UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

EURONET WORLDWIDE, INC.

Delaware (State or other jurisdiction of incorporation or organization)		74-2806888 (I.R.S. employer identification no.)

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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ  No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of the issuer’s common stock, $0.02 par value, outstanding as of October 28, 2005 was 35,623,615 shares.

 

 

Table of Contents

PART I—FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			45
ITEM 4. CONTROLS AND PROCEDURES			45
PART II—OTHER INFORMATION			46
ITEM 1. LEGAL PROCEEDINGS			46
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			46
ITEM 6. EXHIBITS			46

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EURONET WORLDWIDE, INC. AND SUBSIDIARIES

		September 30,
		2005				December 31,
		(unaudited)				2004
ASSETS
Current assets:
Cash and cash equivalents		$	52,798			$	124,198
Restricted cash			70,335				69,300
Inventory — PINs and other			25,127				18,949
Trade accounts receivable, net of allowances for doubtful accounts of $1,670 at September 30, 2005 and $1,373 at December 31, 2004			130,047				110,306
Earnings in excess of billings			7,504				7,206
Deferred income taxes, net			2,805				1,637
Prepaid expenses and other current assets			19,846				13,170
Total current assets			308,462				344,766
Property and equipment, net of accumulated depreciation of $64,733 at September 30, 2005 and $61,384 at December 31, 2004			41,734				39,907
Goodwill			251,505				183,668
Acquired intangible assets, net of accumulated amortization of $10,110 at September 30, 2005 and $5,363 at December 31, 2004			44,020				28,930
Deferred income taxes			8,230				8,494
Other assets, net of accumulated amortization of $7,014 at September 30, 2005 and $5,430 at December 31, 2004			10,390				12,710
Total assets		$	664,341			$	618,475
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	179,718			$	155,079
Accrued expenses and other current liabilities			70,564				107,580
Current installments on obligations under capital leases			5,037				4,403
Short-term obligations			5,686				4,862
Income taxes payable			8,864				9,446
Deferred income taxes			4,386				1,864
Deferred revenue			6,730				9,949
Total current liabilities			280,985				293,183
Debt obligations			140,000				140,000
Obligations under capital leases, excluding current installments			13,276				16,894
Deferred income taxes			24,994				17,520
Other long-term liabilities			1,385				3,093
Minority interest			7,405				5,871
Total liabilities			468,045				476,561
Stockholders’ equity:
Common stock, $0.02 par value; 60,000,000 shares authorized; 35,562,518 and 33,126,038 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively			711				663
Additional paid-in-capital			276,996				235,559
Treasury stock			(149	)			(149	)
Employee loans for stock			(47	)			(47	)
Subscriptions receivable			—				(180	)
Accumulated deficit			(80,541	)			(99,444	)
Restricted reserve			787				774
Accumulated other comprehensive income (loss)			(1,461	)			4,738
Total stockholders’ equity			196,296				141,914
Total liabilities and stockholders’ equity		$	664,341			$	618,475

See accompanying notes to the consolidated financial statements.

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
(Unaudited, in thousands, except share and per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Revenues:
EFT Processing Segment		$	26,315			$	20,930			$	76,245			$	53,872
Prepaid Processing Segment			107,669				75,359				299,530				203,912
Software Solutions Segment			3,406				3,635				11,066				10,217
Total revenues			137,390				99,924				386,841				268,001
Operating expenses:
Direct operating costs			95,779				69,192				270,308				186,338
Salaries and benefits			13,831				10,810				39,504				30,295
Selling, general and administrative			8,163				5,733				22,498				16,313
Depreciation and amortization			5,773				4,215				16,443				11,202
Total operating expenses			123,546				89,950				348,753				244,148
Operating income			13,844				9,974				38,088				23,853
Other income (expenses):
Interest income			1,013				864				3,325				2,050
Interest expense			(1,695	)			(1,769	)			(4,900	)			(5,277	)
Income from unconsolidated affiliates			254				164				906				268
Loss on early retirement of debt			—				(32	)			—				(126	)
Foreign currency exchange gain (loss), net			854				419				(6,703	)			912
Total other income (expense)			426				(354	)			(7,372	)			(2,173	)
Income before income taxes and minority interest			14,270				9,620				30,716				21,680
Income tax expense			(3,929	)			(3,657	)			(11,230	)			(8,051	)
Minority interest			(182	)			—				(583	)			—
Net income			10,159				5,963				18,903				13,629
Translation adjustment, net			(617	)			521				(6,199	)			588
Comprehensive income		$	9,542			$	6,484			$	12,704			$	14,217
Net income per share — basic:
Net income per share		$	0.29			$	0.19			$	0.54			$	0.44
Basic weighted average shares outstanding			35,404,949				31,623,233				34,806,093				30,903,488
Net income per share — diluted (see Note 3):
Net income per share		$	0.26			$	0.17			$	0.51			$	0.40
Diluted weighted average shares outstanding			42,006,633				34,698,436				37,150,939				34,018,812

See accompanying notes to the unaudited consolidated financial statements.

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)

		Nine Months Ended September 30,
		2005				2004
Net income		$	18,903			$	13,629
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			16,443				11,202
Unrealized foreign currency exchange (gain) loss			4,207				(388	)
Gain on disposal of property and equipment			(143	)			(71	)
Deferred income tax expense (benefit)			656				(662	)
Income assigned to minority interest			583				—
Income from unconsolidated affiliates			(906	)			(268	)
Accretion of discount on notes payable			—				151
Amortization of debt obligations issuance expense			1,005				59
Changes in working capital, net of amounts acquired:
Increase in income taxes payable, net			1,350				3,929
Decrease (increase) in restricted cash			(7,181	)			630
Increase in inventory			(6,867	)			(10,131	)
Increase in trade accounts receivable			(27,310	)			(5,450	)
Increase in earnings in excess of billings and other accrued income			(726	)			(4,703	)
Decrease (increase) in prepaid expenses and other current assets			(8,701	)			6,827
Increase in trade accounts payable			40,555				7,831
Decrease (increase) in deferred revenue			(4,786	)			2,269
Increase in accrued expenses and other liabilities			12,067				7,580
Other, net			478				2,169
Net cash provided by operating activities			39,627				34,603
Cash flows from investing activities:
Acquisitions, net of cash acquired			(99,343	)			(3,684	)
Proceeds from sale of fixed assets			389				142
Fixed asset purchases			(11,445	)			(6,047	)
Purchase of other long term assets			(1,369	)			(1,970	)
Net cash used in investing activities			(111,768	)			(11,559	)
Cash flows from financing activities:
Proceeds from issuance of shares and other capital contributions			7,459				5,495
Repayment of notes payable and credit facilities			—				(15,790	)
Repayment of obligations under capital leases			(3,983	)			(4,406	)
Proceeds from borrowings			—				9,473
Other, net			138				(309	)
Net cash provided by (used in) financing activities			3,614				(5,537	)
Effect of foreign currency exchange differences on cash			(2,873	)			140
Net increase (decrease) in cash and cash equivalents			(71,400	)			17,647
Cash and cash equivalents at beginning of period			124,198				19,245
Cash and cash equivalents at end of period		$	52,798			$	36,892
Interest paid during the period		$	3,314			$	4,615
Income taxes paid during the period			10,183				2,980

See accompanying notes to the unaudited consolidated financial statements.
See Note 4 for details of significant non-cash transactions.

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 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. and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited consolidated financial statements contain all adjustments (consisting of normal interim closing procedures) necessary to present fairly the financial position of the Company at September 30, 2005, the results of its operations for the three and nine month periods ended September 30, 2005 and 2004 and cash flows for the nine month periods ended September 30, 2005 and 2004.

The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Euronet for the year ended December 31, 2004, including the notes thereto, set forth in the Company’s Form 10-K.

Certain prior year amounts have been reclassified to conform to the current year consolidated financial statement presentation.

During the third quarter 2004, the Company changed the manner in which it reports EFT Processing Segment direct costs, salaries and benefits and sales, general and administrative (SG&A) expenses. In prior periods, processing center costs were charged and then allocated from SG&A to direct costs on the basis of a standard rate per transaction. Management has evaluated the method and believes that the specific assignment of processing center salaries and related costs, together with other costs directly attributable to the center, is a preferred method and more appropriately reflects the variable and non-variable nature of the Company’s operating expenses. Periods prior to the third quarter 2004 have been conformed to ensure consistent presentation. This change in presentation does not impact consolidated operating income or net income for any period presented.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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- and nine- month periods ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year.

(2) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Accounts receivable financed with recourse

Beginning in 2005, the Company’s Prepaid Processing Segment subsidiaries in Spain entered 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 in each of trade accounts receivable and accrued expenses and other current liabilities on the Company’s unaudited consolidated balance sheet. As of September 30, 2005 the amount recorded under these arrangements was $6.2 million.

Revenue recognition – money transfer services

During the second quarter 2005, with the acquisition of TelecommUSA (See Note 4 – Acquisitions), Euronet entered the international money transfer business. Revenue is earned through the charging of a transaction fee, in addition to the difference between purchasing currency at wholesale exchange rates and selling the currency to consumers at retail exchange rates. The Company has origination and distribution agents in place, which each earn a fee for the respective service and is reflected as direct operating costs. Revenue for money transfer services, and the associated direct operating cost, is recognized at the time the transaction is processed.

Stock-based compensation

The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, compensation cost for stock options or restricted stock is measured as the excess, if any, of the fair market value of the Company’s shares at the date of the grant over the exercise or purchase price. Such compensation cost is charged to expense on a straight-line basis over the vesting period of the respective options or restricted stock. If vesting may be accelerated as a result of achieving certain milestones, and

those milestones are believed to be reasonably achievable, the compensation is recognized on a straight-line basis over the shorter accelerated vesting period.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” to stock-based employee compensation:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
(in thousands, except per share data)		2005				2004				2005				2004
Net income, as reported		$	10,159			$	5,963			$	18,903			$	13,629
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards			(1,345	)			(1,112	)			(4,777	)			(3,158	)
Pro forma net income		$	8,814			$	4,851			$	14,126			$	10,471
Earnings per share:
Basic — as reported		$	0.29			$	0.19			$	0.54			$	0.44
Basic — pro forma		$	0.25			$	0.15			$	0.41			$	0.34
Diluted — as reported		$	0.26			$	0.17			$	0.51			$	0.40
Diluted — pro forma		$	0.23			$	0.14			$	0.38			$	0.31

Due to Euronet’s U.S. corporate income tax position, the Company currently provides a valuation allowance over its entire U.S. net deferred tax position. Therefore, no tax benefits have been attributed to stock-based compensation expense in the above table because management has determined that it is more likely than not that such benefit would not be realized.

For a description of other major accounting policies of the Company, see Note 3 to the Audited Consolidated Financial Statements as of and for the year ended December 31, 2004, set forth in the Company’s Form 10-K.

Recently issued or proposed accounting pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of the original SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the period in which the share-based compensation vests (“requisite service period”). SFAS No. 123R permits prospective application or retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by the original SFAS No. 123. After amendment of the compliance date by the Securities and Exchange Commission during April 2005, the Company is required to adopt the provisions of SFAS No. 123R on or before January 1, 2006.

The Company has not yet determined the method of adoption for the requirements of SFAS No. 123R. The estimated impact on salaries and benefits expense for 2006 is expected to be an increase of approximately $4 million to $6 million for awards outstanding. There will be no impact on the Company’s overall financial position. Management expects to continue using the Black Scholes pricing model for the determination of fair value for future stock option grants, while the amount of future compensation expense related to awards of performance-based restricted shares will be based on the share price at the grant date. Share-based compensation expense will be recognized on a “straight-line” basis over the requisite service period.

(3) NET INCOME PER SHARE

Basic earnings per share has been computed by dividing net income by the weighted average number of common shares outstanding during the respective period. Diluted earnings per share reflect the weighted-average shares outstanding during the respective period, after adjusting for the potential dilution upon the assumed conversion of the Company’s contingent convertible debentures and common stock equivalents, which consist of stock options and warrants outstanding. The following table provides a reconciliation of the weighted average number of common shares outstanding to the diluted weighted average number of common shares outstanding:

		Three Months Ended								Nine Months
		September 30,								Ended September 30,
		2005				2004				2005				2004
Basic weighted average shares outstanding			35,404,949				31,623,233				34,806,093				30,903,488
Additional shares from assumed conversion of warrants			—				201,250				—				202,616
Additional shares from assumed conversion of convertible debentures			4,162,950				—				—				—
Incremental shares from assumed conversion of stock options			2,438,734				2,873,953				2,344,846				2,912,708
Potentially diluted weighted average shares outstanding			42,006,633				34,698,436				37,150,939				34,018,812
Earnings add-back on convertible debentures (in thousands)		$	797			$	—			$	—			$	—

The table includes options with strike prices below the average fair market value of Euronet common shares during the period. For the three and nine month periods ended September 30, 2005, the average market price of Euronet common shares exceeded the exercise price of all options outstanding.

In December 2004, the Company issued convertible senior debentures that, if converted in the future, would have a potentially dilutive effect on the Company’s stock. The debentures are convertible into 4.2 million shares of Common Stock, subject to adjustment. As required by Emerging Issues Task Force (“EITF”) Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” the dilutive impact of the contingently issuable shares must be included in the calculation of diluted net income per share under the “if-converted” method, regardless of whether the conditions upon which the debentures would be convertible into shares of the Company’s Common Stock have been met. For the three months ended September 30, 2005, the assumed conversion of the debentures under the if-converted method was dilutive and, accordingly, the impact has been included in the above computation of potentially diluted weighted average shares outstanding. For the nine months ended September 30, 2005, the assumed conversion of the debentures under the if-converted method was not dilutive and, accordingly, the impact has been excluded from the above computation of potentially 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. The excess purchase price over those fair values is recorded as goodwill. The fair value assigned to intangible assets acquired is supported by valuations using estimates and assumptions provided by management. For certain large or unique acquisitions management engaged an appraiser to assist in the valuation.

2005 Acquisitions:

During the nine months ended September 30, 2005, the Company completed five acquisitions for an aggregate purchase price of $91.6 million. The Company’s allocation of the purchase prices to the fair values of acquired tangible and intangible assets remains preliminary while management completes its valuation of the fair value of the net assets acquired. The following table summarizes the allocation of the purchase price to the fair values of the acquired tangible and intangible assets at the acquisition dates.

		Estimated								Other
(in thousands)		Life				Telerecarga				Acquisitions				Total
Current assets						$	—			$	1,460			$	1,460
Property & equipment		various					1,415				959				2,374
Customer relationships		8 years					10,295				5,647				15,942
Software		5 years					655				900				1,555
Patents		7 years					—				1,699				1,699
Trade name		2 years					254				—				254
Non-compete agreements		5 years					147				—				147
Goodwill		Indefinite					42,225				33,555				75,780
Assets acquired							54,991				44,220				99,211
Current liabilities							—				(563	)			(563	)
Deferred income tax							(3,973	)			(3,065	)			(7,038	)
Net assets acquired						$	51,018			$	40,592			$	91,610

Acquisition of Telerecarga S.L.

In March 2005, Euronet purchased 100% of the assets of Telerecarga S.L. (“Telerecarga”), a Spanish company that distributes prepaid wireless airtime and other prepaid products via point-of-sale (“POS”) terminals throughout Spain. The purchase price of €38.1 million (approximately $51.0 million) was settled through the assumption of €25.4 million (approximately $34.0 million) in liabilities and cash payments of €12.8 million (approximately $17.0 million).

Other acquisitions

During the nine months ended September 30, 2005, Euronet completed four other acquisitions described below for a total purchase price of $40.6 million, consisting of $18.1 million in cash, 754,589 shares of Euronet Common Stock, valued at $19.5 million, and $0.1 million in liabilities assumed. Additionally, the purchase price for acquisitions accounted for as step acquisitions, in accordance with SFAS No. 141, include $2.9 million paid in prior years.

	•		In May 2005, Euronet acquired all of the outstanding membership interests in Continental Transfer, LLC and a wholly-owned subsidiary, TelecommUSA, Limited (“TelecommUSA”), a company based in North Carolina. TelecommUSA provides money transfer services, primarily between consumers in the U.S. and Latin America, and bill payment services within the U.S.
	•		In April 2005, EFT Services Holding B.V. (a wholly-owned subsidiary of Euronet) purchased an additional 30% of Europlanet a.d. (“Europlanet”), a Serbian company, increasing its share ownership in Europlanet to 66%. Europlanet is a debit card processor that owns, operates and manages a network of automated teller machines (ATMs) and POS terminals. Euronet’s $0.2 million share of dividends declared prior to acquiring the additional 30% ownership share of Europlanet was recognized as income from unconsolidated affiliates during the second quarter 2005. With the increase in ownership from 36% to 66%, Euronet is now required to consolidate Europlanet’s financial position and results of operations.
	•		In March 2005, Payspot (a wholly-owned subsidiary of Euronet) purchased substantially all of the assets of Dynamic Telecom, Inc. (“Dynamic Telecom”), a company based in Iowa. Dynamic Telecom’s distribution network in convenience store chains throughout the U.S. provides several types of prepaid products including wireless, long distance and gift cards via POS terminals.
	•		In March 2005, the Company exercised its option to acquire an additional 41% of the shares of ATX Software, Ltd. (“ATX”) and increased its share ownership in ATX to 51%. As described below under “2004 Acquisitions,” Euronet originally acquired a 10% share in ATX in May 2004. Euronet’s $0.1 million share of dividends declared prior to acquiring the additional 41% ownership share of ATX was recognized as income from unconsolidated affiliates during the first quarter 2005. With the increase in ownership from 10% to 51%, Euronet is now required to consolidate ATX’s financial position and results of operations.

In connection with these four other acquisitions, cash and/or Euronet Common Stock have been placed in escrow as security with respect to potential indemnification claims. There are additional contingent payments to be calculated based on certain performance criteria as specified in the purchase agreements. As of September 30, 2005, the Company estimates that these payments will total approximately $5 million to $7 million. When determined beyond a reasonable doubt, additional payments will be recorded as goodwill. The Company must settle a portion of these contingent payments in Euronet Common Stock. Other contingent payments may be settled in cash or Euronet Common Stock, at the Company’s option. As of September 30, 2005, 41,310 shares and $3.5 million in cash remain in escrow related to 2005 acquisitions.

2004 Acquisitions:

During 2004, the Company completed four acquisitions for an aggregate purchase price of $50.6 million. The Company’s allocation of the purchase price to the fair values of acquired tangible and intangible assets remains preliminary while management completes its evaluation of the fair value of the net assets acquired. The following table summarizes the allocation of the purchase price to the fair values of the acquired tangible and intangible assets at the acquisition date.

		Estimated								Other
(in thousands)		Life				Movilcarga				Acquisitions				Total
Current assets						$	—			$	10,902			$	10,902
Property & equipment		various					453				554				1,007
Customer relationships		8 years					4,836				4,488				9,324
Software		5 years					—				199				199
Tradename		2 years					64				—				64
Non-compete agreements		5 years					21				—				21
Goodwill		Indefinite					25,785				23,204				48,989
Assets acquired							31,159				39,347				70,506
Current liabilities							—				(10,544	)			(10,544	)
Deferred income tax							(1,722	)			(1,798	)			(3,520	)
Minority interest							(5,813	)			—				(5,813	)
Net assets acquired						$	23,624			$	27,005			$	50,629

Acquisition of Movilcarga

In November 2004, Euronet indirectly acquired certain prepaid mobile phone top-up assets and a network of POS terminals through which mobile phone time is distributed, contracts with retailers that operate the POS terminals, certain employees, and various operating contracts from Grupo Meflur Corporacion (“Meflur”), a Spanish telecommunications distribution company (the “Movilcarga Assets”). With this acquisition Euronet entered into a service agreement with Meflur to provide certain administrative and support functions necessary to operate the Movilcarga Assets, a lease agreement for office space and a license agreement for technology used to process transactions. To implement the acquisition, Euronet purchased 80% of a non-operating Spanish subsidiary (“Movilcarga”) that acquired the Movilcarga Assets. Meflur owns the remaining 20%. Euronet purchased the Movilcarga Assets for €18.0 million (approximately $23.3 million) in two installments: €8.0 million in cash at closing and €10.0 million in cash paid in January 2005 that was subject to certain revenue targets and adjustments. The revenue targets were met as of December 31, 2004; therefore, €10.0 million (approximately $13.0 million) was recorded as a purchase price payable, and included in the asset allocation, as of December 31, 2004. The purchase price also included $0.3 million in transaction costs. Additional payments may be due during the first quarters of 2007 and 2008, subject to the fulfillment of certain financial conditions. The Company estimates that based on information from Meflur, these additional payments will total approximately €7.0 million to €10.0 million (approximately $8.5 million to $12.1 million). The additional payments may be made, at the option of Euronet, in either cash or a combination of cash and Euronet Common Stock. Goodwill will be increased by the amount of additional consideration, if any, when determined beyond a reasonable doubt.

Other acquisitions

During 2004, Euronet completed the three other acquisitions described below for a total purchase price of $27.0 million, consisting of $5.1 million in cash, 917,007 shares of Euronet Common Stock, valued at $17.9 million, and issued notes payable of $4.0 million. The notes payable were repaid during 2004.

	•		In January 2004, PaySpot purchased all of the shares of Prepaid Concepts, Inc. (“Precept”), a company based in California that distributes prepaid services via POS terminals throughout the U.S.
	•		In May 2004, PaySpot purchased all of the net assets of Electronic Payment Solutions (“EPS”), a company based in Texas that distributes prepaid services via POS terminals throughout the U.S.
	•		In July 2004, PaySpot purchased all of the shares of Call Processing, Inc. (“CPI”), a company based in Texas that distributes prepaid services via POS terminals to convenience store chains throughout the U.S.

In connection with these three other acquisitions, Euronet Common Stock has been placed in escrow as security with respect to potential indemnification claims and/or the achievement of certain performance criteria to be satisfied. Subject to certain performance criteria, there is a potential earn-out payment payable in Euronet Common Stock to the seller of EPS, currently estimated to be approximately $0.8 million. When determined beyond a reasonable doubt, this payment will be recorded as goodwill. These contingent payments may be settled in cash or Euronet Common Stock. As of September 30, 2005, 87,668 shares remain in escrow related to 2004 acquisitions.

Initial investment in ATX Software, Ltd.

In May 2004, Euronet purchased 10% of the shares of ATX, a provider of electronic prepaid voucher solutions incorporated in the U.K. ATX offers software or outsourcing solutions for prepaid processing to existing scratch card distributors willing to switch to electronic

top-up solutions. ATX has customers in more than 25 countries and works directly with scratch card distributors, who in turn contract with the mobile operators and individual retailers. The purchase price of $2.9 million, including professional fees, was settled through the issuance of 125,590 shares of Euronet Common Stock for the ATX shares. Euronet was also granted an option to purchase an additional 41% of the shares of ATX at any time prior to April 1, 2005, which, as discussed above, Euronet exercised in March 2005.

Pro forma results:

The following unaudited pro forma financial information presents the condensed combined results of operations of Euronet for the three and nine months ended September 30, 2005 and 2004, as if the acquisitions described above had occurred January 1, 2004. An adjustment was made to the combined results of operations, reflecting amortization of purchased intangible assets, net of tax, which would have been recorded if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is not intended to represent, or be indicative of, the consolidated results of operations or financial condition of Euronet that would have been reported had the acquisitions been completed as of the beginning of the periods presented. Moreover, the unaudited pro forma financial information should not be considered as representative of the future consolidated results of operations or financial condition of Euronet.

		Pro Forma for the Three Months								Pro Forma for the Nine Months
		Ended September 30,								Ended September 30,
(in thousands, except per share data)		2005				2004				2005				2004
Revenues		$	137,390			$	116,464			$	396,615			$	316,598
Operating income		$	13,844			$	12,762			$	38,969			$	30,708
Net income		$	10,159			$	7,519			$	19,160			$	17,386
Per share data:
Net Income per share-basic		$	0.29			$	0.23			$	0.55			$	0.55
Net Income per share-diluted		$	0.26			$	0.21			$	0.51			$	0.50

(5) GOODWILL AND INTANGIBLE ASSETS

Intangible assets are carried at amortized cost, and goodwill, which is not amortized, is carried at cost. Intangible assets and goodwill are evaluated for impairment annually or more frequently if there is an indication of impairment. As disclosed in Note 4 – Acquisitions, additions during the nine months ended September 30, 2005 include $19.6 million assigned to acquired amortizable intangible assets and $75.8 million assigned to goodwill. Goodwill represents the excess of the purchase price of the acquired businesses over the fair value of the underlying net tangible and intangible assets acquired. A summary of intangible assets and goodwill activity for the nine months ended September 30, 2005, is presented below:

		Amortizable								Total
		Intangible								Intangible
(in thousands)		Assets				Goodwill				Assets
Balance as of December 31, 2004		$	28,930			$	183,668			$	212,598
Increases (decreases):
Acquisition of Telerecarga			11,351				42,225				53,576
Other acquisitions			8,251				33,555				41,806
Adjustment to Transact			1,789				(1,025	)			764
Adjustment to Movilcarga			568				(338	)			230
Amortization			(4,599	)			—				(4,599	)
Other (primarily changes in foreign currency exchange rates)			(2,270	)			(6,580	)			(8,850	)
Balance as of September 30, 2005		$	44,020			$	251,505			$	295,525

The additions above include adjustments to the purchase price allocations of the Company’s previous acquisitions. The purchase price allocations for Transact and Movilcarga, Prepaid Processing Segment subsidiaries based in Germany and Spain, respectively, were adjusted during 2005 based on finalization of independent appraisals. The appraisal for Transact was finalized during the first quarter 2005 and resulted in a $1.8 million reclassification of the initial purchase price from goodwill to amortizable intangible assets, primarily customer relationships. The appraisal for Movilcarga was finalized during the third quarter 2005 and resulted in a $0.6 million reclassification of the initial purchase price from goodwill to amortizable intangible assets, primarily customer relationships. The related deferred income tax liability increased by $0.8 million for Transact and $0.2 million for Movilcarga, which also had the impact of

increasing goodwill related to these subsidiaries. The impact of these reclassifications on the Company’s net income is an increase to amortization expense, net of the related income tax and minority interest effects, of $0.2 million per year.

Estimated amortization expense on intangible assets, before income taxes, as of September 30, 2005 with finite lives is expected to total $6.2 million for of 2005, $6.8 million for 2006, $6.6 million for 2007, $6.4 million for 2008, $6.3 million for 2009 and $6.1 million for 2010.

(6) DEBT OBLIGATIONS

A summary of the activity for the nine months ended September 30, 2005 for all debt obligations is presented below:

														1.625%
														Convertible
		Short-Term				Lines of				Capital				Debentures Due
(in thousands)		Obligations				Credit				Leases				Dec. 2024				Total
Balance at December 31, 2004		$	4,862			$	—			$	21,297			$	140,000			$	166,159
Indebtedness incurred			1,599				19,269				2,880				—				23,748
Repayments			(525	)			(19,269	)			(5,309	)			—				(25,103	)
Interest accrued			—				—				1,326				—				1,326
Foreign exchange gain			(250	)			—				(1,881	)			—				(2,131	)
Balance at September 30, 2005			5,686				—				18,313				140,000				163,999
Less — current maturities			(5,686	)			—				(5,037	)			—				(10,723	)
Long-term obligations at September 30, 2005		$	—			$	—			$	13,276			$	140,000			$	153,276

In October 2005, the Company completed the offering of $175 million in 3.50% Contingent Convertible Debentures Due 2025. See Note 11 – Subsequent Events for further discussion.

In June 2005, the Company amended its $40 million revolving credit agreement signed in October 2004 with Bank of America. The amended agreement increased the amount available for borrowing to $50 million and allows more flexibility within certain debt covenants. The revolving credit agreement is comprised of a $10 million facility among the Company and certain U.S. subsidiaries and a $40 million facility among the Company and certain European subsidiaries. The revolving credit facilities can be used to repay existing debt, for working capital needs, to make acquisitions and for other corporate purposes. Borrowings under the $10 million facility bear interest at either a prime rate plus an applicable margin specified in the respective agreement, or a rate fixed for up to 30- to 90-day periods equal to the U.S. dollar London Interbank Offered Rate (LIBOR) plus an applicable margin, as set forth in the respective agreement, and varies based on a consolidated funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio, adjusted for certain other items as defined in the agreements. Borrowings under the U.S. facility are secured by the share capital of the U.S. subsidiaries and 66% of the share capital of e-pay Ltd., Euronet Services GmbH, Transact GmbH and Delta Euronet GmbH, as well as guaranteed by all U.S. subsidiaries. Borrowings under the $40 million facility may be drawn in U.S. dollars, euro, and/or British pounds. Borrowings in U.S. dollars bear interest similar to the terms of the $10 million facility. Borrowings in euro or British pounds bear interest at a rate fixed for up to 30- to 90-day periods equal to the Euro Interbank Offered Rate (EURIBOR) or British pound LIBOR, respectively, rate plus a margin that varies based on a consolidated debt to EBITDA ratio, plus ancillary costs. Borrowings under this facility are secured by the share capital of the U.S. subsidiaries and the share capital of e-pay Ltd., Euronet Services GmbH, Transact GmbH and Delta Euronet GmbH, as well as guaranteed by a majority of the Company’s subsidiaries.

As of September 30, 2005, there were stand-by letters of credit of $4.7 million outstanding against these facilities. Total debt issuance costs of $0.6 million, including unamortized debt issuance costs of $0.3 million associated with the original October 2004 facility, are being amortized over two years. The agreements expire in October 2006 and contain customary events of default and covenants related to limitations on indebtedness and the maintenance of certain financial ratios. Facility fees and other fees on the entire loan commitment are payable for the duration of this facility.

(7) BUSINESS SEGMENT INFORMATION

The Company operates three principal business segments:

1)

In the EFT Processing Segment, the Company processes transactions for a network of ATMs and POS terminals across Europe, the Middle East, Africa and India. 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).

	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 phone airtime top-up services in the U.S., Europe, Africa and Asia Pacific. This segment includes the results of TelecommUSA, a licensed money transfer and bill payment company acquired during the second quarter 2005. See Note 4 – Acquisitions for a discussion of the Company’s investment in TelecommUSA.
	3)		Through the Software Solutions Segment, the Company offers a suite of integrated electronic financial transaction (EFT) software solutions for electronic payment and transaction delivery systems.

“Corporate Services, Eliminations and Other” includes non-operating results, certain inter-company eliminations and the costs of providing corporate and other administrative services to the three business segments. These services are not directly identifiable with the Company’s business segments. Inter-segment transactions are not significant.

The following tables present the segment results of the Company’s operations for the three and nine month periods ended September 30, 2005 and 2004:

		For the Three Months Ended September 30, 2005
														Corporate
														Services,
		EFT				Prepaid				Software				Eliminations
(in thousands)		Processing				Processing				Solutions				and Other				Consolidated
Total revenues		$	26,315			$	107,669			$	3,632			$	(226	)		$	137,390
Operating expenses:
Direct operating costs			10,875				84,701				203				—				95,779
Salaries and benefits			4,166				6,240				2,056				1,369				13,831
Selling, general and administrative			2,496				4,226				162				1,279				8,163
Depreciation and amortization			2,212				3,253				251				57				5,773
Total operating expenses			19,749				98,420				2,672				2,705				123,546
Operating income (loss)			6,566				9,249				960				(2,931	)			13,844
Other income (expense):
Interest income			41				909				—				63				1,013
Interest expense			(481	)			(394	)			—				(820	)			(1,695	)
Income (loss) from unconsolidated affiliates			(33	)			287				—				—				254
Foreign exchange loss, net			—				—				—				854				854
Total other income (expense)			(473	)			802				—				97				426
Income (loss) before income taxes and minority interest		$	6,093			$	10,051			$	960			$	(2,834	)		$	14,270

		For the Three Months Ended September 30, 2004
														Corporate
														Services,
		EFT				Prepaid				Software				Eliminations
(in thousands)		Processing				Processing				Solutions				and Other				Consolidated
Total revenues		$	20,930			$	75,359			$	3,635			$	—			$	99,924
Operating expenses:
Direct operating costs			9,290				59,744				158				—				69,192
Salaries and benefits			3,590				3,925				2,081				1,214				10,810
Selling, general and administrative			1,572				2,392				514				1,255				5,733
Depreciation and amortization			2,280				1,637				256				42				4,215
Total operating expenses			16,732				67,698				3,009				2,511				89,950
Operating income (loss)			4,198				7,661				626				(2,511	)			9,974
Other income (expense):
Interest income			62				762				—				40				864
Interest expense			(434	)			(37	)			—				(1,298	)			(1,769	)
Income from unconsolidated affiliates			—				164				—				—				164
Loss on early retirement of debt			—				—				—				(32	)			(32	)
Foreign exchange gain, net			—				—				—				419				419
Total other income (expense)			(372	)			889				—				(871	)			(354	)
Income (loss) before income taxes and minority interest		$	3,826			$	8,550			$	626			$	(3,382	)		$	9,620

		For the Nine Months Ended September 30, 2005
														Corporate
														Services,
		EFT				Prepaid				Software				Eliminations
(in thousands)		Processing				Processing				Solutions				and Other				Consolidated
Total revenues		$	76,245			$	299,530			$	11,292			$	(226	)		$	386,841
Operating expenses:
Direct operating costs			32,465				237,033				810				—				270,308
Salaries and benefits			12,038				17,173				6,335				3,958				39,504
Selling, general and administrative			6,251				11,451				738				4,058				22,498
Depreciation and amortization			7,092				8,452				792				107				16,443
Total operating expenses			57,846				274,109				8,675				8,123				348,753
Operating income (loss)			18,399				25,421				2,617				(8,349	)			38,088
Other income (expense):
Interest income			147				2,707				—				471				3,325
Interest expense			(1,571	)			(680	)			—				(2,649	)			(4,900	)
Income from unconsolidated affiliates			169				605				—				132				906
Foreign exchange loss, net			—				—				—				(6,703	)			(6,703	)
Total other income (expense)			(1,255	)			2,632				—				(8,749	)			(7,372	)
Income (loss) before income taxes and minority interest		$	17,144			$	28,053			$	2,617			$	(17,098	)		$	30,716
Segment assets as of September 30, 2005		$	95,221			$	533,020			$	4,725			$	31,375			$	664,341

		For the Nine Months Ended September 30, 2004
														Corporate
														Services,
		EFT				Prepaid				Software				Eliminations
(in thousands)		Processing				Processing				Solutions				and Other				Consolidated
Total revenues		$	53,872			$	203,912			$	10,217			$	—			$	268,001
Operating expenses:
Direct operating costs			24,332				161,568				438				—				186,338
Salaries and benefits			9,791				10,761				6,397				3,346				30,295
Selling, general and administrative			4,531				6,748				1,489				3,545				16,313
Depreciation and amortization			5,929				4,463				712				98				11,202
Total operating expenses			44,583				183,540				9,036				6,989				244,148
Operating income (loss)			9,289				20,372				1,181				(6,989	)			23,853
Other income (expense):
Interest income			99				1,896				1				54				2,050
Interest expense			(908	)			(80	)			(2	)			(4,287	)			(5,277	)
Income (loss) from unconsolidated affiliates			—				289				—				(21	)			268
Loss on early retirement of debt			—				—				—				(126	)			(126	)
Foreign exchange gain, net			—				—				—				912				912
Total other income (expense)			(809	)			2,105				(1	)			(3,468	)			(2,173	)
Income (loss) before income taxes and minority interest		$	8,480			$	22,477			$	1,180			$	(10,457	)		$	21,680
Segment assets as of December 31, 2004		$	92,238			$	429,850			$	6,605			$	89,782			$	618,475

(8) RELATED PARTY TRANSACTIONS

See Note 4 – Acquisitions, for a description of notes payable, deferred payment and additional equity issued and contingently issuable to the former business owners (now Euronet shareholders) in connection with various acquisitions.

Under the terms of certain debt agreements entered into in connection with the acquisitions of e-pay, the Company paid approximately $0.5 million and $1.1 million in interest during the three and nine month periods ended September 30, 2004, respectively, to former e-pay shareholders who now serve as a director and officers of the Company. This indebtedness was repaid in full during December 2004, accordingly, there was no interest incurred for this indebtedness during the nine months ended September 30, 2005.

(9) CONTINGENCIES

The Company is from time to time a party to litigation arising in the ordinary course of its business.

During the second quarter 2005, the Company received a claim from a former cash supply contractor in Central Europe (the “Contractor”) for approximately $2.2 million in cash and interest that the Contractor claims to have provided to Euronet during the fourth quarter 1999 and first quarter 2000. This claim, based on events that purportedly occurred over five years ago, was filed more than a year after the Company had terminated its business with the Contractor and established a cash supply agreement with another supplier. The Contractor has threatened, but not yet initiated legal action regarding the claim. Management expects the Company to prevail in defending itself in this matter and, accordingly has not recorded any liability or expense related to this claim. The Company will continue to monitor and assess this claim until ultimate resolution.

Currently, there are no other legal proceedings that management believes, either individually or in the aggregate, would have a material adverse effect upon the consolidated results of operations or financial condition of the Company.

(10) GUARANTEES

As of September 30, 2005, the Company has $28.1 million of bank guarantees issued on its behalf, $17.2 million of which are collateralized by cash deposits held by the respective issuing banks.

Euronet regularly grants guarantees of certain unrecorded obligations of its wholly-owned subsidiaries. As of September 30, 2005, the Company has guarantees in the following amounts:

	•		Cash supply in various ATM networks — $14.2 million over the terms of the cash supply agreements.
	•		Vendor supply agreements — $2.9 million over the term of the vendor agreements.
	•		Commercial obligations of the Company’s Australian Prepaid Processing subsidiary, including PIN inventory held on consignment with its customers, to a maximum of approximately $40 million as of September 30, 2005.

From time to time, Euronet enters into agreements with unaffiliated parties that contain indemnification provisions, the terms of which may vary depending on the negotiated terms of each respective agreement. The amount of such obligations is not stated in the agreements. The liability under such indemnification provision may be subject to time and materiality limitations, monetary caps and other conditions and defenses. Such indemnity obligations include the following:

	•		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 Company’s use of the vendor’s 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 buyer’s 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 Company’s 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
	•		In connection with the Company’s entry into the money transfer business, the Company has issued surety bonds in compliance with licensing requirements of those states.

To date, the Company is not aware of any significant claims made by the indemnified parties or parties to guarantee agreements with the Company and, accordingly, no liabilities were recorded as of September 30, 2005 and December 31, 2004.

(11) SUBSEQUENT EVENTS

Contingent Convertible Debentures Due 2025

In October 2005, the Company completed the offering of $175 million in 3.50% Contingent Convertible Debentures Due 2025 (“Convertible Debentures”). The Company received net proceeds from the sale of $169.9 million, after fees totaling $5.1 million. The Convertible Debentures have an interest rate of 3.50% per annum payable semi-annually on April 15 and October 15, and are convertible into a total of 4.3 million shares of Euronet Common Stock at a conversion price of $40.48 per share if certain conditions are met (relating to, among other items, the closing prices of Euronet Common Stock exceeding certain thresholds for specified periods). The Company will pay contingent interest during any six-month period commencing with the period from October 15, 2012 through April 14, 2013 and for each six-month period thereafter 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 Convertible Debentures. Contingent interest will equal 0.35% per annum of the average trading price of a debenture for such five trading-day periods. The Convertible Debentures may not be redeemed by the Company for seven years but are redeemable at any time thereafter at par. Holders of the Convertible Debentures have the option to require the Company to purchase their debentures at par on October 15, 2012, 2015 and 2020, or upon a change in control of the Company. These terms and other material terms and conditions applicable to the Convertible Debentures are set forth in the indenture governing the debentures. In connection with the Convertible Debentures, the Company incurred $5.1 million in debt issuance costs, which will be amortized over seven years, the term of the initial put option by the holders of the Convertible Debentures.

Acquisition of Instreamline S.A.

In October 2005, Euronet EFT Services Hellas EPE (a wholly-owned subsidiary of Euronet) acquired all of the share capital of Instreamline S.A. (“Instreamline”), a Greek company that provides credit card and POS outsourcing services in addition to debit card and

transaction gateway switching services in Greece and the Balkan region. Instreamline will complement the Company’s EFT Processing Segment.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

COMPANY OVERVIEW, GEOGRAPHIC LOCATIONS AND PRINCIPAL PRODUCTS AND SERVICES

Euronet Worldwide, Inc. (“Euronet” or the “Company”) is a leading electronic transaction processor, offering ATM and POS outsourcing services, integrated electronic financial transaction (EFT) software, network gateways, 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 and the largest national shared ATM network in India, and are one of the largest providers of prepaid processing, or top-up services, for prepaid mobile airtime.

We operate in three principal business segments:

	•		An EFT Processing Segment, in which we process transactions for a network of 6,841 ATMs and more than 15,000 POS terminals across Europe, the Middle East, Africa and India. We provide 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 an ATM or directly from the handset).
	•		A Prepaid Processing Segment, through which we provide prepaid processing, or top-up, services for mobile airtime and other prepaid products. We operate a network of more than 218,000 POS terminals providing electronic processing of prepaid mobile phone airtime top-up services across more than 109,000 retailers in the U.S., Europe, Africa and Asia Pacific. This segment also includes TelecommUSA, a company acquired during the second quarter 2005, that provides money transfer services to customers between the U.S. and Latin America and bill payment services to consumers in the U.S.
	•		A Software Solutions Segment, through which we offer a suite of integrated EFT software solutions for electronic payment and transaction delivery systems.

We have processing centers in the U.S., Europe and Asia and have 14 principal offices in Europe, four in the Asia-Pacific region, three in the U.S. and two in the Middle East. We serve clients in more than 70 countries. Our executive offices are located in Leawood, Kansas, U.S.

ECONOMIC AND INDUSTRY FACTORS AND RISKS

Our Company faces certain economic and industry-wide factors that could materially affect our business. In particular, as an international company, we face economic, political, technology infrastructure and legal issues that could have a positive or negative impact in every country in which we operate. Some of the more significant risk factors that our management is focused on include the following:

	•		Technological and business developments in the local card, electronic and mobile banking, mobile phone, money transfer and retail markets affecting the demand for our services and the level of transaction and other fees that we are able to charge;
	•		Foreign currency exchange fluctuations;
	•		Competition from bank-owned ATM networks, providers of ATM and POS outsourcing services, providers of prepaid mobile phone services, money transfer services; and software providers;
	•		Contract terminations with major customers, sponsor banks, international card organizations, retailers or mobile operators; and
	•		Changes in laws and regulations affecting our business.

SOURCES OF REVENUES AND CASH FLOW

Euronet earns revenue and income based on ATM management fees, transaction fees, professional services, software licensing fees and software maintenance agreements. Each business segment’s sources of revenue are described below.

EFT Processing Segment - Revenue in the EFT Processing Segment, which represents 20% of total consolidated revenue for the nine months ended September 30, 2005, 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 under outsourcing agreements.

On 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.

For the nine months ended September 30, 2005 approximately 31% of total segment revenue was derived from ATMs we owned (excluding those leased by us in connection with outsourcing agreements) and the remainder was derived from ATMs that we operate for banks on an outsourced basis. The percentage of revenues we generate from our proprietary network of ATMs has fallen significantly over the past two years. We believe this shift from a largely proprietary, Euronet-owned ATM network, to a greater focus on ATMs operated under outsourcing agreements will provide higher marginal returns on investment. This is because we bear all costs of owning and operating ATMs on our proprietary network, including the capital investment represented by the cost of the ATMs themselves, whereas customer-owned ATMs operated under outsource service agreements require a nominal up-front capital investment because we do not purchase the ATMs. Additionally, in many instances operating costs are the responsibility of the owner and, therefore, recurring operating expenses per ATM are lower. In connection with certain long-term outsourcing agreements, we lease many of our ATMs under capital lease arrangements where, generally, we purchase a bank’s 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.

Prepaid Processing Segment - Revenue in the Prepaid Processing Segment, which represents 77% of total consolidated revenue for the nine months ended September 30, 2005, is recognized based on commissions or processing fees received from mobile and other telecommunication operators or from distributors of prepaid wireless products for the distribution and/or processing of prepaid mobile airtime and other telecommunication products. Due to certain provisions in our mobile phone operator agreements, the operators have the ability to reduce the overall commission paid on each top-up transaction. However, by virtue of the Company’s contracts with retailers in certain markets, not all of these reductions are absorbed by Euronet. In those markets, when mobile phone operators reduce overall commissions, the effect is to reduce revenues and reduce our direct operating costs resulting in only a small impact, if any, on gross margin and operating income. In Australia, certain retailers negotiate directly with the mobile phone operators for their own commission rates. Agreements with mobile operators are important to the success of our business. These agreements permit us to distribute top-up to the mobile operators’ customers. The loss of any agreements with mobile operators in any market could materially and adversely affect our results.

During the second quarter 2005, we launched our money transfer and bill payment services through the acquisition of TelecommUSA. TelecommUSA’s patented card-based money transfer and bill payment system allows transactions to be initiated primarily through POS terminals and Integrated Cash Register Systems (“ICR”). Transactions can also be initiated through the internet, fax or telephone. Revenue in the money transfer and bill payment business is earned through the charging of a transaction fee, as well as the difference between purchasing currency at wholesale exchange rates and selling the currency to consumers at retail exchange rates. We have origination and distribution agents in place, which each earn a fee for the cash collection and distribution services. These fees are recognized as direct operating costs at the time of sale. As discussed in “Other trends and uncertainties” below, we incurred an operating loss of $0.4 million during the third quarter 2005 and we expect to continue incurring operating losses of up to $0.4 million per quarter for at least the next two or three quarters as we incur costs to expand this business.

Software Solutions Segment - Revenue in the Software Solutions Segment, which represents 3% of total consolidated revenue for the nine months ended September 30, 2005, is recognized from licensing, professional services and maintenance fees for software and sales of related hardware. Software license fees are the initial fees we charge to license our proprietary application software to customers. Professional fees consist of charges for customization, installation and consulting services to customers. Software maintenance revenue represents the ongoing fees charged for maintenance and support for customers’ software products. Hardware sales are derived from the sale of computer equipment necessary for the respective software solution.

OPPORTUNITIES, CHALLENGES AND RISKS

Our expansion plans and opportunities are focused on four primary areas within our business segments: (i) outsourced ATM management contracts; (ii) our prepaid mobile phone airtime top-up processing services; (iii) transactions processed on our network of owned and operated ATMs, and (iv) our money transfer and bill payment services.

EFT Processing Segment - The continued expansion and development of our ATM business will depend on various factors including the following:

•

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 countries where we operate;
	•		entering into additional card acceptance and ATM management agreements with banks;
	•		the availability of financing for expansion; and
	•		the ability to efficiently convert ATMs contracted under newly awarded outsourcing agreements.

We carefully monitor the revenue and transactional growth of our ATM networks in each of our markets, and we adjust our plans depending on local market conditions, such as variations in the transaction fees we receive, competition, overall trends in ATM-transaction levels and performance of individual ATMs.

We consistently evaluate and add prospects to our list of potential ATM outsource customers. However, we cannot predict the increase or decrease in the number of ATMs we manage under outsourcing agreements, because this depends largely on the willingness of banks to enter into outsourcing contracts with us. Due to the thorough internal reviews and extensive negotiations conducted by existing and prospective banking customers in choosing outsource vendors, the process of entering into or renewing outsourcing agreements can take approximately nine months to more than one year. The process is further complicated by the legal and regulatory considerations of local countries. These agreements tend to cover large numbers of ATMs, so significant increases and decreases in our pool of managed ATMs could result from signature or termination of these management contracts. Therefore, the timing of both current and new contract revenues is uncertain and unpredictable.

Prepaid Processing Segment - We currently offer prepaid mobile phone top-up services in the U.S., Europe, Africa and Asia Pacific, money transfer services to customers between the U.S. and Latin America, and bill payment services to consumers in the U.S. 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 for other markets with mobile phone operators, agent banks and retailers;
	•		the continuation of the trend of conversion from scratch card solutions to electronic processing solutions for prepaid 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 ability to rapidly maximize the opportunity to apply our card-based money transfer and bill payment product to our existing POS terminals in the U.S. and internationally; and
	•		the availability of financing for further expansion.

Growth in our prepaid business in any given market is driven by a number of factors, including the extent to which conversion from scratch cards to electronic distribution solutions is occurring or has been completed, the overall pace of growth in the prepaid mobile phone market, our market share of the retail distribution capacity and the level of commission that is paid to the various intermediaries in prepaid mobile airtime distribution chain. In mature markets, such as the U.K., Australia and Ireland, the conversion from scratch cards to electronic forms of distribution is either complete or nearing completion. Therefore, this factor will cease to provide the organic increases in the number of transactions per terminal that we have experienced historically. Also in mature markets, competition among prepaid distributors results in the reduction of commissions and margins paid by mobile operators as well as retailer churn. The combined impact of these factors in developed markets is a flattening of growth in the revenues and profits that we earn. In other markets in which we operate, such as Poland, Germany and the U.S., many of the factors that may contribute to rapid growth (conversion from scratch cards to electronic distribution, growth in the prepaid market and rapid roll out of our network of retailers) remain present.

Growth in our money transfer and bill payment services business will be driven by the continuation of global worker migration patterns; our ability to manage rapid growth; our ability to maximize the opportunity to apply TelecommUSA’s card-based product to our existing POS terminals in the U.S. and internationally; and our ability to obtain licenses to operate in many of the states within the U.S. as well as other countries. Currently focused on the U.S. and Latin America market, we plan to expand our money transfer services to other markets. Within the U.S., we are focusing on increasing our sending locations in existing licensed states by leveraging our access to over 16,000

terminals in the U.S., and obtaining licenses to operate in other key states. Expansion of our money transfer business internationally will require resolution of numerous licensing and regulatory issues in each of the sending markets we intend to develop.

In addition, our continued expansion may involve acquisitions that could divert our resources and management time and require integration of new assets with our existing networks and services. Our ability to effectively manage our rapid expansion has required us to expand our operating systems and employee base, particularly at the management level, which has reduced our operating income. An inability to continue to effectively manage expansion could have a material adverse effect on our business, growth, financial condition or results of operations. Inadequate technology and resources would impair our ability to maintain current processing technology and efficiencies as well as deliver new and innovative services to compete in the marketplace.

Software Solutions Segment - Software products are an integral part of our product lines, and our investment in research, development, delivery and customer support reflects our ongoing commitment to an expanded customer base. We have been able to enter into agreements under which we use our software in lieu of cash as our initial capital contributions to new transaction processing joint ventures. Such contribution sometimes permits us to enter new markets without significant cash outlay. Additionally, this segment supports our EFT Processing Segment. Therefore, although revenues from our Software Solutions Segment are not currently growing significantly, we view it as a valuable element of our overall business strategy. The competitive factors in the Software Solutions business include price, technology development and the ability of software systems to interact with other leading products. Our success is dependent on our ability to design and implement software applications. Technical disruptions or errors in these systems could have a material adverse impact on our revenue and financial results.

Seasonality - Our business is significantly impacted by seasonality. We normally experience our highest revenue level during the fourth quarter of each year, followed in order by the second quarter, third quarter and first quarter. We have estimated that, absent unusual circumstances (such as the impact of new acquisitions or unusually high levels of growth due to market factors), the overall revenue realized from our three business segments is likely to be approximately 5% to 10% lower during the first quarter of each year than in the fourth quarter of the year. We have historically experienced a less than 5% difference between the second and third quarters of each year. The impact of seasonality has been masked for the last two years due to significant growth rates resulting from the addition of large retail customers in mid-fourth quarter, continued shifts from scratch cards to electronic top-up and acquisitions. There can be no assurance that this will be the case for future years.

Significant events in the nine months ended September 30, 2005:

•		Acquisition of assets of Dynamic Telecom, expanding our Prepaid Processing business in the U.S. – See Management’s Discussion and Analysis, Prepaid Processing Segment and Note 4 – Acquisitions to the Unaudited Consolidated Financial Statements.
•		Acquisition of assets of Telerecarga, expanding our Prepaid Processing business in Spain – See Management’s Discussion and Analysis, Prepaid Processing Segment and Note 4 – Acquisitions to the Unaudited Consolidated Financial Statements.
•		Exercise of our option to acquire a majority ownership share of ATX, expanding our Prepaid Processing business in the European and African markets – See Management’s Discussion and Analysis, Prepaid Processing Segment and Note 4 – Acquisitions to the Unaudited Consolidated Financial Statements.
•		Acquisition of all of the share capital of Continental Transfer, LLC and a wholly-owned subsidiary, TelecommUSA, Limited (TelecommUSA), launching the Company’s money transfer and bill payment business – See Management’s Discussion and Analysis, Overview and Note 4 – Acquisitions to the Unaudited Consolidated Financial Statements.
•		Acquisition of an additional 30% ownership share of Europlanet a.d., a debit card processor that owns, operates and manages a network of ATMs and POS terminals. – See Management’s Discussion and Analysis, Overview and Note 4 – Acquisitions to the Unaudited Consolidated Financial Statements.

SEGMENT SUMMARY RESULTS OF OPERATIONS

Revenue and operating income by segment revenue for the third quarter and nine months ended September 30, 2005 and 2004 are summarized in the tables below:

		Revenues for the																Revenues for the
		Three Months																Nine Months
		Ended								Year-over-Year								Ended								Year-over-Year
		September 30,								Change								September 30,								Change
										Increase				Increase												Increase
										(Decrease)				(Decrease)												(Decrease)				Increase
(dollar amounts in thousands)		2005				2004				Amount				Amount				2005				2004				Amount				Percent
EFT Processing		$	26,315			$	20,930			$	5,385				26	%		$	76,245			$	53,872			$	22,373				42	%
Prepaid Processing			107,669				75,359				32,310				43	%			299,530				203,912				95,618				47	%
Software Solutions			3,632				3,635				(3	)			—	%			11,292				10,217				1,075				11	%
Total revenues			137,616				99,924				37,692				38	%			387,067				268,001				119,066				44	%
Inter-segment eliminations			(226	)			—				(226	)			—	%			(226	)			—				(226	)			—	%
Total		$	137,390			$	99,924			$	37,466				37	%		$	386,841			$	268,001			$	118,840				44	%
		Operating Income																Operating Income
		for the Three Months Ended								Year-over-Year								for the Nine Months Ended								Year-over-Year
		September 30,								Change								September 30,								Change
										Increase				Increase												Increase				Increase
										(Decrease)				(Decrease)												(Decrease)				(Decrease)
(dollar amounts in thousands)		2005				2004				Amount				Percent				2005				2004				Amount				Percent
EFT Processing		$	6,566			$	4,198			$	2,368				56	%		$	18,399			$	9,289			$	9,110				98	%
Prepaid Processing			9,249				7,661				1,588				21	%			25,421				20,372				5,049				25	%
Software Solutions			960				626				334				53	%			2,617				1,181				1,436				122	%
Total			16,775				12,485				4,290				34	%			46,437				30,842				15,595				51	%
Corporate Serivces, Eliminations and Other			(2,931	)			(2,511	)			(420	)			17	%			(8,349	)			(6,989	)			(1,360	)			19	%
Total		$	13,844			$	9,974			$	3,870				39	%		$	38,088			$	23,853			$	14,235				60	%