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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission File Number 001-31648
EURONET WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
| DELAWARE (State or other jurisdiction of incorporation or organization) |
74-2806888 (I.R.S. Employer Identification No.) |
| 4601 COLLEGE BOULEVARD, SUITE 300 LEAWOOD, KANSAS (Address of principal executive offices) |
66211 (Zip Code) |
(913) 327-4200
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, $0.02 par value Preferred Stock Purchase Rights |
Nasdaq Stock Market, LLC Nasdaq Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes o No
þ
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No
þ
As of June 30, 2008, the aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $744.7 million. The aggregate market value was
determined based on the closing price of the Common Stock on June 30, 2008.
At February 23, 2009, the registrant had 50,406,566 shares of common stock (the “Common Stock”)
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its Annual Meeting of Shareholders in 2009, which
will be filed with the Securities and Exchange Commission no later than 120 days after December 31,
2008, are incorporated by reference into Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
General Overview
Euronet Worldwide, Inc. (together with our subsidiaries, “we,” “us,” “Euronet” or the “Company”) is
a leading electronic payments provider, offering automated teller machine (“ATM”), point-of-sale
(“POS”) and card outsourcing services, card issuing and merchant acquiring services, integrated
electronic financial transaction (“EFT”) software, network gateways, electronic distribution of
top-up services for prepaid mobile airtime and other prepaid products, electronic consumer money
transfer and bill payment services to financial institutions, mobile operators, retailers and
individual customers.
Core Business Segments
We operate in the following three principal business segments as of December 31, 2008:
| • | An EFT Processing Segment, which processes transactions for a network of 10,128 ATMs and approximately 54,000 POS terminals across Europe, the Middle East and Asia Pacific. We provide comprehensive electronic payment solutions consisting of ATM network participation; outsourced ATM and POS management solutions; credit and debit card outsourcing; card issuing and merchant acquiring services. Through this segment, we also offer a suite of integrated EFT software solutions for electronic payment and transaction delivery systems. |
| • | A Prepaid Processing Segment, which provides electronic distribution of prepaid mobile airtime and other prepaid products and collection services for various prepaid products, cards and services. We are one of the largest international providers of prepaid mobile airtime processing. Including terminals operated by unconsolidated subsidiaries, we operate a network of approximately 430,000 POS terminals providing electronic processing of prepaid mobile airtime top-up services in Europe, the Middle East, Asia Pacific and North America. Through this segment, we are one of the largest international providers of prepaid mobile airtime processing. |
| • | A Money Transfer Segment, which provides global consumer to consumer money transfer services. We offer this service through a sending network of agents and Company-owned stores primarily in Europe and North America, disbursing money transfers through a worldwide payer network. Bill payment services are offered primarily in the U.S. Based on revenues and volumes, through this segment, we are the third-largest global money transfer company. |
We have five processing centers in Europe, two in Asia Pacific and two in North America. We have 23
principal offices in Europe, one in the Middle East, five in Asia Pacific and six in North America.
Our executive offices are located in Leawood, Kansas, USA.
Historical Perspective
The first company in the Euronet group was established in 1994 as Euronet Bank Access Kft., a
Hungarian limited liability company. We began operations in 1995, setting up a processing center in
Budapest, Hungary and installing our first ATMs in Hungary, followed by Poland and Germany. The
Euronet group was reorganized on March 6, 1997 in connection with its initial public offering, and
at that time the operating entities of the Euronet group became wholly-owned subsidiaries of
Euronet Services Inc., a Delaware corporation. We changed our name from Euronet Services Inc. to
Euronet Worldwide, Inc. in August 2001.
Until December 1998, we devoted substantially all of our resources to establishing and expanding
the EFT Processing Segment’s ATM network and outsourced ATM management services business in Europe:
including Hungary, Poland, the Czech Republic, Croatia and Germany. We subsequently expanded our
presence to the Middle East, Greece, Slovakia, India, Romania, Bulgaria, Serbia, Ukraine and China.
We further expanded the product offerings of the EFT Processing Segment through the 2005
acquisition of Instreamline S.A., a Greek company that provides credit card and POS outsourcing
services in addition to debit card and transaction gateway switching services in Greece and the
Balkan region.
In December 1998, we acquired Arkansas Systems, Inc. (now known as “Euronet USA”), a U.S.-based
company that produces electronic payment and transaction delivery systems software for retail banks
internationally. In 2007, we combined our EFT and Software segments as both businesses are
strategically aligned wherein our software segment is working primarily on supporting our EFT
service offerings and processing centers across Europe, the Middle East and Asia Pacific. This has
resulted in significant cost savings for us in comparison to using third-party licensing and
maintenance options.
In 2003, Euronet complemented its existing EFT and Software business by acquiring a third business,
e-pay Limited (“e-pay”), which had offices in the U.K. and Australia. e-pay processes transactions
for prepaid services, primarily prepaid mobile airtime. We started
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reporting e-pay’s results in a new segment called the Prepaid Processing Segment. The Prepaid
Processing Segment subsequently expanded as a result of acquisitions in Germany, Romania, Spain,
the U.K. and the U.S. and the establishment of new offices in New Zealand, Poland, India and Italy.
During 2007, we established the Money Transfer Segment after completing the acquisition of Los
Angeles-based RIA, the third-largest global money transfer company. Established in 1987, RIA
originates and terminates transactions through a network of sending agents and company-owned stores
located throughout Europe and North America and an extensive payer network located in multiple
countries. The geographic, economic and relationship synergies between RIA and our EFT and Prepaid
businesses are substantial. We are working to leverage our existing operations and customer base in
both segments to help RIA expand its remittance services across many markets around the world.
2008 Developments
In 2007, our EFT Processing Segment entered the cross-border merchant processing and acquiring
business through the execution of an agreement with a large petrol retailer in Central Europe.
Under the agreement, Euronet is required to facilitate the migration of the petrol retailer’s
decentralized acquiring operations at petrol stations in 12 countries to a single central Single
European Payments Area (“SEPA”) compliant cross-border processing platform developed by Euronet. While limited resources were committed to this project in 2007, we significantly increased our commitment in 2008 for the development of the necessary processing systems and
capabilities to enter this business, which involves the purchase and design of hardware and
software. Merchant acquiring involves processing credit and debit card transactions that are made
on POS terminals, including authorization, settlement and processing of settlement files. To date,
we have successfully migrated the retailer’s petrol stations in five countries in Central and
Eastern Europe to our SEPA compliant processing platform and expect to roll out additional
countries in 2009. Our pioneering efforts in launching the first SEPA compliant cross-border
merchant acquiring solution in Europe was recognized by leading industry experts at the Cards
International Global Awards held in Brussels in June 2008 as “Merchant Acquirer of the Year.”
In our Prepaid Processing Segment, we launched prepaid operations in Greece by signing all three
mobile operators in the country and our first retail customer. According to industry sources,
currently, there are about 10 million prepaid subscribers in Greece, of which approximately 10%
top-up through electronic distribution. During 2008, we were able to significantly strengthen our
prepaid position in Australia by taking advantage of shifts in the competitive landscape as a
result of our main competitor ceasing business. In our Money Transfer Segment, we entered a new
market with the launch of money transfer send operations in Belgium.
In the fourth quarter 2008, we performed our annual goodwill impairment test and determined that
certain goodwill and other intangible assets were impaired and we recorded $220.1 million in
impairment charges. See Note 10, Goodwill and Acquired Intangible Assets, Net, to the Consolidated
Financial Statements for a further discussion of this non-cash charge.
BUSINESS SEGMENT OVERVIEW
For a discussion of operating results by segment, please see Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations, and Note 19, Business Segment
Information, to the Consolidated Financial Statements.
EFT PROCESSING SEGMENT
Overview
Our EFT Processing Segment provides outsourcing and network services to financial institutions,
primarily in the developing markets of Central, Eastern and Southern Europe (Hungary, Poland, the
Czech Republic, Croatia, Romania, Slovakia, Serbia, Greece, Bulgaria and Ukraine), the Middle East
and Asia Pacific (India and China), as well as in certain developed countries of Western Europe and
North America. We provide these services either through our Euronet-owned ATMs or through contracts
under which we operate ATMs on behalf of financial institutions. Although all of these markets
present opportunities for expanding the sales of our services, we believe opportunities for growth
in the ATM services business are greater in our developing markets.
The major source of revenue generated by our ATM network is recurring monthly management fees and
transaction-based fees. We receive fixed monthly fees under many of our outsourced management
contracts. This element of revenue has been increasing over the last few years. Revenue sources for
the EFT Processing Segment also include POS and credit and debit card network management revenue
and prepaid mobile phone recharge revenue from ATMs or mobile phone handsets and ATM advertising
revenue. The number of ATMs we operate decreased to 10,128 at December 31, 2008 from 11,347 at
December 31, 2007. The reduction in ATMs was largely due to the Service Agreement with Bank Machine
Limited (“Bank Machine”) in the U.K. expiring and not being renewed in the first quarter 2008.
We monitor the number of transactions made by cardholders on our ATM network. These include cash
withdrawals, balance inquiries, deposits, mobile phone airtime recharge purchases and certain
denied (unauthorized) transactions. We do not bill certain transactions on our network to financial
institutions, and we have excluded these transactions for reporting purposes. The number of
transactions
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processed over our entire ATM network has increased over the last five years at a compound annual
growth rate (“CAGR”) of approximately 32% as indicated in the following table:
| (in millions) | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||
EFT processing transactions per year |
232.5 | 361.5 | 463.6 | 603.8 | 704.2 | |||||||||||||||
Our processing centers for the EFT Processing Segment are located in Budapest, Hungary; Mumbai,
India; Belgrade, Serbia; and Beijing, China. They are staffed 24 hours a day, seven days a week and
consist of production IBM iSeries computers, which run the Euronet GoldNet ATM software package.
EFT Processing Products and Services
Outsourced Management Solutions
Euronet offers outsourced management services to financial institutions and other organizations
using our processing centers’ electronic financial transaction processing software. Our outsourced
management services include management of existing ATM networks, development of new ATM networks,
management of POS networks, management of credit and debit card databases and other financial
processing services. These services include 24-hour monitoring of each ATM’s status and cash
condition, coordinating the cash delivery and management of cash levels in each ATM and providing
automatic dispatches for necessary service calls. We also provide real-time transaction
authorization, advanced monitoring, network gateway access, network switching, 24-hour customer
service, maintenance, cash settlement, forecasting and reporting. Since our infrastructure can
support a significant increase in transactions, any new outsourced management services agreements
should provide additional revenue with lower incremental cost.
Our outsourced management services agreements generally provide for fixed monthly management fees
and, in most cases, fees payable for each transaction. The transaction fees under these agreements
are generally lower than those under card acceptance agreements, described below.
Euronet-Branded ATM Transaction Processing
Our Euronet-branded ATM network in Central and Eastern Europe is managed by a processing center
that uses our internally developed Integrated Transaction Management® (“ITM”) core
software solution. The ATMs in our network are able to process transactions for holders of credit
and debit cards issued by or bearing the logos of financial institutions and international card
organizations such as American Express®, Diners Club International®,
Visa®, MasterCard®/Europay and China Union Pay organizations. This ability is
accomplished through our agreements and relationships with these institutions, international credit
and debit card issuers and international associations of card issuers.
In a typical ATM transaction, the transaction is routed from the ATM to our processing center and
then to the card issuer for authorization. Once authorization is received, the authorization
message is routed back to the ATM and the transaction is completed. The card issuer is responsible
for authorizing ATM transactions processed on our ATMs. This process normally takes less than 30
seconds.
When a bank cardholder conducts a transaction on a Euronet-owned ATM, we receive a fee from the
cardholder’s bank for that transaction. The bank pays us this fee either directly or indirectly
through a central switching and settlement network. When paid indirectly, this fee is referred to
as the “interchange fee.” All of the banks in a shared ATM and POS switching system establish the
amount of the interchange fee by agreement. We receive transaction-processing fees for successful
transactions and, in certain circumstances, for transactions that are not completed because they
fail to receive authorization. The fees paid to us by the card issuers are independent of any fees
charged by the card issuers to cardholders in connection with the ATM transactions. We do not
charge cardholders a transaction or access fee for using our ATMs.
We generally receive fees from our customers for four types of ATM transactions:
| • | cash withdrawals, | ||
| • | balance inquiries, | ||
| • | transactions not completed because the relevant card issuer does not give authorization, and | ||
| • | prepaid telecommunication recharges. |
Card Acceptance or Sponsorship Agreements
Our agreements with financial institutions and international card organizations generally provide
that all credit and debit cards issued by the customer financial institution or organization may be
used at all ATM machines that we operate in a given market. In most markets, we have agreements
with a financial institution under which we are designated as a service provider (which we refer to
as “sponsorship agreements”) for the acceptance of cards bearing international logos, such as Visa
and MasterCard. These card acceptance or sponsorship agreements allow us to receive transaction
authorization directly from the card issuing institution or
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international card organization. Our
agreements generally provide for a term of three to seven years and are automatically renewed
unless either party provides notice of non-renewal prior to the termination date. In some cases,
the agreements are terminable by either party upon six months notice. We are generally able to
connect a financial institution to our network within 30 to 90 days of signing a card acceptance
agreement. Generally, the financial institution provides the cash needed to complete transactions
on the ATM, although we have contracted with a financial institution for cash supply in the Czech
Republic. Under our card acceptance agreements, the ATM transaction fees we charge vary depending
on the type of transaction and the number of transactions attributable to a particular card issuer.
Our agreements generally provide for payment in local currency. Transaction fees are sometimes
denominated in U.S. dollars or are adjusted for inflation. Transaction fees are billed to financial
institutions and card organizations with payment terms typically no longer than one month.
Other Products and Services
Our network of owned or operated ATMs allows for the sale of financial and other products or
services at a low incremental cost. We have developed value-added services in addition to basic
cash withdrawal and balance inquiry transactions. These value added services include electronic
bill payment, ATM advertising and the sale of prepaid mobile airtime recharge services from ATMs or
mobile phone devices. We are committed to the ongoing development of innovative new products and
services to offer our EFT processing customers and intend to implement additional services as
markets develop.
In Poland, Hungary, Croatia, Romania, Czech Republic, Slovakia and India, we have established
electronic connections to some or all of the major mobile phone operators. These connections permit
us to transmit to them electronic requests to recharge mobile phone accounts. We operate networks
of ATMs in these markets to offer customers of the mobile operators the ability to credit their
prepaid mobile phone accounts.
We have expanded our outsourced management solutions beyond ATMs to include credit and debit card
and POS terminal management services. We support these services using our proprietary software
products. Since 1996, we have sold advertising on our ATM network. Clients can display their
advertisements on our ATM video screens, on the ATM receipts and on coupons dispensed with cash
from the ATMs.
We offer a suite of integrated EFT software solutions for electronic payments and transaction
delivery systems. We generate revenue for our software products from licensing, professional
services and maintenance fees for software and sales of related hardware, primarily to financial
institutions around the world.
Commencing
in February 2008, Euronet offered multinational merchants a SEPA compliant cross-border
transaction processing solution. SEPA is an area in which all electronic payments can be made and
received in the euro, whether between or within national boundaries, under the same basic
conditions, rights and obligations, regardless of their location. This single centralized acquiring
platform enables merchants to benefit from cost savings and faster, more efficient payments
transfer.
EFT Processing Segment Strategy
Financial institutions in both developing and developed markets are receptive to outsourcing the
operation of their ATM, POS and card networks. The operation of these devices requires expensive
hardware and software and specialized personnel. These resources are available to us, and we offer
them to financial institutions under outsourcing contracts. The expansion and enhancement of our
outsourced management solutions in new and existing markets will remain an important business
opportunity for Euronet. Increasing the number of non-owned ATMs that we operate under management
services agreements and continued development of our credit and debit card outsourcing business
should provide continued growth while minimizing our capital investment.
We continually strive to make our own ATM networks more efficient by eliminating underperforming
ATMs and installing ATMs in more desirable locations. Moreover, we will make selective additions to
our own ATM network if we see market demand and profit opportunities.
The EFT Processing Segment’s ATM and Mobile Recharge line of services are strengthened through
complementary services offered by our Prepaid Processing Segment, where we provide top-up services
through POS terminals. We intend to expand our technology and business methods into other markets
where we operate and expect to leverage our relationships with mobile operators and financial
institutions to facilitate expansion.
Additionally, our software products are an integral part of the EFT Processing Segment product
lines, and our investment in research, development, delivery and customer support reflects our
ongoing commitment to an expanded customer base both internal and external. Our ITM software is
used by our Budapest, Mumbai, Beijing and Belgrade processing centers in our EFT Processing
Segment, including our Euronet Middle East joint venture processing center in Bahrain, resulting in
cost savings and added value compared to third-party license and maintenance options. Furthermore,
we have identified opportunities to provide processing services to our software solutions customers
and we believe our ability to develop, adapt and control our own software gives us credibility with
our processing services customers. We have been able to enter into agreements under which we
contribute the right to use our ITM
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software in lieu of cash as our initial capital contributions
to new transaction processing joint ventures. Such contributions permit us to enter new markets
without significant cash outlays.
Seasonality
Our business is significantly impacted by seasonality during the fourth quarter and first quarter
of each year due to higher transaction levels during the holiday season and lower levels after the
holiday season. We have estimated that, absent unusual circumstances (such as the impact of new
acquisitions or unusually high levels of growth due to market factors), the overall revenue
realized in the EFT Processing Segment is likely to be approximately 5% to 10% lower during the
first quarter of each year than in the fourth quarter of the year. We have historically experienced
minimal differences between the second and third quarters of each year.
Significant Customers and Government Contracts
No individual customer of the EFT Processing Segment makes up greater than 10% of consolidated
total revenue. We do not have any government contracts in the EFT Processing Segment.
Competition
Our principal EFT Processing competitors include ATM networks owned by financial institutions and
national switches consisting of consortiums of local banks that provide outsourcing and transaction
services to financial institutions and independent ATM deployers in a particular country.
Additionally, large, well-financed companies that operate ATMs offer ATM network and outsourcing
services, and those that provide card outsourcing, POS processing and merchant acquiring services
also compete with us in various markets. None of these competitors have a dominant market share in
any of our markets. Competitive factors in our EFT Processing Segment include breadth of service
offering network availability and response time, price to both the financial institution and to its
customers, ATM location and access to other networks.
Discontinued Operations
During the second quarter 2008, the Company committed to a plan to sell Euronet Essentis Limited
(“Essentis”), a U.K. software entity, in order to focus its investments and resources
on its transaction processing businesses. The Company is in the
process of selling the business.
PREPAID PROCESSING SEGMENT
Overview
We currently offer prepaid mobile phone top-up services and certain other prepaid products on a
network of 430,000 POS terminals across 223,000 retailer locations in Europe, the Middle East, Asia
Pacific and North America. We are one of the largest international providers of prepaid processing,
or “top-up,” services for prepaid mobile airtime. Our processing centers for the Prepaid Processing
Segment are located in Basildon, U.K.; Martinsried, Germany; Madrid, Spain; and Leawood, Kansas,
U.S.
Since 2003, we have continually expanded our prepaid business and plan to further expand our
operations in our existing markets and other markets by taking advantage of our expertise together
with relationships with mobile operators and retailers. In addition to prepaid airtime, we
distribute other prepaid products across our retail networks, including prepaid debit cards, gift
cards, prepaid mobile content such as music, ringtones and games, prepaid long distance and bill
payment.
Sources of Revenue
The major source of revenue generated by our Prepaid Processing Segment is commissions or
processing fees received from telecommunications service providers for the sale and distribution of
prepaid mobile airtime. We also generate revenue from commissions earned from the distribution of
other prepaid products.
Customers using mobile phones generally pay for their usage in two ways:
| • | through “postpaid” accounts, where usage is billed at the end of each billing period, and | ||
| • | through “prepaid” accounts, where customers pay in advance by crediting their accounts prior to usage. |
Although mobile operators in the U.S. and certain European countries have provided service
principally through postpaid accounts, the trend in many other countries in Europe and the rest of
the world is to offer wireless service on a prepaid basis. It is believed that this shift is driven
by customers’ perception that prepaid products better meet their needs and enable them to better
control their monthly wireless expenditures.
Currently, two principal methods are available to credit prepaid accounts (referred to as “top-up”
of accounts). The first is through the purchase of “scratch cards” bearing a PIN (personal
identification number) that, when entered into a customer’s mobile phone
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account, credits the
account by the value of airtime purchased. Scratch cards are sold predominantly through retail
outlets. The second is through various electronic means of crediting accounts using POS terminals.
Electronic top-up (or “e-top-up”) methods have several
advantages over scratch cards, primarily because electronic methods do not require the cost of
creation, distribution and management of a physical inventory of cards or involve the risk of
losses stemming from fraud, theft and mismanagement. Prior to 2004, scratch cards were the
predominant method of crediting mobile phone accounts in most developed markets. However, since
2004, a shift has occurred in these markets away from usage of scratch cards and e-top-up is now
the predominant method.
Our Prepaid Processing Segment processes the sale of prepaid mobile phone minutes to consumers
through networks of POS terminals and direct connections to the electronic payment systems of
retailers. In some markets, we enter into agreements with mobile phone operators and connect
directly to their back-office systems. In other markets, we distribute mobile phone time by
connecting directly to the mobile operators or by purchasing PINs that enable airtime top-up. We
then distribute the mobile phone time electronically through POS terminals either via a direct
credit from the mobile operator to the mobile phone or via the sales of PINs. The business has
grown rapidly over the past few years as new retailers have been added and prepaid airtime
distribution has switched from scratch cards to electronic means.
In our prepaid markets, we expand our distribution networks through the signing of new contracts
with retailers, and in some markets, through the acquisition of existing networks. We also seek to
improve the results of our existing networks through the addition of new mobile operators in
markets where we do not already distribute all of the available prepaid time and the addition of
other prepaid products not necessarily related to the mobile operators. In addition, in the U.S. we
are expanding our sales presence in all sales segments. We are continuing to focus on our growing
network of distributors, generally referred to as Independent Sales Organizations (“ISOs”), that
contract with retailers in their network to distribute PINs from their terminals. We continue to
increase our focus on direct relationships with chains of independent convenience stores and other
larger scale retailers, where we can negotiate agreements with the merchant on a multiyear basis.
To distribute PINs, we establish an electronic connection with the POS terminals and maintain
systems that monitor transaction levels at each terminal. As sales to customers of mobile airtime
are completed, the customer pays the retailer and the retailer becomes obligated to make settlement
to us of the principal amount of the phone time sold. We maintain systems that enable us to monitor
the payment practices of each retailer.
Prepaid Processing Products and Services
Prepaid Mobile Airtime Transaction Processing
We process prepaid mobile airtime top-up transactions on our POS network across Europe, the Middle
East, Asia Pacific and North America for two types of clients: distributors and retailers. Both
types of client transactions start with a consumer in a retail store. The retailer uses a specially
programmed POS terminal in the store or the retailer’s electronic cash register (“ECR”) system that
is connected to our network to buy prepaid airtime. The customer will select a predefined amount of
prepaid airtime from the carrier of his choice, and the retailer enters the selection into the POS
terminal. The consumer will pay that amount to the retailer (in cash or other payment methods
accepted by the retailer). The POS device then transmits the selected transaction to our processing
center. Using the electronic connection we maintain with the mobile operator or drawing from our
inventory of PINs, the purchased amount of airtime will be either credited to the consumer’s
account or delivered via a PIN printed by the terminal and given to the consumer. In the case of
PINs printed by the terminal, the consumer must then call a mobile operator’s toll-free number to
activate the purchased airtime to this consumer’s mobile account.
One difference in our relationships with various retailers and distributors is how we charge for
our services. For distributors and certain very large retailers we charge a processing fee.
However, the majority of our transactions occur with smaller retailer clients. With these clients,
we receive a commission on each transaction that is withheld from the payments made to the mobile
operator, and we share that commission with the retailers.
We monitor the number of transactions made on our prepaid networks. The number of transactions
processed on our entire POS network has increased over the last five years at a CAGR of
approximately 33% as indicated in the following table:
| (in millions) | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||
Prepaid processing transactions per year |
228.6 | 348.0 | 457.8 | 634.8 | 713.1 | |||||||||||||||
Retailer and Distributor Contracts
We provide our prepaid services through POS terminals installed in retail outlets or, in the case
of major retailers, through direct connections between their ECR systems and our processing
centers. In markets where we operate e-pay technology (the U.K., Australia, Poland, Ireland, New
Zealand, Spain, Greece, India, Italy and the U.S.), we generally own and maintain the POS
terminals. In Germany, Austria and Romania, the terminals are sold to the retailers or to
distributors who service the retailer. Our agreements with major retailers for the POS services
typically have one to three-year terms. These agreements include terms regarding
the
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connection of
our networks to the respective retailer’s registers or payment terminals or the maintenance of POS
terminals, and obligations concerning settlement and liability for transactions processed.
Generally, our agreements with individual or small retailers have shorter terms and provide that
either party can terminate the agreement upon three to six months’ notice.
In Germany, distributors have historically controlled the sale of mobile phone scratch cards, and
they now are key intermediaries in the sale of e-top-up. Our business in Germany is substantially
concentrated in, and dependent upon, relationships with our major distributors. The termination of
any of our agreements with major distributors could materially and adversely affect our Prepaid
business in Germany. However, we have been establishing agreements with independent German
retailers in order to diversify our exposure to such distributors.
Other Products and Services
Our POS network can be used for the distribution of other products and services. Although prepaid
mobile airtime is the primary product distributed through our Prepaid Processing Segment,
additional products include prepaid long distance calling card plans, prepaid Internet plans,
prepaid debit cards, prepaid gift cards, bill payment, money transfer and prepaid mobile content
such as music, ringtones and games. In certain locations, the terminals used for prepaid services
can also be used for electronic funds transfer to process credit and debit card payments for retail
merchandise.
Prepaid Processing Segment Strategy
We plan to expand our prepaid processing business in our existing markets and new markets by taking
advantage of our expansive distribution network and existing relationships with mobile phone
operators and retailers. Although all of these markets present opportunities for expanding the
sales of our services, we believe opportunities for transaction growth in the Prepaid Processing
Segment are greater in Poland, Germany, Italy, Romania and India, where there is organic growth of
prepaid products in the prepaid markets.
Seasonality
Our prepaid business is significantly impacted by seasonality during the fourth quarter and first
quarter of each year due to the higher transaction levels during the holiday season and lower
levels following the holiday season. We expect that, absent unusual circumstances (such as the
impact of new acquisitions or unusually high levels of growth due to market factors), the overall
revenue realized is likely to be 5% to 10% lower during the first
quarter than in the fourth quarter of the year. We have historically experienced minimal differences
between the second and third quarters of each year.
Significant Customers and Government Contracts
No individual customer of our Prepaid Processing Segment makes up greater than 10% of consolidated
total revenue. In 2008, we did not have any government contracts in any country within the Prepaid
Processing Segment; our first government contract is with the London transport agency and that
contract will not be implemented until 2009.
Competition
We face competition in the prepaid business in all of our markets. We compete with a few
multinational companies that operate in several of our markets. In other markets, our competition
is from smaller, local companies. The mobile operators in all of our markets have retail
distribution networks of their own through which they offer top-up of their own products. None of
these companies is dominant in any of the markets where we do business.
We believe, however, that we currently have a competitive advantage due to various factors. First,
in the U.K., Germany and Australia, our acquired subsidiaries have been concentrating on the sale
of electronic prepaid mobile airtime for longer than most of our competitors and have significant
market presence in those markets. In addition, we offer complementary ATM and mobile recharge
solutions through our EFT processing centers. We believe this improves our ability to solicit the
use of networks of devices owned by third parties (for example, banks and switching networks) to
deliver recharge services. In selected developing markets, we expect to establish a first to market
advantage by rolling out terminals rapidly before competition is established. We also have an
extremely flexible technical platform that enables us to tailor POS solutions to individual
merchant and mobile operator requirements where appropriate. The GPRS (wireless) technology,
designed by our Transact subsidiary, will also give us an advantage in remote areas where landline
phone lines are of lesser quality or nonexistent.
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The principal competitive factors in this area include price (that is, the level of commission paid
to retailers for each recharge transaction), breadth of mobile operator product and up-time offered
on the system. Major retailers with high volumes are in a position to demand a larger share of the
commission, which increases the amount of competition among service providers. Recently, we are
seeing signs that mobile operators may wish to take over and expand their own distribution networks
of prepaid time, and in doing so, they may become our competitors.
MONEY TRANSFER SEGMENT
Overview
We began reporting the results of this segment in the second quarter 2007 after we completed the
acquisition of RIA, which established Euronet the third-largest global money transfer company. Our
Money Transfer segment processed approximately $6 billion in money transfers in 2008. We originate
transfers through a network of sending agents, including Company-owned stores located in Europe and
North America and disburse money transfers through an extensive payer network in more than 100
countries.
Our sending agent network includes our own stores, large/medium size regional retailers,
convenience stores, bodegas, multi-service shops and phone centers, which are predominantly found
in areas with a large immigrant population. Each money transfer transaction is processed using the
Company’s proprietary software system and checked for security, completeness and compliance with
federal regulations at every step of the process. The sender can track the progress of their
transfer through RIA’s customer service representatives, and funds are delivered quickly to their
beneficiary via our extensive payout network, which includes large banks and non-bank financial
institutions, post offices and large retailers. As of December 31, 2008, we provided
consumer-to-consumer money transfer services through a network of approximately 75,800 locations.
Our processing center for the Money Transfer Segment is located in Cerritos, California and we
operate call centers in El Salvador and Spain and provide multi-lingual customer service for both
our agents and consumers.
Our money transfer sending network is also used to offer other products and services. Additional
product offerings through our sending agents include bill payment services enabling
over-the-counter payments for utilities, wireless and cable bills; money orders; prepaid debit
cards; comprehensive check cashing service for a wide variety of issued checks; and foreign
currency exchange services.
Money Transfer Services
We offer consumer-to-consumer money transfer services primarily through three channels at agent
locations and company-owned stores: by phone (“TeleRIA”), via computer (“RIA Online”) and
card-based over a POS terminal (“Rialink”). All three types of transactions start with a consumer
in an agent location or own store. Through our TeleRIA service, customers connect to our call
center from a telephone available at an agent location or RIA store and a representative collects
the information over the telephone and enters it directly into our secure proprietary system. As
soon as the data capture is complete, our central system automatically faxes a confirmation receipt
to the agent location for the customer to review and sign and the customer pays the agent the money
to be transferred, together with a fee. In an online transaction, customers provide the required
information to the agent who enters the data into our online platform via a computer using a unique
username and password. The real-time online connection we maintain with the agent enables the
agent to generate a receipt and complete the transaction. Transactions through our newest channel,
Rialink, are similar to online transactions, but are initiated over a POS terminal once the
customer has completed a one-time enrollment over the phone with our customer service
representative. After completing a successful pilot, Rialink has become a part of our main product
offering and has shown great results in high volume stores and agent locations in our select send
markets due to the speed, efficiency and ease of use of the POS transfer method, resulting in
increased customer retention. We intend to roll out our Rialink money transfer product across more
markets and locations. We will continue to enhance this product offering by adding a loyalty
program to the card and combining it with prepaid debit technology.
Sources of Revenue
Revenue in the Money Transfer Segment is primarily derived through the charging of a transaction
fee, as well as the difference between purchasing foreign currency at wholesale exchange rates and
selling the foreign currency to consumers at retail exchange rates. We have an origination network
in place comprised of agents and Company-owned stores in Europe and North America and a worldwide
network of correspondent agents, consisting primarily of financial institutions in the transfer
destination countries. Origination and correspondent agents each earn fees for cash collection and
distribution services. These fees are recognized as direct operating costs at the time of sale.
Money Transfer Segment Strategy
Through RIA, we have established high-potential money transfer corridors from the U.S. and
internationally beyond the traditional U.S. to Mexico corridor. In 2007, the Company started to
leverage synergies and cross-selling opportunities between business segments to further expand
RIA’s global money transfer send and receive network. Based on the successful outcome of the
cross-sell
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initiatives, our key focus in 2009 and beyond is to continue to take advantage of cross-selling
opportunities with our Prepaid and EFT Segments by providing prepaid services through RIA’s stores
and agents in multiple countries; offering our money transfer services at ethnically-focused
prepaid retail locations in key markets; and leveraging our banking and merchant/retailer
relationships to expand our agent network in high-growth corridors in Europe and Asia to further
grow our market share in the multi-billion dollar money transfer industry.
Seasonality
Our money transfer business is significantly impacted by seasonality that varies by region. In most
of our markets we experience increased money transfer transaction levels during the month of May
and in the fourth quarter of each year, coinciding with various holidays. Additionally, in the U.S.
to Mexico corridor, we usually experience our heaviest volume during the May through October
timeframe, coinciding with the increase in worker migration patterns, and our lowest volumes during
the first quarter. During the first quarter of each year we have historically experienced a 5% to
10% decrease in overall transactions when compared to the fourth quarter.
Significant Customers and Government Contracts
No individual customer of our Money Transfer Segment makes up greater than 10% of consolidated
total revenue. There are no government contracts with any country within the Money Transfer
Segment.
Competition
Our primary competitors in the money transfer and bill payment business include other independent
processors and electronic money transmitters, as well as certain major national and regional banks,
financial institutions and independent sales organizations. Our competitors include The Western
Union Company, MoneyGram International Inc., Global Payments Inc. and others, some of which are
larger than we are and have greater resources and access to capital for expansion than we have.
This may allow them to offer better pricing terms to customers, agents or correspondents, which may
result in a loss of our current or potential customers or could force us to lower our prices. In
addition to traditional money payment services, new technologies are emerging that may effectively
compete with traditional money payment services, such as stored-value cards, debit networks and
Web-based services. Our continued growth also depends upon our ability to compete effectively with
these alternative technologies.
PRODUCT RESEARCH, DEVELOPMENT AND ENHANCEMENT
In the EFT Processing Segment, development has historically focused on expanding the range of
services offered to our bank customers from ATM and POS outsourcing to card processing and software
services. In 2007, we made significant investments to develop new cross-border merchant acquiring
capabilities that we are now offering to multinational merchants.
In our Prepaid Processing Segment, development has focused on expanding the types of prepaid
products and services available to consumers over our network to include, for example, prepaid gift
and debit cards, and bill payment capabilities. This is intended to make our offerings more
attractive to retailers.
We have made an ongoing commitment to the maintenance and improvement of our software products. We
regularly engage in software product development and enhancement activities aimed at the
development and delivery of new products, services and processes to our customers. Our research and
development costs for software products to be sold, leased or
otherwise marketed totaled $3.4
million, $3.1 million and $3.1 million in 2008, 2007 and 2006, respectively. Amounts capitalized
were $2.0 million, $1.4 million and $1.1 million for the years ended December 31, 2008, 2007 and
2006, respectively.
FINANCIAL INFORMATION BY GEOGRAPHIC AREA
For
information on results from operations, property and equipment, and total assets by geographic
location, please see Note 19, Business Segment Information, to the Consolidated Financial
Statements. Additionally, see Item 1A – Risk Factors, for risk factors related to foreign
operations.
EMPLOYEES
We had approximately 2,500 employees as of December 31, 2008 and 2007 and 1,100 employees as of
December 31, 2006. The increase during 2007 was primarily the result of the acquisition of RIA,
which has a large call center staff, discussed in Note 6, Acquisitions, to the Consolidated
Financial Statements. We believe our future success will depend in part on our ability to continue
to recruit, retain and motivate qualified management, technical and administrative employees.
Currently, no union represents any of our employees, except in our Spanish subsidiary. We
experienced only one minor (five day) work stoppage by our workforce in France and we consider
relations with our employees to be good.
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GOVERNMENT REGULATION
As discussed below, certain of our business activities are subject to regulation in some of our
current markets. In the Money Transfer Segment we are subject to a wide variety of laws and
regulations of the U.S., individual U.S. states, foreign markets and other governmental
jurisdictions where we operate. These include international, federal and state anti-money
laundering laws and regulations; money transfer and payment instrument licensing laws, escheat
laws, laws covering consumer privacy, data protection and information security and consumer
disclosure and consumer protection laws. Our operations have also been subject to increasingly
strict requirements intended to help prevent and detect a variety of illegal financial activity,
including money laundering, terrorist financing, unauthorized access to personal customer data and
other illegal activities. The more significant of these laws and regulations are discussed below.
Noncompliance with these laws and requirements could result in the loss or suspension of licenses
or registrations required to provide money transfer services by either RIA or its agents. For more
discussion, see Item 1A – Risk Factors.
Under German law, only licensed financial institutions may operate ATMs in Germany. Therefore, we
may not operate our own ATM network in Germany without a sponsor, which is Bankhaus August Lenz
(“BAL”). In that market, we act only as a subcontractor providing certain ATM-related services to
BAL. As a result, our activities in the German market currently are entirely dependent upon the
continuance of our agreement with BAL, or the ability to enter into a similar agreement with
another institution in the event of the termination of such agreement. While we believe, based on
our experience, that we should be able to find a replacement for BAL if the agreement with BAL were
to be terminated for any reason, the inability to maintain the BAL agreement or to enter into a
similar agreement with another institution upon a termination of the BAL agreement could have a
material adverse effect on our operations in Germany. For further information, see Item 1A – Risk
Factors.
Any expansion of our activity into areas that are qualified as “financial activity” under local
legislation may subject us to licensing and we may be required to comply with various conditions to
obtain such licenses. Moreover, the interpretations of bank regulatory authorities as to the
activity we currently conduct might change in the future. We monitor our business for compliance
with applicable laws or regulations regarding financial activities.
Money Transfer and Payment Instrument Licensing
Licensing requirements in the U.S. are generally driven by the various state banking departments
regulating the businesses of money transfers and issuance of payment instruments. Typical
requirements include the meeting of minimum net worth requirements, maintaining permissible
investments (e.g., cash, agent receivables, and government –backed securities) at levels
commensurate with outstanding payment obligations and the filing of a security instrument
(typically in the form of a surety bond) to offset the risk of default of trustee obligations by
the license holder. We are required by many regulators to file interim reports of licensed
activity, most often on a quarterly basis, that address changes to agent and branch locations,
operating and financial performance, permissible investments and outstanding transmission
liabilities. These periodic reports are utilized by the regulator to monitor ongoing compliance
with state licensing laws. A number of major state regulators also conduct periodic examinations of
license holders and their authorized delegates, generally with a frequency of every one to two
years. Examinations are most often comprehensive in nature, addressing both the safety and
soundness and overall compliance by the license holder with regard to state and federal
regulations. Such examinations are typically performed on-site at the license holder’s headquarters
or operations center; however, a number of states will choose to perform examinations off-site.
Many states also require money transmitters, issuers of payment instruments and their agents to
comply with federal and/or state anti-money laundering laws and regulations. In summary, our Money
Transfer Segment, as well as our agent network, is subject to regulations issued by the different
state regulators who license us, Office of Foreign Assets Control
(“OFAC”), the Bank Secrecy Act as
amended by the USA PATRIOT ACT (“BSA”), the Financial Crimes Enforcement Network (“FINCEN”), as
well as any existing or future regulations that impact any aspect of our money transfer business.
A similar set of regulations applies to our money transfer businesses in most of the foreign
countries in which we originate transactions. These laws and regulations include monetary limits
for money transfers into or out of a country, rules regarding the foreign currency exchange rates
offered, as well as other limitations or rules for which we must maintain compliance.
Regulatory bodies in the U.S. and abroad may impose additional rules on the conduct of our Money
Transfer Segment that could have a significant impact on our operations and our agent network.
Escheat Regulations
Our Money Transfer Segment is subject to the unclaimed or abandoned property (i.e. “escheat”)
regulations of the U.S. and certain foreign countries in which we operate. These laws require us to
turn over property held by the Company on behalf of others remaining unclaimed after specified
periods of time (i.e., “dormancy” or “escheat” periods). Such abandoned property is generally
attributable to the failure of beneficiary parties to claim money transfers or the failure to
negotiate money orders, a form of payment instrument. We have policies and programs in place to
help us monitor the required relevant information relating to each money transfer or payment
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instrument for possible eventual reporting to the jurisdiction from which the order was originally
received. In the U.S., reporting of unclaimed property by money service companies is performed
annually, generally with a due date of on or before November 1. State banking department regulators
will typically include a review of Company escheat procedures and related filings as part of their
examination protocol.
Privacy and Information Security Regulations
Our Money Transfer Segment operations involve the collection and storage of certain types of
personal customer data that are subject to privacy and security laws in the U.S. and abroad. In the
United States, we are subject to the Gramm-Leach-Bliley Act (“GLBA”), which requires that financial
institutions have in place policies regarding the collection, processing, storage and disclosure of
information considered nonpublic personal information. Laws in other countries include those
adopted by the member states of the European Union under Directive 95/46 EC of the European
Parliament and of the Council of 24 October 1995 (the “Directive”), as well as the laws of other
countries. The Directive prohibits the transfer of personal data to non-European Union member
nations that do not provide adequate protection for personal data. In some cases, the privacy laws
of an EU member state may be more restrictive than the Directive and may impose additional
requirements that we must comply with to operate in the respective country. Generally, these laws
restrict the collection, processing, storage, use and disclosure of personal information and
require that we safeguard personal customer data to prevent unauthorized access.
We comply with the GLBA and any state privacy provision by posting a privacy notice on the receipts
provided to the consumers upon completion of a transaction. In addition, we comply with the
Directive using the safe harbor permitted by the Directive by filing with the U.S. Department of
Commerce, publicly declaring our privacy policy for information collected outside of the U.S.,
posting our privacy policy on our Web site and requiring our agents in the European Union to notify
customers of the privacy policy.
Recently, as identity theft has been on the rise, there has been increased public attention to
concerns about information security and consumer privacy, accompanied by laws and regulations
addressing the issue. We believe we are compliant with these laws and regulations; however, this is
an area that is rapidly evolving and there can be no assurance that we will continue to meet the
existing and new regulations, which could have a material, adverse impact on our Money Transfer
Segment business.
Money Transfer Compliance Policies and Programs
We have developed risk-based policies and programs to comply with the existing, new or changed
laws, regulations and other requirements outlined above, including having dedicated compliance
personnel, training programs, automated monitoring systems and support functions for our offices
and agents. To assist in managing and monitoring our money laundering and terrorist financing
risks, we continue to have our compliance program independently examined on an annual basis. In
addition, we continue to enhance our anti-money laundering and anti-terrorist financing compliance
policy, procedures, monitoring systems and staffing levels.
INTELLECTUAL PROPERTY
Each of our three operating segments utilizes intellectual property which is protected in varying
degrees by a combination of trademark, patent and copyright laws, as well as trade secret
protection, license and confidentiality agreements.
The brand names of “RIA,” “RIA Envia” and “AFEX,” derivations of those brand names and certain
other brand names are material to our Money Transfer Segment and are registered trademarks and/or
service marks in most of the markets in which our Money Transfer Segment operates. Consumer
perception of these brand names is important to the growth prospects of our money transfer
business. We also hold a U.S. patent on a card-based money transfer and bill payment system that
allows transactions to be initiated primarily through POS terminals and integrated cash register
systems.
With respect to our EFT Processing Segment, we have registered or applied for registration of our
trademarks including the names “Euronet” and “Bankomat” and/or the blue diamond logo as well as
other trade names in most markets in which these trademarks are used. Certain trademark authorities
have notified us that they consider these trademarks to be generic and therefore not protected by
trademark laws. This determination does not affect our ability to use the Euronet trademark in
those markets but it would prevent us from stopping other parties from using it in competition with
Euronet. We have registered the “Euronet” trademark in the class of ATM machines in Germany, the
U.K. and certain other Western European countries. We have filed pending patent applications for a
number of our new software products and our new processing technology, including our recharge
services.
With respect to our Prepaid Processing Segment, we have registered the “e-pay” logo trademark in
the U.K. and Australia. We also hold trademarks for our prepaid operating subsidiaries in other
jurisdictions, including PaySpot, Inc. (“PaySpot”) in the U.S. We cannot be certain that we will be
entitled to use the e-pay trademark in any markets other than those in which we have registered the
trademark. In 2003, we filed a series of patent applications for our POS recharge and certain other
products in support of e-pay and PaySpot technology. As of the date of this report, these patents
are still pending. We also hold a patent license covering certain of PaySpot’s operations in the
U.S.
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Technology in the areas in which we operate is developing very rapidly, and we are aware that many
other companies have filed patent applications for products, processes and services similar to
those we provide. The procedures of the U.S. patent office make it impossible for us to predict
whether our patent applications will be approved or will be granted priority dates that are earlier
than other patents that have been filed for similar products or services. Moreover, the Prepaid
Processing business is an area in which many “process patents” have been filed in the U.S. over
recent years covering processes that are in wide use in the industry. If any of these patents are
considered to cover technology that has been incorporated into our systems, we may be required to
obtain additional licenses and pay royalties to the holders of such patents to continue to use the
affected technology or be prohibited from continuing the offering of such services if licenses are
not obtained. This could materially and adversely affect our business.
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, period of service and position held by each of our Executive Officers as of February
28, 2009 are as follows:
| Name | Age | Served Since | Position Held | |||||
Michael J. Brown
|
52 | July 1994 | Chairman and Chief Executive Officer | |||||
Kevin J. Caponecchi
|
42 | July 2007 | President | |||||
Rick L. Weller
|
51 | November 2002 | Executive Vice President — Chief Financial Officer | |||||
Jeffrey B. Newman
|
54 | December 1996 | Executive Vice President — General Counsel | |||||
Juan C. Bianchi
|
38 | April 2007 | Executive Vice President — Managing Director, Money Transfer Segment | |||||
Roger Heinz
|
48 | September 2008 | Senior Vice President — Managing Director, Europe EFT Processing Segment | |||||
Gareth Gumbley
|
36 | May 2008 | Senior Vice President — Managing Director, Prepaid Processing Segment | |||||
MICHAEL J. BROWN is one of the founders of Euronet and has served as our Chairman of the Board and
Chief Executive Officer since 1996. He also co-founded our predecessor in 1994. Mr. Brown has been
a Director of Euronet since our incorporation in December 1996 and previously served on the boards
of Euronet’s predecessor companies. In 1979, Mr. Brown founded Innovative Software, Inc., a
computer software company that was merged in 1988 with Informix. Mr. Brown served as President and
Chief Operating Officer of Informix from February 1988 to January 1989. He served as President of
the Workstation Products Division of Informix from January 1989 until April 1990. In 1993, Mr.
Brown was a founding investor of Visual Tools, Inc. Visual Tools, Inc. was acquired by Sybase
Software in 1996. Mr. Brown received a B.S. in Electrical Engineering from the University of
Missouri — Columbia in 1979 and a M.S. in Molecular and Cellular Biology at the University of
Missouri — Kansas City in 1997.
KEVIN J. CAPONECCHI, President. Mr. Caponecchi joined Euronet as President in July 2007. Prior to
joining Euronet, Mr. Caponecchi served in various capacities with subsidiaries of General Electric
Company for 17 years. From 2003 until June 2007, Mr. Caponecchi served as President of GE Global
Signaling, a provider of products and services to freight, passenger and mass transit systems. From
1998 through 2002, Mr. Caponecchi served as General Manager – Technology for GE Consumer &
Industrial, a provider of consumer appliances, lighting products and electrical products. Mr.
Caponecchi holds degrees in physics from Franklin and Marshall College and industrial engineering
from Columbia University.
RICK L. WELLER, Executive Vice President, Chief Financial Officer. Mr. Weller has been Executive
Vice President and Chief Financial Officer of Euronet since he joined Euronet in November 2002.
From January 2002 to October 2002, he was the sole proprietor of Pivotal Associates, a business
development firm. From November 1999 to December 2001, Mr. Weller held the position of Chief
Operating Officer of ionex telecommunications, inc., a local exchange company. He is a certified
public accountant and received his B.S. in Accounting from University of Central Missouri.
JEFFREY B. NEWMAN, Executive Vice President, General Counsel. Mr. Newman has been Executive Vice
President and General Counsel of Euronet since January 2000. He joined Euronet in December 1996 as
Vice President and General Counsel. Prior to this, he practiced law with the Washington D.C. based
law firm of Arent Fox Kintner Plotkin & Kahn and the Paris based law firm of Salans Hertzfeld &
Heilbronn. He is a member of District of Columbia and Paris bars. He received a B.A. in Political
Science and French from Ohio University in 1976 and law degrees from Ohio State University and the
University of Paris.
JUAN C. BIANCHI, Executive Vice President, Managing Director — Money Transfer Segment. Mr. Bianchi
joined Euronet subsequent to the acquisition of RIA. Prior to the acquisition, Mr. Bianchi served
as the Chief Executive Officer of RIA and has spent his entire career at either RIA or AFEX Money
Express, a money transfer company purchased by RIA’s founders. Mr. Bianchi began his career at AFEX
in Chile in 1992, joined AFEX USA’s operations in 1996, and became chief operating officer of
AFEX-RIA in 2003. Mr. Bianchi studied business at the Universidad Andres Bello in Chile and
completed the Executive Program in Management at UCLA’s John E. Anderson School of Business.
ROGER HEINZ, Senior Vice President, Managing Director — Europe EFT Processing Segment. Mr. Heinz
joined Euronet in 1997 as managing director of the Company’s German EFT subsidiary. Most recently,
he was managing director in charge of EFT operations in Western Europe and was also responsible for
the EFT division’s revenue generation efforts in Central and Eastern Europe. In
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September 2008, Mr.
Heinz took over his current role as Managing Director of the Company’s Europe EFT Processing
Segment. Prior
to joining Euronet, Mr. Heinz spent 12 years working with NCR in Germany and Poland as sales
manager and sales and operations director.
GARETH GUMBLEY, Senior Vice President, Managing Director — Prepaid Processing Segment. Mr. Gumbley
joined Euronet in 2004 as managing director for the Company’s prepaid businesses in Australia and
New Zealand. In May 2008, Mr. Gumbley took over his current responsibility as managing director of
Euronet’s Prepaid Processing Segment. Prior to joining Euronet, he served as chief executive
officer of Dialect Solutions (a News Corporation company), a global Internet payments processor.
Mr. Gumbley is a member of the Chartered Institute of Management Accountants and a member of the
Australian Institute of Company Directors.
Departure of Directors or Certain Officers
In May 2008, Miro I. Bergman resigned the positions of Executive Vice President and Chief
Operations Officer of the Company’s Prepaid Segment. Mr. Bergman continues to be an employee of the
Company and to act, on a limited basis, as an advisor to the CEO and executive management team. The
Company replaced Mr. Bergman as Chief Operations Officer of the
Prepaid Processing Segment through internal
recruitment.
AVAILABILITY OF REPORTS, CERTAIN COMMITTEE CHARTERS AND OTHER INFORMATION
Our Web site addresses are www.euronetworldwide.com and www.eeft.com. We make all Securities and
Exchange Commission (“SEC”) public filings, including our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or
furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act available on our Web site free of
charge as soon as reasonably practicable after these documents are electronically filed with, or
furnished to, the SEC. The information on our Web site is not, and shall not be deemed to be a part
of this report or incorporated into any other filings we make with the SEC. In addition, the SEC
maintains an Internet site at www.sec.gov that contains reports, proxy and information statements,
and other information regarding Euronet.
The charters for our Audit, Compensation, and Corporate Governance and Nominating Committees, as
well as the Code of Business Conduct & Ethics for our employees, including our Chief Executive
Officer and Chief Financial Officer, are available on our Web site at www.euronetworldwide.com in
the “Investors” section.
We will also provide printed copies of these materials to any stockholders, upon request to Euronet
Worldwide, Inc., 4601 College Boulevard, Suite 300, Leawood, Kansas, U.S.A. 66211, Attention:
Investor Relations.
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ITEM 1A. RISK FACTORS
You should carefully consider the risks described below before making an investment decision. The
risks and uncertainties described below are not the only ones facing our company. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial may also impair
our business operations.
If any of the following risks actually occurs, our business, financial condition or results of
operations could be materially adversely affected. In that case, the trading price of our common
stock could decline substantially.
This Annual Report also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in the forward-looking statements
as a result of a number of factors, including the risks described below and elsewhere in this
Annual Report.
Risks Related to Our Business
We have a substantial amount of debt and other contractual commitments, and the cost of servicing
those obligations could adversely affect our business, and such risk could increase if we incur
more debt. We may be required to prepay our obligations under the secured syndicated credit
facility.
We have a substantial amount of indebtedness. As of December 31, 2008, total liabilities were
$981.1 million, of which $321.9 million represents long-term debt obligations, and total assets
were $1,440.1 million. Of our total long-term debt obligations, $245.0 million is comprised of
contingently convertible debentures that, in certain situations, could be settled in stock. We may
not have sufficient funds to satisfy all such obligations as a result of a variety of factors, some
of which may be beyond our control. If the opportunity of a strategic acquisition arises or if we
enter into new contracts that require the installation or servicing of infrastructure, such as
processing centers, ATM machines or POS terminals on a faster pace than anticipated, we may be
required to incur additional debt for these purposes and to fund our working capital needs, which
we may not be able to obtain. The level of our indebtedness could have important consequences to
investors, including the following:
| • | our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes may be limited or financing may be unavailable; | ||
| • | a substantial portion of our cash flows must be dedicated to the payment of principal and interest on our indebtedness and other obligations and will not be available for use in our business; | ||
| • | our level of indebtedness could limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; | ||
| • | our high degree of indebtedness will make us more vulnerable to changes in general economic conditions and/or a downturn in our business, thereby making it more difficult for us to satisfy our obligations; and | ||
| • | because a portion of our debt bears interest at a variable rate of interest, our actual debt service obligations could increase as a result of adverse changes in interest rates. |
If we fail to make required debt payments, or if we fail to comply with other covenants in our debt
service agreements, we would be in default under the terms of these agreements. This default would
permit the holders of the indebtedness to accelerate repayment of this debt and could cause
defaults under other indebtedness that we have.
Prepayment in full of the obligations under our $290 million Credit Facility may be required six
months prior to any required repurchase date under our $175 million 3.5% Convertible Debentures Due
2025, unless we are able to demonstrate that either: (i) we could borrow unsubordinated funded debt
equal to the principal amount of the applicable convertible debentures while remaining in
compliance with the financial covenants in the Credit Facility, or (ii) we will have sufficient
liquidity (as determined by the administrative agent and the lenders). Holders of the $70 million
1.625% debentures have the option to require us to purchase their debentures at par on December 15,
2009, 2014 and 2019, and upon a change in control of the Company. Holders of the $175 million 3.5%
debentures have the option to require us to purchase their debentures at par on October 15, 2012,
2015 and 2020, or upon a change in control of the Company. In connection with a recent amendment to
our Credit Facility (discussed below), the lenders acknowledged that we have sufficient liquidity
with respect to the December 15, 2009 repurchase date for the 1.625% debentures.
Restrictive covenants in our credit facilities may adversely affect us. The Credit Facility
contains four financial covenants that we must meet as defined in the agreement: (1) total debt to
EBITDA ratio, (2) senior secured debt to EBITDA ratio, (3) EBITDA to fixed charge coverage ratio
and (4) minimum Consolidated Net Worth. To remain in compliance with our debt covenants, we may be
required to increase EBITDA, repay debt, or both. We cannot assure you that we will have sufficient
assets, liquidity or EBITDA to meet or avoid these obligations, which could have an adverse impact
on our financial condition.
Our ability to secure additional financing for growth or to refinance any of our existing debt is
also dependent upon the availability of credit in the marketplace, which has recently been
experiencing severe disruptions due to the current economic crisis. If we are unable
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to secure additional financing or such financing is not available at acceptable terms, we may be
unable to secure financing for growth or refinance our debt obligations, if necessary.
In the event that we need debt financing in the future, recent uncertainty in the credit markets
could affect our ability to obtain debt financing on reasonable terms.
In the event we were to require additional debt financing in the future, the severe liquidity
disruptions in the credit markets could materially impact our ability to obtain debt financing on
reasonable terms. The inability to access debt financing on reasonable terms could materially
impact our ability to make acquisitions, refinance existing debt or materially expand our business
in the future.
Increases in interest rates will adversely impact our results from operations.
We have entered into interest rate swap agreements covering the period from June 1, 2007 through
May 29, 2009 for a notional amount of $50 million that effectively converts that portion of our
$190 million variable rate term loan to a fixed interest rate of 7.3% per annum. For the remaining
outstanding balance of the term loan, as well as borrowings incurred under our revolving credit
facility and other variable rate borrowing arrangements, increases in variable interest rates will
increase the amount of interest expense that we pay for our borrowings and have a negative impact
on our results from operations.
Our business may suffer from risks related to our recent acquisitions and potential future
acquisitions, including our acquisition of RIA during 2007.
A substantial portion of our recent growth is due to acquisitions, and we continue to evaluate and
engage in discussions concerning potential acquisition opportunities, some of which could be
material. During 2007, we acquired RIA, which was our largest acquisition to date. We cannot assure
you that we will be able to successfully integrate, or otherwise realize anticipated benefits from,
our recent acquisitions or any future acquisitions. Failure to successfully integrate or otherwise
realize the anticipated benefits of these acquisitions could adversely impact our long-term
competitiveness and profitability. The integration of any future acquisitions will involve a number
of risks that could harm our financial condition, results of operations and competitive position.
In particular:
| • | The integration plans for our acquisitions are based on benefits that involve assumptions as to future events, including leveraging our existing relationships with mobile phone operators and retailers, as well as general business and industry conditions, many of which are beyond our control and may not materialize. Unforeseen factors may offset components of our integration plans in whole or in part. As a result, our actual results may vary considerably, or be considerably delayed, compared to our estimates; | ||
| • | The integration process could disrupt the activities of the businesses that are being combined. The combination of companies requires, among other things, coordination of administrative and other functions. In addition, the loss of key employees, customers or vendors of acquired businesses could materially and adversely impact the integration of the acquired business; | ||
| • | The execution of our integration plans may divert the attention of our management from other key responsibilities; | ||
| • | We may assume unanticipated liabilities and contingencies; or | ||
| • | Our acquisition targets could fail to perform in accordance with our expectations at the time of purchase. |
Future acquisitions may be affected through the issuance of our Common Stock or securities
convertible into our Common Stock, which could substantially dilute the ownership percentage of our
current stockholders. In addition, shares issued in connection with future acquisitions could be
publicly tradable, which could result in a material decrease in the market price of our Common
Stock.
We may be required to recognize additional impairment charges related to long-lived assets and
goodwill recorded in connection with our acquisitions.
Our total assets include approximately $613.6 million, or 43% of total assets, in goodwill and
acquired intangible assets recorded as a result of acquisitions. We assess our goodwill, intangible
assets and other long-lived assets as and when required by accounting principles generally accepted
in the U.S. to determine whether they are impaired. In 2008, we determined that certain goodwill
and intangible assets of our Spanish prepaid business and our RIA money transfer business were
impaired and we recorded a $220.1 million non-cash impairment charge. If operating results in any
of our key markets, including the U.S., U.K., Germany, Spain and Australia, deteriorate or our
plans do not progress as expected when we acquired these entities or
if capital markets depress our value or that of similar companies, we may be required to record an
additional impairment write-down of goodwill, intangible assets or other long-lived assets. This
could have a material adverse effect on our results of operations and financial condition.
Like other participants in the money transfer industry, as a result of immigration developments,
downturns in certain labor markets and the current economic crisis, growth rates in money transfers
from the U.S. to Mexico have slowed. This slowing of growth began during the middle of 2006 and
continues to impact money transfer revenues for transactions from the U.S. to Mexico. These issues
have also resulted in certain competitors lowering transaction fees and foreign currency exchange
spreads in certain markets where we do business in an attempt to limit the impact on money transfer
volumes. For 2008, money transfer transactions to Mexico, which
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represented approximately 32% of
total money transfer transactions, decreased by 9.1%. If this trend continues or worsens, or we
experience similar trends in our international business, we may be required to record an additional
impairment write-down of our goodwill, intangible assets or other long lived assets associated with
the Money Transfer Segment.
A lack of business opportunities or financial or other resources may impede our ability to continue
to expand at desired levels, and our failure to expand operations could have an adverse impact on
our financial condition.
Our expansion plans and opportunities are focused on four separate areas: (i) our network of owned
and operated ATMs; (ii) outsourced ATM management contracts; (iii) our prepaid mobile airtime
services; and (iv) our money transfer and bill payment services. The continued expansion and
development of our ATM business will depend on various factors including the following:
| • | the demand for our ATM services in our current target markets; | ||
| • | the ability to locate appropriate ATM sites and obtain necessary approvals for the installation of ATMs; | ||
| • | the ability to install ATMs in an efficient and timely manner; | ||
| • | the expansion of our business into new countries as currently planned; | ||
| • | entering into additional card acceptance and ATM outsourcing agreements with banks; | ||
| • | the ability to renew existing agreements with customers; | ||
| • | the ability to obtain sufficient numbers of ATMs on a timely basis; and | ||
| • | the availability of financing for the expansion. |
We cannot predict the increase or decrease in the number of ATMs we manage under outsourcing
agreements because this depends largely on the willingness of banks to enter into or maintain
outsourcing contracts with us. Banks are very deliberate in negotiating these agreements, and the
process of negotiating and signing outsourcing agreements typically takes six to twelve months or
longer. Moreover, banks evaluate a wide range of matters when deciding to choose an outsource
vendor and generally this decision is subject to extensive management analysis and approvals. The
process is also affected by the legal and regulatory considerations of local countries, as well as
local language complexities. These agreements tend to cover large numbers of ATMs, so significant
increases and decreases in our pool of managed ATMs could result from entry into or termination of
these management contracts. In this regard, the timing of both current and new contract revenues is
uncertain and unpredictable. Increasing consolidation in the banking industry could make this
process less predictable.
We currently offer prepaid mobile airtime top-up services in Europe, the Middle East, Asia Pacific
and North America. We plan to expand in these and other markets by taking advantage of our existing
relationships with mobile phone operators, banks and retailers. This expansion will depend on
various factors, including the following:
| • | the ability to negotiate new agreements, and renew existing agreements, in these markets with mobile phone operators, banks and retailers; | ||
| • | the continuation of the trend of increased use of electronic prepaid mobile airtime among mobile phone users; | ||
| • | the continuation of the trend of increased use of electronic money transfer and bill payment among immigrant workers; | ||
| • | the increase in the number of prepaid mobile phone users; and | ||
| • | the availability of financing for the expansion. |
In addition, our continued expansion may involve acquisitions that could divert our resources and
management time and require integration of new assets with our existing networks and services and
could require financing that we may not be able to obtain. Our ability to manage our rapid
expansion effectively will require us eventually to expand our operating systems and employee base.
An inability to do this could have a material adverse effect on our business, growth, financial
condition or results of operations.
We are subject to business cycles, seasonality and other outside factors that may negatively affect
our business.
The current recessionary economic environment or other outside factors could have a negative impact on mobile
phone operators, retailers and our customers and could reduce the level of transactions, which
could, in turn, negatively impact our financial results. If mobile phone operators and financial
institutions experience decreased demand for their products and services, or if the locations where
we provide services decrease in number, we will process fewer transactions, resulting in lower
revenue. In addition, the recessionary economic environment could reduce the level of transactions
taking place on our networks, which will have a negative impact on our business.
Our experience is that the level of transactions on our networks is also subject to substantial
seasonal variation. Transaction levels have consistently been much higher in the fourth quarter of
the fiscal year due to increased use of ATMs, prepaid mobile airtime top-ups and money transfer
services during the holiday season. Generally, the level of transactions drops in the first
quarter, during which transaction levels are generally the lowest we experience during the year,
which reduces the level of revenues that we record. Additionally, in the Money Transfer Segment, we
experience increased transaction levels during the April through September
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timeframe coinciding
with the increase in worker migration patterns. As a result of these seasonal variations, our
quarterly operating results may fluctuate materially and could lead to volatility in the price of
our shares.
Additionally, economic or political instability, civil unrest, terrorism and natural disasters may
make money transfers to, from or within a particular country more difficult. The inability to
timely complete money transfers could adversely affect our business.
A prolonged economic slowdown or lengthy or severe recession in the U.S. or elsewhere could harm
our operations.
A prolonged economic downturn or recession could materially impact our results from operations. A
recessionary economic environment could have a negative impact on mobile phone operators, retailers
and our other customers and could reduce the level of transactions processed on our networks, which
would, in turn, negatively impact our financial results. If mobile phone operators and financial
institutions experience decreased demand for their products and services, or if the locations where
we provide services decrease in number, we will process fewer transactions, resulting in lower
revenue.
The growth and profitability of our prepaid business is dependent on certain factors that vary from
market to market.
Our Prepaid Processing Segment derives revenues based on processing fees and commissions from
mobile and other telecommunication operators and distributors of prepaid wireless products. Growth
in our prepaid business in any given market is driven by a number of factors, including the extent
to which conversion from scratch cards to electronic distribution solutions is occurring or has
been completed, the overall pace of growth in the prepaid mobile phone market, our market share of
the retail distribution capacity and the level of commission that is paid to the various
intermediaries in the prepaid mobile airtime distribution chain. In mature markets, such as the
U.K., New Zealand and Spain, the conversion from scratch cards to electronic forms of distribution
is either complete or nearing completion. Therefore, these factors will cease to provide the
organic increases in the number of transactions per terminal that we have experienced historically.
Also, competition among prepaid distributors results in retailer churn and the reduction of
commissions paid by mobile operators, although a portion of such reductions can be passed along to
retailers. In the last year, processing fees and commissions per transaction have declined in most
markets, and we expect that trend to continue. We have been able to improve our results despite
that trend due to substantial growth in the number of transactions, driven by acquisitions and
organic growth. We do not expect to continue this rate of growth. If we cannot continue to increase
our transaction levels and per-transaction fees and commissions continue to decline, the combined
impact of these factors could adversely impact our financial results.
Our prepaid mobile airtime top-up and money transfer businesses may be susceptible to fraud and/or
credit risks occurring at the retailer and/or consumer level.
In our Prepaid Processing Segment, we contract with retailers that accept payment on our behalf,
which we then transfer to a trust or other operating account for payment to mobile phone operators.
In the event a retailer does not transfer to us payments that it receives for mobile airtime, we
are responsible to the mobile phone operator for the cost of the airtime credited to the customer’s
mobile phone. We can provide no assurance that retailer fraud will not increase in the future or
that any proceeds we receive under our credit enhancement insurance policies will be adequate to
cover losses resulting from retailer fraud, which could have a material adverse effect on our
business, financial condition and results of operations.
With respect to our money transfer business, our business is primarily conducted through our agent
network, which provides money transfer services directly to consumers at retail locations. Our
agents collect funds directly from consumers and in turn we collect from the agents the proceeds
due to us resulting from the money transfer transactions. Therefore, we have credit exposure to our
agents. The failure of agents owing us significant amounts to remit funds to us or to repay such
amounts could adversely affect our business, financial condition and results of operations.
Because we typically enter into short-term contracts with mobile phone operators and retailers, our
top-up business is subject to the risk of non-renewal of those contracts, or renewal under less
favorable terms.
Our contracts with mobile phone operators to process prepaid mobile airtime recharge services
typically have terms of less than three years. Many of those contracts may be canceled by either
party upon three months’ notice. Our contracts with mobile phone operators are not exclusive, so
these operators may enter into top-up contracts with other service providers. In addition, our
top-up service contracts with major retailers typically have terms of one to three years, and our
contracts with smaller retailers typically may be canceled by either party upon three to six
months’ notice. The cancellation or non-renewal of one or more of our significant mobile phone
operator or retail contracts, or of a large enough group of our contracts with smaller retailers,
could have a material adverse effect on our business, financial condition and results of
operations. The renewal of contracts under less favorable payment terms, commission terms or other
terms could have a material adverse impact on our working capital requirements and/or results from
operations. In addition, our contracts generally permit operators to reduce our fees at any time.
Commission revenue or fee reductions by any of the mobile phone operators could also have a
material adverse effect on our business, financial condition or results of operations.
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The processes and systems we employ may be subject to patent protection by other parties.
In certain countries, including the U.S., patent protection legislation permits the protection of
processes and systems. We employ processes and systems in various markets that have been used in
the industry by other parties for many years, and which we or other
companies that use the same or similar processes and systems consider to be in the public domain.
However, we are aware that certain parties believe they hold patents that cover some of the
processes and systems employed in the prepaid processing industry in the U.S. and elsewhere. We
believe the processes and systems we use have been in the public domain prior to the patents we are
aware of. The question of whether a process or system is in the public domain is a legal
determination, and if this issue is litigated we cannot be certain of the outcome of any such
litigation. If a person were to assert that it holds a patent covering any of the processes or
systems we use, we would be required to defend ourselves against such claim. If unsuccessful, we
may be required to pay damages for past infringement, which could be trebled if the infringement
was found to be willful. We may also be required to seek a license to continue to use the processes
or systems. Such a license may require either a single payment or an ongoing license fee. No
assurance can be given that we will be able to obtain a license which is reasonable in fee and
scope. If a patent owner is unwilling to grant such a license, or we decide not to obtain such a
license, we may be required to modify our processes and systems to avoid future infringement. Any
such occurrences could materially and adversely affect our prepaid processing business in any
affected markets and could result in our reconsidering the rate of expansion of this business in
those markets.
The stability and growth of our EFT Processing Segment depend on maintaining our current card
acceptance and ATM management agreements with banks and international card organizations, and on
securing new arrangements for card acceptance and ATM management.
The stability and future growth of our EFT Processing Segment depends in part on our ability to
sign card acceptance and ATM management agreements with banks and international card organizations.
Card acceptance agreements allow our ATMs to accept credit and debit cards issued by banks and
international card organizations. ATM management agreements generate service income from our
management of ATMs for banks. These agreements are the primary source of our ATM business.
These agreements have expiration dates, and banks and international card organizations are
generally not obligated to renew them. In some cases, banks may terminate their contracts prior to
the expiration of their terms. We cannot assure you that we will be able to continue to sign or
maintain these agreements on terms and conditions acceptable to us or whether those international
card organizations will continue to permit our ATMs to accept their credit and debit cards. The
inability to continue to sign or maintain these agreements, or to continue to accept the credit and
debit cards of local banks and international card organizations at our ATMs in the future, could
have a material adverse effect on our business, growth, financial condition or results of
operations.
Retaining the founder and key executives of our company, and of companies that we acquire, and
finding and retaining qualified personnel is important to our continued success.
The development and implementation of our strategy has depended in large part on the co-founder of
our company, Michael J. Brown. The retention of Mr. Brown is important to our continued success. In
addition, the success of the expansion of businesses that we acquire may depend in large part upon
the retention of the founders of those businesses. Our success also depends in part on our ability
to hire and retain highly skilled and qualified management, operating, marketing, financial and
technical personnel. The competition for qualified personnel in the markets where we conduct our
business is intense and, accordingly, we cannot assure you that we will be able to continue to hire
or retain the required personnel.
Our officers and some of our key personnel have entered into service or employment agreements
containing non-competition, non-disclosure and non-solicitation covenants, which grant incentive
stock options and/or restricted stock with long-term vesting requirements. However, most of these
contracts do not guarantee that these individuals will continue their employment with us. The loss
of our key personnel could have a material adverse effect on our business, growth, financial
condition or results of operations.
Our operating results depend in part on the volume of transactions on ATMs in our network and the
fees we can collect from processing these transactions.
Transaction fees from banks and international card organizations for transactions processed on our
ATMs have historically accounted for a substantial majority of our revenues. These fees are set by
agreement among all banks in a particular market. The future operating results of our ATM business
depend on the following factors:
| • | the increased issuance of credit and debit cards; | ||
| • | the increased acceptance of our ATM processing and management services in our target markets; | ||
| • | the maintenance of the level of transaction fees we receive; | ||
| • | the installation of larger numbers of ATMs; and | ||
| • | the continued use of our ATMs by credit and debit cardholders. |
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Although we believe that the volume of transactions in developing countries may increase due to
growth in the number of cards being issued by banks in these markets, we anticipate that
transaction levels on any given ATM in developing markets will not increase significantly. We can
attempt to improve the levels of transactions on our ATM network overall by acquiring good sites
for our ATMs, eliminating poor locations, entering new less-developed markets and adding new
transactions to the sets of transactions that are available on our ATMs. However, we may not be
successful in materially increasing transaction levels through these measures.
Per-transaction fees have declined in certain markets in recent years. If we cannot continue to
increase our transaction levels and per-transaction fees generally decline, our results would be
adversely affected.
Our operating results in the money transfer business depend in part on continued worker immigration
patterns, our ability to expand our share of the existing electronic market and to expand into new
markets and our ability to continue complying with regulations issued by the Office of Foreign
Assets Control (“OFAC”), Bank Secrecy Act (“BSA”), Financial Crimes Enforcement Network (“FINCEN”),
PATRIOT Act regulations or any other existing or future regulations that impact any aspect of our
money transfer business.
Our money transfer business primarily focuses on workers who migrate to foreign countries in search
of employment and then send a portion of their earnings to family members in their home countries.
Our ability to continue complying with the requirements of OFAC, BSA, FINCEN, the PATRIOT Act and
other regulations (both U.S. and foreign) is important to our success in achieving growth and an
inability to do this could have an adverse impact on our revenues and earnings. Changes in U.S. and
foreign government policies or enforcement toward immigration may have a negative affect on
immigration in the U.S. and other countries, which could also have an adverse impact on our money
transfer revenues.
Future growth and profitability depend upon expansion within the markets in which we currently
operate and the development of new markets for our money transfer services. Our expansion into new
markets is dependent upon our ability to successfully integrate RIA into our existing operations,
to apply our existing technology or to develop new applications to satisfy market demand. We may
not have adequate financial and technological resources to expand our distribution channels and
product applications to satisfy these demands, which may have an adverse impact on our ability to
achieve expected growth in revenues and earnings.
Changes in state, federal or foreign laws, rules and regulations could impact the money transfer
industry, making it more difficult for our customers to initiate money transfers.
We are subject to regulation by the U.S. states in which we operate, by the U.S. federal government
and by the governments of the other countries in which we operate. Changes in the laws, rules and
regulations of these governmental entities could have a material adverse impact on our results of
operations, financial condition and cash flow.
Changes in banking industry regulation and practice could make it more difficult for us and our
agents to maintain depository accounts with banks.
The banking industry, in light of increased regulatory oversight, is continually examining its
business relationships with companies who offer money transfer services and with retail agents who
collect and remit cash collected from end consumers. Should banks decide to not offer depository
services to companies engaged in processing money transfer transactions, or to retail agents who
collect and remit cash from end customers, our ability to administer and collect fees from money
transfer transactions could be adversely impacted.
Developments in electronic financial transactions could materially reduce our transaction levels
and revenues.
Certain developments in the field of electronic financial transactions may reduce the need for
ATMs, prepaid mobile phone POS terminals and money transfer agents. These developments may reduce
the transaction levels that we experience on our networks in the markets where they occur.
Financial institutions, retailers and agents could elect to increase fees to their customers for
using our services, which may cause a decline in the use of our services and have an adverse effect
on our revenues. If transaction levels over our existing network of ATMs, POS terminals, agents and
other distribution methods do not increase, growth in our revenues will depend primarily on
increased capital investment for new sites and developing new markets, which reduces the margin we
realize from our revenues.
The mobile phone industry is a rapidly evolving area, in which technological developments, in
particular the development of new methods or services, may affect the demand for other services in
a dramatic way. The development of any new technology that reduces the need or demand for prepaid
mobile phone time could materially and adversely affect our business.
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We generally have little control over the ATM transaction fees established in the markets where we
operate, and therefore, cannot control any potential reductions in these fees.
The amount of fees we receive per transaction is set in various ways in the markets in which we do
business. We have card acceptance agreements or ATM management agreements with some banks under
which fees are set. However, we derive the bulk of our revenues in most markets from ‘‘interchange
fees’’ that are set by the central ATM processing switch. The banks that participate in these
switches set the interchange fee, and we are not in a position in any market to greatly influence
these fees, which may increase or decrease over time. A significant decrease in the interchange fee
in any market could adversely affect our results in that market.
In some cases, we are dependent upon international card organizations and national transaction
processing switches to provide assistance in obtaining settlement from card issuers of funds
relating to transactions on our ATMs.
Our ATMs dispense cash relating to transactions on credit and debit cards issued by banks. We have
in place arrangements for the settlement to us of all of those transactions, but in some cases, we
do not have a direct relationship with the card-issuing bank and rely for settlement on the
application of rules that are administered by international card associations (such as Visa or
MasterCard) or national transaction processing switching networks. If a bankcard association fails
to settle transactions in accordance with those rules, we are dependent upon cooperation from such
organizations or switching networks to enforce our right of settlement against such banks or card
associations. Failure by such organizations or switches to provide the required cooperation could
result in our inability to obtain settlement of funds relating to transactions and adversely affect
our business.
Because our business is highly dependent on the proper operation of our computer network and
telecommunications connections, significant technical disruptions to these systems would adversely
affect our revenues and financial results.
Our business involves the operation and maintenance of a sophisticated computer network and
telecommunications connections with financial institutions, mobile operators, retailers and agents.
This, in turn, requires the maintenance of computer equipment and infrastructure, including
telecommunications and electrical systems, and the integration and enhancement of complex software
applications. Our ATM segment also uses a satellite-based system that is susceptible to the risk of
satellite failure. There are operational risks inherent in this type of business that can result in
the temporary shutdown of part or all of our processing systems, such as failure of electrical
supply, failure of computer hardware and software errors. Excluding Germany, transactions in the
EFT Processing Segment are processed through our Budapest, Belgrade, Beijing and Mumbai processing
centers. Transactions in the Prepaid Processing Segment are processed through our Basildon,
Martinsried, Madrid and Leawood, Kansas processing centers. Transactions in our Money Transfer
Segment are processed through our Cerritos, California processing center. Any operational problem
in these centers may have a significant adverse impact on the operation of our networks. Even with
disaster recovery procedures in place, these risks cannot be eliminated entirely, and any technical
failure that prevents operation of our systems for a significant period of time will prevent us
from processing transactions during that period of time and will directly and adversely affect our
revenues and financial results.
We are subject to the risks of liability for fraudulent bankcard and other card transactions
involving a breach in our security systems, breaches of our information security policies or
safeguards, as well as for ATM theft and vandalism.
We capture, transmit, handle and store sensitive information in conducting and managing electronic,
financial and mobile transactions, such as card information and PIN numbers. These businesses
involve certain inherent security risks, in particular: the risk of electronic interception and
theft of the information for use in fraudulent or other card transactions by persons outside the
Company or by our own employees; and the use of fraudulent cards on our network of owned or
outsourced ATMs and POS devices. We incorporate industry-standard encryption technology and
processing methodology into our systems and software, and maintain controls and procedures
regarding access to our computer systems by employees and others, to maintain high levels of
security. Although this technology and methodology decrease security risks, they cannot be
eliminated entirely as criminal elements apply increasingly sophisticated technology to attempt to
obtain unauthorized access to the information handled by ATM and electronic financial transaction
networks. In addition, the cost and timeframes required for implementation of new technology may
result in a time lag between availability of such technology and our adoption of it. Further, our
controls, procedures and technology may not be able to detect when there is a breach, causing a
delay in our ability to mitigate it. The current economic crisis increases the risk that criminals
will attempt such data theft.
Any breach in our security systems could result in the perpetration of fraudulent financial
transactions for which we may bear the liability. We are insured against various risks, including
theft and negligence, but such insurance coverage is subject to deductibles, exclusions and
limitations that may leave us bearing some or all of any losses arising from security breaches.
We also collect, transfer and retain consumer data as part of our money transfer business. These
activities are subject to certain consumer privacy laws and regulations in the U.S. and in other
jurisdictions where our money transfer services are offered. We maintain technical and operational
safeguards designed to comply with applicable legal requirements. Despite these safeguards, there
remains a risk that these safeguards could be breached resulting in improper access to, and
disclosure of, sensitive consumer information. Breaches of our security policies or applicable
legal requirements resulting in a compromise of consumer data could expose us to regulatory
enforcement action, subject us to litigation, limit our ability to provide money transfer services
and/or cause harm to our reputation.
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In addition to electronic fraud issues and breaches of our information security policies and
safeguards, the possible theft and vandalism of ATMs present risks for our ATM business. We install
ATMs at high-traffic sites and consequently our ATMs are exposed to theft and vandalism. Although
we are insured against such risks, deductibles, exclusions or limitations in such insurance may
leave us bearing some or all of any losses arising from theft or vandalism of ATMs. In addition, we
have experienced increases in claims under our insurance, which has increased our insurance
premiums.
We could incur substantial losses if one of the third party depository institutions we use in our
operations were to fail.
As part of our business operations we maintain cash balances at third party depository
institutions. We could incur substantial losses if a financial institution in which we have
significant deposits fails.
We are required under German law and the rules of financial transaction switching networks in all
of our markets to have ‘‘sponsors’’ to operate ATMs and switch ATM transactions. Our failure to
secure ‘‘sponsor’’ arrangements in Germany or any other market could prevent us from doing business
in that market.
Under German law, only a licensed financial institution may operate ATMs. Because we are not a
licensed financial institution we are required to have a ‘‘sponsor’’ bank to conduct our German ATM
operations. In addition, in all of our markets, our ATMs are connected to national financial
transaction switching networks owned or operated by banks, and to other international financial
transaction switching networks operated by organizations such as Citibank, Visa and MasterCard. The
rules governing these switching networks require any company sending transactions through these
switches to be a bank or a technical service processor that is approved and monitored by a bank. As
a result, the operation of our ATM network in all of our markets depends on our ability to secure
these ‘‘sponsor’’ arrangements with financial institutions.
To date, we have been successful in reaching contractual arrangements that have permitted us to
operate in all of our target markets. However, we cannot assure you that we will continue to be
successful in reaching these arrangements, and it is possible that our current arrangements will
not continue to be renewed. If we are unable to secure “sponsor” arrangements in Germany or any
other market, we could be prevented from doing business in the applicable market.
If we are unable to maintain our money transfer agent and correspondent networks, our business may
be adversely affected.
Our money transfer based revenue is primarily generated through the use of our agent and
correspondent networks. Transaction volumes at existing locations may increase over time and new
agents provide us with additional revenue. If agents or correspondents decide to leave our network
or if we are unable to sign new agents or correspondents, our revenue and profit growth rates may
be adversely affected. Our agents and correspondents are also subject to a wide variety of laws and
regulations that vary significantly, depending on the legal jurisdiction. Changes in these laws and
regulations could adversely affect our ability to maintain the networks or the cost of providing
money transfer services. In addition, agents may generate fewer transactions or less revenue due to
various factors, including increased competition. Because our agents and correspondents are third
parties that may sell products and provide services in addition to our money transfer services,
they may encounter business difficulties unrelated to the provision of our services, which may
cause the agents or correspondents to reduce their number of locations or hours of operation, or
cease doing business altogether.
If consumer confidence in our money transfer business or brands declines, our business may be
adversely affected.
Our money transfer business relies on consumer confidence in our brands and our ability to provide
efficient and reliable money transfer services. A decline in consumer confidence in our business or
brands, or in traditional money transfer providers as a means to transfer money, may adversely
impact transaction volumes which would in turn be expected to adversely impact our business.
Our money transfer service offerings are dependent on financial institutions to provide such
offerings.
Our money transfer business involves transferring funds internationally and is dependent upon
foreign and domestic financial institutions, including our competitors, to execute funds transfers
and foreign currency transactions. Changes to existing regulations of financial institution
operations, such as those designed to combat terrorism or money laundering, could require us to
alter our operating procedures in a manner that increases our cost of doing business or to
terminate certain product offerings. In addition, as a result of existing regulations and/or
changes to those regulations, financial institutions could decide to cease providing the services
on which we depend, requiring us to terminate certain product offerings.
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Our competition in the EFT Processing Segment, Prepaid Processing Segment and Money Transfer
Segment include large, well financed companies and financial institutions larger than us with
earlier entry into the market. As a result, we may lack the financial resources and access to
capital needed to capture increased market share.
EFT Processing Segment— Our principal EFT Processing competitors include ATM networks owned by
banks and national switches consisting of consortiums of local banks that provide outsourcing and
transaction services only to banks and independent ATM deployers in that country. Large,
well-financed companies offer ATM network and outsourcing services that compete with us in various
markets. In some cases, these companies also sell a broader range of card and processing services
than we, and are in some cases, willing to discount ATM services to obtain large contracts covering
a broad range of services. Competitive factors in our EFT Processing Segment include network
availability and response time, breadth of service offering, price to both the bank and to its
customers, ATM location and access to other networks.
For our ITM product line, we are a leading supplier of electronic financial transaction processing
software for the IBM iSeries platform in a largely fragmented market, which is made up of
competitors that offer a variety of solutions that compete with our products, ranging from single
applications to fully integrated electronic financial processing software. Additionally, for ITM,
other industry suppliers service the software requirements of large mainframe systems and
UNIX-based platforms, and accordingly are not considered competitors. We have specifically targeted
customers consisting of financial institutions that operate their back office systems with the IBM
iSeries.
Our software solutions business has multiple types of competitors that compete across all EFT
software components in the following areas: (i) ATM, network and POS software systems, (ii)
Internet banking software systems, (iii) credit card software systems, (iv) mobile banking systems,
(v) mobile operator solutions, (vi) telephone banking and (vii) full EFT software. Competitive
factors in the software solutions business include price, technology development and the ability of
software systems to interact with other leading products.
Prepaid Processing Segment— We face competition in the prepaid business in all of our markets. A
few multinational companies operate in several of our markets, and we therefore compete with them
in a number of countries. In other markets, our competition is from smaller, local companies. Major
retailers with high volumes are in a position to demand a larger share of commissions, which may
compress our margins.
Money Transfer Segment— Our primary competitors in the money transfer and bill payment business
include other independent processors and electronic money transmitters, as well as certain major
national and regional banks, financial institutions and independent sales organizations. Our
competitors include The Western Union Company, MoneyGram International Inc., Global Payments Inc.
and others, some of which are larger than we are and have greater resources and access to capital
for expansion than we have. This may allow them to offer better pricing terms to customers, which
may result in a loss of our current or potential customers or could force us to lower our prices.
Either of these actions could have an adverse impact on our revenues. In addition, our competitors
may have the ability to devote more financial and operational resources than we can to the
development of new technologies that provide improved functionality and features to their product
and service offerings. If successful, their development efforts could render our product and
services offerings less desirable, resulting in the loss of customers or a reduction in the price
we could demand for our services. In addition to traditional money payment services, new
technologies are emerging that may effectively compete with traditional money payment services,
such as stored-value cards, debit networks and web-based services. Our continued growth depends
upon our ability to compete effectively with these alternative technologies.
Competition in our EFT Processing Segment has increased over the last several years, increasing the
risk that certain of our long-term bank outsourcing contracts may be terminated or not renewed upon
expiration.
The developing markets in which we have done business have matured over the years, resulting in
increasing competition. In addition, as consolidation of financial institutions in Central and
Eastern Europe continues, certain of our customers have established or are establishing internal
ATM management and processing capabilities. As a result of these developments, negotiations
regarding renewal of contracts have become increasingly challenging and in certain cases we have
reduced fees to extend contracts beyond their original terms. In certain other cases, contracts
have been, and in the future may be, terminated by financial institutions resulting in a
substantial reduction in revenue. Contract termination payments, if any, may be inadequate to
replace revenues and operating income associated with these contracts. Although we have
historically considered the risk of non-renewal of major contracts to be relatively low because of
complex interfaces and operational procedures established for those contracts, the risk of
non-renewal or early termination is increasing.
We conduct a significant portion of our business in Central and Eastern European countries, and we
have subsidiaries in the Middle East and Asia Pacific, where the risk of continued political,
economic and regulatory change that could impact our operating results is greater than in the U.S.
or Western Europe.
We have subsidiaries in Hungary, Poland, the Czech Republic, Romania, Slovakia, Spain, Greece,
Croatia, India, Serbia, Bulgaria, Egypt and China, and have operations in other countries in
Central Europe, the Middle East and Asia Pacific. We expect to continue to expand our operations to
other countries in these regions. We sell software in many other markets in the developing world.
Some of these countries have undergone significant political, economic and social change in recent
years and the risk of new, unforeseen changes in these countries remains greater than in the U.S.
or Western Europe. In particular, changes in laws or regulations or in the
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interpretation of
existing laws or regulations, whether caused by a change in government or otherwise, could
materially adversely affect our business, growth, financial condition or results of operations.
For example, currently there are no limitations on the repatriation of profits from any of the
countries in which we have subsidiaries (although U.S. tax laws discourage repatriation), but
foreign currency exchange control restrictions, taxes or limitations may be imposed or increased in
the future with regard to repatriation of earnings and investments from these countries. If
exchange control restrictions, taxes or limitations are imposed, our ability to receive dividends
or other payments from affected subsidiaries could be reduced, which may have a material adverse
effect on us.
In addition, corporate, contract, property, insolvency, competition, securities and other laws and
regulations in Bulgaria and other countries in Central Europe have been, and continue to be,
substantially revised during the completion of their transition to the European Union. Therefore,
the interpretation and procedural safeguards of the new legal and regulatory systems are in the
process of being developed and defined, and existing laws and regulations may be applied
inconsistently. Also, in some circumstances, it may not be possible to obtain the legal remedies
provided for under these laws and regulations in a reasonably timely manner, if at all.
Transmittal of data by electronic means and telecommunications is subject to specific regulation in
most Central European countries. Although these regulations have not had a material impact on our
business to date, changes in these regulations, including taxation or limitations on transfers of
data across national borders, could have a material adverse effect on our business, growth,
financial condition or results of operations.
We conduct business in many international markets with complex and evolving tax rules, including
value added tax rules, which subjects us to international tax compliance risks.
While we obtain advice from legal and tax advisors as necessary to help assure compliance with tax
and regulatory matters, most tax jurisdictions that we operate in have complex and subjective rules
regarding the valuation of intercompany services, cross-border payments between affiliated
companies and the related effects on income tax, value-added tax (“VAT”), transfer tax and share
registration tax. Our foreign subsidiaries frequently undergo VAT reviews, and from time to time
undergo comprehensive tax reviews and may be required to make additional tax payments should the
review result in different interpretations, allocations or valuations of our services.
As allowable under the Internal Revenue Code (the “Code”), the interest deduction from our
convertible debentures are based on a comparable interest rate for a traditional, nonconvertible,
fixed rate debt instrument with similar terms. This allowable deduction is in excess of the stated
interest rate. This deduction may be deferred, limited or eliminated under certain conditions.
The U.S Treasury regulations contain an anti-abuse regulation, set forth in Section 1.1275-2(g),
that grants the Commissioner of the Internal Revenue Service authority to depart from the
regulations if a result is achieved which is unreasonable in light of the original issue discount
provisions of the Code, including Section 163(e). The anti-abuse regulation further provides that
the Commissioner may, under this authority, treat a contingent payment feature of a debt instrument
as if it were a separate position. If such an analysis were applied to our convertible debentures
and ultimately sustained, our deductions attributable to the convertible debentures could be
limited to the stated interest thereon. The scope of application of the anti-abuse regulations is
unclear. However, we are of the view that application of the contingent payment debt instrument
regulations to our convertible debentures is a reasonable result such that the anti-abuse
regulation should not apply. If a contrary position were asserted and ultimately sustained, our tax
deductions would be severely diminished with a resulting adverse effect on our cash flow and
ability to service the convertible debentures.
Under the Code, no deduction is allowed for interest expense in excess of $5 million on convertible
subordinated indebtedness incurred to acquire stock or assets of another corporation reduced by any
interest paid on other obligations which have provided consideration for an acquisition of stock in
another corporation. If a significant portion of the proceeds from the issuance of the convertible
debentures, either alone or together with other debt proceeds, were used for a domestic acquisition
and the convertible debentures and other debt, if any, were deemed to be corporate acquisition
indebtedness as defined in Section 279, interest deductions for tax purposes in excess of $5
million on such debt reduced by any interest paid on other obligations which have provided
consideration for an acquisition of stock in another corporation would be disallowed. This would
adversely impact our cash flow and our ability to pay down the convertible debentures. We
previously applied a significant portion of the proceeds from our December 2004 issuance of 1.625%
Convertible Senior Debentures Due 2024 to acquisitions of foreign corporations. The interest
expense attributable to these acquisitions exhausted all of the $5 million annual interest expense
deduction permitted under the Code for certain convertible subordinated debt incurred for
corporation acquisitions. Accordingly, if this limitation were to apply, no interest deductions
would be allowed with respect to our October 2005 3.5% Convertible Debentures Due 2025. However, if
the comparable interest deduction were eliminated our future payment of U.S. Federal and state
income taxes, if any, could be accelerated.
In the past, the U.S. Senate has drafted proposed tax relief legislation that contained a provision
that would eliminate the comparable interest rate deduction on future issuances of convertible
debentures such as ours. Legislation containing this provision has not been
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passed, however, we
cannot predict if there will be future tax legislation proposed and approved that would eliminate
the comparable interest rate deduction.
Because we are an international company conducting a complex business in many markets worldwide, we
are subject to legal and operational risks related to staffing and management, as well as a broad
array of local legal and regulatory requirements.
Operating outside of the U.S. creates difficulties associated with staffing and managing our
international operations, as well as complying with local legal and regulatory requirements.
Because we operate financial transaction processing networks that offer new products and services
to customers, the laws and regulations in the markets in which operate are subject to rapid change.
Although we have local staff in countries in which we deem it appropriate, we cannot assure you
that we will continue to be found to be operating
in compliance with all applicable customs, currency exchange control regulations, data protection,
transfer pricing regulations or any other laws or regulations to which we may be subject. We also
cannot assure you that these laws will not be modified in ways that may adversely affect our
business.
Because we derive our revenues from a multitude of countries with different currencies, our
business is affected by local inflation and foreign currency exchange rates and policies.
We attempt to match any assets denominated in a currency with liabilities denominated in the same
currency. However, the majority of our debt obligations are denominated in U.S. dollars, while a
significant amount of our cash outflows, including the acquisition of ATMs, executive salaries,
certain long-term contracts and a significant portion of our debt obligations, are made in U.S.
dollars, most of our revenues are denominated in other currencies. As exchange rates among the U.S.
dollar, the euro, and other currencies fluctuate, the translation effect of these fluctuations may
have a material adverse effect on our results of operations or financial condition as reported in
U.S. dollars. Moreover, exchange rate policies have not always allowed for the free conversion of
currencies at the market rate. Future fluctuations in the value of the U.S. dollar could have an
adverse effect on our results.
Our Money Transfer Segment is subject to foreign currency exchange risks because our customers
deposit funds in one currency at our retail and agent locations worldwide and we typically deliver
funds denominated in a different, destination country currency. Although we use foreign currency
forward contracts to mitigate a portion of this risk, we cannot eliminate all of the exposure to
the impact of changes in foreign currency exchange rates for the period between collection and
disbursement of the money transfers.
We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate
our stockholders’ ability to sell their shares for a premium in a change of control transaction.
Various provisions of our certificate of incorporation and bylaws and of Delaware corporate law may
discourage, delay or prevent a change in control or takeover attempt of our company by a third
party that is opposed to by our management and board of directors. Public stockholders who might
desire to participate in such a transaction may not have the opportunity to do so. These
anti-takeover provisions could substantially impede the ability of public stockholders to benefit
from a change of control or change in our management and board of directors. These provisions
include:
| • | preferred stock that could be issued by our board of directors to make it more difficult for a third party to acquire, or to discourage a third party from acquiring, a majority of our outstanding voting stock; | ||
| • | classification of our directors into three classes with respect to the time for which they hold office; | ||
| • | supermajority voting requirements to amend the provision in our certificate of incorporation providing for the classification of our directors into three such classes; | ||
| • | non-cumulative voting for directors; | ||
| • | control by our board of directors of the size of our board of directors; | ||
| • | limitations on the ability of stockholders to call special meetings of stockholders; and | ||
| • | advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings. |
We have also approved a stockholders’ rights agreement (the ‘‘Rights Agreement’’) between Euronet
and EquiServe Trust Company, N.A., (subsequently renamed Computershare Limited) as Rights Agent.
Pursuant to the Rights Agreement, holders of our common stock are entitled to purchase one
one-thousandth (1/1,000) of a share (a ‘‘Unit’’) of Junior Preferred Stock at a price of $57.00 per
Unit upon certain events. The purchase price is subject to appropriate adjustment for stock splits
and other similar events. Generally, in the event a person or entity acquires, or initiates a
tender offer to acquire, at least 15% of Euronet’s then outstanding common stock, the Rights will
become exercisable for common stock having a value equal to two times the exercise price of the
Right, or effectively
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at one-half of Euronet’s then-current stock price. The existence of the
Rights Plan may discourage, delay or prevent a change of control or takeover attempt of our company
by a third party that is opposed to by our management and board of directors.
Our directors and officers, together with the entities with which they are associated, owned
approximately 10% of our Common Stock as of December 31, 2008, giving them significant control over
decisions related to our Company.
This control includes the ability to influence the election of other directors of our Company and
to cast a large block of votes with respect to virtually all matters submitted to a vote of our
stockholders. This concentration of control may have the effect of delaying or preventing
transactions or a potential change of control of our Company.
We are authorized to issue up to a total of 90 million shares of Common Stock, potentially diluting
equity ownership of current holders and the share price of our Common Stock.
We believe that it is necessary to maintain a sufficient number of available authorized shares of
our Common Stock in order to provide us with the flexibility to issue Common Stock for business
purposes that may arise as deemed advisable by our Board. These purposes could include, among other
things, (i) to declare future stock dividends or stock splits, which may increase the liquidity of
our shares; (ii) the sale of stock to obtain additional capital or to acquire other companies or
businesses, which could enhance our growth strategy or allow us to reduce debt if needed; (iii) for
use in additional stock incentive programs and (iv) for other bona fide purposes. Our Board of
Directors may issue the available authorized shares of Common Stock without notice to, or further
action by, our stockholders, unless stockholder approval is required by law or the rules of the
NASDAQ Stock Market. The issuance of additional shares of Common Stock may significantly dilute the
equity ownership of the current holders of our Common Stock. Further, over the course of time, all
of the issued shares have the potential to be publicly traded, perhaps in large blocks. This may
result in dilution of the market price of the Common Stock.
An additional 11.6 million shares of Common Stock, representing 23% of the shares outstanding as of
December 31, 2008, could be added to our total Common Stock outstanding through the exercise of
options or the issuance of additional shares of our Common Stock pursuant to existing convertible
debt and other agreements. Once issued, these shares of Common Stock could be traded into the
market and result in a decrease in the market price of our Common Stock.
As of December 31, 2008, we had an aggregate of 5.0 million options and restricted stock awards
outstanding held by our directors, officers and employees, which entitles these holders to acquire
an equal number of shares of our Common Stock upon exercise. Of this amount, 1.4 million options
are vested and exercisable as of December 31, 2008. Approximately 0.2 million additional shares of
our Common Stock may be issued in connection with our employee stock purchase plan. Another 6.4
million shares of Common Stock could be issued upon conversion of the Company’s Convertible
Debentures issued in December 2004 and October 2005.
Accordingly, based on current trading prices of our Common Stock, approximately 11.6 million shares
could potentially be added to our total current Common Stock outstanding through the exercise of
options or the issuance of additional shares, which could adversely impact the trading price for
our stock. The actual number of shares issuable could be higher depending upon our stock price at
the time of payment (i.e., more shares could be issuable if our share price declines).
Of the 5.0 million total options and restricted stock awards outstanding, an aggregate of 2.4
million options and restricted shares are held by persons who may be deemed to be our affiliates
and who would be subject to Rule 144. Thus, upon exercise of their options or sale of shares for
which restrictions have lapsed, these affiliates’ shares would be subject to the trading
restrictions imposed by Rule 144. The remainder of the common shares issuable under option and
restricted stock arrangements would be freely tradable in the public market. Over the course of
time, all of the issued shares have the potential to be publicly traded, perhaps in large blocks.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our executive offices are located in Leawood, Kansas. As of December 31, 2008, we also maintain
principal operational offices in Little Rock, Arkansas: Leawood, Kansas; Cerritos, California; San
Juan, Puerto Rico; Budapest, Hungary; Warsaw, Poland; Zagreb, Croatia; Prague, Czech Republic;
Berlin and Martinsried, Germany; Bucharest, Romania; Bratislava, Slovakia; Athens, Greece; Madrid,
Spain; Belgrade, Serbia; Sofia, Bulgaria; Basildon and London, U.K.; Kiev, Ukraine; Rome and Milan,
Italy; Paris, France; Geneva, Switzerland; Stockholm, Sweden; Brussels, Belgium; Dublin, Ireland;
Cairo, Egypt; Mumbai, India; Sydney and Liverpool, Australia; Auckland, New Zealand; Beijing,
China; Antiguo Cuscatlan, El Salvador; and Mexico City, Mexico. Our office leases generally provide
for initial terms ranging from two to twelve years.
Our processing centers for the EFT Processing Segment are located in Budapest, Hungary; Belgrade,
Serbia; Beijing, China; and Mumbai, India. Our processing centers for the Prepaid Processing
Segment are located in Basildon, U.K.; Martinsried, Germany; Madrid, Spain; and Leawood, Kansas.
Our processing center for the Money Transfer Segment is located in Cerritos, California.
Our processing centers in Budapest, Belgrade, Beijing, Mumbai, Basildon, Martinsried, Leawood and
Cerritos have off-site real time backup processing centers that are capable of providing full or
partial processing capability in the event of failure of the primary processing centers. Our
processing center in Madrid does not have an off-site backup processing center; however, it is
migrating its transaction processing to the Martinsried processing center in 2009 where there is an
off-site real time backup processing center.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the ordinary course of its
business.
The
discussion in Part II, Item 8 – Financial Statements
and Supplementary Data and Note 22,
Litigation and Contingencies, to the Consolidated Financial Statements included elsewhere in this
report, regarding litigation is incorporated herein by reference.
Currently, there are no other legal proceedings that management believes, either individually or in
the aggregate, would have a material adverse effect upon the consolidated results of operations or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter ended December 31, 2008 to a vote of
security holders, through the solicitation of proxies or otherwise.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MARKET INFORMATION
Our common stock, $0.02 par value per share (“Common Stock”), is quoted on the NASDAQ Global Select
Market under the symbol EEFT. The following table sets forth the high and low daily sales prices
during the quarter for our Common Stock for the quarters ended:
| 2008 | 2007 | |||||||||||||||
| For the quarters ended | High | Low | High | Low | ||||||||||||
December 31 |
$ | 16.68 | $ | 6.87 | $ | 33.25 | $ | 26.83 | ||||||||
September 30 |
$ | 20.36 | $ | 15.36 | $ | 31.00 | $ | 24.64 | ||||||||
June 30 |
$ | 20.14 | $ | 16.28 | $ | 30.55 | $ | 25.64 | ||||||||
March 31 |
$ | 30.57 | $ | 19.07 | $ | 30.57 | $ | 25.08 | ||||||||
DIVIDENDS
Since our inception, no dividends have been paid on our Common Stock or Preferred Stock. We do not
intend to distribute dividends for the foreseeable future. Certain of our credit facilities contain
restrictions on the payment of dividends without lender consent.
HOLDERS
At December 31, 2008, we had 88 stockholders of record of our Common Stock and none of our
Preferred Stock.
PRIVATE PLACEMENTS AND ISSUANCES OF EQUITY
During 2008, we did not issue any equity securities that were not registered under the Securities
Act of 1933, which have not been previously reported in a Quarterly Report on Form 10-Q or a
Current Report on Form 8-K.
STOCK PERFORMANCE GRAPH
Set forth below is a graph comparing the total cumulative return on the Common Stock from December
31, 2003 through December 31, 2008 with the Total
Returns Index for U.S. companies traded on the NASDAQ Global Select Market (the “Market Group”) and
an index group of peer companies, the Total Returns Index for U.S. NASDAQ Financial Stocks
(the “Peer Group”). The companies in each of the Market Group and the Peer Group were weighted by
market capitalization. Returns are based on monthly changes in price and assume reinvested
dividends. These calculations assume the value of an investment in the Common Stock, the Market
Group and the Peer Group was $100 on December 31, 2003. Our Common Stock is traded on the NASDAQ
Global Select Market under the symbol EEFT.
The following performance graph and related text are being furnished to and not filed with the SEC,
and will not be deemed to be “soliciting material” or subject to Regulation 14A or 14C under the
Exchange Act or to the liabilities of Section 18 of the Exchange Act and will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act,
except to the extent we specifically incorporate such information by reference into such filing.
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Comparison
of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2008
Assumes Initial Investment of $100
December 2008
NOTE: Calculated (or Derived) based from CRSP NASDAQ Stock Market, Center for Research in Security
Prices (CRSP®), Booth School of Business, The University of Chicago. Used with permission. All
rights reserved. Graph copyright 2008 Zacks Investment Research, Inc.
EQUITY COMPENSATION PLAN INFORMATION
The table below sets forth information with respect to shares of Common Stock that may be issued
under our equity compensation plans as of December 31, 2008.
| Number of | ||||||||||||
| securities | ||||||||||||
| remaining | ||||||||||||
| available for | ||||||||||||
| future issuance | ||||||||||||
| Number of | under equity | |||||||||||
| securities to be | compensation | |||||||||||
| issued upon | Weighted average | plans (excluding | ||||||||||
| exercise of | exercise price of | securities | ||||||||||
| outstanding | outstanding | reflected in | ||||||||||
| options and rights | options and rights | column (a)) | ||||||||||
| Plan category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders: |
966,652 | |||||||||||
Stock option awards |
3,383,194 | $ | 11.71 | |||||||||
Restricted share unit awards |
1,536,274 | — | ||||||||||
Equity compensation plans not approved by security holders |
— | — | — | |||||||||
Total |
4,919,468 | 8.05 | 966,652 | |||||||||
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ITEM 6. SELECTED FINANCIAL DATA
The summary consolidated financial data set forth below has been derived from, and is qualified by
reference to, our audited Consolidated Financial Statements and the notes thereto, prepared in
conformity with accounting principles generally accepted in the United States (“U.S. GAAP”), which
have been audited by KPMG LLP, and should not be relied upon as an indication of future
performance. We believe that the period-to-period comparisons of our financial results are not
necessarily meaningful due to certain significant transactions, including numerous acquisitions
(See Note 6, Acquisitions, to the Consolidated Financial Statements). The following information
should be read in conjunction with Item 7 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
| Year Ended December 31, | ||||||||||||||||||||
| (dollar amounts in thousands, except as noted) | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
Consolidated
statements of operations data: |
||||||||||||||||||||
Revenues |
$ | 1,045,665 | $ | 902,666 | $ | 615,376 | $ | 531,159 | $ | 381,080 | ||||||||||
Operating
expenses (1) |
1,138,435 | 779,435 | 536,014 | 461,007 | 335,550 | |||||||||||||||
Depreciation and amortization |
56,251 | 46,997 | 28,590 | 22,800 | 16,216 | |||||||||||||||
Operating
income (loss)(1) |
(149,021 | ) | 76,234 | 50,772 | 47,352 | 29,314 | ||||||||||||||
Other income (expenses) |
$ | (36,962 | ) | 5,194 | 9,212 | (10,080 | ) | (5,646 | ) | |||||||||||
Income from unconsolidated affiliates |
1,250 | 908 | 660 | 1,185 | 345 | |||||||||||||||
Income (loss) from continuing operations
before income taxes and minority interest |
(184,733 | ) | 82,336 | 60,644 | 38,457 | 24,013 | ||||||||||||||
Income tax expense |
(10,228 | ) | (27,759 | ) | (14,294 | ) | (14,843 | ) | (11,389 | ) | ||||||||||
Minority interest |
935 | (2,040 | ) | (977 | ) | (916 | ) | (58 | ) | |||||||||||
Income (loss) from continuing operations |
$ | (194,026 | ) | $ | 52,537 | $ | 45,373 | $ | 22,698 | $ | 12,566 | |||||||||
Earnings (loss) per share from continuing operations: |
||||||||||||||||||||
Basic |
$ | (3.95 | ) | $ | 1.16 | $ | 1.22 | $ | 0.65 | $ | 0.40 | |||||||||
Diluted |
$ | (3.95 | ) | $ | 1.09 | $ | 1.14 | $ | 0.62 | $ | 0.38 | |||||||||
Consolidated balance sheet data: |
||||||||||||||||||||
Assets |
$ | 1,440,124 | $ | 1,886,156 | $ | 1,129,640 | $ | 898,692 | $ | 642,315 | ||||||||||
Debt obligations, long-term portion |
321,909 | 539,303 | 349,073 | 315,000 | 140,000 | |||||||||||||||
Capital lease obligations, long-term portion |
6,356 | 11,520 | 13,409 | 12,229 | 16,894 | |||||||||||||||
Summary network data (unaudited): |
||||||||||||||||||||
Number of operational ATMs at end of period |
10,128 | 11,347 | 8,885 | 7,211 | 5,742 | |||||||||||||||
EFT processing transactions during the period (millions) |
704.2 | 603.8 | 463.6 | 361.5 | 232.5 | |||||||||||||||
Number of operational prepaid processing POS terminals
at end of period (rounded) |
430,000 | 396,000 | 296,000 | 237,000 | 175,000 | |||||||||||||||
Prepaid processing transactions during the period (millions) |
713.1 | 634.8 | 457.8 | 348.0 | 228.6 | |||||||||||||||
Money transfer transactions during the period (millions) |
16.7 | 12.0 | 0.3 | 0.1 | — | |||||||||||||||
(1) The
results for 2008 include a $220.1 million non-cash charge related to
goodwill and acquired intangible assets. The results for 2007 include
a benefit of $12.2 million for a federal excise tax refund.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW, GEOGRAPHIC LOCATIONS AND PRINCIPAL PRODUCTS AND SERVICES
Euronet Worldwide, Inc. (together with our subsidiaries, “we,” “us,” “Euronet” or the “Company”) is
a leading electronic payments provider, offering automated teller machine (“ATM”), point-of-sale
(“POS”) and card outsourcing services, card issuing and merchant acquiring services, integrated
electronic financial transaction (“EFT”) software, network gateways, electronic distribution of
top-up services for prepaid mobile airtime and other prepaid products, electronic consumer money
transfer and bill payment services to financial institutions, mobile operators, retailers and
individual customers. As of December 31, 2008, we operate in the following three principal business
segments:
| • | An EFT Processing Segment, which processes transactions for a network of 10,128 ATMs and approximately 54,000 POS terminals across Europe, the Middle East and Asia Pacific. We provide comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing and electronic recharge services for prepaid mobile airtime. Through this segment, we also offer a suite of integrated EFT software solutions for electronic payment and transaction delivery systems. | ||
| • | A Prepaid Processing Segment, which provides electronic distribution of prepaid mobile airtime and other prepaid products and collection services for various prepaid products, cards and services. Including terminals operated by unconsolidated subsidiaries, we operate a network of approximately 430,000 POS terminals providing electronic processing of prepaid mobile airtime top-up services in Europe, the Middle East, Asia Pacific and North America. | ||
| • | A Money Transfer Segment, which provides global consumer-to-consumer money transfer services through a sending network of agents and Company-owned stores primarily in North America and Europe, disbursing money transfers through a worldwide payer network. The Money Transfer Segment originates and terminates transactions through a network of approximately 75,800 locations, which include sending agents and Company-owned stores, and an extensive payer network in more than 100 countries. |
We have five processing centers in Europe, two in Asia Pacific and two in North America. We have 23
principal offices in Europe, one in the Middle East, five in Asia Pacific, and six in North
America. Our executive offices are located in Leawood, Kansas, USA. With approximately 76% of our
revenues denominated in currencies other than the U.S. dollar, any significant changes in currency
exchange rates will likely have a significant impact on our growth in revenues, operating income
and diluted earnings per share (for more discussion, see Item 1A – Risk Factors and Item 7A –
Quantitative and Qualitative Disclosure About Market Risk).
SOURCES OF REVENUES AND CASH FLOW
Euronet earns revenues and income based on ATM management fees, transaction fees and commissions,
professional services, software licensing fees and software maintenance agreements. Each business
segment’s sources of revenue are described below.
EFT Processing Segment – Revenue in the EFT Processing Segment, which represented approximately 20%
of total consolidated revenue for the year ended December 31, 2008, is derived from fees charged
for transactions effected by cardholders on our proprietary network of ATMs, as well as fixed
management fees and transaction fees we charge to banks for operating ATMs and processing credit
cards under outsourcing agreements. Through our proprietary network, we generally charge fees for
four types of ATM transactions: i) cash withdrawals, ii) balance inquiries, iii) transactions not
completed because the relevant card issuer does not give authorization, and iv) prepaid
telecommunication recharges. Revenue in this segment is also derived from license fees,
professional services and maintenance fees for software and sales of related hardware. Software
license fees are the fees we charge to license our proprietary application software to customers.
Professional service fees consist of charges for customization, installation and consulting
services to customers. Software maintenance revenue represents the ongoing fees charged for
maintenance and support for customers’ software products. Hardware sales are derived from the sale
of computer equipment necessary for the respective software solution.
Prepaid Processing Segment – Revenue in the Prepaid Processing Segment, which represented
approximately 58% of total consolidated revenue for the year ended December 31, 2008, is primarily
derived from commissions or processing fees received from telecommunications service providers for
the sale and distribution of prepaid mobile airtime. We also generate revenue from commissions
earned from the distribution of other prepaid products. Due to certain provisions in our mobile
phone operator agreements, the operators have the ability to reduce the overall commission paid on
each top-up transaction. However, by virtue of our agreements with retailers (distributors where
POS terminals are located) in certain markets, not all of these reductions are absorbed by us
because we are able to pass a significant portion of the reductions to retailers. Accordingly,
under certain retailer agreements, the effect is to reduce revenues and reduce our direct operating
costs resulting in only a small impact on gross margin and operating income. In some markets,
reductions in commissions can significantly impact our results as it may not be possible, either
contractually or commercially in the concerned market, to pass a reduction in commissions to the
retailers. In Australia, certain retailers negotiate
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directly with the mobile phone operators for their own commission rates, which also limits our
ability to pass through reductions in commissions. Agreements with mobile operators are important
to the success of our business. These agreements permit us to distribute prepaid mobile airtime to
the mobile operators’ customers. Other products offered by this segment include prepaid long
distance calling card plans, prepaid Internet plans, prepaid debit
cards, prepaid gift cards, bill payment, money transfer and
prepaid mobile content such as music, ringtones and games.
Money Transfer Segment – Revenue in the Money Transfer Segment, which represents approximately 22%
of total consolidated revenue for the year ended December 31, 2008, is primarily derived through
the charging of a transaction fee, as well as the difference between purchasing foreign currency at
wholesale exchange rates and selling the foreign currency to consumers at retail exchange rates. We
have an origination network in place comprised of agents and Company-owned stores primarily in
North America and Europe and a worldwide network of distribution agents, consisting primarily of
financial institutions in the transfer destination countries. Origination and distribution agents
each earn fees for cash collection and distribution services. These fees are recognized as direct
operating costs at the time of sale.
OPPORTUNITIES AND CHALLENGES
Our expansion plans and opportunities are focused on five primary areas:
| • | signing new outsourced ATM and POS terminal management contracts; | ||
| • | increasing transactions processed on our network of owned and operated ATMs; | ||
| • | expansion of our prepaid mobile airtime top-up processing network; | ||
| • | expansion of our money transfer and bill payment network; and | ||
| • | development of our credit and debit card outsourcing business. |
EFT Processing Segment - The continued expansion and development of our EFT Processing Segment
business will depend on various factors including, but not necessarily limited to, the following:
| • | the impact of competition by banks and other ATM operators and service providers in our current target markets; | ||
| • | the demand for our ATM outsourcing services in our current target markets; | ||
| • | the ability to develop products or services to drive increases in transactions; | ||
| • | the expansion of our various business lines in markets where we operate and in new markets; | ||
| • | the entrance into additional card acceptance and ATM management agreements with banks; | ||
| • | the ability to obtain required licenses in markets we intend to enter or expand services; | ||
| • | the availability of financing for expansion; | ||
| • | the ability to efficiently install ATMs contracted under newly awarded outsourcing agreements; | ||
| • | the ability to renew existing contracts at profitable rates; | ||
| • | the ability to expand and sign additional customers for the cross-border merchant processing and acquiring business; and | ||
| • | the continued development and implementation of our software products and their ability to interact with other leading products. |
We consistently evaluate and add prospects to our list of potential ATM outsource customers.
However, we cannot predict the increase or decrease in the number of ATMs we manage under
outsourcing agreements because this depends largely on the willingness of banks to enter into
outsourcing contracts with us. Due to the thorough internal reviews and extensive negotiations
conducted by existing and prospective banking customers in choosing outsource vendors, the process
of entering into or renewing outsourcing agreements can take approximately six to twelve months or
longer. The process is further complicated by the legal and regulatory considerations of local
countries. These agreements tend to cover large numbers of ATMs, so significant increases and
decreases in our pool of managed ATMs could result from acquisition or termination of these
management contracts. Therefore, the timing of both current and new contract revenues is uncertain
and unpredictable.
Software products are an integral part of our product lines, and our investment in research,
development, delivery and customer support reflects our ongoing commitment to an expanded customer
base. We have been able to enter into agreements under which we contribute the right to use our
software in lieu of cash as our initial capital contributions to new transaction processing joint
ventures. Such contributions sometimes permit us to enter new markets without significant capital
investment.
We have entered the cross-border merchant processing and acquiring business through the execution
of an agreement with a large petrol retailer in Central Europe. Since the beginning of 2007, we
have devoted significant resources to the development of the necessary processing systems and
capabilities to enter this business, which involves the purchase and design of hardware and
software. Merchant acquiring involves processing credit and debit card transactions that are made
on POS terminals, including authorization, settlement, and processing of settlement files. It
generally involves the assumption of credit risk, as the principal amount of transactions is
usually settled to merchants before settlements are received from card associations.
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Prepaid Processing Segment – The continued expansion and development of the Prepaid Processing
Segment business will depend on various factors, including, but not necessarily limited to, the
following:
| • | the ability to negotiate new agreements in additional markets with mobile phone operators, agent financial institutions and retailers; | ||
| • | the ability to use existing expertise and relationships with mobile operators and retailers to our advantage; | ||
| • | the continuation of the trend towards conversion from scratch card solutions to electronic processing solutions for prepaid mobile airtime among mobile phone users, and the continued use of third-party providers such as ourselves to supply this service; | ||
| • | the development of mobile phone networks in the markets in which we do business and the increase in the number of mobile phone users; | ||
| • | the overall pace of growth in the prepaid mobile phone market; | ||
| • | our market share of the retail distribution capacity; | ||
| • | the level of commission that is paid to the various intermediaries in the prepaid mobile airtime distribution chain; | ||
| • | our ability to add new and differentiated prepaid products in addition to those offered by mobile operators; | ||
| • | the ability to take advantage of cross-selling opportunities with our Money Transfer Segment, including providing money transfer services through our prepaid locations; and | ||
| • | the availability of financing for further expansion. |
In mature markets, such as the U.K., New Zealand and Spain, the conversion from scratch cards to
electronic forms of distribution is either complete or nearing completion. Because of this factor,
we are not likely to experience 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. In Australia,
our main competitor ceased business during 2008, allowing us to strengthen our position in this key
market.
Money Transfer Segment – The expansion and development of our money transfer business will depend
on various factors, including, but not necessarily limited to, the following:
| • | the continued growth in worker migration and employment opportunities; | ||
| • | the mitigation of economic and political factors that have had an adverse impact on money transfer volumes, such as changes in the economic sectors in which immigrants work and the developments in immigration policies in the U.S.; | ||
| • | the continuation of the trend of increased use of electronic money transfer and bill payment services among immigrant workers and the unbanked population in our markets; | ||
| • | the ability to maintain our agent and correspondent networks; | ||
| • | the ability to offer our products and services or develop new products and services at competitive prices to drive increases in transactions; | ||
| • | the expansion of our services in markets where we operate and in new markets; | ||
| • | the ability to strengthen our brands; | ||
| • | our ability to fund working capital requirements; | ||
| • | our ability to maintain compliance with the regulatory requirements of the jurisdictions in which we operate or plan to operate; | ||
| • | the ability to take advantage of cross-selling opportunities with the Prepaid Processing Segment, including providing prepaid services through RIA’s stores and agents worldwide; | ||
| • | the ability to leverage our banking and merchant/retailer relationships to expand money transfer corridors to Europe and Asia, including high growth corridors to Central and Eastern European countries; | ||
| • | the availability of financing for further expansion; and | ||
| • | our ability to continue to successfully integrate RIA with our other operations. |
Like other participants in the money transfer industry, as a result of immigration developments,
downturns in certain labor markets and the current economic crisis, the number of money transfers
from the U.S. to Mexico decreased in 2008 compared to 2007. We cannot predict how long these issues
will continue to affect the U.S. market or whether other markets will experience similar issues.
Corporate Services, Eliminations and Other – In addition to operating in our principal business
segments described above, our “Corporate Services, Elimination and Other” division includes
non-operating activity, certain inter-segment eliminations and the cost of providing corporate and
other administrative services to the business segments, including share-based compensation expense
related to most stock option and restricted stock grants. These services are not directly
identifiable with our business segments.
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The accounting policies of each segment are the same as those referenced in the summary of
significant accounting policies (see Note 3, Summary of Significant Accounting Policies and
Practices, to the Consolidated Financial Statements). We evaluate performance of our segments based
on income or loss from continuing operations before income taxes, foreign currency exchange gain
(loss), minority interest and other nonrecurring gains and losses.
For all segments, our continued expansion may involve additional acquisitions that could divert our
resources and management time and require integration of new assets with our existing networks and
services. Our ability to effectively manage our rapid growth has required us to expand our
operating systems and employee base, particularly at the management level, which has added
incremental operating costs. An inability to continue to effectively manage expansion could have a
material adverse effect on our business, growth, financial condition or results of operations.
Inadequate technology and resources would impair our ability to maintain current processing
technology and efficiencies, as well as deliver new and innovative services to compete in the
marketplace.
SEGMENT REVENUES AND OPERATING INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
| Revenues | Operating Income (Loss) | |||||||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||
EFT Processing |
$ | 205,257 | $ | 174,049 | $ | 144,515 | $ | 38,306 | $ | 36,147 | $ | 34,278 | ||||||||||||
Prepaid Processing |
609,106 | 569,858 | 467,651 | (4,659 | ) | 52,813 | 37,622 | |||||||||||||||||
Money Transfer |
231,302 | 158,759 | 3,210 | (157,150 | ) | 7,130 | (3,295 | ) | ||||||||||||||||
Total |
1,045,665 | 902,666 | 615,376 | (123,503 | ) | 96,090 | 68,605 | |||||||||||||||||
Corporate services |
— | — | — | (25,518 | ) | (19,856 | ) | (17,833 | ) | |||||||||||||||
Total |
$ | 1,045,665 | $ | 902,666 | $ | 615,376 | $ | (149,021 | ) | $ | 76,234 | $ | 50,772 | |||||||||||
SUMMARY
Our annual consolidated revenues increased by 16% for 2008 over 2007, and 47% for 2007 over 2006.
These increases reflect acquisitions, primarily RIA in April 2007, as well as growth in our
business resulting from increases in the average number of ATMs managed and transactions processed.
For further discussion regarding acquisitions, see Note 6, Acquisitions, to the Consolidated
Financial Statements.
Our operating income for 2008 includes a non-cash goodwill and intangible asset impairment charge
of $220.1 million as discussed in Note 10, Goodwill and Acquired Intangible Assets, Net, to the
Consolidated Financial Statements. The results for 2007 include an increase in operating income of
$12.2 million for a federal excise tax refund discussed in Note 23, Federal Excise Tax Refund, to
the Consolidated Financial Statements. Excluding the goodwill and intangible assets impairment
charge in 2008 and the federal excise tax refund in 2007, our operating income increased 11% for
2008 over 2007 and 26% for 2007 over 2006. These increases were primarily the result of growth
in transaction volumes and related revenues.
Net loss for 2008 was $195.1 million, or $3.97 per diluted share, compared to net income for 2007
of $53.5 million, or $1.11 per diluted share, and net income of $46.0 million, or $1.16 per diluted
share for 2006. In addition to the explanations above, net loss for 2008 included an $18.8 million
impairment loss on investment securities and a foreign currency exchange translation loss of $9.8
million, while net income for 2007 and 2006 included foreign currency exchange translation gains of
$15.5 million and $10.3 million, respectively. Net loss for 2008 includes a loss from discontinued
operations of $1.1 million, or $0.02 per diluted share while net income for 2007 and 2006 include
gains from discontinued operations of $1.0 million and
$0.6 million, respectively, or $0.02 per
diluted share for each year.
Impact of changes in foreign currency exchange rates
Beginning in 2006 and through mid-2008, the U.S. dollar weakened compared to most of the currencies
of the countries in which we operate. In the second half of 2008, the U.S. dollar strengthened significantly. Despite the recent strengthening, the U.S.
dollar was, on average, weaker in 2008 than in 2007. Because our revenues and local expenses are
recorded in the functional currencies of our operating entities, amounts we earned for 2008 and
2007 are positively impacted by the weakening of the U.S. dollar. We estimate that, depending on
the mix of countries and currencies, our 2008 and 2007 operating income benefited by approximately
5% to 10% when compared to 2007 and 2006, respectively. While the benefit of the weakened U.S.
dollar generally contributed to improvements in each segment in 2007, the benefit for 2008 was
mainly concentrated in the EFT Processing Segment, largely due to the impact of the changes in exchange
rates of the Polish zloty.
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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 – BY BUSINESS
SEGMENT
EFT PROCESSING SEGMENT
2008 Compared to 2007
The following table summarizes the results of operations for the EFT Processing Segment for the
years ended December 31, 2008 and 2007:
| Year Ended December 31, | Year-over-Year Change | |||||||||||||||
| Increase | Increase | |||||||||||||||
| (Decrease) | (Decrease) | |||||||||||||||
| (dollar amounts in thousands) | 2008 | 2007 | Amount | Percent | ||||||||||||
Total revenues |
$ | 205,257 | $ | 174,049 | $ | 31,208 | 18 | % | ||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
93,414 | 74,879 | 18,535 | 25 | % | |||||||||||
Salaries and benefits |
34,944 | 31,874 | 3,070 | 10 | % | |||||||||||
Selling, general and administrative |
19,398 | 14,952 | 4,446 | 30 | % | |||||||||||
Depreciation and amortization |
19,195 | 16,197 | 2,998 | 19 | % | |||||||||||
Total operating expenses |
166,951 | 137,902 | 29,049 | 21 | % | |||||||||||
Operating income |
$ | 38,306 | $ | 36,147 | $ | 2,159 | 6 | % | ||||||||
Transactions processed (millions) |
704.2 | 603.8 | 100.4 | 17 | % | |||||||||||
ATMs as of December 31 |
10,128 | 11,347 | (1,219 | ) | (11 | %) | ||||||||||
Average ATMs |
10,554 | 10,025 | 529 | 5 | % | |||||||||||
Discontinued operations
During 2008, we decided to sell Euronet Essentis Limited (“Essentis”), a U.K. software entity
previously included in the EFT Processing Segment, in order to focus our investments
and resources on our transactions processing businesses. We are in
the process of selling the business.
Accordingly, the results of operations for Essentis are shown as discontinued operations in the
Consolidated Statements of Operations for all periods presented and have been removed from the
table above.
Revenues
Our revenue for 2008 increased when compared to 2007 primarily due to increases in the average
number of ATMs operated and the number of transactions processed. These increases were attributable
to many of our operations, but primarily our operations in Poland, India and Euronet Card Services
Greece. Additionally, during 2008 the U.S. dollar was weaker on average than during 2007 relative
to the currencies of most of the countries in which we operate. Because our revenues are recorded
in the functional currencies of our operating entities, amounts we earn in foreign currencies are
positively impacted by the weakening of the U.S. dollar. Partly offsetting these improvements were
decreases in revenue associated with our operations in Romania due to a decrease in the per
transaction fee structure with a customer that was granted in exchange for an extension of the
contract term and the expiration of an ATM services contract discussed in more detail in the
following paragraph.
Average monthly revenue per ATM was $1,621 for 2008, compared to $1,447 for 2007 and revenue per
transaction was $0.29 for both 2008 and 2007. The increase in revenues per ATM is generally the
result of the expiration of an ATM services contract in the U.K. at the end of the first quarter
2008 that involved processing services only, with very little associated costs and, therefore, had
lower-than-average revenue per ATM. As of December 31, 2007 and March 31, 2008, we were providing processing services for approximately 2,300 and 2,400 ATMs,
respectively, under this contract. Partly offsetting this improvement is the addition of ATMs in
China and India, where revenues per ATM have been historically lower than Central and Eastern
Europe, generally due to lower labor costs.
Our contracts in the EFT Processing Segment tend to cover large numbers of ATMs, so significant
increases and decreases in our pool of managed ATMs could result from entry into or termination of
these management contracts. Banks have historically been very deliberate in negotiating these
agreements and have evaluated a wide range of matters when deciding to choose an outsource vendor.
Generally, the process of negotiating a new agreement is subject to extensive management analysis
and approvals and the process
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typically takes six to twelve months or longer. Increasing
consolidation in the banking industry could make this process less predictable.
Our existing contracts generally have terms of five to seven years and a number
of them will expire
or be up for renewal each year for the next few years. As a result,
we expect to be regularly engaged in discussions with one or more of
our customer banks to either obtain renewal of, or restructure, our ATM
outsourcing agreements. During the fourth quarter 2008 and first quarter 2009,
certain customer contracts were terminated or expired, resulting in a decrease
of 689 ATMs in the fourth quarter 2008 and approximately 1,000 ATMs in
the first quarter 2009. Most of the ATM reductions resulted from bank
customers shifting their processing to related processing subsidiaries
in contemplation of selling the subsidiaries to raise capital, rather
than the loss of contracts to competitors. The reduction in the number
of ATMs from contract terminations or expirations was partially offset
by increases in ATMs driven under new contracts, expansion of ATMs under
existing contracts and the deployment of ATMs in markets where we operate
Euronet-branded ATMs.
For contracts that we are able to renew, as was the case for
contract renewals in Romania and Greece in prior years, we expect customers
to seek rate concessions or up-front payments because of the greater
availability of alternative processing solutions in many of our markets now,
as compared to when we entered into the contracts. We have been able to renew
or extend most of the remaining contracts that came up for renewal in
2008 or expiration in 2009. While we have been successful in many cases in obtaining new terms
that preserve the same level of earnings arising from the agreements, we have
not been successful in all cases, and therefore we expect to experience
reductions in revenue in future quarters arising from the expiration or
restructuring of agreements.
For the contracts that expired during the fourth quarter 2008 and
first quarter 2009, excluding substantial termination fees that we expect to receive,
we estimate that the impact to 2009 will be a reduction in revenue of
approximately $15 million to $16 million, resulting in reduced operating
income of approximately $3 million to $4 million. We cannot be sure
we will have sufficient revenues from new contracts to offset potential
revenue reductions from expired or restructured agreements.
Direct operating costs
Direct operating costs consist primarily of site rental fees, cash delivery costs, cash supply
costs, maintenance, insurance, telecommunications and the cost of data center operations-related
personnel, as well as the processing centers’ facility related costs and other processing center
related expenses. The increase in direct operating cost for 2008, compared to 2007, is attributed
to the increase in the average number of ATMs under operation, particularly the growing number of
independently deployed ATMs in new markets, and the launch of our cross-border merchant acquiring
business. Throughout 2007 and into 2008, we incurred substantial capital and operating expenditures
in anticipation of entering the cross-border merchant acquiring business after we entered into an
agreement for these services with a large petrol retailer in Central Europe. The revenues recorded
after launching this business in mid-2008 have not been significant; however, the cost structure is
largely in place and is contributing to the increase in direct operating costs and certain other
expenses discussed below. Additionally, 2008 and 2007 include losses of approximately $0.7 million
and $1.9 million, respectively, primarily in Poland and Hungary, as a result of certain fraudulent
transactions by card holders on our network.
Gross profit
Gross profit, which is calculated as revenues less direct operating costs, increased to $111.8
million for 2008 from $99.2 million for 2007. This increase is mainly attributable to the increase
in revenues discussed above. Gross profit as a percentage of revenues (gross margin) was 54% for
2008 compared to 57% for 2007. The decrease in gross margin is primarily due to the impact of the
expiration of the ATM services contract in the U.K. and launching the cross-border merchant
acquiring business.
Salaries and benefits
The increase in salaries and benefits for 2008 compared to 2007 was due to staffing costs to
support growth in the average number of ATMs managed and transactions processed and for new
products, such as POS, card processing and cross-border merchant processing and acquiring. Salaries
and benefits also increased as a result of general merit increases awarded to employees. As a
percentage of revenue, however, these costs decreased slightly to 17% of revenues for 2008 compared
to 18% for 2007.
Selling, general and administrative
Selling, general and administrative expenses for 2007 include a $1.2 million arbitration loss
awarded by a tribunal in Budapest, Hungary arising from a claim by a former cash supply contractor
in Central Europe. Excluding the impact of the arbitration loss, as a percentage of revenues,
selling general and administrative expenses increased to 9% in 2008 compared to 8% in 2007. This
increase in selling, general and administrative expenses for 2008 compared to 2007 is due primarily
to the launch of our cross-border merchant acquiring business that occurred during the second
quarter 2008. As explained above, the revenues recorded after launching this business have not
been significant; however, the cost structure is in place to support this new business.
Depreciation and amortization
The increase in depreciation and amortization expense for 2008 compared to 2007 is due primarily to
additional ATMs in Poland and India and additional equipment and software for our processing
centers in Hungary and China. As a percentage of revenue, these expenses remained flat at 9% for
both 2008 and 2007.
Operating income
The increase in operating income was primarily due to the increases in revenues described above.
Additionally, operating income was affected by several unique items in 2008 and 2007: 2007
operating income was reduced $1.2 million by the arbitration loss described above; operating income
was $1.2 million greater in 2008 compared to 2007 due to the decrease in fraudulent card losses
described
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above; operating income was $7.6 million less in 2008 compared to 2007 due to the
expiration of the ATM services contract and the launching of the cross-border merchant acquiring
business described above. Excluding the impacts of these items, operating income
increased 20% in 2008 compared to 2007, was 22% as a percentage of revenues for 2008 compared to
21% for 2007 and was $0.06 per transaction for both 2008 and 2007.
Operating income for 2008 and 2007 also includes $1.0 million and $1.2 million, respectively, in
losses associated with expanding operations for the Company’s 75% owned joint venture in China. As
of December 31, 2008, we had deployed and were providing all of the day-to-day outsourcing services
for 544 ATMs. Under current agreements, we expect that the total number of ATMs in China deployed
and for which we will be providing day-to-day outsourcing services will increase to over 1,000
during the next 12 months.
Software sales backlog
As of December 31, 2008 and 2007, the EFT Segment had a software contract backlog of approximately
$7.9 million compared to approximately $5.7 million as of December 31, 2007. This backlog
represents software sales based on signed contracts under which we continue to have performance
milestones before the sale will be completed. We recognize revenue on a percentage of completion
method, based on certain milestone conditions, for our software solutions. As a result, we have not
recognized all the revenues associated with these sales contracts. We cannot give assurances that
the milestones under the contracts will be completed or that we will be able to recognize the
related revenue within the next year.
2007 Compared to 2006
The following table summarizes the results of operations for the EFT Processing Segment for the
years ended December 31, 2007 and 2006:
| Year Ended December 31, | Year-over-Year Change | |||||||||||||||
| Increase | Increase | |||||||||||||||
| (dollar amounts in thousands) | 2007 | 2006 | Amount | Percent | ||||||||||||
Total revenues |
$ | 174,049 | $ | 144,515 | $ | 29,534 | 20 | % | ||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
74,879 | 56,851 | 18,028 | 32 | % | |||||||||||
Salaries and benefits |
31,874 | 27,417 | 4,457 | 16 | % | |||||||||||
Selling, general and administrative |
14,952 | 12,069 | 2,883 | 24 | % | |||||||||||
Depreciation and amortization |
16,197 | 13,900 | 2,297 | 17 | % | |||||||||||
Total operating expenses |
137,902 | 110,237 | 27,665 | 25 | % | |||||||||||
Operating income |
$ | 36,147 | $ | 34,278 | $ | 1,869 | 5 | % | ||||||||
Transactions processed (millions) |
603.8 | 463.6 | 140.2 | 30 | % | |||||||||||
ATMs as of December 31 |
11,347 | 8,885 | 2,462 | 28 | % | |||||||||||
Average ATMs |
10,025 | 8,066 | 1,959 | 24 | % | |||||||||||
Revenues
Our revenue for 2007 increased when compared to 2006 primarily due to increases in the number of
ATMs operated and, for owned ATMs, the number of transactions processed, primarily in Poland and
India. These increases were attributable to most of our operations, but primarily our operations in
Poland, India and Greece and our software operations. Additionally, beginning in 2006 and during
2007, the U.S. dollar weakened compared to the currencies of most of the countries in which we
operate. Because our revenues are recorded in the functional currencies of our operating entities,
amounts we earn in foreign currencies are positively impacted by the weakening of the U.S. dollar.
Partially offsetting these increases was a reduction in revenues associated with the extension of
certain customer contracts for several years beyond their original terms. In exchange for these
extensions, we paid or received up-front payments and agreed on gradually declining fee structures.
As prescribed by U.S. GAAP, revenue under these contracts is recognized based on proportional
performance of services over the term of the contract, which generally results in “straight-line”
(i.e., consistent value per period) revenue recognition of the contracts’ total cash flows,
including any up-front payment. This straight-line revenue recognition results in revenue that is
less than contractual invoices and cash receipts in the early periods of the agreement and revenue
that is greater than the contractual invoices and cash receipts in the later years of the
agreement. As a result of the revenue recognition under these contracts,
amounts invoiced under the contracts exceeded the amount of revenue that we recognized by about
$2.7 million for 2007, compared to approximately $1.6 million for 2006.
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Average monthly revenue per ATM was $1,447 for 2007, compared to $1,493 for 2006 and revenue per
transaction was $0.29 for 2007, compared to $0.31 for 2006. The decrease in revenues per ATM and
revenues per transaction was due to the addition of ATMs where related revenue has not yet
developed to mature levels, the impact of the contract extensions discussed above and the addition
of ATMs in India where revenues per ATM have been historically lower than Central and Eastern
Europe generally due to lower labor costs.
Direct operating costs
The increase in direct operating cost for 2007, compared to 2006, was attributed to the increase in
the number of ATMs under operation. Additionally, 2007 includes losses of approximately $1.9
million, primarily in Poland and Hungary, as a result of certain fraudulent transactions by card
holders on our network.
Gross profit
Gross profit increased to $99.2 million for 2007 from $87.7 million for 2006. This increase was
attributable to the increase in revenues discussed above. Gross margin was 57% for 2007 compared to
61% for 2006. The decrease in gross margin was due to the impact of accounting for certain contract
renewals, the fraudulent transaction losses and other fluctuations in revenues and direct operating
costs discussed above, as well as the increased contributions of our subsidiary in India, which has
historically earned a lower gross margin than our other operations.
Salaries and benefits
The increase in salaries and benefits for 2007 compared to 2006 was due to staffing costs to expand
in emerging markets, such as India, China and new European markets, and additional products, such
as POS, card processing and cross-border merchant processing and acquiring. Salaries and benefits
also increased as a result of general merit increases awarded to employees and certain additional
staffing requirements due to the larger number of ATMs under operation and transactions processed.
As a percentage of revenue, however, these costs remained relatively flat at 18% of revenues for
2007 compared to 19% for 2006.
Selling, general and administrative
The increase in selling, general and administrative expenses for 2007 compared to 2006 was due to
costs to expand in emerging markets, such as India, China and new European markets, and additional
products, such as POS, card processing and cross-border merchant processing and acquiring.
Additionally, during 2007, we recorded a loss of $1.2 million under an arbitral award granted by a
tribunal in Budapest, Hungary arising from a claim by a former cash supply contractor in Central
Europe. The cash supply contractor claimed it provided us with cash during the fourth quarter 1999
and first quarter 2000 that was not returned. As a percentage of revenue, selling, general and
administrative expenses were relatively flat at 9% for 2007 and 8% for 2006.
Depreciation and amortization
The increase in depreciation and amortization expense for 2007 compared to 2006 was due primarily
to additional equipment and software for the expansion of our Hungarian processing center incurred
during 2006, additional ATMs in Poland and India. As a percentage of revenue, these expenses
decreased slightly to 9% for 2007 from 10% for 2006.
Operating income
The increase in operating income was primarily due to the increases in revenues described above,
offset by the $1.1 million decrease in revenues related to certain contract renewals, the $1.9
million fraudulent card losses and the arbitration loss described in the sections above. Operating
income as a percentage of revenues was 21% for 2007 compared to 24% for 2006 and $0.06 per
transaction for 2007 compared to $0.07 per transaction for 2006. Adjusting for the impact of the
fraudulent card losses and the arbitration loss, operating income as a percentage of revenue would
have been 23% and operating income per transaction would have been $0.07.
Operating income for 2007 and 2006 also includes $1.2 million and $1.3 million, respectively, in
losses associated with expanding operations for the Company’s 75% owned joint venture in China. As
of December 31, 2007, we had deployed and were providing all of the day-to-day outsourcing services
for over 250 ATMs.
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PREPAID PROCESSING SEGMENT
2008 Compared to 2007
The following table summarizes the results of operations for the Prepaid Processing Segment for the
years ended December 31, 2008 and 2007:
| Year Ended December 31, | Year-over-Year Change | |||||||||||||||
| Increase | Increase | |||||||||||||||
| (Decrease) | (Decrease) | |||||||||||||||
| (dollar amounts in thousands) | 2008 | 2007 | Amount | Percent | ||||||||||||
Total revenues |
$ | 609,106 | $ | 569,858 | $ | 39,248 | 7 | % | ||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
495,971 | 464,874 | 31,097 | 7 | % | |||||||||||
Salaries and benefits |
28,574 | 27,493 | 1,081 | 4 | % | |||||||||||
Selling, general and administrative |
22,098 | 20,567 | 1,531 | 7 | % | |||||||||||
Goodwill impairment |
50,681 | — | 50,681 | n/m | ||||||||||||
Federal excise tax refund |
— | (12,191 | ) | 12,191 | n/m | |||||||||||
Depreciation and amortization |
16,441 | 16,302 | 139 | 1 | % | |||||||||||
Total operating expenses |
613,765 | 517,045 | 96,720 | 19 | % | |||||||||||
Operating income (loss) |
$ | (4,659 | ) | $ | 52,813 | $ | (57,472 | ) | n/m | |||||||
Transactions processed (millions) |
713.1 | 634.8 | 78.3 | 12 | % | |||||||||||
| n/m | — Not meaningful. |
Revenues
The increase in revenues for 2008 compared to 2007 was generally attributable to the increase in
total transactions processed across most of our Prepaid Processing Segment operations, particularly
Australia, Germany and Poland. The growth in Australia has been the result of our main competitor
ceasing business during 2008, allowing us to strengthen our position in this key market.
In certain more mature markets, such as the U.K., New Zealand and Spain, our revenue growth has
slowed substantially and, in some cases, revenues have decreased because conversion from scratch
cards to electronic top-up is substantially complete and certain mobile operators and retailers are
driving competitive reductions in pricing and margins. We expect most of our future revenue growth
to be derived from: (i) additional products sold over the base of prepaid processing terminals,
(ii) developing markets or markets in which there is organic growth in the prepaid sector overall,
(iii) continued conversion from scratch cards to electronic top-up in less mature markets, and (iv)
acquisitions, if available.
Revenues per transaction decreased to $0.85 for 2008 from $0.90 for 2007 due primarily to the
growth in revenues and transactions recorded by our ATX subsidiary, which is 51% Euronet-owned. In
accordance with U.S. GAAP, ATX is consolidated and the amounts in our financial statements and in
the table above reflect 100% of ATX’s results. Results attributable to the 49% minority owner are
reflected in the minority interest line of our Consolidated
Statements of Operations. ATX provides only
transaction processing services without direct costs and other operating costs generally associated
with installing and managing terminals; therefore, the revenue we recognize from these transactions
is a fraction of that recognized on average transactions, but with very low cost. Partly offsetting
this decrease was the growth in both volumes and revenues in Australia which generally has higher
revenues per transaction, but also pays higher commission rates to retailers, than our other
Prepaid Processing subsidiaries.
Direct operating costs
Direct operating costs in the Prepaid Processing Segment include the commissions we pay to retail
merchants for the distribution and sale of prepaid mobile airtime and other prepaid products, as
well as expenses required to operate POS terminals. Because of their nature, these expenditures
generally fluctuate directly with revenues and processed transactions. The increase in direct
operating costs is generally attributable to the increase in total transactions processed.
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Gross profit
Gross profit was $113.1 million for 2008 compared to $105.0 million for 2007. Gross margin
increased to 19% for 2008 compared to 18% for 2007 and gross profit per transaction was $0.16 for
2008 compared to $0.17 for 2007. Most of the reduction in gross profit per transaction is due to
the growth of revenues and transactions at our ATX subsidiary and the general maturity of the
prepaid mobile airtime business in many of our markets.
Salaries and benefits
While salaries and benefits increased for 2008 compared to 2007 to support development in new and
growing markets, as a percentage of revenue, they decreased slightly to 4.7% for 2008 from 4.8% for
2007.
Selling, general and administrative
The increase in selling, general and administrative expenses for 2008 compared to 2007 is the
result of additional overhead to support development in new and growing markets. As a percentage of
revenues, these selling, general and administrative expenses remained flat at 3.6% for both 2008
and 2007.
Goodwill impairment
In 2008, we recorded a non-cash impairment charge of $50.7 million related to the goodwill of the
Spanish prepaid business in accordance with the provisions of SFAS No. 142, “Goodwill and Other
Intangible Assets.” We perform our annual goodwill impairment test during the fourth quarter of
each year, which coincided this year with severe disruptions in the credit markets and the
macroeconomic business climate. These events have caused credit, currency and stock markets to
plummet in the second half of 2008 and have adversely impacted corporate valuations across most
industries, all of which contributed to a significant decline in our stock price. An important
component of the 2008 goodwill impairment testing was the reconciliation of a company’s equity to
its market capitalization. During the fourth quarter 2008 and into 2009, our total market
capitalization was less than the recorded value of the Company’s equity by an amount approaching
50% of recorded equity, creating a strong indicator of impairment for our goodwill balance. Because
of these macroeconomic conditions, after incorporating assumptions that we or another purchaser
would likely make into the Company’s business outlook and projections for the Spanish prepaid
business, we determined that the resulting valuations were not sufficient to support the recorded
value of our investment. Specifically, growth in the prepaid mobile phone business in Spain has
been slower than expected and commission pressure from mobile operators, as well as intense
competition from other prepaid processors, has reduced profitability.
Any adjustment to that estimated charge resulting from the
completion of the measurement of the impairment loss will be
recognized in the first quarter 2009. See Note 10, Goodwill and
Acquired Intangible Assets, Net, to the Consolidated Financial Statements for a further discussion
of this charge.
Federal excise tax refund
During 2006, the Internal Revenue Service (“IRS”) announced that Internal Revenue Code Section 4251
(relating to communications excise tax) will no longer apply to, among other services, prepaid
mobile airtime services such as those offered by the Prepaid Processing Segment’s U.S. operations.
Additionally, companies that paid this excise tax during the period beginning on March 1, 2003 and
ending on July 31, 2006, are entitled to a credit or refund of amounts paid in conjunction with the
filing of 2006 federal income tax returns. During 2007, $12.2 million was recorded for amounts paid
during this period as a reduction to operating expenses of the Prepaid Processing Segment.
Depreciation and amortization
Depreciation and amortization expense primarily represents amortization of acquired intangibles and
the depreciation of POS terminals we install in retail stores. The increase in depreciation and
amortization for 2008 compared to 2007 reflects additional POS terminals installed as the business
has grown. As a percentage of revenues, depreciation and amortization expense decreased to 2.7% for
2008 from 2.9% for 2007.
Operating income (loss)
The decrease in operating income for 2008 compared to 2007 is mainly due to the goodwill impairment
charge in 2008 and the benefit of the federal excise tax refund in 2007. Excluding the goodwill
impairment charge and the benefit of the federal excise tax refund, operating income as a
percentage of revenues was 7.6% for 2008 compared to 7.1% for 2007. The increase is due to the
growth in revenues and transactions processed and the impact of leveraging operating costs. Also
excluding the goodwill impairment charge and the federal excise tax refund, operating income per
transaction remained flat at $0.06 for 2008 and 2007.
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2007 Compared to 2006
The following table summarizes the results of operations for the Prepaid Processing Segment for the
years ended December 31, 2007 and 2006:
| Year Ended December 31, | Year-over-Year Change | |||||||||||||||
| Increase | ||||||||||||||||
| (Decrease) | Increase | |||||||||||||||
| (dollar amounts in thousands) | 2007 | 2006 | Amount | Percent | ||||||||||||
Total revenues |
$ | 569,858 | $ | 467,651 | $ | 102,207 | 22 | % | ||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
464,874 | 376,329 | 88,545 | 24 | % | |||||||||||
Salaries and benefits |
27,493 | 22,561 | 4,932 | 22 | % | |||||||||||
Selling, general and administrative |
20,567 | 17,011 | 3,556 | 21 | % | |||||||||||
Federal excise tax refund |
(12,191 | ) | — | (12,191 | ) | n/m | ||||||||||
Depreciation and amortization |
16,302 | 14,128 | 2,174 | 15 | % | |||||||||||
Total operating expenses |
517,045 | 430,029 | 87,016 | 20 | % | |||||||||||
Operating income |
$ | 52,813 | $ | 37,622 | $ | 15,191 | 40 | % | ||||||||
Transactions processed (millions) |
634.8 | 457.8 | 177.0 | 39 | % | |||||||||||
| n/m | — Not meaningful. |
Revenues
The increase in revenues for 2007 compared to 2006 was generally attributable to: (i) the increase
in total transactions processed across all of our Prepaid Processing Segment operations; (ii) $47.2
million in revenues contributed by Omega Logic and Brodos Romania, which were acquired in the first
quarter 2007; and (iii) foreign currency translations to the U.S. dollar. Beginning in 2006 and
during 2007, the U.S. dollar weakened compared to most of the currencies of the countries in which
we operate. Because our revenues are recorded in the functional currencies of our operating
entities, amounts we earn are positively impacted by the weakening of the U.S. dollar.
Revenue growth was partially offset by reduced revenue growth in Spain resulting from the second
quarter 2006 expiration of a preferential commission arrangement with a Spanish mobile operator.
Additionally, in certain more mature markets, such as the U.K., New Zealand and Spain, our revenue
growth slowed substantially and, in some cases, revenues decreased because conversion from scratch
cards to electronic top-up was substantially complete and certain mobile operators and retailers
were driving competitive reductions in pricing and margins.
Revenues per transaction decreased to $0.90 for 2007 from $1.02 for 2006 due primarily to the
growth in revenues and transactions recorded by our ATX subsidiary. Transaction volumes for ATX in
2007 increased over 100% compared to 2006. Partially offsetting the decreases described above was
the growth in both volumes and revenues in Australia and the U.S., which generally have higher
revenues per transaction, but also pay higher commission rates to retailers, than our other Prepaid
Processing subsidiaries.
Direct operating costs
The increase in direct operating costs was generally attributable to the increase in total
transactions processed and foreign currency translations to the U.S. dollar compared to the prior
year.
Gross profit
Gross profit, which represents revenues less direct costs, was $105.0 million for 2007 compared to
$91.3 million for 2006. Gross margin decreased to 18% for 2007 compared to 20% for 2006 and gross
profit per transaction was $0.17 for 2007 compared to $0.20 for 2006. Most of the reduction in
gross profit per transaction was due to the growth of revenues and transactions at our ATX
subsidiary, the expiration of preferential commission arrangements in Spain discussed above and the
general maturity of the prepaid mobile airtime business in many of our markets.
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Salaries and benefits
The increase in salaries and benefits for 2007 compared to 2006 was primarily the result of the
acquisitions of Brodos Romania and Omega Logic, as well as additional overhead to support
development in other new and growing markets. As a percentage of revenue, salaries and benefits
remained flat at 4.8% for both 2007 and 2006.
Selling, general and administrative
The increase in selling, general and administrative expenses for 2007 compared to 2006 was the
result of the acquisitions of Brodos Romania and Omega Logic, as well as additional overhead to
support development in other new and growing markets. As a percentage of revenues these selling,
general and administrative expenses remained flat at 3.6% for both 2007 and 2006.
Federal excise tax refund
During 2007, $12.2 million was recorded as a reduction to operating expenses of the Prepaid
Processing Segment related to the federal excise tax refund more fully described in the previous
section entitled “2008 Compared to 2007.”
Depreciation and amortization
Depreciation and amortization expense primarily represents amortization of acquired intangibles and
the depreciation of POS terminals we install in retail stores. The increase in depreciation and
amortization for 2007 compared to 2006 was primarily due to the acquisitions of Brodos Romania and
Omega Logic. As a percentage of revenues, depreciation and amortization decreased slightly to 2.9%
for 2007 from 3.0% for 2006.
Operating income
The improvement in operating income for 2007 compared to 2006 was due to the significant growth in
revenues and transactions processed, the federal excise tax refund and the benefit of foreign
currency translations to the U.S. dollar, partially offset by the impact of the events in Spain
discussed above and the costs of development in new and growing markets.
Excluding the benefit of the federal excise tax refund, operating income as a percentage of
revenues was 7.1% for 2007 compared to 8.0% for 2006. The decrease is primarily due to the events
in Spain and operating expenses incurred to support development in new and growing markets. Also
excluding the federal excise tax refund, operating income per transaction was $0.06 for 2007
compared to $0.08 for 2006. The decrease in operating income per transaction is due to the events
in Spain, the impact of maturing markets and the growth in revenues and transactions at our ATX
subsidiary. These decreases were partially offset by the benefit of foreign currency translations
to the U.S. dollar.
MONEY TRANSFER SEGMENT
The Money Transfer Segment was established during April 2007 with the acquisition of RIA, which is
more fully described in Note 6, Acquisitions, to the Consolidated Financial Statements included in
this report. To assist in better understanding the results of the Money Transfer Segment, unaudited
pro forma results for 2007 have been provided as if RIA’s results were included in our consolidated
results of operations beginning January 1, 2007. The pro forma financial information is not
intended to represent, or be indicative of, the consolidated results of operations or financial
condition that would have been reported had the RIA acquisition been completed as of the beginning
of the periods presented.
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Table of Contents
2008 Compared to 2007
The following table presents the actual results of operations for the years ended December 31, 2008
and 2007 for the Money Transfer Segment.
| As Reported | ||||||||||||||||
| Year Ended December 31, | Year-over-Year Change | |||||||||||||||
| Increase | ||||||||||||||||
| (Decrease) | Increase | |||||||||||||||
| (dollar amounts in thousands) | 2008 | 2007 | Amount | Percent | ||||||||||||
Total revenues |
$ | 231,302 | $ | 158,759 | $ | 72,543 | 46 | % | ||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
114,457 | 83,795 | 30,662 | 37 | % | |||||||||||
Salaries and benefits |
50,543 | 32,705 | 17,838 | 55 | % | |||||||||||
Selling, general and administrative |
34,673 | 21,459 | 13,214 | 62 | % | |||||||||||
Goodwill and acquired intangible assets impairment |
169,396 | — | 169,396 | n/m | ||||||||||||
Depreciation and amortization |
19,383 | 13,670 | 5,713 | 42 | % | |||||||||||
Total operating expenses |
388,452 | 151,629 | 236,823 | 156 | % | |||||||||||
Operating income (loss) |
$ | (157,150 | ) | $ | 7,130 | $ | (164,280 | ) | n/m | |||||||
Transactions processed (millions) |
16.7 | 12.0 | 4.7 | 39 | % | |||||||||||
n/m — Not meaningful.
The following table compares the results of operations for the year ended December 31, 2008 to the
pro forma results of operations for the year ended December 31, 2007 for the Money Transfer
Segment:
| Year Ended December 31, | Year-over-Year Change | |||||||||||||||
| Increase | ||||||||||||||||
| 2007 | (Decrease) | Increase | ||||||||||||||
| (dollar amounts in thousands) | 2008 | Pro Forma | Amount | Percent | ||||||||||||
| (unaudited) | ||||||||||||||||
Total revenues |
$ | 231,302 | $ | 204,948 | $ | 26,354 | 13 | % | ||||||||
Operating expenses: |
||||||||||||||||
Direct operating costs |
114,457 | 108,589 | 5,868 | 5 | % | |||||||||||
Salaries and benefits |
50,543 | 42,383 | 8,160 | 19 | % | |||||||||||
Selling, general and administrative |
34,673 | 27,444 | 7,229 | 26 | % | |||||||||||
Goodwill and acquired intangible assets impairment |
169,396 | — | 169,396 | n/m | ||||||||||||
Depreciation and amortization |
19,383 | 17,700 | 1,683 | 10 | % | |||||||||||
Total operating expenses |
388,452 | 196,116 | 192,336 | 98 | % | |||||||||||
Operating income (loss) |
$ | (157,150 | ) | $ | 8,832 | $ | (165,982 | ) | n/m | |||||||
Transactions processed (millions) |
16.7 | 15.5 | 1.2 | 8 | % | |||||||||||
n/m — Not meaningful.
Comparison of pro forma operating results
During 2007, we combined our previous money transfer business with RIA and incurred total exit
costs of $0.9 million. These costs represented the accelerated depreciation and amortization of
property and equipment, software and leasehold improvements that were
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Table of Contents
disposed of during 2007; the
write off of marketing materials and trademarks that have been discontinued or will not be used;
the write off of accounts receivable from agents that did not meet RIA’s credit requirements; and
severance and retention payments made to certain employees. These exit costs are not included in
pro forma operating expenses in the above table.
Revenues
Revenues from the Money Transfer Segment include a transaction fee for each transaction as well as
the difference between purchasing currency at wholesale exchange rates and selling the currency to
customers at retail exchange rates. Revenue per transaction was $13.85 for 2008 compared to pro
forma revenue per transaction of $13.22 for 2007. On a historical basis, about 75%
of our Money Transfer Segment revenues are derived from transaction fees, about 25% is derived from
the foreign currency spread and other small amounts of revenue are derived from sources such as
fees for cashing checks, issuing money orders and processing bill payments. For 2008, 68% of our
money transfers were initiated in the U.S., 29% in Europe and 3% in other countries, such as Canada
and Australia. For 2007, 75% of our money transfers were initiated in the U.S., 23% in Europe and
2% in other countries. We expect that the U.S. will continue to represent our highest volume
market; however, significant future growth is expected to be derived from non-U.S. initiated
sources.
The increase in revenues for 2008 compared to pro forma revenues for 2007 is primarily due to an 8%
increase in the number of transactions processed for 2008 compared to 2007. For 2008, money
transfers to Mexico, which represented 32% of total money transfers, decreased by 9%, while
transfers to all other countries increased 18% when compared to the prior year due to the expansion
of our operations and continued growth in immigrant worker populations in countries other than the
U.S. The decline in transfers to Mexico was largely the result of immigration issues, downturns in
certain labor markets and the current economic crisis. These issues have also resulted in certain
competitors lowering transaction fees and foreign currency exchange spreads in certain markets
where we do business in an attempt to limit the impact on money transfer volumes. We have generally
maintained our pricing structure in response to these developments.
Direct operating costs
Direct operating costs in the Money Transfer Segment primarily represent commissions paid to agents
that originate money transfers on our behalf and distribution agents that disburse funds to the
customers’ destination beneficiary, together with less significant costs, such as telecommunication
and bank fees to collect money from originating agents. While direct operating costs generally
increase or decrease by a similar percentage as transactions, growth in transactions has outpaced
the growth in direct costs in 2008 due to a greater growth rate for Company-owned stores rather
than for agents.
Gross profit
Gross profit was $116.8 million for 2008 compared to pro forma gross profit of $96.4 million for
2007. This improvement is primarily due to the growth in money transfer transactions originated in
non-U.S. locations, discussed above, along with favorable management of foreign currency exchange
rate spreads. We have not engaged in the competitive price wars in our industry that some of our
competitors have initiated, choosing instead to preserve our pricing structure and service levels
and maintain a more profitable customer base. We cannot predict how long these issues will continue
to affect the U.S. market or whether other markets will experience similar issues and we cannot
predict whether we will change our strategy over the short or long term in order to protect or
increase market share. Gross margin was 51% for 2008 compared to pro forma gross margin of 47% for
2007. The improvement primarily reflects the strong growth in transaction volume in our more
profitable non-U.S. locations.
Salaries and benefits
Salaries and benefits include salaries and commissions paid to employees, the cost of providing
employee benefits, amounts paid to contract workers and accruals for incentive compensation. The
increase in salaries and benefits for 2008 compared to pro forma salaries and benefits for 2007 is
primarily due to merit increases and additional costs to support our global expansion efforts,
primarily the opening of Company-owned stores in Germany, France, Spain and the U.S.
Selling, general and administrative
Selling, general and administrative expenses include operations support costs, such as rent,
utilities, professional fees, indirect telecommunications, advertising and other miscellaneous
overhead costs. The increase in selling, general and administrative expenses for 2008 compared to
pro forma selling, general and administrative expenses for 2007 is primarily to support our global
expansion efforts.
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Goodwill and acquired intangible assets impairment
In 2008, we recorded a non-cash impairment charge of $169.4 million related to certain goodwill and
intangible assets of the RIA money transfer business in accordance with the provisions of SFAS No.
142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We perform our annual goodwill impairment test during
the fourth quarter of each year, which coincided this year with severe disruptions in the credit
markets and the macroeconomic business climate. These events have caused credit, currency and stock
markets to plummet in the second half of 2008 and have adversely impacted corporate valuations
across most industries, all of which contributed to a significant decline in our stock price. An
important component of the 2008 goodwill impairment testing was the reconciliation of a company’s
equity to its market capitalization. During the fourth quarter 2008 and into 2009, our total market
capitalization was less than the recorded value of the Company’s equity by an amount approaching
50% of recorded equity, creating a strong indicator of impairment for our goodwill balance. Because
of these macroeconomic conditions, after incorporating assumptions that we or another purchaser
would likely make into the business outlook and projections for the Money Transfer Segment, we
determined that the
resulting valuations were not sufficient to support the recorded value of our investment.
Specifically, we have experienced reductions in volumes for money transfers between the U.S. and
Mexico, among other corridors, that were initially expected to continue expanding. Should the
current economic crisis worsen or should other factors cause us to significantly lower our cash
flow projections for our money transfer business, we will need to reassess the business for further
possible impairment. Any adjustment to that estimated charge resulting from the
completion of the measurement of the impairment loss will be
recognized in the first quarter 2009. See Note 10, Goodwill and Acquired Intangible Assets, Net, to the Consolidated
Financial Statements for a further discussion of this charge.
Depreciation and amortization
Depreciation and amortization primarily represents amortization of acquired intangibles and also
includes depreciation of money transfer terminals, computers and software, leasehold improvements
and office equipment. The increase in depreciation and amortization for 2008 compared to pro forma
depreciation and amortization for 2007 is primarily due to additional computer equipment in our
customer service centers and increased leasehold improvements, office equipment and computer
equipment for expansion of our Company-owned stores. As a percentage of revenues, depreciation and
amortization was relatively flat at 8.4% for 2008 compared to pro forma depreciation and
amortization of 8.6% for 2007.
Operating income
The decrease in operating income for 2008 compared to pro forma operating income for 2007 is due to
the goodwill and acquired intangible impairment charge in 2008. Excluding this charge, operating
income increased 39% in 2008 compared to pro forma operating income for 2007 which is the result of
increased revenues and gross profit as discussed in more detail above, partly offset by additional
costs incurred to support our global expansion efforts.
CORPORATE SERVICES
The components of Corporate Services operating expenses for 2008, 2007 and 2006 were as follows:
| Year-over-Year Change | ||||||||||||||||||||
| 2007 | ||||||||||||||||||||
| 2008 | Increase | |||||||||||||||||||
| Year Ended December 31, | Increase | (Decrease) | ||||||||||||||||||
| (dollar amounts in thousands) | 2008 | 2007 | 2006 | Percent | Percent | |||||||||||||||
Salaries and benefits |
$ | 15,037 | $ | 13,217 | $ | 13,285 | 14 | % | (1 | %) | ||||||||||
Selling, general and administrative |
9,249 | 5,811 | 4,343 | 59 | % | 34 | % | |||||||||||||
Depreciation and amortization |
1,232 | 828 | 205 | 49 | % | 304 | % | |||||||||||||
Total operating expenses |
$ | 25,518 | $ | 19,856 | $ | 17,833 | 29 | % | 11 | % | ||||||||||
Operating expenses for Corporate Services increased by 29% for 2008 and 11% for 2007 compared to
the respective prior year. The increase in salaries and benefits for 2008 compared to 2007 is
primarily the result of severance costs related to certain senior level positions and increased
share-based compensation related to awards made to new employees, including those in the Money
Transfer Segment. The increase in selling, general and administrative expenses is due primarily to
the write-off of $3.0 million in professional fees and settlement costs associated with our
abandoned acquisition of MoneyGram. The increase in corporate depreciation and amortization is the
result of amortization associated with the third quarter 2007 purchase of an enterprise-wide
desk-top license.
The decrease in salaries and benefits compensation for 2007 compared to 2006 was due primarily to
lower incentive compensation accruals and the December 2006 resignation of our former President and
Chief Operating Officer. The increase in selling, general and administrative expenses was mainly
the result of higher professional fees and other expenses associated with acquisitions that were
not completed, including Envios de Valores La Nacional Corp. (“La Nacional”). See Note 22,
Litigation and Contingencies, to the
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Consolidated Financial Statements for further discussion
regarding La Nacional. The increase in corporate depreciation and amortization is the result of
amortization associated with the enterprise-wide desk-top license.
OTHER INCOME (EXPENSE)
| Year Ended December 31, | Year-over-Year Change | |||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||
| Increase | Increase | |||||||||||||||||||
| (Decrease) | (Decrease) | |||||||||||||||||||
| (dollar amounts in thousands) | 2008 | 2007 | 2006 | Percent | Percent | |||||||||||||||
Interest income |
$ | 10,611 | $ | 16,250 | $ | 13,644 | (35 | %) | 19 | % | ||||||||||
Interest expense |
(24,538 | ) | (26,126 | ) | (14,719 | ) | (6 | %) | 77 | % | ||||||||||
Income from unconsolidated affiliates |
1,250 | 908 | 660 | 38 | % | 38 | % | |||||||||||||
Impairment loss on investment securities |
(18,760 | ) | — | — | n/m | n/m | ||||||||||||||
Gain (loss) on early retirement of debt |
5,546 | (427 | ) | — | n/m | n/m | ||||||||||||||
Foreign currency exchange gain (loss), net |
(9,821 | ) | 15,497 | 10,287 | (163 | %) | 51 | % | ||||||||||||
Total other income (expense) |
$ | (35,712 | ) | $ | 6,102 | $ | 9,872 | n/m | (38 | %) | ||||||||||
| n/m | — Not meaningful. |
Interest income
The decrease in interest income for 2008 from 2007 is primarily due to a decline in short-term
interest rates and a decrease in average cash balances on hand during 2008. Partly offsetting this
decrease was the recognition of $1.6 million in 2008 for interest related to a federal excise tax
refund. The increase in interest income for 2007 over 2006 was primarily due to investment of the
unused proceeds from the $154.3 million private equity placement that was completed during March
2007, as well as cash generated from operations. Increasing average cash deposits held in our trust
accounts related to the administration of customer collections and vendor remittance activities of
the Prepaid Processing Segment have also generated increased interest income as the Segment’s
operations have grown. Improvements in interest income for 2007 compared to 2006 were also due to
higher average interest rates resulting from a gradual shift of investments from money market
accounts to commercial paper and the general rise in short-term treasury rates during 2007.
Short-term interest rates continue to be at historically low levels at the beginning of 2009 and if
rates continue to be near these levels, we expect interest income earned on our invested balances
for 2009 will decrease as a result.
Interest expense
The decrease in interest expense for 2008 from 2007 is primarily due to the reductions in
borrowings from scheduled repayments and early retirements along with lower interest rates paid on
floating-rate debt. We also reduced borrowings under the revolving credit facility to finance the
working capital requirements of the Money Transfer Segment. We generally borrow amounts under the
revolving credit facility several times each month to fund the correspondent network in advance of
collecting remittance amounts from the agency network. These borrowings are repaid over a very
short period of time, generally within a few days.
The increase in interest expense for 2007 over 2006 was primarily related to the additional
borrowings to finance the April 2007 acquisition of RIA, described in Note 6, Acquisitions, to the
Consolidated Financial Statements. Additionally, we incurred borrowings under the revolving credit
facility to finance the working capital requirements of the Money Transfer Segment as described
above. The increase in interest expense was also due to higher overall interest rates on our debt
obligations in 2007 compared to 2006. Including amortization of deferred financing costs, interest
expense on the term loan and revolving credit facility was approximately 7.5%, compared to
approximately 4.0% for the $315 million in outstanding convertible debentures.
Similar to the impact on interest income, due to the recent trend of decreasing short-term interest
rates, we expect that interest paid on our floating-rate borrowings for 2009 will also decrease if
short-term interest rates remain near their current levels.
Income from unconsolidated affiliates
Income from unconsolidated affiliates mainly represents the equity in income of our 40% equity
investment in e-pay Malaysia and our 49% investment in Euronet Middle East, an EFT Processing
Segment joint venture in Bahrain. The increase in income for 2008 from 2007 is the result of
increased earnings from our equity investment in e-pay Malaysia and our share of the earnings of
Euronet Middle
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East. The increase is partly offset by the $0.4 million gain recognized from the
sale of our 8% interest in CashNet Telecommunications Egypt SAE (CashNet) during 2007.
The increase in income from unconsolidated affiliates recorded for 2007 compared to 2006 was
primarily because of the $0.4 million gain from the sale of our interest in CashNet. The remainder
of income from unconsolidated affiliates represents the income from our investment in e-pay
Malaysia. During 2007, we recognized $0.7 million of equity losses related to e-pay Malaysia’s
unsuccessful expansion efforts into Indonesia.
Impairment loss on investment securities
During 2008, the value of our investment in MoneyGram declined and the decline was determined to be
other than temporary. Accordingly, we recognized an $18.8 million impairment loss.
Gain (loss) on early retirement of debt
During 2008, we repurchased in privately negotiated transactions $70 million in principal amount of
the $140 million 1.625% convertible debentures due 2024. This resulted in a $6.1 million pre-tax
gain, net of the write-off of unamortized deferred financing costs. Additionally, losses on early
retirement of debt of $0.5 million were recorded representing the pro-rata write-off of deferred
financing costs associated with the portion of the $190 million
term loan that was prepaid during
2008. We expect to continue to prepay amounts outstanding under the term loan and/or repurchase
additional outstanding 1.625% convertible debentures through available cash flows. Accordingly, we
would recognize losses on early retirement of debt for the pro-rata portion of unamortized deferred
financing costs and gains on early retirement of debt for any repurchase of the debentures at a
discount to par value.
Loss on early retirement of debt of $0.4 million for 2007 represents the pro-rata write-off of
deferred financing costs associated with the portion of the $190 million term loan that was prepaid
during 2007.
Net foreign currency exchange gain (loss)
Assets and liabilities denominated in currencies other than the local currency of each of our
subsidiaries give rise to foreign currency exchange gains and losses. Exchange gains and losses
that result from re-measurement of these assets and liabilities are recorded in determining net
income. The majority of our foreign currency gains or losses are due to the re-measurement of
intercompany loans that are in a currency other than the functional currency of either the entity
making or receiving the loan. For example, we make intercompany loans based in euros from our
corporate division, which is comprised of U.S. dollar functional currency entities, to certain European entities
that use the euro as the functional currency. As the U.S. dollar
strengthens against the euro, foreign currency losses are generated on our corporate entities because the number of euros to be
received in settlement of the loans decreases in U.S. dollar terms. Conversely, in this example, in
periods where the U.S. dollar weakens, our corporate entities will
record foreign currency gains.
We recorded a net foreign currency exchange loss of $9.8 million during 2008 and net foreign
currency exchange gains of $15.5 million and $10.3 million during 2007 and 2006, respectively.
Throughout 2006 and 2007, the U.S. dollar weakened against most European-based currencies,
primarily the euro and British pound, creating realized and unrealized foreign currency exchange
gains. This compares to 2008, when in the latter part of the year the U.S. dollar strengthened
against these currencies and we, therefore, recorded realized and unrealized foreign currency
exchange losses.
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INCOME TAX EXPENSE
| Year Ended December 31, | ||||||||||||
| (dollar amounts in thousands) | 2008 | 2007 | 2006 | |||||||||
Income (loss) from continuing operations before
income taxes
and minority interest |
$ | (184,733 | ) | $ | 82,336 | $ | 60,644 | |||||
Minority interest |
935 | (2,040 | ) | (977 | ) | |||||||
Income (loss) from continuing operations
before income taxes |
(183,798 | ) | 80,296 | 59,667 | ||||||||
Income tax expense |
10,228 | 27,759 | 14,294 | |||||||||
Income (loss) from continuing operations |
$ | (194,026 | ) | $ | 52,537 | $ | 45,373 | |||||
Effective income tax rate |
(5.6 | %) | 34.6 | % | 24.0 | % | ||||||
Income (loss) from continuing operations before
income taxes |
$ | (183,798 | ) | $ | 80,296 | $ | 59,667 | |||||
Adjust:
Foreign currency exchange gain (loss), net |
(9,821 | ) | 15,497 | 10,287 | ||||||||
Adjust: Goodwill and acquired intangible assets
impairment |
(220,077 | ) | — | — | ||||||||
Adjust: Impairment loss on investment securities |
(18,760 | ) | — | — | ||||||||
Income (loss) from
continuing operations before
income taxes,
foreign currency exchange gain (loss), net and
impairment charges |
$ | 64,860 | $ | 64,799 | $ | 49,380 | ||||||
Income tax expense |
$ | 10,228 | $ | 27,759 | $ | 14,294 | ||||||
Adjust: Income tax expense (benefit)
attributable to foreign currency
exchange gain (loss), net |
(12,896 | ) | 1,850 | 743 | ||||||||
Adjust:
Income tax benefit attributable to goodwill
and acquired intangible assets impairment |
(756 | ) | — | — | ||||||||
Income tax expense, as adjusted |
$ | 23,880 | $ | 25,909 | $ | 13,551 | ||||||
Effective income tax rate, as adjusted |
36.8 | % | 40.0 | % | 27.4 | % | ||||||
We calculate our effective tax rate by dividing income tax expense by pre-tax book income including
the effect of minority interest. Our effective tax rates were (5.6%), 34.6% and 24.0% for the years
ended December 31, 2008, 2007 and 2006, respectively. There are several factors that have caused
our effective tax rate to fluctuate over the past three years. The most significant of these
factors include the Company’s tax position in the U.S., the impact of foreign currency exchange
translation results and, specific to the year ended December 31, 2008, the impairments for goodwill
and acquired intangible assets and for investments securities. Excluding foreign currency exchange
translation results and the impairments to goodwill and acquired intangible assets and to
investment securities from pre-tax income, as well as the related tax effects for these items, our
effective tax rates were 36.8%, 40.0% and 27.4% for the years ended December 31, 2008, 2007 and
2006, respectively.
The
increases in the effective tax rates for 2008 and 2007 compared to 2006, excluding foreign
currency gains and losses and the impairment charges, were primarily related to the recognition of
income tax expense in the U.S. During 2006 tax expense related to our U.S. operations was offset
by reductions in our valuation allowance against our U.S. tax net operating losses. The remaining
valuation allowance against our U.S. tax net operating losses was reversed in 2007. The 2008 and
2007 effective tax rates were also unfavorably impacted by the acquisition of RIA, which operates
in jurisdictions that have tax rates that are higher than our historical effective tax rate, and
the recognition of significant deferred tax benefits for net operating losses in certain countries
during 2006.
In conjunction with the goodwill impairment test performed in the fourth quarter of 2008, we
reviewed the impact of the adverse macroeconomic business conditions and outlook, as well as
business forecasts, on the realization of our net operating losses and other deferred tax assets.
Based on this information, we concluded that a valuation allowance was necessary against the net
deferred tax assets, including tax net operating losses, of our U.S. and Spanish operations.
We determine income tax expense and remit income taxes based upon enacted tax laws and regulations
applicable in each of the taxing jurisdictions where we conduct business. Based on our
interpretation of such laws and regulations, and considering the evidence of available facts and
circumstances and baseline operating forecasts, we have accrued the estimated tax effects of
certain transactions, business ventures, contractual and organizational structures, projected
business unit performance, and the estimated future reversal of timing differences. Should a taxing
jurisdiction change its laws and regulations or dispute our conclusions, or should management
become aware of new facts or other evidence that could alter our conclusions, the resulting impact
to our estimates could have a material adverse effect to our Consolidated Financial Statements.
OTHER
Minority interest
Minority interest was a benefit of $0.9 million for the year ended December 31, 2008 and an expense
of $2.0 million and $1.0 million for the years ended December 31, 2007 and 2006, respectively.
Minority interest represents the elimination of the net income (loss) attributable to the minority
shareholders’ portion of our consolidated subsidiaries that are not wholly-owned, including
Movilcarga, of which we own 80%; ATX, of
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which we own 51%; our 75% owned subsidiary in China; and
e-pay SRL, of which we own 51%. The benefit in 2008 is the minority interest share of the goodwill
impairment charge in Spain.
Discontinued operations
During the second quarter of 2008, we decided to sell Essentis in order to focus our
investments and resources on our transaction processing businesses. We are in the process of
selling the business. Accordingly, Essentis’s results of operations are shown as discontinued
operations in the Consolidated Statements of Operations for all periods presented.
In July 2002, we sold substantially all of the non-current assets and related capital lease
obligations of our ATM processing business in France to Atos S.A. During the first quarter 2007, we
received a binding French Supreme Court decision relating to a lawsuit in France that resulted in a
cash recovery and gain of $0.3 million, net of legal costs. There were no related assets or
liabilities held for sale at December 31, 2008 or 2007.
NET INCOME (LOSS)
We recorded a net loss of $195.1 million in 2008 compared to net income of $53.5 million and $46.0
million for 2007 and 2006, respectively. As more fully discussed above, the decrease of $248.6
million in 2008 compared to 2007 was mainly the result of the $225.3 million decrease in operating
income driven by the $220.1 million non-cash goodwill and acquired intangible assets impairment
charge in 2008 and the $12.2 million federal excise tax refund recorded in 2007. Additionally,
2008 results include an $18.8 million unrealized loss on investment securities and a $25.3 million
increase in foreign currency losses. Furthermore, net interest expense increased $4.0 million and
net income from discontinued operations decreased $2.0 million. Partly offsetting these losses were
a $17.5 million decrease in income tax expense, a $6.0 million improvement in income from the net
gain on early retirement of debt, a $3.0 million benefit from changes in results attributed to
minority interests and a $0.3 million increase in income from unconsolidated affiliates.
The increase of $7.5 million in 2007 over 2006 was primarily the result of an increase in operating
income of $25.5 million, including the federal excise tax refund of $12.2 million, an increase in
the net foreign currency exchange gain of $5.2 million, an increase in income from unconsolidated
affiliates of $0.3 million and an increase in income from discontinued operations of $0.3 million.
These increases were partially offset by an increase in net interest expense of $8.8 million, an
increase in income tax expense of $13.5 million, a loss on early retirement of debt of $0.4 million
and an increase in income attributable to minority interest of $1.1 million.
TRANSLATION ADJUSTMENT
Translation gains and losses are the result of translating our foreign entities’ balance sheets
from local functional currency to the U.S. dollar reporting currency prior to consolidation and are
recorded in comprehensive income (loss). As required by U.S. GAAP, during this translation process,
asset and liability accounts are translated at current foreign currency exchange rates and equity
accounts are translated at historical rates. Historical rates represent the rates in effect when
the balances in our equity accounts were originally created. By using this mix of rates to convert
the balance sheet from functional currency to U.S. dollars, differences between current and
historical exchange rates generate this translation adjustment.
We recorded a loss on translation adjustment of $79.3 million in 2008 and gains on translation
adjustment of $41.8 million and $26.4 million in 2007 and 2006, respectively. Throughout 2006 and
2007, the U.S. dollar weakened against most European-based currencies, primarily the euro and
British pound, creating translation gains. However, in the latter half of 2008, the U.S. dollar
strengthened against most of those currencies, resulting in translation losses which were recorded
in comprehensive income (loss).
LIQUIDITY AND CAPITAL RESOURCES
Working capital
As of December 31, 2008, we had working capital, which is the difference between total current
assets and total current liabilities, of $95.7 million, compared to working capital of $279.3
million as of December 31, 2007. Our ratio of current assets to current liabilities was 1.16 at
December 31, 2008, compared to 1.53 as of December 31, 2007. The decrease in working capital is due
primarily to the use of cash to reduce long-term debt and the reclassification of the remaining
$70.0 million in Convertible Senior Debentures to current liabilities.
We require substantial working capital to finance operations. The Money Transfer Segment funds the
correspondent distribution network before receiving the benefit of amounts collected from customers
by agents. Working capital needs increase due to weekends and international banking holidays. As a
result, we may report more or less working capital for the Money Transfer Segment based solely upon
the fiscal period ending on a particular day. As of December 31, 2008, working capital in the Money
Transfer Segment was $41.1 million. We expect that working capital needs will increase as we expand
this business. The Prepaid Processing Segment produces positive working
capital, but much of it is restricted in connection with the administration of
its customer collection and vendor remittance activities; therefore, it
deposits those amounts in a restricted cash account. The EFT Processing Segment
has little working capital requirements.
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Operating cash flows
Cash flows provided by operating activities were $91.2 million for 2008, compared to $78.3 million
for 2007. The increase was primarily due to fluctuations in working capital, including the
collection of $12.2 million for the federal excise tax refund that was recognized in net income
during 2007. The increase in depreciation and amortization expense that is added to net income to
arrive at operating cash flows is due largely to the inclusion of RIA for a full year, compared to
nine months in 2007. Other fluctuations in working capital are mainly the result of changes in the
timing of the settlement process with mobile operators in the Prepaid Procesing Segment around year-end.
Cash flows provided by operating activities decreased to $78.3 million for 2007, compared to $95.9
million for 2006, primarily due to fluctuations in working capital associated with the timing of
the settlement process with mobile operators in the Prepaid Processing Segment. Offsetting this
decrease, operating cash flows also reflect an increase in net income, net of depreciation and
amortization expense, and the federal excise tax refund, which was accrued in 2007. The increase in
depreciation and amortization expense was primarily the result of the acquisition of RIA.
Investing activity cash flows
Cash flows used in investing activities were $21.3 million for 2008, compared to $439.9 million for
2007. Our investing activities for 2008 include the return of $26 million we placed in escrow in
2007 in connection with the agreement to acquire Envios de Valores La Nacional Corp. (“La
Nacional”). On January 10, 2008, we entered into a settlement agreement with La Nacional and its
stockholder evidencing the parties’ mutual agreement not to consummate the acquisition, in exchange
for payment by Euronet of a portion of the legal fees incurred by La Nacional. Our investing
activities also include $43.0 million and $42.3 million for the purchase of property and equipment,
software development and other long-term assets in 2008 and 2007, respectively. While our
acquisitions in 2008 were $5.4 million, we used $352.7 million in 2007, primarily for the
acquisition of RIA, and another $20 million used to purchase MoneyGram common stock.
Cash flows used in investing activities were $439.9 million in 2007, compared to $26.1 million in
2006. Our investing activities for 2007 consisted of $352.7 million in cash paid related to
acquisitions, primarily RIA, $20.0 milling for the purchase of MoneyGram common stock and $26.0
million placed in escrow in connection with the agreement to acquire La Nacional. We also spent
$42.3 million for purchases of property and equipment and software development. Our investing
activities for 2006 included $2.1 million in cash paid for acquisitions and $25.1 million for
purchases of property and equipment and software development.
Financing activity cash flows
Cash flows used for financing activities were $145.7 million during 2008, compared to cash provided
of $301.5 million during 2007. Our financing activities for 2008 consisted primarily of net
repayments of debt obligations of $146.6 million. To support the short-term cash needs of our Money
Transfer Segment, we generally borrow amounts under the revolving credit facility several times
each month to fund the correspondent network in advance of collecting remittance amounts from the
agency network. These borrowings are repaid over a very short period of time, generally within a
few days. Primarily as a result of this, during 2008 we had a total of $270.0 million in borrowings
and $315.1 million in repayments under our revolving credit facility. In 2008, we repurchased $70
million in principal amount of our 1.625% convertible debentures for $63.4 million in cash.
Additionally, we paid $1.9 million of scheduled payments and $30.1 million of early payments on our
term loan, as well as $6.8 million of capital lease obligations.
Our financing activities for 2007 consisted primarily of $190.0 million in proceeds from borrowings
under our term loan agreement that were used to finance a portion of the acquisition of RIA and
proceeds from the equity private placement and stock option exercises totaling $167.7 million.
Partially offsetting these increases were repayments and early retirements of debt obligations of
$30.9 million, net repayments of borrowings under the revolving credit facility of $8.9 million and
repayments of capital lease obligations of $10.4 million. We also paid dividends to minority
interest stockholders of $2.8 million and debt issuance costs associated with our credit facility
of $3.8 million.
Other sources of capital
Credit Facility — In connection with completing the April 2007 acquisition of RIA, we
entered into a $290 million secured credit facility consisting of a $190 million seven-year term
loan, which was fully drawn at closing, and a $100 million five-year revolving credit facility
(together, the “Credit Facility”). The $190 million seven-year term loan bears interest at LIBOR
plus 200 basis points or prime plus 100 basis points and requires that we repay $1.9 million of the
balance each year, with the remaining balance payable at the end of the seven-year term. We prepaid
amounts on this loan in 2007 and 2008 and we estimate that we will be able to repay the remaining
$132 million term loan prior to its maturity date through cash flows available from operations,
provided our operating cash
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flows are not required for future business developments. Up front
financing costs of $4.8 million were deferred and are being amortized over the terms of the
respective loans.
During April 2008, we entered into an amendment to the Credit Facility to, among other items, (i)
change the definition of one of the financial covenants in the original agreement to exclude the
effect of certain one-time expenses and (ii) allow for the repurchase of up to $70 million
aggregate principal amount of the $140 million in Convertible Senior Debentures Due 2024. In
September 2008 and December 2008, we repurchased in privately negotiated transactions $55 million
and $15 million, respectively, in principal amount of the debentures. Additionally, we incurred
costs of $0.6 million in connection with the amendment, which will be recognized as additional
interest expense over the remaining term of the Credit Facility.
During February 2009, we entered into Amendment No. 2 to the Credit Facility to, among other items,
(i) (a) grant us the ability to repurchase the remaining $70 million of outstanding 1.625%
Convertible Senior Debentures Due 2024 and (b) repurchase our 3.5% Convertible Debentures Due 2025
prior to any repurchase date using proceeds of a qualifying refinancing, the proceeds of a
qualifying equity issuance or shares of common stock; (ii) revise the definition of Consolidated
EBITDA and the covenant regarding maintenance of Consolidated Net Worth to exclude the effect of
non-cash charges for impairment of goodwill or other intangible assets for the periods ending
December 31, 2008 and thereafter; and (iii) broaden or otherwise modify various definitions or
provisions related to Indebtedness, Liens, Permitted Disposition, Debt Transactions, Investments
and other matters. Additionally, the lenders acknowledged that we have sufficient liquidity with
respect to the December 15, 2009 repurchase date for the 1.625%
Convertible Senior Debentures. Furthermore, in February 2009, our Board of Directors authorized the repurchase of up $70 million of these debentures, from time to time, in open market or privately negotiated purchases. We
incurred costs of approximately $1.5 million in connection with the amendment, which will be
recognized as additional interest expense over the remaining term of the Credit Facility.
The $100 million five-year revolving credit facility bears interest at LIBOR or prime plus a margin
that adjusts each quarter based upon our Consolidated EBITDA ratio as defined in the Credit
Facility agreement. We intend to use the revolving credit facility primarily to fund working
capital requirements, which are expected to increase as we expand the Money Transfer business.
Based on our current projected working capital requirements, we anticipate that our revolving
credit facility will be sufficient to fund our working capital needs.
We may be required to repay our obligations under the Credit Facility six months before the
potential repurchase dates, the first being October 15, 2012, under our $175 million 3.5%
Convertible Debentures Due 2025, unless we are able to demonstrate that either: (i) we could borrow
unsubordinated funded debt equal to the principal amount of the applicable convertible debentures
while remaining in compliance with the financial covenants in the Credit Facility or (ii) we will
have sufficient liquidity to meet repayment requirements (as determined by the administrative agent
and the lenders). These and other material terms and conditions applicable to the Credit Facility
are described in the agreement governing the Credit Facility.
The term loan may be expanded by up to an additional $150 million and the revolving credit facility
can be expanded by up to an additional $25 million, subject to satisfaction of certain conditions
including pro forma debt covenant compliance.
As of December 31, 2008, after making required repayments on the term loan of $3.3 million and
voluntary prepayments of $54.7 million, we had borrowings of $132.0 million outstanding against the
term loan. We had borrowings of $16.7 million and stand-by letters of credit of $30.9 million
outstanding against the revolving credit facility. The remaining $52.4 million under the revolving
credit facility ($77.4 million if the facility were increased to $125 million) was available for
borrowing. Borrowings under the revolving credit facility are being used to fund short-term working
capital requirements in the U.S., Spain and India. As of December 31, 2008, our weighted average
interest rate under the revolving credit facility was 5.3% and under the term loan was 5.5%,
excluding amortization of deferred financing costs.
Short-term debt obligations – Short-term debt obligations at December 31, 2008 were
primarily the $70.0 million 1.625% Convertible Senior Debentures Due 2024 as the holders have the
option to require us to repurchase their debentures at par on December 15, 2009, and the $1.9
million annual repayment requirement under the term loan. Certain of our subsidiaries also have
available credit lines and overdraft facilities to supplement short-term working capital
requirements, when necessary, and there was $0.2 million outstanding against these facilities as of
December 31, 2008.
We believe that the short-term debt obligations can be refinanced at terms acceptable to us.
However, if acceptable refinancing options are not available, we believe that amounts due under
these obligations can be funded through cash generated from operations, together with cash on hand
or borrowings under our revolving credit facility.
Convertible debt – We have $175 million in principal amount of 3.5% Convertible Debentures
Due 2025 that are convertible into 4.3 million shares of Euronet Common Stock at a conversion price
of $40.48 per share upon the occurrence of certain events (relating to the closing prices of
Euronet Common Stock exceeding certain thresholds for specified periods). We will pay contingent
interest for the six-month period from October 15, 2012 through April 14, 2013 and for each
six-month period thereafter from April 15 to October 14 or October 15 to April 14 if the average
trading price of the debentures for the applicable five trading-day period preceding such
applicable six-month interest period equals or exceeds 120% of the principal amount of the
debentures. Contingent interest will equal
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0.35% per annum of the average trading price of a
debenture for such five trading-day periods. The debentures may not be redeemed by us until October
20, 2012 but are redeemable at par at any time thereafter. Holders of the debentures have the
option to require us to purchase their debentures at par on October 15, 2012, 2015 and 2020, or
upon a change in control of the Company. On the maturity date, these debentures can be settled in
cash or Euronet Common Stock, at our option, at predetermined conversion rates.
We also have $70 million in principal amount of 1.625% Convertible Senior Debentures Due 2024 that
are convertible into 2.1 million shares of Euronet Common Stock at a conversion price of $33.63 per
share upon the occurrence of certain events (relating to the closing prices of Euronet Common Stock
exceeding certain thresholds for specified periods). We will pay contingent interest for the
six-month period from December 20, 2009 through June 14, 2010 and for each six-month period
thereafter from June 15 to December 14 or December 15 to June 14 if the average trading price of
the debentures for the applicable five trading-day period preceding such applicable six-month
interest period equals or exceeds 120% of the principal amount of the debentures. Contingent
interest will equal 0.30% per annum of the average trading price of a debenture for such five
trading-day periods. The debentures may not be redeemed by us until December 20, 2009 but are
redeemable at any time thereafter at par. Holders of the debentures have the option to require us
to purchase their debentures at par on December 15, 2009, 2014 and 2019, and upon a change in
control of the Company. Unless the price of our common stock appreciates substantially before
December 2009, we believe it is likely that the holders of the debentures will exercise this option
effective December 15, 2009. Based upon our current expectations, we believe we will have
sufficient cash
available to fund the potential $70 million purchase price using our cash currently on hand, cash
flows we expect to generate during 2009 and amounts we expect to be available to borrow under our
revolving credit facility. However, if our capital resources are insufficient to meet these
obligations, we may be required to seek additional debt or equity financing.
Should holders of the convertible debentures require us to repurchase their debentures on the dates
outlined above, we cannot guarantee that we will have sufficient cash on hand or have acceptable
financing options available to us to fund these required repurchases. An inability to be able to
finance these potential repayments could have an adverse impact on our operations. These terms and
other material terms and conditions applicable to the convertible debentures are set forth in the
indenture agreements governing these debentures and in Note 12, Debt Obligations, to the
Consolidated Financial Statements.
Proceeds from issuance of shares and other capital contributions – We have established, and
shareholders have approved, share compensation plans that allow the Company to make grants of
shares of restricted Common Stock, or options to purchase shares of Common Stock, to certain
current and prospective key employees, directors and consultants. During 2008, 78,938 stock options
were exercised at an average exercise price of $9.54, resulting in proceeds to us of approximately
$0.8 million.
We also sponsor a qualified Employee Stock Purchase Plan (“ESPP”) under which we reserved 500,000
shares of Common Stock for purchase under the plan by employees through payroll deductions
according to specific eligibility and participation requirements. This plan qualifies as an
“employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986. Offerings
commence at the beginning of each quarter and expire at the end of the quarter. Under the plan,
participating employees are granted options, which immediately vest and are automatically exercised
on the final date of the respective offering period. The exercise price of Common Stock options
purchased is the lesser of 85% of the “fair market value” (as defined in the ESPP) of the shares on
the first day of each offering or the last day of each offering. The options are funded by
participating employees’ payroll deductions or cash payments. During 2008, we issued 59,983 shares
at an average price of $18.38 per share, resulting in proceeds to us of approximately $1.1 million.
These plans are discussed further in Note 18, Stock Plans, to the Consolidated Financial
Statements.
Other uses of capital
Payment obligations related to acquisitions – As partial consideration for the acquisition
of RIA, we granted the sellers of RIA 3,685,098 contingent value rights (“CVRs”) and 3,685,098
stock appreciation rights (“SARs”). The 3,685,098 CVRs matured on October 1, 2008 and we elected to
settle the CVRs by issuing 1,114,550 additional shares of Euronet Common Stock valued at $20
million. The 3,685,098 SARs entitled the sellers to acquire additional shares of Euronet Common
Stock at an exercise price of $27.14 at any time through October 1, 2008 and were not exercised
before their expiration.
We have potential contingent obligations to the former owner of the net assets of Movilcarga. Based
upon presently available information, we do not believe any additional payments will be required.
The seller disputed this conclusion and initiated arbitration as provided for in the
purchase agreement. A global public accounting firm was engaged as an independent expert to
review the results of the computation, but the legal process in the dispute has remained dormant for over a year. Any additional payments, if ultimately determined to be owed
the seller, will be recorded as additional goodwill and could be made in either cash or a
combination of cash and Euronet Common Stock at our option.
In connection with the acquisition of Brodos Romania, we agreed to contingent consideration
arrangements based on the achievement of certain performance criteria. If the criteria are
achieved, during 2009 and 2010, we would have to pay a total of $2.5 million in cash or 75,489
shares of Euronet Common Stock, at the option of the seller.
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See the section entitled “contingencies” below for discussion of liquidity and capital resources
involving a settlement agreement related to a previous agreement to acquire La Nacional.
Leases – We lease ATMs and other property and equipment under capital lease arrangements
that expire between 2009 and 2014. The leases bear interest between 3.6% and 20.7% per year. As of
December 31, 2008, we owed $11.0 million under these capital lease arrangements. The majority of
these lease agreements are entered into in connection with long-term outsourcing agreements where,
generally, we purchase a 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.
Generally, the leases may be canceled without penalty upon reasonable notice in the unlikely event
the bank or we were to terminate the related outsourcing agreement. We expect that, if terms were
acceptable, we would acquire more ATMs from banks under such outsourcing and lease agreements.
Capital expenditures and needs – Total capital expenditures for 2008 were $42.9 million, of
which $1.5 million were funded through capital leases. These capital expenditures were primarily
for the purchase of ATMs to meet contractual requirements in Poland and India, the purchase and
installation of ATMs in key under-penetrated markets, the purchase of POS terminals for the Prepaid
Processing and Money Transfer Segments, and office and data center computer equipment and software.
Included in capital
expenditures for office and data center equipment and software for 2008 is approximately $3.7
million in capital expenditures for the purchase and development of the necessary processing
systems and capabilities to enter the cross-border merchant processing and acquiring business.
Total capital expenditures for 2009 are estimated to be approximately $35 million to $45 million.
An additional $2.0 million in software development cost was capitalized during 2008 for the
development and enhancement of our EFT Processing Segment software products. See Note 21, Computer
Software to be Sold, to the Consolidated Financial Statements for a further discussion.
In the Prepaid Processing Segment, approximately 100,000 of the approximately 430,000 POS devices
that we operate are Company-owned, with the remaining terminals being operated as integrated cash
register devices of our major retail customers or owned by the retailers. As our Prepaid Processing
Segment expands, we will continue to add terminals in certain independent retail locations at a
price of approximately $300 per terminal. We expect the proportion of owned terminals to total
terminals operated to remain relatively constant.
At current and projected cash flow levels, we anticipate that cash generated from operations,
together with cash on hand and amounts available under our revolving credit facility and other
existing and potential future financing will be sufficient to meet our debt, leasing, contingent
acquisition and capital expenditure obligations. If our capital resources are insufficient to meet
these obligations, we will seek to refinance our debt under terms acceptable to us. However, we can
offer no assurances that we will be able to obtain favorable terms for the refinancing of any of
our debt or other obligations.
In the EFT Processing Segment, we are required to maintain ATM hardware for Euronet-owned ATMs and
software for all ATMs in our network and in our processing centers in accordance with certain
regulations and mandates established by local country regulatory and administrative bodies as well
as EMV (Europay, MasterCard and Visa) chip card support. Additionally, as regulations change or new
regulations or mandates are issued, we may have additional capital expenditures over the next few
years to maintain compliance with these regulations and/or mandates. While we do not currently have
plans to increase capital expenditures to expand our network of owned ATMs, we expect that if
strategic opportunities were available to us, we would consider increasing future capital
expenditures to expand this network in new or existing markets.
Litigation — During 2005, a former cash supply contractor in Central Europe (the
“Contractor”) claimed that we owed approximately $2.0 million for the provision of cash during the
fourth quarter 1999 and first quarter 2000 that had not been returned. This claim was made after we
terminated our business with the Contractor and established a cash supply agreement with another
supplier. In the first quarter 2006, the Contractor initiated legal action in Budapest, Hungary
regarding the claim. In April 2007, an arbitration tribunal awarded the Contractor $1.0 million,
plus $0.2 million in interest, under the claim, which was paid and recorded as selling, general and
administrative expenses of the EFT Processing Segment during 2007.
Contingencies
From time to time, we are a party to litigation arising in the ordinary course of business.
Currently, there are no other contingencies that we believe, either individually or in the
aggregate, would have a material adverse effect upon our consolidated results of operations or
financial condition.
Other trends and uncertainties
Cross border merchant processing and acquiring – In our EFT Processing Segment, we have
entered the cross-border merchant processing and acquiring business, through the execution of an
agreement with a large petrol retailer in Central Europe. Since the
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beginning of 2007, we have
devoted significant resources, including capital expenditures of approximately $7.5 million, to the
ongoing investment in development of the necessary processing systems and capabilities to enter
this business, which involves the purchase and design of hardware and software. Merchant acquiring
involves processing credit and debit card transactions that are made on POS terminals, including
authorization, settlement, and processing of settlement files. It will involve the assumption of
credit risk, as the principal amount of transactions will be settled to merchants before
settlements are received from card associations. We incurred $6.5 million in operating losses
related to this business in 2008 and expect to incur approximately $3.0 million to $4.0 million in
operating losses during 2009.
Stock plans
Historically, the Compensation Committee of our Board of Directors has awarded nonvested shares or
nonvested share units (“restricted stock”) and stock options as an element of long-term management
incentive compensation. The amount of future compensation expense related to awards of restricted
stock is based on the market price for Euronet Common Stock at the grant date. For grants of stock
options, we used the Black-Scholes option pricing model or Monte Carlo simulation model for the
determination of fair value for stock option grants and plan to use the Black Scholes option
pricing model or Monte Carlo simulation model, as appropriate, for future stock option grants, if
any. The grant date for stock options or restricted stock is the date at which all key terms
and conditions of the grant have been determined and the Company becomes contingently obligated to
transfer assets to the employee who renders the requisite service, generally the date at which
grants are approved by our Board of Directors or Compensation Committee thereof. Share-based
compensation expense for awards with only service conditions is generally recognized as expense on
a “straight-line” basis over the requisite service period. For awards with performance conditions,
expense is recognized on a “graded attribution method.” The graded attribution method results in
expense recognition on a straight-line basis over the requisite service period for each separately
vesting portion of an award, as if the award was, in-substance, multiple awards. Expense for stock
options and restricted stock is generally recorded as a corporate expense.
We have total unrecognized compensation cost related to unvested stock option and restricted stock
awards of $32.6 million that will be recognized over a weighted average period of 3.8 years.
Inflation and functional currencies
Generally, the countries in which we operate have experienced low and stable inflation in recent
years. Therefore, the local currency in each of these markets is the functional currency. Due to
these factors, we do not believe that inflation will have a significant effect on our results of
operations or financial position. We continually review inflation and the functional currency in
each of the countries where we operate.
OFF BALANCE SHEET ARRANGEMENTS
We have certain significant off balance sheet items described below and in the following section,
“—Contractual Obligations” (also see Note 24, Guarantees, to the Consolidated Financial
Statements).
As of December 31, 2008 we had $44.8 million of bank guarantees issued on our behalf, of which $8.4
million are collateralized by cash deposits held by the respective issuing banks and $30.9 million
are supported by stand-by letters of credit issued against the revolving credit facility. These
letters of credit reduce the amount available for borrowing under our revolving credit facility.
On occasion we grant guarantees in support of obligations of subsidiaries. As of December 31, 2008,
we had granted guarantees for cash in various ATM networks amounting to $18.6 million over the
terms of the cash supply agreements and performance guarantees amounting to approximately $26.9
million over the terms of the agreements with the customers.
From time to time, we enter into agreements with unaffiliated parties that contain
indemnification provisions, the terms of which may vary depending on the negotiated terms of each
respective agreement. The amount of such obligations is not stated in the agreements. Our liability
under such indemnification provisions may be subject to time and materiality limitations, monetary
caps and other conditions and defenses. Such indemnity obligations include the following:
| • | In connection with contracts with financial institutions in the EFT Processing Segment, we are responsible for damages to ATMs and theft of ATM network cash that, generally, is not recorded on the Consolidated Balance Sheet. As of December 31, 2008, the balance of ATM network cash for which we were responsible was approximately $415 million. We maintain insurance policies to mitigate this exposure; | ||
| • | In connection with the license of proprietary systems to customers, we provide certain warranties and infringement indemnities to the licensee, which generally warrant that such systems do not infringe on intellectual property owned by third parties and that the systems will perform in accordance with their specifications; |
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| • | We have entered into purchase and service agreements with our vendors and into consulting agreements with providers of consulting services, pursuant to which we have agreed to indemnify certain of such vendors and consultants, respectively, against third-party claims arising from our use of the vendor’s product or the services of the vendor or consultant; | ||
| • | In connection with acquisitions and dispositions of subsidiaries, operating units and business assets, we have entered into agreements containing indemnification provisions, which are generally described as follows: (i) in connection with acquisitions made by Euronet, we have agreed to indemnify the seller against third party claims made against the seller relating to the subject subsidiary, operating unit or asset and arising after the closing of the transaction, and (ii) in connection with dispositions made by us, we have agreed to indemnify the buyer against damages incurred by the buyer due to the 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; | ||
| • | We have entered into agreements with certain third parties, including banks that provide fiduciary and other services to Euronet or to our benefit plans. Under such agreements, we have agreed to indemnify such service providers for third party claims relating to the carrying out of their respective duties under such agreements; and | ||
| • | In connection with our entry into the money transfer business, we have issued surety bonds in compliance with licensing requirements of the applicable governmental authorities. |
We are also required to meet minimum capitalization and cash requirements of various regulatory
authorities in the jurisdictions in which we have money transfer operations. We are not aware of
any significant claims made by the indemnified parties or third parties to guarantee agreements
with us and, accordingly, no liabilities were recorded as of December 31, 2008.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31, 2008:
| Payments due by period | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| (in thousands) | Total | 1 year | 1-3 years | 4-5 years | 5 years | |||||||||||||||
Long-term debt obligations, including interest |
$ | 458,935 | $ | 87,776 | $ | 32,040 | $ | 214,373 | $ | 124,746 | ||||||||||
Estimated contingent acquisition obligations |
2,500 | 1,250 | 1,250 | — | — | |||||||||||||||
Obligations under capital leases |
12,475 | 5,510 | 6,211 | 752 | 2 | |||||||||||||||
Obligations under operating leases |
60,417 | 18,775 | 25,704 | 10,901 | 5,037 | |||||||||||||||
Total |
$ | 534,327 | $ | 113,311 | $ | 65,205 | $ | 226,026 | $ | 129,785 | ||||||||||
For the purposes of the above table, our $70 million convertible debentures issued in December 2004
are considered due during 2009, and our $175 million convertible debentures issued in October 2005
are considered due during 2012, representing the first years in which holders have the right to
exercise their put option. Additionally, the above table only includes interest on these
convertible debentures up to these dates. Although in certain circumstances we may be required to
repay our obligations under the Credit Facility six months before any potential repurchase date
under our $175 million 3.5% convertible debentures, the table above assumes that these
circumstances will not be met and the Credit Facility will be fully repaid at maturity. We have
assumed $16.7 million, the December 31, 2008 balance, will be outstanding at all times under the revolving credit facility. The
computation of interest for debt obligations with variable interest rates reflects interest rates
in effect at December 31, 2008. For additional information on debt obligations, see Note 12, Debt
Obligations, to the Consolidated Financial Statements.
Estimated contingent acquisition obligations as of December 31, 2008 are additional consideration
to be settled in cash or Euronet Common Stock that we may have to pay during 2009 and 2010 in
connection with the acquisition of Brodos, totaling up to $2.5 million. See Note 6, Acquisitions,
to the Consolidated Financial Statements for a more complete description of these acquisitions.
For additional information on capital and operating lease obligations, see Note 15, Leases, to the
Consolidated Financial Statements.
Our total liability for uncertain tax positions under Financial Accounting Standards Board (“FASB”)
Interpretation No. 48 (“FIN 48”) was $8.2 million as of December 31, 2008. We are not able to
reasonably estimate the amount by which the liability will increase or decrease over time; however,
at this time, we do not expect a significant payment related to these obligations within the next
year. See Note 16, Taxes, to the Consolidated Financial Statements for additional
information.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the U.S. requires management to make judgments, assumptions, and
estimates, often as a result of the need to make estimates of matters that are inherently uncertain
and for which the actual results will emerge over time. These judgments, assumptions and estimates
affect the amounts of assets, liabilities, revenues and expenses reported in the Consolidated
Financial Statements and accompanying notes. Note 3, Summary of Significant Accounting Policies and
Practices, to the Consolidated Financial Statements describes the significant accounting policies
and methods used in the preparation of the Consolidated Financial Statements. Our most critical
estimates and assumptions are used for computing income taxes, estimating the useful lives and
potential impairment of long-lived assets and goodwill, as well as allocating the purchase price to
assets acquired in acquisitions, and revenue recognition. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. The following descriptions
of critical accounting policies and estimates are forward-looking statements and are impacted
significantly by estimates and should be read in conjunction with Item 1A – Risk Factors. Actual
results could differ materially from the results anticipated by these forward-looking statements.
Accounting for income taxes
The deferred income tax effects of transactions reported in different periods for financial
reporting and income tax return purposes are recorded under the liability method. This method gives
consideration to the future tax consequences of deferred income or expense items and immediately
recognizes changes in income tax laws upon enactment. The income statement effect is generally
derived from changes in deferred income taxes, net of valuation allowances, on the balance sheet as
measured by differences in the book and tax bases of our assets and liabilities.
We have significant tax loss carryforwards, and other temporary differences, which are recorded as
deferred tax assets and liabilities. Deferred tax assets realizable in future periods are recorded
net of a valuation allowance based on an assessment of each entity’s, or group of entities’,
ability to generate sufficient taxable income within an appropriate period, in a specific tax
jurisdiction.
In assessing the recognition of deferred tax assets, we consider whether it is more likely than not
that some portion or all of the deferred tax assets will be realized. As more fully described in
Note 16, Taxes, to the Consolidated Financial Statements, gross deferred tax assets were $122.9
million as of December 31, 2008, partially offset by a valuation allowance of $85.1 million. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. We make judgments
and estimates on the scheduled reversal of deferred tax liabilities, historical and projected
future taxable income in each country in which we operate, and tax planning strategies in making
this assessment.
Based upon the level of historical taxable income and current projections for future taxable income
over the periods in which the deferred tax assets are deductible, we believe it is more likely than
not that we will realize the benefits of these deductible differences, net of the existing
valuation allowance at December 31, 2008. If we have a history of generating taxable income in a
certain country in which we operate, and baseline forecasts project continued taxable income in
this country, we will reduce the valuation allowance for those deferred tax assets that we expect
to realize.
Additionally, we follow the provisions of FIN 48 to account for uncertainty in income tax
positions. FIN 48 requires substantial management judgment and use of estimates in determining
whether the impact of a tax position is “more likely than not” of being sustained on audit by the
relevant taxing authority. We consider many factors when evaluating and estimating our tax
positions, which may require periodic adjustments and which may not accurately anticipate actual
outcomes. It is reasonably possible that amounts reserved for potential exposure could change
significantly as a result of the conclusion of tax examinations and, accordingly, materially affect
our operating results.
Goodwill and other intangible assets
In accordance with SFAS No. 141, “Business Combinations,” we allocate the acquisition purchase
price to the tangible assets, liabilities and intangible assets acquired based on their estimated
fair values. The excess purchase price over those fair values is recorded as goodwill. The fair
value assigned to intangible assets acquired is supported by valuations using estimates and
assumptions provided by management. For larger or more complex acquisitions, management engages an
appraiser to assist in the valuation. Intangible assets with finite lives are amortized over their
estimated useful lives. As of December 31, 2008, the Consolidated Balance Sheet includes goodwill
of $488.3 million and acquired intangible assets, net of accumulated amortization, of $125.3
million.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” on an annual basis, and
whenever events or circumstances dictate, we test for impairment. Impairment tests are performed
annually during the fourth quarter and are performed at the reporting unit level. Generally, fair
value represents discounted projected future cash flows and potential impairment is indicated when
the carrying value of a reporting unit, including goodwill, exceeds its estimated fair value. If
the potential for impairment exists, the fair value of the reporting unit is subsequently measured
against the fair value of its underlying assets and liabilities, excluding
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goodwill, to estimate an
implied fair value of the reporting unit’s goodwill. An impairment loss is recognized for any
excess of the carrying value of the reporting unit’s goodwill over the implied fair value. As a
result of our annual impairment test for the year ended December 31, 2008, we recorded a non-cash
goodwill impairment charge of $219.8 million. See Note 10, Goodwill and Acquired Intangible Assets,
Net, to the Consolidated Financial Statements for additional information regarding this charge. Our
annual impairment tests during the years 2007 and 2006 indicated that there were no impairments.
Determining the fair value of reporting units requires significant management judgment in
estimating future cash flows and assessing potential market and economic conditions. It is
reasonably possible that our operations will not perform as expected, or that estimates or
assumption could change, which may result in the recording of additional material non-cash
impairment charges during the year in which these changes take place.
See “Impact of New and Emerging Accounting Pronouncements Not Yet Adopted” below for discussion
regarding issuance of SFAS No. 141R, “Business Combinations,” that will be effective for
acquisitions we complete after January 1, 2009.
Impairment or disposal of long-lived assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
long-lived assets, such as property and equipment and intangible assets subject to amortization,
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Factors that are considered important which could
trigger an impairment review include the following: significant underperformance relative to
expected historical or projected future operating results; significant changes in the manner of use
of the acquired assets or the strategy for the overall business; and significant negative industry
or economic trends. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by
the respective asset. The same estimates are also used in planning for our long- and short-range
business planning and forecasting. We assess the reasonableness of the inputs and outcomes of our
discounted cash flow analysis against available comparable market data. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount exceeds the fair value of the respective asset. Assets to be disposed
are required to be separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held for sale are required to be presented separately
in the appropriate asset and liability sections of the balance sheet. Reviewing long-lived assets
for impairment requires considerable judgment. Estimating the future cash flows requires
significant judgment. If future cash flows do not materialize as expected or there is a future
adverse change in market conditions, we may be unable to recover the carrying amount of an asset,
resulting in future impairment losses.
Revenue recognition
In accordance with U.S. GAAP, we recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed or determinable
and collection is reasonably assured. The majority of our revenues are comprised of monthly
recurring management fees and transaction-based fees that are recognized when the transactions are
processed or the services are performed. When determining the proper revenue recognition for
monthly management fees and transaction-based fees, we consider the guidance in Staff Accounting
Bulletin (“SAB”) 101, “Revenue Recognition in Financial Statements,” as amended by SAB 104,
“Revenue Recognition,” Emerging Issues Task Force (“EITF”) 99-19, “Reporting Revenue Gross as
Principle versus Net as an Agent,” EITF 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables,” and other various interpretations.
Certain of our noncancelable customer contracts provide for the receipt of up-front fees paid to or
received from the customer and/or decreasing or increasing fee schedules over the agreement term
for substantially the same level of services provided by the Company. As prescribed by SAB 101 and
SAB 104, we recognize revenue under these contracts based on proportional performance of services
over the term of the contract, which generally results in “straight-line” revenue recognition of
the contracts’ total cash flows, including any up-front payment.
We also record certain revenues in the EFT Processing Segment related to the sale of EFT software
solutions for electronic payment and transaction delivery systems, including professional fees for
implementation and customization, ongoing software maintenance and associated computer hardware.
When determining the proper revenue recognition for these items, in addition to SAB 101, SAB 104,
and EITF 00-21, we also consider the guidance contained in Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and SOP 81-1, “Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.” Applying U.S. GAAP revenue
recognition guidance to the software business requires more detailed knowledge of the rules and is
subject to more complex judgment. For the year ended December 31, 2008, revenues from software and
software-related products and services represented less than 2% of our total consolidated revenues.
Substantial management judgment and estimation is required in determining the proper revenue
recognition methodology for our various revenue producing activities, as well as the proper and
consistent application of our determined methodology.
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SUBSEQUENT EVENTS
During February 2009, we entered into Amendment No. 2 to the Credit Facility to, among other items,
(i) (a) grant us the ability to repurchase the remaining $70 million of outstanding 1.625%
Convertible Senior Debentures Due 2024 and (b) repurchase our 3.5% Convertible Debentures Due 2025
prior to any repurchase date using proceeds of a qualifying refinancing, the proceeds of a
qualifying equity issuance or shares of common stock; (ii) revise the definition of Consolidated
EBITDA and the covenant regarding maintenance of Consolidated Net Worth to exclude the effect of
non-cash charges for impairment of goodwill or other intangible assets for the periods ending
December 31, 2008 and thereafter; and (iii) broaden or otherwise modify various definitions or
provisions related to Indebtedness, Liens, Permitted Disposition, Debt Transactions, Investments
and other matters. Additionally, the lenders acknowledged that we have sufficient liquidity with
respect to the December 15, 2009 repurchase date for the 1.625% Convertible Senior Debentures. We
incurred costs of approximately $1.5 million in connection with the amendment, which will be
recognized as additional interest expense over the remaining term of the Credit Facility.
IMPACT OF NEW AND EMERGING ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP
APB 14-1 requires the proceeds from the issuance of such convertible debt instruments to be
allocated between debt and equity components so that debt is discounted to reflect the Company’s
nonconvertible debt borrowing rate. The debt discount is amortized over the period the convertible
debt is expected to be outstanding as additional non-cash interest expense. The change in
accounting treatment is effective for fiscal years beginning after December 15, 2008 and applies
retrospectively to prior periods. FSP APB 14-1 will impact the accounting associated with our $140
million convertible senior debentures and our $175 million convertible debentures. The new
accounting treatment will require us to retrospectively record a significant amount of non-cash
interest as the discount on the debt is amortized. We estimate that we will record additional
interest expense of approximately $12 million for each of the years ended December 31, 2008 and
2007. Additionally, the pre-tax gains on the early retirements of the convertible debentures in
2008 will be reduced by approximately $4 million.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities,” which requires enhanced disclosures about an entity’s derivative and hedging
activities, including: (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. Our adoption of SFAS No. 161 is not expected
to have a material impact on the Consolidated Financial Statements.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible
Assets.” FSP FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets.” This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and the guidance for determining the
useful life of a recognized intangible asset must be applied prospectively to intangible assets
acquired after the effective date. Our adoption of FSP FAS 142-3 is not expected to have a material
impact on the Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which is a revision of
SFAS No. 141, “Business Combinations.” SFAS No. 141R will apply to all business combinations and
will require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired
in a business combination to be recorded at “full fair value.” SFAS No. 141R will also require
transaction-related costs to be expensed in the period incurred, rather than capitalizing these
costs as a component of the respective purchase price. SFAS No. 141R is effective for acquisitions
that we may complete after January 1, 2009 and early adoption was prohibited. The adoption will
have a significant impact on the accounting treatment for acquisitions occurring after the
effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements,” that replaces Accounting Research Bulletin (“ARB”) 51, “Consolidated Financial
Statements.” SFAS No. 160 will require noncontrolling interests (previously referred to as minority
interests) to be reported as a component of equity, which will change the accounting for
transactions with noncontrolling interest holders. SFAS No. 160 is effective for Euronet on January
1, 2009 and will result in a change in the classification of noncontrolling interest from a
component of liabilities to a component of equity in Consolidated Balance Sheets and will change
the accounting for transactions with noncontrolling shareholders after the effective date.
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FORWARD-LOOKING STATEMENTS
This document contains statements that constitute forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934,
as amended. All statements other than statements of historical facts included in this document are
forward-looking statements, including statements regarding the following:
| • | our business plans and financing plans and requirements, | ||
| • | trends affecting our business plans and financing plans and requirements, | ||
| • | trends affecting our business, | ||
| • | the adequacy of capital to meet our capital requirements and expansion plans, | ||
| • | the assumptions underlying our business plans, | ||
| • | business strategy, | ||
| • | government regulatory action, | ||
| • | technological advances, or | ||
| • | projected costs and revenues. |
Although we believe that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to be correct.
Forward-looking statements are typically identified by the words believe, expect, anticipate,
intend, estimate and similar expressions.
Investors are cautioned that any forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, including, but not limited to, those referred to
above and as set forth in Item 1A – Risk Factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
In connection with completing the acquisition of RIA in April 2007, we entered into a $290 million
secured syndicated credit facility consisting of a $190 million seven-year term loan, which was
fully drawn at closing, and a $100 million five-year revolving credit facility, which accrue
interest at variable rates. This credit facility replaced our $50 million revolving credit
facility. The credit facility may be expanded by up to an additional $150 million in term loans and
up to an additional $25 million for the revolving line of credit, subject to satisfaction of
certain conditions including pro forma debt covenant compliance. This facility substantially
increased our interest rate risk.
As of December 31, 2008, our total outstanding debt was $405.0 million. Of this amount, $245
million, or 61% of our total debt obligations, relates to contingent convertible debentures having
fixed coupon rates. Our $175 million contingent convertible debentures, issued in October 2005,
accrue interest at a rate of 3.5% per annum. The $70 million contingent convertible debentures,
issued in December 2004 accrue interest at a rate of 1.625% per annum. Based on quoted market
prices, as of December 31, 2008 the fair value of our fixed rate convertible debentures was $175.7
million, compared to a carrying value of $245 million.
Through the use of interest rate swap agreements covering the period from June 1, 2007 to May 29,
2009, an additional $50.0 million of our variable rate term debt, or 12% of our total debt, has
been effectively converted to a fixed rate of 7.3%. As of December 31, 2008, the unrealized loss on
the interest rate swap agreements was $0.8 million. Interest expense, including amortization of
deferred debt issuance costs, for our total $295.0 million in fixed rate debt totals approximately
$12.2 million per year, or a weighted average interest rate of 4.1% annually. Additionally,
approximately $11.0 million, or 3% of our total debt obligations, relate to capitalized leases with
fixed payment and interest terms that expire between 2009 and 2014.
The remaining $99.0 million, or 24% of our total debt obligations, relates to debt that accrues
interest at variable rates. If we were to maintain these borrowings for one year, and maximize the
potential borrowings available under the revolving credit facility for one year, including the
$25.0 million in potential additional expanded borrowings, a 1% increase in the applicable interest
rate would result in additional annualized interest expense of approximately $1.8 million. This
computation excludes the $50.0 million relating to the interest rate swap discussed above and the
potential $150.0 million from an expanded term loan because of the limited circumstances under
which the additional amounts would be available to us for borrowing. For more information regarding
our debt obligations, see Note 12, Debt Obligations, to the Consolidated Financial Statements.
Our excess cash is invested in instruments with original maturities of three months or less;
therefore, as investments mature and are reinvested, the amount we earn will increase or decrease
with changes in the underlying short term interest rates.
Foreign currency exchange rate risk
For the years ended December 31, 2008 and 2007, 76% of our revenues were generated in non-U.S.
dollar countries. We expect to continue generating a significant portion of our revenues in
countries with currencies other than the U.S. dollar.
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We are particularly vulnerable to fluctuations in exchange rates of the U.S. dollar to the
currencies of countries in which we have significant operations, primarily to the euro, British pound, Australian dollar and Polish zloty. As of December 31, 2008, we
estimate that a 10% fluctuation in these foreign currency exchange rates would have the combined
annualized effect on reported net income and working capital of approximately $30 million to $35
million. This effect is estimated by applying a 10% adjustment factor to our non-U.S. dollar
results from operations, intercompany loans that generate foreign currency gains or losses and
working capital balances that require translation from the respective functional currency to the
U.S. dollar reporting currency. Additionally, we have other non-current, non-U.S. dollar assets and
liabilities on our balance sheet that are translated to the U.S. dollar during consolidation. These
items primarily represent goodwill and intangible assets recorded in connection with acquisitions
in countries other than the U.S. We estimate that a 10% fluctuation in foreign currency exchange
rates would have a non-cash impact on total comprehensive income of
approximately $45 million to
$55 million as a result of the change in value of these items during translation to the U.S.
dollar. For the fluctuations described above, a strengthening U.S. dollar produces a financial
loss, while a weakening U.S. dollar produces a financial gain. We believe this quantitative measure
has inherent limitations and does not take into account any governmental actions or changes in
either customer purchasing patterns or our financing or operating strategies. Because a majority of
our revenues and expenses are incurred in the functional currencies of our international operating
entities, the profits we earn in foreign currencies are positively impacted by the weakening of the
U.S. dollar
and negatively impacted by the strengthening of the U.S. dollar. Additionally, our debt obligations
are primarily in U.S. dollars, therefore, as foreign currency exchange rates fluctuate, the amount
available for repayment of debt will also increase or decrease.
We are also exposed to foreign currency exchange rate risk in our Money Transfer Segment. A
majority of the money transfer business involves receiving and disbursing different currencies, in
which we earn a foreign currency spread based on the difference between buying currency at
wholesale exchange rates and selling the currency to consumers at retail exchange rates. This
spread provides some protection against currency fluctuations that occur while we are holding the
foreign currency. Our exposure to changes in foreign currency exchange rates is limited by the fact
that disbursement occurs for the majority of transactions shortly after they are initiated.
Additionally, we enter into foreign currency forward contracts to help offset foreign currency
exposure related to the notional value of money transfer transactions collected in currencies other
than the U.S. dollar. As of December 31, 2008, we had foreign currency derivative instruments,
primarily forward contracts, outstanding with a notional value of $56.5 million, primarily in euros
that were not designated as hedges and mature in a weighted average of five days. The fair value of
these forward contracts as of December 31, 2008 was an unrealized gain of approximately $0.3
million, which was mostly offset by the unrealized loss on the related foreign currency
receivables.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Euronet Worldwide, Inc.:
Euronet Worldwide, Inc.:
We have audited the accompanying consolidated balance sheets of Euronet Worldwide, Inc. and
subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in stockholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2008. We also have audited the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Euronet Worldwide, Inc.’s management is responsible for these consolidated financial statements,
for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying
“Management’s Report on Internal Controls over Financial Reporting.” Our responsibility is to
express an opinion on these consolidated financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Euronet Worldwide, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their operations
and their cash flows for each of the
years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, Euronet Worldwide, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
As discussed in Note 3 to the consolidated financial statements, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 157, Fair Value Measurements, for its financial
assets and liabilities as of January 1, 2008. Also, as discussed in Notes 3 and 16 to the consolidated
financial statements, the Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, as of January 1,
2007.
| /s/ KPMG LLP | ||||
Kansas City, Missouri
March 2, 2009
March 2, 2009
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CONSOLIDATED FINANCIAL STATEMENTS
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
Consolidated Balance Sheets
(in thousands, except share data)
| As of December 31, | ||||||||
| 2008 | 2007 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 181,341 | $ | 266,869 | ||||
Restricted cash |
131,025 | 140,222 | ||||||
Inventory — PINs and other |
61,279 | 50,265 | ||||||
Trade accounts receivable, net of allowances for doubtful accounts of $9,445 at
December 31, 2008 and $6,194 at December 31, 2007 |
261,084 | 286,245 | ||||||
Deferred income taxes, net |
8,539 | 13,554 | ||||||
Prepaid expenses and other current assets |
35,352 | 39,564 | ||||||
Current assets of discontinued operations |
3,729 | 5,765 | ||||||
Total current assets |
682,349 | 802,484 | ||||||
Property and equipment, net of accumulated depreciation of $125,258 at
December 31, 2008 and $119,190 at December 31, 2007 |
89,532 | 88,337 | ||||||
Goodwill |
488,305 | 762,723 | ||||||
Acquired intangible assets, net of accumulated amortization of $62,920 at
December 31, 2008 and $44,450 at December 31, 2007 |
125,313 | 155,137 | ||||||
Deferred income taxes, net |
29,304 | 30,822 | ||||||
Other assets, net of accumulated amortization of $17,476 at December 31, 2008
and $12,649 at December 31, 2007 |
21,268 | 41,346 | ||||||
Non-current assets of discontinued operations |
4,053 | 5,307 | ||||||
Total assets |
$ | 1,440,124 | $ | 1,886,156 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 245,671 | $ | 306,155 | ||||
Accrued expenses and other current liabilities |
223,814 | 167,054 | ||||||
Current portion of capital lease obligations |
4,614 | 4,974 | ||||||
Short-term debt obligations and current portion of long-term debt obligations |
72,098 | 1,910 | ||||||
Income taxes payable |
16,590 | 15,342 | ||||||
Deferred income taxes |
5,592 | 7,587 | ||||||
Deferred revenue |
14,914 | 12,934 | ||||||
Current liabilities of discontinued operations |
3,359 | 7,218 | ||||||
Total current liabilities |
586,652 | 523,174 | ||||||
Debt obligations, net of current portion |
321,909 | 539,303 | ||||||
Capital lease obligations, net of current portion |
6,356 | 11,520 | ||||||
Deferred income taxes |
51,745 | 74,610 | ||||||
Other long-term liabilities |
6,872 | 4,672 | ||||||
Minority interest |
7,585 | 8,975 | ||||||
Total liabilities |
981,119 | 1,162,254 | ||||||
Stockholders’ equity: |
||||||||
Preferred Stock, $0.02 par value. Authorized 10,000,000 shares; none issued |
— | — | ||||||
Common Stock, $0.02 par value. 90,000,000 shares authorized; 50,605,909
issued at December 31, 2008 and 49,159,968 issued at December 31, 2007 |
1,012 | 983 | ||||||
Additional paid-in-capital |
668,133 | 658,047 | ||||||
Treasury stock, at cost, 225,072 shares at December 31, 2008 and 207,065 shares
at December 31, 2007 |
(784 | ) | (379 | ) | ||||
Accumulated deficit |
(201,002 | ) | (5,905 | ) | ||||
Restricted reserve |
996 | 957 | ||||||
Accumulated other comprehensive income (loss) |
(9,350 | ) | 70,199 | |||||
Total stockholders’ equity |
459,005 | 723,902 | ||||||
Total liabilities and stockholders’ equity |
$ | 1,440,124 | $ | 1,886,156 | ||||
See accompanying notes to the consolidated financial statements.
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EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share data)
Consolidated Statements of Operations
(in thousands, except share data)
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Revenues: |
||||||||||||
EFT Processing Segment |
$ | 205,257 | $ | 174,049 | $ | 144,515 | ||||||
Prepaid Processing Segment |
609,106 | 569,858 | 467,651 | |||||||||
Money Transfer Segment |
231,302 | 158,759 | 3,210 | |||||||||
Total revenues |
1,045,665 | 902,666 | 615,376 | |||||||||
Operating expenses: |
||||||||||||
Direct operating costs |
703,842 | 623,548 | 435,112 | |||||||||
Salaries and benefits |
129,098 | 105,289 | 65,616 | |||||||||
Selling, general and administrative |
85,418 | 62,789 | 35,286 | |||||||||
Goodwill and acquired intangible assets impairment |
220,077 | — | — | |||||||||
Federal excise tax refund |
— | (12,191 | ) | — | ||||||||
Depreciation and amortization |
56,251 | 46,997 | 28,590 | |||||||||
Total operating expenses |
1,194,686 | 826,432 | 564,604 | |||||||||
Operating income (loss) |
(149,021 | ) | 76,234 | 50,772 | ||||||||
Other income (expense): |
||||||||||||
Interest income |
10,611 | 16,250 | 13,644 | |||||||||
Interest expense |
(24,538 | ) | (26,126 | ) | (14,719 | ) | ||||||
Income from unconsolidated affiliates |
1,250 | 908 | 660 | |||||||||
Impairment loss on investment securities |
(18,760 | ) | — | — | ||||||||
Gain (loss) on early retirement of debt |
5,546 | (427 | ) | — | ||||||||
Foreign currency exchange gain (loss), net |
(9,821 | ) | 15,497 | 10,287 | ||||||||
Other income (expense), net |
(35,712 | ) | 6,102 | 9,872 | ||||||||
Income (loss) from continuing operations
before income taxes and minority interest |
(184,733 | ) | 82,336 | 60,644 | ||||||||
Income tax expense |
(10,228 | ) | (27,759 | ) | (14,294 | ) | ||||||
Minority interest |
935 | (2,040 | ) | (977 | ) | |||||||
Income (loss) from continuing operations |
(194,026 | ) | 52,537 | 45,373 | ||||||||
Discontinued operations, net |
(1,071 | ) | 967 | 629 | ||||||||
Net income (loss) |
$ | (195,097 | ) | $ | 53,504 | $ | 46,002 | |||||
Earnings (loss) per share — basic: |
||||||||||||
Continuing operations |
$ | (3.95 | ) | $ | 1.16 | $ | 1.22 | |||||
Discontinued operations |
(0.02 | ) | 0.02 | 0.02 | ||||||||
Total |
$ | (3.97 | ) | $ | 1.18 | $ | 1.24 | |||||
Basic weighted average shares outstanding |
49,180,908 | 45,260,803 | 37,037,435 | |||||||||
Earnings (loss) per share — diluted: |
||||||||||||
Continuing operations |
$ | (3.95 | ) | $ | 1.09 | $ | 1.14 | |||||
Discontinued operations |
(0.02 | ) | 0.02 | 0.02 | ||||||||
Total |
$ | (3.97 | ) | $ | 1.11 | $ | 1.16 | |||||
Diluted weighted average shares outstanding |
49,180,908 | 51,014,086 | 42,456,137 | |||||||||
See accompanying notes to the consolidated financial statements.
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EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share data)
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share data)
| No. of | Additional | |||||||||||||||||||
| Shares | Common | Paid in | Treasury | Subscription | ||||||||||||||||
| Outstanding | Stock | Capital | Stock | Receivable | ||||||||||||||||
Balance at December 31, 2005 |
35,776,431 | $ | 717 | $ | 312,025 | $ | (196 | ) | $ | (124 | ) | |||||||||
Comprehensive income: |
||||||||||||||||||||
Net income |
||||||||||||||||||||
Translation adjustment |
||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||
Stock issued under employee stock plans |
1,539,014 | 31 | 14,630 | (46 | ) | |||||||||||||||
Share-based compensation |
7,366 | |||||||||||||||||||
Shares issued for acquisitions |
109,542 | 2 | 4,123 | |||||||||||||||||
Other |
15,040 | (1 | ) | 72 | ||||||||||||||||
Balance at December 31, 2006 |
37,440,027 | 749 | 338,216 | (196 | ) | (170 | ) | |||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net income |
||||||||||||||||||||
Translation adjustment |
||||||||||||||||||||
Unrealized loss on interest rate swaps |
||||||||||||||||||||
Unrealized gain on available-for-sale securities |
||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||
Stock issued under employee stock plans |
809,313 | 19 | 8,177 | (191 | ) | 170 | ||||||||||||||
Share-based compensation |
7,799 | 8 | ||||||||||||||||||
Shares issued for acquisitions |
4,329,035 | 87 | 149,594 | |||||||||||||||||
Private placement of shares |
6,374,528 | 128 | 154,192 | |||||||||||||||||
Other |
69 | |||||||||||||||||||
Balance at December 31, 2007 |
48,952,903 | 983 | 658,047 | (379 | ) | — | ||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net loss |
||||||||||||||||||||
Translation adjustment |
||||||||||||||||||||
Unrealized gain on interest rate swaps |
||||||||||||||||||||
Unrealized loss on available-for-sale securities |
||||||||||||||||||||
Comprehensive loss |
||||||||||||||||||||
Stock issued under employee stock plans |
313,384 | 7 | 1,793 | (485 | ) | |||||||||||||||
Share-based compensation |
8,579 | |||||||||||||||||||
Settlement of contingent value rights |
1,114,550 | 22 | (22 | ) | ||||||||||||||||
Other |
(264 | ) | 80 | |||||||||||||||||
Balance at December 31, 2008 |
50,380,837 | $ | 1,012 | $ | 668,133 | $ | (784 | ) | $ | — | ||||||||||
See accompanying notes to the consolidated financial statements.
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EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (continued)
(in thousands)
Consolidated Statements of Changes in Stockholders’ Equity (continued)
(in thousands)
| Accumulated Other | ||||||||||||||||||||
| Comprehensive Income (Loss) | ||||||||||||||||||||
| Cumulative | Other | |||||||||||||||||||
| Accumulated | Restricted | Translation | Comprehensive | |||||||||||||||||
| Deficit | Reserve | Adjustment | Income (Loss) | Total | ||||||||||||||||
Balance at December 31, 2005 |
$ | (105,411 | ) | $ | 776 | $ | 2,452 | — | 210,239 | |||||||||||
Comprehensive income: |
||||||||||||||||||||
Net income |
46,002 | 46,002 | ||||||||||||||||||
Translation adjustment |
26,371 | 26,371 | ||||||||||||||||||
Comprehensive income |
72,373 | |||||||||||||||||||
Stock issued under employee stock plans |
14,615 | |||||||||||||||||||
Share-based compensation |
7,366 | |||||||||||||||||||
Shares issued for acquisitions |
4,125 | |||||||||||||||||||
Other |
4 | 75 | ||||||||||||||||||
Balance at December 31, 2006 |
(59,409 | ) | 780 | 28,823 | — | 308,793 | ||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net income |
53,504 | 53,504 | ||||||||||||||||||
Translation adjustment |
41,798 | 41,798 | ||||||||||||||||||
Unrealized loss on interest rate swaps |
(994 | ) | (994 | ) | ||||||||||||||||
Unrealized gain on available-for-sale securities |
572 | 572 | ||||||||||||||||||
Comprehensive income |
94,880 | |||||||||||||||||||
Stock issued under employee stock plans |
8,175 | |||||||||||||||||||
Share-based compensation |
7,807 | |||||||||||||||||||
Shares issued for acquisitions |
149,681 | |||||||||||||||||||
Private placement of shares |
154,320 | |||||||||||||||||||
Other |
177 | 246 | ||||||||||||||||||
Balance at December 31, 2007 |
(5,905 | ) | 957 | 70,621 | (422 | ) | 723,902 | |||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net loss |
(195,097 | ) | (195,097 | ) | ||||||||||||||||
Translation adjustment |
(79,261 | ) | (79,261 | ) | ||||||||||||||||
Unrealized gain on interest rate swaps |
164 | 164 | ||||||||||||||||||
Unrealized loss on available-for-sale securities |
(452 | ) | (452 | ) | ||||||||||||||||
Comprehensive loss |
(274,646 | ) | ||||||||||||||||||
Stock issued under employee stock plans |
1,315 | |||||||||||||||||||
Share-based compensation |
8,579 | |||||||||||||||||||
Settlement of contingent value rights |
— | |||||||||||||||||||
Other |
39 | (145 | ) | |||||||||||||||||
Balance at December 31, 2008 |
$ | (201,002 | ) | $ | 996 | $ | (8,640 | ) | $ | (710 | ) | $ | 459,005 | |||||||
See accompanying notes to the consolidated financial statements.
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EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Consolidated Statements of Cash Flows
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Net income (loss) |
$ | (195,097 | ) | $ | 53,504 | $ | 46,002 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
57,208 | 48,331 | 29,494 | |||||||||
Share-based compensation |
8,547 | 7,736 | 7,423 | |||||||||
Unrealized foreign exchange (gain) loss, net |
9,662 | (9,296 | ) | (10,102 | ) | |||||||
Non-cash impairment of goodwill and acquired intangible assets |
220,077 | — | — | |||||||||
Non-cash impairment of investment securities |
18,760 | — | — | |||||||||
Gain on repurchase of bonds |
(6,625 | ) | — | — | ||||||||
Deferred income tax benefit |
(16,400 | ) | (2,003 | ) | (188 | ) | ||||||
Income (loss) assigned to minority interest |
(935 | ) | 2,040 | 977 | ||||||||
Income from unconsolidated affiliates |
(1,250 | ) | (908 | ) | (660 | ) | ||||||
Amortization of debt obligations issuance expense |
3,481 | 2,354 | 2,031 | |||||||||
Changes in working capital, net of amounts acquired: |
||||||||||||
Income taxes payable, net |
5,260 | (5,595 | ) | (1,392 | ) | |||||||
Restricted cash |
(46,054 | ) | (17,807 | ) | 2,865 | |||||||
Inventory — PINs and other |
(19,169 | ) | 3,619 | (21,395 | ) | |||||||
Trade accounts receivable |
(21,363 | ) | (12,511 | ) | (28,999 | ) | ||||||
Prepaid expenses and other current assets |
1,635 | (20,210 | ) | 8,403 | ||||||||
Trade accounts payable |
(20,109 | ) | 7,542 | 45,299 | ||||||||
Deferred revenue |
1,835 | 4,853 | 3,109 | |||||||||
Accrued expenses and other current liabilities |
93,052 | 14,630 | 14,253 | |||||||||
Other, net |
(1,267 | ) | 2,057 | (1,193 | ) | |||||||
Net cash provided by operating activities |
91,248 | 78,336 | 95,927 | |||||||||
Cash flows from investing activities: |
||||||||||||
Acquisitions, net of cash acquired |
(5,400 | ) | (352,684 | ) | (2,069 | ) | ||||||
Acquisition escrow |
26,000 | (26,000 | ) | — | ||||||||
Purchases of available for sale securities |
— | (19,990 | ) | — | ||||||||
Purchases of property and equipment |
(39,710 | ) | (38,083 | ) | (20,454 | ) | ||||||
Purchases of other long-term assets |
(3,304 | ) | (4,224 | ) | (4,665 | ) | ||||||
Other, net |
1,065 | 1,044 | 1,063 | |||||||||
Net cash used by investing activities |
(21,349 | ) | (439,937 | ) | (26,125 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of shares |
1,379 | 167,727 | 14,680 | |||||||||
Net borrowings (repayments) of short-term debt obligations and revolving
credit agreements classified as current liabilities |
581 | (4,862 | ) | (12,443 | ) | |||||||
Borrowings from revolving credit agreements classified as non-current liabilities |
270,020 | 880,013 | 41,804 | |||||||||
Repayments of revolving credit agreements classified as non-current liabilities |
(315,061 | ) | (888,950 | ) | (12,761 | ) | ||||||
Proceeds from long-term debt obligations |
— | 190,000 | — | |||||||||
Repayments of long-term debt obligations |
(95,375 | ) | (26,000 | ) | — | |||||||
Repayments of capital lease obligations |
(6,811 | ) | (10,414 | ) | (6,375 | ) | ||||||
Cash dividends paid to minority interest stockholders |
— | (2,798 | ) | — | ||||||||
Debt issuance costs |
(750 | ) | (3,827 | ) | — | |||||||
Other, net |
287 | 648 | (183 | ) | ||||||||
Net cash provided (used) by financing activities |
(145,730 | ) | 301,537 | 24,722 | ||||||||
Effect of exchange differences on cash |
(9,867 | ) | 6,597 | 6,602 | ||||||||
Increase (decrease) in cash and cash equivalents |
(85,698 | ) | (53,467 | ) | 101,126 | |||||||
Cash and cash equivalents at beginning of period (includes cash of discontinued
operations of $722 in 2008, $1,446 in 2007 and $0 in 2006) |
267,591 | 321,058 | 219,932 | |||||||||
Cash and cash equivalents at end of period (includes cash of discontinued
operations of $552 in 2008, $722 in 2007 and $1,446 in 2006) |
$ | 181,893 | $ | 267,591 | $ | 321,058 | ||||||
Interest paid during the period |
$ | 22,124 | $ | 24,110 | $ | 12,851 | ||||||
Income taxes paid during the period |
23,745 | 24,698 | 18,147 | |||||||||
See accompanying notes to the consolidated financial statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND
2006
(1) ORGANIZATION
Euronet Worldwide, Inc. was established as a Delaware corporation on December 13, 1997. Euronet
Worldwide, Inc. succeeded Euronet Holding N.V. as the group holding company, which was founded and
established in 1994.
Euronet Worldwide, Inc. and its subsidiaries (the “Company” or “Euronet”) is an industry leader in
processing secure electronic financial transactions. Euronet’s Prepaid Processing Segment is one of
the world’s largest international providers of “top-up” services for prepaid products, primarily
prepaid mobile airtime. The EFT Processing Segment provides end-to-end solutions relating to
operations of automated teller machine (“ATM”) and Point of Sale (“POS”) networks, and debit and
credit card processing in Europe, the Middle East and Asia Pacific. The Money Transfer Segment,
comprised primarily of the Company’s RIA Envia, Inc. (“RIA”) subsidiary and its operating
subsidiaries, is the third-largest global money transfer company, based upon revenues and volumes,
and provides services through a sending network of agents and Company-owned stores primarily in
North America and Europe, disbursing money transfers through a worldwide payer network.
(2) BASIS OF PREPARATION
The Consolidated Financial Statements have been prepared in conformity with accounting principles
generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of
the Securities and Exchange Commission (“SEC”). The Consolidated Financial Statements include the
accounts of Euronet and its wholly owned and majority owned subsidiaries and all significant
intercompany balances and transactions have been eliminated. The Company’s investments in companies
that it does not control, but has the ability to exercise significant influence, are accounted for
under the equity method. Euronet is not involved with any variable interest entities, as defined by
the Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of
Variable Interest Entities.” Results from operations related to entities acquired during the
periods covered by the Consolidated Financial Statements are reflected from the effective date of
acquisition. Certain amounts in prior years have been reclassified to conform to the current year’s
presentation.
The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires that
management make a number of estimates and assumptions relating to the reported amount of assets and
liabilities, the disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Significant items subject to such estimates and assumptions include
computing income taxes, estimating the useful lives and potential impairment of long-lived assets
and goodwill, as well as allocating the purchase price to assets acquired in acquisitions and
revenue recognition. Actual results could differ from those estimates.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Foreign currencies
Assets and liabilities denominated in currencies other than the functional currency of a subsidiary
are remeasured at rates of exchange on the balance sheet date. Resulting gains and losses on
foreign currency transactions are included in the Consolidated Statements of Operations.
The financial statements of foreign subsidiaries where the functional currency is not the U.S.
dollar are translated to U.S. dollars using (i) exchange rates in effect at period end for assets
and liabilities, and (ii) weighted average exchange rates during the period for revenues and
expenses. Adjustments resulting from translation of such financial statements are reflected in
accumulated other comprehensive income (loss) as a separate component of consolidated stockholders’
equity.
Cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Inventory — PINs and other
Inventory — PINs and other is valued at the lower of cost or fair market value and represents
primarily prepaid personal identification number (“PIN”) inventory for prepaid mobile airtime
related to the Prepaid Processing Segment. PIN inventory is generally managed on a specific
identification basis that approximates first in, first out for the respective denomination of
prepaid mobile airtime sold. Additionally, from time to time, Inventory — PINs and other may
include POS terminals, mobile phone handsets and ATMs held by the Company for resale.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation. Property and equipment
acquired in acquisitions have been recorded at estimated fair values as of the acquisition date.
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Depreciation is calculated using the straight-line method over the estimated useful lives of the
respective assets. Depreciation and amortization rates are generally as follows:
Automated teller machines (ATMs) or ATM upgrades |
5 – 7 years | |||
Computers and software |
3 – 5 years | |||
POS terminals |
2 – 5 years | |||
Vehicles and office equipment |
5 years | |||
ATM cassettes |
1 year | |||
Leasehold improvements |
Over the lesser of the lease term or estimated useful life | |||
Goodwill and other intangible assets
The Company accounts for goodwill and other intangible assets in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No.
142 requires that the Company test for impairment on an annual basis and whenever events or
circumstances dictate. Impairment tests are performed annually during the fourth quarter and are
performed at the reporting unit level. Generally, fair value represents discounted projected future
cash flows, and potential impairment is indicated when the carrying value of a reporting unit,
including goodwill, exceeds its estimated fair value. If potential for impairment exists, the fair
value of the reporting unit is subsequently measured against the fair value of its underlying
assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting
unit’s goodwill. An impairment loss is recognized for any excess of the carrying value of the
reporting unit’s goodwill over the implied fair value. As a result of the Company’s annual
impairment test for the year ended December 31, 2008, the Company recorded a non-cash goodwill
impairment charge of $219.8 million. See Note 10, Goodwill and Acquired Intangible Assets, Net, for
additional information regarding this charge. The Company’s annual impairment tests for the years
ended December 31, 2007 and 2006 indicated that there were no impairments. Determining the fair
value of reporting units requires significant management judgment in estimating future cash flows
and assessing potential market and economic conditions. It is reasonably possible that the
Company’s operations will not perform as expected, or that estimates or assumptions could change,
which may result in the Company recording additional material non-cash impairment charges during
the year in which these changes take place.
Other Intangibles – In accordance with SFAS No. 142, intangible assets with finite lives
are amortized over their estimated useful lives. Unless otherwise noted, amortization is calculated
using the straight-line method over the estimated useful lives of the assets as follows:
Non-compete agreements |
2 – 5 years | |||
Trademarks and trade names |
2 – 20 years | |||
Developed software technology |
3 years | |||
Customer relationships |
3 – 9 years | |||
Patents |
7 years | |||
See Note 10, Goodwill and Acquired Intangible Assets, Net, for additional information regarding
SFAS No. 142 and the treatment of goodwill and other intangible assets.
Other assets
Other assets include deferred financing costs, costs related to in process acquisitions,
investments in unconsolidated affiliates, capitalized software development costs and capitalized
payments for new or renewed contracts, contract renewals and customer conversion costs. Deferred
financing costs represent expenses incurred to obtain financing that have been deferred and
amortized over the life of the loan. Euronet capitalizes initial payments for new or renewed
contracts to the extent recoverable through future operations, contractual minimums and/or
penalties in the case of early termination. The Company’s accounting policy is to limit the amount
of capitalized costs for a given contract to the lesser of the
estimated ongoing net future cash flows
related to the contract or the termination fees the Company would receive in the event of early
termination of the contract by the customer.
The Company accounts for investments in affiliates using the equity method of accounting when the
Company has the ability to exercise significant influence over the affiliate. Equity losses in
affiliates are generally recognized until the Company’s investment is zero. Euronet’s investment in
affiliates, primarily related to the Company’s 40% investment in e-pay Malaysia, as of December 31,
2008 and 2007 was $2.5 million and $2.1 million, respectively. Undistributed earnings in these
affiliates as of December 31, 2008 and 2007 were $2.8 million and $2.0 million, respectively.
The Company’s investment in MoneyGram International, Inc. (“MoneyGram”) was classified as
available-for-sale as of December 31, 2007 and was recorded in other assets on the Company’s
Consolidated Balance Sheet. During the first quarter 2008, the Company decided not to pursue the
acquisition of MoneyGram. Also, during the six months ended June 30, 2008, the value of the
Company’s investment in MoneyGram declined and the Company determined the decline to be other than
temporary. Accordingly, the Company
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recognized impairment losses associated with the investment of $18.8 million during the six months
ended June 30, 2008 and reversed the $0.6 million gain recorded during 2007 in other comprehensive
income. Additionally, the $0.1 million gain during the six months ended December 31, 2008 was
recorded in other comprehensive income. The investment is recorded in other current assets on the
Company’s Consolidated Balance Sheet as of December 31, 2008. During the first quarter 2008, the
Company also recorded acquisition related expenses totaling $3.0 million, which are included in
selling, general and administrative expenses.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109,
“Accounting for Income Taxes.” The Company’s policy is to record estimated interest and penalties
related to the underpayment of income taxes as income tax expense in the Consolidated Statements of
Operations. See Note 16, Taxes, for further discussion regarding the adoption of FIN 48.
Presentation of taxes collected and remitted to governmental authorities
During 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3, “How Taxes Collected and
Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross
versus Net Presentation).” The Company presents taxes collected and remitted to governmental
authorities on a net basis in the accompanying Consolidated Statements of Operations.
Fair value measurements
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value
Measurements,” for financial assets and liabilities. 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
measurement. Accordingly, this Statement does not require any new fair value measurements.
Additionally, FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” delayed
the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for certain
nonfinancial assets and liabilities. Beginning January 1, 2009, the Company adopted the provisions
for those nonfinancial assets and liabilities, which include those measured at fair value in
goodwill impairment testing, indefinite-lived intangible assets measured at fair value for
impairment assessment, nonfinancial long-lived assets measured at fair value for impairment
assessment and investments in unconsolidated subsidiaries. The Company does not expect the
provisions of SFAS No. 157 related to these items to have a material impact on its consolidated
financial statements. See Note 20, Financial Instruments and Fair Value Measurements, for the
required fair value disclosures.
Accounting for derivative instruments and hedging activities
The Company accounts for derivative instruments and hedging activities in accordance with SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires
that all derivative instruments be recognized as either assets or liabilities on the balance sheet
at fair value. During 2007, the Company entered into derivative instruments to manage exposure to
interest rate risk that are considered cash flow hedges under the provisions of SFAS No. 133. To
qualify for hedge accounting under SFAS No. 133, the details for the hedging relationship must be
formally documented at the inception of the arrangement, including the Company’s hedging strategy,
risk management objective, the specific risk being hedged, the derivative instrument being used,
the item being hedged, an assessment of hedge effectiveness and how effectiveness will continue to
be assessed and measured. For the effective portion of a cash flow hedge, changes in the value of
the hedge instrument are recorded temporarily in stockholders’ equity as a component of other
comprehensive income and then recognized as an adjustment to interest expense over the term of the
hedging instrument.
In the Money Transfer Segment, the Company enters into foreign currency derivative contracts,
primarily forward contracts, to offset foreign currency exposure related to the notional value of
money transfer settlement assets and liabilities in currencies other than the U.S. dollar. These
contracts are considered derivative instruments under the provisions of SFAS No. 133; however, the
Company does not designate such instruments as hedges for accounting purposes. Accordingly, changes
in the value of these contracts are recognized immediately as a component of foreign currency
exchange gain (loss), net in the Consolidated Statement of Operations. The impact of changes in
value of these contracts, together with the impact of the change in value of the related foreign
currency denominated settlement asset or liability, on the Company’s Consolidated Statement of
Operations and Consolidated Balance Sheets is not significant.
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Cash flows resulting from derivative instruments are classified as cash flows from operating
activities in the Company’s Consolidated Statements of Cash Flows. The Company enters into
derivative instruments with highly credit-worthy financial institutions and does not use derivative
instruments for trading or speculative purposes. See Note 13, Derivative Instruments and Hedging
Activities, for further discussion of derivative instruments.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price is fixed or determinable and collection is
reasonably assured. The majority of the Company’s revenues are comprised of monthly recurring
management fees and transaction-based fees. A description of the major components of revenue, by
business segment is as follows:
EFT Processing – Revenue in the EFT Processing Segment is derived from primarily two
sources: i) transaction and management fees from owned and outsourced ATM, POS and card processing
networks; and ii) from the sale of EFT software solutions for electronic payment and transaction
delivery systems.
Transaction-based fees include charges for cash withdrawals, balance inquiries, transactions not
completed because the relevant card issuer does not give authorization or prepaid mobile airtime
recharges. Outsourcing services are generally billed on the basis of a fixed monthly fee per ATM,
plus a transaction-based fee. Transaction-based fees are recognized at the time the transactions
are processed and outsourcing management fees are recognized ratably over the contract period.
Certain of the 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.
Revenue from the sale of EFT software solutions represent software license fees, professional
service fees for installation and customization, ongoing software maintenance fees and revenue from
the sale of hardware associated with the system.
The Company recognizes professional service fee revenue in accordance with the provisions of
Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4, SOP
98-9 and clarified by SAB 101, SAB 104, “Revenue Recognition,” and EITF Issue No. 00-21,
“Accounting for Revenue Arrangements with Multiple Deliverables.” SOP 97-2, as amended, generally
requires revenue earned on software arrangements involving multiple-elements to be allocated to
each element based on the relative fair values of those elements. Revenue from multiple-element
software arrangements is recognized using the residual method. Under the residual method, revenue
is recognized in a multiple-element arrangement when vendor-specific objective evidence of fair
value exists for all of the undelivered elements in the arrangement, but does not exist for one or
more of the delivered elements in the arrangement. The Company allocates revenue to each element in
a multiple-element arrangement based on the element’s respective fair value, with the fair value
determined by the price charged when that element is sold separately.
Revenues from software licensing agreement contracts are recognized over the professional services
portion of the contract term using the percentage of completion method, following the guidance in
SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,”
as prescribed by SOP 97-2. This method is based on the percentage of professional service fees that
are provided compared with the total estimated professional services to be provided over the entire
term of the contract. The effect of changes to total estimated contract costs is recognized in the
period such changes are determined and provisions for estimated losses are made in the period in
which the loss first becomes probable and estimable. Revenues from software licensing agreement
contracts representing newly released products deemed to have a higher than normal risk of failure
during installation are recognized on a completed contract basis whereby revenues and related costs
are deferred until the contract is complete. Software maintenance revenue is recognized over the
contractual period or as the maintenance-related service is performed. Revenue from the sale of
hardware is generally recognized when title passes to the customer. Revenue in excess of billings
on software licensing agreements was $0.9 million and $1.0 million as of December 31, 2008 and
2007, respectively, and is recorded in prepaid expenses and other current assets. Billings in
excess of revenue on software license agreements was $3.7 million and $1.7 million as of December
31, 2008 and 2007, respectively and is recorded as deferred revenue until such time the above
revenue recognition criteria are met.
Prepaid Processing – Substantially all of the revenue generated in the Prepaid Processing
Segment is derived from commissions or processing fees associated with distribution and/or
processing of prepaid mobile airtime and other telecommunication products. These fees and
commissions are received from mobile and other telecommunication operators, top-up distributors or
retailers. In accordance with EITF 99-19, “Reporting Revenue Gross
as Principal versus Net as an Agent,” commissions received from mobile and other telecommunication
operators are recognized as revenue during the period in which the Company provides the service.
The portion of the commission that is paid to retailers is recorded as a direct operating cost.
Transactions are
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processed through a network of POS terminals and direct connections to the electronic payment
systems of retailers. Transaction processing fees are recognized at the time the transactions are
processed.
Money Transfer – In accordance with EITF 99-19, revenue for money transfer services
represents a transaction fee in addition to the difference between purchasing currency at wholesale
exchange rates and selling the currency to consumers at retail exchange rates. Revenue and the
associated direct operating cost are recognized at the time the transaction is processed. The
Company has origination and distribution agents in place, which each earn a fee for the respective
service. These fees are reflected as direct operating costs.
Software capitalization
Computer software to be sold – The Company applies SFAS No. 2, “Accounting for Research and
Development Costs,” and SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed,” in recording research and development costs. Research costs related
to the discovery of new knowledge with the hope that such knowledge will be useful in developing a
new product or service, or a new process or technique, or in bringing about significant improvement
to an existing product or process, are expensed as incurred (see Note 21, Computer Software to be
Sold). Development costs aimed at the translation of research findings or other knowledge into a
plan or design for a new product or process, or for a significant improvement to an existing
product or process, whether intended for sale or use, are capitalized on a product-by-product basis
when technological feasibility is established. Capitalization of computer software costs is
discontinued when the computer software product is available to be sold, leased, or otherwise
marketed.
Technological feasibility of computer software products is established when the Company has
completed all planning, designing, coding, and testing activities that are necessary to establish
that the product can be produced to meet its design specifications including, functions, features
and technical performance requirements. Technological feasibility is evidenced by the existence of
a working model of the product or by completion of a detail program design. The detail program
design (i) establishes that the necessary skills, hardware, and software technology are available
to produce the product, (ii) is complete and consistent with the product design, and (iii) has been
reviewed for high-risk development issues, with any uncertainties related to identified high-risk
development issues being adequately resolved.
Capitalized software costs are included in other assets and are amortized on a product-by-product
basis, equal to the greater of the amount computed using (i) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross revenues for that product
or (ii) the straight-line method over the remaining estimated economic life of the product,
generally three years, including the period being reported on. Amortization commences when the
product is available for general release to customers.
Software for internal use – The Company also develops software for internal use. These
software development costs are capitalized based upon AICPA Statement of Position No. 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”
Internal-use software development costs are capitalized after the preliminary project stage is
completed and management with the relevant authority authorizes and commits to funding a computer
software project and it is probable that the project will be completed and the software will be
used to perform the function intended. Costs incurred prior to meeting the qualifications are
expensed as incurred. Capitalization ceases when the computer software project is substantially
complete and ready for its intended use. Internal-use software development costs are amortized
using an estimated useful life of five years.
Share-based compensation
The Company follows the provisions of SFAS No. 123R, “Share-Based Payment,” which is a revision of
SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” For equity classified awards,
SFAS No. 123R requires the determination of the fair value of the share-based compensation at the
grant date and subsequent recognition of the related expense over the period in which the
share-based compensation is earned (“requisite service period”). The portion of share-based
compensation to be settled in cash is accounted for as a liability classified award. The fair value
of these awards is remeasured at each reporting period and the related compensation expense is
adjusted.
The 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 only
service conditions is generally recognized as expense on a “straight-line” basis over the requisite
service period. For awards that vest based on achieving annual performance conditions, expense is
recognized on a “graded attribution method.” The graded attribution method results in expense
recognition on a straight-line basis over the requisite service period for each separately vesting
portion of an award, as if the award was, in-substance, multiple awards. The Company has elected to
use the “with and without method” when calculating the income tax benefit associated with its
share-based payment arrangements. See Note 18, Stock Plans, for further disclosure.
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Recent accounting pronouncements
In May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP
APB 14-1 requires the proceeds from the issuance of such convertible debt instruments to be
allocated between debt and equity components so that debt is discounted to reflect the Company’s
nonconvertible debt borrowing rate. The debt discount is amortized over the period the convertible
debt is expected to be outstanding as additional non-cash interest expense. The change in
accounting treatment is effective for fiscal years beginning after December 15, 2008 and applies
retrospectively to prior periods. FSP APB 14-1 will impact the accounting associated with the
Company’s $140 million convertible senior debentures and its $175 million convertible debentures.
The new accounting treatment will require Euronet to retrospectively record a significant amount of
non-cash interest as the discount on the debt is amortized. The Company estimates that it will
record additional interest expense of approximately $12 million for each of the years ended
December 31, 2008 and 2007. Additionally, the pre-tax gains on the early retirements of the
convertible debentures recorded during the year ended December 31, 2008 will be reduced by
approximately $4 million.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities,” which requires enhanced disclosures about an entity’s derivative and hedging
activities, including: (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company’s adoption of SFAS No. 161 is not
expected to have a material impact on the Consolidated Financial Statements.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible
Assets.” FSP FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets.” This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and the guidance for determining the
useful life of a recognized intangible asset must be applied prospectively to intangible assets
acquired after the effective date. The Company’s adoption of FSP FAS 142-3 is not expected to have
a material impact on the Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which is a revision of
SFAS No. 141, “Business Combinations.” SFAS No. 141R will apply to all business combinations and
will require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired
in a business combination to be recorded at “full fair value” at the acquisition date. SFAS No 141R
will also require transaction-related costs to be expensed in the period incurred, rather than
capitalizing these costs as a component of the respective purchase price. SFAS No. 141R is
effective for Euronet for acquisitions completed after January 1, 2009 and early adoption is
prohibited. The adoption will have a significant impact on the accounting treatment for
acquisitions occurring after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements,” that replaces Accounting Research Bulletin (“ARB”) 51, “Consolidated Financial
Statements.” SFAS No. 160 will require noncontrolling interests (previously referred to as minority
interests) to be reported as a component of equity, which will change the accounting for
transactions with noncontrolling interest holders. SFAS No. 160 is effective for Euronet on January
1, 2009 and will result in a change in the classification of the Company’s noncontrolling interest
from a component of liabilities to a component of equity in Consolidated Balance Sheets and will
change the accounting for transactions with noncontrolling shareholders after the effective date.
The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s
Consolidated Financial Statements.
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(4) EARNINGS (LOSS) PER SHARE
Basic earnings per share has been computed by dividing earnings available to common stockholders by
the weighted average number of common shares outstanding during the respective period. Diluted
earnings per share has been computed by dividing earnings available to common stockholders by the
weighted-average shares outstanding during the respective period, after adjusting for the potential
dilution of the assumed conversion of the Company’s convertible debentures, shares issuable in
connection with acquisition obligations, options to purchase the Company’s common stock and
restricted stock. The following table provides a reconciliation of net income to earnings available
to common stockholders and the computation of diluted weighted average number of common shares
outstanding:
| Year Ended December 31, | ||||||||
| (dollar amounts in thousands) | 2007 | 2006 | ||||||
Reconciliation of net income to earnings available to common
stockholders: |
||||||||
Net income |
$ | 53,504 | $ | 46,002 | ||||
Add: interest expense of 1.625% convertible debentures |
3,175 | 3,189 | ||||||
Earnings available to common stockholders |
$ | 56,679 | $ | 49,191 | ||||
Computation of diluted weighted average shares outstanding: |
||||||||
Basic weighted average shares outstanding |
45,260,803 | 37,037,435 | ||||||
Additional shares from assumed conversion of 1.625%
convertible debentures |
4,163,488 | 4,163,488 | ||||||
Weighted average shares issuable in connection with
acquisition obligations (See Note 6 - Acquisitions) |
478,149 | 36,514 | ||||||
Incremental shares from assumed conversion of stock options
and restricted stock |
1,111,646 | 1,218,700 | ||||||
Potentially diluted weighted average shares outstanding |
51,014,086 | 42,456,137 | ||||||
The table includes all stock options and restricted stock that are dilutive to Euronet’s weighted
average common shares outstanding during the period. For the year ended December 31, 2008, the
Company incurred a net loss; therefore, diluted loss per share is the same as basic loss per share.
The calculation of diluted earnings per share excludes stock options or shares of restricted stock
that are anti-dilutive to the Company’s weighted average common shares outstanding for the years
ended December 31, 2008, 2007 and 2006 of approximately 5,046,000, 458,000 and 240,000,
respectively.
The Company issued $140 million of 1.625% convertible senior debentures due 2024 and $175 million
of 3.5% convertible debentures due 2025 (see Note 12, Debt Obligations) that, if converted, would
have a potentially dilutive effect on the Company’s stock. The $140 million 1.625% debentures were
convertible into 4.2 million shares of Common Stock for the periods when the entire issuance was
outstanding, with an initial conversion date of December 2009, and the $175 million 3.5% debentures
are convertible into 4.3 million shares of Common Stock, initially in October 2012, or earlier upon
the occurrence of certain conditions. See Note 12, Debt Obligations, for discussion of the
Company’s repurchase of a portion of the 1.625% debentures. As required by EITF Issue No. 04-8,
“The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” if dilutive, the
impact of the contingently issuable shares must be included in the calculation of diluted earnings
per share under the “if-converted” method, regardless of whether the conditions upon which the
debentures would be convertible into shares of the Company’s Common Stock have been met. Under the
if-converted method, the assumed conversion of the 1.625% convertible debentures was anti-dilutive
for the year ended December 31, 2008 and was dilutive for the years ended December 31, 2007 and
2006 and, accordingly, the impact has been included in the above computation of potentially diluted
weighted average shares outstanding for 2007 and 2006 only. Under the if-converted method, the
assumed conversion of the 3.5% convertible debentures was anti-dilutive for the years ended
December 31, 2008, 2007 and 2006. Accordingly, the impact has been excluded from the above
computation of potentially dilutive weighted average shares outstanding.
(5) DISCONTINUED OPERATIONS
During the second quarter 2008, the Company committed to a plan to sell Euronet Essentis Limited
(“Essentis”), a U.K. software entity, in order to focus its investments and resources
on its transaction processing businesses. The Company is in the
process of selling the business.
Accordingly, Essentis’s results of operations are shown as discontinued operations in the
Consolidated Statements of Operations for all periods presented. Previously, Essentis’s results
were reported in the EFT Processing Segment. The segment results in Note 19, Business Segment
Information, also reflect the reclassification of Essentis’s results to discontinued operations.
The following amounts related to Essentis have been segregated from continuing operations and
reported as discontinued operations:
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| Year Ended December 31, | ||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Revenues |
$ | 9,670 | $ | 14,908 | $ | 13,805 | ||||||
Income (loss) before income taxes |
$ | (1,686 | ) | $ | 920 | $ | 1,039 | |||||
Net income (loss) |
$ | (1,071 | ) | $ | 623 | $ | 629 | |||||
The Consolidated Balance Sheets include Essentis’s net assets expected to be sold and the major
classes of its assets and liabilities are presented below:
| December 31, | December 31, | |||||||
| (in thousands) | 2008 | 2007 | ||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 552 | $ | 722 | ||||
Trade accounts receivable, net of allowance for doubtful accounts |
2,187 | 4,133 | ||||||
Prepaid expenses and other current assets |
990 | 910 | ||||||
Total current assets |
3,729 | 5,765 | ||||||
Property and equipment, net of accumulated depreciation |
427 | 647 | ||||||
Acquired intangible assets, net of accumulated amortization |
991 | 1,614 | ||||||
Other assets, net of accumulated amortization |
2,635 | 3,046 | ||||||
Total assets |
$ | 7,782 | $ | 11,072 | ||||
LIABILITIES |
||||||||
Current liabilities |
||||||||
Trade accounts payable |
$ | 250 | $ | 953 | ||||
Accrued expenses and other current liabilities |
760 | 2,596 | ||||||
Deferred revenue |
2,349 | 3,669 | ||||||
Total current liabilities |
3,359 | 7,218 | ||||||
Deferred income taxes |
624 | 31 | ||||||
Other long-term liabilities |
3 | 1 | ||||||
Total liabilities |
$ | 3,986 | $ | 7,250 | ||||
Net assets |
$ | 3,796 | $ | 3,822 | ||||
In July 2002, the Company sold substantially all of the non-current assets and related capital
lease obligations of its ATM processing business in France to Atos S.A. During 2007, the Company
received a binding French Supreme Court decision relating to a lawsuit in France that resulted in a
cash recovery and gain to the Company of $0.3 million, net of legal costs. There were no assets or
liabilities held for sale related to the operations in France at December 31, 2008 or 2007.
(6) ACQUISITIONS
In accordance with SFAS No. 141, “Business Combinations,” the Company allocates the purchase price
of its acquisitions to the tangible assets, liabilities and intangible assets acquired based on
estimated fair values. Any excess purchase price over those fair values is recorded as goodwill.
The fair value assigned to intangible assets acquired is supported by valuations using estimates
and assumptions provided by management. Generally, for certain large acquisitions management
engages an appraiser to assist in the valuation process.
2007 Acquisitions:
Acquisition of RIA
On April 4, 2007, the Company completed the acquisition of the common stock of RIA, which expanded
the Company’s money transfer operations in the U.S. and internationally. The purchase price of
$505.5 million was comprised of $358.3 million in cash, 4,053,606 shares of Euronet Common Stock
valued at $110.0 million, 3,685,098 contingent value rights (“CVRs”) and stock appreciation rights
(“SARs”) valued at a total of $32.1 million and transaction costs of approximately $5.1 million.
The Company financed the cash portion of the purchase price through a combination of cash on hand
and $190 million in additional debt obligations. The following table summarizes the allocation of
the purchase price to the fair values of the acquired tangible and intangible assets at the
acquisition date.
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| Estimated | ||||||||
| (dollar amounts in thousands) | Life | |||||||
Current assets |
$ | 78,220 | ||||||
Property and equipment |
various | 10,854 | ||||||
Customer relationships |
3 - 8 years | 73,280 | ||||||
Weighted average life |
7.0 years | |||||||
Trademarks and trade names |
20 years | 36,760 | ||||||
Software |
5 years | 1,610 | ||||||
Non-compete agreements |
3 years | 270 | ||||||
Other non-current assets |
1,396 | |||||||
Goodwill |
Indefinite | 404,599 | ||||||
Assets acquired |
606,989 | |||||||
Current liabilities |
(85,062 | ) | ||||||
Non-current liabilities |
(1,574 | ) | ||||||
Deferred income tax liability |
(14,852 | ) | ||||||
Net assets acquired |
$ | 505,501 | ||||||
Pursuant to the terms of the Stock Purchase Agreement, $35.0 million in cash and 276,382 shares of
Euronet Common Stock valued at $7.5 million are being held in escrow to secure certain obligations
of the sellers under the Stock Purchase Agreement. These amounts have been reflected in the
purchase price because the Company has determined beyond a reasonable doubt that the obligations
will be met. The 3,685,098 CVRs matured on October 1, 2008 and resulted in the issuance of $20
million of additional shares of Euronet Common Stock. The 3,685,098 SARs entitled the sellers to
acquire additional shares of Euronet Common Stock at an exercise price of $27.14 at any time
through October 1, 2008 and expired unexercised. The combination of the CVRs and SARs entitled the
sellers to additional consideration of at least $20 million in Euronet Common Stock or cash.
Management estimated the total fair value of the CVRs and SARs at approximately $32.1 million using
a Black Scholes pricing model. These and other terms and conditions applicable to the CVRs and SARs
are set forth in the agreements governing these instruments. Of the amount allocated to goodwill,
approximately $225.5 million is deductible for income tax purposes.
Additionally, in April 2007, the Company combined its previous money transfer business with RIA and
incurred total exit costs of approximately $0.9 million during 2007. These costs were recorded as
operating expenses and represent the accelerated depreciation and amortization of property and
equipment, software and leasehold improvements that were disposed of during 2007; the write off of
marketing materials and trademarks that have been discontinued or will not be used; the write off
of accounts receivable from agents that did not meet RIA’s credit requirements; and severance and
retention payments made to certain employees. Additional costs incurred in association with exiting
the Company’s previous money transfer business, if any, are not expected to be significant.
Other acquisitions
During 2007, the Company completed three other acquisitions described below for an aggregate
purchase price of $26.5 million, comprised of $18.1 million in cash, 275,429 shares of Euronet
Common Stock valued at $7.6 million and notes payable of $0.8 million. In connection with one of
these acquisitions, the Company agreed to certain contingent consideration arrangements based on
the value of Euronet Common Stock and the achievement of certain performance criteria. Upon the
achievement of certain performance criteria, during 2009 and 2010, the Company may have to pay a
total of $2.5 million in cash or 75,489 shares of Euronet Common Stock, at the option of the
seller.
| • | During January 2007, EFT Services Holding BV and Euronet Adminisztracios Kft, both wholly-owned subsidiaries of Euronet, completed the acquisition of a total of 100% of the share capital of Brodos SRL in Romania (“Brodos Romania”). Brodos Romania is a leading electronic prepaid mobile airtime processor that expanded the Company’s Prepaid Processing Segment business to Romania. | ||
| • | During February 2007, e-pay Holdings Limited, a wholly-owned subsidiary of Euronet, completed the acquisition of all of the share capital of Omega Logic, Ltd. (“Omega Logic”). Omega Logic is a prepaid top-up company based, and primarily operating, in the U.K. This acquisition enhanced our Prepaid Processing Segment business in the U.K. | ||
| • | During April 2007, PaySpot, Inc. (a wholly-owned subsidiary of Euronet) acquired customer relationships from Synergy Telecom, Inc. (“Synergy”) and Synergy agreed not to compete with PaySpot in the prepaid mobile phone top-up business in the U.S. for a period of five years. This acquisition enhances the Company’s Prepaid Processing Segment business in the U.S. |
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2006 Acquisition:
Acquisition of Essentis Limited
In January 2006, the Company completed the acquisition of the assets of Essentis Limited for
approximately $2.9 million, which was comprised of $0.9 million in cash and approximately $2.0
million in assumed liabilities. Essentis is a U.K. company that owns and develops software packages
that enhance Euronet’s outsourcing and software offerings to banks. There are no potential
additional purchase price or escrow arrangements associated with the acquisition of Essentis.
During 2006, the Company issued 109,542 shares of Euronet Common Stock, valued at $4.1 million, in
settlement of contingent payment arrangements associated with the Company’s 2005 acquisitions. This
settlement was recorded as an increase in goodwill.
(7) NON-CASH FINANCING AND INVESTING ACTIVITIES
Capital lease obligations of $1.5 million, $3.0 million and $4.9 million during the years ended
December 31, 2008, 2007 and 2006, respectively, were incurred when the Company entered into leases
primarily for new ATMs, to upgrade ATMs or for data center computer equipment.
See Note 6, Acquisitions, for a description of non-cash financing and investing activities related
to the Company’s acquisitions.
(8) RESTRICTED CASH
The restricted cash balances as of December 31, 2008 and 2007 were as follows:
| As of December 31, | ||||||||
| (in thousands) | 2008 | 2007 | ||||||
Cash held in trust and/or cash held on behalf of others |
$ | 122,007 | $ | 108,422 | ||||
Acquisition escrow |
— | 27,307 | ||||||
Collateral on bank credit arrangements |
8,444 | 1,725 | ||||||
ATM network cash |
319 | 423 | ||||||
Other |
255 | 2,345 | ||||||
Total |
$ | 131,025 | $ | 140,222 | ||||
Cash held in trust and/or cash held on behalf of others is in connection with the administration of
the customer collection and vendor remittance activities in the Prepaid Processing Segment. Amounts
collected on behalf of mobile operators are deposited into a restricted cash account. The Company
has deposits with commercial banks to cover guarantees. The bank credit arrangements primarily
represent cash collateral for bank guarantees. ATM network cash represents balances held that are
equivalent to the value of certain banks’ cash held in Euronet’s ATM network.
Acquisition escrow represents cash placed in escrow in connection with an agreement to acquire
Envios de Valores La Nacional Corp. and its U.S. based affiliates (“La Nacional”). See Note 22,
Litigation and Contingencies, for further discussion of events related to the Company’s agreement
with La Nacional.
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(9) PROPERTY AND EQUIPMENT, NET
The components of property and equipment, net of accumulated depreciation and amortization as of
December 31, 2008 and 2007 are as follows:
| As of December 31, | ||||||||
| (in thousands) | 2008 | 2007 | ||||||
ATMs |
$ | 86,606 | $ | 97,361 | ||||
POS terminals |
32,323 | 30,962 | ||||||
Vehicles and office equipment |
31,346 | 27,607 | ||||||
Computers and software |
64,515 | 51,597 | ||||||
| 214,790 | 207,527 | |||||||
Less accumulated depreciation and amortization |
(125,258 | ) | (119,190 | ) | ||||
Total |
$ | 89,532 | $ | 88,337 | ||||
Depreciation and amortization expense related to property and equipment, including property and
equipment recorded under capital leases, for the years ended December 31, 2008, 2007 and 2006 was
$30.2 million, $25.2 million and $19.0 million, respectively.
(10) GOODWILL AND ACQUIRED INTANGIBLE ASSETS, NET
Goodwill represents the excess of the purchase price of the acquired business over the estimated
fair value of the underlying net tangible and intangible assets acquired. The following table
summarizes intangible assets as of December 31, 2008 and 2007:
| December 31, 2008 | December 31, 2007 | |||||||||||||||
| Gross Carrying | Accumulated | Gross Carrying | Accumulated | |||||||||||||
| (in thousands) | Amount | Amortization | Amount | Amortization | ||||||||||||
Customer relationships |
$ | 139,671 | $ | 53,801 | $ | 147,713 | $ | 37,922 | ||||||||
Trademarks and tradenames |
40,793 | 4,712 | 43,191 | 2,992 | ||||||||||||
Software |
5,338 | 3,455 | 6,236 | 3,014 | ||||||||||||
Patent |
1,701 | 505 | 1,701 | 168 | ||||||||||||
Non-compete agreements |
730 | 447 | 746 | 354 | ||||||||||||
Totals |
$ | 188,233 | $ | 62,920 | $ | 199,587 | $ | 44,450 | ||||||||
The following table summarizes the goodwill and amortizable intangible assets activity for the
years ended December 31, 2007 and 2008.
| Amortizable | Total | |||||||||||
| Intangible | Intangible | |||||||||||
| (in thousands): | Assets | Goodwill | Assets | |||||||||
Balance as of January 1, 2007 |
$ | 48,405 | $ | 297,134 | $ | 345,539 | ||||||
Increases (decreases): |
||||||||||||
Acquisition of RIA |
111,920 | 404,599 | 516,519 | |||||||||
Other 2007 acquisitions |
8,366 | 21,553 | 29,919 | |||||||||
Amortization |
(20,385 | ) | — | (20,385 | ) | |||||||
Other (primarily changes in foreign currency exchange rates) |
6,831 | 39,437 | 46,268 | |||||||||
Balance as of December 31, 2007 |
$ | 155,137 | $ | 762,723 | $ | 917,860 | ||||||
Decreases: |
||||||||||||
Impairment |
(321 | ) | (219,756 | ) | (220,077 | ) | ||||||
Amortization |
(24,173 | ) | — | (24,173 | ) | |||||||
Other (primarily changes in foreign currency exchange rates) |
(5,330 | ) | (54,662 | ) | (59,992 | ) | ||||||
Balance as of December 31, 2008 |
$ | 125,313 | $ | 488,305 | $ | 613,618 | ||||||
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As a result of the 2008 annual goodwill impairment test, the Company recorded an estimated non-cash goodwill
impairment charge of $219.8 million. The Company performs its annual goodwill impairment test
during the fourth quarter of each year, which coincided with severe disruptions in the credit
markets and a macroeconomic business climate that had adverse impacts on stock markets and
contributed to a significant decline in the Company’s stock price. In performing the annual
goodwill impairment test, management must apply judgment in determining the estimated fair value of
a business and uses all available information to make these fair value determinations, including
discounted projected future cash flow analysis using discount rates commensurate with the risks
involved in the assets, together with comparable sales prices that the Company or another purchaser
would likely pay for the respective assets. An important key component of the
2008 goodwill impairment test was the reconciliation of the Company’s equity to market
capitalization. During the fourth quarter 2008 and into 2009, the Company’s total market
capitalization was less than the recorded value of the Company’s equity by an amount up to approximately 45% of recorded equity, creating a strong indicator of potential impairment of our
goodwill balance.
Because of the macroeconomic
conditions described above and their impacts on the Company, after incorporating assumptions that the
Company or another purchaser would likely make into the Company’s business outlook and projections for
certain of the Company’s acquired businesses, the Company determined that the resulting valuations were
not sufficient to support the recorded value of the Company’s investments.
Specifically, the Company has experienced reductions in volumes for money transfers
between the U.S. and Mexico, among other corridors, that were initially expected to continue expanding.
Additionally, growth in the Spanish prepaid mobile phone business in general has been slower than expected
and commission pressure from mobile operators, as well as intense competition from other prepaid processors,
has reduced profitability.
Accordingly, during the fourth quarter 2008, the Company recorded a total impairment charge related
to goodwill of $219.8 million, comprised of $169.1 million related to the RIA money transfer
business acquired in April 2007 and $50.7 million related to the Spanish prepaid businesses
acquired in separate transactions during November 2004 and March 2005. The $219.8 million goodwill
impairment charge is the Company’s best estimate of the goodwill charge as of December 31, 2008.
Any adjustment to that estimated charge resulting from the completion of the measurement of the
impairment loss will be recognized in the first quarter 2009.
In a related assessment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets”, it was determined that certain trade names and customer relationships of the
RIA money transfer business were impaired and the Company recorded a non-cash impairment charge of
$0.3 million in 2008 related to those assets.
Of the total goodwill balance of $488.3 million as of December 31, 2008, $250.5 million relates to
the Money Transfer Segment, $214.4 million relates to the Prepaid Processing Segment and the
remaining $23.4 million relates to the EFT Processing Segment. Amortization expense for intangible
assets with finite lives was $24.2 million, $20.4 million and $8.3 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Estimated amortization expense on intangible assets
as of December 31, 2008 with finite lives is expected to be $22.7 million for 2009, $22.3 million
for 2010, $18.5 million for 2011, $16.0 million for 2012 and $11.4 million for 2013.
(11) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The balances as of December 31, 2008 and 2007 were as follows:
| As of December 31, | ||||||||
| (in thousands) | 2008 | 2007 | ||||||
Accrued expenses |
$ | 43,661 | $ | 46,639 | ||||
Accrued amounts due to mobile operators |
152,795 | 94,935 | ||||||
Money transfer settlement obligations |
27,358 | 25,480 | ||||||
Total |
$ | 223,814 | $ | 167,054 | ||||
(12) DEBT OBLIGATIONS
Short-term debt obligations
Short-term debt obligations outstanding were $0.2 million at December 31, 2008 with a weighted
average interest rate of 6.8%.
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Long-term debt obligations
Long-term debt obligations consist of the following as of December 31, 2008 and 2007:
| As of December 31, | ||||||||
| (in thousands) | 2008 | 2007 | ||||||
1.625% convertible senior debentures, unsecured, due 2024 |
$ | 70,000 | $ | 140,000 | ||||
3.50% convertible debentures, unsecured, due 2025 |
175,000 | 175,000 | ||||||
Term loan, due 2014 |
132,000 | 164,000 | ||||||
Revolving credit agreements |
16,719 | 62,203 | ||||||
Other |
90 | — | ||||||
| 393,809 | 541,203 | |||||||
Less current maturities of long-term debt obligations |
(71,900 | ) | (1,900 | ) | ||||
Long-term debt obligations |
$ | 321,909 | $ | 539,303 | ||||
On December 15, 2004, the Company completed the sale of $140 million of 1.625% Contingent
Convertible Senior Debentures Due 2024 (“Convertible Senior Debentures”). The Company received net
proceeds from the sale of $135.4 million, after fees totaling $4.6 million. During the year ended
December 31, 2008, the Company repurchased in privately negotiated transactions $70 million in
principal amount of the Convertible Senior Debentures. This resulted in a $6.1 million pre-tax gain
on early retirement of debt, net of the write-off of unamortized debt issuance costs. The remaining
$70 million of outstanding Convertible Senior Debentures have an interest rate of 1.625% per annum
payable semi-annually in June and December, and are convertible into a total of 2.1 million shares
of Euronet Common Stock at a conversion price of $33.63 per share if certain conditions are met
(relating to the closing prices of Euronet common stock exceeding certain thresholds for specified
periods). The Company will pay contingent interest, during any six-month period commencing with the
period from December 20, 2009 through June 14, 2010, and for each six-month period thereafter for
which the average trading price of the debentures for the applicable five trading-day period
preceding such applicable interest period equals or exceeds 120% of the principal amount of the
debentures. Contingent interest will equal 0.30% per annum of the average trading price of a
debenture for such five trading-day periods. The Convertible Senior Debentures may not be redeemed
by the Company until December 20, 2009 but are redeemable at any time thereafter at par. Holders of
the Convertible Senior Debentures have the option to require the Company to purchase their
debentures at par on December 15, 2009, 2014 and 2019, or upon a change in control of the Company.
These terms and other material terms and conditions applicable to the Convertible Senior Debentures
are set forth in the indenture governing the debentures. In connection with the Convertible Senior
Debentures, the Company recorded $4.6 million in debt issuance costs, which are being amortized
over five years, the term of the initial put option by the holders of the Convertible Senior
Debentures. Pro rata amounts of the debt issuance costs were written off when the early retirements
of the Convertible Senior Debentures occurred. The Convertible Senior Debentures are general
unsecured and unsubordinated obligations and rank equally in right of payment with all other
existing and future unsecured and unsubordinated obligations and senior in right of payment to all
of the Company’s future subordinated indebtedness. The Convertible Senior Debentures are
effectively subordinated to existing and future secured indebtedness, including indebtedness under
the Company’s credit facilities with respect to any collateral securing such indebtedness. The
Convertible Senior Debentures are not guaranteed by any of Euronet’s subsidiaries and, accordingly,
are effectively subordinated to the indebtedness and other liabilities of Euronet’s subsidiaries,
including trade creditors. The Company and its subsidiaries are not restricted under the indenture
from incurring additional secured indebtedness or other additional indebtedness.
On October 4, 2005, the Company completed the sale of $175 million of 3.5% Contingent Convertible
Debentures Due 2025 (“Convertible Debentures”). The Company received net proceeds from the sale of
$169.9 million, after fees totaling $5.1 million. The Convertible Debentures have an interest rate
of 3.5% per annum payable semi-annually in April and October, and are convertible into a total of
4.3 million shares of Euronet Common Stock at a conversion price of $40.48 per share if certain
conditions are met (relating to the closing prices of Euronet common stock exceeding certain
thresholds for specified periods). The Company will pay contingent interest, during any six-month
period commencing with the period from October 15, 2012 through April 14, 2013, and for each
six-month period thereafter for which the average trading price of the debentures for the
applicable five trading-day period preceding such applicable interest period equals or exceeds 120%
of the principal amount of the debentures. Contingent interest will equal 0.35% per annum of the
average trading price of a debenture for such five trading-day periods. The Convertible Debentures
may not be redeemed by the Company until October 20, 2012 but are redeemable at any time thereafter
at par. Holders of the Convertible Debentures have the option to require the Company to purchase
their debentures at par on October 15, 2012, 2015 and 2020, or upon a change in control of the
Company. These terms and other material terms and conditions applicable to the Convertible
Debentures are set forth in the indenture governing the debentures. In connection with the
Convertible Debentures, the Company recorded $5.1 million in debt issuance costs, which is being
amortized over seven years, the term of the initial put option by the holders of the Convertible
Debentures. The Convertible Debentures are general unsecured obligations, and are subordinated in
right of payment to all obligations under “Senior Debt,” which is defined to include secured credit
facilities (including secured replacements, renewals or refinancings
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thereof, including with
different lenders and in higher amounts) and will rank equally in right of payment with all other
existing and future unsecured obligations and senior in right of payment to all future subordinated
indebtedness. The Convertible Debentures will not be subordinated in right of payment to the
remaining $70 million of 1.625% Convertible Senior Debentures described above. The Convertible
Debentures will be effectively subordinated to any existing and future secured indebtedness, with
respect to any collateral securing such indebtedness and all liabilities of Euronet’s subsidiaries.
The Convertible Debentures are not guaranteed by any of Euronet’s subsidiaries and, accordingly,
are effectively subordinated to the indebtedness and other liabilities of Euronet’s subsidiaries,
including trade creditors. The Company and its subsidiaries are not restricted under the indenture
from incurring additional secured indebtedness, Senior Debt or other additional indebtedness.
In connection with the completion of the acquisition of RIA during April 2007, the Company entered
into a $290 million secured syndicated credit facility consisting of a $190 million seven-year term
loan, which was fully-drawn at closing, and a $100 million five-year revolving credit facility (the
“Credit Facility”) that replaced the previous $50 million revolving credit facility. The $190
million seven-year term loan bears interest at LIBOR plus 200 basis points or prime plus 100 basis
points and contains a 1% per annum original principal amortization requirement, payable quarterly,
with the remaining balance outstanding due in April 2014. The $100 million revolving line of credit
bears interest at LIBOR or prime plus a margin that adjusts each quarter based upon the Company’s
consolidated total leverage ratio, and expires in April 2012. The term loan may be expanded by up
to an additional $150 million and the revolving credit facility may be expanded by up to an
additional $25 million, subject to satisfaction of certain conditions, including pro-forma debt
covenant compliance. The Credit Facility contains certain mandatory prepayments, customary events
of default and financial covenants, including leverage ratios. Financing costs of $4.8 million have
been deferred and are being amortized over the terms of the respective loans. Euronet and certain
subsidiaries have guaranteed the repayment of obligations under the Credit Facility and have
granted security interests in the shares (or other equity interests) of certain subsidiaries along
with a security interest in certain other personal property collateral of Euronet and certain
subsidiaries. The weighted average interest rate of the Company’s borrowings under the term loan
was 5.5% and 7.1% as of December 31, 2008 and 2007, respectively.
During April 2008, the Company entered into Amendment No. 1 to the Credit Facility to, among other
items, (i) change the definition of one of the financial covenants in the original agreement to
exclude the effect of certain one-time expenses and (ii) allow for the repurchase of up to $70
million aggregate principal amount of the $140 million in Convertible Senior Debentures Due 2024.
The Company incurred costs of $0.6 million in connection with the amendment, which will be
recognized as additional interest expense over the remaining term of the Credit Facility. During
February 2009, the Company entered into Amendment No. 2 to the Credit Facility. See Note 26,
Subsequent Events, for further discussion about the amendment.
As of December 31, 2008, the Company had $16.7 million in borrowing and $30.9 million in stand-by
letters of credit/bank guarantees outstanding against the revolving credit facility. As of December
31, 2007, the Company had $62.2 million in borrowings and $25.3 million in stand-by letters of
credit/bank guarantees outstanding against the revolving credit facility. Stand-by letters of
credit/bank guarantees are generally used to secure trade credit and performance obligations. The
Company pays an interest rate for stand-by letters of credit/bank guarantees at a rate that adjusts
each quarter based upon the Company’s consolidated total leverage ratio. At December 31, 2008 the
stand-by letter of credit interest charges were 1.25% per annum. Because the revolving credit
agreements expire beyond one year, the borrowings were classified as long-term debt obligations in
the December 31, 2008 and 2007 Consolidated Balance Sheets. The weighted average interest rate of
the Company’s borrowings under the revolving credit facility was 5.3% and 7.0% as of December 31,
2008 and 2007, respectively.
During the year ended December 31, 2008, the Company repaid $32.0 million of the term loan, of
which $1.9 million was pursuant to mandatory repayments, while $30.1 million represented prepayment
of amounts not yet due and resulted in the Company recognizing a $0.5 million loss on early
retirement of debt. During the year ended December 31, 2007, the Company repaid $26.0 million of
the
term loan, of which $1.4 million was pursuant to mandatory repayments, while $24.6 million
represented prepayment of amounts not yet due and resulted in the Company recognizing a $0.4
million loss on early retirement of debt.
As of December 31, 2008, aggregate annual maturities of long-term debt are $71.9 million in 2009,
$1.9 million in 2010, $1.9 million in 2011, $193.7 million in 2012, $1.9 million in 2013 and $122.5
million in periods thereafter. This maturity schedule reflects amounts borrowed under the revolving
credit agreement maturing in 2012 and the term loan maturing in 2014, consistent with the
contractual maturities of the agreements. For Convertible Debentures, the maturity schedule
reflects due dates that coincide with the terms of the initial put options by the holders of the
Convertible Debentures.
(13) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
During the second quarter 2007, the Company entered into interest rate swap agreements for a total
notional amount of $50 million to manage interest rate exposure related to a portion of the term
loan as required under the agreement, which currently bears interest at LIBOR plus 200 basis
points. The interest rate swap agreements are determined to be cash flow hedges and effectively
convert $50 million of the term loan to a fixed interest rate of 7.3% through the May 2009 maturity
date of the swap agreements. The Company recorded liabilities of $0.8 million in the accrued
expenses and other current liabilities caption on the Company’s Consolidated Balance Sheet as of
December 31, 2008 and $1.0 million in other long-term liabilities as of December 31, 2007 to
recognize the fair
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values of the swap agreements. The impact to accumulated other comprehensive
income for the years ended December 31, 2008 and 2007 was a gain of $0.2 million and a loss of $1.0
million, respectively. The fair values of swap agreements are based on the LIBOR swap rate, credit
spreads and other relevant market conditions. The fair values represent the net amount the Company
would have been required to pay at December 31, 2008 and 2007 to terminate the positions. If the
Company does not terminate these swap agreements prior to the maturity date, the fair value will be
zero and no payment will be required to be made.
As of December 31, 2008 and 2007, the Company had foreign currency derivatives contracts, including
forward contracts and swap agreements, outstanding with a notional value of $56.5 million and $52.6
million, respectively, primarily in euros, which were not designated as hedges and had a weighted
average maturity of five days as of each date.
(14) EQUITY PRIVATE PLACEMENT
During March 2007, the Company entered into a securities purchase agreement with certain accredited
investors to issue and sell 6,374,528 shares of Common Stock in a private placement. The offering
price for the shares was $25.00 per share and the gross proceeds of the offering were approximately
$159.4 million. The net proceeds from the sale, after deducting commissions and expenses, were
approximately $154.3 million.
(15) LEASES
(a) Capital leases
The Company leases certain of its ATMs and computer equipment under capital lease agreements that
expire between 2009 and 2014 and bear interest at rates between 3.6% and 20.7%. The lessors for
these leases hold a security interest in the equipment leased under the respective capital lease
agreements. Lease installments are paid on a monthly, quarterly or semi-annual basis. Certain
leases contain a bargain purchase option at the conclusion of the lease period.
The gross amount of the ATMs and computer equipment and related accumulated amortization recorded
under capital leases as of December 31, 2008 and 2007 were as follows:
| As of December 31, | ||||||||
| (in thousands) | 2008 | 2007 | ||||||
ATMs |
$ | 36,361 | $ | 34,185 | ||||
Other |
2,238 | 3,837 | ||||||
Subtotal |
38,599 | 38,022 | ||||||
Less accumulated amortization |
(26,917 | ) | (25,960 | ) | ||||
Total |
$ | 11,682 | $ | 12,062 | ||||
(b) Operating leases
The Company has non-cancelable operating leases, which expire over the next ten years. Rent expense
for the years ended December 31, 2008, 2007 and 2006 amounted to $24.6 million, $20.5 million and
$12.9 million, respectively.
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(c) Future minimum lease payments
Future minimum lease payments under the capital leases and the noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 2008 are:
| Capital | Operating | |||||||
| (in thousands) | Leases | Leases | ||||||
Year ending December 31,
2009 |
$ | 5,510 | $ | 18,775 | ||||
2010 |
4,221 | 14,691 | ||||||
2011 |
1,990 | 11,013 | ||||||
2012 |
528 | 6,998 | ||||||
2013 |
224 | 3,903 | ||||||
thereafter |
2 | 5,037 | ||||||
Total minimum lease payments |
12,475 | $ | 60,417 | |||||
Less amounts representing interest |
(1,505 | ) | ||||||
Present value of net minimum capital lease payments |
10,970 | |||||||
Less current portion of obligations under capital leases |
(4,614 | ) | ||||||
Obligations under capital lease obligations, less
current portion |
$ | 6,356 | ||||||
(16) TAXES
Deferred tax assets and liabilities are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities as measured by the enacted tax rates
which will be in effect when these differences reverse. Deferred tax benefit (expense) is generally
the result of changes in the assets and liabilities for deferred taxes.
The sources of income (loss) before income taxes for the years ended December 31, 2008, 2007 and 2006 are
presented as follows:
| Year Ended December 31, | ||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Income (loss) from continuing operations: |
||||||||||||
United States |
$ | (169,597 | ) | $ | 32,971 | $ | 22,833 | |||||
Europe |
(27,288 | ) | 22,753 | 31,559 | ||||||||
Asia Pacific |
13,087 | 24,572 | 5,275 | |||||||||
Income (loss) from continuing operations before income taxes |
(183,798 | ) | 80,296 | 59,667 | ||||||||
Discontinued operations — Europe |
(1,071 | ) | 967 | 629 | ||||||||
Total income (loss) before income taxes |
$ | (184,869 | ) | $ | 81,263 | $ | 60,296 | |||||
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The Company’s income tax expense for the years ended December 31, 2008, 2007 and 2006 attributable
to continuing operations consisted of the following:
| Year Ended December 31, | ||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Current tax expense: |
||||||||||||
U.S. |
$ | 536 | $ | 5,720 | $ | 246 | ||||||
Foreign |
24,242 | 24,096 | 14,221 | |||||||||
Total current |
24,778 | 29,816 | 14,467 | |||||||||
Deferred tax expense (benefit): |
||||||||||||
U.S. |
$ | (7,650 | ) | $ | 5,168 | $ | 439 | |||||
Foreign |
(6,900 | ) | (7,225 | ) | (612 | ) | ||||||
Total deferred |
(14,550 | ) | (2,057 | ) | (173 | ) | ||||||
Total tax expense |
$ | 10,228 | $ | 27,759 | $ | 14,294 | ||||||
The differences that caused Euronet’s effective income tax rates related to continuing operations
to vary from the federal statutory rate applicable to our U.S tax profile, which was 35% for 2008
and 2007 and 34% for 2006, were as follows:
| Year Ended December 31, | ||||||||||||
| (dollar amounts in thousands) | 2008 | 2007 | 2006 | |||||||||
U.S. federal income tax expense (benefit) at applicable statutory rate |
$ | (64,284 | ) | $ | 28,224 | $ | 20,287 | |||||
Tax effect of: |
||||||||||||
State income tax expense (benefit) at statutory rates |
(8,405 | ) | 1,716 | 753 | ||||||||
Non-deductible expenses |
2,501 | 2,640 | 2,201 | |||||||||
Share-based compensation |
726 | 1,910 | 532 | |||||||||
Other permanent differences |
(7,820 | ) | 2,592 | 4,343 | ||||||||
Difference between U.S. federal and foreign tax rates |
(5,154 | ) | (5,901 | ) | (4,547 | ) | ||||||
Impairment of goodwill |
20,340 | — | — | |||||||||
Provision in excess of foreign statutory rates |
43 | 813 | 573 | |||||||||
Change in valuation allowance |
74,538 | (5,480 | ) | (8,066 | ) | |||||||
Other |
(2,257 | ) | 1,245 | (1,782 | ) | |||||||
Total income tax expense |
$ | 10,228 | $ | 27,759 | $ | 14,294 | ||||||
Effective tax rate |
(5.6 | %) | 34.6 | % | 24.0 | % | ||||||
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The tax effect of temporary differences and carryforwards that give rise to deferred tax assets and
liabilities from continuing operations are as follows:
| As of December 31, | ||||||||
| (in thousands) | 2008 | 2007 | ||||||
Deferred tax assets: |
||||||||
Tax loss carryforwards |
$ | 37,704 | $ | 31,640 | ||||
Share-based compensation |
5,759 | 5,109 | ||||||
Accrued interest |
2 | 1,883 | ||||||
Accrued expenses |
5,304 | 5,889 | ||||||
Billings in excess of earnings |
1,060 | 675 | ||||||
Property and equipment |
3,038 | 3,926 | ||||||
Goodwill and intangible amortization |
52,655 | — | ||||||
Deferred financing costs |
1,541 | 1,378 | ||||||
Intercompany notes |
12,364 | — | ||||||
Other |
3,518 | 2,779 | ||||||
Gross deferred tax assets |
122,945 | 53,279 | ||||||
Valuation allowance |
(85,102 | ) | (8,903 | ) | ||||
Net deferred tax assets |
37,843 | 44,376 | ||||||
Deferred tax liabilities: |
||||||||
Intangibles related to purchase accounting |
(16,138 | ) | (25,989 | ) | ||||
Tax amortizable goodwill |
(4,382 | ) | (9,913 | ) | ||||
Accrued expenses |
(915 | ) | (2,185 | ) | ||||
Intercompany notes |
— | (10,631 | ) | |||||
Investment securities |
(2,442 | ) | (2,322 | ) | ||||
Accrued interest |
(23,502 | ) | (22,814 | ) | ||||
Earnings in excess of billings |
(513 | ) | (410 | ) | ||||
Capitalized research and development |
(1,020 | ) | (823 | ) | ||||
Property and equipment |
(2,475 | ) | (2,384 | ) | ||||
Investment in affiliates |
(2,158 | ) | (935 | ) | ||||
Other |
(3,792 | ) | (3,791 | ) | ||||
Total deferred tax liabilities |
(57,337 | ) | (82,197 | ) | ||||
Net deferred tax liabilities |
$ | (19,494 | ) | $ | (37,821 | ) | ||
Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as
of December 31, 2008 will be allocated to income taxes in the Consolidated Statements of Operations
with the following exceptions. The tax benefit of net operating losses generated from share based
compensation have been excluded from the amounts disclosed for Tax Loss Carry Forwards and
Valuation Allowance to the extent the benefit will be recognized in equity if realized. The
excluded tax benefit of $20.8 million will be allocated to additional paid in capital when utilized
to offset taxable income.
As of December 31, 2008, 2007 and 2006, the Company’s U.S. federal and foreign tax loss
carryforwards were $167.8 million, $150.3 million and $135.1 million, respectively, and U.S. state
tax loss carryforwards were $56.4 million, $60.4 million and $60.7 million, respectively.
In assessing the Company’s ability to realize deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not the Company will only realize the
benefits of these deductible differences, net of the existing valuation allowances at December 31,
2008.
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At December 31, 2008, the Company had U.S. federal and foreign tax net operating loss carryforwards
of $167.8 million, which will expire as follows:
| Year ending December 31, (in thousands) | Gross | Tax Effected | ||||||
2009 |
$ | 1,297 | $ | 246 | ||||
2010 |
2,749 | 697 | ||||||
2011 |
6,365 | 1,610 | ||||||
2012 |
3,174 | 798 | ||||||
2013 |
8,001 | 1,678 | ||||||
thereafter |
138,757 | 46,438 | ||||||
Unlimited |
7,409 | 1,409 | ||||||
Total |
$ | 167,752 | $ | 52,876 | ||||
In addition, the Company’s state tax net operating losses of $56.4 million will expire periodically
from 2009 through 2028.
Except for a portion of the earnings of ATX Software, Ltd., no provision has been made in the
accounts as of December 31, 2008 for U.S. federal income taxes which would be payable if the
undistributed earnings of the foreign subsidiaries were distributed to the Company since management
has determined that the earnings are permanently reinvested in this foreign operation.
Determination of the amount of unrecognized deferred U.S. income tax liabilities and foreign tax
credits, if any, is not practicable to calculate at this time. In the years ended December 31, 2007
and 2006, the Company held provisions for U.S. federal income taxes payable on the undistributed
earnings of ATX Software, Ltd., e-pay Australia Pty Ltd. and e-pay New Zealand Pty Ltd. Due to a
reorganization of the share ownership of e-pay Australia Pty Ltd. and e-pay New Zealand Pty Ltd.,
management has determined that a provision is no longer necessary for these entities.
The Company is subject to corporate income tax audits in each of its various taxing jurisdictions.
Although, the Company believes that its tax positions comply with applicable tax law, a taxing
authority could take a position contrary to that reported by the Company and assess additional
taxes due. The Company believes it has made adequate provisions for identified exposures.
On December 15, 2004, the Company completed the sale of $140 million of 1.625% stated interest
convertible senior debentures in a private offering. Additionally, on October 4, 2005, the Company
completed the sale of $175 million of 3.5% stated interest convertible debentures in a private
offering. Pursuant to the rules applicable to contingent payment debt instruments, the holders are
generally required to include amounts in their taxable income, and the issuer is able to deduct
such amounts from its taxable income, based on the rate at which Euronet would issue a
non-contingent, non-convertible, fixed-rate debt instrument with terms and conditions otherwise
similar to those of the convertible debentures. Euronet has determined that amount to be 9.05% and
8.50% for the 1.625% convertible senior debentures and 3.5% convertible debentures, respectively,
which is substantially in excess of the stated interest rate. In the event the convertible debentures
are repurchased, redeemed, or converted at an amount less than the adjusted issue price for tax purposes,
ordinary income is recognized by the Company to the extent of the prior excess tax deductions. During the
year ended December 31, 2008, the Company repurchased in privately negotiated transactions $70 million in
principal amount of the $140 million of 1.625% Contingent Convertible Senior Debentures. The convertible
debentures were repurchased for less than the adjusted issue price for tax purposes, resulting in the
recognition of taxable income of approximately $23.2 million in excess of the gain recognized for book purposes
on the transactions.
An issuer of convertible debt may not deduct any premium paid upon its repurchase of such debt if
the premium exceeds a normal call premium. This denial of an interest deduction, however, does not
apply to accruals of interest based on the comparable yield of a convertible debt instrument.
Nonetheless, the anti-abuse regulation, set forth in Section 1.1275(g) of the Internal Revenue Code
(“Code”), grants the Commissioner of the Internal Revenue Service authority to depart from the
regulation if a result is achieved which is unreasonable in light of the original issue discount
provisions of the Code, including Section 163(e). The anti-abuse regulation further provides that
the Commissioner may, under this authority, treat a contingent payment feature of a debt instrument
as if it were a separate position. If such an analysis were applied to the debentures described
above and ultimately sustained, our deductions for these debentures could be limited to the stated
interest. The scope of the application of the anti-abuse regulations is unclear. The Company
believes that the application of the Contingent Debt Regulations to the debentures is a reasonable
result such that the anti-abuse regulation should not apply. If a contrary position were asserted
and ultimately sustained, our tax deductions would be severely diminished; however, such a contrary
position would not have any adverse impact on our reported tax expense, because there has been
minimal tax benefit recognized for the difference between the stated interest and the comparable
yield of the debentures.
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Accounting for Uncertainty in Income Taxes
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years
ended December 31, 2008 and 2007 is as follows:
| Year Ended December 31, | ||||||||
| (in thousands): | 2008 | 2007 | ||||||
Beginning balance |
$ | 7,375 | $ | 5,916 | ||||
Additions based on tax positions related to the current year |
892 | 2,033 | ||||||
Additions for tax positions of prior years |
629 | 367 | ||||||
Reductions for tax positions of prior years |
(592 | ) | (587 | ) | ||||
Settlements |
(66 | ) | (354 | ) | ||||
Ending balance |
$ | 8,238 | $ | 7,375 | ||||
As of December 31, 2008 and 2007, approximately $2.2 million and $3.3 million, respectively, of the
unrecognized tax benefits would impact the Company’s provision for income taxes and effective tax
rate, if recognized. Total estimated accrued interest and penalties related to the underpayment of
income taxes was $1.1 million and $0.5 million as of December 31, 2008 and 2007, respectively. The
following tax years remain open in the Company’s major jurisdictions as of December 31, 2008:
| Poland | 2004 through 2008 | |||
| U.S. (Federal) | 2000 through 2008 | |||
| Spain | 2004 through 2008 | |||
| Australia | 2004 through 2008 | |||
| U.K. | 2004 through 2008 | |||
| Germany | 2002 through 2008 |
The application of FIN 48 requires significant judgment in assessing the outcome of future tax
examinations and their potential impact on the Company’s estimated effective tax rate and the value
of deferred tax assets, such as those related to the Company’s net operating loss carryforwards. It
is reasonably possible that amounts reserved for potential exposure could significantly change as a
result of the conclusion of tax examinations and, accordingly, materially affect our operating
results.
(17) VALUATION AND QUALIFYING ACCOUNTS
Accounts receivable balances are stated net of allowance for doubtful accounts. Historically, the
Company has not experienced significant write-offs. The Company records allowances for doubtful
accounts when it is probable that the accounts receivable balance will not be collected. The
following table provides a summary of the allowance for doubtful accounts balances and activity for
the years ended December 31, 2008, 2007 and 2006:
| Year Ended December 31, | ||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Beginning balance-allowance for doubtful accounts |
$ | 6,194 | $ | 2,078 | $ | 1,995 | ||||||
Additions-charged to expense |
3,415 | 2,225 | 1,711 | |||||||||
Amounts written off |
(794 | ) | (555 | ) | (1,819 | ) | ||||||
Impact of acquisition of RIA (See Note 6) |
— | 2,244 | — | |||||||||
Other (primarily changes in foreign currency exchange rates) |
630 | 202 | 191 | |||||||||
Ending balance-allowance for doubtful accounts |
$ | 9,445 | $ | 6,194 | $ | 2,078 | ||||||
(18) STOCK PLANS
The Company has established, and shareholders have approved, share compensation plans (“SCPs”) that
allow the Company to grant restricted shares, or options to purchase shares, of Common Stock to
certain current and prospective key employees, directors and
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consultants of the Company. These
awards generally vest over periods ranging from three to seven years from the date of grant, are
generally exercisable during the shorter of a ten-year term or the term of employment arrangement
with the Company. Certain stock options granted during 2008 vest over a five year period, subject
to the achievement of a pre-determined share price target for Euronet
common stock within three years from the grant date. With the exception of certain awards made to
the Company’s employees in Germany, awards under the SCP plans are settled through the issuance of
new shares under the provisions of the SCPs. For Company employees in Germany, certain awards are
settled through the issuance of treasury shares, which also reduces the number of shares available
for future issuance under the SCPs. As of December 31, 2008, the Company has approximately 1.0
million in total shares remaining available for issuance under the SCPs.
The Company’s Consolidated Statements of Operations includes share-based compensation expense of
$8.5 million, $7.7 million and $7.4 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The amounts are recorded as salaries and benefits expense in the accompanying
Consolidated Statements of Operations. The Company recorded a tax benefit of $0.7 million, $0.4
million and $0.3 million during the years ended December 31, 2008, 2007 and 2006, respectively, for
the portion of this expense that relates to foreign tax jurisdictions in which an income tax
benefit is expected to be derived.
(a) Stock options
Summary stock options activity is presented in the table below:
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic | ||||||||||||||
| Number of | Exercise | Contractual | Value | |||||||||||||
| Shares | Price | Term (years) | (thousands) | |||||||||||||
Balance at December 31, 2007 (1,323,294 shares exercisable) |
1,685,102 | $ | 13.64 | |||||||||||||
Granted |
1,851,518 | $ | 10.10 | |||||||||||||
Exercised |
(78,938 | ) | $ | 9.54 | ||||||||||||
Forfeited |
(33,650 | ) | $ | 16.28 | ||||||||||||
Expired |
(40,838 | ) | $ | 18.72 | ||||||||||||
Balance at December 31, 2008 |
3,383,194 | $ | 11.71 | 7.3 | $ | 6,429 | ||||||||||
Exercisable at December 31, 2008 |
1,392,439 | $ | 12.67 | 3.9 | $ | 3,633 | ||||||||||
Vested and expected to vest at December 31, 2008 |
2,956,194 | $ | 11.94 | 6.9 | $ | 5,784 | ||||||||||
Options outstanding that are expected to vest are net of estimated future option forfeitures. The
Company received cash of $0.8 million, $7.0 million and $12.9 million in connection with stock
options exercised during the years ended December 31, 2008, 2007 and 2006, respectively. The
intrinsic value of these options exercised was $0.6 million, $7.6 million and $34.2 million during
the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008,
unrecognized compensation expense related to nonvested stock options that are expected to vest
totaled $6.5 million and will be recognized over the next 5 years, with an overall weighted average
period of 4.9 years. The following table provides the fair value of options granted under the SCP
during 2008 and 2007, together with a description of the assumptions used to calculate the fair
value using the Black-Scholes or Monte Carlo simulation models:
| Year Ended | Year Ended | |||||||
| 2008 | 2007 | |||||||
Volatility |
53.0 | % | 53.9 | % | ||||
Risk-free interest rate — weighted average |
2.2 | % | 4.9 | % | ||||
Risk-free interest rate — range |
2.0% to 2.3% | 4.9 | % | |||||
Dividend yield |
0.0 | % | 0.0 | % | ||||
Assumed forfeitures |
8.0 | % | 0.0 | % | ||||
Expected lives |
7.1 years | 6.5 years | ||||||
Weighted-average fair value (per share) |
$ | 4.28 | $ | 17.09 | ||||
(b) Restricted stock
Restricted stock awards vest based on the achievement of time-based service conditions and/or
performance-based conditions. For certain awards, vesting is based on the achievement of more than
one condition of an award with multiple time-based and/or performance-based conditions.
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Summary restricted stock activity is presented in the table below:
| Weighted | ||||||||
| Average Grant | ||||||||
| Number of | Date Fair | |||||||
| Shares | Value | |||||||
Nonvested at December 31, 2007 |
1,418,393 | $ | 28.87 | |||||
Granted |
734,935 | $ | 15.05 | |||||
Vested |
(226,146 | ) | $ | 26.45 | ||||
Forfeited |
(264,655 | ) | $ | 27.82 | ||||
Nonvested at December 31, 2008 |
1,662,527 | $ | 23.48 | |||||
The fair value of shares vested during the years ended December 31, 2008, 2007 and 2006 was $3.4
million, $2.9 million and $0.4 million, respectively. As of December 31, 2008, there was $26.1
million of total unrecognized compensation cost related to unvested restricted stock, which is
expected to be recognized over a weighted average period of 3.5 years. The weighted average grant
date fair value of restricted stock granted during the years ended December 31, 2008, 2007 and 2006
was $15.05, $29.62 and $28.48 per share, respectively.
(c) Employee stock purchase plans
In 2003, the Company established a qualified Employee Stock Purchase Plan (the “ESPP”), which
allows qualified employees (as defined by the plan documents) to participate in the purchase of
rights to purchase designated shares of the 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 years ended December 31, 2008, 2007 and 2006 the Company issued 59,983, 49,500 and 41,492
rights, respectively, to purchase shares of Common Stock at a weighted average price per share of
$18.38, $24.19 and $24.00, respectively. The grant date fair value of the option to purchase shares
at the lower of the closing price at the beginning or end of the quarterly period, plus the actual
total discount provided, are recorded as compensation expense. Total compensation expense recorded
was $0.3 million for each of the years ended December 31, 2008 and 2007 and $0.2 million for the
year ended December 31, 2006. The following table provides the weighted average fair value of the
ESPP stock purchase rights during the years ended December 31, 2008, 2007 and 2006 and the
assumptions used to calculate the fair value using the Black-Scholes pricing model:
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Volatility — weighted average |
52.2 | % | 40.4 | % | 31.6 | % | ||||||
Volatility — range |
35.8% to 99.8 | % | 27.1% to 52.3 | % | 28.0% to 34.7 | % | ||||||
Risk-free interest rate — weighted average |
2.1 | % | 4.3 | % | 4.2 | % | ||||||
Risk-free interest rate — range |
0.9% to 3.3 | % | 3.1% to 5.0 | % | 4.0% to 4.5 | % | ||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected lives |
3 months | 3 months | 3 months | |||||||||
Weighted-average fair value (per share) |
$ | 5.14 | $ | 5.18 | $ | 4.88 | ||||||
(19) BUSINESS SEGMENT INFORMATION
Euronet’s reportable operating segments have been determined in accordance with SFAS No. 131,
“Disclosures About Segments of an Enterprise and Related Information.” Effective January 1, 2007,
the Company began reporting and managing the operations of the EFT Processing Segment and the
former Software Solutions Segment on a combined basis. Additionally, as a result of the acquisition
of RIA in April 2007, the Company began reporting the Money Transfer Segment. The Company’s former
money transfer business, which was not significant, was previously reported within the Prepaid
Processing Segment. Previously reported amounts have been adjusted to reflect these changes, which
did not impact the Company’s Consolidated Financial Statements. As a result of these changes, the
Company currently operates in the following three reportable operating segments.
| 1) | Through the EFT Processing Segment, the Company processes transactions for a network of ATMs and POS terminals across Europe, the Middle East and Asia Pacific. The Company provides comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing and electronic recharge services for prepaid mobile airtime. Through this segment, the Company also offers a suite of integrated electronic financial transaction (“EFT”) software solutions for electronic payment and transaction delivery systems. |
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| 2) | Through the Prepaid Processing Segment, the Company provides electronic distribution of prepaid mobile airtime and other prepaid products and collection services in Europe, the Middle East, Asia Pacific and North America. | ||
| 3) | Through the Money Transfer Segment, the Company provides global money transfer and bill payment services through a sending network of agents and Company-owned stores primarily in North America and Europe, disbursing money transfers through a worldwide payer network. |
In addition, in its administrative division, “Corporate Services, Eliminations and Other,” the
Company accounts for non-operating activity, certain intersegment eliminations and the costs of
providing corporate and other administrative services to the three segments. These services are not
directly identifiable with the Company’s reportable operating segments.
The following tables present the segment results of the Company’s operations for the years ended
December 31, 2008, 2007 and 2006:
| For the year ended December 31, 2008 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Services, | ||||||||||||||||||||
| EFT | Prepaid | Money | Eliminations | |||||||||||||||||
| (in thousands) | Processing | Processing | Transfer | and Other | Consolidated | |||||||||||||||
Total revenues |
$ | 205,257 | $ | 609,106 | $ | 231,302 | $ | — | $ | 1,045,665 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Direct operating costs |
93,414 | 495,971 | 114,457 | — | 703,842 | |||||||||||||||
Salaries and benefits |
34,944 | 28,574 | 50,543 | 15,037 | 129,098 | |||||||||||||||
Selling, general and administrative |
19,398 | 22,098 | 34,673 | 9,249 | 85,418 | |||||||||||||||
Goodwill and acquired intangible assets impairment |
— | 50,681 | 169,396 | — | 220,077 | |||||||||||||||
Depreciation and amortization |
19,195 | 16,441 | 19,383 | 1,232 | 56,251 | |||||||||||||||
Total operating expenses |
166,951 | 613,765 | 388,452 | 25,518 | 1,194,686 | |||||||||||||||
Operating income (loss) |
38,306 | (4,659 | ) | (157,150 | ) | (25,518 | ) | (149,021 | ) | |||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
296 | 7,151 | 267 | 2,897 | 10,611 | |||||||||||||||
Interest expense |
(3,693 | ) | (1,056 | ) | (115 | ) | (19,674 | ) | (24,538 | ) | ||||||||||
Income (loss) from unconsolidated affiliates |
183 | 1,149 | — | (82 | ) | 1,250 | ||||||||||||||
Impairment loss on investment securities |
— | — | — | (18,760 | ) | (18,760 | ) | |||||||||||||
Gain on early retirement of debt |
— | — | — | 5,546 | 5,546 | |||||||||||||||
Foreign exchange gain (loss), net |
— | — | — | (9,821 | ) | (9,821 | ) | |||||||||||||
Total other income (expense) |
(3,214 | ) | 7,244 | 152 | (39,894 | ) | (35,712 | ) | ||||||||||||
Income (loss) from continuing operations
before income taxes and minority
interest |
35,092 | 2,585 | (156,998 | ) | (65,412 | ) | (184,733 | ) | ||||||||||||
Income tax (expense) benefit |
(9,788 | ) | (17,148 | ) | 25,585 | (8,877 | ) | (10,228 | ) | |||||||||||
Minority interest |
250 | 685 | — | — | 935 | |||||||||||||||
Income (loss) from continuing operations |
$ | 25,554 | $ | (13,878 | ) | $ | (131,413 | ) | $ | (74,289 | ) | $ | (194,026 | ) | ||||||
Segment assets as of December 31, 2008 |
$ | 203,889 | $ | 685,680 | $ | 410,288 | $ | 140,267 | $ | 1,440,124 | ||||||||||
Property and equipment as of December 31, 2008 |
$ | 57,346 | $ | 13,404 | $ | 17,184 | $ | 1,598 | $ | 89,532 | ||||||||||
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| For the year ended December 31, 2007 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Services, | ||||||||||||||||||||
| EFT | Prepaid | Money | Eliminations | |||||||||||||||||
| (in thousands) | Processing | Processing | Transfer | and Other | Consolidated | |||||||||||||||
Total revenues |
$ | 174,049 | $ | 569,858 | $ | 158,759 | $ | — | $ | 902,666 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Direct operating costs |
74,879 | 464,874 | 83,795 | — | 623,548 | |||||||||||||||
Salaries and benefits |
31,874 | 27,493 | 32,705 | 13,217 | 105,289 | |||||||||||||||
Selling, general and administrative |
14,952 | 20,567 | 21,459 | 5,811 | 62,789 | |||||||||||||||
Federal excise tax refund |
— | (12,191 | ) | — | — | (12,191 | ) | |||||||||||||
Depreciation and amortization |
16,197 | 16,302 | 13,670 | 828 | 46,997 | |||||||||||||||
Total operating expenses |
137,902 | 517,045 | 151,629 | 19,856 | 826,432 | |||||||||||||||
Operating income (loss) |
36,147 | 52,813 | 7,130 | (19,856 | ) | 76,234 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
249 | 5,340 | 1,566 | 9,095 | 16,250 | |||||||||||||||
Interest expense |
(4,416 | ) | (4,851 | ) | (1,257 | ) | (15,602 | ) | (26,126 | ) | ||||||||||
Income (loss) from unconsolidated affiliates |
(26 | ) | 546 | — | 388 | 908 | ||||||||||||||
Loss on early retirement of debt |
— | — | — | (427 | ) | (427 | ) | |||||||||||||
Foreign exchange gain, net |
— | — | — | 15,497 | 15,497 | |||||||||||||||
Total other income (expense) |
(4,193 | ) | 1,035 | 309 | 8,951 | 6,102 | ||||||||||||||
Income (loss) from continuing operations
before income taxes and minority interest |
31,954 | 53,848 | 7,439 | (10,905 | ) | 82,336 | ||||||||||||||
Income tax (expense) benefit |
468 | (12,194 | ) | 7,563 | (23,596 | ) | (27,759 | ) | ||||||||||||
Minority interest |
302 | (2,342 | ) | — | — | (2,040 | ) | |||||||||||||
Income (loss) from continuing operations |
$ | 32,724 | $ | 39,312 | $ | 15,002 | $ | (34,501 | ) | $ | 52,537 | |||||||||
Segment assets as of December 31, 2007 |
$ | 215,087 | $ | 781,176 | $ | 699,305 | $ | 190,588 | $ | 1,886,156 | ||||||||||
Property and equipment as of December 31, 2007 |
$ | 58,143 | $ | 13,638 | $ | 13,957 | $ | 2,599 | $ | 88,337 | ||||||||||
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| For the year ended December 31, 2006 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Services, | ||||||||||||||||||||
| EFT | Prepaid | Money | Eliminations | |||||||||||||||||
| (in thousands) | Processing | Processing | Transfer | and Other | Consolidated | |||||||||||||||
Total revenues |
$ | 144,515 | $ | 467,651 | $ | 3,210 | $ | — | $ | 615,376 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Direct operating costs |
56,851 | 376,329 | 1,932 | — | 435,112 | |||||||||||||||
Salaries and benefits |
27,417 | 22,561 | 2,353 | 13,285 | 65,616 | |||||||||||||||
Selling, general and administrative |
12,069 | 17,011 | 1,863 | 4,343 | 35,286 | |||||||||||||||
Depreciation and amortization |
13,900 | 14,128 | 357 | 205 | 28,590 | |||||||||||||||
Total operating expenses |
110,237 | 430,029 | 6,505 | 17,833 | 564,604 | |||||||||||||||
Operating income (loss) |
34,278 | 37,622 | (3,295 | ) | (17,833 | ) | 50,772 | |||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
379 | 4,508 | 23 | 8,734 | 13,644 | |||||||||||||||
Interest expense |
(3,276 | ) | (1,077 | ) | 3 | (10,369 | ) | (14,719 | ) | |||||||||||
Income from unconsolidated affiliates |
(402 | ) | 1,062 | — | — | 660 | ||||||||||||||
Foreign exchange gain, net |
— | — | — | 10,287 | 10,287 | |||||||||||||||
Total other income (expense) |
(3,299 | ) | 4,493 | 26 | 8,652 | 9,872 | ||||||||||||||
Income (loss) from continuing operations
before income taxes and minority interest |
30,979 | 42,115 | (3,269 | ) | (9,181 | ) | 60,644 | |||||||||||||
Income tax expense |
(5,993 | ) | (7,972 | ) | (179 | ) | (150 | ) | (14,294 | ) | ||||||||||
Minority interest |
346 | (1,323 | ) | — | — | (977 | ) | |||||||||||||
Income (loss) from continuing operations |
$ | 25,332 | $ | 32,820 | $ | (3,448 | ) | $ | (9,331 | ) | $ | 45,373 | ||||||||
During the third quarter 2008, the Company adjusted the allocation of goodwill by component related
to the acquisition of RIA. The adjustment had no impact on total goodwill reported on the Company’s
Consolidated Balance Sheets, but changed the goodwill and total assets reported by geographic
location. The adjustment had no impact on the Company’s results of operations or cash flows. Total
revenues for the years ended December 31, 2008, 2007 and 2006, and property and equipment and total
assets, as adjusted, as of December 31, 2008 and 2007, summarized by geographic location, were as
follows:
| Revenues | Property & Equipment, net | Total Assets | ||||||||||||||||||||||||||
| For the year ended | as of December 31, | as of December 31, | ||||||||||||||||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||
U.S. |
$ | 252,535 | $ | 219,299 | $ | 100,455 | $ | 13,204 | $ | 14,970 | $ | 354,774 | $ | 676,322 | ||||||||||||||
U.K. |
203,449 | 236,137 | 184,557 | 3,503 | 4,090 | 228,431 | 329,077 | |||||||||||||||||||||
Australia |
169,663 | 120,909 | 100,291 | 2,332 | 1,440 | 177,545 | 120,785 | |||||||||||||||||||||
Poland |
98,075 | 74,648 | 58,770 | 27,791 | 28,203 | 73,288 | 71,059 | |||||||||||||||||||||
Germany |
78,337 | 58,720 | 47,276 | 8,615 | 8,932 | 169,157 | 164,510 | |||||||||||||||||||||
Spain |
77,755 | 65,661 | 41,749 | 3,610 | 2,639 | 129,901 | 247,570 | |||||||||||||||||||||
India |
37,182 | 31,459 | 20,769 | 2,189 | 3,348 | 20,087 | 24,136 | |||||||||||||||||||||
Other |
128,669 | 95,833 | 61,509 | 28,288 | 24,715 | 286,941 | 252,697 | |||||||||||||||||||||
Total |
$ | 1,045,665 | $ | 902,666 | $ | 615,376 | $ | 89,532 | $ | 88,337 | $ | 1,440,124 | $ | 1,886,156 | ||||||||||||||
Revenues are attributed to countries based on location of the customer, with the exception of
software sales made by our software subsidiary, which are attributed to the U.S.
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(20) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
(a) Concentrations of credit risk
Euronet’s credit risk primarily relates to trade accounts receivable and cash and cash equivalents.
Euronet’s EFT Processing Segment’s customer base includes the most significant international card
organizations and certain banks in the Company’s markets. The Prepaid Processing Segment’s customer
base is diverse and includes several major retailers and/or distributors in markets that they
operate. The Money Transfer Segment trade accounts receivable are primarily due from independent
agents that collect cash from customers on the Company’s behalf and generally remit the cash within
one week. Euronet performs ongoing evaluations of its customers’ financial condition and limits the
amount of credit extended, or purchases credit enhancement protection, when deemed necessary, but
generally requires no collateral. See Note 17, Valuation and Qualifying Accounts, for further
disclosure.
The Company invests excess cash not required for use in operations primarily in high credit
quality, short-term duration securities that the Company believes bear minimal risk. The two
counterparties to the Company’s interest rate swap agreements are U.S.-based multi-national banks.
(b) Fair value of financial instruments
The carrying amount of cash and cash equivalents, trade accounts receivable, trade accounts payable
and short-term debt obligations approximates fair value, due to their short maturities. The
carrying value of the Company’s term loan due 2014 and revolving credit agreements approximate fair
value because interest is based on LIBOR that resets at various intervals less than one year. The
following table provides the estimated fair values of the Company’s other financial instruments,
based on quoted market prices or significant other observable inputs.
| As of December 31, | ||||||||||||||||
| 2008 | 2007 | |||||||||||||||
| Carrying | Carrying | |||||||||||||||
| (in thousands) | Value | Fair Value | Value | Fair Value | ||||||||||||
Available-for-sale investment securities |
$ | 1,351 | $ | 1,351 | $ | 20,562 | $ | 20,562 | ||||||||
1.625% convertible senior debentures, unsecured, due 2024 |
70,000 | 63,522 | 140,000 | 149,804 | ||||||||||||
3.50% convertible debentures, unsecured, due 2025 |
175,000 | 112,131 | 175,000 | 182,821 | ||||||||||||
Interest rate swaps related to floating rate debt |
(830 | ) | (830 | ) | (994 | ) | (994 | ) | ||||||||
Foreign currency derivative contracts |
278 | 278 | (328 | ) | (328 | ) | ||||||||||
The Company’s assets and liabilities recorded at fair value on a recurring basis are set forth in
the following table:
| Fair Value Measurements as of | ||||||||
| December 31, 2008 Using | ||||||||
| Quoted Prices | Significant | |||||||
| in Active | Other | |||||||
| Markets for | Observable | |||||||
| Assets (liabilities) (in thousands) | Identical Assets | Inputs | ||||||
Available-for-sale investment securities |
$ | 1,351 | $ | — | ||||
Interest rate swaps related to floating rate debt |
— | (830 | ) | |||||
Foreign currency derivative contracts |
— | 278 | ||||||
The Company values available-for-sale investment securities using quoted prices from the
securities’ primary exchange. Interest rate swaps are valued using present value measurements based
on the LIBOR swap rate, credit spreads and other relevant market conditions. Foreign currency
derivative contracts are valued using foreign currency quotes for similar assets and liabilities.
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(21) COMPUTER SOFTWARE TO BE SOLD
Euronet engages in software development activities to continually improve the Company’s core
software products. The following table provides the detailed activity related to capitalized
software development costs of continuing operations for the years ended December 31, 2008, 2007 and
2006.
| Year Ended December 31, | ||||||||||||
| (in thousands) | 2008 | 2007 | 2006 | |||||||||
Beginning balance-capitalized development cost |
$ | 2,078 | $ | 1,516 | $ | 1,440 | ||||||
Additions |
2,010 | 1,410 | 1,050 | |||||||||
Amortization |
(1,262 | ) | (848 | ) | (974 | ) | ||||||
Net capitalized development cost |
$ | 2,826 | $ | 2,078 | $ | 1,516 | ||||||
Research and development costs expensed for the years ending December 31, 2008, 2007 and 2006 were
$1.4 million, $1.6 million and $2.1 million, respectively.
(22) LITIGATION AND CONTINGENCIES
Litigation
During 2005, a former cash supply contractor in Central Europe (the “Contractor”) claimed that the
Company owed it approximately $2.0 million for the provision of cash during the fourth quarter 1999
and first quarter 2000 that had not been returned. This claim was made after the Company terminated
its business with the Contractor and established a cash supply agreement with another supplier.
During 2006, the Contractor initiated legal action in Budapest, Hungary regarding the claim. In
April 2007, an arbitration tribunal awarded the Contractor $1.0 million, plus $0.2 million in
interest, under the claim, which was recorded as selling, general and administrative expenses of
the Company’s EFT Processing Segment.
Contingencies
On January 12, 2007, the Company signed a stock purchase agreement to acquire La Nacional and
certain of its affiliates (“La Nacional”), subject to regulatory approvals and other customary
closing conditions. In connection with this agreement, on January 16, 2007 the Company deposited
$26 million in an escrow account created for the proposed acquisition. The escrowed funds were not
permitted to be released except upon mutual agreement of the Company and La Nacional’s stockholder
or through legal remedies available in the agreement.
On April 5, 2007, the Company gave notice to the stockholder of La Nacional of the termination of
the stock purchase agreement, alleging certain breaches of the terms thereof by La Nacional and
requested the release of the $26 million held in escrow under the terms of the agreement. La
Nacional’s stockholder denied such breaches occurred, contested such termination and did not
consent to our request for release of the escrowed funds. While pursuing all legal remedies
available to us, we engaged in negotiations with La Nacional and its stockholder to determine
whether the dispute could be resolved through revised terms for the acquisition or some other
mutually agreeable method.
On January 10, 2008, the Company entered into a settlement agreement with La Nacional and its
stockholder evidencing the parties’ mutual agreement not to consummate the acquisition of La
Nacional, in exchange for payment by Euronet of a portion of the legal fees incurred by La
Nacional. Among other terms and conditions, the settlement agreement contains mutual releases in
connection with litigation and provided for the release to the Company of the $26 million held in
escrow, plus interest earned on the escrowed funds. In connection with the settlement, the Company
recorded $1.3 million in deferred acquisition costs and other settlement costs during 2007.
In addition, from time to time, the Company is a party to litigation arising in the ordinary course
of its business. Currently, there are no legal proceedings that management believes, either
individually or in the aggregate, would have a material adverse effect upon the consolidated
results of operations or financial condition of the Company. The Company expenses legal costs in
connection with loss contingencies when incurred.
(23) FEDERAL EXCISE TAX REFUND
During 2006, the Internal Revenue Service (“IRS”) announced that Internal Revenue Code Section 4251
(relating to communications excise tax) will no longer apply to, among other services, prepaid
mobile airtime services such as those offered by the Company’s Prepaid Processing Segment’s U.S.
operations. Additionally, companies that paid this excise tax during the period beginning on
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March 1, 2003 and ending on July 31, 2006, are entitled to a credit or refund of amounts paid in
conjunction with the filing of 2006 federal income tax returns. During the fourth quarter 2007, the
IRS completed an initial field examination confirming the amount of the claim and, therefore, the
Company recorded $12.2 million for the amount of the refund claimed as a reduction to operating
expenses of the Prepaid Processing Segment and as an other current asset. Additionally, the Company
received approximately $1.6 million in interest on the amount claimed, which was recorded as
interest income in 2008.
(24) GUARANTEES
As of December 31, 2008 and 2007, the Company had $44.8 million and $30.7 million, respectively, of
stand-by letters of credit/bank guarantees issued on its behalf. Of this amount $8.4 million and
$1.7 million, respectively, are collateralized by cash deposits held by the respective issuing
banks.
Euronet regularly grants guarantees in support of obligations of subsidiaries. As of December 31,
2008, the Company granted off balance sheet guarantees for cash in various ATM networks amounting
to $18.6 million over the terms of the cash supply agreements and performance guarantees amounting
to approximately $26.9 million over the terms of the agreements with the customers.
From time to time, Euronet enters into agreements with unaffiliated parties that contain
indemnification provisions, the terms of which may vary depending on the negotiated terms of each
respective agreement. The amount of such potential obligations is generally not stated in the
agreements. Our liability under such indemnification provisions may be mitigated by relevant
insurance coverage and may be subject to time and materiality limitations, monetary caps and other
conditions and defenses. Such indemnification obligations include the following:
| • | In connection with contracts with financial institutions in the EFT Processing Segment, the Company is responsible for damages to ATMs and theft of ATM network cash that, generally, is not recorded on the Company’s Consolidated Balance Sheet. As of December 31, 2008, the balance of ATM network cash for which the Company was responsible was approximately $415 million. The Company maintains insurance policies to mitigate this exposure; | ||
| • | In connection with the license of proprietary systems to customers, Euronet provides certain warranties and infringement indemnities to the licensee, which generally warrant that such systems do not infringe on intellectual property owned by third parties and that the systems will perform in accordance with their specifications; | ||
| • | Euronet has entered into purchase and service agreements with vendors and consulting agreements with providers of consulting services, pursuant to which the Company has agreed to indemnify certain of such vendors and consultants, respectively, against third-party claims arising from the 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 | ||
| • | The Company has issued surety bonds in compliance with money transfer licensing requirements of the applicable governmental authorities. |
The Company is also required to meet minimum capitalization and cash requirements of various
regulatory authorities in the jurisdictions in which the Company has money transfer operations. To
date, the Company is not aware of any significant claims made by the indemnified parties or third
parties to guarantee agreements with the Company and, accordingly, no liabilities were recorded as
of December 31, 2008 or 2007.
(25) RELATED PARTY TRANSACTIONS
See Note 6, 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.
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The Company leases an airplane from a company owned by Mr. Michael J. Brown, Euronet’s Chief
Executive Officer and Chairman of the Board of Directors, and Mr. Daniel R. Henry, who was a member
of Euronet’s Board of Directors until February 6, 2008. The airplane is leased for business use on
a per flight hour basis with no minimum usage requirement. Euronet incurred $0.3 million during
2008, $0.2 million in 2007 and less than $0.1 million during 2006, in expenses for the use of this
airplane.
(26) SUBSEQUENT EVENTS
During February 2009, the Company entered into Amendment No. 2 to the Credit Facility to, among
other items, (i) (a) grant the Company the ability to repurchase the remaining $70 million of
outstanding 1.625% Convertible Senior Debentures Due 2024 and (b) repurchase its 3.5% Convertible
Debentures Due 2025 prior to any repurchase date using proceeds of a qualifying refinancing, the
proceeds of a qualifying equity issuance or shares of common stock; (ii) revise the definition of
Consolidated EBITDA and the covenant regarding maintenance of Consolidated Net Worth to exclude the
effect of non-cash charges for impairment of goodwill or other intangible assets for the periods
ending December 31, 2008 and thereafter; and (iii) broaden or otherwise modify various definitions
of provisions related to Indebtedness, Liens, Permitted Disposition, Debt Transactions, Investments
and other matters. Additionally, the lenders acknowledged that we have sufficient liquidity with
respect to the December 15, 2009 repurchase date for the 1.625% Convertible Senior Debentures. The
Company incurred costs of approximately $1.5 million in connection with the amendment, which will
be recognized as additional interest expense over the remaining term of the Credit Facility.
(27) SELECTED QUARTERLY DATA (UNAUDITED)
| First | Second | Third | Fourth | |||||||||||||
| (in thousands, except per share data) | Quarter | Quarter | Quarter | Quarter | ||||||||||||
Year Ended December 31, 2008: |
||||||||||||||||
Net revenues |
$ | 244,793 | $ | 264,450 | $ | 280,703 | $ | 255,719 | ||||||||
Operating income (loss) |
$ | 13,231 | $ | 17,298 | $ | 18,768 | $ | (198,318 | ) | |||||||
Net income (loss) |
$ | (6,836 | ) | $ | 7,787 | $ | 5,768 | $ | (201,816 | ) | ||||||
Earnings (loss) per common share: |
||||||||||||||||
Basic |
$ | (0.14 | ) | $ | 0.16 | $ | 0.12 | $ | (4.04 | ) | ||||||
Diluted (1) |
$ | (0.14 | ) | $ | 0.15 | $ | 0.11 | $ | (4.04 | ) | ||||||
Year Ended December 31, 2007: |
||||||||||||||||
Net revenues |
$ | 167,043 | $ | 233,465 | $ | 241,725 | $ | 260,433 | ||||||||
Operating income |
$ | 11,838 | $ | 15,316 | $ | 17,559 | $ | 31,521 | ||||||||
Net income |
$ | 9,461 | $ | 8,496 | $ | 15,921 | $ | 19,626 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.25 | $ | 0.18 | $ | 0.33 | $ | 0.40 | ||||||||
Diluted (1) |
$ | 0.23 | $ | 0.17 | $ | 0.31 | $ | 0.37 | ||||||||
| (1) | With the exceptions of the first and fourth quarters 2008 and the second quarter 2007, the assumed conversion of the Company’s $140 million 1.625% convertible debentures under the “if-converted” method was dilutive and, accordingly, the impact has been included in the computation of diluted earnings per common share for these periods. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our executive management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Rule 13a-15(b) under the Exchange Act as of December 31, 2008. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design
and operation of these disclosure controls and procedures were effective as of such date to provide
reasonable assurance that information required to be disclosed in our reports under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the SEC, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.
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CHANGE IN INTERNAL CONTROLS
There has been no change in our internal control over financial reporting during the fourth quarter
of our fiscal year ended December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
To the Stockholders of Euronet Worldwide, Inc.:
Management is responsible for establishing and maintaining an effective internal control over
financial reporting as this term is defined under Rule 13a-15(f) of the Securities Exchange Act of
1934 (“Exchange Act”) and has made organizational arrangements providing appropriate divisions of
responsibility and has established communication programs aimed at assuring that its policies,
procedures and principles of business conduct are understood and practiced by its employees. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management of Euronet Worldwide, Inc. assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2008. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control—Integrated Framework. Based on these criteria and our assessment, we have
determined that, as of December 31, 2008, the Company’s internal control over financial reporting
was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31,
2008, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in
their audit report.
/s/
Michael J. Brown
|
||
Chief Executive Officer |
||
/s/
Rick L. Weller
|
||
Chief Financial Officer and Chief Accounting Officer |
March 2, 2009
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information under “Election of Directors,” “Section 16(a) Beneficial Ownership Compliance” and
“Corporate Governance” in the Proxy Statement for the Annual Meeting of Shareholders for 2009,
which will be filed with the Securities and Exchange Commission no later than 120 days after
December 31, 2008, is incorporated herein by reference. Information concerning our Code of Ethics
for our employees, including our Chief Executive Officer and Chief Financial Officer, is set forth
under “Availability of Reports, Certain Committee Charters, and Other Information” in Part I and
incorporated herein by reference. Information concerning executive officers is set forth under
“Executive Officers of the Registrant” in Part I and incorporated herein by reference.
We intend to satisfy the requirement under Item 5.05 of Form 8-K to disclose any amendments to our
Code of Ethics and any waiver from a provision of our Code of Ethics by posting such information on
our Web site at www.euronetworldwide.com under Investors/Corporate Governance.
ITEM 11. EXECUTIVE COMPENSATION
The information under “Executive Compensation,” “Compensation Disclosure and Analysis” and
“Compensation Committee Report” in the Proxy Statement for the Annual Meeting of Shareholders for
2009, which will be filed with the Securities and Exchange Commission no later than 120 days after
December 31, 2008, is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information under “Ownership of Common Stock by Directors and Executive Officers” and “Election
of Directors” in the Proxy Statement for the Annual Meeting of Shareholders for 2009, which will be
filed with the Securities and Exchange Commission no later than 120 days after December 31, 2008,
is incorporated herein by reference. See Part II, Item 5 – Equity Compensation Plan Table.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information under “Certain Relationships and Related Transactions and Director Independence” in
the Proxy Statement for the Annual Meeting of Shareholders for 2009, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31, 2008, is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under “Audit Committee Pre-Approval Policy” and “Fees of the Company’s Independent
Auditors” in the Proxy Statement for the Annual Meeting of Shareholders for 2009, which will be
filed with the Securities and Exchange Commission no later than 120 days after December 31, 2008,
is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed as Part of this Report.
1. Financial Statements
The Consolidated Financial Statements and related notes, together with the report of KPMG LLP,
appear in Part II Item 8 Financial Statements and Supplementary Data of this Form 10-K.
2. Schedules
None.
3. Exhibits
The exhibits that are required to be filed or incorporated by reference herein are listed in
the Exhibit Index below.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EURONET WORLDWIDE, INC. |
||
Date: February 27, 2009
|
/s/ Michael J. Brown | |
| Michael J. Brown | ||
| Chairman of the Board of Directors, Chief Executive | ||
| Officer and Director (principal executive officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated on this
27th day of February 2009.
| Signature | Title | |
/s/
Michael J. Brown
|
Chairman of the Board of Directors, Chief Executive Officer and Director (principal executive officer) | |
/s/
Rick L. Weller
|
Chief Financial Officer and Chief Accounting Officer (principal financial officer and principal accounting officer) | |
/s/
Paul S. Althasen
|
Director | |
/s/
Andzrej Olechowski
|
Director | |
/s/
Eriberto R. Scocimara
|
Director | |
/s/
Thomas A. Mcdonnell
|
Director | |
/s/
Andrew B. Schmitt
|
Director | |
/s/
M. Jeannine Strandjord
|
Director |
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Table of Contents
EXHIBITS
Exhibit Index
| Exhibit | Description | |
2.1
|
Stock Purchase Agreement dated November 21, 2006 by and among Euronet Payments & Remittance, Inc., Euronet Worldwide, Inc.; the Fred Kunik Family Trust and the Irving Barr Living Trust (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 28, 2006, and incorporated by reference herein) | |
2.2
|
First Amendment to Stock Purchase Agreement, dated April 2, 2007, by and among Euronet Payments & Remittance, Inc., Euronet Worldwide, Inc., the Fred Kunik Family Trust and the Irving Barr Living Trust (filed as Exhibit 2.1 to the Company’s Form 8-K filed on April 9, 2007, and incorporated by reference herein) | |
2.3
|
Second Amendment to Stock Purchase Agreement, dated April 4, 2007, by and among Euronet Payments & Remittance, Inc., Euronet Worldwide, Inc., the Fred Kunik Family Trust and the Irving Barr Living Trust (filed as Exhibit 2.2 to the Company’s Form 8-K filed on April 9, 2007, and incorporated by reference herein) | |
3.1
|
Certificate of Incorporation of Euronet Worldwide, Inc., as amended (filed as Exhibit 4.2 to the Company’s Registration Statement under the Securities Act of 1933 on Form S-8 on August 10, 2006, and incorporated by reference herein) | |
3.2
|
Amended and Restated Bylaws of Euronet Worldwide, Inc. (filed as Exhibit 3.2 to the Company’s Form 8-K filed on December 22, 2008, and incorporated by reference herein) | |
4.1
|
Rights Agreement, dated as of March 21, 2003, between Euronet Worldwide, Inc. and EquiServe Trust Company, N.A. (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 24, 2003 (File No. 001-31648), and incorporated by reference herein) | |
4.2
|
First Amendment to Rights Agreement, dated as of November 28, 2003, between Euronet Worldwide, Inc. and EquiServe Trust Company, N.A. (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 4, 2003 (File No. 001-31648), and incorporated by reference herein) | |
4.3
|
Indenture, dated as of December 15, 2004, between Euronet Worldwide, Inc. and U.S. Bank National Association (filed as Exhibit 4.10 to the Company’s Registration Statement on Form S-3 filed on January 26, 2005, and incorporated by reference herein) | |
4.4
|
Specimen 1.625% Convertible Senior Debenture Due 2024 (Certificated Security) (filed as Exhibit 4.14 to the Company’s Registration Statement on Form S-3/A filed on February 5, 2005, and incorporated by reference herein) | |
4.5
|
Indenture, dated as of October 4, 2005, between Euronet Worldwide, Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 26, 2005, and incorporated by reference herein) | |
4.6
|
Specimen 3.50% Convertible Debenture Due 2025 (Certificated Security) (included in Exhibit 4.10 to the Company’s Registration Statement on Form S-3/A filed on November 10, 2005, and incorporated by reference herein) | |
4.7
|
Securities Purchase Agreement, dated as of March 8, 2007, among Euronet Worldwide, Inc. and the Purchasers as listed on Exhibit A thereto (filed as Exhibit 4.1 to the Company’s Form 8-K filed March 14, 2007, and incorporated by reference herein) | |
4.8
|
Form of Contingent Value Rights Agreement, entered into April 4, 2007 with each of the Irving Barr Living Trust and the Fred Kunik Family Trust, granting each contingent value rights associated with 1,842,549 shares of common stock (included as Exhibit B to the Stock Purchase Agreement filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 28, 2006, and incorporated by reference herein) |
100
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| Exhibit | Description | |
4.9
|
Form of Stock Appreciation Rights Agreement, entered into April 4, 2007 with each of the Irving Barr Living Trust and the Fred Kunik Family Trust, granting each stock appreciation rights with respect to 1,842,549 shares of common stock (included as Exhibit C to the Stock Purchase Agreement filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 28, 2006, and incorporated by reference herein) | |
10.1
|
Euronet Long-Term Incentive Stock Option Plan (1996), as amended (filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K filed on March 15, 2004, and incorporated by reference herein) (2) | |
10.2
|
Euronet Worldwide, Inc. Stock Option Plan (1998), as amended (filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K filed on March 15, 2004, and incorporated by reference herein) (2) | |
10.3
|
Euronet Worldwide, Inc. 2002 Stock Incentive Plan (Amended and Restated) (included as Appendix B to the Company’s Definitive Proxy Statement filed on April 20, 2004, and incorporated by reference herein) (2) | |
10.4
|
Rules and Procedures for Euronet Matching Stock Option Grant Program (filed as Exhibit 10.3 to Company’s Form 10-Q filed on November 14, 2002 and incorporated by reference herein) (2) | |
10.5
|
Employment Agreement executed in January 2003, between Euronet Worldwide, Inc. and John Romney, Managing Director, Europe, Middle East and Africa (EMEA) (filed as Exhibit 10.15 to the Company’s Form 10-Q filed on May 15, 2005, and incorporated by reference herein) (2) | |
10.6
|
Asset Purchase Agreement among Euronet Worldwide, Inc. and Meflur S.L. dated November 3, 2004 (filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed on March 15, 2005, and incorporated by reference herein) | |
10.7
|
Form of Employee Restricted Stock Grant Agreement pursuant to Euronet Worldwide, Inc. 2006 Stock Incentive Plan (filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed on August 4, 2006, and incorporated by reference herein) (2) | |
10.8
|
Form of Employee Restricted Stock Unit Agreement for Executives and Directors pursuant to Euronet Worldwide, Inc. 2006 Stock Incentive Plan (filed as Exhibit 10.39 to the Company’s Annual Report on Form 10-K filed February 28, 2007, and incorporated by reference herein) (2) | |
10.9
|
Credit Agreement dated as of April 4, 2007 among Euronet Worldwide, Inc., and certain subsidiaries and affiliates, as borrowers, certain subsidiaries and afiliates, as guarantors, the lenders party thereto, Bank of America, N.A., as administrative agent and collateral agent, California Bank & Trust, as synidication agent and Citibank, N.A., as documentation agent (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 4, 2007, and incorporated by reference herein) | |
10.10
|
Euronet Worldwide Inc. 2006 Stock Incentive Plan (Amended and Restated) (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 4, 2007, and incorporated by reference herein) (2) | |
10.11
|
Employment Agreement dated June 19, 2007 between Euronet Worldwide, Inc. and Kevin J. Caponecchi (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 25, 2007, and incorporated by reference herein) (2) | |
10.12
|
Euronet Worldwide, Inc. Executive Annual Incentive Plan (filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed on February 29, 2008, and incorporated by reference herein) (2) | |
10.13
|
Letter Agreement dated January 30, 2008 between Euronet Worldwide, Inc. and John Romney for Confirmation of Terms of Resignation (filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed on February 29, 2008, and incorporated by reference herein) (2) | |
10.14
|
Amendment No. 1 to the Credit Agreement dated April 23, 2008 (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008, and incorporated by reference herein) |
101
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| Exhibit | Description | |
10.15
|
Amended and Restated Employment Agreement executed in March 2008 and effective April 25, 2008 between Euronet Worldwide, Inc. and Miro Bergman, Executive Vice President and Chief Operatons Officer, Prepaid Processing Segment (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008, and incorporated by reference herein) (2) | |
10.16
|
Amended and Restated Employment Agreement dated April 10, 2008 between Euronet Worldwide, Inc. and Michael J. Brown, Chairman and Chief Executive Officer (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008, and incorporated by reference herein) (2) | |
10.17
|
Amended and Restated Employment Agreement dated April 10, 2008 between Euronet Worldwide, Inc. and Rick L. Weller, Executive Vice President and Chief Financial Officer (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008, and incorporated by reference herein) (2) | |
10.18
|
Amended and Restated Employment Agreement dated April 10, 2008 between Euronet Worldwide, Inc. and Jeffrey B. Newman, Executive Vice President and General Counsel (filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008, and incorporated by reference herein) (2) | |
10.19
|
Amended and Restated Employment Agreement dated April 10, 2008 between Euronet Worldwide, Inc. and Juan C. Bianchi, Executive Vice President and Managing Director, Money Transfer Segment (filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008, and incorporated by reference herein) (2) | |
10.20
|
Employment Agreement dated May 11, 2008 between Euronet Worldwide, Inc. and Gareth Gumbley, Managing Director, Prepaid Processing Segment (filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2008, and incorporated by reference herein) (2) | |
10.21
|
Form of Indemnification Agreement, (filed as Exhibit 10.1 to the Company’s Form 8-K filed on December 22, 2008, and incorporated by reference herein) | |
10.22
|
Form of Amendment No. 2 to the Credit Agreement dated February 18, 2009 (filed as Exhibit 10.1 to the Company’s Form 8-K filed on February 19, 2009, and incorporated by reference herein) | |
12.1
|
Computation of Ratio of Earnings to Fixed Charges (1) | |
21.1
|
Subsidiaries of the Registrant (1) | |
23.1
|
Consent of Independent Registered Public Accounting Firm (1) | |
31.1
|
Section 302 — Certification of Chief Executive Officer (1) | |
31.2
|
Section 302 — Certification of Chief Financial Officer (1) | |
32.1
|
Section 906 Certification of Chief Executive Officer (1) | |
32.2
|
Section 906 Certification of Chief Financial Officer (1) |
| (1) | Filed herewith. | |
| (2) | Management contracts and compensatory plans and arrangements required to be filed as Exhibits pursuant to Item 15(a) of this report. |
PLEASE NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we
have filed or incorporated by reference the agreements referenced above as exhibits to this Annual
Report on Form 10-K. The agreements have been filed to provide investors with information regarding
their respective terms. The agreements are not intended to provide any other factual information
about the Company or its business or operations. In particular, the assertions embodied in any
representations, warranties and covenants contained in the agreements may be subject to
qualifications with respect to knowledge and materiality different from those applicable to
investors and may be qualified by information in confidential disclosure schedules not included
with the exhibits. These disclosure schedules may contain information that modifies, qualifies and
creates exceptions to the representations, warranties and covenants set forth in the agreements.
Moreover, certain representations, warranties and covenants in the agreements may have been used
for the purpose of allocating risk between the parties, rather than establishing matters as facts.
In addition, information concerning the subject matter of the representations, warranties and
covenants may have changed after the date of the respective agreement, which subsequent information
may or may not be fully reflected in the Company’s public disclosures. Accordingly, investors
should not rely on the representations, warranties and covenants in the agreements as
characterizations of the actual state of facts about the Company or its business or operations on
the date hereof.
102
EXHIBIT 12.1
EURONET WORLDWIDE, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
| Year Ended December 31, | ||||||||||||
| (dollar amounts in thousands) | 2008 | 2007 | 2006 | |||||||||
Pretax income (loss) from continuing operations before adjustment
for minority interest or income from unconsolidated subsidiaries |
$ | (185,983 | ) | $ | 81,428 | $ | 59,984 | |||||
Add: |
||||||||||||
Fixed charges |
28,896 | 30,362 | 16,601 | |||||||||
Dividends received |
222 | 1,760 | — | |||||||||
Less: |
||||||||||||
Capitalized interest |
(189 | ) | (339 | ) | — | |||||||
Adjusted pretax income (loss) |
$ | (157,054 | ) | $ | 113,211 | $ | 76,585 | |||||
Fixed charges: |
||||||||||||
Interest expense |
$ | 24,538 | $ | 26,126 | $ | 14,719 | ||||||
Estimate of interest within rental expense |
4,169 | 3,897 | 1,882 | |||||||||
Capitalized interest |
189 | 339 | — | |||||||||
Total fixed charges |
$ | 28,896 | $ | 30,362 | $ | 16,601 | ||||||
Ratio of earnings to fixed charges |
(1 | ) | 3.7 | 4.6 | ||||||||
| (1) | Adjusted pretax loss was inadequate to cover fixed charges by $186.0 million in 2008. |
103
Exhibit 21.1
Euronet Worldwide, Inc. Subsidiaries
As of December 31, 2008, Euronet’s wholly owned subsidiaries were:
| • | EFT Services Holding B.V., incorporated in the Netherlands | ||
| • | Euronet Banktechnikai Szolgaltato Kft., incorporated in Hungary | ||
| • | Euronet Adminisztracios Szolgaltato Kft., incorporated in Hungary | ||
| • | Bankomat 24/Euronet Sp. z o.o., incorporated in Poland | ||
| • | EFT-Usluge d o.o., incorporated in Croatia | ||
| • | Euronet Services GmbH, incorporated in Germany | ||
| • | Euronet Services spol. s.r.o., incorporated in the Czech Republic | ||
| • | Euronet Services SRL, incorporated in Romania | ||
| • | Euronet USA Inc., incorporated in Arkansas, U.S.A. | ||
| • | Euronet Services Slovakia, spol. s r.o., incorporated in Slovakia | ||
| • | e-pay Limited, incorporated in England and Wales | ||
| • | e-pay Holdings Limited, incorporated in England and Wales | ||
| • | e-pay Australia Pty Ltd, incorporated in New South Wales, Australia | ||
| • | e-pay Australia Holdings Pty Ltd, incorporated in Victoria, Australia | ||
| • | e-pay New Zealand Ltd, incorporated in New Zealand | ||
| • | e-pay Money Transfer Ltd, incorporated in England and Wales (in liquidation) | ||
| • | transact Elektronische Zahlungssysteme GmbH, incorporated in Germany | ||
| • | Delta Euronet GmbH, incorporated in Germany | ||
| • | PaySpot, Inc., incorporated in Delaware, U.S.A. | ||
| • | Euronet Telerecarga. S.L., incorporated in Spain | ||
| • | Euronet Payments and Remittance, Inc., incorporated in Delaware, U.S.A. | ||
| • | Europlanet d.o.o. Beograd, incorporated in Serbia | ||
| • | Euronet Card Services, S.A., incorporated in Greece | ||
| • | EWI Foreign Holdings Limited, incorporated in Cyprus | ||
| • | Euronet Asia Holdings Limited, incorporated in Hong Kong | ||
| • | Euronet Services India Private Limited, incorporated in India | ||
| • | Euronet Essentis Limited, incorporated in England and Wales | ||
| • | Euronet Ukraine LLC, incorporated in Ukraine | ||
| • | Euronet Bulgaria EOOD, incorporated in Bulgaria | ||
| • | Euronet Pay and Transaction Services SRL, incorporated in Italy | ||
| • | Euronet Business Holdings S.L. (formerly Euronet E-Pay Spain S.L.), incorporated in Spain | ||
| • | RIA Spain Holdings S.L., incorporated in Spain | ||
| • | Brodos Romania SRL, incorporated in Romania | ||
| • | RIA Envia, Inc., incorporated in New York, U.S.A. | ||
| • | Continental Exchange Solutions, Inc., incorporated in Delaware, U.S.A. | ||
| • | RIA Telecommunications of New York, Inc., incorporated in New York, U.S.A. | ||
| • | RIA Envia Financial Services GmbH, incorporated in Germany | ||
| • | RIA Financial Services, Ltd., incorporated in England and Wales | ||
| • | RIA Telecommunications of Canada, Inc., incorporated in Canada | ||
| • | RIA Italia, SRL, incorporated in Italy | ||
| • | RIA Financial Services Australia Pty. Ltd., incorporated in Australia | ||
| • | Envia Telecomunicaciones, S.A., incorporated in Spain |
| • | RIA Financial Services Puerto Rico, Inc., incorporated in Puerto Rico | ||
| • | RIA de la Hispaniola, C.PorA, incorporated in Dominican Republic | ||
| • | RIA France, SAS, incorporated in France | ||
| • | RIA Financial Services New Zealand Ltd., incorporated in New Zealand | ||
| • | RIA Envia Financial Services Belgium, SPRL, incorporated in Belgium | ||
| • | RIA de Centroamérica, S.A. de C.V., incorporated in El Salvador | ||
| • | RIA Financial Services AG, incorporated in Switzerland | ||
| • | Continental Payment Solutions, Inc. (formerly Global Exchange Services, Inc.), incorporated in California, U.S.A. | ||
| • | Omega Logic Ltd., incorporated in England and Wales | ||
| • | Omega Logic France SARL, incorporated in France | ||
| • | Euronet Elektronik Islem Hizmetleri Limited Sirketi, incorporated in Turkey | ||
| • | Euronet Prepaid Hellas LLC, incorporated in Greece |
As of December 31, 2008, Euronet also had shareholdings in the following companies that are not
wholly owned:
| • | PT G4S Euronet Indonesia, incorporated in Indonesia, of which 47.02% of the shares are owned by EFT Services Holdings B.V. | ||
| • | e-pay Malaysia Sdn Bhd, incorporated in Malaysia, of which e-pay Limited owns 40% of the share capital. | ||
| • | ATX Software, Ltd., incorporated in England and Wales, of which 51% is owned by Euronet Worldwide, Inc. | ||
| • | Euronet Services LLC incorporated in Russia, of which 95% is owned by EFT Services Holdings B.V. | ||
| • | Euronet Movilcarga S.L., incorporated in Spain, of which 80% is owned by Euronet Telerecarga S.L. | ||
| • | Euronet Middle East W.L.L., incorporated in Bahrain, of which 49% is owned by EFT Services Holdings B.V. | ||
| • | Jiayintong (Beijing) Technology Development Co. Ltd. d.b.a. Euronet China, incorporated in the Peoples Republic of China, of which 75% is owned by Euronet Asia Holdings Limited | ||
| • | e-pay SRL, incorporated in Italy, of which 51% is owned by Euronet Pay and Transaction Services SRL | ||
| • | Cashlink Bangladesh Ltd., incorporated in Bangladesh, of which 10% is owned by EFT Services Holding B.V. | ||
| • | ATX Middle East FZC, incorporated in the United Arab Emirates, of which 51% is owned by EFT Services Holding B.V. |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Euronet Worldwide, Inc.
Euronet Worldwide, Inc.
We consent to the incorporation by reference in the Registration Statements (Form S-3, No.
333-84046; Form S-3, No. 333-105478; Form S-3, No. 333-111361; Form S-3MEF, No. 333-111363; Form
S-3, No. 333-116934; Form S-3, No. 333-117948; Form S-3, No. 333-128228; Form S-4, No. 333-116938;
Form S-8, No. 333-24539; Form S-8, No. 333-83555; Form S-8, No. 333-44890; Form S-8, No. 333-64634;
Form S-8, No. 333-71766; Form S-8, No. 333-98013; Form S-8, No. 333-102875; Form S-8, No.
333-116920; and Form S-8, No. 333-136485) of Euronet
Worldwide, Inc. of our report dated March 2, 2009, with respect to the consolidated balance sheets of Euronet Worldwide, Inc. and
subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows for each of the years in
the three-year period ended December 31, 2008, and to the effectiveness of internal control over
financial reporting as of December 31, 2008, which report appears in the December 31, 2008 annual
report on Form 10-K of Euronet Worldwide, Inc.
As discussed in Note 3 to the consolidated financial statements, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 157, Fair Value Measurements, for its financial
assets and liabilities as of January 1, 2008. Also, as discussed in Notes 3 and 16 to the consolidated
financial statements, the Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109, as of January 1, 2007.
| /s/ KPMG LLP | ||||
Kansas City, Missouri
March 2, 2009
March 2, 2009
104
EXHIBIT 31.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
I, Michael J. Brown, Chairman and Chief Executive Officer, certify that:
1) I have reviewed this annual report on Form 10-K of Euronet Worldwide, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3) Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting.
5) The registrant’s other certifying officers and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
March 2, 2009
| /s/ Michael J. Brown
Chief Executive Officer |
105
EXHIBIT 31.2
CERTIFICATIONS OF CHIEF FINANCIAL OFFICER
I, Rick L. Weller, Chief Financial Officer, certify that:
1) I have reviewed this annual report on Form 10-K of Euronet Worldwide, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3) Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting.
5) The registrant’s other certifying officers and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
March 2, 2009
| /s/
Rick L. Weller
Chief Financial Officer and Chief Accounting Officer |
106
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Euronet Worldwide, Inc. (the “Company”) for
the period ended December 31, 2008 filed with the Securities and Exchange Commission on the date
hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
| /s/
Michael J. Brown
Chief Executive Officer |
March 2, 2009
107
EXHIBIT 32.2
In connection with the Annual Report on Form 10-K of Euronet Worldwide, Inc. (the “Company”) for
the period ended December 31, 2008 as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
| /s/
Rick L. Weller
Chief Financial Officer and Chief Accounting Officer |
March 2, 2009
108