UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities and Exchange Act of 1934
Date of Report (Date of earliest reported): February 23, 2004
EUROWEB INTERNATIONAL CORP.
(Exact name of registrant as specified in charter)
Delaware 1-1200 13-3696015
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1122 Budapest, Varosmajor utca 13. Hungary
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: +36-1-8897101
INFORMATION INCLUDED IN REPORT
Euroweb International Corp. filed a Form 8-K dated March 9, 2004 with regard to
the acquisition of the 100% of the issued and outstanding shares of Elender Rt.
without the required financial information. Accordingly, Euroweb International
Corp. is filing this Form 8-K/A to include that financial information.
ITEM 2. Acquisition or Disposition of Assets
On February 23, 2004, Euroweb International Corp., a Delaware corporation (the
"Company"), entered into a Shares Purchase Agreement with Vitonas Investments
Limited, a company with registered seat in Cyprus ("Vitonas"), Certus Kft., a
Hungarian corporation ("Certus") and Rumed 2000 Kft., a Hungarian corporation
("Rumed" and collectively with Vitonas and Certus the "Seller"), to acquire
Seller's 100% interest in Elender Business Communications Services Ltd., a
Hungarian corporation ("Elender" or "Elender Rt"). Elender 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 Closing of the Elender acquisition occurred on June 9, 2004.
The total purchase price paid by the Company for Elender was $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. 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 had 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. During the period that the Sellers hold an aggregate of 5% of
the outstanding shares of common stock of the Company, they will be entitled to
appoint a director to the Company's board. In addition, as long as the
non-transferable shareholders loan is outstanding, the Sellers shall also be
entitled to appoint a director to Elender's board or, in the alternative, the
board of the Company's subsidiary managing the Company's Hungarian operations.
ITEM 7. Financial Statements and Exhibits
(a) Financial Statements of businesses acquired.
Audited Financial Statements of Elender Rt. as of and for the years
ended December 31, 2003 and 2002
Unaudited Condensed Financial Statements of Elender Rt. as of March
31, 2004 and for the quarters ended March 31, 2004 and 2003
(b) Pro forma financial statements
1. Unaudited pro forma consolidated balance sheet as of March 31, 2004
2. Unaudited pro forma consolidated statement of operations for the year
ended December 31, 2003
3. Unaudited pro forma consolidated statement of operations for the
quarter ended March 31, 2004
(c) Exhibits.
Exhibit No. Description
10.1 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. (Incorporated by reference to Form 8-K Current Report
filed on March 9, 2004)
ELENDER Business Communications Services Rt.
Financial Statements
December 31, 2003 and 2002
TABLE OF CONTENTS
Page
Independent Auditors' Report 2
Financial Statements:
Balance Sheets 3
Statements of Operations 4
Statements of Changes in Shareholders' Deficit 5
Statements of Cash Flows 6
Notes to the Financial Statements 7-17
Independent Auditors' Report
To the Shareholders of Elender Business Communications Services Rt.
We have audited the accompanying balance sheets of Elender Business
Communications Services Rt. (the "Company") as of December 31, 2003 and 2002,
and the related statements of operations, shareholders' deficit and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the financial position of Elender Business Communications
Services Rt. as of December 31, 2003 and 2002, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte
------------
Deloitte
Budapest, Hungary
July 2, 2004
Elender Business Communications Services Rt.
Balance Sheets
December 31, 2003 and 2002
In HUF'000
2003 2002
----------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents 76,702 145,069
Trade accounts receivable, net 201,152 548,471
Related party receivables 54,663 181,477
Prepaid and other current assets 257,631 150,692
----------------- ---------------
Total current assets 590,148 1,025,709
Property and equipment, net 920,909 1,156,048
Investment in affiliate 102,248 108,605
----------------- ---------------
Total assets 1,613,305 2,290,362
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 324,444 172,535
Related party payables 36,083 173,640
Short term related party loan 166,515 367,793
Short term portion of long term loan payable 94,196 137,277
Other current liabilities 58,278 124,655
Accrued expenses 203,361 160,331
Deferred revenue 11,196 266,092
----------------- ---------------
Total current liabilities 894,073 1,402,323
Long term related party loan 679,339 829,037
Long term loan payable 56,597 148,592
Long term capital lease obligation 1,756 -
----------------- ---------------
Total long term liabilities 737,692 977,629
----------------- ---------------
Total liabilities 1,631,765 2,379,952
----------------- ---------------
Commitments and contingencies (note 11)
Shareholders' deficit
Common stock, HUF 10,000 par value (2,000 and 300 shares 20,000 3,000
authorized, issued and outstanding as of December 31, 2003
and 2002, respectively)
Additional paid in capital 501,874 331,874
Accumulated deficit (540,334) (424,464)
----------------- ---------------
Total shareholders' deficit (18,460) (89,590)
----------------- ---------------
Total liabilities and shareholders' deficit 1,613,305 2,290,362
================= ===============
See accompanying notes to financial statements.
3
Elender Business Communications Services Rt.
Statements of Operations
Years Ended December 31, 2003 and 2002
In HUF'000
2003 2002
------------------- ----------------
Third party revenue 4,624,783 5,202,704
Related party revenue 70,740 113,947
------------------- ----------------
Total revenue 4,695,523 5,316,651
Cost of revenue (exclusive of depreciation and 3,168,711 3,408,184
amortization shown separately below)
------------------- ----------------
Gross profit 1,526,812 1,908,467
Operating expenses
Personnel expenses 252,950 405,337
Consulting, professional and directors fees 297,215 224,149
Other selling, general and administrative expenses
(including THUF 234,570 and THUF 250,037 related
party expenses in 2003 and 2002 respectively)
638,397 824,429
Depreciation and amortization 340,684 302,915
------------------- ----------------
Total operating expenses 1,529,246 1,756,830
(Loss)/income from operations (2,434) 151,637
Other income/(expense)
Interest income 350 13,106
Interest expense (110,195) (53,295)
Foreign exchange gain, net 2,766 5,446
------------------- ----------------
Total other expense (107,079) (34,743)
------------------- ----------------
(Loss)/income before income taxes and equity in loss of
affiliate (109,513) 116,894
Income taxes - -
------------------- ----------------
(Loss)/income before equity in loss of affiliate (109,513) 116,894
------------------- ----------------
Equity in loss of affiliate (6,357) (77,436)
------------------- ----------------
Net (loss)/income (115,870) 39,458
=================== ================
See accompanying notes to financial statements.
4
Elender Business Communications Services Rt.
Statements of Changes in Shareholders' Deficit
Years Ended December 31, 2003 and 2002
In HUF'000 (except number of shares)
Common Stock Additional Accumulated Shareholders'
Shares* Amount paid in capital Deficit Deficit
January 1, 2002 300 3,000 - (463,922) (460,922)
========= =========== ============ =========== ==============
Net income - - - 39,458 39,458
Return of capital to parent (210,959) (210,959)
Forgiveness of related party loan - - 542,833 - 542,833
--------- ----------- ------------ ----------- --------------
December 31, 2002 300 3,000 331,874 (424,464) (89,590)
========= =========== ============ =========== ==============
Issuance of common stock 1,700 17,000 - - 17,000
Net loss - - (115,870) (115,870)
-
Forgiveness of related party loan - - 170,000 - 170,000
--------- ----------- ------------ ----------- --------------
December 31, 2003 2,000 20,000 501,874 (540,334) (18,460)
========= =========== ============ =========== ==============
* number of shares
See accompanying notes to financial statements.
5
Elender Business Communications Services Rt.
Statements of Cash Flows
Year Ended December 31, 2003 and 2002
In HUF'000
2003 2002
Net (loss)/income (115,870) 39,458
Adjustments to reconcile net (loss)/income to net cash used in
operating activities:
Depreciation and amortization 340,684 302,915
Loss on sale of property and equipment 21,702 16,520
Equity in loss of affiliate 6,357 77,436
Increase in allowance for doubtful receivables 16,239 8,337
Changes in assets and liabilities:
Receivables 430,780 553,602
Prepaid and other assets 31,429 21,934
Related party payables (137,557) (982,846)
Payables and other current liabilities 198,022 538,906
Deferred revenue (254,896) 198,091
------------------ -----------------
Net cash provided by operating activities 536,890 774,353
Cash flows from investing activities:
Redemption of marketable securities - 155,034
Investment in affiliate - (186,041)
Purchase of property and equipment (184,871) (708,389)
Proceeds from sale of property and equipment 48,666 165,667
------------------ -----------------
Net cash used in investing activities (136,205) (573,729)
Cash flows from financing activities:
Draw down of short-term and long-term loans from related parties
103,514 497,812
Repayment of of short-term and long-term loans from related parties
(454,487) (242,801)
Draw down of short-term and long-term loans 125,000 -
Repayment of short-term and long-term loans (260,079) (618,312)
Proceeds from issuance of shares 17,000 -
------------------ -----------------
Net cash used in financing activities (469,052) (363,301)
Decrease in cash and cash equivalents (68,367) (162,677)
Cash and cash equivalents, beginning of year 145,069 307,746
------------------ -----------------
Cash and cash equivalents, end of year 76,702 145,069
================== =================
Supplemental Disclosures:
Cash paid for income taxes - -
================== =================
Cash paid for interest (81,777) (19,996)
================== =================
Non-cash financing transactions:
Capital lease 2,201 -
================== =================
Forgiveness of related party loan 170,000 542,833
================== =================
See accompanying notes to financial statements.
6
1. Organization and Business
Elender Business Communications Services Rt was formed on October 23, 2003 at
which time it legally merged with Elender Kft., an Internet Service Provider
("ISP") and three content providers Webigen Rt., Acquarius 2002 Rt. and Elender
Web Kft., all of which were under common control at the time of the merger.
Elender Rt., Elender Kft., Webigen Rt., Acquarius 2002 Rt. and Elender Web Kft
are collectively referred to as "Elender" or the "Company." The Company began
its operations in October 1995.
The Company operates in one industry segment, providing a full range of Internet
related services. The Internet services provided by the Company include Internet
access, web related services, consulting, application development, and other
content services.
On February 23, 2004, Euroweb International Corp., a Delaware corporation,
entered into a Shares Purchase Agreement with Vitonas Investments Limited, a
company with registered seat in Cyprus ("Vitonas"), Certus Kft., a Hungarian
corporation ("Certus") and Rumed 2000 Kft., a Hungarian corporation ("Rumed" and
collectively with Vitonas and Certus the "Seller"), to acquire Seller's 100%
interest in Elender.
2. Summary of Significant Accounting Policies
Accounting Principles
The financial statements and accompanying notes have been prepared in
conformity with accounting principles generally accepted in the United
States of America.
Basis of presentation
The financial statements comprise the accounts of Elender Rt, Elender
Kft, Webigen Rt, Aquarius 2002 Rt and Elender Web Kft. Elender Kft
acquired Webigen Rt. in December 2002 from a related party at book
value, while Aquarius 2002 Rt and Elender Web Kft together with
Webigen Rt. merged with Elender Kft. as of October 13, 2003. The
acquisitions and mergers were made from an entity under common control
(all of the companies were owned or controlled by Wallis group at the
time of mergers in October 2003) and accordingly, the transactions
were accounted in a manner similar to a pooling-of-interest in
accordance with accounting principles generally accepted in the United
States of America, with all prior periods being restated as if the
entities were combined for all periods presented.
All material intercompany balances and transactions have been
eliminated.
2. Summary of Significant Accounting Policies Continued
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
7
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.
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 and individuals. All of the Company's revenues
are derived from the provision of such services.
Fair value of financial instruments
The carrying values of cash equivalents, notes and loans receivable,
accounts payable, loans payable and accrued expenses approximate their
fair values.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and short-term deposits
with maturity date of less than three months at the date of purchase.
8
2. Summary of Significant Accounting Policies Continued
Property and equipment
Property and equipment are stated at cost less accumulated
depreciation. Equipment purchased under capital leases is stated at
the present value of minimum lease payments at the inception of the
lease less accumulated depreciation. Leased assets are depreciated
using a straight-line method over the estimated useful lives of the
leased asset. The Company provides for depreciation of property and
equipment using the straight-line method over the following estimated
useful lives:
Software 3 years
Computer equipment 3 years
Other furniture equipment and fixtures 3-5 years
Vehicles 5 years
Recurring maintenance on property and equipment is expensed as
incurred.
Long-lived assets
In accordance with Statements of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company periodically reviews long-lived assets
for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of those assets are no longer
appropriate. Each impairment test is based on a comparison of the
undiscounted cash flows to the recorded value of the asset. If
impairment is indicated, the asset is written down to its estimated
fair value based on a discounted cash flow analysis.
Invesment in affiliate
The Company uses the equity method to account for its investments in
non-marketable equity securities where it has an ownership interest of
between 20-50%.
2. Summary of Significant Accounting Policies Continued
Revenue recognition
Revenue is recognized when earned. Revenues from Internet services are
recognized in the month in which the services are provided, either
based on monthly usage or on fixed monthly fees. Revenues for
9
consulting services are recognized as the service is performed. The
Company defers revenue recognition for payments on contracts for which
services have not been performed.
Cost of revenues
Cost of revenues comprised principally of telecommunication network
expenses, costs of content services and cost of leased lines.
Barter transactions
The Company periodically barters services for advertising credits. The
Company is able to determine fair value based on comparable cash
transactions for the services provided and for which the advertiser
has the financial ability to pay cash. Revenue related to bartered
services is recognized when the services are rendered. The barter
advertising credits are initially recorded as an asset in "Prepaid and
other current assets" and expensed in "Other selling, general and
administrative expenses" when they are utilized. Barter transactions
totaled approximately THUF 50,650 and THUF 102,902 during the years
ended December 31, 2003 and 2002, respectively.
Advertising costs
Advertising costs are expensed as incurred and amounted THUF 156,832
and THUF 64,336 for the years ended December 31, 2003 and 2002,
respectively.
Foreign currency translation
The Company considers the Hungarian Forint ("HUF") to be its
functional currency.
Gains and losses from foreign currency transactions and the
translation of monetary assets or liabilities not denominated in
Hungarian forints are included in the income statements in the period
in which they occur
2. Summary of Significant Accounting Policies Continued
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
10
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.
Recent accounting pronouncements
On April 30, 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149") which amends SFAS 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 has adopted this pronouncement and it has
no material impact on its financial statements.
3. Trade accounts receivable
2003 2002
--------------------------------------------------------------------------------
Receivable 227,728 558,808
Less allowance for doubtful debts (26,576) (10,337)
--------------------------------------------------------------------------------
Total 201,152 548,471
======= =======
The Company establishes allowance for bad debt to reduce receivables to their
net realizable value. The allowance is determined on an account by account
basis.
4. Prepaid and other current assets
2003 2002
--------------------------------------------------------------------------------
Unbilled revenues 92,787 53,059
Prepaid costs 15,773 7,600
Barter credits 92,050 64,936
Value added tax receivable 7,578 -
Loans 15,000 10,023
Others 34,443 15,074
--------------------------------------------------------------------------------
Total 257,631 150,692
======= =======
11
5. Property and equipment
Property and equipment as at December 31, 2003 and 2002 in THUF were as follows:
2003 2002
--------------------------------------------------------------------------------
Software 392,826 323,733
Computer equipment 983,077 958,606
Vehicles, furniture, fixtures and other 310,453 298,472
Total 1,686,356 1,580,811
Less accumulated depreciation (765,447) (424,763)
Total property and equipment 920,909 1,156,048
======= =========
The gross value of assets recorded under capital lease obligation was THUF
2,319, while accumulated depreciation was THUF 89 as of December 31, 2003. As of
December 31, 2002 there were no assets under capital lease obligations.
6. Investment in affiliates
The Company owned 30.9% of the outstanding shares in Index Rt. as of December
31, 2003 and 2002. In March 2004, the Company sold its investment for THUF
171,920 to a related party. (See note 12). During 2003 and 2002 the Company
recorded losses of THUF 77,436 and THUF 6,357, respectively, reflecting its
proportional share of the operating losses of Index Rt.
12
7. Related party transactions
The Company has entered into transactions with related parties both during the
course of its normal operating activities and for financing its operations.
These transactions are summarized below:
Financing transactions
The balance of long term related party loan liabilities as of December 31, 2003
and 2002 were as follows:
2003 2002
--------------------------------------------------------------------------------
Vitonas Limited 528,818 609,652
Certus Kft. 76,427 102,552
Rumed Kft. 74,094 89,304
Wems - Wallis related entity - 27,529
--------------------------------------------------------------------------------
Total long-term related party loans 679,339 829,037
======= =======
The expiration date of all of the related party loans was October 7, 2007.
Interest rate is BUBOR (interbank credit interest rate in Budapest) + 1.5%
(13.24% and 9.12% as of December 31, 2003 and 2002, respectively).
Based on the share purchase agreement of the Company, the repayment schedule of
the related party loans was amended such that the maturity date is now December
31, 2005.
The balance of short term related party loan liabilities as of December 31, 2003
and 2002 were as follows:
2003 2002
--------------------------------------------------------------------------------
Wallis Rt. 166,515 367,793
--------------------------------------------------------------------------------
Total short-term related party loans 166,515 367,793
======= =======
Interest rate is BUBOR + 1.5% (13.24% and 9.12% as of December 31, 2003 and
2002, respectively).
The Company recorded related party interest expense in the accompanying income
statement of THUF 94,377 and THUF 16,552 in 2003 and 2002, respectively.
7. Related party transactions, continued
13
During 2003 and 2002, certain loan liabilities were waived by related parties
amounting to THUF 170,000 and THUF 542,833, respectively. The effect of the
waivers has been shown as increase in additional paid-in-capital in the
accompanying financial statements.
The schedule of principal payments on related party loans is as follows as of
December 31, 2003:
Payments due in 2004 166,515
Payments due in2005 679,339
-------
Total related party loans 845,854
=======
Operating transactions
The Company provides Internet access and related services to the related
parties. Total revenues generated from these services was THUF 70,740 and THUF
113,947 during 2003 and 2002, respectively
Related parties also provided the following services to the Company:
- Office rental
- Car rental
- Consulting and advisory
- Labour outsourcing
- Advertising and public relations
- Telephone
Total amount of these services purchased by Elender was approximately THUF
234,570 and THUF 250,037 during 2003 and 2002, respectively.
14
8. Long-term loans
The Company has entered a loan agreement with Raiffeisen Bank Rt ("Bank") in a
value of HUF 275,000,000 with an interest rate of BUBOR +2.25% (13.99% and 9.87%
as of December 31, 2003 and 2002, respectively). The loan is payable in
quarterly installments through October 22, 2005. The loan is guaranteed by the
shares of the Company pledged as collateral and also guaranteed by Wallis Rt. In
addition to the loan agreement, the Company also concluded an overdraft facility
with the Bank in a value of HUF 100,000,000 with interest rate of BUBOR + 0.7%
(12.44% and 8.32% as of December 31, 2003 and 2002). The facility will expire on
August 31, 2004.
The outstanding balances were in THUF as follows at December 31:
2003 2002
--------------------------------------------------------------------------------
Long term loan 150,793 285,869
Short term portion of long term loan (94,196) (137,277)
--------------------------------------------------------------------------------
Total long term loan payable 56,597 148,592
====== =======
The schedule of principal payments on long term loans is as follows as of
December 31, 2003:
-----------------------------------------------------------------
Loan payable in 2004 94,196
Loan payable in 2005 56,597
-----------------------------------------------------------------
Total 150,793
=======
There were no amounts drawn on the bank overdraft at December 31, 2003 and 2002.
9. Other current liabilities
2003 2002
--------------------------------------------------------------------------------
Value added tax payable - 47,545
Local tax payable 22,286 21,291
Wages related taxes 29,199 36,935
Other 6,793 18,884
--------------------------------------------------------------------------------
Total other current liabilities 58,278 124,655
====== =======
15
10. Accrued expenses
2003 2002
--------------------------------------------------------------------------------
Telecommunication expenses 112,042 78,964
Interest 28,068 20,193
Subcontractors and consultants 35,281 20,970
Other 27,970 40,204
--------------------------------------------------------------------------------
Total 203,361 160,331
======= =======
11. Commitments and Contingencies
Lease agreements
Capital lease - In 2003, the Company entered into capital lease, which expires
over the next four years. The following is a schedule of future capital lease
payments (with initial or remaining lease terms in excess of one year) as of
December 31, 2003 in THUF:
Short term lease obligation 445
Long term lease obligation 1,756
--------------------------------------------------------------------------------
Total lease payments 2,201
=====
The current portion of the capital lease obligation is included in `Other
current liabilities' in the accompanying balance sheets.
Operating lease - On January 1, 2002, the Company has entered a non-cancelable
rental contract for its office space for the period of seven years with a
related party. The monthly rental fee is HUF 5,400,000 (EUR 21,560). Rent
expense included in the accompanying income statements was THUF 64,800 and THUF
64,800 in 2003 and 2002, respectively.
Following are the Company's commitments under its non-cancelable lease
obligations:
Capital lease Operating lease
2004 745 64,800
2005 745 64,800
2006 745 64,800
2007 683 64,800
2008 - 64,800
--------------------- ----------------------
Total 2,917 324,000
--------------------- ======================
Less amount representing interest (716)
---------------------
Net minimum lease payments 2,201
=====================
There are no restrictions on dividends imposed by lease contracts.
16
12. Income taxes
The statutory corporate tax rate was 18% as of December 31, 2003 and 2002. The
statutory rate will be 16 % effective from January 1, 2004. Owing to the taxable
losses, the Company did not have any corporate income taxes payable for the
years of 2003 and 2002.
The following summarizes the Company's net deferred tax assets as of December
31:
2003 2002
--------------------------------------------------------------------------------
Investment in affiliate 13,407 12,390
Net operating loss carry forwards 21,891 13,483
--------------------------------------------------------------------------------
Total deferred tax assets 35,298 25,873
Less allowance (35,298) (25,873)
--------------------------------------------------------------------------------
Total 0 0
The losses incurred in the previous years can be carried forward for offset
against future taxable profit. The carried forward taxable losses as of December
31, 2003 and 2002 were THUF 136,819 and THUF 84,272, respectively. Such losses
expire beginning 2007 through 2008. The Company has recorded a full valuation
allowance against its deferred tax assets, as management does not believe the
assets will be realized.
13. Subsequent events
In the first quarter of 2004, Elender Rt. has sold its investment in its
affiliate (Index Rt) for HUF 171,920,000 to Wallis. The sale was affected
through a reduction of the short-term related party loan liabilities due to
Wallis.
The Company has concluded a new bank loan agreement with Commerzbank Rt on June
1, 2004. This loan agreement was signed and replaced the existing loan
facilities with Raiffeisen and to increase the current loan facilities to HUF
350 million and the overdraft facilities limit to 450 million HUF. Amounts
outstanding on the Raiffeisen Loan were repaid.
17
TABLE OF CONTENTS
-----------------
Financial Statements:
Unaudited Condensed Balance Sheets
Unaudited Condensed Statements of Operations
Unaudited Condensed Statements of Cash Flows
Notes to the Unaudited Condensed Financial Statements
18
Elender Business Communications Services Rt.
Unaudited Condensed Balance Sheets
March 31, 2004 and December 31, 2003
In HUF'000
March 31, December 31,
2004 2003
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents 881 76,702
Trade accounts receivable, net 364,622 201,152
Related party receivables - 54,663
Prepaid and other current assets 275,053 257,631
----------------- -----------------
Total current assets 640,556 590,148
Property and equipment, net 892,181 920,909
Investment in affiliate - 102,248
----------------- -----------------
Total assets 1,532,737 1,613,305
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 380,559 324,444
Related party payables - 36,083
Short term related party loan 182,191 166,515
Short term portion of long term loan payable 127,335 94,196
Other current liabilities 54,407 58,278
Accrued expenses 267,607 203,361
Deferred revenues 6,932 11,196
----------------- -----------------
Total current liabilities 1,019,031 894,073
Long term related party loan 471,147 679,339
Long term loan payable 970 56,597
Long term capital lease obligation 1,632 1,756
----------------- -----------------
Total long term liabilities 473,749 737,692
----------------- -----------------
Total liabilities 1,492,780 1,631,765
Commitments and contingencies
Shareholders' deficit
Common stock, HUF 10,000 par value (2,000 shares authorized, 20,000 20,000
issued and outstanding)
Additional paid in capital 501,874 501,874
----------------- -----------------
Accumulated deficit (481,917) (540,334)
----------------- -----------------
Total shareholders' deficit 39,957 (18,460)
Total liabilities and shareholders' equity/(deficit) 1,532,737 1,613,305
================= =================
See accompanying notes to unaudited condensed financial statements.
19
Elender Business Communications Services Rt.
Unaudited Condensed Statements of Operations
Quarters Ended March 31, 2004 and 2003
In HUF'000
2004 Q1 2003 Q1
Third party revenue 1,180,403 1,146,974
Related party revenue 20,458 14,342
Total revenue 1,200,861 1,161,316
Cost of revenues (exclusive of depreciation and 825,502 851,512
amortization shown sepatately below)
------------------- -------------------
Gross profit 375,359 309,804
Operating expenses
Personnel expenses 56,249 73,174
Consulting, professional and directors fees 85,428 98,931
Other selling, general and administrative expenses 126,353 134,736
Depreciation and amortization 90,600 71,317
------------------- -------------------
Total operating expenses 358,630 378,158
Income/(loss) from operations 16,729 (68,354)
Interest income 727 133
Interest expense (32,341) (25,180)
Foreign exchange gain, net 3,630 2,494
------------------- -------------------
Total other expense (27,984) (22,553)
Loss before income taxes and equity in loss of affiliate (11,255) (90,907)
Income taxes - -
------------------- -------------------
Loss before equity in loss of affiliate (11,255) (90,907)
Net gain from sale of equity investment 69,672 -
------------------- -------------------
Net income/(loss) 58,417 (90,907)
=================== ===================
See accompanying notes to unaudited condensed financial statements.
20
Elender Business Communications Services Rt.
Unaudited Condensed Statements of Cash Flows
Quarters Ended March 31, 2004 and 2003
In HUF'000
2004 Q1 2003 Q1
Cash flows from operating activities
Net profit/(loss) 58,417 (90,907)
Adjustments to reconcile net profit to net cash used in operating
activities:
Depreciation and amortization 90,600 71,317
Gain from sale of equity investment (69,672) -
Changes in assets and liabilities
Receivables (108,807) 410,677
Prepaid and other assets 24,267 (65,211)
Payables and other current liabilities 38,718 (73,075)
Deferred revenue (4,264)
(247,989)
------------------ -----------------
Net cash provided by operating activities 29,259 4,812
Cash flows from investing activities:
Purchase of property and equipment (61,872) (8,526)
------------------ -----------------
Net cash used in investing activities (61,872) (8,526)
Cash flows from financing activities:
Repayment of short-term and long-term loans (43,208) (39,988)
------------------ -----------------
Net cash used in financing activities (43,208) (39,988)
Decrease in cash and cash equivalents (75,821) (43,702)
------------------ -----------------
Cash and cash equivalents, beginning of period 76,702 100,068
Cash and cash equivalents, end of period 881 56,366
================== =================
See accompanying notes to unaudited condensed financial statements.
21
Basis of presentation
Elender Business Communications Services Rt. (the "Company") is a Hungarian
Corporation, which is owned by Vitonas Investments Limited, a company with
registered seat in Cyprus ("Vitonas"), Certus Kft., a Hungarian corporation
("Certus") and Rumed 2000 Kft. The Company is an Internet service provider in
Hungary.
The accompanying unaudited condensed financial statements of the Company are
stated in Hungarian Forints ("HUF") (the currency in Hungary) and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, these financial statements include all
adjustments, consisting mainly of normal recurring accruals, necessary for a
fair presentation of the results for the interim periods presented. Results for
the interim periods are not necessarily indicative of the results for a full
fiscal year. These unaudited condensed financial statements should be read in
conjunction with the Company's audited financial statements and notes thereto as
of and for the year ended December 31, 2003.
Material events
In the first quarter of 2004, the Company sold its investment in its
affiliate (Index Rt) for HUF 171,920,000 to Wallis. The sale was affected
through a reduction of the short-term related party loan liabilities due to
Wallis.
The Company has concluded a new bank loan agreement with Commerzbank Rt on
June 1, 2004. This loan agreement was signed and replaced the existing loan
facilities with Raiffeisen and to increase the current loan facilities to HUF
350 million and the overdraft facilities limit to HUF 450 million. Amounts
outstanding on the Raiffeisen Loan were fully repaid.
22
(b) Pro forma financial statements:
EUROWEB INTERNATIONAL CORP.
AND ELENDER RT
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Basis of Preparation
The accompanying unaudited pro forma consolidated financial statements give
effect to the acquisition by Euroweb International Corporation of 100% of
Elender Rt. for approximately $6,611,000 in cash consideration (including direct
transaction costs of $111,000) and 677,201 shares of Euroweb International
Corporation's common stock with a fair value of $2,898,420 less registration
cost of $21,000. The acquisition will be accounted for using the purchase method
of accounting. Under this method, the purchase price has been allocated to the
assets and liabilities based on preliminary estimates. The final purchase price
allocation will be calculated based on the transaction value and the fair values
of Elender Rt. identifiable assets and liabilities at the date of closure as of
June 10, 2004 and it will be presented in the 06/30/2004 quarterly report.
Therefore, the actual goodwill amount, as well as other balance sheet items,
could differ from the preliminary unaudited pro forma consolidated financial
statements presented herein, and in turn affect items in the preliminary pro
forma condensed consolidated statement of operations, such as intangible asset
amortization and income taxes.
The accompanying unaudited pro forma consolidated balance sheet as of March
31, 2004 and accompanying unaudited pro forma consolidated statements of
operations for the year ended December 31, 2003 and the quarter ended March 31,
2004 were prepared based on the Company's interpretation of guidance issued by
the United States Securities and Exchange Commission (specifically Article 11 of
Regulation S-X). The unaudited pro forma consolidated statements of operations
give effect to the acquisition as if it occurred on January 1, 2003. The
unaudited pro forma consolidated balance sheet gives effect to the acquisition
as if it occurred on March 31, 2004.
Euroweb International Corporation has presented these unaudited pro forma
consolidated financial statements for illustrative purposes only. The unaudited
pro forma consolidated financial statements are not necessarily indicative of
the actual results of operations or financial position that would have occurred
had the acquisitions occurred on the dates indicated, nor are they necessarily
indicative of future operating results or financial position. No account has
been taken within the unaudited pro forma consolidated financial statements to
any synergy or any severance and restructuring costs that may, or may be
expected to, occur following the acquisition. The unaudited pro forma
consolidated financial statements are only a summary and should be read in
conjunction with the historical consolidated financial statements and related
notes of Euroweb International Corporation and Elender Rt. and other information
included or incorporated by reference in this current report.
The pro forma adjustments described in the accompanying notes are based
upon available information and certain assumptions that management believes are
reasonable.
All pro forma amounts are presented in U.S. dollars, the reporting currency
of Euroweb International Corporation.
23
There were no business transactions between Euroweb International
Corporation and its subsidiaries and Elender Rt. during the periods presented.
24
Euroweb International Corp.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 2004
Restated Elender Rt. Pro forma N Pro forma
Euroweb adjustments o Euroweb Int
International t Corp and
Corporation e Elender Rt.
ASSETS (C) (D)
Current assets:
Cash and cash equivalents $12,050,485 $ 4,326 (6,611,000) A 5,443,811
Investment in securities - - - -
Trade accounts receivable, net 1,235,842 1,790,434 - 3,026,276
Related party receivables 748,285 - - 748,285
Current portion of note receivable 124,143 - - 124,143
Prepaid and other current assets 1,584,887 1,350,616 2,935,503
-
Total current assets 15,743,642 3,145,376 (6,611,000) 12,278,018
Note receivable, less current portion - - - -
Investment in affiliate - - - -
Property and equipment 2,727,193 4,380,952 - 7,108,145
Assets under construction 78,355 - - 78,355
Goodwill 566,000 - 5,814,228 A 6,380,228
Intangibles- customer lists, brand name - - 2,412,759 2,412,759
----------- ---------- ---------- -----------
Total assets $19,115,190 $7,526,328 $1,615,987 $28,257,505
=========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $1,638,049 $1,868,691 - $3,506,740
Related party payables 913,211 - - 913,211
Related party loan payable 240,608 894,628 (894,628) AB 240,608
Other loan payable - 625,263 1,606,138 AB 2,231,401
Other current liabilities 998,387 267,159 - 1,265,546
Accrued expenses 431,247 1,314,057 - 1,745,304
Deferred IRU revenue 46,000 - - 46,000
Deferred other revenues 951,472 34,038 - 985,510
----------- ---------- ---------- -----------
Total current liabilities 5,218,974 5,003,836 711,510 10,934,320
Non-current portion of def. IRU revenue 831,834 - - 831,834
Non-current related party loan payable 962,435 2,313,513 (2,313,513) AB 962,435
Non-current other loan payable - 4,763 536,773 AB 541,536
Non-current portion of lease obligations 219,239 8,013 - 227,252
----------- ---------- ---------- -----------
Total liabilities 7,232,482 7,330,125 (1,065,230) 13,497,377
Stockholders' equity
Preferred stock, $.001 par value
Common stock, $.001 par value 24,129 92,514 (91,837) A 24,806
Additional paid-in capital 48,227,764 2,286,091 590,652 A 51,104,507
Accumulated deficit (35,206,856) (1,758,641) 1,758,641 A (35,206,856)
Accumulated other comprehensive loss (46,917) (423,761) 423,761 A (46,917)
Treasury stock (1,115,412) - - (1,115,412)
----------- ---------- ---------- -----------
Total stockholders' equity 11,882,708 196,203 2,681,217 14,760,128
----------- ---------- ---------- -----------
Total liabilities and stockholders'
equity $19,115,190 $7,526,328 $1,615,987 $28,257,505
=========== ========== ========== ===========
See accompanying notes to the unaudited pro forma
consolidated financial statements.
25
Euroweb International Corp.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
Restated Elender Rt. Pro forma N Pro forma
Euroweb adjustments o Euroweb Int
International t Corp and
Corporation e Elender Rt.
(C) (D)
Revenues
Third party revenues $ 17,540,011 $ 20,677,738 316,283 B $ 38,534,032
Related party revenues 5,740,709 316,283 (316,283) B 5,740,709
------------ ----------- --------- ------------
Total Revenues 23,280,720 20,994,021 - 44,274,741
Cost of revenues
Third party cost of revenues 8,827,513 14,167,535 - 22,995,048
Related party cost of revenues 5,796,351 - - 5,796,351
------------ ----------- --------- ------------
Total Cost of revenues 14,623,864 14,167,535 - 28,791,399
------------ ----------- --------- ------------
Gross profit 8,656,856 6,826,486 - 15,483,342
Operating expenses
Compensation and related costs 3,173,720 1,130,957 - 4,304,677
Severance to officers - - - -
Consulting, professional and 2,135,056 1,328,870 - 3,463,926
directors fees
Other selling, general and 2,723,012 2,854,319 - 5,577,331
administrative expenses
Goodwill impairment 980,538 - - 980,538
Impairment of intangibles 100,364 - - 100,364
Depreciation and amortization 1,727,796 1,523,222 804,253 A 4,055,271
------------ ----------- --------- ------------
Total operating expenses 10,840,486 6,837,368 - 18,482,107
------------ ----------- --------- ------------
Loss from operations (2,183,630) (10,882) (804,253) (2,998,765)
Net interest income/(expense) 344,571 (491,125) - (146,554)
Foreign exchange gain, net - 12,366 12,366
Loss before income taxes (1,839,059) (489,641) (804,253) (3,132,953)
Provision for income taxes 61,590 - - 61,590
------------ ----------- --------- ------------
Equity in earnings (loss) of
affiliate 109,622 (28,422) - 81,200
Net loss $(1,791,027) $ (518,063) (804,253) $(3,113,343)
============ =========== ========= ============
Net loss per share, basic and diluted (0.44) (0.58)
Weighted aver. number of shares outst. 4,665,332 5,342,533
See accompanying notes to the unaudited
pro forma consolidated financial statements.
26
Euroweb International Corp.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2004
Restated Elender Rt. Pro forma Note Pro forma
Euroweb adjustments Euroweb Int
International Corp and
Corporation Elender Rt.
(C) (D)
Revenues
Third party revenues $4,922,587 5,661,677 98,124 B $10,682,388
Related party revenues 1,490,767 98,124 (98,124) B 1,490,767
--------- --------- -------- - -----------
Total Revenues 6,413,354 5,759,801 - 12,173,155
Cost of revenues
Third party cost of revenues 2,803,707 3,959,432 - 6,763,139
Related party cost of revenues 1,251,354 - - 1,251,354
--------- --------- -------- -----------
Total Cost of revenues 4,055,061 3,959,432 - 8,014,493
--------- --------- -------- -----------
Gross profit 2,358,293 1,800,369 - 4,158,662
Operating expenses
Compensation and related costs 876,237 269,792 - 1,146,029
Consulting, professional and 411,179 409,746 - 820,925
directors fees
Other selling, general and 716,194 606,038 - 1,322,232
administrative expenses
Depreciation and amortization 290,081 434,553 201,063 A 925,697
--------- --------- -------- - -----------
Total operating expenses 2,293,691 1,720,129 (201,063) 4,214,883
Loss from operations 64,602 80,240 (201,063) (56,221)
Net interest income/(expense) 7,841 (134,222) - (126,381)
Loss before income taxes 72,443 (53,982) (201,063) (182,602)
Provision for income taxes 31,583 - - 31,583
--------- --------- -------- -----------
Gain from equity
investment - 334,174 - 334,174
Net profit $40,860 $280,192 (201,063) $119,989
========= ========= ========= ===========
Net profit per share, basic and diluted 0.01 0.02
Weighted aver. number of shares outst. 4,665,332 5,342,533
See accompanying notes to the unaudited pro forma
consolidated financial statements.
27
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(A) To reflect the excess of acquisition cost over the estimated fair value of
net assets acquired (goodwill). The purchase price, purchase price
allocation, and financing of the transaction are summarized as follows:
Purchase price is calculated as as:
Cash $ 6,500,000
Fair value of shares issued less registration cost 2,877,420
Direct acquisition expenditures 111,000
-------------
Total purchase consideration 9,488,420
Allocated to:
Transferable shareholders loan 1,065,230
Fair value of Elender's assets acquired and
liabilities assumed 196,203
Customer contracts 2,412,759
-------------
Excess purchase price over allocation to identifiable
assets and liabilities (Goodwill) $ 5,814,228
=============
These unaudited pro forma consolidated financial statements reflect
the preliminary allocation of the purchase price based on a
preliminary fair value assessment of the assets acquired and
liabilities assumed, and as such, the Company has assigned
approximately $2.4 million to customer contracts intangible assets.
These identified intangible assets will be amortized over a period of
three years, which has been reflected as pro forma adjustment in the
profit and loss statements. The purchase price allocation will be
finalized upon the completion of intangible assets valuation.
In accordance with Statement of Financial Accounting Standard ("SFAS")
No. 142, Goodwill and Other Intangible Assets, goodwill is not
amortized. Accordingly, there is no goodwill amortization expense in
the pro forma consolidated statements of operations.
The estimated total purchase price of approximately $9,488,420
consists of approximately $6,500,000 cash, $2,877,420 of Euroweb
International's common stock, representing an estimated 677,201 shares
and estimated direct transaction costs of approximately $111,000.
Under US GAAP, securities issued in a purchase business combination
should be valued at market prices for a reasonable period before and
after the measurement date in determining the fair value of the
securities issued. For the purposes of these unaudited pro forma
consolidated financial statements, the purchase consideration has been
estimated using a signing date of the transaction, as measurement
date, of February 23, 2004. Accordingly, the Euroweb International's
shares issued in consideration are valued based on the average closing
price of the Company's common stock for the five consecutive trading
days between February 19, 2004 and February 25, 2004, which was $4.28
per share.
28
(B) The selling parties will also receive Euroweb International shares during
the acquisition of Elender Rt. Each of them will have less than 10% of
ownership in Euroweb International Corporation, so they are not categorized
as related parties and those transactions are shown as third party
transactions. Elender Rt has an insignificant business relationship with
Pantel Rt, the related party in respect to Euroweb International
Corporation. Total of $3,208,141 short and long term related party loans of
Elender has been reclassified as $1,606,138 short term and $536,773 long
term third party loan, while $1,065,230 is owed to Euroweb International
Corporation (transferable shareholder loan).
(C) Restated financial statements include the combined financial statements of
Euroweb International Corporation and Euroweb Hungary Rt purchased in
February 2004. According to SFAS No. 141, Business Combinations, transfers
of net assets or exchanges of shares between entities under common control
are required to be accounted for by the receiving entity at carryover or
the predecessor basis of the transferring entity, so Euroweb Hungary is
included in the books as if Euroweb Hungary had always been consolidated.
(D) The historical financial position and results of operations of Elender Rt.
have been derived from Elender's historical financial statements
(denoninated in Hungarian Forint) and translated, for the purpose of
preparing pro forma financial information, into U.S. dollars using the
following exchange rates:
Consolidated pro forma balance sheet as of March 31, 2004 - 203.65 HUF/US$
(current exchange rate)
Consolidated pro forma statements of operations for the year ended December
31, 2003 - 223.66 HUF/US$ (average exchange rate)
Consolidated pro forma statements of operations for the quarter ended March
31, 2004 - 208.49 HUF/US$ (average exchange rate)
(E) No adjustments were made to reflect the income tax effect of increased
amortization of intangibles since Euroweb International Corporation has
significant net operating loss carryforwards and, therefore, does not
expect to have taxable income in the foreseeable future.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EUROWEB INTERNATIONAL CORPORATION
(Registrant)
By: /s/ CSABA TORO
---------------------
Name: Csaba Toro
Title: Chief Executive Officer
Date: July 23, 2004
Budapest, Hungary
30