U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________
Commission file number 1-1200
EUROWEB INTERNATIONAL CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3696015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1122 Budapest, Varosmajor utca 13. Hungary
(Address of principal executive offices)
+36-1-8897000 +36-1-8897100
Issuer's telephone number Issuer's facsimile number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value 4,665,332
(Class) (Outstanding at March 31, 2004)
Transitional Small Business Disclosures Format (Check one): Yes ___ No X
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Restated consolidated balance sheets as of March 31, 2004 (unaudited)
and December 31, 2003 (audited) 2
Restated consolidated statements of operations and comprehensive loss
(unaudited) for the three months ended March 31, 2004 and 2003 3
Restated consolidated statements of stockholders' equity for the three months ended
March 31, 2004 (unaudited) and twelve months ended December 31, 2003 4
Restated consolidated statements of cash flows (unaudited) for the three months
ended March 31, 2004 and 2003 5
Notes to interim (unaudited) Restated Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Controls and Procedures 19
PART II. Other Information 22
Signature 23
EUROWEB INTERNATIONAL CORP.
RESTATED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2004 December 31, 2003
------------------ ------------------
(Unaudited) (audited, restated
ASSETS see Note 9)
Current Assets
Cash and cash equivalents $ 12,050,485 $ 3,043,703
Investment in securities - 11,449,669
Trade accounts receivable, net 1,235,842 1,305,268
Related party receivables 748,285 1,145,069
Current portion of note receivable 124,143 173,911
Prepaid and other current assets 1,584,887 1,604,424
------------------ ------------------
Total current assets 15,743,642 18,722,044
Property and equipment, net 2,727,193 2,782,239
Assets under construction 78,355 47,853
Goodwill 566,000 566,000
------------------ ------------------
Total assets $ 19,115,190 $ 22,118,136
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 1,638,049 $ 1,323,747
Related party payables 913,211 1,962,152
Related party loan payable - short term portion 240,608 235,679
Other current liabilities 998,387 903,275
Accrued expenses 431,247 619,821
Deferred IRU revenue 46,000 46,000
Deferred other revenue 951,472 1,007,464
------------------ ------------------
Total current liabilities 5,218,974 6,098,138
Non-current portion of deferred IRU revenue 831,834 843,334
Non-current portion of related party loan payable 962,435 942,715
Non-current portion of lease obligations 219,239 228,686
------------------ ------------------
Total liabilities 7,232,482 8,112,873
Stockholders' Equity
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding - -
Common stock, $.001 par value - Authorized 60,000,000 shares;
Issued and outstanding 4,665,332 shares 24,129 24,129
Additional paid-in capital 48,227,764 48,227,764
Accumulated deficit (35,206,856) (33,105,716)
Accumulated other comprehensive losses: (46,917) (25,502)
Treasury stock - 175,490 common shares, at cost (1,115,412) (1,115,412)
------------------ ------------------
Total stockholders' equity 11,882,708 14,005,263
Commitments and contingencies
Total liabilities and stockholders' equity $ 19,115,190 $ 22,118,136
================== ==================
See accompanying notes to consolidated financial statements.
2
EUROWEB INTERNATIONAL CORP.
RESTATED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended
March 31,
2004 2003
------------ ------------
Restated
(See Note 9)
Revenues
Third party revenues $ 4,922,587 $ 4,502,341
Related party revenues 1,490,767 1,218,653
------------ ------------
Total Revenues 6,413,354 5,720,994
Cost of revenues
Third party cost of revenues 2,803,707 2,426,282
Related party cost of revenues 1,251,354 1,206,289
------------ ------------
Total Cost of revenues 4,055,061 3,632,571
------------ ------------
Gross profit 2,358,293 2,088,423
Operating expenses
Compensation and related costs 876,237 863,687
Consulting and professional fees 411,179 355,959
Other selling, general and administrative expenses 716,194 701,499
Depreciation and amortization 290,081 429,110
------------ ------------
Total operating expenses 2,293,691 2,350,255
Gain (Loss) from operations 64,602 (261,832)
Net interest income 7,841 67,052
Gain (Loss) from operations before income taxes 72,443 (194,780)
Provision for income taxes 31,583 -
------------ ------------
Net profit (loss) 40,860 (194,780)
Other comprehensive loss 21,415 51,601
------------ ------------
Comprehensive gain (loss) $ 19,445 $ (246,381)
============ ============
Net gain/(loss) per share, basic and diluted .01 (.04)
Weighted average number of shares outstanding, basic and diluted 4,665,332 4,665,332
See accompanying notes to consolidated financial statements
3
EUROWEB INTERNATIONAL CORP.
RESTATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Treasury Stockholders'
Shares Amount Capital Deficit Gains(Losses) Stock Equity
----------- -------- ------------ ------------- ------------ ------------ -------------
Balances, December 31, 2002 4,665,332 $24,129 $48,227,764 $(31,314,687) $ 236,142 $(1,115,412) $ 16,057,936
=========== ======== ============ ============= ============ ============ =============
Foreign currency translation loss - - - - (45,237) - (45,237)
Unrealized loss on securities - - - - (216,407) - (216,407)
available for sale
Net loss for the period (1,791,029) - (1,791,029)
----------- -------- ------------ ------------- ------------ ------------ -------------
Balances, December 31, 2003 4,665,332 $24,129 $48,227,764 $(33,105,716) $ (25,502) $(1,115,412) $ 14,005,263
=========== ======== ============ ============= ============ ============ =============
Foreign currency translation loss - - - - 7,390 - 7,390
Adjustment for previously - - - - (28,805) - (28,805)
unrealized gain on securities,
currently included in net income
Deemed distribution (Note 9) - - - (2,142,000) - - (2,142,000)
Net profit for the period 40,860 40,860
----------- -------- ------------ ------------- ------------ ------------ -------------
Balances, March 31, 2004 4,665,332 $24,129 $48,227,764 $(35,206,856) $ (46,917) $(1,115,412) $ 11,882,708
=========== ======== ============ ============= ============ ============ =============
See accompanying notes to consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2004 2003
------------- -------------
Restated
(see Note 9)
Cash flows from operating activities:
Net profit (loss) $ 40,860 (194,780)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 290,081 429,110
Amortization of discount on acquisition indebtedness - 5,232
Foreign currency gain/loss 7,862 (3,936)
Realized gain on sale of securities (28,805) -
Unrealized interest income on securities - (90,159)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable 466,210 (810,325)
Prepaid and other assets 19,537 (464,972)
Accounts payable, other current liabilities and accrued expenses (828,101) 978,111
Deferred revenue (67,492) 209,214
------------- -------------
Net cash used in operating activities (99,848) 57,495
------------- -------------
Cash flows from investing activities:
Maturity of securities 11,464,000 -
Repayments of notes receivable 49,768 39,237
Acquisition of 51% of Euroweb Rt. (2,142,000) -
Acquisition of property and equipment, intangibles (265,537) (952,515)
------------- -------------
Net cash provided by (used in) investing activities 9,106,231 (913,278)
------------- -------------
Cash flows from financing activities:
Receipt (repayment) of loans 24,649 (168,860)
Principal payments under capital lease obligations (9,447) (51,088)
------------- -------------
Net cash used in financing activities 15,202 (219,948)
------------- -------------
Effect of foreign exchange rate changes on cash (14,803) (4,937)
------------- -------------
Net increase (decrease) in cash and cash equivalents 9,006,782 (1,080,668)
Cash and cash equivalents, beginning of period 3,043,703 2,666,525
------------- -------------
Cash and cash equivalents, end of period $ 12,050,485 $ 1,585,857
============= =============
See accompanying notes to consolidated financial statements.
5
Euroweb International Corp.
Notes to Interim Unaudited Restated Consolidated Financial Statements
1. Organization and Business
EuroWeb International Corp. (the "Company") is a Delaware corporation which was
organized on November 9, 1992. The controlling owner of Euroweb International
Corp. as at March 31, 2004 was KPN Telecom B.V., a Netherlands corporation, who
remains the largest shareholder.
The Company owns and operates Internet service providers in the Czech Republic,
Hungary, Slovakia and Romania. The Company operates in one business segment.
The Hungarian operations (conducted through Euroweb Hungary Rt.) were accounted
for under the equity method in prior years as the Company owned a 49% interest,
however, in February 2004, the remaining 51% of Euroweb Hungary Rt. was
purchased from Pantel Rt. and is fully consolidated in the current period
financial statements. The consideration paid by the Company for the 51% interest
consisted of EUR 1,650,000 (USD 2,105,000) in cash, guarantees for amounts owed
to Pantel Rt. by a subsidiary of Euroweb Hungary Rt., and a guarantee that
Euroweb Hungary Rt. will purchase at least HUF 600 million (approximately $3
million) worth of services from Pantel Rt. in each of 2004-2006.
As the acquisition was made from an entity under common control (both Pantel Rt.
and the Company were majority owned by KPN Telecom B.V. at the time of
acquisition in February 2004), the transaction was accounted in a manner similar
to a pooling-of-interest in accordance with generally accepted accounting
principles in the United States of America, with all prior periods being
restated as if the entities were combined for all periods presented (see note 2
(a) below).
2. Summary of Significant Accounting Policies
(a) Principles of consolidation and basis of presentation
The consolidated financial statements comprise the accounts of the
Company and its controlled subsidiaries. All material inter-company
balances and transactions have been eliminated upon consolidation. The
purchase of the remaining 51% of Euroweb Hungary Rt. has been
accounted in a manner similar to a pooling-of-interest with prior
periods being restated (See Note 9).
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Significant estimates made by the Company include the
period of benefit and recoverability of goodwill and other intangible
assets.
6
Euroweb International Corp.
Notes to Interim Unaudited Restated Consolidated Financial Statements
(c) Fair value of financial instruments
The carrying values of cash equivalents, investment in debt
securities, notes and loans receivable, accounts payable, loans
payable and accrued expenses approximate fair values.
(d) Revenue recognition
Revenues from Internet services are recognized in the month in which
the services are provided, either based on monthly traffic or on fixed
monthly fees (leased lines). Revenue for other services, are
recognized as the service is performed.
In 2002, the Company entered into an agreement to provide transmission
capacity to a customer pursuant to an indefeasible rights-of-use
agreement ("IRU") that management believes qualifies as an operating
lease under Financial Accounting Standards Board Interpretation No.
13, "Accounting for Leases" ("FAS 13"), since the IRU agreement
provides rights to use a specific subject asset for a defined period.
Revenue attributable to the lease is recognized on a straight-line
basis over the term of the 20-year lease agreement.
Under Financial Accounting Standards Board Interpretation No. 43,
"Real Estate Sales, an interpretation of FASB Statement No. 66" ("FIN
43"), leases of fiber and capacity that are deemed integral equipment
are required to be accounted for in the same manner as leases of real
estate. If fiber and equipment are considered integral to the related
real estate, a lease must include a provision transferring title of
such integral equipment to the lessee in order for that lease to be
accounted for as a sales-type lease. Failure to satisfy the title
transfer requirements results in operating lease treatment, and
recognition of the related lease income over the lease term. The
Company's IRU does not involve a transfer of title.
IRUs generally require the customer to make a down payment upon
execution of the agreement, with the balance due upon delivery and
acceptance of the fiber. This has resulted in a substantial amount of
deferred revenue being recorded on the balance sheet. The Company is
obligated under the fiber IRU to maintain its network in efficient
working order and in accordance with industry standards. Customers are
obligated for the term of the agreement to pay for their allocable
share of the costs for operating and maintaining the network. The
Company recognizes this revenue monthly as services are provided.
Accounting practice and guidance with respect to the treatment of
fiber sales and IRU agreements continues to evolve. Any changes in the
accounting treatment could affect the way the Company accounts for
revenue and expenses associated with these transactions in the future.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication network
expenses, costs of content services and cost of leased lines.
7
Euroweb International Corp.
Notes to Interim Unaudited Restated Consolidated Financial Statements
(f) Foreign currency translation
The Company considers the United States Dollar ("US$") to be the
functional currency of the Company and unless otherwise stated, the
respective local currency to be the functional currency of its
subsidiaries. The reporting currency of the Company is the US$ and
accordingly, all amounts included in the consolidated financial
statements have been translated into US$.
The balance sheets of subsidiaries are translated into US$ using the
year end exchange rates. Revenues and expenses are translated at
average rates in effect for the periods presented. The cumulative
translation adjustment is reflected as a separate component of
shareholders' equity on the consolidated balance sheet.
The Company conducts business and maintains its accounts for Euroweb
Romania in the Romanian Lei ("ROL"). The U.S. dollar is used as the
functional currency in Romania. The Company's financial statements
presented in ROL are remeasured into U.S. dollars using the following
policies:
o Monetary assets and liabilities are remeasured into the
functional currency using the exchange rate at the balance sheet
date.
o Non-monetary assets and liabilities are remeasured into the
functional currency using historical exchange rates.
o Revenues, expenses, gains and losses are remeasured into the
functional currency using the average exchange rate for the
period except for revenues and expenses related to non-monetary
items that are remeasured using historical exchange rates.
The net effect of re-measurement from the local currency into the
functional currency (US$) is included in the determination of net
profit and loss, under `Other selling, general and administration
expenses'.
Foreign currency transaction gains and losses are included in the
consolidated results of operations for the periods presented.
(g) Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Equipment purchased under capital lease is stated at the
present value of minimum lease payments at the inception of the lease,
less accumulated depreciation. The Company provides for depreciation
of equipment using the straight-line method over the shorter of
estimated useful lives of up to four years or the lease term.
Recurring maintenance on property and equipment is expensed as
incurred.
Any gain or loss on retirements and disposals are included in the
results of operations.
8
Euroweb International Corp.
Notes to Interim Unaudited Restated Consolidated Financial Statements
(h) Goodwill and Intangibles
On January 1, 2002 the Company adopted Statement of Financial
Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting
standards for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17. Goodwill and intangible assets that
have indefinite useful lives are no longer amortized but rather are
tested at least annually for impairment. Intangible assets that have
finite useful lives (whether or not acquired in a business
combination) will continue to be amortized over their estimated useful
lives, which are no longer limited to a maximum of 40 years. The
adoption of SFAS 142 has eliminated the goodwill charge in 2002.
During 2002 and 2003, the Company performed the required SFAS No. 142
impairment test, with respect to goodwill. The first step of this test
requires the Company to compare the carrying value of any reporting
unit that has goodwill to the estimated fair value of the reporting
unit. When the current fair value is less than the carrying value, the
Company performs the second step of the impairment test. This second
step requires the Company to measure the excess of the recorded
goodwill over the current value of the goodwill by performing an
exercise similar to a purchase price allocation, and to record any
excess as an impairment.
(i) Stock-Based compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations including FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation an interpretation of
APB Opinion No. 25" issued in March 2000, to account for its fixed
plan stock options. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. SFAS No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 123") established accounting
and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has
adopted the disclosure requirements of SFAS No. 123.
Under the accounting provisions of SFAS No. 123, the Company's net
loss and net loss per share would have been reduced to the pro forma
amounts indicated below:
March 31,
2004 2003
---------- ----------
Net loss:
Net profit (loss) as reported $ 40,860 $(194,780)
Additional FAS 123 compensation expense (26,293) -
Pro forma net profit (loss) 14,567 (194,780)
Basic and diluted income (loss) per share:
As reported $ 0.01 $ (0.04)
Pro forma 0.00 (0.04)
9
Euroweb International Corp.
Notes to Interim Unaudited Restated Consolidated Financial Statements
3. Investment in Securities
The Company held investments in United States Treasury Notes with a face value
of $11,464,000, which matured on February 15, 2004.
4. Related party loan
Freestart Kereskedelmi es Szolgaltato Kft. (Freestart), a wholly-owned
subsidiary of Euroweb Hungary Rt., has a loan from PanTel of HUF 245,000,000
(approximately $1.225 million) plus 13% annual interest.
Pursuant to the Loan Agreement, Freestart is obligated to repay in full the Loan
with interest, paying principal in five equal semi-annual instalments on
December 1, 2004, June 30, 2005, December 31, 2005, June 30, 2006 and December
31, 2006 and paying interest semi-annually on June 30, 2004, December 1, 2004,
June 30, 2005, December 31, 2005, June 30, 2006 and December 31, 2006
5. Stockholders' Equity
During the three months ended March 31, 2004, the Company did not grant any
options or warrants, nor were any exercised. Upon the exercise of an outstanding
warrant or option granted prior to August 30, 2001, each warrant/option holder
will receive 1/5 of a share, due to the reverse stock split effected on August
30, 2001.
6. Commitments and Contingencies
(a) Employment Agreements
The Company entered into a six-year agreement with its Chief Executive Officer
and Chairman of the Board, Csaba Toro which commenced January 1, 2000, and
provided for an annual compensation of $96,000. The agreement was amended in
2004. The amended agreement provides for an annual salary of $150,000 and a
bonus of up to $100,000 (guaranteed minimum of $50,000) in 2004, and an annual
salary of $200,000 and a bonus of up to $150,000 in 2005.
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises.
(c) 20 years' usage rights
Euroweb Romania has provided an Indefeasible Right of Use for transmission
capacity on 12 pairs of fiber over a period of 20 years. The construction was
finished in April 2003. For the duration of the agreement, Euroweb Romania is
obliged to use all reasonable endeavours to ensure the Cable System is
maintained in efficient working order and in accordance with industry standards.
10
Euroweb International Corp.
Notes to Interim Unaudited Restated Consolidated Financial Statements
(d) Elender Rt. acquisition
On February 23, 2004, the Company signed a Share Purchase Agreement ("SPA") in
connection with its acquisition of all of the outstanding shares of Elender
Business Communications Ltd. ("Elender"), an ISP in Hungary. The purchase price
consists of USD 6,500,000 in cash and 677,201 of the Company's common shares.
The number of common shares may be reduced if certain liabilities of Elender (at
Closing) exceed amounts specified in the SPA. If there needs to be a reduction
in the number of common shares, for calculation purposes, one share is assigned
a value of $4.43 in the SPA. The excess by which certain liabilities of Elender
(at Closing) exceed amounts specified in the SPA, divided by $4.43 will result
in the number of common shares that will be deducted from the 677,201. The
Closing of this acquisition is subject to various conditions being fulfilled,
including the approval of the Hungarian Anti-Monopoly Office. To date, the
Approval of the Hungarian Anti-Monopoly Office has been received, but certain
other conditions are still being finalized.
(e) Euroweb Hungary Rt. acquisition
In February 2004, the remaining 51% of Euroweb Hungary Rt. was purchased from
Pantel Rt. The consideration paid by the Company for the 51% interest consisted
of EUR 1,650,000 (USD 2,105,000) in cash, guarantees for amounts owed to Pantel
Rt. by a subsidiary of Euroweb Hungary Rt., and a guarantee that Euroweb Hungary
Rt. will purchase at least HUF 600 million (approximately $3 million) worth of
services from Pantel Rt. in each of 2004-2006.
(f) Legal Proceedings
The Company is a member of ICANN (Internet Corporation for Assigned Names and
Numbers), which is the association of domain registrations worldwide. The
Company, as a representative of ICANN in Slovakia, started to provide
registration and administration of second level domains for organizations
located in the Slovak Republic in January 2003 (total revenues in 2003
approximately $250,000). Due to the fact that the Company is the only provider
of such services in Slovakia, the Association of Internet Providers in Slovakia
("API") and the Association of Webhosting Providers claim that the Company has a
monopoly and is abusing this dominant position and started legal proceedings
against the Company with the Slovak Antimonopoly Office. The Antimonopoly office
agreed that certain parts of the "General terms of domain registrations" can be
considered as abusing the dominant position and requested the Company to change
certain items in the registration system, and imposed two minor penalties. The
initial decision of the Anti-Monopoly Office was upheld upon appeal.
However, API started a new legal procedure relating to the deadline for
registering in order to migrate to the new domain registration system. Initially
Euroweb Slovakia set a deadline of early 2003 for registration, but extended
this deadline to November 2003 due to the lack of registrants. API claims that
this was unfair to early registrants as they had to pay six or seven months of
additional fees than the registrants who registered in November 2003. Management
believes that it acted in accordance with the requirements of the API and the
whole internet community and does not believe that any penalties will arise in
respect of this claim.
There are no other known significant legal procedures that have been filed and
are outstanding against the Company.
7. Related Party Transactions
The provision of international/domestic leased line and VOIP services are being
provided in conjunction with Pantel Telecommunication Rt., an entity which is
majority owned and controlled by KPN Telecom B.V. (which also owned a majority
interest in the Company as at March 31, 2004). In the first quarter of 2004 and
fiscal 2003, Pantel Telecommunication Rt. Hungary was the most significant
trading partner of the Company with approximately 66% of the 2003 annual
revenues of Euroweb Romania (translating into 36% of the consolidated revenues
of the Company) were derived from providing services to Pantel.
11
Euroweb International Corp.
Notes to Interim Unaudited Restated Consolidated Financial Statements
8. Subsequent events
On April 28, 2004, the Company granted 125,000 options to the Chief Executive
Officer and an additional 240,000 options to seven employees and consultants of
the Company. The exercise price of the options ($4.78) is equal to the market
price on the date the grants were made. The options vest over a period of
between 3-4 years. As the Company has opted to follow APB 25 with respect to
accounting for grants made to employees, the company will recognize total
compensation charges of approximately $162,000, which will be expensed over the
vesting period.
9. Restatement of consolidated financial statements
Under accounting principles generally accepted in the United States of America
("US GAAP"), FASB Statement No. 141, Business Combinations, require's transfers
of net assets or exchanges of shares between entities under common control to be
accounted for by the receiving entity at carryover or the predecessor basis of
the transferring entity. Any excess of purchase consideration over book value
has to be recorded as a capital transaction or deemed distribution resulting in
a deduction from retained earnings rather than the creation of goodwill,
regardless of whether the transaction was valued at fair market value and
carried out at arm's length.
Pantel, Euroweb International Corp., and KPN (as majority shareholder of both
Pantel and Euroweb International Corp.at the time of the acquisition) took the
following steps to ensure the transaction was concluded at arm's length and for
a fair market price:
o the two KPN Board members that are common to Euroweb were not involved
in the transaction as they stepped back from the decision making
process: the transaction was reviewed and approved by an independent
committee consisting solely of the two independent Board members with
the assistance of Csaba Toro, CEO and Chairman of the Board, as
instructed by this committee.
o an independent accounting firm was commissioned to prepare a valuation
of the 51% shareholding which formed the basis of the transaction
price.
o legal advice was sought throughout the process on measures to ensure
that KPN or its appointed Board members were not involved in the
transaction from the Company's side.
However, both Pantel and Euroweb are still deemed to be entities under the
common control of KPN for accounting purposes and therefore the transaction is
required to be booked in the manner described above.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operations
Overview
The Company owns and operates Internet Service Providers in the Czech Republic,
Hungary, Romania and Slovakia through its subsidiaries Euroweb Czech Republic
spol. s.r.o. ("Euroweb Czech"), Euroweb Hungary Rt. ("Euroweb Hungary"), Euroweb
Slovakia a.s. ("Euroweb Slovakia") and Euroweb Romania S.A. ("Euroweb Romania").
The Company operates in one industry segment, providing Internet access and
additional value added services to business customers..
The revenues come from the following four sources:
(1) Internet Service Provider (Internet access, Content and Web services,
Other services);
(2) International/domestic leased line, Internet Protocol data services;
(3) Voice over Internet Protocol services; and
(4) Facilities (sale, rent and maintenance of dark fiber between the
Hungarian border and the Romanian City of Timisoara).
For the services in point (2) and (3), the main customer of the Company in 2003
and the first quarter of 2004 was Pantel Telecommunication Rt, Hungary, a
related party.
Related party transactions - Pantel Telecommunications Rt.
General: The largest customer of the Company since early 2001 has been Pantel
Telecommunication Rt, a Hungary-based alternative telecommunications provider.
Pantel operates within the region and has become a significant trading partner
for Euroweb Romania through the provision of direct fibre cable connection which
enables companies to transmit data to a variety of destinations by utilizing the
international connections of Pantel.
Due to the fact that the significant revenue of the Company derives from the
international/domestic leased line and Voice over Internet Protocol services, a
few of the Company's representatives have moved to the premises of Pantel Rt. in
order to improve co-operation on international projects.
After the acquisition of Euroweb Hungary in 2004, the balance and volume of
transactions with Pantel has changed significantly. First, the net receivable
position in the past (related party receivable less related party liabilities)
has changed to a net liability position through the large trade and loan
liability position of Euroweb Hungary towards Pantel. Second, sales dependency
on Pantel (i.e. percent of consolidated sales derived from Pantel) will decrease
as Euroweb Hungary has insignificant sales to Pantel. Third, dependency on
Pantel as the main supplier of the Company will increase as Pantel is also the
main supplier of Euroweb Hungary.
Transactions: Both Euroweb Hungary and Euroweb Romania have engaged in
transactions with Pantel:
13
(a) Pantel receives revenue from the provision of the following services to
subsidiaries of Euroweb International Corp.:
- Internet and related services
- National and international leased and telephone lines
- VOIP services
- Consulting services
- Interest on loan
The total amount of these services were USD $1,311,848 (2003: $1,206,289)
during the three month period ended March 31, 2004 of which $60,494 is interest
expense and consulting fee, the remaining balance is telecom related.
(b) Euroweb International and its subsidiaries received revenue from the
provision of the following services to Pantel:
- Cost of international leased lines and local telephone lines in
Slovakia and Romania
- International/national data and voice over internet protocol services
for Pantel
- Internet and related services
- Consulting services
- Commission
Total value of these services were approximately USD $1,490,767 in the
three month period ended March 31, 2004 (2003: $1,218,653).
In the first 3 months of 2004, direct sales to Pantel were 23% of total
consolidated revenue, but Euroweb Romania's dependency on Pantel is even greater
than this figure suggests. Some third party sales involve Pantel as the
subcontractor/service provider for the international/domestic lines (hence the
revenues from Pantel are lower than the amounts paid to Pantel), and some third
party customers are also clients of Pantel outside of Romania (i.e. their
relationship with Pantel is stronger than their relationship with Euroweb
Romania).
Effective dependency on Pantel - taking into account direct and Pantel-related
sales - represents approximately 35% of total consolidated revenues of the
Company and approximately 80-90% of total sales of Euroweb Romania. There is no
such dependency in the case of Euroweb Czech, Euroweb Hungary or Euroweb
Slovakia.
Pricing: Agreements are made at market prices or a split of the margin based on
the financial investment into the specific services by each of the parties.
Euroweb International Corporation always considers alternative suppliers for
each individual project.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with generally accepted accounting principles in the
United States of America ("US GAAP"). This preparation requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. US GAAP provides the framework from which to make these estimates,
assumption and disclosures. The Company chooses accounting policies within US
GAAP that management believes are appropriate to accurately and fairly report
the Company's operating results and financial position in a consistent manner.
Management regularly assesses these
14
policies in light of current and forecasted economic conditions. The Company's
accounting policies are stated in Note 1 to the Consolidated Financial
Statements. The Company believes the following accounting policies are critical
to understanding the results of operations and the effect of the more
significant judgments and estimates used in the preparation of the consolidated
financial statements:
Revenue Recognition Policies -- Revenues from services are recognized in
the month in which the services are provided. Invoices for traditional
ISP,International leased line and IP Data services are generally issued at the
beginning of the month except where local legislation prohibits such treatment.
VOIP traffic is measured during the month and invoiced at the end of the month.
Billed revenues for which the services are to be provided in the future, are not
disclosed as revenues in the reporting period, but are accrued and shown as
deferred revenue.
Accounts Receivable - Allowance for Doubtful Accounts -- The Company
regularly reviews the valuation of accounts receivable. The allowance for
doubtful accounts is estimated based on historical experience and future
expectations of conditions that might impact the collectibility of accounts.
Property Plant & Equipment Recovery -- Changes in technology or changes in
the Company's intended use of these assets may cause the estimated period of use
or the value of these assets to change. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. Estimates and assumptions used in both setting
depreciable lives and reviewing recoverability require both judgement and
estimation by management. Impairment is deemed to have occurred if projected
undiscounted cash flows related to the asset are less than its carrying value.
If impairment is deemed to have occurred, the carrying values of the assets are
written down, through a charge against earnings, to their fair value.
Intangibles Recovery - Intangibles consist mostly of goodwill. Goodwill
represented on the balance sheet reflects the unamortized difference between the
purchase price and fair value of businesses acquired. As of January 1, 2002 the
Company adopted SFAS 142 which specifies that goodwill no longer be amortized on
a systematic basis, but should be subject to at least annual impairment tests.
SFAS also prescribes some transitional provisions which have been completed by
June 30, 2002.
Acquisitions
On February 12, 2004, the Company entered into a Share Purchase Agreement with
PanTel Tavkozlesi es Kommunikacios rt. ("Pantel"), a Hungarian corporation, to
acquire Pantel's 51% interest in Euroweb Hungary Rt., a Hungarian corporation
("Euroweb Hungary") that provides Internet service and is based in Budapest,
Hungary. The Company prevoiusly owned 49% of Euroweb Hungary and, as a result of
this acquisition, Euroweb Hungary will become a wholly-owned subsidiary of the
Company. The purchase price to be paid by the Company for Pantel's interest in
Euroweb Hungary is EURO 1,650,000 (USD 2,105,000). The acquisition was funded
from cash that the Company had previously raised.
On February 23, the Company signed a Share Purchase Agreement in connection with
its acquisition of all of the outstanding shares of Elender Business
Communications Ltd., a leading ISP in Hungary. The purchase price consists of
USD 6,500,000 in cash and 677,201 of the Company's common shares. The number of
common shares may be reduced if certain liabilities of Elender (at Closing)
exceed amounts specified in the SPA. If there needs to be a reduction in the
number of common shares, for calculation purposes, one share is assigned a value
of $4.43 in the SPA. The excess by which certain liabilities of Elender (at
Closing) exceed amounts specified in the SPA, divided by $4.43 will result in
the number of common shares that will be deducted from the 677,201 The closing
of this acquisition is subject to various conditions being fulfilled, including
the approval of the Hungarian Anti-Monopoly Office. To date, the
15
Approval of the Hungarian Anti-Monopoly Office has been received, but certain
other conditions are still being finalized.
Results of Operations
Three-month Period Ended March 31, 2004 Compared to Three-month Period
Ended March 31, 2003
The increase in revenues was mainly due to the increased profitability in
Slovakia in connection with domain name sales, successful sale of fiber and
other non-recurring items in Romania as well as positive, profit generated by
the Hungarian operation.
Revenues
Three months ended March 31, 2004 2003
----------- ----------
Total Revenues 6,413,354 5,720,994
The Company experienced a 12% revenue growth in the three months ended March 31,
2004 compared to three months ended March 31, 2003.
The following table summarize the main changes in revenue for each of the
Company's business segments compared to the previous year with respect to the
revenue structure:
Revenue / services 2004 2003 % change
------------------------------------ ---------------- --------------------- -----------------
ISP activity $3,506,351 $3,307,200 6%
------------------------------------ ---------------- --------------------- -----------------
Int./dom. leased line *(a) $1,401,186 $1,431,424 (2%)
------------------------------------ ---------------- --------------------- -----------------
VOIP (b) $1,449,147 $982,370 47%
------------------------------------ ---------------- --------------------- -----------------
Facilities (a) $56,670 0 N/A
------------------------------------ ---------------- --------------------- -----------------
Total $6,413,354 $5,720,994 12%
------------------------------------ ---------------- --------------------- -----------------
* - primarily Pantel or Pantel related sales,
(a) substantially all generated by the Romanian subsidiary
(b) generated by the Hungarian and Romanian subsidiary. 100% of Romania
sales is Pantel direct sales ($852,000 in 2004)
Overall, each revenue category has experienced an increase in 2004 except for
the International/domestic leased line segment, when compared to the previous
year, while facilities became a new revenue source in 2003 after the
installation of the fibre optic cables in Romania in May 2003.
The following table summarize the main changes in revenue compared to the
previous year with respect to the geographical source of revenue:
Revenue/country Slovakia Czech Republic Hungary Romania Total
--------------------------- ----------------- -------------------- ----------------- ----------------- ----------------
Revenues in 2004 $1,019,228 $251,099 2,489,193 $2,653,834 $6,413,354
--------------------------- ----------------- -------------------- ----------------- ----------------- ----------------
Revenues in 2003 $783,316 $322,323 2,379,098 $2,236,257 $5,720,994
--------------------------- ----------------- -------------------- ----------------- ----------------- ----------------
Change in USD 30% (22%) 4% 19% 12%
--------------------------- ----------------- -------------------- ----------------- ----------------- ----------------
ISP business has decreased 30% in local currency in Czech Republic due to the
smaller number of customer base comparing previous years, while it has increased
in Slovakia by 8,7% exclusively due to domain name registration revenue. Overall
ISP revenue improved due to the weakness of the US Dollar relative to the Czeck
16
Koruna and Slovak Koruna. ISP business in Romania and Hungary slightly increased
or stagnated compared to the same period in 2003.
Revenue from international leased lines and IP data services (mostly Euroweb
Romania) has stagnated due to higher competition, falling margins and price
pressure.
Romanian VOIP business in the three months ended March 31, 2004 was $852,000
compared to $572,000 in the three months ended March 31, 2003. Within the same
period, the margin on this service has fallen.
Cost of revenues
The following table summarizes the Company's cost of revenues for the three
months ended March 31, 2004 and 2003:
Three months ended March 31, 2004 2003
----------- -----------
Total cost of revenues 4,055,061 3,632,571
Cost of revenues comprise mostly telecommunication expenses.
Cost of revenues were $4,055,061 for the three months ended March 31, 2004 in
comparison to $3,632,571 for the three months ended March 31, 2003. Gross margin
has remained constant: 36.5% in 2003 and 36.7% in 2004.
Operating expenses (excluding depreciation and amortization)
The following table summarizes the Company's operating expenses for the three
months ended March 31, 2004 and 2003:
Three months ended March 31, 2004 2003
----------- -----------
Operating expenses (excluding depreciation and 2,003,610 1,921,145
amortization)
Overall operating expenses (excluding depreciation, amortization) increased by
4% mostly due to the exchange rate movement of USD in Slovakia, Czech and
Hungary.
Depreciation and amortization
The following table summarizes the Company's depreciation and amortization for
the three months ended March 31, 2004 and 2003:
Three months ended March 31, 2004 2003
----------- ----------
Total depreciation and amortization 290,081 429,110
Depreciation has decreased by $139,029 in the three months ended March 31, 2004
compared to the same period in 2003 due to the strict control of capital
expenditures on equipment in late 2003 and the first quarter of 2004.
17
Net interest income
The following table summarizes the Company's net interest income for the
three months ended March 31, 2004 and 2003:
Three months ended March 31, 2004 2003
-------- ---------
Net interest expense 7,841 67,052
The decrease in net interest income is due to the fact that (i) less
interest-generating funds were available in this period than in the same period
of the previous year, (ii) the effective interest rate on these investments has
decreased over the periods in question (iii) securities expired on February 15,
2004, and there was no other investment made due to cash needs of further
acquisitions in 2004 (iv) Euroweb Hungary recorded interest expenses on its
related party loans.
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities were
approximately $12,050,485 as of March 31, 2004, a decrease of approximately $2.4
million from the end of fiscal year 2003. The decrease was influenced by the
acquisition of Euroweb Rt. (approximately $ 2.1 million) and partial repayments
of related party trade liabilities.
The Company has entered into share purchase agreements to acquire 100% of
Elender Rt in the first quarter of 2004. This agreement will significantly
influence the liquidity position of the Company, which can be separated into
three parts: (1) cash portion of purchase price will be $6,500,000 (2) short and
long term loan liabilities of approximately $ 2,900,000 which cannot be covered
from Elender Rt.'s working capital and (3) funding the working capital shortage
(approximately $300,000) of Elender Rt. The closing of the Elender purchase
remains subject to the satisfaction of customary terms and conditions in the SPA
and the approval of the Hungarian Competition Office.
After the acquisitions, the consolidated working capital (without deferred
revenue) is estimated to be more than $2,000,000 indicating that the Company
will be able to meet its working capital and capital expenditure needs over the
next twelve months. The Company's financial situation is stable, as current
assets cover all current trade, loan and other liabilities of the company.
Management believes, although it cannot provide guarantees, that the
synergy effects and potential business opportunities of the merged Hungarian
entities will significantly improve cash generating ability and will reduce the
loans and trade liabilities of the Company in the coming few years. Management
also believes that with its existing cash, cash equivalents, marketable
securities and internally generated funds, there will be sufficient funds to
meet the Company's currently projected working capital requirements and other
cash requirements until at least the next 12 months taking into account the new
acquisitions.
In the event the Company makes future acquisitions in Central and Eastern
Europe, the excess cash on hand or additional fund raising may be used to
finance such future acquisitions.
Inflation and Foreign Currency
The Company maintains its books in local currencies, including the Czech
koruna for Euroweb Czech Republic, the Hungarian Forint for Euroweb Hungary, and
the Slovak koruna for Euroweb Slovakia. However, the U.S. dollar is the
functional currency of Euroweb Romania.
18
The Slovakian Koruna has strengthened by 16%, the Czech Korona has
strengthened against the U.S. dollar by approximately 10%, while the Hungarian
Forint has strengthen against U.S. dollar by approximately 8% between the three
months of 2004 and 2003. The impact of this is reflected in the exchange rates
used in the three months of 2004 and the three months of 2003.
Effect of Recent Accounting Pronouncements
In December 2003, the Securities and Exchanges Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition". SAB 104 revises or
rescinds certain SAB guidance in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations relating to revenue recognition. This bulletin is
effective immediately. The Company believes that it's current revenue
recognition policies comply with SAB 104.
In April 2003, the Financial Accounting Standards Board ("FASB") announced
that it would mandate the fair value method of accounting for all stock-based
awards. The FASB issued an Exposure Draft of a proposed statement on March 31,
2004, which is subject to a comment period. If enacted, the change in accounting
is not expected to be effective for the Company until fiscal 2005. Until a final
statement is issued, the Company cannot estimate the effect that this change in
accounting would have on its consolidated statement of operations.
Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the SEC, in
the Company's press releases or other public or stockholder communications, or
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "would be," "will allow," "intends to," "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, are based on certain
assumptions and expectations which may or may not be valid or actually occur,
and which involve various risks and uncertainties. In addition, sales and other
revenues may not commence and/or continue as anticipated due to delays or
otherwise. As a result, the Company's actual results for future periods could
differ materially from those anticipated or projected.
Unless otherwise required by applicable law, the Company does not undertake, and
specifically disclaims any obligation, to update any forward-looking statements
to reflect occurrences, developments, unanticipated events or circumstances
after the date of such statement. The Company advises you to review any
additional disclosures made in its 10-QSB, 8-K, and 10-KSB reports filed with
the Commission
Item 3. Controls and Procedures
As of March 31, 2004, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer and the Chief Accounting Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the Chief Executive Officer and
19
the Chief Accounting Officer, concluded that the Company's disclosure controls
and procedures were effective as of March 31, 2004. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to March 31, 2004.
20
PART II
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings as of the date of
this report except for the following:
The Company is a member of ICANN (Internet Corporation for Assigned Names and
Numbers), which is the association of domain registrations worldwide. The
Company, as a representative of ICANN in Slovakia, started to provide
registration and administration of second level domains for organizations
located in the Slovak Republic in January 2003 (total revenues in 2003
approximately $250,000). Due to the fact that the Company is the only provider
of such services in Slovakia, the Association of Internet Providers in Slovakia
("API") and the Association of Webhosting Providers claim that the Company has a
monopoly and is abusing this dominant position and started legal proceedings
against the Company with the Slovak Antimonopoly Office. The Antimonopoly office
agreed that certain parts of the "General terms of domain registrations" can be
considered as abusing the dominant position and requested the Company to change
certain items in the registration system, and imposed two minor penalties. The
initial decision of the Anti-Monopoly Office was upheld upon appeal.
However, API started a new legal procedure relating to the deadline for
registering in order to migrate to the new domain registration system. Initially
Euroweb Slovakia set a deadline of early 2003 for registration, but extended
this deadline to November 2003 due to the lack of registrants. API claims that
this was unfair to early registrants as they had to pay six or seven months of
additional fees than the registrants who registered in November 2003. Management
believes that it acted in accordance with the requirements of the API and the
whole internet community and does not believe that any penalties will arise in
respect of this claim.
Item 2. Changes in Securities
On April 28, 2004, the Company granted 125,000 options to the Chief Executive
Officer and an additional 240,000 options to seven employees and consultants of
the Company. The exercise price of the options ($4.78) is equal to the market
price on the date the grants were made. The options vest over a period of
between 3-4 years.
The Company issued such securities in reliance on the safe harbor and exemptions
from registration provided under Rule 506 of Regulation D and Section 4(2) of
the Securities Act of 1933, as amended. No advertising or general solicitation
was employed in offering the securities. The offerings and sales or issuances
were made to a limited number of persons, all of whom were accredited investors,
business associates of the Company or executive officers of the Company, and
transfer was restricted by the Company in accordance with the requirements of
such act. In addition to representations by the above-referenced persons, the
Company has made independent determinations that all of the investors were
accredited or sophisticated investors, and that they were capable of analyzing
the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, these investors were
provided with access to our Securities and Exchange Commission filings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise, during the three
months of 2003.
ITEM 5. OTHER INFORMATION
None
item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits (numbers below reference Regulation S-B, Item 601)
(3) (a) Certificate of Incorporation filed November 9, 1992(1)
(b) Amendment to Certificate of Incorporation filed July 9, 19972
(c) Restated Certificate of Incorporation filed May 29, 2003
(d) By-laws(2)
1 Exhibits are incorporated by reference to Registrant's Registration Statement
on Form SB-2 dated May 12, 1993 (Registration No. 33-62672-NY, as amended)
2 Filed with Form 10-QSB for quarter ended June 30, 1998.
22
(31) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
(31) (b) Certification of the Chief Accounting Officer of Euroweb
International Corp. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
(32) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(32) (b) Certification of the Chief Accounting Officer of Euroweb
International Corp. pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 20th day of May 2004.
EUROWEB INTERNATIONAL CORP.
By /s/Csaba Toro
--------------
Csaba Toro
Chairman of the Board