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, 2002
OR
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER C00-22167
EURONET WORLDWIDE, 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, 2002, the
Company had 22,913,414 common shares outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
- ------------------------------
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. Dollars, except share and per share data)
(Unaudited)
ASSETS Mar. 31, 2002 Dec. 31, 2001
- ------ ------------- -------------
Current assets:
Cash and cash equivalents $22,123 $ 8,818
Restricted cash 6,113 1,877
Trade accounts receivable, net of allowances for doubtful accounts of
$707,000 at March 31, 2002 and $675,000 at December 31, 2001 8,318 8,908
Costs and estimated earnings in excess of billings on software
installation contracts 245 331
Assets from discontinued operations 434 1,273
Prepaid expenses and other current assets 5,490 5,799
------- --------
Total current assets 42,723 27,006
Property, plant, and equipment, net 27,647 29,086
Intangible assets, net 1,523 1,551
Deposits 41 41
Deferred income taxes 426 429
Other assets, net 3,063 3,278
------- --------
Total assets $75,423 $ 61,391
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIT)
- ------------------------------------------------
Current liabilities:
Trade accounts payable $4,356 $ 4,762
Current installments of obligations under capital leases 4,394 4,627
Accrued expenses and other current liabilities 6,306 7,366
Short-term borrowings - 513
Advance payments on contracts 2,672 2,266
Income taxes payable 192 90
Liabilities from discontinued operations 428 498
Billings in excess of costs and estimated earnings on software
installation contracts 2,272 1,457
Credit facility - 2,000
------- --------
Total current liabilities 20,620 23,579
Obligations under capital leases, excluding current installments 6,461 7,353
Notes payable 38,669 38,146
------- --------
Total liabilities 65,750 69,078
------- --------
Stockholders' equity / (deficit):
Common stock, $0.02 par value. Authorized 60,000,000 shares; issued and
outstanding 22,922,914 shares at March 31, 2002 and 22,038,073 at
December 31, 2001 458 441
Additional paid in capital 132,334 117,940
Treasury stock (145) (145)
Employee loans for stock (446) (463)
Subscription receivable (30) -
Accumulated deficit (119,561) (123,141)
Restricted reserve 784 784
Accumulated other comprehensive loss (3,721) (3,103)
------- --------
Total stockholders' equity / (deficit) 9,673 (7,687)
------- --------
Total liabilities and stockholders' equity / (deficit) $75,423 $ 61,391
======= ========
See accompanying Notes to unaudited consolidated financial statements.
2
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(In thousands of U.S. Dollars, except share and per share data)
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Revenues:
ATM network and related revenue $ 12,177 $ 10,182
Software, maintenance and related revenue 4,863 3,976
-------- --------
Total revenues 17,040 14,158
-------- --------
Operating expenses:
Direct operating costs 7,006 6,526
Salaries and benefits 6,078 6,830
Selling, general and administrative 1,501 2,003
Depreciation and amortization 2,309 2,089
-------- --------
Total operating expenses 16,894 17,448
-------- --------
Operating income / (loss) 146 (3,290)
-------- --------
Other (expense) / income:
Interest income 80 109
Interest expense (1,654) (2,811)
Foreign exchange gain, net 412 4,391
-------- --------
Total other (expense) / income (1,162) 1,689
-------- --------
Loss from continuing operations before income taxes, minority interest
and extraordinary items (1,016) (1,601)
Income tax benefit 1,665 282
-------- --------
Income / (loss) from continuing operations before minority interest
and extraordinary items 649 (1,319)
Minority interest 26 -
Discontinued operations:
Income / (loss) from operations of discontinued US and France
components (including gain on disposal of $4,845 in 2002) 4,762 (522)
Income tax expense 1,857 -
-------- --------
Income / (loss) from discontinued operations 2,905 (522)
-------- --------
Extraordinary gain on early retirement of debt, net of applicable income
taxes - 847
-------- --------
Net income / (loss) 3,580 (994)
Translation adjustment (618) 418
-------- --------
Comprehensive income / (loss) $ 2,962 $ (576)
======== ========
Earnings / (loss) per share - basic
Income / (loss) from continuing operations before minority interest and
extraordinary items per share $ 0.03 $ (0.07)
Income / (loss) from discontinued operations per share 0.13 (0.03)
Extraordinary gain on extinguishment of debt per share - 0.04
-------- --------
Net income / (loss) per share $ 0.16 $ (0.06)
======== ========
Basic weighted average number of shares outstanding 22,476,888 17,915,375
========== ==========
Earnings / (loss) per share - diluted
Diluted income / (loss) from continuing operations before minority
interest and extraordinary items per share $ 0.02 $ (0.07)
Diluted income / (loss) from discontinued operations per share 0.12 (0.03)
Diluted extraordinary gain on extinguishment of debt per share - 0.04
-------- --------
Diluted net income / (loss) per share $ 0.14 $ (0.06)
======== ========
Diluted weighted average number of shares outstanding 26,145,733 17,915,375
========== ==========
See accompanying Notes to unaudited consolidated financial statements.
3
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
(Unaudited)
Three months ended
March 31,
2002 2001
------------------
Cash flows from operating activities:
Net income/(loss) 3,580 (994)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 2,309 2,179
Unrealized foreign exchange gain, net (792) (5,364)
Accretion of discount on notes 1,177 2,329
Decrease in costs and estimated earnings in excess of billings
on software installation contracts 85 31
Gain on sale of discontinued operations, net of tax (2,988) -
Benefit from deferred income tax (1,857) (436)
Gain on extinguishment of debt, net of tax - (847)
Loss from discontinued operations, net of tax 83 522
Decrease in restricted cash 13 67
Decrease in trade accounts receivable 538 99
Decrease/(increase) in prepaid expenses and other current assets 120 (530)
Decrease in trade accounts payable (404) (682)
Increase/(decrease) in billings in excess of costs and estimated
earnings on software installation contracts, net 815 (397)
(Decrease)/increase in accrued expenses and other liabilities (732) 292
Other 54 823
-------- -------
Net cash provided by/(used in) operating activities 2,001 (2,908)
Cash flows from investing activities:
Fixed asset purchases (989) (280)
Proceeds from sale of fixed assets 224 177
Purchase of restricted certificate of deposit (4,250) -
-------- -------
Net cash used in investing activities (5,015) (103)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of shares and other capital contributions 14,412 735
Repayment of credit facility (2,000) -
Repurchase of notes payable - 124
Subscriptions receivable (30) 12
Cash received from employees for the purchase of common stock 17 35
Repayment of obligations under capital leases (1,531) (517)
(Repayments of)/proceeds from bank borrowings (513) 307
-------- -------
Net cash provided by financing activities 10,355 696
-------- -------
Effects of exchange rate differences on cash 175 418
Proceeds from sale of discontinued operations 5,872 -
Cash used in discontinued operations (83) (522)
-------- -------
Net increase/(decrease) in cash and cash equivalents 13,305 (2,419)
Cash and cash equivalents at beginning of period 8,818 7,151
-------- -------
Cash and cash equivalents at end of period $ 22,123 $ 4,732
======== =======
See accompanying Notes to unaudited consolidated financial statements. See Note
6 for details of significant non-cash transactions.
4
EURONET WORLDWIDE, INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL POSITION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Euronet
Worldwide, 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, 2002 and December 31,
2001, the results of its operations for the three-month periods ended March 31,
2002 and 2001, and cash flows for the three-month periods ended March 31, 2002
and 2001.
The unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements of Euronet Worldwide, Inc.
and subsidiaries for the year ended December 31, 2001, including the notes
thereto, set forth in the Company's Form 10-K.
The results of operations for the three-month period ended March 31, 2002 are
not necessarily indicative of the results to be expected for the full year.
The Company generated operating income from continuing operations of $0.1
million for the three months ended March 31, 2002. This is primarily due to
continued increases in revenue and controlled costs. In addition, the Company
generated positive cash flows from operations of $2.0 million for the three
months ended March 31, 2002, as a result of these same factors. Based on the
Company's current business plan and financial projections, the Company expects
to increase operating income and net cash generated from operating activities
during the remainder of 2002. In the Processing Services Segment, the Company
anticipates that increased transaction levels in its ATM network will result in
additional revenues without a corresponding increase in expenses. In addition,
the Company expects to further expand its ATM outsourcing services and offer new
value-added services, which will provide continued revenue growth without
significantly increasing direct operating expenses or capital investments. In
the Software Solutions Segment, the Company expects to continue its strategic
repositioning of its software business from direct software sales to
software-only customers to more integrated solutions combining the strengths of
the Company's electronic financial transaction network system with its software
development strengths.
The Company believes that cash and cash equivalents at March 31, 2002 will
provide the Company with sufficient cash resources going forward. In addition,
the Company holds repurchased notes payable with a face value of euro 79.1
million ($68.9 million) and a fair value estimated at March 31, 2002 of $62.0
million. 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 AND RECENTLY ADOPTED ACCOUNTING
STANDARDS
For a description of the accounting policies of the Company, see Note 3 to the
Notes to Consolidated Financial Statements for the year ended December 31, 2001.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 141, Business Combinations (SFAS 141). The adoption of SFAS 141
had no impact to the financial statements.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). Under SFAS
142 goodwill and intangible assets with indefinite lives are no longer amortized
but are reviewed annually (or more frequently if impairment indicators arise)
for impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their
5
useful lives. The amortization and non-amortization provisions of SFAS 142 apply
upon issuance to all goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, the Company adopted SFAS 142 effective January 1, 2002. Under SFAS 142,
for the interim period we are required to segregate and specifically identify
intangible assets into goodwill and other intangible assets. We have performed
an evaluation and determined that all intangible assets recorded in our
consolidated financial statements comprise only goodwill. The application of the
provisions of SFAS 142 resulted in a reduction of goodwill amortization expense
of $0.1 million in the first quarter of 2002. At March 31, 2002, the Company had
goodwill, net of accumulated amortization, of $1.5 million. The Company does not
anticipate that an impairment charge, if any, arising from our goodwill
assessment in 2002 will be significant.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations (SFAS 143). The
adoption of SFAS 143 had no impact to the financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 establishes accounting and
reporting standards for the impairment and disposal of long-lived assets and
discontinued operations. The application of this statement resulted in the
classification and separate financial statements presentation of certain
entities as discontinued operations, which are not included in continuing
operations.
On January 4, 2002, the Company sold substantially all of the assets of the
United States ATM processing business to ALLTEL in an Asset Purchase Agreement.
The United States processing business was owned by the Company's subsidiary EFT
Network Services, LLC and was commonly known as "DASH" or the "DASH network".
DASH was accounted for as a discontinued operation in accordance with SFAS 144
and, accordingly, amounts in the financial statements and related notes for all
periods shown reflect discontinued operations accounting. Related assets and
liabilities have been segregated and continue to be recorded in the financial
statements at carrying value as at December 31, 2001 (see Note 8). Additionally,
the Company has committed, within 2002, to sell substantially all of the
non-current assets and capital lease obligations of its processing business in
France. Accordingly, the France business also qualifies for discontinued
operations accounting. Non-current assets and capital lease obligations related
to the France business have been segregated and continue to be recorded in the
financial statements at carrying value.
There have been no further significant additions to or changes in accounting
policies of the Company since December 31, 2001.
NOTE 3 - EARNINGS/(LOSS) 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 three months
ending March 31, 2002, dilutive earnings per share reflects the potential
dilution that could occur if dilutive stock options and warrants were exercised
using the treasury stock method where applicable. For the three months ending
March 31, 2001, the effect of potential common stock is anti-dilutive because a
net loss exists. Accordingly, dilutive earnings per share for the three months
ending March 31, 2001 does not assume the exercise of outstanding stock
options and warrants.
For the three months ending March 31, 2002, weighted average shares (undiluted)
were 22,476,888. For the three months ending March 31, 2002, fully diluted
weighted average shares were 26,145,733.
For the three months ending March 31, 2001, weighted average shares (undiluted)
were 17,915,375. For the three months ending March 31, 2001, weighted average
shares including the dilutive effect of dilutive stock options and warrants
would have been 19,737,027. However no fully diluted computations have been
performed for reasons stated above.
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
processing services to banks, retail and financial institutions (the "Processing
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.
6
Prior to June 10, 2001, The Processing Services Segment was referred to in
filings of the Company as the "Network Services Segment." This name change has
been made to conform to current industry terminology.
The Company divided the Processing 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 and the United Kingdom) and the "Other Operations Sub-segment"
(including Indonesia, Egypt and unallocated processing center costs).
The results from operations from France and DASH have been removed from
continuing operations for all reported periods in accordance with SFAS 144.
France was in previous filings reported under the Western European Sub-Segment
and DASH was previously reported under the Other Operations Sub-segment.
The following tables present the segment results of the Company's operations for
the three months ended March 31, 2002 and March 31, 2001.
(Unaudited)
(In thousands)
Processing Services
-------------------
Processing
For the three months ended Central Western Services Software Corporate
March 31, 2002 Europe Europe Other Total Solutions Services Total
- -------------------------- -------- -------- -------- -------- --------- --------- --------
Total revenues $ 6,136 $ 5,562 $ 479 $ 12,177 $ 4,908 $ -- $ 17,085
Direct operating costs (3,248) (3,279) (87) (6,614) (437) -- (7,051)
Salaries and benefits (900) (705) (1,015) (2,620) (2,883) (575) (6,078)
Selling, general and administrative (454) (419) 695 (178) (627) (696) (1,501)
Depreciation and amortization (1,020) (720) (295) (2,035) (232) (42) (2,309)
-------- -------- -------- -------- -------- -------- --------
Total operating expenses (5,622) (5,123) (702) (11,447) (4,179) (1,313) (16,939)
Operating income / (loss) 514 439 (223) 730 729 (1,313) 146
Interest income 8 2 1 11 65 4 80
Interest expense (211) (73) -- (284) -- (1,370) (1,654)
Foreign exchange (loss) / gain, net (180) (99) 59 (220) -- 632 412
-------- -------- -------- -------- -------- -------- --------
Income / (loss) from continuing operations
before income taxes $ 131 $ 269 $ (163) $ 237 $ 794 $ (2,047) $ (1,016)
Minority interest $ -- $ -- $ 26 $ 26 $ -- $ -- $ 26
(Loss)/income from discontinued operations
before income taxes $ -- $ (181) $ 4,943 $ 4,762 $ -- $ -- $ 4,762
Assets as at March 31, 2002
Segment assets $ 23,684 $ 16,898 $ 2,927 $ 43,509 $ 19,876 $ 12,038 $ 75,423
Fixed assets $ 13,773 $ 11,632 $ 1,118 $ 26,523 $ 1,090 $ 34 $ 27,647
7
(Unaudited)
(In thousands)
Processing Services
-------------------
Processing
For the three months ended Central Western Services Software Corporate
March 31, 2001 Europe Europe Other Total Solutions Services Total
- -------------------------- -------- -------- -------- -------- --------- --------- --------
Total revenues $ 5,489 $ 4,693 $ -- $ 10,182 $ 4,021 $ -- $ 14,203
Direct operating costs (3,523) (2,787) -- (6,310) (261) -- (6,571)
Salaries and benefits (731) (505) (638) (1,874) (4,215) (741) (6,830)
Selling, general and administrative (428) (309) 371 (366) (963) (674) (2,003)
Depreciation and amortization (1,003) (707) (224) (1,934) (120) (35) (2,089)
-------- -------- -------- -------- -------- -------- --------
Total operating expenses (5,685) (4,308) (491) (10,484) (5,559) (1,450) (17,493)
Operating (loss) / income (196) 385 (491) (302) (1,538) (1,450) (3,290)
Interest income 24 23 2 49 32 28 109
Interest expense (262) (32) -- (294) -- (2,517) (2,811)
Foreign exchange (loss) / gain, net (211) (110) (461) (782) (1) 5,174 4,391
-------- -------- -------- -------- -------- -------- --------
(Loss) / income from continuing operations
before income taxes $ (645) $ 266 $ (950) $ (1,329) $ (1,507) $ 1,235 $ (1,601)
Minority interest $ -- $ -- $ -- $ -- $ -- $ -- $ --
(Loss)/income from discontinued operations
before income taxes $ -- $ (667) $ 145 $ (522) $ -- $ -- $ (522)
Assets as at December 31, 2001
Segment assets $ 25,548 $ 17,561 $ 4,150 $ 47,259 $ 8,409 $ 5,723 $ 61,391
Fixed assets $ 14,956 $ 11,744 $ 1,085 $ 27,785 $ 1,243 $ 58 $ 29,086
The following is a reconciliation of the segmented information to the unaudited
consolidated financial statements.
For the three months ended
(in thousands) March 31, 2002 March 31, 2001
-------------- --------------
Revenues:
Total revenues for reportable segments $17,085 $14,203
Elimination of inter segment revenues (45) (45)
------- -------
Total consolidated revenues $17,040 $14,158
======= =======
For the three months ended
(in thousands) March 31, 2002 March 31, 2001
-------------- --------------
Operating expense:
Total operating expense for reportable segments $16,939 $17,493
Elimination of inter segment expenses (45) $ (45)
------- -------
Total consolidated operating expenses $16,894 $17,448
======= =======
8
Total revenues for the three month periods ended March 31, 2002 and March 31,
2001 and long-lived assets as of March 31, 2002 and December 31, 2001 for the
Company, analyzed by geographical location, are as follows:
Total Revenues Long-lived Assets
------------------- ------------------------------
For the three months ended
March 31, March 31, At March 31, At December 31,
2002 2001 2002 2001
------- ------- ------------ ---------------
United States $ 4,908 $ 4,021 $ 1,090 $ 1,243
Germany 2,553 2,423 3,325 3,705
Poland 2,963 2,881 8,475 9,275
Hungary 1,789 1,707 3,884 4,306
UK 3,009 2,270 7,985 7,688
Other 1,818 856 2,888 2,869
------- ------- ------- -------
Total $17,040 $14,158 $27,647 $29,086
======= ======= ======= =======
Total revenues are attributed to countries based on location of customer for the
ATM and related services segment. All revenues generated by Euronet USA's
Software Solutions Segment activities are attributed to the United States. Long
lived assets consist of property, plant, and equipment, net of accumulated
depreciation.
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
$0.6 million. 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,
June 28, 2001 and November 27, 2001 and, as a result of such amendments, any
amounts drawn on the facility were to 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, 50,000 and 50,000 warrants, on the same
terms, were issued on January 2, 2001, June 28, 2001, and November 27, 2001,
respectively, for the subsequent extensions of the facility. The exercise price
for Michael J. Brown was originally the same as for the other lenders. It was
revised by an amendment to the Credit Agreement on January 27, 2002 to be no
less than the full trading price of our stock on Nasdaq as of the date of the
agreement providing for grant of the warrants, with the amount of the discount
that would have resulted from the original terms of the Credit Agreement to be
paid to Mr. Brown in cash. Warrants were 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. On May 29, 2001, the Company drew $2.0 million and
issued 160,000 warrants in respect of such draw.
The exercise prices for the warrants for DST Systems and Hungarian-American
Enterprise Fund were $7.00 per share for the 100,000 warrants issued as of
June 28, 2000, $4.12 per share for the 100,000 warrants issued as of
December 29, 2000, $5.92 per share for the 160,000 warrants issued as of May 29,
2001 and $6.70 per share for the 100,000 warrants issued as of June 28, 2001.
The exercise prices for the warrants for Michael J. Brown were $8.25 per share
for the 100,000 warrants issued as of June 28, 2000, $4.12 per share for the
100,000 warrants issued as of December 29, 2000, $7.05 per share for the 160,000
warrants issued as of May 29, 2001 and $9.00 per share for the 100,000 warrants
issued as of June 28, 2001.
Amounts outstanding under the facility accrued interest at 10 percent per annum,
payable quarterly. The Credit Agreement was not renewed in December 2001 and was
repaid in full on March 21, 2002.
In 2001, two participants in the Credit Agreement, in three separate
transactions, elected to exercise a total of 361,000 warrants for an equal
number of shares. The total amount of cash received from these transactions was
$2.1 million. In May of 2002, additional warrants were exercised as more fully
described in Note 11.
9
NOTE 6 - EXTINGUISHMENT OF DEBT
During February 2001, the Company exchanged 3,000 units (principal amount of
euro 1.5 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 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 ($1.1 million)
and the fair market value of the common stock issued ($0.6 million), offset by
the write-off of the allocated unamortized deferred financing costs. This
transaction was exempt from registration in accordance with the U.S. Securities
Act of 1933 (the "Act").
During March 2001, the Company exchanged 8,750 Senior Discount Notes (principal
face amount of euro 4.5 million) of its Senior Discount Notes for two new Senior
discount notes having an aggregate face amount of US $3.0 million (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 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 ($3.3 million) and the fair market value of the New Notes
issued ($2.5 million), offset by the write-off of the allocated unamortized
deferred financing costs ($0.1 million). This transaction was exempt from
registration in accordance with the Act.
The Senior Discount Notes that were acquired by the Company in the above
exchanges have not been retired.
These two transactions result in a combined extraordinary gain of $0.9 million
(net of applicable taxes of $0.3 million) for the quarter ended March 31, 2001.
For the quarter ending March 31, 2002, we have made no further acquisitions of
these Senior Discount Notes.
For a description of additional debt extinguishments during 2001, see Note 3 to
the Consolidated Financial Statements for the year ended December 31, 2001.
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 were extended for a second six
month period. The loans were unsecured. Amounts advanced bore interest of 10%
per annum. In January 2002, the loan of $0.5 million and related interest was
paid in full.
In 2000, Michael J. Brown, the CEO and a Director of the Company, pledged
approximately $4.0 million 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 was payable for
providing this security. On March 14, 2002, a letter of credit was obtained by
the Company in the amount of $5.0 million which replaced the above security
pledge by Michael J. Brown and a related $0.8 million letter of credit supported
by a certificate of deposit that had been obtained for the same purpose.
For the three months ended March 31, 2002, the Company recorded $0.1 million in
revenue related to CashNet, a 10 % owned affiliate, with respect to a data
processing and technical services agreement.
NOTE 8 - DISCONTINUED OPERATIONS
Sale of US Processing Services Business
On January 4, 2002, the Company concluded an Asset Purchase Agreement with
ALLTEL Information Services, Inc. ("AIS"), a wholly owned subsidiary of ALLTEL
Corporation, whereby EFT Network Services, LLC (also
10
known as DASH) sold substantially all of its assets to AIS for $6.8 million, in
cash. Of this amount, $0.7 million is being held in escrow under the terms of a
separate escrow agreement to provide for the payment of any damages that might
arise from any breach of the representations and warranties contained in the
Asset Purchase Agreement and certain post-closing adjustments. DASH is a
wholly-owned subsidiary of Euronet USA Inc, which is a wholly-owned subsidiary
of Euronet Worldwide, Inc. DASH, Euronet USA and AIS are parties to the Asset
Purchase Agreement. The Company recorded a pre-tax gain of approximately $4.8
million related to this transaction. As discussed in Note 9, the Company
entered into a separate Software License Agreement with AIS on January 4, 2002.
Assets/Liabilities From Discontinued Operations
Throughout 2001, we reduced the number of ATMs we have in France in response to
new stringent safety requirements for off branch ATMs. The new safety
requirements were established in response to pressure from the French unions
representing cash delivery employees and will come fully into effect on
January 1, 2003. The requirements make it uneconomical to operate off branch
ATMs in France and we therefore are holding our off branch network of ATMs in
France for sale by January 1, 2003. The losses from operations in France
reported under discontinued operations for the three months ended March 31, 2002
were $0.2 million as compared to $0.7 million for the three months ended
March 31, 2001.
As a result of the above, the results from operations from France and DASH have
been removed from continuing operations for all reported periods in accordance
with SFAS 144. France was previously reported under the Western European
Sub-segment and DASH was previously reported under the Other Operations
Sub-segment. The following pro-forma financial statements show balance sheet
extracts as of March 31, 2002 and December 31, 2001 as well as the summary
operating results of discontinued operations for the three months ended
March 31, 2002 and 2001.
Unaudited
(in thousands) March 31, 2002 December 31, 2001
---------------------------- --------------------------
DASH France Total DASH France Total
---- ------ ----- ---- ------ -----
Current assets $-- -- -- 384 -- $ 384
Fixed assets -- 434 434 -- 434 434
Long term assets -- -- -- 455 -- 455
--------------------------- --------------------------
Total assets
from discontinued operations $-- 434 434 839 434 $1,273
=========================== =========================
Current liabilities -- 138 138 70 138 208
Long term liabilities -- 290 290 -- 290 290
--------------------------- --------------------------
Total liabilities
from discontinued operations $-- 428 428 70 428 $ 498
=========================== ==========================
Three months ended Three months ended
March 31, 2002 March 31, 2001
---------------------------- --------------------------
DASH France Total DASH France Total
---- ------ ----- ---- ------ -----
Revenues $ 101 194 295 517 148 $ 665
Operating expenses 3 301 304 372 650 1,022
------------------------------ --------------------------
Operating income/(loss) 98 (107) (9) 145 (502) (357)
Other (expense)/income -- (74) (74) -- (165) (165)
Gain on disposal 4,845 -- 4,845 -- -- --
------------------------------ --------------------------
Income before taxes 4,943 (181) 4,762 145 (667) (522)
Income tax expense $(1,857) -- (1,857) -- -- $ --
------------------------------ --------------------------
Net income/(loss)
of discontinued operations $ 3,086 (181) 2,905 145 (667) $ (522)
============================== ==========================
11
NOTE 9 - SIGNIFICANT SOFTWARE LICENSE AGREEMENT
On January 4, 2002, the Company entered into a significant Software License
Agreement (the "License Agreement") whereby Euronet USA granted AIS a
nonexclusive license to use, distribute and develop versions 1.5 and 2.2 of
Euronet USA's GoldNet ITM ATM Network Processing Software ("GoldNet Software").
The License Agreement includes certain territorial and other restrictions on the
use and distribution of the GoldNet Software by AIS. Under the terms of the
License Agreement, AIS has agreed to pay license fees of $5.0 million. 50% of
the license fees were received in January 2002, with remaining payments of 40%
upon acceptance of the software, and 10% twelve months from the date of the
agreement, subject to completion of certain maintenance and support services.
The License Agreement does not restrict the ability of Euronet USA to continue
to sell its GoldNet Software, except that Euronet USA may not sell to former
DASH customers or new AIS network processing customers. Revenue from the license
fee and related services will be recognized under the percentage of completion
contract accounting method. The Company recognized $1.3 million in revenues
during the three months ended March 31, 2002. The Company expects to recognize
approximately 70% - 80% of the fees in revenues during 2002 with the remaining
to be recognized in 2003.
NOTE 10 - PRIVATE PLACEMENT
On February 6, 2002 we entered into seven subscription agreements for the sale
of an aggregate of 625,000 new common shares of the Company. These agreements
were signed with certain accredited investors in transactions exempt from
registration under the United States Securities Act of 1933 (the "Act") pursuant
to exemptions under Section 4(2) and Regulation D of the Act. The purchase price
of each share was $20.00. The aggregate amount of proceeds to the Company from
the private placement was $12.5 million. Net proceeds after $0.6 million in
commission fees, legal fees, and Nasdaq registration and filing fees were
approximately $11.9 million.
NOTE 11 - SUBSEQUENT EVENTS
On May 8, 2002, in a single transaction, the Company exchanged an aggregate of
face value euro 1.3 million of its Senior Discount Notes for 75,000 shares of
its common stock, par value $0.02 per share. This exchange will be accounted for
as an extinguishment of debt with the resulting loss 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 transaction is exempt from registration in accordance with
the Act. The Senior Discount Notes that were acquired by the Company in the
above exchange have not been retired.
In May 2002, two participants in the Credit Agreement described in Note 5, in
two separate transactions, elected to exercise warrants to purchase a total of
99,000 shares. The total amount of cash received from these transactions was
$0.7 million.
In May 2002, the Company's shareholders approved a new Stock Incentive Plan
which provides for the issuance of options to purchase up to 2.0 million shares
of stock to employees, directors and consultants of the Company. The terms of
this plan are similar to those of our existing two stock option plans, except
that the new plan permits the grant of certain types of options and stock rights
that were not provided for in our other plans, including "reload options," stock
appreciation rights, restricted share awards, deferred share awards and phantom
rights. Reload options are options which provide for the issuance of new options
upon exercise, if the exercise is made by surrender to the Company of shares
that have been held for at least 6 months.
NOTE 12 - RECLASSIFICATION
Certain amounts have been reclassified in the prior periods' unaudited
consolidated financial statements to conform to the 2002 unaudited consolidated
financial statements presentation.
As described in Note 8, France and DASH have been removed from continuing
operations and classified under discontinued operations. The assets and
liabilities associated with the sale have been classified under assets and
liabilities from discontinued operations. All operating amounts, ATM counts,
transaction numbers and statistics reported in this filing exclude France and
DASH.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
OVERVIEW
We are a leading provider of secure electronic financial transaction solutions.
We provide financial payment middleware, financial network gateways,
outsourcing, and consulting services to financial institutions, retailers and
mobile phone operators. We operate an independent automated teller machine, or
ATM, network of 2,548 ATMs in Europe (and until January 2002 in the United
States). In addition, through our software subsidiary Euronet USA Inc., we offer
a suite of integrated software solutions for electronic payment and transaction
delivery systems. We offer comprehensive electronic payment solutions consisting
of ATM network participation, outsourced ATM management solutions and software
solutions. Our principal customers are banks and other companies such as mobile
phone operators that require electronic financial transaction processing
services. With nine offices in Europe, one in Indonesia, one in Egypt and two in
the United States, we offer our solutions in more than 60 countries around the
world. We changed our name from Euronet Services Inc. to Euronet Worldwide, Inc.
in August 2001.
We currently operate in two business segments: the "Processing Services Segment"
provides secure processing of electronic financial transactions, and the
"Software Solutions Segment" produces application software for the processing of
secure electronic financial transactions. The Processing Services Segment
comprises our proprietary ATM network, outsourced management of ATMs for banks,
and various new processing services that we provide for banks and mobile phone
companies through our ATM network and managed ATMs, such as mobile phone
recharge services. Our Software Solutions Segment provides transaction
processing software solutions to banks that permit them to operate ATMs and
point-of-sale terminals and process financial transactions from those devices
and the internet.
Our management divides the Processing Services Segment into three geographic
sub-segments:
o Central European Sub-segment (including Hungary, Poland, the Czech
Republic, Croatia, Greece and Romania),
o Western European Sub-segment (including Germany and the United
Kingdom), and
o Other Operations Sub-segment (including Indonesia, Egypt and
unallocated processing center costs).
We also operate a "Corporate Services Segment" that provides these two business
segments with corporate and other administrative services that are not directly
identifiable with them. The accounting policies of each segment are the same as
those described in the summary of significant accounting policies. We evaluate
performance based on profit or loss from continuing operations before income
taxes not including nonrecurring gains and losses.
We intend to close our ATM processing business in France, which we commonly
refer to simply as "France". Consequently, we have reclassified the operational
results for France for all reported periods to discontinued operations and have
reported the relevant assets and liabilities from discontinued operations in
accordance with SFAS 144.
On January 4, 2002, we sold substantially all of the assets of our ATM
processing business in the United States, known as DASH, to ALLTEL Information
Services, Inc. for $6.8 million in cash. ALLTEL Information Services, Inc. is a
wholly-owned subsidiary of ALLTEL Corporation. $0.7 million of the proceeds is
being held in escrow under the terms of a separate escrow agreement to cover
certain post-closing adjustments and any damages that might arise from breach of
the representations and warranties contained in the purchase agreement with
ALLTEL. We recorded a pre-tax gain of approximately $4.8 million related to this
transaction.
In previous filings, we reported France under the Western European Sub-segment
and DASH under the Other Operations Sub-segment. All operating amounts, ATM
counts, transaction numbers and statistics reported in this filing exclude
France and DASH. The decrease of our ATMs from 2,999 as reported in our annual
report on Form 10-K for the year ended December 31, 2001 to 2,548 at March 31,
2002 is attributable to this exclusion.
13
SEGMENT RESULTS OF OPERATIONS
(Unaudited)
(In thousands) Revenues Operating Income/(Loss)
-------- -----------------------
Three months ended March 31, 2002 2001 2002 2001
- ---------------------------- ---- ---- ---- ----
Processing Services:
Central European $ 6,136 $ 5,489 $ 514 $ (196)
Western European 5,562 4,693 439 385
Other 479 - (223) (491)
------- ------- ------- --------
Total Processing Services 12,177 10,182 730 (302)
Software Solutions 4,908 4,021 729 (1,538)
Corporate Services - - (1,313) (1,450)
Inter segment eliminations (45) (45) - -
------- ------- ------- --------
Total $17,040 $14,158 $ 146 $(3,290)
======= ======= ======= ========
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND
THE THREE MONTHS ENDED MARCH 31, 2001
PROCESSING SERVICES SEGMENT
Revenues
Total segment revenues increased 20% or $2.0 million to $12.2 million for the
three months ended March 31, 2002 from $10.2 million for the three months ended
March 31, 2001. The increase in revenues is due primarily to the significant
increase in transaction volumes and an increase in the number of ATMs that we
operated during these periods. We installed 2,112 ATMs as of March 31, 2001 and
processed 12.6 million transactions for the three months ended March 31, 2001.
As of March 31, 2002, we increased our ATM network by 436 ATMs, or 21%, to a
total of 2,548 ATMs. We own 85% of this total number of ATMs, while banks and
other financial institutions own the remaining 15% which we operate through
management agreements. We processed 15.6 million transactions for the three
months ended March 31, 2002, an increase of 3.0 million transactions, or 24%,
over the three months ended March 31, 2001. The increase in transaction growth
is greater than the increase in ATM growth and revenue growth. During this
period, there was an increase in ATMs that we operate under ATM management
agreements relative to ATMs we own. The revenues generated from ATM management
agreements have a substantial monthly recurring fee as compared to a per
transaction fee for our owned ATMs. This generates both fixed and variable
revenue components. As a result, transactions on these machines can increase
faster than the revenues.
Revenues for the Central European Sub-segment increased 11% or $0.6 million to
$6.1 million for the three months ended March 31, 2002 from $5.5 million for the
three months ended March 31, 2001. The increase in revenues is largely the
result of an increase in the number of ATMs operated by us from 1,405 at March
31, 2001 to 1,526 at March 31, 2002, and increased transaction volumes. Our
ability to continue to increase revenues at this rate depends on our ability to
sign new contracts to operate more ATMs for banks and financial institutions.
Revenues for the Western European Sub-segment increased 19% or $0.9 million to
$5.6 million for the three months ended March 31, 2002 from $4.7 million for the
three months ended March 31, 2001. The increase in revenues is largely the
result of an increase in the number of ATMs we operate in this region from 707
at March 31, 2001 to 978 at March 31, 2002, and increased transaction volumes.
During this period we also increased transaction fees in certain markets.
Of the net 271 ATMs added to the network in Western Europe, 258 ATMs were
located in the United Kingdom. Our increase in roll-out of ATMs in the United
Kingdom during 2001 was based on the ability to charge a transaction fee
directly to the person using the ATMs in this market. The continuance of an
aggressive roll-out of ATMs in 2002 in the United Kingdom depends on our ability
to find additional sites for ATMs that are capable of highly profitable
transaction levels. Some machines we have installed recently in the United
Kingdom had transaction levels that are lower than those of machines installed
earlier. This is partially due to lower transaction levels at ATM machines at
post office sites and at sites at where cash is replenished by merchants.
Although these ATMs are profitable, they are generating returns that are lower
than we expected. We continue to examine a number of responses to this
situation, including using lower cost machines at these sites, reducing our
roll-out of new
14
machines and relocating machines with low transaction volumes in the United
Kingdom. A decision to reduce our rate of roll-out of ATMs or the continuing
weakness of performance of certain ATMs could result in a decrease in growth in
our revenues and operating profits.
Revenues for the Other Operations Sub-segment were $0.5 million for the three
months ended March 31, 2002 as compared to nil for the three months ended March
31, 2001. Revenues from this segment are generated in Egypt and Indonesia, where
we are just beginning operations. We previously reported our revenue from the
DASH network under this segment but we sold this network in January 2002 (see
Note 8 to the unaudited consolidated financial statements). Therefore, no
further revenues will be realized in continuing operations from the DASH
business for the year 2002.
Of total segment revenue, approximately 90% is from ATMs we own for the three
months ended March 31, 2002 and 91% for the three months ended March 31, 2001.
Of total transactions processed, approximately 86% is attributable to ATMs we
own for the three months ended March 31, 2002 and 88% for the three months ended
March 31, 2001. We believe the shift from a largely proprietary, Euronet-owned
ATM network to a more balanced mix between proprietary ATMs and customer-owned
ATMs is a positive development and will provide higher marginal returns on
investments.
We charge fees for three types of ATM transactions that are currently processed
on our ATMs:
o Cash withdrawals,
o Balance inquiries, and
o Transactions not completed because the relevant card issuer does not
give authorization.
Transaction fees for cash withdrawals vary from market to market but generally
range from $0.60 to $2.15 per transaction. Transaction fees for the other two
types of transactions are generally substantially less. We include in Processing
Services Segment revenues transaction fees payable under the electronic recharge
solutions that we sell. Fees for recharge transactions vary substantially from
market to market and are based on the specific prepaid solution and the
denomination of prepaid hours purchased. Generally transaction fees vary from
$0.90 to $1.80 per prepaid mobile recharge purchase and are shared with the
financial institution.
Operating Expenses
Total segment operating expenses increased 9%, or $0.9 million to $11.4 million
for the three months ended March 31, 2002 from $10.5 million for the three
months ended March 31, 2001. The increase is primarily due to increased salaries
to support our operational growth during the period.
Operating expenses for the Central European Sub-segment decreased 2% or $0.1
million to $5.6 million for the three months ended March 31, 2002 from $5.7
million for the three months ended March 31, 2001. The decrease in operating
expenses is a result of lower direct operating expenses of $0.3 million offset
by increased salary expenses of $0.2 million. We increased the number of ATMs
that we operate in this region from 1,405 at March 31, 2001 to 1,526 at March
31, 2002, and increased transaction volumes. Operating expenses decreased in
spite of increasing ATMs and transactions due to operational efficiencies and
other expense reductions.
Operating expenses for the Western European Sub-segment increased 19% or $0.8
million to $5.1 million for the three months ended March 31, 2002 from $4.3
million for the three months ended March 31, 2001. The increase in operating
expenses was largely the result of an increase in the number of ATMs that we
operated over this period, increased direct operating costs and staff increases
in our expanding UK market. We increased the number of ATMs that we operate in
this region from 707 at March 31, 2001 to 978 at March 31, 2002, and transaction
volumes increased as a result.
We currently hold our ATM processing business in France for sale. Consequently,
we have reclassified the operational results for France for all reported periods
to discontinued operations and have disclosed the relevant assets and
liabilities from discontinued operations in accordance with SFAS 144.
Operating expenses for the Other Operations Sub-segment increased 40% or $0.2
million to $0.7 million for the three months ended March 31, 2002 from $0.5
million for the three months ended March 31, 2001. Indonesia operating expenses
generated most of this increase. We have not included the DASH network expenses
in this
15
segment because we sold DASH in January 2002 as further described in Note 8 to
the unaudited consolidated financial statements.
Direct operating costs in the Processing Services Segment consist primarily of:
o ATM installation costs,
o ATM site rentals,
o Costs associated with maintaining ATMs,
o ATM telecommunications,
o Interest on network cash and cash delivery, and
o Security services to ATMs.
These costs increased to $6.6 million for the three months ended March 31, 2002
from $6.3 million for the three months ended March 31, 2001. This increase is
primarily attributable to operating the increased number of ATMs mentioned
above. Also, allocations within the Euronet operating companies were made to
charge the ATM network operations for transaction switching fees and bank
connection fees incurred by our central processing center in Budapest. These
allocations totaled $1.3 million and $0.9 million for the three months ended
March 31, 2002 and March 31, 2001, respectively.
The components of direct operating costs for the three months ended March 31,
2002 and 2001 were:
Unaudited
(in thousands) Three months ending March 31,
-----------------------------
2002 2001
---- ----
ATM communication $1,001 $1,089
ATM cash filling and interest on network cash 1,712 1,768
ATM maintenance 1,015 1,108
ATM site rental 784 594
ATM installation 170 43
Transaction processing and ATM monitoring 1,523 1,358
Other 409 350
------ ------
Total direct operating expenses $6,614 $6,310
====== ======
As a percentage of this segment's revenue, direct operating costs fell from 62%
for the three months ended March 31, 2001 to 54% for the three months ended
March 31, 2002. On a per-ATM basis, the direct operating costs fell 13% from
$2,988 per ATM for the three months ended March 31, 2001 to $2,596 per ATM for
the three months ended March 31, 2002. On a per-transaction basis, the direct
operating costs fell 16% from $0.50 per transaction for the three months ended
March 31, 2001 to $0.42 per transaction for the three months ended March 31,
2002. Costs per transaction have decreased because of the combination of
increasing transaction volumes on existing sites and having a large fixed direct
operating cost structure on these sites. Increasing transaction volumes on
existing sites that have fixed direct operating expenses decreases our costs per
ATM. In addition, there was an increase in the number of ATMs that we operate
under ATM management agreements, and these ATMs generally have lower direct
operating expenses (telecommunications, cash delivery, security, maintenance and
site rental).
Segment salaries and benefits increased 37% to $2.6 million for the three months
ended March 31, 2002 from $1.9 million for the three months ended March 31,
2001. This increase reflects 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 which were
required to maintain quality service in line with rising transaction volumes. As
a percentage of this segment's revenue, salaries and benefits increased from 18%
for the three months ended March 31, 2001 to 22% for the three months ended
March 31, 2002.
Selling, general and administrative costs allocated to the Processing Services
Segment decreased by $0.2 million from $0.4 million for the three months ended
March 31, 2001 to $0.2 million for the three months ended March 31, 2002.
Depreciation and amortization increased marginally from $1.9 million for the
three months ended March 31, 2001 to $2.0 million for the three months ended
March 31, 2002.
16
Operating Income/(Loss)
As a result of the factors discussed above, the Processing Services Segment as a
whole improved operating income by $1.0 million, reporting operating income of
$0.7 million for the three months ended March 31, 2002 as compared to an
operating loss of $0.3 million for the three months ended March 31, 2001. The
Central European Sub-segment improved operating income by $0.7 million,
reporting operating income of $0.5 million for the three months ended March 31,
2002 compared to a loss of $0.2 million for the three months ended March 31,
2001. The Western European Sub-segment experienced no change in operating income
with $0.4 million for the three months ended March 31, 2002 and the three months
ended March 31, 2001. The Other Operations Sub-segment reduced its operating
loss by $0.3 million to a loss of $0.2 million for the three months ended March
31, 2002 from $0.5 million for the three months ended March 31, 2001.
SOFTWARE SOLUTIONS SEGMENT
Revenues
Revenues of the Software Solutions Segment were $4.9 million before
inter-segment eliminations for the three months ended March 31, 2002 as compared
to $4.0 million for the three months ended March 31, 2001. Software revenues are
grouped into four broad categories:
o Software license fees,
o Professional service fees,
o Maintenance fees, and
o Hardware sales.
Software license fees are the initial fees we charge to license our proprietary
application software to customers. We charge professional service fees for
providing customization, installation and consulting services to our customers.
Software maintenance fees are the ongoing fees we charge for maintenance of our
customers' software products. Hardware sales revenues are derived from the sale
of computer products. The components of software solutions revenue for the three
months ended March 31, 2002 and 2001 were:
Unaudited
(in thousands) Three months ending March 31,
-----------------------------
2002 2001
---- ----
Software license fees $2,188 $1,147
Professional service fees 841 1,671
Maintenance fees 1,409 1,201
Hardware sales 470 2
------ ------
Total $4,908 $4,021
====== ======
Software license fees increased $1.0 million from the three month period ended
March 31, 2001 to the same period in 2002, due primarily to $1.3 million in
license fees that we obtained as part of the software license agreement with
ALLTEL (see Note 9 to our unaudited consolidated financial statements). We
believe that the revenues of the Software Solutions Segment will increasingly be
derived from our upgraded and new set of software solutions, including our
wireless banking solutions.
The decrease in professional service fees of $0.8 million is due to fewer
billable hours, service and consulting contract work that we performed in
connection with the sale and installation of software during the three months
ended March 31, 2002 compared to the three months ended March 31, 2001. Certain
professional service fees are bundled in software license contracts and reported
as license fees using the percentage of completion method.
The increase in maintenance fees is due to the completion of several large
contracts since March 2001, thereby initiating the maintenance aspect of these
contracts, partially offset by termination of maintenance contracts by existing
customers. We intend to secure long-term revenue streams through multi-year
maintenance agreements with existing and new customers.
17
The increase in hardware sales in 2002 from 2001 is mainly attributed to one
computer hardware sale of $0.3 million. The cost for this item is included in
direct costs as described below.
Software Sales Backlog
We define "software sales backlog" as fees specified in contracts which we have
executed and for which we expect recognition of the related revenue within one
year. At March 31, 2002, the revenue backlog was $4.7 million as compared to
$2.0 million at March 31, 2001. This increase results principally from the
ALLTEL software license agreement, which comprises approximately $2.7 million of
the balance. There can be no assurance that the contracts included in backlog
will actually generate the specified revenues or that the revenues will be
generated within the one-year period.
Operating Expenses
Software Solutions Segment operating expenses consist primarily of:
o Salaries and benefits,
o Selling, general and administrative expenses, and
o Depreciation and amortization.
Total segment operating expenses decreased to $4.2 million for the three months
ended March 31, 2002 from $5.6 million for the three months ended March 31,
2001. The components of Software Solutions Segment operating costs for the three
months ended March 31, 2002 and the same period in 2001 were:
Unaudited
(in thousands) Three months ending March 31,
-----------------------------
2002 2001
---- ----
Direct operating costs $ 437 $ 261
Salaries and benefits 2,883 4,215
Selling, general and administrative 627 963
Depreciation and amortization 232 120
------- ------
Total operating expenses $ 4,179 $5,559
======= ======
Direct operating costs consist of hardware costs and distributor commissions.
The increase in direct costs of $0.2 million for the three months ending March
31, 2002 from the three months ending March 31, 2001 is largely due to the cost
of the one computer hardware sale discussed above, partially offset by a
decrease in distributor commissions.
During the first quarter of 2001 we reduced our workforce significantly with the
primary objective of reducing costs in our 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 was greater in the second and
subsequent quarters of 2001.
The decrease in selling, general and administrative expenses for the three
months ending March 31, 2002 from the three months ending March 31, 2001 was
primarily due to our efforts at controlling expenses, in particular,
telecommunication expense which decreased $0.3 million. Some of the cost
reductions were one-time credits and incentives that are not expected to
continue in the future.
Depreciation and amortization expense increased for the three months ending
March 31, 2002 from the three months ending March 31, 2001 due to the addition
of $0.4 million in leasehold improvements in late 2001 and the first quarter of
2002, as well as the addition of $1.0 million in capitalized research and
development costs during 2001. Depreciation of improvements and amortization of
capitalized software development costs were $0.2 million for the three months
ended March 31, 2002.
We have made an ongoing commitment to the development, maintenance and
enhancement of our products and services. As a result of this commitment we
invested substantial amounts in research and development. In
18
particular, we invested and will continue to invest in new software products
that permit additional features and transactions on our ATM network. In
addition, we continue to invest in the on-going development of products that
were recently introduced to the market. Our research and development costs for
computer products to be sold, leased or otherwise marketed were $0.9 million for
the three months ended March 31, 2002 as compared to $1.4 million for the three
months ended March 31, 2001.
We capitalized $0.1 million in software development costs during the three
months ended March 31, 2002 in accordance with our accounting policy of
capitalizing development costs on a product-by-product basis once technological
feasibility is established. In the three months ended March 31, 2001 we did not
capitalize any software development costs. We establish technological
feasibility of computer software products when we complete all planning,
designing, coding, and testing activities necessary to establish that the
product can be produced to meet its design specifications, including functions,
features, and technical performance requirements.
Of the total capitalized research and development costs, $0.2 million and $0.1
million were amortized in the three months ended March 31, 2002 and 2001,
respectively.
Operating Income/(Loss)
The Software Solutions Segment earned an operating income of $0.7 million for
the three months ended March 31, 2002 as compared to an operating loss of $1.5
million for the three months ended March 31, 2001 as a result of the factors
discussed above.
CORPORATE SERVICES SEGMENT
Operating Expenses
Operating expenses for the Corporate Services Segment decreased to $1.3 million
for the three months ended March 31, 2002 from $1.5 million for the three months
ended March 31, 2001. The components of this segment's operating costs for the
three months ended March 31, 2002 and the same period in 2001 were:
Unaudited
(in thousands) Three months ending March 31,
-----------------------------
2002 2001
---- ----
Salaries and benefits $ 575 $ 741
Selling, general and administrative 696 674
Depreciation and amortization 42 35
------ ------
Total operating expenses $1,313 $1,450
====== ======
The reduction of $0.2 million in salaries and benefits for the three months
ending March 31, 2002 compared to the three months ending March 31, 2001 is due
to workforce reductions for the three months ending March 31, 2001.
NON-OPERATING RESULTS
Interest Income
Interest income remained constant at $0.1 million for the three months ended
March 31, 2002 and the same period in 2001.
Interest Expense
Interest expense decreased to $1.7 million for the three months ending March 31,
2002 from $2.8 million for the three months ending March 31, 2001. The decrease
from 2001 to 2002 was due to a reduction in the 12 3/8% senior discount notes as
a result of significant debt/equity swaps during 2001 that are more fully
described in Note 6 to the unaudited consolidated financial statements.
19
Foreign Exchange Gain
We had a net foreign exchange gain of $0.4 million for the three months ended
March 31, 2002, compared to a net foreign exchange gain of $4.4 million for the
three months ended March 31, 2001. Exchange gains and losses that result from
re-measurement of some of our assets and liabilities are recorded in determining
net loss. A portion of the assets and liabilities is denominated in Euros,
including capital lease obligations, notes payable (including the notes issued
in our public bond offering), and cash and cash equivalents. It is our policy to
attempt to match local currency receivables and payables. The foreign currency
denominated assets and liabilities give rise to foreign exchange gains and
losses as a result of U.S. dollar to local currency exchange movements.
Extraordinary Gain
We recorded an extraordinary gain of $0.9 million (net of applicable income
taxes of $0.3 million) for the three months ended March 31, 2001 in two separate
debt extinguishment transactions as described in Note 6 to the unaudited
consolidated financial statements. There were no extraordinary gains or losses
for the three months ended March 31, 2002.
The 12 3/8% senior discount notes that we re-acquired in the above exchanges
have not been retired. We will consider additional repurchases of our senior
discount notes if opportunities arise to complete these transactions on
favorable terms.
Minority Interest
We recorded the minority interest in losses from Euronet Sigma Nusantara, an
Indonesia company. We own 80% of Sigma Nusantara's shares.
Discontinued Operations
We intend to sell our processing business in France. Consequently, we have
reclassified the operational results for France for all reported periods to
discontinued operations. We disclose the relevant assets and liabilities from
discontinued operations in accordance with SFAS 144. The losses from France
operations reported as discontinued operations for the three months ended
March 31, 2002 were $0.2 million as compared to $0.7 million for the three
months ended March 31, 2001.
On January 4, 2002, we sold substantially all of the DASH assets to ALLTEL
Information Services for $6.8 million in cash. Of this amount, $0.7 million is
being held in escrow under the terms of a separate escrow agreement to cover
certain post-closing adjustments and any damages that might arise from breach of
the representations and warranties contained in the purchase agreement with
ALLTEL. We recorded a pre-tax gain of approximately $4.8 million related to this
transaction. We reported income from the discontinued operations of DASH of
$0.1 million and $0.1 million for the three months ended March 31, 2002 and
2001, respectively.
As a result of the above, we have removed the operating results of France and
DASH from continuing operations for all reported periods in accordance with SFAS
144. We previously reported France under the Western European Sub-segment and
DASH under the Other Operations Sub-segment.
Net Income/(Loss)
Our net income increased to $3.6 million during the three months ended March 31,
2002 from a net loss of $1.0 million for the three months ended March 31, 2001,
as explained above.
LIQUIDITY AND CAPITAL RESOURCES
We financed our historical operations and capital expenditures primarily through
the proceeds from the 1998 issue of euro denominated 12 3/8% notes payable, the
1997 public equity offering, equipment lease financing and private placements of
equity securities. We have used the net proceeds of these transactions, together
with revenues from operations and interest income, to fund aggregate net losses
of approximately $120.0 million, investments in property, plant and equipment of
approximately $57.0 million, and acquisitions of $24.6 million.
At March 31, 2002, we had cash and cash equivalents of $22.1 million. We had
$6.1 million of restricted cash held as security with respect to cash provided
by banks participating in our ATM network, to cover guarantees on
20
financial instruments and as deposits with customs officials. In addition to the
assets held on the balance sheet at March 31, 2002, we held repurchased notes
payable with a face value of euro 79.1 million ($68.9 million as of March 31,
2002) and a fair market value estimated at March 31, 2002 of $62.0 million.
On June 28, 2000 we entered into an unsecured revolving credit agreement
providing a facility of up to $4.0 million from three shareholders, one of which
was Michael J. Brown, Euronet's CEO and a director. This credit facility was
renewed twice and was due and payable on June 28, 2002. We issued 300,000
warrants in conjunction with the issuance and extensions to this facility. On
May 29, 2001, we drew $2.0 million and issued an additional 160,000 warrants
based on the terms of the credit agreement. The warrant strike price was set at
the average share price, as quoted on Nasdaq for 10 trading days prior to the
warrant issue date, less 10 percent. The exercise price for Michael J. Brown was
originally the same as for the other lenders. It was revised by an amendment to
the Credit Agreement on January 27, 2002 to be no less than the full trading
price of our stock on Nasdaq as of the date of the agreement providing for grant
of the warrants, with the amount of the discount that would have resulted from
the original terms of the Credit Agreement to be paid to Mr. Brown in cash.
The exercise prices for the warrants for the other two shareholders were $7.00
per share for the 100,000 warrants issued as of June 28, 2000, $4.12 per share
for the 100,000 warrants issued as of December 29, 2000, $5.92 per share for the
160,000 warrants issued as of May 29, 2001 and $6.70 per share for the 100,000
warrants issued as of June 28, 2001. The exercise prices for the warrants for
Michael J. Brown were $8.25 per share for the 100,000 warrants issued as of June
28, 2000, $4.12 per share for the 100,000 warrants issued as of December 29,
2000, $7.05 per share for the 160,000 warrants issued as of May 29, 2001 and
$9.00 per share for the 100,000 warrants issued as of June 28, 2001.
In 2001, two participants in the revolving credit agreement elected to exercise
a total of 361,000 warrants for an equal number of shares. We received a total
amount of $2.1 million in cash from these transactions.
We elected not to renew the credit agreement in December 2001 and, on March 21,
2002, we repaid the outstanding credit facility debt in full. Payment consisted
of $2.0 million in principal and interest. As of March 31, 2002, 99,000 warrants
remain outstanding with respect to this credit facility. Additional warrants
were exercised in May 2002 as described more fully in Note 12 to the unaudited
consolidated financial statements.
In January 2001, we entered into an unsecured credit facility loan agreement
under which we borrowed $0.5 million from Michael Brown in order to fund
transactions on our Czech Republic ATM network. Amounts advanced under this loan
agreement mature six months from the date an advance is made, but the amounts
were extended for a second six-month period. Amounts advanced bear interest of
10% per annum. In January 2002 we paid in full the loan principal and related
interest totaling $0.5 million.
In 2000, Mr. Brown pledged approximately $4.0 million of marketable securities
that he owns (not including any of our common stock) in order to obtain the
release of cash collateral of $4.8 million held by a bank providing cash to our
ATM network in Hungary. We did not have to pay any consideration for this
security pledge. On March 14, 2002, we obtained a letter of credit supported by
a certificate of deposit for $5.0 million that replaced Mr. Brown's security
pledge, as well as a related $0.8 million letter of credit and certificate of
deposit.
We leased many of our ATMs under capital lease arrangements that expire between
2002 and 2008. The leases bear interest between 8% and 12% per annum. As of
March 31, 2002, we owed $10.9 million under these capital lease arrangements. We
expect that our capital requirements will continue in the future, although
strategies that promote outsourcing and redeployment of underperforming ATMs
will reduce some of these requirements. Acquisitions of related ATM businesses
and investments in new markets will require additional capital expenditures.
Fixed asset purchases for 2002 are currently estimated to be in the range of $10
to $13 million, subject to our evaluation of acceptable returns and transaction
levels of new ATM investment, particularly in the United Kingdom.
Effective July 1, 2001, we implemented our Employee Stock Purchase Plan, or
ESPP, under which employees have the opportunity to purchase common stock
through payroll deductions according to specific eligibility and participation
requirements. We completed a series of offerings of three months duration with
new offerings commencing on January 1, April 1, July 1, and October 1 of each
year. Under the plan, participating employees are granted options which
immediately vest and are automatically exercised on the final date of the
respective offering
21
period. The exercise price of common stock options purchased is the lesser of
85% of the "fair market value" (as defined in the ESPP) of the shares on the
first day of each offering or the last date of each offering. The options are
funded by participating employees' payroll deductions or cash payments. Under
the provisions of the ESPP, we reserved 500,000 shares of common stock of which
we had issued 226,454 shares as of March 31, 2002. We intend to qualify this
plan as an "employee stock purchase plan" under section 423 of the Internal
Revenue Code of 1986. During the three months ended March 31, 2002, we issued
51,924 shares at a price of $14.45 per share, resulting in proceeds to us of
$0.75 million.
In 2002, we made matching contributions of 9,647 shares of stock in conjunction
with our 401(k) employee benefits plan for plan year 2001. Under the terms of
this plan, employer matching contributions consist of two parts, referred to as
"basic" and "discretionary". The basic matching contribution is equal to 50% of
eligible employee elective salary deferrals between 4% and 6% of participating
employee salaries for the plan year. The discretionary matching contribution is
determined by our board of directors for a plan year and is allocated in
proportion to employee elective deferrals. As of March 31, 2002, total employer
matching contributions since inception of the plan has consisted of 25,922
shares under the basic match and 16,275 shares under the discretionary matching
contribution.
We reduced the total book value of our long term 12 3/8% senior discount notes
from $82.3 million at March 31, 2001, to $38.7 million at March 31, 2002. We did
this through a series of debt-for-debt and debt-for-equity exchanges as more
fully described in Note 6 to our March 31, 2002 unaudited consolidated financial
statements and in Note 11 to our consolidated financial statements for the year
ending December 31, 2001. Due to market and other factors, we may not be able to
continue to successfully implement these exchanges in 2002 and beyond. We are
required to commence cash payments of interest on these notes on January 1,
2003. At current debt levels, we will be required to make approximately $2.5
million in interest payments on a semi-annual basis beginning January 1, 2003.
The full principal balance of these notes will be due and payable on July 1,
2006.
We have no significant off-balance sheet items.
Based on our current business plan and financial projections, we expect to
continue to improve operating income and generate net cash inflows from our
operating activities in 2002. In our Processing Services Segment, we anticipate
that increased transaction levels in our ATM network will result in additional
revenues without a corresponding increase in expenses. In addition, we expect to
further expand our 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, we believe our operating costs are now more in line with anticipated
revenues. We believe that certain asset sales and cash and cash equivalents will
provide us with sufficient capital. As a result, we believe that we have
sufficient liquid resources to meet current and future cash requirements. We
will continue our policy of assessing opportunities for additional debt and
equity financing as they arise, and will pursue any such opportunities if we
think they can contribute to fulfilling our financial and strategic business
objectives, particularly if attractive acquisition opportunities present
themselves.
BALANCE SHEET ITEMS
Cash and cash equivalents
Cash and cash equivalents increased to $22.1 million at March 31, 2002 from $8.8
million at December 31, 2001 primarily due to the following activity:
o Net proceeds from the sale of DASH of $6.5 million as described in
Note 8 to our unaudited consolidated financial statements,
o Net proceeds from the private placement of equity in February 2002 of
$11.9 million as described in Note 11 to our unaudited consolidated
financial statements, and
o Offset by the transfer of $5.0 million to restricted cash as described
in the restricted cash caption below.
Restricted cash
Restricted cash increased to $6.1 million at March 31, 2002 from $1.9 million at
December 31, 2001. The majority of restricted cash is held as security with
respect to cash provided in Hungary and Poland by banks participating in our ATM
network. The increase is due to the pledge of cash to purchase a $5.0 million
surety bond as cash
22
collateral for the Hungarian ATM network, to replace Mr. Brown's $4.0 million
security pledge and a related $0.8 million certificate of deposit previously
obtained for the same purpose.
Trade accounts receivable
Trade accounts receivable decreased to $8.3 million at March 31, 2002 from $8.9
million at December 31, 2001 primarily due to improved collections.
Assets from discontinued operations
Assets from discontinued operations represent the net assets for France as at
March 31, 2002 and for France and DASH as at December 31, 2001. The decrease
results from the sale of substantially all of DASH's assets from discontinued
operations as discussed in Note 8 to our unaudited consolidated financial
statements.
Property, plant and equipment
Net property, plant and equipment decreased to $27.6 million at March 31, 2002
from $29.1 million at December 31, 2001. This decrease results from fixed asset
depreciation in excess of fixed asset additions.
Intangible assets
Net intangible assets decreased to $1.5 million at March 31, 2002 from $1.6
million at December 31, 2001. The intangible asset is goodwill related to the
1999 acquisition of SBK, a German ATM company.
Other assets
Other assets decreased to $3.1 million at March 31, 2002 from $3.3 million at
December 31, 2001 due to the amortization of capitalized software development
costs.
Current liabilities
Current liabilities decreased to $20.6 million at March 31, 2002 from $23.6
million at December 31, 2001. This decrease results primarily from the $2.0
million repayment of the shareholder credit facility discussed in Note 5 to our
unaudited consolidated financial statements.
Liabilities from discontinued operations
Liabilities from discontinued operations represent the net liabilities for
France as at March 31, 2002 and for France and DASH as at December 31, 2001. The
decrease results from the sale of substantially all of DASH's liabilities from
discontinued operations as discussed in Note 8 to our unaudited consolidated
financial statements.
Capital leases
Total capital lease obligations including current installments decreased to
$10.9 million at March 31, 2002 from $12.0 million at December 31, 2001. This
results from the excess of lease payments over new capital lease obligations.
Notes payable
Notes payable increased to $38.7 million at March 31, 2002 from $38.1 million at
December 31, 2001. This results from the following activity:
23
Balance at December 31, 2001 $ 38.1
Unrealized foreign exchange gain (euro vs. USD) (0.6)
Accretion of notes payable interest 1.2
------
Balance at March 31, 2002 $ 38.7
======
Total Stockholders' Equity/Deficit
Total stockholders' equity increased to $9.7 million at March 31, 2002 from a
deficit of $7.7 million at December 31, 2001. This results from the following
activity:
o $3.6 million in net income for the three months ended March 31, 2002,
o $14.4 million in proceeds from the private placement of equity, the
exercise of options and warrants, and employee stock purchases, and
o $0.6 million increase in the accumulated comprehensive loss.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are as follows:
Software Revenue Recognition
Revenues from software licensing agreement contracts are recognized over the
contract term using the percentage of completion method based on the percentage
of services that are provided compared with the total estimated services to be
provided over the entire contract. Revenue from time and material service
contracts is recognized as the services are provided. Revenues from software
licensing agreement contracts representing newly released products deemed to
have a higher than normal risk of failure during installation are recognized on
a completed contract basis whereby revenues and related costs are deferred until
the contract is complete. Maintenance revenue is recognized over the contractual
period or as services are performed. Revenue in excess of billings on software
license agreements contracts is recorded as unbilled receivables and is included
in current assets. Billings in excess of revenue on software license agreements
contracts are recorded as deferred revenue and are included in current
liabilities until such time the above revenue recognition criteria are met.
Capitalization of Software Development Costs
We apply SFAS 2 and 86 in recording research and development costs.
Research costs aimed at the discovery of new knowledge with the hope that such
knowledge will be useful in developing a new product or service or a new process
or technique or in bringing about significant improvement to an existing product
or process are expensed as incurred (see Note 25 to the Consolidated Financial
Statements for the year ended December 31, 2001--Research and Development).
Development costs aimed at the translation of research findings or other
knowledge into a plan or design for a new product or process or for a
significant improvement to an existing product or process whether intended for
sale or use are capitalized on a product-by-product basis when technological
feasibility is established.
Technological feasibility of computer software products is established when we
have 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. Technological feasibility is evidenced by the existence of a
working model of the product or by completion of a detail program design. The
detail program design must (a) establish that the necessary skills, hardware,
and software technology are available to produce the product, (b) be complete
and consistent with the product design, and (c) have been reviewed for high-risk
development issues, with any uncertainties related to identified high-risk
development issues being adequately resolved.
Accounting for Income Taxes
We have significant tax loss carryforwards and other temporary differences which
are recorded as deferred tax assets and liabilities. Deferred tax assets
realizable in future periods are recorded, net of a valuation allowance based on
an assessment of each individual entity's ability to generate sufficient taxable
income within an appropriate period.
24
In assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. We consider the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, we believe it is more likely than not that
we will realize the benefits of these deductible differences, net of the
existing valuation allowances at March 31, 2002.
In recent periods, profitability has improved in certain countries in which we
operate. When a sufficient history of taxable income has been established in
these countries, deferred tax assets increasingly will be considered realizable,
and the existing valuation allowances will be reduced.
Estimating the Impairment of Long Lived Assets
We are required to evaluate long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of a long-lived asset (asset group) may not be
recoverable. Recoverability of a long-lived asset (asset group) is measured by a
comparison of the carrying amount of an asset to projected undiscounted future
net cash flows expected to result from the use and eventual disposition of the
asset (asset group). Such estimates will exclude interest charges that will be
expensed as incurred. Cash flow assumptions are dependent on whether the asset
is in use or in development. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets on a discounted cash
flow basis. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Future adverse changes in market
conditions could result in an inability to recover the carrying amount of an
asset, thereby possibly requiring an impairment charge in the future.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
SFAS 145
The Financial Accounting Standards Board (FASB) recently issued Statement
No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. The Statement updates,
clarifies and simplifies existing accounting pronouncements. In particular, SFAS
145 rescinds SFAS 4, Reporting Gains and Losses from the Extinguishment of Debt,
which required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. Under SFAS 145, gains and losses from extinguishment of debt should not
be classified as extraordinary unless the extinguishment meets the relevant
criteria of APB Opinion 30 and such instances are expected to be rare. SFAS 145
is effective for fiscal years beginning after May 15, 2002 however early
adoption is encouraged. We do not expect SFAS 145 to have a material
impact on our results of operations or financial condition.
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. All statements other than statements of
historical facts included in this document are forward-looking statements,
including statements regarding the following:
o Our business plans and financing plans and requirements,
o Trends affecting our business plans and financing plans and
requirements,
o Trends affecting our business,
o The adequacy of capital to meet our capital requirements and expansion
plans,
o The assumptions underlying our business plans,
o Business strategy,
o Government regulatory action,
o Technological advances, and
o Projected costs and revenues.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we can give no assurance that these expectations will
prove to be correct. Forward-looking statements are typically identified by the
words believe, expect, anticipated, intend, estimate and similar expressions.
25
Investors are cautioned that any 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 the following:
o Technological and business developments in the local card, electronic
and mobile banking and mobile phone markets affecting transaction and
other fees that we are able to charge for our services,
o Foreign exchange fluctuations,
o Competition from bank-owned ATM networks, outsource providers of ATM
services, software providers and providers of outsourced mobile phone
services,
o Our relationships with our major customers, sponsor banks in various
markets and international card organizations, and
o Changes in laws and regulations affecting our business.
These risks and other risks are described elsewhere in this document and our
periodic filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Operational Risk; Security
Our business involves the operation and maintenance of a sophisticated computer
network and telecommunications connections with banks, financial institutions
and mobile operators. This, in turn, requires the maintenance of computer
equipment and infrastructure, including telecommunications and electrical
systems, and the integration and enhancement of complex software applications.
There are certain operational risks inherent in this type of business which can
require temporary shut-down of part or all of our processing systems, including
failure of electrical supply, failure of computer hardware and software errors.
All of our ATMs other than the ones in Germany are operated through our
processing center in Budapest, so any operational problem there may have a
significant adverse impact on the operation of our network generally.
We have experienced operations and computer development staff and have created
redundancies and procedures, particularly in our Budapest processing center, to
mitigate these risks. However, they cannot be eliminated entirely. Any technical
failure that prevents operation of our systems for a significant period of time
will prevent us from processing transactions during that period of time and will
directly and adversely affect our revenues and financial results.
Our ATM network systems process electronic financial transactions using
information that is read by ATMs or point-of-sale terminals from bank debit and
credit cards, or that our customers input into our systems for mobile phone
recharge services. We capture, transmit, handle and store this sensitive bank
card information in performing services for our customers. In addition, our
software is designed to permit our customers to operate electronic financial
transaction networks similar to our network, so our software is used in handling
this type of sensitive information.
These businesses involve certain inherent security risks, in particular the risk
of electronic interception and theft of the information for use in fraudulent
card transactions. We have incorporated industry standard encryption technology
and processing methodology into our systems and software to maintain high levels
of security. Although this technology and methodology mitigates security risks,
they cannot be eliminated entirely as criminal elements apply increasingly
sophisticated technology to attempt to obtain unauthorized access to the
information handled by ATM and electronic financial transaction networks.
Any breach in our security systems could result in the perpetration of
fraudulent financial transactions for which we may be found liable. We are
insured against various risks, including theft and negligence, but our insurance
coverage is subject to deductibles, exclusions and limitations that may leave us
bearing some or all of any losses arising from security breaches.
In addition to electronic fraud issues, theft and vandalism of ATMs presents
risks for our ATM business. We install ATMs at sites that are high flow traffic
sites and are exposed to theft and vandalism. Vandalism during the year 2001
increased in some of our markets, particularly in Hungary where a series of
incidents were attributed to an organized gang that we believe has been
apprehended. Although we are insured against these risks, deductibles,
exclusions or limitations in our insurance coverage may leave us bearing some or
all of any losses arising from theft
26
or vandalism of ATMs. In addition, we have experienced increases in claims under
our insurance, which has increased our insurance premiums.
Foreign Exchange Exposure
In the three months ended March 31, 2002, 60.2% of our revenues were generated
in Poland, Hungary, the United Kingdom and Germany as compared to 65.6% in the
three months ended March 31, 2001. This decrease is due to the overall increase
in revenues for our operations, including in these four countries. In Hungary
and Poland, the majority of revenues received are denominated in the Hungarian
forint and Polish zloty, respectively. However, the majority of our foreign
currency denominated contracts in both countries are linked to either inflation
or the retail price index. In the United Kingdom and Germany, 100% of the
revenues received are denominated in the British pound and the euro,
respectively. While a significant portion of our expenditures in these countries
are still made in or denominated in U.S. dollars, we are striving to achieve
more of our expenses in local currencies to match our revenues.
We estimate 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 $2.9 million
decrease in the reported net loss. This was estimated by segregating revenues
and expenses by the U.S. dollar, Hungarian forint, Polish zloty, British pounds,
and euro and then applying a 10% currency devaluation to the non-U.S.
dollar amounts. We believe this quantitative measure has inherent limitations.
It does not take into account any governmental actions or changes in either
customer purchasing patterns or our financing or operating strategies.
As a result of continued European economic convergence, including the increased
influence of the euro as opposed to the U.S. dollar on the Central European
currencies, we expect that the currencies of the markets where we invest will
fluctuate less against the euro than against the dollar. Accordingly, we believe
that our euro 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
Generally, the countries we operate in have experienced low and stable inflation
in recent years. Therefore, the local currency in each of these markets is the
functional currency. Although Croatia has maintained relatively stable inflation
and exchange rates, the functional currency of our Croatian subsidiary is the
U.S. dollar due to the significant level of U.S. dollar denominated revenues and
expenses. Due to these factors, we do not believe that inflation will have a
significant effect on our results of operations or financial position. We
continually review inflation and the functional currency in each of the
countries where we operate.
Interest Rate Risk
The fair market value of our 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 our notes payable at March 31, 2002 was $36.2 million
compared to a carrying value of $38.7 million. A 1% increase from prevailing
interest rates at March 31, 2002 would result in a decrease in fair value of
notes payable by approximately $1.2 million. Fair values were determined from
quoted market prices and from investment bankers considering credit ratings and
the remaining term to maturity.
First Interest Repayment
Beginning January 1, 2003, interest payments of approximately euro 2.8 million
($2.5 million) on our outstanding 12 3/8% senior debt will be payable
semi-annually on January 1 and July 1, with the final interest payment due on
July 1, 2006. Because the bond interest is payable in euro, foreign currency
fluctuations between the U.S. dollar and the euro may result in gains or losses
which, in turn, may increase or decrease the amount of U.S. dollar equivalent
interest paid on a U.S. GAAP basis. We currently anticipate making these
interest payments from earnings denominated in local currencies in our European
markets. As a result, it may not be necessary to hedge these expected cash
payments in U.S. dollars, since the source of funds used for payments would
already be in euro or euro-linked denominations. Throughout 2002, we will
actively monitor our potential need to hedge future bond interest payments, and
if required, we will initiate hedging strategies to minimize foreign currency
losses resulting from payments made from U.S. dollars.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
In February 2002, we entered into subscription agreements for the sale of
625,000 new shares of our common stock to accredited investors in transactions
exempt from registration under the 1933 Securities Act. For more details, please
see "Subsequent Events" under Item 7 of our annual report on Form 10-K for the
year ended December 31, 2001 and Note 29 to the financial statements filed with
the annual report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
- ----------------------------------------
(a) Exhibits
Exhibit Number Exhibit Description
-------------- -------------------
Exhibit 10.1 Warrant dated January 27, 2002 reflecting the amended
terms of the warrants Euronet issued to Michael J. Brown
on June 28, 2000 pursuant to the revolving credit
agreement among Euronet, Mr. Brown, DST Systems, Inc.
and Hungarian-American Enterprise Fund originally
dated June 28, 2000.
The terms of the warrants Euronet issued to DST Systems,
Inc. and Hungarian American Enterprise Fund, and the
other warrants issued to Mr. Brown, are similar in all
material respects to those set forth in Exhibit 10.1
except for the dates of the warrants issued, the number
of warrants, and the exercise prices. This information
is set forth in Note 5 to our unaudited consolidated
financial statements and under "Management's Discussion
and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(b) We filed a report on Form 8-K on January 4, 2002, which we amended twice on
January 18, 2002 and May 8, 2002. The items reported were "Item 2.
Acquisition or Disposition of Assets" and "Item 5. Other Events and
Regulation FD Disclosure."
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
May 15, 2002 By: /s/ MICHAEL J. BROWN
--------------------
Michael J. Brown
Chief Executive Officer
By: /s/ KENDALL COYNE
---------------------
Kendall Coyne
Chief Financial Officer
29