<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
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 MARCH 31, 2000
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)
74-2806888
(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 April 30, 2000 16,478,435
common shares.
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS.
- ------------------------------
EURONET SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Mar. 31, 2000 Dec. 31, 1999
------------- -------------
ASSETS (unaudited)
- ------ (in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,394 $ 15,037
Restricted cash 14,252 10,929
Investment securities - 750
Trade accounts receivable, net of allowances for doubtful accounts of
$381,000 as of March 31, 2000 and December 31, 1999 7,310 7,888
Costs and estimated earnings in excess of billings on software
installation contracts 619 667
Income taxes receivable 767 818
Prepaid expenses and other current assets 2,931 3,695
-------- --------
Total current assets 33,273 39,784
Property, plant, and equipment, net 34,704 36,693
Intangible assets, net 15,417 16,259
Deposits 1,578 1,355
Deferred income taxes 440 460
Other assets, net 2,236 2,293
-------- --------
Total assets $ 87,648 $ 96,844
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Trade accounts payable $ 4,207 $ 5,768
Current installments of obligations under capital leases 4,095 4,188
Accrued expenses and other current liabilities 14,312 12,631
Advance payments on contracts 1,248 1,321
Billings in excess of costs and estimated earnings on software
installation costs 2,434 3,030
-------- --------
Total current liabilities 26,296 26,938
Obligations under capital leases, excluding current installments 5,994 6,397
Notes payable 71,837 72,800
Other long-term liabilities 100 202
-------- --------
Total liabilities 104,227 106,337
-------- --------
Stockholders' deficit:
Common stock, $0.02 par value. Authorized 30,000,000 shares;
issued and outstanding 16,191,956 shares at March 31, 2000
and 15,541,956 at December 31, 1999 324 311
Additional paid in capital 71,256 66,969
Treasury stock (3) (3)
Employee loans for stock (762) (794)
Subscription receivable (50) (50)
Accumulated losses (85,545) (74,260)
Restricted reserve 784 784
Accumulated other comprehensive loss (2,583) (2,450)
-------- --------
Total stockholders' deficit (16,579) (9,493)
-------- --------
Total liabilities and stockholders' deficit $ 87,648 $ 96,844
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<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 March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
ATM network and related revenue $ 8,260 $ 5,402
Software, maintenance and related revenue 3,678 2,767
----------- -----------
Total revenues 11,938 8,169
Operating expenses:
Direct operating costs 6,812 5,786
Salaries and benefits 6,958 4,976
Selling, general and administrative 2,634 2,785
Depreciation and amortization 2,733 2,367
----------- -----------
Total operating expenses 19,137 15,914
Operating loss (7,199) (7,745)
Other (expense)/income:
Interest income 331 457
Interest expense (2,540) (2,832)
Foreign exchange (loss)/gain, net (1,826) 282
----------- -----------
Total other expense (4,035) (2,093)
----------- -----------
Loss before income taxes and extraordinary item (11,234) (9,838)
Income taxes (51) -
----------- -----------
Loss before extraordinary item (11,285) (9,838)
Extraordinary gain on early retirement of debt, net of
applicable income taxes - 154
----------- -----------
Net loss $ (11,285) $ (9,684)
Other comprehensive loss:
Translation adjustment (133) (2,119)
----------- -----------
Comprehensive loss $ (11,418) $ (11,803)
=========== ===========
Loss per share -- basic and diluted:
Loss before extraordinary item $ (0.72) $ (0.65)
Extraordinary gain - 0.01
----------- -----------
Net loss $ (0.72) $ (0.64)
=========== ===========
Weighted average number of shares outstanding 15,650,289 15,213,453
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
EURONET SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(11,285) $ (9,684)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,733 2,367
Unrealized foreign exchange loss/(gain), net 1,280 (5,368)
Accretion of discount on notes 2,199 2,453
Decrease in costs and estimated earnings in excess of billings
on software installation contracts 48 414
(Increase)/decrease in restricted cash (2,478) 2,420
Decrease/(increase) in trade accounts receivable 577 (2,712)
Decrease in prepaid expenses and other current assets 815 189
(Decrease)/increase in trade accounts payable (1,416) 552
Decrease/(increase) in income taxes receivable 51 (1,805)
(Decrease)/increase in billings in excess of costs and estimated earnings
on software installation contracts (595) 1,432
Decrease in accrued expenses and other current liabilities (2,465) (607)
Other (339) (219)
-------- --------
Net cash used in operating activities (10,875) (10,568)
-------- --------
Cash flows from investing activities:
Fixed asset purchases (446) (1,151)
Proceeds from sale of fixed assets 88 45
Purchase of investment securities - (2,360)
Proceeds from maturity of investment securities - 2,809
Investment in subsidiaries, net of cash acquired - (7,218)
-------- --------
Net cash used in investing activities (358) (7,875)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of shares and other capital contributions 4,300 -
Repurchase of notes payable - (373)
Subscriptions paid - 50
Repayment of loans to employees for purchase of common stock 32 -
Repayment of obligations under capital leases (874) (772)
Repayment of bank borrowings - (188)
-------- --------
Net cash provided by/(used in) financing activities 3,458 (1,283)
-------- --------
Effects of exchange rate differences on cash 132 (85)
-------- --------
Net decrease in cash and cash equivalents (7,643) (19,811)
Cash and cash equivalents at beginning of period 15,037 55,614
-------- --------
Cash and cash equivalents at end of period $ 7,394 $ 35,803
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
EURONET SERVICES INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 1 - FINANCIAL POSITION AND 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"), 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 March 31, 2000 and the results
of its operations, and cash flows for the three month periods ended March 31,
2000 and 1999.
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, 1999, including the notes thereto,
set forth in the Company's Form 10-K.
The results of operations for the three-month period ended March 31, 2000 are
not necessarily indicative of the results to be expected for the full year.
The Company generated an operating loss of $7.2 million and negative cash flows
from operations of $10.9 million for the three months ended March 31, 2000,
primarily due to the significant costs associated with the expansion of its ATM
network and investment in delivery, support, research and development in its
software subsidiary which was acquired in December 1998. Based on the
Company's current business plan and financial projections, the Company expects
to reduce operating losses and net cash used in operating activities in 2000. In
the ATM Services Segment, the Company anticipates that increased transaction
levels in its ATM network will result in additional revenues without a
corresponding increase in expenses. In addition, the Company expects to further
expand its ATM outsourcing services and offer new value-added services, which
will provide continued revenue growth without significantly increasing direct
operating expenses or capital investments. In the Software Solutions
Segment, the Company expects increased revenues resulting from sales of new
products and services to the existing and expanded customer base resulting from
the continued integration of ATM and software sales and customer service
organizations. The Company believes that $7.0 million in net proceeds from
private placements of common shares (see Notes 5 and 7) and cash and cash
equivalents at March 31, 2000 will provide the Company with sufficient cash
resources until it achieves positive cash flow. The Company nevertheless has a
policy of assessing opportunities for additional debt and equity financing as
they arise, and will pursue any such opportunities if the Company considers
that they may contribute to fulfilling its financial and strategic business
objectives.
Based on the above, management is confident that the Company will be able to
continue as a going concern. Accordingly, these consolidated financial
statements have been prepared on a going concern basis which contemplates the
continuation and expansion of trading activities as well as the realization of
assets and liquidation of liabilities in the ordinary course of business.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
There have been no significant additions to or changes in accounting policies of
the Company since December 31, 1999. For a description of these policies, see
Note 3 to the Notes to Consolidated Financial Statements for the year ended
December 31, 1999.
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.
5
<PAGE>
NOTE 4 - BUSINESS SEGMENT INFORMATION
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 that it serves, ("ATM Services"); and (2) producing application
software for payment and transaction delivery systems, ("Software Solutions").
In addition, the Company's management divides the ATM Services Segment into
three sub-segments: Central European ATM Operations (including Hungary, Poland,
the Czech Republic, Croatia and Romania), Western European ATM Operations
(including Germany, France and the United Kingdom) and Other ATM Operations
(including the United States and unallocated processing center costs). These
business segments, and their sub-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 Services").
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. Prior year segment information has been
restated to conform to the current year's presentation.
As the ATM Services Segment continued to grow throughout 1999, the Company's
management began to divide the internal organization of the segment into
subsegments. Accordingly, beginning in January 2000 the Company divided the ATM
Services Segment into three subsegments: Central European ATM Operations,
Western European ATM Operations and Other ATM Operations. Where practical,
certain amounts have been reclassified for the change in internal reporting. The
Company is unable to present ATM Services Segment assets by subsegment as of
March 31, 1999. Prior to January 1, 2000, certain assets were included in the
assets in the balance sheet of Euronet Banktechnikai Szolgaltato Kft. ("Bank
Tech"), a wholly-owned subsidiary of Euronet Services Inc. Certain assets were
transferred as of December 31, 1999, from Bank Tech to an existing Hungarian
shell company, Euronet Adminisztracios Szolgaltato Kft. ("Corporate Services")
formerly known as SatComNet). Those assets are now shown under the Other ATM
Operations Subsegment. The following tables present the segment results of the
Company's operations for the quarters ended March 31, 2000 and March 31, 1999.
<TABLE>
<CAPTION>
ATM Services
------------
For the Quarter ended Central Western Other Software Corporate
March 31, 2000 Europe Europe ATM Total Solutions Services Total
--------- --------- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 3,995 $ 3,756 $ 509 $ 8,260 $ 3,723 $ - $ 11,983
Total operating expenses (5,226) (5,240) (620) (11,086) (6,253) (1,843) (19,182)
Operating loss (1,231) (1,484) (111) (2,826) (2,530) (1,843) (7,199)
Interest income 82 6 18 106 40 185 331
Interest expense (239) (39) (3) (281) - (2,259) (2,540)
Foreign exchange gain/(loss), net (368) (57) (182) (607) 1 (1,220) (1,826)
Extraordinary gain, net of taxes - - - - - - -
Net loss before income taxes $(1,756) $(1,574) $ (278) $ (3,608) $(2,489) $ (5,137) $(11,234)
Segment assets $29,930 $19,059 $3,354 $ 52,343 $19,088 $ 16,217 $ 87,648
Fixed assets 18,386 13,321 1,810 33,517 1,089 98 34,704
Depreciation and amortization 965 741 318 2,024 635 74 2,733
</TABLE>
<TABLE>
<CAPTION>
ATM Services
------------
For the Quarter ended Central Western Other Software Corporate
March 31, 1999 Europe Europe ATM Total Solutions Services Total
--------- --------- ------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 2,565 $ 2,837 $ - $ 5,402 $ 2,812 $ - $ 8,214
Total operating expenses (5,262) (4,112) (145) (9,519) (4,907) (1,533) (15,959)
Operating loss (2,697) (1,275) (145) (4,117) (2,095) (1,533) (7,745)
Interest income 51 1 - 52 25 380 457
Interest expense (273) (26) (15) (314) - (2,518) (2,832)
Foreign exchange gain/(loss), net 47 2 - 49 - 233 282
Extraordinary gain, net of taxes - - - - - 154 154
Net loss before income taxes $(2,872) $(1,298) $(160) $(4,330) $(2,070) $(3,284) $ (9,684)
Segment assets n/a n/a n/a $58,027 $19,384 $38,275 $115,686
Fixed assets n/a n/a n/a 33,482 827 165 34,474
Depreciation and amortization n/a n/a n/a 1,759 584 24 2,367
</TABLE>
6
<PAGE>
The following is a reconciliation of the segmented information to the unaudited
consolidated financial statements.
<TABLE>
<CAPTION>
For the Quarters ended March 31, 2000 March 31, 1999
-------------- --------------
(in thousands) (in thousands)
<S> <C> <C>
Revenues:
Total revenues for reportable segments $11,983 $8,214
Elimination of inter segment revenues (45) (45)
------- ------
Total consolidated revenues $11,938 $8,169
======= ======
</TABLE>
Total revenues for the three months ended March 31, 2000 and March 31, 1999 and
long-lived assets as of March 31, 2000 and March 31, 1999 for the Company
analyzed by geographical location is as follows:
<TABLE>
<CAPTION>
Total Revenues Long-lived Assets
------------------------- --------------------------
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
United States $ 4,186 $2,767 $14,220 $13,084
Germany 2,499 2,788 8,490 10,838
Poland 2,022 1,100 10,524 9,633
Hungary 1,370 1,292 6,264 11,084
Other 1,861 222 10,623 5,103
----------- --------- --------- ---------
Total $11,938 $8,169 $50,121 $49,742
=========== ========= ========= =========
</TABLE>
Total revenues are attributed to countries based on location of customer for the
ATM Services Segment. For revenues generated by the Software Solutions Segment,
all revenues are attributed to the United States. Long lived assets consist of
property, plant, and equipment, net of accumulated depreciation and intangible
assets, net of accumulated amortization.
NOTE 5 - PRIVATE PLACEMENT OF COMMON SHARES
On February 25, 2000 the Company entered into two subscription agreements for
the sale of an aggregate of 650,000 new common shares of the Company. Closing
under these agreements took place on March 13, 2000. These agreements were
signed with certain accredited investors in transactions exempt from
registration under the United States Securities Act of 1933 (the "Act") pursuant
to exemptions under Section 4(2) and Regulation D of the Act. The purchase price
of each share was $6.615, which represents ninety percent of the average closing
price for the ten trading days prior to and including February 15, 2000. The
aggregate amount of proceeds to the Company from the private placement was $4.3
million. Under each of the agreements, for each two shares of common stock
purchased in the private placement, the purchasers were issued one warrant to
purchase a share of Euronet common stock at an exercise price of $11.615,
expiring in each case on the one year anniversary date of the subscription
agreement.
NOTE 6 - FORWARD FOREIGN EXCHANGE CONTRACTS
In 1999 and 1998, the Company entered into several foreign currency exchange
contracts to reduce the effect of fluctuating currency exchange rates,
principally Deutsche Marks, on notes payable and to a lesser extent capital
lease obligations. The Company does not utilize financial instruments for
trading or speculative purposes.
On May 26, 1999, the Company entered into foreign currency call options with
Merrill Lynch to purchase Euro 79.3 million for $85.9 million and foreign
currency put options to sell $83.6 million for Euro 79.3 million on May 26, 2000
(the "Settlement Date"). Under such contracts, the Company will be required to
make a cash payment to Merrill Lynch on May 31, 2000, if the Euro has weakened
7
<PAGE>
against the US Dollar and falls below $1.055 (the "Floor Rate") on the
Settlement Date. At the same time, if the Euro strengthens against the U.S.
dollar and rises above $1.0835 to the Euro (the "Ceiling Rate") the Company will
receive a cash payment depending upon the Euro/Dollar exchange rate on such
Settlement Date.
In the week of March 13, 2000, the Company entered into put options with Merrill
Lynch to sell Euro 79.0 million for $75.1 million on May 26, 2000. The contracts
were purchased to limit the Company's exposure on the call option described
above against a fall of the Euro below $0.95.
The Company must cash collateralize the net fair value of such options contracts
measured on a mark-to-market basis, and on March 31, 2000, the Company had on
deposit $7.4 million with Merrill Lynch. This amount is shown as restricted cash
on the Company's Consolidated Balance Sheet. The Company has accounted for these
foreign currency options at fair value with the resulting gain/loss included in
foreign exchange losses, net, in the Consolidated Statement of Operations. If
the Euro closes below $0.95 on May 26, 2000, the Company's payment obligations
will be $7.9 million.
NOTE 7 - SUBSEQUENT EVENT
In April 2000 the Company entered into two separate subscription agreements for
the sale of an aggregate of 354,777 new common shares of the Company. Of the
total new shares, closing with respect to 254,777 shares took place on April 10,
2000, and closing with respect to 100,000 shares took place on May 4, 2000.
These agreements were signed with certain foreign persons in transactions exempt
from registration under the United States Securities Act of 1933 (the "Act")
pursuant to exemptions under Regulation S of the Act. The weighted average
purchase price of each share is $7.50. The aggregate amount of proceeds to the
Company from the private placement was $2.7 million. Under each of the
agreements, for each two shares of common stock purchased in the private
placement, the accredited investors were issued one warrant, expiring in each
case on the one year anniversary date of the subscription agreement, to purchase
a share of Euronet common stock at a weighted average exercise price of $12.50.
NOTE 8 - RECLASSIFICATION
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statements to conform to the 2000 unaudited consolidated
financial statements presentation.
8
<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 and sells and supports
software for electronic payment and transaction delivery systems. 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 that it serves, ("ATM Services"); and (2) producing application
software for payment and transaction delivery systems, ("Software Solutions").
In addition, the Company's management divides the ATM Services Segment into
three sub-segments: Central European ATM Operations (including Hungary, Poland,
the Czech Republic, Croatia and Romania), Western European ATM Operations
(including Germany, France and the United Kingdom) and Other ATM Operations
(including the United States and unallocated processing center costs). These
business segments, and their sub-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 Services").
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. Prior year segment information has been
restated to conform to the current year's presentation.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
1999
The Company's total revenues increased to $11.9 million for the three months
ended March 31, 2000 from $8.2 million for the three months ended March 31,
1999. The increase in revenues from 1999 to 2000 is primarily due to two
factors: (1) a $2.8 million increase in total ATM Services Segment revenues; and
(2) a $900,000 increase in Software Solutions Segment revenues. Revenues for the
three months ended March 31, 2000 and 1999 are discussed more fully in the
Segment Results of Operations sections below.
Total operating expenses increased to $19.1 million for the three months ended
March 31, 2000 from $15.9 million for the three months ended March 31, 1999. The
increase from 1999 to 2000 can be broken down by segment as follows: (1) a $1.6
million increase in ATM Services Segment operating costs, (2) a $1.3 million
increase in Software Solutions Segment operating costs, and (3) a $300,000
increase in Corporate Services Segment operating costs. Operating expenses for
the three months ended March 31, 2000 and 1999 are discussed more fully in the
Segment Results of Operations sections below.
The Company generated an operating loss of $7.2 million for the three months
ended March 31, 2000 compared to an operating loss of $7.7 million for the three
months ended March 31, 1999. The decreased operating loss from 1999 to 2000 is
due to the net effect of three factors: (1) a $1.2 million decrease in operating
losses from the Company's ATM Services Segment; (2) a $400,000 increase in
operating losses from the Company's Software Solutions Segment; and (3) a
$300,000 increase in operating losses from the Company's Corporate Services
Segment. Operating losses resulting from segment operations for the three months
ended March 31, 2000 and 1999 are discussed more fully in the Segment Results of
Operations section below.
9
<PAGE>
SEGMENT RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
(In thousands) Revenues Operating Loss
-------- --------------
Three months ended March 31, 2000 1999 2000 1999
- ----------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
ATM Services:
Central European ATM Operations $ 3,995 $2,565 $(1,231) $(2,697)
Western European ATM Operations 3,756 2,837 (1,484) (1,275)
Other ATM Operations 509 - (111) (145)
------- ------ ------- -------
Total ATM Services 8,260 5,402 (2,826) (4,117)
Software Solutions 3,723 2,812 (2,530) (2,095)
Corporate Services - - (1,843) (1,533)
Inter segment eliminations (45) (45) - -
------- ------ ------- -------
Total $11,938 $8,169 $(7,199) $(7,745)
======= ====== ======= =======
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
1999
ATM SERVICES SEGMENT
Revenues
Total segment revenues increased by $2.9 million or 54% to $8.3 million for the
three months ended March 31, 2000 from $5.4 million for the three months ended
March 31, 1999. The increase in revenues is due primarily to the significant
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. Revenues for the Central European Subsegment
totaled $4.0 million for the three months ended March 31, 2000 as compared to
$2.6 million for the three months ended March 31, 1999. The increase in revenues
is largely the result of an increase in the number of ATMs operated by the
Company from 1,092 at March 31, 1999 to 1,218 at March 31, 2000. Revenues for
the Western European Subsegment totaled $3.8 million for the three months ended
March 31, 2000 as compared to $2.8 million for the three months ended March 31,
1999. The increase in revenues is largely the result of an increase in the
number of ATMs operated by the Company from 465 at March 31, 1999 to 710 at
March 31, 2000. Revenues for the Other ATM Operations Subsegment were $509,000
for the three months ended March 3, 2000 as compared to zero for the three
months ended March 31, 1999. The increase in revenues is largely the result of
an increase in the number of ATMs operated by the Company from 0 at March 31,
1999 to 455 at March 31, 2000.
The Company had 1,557 ATMs installed as of March 31, 1999, and processed 5.9
million transactions for three months ended March 31, 1999. As of March 31,
2000, the Company's ATM network increased by 826 ATMs, or 53%, to a total of
2,383 ATMs, of which 70% are owned by the Company and 30% are owned by banks or
other financial institutions but operated by the Company through management
agreements. The Company processed 11.0 million transactions for the three months
ended March 31, 2000, an increase of 5.1 million transactions, or 86%, over the
three months ended March 31, 1999. The Company believes the shift from a largely
proprietary, Euronet-owned ATM network to a more balanced mix between
proprietary ATMs and customer-owned ATMs is an extremely positive development
and will provide substantially higher marginal returns on investments.
Of total segment revenue, approximately 88% is attributable to those ATMs owned
by the Company for the three months ended March 31, 2000 and 97% for the three
months ended March 31, 1999. Of total transactions processed, approximately 91%
is attributable to those ATMs owned by the Company for the three months ended
March 31, 2000 and 85% for the three months ended March 31, 1999.
Operating Expenses
Total segment operating expenses increased to $11.1 million for the three months
ended March 31, 2000 from $9.5 million for the three months ended March 31,
1999. The increases are due primarily to costs associated with the installation
of additional ATMs and expansion of the Company's operations during the periods.
10
<PAGE>
Direct operating costs in the ATM Services Segment consist primarily of: ATM
installation costs; ATM site rentals; and costs associated with maintaining
ATMs, ATM telecommunications, interest on network cash and cash delivery and
security services to ATMs. Such costs increased to $6.7 million for the three
months ended March 31, 2000 from $5.7 million for the three months ended March
31, 1999. In addition, 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
$800,000 for the three months ended March 31, 2000 and $700,000 for the three
months ended March 31, 1999. The components of direct operating costs for the
three months ended March 31, 2000 and 1999 were:
<TABLE>
<CAPTION>
(in thousands) Three months ending March 31,
-----------------------------
2000 1999
------ ------
<S> <C> <C>
ATM communication $1,027 $1,033
ATM cash filling and interest on network cash 1,889 1,623
ATM maintenance 982 616
ATM site rental 563 690
ATM installation 182 44
Transaction processing and ATM monitoring 1,336 938
Other 727 710
------ ------
Total direct operating expenses $6,706 $5,654
====== ======
</TABLE>
Segment salaries and benefits increased to $1.8 million for the three months
ended March 31, 2000 from $1.4 million for the three months ended March 31,
1999. The increase in the year-on-year expenses reflect the continued expansion
of the operations to Western European markets with significantly higher labor
costs than Central Europe as well as some increases in staff levels at the
processing center required to maintain quality service in line with the rising
transaction volumes.
Selling, general and administrative costs allocated to the ATM Services Segment
decreased to $530,000 for the three months ended March 31, 2000 from $660,000
for the three months ended March 31, 1999. The cost decrease for the three
months ended March 31, 2000 results largely from an increase in the allocation
of costs from the Budapest processing center to the direct operating cost of the
ATM network, due to an increase in the number of ATMs operated by the Company,
as discussed above.
Depreciation and amortization increased to $2.0 million for the three months
ended March 31, 2000 from $1.8 million for the three months ended March 31,
1999. The increases are due primarily to the increase in the number of owned
ATMs as discussed previously.
Operating Loss
The total ATM Services Segment operating loss decreased to $2.8 million for
three months ended March 31, 2000 compared to $4.1 million for the three months
ended March 31, 1999, as a result of the factors discussed above. The Central
European ATM Operations Subsegment operating loss decreased to $1.2 million for
three months ended March 31, 2000 compared to $2.7 million for the three months
ended March 31, 1999, as a result of the factors discussed above. The Western
European ATM Operations Subsegment operating loss increased to $1.5 million for
three months ended March 31, 2000 compared to $1.3 million for the three months
ended March 31, 1999, as a result of the factors discussed above. The Other ATM
Operations Subsegment operating loss decreased to $111,000 for three months
ended March 31, 2000 compared to $145,000 for the three months ended March 31,
1999, as a result of the factors discussed above.
ARKSYS SOFTWARE SOLUTIONS SEGMENT
Revenues
Total segment revenues increased by $900,000 or 33% to $3.7 million for the
three months ended March 31, 2000 from $2.8 million for the three months ended
March 31, 1999. Software Solutions Segment revenues are grouped into four broad
categories: software
11
<PAGE>
license fees, professional service fees, maintenance fees and hardware sales.
Software license fees are the initial fees charged by the Company for the
licensing of its proprietary application software to customers. Professional
service fees are charged for customization, installation and consulting services
provided to customers. Software maintenance fees are the ongoing fees charged to
customers for the maintenance of the software products. Hardware sales revenues
are derived from the sale or brokerage of computer products and are reported net
of cost of sales. The table below shows the components of segment revenues for
the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
(in thousands) Three months ending March 31,
------------------------------
2000 1999
------ ------
<S> <C> <C>
Software license fees $ 691 $ 249
Professional service fees 1,313 1,552
Maintenance fees 1,546 1,037
Hardware sales 173 (26)
------ ------
Total segment revenues $3,723 $2,812
====== ======
</TABLE>
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 March 31, 2000 the
revenue backlog was $2.7 million. At March 31, 1999 the revenue backlog was $5.3
million. The decrease in backlog from March 31, 1999 can be attributed to the
Company's efforts towards accelerating the delivery of software, in addition to
a slower rate of purchasing by banks as they allocated 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 a one-year period.
Operating Expenses
Software Solutions Segment operating expenses consist primarily of salaries and
benefits, selling, general and administrative, and depreciation and
amortization. Total segment operating expenses increased to $6.3 million for the
three months ended March 31, 2000 from $4.9 million for the three months ended
March 31, 1999.
The Company has made planned increases in 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, which has contributed to the net losses of
the Software Solutions Segment for the three-month periods ended March 31, 2000
and 1999.
The Company has an ongoing commitment to the development, maintenance and
enhancement of its products and services. As a result of this commitment the
Company has invested substantial amounts in research and development. The
Company's research and development costs incurred for computer products to be
sold, leased or otherwise marketed totaled $1.5 million for the three months
ended March 31, 2000 and $554,000 for the three months ended March 31, 1999.
In December 1999, $322,000 in development costs were capitalized in conjunction
with the Company's accounting policy requiring the capitalization of development
costs on a product by product basis once technological feasibility is
established. Technological feasibility of computer software products is
established when the Company has completed all planning, designing, coding, and
testing activities that are necessary to establish that the product can be
produced to meet its design specifications including functions, features, and
technical performance requirements.
12
<PAGE>
Of this amount $22,000 was expensed in the three-month period ended March 31,
2000.
Operating Loss
The Software Solutions Segment operating loss increased to $2.5 million for the
three months ended March 31, 2000 compared to $2.1 million for the three months
ended March 31, 1999, as a result of the factors discussed above.
CORPORATE SERVICES SEGMENT
Operating Expenses
Operating expenses for the Corporate Services Segment increased to $1.8 million
for the three months ended March 31, 2000 from $1.5 million for the three months
ended March 31, 1999. The Company's expansion of its network infrastructure, and
increases in corporate and administrative capabilities are the primary reasons
for these increased expenditures.
NON-OPERATING RESULTS
Interest Income
Interest income decreased to $300,000 for the three months ended March 31, 2000
from $500,000 for the three months ended March 31, 1999. The decrease is the
result of the decrease in investment securities and cash.
Interest Expense
Interest expense decreased to $2.5 million for the three months ended March 31,
2000 from $2.8 million for the three months ended March 31, 1999. The decrease
is the result of the Company's bond repurchases in 1999 and a reduction in the
U.S. dollar equivalent of interest on foreign currency debt due to devaluation
of the respective foreign currencies.
Foreign Exchange Gain/Loss
The Company had a net foreign exchange loss of $1.8 million for the three months
ended March 31, 2000, compared to a net foreign exchange gain of $300,000 for
the three months ended March 31, 1999. Exchange gains and losses that result
from re-measurement 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 Euros, including capital lease obligations, notes payable
(including the Notes issued in the Company's public bond offering), cash and
cash 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 gives rise to foreign
exchange gains and losses as a result of U.S. dollar to local currency exchange
movements.
Since issuing its Deutsche Mark (Euro) denominated 12 3/8% senior discount notes
(the "Senior Discount Notes") in June 1998, the Company has hedged exposure
resulting from foreign currency fluctuations that could affect the U.S. Dollar
equivalent of the amounts payable under such notes. On May 26, 1999, the Company
entered into several foreign exchange option contracts governed by an ISDA
Master Agreement with Merrill Lynch International Bank Limited ("ML") designed
to protect the Company against fluctuations of the Euro against the U.S. Dollar.
Under such contracts, if as of May 26, 2000 (the settlement date under such
contracts), the Euro has weakened against the dollar and falls below $1.0550 to
the Euro (the "Floor Rate") the Company will be required to make a cash payment
to ML on May 31, 2000 in an amount that will depend on the Dollar/Euro exchange
rate on such settlement date. At the same time, if the Euro has strengthened
against the U.S. Dollar and rises above $1.0835 to the Euro (the "Ceiling Rate")
the Company will receive a cash payment from ML on May 31, 2000 in an amount
that will depend on the Dollar/Euro exchange rate on such settlement date. The
Euro fell to below the Floor Rate for the first time in November 1999 and has
fluctuated both above and below such rate since that time. In the week of March
13, 2000, the Company entered into additional put option contracts to limit the
cash impact of the original put option contracts sold on May 26, 1999, should
the Euro close below $0.95 on May 26, 2000. As of March 31, 2000 the rate of the
Euro was $0.961 and the amount of cash on deposit with ML as collateral for the
Company's payment obligation under the foreign exchange option contracts was
13
<PAGE>
$7.4 million. As of May 12, 2000, the rate of the Euro was $0.92 and the amount
of cash on deposit with ML as collateral was $7.9 million. The amount of the
collateral on deposit corresponds approximately to the payment obligation that
the Company would incur under such option contracts as of the contract date,
which is May 26, 2000. If the Euro closes below $0.95 on May 26, 2000, the
Company's payment obligation will be $7.9 million.
Extraordinary Gain
In March 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 Senior
Discount 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 Company has not retired the bonds
repurchased.
Net Loss
The Company's net loss increased to $10.4 million during the three months ended
March 31, 2000 from $9.7 million for the three months ended March 31, 1999 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 Deutsche Mark 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 $85.5 million,
investments in property, plant and equipment of approximately $51.4 million and
acquisitions of $24.6 million.
At March 31, 2000 the Company had cash and cash equivalents of $7.4 million and
working capital of $8.1 million. The Company had $14.3 million of restricted
cash held as security with respect to cash provided by banks participating in
Euronet's ATM network, to cover guarantees on financial instruments and as
deposits with customs officials. (See Note 6 to the Unaudited Consolidated
Financial Statements). In addition to the assets held on the balance sheet at
March 31, 2000 the Company held repurchased notes payable with a face value of
48.4 million Deutsche Marks ($23.8 million) and a fair value at March 31, 2000
of $16.2 million.
On February 25, 2000 the Company entered into two subscription agreements for
the sale of an aggregate of 650,000 new common shares of the Company. Closing
under those agreements took place on March 13, 2000. These agreements were
signed with certain accredited investors in transactions exempt from
registration under the United States Securities Act of 1933 (the "Act") pursuant
to exemptions under Section 4(2) and Regulation D of the Act. The purchase price
of each share was $6.615, which represents ninety percent of the average closing
price for the ten trading days prior to and including February 15, 2000. The
aggregate amount of proceeds to the Company from the private placement was $4.3
million. Under each of the agreements, for each two shares of common stock
purchased in the private placement, the purchasers were issued one warrant to
purchase a share of Euronet common stock at an exercise price of $11.615,
expiring in each case on the one year anniversary date of the subscription
agreement.
In April 2000 the Company entered into two separate subscription agreements for
the sale of an aggregate of 354,777 new common shares of the Company. Of the
total new shares, closing with respect to 254,777 shares took place on April 10,
2000, and closing with respect to 100,000 shares took place on May 4, 2000.
These agreements were signed with certain foreign persons in transactions exempt
from registration under the United States Securities Act of 1933 (the "Act")
pursuant to exemption under Regulation S of the Act. The weighted average
purchase price of each share was $7.50. The aggregate amount of proceeds to the
Company from the private placement was $2.7 million. Under each of the
agreements, for each two shares of common stock purchased in the private
placement, the purchaser was issued one warrant to purchase a share of Euronet
common stock at a weighted average exercise price of $12.50, expiring in each
case on the one year anniversary date of the subscription agreement.
14
<PAGE>
The Company leases the majority of its ATMs under capital lease arrangements
that expire between 1999 and 2004. The leases bear interest between 8% and 12%
per annum. As of March 31, 2000 the Company owed $10.1 million under such
capital lease arrangements.
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. Fixed asset purchases and capital lease payments for the
remainder of 2000 are expected to be approximately $5.0 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.
Based on the Company's current business plan and financial projections, the
Company expects to reduce operating losses and net cash used in operating
activities in 2000. In the ATM Services Segment, the Company anticipates that
increased transaction levels in its ATM network will result in additional
revenues without a corresponding increase in expenses. In addition, the Company
expects to further expand its ATM outsourcing services and offer new value-added
services, which will provide continued revenue growth without significantly
increasing direct operating expenses or capital investments. In the Software
Solutions Segment, the Company expects increased revenues resulting from sales
of new products and services to the existing and expanded customer base
resulting from the continued integration of the Company's sales and customer
service organizations. The Company believes that the net proceeds from the
private placement of common shares described above and cash and cash equivalents
will provide the Company with sufficient cash resources until it achieves
positive cash flow. As a result, the Company believes it has sufficient
liquidity resources to meet current and future cash requirements. The Company
nevertheless has a policy of assessing opportunities for additional debt and
equity financing as they arise, and will pursue any such opportunities if the
Company considers that they may contribute to fulfilling its financial and
strategic business objectives.
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 flows in any future period.
BALANCE SHEET ITEMS
Cash and Cash Equivalents
The decrease of cash and cash equivalents to $7.4 million at March 31, 2000 from
$15.0 million at December 31, 1999 is due primarily to the net effects of
working capital movements, additional collateral requirements and operating
losses for the three months ended March 31, 2000. In addition, the Company
purchased a put option, discussed above for consideration of $1.2 million, and
recorded net proceeds of $4.3 million from a private placement of the Company's
stock as discussed in Note 5 of the Notes to the Unaudited Consolidated
Financial Statements.
Restricted Cash
Restricted cash increased to $14.3 million at March 31, 2000 from $10.9 million
at December 31, 1999. The majority of restricted cash was held to cover
guarantees for financial instruments. Restricted cash also represents funds held
as security with respect to cash provided in Hungary by banks participating in
Euronet's ATM network and as deposits with customs officials. The increase
relates to an additional deposits with respect to guarantees for financial
instruments.
Trade Accounts Receivable
Trade accounts receivable decreased to $7.3 million at March 31, 2000 from $7.9
million at December 31, 1999 due primarily to increased collections.
Property, Plant and Equipment
Net property, plant and equipment decreased to $34.7 million at March 31, 2000
from $36.7 million at December 31, 1999. This decrease is due primarily to
current period depreciation.
15
<PAGE>
Intangible Assets
Net intangible assets decreased to $15.4 million at March 31, 2000 from $16.3
million at December 31, 1999. This decrease is due primarily to the amortization
of purchased intangibles acquired in the Arksys acquisition in 1998, and the SBK
and Dash acquisitions in 1999.
Notes Payable
Notes payable decreased to $71.8 million at March 31, 2000 from $72.8 million at
December 31, 1999. This is the result of several transactions as follows:
<TABLE>
<S> <C>
Balance at December 31, 1999 $72.8
Unrealized foreign exchange gain (DEM vs. US$) (3.2)
Accretion of bond interest 2.2
-----
Balance at March 31, 2000 $71.8
</TABLE>
Total Stockholders' Deficit
Total stockholders' deficit increased to a deficit of $16.6 million at March 31,
2000 from $9.5 million at December 31, 1999. This is due to the net loss for the
three months ended March 31, 2000 of $11.3 million, offset by $4.3 million
received in the private placement described in Note 5 of the Notes to the
Unaudited Consolidated Financial Statements and an increase in the comprehensive
loss of 133,000.
Impact of New Accounting Pronouncements Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, 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. If
certain conditions are met, a derivative may be specifically designated as a
hedge in one of three categories described in the pronouncement. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting designation.
Under SFAS 133, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedge derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS 133 applies to all
entities and was originally effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
Initial application should be as of the beginning of an entity's fiscal quarter;
on that date, hedging relationships must be designated and documented pursuant
to the provisions of SFAS 133. Earlier application of all of the provisions is
encouraged but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of SFAS 133. Additionally, SFAS 133 should not be applied
retroactively to financial statements of prior periods. Management believes that
the adoption of SFAS 133 will not have a material impact on the Company's
consolidated financial statements. In June 1999, the FASB issued SFAS No. 137
which changed the effective adoption of SFAS 133 to financial years beginning
after June 15, 2000.
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. 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, (ii) trends affecting the Company's business,
(v) the adequacy of capital to meet the Company's capital requirements and
16
<PAGE>
expansion plans, (vi) the assumptions underlying the Company's business plans,
(vii) business strategy, (viii) government regulatory action, (ix) technological
advances and (x) 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 materially differ 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 Organization; 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
Foreign Exchange Exposure
For the three months ended March 31, 2000 28% of the Company's revenues were
generated in Poland and Hungary, as compared to 27% in 1999, 73% in 1998 and 99%
in 1997. The first quarter 2000 and 1999 figures have been substantially reduced
with the additional revenues from the Company's expanded ATM network in Germany.
In Hungary the majority of revenues received are denominated in Hungarian forint
and in Poland, the majority 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 $5.4 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.
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 it invests will fluctuate less against the Deutsche Mark than against the
Dollar. Accordingly, the Company believes that its Deutsche Mark denominated
debt provides, in the medium to long term, for a closer matching of assets and
liabilities than would Dollar denominated debt.
Since issuing its Deutsche Mark denominated 12 3/8% senior discount notes (the
"Senior Discount Notes") in June 1998, the Company has hedged exposure resulting
from foreign currency fluctuations that could affect the U.S. Dollar equivalent
of the amounts payable under such notes. On May 26, 1999, the Company entered
into several foreign exchange option contracts governed by an ISDA Master
Agreement with Merrill Lynch International Bank Limited ("ML") designed to
protect the Company against fluctuations of the Euro against the U.S. Dollar.
Under such contracts, if as of May 26, 2000 (the settlement date under such
contracts), the Euro has weakened against the dollar and falls below $1.0550 to
the Euro (the "Floor Rate") the Company will be required to make a cash payment
to ML on May 31, 2000 in an amount that will depend on the Dollar/Euro exchange
rate on such settlement date. At the same time, if the Euro has strengthened
against the U.S. Dollar and rises above $1.0835 to the Euro (the "Ceiling Rate")
the Company will receive a cash payment from ML on May 31, 2000 in an amount
that will depend on the Dollar/Euro exchange rate on such settlement date. The
Euro fell to below the Floor Rate for the first time in November 1999 and has
fluctuated both above and below such rate since that time. In the week of March
13, 2000, the Company entered into additional put option contracts to limit the
cash
17
<PAGE>
impact of the original put option contracts sold on May 26, 1999, should the
Euro close below $0.95 on May 26, 2000. As of March 31, 2000 the rate of the
Euro was $0.96 and the amount of cash on deposit with ML as collateral for the
Company's payment obligation under the foreign exchange option contracts was
$7.4 million. As of May 12, 2000, the rate of the Euro was $0.92 and the amount
of cash on deposit with ML as collateral was $7.9 million. The amount of the
collateral on deposit corresponds approximately to the payment obligation that
the Company would incur under such option contracts as of the contract date,
which is May 26, 2000. If the Euro closes below $0.95 on May 26, 2000, the
Company's payment obligation will be $7.9 million.
Inflation and Functional Currencies
In recent years, 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. Further, the majority of all three subsidiaries'
revenues are denominated in the local currency. Thus all three subsidiaries use
their local currency as the functional currency. The Polish and Czech
subsidiaries changed their functional currency to the respective local currency
as of January 1, 1998 and January 1, 1999, respectively, and the Hungarian
subsidiary changed as of July 1, 1999.
Germany, France and the United Kingdom 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 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.
Interest Rate Risk
The fair market value of the Company's long-term fixed interest rate debt is
subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as interest
rates rise. The estimated fair value of the Company's notes payable at March 31,
2000 was $65.1 million compared to a carrying value of $71.8 million. A 1%
increase from prevailing interest rates at March 31, 2000 would result in a
decrease in fair value of notes payable by approximately $3.4 million. Fair
values were determined from quoted market prices and from investment bankers
considering credit ratings and the remaining term to maturity.
PART II. OTHER INFORMATION
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
In April 2000 the Company entered into two separate subscription
agreements for the sale of an aggregate of 354,777 new common shares of
the Company. Of the total new shares, closing with respect to 254,777
shares took place on April 10, 2000, and closing with respect to
100,000 shares took place on May 4, 2000. These agreements were signed
with certain foreign persons in transactions exempt from registration
under the United States Securities Act of 1933 (the "Act") pursuant to
exemptions under Regulation S of the Act. The weighted average purchase
price of each share is $7.50. The aggregate amount of proceeds to the
Company from the private placement was $2.7 million. Under each of the
agreements, for each two shares of common stock purchased in the
private placement, the purchasers were issued one warrant, expiring in
each case on the one year anniversary date of the subscription
agreement, to purchase a share of Euronet common stock at a weighted
average exercise price of $12.50.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Company's annual meeting on May 11, 2000, the shareholders of
the Company's Common Stock, par value $0.02 per share voted to renew
the terms of three directors, as follows:
Director Voted in Favor Voted Against Abstain
------- ------------- ------------- -------
Thomas A. McDonnell 12,677,992 -- 87,100
Daniel R. Henry 12,485,792 -- 58,500
Steven J. Buckley 12,485,792 -- 59,100
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
18
<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.
May 15, 2000 By: /s/ MICHAEL J. BROWN
--------------------
Michael J. Brown
Chief Executive Officer
May 15, 2000 By: /s/ RICHARD P. HALKA
--------------------
Richard P. Halka
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
27 Financial Data Schedule
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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