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, 2006

OR

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

Commission File Number: 001-31648

EURONET WORLDWIDE, INC.

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

4601 COLLEGE BOULEVARD, SUITE 300
LEAWOOD, KANSAS 66211
(Address of principal executive offices)

(913) 327-4200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 issuer’s common stock, $0.02 par value, outstanding as of October 31, 2006 was 37,281,342 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			36
ITEM 4.		CONTROLS AND PROCEDURES			37
PART II—OTHER INFORMATION					37
ITEM 1.		LEGAL PROCEEDINGS			37
ITEM 1A.		RISK FACTORS			38
ITEM 6.		EXHIBITS			39

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)

		September 30,
		2006				December 31,
		(unaudited)				2005 (1)
ASSETS
Current assets:
Cash and cash equivalents		$	255,366			$	219,932
Restricted cash			88,300				73,942
Inventory — PINs and other			35,253				25,595
Trade accounts receivable, net of allowances for doubtful accounts of $2,651 at September 30, 2006 and $1,995 at December 31, 2005			164,171				166,451
Deferred income taxes, net			3,593				1,812
Prepaid expenses and other current assets			19,490				21,211
Total current assets			566,173				508,943
Property and equipment, net of accumulated depreciation of $83,110 at September 30, 2006 and $66,644 at December 31, 2005			51,648				44,852
Goodwill			274,918				267,195
Acquired intangible assets, net of accumulated amortization of $18,348 at September 30, 2006 and $11,918 at December 31, 2005			48,712				50,724
Deferred income taxes			6,186				6,994
Other assets, net of accumulated amortization of $9,600 at September 30, 2006 and $7,721 at December 31, 2005			16,604				15,644
Total assets		$	964,241			$	894,352
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	204,675			$	202,655
Accrued expenses and other current liabilities			89,230				77,101
Current portion of capital lease obligations			6,170				5,431
Short-term debt obligations and current maturities of long-term debt obligations			9,232				22,893
Income taxes payable			10,962				8,207
Deferred income taxes			3,180				3,023
Deferred revenue			9,858				8,013
Total current liabilities			333,307				327,323
Debt obligations, net of current portion			321,643				315,000
Capital lease obligations, net of current portion			12,749				12,229
Deferred income taxes			23,766				25,157
Other long-term liabilities			1,631				1,161
Minority interest			7,766				7,129
Total liabilities			700,862				687,999
Stockholders’ equity:
Preferred Stock, $0.02 par value. Authorized 10,000,000 shares; none issued			—				—
Common Stock, $0.02 par value. Authorized 90,000,000 shares at September 30, 2006 and 60,000,000 shares at December 31, 2005; issued and outstanding 37,245,861 shares at September 30, 2006 and 35,776,431 at December 31, 2005			746				717
Additional paid-in-capital			334,245				312,025
Treasury stock			(196	)			(196	)
Subscriptions receivable			—				(124	)
Accumulated deficit			(73,893	)			(104,787	)
Restricted reserve			796				776
Accumulated other comprehensive income (loss)			1,681				(2,058	)
Total stockholders’ equity			263,379				206,353
Total liabilities and stockholders’ equity		$	964,241			$	894,352

See accompanying notes to the unaudited 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 September 30,								Nine Months Ended September 30,
		2006				2005(1)				2006				2005(1)
Revenues:
EFT Processing		$	33,212			$	26,315			$	95,498			$	76,245
Prepaid Processing			121,114				107,669				346,260				299,530
Software Solutions			7,327				3,406				20,668				11,066
Total revenues			161,653				137,390				462,426				386,841
Operating expenses:
Direct operating costs			112,488				95,779				319,602				270,308
Salaries and benefits			18,676				15,086				56,164				43,269
Selling, general and administrative			9,971				8,163				27,684				22,498
Depreciation and amortization			7,388				5,773				21,270				16,443
Total operating expenses			148,523				124,801				424,720				352,518
Operating income			13,130				12,589				37,706				34,323
Other income (expense):
Interest income			3,682				1,013				9,791				3,325
Interest expense			(3,802	)			(1,695	)			(11,055	)			(4,900	)
Income from unconsolidated affiliates			197				254				555				906
Foreign exchange gain (loss), net			1,090				854				5,420				(6,703	)
Other income (expense), net			1,167				426				4,711				(7,372	)
Income before income taxes and minority interest			14,297				13,015				42,417				26,951
Income tax expense			(3,638	)			(3,929	)			(10,807	)			(11,230	)
Minority interest			(243	)			(182	)			(716	)			(583	)
Net income			10,416				8,904				30,894				15,138
Translation adjustment			2,224				(617	)			3,739				(6,199	)
Comprehensive income		$	12,640			$	8,287			$	34,633			$	8,939
Earnings per share — basic:
Earnings per share		$	0.28			$	0.25			$	0.84			$	0.43
Basic weighted average shares outstanding			37,230,518				35,404,949				36,938,652				34,806,093
Earnings per share — diluted (see Note 3):
Earnings per share		$	0.26			$	0.23			$	0.78			$	0.41
Diluted weighted average shares outstanding			42,524,973				41,584,931				42,462,863				36,747,479

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,
		2006				2005 (1)
Net income		$	30,894			$	15,138
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			21,270				16,443
Share-based compensation			5,832				3,966
Unrealized foreign exchange (gain) loss, net			(4,841	)			4,207
Gain on disposal of property and equipment			(165	)			(143	)
Deferred income tax expense (benefit)			(3,176	)			656
Income assigned to minority interest			716				583
Income from unconsolidated affiliates			(555	)			(906	)
Amortization of debt issuance expense			1,581				1,005
Changes in working capital, net of amounts acquired:
Income taxes payable			2,916				1,350
Restricted cash			(8,997	)			(7,181	)
Inventory — PINs and other			(8,793	)			(6,867	)
Trade accounts receivable			10,945				(27,310	)
Prepaid expenses and other current assets			3,318				(9,427	)
Trade accounts payable			(10,741	)			40,555
Deferred revenue			1,750				(4,786	)
Accrued expenses and other current liabilities			9,336				12,067
Other, net			(670	)			(97	)
Net cash provided by operating activities			50,620				39,253
Cash flows from investing activities:
Acquisitions, net of cash acquired			(2,312	)			(99,343	)
Proceeds from sale of property and equipment			732				389
Purchases of property and equipment			(15,586	)			(11,445	)
Purchases of other long-term assets			(3,106	)			(995	)
Net cash used in investing activities			(20,272	)			(111,394	)
Cash flows from financing activities:
Proceeds from issuance of shares			12,456				7,459
Net borrowings (repayments) on short-term debt obligations and revolving credit agreements			(5,941	)			1,039
Repayment of capital lease obligations			(4,639	)			(3,983	)
Other, net			(196	)			(901	)
Net cash provided by financing activities			1,680				3,614
Effect of exchange differences on cash			3,406				(2,873	)
Increase (decrease) in cash and cash equivalents			35,434				(71,400	)
Cash and cash equivalents at beginning of period			219,932				124,198
Cash and cash equivalents at end of period		$	255,366			$	52,798
Interest paid during the period		$	7,366			$	3,314
Income taxes paid during the period			8,862				10,183

See accompanying notes to the unaudited consolidated financial statements.

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 U.S. generally accepted accounting principles (“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 September 30, 2006, the results of its operations for the three- and nine-month periods ended September 30, 2006 and 2005 and cash flows for the nine-month periods ended September 30, 2006 and 2005.

The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Euronet for the year ended December 31, 2005, 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 period consolidated financial statement presentation.

The Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” (“SFAS No. 123R”) on January 1, 2006. The Company elected to adopt SFAS No. 123R utilizing the modified retrospective application method and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have been adjusted to reflect the fair value method of expensing prescribed by SFAS No. 123R. See Note 2 — Significant Accounting Policies and Practices and Note 7 — Stock Plans for further discussion.

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- and nine-month periods ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006.

(2) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Revenue recognition-EFT Processing

Certain of the Company’s non-cancelable customer contracts provide for the receipt of up-front fees from the customer and/or decreasing or increasing fee schedules over the agreement term for substantially the same level of services to be provided by the Company. As prescribed in SEC Staff Accounting Bulletin (“SAB”) 101, “Revenue Recognition in Financial Statements,” as amended by SAB 104, “Revenue Recognition,” the Company recognizes revenue under these contracts based on proportional performance of services over the term of the contract. This generally results in “straight-line” (i.e. consistent value per period) revenue recognition of the contracts’ total cash flows, including any up-front payment received from the customer.

Share-based compensation

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” For equity classified awards, SFAS No. 123R requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the period in which the share-based compensation is earned (“requisite service period”). The Company elected to adopt the modified retrospective application method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have been adjusted to reflect the fair value method of expensing prescribed by SFAS No. 123R. The Company believes that this method achieves the highest level of clarity and comparability among the presented periods.

As a result of adopting SFAS No. 123R, the Company’s deferred tax assets related to U.S. Federal and state net operating loss carryforwards, reported for U.S. GAAP purposes, and the Company’s deferred tax assets related to deferred compensation, increased by an estimated $8.1 million as of December 31, 2005. This estimate remains preliminary while management completes its analysis. However, since the Company records a valuation allowance for its entire U.S. net deferred tax asset position, upon adoption of SFAS No. 123R, the amount of net deferred tax assets did not, and is not expected to, change. The Company has chosen to use the Black-Scholes pricing model for the determination of fair value for stock option grants. The amount of future compensation expense related to awards of nonvested shares or nonvested share units (restricted stock) is based on the market price for Euronet Common Stock at the grant date. The grant date is the date at which all key terms and conditions of the grant have been determined and the Company becomes contingently obligated to transfer assets to the employee who renders the requisite service, generally the date at which grants are approved by the Company’s Board of Directors or Compensation Committee thereof. Share-based compensation expense for awards with service conditions only is generally recognized as an expense of the Corporate division on a “straight-line” basis over the requisite service period.

For awards with performance conditions, expense is recognized on a “graded attribution method.” The graded attribution method results in expense recognition on a straight-line basis over the requisite service period for each separately vesting portion of an award, as if the award was, in-substance, multiple awards. See Note 7 — Stock Plans for further disclosure.

For a description of other significant accounting policies of the Company, see Note 3 to the Audited Consolidated Financial Statements as of and for the year ended December 31, 2005, set forth in the Company’s Annual Report on Form 10-K.

Recent accounting pronouncements

In March 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).” If significant, this issue requires companies to disclose the policy of presenting such taxes in the income statement on either a gross or net basis. The provisions of this issue will be effective for the Company beginning January 1, 2007.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 is an interpretation of SFAS No. 109, “Accounting for Income Taxes,” and 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 disclosure with respect to uncertain tax positions. The provisions of FIN 48 will be effective for the Company beginning January 1, 2007.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Statement applies whenever other accounting pronouncements require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. The provisions of SFAS No. 157 will be effective for the Company beginning January 1, 2008.

The Company is in the process of determining the effect, if any, that the adoption of the above accounting pronouncements will have on its financial statements.

(3) EARNINGS PER SHARE

Basic earnings per share has been computed by dividing income available to common stockholders 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 convertible debentures, options to purchase the Company’s common stock, restricted stock and shares issuable in connection with acquisition obligations. 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 and a reconciliation of net income to earnings available to common stockholders:

		Three Months Ended September 30,								Nine Months Ended September 30,
(dollar amounts in thousands)		2006				2005(1)				2006				2005(1)
Basic weighted average shares outstanding			37,230,518				35,404,949				36,938,652				34,806,093
Additional shares from assumed conversion of 1.625% convertible debentures			4,162,950				4,162,950				4,162,950				—
Weighted average shares issuable in connection with acquisition obligations (See Note 4 - Acquisitions)			—				—				48,685				—
Incremental shares from assumed conversion of stock options and restricted stock (1)			1,131,505				2,017,032				1,312,576				1,941,386
Diluted weighted average shares outstanding			42,524,973				41,584,931				42,462,863				36,747,479
Net income		$	10,416			$	8,904			$	30,894			$	15,138
Add: interest expense of 1.625% convertible debentures			797				797				2,391				—
Earnings available to common stockholders		$	11,213			$	9,701			$	33,285			$	15,138

For the three- and nine-month periods ended September 30, 2006 and 2005, the average market price of Euronet common stock exceeded the exercise price of all stock options 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 Company’s 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, initially in December 2009 and October 2012, respectively, or earlier upon the occurrence of certain conditions. As required by EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” if dilutive, the impact of the contingently issuable shares must be included in the calculation of diluted net income per share under the “if-converted” method, regardless of whether the conditions upon which the debentures would be convertible into shares of the Company’s 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 September 30, 2006 and 2005 and for the nine-month period ended September 30, 2006 and, accordingly, the impact has been included in the above computation of diluted weighted average shares outstanding for these periods. The assumed conversion of the 1.625% convertible debentures was anti-dilutive for the nine-month period ended September 30, 2005 and, accordingly, the impact has been excluded from the above computation for the nine-month period ended September 30, 2005. Under the if-converted method, the assumed conversion of the 3.50% convertible debentures was anti-dilutive for the three- and nine-month periods ended September 30, 2006 and, accordingly, the impact has been excluded from the above computation of dilutive weighted average shares outstanding. The 3.50% convertible debentures were not outstanding for the three- and nine-month periods ended September 30, 2005.

(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.

2006 Acquisitions:

Acquisition of Essentis Limited

In January 2006, the Company completed the acquisition of the assets of Essentis Limited (“Essentis”) for approximately $3.0 million, which was comprised of $0.9 million in cash and approximately $2.1 million in assumed liabilities. Essentis is a U.K. company that owns and develops software packages that enhance Euronet’s outsourcing and software offerings to banks. Essentis is reported in the Company’s Software Solutions Segment. The Company’s allocation of the purchase price to the fair values of acquired tangible and intangible assets is preliminary and remains so while management completes its valuation of the fair value of the net assets acquired. The following table summarizes the estimated allocation of the purchase price to the fair values of the acquired tangible and intangible assets at the acquisition date:

		Estimated
(dollar amounts in thousands)		Life				Essentis
Property and equipment		various				$	573
Software		5 years					2,467
Assets acquired						$	3,040

There are no potential additional purchase price or escrow arrangements associated with the acquisition of Essentis.

2005 Acquisitions:

During 2005, the Company completed seven acquisitions for an aggregate purchase price of approximately $119.0 million. The Company’s allocation of the purchase price to the fair values of acquired tangible and intangible assets for certain acquisitions are preliminary and remain so while management completes its valuation of the fair value of the net assets acquired. The following table summarizes the allocation of the purchase price, including $2.9 million paid in prior years for acquisitions accounted for as step acquisitions, to the fair values of the acquired tangible and intangible assets at the acquisition dates.

		Estimated								Other
(dollar amounts in thousands)		Life				Telerecarga				Acquisitions				Total
Current assets						$	—			$	3,841			$	3,841
Property and equipment		various					1,415				1,412				2,827
Customer relationships		8 or 9 years					10,295				14,703				24,998
Software		5 years					655				900				1,555
Patent		7 years					—				1,699				1,699
Trade name		2 years					254				—				254
Non-compete agreements		5 years					147				—				147
Deferred income tax asset							—				1,055				1,055
Goodwill		Indefinite					42,144				53,417				95,561
Assets acquired							54,910				77,027				131,937
Current liabilities							—				(687	)			(687	)
Deferred income tax liability							(3,892	)			(5,442	)			(9,334	)
Net assets acquired						$	51,018			$	70,898			$	121,916

Acquisition of Telerecarga S.L.

In March 2005, to supplement the Company’s prepaid processing business in Spain, Euronet purchased 100% of the assets of Telerecarga S.L. (“Telerecarga”), a Spanish company that distributes prepaid mobile airtime and other prepaid products via 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 €12.7 million (approximately $17.0 million).

Other acquisitions

During 2005, Euronet completed six other acquisitions described below for a total purchase price of $68.0 million, comprised of $39.6 million in cash, 864,131 shares of Euronet Common Stock (including 109,542 shares issued in settlement of contingent payment arrangements discussed below), valued at $23.6 million and $4.8 million in liabilities assumed. Additionally, the purchase price for acquisitions accounted for as step acquisitions, in accordance with SFAS No. 141, include $2.9 million paid in prior years.

	•		In December 2005, EFT Services Holding B.V. (a wholly-owned subsidiary of Euronet) purchased 6.25% of Euronet Services Private Limited, the Company’s subsidiary in India (“Euronet India”), increasing its share ownership of Euronet India to 100%. Euronet India is included in the Company’s EFT Processing Segment and, since the Company’s ownership share previously exceeded 50%, has been a consolidated subsidiary since inception.
	•		In two separate transactions, one in April 2005 and one in December 2005, EFT Services Holding B.V. purchased an additional 64% of Europlanet a.d. (“Europlanet”), a Serbian company, increasing its share ownership in Europlanet to 100%. Europlanet is an ATM and card processor that owns, operates and manages a network of ATMs and POS terminals. Upon obtaining a controlling interest in April 2005, Euronet began consolidating Europlanet’s financial position and results of operations. Euronet’s $0.2 million share of dividends declared prior to acquiring a controlling ownership share of Europlanet was recognized as income from unconsolidated affiliates during 2005.
	•		In October 2005, Euronet EFT Services Hellas EPE (a wholly-owned subsidiary of Euronet) acquired all of the share capital of Instreamline S.A. (“Instreamline”), a Greek company that provides card processing services in addition to debit card and transaction gateway switching services in Greece and the Balkan region. Instreamline will complement the Company’s EFT Processing Segment. Subsequent to the acquisition, Instreamline was renamed Euronet Card Services Greece.
	•		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, now known as Euronet Payments and Remittance, Inc. (“Euronet Payments & Remittance”), provides money transfer services, primarily to consumers in the U.S. to destinations in Latin America, and bill payment services within the U.S. This acquisition launched the Company’s money transfer and bill payment business.
	•		In March 2005, to enhance the Company’s U.S. prepaid processing business, PaySpot (a wholly-owned subsidiary of Euronet) purchased substantially all of the assets of Dynamic Telecom, Inc. (“Dynamic Telecom”), a company based in Iowa. Dynamic 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%. 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 2005. Upon the increase in ownership from 10% to 51%, Euronet consolidated ATX’s financial position and results of operations.

In connection with these six acquisitions, $3.5 million in cash remains in escrow, subject to the achievement of certain performance criteria. This cash has been reflected in the purchase price allocation because the Company has determined beyond a reasonable doubt that the performance criteria will be met. During the nine-month period ending September 30, 2006, the Company issued 109,542 shares of Euronet Common Stock, valued at $4.1 million, in settlement of contingent payment arrangements associated with the Company’s 2005 acquisitions. This settlement was recorded as an increase in goodwill.

Pro Forma results:

The following unaudited pro forma financial information presents the condensed combined results of operations of Euronet for the three- and nine-month periods ended September 30, 2005, as if the acquisitions described above had occurred January 1, 2005. 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 acquisitions had occurred on January 1, 2005. Because the Company’s 2006 acquisition was effective January 1, 2006, there is no pro-forma financial information for 2006. 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
		Three Months Ended				Nine Months Ended
(amounts in thousands, except per share data)		September 30, 2005				September 30, 2005
Revenues		$	142,731			$	411,435
Operating income		$	11,481			$	30,161
Net income		$	8,287			$	12,090
Per share data:
Earnings per share-basic		$	0.23			$	0.34
Earnings per share-diluted		$	0.22			$	0.32

(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. 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-month period ended September 30, 2006, is presented below:

		Amortizable								Total
		Intangible								Intangible
(in thousands):		Assets				Goodwill				Assets
Balance as of January 1, 2006		$	50,724			$	267,195			$	317,919
Increases (decreases):
2006 acquisitions			2,467				—				2,467
Earn-out payment related to 2005 acquisition			—				4,126				4,126
Adjustments to other 2005 acquisitions			234				(707	)			(473	)
Amortization			(6,229	)			—				(6,229	)
Other (primarily changes in foreign currency exchange rates)			1,516				4,304				5,820
Balance as of September 30, 2006		$	48,712			$	274,918			$	323,630

Estimated annual amortization expense on intangible assets with finite lives, before income taxes, as of September 30, 2006 is expected to be $8.3 million for 2006, $8.3 million for 2007, $8.1 million for 2008, $8.1 million for 2009, $8.0 million for 2010 and $6.1 million for 2011.

(6) DEBT OBLIGATIONS

A summary of the activity for the nine-month period ended September 30, 2006 for all debt obligations is presented below:

														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, 2006		$	7,343			$	15,550			$	17,660			$	140,000			$	175,000			$	355,553
Increases (decreases):
Indebtedness incurred			9,146				1,548				5,290				—				—				15,984
Repayments			(12,761	)			(5,704	)			(5,993	)			—				—				(24,458	)
Capital lease interest accrued			—				—				1,354				—				—				1,354
Foreign exchange loss			251				502				608				—				—				1,361
Balance at September 30, 2006			3,979				11,896				18,919				140,000				175,000				349,794
Less — current maturities			—				(9,232	)			(6,170	)			—				—				(15,402	)
Long-term obligations at September 30, 2006		$	3,979			$	2,664			$	12,749			$	140,000			$	175,000			$	334,392

During the second quarter 2006 the Company amended its October 2004, $50 million revolving credit agreement to extend the maturity date to May 26, 2009 and established a new credit facility in India maturing on May 26, 2009. The amended facility also increased the number of participating financial institutions from one to three. The credit agreement, as amended, comprises the following:

	•		A $10 million facility is to be used by the Company and certain U.S. subsidiaries (the “U.S. facility”) and drawn in U.S. dollars. This facility bears interest at either (i) the prime rate plus an applicable margin specified in the respective agreement, or (ii) a fixed rate equal to the U.S. dollar London Interbank Offered Rate (“LIBOR”), plus an applicable margin set forth in the 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. Fixed rate borrowings are made with maturities of one month, two months or three months. The U.S. facility is secured by approximately 65% of the share capital of Euronet Services Holding B.V. and the share capital of a majority of the Company’s U.S. subsidiaries.
	•		A $30 million facility for use by the Company and certain European subsidiaries (the “European facility”). The European facility is a multi-currency facility that may be drawn in any combination of U.S. dollar, euro or British pound denominations. U.S. dollar draws are subject to interest charges similar to the $10 million U.S. facility described above. Borrowings in euro or British pounds bear interest at a rate fixed to the Euro Interbank Offered Rate (“EURIBOR”) or LIBOR rate, respectively, plus a margin that varies based on a consolidated funded debt to EBITDA ratio, plus ancillary costs. Fixed rate borrowings are made with maturities of one month, two months or three months. Borrowings under this facility are secured by the share capital of e-pay Ltd., Euronet Services GmbH, Transact GmbH and Delta Euronet GmbH, and are secured and guaranteed by a majority of the Company’s U.S. subsidiaries.
	•		A $10 million facility, to be drawn in Indian rupees, for use by the Company’s Indian subsidiary (the “Rupee facility”). Borrowings under the Rupee facility bear interest at either (i) a floating rate equal to the Indian prime lending rate or the Mumbai Interbank Offered Rate (“MIBOR”), plus an applicable margin, or (ii) at a fixed MIBOR rate plus an applicable margin. Fixed rate borrowings are made with maturities of one month, two months or three months. Borrowings under this facility are unsecured and guaranteed by Euronet Worldwide, Inc.

The agreement allows the Company to elect to increase the aggregate commitments under the credit facility from $50 million to $65 million. The borrowings under the agreement may be used to refinance debt, for working capital needs, for permitted acquisitions and for other general corporate purposes. The agreement places certain restrictions on use of the facility to finance investments in, or operations of, “money services businesses” such as those engaged in money transfer activities. The agreement contains customary events of cross-default and covenants related to limitations on indebtedness and the maintenance of certain financial ratios. Total debt issuance costs of $0.3 million are being amortized over three years.

As of September 30, 2006, there were borrowings of $4.0 million and stand-by letters of credit of $6.3 million outstanding against these facilities. As a result of the amendment to the revolving credit facility described above, borrowings under the facilities are classified as long-term debt obligations in the unaudited consolidated balance sheet as of September 30, 2006.

(7) STOCK PLANS

The Company has established, and shareholders have approved, a share compensation plan (the “SCP”) that allows the Company to grant restricted stock, or options to purchase shares, of its Common Stock to certain current and prospective key employees, directors and consultants of the Company. These awards generally vest over periods ranging from three to seven years from the date of grant, are generally exercisable during the shorter of a ten-year term or the term of employment or consulting arrangement with the Company and are settled through the issuance of new shares under the provisions of the SCP. As of September 30, 2006, the Company reserved 13,663,991 shares of Common Stock, including 4,000,000 approved during the second quarter 2006. Of the total shares reserved, 9,795,866 have been awarded to employees.

(a) Adoption of SFAS No. 123R

As discussed in Note 1, Note 2 and Note 3, the Company elected to adopt SFAS No. 123R under the modified retrospective application method applied to all periods for which SFAS No 123 was effective. Accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have been adjusted to reflect the fair value method of expensing prescribed by SFAS No. 123R. The following table outlines the impact of adopting SFAS No. 123R on previously reported results:

		As Previously				Impact of
(in thousands, except per share data)		Reported				Adoption				As Adjusted
For Three Months Ended September 30, 2005:
Income before income taxes and minority interest		$	14,270			$	(1,255	)		$	13,015
Net income		$	10,159			$	(1,255	)		$	8,904
Earnings per share:
Basic		$	0.29			$	(0.04	)		$	0.25
Diluted		$	0.26			$	(0.03	)		$	0.23
For Nine Months Ended September 30, 2005:
Income before income taxes and minority interest		$	30,716			$	(3,765	)		$	26,951
Net income		$	18,903			$	(3,765	)		$	15,138
Earnings per share:
Basic		$	0.54			$	(0.11	)		$	0.43
Diluted		$	0.51			$	(0.10	)		$	0.41
As of December 31, 2005:
Additional paid-in capital		$	279,307			$	32,718			$	312,025
Accumulated deficit		$	(72,069	)		$	(32,718	)		$	(104,787	)
Net deferred income tax liabilities		$	19,374			$	—			$	19,374

Changes to the Company’s consolidated statement of cash flows for the nine-month period ended September 30, 2005 for the adoption of SFAS No. 123R were limited to the impact on net income shown above and the offsetting adjustment for share-based compensation as a non-cash expense.

The Company’s consolidated statements of income and comprehensive income includes share-based compensation expense of $2.0 million and $1.3 million for the three-month periods ended September 30, 2006 and 2005, respectively, and $5.8 million and $4.0 million for the nine-month periods ended September 30, 2006 and 2005, respectively. The amounts are recorded as salaries and benefits expense in the accompanying unaudited consolidated statements of income. Of these amounts, approximately $0.2 million was recorded as expense of the Company’s business segments during both the nine-month periods ended September 30, 2006 and 2005. The Company recorded a tax benefit of $0.1 million and $0.3 million during the three- and nine-month periods ended September 30, 2006, respectively, for the portion of this expense that relates to foreign tax jurisdictions in which an income tax benefit is expected to be derived. The Company did not record a tax benefit for the three- and nine-month periods ended September 30, 2005.

(b) Stock options

Summary stock options activity is presented in the table below:

										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
		Number of				Exercise				Contractual				Value
		Shares				Price				Term (years)				(thousands)
Outstanding at January 1, 2006			3,803,261			$	11.91			6.2 years				$	60,439
Exercised			(1,288,720	)		$	8.59							$	30,629
Forfeited			(98,630	)		$	19.52							$	1,241
Outstanding at September 30, 2006			2,415,911			$	13.47			6.0 years				$	26,779
Exercisable at January 1, 2006			2,142,090			$	8.75			5.2 years				$	40,807
Exercisable at September 30, 2006			1,360,151			$	10.89			5.5 years				$	18,574

There were no options granted during the nine-month period ended September 30, 2006. The Company received cash of $11.1 million in connection with stock options exercised during the nine-month period ended September 30, 2006. As of September 30, 2006, unrecognized compensation expense related to nonvested stock options totaled $4.3 million and will be recognized over the next 27 months, with an overall weighted average period of one year.

(c) Restricted stock

Restricted stock awards vest based on the achievement of time-based service conditions and/or performance-based conditions. For certain awards, vesting is based on the achievement of more than one condition of an award with multiple time-based and/or performance-based conditions.

Summary restricted stock activity is presented in the table below:

						Weighted
						Average Grant
		Number of				Date Fair
		Shares				Value
Outstanding at January 1, 2006			543,063			$	27.26
Granted			322,150			$	26.16
Vested			(12,138	)		$	29.88
Forfeited			(22,100	)		$	30.11
Outstanding at September 30, 2006			830,975			$	26.72

The total fair value of shares vested during the nine-months ended September 30, 2006 was $0.4 million. As of September 30, 2006, there was $19.5 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted average period of 5.2 years. The estimated annual forfeiture rate for restricted stock awards is five percent.

(d) Employee stock purchase plans

In 2003, the Company established a qualified Employee Stock Purchase Plan (the “ESPP”), which allows qualified employees (as defined by the plan documents) to participate in the purchase of rights to purchase designated shares of the Company’s Common Stock at a price equal to the lower of 85% of the closing price at the beginning or end of each quarterly offering period. The Company reserved 500,000 shares of Common Stock for purchase under the ESPP. Pursuant to the ESPP, during the nine-month period ended September 30, 2006 the Company issued 33,557 rights to purchase shares of Common Stock at a weighted average price per share of $24.81. During the nine-month period ended September 30, 2005 the Company issued 30,259 rights to purchase shares of Common Stock at a weighted average price per share of $23.57. The following table provides the weighted average fair value of the ESPP stock purchase rights during the nine-month period ended September 30, 2006 and the weighted average assumptions used to calculate the fair value using the Black-Scholes pricing model:

		Nine Months Ended September 30,
		2006				2005
Volatility			31.1	%			36.3	%
Risk-free interest rates			4.1	%			4.0	%
Dividend yield			0.0	%			0.0	%
Expected lives		3 months				3 months
Weighted-average fair value (per share)		$	5.03			$	4.81

(8) BUSINESS SEGMENT INFORMATION

The Company operates in three 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).
	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 includes the results of Euronet Payments & Remittance, a licensed money transfer and bill payment company.
	3)		Through the Software Solutions Segment, the Company offers a suite of integrated electronic financial transaction (“EFT”) software solutions for electronic payment, merchant acquiring, card issuing and transaction delivery systems.

In addition, in its administrative division, “Corporate Services, Eliminations and Other,” the Company accounts for non-operating results, certain intercompany 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. During the nine-month periods ended September 30, 2006 and 2005 the Company’s Software Solutions Segment recorded intersegment revenues of $0.6 million and $0.2 million, respectively, in relation to software and services provided to EFT Processing Segment entities. Salaries and benefits expense related to share-based compensation is generally recorded as a corporate expense.

The following tables present the segment results of the Company’s operations for the three- and nine-month periods ended September 30, 2006 and 2005:

		For the Three Months Ended September 30, 2006
														Corporate
														Services,
		EFT				Prepaid				Software				Eliminations
(in thousands)		Processing				Processing				Solutions				and Other				Consolidated
Total revenues		$	33,212			$	121,114			$	7,339			$	(12	)		$	161,653
Operating expenses:
Direct operating costs			14,281				97,814				393				—				112,488
Salaries and benefits			4,726				6,119				4,238				3,593				18,676
Selling, general and administrative			2,770				4,793				1,200				1,208				9,971
Depreciation and amortization			3,245				3,541				546				56				7,388
Total operating expenses			25,022				112,267				6,377				4,857				148,523
Operating income (loss)		$	8,190			$	8,847			$	962			$	(4,869	)		$	13,130

		For the Three Months Ended September 30, 2005
														Corporate
														Services,
		EFT				Prepaid				Software				Eliminations
(in thousands)		Processing				Processing				Solutions				and Other (1)				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				2,624				15,086
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				3,960				124,801
Operating income (loss)		$	6,566			$	9,249			$	960			$	(4,186	)		$	12,589

		For the Nine Months Ended September 30, 2006
														Corporate
														Services,
		EFT				Prepaid				Software				Eliminations
(in thousands)		Processing				Processing				Solutions				and Other				Consolidated
Total revenues		$	95,498			$	346,260			$	21,255			$	(587	)		$	462,426
Operating expenses:
Direct operating costs			40,298				278,071				1,233				—				319,602
Salaries and benefits			14,023				18,608				12,620				10,913				56,164
Selling, general and administrative			8,359				13,176				3,268				2,881				27,684
Depreciation and amortization			9,208				10,477				1,441				144				21,270
Total operating expenses			71,888				320,332				18,562				13,938				424,720
Operating income (loss)		$	23,610			$	25,928			$	2,693			$	(14,525	)		$	37,706
Total assets as of September 30, 2006		$	141,990			$	597,973			$	16,723			$	207,555			$	964,241

		For the Nine Months Ended September 30, 2005
														Corporate
														Services,
		EFT				Prepaid				Software				Eliminations
(in thousands)		Processing				Processing				Solutions				and Other (1)				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				7,723				43,269
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				11,888				352,518
Operating income (loss)		$	18,399			$	25,421			$	2,617			$	(12,114	)		$	34,323
Total assets as of December 31, 2005		$	124,772			$	477,893			$	6,308			$	285,379			$	894,352

(9) CONTINGENCIES

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

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 has not been returned. This claim, based on events that purportedly occurred over five years ago, was made more than a year after the Company had 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. The claim has been referred to arbitration and the first hearing took place during the third quarter 2006. No substantive decisions or findings were made at that hearing. Management believes it has strong defenses to this action 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, 2006, the Company had $30.7 million of bank guarantees issued on its behalf, of which $13.2 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 September 30, 2006, the Company had granted guarantees in the following amounts:

	•		Cash in various ATM networks — $18.8 million over the terms of the cash supply agreements.
	•		Commercial obligations of the Company’s Australian Prepaid Processing subsidiary, including PIN inventory held on consignment with our customers, to a maximum of approximately $45 million.
	•		Other vendor supply agreements — $18.5 million over the term of the vendor agreements.

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 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 third parties to guarantee agreements with the Company and, accordingly, no liabilities were recorded as of September 30, 2006 and December 31, 2005.

(11) INCOME TAXES

The Company’s effective tax rate, after consideration of minority interest, was 26% and 31% for the three-month periods ended September 30, 2006 and 2005, respectively, and was 26% and 43% for the nine-month periods ended September 30, 2006 and 2005, respectively. The improvement in the effective tax rate largely relates to the impact of foreign currency exchange gains or losses and the recognition of deferred taxes in Poland. Since the Company is in a net operating loss position for its U.S. operations, valuation allowances have been recorded in instances where we determine that it is more likely than not that a tax benefit will not be realized. Accordingly, tax benefit or expense associated with foreign currency gains or losses incurred by the Company’s U.S. entities are not currently being recognized.

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 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.

We operate in three principal business segments:

	•		An EFT Processing Segment, in which we process transactions for a network of 8,491 ATMs and more than 39,000 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 via an ATM or directly from the handset).
	•		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 265,000 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 resulted from the 2005 acquisition of TelecommUSA, and 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.
	•		A Software Solutions Segment, through which we offer a suite of integrated EFT software solutions for electronic payment and transaction delivery systems.

We have seven processing centers in Europe, two in Asia and one in the U.S., and we have 17 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. With approximately 84% of our revenues denominated in currencies other than the U.S. dollar, any significant changes in currency exchange rates will likely have a significant impact on our growth in revenues, operating income and diluted earnings per share (for more discussion, see Item 7A — Quantitative and Qualitative Disclosure About Market Risk, and Part I, Item 1A — Risk Factors in the Company’s Annual Report of Form 10-K for the year ended December 31, 2005).

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 segment’s sources of revenue are described below.

EFT Processing Segment — Revenue in the EFT Processing Segment, which represents approximately 21% of total consolidated revenue for the nine months ended September 30, 2006, 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.

For the nine months ended September 30, 2006, approximately 26% of total segment revenue was derived from ATMs we owned (excluding those leased by us in connection with outsourcing agreements, as discussed below) and the remainder was primarily derived from ATMs that we operate for banks on an outsourced basis. The percentage of revenues we generate from our proprietary network of ATMs continues to fall as we shift from a largely proprietary, Euronet-owned ATM network, to a greater focus on ATMs operated under outsourcing agreements. This shift will continue to provide lower total revenues, but 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 (often to an entity related to the bank). We then 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 approximately 75% of total consolidated revenue for the nine months ended September 30, 2006, 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. Due to certain provisions in our mobile phone operator agreements, the operators have the ability to reduce the overall commission paid on each top-up transaction. However, by virtue of our agreements with retailers (distributors where POS terminals are located) in certain markets, not all of these reductions are absorbed by us because we are able to pass a significant portion of the reductions to retailers. Accordingly, under certain retailer agreements, the effect is to reduce revenues and reduce our direct operating costs resulting in only a small impact on gross margin and operating income. In some markets, reductions in commissions can significantly impact our results as it may not be possible, either contractually or practically in the concerned market, to pass a reduction in commissions to the retailers. In Australia, certain retailers negotiate directly with the mobile phone operators for their own commission rates, which also limits our ability to pass through reductions in commissions.

Agreements with mobile operators are important to the success of our business. These agreements permit us to distribute prepaid mobile airtime to the mobile operators’ customers. The loss of any agreements with mobile operators in any market could materially and adversely affect our results.

Software Solutions Segment — Revenue in the Software Solutions Segment, which represents approximately 4% of total consolidated revenue for the nine months ended September 30, 2006, is derived 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.

In January 2006, we acquired the assets of Essentis Limited (“Essentis”), a U.K. company that owns a leading card issuing and merchant acquiring software package. The assets, primarily consisting of the software source code, were purchased out of an administrative proceeding for approximately $3.0 million, including the assumption of certain liabilities. The Essentis software product allows us to add additional outsourcing and software offerings to banks. For further discussion, see Note 4 — Acquisitions to the Unaudited Consolidated Financial Statements. The results of Essentis are reported in the Software Solutions Segment.

OPPORTUNITIES AND CHALLENGES

Our expansion plans and opportunities are focused on five primary areas:

	•		outsourced ATM and POS terminal management contracts;
	•		transactions processed on our network of owned and operated ATMs;
	•		our prepaid mobile airtime top-up processing services;
	•		our money transfer and bill payment services; and
	•		development of our credit and debit card outsourcing business.

EFT Processing Segment — The continued expansion and development of our ATM 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;
	•		entering into additional card acceptance and ATM management agreements with banks;
	•		the ability to obtain required licenses in markets we intend to enter or expand services;
	•		the availability of financing for expansion; and
	•		the ability to efficiently install 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 acquisition or termination of these management contracts. Therefore, the timing of both current and new contract revenues is uncertain and unpredictable.

In January 2006, through Jiayintong (Beijing) Technology Development Co. Ltd., our 75% owned joint venture with Ray Holdings in China, we entered into an ATM outsourcing pilot agreement with Postal Savings and Remittance Bureau (“PSRB”), a financial institution located and organized in China. This pilot agreement makes us the first, and currently the only, provider of end-to-end ATM outsourcing services in China. Under the pilot agreement we will deploy and provide all of the day-to-day outsourcing services for a total of 90 ATMs in Beijing, Shanghai and Guangdong, the three largest commercial centers in China. As of September 30, 2006, we have deployed 59 of the 90 ATMs, with the remaining 31 ATMs expected to be deployed by or about October 31, 2006. If this pilot agreement meets certain success criteria, we have agreed to take over additional existing ATMs and install new ATMs at PSRB’s request. We have established a technical processing and operations center in Beijing to operate these ATMs. Our future success in China will depend on our ability to be successful in this pilot agreement, the willingness of PSRB or other banks to outsource additional ATMs to us and our ability to take over, install and operate additional ATMs. While we believe that we have the proper resources and skills in place to be successful, there can be no assurance that we will be successful in the pilot agreement or that we will be successful in our ability to take over existing ATMs or install new ATMs as expected by PSRB or others. Nonetheless, during the third quarter 2006, we signed an ATM outsourcing agreement with a leading multinational bank to deploy 50 ATMs in China over the next 12 months. Start up costs for this joint venture have been expensed as incurred.

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 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 for other markets with mobile phone operators, agent banks and retailers;
	•		the continuation of the conversion trend 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; and
	•		the availability of financing for further expansion.

In mature markets, such as the U.K., Australia, Spain and Ireland, the conversion from scratch cards to electronic forms of distribution is either complete or nearing completion. Because of this factor, we are likely to cease experiencing the organic increases in the number of transactions per terminal that we have experienced historically. Also in mature markets, competition among prepaid distributors results in the increase of commissions paid to retailers and increases in retailer attrition rates. The combined impact of these factors in developed markets is a flattening of growth in the revenues and profits that we earn. In other markets in which we operate, such as Poland, Germany and the U.S., many of the factors that may contribute to rapid growth (conversion from scratch cards to electronic distribution, growth in the prepaid market, expansion of our network of retailers and access to all mobile operators’ products) remain present.

Growth in our money transfer and bill payment services business, Euronet Payments & Remittance, will be driven by the continuation of global worker migration patterns, our ability to manage rapid growth, our ability to maximize the opportunity to sell our card-based product over 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. While we are currently focused on the U.S. and Latin America market, we plan to expand our money transfer services to other markets. We are focusing on increasing our sending locations in existing licensed states and obtaining licenses to operate in other key U.S. states. We have expanded these operations from the original three states into sixteen additional states. We also have seven other states where we are preparing to introduce these services and three additional states where licenses are pending approval. Expansion of our money transfer business internationally will require resolution of numerous licensing and regulatory issues in each market we intend to develop and no assurance can be given that these issues will be resolved.

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 capital investment. Additionally, this segment supports our EFT Processing Segment and is 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. We also recently expanded the Software Solutions Segment with the January 2006 acquisition of Essentis. This acquisition will allow us to offer additional outsourcing and software products to banks.

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 results, 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.

We evaluate performance of our segments based on operating income. 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- and nine-month periods ended September 30, 2006 and 2005 are summarized in the tables below:

		Revenues for the Three														Revenues for the Nine
		Months Ended September 30,								Year-over-Year Change						Months Ended September 30,								Year-over-Year Change
										Increase				Increase										Increase				Increase
										(Decrease)				(Decrease)										(Decrease)				(Decrease)
(dollar amounts in thousands)		2006				2005				Amount				Percent		2006				2005				Amount				Percent
EFT Processing		$	33,212			$	26,315			$	6,897			26%		$	95,498			$	76,245			$	19,253			25%
Prepaid Processing			121,114				107,669				13,445			12%			346,260				299,530				46,730			16%
Software Solutions			7,339				3,632				3,707			102%			21,255				11,292				9,963			88%
Total			161,665				137,616				24,049			17%			463,013				387,067				75,946			20%
Eliminations			(12	)			(226	)			214			n/m			(587	)			(226	)			(361	)		n/m
Total		$	161,653			$	137,390			$	24,263			18%		$	462,426			$	386,841			$	75,585			20%

		Operating Income for the														Operating Income for the
		Three Months Ended														Nine Months Ended
		September 30,								Year-over-Year Change						September 30,								Year-over-Year Change
										Increase				Increase										Increase				Increase
										(Decrease)				(Decrease)										(Decrease)				(Decrease)
(dollar amounts in thousands)		2006				2005 (1)				Amount				Percent		2006				2005 (1)				Amount				Percent
EFT Processing		$	8,190			$	6,566			$	1,624			25%		$	23,610			$	18,399			$	5,211			28%
Prepaid Processing			8,847				9,249				(402	)		(4%)			25,928				25,421				507			2%
Software Solutions			962				960				2			0%			2,693				2,617				76			3%
Total			17,999				16,775				1,224			7%			52,231				46,437				5,794			12%
Corporate services			(4,857	)			(4,186	)			(671	)		16%			(14,054	)			(12,114	)			(1,940	)		16%
Eliminations and other			(12	)			—				(12	)		n/m			(471	)			—				(471	)		n/m
Total		$	13,130			$	12,589			$	541			4%		$	37,706			$	34,323			$	3,383			10%