1
_____________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________________________________
FORM 10-Q
____________________________________________________________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER C00-22167
___________________________________________________________________________
EURONET SERVICES INC.
(Exact name of the registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
74-2806888
(I.R.S. employer identification no.)
14-24 HORVAT U.
1027 BUDAPEST
HUNGARY
(Address of principal executive offices)
36-1-224-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As at July 31, 1997
17,230,058 Common Shares.
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PART I
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, 1997 DECEMBER 31, 1996
------------- ------------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents................................ $20,388 $2,541
Restricted cash.......................................... 3,515 818
Trade accounts receivable, net........................... 455 172
Investment securities.................................... 27,811 194
Prepaid expenses and other current assets................ 1,435 433
------- -------
Total current assets.................................... 53,604 4,158
Property and equipment, net............................... 14,112 7,284
Loans receivable, excluding current portion............... 26 21
Deferred income taxes..................................... 600 471
------- -------
Total assets............................................ $68,342 $11,934
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable................................... $3,478 $1,670
Short term borrowings.................................... 171 194
Current installments of capital leases obligations....... 1,627 637
Note payable -- shareholder.............................. 72 262
Accrued expenses and other current liabilities........... 206 98
------- -------
Total current liabilities............................... 5,554 2,861
Obligations under capital leases, excluding
current installments..................................... 8,040 3,834
Other long-term liabilities............................... 68 103
------- -------
Total liabilities....................................... 13,662 6,798
Shareholders' equity:
Common and preferred shares, Euronet Holding N.V ........ -- 191
Common stock, $0.02 par value; 30,000,000 shares
authorized; 14,969,943 shares issued and outstanding..... 300 --
Treasury stock........................................... (4) --
Additional paid in capital............................... 63,047 11,666
Subscription receivable.................................. -- (500)
Accumulated losses....................................... (9,447) (7,005)
Restricted reserve....................................... 784 784
------- -------
Total shareholders' equity............................... 54,680 5,136
------- -------
Total liabilities and shareholders' equity............... $68,342 $11,934
======= =======
See accompanying notes to condensed consolidated statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
---------------------------- --------------------------
1997 1996 1997 1996
------------- ------------- ------------ ------------
Revenue............................ 1,061 170 1,856 270
Operating expenses:
ATM operating costs................ (965) (299) (1,653) (531)
Other operating costs.............. (1,918) (1,002) (3,024) (1,403)
---------- ---------- ---------- ----------
Operating loss..................... (1,822) (1,131) (2,821) (1,664)
Other income (expenses)............ 192 86 250 (77)
---------- ---------- ---------- ----------
Loss before income taxes........... (1,630) (1,045) (2,571) (1,741)
Deferred income tax benefit........ 3 33 129 87
---------- ---------- ---------- ----------
Net loss........................... $(1,627) $(1,012) $(2,442) $(1,654)
========== ========== ========== ==========
Loss per share (Note 4)............ $(0.09) $(0.07) $(0.15) $(0.12)
Average shares outstanding (Note 4) 17,537,509 13,838,078 16,328,580 13,838,078
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30
------------------------
1997 1996
--------- ----------
Cash flows from operating activities:
Net loss.................................................. $(2,442) $(1,654)
Adjustments to reconcile net loss to net cash used in
operating activities:
Share compensation expense................................ 54 --
Depreciation of property, plant and equipment............. 549 209
Deferred income taxes..................................... (129) (87)
Increase in restricted cash............................... (2,697) (50)
Increase in trade accounts receivable..................... (283) (27)
Increase in prepaid expenses and other current assets..... (1,002) (3,819)
Increase in trade accounts payable........................ 1,808 536
Increase/(Decrease) in accrued expenses and other
long-term liabilities.................................... 73 (395)
------- -------
Net cash used in operating activities.................... (4,069) (5,287)
Cash flows from investing activities:
Fixed asset purchases..................................... (1,628) (505)
Purchase of investment securities......................... (27,617) (209)
Net increase in loan receivable........................... (5) (2)
------- -------
Net cash used in investing activities..................... (29,250) (716)
Cash flows from financing activities:
Net proceeds from public offering......................... 47,857 --
Capital contributions..................................... 4,079 5,973
Purchase of treasury stock................................ (4) --
Repayment of obligations under capital leases............. (553) (172)
(Repayment of)/proceeds from bank borrowings.............. (23) 209
(Repayment of)/proceeds from loan from shareholder........ (190) 108
------- -------
Net cash provided by financing activities................ 51,166 6,118
------- -------
Net increase in cash and cash equivalents................. 17,847 115
Cash and cash equivalents at beginning of period.......... 2,541 411
------- -------
Cash and cash equivalents at end of period................ $20,388 $ 526
======= =======
See accompanying notes to condensed consolidated financial statements.
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NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Euronet Services Inc. have been prepared from the records of Euronet Services
Inc. and subsidiaries (collectively, the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, such financial statements include all adjustments (consisting only
of normal, recurring accruals) necessary to present fairly the financial
position of the Company at June 30, 1997 and the results of its operations for
the three month and six month periods ended June 30, 1997 and 1996 and its cash
flows for the six months ended June 30, 1997 and 1996. The condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements of Euronet Holding N.V. ("Euronet
N.V.") for the year ended December 31, 1996, including the notes thereto, set
forth in the Company's Form S-1 Registration Statement (No. 33-18121).
The results of operations for the three month and six month periods ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the full year.
NOTE 2 -- INVESTMENT SECURITIES
Significantly all of the investment securities at June 30, 1997 consist of
government debt securities, carried at amortized cost and are due within one
year. In accordance with the provisions of Statement of Financial Accounting
Standards Board No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company classifies its investments as held-to-maturity
securities.
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES
There have been no significant additions to or changes in accounting
policies of the Company since December 31, 1996 except as specified in Note 2
above. For a description of these policies, see Note 2 of Notes to Consolidated
Financial Statements for the year ended December 31, 1996.
NOTE 4 -- NET LOSS PER SHARE
As the capital structure of the Company during 1996 is not indicative of
the capital structure after the initial public offering, pro-forma net loss per
share calculation for the three months and six months ended June 30, 1996 has
been included. The pro-forma number of common and common equivalent shares, as
described in the audited consolidated financial statements of Euronet N.V. for
the year ended December 31, 1996 have been applied to the three month and six
month periods ended June 30, 1996. Common stock equivalents consist of shares
issuable under the Company's stock option plans using the treasury stock
method.
Loss per share for the three month and six month periods ended June 30,
1997 have been computed by dividing net loss by the weighted average number of
common shares outstanding after giving effect to dilutive stock options. The
weighted average number of common shares outstanding assumes that the shares
issued by the Company prior to the date of the initial public offering, being
March 7, 1997, have been outstanding for all periods prior to this date.
NOTE 5 -- INITIAL PUBLIC OFFERING OF COMMON STOCK
On March 7, 1997, the Company consummated an initial public offering of
6,095,000 shares of common stock at a price of $13.50 per share. Of the
6,095,000 shares sold, 3,833,650 shares were sold by the Company and 2,261,350
shares by certain selling shareholders. Net proceeds to the Company were
approximately $47.9 million after deduction of the underwriting discount and
other expenses of the offering.
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NOTE 6 -- SHAREHOLDERS' EQUITY
Effective March 5, 1997, the Company changed the stated par value of all
common and preferred shares of Euronet N.V. from $0.10 to $0.14. Euronet N.V.
then effected a seven-for-one stock split which became effective on March 5,
1997, thus reducing the par value of such shares to $0.02. This change in par
value was retroactively taken into account for common and preferred shares of
Euronet N.V. as at June 30, 1996. Subsequently, effective March 6, 1997, the
holders of all of the preferred shares of Euronet N.V. converted all of such
preferred shares into common shares of Euronet N.V.
The increase in par value from $0.01 to $0.02 and the seven-for-one stock
split have been given retroactive treatment to June 30, 1996.
Pursuant to an Exchange Agreement which became effective on March 6, 1997,
entered into between Euronet Services Inc. and the shareholders and option
holders of Euronet N.V., 10,296,076 shares of common stock in Euronet Services
Inc. were issued to the shareholders of Euronet N.V. in exchange for all the
common shares of Euronet N.V. In addition, options to acquire 3,113,355 shares
of common stock of Euronet Services Inc. were issued to the holders of options
to acquire 3,113,355 common shares of Euronet N.V. and awards with respect to
800,520 shares of common stock of Euronet Services Inc. were issued to the
holders of awards with respect to 800,520 preferred shares of Euronet N.V. in
exchange for all such awards.
On February 3, 1997, the Company signed a Subscription Agreement with
General Electric Capital Corporation ("GE Capital") under which GE Capital
purchased preferred stock of Euronet N.V. for an aggregate purchase price of $3
million. Pursuant to the "claw back" option of this agreement, on June 16,
1997, the Company repurchased 292,607 shares of Euronet Services Inc. at the
original par value.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
Euronet Services Inc. and its subsidiaries (collectively, "Euronet" or the
"Company") are operators of independent shared automatic teller machine (ATM)
networks and are service providers to banks and financial institutions.
Euronet serves a number of banks by providing ATMs that accept cards with
international logos such as VISA, American Express and Mastercard and
proprietary bank cards issued by member banks. The subsidiaries of Euronet
are: Euronet-Bank 24 Rt and SatComNet Kft (Hungary), Bankomat 24/Euronet Sp. z
o.o. (Poland), Euronet Holding N.V. (Netherland Antilles), Euronet Services
GmbH (Germany) and EFT-Usluge d o.o. (Croatia).
The Company was formed and established its first office in Budapest in
July 1994. In May 1995, the Company opened its second office in Warsaw. To
date, the Company has devoted substantially all of its resources to
establishing its ATM network through the acquisition and installation of ATMs
and computers and software for its processing center pursuant to capital leases
and through the marketing of its services to banks and international card
organizations in Hungary, Poland, Germany, Croatia and other regions in Central
Europe.
The Company installed its first ATM in Hungary in June 1995, and at the
end of 1996 the Company had 166 ATMs installed. An additional 216 ATMs were
installed during the first six months of 1997 and at July 31, 1997 the
Company's ATM network consisted of 412 ATMs. Euronet's network consisted of
174 ATMs in Poland, 206 ATMs in Hungary and 2 ATMs in Germany at June 30, 1996.
With the expansion of operations, the Company has increased the number of its
employees in Hungary from 35 at
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June 30, 1996 and 36 at December 31, 1996 to 54 at June 30, 1997. In
Poland, the Company increased the number of its employees from 15 at June 30,
1996 and 21 at December 31, 1996 to 40 at June 30, 1997. The Company's
expansion of its network infrastructure and administrative and marketing
capabilities has resulted in increased expenditures. Further planned expansion
will continue to result in substantial increases in general operating expenses
as well as expenses related to the acquisition and installation of ATMs.
The Company has derived substantially all of its revenues from ATM
transaction fees since inception. The Company receives a fee from the card
issuing banks or international card organizations for ATM transactions
processed on its ATMs. As the Company continues to focus on expanding its
network and installing additional ATMs, the Company expects that transaction
fees will continue to account for substantially all of its revenues for the
foreseeable future. The Company recently began to sell advertising on its
network by putting clients' advertisements on its ATMs and also began
generating revenues from ATM network management services that it offers to
banks that own proprietary ATM networks. Although revenues from these
additional sources have been insignificant to date, the Company believes that
they will increase.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997 COMPARED TO THE QUARTER ENDED JUNE 30, 1996 AND SIX
MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996.
Revenues. Total revenues increased to $1,061,000 for the quarter ended
June 30, 1997 from $170,000 for the quarter ended June 30, 1996 and to
$1,856,000 for the six months ended June 30, 1997 from $270,000 for the six
months ended June 30, 1996. These increases were due primarily to the
significant increase in transaction fees resulting from both the increased
number of ATMs operated by the Company during the periods and the greater number
of credit and debit card holders who were able to use their cards at Euronet's
ATMs. Transaction fee revenue represented approximately 86% of total revenues
for the quarter ended June 30, 1997 and 87% of total revenues for the six months
ended June 30, 1997. This compares to 95% for the year ended December 31, 1996.
Approximately 87% of transaction fees in the quarter ended June 30, 1997 were
attributable to cash withdrawals, and 13% were attributable to balance inquiries
and transactions not completed because authorization was not given by the
relevant card issuer.
Operating expenses. Total operating expenses increased by $1.6 million to
$2.9 million for the quarter ended June 30, 1997 from $1.3 million for the
quarter ended June 30, 1996. For the six months ended June 30, 1997, total
operating expenses increased by $2.8 million to $4.7 million, from $1.9 for the
six months ended June 30, 1996. This increase was due primarily to costs
associated with the installation of significant numbers of ATMs during the
periods and expansion of the Company's operations during the period.
ATM operating costs, which consists primarily of ATM site rentals,
depreciation, installation, maintenance, cash delivery and telecommunications,
increased $666,000 to $965,000 for the quarter ended June 30, 1997 from
$299,000 for the quarter ended June 30, 1996. For the six months ended June
30, 1997 operating costs increased $1.1 million to $1.7 million from $531,000
for the six months ended June 30, 1996. The percentage of ATM operating costs
to total expenses for quarter ended June 30, 1997 increased to 33% as compared
to 23% for the same period in 1996. For the six months ended June 30, 1997 the
percentage of ATM operating costs to total expenses was 35%, compared to 27%
for the same period in 1996. The increase in ATM operating costs was primarily
attributable to costs associated with operating an increased number of ATMs in
the network during the period. The number of ATMs in the network increased
from 68 at June 30, 1996 to 382 at June 30, 1997.
Other operating expenses, which includes salaries, professional fees and
other general and administrative expenses, increased $916,000 to $1.9 million
in the quarter ended June 30, 1997 from $1.0 million for the same period in
1996. For the six months ended June 30, 1997 other operating expenses
8
increased $1.6 million to $3.0 million from $1.4 million for the same period in
1996. This increase was due primarily to the expansion of the Company's
operations during the period in current and new markets, including the increase
in the number of employees in the Company. In Poland the number of employees
increased from 15 at June 30, 1996 to 40 at June 30, 1997. In Hungary, the
number of employees increased from 35 to 54 during the same period. Euronet
also employed 6 individuals in Germany and Croatia who were not employed by
the Company at June 30, 1996. The percentage of other operating costs to total
expenses for quarter ended June 30, 1997 decreased to 67% as compared to 77%
for the same period in 1996. For the six months ended June 30, 1997 the
percentage of other operating costs to total expenses was 65%, compared to 73%
for the same period in 1996.
Other income/expense. Interest income increased $511,000 to $581,000 for
the quarter ended June 30, 1997 from $70,000 for the quarter ended June 30,
1996. Interest income increased $585,000 to $656,000 for the six months ended
June 30, 1997 from $71,000 for the six months ended June 30, 1996. The increase
was due to larger amounts held in interest bearing securities primarily as a
result of investing the proceeds of the public offering. See "--Liquidity and
Capital Resources".
Interest expense, relating principally to capital leases of ATMs and the
Company's computer systems, increased $108,000 to $138,000 for the quarter
ended June 30, 1997 from $30,000 for the quarter ended June 30, 1996. Interest
expense increased $194,000 to $249,000 for the six months ended June 30, 1997
from $55,000 for the six months ended June 30, 1996. This increase was due
primarily to the increase in capital lease obligations for ATMs outstanding
during the period.
Net loss. The Company's net loss increased $0.6 million to $1.6 million,
or $(0.09) per share, during the quarter ended June 30, 1997 from $1.0 million,
or $(0.07) per share, for the quarter ended June 30, 1996 as a result of the
factors previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
On March 7, 1997, the Company consummated an initial public offering of
6,095,000 shares of common stock at the price of $13.50 per share. Of the
6,095,000 shares sold, 3,833,650 shares were sold by the Company and 2,261,350
shares by certain selling shareholders. Net proceeds to the Company were
approximately $47.9 million after deduction of the underwriting discount and
other expenses of the offering. The Company has been using, and intends to
continue using, the proceeds to cover expenditures relating to the expansion
and operation of its ATM network and the provision of ATM management services.
Since its inception, the Company has sustained negative cash flows from
operations and has financed its operations and capital expenditures primarily
through private placements of equity securities and through equipment lease
financing.
The Company had $48.1 million of working capital at June 30, 1997,
including $20.4 million of cash and cash equivalents and $27.8 million of
investment securities. Significantly all of the cash and cash equivalents and
investment securities resulted from the net proceeds from the offering. Cash
has been, and the Company contemplates that it will continue to be, invested in
interest bearing, investment grade securities pending use in the Company's
business.
The Company leases the majority of its ATMs under three principal capital
lease arrangements. The lease arrangements expire in July 1999, January 2001
and June 2002 and bear interest at 15%, 11% and 8%, respectively. As of June
30, 1997 the Company owed approximately $9.7 million under such capital lease
arrangements. The amount owed by the Company under such lease agreements is
expected to increase significantly as the Company continues to lease increased
numbers of ATMs in pursuit of its business strategy.
The Company anticipates that its existing capital resources will be
adequate to satisfy its capital requirements, capital lease payment obligations
and other
9
requirements, including possible acquisitions, until the Company begins to
generate sufficient cash flows to fund its operations. There can be no
assurance, however, that such resources will, in fact, be sufficient or that the
Company will achieve or sustain profitability or generate significant revenues
in the future. It is possible that the Company may seek additional equity or
debt financing in the future.
FORWARD LOOKING STATEMENTS
Statements in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this quarterly report that are not
descriptions of historical fact may be forward looking statements that are
subject to risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors, including but not
limited to, the Company's dependence on the maintenance of its contracts with
banks and international card organizations, dependence on key personnel,
dependence on ATM transaction fees, competition, and political, economic and
legal risks in the markets in which the Company operates.
DISCLOSURES ABOUT NEW ACCOUNTING STANDARDS
SFAS No. 128, "Earnings Per Share", was issued in February 1997. This
Statement simplifies the standards for computing earnings per share previously
found in APB Opinion No. 15, "Earnings Per Share", and makes them more
comparable to international EPS standards. Statement 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition, the
Statement requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This Statement is required to be adopted for the fiscal year ending December
31, 1997. The Company has not yet assessed the impact of Statement 128 on its
financial statements.
INFLATION
Since the fall of Communist rule, both Hungary and Poland have experienced
high levels of inflation and significant fluctuation in the exchange rate for
their currencies. Although revenues generally are received by the Company in
local currency, primarily Hungarian forints and Polish zlotys, the Company's
Card Acceptance Agreements and agreements relating to the provision of ATM
management services generally provide for fees that are denominated in U.S.
dollars or inflation adjusted. A significant portion of the Company's
expenditures, including costs associated with the acquisition of ATMs and
executive salaries, are made in or are denominated in U.S. dollars. A
substantial portion of the assets and liabilities of the Company are also
denominated in U.S. dollars, including fixed assets, shareholders' equity and
capital lease obligations. The Company attempts to match local currency
receivables and payables. Hence, the amount of unmatched assets and liabilities
giving rise to foreign exchange gains and losses is relatively limited. 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.
10
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
11 Earnings Per Share
27 Financial Data Schedule
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 14, 1997 By: /S/ MICHAEL J. BROWN
---------------------------
Chief Executive Officer
August 14, 1997 By: /S/ BRUCE S. COLWILL
---------------------------
Chief Financial Officer
(Principle Financial and Accounting Officer)
12
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
11 Earnings Per Share
27 Financial Data Schedule
1
EXHIBIT 11
COMPUTATION OF PRIMARY EARNINGS PER ORDINARY SHARE
AND ORDINARY SHARE EQUIVALENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED
JUNE 30, 1997
-------------
(UNAUDITED)
Earnings per ordinary share and ordinary share equivalents
Primary
Weighted average ordinary shares outstanding................................... 15,138
Average ordinary share options outstanding (net of repurchased shares under the
treasury stock method)......................................................... 2,400
--------
Weighted average number of ordinary shares and ordinary share equivalents
outstanding.................................................................... 17,538
Net loss....................................................................... $(1,627)
Primary loss per ordinary share and ordinary share equivalent.................. $ (0.09)
========
5
1,000
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
23,903
27,811
455
0
0
53,604
15,283
1,171
68,342
5,554
8,040
300
0
0
54,380
68,342
0
1,856
0
4,677
293
0
249
(2,571)
(129)
(2,442)
0
0
0
(2,442)
(0.15)
0
