| EURONET WORLDWIDE INC ITEM 1A RISK FACTORS You should carefully consider the risks described below before making an investment decision |
| The risks and uncertainties described below are not the only ones facing our company |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations |
| If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected |
| In that case, the trading price of our common stock could decline substantially |
| This Annual Report also contains forward-looking statements that involve risks and uncertainties |
| Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks described below and elsewhere in this Annual Report |
| Risks Related to Our Business We have a substantial amount of debt and other contractual commitments, and the cost of servicing those obligations could adversely affect our business, and such risk could increase if we incur more debt |
| We have a substantial amount of indebtedness |
| As of December 31, 2005, our total liabilities were dlra688dtta0 million and our total assets were dlra894dtta4 million |
| In addition, we estimate that we will have to pay approximately dlra15dtta0 million to dlra20dtta0 million during the years 2006 through 2008 as deferred consideration in connection with the Movilcarga and Dynamic Telecom acquisitions |
| A portion of these obligations may be paid in stock |
| While we expect to satisfy any payment obligations from available cash and operating cash flows, we may not have sufficient funds to satisfy all such obligations as a result of a variety of factors, some of which may be beyond our control |
| If the opportunity of a strategic acquisition arises or if we enter into new contracts that require the installation or servicing of ATM machines on a faster pace than anticipated, we may be required to incur additional debt for these purposes and to fund our working capital needs, which we may not be able to obtain |
| The level of our indebtedness could have important consequences to investors, including the following: • our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes may be limited or financing may be unavailable; • a substantial portion of our cash flows must be dedicated to the payment of principal and interest on our indebtedness and other obligations and will not be available for use in our business; • our level of indebtedness could limit our flexibility in planning for, or reacting to, changes in our business and the markets 15 _________________________________________________________________ in which we operate; • our high degree of indebtedness will make us more vulnerable to changes in general economic conditions and/or a downturn in our business, thereby making it more difficult for us to satisfy our obligations; and • because a portion of our indebtedness and other obligations are denominated in other currencies, and because a portion of our debt bears interest at a variable rate of interest, our actual debt service obligations could increase as a result of adverse changes in currency exchange and interest rates |
| If we fail to make required debt payments, or if we fail to comply with other covenants in our debt service agreements, we would be in default under the terms of these agreements |
| This default would permit the holders of the indebtedness to accelerate repayment of this debt and could cause defaults under other indebtedness that we have |
| Although we have reported net income in recent periods, our concentration on expansion of our business in the future may significantly impact our ability to continue to report net income |
| During the period from January 1, 2000 through December 31, 2002, we reported a net loss in each of these fiscal years, primarily attributable to our investments for the expansion of our business |
| We believe these investments have recently started to produce positive results for us, as evidenced by our reporting of net income of approximately dlra27dtta4 million and dlra18dtta4 million fiscal years ended December 31, 2005 and 2004, respectively |
| We may experience operating losses again in the future while we continue to concentrate on expansion of our business and increasing our market share |
| Restrictive covenants in our credit facilities may adversely affect us |
| Our credit facilities contain a variety of restrictive covenants that limit our ability to incur debt, make investments, pay dividends and sell assets |
| In addition, these facilities require us to maintain specified financial ratios (as defined), including Debt to EBITDA and EBITDAR to fixed charges, and satisfy other financial condition tests, including a minimum EBITDA test |
| See ‘‘Description of Credit Facility |
| ’’ Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those tests |
| A breach of any of these covenants could result in a default under our credit facilities |
| Upon the occurrence of an event of default under our credit facilities, the lenders could elect to declare all amounts outstanding under the credit facilities to be immediately due and payable and terminate all commitments to extend further credit |
| If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness |
| We have pledged a substantial portion of our assets as security under the credit facilities |
| If the lenders under either credit facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our credit facilities and our other indebtedness |
| Our business may suffer from risks related to our recent acquisitions and potential future acquisitions |
| A substantial portion of our recent growth is due to acquisitions, and we continue to evaluate and engage in discussions concerning potential acquisition opportunities, some of which could be material |
| We cannot assure you that we will be able to consummate such future transactions |
| We cannot assure you that we will be able to successfully integrate, or otherwise realize anticipated benefits from, our recent acquisitions or any future acquisitions, which could adversely impact our long-term competitiveness and profitability |
| The integration of our recent acquisitions and any future acquisitions will involve a number of risks that could harm our financial condition, results of operations and competitive position |
| In particular: • The integration plan for our acquisitions assumes benefits based on analyses that involve assumptions as to future events, including leveraging our existing relationships with mobile phone operators and retailers, as well as general business and industry conditions, many of which are beyond our control and may not materialize |
| Unforeseen factors may offset components of our integration plan in whole or in part |
| As a result, our actual results may vary considerably, or be considerably delayed, compared to our estimates; • The integration process could disrupt the activities of the businesses that are being combined |
| The combination of companies requires, among other things, coordination of administrative and other functions |
| In addition, the loss of key employees, customers or vendors of acquired businesses could materially and adversely impact the integration of the acquired business; • The execution of our integration plans may divert the attention of our management from operating our business; • We may assume unanticipated liabilities and contingencies; or • Our acquisition targets could fail to perform in accordance with our expectations at the time of purchase |
| Future acquisitions may be affected through the issuance of our Common Stock, or securities convertible into our Common Stock, which could substantially dilute the ownership percentage of our current stockholders |
| In addition, shares issued in connection with future acquisitions could be publicly tradable, which could result in a material decrease in the market price of our Common Stock |
| 16 _________________________________________________________________ A lack of business opportunities or financial or other resources may impede our ability to continue to expand at desired levels, and our failure to expand operations could have an adverse impact on our financial condition |
| Our expansion plans and opportunities are focused on four separate areas: (i) our network of owned and operated ATMs; (ii) outsourced ATM management contracts; (iii) our prepaid mobile airtime services; and (iv) our money transfer and bill payment services |
| The continued expansion and development of our ATM business will depend on various factors including the following: • the demand for our ATM services in our current target markets; • the ability to locate appropriate ATM sites and obtain necessary approvals for the installation of ATMs; • the ability to install ATMs in an efficient and timely manner; • the expansion of our business into new countries as currently planned; • entering into additional card acceptance and ATM management agreements with banks; • the ability to obtain sufficient numbers of ATMs on a timely basis; and • the availability of financing for the expansion |
| We carefully monitor the growth of our ATM networks in each of our markets, and we accelerate or delay our expansion plans depending on local market conditions, such as variations in the transaction fees we receive, competition, overall trends in ATM transaction levels and performance of individual ATMs |
| We cannot predict the increase or decrease in the number of ATMs we manage under outsourcing agreements, because this depends largely on the willingness of banks to enter into outsourcing contracts with us |
| Banks are very deliberate in negotiating these agreements and the process of negotiating and signing outsourcing agreements typically takes six to twelve months or longer |
| Moreover, banks evaluate a wide range of matters when deciding to choose an outsource vendor and generally this decision is subject to extensive management analysis and approvals |
| The process is exacerbated by the legal and regulatory considerations of local countries, as well as local language complexities |
| These agreements tend to cover large numbers of ATMs, so significant increases and decreases in our pool of managed ATMs could result from signature or termination of these management contracts |
| In this regard, the timing of both current and new contract revenues is uncertain and unpredictable |
| Increasing consolidation in the banking industry could make this process less predictable |
| We currently offer prepaid mobile airtime top-up services in the US, Europe, Africa and Asia Pacific and we currently offer money transfer services from the US to Latin America and bill payment services within the US We plan to expand these services in these and other markets by taking advantage of our existing relationships with mobile phone operators, banks and retailers |
| This expansion will depend on various factors, including the following: • the ability to negotiate new agreements in these markets with mobile phone operators, banks and retailers; • the continuation of the trend of increased use of electronic prepaid mobile airtime among mobile phone users; • the continuation of the trend of increased use of electronic money transfer and bill payment among immigrant workers; • the development of mobile phone networks in these markets and the increase in the number of mobile phone users; and • the availability of financing for the expansion |
| In addition, our continued expansion may involve acquisitions that could divert our resources and management time and require integration of new assets with our existing networks and services and could require financing that we may not be able to obtain |
| Our ability to manage our rapid expansion effectively will require us eventually to expand our operating systems and employee base |
| An inability to do this could have a material adverse effect on our business, growth, financial condition or results of operations |
| We are subject to business cycles and other outside factors that may negatively affect mobile phone operators, retailers and our customers |
| A recessionary economic environment or other outside factors could have a negative impact on mobile phone operators, retailers and our customers and could reduce the level of transactions, which could, in turn, negatively impact our financial results |
| If mobile phone operators experience decreased demand for their prepaid products and services (including due to increasing usage of postpaid services) or if the retail locations where we provide POS top-up services decrease in number, we will process fewer transactions, resulting in lower revenue |
| In addition, a recessionary economic environment could result in a higher rate of bankruptcy filings by mobile phone operators, retailers and our customers and could reduce the level of ATM transactions, which will have a negative impact on our business |
| The growth of our prepaid business is dependent on certain factors that vary from market to market but may reduce or eliminate growth in fully mature markets |
| 17 _________________________________________________________________ Growth in our prepaid business in any given market is driven by a number of factors, including the extent to which conversion from scratch cards to electronic distribution solutions is occurring or has been completed, the overall pace of growth in the prepaid mobile telephone market, our market share of the retail distribution capacity and the level of commission that is paid to the various intermediaries in the prepaid mobile airtime distribution chain |
| In mature markets, such as the UK, Australia and Ireland, the conversion from scratch cards to electronic forms of distribution is either complete or nearing completion |
| Therefore, these factors will cease to provide the organic increases in the number of transactions per terminal that we have experienced historically |
| Also in mature markets, competition among prepaid distributors results in the reduction of commissions and margins by mobile operators as well as retailer churn |
| The combined impact of these factors in fully mature markets is a flattening of growth in the revenues and profits that we earn in these markets |
| These factors could adversely impact our financial results as the markets in which we conduct the prepaid business mature |
| Our prepaid mobile airtime top-up business may be susceptible to fraud occurring at the retailer level |
| In our Prepaid Processing Segment, we contract with retailers that accept payment on our behalf, which we then transfer to a trust or other operating account for payment to mobile phone operators |
| In the event a retailer does not transfer to us payments that it receives for mobile airtime, we are responsible to the mobile phone operator for the cost of the airtime credited to the customer’s mobile phone |
| Although, in certain circumstances, we maintain credit enhancement insurance polices and take other precautions to mitigate this risk, we can provide no assurance that retailer fraud will not increase in the future or that any proceeds we receive under our insurance policies will be adequate to cover losses resulting from retailer fraud, which could have a material adverse effect on our business, financial condition and results of operations |
| Our contracts with mobile phone operators to process prepaid mobile airtime recharge services typically have terms of two to three years or less |
| Many of those contracts may be canceled by either party upon three months’ notice |
| Our contracts with mobile phone operators are not exclusive, so these operators may enter into top-up contracts with other service providers |
| In addition, our top-up service contracts with major retailers typically have terms of one to two years and our contracts with smaller retailers typically may be canceled by either party upon three months’ notice |
| The cancellation or non-renewal of one or more of our significant mobile phone operator or retail contracts, or of a large enough group of our contracts with smaller retailers, could have a material adverse effect on our business, financial condition and results of operations |
| In addition, our contracts generally permit operators to reduce our fees at any time |
| Commission revenue or fee reductions by any of the mobile phone operators could also have a material adverse effect on our business, financial condition or results of operations |
| In the US and certain other countries, processes and systems we employ may be subject to patent protection by other parties |
| In the US and certain other countries, patent protection legislation permits the protection of processes and systems |
| We employ certain processes and systems in various markets that have been used in the industry by other parties for many years, and which we or other companies that use the same or similar processes and systems consider to be in the public domain |
| However, we are aware that certain parties believe they hold patents that cover some of the processes and systems employed in the prepaid processing industry in the US and elsewhere |
| We believe the processes and systems we use have been in the public domain prior to patents we are aware of |
| The question whether a process or system is in the public domain is a legal determination, and if this issue is litigated we cannot be certain of the outcome of any such litigation |
| If a person were to assert that it holds a patent covering any of the processes or systems we use, we would be required to defend ourselves against such claim |
| If unsuccessful, we may be required to pay damages for past infringement which could be trebled if the infringement was found to be willful |
| Such a license may require either a single payment or an ongoing license fee |
| No assurance can be given that we will be able to obtain a license which is reasonable in amount and scope |
| If a patent owner is unwilling to grant such a license, or we decide not to obtain such a license, we may be required to modify our processes and systems to avoid future infringement |
| Any such occurrences could materially and adversely affect our prepaid processing business in any affected markets and could result in our reconsidering the rate of expansion of this business in those markets |
| The level of transactions on our ATM and prepaid processing networks is subject to substantial seasonal variation, which may cause our quarterly results to fluctuate materially and create volatility in the price of our shares |
| Our experience is that the level of transactions on our networks is subject to substantial seasonal variation |
| Transaction levels have consistently been much higher in the fourth quarter of the fiscal year due to increased use of ATMs and prepaid mobile airtime top-ups during the holiday season |
| The level of transactions drops in the first quarter, during which transaction levels are generally the lowest we experience during the year |
| Since revenues of the EFT Processing and Prepaid Processing Segments are primarily transaction- 18 _________________________________________________________________ based, these segments are directly affected by this seasonality |
| As a result of these seasonal variations, our quarterly operating results may fluctuate materially and could lead to volatility in the price of our shares |
| The stability and growth of our ATM business depend on maintaining our current card acceptance and ATM management agreements with banks and international card organizations, and on securing new arrangements for card acceptance and ATM management |
| The stability and future growth of our ATM business depend in part on our ability to sign card acceptance and ATM management agreements with banks and international card organizations |
| Card acceptance agreements allow our ATMs to accept credit and debit cards issued by banks and international card organizations |
| ATM management agreements generate service income from our management of ATMs for banks |
| These agreements are the primary source of our ATM business |
| These agreements have expiration dates and banks and international card organizations are generally not obligated to renew them |
| In some cases, banks may terminate their contracts prior to the expiration of their terms |
| We cannot assure you that we will be able to continue to sign or maintain these agreements on terms and conditions acceptable to us or whether those international card organizations will continue to permit our ATMs to accept their credit and debit cards |
| The inability to continue to sign or maintain these agreements, or to continue to accept the credit and debit cards of local banks and international card organizations at our ATMs in the future, could have a material adverse effect on our business, growth, financial condition or results of operations |
| Retaining the founders of our company, and of companies that we acquire, and finding and retaining qualified personnel in Europe may be important to our continued success |
| Our strategy and its implementation depend in large part on the founders of our company, in particular Michael Brown and Daniel Henry, and their continued involvement in Euronet in the future |
| In addition, the success of the expansion of businesses that we acquire may depend in large part upon the retention of the founders of those businesses |
| Our success also depends in part on our ability to hire and retain highly skilled and qualified management, operating, marketing, financial and technical personnel |
| The competition for qualified personnel in Central Europe and the other markets where we conduct our business is intense and, accordingly, we cannot assure you that we will be able to continue to hire or retain the required personnel |
| Our officers and some of our key personnel have entered into service or employment agreements containing non-competition, non-disclosure and non-solicitation covenants and providing for the granting of incentive stock options with long-term vesting requirements |
| However, most of these contracts do not guarantee that these individuals will continue their employment with us |
| The loss of our key personnel could have a material adverse effect on our business, growth, financial condition or results of operations |
| Our operating results depend in part on the volume of transactions on ATMs in our network and the fees we can collect from processing these transactions |
| Transaction fees from banks and international card organizations for transactions processed on our ATMs have historically accounted for a substantial majority of our revenues |
| These fees are set by agreement among all banks in a particular market |
| Although we are less dependent on these fees due to our Prepaid Processing Segment, the future operating results of our ATM business depend on the following factors: • the increased issuance of credit and debit cards; • the increased acceptance of our ATM processing and management services in our target markets; • the maintenance of the level of transaction fees we receive; • the installation of larger numbers of ATMs; and • the continued use of our ATMs by credit and debit cardholders |
| Although we believe that the volume of transactions in developing countries will tend to increase due to growth in the number of cards being issued by banks in these markets, we anticipate that transaction levels on any given ATM in developing markets will not increase significantly |
| We can improve the levels of transactions on our ATM network overall by acquiring good sites for our ATMs, eliminating poor locations, entering new less-developed markets and adding new transactions to the sets of transactions that are available on our ATMs |
| However, we may not be successful in materially increasing transaction levels through these measures |
| Per-transaction fees have declined in certain markets in recent years |
| If we cannot continue to increase our transaction levels and per-transaction fees generally decline, our results would be adversely affected |
| Our operating results depend in part on the volume of transactions for prepaid phone services and the commissions we receive for these services |
| 19 _________________________________________________________________ Our Prepaid Processing Segment derives revenues based on processing fees and commissions from mobile and other telecommunication operators or distributors of prepaid wireless products |
| Generally, these operators have the right to reduce the overall fee paid for each transaction, although a portion of such reductions can be passed along to retailers |
| In the last year, processing fees and commissions per transaction have been declining in most markets, and we expect that trend to continue |
| We have been able to improve our results despite that trend due to substantial growth in transactions, driven by acquisitions and organic growth |
| If we cannot continue to increase our transaction levels and per-transaction fees and commissions continue to decline, our results would be adversely affected |
| Our operating results in the money transfer business depend in part on continued worker immigration patterns, our ability to expand our share of the existing electronic market and to expand into new markets and our ability to continue complying with regulations issued by the Office of Foreign Assets Control (“OFAC”), Bank Secrecy Act (“BSA”), Financial Crimes Enforcement Network (“FINCEN”) and Patriot Act regulations |
| Our money transfer business primarily focuses on customers who immigrate to the United States from Latin American countries in search of employment and then send a portion of their earnings to family members in Latin America |
| Our ability to continue complying with the requirements of OFAC, BSA, FINCEN and the Patriot Act will be important to our success in achieving growth and an inability to do this could have an adverse impact on our revenue and earnings |
| Changes in federal policies toward immigration may have a negative affect on immigration in the US, which could also have an adverse impact on our money transfer revenues |
| Future growth and profitability depend upon expansion within the markets in which we currently operate and the development of new markets for our money transfer services |
| To achieve this expansion, we plan to initially focus on growth in the US and Latin America market by increasing our sending locations in existing states and then expanding into other states by leveraging our prepaid processing terminal base |
| Expansion of our money transfer business to other states in the US and internationally will require resolution of numerous licensing and regulatory issues in each of the sending markets we intend to develop |
| If we are unable to successfully apply the money transfer product to our existing terminal base or obtain the necessary licensing and other regulatory approvals, we may not realize expected results |
| Our expansion into new markets is also dependent upon our ability to apply our existing technology or to develop new applications to satisfy market demand |
| We may not have adequate financial and technological resources to expand our distribution channels and product applications to satisfy these demands, which may have an adverse impact on our ability to achieve expected growth in revenues and earnings |
| Changes in state, federal or foreign laws, rules and regulations could impact the money transfer industry making it more difficult for our customers to initiate money transfers |
| We are subject to regulation by the US states in which we operate, by the federal government and by the foreign governments of the countries in which we operate |
| Changes in the laws, rules and regulations or these governmental entities could adversely impact our money transfer business and make it more difficult for our customers to initiate money transfers |
| This could have a material adverse impact on our results of operations, financial condition and cash flow |
| Changes in banking industry regulation and practice could make it more difficult for us and our agents to maintain depository accounts with banks |
| The banking industry, in light of increased regulatory oversight, is continually examining its business relationships with companies who offer money transfer services and with retail agents who collect and remit cash collected from end consumers |
| Should banks decide to not offer depository services to companies engaged in processing money transfer transactions, or to retail agents who collect and remit cash from end customers, our ability to administer and collect fees from money transfer transactions could be adversely impacted |
| Developments in electronic financial transactions, such as the increased use of debit cards by customers and pass-through of ATM transaction fees by banks to customers or developments in the mobile phone industry, could materially reduce ATM transaction levels and our revenues |
| Certain developments in the field of electronic financial transactions may reduce the amount of cash that individuals need on a daily basis, including the promotion by international card organizations and banks of the use of bank debit cards for transactions of small amounts |
| These developments may reduce the transaction levels that we experience on our ATMs in the markets where they occur |
| Banks also could elect to pass through to their customers all, or a large part of, the fees we charge for transactions on our ATMs |
| This would increase the cost of using our ATM machines to the banks’ customers, which may cause a decline in the use of our ATM machines and, thus, have an adverse effect on our revenues |
| If transaction levels over our existing ATM network do not increase, 20 _________________________________________________________________ growth in our revenues from the ATMs we own will depend primarily on rolling out ATMs at new sites and developing new markets, which requires capital investment and resources and reduces the margin we realize from our revenues |
| The mobile phone industry is a rapidly evolving area, in which technological developments, in particular the development of new methods or services, may affect the demand for other services in a dramatic way |
| The development of any new technology that reduces the need or demand for prepaid mobile phone time could materially and adversely affect our business |
| We generally have little control over the ATM transaction fees established in the markets where we operate, and therefore cannot control any potential reductions in these fees |
| The amount of fees we receive per transaction is set in various ways in the markets in which we do business |
| We have card acceptance agreements or ATM management agreements with some banks under which fees are set |
| However, we derive the bulk of our revenues in most markets from ‘‘interchange fees’’ that are set by the central ATM processing switch |
| The banks that participate in these switches set the interchange fee, and we are not in a position in any market to greatly influence these fees, which may increase or decrease over time |
| A significant decrease in the interchange fee in any market could adversely affect our results in that market |
| In some cases, we are dependent upon international card organizations and national transaction processing switches to provide assistance in obtaining settlement from card issuers of funds relating to transactions on our ATMs |
| Our ATMs dispense cash relating to transactions on credit and debit cards issued by banks |
| We have in place arrangements for the settlement to us of all of those transactions, but in some cases we do not have a direct relationship with the card-issuing bank and rely for settlement on the application of rules that are administered by international card associations (such as Visa or MasterCard) or national transaction processing switching networks |
| If a bankcard association fails to settle transactions in accordance with those rules, we are dependent upon cooperation from such organizations or switching networks to enforce our right of settlement against such banks or card associations |
| Failure by such organizations or switches to provide the required cooperation could result in our inability to obtain settlement of funds relating to transactions and adversely affect our business |
| We derive a significant amount of revenue in our business from service agreements signed with financial institutions to own and/or operate their ATM machines |
| Certain contracts have been and, in the future, may be terminated by the financial institution resulting in a substantial reduction in revenue |
| Contract termination payments, if any, may be inadequate to replace revenues and operating income associated with these contracts |
| Because our business is highly dependent on the proper operation of our computer network and telecommunications connections, significant technical disruptions to these systems would adversely affect our revenues and financial results |
| Our business involves the operation and maintenance of a sophisticated computer network and telecommunications connections with banks, financial institutions, mobile operators and retailers |
| This, in turn, requires the maintenance of computer equipment and infrastructure, including telecommunications and electrical systems, and the integration and enhancement of complex software applications |
| Our ATM segment also uses a satellite-based system that is susceptible to the risk of satellite failure |
| There are operational risks inherent in this type of business that can result in the temporary shutdown of part or all of our processing systems, such as failure of electrical supply, failure of computer hardware and software errors |
| Excluding Germany, transactions in the EFT Processing Segment are processed through our Budapest, Belgrade, Athens, Beijing and Mumbai operations centers |
| Our e-top-up transactions are processed through our Basildon, Munich, Monzon, Madrid and Leawood, Kansas operations centers |
| Our US money transfer and bill payment transactions are contracted through a Charlotte, North Carolina third party processing center |
| Any operational problem in these centers may have a significant adverse impact on the operation of our networks generally |
| To mitigate these risks, our significant processing centers in Budapest, Basildon, Madrid, and Munich have off-site real time backup processing centers that are capable of providing high availability in the event of failure of the primary processing centers |
| Our processing centers in Mumbai, Monzon, Athens, Belgrade and the US have on-site backup systems designed to prevent the loss of transaction records due to power failure |
| Even with disaster recovery procedures in place, these risks cannot be eliminated entirely and any technical failure that prevents operation of our systems for a significant period of time will prevent us from processing transactions during that period of time and will directly and adversely affect our revenues and financial results |
| We have the risk of liability for fraudulent bankcard and other card transactions involving a breach in our security systems, as well as for ATM theft and vandalism |
| We capture, transmit, handle and store sensitive information in conducting and managing electronic, financial and mobile transactions, such as card information and PIN numbers |
| These businesses involve certain inherent security risks, in particular the risk of electronic 21 _________________________________________________________________ interception and theft of the information for use in fraudulent or other card transactions, by persons outside the Company or by our own employees |
| We incorporate industry-standard encryption technology and processing methodology into our systems and software, and maintain controls and procedures regarding access to our computer systems by employees and others, to maintain high levels of security |
| Although this technology and methodology decrease security risks, they cannot be eliminated entirely, as criminal elements apply increasingly sophisticated technology to attempt to obtain unauthorized access to the information handled by ATM and electronic financial transaction networks |
| 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 coverage 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, the possible theft and vandalism of ATMs present risks for our ATM business |
| We install ATMs at high-traffic sites and consequently our ATMs are exposed to theft and vandalism |
| Although we are insured against such risks, deductibles, exclusions or limitations in such insurance may leave us bearing some or all of any losses arising from theft or vandalism of ATMs |
| In addition, we have experienced increases in claims under our insurance, which has increased our insurance premiums |
| We are required under German law and the rules of financial transaction switching networks in all of our markets to have ‘‘sponsors’’ to operate ATMs and switch ATM transactions |
| Our failure to secure ‘‘sponsor’’ arrangements in Germany or any other market could prevent us from doing business in that market |
| Under German law, only a licensed financial institution may operate ATMs |
| Because we are not a licensed financial institution we are required to have a ‘‘sponsor’’ bank to conduct our German ATM operations |
| In addition, in all of our markets, our ATMs are connected to national financial transaction switching networks owned or operated by banks, and to other international financial transaction switching networks operated by organizations such as Citibank, Visa and MasterCard |
| The rules governing these switching networks require any company sending transactions through these switches to be a bank or a technical service processor that is approved and monitored by a bank |
| As a result, the operation of our ATM network in all of our markets depends on our ability to secure these ‘‘sponsor’’ arrangements with financial institutions |
| To date, we have been successful in reaching contractual arrangements that have permitted us to operate in all of our target markets |
| However, we cannot assure you that we will continue to be successful in reaching these arrangements, and it is possible that our current arrangements will not continue to be renewed |
| If we are unable to secure “sponsor” arrangements in Germany or any other market, we could be prevented from doing business in the applicable market |
| Our competition in the EFT Processing Segment and Prepaid Processing Segment include large, well financed companies and banks and, in the software market, companies larger than us with earlier entry into the market |
| EFT Processing Segment— Our principal EFT Processing competitors include ATM networks owned by banks and national switches consisting of consortiums of local banks that provide outsourcing and transaction services only to banks and independent ATM deployers in that country |
| Large, well-financed companies that operate ATMs offer ATM network and outsourcing services that compete with us in various markets |
| None of these competitors have dominant market share |
| Competitive factors in our EFT Processing Segment include network availability and response time, price to both the bank and to its customers, ATM location and access to other networks |
| We are not aware of any individual independent companies providing electronic recharge on ATMs across multiple markets in which we provide this service |
| In this area, we believe competition will come principally from the banks providing such services on their own ATMs through relationships with mobile operators or from card transaction switching networks that add recharge transaction capabilities to their offerings (as is the case in the UK through the LINK network) |
| Prepaid Processing Segment— We face competition in the prepaid business in all of our markets |
| A few multinational companies operate in several of our markets, and we therefore compete with them in a number of countries |
| In other markets, our competition is from smaller, local companies |
| The principal competitive factors in this area include price (that is, the level of commission charged for each recharge transaction) and up time offered on the system |
| Major retailers with high volumes are in a position to demand a larger share of the commission, which increases the amount of competition among service providers |
| Our primary competitors in the money transfer and bill payment business include other independent processors and electronic money transmitters, as well as certain major national and regional banks, financial institutions and independent sales organizations |
| Our competitors include First Data Corporation, Global Payments, Moneygram and others who are larger than we are and have greater resources than we have |
| This may allow them to offer better pricing terms to customers, which may result in a loss of our potential or 22 _________________________________________________________________ current customers or could force us to lower our prices |
| In addition, our competitors may have the ability to devote more financial and operational resources than we can to the development of new technologies that provide improved functionality and features to their product and service offerings |
| If successful, their development efforts could render our product and services offerings less desirable, resulting in the loss of customers or a reduction in the price we could demand for our services |
| Software Solutions Segment— We believe we are the leading supplier of electronic financial transaction processing software for the IBM iSeries (formerly AS/400) platform in a largely fragmented market, which is made up of competitors that offer a variety of solutions that compete with our products, ranging from single applications to fully integrated electronic financial processing software |
| Other industry suppliers service the software requirements of large mainframe systems and UNIX-based platforms, and accordingly are not considered competitors |
| We have specific target customers consisting of financial institutions that operate their back office systems with the IBM iSeries |
| The Software Solutions Segment has multiple types of competitors that compete across all EFT software components in the following areas: (i) ATM, network and POS software systems, (ii) Internet banking software systems, (iii) credit card software systems, (iv) mobile banking systems, (v) mobile operator solutions, (vi) telephone banking, and (vii) full EFT software |
| Competitive factors in the Software Solutions business include price, technology development and the ability of software systems to interact with other leading products |
| We conduct a significant portion of our business in Central and Eastern European countries, and we have subsidiaries in the Middle East and Asia, where the risk of continued political, economic and regulatory change that could impact our operating results is greater than in the US or Western Europe |
| We have subsidiaries in Hungary, Poland, the Czech Republic, Romania, Slovakia, Spain, Greece, Croatia, India, Serbia, Bulgaria, Russia, Egypt and China, and have operations in other countries in Central Europe, the Middle East and Asia |
| We expect to continue to expand our operations to other countries in these areas |
| We sell software in many other markets in the developing world |
| Some of these countries have undergone significant political, economic and social change in recent years and the risk of new, unforeseen changes in these countries remains greater than in the US or Western Europe |
| In particular, changes in laws or regulations or in the interpretation of existing laws or regulations, whether caused by a change in government or otherwise, could materially adversely affect our business, growth, financial condition or results of operations |
| For example, currently there are no limitations on the repatriation of profits from any of the countries in which we have subsidiaries (although US tax laws discourage repatriation), but foreign currency exchange control restrictions, taxes or limitations may be imposed or increased in the future with regard to repatriation of earnings and investments from these countries |
| If exchange control restrictions, taxes or limitations are imposed, our ability to receive dividends or other payments from affected subsidiaries could be reduced, which may have a material adverse effect on us |
| In addition, corporate, contract, property, insolvency, competition, securities and other laws and regulations in Hungary, Poland, the Czech Republic, Romania, Slovakia, Croatia, Bulgaria, Russia and other countries in Central Europe have been, and continue to be, substantially revised during the completion of their transition to the European Union |
| Therefore, the interpretation and procedural safeguards of the new legal and regulatory systems are in the process of being developed and defined, and existing laws and regulations may be applied inconsistently |
| Also, in some circumstances, it may not be possible to obtain the legal remedies provided for under these laws and regulations in a reasonably timely manner, if at all |
| Transmittal of data by electronic means and telecommunications is subject to specific regulation in most Central European countries |
| Although these regulations have not had a material impact on our business to date, changes in these regulations, including taxation or limitations on transfers of data across national borders, could have a material adverse effect on our business, growth, financial condition or results of operations |
| We conduct business in many international markets with complex and evolving tax rules, including value added tax rules, which subjects us to international tax compliance risks |
| While we obtain advice from legal and tax advisors as necessary to help assure compliance with tax and regulatory matters, most tax jurisdictions that we operate in have complex and subjective rules regarding the valuation of intercompany services, cross-border payments between affiliated companies and the related effects on income tax, value-added tax (“VAT”), transfer tax and share registration tax |
| Our foreign subsidiaries frequently undergo VAT reviews, and from time to time undergo comprehensive tax reviews and may be required to make additional tax payments should the review result in different interpretations, allocations or valuations of our services |
| 23 _________________________________________________________________ Because we are a public company, we will continue to incur costs for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, and we are exposed to future risks of non-compliance with these regulations |
| As required by Section 404 of the Sarbanes-Oxley Act of 2002, on an annual basis, we evaluate our internal controls over financial reporting |
| Although our assessment, testing, and evaluation resulted in our conclusion that as of December 31, 2005, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in future periods |
| If our internal controls are ineffective in future periods, our financial results or the market price of our stock could be adversely affected |
| We will incur additional expenses and commitment of management’s time in connection with further evaluations and there can be no assurance that we will continue to be able to comply with these regulations |
| As allowable under the Internal Revenue Code (the “Code”), the interest deduction from our convertible debentures are based on a comparable interest rate for a traditional, nonconvertible, fixed rate debt instrument with similar terms |
| This allowable deduction is in excess of the stated interest rate |
| This deduction may be deferred, limited or eliminated under certain conditions |
| The US Treasury regulations contain an anti-abuse regulation, set forth in Section 1dtta1275-2(g), that grants the Commissioner of the Internal Revenue Service authority to depart from the regulations if a result is achieved which is unreasonable in light of the original issue discount provisions of the Code, including Section 163(e) |
| The anti-abuse regulation further provides that the Commissioner may, under this authority, treat a contingent payment feature of a debt instrument as if it were a separate position |
| If such an analysis were applied to our convertible debentures and ultimately sustained, our deductions attributable to the convertible debentures could be limited to the stated interest thereon |
| The scope of application of the anti-abuse regulations is unclear |
| However, we are of the view that application of the contingent payment debt instrument regulations to our convertible debentures is a reasonable result such that the anti-abuse regulation should not apply |
| If a contrary position were asserted and ultimately sustained, our tax deductions would be severely diminished with a resulting adverse effect on our cash flow and ability to service the convertible debentures |
| Under the Code, no deduction is allowed for interest expense in excess of dlra5 million on convertible subordinated indebtedness incurred to acquire stock or assets of another corporation reduced by any interest paid on other obligations which have provided consideration for an acquisition of stock in another corporation |
| If a significant portion of the proceeds from the issuance of the convertible debentures, either alone or together with other debt proceeds, were used for a domestic acquisition and the convertible debentures and other debt, if any, were deemed subordinated to certain trade creditors or were expressly subordinated to a substantial amount of unsecured creditors of the affiliated group, interest deductions for tax purposes in excess of dlra5 million on such debt reduced by any interest paid on other obligations which have provided consideration for an acquisition of stock in another corporation would be disallowed |
| This would adversely impact our cash flow and our ability to pay down the convertible debentures |
| We previously applied a significant portion of the proceeds from our December 2004 issuance of 1dtta625prca Convertible Senior Debentures Due 2024 to acquisitions of foreign corporations |
| The interest expense attributable to these acquisitions exhausted all of the dlra5 million annual interest expense deduction permitted under the Code for certain convertible subordinated debt incurred for corporation acquisitions |
| Accordingly, if this limitation were to apply, no interest deductions would be allowed with respect to our October 2005 3dtta50prca Convertible Debentures Due 2025 |
| We do not currently anticipate that this limitation will apply but there can be no assurance of that fact |
| The US Senate has drafted proposed tax relief legislation that contains a provision that would eliminate the comparable interest rate deduction on future issuances of convertible debentures such as ours |
| We cannot predict what the final proposed tax relief legislation, or future tax legislation, will include or whether it will be approved |
| As a result of our US Federal and state net operating loss carryforwards, we have not recognized the benefit of the comparable interest deduction |
| However, the elimination of this provision could accelerate our future payment of US Federal and state income taxes, if any |
| Because we are an international company conducting a complex business in many markets worldwide, we are subject to legal and operational risks related to staffing and management, as well as a broad array of local legal and regulatory requirements |
| Operating outside of the US creates difficulties associated with staffing and managing our international operations, complying with local legal and regulatory requirements |
| Because we operate financial transaction processing networks that offer new products and services to customers, the laws and regulations in the markets in which operate are subject to rapid change |
| Although we have local staff in countries in which we deem it appropriate, we cannot assure you that we will continue to be found to be operating in compliance with all applicable customs, currency exchange control regulations, data protection, transfer pricing regulations or any other laws or regulations to which we may be subject |
| We also cannot assure you that these laws will not be modified in ways that may adversely affect our business |
| Because we derive our revenue from a multitude of countries with different currencies, our business is affected by local inflation and foreign currency exchange rates and policies |
| 24 _________________________________________________________________ We attempt to match any assets denominated in a currency with liabilities denominated in the same currency |
| Nonetheless, substantially all of our indebtedness is denominated in US dollars, euro and British pounds |
| While a significant amount of our expenditures, including the acquisition of ATMs, executive salaries and certain long-term telecommunication contracts, are made in US dollars, most of our revenues are denominated in other currencies |
| As exchange rates among the US dollar, the euro, and other currencies fluctuate, the translation effect of these fluctuations may have a material adverse effect on our results of operations or financial condition as reported in US dollars |
| Moreover, exchange rate policies have not always allowed for the free conversion of currencies at the market rate |
| Future fluctuations in the value of the dollar could continue to have an adverse effect on our results |
| Our consumer money transfer operations subject us to foreign currency exchange risks as our customers deposit US dollars at our retail locations in the United States and we typically deliver funds denominated in the destination country currencies to beneficiaries in Mexico and other Latin American countries |
| We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate our stockholders’ ability to sell their shares for a premium in a change of control transaction |
| Various provisions of our certificate of incorporation and bylaws and of Delaware corporate law may discourage, delay or prevent a change in control or takeover attempt of our company by a third party that is opposed to by our management and board of directors |
| Public stockholders who might desire to participate in such a transaction may not have the opportunity to do so |
| These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and board of directors |
| These provisions include: • preferred stock that could be issued by our board of directors to make it more difficult for a third party to acquire, or to discourage a third party from acquiring, a majority of our outstanding voting stock; • classification of our directors into three classes with respect to the time for which they hold office; • supermajority voting requirements to amend the provision in our certificate of incorporation providing for the classification of our directors into three such classes; • non-cumulative voting for directors; • control by our board of directors of the size of our board of directors; • limitations on the ability of stockholders to call special meetings of stockholders; and • advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings |
| We have also approved a stockholders’ rights agreement (the ‘‘Rights Agreement’’) between Euronet and EquiServe Trust Company, NA, (subsequently renamed Computershare Limited) as Rights Agent |
| Pursuant to the Rights Agreement, holders of our common stock are entitled to purchase one one-thousandth (1/1cmam000) of a share (a ‘‘Unit’’) of Junior Preferred Stock at a price of dlra57dtta00 per Unit upon certain events |
| The purchase price is subject to appropriate adjustment for stock splits and other similar events |
| Generally, in the event a person or entity acquires, or initiates a tender offer to acquire, at least 15prca of Euronet’s then outstanding common stock, the Rights will become exercisable for common stock having a value equal to two times the exercise price of the Right, or effectively at one-half of Euronet’s then-current stock price |
| The existence of the Rights Plan may discourage, delay or prevent a change of control or takeover attempt of our company by a third party that is opposed to by our management and board of directors |
| Our directors and officers, together with the entities with which they are associated, owned about 14prca of our Common Stock as of December 31, 2005, giving them significant control over decisions related to our Company |
| This control includes the ability to influence the election of other directors of our Company and to cast a large block of votes with respect to virtually all matters submitted to a vote of our stockholders |
| This concentration of control may have the effect of delaying or preventing transactions or a potential change of control of our Company |
| An additional 13dtta9 million shares of Common Stock could be added to our total Common Stock outstanding through the exercise of options or the issuance of additional shares of our Common Stock pursuant to existing agreements |
| Once issued, these shares of Common Stock could be traded into the market and result in a decrease in the market price of our Common Stock |
| As of December 31, 2005, we had an aggregate of 4dtta3 million options and restricted share awards outstanding held by our directors, officers and employees, which entitles these holders to acquire an equal number of shares of our Common Stock upon exercise |
| Of 25 _________________________________________________________________ this amount, 2dtta1 million options are currently vested, which means they can be exercised at any time |
| Approximately 0dtta4 million additional shares of our Common Stock are issuable in connection with our employee stock purchase plan |
| Additionally, we may be required to issue approximately 0dtta7 million shares of our Common Stock (based on current prices and estimated earn-out payments) to the former shareholders or owners of the Movilcarga Assets and Dynamic Telecom under contingent “earn-out” payments in connection with these acquisitions |
| The number of shares issued under the earn-outs will depend upon performance of the businesses acquired and the trading price of our Common Stock at the time we make the earn-out payments |
| Another 8dtta5 million shares of Common Stock could be issued upon conversion of the Company’s Convertible Debentures issued in December 2004 and October 2005 |
| Accordingly, approximately 13dtta9 million shares (based on current prices and estimated earn-out payments) could potentially be added to our total current Common Stock outstanding through the exercise of options or the issuance of additional shares, which could adversely impact the trading price for our stock |
| The actual number of shares issuable could be higher depending upon the actual amounts of the earn-outs and our stock price at the time of payment (more shares could be issuable if our share price declines) |
| Of the 4dtta3 million total options and restricted share awards outstanding, an aggregate of 1dtta7 million options and restricted shares are held by persons who may be deemed to be our affiliates and who would be subject to Rule 144 |
| Thus, upon exercise of their options, these affiliates’ shares would be subject to the trading restrictions imposed by Rule 144 |
| The remainder of the common shares issuable under options or as earn-outs described above would be freely tradable in the public market |
| Over the course of time, all of the issued shares have the potential to be publicly traded, perhaps in large blocks |