Source: finance

The Company recorded an $300,000 write-down of certain ATM hardware assets associated with the purchase of the Budapest Bank ATM network in May 2000 and the Service Bank ATM network in March 1999 (see Note 10 to the Consolidated Financial Statements – Asset Write Down). In addition, the Company recorded a one-time gain in its Central European Sub-segment of $1.2 million. The gain is related to a change in Hungarian law that eliminates a major portion of the Company’s liability for import taxes on ATM hardware to the Hungarian government. The gain is included as an element of direct operating costs.

The operating expenses for the Central European Sub-segment totaled $21.7 million for the year ended December 31, 2000 as compared to $20.7 million for the year ended December 31, 1999, an increase of 5%. The increase in operating expenses is largely the result of an increase in the number of ATMs operated by the Company from 1,203 at December 31, 1999 to 1,391 at December 31, 2000, and increased transaction volumes.

The operating expenses for the Western European Sub-segment totaled $18.9 million for the year ended December 31, 2000 as compared to $16.5 million for the year ended December 31, 1999, an increase of 15%. The increase in operating expenses is largely the result of an increase in the number of ATMs operated by the Company from 621 at December 31, 1999 to 787 at December 31, 2000, and increased transaction volumes.

The operating expenses for the Other ATM Operations Sub-segment were $2.4 million for the year ended December 31, 2000 as compared to $2.2 million for the year ended December 31, 1999, an increase of 9%. The operating expenses from this segment are the result of the acquisition of the Dash network located in the United States in August 1999 and the unallocated costs associated with the Company’s processing facilities.

Direct operating costs in the Network Services Segment consist primarily of: ATM installation costs; ATM site rentals; and costs associated with maintaining ATMs, ATM telecommunications, interest on network cash and cash delivery and security services to ATMs. Such costs increased to $24.4 million for the year ended December 31, 2000 from $21.9 million for the year ended December 31, 1999. The increase in direct operating costs is primarily attributable to costs associated with operating the increased number of ATMs in the network during the periods. Also, intercompany allocations were made to charge the ATM operations with transaction switching and bank connection fees associated with the operations central processing center in Budapest. These allocations totalled $3.5 million and $2.9 million for the years ended December 31, 2000 and 1999, respectively. Direct operating costs for 2000 include a one-time gain of $1.2 million due to a change in Hungarian law that eliminates a major portion of the Company’s liability for import taxes on ATM hardware. Direct operating costs also include a $657,000 gain realized in 1999 from the sale of the Croatian network assets. The components of direct operating costs for the years ended December 31, 2000 and 1999 were:

<table>
  <tr>
    <th></th>
    <th>Years ending December 31,</th>
    <th>2000</th>
    <th>1999</th>
  </tr>
  <tr>
    <td>ATM communication</td>
    <td>$</td>
    <td>4,183</td>
    <td>3,932</td>
  </tr>
  <tr>
    <td>ATM cash filling and interest on network cash</td>
    <td></td>
    <td>7,426</td>
    <td>5,900</td>
  </tr>
  <tr>
    <td>ATM maintenance</td>
    <td></td>
    <td>3,987</td>
    <td>2,967</td>
  </tr>
  <tr>
    <td>ATM site rental</td>
    <td></td>
    <td>2,258</td>
    <td>2,421</td>
  </tr>
  <tr>
    <td>ATM installation</td>
    <td></td>
    <td>675</td>
    <td>783</td>
  </tr>
  <tr>
    <td>Transaction processing and ATM monitoring</td>
    <td></td>
    <td>5,242</td>
    <td>4,205</td>
  </tr>
  <tr>
    <td>Other</td>
    <td></td>
    <td>600</td>
    <td>1,663</td>
  </tr>
  <tr>
    <th>Total direct operating expenses</th>
    <th>$</th>
    <th>24,371</th>
    <th>21,921</th>
  </tr>
</table>

As a percentage of network revenue, direct operating costs fell from 83% for the year ended December 31, 1999 to 66% for the year ended December 31, 2000. On a per ATM basis the direct operating costs fell from $12.782 per ATM for the year ended December 31, 1999 to $9.607 per ATM for the year ended December 31, 2000, an improvement of 23%. On a per transaction basis the direct operating costs fell from $0.66 per transaction for the year ended December 31, 1999 to $0.46 per transaction for the year ended December 31, 2000, an improvement of 30%.

Segment salaries and benefits increased to $7.4 million for the year ended December 31, 2000 from $7.2 million for the year ended December 31, 1999, an increase of 3%. The increase in the year-on-year expenses reflect the continued expansion of the operations to Western European markets with significantly higher labor costs than Central Europe as well as some increases in staff levels at the processing center required to maintain quality service in line with the rising transaction volumes. As a percentage of Network Services Segment revenue, salaries and benefits fell from 27% for the year ended December 31, 1999 to 20% for the year ended December 31, 2000.

Selling, general and administrative costs allocated to the Network Services Segment decreased to $2.4 million for the year ended December 31, 2000 from $2.9 million for the year ended December 31, 1999. The $500,000 cost decrease for the year ended December 31, 2000 results from the net effect of (1) a $600,000 increase in the allocation of costs from the selling, general and administrative line of the Budapest processing center to the operating cost line, as discussed above, from $2.9 million for the year ended December 31, 1999 to $3.5 for the year ended December 31, 2000 and (2) a $100,000 increase in costs associated with the expansion of the Company’s network operations.

Depreciation and amortization increased to $3.0 million for the year ended December 31, 2000 from $7.4 million for the year ended December 31, 1999. The increases are due primarily to the increase in the number of owned ATMs as discussed previously. The Company also recorded an $300,000 write-down of certain ATM hardware assets for the year ended December 31, 2000, as previously discussed.