<PAGE>
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER C00-22167
________________________________________________________________________________
EURONET SERVICES INC.
(Exact name of the registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
7428 06 888
(I.R.S. employer identification no.)
4601 COLLEGE BOULEVARD
SUITE 300
LEAWOOD, KANSAS 66211
(Address of principal executive offices)
(913) 327-4200
(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 of October 31, 1999
15,514,353 common shares.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EURONET SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, 1999 Dec. 31, 1998
------------------ -------------
ASSETS (unaudited)
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,857 $ 55,614
Restricted cash 9,143 12,972
Investment securities 3,337 3,149
Trade accounts receivable, net of allowances for doubtful
accounts of $371 at September 30, 1999 and $291 at December 31, 1998 7,740 5,681
Costs and estimated earnings in excess of billings on software
installation contracts 718 745
Prepaid expenses and other current assets 5,668 3,869
-------- --------
Total current assets 44,463 82,030
Property, plant, and equipment, net 36,594 33,182
Intangible assets, net 14,929 12,464
Deposits for leases 1,372 2,157
Deferred income taxes 571 571
Other assets, net 2,464 3,034
-------- --------
Total assets $100,393 $133,438
======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)/EQUITY
- ----------------------------------------------
Current liabilities:
Trade accounts payable $ 6,749 $ 4,739
Current installments of obligations under capital leases 4,249 4,266
Accrued expenses and other current liabilities 7,012 6,632
Short term borrowings 918 300
Income taxes payable 44 1,849
Billings in excess of costs and estimated earnings on software
installation costs 2,543 953
-------- --------
Total current liabilities 21,515 18,739
Obligations under capital leases, excluding current installments 4,821 6,809
Notes payable (note 6) 77,776 83,720
-------- --------
Total liabilities 104,112 109,268
-------- --------
Stockholders' (deficit)/equity:
Common stock, $0.02 par value. Authorized 30,000,000 shares;
issued and outstanding 15,514,353 shares at September 30, 1999
and 15,213,453 shares at December 31, 1998 310 307
Warrants 1,549 1,725
Additional paid in capital 65,517 64,688
Treasury stock (3) (4)
Loans to employees for purchase of common stock (640) -
Subscription receivable - (50)
Accumulated losses (69,831) (43,345)
Restricted reserve 784 784
Accumulated other comprehensive (loss)/income (1,405) 65
-------- --------
Total stockholders' (deficit)/equity (3,719) 24,170
-------- --------
Total liabilities and stockholders' (deficit)/equity $100,393 $133,438
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
EURONET SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
ATM network and related revenue $ 7,036 $ 3,127 $ 18,366 $ 7,751
Software, maintenance and related revenue 4,802 - 12,350 -
----------- ----------- ----------- -----------
Total revenues 11,838 3,127 30,716 7,751
Operating expenses:
Direct operating costs 5,960 2,861 17,358 6,808
Salaries and benefits 6,529 2,382 18,376 6,054
Selling, general and administrative 2,404 2,067 8,097 5,421
Depreciation and amortization 2,544 1,290 7,184 3,324
----------- ----------- ----------- -----------
Total operating expenses 17,437 8,600 51,015 21,607
Operating loss (5,599) (5,473) (20,299) (13,856)
Other (expense)/income:
Interest income 461 863 1,462 1,703
Interest expense (3,017) (3,457) (8,249) (4,606)
Foreign exchange loss, net (1,937) (1,242) (1,211) (409)
----------- ----------- ----------- -----------
Total other (expense)/income (4,493) (3,836) (7,998) (3,312)
----------- ----------- ----------- -----------
Loss before income taxes and extraordinary item (10,092) (9,309) (28,297) (17,168)
Income taxes - - - -
----------- ----------- ----------- -----------
Loss before extraordinary item (10,092) (9,309) (28,297) (17,168)
Extraordinary gain on early retirement of debt, net of
applicable income taxes (note 6) 149 - 1,810 -
----------- ----------- ----------- -----------
Net loss $ (9,943) $ (9,309) $ (26,487) $ (17,168)
Other comprehensive (loss)/income:
Translation adjustment (427) (106) (1,470) 96
----------- ----------- ----------- -----------
Comprehensive loss $ (10,370) $ (9,415) $ (27,957) $ (17,072)
=========== =========== =========== ===========
Loss per share -- basic and diluted (note 3):
Loss before extraordinary item $ (0.66) $ (0.61) $ (1.86) $ (1.13)
Extraordinary gain 0.01 - 0.12 -
----------- ----------- ----------- -----------
Net loss $ (0.65) $ (0.61) $ (1.74) $ (1.13)
=========== =========== =========== ===========
Weighted average number of shares outstanding 15,263,603 15,224,214 15,220,140 15,167,553
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
EURONET SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(26,487) $(17,168)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 7,184 3,324
Unrealized foreign exchange (gains)/losses, net (8,014) 3,807
Accretion of discount on notes 7,179 2,942
Gain on extinguishment of debt (1,890) -
Decrease/(increase) in restricted cash 3,829 (12,022)
Increase in trade accounts receivable (2,000) (643)
Increase in prepaid expenses and other current assets (1,789) (1,645)
Decrease in deposits on ATM leases 785 522
Increase in trade accounts payable 1,973 629
Decrease in income taxes payable (1,805) -
Increase in billings in excess of costs and estimated earnings
on software installation contracts, net 1,617 -
Increase/(decrease) in accrued expenses and other liabilities 318 (519)
Other 279 112
-------- --------
Net cash used in operating activities (18,821) (20,661)
-------- --------
Cash flows from investing activities:
Fixed asset purchases (5,416) (6,582)
Acquisition of subsidiaries (7,840) -
Proceeds from sale of fixed assets 210 123
Purchase of investment securities (2,849) (29,603)
Proceeds from maturity of investment securities 2,795 35,000
-------- --------
Net cash used in investing activities (13,100) (1,062)
-------- --------
Cash flows from financing activities:
Cash loaned to employees for the purchase of common stock (640) -
Proceeds from issuance of shares and other capital contributions 561 -
Proceeds from issuance of notes payable - 83,102
Costs to obtain loans (22) (3,294)
Repurchase of notes payable (3,167) -
Subscriptions paid 50 202
Repayment of obligations under capital leases (3,378) (4,888)
Proceeds from/(repayment of) bank borrowings 618 (153)
-------- --------
Net cash (used in)/provided by financing activities (5,978) 74,969
-------- --------
Effects of exchange rate differences on cash 142 29
-------- --------
Net (decrease)/increase in cash and cash equivalents (37,757) 53,275
Cash and cash equivalents at beginning of period 55,614 7,516
-------- --------
Cash and cash equivalents at end of period $ 17,857 $ 60,791
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
EURONET SERVICES INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Euronet Services
Inc. and subsidiaries have been prepared from the records of Euronet Services
Inc. and subsidiaries (collectively, the "Company" or "Euronet"), pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, such unaudited consolidated financial statements include
all adjustments (consisting only of normal, recurring accruals) necessary to
present fairly the financial position of the Company at September 30, 1999; the
results of its operations for the three month periods ended September 30, 1999
and 1998 and the nine month periods ended September 30, 1999 and 1998; and cash
flows for the nine month periods ended September 30, 1999 and 1998.
The unaudited 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, 1998, including the notes thereto,
set forth in the Company's 1998 Annual Report on Form 10-K.
The results of operations for the nine month period ended September 30, 1999 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, 1998. For a description of these policies, see
Note 2 to the Notes to Consolidated Financial Statements as of and for the year
ended December 31, 1998.
NOTE 3 -- NET LOSS PER SHARE - BASIC AND DILUTED
Net loss per share has been computed by dividing net loss by the weighted
average number of common shares outstanding. The effect of potential common
stock (stock options and warrants outstanding) is antidilutive. Accordingly,
diluted net loss per share does not assume the exercise of stock options and
warrants outstanding.
NOTE 4 - SERVICE BANK ACQUISITION
On March 26, 1999 the Company signed an agreement with Service Bank GmbH & Co.
KG ("Service Bank") to acquire 252 installed ATMs in Germany and 36 ATMs in
inventory. The purchase price for this established ATM network was DEM 12.2
million (USD 6.7 million). Pursuant to the agreement, the Company receives
monthly fees based on revenues realized from the ATMs less certain expenses and
management fees payable to Service Bank. The risks and rewards of ownership of
the ATM network transferred to the Company as of January 1, 1999, and revenues
and expenses from the operation of the ATM network accrued to Euronet from that
date.
The acquisition has been accounted for as a purchase, accordingly, the results
of operations are included in the accompanying consolidated financial statements
since January 1, 1999. The purchase price has been allocated to assets acquired
in the amount of $3.5 million based on their fair values. The excess of the
purchase price over the fair value of the net assets acquired of $3.2 million
has been recorded as goodwill and will be amortized over seven years.
NOTE 5 - DASH ACQUISITION
On August 13, 1999, Arkansas Systems, Inc. ("ARKSYS"), a wholly-owned subsidiary
of the Company, purchased the remaining 66 2/3% interest in EFT Network Services
LLC ("Dash"). Until August 13, 1999 the Company held a 33 1/3% interest in Dash.
ARKSYS paid $800,000 to the sellers for the interest in Dash, in 24 equal
monthly installments. ARKSYS has delivered letters of credit to each of the
sellers in the amount of the entire unpaid balance of the purchase price of
Dash. As payments are made, the outstanding credit risk exposures related to the
letters of credit are reduced proportionately. ARKSYS now owns a 100% interest
in Dash.
The acquisition has been accounted for as a purchase, accordingly, the results
of operations are included in the accompanying consolidated financial statements
since July 1, 1999. The purchase price has been allocated to assets
<PAGE>
acquired of $680,000 based on their fair values. The excess of the purchase
price over the fair value of the net assets acquired of $120,000 has been
recorded as goodwill and will be amortized over ten years.
NOTE 6 -- EXTINGUISHMENT OF DEBT
During September 1999, the Company repurchased 1,200 units (principal amount of
DEM 1.2 million) of its senior discount 12 3/8% notes and 3,600 warrants for
$297,000. This repurchase has been accounted for as an extinguishment of debt
with a resulting $149,000 (net of applicable income taxes of $0) recognized as
an extraordinary gain on such extinguishment. The extinguishment gain (pre-tax)
represents the difference between the allocated carrying value of the debt
extinguished ($461,000) and the consideration paid ($297,000), offset by the
write-off of the allocated unamortized deferred financing costs ($15,000).
During June 1999, the Company repurchased 11,500 units (principal amount of DEM
11.5 million) of its senior discount 12 3/8% notes and 34,500 warrants for $2.5
million. This repurchase has been accounted for as an extinguishment of debt
with a resulting $1.5 million (net of applicable income taxes of $0) recognized
as an extraordinary gain on such extinguishment. The extinguishment gain (pre-
tax) represents the difference between the allocated carrying value of the debt
extinguished ($4.2 million) and the consideration paid ($2.5 million), offset by
the write-off of the allocated unamortized deferred financing costs ($149,000).
During February 1999, the Company repurchased 1,700 units (principal amount of
DEM 1.7 million) of its senior discount 12 3/8% notes and 5,100 warrants for
$373,000. This repurchase has been accounted for as an extinguishment of debt
with a resulting $154,000 (net of income taxes of $80,000) recognized as an
extraordinary gain on such extinguishment. The extinguishment gain (pre-tax)
represents the difference between the allocated carrying value of the debt
extinguished ($629,000) and the consideration paid ($373,000), offset by the
write-off of the allocated unamortized deferred financing costs ($22,000).
NOTE 7 -- BUSINESS SEGMENT INFORMATION
Up until the acquisition of ARKSYS, Euronet and its subsidiaries operated as one
business segment: "ATM and related services", the service of providing an
independent shared network to the banks and financial institutions that it
serves. During 1998 and 1997, the Company's corporate function resources were
allocated to the ATM and related services segment. As a result of the
acquisition of ARKSYS in December 1998, the Company established a second
business segment for its software delivery and development activities ("ARKSYS
software solutions"). Beginning in January 1999, the Company separated corporate
function resources from the ATM and related services segment, and reported
separately corporate support activities ("Corporate and other"). The following
tables present the segment results of the Company's operations for the three-
month and nine-month periods ended September 30, 1999 and 1998.
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes not including
nonrecurring gains and net loss. The Company accounts for inter segment sales
and transfers as if the sales or transfers were to third parties, that is, at
current market prices.
<TABLE>
<CAPTION>
ATM and ARKSYS
Related Software Corporate
For the three months ended September 30, 1999 Services Solutions and other Total
-------- --------- --------- -----
<S> <C> <C> <C> <C>
Total revenues $ 7,036 $ 4,847 $ - $ 11,883
Total operating expenses 10,209 5,765 1,508 17,482
Operating loss (3,173) (918) (1,508) (5,599)
Interest income 153 20 288 461
Interest expense (254) - (2,763) (3,017)
Foreign exchange loss, net (50) - (1,887) (1,937)
Extraordinary gain, net of tax expense - - 149 149
Net loss $(3,324) $ (898) $(5,721) $ (9,943)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Segment assets $58,967 $20,623 $20,803 $100,393
</TABLE>
<TABLE>
<CAPTION>
ATM and ARKSYS
Related Software Corporate
For the three months ended September 30, 1998 Services Solutions and other Total
-------- --------- --------- -----
<S> <C> <C> <C> <C>
Total revenues $ 3,127 $ - $ - $ 3,127
Total operating expenses 7,542 - 1,058 8,600
Operating loss (4,415) - (1,058) (5,473)
Interest income 40 - 823 863
Interest expense (739) - (2,718) (3,457)
Foreign exchange loss, net (525) - (717) (1,242)
Extraordinary gain, net of tax expense - - - -
Net loss $(5,639) $ - $(3,670) $ (9,309)
Segment assets $51,148 $ - $92,229 $143,377
</TABLE>
<TABLE>
<CAPTION>
ATM and ARKSYS
Related Software Corporate
For the nine months ended September 30, 1999 Services Solutions and other Total
-------- --------- --------- -----
<S> <C> <C> <C> <C>
Total revenues $ 18,366 $ 12,485 $ - $ 30,851
Total operating expenses 29,691 16,519 4,940 51,150
Operating loss (11,325) (4,034) (4,940) (20,299)
Interest income 297 64 1,101 1,462
Interest expense (871) - (7,378) (8,249)
Foreign exchange loss, net (99) 2 (1,114) (1,211)
Extraordinary gain, net of tax expense - - 1,810 1,810
Net loss $(11,998) $ (3,968) $(10,521) $(26,487)
Segment assets $ 58,967 $ 20,623 $ 20,803 $100,393
</TABLE>
<TABLE>
<CAPTION>
ATM and ARKSYS
Related Software Corporate
For the nine months ended September 30, 1998 Services Solutions and other Total
-------- --------- --------- -----
<S> <C> <C> <C> <C>
Total revenues $ 7,751 $ - $ - $ 7,751
Total operating expenses 18,119 - 3,488 21,607
Operating loss (10,368) - (3,488) (13,856)
Interest income 106 - 1,597 1,703
Interest expense (1,663) - (2,943) (4,606)
Foreign exchange loss, net 330 - (739) (409)
Extraordinary gain, net of tax expense - - - -
Net loss $(11,595) $ - $(5,573) $(17,168)
Segment assets $ 51,148 $ - $92,229 $143,377
</TABLE>
<PAGE>
The following is a reconciliation of the segmented information to the unaudited
consolidated financial statements.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ ------------------
(in thousands) (in thousands)
<S> <C> <C>
Revenues:
- ---------
Total revenues for reportable segments $11,883 $30,851
Elimination of inter segment revenues (45) (135)
------- -------
Total consolidated revenues $11,838 $30,716
Operating expenses:
- -------------------
Total operating expenses for reportable segments $17,482 $51,150
Elimination of inter segment expenses (45) (135)
------- -------
$17,437 $51,015
</TABLE>
Total revenues and long-lived assets for the nine months ended September 30,
1999 and June 30, 1998 for the Company analyzed by geographical location is as
follows:
<TABLE>
<CAPTION>
Total Revenues Long-lived Assets
-------------- -----------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $13,120 $ - $ 1,138 $ -
Hungary 4,143 4,510 10,073 11,062
Poland 4,045 1,744 9,661 11,314
Germany 8,116 1,302 7,283 3,172
Other 1,427 195 8,439 4,354
------- ------ ------- -------
Total $30,851 $7,751 $36,594 $29,902
======= ====== ======= =======
</TABLE>
Total revenues are attributed to countries based on location of customer for the
ATM and related service segment. For revenues generated by the ARKSYS software
solutions segment, all revenues are attributed to the United States. Long lived
assets consist of property, plant, and equipment, net of accumulated
depreciation.
NOTE 8 - FORWARD EXCHANGE OPTION CONTRACT
On May 26, 1999, the Company entered into several foreign currency option
contracts to limit their exposure to foreign currency fluctuations on the notes
payable. Pursuant to such strategy, the Company entered into call options to
purchase EURO 79.3 million for $85.9 million and put options to sell $83.6
million for EURO 79.3 million on May 26, 2000.
The Company has accounted for these foreign currency options at fair value with
the resulting gain/loss included in foreign exchange loss, net in the
consolidated statement of operations and comprehensive loss. At September 30,
1999, the net fair value of such option contracts measured on a mark-to-market
basis, which represent the carrying value recognized in other current assets,
amounted to $1.2 million. The foreign exchange gain recognized in the
consolidated statement of operations and comprehensive loss amounted to $492,000
for the three-month period ended September 30, 1999.
NOTE 9 - EMPLOYEE LOANS FOR COMMON STOCK PROGRAM
In October 1999 the Company's Board of Directors approved and implemented a Loan
Agreement Program ("Program") for certain employees under which the Company has
loaned sums of money to participating employees in order to purchase shares of
the Company's stock on the open market. The shares are pledged to the Company
to secure the loans. The loans carry five-year terms and are non-recourse, non-
interest bearing loans. The shares vest to the employees in five equal tranches
of 20 percent of the shares for five years, commencing as of the time each
employee began employment with the Company. As the shares vest, the employees
are entitled to pay off the loans and free the shares of the pledge. These
loans are considered an award of stock options as the loans are non-recourse and
the employee is not obligated to pay any interest on the loans. The loans have
been accounted for as a separate component of stockholders' (deficit)/equity. In
the event that any one of the employees defaults on the term of the loans, the
shares received by the Company will be recorded as treasury stock.
<PAGE>
NOTE 11 - SUBSEQUENT EVENT -- TAX REFUND
In October 1999 the Company received a tax refund from the US government in the
amount of $1.0 million, representing tax expenses charged on extraordinary
revenues recorded for the Year ended December 31, 1998. This refund will be
recorded in the fourth quarter of 1999.
NOTE 10 - RECLASSIFICATION
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statements to conform to the 1999 unaudited consolidated
financial statements presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Euronet is a provider of end-to-end electronic payment solutions and transaction
processing for retail banks and other companies. The Company operates an
independent automated teller machine ("ATM") network in Europe and owns ARKSYS,
a software company that specializes in electronic payment and transaction
delivery systems. Together with ARKSYS, Euronet offers electronic payment
solutions consisting of ATM network participation and outsourced ATM network
management solutions, and comprehensive software solutions to retail banks and
other companies around the world.
Euronet and its subsidiaries operate in two business segments: (1) the service
of providing an independent shared ATM network to the banks and financial
institutions ("ATM and related services"); and (2) producing application
software for payment and transaction delivery systems ("ARKSYS software
solutions"). These business segments are supported by a corporate service
segment, which provides corporate and other administrative services, which are
not directly identifiable with the two business segments ("Corporate and
other"). (See Note 7 to the unaudited Consolidated Financial Statements -
Business Segment Information.)
Until December 1998, Euronet had devoted substantially all of its resources to
establishing and expanding its ATM network through the addition of ATMs to its
proprietary network and through providing outsourced management solutions for
bank-owned ATMs. On December 2, 1998, the Company acquired ARKSYS and for the
nine months ended September 30, 1999, a significant portion of the Company's
revenues and expenses resulted from and are attributable to ARKSYS operations.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
Total revenues increased to $11.8 million for the quarter ended September 30,
1999 from $3.1 million for the quarter ended September 30, 1998. The increase in
revenues is primarily due to two factors: (1) a $3.9 million increase in ATM and
related services segment revenues 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, and (2) the addition of $4.8 million of ARKSYS software solutions
segment revenues. Revenues for the quarters ended September 30, 1999 and
September 30, 1998 are discussed more fully in the Segment Results of Operations
sections below.
Total operating expenses increased to $17.5 million for the quarter ended
September 30, 1999 from $8.6 million for the quarter ended September 30, 1998.
The increase can be broken down by segment as follows: (1) a $2.7 million
increase in ATM and related services segment operating costs, (2) the addition
of $5.8 million of ARKSYS software solutions segment operating costs, and (3) a
$400,000 increase in Corporate and other operating costs. Operating expenses
from the quarters ended September 30, 1999 and September 30, 1998 are discussed
more fully in the Segment Results of Operations sections below.
The Company generated an operating loss of $5.6 million for the quarter ended
September 30, 1999 compared to an operating loss of $5.5 million for the quarter
ended September 30, 1998. The increased operating loss is due to the net effect
of three factors: (1) a $1.2 million decrease in operating losses from the
Company's ATM and related services segment; (2) the addition of $900,000 in
operating losses from the Company's ARKSYS software solutions segment; and (3) a
$400,000 increase in operating losses from the Company's Corporate and other
segment. The results of segment operations are discussed more fully in the
Segment Results of Operations section below.
Other (expense)/income totalled $4.5 million in expenses for the quarter ended
September 30, 1999 as compared to $3.8 million in expenses for the quarter ended
September 30, 1998. The additional expense is due primarily to a decrease in
interest income of $400,000, a decrease in interest expense of $400,000 and an
increased foreign exchange loss of $700,000. Other (expense)/income from the
quarters ended September 30, 1999 and September 30, 1998 are discussed more
fully in the Segment Results of Operations sections below.
<PAGE>
The Company recorded an extraordinary gain of $149,000 for the quarter ended
September 30, 1999. There was no extraordinary gain recorded for the quarter
ended September 30, 1998. The extraordinary gain resulted from the early
retirement of debt. (See Note 6 to the unaudited Consolidated Financial
Statements - Extinguishment of Debt.)
The Company generated a net loss of $9.9 million for the quarter ended September
30, 1999 compared to a net loss of $9.3 million for the quarter ended September
30, 1998 as a result of the factors discussed above.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998
Total revenues increased to $30.7 million for the nine months ended September
30, 1999 from $7.8 million for the nine months ended September 30, 1998. The
increase in revenues is primarily due to two factors: (1) a $10.5 million
increase in ATM and related services segment revenues 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, and (2) the addition of $12.4 million of
ARKSYS software solutions segment revenues. Revenues for the nine months ended
September 30, 1999 and September 30, 1998 are discussed more fully in the
Segment Results of Operations sections below.
Total operating expenses increased to $51.1 million for the nine months ended
September 30, 1999 from $21.6 million for the nine months ended September 30,
1998. The increase can be broken down by segment as follows: (1) an $11.6
million increase in ATM and related services segment operating costs, (2) the
addition of $16.5 million of ARKSYS software solutions segment operating costs,
and (3) a $1.4 million increase in Corporate and other operating costs.
Operating expenses from the nine months ended September 30, 1999 and September
30, 1998 are discussed more fully in the Segment Results of Operations sections
below.
The Company generated an operating loss of $20.3 million for the nine months
ended September 30, 1999 compared to an operating loss of $13.9 million for the
nine months ended September 30, 1998. The increased operating loss is due to
three factors: (1) a $1.0 million increase in operating losses from the
Company's ATM and related services segment; (2) the addition of $4.0 million in
operating losses from the Company's ARKSYS software solutions segment; and (3) a
$1.4 million increase in operating losses from the Company's Corporate and other
segment. The results of segment operations are discussed more fully in the
Segment Results of Operations section below.
Other (expense)/income totalled $8.0 million in expenses for the nine months
ended September 30, 1999 as compared to $3.3 million in expenses for the nine
months ended September 30, 1998. The additional expense is due primarily to the
recording of interest expense related to the Company's 12 3/8% senior discount
notes issued in June 1998. Other (expense)/income for the nine months ended
September 30, 1999 and September 30, 1998 are discussed more fully in the
Segment Results of Operations sections below.
The Company recorded an extraordinary gain of $1.8 million for the nine months
ended September 30, 1999. There was no extraordinary gain recorded for the nine
months ended September 30, 1998. The extraordinary gain resulted from the early
retirement of debt. (See Note 6 to the unaudited Consolidated Financial
Statements - Extinguishment of Debt.)
The Company generated a net loss of $26.5 million for the nine months ended
September 30, 1999 compared to a net loss of $17.2 million for the nine months
ended September 30, 1998 as a result of the factors discussed above.
<PAGE>
SEGMENT RESULTS OF OPERATIONS
SEGMENT RESULTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
Revenues Operating Loss Net Loss
-------- -------------- --------
Quarter ended September 30, 1999 1998 1999 1998 1999 1998
- --------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ATM and related services $ 7,036 $3,127 $ (3,173) $ (4,415) $ (3,324) $ (5,639)
ARKSYS software solutions 4,847 - (918) - (898) -
Corporate and other - - (1,508) (1,058) (5,721) (3,670)
Inter segment eliminations (45) - - - - -
------- ------ -------- -------- -------- --------
Total $11,838 $3,127 $ (5,599) $ (5,473) $ (9,943) $ (9,309)
</TABLE>
<TABLE>
<CAPTION>
Revenues Operating Loss Net Loss
-------- -------------- --------
Nine months ended September 30, 1999 1998 1999 1998 1999 1998
- ------------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ATM and related services $18,366 $7,751 $(11,325) $(10,368) $(11,998) $(11,595)
ARKSYS software solutions 12,485 - (4,034) - (3,968) -
Corporate and other - - (4,940) (3,488) (10,521) (5,573)
Inter segment eliminations (135) - - - - -
------- ------ -------- -------- -------- --------
Total $30,716 $7,751 $(20,299) $(13,856) $(26,487) $(17,168)
</TABLE>
ATM AND RELATED SERVICES SEGMENT OVERVIEW
The Company operates the only independent, non-bank owned automated teller
machine ("ATM") network in Central and Western Europe, as a service provider to
banks and other retail oriented financial institutions. This segment's principal
source of revenue to date has been transaction and service fees from a growing
number of ATMs installed in Hungary, Poland, the Czech Republic, Croatia,
France, Germany, and the UK.
During the first quarter of 1999, the Company further expanded its proprietary
network by acquiring a network of 252 installed ATMs and 35 ATMs in inventory
from Service Bank GmbH & Co. KG ("Service Bank").
On August 13, 1999, the Company purchased the remaining 66 2/3% interest in EFT
Network Services LLC ("Dash") located in Little Rock, Arkansas, USA. Until that
date, the Company owned 33 1/3% of Dash as a result of its acquisition of ARKSYS
on December 2, 1998. The Company now owns 100% of Dash. (See Note 5 to the
unaudited Consolidated Financial Statements--Dash Acquisition.)
Dash is an ATM switch-processing center. The current operations of Dash include
processing transactions for approximately 112 bank-owned ATMs. The hardware used
in Dash's operations in Little Rock, Arkansas will serve as a disaster recovery
center for the Company's processing center located in Budapest, Hungary. In
addition, Dash provide a platform for offering ATM and related processing
services to potential bank and non-bank customers in the United States. The
Company's management will treat the Dash network operation as a part of the ATM
and related services segment.
During the third quarter of 1999, the Company further expanded its outsourced
management solutions business in the US by executing a contract for up to 350
ATMs with a single customer in the US. Under the terms of a value-added reseller
agreement ("VAR agreement") the Company resold 22 ATMs in August 1999, 204 ATMs
in September 1999 and 124 ATMs in October 1999. The company will operate the
resold ATMs from the Dash switch-processing center in Little Rock. The Company
estimates that it will take a period of approximately 90 to 120 days for the
ATMs to be `on-line' with the Dash switch-processing center. The Company does
not consider ATMs that are not on-line as a part of its proprietary network.
Thus, the Company expects an additional 328 ATMs to come on-line by the end of
November under the terms of the VAR agreement.
As of September 30, 1999, the Company's proprietary ATM network totalled 1,817
ATMs, of which 82% are owned by the Company and 18% are owned by banks and
financial institutions but operated by the Company through management agreements
with such banks and financial institutions as a part of the Company's outsourced
<PAGE>
management solutions business. The Company expects the proportion of ATMs owned
by the Company to decrease as the ATMs under the VAR agreement come on-line to
Dash. The company believes this is an extremely positive development and will
provide substantially higher marginal returns on investments.
The ATM and related services segment derives substantially all of its revenues
from ATM transaction fees. The Company receives a fee from the card issuing
banks or International Card Organizations for ATM transactions processed on its
ATMs. The Company continues to focus on expanding its network and installing
additional ATMs, especially ATMs installed as part of the outsourced management
solutions business where contracts may include flat monthly management fees or
minimum transaction guarantees. The Company expects that transaction fees will
continue to account for a substantial amount of its ATM and related services
segment revenues for the foreseeable future even as its outsourced management
solutions business expands.
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 three to twelve 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 mature ATMs operating in the Company's network increases.
The Company's outsourced management solutions business also generates revenues
from ATM network management services that it offers to banks that own
proprietary ATM networks. The Company has expanded its outsourced management
solutions to include not only the operation of existing ATMs owned by banks, but
also the installation and management of Company-owned ATMs for banks in their
branches or off-site locations. Both types of outsourced management agreements
involve the operation of ATMs in return for monthly management fees or a
guaranteed monthly level of transaction fees, ensuring a certain level of return
for the Company. The Company believes that revenues from these services will
continue to increase in the future.
The Company sells advertising on its network by displaying clients'
advertisements on its ATM screens and receipts. The Company believes that
advertising revenues can increase as it expands its network and continues to
market this service.
ARKSYS SOFTWARE SOLUTIONS SEGMENT OVERVIEW
ARKSYS is a leading provider of electronic payment software solutions for the
IBM AS/400 platform, one of the major hardware options for retail banks. ARKSYS
software performs a number of retail banking functions including payment and
transaction delivery for ATM systems, financial transaction processing, credit
and debit card management, POS transaction processing, comprehensive card and
client management, Internet and PC banking, and other means of electronic funds
transfer ("EFT"). ARKSYS's primary software solution is the Integrated
Transaction Management ("ITM") product, a suite of payment and transaction
functions designed to support virtually every aspect of retail financial
transaction delivery. The core systems of ITM provide for transaction
identification, transaction routing, security, transaction detail logging,
network connections, authorization interfaces, settlement and management of the
system. Front-end systems support ATM management, POS management, telephone
banking, internet banking, kiosks, and workstation authorization. These systems
provide a comprehensive solution for ATM, debit or credit card management and
bill payment facilities. ARKSYS also offers Goldnet, a shared EFT network
solution that allows the formation of an independent gateway network. Euronet
uses Goldnet for its EFT requirements in five countries in Europe.
While the traditional target market for ARKSYS has been retail banks, the
Company expects to seek other retail customers who require EFT solutions and who
would benefit from the installation of ARKSYS's integrated suite of products.
Software solutions developed by ARKSYS are currently used by more than 160
retail banks and other companies in over 60 countries, including the Company's
own transaction processing center located in Budapest, Hungary.
<PAGE>
CORPORATE AND OTHER SEGMENT OVERVIEW
The Corporate and other segment exists solely to support the activities of the
ATM and related services and ARKSYS software solutions segments. This segment
performs general corporate, administrative and support functions including
legal, corporate finance, treasury, investor relations and corporate
communications services.
COMPARISON OF OPERATING RESULTS THE QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
ATM AND RELATED SERVICES SEGMENT
ATM and Related Services Revenue
Total segment revenues increased by $3.9 million or 125% to $7.0 million for the
quarter ended September 30,1999 from $3.1 million for the quarter September 30,
1998. Total segment revenues increased by $10.6 million or 137% to $18.4 million
for the nine months ended September 30,1999 from $7.8 million for the nine
months ended September 30, 1998. The increases in revenues are due primarily to
the significant increase in transaction revenues resulting from a corresponding
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 1,123 ATMs installed as of
September 30, 1998, and processed 4.0 million transactions for the quarter ended
September 30, 1998 and 10.3 million transactions for the nine months ended
September 30, 1998. As of September 30, 1999, the Company's proprietary ATM
network increased by 694 ATMs or 62% to a total of 1,817 ATMs, of which 82% are
owned by the Company and 18% are owned by banks but operated by the Company
through management agreements with banks and financial institutions as a part of
the Company's Outsourced Management Solutions business.
Transaction fees charged by the Company vary for the three types of transactions
that are currently processed on the Company's ATMs: cash withdrawals, balance
inquiries and transactions not completed because the relevant Card Issuer does
not give authorization. Transaction fees for cash withdrawals vary from market
to market but generally range from $0.60 to $1.75 per transaction while
transaction fees for the other two types of transactions are generally
substantially less.
Operating Expenses
Total segment operating expenses increased to $10.2 million for the quarter
ended September 30, 1999 from $7.5 million for the quarter ended September 30,
1998, and $29.7 million for the nine months ended September 30, 1999 from $18.1
million for the nine months ended September 30, 1998. The increases are due
primarily to costs associated with the installation of significant numbers of
ATMs and expansion of the Company's operations during the periods.
ATM and related services segment direct operating costs consist primarily of:
ATM installation costs; ATM site rentals; costs associated with maintaining
ATMs; ATM telecommunications; interest on network cash and cash delivery and
security services to ATMs. Such costs increased to $5.6 million for the quarter
ended September 30, 1999 from $2.9 million for the quarter ended September 30,
1998, and $16.7 million for the nine months ended September 30, 1999 from $6.8
million for the nine months ended September 30, 1998. The increases in direct
operating costs are 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 $833,000 for the
quarter ended September 30, 1999 and $2.2 million for the nine months ended
September 30, 1999. Previously these costs were not allocated as a direct
operating cost but were included as a component of selling, general and
administrative costs. The components of direct operating costs for the quarters
ended September 30, 1999 and 1998 and nine months ended September 30, 1999 and
1998 were:
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Quarters ending Nine months ending
September 30, September 30,
1999 1998 1999 1998
------------------------ --------------------------
<S> <C> <C> <C> <C>
ATM communication $ 981 $ 919 $ 3,021 $2,378
ATM cash filling and interest on
network cash 1,278 468 4,115 1,313
ATM maintenance 873 579 2,257 1,137
ATM site rental 617 174 1,942 529
ATM installation 315 290 643 412
Transaction processing and ATM
monitoring 1,033 - 2,951 -
Other 541 431 1,725 1,039
------ ------ ------- ------
Total direct operating expenses $5,638 $2,861 $16,654 $6,808
====== ====== ======= ======
</TABLE>
Segment salaries and benefits decreased to $1.8 million for the quarter ended
September 30, 1999 from $2.0 million for the quarter ended September 30, 1998,
and increased to $5.4 million for the nine months ended September 30, 1999 from
$4.2 million for the nine months ended September 30, 1998. The slight decrease
in the quarter-on-quarter expenses reflects operational efficiencies gained over
the past year. 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.
Selling, general and administrative costs allocated to the ATM and related
services segment decreased to $800,000 for the quarter ended September 30, 1999
from $1.5 million for the quarter ended September 30, 1998, and $2.2 million for
the nine months ended September 30, 1999 from $3.9 million for the nine months
ended September 30, 1998. It is the opinion of management that this decrease
reflects an accurate allocation of these types of costs. The cost decrease for
the quarter ended September 30, 1999 results from the net effect of (1) a
$800,000 allocation of costs from the selling, general and administrative line
of the Budapest processing center to the operating cost line, as discussed
above, and (2) an $100,000 increase in costs associated with the expansion of
the Company's network operations. The cost decrease for the nine months ended
September 30, 1999 results from the net effect of (1) a $2.2 million allocation
of costs from the selling, general and administrative line of the Budapest
processing center to the operating cost line, as discussed above, and (2) a
$500,000 increase in costs associated with the expansion of the Company's
network operations.
Depreciation and amortization increased to $2.0 million for the quarter ended
September 30, 1999 from $1.2 million for the quarter ended September 30, 1998,
and $5.4 million for the nine months ended September 30, 1999 from $3.2 for the
nine months ended September 30, 1998. The increases are due primarily to the
increase in the number of deployed ATMs as discussed previously.
Operating Loss
The ATM and related services segment operating loss decreased to $3.2 million
for the quarter ended September 30, 1999 compared to $4.4 million for the
quarter ended September 30, 1998, and increased to $11.3 million for the nine
months ended September 30, 1999 compared to $10.4 million for the nine months
ended September 30, 1998 as a result of the factors discussed above.
ARKSYS SOFTWARE SOLUTIONS SEGMENT
ARKSYS was acquired by the Company on December 2, 1998. Therefore, comparable
figures for the quarter and nine months ended September 30, 1998 have not been
provided.
ARKSYS Software Solutions Revenue
Revenues from the ARKSYS software solutions segment totalled $4.8 million before
inter segment eliminations for the quarter ended September 30, 1999, and $12.5
million for the nine months ended September 30, 1999.
Software Sales Backlog
The Company defines "software sales backlog" as fees specified in contracts
which have been executed by the Company and for which the Company expects
recognition of the related revenue within one year. At December 31, 1998 the
revenue backlog was $2.3 million, at March 31, 1999 the revenue backlog was $5.3
million, at June 30, 1999 the revenue backlog was $3.7 million, and at September
30, 1999 the revenue backlog was $2.6 million. The
<PAGE>
increase in backlog from December 31, 1998 results principally from growth in
ARKSYS sales since the acquisition. The decrease in backlog from March 31, 1999
and June 30, 1999 can be attributed to the Company's increased focus and results
in expediting delivery of software, in addition to a slower rate of purchasing
by banks as they allocate resources to short term operational issues related to
Year 2000 compliance. It is management's intention to continue to focus on
expediting delivery and implementation of software in an effort to reduce
backlog while continuing sales growth. There can be no assurance that the
contracts included in backlog will actually generate the specified revenues or
that the actual revenues will be generated within the one-year period.
Operating Expenses
ARKSYS software solutions segment operating expenses consist primarily of
salaries and benefits, selling, general and administrative, and depreciation and
amortization. Operating expenses totalled $5.8 million for the quarter ended
September 30, 1999, and $16.5 for the nine months ended September 30, 1999.
Since the acquisition of ARKSYS in December 1998, the Company has made planned
increases in ARKSYS's staff in order to increase sales, accelerate development
of certain software enhancements and reduce delivery times for software. These
staff increases have resulted in a significant increase in salaries and benefits
at ARKSYS, which has contributed to the net losses of the ARKSYS software
solutions segment for the nine months ended September 30, 1999.
Operating Loss
The ARKSYS software solutions segment operating loss was $898,000 for the
quarter ended September 30, 1999 and $4.0 million for the nine months ended
September 30, 1999 as a result of the factors discussed above.
CORPORATE AND OTHER SEGMENT
Operating Expenses
Operating expenses for the Corporate and other segment increased to $1.5 million
for the quarter ended September 30, 1999 from $1.1 million for the quarter ended
September 30, 1998, and $4.9 million for the nine months ended September 30,
1999 from $3.5 million for the nine months ended September 30, 1998. The
Company's expansion of its network infrastructure, and increases in corporate
and administrative capabilities are the primary reason for these increased
expenditures.
NON-OPERATING RESULTS
Interest Expense
Interest expense decreased to $3.0 million for the quarter ended September 30,
1999 from $3.5 million for the quarter ended September 30, 1998, and increased
to $8.2 million for the nine months ended September 30, 1999 from $4.6 million
for the nine months ended September 30, 1998. The increase in the year-on-year
expenses is the result of recording interest expense related to the issue in
June 1998 of 243,211 units of DEM 1,000 12 3/8% senior discount notes due on
July 1, 2006 (the "Notes"). The decrease in the quarter-on-quarter expenses is
the result of the Company's repurchase of portions of the Notes during 1999 and
decrease in the US dollar equivalent of the DEM denominated expenses (See Note
6 to the unaudited Consolidated Financial Statements - Extinguishment of Debt).
Other Income/Expense
The Company had a net foreign exchange loss of $1.9 million for the quarter
ended September 30, 1999, as compared to a net foreign exchange loss of $1.2
million for the quarter ended September 30, 1998, and a net foreign exchange
loss of $1.2 million for the nine months ended September 30, 1999 compared to a
net foreign exchange loss of $400,000 for the nine months ended September 30,
1998. Exchange gains and losses that result from remeasurement of certain
Company assets and liabilities are recorded in determining net loss. A portion
of the assets and liabilities of the Company are denominated in currencies other
than the U.S. dollar, including capital lease obligations, notes payable
(including the Notes issued in the Company's public bond offering), cash and
cash
<PAGE>
equivalents, investments, and forward foreign exchange contracts. It is the
Company's policy to attempt to match local currency receivables and payables.
The foreign currency denominated assets and liabilities give rise to foreign
exchange gains and losses as a result of U.S. dollar to local currency exchange
movements. The Company entered into several foreign currency option contracts to
limit their exposure to foreign currency fluctuations of the notes payable (See
Note 8 to the unaudited Consolidated Financial Statements -- Forward Exchange
Option Contract).
The Company's losses due to holding cash and other assets and liabilities
denominated in several Eastern and Western European currencies were
significantly reduced due to the relative strength of the U.S. dollar against
the German mark, which generated unrealized exchange gains on the notes payable
of $7.9 million for the nine months ended September 30, 1999. There can be no
assurance that future performance of the U.S. dollar against other currencies,
especially the German mark, will continue to yield exchange gains in future
periods.
Extraordinary Gain
In September 1999 the Company recorded an extraordinary gain of $149,000 (net of
income taxes of $0) following its repurchase of a portion of its DEM denominated
senior discount 12 3/8% notes. The gain represents the difference between the
allocated carrying value of the face value of the debt repurchased of $461,000
less the consideration paid of $297,000, offset by the write-off of allocated
unamortized deferred financing costs of $15,000.
In June 1999 the Company recorded an extraordinary gain of $1.5 million (net of
income taxes of $0) following its repurchase of a portion of its DEM denominated
senior discount 12 3/8% notes. The gain represents the difference between the
allocated carrying value of the face value of the debt repurchased of $4.2
million less the consideration paid of $2.5 million, offset by the write-off of
allocated unamortized deferred financing costs of $149,000.
In February 1999 the Company recorded an extraordinary gain of $154,000 (net of
income taxes of $80,000), following its repurchase of a portion of its DEM
denominated senior discount 12 3/8% notes. The gain represents the difference
between the allocated carrying value of the face value of the debt repurchased
of $629,000 less the consideration paid of $373,000, offset by the write-off of
allocated unamortized deferred financing costs of $22,000.
The three transactions above result in a combined extraordinary gain of $1.8
million for the nine months ended September 30, 1999. There were no
extraordinary gains or losses for the six months ended June 30, 1998. The
Company has not retired the bonds repurchased.
Net Loss
The Company's net loss increased to $9.9 million during the quarter ended
September 30, 1999 from $9.3 million for the quarter ended September 30, 1998,
and $26.5 million for the nine months ended September 30, 1999 from $17.2
million for the nine months ended September 30, 1998 as a result of the factors
discussed above.
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 1998 issue of DEM denominated notes payable, the
Company's 1997 public equity offering, equipment lease financing and private
placements of equity securities. The net proceeds of such transactions, together
with revenues from operations and interest income have been used to fund
aggregate net losses of approximately $70.0 million and investments in property,
plant and equipment of approximately $50.2 million.
At September 30, 1999 the Company had cash and cash equivalents of $17.9 million
and working capital of $23.0 million. The Company had $9.1 million of restricted
cash held as security with respect to cash provided by banks participating in
Euronet's ATM network, to cover guarantees to a customer and as deposits with
customs officials.
The Company expects to continue to reduce operating losses and net cash used in
operating activities in the fourth quarter of 1999 and 2000. As a result, the
Company believes it has sufficient liquidity resources to meet current and
<PAGE>
future cash requirements. There can be, however, 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 flows from operations
in any future period.
The Company leases the majority of its ATMs under capital lease arrangements
that expire between 1999 and 2007. The leases bear interest between 8% and 17%
per annum. As of September 30, 1999 the Company owed $9.0 million under such
capital lease arrangements.
At September 30, 1999, the Company had contractual capital commitments of
approximately $800,000. The Company expects that its capital requirements will
continue in the future but will not be as great as they were in the past, as the
Company intends to continue to promote its outsourcing capabilities and re-
deploy under-performing ATMs currently operating in the network. This strategy
should reduce the Company's reliance on capital expenditures in the future as
the business continues to grow. The Company anticipates that its fixed asset
purchases and capital lease payments for the 12 months ending December 31, 1999
could total approximately $11.0 million, of which $8.8 million has been incurred
as of September 30, 1999 ($5.4 million for fixed asset purchases and $3.4
million for capital lease payments), primarily in connection with the
acquisition of ATMs, scheduled capital lease payments on existing lease
obligations, and related ATM installation costs. Fixed asset purchases and
capital lease payments for 2000 are expected to be approximately $8.6 million in
the Company's existing markets, notably Western and Central Europe. Acquisitions
of related ATM business and investments in new markets in furtherance of the
Company's strategy may require additional capital expenditures.
The Company's capital expenditures will be funded through a combination of cash
flows from existing operations and current cash resources. The Company believes
that such cash flows and cash resources will be adequate to fund existing
operations and planned capital expenditures. Although the Company does not
currently anticipate a need to seek additional financing other than through
capital leases associated with fixed asset purchases, it is possible that the
Company could seek additional equity or debt financing in the future.
BALANCE SHEET ITEMS
Cash and Cash Equivalents
The decrease of cash and cash equivalents to $17.9 million at September 30, 1999
from $55.6 million at December 31, 1998 is due primarily to the net effects of
working capital movements, foreign exchange gains and losses, the acquisition of
a network of 252 installed and 36 inventoried ATMs from Service Bank for $6.7
million, capital expenditures and capital lease payments, and operating losses
during the nine months ended September 30, 1999.
Restricted Cash
Restricted cash decreased to $9.1 million at September 30, 1999 from $13.0
million at December 31, 1998. The majority of restricted cash was held as
security with respect to cash provided in Hungary by banks participating in
Euronet's ATM network to cover guarantees to a customer and as deposits with
customs officials. The decrease represents a reduction in the amount of cash
held as collateral for a foreign exchange contract and devaluation of the
Hungarian forint and Polish zloty.
Trade Accounts Receivable
Trade accounts receivable increased to $7.7 million at September 30, 1999 from
$5.7 million at December 31, 1998 is due primarily to sales from the ARKSYS
software solutions segment and increased ATM revenues.
Property, Plant and Equipment
Net property, plant and equipment increased to $36.5 million at September 30,
1999 from $33.2 million at December 31, 1998. This increase is due primarily to
the installation of ATMs, the Service Bank transaction, and the acquisition of
computer equipment as the network expands.
Intangible Assets
<PAGE>
The increase in intangible assets to $14.9 million at September 30, 1999 from
$12.5 million at December 31, 1998 is due primarily to the acquisition of the
network of 252 installed and 36 inventoried ATMs from Service Bank and recording
of purchased intangibles of $3.2 million, and the acquisition of Dash and
recording of purchased intangibles of $724,000, including goodwill of $120,000
purchased in August 1999.
Notes Payable
Notes payable decreased to $77.8 million at September 30, 1999 from $83.7
million at December 31, 1998. This is the result of several transactions as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1998 $83.7
Unrealized foreign exchange gain (DEM vs. US$) (7.8)
Accretion of bond interest 7.2
Bond repurchases (5.3)
-----
Balance at September 30, 1999 $77.8
</TABLE>
Accumulated other Comprehensive (Loss)/Income
The decrease in other comprehensive loss to $1.4 million at September 30, 1999
from a gain of $65,000 at December 31, 1998 is a result of the change in the
foreign currency translation due to an approximate 16.9% devaluation of the
Polish zloty against the US dollar and an approximate 11.1% devaluation of the
DEM against the US dollar for the nine months ended September 30, 1999.
Total Stockholders (Deficit)/Equity
Total stockholders (deficit)/equity decreased to a deficit of ($3.7) million at
September 30, 1999 from $24.2 million at December 31, 1998. This is due to the
loss from operations for the nine months ended September 30, 1999 of $26.5
million and the recording of a cumulative translation adjustment of $1.4 million
discussed above.
In addition, the Company recorded a receivable for the sale of 100,000 shares of
treasury stock in September 1999. This transaction resulted in a reduction to
the carrying value of treasury stock in the amount of $1,000 and an increase to
Additional paid in capital ("APIC") of $274,000.
In addition, the Company recorded a receivable for the issuance of new shares
resulting from the exercise of 200,900 options held by an employee of the
Company. This transaction resulted in an increase in common stock and APIC in
the amount of $3,000 and $284,000, respectively.
In addition, from December 1998 through September 1999, the Company repurchased
24,791 units of its senior discount 12 3/8% notes to which 74,373 warrants were
attached. The warrants carry an assigned value of $2.3642 per warrant. As a
result of the Company's bond repurchases, a reduction to the outstanding value
of the warrants and corresponding increase to APIC was recorded by the Company
in September 1999 in the amount of $176,000.
YEAR 2000 COMPLIANCE
ATM and Related Services Segment
The Company depends on hardware and software systems to provide services to its
customers, to maintain substantially all of its internal operations, and for the
maintenance of on-line computer links to its bank customers, whose software
systems are relied upon to deliver transaction authorization requests. As part
of the program to obtain confirmation of Year 2000 compliance, the Company has
identified the following specific areas of its or its bank customers' business,
that are affected by year 2000 considerations:
- The Company's central processing center in Budapest, which uses ARKSYS and
vendor software and AS/400 hardware.
- Firmware and operating systems in each ATM ("ATM Firmware and Software").
<PAGE>
- Vendor and internally generated software which is used in the Company's
country operations.
- Software and hardware used to support the financial reporting and
accounting systems of the Company.
- Software and hardware used by the Company's bank customer to authorize
transactions.
- Year 2000 readiness of subcontractors performing telecommunications,
driving, monitoring and operating services.
Central Processing Center
The Company has received written confirmation from IBM that the Company's
current version of the AS/400 operating system is Year 2000 compliant. The
Company has upgraded all versions of its ARKSYS software to the Year 2000
compliant release 1.4.
ATM Firmware and Software
IBM and NCR, from which the Company purchases its ATMs, have supplied
information regarding Year 2000 compliance. Approximately 103 ATM machines
required an upgrade. The required changes for both the IBM and NCR ATM's have
been made and tested. The NCR software package has been distributed and the
Company began installation beginning in April 1999. The IBM package has been
tested and installed most of the Company's production machines. Upgrades to the
Company's entire network were approximately 96% completed as of September 30,
1999 and 100% completed as of October 31, 1999.
Vendor and Internal Software Used in the Company's Subsidiaries
The Company has received guarantees from suppliers of its standard vendor
software that it is Year 2000 compliant. Where some of the Company's
subsidiaries have developed additional software locally this has been
inventoried and is being reviewed for compliance, and will be replaced by
standard products provided through the IS group. All necessary upgrading and
testing of all Company software used in all entities has been completed. The
cost of the above upgrades was immaterial.
Software Used in Financial and Accounting Systems
The majority of the Company's internal financial analysis tools have been built
internally, using Microsoft Access and Microsoft Excel, and are Year 2000
compliant. The Company's primary financial reporting software (ORACLE FINANCIAL
ANALYZER 6.20 and ORACLE EXPRESS SERVER) is Year 2000 compliant. The Company's
primary financial accounting software packages (Scala 5.0 and MAS90) have been
updated for compliance, tested and implemented.
Software and Hardware Used by the Company's Bank Customers to Authorize
Transactions
The Company has contacted each customer bank in writing requesting certification
of its transaction authorization software for Year 2000 readiness, and advising
that the Company will be required to unilaterally cease support for any
connection which is unable to continue processing. The Company has offered the
use of its test center to verify ability to authorize transactions into the Year
2000. In addition, the Company has offered the opportunity to place "stand- in"
authorization files at the Company's computer center, against the event of
difficulty with the customer's in-house software.
The Company's revenues could be materially and adversely affected if a material
number of the Company's bank customers are unable to process transactions into
the Year 2000. The Company continues to assess and monitor the potential impact
of the advent of Year 2000 as it receives replies to its request and
suggestions.
The Company has successfully completed a testing program with regard to all of
its major card association gateways (Visa, Europay, Mastercard, American
Express, Diners Club).
Year 2000 Compliance of Subcontractors Providing Telecommunications Driving,
Switching and Authorization Services
<PAGE>
The Company relies on telecommunications providers in each market and has
retained subcontractors in Germany, France and the UK to perform the majority of
ATM services it provides. Each of these subcontractors has been required to
provide written certification of Year 2000 compliance. As of September 30, 1999
substantially all of the Company's major suppliers had indicated their
compliance. As of October 31, 1999, all of the Company's major suppliers had
indicated their compliance.
Contingency Plan
The Company has developed a contingency plan to staff a Year 2000 support center
that will involve skilled technical staff located at the processing center in
Budapest, Hungary. Staffing will be coordinated to provide support to the
Company's proprietary ATM network, customers who rely on the Company to operate
their ATM networks through ATM network management contracts, and the Company's
ARKSYS software customers. In Europe, there will be staffing commencing December
30, 1999, running continuously through January 5, 2000. The Company believes
this arrangement will provide technical support to all segments of the business,
including customers of the Company's ATM and related segment and customers of
the Company's ARKSYS software solutions segment. A similar center is being
staffed in the US for ARKSYS software solutions segment, and will coordinate
with the European center to provide maximum resource availability in the event
that any problems related to Year 2000 occur.
The Company is confident that it's own systems are ready to process and maintain
uninterrupted service. The above contingency plan is intended to provide support
in the event of infrastructure failure in any country or province, and to
provide support to bank service and software customers who may encounter
unforeseen problems during this period.
ARKSYS Software Solutions Segment
ARKSYS has developed and is marketing to its customers a fully Year 2000
compliant version of its ITM software. This version is being operated in the
Company's central processing center. During 1999, ARKSYS conducted a program of
updating previous versions of software that had been installed for its customers
who have maintenance contracts with ARKSYS. This program has been completed with
respect to the Company's core ITM software except with respect to a very limited
number of customers who, for varying reasons, have chosen not to upgrade their
core software.
Certain adaptations and enhancements to the ITM software are made on a case by
case basis by ARKSYS and its distributors as the software is installed and
connected to each customer's system. Some of these adaptations and enhancements
may have year 2000 implications, involving performance discrepancies of
relatively minor importance. The Company is conducting an ongoing program to
create and implement remedies for performance discrepancies if and when they
arise.
The Company is aware that certain of its customers may choose to temporarily
freeze software development and installation during the third and fourth
quarters of 1999, in order to limit any complications arising from the advent of
the Year 2000. As previously noted, while the Company believes that such freezes
may not affect signing of new contracts for software, implementation of existing
contracts may be affected (See ARKSYS Software Solutions Segment -Software Sales
Backlog). Because the Company recognizes revenue based upon the percentage of
completed contract method, any such freezes may adversely affect revenues of
this segment during the fourth quarter of 1999.
PREPARATION FOR THE INTRODUCTION OF THE EURO
From January 1, 2002, eleven of the fifteen member countries of the European
Union are scheduled to issue new euro-denominated bills and coins for use in
cash transactions. No later than July 1, 2002 these eleven participating
countries, and other member countries who so elect, will withdraw all bills and
coins denominated in their sovereign currencies, which will no longer be legal
tender.
<PAGE>
The Company must be able to dispense euro cash in its networks from January 1,
2002. The Company's networks in Germany, France and potentially the UK will be
affected in this regard. The Company's ATMs are able to dispense various
national currencies and will be able to dispense the euro without hardware
modification. A single currency across these countries may provide opportunities
for operating efficiencies and should reduce foreign exchange exposure.
The Company continues to assess the potential impact of the euro in terms of its
effect on competition, currency risk, and additional costs, but does not
currently believe that the adoption of the euro to date has had a material
adverse effect on its business.
FORWARD-LOOKING STATEMENTS
This document contains statements that constitute forward-looking statements
within the meaning of section 27A of the Securities Act of 1933 and section 21E
of the U.S. Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this document, including,
without limitation, statements regarding (i) the Company's business plans and
financing plans and requirements, (ii) trends affecting the Company's business
plans and financing plans and requirements, (iii) trends affecting the Company's
business, (iv) the adequacy of capital to meet the Company's capital
requirements and expansion plans, (v) the assumptions underlying the Company's
business plans, (vi) business strategy, (vii) government regulatory action,
(viii) technological advances and (ix) projected costs and revenues, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-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, anticipated,
intend, estimate and similar expressions.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from those in the forward-looking statements as a
result of various factors, including: technological and business developments in
the local card and electronic banking markets affecting the transaction and
other fees which the Company is able to charge for its services; foreign
exchange fluctuations; competition from bank- owned ATM networks, outsource
providers of ATM services and software providers; the Company's relationships
with its major customers, sponsor banks in various markets and International
Card Organizations; unanticipated Year 2000 problems; and changes in laws and
regulations affecting the Company's business. These risks and other risks are
described elsewhere in this document and the Company's periodic filings with the
Securities and Exchange Commission.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE EXPOSURE
For the nine months ended September 30, 1999, 27% of the Company's revenues were
generated in Poland and Hungary, compared to 73% for year ended December 31,
1998, and 99% for the year ended December 31, 1997. This figure is substantially
reduced with the additional revenues from ARKSYS and the Company's expanded ATM
network in Germany. In Hungary about 20% of revenues received are US dollar
denominated. In Poland substantially all of revenues are denominated in Polish
zloty. However the majority of these foreign currency denominated 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 estimates that a further 10% depreciation in foreign exchange rates
of the Deutsche mark, Hungarian forint, and Polish zloty against the U.S.
dollar, would have the combined effect of a $1.4 million decrease in the
reported net loss. This was estimated using 10% of the Company's net losses
after adjusting for unusual impairment and other items including U.S. dollar
denominated or indexed expenses. The Company believes that this quantitative
measure has inherent limitations. It does not take into account any governmental
actions or changes in either customer purchasing patterns or the Company's
financing or operating strategies.
<PAGE>
INFLATION AND FUNCTIONAL CURRENCIES
In the past, Hungary, Poland and the Czech Republic have experienced high levels
of inflation. Consequently, these countries' currencies have continued to
decline in value against the major currencies of the OECD over this time period.
However, due to the significant reduction in the inflation rate of these
countries in recent years, none of these countries are considered to have a
hyper-inflationary economy. Therefore, since Poland was no longer considered
hyper-inflationary since 1998 and 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 is the zloty. While in the past the
Hungarian and the Czech Republic subsidiaries had a significant portion of
revenues and expenses denominated in the U.S. dollar, the majority of revenues
and expenses are now denominated in local currencies. Consequently, with effect
from July 1, 1999, the U.S. dollar is no longer the functional currency and has
been replaced by the Hungarian forint and Czech krona, respectively, as the
functional currencies.
Germany, France and the U.K. have experienced relatively low and stable
inflation rates in recent years. Therefore, the local currency in each of these
markets is the functional currency. Although Croatia, like Germany, France and
the U.K. has maintained relatively stable inflation and exchange rates, the
functional currency of the Company's Croatian subsidiary is the U.S. dollar due
to the significant level of U.S. dollar denominated revenues and expenses. The
Company's Romanian subsidiary operates with the U.S. dollar as the functional
currency 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.
The Company's exposure to market risks for changes in interest rates relates
primarily to the Company's investments and long-term debt obligations and
related derivative financial instruments. The Company places its investments
with high credit quality issuers and, limits the amount of credit exposure to
any one issuer. The Company's general policy is to limit the risk of principal
loss and ensure the safety of invested funds by limiting market and credit risk.
All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments. As of September 30, 1999, there are no investments with maturities
greater than 12 months.
<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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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.
November 4, 1999 By: /s/ MICHAEL J. BROWN
Michael J. Brown
Chief Executive Officer
November 4, 1999 By: /s/ DANIEL C. STEVENS
Daniel C. Stevens
Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,857
<SECURITIES> 3,337
<RECEIVABLES> 8,111
<ALLOWANCES> (371)
<INVENTORY> 0
<CURRENT-ASSETS> 44,463
<PP&E> 36,594
<DEPRECIATION> 0
<TOTAL-ASSETS> 100,393
<CURRENT-LIABILITIES> 21,515
<BONDS> 77,776
0
0
<COMMON> 310
<OTHER-SE> (4,029)
<TOTAL-LIABILITY-AND-EQUITY> 100,393
<SALES> 11,838
<TOTAL-REVENUES> 11,838
<CGS> (17,437)
<TOTAL-COSTS> (17,437)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,017)
<INCOME-PRETAX> (10,092)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 149
<CHANGES> 0
<NET-INCOME> (9,943)
<EPS-BASIC> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
