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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER C00-22167
___________________________________________________________________________
EURONET SERVICES INC.
(Exact name of the registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
74-2806888
(I.R.S. employer identification no.)
14-24 HORVAT U.
1027 BUDAPEST
HUNGARY
(Address of principal executive offices)
36-1-224-1000
(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 at October 31st, 1998
15,250,453 common shares.
PART I
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- ------------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents.............................................................. 60,791 7,516
Restricted cash........................................................................ 12,865 847
Trade accounts receivable.............................................................. 1,299 647
Investment securities (note 4)......................................................... 29,230 31,944
Prepaid expenses and other current assets.............................................. 3,471 1,878
------- -------
Total current assets................................................................. 107,656 42,832
Property, plant and equipment, net....................................................... 29,902 24,088
Deferred financing costs, net............................................................ 3,228 -
Deposits for ATM leases.................................................................. 2,020 2,542
Deferred income taxes.................................................................... 571 571
------- -------
Total assets......................................................................... 143,377 70,033
======= =======
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable................................................................. 5,056 4,420
Short term borrowings.................................................................. 5 158
Current installments of capital lease obligations...................................... 4,035 3,140
Accrued expenses....................................................................... 1,247 1,597
------- -------
Total current liabilities............................................................ 10,343 9,315
------- -------
Obligations under capital leases, excluding
Current installments..................................................................... 8,041 11,330
Notes payable (note 5)................................................................... 90,807 -
Other long-term liabilities.............................................................. - 169
------- -------
Total liabilities.................................................................... 109,191 20,814
Stockholders' equity:
Common stock, $0.02 par value, 30,000,000 shares
authorized; issued and outstanding 15,250,453
shares in 1998 and 15,133,321 shares in 1997......................................... 306 304
Warrants (note 5)...................................................................... 1,725 -
Treasury stock......................................................................... (4) (4)
Additional paid in capital............................................................. 63,468 63,358
Subscription receivable................................................................ (51) (253)
Accumulated losses..................................................................... (32,138) (14,970)
Restricted reserve..................................................................... 784 784
Cumulative translation adjustment...................................................... 96 -
------- -------
Total stockholders' equity........................................................... 34,186 49,219
------- -------
Total liabilities and stockholders' equity........................................... 143,377 70,033
======= =======
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- -----------------------
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- -----------------------
1998 1997 1998 1997
---------------- ---------------- ----------- ----------
Revenues............................................................. 3,127 1,577 7,751 3,433
Operating expenses:
ATM operating costs............................................... (3,739) (1,393) (9,226) (3,046)
Other operating costs............................................. (4,861) (2,117) (12,381) (5,368)
---------- ---------- ---------- ---------
Operating loss.................................................... (5,473) (1,933) (13,856) (4,981)
Interest income ..................................................... 863 419 1,703 1,075
Interest expense..................................................... (3,457) (271) (4,606) (520)
Foreign exchange gains (losses) ..................................... (1,242) 264 (409) 334
---------- ---------- ---------- ---------
Loss before income taxes............................................. (9,309) (1,521) (17,168) (4,092)
Deferred income tax benefit.......................................... - - - 129
---------- ---------- ---------- ---------
Net loss.......................................................... (9,309) (1,521) (17,168) (3,963)
Other comprehensive income:
Cumulative translation adjustment.................................... (106) - 96 -
---------- ---------- ---------- ---------
Comprehensive loss................................................... (9,415) (1,521) (17,072) (3,963)
========== ========== ---------- ---------
Loss per share -- basic and diluted (Note 3)......................... (0.61) (0.10) (1.13) (0.41)
Average shares outstanding (Note 3) ................................. 15,224,214 15,159,515 15,167,553 9,671,303
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---------------- ---------------
Cash flows from operating activities:
Net loss............................................................................. (17,168) (3,963)
Adjustments to reconcile net loss to net cash used in operating
activities:
Share compensation expense....................................................... 81 81
Depreciation of property, plant and equipment.................................... 3,258 1,013
Unrealized foreign exchange losses............................................... 3,807
Loss on disposal of fixed assets................................................. 31 -
Amortization of deferred financing cost.......................................... 66 -
Accretion of Discount Notes Payable.............................................. 2,942 -
Decrease in deposits for ATM leases.............................................. 522 -
Deferred income taxes............................................................ - (129)
Increase in restricted cash...................................................... (12,022) (2,583)
Increase in trade accounts receivable............................................ (643) (284)
Increase in prepaid expenses and other current assets............................ (1,645) (704)
Increase in trade accounts payable............................................... 629 249
Increase in accrued (decrease) expenses and other long-term liabilities.......... (519) 685
---------- ---------
Net cash used in operating activities.......................................... (20,661) (5,635)
Cash flows from investing activities:
Fixed asset purchases................................................................ (6,582) (2,844)
Proceeds from sale of fixed assets................................................... 123 -
Purchase of investment securities.................................................... (29,603) (17,304)
Proceeds from maturity of investment securities...................................... 35,000 -
Net cash used in investing activities.............................................. (1,062) (20,148)
Cash flows from financing activities:
Proceeds from issuance of shares and other capital contributions..................... - 51,944
Proceeds from issuance of Notes Payable and warrants................................. 83,102 -
Costs to obtain loans................................................................ (3,294) -
Purchase of treasury stock........................................................... - (4)
Repayment of obligations under capital leases........................................ (4,888) (786)
Repayment of bank borrowings......................................................... (153) (31)
Repayment of loan from shareholder................................................... - (190)
Subscription receivable.............................................................. 202 -
---------- ---------
Net cash by financing activities................................................... 74,969 50,933
---------- ---------
Effect of exchange differences on cash................................................. 29 -
---------- ---------
Net increase in cash and cash equivalents.............................................. 53,275 25,150
Cash and cash equivalents at beginning of period....................................... 7,516 2,541
---------- ---------
Cash and cash equivalents at end of period............................................. 60,791 27,691
========== =========
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and September 1997
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Euronet Services Inc. have been prepared from the records of Euronet Services
Inc. and subsidiaries (collectively, the "Company"), pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission. In the opinion of
management, such financial statements include all adjustments (consisting only
of normal, recurring accruals) necessary to present fairly the financial
position of the Company at September 30, 1998 and the results of its operations
and cash flows for the three and nine month periods ended September 30, 1998
and 1997. The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of Euronet
Services Inc. and subsidiaries for the year ended December 31, 1997, including
the notes thereto, set forth in the Company's Annual Report on Form 10K.
The results of operations for the nine-month period ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
There have been no significant additions to or changes in accounting
policies of the Company since December 31, 1997. For a description of the
Company's accounting policies, see Note 2 to the Notes to Consolidated Financial
Statements for the year ended December 31, 1997.
The Company adopted during the nine months ended September 30, 1998
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income". SFAS 130 requires the reporting and display of
comprehensive loss, which is composed of net loss and other comprehensive income
items, in a full set of general purpose financial statements. Other
comprehensive income items are revenue, expenses, gains and losses that under
generally accepted accounting principles are excluded from net loss and
reflected as a component of equity, such as currency translation adjustment. The
adoption of SFAS 130 had no effect on the presentation of the prior period
statement of operations.
Certain amounts have been reclassified in the prior year financial
statements to conform to the current financial statement presentation.
NOTE 3--NET LOSS PER SHARE - BASIC AND DILUTIVE
Loss per share has been computed by dividing net loss by the weighted
average number of common shares outstanding. The effect of potential common
stock (stock options outstanding) is antidilutive. Accordingly, dilutive loss
per share does not assume the exercise of stock options and warrants
outstanding.
NOTE 4--FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward contracts to reduce the
effect of fluctuating currency exchange rates (principally Deutsche Mark on
notes payable and capital lease obligations). The Company does not utilize
financial instruments for trading or other speculative purposes. The fair value
of the forward exchange contracts is estimated by obtaining quoted market
prices. Gains and losses on foreign currency forward contracts are recognized in
income and offset the foreign exchange gains and losses on the underlying
transactions. The counterparties to the foreign currency forward contracts are
major financial institutions with investment grade or better credit ratings;
however, the Company is exposed to credit risk with these institutions. This
credit risk is generally limited to the unrealized gains in such contracts
should any of these counterparties fail to perform as contracted. The company
considers the risk of counterparty default to be minimal.
NOTE 5--PUBLIC OFFERING OF SENIOR DISCOUNT NOTES DUE 2006
On June 22, 1998, the Company sold 243,211 Units in a public offering, each
consisting of DM 1,000 principal amount at maturity of 12 3/8% Senior Discount
Notes (the "Notes") and three warrants (each a "Warrant"), each Warrant
initially entitling the holder thereof to purchase 1.05 shares of common stock
at an exercise price of $5.00 per share. The Notes and the Warrants are
separately transferable. The Notes were issued with an original issue discount.
The gross proceeds to the Company were DM 150,000,385 (approximately
$83,100,000) representing an issue price of DM 616.75 per DM 1,000 principal
amount at maturity. Of this amount, $1,725,000 has been allocated to the
Warrants within stockholders' equity to reflect their fair market value on the
date of issuance. Net proceeds to the Company after underwriting discount and
offering expenses were DM 145,125,000 (approximately $81,285,000).
The Notes have a maturity date of July 1, 2006. Cash interest on the Notes
will not be payable prior to July 1, 2002. Commencing January 1, 2003, cash
interest will be payable semiannually on January 1 and July 1 of each year. The
Notes are recorded net of unamortized discount and any incremental costs
associated with the bond offering have been capitalized and are being amortized,
using the interest method, over the term of the Notes.
Pursuant to the indenture entered into in connection with issuance of the Notes,
the Company is subject to certain restrictions and covenants, including, without
limitation, covenants with respect to the following matters: (i) limitation on
additional indebtedness; (ii) limitation on restricted payments; (iii)
limitation on issuance and sales of capital stock of restricted subsidiaries;
(iv) limitation on transactions with affiliates; (v) limitation on liens; (vi)
limitation on guarantees of indebtedness by restricted subsidiaries; (vii)
purchase of Euronet Notes upon a change of control; (viii) limitation on sale of
assets; (ix) limitation on dividends and other payment restrictions affecting
restricted subsidiaries; (x) limitation on investments in unrestricted
subsidiaries; (xi) limitation on lines of business; and (xii) provision of
financial statements and reports. The Company is in compliance with these
covenants.
NOTE 6--SUBSEQUENT EVENTS
In November 1998, the Company entered into an agreement to acquire the
outstanding common stock of Arkansas Systems, Inc., doing business as ARKSYS.
Based in Little Rock, Arkansas, its main product lines include electronic funds
transfer (EFT) solutions for ATM management, debit and credit cards, point-of-
sale (POS) and merchant transaction acquiring, and commercial and PC banking.
ARKSYS is the software provider to Euronet's ATM transaction processing center
in Central Europe. ARKSYS had revenues of approximately $11.4 million in 1997
and $9.6 million in 1996. Established in 1975, the company has approximately
130 employees. The acquisition, to be accounted for under the purchase method,
includes a cash payment of approximately $18 million subject to adjustment based
on final working capital determinations. The transaction should be completed in
the fourth quarter.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
The Company was formed and established its first office in Budapest (Hungary) in
June 1994. In May 1995, the Company opened its second office in Warsaw (Poland).
Since then, the Company has expanded operations into Germany, Croatia, the Czech
Republic, and France. Substantially all of the Company's investment to date has
been directed at establishing its ATM network through the acquisition and
installation of ATMs and computers and software for its transaction processing
center and through the marketing of its services to local banks and
International Card Organizations. Euronet installed its first ATM in Hungary in
June 1995 and by the end of 1995, the Company had 53 ATMs installed. During 1996
an additional 113 ATMs were installed in Hungary and. The Company installed a
further 527 ATMs in 1997, consisting of 469 in Hungary and Poland and 58 in
Germany and Croatia. During the first nine months of 1998, a further 430 ATMs
were added to the network consisting of 187 in Hungary and Poland, 214 in
Germany and Croatia, and 29 in the Czech Republic and France.
As of September 30, 1998 the Company employed 204 people across it's existing
markets.
In 1997, 99% of the Company's revenues were generated in Hungary and Poland. For
the three and nine months ended September 30, 1998 Hungary and Poland generated
72% and 81% of the Company's revenues, respectively.
The Company's expansion of its network infrastructure and administrative and
marketing capabilities has resulted in increased expenditures. Further planned
expansion will continue to result in increases in general operating expenses as
well as expenses related to the acquisition and installation of ATMs.
The Company has derived substantially all of its revenues from ATM transaction
fees since inception. The Company receives a fee from the card issuing banks or
International Card Organizations for ATM transactions processed on its ATMs. As
the Company continues to focus on expanding its network and installing
additional ATMs, the Company expects that transaction fees will continue to
account for a substantial majority of its revenues for the foreseeable future.
The Company's existing contracts with banks and International Card Organizations
provide for reduced transaction fees with increases in transaction volume. As
the Company's transaction levels continue to increase, the average fee it
receives per transaction will decrease. However, the Company expects that
because the decrease in transaction fees is tied to an increase in transactional
volume, the overall revenues of the Company should increase despite the fee
discounts. However, the Company expects that transaction levels may be
negatively impacted if all or a large part of the transaction fees are passed on
to cardholders by client banks.
The transaction volumes processed on an ATM in any given market are affected by
a number of factors, including location of the ATM and the amount of time the
ATM has been installed at the location. The Company's experience has been that
the number of transactions on a newly installed ATM is initially very low and
takes approximately six months after installation to achieve average transaction
volumes for that market. Accordingly, the average number of transactions, and
thus
revenues, per ATM are expected to increase as the percentage of ATMs operating
in the Company's network for over six months increases.
The Company has had substantial increases in the level of operations, including
ATMs operated and total personnel since its inception in 1994. In addition, the
Company was in the development stage until June 1995 when it began operations in
Hungary. As a result, a comparison of the Company's results of operations from
period to period is not necessarily meaningful.
ATM operating expenses, on a per ATM basis, are generally fixed in nature and
consist primarily of ATM site rentals, depreciation of ATMs and ATM installation
costs, maintenance, telecommunications, insurance, and cash delivery and
security services to ATMs. ATM operating expenses will necessarily increase as
the Company's network expands. Other operating expenses consist of items such as
salaries, professional fees, rent and utilities, communication and travel
related expenditures. While these expenditures are anticipated to increase with
the Company's expansion into new markets and the introduction of new products,
other operating expenses are expected to decrease as a percentage of total
revenues.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Total revenues increased to $3,127,000 for the three months ended
September 30, 1998 from $1,577,000 for the three months ended September 30, 1997
and to $7,751,000 for the nine months ended September 30, 1998 from $3,433,000
for the nine months ended September 30, 1997. The increase was due primarily to
the growth in transaction fees resulting from the increase in transaction volume
attributable to additional network connections to credit and debit card issuers
and an increase in the number of ATMs operated by the Company during these
periods. The Company had 1,123 ATMs in operation as of September 30, 1998
compared with 503 ATMs as of September 30, 1997. Transaction fee revenue
represented approximately 93% of total revenues for the nine months ended
September 30, 1998, and 87% for the nine months ended September 30, 1997.
Transaction fees charged by the Company vary for the types of transactions that
are currently processed on the Company's ATMs: cash withdrawals, balance
inquiries, transactions not completed because authorization is not given by the
relevant Card Issuer, and transactions processed under ATM network management
agreements. Approximately 96% of transaction fees for the nine months ended
September 30, 1998 were attributable to cash withdrawals compared to 97% for the
nine months ended September 30, 1997. The remaining transaction fees were
attributable to balance inquiries and transactions not completed because
authorization is not given by the relevant Card Issuer. Transaction fees for
cash withdrawals vary from market to market but generally range from $0.60 to
$1.75 per transaction while transaction fees for the other types of transactions
are generally substantially less.
In January 1998, Orszages es Takarek Pentzar Bank ("OTP"), the Hungarian
National Savings Bank, notified the Company that it was terminating its
contract with Euronet effective as of July 27, 1998. OTP advised the Company
that it terminated the contract since it desired to promote the use of its own
ATM network. OTP also indicated that the Company selected ATM sites which OTP
believed to be in competition with OTP ATM sites and that the Company failed to
provide OTP with certain transaction reports on a timely basis. It should be
noted that the reporting failure had been corrected more than two months prior
to OTP's notice of termination. As a result of this termination, the Company
will not have a direct connection with OTP and will not be able to accept OTP
proprietary bank cards. The Company has negotiated a new EUROPAY sponsorship
arrangement with another bank to replace OTP as its EUROPAY sponsor, and as a
result of that agreement, the Company is still able to accept all OTP issued
VISA and EUROPAY cards through its VISA and EUROPAY gateways. The Company's
contract with OTP (including transactions processed for non-OTP EUROPAY
cardholders) represented approximately 51% of its consolidated revenues for the
year ended December 31, 1997 and 35% for the six months ended June 30, 1998.
For the three months ended September 30, 1998 revenues from OTP cardholder
transaction accounted for 15% of consolidated revenues, or $459,000 compared to
$575,000 for the quarter ended June 30, 1998.
The Company generates advertising revenue on its network by putting clients'
advertisements on its ATMs. In addition, the Company also generates revenues
from ATM network management services, including sales of the Blue Diamond
product. For the nine months ended September 30, 1998 these revenues were
$537,000 compared to $454,000 for the nine months ended September 30, 1997. For
the three months ended September 30, 1998 these revenues were $148,000 compared
to $53,000 for the three months ended September 30, 1997.
Operating expenses. Total operating expenses for the three months ended
September 30, 1998 were $8,600,000 compared to $3,510,000 for the three months
ended September 30, 1997 and $21,607,000 ended September 30,
1998 compared to $8,414,000 for the nine months ended September 30, 1997. This
increase was due primarily to costs associated with the expansion of the
Company's operations and increase in the number of ATMs installed.
ATM operating costs increased to $3,739,000 for the three months ended
September 30, 1998 from $1,393,000 for the three months ended September 30,
1997. For the nine months ended September 30, 1998 operating costs increased to
$9,226,000 from $3,046,000 for the nine months ended September 30, 1997. ATM
depreciation, included in ATM operating costs, for the three months ended
September 30, 1998 increased to $985,000 from $350,000 for the three months
ended September 30, 1997, and to $2,355,000 for the nine months ended September
30, 1998 from $775,000 for the nine months ended September 30, 1997.
Professional fees for the three months ended September 30, 1998 were $685,000
compared to $179,000 for the three months ended September 30, 1997, and for the
nine months ended September 30, 1998 were $1,414,000 compared to $592,000 for
the nine months ended September 30, 1997. These increases are due primarily to
expansion into new markets, including fees spent on arranging the acquisition of
new ATMs in Germany. Professional fees are comprised of legal, accounting,
recruitment and other various professional fees.
Salaries increased to $2,355,000 for the three months ended September 30, 1998
from $1,026,000 for the three months ended September 30, 1997, and to $5,973,000
for the nine months ended September 30, 1998 from $2,462,000 for the nine months
ended September 30, 1997 as a result of the increase in the number of employees
from 133 as of September 30, 1997 to 204 as of September 30, 1998.
Communication, Rent and Utilities, and Travel related costs were $924,000 for
the three months ended September 30, 1998 compared to $375,000 for the three
months ended September 30, 1997 and $2,540,000 for the nine months ended
September 30, 1998 compared to $965,000 for the nine months ended September 30,
1997. The increase relates to the expansion of the Company's operations, as
previously discussed.
Other operating expenses, which includes marketing, depreciation of non-ATM
related assets and insurance, were $897,000 for the three months ended September
30, 1998 compared to $537,000 for the three months ended September 30, 1997, and
$2,454,000 for the nine months ended September 30, 1998 compared to $1,349,000
for the nine months ended September 30, 1997. Depreciation of non- ATM related
assets for the three months ended September 30, 1998 increased to $412,000 from
$114,000 for the three months ended September 30, 1997, and to $903,000 for the
nine months ended September 30, 1998 from $238,000 for the nine months ended
September 30, 1997. These expenses increased in conjunction with the expansion
of the Company's operations into new and existing markets.
Interest income. Interest income for the three months ended September 30, 1998
was $863,000 compared to $419,000 for the three months ended September 30, 1997,
and was $1,703,000 for the nine months ended September 30, 1998 compared to
$1,075,000 for the nine months ended September 30, 1997. The increases for the
three month and nine month periods in 1998 compared to the same periods in 1997
reflect the impact of the receipt of the bond proceeds in June of 1998 and the
subsequent investment of the proceeds. Investments held at September 30, 1998
were $29,230,000 compared to $17,498,000 held at September 30, 1997.
Interest expense relating principally to capital leases of ATMs and computer
systems and to accrued interest on the notes payable, was $3,457,000 for the
three months ended September 30, 1998 compared to $271,000 for the three months
ended September 30, 1997, and $4,606,000 for the nine months ended September 30,
1998 compared to $520,000 for the nine months ended September 30, 1997. This
increase was due primarily to the increase of capital lease obligations
outstanding and the accretion of interest on the Notes issued in June 1998.
Foreign exchange loss. For the three months ended September 30, 1998 the
Company had a foreign exchange loss of $1,242,000 compared to a gain of
$264,000 for the three months ended September 30, 1997. For the nine months
ended September 30, 1998 the Company had a foreign exchange loss of
$409,000 compared with a gain of $334,000 for the nine months ended September
30, 1997. Exchange gains and losses that result from remeasurement of assets and
liabilities, in markets where the functional currency is the US Dollar, are
recorded in determining net loss. The increase in foreign exchange loss during
the period arose primarily as a result of a net exposure to the Deutsche Mark on
Deutsche Mark denominated Notes Payable and capital lease obligations.
Net loss. The Company's net loss was $9,309,000 for the three months ended
September 30, 1998 compared to $1,521,000 for the three months ended September
30, 1997 and $17,168,000 for the nine months ended September 30, 1998 compared
to $3,963,000 for the nine months ended September 30, 1997. This increase was
as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has sustained negative cash flows from
operations and has financed its operations and capital expenditures primarily
through the proceeds from the 1998 Senior Discount Notes offering, the 1997
equity offering, through equipment lease financing and through private
placements of equity securities. The net proceeds of such transactions, together
with revenues from operations and interest income, have been used to fund
aggregate net losses of approximately $34,879,000 and investments in property,
plant and equipment. The Company had cash and cash equivalents of $60,791,000
and working capital of $97,313,000 at September 30, 1998. As of September 30,
1998,
the Company had $12,865,000 of restricted cash held as security with respect to
cash provided by banks participating in Euronet's ATM network and to cover
guarantees and as deposits with customs officials. The Company expects to
continue to generate losses from operating activities and negative cash flow
while it concentrates on the expansion of its ATM network business. As a result
of the Company's strategy of continuing expansion and increasing its market
share, the Company's net losses are expected to increase.
On June 22, 1998 the Company made a Public Offering of 243,211 units consisting
of 12 3/8% Senior Discount Notes due 2006 and 729,633 Warrants to purchase
766,114 shares of common stock. The price to the public was DM150,000,000. The
Company received net proceeds of approximately $81,285,000 after deducting
underwriting discount and offering expenses. The Company currently intends to
use the net proceeds from the offering for network expansion in its existing
markets to repay a portion of the Company's capitalized lease obligations, and
for general corporate purposes, including expansion into new markets, expanding
the provision of ATM management services, and the pursuit of possible strategic
acquisition (see Note 6 to the condensed consolidated financial statements) and
joint venture opportunities. With respect to repayment of capitalized leases, as
part of the implementation of the Company's new Europay sponsor arrangement in
Hungary, an existing equipment lease arrangement must be transferred to the
Company's new Europay sponsor bank. This lease will therefore not be paid off as
anticipated, and the initially proposed amount of lease repayments of
approximately $11 million will be reduced by approximately $5,000,000.
There can be no assurance that the Company's revenues will grow or be sustained
in future periods or that the Company will be able to achieve or sustain
profitability or positive cash flow from operations in any future period. If the
Company cannot achieve and sustain operating profitability or positive cash flow
from operations, it may not be able to meet its debt service or working capital
requirements including its obligation with respect to the Notes.
The Company leases the majority of its ATMs under capital lease arrangements
that expire between 1999 and 2002. The leases bear interest between 8% and 15%.
As of September 30, 1998 the Company owed $12,076,000 under such capital lease
arrangements.
At September 30, 1998, the Company had contractual commitments of approximately
$1,143,000. The Company expects that its capital requirements will increase in
the future as it pursues its strategy of expanding its network and increase the
number of installed ATMs. The Company anticipates that its capital expenditures
for the 12 months ending December 31, 1998 will total approximately $17 million,
primarily in connection with the acquisition of ATMs, scheduled capital lease
payments on existing lease obligations, and related installation costs. Capital
expenditures, which exclude assets acquired under capital leases, for 1997 were
$8,619,000 and for 1996 were $2,162,000. The increase reflects the growth in the
Company's operations across all markets.
Balance Sheet Items
Restricted cash: Restricted cash increased to $12,865,000 at September 30, 1998
from $847,000 at December 31, 1997 due to expansion of the Company's operations
and consequently an increased requirement for cash in the ATMs. This includes
$12,335,000 of funds held on deposit to guarantee funds in the Hungarian
network.
Cash and Cash Equivalents. Cash and cash equivalents increased to $60,791,000 as
at September 30, 1998 from $7,516,000 at December 31, 1997. This increase is
primarily the result of investing a portion of the proceeds from the Notes in
short term investments.
Deferred financing costs. Deferred financing costs were $3,228,000 at September
30, 1998. This represents the unamortized portion of underwriting discount and
other offering costs associated with the issuance of the Notes. These costs will
be amortized over the eight-year life of the Notes using the interest method.
Property, plant and equipment. Net property, plant and equipment increased
from $24,088,000 at December 31, 1997 to $29,902,000 at September 30, 1998.
This increase is due primarily to the installation of 430 ATMs during the nine
months ended September 30, 1998 and expenditures on office equipment and
vehicles for new operations.
Obligations under capital leases. Obligations under capital leases decreased to
$12,076,000 at September 30, 1998 from $14,470,000 at December 31, 1997 as a
result of repayments exceeding new leases entered into during the nine months
ended September 30, 1998. The repayments include the early buy out of certain
existing capital lease obligations.
Notes payable. Notes payable at September 30, 1998 was $90,807,000. This
represents the gross proceeds from the issue of the Notes and the accretion of
interest to September 30, 1998 less an amount of $1,725,000 representing the
fair value of the warrants that have been recorded as stockholders equity.
FOREIGN EXCHANGE EXPOSURE
In 1997, 99% of the Company's revenues were generated in Poland and Hungary. For
the nine months ended September 30, 1998 the comparable figure was 81%, with the
remaining 19% being generated in Germany and Croatia. While in Hungary the
majority of revenues received are U.S. dollar denominated, this is not the case
in Poland, where the majority of revenues are denominated in Polish zloty.
However the majority of these contracts are linked either to inflation or the
retail price index. While it remains the case that a significant portion of the
Company's expenditures are made in or are denominated in U.S. dollars, the
Company is also striving to achieve more of its expenses in local currencies to
match its revenues.
The Company anticipates that in the future, a substantial portion of the
Company's assets, including fixed assets, will be denominated in the local
currencies of each market. As a result of continued European economic
convergence, including the increased influence of the Deutsche Mark as opposed
to the U.S. dollar, on the Central European currencies, the Company expects that
the currencies of the markets where the proceeds from the offering will be used
will fluctuate less against the Deutsche Mark than against the Dollar.
Accordingly, the Company believes that the issuance of Deutsche Mark denominated
debt will provide, in the medium to long term, for a closer matching of assets
and liabilities than a dollar denominated issuance would.
INFLATION AND FUNCTIONAL CURRENCIES
In recent years, Hungary, Poland and the Czech Republic have experienced high
levels of inflation. Consequently, these countries' currencies have generally
declined in value against the major currencies of the OECD over this time
period. However, there has been a significant reduction in the inflation rate of
these countries in recent years. Poland is no longer considered to be hyper-
inflationary from 1998 and given that a significant portion of the Company's
Polish subsidiary's revenues and expenses are denominated in zloty, the
functional currency of the Company's Polish subsidiary will now be the zloty.
The functional currency of the Company's Hungarian and Czech subsidiaries will
continue to be the U.S. dollar.
Germany and France have experienced relatively low and stable inflation rates in
recent years. Therefore, the local currency in each of these markets is the
functional currency. Although Croatia, like Germany and France, has maintained
relatively stable inflation and exchange rates, the functional currency of the
Croatian company is the U.S. dollar due to the significant level of U.S. dollar
denominated revenues and expenses. Due to the factors mentioned above, the
Company does not believe that inflation will have a significant effect on
results of operations or financial condition. The Company continually reviews
inflation and the functional currency in each of the countries that it operates
in.
YEAR 2000 COMPLIANCE
The Company depends upon hardware and software systems to provide services to
its customer banks and to maintain substantially all of its internal operations.
Moreover, the Company provides services to its customer banks through on-line
computer links to its bank customers, whose software systems are relied upon to
deliver transaction authorization requests. The Company has instituted a program
to obtain confirmation of year 2000 compliance of the hardware and software used
in its operations and by its customer banks. As part of such program, the
Company has identified the following specific areas of its or its bank
customers' business that are affected by the Year 2000 issue:
. The Company's central processing center in Budapest, which uses ARKSYS
software and an IBM A5400 hardware platform and operating system.
. Vendor software, which operates on the AS400, used for control of the
central processing center.
. Firmware and operating systems in each ATM ("ATM Firmware and Software").
. Vendor and internally generated software which is used in the Company's
country operations.
. Software and hardware used to support the financial reporting and
accounting systems of the Company.
. The ability of the Company's bank customer to continue to authorize
transactions after the turn of the century.
. Year 2000 readiness of subcontractors performing driving, monitoring and
operating services in Germany.
Central Processing Center Operations. The Company has received written
confirmation from IBM that the Company's current version of the AS400 operating
system is year 2000 compliant.
The Company runs more than one version of the ARKSYS software which is used in
the central processing center. The version currently processing transactions
from Croatia and France is fully year 2000 compliant. The remaining versions
have not yet been completely upgraded to process transactions into the year 2000
but the Company in the process of upgrading such software for 2000 compliance.
The Company wishes to fully test all such software by operating it on a test
basis for 90 days before it is installed into the central processing center, and
the Company anticipates completing the installation of such software during the
first and second quarters of 1999 after such testing.
Vendor Software. The Company has requested confirmation letters from all vendors
of its support software regarding Year 2000 compliance, including Mimix, Gasper,
and AS400 operating system. The Company has received statements from most such
suppliers to the effect that their software will operate properly after the turn
of the century. However, the Company will also test these programs in
conjunction with the testing of the Year 2000 compliant ARKSYS application.
ATM Firmware and Software. The Company purchases its ATM machines from IBM and
NCR, and has received information from them regarding Year 2000 compliance of
ATM Firmware and Software. Approximately 500 IBM machines require an upgrade to
become year 2000 compliant. The components of the upgrade are all software that
can be loaded immediately. The Company is preparing a software upgrade suite
which will be rolled out in Hungary during December 1998 and in Poland, Croatia
and the Czech republic during the first quarter of 1999. Approximately 250 of
the Company's NCR machines will require an upgrade to their firmware and PC BIOS
to become year 2000 compliant. Similar to the IBM upgrade, the Company is
preparing a software upgrade suite which will be released prior to the end of
the year and the upgrade of NCR machines will be completed during the first
quarter of 1999. The anticipated expense for upgrading the ATMs is estimated to
be less than $500 per machine, for a total of $375,000.
Vendor and Internal Software used in the Company's Subsidiaries. The Company has
conducted an inventory of all software in use in the Company and all of its
subsidiaries. The standard suite of software provided for use in the country
operations and provided by the Company's internal software group (the "IS
Group") is fully year 2000 compliant. Some of the Company's subsidiaries have
developed additional software locally. This has been inventoried and copies are
being reviewed for compliance purposes. All "in-country" software will be
replaced with standard products provided through the IS Group. Should the
Company determine that individualized software components are required due to
commitments made under customer contracts, the software will be upgraded during
the second quarter of 1999. Testing of standard Company software used in all
entities will be completed by June 1999.
Software used in Financial and Accounting Systems. The majority of the Company's
internal financial analysis tools have been built using Microsoft Access and
Mircrosoft Excel. These tools were built internally and are year 2000 compliant.
The Company's primary financial reporting software (Scala 5.0) has been updated
for year 2000 compliance. Implementation and testing of the new version of the
software is currently underway with completion anticipated by the end of 1998.
Ability of the Company's Customers to Authorize Transactions after the Turn
of the Century. As part of its year 2000 program the Company will contact
each bank customer in writing requesting certification of its transaction
authorization software for year 2000 readiness. The Company will offer each
customer the opportunity to use the Company's test center to verify the
ability to authorize transactions into the year 2000. In addition, each
customer will be offered the opportunity to place "stand-in" authorization
files at the Company's computer center in the event of difficulty with the
customer's in-house software. Each customer will also be advised that the
Company will be required to unilaterally cease support for any connection
which is unable to continue processing.
Substantially all of the Company's revenues are derived from processing
transactions on behalf of its bank customers. If such customers are not able
to authorize transactions beyond the turn of the century due to failure
of their systems to meet year 2000 compliance standards, the Company's
revenues will be adversely impacted. The Company's revenues could be materially
and adversely affected if a material number of the Company's bank customers
are unable to process transactions into the year 2000. As part of its year
2000 program, the Company will assess the potential impact of the advent
of the year 2000 on its revenues on an ongoing basis, as responses to the
survey described in the previous paragraph are received.
The Company has established a testing program with respect to all of its
major card association gateways (Visa, Europay, Mastercard, American Express,
Diners Club). The Company has already performed and passed a year 2000
verification conducted by Visa International.
Year 2000 Readiness of Subcontractors performing driving, switching and
authorization services in Germany. In Germany, the Company has retained
subcontractors to perform the majority of ATM services provided by the Company.
Each of these sub-contractors will be requested to provide detailed
certification statements that meet the Company's requirements regarding
year 2000 compliance. In the event such assurances are not received promptly,
the Company will begin surveying alternative providers.
Contingency Plan. Except as described above with respect to stand-in
authorization for banks, the Company has not yet developed a contingency
plan for handling the inability of any components of its, or its bank customers'
hardware or software to process transactions into the year 2000. The Company
is confident that its own systems are or will be ready to process transactions
and maintain uninterrupted operations into the year 2000 and that such a
contingency plan will be required, if at all, only with respect to its bank
customers. However, the elements of such a contingency plan, if necessary,
can only be defined based on information which will be gathered from such
bank customers as part of the survey described above.
PREPARATION FOR THE INTRODUCTION OF THE EURO.
On January 1, 1999 eleven of the fifteen member countries of the European Union
(the "participating countries") are scheduled to establish fixed conversion
rates between their existing sovereign currencies (the "legacy currencies") and
the Euro. The participating countries have agreed to adopt the euro as their
common legal currency on that date. The euro will then trade on currency
exchanges and be available for non-cash transactions. The participating
countries will issue sovereign debt exclusively in euro, and will redenominate
outstanding sovereign debt.
As of January 1, 1999, the participating countries no longer will control their
own monetary policies by directing independent interest rates for the legacy
currencies. Instead, the authority to direct monetary policy, including money
supply and official interest rates for the euro will be exercised by the new
European Central Bank.
Following the introduction of the euro, the legacy currencies are scheduled to
remain legal tender in the participating countries as denominations of the euro
between January 1, 1999 and January 1, 2002 (the "transition period"). During
the transition period, public and private parties may pay for goods and services
using either the euro or the participating country's legacy currency on a "no
compulsion, no prohibition basis". However, conversion rates no longer will be
computed directly from one legacy currency to another. Instead, the following
triangulation process will be applied:
. An amount denominated in one legacy currency first will be converted into
an amount denominated in euro.
. The resultant euro-denominated amount will be converted into the second
legacy currency.
European Union regulations specify the number of decimal places and rounding
conventions that will be used in these "triangulation" computations.
Beginning January 1, 2002, the participating countries will issue new euro-
denominated bills and coins for use in cash transactions. No later than July 1,
2002 the participating countries will withdraw all bills and coins denominated
in the legacy currencies, so that the legacy currencies no longer will be legal
tender for any transactions, making conversion to the euro complete.
The Company has operations in two participating countries, being France and
Germany. The Company's accounting software is currently being upgraded to be
able to account for both the euro and legacy currency. Since financial
settlement is managed only by chartered banking institutions the company does
not anticipate any operational impact until January 1, 2002.
The Company has until January 1, 2002 to plan for being able to handle euro cash
in its network. During the period January 1, 2002 to July 1, 2002 the company
could potentially have to deal with both the legacy currency and the euro in its
German and French networks. The implications of this `duality' and a strategy
for conversion to the Euro are currently under consideration.
The Company is still in the process of assessing the potential impact of the
euro in terms of likely competitive effects, currency risks, and additional
costs. However the Company does not anticipate that any of these issues will
have a material adverse effect on its business.
IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company, effective for the year ended December 31, 1997, has adopted the
following Statements of Financial Accounting Standards (SFAS): SFAS No. 128,
"Earnings per Share." Pursuant to the provisions of the statement, basic loss
per share has been computed by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding during
the period. The effect of potential common shares (stock options outstanding) is
anti-dilutive. Accordingly, dilutive loss per share does not assume the exercise
of stock options outstanding.
SFAS No. 130, "Reporting Comprehensive Income". The Company has adopted this
statement for the nine months ended September 30, 1998 by providing a statement
of operations and comprehensive loss.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." The Company has one industry segment but operates in a number of
geographical segments. The Company has disclosed separately its two major
geographical segments in 1997, being Hungary and Poland, as required by SFAS
No.131.
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management has not determined the effect of the
adoption of SFAS No. 133.
FORWARD LOOKING STATEMENTS
This document contains statements that constitute forward-looking statements
within the meaning of section 27A of the Securities Act and section 21E of the
U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements other than statements of historical facts included in this document,
including, without limitation, statements regarding (i) the use of proceeds of
the Offering, (ii) the Company's business plans and financing plans and
requirements, (iii) trends affecting the Company's financial condition or
results of operations, (iv) the impact and extent of competition, (v) expansion
of the Company's ATM network and expansion of the Company's operations, (vi) the
assumptions underlying the Company's business plans, (vii) business strategy,
(viii) government regulatory actions, (ix) technological advances and (x)
projected costs and revenues, are forward-looking statements. Although the
Company believes that the expectations reflected in such forwarding-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Forward-looking statements are typically identified by the
words believe, expect, anticipate, intend, estimate and similar expressions.
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties and that actual results may differ materially from those in the
forward-looking statements as a result of various factors.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 - Agreement and Plan of Merger
Exhibit 27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 12, 1998 By: /s/ Michael J. Brown
------------------------
(Chief Executive Officer)
November 12, 1998 By: /s/ Bruce S. Colwill
------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX DESCRIPTION OF DOCUMENT
- ------------- ---------------------------------------------------------
10 Agreement and Plan of Merger
27 Financial Data Schedule