding litigation is incorporated herein by reference.
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.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described in Part I, Item 1A. Rick Factors in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2006 as updated in our subsequent
filings with the SEC, including this Quarterly Report on Form 10-Q, before making an investment
decision. The risks and uncertainties described in our Annual Report on Form 10-K, as updated by
any subsequent Quarterly Reports on Form 10-Q, 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 risks identified in our Annual Report on Form 10-K, as updated by any subsequent
Quarterly Reports on Form 10-Q, 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 Quarterly 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 Quarterly Report.
Other than as set forth below, there have been no material changes from the risk factors previously
disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2006, as
filed with the SEC.
Risks Related to Our Business
We may be required to prepay our obligations under the $290 million secured syndicated credit
facility.
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). The Credit
Facility
contains three financial covenants that become more restrictive between now and September 30, 2008.
The financial covenants that become more restrictive are: (1) total debt to earnings before
interest, taxes, depreciation and amortization (EBITDA) ratio, (2) senior secured debt to EBITDA
ratio and (3) EBITDA to fixed charge coverage ratio. Because these covenant thresholds will be come
more restrictive between now and September 30, 2008, to remain in compliance with our debt
covenants we will 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.
If we are unable to maintain our money transfer agent network, our business may be adversely
affected.
Our money transfer based revenue is primarily generated through our agent network. Transaction
volumes at existing agent locations may increase over time and new agents provide us with
additional revenue. If agents decide to leave our network or if we are unable to sign new agents,
our revenue and profit growth rates may be adversely affected. Our agents 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 our agent
network 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 are third parties that may sell products and provide services in addition to our money
transfer services, our agents may encounter business difficulties unrelated to the provision of our
services, which may cause the agents to reduce their number of locations or hours of operation, or
cease doing business altogether.
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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 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.
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. We incorporate industry-standard encryption technology and
processing methodology into our systems and software, and maintain controls and procedures
regarding access to our computer systems by employees and others, to maintain high levels of
security. Although this technology and methodology decrease security risks, they cannot be
eliminated entirely, as criminal elements apply increasingly sophisticated technology to attempt to
obtain unauthorized access to the information handled by ATM and electronic financial transaction
networks.
Any breach in our security systems could result in the perpetration of fraudulent financial
transactions for which we may be found liable. We are insured against various risks, including
theft and negligence, but 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 reputational harm.
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.
Our money transfer and prepaid mobile airtime top-up 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 the consumers and in turn we collect from the agents the
proceeds due 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.
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
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operators, financial
institutions and other money transfer customers experience decreased demand for their products and
services or if the locations where we provide 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 transaction levels during the April through September timeframe coinciding
with the increase in worker migration patterns. 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.
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 revenue 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 through the acquisition
of RIA. 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.
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.
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. Our e-top-up transactions 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
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any technical failure
that prevents operation of our systems for a significant period of time will prevent us from
processing transactions during that period of time and will directly and adversely affect our
revenues and financial results.
Our 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 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 the commission, 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, Global Payments, MoneyGram and others, some of which are larger
than we are and have greater resources than we have. This may allow them to offer better pricing
terms to customers, which may result in a loss of our potential or current 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.
Because we derive our revenue 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. Nonetheless, substantially all of our indebtedness is denominated in U.S. dollars, Euros
and British pounds. 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 continue to have an adverse effect on our results.
Our consumer money transfer operations subject us to foreign currency exchange risks as our
customers deposit one currency at our retail and agent locations worldwide and we typically deliver
funds denominated in a different, destination country currency.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During August 2006,
we entered into a purchase agreement with the former shareholders of
Brodos Romania for the acquisition of all of the share capital of
Brodos Romania, which includes $2.5 million
in contingent consideration. The acquisition closed in January 2007. The issuance of our Common
Stock in connection with the Brodos Romania acquisition is contingent
upon Brodos Romania achieving certain
performance criteria during the years 2007 through 2010. If contingent consideration becomes
payable, the sellers of Brodos Romania have the right to elect payment in the form of cash or our Common
Stock. If the sellers of Brodos Romania select payment of the contingent consideration in Common Stock,
then we will be required to issue a maximum of 75,489 shares. When the shares of our Common Stock
are issued, they will not be registered under the Securities Act of 1933 (the Act). Because the
offer was, and potential future issuance of our Common Stock will be, made in an offshore
transaction as contemplated by Regulation S promulgated under of the Act (Regulation S), the
issuance of our Common Stock is exempt from registration pursuant to the exemption provided by Rule
903 of Regulation S. However, we have obligations under the purchase agreement to register for
resale any shares of our Common Stock that may be issued as contingent consideration.
During February 2007, we issued 275,429 shares of our Common Stock, valued at approximately $7.6
million, to the former shareholders of Omega Logic as a portion of the consideration for all the
share capital of Omega Logic. The shares of our Common Stock were not registered under the
Securities Act of 1933 at the time of issuance. Because both the offer and issuance of our Common
Stock was made in an offshore transaction as contemplated by Regulation S, the issuance of our
Common Stock in this transaction was exempt from registration pursuant to the exemption provided by
Rule 903 of Regulation S. However, in accordance with our obligations under the Omega Logic
purchase agreement, we committed to file a registration statement with the SEC to enable the public
resale of the Common Stock received by the sellers of Omega Logic by April 30, 2007, which filing
was timely made.
ITEM 6. EXHIBITS
a) Exhibits
The exhibits that are required to be filed or incorporated herein by reference are listed on the
Exhibit Index below.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 4, 2007
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By:
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/s/ MICHAEL J. BROWN
Michael J. Brown
Chief Executive Officer
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By:
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/s/ RICK L. WELLER
Rick L. Weller
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Chief Financial Officer |
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EXHIBITS
Exhibit Index
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Exhibit |
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Description |
4.1
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Securities Purchase Agreement, dated as of March 8, 2007, among Euronet
Worldwide, Inc and the Purchasers listed on Exhibit A thereto (filed as
Exhibit 4.1 to the Companys Form 8-K filed March 14, 2007 and incorporated
herein by reference) |
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10.1(1)
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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 Hereto, Bank of America, N.A., as
Administrative Agent and Collateral Agent, California Bank & Trust, as
Synidication Agent and Citibank, N.A., as Documentation Agent |
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10.2(1)
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Euronet Worldwide Inc. 2006 Stock Incentive Plan (Amended and Restated) |
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10.3
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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 March 6, 2007 and incorporated herein by
reference) |
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12.1(1)
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Computation of Ratio of Earnings to Fixed Charges |
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31.1(1)
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Section 302 Certification of Chief Executive Officer |
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31.2(1)
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Section 302 Certification of Chief Financial Officer |
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32.1(1)
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Section 906 Certifications of Chief Executive Officer and Chief Financial Officer |
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(1)
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Filed herewith. |
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