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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, 1999
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, 2000, the Registrant had 15,541,956 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 $99.5 million. The
aggregate market value was determined based on the closing price of the Common
Stock on March 1, 1999.
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, 1999, 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" or the "Company") is a leading provider of
electronic financial solutions and transaction processing services. The Company
operates an independent automated teller machine ("ATM") network of over 2,200
ATMs in Europe and the United States, and through its subsidiary, Arkansas
Systems Inc. ("Arksys"), offers a suite of integrated software solutions for
electronic payment and transaction delivery systems. Euronet thus offers
comprehensive electronic payment solutions consisting of ATM network
participation, outsourced ATM management solutions and software solutions. Its
principal customers are banks and other companies such as retail outlets that
require transaction processing services. With eight offices in Europe and three
in the United States, the Company offers its solutions in more than 70 countries
around the world.
The first company in the Euronet group was established in 1994 as a Hungarian
limited liability company. That company commenced operations in June 1995. The
Euronet 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
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
seven European countries and the United States. The Company had 53, 166, 693,
1,271 and 2,283 ATMs in operation at December 31, 1995, 1996, 1997, 1998 and
1999, respectively. Of the 2,283 ATMs in operation on December 31, 1999, 69% are
owned by Euronet as part of its proprietary network, and 31% are customer-owned
and operated by Euronet under outsourcing agreements. The Company owns or
operates ATMs in Hungary, Poland, Germany, Croatia, the Czech Republic, France,
the United Kingdom and the United States.
On December 2, 1998, the Company acquired Arksys, 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 is now 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
heavily in Arksys's 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.
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'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 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 intends to provide additional services such as POS terminal
management, internet banking and mobile banking. These services will be
supported using Arksys software products.
Arksys software solutions have been a major contributor to the Company's revenue
growth in 1999. While sales were impacted by concerns over the Year 2000 issues,
the Company has made significant progress in reducing software delivery times
and adding resources to enhance and expand its software products. Arksys
software products are now an integral part of the Company's product lines and
its investment in delivery and customer support reflect its ongoing commitment
to an expanded customer base. The Company is currently developing a number of
new products and services for its bank customers, including in particular a set
of wireless banking products which will permit various financial transactions to
be make from handheld devices, such as mobile telephones. The Company expects to
have the first of these products available for installation at the end of the
second quarter, 2000.
The Company has developed its business around two integrated service segments:
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ATM network services and outsourced ATM management (the "ATM Services Segment")
and Arksys software solutions (the "Arksys 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 will allow the Company to provide
bank customers the choice of completely outsourcing their "front-end" business
to the Company, using the Company's Arksys software to manage their transaction
networks in-house, or utilizing a tailor-made mixture of outsourcing and in-
house capabilities.
ATM Services Segment
Network Operation Overview
At December 31, 1999 and 1998 the Company operated 2,283 and 1,271 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 112% from 15.5 million transactions in 1998 to 32.9 million transactions in
1999. Revenue sources also include advertising revenue and outsourced management
revenue, which is revenue from operating ATMs that are not owned by the Company
or are owned by the Company under agreements that provide for guaranteed monthly
fees. The number of ATMs operated under outsourced management agreements
increased 269%, from 191 at December 31, 1998 to 705 at December 31, 1999.
ATM network growth in 1999 is attributable to organic growth in its established
markets (in particular Poland), roll out of ATMs in France and the United
Kingdom and growth through acquisition in the United States and Germany.
In March 1999, the Company signed an agreement with Service Bank GmbH & Co. KG
("Service Bank") to acquire 252 installed ATMs in Germany and 35 ATMs in
inventory. The purchase price for this established ATM network was 12.2 million
Deutsche Marks (USD 6.7 million). Under the agreement, Euronet 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 Euronet on January 1, 1999, and revenues and
expenses from the operation of the ATM network began accruing to Euronet on that
date. The revenues generated from these additional ATMs combined with Euronet's
existing German network made Germany the Company's largest market in terms of
ATM revenues for the year ended December 31, 1999.
In 1999, revenues under the Service Bank contract were $11.2 million, and they
accounted for approximately 42% of the total revenues of the ATM Services
Segment. However, Service Bank essentially acts as a sponsor bank to Euronet
under such contract with respect to Euronet's ATMs in Germany, and Euronet is
confident, based on active discussions with other banks in Germany and its
experience in other markets, that it would be possible to replace Service Bank
as a sponsor bank on terms that are comparable to those of the Service Bank
contract if the Service Bank contract were terminated. As a result, the Company
does not consider that the loss of the Service Bank contract would have a
material adverse effect on the results of the ATM Services Segment or the
Company. However, if for some reason the Company were not able to replace
Service Bank as a sponsor bank, the loss of the Service Bank contract could have
a material adverse affect on the results of the ATM Services Segment and the
Company.
In August 1999, the Company purchased a 66 2/3% interest in EFT Network Services
LLC ("Dash"). The Company previously held a 33 1/3% interest in Dash. The
purchase price for the remaining 66 2/3 % interest was $800,000, payable in 24
equal monthly installments. Accordingly, the results of operations are included
beginning July 1, 1999. Dash operated 112 ATMs at the time of this acquisition.
During the third quarter, 1999, the Company signed a turnkey contract for the
installation and operation of 334 ATMs with Dillard's Department Store, which
will be performed by Dash.
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
3
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's ATMs is less
than the fee charged by Euronet to the card issuer. The Company itself does not
charge cardholders a fee for using its ATMs, except in the UK, where there is
surcharge fee of one British 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 network
are not billable to banks, and these have been excluded for reporting purposes.
The average number of transactions processed each month at Euronet's ATMs over
its entire network increased on average approximately 26% per month in 1996, 13%
in 1997, 7% in 1998 and 7% in 1999. The number of transactions processed grew
from approximately 1.9 million in January 1999 to approximately 3.9 million in
December 1999, totaling approximately 32.9 million transactions for the year.
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, depending upon the market, after
installation as consumers become familiar with the location of the machine.
Because the Company is continuing to build out its ATM network, the number of
newly installed machines is relatively high in proportion to older machines. The
Company anticipates that the number of transactions per machine will increase as
the network matures and card issuance continues.
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.
Delivery of Other Products and Services
The Euronet Network constitutes a distribution network through which financial
and other products or services may be sold at a low incremental cost. The
Company is developing added value services in addition to basic cash withdrawal,
balance inquiry and GSM telephone voucher transactions (such as bill payment and
"mini-statements") and will implement additional services as markets develop.
In November 1999, the Company began to sell pre-paid mobile telephone vouchers
on its networks in Hungary and Poland. 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'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 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.
The Company is currently developing a number of new products and services for
its bank customers, including in particular a set of wireless banking products
which will permit various financial transactions to be made from hand held
devices, such as mobile telephones. The Company expects to have the first of
these products available for installation at the end of the second quarter,
2000.
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 to
receive transaction authorization directly from the card issuing bank or
International Card Organization. Card Acceptance Agreements generally provide
4
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 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 Service Bank in Germany 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 ATM management services to banks and other
organizations that operate their own ATM networks. The ATM management services
provided by the Company include management of an existing bank network of ATMs
or development of new ATM networks on a complete turn-key basis. These services
include 24-hour monitoring from the Company's processing center 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 ATM management
services ("ATM Management Agreements") provide additional revenue with lower
incremental cost.
The Company's ATM Management Agreements, other than in Germany, provide for
fixed monthly management fees plus 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 ATM Management
Agreement in Germany are purely transaction based and include no fixed
component.
Major ATM Management Agreements signed in 1999 include the turn-key solution for
the installation and operation of 334 ATMs in Dillard's Department Stores
throughout the U.S. and a fifteen year comprehensive service agreement with
Raiffeisenenbank Austria d.d. of Zagreb, Croatia ("RBA") for the operation of 80
ATMs sold by Euronet to RBA.
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 Arksys software, and is intended to permit banks to
rapidly implement card issuance programs. In exchange for a fee, Euronet 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's Arksys network software and facilitates
acceptance on the Euronet network of transactions by the cards issued in
connection with 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's network.
In December 1999, the Company launched a "Diamond Link" service with ABN AMRO
in the Czech Republic. This service provides new Visa charge card outsourcing
and is a comprehensive solution which performs Visa charge card issuance,
transaction authorization and processing, and account reconciliation functions
for ABN AMRO's corporate clients. Euronet also began ATM management outsourcing
services for ABN AMRO in December 1999.
Cost of ATM Operation
The components of direct operating costs of ATMs for the years ended December
31, 1999 and 1998 were:
5
1999 1998
------------ --------------
(in thousands)
ATM communication $ 3,982 $ 3,323
ATM cash filling and interest on network cash 5,900 2,415
ATM maintenance 2,967 1,538
ATM site rental 2,421 915
ATM installation 783 722
Transaction processing and ATM monitoring 4,205 -
Other 1,663 1,138
----------- ----------
TOTAL $ 21,921 $ 10,051
=========== ==========
Beginning in January 1999, inter-company allocations were made to charge the ATM
operations with transaction switching and bank connection fees associated with
the operations' central processing center in Budapest, Hungary. These
allocations totaled $2.9 million for the year ended December 31, 1999.
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 were justified, in part, because while all ATM subsidiary operations
require the services of a processing center to route transactions, some
subsidiary operations such as Hungary and Poland, 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 ATM 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. While Euronet
is expanding its network, the cost of ATM operation is high relative to
transaction revenue. As the number of cards issued by banks increased in Central
Europe, local economic development accelerated, and new ATMs began to mature,
the proportion of revenue consumed by the cost of operating ATMs reduced.
Direct operating costs as a percentage of ATM network revenue decreased from 87%
in 1998 to 83% in 1999. If the processing center allocation is excluded from the
1999 direct costs the figure is 72% which is a 15 percentage point improvement
over the 1998 comparable figure. 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.
Arksys Software Solutions
Arksys Background
On December 2, 1998, the Company completed the acquisition of Arksys, the key
upstream software provider to Euronet's ATM transaction processing center in
Central Europe. Previously, Arksys 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 Arksys in 1975.
Arksys 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., Arksys developed
software and implemented solutions for such connections and implemented a card
management system. Through the 1980's and 1990's, Arksys 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 Arksys software systems. Arksys 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, Arksys 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, Arksys has begun to expand into the
supply of software services for large mainframe operations. Competition for
Arksys 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
Arksys 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
6
banking, kiosks, and workstation authorization. These systems provide a
comprehensive solution for ATM, debit or credit card management and bill payment
facilities. Arksys 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 five 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 ATM services and Arksys software solutions has positioned
the Company uniquely among its competitors. Furthermore the vertical integration
of software vendor and outsourced management services provider enhances the
Company's ability to meet its customers varied requirements.
Significant resources have been invested in increasing the delivery pipeline 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 Arksys products, particularly in Central
Europe and other emerging markets.
Arksys Software Solutions Segment Revenue
Arksys Software Solutions Segment revenue is derived from three main sources:
software licence fees, professional service fees and software maintenance fees.
Software licence fees are the initial fees charged by Arksys for the licencing
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 Arksys software products.
The Arksys Software Solutions Segment revenue for the year ended December 31,
1999 was approximately $15 million of which software licence fees accounted for
16%, professional service fees accounted for 55% and software maintenance fees
accounted for 26%. The remaining 3% 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.
The Company experienced a slow down in sales in the last quarter of 1999 due to
many banks instituting system freezes in anticipation of the advent of the year
2000. This slow down in sales has continued into the first quarter of 2000 but
is expected to abate as banks return to normal spending levels.
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, 1998 the revenue backlog was $2.3 million and at December 31, 1999 the
revenue backlog was $3.1 million. The increase in backlog results principally
from growth in Arksys sales since the acquisition. 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 believes in 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. This includes, but not
limited to, bill payment and presentment, telephone banking products,
applications for wireless application protocol ("WAP") enabled customer touch
points and internet banking solutions as well as significant improvements to
core software products.
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The Company's research and development costs incurred for computer products to
be sold, leased or otherwise marketed totaled $3.2 million for 1999. Of this
total figure, $322,000 was capitalized 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.
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, 1999
except a commitment in the UK to purchase 554,000 British Pounds ($896,000) of
machines from NCR. Because Euronet is one of the largest purchasers of new ATMs
in Europe, 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 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's ATMs are more technologically advanced and more
adaptable than many older ATMs in use in more 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's
processing center through satellite or land-based telecommunications. Because
the Company strives to ensure very high levels of reliability for its network,
it relies primarily on satellite telecommunications for ATM connections to its
processing center in Europe. Except in Germany, France and the UK, all ATMs in
the network are linked through VSAT telecommunications to the processing center
in Budapest, and 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, 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 the Budapest Processing Center. It is
located in Euronet's Budapest office, is staffed 24 hours a day, seven days a
week and consists of two production IBM AS/400 computers which run the Arksys
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 Arksys 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'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 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 then three hours.
8
The Company has a second processing center in Little Rock, Arkansas. This center
processed transactions for approximately 459 ATMs in the U.S. as of December 31,
1999. The hardware used in the operations in Little Rock serve as a disaster
recovery center for the Company's Budapest processing center.
Competition
ATM Services Segment
Euronet's principal ATM 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 ATM services business include network availability and response
time, price to both the bank and to its customers, ATM location and access to
other networks.
Arksys Software Solutions
Competitors of the Arksys Software Solutions Segment compete primarily in the
following three areas: (i) ATM, network and point-of-sale software systems, (ii)
internet banking software systems and (iii) credit card 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's principal competitor with respect to credit card software systems is
PaySys International Inc., based in Orlando, Florida. Competitive factors in the
Arksys 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'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 Arksys'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, 1999 and December 31, 1998, the Company and its subsidiaries
had 412 and 331 employees, respectively.
The Company has a European head office organization, European software delivery
and support center and European processing center in Budapest, Hungary. It has
also established a corporate office 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
9
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 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, therefore, may not operate its own ATM network in
Germany and must act, under its agreement with Service Bank, as a subcontractor
providing certain ATM-related services to Service Bank. As a result, the
Company's activities in the German market currently are entirely dependent upon
the continuance of the agreement with Service Bank, or the ability to enter into
a similar agreement with another bank in the event of a termination of such
agreement. As part of the recent ATM acquisition from Service Bank the term of
that agreement was extended to December 31, 2003. The inability to maintain such
agreement or to enter into a similar agreement with another bank upon a
termination of the agreement with Service Bank 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 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. A single currency across 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 does not hold the Euronet trademark in Germany, France or certain
other Western European countries due to prior registrations by other Companies.
For the time being, the Company does not "brand" ATMs or otherwise use the
Euronet trademark in these countries, except as permissible as a corporate name.
The Company is developing an alternative trademark and corporate identity for
European countries in which the Euronet name is not available and non-European
countries.
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 43 June 1994 Chairman, President and Chief Executive Officer
Daniel R. Henry 34 June 1994 Director, Chief Operating Officer
Daniel Stevens 43 April 1999 Chief Financial Officer and Chief Accounting Officer
Jeffrey B. Newman 45 January 1997 General Counsel
Anthony M. Ficarra 58 January 1998 Chief Information Officer
Ronald Ferguson 50 December 1998 Executive Vice President
10
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. 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 2000. Mr.
Henry is married to the sister of Mr. Brown's wife.
Daniel Stevens joined the company as CFO effective April 20, 1999. From June
1998 until the date he joined the Company, Mr. Stevens was a partner in Rochdale
Principals, an agricultural finance venture. From January 1997 to June 1998, he
was Senior Vice-President, Chief Financial and Risk Officer for U.S. Central
Credit Union, the principal financial intermediary and technology, operational
and payment provider for the U.S. credit union industry. Mr. Stevens held
various positions with ABN AMRO in their North American headquarters from
November 1993 until January 1997; his final position was Senior Vice President
and Chief Financial Officer, USA. Prior to that, he was First Vice President and
Chief Financial Officer of the US operations of Caisse Nationale de Credit
Agricole. Mr. Stevens started his financial career with Arthur Andersen & Co.,
Chicago. He holds a B.A. in English/Communications from Loyola University and a
M.S.A. from DePaul University. Mr. Stevens is a Certified Public Accountant.
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.
Anthony M. Ficarra joined the company as Chief Information Officer in January
1998. Prior to this, he was with Bisys Inc. from 1983 to 1997 as Director
National Operations (Banking), Vice-President (Electronic Financial Services),
Eastern Region General Manager, and finally Senior Vice President/Chief
Information Officer. From 1971 to 1983, he worked with Tymshare Inc. with the
final post of Regional Vice President of the Dynatax Division. From 1969 to
1971, he was with Brandon Applied Systems in the final post of Executive Vice
President/General Manager. He also previously worked with Thiokol Chemical
Corporation from 1962 to 1966. Mr. Ficarra has a B.B.A. in Management from
Florida International University.
Ronald Ferguson joined the Company as President of Arksys 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
11
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 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.
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 has
been listed 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
------- ---- ---
1999 Fourth 7.56 2.25
Third 3.38 2.00
Second 2.56 1.81
First 3.13 2.50
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, 1999, there were approximately 103 record holders of
the Common Stock.
Private Placement. On February 25, 2000, the Company entered into subscription
agreements for the sale of an aggregate of 650,000 new common shares of the
Company for a price of $6.615. The Company is in active discussions with another
private placement investor to subscribe for an additional 500,000 common shares
on the same terms and expects execution of an agreement relating to such
placement by March 15. These agreements were signed with certain accredited
investors and foreign persons in transactions exempt from registration under the
United States Securities Act of 1933 (the "Act") pursuant to exemptions under
Section 4(2) and Regulation D and Regulation S of the Act. Closing is expected
to occur on March 15, 2000 with respect to the 650,000 shares for which
subscription agreements have already been executed and on March 31 with respect
to the additional 500,000 shares with respect to which the subscription
agreement is not yet executed. If such transactions are closed as expected, the
transactions will generate $7,607,250 in net proceeds to the Company. Under each
of these agreements, for each two shares of common stock purchased in the
private placement, the purchaser will be issued a warrant, exercisable upon
issuance and expiring 12 months from the date of the signature of each
agreement, to purchase one share of Euronet common stock at an exercise price of
$11.615. (See Note 28 to the Consolidated Financial Statements -
12
Subsequent Event included in Part II, item 8, Financial Statements and
Supplementary Data).
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,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
Consolidated Statements of Operations Data: (in thousands, except for share and per share data)
Revenues:
ATM network and related revenue $ 26,503 $ 11,525 $ 5,290 $ 1,261 $ 62
Software and related revenue 14,969 356 - - -
Total revenues ---------- ---------- ----------- ------- ---------
41,472 11,881 5,290 1,261 62
Operating expenses:
Direct operating costs 22,830 10,036 3,717 827 414
Salaries and benefits 24,350 9,723 3,796 989 452
Selling, general and administrative 10,725 8,650 4,468 2,459 1,032
Depreciation and amortization 10,238 4,955 1,731 481 133
In-process research and
development write-off - 1,020 - - -
Share compensation expense 127 108 108 4,172 -
---------- ---------- ----------- ------- ---------
Total operating expenses 68,270 34,492 13,820 8,928 2,012
---------- ---------- ----------- ------- ---------
Operating loss (26,798) (22,611) (8,530) (7,667) (1,950)
Other income/expenses:
Interest income 1,950 2,514 1,609 225 126
Interest expense (10,899) (7,826) (1,152) (378) (107)
Foreign exchange (loss)/gain, net (2,110) (1,911) 8 (79) (158)
---------- ---------- ----------- ------- ---------
Loss before income tax benefit/(expense) (37,857) (29,834) (8,065) (7,899) (2,089)
4,182 (1,430) 100 323 148
---------- ---------- ----------- ------- ---------
Loss before extraordinary item (33,675) (31,264) (7,965) (7,576) (1,941)
Extraordinary gain, net 2,760 2,889 - - -
---------- ---------- ----------- ------- ---------
Net loss $ (30,915) $ (28,375) $ (7,965) $(7,576) $ (1,941)
========== ========== =========== ======= =========
Loss per share - basic and diluted:
Loss before extraordinary item $ (2.21) $ (2.06) $ (0.64) $(15.18) $ (4.00)
Extraordinary gain $ 0.18 $ 0.19 - - -
---------- ---------- ----------- ------- ---------
Net loss $ (2.03) $ (1.87) $ (0.64) $(15.18) $ (4.00)
========== ========== =========== ======= =========
Weighted average number of shares outstanding 15,252,030 15,180,651 $12,380,962 499,100 423,324
========== ========== =========== ======= =========
14
As of December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ---------- --------- -----------
(in thousands, except Summary Network Data)
Consolidated Balance Sheet Data:
Cash and cash equivalents: $ 15,037 $ 55,614 $ 7,516 $ 2,541 $ 411
Restricted cash 10,929 12,972 847 152 952
Investment securities 750 3,149 31,944 194 -
Other current assets 13,068 10,295 2,504 605 466
----------- ---------- --------- -------- ---------
Total current assets 39,784 82,030 42,811 3,492 1,829
Net property, plant and equipment 36,693 33,182 24,088 7,284 2,518
Other long-term assets 20,367 18,226 3,134 1,158 172
----------- ---------- --------- -------- ---------
Total assets $ 96,844 $ 133,438 $ 70,033 $ 11,934 $ 4,519
=========== ========== ========= ======== =========
Current liabilities $ 26,938 $ 18,739 $ 9,315 $ 2,861 $ 1,303
Obligations under capital leases,
excluding current installments 6,397 6,809 11,330 3,834 1,119
Notes payable 72,800 83,720 - - -
Other long-term liabilities 202 - 169 103 -
----------- ---------- --------- -------- ---------
Total liabilities 106,337 109,268 20,814 6,798 2,422
Total stockholders' (deficit)/equity (9,493) 24,170 49,219 5,136 2,097
----------- ---------- --------- -------- ---------
$ 96,844 $ 133,438 $ 70,033 $ 11,934 $ 4,519
=========== ========== ========= ======== =========
Summary Network Data:
Number of operational ATMs at end of
period 2,283 1,271 693 166 53
ATM transactions during the period 32,938,000 15,467,000 5,758,000 1,138,000 45,000
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ----------------------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
General Overview
Euronet is a provider of end-to-end electronic payment solutions and transaction
processing for retail banks and other companies. The Company operates an
independent automated teller machine ("ATM") network in Europe and owns Arksys,
a software company that specializes in electronic payment and transaction
delivery systems. Together with Arksys, Euronet offers electronic payment
solutions consisting of ATM network participation and outsourced ATM network
management solutions, and comprehensive software solutions to retail banks and
other companies around the world.
Euronet and its subsidiaries operate in two business segments: (1) a segment
providing an independent shared ATM network and related ATM services to banks
and financial institutions (the "ATM Services Segment"); and (2) a segment
producing application software for payment and transaction delivery systems (the
"Arksys Software Solutions Segment"). These business 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"). (See Note 17 to the Consolidated Financial
Statements - Business segment information.)
Until December 1998, Euronet had devoted substantially all of its resources to
establishing and expanding its ATM network through the addition of ATMs to its
proprietary network and through providing outsourced management solutions for
bank-owned ATMs. On December 2, 1998, the Company acquired Arksys and for the
year ended December 31, 1999, a significant portion of the Company's revenues
and expenses resulted from and are attributable to Arksys operations.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND
1997
The Company's total revenues increased to $41.5 million for the year ended
December 31, 1999 from $11.9 million for the year ended December 31, 1998 and
$5.3 million for the year ended December 31, 1997. The increase in revenues from
1998 to 1999 is primarily due to two factors: (1) a $15.0 million increase in
ATM 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 Arksys Software Solutions
Segment revenues. The increase in revenues from 1997 to 1998 was due primarily
to a $6.2 million increase in ATM Services Segment revenues due to an increase
in transaction volume attributable to additional network connections to credit
and debit card issuers. Revenues for the years ended December 31, 1999 and 1998
are discussed more fully in the Segment Results of Operations sections below.
Total operating expenses increased to $68.3 million for the year ended December
31, 1999 from $34.5 million for the year ended December 31, 1998 and $13.8
million for the year ended December 31, 1997. The increase from 1998 to 1999 can
be broken down by segment as follows: (1) a $13.0 million increase in ATM
Services Segment operating costs, (2) the addition of $19.6 million of Arksys
Software Solutions Segment operating costs, and (3) a $1.2 million increase in
Corporate Services Segment operating costs. The increase from 1997 to 1998 is
due to increased expenditures resulting from the expansion of the ATM network
operations. Operating expenses for the years ended December 31, 1999 and 1998
are discussed more fully in the Segment Results of Operations sections below.
The Company generated an operating loss of $26.8 million for the year ended
December 31, 1999 compared to operating losses of $22.6 million for the year
ended December 31, 1998 and $8.5 million for the year ended December 31, 1997.
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 ATM
Services Segment; (2) the addition of $4.8 million in operating losses from the
Company's Arksys Software Solutions Segment; and (3) a $1.3 million increase in
operating losses from the Company's Corporate Services Segment. The increase
from 1997 to 1998 is due to increased expenditures resulting from the expansion
of the ATM network operations. The results of segment operations expenses for
the years ended December 31, 1999 and 1998 are discussed more fully in the
Segment Results of Operations section below.
SEGMENT RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(In thousands) Revenues Operating Loss
Year ended December 31, 1999 1998 1999 1998
- -------------------------------- -------------- -------------- ---------------- ----------------
ATM Services $ 26,503 $ 11,525 $ (12,907) $ (14,825)
Arksys Software Solutions 15,149 371 (7,141) (2,300)
Corporate Services - - (6,750) (5,486)
Inter segment eliminations (180) (15) - -
----------- ------------ ------------- -------------
Total $ 41,472 $ 11,881 $ (26,798) $ (22,611)
16
ATM SERVICES SEGMENT OVERVIEW
The Company operates the only independent, non-bank owned automated teller
machine ("ATM") network in Central and Western Europe, as a service provider to
banks and other retail oriented financial institutions. The ATM Services
Segment's principal source of revenue to date has been transaction and service
fees from a growing number of ATMs installed in Hungary, Poland, the Czech
Republic, Croatia, France, Germany, and the UK.
On March 26, 1999, the Company expanded its proprietary network in Germany by
acquiring a network of 252 installed ATMs and 35 ATMs in inventory from Service
Bank GmbH & Co. KG ("Service Bank").
On August 13, 1999, the Company purchased a 66 2/3% interest in EFT Network
Services LLC ("Dash") located in Little Rock, Arkansas, USA. The Company had
previously owned 33 1/3% of Dash as a result of its acquisition of Arksys on
December 2, 1998. The Company now owns 100% of Dash. (See Note 5 to the
Consolidated Financial Statements - Acquisitions.)
Dash is an ATM switch-processing center. The current operations of Dash include
processing transactions for approximately 459 customer-owned ATMs. In addition,
Dash provides a platform for offering ATM and related processing services to
potential bank and non-bank customers in the United States.
During the third quarter of 1999, the Company expanded its outsourced management
solutions business in the U.S. by executing a contract which provided for the
sale of 334 ATMs to Dillard's Department Stores and the operation of such ATMs
by the Company under a service agreement. The ATMs were sold to Dillard's under
a value-added reseller agreement with the manufacturer of the machines. The
Company arranged for the sale, delivery and installation of 22 ATMs in August
1999, 204 ATMs in September 1999 and 124 ATMs in October 1999, recording
hardware revenues of $340,000, net of all costs. The company will operate these
ATMs from the Dash switch-processing center in Little Rock.
During the fourth quarter of 1999, the Company completed the sale of its
Croatian network assets to Raiffeisenbank Austria ("RBA") for consideration of
$2.7 million. The carrying value of the Croatian network 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. (See Note 26 to the Consolidated Financial Statements - Sale of Croatian
Network.)
As of December 31, 1999, the Company owned or operated 2,283 ATMs, of which 69%
were owned by the Company and 31% were owned by banks and financial institutions
but operated by the Company through management agreements as a part of the
Company's outsourced management solutions business. By comparison, as of
December 31, 1998, the Company's proprietary ATM network totalled 1,271 ATMs, of
which 86% were owned by the Company and 14% were owned by banks and financial
institutions. The Company believes the shift from a largely proprietary,
Euronet-owned ATM network to a more balanced mix between proprietary ATMs and
customer-owned ATMs is an extremely positive development and will provide
substantially higher marginal returns on investments.
The ATM Services Segment derives substantially all of its revenues from ATM
transaction fees. The Company receives a fee from the card issuing banks or
International Card Organizations for ATM transactions processed on its ATMs. The
Company continues to focus on expanding its network and installing additional
ATMs, especially ATMs installed as part of the outsourced management solutions
business where contracts may include flat monthly management fees or minimum
transaction guarantees. The Company expects that transaction fees will continue
to account for a substantial proportion of its ATM Services Segment revenues for
the foreseeable future even as its outsourced management solutions business
expands.
The transaction volumes processed on an ATM in any given market are affected by
a number of factors, including location of the ATM and the amount of time the
ATM has been installed at the location. The Company's experience has been that
the number of transactions on a newly installed ATM is initially very low and it
takes approximately three to twelve months after installation to achieve average
transaction volumes for that market. Accordingly, the average number of
transactions, and thus revenues, per ATM are expected to increase as the
percentage of mature ATMs operating in the Company's network increases.
The Company has expanded its outsourced management solutions to include not only
the operation of existing ATMs owned by banks, but also the installation and
management of Company-owned ATMs for banks in their branches or off-site
locations. Both types of outsourced management agreements involve the operation
of ATMs in return for monthly management fees or a guaranteed monthly level of
transaction fees, ensuring a certain level of return for the Company. The
Company believes that revenues from these services will continue to increase in
the future.
The Company sells advertising on its network by displaying clients'
advertisements on its ATM screens and receipts. The Company believes that
advertising revenues may increase as it expands its network and continues to
market this service. In November 1999, the Company began to sell pre-paid mobile
telephone vouchers on its networks in Hungary and Poland. This represents just
one of the many new products and services that can be delivered to the consumer
through the ATM. The Company intends to implement further value-added services
on its ATM network.
17
ARKSYS SOFTWARE SOLUTIONS SEGMENT OVERVIEW
Arksys is a leading provider of electronic payment software solutions for the
IBM AS/400 platform, one of the major hardware options for retail banks. Arksys
software performs a number of retail banking functions including payment and
transaction delivery for ATM systems, financial transaction processing, credit
and debit card management, POS transaction processing, comprehensive card and
client management, Internet and PC banking, and other means of electronic funds
transfer ("EFT").
Arksys's primary software solution is the Integrated Transaction Management
("ITM") product, a suite of payment and transaction functions designed to
support virtually every aspect of retail financial transaction delivery. The
core systems of ITM 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. Arksys 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
five countries in Europe.
While the traditional target market for Arksys has been retail banks, the
Company expects to seek other retail customers who require EFT solutions and who
would benefit from the installation of Arksys's integrated suite of products.
Software solutions developed by Arksys are currently used by more than 160
retail banks and other companies in over 60 countries, including the Company's
own transaction processing centers located in Budapest, Hungary and Little Rock,
Arkansas, USA.
CORPORATE SERVICES SEGMENT OVERVIEW
The Corporate Services Segment exists solely to support the activities of the
ATM Services and Arksys Software Solutions Segments. This segment performs
general corporate, administrative and support functions including legal,
corporate finance, treasury, investor relations and corporate communications
services.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
ATM SERVICES SEGMENT
Total segment revenues increased by $15.0 million or 130% to $26.5 million for
the year ended December 31, 1999 from $11.5 million for the year ended December
31, 1998. The increase in revenues is due primarily to the significant increase
in transaction volume attributable to additional network connections to credit
and debit card issuers and an increase in the number of ATMs operated by the
Company during these periods. The Company had 1,271 ATMs installed as of
December 31, 1998, and processed 15.5 million transactions for the year ended
December 31, 1998. As of December 31, 1999, the Company's proprietary ATM
network increased by 1,012 ATMs, or 80%, to a total of 2,283 ATMs, of which 69%
are owned by the Company and 31% are owned by banks or other financial
institutions but operated by the Company through management agreements. The
Company processed 32.9 million transactions for the year ended December 31,
1999, an increase of 17.4 million transactions, or 112%, over the year ended
December 31, 1998.
Transaction fees charged by the Company vary for the three types of 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.
Operating Expenses
Total segment operating expenses increased to $39.4 million for the year ended
December 31, 1999 from $26.4 million for the year ended December 31, 1998. The
increases are due primarily to costs associated with the installation of
significant numbers of ATMs and expansion of the Company's operations during the
period.
Direct operating costs in the ATM 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 $21.9 million for the year
ended December 31, 1999 from $10.1 million for the year ended December 31, 1998.
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
$2.9 million for the year ended December 31, 1999. Previously these costs were
not allocated as a direct operating cost but were included as a component of
selling, general and administrative costs. Direct operating costs include a
$657,000 gain realized in 1999 from the sale of the Croatian network assets to
Raiffeisenbank Austria (see Note 26 to the Consolidated Financial Statements -
Sale of Croatian Network). The components of direct operating costs for the
years ended December 31, 1999 and 1998 were:
18
(in thousands) Years ending
December 31,
1999 1998
----------------------------------------
ATM communication $ 3,982 $ 3,323
ATM cash filling and interest on network
cash 5,900 2,415
ATM maintenance 2,967 1,538
ATM site rental 2,421 915
ATM installation 783 722
Transaction processing and ATM monitoring 4,205 -
Other 1,663 1,138
------------ ------------
Total direct operating expenses $ 21,921 $ 10,051
============ ============
As a percentage of ATM network revenue, direct operating costs fell from 87% for
the year ended December 31, 1998 to 83% for the year ended December 31, 1999. If
the internal processing center charge is removed the comparable figure for 1999
falls to 72%.
Segment salaries and benefits increased to $7.2 million for the year ended
December 31, 1999 from $6.1 million for the year ended December 31, 1998. 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 ATM Services Revenue, salaries and benefits fell from 53% for
the year ended December 31, 1998 to 27% for the year ended December 31, 1999.
Selling, general and administrative costs allocated to the ATM Services Segment
decreased to $2.9 million for the year ended December 31, 1999 from $5.5 million
for the year ended December 31, 1998. The cost decrease for the year ended
December 31, 1999 results from the net effect of (1) a $2.9 million allocation
of costs from the selling, general and administrative line of the Budapest
processing center to the operating cost line, as discussed above, and (2) a
$300,000 increase in costs associated with the expansion of the Company's
network operations.
Depreciation and amortization increased to $7.4 million for the year ended
December 31, 1999 from $4.7 million for the year ended December 31, 1998. The
increases are due primarily to the increase in the number of owned ATMs as
discussed previously.
Operating Loss
The ATM Services Segment operating loss decreased to $12.9 million for year
ended December 31, 1999 compared to $14.8 million for the year ended December
31, 1998, as a result of the factors discussed above.
Arksys SOFTWARE SOLUTIONS SEGMENT
Arksys was acquired by the Company on December 2, 1998. Financial information
for the full year ended December 31, 1998 is not available in a form that is
comparable to the Company's Arksys information, and 1998 information is
therefore not provided.
Arksys Software Solutions Revenue
Revenues from the Arksys Software Solutions Segment totaled $15.1 million before
inter-segment eliminations for the year ended December 31, 1999. Arksys
revenues are grouped into four broad categories: software license fees,
professional service fees, maintenance fees and hardware sales. Software licence
fees are the initial fees charged by Arksys for the licencing 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 Arksys software products. Hardware sales revenues are derived
from the sale of computer products and are reported net of cost of sales. For
the year ended December 31, 1999, revenues from the four categories were as
follows: software license fees ($2.4 million), professional service fees ($8.3
million), maintenance fees ($4.1 million) and hardware sales ($400,000).
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, 1998 the
revenue backlog was $2.3 million, at March 31, 1999 the revenue backlog was $5.3
million, at June 30, 1999 the revenue backlog was $3.7 million, at
19
September 30, 1999 the revenue backlog was $2.6 million, and at December 31,
1999 the revenue backlog was $3.1 million. The increase in backlog from December
31, 1998 results principally from growth in Arksys sales since the acquisition.
The decrease in backlog from March 31, 1999 and June 30, 1999 can be attributed
to the Company's efforts towards accelerating the delivery of software, in
addition to a slower rate of purchasing by banks as they allocated resources to
short term operational issues related to Year 2000 compliance. The Company
expects this factor may negatively impact recognized revenue in the first
quarter and into the second quarter of 2000. 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 actual revenues will be generated
within the one-year period.
Operating Expenses
Arksys Software Solutions Segment operating expenses consist primarily of
salaries and benefits, selling, general and administrative, and depreciation and
amortization. Operating expenses totaled $22.3 million for the year ended
December 31, 1999.
Since the acquisition of Arksys in December 1998, the Company has made planned
increases in Arksys's 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
at Arksys, which has contributed to the net losses of the Arksys Software
Solutions Segment for the year ended December 31, 1999.
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. The
Company's research and development costs incurred for computer products to be
sold, leased or otherwise marketed totaled $3.2 million for 1999. Of this total
figure, $322,000 was capitalized 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 Arksys Software Solutions Segment incurred an operating loss of $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 $6.8 million
for the year ended December 31, 1999 from $5.5 million for the year ended
December 31, 1998. 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 $2.0 million for the year ended December 31, 1999
from $2.5 million for the year ended December 31, 1998, and increased from $1.6
million for the year ended December 31, 1997. 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. The increase from 1997 to 1998 is the
result of increased investing activities related to the proceeds from the
Company's Notes Payable.
Interest Expense
Interest expense increased to $10.9 million for the year ended December 31, 1999
from $7.8 million for the year ended December 31, 1998, and from $1.2 million
for the year ended December 31, 1997. The increase 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 and none in 1997. The increase from 1997 to 1998 is the result
of accretion of the Company's Notes Payable.
Foreign Exchange Gain/Loss
The Company had a net foreign exchange loss of $2.1 million for the year ended
December 31, 1999, as compared to a net foreign exchange loss of $1.9 million
for the year ended December 31, 1998, and a net foreign exchange gain of $8,000
for the year ended December 31, 1997. Exchange gains and losses that result from
re-measurement of certain Company assets and liabilities are recorded in
20
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.
Since issuing its Deutsche Mark denominated 12 3/8% senior discount notes (the
"Senior Discount Notes") in June 1998, the Company has hedged exposure resulting
from foreign currency fluctuations that could affect the U.S. Dollar equivalent
of the amounts payable under such notes. On May 26, 1999, the Company entered
into several foreign exchange option contracts governed by an ISDA Master
Agreement with Merrill Lynch International Bank Limited ("ML") designed to
protect the Company against fluctuations of the Euro against the U.S. Dollar.
Under such contracts, if as of May 26, 2000 (the settlement date under such
contracts), the Euro has weakened against the dollar and falls below $1.0550 to
the Euro (the "Floor Rate") the Company will be required to make a cash payment
to ML on May 31, 2000 in an amount that will depend on the Dollar/Euro exchange
rate on such settlement date. At the same time, if the Euro has strengthened
against the U.S. Dollar and rises above $1.0835 to the Euro (the "Ceiling Rate")
the Company will receive a cash payment from ML on May 31, 2000 in an amount
that will depend on the Dollar/Euro exchange rate on such settlement date. The
Euro fell to below the Floor Rate for the first time in November 1999 and has
fluctuated both above and below such rate since that time. As of December 31,
1999 the rate of the Euro was $1.0041 and the amount of cash on deposit with ML
as collateral for the Company's payment obligation under the foreign exchange
option contracts was $3.6 million. As of March 10, 2000, the rate of the Euro
was $0.9662 and the amount of cash on deposit with ML as collateral was $7.4
million. The amount of the collateral on deposit corresponds approximately to
the payment obligation that the Company would incur under such option contracts
as of the time the amount of collateral is established. On March 13, 2000, the
Company entered into a put option that will mitigate the cash cost under the
original option contracts resulting from a fall of the Euro below $0.95.
(See Notes 12 and 19 to the Consolidated Financial Statements -Forward Foreign
Exchange Contracts and Financial Instruments).
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 $30.9 million during the year ended December
31, 1999 from $28.4 million for the year ended December 31, 1998, and $8.0
million for the year ended December 31, 1997 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 $74.3 million,
investments in property, plant and equipment of approximately $51.4 million and
acquisitions of $24.6 million.
At December 31, 1999 the Company had cash and cash equivalents of $15.0 million
and working capital of $12.8 million. The Company had $10.9 million of
restricted cash held as security with respect to cash provided by banks
participating in Euronet's ATM network, to cover guarantees on financial
instruments and as deposits with customs officials. (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 ($24.0 million)
and a fair value at December 31, 1999 of $17 million (See note 19 to
Consolidated Financial Statements--Financial Instruments).
As of February 25, 2000 the Company entered into subscription
agreements for the sale of an aggregate of 650,000 new common shares of the
Company for a price of $6.615. The Company is in active discussions with another
private placement investor to subscribe for an additional 500,000 common shares
on the same terms and expects execution of an agreement relating to such
placement by March 15. These agreements were signed with certain accredited
investors and foreign persons in transactions exempt from registration under the
United States Securities Act of 1933 pursuant to exemptions under Section 4(2)
and Regulation D and Regulation S of the Act. Closing is expected to occur on
March 15, 2000 with respect to the 650,000 shares for which subscription
agreements have already been executed and on March 31 with respect to the
additional 500,000 shares with respect to which the subscription agreement is
not yet executed. If such transactions are closed as expected, the transactions
will generate $7,607,250 in net proceeds to the Company. Under each of these
agreements, for each two shares of common stock purchased in the private
placement, the purchaser will be issued a warrant, exercisable upon issuance
21
and expiring 12 months from the date of the signature of each agreement, to
purchase one share of Euronet common stock at an exercise price of $11.615.
The Company leases the majority of its ATMs under capital lease arrangements
that expire between 1999 and 2004. The leases bear interest between 8% and 12%
per annum. As of December 31, 1999 the Company owed $10.6 million under such
capital lease arrangements. (See Note 13 to the Consolidated Financial
Statements - Leases.)
At December 31, 1999, the Company had contractual capital commitments of
approximately $900,000 for the purchase of ATMs. (See Note 23 to the
Consolidated Financial Statements - Commitments.) 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 2000 are expected to be approximately
$7.4 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 2000. In the ATM 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 Arksys Software Solutions Segment, the Company expects increased revenues
resulting from sales of new products and services to the existing and expanded
customer base resulting from the continued integration of the Arksys and Euronet
sales and customer service organizations. The Company believes that the net
proceeds from the private placement of common shares described above 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.
There can be no assurance that the Company's revenues will grow or be sustained
in future periods or that the Company will be able to achieve or sustain
profitability or positive cash flows in any future period.
BALANCE SHEET ITEMS
Cash and Cash Equivalents
The decrease of cash and cash equivalents to $15.0 million at December 31, 1999
from $55.6 million at December 31, 1998 is due primarily to the net effects of
working capital movements, foreign exchange gains and losses, the acquisition of
a network of 252 installed and 36 inventoried ATMs from Service Bank for $6.7
million, capital expenditures and capital lease payments, repurchase of notes
payable and warrants and operating losses for the year ended December 31, 1999.
(See Note 20 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 $10.9 million at December 31, 1999 from $13.0
million at December 31, 1998. 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 represents a reduction in the
amount of cash held as security with respect to cash provided in Hungary by
banks participating in Euronet's ATM network, and devaluation of the Hungarian
forint and Polish zloty.
Trade Accounts Receivable
Trade accounts receivable increased to $7.9 million at December 31, 1999 from
$5.7 million at December 31, 1998 is due primarily to sales from the Arksys
Software Solutions Segment and increased ATM revenues.
Property, Plant and Equipment
Net property, plant and equipment increased to $36.7 million at December 31,
1999 from $33.2 million at December 31, 1998. This increase is due primarily to
the installation of ATMs, the Service Bank acquisition and the acquisition of
computer equipment as the network expands, offset by the sale of the Croatian
network.
Intangible Assets
The increase in net intangible assets to $16.3 million at December 31, 1999 from
$12.5 million at December 31, 1998 is due primarily to the acquisition of the
network of 252 installed and 36 inventoried ATMs from Service Bank and recording
of purchased intangibles of $3.2 million, $2.4 million related to a deferred tax
liability related to non-goodwill intangible assets acquired in the Arksys
acquisition, and the acquisition of Dash and recording of purchased intangibles
of $724,000, including goodwill of $120,000 purchased in August 1999.
Notes Payable
Notes payable decreased to $77.8 million at December 31, 1999 from $83.7 million
at December 31, 1998. This is the result of several transactions as follows:
Balance at December 31, 1998 $83.7
Unrealized foreign exchange gain (DEM vs. US$) (12.6)
Accretion of bond interest 9.8
Bond repurchases (8.1)
-----
Balance at December 31, 1999 $72.8
22
Accumulated Other Comprehensive (Loss)/Income
The decrease in other comprehensive loss to $2.5 million at December 31, 1999
from a gain of $65,000 at December 31, 1998 is a result of the change in the
foreign currency translation due to an approximate 17% devaluation of the
Hungarian forint against the U.S. Dollar, an approximate 18% devaluation of the
Polish zloty against the U.S. Dollar and an approximate 16% devaluation of the
Deutsche Mark against the U.S. Dollar for the year ended December 31, 1999.
Total Stockholders (Deficit)/Equity
Total stockholders (deficit)/equity decreased to a deficit of ($9.5) million at
December 31, 1999 from equity of $24.2 million at December 31, 1998. This is due
to the net loss for the year ended December 31, 1999 of $30.9 million and the
recording of a cumulative translation adjustment of $2.5 million discussed
above.
The Company recorded the sale of 100,000 shares of treasury stock in September
1999 for $275,000. This transaction resulted in a reduction to the carrying
value of treasury stock in the amount of $1,000 and an increase to Additional
paid in capital ("APIC") of $274,000. The Company also recorded the issuance of
new shares resulting from the exercise of 200,900 options held by an employee of
the Company. This transaction resulted in an increase in common stock and APIC
in the amount of $3,000 and $284,000, respectively.
From December 1998 through December 1999, the Company repurchased 48,341 units
of its Senior Discount Notes to which 97,023 warrants were attached. The
warrants carry an assigned value of $2.53 per warrant. As a result of the
Company's bond repurchases, a reduction to the outstanding value of the warrants
in the amount of $246,000 and an increase to APIC in the amount of $70,000 was
recorded by the Company in 1999.
Year 2000 Compliance
Euronet depends on hardware and software systems to provide services to its
customers, to maintain substantially all of its internal operations, and for the
maintenance of on-line computer links to its bank customers, whose software
systems are relied upon to deliver transaction authorization requests. As part
of the program to obtain confirmation of Year 2000 compliance, Euronet
identified the following specific areas of its or its bank customers' business,
that are affected by Year 2000 considerations and undertook appropriate testing
and upgrading: (i) central processing center; (ii) ATM firmware and software;
(iii) vendor and internal software used in the Euronet subsidiaries; (iv)
software used in financial and accounting systems; (v) software and hardware
used by Euronet's bank customers to authorize transactions; and (vi)
subcontractors providing telecommunications driving, switching and authorization
services.
For the period just before and after January 1, 2000, Euronet implemented a plan
to staff Year 2000 support centers with skilled technical staff in its
processing centers in Budapest, Hungary and Little Rock, Arkansas. Staffing was
coordinated to provide support to Euronet's proprietary ATM network, customers
who rely on Euronet to operate their ATM networks through ATM Management
Agreements, and Euronet's Arksys software customers. In Europe, staffing
commencing December 30, 1999, and ran continuously through January 5, 2000. A
similar center was staffed in the U.S. to service Arksys Software Solutions
Segment customers, and was coordinated with the European center to provide
maximum resource availability in the event of any problems related to Year 2000.
The European and U.S. compliance teams reported no material Year 2000 problems,
either with Euronet's own systems or the systems of its customers, and Euronet
is unaware of any material Year 2000 complications to date. Euronet is confident
that its own systems will maintain uninterrupted service through the Year 2000,
although it continues to assess and monitor the potential impact of any Year
2000 issues.
Impact of New Accounting Pronouncements Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge in one of three categories described in the pronouncement. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting designation.
Under SFAS 133, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedge derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS 133 applies to all
entities and was originally effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
23
Initial application should be as of the beginning of an entity's fiscal quarter;
on that date, hedging relationships must be designated and documented pursuant
to the provisions of SFAS 133. Earlier application of all of the provisions is
encouraged but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of SFAS 133. Additionally, SFAS 133 should not be applied
retroactively to financial statements of prior periods. Management believes that
the adoption of SFAS 133 will not have a material impact on the Company's
consolidated financial statements. In June 1999, the FASB issued SFAS No. 137
which changed the effective adoption of SFAS 133 to financial years beginning
after June 15, 2000.
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
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Foreign Exchange Exposure
In 1999, 27% of the Company's revenues were generated in Poland and Hungary, as
compared to 73% in 1998 and 99% in 1997. The 1999 figure has been substantially
reduced with the additional revenues from Arksys and the Company's expanded ATM
network in Germany. 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, and Polish Zloty against the U.S.
dollar, would have the combined effect of a $1.3 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.
Since issuing its Deutsche Mark denominated 12 3/8% senior discount notes (the
"Senior Discount Notes") in June 1998, the Company has hedged exposure resulting
from foreign currency fluctuations that could affect the U.S. Dollar equivalent
of the amounts payable under such notes. On May 26, 1999, the Company entered
into several foreign exchange option contracts governed by an ISDA Master
Agreement with Merrill Lynch International Bank Limited ("ML") designed to
protect the Company against fluctuations of the Euro against the U.S. Dollar.
Under such contracts, if as of May 26, 2000 (the settlement date under such
contracts), the Euro has weakened against the dollar and falls below $1.0550
to the Euro (the "Floor Rate") the Company will be required to make a cash
payment to ML on May 31, 2000 in an amount that will depend on the Dollar/Euro
exchange rate on such settlement date. At the same time, if the Euro has
strengthened against the U.S. Dollar and rises above $1.0835 to the Euro (the
"Ceiling Rate") the Company will receive a cash payment from ML on May 31, 2000
in an amount that will depend on the Euro/Dollar exchange rate on such
settlement date. The Euro fell to below the Floor Rate for the first time in
November 1999 and has fluctuated both above and below such rate since that time.
As of December 31, 1999 the rate of the Euro was $1.0041 and the amount of cash
on deposit with ML as collateral for the Company's payment obligation under the
foreign exchange option contracts was $3.6 million. As of March 10, 2000, the
rate of the Euro was $0.9662 and the amount of cash on deposit with ML as
collateral was $7.4 million. The amount of the collateral on deposit corresponds
approximately to the payment obligation that the Company would incur under such
option contracts as of the time the amount of collateral is established. On
March 13, 2000, the Company entered into a put option that will mitigate the
cash cost und