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 September 30, 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.)
Vaci ut 141, 1138 Budapest, 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 5,342,533
----------------------------- ---------
(Class) (Outstanding at November 17, 2004)
Transitional Small Business Disclosures Format (Check one): Yes_____No X
EUROWEB INTERNATIONAL CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of September 30, 2004 (unaudited)
and December 31, 2003 (restated) 2
Consolidated statements of operations and comprehensive loss (unaudited)
for the three months ended September 30, 2004 and 2003 and nine months ended
September 30, 2004 and 2003 (restated) 3
Consolidated statements of stockholders' equity for the nine months ended
September 30, 2004 (unaudited) and twelve months ended December 31, 2003 (restated) 4
Consolidated statements of cash flows (unaudited) for the nine months
ended September 30, 2004 and 2003 (restated) 5
Notes to interim (unaudited) Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Controls and Procedures 22
PART II. Other Information 23
Signature 24
27
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2004 2003
------------ -----------
(Unaudited) (restated see Note 8)
ASSETS
Current Assets
Cash and cash equivalents $ 4,607,608 $ 3,043,703
Investment in securities - 11,449,669
Trade accounts receivable, net 3,166,749 1,305,268
Related party receivables 1,439,565 1,145,069
Current portion of note receivable 21,771 173,911
Prepaid and other current assets 2,315,421 1,604,424
Total current assets 11,551,114 18,722,044
------------ -----------
Property and equipment, net 7,057,793 2,782,239
Assets under construction 435,023 47,853
Intangibles - customer contracts 2,167,015 -
Goodwill 5,943,821 566,000
------------ -----------
Total assets $27,154,766 $22,118,136
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $4,079,193 $1,323,747
Related party payables 928,955 1,962,152
Related party loan payable - short term portion 488,729 235,679
Overdrafts and current portion of bank loans 435,637 -
Current portion of notes payable 1,053,975 -
Other current liabilities 715,039 903,275
Accrued expenses 2,157,728 619,821
Deferred IRU revenue 46,000 46,000
Deferred other revenue 1,116,985 1,007,464
------------ -----------
Total current liabilities 11,022,241 6,098,138
Non-current portion of deferred IRU revenue 808,834 843,334
Non-current portion of related party loan payable 733,093 942,715
Non-current portion of bank loans 711,111 -
Non-current portion of notes payable 181,712 -
Non-current portion of lease obligations 144,605 228,686
------------ -----------
Total liabilities 13,601,596 8,112,873
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding - -
Common stock, $.001 par value - Authorized 35,000,000 shares;
Issued and outstanding 5,342,533 and 4,665,332 shares respectively 24,807 24,129
Additional paid-in capital 50,755,993 48,227,764
Accumulated deficit (36,066,607) (33,105,716)
Accumulated other comprehensive losses: (45,611) (25,502)
Treasury stock - 175,490 common shares, at cost (1,115,412) (1,115,412)
------------ -----------
Total stockholders' equity 13,553,170 14,005,263
------------ -----------
Total liabilities and stockholders' equity $27,154,766 $22,118,136
============ ===========
See accompanying notes to consolidated financial statements.
2
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
----------- ---------- ------------ -------------
restated restated
Revenues
Third party revenues 8,649,877 4,500,545 $ 19,631,983 $ 13,191,279
Related party revenues 2,096,190 1,244,830 5,533,618 3,990,294
----------- ---------- ------------ -------------
Total Revenues 10,746,067 5,745,375 25,165,601 17,181,573
Cost of revenues
Third party cost of revenues 4,951,923 2,020,796 11,606,917 6,764,310
Related party cost of revenues 1,785,613 1,718,025 4,454,898 4,126,802
----------- ---------- ------------ -------------
Total Cost of revenues 6,737,536 3,738,821 16,061,815 10,891,112
----------- ---------- ------------ -------------
Gross profit 4,008,531 2,006,554 9,103,786 6,290,461
Operating expenses
Compensation and related costs 1,316,364 540,292 3,306,058 2,418,226
Consulting and professional fees 1,220,176 445,166 2,158,069 1,299,616
Other selling, general and administrative expenses 1,262,993 864,401 2,836,855 1,963,853
Depreciation and amortization 833,404 421,773 1,466,329 1,301,017
----------- ---------- ------------ ------------
Total operating expenses 4,632,937 2,271,632 9,767,311 6,982,712
Loss from operations (624,406) (265,078) (663,525) (692,251)
Net interest (expense) income (89,695) 87,801 (130,113) 228,134
Gain from sale of subsidiaries - - 28,751 109,421
Loss before income taxes (714,101) (177,277) (764,887) (354,696)
----------- ---------- ------------ -------------
Provision for income taxes 4,436 21,479 50,455 77,057
----------- ---------- ------------ -------------
Net Loss (718,537) (198,756) (815,342) (431,753)
----------- ---------- ------------ -------------
Other comprehensive (income) loss (2,422) 61,465 20,109 170,443
----------- ---------- ------------ -------------
Comprehensive loss (716,115) (260,221) $(835,451) $(602,196)
=========== ========== ============ =============
Net loss per share, basic and diluted (.14) (.04) (.16) (.05)
Weighted average number of shares outstanding, basic and 5,342,533 4,665,332 4,948,753 4,665,332
diluted
See accompanying notes to consolidated financial statements
3
EUROWEB INTERNATIONAL CORP.
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
(restated)
Foreign currency translation loss - - - - (45,237) - (45,237)
Unrealized loss on securities - - - - (216,407) - (216,407)
available for sale
Net loss for the period (restated) - - - (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
(restated) --------- ------- ----------- ------------ -------- ----------- -----------
Foreign currency translation loss - - - - 6,274 - 6,274
Realized gain on securities - - - - (26,383) - (26,383)
Deemed distribution (Note 8) - - - (2,145,549) - - (2,145,549)
Compensation charge on share 70,121 70,121
options issued to consultants
Issuance of shares (Elender Rt. 677,201 678 2,458,108 2,458,786
acquisition)
Net loss for the period - - - (815,342) - - (815,342)
--------- ------- ----------- ------------ -------- ----------- -----------
Balances, September 30, 2004 5,342,533 $24,807 $50,755,993 $(36,066,607) $(45,611) $(1,115,412) $13,553,170
========= ======= =========== ============ ======== =========== ===========
See accompanying notes to consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
Nine Months Ended
September 30,
------------------
2004 2003 (restated)
-------------------------------
Cash flows from operating activities:
Net loss $ (815,342) $ (431,753)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 1,466,329 1,301,017
Foreign currency gain 43,428 (3,362)
Compensation expense booked to equity (options issued to consultants) 70,121 -
Realized gain on sale of securities (26,383) -
Unrealized interest income on securities - (272,173)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable 390,083 (565,541)
Prepaid and other assets 160,416 (67,865)
Accounts payable, other current liabilities and accrued expenses (290,065) 709,935
Deferred revenue 14,504 357,378
------------ ------------
Net cash provided by operating activities 1,013,091 1,027,636
------------ ------------
Cash flows from investing activities:
Maturity of securities 11,464,000 499,632
Collection on notes receivable 152,140 141,274
Payment of acquisition indebtedness - (180,000)
Acquisition of 100% of Elender Rt.net of cash and transaction costs (6,459,219) -
Acquisition of 51% of Euroweb Rt. (2,142,000) -
Acquisition of property and equipment (1,570,738) (1,199,353)
------------ ------------
Net cash provided by (used in) investing activities 1,444,183 (738,447)
------------ ------------
Cash flows from financing activities:
Change in bank loans and overdraft (211,375) -
Repayment of notes payable (180,161) (129,945)
Principal payments under capital lease obligations (425,235) (386,187)
------------ ------------
Net cash used in financing activities (816,771) (516,132)
------------ ------------
Effect of foreign exchange rate changes on cash (76,598) 3,615
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,563,905 (223,328)
Cash and cash equivalents, beginning of period 3,043,703 2,666,526
------------ ------------
Cash and cash equivalents, end of period $ 4,607,608 $ 2,443,198
------------ ============
Significant non cash items:
Issuance of shares as part of Elender Rt. acquisition $ 2,458,786 -
New capital leases $ 140,251 $ 245,904
See accompanying notes to consolidated financial statements.
5
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
1. Organization and Business
EuroWeb International Corp. (the "Company") is a Delaware corporation which was
organized on November 9, 1992. The largest shareholder of Euroweb International
Corp. is KPN Telecom B.V. ("KPN"), a Netherlands corporation, with a 43.6%
shareholding at September 30, 2004.
The Company owns and operates Internet service providers in the Czech Republic,
Hungary, Slovakia and Romania. The Company operates in one business segment.
Acquisition of remaining 51% of Euroweb Hungary Rt.
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 Telecommunication Rt. ("Pantel Rt.") and is fully
consolidated in the financial statements for all periods presented. Pantel Rt.
is majority owned by KPN. The consideration paid by the Company for the 51%
interest comprised EUR 1,650,000 (USD $2,105,000) in cash, guarantees for
amounts owed by Euroweb Hungary Rt. to Pantel 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 the three years ending December 31,
2006.
As the acquisition was made between entities 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 for 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).
Acquisition of Elender Business Communications Rt. ("Elender Rt.")
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 Rt.,
an Internet Service Provider ("ISP") located in Hungary. Consideration paid of
USD $9,142,572 consisted of USD $6,500,000 in cash and 677,201 of the Company's
common shares valued at USD $2,458,786 net of registration cost, and USD
$134,219 in transaction costs (consisting primarily of professional fees
incurred related to attorneys, accountants and valuation advisors). The closing
occurred on June 9, 2004 and the results of Elender Rt. have been consolidated
into the financial statements from this date.
In accordance with the purchase method of accounting prescribed by SFAS No. 141
"Business Combinations" ("SFAS 141"), the Company allocated the Consideration to
the tangible net assets and liabilities and intangible assets acquired, based on
their estimated fair values. The Consideration has been allocated as follows:
Fair value of Elender Rt.'s recorded assets acquired and
liabilities assumed 1,351,991
Identified intangibles - customer contracts 2,412,759
Excess purchase price over allocation to identifiable
assets and liabilities (Goodwill) 5,377,822
-----------
Total Consideration $ 9,142,572
===========
6
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
The purchase price allocation is preliminary and a final determination of the
purchase accounting adjustments will be made upon the completion of a final
analysis of the total purchase cost. The Company expects to finalize these
matters by the end of 2004.
In performing this preliminary purchase price allocation of acquired intangible
assets, the Company considered its intention for future use of the assets,
analyses of historical financial performance and estimates of future performance
of Elender Rt.'s services, among other factors. Acquired identifiable intangible
assets obtained in the Company's acquisition of Elender Rt. relate to customer
contracts which are being amortized over the estimated useful life of 3 years.
The Company preliminarily estimated the fair values of the identified
intangibles - customer contracts using the "income" valuation approach and
discount rates ranging from 16% to 18%. The discount rates selected were based
in part on the Company's weighted average cost of capital and determined after
consideration of the Company's rate of return on debt and equity, and the risk
associated with achieving forecasted cash flows.
The excess of the purchase price over the fair value of the identifiable
tangible and intangible net assets acquired was preliminarily assigned to
goodwill. In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142"), goodwill will not be amortized but will be tested for impairment
at least annually. The operating results of Elender Rt. have been included in
the Company's consolidated financial statements from the date of acquisition.
Although the former owners of Elender Rt. received shares of common stock of the
Company, each of the former owners of Elender Rt. currently holds less than 10%
of the outstanding shares of common stock in the Company. Therefore, they are
not considered related parties and those transactions are shown as third party
transactions in the unaudited interim consolidated financial statements of the
Company.
The following table presents unaudited summarized combined results of operations
of the Company and Elender Rt., on a pro forma basis, as though the companies
had been combined as of January 1, 2003:
------------------------ ---------------------- ------------------------ ----------------------- ---------------------
**** Three months ended Three months ended Nine months ended Nine months ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
----------------------- ---------------------- ------------------------ ----------------------- ---------------------
Revenues $ 11,108,420 $11,383,120 $ 35,719,526 $ 33,039,097
------------------------ ---------------------- ------------------------ ----------------------- ---------------------
Net loss $ (665,454) ($1,302,677) $ (905,935) $(2,080,987)
------------------------ ---------------------- ------------------------ ----------------------- ---------------------
Net loss per share $ (0.12) $(0.24) $ (0.17) $ (0.39)
------------------------ ---------------------- ------------------------ ----------------------- ---------------------
The above unaudited pro forma summarized results of operations are intended for
informational purposes only and, in the opinion of management, are neither
indicative of the financial position or results of operations of the Company had
the acquisition actually taken place as of January 1, 2003, nor indicative of
the Company's future results of operations. In addition, the above unaudited pro
forma summarized results of operations do not include potential cost savings
from operating efficiencies or synergies that may result from the Company's
acquisition of Elender Rt.
7
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
2. Summary of Significant Accounting Policies
(a) Principles of consolidation and basis of presentation
The unaudited 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 and all adjustments, consisting mainly of normal
recurring accruals, necessary for a fair presentation, have been made.
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 8). Results for interim periods are
not necessarily indicative of the results for a full year.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States of America ("U.S. GAAP").
The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the
Company for the year ended December 31, 2003, including the notes
thereto, set forth in the Company's annual report on Form 10-KSB filed
with the United States Securities and Exchange Commission ("SEC").
(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.
(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. Revenues from prepaid calling
card sales (i.e. "Neo-phone cards" sold by Euroweb Hungary) are
recognized when the customer uses the cards and are based on the ratio
of actual minutes used to minutes purchased. Once the prepaid calling
cards expire, any remaining prepaid amounts are recognized as
revenues.
8
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
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.
Full payment was received upon signing, and therefore revenue
attributable to the lease is recognized on a straight-line basis over
the term of the 20-year lease agreement.
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.
(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 its
subsidiary, Euroweb Romania in the Romanian Lei ("ROL"). In Romania,
which has a hyper-inflationary economy, the U.S. dollar is used as the
functional currency. The Company's financial statements prepared in
ROL are remeasured into U.S. dollars using the following policies:
|X| Monetary assets and liabilities are remeasured into the
functional currency using the exchange rate at the balance sheet
date.
|X| Non-monetary assets and liabilities are remeasured into the
functional currency using historical exchange rates.
|X| 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 for all
subsidiaries are included in the consolidated results of operations
for the periods presented.
9
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(g) Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Equipment accounted for as capital leases are 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 life 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.
(h) Goodwill and Other Intangibles
Goodwill and intangible assets that have indefinite useful lives are
tested at least annually for impairment. Intangible assets that have
finite useful lives (whether or not acquired in a business
combination) are amortized over their estimated useful lives. During
2002 and 2003, the Company performed the required 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.
The Company has preliminarily assigned approximately $2.4 million to
customer contract intangible assets related to the acquisition of
Elender Rt., and these assets are being amortized over a period of
three years. The Company preliminarily assigned a value of $5.7
million to Goodwill related to the acquisition of Elender Rt. However,
a later detailed fixed asset valuation by an independent valuation
expert increased the value initially assigned to fixed assets by $
330,000 and therefore Goodwill was revised to $5.4 million in the
third quarter of 2004.
(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.
10
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
Under the accounting provisions of SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the pro forma
amounts indicated below:
Nine months ended September 30,
2004 2003
------ ------
Net loss:
Net loss as reported $ (815,342) $ (431,753)
Additional FAS 123 compensation expense (553,027) -
Pro forma net loss (1,368,369) (431,753)
Basic and diluted loss per share:
As reported $ (0.16) $ (0.05)
Pro forma (0.28) (0.05)
3. Related party loan payable
Freestart Kereskedelmi es Szolgaltato Kft. (,,Freestart"), a wholly-owned
subsidiary of Euroweb Hungary Rt., has a loan from Pantel Rt. of HUF 245 million
(approximately $1.222 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
4. Bank loans, overdraft, and notes payable
On June 1, 2004, Elender Rt. (which is now a wholly owned subsidiary) entered
into a bank loan agreement with Commerzbank (Budapest) Rt. The agreement
consists of a loan facility of HUF 300 million (approximately $1.5 million) of
which approximately $1 million was outstanding at September 30, 2004. The loan
is to be repaid in quarterly installments of HUF 14.5 million (approximately
$72,500), commencing November 30, 2004. The interest rate is BUBOR (Budapest
Interbank Offered Rate) + 1.35%.
In addition, the bank also provided an overdraft facility of HUF 150 million
(approximately $720,000) to Elender Rt., of which approximately $146,389 was
drawn down as at September 30, 2004. The interest rate is BUBOR (Budapest
Interbank Offered Rate) + 1%.
Notes payable (approximately $1,235,687 as at September 30, 2004) relate to
outstanding Elender Rt. liabilities to three previous shareholders of Elender
Rt.: Vitonas Investments Limited, Certus Kft. and Rumed 2000 Kft.. Approximately
$508,000 is payable on December 31, 2004, while the remaining amount is payable
in four equal quarterly installments of HUF 36.438 million (approximately
$182,000), with the final payment on December 31, 2005.
11
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
5. Stockholders' Equity
On April 28, 2004, the Company granted 125,000 options to the Chief Executive
Officer and an additional 195,000 options to five employees and 45,000 options
to two consultants of the Company. All of these options have an exercise price
equal to the market price on day of grant ($4.78), vest over a period of between
3-4 years and relate to future services to be performed. There were no options
or warrants exercised during this period. As the Company follows APB 25 with
respect to accounting for grants made to employees, no compensation expense was
recorded for the options granted to the Chief Executive Officeer and the five
employees. However, the Company will recognize total compensation charges of
approximately $162,000 for the grants made to the two consultants, which will be
expensed over the vesting period of three years (compensation expense for the
nine month period ended September 30, 2004 was $70,121).
In connection with the acquisition of Elender Rt. (Note 1), the Company issued
677,201 of common shares. The Company is required to register the shares of
common stock issued in connection with the Elender Rt. acquisition.
6. Commitments and Contingencies
(a) Employment Agreements
The Company entered into a six-year agreement with its Chief Executive Officer,
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 (approximately $ 126,368 due in 2005, $ 73,265 due in
2006, and $ 7,955 due in 2007), as well as non-cancelable agreements for office
premises ($ 584,264 in each of 2005 and 2006, $ 512,964 in 2007 and $416,000 in
2008).
(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.
(d) 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.
12
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(e) Elender Rt. acquisition
The Company is in the process of registering the shares of common stock issued
in connection with the Elender Rt. acquisition. Pursuant to section 1 of the
Registration Rights Agreement signed on June 1, 2004 with the Sellers of Elender
Rt., if the shares of common stock are not registered within 120 days of Closing
(Closing was on June 9, 2004) for reasons attributable to the Company, a penalty
of $ 2,000 per day is payable until the shares are registered.
(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).
The Association of Internet Providers in Slovakia ("API") started a 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 more than the registrants
who registered in November 2003. On 15 July 2004, the Anti-Monopoly Office
dismissed the claim of API. However, API can appeal against this decision
although management is confident that the decision of the Anti-Monopoly Office
will be upheld. As of November 8, 2004 API has not filed an appeal.
There are no known significant legal procedures that have been filed and are
outstanding against the Company.
(g) Capital expenditure commitment
In August 2004, Euroweb Romania won a tender to provide domestic leased line
services over a period of 10 years. In connection with this transaction, the
company estimates that an investment of approximately $1,600,000 will be
required, of which approximately $350,000 has already been spent. The remaining
$ 1,250,000 will be spent over the next six months.
7. Related Party Transactions
The provision of international/domestic leased line and VOIP services are being
provided in conjunction with Pantel Rt., an entity which is majority owned and
controlled by KPN Telecom B.V. (which is also the largest shareholder of the
Company as at September 30, 2004 it held 43.6% of the Company's outstanding
shares of common stock). In the first nine months of 2004 and fiscal 2003,
Pantel Rt. was the most significant trading partner of the Company comprising
approximately 67% of the 2004 revenues of Euroweb Romania (translating into 22%
of the consolidated revenues of the Company).
13
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
8. Restatement of consolidated financial statements
Under accounting principles generally accepted in the United States of America
("US GAAP"), FASB Statement No. 141, Business Combinations, requires 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 is
recorded as a capital transaction or deemed distribution resulting in a
deduction from retained earnings. Therefore, the Company's purchase of the
remaining 51% of Euroweb Hungary Rt. from Pantel Rt. has been accounted for in
this manner as KPN was the majority shareholder of both Pantel Rt. and the
Company at the time of the acquisition.
Pantel, the Company and KPN took the following steps to ensure the transaction
was concluded at arm's length:
o the two KPN Board members that are common to the Company were not
involved in the transaction as they recused themselves from the
decision making process. Accordingly, the transaction was reviewed and
approved by an independent committee consisting solely of the two
independent Board members with the assistance of Csaba Toro the
Company's CEO and former Chairman of the Board.
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.
Nonetheless, both Pantel and the Company are entities under the common control
of KPN and therefore the transaction is required to be recorded as if it were a
pooling of interests (see Note 1).
14
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operations
Overview
Euroweb International Corp. ("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") and Elender Business Communications Rt.
("Elender") , 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 and 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) in Romania, the main customer of the
Company in 2004 and 2003 was Pantel Rt, a related party.
As an Internet Service Provider, the Company generally did not build out optical
fibers in the past, rather it has several agreements with infrastructure owners
and telecom companies to buy internet and telecom services and resell them to
customers, from private individuals to larger corporations. The Company also
provides value added services and more comprehensive solutions to its customers.
Such structures enable the Company to avoid significant capital expenditures on
network development. However without its own infrastructure, the Company's
ability to compete with other Internet Service Providers and telecom companies
is limited due to existing access costs. In order to mitigate the impact of
newly introduced cheaper technology and competition, the Company took several
steps, including the following:
(a) Built strategic partnership with telecom companies;
(b) Increased the value added services and offered more comprehensive
solutions;
(c) Introduced voice and international/domestic leased lines services;
(d) Started to build its own optical fiber network in Romania; and
(e) Made acquisitions to ensure economies of scale and utilize synergies.
This strategy resulted in a continuous increase in revenue and a reduction of
losses over the last two years and has also increased the cash generating
ability of the Company.
15
Related party transactions - Pantel Telecommunications Rt. (or "Pantel Rt.")
General: The largest customer and supplier of the Company since early 2001 has
been Pantel 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 a direct fibre cable connection which
enables companies to transmit data to a variety of destinations by utilizing the
international connections of Pantel Rt.. As a result, Euroweb Romania became the
preferred, but not exclusive partner for services in connection with Romania. In
addition to this, Euroweb Hungary utilizes significant telecom services from
Pantel Rt..
Due to the fact that a significant portion of the Company's revenue is generated
by international/domestic leased line and Voice over Internet Protocol services,
a number 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 and Elender Rt. in 2004, the balance
and volume of transactions with Pantel Rt. has changed significantly. First, the
net receivable position in the past (related party receivables less related
party liabilities) has changed to a net liability position through the large
trade and loan liability position of Euroweb Hungary to Pantel Rt.. Second,
sales dependency on Pantel Rt. (i.e. percent of consolidated sales derived from
Pantel Rt.) will decrease as Euroweb Hungary and Elender Rt. have insignificant
sales to Pantel Rt. Third, dependency on Pantel Rt. as the main supplier of the
Company increased as Pantel Rt. is also the main supplier of Euroweb Hungary.
Transactions: Both Euroweb Hungary and Euroweb Romania engage in the following
transactions with Pantel Rt.:
(a) Pantel Rt. receives revenue from the provision of the following services to
subsidiaries of the Company:
- Internet and related services;
- National and international leased and telephone lines;
- VOIP services;
- Consulting services; and
- Interest on a loan to the Company.
The total amount of these services were USD $4,596,878 (2003: $4,290,341)
during the nine month period ended September 30, 2004 of which $141,980 (2003:
$163,539) is interest expense and consulting fees, while the remaining balance
is telecom related.
(b) The Company and its subsidiaries received revenue from the provision of the
following services to Pantel Rt.:
- 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; and
Commission.
Total value of these services were approximately USD $5,533,618
($3,990,294) in the nine months period ended September 30, 2004.
16
During the nine months ended September 30, 2004, direct sales to Pantel Rt. were
22% of total consolidated revenue, but Euroweb Romania's dependency on Pantel
Rt. is even greater than this figure suggests. Some third party sales involve
Pantel Rt. as the subcontractor/service provider for the international/domestic
lines (hence the revenues related to Pantel Rt. are greater than the amounts
paid to Pantel Rt.), and some third party customers are also clients of Pantel
Rt. outside of Romania (i.e. their relationship with Pantel is stronger than
their relationship with Euroweb Romania).
Effective dependency on Pantel Rt. - taking into account direct and Pantel
Rt.-related sales - represents approximately 30% of total consolidated revenues
of the Company and approximately 85% of total sales of Euroweb Romania. There is
no such dependency in the case of Euroweb Czech, Euroweb Hungary or Euroweb
Slovakia.
With respect to 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. The Company always considers alternative suppliers for each
individual project.
In 2004, KPN Telecom B.V. (the majority owner of Pantel Rt. and the largest
shareholder in the Company), announced its intention to divest its interest in
Pantel Rt., with certain sale agreements being signed with a view to final
consummation in 2005. If final consummation occurs, then the Company will no
longer be a related party with Pantel Rt. It cannot be predicted in advance
whether this change will have an influence on the business relationship between
the Company and Pantel Rt. However, Company management is confident - although
it cannot be assured - that the current business agreements were made on
arms-length principles and are beneficial to both parties, and therefore
significant changes may not occur.
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 policies in light of current and
forecasted economic conditions. Accounting policies the Company believes to be
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 are the same as those described in its Annual Report on
Form 10-KSB for the year ended December 31, 2003.
Acquisitions
On February 12, 2004, the Company entered into an agreement with Pantel Rt. to
acquire Pantel Rt.'s 51% interest in Euroweb Hungary, a provider of Internet
services and based in Budapest, Hungary. The Company previously owned 49% of
Euroweb Hungary and, as a result of this acquisition, Euroweb Hungary became a
wholly-owned subsidiary of the Company. The purchase price paid by the Company
for Pantel's interest in Euroweb Hungary was EURO 1,650,000 ($2,105,000) in
cash. Under accounting principles generally accepted in the United States of
America ("US GAAP"), FASB Statement No. 141, Business Combinations, requires
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 is recorded as a capital transaction or deemed
17
distribution resulting in a deduction from retained earnings. Therefore, the
Company's purchase of the remaining 51% of Euroweb Hungary Rt. from Pantel Rt.
has been accounted for in this manner as KPN was the majority shareholder of
both Pantel Rt. and the Company at the time of the acquisition.
On February 23, 2004, the Company signed an agreement to acquire all of the
outstanding shares of Elender Rt., a leading ISP in Hungary. The consideration
of $9,142,572 consisted of $6,500,000 in cash and 677,201 of the Company's
common shares valued at $2,458,786 and $134,219 in transaction costs. The
closing of this acquisition was on June 9, 2004, which is the starting date of
consolidation. The Company is required to register the shares of common stock
issued in connection with the Elender Rt. acquisition.
Results of Operations
Nine-month Period Ended September 30, 2004 Compared to Nine-month Period
Ended September 30, 2003
With the inclusion of Elender Rt. in the profit and loss statements from June 9,
2004, revenues and costs have increased significantly, however the $624,406 loss
from operations for the three months ended September 30, 2004 is due to two main
factors: (1) $400,000 spent on a special marketing campaign due to the
acquisitions of Euroweb Hungary and Elender Rt. together with a renewed
"Euroweb" brand introduction and (2) amortization of $245,744 related to the
customer contracts of Elender Rt. being amortized over a period of three years.
The Company plans to finalize the legal and organizational merger of Euroweb
Hungary. and Elender Rt. in the fourth quarter of 2004, so management expects to
realize certain synergy effects mainly from 2005 onwards.
Revenues
Nine months ended September 30, 2004 2003
Total Revenues 25,165,601 17,181,573
The Company experienced a 46% revenue growth, or an increase of $7,984,028, for
the nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003. The increase was mainly due to the Elender Rt. acquisition
and increase in VOIP services.
The following table summarizes the main changes in revenue for each of the
Company's revenue sources compared to the previous year:
------------------------------------ --------------------- --------------------- --------------
Revenue / services 2004 (9 months Sept 2003 (9 months Sept % change
30) 30)
------------------------------------ --------------------- --------------------- --------------
ISP activity $14,216,434 $8,907,044 +60%
------------------------------------ --------------------- --------------------- --------------
Int./dom. leased line *(a) $ 4,163,635 $4,772,953 (13)%
------------------------------------ --------------------- --------------------- --------------
VOIP (b) $ 6,692,496 $3,256,785 +105%
------------------------------------ --------------------- --------------------- --------------
Facilities (a) $ 93,036 244,791 (62)%
------------------------------------ --------------------- --------------------- --------------
Total $25,165,601 $17,181,573 46%
------------------------------------ --------------------- --------------------- --------------
* - primarily Pantel or Pantel related sales,
(a) substantially all generated by the Romanian subsidiary
(b) generated by the Hungarian and Romanian subsidiaries.
18
ISP revenue analysis
87% of the 60% increase in ISP revenue is due to the acquisition of Elender Rt.
The remaining growth of ISP revenue (13%) can be attributed to the weakness of
the US Dollar (7%-13% depending on comparisons with Hungary, Slovakia or Czech)
and organic growth compared to the previous year. Due to economic conditions and
pricing issues, customers - having access type services - generally transfer
from higher monthly fee subscriptions to lower monthly fee subscriptions, and
therefore the revenue growth possibilities in this segment is limited.
Leased Line revenue analysis
Revenue from international leased lines and IP data services produced by Euroweb
Romania has decreased by 13% compared to last year. This service is provided in
relationship with Pantel Rt.'s client base and services, and are generally
provided to Internet Service Providers, telecommunication firms, and other
international companies. Due to developments in the Romanian market in the last
few years, these individually agreed wholesale prices have dropped (from 20% to
more than 50%). Although the Company was able to obtain some new customers and
contracts to offset the reduction in prices, further decreases in overall
revenues from this source may be experienced in the future.
VOIP Service revenue analysis
--------------------------------------------- -------------------- --------------------- ---------------
VOIP services revenue 2004 (9 months 2003 (9 months Sept % change
Sept 30) 30)
--------------------------------------------- -------------------- --------------------- ---------------
Retail voice origination 748,020 343,376 +118%
--------------------------------------------- -------------------- --------------------- ---------------
Wholesale voice termination (a) 3,507,774 1,771,724 98%
--------------------------------------------- -------------------- --------------------- ---------------
Neophone prepaid phonecard (b) 2,436,702 1,141,685 113%
--------------------------------------------- -------------------- --------------------- ---------------
Total $6,692,496 $3,256,785 105%
--------------------------------------------- -------------------- --------------------- ---------------
(a) substantially all generated by the Romanian subsidiary, and 100% sales to
Pantel
(b) generated by the Hungarian subsidiary.
Retail voice origination is provided to corporate customers over leased lines.
Such services enable the Customers to reduce their costs for international, long
distance and local calls initiated by them. These services are provided to large
number of clients in Hungary and Romania. The company has experienced demand for
these services and increased traffic especially in Romania.
Wholesale voice termination is voice minutes received from Pantel Rt. and
forwarded to Romanian telecommunication companies. Such services have increased
by 98%, but the margin has fallen significantly in 2004 as in middle of 2003,
the Company changed its wholesale voice termination business model, which
resulted in an approximate 10% reduction in wholesale margins. It is a price
sensitive service which is also affected by the regulatory environment in
Romania. The service bears a high risk that the voice traffic can be completely
eliminated and this may occur at any time, although impact on consolidated gross
profit will be limited as margins are low.
Neophone prepaid phonecards enable users to make cheaper international calls
compared to the rates of the incumbent telecom operators, and were first
introduced three years ago in Hungary. During this time, the number of users and
voice traffic has continuously and significantly increased. In the nine months
ended September 30, 2004, revenues from phone cards have increased by 113%
compared to previous years. From 2004, competition has introduced aggressively
low prices: up to 50% discounts depending on the destination of calls compared
to previous periods. Consequently, the Company has also had to reduce its
prices, and so this development may impair the increase of such revenues in the
following quarters.
19
Facilities revenue analysis
Revenues from facilities consist of mainly non-recurring sale of fiber optic
cables in 2003, while such source of revenue has decreased substantially in
2004.
Geographic revenue analysis
The following table summarizes the main changes in revenue compared to the
previous year with respect to the geographical source of revenue:
------------------------ --------------------- --------------------- -----------
Revenue/country 2004 (9 months Sept 2003 (9 months Sept Change in
30) 30) %
--------------------------------------------- --------------------- ------------
Czech Republic $736,844 $894,315 (18%)
------------------------ --------------------- --------------------- -----------
Slovakia $2,901,760 $2,469,216 18%
------------------------ --------------------- --------------------- -----------
Hungary $12,434,830 $6,280,734 98%
------------------------ --------------------- --------------------- -----------
Romania $9,092,167 $7,537,308 21%
------------------------ --------------------- --------------------- -----------
Total $25,165,601 $17,181,573 46%
------------------------ --------------------- --------------------- -----------
The decrease of 18% in the Czech Republic is the result of two factors: a
decrease of 24% in the ISP business due to a reduced customer base compared to
previous years and an increase due to the strengthening of the Czech Koruna
against the US Dollar.
The increase of 18% in Slovakia is due to an increase in domain registration
revenue (3%) and the strengthening of the Slovak Koruna against the US Dollar.
Elender Rt. is consolidated from June 9, 2004, and therefore the Hungarian
operations have almost doubled, mainly (78%) due to this acquisition. The
remaining increase in Hungary is because the Hungarian Forint has also
strengthened against the US Dollar and the organic growth.
The Romanian operations have experienced an additional 21% revenue increase
compared to previous years due to increased wholesale voice termination (113%)
and ISP revenue (40%), while a decrease was realized in revenues from
international/domestic leased lines (13%).
Cost of revenues
The following table summarizes the Company's cost of revenues for the nine
months ended September 30, 2004 and 2003:
Nine months ended September 30, 2004 2003
---- ----
Total cost of revenues 16,061,815 10,891,112
Cost of revenues comprise mostly telecommunication expenses. Gross margin is
consistent at 36% for the nine-month periods ended September 30, 2004 and 2003.
However, the fact that the 2004 margin did not change from the prior year is due
to two offsetting variables: the significant increase of low margin voice
revenue which had a downward impact on the overall margin, and the consolidation
of Elender Rt. which has a higher gross margin than the average margin,
resulting in an upward impact on the overall margin.
Operating expenses (excluding depreciation and amortization)
20
The following table summarizes the Company's operating expenses for the nine
months ended September 30, 2004 and 2003:
Nine months ended September 30, 2004 2003
---- ----
Operating expenses (excluding depreciation and 8,300,982 5,681,695
amortization)
Overall operating expenses (excluding depreciation and amortization) increased
by 46%. A part of the increase (54%) was due to the consolidation of Elender Rt.
from June 9, 2004. Moreover, in the third quarter, the Company conducted a
significant marketing campaign in Hungary (related to the merger of Elender Rt.)
resulting in more than $400,000 (15%) of expenditures. The company expects to
finalize the merger of the Hungarian operations by the end of this year, and
management believes that most of the expected synergy and operating cost savings
can be achieved starting from 2005 onwards.
Depreciation and amortization
The following table summarizes the Company's depreciation and amortization for
the nine months ended September 30, 2004 and 200
Nine months ended September 30, 2004 2003
---- ----
Depreciation 1,220,585 1,250,836
Amortization of intangibles 245,744 50,181
Total depreciation and amortization 1,466,329 1,301,017
Depreciation has decreased by $30,251 in the nine months ended September 30,
2004 compared to the same period in 2003. Although depreciation increased by
$362,217 due to the acquisition and consolidation of Elender Rt., this was
offset by the reduction ($353,313) of depreciation in Euroweb Hungary and its
subsidiary Freestart Rt. The bulk of the reduction (over 75%) is due to the
depreciation of Freestart Rt., because certain high-value computer equipment
have been fully depreciated.
Amortization of intangibles of $245,744 in 2004 related to certain customer
contracts of Elender Rt. which were recognized as intangible assets upon
acquisition of Elender Rt. In 2003, amortization of intangibles related to the
customer lists of Euroweb Romania (which were fully impaired in 2003).
Net interest income
The following table summarizes the Company's net interest income for the
nine months ended September 30, 2004 and 2003:
Nine months ended September 30, 2004 2003
---- ----
Interest income 165,746 356,374
Interest expenses 295,859 128,240
Net interest (expense) income (130,113) 228,134
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, without new investments being made due to cash being needed to fund
acquisitions in 2004, and (iv) consolidation of Elender Rt. has increased
interest expense by $91,639 due to loans outstanding, and therefore reduced net
interest income.
21
Liquidity and Capital Resources
In recent years the Company maintained approximately $11 million in cash
invested into US Government Securities, which expired in February 2004. The main
source of these funds were capital injections to the Company by KPN Telecom B.V.
in the past.
As of September 30, 2004, the Company's cash, cash equivalents and
marketable securities were $4,607,608, a decrease of approximately $9.9 million
from the end of fiscal year 2003. The decrease is primarily due to the
acquisition of Euroweb Hungary (approximately $ 2.1 million), the acquisition of
Elender Rt.(approximately $ 6.6 million) and partial repayments of related party
trade liabilities.
Management believes, that the synergy effects and potential business
opportunities of the merged Hungarian entities may contribute to improving the
Company's cash generating ability from 2005. The Company intends to reduce the
loans and trade liabilities of the Company from any such cash generated.
After the acquisitions, the consolidated working capital (current assets
less current liabilities excluding deferred revenue) is still more than $1.6
million, and management believes that there will be sufficient funds to meet the
Company's currently projected working capital requirements and other cash
requirements for at least the next 12 months. In case of further acquisitions,
the Company may raise additional funds or it may sell non-strategic assets
within one year in order to finance such movements.
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.
The Slovakian Koruna has strengthened by 13%, the Czech Korona has
strengthened against the U.S. dollar by approximately 7%, while the Hungarian
Forint has strengthened against U.S. dollar by approximately 8% using the
average rates for the nine month periods ended September 30, 2004 and 2003.
Effect of Recent Accounting Pronouncements
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 the fiscal year 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.
22
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 Securities & Exchange Commission
Item 3. Controls and Procedures
As of September 30, 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 the Chief Accounting Officer, concluded that the Company's
disclosure controls and procedures were effective as of September 30, 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
September 30, 2004.
23
PART II
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings as of the date of
this report.
Item 2. Changes in Securities
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. OTHER INFORMATION
Janos Koka, a director of Euroweb International Corp. and a director
and executive officer of ELENDER Business Communications Services Ltd.
("Elender"), a wholly-owned subsidiary of the Company, resigned from
all positions with the Company and Elender effective October 4, 2004.
On November 9, 2004, the Board of Directors voted to appoint Gabor
Ormosy as a director of the Company to fill the vacancy caused by the
resignation of Janos Koka.
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) Restated By-laws (filed herewith)
(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.
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)
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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 19th day of November 2004.
EUROWEB INTERNATIONAL CORP.
By /s/Csaba Toro
-------------
Csaba Toro
Chairman of the Board
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