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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): December 2, 1998
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Euronet Services Inc.
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(Exact name of registrant as specified in its charter)
Delaware 04-2806888
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(STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER
OF INCORPORATION) FILE NUMBER) ID NUMBER)
Horvat u. 14-24 1027 Budapest, Hungary N/A
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 011-361-224-1000
N/A
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(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 2, 1998, Euronet Services, Inc. (the "Company") completed the
acquisition of Arkansas Systems Inc., an Arkansas corporation ("Arksys") through
the merger of AE Merger Corp., an Arkansas corporation and a wholly owned
subsidiary of the Company ("Merger Sub"), with and into Arksys (the "Merger")
with Arksys remaining as the surviving corporation. Immediately prior to the
effective time of the Merger, the real estate holdings of Arksys were sold,
transferred and assigned to various Arksys shareholders in exchange for the
redemption by Arksys of a portion of the Arksys common stock held by such
shareholders. Accordingly, Arksys's real estate holdings were not included in
the acquisition.
The Merger was consummated pursuant to terms and conditions of an Agreement
and Plan of Merger entered into between the Company, Merger Sub, Arksys and
certain shareholders of Arksys (the "Merger Agreement"). Upon the effective
time of the Merger, the Company purchased all of the issued and outstanding
capital stock of Arksys for a purchase price of $18.2 million of which $ 6
million are being held in escrow to provide for the payment of damages
attributable to any breach of the representations and warranties contained in
the Merger Agreement and certain post-closing payments set forth in the Merger
Agreement. In addition, as a result of the Merger, each option to purchase
shares of the common stock of Arksys held by optionholders with less than 1000
unvested options was cancelled and replaced by an option to purchase the same
number of shares of the Company's common stock as the number of Arksys's shares
that were subject to such option immediately prior to the Merger. Following the
acquisition, Arksys became a wholly owned subsidiary of the Company.
Euronet operates the only independent, non-bank owned ATM network in
Central Europe. Through agreements with local banks and international card
issuers such as Visa, MasterCard, Europay, American Express and Diners Club
International, Euronet's ATMs are able to process ATM transactions for holders
of credit and debit cards issued by or bearing logos of such banks and card
issuing organizations. Arksys, which is based in Little Rock, Arkansas, produces
computer software for comprehensive electronic payment and transaction delivery
systems. Arkysys's products and services include comprehensive ATM, POS, debt
and smart card packages, EFT network solutions, interactive voice response,
international credit card systems and Internet and intranet cash management,
home banking, bill payment and presentment offerings. Arksys is also the
primary supplier of ATM network software for the IBM AS/400 platform. Prior to
the Merger, Arksys was a key software provider to Euronet's ATM transactions
processing center in Central Europe. The Company plans to continue Arksys's
business and operations.
The foregoing summary is qualified in its entirety by reference to the copy
of the Merger Agreement.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
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Unaudited consolidated balance sheets for the acquired business as of
September 30, 1998 and December 31, 1997 and the related unaudited consolidated
statements of operations and comprehensive income (loss), shareholders' equity
and cash flows for the nine month period ended September 30, 1998 and for the
year ended December 31, 1997 have been provided. These financial statements
represent the business as carried out by the selling shareholders and, as such,
certain aspects of the acquired business which will change as a result of the
acquisition have not been reflected therein. Such adjustments will be presented
with the Pro Forma Financial Information. The required financial information for
the business acquired will be filed under cover of Form 8-K/A within 60 days of
the date this Form 8-K was required to be filed.
(b) Pro Forma Financial Information
The required audited pro forma financial information will be filed under
cover of Form 8-K/A within 60 days of the date this Form 8-K was required to be
filed.
C. Exhibits
Exhibit 2.1 - Agreement of Merger dated as of November 3, 1998, by and among
Euronet Services, Inc., AE Merger Corp., Arkansas Systems Inc.
and certain shareholders of Arkansas Systems, Inc. (previously
filed as Item 6 Exhibit 10 to Form 10Q filed with the
Commission on November 14, 1998.)
Exhibit 2.2 - Escrow Agreement dated as of December 2, 1998 by and among
Euronet Services, Inc., John Chamberlin, James Hendren, Donald
B. Hatfield, Eugene Jones, David Payne and Mercantile Trust
Company, N.A.
Exhibit 99 - Unaudited Consolidated Financial Statements for ARKSYS for
period January 1, 1998 to September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Euronet Services Inc.
By: /s/ Daniel R. Henry
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Daniel R. Henry
Chief Operating Officer
Date: December 16, 1998
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ESCROW AGREEMENT
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This Escrow Agreement, dated as of December ___, 1998, is entered into by
and among Euronet Services, Inc., a Delaware corporation (the "Buyer"), John
Chamberlin ("Chamberlin"), James Hendren ("Hendren"), Donald B. Hatfield
("Hatfield"), Eugene Jones ("Jones") and David Payne ("Payne") each in his
capacity as a representative of the shareholders of Arkansas Systems, Inc., an
Arkansas corporation (the "Company"), identified on Schedule 1 attached hereto
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and made a part hereof (collectively, the "Shareholders" and Chamberlin,
Hendren, Hatfield, Jones and Payne collectively in such representative capacity,
and their successors as provided herein, the "Shareholders' Representative
Committee"), and Mercantile Trust Company, N.A. in its capacity as an escrow
agent hereunder (in such capacity, the "Escrow Agent"). Capitalized terms used
in this Agreement and not otherwise defined herein shall have the meaning
ascribed thereto in the "Merger Agreement" (as defined below).
W I T N E S S E T H:
WHEREAS, the Buyer, AE Merger Corp., an Arkansas corporation and a wholly-
owned subsidiary of the Buyer ("Merger Sub"), the Company and each member of the
Shareholders' Representative Committee entered into that certain Agreement of
Merger dated as of November 3, 1998 (the "Merger Agreement") pursuant to which
the Buyer has agreed to acquire the business of the Company through the merger
of Merger Sub with and into the Company (the "Merger"), with the Company as the
surviving corporation in the Merger;
WHEREAS, $6,000,000 (the "Initial Escrowed Cash") of the consideration to
be received by the Shareholders pursuant to the Merger Agreement is required to
be deposited in escrow pursuant to the Merger Agreement to provide for (i) a
possible adjustment to the Purchase Price for Damages to be paid from the Escrow
Account as provided in the Merger Agreement, (ii) the payment of certain costs
and expenses of the Company and the Shareholders as set forth in Section 7.4 of
the Merger Agreement; and (iii) certain other post-closing payments to the
Shareholders and/or the Buyer as set forth in the Merger Agreement; and
WHEREAS, as set forth in Article XIV of the Merger Agreement, Chamberlin,
Hendren, Hatfield, Jones and Payne have been authorized, appointed and directed
to act as the Shareholders' Representative Committee and to make any and all
decisions to be made and to take or omit any and all actions which may be made
or taken by the Shareholders under the Merger Agreement and this Agreement,
including, without limitation, the authority to act on behalf of the
Shareholders with respect to the Escrowed Funds (defined below);
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINED TERMS. The following capitalized terms shall have the
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meanings specified in this Section 1. Other capitalized terms used herein that
are not otherwise defined shall have the meanings ascribed to such terms in the
Merger Agreement.
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"Aggregate Set Aside Amount" shall mean the aggregate of each Set Aside
Amount subject to an outstanding unresolved Dispute.
"Available Escrowed Funds" shall mean for the period commencing on the date
of this Agreement and ending on and including June 29, 2000, the amount equal to
the Escrowed Funds minus the sum of the Aggregate Set Aside Amount and the Year
2000 Reserve. After June 29, 2000, "Available Escrowed Funds" shall mean the
amount equal to the Escrowed Funds minus the Aggregate Set Aside Amount.
"Closing Balance Sheet Adjustment" shall mean the difference between (i)
the Net Working Capital Payment and (ii) the Estimated Net Working Capital
Payment. If such amount is positive, such adjustment shall be in favor of the
Shareholders, and if such amount is negative, such adjustment shall be in favor
of the Buyer.
"Dispute" shall mean any dispute arising out of, pertaining to or in
connection with the release of the Escrowed Funds.
"Escrow Account" shall mean the trust account established pursuant to this
Agreement, and identified in Section 3, to be held, invested, administered, and
disbursed as provided herein.
"Escrowed Funds" shall mean the Initial Escrowed Cash and any other funds
deposited in the Escrow Account together with all investments and reinvestments
thereof and all interest, profits and other earnings accumulated thereon
("Income") and proceeds therefrom, less any distributions made from time to time
from the Escrow Account hereunder in accordance with the terms of this
Agreement.
"Initial Escrowed Cash" shall mean the initial $6,000,000 deposit to the
Escrow Account to be made by Buyer upon the Closing of the Merger as provided
herein and in the Merger Agreement.
"Post-Closing Deposit" shall mean the remaining unpaid amount, if any, of
the Purchase Price to be paid by Buyer pursuant to the Merger Agreement,
determined in the manner contemplated by Section 7.5 of the Merger Agreement.
"Set Aside Amount" shall mean the amount set aside by the Escrow Agent with
respect to any Dispute. The Set Aside Amount with respect to a Dispute shall
equal the lesser of (i) the portion of the Escrowed Funds sufficient to pay the
Damages (less any applicable Threshold) relating to such Dispute in full
[determined by mutual agreement of the Buyer and the Shareholders'
Representative Committee, or in the absence of agreement by arbitration as set
forth in Section 14(c) hereof] or (ii) the balance of the Escrowed Funds as of
the date such set aside occurs.
"Year 2000 Reserve" shall mean $200,000.
SECTION 2. APPOINTMENT. The Escrow Agent agrees to act as the escrow
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agent as set forth herein, and as such escrow agent to receive, invest and
dispose of all of the Escrowed Funds on deposit, from time to time, in the
Escrow Account as provided herein. The Escrow Agent agrees
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that it shall hold all of the Escrowed Funds on deposit, from time to time, in
the Escrow Account in trust pursuant to the terms and conditions of this
Agreement.
SECTION 3. ESTABLISHMENT AND MAINTENANCE OF ESCROW ACCOUNT.
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(a) On the date hereof, the Buyer shall pay or cause Merger Sub to pay to
the Escrow Agent, the Initial Escrowed Cash by wire transfer of immediately
available funds in U.S. dollars. Upon receipt of the Initial Escrowed Cash, the
Escrow Agent shall establish on its books at the office of the Escrow Agent, a
trust account for the purposes contemplated hereby entitled the "ARKSYS-Euronet
Escrow Account (the "Escrow Account").
(b) Within ten (10) Business Days after the final determination of Net
Working Capital in the Closing Balance Sheet, either (i) Buyer shall pay to the
Escrow Agent any Closing Balance Sheet Adjustment in favor of the Shareholders,
plus interest at a rate equal to the lesser of (A) eight percent (8%) per annum
or (B) the average rate of return earned on the Escrowed Funds from the date of
receipt of the Initial Escrowed Cash to the date of payment by Buyer of any such
Closing Balance Sheet Adjustment, or (ii) the Escrow Agent shall pay to the
Buyer any Closing Balance Sheet Adjustment in favor of the Buyer (plus
applicable Income earned thereon as set forth in Section 9), in each case
pursuant to a written instruction letter signed by the Buyer and the
Shareholders' Representative Committee. Upon written notice from the
Shareholders Representative Committee, the Escrow Agent shall distribute to the
Shareholders an amount equal to the lesser of (A) any amount paid to the Escrow
Agent by Buyer pursuant to Section 3(b)(i) above and (B) the Available Escrowed
Funds on such date.
(c) On or before December 5, 1999, the Buyer shall pay to the Escrow Agent
the Post-Closing Deposit.
SECTION 4. INVESTMENT OF ESCROW FUNDS.
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(a) The Escrow Agent shall invest and reinvest from time to time the
Escrowed Funds (i) in any obligation of the United States with maturities not to
exceed ninety (90) days, (ii) in one or more money market investment funds
approved in writing by Buyer and the Shareholders' Representative Committee, the
primary investment policy of which is to invest in short-term obligations
guaranteed by the United States or any agency thereof, or (iii) in any other
investment agreed to in writing by the Shareholders' Representative Committee
and the Buyer. To the extent the Escrow Agent invests any Escrowed Funds in the
manner provided for in this Section, no party hereto shall be liable for any
loss which may be incurred by reason of such investment.
(b) The Escrow Agent shall have the power to reduce, sell or liquidate the
foregoing investments whenever the Escrow Agent shall be required to release all
or any portion of the Escrowed Funds. The Escrow Agent shall have no liability
for any investment losses resulting from the investment, reinvestment, sale or
liquidation of any portion of the Escrowed Funds, except in the case of the bad
faith, gross negligence or willful misconduct of the Escrow Agent.
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SECTION 5. CLAIMS AGAINST ESCROW FUNDS.
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Subject to the limitations set forth in Section 12 of the Merger Agreement,
at any time or times prior to the expiration of this Agreement, the Buyer may
make claims against the Escrowed Funds for indemnification pursuant to and in
accordance with Section 12 of the Merger Agreement (each an "Indemnification
Claim"). The Buyer shall notify the Shareholders' Representative Committee and
the Escrow Agent in writing of each Indemnification Claim (each an
"Indemnification Claim Notice") pursuant to and in accordance with Section 12 of
the Merger Agreement, including a description (based on information then
available) of the amount and nature of each Indemnification Claim. If the
Shareholders Representative Committee dispute an Indemnification Claim, the
Shareholders' Representative Committee shall give written notice thereof (each
an "Indemnification Dispute Notice") to the Buyer and to the Escrow Agent within
ten (10) Business Days after date the Indemnification Claim Notice pertaining to
such disputed Indemnification Claim was received by the Shareholders'
Representative Committee. An Indemnification Dispute Notice must (i) describe
the Indemnification Claim underlying the Dispute; (ii) identify the
Indemnification Claim Notice containing a description of the disputed
Indemnification Claim; and (iii) state the nature of the Dispute (based on
information then available). Any disputed amount of an Indemnification Claim
shall be held by the Escrow Agent in accordance with the terms of this
Agreement. If an Indemnification Dispute Notice is not provided to the Buyer and
the Escrow Agent within ten (10) Business Days after the date the
Indemnification Claim Notice was received by the Shareholders' Representative
Committee, the Indemnification Claim set forth on such Indemnification Claim
Notice shall be deemed to be undisputed.
SECTION 6. DISPUTED INDEMNIFICATION CLAIMS. If the Shareholders'
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Representative Committee shall dispute an Indemnification Claim as above
provided, the Escrow Agent shall set aside the appropriate Set Aside Amount on
the date the Escrow Agent receives the Indemnification Dispute Notice pertaining
to such disputed Indemnification Claim. Any Disputes regarding an
Indemnification Claim and/or Set Aside Amount shall be settled either by (i)
written agreement between the Shareholders' Representative Committee and the
Buyer or (ii) by binding arbitration in accordance with Section 14(c) of this
Agreement.
SECTION 7. RELEASE OF ESCROWED FUNDS TO THE BUYER. The amount of any
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undisputed Indemnification Claim (including any such undisputed claim arising by
reason of the failure to provide an Indemnification Dispute Notice as set forth
in Section 5) shall be distributed promptly by the Escrow Agent to the Buyer by
wire transfer of immediately available funds in U.S. Dollars, to an account
designated in writing by an officer of the Buyer. If the amount of an undisputed
Indemnification Claim exceeds the value of the Escrowed Funds, the Escrow Agent
shall distribute the balance of the Escrowed Funds to the Buyer. Upon receipt of
(i) a written instruction letter signed by the Shareholders' Representative
Committee and an officer of the Buyer indicating that Escrowed Funds should be
distributed to the Buyer, or (ii) a final written determination from an
arbitration panel established pursuant to Section 14(c) hereof indicating that a
portion of the Escrowed Funds are payable to the Buyer in connection with a
Dispute, the Escrow Agent shall release promptly to the Buyer the lesser of (i)
such amount payable to the Buyer or (ii) the balance of the Escrowed Funds on
the date of such release.
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SECTION 8. RELEASE OF THE ESCROWED FUNDS TO THE SHAREHOLDERS.
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(a) On or before April 5, 1999, the Shareholders' Representative Committee
and the Buyer shall send a joint written notice executed by an officer of the
Buyer and the Shareholders' Representative Committee to the Escrow Agent (the
"Interim Distribution Notice"). The Interim Distribution Notice shall indicate
the amount of any Receivables collected on or prior to March 31, 1999 (the
"Interim Distribution Amount"). Upon receipt of the Interim Distribution Notice,
the Escrow Agent shall release and distribute to the Shareholders on or before
April 9, 1999 (the "Interim Distribution Date") an amount of the Escrowed Funds
equal to the lesser of (i) the Interim Distribution Amount or (ii) the Available
Escrowed Funds on the Interim Distribution Date.
(b) Section 7.5 of the Merger Agreement contains provisions relating to
certain post-closing adjustments to the Purchase Price. On or before December 5,
1999, the Buyer and the Shareholders' Representative Committee shall send a
written instruction letter (the "Post-Closing Instruction Letter") regarding any
amounts due to the Shareholders and/or Buyer pursuant to Section 7.5 of the
Merger Agreement (the "Post-Closing Settlement"). Following receipt of, and as
set forth in, the Post-Closing Instruction Letter, on December 15, 1999 (the
"Post-Closing Settlement Date"), the Escrow Agent (A) shall release and
distribute to the Shareholders the amount by which the undisputed portion of the
Post-Closing Settlement payable to the Shareholders exceeds the sum of the
Aggregate Set Aside Amount and the Year 2000 Reserve on the Post-Closing
Settlement Date, and (B) shall release and distribute to the Buyer any
undisputed portion of the Post Closing Settlement payable to the Buyer. Any
Disputes regarding the Post-Closing Settlement shall be settled either by (i)
written agreement between the Shareholders Representative Committee and the
Buyer or (ii) by binding arbitration in accordance with Section 14(c) of this
Agreement. If, upon the resolution of any Dispute regarding the Post-Closing
Settlement the Shareholders or Buyer become entitled to a portion of the
Escrowed Funds, such funds payable to the Shareholders shall be promptly
released and distributed to the Shareholders, and such funds payable to the
Buyer shall be promptly released and distributed to the Buyer.
(c) In accordance with Section 7.5(b) of the Merger Agreement, beginning
on or before June 1, 2000, the Buyer and the Shareholders' Representative
Committee shall work together to determine by June 15, 2000, the amount of the
Year 2000 Reserve which is properly distributable to the Shareholders and/or the
Buyer. To the extent they reach agreement, they shall deliver a joint written
instruction letter to the Escrow Agent by June 15, 2000 executed by an officer
of the Buyer and the Shareholders' Representative Committee. Following receipt
of, and as set forth in, such written instruction letter, on or before June 30,
2000 the Escrow Agent shall release and distribute the undisputed portion of the
Year 2000 Reserve to the Shareholders and/or the Buyer; provided, the Escrow
Agent shall retain in escrow the amount of any Aggregate Set Aside Amounts until
the Dispute relating thereto has been resolved as set forth herein.
(d) Distributions to the Shareholders made pursuant to this Agreement
shall be made in accordance with their respective ownership interests therein as
set forth in the Merger Agreement. With respect to each distribution to the
Shareholders hereunder, the Shareholders' Representative Committee shall deliver
written instructions to the Escrow Agent (with a copy to the Buyer) setting
forth the amount of such distribution payable to each Shareholder in accordance
with the Merger
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Agreement, and either (i) appropriate wire transfer instructions with respect to
the Shareholder's account to which such payment should be sent by wire transfer,
or (ii) the address to which a check payable to such Shareholder should be
mailed. Neither the Escrow Agent nor the Buyer shall have any liability to any
Shareholder with respect to any payment so made pursuant to such written
instructions from the Shareholders' Representative Committee.
SECTION 9. INCOME ON ESCROWED FUNDS. It is the intent of the Buyer and the
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Shareholders Representative Committee that the party receiving any distribution
of Escrowed Funds hereunder shall also receive at the time of such distribution
the Income earned on such funds so distributed during the period of time such
funds were held in escrow hereunder. Accordingly, prior to the time of any
distribution hereunder, the Buyer and the Shareholders' Representative Committee
shall review the records of the Escrow Agent to determine in good faith the
amount of Income on the Escrowed Funds properly allocable to the funds to be
distributed, and at least one (1) Business Day prior to the day of such
distribution, the Buyer and the Shareholders' Representative Committee shall
deliver joint written instructions to the Escrow Agent of the amount of Income
so determined to be included in such distribution. Any dispute regarding the
determination of such allocable amount of Income shall be determined by
arbitration in accordance with Section 14(c) hereof. As soon as practical
hereafter, the Shareholders' Representative Committee shall provide to the
Escrow Agent a list of the address and tax identification number for each
Shareholder and Buyer shall provide to the Escrow Agent Buyer's tax
identification number.
SECTION 10. TERMINATION. This Agreement shall terminate at such time as
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all outstanding Disputes have been resolved and the Escrow Agent has received a
written notice executed by an officer of the Buyer and the Shareholders'
Representative Committee to that effect and any and all amounts to be
distributed to the parties hereunder have been so distributed.
SECTION 11. LIMITATION OF ESCROW AGENT'S DUTIES AND LIABILITY.
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(a) All parties hereto acknowledge that the duties of the Escrow Agent
hereunder are solely administerial in nature, and have been requested for their
convenience. The Escrow Agent shall not be deemed to be the agent of any party
hereto, to have any beneficial interest in any of the Escrowed Funds, or to have
any knowledge of the terms of the Merger Agreement. The parties hereto agree
that the Escrow Agent shall not be liable for any act or omission taken or
suffered in good faith with respect to this Agreement, unless such act or
omission is the result of the gross negligence or willful misconduct of the
Escrow Agent.
(b) The Escrow Agent may consult with legal counsel and shall be fully
protected and incur no liability relative to any action or inaction taken in
good faith in accordance with the advice of such counsel. The Escrow Agent
shall have no responsibility for determining the genuiness or validity of any
certificate, document, notice or other instrument or item presented to or
deposited with it, and shall be fully protected in acting in accordance with any
written instruction given to it by any of the parties hereto and reasonably
believed by the Escrow Agent to have been signed by the proper representatives
of such parties.
(c) The Escrow Agent shall not be required to institute legal proceedings
of any kind in connection with any dispute or other controversy hereunder, and
the Escrow Agent shall not be
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required to defend any legal proceedings which may be instituted against it with
respect to this Agreement unless requested to do so in writing by any of the
parties hereto, and unless and until it is indemnified by the requesting party
to the satisfaction of the Escrow Agent, in its sole discretion, against the
cost and expense of such defense, including, without limitation, the reasonable
fees and expenses of its legal counsel. If the Escrow Agent is confronted with
any inconsistent or conflicting claims or demands by the parties hereto, the
Escrow Agent shall not be required to determine the same or take any action
thereon and may await settlement or resolution of the controversy by mutual
written agreement between the Buyer and the Shareholders' Representative
Committee or arbitration pursuant to Section 14(c) hereof. Upon the
commencement of any action against or otherwise involving the Escrow Agent with
respect to this Agreement, the Escrow Agent shall be entitled to interplead the
parties to this Agreement and to deposit the amount in dispute with a court of
competent jurisdiction in the State of Arkansas, and in such event, the Escrow
Agent shall be relieved of and discharged from any and all further obligations
and liabilities under this Agreement with respect to such amount so deposited
with such court.
SECTION 12. INDEMNIFICATION OF ESCROW AGENT. The Escrow Agent shall be
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reimbursed and indemnified for, and held harmless against, any loss, liability
or out-of-pocket expense, including, but not limited to, reasonable attorneys'
fees, incurred in good faith and without gross negligence or willful misconduct
on the part of the Escrow Agent, arising out of or in connection with the
acceptance of this Agreement, or the performance of its duties and obligations
hereunder, as well as the reasonable costs and expenses of defending itself
against any claim or liability arising out of or relating to this Agreement,
incurred in good faith and without gross negligence or willful misconduct on the
part of the Escrow Agent. All of such amounts owing to the Escrow Agent
pursuant to this Section 11 shall be shared equally between the Buyer, on the
one hand, and the Shareholders' Representative Committee (on behalf of and for
the account of the Shareholders) on the other, unless either of them has acted
in bad faith in which event the party that has been determined to have acted in
bad faith shall be obligated to pay all of such amounts.
SECTION 13. ESCROW AGENT'S FEES. As compensation for its services to be
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rendered hereunder, the Escrow Agent will receive a fee in accordance with the
Schedule of Fees attached hereto and incorporated herein by reference as
Schedule 2, until termination of this Agreement. In addition, the Escrow Agent
will be reimbursed for all out-of-pocket expenses, including reasonable
attorneys' fees, if any, incurred by it in good faith (without gross negligence
or willful misconduct on the part of the Escrow Agent), in connection with the
carrying out of its duties under this Agreement upon request and presentation to
and approval of the Buyer and the Shareholders' Representative Committee of
receipts or other documentary evidence to reasonably support such expenses. All
of such fees and expenses shall be shared equally between the Buyer, on the one
hand, and the Shareholders' Representative Committee (on behalf of and for the
account of the Shareholders) on the other hand. The Shareholders' share of any
such fees may be paid from time to time with Available Escrowed Funds and
Buyer's share of any such fees shall be paid directly by the Buyer. To the
extent the Shareholders' share of any such fees exceed Available Escrowed Funds,
such fees shall be paid by the Shareholders' Representative Committee (on behalf
of and for the account of the Shareholders)
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SECTION 14. MISCELLANEOUS.
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(a) The Escrow Agent (or any successor to it as escrow agent hereafter
appointed (i) in writing by the Buyer and the Shareholders' Representative
Committee or (ii) by a court of competent jurisdiction) may at any time be
removed from such appointment by mutual written agreement of the Buyer and the
Shareholders' Representative Committee, or may resign and be discharged from the
duties imposed hereunder by giving at least thirty (30) days notice to each of
the parties hereto, such resignation to take effect upon a successor escrow
agent's acceptance of such appointment and the delivery of the Escrowed Funds to
the successor escrow agent. If no successor escrow agent accepts such
appointment, the Escrow Agent may apply to a court of competent jurisdiction for
the appointment of a successor escrow agent. In the event the Escrow Agent is
removed by mutual written agreement of the Buyer and the Shareholders'
Representative Committee, such Escrow Agent shall promptly deliver the Escrowed
Funds to the successor escrow agent appointed by Buyer and the Shareholders'
Representative Committee.
(b) This Agreement shall be construed, and the obligations, rights and
remedies of the parties hereunder shall be determined, in accordance with the
laws of the State of Delaware without resort to its conflict of laws rules. The
invalidity or uneforceability of any particular provision of this Agreement
shall not affect the other provisions hereof, and in such event this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
was omitted.
(c) Any controversy, Dispute or claim arising out of or relating to this
Agreement or the breach thereof, including, but not limited to, any disputes
regarding the release of the Escrowed Funds, shall be settled by binding
arbitration in Little Rock, Arkansas, in accordance with the commercial
arbitration rules of the American Arbitration Association ("AAA") and the laws
of the State of Delaware. The three-member arbitration panel shall be selected
in accordance with Section 15.11 of the Merger Agreement. Judgment upon the
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. The arbitrators shall award reimbursement of attorneys'
fees and other costs of arbitration to the prevailing party, in such manner as
the arbitrators shall deem appropriate. In addition, the losing party shall
reimburse the prevailing party for attorneys' fees and disbursements and court
costs incurred by the prevailing party in successfully seeking any preliminary
equitable relief or judicially enforcing any arbitration award.
(d) This Agreement (and as between the Buyer and the Shareholders, the
Merger Agreement) sets forth the entire agreement between the parties hereto
with respect to the subject matter hereof. If any of the terms and provisions
of any other agreement (excluding any amendment to this Agreement) between any
of the parties hereto conflict or are inconsistent with any of the terms and
provisions of this Agreement, the terms and provisions of this Agreement shall
govern and control in all respects, except as between the Buyer and the
Shareholders, they acknowledge and agree that it is their intent that this
Agreement and the Merger Agreement shall be construed consistently together.
(e) This Agreement shall be binding upon the parties hereto and their
heirs, administrators, executors, successors and assigns, respectively; provided
that no party may assign its interests hereunder without the prior written
consent of the other parties, except that the interests of any deceased
Shareholder in the Escrowed Funds shall succeed to the decedent's personal
8
<PAGE>
representative for distribution in accordance with such Shareholder's will, or
in the absence thereof in accordance with applicable laws of intestate
succession. The members of the Shareholders' Representative Committee shall be
succeeded in such position as set forth in Section 14.1 of the Merger Agreement.
(f) Any notices or other communications required to be given pursuant
to this Agreement shall be in writing and shall be deemed given: (i) upon
delivery, if by hand; (ii) three (3) Business Days after mailing, if sent by
registered or certified mail, postage prepaid, return receipt requested; (iii)
one (1) Business Day after mailing, if sent via overnight courier; or (iv) upon
transmission, if sent by telex or facsimile (provided that a confirmation copy
is sent in the manner provided in Section 14(f)(ii) or (iii) above written
thirty-six (36) hours after such transmission), except that if such notice or
other communication is received by telex or facsimile after 5:00 p.m. on a
Business Day at the place of receipt, it shall be effective as of the following
Business Day; provided, however, all notices to the Escrow Agent shall be deemed
-------- -------
delivered upon the Escrow Agent's actual receipt thereof. All notices and other
communications hereunder shall be given as follows:
If to the Escrow Agent to it at:
Mercantile Trust Company N.A.
P.O. Box 15008
Little Rock, AR 72231-5008
Attn: Mr. Hank Hull
Telecopy:(501) 688-7980
If to the Buyer to it at:
Euronet Services, Inc.
Horvat u. 14-24
1027 Budapest
Hungary
Attn: Jeffrey B. Newman, Vice President, General Counsel
Telecopy: 011-36-1-224-1023
with a copy to:
Arent Fox Kintner Plotkin & Kahn, PLLC
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attn: Arnold Westerman
Telecopier: (202) 857-6395
9
<PAGE>
If to the Shareholders Representative Committee to:
John Chamberlin
1518 Ellen Cane
Little Rock, Arkansas 72212
Telecopier: (501) 224-3062
James Hendren
#12 Perdido Circle
Little Rock, Arkansas 72211
Telecopier:
Donald B. Hatfield
148 Valley Club Circle
Little Rock, Arkansas 72212
Telecopier: (501) 223-0348
Eugene Jones
2823 Painted Valley Drive
Little Rock, Arkansas 72212
Telecopier: (501) 225-3721
David Payne
12425 Timber Bend Drive
Little Rock, Arkansas 72212
Telecopier: (501) 218-7302
with a copy to:
Friday, Eldredge & Clark
400 W. Capital Avenue, Suite 2000
Little Rock, Arkansas 72201
Attn: Walter M. Ebel, III
Telecopier: (501) 376-2147
(or to such other addresses and telephone numbers as a party may designate as to
itself by notice to the other parties). Notices hereunder from the
Shareholders' Representative Committee shall be effective if signed by John
Chamberlin (or his successor) and two or more members of such committee or by
James Hendren (or his successor) and two or more members of such committee, or
by any other member of the committee or representative or agent thereof
authorized in writing by the Shareholders' Representative Committee.
(g) In performing their respective obligations under this Agreement, the
Buyer and the Shareholders' Representative Committee agree to act in good faith.
10
<PAGE>
(h) This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original instrument and all of which together
shall constitute a single agreement.
IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or
caused this Agreement to be executed by its duly authorized officer, as the case
may be, as of the date first written above.
SHAREHOLDERS'
REPRESENTATIVE COMMITTEE:
__________________________________________
John Chamberlin
__________________________________________
James Hendren
__________________________________________
Donald B. Hatfield
__________________________________________
Eugene Jones
__________________________________________
David Payne
ESCROW AGENT:
MERCANTILE TRUST COMPANY, N.A.
By:____________________________________________
Name: _____________________________________
Title: ____________________________________
BUYER:
EURONET SERVICES INC.
By:____________________________________________
Name: _____________________________________
Title: ____________________________________
11
<PAGE>
Schedule 1
to
Escrow Agreement
Dated as of December ___, 1998
List of Shareholders
--------------------
[See attached]
12
<PAGE>
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
ARKANSAS SYSTEMS, INC. AND SUBSIDIARIES D/B/A ARKSYS
Nine month period ended September 30, 1998 and year
ended December 31, 1997
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Consolidated Balance Sheets
Unaudited
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,688,615 $2,438,246
Investment securities 6,989 57,660
Accounts receivable:
Trade, less allowance for doubtful accounts
of $252,000 at September 30, 1998 and
December 31, 1997 3,482,022 2,870,388
Other 70,519 33,622
Note receivable from affiliate 26,555 26,555
Costs and estimated earnings in excess of
billings on software installation contracts 603,733 640,165
Income taxes receivable 139,146 -
Deferred income taxes 375,163 331,536
Prepaid expenses and other assets 126,170 116,281
-----------------------------
Total current assets 6,518,912 6,514,453
Investment in affiliates 352,029 499,116
Receivable from affiliates 1,000 390,121
Net property and equipment 825,202 879,500
Cash surrender value of life insurance policies 928,488 847,620
-----------------------------
Total assets $8,625,631 $9,130,810
=============================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Accounts payable $ 340,666 $ 388,151
Income taxes payable - 189,055
Accrued expenses 897,705 1,153,549
Advance payments on contracts 1,384,343 1,253,385
Billings in excess of costs and estimated
earnings on software installation contracts 273,437 316,713
------------------------------
Total current liabilities 2,896,151 3,300,853
Deferred compensation 499,597 476,790
Deferred rent 106,607 68,573
-------------------------------
Total liabilities 3,502,355 3,846,216
Stockholders' equity:
Common stock, ($.000167 par value, authorized
6,000,000 shares; issued and outstanding:
September 30, 1998--2,655,301; December 31,
1998--2,654,461 443 443
Additional paid in capital 393,885 387,517
Unrealized gain on investments (net of tax of
$1,225 at September 30, 1998 and $1,524 at
December 31, 1997) 1,973 2,454
Retained earnings 6,552,862 6,632,772
-------------------------------
6,949,163 7,023,186
Less treasury stock, at cost (September 30,
1998--1,102,809 shares; December 31,
1997--1,090,935 shares) (1,825,887) (1,738,592)
-------------------------------
Total stockholders' equity 5,123,276 5,284,594
-------------------------------
Total liabilities and stockholders' equity $ 8,625,631 $ 9,130,810
===============================
</TABLE>
See accompanying notes.
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Consolidated Statements of Operations and Comprehensive Income (Loss)
Unaudited
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
Revenue:
Software, maintenance and related revenue $8,767,193 $11,143,465
Gross profit on hardware sales 182,630 292,045
-------------------------------
Total revenue 8,949,823 11,435,510
Operating expense:
Salaries, wages and employee benefits 7,104,425 8,147,139
Depreciation 200,577 260,980
Other general and administrative 2,736,502 3,606,598
Expenses billed to customers (635,628) (896,984)
-------------------------------
Total operating expense 9,405,876 11,117,733
-------------------------------
(Losses) earnings from operations (456,053) 317,777
Other income (expense):
Interest income 64,229 110,663
Interest expense (7) (12)
Loss on sale of property - (157,306)
Other, net 148,289 105,970
-------------------------------
Total other income 212,511 59,315
-------------------------------
(Loss) income before equity in loss of
affiliates and income taxes (243,542) 377,092
Equity in loss of affiliates (26,921) (16,978)
-------------------------------
(Loss) income before income taxes (benefit) (270,463) 360,114
Provision for income taxes (benefit):
Current (146,926) 240,315
Deferred (43,627) (124,195)
-------------------------------
(190,553) 116,120
-------------------------------
Net (loss) income (79,910) 243,994
Other comprehensive income, net of tax:
Unrealized gains on investments:
Unrealized holding gains arising during period 219 909
Less: reclassification adjustments for gains
included in net income (700) -
-------------------------------
Other comprehensive income (loss) (481) 909
-------------------------------
Comprehensive income (loss) $ (80,391) $ 244,903
===============================
</TABLE>
See accompanying notes.
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
Nine month period ended September 30, 1998 and year ended December 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN GAIN (LOSS) RETAINED TREASURY
STOCK CAPITAL ON INVESTMENTS EARNINGS STOCK TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $443 $368,065 $1,545 $6,388,778 $(1,632,287) $5,126,544
Net income for 1997 - - - 243,994 - 243,994
Sales of stock to employees - 19,452 - - - 19,452
Purchases of treasury
stock--(19,547 shares at $5.44
average per share) - - - - (106,305) (106,305)
Change in unrealized gain (loss)
on investments - - 909 - - 909
----------------------------------------------------------------------------------------
Balance at December 31, 1997 443 387,517 2,454 6,632,772 (1,738,592) 5,284,594
Net loss for 1998 - - - (79,910) - (79,910)
Sales of stock to employees - 6,368 - - - 6,368
Purchases of treasury
stock--(11,874 shares at $7.35
average per share) - - - - (87,295) (87,295)
Change in unrealized gain (loss)
on investments - - (481) - - (481)
---------------------------------------------------------------------------------------
Balance at September 30, 1998 $443 $393,885 $1,973 $6,552,862 $(1,825,887) $5,123,276
=======================================================================================
</TABLE>
See accompanying notes
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) income $ (79,910) $ 243,994
Adjustments to reconcile net (loss) income to
cash provided by (used in) operating activities:
Depreciation 200,577 260,980
Loss on sale of property - 157,305
Undistributed loss of affiliates 26,921 16,978
Deferred income taxes (43,627) (124,195)
Changes in operating assets and liabilities:
Accounts and other receivables (648,531) (1,132,450)
Receivable from affiliates 389,121 669,822
Income taxes receivable (139,146) -
Income taxes payable (189,055) 475,420
Costs and estimated earnings in excess of
billings on software installation contracts 36,432 (294,027)
Prepaid expenses and other assets (9,889) 55,155
Cash surrender value of life insurance policies (80,868) (46,233)
Accounts payable and accrued expenses (303,329) 357,396
Advance payments on contracts 130,958 305,482
Billings in excess of costs and estimated
earnings on software installation contracts (43,276) 77,206
Deferred compensation 22,807 72,595
Deferred rent 38,034 24,656
-----------------------------
Net cash (used in) provided by operating (692,781) 1,120,084
activities
INVESTING ACTIVITIES
Proceeds from sale of property and equipment - 963,783
Proceeds from maturities of investments 50,190 -
Purchases of property and equipment (146,279) (50,962)
Purchases of investment securities - (461)
Additional investment in affiliates 120,166 (86,653)
-----------------------------
Net cash provided by investing activities 24,077 825,707
FINANCING ACTIVITIES
Proceeds from sale of stock 6,368 19,452
Purchase of treasury stock (87,295) (106,305)
-----------------------------
Net cash used by financing activities (80,927) (86,853)
-----------------------------
(Decrease) increase in cash and cash equivalents (749,631) 1,858,938
Cash and cash equivalents:
Beginning balance 2,438,246 579,308
-----------------------------
Ending balance $1,688,615 $ 2,438,246
=============================
</TABLE>
See accompanying notes.
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements
Unaudited
September 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Founded in 1975 and managed by software professionals Arkansas Systems, Inc. and
Subsidiaries d/b/a ARKSYS, ("ARKSYS" or the "Company") sells payment and
financial transaction delivery systems worldwide. ARKSYS is a closely-held,
independently controlled corporation that is owned 98%, directly and indirectly,
by current employees.
ARKSYS provides payment and transaction processing solutions on the IBM AS/400
platform. Its core solution, Integrated Transaction Management ("ITM"), is a
modular, comprehensive software architecture for ARKSYS' offerings. Offerings
include:
ATM and network processing software
Electronic funds transfer software interfaces
Electronic funds transfer switch control software
Credit/debt card processing software
Corporate cash management and personal financial management access products
Headquartered in Little Rock, Arkansas, ARKSYS has satellite offices in
Budapest, Hungary, and Orlando, Florida. Arkansas-based marketing and regional
sales representatives and a global network of distributors market and sell its
offerings and services. Technical staff members, which include delivery,
development, research and support personnel, are based in Little Rock.
ARKSYS' client base includes more than 350 active clients in the United States
and approximately 70 countries worldwide. ARKSYS has approximately 140
employees.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Arkansas Systems, Inc. and its wholly owned subsidiary, Arkansas Systems, Inc.
International (a Foreign Sales Corporation). All significant intercompany
accounts and transactions have been eliminated in consolidation.
10
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
ARKSYS considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
INVESTMENT SECURITIES
All marketable securities are classified as available-for-sale and are available
to support current operations or to take advantage of other investment
opportunities. Those securities are stated at estimated fair value based upon
market quotes. Unrealized gains and losses, net of tax, are computed on the
basis of specific identification and are included in Retained Earnings.
INVESTMENT IN COMMON STOCK OF LIMITED LIABILITY COMPANIES
ARKSYS is accounting for its investments in Arkansas Systems Building Company,
LLC, a 48.389% owned affiliate, Arkansas Systems Land Company, LLC, a 50% owned
affiliated, Chenal Technology Center, LLC, a 17% owned affiliate, and EFT
Network Services, LLC, a 33 1/3% owned affiliate, by the equity method of
accounting. Under this method, ARKSYS's share of the net income or loss of each
affiliate is reflected in ARKSYS's investment account, and dividends received
from an affiliate are treated as a reduction of the investment account.
RECOGNITION OF REVENUES
ARKSYS offers banking and financial software products under licensing agreements
with monthly and annual maintenance support. Revenues from licensing agreement
contracts are recognized on a percentage of completion basis whereby a pro rata
portion of revenue and related costs are recognized as the work progresses.
Maintenance agreement revenues are recognized over the terms of the maintenance
contracts on a monthly basis. Licensing and maintenance contract revenues
received before they are earned are included in the balance sheets as "Advance
payments on contracts".
FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATION OF CREDIT RISK
ARKSYS maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. ARKSYS has not experienced any losses in such accounts
and does not believe it is exposed to any significant credit risk on cash and
cash equivalents.
11
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Also, ARKSYS's investment portfolio is comprised primarily of U.S. Government
obligations which are backed by the full faith and credit of the United States
Government.
The concentration of credit risk in the Company's receivables with respect to
the financial services industry is mitigated by the Company's credit evaluation
policy, reasonably short collection terms and geographical dispersion of sales
transactions. The Company generally does not require collateral or other
security to support accounts receivables.
At September 30, 1998, 79% of the Company's total accounts receivable resulted
from foreign sales. Customers in Hungary accounted for approximately 2% of the
Company's total accounts receivable at September 30, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight line method. The building and
building additions have been assigned depreciable lives of 10 to 30 years. The
depreciable lives of automobiles, office furniture and data processing equipment
are 3 to 8 years.
IMPAIRMENT OF ASSETS
The Company accounts for any impairment of its long-lived assets using SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-lived Assets
to be Disposed Of". Under SFAS No. 121, impairment losses are recognized when
information indicates the carrying amount of long-lived assets, identifiable
intangibles and any goodwill related to those assets will not be recovered
through future operations or sale.
INCOME TAXES
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
12
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures, consisting primarily of employee salaries
and computer-related expenses, incurred for the development of new software
systems, are expensed as incurred and amounted to approximately $1,300,000 for
the nine months ended September 30, 1998 and $1,700,000 for December 31, 1997.
USE OF ESTIMATES
The preparation of 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs included
in other general and administrative expenses totaled $66,620 for the nine months
ended September 30, 1998 and $66,390 for December 31, 1997.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and accordingly, recognized no compensation expense for the stock
option grants.
2. INVESTMENT SECURITIES
The cost and fair value of investments in debt and equity securities consist of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities $3,791 $3,198 $ - $6,989
--------------------------------------------------
$3,791 $3,198 $ - $6,989
==================================================
</TABLE>
13
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
2. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities $ 3,791 $2,844 $ - $ 6,635
Obligations of local governments 49,891 1,134 - 51,025
--------------------------------------------------
$53,682 $3,978 $ - $57,660
==================================================
</TABLE>
Debt securities at December 31, 1997 matured in 1998.
The fair market value of these financial instruments is based upon quoted market
prices for these or similar investments.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------------------------
<S> <C> <C>
Land $ 107,088 $ 107,088
Building and improvements 15,176 6,747
Data processing equipment 1,786,257 2,088,947
Office equipment and automobiles 622,885 591,935
--------------------------------
2,531,406 2,794,717
Less accumulated depreciation (1,706,204) (1,915,217)
--------------------------------
Net property and equipment $ 825,202 $ 879,500
================================
</TABLE>
4. CONTRACTS IN PROCESS
The software installation contracts in process consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------------------------
<S> <C> <C>
Costs and estimated earnings on software
installation contracts $ 4,496,700 $ 3,911,139
Less billings to date (4,166,404) (3,587,687)
--------------------------------
$ 330,296 $ 323,452
================================
15
</TABLE>
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
4. CONTRACTS IN PROCESS (CONTINUED)
Components are included in the accompanying consolidated balance sheets under
the following captions:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on software installation contracts $ 603,733 $ 640,165
Billings in excess of costs and estimated
earnings on software installation contracts (273,437) (316,713)
-----------------------------
$ 330,296 $ 323,452
=============================
</TABLE>
5. INVESTMENT IN LIMITED LIABILITY COMPANIES (UNAUDITED)
Condensed financial information for Arkansas Systems Building Company, LLC;
Arkansas Systems Land Company, LLC; EFT Network Services, LLC; and Chenal
Technology Center, LLC consist of the following:
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
BUILDING LAND NETWORK TECHNOLOGY
COMPANY COMPANY SERVICES CENTER
-----------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 369,980 $ 211 $ 17,117 $ 178,805
Property and equipment (net) 11,274,322 - 195,470 166,200
Other - 421,453 75,459 1,397,034
-----------------------------------------------------------
Total assets $11,644,302 $421,664 $288,046 $1,742,059
===========================================================
LIABILITIES AND EQUITY
Payable to ARKSYS $ 94,662 $ 1,000 $ 26,555 $ -
Other payables - 421,453 76,795 36,523
Debt 10,505,433 - - 813,704
Capital 490,279 64,695 262,134 406,081
Retained earnings (deficit) 553,928 (65,484) (77,438) 485,751
-----------------------------------------------------------
Total liabilities and equity $11,644,302 $421,664 $288,046 $1,742,059
===========================================================
Revenue $ 1,705,419 $ - $414,897 $1,164,202
Cost of sales - - 65,642 264,542
Operating expenses 1,405,799 23,765 403,101 113,715
-----------------------------------------------------------
Net income (loss) $ 299,620 $(23,765) $(77,438) $ 785,945
===========================================================
Percent owned by ARKSYS 48.389 50 33.33 17
===========================================================
</TABLE>
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
5. INVESTMENT IN LIMITED LIABILITY COMPANIES (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
BUILDING LAND NETWORK TECHNOLOGY
COMPANY COMPANY SERVICES CENTER
------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 381,480 $ 267 $ 54,597 $ 17,352
Property and equipment
(net) 11,467,503 - 201,297 168,460
Other - 421,453 112,213 2,427,481
------------------------------------------------------------
Total assets $11,848,983 $421,720 $ 368,107 $2,613,293
============================================================
LIABILITIES AND EQUITY
Payable to ARKSYS $ 389,121 $ 1,000 $ 26,555 $ -
Other payables - - 42,733 30,939
Debt 10,602,196 421,453 - 2,077,886
Capital 623,398 80,525 676,628 804,662
Retained earnings
(deficit) 234,268 (81,258) (377,809) (300,194)
------------------------------------------------------------
Total liabilities and
equity $11,848,983 $421,720 $ 368,107 $2,613,293
============================================================
Revenue $ 1,999,697 $ - $ 372,453 $ 303,100
Cost of sales - - 39,115 180,931
Operating expenses 1,823,436 41,719 567,892 216,723
------------------------------------------------------------
Net income (loss) $ 176,261 $(41,719) $(234,554) $ (94,554)
============================================================
Percent owned by ARKSYS 48.389 50 33.33 17
============================================================
</TABLE>
None of the debt incurred by the above entities is with recourse to the owners.
6. EMPLOYEE BENEFIT PLANS
ARKSYS has established a Profit Sharing and 401(k) plan for all employees who
have completed one year of service. Each plan participant can contribute up to
the maximum amount allowed by the Internal Revenue Service to the Plan through
payroll deductions. ARKSYS's matching contribution to the plan is discretionary
and is determined each year by the Board of Directors. The employees' vested
percentage regarding the employer's contribution varies according to years of
service. ARKSYS's expense for contributions to the plan for the nine month
period ended September 30, 1998 and the year ended December 31, 1997 was
$224,408 and $287,624, respectively.
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
ARKSYS maintains a self-funded health insurance program which covers all full-
time employees and their families at no charge to the employees. In order to
administer this program, ARKSYS has entered into a contractual agreement with a
third party administrator by which ARKSYS pays a monthly service fee to the
administrator based upon employee enrollment. ARKSYS has also purchased
stop/loss insurance to limit ARKSYS's liability to $25,000 per employee per year
and a total loss on all claims to approximately $21,400 per month. Health care
claims are accrued as the services are rendered and, accordingly, the cost of
claims incurred but not yet paid of approximately $65,000 and $63,000 at
September 30, 1998 and December 31, 1997, respectively is included in accrued
liabilities in the accompanying balance sheets.
Until October 1, 1996, ARKSYS also had a nonqualified, unfunded deferred
compensation plan for certain key executives providing for payments upon
retirement or death. The retirement benefit to be provided was based upon the
length of service rendered and a fixed amount determined at the date of initial
participation. ARKSYS had insured the lives of the participants in the deferred
compensation plan to assist in the funding of the deferred compensation
liability. On October 1, 1996, ARKSYS terminated the deferred compensation plan.
As of December 31, 1996, five of the seven participants in the deferred
compensation plan had received life insurance policies in their names, in full
settlement of the related liability.
In 1997, the obligation related to the remaining two participants was converted
into a new retirement agreement under which payments are to be made monthly
beginning in 2012, for a maximum of 15 years, to either the employee or their
beneficiary. The liability had a present value, at an assumed discount rate of
9%, of $499,597 at September 30, 1998. ARKSYS has insured the lives of the
participants covered by the new retirement agreement to assist in funding of the
deferred compensation liability by acquiring insurance contracts with a combined
cash surrender value of $519,276 at September 30, 1998. The assets and
liabilities are reported gross in the accompanying balance sheets because the
insurance contracts have not been irrevocably assigned to the employees or any
plan or trust and accordingly, the insurance contracts are subject to the claims
of creditors.
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTION PLAN
Effective January 1, 1996, ARKSYS established an incentive stock-based
compensation plan under which stock options may be granted to officers and other
key employees. The plan provides for option prices based on the fair value of
the stock on the date the option is granted, as established by the Board of
Directors based upon a formula which takes into consideration the Company's book
value, gross sales and retained earnings. Options granted under this plan become
exercisable in five equal installments commencing one year from the date of the
grant.
Shares issued pursuant to options granted under this plan shall not exceed
1,000,000.
Transactions relating to the incentive stock-based compensation plan are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
-------------------------
<S> <C> <C>
Options outstanding at January 1, 1997 60,250 $6.46
Granted 152,884 6.91
Exercised (200) 6.46
Terminated (9,000) 6.57
-------------------------
Options outstanding at December 31, 1997 203,934 6.82
Granted 154,967 7.17
Exercised - -
Terminated (74,700) 7.33
-------------------------
Options outstanding at September 30, 1998 284,201 6.88
=========================
</TABLE>
As of September 30, 1998, options for 251,362 shares were exercisable and
715,599 shares were available for stock option grants under the 1996 plan.
Effective April 1, 1996, ARKSYS established a nonqualified stock-based
compensation plan under which stock option smay be granted to members of the
Board of Directors of the Company. The plan provides for option prices as
established by the Board of Directors. Options granted under this plan become
exercisable, based on the form of the stock option agreement, either upon the
date of grant (incentive form) or in five equal installments commencing one year
from the date of the grant (longevity form).
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTION PLAN (CONTINUED)
Shares issued pursuant to options granted under this plan shall not exceed
240,000. Transactions relating to the nonqualified stock-based compensation plan
are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
------------------------------
<S> <C> <C>
Options outstanding at January 1, 1997 30,000 $6.46
Granted 4,342 6.46
Exercised - -
Terminated - -
------------------------------
Options outstanding at December 31, 1997 34,342 6.46
Granted 35,620 6.46
Exercised - -
Terminated - -
------------------------------
Options outstanding at September 30, 1998 69,962 $6.46
==============================
</TABLE>
As of September 30, 1998, options for 51,940 shares were exercisable and 170,038
shares were available for stock option grants under the 1996 nonqualified plan.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards during the nine
month period ended September 30, 1998 and the year ended December 31, 1997
consistent with the provisions of SFAS 123, the Company's pro forma net (loss)
income would have been $(198,723) and $197,131, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used for grants during the nine month period ended September 30, 1998:
dividend yield of 0%; expected volatility of 0%; risk-free interest rate of
4.33% and expected life of 5 years. The following weighted-average assumptions
were used for grants in 1997: dividend yield of 0%; expected volatility of 0%,
risk-free interest rate of 6.73% and expected life of 5 years.
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE STOCK PLANS
The Company also has an employee stock purchase plan for purposes of providing
employees with ownership opportunities. The Plan is a non-compensatory plan
available to all employees who have completed three full quarters of employment.
After meeting the length of employment requirement, an employee accrues rights
at the rate of twenty shares per full quarter of employment if employed prior to
March 1, 1991. Employees who were employed subsequent to February 28, 1991
accrue ten purchase rights per quarter. Employees who were employed prior to
December 31, 1980 accrue four hundred rights per full quarter of employment.
Rights granted on or after March 1, 1991 expire if not exercised within three
years. Shares of stock purchased with these rights fully vest to the employee
immediately upon purchase. All purchases and sales of stock are at values
established by the Board of Directors based upon a formula which takes into
consideration the Company's book value, gross sales, and retained earnings. The
Company retains a right of first refusal on all proposed sales of Company stock.
The Board of Directors may also grant purchase rights to employees on a
discretionary basis. Shares of stock purchased with these granted rights vest to
the employee over a five year period.
There were rights to purchase 26,603 and 30,213 shares of stock outstanding at
September 30, 1998 and December 31, 1997, respectively. Rights were exercised to
purchase 840 shares during the nine month period ended September 30, 1998 and
2,570 shares during the year ended December 31, 1997.
9. LINE OF CREDIT
At September 30, 1998, ARKSYS had a $1,500,000 unused line of credit with a bank
to be drawn upon as needed, with interest at the lower of 10.0% or the New York
Premium rate. The line expires on July 5, 1999. The line has no outstanding
balance.
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
10. FEDERAL AND STATE INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1998
CURRENT NONCURRENT TOTAL
-----------------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Property and equipment $ - $ 74,950 $ 74,950
Deferred revenue 121,229 - 121,229
Other - 1,225 1,225
Prepaid expenses 4,212 - 4,212
-----------------------------------------
Total deferred tax liabilities 125,441 76,175 201,616
Deferred tax assets:
Bad debt reserve 96,491 - 96,491
Deferred rent - 40,820 40,820
Deferred compensation 191,296 - 191,296
Accrued vacation 104,665 - 104,665
Contributions 4,012 - 4,012
Net operating losses and credits - 135,783 135,783
Other 3,712 - 3,712
-----------------------------------------
Total deferred tax assets 400,176 176,603 576,779
-----------------------------------------
Net deferred tax (liabilities)/assets $ 274,735 $ 100,428 $ 375,163
=========================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
CURRENT NONCURRENT TOTAL
-----------------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Property and equipment $ - $ (92,534) $ (92,534)
Deferred revenue (123,850) - (123,850)
Other - (940) (940)
Prepaid expenses (4,323) - (4,323)
-----------------------------------------
Total deferred tax liabilities (128,173) (93,474) (221,647)
Deferred tax assets:
Bad debt reserve 96,491 - 96,491
Deferred rent - 26,257 26,257
Deferred compensation - 182,563 182,563
Accrued medical claims 14,641 - 14,641
Accrued bonuses 111,274 - 111,274
Accrued vacation 118,756 - 118,756
Other 2,262 939 3,201
-----------------------------------------
Total deferred tax assets 343,424 209,759 553,183
-----------------------------------------
Net deferred tax (liabilities)/assets $ 215,251 $ 116,285 $ 331,536
=========================================
</TABLE>
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
10. FEDERAL AND STATE INCOME TAXES (CONTINUED)
The use of the liability method in accounting for income taxes requires that
deferred tax assets are reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Whether a deferred tax asset will be realized depends upon sufficient
future taxable income and consideration of limitation on the ability to utilize
net operation loss carryforwards and other tax attributes.
Management has considered appropriate factors in assessing the probability of
realizing these deferred tax assets. These factors include the deferred tax
liabilities of $204,528 and the projection of future taxable earnings. The
Company believes that the benefits of the deferred tax assets of $587,856 will
be realized, therefore a valuation allowance has not been provided for the
deferred tax asset.
At September 30, 1998, the Company has federal and state net operating loss
carryforwards of approximately $57,000 and $685,000, respectively. The net
operating losses will expire in the year 2018 for federal and 2003 for state.
The Company also has general business credits of approximately $78,000 that will
expire in 2013.
A reconciliation of the statutory federal income tax rate to the Company's
effective rate is presented below.
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Income tax at the statutory rate of 34% $ (91,957) $ 122,439
Federal income tax effects of:
State income taxes - (3,637)
Nondeductible portion of meals and entertainment 8,082 10,915
Cash surrender value of life insurance (27,495) (15,719)
Benefit of nontaxable income from Arkansas Systems, Inc.
International (33,150) (37,563)
Other (46,033) 28,989
-------------------------------
Federal income taxes (190,553) 105,424
State income taxes - 10,696
-------------------------------
Provision for income taxes $ (190,553) $ 116,120
===============================
</TABLE>
No income taxes were paid for the nine month period ended September 30, 1998.
Income taxes paid for the year ended December 31, 1997 was $6,500.
<PAGE>
Arkansas Systems, Inc. and Subsidiaries
d/b/a ARKSYS
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY
During 1996, ARKSYS entered into an agreement with Arkansas Systems Building
Company, LLC, an affiliate, to lease office space. The lease is classified as an
operating lease and provides for specified annual percentage increases. Minimum
future rental payments under this noncancelable operating lease as of September
30, 1998, for each of the next 5 years and in the aggregate are:
<TABLE>
<S> <C>
1999 $1,071,844
2000 1,103,999
2001 1,137,119
2002 1,171,233
2003 1,206,370
--------------
Total minimum future rental payments $5,690,565
==============
</TABLE>
ARKSYS incurred lease expense of $774,909 for the nine month period ended
September 30, 1998 and $1,071,242 for December 31, 1997, respectively.
12. COMMITMENTS
The Company has an agreement with a former shareholder to repurchase shares of
the Company's common stock over a period extending through 2006. Under the terms
of the agreement the Company will pay the former shareholder approximately
$60,000 per year through 2006.
13. YEAR 2000 CONSIDERATION
ARKSYS has developed a plan to modify its information technology to be ready for
the year 2000 and has begun converting critical data processing systems. ARKSYS
currently expects the project to be substantially complete by early 1999. ARKSYS
does not expect this project to have a significant effect on operations.
14. PENDING SALE
On September 18, 1998, management of the Company signed a letter of
understanding with Euronet Services, Inc. for the sale of all outstanding stock
of the Company. The transaction is expected to close the first week of December
1998 with an effective closing date of November 30, 1998.
