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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER C00-22167
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EURONET SERVICES INC.
(Exact name of the registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
74-2806888
(I.R.S. employer identification no.)
14-24 Horvat u.
1027 Budapest
Hungary
(Address of principal executive offices)
36-1-224-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As at July 31st,
1998 15,506,060 common shares.
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................. 97,289 7,516
Restricted cash....................................... 1,694 847
Trade accounts receivable............................. 1,233 647
Investment securities................................. 8,602 31,944
Prepaid expenses and other current assets............. 2,679 1,857
------------- -----------------
Total current assets................................ 111,497 42,811
Property, plant and equipment, net...................... 27,847 24,088
Deferred financing costs................................ 3,294 -
Deposits for ATM leases................................. 2,542 2,542
Deferred income taxes................................... 571 571
Loans receivable, excluding current portion............. 21 21
------------- -----------------
Total assets........................................ 145,772 70,033
============= =================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable................................ 5,624 4,420
Short term borrowings................................. 152 158
Current installments of capital leases obligations.... 4,203 3,140
Accrued expenses...................................... 1,594 1,597
------------- -----------------
Total current liabilities........................... 11,573 9,315
Obligations under capital leases, excluding
current installments................................ 8,938 11,330
Notes payable (Note 4).................................. 81,479 -
Other long-term liabilities............................. - 169
------------- -----------------
Total liabilities................................... 101,990 20,814
Stockholders' equity:
Common stock, $0.02 par value, 30,000,000 shares
authorized; issued and outstanding 15,213,453
shares in 1998 and 15,133,321 shares in 1997........ 306 304
Warrants (Note 4)..................................... 1,846 -
Treasury stock........................................ (4) (4)
Additional paid in capital............................ 63,570 63,358
Subscription receivable............................... (92) (253)
Accumulated losses.................................... (22,830) (14,970)
Restricted reserve.................................... 784 784
Cumulative translation adjustment..................... 202 -
------------- -----------------
Total stockholders' equity.......................... 43,782 49,219
------------- -----------------
Total liabilities and stockholders' equity.......... 145,772 70,033
============= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ...................................... 2,623 1,061 4,624 1,856
Operating expenses:
ATM operating costs ........................ (3,015) (965) (5,487) (1,653)
Other operating costs ...................... (4,282) (2,070) (7,521) (3,251)
-------- -------- -------- --------
Operating loss ............................. (4,674) (1,974) (8,384) (3,048)
Other income .................................. 1,154 482 1,673 726
Interest expense .............................. (693) (138) (1,149) (249)
-------- -------- -------- --------
Loss before income taxes ...................... (4,213) (1,630) (7,860) (2,571)
Deferred income tax benefit ................... - 3 - 129
-------- -------- -------- --------
Net loss ................................... (4,213) (1,627) (7,860) (2,442)
Other comprehensive income:
Cumulative translation adjustment ............. (173) - 202 -
-------- -------- -------- --------
Comprehensive loss ............................ (4,386) (1,627) (7,658) (2,442)
======== ======== ======== ========
Loss per share -- basic and diluted (Note 3) .. (0.28) (0.11) (0.52) (0.25)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... (7,860) (2,442)
Adjustments to reconcile net loss to net cash
used in operating activities:
Share compensation expense....................... 54 54
Depreciation of property, plant and equipment.... 2,034 549
Loss on disposal of fixed assets................. 7 -
Deferred income taxes............................ - (129)
Increase in restricted cash ..................... (847) (2,697)
Increase in trade accounts receivable............ (586) (283)
Increase in prepaid expenses and other current
assets.......................................... (714) (1,002)
Increase in trade accounts payable............... 1,197 1,808
Increase in accrued expenses and other
long-term liabilities........................... 53 73
-------- --------
Net cash used in operating activities.......... (6,662) (4,069)
Cash flows from investing activities:
Fixed asset purchases.............................. (5,613) (1,628)
Proceeds from sale of fixed assets................. 124 -
Purchase of investment securities.................. (2,765) (27,617)
Proceeds from maturity of investment securities.... 26,107 -
Net decrease in loan receivable.................... - (5)
-------- --------
Net cash provided by/(used in) investing
activities.................................... 17,853 (29,250)
Cash flows from financing activities:
Proceeds from issuance of shares and other
capital contributions............................. 160 51,936
Proceeds from issuance of notes payable............ 83,100 -
Costs to obtain loans.............................. (3,294) -
Purchase of treasury stock......................... - (4)
Repayment of obligations under capital leases...... (1,617) (533)
Repayment of bank borrowings....................... (6) (23)
Repayment of loan from shareholder................. - (190)
Subscription receivable............................ 161 -
-------- --------
Net cash provided by financing activities...... 78,504 51,166
-------- --------
Effects of exchange rate differences on cash......... 78 -
-------- --------
Net increase in cash and cash equivalents............ 89,773 17,847
Cash and cash equivalents at beginning of period..... 7,516 2,541
-------- --------
Cash and cash equivalents at end of period........... 97,289 20,388
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Euronet Services Inc. have been prepared from the records of Euronet Services
Inc. and subsidiaries (collectively, the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, such financial statements include all adjustments (consisting only
of normal, recurring accruals) necessary to present fairly the financial
position of the Company at June 30, 1998 and the results of its operations, and
cash flows for the six month periods ended June 30, 1998 and 1997.
The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of Euronet
Services Inc. and subsidiaries for the year ended December 31, 1997, including
the notes thereto, set forth in the Company's Annual Report on Form 10-K.
The results of operations for the six month period ended June 30, 1998
are not necessarily indicative of the results to be expected for the full year.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
There have been no significant additions to or changes in accounting
policies of the Company since December 31, 1997. For a description of these
policies, see Note 2 to the Notes to Consolidated Financial Statements for the
year ended December 31, 1997.
The Company adopted during the six months ended June 30, 1998 Statement
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income". SFAS 130 requires the reporting and display of comprehensive loss,
which is composed of net loss and other comprehensive income items, in a full
set of general purpose financial statements. Other comprehensive income items
are revenue, expenses, gains and losses that under generally accepted accounting
principles are excluded from net loss and reflected as a component of equity;
such as currency translation adjustment. The adoption of SFAS 130 had no effect
on the presentation of prior year statement of operations.
NOTE 3 -- NET LOSS PER SHARE - BASIC AND DILUTIVE
Loss per share has been computed by dividing net loss by the weighted
average number of common shares outstanding. The effect of potential common
stock (stock options outstanding) is antidilutive. Accordingly, dilutive loss
per share does not assume the exercise of stock options and warrants
outstanding.
NOTE 4 --PUBLIC OFFERING OF SENIOR DISCOUNT NOTES DUE 2006
On June 22, 1998, the Company sold 243,211 Units in a public offering,
each consisting of DM 1,000 principal amount at maturity of 12 3/8% Senior
Discount Notes (the "Notes") and three warrants (each a "Warrant"), each Warrant
initially entitling the holder thereof to purchase 1.05 shares of common stock
at an exercise price of $5.00 per share. The Notes and the Warrants are
separately transferable. The Notes were issued with an original issue discount.
The gross proceeds to the Company was DM 150,000,385 (approximately $83,100,000)
representing an issue price of DM 616.75 per DM 1,000 principal amount at
maturity. Of this amount, $1,846,000 has been allocated to the Warrants within
stockholders' equity to reflect their fair market value on the date of issuance.
Net proceeds to the Company after underwriting discount and offering expenses
were DM145,125,000 (approximately $81,285,000).
The Notes have a maturity date of July 1, 2006. Cash interest on the
Notes will not accrue prior to July 1, 2002. Commencing January 1, 2003, cash
interest will be payable semiannually on January 1 and July 1 of each year. The
Notes are recorded net of unamortized discount and any incremental costs
associated with the bond offering will be capitalized and amortized over the
term of the Notes.
Pursuant to the Company's Indenture, the Company is subject to certain
restrictions and covenants, including, without limitation, covenants with
respect to the following matters: (i) limitation on
<PAGE>
additional indebtedness; (ii) limitation on restricted payments; (iii)
limitation on issuance and sales of capital stock of restricted subsidiaries;
(iv) limitation on transactions with affiliates; (v) limitation on liens; (vi)
limitation on guarantees of indebtedness by restricted subsidiaries; (vii)
purchase of Euronet Notes upon a change of control; (viii) limitation on sale of
assets; (ix) limitation on dividends and other payment restrictions affecting
restricted subsidiaries; (x) limitation on investments in unrestricted
subsidiaries; (xi) limitation on lines of business; and (xii) provision of
financial statements and reports. The Company is in compliance with these
covenants.
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
The Company was formed and established its first office in Budapest (Hungary) in
June 1994. In May 1995, the Company opened its second office, in Warsaw
(Poland). The Company also has operations in Germany, the Czech Republic and
Croatia. To date, Euronet has devoted substantially all of its resources to
establishing its ATM network through the acquisition and installation of ATMs
and computers and software for its transaction processing center and through the
marketing of its services to local banks as well as International Card
Organizations. Euronet installed its first ATM in Hungary in June 1995, and at
the end of 1995, the Company had 53 ATMs installed. An additional 113 ATMs were
installed during 1996 in Hungary and Poland and as of December 31, 1996, the
Company's ATM network consisted of 166 ATMs. During 1997 the Company installed a
further 527 ATMs, consisting of 469 in Hungary and Poland and 58 in Germany and
Croatia. During the first six months of 1998, a further 293 ATMs were added to
the network consisting of 114 in Hungary and Poland, 160 in Germany and Croatia
and 19 in the Czech Republic.
As of June 30, 1998 the Company employed 203 employees across the Company's
existing markets.
In 1997, 99% of the Company's revenues were generated in Hungary and Poland. For
the six months ended June 30, 1998, 87% of the Company's revenue was
generated in Hungary and Poland, and 13% in Germany and Croatia. The Company's
expansion of its network infrastructure and administrative and marketing
capabilities has resulted in increased expenditures. Further planned expansion
will continue to result in increases in general operating expenses as well as
expenses related to the acquisition and installation of ATMs.
The Company has derived substantially all of its revenues from ATM transaction
fees since inception. The Company receives a fee from the card issuing banks or
International Card Organizations for ATM transactions processed on its ATMs. As
the Company continues to focus on expanding its network and installing
additional ATMs, the Company expects that transaction fees will continue to
account for a substantial majority of its revenues for the foreseeable future.
The Company's existing contracts with banks and International Card Organizations
provide for reduced transaction fees with increases in transaction volume. As
the Company's transaction levels continue to increase, the average fee it
receives per transaction will decrease. However, the Company expects that
because the decrease in transaction fees is tied to an increase in transactional
volume, the overall revenues of the Company should increase despite the fee
discounts. However, the Company expects that transaction levels may, however, be
negatively impacted if all or a large part of the transaction fees are passed on
to cardholders by client banks.
In January 1998, Orszages es Takarek Pentzar Bank ("OTP"), the Hungarian
National Savings Bank, notified the Company that it was terminating its contract
with Euronet effective as of July 27, 1998. OTP advised the Company that it
terminated the contract since it desired to promote the use of its own ATM
network. OTP also indicated that the Company selected ATM sites which OTP
believed to be in competition with OTP ATM sites and that the Company failed to
provide OTP with certain transaction reports on a timely basis. It should be
noted that the reporting failure had been corrected more than two months prior
to OTP's notice of termination. As a result of this termination, the Company
will not have a direct connection with OTP and will not be able to accept OTP
proprietary bank cards. The Company has negotiated a new EUROPAY sponsorship
arrangement with another bank to replace OTP as its EUROPAY sponsor, and as a
result of that agreement, the Company is still able to accept all OTP issued
VISA and EUROPAY cards through its VISA and EUROPAY gateways. The Company's
contract with OTP (including transactions processed for non OTP EUROPAY
cardholders) represented approximately 51% of its consolidated revenues for the
year ended December 31, 1997 and 35 % for the six months ended June 30, 1998.
The revenues derived from OTP cardholders only, however, represented 24% of
consolidated revenues for the six months ended June 30, 1998. The financial
impact of the OTP contract termination is difficult to assess. The Company
believes that such impact may be mitigated in part because (i) the Company
believes that VISA and EUROPAY cards represent over 95% of the cards issued by
OTP and (ii) the Company receives a higher fee for transactions processed
through its VISA and EUROPAY gateway(s) than for OTP proprietary bank cards.
However, the Company believes that some of OTP's cardholders will be dissuaded
from patronizing Euronet's ATMs due to the higher fees passed through to
customers for transactions processed through the VISA and EUROPAY connection.
<PAGE>
The transaction volumes processed on an ATM in any given market are affected by
a number of factors, including location of the ATM and the amount of time the
ATM has been installed at the location. The Company's experience has been that
the number of transactions on a newly installed ATM is initially very low and
takes approximately six months after installation to achieve average transaction
volumes for that market. Accordingly, the average number of transactions, and
thus revenues, per ATM are expected to increase as the percentage of ATMs
operating in the Company's network for over six months increases.
The Company generates advertising revenue on its network by putting clients'
advertisements on its ATMs. For the six months ended June 30, 1998 advertising
revenues were $105,000 compared to $233,000 for the six months ended June 30,
1997. In addition, the Company also generates revenues from ATM network
management services, including sales of the Blue Diamond product. The revenues
generated from such activities during the first six months of 1998 were $284,000
compared to $135,000 for the first six months of 1997.
The Company has had substantial increases in the level of operations, including
ATMs operated and total personnel, in 1995, 1996, 1997 and the first six months
of 1998. In addition, the Company was in the development stage until June 1995
when it began operations in Hungary. As a result, a comparison of the Company's
results of operations between such periods is not necessarily meaningful.
The Company's expenses consist of ATM operating expenses and other operating
expenses. ATM operating expenses are generally variable in nature and consist
primarily of ATM site rentals, depreciation of ATMs and ATM installation costs,
maintenance, telecommunications, insurance, and cash delivery and security
services to ATMs. ATM operating expenses will necessarily increase as the
Company's network expands. Other operating expenses consist of items such as
salaries, professional fees, rent and utilities, communication and travel
related expenditures. While these expenditures are anticipated to increase with
the Company's expansion into new markets and the introduction of new products,
other operating expenses are expected to decrease as a percentage of total
revenues.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 TO
THE THREE MONTHS ENDED JUNE 30, 1997 AND SIX MONTHS ENDED JUNE 30, 1998 TO THE
SIX MONTHS ENDED JUNE 30, 1997
Revenues. Total revenues increased to $2,623,000 for the three months ended
June 30, 1998 from $1,061,000 for the three months ended June 30, 1997 and to
$4,624,000 for the six months ended June 30, 1998 from $1,856,000 for the six
months ended June 30, 1997. The increase was due primarily to the significant
growth in transaction fees resulting from the increase in transaction volume
attributable to additional network connections to credit and debit card issuers
and an increase in the number of ATMs operated by the Company during these
periods. The Company had 986 ATMs in operation as of June 30, 1998 compared
with 336 ATMs as of June 30, 1997. Transaction fee revenue represented
approximately 92% of total revenues for the six months ended June 30, 1998, and
87% for the six months ended June 30, 1997.
Transaction fees charged by the Company vary for the types of transactions
that are currently processed on the Company's ATMs: cash withdrawals, balance
inquiries, transactions not completed because authorization is not given by the
relevant Card Issuer and transactions processed under ATM network management
agreements. Approximately 97% of transaction fees for the six months ended
June 30, 1998 and for the six months ended June 30, 1997, were attributable to
cash withdrawals. The remaining transaction fees were attributable to balance
inquiries and transactions not completed because authorization is not given by
the relevant Card Issuer. Transaction fees for cash withdrawals vary from market
to market but generally range from $0.60 to $1.75 per transaction while
transaction fees for the other types of transactions are generally substantially
less.
<PAGE>
Operating expenses. Total operating expenses for the three months ended June 30,
1998 were $7,297,000 compared to $3,035,000 for the three months ended June 30,
1997 and $13,008,000 for the six months ended June 30, 1998 compared to
$4,904,000 for the six months ended June 30, 1997. This increase was due
primarily to costs associated with the expansion of the Company's operations and
increase in the number of ATMs installed.
ATM operating costs increased to $3,015,000 for the three months ended June 30,
1998 from $965,000 for the three months ended June 30, 1997, and for the six
months ended June 30, 1998 operating costs increased to $5,487,000 from
$1,653,000 for the six months ended June 30, 1997 as a result of the increase in
the number of ATMs installed. ATM depreciation included in ATM operating costs
increased to $704,000 for the three months ended June 30, 1998 from $186,000 for
the three months ended June 30, 1997, and to $1,540,000 for the six months ended
June 30, 1998 from $425,000 for the six months ended June 30, 1997.
Professional fees for the three months ended June 30, 1998 were $381,000
compared to $309,000 for the three months ended June 30, 1997, and for the six
months ended June 30, 1998 were $729,000 compared to $413,000 for the six months
ended June 30, 1997. These increases are due to expansion into new markets.
Salaries increased to $1,901,000 for the three months ended June 30, 1998 from
$856,000 for the three months ended June 30, 1997, and to $3,618,000 for the six
months ended June 30, 1998 from $1,436,000 for the six months ended June 30,
1997 as a result of the increase in the number of employees from 103 as of June
30, 1997 to 203 as of June 30, 1998.
Communication, Rent and Utilities, and Travel related costs were $852,000 for
the three months ended June 30, 1998 compared to $375,000 for the three months
ended June 30, 1997 and $1,616,000 for the six months ended June 30, 1998
compared to $590,000 for the six months ended June 30, 1997. The increase
relates to the expansion of the Company's operations, as previously discussed.
Other operating expenses, which include marketing, depreciation of non-ATM
related assets, and insurance, were $1,148,000 for the three months ended
June 30, 1998 compared to $530,000 for the three months ended June 30, 1997, and
$1,558,000 for the six months ended June 30, 1998 compared to $812,000 for the
six months ended June 30, 1997. Depreciation of non ATM related assets for the
three months ended June 30, 1998 increased to $398,000 from $58,000 for the
three months ended June 30, 1997, and to $494,000 for the six months ended
June 30, 1998 from $124,000 for the six months ended June 30, 1997. These
increases are in line with the expansion of the Company's operations into new
and existing markets.
Other income/expense. Interest income for the three months ended June 30, 1998
was $379,000 compared to $581,000 for the three months ended June 30, 1997, and
was $840,000 for the six months ended June 30, 1998 compared to $656,000 for
the six months ended June 30, 1997. The decrease for the three month period was
the result of a decrease in the investments held by the Company as the proceeds
from such investments have been used to fund the Company's operations. The
increase for the six month period reflects the fact that for the first two
months of 1997 investments were minimal, prior to the Initial Public Offering.
The amount held under such investments at June 30, 1998 was $8,602,000 compared
to $27,811,000 at June 30, 1997.
Interest expense relating principally to capital leases of ATMs and Euronet's
computer systems and to the notes payable, was $693,000 for the three months
ended June 30, 1998 compared to $138,000 for the three months ended June 30,
1997, and $1,149,000 for the six months ended June 30, 1998 compared to
$249,000 for the six months ended June 30, 1997. This increase was due primarily
to the increase of capital lease obligations outstanding and the Notes issue in
June 1998.
For the three months ended June 30, 1998 the Company had a foreign exchange gain
of $638,000 compared to a loss of $99,000 for the three months ended June 30,
1997. For the six months ended June 30, 1998 the Company had a foreign exchange
gain of $812,000 compared with a loss of $70,000 for the six months ended June
30, 1997. Exchange gains and losses that result from remeasurement of assets and
liabilities are recorded in determining net loss. From January 1, 1998 the
functional currency in Poland is the Polish Zloty replacing the US dollar.
Net loss. The Company's net loss was $4,213,000 for the three months ended June
30, 1998 compared to $1,627,000 for the three months ended June 30, 1997 and
$7,860,000 for the six months ended June 30, 1998 compared to $2,442,000 for the
six months ended June 30, 1997. This increase was as a result of the factors
discussed above.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has sustained negative cash flows from
operations and has financed its operations and capital expenditures primarily
through the proceeds from the 1997 equity offering, through equipment lease
financing and through private placements of equity securities. The net proceeds
of such transactions, together with revenues from operations and interest income
have been used to fund aggregate net losses of approximately $25,570,000 and
investments in property, plant and equipment. The Company had cash and cash
equivalents of $97,289,000 and working capital of $99,924,000 at
June 30, 1998. As of June 30, 1998, the Company had $1,694,000 of restricted
cash held as security with respect to cash provided by banks participating in
Euronet's ATM network, to cover guarantees and as deposits with customs
officials. The Company expects to continue to generate losses from operating
activities and negative cash flow while it concentrates on the expansion of its
ATM network business. As a result of the Company's strategy of continuing
expansion and increasing its market share, the Company's net losses are expected
to increase.
On June 22, 1998 the Company made a Public Offering of 243,211 units consisting
of 12 3/8% Senior Discount Notes due 2006 and 729,633 Warrants to purchase
766,114 shares of common stock. The price to the public was DM150,000,000.The
Company received net proceeds of approximately $81,285,000 after deducting
underwriting discount and offering expenses. The Company currently intends to
use the net proceeds from the offering for network expansion in its existing
markets to repay a portion of the Company's capitalized lease obligaitons, and
for general corporate purposes , including expansion into new markets, expanding
the provision of ATM management services, and the pursuit of possible strategic
acquisition and joint venture opportunities. With respect to repayment of
capitalized leases, as part of the implementation of the Company's new Europay
sponsor arrangement in Hungary, an existing equipment lease arrangement must be
transferred to the Company's new Europay sponsor bank. This lease will therefore
not be paid off as anticipated, and the initially proposed amount of lease
repayments will be reduced by approximately $5,000,000.
There can be no assurance that the Company's revenues will grow or be sustained
in future periods or that the Company will be able to achieve or sustain
profitability or positive cash flow from operations in any future period. If the
Company cannot achieve and sustain operating profitability or positive cash flow
from operations, it may not be able to meet its debt service or working capital
requirements including its obligation with respect to the notes.
The Company leases the majority of its ATMs under capital lease arrangements
that expire between 1999 and 2002. The leases bear interest between 8% and 15%.
As of June 30, 1998 the Company owed $13,141,000 under such capital lease
arrangements.
At June 30, 1998, the Company had contractual commitments of approximately
$3,825,000. The Company expects that its capital requirements will increase in
the future as it pursues its strategy of expanding its network and increase the
number of installed ATMs. The Company anticipates that its capital expenditures
for the 12 months ending December 31, 1998 will total approximately $17 million,
primarily in connection with the acquisition of ATMs, scheduled capital lease
payments on existing lease obligations, and related installation costs. Capital
expenditures, which exclude assets acquired under capital leases, for 1997 were
$8,619,000 and for 1996 were $2,162,000. The increase reflects the growth in the
Company's operations across all markets.
Balance Sheet Items
Cash and cash equivalents. Cash and cash equivalents has increased to
$97,289,000 at June 30, 1998 from $7,516,000 at December 31, 1997 due to the
receipt of proceeds from the bond issue and from the maturity of investment
securities during the period.
Restricted cash: Restricted cash increased to $1,694,000 at June 30, 1998 from
$847,000 at December 31, 1997 due to expansion of the Company's operations and
consequently an increased requirement for cash in the ATMs.
Investment securities. Investment securities decreased to $8,602,000 at June
30, 1998 from $31,944,000 at December 31, 1997 as the proceeds from maturity of
securities were being used to fund operations of the Company.
<PAGE>
Deferred financing costs. Deferred financing costs were $3,294,000 at June 30,
1998. This represents the underwriting discount and other offering costs
associated with the issuance of the Senior Discount Notes. These costs will be
amortised over the eight year life of the notes using the interest method.
Property, plant and equipment. Total property, plant and equipment increased
from $26,439,000 at December 31, 1997 to $32,232,000 at June 30, 1998. This
increase is due primarily to the installation of 293 ATMs during the first six
months of 1998 and expenditure on computers and software, and office equipment
and vehicles for the new operations.
Obligations under capital leases. Obligations under capital leases decreased to
$13,141,000 at June 30, 1998 from $14,470,000 at December 31, 1997 as a result
of repayments exceeding new leases entered into during the first six months of
1998.
Trade accounts payable. Trade accounts payable increased from $4,420,000 at
December 31, 1997 to $5,624,000 at June 30, 1998. The increase resulted
primarily from the purchase of ATMs not paid for during the period.
Notes payable. Notes payable at June 30, 1998 was $81,479,000. This
represents the gross proceeds from the issue of the Senior Discount Notes due
2006 less an amount of $1,846,000 representing the fair value of the warrants
which have been recorded as stockholders equity.
FOREIGN EXCHANGE EXPOSURE
In 1997, 99% of the Company's revenues were generated in Poland and Hungary. For
the six months ended June 30, 1998 the comparable figure was 87%, with the
remaining 13% being generated in Germany and Croatia. While in Hungary the
majority of revenues received are US dollar denominated, this is not the case in
Poland, where the majority of revenues are denominated in Polish zloty. However
the majority of these contracts are linked either to inflation or the retail
price index. While it remains the case that a significant portion of the
Company's expenditures are made in or are denominated in U.S. dollars, the
Company is also striving to achieve more of its expenses in local currencies to
match its revenues.
The Company anticipates that in the future, a substantial portion of the
Company's assets, including fixed assets, will be denominated in the local
currencies of each market. As a result of continued European economic
convergence, including the increased influence of the Deutsche Mark, as opposed
to the U.S. dollar, on the Central European currencies, the Company expects that
the currencies of the markets where the proceeds from the offering will be used
will fluctuate less against the Deutsche Mark than against the Dollar.
Accordingly, the Company believes that the issuance of Deutsche Mark denominated
debt will provide, in the medium to long term, for a closer matching of assets
and liabilities than a dollar denominated issuance would.
INFLATION AND FUNCTIONAL CURRENCIES
Since the fall of Communist rule in 1989, Hungary, Poland and the Czech Republic
have experienced high levels of inflation. Consequently, these countries'
currencies have generally declined in value against the major currencies of the
OECD over this time period. However, there has been a significant reduction in
the inflation rate of these countries in recent years. As a result, Poland is no
longer considered to be hyper-inflationary from 1998 and given that a
significant portion of the Company's Polish subsidiary's revenues and expenses
are denominated in zloty the functional currency of the Company's Polish
subsidiary will now be the zloty. The functional currency of the Company's
Hungarian and Czech subsidiaries will continue to be the U.S. dollar.
Germany and France have experienced relatively low and stable inflation rates in
recent years. Therefore, the local currencies in each of these markets is the
functional currency. Although Croatia, like Germany and France, has maintained
relatively stable inflation and exchange rates, the functional currency of the
Croatian company is the U.S. dollar due to the significant level of U.S. dollar
denominated revenues and expenses. Due to the factors mentioned above, the
Company does not believe that inflation will have a significant effect on
results of operations or financial condition. The Company continually reviews
inflation and the functional currency in each of the countries that it operates
in.
<PAGE>
YEAR 2000 COMPLIANCE
The Company has made an assessment of the impact of the advent of the year 2000
on its systems and operations. The Processing Center will require certain
upgrades which have been ordered and are scheduled for installation by the
fourth quarter of 1998. Most of the ATMs in the Euronet network are not year
2000 compliant, and hardware and software upgrades will be installed under
contract with the Company's ATM maintenance vendors. According to the Company's
current estimates, the cost will range from USD 1,000 to USD 4,000 per ATM, and
the required installation will be finished by the end of 1998. The Company
estimates that approximately 560 of its ATMs will require upgrades for year 2000
compliance.
The Company is currently planning a survey of its bank customers concerning the
compliance of their back office systems with year 2000 requirements, and
anticipates launching that survey in the third quarter of 1998. If the Company's
bank customers do not bring their card authorization systems into compliance
with year 2000 requirements, the Company may be unable to process transactions
on cards issued by such banks and may lose revenues from such transactions. This
could have a material adverse effect on the Company's revenues. Therefore
Euronet will monitor, and hopes to assist its bank clients in, implementation of
its customers' year 2000 compliance programs, and may, if required to accelerate
the compliance programs of its banks, create consulting capabilities in this
respect.
IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company, effective for the year ended December 31, 1997, has adopted the
following Statements of Financial Accounting Standards (SFAS): SFAS No. 128,
"Earnings per Share." Pursuant to the provisions of the statement, basic loss
per share has been computed by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding during
the period. The effect of potential common shares (stock options outstanding) is
anti-dilutive. Accordingly, dilutive loss per share does not assume the exercise
of stock options outstanding.
SFAS No. 130, "Reporting Comprehensive Income". The Company has adopted this
statement for the six months ended June 30, 1998 by providing a statement of
operations and comprehensive loss.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." The Company has one industry segment but operates in a number of
geographical segments. The Company has disclosed separately its two major
geographical segments in 1997, being Hungary and Poland, as required by SFAS
No.131.
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
`Accounting for Derivative Instruments and Hedging Activities.' This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management has not determined the effect of
the adoption of SFAS No. 133.
FORWARD LOOKING STATEMENTS
This document contains statements that constitute forward-looking statements
within the meaning of section 27A of the Securities Act and section 21E of the
U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements other than statements of historical facts included in this document,
including, without limitation, statements regarding (i) the use of proceeds of
the Offering, (ii) the Company's business plans and financing plans and
requirements, (iii) trends affecting the Company's financial condition or
results of operations, (iv) the impact and extent of competition, (v) expansion
of the company's ATM network and expansion of the Company's operations, (vi) the
assumptions underlying the Company's business plans, (vii) business strategy,
(viii) government regulatory actions, (ix) technological advances and (x)
projected costs and revenues, are forward-looking statements. Although the
Company believes that the expectations reflected in such forwarding-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Forward-looking statements are typically identified by the
words believe, expect, anticipate,
<PAGE>
intend, estimate and similar expressions.
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties and that actual results may differ materially from those in the
forward-looking statements as a result of various factors.
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
See report below
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) In lieu of a 1998 Annual Meeting, on or about June 26, 1998, Consent
Solicitation Statements and voting instructions were mailed to all stockholders
of record on the books of the Company on May 29, 1998. A total of 11,007,031
shares of the Company's Common Stock, representing 71.33% of eligible voting
shares, voted in the Consent Solicitation
(b) The Consent Solicitation Statement requested stockholder consent to the
election of Michael J. Brown and Andrzej Olechowski to the Board of Directors
(the "Board") of the Company for a term of three years; the results of the vote
were:
- --------------------------------------------------------------------------------
NAME FOR WITHHELD PERCENT OF
ELIGIBLE SHARES VOTING
IN FAVOR
- --------------------------------------------------------------------------------
Michael J. Brown 10,995,331 11,700 71.3%
- --------------------------------------------------------------------------------
Andrzej Olechowski 10,995,331 11,700 71.3%
- --------------------------------------------------------------------------------
The terms of the following directors continued after the annual meeting:
Daniel R. Henry, Thomas A. McDonnell, Nicholas B. Callinan, Steven J. Buckley,
and Eriberto R. Scocimara.
(c) The Company's stockholders also voted on the following matters:
(i) To consider and vote upon a proposal to approve the Company's Stock
Option Plan, as adopted by the Board on May 18, 1998; the results of the
vote were:
- --------------------------------------------------------------------------------
FOR AGAINST ABSTENTIONS BROKER PERCENT OF ELIGIBLE
NON-VOTES SHARES VOTING IN FAVOR
- --------------------------------------------------------------------------------
8,870,515 459,890 8,645 1,667,981 57.5%
- --------------------------------------------------------------------------------
(ii) To consider and vote upon a proposal to ratify the Company's Long Term
Incentive Stock Option Plan originally adopted in December 1996; the
results of the vote were:
- --------------------------------------------------------------------------------
FOR AGAINST ABSTENTIONS BROKER PERCENT OF ELIGIBLE
NON-VOTES SHARES VOTING IN FAVOR
- --------------------------------------------------------------------------------
8,867,905 462,000 9,145 1,667,981 57.5%
- --------------------------------------------------------------------------------
<PAGE>
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, thereunto duly authorized.
August __, 1998 /S/ MICHAEL J. BROWN
By:
/s/ Michael J. Brown
(Chief Executive Officer)
August __, 1998 /S/ BRUCE S. COLWILL
By:
/s/ Bruce S. Colwill
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- -------------------- --------------------------------
20 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 97,289
<SECURITIES> 8,602
<RECEIVABLES> 1,233
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 111,497
<PP&E> 32,232
<DEPRECIATION> (4,385)
<TOTAL-ASSETS> 145,772
<CURRENT-LIABILITIES> 11,573
<BONDS> 81,479
0
0
<COMMON> 306
<OTHER-SE> 43,476
<TOTAL-LIABILITY-AND-EQUITY> 145,772
<SALES> 4,624
<TOTAL-REVENUES> 4,624
<CGS> (5,487)
<TOTAL-COSTS> (13,008)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,149)
<INCOME-PRETAX> (7,860)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> 0
</TABLE>
