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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
For the fiscal year ended December 31, 2002
Commission File Number 000-22167
EURONET WORLDWIDE, INC.
(Exact name of the Registrant as specified in its charter)
DELAWARE
(State of other jurisdiction of incorporation or organization)
74-2806888
(I.R.S. employer identification no.)
4601 COLLEGE BOULEVARD
SUITE 300
LEAWOOD, KANSAS 66211
(913) 327-4200
(Address and telephone number of the Registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.02 par value
Preferred Stock Purchase Rights
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 [X] No [ ]
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
At February 28, 2003, the Registrant had 26,473,206 shares of common stock (the
"Common Stock") outstanding. As of June 28, 2002, the aggregate market value of
the Common Stock held by non-affiliates of the Registrant was approximately $373
million. The aggregate market value was determined based on the closing price of
the Common Stock on June 28, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders in 2003, which will be filed with the Securities and Exchange
Commission no later than 120 days after December 31, 2002, are incorporated by
reference into Part III.
PART I
ITEM 1. BUSINESS
OVERVIEW
Euronet Worldwide, Inc. is a leading provider of secure electronic financial
transaction solutions. We provide financial payment middleware, financial
network gateways, outsourcing, and consulting services to financial
institutions, retailers and mobile phone operators. We process transactions for
a network of 3,005 automated teller machines (ATMs) across Europe (and until
January 2002 in the United States). Through our software subsidiary, Euronet
USA, Inc. ("Euronet USA"), we offer a suite of integrated electronic fund
transfer (EFT) software solutions for electronic payment and transaction
delivery systems. We provide comprehensive electronic payment solutions
consisting of ATM network participation, outsourced ATM management solutions,
electronic recharge services (for prepaid mobile airtime) and integrated EFT
software solutions. Through our subsidiary, e-pay Ltd. which we acquired on
February 19, 2003, we operate a network of point-of-sale (POS) terminals
providing electronic processing of prepaid mobile phone airtime ("top-up")
services in the U.K. and in Australia through its wholly owned subsidiary e-pay
Australia Pty Ltd. Our principal customers are banks, mobile phone operators and
retailers that require electronic financial transaction processing services. Our
solutions are used in more than 60 countries around the world. As of December
31, 2002, we had ten offices in Europe, two in the United States and one each in
India, Indonesia, and Egypt.
The first company in the Euronet group was established in 1994 as a Hungarian
limited liability company. We began operations in 1995, setting up a processing
center and installing our first ATMs in Budapest, Hungary. We commenced
operations in Poland and Germany in 1995 and 1996, respectively. 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 an ATM network and outsourced ATM management services
business in Central Europe (including Hungary, Poland, the Czech Republic,
Croatia and Romania) and Germany. On December 2, 1998, we acquired Euronet USA
(formerly Arkansas Systems, Inc.), a U.S. company that produces electronic
payment systems software for retail banks and is the leading electronic payment
software system for the IBM iSeries (formerly AS/400) platform. As a result of
this acquisition, we were able to offer a broader and more complete line of
services and solutions to the retail banking market, including software
solutions related not only to ATMs, but also to POS devices, credit and debit
card operations and Internet, telephone and mobile banking. We have invested in
software research, development and delivery capabilities and have integrated our
ATM processing business and software business. These two complementary
businesses present strong cross-selling opportunities within our combined
customer base. Also, since this software is used in our operations center,
opportunities exist to leverage the core infrastructure and software to provide
innovative value-added e-commerce products and services.
Between 1999 and 2001, we expanded our presence to Egypt and to Western and
Southern Europe including Greece, France and in particular the U.K., where we
established a sizeable independent ATM network. As of December 31, 2002, we
operated 772 ATMs in the U.K. of which 640 were owned by us. As described
further below, in January 2003, we sold our U.K. subsidiary but we will continue
to operate all of the ATMs through a five-year outsourcing agreement. (See Note
29 - Subsequent Events to the Consolidated Financial Statements.) We sold our
ATM operations in France in May 2002 due to the imposition of stringent new
safety requirements for the operation of ATMs, which made it difficult to
operate ATMs profitably in that market.
Throughout 2001 and 2002, Euronet has focused on product developments that would
add transaction functionality via new and existing products, including mobile
banking and event messaging. Another new product line was the Electronic
Recharge line, which enabled purchasing prepaid mobile airtime from ATMs, POS
terminals and directly from the mobile handset.
In 2002, we opened a small office in Slovakia to support expanding efforts in
Central Europe. We also entered India, one of the largest emerging markets for
ATM and card growth potential. In the India market, we will focus on ATM
outsourcing and electronic recharge products for replenishing prepaid mobile
airtime.
As of December 31, 2002, we operated in two principal business segments. The
first is the Processing Services Segment, which comprises our proprietary ATM
network and outsourced management of ATMs for banks. It includes various new
processing services that we provide for banks and mobile phone companies through
our ATM network and managed ATMs, such as mobile phone recharge services. Our
second principal segment is the Software Solutions Segment, which provides
transaction processing software solutions to banks that enable them to operate
ATMs and POS terminals and process financial transactions from those devices and
the Internet.
Subsequent to December 31, 2002, we entered into two transactions that will
significantly impact our results for the years 2003 and beyond.
First, on January 17, 2003, we sold our U.K. ATM network and simultaneously
signed an ATM outsourcing agreement with the buyer. From that date forward, we
will operate the ATMs in that network under a five year outsourcing agreement.
With this transaction, we in effect sold our UK subsidiary, and all our
employees working in that office transitioned to the new company. This
transaction will significantly decrease the revenues we realize from the ATM
Processing Services Segment. However, because revenues from the outsourcing
agreement are high margin revenues, this transaction will not decrease operating
profits going forward as significantly, as described in Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Second, on February 19, 2003, we acquired e-pay, Ltd. (See Note 29 - Subsequent
Events to the Consolidated Financial Statements.) e-pay is an electronic
payments processor of prepaid mobile phone airtime "top-up" services in the U.K
and Australia. It has agreements with mobile operators in those markets under
which it supports the distribution of airtime to their subscribers through POS
terminals in retail outlets. e-pay currently processes top-up sales at more than
50,000 POS terminals in approximately 18,000 retail locations, including the
mobile operators' own retail outlets, major retail chains and independent retail
outlets. In addition to the U.K. and Australia operations, e-pay owns 40% of the
shares of e-pay Malaysia, a separate company that offers electronic top-up
services through approximately 2,600 POS terminals in Malaysia. With this
acquisition, we gained offices in London and Sydney.
We will maintain e-pay's data center in Basildon, U.K. but will establish a
connection between that center and Euronet's existing data center in Budapest.
We intend to market e-pay's services in selected countries in which we currently
operate. With the e-pay acquisition, Euronet will add a third principal business
segment, called the Prepaid Processing Services Segment.
Our website address is www.euronetworldwide.com. We make available free of
charge through our website all SEC public filings including our annual report 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 Section 13(d) or
15(d) of the Exchange Act as soon as reasonably practicable after these
documents are electronically filed with, or furnished to, the SEC. The
information on our website is not, and shall not be deemed to be, a part of this
report or incorporated into any other filings we make with the SEC.
MARKET OPPORTUNITY
PROCESSING SERVICES SEGMENT
Our Processing Services Segment provides services to banks and mobile phone
companies primarily in the developing markets of Central and Southern Europe
(Hungary, Poland, Czech Republic, Croatia, Romania, Slovakia, Serbia and
Greece), Egypt, Indonesia and India, as well as in the developed countries of
Western Europe (Germany and the U.K.) and, until January 2002, the United
States. Although all of these markets present market opportunities for expanding
the sales of our services, we believe opportunities for transaction growth in
our core ATM services business are greater in the developing countries.
Our ATM network enables cardholders to make cash withdrawals, balance inquiries
and other transactions with cards issued by banks. The number of transactions
made on our ATMs depends on the number of bankcards issued in the country where
the ATM is located. In the developing markets, the number of cards currently
issued per person is substantially lower than in the developed markets but is
increasing rapidly. We believe transaction levels in the developing markets will
increase eventually to approximate those of the developed markets as banks bring
new customers into the banking system and issue more cards to their existing
customers. Therefore, the growth rates that we expect to achieve from
transaction-based revenues in developing markets are higher than in developed
markets.
In the developed European markets, ATMs are located primarily at bank branches
as compared to a broader array of sites in the United States. We believe there
are opportunities in these markets to provide ATM access in places where our
experience suggests that customers use ATMs often, such as in shopping malls and
large retail outlets.
Economic development in the developing markets also influences the growth rates
we expect for certain other services we offer. For example, banks that are
seeking to expand and develop their business in developing markets are good
potential clients for our existing ATM network, as we can provide their
customers access to ATMs we have already installed in those markets so the banks
do not have to install ATMs themselves. Likewise, we offer banks outsourced ATM
services whereby we will establish a network of ATMs for banks and operate those
ATMs for a fixed monthly fee or a combination of a fixed fee and a monthly fee.
In all of our markets except the U.K., when a bank cardholder conducts a
transaction on one of the ATMs in our network, 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.
In the U.K., where we previously owned ATMs directly, we were permitted to
charge a transaction fee directly to the person using the ATMs (which is
referred to as "surcharging"). This surcharge was in place of the interchange
fee and we determined its amount. The surcharge ranged from GBP 1 to GBP 1.5
(approximately $1.59 to $2.39), which is substantially higher than the
interchange fee determined by banks in the U.K., which is currently GBP 0.43
(approximately $0.68). This permitted us to realize more income per transaction
in the U.K. than most of our other markets and made it possible to operate
profitable ATMs in locations with lower transaction levels. Our aggressive
roll-out of ATMs in the U.K. during 2001 and 2002 was based on the ability to
surcharge there. However, in January 2003, we sold our U.K. subsidiary to focus
more on outsourcing rather than owning ATMs, and we now receive fees for
outsourced management of those same U.K. ATMs rather than a surcharge fee. The
sale of our U.K. subsidiary enabled us to focus more on outsourcing in our most
profitable regions rather than on deploying ATMs. (See Note 29 - Subsequent
Events to the Consolidated Financial Statements.)
We believe banks in both the developing and developed markets are becoming more
receptive to outsourcing the operation of their ATMs and POS networks. The
operation of these devices requires expensive hardware and software and
specialized personnel. We have these resources available and offer them to banks
under outsourcing contracts that provide that the banks pay a monthly and/or
transaction-based fee to us. This arrangement reduces substantially the
investment a bank needs to make to operate its ATMs and POS terminals. We
believe opportunities exist for developing our outsourcing business in all of
our markets.
SOFTWARE SOLUTIONS SEGMENT
Although our Software Solutions Segment is headquartered in the United States,
approximately 75% of our software customers are international and in particular
located in developing markets. This distribution is largely because our software
products, based on the Integrated Transaction Management ("ITM") core system, is
a relatively small and inexpensive package that is appropriate for banks with
smaller transaction processing needs. Euronet Software is the preferred
transaction-processing software for banks that operate their back office
software using the IBM iSeries platform, which is also a relatively inexpensive,
expandable hardware platform. The software offering includes modules for ATM
management, POS management, merchant management, debit card and credit card
systems, telephone banking, Internet banking and mobile banking. We believe
demand will continue for our Euronet software from smaller banks in the
developed markets and throughout the developing world as new banks are
established. Once a customer purchases our software and installs the core
system, we provide a series of modules, upgrades and maintenance services that
often result in recurring revenues for us.
PREPAID PROCESSING SERVICES SEGMENT (COMMENCING FROM FIRST QUARTER 2003)
We acquired e-pay Ltd. in February 2003 and will report its results in a
separate segment, referred to as the Prepaid Processing Services Segment
beginning in the first quarter of 2003. Disclosure of separate financial segment
information is not reflected in this report, which relates to the 2002 year.
(See Note 29 - Subsequent Events to the Consolidated Financial Statements.)
Customers using mobile phones 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 must pay in advance by crediting
their accounts prior to usage. Although operators in the United States and
certain European countries have provided service principally through postpaid
accounts, the trend in Europe has shifted toward prepaid accounts because mobile
operators of those accounts do not
take the credit risk with respect to payment for airtime usage. In many
developing markets, the majority of mobile phones are prepaid. As of February
2003, mobile phone penetration in the countries in which Euronet has operations
and mobile operator agreements ranges from 1 percent in India to 88 percent in
Slovakia. Last year's prepaid service growth rates in these countries ranged
from 19 percent in Greece to 80 percent in Indonesia. In 2001, many countries
doubled their numbers of prepaid subscribers, and in 2002, the countries in
which Euronet operates increased prepaid services collectively by 12 percent.
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 code numbers, that when entered into a customer's mobile
phone account, credit the account by a certain value of airtime. 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 creation, distribution and management of a
physical inventory of cards. Currently scratch cards are the predominant method
of crediting mobile phone accounts in most developed markets, but a shift is
occurring in such markets away from usage of scratch cards to the usage of
electronic top-up methods. In the U.K., for example, we estimate that
approximately 10% of all top-ups were performed through electronic top-ups in
early 2002. By December 2002, we estimate that as much as 40% of all U.K.
top-ups were performed through e-top-ups.
We believe substantial opportunity exists to provide services to the mobile
operators with respect to electronic top-up transactions. We intend to use the
technology and business methods of e-pay in developing markets to leverage this
opportunity. In addition, we are developing similar capabilities in the U.S.
through a service branded "PaySpot."
STRATEGY
The expansion and enhancement of our outsourced management solutions, both in
existing markets and new markets, will remain a core business strategy. We also
have been and will continue to focus heavily on the development of our
outsourced management solutions with fixed fee arrangements. We believe
increasing the number of bank-owned ATMs that we operate under management
agreements will provide continued growth while minimizing the capital we place
at risk. We continually strive to make our own ATM networks more efficient by
eliminating the underperforming ATMs and installing ATMs in more desirable
locations.
We have expanded our outsourced management solutions beyond ATMs to include card
management and additional services such as POS terminal management, bill
payment, and prepaid mobile operator solutions. We support these services using
our proprietary software products. The introduction of value-added services for
delivery over our ATM network has resulted in increased transactions and
revenues. In the last two years, we developed and entered into a number of
agreements for a new line of services involving the use of our ATM networks and
central processing infrastructure to provide users of mobile phones the ability
to purchase prepaid mobile phone time on ATMs and on the mobile phones
themselves. We contract with mobile phone providers to facilitate their sale of
mobile phone time, and we are paid a commission on each sale, often a percentage
of the value of the mobile phone time purchased. In this regard, we also
contract with banks to be able to use their ATMs for the distribution of mobile
phone time, thereby expanding the distribution networks we can offer to mobile
phone operators. We offer these transaction types as a service enhancement to
existing clients, or as a "pass-through" service on ATMs that are owned and
operated by others.
This ATM and Mobile Recharge line of services has been substantially
strengthened through complementary services obtained by our acquisition of
e-pay. We can now provide top-up services through POS terminals. We intend to
expand e-pay's technology and business methods into other markets where we
operate and hope to leverage our relationships with mobile phone companies and
banks in those markets to cross-sell and to facilitate that expansion.
We downsized our Software Solutions Segment in January 2001 to bring expenses in
line with revenues, and this segment's improved results have contributed to our
overall results in 2002. We have made significant progress in reducing software
delivery times and adding resources to enhance and expand our software products.
Software products are now 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 found significant
opportunities for cross-selling processing services to our software solutions
customers and that our ability to develop, adapt and control our own software
gives us credibility with our processing services customers. In addition, during
2001 we signed agreements under which we used our software in lieu of cash as
our initial capital contributions to new transaction processing joint ventures
that launched in 2002 (for example, one in Serbia). This type of contribution is
permitting us to enter these new markets without any cash outlay. Therefore,
although revenues from our Software Solutions Segment are not currently growing
significantly, we view it as a valuable piece of our overall business strategy.
Our strategy in the Software Segment in 2002 included improvement of the
application functionality for our core debit and credit solutions. Our software
was upgraded to become compliant with certain new mandates of the international
card organizations involving initiatives such as EMV (Europay, MasterCard and
Visa) chip card support and Triple DES (Data Encryption Standard) support. EMV
standards define the issuance and acceptance of chip card technology. Triple DES
security standards represent a significant strengthening of encryption
requirements to further protect sensitive data that is transmitted in
transactions. These emerging industry standards have been jointly developed by
the three major card associations and will have a significant influence over
EFT-related hardware and software decisions throughout the next five years. Our
ability to provide support for mandated initiatives such as EMV and Triple DES
will provide significant opportunities to sell updated software to our existing
customers and will enable Euronet to replace competitors' non-compliant
solutions.
In the last two years, we also undertook a strategy of signing customers to
extended long-term maintenance agreements. We continue to invest in emerging
markets and technologies that complement our processing and software solutions.
DISCONTINUED OPERATIONS
On January 4, 2002, we sold substantially all of the assets of our ATM
processing business in the United States, known as DASH, to ALLTEL Information
Services, Inc. ("AIS") for $6.8 million in cash. AIS is a wholly owned
subsidiary of ALLTEL Corporation. We recorded a pre-tax gain of approximately
$4.8 million related to this transaction.
On July 15, 2002, we sold substantially all of the non-current assets and
capital lease obligations of our processing business in France to Atos.
Non-current assets and capital lease obligations related to the France business
have been removed from continuing operations and classified under discontinued
operations. We incurred a loss on disposal of the France business of $0.1
million.
In previous filings, we reported France under the Western European Sub-segment
and DASH under the Other Operations Sub-segment. All operating amounts, ATM
counts, transaction numbers and statistics reported in this filing exclude
France and DASH.
OPERATIONS
PROCESSING SERVICES SEGMENT
OVERVIEW
At December 31, 2002 and 2001, we operated 3,005 and 2,400 ATMs, respectively.
The major source of revenue generated by our ATM network is transaction revenue.
The transactions processed by the ATM network increased by 39% from 57.1 million
transactions in 2001 to 79.2 million transactions in 2002. Revenue sources of
the Processing Services Segment also include outsourced management revenue,
which is revenue from operating ATMs that we do not own, prepaid mobile phone
recharge revenue and advertising revenue. The number of ATMs operated under
outsourced management agreements increased from 458 at December 31, 2001 to 635
ATMs at December 31, 2002.
Our experience is that the level of transactions on our networks is subject to
seasonal variation. Transactions tend to drop in the first quarter, as compared
to the preceding fourth quarter, to levels per ATM that are the lowest we
experience during the year. Since revenues of the Processing Services Segment
are primarily transaction based, this segment is directly affected by this
seasonality. In years prior to 2002, we believe our aggressive roll-out of ATMs
lessened the impact of seasonal variations on our overall transaction levels and
revenues as transactions from new ATMs compensated for the reduction in overall
transaction levels.
ATM network growth in 2002 is attributable to transaction growth and additional
outsourcing contracts in our established markets, in particular Poland, Hungary,
the Czech Republic, and Croatia as well as the rollout of additional ATMs in the
U.K. Of the net 605 ATMs added to the network during 2002, 205 ATMs were located
in the U.K.
ATM TRANSACTION PROCESSING
Our operations center uses our Integrated Transaction Management System. The
ATMs in our networks are able to process transactions for holders of credit and
debit cards issued by or bearing the logos of banks and international card
organizations such as American Express, Diners Club International, Visa,
MasterCard and Europay. This ability is accomplished through our agreements and
relationships with these banks, 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
authorization of ATM transactions processed on our ATMs.
The card issuer pays us a transaction-processing fee, even for certain
transactions that are not completed because they fail to receive authorization.
The fees we charge to 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 fee for using our ATMs, except in the U.K. where we
charged prior to the disposition of our U.K. subsidiary, a "surcharge" fee that
ranged between GBP 1.00 and GBP 1.50 on each cash withdrawal transaction.
We monitor the number of transactions made by cardholders on our 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 banks, and we have excluded these
transactions for reporting purposes. The number of transactions processed over
our entire ATM network increased as follows: 29.7 million in 1999, 43.5 million
in 2000, 57.2 million in 2001 and 79.2 million in 2002. The number of
transactions processed monthly grew from approximately 6.6 million in December
2001 to approximately 7.0 million in December 2002.
A number of factors affect the transaction volumes processed on any given ATM,
including location of the ATM and the amount of time the ATM has been installed
at that location. Our experience is that the number of transactions on a newly
installed ATM is initially very low. It increases for varying periods ranging
from three to twelve months after installation, depending upon the market, as
consumers become familiar with the location of the machine. As the ATM network
has matured, the number of transactions per ATM has increased. We have an
ongoing policy of re-deploying under-performing ATMs to locations that we
believe are better for transaction volumes. We anticipate that future
transaction growth at our ATMs will depend heavily upon increased card issuance
in developing markets and continued re-deployment of ATMs to better locations.
We believe that the location of ATMs is one of the most important factors in
determining the success of an ATM network. Key target locations for our ATMs
include:
. major shopping malls
. busy intersections
. local smaller shopping areas offering grocery stores
. supermarkets and services where people routinely shop
. mass transportation hubs such as city bus and subway stops, rail and
bus stations, airports and gas stations
. tourist and entertainment centers such as historical sections of
cities, cinemas, and recreational facilities
Recognizing that convenience and reliability are principal factors in attracting
and retaining ATM customers, we have invested in the establishment of advanced
ATM machines and monitoring systems, as well as redundancies to protect against
network interruption. We centrally monitor the performance and cash positions of
our ATMs around the clock, and we dispatch local operations and maintenance
contractors to service the machines. Our ATMs in all markets except Germany are
linked by satellite or land-based telecommunications lines to our processing
centers.
OTHER PRODUCTS AND SERVICES
Our network constitutes a distribution network through which financial and other
products or services may be sold at a low incremental cost. We have developed
value-added services in addition to basic cash withdrawal and balance inquiry
transactions. These new services include bill payment, "mini-statement" and
recharge (purchasing prepaid airtime from ATM
and mobile phone devices) transactions. We are committed to the ongoing
development of innovative new products and services to offer our Processing
Services customers and will implement additional services as markets develop.
In our central European markets (including Poland, Hungary, Croatia, Romania and
the Czech Republic), as well as the U.K., Egypt, India and Indonesia, 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 have either established or adapted
networks of ATMs in these markets to offer customers of the mobile operators the
ability to credit their prepaid mobile phone accounts. We began to distribute
prepaid mobile telephone vouchers on our networks in Hungary and Poland in
November 1999. In May and October 2000, we added this service to our Czech
Republic and Croatian ATM networks, respectively. As of December 31, 2002, we
had 18 mobile operators contracted to use our electronic recharge solutions in
various markets. In Poland, Hungary, Croatia and Indonesia, we have signed
contracts with all of the local mobile operators. In September 2001, we entered
into a joint venture with a Malaysian group to establish a company to provide
this service in Malaysia and other Asian countries, including China, but that
joint venture was terminated in 2002.
In an automatic ATM recharge transaction, our ATM prompts a consumer through a
series of ATM screens, during which the customer's credit or debit card is used
to make payment for the recharge transaction. The card transaction is processed
and settled to us in the same fashion as a typical ATM transaction, and we then
send a signal to the mobile operator requesting credit to the customer's account
in the amount of the transaction. The credit takes place automatically and the
customer receives a message confirming the transaction. Similarly, our Mobile
Recharge transaction uses the same workflow, but the transaction occurs with
screens directly on the mobile phone. These recharge transactions are similar to
the new Prepaid Processing Segment, but since they are processed through our
existing operations center, they will continue to be reported in the current
Processing Services Segment.
Since 1996, we have been selling advertising on our network. Advertising clients
can put their advertisements on the video screens of our ATMs, on the receipts
issued by the ATMs and on coupons dispensed with cash from the ATMs.
CARD ACCEPTANCE OR SPONSORSHIP AGREEMENTS
Our agreements with banks and international card organizations generally provide
that all credit and debit cards issued by the customer bank or organization may
be used at all ATM machines we operate in a given market. In many markets, we
have agreements with a bank 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 bank or international card organization. Our agreements
generally provide for a term of three to seven years and are automatically
renewed unless either party gives 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 bank to our network within 30
to 90 days of signing a card acceptance agreement. Generally, the bank provides
the cash needed to complete transactions on the ATM, although we have contracted
for cash supply with a cash supply bank in the Czech Republic.
Under our card acceptance agreements and many of our outsourced management
agreements, we are required to maintain insurance on the cash in the ATMs. We
also maintain insurance against vandalism and theft of the ATMs themselves.
During 2001 and 2002, the number of incidents of theft and vandalism grew in
certain markets, and claims for all ATM-related losses during the year
(including cash losses, property, and business interruption from inoperable
ATMs) were approximately $0.9 million. Insurance costs for ATM-related risks are
increasing, both as a result of these losses and overall increases in insurance
rates following the September 11, 2001 terrorist attacks.
Under our card acceptance agreements the ATM transaction fees we charge vary
depending on the type of transaction (which are currently cash withdrawals,
balance inquiries, GSM airtime recharge purchases, deposits and transactions
not completed because authorization is not given by the relevant card issuer)
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 inflation adjusted. Transaction
fees are billed to banks and card organizations with payment terms no longer
than one month.
OUTSOURCED MANAGEMENT SOLUTIONS
We offer complete outsourced management services to banks and other
organizations using our processing center's full suite of secure electronic
financial transaction processing software. Our outsourced management services
include management of an existing bank network of ATMs, development of new ATM
networks on a complete turn-key basis (as we are doing for Citibank in Greece),
management of POS networks, management of charge and debit card databases and
other financial processing services. These services include 24-hour monitoring
from our processing centers of each individual ATM's status and cash condition,
coordinating the cash delivery and management of cash levels in the ATM and
automatic dispatch for necessary service calls. They also include realtime
transaction authorization, advanced monitoring, network gateway access, network
switching, 24-hour customer services, maintenance services, settlement and
reporting. We already provide these services to existing customers and we have
invested in the necessary infrastructure to support many additional
transactions. As a result, any new agreements we sign for outsourced management
services would provide additional revenue with lower incremental cost.
Our outsourced management agreements, other than in Germany, provide for fixed
monthly management fees in addition to fees payable for each transaction.
Therefore, the transaction fees under these agreements are generally lower than
under card acceptance agreements. The fees payable under our outsourced
management agreement in Germany are purely transaction based and include no
fixed component.
Our agreements with mobile operators for the non-POS recharge business vary in
term from one to five years. They provide for the maintenance of the electronic
connection necessary to provide recharge transactions to customers and define
operational and commercial terms regarding the method by which we will provide
that transaction (ATM and mobile phone), settlement and the liability for
transactions processed.
SEGMENT RESULTS
The cost of operating ATMs varies from country to country. On a per ATM or
transaction basis, the operating cost depends on the proportions of fixed and
variable cost, and therefore the stage of development of a new country market,
the number of ATMs in that market and the number of transactions. As the network
reaches a more mature stage, the operating costs begin to resemble fixed costs,
with increases in revenue generating incrementally less operating costs.
Direct operating costs as a percentage of ATM network revenue decreased from 69%
in 2000 to 57% in 2001 and 54% in 2002. We intend to continue to improve the
ratio of direct operating costs to revenue as the network continues to mature
and growth continues in higher margin outsourcing management solutions.
For a discussion of revenues, operating profits/losses and total assets of the
Processing Services Segment during each of the last three fiscal years,
including a breakdown for each geographic sub-segment and the percentages
thereof attributable to ATM transaction processing, please see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Operating Results for the Years Ended December 31,
2002, 2001, and 2000--Processing Services Segment" and Note 20 - Business
Segment Information to the Consolidated Financial Statements.
SOFTWARE SOLUTIONS SEGMENT
OVERVIEW
Through our subsidiary Euronet USA, we offer an integrated suite of card and
retail transaction delivery applications for the IBM i-Series (formerly AS/400)
platform and some applications on NT server environments. These applications are
generally referred to as Euronet Software. The core system of this product,
called "Integrated Transaction Management" (ITM), provides for transaction
identification, transaction routing, security, transaction detail logging,
network connections, authorization interfaces and settlement. Front-end systems
in this product support ATM and POS management, telephone banking, Internet
banking, mobile banking and event messaging. These systems provide a
comprehensive solution for ATM, debit or credit card management and bill payment
facilities. We also offer increased functionality to authorize, switch and
settle transactions for multiple banks through our GoldNet module. We use
GoldNet for our own EFT requirements, processing transactions across ten
countries in Europe.
We have invested significant resources in increasing the delivery capacity for
our software solutions and expanding customer service. We have expanded our
European headquarters in Budapest to provide comprehensive delivery and support
for our
European customer base. We have made further investments in research and
development of a number of new electronic- and mobile-commerce products that
should enhance the segment's performance in the future. We established a
customer service center in Asia to expand our "follow-the-sun" support
initiatives, which represent the company's commitment to providing same time
zone support for our customers worldwide. With the addition of the customer
support personnel in Asia, we have three centers covering EMEA, the Americas,
and Asia-Pacific. This coverage presents several benefits to our customers
including immediate access to live technical support, infrastructure expansion
to aid in faster problem resolution and a more in-depth knowledge and allowance
for the uniqueness of conducting business in the various regions.
SEGMENT RESULTS AND SOFTWARE SALES BACKLOG
Software Solutions Segment revenue is derived from three main sources: software
license fees, professional service fees and software maintenance fees. Software
license fees are the initial fees we charge for the licensing of our proprietary
application software to customers. We charge professional service fees for
customization, installation and consulting services provided to customers.
Software maintenance fees are the ongoing fees we charge to customers for the
maintenance of the software products.
The Software Solutions Segment revenue for the year ended December 31, 2002 was
approximately $17.4 million, of which software license fees accounted for 36.6%,
professional service fees accounted for 26.7% and software maintenance fees
accounted for 33.1%. The remaining 3.6% of revenue was miscellaneous revenue
including margins on hardware sales. We do not break down revenues for this
segment on a geographic basis.
Revenues from software licensing contracts are recognized over the contract term
using the percentage of completion method based on the percentage of services
that are provided compared with the total estimated services to be provided over
the entire contract. Revenue from time and material service contracts is
recognized as the services are provided. Revenues from software licensing
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. Maintenance revenue is recognized over the contractual
period or as services are performed. Revenue in excess of billings on software
licensing contracts is recorded as unbilled receivables and is included in
current assets. Billings in excess of revenue on software licensing contracts is
recorded as deferred revenue and is included in current liabilities until such
time the above revenue recognition criteria are met.
We define "software sales backlog" as fees specified in contracts which have
been executed by us and for which we expect recognition of the related revenue
within one year. At December 31, 2002 the revenue backlog was $4.9 million, as
compared to December 31, 2001 when the revenue backlog was $2.5 million and at
December 31, 2000, when the revenue backlog was $3.5 million. The increase in
backlog from December 31, 2001 results principally from the timing of software
sales. We intend to continue to focus on expediting the delivery and
implementation of software in an effort to deliver existing backlog sales, while
simultaneously replenishing the backlog through continuing product sales growth.
The decrease in backlog from December 31, 2000 as compared to 2001 resulted
principally from the decrease in software sales during 2001.
For a discussion of revenues, operating losses and total assets of the Software
Solutions Segment during each of the last three fiscal years, please see "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -Comparison of Operating Results for the Years Ended December 31,
2002, 2001, and 2000 - Software Solutions Segment" and Note 20 - Business
Segment Information to the Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
We have made an ongoing commitment to the development, maintenance and
enhancement of our products and services. We regularly engage in research and
development activities aimed at the development and delivery of new products,
services and processes to our customers, including bill payment and presentment,
telephone and Internet banking products, applications for mobile devices,
wireless banking products, prepaid mobile phone recharge products and
browser-based ATM software products. We are also making significant improvements
to our core software products.
Our research and development costs for software products to be sold, leased or
otherwise marketed totaled $4.0 million for 2002, $5.0 million for 2001, and
$6.7 million for 2000. Of this figure, as of December 31, 2002, $2.9 million was
capitalized and is included on our balance sheet in other long-term assets, net
of accumulated amortization of $1.3 million. These costs were capitalized under
our accounting policy requiring the capitalization of development costs on a
product-by-product basis once technological feasibility is established through
the completion of a detailed program design or the creation of a working model
of the product. Technological feasibility of computer software products is
established when we have completed all
planning, designing, coding, and testing activities necessary to establish that
the product can be produced to meet its design specifications including
functions, features, and technical performance requirements. Technological
feasibility is evidenced by the existence of a working model of the product or
by completion of a detailed program design.
PREPAID PROCESSING SERVICES SEGMENT (COMMENCING FROM FIRST QUARTER 2003)
OVERVIEW
We acquired e-pay Ltd. in February 2003, and will report its results in a
separate segment, referred to as the Prepaid Processing Services Segment,
beginning in the first quarter, 2003. Disclosure of separate financial segment
information is not reflected in this report, which relates to the 2002 year.
(See Note 29 - Subsequent Events to the Consolidated Financial Statements.)
In a typical POS top-up transaction in the U.K., a consumer in a retail shop
will use an electronic card issued by the mobile phone operator to identify the
consumer's mobile phone number. The consumer uses this card with a specially
programmed POS terminal in the shop that is connected to our network. The
consumer will make a payment of a defined amount to the retailer (in cash or by
adding to the amount of a bank card transaction for other services). Using the
electronic connection we maintain with the mobile operator, the retailer will
use the POS terminal to credit the purchased amount of airtime directly to the
account of the consumer. We receive a commission on each transaction that is
withheld from the payments made and we share that commission with the retailers.
In a typical POS top-up transaction in Australia, we top-up the consumers
account by issuing a voucher from the POS terminal. The voucher includes PIN
numbers used to access the mobile phone time. The retailers settle the
transaction by paying us the amount received from the consumer, and we pay that
amount to the mobile phone operators. As is the case in the U.K., we receive a
commission on each transaction that is withheld from the payments made, and we
share that commission with the retailers.
Our agreements with major retailers for the POS business typically have two-year
terms. These agreements include terms regarding the 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 regarding the installation and operation of the POS terminals have
terms of two years, but with the ability of either party to terminate the
agreement upon three months' notice and include provisions similar to those with
major retailers.
TECHNOLOGY AND PROCESSING FACILITIES
HARDWARE
We use IBM/Diebold and NCR ATMs in our ATM network. We currently have long-term
contracts with these manufacturers to purchase ATMs at contractually defined
prices that include quantity discounts. However, we have no contractually
defined commitments with respect to quantities to be purchased. Because we
operate one of the largest Pan-European ATM network, we have substantial
negotiating leverage with ATM manufacturers and we believe we have received
favorable prices as compared to lower volume purchasers. The wide range of
advanced technology available from IBM/Diebold and NCR provides our customers
with state-of-the-art electronics features and reliability through sophisticated
diagnostics and self-testing routines. Our ATMs are modular and upgradeable so
that they can be adapted to provide additional services in response to changing
technology and consumer demand. This allows us to modify our ATMs to provide new
services without replacing our existing network infrastructure.
e-pay's POS terminals are primarily acquired from Verifone and Dione PLC. We
find the development environment for these products to be well suited to our
services. We do not have any long-term supply agreement with any manufacturer,
and we negotiate on an ad hoc basis for our terminal requirements. The market
for terminals is highly competitive, and we believe this manner of procurement
is in our best interests.
TELECOMMUNICATIONS
Strong back office central processing support is a critical factor in the
successful operation of an ATM network. Each ATM (other than ATMs in Germany) is
connected to a Euronet processing center through satellite or land-based
telecommunications depending upon physical location, reliability of the
communications supplier and cost. Because we strive to ensure very high levels
of reliability for our network, we rely primarily on satellite
telecommunications to the processing
center in Budapest for most of our ATM connections in Central Europe. Our
Budapest processing center is, in most cases, linked by VSAT (very small
aperture terminal) telecommunications to the card issuers. The VSAT
telecommunications providers generally guarantee uninterrupted service for 99.9%
of the time.
We continually strive to improve the terms of our agreements with our
telecommunications providers and have entered into multi-country agreements with
lower rates for service. In this regard, new agreements are negotiated
periodically with our VSAT suppliers, establishing a lower communication cost
per ATM that takes into account transaction volume growth.
Our agreements with our satellite telecommunications providers contain certain
assurances with respect to the repair of satellite malfunction to ensure
continuous reliable communications for the network. As the reliability of land
based telecommunications improves in the emerging economies in which we do
business, we may rely more heavily on them because they are generally less
expensive than satellite telecommunications.
Our newly acquired e-pay operations center uses Transaction Network Services
(TNS) that provides fast, cost-effective data communication services for
transaction-oriented applications. TNS proprietary technology has been
deployed worldwide. TNS claims to be 99.99% reliable and claims to have
processed over 10 billion transactions worldwide in 2002.
e-pay operates two fully live data centers in the U.K. and receives
transactional traffic from TNS via multiple fixed private circuits. The circuits
between e-pay and TNS are delivered in a diverse routed fashion which ensures
different serving exchanges are used throughout. Inbound traffic is balanced
across all available links providing maximum resilience and efficient use of
bandwidth.
Using this infrastructure e-pay is capable of receiving transactions from Dial
POS solutions (PSTN, ISDN B & D Channel), Host to Host, and ATMs in most
countries around the world.
PROCESSING CENTERS
Our primary EFT processing center for the Processing Services Segment is located
in Budapest, Hungary. It is staffed 24 hours a day, seven days a week and
consists of two production IBM iSeries computers which run the Euronet GoldNet
ATM software package, as well as an off-site realtime back up iSeries computer.
The back up machine provides high availability during a failure of either
production iSeries computer. The Budapest processing center also includes two
iSeries computers used for product and connection testing and development. Our
software is a state-of-the-art software package that conforms to all relevant
industry standards and has been installed in at least 60 countries worldwide.
The Budapest processing center's computers operate our ATMs and interface with
the local bank and international transaction authorization centers.
To protect against power fluctuations or short-term interruptions, the Budapest
processing center has full uninterruptible power supply systems with battery
back-up to service the network in case of a power failure. The Budapest
processing center's data back-up systems are designed to prevent the loss of
transaction records due to power failure and permit the orderly shutdown of the
switch in an emergency. The center also has a diesel-powered generator available
to supply electrical power to the processing center in the event of a prolonged
power outage.
In July 2001, our Budapest processing center was certified by LINK Interchange
Network Limited, the national ATM network in the U.K., to process transactions
made on U.K. ATMs through the LINK switch. We thus became the only foreign-based
processing company that has been certified in this fashion. We view this
certification as significant and as a validation of the high quality of our
processing center.
e-pay's primary prepaid processing center for the Prepaid Processing Services
Segment is located in Basildon, U.K. It is staffed 24 hours a day, seven days a
week, and provides the processing for all of our e-top-up services in the U.K.
and Australia. The operation of e-pay's POS based recharge business involves the
maintenance of a central processing computer that maintains the connections to
the mobile operators, on the one hand, and POS terminals or retail billing
systems on the other. e-pay uses a combination of off-the-shelf and proprietary
software to operate the system. e-pay has methods for monitoring the volumes of
transactions handled by each retailer and managing merchant settlement risk. To
protect against power fluctuations or short-term interruptions, the Basildon
processing center has full uninterruptible power supply systems with battery
back-up to service the network in case of a power failure. The processing
center's data back-up systems are designed to prevent the loss of transaction
records due to power failure and permit the orderly shutdown of the switch in an
emergency. The center also has a diesel-powered generator available to supply
electrical power to the processing center in the event of a prolonged power
outage.
COMPETITION
PROCESSING SERVICES SEGMENT
Our principal Processing Services 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 that operate ATMs,
such as EDS, American Express, First Data Corporation or Concord EFS may also
establish ATM networks or offer outsourcing services that compete with us in
various markets. Competitive factors in our Processing Services business include
network availability and response time, price to both the bank and to its
customers, ATM location and access to other networks.
There are certain independent (non bank-owned) companies providing electronic
recharge on ATMs in individual markets in which we provide this service. We are
not aware of any individual independent companies providing electronic recharge
on ATMs across multiple markets in which we provide this service. In this area,
we believe competition will come principally from the banks providing such
services on their own ATMs through relationships with mobile operators or from
card transaction switching networks that add recharge transaction capabilities
to their offerings (as is the case in the U.K. through the LINK network).
SOFTWARE SOLUTIONS SEGMENT
We believe we are the leading supplier of electronic financial transaction
processing software for the IBM iSeries (formerly AS/400) platform. Other
suppliers service the software requirements of large mainframe systems and
UNIX-based platforms.
Competitors of the Software Solutions Segment compete across all EFT software
components in the following areas: (i) ATM, network and point-of-sale software
systems, (ii) Internet banking software systems, (iii) credit card software
systems and (iv) wireless banking software systems. One competitor is Applied
Communications Inc. ("ACI") based in Omaha, Nebraska which enjoys a large market
share due to its early entry into the financial systems software market and a
client base of larger banks and financial institutions. Other competitors
include Mosaic Software and Oasis Software International.
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 SERVICES SEGMENT (COMMENCING FROM FIRST QUARTER 2003)
Several companies offer electronic recharge services for mobile phone airtime on
POS terminals in the markets where we do business. These companies include
Alphyra, Paypoint, Omega Logic, Barclays Merchant Services and Anpost in the
U.K., and On-Q and Ezipin in Australia. In our target markets within Central
Europe companies such as Sonera, Smart Trust, Hypercom and others are attempting
to obtain footholds, but are not currently enjoying any significant market
share.
We believe, however, that we have a competitive advantage due to various
factors. First, in the U.K. and Australia, our newly acquired subsidiary has
been in existence for longer than most of our competitors and has significant
market share in those markets. e-pay currently has approximately 35% of the POS
recharge market in the U.K. and 70% in Australia. In addition, we offer
complementary ATM and mobile recharge solutions through our processing center.
We believe this will improve 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 hope 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 requirements where
appropriate.
The principal competitive factors in this area include price (that is, the level
of commission charged for each recharge transaction) and uptime 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.
As the volume of transactions increases, we believe the principal factor in
competition will be quality and price, as competitors may offer lower
commissions to secure business.
EMPLOYEES
Our business is highly automated and we outsource many of its specialized,
repetitive functions such as ATM maintenance and installation, cash delivery and
security. As a result, our labor requirements for operation of the network are
relatively modest and are centered on monitoring activities to ensure service
quality and cash reconciliation and control. We also have a customer service
department to interface with cardholders to investigate and resolve reported
problems in processing transactions.
Our rollout of ATMs, our development of new products and individual bank
connections and our expansion into new markets creates a need for qualified
staff on many levels. We require skilled staff to identify desirable locations
for ATMs and negotiate ATM lease agreements. In addition, ensuring consistency
in quality and approach to new markets as well as proper coordination and
administration of our expansion requires staff in the areas of technical
operations, financial analysis, project management, human resources,
communications, marketing and sales. 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. The success of our Software
Solutions business in particular depends upon the ability to hire and retain
highly qualified computer engineers and programmers.
As of December 31, 2000, we had 478 employees. In the first quarter of 2001, we
reduced staffing, primarily in Little Rock and Budapest, in a reorganization of
our software business. We had 384 employees as of December 31, 2001 and 385
employees as of December 31, 2002.
In January 2003, we sold our U.K. subsidiary. All of the 20 employees of this
subsidiary transferred to the buyer. In February 2003, we acquired e-pay and its
83 employees.
We have a European head office organization, European software delivery and
support center and European processing center in Budapest, Hungary. We have an
office in Little Rock, Arkansas where Euronet USA is based. Our corporate
headquarters is located in Leawood, Kansas. We have Euronet offices in 14
countries and e-pay offices in three countries, including joint ventures. None
of our employees is currently represented by a union. We have never experienced
any work stoppages or strikes by our workforce.
GOVERNMENT REGULATION
We have received advice from banking supervisory authorities or local counsel in
certain markets in which we do business to the effect that our business
activities in those markets do not constitute "financial activities" subject to
licensing. Any expansion of our activity into areas, which 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.
Under German law, only licensed financial institutions may operate ATMs in
Germany. Therefore, we may not operate our own ATM network in Germany. In that
market, we act only as a subcontractor providing certain ATM-related services to
a sponsor bank. As a result, our activities in the German market currently are
entirely dependent upon the continuance of the agreement with our sponsor bank,
or the ability to enter into a similar agreement with another bank in the event
of the termination of such agreement. In April 2000, we entered into a new
sponsorship agreement with DiBa Bank canceling an agreement with Service Bank,
our previous sponsor bank. We believe, based on our experience, that we should
be able to find a replacement for DiBa if the agreement with DiBa is terminated
for any reason. The inability to maintain the DiBa agreement or to
enter into a similar agreement with another bank upon a termination of the DiBa
agreement could have a material adverse effect on our operations in Germany.
TRADEMARKS
We have registered or applied for registration of our trademarks including the
names "Euronet" and "Bankomat" and/or the blue diamond logo in any markets in
which we use those trademarks. Certain trademark authorities have notified us
that they consider the trademarks "Euronet" and "Bankomat" to be generic and
therefore not protected by trademark laws. This determination does not affect
our ability to use the Euronet trademark in those markets but it would prevent
us from stopping other parties from using it in competition with Euronet. We
have purchased a registration of the "Euronet" trademark in the class of ATM
machines in Germany, France, the U.K. and certain other Western European
countries. We have registered the "e-pay logo" trademark in the U.K., Australia,
and Malaysia and will be extending such registration as we expand that
business to new markets. We cannot be sure that we will be entitled to use the
e-pay trademark in any markets other than those in which we have registered the
trademark. Other trademarks Euronet has registered or has registrations pending
in various countries include Integrated Transaction Management; ITM; PaySpot;
Arksys; Bank24 and Bank Access 24.
During 2000 and 2001, we filed patent applications for a number of our new
software products and processes, including our recharge services and a
browser-based ATM operating system. As of the date of this report, these patents
are still pending. 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 similar products. 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. If other applicants are granted
priority dates that are earlier than ours, and if their patents are considered
to cover technology that has been incorporated into our systems, we may be
required to pay royalties to the holders of such patents to continue to use the
affected technology. This scenario 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 March 15, 2003 are as follows:
NAME AGE SERVED SINCE POSITION HELD
- ------------------------ --- ----------------- -----------------------------------------------------------------
Michael J. Brown 46 July 1994 Chairman and Chief Executive Officer
Daniel R. Henry 37 July 1994 Director, President and Chief Operating Officer
Jeffrey B. Newman 48 December 1996 Executive Vice President - General Counsel
Rick L. Weller 45 November 2002 Executive Vice President - Chief Financial Officer
Miro I. Bergman 40 March 1997 Executive Vice President - Managing Director EMEA
James P. Jerome 45 October 1999 Executive Vice President - Managing Director - Software Division
Paul S. Althasen 38 March 2003 Executive Vice President - Joint Managing Director e-pay
John A. Gardiner 39 March 2003 Executive Vice President - Joint Managing Director e-pay
Michael J. Brown is one of the founders of our Company and has served as its
Chief Executive Officer since 1994. In 1979 Mr. Brown founded Innovative
Software, a computer software company that was merged with Informix in 1988. 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. Sybase Software acquired Visual Tools,
Inc. in February 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 1996. Mr. Brown has been a
Director of Euronet since its incorporation in December 1996 and he previously
served on the boards of Euronet's predecessor companies. Mr. Brown's term will
expire in July 2004. Mr. Brown is married to the sister of Mr. Henry's wife.
Daniel R. Henry founded our predecessor Company with Michael Brown in 1994 and
serves as Chief Operating Officer. In September 2001 he was also appointed
President. Mr. Henry is responsible for all of our operations, including the
United States and overseas. He is also responsible for our expansion into other
countries and the development of new markets. Prior to joining us, Mr. Henry was
a commercial real estate broker for five years in the Kansas City metropolitan
area where he specialized in the development and leasing of premiere office
properties. Mr. Henry received a B.S. in Business Administration from the
University of Missouri-Columbia in 1988. Mr. Henry has been a Director of the
Company since its incorporation in December 1996 and he previously served on the
boards of our predecessor companies. His term as Director will expire in May
2003. Mr. Henry is married to the sister of Mr. Brown's wife.
Jeffrey B. Newman serves as Executive Vice President and General Counsel. He
joined the Company in December 1996 as Vice President and General Counsel. Prior
to this, he practiced law in Paris with the law firm of Salans Hertzfeld &
Heilbronn and then with the Washington, D.C. based law firm of Arent Fox Kintner
Plotkin & Kahn, PLLC, of which he was a partner from 1993 until joining the
Company in December 1996. He established the Budapest office of Arent Fox
Kintner Plotkin & Kahn, PLLC in 1991. He is a member of the Virginia, District
of Columbia and Paris bars. He received a B.A. in Political Science and French
from Ohio University and law degrees from Ohio State University and the
University of Paris.
Rick L Weller joined us in November 2002 as Executive Vice President and Chief
Financial Officer. 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. From April 1999 to November
1999, Mr. Weller was a founder and Chief Financial Officer of Compass Partners,
a venture that lead to the formation of ionex telecommunications, inc. From
January 1999 to March 1999 he was Chief Financial Officer of USA Global Link, an
international long distance company. Mr. Weller served as Chief Financial
Officer of Intek Information, Inc., an outsource service provider from 1997 to
December 1998. From January 1990 to September 1997, he held various positions at
Sprint Communications Inc., including Vice President Finance for the Consumer
Services Long Distance Group, Assistant Vice President Finance for Sprint's
Business Services Long Distance Group and Assistant Vice President for Sprint's
Corporate-wide Internal Audit Group. Prior to joining Sprint, Mr. Weller served
as Senior Manager in the Financial Service Industry Practice of Price
Waterhouse, an international public accounting firm. He is a certified public
accountant and received his bachelor's degree from Central Missouri State
University.
Miro I. Bergman joined us in 1997 as country manager for the Czech Republic. He
subsequently became an area director responsible for our operations in Central
Europe, and is now the Managing Director for the entire Europe, Middle East, and
Africa region. Prior to joining us, Mr. Bergman was with First Bank System from
1992 to 1996 as vice president in charge of the bank's off-premise ATM business
of over 1,200 ATMs. He also served as vice president of new Visa Co-Brand card
program initiatives. From 1988 to 1992, Mr. Bergman worked for Citicorp-Diners
Club in various card management and marketing positions. Mr. Bergman received a
bachelors degree in business administration from the University of New York at
Albany and an M.B.A. from Cornell University.
James P. Jerome currently serves as Executive Vice President and Managing
Director of our software division. He joined us in October 1999, managing the
delivery of products and services until he was appointed Managing Director
Software in 2001. From 1994-1999, he served in various capacities with
Electronic Banking Services with BISYS, Inc. From 1992 to 1994 he was a senior
account executive, responsible for commercial banks and west-coast clients, and
from 1990 to 1992 he was conversion manager for the Houston Regional Service
Center. Prior to that, Mr. Jerome was a senior systems analyst at First City
National Bank in Austin, Texas. Mr. Jerome served in various profitability
systems capacities with Republic Bank of Houston from 1982 to 1983. His industry
affiliations include serving as a director on the Electronic Funds Transfer
Association Board, the Base24 User Group, and as a board member of the Exchange
Network Advisory Council. He received his degree in business administration from
the State University of New York in 1979.
Paul S. Althasen currently serves as Executive Vice President and Joint Managing
Director of e-pay. He joined Euronet in February 2003 pursuant to Euronet's
acquisition of e-pay Limited. Mr. Althasen is a co-founder and former CEO of
e-pay, where he was responsible for the strategic direction of the company since
its formation in 1999. From 1989 to 1999, Mr. Althasen was a co-founder and
Managing Director of MPC Mobile Phone Center, a franchised retailer of cellular
phones in the U.K. Previously, Mr. Althasen worked for Chemical Bank in London
where he traded financial securities. Mr. Althasen has a B.A. (Honors) degree in
business studies.
John A. Gardiner currently serves as Executive Vice President and Joint Managing
Director of e-pay. He joined Euronet in February 2003 pursuant to Euronet's
acquisition of e-pay Limited. Mr. Gardiner co-founded e-pay in 1999 and was
formerly Managing Director of e-pay where he has been responsible for the
creation and evolution of the company and its Asia Pacific operations in
Australia and Malaysia. Mr. Gardiner had previously worked for 11 years in the
wireless communications industry, initially as Managing Director of Twinchoice
Ltd, one of the U.K.'s largest cellular accessory companies, and later as Chief
Executive of Banner Telecom Group PLC, a U.K. based cellular distribution
company.
ITEM 2. PROPERTIES
Our executive offices are located in Leawood, Kansas, U.S.A. The European head
office and European Processing Center are located in Budapest, Hungary. As of
December 31, 2002, we also maintained offices in the major metropolitan areas of
Little Rock, Arkansas, U.S.A.; Warsaw, Poland; Zagreb, Croatia; Prague, Czech
Republic; Berlin, Germany; Bucharest, Romania; Bratislava, Slovakia; Athens,
Greece; Cairo, Egypt; Mumbai, India; Jakarta, Indonesia; and London, U.K.
Subsequent to the year end, Euronet removed the London office, and with the
acquisition of e-pay, added new offices in London and Sydney. For more
information see Note 29 - Subsequent Events to the Consolidated Financial
Statements. All of our offices are leased. Our office leases provide for initial
terms of 24 to 84 months.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
From March 1997 to November 8, 1999, the Common Stock was quoted on the Nasdaq
National Market under the symbol EEFT. On November 8, 1999, our listing was
shifted to the Nasdaq SmallCap Market. On July 3, 2002, our listing was again
transferred to the Nasdaq National Market. The following table sets forth the
high and low closing prices for our Common Stock for the periods indicated:
2002 2001
--------------------- -----------------------
For the three months ended High Low High Low
--------------------------- ------- ------- ------- -------
December 31 $ 7.98 $ 4.59 $ 18.20 $ 11.54
September 30 $ 13.71 $ 4.61 $ 14.00 $ 8.45
June 30 $ 18.30 $ 11.34 $ 9.00 $ 5.40
March 31 $ 22.09 $ 16.91 $ 8.06 $ 4.50
DIVIDENDS
Since our inception, no dividends have been paid on our Common Stock. We do not
intend to distribute dividends for the foreseeable future.
HOLDERS
At December 31, 2002 and 2001, there were approximately 103 and 107 record
holders of the Common Stock, respectively.
PRIVATE PLACEMENTS AND ISSUANCES OF EQUITY
On February 19, 2003, we purchased all of the share capital of e-pay Limited
from its shareholders for approximately $76.2 million. Of the total purchase
price, $30.2 million was paid in cash at closing, $19.0 million was paid through
the issuance at closing of 2,497,504 shares of our Common Stock, and the
remaining $27 million will be paid as deferred purchase price or under
promissory notes executed at closing with 24-month maturity dates bearing
interest rates averaging approximately 7.25% per annum. Approximately $7.4
million of the notes are convertible into our Common Stock at the option of the
holders at a conversion price of $11.43 per share, or approximately 647,000
shares. We may redeem the convertible notes under certain conditions. The
conversion price and the redemption price are subject to customary anti-dilution
provisions. The remaining $11.0 million of promissory notes are not convertible.
These transactions were exempt from registration pursuant to the exemption
provided by Regulation S of the Securities Act; however, the Stock Purchase
Agreement, by which we purchased e-pay, requires us to file a registration
statement to register these shares within 30 days of filing this report.
EQUITY COMPENSATION PLAN INFORMATION
The table below sets forth information with respect to shares of Euronet Common
Stock that may be issued under our equity compensation plans as of December 31,
2002.
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted average equity compensation
issued upon exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan category (a) (b) (c)
Equity compensation plans approved by security
holders 5,859,164 $ 7.26 486,392
Equity compensation plans not approved by security
holders - - -
-------------------------- -------------------- -------------------------
Total 5,859,164 $ 7.26 486,392
========================== ==================== =========================
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data set forth below have been derived from,
and are qualified by reference to, our audited consolidated financial statements
and the notes thereto, prepared in conformity with generally accepted accounting
principles as applied in the United States ("U.S. GAAP"), which have been
audited by KPMG Polska Sp. z o.o., independent public accountants. We believe
that the period-to-period comparisons of our financial results are not
necessarily meaningful due to our significant acquisitions in December 1998 and
January 1999, and should not be relied upon as an indication of future
performance. Our future results will also be affected by the sale of our U.K.
subsidiary and the acquisition of e-pay Ltd. after December 31, 2002. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
As of December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(in thousands, except for Summary Network Data)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 12,021 $ 8,820 $ 6,760 $ 14,598 $ 55,611
Restricted cash 4,401 1,877 2,103 10,929 12,972
All other current assets 12,677 14,646 13,639 12,802 13,384
------------ ------------ ------------ ------------ ------------
Total current assets 29,099 25,343 22,502 38,329 81,967
Assets held for sale 10,767 9,351 6,597 8,627 773
Property, plant and equipment, net 21,394 21,398 26,304 29,933 32,472
Other long term assets, net 5,299 5,299 5,487 19,955 18,226
------------ ------------ ------------ ------------ ------------
Total assets $ 66,559 $ 61,391 $ 60,890 $ 96,844 $ 133,438
============ ============ ============ ============ ============
Total current liabilities 16,232 20,159 18,005 24,412 18,040
Liabilities held for sale 3,537 4,594 2,751 3,402 780
Notes payable 36,318 38,146 77,191 72,800 83,720
Other long term liabilities 4,301 6,179 7,744 5,723 6,728
------------ ------------ ------------ ------------ ------------
Total liabilities 60,388 69,078 105,691 106,337 109,268
Total stockholders' equity/(deficit) 6,171 (7,687) (44,801) (9,493) 24,170
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' $ 66,559 $ 61,391 $ 60,890 $ 96,844 $ 133,438
============ ============ ============ ============ ============
equity/(deficit)
Summary Network Data:
Number of operational ATMs at end of period 3,005 2,400 2,081 1,776 1,271
ATM transactions during the period 79,193,580 57,185,231 43,531,830 29,661,329 15,467,000
Year Ended December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(in thousands, except for share and per share data)
Consolidated Statements of Operations Data:
Revenues:
ATM network and related revenue $ 53,918 $ 45,941 $ 34,201 $ 25,367 $ 11,523
Software and related revenue 17,130 15,042 15,827 14,969 356
------------ ------------ ------------ ------------ ------------
Total 71,048 60,983 50,028 40,336 11,879
------------ ------------ ------------ ------------ ------------
Operating expenses:
Direct operating costs 29,609 26,469 24,162 22,491 10,029
All other operating expenses 41,858 40,564 61,321 43,836 23,809
------------ ------------ ------------ ------------ ------------
Total operating expenses 71,467 67,033 85,483 66,327 33,838
------------ ------------ ------------ ------------ ------------
Operating loss (419) (6,050) (35,455) (25,991) (21,959)
------------ ------------ ------------ ------------ ------------
Other (expense)/income (11,626) 5,994 (12,930) (8,262) (4,297)
Income tax benefit/(expense) 2,312 807 (1,181) 4,244 (1,692)
Minority interest 100 - - - -
------------ ------------ ------------ ------------ ------------
(Loss)/income from continuing operations (9,633) 751 (49,566) (30,009) (27,948)
Income/(loss) from discontinued operations 3,119 (81) 15 (906) (427)
------------ ------------ ------------ ------------ ------------
Net (loss)/income (6,514) 670 (49,551) (30,915) (28,375)
Translation adjustment 769 (406) - (2,515) -
------------ ------------ ------------ ------------ ------------
Comprehensive (loss)/income $ (5,745) $ 264 $ (49,551) $ (33,430) $ (28,375)
============ ============ ============ ============ ============
(Loss)/income per share - basic
(Loss)/income from continuing operations $ (0.42) $ 0.04 $ (3.00) $ (1.97) $ (1.84)
Income/(loss) from discontinued operations 0.14 (0.01) - (0.06) (0.03)
------------ ------------ ------------ ------------ ------------
Net (loss)/income $ (0.28) $ 0.03 $ (3.00) $ (2.03) $ (1.87)
============ ============ ============ ============ ============
Basic weighted average outstanding shares 23,156,129 19,719,253 16,499,699 15,252,030 15,180,651
============ ============ ============ ============ ============
(Loss)/income per share - diluted
(Loss)/income from continuing operations $ (0.42) $ 0.03 $ (3.00) $ (1.97) $ (1.84)
Income/(loss) from discontinued operations 0.14 - - (0.06) (0.03)
------------ ------------ ------------ ------------ ------------
Net (loss)/income $ (0.28) $ 0.03 $ (3.00) $ (2.03) $ (1.87)
============ ============ ============ ============ ============
Diluted weighted average outstanding shares 23,156,129 22,413,408 16,499,699 15,252,030 15,180,651
============ ============ ============ ============ ============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND
2000 -- OVERVIEW
The following description of our operating results compares the fiscal year
ended December 31, 2002 with prior periods. As indicated elsewhere in this
report, after December 31, 2002, we entered into two significant transactions
that will substantially impact our future results. The first transaction was the
sale of our network of ATMs in the U.K. and the simultaneous outsourcing
agreement for those ATMs on January 17, 2003. Results of the U.K. operations are
included in the 2002 Financial Statements. The second transaction was the
purchase of e-pay Ltd. on February 19, 2003. These transactions are described in
full in the section entitled "Subsequent Events" and in Note 29 - Subsequent
Events to the Consolidated Financial Statements. These transactions make it
difficult to use the financial results for the year 2002 to predict our results
for the years 2003 and beyond and thus need to be considered when analyzing the
financial information presented in this report for the year 2002. These
transactions are described in full in the section entitled "Subsequent Events"
and in Note 29 - Subsequent Events to the Consolidated Financial Statements.
Our total revenues increased by $10.0 million or 17% to $71.0 million, compared
to $61.0 million for 2001. Our 2001 total revenues increased by $11.0 million or
22% to $61.0 million, compared to $50.0 million for 2000. The increase in
revenues from 2001 to 2002 was primarily due to two factors: (1) an $8.4 million
increase in Processing Services Segment revenues resulting from the increase in
transaction volumes in ATMs owned by us and an increase in the number of ATMs
operated by us during this period; and (2) a $2.2 million increase in Software
Solutions Segment revenues. The increase in revenues from 2000 to 2001 was
primarily due to two factors: (1) an $11.7 million increase in Processing
Services Segment revenues
resulting from the increase in transaction volumes in ATMs owned by us and an
increase in the number of ATMs operated by us during this period; and (2) offset
in part by a decrease of $0.8 million in Software Solutions Segment revenues.
Revenues for 2002, 2001 and 2000 are discussed more fully in the Segment Results
of Operations sections below.
Effective November 1, 2001, we entered into an agreement with ABN AMRO under
which ABN AMRO agreed to pay us $1.1 million to terminate an ATM management
agreement for 106 ATMs and a card agreement between our Hungarian subsidiary and
ABN AMRO. This amount has been included in annual revenue in the fourth quarter
2001. The contract that was terminated would have generated revenues in 2002 and
2003 of $0.9 million and $0.4 million, respectively. The principal reason for
the termination of these agreements was that ABN AMRO merged with K&H Bank, and
K&H Bank had existing relationships with a competing transaction processing
switch service in Hungary.
Our 2002 total operating expenses increased by $4.4 million or 7% to $71.5
million compared to $67.0 million for 2001. Our 2001 total operating expenses
decreased by $18.5 million or 22% to $67.0 million compared to $85.5 million for
2000. The increase from 2001 to 2002 can be broken down by segment as follows:
(1) a $6.0 million increase in Processing Services Segment operating costs due
to an increase of 472 ATMs together with related transactional costs and other
costs associated with the overall growth in the size of the network operations
in 2002; (2) a $0.1 million decrease in Software Services Segment operating
costs due to cost reductions in personnel and resources in 2002; and (3) a $0.9
million decrease in Corporate Services Segment operating costs due to reductions
in personnel and resources in 2002.
The decrease in operating expenses from 2000 to 2001 can be broken down by
segment as follows: (1) a $3.3 million increase in Processing Services Segment
operating costs due to growth in the size of the network operations in 2001; (2)
a $20.4 million decrease in Software Services Segment operating costs due to the
write-down of certain intangible assets of $11.2 million in 2000 and reductions
in personnel and resources in 2001; and (3) a $1.3 million decrease in Corporate
Services Segment operating costs due to reductions in personnel and resources in
2001. Operating expenses for 2002, 2001, and 2000 are discussed more fully in
the Segment Results of Operations sections below.
We generated an operating loss of $0.4 million for 2002 compared to operating
losses of $6.0 million for 2001 and $35.5 million for 2000. The change from 2001
to 2002 was due to (1) a $2.5 million improvement in operating income in our
Processing Services Segment; (2) a $2.3 million improvement in the operating
results of our Software Solutions Segment; and (3) a $0.9 million decrease in
the operating loss from our Corporate Services Segment. The change from 2000 to
2001 was due to three factors: (1) an $8.5 million improvement in the operating
results of our Processing Services Segment; (2) a $19.6 million decrease in the
operating loss from our Software Solutions Segment; and (3) a $1.3 million
decrease in the operating loss from our Corporate Services Segment. Operating
expenses for 2002, 2001 and 2000 are discussed more fully in the Segment Results
of Operations section below.
Subsequent to December 31, 2002, we entered into two significant transactions
that will significantly impact our results for the years 2003 and beyond. These
transactions make it difficult to use the financial results for the year 2002 to
predict our results for the years 2003 and beyond and thus need to be considered
when analyzing the financial information presented in this report for the year
2002. These transactions are described in full in the section entitled
"Subsequent Events" and in Note 29 - Subsequent Events to the Consolidated
Financial Statements.
First, on January 17, 2003, we sold our U.K. ATM network and simultaneously
signed an outsourcing contract for those ATMs and thereafter. We will operate
the ATMs in that network under a five year outsourcing agreement. This
transaction will significantly decrease the revenues we realize from the
Processing Services Segment. However, because revenues from the outsourcing
agreement are high margin revenues, this transaction will not significantly
decrease operating profits going forward. The services to be provided are
substantially identical to existing services previously provided to the U.K.
subsidiary prior to the sale. In accordance with SFAS 144, the assets and
liabilities have been recorded as held for sale. The U.K.'s operations continue
to be included in continuing operations due to the ongoing revenues to be
generated by the services agreement.
We earned revenues of $14.4 million from our ATM network in the U.K. in 2002. We
estimate that we would have earned $1.4 million in revenue from this U.K.
outsourcing agreement had it been in place for 2002. Our operating income from
operation of our U.K. ATM network was approximately $2.4 million for the full
year 2002 and we estimate that we would have realized an operating profit of
$1.4 million if the outsourcing agreement had been in place for the full year
2002. Therefore, on a pro forma basis, we estimate that our consolidated
revenues would have been approximately $58 million and our consolidated
operating loss would have been approximately $1.3 million in 2002 if the sale of
U.K. ATM network had occurred on January 1, 2002.
Second, on February 19, 2003, we purchased e-pay Limited ("e-pay"), an
electronic payments processor of prepaid mobile phone airtime recharge, or
"top-up," services in the U.K and Australia. e-pay's revenues and cash flow will
be included in Euronet's results going forward. For the fourth quarter of 2002,
e-pay's unaudited revenues were approximately $23.7 million and its unaudited
operating income was approximately $2.5 million.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us
to make judgments, assumptions, and estimates that affect the amounts 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. Estimates are
used for, but not limited to, the accounting for the impairment of goodwill and
other intangibles, acquisition related costs, income taxes, and contingency
accruals. Actual results could differ from these estimates. The following
critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the Consolidated Financial
Statements.
Software Revenue Recognition
Revenues from software licensing agreement contracts are recognized over the
contract term using the percentage of completion method based on the percentage
of services that are provided compared with the total estimated services to be
provided over the entire contract. Revenue from time and material service
contracts is recognized as the services are provided. Revenues from software
licensing 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. Maintenance revenue is recognized over the contractual
period or as services are performed. Revenue in excess of billings on software
licensing contracts is recorded as unbilled receivables and is included in
current assets. Billings in excess of revenue on software licensing contracts
are recorded as deferred revenue and included in current liabilities until such
time the above revenue recognition criteria are met.
Capitalization of Software Development Costs
We apply SFAS 2 and SFAS 86 in recording research and development costs.
Research costs aimed at 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 25 - Research and Development to
the Consolidated Financial Statements). 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.
Technological feasibility of computer software products is established when we
have completed all planning, designing, coding, and testing activities necessary
to establish that the product can be produced to meet its design specifications
including functions, features, and technical performance requirements.
Technological feasibility is evidenced by the existence of a working model of
the product or by completion of a detailed program design. The detailed program
design must (a) establish that the necessary skills, hardware, and software
technology are available to produce the product, (b) be complete and consistent
with the product design, and (c) have been reviewed for high-risk development
issues, with any uncertainties related to identified high-risk development
issues being adequately resolved.
Accounting for Income Taxes
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 or group of entities' ability to generate
sufficient taxable income within an appropriate period in a specific tax
jurisdiction.
In assessing the realizability 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 $30.3 million as of
December 31, 2002, substantially offset by a valuation allowance of $28.1
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 consider 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 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, 2002.
As requisite history of taxable income is established in certain of the
countries in which we operate and baseline forecasts project continued taxable
income in these countries, we will reduce the valuation allowance for those
deferred tax assets that will be considered realizable.
Estimating the Impairment of Long-Lived Assets
We are required to evaluate long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to projected undiscounted future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets on a discounted cash
flow basis. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Future adverse changes in market
conditions could result in an inability to recover the carrying amount of an
asset, thereby possibly requiring an impairment charge in the future.
Goodwill and Other Intangible Assets
We apply SFAS 142 in accounting for goodwill and other intangible assets. Under
SFAS 142, goodwill and intangible assets with indefinite lives are not amortized
but are reviewed annually (or more frequently if impairment indicators arise)
for impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives and
evaluated for impairment in accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The amortization and
non-amortization provisions of SFAS 142 apply upon issuance to all goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, we adopted SFAS 142 effective
January 1, 2002.
In accordance with SFAS 142, we have performed an evaluation and determined that
all intangible assets recorded in our consolidated financial statements comprise
only goodwill. We have completed the impairment tests required by SFAS 142 and
determined that there is no impairment of goodwill. The goodwill is reported in
the Processing Services Segment and in the Germany reporting unit.
BUSINESS SEGMENT INFORMATION
As of December 31, 2002, we operated in two principal business segments. The
first is the Processing Services Segment, which comprises our proprietary ATM
network and outsourced management of ATMs for banks. It includes various new
processing services that we provide for banks and mobile phone companies through
our ATM network and managed ATMs, such as mobile phone recharge services. Our
second principal segment is the Software Solutions Segment, which provides
transaction processing software solutions to banks that enable them to operate
ATMs and POS terminals and process financial transactions from those devices and
the Internet.
Our management divides the Processing Services Segment into three geographic
sub-segments:
. Central European Sub-segment (including Hungary, Poland, the Czech
Republic, Croatia, Greece, Slovakia and Romania)
. Western European Sub-segment (including Germany and the U.K.)
. Other Operations Sub-segment (including Indonesia, Egypt, India and
unallocated processing center costs)
We also operate a "Corporate Services Segment" that provides the Company's two
business segments with corporate and other administrative services that are not
directly identifiable with them. The accounting policies of each segment are the
same as those described in the summary of significant accounting policies. We
evaluate performance based on income or loss from continuing operations before
income taxes and minority interest.
On January 4, 2002, we sold substantially all of the assets of our ATM
processing business in the United States, known as DASH, to ALLTEL Information
Services, Inc. ("AIS") for $6.8 million in cash. AIS is a wholly owned
subsidiary of ALLTEL Corporation. We recorded a pre-tax gain of approximately
$4.8 million related to this transaction.
On July 15, 2002, we sold substantially all of the non-current assets and
capital lease obligations of our processing business in France to Atos.
Non-current assets and capital lease obligations related to the France business
have been removed from continuing operations and classified under discontinued
operations. We incurred a loss on disposal of the France business of $0.1
million.
In previous filings, we reported France under the Western European Sub-segment
and DASH under the Other Operations Sub-segment. All operating amounts, ATM
counts, transaction numbers and statistics reported in this filing exclude
France and DASH.
We have restated prior period segment information to conform to the current
period's presentation (see Note 20 - Business Segment Information to the
Consolidated Financial Statements).
On January 17, 2003, we sold our ATM network in the U.K. We will continue to
operate all of the ATMs that we formerly owned in the U.K. though a five year
ATM outsourcing agreement with the purchaser.
On February 19, 2003, we acquired e-pay Ltd., a U.K.-based company that operates
a network of point-of-sale ("POS") terminals providing electronic processing of
prepaid mobile phone airtime recharge (or "top-up") services in the U.K. and
Australia. Beginning in the first quarter of 2003, we intend to report that
business as a separate segment, which we will call the Prepaid Processing
Services Segment.
SEGMENT RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
2000
Revenues Operating income/(loss)
-------------------------------- --------------------------------
Year Ended December 31, 2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
(in thousands) (in thousands)
Processing Services:
Central Europe $ 26,376 $ 25,237 $ 18,599 $ 2,085 $ 1,612 $ (3,070)
Western Europe 26,573 20,702 15,519 4,482 2,289 (1,823)
Other 1,434 3 84 (1,758) (1,555) (1,231)
-------- -------- -------- -------- -------- --------
Total Processing Services 54,383 45,942 34,202 4,809 2,346 (6,124)
Software Solutions 17,410 15,221 16,006 434 (1,875) (21,469)
Corporate Services - - - (5,621) (6,521) (7,862)
Inter segment eliminations (745) (180) (180) (41) - -
-------- -------- -------- -------- -------- --------
Total $ 71,048 $ 60,983 $ 50,028 $ (419) $ (6,050) $(35,455)
======== ======== ======== ======== ======== ========
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
2000 - BY BUSINESS SEGMENT
PROCESSING SERVICES SEGMENT
Processing Services Revenues
Total segment revenues increased by $8.4 million or 18.4% to $54.4 million for
2002 compared to $45.9 million for 2001. Total segment revenues increased by
$11.7 million or 34% to $45.9 million for 2001 compared to $34.2 million for
2000. The increase in revenues in 2002 and 2001was due primarily to the
significant increase in transaction volume and an increase in the number of ATMs
operated by us during these periods. We had 2,081 ATMs installed as of December
31 2000, 2,400 ATMs installed as of December 31, 2001 and 3,005 ATMs installed
as of December 31, 2002. In 2002, our owned and operated ATM network increased
by 605 ATMs, or 25%, over 2001 to a total of 3,005 ATMs, of which 81% are owned
by us and 19% are owned by banks or other financial institutions but operated by
us through management agreements. We processed 79.2 million transactions for
2002, an increase of 22.0 million transactions, or 38%, over 2001. We processed
43.5 million transactions in 2000, and processed 57.2 million transactions in
2001.
Revenues for the Central European Sub-segment increased by $1.1 million or 5% to
$26.4 million for 2002 from $25.2 million for 2001. Revenues for this
sub-segment increased by $6.6 million or 36% to $25.2 million for 2001 from
$18.6 million for 2000. The increase in revenues in 2002 and 2001 was largely
the result of an increase in the number of ATMs
operated by us over this period and increased transaction volumes. We increased
the number of ATMs that we operated from 1,391 at December 31, 2000 to 1,440 at
December 31, 2001 and to 1,736 at December 31, 2002.
In the Czech Republic, beginning November 1, 2002 a new, single intra-regional
interchange fee for ATM cash withdrawals was agreed to by Czech issuer banks for
both Visa and Europay cards. For VISA cards, the new fee is $1.00 and for
Europay cards the new fee is 1.20 euro. Prior to these changes, we were
averaging fees of approximately $1.40 per cash withdrawal in the Czech Republic.
This intra-regional interchange fee reduction is expected to reduce revenues for
our deployed machines in the Czech Republic by approximately $0.8 million in
2003 based upon forecasted 2003 transaction levels. Additionally, the
transactions per ATM in the Czech Republic trended downward during 2002 by
approximately 15% from the first as compared to the fourth quarters, partially
due to the increase in the interchange fee in late 2001 as well as certain
competitive and other economic conditions. We are actively monitoring this trend
and will take appropriate action, including deinstallation of any
under-performing ATMs, as conditions and further trends warrant to protect
deployment margins.
In 2002, revenues for the Western European Sub-segment increased by $5.9 million
or 28% to $26.6 million, compared to for 2002 from $20.7 million for 2001. In
2001, revenues for this sub-segment increased by $5.2 million or 33% to $20.7
million from $15.5 million. The increase in revenues in 2002 and 2001 was
largely the result of an increase in the number of ATMs operated by us over this
period and increased transaction volumes. We increased the number of ATMs that
we operated from 690 at December 31, 2000 to 941 at December 31, 2001 and to
1,181 at December 31, 2002. During this period we also increased transaction
fees in certain markets.
Of the net 605 ATMs added to the network during 2002, 205 ATMs are located in
the U.K. Our aggressive rollout of ATMs in the U.K. during 2001 and early 2002
was based on the ability to charge a transaction fee directly to the person
using the ATMs in this market. As noted elsewhere in this report, in January
2003 we sold our U.K. subsidiary and simultaneously entered into a five-year
service agreement pursuant to which we will continue to provide substantially
similar ATM processing services in the U.K.
Our 2002 revenues for the Other Processing Services Sub-segment were $1.4
million as compared to nil in 2001 and $0.1 million in 2000. All revenues from
this segment are generated by countries not specifically included in the other
European sub-segments. The increase in revenues in 2002 is mainly a result of
one time set up revenues associated with contracts in Egypt and Indonesia, where
we began operations in 2002. We previously reported our revenue from the DASH
network under this segment but we sold this network in January 2002 (see Note 26
- - Discontinued Operations and Assets Held for Sale to the Consolidated Financial
Statements). Therefore, no further revenues were realized in continuing
operations from the DASH business for the year 2002, and for comparative
purposes, DASH revenues have also been eliminated from continuing operations for
all periods presented.
Of total segment revenue, approximately 88% was attributable to ATMs owned by us
for the year 2002, 91% for 2001 and 91% for the year 2000. Of total transactions
processed, approximately 83% were attributable to ATMs owned by us for the year
2002, 86% for 2001 and 90% for the year 2000. We expect that in the future there
will be a shift from a largely proprietary ATM network owned by us to a more
balanced mix between proprietary ATMs and customer-owned ATMs. We believe the
shift from a largely proprietary, Euronet-owned ATM network to a more balanced
mix between proprietary ATMs and customer-owned ATMs is a positive development
and will provide higher marginal returns on investments.
We generally charge fees for four types of ATM transactions that are currently
processed on our ATMs:
. cash withdrawals
. balance inquiries
. transactions not completed because the relevant card issuer does not
give authorization
. recharges for prepaid mobile phone airtime
Transaction fees for cash withdrawals vary from market to market but generally
range from $0.6