Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_________________
Commission File Number 001-1200
EUROWEB INTERNATIONAL CORP.
(Name of small business issuer as specified in its charter)
Delaware 13-3696015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1122 Budapest, Varosmajor utca 13. Hungary
(Address of principal executive offices)
Issuer's telephone number, including area code:
(+36) 1-88-97-101, Facsimile: (+36)-1-88-97-100
-----------------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class Name of Each Exchange on which Registered
Common Stock, par value $.001 per share NASDAQ SMALL CAP
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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer had revenues of $14,761,374 for the year ended December 31, 2003. As of
March 25, 2003, 4,665,332 shares of Common Stock were outstanding of which
2,324,318 were held by non-affiliates of the Company. The aggregate market value
of the Common Stock held by non-affiliates of the Company as of March 1, 2004
was $11,389,158 (based upon the closing bid price on such date on the Nasdaq of
$4.90).
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
-
TABLE OF CONTENTS
Page
PART I .....................................................................................................3
Item 1. Description of Business.........................................................................3
EuroWeb Strategy................................................................................3
Entry into ISP Market in Central Europe and History of Acquisitions.............................3
Products and Services...........................................................................5
Customers.......................................................................................6
Network Operations and Technical Support........................................................6
Sales and Marketing.............................................................................7
Government Regulations..........................................................................7
Employees.......................................................................................7
Item 2. Description of Properties.......................................................................7
Item 3. Legal Proceedings...............................................................................8
Item 4. Submission of Matters to a Vote of Security Holders.............................................8
PART II .....................................................................................................9
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters...........................9
Market Information..............................................................................9
Holders of Common Stock.........................................................................9
Dividends......................................................................................10
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations..........10
Operations.....................................................................................10
Results of Operations..........................................................................13
Year Ended December 31, 2003 compared to Year Ended December 31, 2002..........................14
Liquidity and Capital Resources................................................................17
Inflation and Foreign Currency.................................................................18
Effect of Recent Accounting Pronouncements.....................................................18
Risk Factors...................................................................................19
Forward-Looking Statements.....................................................................23
Item 7. Financial Statements...........................................................................24
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........24
ITEM 8A CONTROLS AND
PROCEDURES.........................................................................................22
PART III ...............................................................................................25
-i-
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT...............................................................................25
Item 10. EXECUTIVE COMPENSATION.........................................................................27
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................29
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................30
PART IV 30
Item 13. EXHIBITS AND REPORTS ON FORM 8-K...............................................................30
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................................................30
2
PART I
ITEM 1. Description of Business
History of Business
EuroWeb International Corp. (the "Company" or "EuroWeb") is a Delaware
corporation which was organized on November 9, 1992. It was a development stage
company through December 31, 1993. The Company operates in the Czech Republic,
Slovakia , and Romania, through its subsidiaries Euroweb Czech Republic spol.
s.r.o. ("Euroweb Czech"), Euroweb Slovakia a.s. ("Euroweb Slovakia") and Euroweb
Romania S.A. ("Euroweb Romania"). The Company provides Internet access and
additional value added services to business customers. The Company also has a
49% ownership interest in Euroweb Hungary Rt., with the remaining 51% held by
Pantel Telecommunication Rt., Hungary ("Pantel Rt."), of which KPN Telecom BV is
the controlling owner. Effective March 1, 2004, the Company purchased the
remaining 51% of Euroweb Hungary Rt. from Pantel Rt.
KPN Telecom BV owns approximately 50.18% of EuroWeb's outstanding shares of
common stock as at December 31, 2003.
EuroWeb Strategy
The Company strives to be a leading supplier in Central Europe to
businesses of complete communications solutions using Internet technologies.
Rather than servicing individual users, the Company focuses its efforts on
business users and seeks to satisfy all their needs with high quality and
reliable service.
The Company's business has shown continued growth since it entered the
Internet field in January 1997, and the Company has made various acquisitions in
Hungary, the Czech Republic, Slovakia and Romania. As a continuing consolidation
is taking place in the industry, the Company is constantly reviewing various
business opportunities, which may include either an acquisition or a merger with
another company.No assurances can be given that we will be successful in
locating or negotiating with any of these potential business opportunities.
Entry into ISP Market in Central Europe and History of
Acquisitions/Dispositions
The Company entered the Internet Service Provider ("ISP") market in Central
Europe through various acquisitions of companies in that area over the past five
years. On January 2, 1997, the Company acquired all of the outstanding stock of
three Hungarian ISPs for a total purchase price of approximately $1,785,000,
consisting of 28,800 shares of common stock of the Company and $1,425,000 in
cash (collectively, the "1997 Acquisitions").1 Thereafter in 1997, the three
Hungarian companies were combined and merged into a new Hungarian entity,
EuroWeb Hungary Rt. On November 22, 1998, the Company sold 51% of the
outstanding shares of EuroWeb Hungary Rt. to Pantel Rt. for $2,200,000 in cash
and an agreement to
-------------------
1 1997 Acquisitions were as follows:
(a) Eunet (Hungary Ltd.) for a total cash cost of $1,000,000, and an assumption
of $128,000 in liabilities;
(b) E-Net Hungary Telecommunications and Multimedia
for a total cash cost of $200,000 and $150,000 in stock (12,000 shares); and
(c) MS Telecom Rt. for a total cash cost of $225,000 and $210,000 in stock
(16,800 shares).
3
increase the share capital of EuroWeb Hungary Rt. by $300,000 without changing
the ownership ratio (after the capital increase, the ownership ratio would
remain 49 - 51 percent). The Company currently uses the equity method of
accounting to record its interest in EuroWeb Hungary Rt.
On February 12, 2004, Euroweb International Corp. entered into a Shares
Purchase Agreement to re-acquire Pantel Rt.'s 51% interest in Euroweb Hungary
Rt. See Note 18 in the Consolidated Financial Statements.
The Company continued with its acquisitions of ISPs in the Czech Republic,
Slovakia and Romania in 1999 and 2000. On June 11, 1999, the Company acquired
all of the participating interests of Luko CzechNet, an ISP in the Czech
Republic, for a total cost of $1,862,154 consisting of 90,000 shares of the
Company's common stock and 50,000 options valued at $2.00 per share, and the
balance paid in cash. This acquisition was effective as of June 1, 1999.
On July 15, 1999, the Company acquired all of the outstanding shares of
capital stock of EUnet Slovakia, an ISP in the Slovak Republic, for a total cost
of $813,299 consisting of 47,408 shares of the Company's common stock valued at
$400,005 issued August 9, 1999 and the balance paid in cash. This acquisition
was effective as of August 1, 1999. The Company then made another acquisition of
a Slovak ISP on July 15, 1999 with the purchase of 70% of the outstanding shares
of Dodo s.r.o.'s subsidiary, R-Net, for a total cost of $630,234 consisting of
29,091 shares of the Company's common stock valued at $200,000 issued August 13,
1999 and the balance paid in cash. This acquisition was effective as of August
1, 1999.
On September 23, 1999 and November 16, 1999, the Company acquired from
Slavia Capital o.c.p., a.s. 70% and 30%, respectively, of the issued and
outstanding stock of Global Network Services a.s.c., a Slovakian corporation
providing Internet service primarily to businesses located in Bratislava and
other major cities in Slovakia for a total purchase price of $1,633,051,
consisting of 71,114 shares of the Company's common stock valued at $499,929
issued on September 23, 1999, and the balance paid in cash. This acquisition was
effective as of October 1, 1999. All Slovakian operations were then merged into
one company under the name of Euroweb Slovakia.
On April 21, 2000, the Company acquired all of the outstanding capital
stock of Isternet SR, s.r.o., an Internet service provider in the Slovak
Republic, for $1,029,299 in cash. Goodwill arising on this purchase was
$945,200. This acquisition was effective May 1, 2000.
On May 19, 2000, the Company purchased all of the Internet related assets
of Sumitkom Rokura, S.R.L. an Internet service provider in Romania, for
$1,561,125 in cash. The acquisition has been accounted for as an asset purchase
with a value of $1,150,000 being assigned to customer lists acquired.
On May 22, 2000, the Company acquired the remaining 30% of R-Net (the
initial 70% being acquired in 1999) for $355,810 in cash. Goodwill arising on
this purchase was $357,565.
On June 14, 2000, the Company acquired all of the outstanding shares of
capital stock of Mediator S.A., an Internet service provider in Romania for a
total cost of $2,835,569. This consisted of $2,040,000 in cash and the
assumption of a $540,000 liability to the former owner payable in annual
installments of $180,000 commencing on June 1, 2001. Goodwill arising on this
purchase was $2,455,223. Immediately after the purchase the name was changed to
Euroweb Romania, S.A. This acquisition was effective as of July 1, 2000.
On August 25, 2000, the Company, through its subsidiary, Luko Czech,
acquired all of the outstanding capital stock of Stand s.r.o., an Internet
service provider in the Czech Republic for $280,735 in cash, which was merged
into Luko Czech under the name of Euroweb Czech Republic. This acquisition was
effective as of September 1, 2000.
On February 11, 2000, a special meeting of the shareholders was held and
two proposals were approved. Proposal number one approved the amendment of the
Company's certificate of incorporation increasing the number of shares of common
stock that is authorized for issuance by the Company from 20,000,000 shares of
common stock to 60,000,000 shares of common stock. Proposal number two approved
the issuance and sale by the Company to KPN Telecom B.V. ("KPN"), a Netherlands
Limited Liability Company, of 2,057,348 shares at $7.9 per share and rights to
shares equal to all other outstanding warrants, options and other securities at
$6.9 per share. At closing KPN exercised its option to purchase 303,362 shares
at $6.9 per share in addition to the 2,057,348 shares at $7.9 per share. These
approvals gave KPN control of 51% of the Company's common stock, representing
voting control of the Company. This transaction provided the Company with more
than $18,000,000 in capital to fund future acquisitions.
On October 24, 2000, KPN Telecom B.V. exercised its option for 100,302
shares of the Company's common stock at $ 6.9 per share, in order to maintain
its 51% equity interest in the Company.
All share figures in the discussion above have been restated to reflect the
one for five reverse stock split effective August 21, 2001.
4
On February 23, 2004, the Company entered into a Shares Purchase Agreement
with the owners of 100% interest in Elender Business Communications Services
Ltd., a Hungarian corporation ("Elender"), which is an Internet service provider
located in Hungary that provides internet access to the corporate and
institutional (public) sector and, amongst others, 2,300 schools in Hungary. The
total purchase price to be paid by the Company for Elender shall be $9,500,000
as follows: (i) cash in the amount of $6,500,000; and (ii) 677,201 shares of the
Company's common stock valued at $3,000,000. The number of shares was calculated
by dividing $3,000,000 by $4.43, which is the average trade weighted stock
market price during the 60 days prior to signing of the binding term sheet
between the parties. At Closing, Elender shall have debt valued at $2,900,000,
consisting of a bank loan and a non-transferable shareholders loan payable by
Elender to the Sellers. The Company guarantees the full repayment of the
non-transferable shareholders loan in a period of one and a half years and, in
addition, the Company has also placed in escrow 248,111 shares, which are to be
issued to the Sellers in the event that there is a default in connection with
the non-transferable shareholders loan. The closing of the Elender purchase
remains subject to the satisfaction of customary terms and conditions and the
approval of the Hungarian Competition Office.
Products and Services
The activity of the Company can be divided into the following categories:
o Traditional ISP services: (a) Internet access, (b) Content, Web and
other services
o International/national leased line, IP data services (IP connections
between different countries);
o Voice over IP services; and
o Facilities (sale,rent and maintenance of dark fiber between the
Hungarian border and the Romanian City of Timisoara).
Traditional ISP services
Internet access
Access to the Internet can be either through a leased line / DSL, microwave
technology, which enables a constant connection to the Internet at all times, or
through dial-up service, which requires subscribers to dial a telephone number
to connect to the Internet. EuroWeb offers a variety of access options and
packages.
Content and Web services
In addition to internet access services, EuroWeb provides services such as the
design, development, hosting and maintenance of home pages and web servers,
domain registration, consulting, and other services.
International/domestic leased line, IP data services
In order to meet requests of International customers, EuroWeb offers
international/national data connection for companies across borders, or within
the countries to connect premises in different countries. This service includes
single (one to one point) and also Virtual Private Network (many to many point)
IP connections. In most cases, PanTel Rt. acts as a partner in the development
of international network possibilities.
Voice over IP services
Capitalizing on its existing international presence and cross border
connections, EuroWeb offers voice services to major carriers and its customers
based on Internet Protocol (IP) technology. Carriers and partners send Voice
minutes to/from the region in which EuroWeb operates. Euroweb's most significant
VOIP partner is Pantel Rt.
Customers
EuroWeb's customers are mainly local businesses and professionals including
telecommunication carriers and multinational corporations. EuroWeb's customer
base uses more than 780 leased lines and over 6,550 dial up accounts in
Slovakia, the Czech Republic and in Romania as of December 31, 2003.
Network Operations and Technical Support
As of December 31, 2003, EuroWeb had a network operations group consisting
of approximately 42 people, including technical and customer support employees.
EuroWeb's network operations personnel located at EuroWeb's network operations
center in Slovakia, the Czech Republic and Romania are responsible for
continuously monitoring traffic across EuroWeb's network infrastructure and also
to carry out implementation of new customer connections both for Internet and
other IP data connections. Both technical support and customer support personnel
are currently available from 8 a.m. to 8 p.m., Monday through Friday. At other
times, these personnel respond to technical support requests via telephone 24
5
hours a day. By the end of December 2003, EuroWeb owned or contracted 61 Point
of Presences (POPs) covering the territory of the Czech Republic, Slovakia and
Romania.
Sales and Marketing
EuroWeb employs approximately 25 persons in sales and marketing. To date,
EuroWeb has sold its Internet access and applications products and services
primarily through direct personal and telephone contact. The sales force works
closely with the customer and technical support group, which is responsible for
installation at multiple sites and for support and technical consulting
services, thereby demonstrating our commitment to account management to our
customers. v. vi. Government Regulations
EuroWeb is not currently subject to direct government regulation other than
laws and regulations applicable to businesses generally. There are specific
industry laws that may apply to the local subsidiaries in the field of Internet
and Telecommunications. However, with the increasing popularity and use of the
Internet, it is likely that new laws and regulations involving the Internet will
be adopted at the local, state, national or international levels, covering
issues such as user privacy, freedom of expression, pricing of products and
services, taxation, information security or the convergence of traditional
communications services with Internet communications.
Employees
The Company employs a total of 115 persons in the Czech Republic, Slovakia
and Romania all of which are full-time employees. None of the Company's
employees are represented by a labor organization.
ITEM 2. Description of Properties
The following table lists the office spaces that the Company and its
subsidiaries lease from unaffiliated persons:
Rent
Amount/
Lessor Address of Property Primary Use Sq. feet Month Lease Terms
-------------------- -------------------------- -------------------------- -------- ---------- -------------
Euroweb Varosmajor utca 13. stockholder relations 250 - Month-to-month-
H-1122 and general executive
Budapest, Hungary
Euroweb Czech Argentinska 38 general operations 3,617 EUR 3 years and
Republic CS-170 05 4,469 4 months
Prague, Czech Republic non-cancelable
Euroweb Slovakia Priemyselna 1/A general operations 14,274 EUR 3 years and
SK - 821 09 7,365 8 months
Bratislava, Slovakia non-cancelable
Euroweb Romania Bd. Unirii 33, Bl. A2, general operations 4,951 $7,664 1-month
Sc.3, 6th Floor, Sector notice
3 Bucharest, Romania
6
The Company's Chief Executive, Csaba Toro, uses offices provided by Euroweb
Rt. No rent was charged in 2003.
ITEM 3. Legal Proceedings
Euroweb Slovakia has been the National registrar of Top Level Domains
(suffix attached to Internet domain names e.g. .sk, .net, etc.) since the middle
of 2003. The Company has been subject to legal proceedings and submissions to
different authorities in connection with its exclusive right to manage the
system. The Company has succeeded in its defense on all occasions to date, but
there is no assurance that it will be able to keep these rights and/or that
penalties will not be charged in the future.
From time to time, we are a party to litigation or other legal proceedings
that we consider to be a part of the ordinary course of our business. We are not
involved currently in legal proceedings that could reasonably be expected to
have a material adverse effect on our business, prospects, financial condition
or results of operations. We may become involved in material legal proceedings
in the future.
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 last quarter of the
fiscal year ended December 31, 2003.
7
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters
Market Information
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq SmallCap Market ("Nasdaq") under the symbol "EWEB". On August 30, 2001,
the shareholders approved a one-for-five reverse stock split of the Company's
Common Stock.
The following table sets forth the high and low bid prices for the Common
Stock during the periods indicated as reported by Nasdaq. The prices reported
reflect inter-dealer quotations, and may not represent actual transactions and
do not include retail mark-ups, mark-downs or commissions.
High Low
Quarter Ending: ------ ------
2002
----
March 31, 2002 2.95 1.47
June 30, 2002 2.85 1.84
September 30, 2002 2.50 1.88
December 31, 2002 2.14 1.72
2003
----
March 31, 2003 3.73 1.53
June 30, 2003 3.25 1.92
September 30, 2003 8.30 2.45
December 31, 2003 4.82 3.10
On March 25, 2004 the closing bid price on the Nasdaq for the Common Stock was
$5.01.
Holders of Common Stock
As of February 27, 2004, the Company had 4,665,332 shares of Common
Stock outstanding and 177 shareholders of record. The Company was advised by its
transfer agent, the American Stock Transfer & Trust Company, that according to a
search made, the Company has approximately 6,153 beneficial owners who hold
their shares in street names.
Dividends
It has been the policy of the Company to retain earnings, if any, to
finance the development and growth of its business.
8
Equity Compensation Plans
------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of shares to be Weighted-average exercise Number of shares remaining
issued upon exercise of price of outstanding available for future
outstanding options and options and warrants issuance under equity
warrants compensation plans
------------------------------- ---------------------------- ---------------------------- ----------------------------
Approved by security holders 46,000 $ 7.97 44,500
------------------------------- ---------------------------- ---------------------------- ----------------------------
Not approved by security 263,000 $5.60 --
holders
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 309,000 $5.95 44,500
------------------------------- ---------------------------- ---------------------------- ----------------------------
The equity compensation plans are discussed in Notes 16 and 17 to the 2003
Consolidated Financial Statements.
Sale of Securities that were not Registered Under the Securities Act of 1933
The Company did not sell any securities that were not registered under the
Securities Act of 1933 during the year ended December 31, 2003.
ITEM 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Operations
The Company operates through three wholly-owned subsidiaries, located in
the Czech Republic, Slovakia and Romania, known as Euroweb Czech Republic,
Euroweb Slovakia, and Euroweb Romania, respectively. The Company made no new
acquisitions in 2003 and 2002.
The revenues are derived from the following four activities:
(1) Internet Service Provider (Internet access, Content, Web services
and Other services);
(2) International/domestic leased line, Internet Protocol data services;
(3) Voice over Internet Protocol services; and
(4) Facilities (sale, rent and maintenance of dark fiber between the
Hungarian border and the Romanian City of Timisoara)
For the services in points (2) and (3), the Company's main customer in 2003 and
2002 was Pantel Rt.
9
The results of operations of each ISP have been included in the Company's
consolidated results of operations from the effective date of acquisition.
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, assumptions 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 2 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.
In 2002, the Company entered into an agreement to provide transmission
capacity to a customer pursuant to an indefeasible rights-of-use agreement
("IRUs") that management believe qualifies as an operating lease under Financial
Accounting Standards Board Interpretation No. 13, "Accounting for Leases" ("FAS
13"), since the IRU agreement provides rights to use a specific subject asset
for a defined period. Revenue attributable to the lease is recognized on a
straight-line basis over the term of the 20-year lease agreement.
Under Financial Accounting Standards Board Interpretation No. 43, "Real
Estate Sales, an interpretation of FASB Statement No. 66" ("FIN 43"), leases of
fiber and capacity that are deemed integral equipment are required to be
accounted for in the same manner as leases of real estate. If fiber and
equipment are considered integral to the related real estate, a lease must
include a provision transferring title of such integral equipment to the lessee,
in order for that lease to be accounted for as a sales-type lease. Failure to
satisfy the title transfer requirements results in operating lease treatment,
and recognition of the related lease income over the lease term. The Company's
IRU does not involve a transfer of title.
IRUs generally require the customer to make a down payment upon execution
of the agreement, with the balance due upon delivery and acceptance of the
fiber. This has resulted in a substantial amount of deferred revenue being
recorded on the balance sheet. The Company is obligated under the fiber IRU to
maintain its network in efficient working order and in accordance with industry
standards. Customers are obligated for the term of the agreement to pay for
their allocable share of the costs for operating and maintaining the network.
The Company recognizes this revenue monthly as services are provided.
10
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.
Goodwill - 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. On January 1, 2002
the Company adopted Statement of Financial Accounting Standard No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets," which establishes new accounting
and reporting standards for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17. Goodwill and intangible assets that have
indefinite useful lives are no longer amortized but rather are tested at least
annually for impairment. Intangible assets that have finite useful lives
(whether or not acquired in a business combination) will continue to be
amortized over their estimated useful lives. The adoption of SFAS 142 has
eliminated the goodwill charge in 2002. During 2003 and 2002, the Company
performed the required SFAS No. 142 impairment test, with respect to goodwill.
The first step of this test requires the Company to compare the carrying value
of any reporting unit that has goodwill to the estimated fair value of the
reporting unit. When the current fair value is less than the carrying value, the
Company performs the second step of the impairment test. This second step
requires the Company to measure the excess of the recorded goodwill over the
current value of the goodwill by performing an exercise similar to a purchase
price allocation, and to record any excess as an impairment. Based upon the
results, the Company recorded an impairment of $980,538 to the carrying value of
its goodwill in its financial statements for the year ended December 31, 2003
(2002: $2,016,000).
Other Intangibles - Other Intangibles reflects customer lists and the
amount represented on the balance sheet reflects the unamortized difference
between the purchase price and fair value of businesses acquired, less any
impairment recognized. 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 was
determined using estimates of undiscounted future cash flows in a manner in
accordance with the provisions of Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"), with a write-down recorded in the fourth quarter of 2003
($100,364), and the third quarter of 2002 ($448,500). The carrying value of
customer lists is considered impaired when the projected undiscounted future
cash flows related to the asset are less than its carrying value. The Company
then measures impairment based on the amount by which the carrying value of the
customer lists exceeds its fair market value. Fair
11
market value is determined primarily using the projected future cash flows
discounted at a rate commensurate with the risk involved.. The impairment in
2003 has resulted in the customer lists being written down to zero.
Commitments and contingencies
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises. Refer to Note 9 (Leases) of the Financial Statements for details.
An employment agreement with the Chief Executive Officer which provided for
aggregate annual compensation of $96,000 through December 31, 2005 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.
The following table summarizes the commitments described above:
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Contractual Cash Obligations Less than 1 1-2 Years 2-3 Years 3-4 Years 4-5 Years After 5
year Years
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Capital Lease Obligations 109,293 36,801 8,391 - - -
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Capital Lease Obligations for 35,213 35,213 26,411
Vehicles delivered in January 2004
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Operating Leases 168,264 168,264 168,264 96,964 -
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Employment agreements (including 200,000 200,000 - - - -
guaranteed bonus)
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
Total Contractual Cash Obligations 512,770 440,278 203,066 96,964 - -
----------------------------------- ------------- ------------ ------------- ------------- ------------ ------------
12
In addition to the above contractual cash obligations, the Company's subsidiary
in Romania has entered into a 20 year Indefeasible Right of Use agreement
whereby 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. The total consideration
of $920,000 has already been received, and is being accounted for as an
operating lease. Refer to Note 9 (Leases) of the Financial Statements. v. vi.
Results of Operations
Year Ended December 31, 2003 compared to Year Ended December 31, 2002
Revenues
The Company experienced a 14.07% revenue growth compared to 2002. The
increase in revenue can be attributed to the weakness of the US Dollar relative
to the Czeck Koruna and Slovak Koruna, as well as to revenues generated from the
International/Domestic leased line and VOIP services, which were introduced
during 2001. A significant portion of these services is provided to Pantel Rt.,
a related party (see discussion under `revenues').
2003 2002
---- ----
Total Revenues 14,761,374 12,940,631
The following table summarize the main changes in revenue compared to the
previous year with respect to the revenue structure:
------------------------------------ ---------------- --------------------- -----------------
Revenue / services 2003 2002 % increase
------------------------------------ ---------------- --------------------- -----------------
ISP activity $5,497,222 $4,814,690 14.17%
------------------------------------ ---------------- --------------------- -----------------
Int./dom. leased line *(a) $6,487,607 $6,100,530 6.34%
------------------------------------ ---------------- --------------------- -----------------
VOIP ** (a) $2,491,212 $2,025,411 23.00%
------------------------------------ ---------------- --------------------- -----------------
Facilities (a) $285,333 0 N/A
------------------------------------ ---------------- --------------------- -----------------
Total $14,761,374 $12,940,631 14.07%
------------------------------------ ---------------- --------------------- -----------------
* - primarily Pantel or Pantel related sales, ** - substantially all direct
sales to Pantel (a) substantially all generated by the Romanian subsidiary
Overall, each revenue category has experienced an increase in 2003 compared to
the previous year, while facilities became a new revenue source in 2003 after
the installation of the fibre optic cables in Romania in May 2003.
The following table summarize the main changes in revenue compared to the
previous year with respect to the geographical source of revenue:
--------------------------- ----------------- -------------------- ----------------- -----------------
Revenue/country * Slovakia Czech Republic Romania Total
--------------------------- ----------------- -------------------- ----------------- -----------------
Revenues in 2003 $3,424,633 $1,163,662 $10,173,079 $14,761,374
--------------------------- ----------------- -------------------- ----------------- -----------------
Revenues in 2002 $2,757,086 $1,415,541 $8,768,004 $12,940,631
--------------------------- ----------------- -------------------- ----------------- -----------------
Change in USD 24% (18%) 16% 14%
--------------------------- ----------------- -------------------- ----------------- -----------------
* Revenues allocated to the respected countries
Euroweb Czech Republic and Slovakia generate purely internet related revenue
representing 83% of the total ISP turnover.
In 2003, Euroweb Slovakia experienced an approximate 8% decrease in revenue
from its traditional ISP revenue sources, which was wholly offset by revenues
generated from domain registration (Euroweb Slovakia became the National
registrar of Top Level Domains in 2003). The increase in USD terms of 24% (from
the table above) is due to the strengthening of the Slovak Koruna against the US
Dollar.
In 2003, Euroweb Czech Republic experienced an approximately 30% decrease
in its overall revenue in local currency, which was partly offset by the
strength of the US Dollar, with the decrease in Dollar terms being 18%. The
decrease was due to a smaller customer base compared
13
to the previous year. The decrease in the customer base was due mainly to lower
pricing by competitors and to customers switching to fibre optic cable
providers.
Euroweb Romania generated 17% of the total ISP revenue, however this represents
only 9% of Euroweb Romania's total revenue, as Euroweb Romania is focusing on
the international/national leased line, VOIP and facilities services, where
Pantel Rt. is the main Client.
In 2003, Pantel Rt., (a related party controlled by KPN Telecom B.V. as of
December 31, 2003), was the most significant customer of the Company
representing approximately 38% of the total revenue of Euroweb International
Corp. and 55% of total revenue of Euroweb Romania. In connection with VOIP
services, over 95% of VOIP sales are provided directly to Pantel Rt. In the
event that Pantel Rt. should no longer use the Company's VOIP services, then the
Company's VOIP revenue would almost completely disappear.
Although the direct sales to Pantel Rt. were 38% of consolidated revenue,
Euroweb'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, and some third party customers are also
clients of Pantel Rt. outside of Romania (i.e. their relationship with Pantel
Rt. is stronger than that with Euroweb Romania).
Effective dependency on Pantel Rt., taking into account the direct as well as
Pantel Rt.-related sales, represents approximately 60% of total consolidated
revenues of Euroweb International Corp. or approximately 87% of total sales of
Euroweb Romania. There is no such dependency in the case of Euroweb Czech or
Euroweb Slovakia.
Cost of revenues
2003 2002
Total Cost of revenues 10,149,609 8,613,196
Cost of revenues comprise mostly telecommunication network telecom expenses
which are related to the provision of access facilities to customers. This
category also includes costs of phone calls in connection with VOIP services.
Network costs were $10,149,609 in 2003 in comparison to $8,613,196 in 2002.
The increase of 18% is larger than the increase of revenue due to a higher
proportion of VOIP services in 2003 which have a lower margin compared with
margins on other revenue categories. There were no significant pricing policy
changes within the Company during 2003. Pantel Rt. was the largest supplier
representing approximately 26% of the total direct cost.
Operating expenses (excluding depreciation, amortization, goodwill/intangibles
impairment, and 2002 severance payments to officers)
2003 2002
Compensation and related costs 1,888,417 1,884,891
Consulting, professional and directors fees 1,289,295 1,078,908
Other selling, general and administrative expenses 1,336,613 1,439,912
--------- ---------
Total 4,514,325 4,403,711
--------- ---------
14
Operating expenses (excluding depreciation, amortization,
goodwill/intangibles impairment, and 2002 severance payments to officers)
increased from $4,403,711 to $4,514,325, or 2.5% ($110,614), which is smaller
than the increase related to gross margin. This is due mainly to the continuing
process of cost rationalization and a better utilization of internal resources
leading to an improvement in efficiency.
The proportion of salaries versus consulting, professional and directors
fees for the year ended December 31, 2003 as compared to the year ended December
31, 2002 has changed. Salaries have remained the same, while the Company paid
slightly higher (20%) professional fees and directors' fees compared to the
previous year. A portion of the increase in professional fees was in connection
the successfully resolving a VAT dispute with the Romanian Tax Authorities.
Depreciation, amortization, goodwill impairment and writedown of intangibles
2003 2002
---- ----
Depreciation and amortization 886,698 1,038,166
Goodwill impairment 980,538 2,016,000
Impairment of intangibles 100,364 448,500
Amortization and depreciation has decreased by approximately 15% from 2002
due mostly to the fact that amortization on the customer lists in Romania
significantly decreased between 2002 ($189,227) and 2003 ($66,909). This
decrease is due to the fact that a significant portion of the customer lists
($448,500) were considered impaired in the third quarter of 2002 (see writedown
of intangibles below) and so the remaining amount being amortized was
significantly lower than in the first 9 months of 2002.
At the end of 2003 and 2002, the Company performed an annual impairment
test relating to the goodwill recorded in its books. Euroweb Romania, Euroweb
Czech, and Euroweb Slovakia were identified as `Reporting Units' under SFAS 142.
The Company compared the fair value of the reporting units (determined using
discounted cash flow projections) to their carrying amounts, noting that the
carrying amounts in some cases were higher than their fair values taking into
account the market developments, actual performance and outlook. The Company
then compared the implied fair value of each reporting unit's goodwill with
their carrying amounts and recorded an impairment charge of $980,538 (2002:
$2,016,000), with $92,881 relating to Euroweb Czech, $563,000 relating to
Euroweb Slovakia, and $324,657 relating to Euroweb Romania. An average annual 1%
growth rate for revenues was used in the calculations for Euroweb Czech and
Euroweb Slovakia, and 3% for Euroweb Romania. After the 2003 impairment, the
Goodwill relating to Euroweb Czech and Euroweb Slovakia have a net book value of
zero, while the Goodwill relating to Euroweb Romania has a net book value of
$566,000.
The Romanian customer lists acquired, were being amortized over an
estimated period of benefit of 5 years. However, an analysis of the customers
and revenues as at September 2002 indicated that most of the expected revenues
to be generated by this customer list did not materialize and the Company
recorded an impairment of $448,500. At the end of 2003, the company again
assessed the recoverability of the outstanding amount and wrote down the
remaining value ($100,364) to zero.
15
Net interest income
2003 2002
---- ----
Net interest income 355,690 385,177
Net interest income is approximately 8% lower than last year. The
decrease is due to the reduction in interest-generating funds available, and
also because the effective interest rate on these investments has decreased. The
major revenue source is the approximately $12 million cash which is invested
into US Government Securities bearing interest at 3.1%. The remaining amount was
invested in other securities and /or was held in interest bearing accounts.
Equity interest in affiliate
2003 2002
---- ----
Equity in net loss of - (679,637)
affiliate
The Company's 49% interest in Euroweb Hungary Rt. was written down to zero in
2002 and the Company has no legal or commercial commitments to provide
continuing financial support as of December 31, 2003. Therefore, the 49%
interest in net loss of Euroweb Rt. for the year ended December 31, 2003 of
$17,206 (2002: $809,967) has not been recorded.
Sale or disposal transactions
During 2003 and 2002, the Company focused purely on improving its
operations and introduction of new services and thus did not divest any of its
assets. Consequently, no gain/loss on sale or disposals are recorded in 2003 or
2002.
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities were
approximately $13,391,338 as of December 31, 2003, a decrease of $811,749 from
the end of fiscal year 2002. The decrease was influenced by two major reasons:
(1) unrealised loss on marketable securities and (2) purchase of fixed assets
(mostly fiber optic cables in Romania).
The Company has $13,391,338 of cash, cash equivalents and marketable
securities compared to $2,713,877 total short and long term liabilities
(excluding deferred revenue), while the working capital (current assets less
current liabilities) of the company is $12,684,692 indicating that the Company
is in a strong financial position.
The Company has entered into share purchase agreements to acquire 100% of
Elender Rt and the remaining 51% of Euroweb Hungary Rt in the first quarter of
2004. These agreements will significantly influence the liquidity position of
the Company, which can be separated into three parts: (1) cash portion of
purchase price will be $8,607,000 (2) liabilities (approximately $ 2,000,000)
for short term loans related to Euroweb Hungary Rt., which cannot be covered
from Euroweb Hungary Rt.'s nor Elender Rt.'s working capital and (3) funding the
working capital shortage (approximately $600,000) of Euroweb Hungary Rt. and
Elender Rt. The closing of the Elender purchase remains subject to the
satisfaction of customary terms and conditions and the approval of the Hungarian
Competition Office.
16
After the acquisitions, the consolidated working capital (without deferred
revenue) is estimated to be more than $2,000,000 indicating that the Company
will be able to meet its working capital and capital expenditure needs over the
next twelve months. The Company's financial situation is still stable and
strong, as current assets covers all current trade, loan and other liabilities
of the company.
Management believes, although it cannot provide guarantees, that the
synergy effects and potential business opportunities of the merged entities will
significantly improve cash generating ability and will reduce the loans of the
Company in the coming few years. Management also believes that with its existing
cash, cash equivalents, marketable securities and internally generated funds,
there will be sufficient funds to meet the Company's currently projected working
capital requirements and other cash requirements until at least the next 12
months taking into account the new acquisitions.
In the event the Company makes future acquisitions of Internet service
providers in Central and Eastern Europe, the excess cash on hand or additional
fund raising may be used to finance such future acquisitions.
Inflation and Foreign Currency
The Company maintains its books in local currencies: 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 18.6%, while the Czech Korona has
strengthened against the U.S. dollar by approximately 14% when compared with
2002.
Effect of Recent Accounting Pronouncements
At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF)
reached consensuses on EITF 02-18 Accounting for Subsequent Investments in an
Investee after Suspension of Equity Method Loss Recognition. Issues 1 and 2 of
EITF 02-18 which considered whether, (i) an investor should recognize any
previously suspended losses when accounting for a subsequent investment in an
investee that does not result in the ownership interest increasing from one of
significant influence to one of control, and (ii), if the additional investment
represents the funding of prior losses, whether all previously suspended losses
should be recognized or whether only the previously suspended losses equal to
the portion of the investment determined to be funding prior losses should be
recognized. The EITF concluded that if the additional investment, represents, in
substance, the funding of prior losses, the investor should recognize previously
suspended losses only up to the amount of the additional investment determined
to represent the funding of prior losses. At its February 5, 2003 meeting, the
FASB ratified the consensuses reached by the Task Force in this Issue. As
discussed in notes 1 (i) and 6, the Company has discontinued recording losses on
its equity method investment in Euroweb Hungary Rt., and purchased the remaining
51% owned by Pantel Rt. in February 2004.
On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, to address (1) decisions reached
17
by the Derivatives Implementation Group, (2) developments in other Board
projects that address financial instruments, and (3) implementation issues
related to the definition of a derivative. Statement 149 has multiple effective
date provisions depending on the nature of the amendment to Statement 133, and
the Company is currently considering its potential effect on the financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for contracts entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
non-public entities. The Company has adopted SFAS 150 and has concluded that
there is no current impact on its consolidated financial statements.
In December 2003, the Securities and Exchanges Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition". SAB 104 revises or
rescinds certain SAB guidance in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations relating to revenue recognition. This bulletin is
effective immediately. The Company's current revenue recognition policies comply
with SAB 104.
Risk Factors
The Company is subject to certain risk factors due to the industry in which
it competes and the nature of its operations. Theses risks include the
following:
Limited Operating History; Accumulated Deficit.
Although the Company was founded in November 1992, it only entered the
Internet business in January 1997 by acquiring three operating Internet
businesses. Accordingly, the Company has only limited operating history on which
to base an evaluation of its present business and prospects. The Company and its
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in an early stage of development,
particularly companies in new and rapidly evolving markets such as the Internet.
Such risks for the Company include, but are not limited to, an evolving business
model and the management of both internal and acquisition based growth. To
address these risks, the Company must, among other things, continue to expand
its client base, continue to develop the strength and quality of its operations,
maximize the value delivered to clients, respond to competitive developments and
continue to attract, retain and motivate qualified employees. There can be no
assurance that the Company will be successful in meeting these challenges and
addressing such risks and the failure to do so could have a material adverse
affect on the Company's business, results of operations and financial condition.
Regulations and Legal Uncertainties.
In eastern Europe, the business engaged in by the Company is not currently
subject to direct regulation other than federal and state regulation applicable
to businesses generally and multi-level marketing. However, changes in the
regulatory environment relating to the
18
telecommunications, Internet and media industries could have an effect on its
business, which effect may be materially adverse to the interests of the
Company. Additionally, legislative proposals from international, federal, state
and foreign governmental bodies in the areas of content regulation, intellectual
property, privacy rights and tax issues, could impose additional regulations and
obligations upon all online service and content providers, which effect may be
materially adverse to the interests of the Company. The Company cannot predict
the likelihood that any such legislation will pass, nor the financial impact, if
any, the resulting regulation may have on it.
Moreover, the applicability to persons engaged in Internet commerce of
existing laws governing issues such as intellectual property ownership, libel
and personal privacy is uncertain. Recent events relating to the use of online
services for certain activities has increased public focus and could lead to
increased pressure on foreign and national legislatures to impose regulations on
online service providers. While the Company intends to provide only content
which meets the highest standards in quality, creativity and ethical values,
should actions be initiated against it, costs incurred as a result of such
actions could have a material adverse effect on the business of the Company.
Dependence on Key Personnel; Limited Management; Need for Qualified
Management and Other Personnel.
The success of the Company will be dependent on the personal efforts of
Csaba Toro, Chief Executive Officer (CEO). The loss of the services of Mr. Toro
could have a material adverse effect on the Company's business and prospects.
The Company does not have and does not intend to obtain "key-man" insurance on
the life of any of its officers. The success of the Company is largely dependent
upon its ability to hire and retain additional qualified management, marketing,
technical, financial and other personnel. Competition for qualified personnel is
intense, and there can be no assurance that the Company will be able to hire or
retain additional qualified management. The inability to attract and retain
qualified management and other personnel will have a material adverse effect on
the Company.
Dependence on Pantel Rt.
The majority owner of Pantel Rt. and Euroweb International Corp. is KPN
Telecom B.V. Such ownership has led to improved co-operation between the two
companies, which has resulted in a high level of dependency in the case of
Euroweb Romania. Actual dependency from Pantel Rt., taking into account the
direct and Pantel Rt. related sales, represents approximately 50-56% of total
consolidated revenue of Euroweb International Corp. and approximately 80-90% of
total sales of Euroweb Romania. Despite the fact that co-operation is based on
arm's length agreements, disagreements between the management of Pantel Rt. and
EuroWeb, or an effective change of ownership in one or both companies, may
result in the loss of the Pantel Rt. related revenues and their significant
margin.
Developing Market; New Entrants; Unproven Acceptance of the Products;
Uncertain Adoption of Internet as a Medium of Commerce and Communications.
The market for Internet Programs and services has only recently begun to
develop and is rapidly evolving. The Internet is characterized by an increasing
number of market entrants who have introduced or developed products and services
for communication and commerce over the Internet and private networks. As is
typical in the case of a new and rapidly evolving industry,
19
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. Critical issues concerning the
commercial use of the Internet (including security, reliability, cost, ease of
use and access, and quality of service) remain unresolved and may impact the
growth of Internet use. While the Company believes that its products and
services offer significant advantages for Internet users, there can be no
assurance that its products and services will become widely chosen for access to
the Internet or that, if chosen, will hold the attention of users in order to
allow it to continue to attract users.
Because the market for the Company's proposed business, products and
services is new and evolving, it is difficult to predict the future growth rate,
if any, and size of this market. There can be no assurance that the market for
its products and services will develop, that the Company's products or services
will be adopted, or that individual personal computer users in business or at
home will use the Internet for commerce and communication. If the market fails
to develop, develops more slowly than expected, becomes saturated with
competitors, or if its products do not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected.
Competition.
The market for Internet-based products and services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in the future.
Such competition could materially adversely affect the Company's business,
operating results or financial condition.
We believe that the main competitors of Euroweb Slovakia are four of
the largest or most active providers in Slovakia:
o Nextra;
o GTS Inec;
o SLOVANET; and
o the incumbent telecom operator, Slovak Telecom. The above are all also
providing internet services. Both Nextra and GTS Inec have a customer
base similar to that of the Company's.
Romania's Internet market is in the initial phase of development. At
present, other then Euroweb Romania, there are two other data transmission
companies providing internet services, which also cover the entire territory of
Romania:
o Global One Romania; and
o Logic Telecom.
The Company may face intense competition from other companies directly
involved in the same business and also from many other companies offering
products which can be used in lieu of those offered by the Company. Competition
can take many forms, including convenience in obtaining products, service,
marketing and distribution channels. Although the Company believes it can
compete on the basis of the quality and reliability of its services, there can
20
be no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the Company
will not materially adversely affect the Company's business, operating results
or financial condition.
Volatility of Stock Prices.
Market prices for the Company's common stock will be influenced by many
factors and will be subject to significant fluctuations in response to
variations in operating results of the Company and other factors such as
investor perceptions of the Company, supply and demand, interest rates, general
economic conditions and those specific to the industry, developments with regard
to the Company's activities, future financial condition and management. There
can be no assurance regarding the future prices at which the Company's common
stock will trade, if any.
Foreign Currency and Exchange Risks and Rate Revaluation.
The Company will be subject to significant foreign exchange risk. There are
currently no meaningful ways to hedge currency risk in either Hungary, the Czech
Republic, Romania or Slovakia. Therefore, the Company's ability to limit its
exposure to currency fluctuations is significantly restricted. The Company's
ability to obtain dividends or other distributions is subject to, among other
things, restrictions on dividends under applicable local laws and foreign
currency exchange regulations of the jurisdictions in which its subsidiaries
operate. The laws under which the Company's operating subsidiaries are organized
provide generally that dividends may be declared by the partners or shareholders
out of yearly profits subject to the maintenance of registered capital and
required reserves and after the recovery of accumulated losses.
Other factors affecting shareholders/investors
Possible Future Capital Needs.
The Company currently anticipates that its available cash resources will be
sufficient to meet its presently anticipated working capital and capital
expenditure requirements for at least the next 12 months and has currently no
immediate plans for acquisitions that would exceed the available funds (other
than the acquisition of the remaining 51% of Euroweb Hungary Rt. and the
acquisition of Elender Business Communications Ltd. (subject to approval from
Hungarian Competition Office)). However, the Company may need to raise
additional funds in order to support more rapid expansion, acquire complementary
businesses or technologies or take advantage of unanticipated opportunities
through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such additional funding, if needed,
will be available on terms acceptable to the Company, or at all. If adequate
funds are not available on acceptable terms, the Company may be unable to
develop or enhance its services and products or take advantage of future
opportunities either of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
No Dividends.
It has been the policy of the Company to not pay cash dividends on its
common stock. At present, the Company will follow a policy of retaining all of
its earnings, if any, to finance the development and expansion of its business
21
Potential Issuance of Additional Common and Preferred Stock.
The Company is currently authorized to issue up to 12,500,000 shares (after
obtaining shareholder approval in 2003 to amend its Certificate of Incorporation
so as to decrease the number of authorizes shares of common stock from
60,000,000 to 12,500,000). The Board of the Company will have the ability,
without seeking stockholder approval, to issue additional shares of common stock
in the future for such consideration as the Board may consider sufficient. The
issuance of additional common stock in the future will reduce the proportionate
ownership and voting power of the common stock offered hereby. The Board intends
to seek shareholder approval in 2004 to increase the authorized limit from
12,500,000 to 25,000,000 shares of common stock. The Company is also authorized
to issue up to 5,000,000 shares of preferred stock, the rights and preferences
of which may be designated in series by the Board. To the extent of such
authorization, such designations may be made without stockholder approval. The
designation and issuance of series of preferred stock in the future would create
additional securities which may have voting, dividend, liquidation preferences
or other rights that are superior to those of the common stock, which could
effectively deter any takeover attempt of the Company.
Forward-Looking Statements
When used in this Form 10-KSB, 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, including but not
limited to the risks set forth above. See "Risk Factors." 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.
ITEM 7. Financial Statements
Reference is made to the Consolidated Financial Statements of the Company,
beginning with the index thereto on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
22
As of December 31, 2003, 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 December 31, 2003. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to December
31, 2003.
23
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information regarding the executive
officers and directors of the Company as of March 25, 2004
Name Age Position with Company
---- --- ---------------------
Csaba Toro 38 Chief Executive Officer, Board Chairman, Treasurer
Howard Cooper 47 Director
Stewart Reich 59 Director
Hans Lipman 43 Director
Daniel Kwantes 43 Director
Csaba Toro, age 38, Chairman and CEO of the Company since June 2002, has been
with the Company since September 1998 in various other positions. During 2001
and 2002, Mr. Toro held the positions of COO and CEO in Pantel Rt. He resigned
as CEO of Pantel Rt. as of March 2003. From 1997 to 1999, Mr. Toro was managing
director of the Company's Hungarian subsidiary. Prior thereto, since 1994, he
was managing director of ENET Kft., which was acquired by the Company in 1997.
Howard Cooper, age 47, has been the President, CEO and Chairman, Teton Petroleum
Company - Denver, CO (AMEX:TPE) from 1996. Teton has raised institutional equity
and US Trade and Development Agency funding for the development of proven oil
fields in Russia. Teton has been successful in Russia producing oil, exporting
oil for hard currency, and developing an oil field with proven and probable
reserves in excess of 107 million barrels. Previously he was engaged in oil
projects in the former Soviet Union.
Stewart Reich, age 60, was Chief Executive Officer and President of Golden
Telecom Inc., Russia's largest alternative voice and data service provider as
well as its largest ISP, since 1997. In September 1992, Mr Reich was employed as
Chief Financial Officer at UTEL (Ukraine Telecommunications), of which he was
appointed President in November 1992. Prior to that Mr. Reich held various
positions at a number of subsidiaries of AT&T Corp. Mr. Reich has been a
director of the Company since 2002.
Hans Lipman, age 44, is a Dutch Registered Accountant and is financial manager
for Royal Dutch KPN's International Participations department since March 2001.
He is a member of the supervisory board of Pantel Rt, Hungary. From April 1994,
Mr. Lipman has been working as a financial manager and IT controller with KPN
Telecom. Prior to that he was auditor with PriceWaterhouseCoopers' predecessors,
since 1978. Mr. Lipman replaces Mr. Roelant Lyppens who resigned as director on
December 18, 2002.
Daniel Kwantes, age 43, has been working for 13 years within KPN in various
financial positions, and since the end of 1998 especially focused on KPN's
international operations. He graduated as a business economist at the Free
University of Amsterdam, and is currently managing director of various (holding)
companies owned by KPN. Since 2002, he is also Chairman of the Supervisory Board
of Pantel Rt. in Hungary.
24
Directors are elected annually and hold office until the next annual meeting of
the stockholders of the Company and until their successors are elected and
qualified. Officers are elected annually and serve at the discretion of the
Board of Directors.
ROLE OF THE BOARD
Pursuant to Delaware law, our business, property and affairs are managed
under the direction of our board of directors. The board has responsibility for
establishing broad corporate policies and for the overall performance and
direction of EuroWeb, but is not involved in day-to-day operations. Members of
the board keep informed of our business by participating in board and committee
meetings, by reviewing analyses and reports sent to them regularly, and through
discussions with our executive officers.
2003 BOARD MEETINGS
In 2003, the board met 5 times. No director attended less than 80% of all
of the combined total meetings of the board and the committees on which they
served in 2003.
BOARD COMMITTEES
Audit Committee
The audit committee of the board of directors reviews the internal
accounting procedures of the Company and consults with and reviews the services
provided by our independent accountants. During 2003, the audit committee
consisted of Messrs. Stewart Reich and Howard Cooper, both of whom are
considered to be independent The audit committee held three meetings in 2003.
Mr. Reich serves as the financial expert on the Audit Committee. Compensation
Committee The compensation committee of the board of directors i) reviews and
recommends to the board the compensation and benefits of our executive officers;
ii) administers our stock option plans and employee stock purchase plan; and
iii) establishes and reviews general policies relating to compensation and
employee benefits. In 2003, the compensation committee consisted of Messrs
Cooper, Reich and Lipman. No interlocking relationships exist between the board
of directors or compensation committee and the board of directors or
compensation committee of any other company. During the past fiscal year the
compensation committee had two meetings.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more then 10 percent of
the Company's Common Stock, to file with the SEC the initial reports of
ownership and reports of changes in ownership of common stock. Officers,
directors and greater than 10 percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
25
Specific due dates for such reports have been established by the Commission and
the Company is required to disclose in this Proxy Statement any failure to file
reports by such dates during fiscal 2003. Based solely on its review of the
copies of such reports received by it, or written representations from certain
reporting persons that no Forms 5 were required for such persons, the Company
believes that during the fiscal year ended December 31, 2003, there was no
failure to comply with Section 16(a) filing requirements applicable to its
officers, directors and ten percent stockholders.
POLICY WITH RESPECT TO SECTION 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), provides that, unless an appropriate exemption applies, a tax deduction
for the Company for compensation of certain executive officers named in the
Summary Compensation Table will not be allowed to the extent such compensation
in any taxable year exceeds $1 million. As no executive officer of the Company
received compensation during 2003 approaching $1 million, and the Company does
not believe that any executive officer's compensation is likely to exceed $1
million in 2003, the Company has not developed an executive compensation policy
with respect to qualifying compensation paid to its executive officers for
deductibility under Section 162(m) of the Code.
CODE OF ETHICS
The Company has adopted its Code of Ethics and Business Conduct for
Officers, Directors and Employees that applies to all of the officers, directors
and employees of the Company.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long term
compensation of the Company's Chief Executive Officer. The Company does not have
any officer whose annual salary and bonus exceeds $100,000 as of December 31,
2003:
ANNUAL COMPENSATION LONG-TERM COMPENSATION
Restricted Number of
Stock Award(s) Securities
Bonus and Underlying
Name and Year Ended Other Annual All Other
Principal Position December 31, Salary ($) Compensation ($) ($) Options/SARs Compensation ($)
------------------ ------------ ---------- ---- --- ------------- ----------------
Csaba Toro 2003 $96,000 -- -- -- --
Chairman, CEO, and
Treasurer 2002 $96,000 -- -- -- --
2001 $96,000 -- -- -- --
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
There were no grants of Stock Options/SAR made to the named Executive during the
fiscal year ended December 31, 2003.
26
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR VALUES
------------------------ ---------------------- --------------------- ------------------------ -----------------------
Number of securities Value of the
underlying unexercised unexercised in the
options/SARs at FY-end money options/SARs atFY-end
(#) ($)*
Name Shares acquired on Value realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
exercise (#)
------------------------ ---------------------- --------------------- ------------------------ -----------------------
Csaba Toro, Chairman None None 83,000 $0.00
CEO, and Treasurer
------------------------ ---------------------- --------------------- ------------------------ -----------------------
* Fair market value of underlying securities (calculated by subtracting the
exercise price of the options from the closing price of the Company's Common
Stock quoted on the Nasdaq as of December 31, 2003), which was $3.77 per share.
None of Mr. Toro's options are presently in the money.
EMPLOYMENT AND MANAGEMENT AGREEMENTS
The Company entered into a six-year agreement with its Chief Executive
Officer and Chairman of the Board, Csaba Toro on October 18, 1999, 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.
The agreement further provides that, if Mr. Toro's employment is terminated
other than for willful breach by the employee, for cause or in event of a change
in control of the Company, then the employee has the right to terminate the
agreement. In the event of any such termination, the employee will be entitled
to receive the payment due on the balance of his employment agreement.
The Company has no pension or profit sharing plan or other contingent forms
of remuneration with any officer, director, employee or consultant, although
bonuses are paid to some individuals.
DIRECTOR COMPENSATION
Directors who are also officers of the Company are not separately
compensated for their services as a director. Directors who are not officers
receive cash compensation for their services: $2,000 at the time of agreeing to
become a Director; $2,000 for each Board Meeting attended either in person or by
telephone; and $1,000 for each Audit Committee Meeting attended either in person
or by telephone. Non-employee directors are reimbursed for their expenses
incurred in connection with attending meetings of the Board or any committee on
which they serve and are eligible to receive awards under the Company's 1993
Stock Option Plan (described below).
27
STOCK OPTION PLAN
The Company's 1993 Stock Option Plan (the "Plan") permits the grant of
options to employees of the Company, including officers and directors, who are
serving in such capacities. An aggregate of 134,000 shares of Common Stock are
authorized for issuance under the Plan. At December 31, 2003, options for 46,000
Common Stock were outstanding and exercisable under the Plan. The Plan provides
that qualified and non-qualified options may be granted to officers, directors,
employees and consultants to the Company for the purpose of providing an
incentive to those persons to work for the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of the Common Stock as of March 22, 2004 by (i) each person known by
the Company to own beneficially more than 5% of the outstanding Common Stock;
(ii) each director of the Company; (iii) each officer of the Company and (iv)
all executive officers and directors as a group. Except as otherwise indicated
below, each of the entities or persons named in the table has sole voting and
investment powers with respect to all shares of Common Stock beneficially owned
by it or him as set forth opposite its or his name.
Shares
Name and Address Beneficially Owned(1) Percent Owned (1)
--------------------------------------------------- ----------------------------
KPN Telecom B.V. (4) 2 ,461,014 52.75%
Maanplein 5
The Hague, The Netherlands
Csaba Toro(5)(6) 83,000(2) 1.86%
1122 Budapest
Varosmajor utca 13
Hungary
Hans Lipman (3)(6) 0 0
KPN Telecom B.V.
Maanplein 55
2516 CK The Hague, The Netherlands
25,000(7) *
Howard Cooper (6)
2135 Burgess Creek Road, Ste. #7
Steamboat Springs, CO 80477
Daniel Kwantes (6) 0 0
KPN Telecom B.V.
Maanplein 55
2516 CK The Hague, The Netherlands
Stewart Reich (6) 25,000(7) *
18 Dorset Lane,
Bedminister, NJ 07921
All Officers and Directors as a 137,000 2.90%
Group (5 Persons)
* Less than one percent
28
----------------------------
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated. For purposes of this table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares which such person has the right to acquire within 60 days after May
22, 2004. For purposes of computing the percentage of outstanding shares
held by each person or group of persons named above on May 22, 2004 any
security which such person or group of persons has the right to acquire
within 60 days after such date is deemed to be outstanding for the purpose
of computing the percentage ownership for such person or persons, but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Mr. Toro owns, directly or indirectly, 1.86% of the issued and outstanding
shares of the Company represented by options to purchase 83,000 shares.
(3) Does not include shares reported to be beneficially owned by KPN Telecom
B.V. Mr. Lipman is an employee of KPN Telecom B.V.
(4) KPN Telecom B.V. is a subsidiary of Royal KPN N.V.
(5) An officer of the Company.
(6) A director of the Company.
(7) Includes an option to purchase 25,000 shares of common stock at an exercise
price of $4.21 per share. The options vest on April 13, 2004.
The foregoing table is based upon 4,665,332 shares of common stock outstanding
as of March 30, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Significant related party transactions exist with Pantel Rt. Details of
these transactions can be found in the MD&A section of this form 10-KSB and in
Note 14 of the 2003 Consolidated Financial Statements.
There are no other significant related party transactions.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits (numbers below reference Regulation S-B, Item 601)
(2) Subscription Agreement and Option Agreement with KPN(1)(2)
(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)
(4) (a) Form of Common Stock Certificate(1)
(b) Form of Underwriters' Warrants to be sold to Underwriters(1)
(c) Placement Agreement between Registrant and J.W. Barclay & Co.,
Inc. and form of Placement Agent Warrants issued in connection
with private placement financing(1)
(10) (a) Shares Purchase Agreement between PanTel Tavkozlesi es
Kommunikacios rt., a Hungarian company, and Euroweb International
Corp., a Delaware corporation (3)
29
(10) (b) Guaranty by Euroweb International Corp., a Delaware
corporation, in favor of PanTel Tavkozlesi es Kommunikacios rt.,
a Hungarian company (3)
(10) (c) Shares Purchase Agreement between Vitonas Investments
Limited, a Hungarian corporation, Certus Kft., a Hungarian
corporation, Rumed 2000 Kft., a Hungarian corporation and Euroweb
International Corp., a Delaware corporation, dated as of February
23, 2004. (4)
(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 18 U.S.C. Section 1350, As
Adopted 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 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(99) (a) Code of Ethics and Business Conduct of Officers, Directors
and Euroweb International Corp.
----------------------------------
(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.
(3) Filed as an exhibit to Form 8-K on February 27, 2004. (4) Filed as an
exhibit to Form 8-K on March 9, 2004.
B. Reports on Form 8-K
On February 27, 2004, the Company filed a Form 8-K Current Report reporting its
acquisition of Pantel Rt.'s interest in Euroweb Hungary Rt.
On March 9, 2004, the Company filed a Form 8-K Current Report reporting the
entering into of a Shares Purchase Agreement for the acquisition of Elender
Business Communications Ltd.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Audit Fees. The aggregate fees billed by our auditors, for professional services
rendered for the audit of the Company's annual financial statements for the
years ended December 31, 2003 and 2002, and for the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-QSB during the
fiscal years were $153,100 and $135,500, respectively.
There were no audit related fees in 2003 and 2002.
30
All Other Fees. The aggregate fees billed by auditors for services rendered to
the Company, other than the services covered in "Audit Fees" and for the fiscal
years ended December 31, 2003 and 2002 were $33,000 and $1,400. - The 2003 fees
relate to assistance provide to Euroweb Romania in connection with the Tax
Authority Review on VAT. The 2002 fees relate to miscellaneous tax advise
provided during the course of 2002.
The Board of Directors has considered whether the provision of non-audit
services is compatible with maintaining the principal accountant's independence.
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 25th day of March 2003.
EUROWEB INTERNATIONAL CORP.
By /s/Csaba Toro
-----------------------------
Csaba Toro
Chairman of the Board
Pursuant to the requirements of the Securities Exchange of 1934, as
amended, this Report has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/Csaba Toro Chairman of Board, March 25, 2004
------------------ Chief Executive Officer (CEO)
Csaba Toro Director,Treasurer
/s/ Daniel Kwantes March 25, 2004
------------------
Daniel Kwantes Director
/s/Hans Lipman Director March 25, 2004
------------------
Hans Lipman
/s/ Stewart Reich Director March 25, 2004
------------------
Stewart Reich
/s/Howard Cooper Director March 25, 2004
------------------
Howard Cooper
31
EUROWEB INTERNATIONAL CORP.
Consolidated Balance Sheet as of December 31, 2003 and 2002, and
Consolidated Statements of Operations & Comprehensive Loss,
Stockholders' Equity, and Cash Flows for the
Years ended December 31, 2003 and 2002
34
EUROWEB INTERNATIONAL CORP.
Consolidated Financial Statements
December 31, 2003 and 2002
TABLE OF CONTENTS
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheet F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Independent Auditors' Report
The Board of Directors and Stockholders
Euroweb International Corp.
We have audited the accompanying consolidated balance sheet of Euroweb
International Corp. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations and comprehensive loss,
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Euroweb
International Corp. and subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed in note 1(k) to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangibles in 2002.
KPMG Hungaria Kft.
Budapest, Hungary
March 23, 2004
F-2
Euroweb International Corp.
Consolidated Balance Sheet
December 31, 2003 and 2002
2003 2002
ASSETS
Current assets:
Cash and cash equivalents (note 3) $ 1,941,669 $ 2,098,983
Investment in securities (note 4) 11,449,669 12,104,104
Trade accounts receivable, less allowance for doubtful accounts of 455,990 348,488
$729,530 (2002: $634,484)
Related party receivables 1,074,861 855,194
Current portion of note receivable (note 5) 173,911 190,105
Prepaid and other current assets 863,200 851,100
Total current assets 15,959,300 16,447,974
Note receivable, less current portion (note 5) - 173,871
Investment in affiliate (note 6) - -
Property and equipment (note 7) 1,902,854 1,269,923
Assets under construction (note 7) 47,853 430,000
Goodwill (note 8) 566,000 1,546,538
Intangibles- customer lists (note 8) - 167,273
----------- -----------
Total assets $18,476,007 $20,035,579
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $967,492 $659,244
Related party payables 935,310 345,110
Acquisition indebtedness (note 10) - 180,000
Loan payable (note 11) - 129,945
Other current liabilities 302,160 469,547
Accrued expenses 466,502 965,885
Deferred IRU revenue (note 9) 46,000 30,667
Deferred other revenues 557,144 145,392
------------ ----------
Total current liabilities 3,274,608 2,925,790
Non-current portion of deferred IRU revenue (note 9) 843,334 889,333
Non-current portion of lease obligations (note 9) 42,413 67,100
------------ ----------
Total liabilities 4,160,355 3,882,223
Stockholders' equity
Preferred stock, $.001 par value - Authorized 5,000,000 shares;
no shares issued or outstanding - -
Common stock, $.001 par value - Authorized 12,500,000 shares;
issued and outstanding 4,665,332 shares 24,129 24,129
Additional paid-in capital 48,227,764 48,227,764
Accumulated deficit
(32,795,327) (31,219,267)
Accumulated other comprehensive (loss)/income (25,502) 236,142
Treasury stock - 175,490 common shares, at cost
(1,115,412) (1,115,412)
------------ ----------
Total stockholders' equity 14,315,652 16,153,356
------------ ----------
Commitments and contingencies (note 14)
Total liabilities and stockholders' equity $18,476,007 $20,035,579
============ ===========
F-3
See accompanying notes to consolidated financial statements.
Euroweb International Corp.
Consolidated Statements of Operations and Comprehensive Loss
Years Ended December 31, 2003 and 2002
2003 2002
Revenues
Third party revenues $ 9,127,510 $ 8,067,290
Related party revenues 5,633,864 4,873,341
------------- -----------
Total Revenues 14,761,374 12,940,631
Cost of revenues
Third party cost of revenues 7,474,071 6,584,806
Related party cost of revenues 2,675,538 2,028,390
------------- -----------
Total Cost of revenues 10,149,609 8,613,196
------------- -----------
Gross profit 4,611,765 4,327,435
Operating expenses
Compensation and related costs 1,888,417 1,884,891
Severance to officers - 2,020,832
Consulting, professional and directors fees 1,289,295 1,078,908
Other selling, general and administrative expenses 1,336,613 1,439,912
Goodwill impairment (Note 8) 980,538 2,016,000
Impairment of intangibles (Note 8) 100,364 448,500
Depreciation and amortization 886,698 1,038,166
------------- -----------
Total operating expenses 6,481,925 9,927,209
------------- -----------
Loss from operations (1,870,160) (5,599,774)
Net interest income 355,690 385,177
Equity in net loss of affiliate (Note 6) - (679,637)
Loss before income taxes (1,514,470) (5,894,234)
Provision for income taxes 61,590 -
------------- -----------
Net loss (1,576,060) (5,894,234)
Other comprehensive (loss) income (261,644) 379,465
-------------- -------------
Comprehensive loss $(1,837,704) $(5,514,769)
============== =============
Net loss per share, basic (0.34) (1.26)
Weighted average number of shares outstanding 4,665,332 4,665,332
See accompanying notes to consolidated financial statements
F-4
EUROWEB INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003 and 2002
Accumulated
Additional Other TOTAL
Common Stock Paid-in Accumulated Comprehensive Treasury Stockholders'
Shares* Amount Capital Deficit Gains(Losses) Stock Equity
---------- --------- ------------ ------------- ----------- ------------- --------------
Balances, December 31, 2001 4,665,332 $24,129 $48,227,764 $(25,325,033) $ (143,323) (1,115,412) $21,668,125
========== ========= ============ ============= =========== ============= ==============
Foreign currency translation
gain - - - - 160,687 - 160,687
Unrealized gain on securities
available for sale - - - - 245,212 - 245,212
Reclassification of realized
gain included in net income - - - - (26,434) - (26,434)
Net loss for the period - - - (5,894,234) - - (5,894,234)
Treasury stock - - - - - - -
---------- --------- ------------ ------------- ----------- ------------- --------------
Balances, December 31, 2002 4,665,332 $24,129 $48,227,764 $(31,219,267) $236,142 $(1,115,412) $16,153,356
========== ========= ============ ============= =========== ============= ==============
Foreign currency translation
loss - - - - (45,237) - (45,237)
Unrealized loss on securities - - - - (216,407) - (216,407)
available for sale (Note 4)
Net loss for the period - - - (1,576,060) - - (1,576,060)
---------- --------- ------------ ------------- ----------- ------------- --------------
Balances, December 31, 2003 4,665,332 $24,129 $48,227,764 $(32,795,327) $(25,502) $(1,115,412) $14,315,652
========== ========= ============ ============= =========== ============= ==============
* restated to reflect 1 for 5 reverse stock split
See accompanying notes to consolidated financial statements
F-5
Euroweb International Corp.
Consolidated Statements of Cash Flows
Year Ended December 31, 2003 and 2002
-------------------------------------------------------------------------------------- ------------------- -------------------
2003 2002
Cash flows from operating activities
Net loss $(1,576,060) $(5,894,234)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 886,698 1,038,166
Goodwill impairment 980,538 2,016,000
Intangibles impairment - customer lists 100,364 448,500
Amortization of discount on acquisition indebtedness (note 10) 5,232 15,380
Equity in net loss of affiliate - 679,637
Provision on doubtful accounts 3,639 176,763
Foreign currency loss 53,784 35,041
Realized gain on sale of investment securities (7,113) (47,970)
Unrealized interest income on investment securities (360,539) (357,046)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (620,357) (579,009)
Prepaid and other assets (3,112) (247,384)
Accounts payable, other current liabilities and accrued expenses 534,100 743,416
Deferred revenue 310,486 788,265
------------- ------------
Net cash provided by (used in) operating activities 307,660 (1,184,475)
------------- ------------
Cash flows from investing activities:
Investment in securities - (13,506,666)
Maturity of securities 798,567 16,654,820
Payment of acquisition indebtedness (180,000) (180,000)
Collection on notes receivable 190,065 194,296
Repayment of loan receivable (129,945) -
Acquisition of property and equipment (757,863) (966,545)
------------- ------------
Net cash (used in) provided by investing activities (79,176) 2,195,905
------------- ------------
Cash flows from financing activities:
Principal payment under capital lease obligations (329,726) (400,987)
------------- ------------
Net cash used in financing activities (329,726) (400,987)
------------- ------------
Effect of foreign exchange rate changes on cash (56,072) (23,763)
------------- ------------
Net (decrease) increase in cash and cash equivalents (157,314) 586,680
Cash and cash equivalents, beginning of year
2,098,983 1,512,303
------------- ------------
Cash and cash equivalents, end of year $1,941,669 $2,098,983
============= ============
Supplemental disclosure:
Interest paid $49,744 $77,247
Income taxes paid $61,590 -
New capital leases $98,917 $155,713
See accompanying notes to consolidated financial statements.
F-6
1. Organization and Business
EuroWeb International Corp. (the "Company") is a Delaware corporation which was
organized on November 9, 1992. The controlling owner of Euroweb International
Corp. is KPN Telecom BV, a Netherlands corporation.
The Company operates in the Czech Republic, Romania and Slovakia, through its
subsidiaries Euroweb Czech Republic spol. s.r.o. ("Euroweb Czech"), 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 Company's
consolidated statements of operations also include its equity in the net income
or loss of Euroweb Hungary Rt., in which the Company has a 49% ownership
interest. The other 51% of Euroweb Hungary Rt. is held by Pantel
Telecommunication Rt., Hungary ("Pantel Rt."), of which KPN Telecom BV is also
the controlling owner.
The revenues come from the following four sources:
(1) Internet Service Provider (Internet access, Content and Web services,
Other services)
(2) International/domestic leased line, Internet Protocol data services
(3) Voice over Internet Protocol services
(4) Facilities
For the services in points (2) and (3) above, the primary customer of the
Company in 2003 and 2002 was Pantel Rt. (See Note 15).
2. Summary of Significant Accounting Policies
(a) Principles of consolidation and basis of presentation
The consolidated financial statements comprise the accounts of the
Company and its controlled subsidiaries. All material inter-company
balances and transactions have been eliminated upon consolidation.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
made by the Company include the period of benefit and recoverability of
goodwill and other intangible assets.
F-7
(c) Fair value of financial instruments
The carrying values of cash equivalents, investment in debt securities,
notes and loans receivable, accounts payable, loans payable and accrued
expenses approximate fair values.
(d) Revenue recognition
Revenues from Internet services are recognized in the month in which
the services are provided, either based on monthly traffic or on fixed
monthly fees (leased lines). Revenue for other services, are recognized
as the service is performed.
In 2002, the Company entered into an agreement to provide transmission
capacity to a customer pursuant to an indefeasible rights-of-use
agreement ("IRU") that management believe qualifies as an operating
lease under Financial Accounting Standards Board Interpretation No. 13,
"Accounting for Leases" ("FAS 13"), since the IRU agreement provides
rights to use a specific subject asset for a defined period. Revenue
attributable to the lease is recognized on a straight-line basis over
the term of the 20-year lease agreement.
Under Financial Accounting Standards Board Interpretation No. 43, "Real
Estate Sales, an interpretation of FASB Statement No. 66" ("FIN 43"),
leases of fiber and capacity that are deemed integral equipment are
required to be accounted for in the same manner as leases of real
estate. If fiber and equipment are considered integral to the related
real estate, a lease must include a provision transferring title of
such integral equipment to the lessee in order for that lease to be
accounted for as a sales-type lease. Failure to satisfy the title
transfer requirements results in operating lease treatment, and
recognition of the related lease income over the lease term. The
Company's IRU does not involve a transfer of title.
IRUs generally require the customer to make a down payment upon
execution of the agreement, with the balance due upon delivery and
acceptance of the fiber. This has resulted in a substantial amount of
deferred revenue being recorded on the balance sheet. The Company is
obligated under the fiber IRU to maintain its network in efficient
working order and in accordance with industry standards. Customers are
obligated for the term of the agreement to pay for their allocable
share of the costs for operating and maintaining the network. The
Company recognizes this revenue monthly as services are provided.
Accounting practice and guidance with respect to the treatment of fiber
sales and IRU agreements continues to evolve. Any changes in the
accounting treatment could affect the way the Company accounts for
revenue and expenses associated with these transactions in the future.
(e) Cost of revenues
Cost of revenues comprise principally of telecommunication network
expenses, costs of content services and cost of leased lines.
(f) Foreign currency translation
F-8
The Company considers the United States Dollar ("US$") to be the
functional currency of the Company and unless otherwise stated, the
respective local currency to be the functional currency of its
subsidiaries. The reporting currency of the Company is the US$ and
accordingly, all amounts included in the consolidated financial
statements have been translated into US$.
The balance sheets of subsidiaries are translated into US$ using the
year end exchange rates. Revenues and expenses are translated at
average rates in effect for the periods presented. The cumulative
translation adjustment is reflected as a separate component of
shareholders' equity on the consolidated balance sheet.
The Company conducts business and maintains its accounts for Euroweb
Romania in the Romanian Lei ("ROL"). Romania is considered a highly
inflationary economy and, therefore the U.S. dollar is used as the
functional currency. The Company's financial statements presented 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 are included in the
consolidated results of operations for the periods presented.
(g) Cash and cash equivalents
Cash and cash equivalents include cash at bank and short-term deposits
of less than three months duration.
(h) 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. Investments with remaining maturities of greater
than one year are classified as long-term, while those with remaining
maturities of less than one year are classified as short-term.
(i) Investment in affiliate
The Company holds a minority interest of 49% in Euroweb Hungary Rt.
which is controlled by its 51% shareholder, Pantel Rt. As the Company
exerts significant influence over Euroweb Hungary
F-9
Rt., the investment is carried under the equity method of accounting,
with the Company recording its share of the earnings or loss of
Euroweb Hungary Rt. Dividends are credited against the investment
account when received.
As a result of continuing losses, the carrying value of the net
investment in affiliate was written down to zero in 2002. Since the
Company has no legal or commercial commitments to provide continuing
financial support, no further losses were recognized. In February 2004,
the Company purchased the remaining 51% of the shares of Euroweb
Hungary Rt. Consideration consists of EUR 1,650,000 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. (See Note 18: Subsequent Events).
(j) Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Equipment purchased under capital lease is stated at the
present value of minimum lease payments at the inception of the lease,
less accumulated depreciation. The Company provides for depreciation of
equipment using the straight-line method over the shorter of estimated
useful lives of up to four years or the lease term.
Recurring maintenance on property and equipment is expensed as
incurred.
Any gain or loss on retirements and disposals are included in the
results of operations.
(k) Goodwill and Intangibles
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. On January 1, 2002 the Company adopted Statement of Financial
Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting
standards for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17. Goodwill and intangible assets that have
indefinite useful lives are no longer amortized but rather are tested
at least annually for impairment. Intangible assets that have finite
useful lives (whether or not acquired in a business combination) will
continue to be amortized over their estimated useful lives, which are
no longer limited to a maximum of 40 years. The adoption of SFAS 142
has eliminated the goodwill charge in 2002. During 2002 and 2003, the
Company performed the required SFAS No. 142 impairment test, with
respect to goodwill. The first step of this test requires the Company
to compare the carrying value of any reporting unit that has goodwill
to the estimated fair value of the reporting unit. When the current
fair value is less than the carrying value, the Company performs the
second step of the impairment test. This second step requires the
Company to measure the excess of the recorded goodwill over the current
value of the goodwill by performing an exercise similar to a purchase
price allocation, and to record any excess as an impairment.
Intangibles consist of customer lists which 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
F-10
recoverability and possible impairment are determined using estimates
of undiscounted future cash flows in accordance with the provisions of
Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144"),
with a write-down recorded in the third quarter of 2002. The carrying
value of customer lists is considered impaired when the projected
undiscounted future cash flows related to the asset are less than its
carrying value. The Company measures impairment based on the amount by
which the carrying value of the customer lists exceeds its fair market
value. Fair market value is determined primarily using the projected
future cash flows discounted at a rate commensurate with the risk
involved. In 2003, the remaining value of customer lists was written
off.
(l) 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 years ended
December 31, 2003 and 2002, which were not included in the computation
of diluted net loss per share because they were antidilutive.
(m) Comprehensive income
Comprehensive income includes all changes in equity except those
resulting from investments by, and distributions to, owners. All items
that are required to be recognized under current accounting standards
as components of comprehensive income are required to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company has chosen to present a Combined
Statement of Operations and Comprehensive Loss.
(n) Business segment reporting
Management has determined that the Company operates in one industry
segment, providing Internet access and additional value added services
to business customers. Substantially all of the Company's revenues are
derived from the provision of such services.
(o) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities, net of appropriate valuation
allowances, are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities, if any, are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-11
(p) Stock-Based compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25" issued in March 2000, to account for its fixed plan
stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying
stock exceeds the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") established accounting and
disclosure requirements using a fair value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123.
Under the accounting provisions of SFAS No. 123, the Company's 2003 net
loss and net loss per share would have been reduced to the pro forma
amounts indicated below:
2003 2002
Net loss:
Net loss as reported $(1,576,060) $(5,894,234)
Compensation expense (22,826) -
Pro forma net loss (1,598,886) (5,894,234)
Basic and diluted loss per share:
As reported $ (0.34) $ (1.26)
Pro forma (0.34) (1.26)
(q) Recent accounting pronouncements
At the January 23, 2003 meeting, the Emerging Issues Task
Force (EITF) reached consensuses on EITF 02-18 Accounting for
Subsequent Investments in an Investee after Suspension of Equity Method
Loss Recognition. Issues 1 and 2 of EITF 02-18 which considered
whether, (i) an investor should recognize any previously suspended
losses when accounting for a subsequent investment in an investee that
does not result in the ownership interest increasing from one of
significant influence to one of control, and (ii), if the additional
investment represents the funding of prior losses, whether all
previously suspended losses should be recognized or whether only the
previously suspended losses equal to the portion of the investment
determined to be funding prior losses should be recognized. The EITF
concluded that if the additional investment, represents, in substance,
the funding of prior losses, the investor should recognize previously
suspended losses only up to the amount of the additional investment
determined to represent the funding of prior losses. At its February 5,
2003 meeting, the FASB ratified the consensuses reached by the Task
Force in this
F-12
Issue. As discussed in notes 1 (i) and 6, the Company had
previously discontinued recording losses on its equity method
investment in Euroweb Hungary Rt. and purchased the remaining 51% owned
by Pantel Rt. in February 2004.
On April 30, 2003, the FASB issued FASB Statement No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, which amends FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, to address (1) decisions
reached by the Derivatives Implementation Group, (2) developments in
other Board projects that address financial instruments, and (3)
implementation issues related to the definition of a derivative. The
Company does not believe that FAS 149 will have any impact on its
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities
and Equity". This statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is
effective for contracts entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of non-public entities. The Company
has adopted SFAS 150 and has concluded that there is no current impact
on its consolidated financial statements.
In December 2003, the Securities and Exchanges Commission
("SEC") issued Staff Accounting Bulletin ("SAB") 104, "Revenue
Recognition". SAB 104 revises or rescinds certain SAB guidance in order
to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and
regulations relating to revenue recognition. This bulletin is effective
immediately. The Company believes that it's current revenue recognition
policies comply with SAB 104.
3. Cash Concentration
At December 31, 2002, cash and cash equivalents included $312,343 on deposit
with a U.S. money market fund. All cash and cash equivalents are held in current
accounts as of December 31, 2003.
4. Investment in Securities
The Company holds investments in United States Treasury Notes with a face value
of $11,464,000, (2002: $12,269,000) which mature on February 15, 2004.
On April 24, 2003, the Company sold United States Treasury Notes with a face
value of $505,000 for $499,632. On November 14, 2003 the Company sold additional
Notes with a face value of $300,000 for $298,935.
F-13
During 2003, the Company recorded net unrealized losses of $216,407 and the
accretion of interest and discount on the Notes of $360,539. In 2002, the
Company recorded a net unrealized gain of $245,212 and accreted interest of
$357,046.
5. Notes Receivable
In December 1998, the Company sold its entire shareholding in a wholly-owned
Hungarian subsidiary, Teleconstruct Epitesi, for $1,500,000. The sale was
satisfied by a payment of $500,000 in January 1999 and the issuance of a
promissory note for $1,000,000 payable in sixty equal monthly installments,
including interest at approximately 7.3% per annum. The note is collateralized
by a building. The receivable is due to be fully repaid by the end of 2004.
6. Investment in affiliate
The Company's consolidated statement of operations for the years ended December
31, 2003 and 2002 include the Company's equity interest in the net income of
Euroweb Hungary Rt. for each period. Summarized financial information about
Euroweb Hungary Rt.is as follows:
2003 2002
---- ----
Revenues $ 8,519,346 $ 6,536,790
Gross profit 4,045,091 3,432,494
Net loss $(35,114) $ (1,652,994)
The carrying value of the net investment in affiliate was $ 495,187 at the
beginning of 2002. However, as the Company's 49% share of the 2002 net loss
($809,967) was greater than the carrying value, the investment was written down
to zero, and since the Company had no legal or commercial commitments to provide
continuing financial support, no further losses are recognized.
The following information is a summary of selected items from Euroweb Hungary
Rt.'s consolidated balance sheet as at December 31, 2003 and 2002:
2003 2002
---- ----
Current Assets $ 2,762,648 $ 2,254,179
Total Assets 3,644,882 3,526,497
Current Liabilities 2,240,765 2,189,301
Total Liabilities 3,963,219 3,785,579
F-14
Pursuant to the non-compete provision in the shareholders' agreement, the
Company cannot: (i) engage in any business activity listed in the scope of
activities of Euroweb Hungary Rt.'s charter,which, among others, includes
telecommunications, data bank activity and information technology activity, (ii)
own or control any equity interest in any person or entity that engages in any
such business activity or (iii) permit any of its employees to act as a
director, officer, manager or consultant to any person or entity that engages in
any such business activity. If the Company breaches its obligation set forth
under this provision, the Company will be required to sell to PanTel Rt. all of
its shares at the time of such breach at a price equal to the nominal value of
such shares.
In February 2004, the Company purchased the remaining 51% of Euroweb Hungary Rt.
(Note 18: Subsequent Events).
7. Property and equipment -
Property and equipment as at December 31, 2003 and 2002 were as follows:
2003 2002 Useful Life
---- ---- -----------
Software $ 70,742 $ 60,424 3 years
Internet equipment 2,569,490 2,577,924 3 years
Fibre optic cables-Romania* 1,136,600 - 20 years
Vehicles 549,798 474,791 4-5 years
Other 510,865 248,930 3-5 years
------- ----------
Total 4,837,495 3,362,069
Less accumulated
depreciation (2,934,641) (2,092,146)
---------- -----------
$ 1,902,854 $ 1,269,923
=========== ===========
Depreciation charged during 2003 and 2002 was $ 819,789 and $ 848,939
respectively.
*In October 2002, the Company started construction of a line consisting of 24
pairs of optical fibres between the Hungarian - Romanian border and Timisoara.
As at December 31, 2002, $430,000 of costs (separately disclosed as `Assets
under construction' on the balance sheet) were incurred. The project was
completed in 2003.
F-15
8. Goodwill and Other intangible assets
Goodwill and other intangible assets as at December 31, 2003 and 2002
consist of the following:
2003 2002
---- ----
Customer lists $1,150,000 $ 1,150,000
Goodwill 8,863,455 8,863,455
--------- ---------
Total 10,013,455 10,013,455
Less impairment writedown-Customer lists (548,864) (448,500)
Less impairment writedown-Goodwill (4,504,297) (3,523,759)
Less accumulated amortization-Customer lists (601,136) (534,227)
Less accumulated amortization-Goodwill (3,793,158) (3,793,158)
----------- -----------
$566,000 $ 1,713,811
=========== ===========
Amortization charged during 2003 and 2002 was $66,909 and $189,227 respectively.
The customer lists were obtained during the course of the purchase of assets
from a Romanian company.
At the end of 2003 the Company performed an annual impairment test relating to
the goodwill recorded in its books. Euroweb Romania, Euroweb Czech, and Euroweb
Slovakia were identified as `Reporting Units' under SFAS 142. The Company
compared the fair value of the reporting units (determined using discounted cash
flow projections) to their carrying amounts, noting that the carrying amounts in
each case were higher than their fair values. The Company then compared the
implied fair value of each reporting unit's goodwill with their carrying amounts
and recorded an impairment charge of $980,538 (2002: $2,016,000). The impairment
relating to Euroweb Slovakia was $563,000 (2002: $442,000), Euroweb Czech was
$92,581 (2002: $746,000) and Euroweb Romania was $324,957 (2002: $828,000). The
remaining goodwill as of December 31, 2003 for Euroweb Romania is $566,000
(2002: $ 890,957). The Goodwill relating to Euroweb Czech and Euroweb Slovakia
have been fully impaired.
In 2002, an analysis of Euroweb Romania's customers and revenues generated by
the purchased customer list indicated that most of the customers on this
customer list were lost during the year. Therefore, the Company recorded an
impairment of $448,500, with the balance of $184,000 being amortized over the
remaining estimated period of benefit of 33 months. At the end of 2003, the
company again assessed the recoverability of the outstanding amount and wrote
down the remaining value ($100,364) to zero.
9. Leases
Capital leases
The Company is committed under various capital leases, which expire over the
next four years. The amount of assets held under capital leases included in
property and equipment is as follows:
2003 2002
---- ----
Internet equipment $ 706,227 $ 706,227
Vehicles 327,167 203,796
------- -------
Total 1,033,394 910,023
Less accumulated depreciation (826,077) (499,594)
--------- ---------
$207,317 410,429
========== =========
F-16
The following is a schedule of future minimum capital lease payments (with
initial or remaining lease terms in excess of one year) as of December 31, 2003:
2004 $ 109,293
2005 36,801
2006 8,391
-----
Total minimum lease payments 154,486
Less interest costs (8,517)
------
Present value of future mimimum lease payments 145,969
Less: current installments (103,556)
---------
Non-current portion of lease obligations $42,413
=======
The current portion of lease obligations are included in `Other current
liabilities' on the Balance Sheet.
Operating leases
The Company's subsidiaries in Slovakia and the Czech Republic each (as Lessee)
have five year non-cancelable lease agreements for office premises. The
Slovakian contract is denominated in local currency, while the Czech contract is
denominated in Euro's. Remaining minimal rental payments total approximately
$769,980; $168,264 in each of the years 2004-2006, and $96,924 in 2007.
The Company (as Lessor) has also entered into an Indefeasible Right of Use
agreement to provide transmission capacity (See note 2(d)), which is accounted
for as an operating lease. The entire amount of the consideration of $920,000
was prepaid by the customer in 2002, and the Company recognizes this revenue on
a straight line basis over the term of the agreement (monthly $3,833.33).
10. Acquisition Indebtedness
In connection with the acquisition of Euroweb Romania S.A., the company assumed
indebtedness of $ 540,000 from a selling shareholder. The indebtedness is
payable in three yearly installments of $180,000, commencing June 1, 2001. The
last payment was made in June 2003.
11. Loan payable
At the date of acquisition in April 2000, Isternet SR, s.r.o. had a loan from
one of its former shareholders amounting to SKK 4,600,000.The loan bore interest
at a rate of BRIBOR ("Bratislava Inter-Bank Overnight Rate")+ 5%. The loan,
including the 2002 interest, was settled in January 2003.
F-17
12. Income taxes
The components of tax expense for the years ended 2003 and 2002 are as follows:
2003 2002
---- ----
Current
Federal -- -
State and Local -- -
Foreign $61,590 -
Deferred
Federal - -
State and Local -- -
Foreign $61,590 -
------- -------
Total income tax expense $61,590 -
------- -------
The difference between the total expected tax expense (benefit) and tax expense
for the years ended December 31, 2003 and 2002 is accounted for as follows:
2003 2002
----- ----
Amount % Amount %
--------- ------ -------- ------
Computed expected tax
Benefit $(514,920) (34.00) $(1,715,040) (34.00)
State Taxes Net of Federal Benefit (299,627) (5.94)
Amount Attributable to Foreign
Operations 147,257 9.72 1,220,982 24.21
Other 333,383 22.01 (400) (0.01)
Change in Valuation Allowance 95,870 6.33 794,085 15.74
--------- ----- -------- -----
Total Expense (Benefit) $61,590 4.07% $ - 0.00%
========= ===== ======== =====
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at December 31, 2003 and 2002 are as follows:
2003 2002
---------- ----------
Deferred Tax Assets:
Net Operating Loss Carryovers $3,797,840 $3,560,191
Capital Loss Carryovers 63,801 1,278,955
---------- ----------
Gross Tax Assets 3,861,641 4,839,146
Valuation Allowance (3,861,641) (4,839,146)
---------- ----------
Net Deferred Tax Asset $ - $ -
========== ==========
For U.S. Federal income tax purposes, the Company has unused net operating loss
carryforwards at December 31, 2003 of approximately $9,591,000 available to
offset future taxable income. Such carryforwards expire in various years from
2008 through 2023. The Company has unused capital loss carryovers at December
31, 2003 of approximately $187,650. Capital loss carryforwards expire in 2004.
A valuation allowance has been established due to uncertainty whether the
Company will generate sufficient taxable earnings and capital gains to utilize
the available carryovers. The Tax Acts of some jurisdictions contain provisions
which may limit the net operating loss carryforwards available to be used in any
given year if certain events occur, including significant changes in ownership
interests. The Company has not assessed the impact of these provisions on the
availability of Company loss carryovers.
13. Related party transactions
General: The largest customer 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 fiber cable connection, which enables
companies to transmit data to a variety of destinations by utilizing the
international connections of Pantel.
Due to the increase in revenues from International/domestic leased line and VOIP
services provided in conjunction with Pantel, some of the representatives of the
Company have moved to the premises of Pantel in order to improve the
effectiveness of the co-operation on international projects and daily
operational issues. Csaba Toro, Chief Executive Officer of Euroweb International
Corp., was also the Chief Executive Officer of Pantel until February 2003.
F-18
Transactions: Both Euroweb Slovakia and Euroweb Romania have engaged in
------------ transactions with Pantel:
(a) Pantel provides the following services to the subsidiaries of the Company:
- Internet bandwidth
- International leased lines outside of Romania and Slovakia
The total amount of these services purchased from Pantel was $2,675,538
during 2003 (2002: $2,028,390).
(b) Euroweb International and its subsidiaries provided the following services
to Pantel:
- International leased lines and local loops in Slovakia and Romania
- International IP and VOIP services
- Certain consultants are hired by the Company, but also work on
projects for Pantel. In these cases, Pantel is recharged a portion of
the consulting fees
The total value of these services sold was approximately $5,633,864 in 2003
(2002: $4,873,371).
Direct sales to Pantel were 38% of total consolidated revenue, but Euroweb's
dependency on Pantel is even greater than this figure suggests. Some third party
sales involve Pantel as the subcontractor/service provider for the
international/domestic lines, and some third party customers are also clients of
Pantel outside of Romania (i.e. their relationship with Pantel is stronger than
their relationship with Euroweb Romania).
Effective dependency on Pantel - taking into account direct and Pantel-related
sales - represents approximately 60% of total consolidated revenues of the
Company and approximately 88% of total sales of Euroweb Romania. There is no
such dependency in the case of Euroweb Czech or Euroweb Slovakia.
Pricing: Agreements are made at market prices or a split of the margin based on
the financial investment into the specific services by each of the parties. The
Company considers alternative suppliers for individual projects, when
appropriate.
The Company's Chief Executive, Csaba Toro, uses offices provided by Euroweb Rt.
No rent was charged in 2003.
There were no other significant related party transactions in 2003.
14. Commitments and Contingencies
(a) Employment Agreements
An employment agreement with the Chief Executive Officer which provided for
aggregate annual compensation of $96,000 through December 31, 2005 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.
F-19
(b) Lease agreements
The Company's subsidiaries have entered into various capital leases for vehicles
and internet equipment, as well as non-cancelable agreements for office
premises. Refer to Note 9 (Leases). In the fourth quarter of 2003, the Company
entered into capital leases for vehicles in Romania, which were delivered in the
first quarter of 2004. Total future minimum lease payments under this agreement
($96,837) is not reflected in the financial statements as the vehicles were
delivered subsequent to year-end.
(c) 20 years' usage rights
In 2002, Euroweb Romania provided an Indefeasible Right of Use for transmission
capacity on 12 pairs of fiber (see Note 9) over a period of 20 years, commencing
in 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) Legal Proceedings
The Company is a member of ICANN (Internet Corporation for Assigned Names and
Numbers), which is the association of domain registrations worldwide. The
Company, as a representative of ICANN in Slovakia, started to provide
registration and administration of second level domains for organizations
located in the Slovak Republic in January 2003 (total revenues in 2003
approximately $250,000). Due to the fact that the Company is the only provider
of such services in Slovakia, the Association of Internet Providers in Slovakia
("API") and the Association of Webhosting Providers claim that the Company has a
monopoly and is abusing this dominant position and started legal proceedings
against the Company with the Slovak Antimonopoly Office. The Antimonopoly office
agreed that certain parts of the "General terms of domain registrations" can be
considered as abusing the dominant position and requested the Company to change
certain items in the registration system, and imposed two minor penalties. The
Association of Webhosting Providers filed an appeal against the decision, which
is still pending.
Based on advise from local legal counsel, management believe that the two minor
penalties the Antimonopoly Office imposed to date were symbolic as they related
only to minor breaches of the Act on the Protection of Competition, even though
penalties could potentially reach up to 10% of the Company's annual turnover.
Based on this, further penalties are not expected to be significant. Management
believes that the registration system is compliant with both local and ICANN
requirements and the Company has already corrected the minor discrepancies
highlighted by the Antimonopoly Office.
There are no other known significant legal procedures that have been filed and
are outstanding against the Company.
15. Stock Option Plan and Employee Options
The outstanding options have been adjusted to reflect the reverse stock split of
one for five that became effective on August 30, 2001, and prior period amounts
have been restated.
F-20
a) Stock Option Plan
Under the Company's Stock Option Plan (the "Plan") which expired in 2003, an
aggregate of 134,000 shares of common stock were authorized for issuance. The
Plan provides that incentive and nonqualified options may be granted to
officers, directors and consultants of the Company for the purpose of providing
an incentive to those persons. The Plan may be administered by either the Board
of Directors or a committee of three directors appointed by the Board (the
"Committee"). The Board or Committee determines, among other things, the persons
to whom stock options are granted, the number of shares subject to each option,
the date or dates upon which each option may be exercised and the exercise price
per share.
Options granted under the Plan are generally exercisable for a period of up to
six years from the date of grant. Options terminate upon the option holder's
termination of employment or consulting arrangement with the Company, except
that, under certain circumstances, an option holder may exercise an option
within the three-month period after such termination of employment. An option
holder may not transfer any options although an option may be exercised by the
personal representative of a deceased option holder within the three-month
period following the option holder's death. Incentive options granted to any
employee who owns more than 10% of the Company's outstanding common stock
immediately before the grant must have an exercise price of not less than 110%
of the fair market value of the underlying stock on the date of the grant.
Moreover, the exercise term may not exceed five years. The aggregate fair market
value of common stock (determined at the date of grant) for which any employee
may exercise incentive options in any calendar year may not exceed $100,000. In
addition, the Company will not grant a nonqualified option with an exercise
price less than 85% of the fair market value of the underlying common stock on
the date of the grant.
As of December 31, 2003, the total number of shares for which options have been
issued and are exercisable pursuant to the Plan is 46,000 (2002: 61,500). No
options were granted under the plan in 2003 and 2002.
(b) Other Options
The Company has issued exercisable options pursuant to employment agreements. As
of December 31, 2003 fully vested options are outstanding and exercisable for
63,000 shares pursuant to the employment agreement with Mr. Csaba Toro, CEO. The
options were granted on April 2, 1999 and expire on April 2, 2005. The options
are exercisable at $ 10.00 per share.
On October 13 2003, the Company granted two Directors 100,000 options each, at
an exercise price (equal to the fair value on that day) of $4.21 per share, with
25,000 options being exercisable on April 13 of 2004-2007. However, the options
expire ninety days after the date the Director no longer serves on the Board.
(c) Accounting for stock-based options
Stock options and employment agreement options are all considered options which
come under the guidelines of stock-based compensation. For options granted to
employees at exercise prices equal to the fair market value of the underlying
common stock at the date of grant, no compensation cost is recognized. In 2003,
grants were made to two Directors where the exercise price was equal to the fair
market price at the date of grant and therefore no expense was recognized as the
Company has elected to continue to apply the intrinsic value-based method of
accounting described in APB 25 (See Note 2 (p)).
F-21
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123"),
requires the Company to provide pro forma information regarding net income and
earnings per share as if compensation cost for the Company's stock options had
been determined in accordance with the fair value-based method prescribed in
SFAS No. 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model. No grants were made
in 2002 and consequently in 2002 the reported loss is the same as the pro forma
loss, as all previous grants vested prior to 2002.
The amount that should be recorded as total compensation expense under SFAS No.
123 is $632,766 (calculated at grant date using Black-Scholes valuation model
with volatility of 88%) for the options granted to the directors on October 13,
2003. Under the accounting provisions of SFAS No. 123, this compensation expense
can be recorded over the life of the options and the Company's 2003 net loss and
net loss per share would have been reduced to the pro forma amounts indicated
below:
2003 2002
---- ----
Net loss:
Net loss as reported $(1,576,060) $(5,894,234)
Compensation expense (22,826) -
Pro forma net loss (1,598,886) (5,894,234)
Basic and diluted loss per share:
As reported $ (0.34) $ (1.26)
Pro forma (0.34) (1.26)
The following table summarizes the total number of shares for which options have
been issued (Stock Option Plan, Employment Agreements and grants to Directors)
and are exercisable:
2003 2002
------------------- -------------------
Weighted Weighted
average average
exercise exercise
Options Price Options Price
Outstanding, January 1, 124,500 $9.00 319,500 $8.99
Granted* 200,000 4.21 - -
Cancelled - - (185,000) 8.93
Expired (15,500) 7.65 (10,000) 10.00
-------- --------
Outstanding and
exercisable, December 31, 309,000 5.95 124,500 9.00
======= =======
*50,000 exercisable on each April 14 of 2004, 2005, 2006, and 2007.
No options were exercised in 2003 and 2002.
16. Stock Warrants
As at December 31, 2003 and 2002, the total number of shares for which warrants
have been issued and are exercisable (at $ 11 per share) is 10,000. The warrants
expire on May 2, 2004.
F-22
Warrants are generally granted in connection with private placement
transactions. In 2003, no warrants expired, nor were any granted or exercised.
In 2002, 1,076,731 warrants (each equivalent to one-fifth of a share of common
stock) expired, while none were granted or exercised.
17. Segment information
The following table summarizes financial information by geographic area
for the year ended December 31, 2003 after intercompany eliminations and
allocation of certain salaries and revenues/direct cost to the respective
countries for better analysis:
2003 Slovakia Czech Romania Corporate Total
3rd party revenues 3,424,633 1,163,662 4,539,215 - $9,127,510
Pantel related revenues - - 5,633,864 - 5,633,864
Total revenues 3,424,633 1,163,662 10,173,079 - 14,761,374
Gross profit 1,999,728 491,985 2,120,052 - 4,611,765
EBITDA* 443,369 (220,740) 574,931 (700,120) 97,440
Depreciation 328,182 91,663 466,853 - 886,698
Intangible impairment - - 100,364 - 100,364
Goodwill impairment 563,000 92,581 324,957 - 980,538
Interest income 18,990 463 3,934 390,349 413,736
Interest expense 28,269 213 24,333 5,231 58,046
Net interest (expense) income (9,279) 250 (20,399) 385,118 355,690
Income tax - - 61,590 - 61,590
Net profit/(loss) (457,392) (404,734) (398,932) (315,002) (1,576,060)
Segment fixed assets, net 326,788 48,068 1,575,851 - 1,950,707
Fixed asset additions 94,954 8,978 752,848 - 856,780
Goodwill - - 566,000 - 566,000
*defined as net income/loss before interest, income taxes, depreciation and
amortization, impairment of goodwill and intangibles
Goodwill and related impairment amounts are recorded in the books of the
Corporate entity and allocated to segments.
F-23
The Company does not consider the revenue generated by the fibre optic cables in
Romania through an IRU agreement as a separate operating segment.
18. Subsequent events
On February 12, 2004, Euroweb International Corp. entered into a Share Purchase
Agreement with a related party, PanTel Tavkozlesi es Kommunikacios Rt., Hungary
("Pantel"), to acquire Pantel's 51% interest in Euroweb Hungary Rt. (currently
49% owned by the Company). Consideration consists of EUR 1,650,000 in cash and a
guarantee that Euroweb Hungary Rt. will purchase at least HUF 600 million
(approximately $3 million) worth of services from Pantel in each of 2004-2006,
with a penalty of 25% of the amount by which purchases are less than the HUF 600
million in any year. The Company has also provided a guarantee for a loan
obtained from Pantel by a subsidiary of Euroweb Hungary Rt. (HUF 245 million
plus interest) as well as a guarantee relating to a trade payable by Euroweb
Hungary Rt. to Pantel of HUF 93 million plus VAT. The transaction was closed on
February 29, 2004.
On February 23, the Company signed a Share Purchase Agreement in connection with
its acquisition of all of the outstanding shares of Elender Business
Communications Ltd., a leading ISP in Hungary. The purchase price consisted of
USD 6,500,000 in cash and 677,201 of the Company's common shares. The closing of
this acquisition is subject to the approval of the Hungarian Competition Office,
which is still pending.
During 2003, the Romanian Tax Authorities conducted an audit relating to the
Company's accounting for VAT with respect to foreign invoices. Due to this
investigation, the Tax Authorities did not process VAT reclaims of $766,589
which were recorded in `prepaids and other current assets' as at December 31,
2003. The Tax Authorities have finalized their report and assessed penalties of
$ 168,154, which is recorded in other selling, general and administrative
expenses. In February 2004, the VAT receivable, net of the $168,154 penalty was
refunded by the Tax Authority.
F-24