UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-22167
EURONET WORLDWIDE, INC.
(Exact name of the registrant as specified in its charter)
| Delaware | 74-2806888 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) |
4601 COLLEGE BOULEVARD, SUITE 300
LEAWOOD, KANSAS 66211
(Address of principal executive offices)
(913) 327-4200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 30, 2004, the Company had 30,723,667 common shares outstanding.
1
PART 1—FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited, in thousands, except share data)
| As of |
||||||||
| March 31, 2004 |
December 31, 2003 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 19,268 | $ | 19,245 | ||||
| Restricted cash |
37,613 | 58,280 | ||||||
| Trade accounts receivable, net of allowances for doubtful accounts of $1,395 at March 31, 2004 and $1,047 at December 31, 2003 |
77,140 | 75,648 | ||||||
| Earnings in excess of billings on software installation contracts |
411 | 729 | ||||||
| Deferred income tax |
2,543 | 2,543 | ||||||
| Prepaid expenses and other current assets |
19,184 | 11,509 | ||||||
| Total current assets |
156,159 | 167,954 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $45,784 at March 31, 2004 and $45,817 at December 31, 2003 |
20,979 | 20,658 | ||||||
| Goodwill |
104,034 | 88,512 | ||||||
| Deferred income taxes |
274 | 279 | ||||||
| Acquired intangible assets, net of accumulated amortization of $2,529 at March 31, 2004 and $1,704 at December 31, 2003 |
25,460 | 22,772 | ||||||
| Other assets, net of accumulated amortization of $2,466 at March 31, 2004 and $2,380 at December 31, 2003 |
3,315 | 3,598 | ||||||
| Total assets |
$ | 310,221 | $ | 303,773 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Trade accounts payable |
$ | 93,238 | $ | 97,188 | ||||
| Accrued expenses and other current liabilities |
36,773 | 39,277 | ||||||
| Debt obligations |
21,635 | 5,930 | ||||||
| Accrued interest on notes payable |
1,148 | 381 | ||||||
| Income taxes payable |
4,877 | 3,316 | ||||||
| Deferred income taxes |
1,539 | 1,374 | ||||||
| Other |
2,455 | 4,460 | ||||||
| Total current liabilities |
161,665 | 151,926 | ||||||
| Debt obligations |
40,435 | 59,032 | ||||||
| Deferred income tax |
8,579 | 7,828 | ||||||
| Other long term liabilities |
2,808 | 3,118 | ||||||
| Total liabilities |
213,487 | 221,904 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, $0.02 par value. Authorized 60,000,000 shares; issued and outstanding 30,403,237 shares at March 31, 2004 and 29,525,554 at December 31, 2003 |
608 | 590 | ||||||
| Additional paid-in-capital |
210,144 | 198,377 | ||||||
| Treasury stock |
(145 | ) | (145 | ) | ||||
| Employee loans for stock |
(427 | ) | (427 | ) | ||||
| Subscription receivable |
26 | 26 | ||||||
| Accumulated deficit |
(114,582 | ) | (117,871 | ) | ||||
| Restricted reserve |
777 | 777 | ||||||
| Accumulated other comprehensive income |
333 | 542 | ||||||
| Total stockholders’ equity |
96,734 | 81,869 | ||||||
| Total liabilities and stockholders’ equity |
$ | 310,221 | $ | 303,773 | ||||
See accompanying notes to the consolidated financial statements.
2
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Comprehensive Income
(Unaudited, in thousands, except share and per share data)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenues: |
||||||||
| EFT processing services |
$ | 14,940 | $ | 11,889 | ||||
| Prepaid processing services |
62,919 | 17,372 | ||||||
| Software and related revenue |
3,196 | 3,839 | ||||||
| Total revenues |
81,055 | 33,100 | ||||||
| Operating expenses: |
||||||||
| Direct operating costs |
56,674 | 20,005 | ||||||
| Salaries and benefits |
10,088 | 6,875 | ||||||
| Selling, general and administrative |
4,226 | 2,313 | ||||||
| Depreciation and amortization |
3,554 | 2,756 | ||||||
| Total operating expenses |
74,542 | 31,949 | ||||||
| Operating income |
6,513 | 1,151 | ||||||
| Other income (expense): |
||||||||
| Interest income |
571 | 353 | ||||||
| Interest expense |
(1,836 | ) | (1,607 | ) | ||||
| Gain on sale of U.K. ATM network |
— | 18,001 | ||||||
| Equity in income (loss) from unconsolidated subsidiaries |
(21 | ) | 37 | |||||
| Loss on early retirement of debt |
(71 | ) | — | |||||
| Foreign exchange gain (loss), net |
235 | (1,839 | ) | |||||
| Total other income (expense) |
(1,122 | ) | 14,945 | |||||
| Income from before income taxes |
5,391 | 16,096 | ||||||
| Income tax expense |
(2,105 | ) | (675 | ) | ||||
| Net income |
3,286 | 15,421 | ||||||
| Translation adjustment |
(205 | ) | 47 | |||||
| Comprehensive income |
$ | 3,081 | $ | 15,468 | ||||
| Income per share-basic: |
||||||||
| Net income |
$ | 0.11 | $ | 0.61 | ||||
| Basic weighted average shares outstanding |
30,120,295 | 25,215,308 | ||||||
| Income per share-diluted: |
||||||||
| Net income |
$ | 0.10 | $ | 0.57 | ||||
| Diluted weighted average shares outstanding |
33,351,456 | 26,936,990 | ||||||
See accompanying notes to the unaudited consolidated financial statements.
3
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net income |
$ | 3,286 | $ | 15,421 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
3,554 | 2,756 | ||||||
| Unrealized foreign exchange (gain) loss |
(672 | ) | 904 | |||||
| Gain on sale of U.K. ATM network |
— | (18,001 | ) | |||||
| Deferred income tax benefit |
1,563 | 501 | ||||||
| Change in operating assets and liabilities, net of effects of acquisition: |
||||||||
| Decrease (increase) in restricted cash |
20,667 | (8,049 | ) | |||||
| Decrease in trade accounts receivable |
414 | 19,497 | ||||||
| Increase in prepaid expenses and other current assets |
(1,283 | ) | (2,646 | ) | ||||
| Decrease in trade accounts payable |
(13,789 | ) | (12,185 | ) | ||||
| Increase (decrease) in accrued expenses and other liabilities |
(2,962 | ) | 6,297 | |||||
| Other |
(1,371 | ) | 1,795 | |||||
| Net cash provided by operating activities |
9,407 | 6,290 | ||||||
| Cash flows from investing activities: |
||||||||
| Acquisitions, net of cash acquired |
(2,600 | ) | (27,967 | ) | ||||
| Sale of U.K. ATM network |
— | 24,418 | ||||||
| Fixed asset purchases |
(2,000 | ) | (236 | ) | ||||
| Other |
(65 | ) | (218 | ) | ||||
| Net cash used in investing activities |
(4,665 | ) | (4,003 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Proceeds from issuance of shares and other capital contributions |
1,769 | 611 | ||||||
| Debt obligation repayments |
(6,550 | ) | (1,096 | ) | ||||
| Other |
(2 | ) | 45 | |||||
| Net cash used in financing activities |
(4,783 | ) | (440 | ) | ||||
| Effect of exchange differences on cash |
64 | 62 | ||||||
| Net increase in cash and cash equivalents |
23 | 1,909 | ||||||
| Cash and cash equivalents at beginning of period |
19,245 | 12,021 | ||||||
| Cash and cash equivalents at end of period |
$ | 19,268 | $ | 13,930 | ||||
| Interest paid during quarter |
$ | 1,069 | $ | 1,226 | ||||
| Income taxes paid during quarter |
$ | 998 | $ | 21 | ||||
See accompanying notes to the unaudited consolidated financial statements.
See Note 4 for details of significant non-cash transactions.
4
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—GENERAL
Basis of Presentation
The accompanying unaudited consolidated financial statements of Euronet Worldwide, Inc. and Subsidiaries (“Euronet” or the “Company”) have been prepared from the records of the Company, in conformity with generally accepted accounting principles of the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting only of normal, recurring accruals) necessary to present fairly the financial position of the Company at March 31, 2004, the results of its operations for the three-month periods ended March 31, 2004 and 2003, and cash flows for the three-month periods ended March 31, 2004 and 2003.
The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Euronet for the year ended December 31, 2003, including the notes thereto, set forth in the Company’s Form 10-K.
The results of operations for the three-month period ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ADOPTED ACCOUNTING STANDARDS
For a description of the accounting policies of the Company, see Note 3 to the audited consolidated financial statements for the year ended December 31, 2003 set forth in the Company’s Form 10-K.
NOTE 3—EARNINGS (LOSS) PER SHARE—BASIC AND DILUTED
Basic earnings per share has been computed by dividing net income (loss) by the weighted average number of common shares outstanding. Dilutive earnings per share reflect the potential dilution that could occur if dilutive stock options and warrants were exercised using the treasury stock method, where applicable. The following table provides a reconciliation of the weighted average number of common shares outstanding to the fully diluted weighted average number of common shares outstanding:
| As of March 31, | ||||
| 2004 |
2003 | |||
| Weighted average common shares outstanding |
30,120,295 | 25,215,308 | ||
| Dilutive effect of: |
||||
| Convertible warrants |
196,572 | 89,802 | ||
| Stock options * |
3,034,589 | 1,631,880 | ||
| Weighted average common shares outstanding, assuming dilution |
33,351,456 | 26,936,990 | ||
| * | Includes options with strike prices below the average fair market value of Euronet common shares during the period. |
The table above does not reflect options of 137,000 for the three months ended March 31, 2004 that have an exercise price in excess of the average market price of Euronet common shares during the period. These options may have an additional dilutive effect in the future if the average market value of Euronet common shares rises above the exercise price of the options.
NOTE 4—BUSINESS COMBINATION
In accordance with SFAS No. 141, “Business Combinations,” the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair value assigned to intangible assets acquired is supported by valuations using
5
estimates and assumptions provided by management. For larger acquisitions management engaged an appraiser to assist in the evaluation.
Acquisition of Prepaid Concepts, Inc.
In January 2004, Euronet purchased all of the share capital of Prepaid Concepts, Inc. (Precept), a company based in California. Precept is a U.S. based top-up company that distributes prepaid services via point-of-sale (POS) terminals. Euronet will use Precept’s resources to enhance the Company’s U.S. prepaid program, called PaySpot, which enables customers to purchase airtime and long-distance calling plans from POS terminals across the country.
The purchase price assigned for the Precept shares was approximately $17.8 million. The Company paid $4.0 million in cash, issued promissory notes in the original principal amount of $4.0 million and issued 527,180 shares of Euronet Common Stock for the Precept shares. Of the issued shares of Common Stock, 160,000 shares will be held in escrow and released on February 25, 2005 subject to certain performance criteria. Of the $4.0 million in promissory notes, $2.0 million are convertible into shares of Euronet Common Stock as described more fully below. The principal terms of the promissory notes issued in this transaction are as follows:
| • | Installment promissory notes in the amount of $2.0 million, bearing interest at an annual rate of 7% and payable October 30, 2004. Principal payments and interest are payable in three installments on April 30, July 30, and October 30, 2004. |
| • | Indebtedness of $2.0 million under promissory notes bearing interest at an annual rate of 7%, with accrued interest payable at maturity on February 25, 2005. Euronet has the option to pay the principal and interest at maturity in shares of Common Stock valued at a 10% discount to the average market price for 20 trading days prior to the maturity date. In addition, at any time prior to the maturity date, the amount outstanding under these notes is convertible into shares of Euronet Common Stock at the option of the holders, based upon a conversion price of $28.43 per share. |
The following table summarizes the total cost of the acquisition of Precept. Note that all amounts are included as of the purchase price date. Certain minor changes are ongoing, due to final purchase price allocations and adjustments to acquisition costs (unaudited, in thousands):
| Cash paid at closing |
$ | 4,000 | |
| Notes payable |
4,000 | ||
| Estimated fair value of Euronet Common Stock (527,180 common shares) |
9,801 | ||
| Total paid to Precept shareholders |
17,801 | ||
| Transaction costs and share registration fees (preliminary estimate) |