<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, 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 October 31, 2000, the
Company had 17,787,824 common shares outstanding.
<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)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS Sept. 30, 2000 Dec. 31, 1999
------ --------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,239 $ 15,037
Restricted cash 2,069 10,929
Investment securities -- 750
Trade accounts receivable, net of allowances for doubtful accounts of
$332 at September 30, 2000 and $381 at December 31, 1999 8,191 7,888
Costs and estimated earnings in excess of billings on software
installation contracts 914 667
Income taxes receivable -- 818
Prepaid expenses and other current assets 3,504 3,695
--------- --------
Total current assets 25,917 39,784
Property, plant, and equipment, net 30,725 36,693
Intangible assets, net 2,594 16,259
Deposits 1,616 1,355
Deferred income taxes 404 460
Other assets, net 2,133 2,293
--------- --------
Total assets $ 63,389 $ 96,844
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Trade accounts payable $ 4,033 $ 5,768
Current installments of obligations under capital leases 3,574 4,188
Accrued expenses and other current liabilities 6,622 12,631
Advance payments on contracts 1,384 1,321
Billings in excess of costs and estimated earnings on software
installation contracts 2,382 3,030
--------- --------
Total current liabilities 17,995 26,938
Obligations under capital leases, excluding current installments 9,110 6,397
Notes payable 69,911 72,800
Other long-term liabilities 3 202
--------- --------
Total liabilities 97,019 106,337
--------- --------
Stockholders' deficit:
Common stock, $0.02 par value. Authorized 30,000,000 shares; issued and
outstanding 17,780,624 shares at September 30, 2000 and 15,541,956 at
December 31, 1999 353 311
Additional paid in capital 80,777 66,969
Treasury stock (33) (3)
Employee loans for stock purchases (672) (794)
Subscription receivable (50) (50)
Accumulated losses (111,823) (74,260)
Restricted reserve 782 784
Accumulated other comprehensive loss (2,964) (2,450)
--------- --------
Total stockholders' deficit (33,630) (9,493)
--------- --------
Total liabilities and stockholders' deficit $ 63,389 $ 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>
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
--------------------------- ----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
ATM network and related revenue $ 26,773 $ 18,366 $ 9,562 $ 7,036
Software, maintenance and related revenue 12,109 12,350 4,464 4,802
-------- -------- -------- --------
Total revenues 38,882 30,716 14,026 11,838
-------- -------- -------- --------
Operating expenses:
Direct operating costs 18,707 17,358 5,408 5,960
Salaries and benefits 22,200 18,376 7,814 6,529
Selling, general and administrative 8,333 8,097 3,107 2,404
Depreciation and amortization 8,061 7,184 2,624 2,544
Asset write-down 11,968 - 11,968 -
-------- -------- -------- --------
Total operating expenses 69,269 51,015 30,921 17,437
-------- -------- -------- --------
Operating loss (30,387) (20,299) (16,895) (5,599)
Other (expense)/income:
Interest income 926 1,462 187 461
Interest expense (7,548) (8,249) (2,505) (3,017)
Foreign exchange gain/(loss), net 284 (1,211) 4,202 (1,937)
-------- -------- -------- --------
Total other (expense)/income (6,338) (7,998) 1,884 (4,493)
-------- -------- -------- --------
Loss before income taxes and extraordinary item (36,725) (28,297) (15,011) (10,092)
Income taxes (838) -- (767) --
-------- -------- -------- --------
Loss before extraordinary item (37,563) (28,297) (15,778) (10,092)
Extraordinary gain on early retirement of debt, net
of applicable income taxes -- 1,810 -- 149
-------- -------- -------- --------
Net loss $(37,563) $(26,487) $(15,778) $ (9,943)
Other comprehensive loss:
Translation adjustment (514) (1,470) (65) (427)
-------- -------- -------- --------
Comprehensive loss $(38,077) $(27,957) $(15,843) $(10,370)
======== ======== ======== ========
Loss per share - basic and diluted:
Loss before extraordinary item $(2.36) $(1.86) $(0.90) $(0.66)
Extraordinary gain on early retirement of debt -- 0.12 -- 0.01
-------- -------- -------- --------
Net loss $(2.36) $(1.74) $(0.90) $(0.65)
======== ======== ======== ========
Weighted average number of shares outstanding 15,947,745 15,220,140 17,541,079 15,263,603
========== ========== ========== ==========
</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>
Nine months ended
September 30,
<S> <C> <C>
2000 1999
-------- --------
Cash flows from operating activities:
Net loss (37,563) (26,487)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 8,061 7,184
Asset write-down 11,968 -
Unrealized foreign exchange gains, net (8,970) (8,014)
Accretion of discount on notes 6,554 7,179
Gain on extinguishment of debt - (1,890)
Decrease in restricted cash 9,872 3,829
Increase in trade accounts receivable (303) (2,000)
Decrease/(increase) in prepaid expenses and other current assets 303 (1,789)
(Increase)/decrease in deposits on ATM leases (261) 785
(Decrease)/increase in trade accounts payable (1,279) 1,973
Decrease/(increase) in income taxes receivable 874 (1,805)
(Decrease)/increase in billings in excess of costs and estimated
earnings on software installation contracts, net (895) 1,617
(Decrease)/increase in accrued expenses and other liabilities (4,747) 318
Other 362 279
-------- --------
Net cash used in operating activities (16,024) (18,821)
-------- --------
Cash flows from investing activities:
Fixed asset purchases (1,363) (5,416)
Acquisition of subsidiaries - (7,840)
Proceeds from sale of fixed assets 923 210
Purchase of investment securities - (2,849)
Proceeds from maturity of investment securities - 2,795
-------- --------
Net cash used in investing activities (440) (13,100)
-------- --------
Cash flows from financing activities:
Cash received from/(loaned to) employees for the purchase of common stock 123 (640)
Proceeds from issuance of shares and other capital contributions 13,819 561
Repurchase of notes payable - (3,167)
Repayment of obligations under capital leases (1,556) (3,378)
(Repayment of)/proceeds from bank borrowings (14) 618
Other - 28
-------- --------
Net cash provided by/(used in) financing activities 12,372 (5,978)
-------- --------
Effects of exchange rate differences on cash 294 142
Net decrease in cash and cash equivalents (3,798) (37,757)
Cash and cash equivalents at beginning of period 15,037 55,614
-------- --------
Cash and cash equivalents at end of period $ 11,239 $ 17,857
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
EURONET SERVICES INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 2000, the results
of its operations for the three-month and nine-month periods ended September 30,
2000 and 1999 and cash flows for the nine-month periods ended September 30, 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 and nine-month periods ended
September 30, 2000 are not necessarily indicative of the results to be expected
for the full year.
The Company generated an operating loss of $30.4 million for the nine months
ended September 30, 2000 primarily due to the significant costs associated with
the expansion of its ATM network, investment in delivery, support, research and
development in its software subsidiary which was acquired in December 1998, as
well as a write-down of goodwill and other identifiable intangible assets
associated with the Company's Software Solutions Segment (see Note 8). In
addition, the Company generated negative cash flows from operations of $16.0
million for the nine months ended September 30, 2000, primarily due to the
significant costs associated with the expansion of its ATM network, investment
in delivery, support, research and development in its software subsidiary which
was acquired in December 1998, and settlement of currency option contracts (see
Note 6). 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 during the remainder of 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 to continue
its strategic repositioning of its software business from direct software sales
to software-only customers to more integrated solutions combining the strengths
of the Company's electronic financial transaction network system with its
software development strengths.
The Company believes that cash and cash equivalents at September 30, 2000 will
provide the Company with sufficient cash resources until it achieves positive
cash flow. In addition, the Company entered into an unsecured revolving credit
agreement (see Note 7) which provides a facility of up to $4.0 million, and the
Company held repurchased notes payable with a face value of 48.4 million
Deutsche Marks ($21.7 million) and a fair value at September 30, 2000 of $17.3
million. As of September 30, 2000, the Company had not made any draws against
the Credit Agreement. 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.
5
<PAGE>
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 - BUSINESS SEGMENT INFORMATION
Euronet and its subsidiaries operate in two business segments: (1) a segment
that provides an independent shared ATM network and other electronic payment
network services to banks, retail and financial institutions (the "ATM Services
Segment"); and (2) a segment that produces application software and solutions
for payment and transaction delivery systems (the "Software Solutions Segment").
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, (the "Corporate Services Segment").
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 period segment information has been
restated to conform to the current period'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"
(including Hungary, Poland, the Czech Republic, Croatia, Greece 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). Where practical, certain amounts have been
reclassified to reflect the change in internal reporting. The Company is unable
to present ATM Services Segment assets by subsegment as of September 30, 1999.
Prior to January 1, 2000, certain assets that were used to provide support
services to the Company as a whole were included in the assets in the balance
sheet of the Company's wholly owned Hungarian subsidiary, Euronet Banktechnikai
Szolgaltato Kft. ("Bank Tech"). In order to segregate corporate assets from
those of the Hungarian operations, these assets were transferred as of December
31, 1999, from Bank Tech to an existing Hungarian shell company, Euronet
Adminisztracios Szolgaltato Kft. ("Euronet 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 three-month and nine-month periods ended September 30, 2000 and September
30, 1999.
<TABLE>
<CAPTION>
(Unaudited)
(In thousands)
ATM Services
----------------
For the three months ended Central Western Other ATM Software Corporate
September 30, 2000 Europe Europe ATM Total Solutions Services Total
------- ------- ------ ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 4,886 $ 4,209 $ 467 $ 9,562 $ 4,509 $ - $ 14,071
Total operating expenses (4,997) (4,888) (614) (10,499) (18,293) (2,174) (30,966)
Operating loss (111) (679) (147) (937) (13,784) (2,174) (16,895)
Interest income 19 (39) 154 134 (24) 77 187
Interest expense (228) (43) (1) (272) - (2,233) (2,505)
Foreign exchange (loss)/gain, net (649) (206) (288) (1,143) 1 5,344 4,202
Net loss/(profit) before
income taxes $ (969) $ (967) $ (282) $ (2,218) $(13,807) $ 1,014 $(15,011)
Segment assets $ 24,710 $ 17,084 $ 3,104 $ 44,898 $ 6,842 $ 11,649 $ 63,389
Fixed assets 16,643 11,508 1,410 29,561 974 190 30,725
Depreciation and amortization 1,001 705 253 1,959 629 36 2,624
<CAPTION>
(Unaudited)
(In thousands)
ATM Services
----------------
For the Three months ended Central Western Other ATM Software Corporate
September 30, 1999 Europe Europe ATM Total Solutions Services Total
------- ------- ------ ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 3,380 $ 3,019 $ 637 $ 7,036 $ 4,847 $ -- $ 11,883
Total operating expenses (5,615) (3,982) (612) (10,209) (5,765) (1,508) (17,482)
Operating (loss)/income (2,235) (963) 25 (3,173) (918) (1,508) (5,599)
Interest income 137 9 7 153 20 288 461
Interest expense (212) (21) (21) (254) -- (2,763) (3,017)
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Foreign exchange (loss)/gain, net (185) 15 120 (50) -- (1,887) (1,937)
Net (loss)/profit before
income taxes $ (2,495) $ (960) $ 131 $ (3,324) $ (898) $ (5,870) $(10,092)
Segment assets n/a n/a n/a $ 58,967 $ 20,623 $ 20,803 $100,393
Fixed assets n/a n/a n/a 35,369 1,066 159 36,594
Depreciation and amortization n/a n/a n/a 1,968 538 38 2,544
<CAPTION>
(Unaudited)
(In thousands)
ATM Services
----------------
For the Three months ended Central Western Other ATM Software Corporate
September 30, 2000 Europe Europe ATM Total Solutions Services Total
------- ------- ------ ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 13,468 $ 11,907 $ 1,398 $ 26,773 $ 12,244 $ -- $ 39,017
Total operating expenses (15,718) (14,712) (1,740) (32,170) (31,029) (6,205) (69,404)
Operating loss (2,250) (2,805) (342) (5,397) (18,785) (6,205) (30,387)
Interest income 254 26 186 466 72 388 926
Interest expense (687) (122) (7) (816) -- (6,732) (7,548)
Foreign exchange (loss)/gain, net (1,435) (531) (697) (2,663) 1 2,946 284
Net loss before income taxes $ (4,118) $ (3,432) $ (860) $ (8,410) $(18,712) $ (9,603) $(36,725)
Segment assets $ 24,710 $ 17,084 $ 3,104 $ 44,898 $ 6,842 $ 11,649 $ 63,389
Fixed assets 16,643 11,508 1,410 29,561 974 190 30,725
Depreciation and amortization 2,942 2,200 867 6,009 1,894 158 8,061
<CAPTION>
(Unaudited)
(In thousands)
ATM Services
----------------
For the Three months ended Central Western Other ATM Software Corporate
September 30, 2000 Europe Europe ATM Total Solutions Services Total
------- ------- ------ ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 9,002 $ 8,727 $ 637 $ 18,366 $ 12,485 $ -- $ 30,851
Total operating expenses (16,076) (12,235) (1,380) (29,691) (16,519) (4,940) (51,150)
Operating loss (7,074) (3,508) (743) (11,325) (4,034) (4,940) (20,299)
Interest income 273 13 11 297 64 1,101 1,462
Interest expense (751) (73) (47) (871) -- (7,378) (8,249)
Foreign exchange (loss)/gain, net (217) -- 118 (99) 2 (1,114) (1,211)
Net loss before income taxes $ (7,769) $ (3,568) $ (661) $(11,998) $ (3,968) $(12,331) $(28,297)
Segment assets n/a n/a n/a $ 58,967 $ 20,623 $ 20,803 $100,393
Fixed assets n/a n/a n/a 35,369 1,066 159 36,594
Depreciation and amortization n/a n/a n/a 5,418 1,666 100 7,184
</TABLE>
The following is a reconciliation of the segmented information to the unaudited
consolidated financial statements.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
(in thousands) Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Total revenues for reportable segments $14,071 $11,883 $39,017 $30,851
Elimination of inter segment revenues (45) (45) (135) (135)
------- ------- ------- -------
Total consolidated revenues $14,026 $11,838 $38,882 $30,716
======= ======= ======= =======
</TABLE>
7
<PAGE>
Total revenues for the nine months ended September 30, 2000 and September 30,
1999 and long-lived assets as of September 30, 2000 and September 30, 1999 for
the Company analyzed by geographical location is as follows:
Total Revenues Long-lived Assets
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- --------- --------- ---------
United States $12,244 $13,120 $ 1,187 $ 1,138
Germany 7,286 8,116 4,691 7,283
Poland 6,489 4,045 9,186 9,661
Hungary 4,841 4,143 5,915 10,073
Other 8,157 1,427 9,746 8,439
------- ------- ------- -------
Total $39,017 $30,851 $30,725 $36,594
======= ======= ======= =======
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.
NOTE 5 - PRIVATE PLACEMENT OF COMMON SHARES
In July 2000 the Company entered into subscription agreements for the sale of
877,946 new common shares of the Company. Closing with respect to such sale took
place on July 14, 2000 and August 29, 2000. These agreements were signed with
accredited investors in transactions exempt from registration pursuant to the
exemptions provided in Section 4(2) and Regulation D of the Act. The purchase
price of each share was $6.97. The aggregate amount of proceeds to the Company
from the private placement was $6.1 million.
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 the exemption provided in 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 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.
In February 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 pursuant
to the exemptions provided in Section 4(2) and Regulation D of the Act. The
purchase price of each share was $6.615, which represents 90% 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
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 would be required to
make a cash payment to Merrill Lynch on May 31, 2000, should the Euro weaken
against the US Dollar and fall below $1.055 (the "Floor Rate") on the Settlement
Date. At the same time, should the Euro strengthen against the U.S. dollar and
rise above $1.0835 to the Euro (the "Ceiling Rate") the Company would receive a
cash payment from Merrill Lynch 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 was required to cash collateralize the net fair value of such
options contracts measured on a mark-to-market basis, and on May 26, 2000, the
Company had on deposit $8.3 million with Merrill Lynch.
On May 26, 2000, the rate of the Euro was $0.9118 and the Company settled the
above option contracts in the amount of $8.3 million resulting in a total net
loss on such contracts of $10.3 million inclusive of the cost of the contracts.
At September 30, 2000, the Company had not entered into any further option
contracts.
8
<PAGE>
NOTE 7 - CREDIT FACILITY
On June 30, 2000 the Company entered into an unsecured revolving credit
agreement (the "Credit Agreement"). The Credit Agreement provides a facility of
up to $4.0 million from three shareholders of the Company as follows: DST
Systems Inc. in the amount of $2.4 million; Hungarian-American Enterprise Fund
in the amount of $1.0 million; and Michael J. Brown in the amount of $600,000.
The facility may be drawn upon until December 28, 2000, and repayments of any
draws are due June 30, 2001. Draws on the facility will accrue interest at 10
percent per annum, payable quarterly. The Company paid a facility fee, in the
form of warrants of the Company's stock, of 100,000 warrants issued pro-rata to
the lenders with a warrant strike price of $7.00 (90% of the average price of
the Company's shares, as quoted on the NASDAQ SmallCap market for 10 trading
days prior to the warrant issue date). Additional warrants are issued on similar
terms and conditions for each draw on the facility at the rate of 80,000
warrants for each $1.0 million of funds drawn. As of September 30, 2000, the
Company had not made any draws against the Credit Agreement.
NOTE 8 - ASSET WRITE-DOWN
On a periodic basis, the Company estimates the future undiscounted cash flows of
the business to which goodwill and other identifiable intangible assets relates
in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". When such an estimate of
the future undiscounted cash flows, net of the carrying amount of tangible net
assets, is less than the carrying amount of goodwill and other identifiable
intangible assets, impairment is recognized. During the third quarter of 2000,
the Company reduced the carrying value of certain assets. The asset write-downs
totaled $12.0 million, of which $11.2 million related to goodwill and other
identifiable intangible assets associated with the Company's acquisition of
Arkansas Systems, Inc. ("Arksys) in December 1998. The remaining $800,000 write-
down related to the Company's ATM hardware inventory acquired associated with
the Company's acquisition of the SBK ATM network in Germany and the Budapest
Bank ATM network in Hungary.
As a result of the Company's inability to achieve operating improvements,
including software licence and service orders for Arksys's traditional core
product (ITM) and cost reductions, the Software Solutions Segment continued
operating at a loss through the first three quarters of 2000. The Company
calculated the expected cash flows of the Company's Software Solutions Segment,
which identified an impairment of its long-lived assets. Accordingly, in the
third quarter of 2000, the Company recorded an impairment charge based on the
present value of expected cash flows of $11.2 million for the write-down of
goodwill and other identifiable intangible assets recorded upon the acquisition
of Arksys. The Company considers the rapidly changing business environment
surrounding electronic transaction payment systems software to be a primary
indicator of any potential impairment of goodwill and other identifiable
intangible assets related to the Company's Software Solutions Segment. The
Company is in the process of repositioning Arksys in the market through
development and release of a new set of products that are independent of
Arksys's traditional core product lines, including a new, platform independent
Java based transaction processing software package with wireless banking and
messaging modules and a set of mobile phone prepaid recharge solutions. It has
become apparent, based on market reaction to these new products, that these new
products and solutions rather than Arksys's traditional ITM solution will be the
primary source of software solutions revenues going forward.
In order to determine the extent of the asset impairment and the related asset
write-down, the Company estimated the discounted cash flows of the Software
Solutions Segment products and services in determining the fair value of the
goodwill and related identifiable intangible assets. The Company's estimate was
based on historical results which have shown recurring operating losses since
acquisition, current projections, and internal earnings targets, net of
applicable taxes. The Company's discounted cash flow analysis indicated that the
carrying value of intangible assets related to Arksys should be reduced to zero
as of September 30, 2000. The net book value of the intangible assets prior to
the write down was $11.2 million.
The asset write-down is disclosed as a separate operating expense item in the
Company's Consolidated Statements of Operations and Comprehensive Loss.
9
<PAGE>
The table below summarizes the Company's intangible assets as of September 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
(in thousands) September 30 December 31
2000 1999
------ -------
<S> <C> <C>
Goodwill $2,973 $10,641
Developed technology - 5,700
Assembled workforce - 1,130
Installed base - 1,080
Distributor/agent relationships - 380
Trade name - 400
------ -------
2,973 19,331
Less: accumulated amortization (379) (3,072)
------ -------
Total $2,594 $16,259
====== =======
</TABLE>
The Company periodically reviews the recorded values of its long-lived assets to
determine if future cash flows to be derived from these assets will be
sufficient to recover the remaining recorded asset values. A portion of the ATM
hardware assets acquired with the Budapest Bank and Service Bank ATM network
purchases were deemed technologically inferior relative to the Company's
standards. Specifically, these assets were not technologically advanced to
support the entire current and future set of transactions the Company typically
offers to users of its ATM network. As a result of this analysis, the Company
recorded a non-cash charge of $800,000 related to a reduction in the carrying
value of ATM hardware, adjusting to its net realizable value.
NOTE 9 - RECLASSIFICATION
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statements to conform to the 2000 unaudited consolidated
financial statements presentation.
10
<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) a segment
that provides an independent shared ATM network and other ATM services to banks
and financial institutions (the "ATM Services Segment"); and (2) a segment that
produces application software and solutions for payment and transaction delivery
systems (the "Software Solutions Segment"). 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, Greece 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 period segment information has been
restated to conform to the current period's presentation.
During the year 2000, the Company began offering a new set of solutions to
mobile phone companies and banks, including solutions facilitating the purchase
of prepaid mobile phone time ("Prepaid Recharge Solutions") and wireless banking
("Wireless Banking Solutions"). The Prepaid Recharge Solutions are offered to
mobile phone companies and involve processing transactions initiated by mobile
phone users on ATMs (including in particular ATMs owned or operated by the
Company), POS terminals, PCs connected to the internet, the mobile phones
themselves or other wireless devices. These transactions are routed to
Euronet's processing centers, then to card issuers to obtain authorization of a
card transaction, and finally to the mobile phone company to open up the prepaid
phone time purchased on the mobile phone user's account. The Wireless Banking
Solutions are sold to banks and permit individuals to access their bank account
information and initiate transactions from wireless devices and permit banks to
send messages regarding events occurring on their customers' accounts to the
customers' mobile phones. Revenues from these solutions were not significant
for three month period ended September 30, but are increasing as contracts are
signed with more mobile phone companies. Based on indications of interest from
the market, the Company believes this emerging area of its business will grow
rapidly.
SEGMENT RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
(In thousands) Revenues Operating Profit/(Loss)
------------------ -------------------------
Three months ended September 30, 2000 1999 2000 1999
----------------------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
ATM Services:
Central European ATM Operations $ 4,886 $ 3,380 $ (111) $ (2,235)
Western European ATM Operations 4,209 3,019 (679) (963)
Other ATM Operations 467 637 (147) 25
------- ------- -------- --------
Total ATM Services 9,562 7,036 (937) (3,173)
Software Solutions 4,509 4,847 (13,784) (918)
Corporate Services - - (2,174) (1,508)
Inter segment eliminations (45) (45) - -
------- ------- -------- --------
Total $14,026 $11,838 $(16,895) $ (5,599)
======= ======= ======== ========
<CAPTION>
(Unaudited) Operating
(In thousands) Revenues Profit/(Loss)
----------------- ---------------------
Nine months ended September 30, 2000 1999 2000 1999
------------------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
ATM Services:
Central European ATM Operations $13,468 $ 9,002 $ (2,250) $ (7,074)
Western European ATM Operations 11,907 8,727 (2,805) (3,508)
Other ATM Operations 1,398 637 (342) (743)
------- ------- -------- --------
Total ATM Services 26,773 18,366 (5,397) (11,325)
Software Solutions 12,244 12,485 (18,785) (4,034)
Corporate Services - - (6,205) (4,940)
Inter segment eliminations (135) (135) - -
------- ------- -------- --------
Total $38,882 $30,716 $(30,387) $(20,299)
======= ======= ======== ========
</TABLE>
11
<PAGE>
COMPARISON OF OPERATING RESULTS THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
ATM SERVICES SEGMENT
Revenues
Total segment revenues increased by $2.6 million or 37% to $9.6 million for the
three months ended September 30, 2000 from $7.0 million for the three months
ended September 30, 1999, and by $8.4 million or 46% to $26.8 million for the
nine months ended September 30, 2000 from $18.4 million for the nine months
ended September 30, 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 $4.9 million for the three
months ended September 30, 2000 as compared to $3.4 million for the three months
ended September 30, 1999 and $13.5 million for the nine months ended September
30, 2000 as compared to $9.0 million for the nine months ended September 30,
1999. The increase in revenues is largely the result of an increase in the
number of ATMs operated by the Company from 1,167 at September 30, 1999 to 1,359
at September 30, 2000, and increased transaction volumes. Revenues for the
Western European Subsegment totaled $4.2 million for the three months ended
September 30, 2000 as compared to $3.0 million for the three months ended
September 30, 1999 and $11.9 million for the nine months ended September 30,
2000 as compared to $8.7 million for the nine months ended September 30, 1999.
The increase in revenues is largely the result of an increase in the number of
ATMs operated by the Company from 516 at September 30, 1999 to 763 at September
30, 2000, and increased transaction volumes. Revenues for the Other ATM
Operations Subsegment were $467,000 for the three months ended September 30,
2000 as compared to $637,000 for the three months ended September 30, 1999 and
$1.4 million for the nine months ended September 30, 2000 as compared to
$637,000 for the nine months ended September 30, 1999. The revenues from this
segment are the result of the acquisition of the Dash Network located in the
United States in August 1999.
In total, the Company had 1,817 ATMs installed as of September 30, 1999, and
processed 9.4 million transactions for the three months ended September 30, 1999
and 22.2 million transactions for the nine months ended September 30, 1999. As
of September 30, 2000, the Company's ATM network increased by 754 ATMs, or 41%,
to a total of 2,571 ATMs, of which 73% are owned by the Company and 27% are
owned by banks or other financial institutions but operated by the Company
through management agreements. The Company processed 13.8 million transactions
for the three months ended September 30, 2000, an increase of 4.4 million
transactions, or 47%, over the three months ended September 30, 1999. The
Company processed 37.7 million transactions for the nine months ended September
30, 2000, an increase of 15.5 million transactions, or 70%, over the nine months
ended September 30, 1999.
Of total segment revenue, approximately 86% is attributable to those ATMs owned
by the Company for the three months ended September 30, 2000 and 92% for the
three months ended September 30, 1999. Of total transactions processed,
approximately 77% is attributable to those ATMs owned by the Company for the
three months ended September 30, 2000 and 77% for the three months ended
September 30, 1999. In addition, of total segment revenue approximately 86% is
attributable to those ATMs owned by the Company for the nine months ended
September 30, 2000 and 95% for the
12
<PAGE>
nine months ended September 30, 1999. Of total transactions processed,
approximately 77% is attributable to those ATMs owned by the Company for the
nine months ended September 30, 2000 and 83% for the nine months ended September
30, 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 higher marginal
returns on investments.
Transaction fees payable under the Prepaid Recharge Solutions and Wireless
Banking Solutions are included in ATM Services Segment Revenues.
Operating Expenses
Total segment operating expenses increased to $10.5 million for the three months
ended September 30, 2000 from $10.2 million for the three months ended September
30, 1999 and to $32.2 million for the nine months ended September 30, 2000 from
$29.7 million for the nine months ended September 30, 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.
The Company recorded an $800,000 write-down of certain ATM hardware assets
associated with the purchase of the Budapest Bank ATM network in May 2000 and
the Service Bank ATM network in March 1999 (see Note 8). In addition, the
Company recorded a one-time gain in its Central European Subsegment of $1.2
million. The gain is related to a change in Hungarian law that eliminates a
major portion of the Company's liability for import taxes on ATM hardware to the
Hungarian government. The gain is included as an element of direct operating
costs.
Direct operating costs in the ATM Services Segment consist primarily of: ATM
installation costs, ATM site rental costs, costs associated with maintaining
ATMs, ATM telecommunication costs, interest on network cash and cash delivery
and security services to ATMs. Such costs decreased to $5.3 million for the
three months ended September 30, 2000 from $5.6 million for the three months
ended September 30, 1999 and increased to $18.3 million for the nine months
ended September 30, 2000 from $16.7 million for the nine months ended September
30, 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 totaled
$1.0 million for the three months ended September 30, 2000 and $800,000 for the
three months ended September 30, 1999 and $3.0 million for the nine months ended
September 30, 2000 and $2.2 million for the nine months ended September 30,
1999. The components of direct operating costs for the three months and nine
months ended September 30, 2000 and 1999 were:
<TABLE>
<CAPTION>
Three months ended Nine months ended
(Unaudited) September 30, September 30,
(in thousands) 2000 1999 2000 1999
------- ------ ------- -------
<S> <C> <C> <C> <C>
ATM communication $ 955 $ 981 $ 3,041 $ 3,021
ATM cash filling and interest on network cash 1,798 1,278 5,468 4,115
ATM maintenance 1,008 873 2,941 2,257
ATM site rental 547 617 1,655 1,942
ATM installation 70 315 567 643
Transaction processing and ATM monitoring 1,363 1,033 3,898 2,951
Other 697 431 1,876 1,725
Gain on import-duty (1,166) - (1,166) -
------- ------ ------- -------
Total direct operating costs $ 5,272 $5,638 $18,280 $16,654
======= ====== ======= =======
</TABLE>
Segment salaries and benefits were $1.8 million for the three months ended
September 30, 2000 as compared to $1.8 million for the three months ended
September 30, 1999 and increased to $5.5 million for the nine months ended
September 30, 2000 from $5.4 million for the nine months ended September 30,
1999. The largely flat year-on-year expenses reflect the Company's efforts to
control costs, and indicate the Company's current staffing in both Central and
Western Europe are sufficient to maintain current operational activities.
Selling, general and administrative costs allocated to the ATM Services Segment
decreased to $700,000 for the three months ended September 30, 2000 from
$800,000 for the three months ended September 30, 1999 and to $1.6 million for
the nine months ended September 30, 2000 from $2.2 million for the nine months
ended September 30, 1999. The cost decreases for the three months and nine
months ended September 30, 2000, result largely from increases in the allocation
of costs from the Budapest processing center to the direct operating costs of
the ATM network, due to an increase in the number of ATMs operated by the
Company, as discussed above.
13
<PAGE>
Depreciation and amortization charges were $2.0 million for the three months
ended September 30, 2000 as compared to $2.0 million for the three months ended
September 30, 1999 and increased to $6.0 million for the nine months ended
September 30, 2000 from $5.4 million for the nine months ended September 30,
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 $937,000 for three
months ended September 30, 2000 from $3.2 million for the three months ended
September 30, 1999 and to $5.4 million for the nine months ended September 30,
2000 from $11.3 million for the nine months ended September 30, 1999, as a
result of the factors discussed above. The Central European ATM Operations
Subsegment recorded an operating loss of $111,000 for the three months ended
September 30, 2000 compared to a loss of $2.2 million for the three months ended
September 30, 1999 and a loss of $2.3 million for the nine months ended
September 30, 2000 from $7.1 million for the nine months ended September 30,
1999, as a result of the factors discussed above. The Western European ATM
Operations Subsegment operating loss decreased to $679,000 for three months
ended September 30, 2000 compared to $963,000 for the three months ended
September 30, 1999 and to $2.8 million for the nine months ended September 30,
2000 from $3.5 million for the nine months ended September 30, 1999, as a result
of the factors discussed above. The Other ATM Operations Subsegment incurred an
operating loss of $147,000 for the three months ended September 30, 2000
compared to an operating profit of $25,000 for the three months ended September
30, 1999 and an operating loss of $342,000 for the nine months ended September
30, 2000, down from $743,000 for the nine months ended September 30, 1999, as a
result of the factors discussed above.
SOFTWARE SOLUTIONS SEGMENT
Revenues
Total segment revenues decreased by $300,000 or 7% to $4.5 million for the three
months ended September 30, 2000 from $4.8 million for the three months ended
September 30, 1999, and by $300,000 or 2% to $12.2 million for the nine months
ended September 30, 2000 from $12.5 million for the nine months ended September
30, 1999.
Software Solutions Segment revenues are grouped into four broad categories:
software 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 September 30, 2000 and 1999 and for the nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
(Unaudited) September 30, September 30,
(in thousands) 2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Software license fees $1,314 $ 424 $ 3,294 $ 1,593
Professional service fees 2,035 3,271 4,978 7,469
Maintenance fees 988 1,015 3,534 3,302
Hardware sales 172 137 438 121
------ ------ ------- -------
Total segment revenues $4,509 $4,847 $12,244 $12,485
====== ====== ======= =======
</TABLE>
The increases in software license fees from 1999 to 2000 can be attributed to an
increased number of software sales contracts signed in 2000 as compared to 1999,
primarily in the first half of the year 2000. Sales of Arksys's core products
have dropped off substantially in the third quarter 2000 and are expected to be
soft again during the last quarter. The Company believes that revenues of the
Software Solutions Segment will increasingly be derived from the Company's new
set of software solutions, including its Wireless Banking Solutions.
The decreases in Professional service fees from 1999 to 2000 can be attributed
to the Company's reduction of its software sales backlog in the second and third
quarters of 2000.
14
<PAGE>
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 September 30, 2000 the
revenue backlog was $3.7 million compared to $2.6 million at September 30, 1999.
The increase in backlog can be attributed to the Company's efforts towards
improving delivery, balanced with increasing software sales. 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 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. In addition, the Company recorded a $11.2 million one-time write-
down of goodwill and other identifiable intangible assets associated with the
Company's purchase of Arksys in December 1998 (see Note 8). Total segment
operating expenses increased to $18.3 million for the three months ended
September 30, 2000 from $5.8 million for the three months ended September 30,
1999 and $31.0 million for the nine months ended September 30, 2000 from $16.5
million for the nine months ended September 30, 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 and nine -month periods ended
September 30, 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. In
particular, the Company has invested and will continue to invest in new software
products that will serve as the underlying application software that permits
additional features and transactions on the Company's ATM network. In addition,
the Company continues to invest in the on-going development of products that
were recently introduced to the market. The Company's research and development
costs incurred for computer products to be sold, leased or otherwise marketed
increased to $2.1 million for the three months ended September 30, 2000 from
$1.0 million for the three months ended September 30, 1999 and to $5.7 million
for the nine months ended September 30, 2000 from $2.4 million for the nine
months ended September 30, 1999.
Operating Loss
The Software Solutions Segment operating loss increased to $13.8 million for the
three months ended September 30, 2000 from $918,000 for the three months ended
September 30, 1999 and to $18.8 million for the nine months ended September 30,
2000 from $4.0 million for the nine months ended September 30, 1999, as a result
of the factors discussed above.
CORPORATE SERVICES SEGMENT
Operating Expenses
Operating expenses for the Corporate Services Segment increased to $2.2 million
for the three months ended September 30, 2000 from $1.5 million for the three
months ended September 30, 1999 and to $6.2 million for the nine months ended
September 30, 2000 from $4.9 million for the nine months ended September 30,
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 $187,000 for the three months ended September 30,
2000 from $461,000 for the three months ended September 30, 1999 and to $926,000
for the nine months ended September 30, 2000 from $1.5 million for the nine
months ended September 30, 1999. The decrease is the result of the decrease in
investment securities and cash.
15
<PAGE>
Interest Expense
Interest expense decreased to $2.5 million for the three months ended September
30, 2000 from $3.0 million for the three months ended September 30, 1999 and
decreased to $7.5 million for the nine months ended September 30, 2000 from $8.2
million for the nine months ended September 30, 1999. The decrease for the three
and nine months ended September 30, 2000 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 gain of $4.2 million for the three months
ended September 30, 2000, compared to a loss of $1.9 million for the three
months ended September 30, 1999 and a net foreign exchange gain of $284,000 for
the nine months ended September 30, 2000 compared to a loss of $1.2 million for
the nine months ended September 30, 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), and cash and
cash equivalents. 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.
From the time of issuance of its Deutsche Mark (Euro) denominated 12 3/8% senior
discount notes (the "Senior Discount Notes") in June 1998 until May 31, 2000,
the Company hedged its 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"). Under such contracts, if as of May 26, 2000 (the settlement
date under such contracts), the Euro weakened against the dollar and fell below
$1.0550 to the Euro (the "Floor Rate") the Company would be required to make a
cash payment to ML on May 31, 2000 in an amount that depended on the Dollar/Euro
exchange rate on such settlement date. At the same time, if the Euro
strengthened against the U.S. Dollar and rose above $1.0835 to the Euro (the
"Ceiling Rate") the Company would have received a cash payment from ML on May
31, 2000 in an amount that depended on the Dollar/Euro exchange rate on the
settlement date. 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.
On May 26, 2000, the rate of the Euro was $0.9118 and the Company settled the
above option contracts in the amount of $8.3 million resulting in a total net
loss on such contracts of $10.3 million inclusive of the cost of the contracts.
Of the total amount, $0 was recorded in the three-month period ended September
30, 2000 and $6.2 million was recorded in the nine-month period ended September
30, 2000. At September 30, 2000, the Company had not entered into any further
option contracts.
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 nine months ended September 30, 2000. The
Company has not retired the bonds repurchased.
16
<PAGE>
Net Loss
The Company's net loss increased to $15.8 million during the three months ended
September 30, 2000 from $9.9 million for the three months ended September 30,
1999 and $37.6 for the nine months ended September 30, 2000 from $26.5 for the
nine months ended September 30, 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 since inception of approximately $111.8
million, investments in property, plant and equipment of approximately $48.9
million and acquisitions of $24.6 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 exemptions provided in 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 exemption provided in 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.
In July 2000 the Company entered into subscription agreements for the sale of
877,946 new common shares of the Company. These agreements were signed with
accredited investors in transactions exempt from registration pursuant to the
exemptions provided in Section 4(2) and Regulation D of the Act. Closing with
respect to such sale took place on July 14 and August 29, 2000. The purchase
price of each share was $6.97. The aggregate amount of proceeds to the Company
from the private placement was $6.1 million.
The Company leases the majority of its ATMs under capital lease arrangements
that expire between 2000 and 2004. The leases bear interest between 8% and 12%
per annum. As of September 30, 2000 the Company owed $12.7 million under such
capital lease arrangements.
At September 30, 2000 the Company had cash and cash equivalents of $11.2 million
and working capital of $7.9 million. The Company had $2.1 million of restricted
cash held as security with respect to cash provided by banks participating in
Euronet's ATM network and as deposits with customs officials. In addition to the
assets held on the balance sheet at September 30, 2000 the Company held
repurchased notes payable with a face value of 48.4 million Deutsche Marks
($21.7 million) and a fair value at September 30, 2000 of $17.3 million.
Furthermore, on June 30, 2000 the Company entered into an unsecured revolving
credit agreement (the "Credit Agreement"). The Credit Agreement provides a
facility of up to $4.0 million from three shareholders as follows: DST Systems
in the amount of $2.4 million; Hungarian-American Enterprise Fund in the amount
of $1.0 million; and Michael J. Brown in the amount of $600,000. The facility
may be drawn upon until September 30, 2000, and repayments of any draws are due
June 30, 2001. Draws on the facility will accrue interest at 10 percent per
annum, payable quarterly. In addition, the facility has a fee of 100,000
warrants issued pro- rata to the lenders with a warrant strike price at the
average share price, as quoted on NASDAQ for 10 trading days prior to the
warrant issue date, less 10 percent. Additional warrants are issued on similar
terms and conditions for each draw on the facility at the rate of 80,000
warrants
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for each $1.0 million of funds drawn. As of September 30, 2000, the Company had
not made any draws against the Credit Agreement.
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 $1.4 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 continue to reduce operating losses and net cash used in
operating activities for the remainder of 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 placements of common shares described above and cash
and cash equivalents will provide the Company with sufficient cash resources
until it achieves positive cash flow from operations. 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.
BALANCE SHEET ITEMS
Cash and Cash Equivalents
The decrease of cash and cash equivalents to $11.2 million at September 30, 2000
from $15.0 million at December 31, 1999 is due primarily to the net effects of
working capital movements and operating losses for the nine months ended
September 30, 2000. In addition, the Company recorded net proceeds of $13.1
million from private placements of the Company's stock as discussed in Note 5 of
the Notes to the Unaudited Consolidated Financial Statements.
Restricted Cash
Restricted cash decreased to $2.1 million at September 30, 2000 from $10.9
million at December 31, 1999. Restricted cash represents funds held as security
with respect to cash provided by banks participating in the Company's ATM
network and as deposits with customs officials. The decrease resulted primarily
from the settlement of the Merrill Lynch option contracts using restricted cash
as discussed above, and a release of restricted cash resulting from the posting
of a surety bond with the Hungarian banking institution that supplies cash to
the Company's ATM network.
Trade Accounts Receivable
Trade accounts receivable increased slightly to $8.2 million at September 30,
2000 from $7.9 million at December 31, 1999 due primarily to increased software
sales in the current year and ATM transaction revenues.
Property, Plant and Equipment
Net property, plant and equipment decreased to $30.7 million at September 30,
2000 from $36.7 million at December 31, 1999. This decrease is due primarily to
recognizing fixed asset depreciation in excess of fixed asset additions, and the
write-off of $800,000 in ATM hardware (see Note 8).
Intangible Assets
Net intangible assets decreased to $2.6 million at September 30, 2000 from $16.3
million at December 31, 1999. This decrease is due primarily to the $11.2
million write-down of goodwill and other identifiable intangible assets
associated with the Software Solutions Segment (see Note 8). In addition, the
decrease is the result of amortization of purchased intangibles acquired in the
Arksys acquisition in 1998, and the SBK and Dash acquisitions in 1999.
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<PAGE>
Current liabilities
Current liabilities decreased to $18.0 million at September 30, 2000 from $26.9
million at December 31, 1999. This decrease is due primarily to decreases in
accrued expenses, billings in excess of costs and estimated earnings on software
installation costs and settlement of the Merrill Lynch option contracts.
Notes Payable
Notes payable decreased to $69.9 million at September 30, 2000 from $72.8
million at December 31, 1999. This is the result of several transactions as
follows:
Balance at December 31, 1999 $72.8
Unrealized foreign exchange gain (DEM vs. USD) (9.5)
Accretion of bond interest 6.6
-----
Balance at September 30, 2000 $69.9
=====
Capital Leases
Total capital lease obligations including current installments increased to
$12.7 million at September 30, 2000 from $10.6 million at December 31, 1999.
This increase is due primarily to additional capital leases resulting from the
Company's purchase of Budapest Bank's ATM network, consisting of 147 ATMs on May
1, 2000.
Total Stockholders' Deficit
Total stockholders' deficit increased to a deficit of $33.6 million at September
30, 2000 from $9.5 million at December 31, 1999. This is due to the net loss for
the nine months ended September 30, 2000 of $37.6 million, offset by $13.1
million received in the private placement described in Note 5 of the Notes to
the Unaudited Consolidated Financial Statements and an increase in the
accumulated comprehensive loss of $500,000.
Impact of New Accounting Pronouncements Not Yet Adopted
SFAS 133
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133, as amended by FASB
Statement No. 137 and 138, 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, as amended, is 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.
SAB 101
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), on December 3, 1999.
SAB 101 provides additional guidance on the application of existing generally
accepted accounting principles to revenue recognition in financial statements.
The Company does not expect the guidance of SAB 101 to have a material effect
on its financial statements.
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FIN 44
The Financial Accounting Standards Board (FASB) issued Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation (FIN No. 44),
in March 2000. This interpretation clarifies the application of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, with
respect to certain issues in accounting for employee stock compensation and is
generally effective as of July 1, 2000. The Company does not expect FIN 44 to
have a material effect on its financial statements.
SFAS 140
The FASB issued Statement of Financial Accounting Standard No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (SFAS No. 140). SFAS No. 140 replaces SFAS No. 125 as it revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001 and in certain limited instances can
be applied early. SFAS No. 140 requires recognition and reclassification of
collateral and for disclosures relating to securitzation and collateral for
fiscal years ending after December 15, 2000.The Company does not expect SFAS No.
140 to have a material effect on its financial statements.
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
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.
20
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
Foreign Exchange Exposure
For the nine months ended September 30, 2000 29% 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 nine-month 2000 and 1999 figures have been substantially reduced
with the additional revenues from the Company's expanded ATM network in Germany,
the UK and the US. 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 $6.4 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.
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 September
30, 2000 was $57.0 million compared to a carrying value of $69.9 million. A 1%
increase from prevailing interest rates at September 30, 2000 would result in a
decrease in fair value of notes payable by approximately $2.6 million. Fair
values were determined from quoted market prices and from investment bankers
considering credit ratings and the remaining term to maturity.
21
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PART II. OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On July 13, 2000 the Company entered into subscription agreements for
the sale of 877,946 new common shares of the Company. These agreements
were signed with accredited investors in transactions exempt from
registration pursuant to the exemptions provided in Section 4(2) and
Regulation D of the Act. Closing with respect to such sales took place
on July 14, 2000 and August 29, 2000. The purchase price of each share
was $6.97. The aggregate amount of proceeds to the Company from this
private placement was $6.1 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Dr. Andrez Olechowski resigned from the Board of Directors of the
Company to run for election as President of Poland. Mr. Olechowski's
last board meeting was May 12, 2000.
Mr. Nicolas Callinan resigned from the Board of Directors of the
Company effective September 6, 2000. This resignation was in keeping
with the policy of his employer, Advent International, regarding
employees serving on boards of companies in which Advent-managed funds
have invested and which have become listed on a stock exchange. Mr.
Callinan has explicitly stated that his resignation was not motivated
by any disagreement regarding the Company's operations, policies or
practices.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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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 13, 2000 By: /s/ MICHAEL J. BROWN
--------------------
Michael J. Brown
Chief Executive Officer
November 13, 2000 By: /s/ RICHARD P. HALKA
--------------------
Richard P. Halka
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
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27 Financial Data Schedule
