UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER C00-22167
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EURONET SERVICES INC.
(Exact name of the registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
74-2806888
(I.R.S. employer identification no.)
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 July 31, 2001, the
Company had 20,483,653 common shares outstanding.
PART I. FINANCIAL INFORMATION
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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)
ASSETS June 30, 2001 Dec. 31, 2000
- ------ ------------- -------------
Current assets:
Cash and cash equivalents $ 5,619 $ 7,151
Restricted cash 1,877 2,103
Trade accounts receivable, net of allowances for doubtful accounts of
$890,000 at June 30, 2001 and $740,000 at December 31, 2000 8,823 9,485
Costs and estimated earnings in excess of billings on software
installation contracts 956 1,117
Income taxes receivable 970 -
Prepaid expenses and other current assets 5,630 4,229
---- -----
Total current assets 23,875 24,085
Property, plant, and equipment, net 27,780 31,657
Intangible assets, net 2,156 2,604
Deferred income taxes 418 424
Other assets, net 1,636 2,120
----- -----
Total assets $ 55,865 $60,890
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable $ 4,192 $5,223
Current installments of obligations under capital leases 3,936 3,466
Accrued expenses and other current liabilities 6,639 6,397
Short-term borrowings 519 -
Advance payments on contracts 1,839 2,155
Income taxes payable 384 350
Billings in excess of costs and estimated earnings on software
installation contracts 1,952 2,875
----- -----
Total current liabilities 19,461 20,466
Obligations under capital leases, excluding current installments 6,899 8,034
Notes payable 54,489 77,191
Other long-term liabilities 2,000 -
-----
Total liabilities 82,849 105,691
------ -------
Stockholders' deficit:
Common stock, $0.02 par value. Authorized 60,000,000 shares; issued and
outstanding 19,661,643 shares at June 30, 2001 and 17,814,910 at
December 31, 2000 392 356
Additional paid in capital 92,508 81,327
Treasury stock (145) (140)
Employee loans for stock (463) (561)
Subscription receivable - (59)
Accumulated deficit (117,158) (123,811)
Restricted reserve 785 784
Accumulated other comprehensive loss (2,903) (2,697)
------- -------
Total stockholders' deficit (26,984) (44,801)
-------- --------
Total liabilities and stockholders' deficit $ 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 June 30,
------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
ATM network and related revenue $22,637 $17,211 $11,791 $8,951
Software, maintenance and related revenue 8,125 7,645 4,148 3,967
----- ----- ----- -----
Total revenues 30,762 24,856 15,939 12,918
------ ------ ------ ------
Operating expenses:
Direct operating costs 14,031 13,299 6,939 6,487
Salaries and benefits 13,525 14,386 6,458 7,428
Selling, general and administrative 4,179 5,226 2,046 2,592
Depreciation and amortization 4,305 5,437 2,126 2,704
----- ----- ----- -----
Total operating expenses 36,040 38,348 17,569 19,211
------ ------ ------ ------
Operating loss (5,278) (13,492) (1,630) (6,293)
Other income/(expense):
Interest income 146 739 36 408
Interest expense (5,051) (5,043) (2,221) (2,503)
Foreign exchange gain/(loss), net 7,391 (3,918) 3,146 (2,092)
----- ------- ----- -------
Total other income/(expense) 2,486 (8,222) 961 (4,187)
----- ------- --- -------
Loss before income taxes and extraordinary item (2,792) (21,714) (669) (10,480)
Income taxes 2,074 (71) 1,792 (20)
----- --- ----- ---
(Loss)/income before extraordinary item (718) (21,785) 1,123 (10,500)
Extraordinary gain on extinguishment of debt, net of
income taxes of $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 income/(loss) $6,653 $(21,785) $7,647 $(10,500)
Other comprehensive loss:
Translation adjustment (206) (449) (624) (316)
----- ----- ----- -----
Comprehensive income/(loss) $6,447 $(22,234) $7,023 $(10,816)
====== ========= ====== =========
Income/(loss) per share - basic:
(Loss)/income before extraordinary item $ (0.04) $(1.37) $0.06 $(0.64)
Extraordinary gain on extinguishment of debt 0.40 - 0.34 -
---- ---- ----- --
Net income/(loss) $0.36 $(1.37) $0.40 $(0.64)
===== ======= ===== =======
Weighted average number of shares outstanding 18,240,443 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)
Six months ended June 30,
-------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income/(loss) $6,653 $(21,785)
Adjustments to reconcile net income/(loss) to net cash used in
operating activities:
Depreciation and amortization 4,305 5,437
Unrealized foreign exchange gains, net (6,975) (3,597)
Accretion of discount on notes 4,088 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 161 182
Decrease in restricted cash 225 5,437
Decrease in trade accounts receivable 661 1,856
(Increase)/decrease in prepaid expenses and other current assets (1,340) 262
Decrease in trade accounts payable (694) (1,271)
Increase in income taxes receivable (970) -
Decrease in billings in excess of costs and estimated earnings
on software installation contracts (923) (1,332)
Increase/(decrease) in accrued expenses and other current liabilities 36 (4,676)
Other 519 98
--- --
Net cash used in operating activities (2,883) (14,897)
------- --------
Cash flows from investing activities:
Fixed asset purchases (535) (1,090)
Proceeds from sale of fixed assets 317 221
Net decrease in loan receivable - (14)
- ----
Net cash used investing activities (218) (883)
----- -----
Cash flows from financing activities:
Proceeds from issuance of shares and other capital contributions 637 7,034
Cash received from employees for purchase of common stock 98 123
Repurchase of notes payable 185 -
Subscriptions paid/(receivable) 59 (21)
Repayment of obligations under capital leases (1,833) (2,259)
Proceeds from borrowings 2,327 612
----- ---
Net cash provided by financing activities 1,473 5,489
Effects of exchange rate differences on cash 96 294
-- ---
Net decrease in cash and cash equivalents (1,532) (9,997)
Cash and cash equivalents at beginning of period 7,151 15,037
----- ------
Cash and cash equivalents at end of period $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
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 June 30, 2001, the results of its operations for the
three-month periods and six-month periods ended June 30, 2001 and 2000 and cash
flows for the six-month periods ended 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 and six-month periods ended June
30, 2001 are not necessarily indicative of the results to be expected for the
full year.
The Company generated an operating loss of $5.3 million for the six months ended
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 $2.9 million for the six months ended 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 a $4.0 million credit facility under an unsecured revolving
credit agreement (see Note 5). As of June 30, 2001, the Company had drawn $2.0
million under such credit agreement. In addition, the Company holds repurchased
notes payable with a face value of DEM 105.7 million ($46.0 million) and a fair
value at June 30, 2001 of $27.5 million. The Company believes that cash and cash
equivalents at 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 - EARNINGS PER SHARE - BASIC AND DILUTED
Basic earnings per share has been computed by dividing net income/(loss) by the
weighted average number of common shares outstanding. For 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 is antidilutive, 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 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 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. Accordingly, beginning in January 2000, the Company divided 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).
The following tables present the segment results of the Company's operations for
the three-month and six-month periods ended June 30, 2001 and June 30, 2000.
(Unaudited)
(In thousands)
Network Services
----------------
For the three months ended Central Western Network Software Corporate
June 30, 2001 Europe Europe Other Total Solutions Services Total
------ ------ ------ ----- --------- -------- -----
Total revenues $5,934 $5,241 $616 $11,791 $4,193 $- $15,984
Total operating expenses (5,850) (4,570) (1,087) (11,507) (4,248) (1,859) (17,614)
Operating income/(loss) 84 671 (471) 284 (55) (1,859) (1,630)
Interest income 12 7 3 22 (9) 23 36
Interest expense (215) (61) (6) (282) - (1,939) (2,221)
Foreign exchange gain/(loss), net 311 (204) 740 847 - 2,299 3,146
Net income/(loss) before income $192 $413 $266 $871 $(64) $(1,476) $(669)
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 979 752 242 1,973 117 36 2,126
(Unaudited)
(In thousands)
Network Services
----------------
For the three months ended Central Western Network Software Corporate
June 30, 2000 Europe Europe Other Total Solutions Services Total
------ ------ ------ ----- --------- -------- -----
Total revenues $4,587 $3,942 $422 $8,951 $4,012 $- $12,963
6
Total operating expenses (5,495) (4,584) (506) (10,585) (6,483) (2,188) (19,256)
Operating loss (908) (642) (84) (1,634) (2,471) (2,188) (6,293)
Interest income 153 59 14 226 56 126 408
Interest expense (220) (40) (3) (263) - (2,240) (2,503)
Foreign exchange loss, net (418) (268) (227) (913) (1) (1,178) (2,092)
Net loss before income taxes $ (1,393) $(891) $(300) $(2,584) $(2,416) $(5,480) $(10,480)
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 976 754 296 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) June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
-------------- ------------- ------------- -------------
Revenues:
Total revenues for reportable segments $15,984 $12,963 $30,852 $24,946
Elimination of inter segment revenues (45) (45) (90) (90)
---- ---- ---- ----
Total consolidated revenues $15,939 $12,918 $30,762 $24,856
======= ======= ======= =======
7
Total revenues for the six months ended June 30, 2001 and June 30, 2000 and
long-lived assets as of June 30, 2001 and June 30, 2000 for the Company analyzed
by geographical location is as follows:
Total Revenues Long-lived Assets
-------------- -----------------
June 30, June 30, June 30, Dec 31,
2001 2000 2001 2000
---- ---- ---- ----
United States $9,347 $8,667 $931 $984
Germany 4,900 4,907 3,985 4,800
Poland 5,932 4,197 9,293 9,824
Hungary 3,584 3,147 4,839 5,878
UK 4,794 2,343 4,830 4,902
Other 2,295 1,685 3,902 5,269
----- ----- ----- -----
Total $30,852 $24,946 $27,780 $31,657
======= ======= ======= =======
Total revenues are attributed to countries based on location of customer for the
ATM Services Segment. For revenues generated by the Software Solutions Segment,
all revenues are attributed to the United States. Long lived assets consist of
property, plant, and equipment, net of accumulated depreciation and intangible
assets, net of accumulated amortization.
NOTE 5 - 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. The Credit Agreement
was amended and renewed for six month periods on December 28, 2000 and June 28,
2001 and, as a result of such amendments, any amounts drawn on the facility must
now be repaid by June 28, 2002.
A "commitment" fee was paid for the initial facility of 100,000 warrants issued
pro-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
extensions of the facility. Warrants are issuable 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 June 30, 2001, the Company has drawn $2.0 million and issued 160,000
warrants in respect of such draw. Amounts outstanding under the 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 the 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 $0.5
million (net of applicable income taxes of $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 ($1,205,000) and the fair market value of the
common stock issued ($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 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 $0.4
million (net of applicable income taxes of $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. The Company will consider additional
repurchases of its Senior Discount Notes if opportunities arise to complete such
transactions 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 August 14, 2001, in three separate transactions, the Company exchanged an
aggregate of face value DEM 30 million of its Senior Discount Notes for
1,021,000 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 are 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.
- --------------
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 2,800 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 transaction (the "Software Solutions Segment").
In addition, the Company's management divides the Network Services Segment into
three sub-segments: "Central European Sub-segment" (including Hungary, Poland,
the Czech Republic, Croatia, Greece and Romania), "Western European Sub-segment"
(including Germany, France and the United Kingdom) and "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 and six month periods ended 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.
11
SEGMENT RESULTS OF OPERATIONS
(Unaudited)
(In thousands) Revenues Operating Income/(loss)
-------- -----------------------
Three months ended June 30, 2001 2000 2001 2000
- --------------------------- ---- ---- ---- ----
Network Services:
Central European $5,934 $4,587 $84 $(908)
Western European 5,241 3,942 671 (642)
Other 616 422 (471) (84)
--- -- ----- ----
Total Network Services 11,791 8,951 284 (1,634)
Software Solutions 4,193 4,012 (55) (2,471)
Corporate Services - - (1,859) (2,188)
Inter segment eliminations (45) (45) - -
---- ---- - -
Total $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 JUNE 30, 2001 AND
2000 AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
NETWORK SERVICES SEGMENT
Revenues
Total segment revenues increased by $2.8 million or 32% to $11.8 million for the
three months ended June 30, 2001 from $9.0 million for the three months ended
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 volume and an increase in the number of ATMs operated by the Company
during these periods.
In total, the Company had 2,518 ATMs installed as of June 30, 2000, and
processed 12.9 million transactions for the three months ended June 30, 2000 and
23.9 million transactions for the six months ended June 30, 2000. As of June 30,
2001, the Company's ATM network increased by 345 ATMs, or 14%, to a total of
2,863 ATMs, of which 68% are owned by the Company and 32% are owned by banks or
other financial institutions but operated by the Company through management
agreements. The Company processed 16.7 million transactions for the three months
ended June 30, 2001, an increase of 3.8 million transactions, or 29%, over the
three months ended June 30, 2000. The 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 $5.9 million for the three
months ended June 30, 2001 as compared to $4.6 million for the three months
ended June 30, 2000 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 1,342 at June 30, 2000 to 1,455 at June 30, 2001, and increased
transaction volumes.
Revenues for the Western European Sub-segment totaled $5.2 million for the three
months ended June 30, 2001 as compared to $3.9 million for the three months
ended June 30, 2000 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 719 at June 30, 2000 to 861 at June 30, 2001, and increased
transaction volumes.
Revenues for the Other ATM Operations Sub-segment were $0.6 million for the
three months ended June 30, 2001 as compared to $0.4 million for the three
months ended 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 86% is attributable to those ATMs owned
by the Company for the three months ended June 30, 2001 and 84% for the three
months ended June 30, 2000. Of total transactions processed, approximately 73%
is attributable to those ATMs owned by the Company for the three months ended
June 30, 2001 and 77% for the three months ended 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-owned ATM network to a more
balanced mix between proprietary ATMs and customer-owned ATMs is an extremely
positive development and will provide higher marginal returns on investments.
Transaction fees 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 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 increased to $11.5 million for the three months
ended June 30, 2001 from $10.6 million for the three months ended 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 increases are due primarily to
reallocations of cost from the companies corporate segment to the Other
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 $5.9 million
for the three months ended June 30, 2001 as compared to $5.5 million for the
three months ended June 30, 2000 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 mainly the result of
certain 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 Network Services Sub-segment.
The operating expenses for the Western European Sub-segment totaled $4.6 million
for the three months ended June 30, 2001 as compared to $4.6 million for the
three months ended June 30, 2000, 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 2000 (the three
months ended March 31, 2000). This is partially offset by costs associated with
the installation of additional ATMs and expansion of the Company's operations
during the periods in this Sub-segment.
The operating expenses for the Other Operations Sub-segment were $1.1 million
for the three months ended
13
June 30, 2001 as compared to $0.5 million for the three months ended June 30,
2000, and $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 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, ATM site rental costs, costs associated with maintaining
ATMs, ATM telecommunication costs, interest on network cash and cash delivery
and security services to ATMs. Such costs increased to $6.7 million for the
three months ended 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. In addition, intercompany
allocations were made to charge the Network Services operations with transaction
switching and bank connection fees associated with the operations central
processing center in Budapest. These allocations totaled $1.1 million for the
three months ended June 30, 2001 and $0.9 million for the three months ended
June 30, 2000 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 and six month periods ended June 30, 2001 and 2000
were:
(Unaudited) Three months ended June 30, Six months ended June 30,
(in thousands) 2001 2000 2001 2000
---- ---- ---- ----
ATM communication $1,131 $1,060 $2,268 $2,087
ATM cash filling and interest on network cash 1,760 1,781 3,546 3,670
ATM maintenance 999 907 2,125 1,933
ATM site rental 619 545 1,221 1,108
ATM installation 79 315 355 497
Transaction processing and ATM monitoring 1,696 1,199 3,272 2,534
Other 434 495 807 1,179
--- --- --- -----
Total direct operating expenses $6,718 $6,302 $13,594 $13,008
====== ====== ======= =======
As a percentage of network revenue, direct operating costs fell from 70% for the
three months ended June 30, 2000 to 57% for the three months ended June 30,
2001. On a per ATM basis, the direct operating costs fell from $2,503 per ATM
for the three months ended June 30, 2000 to $2,346 per ATM for the three months
ended June 30, 2001. On a per transaction basis the direct operating costs fell
from $0.49 per transaction for the three months ended June 30, 2000 to $0.40 per
transaction for the three months ended June 30, 2001, an improvement of 18%.
Segment salaries and benefits increased to $2.5 million for the three months
ended June 30, 2001 from $1.9 million for the three months ended June 30, 2000
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 result of certain performance related bonus payments
that were expensed in 2001 in the Other Network Services Sub-segment
Selling, general and administrative costs allocated to the Network Services
Segment decreased to $0.3 million for the three months ended June 30, 2001 from
$0.4 million for the three months ended 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 June 30, 2001 and 2000 and $4.0 million for the six months ended June 30,
2001 and 2000.
Operating Income/(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 previously.
The Central European Sub-segment posted operating income of $0.1 million for the
three months ended June 30, 2001 compared to an operating loss of $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 June 30, 2001 compared to an operating loss of $0.6 million
for the three months ended June 30, 2000 and operating income of $0.6 million
for the six months ended June 30, 2001 compared to an operating loss of $2.1
million for the six months ended June 30, 2000, as a result of the factors
discussed previously.
The Other Sub-segment operating loss increased to $0.5 million for the three
months ended June 30, 2001 compared to $0.1 million for the three months ended
June 30, 2000 and to $0.8 million for the six months ended June 30, 2001 from
$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 $4.2 million for the
three months ended June 30, 2001 from $4.0 million for the three months ended
June 30, 2000, and increased by $0.5 million or 6% to $8.2 million for the six
months ended June 30, 2001 from $7.7 million for the six months ended 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 month and six
month periods ended June 30, 2001 and 2000 were:
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
(in thousands) 2001 2000 2001 2000
---- ---- ---- ----
Software license fees $885 $1,289 $2,032 $1,980
Professional service fees 1,734 1,630 3,405 2,943
Maintenance fees 1,211 1,000 2,412 2,546
Hardware sales 363 93 365 266
--- -- --- ---
Total segment revenues $4,193 $4,012 $8,214 $7,735
====== ====== ====== ======
The decrease in software license fees the three months ended June 30, 2001
reflects the change in the mix of contracts signed 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, although an increasing amount of professional services
are being derived from contracts 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 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 June 30, 2001 the revenue
backlog was $1.7 million compared to $3.4 million at June 30, 2000. The decrease
in backlog from 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 increased to $4.2 million for the
three months ended June 30, 2001 from $6.5 million for the three months ended
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 month and six month periods
ended June 30, 2001 and 2000 were:
(Unaudited)
(in thousands) Three months ending June 30, Six months ending June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Direct operating costs $ 266 $ 230 $ 527 $ 381
Salaries and benefits 3,040 4,572 7,255 8,692
Selling, general and administrative 825 1,050 1,788 2,397
Depreciation and amortization 117 630 237 1,265
--- --- --- -----
Total direct operating expenses $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. The financial impact of
these reductions can be seen in the results for the three 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
decreased to $1.1 million for the three months ended June 30, 2001 from $1.8
million for the three months ended June 30, 2000 and to $2.4 million for the six
months ended June 30, 2001 from $3.3 million for the six months ended June 30,
2000.
Operating Loss
The Software Solutions Segment operating loss decreased to $55,000 for the three
months ended June 30, 2001
16
from $2.5 million for the three months ended 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.
CORPORATE SERVICES SEGMENT
Operating Expenses
Operating expenses for the Corporate Services Segment decreased to $1.9 million
for the three months ended June 30, 2001 from $2.2 million for the three months
ended 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 three and six month periods ended June 30, 2001
and 2000 were:
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
(in thousands) 2001 2000 2001 2000
---- ---- ---- ----
Salaries and benefits $921 $991 $1,662 $2,003
Selling, general and administrative 902 1,149 1,576 1,906
Depreciation and amortization 36 48 71 122
-- -- -- ---
Total direct operating expenses $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 during the first quarter
of 2001.
NON-OPERATING RESULTS
Interest Income
Interest income decreased to $36,000 for the three months ended June 30, 2001
from $0.4 million for the three months ended 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 June 30, 2000 and remained at
$5.0 million for the six months ended June 30, 2001 and 2000. The decrease for
the three months ended June 30, 2001 is the result of 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 $3.1 million for the three months
ended June 30, 2001, compared to a net foreign exchange loss of $2.1 million for
the three months ended 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), cash and cash equivalents, investments,
and forward foreign exchange contracts. It is the Company's policy to attempt to
match local currency receivables and payables. The foreign currency denominated
assets and liabilities gives rise to foreign exchange gains and losses as a
result of U.S. dollar to local currency exchange movements.
17
Extraordinary Gain
During the six months ended June 30, 2001 the Company entered into nine debt
swap transactions which resulted in a combined extraordinary gain of $6.5
million (net of applicable income taxes of $0.9 million) for the three months
ended June 30, 2001, and $7.4 million (net of applicable income taxes of $1.3
million) for the six months ended June 30, 2001 (see Note 6 to the unaudited
Consolidated Financial Statements included in Part I, Item 1). There were no
extraordinary gains or losses for the three and six month periods ended June 30,
2000.
Net Income/(Loss)
The Company generated net income of $7.6 million during the three months ended
June 30, 2001 as compared to a net loss of $10.5 million for the three months
ended 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 $117.1 million, investments in property,
plant and equipment of approximately $55.9 million and acquisitions of $24.6
million.
At June 30, 2001 the Company had cash and cash equivalents of $5.6 million and
working capital of $4.4 million. The Company had $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 June 30, 2001, the Company held repurchased notes payable with a face
value of DEM 105.7 million ($46.0 million as of June 30, 2001, based on a USD to
DM rate of 1:2.30) and a fair market value at June 30, 2001, of $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 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. The Credit Agreement
was amended and renewed for six month periods on December 28, 2000 and June 28,
2001 and, as a result of such amendments, any amounts drawn on the facility must
now be repaid by June 28, 2002.
A "commitment" fee was paid for the initial facility of 100,000 warrants issued
pro-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
extensions of the facility. Warrants are issuable 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 June 30, 2001, the Company has drawn $2.0 million and issued 160,000
warrants in respect of such draw. Amounts outstanding under the 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 June 30, 2001 the Company owed $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 $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 completed 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 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 $5.6 million at 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 six months ended June 30, 2001.
Restricted Cash
Restricted cash decreased to $1.9 million at June 30, 2001 from $2.1 million at
December 31, 2000. The majority of restricted cash was held as security with
respect to cash provided in Hungary by banks participating in Euronet's ATM
network.
Trade Accounts Receivable
Trade accounts receivable decreased to $8.8 million at June 30, 2001 from $9.5
million at December 31, 2000, due primarily to increased collections.
Property, Plant and Equipment
Net property, plant and equipment decreased to $27.8 million at 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 $2.2 million at June 30, 2001 from $2.6
million at December 31, 2000. The decrease is the result of amortization of
purchased goodwill in respect of the SBK and Dash acquisitions in 1999.
Current liabilities
Current liabilities decreased to $19.5 million at 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 installments decreased to
$10.8 million at 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 $54.5 million at 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) (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 $27.0 million at June 30, 2001 from
$44.8 million at December 31, 2000. This is due to the net profit for the six
months ended June 30, 2001 of $6.7 million, $0.6 million received for options
exercised and $10.7 million for the shares issued on the extinguishments of debt
(see note 6 to the unaudited consolidated financial statements) and an increase
in the accumulated comprehensive loss of $0.2 million.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 accounting 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. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 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 appropriate pre-Statement 142 accounting literature.
Statement 141 will require upon adoption of Statement 142 that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to 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 identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment 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 recognized as the cumulative effect of a 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 liabilities, 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 in a manner similar to a purchase price allocation
in accordance with Statement 141 to its carrying amount both of which would be
measured as of the date of adoption. This second step is required to be
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 expects 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 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, (iii) trends affecting the Company's business,
(iv) the adequacy of capital to meet the Company's capital requirements and
expansion plans, (v) the assumptions underlying the Company's business plans,
(vi) business strategy, (vii) government regulatory action, (viii) technological
advances and (ix) projected costs and revenues, are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Forward-looking statements are typically
identified by the words believe, expect, anticipated, intend, estimate and
similar expressions.
Investors are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
results may 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 six months ended June 30, 2001, 31% of the Company's revenues were
generated in Poland and Hungary, as compared to 30% in the six months ended June
30, 2000 and 27% in the six months ended June 30, 1999. The first six 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 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
against the U.S. dollar, would have the combined effect of a $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 June 30,
2001 was $40.7 million compared to a carrying value of $54.5 million. A 1%
increase from prevailing interest rates at June 30, 2001 would result in a
decrease in fair value of notes payable by approximately $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
At 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
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 15, 2001 By: /s/ MICHAEL J. BROWN
--------------------
Michael J. Brown
Chief Executive Officer
By: /s/ KENDALL COYNE
-----------------
Kendall Coyne
(Chief Financial Officer)
24