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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 000-22167
EURONET SERVICES INC.
(Exact name of the Registrant as specified in its charter)
DELAWARE
(State of other jurisdiction of incorporation or organization)
74-2806888
(I.R.S. employer identification no.)
4601 COLLEGE BOULEVARD
SUITE 300
LEAWOOD, KANSAS 66211
(913) 327-4200
(Address and telephone number of the Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.02
par value
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
At March 1, 2001, the Registrant had 17,814,910 shares of common stock (the
"Common Stock") outstanding, and the aggregate market value of the Common Stock
held by non-affiliates of the Registrant was approximately $120 million. The
aggregate market value was determined based on the closing price of the Common
Stock on March 1, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders in 2000, which will be filed no later than 120 days after December
31, 2000, are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
- ----------------
The information set forth in response to Item 101 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and in Part II Item 8, Financial Statements and
Supplementary Data, at Note 17 - Business segment information, of this Form 10-K
is incorporated by reference in partial response to this Item 1.
Overview
Euronet Services Inc. ("Euronet Worldwide" or the "Company") is a leading
provider of secure electronic financial transaction solutions. The Company
provides financial payment middleware, financial network gateways, outsourcing,
and consulting services to financial institutions, retailers and mobile
operators. The Company operates an independent automated teller machine ("ATM")
network of over 2,600 ATMs in Europe and the United States, and through its
software subsidiary, Euronet USA Inc. ("Euronet USA"), offers a suite of
integrated software solutions for electronic payment and transaction delivery
systems. Euronet Worldwide thus offers comprehensive electronic payment
solutions consisting of ATM network participation, outsourced ATM management
solutions and software solutions. Its principal customers are banks and other
companies such as retail outlets that require transaction processing services.
With eleven offices in Europe and three in the United States, the Company offers
its solutions in more than 60 countries around the world.
The first company in the Euronet Worldwide group was established in 1994 as a
Hungarian limited liability company. That company commenced operations in June
1995. The Euronet Worldwide group was reorganized on March 6, 1997 in connection
with the Company's initial public offering, and at that time the operating
entities of the Euronet Worldwide group became wholly owned subsidiaries of the
Company, a Delaware corporation.
Until December 1998, the Company devoted substantially all of its resources to
establishing and expanding its ATM network and outsourced ATM management
services business. The Company has undertaken a rollout of its ATM network in
eight European countries and the United States. The Company had 53, 166, 693,
1,271, 2,283 and 2,634 ATMs in operation at December 31, 1995, 1996, 1997, 1998,
1999 and 2000, respectively. Of the 2,634 ATMs in operation on December 31,
2000, 72% are owned by Euronet Worldwide as part of its proprietary network, and
28% are customer-owned and operated by Euronet Worldwide under outsourcing
agreements. The Company owns or operates ATMs in Hungary, Poland, Germany,
Croatia, the Czech Republic, France, the United Kingdom, Greece and the United
States.
On December 2, 1998, the Company acquired Euronet USA (formerly Arkansas
Systems, Inc.), a U.S. company which produces electronic payments systems
software for retail banks and is the leading electronic payment software system
for the IBM A/S 400 platform. As a result of this acquisition, the Company was
able to offer a broader and more complete line of services and solutions to the
retail banking market, including software solutions related not only to ATMs,
but also to point-of-sale ("POS"), credit and debit card operations and internet
and PC banking. The Company has invested in software research, development and
delivery capabilities and has integrated its ATM business and its software
business. These two complementary businesses present strong cross selling
opportunities within the Company's combined customer base and new opportunities
to leverage the core infrastructure and software to provide innovative value-
added e-commerce products and services. The name of Arkansas Systems Inc. was
changed to Euronet USA Inc. effective as of January 24, 2001.
The Company adopted the trade name "Euronet Worldwide" on October 31, 2000 and
will propose to formally change its name from "Euronet Services Inc." to
"Euronet Worldwide" at its annual meeting of the shareholders' in the year 2001.
Strategy
The Company believes that the expansion and enhancement of its ATM network will
remain a core business strategy of the Company. The introduction of value-added
products and services for delivery over its ATM network has resulted in
increased transactions and supplemental revenues. The development of Euronet
Worldwide's outsourced management solutions has also been, and will continue to
be, a primary focus for the Company. The Company believes that expansion of the
number of bank-owned ATMs under management
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agreements and Company-owned ATMs operated for banks which have agreed
contractually to pay guaranteed fees will provide continued growth while
minimizing the capital it places at risk. The Company has also expanded
outsourced management solutions beyond ATMs to include card management, and
additional services such as POS terminal management, prepaid mobile operator
solutions and mobile banking. These services are supported using Euronet
Worldwide's proprietary software products.
The Company's software solutions division has contributed to the Company's
revenue growth in 2000. The Company has made significant progress in reducing
software delivery times and adding resources to enhance and expand its software
products. Software products are now an integral part of the Company's product
lines and its investment in research, development, delivery and customer support
reflect its ongoing commitment to an expanded customer base. The Company
developed a number of new products and services for its bank customers,
including in particular a set of wireless banking products which permit various
financial transactions to be made from handheld devices, such as mobile
telephones. The Company has also expanded its software solutions and processing
capabilities to include a suite of prepaid mobile airtime solutions for mobile
service providers. The Company has entered global co-operative marketing and
sales agreements with industry leaders to provide enhanced distribution channels
for its products and services.
The Company has developed its business around two integrated service segments:
network services and outsourced management solutions (the "Network Services
Segment") and software solutions (the "Software Solutions Segment"). Both
support the "front-end" business of retail banks, which includes a bank's
management of payment cards, ATMs, POS devices, internet banking, telephone
banking and mobile phone banking. The Company's strategy is to use its two
business segments to support electronic financial transactions and e-commerce
across multiple customer touch-points. This allows the Company to provide bank
customers the choice of completely outsourcing their "front-end" business to the
Company, using the Company's software to manage their transaction networks in-
house, or utilizing a tailor-made mixture of outsourcing and in-house
capabilities.
Network Services Segment
Network Operation Overview
At December 31, 2000 and 1999 the Company operated 2,634 and 2,283 ATMs,
respectively. The major source of revenue generated by the Company's ATM network
is transaction revenue. The transactions processed by the ATM network increased
by 60% from 32.9 million transactions in 1999 to 52.7 million transactions in
2000. Revenue sources also include advertising revenue, prepaid mobile phone
voucher revenue and outsourced management revenue, which is revenue from
operating ATMs that are not owned by the Company. The number of ATMs operated
under outsourced management agreements increased from 705 at December 31, 1999
to 734 at December 31, 2000.
ATM network growth in 2000 is attributable to transaction growth and additional
outsourcing contracts in its established markets, in particular Poland, Hungary,
the Czech Republic, Croatia and the United States as well as the roll out of
additional ATMs in France and the United Kingdom.
Transaction Processing
Through agreements and relationships established with local banks, international
credit and debit card issuers ("Card Issuers") and associations of Card Issuers
such as American Express, Diners Club International, VISA, MasterCard and
EUROPAY ("International Card Organizations"), the Company's ATMs are able to
process transactions for holders of credit and debit cards issued by or bearing
the logos of such banks and International Card Organizations.
In a typical ATM transaction processed by the Company, the transaction is routed
from the ATM to the Company's processing center, and then to the Card Issuer for
authorization. Once authorization is received, the authorization message is
routed back to the ATM and the transaction is completed. Authorization of ATM
transactions processed on the Company's ATMs is the responsibility of the Card
Issuer.
The Company receives payment of a transaction processing fee from the Card
Issuer, even for certain transactions that are not completed because they fail
to receive authorization. The fees charged by the Company to the Card Issuers
are independent of any fees charged by the Card Issuers to cardholders in
connection with the ATM transactions. In many cases, the fee charged by a Card
Issuer to a cardholder for a transaction processed at Euronet Worldwide's ATMs
is less than the fee charged by Euronet to the Card Issuer. The
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Company itself does not charge cardholders a fee for using its ATMs, except in
the UK, where there is surcharge fee of approximately one pound on each cash
withdrawal transaction.
The Company monitors the number of transactions made by cardholders on its
network. These include cash withdrawals, balance inquiries, deposits and certain
denied (unauthorized) transactions. Certain transactions on the Euronet
Worldwide network are not billable to banks, and these have been excluded for
reporting purposes. The number of transactions processed over Euronet
Worldwide's entire ATM network increased from 1.1 million in 1996 to 5.8 million
in 1997, 15.5 million in 1998, 32.9 million in 1999 and 52.7 million in 2000.
The number of transactions processed monthly grew from approximately 3.3 million
in January 2000 to approximately 5.3 million in December 2000.
The transaction volumes processed on any given ATM are affected by a number of
factors, including location of the ATM and the amount of time the ATM has been
installed at that location. The Company's experience is that the number of
transactions on a newly installed ATM is initially very low and increases for
varying periods of from three to twelve months after installation, depending
upon the market, as consumers become familiar with the location of the machine.
As the ATM network has matured, the number of transactions per ATM has
increased. The Company has an ongoing policy of re-deploying under performing
ATMs to superior locations. The Company anticipates that future transaction
growth will depend upon the addition of further outsourcing contracts, increased
card issuance in certain markets and continued re-deployment of ATMs to superior
locations.
The Company believes that the location of ATMs is one of the most important
factors in determining the success of an ATM network. As part of its strategy to
establish ATM sites that provide high visibility and cardholder utilization, the
Company identifies major pedestrian traffic locations where people need quick
and convenient access to cash. Key target locations for the Company's ATMs
include (i) major shopping malls, (ii) busy intersections, (iii) local smaller
shopping areas offering grocery stores, supermarkets and services where people
routinely shop, (iv) mass transportation hubs such as city bus and subway stops,
rail and bus stations, airports and gas stations, and (v) tourist and
entertainment centers such as historical sections of cities, cinemas, and
recreational facilities.
Recognizing that convenience and reliability are principal factors in attracting
and retaining ATM customers, the Company has invested in the establishment of
advanced ATM machines and monitoring systems, as well as redundancies to protect
against network interruption. The performance and cash positions of the
Company's ATMs are monitored centrally around the clock, and local operations
and maintenance contractors are dispatched to service the machines. The
Company's ATMs in all markets except Germany and the UK are linked by satellite
or land based telecommunications lines to the Company's processing centers.
Plans, however, are currently underway to connect the UK ATM's to the Company's
Budapest processing center.
The Euronet Worldwide network constitutes a distribution network through which
financial and other products or services may be sold at a low incremental cost.
The Company has developed added value services in addition to basic cash
withdrawal and balance inquiry transactions. These new services include GSM
telephone voucher transactions, bill payment and "mini-statements" transactions.
The Company has an ongoing commitment to develop innovative new products and
services to offer its network services customers and will implement additional
services as markets develop.
Delivery of Other Products and Services
In November 1999, the Company began to sell pre-paid mobile telephone vouchers
on its networks in Hungary and Poland. In May and October 2000, this service was
added to the Company's Czech Republic and Croatian ATM networks, respectively.
This service is one of many new products and services that the Company believes
can be delivered to consumers through ATMs.
Since May 1996, the Company has been selling advertising on its network.
Advertising clients can put their advertisements on the video screens of Euronet
Worldwide's ATMs, on the receipts issued by the ATMs and on coupons dispensed
with cash from the ATMs. Furthermore, the Company's ATMs are modular and can be
upgraded with new technologies such as the capacity to read and re-charge
computer chip "smart cards."
The Company believes that the level of services it provides and the locations of
its ATMs make it an attractive service provider to banks and International Card
Organizations. By connecting to the Company's network, local banks can offer
their customers the convenience of ATM services in numerous off-site locations
without incurring additional branch operating costs. In addition, the Company
believes that the services it provides
4
permit it to capitalize on the increase in bank account usage and credit and
debit card issuance in Central Europe as demand for banking services continue to
grow in the region.
Card Acceptance Agreements
The Company's agreements with banks and International Card Organizations ("Card
Acceptance Agreements") generally provide that all credit and debit cards issued
by the customer bank or organization may be used at all ATM machines operated by
the Company in a given market. The Card Acceptance Agreements allow Euronet
Worldwide to receive transaction authorization directly from the card issuing
bank or International Card Organization. Card Acceptance Agreements generally
provide for a term of two to seven years and are automatically renewed unless
either party gives notice of non renewal prior to the termination date. In some
cases, the agreements are terminable by either party upon six months' notice.
The Company generally is able to connect a bank to its network within 30 to 90
days of signing a Card Acceptance Agreement. The cash needed to complete
transactions is generally provided by the Bank customer. The Company maintains
insurance in respect of cash while it is in its ATMs.
The ATM transaction fees charged by Euronet Worldwide under its Card Acceptance
Agreements vary depending on the type of transaction (which are currently cash
withdrawals, balance inquiries, GSM telephone vouchers, deposits and
transactions not completed because authorization is not given by the relevant
Card Issuer) and the quantity of transactions attributable to a particular Card
Issuer.
The Card Acceptance Agreements generally provide for payment in local currency
but transaction fees are denominated in U.S. dollars or inflation adjusted.
Transaction fees are billed on terms no longer than one month. The Company's
agreement with DiBa in Germany (see "Government Regulation") to manage and
install ATMs provides for fees similar to those paid with respect to Card
Acceptance Agreements.
Outsourced Management Solutions
The Company offers complete outsourced management services to banks and other
organizations based on the Company's processing center's full suite of secure
electronic financial transaction processing software. The outsourced management
services provided by the Company include management of an existing bank network
of ATMs, development of new ATM networks on a complete turn-key basis,
management of POS networks, management of credit and debit card bases and other
financial processing services. These services include 24-hour monitoring from
the Company's processing centers of each individual ATM's status and cash
condition, coordinating the cash delivery and management of cash levels in the
ATM and automatic dispatch for necessary service calls. They also include real-
time transaction authorization, advanced monitoring, network gateway access,
network switching, 24-hour customer services, maintenance services, settlement
and reporting. The Company already provides many of these services to existing
customers and has invested in the necessary infrastructure. As a result,
agreements for such outsourced management services ("Outsourced Management
Agreements") provide additional revenue with lower incremental cost.
The Company's Outsourced Management Agreements, other than in Germany, provide
for fixed monthly management fees in addition to fees payable for each
transaction. Therefore, the transaction fees under these agreements are
generally lower than under Card Acceptance Agreements. The fees payable to the
Company under its Outsourced Management Agreement in Germany are purely
transaction based and include no fixed component.
In addition to transactions over its network, the Company is developing services
that are complementary to, or promote, ATM transactions. The Company offers a
new card issuance product, referred to as the "Diamond Link." This product
combines IBM hardware and Euronet Worldwide's software, and is intended to
permit banks to rapidly implement card issuance programs. In exchange for a fee,
Euronet Worldwide acts as a consultant in connection with the installation of
the hardware and software necessary to implement an ATM processing network and
assists banks in issuing credit and debit cards to their account holders. The
Diamond Link system interfaces automatically with Euronet Worldwide's network
software and facilitates acceptance on the Euronet Worldwide network of
transactions by the cards issued using the Diamond Link service. The market for
this product appears to be strongest among banks wishing to issue a small number
of cards or to initiate their first card programs. The Company's primary
motivation in the development of this program is to promote the issuance of
cards by banks, which ultimately may be used on Euronet Worldwide's network.
Major Outsourced Management Agreements signed in 2000 include: complete
outsourcing of a credit card
5
management system and processing of point-of-sale ("POS") transactions for
Credigen Bank, a new consumer credit institution in Hungary; ATM management for
Citibank in the Czech Republic; an amendment and extension of the Company's ATM
management agreement with Budapest Bank in Hungary; ATM management for ABN AMRO
Bank in Hungary; a complete turn-key solution for the installation and operation
of ATMs for Citibank in Greece; and outsourcing of credit card management for
ABN AMRO corporate clients in the Czech Republic.
Cost of Network Operation
The components of direct operating costs of the Network Services Segment for the
years ended December 31, 2000 and 1999 were:
2000 1999
---- ----
(in thousands)
ATM communication $ 4,183 $ 3,982
ATM cash filling and interest on network cash 7,426 5,900
ATM maintenance 3,987 2,967
ATM site rental 2,258 2,421
ATM installation 675 783
Transaction processing and ATM monitoring 5,242 4,205
Other 600 1,663
------- -------
TOTAL $24,371 $21,921
======= =======
Since January 1999, inter-company allocations have been made to charge the
network operations with transaction switching and bank connection fees
associated with the operations' central processing center in Budapest, Hungary.
These allocations totaled $3.5 million and $2.9 million for the years ended
December 31, 2000 and 1999, respectively, and are included with the transaction
processing and ATM monitoring costs. Previously these costs were not allocated
as a direct operating cost but were included as a component of selling, general
and administrative costs. These allocations are necessary because, although all
ATM subsidiary operations require the services of a processing center to route
transactions, some subsidiary operations such as Hungary, Poland, the Czech
Republic, Croatia and France do not pay a third party for these services while
other subsidiary operations such as Germany and the United Kingdom do pay a
third party for these services. Thus, by allocating internal costs for
transaction processing, the Company's management is able to produce comparable
financial information across all network subsidiary operations.
The cost of operating ATMs varies from country to country. On a per ATM or
transaction basis, statistics are dependent on the proportions of fixed and
variable cost, and therefore the stage of development of a new country market,
the number of ATMs in that market and the number of transactions. As the network
has reached a more mature stage, the operating costs begin to resemble fixed
costs, with increases in revenue generating incrementally less operating costs.
Direct operating costs as a percentage of ATM network revenue decreased from 83%
in 1999 to 66% in 2000. The Company intends to continue to improve the ratio of
direct operating costs to revenue as the network continues to mature and growth
continues in higher margin outsourcing management solutions.
Software Solutions
Background
On December 2, 1998, the Company completed the acquisition of Euronet USA, the
key upstream software provider to Euronet Worldwide's ATM transaction processing
center in Central Europe. Previously, Euronet USA was a privately held
corporation, with three principal stockholders and 30 past and present employee
stockholders.
John G. Chamberlin, in Little Rock, Arkansas, USA, founded Euronet USA in 1975.
Euronet USA began as a local custom IT project company. In 1980 and 1981 it
connected an ATM to an IBM S/36 processor and developed expertise in such
connections. As banks began to connect to various networks in the U.S., Euronet
6
USA developed software and implemented solutions for such connections and
implemented a card management system. Through the 1980's and 1990's, Euronet USA
continued to expand its electronic financial transaction ("EFT") solutions for
financial services customers, with telephone banking, item processing,
remittance, branch teller and related solutions, for the IBM mid-range platform.
In 1988, IBM introduced the AS/400 processor, which has become the most popular
multi-user processor. Many multinational banks currently use the AS/400 hardware
and Euronet USA software systems. Euronet USA now supplies ATM, card management,
POS, and/or internet banking systems to ABN-AMRO, CIBC, Bank of Nova Scotia,
ING, Bank of America and other multinational institutions. By 1998, Euronet USA
had grown to over 130 employees and 150 active customers, in 60 countries, with
no one customer or customer grouping accounting for more than 10% of revenue.
Other suppliers have serviced the software requirements of large mainframe
systems and UNIX based platforms. Recently, Euronet USA has begun to expand into
the supply of software services for large mainframe operations. Competition for
Euronet USA software exists internationally in the form of larger multinational
companies, who service the requirements of a range of platforms, and regionally,
in smaller or similar-sized companies, who specialize in the IBM AS/400
platforms. The Company believes, however, that it is now the primary supplier of
ATM network software for the IBM AS/400 platform.
Products and Services
Euronet USA offers an integrated suite of card and retail transaction delivery
applications. The core systems provide for transaction identification,
transaction routing, security, transaction detail logging, network connections,
authorization interfaces, settlement and management of the system. Front-end
systems support ATM management, POS management, telephone banking, internet
banking, kiosks, and workstation authorization. These systems provide a
comprehensive solution for ATM, debit or credit card management and bill payment
facilities. Euronet USA also offers Goldnet, a shared EFT network solution that
allows the formation of an independent gateway network. Euronet uses Goldnet for
its EFT requirements in six countries in Europe.
The Company has the capacity not only to service a full range of the individual
demands of its customers, but also to supply software and management systems for
credit card operations, internet and intranet banking, including bill payment
through its ATM network and POS terminal management and reporting and to supply
a full range of consultancy services where required by software customers. This
ability to cross sell network services and software solutions has positioned the
Company uniquely among its competitors. Furthermore the vertical integration of
software and outsourced management services enhances the Company's ability to
meet its customers varied requirements.
Significant resources have been invested in increasing the delivery pipeline for
the Company's solutions and expanding customer service. The Company's European
headquarters in Budapest has been expanded to provide comprehensive delivery and
support for its European customer base. Further investments have been made in
research and development of a number of new e-commerce and m-commerce products
that should enhance the segment's performance in the future.
The timing of the full introduction, or material expansion, of these products
and services will in part depend on the demands of the customers in the
financial, retail and service sectors. Although the commercial success of these
products and services will be dependent on the Company's customer banks' desire
to invest in new electronic financial transaction systems, the Company
anticipates continuing demand for software products, particularly in Central
Europe and other emerging markets.
In the third quarter of 2000 the Company wrote down the carrying value of
goodwill and other identifiable intangible assets of Euronet USA by $11.2
million. The Company considers the rapidly changing business environment
surrounding electronic transaction payment systems software to be a primary
indicator of any potential impairment of goodwill and other identifiable
intangible assets related to the Company's Software Solutions Segment. The
Company is in the process of repositioning the its software solutions division
in the market through development and release of a new set of products that are
independent of Euronet USA's traditional core product lines, including a new,
platform independent Java based transaction processing software package with
wireless banking and messaging modules and a set of mobile phone prepaid
recharge solutions. It has become apparent, based on market reaction to these
new products, that these new products and solutions rather than Euronet USA's
traditional ITM solution will be the primary source of software solutions
revenues in the future.
7
Software Solutions Segment Revenue
Software Solutions Segment revenue is derived from three main sources: software
license fees, professional service fees and software maintenance fees. Software
license fees are the initial fees charged by the Company for the licensing of
its proprietary application software to customers. Professional service fees are
charged for customization, installation and consulting services provided to
customers. Software maintenance fees are the ongoing fees charged to customers
for the maintenance of the software products.
The Software Solutions Segment revenue for the year ended December 31, 2000 was
approximately $15.8 million, of which software license fees accounted for 26%,
professional service fees accounted for 43% and software maintenance fees
accounted for 27%. The remaining 4% of revenue was miscellaneous revenue
including fees for brokering hardware sales.
Revenue is recognized on a percentage of completion basis whereby a pro-rata
portion of revenue and related costs are recognized as the work progresses.
Revenues from software license agreements 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.
Software Sales Backlog
The Company defines "software sales backlog" as fees specified in contracts
which have been executed by the Company and its customers and for which the
Company expects recognition of the related revenue within one year. At December
31, 1999 the revenue backlog was $3.1 million and at December 31, 2000 the
revenue backlog was $3.5 million. The increase in backlog results principally
from growth in software sales. It is management's intention to focus on delivery
and implementation of software while continuing sales growth. There can be no
assurance that the contracts included in backlog will actually generate the
specified revenues or that the actual revenues will be generated within the one-
year period.
Research and Development
The Company has made an ongoing commitment to the development, maintenance and
enhancement of its products and services. The Company regularly engages in
research and development activities aimed at the development and delivery of new
products, services and processes to its customers, including bill payment and
presentment, telephone banking products, applications for wireless application
protocol ("WAP") enabled customer touch points, other wireless banking products,
GSM prepaid mobile phone recharge products, ATM browser based products and
internet banking solutions. The Company is also making significant improvements
to its core software products.
The Company's research and development costs incurred for computer products to
be sold, leased or otherwise marketed totaled $6.7 million for 2000. Of this
figure, $1,023,000 was capitalized under the Company's accounting policy
requiring the capitalization of development costs on a product by product basis
once technological feasibility is established. Technological feasibility of
computer software products is established when the Company has completed all
planning, designing, coding, and testing activities that are necessary to
establish that the product can be produced to meet its design specifications
including functions, features, and technical performance requirements.
Technology and Processing Facilities
ATM Hardware
The Company uses IBM/Diebold and NCR ATMs. It currently has long term contracts
with these manufacturers to purchase ATMs at contractually defined prices which
include tiered quantity discounts. However, there are no contractually defined
commitments with respect to quantities to be purchased as of December 31, 2000.
Because Euronet Worldwide operates the largest Pan-European ATM network, it has
substantial negotiating leverage with ATM manufacturers and believes it has
received favorable prices as compared to lower volume purchasers. The wide range
of advanced technology available from IBM/Diebold and NCR provides Euronet
Worldwide customers with state-of-the-art electronics features and reliability
through sophisticated diagnostics and self-testing routines. The Company's ATMs
are modular and upgradable so that they can be adapted to provide additional
services in response to changing technology and consumer demand. In many
respects, Euronet Worldwide's ATMs are more technologically advanced and
adaptable than many older ATMs in use in
8
developed ATM markets. This allows the Company to modify its ATMs to provide new
services without replacing its existing network infrastructure.
Telecommunications
Strong back office central processing support is a critical factor in the
successful operation of an ATM network. Each ATM is connected to a Euronet
Worldwide's processing center through satellite or land-based telecommunications
depending upon physical location, reliability of the communications supplier and
cost. Because the Company strives to ensure very high levels of reliability for
its network, it relies primarily on satellite telecommunications to its
processing center in Budapest for most of its ATM connections in Central Europe.
The Budapest processing center is, in most cases, linked by VSAT
telecommunications to the card issuers. The VSAT telecommunications providers
generally guarantee uninterrupted service for 99% of the time. ATMs in France
are linked to the processing center in Budapest by land telephone lines.
The Company continually strives to improve the terms of its agreements with its
telecommunications providers and has entered into multi-country agreements with
lower rates for service. In this regard, new agreements are negotiated
periodically with the Company's VSAT suppliers, establishing a lower
communication cost per ATM that takes into account the Company's growth in
volume.
The Company's agreements with its satellite telecommunications providers contain
certain assurances with respect to the repair of satellite malfunction to ensure
continuous reliable communications for the network. As the reliability of land
based telecommunications improves in the emerging economies in which the Company
does business, the Company may rely more heavily on them because they are
generally less expensive than satellite telecommunications.
Processing Centers
The Company's primary processing center is in Euronet Worldwide's offices in
Budapest, Hungary. It is staffed 24 hours a day, seven days a week and consists
of two production IBM AS/400 computers which run the Euronet USA Gold Net ATM
software package, as well as a real time back up AS/400. The back up machine
provides high availability during a failure of either production AS/400. The
Budapest processing center also includes two AS/400's used for product and
connection testing and development. The Euronet USA software is a state- of-the-
art software package that conforms to all relevant industry standards and has
been installed in at least 60 countries worldwide. The Budapest processing
center's computers operate Euronet Worldwide's ATMs and interface with the local
bank and international transaction authorization centers.
To protect against power fluctuations or short-term interruptions, the Budapest
processing center has full uninterruptable power supply systems with battery
back-up to service the network in case of a power failure. The Budapest
processing center's data back-up systems would prevent the loss of transaction
records due to power failure and permit the orderly shutdown of the switch in an
emergency. The center also has a gasoline powered generator available to supply
electrical power to the processing center in the event of a prolonged power
outage. The Company has contracted for backup of its VSAT hub in Hungary with a
fully functional site in Germany. The transfer to this communications site can
be made in less than three hours.
The Company has a second processing center in Little Rock, Arkansas. This center
processed transactions for approximately 456 ATMs in the U.S. as of December 31,
2000. This center also has full uninterruptable power supply systems and a
gasoline powered generator.
Competition
Network Services Segment
Euronet Worldwide's principal network services competitors in markets outside
the United States include ATM networks owned by banks and regional networks
consisting of consortiums of local banks. In the U.S., principal competitors
include individual banks operating proprietary ATM networks, shared bank
networks such as the Plus and Cirrus networks, independent, non-bank owned ATM
networks of varying sizes (ranging from a few ATMs to many thousands of ATMs)
and individual retail outlets operating ATMs. Large, well financed companies may
also establish ATM networks in competition with Euronet in various markets.
Competitive factors in Euronet's network services business include network
availability and response time, price to both the bank and to its customers, ATM
location and access to other networks.
9
There are many companies that offer electronic recharge services for mobile
phone airtime in the markets where Euronet does business, particularly through
use of POS terminals. There include Sonera Smart Trust, ITG, Hypercom, PreNet,
e-Vita and Sicap. The Company believes, however, that it has a competitive
advantage in that it offers recharge solutions on all customer touch points,
including ATMs, POS Terminals, mobile phones and the internet, and the Company
processes the financial transactions associated with the recharge.
Software Solutions
Competitors of the Software Solutions Segment compete primarily in the following
four areas: (i) ATM, network and point-of-sale software systems, (ii) internet
banking software systems, (iii) credit card software systems and (iv) wireless
banking software systems. The principal competitor with respect to ATM, network
and point-of-sale software systems is Applied Communications Inc. ("ACI") based
in Omaha, Nebraska which enjoys a large market share due to its early entry into
the financial systems software market and a clientele base of larger banks and
financial institutions. Oasis Software International, based in Toronto, Canada,
also competes in the area of ATM, network and point-of-sale software systems.
Internet banking software systems competitors include Edify Corporation, a
division of S1 Corporation based in Santa Clara, California and Q UP Systems
Inc. based in Austin, Texas. Both Edify Corporation and Q UP Systems Inc. have
started operations during the last decade and specialize in internet banking
systems. Euronet Worldwide's principal competitor with respect to credit card
software systems is PaySys International Inc., based in Orlando, Florida.
Competitors in the wireless banking software market include 724 Solutions,
based in Toronto, Canada and Brokat AG, based in Suttgart, Germany. Competitive
factors in the Software Solutions business include price, technology development
and the ability of software systems to interact with other leading products.
Employees
The Company's business is highly automated and it outsources many of its
specialized, repetitive functions such as ATM maintenance and installation, cash
delivery and security. As a result, the Company's labor requirements for
operation of the network are relatively modest and are centered on monitoring
activities to ensure service quality and cash reconciliation and control. The
Company also has a customer service department to interface with cardholders to
investigate and resolve reported problems in processing transactions.
However, Euronet Worldwide's roll out of ATMs, its development of new products
and individual bank connections and its expansion into new markets creates a
substantial need to increase existing staff on many levels. The Company requires
skilled staff to identify desirable locations for ATMs and negotiate ATM lease
agreements. Euronet has expanded its systems department to add new technical
personnel and has recruited strong business leadership for new markets. In
addition, the need to ensure consistency in quality and approach in new markets
and proper coordination and administration of the Company's expansion, has led
the Company to recruit additional staff in the areas of financial analysis,
project management, human resources, communications, marketing and sales. The
Company has a program of continual recruitment of superior talent whenever it is
identified and ongoing building of skill for existing staff. The Company
believes that its future success will depend in part on its ability to continue
to recruit, retain and motivate qualified management, technical and
administrative employees. The success of Software Solution's business in
particular depends upon the ability to hire and retain highly qualified computer
engineers and programmers. Competition for such employees in the United States
is particularly intense at the present time.
As of December 31, 2000 and December 31, 1999, the Company and its subsidiaries
had 478 and 412 employees, respectively. In January 2001, a restructuring plan
was announced by the Company with the objective of reducing the headcount by up
to 20% by March 31, 2001.
The Company has a European head office organization, European software delivery
and support center and European processing center in Budapest, Hungary. It has a
large office in Little Rock, Arkansas where Euronet USA is based and its
headquarters in Leawood, Kansas. None of the Company's or its subsidiaries'
employees are currently represented by a union. The Company has never
experienced any work stoppages or strikes.
Government Regulation
The Company has received advice from banking supervisory authorities or local
counsel in each of the markets in which it does business to the effect that the
business activities of the Company in those markets do not constitute "financial
activities" subject to licensing. Any expansion of the activity of the Company
into areas which are qualified as "financial activity" under local legislation
may subject the Company to licensing, and the
10
Company may be required to comply with various conditions in order to obtain
such licenses. Moreover, the interpretations of bank regulatory authorities as
to the activity of the Company as currently conducted might change in the
future. The Company monitors its business for compliance with applicable laws or
regulations regarding financial activities.
Under German law, ATMs in Germany may be operated only by licensed financial
institutions. The Company may not operate its own ATM network in Germany and in
that market it acts only as a subcontractor providing certain ATM-related
services to a sponsor bank. As a result, the Company's activities in the German
market currently are entirely dependent upon the continuance of the agreement
with its sponsor bank, or the ability to enter into a similar agreement with
another bank in the event of a termination of such agreement. In April 2000, the
Company entered into a new sponsorship agreement with DiBa Bank canceling an
agreement with Service Bank, its previous sponsor bank. The new agreement
provides similar terms and arrangements with the Company acting as a
subcontractor for DiBa. The Company believes, based on its experience, that it
should be able to find a replacement for DiBa should the agreement with DiBa be
terminated for any reason. However, the inability to maintain such agreement or
to enter into a similar agreement with another bank upon a termination of the
agreement with DiBa could have a material adverse effect on the Company's
operations in Germany.
Preparation for the Introduction of the Euro
From January 1, 2002, eleven of the fifteen member countries of the European
Union are scheduled to issue new Euro-denominated bills and coins for use in
cash transactions. No later than July 1, 2002 these eleven participating
countries, and other member countries who so elect, will withdraw all bills and
coins denominated in their sovereign currencies, which will no longer be legal
tender.
The Company must be able to dispense Euro cash in its networks from January 1,
2002, and may have to dispense both Euro and the sovereign currencies between
January 1, 2002 and July 1, 2002. The Company's networks in Germany, France and
potentially the UK and Greece will be affected in this regard. The Company's
ATMs are able to dispense various national currencies and will be able to
dispense the Euro without hardware modification. The existence of a single
currency in these countries may provide opportunities for operating efficiencies
and should reduce foreign exchange exposure.
The Company continues to assess the potential impact of the Euro in terms of its
effect on competition, currency risk, and additional costs, but does not
currently believe that the adoption of the Euro will have a material adverse
effect on its business.
Trademarks
The Company has filed applications for registration of certain of its trademarks
including the names "Euronet" and "Bankomat" and/or the blue diamond logo in
Hungary, Poland, the Czech Republic, Slovakia, Sweden, France and the United
Kingdom. Such applications have been granted in Hungary, Poland and Croatia but
are still pending in the other countries.
The Company has filed patent applications for a number of its new software
products and processes.
Executive Officers of the Company
The name, age, period of service and position held by each of the Executive
Officers of the Company are as follows:
Name Age Served Since Position Held
- ---- --- ------------ -------------
Michael J. Brown 44 June 1994 Chairman, President and Chief
Executive Officer
Daniel R. Henry 35 June 1994 Director, Chief Operating Officer
Jeffrey B. Newman 46 January 1997 General Counsel
Richard Halka 41 March 2000 Acting Chief Financial Officer, Chief
Accounting Officer
Ronald Ferguson 51 December 1998 Executive Vice President
Michael J. Brown is one of the founders of the Company and has served as its
Chief Executive Officer since 1994. In 1979 Mr. Brown founded Innovative
Software, a computer software company that was merged with Informix in 1988.
During this period, Innovative Software conducted three public offerings of its
shares. Mr. Brown served as President and Chief Operating Officer of Informix
from February 1988 to January 1989. He served as President of the Workstation
Products Division of Informix from January 1989 until April 1990.
11
Annual revenues of Informix had grown to $170 million by the time Mr. Brown left
Informix in 1990. In 1993 Mr. Brown was a founding investor of Visual Tools,
Inc., a company that writes and markets component software for the growing
Visual Basic and Visual C++ developer market. Visual Tools, Inc. was acquired by
Sybase Software in February 1996. Mr. Brown received a B.S. in Electrical
Engineering from the University of Missouri--Columbia in 1979 and a M.S. in
Molecular and Cellular Biology at the University of Missouri--Kansas City in
1996. Mr. Brown has been a Director of the Company since its incorporation in
December 1996 and he previously served on the boards of Euronet's predecessor
companies. Mr. Brown's term will expire in July 2001. Mr. Brown is married to
the sister of Mr. Henry's wife.
Daniel Henry founded the predecessor of the Company with Michael Brown in 1994
and is serving as Chief Operating Officer of the Company. Mr. Henry divides his
time between Budapest and Kansas City, and he oversees the daily operations of
the Company's European subsidiaries. Mr. Henry also is responsible for the
expansion of the Company into other countries and the development of new
markets. Prior to joining the Company, Mr. Henry was a commercial real estate
broker for five years in the Kansas City metropolitan area where he specialized
in the development and leasing of premiere office properties. Mr. Henry received
a B.S. in Business Administration from the University of Missouri--Columbia in
1988. Mr. Henry has been a Director of the Company since its incorporation in
December 1996 and he previously served on the boards of Euronet's predecessor
companies. His term as Director of the Company will expire in May 2002. Mr.
Henry is married to the sister of Mr. Brown's wife.
Jeffrey B. Newman joined the Company as Vice President and General Counsel on
January 31, 1997. Prior to this, he practiced law in Paris with the law firm of
Salans Hertzfeld & Heilbronn and then with the Washington, D.C. based law firm
of Arent Fox Kintner Plotkin & Kahn, PLLC, of which he was a partner from 1993
until joining the Company in 1997. He established the Budapest office of Arent
Fox Kintner Plotkin & Kahn, PLLC in 1991. He is a member of the Virginia,
District of Columbia and Paris bars. He received a B.A. in Political Science and
French from Ohio University and law degrees from Ohio State University and the
University of Paris.
Richard Halka joined Euronet in January 1999 as European Finance Director. He
became Acting Chief Financial Officer in March 2000. Prior to joining Euronet,
Mr. Halka was treasurer, financial controller and principal accounting officer
for the Hungarian Telephone and Cable Corporation, a publicly-traded U.S.
company that operates concessions to provide telephone service in Hungary.
Before that, Mr. Halka was a management consulting and corporate finance partner
with KPMG in both Hungary and New Zealand. He holds an Honors Bachelor's Degree
in business administration from Wilfrid Laurier University of Waterloo, Ontario
and is a Canadian Chartered Accountant.
Mr. Halka has resigned effective March 23, 2001 to pursue an opportunity in
Canada. Mr. Halka will be available to assist the Company in transition matters
until the closing of the first quarter 2001 financial statements.
Ronald Ferguson joined the Company as President of Euronet USA in December 1998.
Prior to this he was President of Bankline MidAmerica, Inc., from mid 1997. Mr.
Ferguson was Vice President of Marketing for AeroComm, Inc. for a period of
three years and also was principal of Ferguson Group, a consulting company
involved with technology based hardware and software firms. During the period
from 1984 to 1990, Mr. Ferguson was Vice President of Marketing for Innovative
Software, Inc. which was later acquired by Informix Software, Inc. where he was
also Vice President of Marketing. Prior to Innovative Software, he was Director
of Financial Services Marketing for United Computing Services from 1981 to 1984.
He also was President of Dynabank Corporation from 1976 to 1981 and started his
career with the First National Bank in Lawrence, Kansas in 1973. Mr. Ferguson
has a B.S. in Business and an MBA from the University of Kansas.
ITEM 2. PROPERTY.
- ----------------
The Company's executive offices are located in Leawood , Kansas. The European
head office and European Processing Center are located in Budapest, Hungary. The
Company also maintains offices in Europe in Warsaw, Zagreb, Prague, Berlin,
Paris, Bucharest, Athens, Cairo, Istanbul and London; and in the United States
in Little Rock, Arkansas and Orlando, Florida. All of the Company's offices are
leased. The Company's office leases provide for initial terms of 24 to 60
months.
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------
The Company is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- -----------------------------------------------------------
Not applicable.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- --------------------------------------------------------------------------------
Market Information. From March 1997 to November 8, 1999, the Common Stock was on
the NASDAQ National Market under the symbol EEFT. On November 8, 1999, the
Company's listing was shifted to the NASDAQ SmallCap Market. The following table
sets forth the high and low closing prices for the Common Stock for the periods
indicated:
Quarter High Low
------- ----- ----
2000 Fourth 8.38 3.88
Third 9.63 6.88
Second 10.75 4.88
First 10.78 6.00
Dividends. Since the Company's inception, no dividends have been paid on the
Common Stock. The Company does not intend to distribute dividends for the
foreseeable future.
Holders. As of December 31, 2000, there were approximately 103 record holders of
the Common Stock.
Private Placements of Common Stock.
In July 2000 the Company entered into subscription agreements for the sale of
877,946 new common shares of the Company. Closing with respect to such sale took
place on July 14, 2000 and August 29, 2000. These agreements were signed with
accredited investors in transactions exempt from registration pursuant to the
exemptions provided in Section 4(2) and Regulation D of the Act. The purchase
price of each share was $6.97. The aggregate amount of proceeds to the Company
from the private placement was $6.1 million.
In April 2000 the Company entered into two separate subscription agreements for
the sale of an aggregate of 354,777 new common shares of the Company. Of the
total new shares, closing with respect to 254,777 shares took place on April 10,
2000, and closing with respect to 100,000 shares took place on May 4, 2000.
These agreements were signed with certain foreign persons in transactions exempt
from registration under the United States Securities Act of 1933 (the "Act")
pursuant the exemption provided in Regulation S of the Act. The weighted average
purchase price of each share was $7.50. The aggregate amount of proceeds to the
Company from the private placement was $2.7 million. Under each of the
agreements, for each two shares of common stock purchased in the private
placement, the accredited investors were issued one warrant, expiring in each
case on the one year anniversary date of the subscription agreement, to purchase
a share of Euronet common stock at a weighted average exercise price of $12.50.
In February 2000 the Company entered into two subscription agreements for the
sale of an aggregate of 650,000 new common shares of the Company. Closing under
these agreements took place on March 13, 2000. These agreements were signed with
certain accredited investors in transactions exempt from registration pursuant
to the exemptions provided in Section 4(2) and Regulation D of the Act. The
purchase price of each share was $6.615, which represents 90% of the average
closing price for the ten trading days prior to and including February 15, 2000.
The aggregate amount of proceeds to the Company from the private placement was
$4.3 million. Under each of the agreements, for each two shares of common stock
purchased in the private placement, the purchasers were issued one warrant to
purchase a share of Euronet common stock at an exercise price of $11.615,
expiring in each case on the one year anniversary date of the subscription
agreement.
13
ITEM 6. SELECTED FINANCIAL DATA.
- -----------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data set forth below have been derived from,
and are qualified by reference to, the audited consolidated financial statements
of the Company and the notes thereto, prepared in conformity with generally
accepted accounting principles as applied in the United States ("U.S. GAAP"),
which have been audited by KPMG Polska Sp. z o.o., independent public
accountants. The Company believes that the period-to-period comparisons of its
financial results are not necessarily meaningful due to its significant
acquisitions in December 1998 and January 1999, and should not be relied upon as
an indication of future performance. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included herein.
Year ended December 31,
----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Consolidated Statements of Operations Data: (in thousands, except for share and per share data)
Revenues:
ATM network and related revenue $ 36,913 $ 26,503 $ 11,525 $ 5,290 $ 1,261
Software and related revenue 15,827 14,969 356 - -
---------- ---------- ---------- ---------- --------
Total 52,740 41,472 11,881 5,290 1,261
Operating expenses:
Direct operating costs 24,988 22,830 10,036 3,717 827
Salaries and benefits 29,265 24,350 9,723 3,796 989
Selling, general and administrative 11,531 10,725 8,650 4,468 2,459
Depreciation and amortization 10,384 10,238 4,955 1,731 481
In-process research and
development write-off - - 1,020 - -
Asset write down 11,968 - - - -
Share compensation expense - 127 108 108 4,172
---------- ---------- ---------- ---------- --------
Total operating expenses 88,136 68,270 34,492 13,820 8,928
---------- ---------- ---------- ---------- --------
Operating loss (35,396) (26,798) (22,611) (8,530) (7,667)
Other income/expenses:
Interest income 1,089 1,950 2,514 1,609 225
Interest expense (10,829) (10,899) (7,826) (1,152) (378)
Foreign exchange (loss)/gain, net (3,227) (2,110) (1,911) 8 (79)
---------- ---------- ---------- ---------- --------
Loss before income tax (expense)/benefit (48,363) (37,857) (29,834) (8,065) (7,899)
Income tax (expense)/benefit (1,188) 4,182 (1,430) 100 323
---------- ---------- ---------- ---------- --------
Loss before extraordinary item (49,551) (33,675) (31,264) (7,965) (7,576)
Extraordinary gain, net - 2,760 2,889 - -
---------- ---------- ---------- ---------- --------
Net loss $ (49,551) $ (30,915) $ (28,375) $ (7,965) $ (7,576)
========== ========== ========== ========== ========
Loss per share - basic and diluted:
Loss before extraordinary item $ (3.00) $ (2.21) $ (2.06) $ (0.64) $ (15.18)
Extraordinary gain - 0.18 0.19 - -
---------- ---------- ---------- ---------- --------
Net loss $ (3.00) $ (2.03) $ (1.87) $ (0.64) $ (15.18)
========== ========== ========== ========== ========
Weighted avg. number of shares outstanding 16,499,699 15,252,030 15,180,651 $12,380,962 499,100
========== ========== ========== ========== ========
14
As of December 31,
-----------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except Summary Network Data)
Consolidated Balance Sheet Data:
Cash and cash equivalents: $ 7,151 $ 15,037 $ 55,614 $ 7,516 $ 2,541
Restricted cash 2,103 10,929 12,972 847 152
Investment securities - 750 3,149 31,944 194
Trade accounts receivable, net 9,485 7,888 5,681 647 172
Other current assets 5,346 5,180 4,614 1,857 433
----------- ----------- ----------- ----------- ----------
Total current assets 24,085 39,784 82,030 42,811 3,492
Net property, plant and equipment 31,657 36,693 33,182 24,088 7,284
Intangible assets, net 2,604 16,259 12,464 - -
Other long-term assets 2,544 4,108 5,762 3,134 1,158
----------- ----------- ----------- ----------- ----------
Total assets $ 60,890 $ 96,844 $ 133,438 $ 70,033 $ 11,934
=========== =========== =========== =========== ==========
Current liabilities $ 20,466 $ 26,938 $ 18,739 $ 9,315 $ 2,861
Obligations under capital leases,
excluding current installments 8,034 6,397 6,809 11,330 3,834
Notes payable 77,191 72,800 83,720 - -
Other long-term liabilities - 202 - 169 103
----------- ----------- ----------- ----------- ----------
Total liabilities 105,691 106,337 109,268 20,814 6,798
Total stockholders' (deficit)/equity (44,801) (9,493) 24,170 49,219 5,136
----------- ----------- ----------- ----------- ----------
$ 60,890 $ 96,844 $ 133,438 $ 70,033 $ 11,934
=========== =========== =========== =========== ==========
Summary Network Data:
Number of operational ATMs at end of
period 2,634 2,283 1,271 693 166
ATM transactions during the period 52,663,000 32,938,000 15,467,000 5,758,000 1,138,000
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ---------------------
General Overview
Euronet Worldwide is a leading provider of secure electronic financial
transaction solutions. The Company provides financial payment middleware,
financial network gateways, outsourcing, and consulting services to financial
institutions, retailers and mobile operators. The Company operates an
independent automated teller machine ("ATM") network of over 2,600 ATMs in
Europe and the United States, and through its software subsidiary, Euronet USA
Inc. (formerly, Arkansas Systems, Inc.)("Euronet USA"), offers a suite of
integrated software solutions for electronic payment and transaction delivery
systems. Euronet Worldwide thus offers comprehensive electronic payment
solutions consisting of ATM network participation, outsourced ATM management
solutions and software solutions. Its principal customers are banks and other
companies such as retail outlets that require transaction processing services.
With eleven offices in Europe and three in the United States, the Company offers
its solutions in more than 60 countries around the world.
Euronet Worldwide and its subsidiaries operate in two business segments: (1) a
segment providing secure processing of financial transactions (the "Network
Services Segment"); and (2) a segment producing application software for the
processing of secure electronic financial transaction (the "Software Solutions
Segment"). In addition, the Company's management divides the Network Services
Segment into three sub-segments: "Central European Sub-segment" (including
Hungary, Poland, the Czech Republic, Croatia, Greece and Romania), "Western
European Sub-segment" (including Germany, France and the United Kingdom) and
"Other Operations Sub-segment" (including the United States and unallocated
processing center costs). These business segments, and their sub-segments, are
supported by a corporate service segment, which provides corporate and other
administrative services that are not directly identifiable with the two business
segments (the "Corporate Services Segment"). The accounting policies of each
segment are the same as those described in the summary of significant accounting
policies. The Company evaluates performance based on profit or loss from
operations before income taxes not including nonrecurring gains and net loss.
Prior period segment information has been restated to conform to the current
period's presentation. (See Note 19 to the Consolidated Financial Statements -
Business segment information.)
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND
1998
The Company's total revenues increased to $52.7 million for the year ended
December 31, 2000 from $41.5 million for the year ended December 31, 1999 and
$11.9 million for the year ended December 31, 1998. The increase in revenues
from 1999 to 2000 is primarily due to two factors: (1) a $10.4 million increase
in Network Services Segment revenues resulting from the increase in transaction
volumes in the Company owned ATMs and an increase in the number of ATMs operated
by the Company during this period; and (2) an increase of $800,000 in Software
Solutions Segment revenues. The increase in revenues from 1998 to 1999 is
primarily due to two factors: (1) a $15.0 million increase in Network Services
Segment revenues resulting from the increase in transaction volume attributable
to an increase in the number of ATMs operated by the Company during this period;
and (2) the addition of $14.6 million of Software Solutions Segment revenues.
Revenues for the years ended December 31, 2000 and 1999 are discussed more fully
in the Segment Results of Operations sections below.
Total operating expenses increased to $88.1 million for the year ended December
31, 2000 from $68.3 million for the year ended December 31, 1999 and from $34.5
million for the year ended December 31, 1998. The increase from 1999 to 2000 can
be broken down by segment as follows: (1) a $3.5 million increase in Network
Services Segment operating costs due to growth in the size of the network
operations; (2) a $15.2 million increase in Software Services Segment due to
write down of intangibles of $11.2 million and investment in personnel and
resources; and (3) a $1.1 million increase in Corporate Services Segment
operating costs due to the expended operations. The increase from 1998 to 1999
can be broken down by segment as follows: (1) a $13.0 million increase in
Network Services Segment operating costs, (2) the addition of $19.6 million of
Software Solutions Segment operating costs, and (3) a $1.2 million increase in
Corporate Services Segment operating costs. Operating expenses for the years
ended December 31, 2000 and 1999 are discussed more fully in the Segment Results
of Operations sections below.
16
The Company generated an operating loss of $35.4 million for the year ended
December 31, 2000 compared to $26.8 million for the year ended December 31, 1999
and $22.6 million for the year ended December 31, 1998. The increased operating
loss from 1999 to 2000 is due to the net effect of three factors: (1) a $6.8
million decrease in the operating loss from the Company's Network Services
Segment; (2) a $14.3 million increase in the operating loss from the Company's
Software Solutions Segment; and (3) a $1.1 million increase in the operating
loss from the Company's Corporate Services Segment. The increased operating loss
from 1998 to 1999 is due to the net effect of three factors: (1) a $1.9 million
decrease in operating losses from the Company's Network Services Segment; (2)
the addition of $4.8 million in operating losses from the Company's Software
Solutions Segment; and (3) a $1.3 million increase in operating losses from the
Company's Corporate Services Segment. The results of segment operations expenses
for the years ended December 31, 2000 and 1999 are discussed more fully in the
Segment Results of Operations section below.
SEGMENT RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(In thousands) Revenues Operating Loss
-------- --------------
Year ended December 31, 2000 1999 2000 1999
- ---------------------- ---- ---- ---- ----
Network Services
Central Europe $18,599 $12,664 $ (3,070) $ (8,019)
Western Europe 16,615 12,637 (2,286) (3,840)
Other 1,700 1,202 (709) (1,048)
------- ------- -------- --------
Total Network Services 36,914 26,503 (6,065) (12,907)
Software Solutions 16,006 15,149 (21,469) (7,141)
Corporate Services - - (7,862) (6,750)
Inter segment eliminations (180) (180) - -
------- ------- -------- --------
Total $52,740 $41,472 $(35,396) $(26,798)
======= ======= ======== ========
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NETWORK SERVICES SEGMENT
Total segment revenues increased by $10.4 million or 39% to $36.9 million for
the year ended December 31, 2000 from $26.5 million for the year ended December
31, 1999. The increase in revenues is due primarily to the significant increase
in transaction volume and an increase in the number of ATMs operated by the
Company during these periods. The Company had 2,283 ATMs installed as of
December 31, 1999 and processed 32.9 million transactions for the year ended
December 31, 1999. As of December 31, 2000, the Company's owned and operated ATM
network increased by 351 ATMs, or 15%, to a total of 2,634 ATMs, of which 72%
are owned by the Company and 28% are owned by banks or other financial
institutions but operated by the Company through management agreements. The
Company processed 52.7 million transactions for the year ended December 31,
2000, an increase of 19.8 million transactions, or 60%, over the year ended
December 31, 1999.
Revenues for the Central European Sub-segment totaled $18.6 million for the year
ended December 31, 2000 as compared to $12.7 million for the year ended December
31, 1999, an increase of 47%. The increase in revenues is largely the result of
an increase in the number of ATMs operated by the Company from 1,203 at December
31, 1999 to 1,391 at December 31, 2000, and increased transaction volumes.
Revenues for the Western European Sub-segment totaled $16.6 million for the year
ended December 31, 2000 as compared to $12.6 million for the year ended December
31, 1999, an increase of 31%. The increase in revenues is largely the result of
an increase in the number of ATMs operated by the Company from 621 at December
31, 1999 to 787 at December 31, 2000, and increased transaction volumes.
Revenues for the Other ATM Operations Sub-segment were $1.7 million for the year
ended December 31, 2000 as compared to $1.2 million for the year ended December
31, 1999, an increase of 41%. The revenues from this segment are the result of
the acquisition of the Dash network located in the United States in August 1999.
17
Of total segment revenue, approximately 87% is attributable to those ATMs owned
by the Company for the year ended December 31, 2000 and 94% for the year ended
December 31, 1999. Of total transactions processed, approximately 78% is
attributable to those ATMs owned by the Company for the year ended December 31,
2000 and 76% for the year ended December 31, 1999. The Company believes the
shift from a largely proprietary, Euronet Worldwide 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.
Transaction fees charged by the Company vary for the three types of ATM
transactions that are currently processed on the Company's ATMs: cash
withdrawals, balance inquiries and transactions not completed because the
relevant card issuer does not give authorization. Transaction fees for cash
withdrawals vary from market to market but generally range from $0.60 to $1.75
per transaction while transaction fees for the other two types of transactions
are generally substantially less. Transaction fees payable under the electronic
recharge solutions sold by the Company are included in Network Services Segment
revenues and vary substantially from market to market and based upon the
specific prepaid solution and the denomination of prepaid hours purchased.
Generally the range of transaction fees vary from $1.10 to $1.80 per prepaid
mobile recharge purchase.
Operating Expenses
Total segment operating expenses increased to $43.0 million for the year ended
December 31, 2000 from $39.4 million for the year ended December 31, 1999. The
increases are due primarily to costs associated with the growth in the numbers
of ATMs and expansion of the Company's operations during the period.
The Company recorded an $800,000 write-down of certain ATM hardware assets
associated with the purchase of the Budapest Bank ATM network in May 2000 and
the Service Bank ATM network in March 1999 (see Note 10 to Consolidated
Financial Statements - Asset Write Down). In addition, the Company recorded a
one-time gain in its Central European Sub-segment of $1.2 million. The gain is
related to a change in Hungarian law that eliminates a major portion of the
Company's liability for import taxes on ATM hardware to the Hungarian
government. The gain is included as an element of direct operating costs.
The operating expenses for the Central European Sub-segment totaled $21.7
million for the year ended December 31, 2000 as compared to $20.7 million for
the year ended December 31, 1999, an increase of 5%. The increase in operating
expenses is largely the result of an increase in the number of ATMs operated by
the Company from 1,203 at December 31, 1999 to 1,391 at December 31, 2000, and
increased transaction volumes.
The operating expenses for the Western European Sub-segment totaled $18.9
million for the year ended December 31, 2000 as compared to $16.5 million for
the year ended December 31, 1999, an increase of 15%. The increase in operating
expenses is largely the result of an increase in the number of ATMs operated by
the Company from 621 at December 31, 1999 to 787 at December 31, 2000, and
increased transaction volumes.
The operating expenses for the Other ATM Operations Sub-segment were $2.4
million for the year ended December 31, 2000 as compared to $2.2 million for the
year ended December 31, 1999, an increase of 9%. The operating expenses from
this segment are the result of the acquisition of the Dash network located in
the United States in August 1999 and the unallocated costs associated with the
Company's processing facilities.
Direct operating costs in the Network Services Segment consist primarily of: ATM
installation costs; ATM site rentals; and costs associated with maintaining
ATMs, ATM telecommunications, interest on network cash and cash delivery and
security services to ATMs. Such costs increased to $24.4 million for the year
ended December 31, 2000 from $21.9 million for the year ended December 31, 1999.
The increase in direct operating costs is primarily attributable to costs
associated with operating the increased number of ATMs in the network during the
periods. Also, intercompany allocations were made to charge the ATM operations
with transaction switching and bank connection fees associated with the
operations central processing center in Budapest. These allocations totalled
$3.5 million and $2.9 million for the years ended December 31, 2000 and 1999,
respectively. Direct operating costs for 2000 include a one-time gain of $1.2
million due to a change in Hungarian law that eliminates a major portion of the
Company's liability for import taxes on ATM hardware. Direct operating costs
also include a $657,000 gain realized in 1999 from the sale of the Croatian
network assets. The components of direct operating costs for the years ended
December 31, 2000 and 1999 were:
(in thousands) Years ending December 31,
-------------------------
2000 1999
---- ----
ATM communication $ 4,183 $ 3,982
18
ATM cash filling and interest on network cash 7,426 5,900
ATM maintenance 3,987 2,967
ATM site rental 2,258 2,421
ATM installation 675 783
Transaction processing and ATM monitoring 5,242 4,205
Other 600 1,663
------- -------
Total direct operating expenses $24,371 $21,921
======= =======
As a percentage of network revenue, direct operating costs fell from 83% for the
year ended December 31, 1999 to 66% for the year ended December 31, 2000. On a
per ATM basis the direct operating costs fell from $12,782 per ATM for the year
ended December 31, 1999 to $9,807 per ATM for the year ended December 31, 2000,
an improvement of 23%. On a per transaction basis the direct operating costs
fell from $0.66 per transaction for the year ended December 31, 1999 to $0.46
per transaction for the year ended December 31, 2000, an improvement of 30%.
Segment salaries and benefits increased to $7.4 million for the year ended
December 31, 2000 from $7.2 million for the year ended December 31, 1999, an
increase of 3%. The increase in the year-on-year expenses reflect the continued
expansion of the operations to Western European markets with significantly
higher labor costs than Central Europe as well as some increases in staff levels
at the processing center required to maintain quality service in line with the
rising transaction volumes. As a percentage of Network Services Segment revenue,
salaries and benefits fell from 27% for the year ended December 31, 1999 to 20%
for the year ended December 31, 2000.
Selling, general and administrative costs allocated to the Network Services
Segment decreased to $2.4 million for the year ended December 31, 2000 from $2.9
million for the year ended December 31, 1999. The $500,000 cost decrease for
the year ended December 31, 2000 results from the net effect of (1) a $600,000
increase in the allocation of costs from the selling, general and administrative
line of the Budapest processing center to the operating cost line, as discussed
above, from $2.9 million for the year ended December 31, 1999 to $3.5 for the
year ended December 31, 2000 and (2) a $100,000 increase in costs associated
with the expansion of the Company's network operations.
Depreciation and amortization increased to $8.0 million for the year ended
December 31, 2000 from $7.4 million for the year ended December 31, 1999. The
increases are due primarily to the increase in the number of owned ATMs as
discussed previously. The Company also recorded an $800,000 write-down of
certain ATM hardware assets for the year ended December 31, 2000, as previously
discussed.
Operating Loss
The total Network Services Segment operating loss decreased to $6.1 million for
the year ended December 31, 2000 from $12.9 million for the year ended December
31, 1999, an improvement of 53%, as a result of the factors discussed above. The
Central European Sub-segment recorded an operating loss of $3.1 million for the
year ended December 31, 2000 compared to a loss of $8.0 million for the year
ended December 30, 1999, an improvement of 61%, as a result of the factors
discussed above. The Western European Sub-segment operating loss decreased to
$2.3 million for year ended December 31, 2000 compared to a loss of $3.8 million
for the year ended December 31, 1999, an improvement of 39%, as a result of the
factors discussed above. The Other ATM Operations Sub-segment incurred an
operating loss of $700,000 for the year ended December 31, 2000 compared to a
loss $1.0 million for the year ended December 31, 1999, an improvement of 30%,
as a result of the factors discussed above.
SOFTWARE SOLUTIONS SEGMENT
Software Solutions Revenue
Revenues from the Software Solutions Segment totaled $16.0 million before inter-
segment eliminations for the year ended December 31, 2000 as compared to revenue
of $15.1 for the year ended December 31, 1999. Software revenues are grouped
into four broad categories: software license fees, professional service fees,
maintenance fees and hardware sales. Software license fees are the initial fees
charged by the Company for the licensing of its proprietary application software
to customers. Professional service fees are charged for customization,
installation and consulting services provided to customers. Software maintenance
fees are the
19
ongoing fees charged to customers for the maintenance of the software products.
Hardware sales revenues are derived from the sale of computer products and are
reported net of cost of sales. The components of software solutions revenue for
the years ended December 31, 2000 and 1999 were:
(in thousands) Years ending December 31,
-------------------------
2000 1999
---- ----
Software license fees $ 4,117 $ 2,430
Professional service fees 6,867 8,298
Maintenance fees 4,487 4,051
Hardware Sales 535 370
------- -------
Total direct operating expenses $16,006 $15,149
======= =======
The increases in software license fees from 1999 to 2000 can be attributed to an
increased number of software sales contracts signed in 2000 as compared to 1999,
primarily in the first half of the year 2000. Sales of the Company's core
software products have dropped off substantially in the third and fourth quarter
of 2000 and are expected to be soft again during 2001. The Company believes that
revenues of the Software Solutions Segment will increasingly be derived from the
Company's new set of software solutions, including its wireless banking
solutions.
The decreases in professional service fees from 1999 to 2000 can be attributed
to increased efficiency in the installation of software.
Software Sales Backlog
The Company defines "software sales backlog" as fees specified in contracts
which have been executed by the Company and for which the Company expects
recognition of the related revenue within one year. At December 31, 2000 the
revenue backlog was $3.5 million, as compared to December 31, 1999 the revenue
backlog was $3.1 million. The increase in backlog from December 31, 1999 results
principally from growth in software sales. It is management's intention to
continue to focus on expediting delivery and implementation of software in an
effort to reduce backlog while continuing sales growth.
There can be no assurance that the contracts included in backlog will actually
generate the specified revenues or that the revenues will be generated within
the one-year period.
Operating Expenses
Software Solutions Segment operating expenses consist primarily of salaries and
benefits, selling, general and administrative, and depreciation and
amortization. In addition, the Company recorded a $11.2 million one-time write
down of goodwill and other identifiable intangible assets associated with the
Company's purchase of Euronet USA in December 1998 (see Note 10 to Consolidated
Financial Statements - Asset Write Down). Total segment operating expenses
increased to $37.5 million for the year ended December 31, 2000 from $22.3
million for the year ended December 31, 1999. The components of software
solutions operating costs for the years ended December 31, 2000 and 1999 were:
(in thousands) Years ending December 31,
-------------------------
2000 1999
---- ----
Direct operating costs $ 800 $ 1,089
Salaries and benefits 18,004 13,953
Selling, general and administrative 5,266 4,565
Depreciation and amortization 2,215 2,683
Asset write down 11,190 -
------- -------
Total direct operating expenses $37,475 $22,290
======= =======
The Company has made planned increases in staff in order to increase sales,
accelerate development of certain software enhancements and reduce delivery
times for software. These staff increases have resulted in a significant
increase in salaries and benefits, which has contributed to the net losses of
the Software Solutions Segment for the years ended December 31, 2000 and 1999.
In January 2001, a reduction in the work force took
20
place with the objective being to reduce costs to bring them more in line with
the anticipated revenue.
The Company has an ongoing commitment to the development, maintenance and
enhancement of its products and services. As a result of this commitment the
Company has invested substantial amounts in research and development. In
particular, the Company has invested and will continue to invest in new software
products that will serve as the underlying application software that permits
additional features and transactions on the Company's ATM network. In addition,
the Company continues to invest in the on-going development of products that
were recently introduced to the market. The Company's research and development
costs incurred for computer products to be sold, leased or otherwise marketed
increased to $6.7 million for the year ended December 31, 2000 from $3.2 million
for the year ended December 31, 1999. Of this total figure, $1.0 million and
$322,000 were capitalized, as at December 31, 2000 and 1999, respectively, in
conjunction with the Company's accounting policy requiring the capitalization of
development costs on a product by product basis once technological feasibility
is established. Technological feasibility of computer software products is
established when the Company has completed all planning, designing, coding, and
testing activities that are necessary to establish that the product can be
produced to meet its design specifications including functions, features, and
technical performance requirements.
Operating Loss
The Software Solutions Segment incurred an operating loss of $21.5 million for
the year ended December 31, 2000 and $7.1 million for the year ended December
31, 1999 as a result of the factors discussed above.
CORPORATE SERVICES SEGMENT
Operating Expenses
Operating expenses for the Corporate Services Segment increased to $7.9 million
for the year ended December 31, 2000 from $6.8 million for the year ended
December 31, 1999. The components of corporate services operating costs for the
years ended December 31, 2000 and 1999 were:
(in thousands) Years ending December 31,
-------------------------
2000 1999
---- ----
Salaries and benefits $3,813 $3,335
Selling, general and administrative 3,841 3,270
Depreciation and amortization 208 145
------ ------
Total direct operating expenses $7,862 $6,750
====== ======
The Company's expansion of its network infrastructure, and increases in
corporate and administrative capabilities are the primary reasons for these
increased expenditures.
NON-OPERATING RESULTS
Interest Income
Interest income decreased to $1.1 million for the year ended December 31, 2000
from $2.0 million for the year ended December 31, 1999 and from $2.5 million for
the year ended December 31, 1998. The decrease is the result of the decrease in
investment securities and cash as a result of negative cash flow from operations
and capital expenditures.
Interest Expense
Interest expense decreased to $10.8 million for the year ended December 31, 2000
from $10.9 million for the year ended December 31, 1999 and increased from $7.8
million for the year ended December 31, 1998. The decrease from 1999 to 2000 is
due to exchange rate differences as the majority of the debt is denominated in
Deutsche Mark. The increase from 1998 to 1999 is the result of accretion of the
Company's Notes Payable for a full year in 1999 in comparison to 6 months'
accretion in 1998.
21
Foreign Exchange Gain/Loss
The Company had a net foreign exchange loss of $3.2 million for the year ended
December 31, 2000, as compared to $2.1 million for the year ended December 31,
1999, and $1.9 million for the year ended December 31, 1998. Exchange gains and
losses that result from re-measurement of certain Company assets and liabilities
are recorded in determining net loss. A portion of the assets and liabilities of
the Company are denominated in Euros, including capital lease obligations, notes
payable (including the Notes issued in the Company's public bond offering), cash
and cash equivalents, investments, and forward foreign exchange contracts. It is
the Company's policy to attempt to match local currency receivables and
payables. The foreign currency denominated assets and liabilities give rise to
foreign exchange gains and losses as a result of U.S. dollar to local currency
exchange movements.
Extraordinary Gain
In 1999 the Company recorded an extraordinary gain of $2.8 million (net of
income taxes of $0) following its repurchase of a portion of its Senior Discount
Notes. The gain represents the difference between the allocated carrying value
of the face value of the debt repurchased of $8.1 million less the consideration
paid of $5.0 million, offset by the write-off of allocated unamortized deferred
financing costs of $300,000. The Company has not retired the bonds repurchased.
In addition, the Company repurchased 97,023 warrants that were attached to the
notes payable. Accordingly, approximately $176,000 was allocated to the carrying
value of the warrants which reduced additional paid-in capital.
In 1998 the Company recorded an extraordinary gain of $2.9 million (net of
income taxes of $1.5 million), following its repurchase of a portion of its
Senior Discount Notes. The gain represents the difference between the allocated
carrying value of the face value of the debt repurchased of $10.2 million less
the consideration paid of $5.5 million, offset by the write-off of allocated
unamortized deferred financing costs of $400,000. The Company has not retired
the bonds repurchased.
Net Loss
The Company's net loss increased to $49.6 million for the year ended December
31, 2000, as compared to $30.9 million for the year ended December 31, 1999 and
$28.4 million for the year ended December 31, 1998, as a result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has sustained negative cash flows from
operations and has financed its operations and capital expenditures primarily
through the proceeds from the 1998 issue of Deutsche Mark denominated notes
payable, the Company's 1997 public equity offering, equipment lease financing
and private placements of equity securities. The net proceeds of such
transactions, together with revenues from operations and interest income have
been used to fund aggregate net losses of approximately $123.8 million,
investments in property, plant and equipment of approximately $52.8 million and
acquisitions of $24.6 million.
At December 31, 2000 the Company had cash and cash equivalents of $7.2 million
and working capital of $3.6 million. The Company had $2.1 million of restricted
cash held as security with respect to cash provided by banks participating in
Euronet's ATM network, to cover guarantees on financial instruments and as
deposits with customs officials (See Note 7 to the Consolidated Financial
Statements - Restricted cash). In addition to the assets held on the balance
sheet at December 31, 1999 the Company held repurchased notes payable with a
face value of 48.4 million Deutsche Marks ($23.3 million as at December 31, 2000
based on a USD to DM rate of 1:2.08) and a fair market value at December 31,
2000 of $9.3 million (See Note 20 to the Consolidated Financial Statements -
Financial instruments).
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 in the amount of $2.4 million;
Hungarian-American Enterprise Fund in the amount of $1.0 million; and Michael J.
Brown in the amount of $600,000. The facility was available to be drawn upon
until December 28, 2000, with repayment of any draws being due June 28, 2001. On
December 28, 2000 the facility was amended and renewed for a further
22
six months and is available to be drawn until June 28, 2001 with repayments of
any draws being due December 28, 2001. Draws on the facility will accrue
interest at 10 percent per annum, payable quarterly. 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 fee of 100,000 warrants, on the same terms, was paid for the
subsequent extension of the facility. Warrants are to be issued on similar terms
and conditions for each draw on the facility at the rate of 80,000 warrants for
each $1.0 million of funds drawn. As of March 1, 2001, the Company had not made
any draws under the Credit Agreement.
On February 25, 2000 the Company entered into two subscription agreements for
the sale of an aggregate of 650,000 new common shares of the Company. Closing
under those agreements took place on March 13, 2000. These agreements were
signed with certain accredited investors in transactions exempt from
registration under the exemptions provided in Section 4(2) and Regulation D of
the Act. The purchase price of each share was $6.615, which represents ninety
percent of the average closing price for the ten trading days prior to and
including February 15, 2000. The aggregate amount of proceeds to the Company
from the private placement was $4.3 million. Under each of the agreements, for
each two shares of common stock purchased in the private placement, the
purchasers were issued one warrant to purchase a share of Euronet common stock
at an exercise price of $11.615, expiring in each case on the one year
anniversary date of the subscription agreement.
In April 2000 the Company entered into two separate subscription agreements for
the sale of an aggregate of 354,777 new common shares of the Company. Of the
total new shares, closing with respect to 254,777 shares took place on April 10,
2000, and closing with respect to 100,000 shares took place on May 4, 2000.
These agreements were signed with certain foreign persons in transactions exempt
from registration under the exemption provided in Regulation S of the Act. The
weighted average purchase price of each share was $7.50. The aggregate amount of
proceeds to the Company from the private placement was $2.7 million. Under each
of the agreements, for each two shares of common stock purchased in the private
placement, the purchaser was issued one warrant to purchase a share of Euronet
common stock at a weighted average exercise price of $12.50, expiring in each
case on the one year anniversary date of the subscription agreement.
In July 2000 the Company entered into subscription agreements for the sale of
877,946 new common shares of the Company. These agreements were signed with
accredited investors in transactions exempt from registration pursuant to the
exemptions provided in Section 4(2) and Regulation D of the Act. Closing with
respect to such sale took place on July 14 and August 29, 2000. The purchase
price of each share was $6.97. The aggregate amount of proceeds to the Company
from the private placement was $6.1 million.
The Company leases many of its ATMs under capital lease arrangements that expire
between 2001 and 2005. The leases bear interest between 8% and 12% per annum. As
of December 31, 2000 the Company owed $11.5 million under such capital lease
arrangements. (See Note 15 to the Consolidated Financial Statements - Leases.)
The Company expects that its capital requirements will continue in the future
but will not be as great as they were in the past, as the Company intends to
continue to promote its outsourcing capabilities and re-deploy under-performing
ATMs currently operating in the network. This strategy should reduce the
Company's reliance on capital expenditures in the future as the business
continues to grow. Fixed asset purchases and capital lease payments for 2001 are
expected to be approximately $6.2 million in the Company's existing markets,
notably Western and Central Europe. Acquisitions of related ATM business and
investments in new markets in furtherance of the Company's strategy may require
additional capital expenditures.
Based on the Company's current business plan and financial projections, the
Company expects to continue to reduce operating losses and net cash used in
operating activities in 2001. In the Network Services Segment, the Company
anticipates that increased transaction levels in its ATM network will result in
additional revenues without a corresponding increase in expenses. In addition,
the Company expects to further expand its ATM outsourcing services and offer new
value-added services, which will provide continued revenue growth without
significantly increasing direct operating expenses or capital investments. In
the Software Solutions Segment, the Company expects that the benefits of a
restructuring program commenced in the first quarter of 2001 will reduce the
operating losses and bring operating costs more in line with anticipated
revenues. The Company believes that the credit facility, certain asset sales and
cash and cash equivalents will provide the Company with sufficient capital until
it achieves positive cash flow. As a result, the Company believes it has
sufficient liquidity resources to meet current and future cash requirements.
23
BALANCE SHEET ITEMS
Cash and Cash Equivalents
The decrease of cash and cash equivalents to $7.2 million at December 31, 2000
from $15.0 million at December 31, 1999 is due primarily to the net effects of
working capital movements, foreign exchange gains and losses, the settlement of
a forward foreign exchange contract, private placement of common shares, capital
expenditures and capital lease payments, and operating losses for the year ended
December 31, 2000. (See Note 21 to the Consolidated Financial Statements -
Reconciliation of net loss to net cash used in operating activities and the
Consolidated Statements of Cash Flows.)
Restricted Cash
Restricted cash decreased to $2.1 million at December 31, 2000 from $10.9
million at December 31, 1999. The majority of restricted cash was held as
security with respect to cash provided in Hungary by banks participating in
Euronet's ATM network, to cover guarantees for financial instruments and as
deposits with customs officials. The decrease resulted primarily from the
settlement of the forward foreign exchange contracts using restricted cash and a
release of restricted cash resulting from the posting of a surety bond with the
Hungarian banking institution that supplies cash to the Company's ATM network in
Hungary.
Trade Accounts Receivable
Trade accounts receivable increased to $9.5 million at December 31, 2000 from
$7.9 million at December 31, 1999 due primarily to sales from the Software
Solutions Segment and increased Network Services Segment revenues.
Property, Plant and Equipment
Net property, plant and equipment decreased to $31.7 million at December 31,
2000 from $36.7 million at December 31, 1999. This decrease is due primarily to
a reduction in the rate of installation of ATMs and fixed asset additions. Fixed
asset depreciation was in excess of fixed asset additions, and the write-off of
$800,000 in ATM hardware further reduced the net fixed asset position.
Intangible Assets
The decrease in net intangible assets to $2.6 million at December 31, 2000 from
$16.3 million at December 31, 1999 is due primarily to the $11.2 million write-
down of goodwill and other identifiable intangible assets associated with the
Software Solutions Segment (see Note 9 to the Consolidated Financial Statements-
Intangibles). In addition, the decrease is the result of amortization of
purchased intangibles acquired in the Euronet USA acquisition in 1998, and the
SBK and Dash acquisitions in 1999.
Current liabilities
Current liabilities decreased to $20.5 million at December 31, 2000 from $26.9
million at December 31, 1999. This decrease is due primarily to decreases in
accrued expenses, billings in excess of costs and estimated earnings on software
installation costs and settlement of the forward foreign exchange contracts.
Capital Leases
Total capital lease obligations including current installments increased to
$11.5 million at December 31, 2000 from $10.6 million at December 31, 1999. This
increase is due primarily to additional capital leases resulting from the
Company's purchase of Budapest Bank's ATM network, consisting of 147 ATMs on May
1, 2000.
Notes Payable
Notes payable increased to $77.2 million at December 31, 2000 from $72.8 million
at December 31, 1999. This is the result of several transactions as follows:
24
(In millions)
Balance at December 31, 1999 $72.8
Unrealized foreign exchange gain (DEM vs. US$) (4.4)
Accretion of bond interest 8.8
-----
Balance at December 31, 2000 $77.2
Stockholders' Deficit
Stockholders' deficit increased to $44.8 million at December 31, 2000 from $9.5
million at December 31, 1999. This is due to the net loss for the year ended
December 31, 2000 of $49.6 million which was offset by an increase in additional
paid in capital of $14.4 million due to the sale of 1,882,723 shares of common
stock for proceeds of $13.0 million, the issue of $400,000 of warrants and the
exercise of 390,231 stock options for proceeds of $900,000.
Year 2000 Compliance
The Company's European and U.S. Year 2000 compliance teams reported no material
Year 2000 problems during the advent of the year 2000, either with Euronet's own
systems or the systems of its customers. The Company is unaware of any material
Year 2000 complications to date.
Impact of New Accounting Pronouncements Not Yet Adopted
SFAS 133
The Company is required to adopt Statement of Financial Accounting Standard
(SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" as
amended by SFAS No. 138 for US GAAP reporting as of 1 January 2001. SFAS 133 and
138 establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives).
In accordance with SFAS No. 133, entities are required to carry all derivative
instruments on the balance sheet at fair value. The accounting for movements in
fair value of derivatives depends upon whether it has been designated and
qualifies as part of a hedging relationship and, if so, the reason for holding
it. If certain conditions are met, the Company may elect to designate a
derivative instrument as a hedge of exposures. If the hedged exposure is a fair
value exposure, movements in fair value are recognized in earnings with the
offsetting gain or loss on the hedged item attributable to the hedged risk. If
the hedged exposure is a cash flow exposure, the effective portion of the
movement in fair value of the derivative instrument is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings at the time the forecasted transaction impacts earnings. Amounts
excluded from the assessment of hedge effectiveness as well as the ineffective
portion of movements in fair value of the derivative instrument are reported in
earnings in the current period. Accounting for foreign currency hedges is
similar to the accounting for fair value and cash flow hedges. If a derivative
instrument is not designated as a hedge, movements in the fair value of
derivative instruments are recognized in earnings.
Under the provisions of SFAS No. 133, the method that the Company will use to
assess effectiveness of a hedge, as well as the measurement approach for
determining the ineffectiveness of a hedge, must be established at the inception
of a hedge. The Company formally documents all relationships between hedging
instruments and hedged items as well as its risk management objective and
strategy for entering into the transaction. This process includes linking
derivatives designated as fair value or cash flow hedges to specific assets,
liabilities or firm commitments on forecasted transactions. This process is
repeated on a periodic basis. If at any time the Company determines a hedge is
no longer effective, hedge accounting is immediately discontinued and the
derivative is marked to market with any gain or loss recorded in earnings.
The Company adopted the provisions of SFAS No. 133 on 1 January 2001 and this
had no impact on the Company's consolidated financial statements as the Company
does not have any derivative financial instruments. Future changes in the fair
value for any remaining trading securities will be recorded through earnings.
Changes in fair value of available for sale securities will be recorded in other
comprehensive income.
SFAS 140
The FASB issued Statement of Financial Accounting Standard No. 140, Accounting
for Transfers and Servicing
25
of Financial Assets and Extinguishments of Liabilities (SFAS No. 140). SFAS No.
140 replaces SFAS No. 125 as it revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and in certain limited instances can be applied early. SFAS No.
140 requires recognition and reclassification of collateral and for disclosures
relating to securitzation and collateral for fiscal years ending after December
15, 2000.The Company does not expect SFAS No. 140 to have a material effect on
its financial statements.
Forward-Looking Statements
This document contains statements that constitute forward-looking statements
within the meaning of section 27A of the Securities Act and section 21E of the
U.S. Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this document, including, without
limitation, statements regarding (i) the Company's business plans and financing
plans and requirements, (ii) trends affecting the Company's business plans and
financing plans and requirements, (ii) trends affecting the Company's business,
(v) the adequacy of capital to meet the Company's capital requirements and
expansion plans, (vi) the assumptions underlying the Company's business plans,
(vii) business strategy, (viii) government regulatory action, (ix) technological
advances and (x) projected costs and revenues, are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Forward-looking statements are typically
identified by the words believe, expect, anticipated, intend, estimate and
similar expressions.
Investors are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
results may materially differ from those in the forward-looking statements as a
result of various factors, including: technological and business developments in
the local card and electronic banking markets affecting the transaction and
other fees which the Company is able to charge for its services; foreign
exchange fluctuations; competition from bank owned ATM networks, outsource
providers of ATM services and software providers; the Company's relationships
with its major customers, sponsor banks in various markets and International
Card Organization; and changes in laws and regulations affecting the Company's
business. These risks, and other risks are described elsewhere in this document
and the Company's periodic filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Foreign Exchange Exposure
In 2000, 30% of the Company's revenues were generated in Poland and Hungary, as
compared to 27% in 1999 and 73% in 1998. The 2000 figure has increased due to
the increase in revenues for the Polish operations. In Hungary the majority of
revenues received are denominated in Hungarian Forint and in Poland, the
majority of revenues are denominated in Polish Zloty. However the majority of
these foreign currency denominated contracts are linked either to inflation or
the retail price index. While it remains the case that a significant portion of
the Company's expenditures are made in or are denominated in U.S. Dollars the
Company is also striving to achieve more of its expenses in local currencies to
match its revenues.
The Company estimates that a further 10% depreciation in foreign exchange rates
of the Deutsche Mark, Hungarian Forint, Polish Zloty and the British Pound
Sterling against the U.S. dollar, would have the combined effect of a $7.1
million decrease in the reported net loss. This was estimated using 10% of the
Company's net losses after adjusting for unusual impairment and other items
including U.S. dollar denominated or indexed expenses. The Company believes that
this quantitative measure has inherent limitations. It does not take into
account any governmental actions or changes in either customer purchasing
patterns or the Company's financing or operating strategies.
As a result of continued European economic convergence, including the increased
influence of the Deutsche Mark, as opposed to the U.S. Dollar, on the Central
European currencies, the Company expects that the currencies of the markets
where it invests will fluctuate less against the Deutsche Mark than against the
Dollar. Accordingly, the Company believes that its Deutsche Mark denominated
debt provides, in the medium to long term, for a closer matching of assets and
liabilities than would Dollar denominated debt.
26
Inflation and Functional Currencies
In recent years, Hungary, Poland and the Czech Republic have experienced high
levels of inflation. Consequently, these countries' currencies have continued to
decline in value against the major currencies of the OECD over this time period.
However, due to the significant reduction in the inflation rate of these
countries in recent years, none of these countries are considered to have a
hyper-inflationary economy. Further, the majority of all three subsidiaries'
revenues are denominated in the local currency. Thus all three subsidiaries use
their local currency as the functional currency. The Polish and Czech
subsidiaries changed their functional currency to the respective local currency
as of January 1, 1998 and January 1, 1999, respectively, and the Hungarian
subsidiary changed as of July 1, 1999.
Germany, France and the United Kingdom have experienced relatively low and
stable inflation rates in recent years. Therefore, the local currency in each of
these markets is the functional currency. Although Croatia, like Germany and
France, has maintained relatively stable inflation and exchange rates, the
functional currency of the Croatian company is the U.S. dollar due to the
significant level of U.S. dollar denominated revenues and expenses. Due to the
factors mentioned above, the Company does not believe that inflation will have a
significant effect on results of operations or financial condition. The Company
continually reviews inflation and the functional currency in each of the
countries that it operates in.
Interest Rate Risk
The fair market value of the Company's long-term fixed interest rate debt is
subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as interest
rates rise. The estimated fair value of the Company's notes payable at December
31, 2000 was $37.5 million compared to a carrying value of $77.2 million. A 1%
increase from prevailing interest rates at December 31, 2000 would result in a
decrease in fair value of notes payable by approximately $1.5 million. Fair
values were determined from quoted market prices and from investment bankers
considering credit ratings and the remaining term to maturity. (See Note 20 to
the Consolidated Financial Statements - Financial Instruments)
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
EURONET SERVICES INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report 28
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999 29
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2000, 1999 and 1998 31
Consolidated Statements of Changes in Stockholders' (Deficit)/Equity for the years ended
December 31, 2000, 1999 and 1998 32
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 35
Notes to Consolidated Financial Statements 35
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Euronet Services Inc.:
We have audited the accompanying consolidated balance sheets of Euronet Services
Inc. and subsidiaries as of December 31, 2000 and 1999 and the related
consolidated statements of operations and comprehensive loss, changes in
stockholders' (deficit)/equity, and cash flows for each of the years in the
three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Euronet Services
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with generally accepted accounting
principles in the United States of America.
KPMG
Warsaw, Poland
February 9, 2001
28
EURONET SERVICES INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
-----------
2000 1999
----- ----
(in thousands)
Assets
- ------
Current assets:
Cash and cash equivalents (note 7) $ 7,151 $ 15,037
Restricted cash (note 6) 2,103 10,929
Investment securities (note 7) - 750
Trade accounts receivable (less allowance for doubtful accounts
of $740,000 in 2000 and $381,000 in 1999, note 17) 9,485 7,888
Costs and estimated earnings in excess of billings
on software installation contracts (note 8) 1,117 667
Income taxes receivable (note 16) - 818
Prepaid expenses and other current assets 4,229 3,695
-------- --------
Total current assets 24,085 39,784
-------- --------
Property, plant, and equipment (note 10 and 15):
Equipment - Automatic teller machines 41,691 41,253
Vehicles and office equipment 2,451 2,363
Computers and software 8,628 7,806
-------- --------
52,770 51,422
Less accumulated depreciation and amortization (21,113) (14,729)
-------- --------
Net property, plant, and equipment 31,657 36,693
Intangible assets, net (notes 9 and 10) 2,604 16,259
Deposits 45 1,355
Deferred income taxes (note 16) 424 460
Other assets, net (notes 3(i)) 2,075 2,293
-------- --------
Total assets $ 60,890 $ 96,844
======== ========
See accompanying notes to the consolidated financial statements.
29
EURONET SERVICES INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (cont'd)
December 31,
------------
2000 1999
---- ----
Liabilities and Stockholders' Deficit (in thousands)
- -------------------------------------
Current liabilities:
Trade accounts payable $ 5,223 $ 5,768
Current installments of obligations under capital leases (note 15) 3,466 4,188
Accrued expenses and other current liabilities 6,397 12,631
Advance payments on contracts 2,155 1,321
Income taxes payable (note 16) 350 -
Billings in excess of costs and estimated earnings
on software installation contracts (note 8) 2,875 3,030
--------- --------
Total current liabilities 20,466 26,938
Obligations under capital leases, excluding
current installments (note 15) 8,034 6,397
Notes payable (note 11) 77,191 72,800
Other long-term liabilities - 202
--------- --------
Total liabilities 105,691 106,337
--------- --------
Stockholders' deficit (note 4):
Common stock, $0.02 par value. Authorized 30,000,000 shares;
issued and outstanding 17,814,910 shares in 2000 and
15,541,956 shares in 1999 (note 12) 356 311
Additional paid in capital (note 11) 81,327 66,969
Treasury stock (140) (3)
Employee loans for stock (note 25) (561) (794)
Subscription receivable (59) (50)
Accumulated deficit (123,811) (74,260)
Restricted reserve (note 5) 784 784
Accumulated other comprehensive loss (2,697) (2,450)
--------- --------
Total stockholders' deficit (44,801) (9,493)
--------- --------
Total liabilities and stockholders' deficit $ 60,890 $ 96,844
========= ========
See accompanying notes to the consolidated financial statements.
30
EURONET SERVICES INC.
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands, except per share data)
Revenues:
ATM network and related revenue $ 36,913 $ 26,503 $ 11,525
Software, maintenance and related revenue 15,827 14,969 356
----------- ----------- -----------
Total revenues 52,740 41,472 11,881
Operating expenses:
Direct operating costs 24,988 22,830 10,036
Salaries and benefits (note 18) 29,265 24,477 9,831
Selling, general and administrative 11,531 10,725 8,650
Depreciation and amortization 10,384 10,238 4,955
In-process research and development write-off (note 4) - - 1,020
Asset write down (note 10) 11,968 - -
----------- ----------- -----------
Total operating expenses 88,136 68,270 34,492
----------- ----------- -----------
Operating loss (35,396) (26,798) (22,611)
Other income/(expense):
Interest income 1,089 1,950 2,514
Interest expense (note 11) (10,829) (10,899) (7,826)
Foreign exchange loss, net (note 14) (3,227) (2,110) (1,911)
----------- ----------- -----------
(12,967) (11,059) (7,223)
----------- ----------- -----------
Loss before income tax and extraordinary item (48,363) (37,857) (29,834)
Income tax (expense)/benefit (note 16) (1,188) 4,182 (1,430)
----------- ----------- -----------
Loss before extraordinary item (49,551) (33,675) (31,264)
Extraordinary gain on early retirement of debt,
net of applicable income taxes of $0 in 2000, $0 in
1999 and $1,488,000 in 1998 (note 11) - 2,760 2,889
----------- ----------- -----------
Net loss (49,551) (30,915) (28,375)
Other comprehensive income:
Translation adjustment (247) (2,515) 65
----------- ----------- -----------
Comprehensive loss $ (49,798) $ (33,430) $ (28,310)
=========== =========== ===========
Loss per share - basic and diluted (note 3(o)):
Loss before extraordinary item $ (3.00) $ (2.21) $ (2.06)
Extraordinary gain - 0.18 0.19
----------- ----------- -----------
Net loss $ (3.00) $ (2.03) $ (1.87)
=========== =========== ===========
Weighted average number of shares outstanding 16,499,699 15,252,030 15,180,651
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
31
EURONET SERVICES INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' (Deficit)/Equity
Employee Additional
No. of Common Loans For Paid in Treasury
Shares Stock Stock Capital Stock
-----------------------------------------------------
(in thousands, except share data)
Balance December 31, 1997 15,133,321 $ 304 $ - $ 63,358 $ (4)
Warrants issue (note 11) - - - 1,725 -
Stock options exercised (note 18) 80,132 3 - 175 -
Stock options granted in Euronet USA acquisition (note 4) - - - 96 -
Subscription paid - - - - -
Translation adjustment - - - - -
Tax benefit from exercise of stock options (note 16) - - - 951 -
Share compensation expense (note 18) - - - 108 -
Net loss for 1998 - - - - -
-----------------------------------------------------
Balance December 31, 1998 15,213,453 $ 307 $ - $ 66,413 $ (4)
Share compensation expense (note 18) - - - 127 -
Stock options exercised (note 18) 228,503 4 - 331 -
Sale of treasury stock 100,000 - - 274 1
Warrants repurchase (note 11) - - - (176) -
Employee loans for stock (note 25) - - (794) - -
Translation adjustment - - - - -
Net loss for 1999 - - - - -
-----------------------------------------------------
Balance December 31, 1999 15,541,956 $ 311 $ (794) $ 66,969 $ (3)
Stock options exercised (note 18) 390,231 8 - 941 -
Sale of common stock (note 12) 1,882,723 37 - 13,045 -
Warrants issue (note 12 and 13) - - - 372 -
Subscriptions - - - - -
Employee loans for stock (note 25) - - 233 - (137)
Translation adjustment - - - - -
Net loss for 2000 - - - - -
-----------------------------------------------------
Balance December 31, 2000 17,814,910 $ 356 $ (561) $ 81,327 $ (140)
See accompanying notes to the consolidated financial statements.
32
EURONET SERVICES INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' (Deficit)/Equity (cont'd)
Accumulated
Other
Subscription Accumulated Restricted Comprehensive
Receivable Deficit Reserve (Loss)/Income Total
------------------------------------------------------------------
(in thousands, except share data)
Balance December 31, 1997 $(253) $ (14,970) $784 $ - $ 49,219
Warrants issue (note 11) - - - - 1,725
Stock options exercised (note 18) - - - - 178
Stock options granted in Euronet USA acquisition (note 4) - - - - 96
Subscription paid 203 - - - 203
Translation adjustment - - - 65 65
Tax benefit from exercise of stock options (note 16) - - - - 951
Share compensation expense (note 18) - - - - 108
Net loss for 1998 - (28,375) - - (28,375)
------------------------------------------------------------------
Balance December 31, 1998 $ (50) $ (43,345) $784 $ 65 $ 24,170
Share compensation expense (note 18) - - - - 127
Stock options exercised (note 18) - - - - 335
Sale of treasury stock - - - - 275
Warrants repurchase (note 11) - - - - (176)
Employee loans for stock (note 25) - - - - (794)
Translation adjustment - - - (2,515) (2,515)
Net loss for 1999 - (30,915) - - (30,915)
------------------------------------------------------------------
Balance December 31, 1999 $ (50) $ (74,260) $784 $(2,450) $ (9,493)
Stock options exercised (note 18) - - - - 949
Sale of common stock (note 12) - - - - 13,082
Warrants issue (notes 12 and 13) - - - - 372
Subscriptions (9) - - - (9)
Employee loans for stock (note 25) - - - - 96
Translation adjustment - - - (247) (247)
Net loss for 2000 - (49,551) - - (49,551)
------------------------------------------------------------------
Balance December 31, 2000 $ (59) $(123,811) $784 $(2,697) $(44,801)
==================================================================
See accompanying notes to the consolidated financial statements.
33
EURONET SERVICES INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Net cash used in operating activities (note 21) $(16,357) $(20,371) $(22,768)
Cash flows from investing activities:
Fixed asset purchases (3,428) (8,685) (9,740)
Proceeds from sale of fixed assets 706 3,742 543
Purchase of investment securities - (5,373) (29,778)
Proceeds from maturity of investment securities - 7,772 58,789
Investment in subsidiaries, net of cash acquired - (7,316) (17,338)
Net (decrease)/increase in loan receivable (13) 28 (8)
-------- -------- --------
Net cash (used in)/provided by investing activities (2,735) (9,832) 2,468
Cash flows from financing activities:
Proceeds from the sale and leaseback of fixed assets - 827 -
Proceeds from issuance of shares and other
capital contributions 13,889 610 178
Proceeds from issuance of notes payable and warrants 378 - 83,100
Costs to obtain loans - (22) (3,294)
Repurchase of notes payable and warrants - (5,202) (5,473)
Repayment of obligations under capital leases (3,677) (5,660) (7,323)
Increase/(decrease) in short-term bank borrowings 192 (300) 142
(Increase)/decrease in subscriptions receivable (9) - 203
Cash loaned to employees for purchase of common stock 233 (794) -
-------- -------- --------
Net cash provided by/(used in) financing activities 11,006 (10,541) 67,533
-------- -------- --------
Effect of exchange differences on cash 200 (167) 865
Net (decrease)/increase in cash and cash equivalents (7,886) (40,577) 48,098
Cash and cash equivalents at beginning of period 15,037 55,614 7,516
-------- -------- --------
Cash and cash equivalents at end of period $ 7,151 $ 15,037 $ 55,614
======== ======== ========
Supplemental disclosures of cash flow information (note 22):
Interest paid during year $ 2,076 $ 1,133 $ 1,907
======== ======== ========
Income taxes refunded during year $ - $ 839 $ -
======== ======== ========
See accompanying notes to the consolidated financial statements.
34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
2000, 1999 AND 1998
(1) Organization
Euronet Services Inc. was established as a Delaware corporation on
December 13, 1997 and capitalized on March 6, 1998. Euronet Services Inc.
succeeded Euronet Holding N.V. as the group holding company.
Euronet Services Inc. and its subsidiaries (the "Company" or "Euronet")
is a provider of electronic financial solutions and transaction
processing services to banks, financial institutions, and other
companies. Euronet operates an automated teller machine ("ATM") network
in Europe and the U.S., which serves banks and retail companies by
accepting most international bankcards and proprietary cards issued by
member banks. Some of the ATMs also perform certain deposit, sales or
advertising functions. Euronet also provides ATM network management
outsourcing services to banks or companies with their own networks.
Euronet sells integrated software solutions for electronic payment and
financial transaction delivery systems worldwide. Its software comprises
a suite of products including a core system, Integrated Transaction
Management ("ITM"), and compatible modular software for ATM and POS
network processing, electronic funds transfer interfaces, electronic
funds transfer switch control, credit/debit card management and
processing, and corporate cash management and personal financial
management access products.
The subsidiaries of Euronet Services Inc., all of which are, directly or
indirectly, wholly owned are:
- EFT Services Holding B.V., incorporated in the Netherlands
- Euronet Banktechnikai Szolgaltato Kft. ("Bank Tech"), incorporated in
Hungary
- Euronet Adminisztracios Szolgaltato Kft. ("Administrative Services")
(formerly SatComNet), incorporated in Hungary
- Bankomat 24/Euronet Sp. z o.o. ("Bankomat"), incorporated in Poland
- EFT-Usluge d o.o., incorporated in Croatia
- Euronet Services GmbH, incorporated in Germany
- EFT Services France SAS, incorporated in France
- Euronet Services spol. s.r.o., incorporated in the Czech Republic
- Euronet Services SRL, incorporated in Romania
- Euronet Services (UK) Limited, incorporated in the United Kingdom
- Euronet USA Inc. (formerly Arkansas Systems, Inc.) ("Euronet USA")
incorporated in Arkansas, United States of America
- EFT Network Services LLC ("Dash"), incorporated in Arkansas, United
States of America
- Euronet Holding N.V., incorporated in the Netherlands Antilles (in
liquidation)
- Euronet Eft Services Hellas, incorporated in Greece
(2) Financial position and basis of preparation
The Company generated an operating loss of $35.4 million and negative
cash flows from operations of $16.4 million for the year ended December
31, 2000, primarily due to the significant costs associated with its
investment in delivery, support, research and development in its software
subsidiary which was acquired in December 1998. Based on the Company's
current business plan and financial projections, the Company expects to
reduce operating losses and net cash used in operating activities in
2001. In the Network Services Segment, the Company anticipates that
increased transaction levels in its ATM network will result in additional
revenues without a corresponding increase in expenses. In addition, the
Company expects to further expand its ATM outsourcing services and offer
new value-added services, which will provide continued revenue growth
without significantly increasing direct operating expenses or capital
investments. In the Software Solutions Segment, the Company expects
reduced operating expenses and improved operating performance due to a
cost restructuring program introduced in the first quarter of 2001. The
Company believes that the credit facility (see note 13), certain asset
sales and cash and cash equivalents at December 31, 2000 will provide the
Company with sufficient cash resources until it achieves positive cash
flow.
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
35
assets and liquidation of liabilities in the ordinary course of business.
(3) Summary of significant accounting policies and practices
(a) Basis of presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States of America.
All significant intercompany balances and transactions have been
eliminated.
(b) Foreign currencies
Foreign currency transactions are recorded at the exchange rate
prevailing on the date of the transactions. Assets and liabilities
denominated in foreign currencies are remeasured at rates of exchange on
the balance sheet date. Resulting gains and losses on foreign currency
transactions are included in the consolidated statement of operations and
comprehensive loss.
The financial statements of foreign subsidiaries where the local currency
is the functional currency are translated to U.S. dollars using (i)
exchange rates in effect at period end for assets and liabilities, and
(ii) average exchange rates during the period for results of operations.
Adjustments resulting from translation of such financial statements are
reflected in accumulated other comprehensive income as a separate
component of consolidated stockholders' equity.
The financial statements of foreign subsidiaries where the functional
currency is the U.S. dollar are remeasured using historical exchange
rates for nonmonetary items while current exchange rates are used for
monetary items. Foreign exchange gains and losses arising from the
remeasurement are reported in the consolidated statement of operations
and comprehensive loss.
(c) Cash equivalents
For the purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
(d) Investment securities
The Company has classified its investment securities as held-to-maturity
or available-for-sale. Held-to-maturity securities are those securities
in which the Company has the ability and intent to hold the security to
maturity. All securities not included in held-to-maturity are classified
as available-for sale.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premium and discounts. Available-for-
sale securities are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale securities
are excluded from operating results and reported as a separate component
of other comprehensive income/loss until realized. Realized gains and
losses from the sale of available-for-sale securities are determined on a
specific identification basis.
A decline in the market value of any held-to-maturity or available-for-
sale security below cost that is deemed other than temporary results in a
reduction in the carrying amount to fair value. The impairment is charged
to operating results and a new cost basis for the security is
established. Premiums and discounts are amortized or accreted over the
life or term of the related held-to-maturity security or available-for-
sale security as an adjustment to yield using the effective interest
method.
Dividend and interest income are recognized when earned.
(e) Forward foreign exchange contracts
Forward foreign exchange contracts are recorded at fair values in the
consolidated balance sheet in other current assets or other current
liabilities with the related gain or loss recognized in the consolidated
statement of operations, unless the contracts meet certain hedging
criteria. A foreign exchange contract is considered a hedge of an
identifiable foreign currency commitment if (i) the contract is
designated as, and is effective as, a hedge of foreign currency
commitment and (ii) the foreign currency commitment is firm.
36
In addition, the significant characteristics of expected terms of the
anticipated transaction are identified and it is probable that the
anticipated transaction will occur. Gains and losses on foreign exchange
contracts meeting these hedge accounting criteria are deferred and
included in the measurement of the related foreign currency transaction.
Losses are not deferred if, however, it is estimated that the deferral
would lead to recognition of losses in later periods.
(f) Property, plant and equipment
Property, plant, and equipment are stated at cost. Equipment under
capital leases are stated at the lesser of fair value of the leased
equipment and the present value of future minimum lease payments.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets. Equipment held under capital leases
and leasehold improvements are amortized straight line over the shorter
of their estimated useful lives or the lease term.
Depreciation and amortization rates are as follows:
Automated teller machines 5-7 years
Computers and software 3-5 years
Vehicles & office equipment 5 years
Cassettes 1 year
Leasehold improvements Over the lease term
(g) Goodwill and other intangible assets
Goodwill represents the excess of purchase price over fair value of net
assets acquired. Other identifiable intangible assets are valued at their
fair market value at the time of purchase.
Amortization is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
Goodwill 7-10 years
Developed technology 5 years
Assembled workforce 4 years
Installed base 4 years
Distributor/agent relationships 8 years
Trade-name 10 years
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment,
if any, is measured based on projected undiscounted future operating cash
flows. The assessment of the recoverability of goodwill will be impacted
if estimated future operating cash flows are not achieved.
(h) Impairment of long-lived assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of." This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
projected undiscounted future net cash flows expected to be generated by
the asset. 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.
(i) Other assets
Other assets include deferred financing costs, investments in affiliates,
and loans receivables. Deferred financing costs represent expenses
incurred to obtain financing which have been deferred and amortized
37
over the life of the loan using the effective interest method.
(j) Investments in affiliates
Investment in the common stock of EFT Network Services, LLC ("Dash"), a
33 1/3% owned affiliate until wholly acquired on August 13, 1999, was
accounted for by the equity method until the date of acquisition. Under
this method, the Company's share of net income or loss was reflected in
the Company's investment account, and dividends received are treated as a
reduction of the investment account. The fair value of the investment in
excess of the underlying equity in net assets is amortized over 10 years.
The acquisition on August 13, 1999 was accounted for under the purchase
method of accounting (see note 4).
(k) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(l) Risks and uncertainties
The Company has made a number of estimates and assumptions related to the
reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these consolidated financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(m) Revenue recognition
Euronet recognizes revenue at the point at which the service is
performed. Revenues from software licensing agreement contracts are
recognized on a percentage of completion basis whereby a pro-rata portion
of revenue and related costs are recognized as the work progresses.
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.
(n) Research and development costs
The Company applies 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
(refer to Note 24). 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 the Company has completed all planning, designing, coding, and
testing activities that are necessary to establish that the product can
be produced to meet its design specifications including functions,
features, and technical performance requirements.
Capitalized software costs are amortized on a product-by-product basis
equal to the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-
line method over the remaining estimated economic life of the product,
generally three years, including the period being reported on.
Amortization commences in the period when the product is available for
general release to customers.
(o) Loss per share
38
Loss per share has been calculated by dividing the net loss attributable
to common shareholders by the weighted-average number of shares
outstanding during the year. The effect of potential common shares (stock
options and warrants outstanding) is anti-dilutive. Accordingly, dilutive
loss per share does not assume the exercise of the stock options and
warrants outstanding.
(p) Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the fair market value of the Company's shares at the
date of the grant over the exercise price. Such compensation cost is
charged to expense on a straight-line basis over the vesting period of
the respective options. If vesting is accelerated as a result of certain
milestones, the unrecognized compensation would be recorded as expense on
the date such milestones have or have been deemed to have been achieved.
The Company has adopted the disclosure-only provisions of SFAS No. 123
(see Note 18).
(q) Reclassifications
Certain amounts have been reclassified in the prior year consolidated
financial statements to conform to the 2000 consolidated financial
statement presentation.
(4) Acquisitions
On March 26, 1999 the Company signed an agreement with Service Bank GmbH
& Co. KG ("Service Bank") to acquire 252 installed ATMs in Germany and 36
ATMs in inventory. The purchase price for this established ATM network
was 12.2 million Deutsche Marks ($6.7 million). Pursuant to the
agreement, the Company receives monthly fees based on revenues realized
from the ATMs less certain expenses and management fees payable to
Service Bank. The risks and rewards of ownership of the ATM network
transferred to the Company as of January 1, 1999, and revenues and
expenses from the operation of the ATM network accrued to Euronet from
that date.
The acquisition was accounted for as a purchase; accordingly, the results
of operations have been included in the accompanying consolidated
financial statements since January 1, 1999. The purchase price was
allocated to assets acquired in the amount of $3.5 million based on their
fair values. The excess of the purchase price over the fair value of the
net assets acquired of $3.2 million was recorded as goodwill and is
amortized over seven years.
On August 13, 1999, Euronet USA purchased the remaining 66 2/3% interest
in Dash for a consideration of $800,000 payable in 24 equal monthly
installments commencing on July 1, 1999. Euronet USA has delivered
letters of credit to each of the sellers in the amount of the entire
unpaid balance of the purchase price of Dash. As payments are made, the
outstanding credit risk exposures related to the letters of credit are
reduced proportionately. Euronet USA now owns a 100% interest in Dash.
The acquisition was accounted for as a purchase; accordingly, the results
of operations have been included in the accompanying consolidated
financial statements since July 1, 1999. The purchase price was allocated
to assets acquired of $680,000 based on their fair values. The excess of
the purchase price over the fair value of the net assets acquired of
$120,000 has been recorded as goodwill and is amortized over ten years.
On November 30, 1998, the Company acquired the outstanding common stock
of Euronet USA for purchase consideration of approximately $17.9 million
(including incidental costs of $90,000 and fair value of stock options of
$96,000). Euronet USA, with headquarters in Little Rock, Arkansas, sells
payment and transaction delivery systems worldwide. Its main software
products include ATM and network processing, electronic funds transfer
interfaces, electronic funds transfer switch control, credit/debit card
processing and corporate cash management and personal financial
management access products. Euronet USA is the software provider to
Euronet's ATM transaction processing center in Central Europe.
The acquisition was accounted for as a purchase; accordingly, the results
of operations are included in the accompanying consolidated financial
statements since the date of acquisition. The purchase price was
39
allocated to assets acquired ($7.5 million) and liabilities assumed ($6.0
million) based on their fair values. The excess of the purchase price
over the fair value of the net assets acquired of $16.4 million was
allocated $1.0 million to in-process research and development ("IPRD"),
$8.7 million to other identifiable intangible assets and the remaining
$6.7 million to goodwill (see Note 9). This allocation was based on
independent valuations performed at the time of acquisition. In-process
research and development was written-off to operations at the date of the
acquisition. In the third quarter of 2000 the remaining book value of
intangibles and goodwill of $11.2 million was written down in accordance
with SFAS No. 121 (see Note 10).
(5) Restricted reserve
The restricted reserve arose from the provisions of Hungarian accounting
law in relation to share capital contributed in foreign currency to Bank
Tech and Administrative Services. Under these rules, a foreign currency
capital contribution is recorded in the local accounting records of the
companies using the rate when the capital was contributed. The foreign
currency gain (or loss) which arises upon usage of the foreign currency
is recorded as a separate non-distributable reserve.
The reserve has remained frozen during the year as the laws in Hungary
have now changed and no longer require this accounting. However, the
change in the law is not retroactive and the historical reserve remains
undistributable.
(6) Restricted cash
The restricted cash balances as of December 31, 2000 and 1999, were as
follows:
December 31,
------------
2000 1999
---- ----
(in thousands)
ATM deposits $ 710 $ 6,567
Deposits for financial instruments - 3,649
Other 1,393 713
------ -------
$2,103 $10,929
====== =======
The ATM deposit balances held are equivalent to the value of certain
banks' cash held in Euronet's ATM network. The Company also has deposits
with commercial banks to cover guarantees and deposits with customs
officials to cover future charges.
(7) Investment securities
The amortized cost for short-term held-to-maturity and available-for-sale
securities by class security type at December 31, 2000 and 1999, were as
follows:
December 31,
------------
2000 1999
-----------------
(in thousands)
Held-to-maturity:
U.S. Federal Agency obligations $ - $ 750
Corporate debentures - 2,305
--- ------
Total investments $ 0 $3,055
==== ======
Securities totaling $2,305,000 and $750,000 have been recorded in cash
and cash equivalents and investment securities, respectively, on the
balance sheet at December 31, 1999. In 2000 and 1999, the Company
recorded a realized loss of $0 and $40,780, respectively, resulting from
the sale of available-
40
for-sale securities.
(8) Contracts in progress
Amounts included in the consolidated financial statements which relate to
recoverable costs and accrued profits not yet billed on contracts are
classified as current assets under costs and estimated earnings in excess
of billings on software installation contracts. Amounts received from
customers in excess of revenues recognized to date are classified as
current liabilities under billings in excess of cost and estimated
earnings of software installation contracts.
The software installation contracts in progress consist of the following:
December 31,
------------
2000 1999
-------------------
(in thousands)
Costs and estimated earnings on software
installation contracts $ 11,911 $ 7,872
Less billings to date (13,669) (10,235)
-------- --------
$ (1,758) $ (2,363)
======== =========
Components are included in the accompanying consolidated balance
sheets under the following captions:
December 31,
------------
2000 1999
-------------------
(in thousands)
Costs and estimated earnings in excess of
billings on software installation contracts $ 1,117 $ 667
Billings in excess of costs and estimated
earnings on software installation contracts (2,875) (3,030)
------- -------
$(1,758) $(2,363)
======= =======
(9) Intangibles
Intangible assets are carried at amortized cost and consist of the
following:
December 31,
------------
2000 1999
-------------------
(in thousands)
Goodwill $2,973 $10,641
Developed technology - 5,700
Assembled workforce - 1,130
Installed base - 1,080
Distributor/agent relationships - 380
Trade-name - 400
------ -------
2,973 19,331
Less accumulated amortization (369) (3,072)
------ -------
41
Total $2,604 $16,259
====== =======
Refer to Note 10 for details of the write down of intangibles in 2000.
(10) Asset Write Down
During the third quarter of 2000, the Company reduced the carrying value of
certain assets in accordance with SFAS No.121. The asset write-downs
totaled $12.0 million, of which $11.2 million related to goodwill and other
identifiable intangible assets associated with the Company's acquisition of
Arkansas Systems, Inc. ("Euronet USA) in December 1998. The remaining
$800,000 write- down related to the Company's ATM hardware inventory
acquired associated with the Company's acquisition of the SBK ATM network
in Germany and the Budapest Bank ATM network in Hungary.
As a result of the Company's inability to achieve operating improvements,
including software license and service orders for Euronet USA's traditional
core product (ITM) and cost reductions, the Software Solutions Segment
continued operating at a loss through the first three quarters of 2000. The
Company calculated the expected cash flows of the Company's Software
Solutions Segment, which identified an impairment of its long-lived assets.
Accordingly, in the third quarter of 2000, the Company recorded an
impairment charge based on the present value of expected cash flows of
$11.2 million for the write-down of goodwill and other identifiable
intangible assets recorded upon the acquisition of Euronet USA. The Company
considers the rapidly changing business environment surrounding electronic
transaction payment systems software to be a primary indicator of any
potential impairment of goodwill and other identifiable intangible assets
related to the Company's Software Solutions Segment. The Company is in the
process of repositioning Euronet USA in the market through development and
release of a new set of products that are independent of Euronet USA's
traditional core product lines, including a new, platform independent Java
based transaction processing software package with wireless banking and
messaging modules and a set of mobile phone prepaid recharge solutions. It
has become apparent, based on market reaction to these new products, that
these new products and solutions rather than Euronet USA's traditional ITM
solution will be the primary source of software solutions revenues in the
future.
In order to determine the extent of the asset impairment and the related
asset write-down, the Company estimated the discounted cash flows of the
Software Solutions Segment products and services in determining the fair
value of the goodwill and related identifiable intangible assets. The
Company's estimate was based on historical results which have shown
recurring operating losses since acquisition, current projections, and
internal earnings targets, net of applicable taxes. The Company's
discounted cash flow analysis indicated that the carrying value of
intangible assets related to Euronet USA should be reduced to zero as of
September 30, 2000. The net book value of the intangible assets prior to
the write down was $11.2 million.
The asset write-down is disclosed as a separate operating expense item in
the Company's Consolidated Statements of Operations and Comprehensive Loss.
The Company periodically reviews the recorded values of its long-lived
assets to determine if future cash flows to be derived from these assets
will be sufficient to recover the remaining recorded asset values. A
portion of the ATM hardware assets acquired with the Budapest Bank and
Service Bank ATM network purchases were deemed technologically inferior
relative to the Company's standards. Specifically, these assets were not
technologically advanced to support the entire current and future set of
transactions the Company typically offers to users of its ATM network. As a
result of this analysis, the Company recorded a non-cash charge of $800,000
related to a reduction in the carrying value of ATM hardware, adjusting to
its net realizable value.
(11) Notes payable
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 due on July 1, 2006 and 729,633 warrants to purchase 766,114
shares of common stock. Each warrant entitles the holder to purchase, on or
after June 22, 1998 and prior to July 1, 2006, 1.05 shares of common stock
at an exercise price of $5.00 per share. Cash interest on the notes will
not be payable prior to July 1, 2002. Commencing January 1, 2003,
42
cash interest will be payable semi-annually on January 1 and July 1 of
each year. The notes and the warrants are separately transferable. The
gross proceeds to the Company was DM 150.0 million (approximately $83.1
million) representing an issue price of DM 616.75 per DM 1,000 principal
amount at maturity. Of this amount, $1.7 million 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 145.1 million (approximately $81.3
million).
Pursuant to the Company's indenture, 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 at December 31, 2000.
During 1999, the Company repurchased notes with a face value of DM 22.0
million and 65,850 warrants for a total purchase price of $5.2 million.
This repurchase was accounted for as an extinguishment of debt with a
resulting $2.7 million (net of income taxes of $0) recognized as an
extraordinary gain on such extinguishment. The extinguishment gain
represents the difference between the allocated carrying value of the debt
extinguished ($8.1 million) and the consideration paid ($5.0 million),
offset by the write-off of the allocated unamortized deferred financing
costs ($300,000). Of the total purchase price of $5.2 million, $176,000
was allocated to the warrants based on their fair market value at the time
of purchase and recorded as an adjustment to additional paid-in capital.
Of the total extinguishment gain, $803,000 was recorded in the fourth
quarter of 1999 relating to the purchase of notes with a face value of DM
7.6 million on December 13, 1999.
During December 1998, the Company repurchased notes with a face value of
DM 26.4 million and 31,173 warrants for a total purchase price of $5.5
million. This repurchase was accounted for as an extinguishment of debt
with a resulting $2.9 million (net of income taxes of $1.5 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 ($10.2 million) and the
consideration paid ($5.5 million), offset by the write-off of the
allocated unamortized deferred financing costs ($341,000).
The following table provides the composition of notes payable at December
31,:
2000 1999
----------------
(in thousands)
Principal amount $ 93,819 $100,113
Unamortized discount (16,628) (27,313)
-------- --------
Carrying balance $ 77,191 $ 72,800
======== ========
The effective interest rate relating to the aforementioned notes payable
was 13.09% for 2000 and 1999. The interest expense was approximately $8.8
million and $9.5 million for the years ended December 31, 2000 and 1999,
respectively.
(12) Private Placement of Common Shares
In July 2000, the Company entered into subscription agreements for the sale
of 877,946 new common shares of the Company. Closing with respect to such
sale took place on July 14, 2000 and August 29, 2000. These agreements were
signed with accredited investors in transactions exempt from registration
pursuant to the exemptions provided in Section 4(2) and Regulation D of the
Act. The purchase price of each share was $6.97. The aggregate amount of
proceeds to the Company from the private placement was $6.1
43
million.
In April 2000, the Company entered into two separate subscription
agreements for the sale of an aggregate of 354,777 new common shares of the
Company. Of the total new shares, closing with respect to 254,777 shares
took place on April 10, 2000, and closing with respect to 100,000 shares
took place on May 4, 2000. These agreements were signed with certain
foreign persons in transactions exempt from registration under the United
States Securities Act of 1933 (the "Act") pursuant the exemption provided
in Regulation S of the Act. The weighted average purchase price of each
share was $7.50. The aggregate amount of proceeds to the Company from the
private placement was $2.7 million. Under each of the agreements, for each
two shares of common stock purchased in the private placement, the
accredited investors were issued one warrant, expiring in each case on the
one year anniversary date of the subscription agreement, to purchase a
share of Euronet common stock at a weighted average exercise price of
$12.50.
In February 2000, the Company entered into two subscription agreements for
the sale of an aggregate of 650,000 new common shares of the Company.
Closing under these agreements took place on March 13, 2000. These
agreements were signed with certain accredited investors in transactions
exempt from registration pursuant to the exemptions provided in Section
4(2) and Regulation D of the Act. The purchase price of each share was
$6.615, which represents 90% of the average closing price for the ten
trading days prior to and including February 15, 2000. The aggregate amount
of proceeds to the Company from the private placement was $4.3 million.
Under each of the agreements, for each two shares of common stock purchased
in the private placement, the purchasers were issued one warrant to
purchase a share of Euronet common stock at an exercise price of $11.615,
expiring in each case on the one year anniversary date of the subscription
agreement.
(13) 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 in the amount of
$2.4 million; Hungarian-American Enterprise Fund in the amount of $1.0
million; and Michael J. Brown in the amount of $600,000. The facility was
available to be drawn upon until December 28, 2000, and repayment of any
draws was due June 28, 2001. On December 28, 2000 the facility was amended
and renewed for a further six months and is available to be drawn until
June 28, 2001 with repayment of any draws being due December 28, 2001.
Draws on the facility will accrue interest at 10 percent per annum, payable
quarterly. 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 fee of 100,000
warrants, on the same terms, was paid for the subsequent extension of the
facility. Warrants are to be issued on similar terms and conditions for
each draw on the facility at the rate of 80,000 warrants for each $1.0
million of funds drawn. As of March 1, 2001, the Company had not made any
draws under the Credit Agreement.
(14) Forward Foreign Exchange Contracts
On May 26, 1999, the Company entered into foreign currency call options
with Merrill Lynch to purchase Euro 79.3 million for $85.9 million and
foreign currency put options to sell $83.6 million for Euro 79.3 million on
May 26, 2000 (the "Settlement Date"). Under such contracts, the Company
would be required to make a cash payment to Merrill Lynch on May 31, 2000,
should the Euro weaken against the US Dollar and fall below $1.055 (the
"Floor Rate") on the Settlement Date. At the same time, should the Euro
strengthen against the U.S. dollar and rise above $1.0835 to the Euro (the
"Ceiling Rate") the Company would receive a cash payment from Merrill Lynch
depending upon the Euro/Dollar exchange rate on such Settlement Date.
In the week of March 13, 2000, the Company entered into put options with
Merrill Lynch to sell Euro 79.0 million for $75.1 million on May 26, 2000.
The contracts were purchased to limit the Company's exposure on the call
option described above against a fall of the Euro below $0.95.
The Company was required to cash collateralize the net fair value of such
options contracts measured on a mark-to-market basis, and on May 26, 2000,
the Company had on deposit $8.3 million with Merrill Lynch.
On May 26, 2000, the rate of the Euro was $0.9118 and the Company settled
the above option contracts in
44
the amount of $8.3 million resulting in a total net loss on such contracts
of $10.3 million inclusive of the cost of the contracts. At December 31,
2000, the Company had not entered into any further option contracts.
(15) Leases
(a) Capital leases
The Company leases many of its ATMs under capital lease agreements that
expire between 2001 and 2005 and bear interest at rates between 8% and 12%.
Lease installments are paid on a monthly, quarterly or semi-annual basis.
Euronet has the right to extend the term of certain leases at the
conclusion of the basic lease period.
The gross amount of the ATMs and computer equipment and related accumulated
amortization recorded under capital leases were as follows:
December 31,
------------
2000 1999
-------------------
(in thousands)
ATMs $13,924 $18,027
Other 366 768
------- -------
14,290 18,795
Less accumulated amortization (3,429) (4,813)
------- -------
Net book value $10,861 $13,982
======= =======
Depreciation of assets held under capital leases amounted to $2.0 million,
$2.1 million, and $2.9 million for the years ended December 31, 2000, 1999,
and 1998, respectively, and is included in depreciation and amortization
expense.
(b) Operating leases
The Company also has noncancelable operating rental leases for office space
which expire over the next 3 to 9 years. Rent expense under these leases
amounted to $1.4 million, $2.1 million, and $1.1 million for the years
ended December 31, 2000, 1999, and 1998, respectively.
(c) Future minimum lease payments
Future minimum lease payments under the capital leases and the
noncancelable operating lease (with initial or remaining lease terms in
excess of one year) as of December 31, 2000 are:
Capital Operating
Leases Leases
------ ------
(in thousands)
Year ending December 31,
2001 5,137 1,315
2002 4,470 1,049
2003 2,951 779
2004 1,512 515
2005 363 515
2006 and thereafter - 82
-------
Total minimum lease payments 14,433
Less amounts representing interest (2,933)
-------
Present value of net minimum capital lease payments 11,500
45
Less current installments of obligations under capital leases (3,466)
-------
Long term capital lease obligations $ 8,034
=======
(16) Taxes
The sources of (loss)/income before income taxes are presented as follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
United States $(30,227) $(19,866) $ (8,985)
Netherlands Antilles - 77 700
Europe (18,136) (18,068) (21,549)
-------- -------- --------
Loss before income taxes $(48,363) $(37,857) $(29,834)
======== ======== ========
Total income tax (expense)/benefit for the years ended December 31, 2000,
1999 and 1998 was allocated as follows:
Year Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
(in thousands)
Loss from continuing operations $(1,188) $ 4,182 $(1,430)
Extraordinary item - - (1,488)
Stockholders' (deficit)/equity for compensation
expense for tax purposes in excess of
amounts recognized for financial
reporting purposes - - 951
------- ------- -------
$(1,188) $(4,182) $(1,967)
======= ======= =======
The income tax benefit/(expense) from operations consisted of the
following:
Year Ended December 31,
----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Current tax (expense)/benefit:
U.S. Federal $ (838) $ 1,828 $(1,430)
Europe (350) - -
-------- ------- -------
Total current (1,188) 1,828 (1,430)
-------- ------- -------
Deferred tax benefit/(expense):
U.S. Federal - 2,354 -
-------- ------- -------
Total deferred - 2,354 -
-------- ------- -------
Total tax (expense)/benefit $ (1,188) $ 4,182 $(1,430)
======== ======= =======
46
Year Ended December 31,
-----------------------
2000 1999 1998
----- ---- ----
(in thousands)
Income tax benefit at statutory rates $ 16,443 $11,933 $10,143
Permanent differences (186) (1,078) (1,191)
Tax-exempt interest - - 520
Stock options exercised - - (931)
Tax rate differences (1,757) (938) (638)
Adjustment to deferred tax asset for enacted
changes in tax rates (1,909) (443) (191)
(Expiration)/utilization of tax loss carried forward (716) (1,700) 971
Other (2,115) 176 (175)
Change in valuation allowance (10,948) (5,924) (9,938)
-------- ------- -------
Actual income tax (expense)/benefit $ (1,188) $ 4,182 $(1,430)
======== ======= =======
As a result of the formation of the Company a portion of the stock
compensation cost recorded in 1996 became a temporary difference for which
the Company recognized a gross deferred tax asset of $1.4 million in 1997. A
valuation allowance for this deferred tax asset was established. During 1997,
certain of the stock options were exercised resulting in a tax deduction of
$1.0 million. Because of the tax loss position of the Company in 1997 in the
United States, this tax deduction was not utilized and increased the tax loss
carryforward. The Company established a valuation allowance for the deferred
tax asset resulting from the tax loss carryforward in the United States. This
tax loss carryforward was utilized in 1998 and therefore, $951,553 of the tax
benefit was recorded as an adjustment to additional paid in capital.
The tax effect of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities are as follows:
December 31,
------------
2000 1999
---- ----
(in thousands)
Deferred tax assets:
Tax loss carryforwards $ 14,325 $ 11,526
Stock compensation expense 1,130 1,130
Unrealized exchange rate differences 4,614 2,559
Interest expense 7,164 4,327
Accrued expenses 1,548 2,936
Billings in excess of earnings 1,108 1,036
Other 2,145 16
----- --
Total deferred tax assets 32,034 23,530
Valuation allowance (30,689) (19,741)
-------- --------
Total deferred tax assets 1,345 3,789
----- ---
Deferred tax liabilities:
Property and equipment 26 660
Non-goodwill intangible assets - 2,333
Capitalized research and development costs 515 109
Earnings in excess of billings 380 227
--- ---
Total deferred tax liabilities 921 3,329
--- -----
Net deferred tax assets $ 424 $ 460
======== ========
The valuation allowance for deferred tax assets as of January 1, 2000, 1999
and 1998 was $19.7 million, $14.3 million and $4.8 million, respectively. The
net change in the total valuation allowance for the years ended December 31,
2000, 1999, and 1998 were increases of $10.9 million, $5.4 million and $9.5
million, respectively.
47
The valuation allowance relates primarily to deferred tax assets
established under SFAS No. 109 for loss carryforwards at December 31, 2000,
1999 and 1998 of $46.9 million, $45.0 million and $32.9 million,
respectively. The tax operating loss carryforwards will expire through 2004
for EFT-Uslage d o.o., The tax operating loss carryforwards will expire
through 2005 for Euronet Adminisztracios Szolgaltato Kft., Euronet
Banktechnikai Szolgaltato Kft.,Bankomat 24/Euronet Sp. Z o.o., Euronet SRL,
and 2007 for Euronet Services spol. sro. The tax operating losses for
Euronet Services Inc. and Euronet USA can be carried back two years and
forward twenty years. The tax operating losses for Euronet Services Inc.
and Euronet USA can be carried back two years and forward twenty years. The
tax operating losses for Euronet GmbH and Euronet Services Ltd. can be
carried forward indefinitely.
In assessing the realizability of deferred tax assets, management considers
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. Management
considers 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 which the deferred
tax assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible differences, net
of the existing valuation allowances at December 31, 2000. The amount of
the deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward
period are reduced.
At December 31, 2000 the Company has net operating loss carry forwards of
approximately $46.9 million which will expire as follows:
Year ending
December 31, In thousands
------------ ------------
2001 $ 1,479
2002 4,108
2003 7,860
2004 8,771
2005 7,541
2006 1,014
2007 and thereafter 16,162
------
Total $46,935
=======
(17) Valuation and Qualifying Accounts
Additions
Balance at charged to Amounts Balance at
January 1 expense written off December 31
--------- ------- ----------- -----------
(in thousands)
1998
Allowance for doubtful accounts $- $ 291 $ - $291
1999
Allowance for doubtful accounts $ 291 $ 90 $ - $381
2000
Allowance for doubtful accounts $ 381 $ 408 $49 $740
(18) Stock plans
The Company has established a share compensation plan that provides certain
employees options to purchase shares of its common stock. The options vest
over a period of five years from the date of grant. Options are exercisable
during the term of employment or consulting arrangements with the Company
and its subsidiaries. At December 31, 2000, the Company has authorized
options for the purchase of 6,463,991 shares of common shares, of which
4,584,508 have been awarded to employees and 2,441,928 remain unexercised.
48
In accordance with a shareholders' agreement dated February 15, 1996 and
amended on October 14, 1996, Euronet reserved 2,850,925 common shares for
the purpose of awarding common shares ("milestone awards") to certain
investors and options to acquire common shares ("milestone options") to the
founders, management and key employees. The Company granted 800,520
milestone awards at an exercise price of $0.02 per share and 2,050,405
milestone options at an exercise price of $2.14 per share.
Upon the initial public offering of the Company on March 6, 1997, all
milestone awards and milestone options granted under the milestone
arrangement (with the exception of 49,819 options to certain key employees
which vested equally over the two years following the initial public
offering) vested and all shares became immediately issuable to
beneficiaries of milestone awards and options. At that time, 800,520
milestone awards and 232,078 milestone options were exercised. As of
December 31, 2000 1,428,303 milestone options remain unexercised.
Share option activity during the periods indicated is as follows:
Number of
Weighted-Average
Shares Exercise Price
---------- --------------
Balance at December 31, 1997 (1,984,365 shares exercisable) 2,798,206 2.67
Granted 941,396 5.87
Granted in Euronet USA acquisition 63,410 4.44
Exercised (80,132) 2.13
Forfeited (100,289) 6.23
---------
Balance at December 31, 1998 (2,174,412 shares exercisable) 3,622,591 3.46
Granted 1,140,830 5.02
Exercised (228,503) 1.46
Forfeited (233,194) 5.09
---------
Balance at December 31, 1999 (2,379,729 shares exercisable) 4,301,724 3.87
Granted 1,237,000 7.24
Exercised (390,231) 2.43
Forfeited (563,985) 6.00
---------
Balance at December 31, 2000 (2,441,928 shares exercisable) 4,584,508 4.65
=========
At December 31, 2000, the range of exercise prices, weighted-average
remaining contractual life and number exercisable of outstanding options
was as follows:
Weighted-Average
Contractual
Range of Number of Weighted-Average Remaining Life Number Weighted-Average
Exercise Prices Shares Exercise Price (years) Exercisable Exercise Price
----------------- --------- ---------------- ----------------- ----------- ----------------
0-1.39 359,506 $ 0.73 3.5 359,506 $ 0.73
1.40-2.79 1,553,703 2.11 6.0 1,529,343 2.12
2.80-4.18 71,471 3.33 7.1 32,143 3.32
4.19-5.58 747,208 5.00 7.9 196,186 5.00
5.59-6.97 1,190,396 6.38 8.0 194,971 5.90
6.98-8.36 441,800 8.05 8.8 8,800 8.00
8.36-9.76 22,000 8.69 9.6 0 0.00
9.77-11.15 62,004 10.57 5.3 35,317 10.62
11.16-12.54 43,924 11.60 6.4 27,368 11.60
12.55-13.94 92,496 13.94 5.8 58,294 13.94
--------- ------ ------ ------
4,584,508 $ 4.65 6.9 2,441,928 $ 3.00
========= ====== ========= ======
49
The Company applies APB Opinion No. 25 in accounting for its share option
plans. The exercise price of the options is established generally based on
the estimated fair value of the underlying shares at grant date. For
options granted prior to the initial public offering, the fair value was
determined by taking into consideration the per share price at which the
most recent sale of equity securities was made by Euronet to investors. For
options granted after the initial public offering, the fair value is
determined by the market price of the share at the date of grant. However,
in contemplation of the initial public offering in March 1997, compensation
expense was recognized in 1996 relating to all options granted during the
fourth quarter of 1996. Such compensation expense was calculated as the
excess of the fair market value of the underlying shares (determined as
$4.22, which is the cash price per share at which GE Capital subscribed for
preferred shares of Euronet in February 1997) over the exercise price of
$2.14 per share. Euronet recorded $4,172,000 of compensation expense in the
1997 consolidated financial statements and an additional compensation
expense of $343,000 with respect to these options was recognized over the
remaining vesting period of such options. Of this amount, $0, $127,000 and
$108,000 has been expensed in the years ended December 31, 2000, 1999 and
1998, respectively.
The following table provides the fair value of options granted during 2000,
1999 and 1998 together with a description of the assumptions used to
calculate the fair value using the Black-Scholes pricing model:
Year ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Expected volatility 82.0% 100% 100%
Average risk-free rate 7.21% 6.61% 8.8%
Average expected lives 5 years 5 years 5 years
Weighted-average fair value (per share) $5.27 $1.71 $3.51
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, Euronet's net loss and
net loss per share would have increased to the amounts indicated below:
Year ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands, except per share data)
Net loss-as reported $(49,551) $(30,915) $(28,375)
Net loss-pro forma $(50,280) $(32,606) $(29,067)
Loss per share-as reported $(3.00) $(2.03) $(1.87)
Loss per share-pro forma $(3.05) $(2.14) $(1.91)
Pro forma impact reflects only options granted since December 31, 1994.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma amounts
presented above because compensation cost is reflected over the options'
vesting periods and compensation cost for options granted prior to January
1, 1995 is not considered.
(19) Business segment information
Euronet and its subsidiaries operate in two business segments: (1) a
segment that provides an independent shared ATM network and other
electronic payment network services to banks, retail and financial
institutions (the "Network Services Segment"); and (2) a segment that
produces application software and solutions for payment and transaction
delivery systems (the "Software Solutions Segment"). These business
segments are supported by a corporate service segment which provides
corporate and other administrative services which are not directly
identifiable with the two business segments, (the "Corporate Services
Segment"). The accounting policies of each segment are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on profit or loss from operations before
50
income taxes not including nonrecurring gains and net loss. Prior period
segment information has been restated to conform to the current period's
presentation.
As the Network Services Segment continued to grow throughout 1999, the
Company's management began to divide the internal organization of the
segment into Sub-segments. Accordingly, beginning in January 2000, the
Company divided the Network Services Segment into three Sub-segments:
"Central European Sub-segment" (including Hungary, Poland, the Czech
Republic, Croatia, Greece and Romania), "Western European Sub-segment"
(including Germany, France, and the United Kingdom) and "Other Operations
Sub-segment" (including the United States and unallocated processing center
costs). Where practical, certain amounts have been reclassified to reflect
the change in internal reporting. The Company is unable to present Network
Services Segment assets by Sub-segment as of December 31, 1999. Prior to
January 1, 2000, certain assets that were used to provide support services
to the Company as a whole were included in the assets in the balance sheet
of the Company's wholly owned Hungarian subsidiary, Bank Tech. In order to
segregate corporate assets from those of the Hungarian operations, these
assets were transferred as of December 31, 1999, from Bank Tech to an
existing Hungarian shell company, Administrative Services. Those assets are
now shown under the Other Operations Sub-segment.
The following tables present the segment results of the Company's
operations for the years ended December 31, 2000, 1999 and 1998.
(In thousands)
Network Services
----------------
Network
For the year ended Central Western Services Software Corporate
December 31, 2000 Europe Europe Other Total Solutions Services Total
------ ------ ----- ----- --------- -------- -----
Total revenues $ 18,599 $ 16,615 $ 1,700 $ 36,914 $ 16,006 $ - $ 52,920
Total operating expenses (21,669) (18,901) (2,409) (42,979) (37,475) (7,862) (88,316)
-------- -------- ------- -------- -------- -------- --------
Operating loss (3,070) (2,286) (709) (6,065) (21,469) (7,862) (35,396)
Interest income 289 65 190 544 103 442 1,089
Interest expense (1,016) (168) (150) (1,334) - (9,495) (10,829)
Foreign exchange (loss)/gain, net (616) (494) (155) (1,265) 1 (1,963) (3,227)
-------- -------- ------- -------- -------- -------- --------
Net loss before income taxes $ (4,413) $ (2,883) $ (824) $ (8,120) $(21,365) $(18,878) $(48,363)
======== ======== ======= ======== ======== ======== ========
Segment assets $ 25,697 $ 16,755 $ 3,652 $ 46,104 $ 9,433 $ 5,353 $ 60,890
Fixed assets 17,145 11,707 1,682 30,534 968 155 31,657
Depreciation and amortization 3,977 2,884 1,100 7,961 2,215 208 10,384
Asset write down 668 110 - 778 11,190 - 11,968
(In thousands)
Network Services
----------------
Network
For the year ended Central Western Services Software Corporate
December 31, 1999 Europe Europe Other Total Solutions Services Total
------ ------- ------ ----- --------- --------- --------
Total revenues $ 12,664 $ 12,637 $ 1,202 $ 26,503 $ 15,149 $ - $ 41,652
Total operating expenses (20,683) (16,477) (2,250) (39,410) (22,290) (6,750) (68,450)
-------- -------- ------- -------- -------- -------- --------
Operating loss (8,019) (3,840) (1,048) (12,907) (7,141) (6,750) (26,798)
Interest income 448 16 103 567 148 1,235 1,950
Interest expense (981) (101) (51) (1,133) - (9,766) (10,899)
Foreign exchange (loss)/gain, net (399) (19) (146) (564) 2 (1,548) (2,110)
-------- -------- ------- -------- -------- -------- --------
Net loss before income taxes $ (8,951) $ (3,944) $(1,142) $(14,037) $ (6,991) $(16,829) $(37,857)
======== ======== ======= ======== ======== ======== ========
Segment assets n/a n/a n/a $ 56,658 $ 21,527 $ 18,659 $ 96,844
Fixed assets, net n/a n/a n/a 35,438 1,113 142 36,693
Depreciation and amortization expense n/a n/a n/a 7,410 2,683 145 10,238
(In thousands)
Network Software Corporate
For the Year ended December 31, 1998 Services Solutions Services Total
-------- --------- --------- -----
Total revenues $ 11,525 $ 371 $ - $ 11,896
Total operating expenses 26,350 2,671 5,486 34,507
-------- -------- -------- --------
Operating loss (14,825) (2,300) (5,486) (22,611)
Interest income 193 1 2,320 2,514
Interest expense (1,903) - (5,923) (7,826)
51
Foreign exchange (loss)/gain, net 102 - (2,013) (1,911)
-------- -------- -------- --------
Net loss before income taxes and
extraordinary item $(16,433) $ (2,299) $(11,102) $(29,834)
======== ======== ======== ========
Segment assets 57,828 19,493 56,117 133,438
Fixed assets, net 32,400 697 85 33,182
Depreciation and amortization expense 4,724 190 41 4,955
The following is a reconciliation of the segment information to the consolidated
financial statements.
Year ended December 31,
2000 1999 1998
(in thousands)
-------------
Revenues:
- ---------
Total revenues for reportable segments $52,920 $41,652 $11,896
Elimination of inter-segment revenues (180) (180) (15)
----- ----- ----
Total consolidated revenues $52,740 $41,472 $11,881
======= ======= =======
Operating expenses:
- -------------------
Total operating expenses for reportable segments $88,316 $68,450 $34,507
Elimination of inter-segment expenses (180) (180) (15)
----- ----- ----
$88,136 $68,270 $34,492
======= ======= =======
Total revenues and long-lived assets for the years ended December 31, 2000, 1999
and 1998 for the Company analyzed by geographical location is as follows:
Total Revenues Long-lived Assets
-------------- -----------------
(in thousands) Year ended December 31, December 31,
- -------------- ------------------------- ----------------
2000 1999 1998 2000 1999
------- ------- ------- ------- -------
United States $17,442 $16,172 $356 $984 $ 1,155
Germany 9,984 11,160 2,394 4,800 6,635
Hungary 6,524 5,606 5,936 5,878 9,114
Poland 9,147 5,798 2,787 9,824 10,991
Other 9,643 2,736 408 10,171 8,798
----- ----- --- ------ -----
Total $52,740 $41,472 $11,881 $31,657 $36,693
======= ======= ======= ======= =======
Total revenues are attributed to countries based on location of customer
for the ATM and related service segment. For revenues generated by the
Euronet USA software solutions segment, all revenues are attributed to the
United States. Long lived assets consist of property, plant, and equipment,
net of accumulated depreciation.
(20) Financial instruments
Most of Euronet's financial instruments (cash and cash equivalents, trade
accounts receivable, investment securities, prepaid expenses and other
current assets, trade accounts payable, accrued expenses and other current
liabilities, advance payments on contracts, billings in excess of costs and
estimated earnings on software installation contracts, costs and estimated
earnings in excess of billings on software installation contracts) are
short-term in nature. Accordingly, the carrying value of these instruments
approximates their fair values. The fair value of notes payable was
determined based on quoted market prices for the same issue and amounted to
$37.5 million (carrying value of $77.2 million) at December 31, 2000 and
$52.0 million (carrying value of $72.8 million) at December 31, 1999. See
Note 14 for details of the Company's foreign exchange contracts.
52
(21) Reconciliation of net loss to net cash used in operating activities
The reconciliation of net loss to net cash used in operating activities
for the years ended December 31, 2000, 1999, and 1998 follows.
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Net loss $(49,551) $(30,915) $(28,375)
Adjustments to reconcile net loss to net cash
used in operating activities:
Share compensation expense - 127 108
Depreciation and amortization 10,383 10,238 4,955
Asset write downs 11,968 - -
Unrealized foreign exchange (losses)/gains (4,261) (8,294) 5,690
Loss/(gain) on disposal of fixed assets 2,182 (715) 28
In-process research and development write-off - - 1,020
Amortization of deferred financing costs 232 269 147
Accretion of discount on notes payable 8,753 9,506 5,772
Extraordinary gain on extinguishment of debt - (2,760) (4,377)
Realization of deferred tax benefit from stock
compensation credited to additional paid-in capital - - 951
Decrease/(increase) in deferred income tax 36 (2,797) -
Increase/(decrease) in income tax payable, net 818 (2,667) 1,969
Decrease/(increase) in restricted cash 9,755 2,043 (12,125)
Increase in trade accounts receivable (1,597) (2,028) (473)
(Increase)/decrease in costs and estimated earnings in
excess of billings on software installation contracts (450) 78 (326)
(Increase)/decrease in prepaid expenses and
other current assets (457) 184 (1,692)
Decrease/(increase) in deposits for ATM leases 1,310 802 385
Decrease in cash surrender value of life
insurance policies - - 489
(Decrease)/increase in trade accounts payable (432) 1,119 94
Increase/(decrease) in advance payments on contracts 834 350 (32)
(Decrease)/increase in accrued expenses and other
liabilities (5,725) 3,049 2,523
(Decrease)/increase in billings in excess of costs and
estimated earnings on software installation costs (155) 2,040 501
-------- -------- --------
Net cash used in operating activities $(16,357) $(20,371) $(22,768)
======== ======== ========
(22) Non-cash financing and investing activities
Capital lease obligations of $5.1 million, $5.2 million and $3.9 million
during the years ended December 31, 2000, 1999 and 1998, respectively,
were incurred when the Company entered into leases primarily for new
automated teller machines.
During the years ended December 31, 2000, 1999 and 1998, the Company
issued warrants to purchase common stock totaling $ 372,000, $0, and
$1,725,000, respectively.
(23) Concentrations of business and credit risk
Euronet is subject to concentrations of business and credit risk.
Euronet's financial instruments mainly include trade accounts receivables,
cash and cash equivalents and investment securities. Euronet's customer
base, although limited, includes the most significant international card
organizations and certain banks in the markets in which it operates.
Therefore, the Company's operations are directly affected by
53
the financial condition of those entities.
Cash and cash equivalents, and investment securities are placed with high-
credit quality financial institutions or in short-term duration, high-
quality debt securities. Euronet does not require collateral or other
security to support financial instruments subject to credit risk.
Management believes that the credit risk associated with its financial
instruments is minimal due to the control procedures which monitor credit
worthiness of customers and financial institutions.
(24) Research and Development
The Company regularly engages in research and development activities aimed
at the development and delivery of new products, services and processes to
its customers including, but not limited to, bill payment and presentment,
telephone banking products, applications for wireless application protocol
("WAP") enabled customer touch points, other wireless banking products,
GSM mobile prepaid recharge products ATM browser products and internet
banking solutions as well as significant improvements to core software
products.
The Company's research and development costs incurred for computer
products to be sold, leased or otherwise marketed totaled $6.7 million,
$3.2 million and $153,000 for the years ended December 31, 2000, 1999 and
1998, respectively. In 2000, $1.0 million was capitalized and appears on
the Company's balance sheet in prepaid expenses and other assets, net of
accumulated amortization of $137,000. In 1999, $322,000 was capitalized,
net of accumulated amortization of $70,000.
(25) Employee Loans for Common Stock Program
In October 1999 the Company's Board of Directors approved and implemented
a Loan Agreement Program ("Program") for certain employees under which the
Company has loaned sums of money to participating employees in order for
them to purchase shares of the Company's stock on the open market. The
shares are pledged to the Company to secure the loans. As of December 31,
2000 166,195 shares are held by the Company as collateral for the loans.
The loans carry five-year terms are non-recourse, non-interest bearing
loans. The shares vest to the employees in five equal tranches of 20
percent of the shares for five years, commencing at the date each employee
began employment with the Company. As the shares vest, the employees are
entitled to pay off the loans and free the shares of the pledge. These
loans are considered an award of stock options as the loans are non-
recourse and the employee is not obligated to pay any interest on the
loans. The loans have been accounted for as a separate component of
stockholders' deficit. In the event that any one of the employees defaults
on the term of the loans, the shares received by the Company will be
recorded as treasury stock.
(26) Sale of Croatian Network
On November 19, 1999, the Company completed the sale of its Croatian ATM
network to Raiffeisenbank Austria, d.d., a Croatian financial institution
("RBA"), for consideration of $2.7 million. The carrying value of the
Croatian assets was $2.0 million, resulting in a gain to the Company of
$657,000, recorded as an offset to operating costs. Subsequent to the sale
of the network assets, the Company and RBA entered into an ATM services
agreement whereby the Company will provide ATM management and other
related services to RBA for an initial term of 15 years.
(27) Employee Benefit Plans
Euronet has established a Profit Sharing and 401(k) plan for all employees
who have completed six months of service and are not otherwise covered by
a retirement benefit plan (national or private) outside of the US. Each
plan participant can contribute up to the maximum amount allowed by the
Internal Revenue Service to the Plan through payroll deductions. Euronet's
matching contribution to the plan is discretionary and is determined each
year by the Board of Directors. The employee's vested percentage regarding
the employer's contribution varies according to years of service.
Euronet's contribution accrual to the Plan for the years ended December
31, 2000, 1999 and 1998 was $213,000 $159,000 and $26,000 respectively.
54
Euronet maintains both a fully funded and self-funded health insurance
programs, which cover all full-time employees and their families at no
charge to the employees. In order to administer the self-funded program,
Euronet has entered into a contractual agreement with a third party
administrator by which Euronet pays a monthly service fee to the
administrator based upon employee enrollment participating in the self-
funded plan. Euronet has also purchased a stop/loss insurance policy to
limit Euronet's self-funded liability to $25,000 per employee per year and a
total loss on all claims to approximately $31,000 per month.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ----------------------
Not applicable.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
- --------------------------------------------------------
The information under "Election of Directors" in the Proxy Statement for the
Annual Meeting of Shareholders for 2001 is incorporated herein by reference.
Information concerning executive officers is set forth under "Executive Officers
of the Registrant" in Part I.
ITEM 11. EXECUTIVE COMPENSATION.
- -------------------------------
The information under "Executive Compensation" in the Proxy Statement for the
Annual Meeting of Shareholders for 2001 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -----------------------------------------------------------------------
The information under "Ownership of Common Stock by Directors and Executive
Officers" and "Election of Directors" in the Proxy Statement for the Annual
Meeting of Shareholders for 2001 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------------------------------------------------------
The information under "Election of Directors" and "Executive Compensation" in
the Proxy Statement for the Annual Meeting of Shareholders for 2001 is
incorporated herein by reference.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(a) List of Documents Filed as Part of this Report.
1. Financial Statements Page
----
Independent Auditors' Report............................................................. 1
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999................ 2
Consolidated Statements of Operations and Comprehensive Loss for the years
ended December 31, 2000, 1999 and 1998................................................. 4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998....................................................... 5
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998............................................................................... 7
Notes to Consolidated Financial Statements............................................... 8
2. Schedules
None.
3. Exhibits
Exhibit Number Exhibit Description
-------------- -------------------
Exhibit 10.1 Revolving Credit Agreement between
Euronet Services Inc. and Michael J.
Brown, DST Systems Inc. and Hungarian
American Enterprise Fund dated June 28,
2000.
Exhibit 10.2 Amendement to Revolving Credit Agreement
dated December 28, 2000.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
EURONET SERVICES INC.
Date: March 6, 2001 /s/ Richard P. Halka
--------------------
Richard P. Halka
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Michael J. Brown Chairman of the Board of Directors March 6, 2001
- --------------------
Michael J. Brown Chief Executive Officer and President
(principal executive officer)
/s/ Daniel R. Henry Director and Chief Operating Officer March 6, 2001
- -------------------
Daniel R. Henry
/s/ Steven J. Buckley Director March 6, 2001
- ---------------------
Steven J. Buckley
/s/ Eriberto R. Scocimara Director March 6, 2001
- -------------------------
Eriberto R. Scocimara
/s/ Thomas A. McDonnell Director March 6, 2001
- -----------------------
Thomas A. McDonnell
/s/ Richard P. Halka March 6, 2001
- --------------------
Richard P. Halka Chief Financial Officer and
Chief Accounting Officer (principal financial
officer and principal accounting officer)
58