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 June 30, 2002
[] 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.)
1113 Budapest, Bocskai ut 134-146. Hungary
(Address of principal executive offices)
+36-1-382-3771
Issuer's telephone 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 4,665,326
(Class) (Outstanding at June 30, 2002)
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 June 30, 2002 (unaudited)
and December 31, 2001 (audited) 2
Consolidated statements of operations and comprehensive loss (unaudited) for
the three months ended June 30, 2002 and 2001 and six months
ended June 30, 2002 and 2001 3
Consolidated statements of stockholders' equity for the six months ended
June 30, 2002 (unaudited) and twelve months ended December 31, 2001 4
Consolidated statements of cash flows (unaudited) for the six months
ended June 30, 2002 and 2001 5
Notes to interim (unaudited) Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. Other Information 17
Signature 21
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2002 December 31, 2001
------------- ------------
(Unaudited) (audited)
ASSETS
Current Assets
Cash and cash equivalents ...................................................... $ 1,533,391 $ 1,512,303
Investment in securities ....................................................... 11,762,902 14,628,464
Trade accounts receivable, net ................................................. 659,689 801,436
Current portion of note receivable ............................................. 183,312 194,296
Prepaid and other current assets ............................................... 730,679 598,484
------------ ------------
Total current assets ...................................................... 14,869,973 17,734,983
Note receivable, less current portion ............................................ 270,653 363,976
Investment in affiliate .......................................................... -- 495,187
Property and equipment, net ...................................................... 1,405,364 1,426,604
Intangibles, net ................................................................. 4,252,538 4,367,538
Other non-current assets ......................................................... 10,457 20,612
------------ ------------
Total assets ................................................................ $ 20,808,985 $ 24,408,900
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable ......................................................... $ 467,390 $ 638,729
Current portion of acquisition indebtedness .................................... 180,000 180,000
Other current liabilities ...................................................... 593,000 704,483
Loan payable - short term portion .............................................. 100,723 --
Accrued expenses ............................................................... 328,295 468,921
Deferred revenue ............................................................... 163,666 277,127
------------ ------------
Total current liabilities ................................................... 1,833,074 2,269,260
Loan payable .................................................................... -- 94,904
Acquisition indebtedness, less current portion .................................. -- 180,000
Non-current portion of lease obligations ........................................ 122,509 196,611
Total liabilities ........................................................... 1,955,583 2,740,775
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 4,665,326 shares ......................................... 24,129 24,129
Additional paid-in capital ...................................................... 48,227,764 48,227,764
Accumulated deficit (28,218,532) (25,325,033)
Accumulated other comprehensive losses: ......................................... (64,547) (143,323)
Treasury stock - 175,490 common shares, at cost ................................ (1,115,412) (1,115,412)
------------ ------------
Total stockholders' equity ................................................... 18,853,402 21,668,125
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity ................................... $ 20,808,985 $ 24,408,900
============ ============
See accompanying notes to consolidated financial statements.
2
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended Six months ended
------------------ ----------------
June 30 June 30
------- -------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $2,969,182 $ 1,555,147 $6,119,762 $ 2,814,007
Cost of revenues 1,896,596 889,474 3,853,434 1,528,292
--------- ------- --------- ---------
Gross profit 1,072,586 665,673 2,266,328 1,285,715
Operating expenses
Compensation and related costs 453,966 480,845 976,366 966,988
Severance to officers 2,020,832 - 2,020,832 -
Consulting and professional fees 293,102 211,036 539,498 389,285
Other selling, general and administrative expenses 569,766 389,792 902,642 825,483
Depreciation and amortization 237,093 665,771 451,547 1,266,479
--------- ------- --------- ---------
Total operating expenses 3,574,759 1,747,444 4,890,885 3,448,235
Loss from operations (2,502,173) (1,081,771) (2,624,557) (2,162,520)
Net interest income 100,441 273,516 226,245 592,661
Equity in loss (income) of affiliate 307,137 72,009 495,187 50,757
Loss from operations before income taxes (2,708,869) (880,264) (2,893,499) (1,620,616)
Provision for income taxes - - - -
- - - -
--------- ------- --------- ---------
Net Loss (2,708,869) (880,264) (2,893,499) (1,620,616)
Other comprehensive (gain) loss (239,973) 3,839 (78,776) 159,716
--------- ------- --------- ---------
Comprehensive loss $(2,468,896) $(884,103) $(2,814,723) $(1,780,332)
============== =========== ============ ============
Net Loss per share, basic and diluted (.57) (.19) (.61) (.34)
Weighted average number of shares outstanding, basic and diluted 4,771,804 4,707,873 4,771,804 4,721,604
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, 2000 4,801,696 $24,129 $48,227,764 $(19,742,020) $(14,011) $(173,688) $28,322,174
============ ======= =========== ============ ========= ========== ===========
Foreign currency translation gain - - - - 16,642 - 16,642
Unrealized gain on securities - - - - 26,434 -
available for sale 26,434
Reclassification adjustment for gain - - - - (172,388) -
included currently in net income (172,388)
Net loss for the period - - - (5,583,013) - - (5,583,013)
Treasury stock (136,370) - - - - (941,724) (941,724)
------------ ------- ----------- ------------ --------- ---------- -----------
Balances, December 31, 2001 4,665,326 $24,129 $48,227,764 $(25,325,033) $(143,323) $(1,115,412) $21,668,125
============ ======= =========== ============ ========= ========== ===========
Foreign currency translation gain - - - - 16,873 - 16,873
(loss)
Unrealized gain (loss) on - - - - 88,337 - 88,337
securities available for sale
Reclassification adjustment for gain - - - - (26,434) -
included currently in net income (26,434)
Net loss for the period - - - (2,893,499) - - (2,893,499)
------------ ------- ----------- ------------ --------- ---------- -----------
- - - - - -
- - - - - -
Balances, June 30, 2002 4,665,326 $24,129 $48,227,764 $(28,218,532) $(64,547) $(1,115,412) $18,853,402
============ ======= =========== ============ ========= ========== ===========
* restated to reflect 1 for 5 reverse stock split
See accompanying notes to consolidated financial statements
4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2002 2001
----
Cash flows from operating activities:
Net loss .................................................................................. $ (2,893,499) $ (1,620,616)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................................. 451,547 1,266,479
Amortization of discount on acquisition indebtedness ...................................... 10,155 14,793
Equity in loss (income) of affiliate ...................................................... 495,187 50,757
Foreign currency loss ..................................................................... 5,819 10,893
Realized gain on sale of securities ....................................................... (62,786) (194,540)
Unrealized interest income on securities .................................................. (157,903) (250,777)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable ....................................................................... 141,747 (83,908)
Prepaid and other assets .................................................................. (132,195) 300,757
Accounts payable, other current liabilities and accrued expenses .......................... (477,212) (441,065)
Deferred revenue (113,461) (28,865)
------------ ------------
Net cash used in operating activities
(2,732,601) (976,092)
------------ ------------
Cash flows from investing activities:
Investment in securities .................................................................. (13,506,666) (14,002,206)
Maturity of securities .................................................................... 16,654,820 14,200,000
Payment of acquisition indebtedness ....................................................... (180,000) (180,000)
Repayments of notes receivable ............................................................ 104,307 80,682
Repayments of loan receivable ............................................................. -- 44,235
Acquisition of property and equipment, intangibles ........................................ (315,307) (178,087)
Net cash provided by investing activities ......................................... 2,757,154 (35,376)
------------ ------------
Cash flows from financing activities:
Payments to acquire treasury stock ........................................................ -- (805,125)
Principal payments under capital lease obligations ........................................ (20,338) (12,963)
------------ ------------
Net cash used in financing activities .............................................. (20,338) (818,088)
------------ ------------
Effect of foreign exchange rate changes on cash .............................................. 16,873 (9,769)
------------ ------------
Net increase (decrease) in cash and cash equivalents ......................................... 21,088 (1,839,325)
Cash and cash equivalents, beginning of period ............................................... 1,512,303 4,372,783
------------ ------------
Cash and cash equivalents, end of period ..................................................... $ 1,533,391 $ 2,533,458
============ ============
See accompanying notes to consolidated financial statements.
5
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
1. Organization and Business
EuroWeb International Corporation (the "Company") is a Delaware corporation
which was organized on November 9, 1992, and was a development stage enterprise
through December 31, 1993.
The Company owns and operates Internet service providers in the Czech Republic,
Romania and Slovakia. The Company's consolidated statements of operations also
include the equity in the net income of Euroweb Hungary Rt., in which the
Company has a 49% ownership interest. The Company operates in one business
segment.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with the instructions for Form 10-QSB and,
therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations, and cash
flows in conformity with generally accepted accounting principles. All
adjustments which are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the
interim financial statements, have been included. The results of
operations for the periods ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the entire fiscal
year or any other interim period.
(b) Principles of consolidation
The consolidated financial statements comprise the accounts of the
Company and its controlled subsidiaries. All material intercompany
balances and transactions have been eliminated upon consolidation.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the Unites States of
America.
(c) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles, 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 Consolidated Financial Statements
(d) Revenue recognition
Revenues from services are recognized in the month in which the
services are provided.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication expenses
(f) Cash and cash equivalents
Cash and cash equivalents include cash at bank and short-term deposits
of less than three months duration.
(g) Investment in securities
Investments in marketable debt securities are classified as
available-for-sale and are recorded at fair value with any unrealized
holding gains or losses included as a component of other comprehensive
income until realized.
(h) Investment in affiliate
The Company records as income its share of the earnings of
Euroweb Hungary Rt.(a 49% held associate) net of goodwill
amortization. Goodwill was fully amortized as of December 31, 2001.
The other 51% of Euroweb Hungary Rt. is held by Pantel Rt., a related
party and major trading partner.
(i) 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 four years or the lease term.
Recurring maintenance on property and equipment is expensed as
incurred.
When assets are retired or otherwise disposed of, the related costs and
accumulated depreciation from the respective accounts and any gain or
loss on disposals are included in the results of operations.
7
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
(j) Intangibles
Intangibles consist of goodwill and customer lists. Goodwill results
from business acquisitions and represents the excess of purchase price
over the fair value of net assets acquired. Amortization was computed
over the estimated future period of benefit (generally five years) on a
straight-line basis until December 31 2001. In accordance with the
provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," ("SFAS No. 142"), no
amortization of goodwill has occurred since January 1, 2002. The
Company assesses whether the goodwill can be recovered through
undiscounted future operating cash flows of the acquired operations.
The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using appropriate
discount rates. Conditions which may indicate that an impairment issue
exists include a negative economic downturn or a change in the
assessment of future operations. However, the assessment of the
recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
Customer lists were acquired as a result of a purchase of assets and
are being amortized over the estimated future period of benefit of five
years. The assessment of recoverability and possible impairment are
determined in a manner similar to the assessment of goodwill described
above. No recoverability or impairment issues have been identified,
although the assessment of the recoverability will be impacted if
estimated future operating cash flows are not achieved.
(k) Net loss per share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share," ("SFAS No. 128"), which provides for the
calculation of "basic" and "diluted" earnings per share. Basic
earnings(loss) per share include no dilution and is computed by
dividing income(loss) attributable to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings(loss) per share reflects the potential effect of
common shares issuable upon exercise of stock options and warrants in
periods in which they have a dilutive effect. The Company had
potentially dilutive common stock equivalents for the quarters ended
June 30, 2002 and 2001, which were not included in the computation of
diluted net loss per share because they were antidilutive.
3. Cash Concentration
At June 30, 2002, cash and cash equivalents included $670,429 on deposit with a
U.S. money market fund or major money center bank.
8
Euroweb International Corp.
Notes to Interim Unaudited Consolidated Financial Statements
4. Investment in Securities
On January 25, 2002, the Company purchased an United States Treasury Note with a
face value of $14,389,000, which was purchased for $ 13,506,666. The note
matures on February 15, 2004.
On May 1, 2002, the Company sold US Treasury Notes for $2,004,820 representing a
face value of $2,120,000 in order to cover the severances discussed in Note 7.
Of the $246,240 difference between the market value as of June 30, 2002 and the
purchase price of the remaining investment, $157,903 is recorded as interest
income on securities calculated with an effective interest rate of 3%, while the
remaining $88,337 has been recorded as a comprehensive gain.
5. Affiliate, carried on an equity basis
The Company's consolidated statement of operations for the six months ended June
30, 2002 and 2001 include the Company's equity interest in the net income of
Euroweb Rt. for each period, calculated as follows:
2002 (six months) 2001 (six months)
----------------- -----------------
Revenues ............................... $ 2,638,978 $ 2,317,760
Gross profit ........................... 1,566,933 1,552,985
Net (loss) income from operations ...... (346,556) 89,905
Goodwill impairment .................... (869,346) --
Net (loss) income ...................... $(1,215,902) $ 89,905
=========== ===========
Company's 49% equity in net income ..... (595,792) 44,053
Amortization of goodwill related to
the Company's investment ............... -- (94,810)
----------- -----------
Equity in net (loss) income of affiliate $ (595,792) $ (50,757)
=========== ===========
$307,640 of the goodwill impairment resulted in the write-off of the remaining
goodwill balances in Euroweb Rt. relating to subsidiaries purchased in 2000 and
2001. These subsidiaries did not generate the revenues or operating profit that
was initially thought possible and management assessed that goodwill was
impaired.
The remaining goodwill impairment resulted from an April 2002 acquisition
(purchase of 100% of the shares of Freestart Rt., a free Internet Service
Provider, for a purchase price of $10,000). However, this Company had a net
liability position of approximately USD 500,000 at the purchase date, due to a
USD 1,000,000 liability to Pantel Rt. (the majority owner of Euroweb Rt. and a
9
KPN Group subsidiary). As the main revenue stream of this entity is a
revenue-sharing arrangement with the dominant player in local fixed-line
telephony, the terms of which may be subject to legislation, management has
decided to write-off the entire amount of the excess of purchase price over net
fair value of the assets, consistent with the practice for the other
acquisitions in the past two years.
Since the carrying value of the net investment in affiliate was $ 495,187 at the
beginning of the year, the net investment in affiliate has been written down to
zero. Since no commitments or guarantees were made by the Company on behalf of
Euroweb Rt., the difference between the 49% equity interest in the net loss ($
595,792) and the opening net carrying value of the investment at the beginning
of the year ($495,187) is not recorded.
6. Stockholders' Equity
On August 30, 2001, the shareholders approved a one-for-five reverse stock split
of the Company's common stock. Prior period share and per share amounts have
been restated to give effect to the reverse stock split.
During the first six months of 2002, the Company did not grant any options or
warrants, nor were any exercised. Upon the exercise of an outstanding warrant or
option, each warrant/option holder will receive 1/5 of a share, due to the
reverse stock split effected on August 30, 2001.
7. Severance to officers
In May 2002, the employment contract of two officers were terminated. The
company has paid a total compensation of $1,254,166 to Mr. Robert Genova and
$766,666 to Mr. Frank Cohen covering the period until the end of the employment
contracts (December 2005).
The new management decided to close the New York offices and move the principle
office to Budapest, Hungary by June 30, 2002.
8. Commitments and Contingencies
Employment agreements with Mr. Frank Cohen and Robert Genova were terminated in
the second quarter of 2002 and their total compensation for the period from June
2002 to December 31, 2005 was settled. At the same time, Mr. Robert Genova and
Mr. Frank Cohen forfeited all of their outstanding options in the Company.
There is one employment agreement remaining as of June 30, 2002 with the Company
providing for aggregate annual compensation of $96,000 through December 31,
2005.
9. Related Party Transactions
In 2001, the Company's subsidiary in Romania launched a service which includes
the provision of international IP and international leased line services. This
service is being provided in conjunction with Pantel Telecommunication Rt., an
entity which is majority owned and controlled by the KPN Group (which also owns
a majority interest in the Company). In 2001, Pantel Telecommunication Rt.
Hungary, a subsidiary of KPN and therefore a related party, became the most
significant trading partner of the Company. Approximately 55% of the 2001 annual
revenues of Euroweb Romania (translating into 30% of the consolidated revenues
of the Company) were derived from the provision of services to Pantel. In the
first six months of 2002, sales to Pantel has increased to 60% of revenues of
Euroweb Romania (which represents 40% in the consolidated revenues of the
Company).
10
Pantel has also invoiced USD 1,060,171 in the first six months of 2002 to the
subsidiaries of the Company in connection with the provision of internet
bandwidth and international leased lines.
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,
Romania and Slovakia. These subsidiaries (Euroweb Czech Republic, Euroweb
Slovakia, and Euroweb Romania) are wholly owned. The Company's consolidated
statements of operations also include the equity in the net income of Euroweb
Hungary Rt., in which the Company has a 49% ownership interest. The Company
operates in one business segment, acting as an Internet service provider to
business customers through the provision of the following services:
(1) Traditional ISP business (Internet access, Content and Web services, Other
services) (2) International leased line, IP data services (3) Voice over IP
services
For the services in point (2) and (3), the main customer of the Company in 2002
was Pantel Telecommunication Rt, Hungary, a related party. The majority owner of
Euroweb International Corporation and Pantel Telecommunication Rt is KPN Telecom
BV, a Netherlands corporation.
Related party transactions - Pantel Telecommunications Rt.
General: The largest customer of the Company since early 2001 is Pantel
Telecommunication Rt, a Hungary-based alternative telecommunications provider.
Pantel operates within the region and has become a significant trading partner
for Euroweb Romania and Euroweb Slovakia 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 increase of revenue comes from the new services
provided in conjunction with Pantel, some of the consultants of the Company have
moved to the premises of Pantel in order to improve the effectiveness of the
co-operation on international projects. Csaba Toro, Chief Executive Officer of
Euroweb International Corporation is also the Chief Executive Officer of Pantel.
Transactions: Both Euroweb Slovakia and Euroweb Romania have engaged in
transactions with Pantel:
(a) Pantel receives revenue from the provision of the following services to
subsidiaries of Euroweb International Corporation:
11
- Internet bandwidth
- Costs of international leased lines outside Romania and Slovakia
The total amount of these services were USD $1,060,171 during the six month
period ended June 30, 2002.
(b) Euroweb International and its subsidiaries received revenue from the
provision of the following services to Pantel:
- Cost of international leased lines and local loops in Slovakia and Romania
- International IP and VOIP services for Pantel
- Re-invoice of costs of Pantel related work of consultants of Euroweb
International Corporation
Total value of these services were approximately USD $2,415,132 in the first six
months of 2002.
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.
Other: Some services provided by Pantel are invoiced through Euroweb Hungary Rt,
which is 49% owned by the Company and 51% owned by Pantel. These transactions
are considered as essentially Pantel services and disclosed as revenue of Pantel
in point (a) as set forth above. No other service is invoiced to/from Euroweb
Hungary Rt.
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. 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.
12
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
There were no new acquisitions in 2001 and the first six months of 2002.
Results of Operations
Six-month Period Ended June 30, 2002 Compared to Six-month Period Ended
June 30, 2001
The Company has significantly increased its revenue and gross margin (in
absolute terms) compared to the same period in the previous year; with most of
this increase being attributable to activities in Romania. However, during the
same time period, the company was able to keep operating expenses at similar
levels to the previous year, resulting in a significant improvement of the
operating results (excluding the one-time termination payment to officers). In
accordance with SFAS 142, the Company no longer amortizes goodwill. This has had
a positive impact on the operating results of the first six months of 2002.
Revenues
Total revenues for the six months ended June 30, 2002 were $6,119,641 in
comparison with $2,814,007 for the six months ended June 30, 2001. The increase
in revenues of $3,305,634 was due to the introduction of new services, while
traditional ISP activity has not changed when compared with the previous period.
Most of the increase has been in Euroweb Romania as can be seen as follows:
Revenue per countries/first half of 2002 2001
---------------------------------------------------------------------------------------------------------------
Czech Republic $ 738,244 $ 593,286
Romania 4,003,826 1,009,594
Slovakia 1,377,571 1,211,127
---------------------------------------------------------------------------------------------------------------
Total 6,119,641 2,814,007
13
The new services were introduced in co-operation with Pantel
Telecommunication Rt. , a subsidiary of KPN Telecom BV, which is also the
majority shareholder of the Company and therefore a related party. Sales to
Pantel have increased compared with 2001. Approximately 55% of the 2001 annual
revenues of Euroweb Romania (representing 30% of the consolidated revenues of
the Company) were derived from the provision of services to Pantel, while in the
first six months of 2002 this percentage has increased to 60% (representing 40%
of the consolidated revenues of the Company).
The proportion of revenue per product lines has developed as follows:
Revenue per services 2002 2001
---------------------------------------------------------------------------------------------------------------
ISP $ 2,426,590 $ 2,351,841
Int. leased line and IP data 3,240,020 144,305
VOIP 453,152 317,861
---------------------------------------------------------------------------------------------------------------
Total 6,119,762 2,814,007
Cost of revenues
Cost of revenues comprise mostly telecommunication expenses.
Network costs were $3,853,434 in 2002 in comparison to $1,528,292 in 2001. Gross
margin has decreased from 45% to 37% when compared to the previous year.
Although there were no significant pricing policy changes within the Company
during the first six months of 2002, the margin rate has decreased due to the
new services, which have significantly less margin than traditional ISP
activity. Although the margins have fallen, the Company was able to increase
gross profit by 76% in absolute terms.
Severance to officers
In May 2002, the employment contracts for two executive officers, which had
fixed-terms until 2005, were terminated. A significant one-time cash outflow was
paid as severance, with Mr. Robert Genova receiving $1,254,166 and Mr. Frank
Cohen receiving $766,666.
The new management has closed the office in New York and moved the Company's
principle office to Budapest, Hungary. The Company expects to reduce its
compensation and related costs by $45,000 per month as a result of the Company's
relocation of its principal offices.
Operating expenses (excluding depreciation and amortization and
severance)
Despite the 117% increase in revenues, operating expenses (excluding
depreciation, amortization and severance) increased by only 9% as cost control
measures and the operational consolidation of the subsidiaries acquired in 1999
and 2000 began to have a positive impact. This enabled the Company to roll out
new services using the existing operational infrastructure minimizing the need
for additional resources. The increase in operating expenses can be attributed
primarily to one time legal fees in connection with the tender offer by KPN and
the cost of closing the New York office.
14
Depreciation and amortization
As disclosed above, no goodwill was amortized in 2002. Other intangibles,
representing customer lists obtained in an acquisition in Romania in 2000, are
being amortized ($57,500 quarterly) over a period of five years. Depreciation of
tangible fixed assets has increased from $253,479 in 2001 to $336,547 in 2002,
reflecting the investment in equipment used to provide the new services.
Net interest income
Net interest income of $226,245 in the first six months of 2002 is lower than
the net interest income of $592,661 in the first six months of 2001. The
decrease is due to the fact that less interest-generating funds were available
in this period than in the same period of the previous year, and also because
the effective interest rate on these investments has decreased over the periods
in question.
Equity interest in affiliate
Euroweb Rt. has made some acquisitions over the past two years where goodwill
has been initially recognized. However, management has considered such goodwill
to be impaired and has subsequently made write-offs which have had a significant
impact in the results for the first half of 2002. All goodwill previously
recognized by Euroweb Rt. have now been written off and as of June 30, 2002, no
goodwill exists on its books.
Although the Company's 49% share in the net loss of Euroweb Rt. for the six
months ended June 30, 2002 is $595,792, the opening net carrying value of the
investment in the Company's financial statements at the beginning of the year
was only $495,187. Therefore, the net investment has been written down to zero.
The difference of $100,605 is not required to be recorded in the books of the
Company. However, if in the future, Euroweb Rt. has net income, then the Company
may only recognize its 49% interest on Euroweb Rt. net income in excess of
$100,605.
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities were
approximately $13,296,293 as of June 30, 2002, a decrease of $2,844,474 from the
end of 2001.
The Company has $13,296,293 of cash, cash equivalents and marketable
securities compared to $ 1,955,583 total short and long term liabilities.
Management 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.
KPN Telecom B.V. (NY Stock Exchange: KPN) owns 52% of the outstanding shares of
Common Stock of the Company. KPN has announced that it intends to sell all of
its non-core assets, including its ownership of 52% of the outstanding shares of
the Company. KPN has distributed to interested buyers a Business Plan on the
Company, has made available all the documents relating to the Company, and
arranged for meetings of Management of the Company with prospective suitors. So
far, non of the offers were accepted by KPN.
15
On February 20, 2002, Everest Acquisition Corp., a wholly owned subsidiary of
Royal KPN, commenced a tender offer for all of the outstanding shares of common
stock of EuroWeb International Corp. at the purchase price of $2.25 in cash per
share. This offer was raised to $2.70 on March 20, 2002 and expired on April 4,
2002.
The tender offer was conditional on at least 90% of the outstanding common stock
of EuroWeb calculated on a fully diluted basis being validly tendered and not
withdrawn prior to the expiration date (March 19, 2002). Everest Acquisition
Corp did not intend to waive this condition if the effect of the waiver would be
to permit Everest Acquisition to purchase less than a majority of the
outstanding EuroWeb shares that KPN does not already own.
Upon consummation of the Offer, Everest Acquisition and KPN intended to effect a
merger between EuroWeb and Everest Acquisition with the cash and marketable
securities of Euroweb International to be used to pay off financing costs of the
acquisition.
On April 8, 2002, the offer was cancelled after insufficient interest from
investors.
Inflation and Foreign Currency
The Company maintains its books in local currencies, including the Czech
koruna for Euroweb Czech Republic and the Slovak koruna for Euroweb Slovakia.
However, given the hyper-inflationary situation in Romania, the U.S. dollar is
used as the functional currency.
The Slovakian Koruna has strengthened by 2.43%, while the Czech Korona has
strengthened against the U.S. dollar by approximately 10% between the first six
months of 2002 and 2001. The impact of this is reflected in the exchange rates
used in the first six months of 2002 and the first six months of 2001.
Effect of Recent Accounting Pronouncements
In July 2001, Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("Statement 142") was issued. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provision of Statement 142. Statement 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The Company is required to implement
Statement 142 on January 1, 2002.
Statement 142 established certain transition provisions which will require,
amongst other things, the Company perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
16
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings. The Company was required to, and has adopted, Statement 142 as of
January 1, 2002 and has completed the transition provisions described above .
The Financial Accounting Standards Board No. 143 "Accounting for Asset
Retirement Obligations" ("Statement 143") was issued in June 2001. Statement 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company is required to
adopt the provisions of Statement 143 on January 1, 2003. The Company is
evaluating the impact, if any, Statement 143 may have on its future consolidated
financial statements.
The Financial Accounting Standards Board ("FASB") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144") was issued in
August 2001. Statement 144 supersedes FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. Statement
144 addresses the financial accounting and reporting for (i) long-lived assets
to be held and used, (ii) long-lived assets to be disposed of other than by sale
and (iii) long-lived assets to be disposed of by sale. The Company is required
to, and has adopted, the provisions of Statement 144 as of January 1, 2002.
The Financial Accounting Standards Board ("FASB") No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("Statement 146") was issued in
June 2002. Statement 146 nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". `Costs' include (a)
one-time termination benefits, (b) costs to terminate a contract that is not a
capital lease and (c) other associated costs including costs to consolidate
facilities or relocate employees. The Statement is based on the general
principle that a liability for a cost associated with an exit or disposal
activity should be (1) recorded when it is incurred and (2) initially measured
at fair value. Thus, a commitment to an exit or disposal plan no longer will be
a sufficient basis for recording a liability for those activities. The Company
is required to adopt the provisions of Statement 146 for exit or disposal
activities initiated after December 31, 2002. The Company is evaluating the
impact, if any, Statement 146 may have on its future consolidated financial
statements.
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.
17
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.
PART II
Item 1. Legal Proceedings
On March 8, 2002, the Company was served with a complaint filed in Delaware
Chancery Court by Suan Investments Inc. against, among others, the Company,
Purchaser , KPN Telecom BV and the individual directors of the Company,
including the members of the Special Committee.
The complaint alleges, among other things, that the consideration offered
by KPN is "unfair and inadequate" and that the "intrinsic value of publicly
owned shares is materially in excess of the amount offered". The complaint also
alleges that the documents disseminated to the Company's unaffiliated
stockholders by KPN and its affiliates in respect of the tender offer are
"materially false and misleading" and that KPN, "with the acquiescence of the
individual defendants, has breached and will continue to breach its fiduciary
duties ... by engaging in improper overreaching and self-dealing in pursuing the
proposed transaction."
According to the complaint, plaintiff is seeking, among other things, to
recover unspecified damages and costs and to enjoin or rescind the tender offer
and all related transactions contemplated in the Purchaser's tender offer
documents.
A complaint containing similar allegations and seeking similar relief was
filed in Delaware Chancery Court by Laurence Paskowitz on March 5, 2002 against
the Company and the other defendants in the Suan Investments action.
In light of the fact that the Special Committee recommended that the
Company's stockholders reject KPN's offer of $2.25 per Share, it is not clear
what relevance, if any, these actions have for the Company or for the individual
directors who serve on the Special Committee.
The Company is not a party to any other material legal proceedings as of
the date of this report.
Item 2. Changes in Securities
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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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 first six months of 2002.
ITEM 5. OTHER INFORMATION
On June 10, 2002, the Board of Directors of the Company unanimously
approved appointments to the Company's Executive Committee, Audit Committee and
Compensation Committee. Messrs. Csaba Toro, Roelant Lyppens and Rob van Vliet
were appointed to the Executive Committee, Messrs. Stewart Reich, Gerald Yellin
and Rob van Vliet were appointed to the Audit Committee and Messrs. Rob van
Vliet, Roelant Lyppens and Csaba Toro were appointed to the Compensation
Committee.
In addition, on June 10, 2002, the Board of Directors of the Company also
approved the appointment of Mr. Csaba Toro as the Chief Executive Officer and
Chairman of the Board. It was also decided that the position of Chief Financial
Officer will remain vacant and that Mr. Peter Szigeti, the Company's Chief
Accounting Officer, and Mr. Rob van Vliet, the Company's Treasurer, will assume
all responsibilities of this position.
The Company has closed its offices at 445 Park Avenue, New York as of June
30, 2002. Correspondence from this date can be sent to 1065 Avenue of the
Americas 21st Floor, New York, NY 10018. The new phone number is +36-1-382-3771,
while the fax number is +36-1-382-3783.
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,
1997 (2)
(c) By-laws(2)
(99) (a) Certification of the Chief Executive Officer of Euroweb
International Corp. Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(99) (b) Certification of the Chief Financial Officer of Euroweb
International Corp. Pursuant to 18 U.S.C. Section 1350,
As Adopted 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 9th day of August 2002.
EUROWEB INTERNATIONAL CORP.
By /s/Csaba Toro
Csaba Toro
Chairman of the Board
--------
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.