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 MARCH 31,JUNE 30, 2001
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,July 31, 2001, the
Company had 18,119,03520,483,653 common shares outstanding.
1
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)
EURONET SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. Dollars, except share and per share data)
Unaudited
ASSETS Mar. 31,June 30, 2001 Dec. 31, 2000
- ------ ------------- -------------
Current assets:
Cash and cash equivalents $ 4,7325,619 $ 7,151
Restricted cash 2,0361,877 2,103
Trade accounts receivable, net of allowances for doubtful accounts of
$832$890,000 at March 31,June 30, 2001 and $740$740,000 at December 31, 2000 9,3858,823 9,485
Costs and estimated earnings in excess of billings on software
installation contracts 1,086956 1,117
Income taxes receivable 970 -
Prepaid expenses and other current assets 4,4925,630 4,229
------- ----------- -----
Total current assets 21,73123,875 24,085
Property, plant, and equipment, net 28,74327,780 31,657
Intangible assets, net 2,3412,156 2,604
Deposits 44 45
Deferred income taxes 400418 424
Other assets, net 1,857 2,075
------- -------1,636 2,120
----- -----
Total assets $55,116$ 55,865 $60,890
=============== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Trade accounts payable $ 4,075 $ 5,2234,192 $5,223
Current installments of obligations under capital leases 3,3253,936 3,466
Accrued expenses and other current liabilities 5,5936,639 6,397
Short-term borrowings 508519 -
Advance payments on contracts 2,5421,839 2,155
Income taxes payable 383384 350
Billings in excess of costs and estimated earnings on software
installation contracts 2,4781,952 2,875
--------- -------------- -----
Total current liabilities 18,90419,461 20,466
Obligations under capital leases, excluding current installments 8,0306,899 8,034
Notes payable 72,34654,489 77,191
Other long-term liabilities 672,000 -
--------- --------------
Total liabilities 99,34782,849 105,691
--------- --------------- -------
Stockholders' deficit:
Common stock, $0.02 par value. Authorized 30,000,00060,000,000 shares; issued and
outstanding 17,993,23519,661,643 shares at March 31,June 30, 2001 and 17,814,910 at
December 31, 2000 360392 356
Additional paid in capital 82,39792,508 81,327
Treasury stock (140)(145) (140)
Employee loans for stock (526)(463) (561)
Subscription receivable (47)- (59)
Accumulated deficit (124,805)(117,158) (123,811)
Restricted reserve 808785 784
Accumulated other comprehensive loss (2,278)(2,903) (2,697)
--------- ---------------- -------
Total stockholders' deficit (44,231)(26,984) (44,801)
--------- ----------------- --------
Total liabilities and stockholders' deficit $55,116$ 55,865 $60,890
========= ================= =======
See accompanying notes to unaudited consolidated financial statements.
2
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)
Six Months Ended June 30, Three Months Ended March 31,
----------------------------June 30,
------------------------- ---------------------------
2001 2000 ---------- ----------2001 2000
---- ---- ---- ----
Revenues:
ATM network and related revenue $ 10,846 $ 8,260$22,637 $17,211 $11,791 $8,951
Software, maintenance and related revenue 3,977 3,678
---------- ----------8,125 7,645 4,148 3,967
----- ----- ----- -----
Total revenues 14,823 11,938
---------- ----------30,762 24,856 15,939 12,918
------ ------ ------ ------
Operating expenses:
Direct operating costs 7,092 6,81214,031 13,299 6,939 6,487
Salaries and benefits 7,067 6,95813,525 14,386 6,458 7,428
Selling, general and administrative 2,133 2,6344,179 5,226 2,046 2,592
Depreciation and amortization 2,179 2,733
---------- ----------4,305 5,437 2,126 2,704
----- ----- ----- -----
Total operating expenses 18,471 19,137
---------- ----------36,040 38,348 17,569 19,211
------ ------ ------ ------
Operating loss (3,648) (7,199)(5,278) (13,492) (1,630) (6,293)
Other income/(expense):
Interest income 110 331146 739 36 408
Interest expense (2,830) (2,540)(5,051) (5,043) (2,221) (2,503)
Foreign exchange gain/(loss), net 4,245 (1,826)7,391 (3,918) 3,146 (2,092)
----- ------- ------------- -------
Total other income/(expense) 1,525 (4,035)2,486 (8,222) 961 (4,187)
----- ------- ----------- -------
Loss before income taxes and extraordinary item (2,123) (11,234)(2,792) (21,714) (669) (10,480)
Income taxes 282 (51)
---------- ----------
Loss2,074 (71) 1,792 (20)
----- --- ----- ---
(Loss)/income before extraordinary item (1,841) (11,285)(718) (21,785) 1,123 (10,500)
Extraordinary gain on extinguishment of debt, net of
applicable income taxes 847of $1.3 million for the
six months ended June 30, 2001 and $0.9
million for the three months ended
June 30, 2001 7,371 - ---------- ----------6,524 -
----- - ----- -
Net loss $ (994) $ (11,285)income/(loss) $6,653 $(21,785) $7,647 $(10,500)
Other comprehensive gain/(loss):loss:
Translation adjustment 418 (133)
---------- ----------(206) (449) (624) (316)
----- ----- ----- -----
Comprehensive loss $ (576) $ (11,418)
========== ==========
Lossincome/(loss) $6,447 $(22,234) $7,023 $(10,816)
====== ========= ====== =========
Income/(loss) per share - basic and diluted:
Lossbasic:
(Loss)/income before extraordinary item $ (0.13) $ (0.72)(0.04) $(1.37) $0.06 $(0.64)
Extraordinary gain on extinguishment of debt 0.070.40 - ---------- ----------0.34 -
---- ---- ----- --
Net loss $ (0.06) $ (0.72)
========== ==========income/(loss) $0.36 $(1.37) $0.40 $(0.64)
===== ======= ===== =======
Weighted average number of shares outstanding 17,915,375 15,650,28918,240,443 15,947,745 19,105,450 16,528,883
========== ========== ========== ==========
Income/(loss) per share - diluted:
(Loss)/income before extraordinary item $(0.04) $(1.37) 0.05 $(0.64)
Extraordinary gain an extinguishment of debt $ 0.40 - $0.32 -
----- ------ ---- ------
Net income/(loss) $ 0.36 $(1.37) $0.37 $(0.64)
===== ====== ==== ======
See accompanying notes to unaudited consolidated financial statements.
3
EURONET SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
(Unaudited)
ThreeSix months ended March 31,June 30,
-------------------------
2001 2000
------- ------------ ----
Cash flows from operating activities:
Net loss (994) (11,285)income/(loss) $6,653 $(21,785)
Adjustments to reconcile net lossincome/(loss) to net cash used in
operating activities:
Depreciation and amortization 2,179 2,7334,305 5,437
Unrealized foreign exchange (gain)/loss,gains, net (5,364) 1,280(6,975) (3,597)
Accretion of discount on notes 2,329 2,1994,088 4,492
Gain on extinguishment of debt, net of tax (7,371) -
Deferred tax benefit (1,258) -
Decrease in costs and estimated earnings in excess of billings
on software installation contracts 31 48
Gain on extinguishment of debt (1,283) -
Decrease/(increase)161 182
Decrease in restricted cash 67 (2,478)225 5,437
Decrease in trade accounts receivable 99 577661 1,856
(Increase)/decrease in prepaid expenses and other current assets (530) 866(1,340) 262
Decrease in trade accounts payable (682) (1,416)(694) (1,271)
Increase in income taxes receivable (970) -
Decrease in billings in excess of costs and estimated earnings
on software installation contracts net (397) (595)(923) (1,332)
Increase/(decrease) in accrued expenses and other current liabilities 292 (2,465)36 (4,676)
Other 823 (339)
------- --------519 98
--- --
Net cash used in operating activities (3,430) (10,875)(2,883) (14,897)
------- --------
Cash flows from investing activities:
Fixed asset purchases (280) (446)(535) (1,090)
Proceeds from sale of fixed assets 177 88
------- --------317 221
Net decrease in loan receivable - (14)
- ----
Net cash used in investing activities (103) (358)
------- --------(218) (883)
----- -----
Cash flows from financing activities:
Proceeds from issuance of shares and other capital contributions 735 4,300
Repurchase of notes payable 124 -
Subscriptions paid 12 -637 7,034
Cash received from employees for the purchase of common stock 35 3298 123
Repurchase of notes payable 185 -
Subscriptions paid/(receivable) 59 (21)
Repayment of obligations under capital leases (517) (874)(1,833) (2,259)
Proceeds from bank borrowings 307 -
------- --------2,327 612
----- ---
Net cash provided by financing activities 696 3,458
------- --------1,473 5,489
Effects of exchange rate differences on cash 418 132
------- --------96 294
-- ---
Net decrease in cash and cash equivalents (2,419) (7,643)(1,532) (9,997)
Cash and cash equivalents at beginning of period 7,151 15,037
------- ------------- ------
Cash and cash equivalents at end of period $ 4,732 $ 7,394
======= ========$5,619 $5,040
====== ======
See accompanying notes to unaudited consolidated financial statements. See Note
6 for details of significant non-cash transactions.
4
EURONET SERVICES INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,JUNE 30, 2001 AND 2000
NOTE 1 - FINANCIAL POSITION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Euronet Services
Inc. and subsidiaries (collectively, "Euronet" or the "Company") have been
prepared from the records of 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,June 30, 2001, the results of its operations for the
three-month periods and six-month periods ended March 31,June 30, 2001 and 2000 and cash
flows for the three-
monthsix-month periods ended March 31,June 30, 2001 and 2000.
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, 2000, including the notes thereto,
set forth in the Company's Form 10-K.
The results of operations for the three-month periodand six-month periods ended March 31,June
30, 2001 are not necessarily indicative of the results to be expected for the
full year.
The Company generated an operating loss of $3.6$5.3 million for the threesix months ended
March 31,June 30, 2001 primarily due to the significant costs associated with the
expansion of its ATM network and investment support and research and development
in its software. In addition, the Company generated negative cash flows from
operations of $3.4$2.9 million for the threesix months ended March 31,June 30, 2001, as a result
of these same factors. 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 2001. In the Network
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 has $4a $4.0 million of available financingcredit facility under an unsecured revolving
credit agreement (see Note 5). As of March 31,June 30, 2001, the Company had not made
any draws againstdrawn $2.0
million under such credit agreement. In addition, the Company holds repurchased
notes payable with a face value of DEM 60.1105.7 million ($27.046.0 million) and a fair
value at March 31,June 30, 2001 of $10.8$27.5 million. The Company believes that cash and cash
equivalents at March 31,June 30, 2001, and the revolving credit agreement described
above, 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, 2000. For a description of these policies, see
Note 3 to the Notes to Consolidated Financial Statements for the year ended
December 31, 2000. The Company adopted the provisions of SFAS No. 133 on 1
January 2001 and this had no impact on the Company's consolidated financial
statements as the Company does not have any derivative financial instruments.
Future changes in the fair value for any
5
remaining trading securities will be recorded through earnings. Changes in fair
value of available for sale securities will be recorded in other comprehensive
income.
NOTE 3 - NET LOSSEARNINGS PER SHARE - BASIC AND DILUTED
Net lossBasic earnings per share has been computed by dividing net lossincome/(loss) by the
weighted average number of common shares outstanding. TheFor the six month periods
ended June 30, 2001 and 2000 and the three month period ended June 30, 2000 the
effect of potential common stock (stock options and warrants outstanding) is antidilutive. Accordingly,
diluted net lossantidilutive, accordingly dilutive earnings
per share does not assume the exercise of outstanding stock and warrants. For
the 3 months ended June 30, 2001 dilutive earnings per share reflects the
potential dilution that could occur if stock options and warrants outstanding.
5
were exercised
using the treasury stock method where applicable.
Weighted average shares including the dilutive effect of stock options
1,535,603 and warrants 162,537 amounts to 20,803,590 for the three months
ended June 30, 2001.
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 outlets and financial institutions (the "Network
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 losses. Prior period segment
information has been restated to conform to the current period's presentation.
As the Network Services Segment continued to grow throughout 1999, the Company's
management began to divide the internal organization of the segment into
sub-
segments.sub-segments. Accordingly, beginning in January 2000, the Company divided the
Network Services Segment into three sub-segments: the "Central European
Sub-
segment"Sub-segment" (including Hungary, Poland, the Czech Republic, Croatia, Greece and
Romania), the "Western European Sub-segment" (including Germany, France, and the
United Kingdom) and the "Other operations Sub-segment" (including the United
States and unallocated processing center costs).
Where practical, certain
amounts have been reclassified to reflect the change in internal reporting.
The following tables present the segment results of the Company's operations for
the quarterthree-month and six-month periods ended March 31,June 30, 2001 and March 31,June 30, 2000.
(Unaudited)
(In thousands)
Network Services
--------------
Network----------------
For the Quarterthree months ended Central Western ServicesNetwork Software Corporate
March 31,June 30, 2001 Europe Europe Other Total Solutions Services Total
------ ------ ------ ----- --------- --------- -------- -----
Total revenues $ 5,489 $ 4,841 $ 517 $ 10,847 $ 4,021 $ - $ 14,868$5,934 $5,241 $616 $11,791 $4,193 $- $15,984
Total operating expenses (5,685) (4,958) (864)(5,850) (4,570) (1,087) (11,507) (5,559) (1,450) (18,516)(4,248) (1,859) (17,614)
Operating loss (196) (117) (347) (660) (1,538) (1,450) (3,648)income/(loss) 84 671 (471) 284 (55) (1,859) (1,630)
Interest income 2412 7 3 22 (9) 23 3 50 32 28 11036
Interest expense (262) (51) (-) (313)(215) (61) (6) (282) - (2,517) (2,830)(1,939) (2,221)
Foreign exchange gain/(loss)/gain,, net (211) (256) (461) (928) (1) 5,174 4,245311 (204) 740 847 - 2,299 3,146
Net income/(loss)/profit before income $192 $413 $266 $871 $(64) $(1,476) $(669)
taxes $ (645) $ (401) $ (805) $ (1,851) $(1,507) $ 1,235 $ (2,123)
Segment assets $23,296 $15,406 $3,654 $ 42,356 $ 8,570 $ 4,190 $ 55,116$23,097 $15,645 $3,914 $42,656 $7,552 $5,657 $55,865
Fixed assets 15,837 10,456 1,431 27,724 888 131 28,74315,330 10,108 1,328 26,766 908 106 27,780
Depreciation and amortization 1,003 761 260 2,024 120 35 2,179979 752 242 1,973 117 36 2,126
(Unaudited)
(In thousands)
Network Services
--------------
Network----------------
For the Quarterthree months ended Central Western ServicesNetwork Software Corporate
March 31,June 30, 2000 Europe Europe Other Total Solutions Services Total
------ ------ ------ ----- --------- --------- -------- -----
Total revenues $ 3,995 $ 3,756 $ 509 $ 8,260 $ 3,723 $ - $ 11,983$4,587 $3,942 $422 $8,951 $4,012 $- $12,963
6
Total operating expenses (5,226) (5,240) (620) (11,086) (6,253) (1,843) (19,182)(5,495) (4,584) (506) (10,585) (6,483) (2,188) (19,256)
Operating loss (1,231) (1,484) (111) (2,826) (2,530) (1,843) (7,199)(908) (642) (84) (1,634) (2,471) (2,188) (6,293)
Interest income 82 6 18 106 40 185 331153 59 14 226 56 126 408
Interest expense (239) (39)(220) (40) (3) (281)(263) - (2,259) (2,540)(2,240) (2,503)
Foreign exchange (loss)/gain,loss, net (368) (57) (182) (607) 1 (1,220) (1,826)(418) (268) (227) (913) (1) (1,178) (2,092)
Net loss before income taxes $(1,756) $(1,574) $ (278) $ (3,608) $(2,489) $(5,137) $(11,234)(1,393) $(891) $(300) $(2,584) $(2,416) $(5,480) $(10,480)
Segment assets $29,930 $19,059 $3,354 $ 52,343 $19,088 $16,217 $ 87,648$31,710 $18,323 $3,098 $53,131 $16,858 $6,355 $76,344
Fixed assets 18,836 13,321 1,810 33,517 1,089 98 34,70419,600 12,734 1,650 33,984 1,017 127 35,128
Depreciation and amortization 965 741 318 2,024 635 74 2,733976 754 296 2,026 630 48 2,704
(Unaudited)
(In thousands)
Network Services
----------------
For the six months ended Central Western Network Software Corporate
June 30, 2001 Europe Europe Other Total Solutions Services Total
------ ------ ----- --------- --------- -------- -------
Total revenues $11,423 $10,082 $1,133 $22,638 $8,214 $- $30,852
Total operating expenses (11,535) (9,528) (1,951) (23,014) (9,807) (3,309) (36,130)
Operating (loss)/income (112) 554 (818) (376) (1,593) (3,309) (5,278)
Interest income 36 30 6 72 23 51 146
Interest expense (477) (112) (6) (595) - (4,456) (5,051)
Foreign exchange gain/(loss), net 100 (460) 279 (81) (1) 7,473 7,391
Net (loss)/income before income $(453) $12 $(539) $(980) $(1,571) $(241) $(2,792)
taxes
Segment assets $23,097 $15,645 $3,914 $42,656 $7,552 $5,657 $55,865
Fixed assets 15,330 10,108 1,328 26,766 908 106 27,780
Depreciation and amortization 1,982 1,513 502 3,997 237 71 4,305
(Unaudited)
(In thousands)
Network Services
----------------
For the six months ended Central Western Network Software Corporate
June 30, 2001 Europe Europe Other Total Solutions Services Total
------ ------ ----- --------- --------- -------- -------
Total revenues $8,582 $7,698 $931 $17,211 $7,735 $- $24,946
Total operating expenses (10,722) (9,825) (1,125) (21,672) (12,735) (4,031) (38,438)
Operating loss (2,140) (2,127) (194) (4,461) (5,000) (4,031) (13,492)
Interest income 235 65 32 332 96 311 739
Interest expense (459) (79) (6) (544) - (4,499) (5,043)
Foreign exchange loss, net (786) (325) (409) (1,520) - (2,398) (3,918)
Net loss before income taxes $(3,150) $(2,466) $(577) $(6,193) $(4,904) $(10,617) $(21,714)
Segment assets $31,710 $18,323 $3,098 $53,131 $16,858 $6,355 $76,344
Fixed assets 19,600 12,734 1,650 33,984 1,017 127 35,128
Depreciation and amortization 1,941 1,495 614 4,050 1,265 122 5,437
The following is a reconciliation of the segmented information to the unaudited
consolidated financial statements.
(Unaudited) For the three months ended For the six months ended
(in thousands) March 31,June 30, 2001 March 31,June 30, 2000 June 30, 2001 June 30, 2000
-------------- --------------------------- ------------- -------------
Revenues:
Total revenues for reportable segments $14,868 $ 11,983$15,984 $12,963 $30,852 $24,946
Elimination of inter segment revenues (45) (45) ------- --------(90) (90)
---- ---- ---- ----
Total consolidated revenues $14,823 $ 11,938$15,939 $12,918 $30,762 $24,856
======= =============== ======= =======
67
For the three months ended
(in thousands) March 31, 2001 March 31, 2000
-------------- ---------------
Operating expense:
Total operating expense for reportable segments $18,516 $ 19,182
Elimination of inter segment expenses (45) $ (45)
------- --------
Total consolidated operating expenses $18,471 $ 19,137
======= ========
Total revenues for the three month periodssix months ended March 31,June 30, 2001 and March 31,June 30, 2000 and
long-lived assets as of March 31,June 30, 2001 and March 31,June 30, 2000 for the Company analyzed
by geographical location areis as follows:
Total Revenues Long-lived Assets
-------------------- -------------------------
For the three
months ended
March 31, March 31, At March 31, At March-------------- -----------------
June 30, June 30, June 30, Dec 31,
2001 2000 2001 2000
------- ------- ------- ----------- ---- ---- ----
United States $ 4,538 $ 4,186 $ 900 $ 1,125$9,347 $8,667 $931 $984
Germany 2,270 2,499 4,523 6,0724,900 4,907 3,985 4,800
Poland 2,881 2,022 9,455 10,5235,932 4,197 9,293 9,824
Hungary 1,707 1,370 4,901 6,2643,584 3,147 4,839 5,878
UK 2,770 1,060 4,555 5,4284,794 2,343 4,830 4,902
Other 702 801 4,409 5,292
------- ------- ------- -------2,295 1,685 3,902 5,269
----- ----- ----- -----
Total $14,868 $11,938 $28,743 $34,704$30,852 $24,946 $27,780 $31,657
======= ======= ======= =======
Total revenues are attributed to countries based on location of customer for the
ATM and related services segment. AllServices Segment. For revenues generated by Euronet USA'sthe Software Solutions Segment,
activitiesall revenues are attributed to the United States. Long lived assets consist of
property, plant, and equipment, net of accumulated depreciation.depreciation and intangible
assets, net of accumulated amortization.
NOTE 5 - CREDIT FACILITY
On June 28, 2000 the Company entered into an unsecured revolving credit
agreement (the "Credit Agreement") providing a facility of up to $4.0 million
from three shareholders 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, the CEO and a Director of the Company, in the amount of
$600,000. The facility was originally available to be drawn upon until December
28, 2000, and repayment of any draws was due June 28, 2001. On December 28, 2000 the facilityThe Credit Agreement
was amended and renewed for a further six monthsmonth periods on December 28, 2000 and is available to be drawn until June 28,
2001 with repaymentand, as a result of such amendments, any draws being due December 28, 2001. Drawsamounts drawn on the facility will accrue interest at 10 percent per annum, payable quarterly.must
now be repaid by June 28, 2002.
A "commitment" fee was paid for the initial facility of 100,000 warrants issued
pro- ratapro-rata to the lenders with a warrant strike price set at the average share
price, as quoted on NASDAQ for 10 trading days prior to the warrant issue date,
less 10 percent. An additional 100,000 and 50,000 warrants, on the same terms,
were issued on January 2, 2001, and on June 28, 2001, for the subsequent
extensionextensions of the facility. Warrants are to
be issuedissuable 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 March 31,June 30, 2001, the Company had not made any drawshas drawn $2.0 million and issued 160,000
warrants in respect of such draw. Amounts outstanding under the Credit Agreement.facility accrue
interest at 10 percent per annum, payable quarterly. Repayment of the principal
is due on June 28, 2002. The remaining $2.0 million under the agreement is
available to be drawn until December 28, 2001.
8
NOTE 6 - EXTINGUISHMENT OF DEBT
During Februarythe three months ending March 31, 2001, in a single transaction, the
Company exchanged 3,000 units (principal amount of DEM 3.0 million) of its
12 3/8% senior discount notes (the "Senior Discount Notes") and 9,000 warrants
for 95,000 shares of its common stock, par value $0.02 per share. This exchange
has been accounted for as an extinguishment of debt with a resulting $0.4$0.5
million (net of applicable income taxes of $0.2$0.1 million) recognized as an
extraordinary gain on such extinguishment. The extinguishment gain (pre-tax)
represents the difference between the allocated carrying value of the debt and
any related warrants extinguished ($1,152,000)1,205,000) and the fair market value of the
common stock issued ($571,000)594,000), offset by the write-off of the allocated
unamortized deferred financing costs ($30,000). This transaction was exempt from
registration in accordance with Section 3(a)9 of the U.S. Securities Act of 1933
(the "Act").
During the three months ending March 31, 2001, in a single transaction, the
Company exchanged 8,750 Senior Discount Notes (principal face amount of DEM 8.75
million) of its Senior Discount Notes for two new Senior discount notes having
an aggregate face amount of US $2,933,000 (the "New Notes"). The interest,
repayment and other terms of the New Notes are identical to those of the Senior
Discount Notes for which they were exchanged, except that (i) the principal
amount was reduced as indicated in the previous sentence, (ii) the Company has
the right to prepay the New Notes at any time at its option by paying the
"Accreted Value" of the Notes, and (iii) the new notes are governed by a new
Note Purchase Agreement rather than the indenture under which the Senior
Discount Notes were issued and the New Notes therefore are not covered by any
of the provisions of 7
such indenture relating to action by the trustee, voting or
maintenance of listing on a stock exchange. This exchange has been accounted for
as an extinguishment of debt and issuance of new debt with a resulting $0.5$0.4
million (net of applicable income taxes of $0.2$0.3 million) recognized as an
extraordinary gain on such extinguishment. The extinguishment gain (pre-tax)
represents the difference between the allocated carrying value of the debt
extinguished ($3,336,000) and the fair market value of the New Notes issued
($2,525,000), offset by the write-off of the allocated unamortized deferred
financing costs ($85,000). This transaction was exempt from registration in
accordance with Section 3(a)9 of the Act.
During the three months ending June 30, 2001, in seven separate transactions,
the Company exchanged 45,600 units (principal amount of DEM 45.6 million) of its
Senior Discount Notes and 136,800 warrants for 1,596,000 shares of its common
stock, par value $0.02 per share. This exchange has been accounted for as an
extinguishment of debt with a resulting $6.5 million (net of applicable income
taxes of $0.9 million) recognized as an extraordinary gain on such
extinguishment. The extinguishment gain (pre-tax) represents the difference
between the allocated carrying value of the debt and any related warrants
entinguished ($17,776,000) and the fair market value of the common stock issued
($9,883,000), offset by the write-off of the allocated unamortized deferred
financing costs ($431,000). These transactions were exempt from registration in
accordance with Section 3(a)9 of the Act.
The Senior Discount Notes that were acquired by the Company in the above
exchanges have not been retired. These twoThe Company will consider additional
repurchases of its Senior Discount Notes if opportunities arise to complete such
transactions result in a combined extraordinary gain of $0.9 million
(net of applicable taxes of $0.4 million) for the quarter ended March 31, 2001.on favorable terms.
9
NOTE 7 - RELATED PARTY TRANSACTIONS
In January 2001, the Company entered into a Credit Facility Loan Agreement under
which it borrowed an aggregate of $0.5 million from Michael J. Brown, the CEO
and a Director of the Company, in order to fund transactions on its Czech
Republic ATM network. Amounts advanced under this loan agreement mature six
months from the date an advance is made, but may be renewed for a second six
month period, for a total period for the loans of up to one year. The loans are
unsecured. Amounts advanced bear interest of 10% per annum.
In 2000, Michael J. Brown, the CEO and a Director of the Company, pledged
approximately $4,000,000 of marketable securities (not including any common
stock of the Company) that he owns in order to obtain the release to the Company
of cash collateral in the amount of $4.8 million held by a bank providing cash
to the Company's ATM network in Hungary. No consideration is payable for
providing this security.
NOTE 8 - SUBSEQUENT EVENTS
As of May 2,August 14, 2001, in fourthree separate transactions, the Company exchanged an
aggregate of face value DEM 2330 million of its DEM denominated 12 3/8% Senior Discount Notes for
805,0001,021,000 shares of its common stock, par value $0.02 per share. These exchanges
will be accounted for as an extinguishment of debt with the resulting
extraordinary gains on such extinguishment calculated as the difference between
the allocated carrying value of the debt and any related warrants extinguished
and the fair market value of the common stock issued, offset by the write-off of
the allocated unamortized deferred financing costs. The transactions wereare exempt
from registration in accordance with Section 3(a)9 of the Act. The Senior
Discount Notes that were acquired by the Company in the above exchanges have not
been retired.
NOTE 9 - RECLASSIFICATION
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statements to conform to the 2001 unaudited consolidated
financial statements presentation.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
OF OPERATIONS.
- -------------
OVERVIEW--------------
Euronet Services Inc. ("Euronet" or the "Company") is a leading provider of
secure electronic financial transaction solutions. The Company provides
financial payment middleware, financial network gateways, outsourcing, and
consulting services to financial institutions, retailers and mobile operators.
The Company operates an independent automated teller machine ("ATM") network of
over 2,6002,800 ATMs in Europe and the United States, and through its software
subsidiary, Euronet USA, Inc., (formerly Arkansas Systems, Inc.)("Euronet USA"),
offers a suite of integrated software solutions for electronic payment and
transaction delivery systems. Euronet thus offers comprehensive electronic
payment solutions consisting of ATM network participation, outsourced ATM
management solutions and software solutions. Its principal customers are banks
and other companies such as retail outlets that require transaction processing
services. With eleven offices in Europe and three in the United States, Euronet
offers its solutions in more than 60 countries around the world.
Euronet and its subsidiaries operate in two business segments: (1) a segment
providing secure processing of financial transactions (the "Network Services
Segment"); and (2) a segment producing application software for the processing
of secure electronic financial 8
transactionstransaction (the "Software Solutions Segment").
In addition, the Company's management divides the Network Services Segment into
three sub-segments: the
"Central European Sub-segment" (including Hungary, Poland,
the Czech Republic, Croatia, Greece and Romania), the "Western European Sub-segment"
(including Germany, France and the United Kingdom) and the "Other Operations
Sub-segment" (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 that 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 losses. Prior period segment
information has been restated to conform to the current period's presentation.
Beginning in 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 periodand six month periods ended March 31,June 30, 2001, 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.
During the first quarter, 2001 the Company reduced its workforce significantly
with the primary objective of reducing costs in its Software Solutions Segment
to bring them more in line with the anticipated revenue. Because the workforce
reductions involved payment of severance equal to several weeks' salary to most
employees, the financial impact of these reductions will be greater in the
second and subsequent quarters than in the first quarter 2001.11
SEGMENT RESULTS OF OPERATIONS
(Unaudited)
(In thousands) Revenues Operating Profit/(Loss)
--------- -------------------------Income/(loss)
-------- -----------------------
Three months ended March 31,June 30, 2001 2000 2001 2000
- ------------------------------ ------- ------- ------- ---------------------------------- ---- ---- ---- ----
Network Services:
Central European $ 5,489 $ 3,995 $ (196) $(1,231)$5,934 $4,587 $84 $(908)
Western European 4,841 3,756 (117) (1,484)5,241 3,942 671 (642)
Other 517 509 (347) (111)
------- ------- ------- -------616 422 (471) (84)
--- -- ----- ----
Total Network Services 10,847 8,260 (660) (2,826)11,791 8,951 284 (1,634)
Software Solutions 4,021 3,723 (1,538) (2,530)4,193 4,012 (55) (2,471)
Corporate Services - - (1,450) (1,843)(1,859) (2,188)
Inter segment eliminations (45) (45) - -
------- ------- ------- ----------- ---- - -
Total $14,823 $11,938 $(3,648) $(7,199)$15,939 $12,918 $(1,630) $(6,293)
======= ======= ======== ========
(Unaudited)
(In thousands) Revenues Operating Income/(Loss)
-------- -----------------------
Six months ended June 30, 2001 2000 2001 2000
- ------------------------- ---- ---- ---- ----
Network Services:
Central European $11,423 $8,582 $(112) $(2,140)
Western European 10,082 7,698 554 (2,127)
Other 1,133 931 (818) (194)
----- --- ----- -----
Total Network Services 22,638 17,211 (376) (4,461)
Software Solutions 8,214 7,735 (1,593) (5,000)
Corporate Services - - (3,309) (4,031)
Inter segment eliminations (90) (90) - -
---- ---- - -
Total $30,762 $24,856 $(5,278) $(13,492)
======= ======= ======== =========
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31,JUNE 30, 2001 AND
2000 AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
NETWORK SERVICES SEGMENT
Revenues
Total segment revenues increased by $2.5$2.8 million or 30%32% to $10.8$11.8 million for the
three months ended March 31,June 30, 2001 from $8.3$9.0 million for the three months ended
March 31,June 30, 2000, and by $5.4 million or 32% to $22.6 million for the six months
ended June 30, 2001 from $17.2 million for the six months ended June 30, 2000.
The increase in revenues is due primarily to the significant increase in
transaction volumesvolume and an increase in the number of ATMs operated by the Company
during these periods.
TheIn total, the Company had 2,3832,518 ATMs installed as of March 31,June 30, 2000, and
processed 11.012.9 million transactions for the three months ended March 31,June 30, 2000 and
23.9 million transactions for the six months ended June 30, 2000. As of March 31,June 30,
2001, the Company's owned and operated ATM network increased by 278345 ATMs, or 12%14%, to a total of
2,6612,863 ATMs, of which 70%68% are owned by the Company and 30%32% are owned by banks or
other financial institutions but operated by the Company through management
agreements. The Company processed 14.916.7 million transactions for the three months
ended March 31,June 30, 2001, an increase of 3.93.8 million transactions, or 35%29%, over the
three months ended March 31,June 30, 2000. 9The Company processed 31.6 million
transactions for the six months ended June 30, 2001, an increase of 7.7 million
transactions, or 32%, over the six months ended June 30, 2000.
12
Revenues for the Central European Sub-segment totaled $5.5$5.9 million for the three
months ended March 31,June 30, 2001 as compared to $4.0$4.6 million for the three months
ended March 31,June 30, 2000 an increase of 37%.and $11.4 million for the six months ended June 30, 2001 as
compared to $8.6 million for the six months ended June 30, 2000. The increase in
revenues is largely the result of an increase in the number of ATMs operated by
the Company from 1,2181,342 at March 31,June 30, 2000 to 1,4051,455 at March 31,June 30, 2001, and increased
transaction volumes.
Revenues for the Western European Sub-segment totaled $4.8$5.2 million for the three
months ended March 31,June 30, 2001 as compared to $3.8$3.9 million for the three months
ended March 31,June 30, 2000 an increase of 29%.and $10.1 million for the six months ended June 30, 2001 as
compared to $7.7 million for the six months ended June 30, 2000. The increase in
revenues is largely the result of an increase in the number of ATMs operated by
the Company from 710719 at March 31,June 30, 2000 to 770861 at March 31,June 30, 2001, and increased
transaction volumes.
Revenues for the Other ATM Operations Sub-segment were $0.5$0.6 million for the
three months ended March 31,June 30, 2001 as compared to $0.5$0.4 million for the three
months ended March 31,June 30, 2000 and $1.1 million for the six months ended June 30,
2001 as compared to $0.9 million for the six months ended June 30, 2000. The
revenues from this segment were earned by EFT Network Services, LLC. a
subsidiary of Euronet USA.
Of total segment revenue, approximately 87%86% is attributable to those ATMs owned
by the Company for the three months ended March 31,June 30, 2001 and 89%84% for the three
months ended March 31,June 30, 2000. Of total transactions processed, approximately 76%73%
is attributable to those ATMs owned by the Company for the three months ended
March 31,June 30, 2001 and 75%77% for the yearthree months ended March 31,June 30, 2000. In addition, of
total segment revenue approximately 86% is attributable to those ATMs owned by
the Company for the six months ended June 30, 2001 and 86% for the six months
ended June 30, 2000. Of total transactions processed, approximately 74% are
attributable to those ATMs owned by the Company for the six months ended June
30, 2001 and 76% for the six months ended June 30, 2000. The Company believes
the shift from a largely proprietary, Euronet ownedEuronet-owned ATM network to a more
balanced mix between proprietary ATMs and customer-owned ATMs is aan extremely
positive development and will provide higher marginal returns on investments.
Transaction fees charged by the Company vary for the three types of ATM
transactions that are currently processed on the Company's ATMs: cash
withdrawals, balance inquiries and transactions not completed because the
relevant card issuerCard Issuer does not give an authorization. Transaction fees for cash
withdrawals vary from market to market but generally range from $0.60 to $1.75
per transaction while transaction fees for the other two types of transactions
are generally substantially less. Transaction fees payable under the Prepaid
Recharge Solutions are included in Network Services Segment Revenues and vary
substantially from market to market and based upon the specific prepaid solution
and the denomination of prepaid hours purchased. Generally the range of
transaction fees vary from $1.10 to $1.80 per prepaid mobile recharge purchase.
Operating Expenses
Total segment operating expenses decreasedincreased to $18.5$11.5 million for the three months
ended March 31,June 30, 2001 from $19.2$10.6 million for the three months ended March 31,June 30, 2000
and to $23.0 million for the six months ended June 30, 2001 from $21.7 million
for the six months ended June 30, 2000. The decrease isincreases are due primarily to
reallocations of cost control measures implemented byfrom the Company duringcompanies corporate segment to the period, including workforce reductions.
OperatingOther
Operations Sub-segment and costs associated with the installation of additional
ATMs and expansion of the Company's operations.
The operating expenses for the Central European Sub-segment totaled $5.7$5.9 million
for the three months ended March 31,June 30, 2001 as compared to $5.2$5.5 million for the
three months ended March 31,June 30, 2000 an increase of 9%.and $11.5 million for the six months ended June
30, 2001 as compared to $10.7 million for the six months ended June 30, 2000.
The increase in operating expenses year-on-year is largelymainly the result of
an increasecertain performance related bonus payments that were expensed in 2001 and costs
associated with the installation of additional ATMs and expansion of the
Company's operations during the periods in the number of ATMs operated by
the Company from 1,218 at March 31, 2000 to 1,405 at March 31, 2001, and
increased transaction volumes.
OperatingNetwork Services Sub-segment.
The operating expenses for the Western European Sub-segment totaled $5.0$4.6 million
for the three months ended March 31,June 30, 2001 as compared to $5.2$4.6 million for the
three months ended March 31,June 30, 2000, an decrease of 4%.and $9.5 million for the six months ended June
30, 2001 as compared to $9.8 million for the six months ended June 30, 2000. The
decrease in operating expenses is due to significant costs related to the
relocation of ATMs in Germany for the comparable period in the year 2000 (the three
months ended March 31, 2000). This is partially offset by costs associated with
the increaseinstallation of additional ATMs and expansion of the Company's operations
during the periods in the number of ATMs
operated by the Company from 710 at March 31, 2000 to 770 at March 31, 2001 and
increased transaction volumes.
Operatingthis Sub-segment.
The operating expenses for the Other Operations Sub-segment were $0.9$1.1 million
for the three months ended
March 31,13
June 30, 2001 as compared to $0.6$0.5 million for the three months ended March 31,June 30,
2000, an increaseand $2.0 million for the six months ended June 30, 2001 as compared to
$1.1 million for the six months ended June 30, 2000. The increases are due
primarily to reallocations of 39%.cost from the corporate services segment to the
Other Operations Sub-segment. The operating expenses of this segment are
generated by EFT Network Services LLC, a subsidiary of Euronet USA, and
unallocated costs associated with the Company's processing facilities in
Budapest, Hungary.
Direct operating costs in the Network Services Segment consist primarily of: ATM
installation costs;costs, ATM site rentals; andrental costs, costs associated with maintaining
ATMs, ATM telecommunications,telecommunication costs, interest on network cash and cash delivery
and security services to ATMs. Such costs increased to $6.9 million for the three
months ended March 31, 2001 from $6.7 million for the
three months ended March
31,June 30, 2001 from $6.3 million for the three months ended
June 30, 2000 and to $13.6 million for the six months ended June 30, 2001 from
$13.0 million for the six months ended June 30, 2000. The increase in direct operating costs is primarily attributable to
costs associated with operating the increased number of ATMs in the network
during the periods. Also,In addition, intercompany
allocations were made to charge the ATM
networkNetwork Services operations forwith transaction
switching fees from, and bank connection fees incurred by,associated with the Company'soperations central
processing center in Budapest. These allocations totalled $0.9 million and $0.8totaled $1.1 million for the
three months ended March 31,June 30, 2001 and $0.9 million for the three months ended
June 30, 2000 respectively.and $2.0 million for the six months ended June 30, 2001 and $1.7
million for the six months ended June 30, 2000. The components of direct
operating costs for the three monthsand six month periods ended March 31,June 30, 2001 and 2000
were:
10
(Unaudited) Three months ended June 30, Six months ended June 30,
(in thousands) Three Months ending March 31,
-----------------------------
2001 2000 ------ ------2001 2000
---- ---- ---- ----
ATM communication $1,137 $1,027$1,131 $1,060 $2,268 $2,087
ATM cash filling and interest on network cash 1,786 1,8891,760 1,781 3,546 3,670
ATM maintenance 1,126 982999 907 2,125 1,933
ATM site rental 602 563619 545 1,221 1,108
ATM installation 276 18279 315 355 497
Transaction processing and ATM monitoring 1,576 1,3361,696 1,199 3,272 2,534
Other 373 727
------ ------434 495 807 1,179
--- --- --- -----
Total direct operating expenses $6,876 $6,706$6,718 $6,302 $13,594 $13,008
====== ====== ======= =======
As a percentage of network revenue, direct operating costs fell from 81%70% for the
three months ended March 31,June 30, 2000 to 63%57% for the three months ended March 31,June 30,
2001. On a per ATM basis, the direct operating costs fell from $2,814$2,503 per ATM
for the three months ended March 31,June 30, 2000 to $2,584$2,346 per ATM for the three months
ended March 31, 2001, an improvement of 9%.June 30, 2001. On a per transaction basis the direct operating costs fell
from $0.61$0.49 per transaction for the three months ended March 31,June 30, 2000 to $0.46$0.40 per
transaction for the three months ended March
31,June 30, 2001, an improvement of 25%18%.
Segment salaries and benefits increased to $2.1$2.5 million for the three months
ended March 31,June 30, 2001 from $1.8$1.9 million for the three months ended March 31,June 30, 2000
an increase of 17%.and increased to $4.6 million for the six months ended June 30, 2001 from $3.7
million for the six months ended June 30, 2000. The increase in salaries
year-on-year is mainly the year-on-year expenses reflectresult of certain performance related bonus payments
that were expensed in 2001 in the continued expansion of the operations to Western European markets with
significantly higher labor costs than Central Europe as well as increases in
staff levels at the processing center required to maintain quality service in
line with the rising transaction volumes. As a percentage of ATMOther Network Services Revenue, salaries and benefits fell from 22% for the three months ended March
31, 2000 to 19% for the three months ended March 31, 2001.Sub-segment
Selling, general and administrative costs allocated to the ATMNetwork Services
Segment remained constant at $0.5decreased to $0.3 million for the three months ended March 31,June 30, 2001 and
$0.5from
$0.4 million for the three months ended March 31,June 30, 2000 and to $0.8 million for
the six months ended June 30, 2001 from $0.9 million for the six months ended
June 30, 2000. The cost decreases for the three months and six months ended June
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
previously.
Depreciation and amortization remained at $2.0 million for the three months
ended March 31,June 30, 2001 and 2000 and $4.0 million for the six months ended June 30,
2001 and 2000.
Operating Loss
AsIncome/(Loss)
The total Network Services Segment posted operating income of $0.3 million
for three months ended June 30, 2001 as compared to an operating loss of $1.6
million for the three months ended June 30, 2000 and the
14
operating loss decreased to $0.4 million for the six months ended June 30, 2001
from $4.5 million for the six months ended June 30, 2000, as a result of the
factors discussed above,previously.
The Central European Sub-segment posted operating income of $0.1 million for the
total Network Services Segmentthree months ended June 30, 2001 compared to an operating loss decreased toof $0.9 million
for the three months ended June 30, 2000 and an operating loss of $0.1 million
for the six months ended June 30, 2001 from $2.1 million for the six months
ended June 30, 2000, as a result of the factors discussed previously.
The Western European Sub-segment posted operating income of $0.7 million for the
three months ended March 31,June 30, 2001 from $2.8compared to an operating loss of $0.6 million
for the three months ended March 31,June 30, 2000 and operating income of $0.6 million
for the six months ended June 30, 2001 compared to an improvementoperating loss of 75%,$2.1
million for the six months ended June 30, 2000, as a result of the factors
discussed above.previously.
The Central European
OperationsOther Sub-segment recorded an operating loss of $0.2increased to $0.5 million for the three
months ended March 31,June 30, 2001 compared to a loss of $1.2$0.1 million for the three months ended
March 31,June 30, 2000 an improvement of 83%. The Western European
Operations Sub-segment operating loss decreasedand to $0.1$0.8 million for threethe six months ended March 31,June 30, 2001 comparedfrom
$0.2 million for the six months ended June 30, 2000, as a result of the factors
discussed previously.
SOFTWARE SOLUTIONS SEGMENT
Software Solutions Revenue
Total segment revenues increased by $0.2 million or 4.5% to a loss of $1.5$4.2 million for the
three months ended March 31, 2000, an improvement of 93%. The Other Operations Sub-segment
incurred an operating loss of $347,000June 30, 2001 from $4.0 million for the three months ended
March 31, 2001
comparedJune 30, 2000, and increased by $0.5 million or 6% to a loss $111,000$8.2 million for the threesix
months ended March 31, 2000.
SOFTWARE SOLUTIONS SEGMENT
Software Solutions Revenue
Revenues of the Software Solutions Segment totaled $4.0June 30, 2001 from $7.7 million before inter-
segment eliminations for the threesix months ended March 31, 2001 as compared to
revenue of $3.7 for the three months ended March 31,June 30,
2000. Software 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 of computer products and are reported net of cost of
sales. The components of software solutions revenue for the three monthsmonth and six
month periods ended March 31,June 30, 2001 and 2000 were:
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
(in thousands) Three Months ending March 31,
-----------------------------
2001 2000 ------ ------2001 2000
---- ---- ---- ----
Software license fees $1,147 $ 691$885 $1,289 $2,032 $1,980
Professional service fees 1,671 1,3131,734 1,630 3,405 2,943
Maintenance fees 1,201 1,5461,211 1,000 2,412 2,546
Hardware sales 2 173
------ ------363 93 365 266
--- -- --- ---
Total software solutions segment revenue $4,021 $3,723revenues $4,193 $4,012 $8,214 $7,735
====== ====== ====== ======
11
The increasedecrease in software license fees from 2000 tothe three months ended June 30, 2001
can be attributed to an
increased numberreflects the change in the mix of software sales contracts signed in 2001 as compared to the three
months ended 30th June 2000. The Company has signed an increasing number of
contracts that have a larger share of professional services relative to the
license fee. 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.
Professional service fees are generally realized in connection with the sale and
installation of software, and the increases in Professional service feesalthough an increasing amount of professional services
are being derived from 2000 to 2001 can be attributed to ancontracts that do not necessarily have a software license
component.
The increase in maintenance fees for the three months ended June 30, 2001 is due
to the good software sales.sales in the first quarter. The decrease in maintenance
fees for the six months ended June 30, 2001 is due to the expiration of
maintenance contracts in the first quarter that have not been renewed by
customers. The Company
15
expects this decrease to be offset by existing and future software sales
contracts, which include ongoing maintenance fees.
Although hardware sales were favorable for the current quarter, the Company
does not plan to pursue growth in this segment.
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,June 30, 2001 the revenue
backlog was $2.0$1.7 million as compared to $2.7$3.4 million at March 31,June 30, 2000. The decrease
in backlog from March 31,June 30, 2000 results principally from improved delivery of
software. There can be no assurance that the contracts included in backlog will
actually generate the specified revenues or that the actual revenues will be
generated within the one-year period.
Operating Expenses
Software Solutions Segment operating expenses consist primarily of salaries and
benefits, selling, general and administrative expenses, and depreciation and
amortization. Total segment operating expenses decreasedincreased to $5.6$4.2 million for the
three months ended March 31,June 30, 2001 from $6.3$6.5 million for the three months ended
March 31,June 30, 2000 and $9.8 million for the six months ended June 30, 2001 from $12.7
million for the six months ended June 30, 2000. The components of Software
Solutions Segment operating costs for the three monthsmonth and six month periods
ended March 31,June 30, 2001 and 2000 were:
(Unaudited)
(in thousands) Three Monthsmonths ending March 31,
-----------------------------June 30, Six months ending June 30,
--------------------------- -------------------------
2001 2000 ------ ------2001 2000
---- ---- ---- ----
Direct operating costs $ 261266 $ 151230 $ 527 $ 381
Salaries and benefits 4,215 4,1203,040 4,572 7,255 8,692
Selling, general and administrative 963 1,347825 1,050 1,788 2,397
Depreciation and amortization 120 635
------ ------117 630 237 1,265
--- --- --- -----
Total direct operating expenses $5,559 $6,253$4,248 $6,482 $9,807 $12,735
====== ====== ====== =======
During the first quarter, 2001 the Company reduced its workforce significantly
with the primary objective of reducing costs in its Software Solutions Segment
to bring them more in line with the anticipated revenue. Because the workforce
reductions involved payment of severance equal to several weeks' salary to most
employees, theThe financial impact of
these reductions willcan be greaterseen in the second and subsequent quarters than inresults for the first quarterthree months ended June 30,
2001.
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
was $1.4decreased to $1.1 million for the three months ended March 31, 2001.
InJune 30, 2001 from $1.8
million for the three months ended June 30, 2000 $1.0and to $2.4 million in development costs were capitalized in conjunction withfor the Company's accounting policy requiringsix
months ended June 30, 2001 from $3.3 million for 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. Of this amount $51,000 was expensed in the
three-month periodsix months ended March 31, 2001.June 30,
2000.
Operating Loss
The Software Solutions Segment incurred an operating loss of $1.5 milliondecreased to $55,000 for the three
months ended March 31,June 30, 2001
and16
from $2.5 million for the three months ended March 31,June 30, 2000 and to $1.6 million
for the six months ended June 30, 2001 from $5.0 million for the six months
ended June 30, 2000, as a result of the factors discussed above.
12
CORPORATE SERVICES SEGMENT
Operating Expenses
Operating expenses for the Corporate Services Segment decreased to $1.5$1.9 million
for the three months ended March 31,June 30, 2001 from $1.8$2.2 million for the three months
ended March 31,June 30, 2000 and $3.3 million for the six months ended June 30, 2001 from
$4.0 million for the six months ended June 30, 2000. The components of corporate
services operating costs for the yearsthree and six month periods ended March 31,June 30, 2001
and 2000 were:
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
(in thousands) Three Months ending March 31,
-----------------------------
2001 2000 ------ ------2001 2000
---- ---- ---- ----
Salaries and benefits $ 741 $1,012$921 $991 $1,662 $2,003
Selling, general and administrative 674 757902 1,149 1,576 1,906
Depreciation and amortization 35 74
------ ------36 48 71 122
-- -- -- ---
Total direct operating expenses $1,450 $1,843$1,859 $2,188 $3,309 $4,031
====== ====== ====== ======
Cost control measures taken by the Company are the primary reasons for these
decreased expenditures, including workforce reductions induring the three months
ended March 31,first quarter
of 2001.
NON-OPERATING RESULTS
Interest Income
Interest income decreased to $110,000$36,000 for the three months ended March 31,June 30, 2001
from $331,000 for the three months ended March 31, 2000. The decrease is the
result of a decrease in investment securities and cash.
Interest Expense
Interest expense increased to $2.8$0.4 million for the three months ended March 31,June 30, 2000 and $0.1 million for
the six months ended June 30, 2001 from $0.7 million for the six months ended
June 30, 2000. The decreases are the result of the decrease in cash.
Interest Expense
Interest expense decreased to $2.2 million for the three months ended June 30,
2001 from $2.5 million for the three months ended March 31,June 30, 2000 and remained at
$5.0 million for the six months ended June 30, 2001 and 2000. The increasedecrease for
the three months ended March 31,June 30, 2001 is the result of notes payable
accretion.the Company's bond
repurchases in 2001 and a reduction in the interest on foreign currency debt due
to devaluation of the respective foreign currency.
Foreign Exchange Gain/Loss
The Company had a net foreign exchange gain of $4.2$3.1 million for the three months
ended March 31,June 30, 2001, compared to a net foreign exchange loss of $1.8$2.1 million for
the three months ended March 31,June 30, 2000 and a net foreign exchange gain of $7.4
million for the six months ended June 30, 2001 compared to a net foreign
exchange loss of $3.9 million for the six months ended June 30, 2000. 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 or Euro equivalents,
including capital lease obligations, notes payable (including the Notes issued
in the Company's public bond offering), and cash and cash equivalents.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.
17
Extraordinary Gain
During Februarythe six months ended June 30, 2001 the Company exchanged 3,000 units (principal amountentered into nine debt
swap transactions which resulted in a combined extraordinary gain of DEM
3.0 million) of its 12 3/8 % senior discount notes (the "Senior Discount Notes")
and 9,000 warrants for 95,000 shares of its common stock, par value $0.02 per
share. This exchange has been accounted for as an extinguishment of debt with a
resulting $0.4$6.5
million (net of applicable income taxes of $0.2$0.9 million) recognized as an extraordinary gain on such extinguishment. The extinguishment
gain (pre-tax) representsfor the difference between the allocated carrying value of
the debt extinguishedthree months
ended June 30, 2001, and any related warrants ($1,152,000) and the fair market
value of the common stock issued ($571,000), offset by the write-off of the
allocated unamortized deferred financing costs ($30,000). This transaction was
exempt from registration in accordance with Section 3(a)9 of the Act.
During March 2001, the Company exchanged 8,750 Senior Discount Notes (principal
face amount of DEM 8.75 million) of its Senior Discount Notes for two new notes
having an aggregate face value of US $2,933,000 (the "New Notes"). The interest,
repayment and other terms of the New Notes are identical to those of the Senior
Discount Notes for which they were exchanged, except that (i) the principal
amount was reduced as indicated in the previous sentence, (ii) the Company has
the right to prepay the New Notes at any time at its option by paying the
"Accreted Value" of the Notes, and (iii) the new notes are governed by a new
Note Purchase Agreement rather than the indenture under which the Senior
Discount Notes were issued and the New Notes therefore are not covered by any of
the provisions of such indenture relating to action by the trustee, voting or
maintenance of listing on a stock exchange. This exchange has been accounted for
as an extinguishment of debt and issuance of new debt with a resulting $0.5$7.4 million (net of applicable income taxes of $0.2 million) recognized as an
extraordinary gain on such extinguishment. The extinguishment gain (pre-tax)
represents the difference between the allocated carrying value of the debt
extinguished ($3,336,000) and the fair market value of the New Notes issued
($2,525,000), offset by the write-off of the allocated unamortized deferred
financing costs ($85,000). This transaction was exempt from registration in
accordance with Section 3(a)9 of the Act.
The Senior Discount Notes that were acquired by the Company in the above
exchanges have not been retired. The Company will consider additional
repurchases of its Senior Discount Notes if opportunities arise to complete such
transactions on favorable terms.
The two transactions described above result in a combined extraordinary gain of
$0.9 million (net of applicable income taxes of $0.4$1.3
million) for the threesix months ended March 31,June 30, 2001 (see Note 6 to the unaudited
consolidatedConsolidated Financial Statements included in Part I, Item 1). There were no
extraordinary gains or losses for the three monthsand six month periods ended March 31,June 30,
2000.
13
Net LossIncome/(Loss)
The Company'sCompany generated net loss decreased to $1.0income of $7.6 million during the three months ended
March 31,June 30, 2001 from $11.3as compared to a net loss of $10.5 million for the three months
ended March 31,June 30, 2000 and net income of $6.7 million for the six months ended June
30, 2001 as compared to a net loss of $21.8 million for the six months ended
June 30, 2000, 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 its Senior Discount Notes, 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 $124.8$117.1 million, investments in property,
plant and equipment of approximately $55.2$55.9 million and acquisitions of $24.6
million.
At March 31,June 30, 2001 the Company had cash and cash equivalents of $4.7$5.6 million and
working capital of $2.8$4.4 million. The Company had $2.0$1.9 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. In addition to the assets held on the balance
sheet at March 31,June 30, 2001, the Company held repurchased notes payable with a face
value of DEM 60.1105.7 million ($27.046.0 million as of March 31,June 30, 2001, based on a USD to
DM rate of 1:2.23)2.30) and a fair market value at March 31,June 30, 2001, of $10.8$27.5 million.
On June 28, 2000 the Company entered into an unsecured revolving credit
agreement (the "Credit Agreement") providing a facility of up to $4.0 million
from three shareholders 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, the CEO and a directorDirector of the Company, in the amount of
$600,000. The facility was originally available to be drawn upon until December
28, 2000, and repayment of any draws was due June 28, 2001. On December 28, 2000, the facilityThe Credit Agreement
was amended and renewed for a further six monthsmonth periods on December 28, 2000 and is available to be drawn until June 28,
2001 with repaymentand, as a result of such amendments, any draws being due December 28, 2001. Drawsamounts drawn on the facility will accrue interest at 10 percent per annum, payable quarterly.must
now be repaid by June 28, 2002.
A commitment"commitment" fee was paid for the initial facility of 100,000 warrants issued
pro-
ratapro-rata to the lenders with a warrant strike price set at the average share
price, as quoted on NASDAQ for 10 trading days prior to the warrant issue date,
less 10 percent. An additional 100,000 and 50,000 warrants, on the same terms,
were issued on January 2, 2001, and on June 28, 2001, for the subsequent
extensionextensions of the facility. Warrants are to
be issuedissuable 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 March 31,June 30, 2001, the Company had not made any drawshas drawn $2.0 million and issued 160,000
warrants in respect of such draw. Amounts outstanding under the Credit Agreement.facility accrue
interest at 10 percent per annum, payable quarterly. Repayment of the principal
is due on June 28, 2002. Interest payments are due quarterly. The remaining $2.0
million under the agreement is available to be drawn until December 28, 2001.
The Company leases many of its ATMs under capital lease arrangements that expire
between 2001 and 2005. The leases bear interest between 8% and 12% per annum. As
of March 31,June 30, 2001 the Company owed $11.4$10.8 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
18
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 2001 are expected to be approximately $4.5$3.0 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 continue to reduce operating losses and net cash used in
operating activities in 2001. In the Network 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 that the benefits of a
restructuring program commencedcompleted in the first quarter of 2001 will reduce the
operating losses and bring operating costs more in line with anticipated
revenues. The Company believes that the amounts available under the Credit
Agreement certain asset sales and cash and cash equivalents will provide the Company with sufficient
capital until it achieves positive cash flow. As a result, the Company believes
it has sufficient liquidity resources to meet current and future cash
requirements.
BALANCE SHEET ITEMS
Cash and Cash Equivalents
The decrease of cash and cash equivalents to $4.7$5.6 million at March 31,June 30, 2001 from
$7.2 million at December 31, 2000 is due primarily to the net effects of working
capital movements and operating losses for the threesix months ended March 31,June 30, 2001.
Restricted Cash
Restricted cash decreased to $2.0$1.9 million at March 31,June 30, 2001 from $2.1 million at
December 31, 2000. The majority of restricted cash
14
was held as security with
respect to cash provided in Hungary by banks participating in Euronet's ATM
network, to cover guarantees for financial
instruments and as deposits with customs officials.network.
Trade Accounts Receivable
Trade accounts receivable decreased to $9.4$8.8 million at March 31,June 30, 2001 from $9.5
million at December 31, 2000.2000, due primarily to increased collections.
Property, Plant and Equipment
Net property, plant and equipment decreased to $28.7$27.8 million at March 31,June 30, 2001
from $31.7 million at December 31, 2000. This decrease is due primarily to
recognizing fixed asset depreciation in excess of fixed asset additions.
Intangible Assets
Net intangible assets decreased to $2.3$2.2 million at March 31,June 30, 2001 from $2.6
million at December 31, 2000. The decrease is the result of amortization of
purchased intangiblesgoodwill in respect of the SBK and Dash acquisitions in 1999.
Current liabilities
Current liabilities decreased to $18.9$19.5 million at March 31,June 30, 2001 from $20.5
million at December 31, 2000. This decrease is due primarily to decreases in
trade accounts payable.
Capital Leases
Total capital lease obligations including current instalmentsinstallments decreased to
$11.4$10.8 million at March 31,June 30, 2001 from $11.5 million at December 31, 2000. This
decrease is due primarily to recognizing lease payments in excess of leased
fixed asset additions.
19
Notes Payable
Notes payable decreased to $72.3$54.5 million at March 31,June 30, 2001 from $77.2 million at
December 31, 2000. This is the result of several transactions as follows:
Balance at December 31, 2000 $77.2
Unrealized foreign exchange gain (DEM vs. USD) (5.2)
Accretion of notes payable interest 2.3
Extinguishment of debt (see note 6 to the unaudited
consolidated financial statements) (2.0)
-----
Balance at March 31, 2001 $72.3Balance at December 31, 2000 $77.2
Unrealized foreign exchange gain (DEM vs. USD) (7.5)
Accretion of notes payable interest 4.2
Extinguishment of debt (see note 6 to the unaudited
consolidated financial statements) (19.4)
------
Balance at June 30, 2001 $54.5
=====
Total Stockholders' Deficit
Total stockholders' deficit decreased to $44.2$27.0 million at March 31,June 30, 2001 from
$44.8 million at December 31, 2000. This is due to the net lossprofit for the threesix
months ended March 31,June 30, 2001 of $1.0$6.7 million, offset by $0.6 million received for options
exercised and $0.6$10.7 million for the February 28, 2001 extinguishmentshares issued on the extinguishments of debt
(see Notenote 6 to the unaudited consolidated Financial Statements included in
Part I, Item 1)financial statements) and a decreasean increase
in the accumulated comprehensive loss of $0.4.$0.2 million.
IMPACT OF NEWRECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
15
SFAS 140
TheSTANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of Financial Accounting Standardaccounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 140,121, Accounting for Transfers and Servicingthe Impairment of
FinancialLong-Lived Assets and Extinguishmentsfor Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Liabilities (SFAS No. 140). SFAS No. 140 replaces SFAS No. 125 as it revisesStatement 141 immediately,
and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the standards forappropriate pre-Statement 142 accounting for securitizations and other transfersliterature.
Statement 141 will require upon adoption of financialStatement 142 that the Company
evaluate its existing intangible assets and collateralgoodwill that were acquired in a
prior purchase business combination, and requires certain disclosures. SFAS No. 140to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is effectiveidentified as
having an indefinite useful life, the Company will be required to test the
intangible asset for transfersimpairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and servicingrecognized as the cumulative effect of financiala change in
accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and extinguishmentsliabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities occurring after March 31, 2001 and in certain limited instances cana manner similar to a purchase price allocation
in accordance with Statement 141 to its carrying amount both of which would be
applied early. SFAS No. 140 requires recognition and reclassificationmeasured as of collateral and for disclosures relatingthe date of adoption. This second step is required to securitzation and collateral for
fiscal years ending after December 15, 2000.Thebe
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
And finally, any unamortized negative goodwill existing at the date Statement
142 is adopted must be written off as the cumulative effect of a change in
accounting principle.
As of the date of adoption, the Company does not expect SFAS No.
140expects to have unamortized goodwill in
the amount of $1.7 million which will be subject to the transition provisions of
Statements 141 and 142. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, it is not practicable to reasonably estimate
the impact of adopting these Statements on the Company's financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a material effect on its financial statements.change in
accounting principle.
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)(iii) trends affecting the Company's business,
(v)(iv) the adequacy of capital to meet the Company's capital requirements and
expansion plans, (vi)(v) the assumptions underlying the Company's business plans,
(vii)(vi) business strategy, (viii)(vii) government regulatory action, (ix)(viii) technological
advances and (x)(ix) projected costs and revenues, are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Forward-looking statements are typically
identified by the words believe, expect, anticipated, intend, estimate and
similar expressions.
Investors are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
results may materially differ from those in the forward-looking statements as a
result of various factors, including: technological and business developments in
the local card, electronic and mobile banking and mobile phone 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, software providers and providers
of outsourced mobile phone services; 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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Exposure
In the threesix months ended March 31,June 30, 2001, 31% of the Company's revenues were
generated in Poland and Hungary, as compared to 28%30% in the threesix months ended March 31,June
30, 2000 and 27% in the threesix months ended March 31,June 30, 1999. The first quartersix months of
2001 and 2000 figures have increased mainly due to the increase in revenues for
the Polish operations. 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
16
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, Polish Zloty and the British Pound
Sterling against the U.S. dollar, would have the combined effect of a $6.3$4.6 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 March 31,June 30,
2001 was $31.3$40.7 million compared to a carrying value of $72.3$54.5 million. A 1%
increase from prevailing interest rates at March 31,June 30, 2001 would result in a
decrease in fair value of notes payable by approximately $1.0$1.6 million. Fair
values were determined from quoted market prices and from investment bankers
considering credit ratings and the remaining term to maturity.
21
PART II. OTHER INFORMATION
- -------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
NoneAt the Company's annual meeting on May 24, 2001, the shareholders of the
Company's Common Stock, par value $0.02 per share voted in favor of the
following actions, as follows:
1. Election of Directors:
The shareholders voted in favor of the renewal of the term of office of Michael
J. Brown and to elect a new director, Jeanine Strandjord, as follows:
Director Voted in Favor Withheld
- -------- -------------- --------
Michael J. Brown 11,843,810 481,650
Jeanine Strandjord 12,280,465 44,995
2. Increase in Authorized Shares
The shareholders voted to approve an amendment to the Company's Certificate of
Incorporation increasing the total number of authorized shares of Common Stock
of the Company, par value $0.02, from 30,000,000 to 60,000,000 shares.
Voted in Favor Voted Against Abstain
-------------- ------------- -------
12,205,253 116,007 4,200
3. Change of Corporate Name
The shareholders voted to approve an amendment to the Company's Certificate of
Incorporation changing the name of the Company from "Euronet Services Inc." to
"Euronet Worldwide, Inc."
Voted in Favor Voted Against Abstain
-------------- ------------- -------
12,322,960 1,700 800
4. Approval of Stock Purchase Plan
The shareholders voted approve the Euronet Services Inc. Employee Stock Purchase
Plan.
Voted in Favor Voted Against Abstain
-------------- ------------- -------
12,221,971 94,964 8,525
5. Ratification of Appointment of Accountants
The shareholders voted to ratify the appointment of the KPMG as independent
auditors of the Company for the year ending December 31, 2001.
Voted in Favor Voted Against Abstain
-------------- ------------- -------
12,263,345 58,015 4100
ITEM 5. OTHER INFORMATION
22
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
1723
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.
MayAugust 15, 2001 By: /s/ MICHAEL J. BROWN
--------------------
Michael J. Brown
Chief Executive Officer
By: /s/ JONATHAN P. SCHULTHEISS
---------------------------
Jonathan P. Schultheiss
(Principal AccountingKENDALL COYNE
-----------------
Kendall Coyne
(Chief Financial Officer)
1824