SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6
(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
EURONET WORLDWIDE, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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EURONET WORLDWIDE, INC.
4601 COLLEGE BOULEVARD
SUITE 300
LEAWOOD, KANSAS 66211
913-327-4200
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 8, 2002
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Euronet Worldwide, Inc., a Delaware corporation ("Euronet", "we" or "us"),
will hold the Annual Meeting of our Stockholders on Wednesday, May 8, 2002 at
2:00 p.m. (Central time), at the Marriott Hotel, 10800 Metcalf Avenue, Overland
Park, Kansas 66210, for the following purposes:
1. To elect two directors, each to serve a three-year term expiring upothe
2005 Annual Meeting of Stockholders or until a successor is duly elected
and qualified.
2. To approve the Euronet Worldwide, Inc. 2002 Stock Incentive Plan.
3. To approve the issuance of up to 3 million shares of common stock, par
value $0.02 per share, in order to exchange these shares for our 12 3/8%
Senior Discount Notes due June 28, 2006 and warrants associated with the
Notes, in transactions in which the shares could be valued at up to 25%
less than market value.
4. To ratify the appointment of KPMG Polska Sp. z o.o. ("KPMG") as
Euronet's independent auditors for the year ending December 31, 2002.
5. To transact such other business as may properly come before the meeting
or any adjournment of the meeting.
Our Board of Directors (the "Board") has fixed the close of business on
April 1, 2002, as the record date for determination of stockholders entitled to
notice of, and to vote at, the annual meeting and at any adjournment of the
meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy as promptly as possible in the postage
prepaid envelope provided for that purpose. Any stockholder attending the
meeting may vote in person even if he or she returned a proxy.
By Order of the Board
Jeffrey B. Newman
Executive Vice President
General Counsel and Secretary
April 8, 2002
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EURONET WORLDWIDE, INC.
4601 COLLEGE BOULEVARD
SUITE 300
LEAWOOD, KANSAS 66211
913-327-4200
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PROXY STATEMENT
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ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 8, 2002
DATE, TIME AND PLACE OF MEETING
Euronet Worldwide, Inc. ("Euronet", "we" or "us") is furnishing this proxy
statement in connection with the solicitation of proxies by our Board of
Directors (the "Board"), for use at the annual meeting of stockholders to be
held on Wednesday, May 8, 2002, at 2:00 p.m. (Central time), at the Marriott
Hotel, 10800 Metcalf Avenue, Overland Park, Kansas 66210, and at any adjournment
of the meeting (the "Annual Meeting").
Record Date; Outstanding Shares
Stockholders at the close of business on April 1, 2002 (the "Record Date")
are entitled to notice of, and to vote at, the Annual Meeting. The stockholders
will be entitled to one vote for each share of Common Stock, par value $0.02 per
share (the "Common Stock"), held of record at the close of business on the
Record Date. To take action at the Annual Meeting, a quorum composed of holders
of one-third of the outstanding shares of Common Stock must be represented by
proxy or in person at the Annual Meeting. On February 20, 2002, there were
23,035,994 shares of Common Stock outstanding. No shares of preferred stock are
outstanding.
Date of Mailing
We are first sending this proxy statement, the accompanying proxy and our
annual report to stockholders for the year ended December 31, 2001 (the "Annual
Report") to stockholders on or about April 8, 2002.
Stockholder Proposals for the 2003 Annual Meeting
We must receive any proposal of a stockholder to be presented at our annual
meeting of stockholders in 2003, including the nomination of persons to serve on
the Board, not later than December 8, 2002 in order for us to include it in the
proxy materials for that meeting. Any proposal of a stockholder to be presented
at our annual meeting of stockholders in 2003 which has not been included in our
proxy materials must be received not later than February 22, 2003 to be
considered timely. We reserve the right to exercise discretionary voting
authority on the proposal if a shareholder has failed to submit the proposal by
February 22, 2003. Stockholders submitting proposals should submit them in
writing and direct them to Euronet's secretary at our principal executive
offices via certified mail, return receipt requested, to ensure timely delivery.
We did not receive any stockholder proposals with respect to the Annual Meeting
scheduled for May 8, 2002.
REVOCABILITY OF PROXIES
Shares of Common Stock represented by valid proxies that we receive at any
time up to and including the day of the Annual Meeting will be voted as
specified in such proxies. Any stockholder giving a proxy has the right to
revoke it at any time before it is exercised by attending the Annual Meeting and
voting in person or by filing with Euronet's secretary an instrument of
revocation or a duly executed proxy bearing a later date.
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VOTING AND SOLICITATION
Each share of Common Stock issued and outstanding as of the Record Date
will have one vote on each of the matters presented herein. Votes cast by proxy
or in person at the Annual Meeting will be tabulated by the judge of elections
appointed for the Annual Meeting. We will treat shares that are voted "For,"
"Against" or "Withheld From" a matter as being present at the meeting for
purposes of establishing a quorum and also as shares entitled to vote at the
Annual Meeting (the "Votes Cast"). We will treat abstentions and broker
non-votes also as shares that are present and entitled to be voted for purposes
of determining the presence of a quorum. Abstentions will count in determining
the total number of Votes Cast with respect to a proposal and, therefore, will
have the same effect as a vote against the proposal. Broker non-votes will not
count in determining the number of Votes Cast with respect to a proposal and,
therefore, will not affect the outcome of the voting on a proposal that requires
a majority of the Votes Cast.
PERSONS MAKING THE SOLICITATION
Euronet is making all the solicitations in this proxy statement. We will
bear the entire cost of this solicitation of proxies. Our directors, officers,
and regular employees, without additional remuneration, may solicit proxies by
telephone, telegraph and personal interviews. We will, if requested, reimburse
banks, brokerage houses and other custodians, nominees and certain fiduciaries
for their reasonable out-of-pocket expenses incurred in connection with the
distribution of proxy materials to their principals.
WE WILL FURNISH ADDITIONAL COPIES OF THE ANNUAL REPORT, NOT INCLUDING
EXHIBITS, WITHOUT CHARGE TO ANY STOCKHOLDER UPON WRITTEN REQUEST TO JEFFREY B.
NEWMAN AT OUR ADDRESS SET FORTH ABOVE. WE WILL FURNISH EXHIBITS TO THE ANNUAL
REPORT TO STOCKHOLDERS UPON WRITTEN REQUEST AND PAYMENT OF AN APPROPRIATE
PROCESSING FEE.
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BENEFICIAL OWNERSHIP OF COMMON STOCK
As of the close of business on February 20, 2002, we had 23,035,994 shares
of Common Stock issued and outstanding. The following table sets forth certain
information with respect to the beneficial ownership of the shares of our Common
Stock as of February 20, 2002, by (i) each Euronet Director and named Executive
Officer, (ii) all Euronet Directors and Executive Officers as a group and (iii)
each shareholder known by Euronet to own beneficially more than 5% of the Common
Stock.
Beneficial Ownership
Stockholder Number of Percent of
----------- Shares (1) Outstanding (1)
---------- ---------------
Directors and Named Executive Officers
Michael J. Brown (2) 3,199,277 13.9%
Daniel R. Henry (3) 927,595 4.0%
Kendall D. Coyne (4) 7,667 *
Jeffrey B. Newman (5) 106,401 *
James P. Jerome (6) 26,529 *
Miro I. Bergman (7) 95,300 *
Steven J. Buckley (8) 2,333 *
Thomas A. McDonnell (9) 2,333 *
Eriberto R. Scocimara (10) 2,333 *
M. Jeannine Strandjord 9,500 *
Dr. Andrzej Olechowski 10,533 *
All Directors and Executive Officers as a Group (12 persons) 4,389,801 19.0%
Five Percent Holders
DST Systems, Inc. (11) 2,186,930 9.5%
333 West 11/th/ Street
Kansas City, Missouri 64105-1594
Poland Partners L.P. 1,769,446 7.7%
C/o Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
Waddell & Reed 2,136,350 9.3%
6300 Lamar Avenue
Overland Park, Kansas 66202
-----------
* The percentage of shares of Common Stock beneficially owned does not exceed
one percent of the outstanding shares of Common Stock.
(1) Calculation of percentage of beneficial ownership assumes the exercise by
only the respective named stockholder of all options for the purchase of
shares of Common Stock held by such stockholder, which are exercisable
within 60 days of February 20, 2002.
(2) Includes an aggregate of 860,398 shares of Common Stock issuable pursuant
to options (including Milestone Options) exercisable within 60 days of
February 20, 2002 and an aggregate of 69,000 shares of Common Stock
issuable under warrants exercisable within 60 days of February 20, 2002.
(3) Includes an aggregate of 855,795 shares of Common Stock issuable pursuant
to options (including Milestone Options) exercisable within 60 days of
February 20, 2002.
(4) Includes an aggregate of 5,000 shares of Common Stock issuable pursuant to
options exercisable within 60 days of February 20, 2002.
(5) Includes an aggregate of 91,950 shares of Common Stock issuable pursuant
to options exercisable within 60 days of February 20, 2002. Also includes
14,451 shares beneficially owned pursuant to a Loan Agreement program
(the "Loan Program") implemented in October 1999 pursuant to which
Euronet loaned sums to the employee in order to purchase shares of Common
Stock on the open market.
(6) Includes an aggregate of 24,000 shares of Common Stock issuable pursuant to
options exercisable within 60 days of February 20, 2002.
(7) Includes an aggregate of 65,606 shares of Common Stock issuable pursuant
to options exercisable within 60 days of February 20, 2002. Also includes
22,194 shares of Common Stock beneficially owned pursuant to the Loan
Program.
(8) Steven J. Buckley is also the President of Poland Partners L.P. Management
Company, the advisor to Poland Partners L.P., a shareholder of Euronet, but
disclaims ownership of the shares held by Poland Partners L.P. Mr. Buckley
resigned from the Board on March 7, 2002.
(9) Thomas A. McDonnell is also the President of DST Systems, Inc., a
shareholder of Euronet, but disclaims ownership of
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the shares held by DST Systems, Inc.
(10) Eriberto R. Scocimara is also the President and Chief Executive Officer of
the Hungarian-American Enterprise Fund ("HAEF"), a shareholder of Euronet,
but disclaims ownership of the shares held by HAEF.
(11) Includes an aggregate of 30,000 shares of Common Stock issuable under
warrants exercisable within 60 days of February 20, 2002.
ELECTION OF DIRECTORS
Our Directors and Executive Officers are as follows:
Name Age Position
---- --- ---------
Directors
---------
Michael J. Brown(1) 45 Chairman, Chief Executive Officer and Director
Daniel R. Henry 36 President, Chief Operating Officer and Director
Thomas A. McDonnell(1)(2)(3) 52 Director
Dr. Andrzej Olechowski(1)(2)(3) 66 Director
Eriberto R. Scocimara(1)(2)(3) 52 Director
M. Jeannine Strandjord(1)(2)(3) 56 Director
Executive Officers
------------------
Kendall D. Coyne (4) 46 Chief Financial Officer
Jeffrey B. Newman 47 Executive Vice President, General Counsel
James P. Jerome (5) 44 Executive Vice President, Managing Director
Software
Miro I. Bergman (6) 39 Executive Vice President, EMEA General Manager
----------
(1) Member of the Compensation Committee until November 27, 2001
(2) Member of the Audit Committee
(3) Member of the Stock Option Committee
(4) Mr. Coyne was appointed Chief Financial Officer effective May 8, 2001.
(5) Mr. Jerome was appointed Executive Vice President on November 27, 2001.
(6) Mr. Bergman was appointed Executive Vice President on January 8, 2001.
Classified Board
We currently have six directors divided among three classes as follows:
Class I - Michael J. Brown and M. Jeannine Strandjord; Class II - Eriberto R.
Scocimara and Dr. Andrzej Olechowski; and Class III - Thomas A. McDonnell and
Daniel R. Henry.
On March 5, 2002, the Board of Directors expanded the Board to seven
members, and appointed Dr. Andrzej Olechowski to the Board as a Class II
director. Dr. Olechowski had previously served as a director of Euronet from
1996 until 2000. Steven J. Buckley resigned as director on March 7, 2002. This
resignation was not motivated by a disagreement over our operations, policies or
practices. By a written consent dated March 25, 2002, the Board reduced the
number of directors to six.
Mr. Brown and Mr. Henry are employee directors. The remaining four
directors are independent directors.
Two Class II directors are to be elected at the Annual Meeting for
three-year terms ending at the Annual Meeting of Stockholders in 2005. The Board
has nominated Dr. Andrzej Olechowski and Eriberto R. Scocimara for election as
Class II directors. Unless otherwise instructed, the proxy holders will vote the
proxies received for Dr. Andrzej Olechowski and Eriberto R. Scocimara. In the
event that Dr. Olechowski or Mr. Scocimara are unable or decline to serve as a
director at the time of the Annual Meeting, the proxies will be voted for any
alternative nominees who shall be designated by the present Board of Directors
to fill the vacancy. We are not aware of any reason that Dr. Olechowski or Mr.
Scocimara will be unable or will decline to serve as a director.
The election of each director requires an affirmative vote by the holders
of a plurality of the outstanding shares of Common Stock present and entitled to
be voted at the Annual Meeting.
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The following information relates to the nominees indicated above and to
our other directors whose terms of office will extend beyond 2002. All directors
have held their present positions for at least five years, except as otherwise
indicated.
Name of Director or Nominee Current Term Expires
--------------------------- --------------------
Thomas A. McDonnell 2003
Daniel R. Henry 2003
Michael J. Brown 2004
M. Jeannine Strandjord 2004
Dr. Andrzej Olechowski* 2005
Eriberto Scocimara* 2005
----------
* If elected at the Annual Meeting.
DR. ANDRZEJ OLECHOWSKI previously served as a Director of Euronet from its
incorporation in December 1996 until his resignation in May 2000. He has held
several senior positions with the Polish government: from 1993 to 1995, he was
Minister of Foreign Affairs and in 1992 he was Minister of Finance. From 1992 to
1993, and again in 1995, he served as economic advisor to President Walesa. From
1991 to 1992, he was Secretary of State in the Ministry of Foreign Economic
Relations and from 1989 to 1991 he was Deputy Governor of the National Bank of
Poland. At present Dr. Olechowski is with Central Europe Trust, Poland, a
consulting firm. Former Chairman of Bank Handlowy, Dr. Olechowski sits on the
International Advisory Board of Textron and boards of various charitable and
educational foundations. He received a Ph.D. in Economics in 1979 from the
Central School of Planning and Statistics in Warsaw. If elected, Dr.
Olechowski's term will expire in May 2005, or when his successor is duly elected
and qualified at the next Annual Meeting of Stockholders.
ERIBERTO R. SCOCIMARA has been a Director of Euronet since its incorporation in
December 1996 and he previously served on the boards of Euronet's predecessor
companies. Since April 1994, Mr. Scocimara has served as President and Chief
Executive Officer of the Hungarian-American Enterprise Fund ("HAEF"), a private
company that is funded by the U.S. government and invests in Hungary. HAEF is a
shareholder of Euronet. Since 1984 he has been the President of Scocimara &
Company, Inc., an investment management company. Mr. Scocimara is currently a
director of HAEF, Carlisle Companies, Roper Industries, Quaker Fabrics and
several privately owned companies. He has a Licence de Science Economique from
the University of St. Gallen, Switzerland, and an M.B.A. from Harvard
University. If elected, Mr. Scocimara's term will expire in May 2005, or when
his successor is duly elected and qualified at the next Annual Meeting of
Stockholders.
The Board of Directors recommends that stockholders vote "FOR" election of Dr.
Andrzej Olechowski and Eriberto R. Scocimara as Class II directors of Euronet.
Other Directors
THOMAS A. MCDONNELL has been a Director of Euronet since its incorporation in
December 1996 and he previously served on the boards of Euronet's predecessor
companies. From 1973 to September 1995, he served as Treasurer of DST Systems,
Inc., a shareholder of Euronet. Since October 1984 he has served as Chief
Executive Officer and since January 1973 (except for a 30-month period from
October 1984 to April 1987) he has served as President of DST Systems, Inc. He
is a director of BHA Group, Inc., DST Systems, Inc., Computer Science
Corporation, Commerce Bancshares, Inc., Gramin Ltd. and Blue Valley Ban Corp.
Mr. McDonnell has a B.S. in Accounting from Rockhurst College and an M.B.A. from
the Wharton School of Finance. Mr. McDonnell's term will expire in May 2003.
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DANIEL R. HENRY founded the predecessor of Euronet with Michael Brown in 1994
and is serving as our President and Chief Operating Officer. Mr. Henry oversees
Euronet's daily operations, including our overseas subsidiaries, and is
responsible for our expansion into 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 premier
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
Euronet since our incorporation in December 1996 and he previously served on the
boards of Euronet's predecessor companies. Mr. Henry is married to the sister of
the wife of Michael J. Brown, the Chief Executive Officer of Euronet. Mr.
Henry's term will expire in May 2003.
MICHAEL J. BROWN is one of the founders of Euronet and has served as our Chief
Executive Officer since 1994. In 1979, Mr. Brown founded Innovative Software,
Inc., 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. 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 our incorporation
in December 1996 and he previously served on the boards of Euronet's predecessor
companies. Mr. Brown is married to the sister of the wife of Daniel R. Henry,
President and Chief Operating Officer of Euronet. Mr. Brown's term will expire
in May 2004.
M. JEANNINE STRANDJORD agreed to serve on our Board on March 26, 2001. Since
November 1998, Ms. Strandjord has been Senior Vice President of Finance for the
Long Distance Division of Sprint Corporation ("Sprint"), with responsibility for
billing, accounting, budgeting, financial policy, financial systems, operational
analysis, receivables management and decision support. Prior to November 1998,
Ms. Strandjord was Senior Vice President and Treasurer for Sprint. She held that
position since 1990. From 1986 to 1990, she served as Vice President and
Controller of Sprint. Ms. Strandjord joined Sprint in January 1985, serving as
Vice President of Finance and Distribution at AmeriSource, Inc., a Sprint
subsidiary. Prior to joining Sprint, Ms. Strandjord was Vice President of
Finance for Macy's Midwest and had held positions with Kansas City Power & Light
Co. and Ernst and Whinney. Ms. Strandjord holds a bachelor's degree in
accounting and business administration from the University of Kansas and is a
certified public accountant. She is a member of the board of directors of
American Century Mutual Funds and DST Systems, Inc., a shareholder of Euronet.
Ms. Strandjord's term will expire in May 2004.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Collateral for Delivery of Surety Bond
On September 12, 2000, Michael J. Brown, our CEO, pledged approximately $4
million of marketable securities that he owns (the "Pledge") to Travelers
Insurance Company ("Travelers") in order to induce Travelers to provide a surety
bond in the amount of $5 million on our behalf to the Hungarian bank, MKB (the
"Surety Bond"). MKB provides cash to us for use in our ATM network in Hungary.
We did not pay any consideration to Mr. Brown for providing the Pledge. As of
March 18, 2002, we provided a letter of credit as collateral to secure the
Surety Bond and the Pledge was released.
Advance of Cash for Use in Czech Republic ATM Network
In January and February 2001, Mr. Brown and his wife, Mildred E. Brown,
made cash advances to us totaling $500,000 for use in our Czech Republic ATM
network. The advances have been made at a rate of interest of 10% per annum. We
did not grant any security for these advances, which have been made on a rolling
six-month basis. We repaid this loan on January 9, 2002.
Credit Facility
On June 28, 2000, we entered into an unsecured revolving credit agreement
(the "Credit Agreement") providing a facility of up to $4.0 million from three
of our shareholders as follows: DST Systems, Inc. ("DST") in the amount of $2.4
million; Hungarian-American Enterprise Fund ("HAEF")
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in the amount of $1.0 million; and Michael J. Brown in the amount of $600,000.
Thomas M. McDonnell and Eriberto Scocimara, who are two oft our directors, are
the President and Chief Executive Officers of DST Systems, Inc. and HAEF,
respectively. Draws under the facility bore interest at 10% per annum. The
facility was originally available to be drawn upon until December 28, 2000, and
repayment of any draws was to be due June 28, 2001. The facility was amended and
renewed twice (on December 28, 2000 and June 28, 2001). The date for drawing was
extended by these amendments to December 28, 2001 and the maturity date was
extended to June 28, 2002.
In lieu of a commitment fee, the Credit Agreement provided for issuance of
100,000 warrants to these lenders on execution of the agreement, pro rata to
their contributions to the facility. In addition, it provided for issuance of
80,000 warrants pro rata to these lenders for each $1 million drawn by us under
the facility. All warrants were to have one-year expiration dates. The exercise
price of the warrants for DST and HAEF was set at the average closing share
price, as quoted on the Nasdaq SmallCap Market, for 10 trading days prior to the
warrant issue date, less 10 percent. The exercise price for Michael J. Brown was
originally the same as for the other lenders. It was revised by an amendment to
the Credit Agreement on January 27, 2002 to be no less than the full trading
price of our stock on Nasdaq as of the date of the agreement providing for grant
of the warrants, with the amount of the discount that would have resulted from
the original terms of the Credit Agreement to be paid to Mr. Brown in cash.
On May 29, 2001 we drew $2.0 million under this facility and issued 160,000
warrants with respect to this draw.
We issued warrants as required under the Credit Agreement as of the time of
execution of the agreement on June 28, 2000 and the draw-down on May 29, 2001.
In addition, we issued 100,000 warrants upon each extension of the Credit
Agreement, that is, on December 28, 2000 and June 28, 2001. The exercise prices
for the warrants for DST and HAEF were $7.00 per share for the 100,000 warrants
issued as of June 28, 2000, $4.12 per share for the 100,000 warrants issued as
of December 29, 2000, $5.92 per share for the 160,000 warrants issued as of May
29, 2001 and $6.70 per share for the 100,000 warrants issued as of June 28,
2001. The exercise prices for the warrants for Michael J. Brown were $8.25 per
share for the 100,000 warrants issued as of June 28, 2000, $4.12 per share for
the 100,000 warrants issued as of December 29, 2000, $7.05 per share for the
160,000 warrants issued as of May 29, 2001 and $9.00 per share for the 100,000
warrants issued as of June 28, 2001.
We repaid all amounts outstanding under the Credit Agreement on March 21,
2002, and the Credit Agreement was terminated.
Loans to Executives
We have made loans in the amount of $73,000 and $47,500, respectively, to
Mr. Bergman, our Executive Vice President and Mr. Newman, our Executive Vice
President and General Counsel, under a Loan Agreement Program implemented in
October 1999 pursuant to which Euronet loaned sums to Mr. Newman and Mr. Bergman
in order to purchase shares of Common Stock on the open market. These are
non-recourse, non-interest bearing loans with a maturity date of July 30, 2004.
Mr. Bergman and Mr. Newman have used the proceeds to purchase 22,194 and 14,451
shares, respectively, of our Common Stock that have been pledged to secure the
loans. The full amount of these loans are currently outstanding.
In addition, we made a $35,000 loan to Mr. Newman in October 1998, at an
interest rate of 7%, primarily to defray certain moving and other personal
expenses incurred by Mr. Newman in connection with his family's move from
Hungary to France. This loan was repayable in December 2000, but has been
extended for an additional two years to December 2002.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To our knowledge, based solely on a review of copies of reports available
to us, during 2001, our directors, officers and greater than 10% beneficial
owners complied with all applicable Section 16(a) filing requirements, except
that Form 3s (Initial Statement of Beneficial Ownership of Securities) were
filed late following the appointments of Miro I. Bergman as Executive Vice
President, Kendall D.
9
Coyne as Chief Financial Officer, M. Jeannine Strandjord as a Director and James
P. Jerome as Executive Vice President. These appointments took place on January
8, 2001, May 8, 2001, May 30, 2001 and November 27, 2001, respectively, and a
Form 3 should have been filed within 10 days of each of these appointments. The
Form 3 for Mr. Bergman was filed on October 18, 2001, the Form 3 for Mr. Coyne
was filed on October 3, 2001, the Form 3 for Ms. Strandjord was filed on
November 25, 2001 and the Form 3 for Mr. Jerome was filed on February 13, 2002.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board held seven meetings (including telephonic meetings) during 2001.
Each director attended at least 75% of the aggregate of the total number of
meetings of the Board held (during the period for which he or she was a
director) and the total number of meetings held by all Board committees on which
he or she served (during the periods for which he or she was a member). The
Board has a standing Audit Committee, a standing Compensation Committee and a
standing Stock Option Committee. The Board does not have a standing nominating
committee.
Audit Committee
The Audit Committee of the Board of Directors met three times in 2001. The
Audit Committee has oversight responsibilities with respect to our financial
audit and reporting process, system of internal controls and processes for
monitoring compliance with law. The Committee is also responsible for
maintaining open communication among the Committee, management and our outside
auditors. However, the Committee is not responsible for conducting audits,
preparing financial statements, or assuring the accuracy of financial statements
or filings, all of which is the responsibility of management and the outside
auditors.
Thomas A. McDonnell, M. Jeannine Strandjord, Eriberto Scocimara and Andrzej
Olechowski are the current members of the Audit Committee. Each member of the
Audit Committee is "independent" under the listing standards of the Nasdaq
SmallCap Market.
The Audit Committee performs its oversight functions and responsibilities
pursuant to a written charter adopted by our Board.
Report of the Audit Committee
The Audit Committee has reviewed and discussed with our management
Euronet's audited financial statements for the fiscal year ended December 31,
2001. The Audit Committee has also discussed with KPMG Polska Sp. z o.o.
("KPMG"), our independent auditors, all matters required by generally accepted
auditing standards to be discussed. The Audit Committee has received the written
disclosures and the letter from KPMG required by Independence Standards Board
Standard No. 1.
Based on this review and these discussions, and consistent with the Audit
Committee's roles and responsibilities described above and in the Committee's
charter, the Audit Committee recommended to the Board that the audited financial
statements be included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 for filing with the Securities and Exchange Commission.
Thomas A. McDonnell, M. Jeannine Strandjord, Eriberto Scocimara and Andrzej
Olechowski are the current members of the Audit Committee.
Compensation Committee
The Compensation Committee, which in majority is comprised of our
independent directors, met once in 2001 to review and approve the compensation
levels of our executives. In addition, the full Board dealt with staffing and
executive compensation matters throughout the year, with the management board
members recusing themselves with respect to decisions regarding management
compensation. The Compensation Committee makes determinations with respect to
salaries and bonuses payable to our executive officers. Thomas A. McDonnell, M.
Jeannine Strandjord, Andzrej Olechowski and Eriberto Scocimara are the current
members of the Compensation Committee. In
10
addition, among our current directors, Michael J. Brown was a member of this
Committee until November 27, 2001.
Compensation Committee Interlocks and Insider Participation
Of the members of our Compensation Committee in 2001, Michael J. Brown is
our Chief Executive Officer and President. Mr. Brown did not participate in
decisions relating to his own compensation.
As we described above under the section entitled "Certain Relationships and
Related Transactions," on September 12, 2000, Michael J. Brown, our CEO, pledged
approximately $4 million of marketable securities that he owns (the "Pledge") to
Travelers Insurance Company ("Travelers") in order to induce Travelers to
provide a surety bond in the amount of $5 million on our behalf to the Hungarian
bank, MKB (the "Surety Bond"). MKB provides cash to us for use in our ATM
network in Hungary. We did not pay any consideration to Mr. Brown for providing
the Pledge. As of March 18, 2002, we provided a letter of credit as collateral
to secure the Surety Bond and the Pledge was released. In January and February
2001, Mr. Brown and his wife, Mildred E. Brown, made cash advances to us
totaling $500,000 for use in our Czech Republic ATM network. The advances have
been made at a rate of interest of 10% per annum. We did not grant any security
for these advances, which have been made on a rolling six-month basis. We repaid
this loan on January 9, 2002.
On June 28, 2000, we entered into an unsecured revolving credit agreement
(the "Credit Agreement") providing a facility of up to $4.0 million from three
of our shareholders as follows: DST Systems, Inc. ("DST") in the amount of $2.4
million; Hungarian-American Enterprise Fund ("HAEF") in the amount of $1.0
million; and Michael J. Brown in the amount of $600,000. Thomas M. McDonnell and
Eriberto Scocimara, who are two of our directors, are the President and Chief
Executive Officers of DST Systems, Inc. and HAEF, respectively. Draws under the
facility bore interest at 10% per annum. The facility was originally available
to be drawn upon until December 28, 2000, and repayment of any draws was to be
due June 28, 2001. The facility was amended and renewed twice (on December 28,
2000 and June 28, 2001). The date for drawing was extended by these amendments
to December 28, 2001 and the maturity date was extended to June 28, 2002.
In lieu of a commitment fee, the Credit Agreement provided for issuance of
100,000 warrants to these lenders on execution of the agreement, pro rata to
their contributions to the facility. In addition, it provided for issuance of
80,000 warrants pro rata to these lenders for each $1 million drawn by us under
the facility. All warrants were to have one-year expiration dates. The exercise
price of the warrants for DST and HAEF was set at the average closing share
price, as quoted on the Nasdaq SmallCap Market, for 10 trading days prior to the
warrant issue date, less 10 percent. The exercise price for Michael J. Brown was
originally the same as for the other lenders. It was revised by an amendment to
the Credit Agreement on January 27, 2002 to be no less than the full trading
price of our stock on Nasdaq as of the date of the agreement providing for grant
of the warrants, with the amount of the discount that would have resulted from
the original terms of the Credit Agreement to be paid to Mr. Brown in cash.
On May 29, 2001 we drew $2.0 million under this facility and issued 160,000
warrants with respect to this draw.
We issued warrants as required under the Credit Agreement as of the time of
execution of the agreement on June 28, 2000 and the draw-down on May 29, 2001.
In addition, we issued 100,000 warrants upon each extension of the Credit
Agreement, that is, on December 28, 2000 and June 28, 2001. The exercise prices
for the warrants for DST and HAEF were $7.00 per share for the 100,000 warrants
issued as of June 28, 2000, $4.12 per share for the 100,000 warrants issued as
of December 29, 2000, $5.92 per share for the 160,000 warrants issued as of May
29, 2001 and $6.70 per share for the 100,000 warrants issued as of June 28,
2001. The exercise prices for the warrants for Michael J. Brown were $8.25 per
share for the 100,000 warrants issued as of June 28, 2000, $4.12 per share for
the 100,000 warrants issued as of December 29, 2000, $7.05 per share for the
160,000 warrants issued as of May 29, 2001 and $9.00 per share for the 100,000
warrants issued as of June 28, 2001.
11
We repaid all amounts outstanding under the Credit Agreement on March 21,
2002, and the Credit Agreement was terminated.
Stock Option Committee
The Stock Option Committee, which is comprised solely of independent
directors who are also members of the Compensation Committee, did not meet in
2001. The full Board adopted a policy commencing in the year 1999, which was
complied with during the full year 2001, of reviewing and approving option
grants during each of its meetings. The Stock Option Committee is available
between Board meetings to make determinations with respect to grants of options
to officers and other of our key employees. Thomas A. McDonnell, Dr. Andrzej
Olechowski, Eriberto R. Scocimara and M. Jeannine Strandjord are the current
members of the Stock Option Committee.
Compensation of Directors
We pay each director a fee of $3,000 for each board meeting attended in
person, $1,000 for each telephonic Board meeting attended and $1,000 for
participation in a Committee meeting. In addition, commencing May 2001, we grant
each director an option to purchase 10,000 shares of our Common Stock upon
appointment to the Board and an option to purchase 10,000 shares for each year
of service as a director. These options have a three-year vesting period and a
strike price that is equal to the closing trading price of our Common Stock on
the Nasdaq SmallCap Market on the day of the grant. We also reimburse directors
for out-of-pocket expenses incurred in connection with the directors' attendance
at meetings.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation awarded or paid by us to our Chief Executive Officer and to the
four other most highly compensated of our executive officers whose total annual
salary and bonus equaled or exceeded $100,000 during the year ended December 31,
2001 (the "Named Executive Officers") for the periods indicated:
Summary Compensation Table
Annual Compensation Long-Term Compensation
Name and Principal ------------ ---------- Other Annual Securities Underlying
Position Period Salary ($) Bonus($) Compensation Options/SARs (#)
------------------ ------ ------------ ---------- -------------- ---------------------
Michael J. Brown 2001 58,333 80,000 0 30,000
Chief Executive 2000 158,333 0 0 ---
Officer 1999 200,000 0 0 ---
Daniel R. Henry 2001 161,875 80,000 0 30,000
President and 2000 171,135 0 0 ---
Chief Operating 1999 175,000 0 0 ---
Officer
Jeffrey B. Newman 2001 205,000 20,500 33,853(1) 19,200
Executive Vice 2000 202,000 20,000 35,000(1) 10,000
President
General Counsel 1999 190,000 0 30,584(1) 28,321
Miro I. Bergman 2001 206,250 52,500 18,000(2) 37,500
Managing Director 2000 177,348 60,000 18,000(2) ---
EMEA 1999 160,450 0 18,000(2) 35,000
James Jerome 2001 165,000 24,750 0 35,000
Executive Vice 2000 135,000 20,000 0 10,000
President
Software Solutions 1999 120,000 0 0 30,000
----------
(1) Reimbursement of tuition paid for attendance of Mr. Newman's children at
American schools abroad and travel allowance.
(2) Housing allowance.
12
Option Grants in Last Fiscal Year
The following table provides certain information concerning options granted
to our Named Executive Officers during the year ended December 31, 2001. All the
options described below were granted under either the 1996 Euronet Long-Term
Incentive Stock Option Plan or the 1998 Euronet Stock Option Plan.
Individual Grants
Summary Compensation Table
Annual Compensation Long-Term Compensation
% of Total
Number of Options
Securities Granted to Potential Realizable Value at
Underlying Employees Exercise Assumed Annual Rates of
Options in Fiscal Price Per Stock Price Appreciation for
Name Granted(1) Year Share Expiration Date Option Term (2)
---------------------- ------------- ------------ ----------- -------------------- --------------------------------
5%($) 10%($)
----- ------
Michael J. Brown ..... 10,000* 0.8% $ 5.85 April 30, 2011 36,790 93,234
20,000** 1.5% $16.40 November 27, 2011 206,277 522,748
Daniel R. Henry ...... 10,000* 0.8% $ 5.85 April 30, 2011 36,790 93,234
20,000** 1.5% $16.40 November 27, 2011 206,277 522,748
Jeffrey B. Newman .... 10,000 0.8% $ 5.50 January 8, 2011 34,589 87,656
3,500* 0.3% $ 5.85 April 30, 2011 12,877 32,632
10,000* 0.4% $16.40 November 27, 2011 20,970 53,143
Miro I. Bergman ...... 20,000 1.5% $ 5.50 January 8, 2011 69,178 175,312
7,500* 0.6% $ 5.85 April 30, 2011 27,593 69,925
10,000* 0.8% $16.40 November 27, 2011 103,139 261,374
James Jerome ......... 10,000 0.8% $ 5.50 January 8, 2011 34,589 87,656
6,000* 0.5% $ 5.85 April 30, 2011 22,074 55,940
9,000 0.7% $12.68 September 6, 2011 71,769 181,878
10,000* 0.8% $16.40 November 27, 2011 103,139 261,374
_________________
(1) All options except those marked with a double asterisk vest over five-year
periods, in equal tranches of one-fifth per year, commencing on the first
anniversary date of the grant. Options marked with a double asterisk vest
four years after the date of grant. Vesting of the options marked with a
single or double asterisk is accelerated and the options vest immediately
if Euronet meets certain annual financial targets that are defined in the
option grant. The options with April 30, 2011 expiration dates have vested
completely as a result of the fact that Euronet met its annual performance
target for the fiscal year 2001.
(2) Potential realizable value is based on the assumption that the shares
appreciate at the annual rates shown (compounded annually) from the date of
grant until the expiration of the option term. These numbers are calculated
based upon the requirements promulgated by the Securities and Exchange
Commission and do not reflect any estimate by us of future price increases.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth certain information concerning options
exercised by the Named Executive Officers during the year ended December 31,
2001 and options held by such individuals at December 31, 2001.
13
Shares Number of Securities Underlying Value of Unexercised In-The-
Acquired on Value Unexercised Option at Money Options at
Name Exercise Realized$(1) December 31, 2001 December 31, 2001($)(2)
--------------------- ------------- ------------ ------------------------------- --------------------------------
-------------- --------------- -------------- ----------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- --------------- -------------- ----------------
Michael J. Brown .... --- --- 850,398 30,000 13,572,352 156,500
Daniel R. Henry ..... 20,000 99,560 845,795 30,000 13,937,034 156,500
Jeffrey B. Newman ... 1,300 5,341 87,100 34,450 1,133,429 330,808
Miro Bergman ........ --- --- 62,781 57,190 584,664 517,394
James Jerome ........ --- --- 18,000 57,000 227,800 525,980
_______________
(1) Market value of underlying securities on the date of exercise, minus the
exercise price.
(2) Market value of underlying securities on December 31, 2001 ($18.10),
minus the exercise price of in-the-money options.
Employment Agreements
Mr. Brown serves as our Chief Executive Officer and Chairman of the Board
pursuant to an employment agreement dated December 17, 1996. The term of this
agreement expired on December 17, 2001, but it was automatically renewed on that
date for an additional period of two years, until December 17, 2003. Under the
terms of his agreement, Mr. Brown's salary for 1997 was $100,000, subject to
annual review and adjustments by the Board. His salary was increased to $200,000
per year effective July 1, 1998 and remained at that level until September 2000,
when Mr. Brown volunteered to reduce his salary. His salary was restored to its
full amount as of October 1, 2001. We reimburse Mr. Brown for all reasonable and
proper business expenses incurred by him in the performance of his duties under
the agreement. The terms of the agreement also provide that Mr. Brown will be
entitled to fringe benefits and perquisites comparable to those provided to any
or all of our senior officers. In the event we terminate Mr. Brown's employment
for certain reasons including serious misconduct, dishonesty or breach of the
agreement (referred to in the agreement as "Cause"), or if Mr. Brown voluntarily
terminates employment with us, he will be entitled to receive all compensation,
benefits and reimbursable expenses accrued as of the date of this termination.
If the agreement is terminated without Cause, then Euronet will be required to
pay all compensation and benefits that are due to Mr. Brown under the agreement
until the next expiration date of the agreement, which at present is December
2003. In the event Mr. Brown's employment with us is terminated by reason of
death or disability (as defined in the agreement), he (or his designated
beneficiary) will be paid his annual salary at the rate then in effect for an
additional one-year period. The agreement includes a provision requiring payment
of minimum severance of one year's salary in the event of dismissal following a
"change of control" of Euronet (as defined in the agreement). The agreement also
contains certain non-competition, non-solicitation and confidentiality
covenants.
We have entered into employment agreements on terms that are the same as
those of Mr. Brown's agreement with Messrs. Henry (President and Chief Operating
Officer), Newman (Executive Vice President and General Counsel) and Bergman
(Executive Vice President). These agreements include the same duration and
expiration dates, termination provisions (including those regarding termination
with and without Cause), severance pay on "change of control" and
non-competition, non-solicitation and confidentiality provisions. The only
differences between these agreements and Mr. Brown's agreement relate to salary.
We have described the base salary payable under each of these agreements in the
Summary Compensation Table above.
We do not have an employment agreement with Mr. Jerome.
Benefit Plans
We provide insurance benefits to our officers and other employees,
including health, dental, and life insurance, subject to certain deductibles and
copayments by employees.
14
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee, which currently consists of three outside
directors, administers our executive compensation programs. The Committee is
responsible for establishing policies that govern both annual cash compensation
and equity ownership programs.
Overview and Philosophy
Our executive compensation policies have the following objectives:
- To provide competitive compensation that will help attract, retain and
reward highly qualified executives who contribute to our long-term
success.
- To align the interests of executive management and stockholders by
making individual compensation dependent upon achievement of financial
goals and by providing long-term incentives through our stock option
plans.
Our compensation package for executives consists of a base salary, annual
bonuses based on a combination of corporate and individual performance and stock
options, which vest over a period of years.
Compensation Levels in 2001
Base Salary
We set initial base salary for executives and management-level employees
within the range of salaries of executive officers with comparable
qualifications, experience and responsibilities at other companies in the same
or similar businesses and of comparable size and success. Salary determinations
upon hiring depend both upon the executive's salary at his previous place of
employment and upon the individual's potential value to Euronet as measured by
certain subjective non-financial objectives. The non-financial objectives
include the individual's potential and actual contribution to Euronet as a
whole, including his or her ability to motivate others, develop the skills
necessary to grow as Euronet matures, recognize and pursue new business
opportunities and initiate programs to enhance Euronet's growth and success.
In reviewing base salaries on an annual basis and in determining bonuses,
we balance the need to keep executives' compensation competitive as compared
with market levels and with our financial performance as a whole, measured,
among other things, by our stock price. Our stock price increased during the
year 2001 from $4.50 on January 2, 2001 to $18.10 on December 31, 2001. This has
substantially increased the in-the-money component of options held by
management.
In July 1998, Mr. Brown's salary was set at $200,000 and Mr. Henry's was
set at $175,000. Neither salary has been increased since. Commencing October 15,
2000, Mr. Brown voluntarily waived payment of his salary entirely until further
notice and Mr. Henry reduced his salary by 10%, also until further notice.
Starting on October 1, 2001, Mr. Henry and Mr. Brown resumed drawing their full
salaries.
In view of compensation earned through grant of "milestone" share options
at the time of our initial public offering in March 1997, the Committee believes
that Mr. Brown's and Mr. Henry's overall compensation packages (base salary,
incentive compensation and stock options) are within an appropriate range given
the size and performance of Euronet.
Annual Incentive Compensation and Stock Option Programs
We established a bonus plan for 2001 that provided for payment of cash
bonuses and the grant of options that vest immediately in the event we hit
certain financial targets for the fiscal year 2001, defined by reference to our
operating gain/loss as a whole or of the specific division to which an employee
is attached. If the defined financial targets were met, cash bonuses were earned
and became payable in four quarterly installments over the year 2002, and the
"target vest" options were to become
15
exercisable as of March 31, 2002. Since Euronet met the overall corporate
financial target for the year 2001, the target vest options will vest as of
March 31, 2002 and cash bonuses will be payable for the year 2001. Under this
program, Mr. Brown and Mr. Henry earned bonuses of $80,000 each, Mr. Bergman
earned a bonus of $52,500, Mr. Jerome earned a bonus of $24,750 and Mr. Newman
earned a bonus of $20,500. We also paid bonuses to other management-level
employees under this program.
We sometimes pay discretionary bonuses based on a subjective evaluation of
an employee's contribution to our success or the need to retain a specific
individual. We did not pay any such bonuses to Named Executive Officers for the
year 2001.
Stock Option Programs
Our stock option plans are designed to promote a convergence of long-term
interests between our employees and our stockholders and to assist in the
retention of executives. During the year 2001, all option grants were proposed
by management and approved by the Board.
The initial grant of options to an executive is designed to be competitive
with those of comparable companies for the level of job the executive holds and
to motivate the employee to contribute to an increase in our stock price over
time. We make additional grants periodically to reflect an executive's ongoing
contributions to our success, to create an incentive to remain with us and to
provide a long-term incentive to achieve or exceed our financial goals.
Executives realize gains only if the stock price increases over the
exercise price of their options and they exercise their options. Under the
general terms of our stock option plans, options are to be granted at an option
price equal to the fair market value of the Common Stock on the date of grant.
Stock options generally vest over a five-year period in order to encourage key
employees to remain with Euronet, but during 2001 Euronet also granted "target
vest" options as described above in the section entitled "Annual Incentive
Compensation and Stock Option Programs."
Our stock traded in a wide band from a low of $4.50 to a high of $18.20
during the year 2001, closing at $18.10, a four-fold increase as compared with
its price on January 2, 2001. As a result, most executive and upper-level
management employees have a substantial in-the-money component in their stock
options.
Benefits
Our executive officers are entitled to receive medical insurance benefits
and may participate in our 401(K) plan. We match 50% of participant deferrals on
the first 6% of employee deferrals, provided the participant's deferral is a
minimum of 4% of salary. The amounts matched vest to the employees over 5 years.
All of our employees are entitled to participate in an Employee Stock
Purchase Plan (the "ESPP") that was established in June 2001. This plan, which
has been established in accordance with certain federal income tax rules set
forth in Section 423 of the Internal Revenue Code, permits employees to purchase
stock from us at a price that is equal to 85% of the trading price on the
opening or the closing (at the employee's option) of certain three-month
"offering periods." Because of the relatively steady increase in our stock price
during the year, many employees took advantage of the ESPP and were able to
purchase stock at prices that were substantially below the price of the stock as
of the date of the purchase.
The amount of perquisites, as determined in accordance with the rules of
the Securities and Exchange Commission relating to executive compensation, did
not exceed 10% of salary and bonus for 2001 for any of the Named Executive
Officers except Mr. Newman.
Conclusion
Through our programs, a significant portion of our executive compensation
is linked directly to individual and company performance in furtherance of
strategic goals, as well as stock price
16
appreciation. The Committee intends to continue the policy of linking executive
compensation to company performance and stockholder return.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Audit Fees
KPMG billed us aggregate fees of $336,478 for the audit of our annual
financial statements and for reviews of the financial statements included in our
Forms 10-Q, all for the year ended December 31, 2001.
Financial Information Systems Design and Implementation
No fees were billed during the 2001 fiscal year for Financial Information
Systems Design and Implementation.
All Other Fees
For the 2001 fiscal year, KPMG (including KPMG entities other than KPMG Polska
Sp. z o.o.) billed $323,403 in fees for all services other than those described
above. These fees included $247,803 for non-audit fees consisting of tax
compliance and tax advisory services, and $75,600 relating to due diligence
services in connection with a potential acquisition target. The Audit Committee
has considered whether the provision of these other services is compatible with
maintaining KPMG's independence and has determined that it is compatible.
Ratification of Appointment
We employed KPMG to perform the annual audit and to render other services
for 2001 and the Board has reappointed KPMG to render these same services in
2002. Representatives of KPMG will be available by telephone conference at the
Annual Meeting to answer questions and discuss any matter pertaining to the
report of Independent Public Accountants contained in the 2001 Annual Report to
Stockholders, which accompanies this proxy statement. Representatives of KPMG
will have the opportunity to make a statement, if they desire to do so.
Approval of Proposal
The ratification of the appointment of KPMG as our auditors for the year
2002 will require the affirmative vote of holders of a majority of our shares
outstanding on the Record Date.
The Board recommends that the stockholders vote "FOR" the ratification of the
appointment of KPMG as Euronet's independent auditors for the fiscal year ending
December 31, 2002.
17
APPROVAL OF THE EURONET WORLDWIDE, INC.
2002 STOCK INCENTIVE PLAN
General
Our Board is seeking stockholder approval of the Euronet Worldwide, Inc.
2002 Stock Incentive Plan (the "Plan"). A copy of the Plan is attached hereto as
an exhibit and should be consulted for detailed information. All statements made
herein regarding the Plan are only intended to summarize the Plan and are
qualified in their entirety by reference to the Plan.
If approved, the Plan will be in addition to two other option plans
currently in effect at Euronet. The two other plans, adopted in 1996 and 1998,
provided for the grant of options to purchase 2.4 million and 2 million shares,
respectively. Approximately 32,000 options in the aggregate remain available for
grant under the 1996 and 1998 plans.
Purpose of the Plan
The purpose of the Plan is to promote our long-term growth and
profitability by providing our eligible and prospective directors, officers,
employees and consultants with incentives to improve stockholder value and
thereby to attract, retain and motivate the best available persons for positions
of substantial responsibility.
Description of the Plan
Effective Date. The Plan became effective March 25, 2002 (the "Effective
Date").
Administration. The Plan will be administered by the Stock Option Committee
(the "Committee"). The Board may act in lieu of the Committee on any matter
within its discretion or authority, and may eliminate the Committee, or remove
any Committee member, at any time in its discretion. The Committee has broad
discretionary authority to administer the Plan, to make and modify Awards (which
are defined below) and document Awards, to prescribe rules and regulations
relating to the Plan, and to interpret the terms of the Plan and any Award
agreements. In addition, the Plan authorizes the Board from time to time to
authorize one or more of our officers to grant Options (which are defined below)
to our officers and employees or those of our subsidiaries, and to determine the
number of Options to be granted to these officers and employees. However, no
officer is permitted to grant an Option either to himself or herself, or to any
officer or employee who is a reporting person for purposes of Securities and
Exchange Commission Rule 16.
Types of Awards. Under the Plan, the Committee has discretionary authority
to grant stock options ("Options"), stock appreciation rights ("SARs"),
restricted stock awards ("Restricted Shares"), deferred share awards ("Deferred
Shares") and phantom rights ("Phantom Rights") (collectively, "Awards") to any
employee, independent contractor or non-employee director of Euronet as the
Committee shall designate. As of the Record Date, we, including our
subsidiaries, had 384 officers and employees and 4 non-employee directors who
were reasonably regarded as being eligible to participate in the Plan.
Shares Available for Grants. If the stockholders approve this proposal, the
Plan will reserve 2 million shares of our Common Stock for Awards granted
pursuant to the Plan, subject to certain adjustments upon an event such as a
stock split, reverse stock split, stock dividend, combination or
reclassification of Common Stock, or any other similar event.
Agreements Evidencing Awards; Stockholder Rights. Each Award granted under
the Plan (except an Award of unrestricted stock) will be evidenced by a written
Award agreement, which will contain provisions as the Committee in its
discretion deems necessary or desirable.
Options; Exercise Price; Term. Options may be either incentive stock
options ("ISOs") having terms required under Section 422 of the Internal Revenue
Code, or Options that are not ISOs ("NQSOs"). The Committee may grant Options
sequentially in one resolution for a series of future grants. The exercise price
as to any ISO may not be less than 100% of the fair market value (as
18
determined under the Plan) of the optioned shares on the date of grant and 110%
in the case of an employee who owns more than 10% of the outstanding Common
Stock on the date of receiving an ISO grant. The per-share exercise price for
each NQSO grant shall also not be less than the fair market value of the
optioned shares on the date of the grant.
Vesting. Unless an Award agreement provides otherwise: (i) an independent
contractor may immediately exercise any Option, and (ii) any other Option will
become exercisable at the rate of 20% per year of the participant's service
after the grant date.
The Plan authorizes the Committee to unilaterally cancel any Option with
respect to which the exercise price of the underlying shares is more than twice
their fair market value on the date of the cancellation and for a continuous
period of 20 or more business days beforehand. If the Committee exercises this
discretion, each participant whose Options are cancelled will receive an amount
that is not less than the product of (i) the number of shares that the
participant had the vested right to purchase through exercise of the Option
immediately before its cancellation, (ii) 25% of the fair market value per share
on the date cancelled, and (iii) the ratio of such fair market value to the
cancelled Option's exercise price per share.
Dividend Equivalent Rights and Reload Grants. The Committee may award
dividend equivalent rights entitling the recipient of an Option to receive
amounts equal to the ordinary dividends that would be paid on shares, subject to
an unexercised Award as if such shares were currently outstanding. The Committee
will determine the method of any payment and the terms and conditions of any
dividend equivalent rights granted. In addition, the Committee may include in
any Option Award a provision under which a participant who exercises the Option
(in whole or in part) through the surrender of shares held for at least six
months will receive a new Option (the "Reload Option") to purchase an equivalent
number of shares at their fair market value on the grant date of the Reload
Option.
SARs. SARs may be granted in connection with an Option or independently as
determined by the Committee. The pricing restrictions in the Plan applicable to
Options also apply to the exercise price of SARs. Upon the exercise of an Option
in connection with which a SAR has been granted, the number of shares that the
Option is exercised for shall reduce the number of shares subject to the SAR.
Unless the Committee determines otherwise, upon exercise of a SAR and the
surrender of the exercisable portion of any related Award, the participant will
be entitled to receive payment of an amount equal to the excess of (a) the fair
market value of a share on the date of exercise of the SAR over (b) the exercise
price of this right as set forth in the Award agreement (or over the Option
exercise price if the SAR is granted in connection with an Option), multiplied
by (c) the number of shares with respect to which the SAR is exercised.
Effect of Termination of Service. The Committee has broad discretion to
determine the effect of a termination of continuous service, with the Plan
requiring as follows unless the Committee determines otherwise: an Option or SAR
may be exercised at any time during an employee's continuous service with
Euronet or within 60 days thereafter unless (a) the Committee determines that
the employee's continuous service terminates due to "cause" as defined in the
Plan, in which case the participant's Option or SAR will lapse immediately and
the participant must return any dividend equivalent rights granted by us, and
(b) an employee dies, in which case the Option or SAR remains exercisable for 90
days following the employee's death. In addition, no Option or SAR may be
exercisable after expiration of its term or to a greater extent than the
employee was entitled to exercise it when the employee's continuous service
terminated. In the event a director or independent consultant terminates his
directorate or service for any reason other than death, all Options and SARs
then exercisable shall be exercisable for the remainder of their terms, subject
to the terms of any Award agreement, subject to immediate forfeiture if a
directorate is terminated for cause, and subject to expiration 90 days after a
director's death. If an outside consultant dies, the consultant's estate may
exercise any Options during their remaining term.
Restricted Share Awards. The Committee may grant Restricted Share Awards
that vest based on future conditions, and may include a purchase price if the
Committee desires. The participant will receive a certificate or certificates
for the appropriate number of shares after exercising the Restricted Share
Award.
Deferred Share Awards. The Committee may make discretionary Deferred Share
Awards to select eligible persons subject to the terms of the Plan. At the end
of each calendar year, or other periods approved by the Committee, the Committee
will credit the participant's account with a number of Deferred Shares having a
fair market value on that date equal to the compensation deferred during the
year, and any cash dividends paid during the year on Deferred Shares previously
credited to the participant's account. A participant may receive immediate
distribution of all or a portion of his or her Deferred Shares on account of
hardship (as defined in the Plan). Fractional shares will not be distributed,
but will be paid out in cash.
19
In all cases, we will generally distribute the Common Stock associated with
a Deferred Share Award over the five-year period after the Award holder
terminates service, subject to the holder's right to elect a different payout
term and commencement date. Any distribution of Common Stock will include
dividends that accrued after the date of the Deferred Share Award (with cash
dividends being converted into Deferred Shares at the end of each fiscal year).
Phantom Rights. The Committee may make discretionary Phantom Rights Awards
with respect to Common Stock, may select eligible persons for these Awards, and
may establish the terms and conditions under which Phantom Rights vest and are
cashed out.
Conditions on Issuance of Shares. The Committee has the discretionary
authority to impose restrictions on shares of Common Stock issued pursuant to
the Plan as it may deem appropriate or desirable, including the authority to
impose a right of first refusal and to establish repurchase rights.
Effect of Certain Transactions. Upon the later of (i) a change in corporate
control or the execution of an agreement to effect an "Accelerating Event"
(within the meaning of the Plan) and (ii) a participant's termination of service
either involuntarily or for good reason (within the meaning of the Plan), all of
the participant's Options and SARs will become fully exercisable, all other
Awards will become fully vested, and the Committee may permit the participant to
cancel outstanding Awards in exchange for a cash payment equal to the value of
the cancelled Award.
Duration of the Plan and Grants. The Plan prohibits Awards more than 10
years after its Effective Date. Each Award agreement for Options and SARs will
set forth the periods during which they will be exercisable. The maximum term
for an ISO (and a SAR granted in tandem with an ISO) may not exceed 10 years
(five years if the participant owns more than 10% of the Common Stock on the
date of grant).
Modification of Awards. The Committee may modify an Award as long as the
modification to the Award does not materially reduce the participant's rights or
materially increase the participant's obligations as determined by the
Committee.
Amendment and Termination of the Plan. The Board may from time to time
amend the terms of the Plan and, with respect to any shares at the time not
subject to Awards, suspend or terminate the Plan. No amendment, suspension, or
termination of the Plan will, without the consent of any affected participant,
alter or impair any rights or obligations under any Award previously granted.
Financial Effects of Awards. Euronet will receive no monetary consideration
for the granting of Awards under the Plan. We will receive no monetary
consideration other than the exercise price for shares of Common Stock issued to
participants upon the exercise of their Options or SARs or the purchase price,
if any, paid for Restricted Shares. We will also not receive monetary
consideration upon the distribution of Common Stock satisfying Deferred Share or
Phantom Rights Awards. Cash proceeds from the issuance of Common Stock pursuant
to any Award will be added to our general funds to be used for general corporate
purposes.
Under the intrinsic value method that we follow under applicable accounting
standards, recognition of compensation expense is not required when Options are
granted at an exercise price equal to or exceeding the fair market value of the
Common Stock on the date the Option is granted. Nonetheless, disclosure may be
required in financial statement footnotes regarding pro forma effects on
earnings and earnings per share of recognizing as a compensation expense an
estimate of the fair value of such stock-based awards.
The Financial Accounting Standards Board of Directors has issued an
interpretation of existing accounting treatment for stock-based compensation to
individuals who do not qualify as employees or directors of Euronet. Among other
things, this change requires recognition of compensation expense when Options
are awarded to these individuals.
The granting of SARs will require charges to our income based on the amount
of the appreciation, if any, in the average market price of the Common Stock to
which the SARs relate over the exercise price of those shares. If the average
market price of the Common Stock declines
20
subsequent to a charge against earnings due to estimated appreciation in the
Common Stock subject to SARs, the amount of the decline will reverse these prior
charges to our income (but not by more than the aggregate of these prior
charges).
The granting of Restricted Shares or Deferred Shares will require charges
to our income in an amount equal to the fair market value, on the date of the
Award, of the shares of Common Stock credited pursuant to the Award, with the
expense generally being spread over any vesting period.
The granting of Phantom Rights will require ongoing charges to our income
based on changes in their vested value.
Disclosure of Awards
We have not yet made any Awards pursuant to the Plan and do not expect to
do so before the Plan receives stockholder approval.
Recommendation and Vote Required
The Board has determined that the Plan is desirable, cost-effective, and
produces incentives that will benefit us and our stockholders. The Board is
seeking stockholder approval of the Plan in order to satisfy the requirements of
the Internal Revenue Code for favorable tax treatment of ISOs, for an exemption
under Section 162(m) of the Internal Revenue Code, and to satisfy the listing
requirements of the National Association of Securities Dealers for national
market system securities.
Stockholder approval of the Plan requires the affirmative vote of the
holders of a majority of the votes cast at the Annual Meeting.
The Board recommends a vote "For" approval of the Plan.
APPROVAL OF ISSUANCE OF COMMON STOCK IN EXCHANGES OF EURONET'S SENIOR DISCOUNT
NOTES PURSUANT TO SECTION 3(a)(9) OF THE SECURITIES ACT OF 1933
In June 1998 we issued 243,211 units consisting of 12 3/8% Senior Discount
Notes due 2006 (the "Senior Discount Notes") and 729,633 warrants to purchase
766,114 shares of our Common Stock pursuant to a registration statement filed
with the Securities and Exchange Commission. Since 1998, we have exchanged a
portion of the Senior Discount Notes and warrants for shares of our Common Stock
in a number of unrelated transactions that were exempt from registration
pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended (the
"Securities Act"). During 2001, we exchanged 97,700 units (principal amount of
DM 97.7 million) of our Senior Discount Notes and 293,100 warrants for a total
of 3,238,650 shares of Common Stock in 16 separate transactions pursuant to
Section 3(a)(9).
We believe these transactions are favorable to Euronet and are accretive to
earnings per share. Each time we have exchanged debt for equity, we have reduced
the amount of interest payable (which interest would reduce earnings) by more
than the amount of dilution resulting to shareholders from the issuance of new
shares. As a general rule, we intend to continue to enter into these types of
exchange transactions when they are accretive to earnings per share, although we
may wish to enter into transactions that are not accretive as the number of our
bonds decreases, in order to be able to eliminate our outstanding bond debt
entirely.
Our Common Stock is listed on the Nasdaq SmallCap Market, and we have
agreed to comply with Nasdaq's listing rules. Rule 4350 of the Nasdaq listing
rules sets forth certain corporate governance standards for issuers whose Common
Stock is listed on the Nasdaq SmallCap Market. Rule 4350 requires, among other
matters, that a company obtain stockholder approval in connection with a
transaction (other than a public offering) involving the sale or issuance of
Common Stock at a price less than the market price of the Common Stock, if the
transaction equals 20% or more of the Common Stock or the voting power of the
company outstanding before the issuance. Our previous exchanges of Senior
Discount Notes and warrants for shares of our Common Stock did not require
stockholder approval under Rule 4350. However, in the future we may be presented
with an opportunity to
21
exchange Senior Discount Notes and warrants for shares of our Common Stock in a
transaction or series of related transactions that require stockholder approval
under Rule 4350.
In the past six months the closing price of our Common Stock has ranged
from $ to $ . Due to the volatility of the trading price of our Common Stock
we cannot predict with certainty the number of shares that would be issued in
any of these exchanges in the future, or the discount, if any, of the shares
exchanged. However, we wish to attempt to repurchase up to the full amount of
our Senior Discount Notes outstanding, which as of the date of these proxy
materials is $38 million face value. We intend to limit the exchange
transactions in which we issue Common Stock to those in which we would obtain a
discount to the market price of the Common Stock that does not exceed 25%.
In order to take advantage of any opportunity that arises for exchanges of
our Senior Discount Notes, we are asking you to approve the issuance of up to 3
million shares of Common Stock for use in these exchanges, within the discount
parameters described above and on such other terms and conditions that the
Board, in its discretion, considers favorable to Euronet. We ask that this
authorization be available for us to conduct these exchanges for a period of
four months from the date of the Annual Meeting.
The Board recommends that the stockholders vote "FOR" approval of issuance
of up to 3 million shares of Common Stock in exchanges of Senior Discount Notes
pursuant to Section 3(a)(9) of the Securities Act, in exchange transactions
where the shares of Common Stock could be issued at a discount of no more than
20% of the market price and on such other terms and conditions that the Board,
in its discretion, considers favorable to Euronet.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the total cumulative return on
the Common Stock from March 7, 1997 (the date of the IPO) through December 31,
2001 with the Center for Research in Security Prices ("CRSP") Total Returns
Index for U.S. companies traded on the Nasdaq Stock Market (the "Market Group")
and an index group of peer companies, the CRSP Total Returns Index for U.S.
Nasdaq Financial Stocks (the "Peer Group"). The companies in each of the Market
Group and the Peer Group were weighted by market capitalization. Returns are
based on monthly changes in price and assume reinvested dividends. These
calculations assume the value of an investment in the Common Stock, the Market
Group and the Peer Group was $100 on March 7, 1997. Our Common Stock is traded
on the Nasdaq SmallCap Market under the symbol EEFT.
22
Comparison of Five-Year Cumulative Total Returns
Performance Graph for
EURONET WORLWIDE, INC.
Produced on 02/07/2002 including data to 12/31/2001
[GRAPH]
Legend
CRSP Total Returns Index for: 03/1997 12/1997 12/1998 12/1999 12/2000 12/2001
----------------------------- -------- -------- -------- -------- -------- --------
EURONET WORLDWIDE, INC. 100.0 51.7 17.9 50.4 32.9 120.7
Nasdaq Stock Market (US Companies) 100.0 120.8 170.3 316.4 190.3 151.0
Nasdaq Financial Stocks 100.0 138.1 134.2 133.3 143.9 158.3
SIC 6000--6799 US & Foreign
Notes
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 03/07/1997.
OTHER MATTERS
The Board knows of no other business which may come before the Annual
Meeting. If, however, any other matters are properly presented to the Annual
Meeting, it is the intention of the persons named in the accompanying proxy to
vote, or otherwise act, in accordance with their judgment on such matters.
23
By Order of the Board,
Jeffrey B. Newman
Executive Vice President, General Counsel and
Secretary
April 8, 2002
24
EXHIBITS
. Euronet Worldwide, Inc. 2002 Stock Incentive Plan
. Annual Report to Securityholders for the Fiscal Year Ended December
31, 2001
INCORPORATION BY REFERENCE
. The "Financials" section of the Annual Report to Securityholders for
the Fiscal Year Ended December 31, 2001 is incorporated by reference
in this proxy statement.
25
EURONET WORLDWIDE, INC.
FOR USE AT THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 8, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF EURONET
WORLDWIDE, INC. The undersigned holder of shares of Common Stock of Euronet
hereby appoints Michael J. Brown, President and Chief Executive Officer, or
failing him, Jeffrey B. Newman, Executive Vice President and General Counsel, as
proxy for the undersigned to attend, vote, and act for and on behalf of the
undersigned at the annual meeting of stockholders of Euronet to be held on
Wednesday May 8, 2002 at 11:00 a.m. (Central time), at the Marriott Hotel, 10800
Metcalf Avenue, Overland Park, Kansas 66210, USA, and at any adjournments
thereof (the "Meeting"), and hereby revokes any proxy previously given by the
undersigned. If this proxy is not dated, it shall be deemed to be dated on the
date on which this proxy was mailed to Euronet.
Without limiting the general powers hereby conferred, with respect to
Euronet's proposal to elect directors, the shares of Common Stock represented by
this proxy are to be:
DIRECTORS
1. Nominees: (01) Dr. Andrzej Olechowski
(02) Eriberto R. Scocimara
[_] VOTED FOR ALL NOMINEES
[_] WITHHOLD ALL NOMINEES
[_] FOR ALL EXCEPT
INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark the
"For All Except" box and strike a line through the nominee's name in the list
below. You shall consent to the election of the remaining nominee.
PROPOSALS
2. Proposal to approve the Euronet Worldwide, Inc. 2002 Stock Incentive Plan.
[_] Voted For
[_] Voted Against
[_] Abstain
3. Proposal to approve the issuance of up to 3 million shares of Common Stock
for use in exchanges of Senior Discount Notes in which the shares of Common
Stock could be issued at a discount of no more than 25% of the market
price.
[_] Voted For
[_] Voted Against
[_] Abstain
(CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE.)
26
(CONTINUED FROM PREVIOUS SIDE)
4. Proposal to ratify the selection of KPMG as independent auditors for 2002.
[ ] Voted For
[ ] Voted Against
[ ] Abstain
Please indicate your proposal selection by placing an "X" in the appropriate
numbered box with blue or black ink only.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted in favor of each of the nominees set forth above and each of the
proposals indicated above.
Please sign exactly as your name(s) appear(s) on the books of Euronet. When
shares of Common Stock are held by joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by president
or other authorized officer. If a partnership, please sign in partnership name
by authorized person.
Dated _______ ___, 2002
Signature
Signature, if Held Jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
27
EURONET WORLDWIDE, INC.
2002 STOCK INCENTIVE PLAN
1. PURPOSE
This 2002 Stock Incentive Plan (the "Plan") for Euronet Worldwide, Inc.
(the "Company") is intended to advance the interests of the Company through
providing select current and prospective key employees, directors, and
consultants of the Company with the opportunity to acquire Shares. By
encouraging such stock ownership, the Company seeks to attract, retain and
motivate the best available personnel for positions of substantial
responsibility and to provide additional incentives to directors, consultants,
and key employees of the Company to promote the success of the business.
2. DEFINITIONS
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "Award" shall mean any award made pursuant to this Plan, including
Options, Stock Appreciation Rights, Restricted Shares, Deferred Shares, and
Phantom Rights.
(b) "Award Agreement" shall mean any written document setting forth the
terms and conditions of an Award, as prescribed by the Committee.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean (i) the committee that the Board appoints in
its discretion to administer the Plan, and (ii) any committee of Delegated
Officers whom the Board authorizes to make Awards pursuant to Section 3(c)
of the Plan.
(f) "Common Stock" shall mean the Common Stock, $0.01 par value, of the
Company.
(g) "Company" shall mean Euronet Worldwide, Inc., a Delaware corporation.
(h) "Deferred Shares" shall mean shares of Common Stock credited under
Section 10 of this Plan.
(i) "Delegated Officer" has the meaning set forth in Section 3(c) of this
Plan.
(j) "Exercise Price" shall mean the price per Share at which an Option or
Stock Appreciation Right may be exercised.
(k) "Fair Market Value" per share as of a particular date shall mean (i)
the closing sales price per share of Common Stock on the principal national
securities exchange, if any, on which the shares of Common Stock shall then
be listed for the last preceding date on which there was a sale of such
Common Stock on such exchange, or (ii) if the shares of Common Stock are
not then listed on a national securities exchange, the last sales price per
share of Common Stock entered on a national inter-dealer quotation system
for the last preceding date on which there was a sale of such Common Stock
on such national inter-dealer quotation system, or (iii) if no closing or
last sales price per share of Common Stock is entered on a national
inter-dealer quotation system, the average of the closing bid and asked
prices for the shares of Common Stock in the over-the-counter market for
the last preceding date on which
28
there was a quotation for such Common Stock in such market, or (iv) if no
price can be determined under the preceding alternatives, then the price
per share as most recently determined by the Board, which shall make such
determinations of value at least once annually.
(l) "Good Reason" shall mean any of the following events, which has not
been either consented to in advance by the Participant in writing or cured
by the Company within a reasonable period of time not to exceed 20 days
after the Participant provides written notice thereof: (i) the requirement
that the Participant's principal service for the Company be performed more
than 30 miles from the Participant's primary office as of an Accelerating
Event (as defined in Section 12 hereof), (ii) other than as part of an
across-the-board reduction affecting all similarly-situated employees, a
material reduction in the Participant's base compensation in effect
immediately before the Accelerating Event; (iii) other than as part of an
across-the-board reduction affecting all similarly-situated employees, the
failure by the Company to continue to provide the Participant with the same
level of overall compensation and benefits provided immediately before the
Accelerating Event, or the taking of any action by the Company which would
directly or indirectly reduce any of such benefits or deprive the
Participant of any material fringe benefit; (iv) the assignment to the
Participant of duties and responsibilities materially different from those
associated with his position immediately before the Accelerating Event; or
(v) a material diminution or reduction, on or after an Accelerating Event,
in the Participant's responsibilities or authority, including reporting
responsibilities in connection with the Participant's service with the
Company.
(m) "Group of Persons" shall mean a "group" as such term is defined in
Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder (the "Exchange Act").
(n) "Incentive Stock Option" shall mean one or more Options to purchase
Common Stock which, at the time such Options are granted under this Plan or
any other such plan of the Company, qualify as incentive stock options
under Section 422 of the Code.
(o) "Non-Qualified Option" shall mean any Option that is not an Incentive
Stock Option.
(p) "Option" shall mean an Incentive Stock Option and/or a Non-Qualified
Option.
(q) "Optioned Shares" shall mean Shares subject to an Option granted
pursuant to this Plan.
(r) "Parent" shall mean any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
granting an Option, each of the corporations other than the Company owns
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain.
(s) "Participant" shall mean any person who receives an Award pursuant to
this Plan.
(t) "Phantom Rights" shall have the meaning set forth in Section 11(a) of
this Plan.
(u) "Plan" shall mean this Stock Incentive Plan.
(v) "Restricted Shares" shall mean Shares subject to restrictions imposed
pursuant to Section 9 of this Plan.
(w) "Share" shall mean one share of Common Stock.
29
(x) "Stock Appreciation Right" shall mean the right to receive the
appreciation in value, or a portion of the appreciation in value, of a
specified number of shares of Common Stock pursuant to Section 8 of this
Plan.
(y) "Subsidiary" shall mean any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the
time of granting an Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
(z) "Ten Percent Stockholder" shall mean a Participant who, at the time
an Option is granted, owns directly or indirectly (within the meaning of
Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company, its
Parent or a Subsidiary.
3. GENERAL ADMINISTRATION
(a) The Plan shall be administered by the Committee, provided that (i)
only directors who are "outside directors" within the meaning of Code
Section 162(m) shall make awards to persons subject to that section, and
(ii) only directors who are "non-employee directors" within the meaning of
SEC Rule 16b-3 shall make awards to persons who are reporting persons for
purposes of SEC Rule 16.
(b) The Committee shall have the authority in its discretion, subject to
and not inconsistent with the express provisions of the Plan, to administer
the Plan and to exercise all the powers and authorities either specifically
granted to it under the Plan or necessary or advisable in the
administration of the Plan, including, without limitation, the authority to
grant Options; to determine the Exercise Price; to determine the persons to
whom, and the time or times at which, Options shall be granted; to
determine the number of shares to be covered by each Option; to interpret
the Plan; to prescribe, amend and rescind rules and regulations relating to
the Plan; to determine the terms and provisions of the Award Agreements
(which need not be identical) entered into in connection with Options
granted under the Plan; and to make all other determinations deemed
necessary or advisable for the administration of the Plan.
(c) Notwithstanding any provision to the contrary in Section 3(b) of this
Plan, the Board may from time to time authorize one or more officers of the
Company (each such officer, a "Delegated Officer") to do one or both of the
following: (i) designate officers and employees of the Company or any
Subsidiary to be granted Options; and (ii) determine the number of Options
to be granted to such officers and employees; provided, however, that the
Board may not authorize any Delegated Officer to grant an Option to (i)
himself or herself, or (ii) any officer or employee who is a reporting
person for purposes of SEC Rule 16. The Board resolution providing such
authorization shall specify both the total number of Options that such
Delegated Officer or Officers may grant and the formula for determining the
Exercise Price for each Option granted hereunder, provided that the
authorized Exercise Price shall be deemed to be the Fair Market Value of
the underlying Shares if the Board does not specify a different formula for
determining the Exercise Price for particular grants. Except as expressly
provided herein, nothing in this Section 3(c) shall be construed as
creating any limitations on the power or authority of the Board and the
Committee to administer and operate the Plan.
(d) No member of the Committee shall be liable for any action taken or
determination made in good faith with respect to the Plan or any Award
granted hereunder.
4. GRANTING OF AWARDS
The Committee may grant Awards under the Plan at any time during the
term of the Plan (as established pursuant to Section 16).
30
5. ELIGIBILITY
(a) The Committee may grant Awards to any director, officer, key employee
or outside consultant of the Company or any Subsidiary, as well as to any
prospective director, officer, key employee, or outside consultant of the
Company or any Subsidiary as an inducement for such person to perform
services for the Company or any Subsidiary; provided that an Award
Agreement may contain terms and conditions providing for the termination of
an inducement Award in the event that a recipient thereof is not retained
to perform services for the Company with the period specified therein. In
determining from time to time the officers and employees to whom Awards
shall be granted and the number of shares to be covered by each Awards, the
Committee shall take into account the duties of the respective officers and
employees, their present and potential contributions to the success of the
Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the Plan.
(b) At the time of the grant of each Option under the Plan, the Committee
shall determine whether or not such Option is to be designated an Incentive
Stock Option. Incentive Stock Options shall not be granted to a director or
a consultant who is not an employee of the Company. The length of the
exercise period of Incentive Stock Options shall be governed by Section
7(e)(2) of the Plan; the exercise period of all other Options will be
governed by Section 7(e)(3).
(c) An Option designated as an Incentive Stock Option can, prior to its
exercise, be changed to a Non-Qualified Option if the Participant consents
to amend his Award Agreement to provide that the exercise period of such
Option will be governed by Section 7(e)(2) of the Plan.
6. STOCK
The stock subject to Awards shall be shares of the Common Stock. Such
shares may, in whole or in part, be authorized but unissued shares contributed
directly by the Company or shares which shall have been or which may be acquired
by the Company. The aggregate number of shares of Common Stock as to which
Awards may be granted from time to time under the Plan shall be 2,000,000
shares, with a limit of 250,000 shares per Participant during the term of the
Plan. The limitations established by the preceding sentence shall be subject to
adjustment as provided in Section 12 hereof. If any outstanding Awards under the
Plan for any reason expires or is cancelled or terminated without having been
exercised or vested in full, the shares of Common Stock allocable to the
unexercised or unvested portion of such Award shall (unless the Plan shall have
been terminated) become available for subsequent grants of Awards under the
Plan.
7. TERMS AND CONDITIONS OF OPTIONS
Each Option granted pursuant to the Plan shall be evidenced an Award
Agreement in such forms as the Committee may from time to time approve. Options
shall comply with and be subject to the following terms and conditions:
(a) EXERCISE PRICE. Each Option shall state the Exercise Price, which in
the case of Incentive Stock Options shall be not less than one hundred
percent (100%) of the Fair Market Value of the shares of Common Stock on
the date of grant of the Option; provided, however, that in the case of an
Incentive Stock Option granted to a Ten Percent Stockholder, the Exercise
Price shall not be less than one hundred ten percent (110%) of such Fair
Market Value. The Exercise Price per share for Non-Qualified Options shall
also not be less than the Fair Market Value of a share of Common Stock on
the effective date of grant of the Option. The Exercise Price shall be
subject to adjustment as provided in Section 12 hereof. The date on which
the Committee adopts a resolution expressly granting an Option shall
generally be considered the day on which such Option is granted. However,
the Committee may, in its sole discretion, grant a series of sequential
Options to a Participant pursuant to a single resolution adopted by the
Committee. Such a series of sequential Options will be treated as granted
as of the specific future dates designated by the Committee and such
Options will have an Exercise
31
Price determined in each case by reference to the Fair Market Value of
Common Stock as of the respective future dates as of which the Options
are deemed granted. For example, as of May 15, 2002, the Committee could,
in its sole discretion, grant a series of Options to a Participant equal
to 1,000 shares of Common Stock which could be deemed by the Committee to
be granted at the rate of 250 shares as of June 1, 2002 and at the rate
of 250 shares as of the first day of each of the next three calendar
months thereafter for an Exercise Price in each case equivalent to the
Fair Market Value of 250 shares of Common Stock as of each of the deemed
grant days.
(b) RESTRICTIONS. Any Common Stock issued under the Plan may contain
restrictions including, but not limited to, limitations on
transferability, as the Committee may set forth in the Award Agreement
effecting an Award.
(c) VALUE OF SHARES. Options may be granted to any eligible person
for shares of Common Stock of any value, provided that the aggregate Fair
Market Value (determined at the time the Option is granted) of the stock
with respect to which Incentive Stock Options are exercisable for the
first time by the Participant during any calendar year (under all the
plans of the Company, its Parent and its Subsidiaries) shall not exceed
$100,000.MEDIUM AND TIME OF PAYMENT. The Exercise Price shall be paid in
full, at the time of exercise, in cash or, with the approval of the
Committee, in shares of Common Stock having a Fair Market Value in the
aggregate equal to such Exercise Price or in a combination of cash and
such shares, provided that any shares of Common Stock used to pay the
Exercise Price must have been held by the Participant for no less than
six (6) months. In addition, the Committee may provide in an Award
Agreement for the payment of the Exercise Price on a cashless basis, by
stating in the exercise notice the number of Shares the Participant
elects to purchase pursuant to such exercise (in which case the
Participant shall receive a number of Shares equal to the number the
Participant would have received upon such exercise for cash less such
number of Shares as shall then have a Fair Market Value in the aggregate
equal to the Exercise Price due in respect of such exercise). The
Committee may, in its discretion and for any reason, refuse to accept a
particular form of consideration (other than cash or a certified or
official bank check) at the time of any Option exercise.
(d) TERM AND EXERCISE OF OPTIONS
(1) Unless the applicable Award Agreement otherwise provides,
each Option granted to an independent contractor performing services for
the Company shall be vested immediately and each Option granted to an
employee or director shall become vested and first exercisable in the
following installments:
ANNIVERSARY PERCENTAGE
DATE OF GRANT EXERCISABLE
Less than One ......................... 0%
One ................................... 20%
Two ................................... 40%
Three ................................. 60%
Four .................................. 80%
Five .................................. 100%
(2) Incentive Stock Options shall be exercisable over the
exercise period specified by the Committee in the Award Agreement, but in
no event shall such period exceed ten (10) years from the date of the
grant of each such Incentive Stock Option; provided, however, that in the
case of an Incentive Stock Option granted to a Ten Percent Stockholder,
the exercise period shall not exceed five (5) years from the date of
grant of such Option.
(3) Non-Qualified Options shall be exercisable over a period
specified by the Committee in the Award Agreement, but in no event shall
such period exceed ten (10) years from the date of the grant of each such
Non-Qualified Option.
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(4) The exercise period of any Option shall be subject to
earlier termination as provided in Section 7(g) and 7(h) hereof. An
Option may be exercised, as to any or all full shares of Common Stock
as to which the Option has become exercisable, by giving written
notice of such exercise to the Committee; provided that an Option may
not be exercised at any one time as to less than 100 shares (or such
number of shares as to which the Option is then exercisable if such
number of shares is less than 100).
(5) The Committee may unilaterally and without advance notice
to any Participant cancel any Option with respect to which the
Exercise Price per Share is more than twice the Fair Market Value per
Share both on the date of the cancellation and for a continuous period
of 20 or more business days before that date. In consideration for
this cancellation, the Committee shall make a cash payment, to each
Participant whose Options are cancelled, in an amount that is not less
than the product of (i) the number of Shares that the Participant had
the vested right to purchase through exercise of the Option
immediately before its cancellation, (ii) 25% of the Fair Market Value
per Share on the date cancelled, and (ii) the ratio of such Fair
Market Value to the cancelled Option's Exercise Price per Share."
(e) DIVIDEND EQUIVALENCY; RELOAD GRANTS
(1) Any Option may, in the discretion of the Committee,
provide for dividend equivalency rights under which the Participant shall be
entitled to additional payments, in the nature of compensation, equal to the
amount of dividends which would have been paid, during the period such Option is
held, on the number of shares of Common Stock equal to the number of shares
subject to such Option.
(2) The Committee may in its discretion include in any Award
Agreement with respect to an Option (the "Original Option") a provision awarding
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an additional option (the "Reload Option") to any Participant who delivers
Shares in partial or full payment of the Exercise Price of the Original Option.
The Reload Option shall be for a number of Shares equal to the number of Shares
so delivered, shall have an Exercise Price equal to the Fair Market Value of a
Share on the date of exercise of the Original Option, and shall have an
expiration date no later than the expiration date of the Original Option. In the
event that an Award Agreement provides for the grant of a Reload Option, such
Award Agreement shall also provide that the Exercise Price of the Original
Option be no less than the Fair Market Value of a Share on its date of grant,
and that any Shares that are delivered in payment of such Exercise Price shall
have been held for at least 6 months.
(f) TERMINATION OF SERVICE
Except as provided in this Section 7(g) and Section 7(h)
hereof and except with respect to Options granted to an independent contractor
performing services for the Company, an Option may only be exercised by persons
who are employees or of the Company or any Parent or Subsidiary of the Company
(or a corporation or a Parent or Subsidiary of such corporation issuing or
assuming the Option in a transaction to which Section 424(a) of the Code
applies), who have remained continuously, or directors so in service since the
date of grant of the Option.
In the event the directorship of a Participant who is a director of
the Company shall terminate (other than by reason of death), all Options or
unexercised portions thereof granted to such Participant which are then
exercisable shall, unless earlier terminated in accordance with their terms,
remain exercisable over the exercise period specified by the Committee in the
Award Agreement; provided, however, that if the association of the Participant
with the Company shall terminate for "cause" (as determined by the Committee),
all Options theretofore granted to such Participant shall, to the extent not
theretofore exercised, terminate forthwith; and further provided that all
Options theretofore granted to such Participant which have not vested shall
terminate forthwith.
In the event a Participant who is an employee shall terminate all
association with the Company (other than by reason of death), all Options or
unexercised portions thereof granted to such Participant which are then
exercisable may, unless earlier terminated in accordance with their terms, be
exercised within sixty (60) days after such termination; provided, however, that
if the association of the Participant with the Company shall terminate for
"cause" (as determined by the Committee), all Options
33
theretofore granted to such Participant shall, to the extent not theretofore
exercised, terminate forthwith. A bona fide leave of absence shall not be
considered a termination or break in continuity of employment for any purpose of
the Plan so long as the period of such leave does not exceed ninety (90) days or
such longer period during which the Participant's right to reemployment is
guaranteed by statute or by contract. Where the period of such leave exceeds
ninety (90) days and the Participant's right to reemployment is not guaranteed,
the Participant's employment will be deemed to have terminated on the
ninety-first (91st) day of such leave. Nothing in the Plan or in any Option
granted pursuant hereto shall confer upon an employee any right to continue in
the employ of the Company or any of its divisions or Parent or Subsidiaries or
interfere in any way with the right of the Company or any such divisions or
Parent or Subsidiary to terminate or change the terms of such employment at any
time.
Unless an Award Agreement provides otherwise, a Participant's changes
or changes in status between employee and director shall not be considered a
termination or break in continuity of employment for any purpose of the Plan.
The Committee may, in its discretion, provide similar treatment for changes in
the status of any independent consultant, and may so provide in an Award
Agreement or future modification thereof.
(g) DEATH OF PARTICIPANT. If a Participant who was an outside
consultant when his Option was granted shall die, all Options
heretofore granted to such Participant may be exercised at any time
during the remaining period of their terms by the personal
representative of the Participant's estate or by a person who acquired
the right to exercise such Options by bequest or inheritance or
otherwise by reason of death of the Participant. If a Participant shall
die while a director of or employed by the Company or any Parent or
Subsidiary of the Company, all Options theretofore granted to such
Participant may, unless earlier terminated in accordance with their
terms and to the extent already vested and exercisable, be exercised by
the Participant or by the personal representative of the Participant's
estate or by a person who acquired the right to exercise such Option by
bequest or inheritance or otherwise by reason of death of the
Participant, at any time within one year after the date of death of the
Participant.
8. STOCK APPRECIATION RIGHTS
(a) GRANTING OF STOCK APPRECIATION RIGHTS. In its sole
discretion, the Committee may from time to time grant Stock
Appreciation Rights to Participants either in conjunction with, or
independently of, any Options granted under the Plan. A Stock
Appreciation Right granted in conjunction with an Option may be an
alternative right wherein the exercise of the Option terminates the
Stock Appreciation Right to the extent of the number of shares
purchased upon exercise of the Option and, correspondingly, the
exercise of the Stock Appreciation Right terminates the Option to the
extent of the number of Shares with respect to which the Stock
Appreciation Right is exercised. Alternatively, a Stock Appreciation
Right granted in conjunction with an Option may be an additional right
wherein both the Stock Appreciation Right and the Option may be
exercised. A Stock Appreciation Right may not be granted in conjunction
with an Incentive Stock Option under circumstances in which the
exercise of the Stock Appreciation Right affects the right to exercise
the Incentive Stock Option or vice versa, unless the Stock Appreciation
Right, by its terms, meets all of the following requirements: (1) the
Stock Appreciation Right will expire no later than the Incentive Stock
Option; (2) the Stock Appreciation Right may be for no more than the
difference between the Exercise Price of the Incentive Stock Option and
the Fair Market Value of the Shares subject to the Incentive Stock
Option at the time the Stock Appreciation Right is exercised; (3) the
Stock Appreciation Right is transferable only when the Incentive Stock
Option is transferable, and under the same conditions; (4) the Stock
Appreciation Right may be exercised only when the Incentive Stock
Option may be exercised; and (5) the Stock Appreciation Right may be
exercised only when the Fair Market Value of the Shares subject to the
Incentive Stock Option exceeds the Exercise Price of the Incentive
Stock Option.
(b) EXERCISE PRICE. The Exercise Price as to any particular
Stock Appreciation Right shall not be less than the Fair Market Value
of the Optioned Shares on the date of grant.
34
(c) TIMING OF EXERCISE. The provisions of Section 7 regarding the
period of exercisability of Options are incorporated by reference
herein, and shall determine the period of exercisability of Stock
Appreciation Rights.
(d) EXERCISE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation
Right granted hereunder shall be exercisable at such times and under
such conditions as shall be permissible under the terms of the Plan
and of the Award Agreement granted to a Participant, provided that a
Stock Appreciation Right may not be exercised for a fractional Share.
Upon exercise of a Stock Appreciation Right, the Participant shall be
entitled to receive, without payment to the Company, an amount equal
to the excess of (or, in the discretion of the Committee if provided
in the Award Agreement, a portion of) the excess of the then aggregate
Fair Market Value of the number of Optioned Shares with respect to
which the Participant exercises the Stock Appreciation Right, over the
aggregate Exercise Price of such number of Optioned Shares. This
amount shall be payable by the Company, at the discretion of the
Committee, in cash or in Shares valued at the then Fair Market Value
thereof, or any combination thereof.
(e) PROCEDURE FOR EXERCISING STOCK APPRECIATION RIGHTS. To the
extent not inconsistent herewith, the provisions of Section 7 as to
the procedure for exercising Options are incorporated by reference,
and shall determine the procedure for exercising Stock Appreciation
Rights.
9. RESTRICTED SHARE AWARDS
(a) GRANTS. The Committee shall have the discretion to grant
Restricted Share Awards to Participants. As promptly as practicable
after a determination is made that a Restricted Share Award is to be
made, the Committee shall notify the Participant in writing of the
grant of the Award, the number of Shares covered by the Award, and the
terms upon which the Shares subject to the Award may be earned. The
date on which the Committee so notifies the Participant shall be
considered the date of grant of the Restricted Share Awards. The
Committee shall maintain records as to all grants of Restricted Share
Awards under the Plan.
(b) EARNING SHARES. Unless the applicable Award Agreement otherwise
provides, Shares subject to Restricted Share Awards shall be earned
and become non-forfeitable by a Participant according to the schedule
set forth in Section 7(e)(1), provided the Participant is a director,
officer, employee or consultant on the scheduled vesting date.
Notwithstanding the foregoing, each Participant shall become (100%)
vested immediately upon termination of the Participant's service due
to the Participant's disability or death.
(c) ACCRUAL OF DIVIDENDS. Whenever Restricted Shares are paid to a
Participant under this Plan, the Participant shall also be entitled to
receive, with respect to each Restricted Share paid, an amount equal
to any cash dividends and a number of shares of Common Stock equal to
any stock dividends declared and paid with respect to a share of
Common Stock between the date the relevant Restricted Share Award was
initially granted to such Participant and the date the Restricted
Shares are being distributed. The Committee may also, in its
discretion distribute an appropriate amount of net earnings, if any,
with respect to any cash dividends paid between the grant date of the
Restricted Share Award and the distribution date of the Restricted
Shares.
(d) DISTRIBUTION OF RESTRICTED SHARES.
(1) TIMING OF DISTRIBUTIONS; GENERAL RULE. Except as otherwise
expressly stated in this Plan, the Committee shall distribute
Restricted Shares and accumulated dividends and interest to the
Participant or his beneficiary, as the case may be, as soon as
practicable after they have been earned. No fractional shares shall be
distributed.
35
(2) FORM OF DISTRIBUTION. The Committee shall distribute all
Restricted Shares, together with any shares representing stock
dividends, in the form of Common Stock. One share of Common Stock shall
be given for each Restricted Share earned. Payments representing cash
dividends (and earnings thereon) shall be made in cash.
(e)
DEFERRAL ELECTIONS. If expressly authorized in an Award
Agreement a Participant who is a member of a select group of management
or highly compensated employees (within the meaning of the Employee
Retirement Income Security Act of 1974, as amended) may irrevocably
elect, at any time at least 12 months prior to the date on which a
Participant becomes vested in any shares subject to his or her
Restricted Share Award, to defer the receipt of all or a percentage of
the Restricted Shares that would otherwise be transferred to the
Participant upon the vesting of such Award pursuant to Section 10 of
this Plan. If such an election is made, the Restricted Shares shall be
credited to the Participant's account as Deferred Shares on the date
such Restricted Shares would otherwise have been distributed to the
Participant.
10. DEFERRAL ELECTIONS BY PARTICIPANTS.
(a) ELECTIONS TO DEFER. The Committee may, in its discretion,
authorize any Participant who is a director, consultant, or member of a
select group of management or highly compensated employees (within the
meaning of the Employee Retirement Income Security Act of 1974, as
amended) to irrevocably elect to forego the receipt of cash compensation
and in lieu thereof to have the Company credit Deferred Shares to an
account payable to the Participant. Each election shall take effect five
business days after its delivery to the Committee, unless in the
meantime the Committee sends the Participant a written notice explaining
why the election is invalid. Notwithstanding the foregoing sentence,
elections shall be ineffective with respect to any compensation that a
Participant earns before the date on which the Committee receives the
election.
(b) CASH EARNINGS ON DEFERRED SHARES. On the last day of each fiscal
year of the Company, the Committee shall credit to the Participant's
account a number of Deferred Shares having a value equal to the sum of
any cash dividends paid on Deferred Shares previously credited to the
Participant's account. The Committee shall hold each Participant's
Deferred Shares until distribution is required pursuant to subsection
(c) hereof.
(c) DISTRIBUTIONS OF DEFERRED SHARES AND EARNINGS. The Committee
shall distribute a Participant's Deferred Shares in five substantially
equal annual installments that are paid before the last day of each of
the five fiscal years of the Company that end after the date on which
the Participant's continuous service terminates, unless the Participant
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has properly elected a different form of distribution pursuant to an
election (on a Form that the Committee approves) that the Committee
receives either more than 90 days before an Accelerating Event or more
than one year before the date on which the Participant's continuous
service terminates for any reason.
(d) HARDSHIP WITHDRAWALS. Notwithstanding any other provision of the
Plan or a Participant's election hereunder, in the event the Participant
suffers an unforeseeable hardship within the contemplation of this
subsection, the Participant may apply to the Committee for an immediate
distribution of all or a portion of his Deferred Shares. The hardship
must result from a sudden and unexpected illness or accident of the
Participant or a dependent of the Participant, casualty loss of
property, or other similar conditions beyond the control of the
Participant. Examples of purposes which are not considered hardships
include post-secondary school expenses or the desire to purchase a
residence. In no event will a distribution be made to the extent the
hardship could be relieved through reimbursement or compensation by
insurance or otherwise, or by liquidation of the Participant's
nonessential assets to the extent such liquidation would not itself
cause a severe financial hardship. The amount of any distribution
hereunder shall be limited to the amount necessary to relieve the
Participant's financial hardship. The determination of whether a
Participant has a qualifying hardship and the amount which qualifies for
distribution, if any, shall be made by the
36
Committee in its sole discretion. The Committee may require evidence of the
purpose and amount of the need, and may establish such application or other
procedures as it deems appropriate.
(e) RIGHTS TO DEFERRED SHARES. A Participant may not assign his or her
claim to Deferred Shares during his or her lifetime. A Participant's right
to Deferred Shares shall at all times constitute an unsecured promise of
the Company to pay benefits as they come due. The right of the Participant
or his or her beneficiary to receive benefits hereunder shall be solely an
unsecured claim against the general assets of the Company. Neither the
Participant nor his or her beneficiary shall have any claim against or
rights in any specific assets, shares, or other funds of the Company.
11. PHANTOM RIGHTS
(a) AWARDS. Awards of rights ("Phantom Rights") that relate indirectly to
shares of Common Stock may be made under this Plan and set forth in an
applicable Award Agreement. The Committee may, but shall not be required
to, make Awards of Phantom Rights. Subject to the terms of this Plan, the
Committee shall determine the terms of Phantom Rights Awards, may in its
discretion provide for their settlement in cash, Restricted Shares or other
consideration, and may impose different terms and conditions on a Phantom
Rights Award than on any other Award made to the same recipient or other
Award recipients.
(b) EXERCISE OF PHANTOM RIGHTS. Unless an Award Agreement provides
otherwise, Phantom Rights Awards become vested according to the schedule
set forth in Section 7(e)(1).
(c) PAYMENT OF PHANTOM RIGHTS. Upon exercise of a vested Phantom Right,
the holder thereof shall be entitled to receive a payment in respect of
such Phantom Right calculated using the formula set forth in the Award
Agreement (which shall relate to Shares available for Awards under the
Plan).
(d) FORFEITURE OF PHANTOM RIGHTS. In making an Award of Phantom Rights,
the Committee may impose a requirement that the recipient remain in the
employment or service (including service as an advisor or consultant) of
the Company or any Parent Corporation or Subsidiary for a specified minimum
period of time, or else forfeit all or a portion of such Phantom Rights
Right which has not been exercised, whether or not vested. Whether or not
vested, a Phantom Rights Award shall expire on the earlier of (a) the
expiration of the tandem Option or Restricted Share, if applicable, or (b)
the expiration date set forth in the Award Agreement. The Committee shall
have authority to determine whether to accelerate the termination of any
forfeiture provisions contained in any applicable Award Agreement.
(e) RIGHTS AS STOCKHOLDER; DIVIDENDS. A recipient of a Phantom Rights
Award shall have no rights as a stockholder with respect to any Phantom
Rights.
12. EFFECT OF CERTAIN CHANGES
(a) If there is any change in the number of shares of Common Stock
through the declaration of stock dividends, recapitalization resulting in
stock splits, or combinations or exchanges of such shares, then the number
of shares of Common Stock available for Awards, the number of such shares
covered by outstanding Awards, and the price per Share pertaining to such
Awards, shall be proportionately adjusted to reflect any increase or
decrease in the number of issued shares of Common Stock; provided, however,
that any fractional shares resulting from such adjustment shall be
eliminated.
(b) In the event of a proposed dissolution or liquidation of the Company,
or in the event of any corporate separation or division, including but not
limited to, a split-up, a split-off or spin-off, the Committee may provide
that the holder of each Award then exercisable shall have
37
the right to exercise such Award (at its then Exercise Price) solely for
the kind and amount of shares of stock and other securities, property, cash
or any combination thereof receivable upon such dissolutions or
liquidation, or corporate separation or division; or the Committee may
provide, in the alternative, that each Award granted under the Plan shall
terminate as of a date to be fixed by the Committee, provided, however,
that no less than thirty (30) days' written notice of the date so fixed
shall be given to each Participant who shall have the right, during the
period of thirty (30) days preceding such termination, to exercise the
Award as to all or any part of the shares of Common Stock covered thereby,
including shares as to which such Award would not otherwise be exercisable.
(c) If while unexercised or unvested Awards remain outstanding under the
Plan (i) the Company executes a definitive agreement to merge or
consolidate with or into another corporation or to sell or otherwise
dispose of substantially all its assets, or (ii) more than 50% of the
Company's then outstanding voting stock is acquired by any person or Group
of Persons (any such event being an "Accelerating Event"), then from and
after any later date on which a Participant's service with the Company
(including any successor) terminates involuntarily or for Good Reason (any
such date being referred to herein as the "Acceleration Date"), all Awards
granted to the Participant shall be exercisable and vested in full, whether
or not otherwise exercisable or vested. Following the Acceleration Date,
(a) the Committee shall, in the case of a merger, consolidation or sale or
disposition of assets, promptly make an appropriate adjustment to the
number and class of shares of Common Stock available for Awards, and to the
amount and kind of shares or other securities or property receivable upon
exercise or vesting of any outstanding Awards after the effective date of
such transaction, and the price thereof (if applicable), and (b) the
Committee may, in its discretion, permit the cancellation of outstanding
Awards in exchange for a cash payment in an amount per share subject to any
such Award determined by the Committee in its sole discretion, but not less
than the difference between the Fair Market Value per share of Common Stock
on the Acceleration Date, and the Exercise Price (if any) pertaining to the
Award.
(d) Subsections (a) and (b) of this Section 12 shall not apply to a
merger or consolidation in which the Company is the surviving corporation
and shares of Common Stock are not converted into or exchanged for stock,
securities or any other corporation, cash or any other thing of value.
Notwithstanding the preceding sentence, in case of any consolidation or
merger of another corporation into the Company in which the Company is the
continuing corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
shares of Common Stock (other than a change in par value, or from par value
to no par value, or as a result of a subdivision or combination, but
including any change in such shares into two or more classes or series of
shares), the Committee may provide that the holder of each Option or Stock
Appreciation Right then exercisable shall have the right to exercise such
Option or Stock Appreciation Right solely for the kind and amount of shares
of stock and other securities (including those of any new direct or
indirect parent of the Company), property, cash or any combination thereof
receivable by the holder of the number of shares of Common Stock for which
such Option or Stock Appreciation Right might have been exercised upon such
reclassification, change, consolidation or merger.
(e) In the event of a change in the Common Stock as presently
constituted, which is limited to a change of all of its authorized shares
with par value into the same number of shares with a different par value or
without par value, the shares resulting from any such change shall be
deemed to be the Common Stock within the meaning of the Plan.
(f) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Committee,
whose determination in that respect shall be final, binding and conclusive,
provided that each Option granted pursuant to this Plan and designated an
Incentive Stock Option shall not be adjusted in a manner that causes the
Option to fail to continue to qualify as an Incentive Stock Option within
the meaning of Section 422 of the Code.
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(g) Except as hereinbefore expressly provided in this Section 12, a
Participant shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of shares of stock
of any class or by reason of any dissolution, liquidation, merger, or
consolidation, and any issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
not affect, and no adjustment by reason thereof shall be made with respect
to, the number or Exercise Price of shares of Common Stock subject to an
Award. The grant of an Award pursuant to the Plan shall not affect in any
way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell,
or transfer all or any part of its business or assets.
13. RIGHTS AS A STOCKHOLDER; NONTRANSFERABILITY.
(a) A Participant or a transferee of an Award shall have no rights as a
stockholder with respect to any Shares covered by such Award until the date
of the issuance of a stock certificate such Participant or transferee for
such Shares. No adjustments shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as provided in Section 7(f)
or Section 12 hereof.
(b) NONTRANSFERABILITY OF AWARDS. Awards granted under the Plan shall not
be transferable other than by will or by the laws of descent and
distribution, and Options and Stock Appreciation Rights may be exercised,
during the lifetime of the Participant, only by the Participant.
Notwithstanding the preceding sentence, the Committee, in its sole
discretion, may permit the assignment or transfer of Awards (other than
Incentive Stock Options except if permitted pursuant to Section 422 of the
Code) and the exercise thereof by a person other than a Participant, on
such terms and conditions as the Committee may determine.
14. OTHER PROVISIONS. The Award Agreements authorized under the Plan shall
contain such other provisions, including, without limitation, (i) the imposition
of restrictions upon the exercise of rights pertaining to an Award and (ii) the
inclusion of any condition not inconsistent with an Option designated by the
Committee as an Incentive Stock Option qualifying as an Incentive Stock Option,
as the Committee shall deem advisable, including provisions with respect to
compliance with federal and applicable state securities laws. In furtherance of
the foregoing, at the time of any exercise of rights pertaining to an Award, the
Committee may, if it shall determine it necessary or desirable for any reason,
require the Participant as a condition to the exercise thereof, to deliver to
the Committee a written representation of the Participant's present intention to
purchase the Common Stock for investment and not for distribution. If such
representation is required to be delivered, an appropriate legend may be placed
upon each certificate delivered to the Participant upon his exercise of part or
all of the rights pertaining to an Award and a stop transfer order may be placed
with the transfer agent. Each such Award shall also be subject to the
requirement that, if at any time the Committee determines, in its discretion,
that either (i) the listing, registration or qualification of Common Stock
subject to an Award upon any securities exchange or under any state, federal or
foreign law, or (ii) the consent or approval of any governmental regulatory
body, is necessary or desirable as a condition of, or in connection with, the
issue or purchase of Common Stock thereunder, the rights pertaining to an Award
may not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. A Participant shall not have the
power to require or oblige the Company to register any Common Stock subject to
an Award.
39
15. AGREEMENT BY PARTICIPANT REGARDING WITHHOLDING TAXES
(a) No later than the date of exercise of any Option or SAR, or the
distribution of Shares to a Participant pursuant to a Restricted Share or
Deferred Share Award, the Participant shall pay to the Company or make
arrangements satisfactory to the Committee regarding payment of any
federal, state or local taxes of any kind required by law to be withheld,
and may satisfy minimum withholding consequences through the surrender of
shares subject to the Award; and
(b) The Company shall, to the extent permitted or required by law, have
the right to deduct from any payment of any kind otherwise due to the
Participant any federal, state or local taxes of any kind required by law
to be withheld with respect to an Award.
16. TERM OF PLAN
Awards may be granted pursuant to the Plan from time to time within a
period of ten (10) years from the date on which the Plan is adopted by the
Board, provided that no Awards granted under the Plan shall become effective,
vested, or exercisable unless and until the Plan shall have been approved by the
Company's stockholders.
17. SAVINGS CLAUSE
Notwithstanding any other provision hereof, this Plan is intended to
qualify as a plan pursuant to which Incentive Stock Options may be issued under
Section 422 of the Code. If this Plan or any provision of this Plan shall be
held to be invalid or to fail to meet the requirements of Section 422 of the
Code or the regulations promulgated thereunder, such invalidity or failure shall
not affect the remaining parts of this Plan, but rather it shall be construed
and enforced as if the Plan or the affected provision thereof, as the case may
be, complied in all respects with the requirements of Section 422 of the Code.
18. AMENDMENT AND TERMINATION OF THE PLAN; MODIFICATION OF AWARDS
(a) The Board may at any time and from time to time suspend, terminate,
modify or amend the Plan, provided that any amendment that requires
stockholder approval under applicable law shall be contingent on such
approval. Except as provided in Section 7 or 12 hereof, no suspension,
termination, modification or amendment of the Plan may adversely affect any
Award previously granted unless the written consent of the Participant is
obtained.
(b) Modification of Awards. The Committee may modify an Award, provided
that no modification to such Award shall materially reduce the
participant's rights or materially increase the participant's obligations
as determined by the Committee.
19. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the
Plan to stockholders of the Company for approval shall be construed as creating
any limitations on the power or authority of the Board to adopt such other or
additional incentive or other compensation arrangements of whatever nature as
the Board may deem necessary or desirable or preclude or limit the continuation
of any other plan, practice or arrangement for the payment of compensation or
fringe benefits to employees generally, or to any class or group of employees,
which the Company or any Subsidiary now has lawfully put into effect, including,
without limitation, any retirement, pension, savings and stock purchase plan,
insurance, death and disability benefits and executive short-term incentive
plans.
20. NATURE OF PAYMENTS
(a) All Awards granted shall be in consideration of services performed
for the Company by the Participant, except for inducement Awards, which
shall be granted in consideration of a Participant's agreement to perform
services for the Company and are subject to revocation in the event that
such services are not performed.
40
(b) All Awards granted shall constitute a special incentive benefit to
the Participant and shall not be taken into account in computing the amount
of salary or compensation of the Participant for the purpose of determining
any benefits under any pension, retirement, profit-sharing, bonus, life
insurance or other benefit plan of the Company or under any agreement
between the Company and the Participant, unless such plan or agreement
specifically otherwise provides.
21. NONUNIFORM DETERMINATIONS
The Committee's determinations under this Plan need not be uniform and may
be made by it selectively among persons who receive, or are eligible to receive,
Awards (whether or not such persons are similarly situated). Without limiting
the generality of the foregoing, the Committee shall be entitled, among other
things, to make nonuniform and selective determinations which may, inter alia,
reflect the specific terms of individual employment agreements, and to enter
into nonuniform and selective Award Agreements, as to the persons to receive
Awards and the terms and conditions of Awards.
22. SECTION HEADINGS
The section headings contained herein are for the purpose of convenience
only and are not intended to define or limit the contents of said sections.
Adopted by the Board of Directors on __________, 2002.
41
Strength to Succeed
Connecting a World in Motion
Euronet Worldwide Annual Report 2001
Secure Financial Transactions Any Time, Any Place
42
To Our Shareholders
The year 2001 will be remembered as an exciting and pivotal year for Euronet
Worldwide.
In 2001, Euronet Worldwide surpassed many significant milestones, proving that a
company with 400 dedicated people can meet the challenges in today's
ever-changing business environment. The sacrifices and achievements made have
provided a foundation of strength and positioned us for continued growth.
Throughout 2001, Euronet Worldwide continued to focus on processing secure
electronic financial transactions via multiple touchpoints, such as ATMs, POS
devices and mobile phones. The number of transactions we process has increased
quarter-on-quarter through the last seven years. In 2001, we processed 68.42
million billable transactions, and our Processing Services division reported
revenues of $49.13 million,/1/ an increase of 33% over 2000 revenues.
This growth contributed to Euronet's $64.17 million/1/ consolidated revenues,
which represented a 22% increase over 2000 consolidated revenues of $52.74
million.
Hard work and persistence, combined with a clear strategy, culminated in solid
financial results. With an $11 million increase in consolidated revenue in 2001,
consolidated EBITDA/2/ improved by $17 million and operating results improved by
$19 million, respectively, compared to 2000./3/ We achieved these results
through rigorous expense control combined with the leverage of our growing
business, which sent large margins to the bottom line as we hit record
transaction numbers in 2001.
We also strengthened our balance sheet by achieving positive operating cash flow
and reducing bond debt by $39 million. Additionally, in January and February
2002, the sale of Dash, our U.S.-based ATM network, and a private placement of
common stock added approximately $20 million cash to our balance sheet.
We continue to build on our financial successes and solidify our leadership
position as a transaction processor. Euronet grows one new country, customer,
product, ATM and transaction at a time. We added many new bank and mobile
operator clients in 2001 and have entered 2002 with many opportunities.
Euronet expanded its core processing business through ATM outsourcing contracts
with clients such as BIG Bank GDANSKI and Multibank/BRE in Poland,
HypoVereinsbank/Bank Austria in the Czech Republic and Alldays convenience
stores in the U.K. Additionally, we successfully certified with the LINK
Interchange Network Limited, the national ATM network in the U.K. Euronet also
expanded with Debit Card program outsourcing opportunities with Deutsche Bank 24
and Inteligo Financial Services.
We strengthened our ties with mobile operators in 2001, primarily through
Euronet Electronic Recharge, which enables consumers to add prepaid airtime to
their mobile phones. Euronet has 12 contracted clients in seven countries,
including subsidiaries of Vodafone, Deutsche Telekom and Bell Atlantic.
Combined, these mobile operators cover a current prepaid subscriber base of 11.2
million. Considering that subscribers recharge their prepaid accounts an average
of once a month, that is a lot of potential transactions.
We thank you for your continued interest in and support of our growing company!
We are confident and excited about our business as we look forward to 2002 and
beyond.
43
We are building a powerful organization. By securing our sound competitive
position and creating a comprehensive product portfolio, Euronet has established
the strength to succeed.
Michael J. Brown
Chairman & CEO
Daniel R. Henry
President & COO
/1/The 2001 consolidated revenue amounts include a contract termination payment
of $1.1 million received in the fourth quarter of 2001.
/2/EBITDA is earnings before interest, taxes, depreciation, amortization, net
foreign exchange gain/(loss) and extraordinary items.
/3/Year 2000 EBITDA and operating loss amounts have been adjusted to exclude
non-recurring items of $10.8 million, consisting primarily of asset write-downs
of $12.0 million and a non-recurring gain of approximately $1.2 million, which
was recorded as a component of direct operating costs.
44
Strength in Euronet's Vision
A conversation with Euronet executives, Mike Brown and Dan Henry, on the
company's opportunities and challenges
How would you describe Euronet Worldwide's main business?
MB: Euronet Worldwide delivers convenient electronic payment solutions to
forward-thinking institutions around the world. We develop innovative products
and services to acquire and process personal financial transactions from ATMs,
POS devices, telephones, the Internet and mobile phones. Our comprehensive
outsourcing and software solutions help banks offer consumers greater freedom in
accessing their financial accounts. The more solutions that we develop and
install, the more transactions we process, the stronger we become. We are a
global company, supporting more than 200 clients in 60 countries with the only
independent ATM network spanning multiple European countries. Our sophisticated,
centralized operations center, based in Hungary, also provides ATM, POS and
other financial transaction processing services for our client throughout
Europe.
What were your greatest achievements in 2001?
DH: What a fantastic year 2001 was! Our greatest achievements centered on
improvements in the company's financial results. First, after seven consecutive
quarters of EBITDA improvements, we achieved a positive EBITDA in Q2 and have
continued accelerating in that area. We also posted a positive operating profit
in Q4 after increases over five consecutive quarters. Our balance sheet improved
dramatically due to reductions in debt. Ultimately, our stockholders rewarded us
for our efforts, and we saw a steady increase in share value. Our stock
appreciated 267% in 2001.
What were you most proud of in 2001?
DH: What gives me a tremendous sense of pride is how all Euronet associates rose
to the occasion in 2001. We made a conscious effort to reduce expenses last
year, including a workforce reduction in January, and we still managed to grow
the business with limited resources. It really shows the dedication and
determination of each Euronet associate. Continuing forward, we will carefully
choose where we allocate resources to get the biggest bang for the buck.
How has the recent economic slowdown affected your business?
MB: We were virtually untouched. Our business has been relatively recession
proof. Most people average 3.5 ATM transactions a month--people need convenient
ATM cash withdrawals through both good and bad times. Also people will continue
to recharge their mobile airtime and to make purchases with debit and credit
cards.
How will you continue to increase transactions, revenue and operating profit?
DH: We plan to continue to grow in all of these areas by generating more
transactions globally. We are currently in markets that have significant organic
growth, which will naturally increase transaction numbers. Additionally, we will
pursue three avenues to acquire new transactions.
First, we will push transactions through more touchpoints. Currently, most of
our transactions are generated through ATMs, but we have agreements with banks,
such as Raiffesenbank in Croatia, to outsource POS and merchant management
services. We expect POS devices and mobile devices to drive many additional
transactions.
45
Second, we are creating more types of value-added transactions, such as
Electronic Recharge and Bill Pay. These new transactions should be well received
in cash-based societies looking for electronic payment convenience.
Third, we will generate more transactions by entering new markets, such as
Egypt, which have great potential but don't require significant capital to
launch. We have proven our business model in all three of these areas.
What industry trend interests you the most?
MB: The biggest industry trend we see--I can't say this enough--is the movement
to outsourcing. Banks are now being held more accountable for profitable growth,
and they are forced to do more aggressive consumer marketing and fight off
strong competition. These factors cause banks to reevaluate the entire way they
do business--how they interact with customers, how they run their own P&L, how
they quickly generate more kinds of transactions and more kinds of products and
services. You can't do it all internally. You can't be a bank and the most
innovative player in every one of your submarkets. Outsourcing is a viable
alternative. Euronet is a low cost service provider, offering comprehensive
solutions.
Why are you considering growing your business in Asia and the Middle East?
DH: We see some of these markets really expanding in two or three years. Through
joint venture partnerships, we are developing these markets with little capital
investment and limited personnel. We can leverage our expertise and existing
infrastructure to gain significant market share with limited risk.
Describe the value of the software business to a transaction processor.
DH: Software completes our product offerings. It is a cornerstone for Euronet,
and in 2001, it accounted for 24% of sales. By developing the software that
drives our processing center, we can respond quickly to the needs of our
clients. The software expertise helps us maintain a strong, competitive edge
when creating new solutions. Also, our software clients often become full
outsourcing clients or form a hybrid software and outsourcing relationship with
Euronet.
What indicators should be used to measure your success going forward?
MB: As we look forward into the next year, watch the number of ATMs we add to
our network and how many outsourcing contracts we sign. With the latest
outsourcing trends, we think we can grab a good share of several markets. Also,
pay attention to how many mobile operators we add to the customer base. These
touchpoints will create opportunities to acquire and process more and more
transactions, as consumers transition to electronic payments.
What is your outlook for Euronet Worldwide?
MB: We are excited about our future. More deals are available than ever before.
We are managing resources and growing carefully. I think the acceleration
through 2001 has generated momentum. We have attained this momentum through
seven years' experience in many difficult markets. We have cash on our balance
sheet and Q-on-Q improvements in positive EBITDA and revenues. I think that we
have proven that we have the strength to succeed.
46
Euronet At-A-Glance
Our Solutions
Processing Services
Description
Euronet's Processing Services division provides complete management and
outsourcing solutions for distribution channels and transaction processing. This
includes ATM networks, POS networks and card management services as well as
access to major payment gateways and mobile operators.
Offerings
.. ATM, POS and card outsourcing services
.. Owner and operator of Europe's largest independent ATM network
.. Euronet transaction network - Europe
.. Cakra transaction network - Asia Pacific
.. Cashnet transaction network - Middle East
Target Markets
.. Banks
.. Credit unions
.. Independent ATM owners
.. Mobile operators
.. Payment associations
.. Retailers and merchants
Clients
.. ABN AMRO (CZE)
.. Bankgesellschaft/Inteligo (POL)
.. BIG Bank GDANSKI S.A.(POL)
.. BNP/Lukas Bank (POL)
.. Ceska Sporitelna a.s. (CZE)
.. Citibank (GRC, HUN,POL, CZE, EGY)
.. Credigen (HUN)
.. Deutsche Bank (HUN,POL)
.. Erste Bank (HUN)
.. GE/Budapest Bank (HUN)
.. HSBC (IDN)
.. ING/DiBa (DEU)
.. Posta Bank (HUN)
.. Raiffeisenbank (HRV, HUN, ROM)
Our Solutions
Mobile Operator Solutions
Descriptions
With mobile phone ownership at an all-time high, Euronet's mobile operator
solutions provide mobile customers easy access to payment options. Our
transaction expertise helps mobile operators supply consumers with the
convenience of any time, any place transactions.
Offerings
.. Mobile banking
.. Electronic recharge for prepaid airtime
.. Mobile bill payment
Target Markets
.. Mobile operators
.. Third-party prepaid suppliers for mobile operators
47
.. Banks
Clients
.. Centertel (POL)
.. Eurotel (CZE)
.. Pannon GSM (HUN)
.. Polkomtel (POL)
.. Polska Telefonia Cyfrowa (POL)
.. Satelindo (IDN)
.. VIP-Net (HRV)
.. Vodafone Egypt (EGY)
.. Westel (HUN)
.. Zalto (NRW)
Our Solutions
M- and E-Commerce Solutions
Descriptions
Consumers are expecting more personalized service than ever before,
including instant access to financial account information. Euronet's Account
Access and Event Messaging products meet these demands with secure, efficient,
integrated transaction and information delivery functions via mobile devices and
the Internet.
Offerings
.. Account access
.. Event messaging services
.. Internet banking
.. Electronic bill presentment and payment (EBPP)
Target Markets
.. Banks
.. Credit unions
.. Credit card issuers
.. Investment community
.. Brokerages
.. Retailers and merchants
.. Mobile operators
Clients
.. Banco de Oro, Unibank (PHL)
.. Banco Mercantil (DOM)
.. Bank of Cyprus (GRC, GBR)
.. First Federal Savings Bank of LaCrosse (USA)
.. National Bank of Kuwait-Lebanon (LKA)
.. Maduro and Curiel's Bank N.V. (CUR)
Our Solutions
EFT and Payments Software
Descriptions
Euronet's suite of EFT and payment software offers one of the most secure,
seamlessly integrated, real-time electronic payment solutions for financial
institutions. Our product integrations enable customers to deliver
up-to-the-minute, consistent information across multiple touchpoints, such as
ATMs, POS terminals, IVR systems, the Internet and mobile devices.
Offerings
.. ATM management
.. POS and merchant management
.. Credit card solutions
48
.. Debit card solutions
.. EMV support
.. Switching and settlement applications
.. Telephone banking
.. EBPP
Target Markets
.. Banks
.. Credit unions
.. EFT network
.. Independent ATM owners
.. Resellers
.. Retailers and merchants
Clients
.. ABC Professional Services A.E. (GRC)
.. ABN AMRO (GRC)
.. ALLTEL Information Services (USA)
.. Arab International Bank (EGY)
.. Arab African International Bank (ARE)
.. Banca Comerciala Romania SA (ROM)
.. Banco Comercial Portugues (MOZ)
.. Cayman National Bank (CYM)
.. Century Bank (ZWE)
.. Commercial Bank of Ceylon (LKA)
.. Dubrovacka Banka (HRV)
.. Egyptian American Bank (EGY)
.. Republic Bank (TTO)
.. Seylan Bank (LKA)
.. VIFI Card Services (USA)
.. Westpac Banking Corp (FJI, PNG)
Our Solutions
Professional Services
Descriptions
Euronet Worldwide is uniquely qualified to offer professional
consulting services because of our day-to-day experience in the transactions
business. Euronet's Professional Services Organization (PSO) supports
institutions with EDGE, our proprietary, structured, phased methodology for
implementing solutions.
Offerings
.. Design
.. Gap analysis
.. Implementation
.. Management
.. Planning
.. Purchasing
Target Markets
.. Banks
.. Credit unions
.. Independent ATM owners
.. Retailers
Clients
.. CIBC Barbados (BRB)
.. Fortis Bank (POL)
49
.. ING Bank Slaski (POL)
.. Nova Bank (GRC)
.. Splitska Banka (HRV)
.. Union Bank Ltd. (PAK)
.. Union Banka (CZE)
50
We add new responsibilities and balance existing demands with strength and
endurance.
Euronet is continually innovating new transaction types and electronic
capabilities, creating new payment options for an increasing array of customer
touchpoints.
Strength in Ever-Increasing Transactions
New, electronic financial solutions and additional transaction venues provide
access and expediency to an expanding consumer base.
In today's world of gadgets, electronics and technology, consumers can pay
bills, transfer funds and access their accounts with the press of a button. It
all seems so simple. But behind that seemingly simple activity thrives an entire
industry for processing transactions.
Euronet Worldwide's core business is securely processing electronic financial
transactions. As each transaction routes through the Euronet Operations Center,
we generate revenue. Every transaction counts.
Electronic transactions and financial convenience are becoming a way of life and
are transforming cash-based societies. Euronet is continually innovating new
transaction types and electronic capabilities for this burgeoning industry.
Transactions from more touchpoints
Access is key. With a population on the move now more than ever, consumers need
the ability to access their financial accounts and perform transactions from a
host of device types. New devices mean more transaction opportunities.
Today, financial institutions are faced with the tough realities of mergers,
costly customer service and stiff competition vying for fickle customers.
Differentiating themselves through consumer convenience is paramount to their
success. With Euronet's expanded suite of touchpoints, consumers can interact
with their financial institutions like never before.
The fastest growing touchpoint is the mobile telephone. The Yankee Group
forecasts that the number of Internet-accessible wireless devices around the
world will grow to 1.25 billion by 2003. Forward-thinking companies are adding
mobile access now, showing their willingness to expand interaction between them
and their customers.
Arab Bank, the largest bank in the Middle East region with locations in more
than 27 countries, was one of the first financial institutions to offer mobile
banking in Egypt. "The Mobile Banking distribution channel enhances our existing
electronic touchpoints and helps differentiate us from our competitors," said
Mr. Atef Sono, Arab Bank-Egypt Vice President, Management & Information System
Manager.
The multiplicity of electronic channels is the key to Euronet's goal--any time,
any place financial access--and it has proven to be a cost effective way for
banks to provide services.
More types of transactions
Transactions generate revenue, and at Euronet, we are constantly devising new
types of transactions. Banks view Euronet as a payments innovator. Euronet's
Electronic Bill Presentment and Payment (EBPP) product line enables banking
customers to make payments to merchants, utilities or individuals from ATMs, POS
devices, the Internet, the telephone or mobile devices. Mobile operators and
banks have endorsed Electronic Recharge, a version of bill payment that enables
their customers to electronically add prepaid airtime to their mobile phones.
51
Ceska Sporitelna a.s., the largest bank in the Czech Republic, saw the vast
volume potential for the recharge transaction type. "We chose Euronet's ATM
Recharge because the transaction servicing creates a new revenue stream for us,
without requiring any capital investment," said Marie Hesnaurova, Director of
Business Department of Ceska Sporitelna a.s. "Our cardholders will enjoy the
convenience with which they can increase their prepaid phone minutes, and our
company will benefit from providing additional customer services."
Transactions from new markets
Euronet's mission--To bring electronic financial payment convenience to millions
of people who have not had it before--leads Euronet into emerging markets,
bringing the potential of millions of untapped electronic transactions. Euronet
enables banks and mobile operators in these markets to quickly and easily
introduce electronic payments to their customers.
As Euronet Worldwide expands into new territories, financial institutions can
leverage Euronet's success with multiple languages, currencies and devices.
Providing convenience leads to repetitive use of the touchpoint, which in turn
leads to recurring transaction income for the institution and for Euronet.
BIG Bank GDANSKI S.A.
Additional Transactions Garner Customer Loyalty and Praise
BIG Bank GDANSKI S.A. (BBG) heard its customers' demands for convenience, so the
Polish bank expanded its transaction set to include Electronic Bill Payment and
Electronic Recharge opportunities with Euronet Worldwide. The bank's 927,000
convenience-minded customers enjoy the speed and practicality associated with
automated banking, and their electronic transaction volume shows it.
"Around 50% of our customers' transactions are performed through
alternative/automatic distribution channels," said Pedro Ribeiro, BIG Bank
GDANSKI Vice-President of the Board. "Thanks to Euronet we can enhance customer
convenience and benefit from an expanded transaction set and quick-to-market
solutions."
Euronet's innovative transactions helped BBG gain recognition. In December 2000,
BBG was recognized in a Polish survey published by Rzeczpospolita as one of the
best and most available ATM networks, offering one of the most expanded
transaction sets.
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Taking a disciplined approach, we maintain our focus and the agility to extend
our reach into new terrain.
Euronet systematically seeks out markets around the world with strong growth
potential where we can quickly gain a substantial and sustainable market share.
Strength in Geographic Market Selection
Euronet seeks out developing trends and untapped potential as we deliver secure
financial payment solutions in emerging markets and identify opportunities in
established markets.
"Location! Location! Location!" Selecting and entering the right geographic
markets--at the right time, with the right product--are essential to business
expansion, and Euronet has strategically implemented these practices since the
company was founded. We seek out markets with strong growth potential where we
can gain a substantial and sustainable market share.
Through deliberate market evaluation, we identify opportunities to bridge the
payment gap in emerging cash-based economies, to establish joint ventures with
industry partners and to capitalize on evolving payment opportunities in
established markets.
Entering emerging markets
Most of the world still predominantly relies on cash. Yet for many developing
and transitional economies in Central and Eastern Europe, the Middle East,
Africa, Asia-Pacific, Latin America and the Caribbean, the use of secure
electronic transactions is gaining momentum, as consumers discover alternative
methods to pay bills quickly and conveniently.
When entering any new market, Euronet identifies opportunities where the capital
investment required is low and the potential demand for electronic payments is
high. In Egypt, for example, Euronet is working with several banks to employ
Electronic Funds Transfer (EFT) services and attract customer traffic, accounts
and transactions.
"With 65 million people, Egypt holds great potential for EFT products," said
John Romney, Euronet Worldwide Vice President and Southern Europe/Middle East
Regional Manager. "Similar to Poland in the mid-1990s, Egypt is virtually
undeveloped in terms of the number of ATMs deployed and cards issued. But Egypt
is on the verge of significant growth as banks prepare to issue millions of
debit cards and as the Egyptian government plans to automate salary payments for
approximately 6 million civil servants through direct deposit and debit/salary
cards. Through our combination of software and service offerings, Euronet is
uniquely positioned to help influence and benefit from the explosive growth in
the EFT business in Egypt over the next few years."
Expanding via joint ventures
As we evaluate markets ready to transition from cash to electronic transactions,
Euronet also looks for joint venture opportunities with industry partners
already established in those markets. By combining each company's respective
strengths and expertise, Euronet can address the market's individual needs.
Our joint venture with Hong Kong-based First Mobile Group enabled us to quickly
enter the Malaysian market and offer Mobile Bill Pay and Electronic Recharge
services as completely outsourced solutions to all of the country's mobile
operators. Similarly, our Indonesian joint venture with Sigma Cipta Caraka is
marketing mobile services to banks and mobile
53
operators in Indonesia. Satelindo was the first mobile operator in that region
to adopt Mobile Recharge.
Finding new opportunities in existing markets
Facing intense competition, retail banks and mobile operators in established
markets such as the U.K., Germany, France, and the U.S. are challenged to create
new, sustainable revenue streams. Each of these institutions must quickly and
successfully adopt profitable new products and technologies to retain its
demanding client base. Euronet is poised to help them reach their goals.
The U.K., a market whose citizens are highly dependent on cards yet where few
retail ATMs exist outside bank branches, presents an exciting opportunity for
Euronet. Certification from the national ATM network, LINK, enables us to
provide more ATM installations and outsourcing services, while rapidly expanding
our own ATM network across the country.
Likewise, prepaid mobile airtime represents the fastest growing market segment
for mobile operators in Europe, the U.S. and other locations. "As more mobile
operators and banks embrace our value-added payment solutions, Euronet's secure
financial technology reaches into promising new sectors within established
markets," said Dan Henry, Euronet Worldwide President and Chief Operating
Officer. "These innovative products clearly demonstrate our commitment to
helping these businesses connect their customers with additional payment
opportunities."
U.K. Post Offices
Providing ATM Convenience in an Established Market
What's an ideal way to tap new transaction potential in a mature market? Make it
possible for consumers to withdraw cash from a convenient location. The U.K.
Post Office will soon feature Euronet ATMs at local branches across the country.
The U.K. Post Office, with 18,000 branches, serves more than 28 million
customers every week.
"Euronet's low-cost solution will help us meet our strategic goals of providing
a new level of customer service," said Peter Davies, ATM Client Manager, Post
Office Ltd. "This arrangement with Euronet will enable us to provide ATM
services across the United Kingdom, including in many small and rural areas,
where there is often no traditional access to banking."
Euronet already operates full-service ATMs in 65 Post Office branches and will
add ATMs at approximately 100 locations, with plans to expand this program to
more branches in the future.
54
Moving swiftly in unison, we generate the speed, timing and momentum to sustain
our competitive edge.
Along with our core expertise in secure financial transactions, Euronet is
committed to a dynamic mix of products and services that help customers adapt to
changing markets.
Strength in Diverse Product Offerings
Innovative payment options help Euronet's customers compete successfully in an
industry continually reshaped by changing technologies and consumer dynamics.
Euronet has created a dynamic mix of products and services that generate
transactions and revenues. With our expertise in facilitating secure financial
transactions, we provide end-to-end solutions through network operations,
software development, consulting services and outsourcing, all of which help
customers adapt quickly to changing market forces and generate new revenue
virtually immediately.
Comprehensive processing services
More and more financial institutions are realizing the value of combining the
use of Euronet's ATM network with outsourcing of their own ATMs. By basing these
solutions on Euronet's core software, Euronet delivers innovative services that
can help improve customer return on investment (ROI) and quickly increase
efficiencies to meet tomorrow's transaction needs.
Euronet has the largest independently owned ATM network in Europe. Since 1995,
we have installed 1,669 Euronet-branded ATMs in the most coveted, high-traffic
retail locations across nine countries where many consumers perform over three
transactions each month. This extensive network continuously generates
transaction and advertising revenues.
Financial institutions often look for additional distribution points where their
cardholders can access their accounts. With a Euronet network participation
agreement, banks can use Euronet's vast ATM network and instantly expand their
customer reach. Through Euronet's network, consumers can benefit from acceptance
of the widest range of cards, network reliability and an expanded transaction
set including bill payment and recharge services.
Euronet recently teamed with Poland's Inteligo Financial Services S.A., a newly
formed Internet bank backed by Bankgesellschaft Berlin (Polska) S.A., for ATM
network participation in conjunction with a debit card program. "Euronet has
helped us to build the infrastructure required to support our card operations in
a very short period of time," said Grzegorz Dlugosz, Retail Banking Operations
Director for Bankgesellschaft Berlin (Polska) S.A. "Now, we are able to offer
our clients access to a more extensive set of financial transactions on
Euronet's ATM network in Poland."
55
With experience managing secure electronic transactions, Euronet also offers
comprehensive outsourcing programs that enable financial institutions to focus
on their core business of banking. Euronet's clients outsource their electronic
transaction services, including debit and credit card programs, ATM and POS
networks, and mobile banking services.
These programs generate increased revenue and provide a competitive advantage,
while giving their customers greater access to high-performance products.
Outsourcing simplifies implementation and system administration, improves
time-to-market and lowers the cost of entry and the total cost of ownership.
Poland's Deutsche Bank 24 S.A. recently signed a multiyear ATM outsourcing
agreement, which supplements its current ATM program with value-added Bill
Payment and ATM Recharge services. "Our customers want integrated solutions and
freedom of choice in their banking as well as access to branch-based, mobile and
online services," said Dr. Friedhelm Herb, President of the Board and CEO at
Deutsche Bank 24 S.A.
Integrated software solutions
Euronet's Software division relies on 27 years of experience developing and
producing financial transaction software products that meet the evolving needs
of banks around the world. Banks need to balance investment in new secure
payment schemes with enhancements to existing systems, while laying the
groundwork to meet customers' future needs.
Euronet's comprehensive software suite helps financial institutions to
seamlessly integrate ATM networks, POS and merchant systems, debit and credit
card management, Internet and telephone banking, bill payment, mobile banking
and event messaging. Euronet's core technology, Integrated Transaction
Management(R) (ITM), enables banks to deliver a range of highly specialized
applications through a central, interactive gateway. This advanced, scalable
middleware offers speed to market and requires a low capital investment to
provide flexibility for banks to expand their service offerings into additional
customer delivery channels.
Westpac Pacific Banking has implemented Euronet's entire software suite,
allowing customers in Fiji and Papua New Guinea to bank via ATMs, POS terminals,
telephone and soon via the Internet. By taking advantage of these integrated
software solutions, Westpac ensures the consistency of transaction and
payment/balance information across widely diverse electronic touchpoints. "As we
grow and expand our banking services, this approach helps us to streamline data
entry with a single source, reduce software training costs and improve the
overall quality of our customer service," said Peter Mills, Westpac's Head of
Technology Distribution & Operations for the Pacific.
Raiffensenbank Austria d.d.
Croatian Bank Integrates Software and Outsourcing Solutions
Following the successful launch of new debit and credit card services for
customers, Raiffeisenbank Austria d.d. of Croatia planned to enhance its
corporate banking program with POS services for merchants, retailers and other
corporate clients.
The bank chose to expand on its current ATM outsourcing program already
established with Euronet. By combining Euronet's POS (point-of-sale) outsourcing
services and Integrated Merchant Management software, Raiffeisenbank was able to
leverage the Euronet systems already installed at the bank and significantly
reduce the time and costs associated with implementing these comprehensive
programs.
"This outsourcing project is enabling Raiffeisenbank to meet the needs of our
corporate
56
clients and the ever-increasing card market," said Zdenko Adrovic,
Raiffeisenbank President of the Management Board. "Based on our experiences with
Euronet, I am confident that this project will be quickly and smoothly
integrated with our ATM and Visa/Europay outsourcing programs."
57
Applying our energy and experience, we rely on speed and flexibility to maximize
every new opportunity.
As a premier provider of EFT solutions, Euronet is now successfully helping
banks and mobile operators meet the evolving demand for new electronic payment
options.
Strength in Vertical Market Focus
Euronet's electronic financial solutions target financial institutions and
mobile operators, enabling payment ease in multiple markets.
Secure electronic payments are in demand. Institutions want to offer the latest
conveniences using cost-effective and quick-to-market payment products and
services. Euronet Worldwide provides those comprehensive transaction solutions
for financial institutions and mobile operators.
Electronic transactions provide the key to customer satisfaction in the
competitive banking industry where churn is high. With decades of developing EFT
(Electronic Funds Transfer) software, Euronet stands as the premier provider of
AS/400- based EFT solutions from card-based services to the latest in e- and
m-commerce applications. Euronet offers integrated transactions from several
touchpoints tailored to banks' evolving requirements.
Electronic payments also add convenience for consumers outside the financial
arena. International Data Corp. predicts that in the next two years the
electronic bill pay (EBP) industry will be worth $1 billion worldwide, and
Euronet is positioned to dominate this booming market by generating transactions
and revenue.
Euronet offers a comprehensive line of payment options, including Electronic
Recharge services for increasing prepaid mobile airtime and Electronic Bill Pay
and Presentment for any postpaid bill, such as utility bills. Our unique
combination of transaction types and touchpoint venues enables consumers to
initiate payments from the convenience of the ATM, POS device, the Internet and
the ever-present mobile phone.
In the two years since Euronet launched Electronic Recharge, we have signed 12
mobile operators in seven countries, covering more than 23 million subscribers,
including 11.2 million prepaid airtime users. With this product, consumers enjoy
convenient payment options, while mobile operators save on costly distribution
practices, eliminating the paperbased logistics associated with the production,
delivery, and inventory management of scratch cards previously used for
recharge.
Zalto Communications AS, Norway's second largest mobile service provider,
recently implemented Euronet Mobile Recharge, enabling airtime purchases
directly from the mobile phone. "Euronet's Mobile Recharge solution is an
essential component of our competitive strategy that will significantly decrease
the cost of selling prepaid airtime," said Morten Krarup Hansen, CEO of Zalto
Communications AS. "We chose Euronet to launch us into the sphere of m-commerce
because they have the skills, knowledge and experience to deliver and support
the financial products necessary to secure our position as a market leader."
58
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. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein.
Consolidated Statements of Operations Data:
Year Ended December 31,
2001 2000 1999 1998 1997
(in thousands, except for share and per share data)
Revenues:
ATM network and related revenue $ 49,129 $ 36,913 $ 26,503 $ 11,525 $ 5,290.
Software and related revenue 15,042 15,827 14,969 356 --.
Total 64,171 52,740 41,472 11,881 5,290
Operating expenses:
Direct operating costs 28,101 24,988 22,830 10,036 3,717.
Salaries and benefits 24,874 29,265 24,350 9,723 3,796.
Selling, general and administrative 8,051 11,531 10,725 8,650 4,468.
Depreciation and amortization 9,112 10,384 10,238 4,955 1,731.
In-process research and development write-off -- -- -- 1,020 --
Asset write-down -- 11,968 -- -- --
Share compensation expense -- -- 127 108 108.
Total operating expenses 70,138 88,136 68,270 34,492 13,820.
Operating loss (5,967) (35,396) (26,798) (22,611) (8,530)
Other income/expenses:
Interest income 282 1,089 1,950 2,514 1,609.
Interest expense (9,471) (10,829) (10,899) (7,826) (1,152)
Foreign exchange gain/(loss), net 5,300 (3,227) (2,110) (1,911) 8
Loss before income tax benefit/(expense) (9,856) (48,363) (37,857) (29,834) (8,065)
Income tax benefit/(expense) 2,030 (1,188) 4,746 (1,430) 100.
Loss before extraordinary item (7,826) (49,551) (33,111) (31,264) (7,965)
Extraordinary gain, net 8,496 -- 2,196 2,889 --
Net income/(loss) $ 670 $ (49,551) $ (30,915) $ (28,375) $ (7,965)
Income (loss) per share - basic and diluted:
Loss before extraordinary item $ (0.40) $ (3.00) $ (2.17) $ (2.06) $ (0.64)
Extraordinary gain $ 0.43 $ -- $ 0.14 $ 0.19 --
Net income/(loss) $ 0.03 $ (3.00) $ (2.03) $ (1.87) $ (0.64)
Weighted average number of shares
outstanding 19,719,253 16,499,699 15,252,030 15,180,651 12,380,962
59
Consolidated Balance Sheet Data:
As of December 31,
2001 2000 1999 1998 1997
(in thousands, except for share and per share data)
Cash and cash equivalents $ 8,818 $ 7,151 $ 15,037 $ 55,614 $ 7,516
Restricted cash 1,877 2,103 10,929 12,972 847
Investment securities -- -- 750 3,149 31,944
Trade accounts receivable, net 9,292 9,485 7,888 5,681 647
Other current assets 6,130 4,459 4,928 4,614 1,857
Total current assets 26,117 23,198 39,532 82,030 42,811
Net property, plant and equipment 29,551 31,657 36,693 33,182 24,088
Intangible assets, net 1,975 2,604 16,259 12,464 --
Other long-term assets 3,748 3,431 4,360 5,762 3,134
Total assets $ 61,391 $ 60,890 $ 96,844 $ 133,438 $ 70,033
Current liabilities $ 23,289 $ 20,466 $ 26,938 $ 18,739 $ 9,315
Obligations under capital leases,
excluding current installments 7,643 8,034 6,397 6,809 11,330
Notes payable 38,146 77,191 72,800 83,720 --
Other long-term liabilities -- -- 202 -- 169
Total liabilities 69,078 105,691 106,337 109,268 20,814
Total stockholders' (deficit)/equity (7,687) (44,801) (9,493) 24,170 49,219
$ 61,391 $ 60,890 $ 96,844 $ 133,438 $ 70,033
Summary Network Data:
Number of operational ATMs at end of period 2,999 2,634 2,283 1,271 693
ATM transactions during the period 68,388,780 52,663,000 32,938,000 15,467,000 5,758,000
60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
--------------
General Overview
We are 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 operate an independent automated teller machine, ATM,
network of approximately 3,000 ATMs in Europe and, until January 2002, the
United States. Through our software subsidiary, Euronet USA Inc. (formerly,
Arkansas Systems, Inc.), we offer a suite of integrated software solutions for
electronic payment and transaction delivery systems. We offer comprehensive
electronic payment solutions consisting of ATM network participation, outsourced
ATM management solutions and software solutions. Our principal customers are
banks and other companies such as retail outlets that require transaction
processing services. With 13 offices worldwide, we offer our solutions in more
than 60 countries around the world.
We and our subsidiaries operate in two business segments: (1) a segment
providing secure processing of financial transactions (the "Processing Services
Segment"); and (2) a segment producing application software for the processing
of secure electronic financial transactions (the "Software Solutions Segment").
In addition, our management divides the Processing Services Segment into three
sub-segments: "Central European Sub-segment" (including Hungary, Poland, the
Czech Republic, Croatia, Greece and Romania), "Western European Sub-segment"
61
(including Germany, France and the United Kingdom) and "Other Processing
Services Sub-segment" (including the United States and unallocated processing
center costs). These business segments, and their sub-segments, are supported by
a corporate service segment, which provides corporate and other administrative
services that are not directly identifiable with the two business segments (the
"Corporate Services Segment"). We evaluate performance based on profit or loss
from operations before income taxes not including nonrecurring gains and losses.
We have restated prior period segment information to conform to the current
period's presentation (see Note 20 to the Consolidated Financial
Statements--Business segment information).
Critical Accounting Policies
Our critical accounting policies are as follows:
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 agreement contracts representing newly released products
deemed to have a higher than normal risk of failure during installation are
recognized on a completed contract basis whereby revenues and related costs are
deferred until the contract is complete. Maintenance revenue is recognized over
the contractual period or as services are performed. Revenue in excess of
billings on software license agreements contracts is recorded as unbilled
receivables and is included in current assets. Billings in excess of revenue on
software license agreements contracts are recorded as deferred revenue and is
included in current liabilities until such time the above revenue recognition
criteria are met.
Capitalization of Software Development Costs
We apply SFAS 2 and 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 to the Consolidated Financial
Statements--Research and Development). 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
that are necessary to establish that the product can be produced to meet its
design specifications including functions, features, and technical performance
requirements. Technological feasibility is evidenced by the existence of a
working model of the product or by completion of a detail program design. The
detail program design 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 individual entity's ability to generate
sufficient taxable income within an appropriate period.
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 not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. 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 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 allowances at December 31, 2001.
62
In the current year, profitability has improved in certain countries in
which we operate. When a sufficient history of taxable income has been
established in these countries, deferred tax assets increasingly will be
considered realizable, and the existing valuation allowances will be reduced.
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.
Comparison of Operating Results for the Years Ended December 31, 2001, 2000 and
1999 -- Overview
Our total revenues increased by $11.5 million or 22% to $64.2 million
for 2001 from $52.7 million for 2000. Such revenues increased by $11.2 million
or 27% to $52.7 million for 2000 from $41.5 million for 1999. The increase in
revenues from 2000 to 2001 was primarily due to two factors: (1) a $12.3 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 by a decrease of $0.8 million
in Software Solutions Segment revenues. The increase in revenues from 1999 to
2000 was primarily due to two factors: (1) a $10.4 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) an increase of $0.8 million in Software Solutions
Segment revenues. Revenues for 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 contracts that were 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.
Total operating expenses decreased by $18.0 million or 20% to $70.1
million for 2001 from $88.1 million for 2000. Such expenses increased by $19.8
million or 30% to $88.1 million for 2000 from $68.3 million for 1999. The
decrease from 2000 to 2001 can be broken down by segment as follows: (1) a $3.7
million increase in Processing Services Segment operating costs due to growth in
the size of the network operations; (2) a $20.4 million decrease in the Software
Services Segment due to 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. The increase from 1999 to 2000 can be broken
down by segment as follows: (1) a $3.5 million increase in Processing Services
Segment operating costs due to growth in the size of the network operations; (2)
a $15.2 million increase in Software Services Segment due to the write down of
certain intangible assets of $11.2 million and investment in personnel and
resources; and (3) a $1.1 million increase in Corporate Services Segment
operating costs due to the expanded operations. Operating expenses for 2001,
2000 and 1999 are discussed more fully in the Segment Results of Operations
sections below.
We generated operating losses of $6.0 million for 2001 compared to
operating losses of $35.4 million for 2000 and $26.8 million for 1999. The
change from 2000 to 2001 was due to the net effect of three factors: (1) an $8.5
million improvement in the operating results which has generated an operating
income in 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. The
increased operating loss from 1999 to 2000 was due to the net effect of three
factors: (1) a $6.8 million decrease in the operating loss from our Processing
Services Segment; (2) a $14.3 million increase in the operating loss from our
Software Solutions Segment; and (3) a $1.1 million increase in the operating
loss from our Corporate Services Segment. The results of
63
segment operations expenses for 2001, 2000 and 1999 are discussed more fully in
the Segment Results of Operations section below.
Segment Results of Operations for the Years Ended December 31, 2001, 2000 and
1999
(In thousands) Revenues Operating Income/(Loss)
----------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999 2001 2000 1999
------------ ------------ ------------ ------------ ----------- ------------
Processing Services
Central Europe $ 25,236 $ 18,599 $ 12,664 $ 1,612 $ (3,070) $ (8,019)
Western Europe 21,595 16,615 12,637 1,490 (2,286) (3,840)
Other 2,298 1,700 1,202 (673) (709) (1,048)
-------- -------- -------- -------- -------- --------
Total Processing Services 49,129 36,914 26,503 2,429 (6,065) (12,907)
Software Solutions 15,222 16,006 15,149 (1,875) (21,469) (7,141)
Corporate Services - - - (6,521) (7,862) (6,750)
Inter segment eliminations (180) (180) (180) - - -
-------- -------- -------- -------- -------- --------
Total $ 64,171 $ 52,740 $ 41,472 $ (5,967) $(35,396) $(26,798)
======== ======== ======== ======== ======== ========
Comparison of Operating Results for the Years Ended December 31, 2001, 2000 and
1999 -- By Business Segment
Processing Services Segment
Processing Services Revenues
Total segment revenues increased by $12.2 million or 33% to $49.1
million for 2001 from $36.9 million for 2000. Total segment revenues increased
by $10.4 million or 39% to $36.9 million for 2000 from $26.5 million for 1999.
The increase in revenues in 2001 and 2000 was 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 2,283 ATMs installed as of December 31, 1999 and
2,634 ATMs installed as of December 31, 2000. We processed 32.9 million
transactions in 1999, and processed 52.7 million transactions in 2000. In the
year 2001, our owned and operated ATM network increased by 365 ATMs, or 14%,
over 2000 to a total of 2,999 ATMs, of which 70% are owned by us and 30% are
owned by banks or other financial institutions but operated by us through
management agreements. We processed 68.4 million transactions for 2001, an
increase of 15.7 million transactions, or 30%, over 2000.
Revenues for the Central European Sub-segment increased by $6.6 million
or 35% to $25.2 million for 2001 from $18.6 million for 2000. Revenues for this
sub-segment increased by $5.9 million or 46% to $18.6 million for 2000 from
$12.7 million for 1999. The increase in revenues in 2001 and 2000 was largely
the result of an increase in the number of ATMs operated by us over this period.
We increased the number of ATMs that we operated from 1,203 at December 31, 1999
to 1,391 at December 31, 2000 and 1,440 at December 31, 2001.
Revenues for the Western European Sub-segment increased by $5.0 million
or 30% to $21.6 million for 2001 from $16.6 million for 2000. Revenues for this
sub-segment increased by $4.0 million or 32% to $16.6 million for 2000 from
$12.6 million for 1999. The increase in revenues in 2001 and 2000 was largely
the result of an increase in the number of ATMs operated by us over this period.
We increased the number of ATMs that we operated from 621 at December 31, 1999
to 787 at December 31, 2000 and 1,009 at December 31, 2001. During this period
we also increased transaction volumes and increased transaction fees in certain
markets. Of the net 365 ATMs added to the network, 250 ATMs are located in the
United Kingdom. Our aggressive roll-out of ATMs in the United Kingdom during
2001 was based on the ability to charge a transaction fee directly to the person
using the ATMs in this market. The continuance of an aggressive roll-out of ATMs
in the United Kingdom is dependent on our ability to find additional sites for
ATMs that are capable of highly profitable transaction levels. Certain machines
that we have installed recently in the United Kingdom had transaction levels
that are lower that those of machines installed earlier. This is partially due
to the fact that transaction levels are lower at ATM machines at Post Office
sites and at sites at which cash is replenished by merchants. Although these
ATMs are profitable, they are generating returns that are lower than we
expected. We are examining a number of responses to this situation, including
using lower cost machines at these sites or reducing our roll-out of machines in
the United Kingdom. A decision to reduce our rate of roll-out of ATMs or the
continuing weakness of performance of certain ATMs could result in a decrease in
growth in our revenues and operating profits.
64
Revenues for the Other Processing Services Sub-segment increased by $0.6
million or 35% to $2.3 million for 2001 from $1.7 million for 2000. Revenues
from these operations increased by $0.5 million or 42% to $1.7 million for 2000
from $1.2 million for 1999. All revenues from this segment are generated by the
Dash network located in the United States. We sold the Dash network in January
2002 (see Note 29 to the Consolidated Financial Statements--Subsequent Events)
and therefore no revenues will be realized from that business for the year 2002.
As a result, we will no longer report on this Sub-segment.
Of total segment revenue, approximately 86% was attributable to ATMs owned
by us for the year 2001, 87% for 2000 and 94% for the year 1999. Of total
transactions processed, approximately 73% were attributable to ATMs owned by us
for the year 2001, 78% for 2000 and 76% for the year 1999. 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 that this trend is a positive development and will provide higher
marginal returns on investments.
The transaction fees that we charge vary for the three types of ATM
transactions that are currently processed on our ATMs: cash withdrawals; balance
inquiries; and transactions not completed because the relevant card issuer does
not give authorization. Transaction fees for cash withdrawals vary from market
to market but generally range from $0.60 to $2.15 per transaction. Transaction
fees for the other two types of transactions are generally substantially less.
Transaction fees payable under the electronic recharge solutions sold by us are
included in Processing Services Segment revenues and vary substantially from
market to market and based upon the specific prepaid solution and the
denomination of prepaid hours purchased. Generally the range of transaction fees
vary from $1.10 to $1.80 per prepaid mobile recharge purchase.
Operating Expenses
Total segment operating expenses increased by $3.7 million or 9% to $46.7
million for 2001 from $43.0 million for 2000. Such expenses increased by $3.6
million or 9% to $43.0 million for 2000 from $39.4 million for 1999. The
increases in 2001 and 2000 were due primarily to costs associated with the
growth in the numbers of ATMs and expansion of our operations during the
periods.
We recorded a $0.8 million write-down of certain ATM hardware assets
associated with the purchase of the Budapest Bank ATM network in May 2000 and
the Service Bank ATM network in March 1999 (see Note 10 to the Consolidated
Financial Statements--Asset Write Down). In addition, we recorded a one-time
gain in our Central European Sub-segment of $1.2 million in 2000. The gain was
related to a change in Hungarian law that eliminates a major portion of our
liability for import taxes on ATM hardware to the Hungarian government. The gain
was included as an element of direct operating costs.
The operating expenses for the Central European Sub-segment increased by
$1.9 million or 9% to $23.6 million for 2001 from $21.7 million for 2000. Such
expenses increased by $1.0 million or 5% to $21.7 million for 2000 from $20.7
million for 1999. The increase in operating expenses in 2001 and 2000 was
largely the result of an increase in the number of ATMs operated by us over this
period. We increased the number of ATMs that we operated from 1,203 at December
31, 1999 to 1,391 at December 31, 2000 and 1,440 at December 31, 2001.
The operating expenses for the Western European Sub-segment increased by
$1.2 million or 6% to $20.1 million for 2001 from $18.9 million for 2000. Such
expenses increased by $2.4 million or 15% to $18.9 million for 2000 from $16.5
million for 1999. The increase in operating expenses in 2001 and 2000 was
largely the result of an increase in the number of ATMs operated by us over this
period. We increased the number of ATMs that we operated from 621 at December
31, 1999 to 787 at December 31, 2000 and 1,009 at December 31, 2001.
The operating expenses for the Other Processing Services Sub-segment
increased by $0.6 million or 25% to $3.0 million for 2001 from $2.4 million for
2000. Such expenses increased by $0.2 million or 9% to $2.4 million for 2000
from $2.2 million for 1999. The operating expenses from this segment are
generated from the Dash network located in the United States and the unallocated
costs associated with our processing facilities. We sold the Dash network in
January 2002. (See Note 29 to the Consolidated Financial Statements - Subsequent
Events).
Direct operating costs in the Processing Services Segment consist primarily
of the following: ATM installation costs; ATM site rentals; and costs associated
with maintaining ATMs, ATM telecommunications, interest on network cash and cash
delivery and security services to ATMs. Such costs increased by $3.6 million or
15% to $28.0 million for 2001 from $24.4 million for 2000. Such costs increased
by $2.5 million or 11% to $24.4
65
million for 2000 from $21.9 million for 1999. The increase in direct operating
costs was primarily attributable to costs was associated with operating the
increased number of ATMs in the network during the periods. Also, intercompany
allocations were made to charge the ATM operations with transaction switching
and bank connection fees associated with the operations central processing
center in Budapest. These allocations totaled $4.8 million, $3.5 million and
$2.9 million for 2001, 2000 and 1999, respectively. Direct operating costs for
2000 include a one-time gain of $1.2 million due to a change in Hungarian law
that eliminates a major portion of our liability for import taxes on ATM
hardware. The components of direct operating costs for 2001, 2000 and 1999 were:
Year ending December 31,
------------------------------------------
2001 2000 1999
------------- ------------- ------------
(In thousands)
ATM communication $ 4,619 $ 4,183 $ 3,982
ATM cash filling and interest on network cash 7,511 7,426 5,900
ATM maintenance 4,259 3,987 2,967
ATM site rental 2,517 2,258 2,421
ATM installation 470 675 783
Transaction processing and ATM monitoring 7,091 5,242 4,205
Other 1,545 600 1,663
------------- ------------- ------------
Total direct operating expenses $ 28,012 $ 24,371 $ 21,921
============= ============= ============
As a percentage of network revenue, direct operating costs have continued
to fall. Such costs fell from 83% to 66% for 1999 and 2000, respectively, to 57%
for 2001. On a per ATM basis the direct operating costs fell from $12,872 per
ATM and $9,807 per ATM for 1999 and 2000, respectively, to $9,340 per ATM for
2001, an improvement of 5% over 2000. On a per transaction basis the direct
operating costs fell from $0.66 per transaction and $0.46 per transaction for
1999 and 2000 to $0.41 per transaction for 2001, an improvement of 11% over
2000.
Costs for segment salaries and benefits increased by $1.8 million or 24% to
$9.2 million for 2001 from $7.4 million for 2000. Such expenses increased by
$0.2 million or 3% to $7.4 million for 2000 from $7.2 million for 1999. The
increase in the year-on-year expenses reflect the continued expansion of the
operations to Western European markets with significantly higher labor costs
than Central Europe as well as some increases in staff levels at the processing
center required to maintain quality service in line with the rising transaction
volumes. As a percentage of Processing Services Segment revenue, salaries and
benefits fell from 27% and 20% for 1999 and 2000, respectively, to 19% for 2001.
Selling, general and administrative costs allocated to the Processing
Services Segment decreased $1.1 million or 46% to $1.3 million for 2001 from
$2.4 million for 2000. Such expenses decreased $0.5 million or 17% to $2.4
million for 2000 from $2.9 million for 1999. The cost decrease for the year 2001
resulted from the net effect of (1) a $1.3 million increase in the allocation of
costs from the selling, general and administrative line of the Budapest
processing center to the operating cost line, from $3.5 million for 2000 to $4.8
million for 2001 and (2) a $0.2 million increase in costs associated with the
expansion of our network operations. The $0.5 million cost decrease for 2000
resulted from the net effect of (1) a $0.6 million increase in the allocation of
costs from the selling, general and administrative line of the Budapest
processing center to the operating cost line, from $2.9 million for 1999 to $3.5
million for 2000 and (2) a $0.1 million increase in costs associated with the
expansion of our network operations.
Depreciation and amortization increased by $0.2 million or 3% to $8.2
million for 2001 from $8.0 million for 2000. Such expenses increased by $0.6
million or 8% to $8.0 million for 2000 from $7.4 million for 1999. The increases
were due primarily to the increase in the number of owned ATMs as discussed
previously. We recorded a $0.8 million write-down of certain ATM hardware assets
for the year ended December 31, 2000, as previously discussed.
Operating Profit/Loss
The total Processing Services Segment posted an operating profit of $2.4
million for 2001 as compared to operating losses of $6.1 million and $12.9
million for 2000 and 1999, respectively, as a result of the factors discussed
above. The Central European Sub-segment recorded an operating profit of $1.6
million for 2001 compared to operating losses of $3.1 million and $8.0 million
for 2000 and 1999, respectively, as a result of the
66
factors discussed above. The Western European Sub-segment had an operating
profit of $1.5 million for 2001 compared to operating losses of $2.3 million and
$3.8 million for 2000 and 1999, respectively, as a result of the factors
discussed above.
The Other Processing Services Sub-segment incurred an operating loss of
$0.7 million for 2000 and 2001, respectively, and an operating loss of $1.0
million for 1999, as a result of the factors discussed above.
Software Solutions Segment
Software Solutions Revenue
Revenues from the Software Solutions Segment decreased by $0.8 million or
5% to $15.2 million before inter-segment eliminations for the 2001 from $16.0
million for 2000. Revenues from this segment increased $0.9 million or 6% to
$16.0 million for 2000 from $15.1 million for the year ended December 31, 1999.
The decrease in revenues from 2000 to 2001 is due to the decrease in sales while
being partially offset by increased maintenance fees earned from sales in 2000
and prior. The increase in revenues from 1999 to 2000 is due to the increased
sales generated by an expanded sales force employed in 1999 and 2000. Software
revenues are grouped into four broad categories: software license fees,
professional service fees, maintenance fees and hardware sales. Software license
fees are the initial fees that we charged the licensing of our proprietary
application software to customers. Professional service fees are charged for
customization, installation and consulting services provided to customers.
Software maintenance fees are the ongoing fees charged to customers for the
maintenance of the software products. Hardware sales revenues are derived from
the sale of computer products and are reported net of cost of sales. The
components of software solutions revenue for 2001, 2000 and 1999 were:
Years ending December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- ------------
(in thousands)
Software license fees $ 3,030 $ 4,117 $ 2,430
Professional service fees 6,765 6,867 8,298
Maintenance fees 5,045 4,487 4,051
Hardware sales 382 535 370
------------- ------------- ------------
Total Software Revenue $ 15,222 $ 16,006 $ 15,149
============= ============= ============
The decrease in software license fees from 2000 to 2001 reflects a decrease
in sales and a change in the mix of contracts signed. In 2001, we signed an
increasing number of contracts that have a larger share of professional services
relative to the license fee. However, decreased overall sales in 2001 offset
some of the mix-related change decreased above. Overall, revenue decreased
slightly reflecting the decrease in sales although the recurring revenue stream
represented by maintenance fees increased. We intend to secure long-term revenue
streams through multi-year maintenance agreements with existing and new
customers. We believe that the revenues of the Software Solutions Segment will
increasingly be derived from our new set of software solutions, including our
wireless banking solutions. The increases in software license fees from 1999 to
2000 were primarily attributable to an increased number of software sales
contracts signed in 2000 as compared to 1999, primarily in the first half of
2000.
Professional service fees are generally realized in connection with the
sale and installation of software, although increasingly professional service
fees are being derived from contracts that do not necessarily have a software
license component.
Software Sales Backlog
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, 2001 the revenue backlog was $2.5
million, as compared to December 31, 2000 when the revenue backlog was $3.5
million and at December 31, 1999 when the revenue backlog was $3.1 million. The
decrease in backlog from December 31, 2000 results principally from the timing
of software sales. We intend to continue to focus on expediting delivery and
implementing of software in an effort to deliver existing backlogged sales,
while simultaneously replenishing the backlog through continuing product sales
growth. The increase in backlog from December 31, 1999 as compared to 2000
resulted principally from growth and timing of software sales.
67
There can be no assurance that the contracts included in backlog will
actually generate the specified revenues or that the revenues will be generated
within a one-year period.
Operating Expenses
Software Solutions Segment operating expenses consist primarily of salaries
and benefits, selling, general and administrative, and depreciation and
amortization. In 2000, we recorded a one-time write down of goodwill and other
identifiable intangible assets associated with our purchase of Euronet USA in
December 1998. As a result of our inability to achieve operating improvements,
including software license and service orders for Euronet USA's traditional core
product (ITM) and cost reductions, the Software Solutions Segment continued
operating at a loss through 2000. We calculated the expected cash flows of our
Software Solutions Segment, which identified an impairment of its long-lived
assets. Accordingly, in 2000, we recorded an impairment charge based on the
present value of expected cash flows of $11.2 million for the write-down of
goodwill and other identifiable intangible assets recorded upon the acquisition
of Euronet USA (see Note 10 to Consolidated Financial Statements--Asset Write
Down). Total segment operating expenses decreased by $20.4 million or 54% to
$17.1 million for 2001 from $37.5 million for 2000. Such expenses increased by
$15.2 million or 68% to $37.5 million for 2000 from $22.3 million for 1999. The
decrease from 2000 to 2001 is primarily the result of (1) the $11.2 million
one-time write down during 2000 discussed above, (2) a reduction in staffing in
the first quarter of 2001, and (3) general cost-reduction efforts in our general
operations. The increase from 1999 to 2000 is primarily the result of (1) the
$11.2 million one-time write down during 2000 discussed above, and (2) headcount
increases intended to increase sales, accelerate development of certain software
enhancements and reduce delivery times for software. The components of the
Software Solutions Segment operating costs for 2001, 2000 and 1999 were:
Year ending December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- ------------
(in thousands)
Direct operating costs $ 269 $ 800 $ 1,089
Salaries and benefits 12,329 18,004 13,953
Selling, general and administrative 3,754 5,266 4,565
Depreciation and amortization 744 2,215 2,683
Asset write down - 11,190 -
------------- ------------- ------------
Total operating expenses $ 17,096 $ 37,475 $ 22,290
============= ============= ============
These staff increases during 1999 and 2000 resulted in a significant
increase in salaries and benefits, which contributed to the net losses of the
Software Solutions Segment for 2000. During the first quarter of 2001 we reduced
our workforce significantly with the primary objective of reducing costs in the
Software Solutions Segment to bring the costs more in line with the anticipated
revenue. The financial impact of these reductions can be seen throughout the
results for 2001.
We have made an ongoing commitment to the development, maintenance and
enhancement of our products and services. As a result of this commitment we have
invested substantial amounts in research and development. In particular, we have
invested and will continue to invest in new software products that will serve as
the underlying application software that permits additional features and
transactions on our ATM network. In addition, we continue to invest in the
on-going development of products that were recently introduced to the market.
Our research and development costs incurred for computer products to be sold,
leased or otherwise marketed decreased $1.7 million or 25% to $5.0 million for
2001 from $6.7 million for 2000. Such costs increased $3.5 million or 109% to
$6.7 million for 2000 from $3.2 million for 1999. Of these total figures, $1.3
million, $1.0 million and $0.3 million were capitalized, during the years ended
December 31, 2001, 2000 and 1999 respectively, in accordance with our accounting
policy requiring the capitalization of development costs on a product by product
basis once technological feasibility is established. Technological feasibility
of computer software products is established when we have completed all
planning, designing, coding, and testing activities that are necessary to
establish that the product can be produced to meet its design specifications
including functions, features, and technical performance requirements.
68
Operating Loss
The Software Solutions Segment incurred an operating loss of $1.9 million
for 2001, $21.5 million for 2000 and $7.1 million for 1999, as a result of the
factors discussed above.
Corporate Services Segment
Operating Expenses
Operating expenses for the Corporate Services Segment decreased by $1.4
million or 18% to $6.5 million for 2001 from $7.9 million for 2000. Such costs
increased by $1.1 million or 16% to $7.9 million for 2000 from $6.8 million for
1999. The components of the Corporate Services Segment operating costs for 2001,
2000 and 1999 were:
Year ending December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- ------------
(in thousands)
Salaries and benefits $ 3,362 $ 3,813 $ 3,335
Selling, general and administrative 3,017 3,841 3,270
Depreciation and amortization 142 208 145
------------- ------------- ------------
Total direct operating expenses $ 6,521 $ 7,862 $ 6,750
============= ============= ============
The cost control measures that were implemented in 2001 are the primary
reasons for these decreased expenditures, including the workforce reductions
during the first quarter of 2001. In 2000 due to the expansion in the company's
network infrastructure there was an increase in corporate and administrative
capabilities. In January 2001 we began to reclassify certain salary and benefits
expense to the Processing Services Other Sub-segment to better reflect the
actual job responsibilities performed.
Non-operating Results
Interest Income
Interest income decreased to $0.3 million for 2001 from $1.1 million for
2000 and from $2.0 million for 1999. The decreases are the result of lower
average cash balances during 2001.
Interest Expense
Interest expense decreased to $9.5 million for 2001 from $10.8 million for
2000 and $10.9 million for 1999. The decrease from 2000 to 2001 was due to a
reduction in the notes payable as a result of significant debt/equity swaps
during 2001 and exchange rate differences as the majority of the debt is
denominated in Euro. The decrease from 1999 to 2000 was due to exchange rate
differences as the majority of the debt is denominated in Euro.
Foreign Exchange Gain/Loss
We had a net foreign exchange gain of $5.3 million for 2001, as compared to
exchange losses of $3.2 million for 2000 and $2.1 million for 1999. Exchange
gains and losses that result from re-measurement of certain assets and
liabilities are recorded in determining net income or loss. A portion of our
assets and liabilities are denominated in Euros, including capital lease
obligations, notes payable (including the notes issued in our public bond
offering), cash and cash equivalents, investments, and forward foreign exchange
contracts. It is our policy to attempt to match local currency receivables and
payables. The foreign currency denominated assets and liabilities give rise to
foreign exchange gains and losses as a result of U.S. dollar to local currency
exchange movements.
Extraordinary Gain
During 2001, in sixteen separate transactions, we exchanged 97,700 units
(principal amount of DEM 97.7 million) of our Senior Discount Notes and 293,100
warrants for 3,238,650 shares of Common Stock. These exchanges were accounted
for as an extinguishment of debt with a resulting $8.2 million (net of
applicable income
69
tax expense of $0.6 million) recognized as an extraordinary gain on such
extinguishment. The extinguishment gain (pre-tax) represents the difference
between the allocated carrying value of the debt and any related warrants
extinguished ($39.0 million) and the fair market value of the Common Stock
issued ($29.3 million), offset by the write-off of the allocated unamortized
deferred financing costs ($0.9 million). These transactions were exempt from
registration in accordance with Section 3(a)(9) of the Securities Act.
During 2001, in a single transaction, we exchanged 8,750 (principal face
amount of DEM 8.75 million) of our Senior Discount Notes for two new Senior
discount notes having an aggregate face amount of $2.9 million (the "New
Notes"). The interest, repayment and other terms of the New Notes are identical
to those of the Senior Discount Notes for which they were exchanged, except that
(i) the principal amount was reduced as indicated in the previous sentence, (ii)
we have the right to prepay the New Notes at any time at our option by paying
the "Accreted Value" of the Notes, and (iii) the new notes are governed by a new
Note Purchase Agreement rather than the indenture under which the Senior
Discount Notes were issued and the New Notes therefore are not covered by any of
the provisions of such indenture relating to action by the trustee, voting or
maintenance of listing on a stock exchange. This exchange has been accounted for
as an extinguishment of debt and issuance of new debt with a resulting $0.2
million (net of applicable income tax expense of $0.5 million) recognized as an
extraordinary gain on such extinguishment. The extinguishment gain (pre-tax)
represents the difference between the allocated carrying value of the debt
extinguished ($3.3 million) and the fair market value of the New Notes issued
($2.5 million), offset by the write-off of the allocated unamortized deferred
financing costs ($0.1 million). This transaction was exempt from registration in
accordance with Section 3(a)(9) of the Securities Act.
During 2001, in a single transaction, we exchanged bonds with face amount
$2.1 million of our Senior Discount Notes for 104,750 shares of Common Stock.
This exchange has been accounted for as an extinguishment of debt with a
resulting $0.1 million (net of applicable income tax expense of $0.1 million)
recognized as an extraordinary gain on such extinguishment. The extinguishment
gain (pre-tax) represents the difference between the allocated carrying value of
the debt and any related warrants extinguished ($2.0 million) and the fair
market value of the Common Stock issued ($1.7 million). These transactions were
exempt from registration in accordance with Section 3(a)(9) of the Securities
Act.
During 1999, we repurchased notes with a face value of DM 22.0 million and
65,850 warrants for a total purchase price of $5.2 million. This repurchase was
accounted for as an extinguishment of debt with a resulting $2.2 million (net of
income taxes of $0.6 million) recognized as an extraordinary gain on such
extinguishment. The extinguishment gain represents the difference between the
allocated carrying value of the debt extinguished ($8.1 million) and the
consideration paid ($5.0 million), offset by the write-off of the allocated
unamortized deferred financing costs ($0.3 million). Of the total purchase price
of $5.2 million, $0.2 million was allocated to the warrants based on their fair
market value at the time of purchase and recorded as an adjustment to additional
paid-in capital.
The Senior Discount Notes that were acquired by us in the above exchanges
have not been retired. We will consider additional repurchases of our Senior
Discount Notes if opportunities arise to complete such transactions on favorable
terms.
Net Income/Loss
We recorded net income of $0.7 million for 2001, as compared to a $49.6
million net loss for 2000 and a $30.9 million net loss for 1999, as a result of
the factors discussed above.
Liquidity and Capital Resources
Up to 2001 we had sustained negative cash flows from operations and had
financed our operations and capital expenditures primarily through the proceeds
from the 1998 issue of Deutsche Mark denominated notes payable, the 1997 public
equity offering, equipment lease financing and private placements of equity
securities. The net proceeds of such transactions, together with revenues from
operations and interest income have been used to fund aggregate net losses of
approximately $123.1 million, investments in property, plant and equipment of
approximately $58.4 million and acquisitions of $24.6 million.
At December 31, 2001 we had cash and cash equivalents of $8.8 million
included in working capital of $2.8 million. We had $1.9 million of restricted
cash held as security with respect to cash provided by banks participating in
our ATM network, to cover guarantees on financial instruments and as deposits
with customs officials (See Note 6 to the Consolidated Financial
Statements--Restricted Cash). In addition to the assets shown
70
on the balance sheet at December 31, 2001 we held repurchased notes payable with
a face value of 154.8 million Deutsche Marks ($70.1 million as at December 31,
2001 based on a USD to DM rate of 1:2.2079) and a fair market value at December
31, 2001 of $56.1 million (See Note 21 to the Consolidated Financial
Statements--Financial Instruments).
On June 28, 2000 we entered into an unsecured revolving credit
agreement (the "Credit Agreement"), which provided a facility of up to $4.0
million from three shareholders as follows: DST Systems, Inc. in the amount of
$2.4 million; Hungarian-American Enterprise Fund in the amount of $1.0 million;
and Michael J. Brown, the CEO and a Director of the Company, in the amount of
$0.6 million. The facility was originally available to be drawn upon until
December 28, 2000, and repayment of any draws was due June 28, 2001. The Credit
Agreement was amended and renewed for six month periods on December 28, 2000 and
June 28, 2001 and, as a result of such amendments, any amounts drawn on the
facility must now be repaid by June 28, 2002.
A commitment fee was paid for an initial facility of 100,000 warrants
issued pro-rata to the lenders with a warrant strike price set at the average
share price, as quoted on NASDAQ for 10 trading days prior to the warrant issue
date, less 10 percent. An additional 100,000, 50,000 and 50,000 warrants, on the
same terms, were issued on January 2, 2001, on June 28, 2001, and on November
27, 2001 for the subsequent extensions of the facility. Warrants were issuable
on similar terms and conditions for each draw on the facility at the rate of
80,000 warrants for each $1.0 million of funds drawn.
As of December 31, 2001, we have drawn $2.0 million and issued 160,000
warrants with respect to such draw. Amounts outstanding under the facility
accrue interest at 10 percent per annum, payable quarterly. Repayment of the
principal is due on June 28, 2002 and we expect to make this repayment on or
before this date. The Credit Agreement was not renewed in December 2001.
In 2001, two participants in the revolving credit agreement, in three
separate transactions, elected to exercise a total of 361,000 warrants for an
equal number of shares. The total amount of cash received from these
transactions was $2.1 million.
We lease many of our ATMs under capital lease agreements that expire
between 2002 and 2007 and bear interest at rates between 8% and 12%. As of
December 31, 2001 we owed $12.4 million under such capital lease arrangements
(see Note 15 to the Consolidated Financial Statements--Leases).
We expect that our capital requirements will continue in the future,
although strategies that promote outsourcing and redeployment of underperforming
ATMs will reduce some of these requirements. Acquisitions of related ATM
businesses and investments in new markets will require additional capital
expenditures. Fixed asset purchases for 2002, subject to our evaluation of
acceptable returns on new ATM investment particularly in the United Kingdom, are
currently estimated to be in the range of $10 to $13 million.
Effective July 1, 2001, we implemented our Employee Stock Purchase Plan
("ESPP"), under which employees have the opportunity to purchase common stock
through payroll deductions according to specific eligibility and participation
requirements. The ESPP was implemented by a series of offerings of three months
duration with new offerings commencing on January 1, April 1, July 1, and
October 1 of each year. The option price of common stock purchased under the
ESPP is the lesser of 85% of the Fair Market Value (as defined in the ESPP) of
the shares on the first day of each offering or the last date of each offering.
Under the provisions of the ESPP, we have reserved 500,000 shares of common
stock of which 175,000 shares had been issued as of December 31, 2001. We intend
to qualify the Plan as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986 (See Note 18 to the Consolidated Financial
Statement--Stock Plans).
In 2001, matching contributions of 32,550 shares of stock were made in
conjunction with our 401(k) employee benefits plan for year 2000. Under the
terms of such plan, employer match contributions consist of two parts, referred
to as "Basic" and "Discretionary". The Basic Matching Contribution is equal to
50% of eligible employee Elective Salary Deferrals between 4% and 6% of
participating employee salaries for the Plan Year. The Discretionary Matching
Contribution is determined by the Board for a Plan Year and is allocated in
proportion to employee Elective Deferrals. For 2001, employer match
contributions (Basic Match) consisted of 16,275 shares and an equal number,
16,275 shares, were issued under the Discretionary Matching Contribution.
Employer matching under the Plan for year 2001 is expected to be determined in
the first quarter of 2002 (See Note 19 to the Consolidated Financial
Statements--Employee Benefit Plans).
71
We reduced the aggregate amount of our 12 3/8% Senior Discount Notes
payable from $77.2 million at December 31, 2000, to $38.1 million at December
31, 2001 through a series of debt-for-debt and debt-for-equity exchanges as more
fully described in Note 11 to the Consolidated Financial Statements. Due to
market and other factors, we may not be able to continue to successfully
implement such exchanges in 2002 and beyond. We are required to commence cash
payments of interest on Senior Discount Notes on January 1, 2003. At current
debt levels, we will be required to make approximately $2.5 million in interest
payments on a semi annual basis beginning January 1, 2003. The remaining
principal balance of Senior Discount Notes of approximately $40 million (after
accretion during 2002) will be due and payable on January 1, 2006.
We have no significant off balance sheet items (see Note 28 to the
Consolidated Financial Statements--Commitments and Contingencies).
Based on our current business plan and financial projections, we expect
to continue to improve operating income and generate net cash inflows from our
operating activities in 2002. In the Processing Services Segment, we anticipate
that increased transaction levels in our ATM network will result in additional
revenues without a corresponding increase in expenses. In addition, we expect to
further expand our ATM outsourcing services and offer new value-added services,
which will provide continued revenue growth without significantly increasing
direct operating expenses or capital investments. In the Software Solutions
Segment, we believe our operating costs are now more in line with anticipated
revenues. We believe that the credit facility, certain asset sales, and cash and
cash equivalents will provide us with sufficient capital. As a result, we
believe that we have sufficient liquidity resources to meet current and future
cash requirements. We will continue our policy of assessing opportunities for
additional debt and equity financing as they arise, and will pursue any such
opportunities if we consider that such opportunities can contribute to
fulfilling our financial and strategic business objectives particularly if
attractive acquisition opportunities present themselves.
Subsequent Events
In January 2002, we concluded two agreements with ALLTEL Information
Services, Inc. ("AIS"), a wholly owned subsidiary of ALLTEL Corporation. The
first agreement was an Asset Purchase Agreement whereby Dash sold substantially
all of its assets to AIS for $6.8 million in cash subject to a working capital
adjustment. Of this amount, $0.7 million is being held in escrow under the terms
of a separate escrow agreement to provide for the payment of any damages that
might arise from any breach of the representations and warranties contained in
the Asset Purchase Agreement and certain post-closing adjustments. Revenues for
Dash were $2.3 million for 2001 and were included in the revenue of the Other
Processing Services Sub-segment (see Note 29 to the Consolidated Financial
Statements--Subsequent Events).
The second agreement was a Software License Agreement whereby Euronet
USA granted AIS a nonexclusive license to use, distribute and develop versions
1.5 and 2.2 of Euronet USA's GoldNet ITM ATM Network Processing Software
("GoldNet Software"). The License Agreement includes certain territorial and
other restrictions on the use and distribution of the GoldNet Software by AIS.
Under the terms of the License Agreement, AIS has agreed to pay license fees of
$5 million, with 50% of the fees having been paid upon execution of the License
Agreement, 40% to be paid six months from the date of the Agreement, and the
remaining 10% twelve months from the date of the License Agreement.
In February 2002, we entered into subscription agreements for the sale
of 625,000 new common shares of the Company. These agreements were signed with
accredited investors in transactions exempt from registration pursuant to the
exemptions provided in Section 4(2) and Regulation D of the Act. The purchase
price of each share was $20.00. We received aggregate proceeds of approximately
$12 million from the private placement (see Note 29 to the Consolidated
Financial Statements--Subsequent Events).
Balance Sheet Items
Cash and Cash Equivalents
The increase of cash and cash equivalents to $8.8 million at December
31, 2001 from $7.2 million at December 31, 2000 is due primarily to the net
effects of working capital movements, foreign exchange gains and losses, capital
expenditures and capital lease payments, and operating income for the year ended
December 31, 2001. (See Note 22 to the Consolidated Financial
Statements--Reconciliation of Net Income/(Loss) to Net Cash Provided by/(Used
in)
72
Operating Activities, and the Consolidated Statements of Cash Flows).
Restricted Cash
Restricted cash decreased to $1.9 million at December 31, 2001 from
$2.1 million at December 31, 2000. The majority of restricted cash was held as
security with respect to cash provided in Hungary and Poland by banks
participating in our ATM network.
Trade Accounts Receivable
Trade accounts receivable decreased to $9.3 million at December 31,
2001 from $9.5 million at December 31, 2000 due primarily to improvements in the
collections process in 2001.
Property, Plant and Equipment
Net property, plant and equipment decreased to $29.6 million at
December 31, 2000 from $31.7 million at December 31, 2000. This decrease is due
primarily to a reduction in the rate of installation of ATMs and recognizing
fixed asset depreciation in excess of fixed asset additions.
Intangible Assets
Net intangible assets decreased to $2.0 million at December 31, 2001,
from $2.6 million at December 31, 2000. The decrease is the result of
amortization of purchased goodwill in respect of the SBK and Dash acquisitions
in 1999.
Current Liabilities
Current liabilities increased to $23.3 million at December 31, 2001
from $20.5 million at December 31, 2000. This increase is due primarily to
increases in accrued expenses and the credit facility.
Capital Leases
Total capital lease obligations including current installments
increased to $12.4 million at December 31, 2001 from $11.5 million at December
31, 2000. This increase is due primarily to additional fixed assets leased in
excess of 2001 lease payments.
Notes Payable
Notes payable decreased to $38.1 million at December 31, 2001 from
$77.2 million at December 31, 2000. This is the result of several transactions
as follows:
(In millions)
Balance at December 31, 2000 $ 77.2
Unrealized foreign exchange gain (DEM vs. USD) (4.8)
Debt Equity Swaps (41.1)
Accretion of bond interest 6.8
------
Balance at December 31, 2001 $ 38.1
======
Stockholders' Deficit
Stockholders' deficit decreased to $7.7 million at December 31, 2001
from $44.8 million at December 31, 2000. This is due to the net income for the
year ended December 31, 2001 of $0.7 million, $5.8 million received for options
exercised and other equity and $31.0 million for the shares issued on the
extinguishments of debt offset by an increase in the accumulated comprehensive
loss of $0.4 million.
73
Impact of New Accounting Pronouncements Not Yet Adopted
SFAS 141 and 142
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
We are required to adopt the provisions of Statement 141 immediately,
and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature.
Statement 141 will require upon adoption of Statement 142 that we
evaluate our existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, we will be required to reassess
the useful lives and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, we will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require us to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, we must identify our reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. We will then have up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and we must perform the second step of the transitional impairment
test. In the second step, we must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of its assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation in accordance with Statement 141
to its carrying amount both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as possible, but
no later than the end of the year of adoption. Any transitional impairment loss
will be recognized as the cumulative effect of a change in accounting principle
in our statement of earnings.
And finally, any unamortized negative goodwill existing at the date
Statement 142 is adopted must be written off as the cumulative effect of a
change in accounting principle.
As of the date of adoption, we expect to have unamortized goodwill in
the amount of $2.0 million, which will be subject to the transition provisions
of Statements 141 and 142. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, it is not practicable to reasonably estimate
the impact of adopting these Statements on our financial statements at the date
of this report, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle.
SFAS 143
Statement of Financial Accounting Standard (SFAS) No. 143, Accounting
for Asset Retirement Obligations (SFAS No. 143), addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and for the associated asset retirement costs.
74
The Financial Accounting Standards Board (FASB) began this project in
1994 to address the accounting for the costs of nuclear decommissioning. The
FASB subsequently expanded the scope of the project to include closure or
removal- type costs in other industries. As a result, Statement No. 143 applies
to all entities.
SFAS No. 143 requires an enterprise to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and or normal use of
the assets. The enterprise also is to record a corresponding increase to the
carrying amount of the related long-lived asset (i.e., the associated asset
retirement costs) and to depreciate that cost over the life of the asset. The
liability is changed at the end of each period to reflect the passage of time
(i.e., accretion expense) and changes in the estimated future cash flows
underlying the initial fair value measurement. Because of the extensive use of
estimates, most enterprises will record a gain or loss when they settle the
obligation. Enterprises are required to adopt Statement No. 143 for fiscal years
beginning after June 15, 2002. We have not evaluated the impact on the
consolidated financial statements of adopting this standard.
SFAS 144
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses financial accounting and reporting for the impairment or
disposal of long lived assets. While SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, it retains many of the fundamental provisions of that Statement.
SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment and extends
that reporting to a component of an entity that either has been disposed of (by
sale, abandonment, or in a distribution to owners) or is classified as held for
sale.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The Statement is to be
applied prospectively. We have not yet determined the impact, if any, the
adoption of this standard will have on our financial position or results of
operations.
Forward-Looking Statements
This document contains statements that constitute forward-looking
statements within the meaning of section 27A of the Securities Act and section
21E of the U.S. Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this document, including,
without limitation, statements regarding (i) our business plans and financing
plans and requirements, (ii) trends affecting our business plans and financing
plans and requirements, (iii) trends affecting our business, (iv) the adequacy
of capital to meet our capital requirements and expansion plans, (v) the
assumptions underlying our business plans, (vi) business strategy, (vii)
government regulatory action, (viii) technological advances and (ix) projected
costs and revenues, are forward-looking statements. Although we believe that the
expectations reflected in such forward- looking statements are reasonable, we
can give no assurance that such expectations will prove to be correct.
Forward-looking statements are typically identified by the words believe,
expect, anticipated, intend, estimate and similar expressions.
Investors are cautioned that any such forward looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
results may materially differ from those in the forward-looking statements as a
result of various factors, including: technological and business developments in
the local card, electronic and mobile banking and mobile phone markets affecting
the transaction and other fees which we are able to charge for our services;
foreign exchange fluctuations; competition from bank owned ATM networks,
outsource providers of ATM services, software providers and providers of
outsourced mobile phone services; our relationships with our major customers,
sponsor banks in various markets and International Card Organizations; and
changes in laws and regulations affecting our business. These risks, and other
risks are described elsewhere in this document and our periodic filings with the
Securities and Exchange Commission.
75
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Operational Risk; Security
Our business involves the operation and maintenance of a sophisticated
computer network and telecommunications connections with banks, financial
institutions and mobile operators. This, in turn, requires the maintenance of
computer equipment and infrastructure, including telecommunications and
electrical systems, and the integration and enhancement of complex software
applications. There are certain operational risks inherent in this type of
business which can require temporary shut-down of parts or all of our processing
systems, including failure of electrical supply, failure of computer hardware
and software errors. All of our ATMs other than our ATMs in Germany are operated
through our processing center in Budapest so any operational problem there may
have a significant adverse impact on the operation of our network generally. We
have experienced operations and computer development staff and have created
redundancies and procedures, particularly in our Budapest processing center, to
mitigate such risks, but they cannot be eliminated entirely. Any technical
failure that prevents operation of our systems for a significant period of time
will prevent us from processing transactions during that period of time and will
directly and adversely affect our revenues and financial results.
Our ATM network systems process electronic financial transactions using
information read by ATMs or POS terminals from bank debit and credit cards or
input into our systems by our customers in the registration process for mobile
phone recharge services. We capture, transmit, handle and store this sensitive
bank card information in performing services for our customers. In addition, our
software is designed to permit the operation by our customers of electronic
financial transaction networks similar to our network, so our software is used
in handling such information. These businesses involve certain inherent security
risks and in particular the risk of electronic interception and theft of the
information for use in fraudulent card transactions. We have incorporated
industry standard encryption technology and processing methodology into our
systems and software to maintain high levels of security. Although this
technology and methodology mitigates security risks, they cannot be eliminated
entirely as criminal elements apply increasingly sophisticated technology to
attempt to obtain unauthorized access to the information handled by ATM and
electronic financial transaction networks.
Any breach in our security systems could result in the perpetration of
fraudulent financial transactions for which we may be found liable. We are
insured against various risks, including theft and negligence, but such
insurance is subject to deductibles, exclusions and limitations that may leave
us bearing some or all of any losses arising from security breaches.
In addition to electronic fraud issues, theft and vandalism of ATMs
presents risks for our ATM business. We install ATMs at sites that are high foot
traffic sites and are exposed to theft and vandalism. Vandalism during the year
2001 increased in some of our markets, particularly in Hungary where a series of
incidents were attributed to an organized gang that we believe has been
apprehended. Although we are insured against such risks, deductibles, exclusions
or limitations in such insurance may leave us bearing some or all of any losses
arising from theft or vandalism of ATMs. In addition, we have experienced
increases in claims under our insurance, which has increased our insurance
premiums.
Foreign Exchange Exposure
In 2001, 32% of our total revenues were generated in Poland and Hungary, as
compared to 30% in 2000 and 27% in 1999. The primary cause of this upward trend
is continued revenue growth in our Polish operations during 2001. In Hungary,
the majority of revenues received are denominated in Hungarian Forints while in
Poland, the majority of revenues are denominated in Polish Zlotys. However, most
of our foreign currency denominated contracts are linked to either inflation or
the retail price index. While a significant portion of our expenditures continue
to be denominated in U.S. Dollars, we are working to create higher matching
levels between revenues and expenses denominated in local currencies in order to
take advantage of the natural currency hedging this would provide.
We estimate that a further 10% depreciation in foreign exchange rates of
the Euro, Hungarian Forint, Polish Zloty and the British Pound Sterling against
the U.S. Dollar, would have the combined effect of a $2.9 million decrease in
our reported net income. This was estimated using 10% of our net losses after
adjusting for unusual impairment and other items including U.S. Dollar
denominated or indexed expenses. We acknowledge that this quantitative measure
has inherent limitations in that it does not take into account any governmental
actions or
76
changes in either customer purchasing patterns or our financing or operating
strategies.
As a result of the introduction of the Euro on January 1, 2002, and
continued European economic convergence, including the increased influence of
the Euro, as opposed to the U.S. Dollar, on the Central European currencies, we
expect that the currencies of the markets where we invest will fluctuate less
against the Euro than against the U.S. Dollar. Accordingly, we believe that our
Euro denominated debt provides, in the medium to long term, a closer matching of
assets and liabilities than would U.S. Dollar denominated debt.
Inflation and Functional Currencies
In recent years, Hungary, Poland and the Czech Republic have experienced
high levels of inflation. Consequently, these countries' currencies have
continued to decline in value against the major currencies of the OECD over this
time period. However, due to the significant reduction in the inflation rate of
these countries in recent years, none of these countries are considered to have
a hyper-inflationary economy. Further, the majority of all three subsidiaries'
revenues are denominated in the local currency. Thus all three subsidiaries use
their local currency as the functional currency. The Czech subsidiary changed
their functional currency to the respective local currency as of January 1,
1999, and the Hungarian subsidiary changed as of July 1, 1999.
Germany, France and the United Kingdom have experienced relatively low and
stable inflation rates in recent years. Therefore, the local currency in each of
these markets is the functional currency. Although Croatia, like Germany and
France, has maintained relatively stable inflation and exchange rates, the
functional currency of the Croatian company is the U.S. Dollar due to the
significant level of U.S. Dollar denominated revenues and expenses. Due to the
factors mentioned above, we do not believe that inflation will have a
significant effect on results of operations or financial condition. We
continually review inflation and the functional currency in each of the
countries in which we operate.
Interest Rate Risk
The fair market value of our long-term fixed interest rate debt is subject
to interest rate risk. Generally, the fair market value of fixed interest rate
debt will increase as interest rates fall and decrease as interest rates rise.
The estimated fair value of our notes payable at December 31, 2001 was $32.7
million compared to a carrying value of $38.1 million. A 1% increase from
prevailing interest rates at December 31, 2001 would result in a decrease in
fair value of notes payable by approximately $1.5 million. Fair values were
determined from quoted market prices and from investment bankers considering
credit ratings and the remaining term to maturity (see Note 21 to the
Consolidated Financial Statements--Financial Instruments).
First Interest Repayment
Beginning in 2003 interest payments of approximately EUR 2.8 million ($2.5
million) on our outstanding bond issue will be payable semi-annually on January
1 and July 1, with the final interest payment due on July 1, 2006. Because the
bond interest is payable in Euros, foreign currency fluctuations between the
U.S. Dollar and the Euro could result in gains or losses which, in turn, could
increase or decrease the amount of U.S. Dollar equivalent interest paid on a
GAAP basis. We currently anticipate making these interest payments from earnings
denominated in local currencies in our European markets. As a result, it may not
be necessary to hedge these expected cash payments in U.S. Dollars, since the
source of funds used for payments would already be in Euro or Euro-linked
denominations. Throughout 2002, we will actively monitor our potential need to
hedge future bond interest payments, and if required, we will initiate hedging
strategies to minimize foreign currency losses resulting from payments made in
U.S. Dollars.
77
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Euronet Worldwide, Inc.:
We have audited the accompanying consolidated balance sheets of Euronet
Worldwide Inc. and subsidiaries as of December 31, 2001 and 2000 and the related
consolidated statements of operations and comprehensive loss, changes in
stockholders' (deficit)/equity, and cash flows for each of the years in the
three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Euronet Worldwide
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with generally accepted accounting
principles in the United States of America.
KPMG Polska S.p. z o.o.
Warsaw, Poland
February 6, 2002
78
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
------------------
2001 2000
-------- --------
(in thousands)
Assets
------
Current assets:
Cash and cash equivalents $ 8,818 $ 7,151
Restricted cash (note 6) 1,877 2,103
Trade accounts receivable (less allowance for doubtful accounts of $675,000 in
2001 and $740,000 in 2000, note 17) 9,292 9,485
Costs and estimated earnings in excess of billings on software installation
contracts (note 8) 331 1,117
Prepaid expenses and other current assets (note 7) 5,799 3,342
-------- --------
Total current assets 26,117 23,198
Property, plant, and equipment (notes 10, 15, 20, 28 and 29):
Equipment - Automatic teller machines 45,465 41,691
Vehicles and office equipment 2,923 2,451
Computers and software 9,995 8,628
-------- --------
58,383 52,770
Less accumulated depreciation and amortization (28,832) (21,113)
-------- --------
Net property, plant, and equipment 29,551 31,657
Goodwill and intangible assets, net (notes 9 and 10) 1,975 2,604
Deposits 41 45
Deferred income taxes (note 16) 429 424
Other assets, net (note 3(h)) 3,278 2,962
-------- --------
Total assets $ 61,391 $ 60,890
======== ========
See accompanying notes to the consolidated financial statements.
79
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (cont'd)
December 31,
----------------------
2001 2000
---------- ----------
(in thousands)
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Trade accounts payable $ 4,812 $ 5,223
Current installments of obligations under capital leases (note 15) 4,765 3,466
Accrued expenses and other current liabilities 7,386 6,397
Advance payments on contracts 2,266 2,155
Income taxes payable 90 350
Short term borrowings 513 -
Billings in excess of costs and estimated earnings on software installation
contracts (note 8) 1,457 2,875
Credit facility (note 13) 2,000 -
---------- ----------
Total current liabilities 23,289 20,466
Obligations under capital leases, excluding current installments (note 15) 7,643 8,034
Notes payable (note 11) 38,146 77,191
---------- ----------
Total liabilities 69,078 105,691
---------- ----------
Stockholders' deficit:
Common stock, $0.02 par value. Authorized 60,000,000 shares; issued and
outstanding 22,038,073 shares at December 31, 2001 and 17,814,910 at
December 31, 2000 (note 12) 441 356
Additional paid in capital 117,940 81,327
Treasury stock (145) (140)
Employee loans for stock (note 26) (463) (561)
Subscription receivable - (59)
Accumulated deficit (123,141) (123,811)
Restricted reserve (note 5) 784 784
Accumulated other comprehensive loss (3,103) (2,697)
---------- ----------
Total stockholders' deficit (7,687) (44,801)
---------- ----------
Total liabilities and stockholders' deficit $ 61,391 $ 60,890
========== ==========
See accompanying notes to the consolidated financial statements.
80
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
Year Ended December 31,
-----------------------------------------
2001 2000 1999
------------ ------------ ------------
(in thousands, except per share data)
Revenues:
ATM network and related revenue $ 49,129 $ 36,913 $ 26,503
Software, maintenance and related revenue 15,042 15,827 14,969
------------ ------------ ------------
Total revenues 64,171 52,740 41,472
Operating expenses:
Direct operating costs 28,101 24,988 22,830
Salaries and benefits (note 18) 24,874 29,265 24,477
Selling, general and administrative 8,051 11,531 10,725
Depreciation and amortization 9,112 10,384 10,238
Asset write down (note 10) - 11,968 -
------------ ------------ ------------
Total operating expenses 70,138 88,136 68,270
------------ ------------ ------------
Operating loss (5,967) (35,396) (26,798)
Other income/(expense):
Interest income 282 1,089 1,950
Interest expense (note 11) (9,471) (10,829) (10,899)
Foreign exchange gain / (loss), net (note 14) 5,300 (3,227) (2,110)
------------ ------------ ------------
(3,889) (12,967) (11,059)
Loss before income tax and extraordinary item (9,856) (48,363) (37,857)
Income tax benefit / (expense) (note 16) 2,030 (1,188) 4,746
------------ ------------ ------------
Loss before extraordinary item (7,826) (49,551) (33,111)
Extraordinary gain on extinguishment of debt,
net of applicable income taxes of $1.1 million in 2001,
$0 in 2000 and $0.6 million in 1999 (note 11) 8,496 - 2,196
------------ ------------ ------------
Net income / (loss) 670 (49,551) (30,915)
Other comprehensive income:
Translation adjustment (406) (247) (2,515)
------------ ------------ ------------
Comprehensive income/(loss) $ 264 $ (49,798) $ (33,430)
============ ============ ============
Loss per share - basic and diluted (note 3(n)):
Loss before extraordinary item (0.40) $ (3.00) $ (2.17)
Extraordinary gain on extinguishment of debt 0.43 - 0.14
------------ ------------ ------------
Net income/(loss) $ 0.03 $ (3.00) $ (2.03)
============ ============ ============
Weighted average number of shares outstanding 19,719,253 16,499,699 15,252,030
============ ============ ============
See accompanying notes to the consolidated financial statements.
81
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' (Deficit)/Equity
Employee Additional
No. of Common Loans for Paid in Treasury
Shares Stock Stock Capital Stock
---------- ---------- ---------- ---------- ----------
(in thousands, except share data)
Balance December 31, 1998 15,213,453 $ 307 $ - $ 66,413 $ (4)
Share compensation expense (note 18) - - - 127 -
Stock options exercised (note 18) 228,503 4 - 331 -
Sale of treasury stock 100,000 - - 274 1
Warrants repurchase (note 11) - - (176) -
Employee loans for stock (note 26) - - (794) - -
Translation adjustment - - - - -
Net loss for 1999 - - - - -
---------- ---------- ---------- ---------- ----------
Balance December 31, 1999 15,541,956 $ 311 $ (794) $ 66,969 $ (3)
Stock options exercised (note 18) 390,231 8 - 941 -
Sale of common stock (note 12) 1,882,723 37 - 13,045 -
Warrants issue (note 12 and 13) - - - 372 -
Subscriptions - - - - -
Employee loans for stock (note 26) - - 233 - (137)
Translation adjustment - - - - -
Net loss for 2000 - - - - -
---------- ---------- ---------- ---------- ----------
Balance December 31, 2000 17,814,910 $ 356 $ (561) $ 81,327 $ (140)
Stock options exercised (note 18) 292,643 6 - 1,446 -
Shares issued for extinguishment of debt 3,343,400 67 - 30,961 -
Private placement of shares 19,000 1 - 104 -
Warrants exercised 361,000 7 - 2,112 -
Employee loans for stock (note 26) - - 98 - (5)
Sale of common stock (note 18) 207,120 4 - 1,990 -
Other - - - - -
Translation adjustment - - - - -
Net income for 2001 - - - - -
---------- ---------- ---------- ---------- ----------
Balance December 31, 2001 22,038,073 $ 441 $ (463) $ 117,940 $ (145)
========== ========== ========== ========== ==========
See accompanying notes to the consolidated financial statements.
82
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' (Deficit)/Equity (cont'd)
Accumulated
Other
Subscription Accumulated Restricted Comprehensive
Receivable Deficit Reserve (Loss)/Income Total
-------------- ------------- ------------ --------------- ---------
(in thousands, except share data)
Balance December 31, 1998 $ (50) $ (43,345) $ 784 $ 65 $ 24,170
Share compensation expense (note 18) - - - - 127
Stock options exercised (note 18) - - - - 335
Sale of treasury stock - - - - 275
Warrants repurchase (note 11) - - - (176)
Employee loans for stock (note 26) - - - - (794)
Translation adjustment - - - (2,515) (2,515)
Net loss for 1999 - (30,915) - - (30,915)
--------- --------- --------- --------- ---------
Balance December 31, 1999 $ (50) $ (74,260) $ 784 $ (2,450) $ (9,493)
Stock options exercised (note 18) - - - - 949
Sale of common stock (note 12) - - - - 13,082
Warrants issue (note 12 and 13) - - - - 372
Subscriptions (9) - - - (9)
Employee loans for stock (note 26) - - - - 96
Translation adjustment - - - (247) (247)
Net loss for 2000 - (49,551) - - (49,551)
--------- --------- --------- --------- ---------
Balance December 31, 2000 $ (59) $(123,811) $ 784 $ (2,697) $ (44,801)
========= ========= ========= ========= =========
Stock options exercised (note 18) - - - 1,452
Shares issued for extinguishment of debt - - - - 31,028
Private placement of shares - - - - 105
Warrants exercised - - - - 2,119
Employee loans for stock (note 26) - - - 93
Sale of common stock (note 18) - - - - 1,994
Other 59 - - - 59
Translation adjustment - - - (406) (406)
Net income for 2001 - 670 - - 670
--------- --------- --------- --------- ---------
Balance December 31, 2001 $ (-) $(123,141) $ 784 $ (3,103) $ (7,687)
========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
83
EURONET WORLDWIDE, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
-----------------------------------------------
2001 2000 1999
------------- ---------------- ----------------
(in thousands)
Net cash provided by / (used in) operating activities (note 22) $ 39 $(16,357) $(20,371)
Cash flows from investing activities:
Fixed asset purchases (2,756) (3,428) (8,685)
Proceeds from sale of fixed assets 566 706 3,742
Purchase of investment securities - - (5,373)
Proceeds from maturity of investment securities - - 7,772
Investment in subsidiaries, net of cash acquired - - (7,316)
Net (decrease)/increase in loan receivable - (13) 28
------------- ---------------- ----------------
Net cash used in investing activities (2,190) (2,735) (9,832)
Cash flows from financing activities:
Proceeds from the sale and leaseback of fixed assets 1,234 - 827
Proceeds from issuance of shares and other
capital contributions 5,608 13,889 610
Proceeds from issuance of notes payable and warrants (845) 378 -
Costs to obtain loans - - (22)
Repurchase of notes payable and warrants - - (5,202)
Repayment of obligations under capital leases (4,756) (3,677) (5,660)
Proceeds from / (repayment of) borrowings 2,321 192 (300)
Decrease/(increase) in subscriptions receivable 59 (9) -
Cash repaid by/(loaned to) employees for purchase of
common stock 98 233 (794)
------------- ---------------- ----------------
Net cash provided by/(used in) financing activities 3,719 11,006 (10,541)
Effect of exchange differences on cash 99 200 167
Net increase/(decrease) in cash and cash equivalents 1,667 (7,886) (40,577)
Cash and cash equivalents at beginning of period 7,151 15,037 55,614
------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 8,818 $ 7,151 $ 15,037
------------- ---------------- ----------------
Supplemental disclosures of cash flow information (note 23):
Interest paid during year $ 2,292 $ 2,076 $ 1,133
============= ================ ================
Income taxes refunded during year $ 894 $ - $ 839
============= ================ ================
See accompanying notes to the consolidated financial statements
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
2001, 2000 AND 1999
(1) Organization
Euronet Worldwide Inc. was established as a Delaware corporation on
December 13, 1997 and capitalized on March 6, 1998. Euronet Worldwide Inc.
succeeded Euronet Holding N.V. as the group holding company.
Euronet Worldwide Inc. and its subsidiaries (the "Company" or "Euronet") is
a provider of electronic financial solutions and transaction processing
services to banks, financial institutions, and other companies. Euronet
operates an automated teller machine ("ATM") network in Europe and the
U.S., which serves banks and retail companies by accepting most
international bankcards and proprietary cards issued by member banks. Some
of the ATMs also perform certain deposit, sales or advertising functions.
Euronet also provides ATM network management outsourcing services to banks
or companies with their own networks. Euronet sells integrated software
solutions for electronic payment and financial transaction delivery systems
worldwide. Its software comprises a suite of products including a core
system, Integrated Transaction Management ("ITM"), and compatible modular
software for ATM and POS network processing, electronic funds transfer
interfaces, electronic funds transfer switch control, credit/debit card
management and processing, and corporate cash management and personal
financial management access products.
The subsidiaries of Euronet that are directly or indirectly wholly owned
are:
- EFT Services Holding B.V., incorporated in the Netherlands
- Euronet Banktechnikai Szolgaltato Kft. ("Bank Tech"), incorporated in
Hungary
- Euronet Adminisztracios Szolgaltato Kft. ("Administrative Services")
(formerly SatComNet), incorporated in Hungary
- Bankomat 24/Euronet Sp. z o.o. ("Bankomat"), incorporated in Poland
- EFT-Usluge d o.o., incorporated in Croatia
- Euronet Services GmbH, incorporated in Germany
- EFT Services France SAS, incorporated in France
- Euronet Services spol. s.r.o., incorporated in the Czech Republic
- Euronet Services SRL, incorporated in Romania
- Euronet Services (UK) Limited, incorporated in the United Kingdom
- Euronet USA Inc. (formerly Arkansas Systems, Inc.) ("Euronet USA")
incorporated in Arkansas, United States of America
- EFT Processing Services LLC ("Dash"), incorporated in Arkansas, United
States of America
- Euronet Holding N.V., incorporated in the Netherlands Antilles (in
liquidation)
- Euronet Eft Services Hellas, incorporated in Greece.
Euronet also has indirect shareholdings in the following companies that are
not wholly owned:
- Euronet Sigma Nusantara, incorporated in Indonesia, of which 80% of
the shares are owned by EFT Services Holdings BV.
- CashNet Telecommunications Egypt SAE ("CashNet"), an Egyptian company
limited by shares, of which 10% of the shares are owned by EFT
Services Holdings BV. Cashnet was formed on April 11, 2000 with a
equity investment of $1,1 million by National Telecommunications
Company SAE ("NTC"), to own and/or operate and manage ATM machines and
Point of Sale Terminals both for their own account and for the account
of customer banks. The Company purchased its 10% investment on May 10,
2001 for $0.1 million from NTC and has an agreement to increase this
ownership to 40% through additional equity payments totalling $0.3
million. The Company made payments in this respect of $47,158 on
November 26, 2001 and $0.1 million on January 17, 2002 and the
transfer of shares is in process. There are required payments of $0.2
million in 2002 for the Company to reach 40% ownership.
(2) Financial Position and Basis of Preparation
The Company generated an operating loss of $6.0 million for the twelve
months ended December 31, 2001 primarily due to the significant costs
associated with the expansion of its ATM network and investment support and
research and development in its software. In addition, the Company
generated positive cash flows from operations of $0.1 million for the
twelve months ended December 31, 2001, as a result of these same factors.
Based on the Company's current business plan and financial projections, the
Company
85
expects to further improve operating income and net cash provided by
operating activities in 2002. In the Processing Services Segment, the
Company anticipates that increased transaction levels in its ATM
network will result in additional revenues without a corresponding
increase in expenses. In addition, the Company expects to further
expand its ATM outsourcing services and offer new value-added
services, which will provide continued revenue growth without
significantly increasing direct operating expenses or capital
investments. In the Software Solutions Segment, the Company expects to
continue its strategic repositioning of its software business from
direct software sales to software-only customers to more integrated
solutions combining the strengths of the Company's electronic
financial transaction network system with its software development
strengths.
The Company has a $4.0 million credit facility under an unsecured
revolving credit agreement (see Note 13). As of December 31, 2001, the
Company had drawn $2.0 million against such credit agreement. In
addition, the Company holds repurchased notes payable with a face
value of DEM $154.8 million ($70.1 million) and a fair value at
December 31, 2001 of $56.1 million. The Company believes that cash and
cash equivalents at December 31, 2001, and the revolving credit
agreement described above, and sustained positive cash flows from
operations will provide the Company with sufficient cash resources to
fulfill its financial and strategic business objectives. The Company
will in light of these financial and strategic business objectives
continue its policy of assessing opportunities for additional debt and
equity financing as they arise.
In January 2002, the Company concluded two agreements with ALLTEL
Information Services, Inc. ("AIS"), a wholly owned subsidiary of
ALLTEL Corporation. The first agreement was an Asset Purchase
Agreement whereby Dash sold substantially all of its assets to AIS for
$6.8 million in cash subject to a working capital adjustment. Of this
amount, $650,000 is being held in escrow under the terms of a separate
escrow agreement. The second agreement was a Software License
Agreement whereby AIS pays license fees of $5 million, with 50% of the
fees being paid upon execution of the License Agreement, 40% to be
paid six months from the date of the Agreement, and the remaining 10%
twelve months from the date of the License Agreement (see note 29).
In February 2002, the Company entered into subscription agreements for
the sale of 625,000 new common shares of the Company. The aggregate
amount of proceeds to the Company from the private placement was
approximately $12 million (see note 29).
Based on the above, management is confident that the Company will be
able to continue as a going concern. Accordingly, these consolidated
financial statements have been prepared on a going concern basis which
contemplates the continuation and expansion of trading activities as
well as the realization of assets and liquidation of liabilities in
the ordinary course of business.
(3) Summary of Significant Accounting Policies and Practices
(a) Principles of consolidation
The consolidated financial statements include the accounts of Euronet
Worldwide Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. The
company's investments in companies which it does not control but has
the ability to exercise significant influence over operating and
financial policies are accounted for under the equity method.
(b) Foreign currencies
Foreign currency transactions are recorded at the exchange rate
prevailing on the date of the transactions. Assets and liabilities
denominated in foreign currencies are remeasured at rates of exchange
on the balance sheet date. Resulting gains and losses on foreign
currency transactions are included in the consolidated statement of
operations and comprehensive loss.
The financial statements of foreign subsidiaries where the local
currency is the functional currency are translated to U.S. Dollars
using (i) exchange rates in effect at period end for assets and
liabilities, and (ii) average exchange rates during the period for
results of operations. Adjustments resulting from translation of such
financial statements are reflected in accumulated other comprehensive
income as a separate component of consolidated stockholders' equity.
86
The financial statements of foreign subsidiaries where the functional
currency is the U.S. dollar are remeasured using historical exchange
rates for nonmonetary items while current exchange rates are used for
monetary items. Foreign exchange gains and losses arising from the
remeasurement are reported in the consolidated statement of operations
and comprehensive loss.
(c) Cash equivalents
For the purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
(d) Forward foreign exchange contracts
Prior to the adoption of SFAS No. 133 (Accounting for Derivative
Instruments and Hedging Activities) on January 1, 2001, forward
foreign exchange contracts were recorded at fair values in the
consolidated balance sheet in other current assets or other current
liabilities with the related gain or loss recognized in the
consolidated statement of operations, unless the contracts met certain
hedging criteria. A foreign exchange contract was considered a hedge
of an identifiable foreign currency commitment if (i) the contract was
designated as, and was effective as, a hedge of foreign currency
commitment and (ii) the foreign currency commitment was firm.
In addition, the significant characteristics of expected terms of the
anticipated transaction were identified and it was probable that the
anticipated transaction would occur. Gains and losses on foreign
exchange contracts meeting these hedge accounting criteria were
deferred and included in the measurement of the related foreign
currency transaction. Losses were not deferred if, however, it was
estimated that the deferral would lead to recognition of losses in
later periods.
In 2000, the Company settled all outstanding forward foreign exchange
contracts. As of December 31, 2001, and 2000, the Company had not
entered into any forward foreign exchange contracts or any other
derivative contracts.
(e) Property, plant and equipment
Property, plant, and equipment are stated at cost. Equipment under
capital leases are stated at the lesser of fair value of the leased
equipment and the present value of future minimum lease payments.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets. Equipment held under capital
leases and leasehold improvements are amortized straight line over the
shorter of their estimated useful lives or the lease term.
Depreciation and amortization rates are as follows:
Automated teller machines 5-7 years
Computers and software 3-5 years
Vehicles & office equipment 5 years
Cassettes 1 year
Leasehold improvements Over the lease term
(f) Goodwill and other intangible assets
Goodwill represents the excess of purchase price over fair value of
net assets acquired. Other identifiable intangible assets are valued
at their fair market value at the time of purchase.
87
Amortization is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
Goodwill 7-10 years
Developed technology 5 years
Assembled workforce 4 years
Installed base 4 years
Distributor/agent relationships 8 years
Trade-name 10 years
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through discounted future operating
cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows. The assessment of the recoverability of goodwill
will be impacted if estimated future operating cash flows are not
achieved.
(g) Impairment of long-lived assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed 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.
(h) Other assets
Other assets include deferred financing costs, investments in
affiliates, and capitalized software development costs. Deferred
financing costs represent expenses incurred to obtain financing which
have been deferred and amortized over the life of the loan using the
effective interest method.
(i) Investments in affiliates
Investment in the common stock of EFT Processing services, LLC
("Dash"), a 33 1/3% owned affiliate until wholly acquired on August
13, 1999, was accounted for by the equity method until the date of
acquisition. Under this method, the Company's share of net income or
loss was reflected in the Company's investment account, and dividends
received are treated as a reduction of the investment account. The
fair value of the investment in excess of the underlying equity in net
assets is amortized over 10 years. The acquisition on August 13, 1999
was accounted for under the purchase method of accounting (see note
4).
Substantially all of the assets of Dash were sold in January 2002 (see
note 29).
Investment in the common stock of Cash Net Telecommunications Egypt, a
10% owned affiliate, was made on May 10, 2001 and accounted for using
the cost method of accounting. Under this method, the original cost of
the investment is reported on the balance sheet. No income or loss
from the investment is reflected in other long term assets. Operations
commenced in the third quarter of 2001.
(j) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
88
(k) Risks and uncertainties
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Significant
estimates and assumptions are used to account for software revenue,
software development costs, income taxes and impairments of long-lived
assets. Because of the use of such estimates inherent in the financial
reporting process actual results could differ from those estimates.
(l) Revenue recognition
Euronet recognizes revenue at the point at which the service is
performed. Revenue from time and material service contracts is
recognized as the services are provided. 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. The effect of changes to
total estimated contract costs is recognized in the period such
changes are determined. Provisions for estimated losses are made in
the period in which the loss first becomes probable and estimable.
Revenues from software licensing agreement contracts representing
newly released products deemed to have a higher than normal risk of
failure during installation are recognized on a completed contract
basis whereby revenues and related costs are deferred until the
contract is complete. Maintenance revenue is recognized over the
contractual period or as services are performed. Revenue in excess of
billings on software license agreements contracts is recorded as
unbilled receivables and is included in current assets. Billings in
excess of revenue on software license agreements contracts is recorded
as deferred revenue and is included in current liabilities until such
time the above revenue recognition criteria are met (see Note 8).
(m) Research and development costs
The Company applies SFAS 2 and 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). 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 the Company has completed all planning, designing, coding, and
testing activities that are necessary to establish that the product
can be produced to meet its design specifications including functions,
features, and technical performance requirements. Technological
feasibility is evidenced by the existence of a working model of the
product or by completion of a detail program design. The detail
program design 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.
Capitalized software costs are amortized on a product-by-product basis
equal to the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-
line method over the remaining estimated economic life of the product,
generally three years, including the period being reported on.
Amortization commences in the period when the product is available for
general release to customers.
(n) Loss per share
Net loss per share has been computed by dividing net loss by the
weighted average number of common shares outstanding. The effect of
potential common stock (options and warrants outstanding) is
antidilutive. Accordingly diluted net loss per share does not assume
the exercise of outstanding stock options and warrants.
89
(o) Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the fair market value of the Company's shares at the date of the
grant over the exercise price. Such compensation cost is charged to expense
on a straight-line basis over the vesting period of the respective options.
If vesting is accelerated as a result of certain milestones, the
unrecognized compensation would be recorded as expense on the date such
milestones have or have been deemed to have been achieved. The Company has
adopted the disclosure-only provisions of SFAS No. 123 (see Note 18).
(p) Reclassifications
Certain amounts have been reclassified in the prior year consolidated
financial statements to conform to the 2001 consolidated financial
statement presentation.
(4) Acquisitions
On March 26, 1999 the Company signed an agreement with Service Bank GmbH &
Co. KG ("Service Bank") to acquire 252 installed ATMs in Germany and 36
ATMs in inventory. The purchase price for this established ATM network was
12.2 million Deutsche Marks ($6.7 million). Pursuant to the agreement, the
Company receives monthly fees based on revenues realized from the ATMs less
certain expenses and management fees payable to Service Bank. The risks and
rewards of ownership of the ATM network transferred to the Company as of
January 1, 1999, and revenues and expenses from the operation of the ATM
network accrued to Euronet from that date.
The acquisition was accounted for as a purchase; accordingly, the results
of operations have been included in the accompanying consolidated financial
statements since January 1, 1999. The purchase price was allocated to
assets acquired in the amount of $3.5 million based on their fair values.
The excess of the purchase price over the fair value of the net assets
acquired of $3.2 million was recorded as goodwill and is amortized over
seven years.
On August 13, 1999, Euronet USA purchased the remaining 66 2/3% interest in
Dash for a consideration of $0.8 million payable in 24 equal monthly
installments commencing on July 1, 1999. Euronet USA has delivered letters
of credit to each of the sellers in the amount of the entire unpaid balance
of the purchase price of Dash. As payments are made, the outstanding credit
risk exposures related to the letters of credit are reduced
proportionately. At December 31, 2001, Euronet USA owns a 100% interest in
Dash.
The acquisition was accounted for as a purchase; accordingly, the results
of operations have been included in the accompanying consolidated financial
statements since July 1, 1999. The purchase price was allocated to assets
acquired of $0.7 million based on their fair values. The excess of the
purchase price over the fair value of the net assets acquired of $0.1
million has been recorded as goodwill and is amortized over ten years.
On January 4, 2002, The Company sold essentially all of the assets of Dash
(see Note 29).
(5) Restricted Reserve
The restricted reserve arose from the provisions of Hungarian accounting
law in relation to share capital contributed in foreign currency to Bank
Tech and Administrative Services. Under these rules, a foreign currency
capital contribution is recorded in the local accounting records of the
companies using the rate when the capital was contributed. The foreign
currency gain (or loss) which arises upon usage of the foreign currency is
recorded as a separate non-distributable reserve.
The reserve has remained frozen as the laws in Hungary have now changed and
no longer require this accounting. However, the change in the law is not
retroactive and the historical reserve remains undistributable.
90
(6) Restricted Cash
The restricted cash balances as of December 31, 2001 and 2000, were as
follows:
December 31,
--------------------------------
2001 2000
--------------- ----------------
(in thousands)
ATM deposits $ 674 $ 710
Other 1,203 1,393
---------- ----------
$1,877 $2,103
========== ==========
The ATM deposit balances held are equivalent to the value of certain
banks' cash held in Euronet's ATM network. The Company also has
deposits with commercial banks to cover guarantees and deposits with
customs officials to cover future charges.
(7) Prepayments
The prepayments balances as of December 31, 2001 and 2000, were as
follows:
December 31,
-----------------------------
2001 2000
---------------- ------------
(in thousands)
Prepayments $4,399 $3,342
Non trade receivable 1,400 -
---------- ----------
$5,799 $3,342
========== ==========
(8) Contracts in Progress
Amounts included in the consolidated financial statements which relate
to recoverable costs and accrued profits not yet billed on contracts
are classified as current assets under costs and estimated earnings in
excess of billings on software installation contracts. Amounts received
from customers in excess of revenues recognized to date are classified
as current liabilities under billings in excess of cost and estimated
earnings of software installation contracts.
The software installation contracts in progress consist of the
following:
December 31,
--------------------------------
2001 2000
--------------- ----------------
(in thousands)
Costs and estimated earnings
on software installation $ 8,746 $ 11,911
contracts
Less billings to date (9,872) (13,669)
---------- ----------
$(1,126) $ (1,758)
========== ==========
91
Components are included in the accompanying consolidated balance sheets under
the following captions:
December 31,
-----------------------------
2001 2000
---------------- ------------
(in thousands)
Costs and estimated earnings in excess of billings on
software installation contracts $ 331 $ 1,117
Billings in excess of costs and estimated earnings on
software installation contracts (1,457) (2,875)
----------- ----------
$(1,126) $(1,758)
=========== ==========
(9) Goodwill and Intangibles Assets
Goodwill and Intangible assets are carried at amortized cost and
consist of the following:
December 31,
----------------------------
2001 2000
--------------- ------------
(in thousands)
Goodwill $2,973 $2,973
Less accumulated amortization (998) (369)
----------- ----------
Total $1,975 $2,604
=========== ==========
See Note 10 for details of the write down of goodwill and intangible
assets in 2000.
(10) Asset Write Down
During the third quarter of 2000, the Company reduced the carrying
value of certain assets in accordance with SFAS No. 121. The asset
write-downs totaled $12.0 million, of which $11.2 million related to
goodwill and other identifiable intangible assets associated with the
Company's acquisition of Arkansas Systems, Inc. ("Euronet USA") in
December 1998. The remaining $0.8 million write down related to the
Company's ATM hardware inventory acquired associated with the Company's
acquisition of the SBK ATM network in Germany and the Budapest Bank ATM
network in Hungary.
As a result of the Company's inability to achieve operating
improvements, including software license and service orders for Euronet
USA's traditional core product (ITM) and cost reductions, the Software
Solutions Segment continued operating at a loss through 2000. The
Company calculated the expected cash flows of the Company's Software
Solutions Segment, which identified an impairment of its long-lived
assets. Accordingly, in 2000, the Company recorded an impairment charge
based on the present value of expected cash flows of $11.2 million for
the write-down of goodwill and other identifiable intangible assets
recorded upon the acquisition of Euronet USA. The Company considers the
rapidly changing business environment surrounding electronic
transaction payment systems software to be a primary indicator of any
potential impairment of goodwill and other identifiable intangible
assets related to the Company's Software Solutions Segment. The Company
is in the process of repositioning Euronet USA in the market through
development and release of a new set of products that leverage Euronet
USA's traditional core product lines, including a new, platform
independent Java based transaction processing software package with
wireless banking and messaging modules and a set of mobile phone
prepaid recharge solutions. It has become apparent, based on market
reaction to these new products, that these new products and solutions
rather than Euronet USA's traditional ITM solution will be the primary
source of software solutions revenues in the future.
In order to determine the extent of the asset impairment and the
related asset write-down, the Company estimated the discounted cash
flows of the Software Solutions Segment products and services in
determining the fair value of the goodwill and related identifiable
intangible assets. The Company's estimate was based on historical
results which have shown recurring operating losses since acquisition,
92
current projections, and internal earnings targets, net of applicable
taxes. The Company's discounted cash flow analysis indicated that the
carrying value of intangible assets related to Euronet USA should be
reduced to zero as of September 30, 2000. The net book value of the
intangible assets prior to the write down was $11.2 million.
The asset write-down was disclosed as a separate operating expense item
in the Company's Consolidated Statements of Operations and
Comprehensive Loss.
The Company periodically reviews the recorded values of its long-lived
assets to determine if future cash flows to be derived from these
assets will be sufficient to recover the remaining recorded asset
values. A portion of the ATM hardware assets acquired with the Budapest
Bank and Service Bank ATM network purchases were deemed technologically
inferior relative to the Company's standards. Specifically, these
assets were not technologically advanced to support the entire current
and future set of transactions the Company typically offers to users of
its ATM network. As a result of this analysis, the Company recorded a
non-cash charge of $0.8 million related to a reduction in the carrying
value of ATM hardware, adjusting to its net realizable value.
(11) Notes Payable
On June 22, 1998, the Company sold 243,211 units in a public offering,
each consisting of DM 1,000 principal amount at maturity of 12 3/8%
senior discount notes due on July 1, 2006 and 729,633 warrants to
purchase 766,114 shares of common stock. Each warrant entitles the
holder to purchase, on or after June 22, 1998 and prior to July 1,
2006, 1.05 shares of common stock at an exercise price of $5.00 per
share. Cash interest on the notes will not be payable prior to July 1,
2002. Commencing January 1, 2003, cash interest will be payable
semi-annually on January 1 and July 1 of each year. The notes and the
warrants are separately transferable. The gross proceeds to the Company
was DM 150.0 million (approximately $83.1 million) representing an
issue price of DM 616.75 per DM 1,000 principal amount at maturity. Of
this amount, $1.7 million has been allocated to the warrants within
stockholders' equity to reflect their fair market value on the date of
issuance. Net proceeds to the Company after underwriting discount and
offering expenses were DM 145.1 million (approximately $81.3 million).
Pursuant to the Company's indenture, the Company is subject to certain
restrictions and covenants, including, without limitation, covenants
with respect to the following matters: (i) limitation on additional
indebtedness; (ii) limitation on restricted payments; (iii) limitation
on issuance and sales of capital stock of restricted subsidiaries; (iv)
limitation on transactions with affiliates; (v) limitation on liens;
(vi) limitation on guarantees of indebtedness by restricted
subsidiaries; (vii) purchase of Euronet notes upon a change of control;
(viii) limitation on sale of assets; (ix) limitation on dividends and
other payment restrictions affecting restricted subsidiaries; (x)
limitation on investments in unrestricted subsidiaries; (xi) limitation
on lines of business; and (xii) provision of financial statements and
reports. The Company is in compliance with these covenants at December
31, 2001.
During 2001, in sixteen separate transactions, the Company exchanged
97,700 units (principal amount of DEM 97.7 million) of its Senior
Discount Notes and 293,100 warrants for 3,238,650 shares of its common
stock, par value $0.02 per share. This exchange has been accounted for
as an extinguishment of debt with a resulting $8.2 million (net of
applicable income tax expense of $0.6 million) recognized as an
extraordinary gain on such extinguishment. The extinguishment gain
(pre-tax) represents the difference between the allocated carrying
value of the debt and any related warrants extinguished ($39.0 million)
and the fair market value of the common stock issued ($29.3 million),
offset by the write-off of the allocated unamortized deferred financing
costs ($0.9 million). These transactions were exempt from registration
in accordance with Section 3(a)(9) of the Act
During 2001, in a single transaction, the Company exchanged 8,750
Senior Discount Notes (principal face amount of DEM 8.75 million) of
its Senior Discount Notes for two new Senior discount notes having an
aggregate face amount of $2.9 million (the "New Notes"). The
interest, repayment and other terms of the New Notes are identical to
those of the Senior Discount Notes for which they were exchanged,
except that (i) the principal amount was reduced as indicated in the
previous sentence, (ii) the Company has the right to prepay the New
Notes at any time at its option by paying the "Accreted Value" of the
Notes, and (iii) the new notes are governed by a new Note Purchase
Agreement rather than the indenture under which
93
the Senior Discount Notes were issued and the New Notes therefore are
not covered by any of the provisions of such indenture relating to
action by the trustee, voting or maintenance of listing on a stock
exchange. This exchange has been accounted for as an extinguishment of
debt and issuance of new debt with a resulting $0.2 million (net of
applicable income tax expense of $0.5 million) recognized as an
extraordinary gain on such extinguishment. The extinguishment gain
(pre-tax) represents the difference between the allocated carrying
value of the debt extinguished ($3.3 million) and the fair market value
of the New Notes issued ($2.5 million), offset by the write-off of the
allocated unamortized deferred financing costs ($0.1 million). This
transaction was exempt from registration in accordance with Section
3(a)(9) of the Securities Act.
During 2001, in a single transaction, the Company exchanged bonds with
face amount $2.1 million of its Senior Discount Notes for 104,750
shares of its common stock, par value $0.02 per share. This exchange
has been accounted for as an extinguishment of debt with a resulting
$0.1 million (net of applicable income tax expense of $0.1 million)
recognized as an extraordinary gain on such extinguishment. The
extinguishment gain (pre-tax) represents the difference between the
allocated carrying value of the debt and any related warrants
extinguished ($2.0 million) and the fair market value of the common
stock issued ($1.7 million). These transactions were exempt from
registration in accordance with Section 3(a)(9) of the Securities Act.
During 1999, the Company repurchased notes with a face value of DM 22.0
million and 65,850 warrants for a total purchase price of $5.2 million.
This repurchase was accounted for as an extinguishment of debt with a
resulting $2.2 million (net of applicable income tax expense of $0.6
million) recognized as an extraordinary gain on such extinguishment.
The extinguishment gain represents the difference between the allocated
carrying value of the debt extinguished ($8.1 million) and the
consideration paid ($5.0 million), offset by the write-off of the
allocated unamortized deferred financing costs ($0.3 million). Of the
total purchase price of $5.2 million, $0.2 million was allocated to the
warrants based on their fair market value at the time of purchase and
recorded as an adjustment to additional paid-in capital.
The Senior Discount Notes that were acquired by the Company in the
above exchanges have not been retired. The Company will consider
additional repurchases of its Senior Discount Notes if opportunities
arise to complete such transactions on favorable terms.
The following table provides the composition of notes payable at
December 31, 2001 and 2000:
December 31,
--------------------------------
2001 2000
-------------- --------------
(in thousands)
Principal amount $40,885 $ 93,819
Unamortized discount (2,739) (16,628)
-------------- --------------
Carrying balance $38,146 $ 77,191
============== ==============
The effective interest rate relating to the aforementioned notes
payable was 13.06% for 2001 and 13.09% for the years ended 2000 and
1999. The interest expense was approximately $6.8 million, $8.8 million
and $9.5 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
(12) Private Placement of Common Shares
In July 2000, the Company entered into subscription agreements for the
sale of 877,946 new common shares of the Company. Closing with respect
to such sale took place on July 14, 2000 and August 29, 2000. These
agreements were signed with accredited investors in transactions exempt
from registration pursuant to the exemptions provided in Section 4(2)
and Regulation D of the Act. The purchase price of each share was
$6.97. The aggregate amount of proceeds to the Company from the private
placement was $6.1 million.
In April 2000, the Company entered into two separate subscription
agreements for the sale of an aggregate of 354,777 new common shares of
the Company. Of the total new shares, closing with respect to 254,777
94
shares took place on April 10, 2000, and closing with respect to
100,000 shares took place on May 4, 2000. These agreements were signed
with certain foreign persons in transactions exempt from registration
under the United States Securities Act of 1933 (the "Act") pursuant the
exemption provided in Regulation S of the Act. The weighted average
purchase price of each share was $7.50. The aggregate amount of
proceeds to the Company from the private placement was $2.7 million.
Under each of the agreements, for each two shares of common stock
purchased in the private placement, the accredited investors were
issued one warrant, expiring in each case on the one year anniversary
date of the subscription agreement, to purchase a share of Euronet
common stock at a weighted average exercise price of $12.50. The
warrants issued under this agreement expired in 2001.
In February 2000, the Company entered into two subscription agreements
for the sale of an aggregate of 650,000 new common shares of the
Company. Closing under these agreements took place on March 13, 2000.
These agreements were signed with certain accredited investors in
transactions exempt from registration pursuant to the exemptions
provided in Section 4(2) and Regulation D of the Act. The purchase
price of each share was $6.615, which represents 90% of the average
closing price for the ten trading days prior to and including February
15, 2000. The aggregate amount of proceeds to the Company from the
private placement was $4.3 million. Under each of the agreements, for
each two shares of common stock purchased in the private placement, the
purchasers were issued one warrant to purchase a share of Euronet
common stock at an exercise price of $11.615, expiring in each case on
the one year anniversary date of the subscription agreement. The
warrants issued under this agreement expired in 2001.
(13) Credit Facility
On June 28, 2000 the Company entered into an unsecured revolving credit
agreement (the "Credit Agreement") providing a facility of up to $4.0
million from three shareholders as follows: DST Systems, Inc. in the
amount of $2.4 million; Hungarian-American Enterprise Fund in the
amount of $1.0 million; and Michael J. Brown, the CEO and a Director of
the Company, in the amount of $0.6 million. The facility was originally
available to be drawn upon until December 28, 2000, and repayment of
any draws was due June 28, 2001. The Credit Agreement was amended and
renewed for six month periods on December 28, 2000 and June 28, 2001
and, as a result of such amendments, any amounts drawn on the facility
must now be repaid by June 28, 2002.
A commitment fee was paid for the initial facility of 100,000 warrants
issued pro-rata to the lenders with a warrant strike price set at the
average share price, as quoted on NASDAQ for 10 trading days prior to
the warrant issue date, less 10 percent. An additional 100,000, 50,000
and 50,000 warrants, on the same terms, were issued on January 2, 2001,
June 28, 2001, and November 27, 2001, respectively, for the subsequent
extensions of the facility. Warrants are issuable on similar terms and
conditions for each draw on the facility at the rate of 80,000 warrants
for each $1.0 million of funds drawn.
As of December 31, 2001, the Company has drawn $2.0 million and issued
160,000 warrants in respect of such draw. Amounts outstanding under the
facility accrue interest at 10 percent per annum, payable quarterly.
Repayment of the principal is due on June 28, 2002. The Credit
Agreement was not renewed in December 2001.
In 2001, two participants in the revolving credit agreement, in three
separate transactions, elected to exercise a total of 361,000 warrants
for an equal number of shares. The total amount of cash received from
these transactions was $2.1 million.
(14) Forward Foreign Exchange Contracts
On May 26, 1999, the Company entered into foreign currency call options
with Merrill Lynch to purchase Euro 79.3 million for $85.9 million and
foreign currency put options to sell $83.6 million for Euro 79.3
million on May 26, 2000 (the "Settlement Date"). Under such contracts,
the Company would be required to make a cash payment to Merrill Lynch
on May 31, 2000, should the Euro weaken against the U.S. Dollar and
fall below $1.055 (the "Floor Rate") on the Settlement Date. At the
same time, should the Euro strengthen against the U.S. dollar and rise
above $1.0835 to the Euro (the "Ceiling Rate") the Company would
receive a cash payment from Merrill Lynch depending upon the
Euro/Dollar exchange rate on such Settlement Date.
95
In the week of March 13, 2000, the Company entered into put options
with Merrill Lynch to sell Euro 79.0 million for $75.1 million on May
26, 2000. The contracts were purchased to limit the Company's exposure
on the call option described above against a fall of the Euro below
$0.95.
The Company was required to cash collateralize the net fair value of
such options contracts measured on a mark-to-market basis, and on May
26, 2000, the Company had on deposit $8.3 million with Merrill Lynch.
On May 26, 2000, the rate of the Euro was $0.9118 and the Company
settled the above option contracts in the amount of $8.3 million
resulting in a total net loss on such contracts of $10.3 million
inclusive of the cost of the contracts. At December 31, 2001 and 2000,
the Company had not entered into any option or other formal foreign
exchange contracts.
(15) Leases
(a) Capital leases
The Company leases many of its ATMs under capital lease agreements that
expire between 2002 and 2007 and bear interest at rates between 8% and
12%. Lease installments are paid on a monthly, quarterly or semi-annual
basis. Euronet has the right to extend the term of certain leases at
the conclusion of the basic lease period.
The gross amount of the ATMs and computer equipment and related
accumulated amortization recorded under capital leases were as follows:
December 31,
----------------------------------
2001 2000
-------------- ---------------
(in thousands)
ATMs $17,642 $13,924
Other 1,045 366
-------------- --------------
18,687 14,290
Less accumulated amortization (3,201) (3,429)
-------------- --------------
Net book value $15,486 $10,861
============== ==============
Depreciation of assets held under capital leases amounted to $2.1
million, $2.0 million, and $2.1 million for the years ended December
31, 2001, 2000, and 1999, respectively, and is included in depreciation
and amortization expense.
(b) Operating leases
The Company also has noncancelable operating rental leases for office
space which expire over the next 2 to 8 years. Rent expense under these
leases amounted to $1.6 million, $1.4 million, and $2.1 million for the
years ended December 31, 2001, 2000, and 1999, respectively.
96
(c) Future minimum lease payments
Future minimum lease payments under the capital leases and the
noncancelable operating leases (with initial or remaining lease terms
in excess of one year) as of December 31, 2001 are:
--------------------------------
Capital Operating
Leases Leases
------------- ------------
(in thousands)
Year ending December 31,
2002 $ 6,080 $ 1,437
2003 4,145 1,042
2004 3,039 763
2005 917 638
2006 268 595
2007 and thereafter 51 1,039
------------ -----------
Total minimum lease payments $ 14,500 $ 5,514
============ ===========
Less amounts representing interest (2,092)
------------
Present value of net minimum capital lease payments 12,408
Less current installments of obligations under capital
leases (4,765)
------------
Long term capital lease obligations $ 7,643
============
(16) Taxes
The sources of income/(loss) before income taxes are presented as
follows:
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
------------ --------------- -------------
(in thousands)
United States $ (2,154) $ (30,227) $ (19,866)
Netherlands Antilles - - 77
Europe (7,702) (18,136) (18,068)
--------- -------- --------
Loss before income tax and extraordinary item $ (9,856) $ (48,363) $ (37,857)
========= ========== ==========
Total income tax benefit/(expense) for the years ended December 31,
2001, 2000 and 1999 was allocated as follows:
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
------------ --------------- -------------
(in thousands)
Loss from continuing operations $ 2,030 $ (1,188) $ 4,746
Extraordinary item (1,181) - (564)
------- --------- --------
$ 849 $ (1,188) $ 4,182
======= ========= ========
97
The income tax benefit/(expense) from operations consisted of the
following:
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
------------ ------------- ----------
(in thousands)
Current tax benefit/(expense):
U.S. Federal $ 2,154 $ (838) $ 1,828
Europe (124) (350) -
-------- -------- -------
Total current 2,030 (1,188) 1,828
======== ======== =======
Deferred tax benefit/(expense)/:
U.S. Federal - - 2,354
Europe - - -
-------- -------- -------
Total deferred - - 2,354
-------- -------- -------
Total tax benefit/(expense) $ 2,030 $ (1,188) $ 4,182
======== ========= =======
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
------------ ------------- ----------
(in thousands)
Income tax benefit at statutory rates $ 3,351 $ 16,443 $ 11,933
Permanent differences (446) (186) 1,078
Tax rate differences (795) (1,757) (938)
Adjustment to deferred tax asset for enacted
changes in tax rates (293) (1,909) (443)
Correction of prior year deferred taxes 1,110 (716) (1,700)
Tax refund received 973 - -
Other (166) (2,115) 176
Change in valuation allowance (1,704) (10,948) (5,360)
-------- ---------- --------
Actual income tax benefit/(expense) $ 2,030 $ (1,188) $ 4,746
======== ========== ========
98
The tax effect of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities are as follows:
Year Ended December 31,
----------------------------
2001 2000
---------- ----------
(in thousands)
Deferred tax assets:
Tax loss carryforwards $ 18,729 $ 14,325
Stock compensation expense 1,130 1,130
Unrealized exchange rate differences 2,457 4,614
Interest expense 3,081 7,164
Accrued expenses 2,238 1,548
Billings in excess of earnings 565 1,108
Other 3,512 2,145
----- -----
Total deferred tax assets 31,712 32,034
Valuation allowance (30,285) (30,689)
-------- --------
Net deferred tax assets 1,427 1,345
-------- --------
Deferred tax liabilities:
Property and equipment - 26
Capitalized research and development costs 920 515
Earnings in excess of billings 78 380
-------- --------
Total deferred tax liabilities 998 921
-------- --------
Net deferred tax assets / liabilities $ 429 $ 424
======== ========
The valuation allowance for deferred tax assets as of January 1, 2001,
2000 and 1999 was $30.6 million, $19.7 million and $14.3 million,
respectively. The net change in the total valuation allowance for the
year ended December 31, 2001 was a decrease of $0.4 million and for the
years ended December 31, 2000, and 1999 were increases of $10.9 million
and $5.4 million, respectively.
The valuation allowance relates in part to deferred tax assets
established under SFAS No. 109 for loss carryforwards at December 31,
2001, 2000 and 1999 of $65.6 million, $46.9 million and $45.0 million,
respectively.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31,
2001. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced.
99
At December 31, 2001 the Company has net operating loss carry forwards of
approximately $65.6 million which will expire as follows:
Year Ended December 31, In thousands
--------------------------- -----------------------------
2002 1,910
2003 7,928
2004 9,671
2005 7,022
2006 7,718
2007 624
2008 and thereafter 30,776
------
Total $65,649
=======
Subsequently recognized tax benefits relating to the valuation
allowance for deferred tax assets as of December 31, 2001 will be
allocated to income taxes in the consolidated statements of operations,
except for $ 1.1 million, which will be allocated to additional paid in
capital.
(17) Valuation and Qualifying Accounts
Additions
Balance at charged to Amounts
January 1 expense written off December 31
-------------- ---------------- ----------------- -----------
(in thousands)
1999
Allowance for doubtful accounts $291 $ 90 $ - $381
2000
Allowance for doubtful accounts $381 $408 $ 49 $740
2001
Allowance for doubtful accounts $740 $717 $782 $675
(18) Stock Plans
(a) Employee stock option plans
The Company has established a share compensation plan that provides
certain employees options to purchase shares of its common stock. The
options vest over a period of five years from the date of grant.
Options are exercisable during the term of employment or consulting
arrangements with the Company and its subsidiaries. At December 31,
2001, the Company has authorized options for the purchase of 6,463,991
shares of common shares, of which 6,416,416 have been awarded to
employees and 2,594,744 remain unexercised.
In accordance with a shareholders' agreement dated February 15, 1996
and amended on October 14, 1996, Euronet reserved 2,850,925 common
shares for the purpose of awarding common shares ("milestone awards")
to certain investors and options to acquire common shares ("milestone
options") to the founders, management and key employees. The Company
granted 800,520 milestone awards at an exercise price of $0.02 per
share and 2,050,405 milestone options at an exercise price of $2.14 per
share.
Upon the initial public offering of the Company on March 6, 1997, all
milestone awards and milestone options granted under the milestone
arrangement (with the exception of 49,819 options to certain key
employees which vested equally over the two years following the initial
public offering) vested and all shares became immediately issuable to
beneficiaries of milestone awards and options. At that time, 800,520
milestone awards and 232,078 milestone options were exercised. As of
December 31, 2001 1,412,756 milestone options remain unexercised.
100
Share option activity during the periods indicated is as follows:
Number of
Weighted-Average
Shares Exercise Price
------------------- -------------------
Balance at December 31, 1998 (2,174,412 shares exercisable) 3,622,591 $ 3.46
=================== ===================
Granted 1,140,830 5.02
Exercised (228,503) 1.46
Forfeited (233,194) 5.09
Balance at December 31, 1999 (2,379,729 shares exercisable) 4,301,724 $ 3.87
=================== ===================
Granted 1,237,000 7.24
Exercised (390,231) 2.43
Forfeited (563,985) 6.00
Balance at December 31, 2000 (2,441,928 shares exercisable) 4,584,508 $ 4.65
=================== ===================
Granted 1,321,968 8.32
Exercised (292,643) 4.41
Forfeited (693,698) 6.35
Balance at December 31, 2001 (2,594,744 shares exercisable) 4,920,135 $ 5.41
=================== ===================
At December 31, 2001, the range of exercise prices, weighted-average
remaining contractual life and number exercisable of outstanding options
was as follows:
Weighted-Average
Outstanding Remaining
Range of Shares as of Contractual Life Weighted-Average Number Weighted-Average
Exercise Prices Dec 31, 2001 (Years) Exercise Price Exercisable Exercise Price
---------------- --- ---------------- ---------------- ----------------- ----------------- ---------------
0.00 - 1.64 347,586 2.6 $ 0.7634 347,586 $ 0.7634
1.65 - 3.28 1,518,834 5.2 $ 2.1670 1,503,099 $ 2.1558
3.28 - 4.92 20,700 6.7 $ 3.5136 11,820 $ 3.4952
4.92 - 6.56 1,659,396 8.1 $ 5.6218 435,561 $ 5.5503
6.56 - 8.20 799,500 8.3 $ 7.1621 145,681 $ 7.1441
8.20 - 9.84 57,000 8.3 $ 8.4375 11,400 $ 8.4375
9.84 - 11.48 49,214 5.6 $ 10.6738 38,370 $10.6914
11.48 - 13.12 125,859 8.4 $ 12.3276 32,283 $11.5809
13.12 - 14.76 85,496 5.3 $ 13.9400 68,394 $13.9400
14.76 - 16.40 256,550 9.9 $ 16.4000 550 $16.4000
---------------- ---------------- ----------------- ----------------- ---------------
4,920,135 6.9 $ 5.4147 2,594,744 $ 3.4100
The Company applies APB Opinion No. 25 in accounting for its share
option plans. The exercise price of the options is established
generally based on the estimated fair value of the underlying shares at
grant date. For options granted prior to the initial public offering,
the fair value was determined by taking into consideration the per
share price at which the most recent sale of equity securities was made
by Euronet to investors. For options granted after the initial public
offering, the fair value is determined by the market price of the share
at the date of grant. However, in contemplation of the initial public
offering in March 1997, compensation expense was recognized in 1996
relating to all options granted during the fourth quarter of 1996. Such
compensation expense was calculated as the excess of the fair market
value of the underlying shares (determined as $4.22, which is the cash
price per share at which GE Capital subscribed for preferred shares of
Euronet in February 1997) over the exercise price of $2.14 per share.
Euronet recorded $4,172,000 of compensation expense in the 1997
consolidated financial statements and an additional compensation
expense of $343,000 with respect to these options was recognized over
the remaining vesting period of such options. Of this amount, $0, $0
and $127,000 have been expensed in the years ended December 31, 2001,
2000 and 1999, respectively.
101
(b) Employee stock purchase plans
The Company has established a qualified Employee Stock Purchase Plan
(the "ESPP") the terms of which allow for qualified employees (as
defined by the ESPP) to participate in the purchase of designated
shares of the Company's common stock at a price equal to the lower of
85% of the closing price at the beginning or end of each quarterly
offering period. The Company issued 174,570 shares of common stock
during 2001 pursuant to the ESPP at an average price per share of
$9.12.
The following table provides the fair value of options granted and
shares granted under the employee stock purchase plan during 2001, 2000
and 1999 together with a description of the assumptions used to
calculate the fair value using the Black-Scholes pricing model:
Year ended December 31,
---------------------------------------------------------
2001 2000 1999
---------------- ------------------ ---------------
Expected volatility 62.7% 82.0% 100%
Average risk-free rate 5.63% 7.21% 6.61%
Average expected lives 5 years 5 years 5 years
Weighted-average fair value (per share) $4.59 $5.10 $5.02
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options and shares granted under the
employee stock purchase plan under SFAS No. 123, Euronet's net
income/(loss) and net income/(loss) per share would have been the amounts
indicated below:
Year ended December 31,
---------------------------------------------------------
2001 2000 1999
---------------- ------------------ ---------------
(in thousands, except per share data)
Net income / (loss) as reported $ 670 $(49,551) $(30,915)
Net loss-pro forma $(3,103) $(52,606) $(33,355)
Income / (loss) per share as reported $ 0.03 $ (3.00) $ (2.03)
Loss per share pro forma ($0.16) $ (2.99) $ (2.13)
Pro forma impact reflects only options granted since December 31, 1994.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma amounts
presented above because compensation cost is reflected over the
options' vesting periods and compensation cost for options granted
prior to January 1, 1995 is not considered.
(19) Employee Benefit Plans
The Company has established a Profit Sharing and 401(k) plan for all
employees who have completed six months of service and are not
otherwise covered by a retirement benefit plan (national or private)
outside of the US. Each plan participant can contribute up to the
maximum amount allowed by the Internal Revenue Service to the Plan
through payroll deductions. The Company's matching contributions to the
plan are made in stock and are discretionary and are determined each
year by the Board of Directors. The employee's vested percentage
regarding the employer's contribution varies according to years of
service. The Company's contribution accrual to the Plan for the years
ended December 31, 2001, 2000 and 1999 was $0.3 million, $0.2 million
and $0.2 million respectively. The Company maintains a health insurance
program, which covers all regular full-time and regular part-time
employees at no charge to the employee. Coverage for eligible family
members is available through employee contributions.
(20) Business Segment Information
Euronet and its subsidiaries operate in two business segments: (1) a
segment that provides an independent shared ATM network and other
electronic payment processing services to banks, retail and financial
institutions (the "Processing Services Segment"); and (2) a segment
that produces application software and solutions for payment and
transaction delivery systems (the "Software Solutions Segment"). These
business segments are supported by a corporate service segment which
provides corporate and other administrative services which are not
directly identifiable with the two business segments, (the "Corporate
102
Services Segment"). The accounting policies of each segment are the
same as those described in the summary of significant accounting
policies. The Company evaluates performance based on profit or loss
from operations before income taxes not including nonrecurring gains
and losses. Prior period segment information has been restated to
conform to the current period's presentation.
As the Processing Services Segment continued to grow throughout 1999,
the Company's management began to divide the internal organization of
the segment into Sub-segments. Accordingly, beginning in January 2000,
the Company divided the Processing services Segment into three
Sub-segments: "Central European Sub-segment" (including Hungary,
Poland, the Czech Republic, Croatia, Greece and Romania), "Western
European Sub-segment" (including Germany, France, and the United
Kingdom) and "Other Operations Sub-segment" (including the United
States and unallocated processing center costs). Where practical,
certain amounts have been reclassified to reflect the change in
internal reporting. The Company is unable to present Processing
services Segment assets by Sub-segment as of December 31, 1999. Prior
to January 1, 2000, certain assets that were used to provide support
services to the Company as a whole were included in the assets in the
balance sheet of the Company's wholly owned Hungarian subsidiary, Bank
Tech. In order to segregate corporate assets from those of the
Hungarian operations, these assets were transferred as of December 31,
1999, from Bank Tech to an existing Hungarian shell company,
Administrative Services. Those assets are now shown under the Other
Operations Sub-segment.
The following tables present the segment results of the Company's
operations for the years ended December 31, 2001, 2000 and 1999.
Processing Services
(In thousands)
For the year ended Central Western Software Corporate
December 31, 2001 Europe Europe Other Total Solutions Services Total
---------------------- --------- -------- -------- -------- --------- --------- --------
Total revenues $ 25,236 $ 21,595 $ 2,298 $ 49,129 $ 15,222 $ - $ 64,351
Total operating
expenses (23,625) (20,105) (2,971) (46,701) (17,096) (6,521) (70,318)
--------- -------- -------- -------- -------- --------- --------
Operating income/(loss) 1,611 1,490 (673) 2,428 (1,874) (6,521) (5,967)
Interest income 81 51 10 142 36 104 282
Interest expense (977) (344) (25) (1,346) - (8,125) (9,471)
Foreign exchange
gain/(loss), net 237 (216) 545 566 (26) 4,760 5,300
--------- -------- -------- -------- -------- -------- --------
Net income/(loss)
before income taxes $ 952 $ 981 $ (143) $ 1,790 $ (1,864) $ (9,782) $ (9,856)
========= ======== ======== ======== ======== ========= ========
Segment assets $ 25,548 $ 17,561 $ 4,150 $ 47,259 $ 8,409 $ 5,723 $ 61,391
Fixed assets 14,956 12,178 1,116 28,250 1,243 58 29,551
Depreciation and
amortization 3,969 3,202 1,051 8,222 744 146 9,112
103
Processing Services
(In thousands)
For the year ended Central Western Software Corporate
December 31, 2000 Europe Europe Other Total Solutions Services Total
--------------------- --------- --------- --------- --------- ----------- ---------- ----------
Total revenues $ 18,599 $ 16,615 $ 1,700 $ 36,914 $ 16,006 $ - $ 52,920
Total operating expenses (21,669) (18,901) (2,409) (42,979) (37,475) (7,862) (88,316)
-------- -------- -------- -------- -------- -------- --------
Operating loss (3,070) (2,286) (709) (6,065) (21,469) (7,862) (35,396)
Interest income 289 65 190 544 103 442 1,089
Interest expense (1,016) (168) (150) (1,334) - (9,495) (10,829)
Foreign exchange
(loss)/gain, net (616) (494) (155) (1,265) 1 (1,963) (3,227)
-------- -------- -------- -------- --------- -------- --------
Net loss
before income taxes $ (4,413) $ (2,883) $ (824) $ (8,120) $(21,365) $(18,878) $(48,363)
======== ======== ======== ======== ======== ======== ========
Segment assets $ 25,697 $ 16,755 $ 3,652 $ 46,104 $ 9,433 $ 5,353 $ 60,890
Fixed assets 17,145 11,707 1,682 30,534 968 155 31,657
Depreciation and
amortization 3,977 2,884 1,100 7,961 2,215 208 10,384
Asset write down 668 110 - 778 11,190 - 11,968
Processing Services
(In thousands)
For the year ended Central Western Software Corporate
December 31, 1999 Europe Europe Other Total Solutions Services Total
-------------------- --------- --------- --------- --------- ---------- --------- ----------
Total revenues $ 12,664 $ 12,637 $ 1,202 $ 26,503 $ 15,149 $ - $ 41,652
Total operating expenses (20,683) (16,477) (2,250) (39,410) (22,290) (6,750) (68,450)
-------- -------- -------- -------- --------- -------- --------
Operating loss (8,019) (3,840) (1,048) (12,907) (7,141) (6,750) (26,798)
Interest income 448 16 103 567 148 1,235 1,950
Interest expense (981) (101) (51) (1,133) - (9,766) (10,899)
Foreign exchange
(loss)/gain, net (399) (19) (146) (564) 2 (1,548) (2,110)
-------- -------- -------- -------- --------- -------- --------
Net loss
before income taxes $ (8,951) $ (3,944) $ (1,142) $(14,037) $ (6,991) $(16,829) $(37,857)
======== ======== ======== ======== ========= ======== ========
Segment assets n/a n/a n/a $ 56,658 $ 21,527 $ 18,659 $ 96,844
Fixed assets n/a n/a n/a 35,438 1,113 142 36,693
Depreciation and
amortization n/a n/a n/a 7,410 2,683 145 10,238
104
The following is a reconciliation of the segment information to the consolidated
financial statements.
Year end December 31,
-------------------------------------------------------
2001 2000 1999
-------------------- ---------------- ---------------
(in thousands)
Revenues:
---------
Total revenues for reportable segments $64,351 $52,920 $41,652
Elimination of inter-segment revenues (180) (180) (180)
-------------- ------------- -------------
Total consolidated revenues $64,171 $52,740 $41,472
============== =============== ==============
Operating expenses:
-------------------
Total operating expenses for reportable segments $70,318 $88,316 $68,450
Elimination of inter-segment expenses (180) (180) (180)
-------------- --------------- --------------
$70,138 $88,136 $68,270
============== =============== ==============
Total revenues and long-lived assets for the years ended December 31, 2001, 2000
and 1999 for the Company analyzed by geographical location is as follows:
Total Revenues Long-lived Assets
Year ended December 31, December 31,
------------------------------------------------------ -------------------------------------
(in thousands) 2001 2000 1999 2001 2000
--------------- ------------------ ----------------- ------------------ -----------------
United States $17,516 $17,442 $16,172 $ 1,274 $ 984
Germany 10,492 9,984 11,160 3,705 4,800
Hungary 8,323 6,524 5,606 4,306 5,878
UK 10,210 5,535 1,199 7,688 4,902
Poland 12,309 9,147 5,798 9,275 9,824
Other 5,321 4,108 1,537 3,303 5,269
--------------- ----------------- ---------------- ----------------- ----------------
Total $64,171 $52,740 $41,472 $29,551 $31,657
=============== ================= ================ ================= ================
Total revenues are attributed to countries based on location of
customer for the Processing Services Segment. For revenues generated
by the Euronet USA software solutions segment, all revenues are
attributed to the United States. Long lived assets consist of
property, plant, and equipment, net of accumulated depreciation.
(21) Financial Instruments
Most of Euronet's financial instruments (cash and cash equivalents,
trade accounts receivable, prepaid expenses and other current assets,
trade accounts payable, accrued expenses and other current liabilities,
advance payments on contracts, billings in excess of costs and
estimated earnings on software installation contracts, costs and
estimated earnings in excess of billings on software installation
contracts) are short-term in nature. Accordingly, the carrying value of
these instruments approximates their fair values. The fair value of
notes payable was determined based on quoted market prices for the same
issue and amounted to $32.7 million (carrying value of $38.1 million)
at December 31, 2001 and $37.5 million (carrying value of $77.2
million) at December 31, 2000.
105
(22) Reconciliation of Net Income/(Loss) to Net Cash Provided by/(Used in)
Operating Activities
The reconciliation of net income/(loss) to net cash provided by/(used
in) operating activities for the years ended December 31, 2001, 2000,
and 1999 follows.
Year Ended December 31,
-----------------------------------------
2001 2000 1999
--------- ---------- -----------
(in thousands)
Net income / (loss) $ 670 $(49,551) $(30,915)
Adjustments to reconcile net income/(loss) to net cash used in operating
activities:
Share compensation expense - - 127
Depreciation and amortization 9,112 10,383 10,238
Asset write downs - 11,968 -
Unrealized foreign exchange losses (4,596) (4,261) (8,294)
Loss/(gain) on disposal of fixed assets 102 2,182 (715)
Amortization of deferred financing costs (116) 232 269
Accretion of discount on notes payable 6,813 8,753 9,506
Extraordinary gain on extinguishment of debt (8,496) - (2,196)
Tax effect of extraordinary gain on extinguishment of debt (1,181) - (564)
Decrease/(increase) in deferred income tax - 36 (2,797)
(Decrease)/increase in income tax payable, net (849) 818 (2,667)
Decrease/(increase) in restricted cash 222 9,755 2,043
Decrease/(increase) in trade accounts receivable 194 (1,597) (2,028)
Decrease/(increase) in costs and estimated earnings in excess of
billings on software installation contracts 786 (450) 78
(Increase)/decrease in prepaid expenses and other current assets (2,111) (457) 184
Decrease in deposits for ATM leases - 1,310 802
(Decrease)/increase in trade accounts payable (192) (432) 1,119
Increase/(decrease) in advance payments on contracts 1,018 834 350
Increase/(decrease) in accrued expenses and other liabilities 80 (5,725) 3,049
(Decrease)/increase in billings in excess of costs and estimated
earnings on software installation costs (1,417) (155) 2,040
---------- ---------- ----------
Net cash provided by / (used in) operating activities $ 39 $(16,357) $(20,371)
========== ========== ==========
(23) Non-cash Financing and Investing Activities
Capital lease obligations of $5.7 million, $5.1 million and $5.2
million during the years ended December 31, 2001, 2000 and 1999,
respectively, were incurred when the Company entered into leases
primarily for new automated teller machines.
During the years ended December 31, 2001, 2000 and 1999, the Company
issued warrants to purchase common stock totaling $0.9 million, $0.4
million, and nil, respectively.
During 2001 there were various non cash extinguishments of the 12 3/8%
Senior Discount Notes (see Note 11).
(24) Concentrations of Business and Credit Risk
Euronet is subject to concentrations of business and credit risk.
Euronet's financial instruments mainly include trade accounts
receivables and cash and cash equivalents. Euronet's customer base,
although limited, includes the most significant international card
organizations and certain banks in the markets in which it operates.
Therefore, the Company's operations are directly affected by the
financial condition of those entities.
Cash and cash equivalents are placed with high credit quality financial
institutions or in short-term duration, high quality debt securities.
Euronet does not require collateral or other security to support
financial instruments subject to credit risk. Management believes that
the credit risk associated with its financial instruments is minimal
due to the control procedures which monitor credit worthiness of
customers and financial institutions.
106
(25) Research and Development
The Company regularly engages in research and development activities
aimed at the development and delivery of new products, services and
processes to its customers including, but not limited to, bill payment
and presentment, telephone banking products, applications for wireless
application protocol ("WAP") enabled customer touch points, other
wireless banking products, GSM mobile prepaid recharge products ATM
browser products and internet banking solutions as well as significant
improvements to core software products.
The Company's research and development costs incurred for computer
products to be sold, leased or otherwise marketed totaled $5.0 million,
$6.7 million and $3.2 million for the years ended December 31, 2001,
2000 and 1999, respectively. As of December 31, 2001, $2.3 million was
capitalized and appears on the Company's balance sheet in other long
term assets, net of accumulated amortization of $0.6 million. As of
2000 and 1999, $1.0 million and $0.3 million was capitalized, net of
accumulated amortization of $0.1 million and $0.1 million,
respectively. Related amortization expense of capitalized software
costs amounted to $0.5 million, $0.1 million and $0.1 million for the
years 2001, 2000, and 1999, respectively. During 2000, approximately
$0.3 million of previous capitalized costs were written down to reflect
estimated net realizable value.
(26) Employee Loans for Common Stock Program
In October 1999 the Company's Board of Directors approved and
implemented a Loan Agreement Program ("Program") for certain employees
under which the Company has loaned sums of money to participating
employees in order for them to purchase shares of the Company's stock
on the open market. The shares are pledged to the Company to secure the
loans. As of December 31, 2001, 137,851 shares are held by the Company
as collateral for the loans. The loans carry five-year terms and are
non-recourse, non-interest bearing loans. The shares vest to the
employees in five equal tranches of 20 percent of the shares for five
years, commencing at the date each employee began employment with the
Company. As the shares vest, the employees are entitled to pay off the
loans and free the shares of the pledge. These loans are considered an
award of stock options as the loans are non- recourse and the employee
is not obligated to pay any interest on the loans. The loans have been
accounted for as a separate component of stockholders' deficit. In the
event that any one of the employees defaults on the terms of the loans,
or leaves the Company prior to vesting, the shares received by the
Company or the unvested shares will be recorded as treasury stock.
(27) Sale of Croatian Network
On November 19, 1999, the Company completed the sale of its Croatian
ATM network to Raiffeisenbank Austria, d.d., a Croatian financial
institution ("RBA"), for consideration of $2.7 million. The carrying
value of the Croatian assets was $2.0 million, resulting in a gain to
the Company of $0.7 million, recorded as an offset to operating costs.
Subsequent to the sale of the network assets, the Company and RBA
entered into an ATM services agreement whereby the Company will provide
ATM management and other related services to RBA for an initial term of
15 years.
(28) Commitments and Contingencies
As of December 31, 2001, the Company has caused the issuance of a
performance bond on its behalf and has collateralized the obligation
under the performance bond to the extent of $0.4 million. The
collateral consists of certain assets in the UK.
The company has commitments to make capital contributions to Cash Net
Telecommunications Egypt, of $0.2 million.
(29) Subsequent Events
In January 2002, the Company entered into an Asset Purchase Agreement
with ALLTEL Information Services, Inc. ("AIS"), a wholly owned
subsidiary of ALLTEL Corporation, whereby Dash sold substantially all
of its assets to AIS for $6.8 million, in cash, subject to a working
capital adjustment. Of this amount, $0.7 million is being held in
escrow under the terms of a separate escrow agreement to provide for
the payment of any damages that might arise from any breach of the
representations and warranties
107
contained in the Asset Purchase Agreement and certain post-closing
adjustments. Dash, Euronet USA and AIS are parties to the Asset
Purchase Agreement. The Company expects to record a gain of
approximately $5.9 million related to this transaction.
In January 2002, the Company entered into a Software License Agreement
(the "License Agreement") whereby Euronet USA granted AIS a
nonexclusive license to use, distribute and develop versions 1.5 and
2.2 of Euronet USA's GoldNet ITM ATM Network Processing Software
("GoldNet Software"). The License Agreement includes certain
territorial and other restrictions on the use and distribution of the
GoldNet Software by AIS. Under the terms of the License Agreement, AIS
has agreed to pay license fees of $5 million. The License Agreement
does not restrict the ability of Euronet USA to continue to sell its
GoldNet Software, except that Euronet USA may not sell to former Dash
customers or new AIS network processing customers. Revenue from the
license fee and related services will be recognized under the
percentage of completion contract accounting method. The Company
expects to recognize approximately 70% - 80% of the fees in Revenues
during 2002 with the remaining to be recognized in 2003.
In February 2002, the Company entered into subscription agreements for
the sale of 625,000 new common shares of the Company. These agreements
were signed with accredited investors in transactions exempt from
registration pursuant to the exemptions provided in Section 4(2) and
Regulation D of the Act. The purchase price of each share was $20.00.
The aggregate amount of proceeds to the Company from the private
placement was approximately $12 million.
(30) Related Party Transactions
In January 2001, the Company entered into a Credit Facility Loan
Agreement under which it borrowed an aggregate of $0.5 million from
Michael J. Brown, the CEO and a Director of the Company, in order to
fund transactions on its Czech Republic ATM network. Amounts advanced
under this loan agreement mature six months from the date an advance is
made, but were extended for a second six month period. The loans are
unsecured. Amounts advanced bear interest of 10% per annum. In
January 2002, the loan and related interest was paid off in full.
In 2000, Michael J. Brown, the CEO and a Director of the Company,
pledged approximately $4.0 million of marketable securities (not
including any common stock of the Company) that he owns in order to
obtain the release to the Company of cash collateral in the amount of
$4.8 million held by a bank providing cash to the Company's ATM network
in Hungary. No consideration is payable for providing this security.
For the year ended December 31, 2001, the Company recorded $0.3 million
in revenue related to CashNet with respect to a data processing and
technical services agreement.
108
Selected Quarterly Data (Unaudited)
Year Ended December 31, 2001
-------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------------------------------------------------
(in thousands, except per share)
Net revenues $ 14,823 $15,939 $ 15,681 $ 17,728
----------------------------------------------------------------------------------------------------------------------------------
Operating (loss)/income (3,648) (1,630) (938) 249
----------------------------------------------------------------------------------------------------------------------------------
Net (loss)/income before extraordinary items (1,841) 1,123 (7,505) 397
Net (loss)/income per common share before extraordinary items
Basic $ (0.13) $ 0.05 $ (0.37) $ 0.02
----------------------------------------------------------------------------------------------------------------------------------
Diluted $ (0.13) $ 0.05 $ (0.37) $ 0.02
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000
-------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------------------------------------------------
(in thousands, except per share)
Net revenues $ 11,938 $ 12,918 $ 14,026 $ 13,858
----------------------------------------------------------------------------------------------------------------------------------
Operating loss (7,199) (6,293) (16,895) (5,009)
----------------------------------------------------------------------------------------------------------------------------------
Net loss before extraordinary items (11,285) (10,500) (15,778) (11,988)
Net (loss)/income per common share before extraordinary items
Basic $ (0.72) $ (0.64) $ (0.90) $ (0.67)
----------------------------------------------------------------------------------------------------------------------------------
Diluted $ (0.72) $ (0.64) $ (0.90) $ (0.67)
----------------------------------------------------------------------------------------------------------------------------------
109